Fat Brands, Inc 8-K/A, filed Oct 15, 2021
Fat Brands, Inc (FATAQ)
About this 8-K/A
Fat Brands, Inc filed this 8-K/A on October 15, 2021, reporting on events of October 1, 2021.
Items reported
- Item 9.01: Financial statements and exhibits
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CURRENT REPORT
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Explanatory Note
This Current Report on Form 8-K/A amends the Current Report on Form 8-K previously filed by Fat Brands, Inc. (the “Company”) on October 6, 2021 related to the acquisition of Twin Peaks Buyer, LLC. This Current Report on Form 8-K/A includes the financial statements that had been omitted from the previously filed Current Report on Form 8-K as permitted by Item 9.01(a) and (b) of Form 8-K.
On October 1, 2021, FAT Brands Inc. (the “Company”) acquired Twin Peaks Buyer, LLC (“Twin Peaks”) from Garnett Station Partners. Twin Peaks and its subsidiaries, franchise and operate polished casual dining restaurants.
The Company is filing this Current Report on Form 8-K/A to provide certain financial statements of Twin Peaks and unaudited pro forma financial information of Twin Peaks and the Company required by Item 9.01 of Form 8-K.
| Item 9.01 | Financial Statements and Exhibits. |
| (a) | Financial Statements of Business Acquired |
The audited consolidated financial statements of Twin Peaks for the years ended December 27, 2020 and December 29, 2019 are included as Exhibit 99.1 to this Current Report on Form 8-K/A as Exhibit 99.1 and are incorporated by reference herein.
The unaudited condensed interim consolidated financial statements of Twin Peaks as of and for the interim six months ended June 13, 2021 and June 14, 2020 are included as Exhibit 99.2 to this Current Report on Form 8-K/A as Exhibit 99.2 and are incorporated by reference herein.
| (b) | Pro forma Financial Information |
The unaudited pro forma combined financial information of FAT Brands, Inc, Global Franchise Holding Inc. and its subsidiaries and Twin Peaks Buyer LLC with respect to the year ended December 27, 2020 and the six months ended June 27, 2021 are included as Exhibit 99.3 to this Current Report on Form 8-K/A as Exhibit 99.3 and are incorporated by reference herein.
(d) Exhibits
The following exhibits are filed herewith:
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: October 15, 2021
| FAT Brands Inc. | ||
| By: | /s/ Kenneth J. Kuick | |
| Kenneth J. Kuick | ||
| Chief Financial Officer | ||
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
FAT Brands, Inc.
Beverly Hills, California
We hereby consent to the incorporation by reference in the Registration Statements on Form S-1 (No. 333-239032), Form S-3 (No. 333-256342) and Form S-8 (No. 333-239031) of FAT Brands, Inc. of our report dated October 15, 2021, relating to the consolidated financial statements of Twin Restaurant Holding LLC, which appears in this Form 8-K/A of FAT Brands, Inc. filed on October 15, 2021.
| /s/ BDO USA, LLP | |
| Dallas, Texas | |
| October 15, 2021 |
Exhibit 99.1
Twin Restaurant Holding, LLC
Consolidated Financial Statements
As of December 27, 2020 and December 29, 2019
Twin Restaurant Holding, LLC
Contents
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Tel: 214-969-7007 Fax: 24-953-0722 www.bdo.com |
600 North Pearl, Suite 1700 Dallas, TX 7201 |
Members and Audit Committee of Twin Restaurant Holding, LLC
Dallas, Texas
Opinion
We have audited the consolidated financial statements of Twin Restaurant Holding, LLC (the “Company”), which comprise the consolidated balance sheets as of December 27, 2020 and December 29, 2019, and the related consolidated statements of operations, changes in members’ equity, and cash flows for the year ended December 27, 2020 and for the period from March 29, 2019 (inception) to December 29, 2019, and the related notes to the consolidated financial statements.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 27, 2020 and December 29, 2019, and the results of its operations and its cash flows for the year ended December 27, 2020 and for the period from March 29, 2019 (inception) to December 29, 2019, in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued or available to be issued.
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Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the consolidated financial statements.
In performing an audit in accordance with GAAS, we:
| ● | Exercise professional judgment and maintain professional skepticism throughout the audit. | |
| ● | Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. | |
| ● | Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed. | |
| ● | Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the consolidated financial statements. | |
| ● | Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.
| /s/ BDO USA, LLP | |
| Dallas, Texas | |
| October 15, 2021 |
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Consolidated Financial Statements
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Twin Restaurant Holding, LLC
| December 27, 2020 | December 29, 2019 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 18,506,066 | $ | 9,931,577 | ||||
| Receivables | 1,663,644 | 1,486,451 | ||||||
| Inventory | 947,588 | 1,047,253 | ||||||
| Prepaids and other current assets | 1,539,837 | 1,795,311 | ||||||
| Total current assets | 22,657,135 | 14,260,592 | ||||||
| Investment in Joint Venture | 1,500,000 | - | ||||||
| Property and Equipment - net | 26,172,245 | 35,855,950 | ||||||
| Deposits | 562,349 | 401,808 | ||||||
| Restricted cash | 9,493,059 | 9,802,917 | ||||||
| Goodwill | 2,633,876 | 2,633,876 | ||||||
| Intangibles - net | 89,806,034 | 91,644,278 | ||||||
| Total Assets | $ | 152,824,698 | $ | 154,599,421 | ||||
| Liabilities and Members’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 4,254,996 | $ | 4,495,984 | ||||
| Accrued liabilities | 6,838,356 | 6,876,650 | ||||||
| Current portion of long-term debt | 1,300,000 | 1,300,000 | ||||||
| Current portion of PPP Loan | 4,505,860 | - | ||||||
| Deferred revenue | 660,614 | 607,961 | ||||||
| Deferred development and franchise fees - current | 234,842 | 205,698 | ||||||
| Total current liabilities | 17,794,668 | 13,486,293 | ||||||
| Long-term debt - net | 64,392,231 | 61,926,731 | ||||||
| PPP loan, net of current portion | 7,724,330 | - | ||||||
| Earn out liability | - | 5,200,000 | ||||||
| Restricted cash liability | 9,493,059 | 9,802,917 | ||||||
| Interest rate swap liability | 468,793 | 124,741 | ||||||
| Deferred development and franchise fees, less current | 2,290,053 | 3,122,395 | ||||||
| Total Liabilities | 102,163,134 | 93,663,077 | ||||||
| Commitments and Contingencies (Note 8) | ||||||||
| Members’ Equity | ||||||||
| Additional paid-in capital | 69,867,510 | 69,867,510 | ||||||
| Retained loss | (19,205,946 | ) | (8,931,166 | ) | ||||
| Total members’ equity | 50,661,564 | 60,936,344 | ||||||
| Total Liabilities and Members’ Equity | $ | 152,824,698 | $ | 154,599,421 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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Twin Restaurant Holding, LLC
Consolidated Statements of Operations
| Year Ended December 27, 2020 | March 29, 2019 (inception) through December 29, 2019 | |||||||
| (52 weeks) | (39 weeks) | |||||||
| Revenues | ||||||||
| Restaurant net sales | $ | 75,537,705 | $ | 82,350,533 | ||||
| Franchise and royalty fees | 9,446,186 | 9,118,334 | ||||||
| Marketing fees | 6,083,697 | 6,200,333 | ||||||
| Other revenue | 1,322,419 | 1,309,570 | ||||||
| Total revenues | 92,390,007 | 98,978,770 | ||||||
| Operating Expenses | ||||||||
| Cost of sales | 20,809,944 | 23,030,284 | ||||||
| Labor expenses | 29,136,001 | 30,910,766 | ||||||
| Restaurant expenses | 25,390,674 | 22,656,859 | ||||||
| General and administrative expenses | 9,957,869 | 9,559,193 | ||||||
| Depreciation and amortization expense | 8,232,037 | 8,216,204 | ||||||
| Total operating expenses | 93,526,525 | 94,373,306 | ||||||
| (Loss) income from operations | (1,136,518 | ) | 4,605,464 | |||||
| Other Income (Expense) | ||||||||
| Interest expense, net | (6,892,588 | ) | (4,025,042 | ) | ||||
| Unrealized loss on interest rate swap | (344,051 | ) | (124,741 | ) | ||||
| Loss on disposal of assets | (3,050,844 | ) | - | |||||
| Earnout liability adjustment | 5,200,000 | - | ||||||
| Other expense | (4,050,779 | ) | (9,386,847 | ) | ||||
| Total other expenses | (9,138,262 | ) | (13,536,630 | ) | ||||
| Net loss | $ | (10,274,780 | ) | $ | (8,931,166 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
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Twin Restaurant Holding, LLC
Consolidated Statements of Changes in Members’ Equity
| Parent Unit – Series A | ||||||||||||||||
| Preferred Units | Retained | |||||||||||||||
| Shares | Amount | Earnings | Total | |||||||||||||
Balance – March 29, 2019 (inception) | ||||||||||||||||
| Equity contribution for acquisition | 61,136 | $ | 61,136,857 | $ | - | $ | 61,136,857 | |||||||||
| Equity rollover for acquisition | 8,730 | 8,730,653 | - | 8,730,653 | ||||||||||||
| Net loss | - | - | (8,931,166 | ) | (8,931,166 | ) | ||||||||||
| Balance – December 29, 2019 | 69,866 | $ | 69,867,510 | $ | (8,931,166 | ) | $ | 60,936,344 | ||||||||
| Net loss | - | - | (10,274,780 | ) | (10,274,780 | ) | ||||||||||
| Balance – December 27, 2020 | 69,866 | $ | 69,867,510 | $ | (19,205,946 | ) | $ | 50,661,564 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Twin Restaurant Holding, LLC
Consolidated Statements of Cash Flows
Year
Ended | March 29, 2019 (inception) through December 29, 2019 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | (10,274,780 | ) | $ | (8,931,661 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization expense | 8,232,037 | 8,216,204 | ||||||
| Earnout liability adjustment | (5,200,000 | ) | - | |||||
| Amortization of deferred financing costs | 265,500 | 204,231 | ||||||
| Loss (gain) on interest rate swap | 344,051 | (124,741 | ) | |||||
| Transaction costs related to the acquisition | - | 6,237,807 | ||||||
| Loss on disposal of assets | 3,050,844 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Receivables | (177,192 | ) | (865,864 | ) | ||||
| Inventory | 99,665 | (103,034 | ) | |||||
| Prepaids and other current assets | 255,474 | (1,580,258 | ) | |||||
| Deposits | (160,541 | ) | (348,289 | ) | ||||
| Accounts payable | (240,989 | ) | 2,842,719 | |||||
| Accrued expenses | (1,139,992 | ) | 2,114,271 | |||||
| Deferred revenue | 52,653 | 65,942 | ||||||
| Deferred development and franchise fees | (803,198 | ) | 169,345 | |||||
| Deferred rent and tenant allowance | 848,340 | 41,153 | ||||||
| Net cash provided by (used in) operating activities | (4,848,128 | ) | 7,937,825 | |||||
| Cash Flows from Investing Activities | ||||||||
| Acquisition, net of cash received | - | (59,405,846 | ) | |||||
| Principal payments on notes receivable | - | 113,786 | ||||||
| Investment in joint venture | (1,500,000 | ) | - | |||||
| Proceeds on sale of property | 4,132,952 | - | ||||||
| Purchase of property and equipment | (3,893,883 | ) | (8,076,272 | ) | ||||
| Net cash used in investing activities | (1,260,931 | ) | (67,368,332 | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds on PPP Loans | 12,867,043 | - | ||||||
| Payments on PPP Loans | (693,353 | ) | - | |||||
| Proceeds on Revolving Loans | 12,000,000 | - | ||||||
| Payments on Revolving Loans | (12,000,000 | ) | - | |||||
| Proceeds on long-term borrowings | 3,500,000 | 65,000,000 | ||||||
| Payments on long-term borrowings | (1,300,000 | ) | (650,000 | ) | ||||
| Payments on related party notes payable | - | (347,625 | ) | |||||
| Net cash provided by financing activities | 14,373,690 | 64,002,375 | ||||||
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Twin Restaurant Holding, LLC
Consolidated Statements of Cash Flows (continued)
Year
Ended | From March 29, 2019 (inception) through December 29, 2019 | |||||||
| Net change in cash, cash equivalents and restricted cash | 8,264,631 | 4,572,363 | ||||||
| Cash, cash equivalents and restricted cash, beginning of year | 19,734,494 | 15,162,131 | ||||||
| Cash, cash equivalents and restricted cash, end of year | $ | 27,999,125 | $ | 19,734,494 | ||||
| Supplemental disclosure | ||||||||
| Cash paid for interest | $ | 6,109,631 | $ | 2,750,979 | ||||
| Non-cash equity contribution for acquisition | - | 61,136,857 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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Twin Restaurant Holding, LLC
Notes to Consolidated Financial Statements
1. Business
Twin Restaurant Holding, LLC (“TRH”, the “Company”, “we”), a Delaware limited liability company, is principally engaged in the ownership, operation, development, and franchising of the Twin Peaks Restaurant brands. As of December 27, 2020, and December 29, 2019, the Company operated 79 and 26 company-operated locations in Arkansas, Colorado, Illinois, Nevada, New Mexico and Texas, and franchised 53 restaurants located in Alabama, Arkansas, Arizona, California, Florida, Georgia, Idaho, Indiana, Kansas, Louisiana, Michigan, Mississippi, Missouri, North Carolina, Oklahoma, Ohio, South Carolina, Tennessee, Texas, Washington, Mexico and Russia.
On March 29, 2019, Garnett Station Partners, LLC, and associated affiliates and co-investors, formed Twin Restaurant Holding, LLC which, through other wholly owned subsidiaries acquired 100% of the shares of the Company (the 2019 Acquisition).
On October 1, 2021, FAT Brands Inc. acquired Twin Peaks Buyer LLC (“Twin Peaks”) (the Transaction) (see Note 12), a wholly-owned subsidiary of Twin Restaurant Holdings, LLC, that in turn owns and operates all of the aforementioned businesses.
COVID-19
Beginning in January 2020, there has been an outbreak of the Coronavirus Disease 2019 (“COVID-19” or “virus”), which has been declared a “pandemic” by the World Health Organization. As of the date of these financial statements, approximately 70% of the Company’s stores are operational with limited or no restrictions and 30% are subject to reduced store hours or capacity limits. The length and severity of the COVID-19 pandemic, along with the financial impact from COVID-19 on the Company, if any, cannot be reasonably estimated at this time. The extent to which the COVID-19 will impact the Company’s financial condition, results of operations and liquidity will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain the virus or treat its impact, among others.
On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property.
It also appropriated funds for the SBA Paycheck Protection Program loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19. The Company applied for and received approximately $12.9 million for the SBA Paycheck Protection Program on April 22, 2020. See Note 12 - Subsequent Events, for details surrounding PPP loan forgiven as of the date of this report.
Acquisition of the Company (2019 Acquisition)
On March 29, 2019, Garnett Station Partners, LLC, and associated affiliates and co-investors, formed Twin Restaurant Holding, LLC which, through other wholly owned subsidiaries acquired 100% of the shares of Twin Peaks Holdings. The consideration paid consisted of approximately $31,196,759 of cash to the sellers, approximately $2,140,000 to repay outstanding debt, approximately $65,000,000 of assumed debt, and equity rollover with a fair value of approximately $8,731,000.
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Twin Restaurant Holding, LLC
Notes to Consolidated Financial Statements
The transaction was affected through a merger in which we continued as the surviving entity. The purchase price has been allocated to the assets acquired and liabilities assumed by the Company and its subsidiaries based on third-party valuation studies and management estimates of their fair value in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, on March 29, 2019 (the “Date of Acquisition”).
| The purchase price was allocated as follows (in thousands): | ||||
| Working capital | $ | (6,028 | ) | |
| Property and equipment | 31,491 | |||
| Favorable leases | 7,055 | |||
| Liquor licenses | 375 | |||
| Trade name and trademarks | 64,000 | |||
| Franchise agreement | 22,000 | |||
| Goodwill | 1,650 | |||
| Total consideration | $ | 120,543 | ||
Transaction expenses incurred on behalf of the Company of $6,237,806 are included in the period from March 29, 2019 through December 29, 2019, in other expense on the consolidated statement of operations.
As part of the acquisition, the Company agreed to pay sellers up to $15,000,000 in additional purchase price (Earn Out) based on certain results to be attained in 2020 and in 2021. Seller could receive up to $7,500,000 in 2020 and a cumulative, inclusive of 2020, $15,000,000 in 2021. As part of the third party analysis on the acquisition, the Company recognized $5,200,000 as a future obligation and adjusted the purchase price to include that liability. As of December 27, 2020 it is not probable that the results to be attained will be reached and therefore the Company has recorded the Earn Out liability adjustment of $5,200,000 as Other Income.
Acquisitions
In 2019 the Company acquired the Round Rock store for $3,250,000 and renovated it for approximately $1,000,000. In 2020 the Company sold the store in return for cash and a long term lease. Additionally, as part of the acquisition the Company withheld $2,500,000 from the seller until the Albuquerque restaurant’s liquor license could be transferred from seller to the Company. The Round Rock and Albuquerque store were owned by the same party prior to the purchase in 2019. In December 2019, the license was successfully transferred, and the Company remitted the $2,500,000 to seller, included within the property and equipment on the consolidated statements of cashflow.
2. Significant Accounting Policies
Basis of Presentation
The consolidated financial statements of Twin Restaurant Holding, LLC includes the accounts of Twin Restaurant Holding, LLC and its subsidiaries. Significant inter-company transactions and balances are eliminated in the consolidated financial statements.
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Twin Restaurant Holding, LLC
Notes to Consolidated Financial Statements
Fiscal Year
The Company’s fiscal year is based on a 52 - 53 week reporting period, which ends each year on the last Sunday of December. The fiscal year ended December 27, 2020 consisted of 52 weeks. Fiscal year ended December 29, 2019 consisted of 39 weeks and 3 days.
Use of Estimates and Assumptions
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value Measurements
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1 – This level consists of unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 – This level consists of unadjusted quoted prices other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 – This level consists of unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, restricted cash, trade receivables, other receivables, prepaid expenses, accounts payable and accrued expenses and deferred revenue approximate their respective fair value based on the short-term nature of these instruments.
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, and accounts payable. The carrying amounts of cash and cash equivalents and accounts payable, approximate their fair values because of the short-term maturities or expected settlement dates of these instruments.
The Company follows the provisions of ASC 820 for fair value measurements. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
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Twin Restaurant Holding, LLC
Notes to Consolidated Financial Statements
In addition to the $65,000,000 variable rate loan with Comvest Capital, the Company entered into an interest rate agreement with Regions Bank, effective August 2, 2019, fixing the interest rate at 1.9%. This interest rate protection product, commonly called a swap, provides the Company with the assurance of a floating interest rate of 2.2% during the term of the bank loan. This swap agreement is re-measured to fair value each reporting period to provide a current value of the interest rate protection product as if the loan were to be repaid at that point in time.
As of December 27, 2020, and December 29, 2019, the Company had a liability of $468,793 and $124,741 related to this agreement. This liability was classified as a level 2 fair value measurement as all significant inputs are based on quoted market prices of investments that are not actively traded and for which certain significant inputs are observable, either directly or indirectly, such as benchmark interest rates and yield curves and/or securities indices.
There were no investment assets or liabilities classified within level 1 or 3 at or during the year ended December 27, 2020.
Cash and Cash Equivalents
The Company considers all investments in highly liquid instruments, purchased with maturity of three months or less, to be cash equivalents. The Company maintains cash deposits with federally insured financial institutions that may at times exceed federally insured limits. The Company has not incurred any losses from such accounts, and management considers the risk to be minimal. At December 27, 2020, the Company had no cash equivalents.
Restricted Cash
In conjunction with the 2019 acquisition, the Company made a Specified Matters Payment, as per the 2019 Acquisition, of $10,000,000 to cover insurance retentions/deductibles on open claims at the acquisition date, see Note 8. This payment is held in a Regions bank account held by purchaser and is disbursed based on the examination of legal liabilities that meet the intended criteria of the designated account. In relation to the Restricted Cash, a Restricted Liability has been created to in the same amount to represent future potential outflows. At December 27, 2020 and December 29, 2019 $506,941 and $197,083 in legal costs had been incurred and paid.
Accounts Receivable
Accounts receivable consists primarily of Franchise royalties and are analyzed for collectability periodically by management and are carried at net realizable value. The Company continuously evaluates the creditworthiness of its customers’ financial condition and generally does not require collateral. An allowance for doubtful accounts is estimated by management and is adjusted for those trade accounts receivable for which collection is uncertain. Accounts receivable are written-off when deemed uncollectible. At December 27, 2020, there was no allowance for doubtful accounts.
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Twin Restaurant Holding, LLC
Notes to Consolidated Financial Statements
Inventories
Inventories consist primarily of food and drink products, which are valued at the lower of cost, determined principally on the first-in, first-out method “FIFO”, or net realizable value.
Investment in Joint Venture (JV)
Investment in JV is accounted for under the Equity Method per ASC 323 Investments – Equity Method and Joint Ventures (ASC 323) which provides guidance on the criteria for determining whether you have an investment that qualifies for the equity method of accounting and how to account for the investment under US GAAP. Equity method investments are recorded as assets on the balance sheet at their initial cost and adjusted each reporting period by the investor through the income statement. As of December 27, 2020, Investment in JV consisted of a secured convertible promissory note and is considered immaterial to these financial statements.
Leases
The Company reviews all leases for capital or operating classification at their inception. Within the provisions of certain leases, there are rent holidays and escalations in payments over the base lease term, as well as renewal periods. The effects of the holidays and escalations have been reflected in rent expense on a straight-line basis over the expected lease term. Differences between amounts paid and amounts expensed are recorded as deferred rent. The lease term commences on the date when the Company has the right to control the use of the leased property. Certain leases also include contingent rent provisions based on sales levels, which are accrued at the point in time the Company determines that it is probable such sales levels will be achieved.
Tenant improvement allowance incentives may be available to partially offset the cost of developing and opening the related restaurants, pursuant to agreed-upon terms in the lease. Tenant improvement allowances can take the form of cash payments upon the opening of the related restaurants, full or partial credits against minimum or percentage rents otherwise payable by the Company or a combination thereof. All tenant improvement allowances received by the Company are recorded as a deferred lease incentive and amortized over the term of the lease.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation. Depreciation on equipment is provided in amounts sufficient to relate the cost of the assets to operations over their estimated service lives as follows:
| Leasehold improvements: Straight-line | 15 years or lease terms | |
| Furniture and equipment: Straight-line | 3 years | |
| Restaurant equipment: Straight-line | 5 years | |
| Office equipment: Straight-line | 3 years |
Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and betterments, which extend the useful lives of the existing property and equipment, are capitalized and depreciated.
| 15 |
Twin Restaurant Holding, LLC
Notes to Consolidated Financial Statements
Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is recognized in the consolidated statement of operations.
Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment loss is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
Goodwill
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. The Company tests goodwill for impairment on an annual basis, or more frequently if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount (a triggering event). Upon the occurrence of a triggering event, a quantitative test is necessary, and the Company would perform a one-step impairment test comparing the fair value of the entity with its carrying value. The excess carrying value over fair value, if any, would represent the impairment loss.
In testing goodwill for impairment, Management has the option first to perform a qualitative assessment to determine whether it is more-likely-than-not that goodwill is impaired, or the reporting unit can bypass the qualitative assessment and proceed directly to the quantitative test by comparing the carrying amount, including goodwill, of the entity with its fair value. Management performed the quantitative test as of December 27, 2020 and December 29, 2019 and determined that no impairment has occurred. The goodwill impairment loss, if any, is the amount by which the carrying amount of an entity, including goodwill, exceeds its fair value. Any subsequent increase in goodwill value is not recognized. Goodwill is deemed to be impaired if the carrying amount of goodwill exceeds its fair value.
Intangible Assets
Trademarks represent the value of expected future royalty income associated with the ownership of the Company’s brand. Other non-amortizable intangible assets consist of the liquor licenses. Trademarks and the liquor licenses acquired at acquisition are not amortized. Instead, they are tested for impairment annually or upon a triggering event unless it is subsequently determined that the intangible asset has a finite useful life. At each reporting period, trademarks and other non-amortizable intangible assets are assessed to determine if any changes in facts or circumstances require a reevaluation of the estimated value. Impairment tests for trademarks include comparing the fair value of the respective reporting unit with its carrying value. The Company uses a methodology in conducting these impairment assessments, which includes cash flow analyses that the Company believes are consistent with the assumptions hypothetical marketplace participants would use. Where applicable, an appropriate discount rate is used that is commensurate with the risk inherent in the projected cash flows.
| 16 |
Twin Restaurant Holding, LLC
Notes to Consolidated Financial Statements
Other intangible assets are amortized over their respective estimated useful lives to their estimated residual values and periodically reviewed for impairment should indicators of possible impairment arise. Amortizable intangible assets consist of favorable leases and franchise agreements, which are amortized on a straight-line basis over six and twenty-one years; respectively, which is representative of the economic benefits the Company expects to receive from the respective agreements.
Management’s annual impairment test for indefinite lived intangibles is performed annually in the third quarter, and Management has determined that no impairment occurred. In addition, whenever events or changes in circumstances indicate that the carrying amount for an asset may not be recoverable, the Company evaluates, for impairment, the carrying value of acquired definite lived intangible assets by comparing the carrying value to the anticipated future undiscounted cash flows expected to be generated from the use of the intangible assets. If the carrying amount is not recoverable, a loss is recorded in the amount the carrying value exceeds the fair market value of the assets.
Impairment of Long-Lived Assets
Long-lived assets, goodwill, and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company does not perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if an impairment is indicated by its carrying value not being recoverable through undiscounted cash flows. Impairment is recognized for the difference between the carrying amount and the fair value of the asset, generally estimated using discounted cash flows. There was no impairment recorded for the fiscal years ended December 27, 2020 and December 29, 2019
Pre-opening Costs
Pre-opening costs include costs associated with the opening and organizing of new stores or conversion of existing stores, including the cost of feasibility studies, pre-opening rent, training, recruiting, and traveling for employees engaged in such pre-opening activities. All such costs are expensed as incurred.
Sales Tax
Sales taxes collected from guests are excluded from revenues. The obligation is included in accrued liabilities until the taxes are remitted to the appropriate taxing authorities.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses were $5,867,288 and $9,090,006 for the fiscal years ended December 27, 2020 and for the period from March 29, 2019 (inception) to December 29, 2019.
| 17 |
Twin Restaurant Holding, LLC
Notes to Consolidated Financial Statements
Revenue Recognition
Adoption of New Accounting Standard
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The standards update outlines a single comprehensive model for an entity to utilize to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that will be received in exchange for the goods and services. The ASU and all subsequently issued clarifying ASUs replaced most existing revenue recognition guidance in U.S. GAAP. The ASU also required expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company elected to apply the modified retrospective method of adoption to those contracts which were entered into subsequent to the Date of Acquisition and not completed as of that day.
Revenue Recognition Policy
The Company derives its revenues from area development, franchise, royalty and marketing fees from each franchise partner. The Company accounts for revenue from contracts with customers through the following steps:
| ● | Identification of the contract with a customer | |
| ● | Identification of the performance obligations in the contract | |
| ● | Determination of the transaction price | |
| ● | Allocation of the transaction price to the performance obligations in the contract | |
| ● | Recognition of revenue when, or as, the Company satisfies a performance obligation |
The Company has entered into area development agreements (ADA) with its franchise partners whereby they will open varying numbers of Twin Peaks restaurants within a designated geographic area over the next one to eight years following their respective agreement dates. Area development fees required to be paid are upfront, non-refundable fees which serve as a prepayment for all or a portion of the initial franchise fee for each location to be opened under the area development agreement. The area development fees are recognized ratably over the term of the related franchise agreement beginning at the opening date of the franchise location. Additionally, the Company receives upfront, non-refundable initial franchise fees (when not fully satisfied by the fee paid under the area development agreement) that are recognized ratably over the term of the related franchise agreement beginning at the opening date of the franchise location.
The Company receives variable sales-based royalty fees from the franchisee at the rate of 5% of gross sales, payable on a weekly basis. Royalty fees are recognized in the period in which the related sales occur.
The Company receives variable sales-based marketing fees from the franchisee at the rate of 2.5% of gross sales, payable on a weekly basis. Marketing fees are recognized in the period in which the related sales occur.
The Company receives rebate income from purchases from vendors which is recorded in other revenue. Rebate income is recognized as purchases are made by franchise owners from vendors and rebates are earned.
The Company’s agreements generally do not include any significant financing components.
| 18 |
Twin Restaurant Holding, LLC
Notes to Consolidated Financial Statements
Performance Obligations
The Company typically satisfies its performance obligations as the franchise partner utilizes the franchise right and as services are rendered each month. Substantially all of the Company’s revenue is satisfied over time.
Royalty and marketing fees are recognized over time using the “sales-based royalty” exception, which states that revenue will be recognized at the later of when the subsequent sales occur or when the satisfaction or partial satisfaction of the performance obligation to which the royalty relates occurs.
The aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) for executed agreements includes deferred revenue yet to be recognized from area development and initial franchise fees. During 2020 one franchisee forfeited their ADA and the Company recognized $598 thousand of remaining deferred revenue. The Company recognized $206 and $117 thousand in revenue for 2020 and 2019, respectively. As of December 27, 2020, and December 29, 2019, the Company’s remaining performance obligations approximated $2.5 million and $3.3 million, of which approximately 6% will be recognized over the next twelve months and the remaining 94% thereafter.
In this balance, the Company does not include the value of unsatisfied performance obligations related to those agreements for which it recognizes revenue at the amount for which it has the right to invoice for services performed. Additionally, this balance does not include revenue related to performance obligations that are part of an agreement with an original expected duration of one year or less. Lastly, this balance does not include variable consideration recognized using the sales-based royalty exception.
As part of the adoption of Topic 606, the Company has elected the following practical expedients provided for in the standard.
| 1) | The Company is excluding from its transaction price all sales and similar taxes collected from its customers. | |
| 2) | The portfolio approach has been elected by the Company as it expects any effects of adoption would not be materially different in application at the portfolio level compared with the application at an individual agreement level. | |
| 3) | The Company has elected the “right to invoice” expedient which states that for performance obligations satisfied over time, if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date, the entity may recognize revenue in the amount to which the entity has a right to invoice. | |
| 4) | The Company has elected not to disclose information about its remaining performance obligations for any agreement that has an original expected duration of one year or less. | |
| 5) | The Company has elected not to disclose information about its remaining performance obligations for variable consideration that is a sales-based royalty promised in exchange for a license of intellectual property. | |
| 6) | The Company has elected to disclose rebates in the “Other Revenue” line. Rebates are based on volume purchases with the specified vendors. |
| 19 |
Twin Restaurant Holding, LLC
Notes to Consolidated Financial Statements
The Company records food and beverage revenues from company-owned stores upon sale to the customer. Neither the type of service sold, nor the location of sale significantly impacts the nature, amount, timing, or uncertainty of revenue and cash flows.
The Company records a liability in the period in which a gift card is sold. As gift cards are redeemed, the liability is reduced. When gift cards are redeemed at a franchisee-operated restaurant, the revenue and related administrative costs are recognized by the franchisee. The Company recognizes revenue and related administrative costs when gift cards are redeemed at Company-operated restaurants. The gift card breakage approximates 20% and has been immaterial to date.
The company does not currently incur direct incremental costs to obtain new Franchise Agreements.
Deferred Development and Franchise Fees
The components of the change in deferred development and franchise fees are as follows:
2020 | 2019 | |||||||
| Balance at beginning of period | $ | 3,328 | $ | 3,159 | ||||
| Fees received from franchise owners | 100 | 377 | ||||||
| Development and franchise fees recognized | (903 | ) | (208 | ) | ||||
| Balance at end of period | 2,525 | 3,328 | ||||||
| Less: current portion | 235 | 206 | ||||||
| Deferred development and franchise fees noncurrent | $ | 2,290 | $ | 3,122 | ||||
Deferred development and franchise fees expected to be recognized as of December 27, 2020 are as follows:
| For the fiscal years ending | ||||
| 2021 | $ | 235 | ||
| 2022 | 159 | |||
| 2023 | 159 | |||
| 2024 | 159 | |||
| 2025 | 159 | |||
| Thereafter | 1,654 | |||
| $ | 2,525 | |||
Income Taxes
The Company is a limited liability company and is not required to pay federal income tax. Accordingly, no federal income tax expense has been recorded in the consolidated financial statements. The Company’s federal taxable income or loss has been included in the member’s respective income tax return. The Company is subject to state income taxes as applicable.
| 20 |
Twin Restaurant Holding, LLC
Notes to Consolidated Financial Statements
The Company applies FASB ASC 740-10 - Income Taxes in establishing standards for accounting for uncertain tax positions. The Company evaluates uncertain tax positions with the presumption of audit detection and applies a “more likely than not” standard to evaluate the recognition of tax benefits or provisions. ASC 740-10 applies a two-step process to determine the amount of tax benefits or provisions to record in the financial statements. First, the Company determines whether any amount may be recognized and then determines how much of a tax benefit or provision should be recognized. As of December 27, 2020, the Company has no uncertain tax positions.
Recent Accounting Pronouncements
In January 2017, the FASB issued Accounting Standards Update ASU 2017-04, Intangibles – Goodwill and Other, which simplifies the test for goodwill impairment by removing the second step of the two-step impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. For nonpublic entities, the standard is effective for annual periods beginning after December 15, 2022 with early application permitted for tests performed after January 1, 2017. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in ASU 2016-02 (as subsequently amended by ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20) requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. As with previous guidance, there continues to be a differentiation between finance leases and operating leases, however this distinction now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments in the statement of cash flows. Lease assets and liabilities arising from both finance and operating leases will be recognized in the statement of financial position. ASU 2016-02 leaves the accounting for leases by lessors largely unchanged from previous GAAP. The transitional guidance for adopting the requirements of ASU 2016-02 calls for a modified retrospective approach that includes a number of optional practical expedients that entities may elect to apply. In addition, ASU 2018-11 provides for an additional (and optional) transition method by which entities may elect to initially apply the transition requirements in Topic 842 at that Topic’s effective date with the effects of initially applying Topic 842 recognized as a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption and without retrospective application to any comparative prior periods presented. Also, ASU 2018-20 provides certain narrow-scope improvements to Topic 842 as it relates to lessors. The ASU is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
| 21 |
Twin Restaurant Holding, LLC
Notes to Consolidated Financial Statements
On January 28, 2021, the FASB issued ASU 2021-02, “Practical Expedient for Private-Company Franchisors on the Identification of Performance Obligations” under ASC 606 which allows a franchisor that is not a public business entity (“private-company franchisor”) to use a practical expedient when identifying performance obligations in its contracts with customers (i.e., franchisees) under ASC 606. When using the practical expedient, a private-company franchisor that has entered into a franchise agreement would treat certain preopening services provided to its franchisee as distinct from the franchise license. The practical expedient is intended to reduce the cost and complexity of applying ASC 606 to preopening services associated with initial franchise fees. Although the practical expedient simplifies determination of preopening service of ASC 606 (i.e., identifying the performance obligations), entities are still required to apply the rest of the
guidance in ASC 606, including the guidance on (1) identifying other performance obligations (e.g., equipment sales), (2) determining the stand-alone selling prices of the performance obligations, (3) allocating the transaction price to the performance obligations, and (4) determining the timing of revenue recognition. Further, ASU 2021-02 applies only to certain preopening services provided by private-company franchisors, and entities not within the scope of the ASU’s guidance are precluded from applying the ASU directly or by analogy. If an entity has already adopted ASC 606, the amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. For those entities that have already adopted ASC 606, the amendments must be applied retrospectively as of the date of initial application of ASC 606, with a cumulative-effect adjustment to opening retained earnings. For entities that have already adopted ASC 606, the following transition disclosures are required in the period of adoption of the ASU: (1)The nature of the change in accounting principle, including an explanation of the newly adopted accounting principle, (2) The method of applying the change, (3) The effect of the adoption on any line item in the statement of financial position as of the beginning of the first period for which (ASU 2021-02) is applied, (4)The cumulative effect of the change on retained earnings or other components of equity in the statement of financial position as of the beginning of the first period for which (ASU 2021-02) is applied. The Company has elected to not adopt this guidance as ASC 606 was previously adopted as of January 1, 2018
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses (“ASU 2018-19”), which clarifies that receivables arising from operating leases are accounted for using lease guidance and not as financial instruments. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”), which clarifies the treatment of certain credit losses. In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief (“ASU 2019-05”), which provides an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost. In November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses (“ASU 2019-11”), which provides guidance around how to report expected recoveries. ASU 2016-13, ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2019-11 (collectively, “ASC 326”) are effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
| 22 |
Twin Restaurant Holding, LLC
Notes to Consolidated Financial Statements
3. Property and Equipment
Property and equipment consists of the following at December 27, 2020 and December 29, 2019:
| 2020 | 2019 | |||||||
| Leasehold improvements | $ | 25,761,938 | $ | 31,102,165 | ||||
| Furniture and equipment | 8,683,524 | 8,115,437 | ||||||
| Construction in progress | 2,641,967 | 3,069,150 | ||||||
| 37,087,429 | 42,286,752 | |||||||
| Accumulated depreciation | (10,915,184 | ) | (6,430,802 | ) | ||||
| $ | 26,172,245 | $ | 35,855,950 | |||||
Depreciation expense for property and equipment for the fiscal year ended December 27, 2020 and December 29, 2019 was $5,811,987 and $6,430,802.
4. Sale Leaseback Transactions
During fiscal 2020, the Company executed a sale leaseback of one property for proceeds of $4,132,951. The company recognized a loss on the sale of $36,310. The lease term is 20 years and the annual base rent is $250,000.
5. Accrued Liabilities
Accrued liabilities consist of the following at December 27, 2020 and December 29, 2019:
| 2020 | 2019 | |||||||
| Payroll | $ | 1,238,475 | $ | 3,487,465 | ||||
| Sales and use tax | 1,741,120 | 1,300,850 | ||||||
| Real and personal property taxes | 1,168,169 | 329,477 | ||||||
| Marketing Fund Accrual | 1,065,696 | - | ||||||
| Other accruals | 1,624,896 | 1,758,858 | ||||||
| $ | 6,838,356 | $ | 6,876,650 | |||||
| 23 |
Twin Restaurant Holding, LLC
Notes to Consolidated Financial Statements
6. Intangible Assets and Goodwill
Intangible assets at December 27, 2020 and December 29, 2019, consist of the following:
December 27, 2020
| In thousands | Useful Life | Gross Amount | Accumulated Amortization | Net Amount | ||||||||||
| Franchise Relationships | 21 years | $ | 22,000 | $ | 1,853 | $ | 20,147 | |||||||
| Favorable Leases | 6 years | 7,765 | 2,480 | 5,285 | ||||||||||
| Total definite-lived intangibles | $ | 29,765 | $ | 4,333 | $ | 25,432 | ||||||||
| In thousands | Useful Life | Gross Amount | Accumulated Impairment | Net Amount | ||||||||||
| Trademarks | Indefinite | $ | 64,000 | $ | - | $ | 64,000 | |||||||
| Liquor Licenses | Indefinite | 375 | - | 375 | ||||||||||
| Total indefinite-lived intangibles | $ | 64,375 | $ | - | $ | 64,375 | ||||||||
December 29, 2019
| In thousands | Useful Life | Gross Amount | Accumulated Amortization | Net Amount | ||||||||||
| Franchise Relationships | 21 years | $ | 22,000 | $ | 806 | $ | 21,194 | |||||||
| Favorable Leases | 6 years | 7,055 | 980 | 6,075 | ||||||||||
| Total definite-lived intangibles | $ | 29,055 | $ | 1,786 | $ | 27,269 | ||||||||
| In thousands | Useful Life | Gross Amount | Accumulated Impairment | Net Amount | ||||||||||
| Trademarks | Indefinite | $ | 64,000 | $ | - | $ | 64,000 | |||||||
| Liquor Licenses | Indefinite | 375 | - | 375 | ||||||||||
| Total indefinite-lived intangibles | $ | 64,375 | $ | - | $ | 64,375 | ||||||||
Amortization expense was $2,420,050 and $3,755,863 for the years ended December 27, 2020 and for the period from March 29, 2019 (inception) to December 29, 2019. Estimated amortization expense for the subsequent five years is as follows:
| Years ending December 29, | ||||
| 2021 | $ | 2,450 | ||
| 2022 | 2,450 | |||
| 2023 | 2,450 | |||
| 2024 | 2,126 | |||
| 2025 and Thereafter | 15,956 | |||
| $ | 25,432 | |||
| 24 |
Twin Restaurant Holding, LLC
Notes to Consolidated Financial Statements
Goodwill
The Company has goodwill assigned based on the studies completed for the acquisition of the Company and subsequent acquisitions.
The changes in the carrying amount of goodwill for the year ended December 27, 2020 and for the period from March 29, 2019 (inception) to December 29, 2019 (in thousands): | ||||
| Balance as of March 29, 2019 | $ | 1,650 | ||
| Goodwill recorded from acquisitions | 984 | |||
| Balance as of December 29, 2019 | $ | 2,634 | ||
| Balance as of December 27, 2020 | $ | 2,634 | ||
The additional goodwill recorded relates to the subsequent acquisition of the Albuquerque store location.
7. Notes Payable
At the Date of Acquisition, the Company paid off its existing debt agreements and entered into a new debt facility (the “Credit Agreement”) to facilitate the acquisition. As of December 29, 2019, the Credit Agreement provide for, among other things, (a) a term loan with a commitment of $64,350,000 (Term Loan), (b) a revolver of $12,000,000 (Revolver), and (c) development line of credit (DLOC) of $23,000,000, all of which are due March 29, 2024.
On March 10, 2020, the Company borrowed from the DLOC in the amount of $3,500,000 consisting of LIBOR loans with an interest period of six months. The Company received the borrowing on March 13, 2020. On March 16, 2020, the Company borrowed from the revolver in the amount of $12,000,000 consisting of LIBOR loans with an interest period of six months. The Company received the borrowing on March 19,2020.
On October 8, 2020 the Company Amended the Credit Agreement to obtain a waiver of debt covenants that were unable to be maintained due to the impact of Covid-19 on operations. The amendment adjusted the leverage to EBITDA ratios, increased the interest rate, and reduced the DLOC capacity to $12,000,000. At the execution of the Amendment the Company repaid the $12,000,000 outstanding on the Revolver.
As of December 27, 2020, the DLOC Commitment of $3,500,000 and the term loan of $63,050,000 were outstanding. As of December 29, 2019, only the term loan commitment of $64,350,000 was outstanding.
Interest on all borrowings under the Credit Agreement is paid monthly. The Credit Agreement bears interest at LIBOR plus 7.5% (amended from 5.75% and will reduce in accordance with meeting certain leverage ratios back to 5.75%) with a LIBOR floor of 1.25%. The term loan requires quarterly principal payments of $325,000. The DLOC draw period ends on October 15, 2021 and payments commence on January 1, 2022. The revolver has no required payments.
| 25 |
Twin Restaurant Holding, LLC
Notes to Consolidated Financial Statements
The Credit Agreement is secured by substantially all assets of the Company and its subsidiaries. The agreement requires, among other things, maintenance by the Company of minimum levels of leverage to EBITDA ratio. As of December 27, 2020, and December 29, 2019, the Company was in compliance with all covenants.
In conjunction with the Credit Agreement borrowings, $1,327,500 in transaction fees were capitalized as deferred financing costs, to be amortized over the term of the debt agreement using the effective interest method.
| 2020 | 2019 | |||||||
| Term Note, | $ | 63,050,000 | $ | 64,350,000 | ||||
| DLOC, 1% Amortization beginning 2022 | 3,500,000 | - | ||||||
| Deferred financing fees – net | (857,769 | ) | (1,123,269 | ) | ||||
| Total debt | 65,692,231 | 63,226,731 | ||||||
| Current portion of long-term debt | (1,300,000 | ) | (1,300,000 | ) | ||||
| Long-term debt | $ | 64,392,231 | $ | 61,926,731 | ||||
As of December 27, 2020, future principal payment obligations on notes payable are as follows:
| For the fiscal year ending | ||||
| 2021 | $ | 1,300,000 | ||
| 2022 | 1,440,000 | |||
| 2023 | 1,370,000 | |||
| 2024 | 62,440,000 | |||
| $ | 66,550,000 | |||
Paycheck Protection Program
On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property.
It also appropriated funds for the SBA Paycheck Protection Program (PPP) loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19.
The Company applied for and received approximately $12.9 million for the SBA Paycheck Protection Program on April 22, 2020. Prior to December 27, 2020 the Company applied for forgiveness of $12.2 million of the loan and repaid $0.7 million of the loan related to a location that was permanently closed post-Covid and therefore not eligible for forgiveness. The PPP loan carries an interest rate of 1.00%. The Company accrued interest of $84,877 in fiscal year 2020 but no interest payments were required in fiscal year 2020. The PPP loan has a two-year repayment schedule for any unforgiven amounts, no principal payments were required in fiscal year 2020.
| 26 |
The application for these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on adherence to the forgiveness criteria. The PPP loan is subject to any new guidance and new requirements released by the Department of the Treasury who has indicated that all companies that have received funds in excess of $2.0 million will be subject to a government (SBA) audit to further ensure PPP loans are limited to eligible borrowers in need.
8. Commitment and Contingencies
Operating leases
The Company leases various restaurant locations, which generally have renewal clauses of 5 to 20 years exercisable at the Company’s option, under non-cancelable operating leases expiring in June 2030.
The Company’s restaurant leases generally provide for fixed rental payments plus real estate taxes, insurance and other expenses. In addition, several of the Company’s leases provide for contingent rental payments between 2% and 6% of the restaurant’s gross sales once certain thresholds are met.
Future minimum lease payments under non-cancelable operating leases as of December 27, 2020 are as follows:
| For the fiscal year ending | ||||
| 2021 | $ | 5,334,979 | ||
| 2022 | 4,886,942 | |||
| 2023 | 4,448,801 | |||
| 2024 | 3,537,463 | |||
| 2025 | 3,322,366 | |||
| Thereafter | 16,553,049 | |||
| $ | 38,083,600 | |||
Rent expense for the fiscal years ended December 27, 2020 and for the period from March 29, 2019 (inception) to December 29, 2019 was $6,411,064 and $4,911,257. The Company includes rent expense associated with the construction period of its restaurants in restaurant pre-opening costs in the accompanying statements of operations.
| 27 |
Twin Restaurant Holding, LLC
Notes to Consolidated Financial Statements
Contingencies
The Company may be a party to routine claims brought against it in the ordinary course of business. The Company estimates whether such liabilities are probable to occur and whether reasonable estimates can be made and accrues liabilities when both conditions are met.
During the fiscal year ended December 29, 2019, charges of discrimination were filed with the United States Equal Employment Opportunity Commission through the Chicago District Office, which are pending as of December 29, 2019. The majority of the charges of discrimination claim discrimination based on retaliation and sex, additionally, some claim discrimination based on race, age, disability and/or color. No actions have been filed in court, but claimants seek monetary relief between $500,000 and $1,000,000 through their attorney. While the Company strongly maintained that the claims asserted in the lawsuit were without merit, it mediated the case on March 4, 2021 and are negotiating a settlement agreement.
The accompanying consolidated financial statements include a Restricted Cash asset and a Restricted Cash liability accrual for $9.5 million related to pending lawsuits. The remaining corresponding restricted cash balance is payable by the Company to the sellers at the later of March 29, 2022 or the date on which no action relating to any Specified Matter as per the 2019 Acquisition is pending and no other action relating to any Specified Matter has been asserted or threatened.
9. Related Party Transactions
At the acquisition date the Company contracted in separate transition service agreements with the former owner in which $5,000 is received per period or $65,000 and $50,000 for Fiscal Year 2020 and 2019 for certain accounting and legal services. The Company also contracted with the former owner for certain transportation costs in the amount of $23,000 per period or $293,000 and $230,000 for Fiscal Year 2020 and 2019. The agreements are for a period of from one to five years and are cancellable with 90 days notice.
The Company had related party payables of $247,114 and $161,640 at December 27, 2020 and December 29, 2019. These balances consist primarily of amounts due to Front Burner Restaurants, LP, for transaction services agreements and intercompany payables.
The Company earned revenue from locations owned by related parties for services associated with franchise and royalty fees and marketing fees. The Company earned approximately $11,300 and $111,170 for the fiscal years ended December 27, 2020 and for the period from March 29, 2019 (inception) to December 29, 2019.
Certain franchise restaurant locations have investors that include key employees of the Company and follow the standard franchise agreement.
10. Members’ Equity
Garnett Station Partners raised $61,300,000 and a combination of the Company’s Senior management and the former owners rolled over $8,500,000, which is accounted as approximately 69,900,000 shares of Series A preferred units.
| 28 |
Twin Restaurant Holding, LLC
Notes to Consolidated Financial Statements
The Company is authorized to issue, in order of preference in the event of a Distribution or Qualified Transaction (such as a sale of the Company): Repurchase Units, Series A Preferred Units, Series A Units and Series B Units. The total number of authorized and outstanding Repurchase Units, Series A Preferred Units, Series A Units and Series B Units were 0, 69,900,000, and 8,200,000 respectively at December 27, 2020 and December 29, 2019.
The Series A Preferred Units earn a dividend of 8% per annum compounded quarterly. No dividends were declared as of December 27, 2020 and December 29, 2019.
Shortly after the acquisition the Company issued 8,207,501 Series B Units to certain key members of management. The shares vest over 4 years and the related compensation expense for the period ended December 27, 2020 and December 29, 2019 were deemed immaterial.
11. Employee Benefit Plan
The Company has a 401(k)-defined contribution plan (“the Plan”). Participation in the Plan is available to all employees meeting certain eligibility requirements. The Plan allows employees to contribute the maximum amount allowable under IRS regulations. The Company made matching contributions to the Plan totaling $107,264 and $117,441 during the years ended December 27, 2020 and for the period from March 29, 2019 (inception) to December 29, 2019.
12. Subsequent Events
The Company evaluated all material events or transactions that occurred after December 27, 2020 through October 15, 2021, the date these consolidated financial statements were available to be issued. As of April 26, 2021, $1.4 million in PPP loans have been forgiven. The Company will record the derecognition of this liability as of the forgiveness date. A corresponding gain on PPP loan forgiveness will be recorded in the Consolidated Statement of Operations accordingly.
On October 1, 2021,FAT Brands, Inc. completed its previously announced acquisition from Twin Peaks Holdings, LLC (the “Seller”) of Twin Peaks and its subsidiaries, which franchise and operate a chain of sports lodge restaurants. FAT Brands Inc. acquired Twin Peaks Holdings, LLC. and its direct and indirect subsidiaries including Twin Restaurant Holding, LLC. FAT Brands Inc. completed the issuance and sale in a private offering through its special purpose, wholly-owned subsidiary, FAT Brands Twin Peaks I, LLC (the “Issuer”), of an aggregate principal amount of $250,000,000 of Series 2021-1 Fixed Rate Secured Notes (the “Notes”). The net proceeds from the sale of the Notes were used by the Company to finance the cash portion of the purchase price for the acquisition of Twin Peaks Buyer, LLC and its direct and indirect subsidiaries (collectively, “Twin Peaks”) in the transaction. Immediately following the closing of the acquisition, the Company contributed to the Issuer 100% of its ownership interest in Twin Peaks Buyer, LLC, including all of its subsidiaries and operations, pursuant to a Contribution Agreement dated October 1, 2021.
The purchase price for the acquisition was $300,000,000, paid for by the Company in the form of $222,100,000 in net cash, $10,350,000 Note Payable and 2,847,393 shares of the Company’s Series B Cumulative Preferred Stock (the “Preferred Stock Consideration”). The Company agreed to register for resale the Preferred Stock Consideration and maintain the effectiveness of such registration for up to six years. The Seller has agreed to a lock-up period following the Closing with respect to the Preferred Stock Consideration, during which time the Seller may not offer, sell or transfer any interest in such shares. The lock-up provisions restrict sales until March 31, 2022 for 1,793,858 shares (the “Initial Put/Call Shares”) and September 30, 2022 for the remaining 1,053,535 shares (the “Secondary Put/Call Shares”), subject to certain exceptions set forth in the Put/Call Agreement (as defined below).
On the Closing Date, the Company and the Seller entered into a Put/Call Agreement (the “Put/Call Agreement”) pursuant to which the Company was granted the right to call from the Seller, and the 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 $42,500,000, and the Secondary Put/Call Shares at any time until September 30, 2022 for a cash payment of $25,000,000, plus any accrued but unpaid dividends on such shares. If the Company does not deliver the applicable cash proceeds to the Seller when due, the amounts then due will accrue interest at the rate of 10.0% per annum.
| 29 |
Exhibit 99.2
Twin Restaurant Holding, LLC
Consolidated Financial Statements
As of June 13, 2021 and December 27, 2020
Twin Restaurant Holding, LLC
Consolidated Financial Statements
As of June 13, 2021 and December 27, 2020
Consolidated Financial Statements
| 3 |
Consolidated Financial Statements
| 4 |
Twin Restaurant Holding, LLC
Unaudited Condensed Interim Consolidated Balance Sheets
June 13, 2021 | December 27, 2020 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 18,458,139 | $ | 18,506,066 | ||||
| Restricted cash | 5,000,000 | - | ||||||
| Receivables | 1,683,724 | 1,663,644 | ||||||
| Inventory | 1,296,168 | 947,588 | ||||||
| Prepaids and other current assets | 791,307 | 1,539,837 | ||||||
| Total current assets | 27,229,338 | 22,657,135 | ||||||
| Notes Receivable | 1,500,000 | 1,500,000 | ||||||
| Property and Equipment - net | 26,660,144 | 26,172,245 | ||||||
| Deposits | 589,913 | 562,349 | ||||||
| Restricted cash - asset | 9,493,059 | 9,493,059 | ||||||
| Goodwill | 2,633,876 | 2,633,876 | ||||||
| Intangibles - net | 88,675,434 | 89,806,034 | ||||||
| Total Assets | $ | 156,781,764 | $ | 152,824,698 | ||||
| Liabilities and Members’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 6,081,589 | $ | 4,254,996 | ||||
| Accrued liabilities | 9,360,801 | 6,838,356 | ||||||
| Current portion of long-term debt | 1,300,000 | 1,300,000 | ||||||
| Current portion of PPP Loan | - | 4,505,860 | ||||||
| Deferred revenue | 667,589 | 660,614 | ||||||
| Deferred development and franchise fees - current | 159,334 | 234,832 | ||||||
| Total current liabilities | 17,569,313 | 17,794,558 | ||||||
| Long-term debt - net | 63,871,640 | 64,392,231 | ||||||
| PPP loan, net of current portion | - | 7,724,330 | ||||||
| Deferred development and franchise fees – non-current | 2,440,745 | 2,290,053 | ||||||
| Restricted cash liability | 9,493,059 | 9,493,059 | ||||||
| Interest rate swap liability | 355,390 | 468,793 | ||||||
| Total Liabilities | 93,730,147 | 102,163,134 | ||||||
| Commitments and Contingencies (Note 8) | ||||||||
| Members’ Equity | ||||||||
| Additional paid-in capital | 69,867,510 | 69,867,510 | ||||||
| Retained earnings (loss) | (6,815,893 | ) | (19,205,946 | ) | ||||
| Total members’ equity | 63,051,617 | 50,661,564 | ||||||
| Total Liabilities and Members’ Equity | $ | 156,781,764 | $ | 152,824,698 | ||||
The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.
| 5 |
Twin Restaurant Holding, LLC
Unaudited Condensed Interim Consolidated Statements of Operations
Twenty-four Weeks Ended June 13, 2021 | Twenty-four Weeks Ended June 14, 2020 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Revenues | ||||||||
| Restaurant net sales | $ | 47,531,515 | $ | 29,427,647 | ||||
| Franchise and royalty fees | 5,912,894 | 3,217,082 | ||||||
| Marketing fees | 2,964,851 | 1,490,688 | ||||||
| Other revenue | 360,295 | 876,986 | ||||||
| Total revenues | 56,769,555 | 35,012,403 | ||||||
| Operating Expenses | ||||||||
| Restaurant operating expenses | 40,003,072 | 29,009,097 | ||||||
| General and administrative expenses | 4,831,538 | 4,063,969 | ||||||
| Advertising expenses | 3,325,146 | 2,367,674 | ||||||
| Loss on disposal of assets | - | 3,317,079 | ||||||
| Pre-Opening expenses | - | 66,940 | ||||||
| Depreciation and amortization expense | 3,788,213 | 3,985,950 | ||||||
| Total operating expenses | 51,947,969 | 42,810,709 | ||||||
| Income (loss) from operations | 4,821,586 | (7,798,306 | ) | |||||
| Other Income (Expense) | ||||||||
| Interest expense, net | (2,830,824 | ) | (3,094,040 | ) | ||||
| Other income (expense) | 10,399,291 | (1,637,592 | ) | |||||
| Total other income (expenses) | 7,568,467 | (4,731,632 | ) | |||||
| Net income (loss) | $ | 12,390,053 | $ | (12,529,938 | ) | |||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 6 |
Twin Restaurant Holding, LLC
Unaudited Condensed Interim Consolidated Statements of Changes in Members’ Equity
| Parent Unit – Series A | ||||||||||||||||
| Preferred Units | Retained | |||||||||||||||
| Shares | Amount | Earnings | Total | |||||||||||||
| Balance – December 29, 2019 | 69,866 | $ | 69,867,510 | $ | (8,931,166 | ) | $ | 60,936,344 | ||||||||
| Net Loss | - | - | (12,529,938 | ) | (12,529,938 | ) | ||||||||||
| Balance – June 14, 2020 | 69,866 | $ | 69,867,510 | $ | (21,461,104 | ) | $ | 48,406,406 | ||||||||
| Parent Unit – Series A | ||||||||||||||||
| Preferred Units | Retained | |||||||||||||||
| Shares | Amount | Earnings | Total | |||||||||||||
Balance – December 27, 2020 | 69,866 | $ | 69,867,510 | $ | (19,205,946 | ) | $ | 50,661,564 | ||||||||
| Net Income | - | - | 12,390,053 | 12,390,053 | ||||||||||||
| Balance – June 13, 2021 | 69,866 | $ | 69,867,510 | $ | (6,815,893 | ) | $ | 63,051,617 | ||||||||
The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.
| 7 |
Twin Restaurant Holding, LLC
Unaudited Condensed Interim Consolidated Statements of Cash Flows
Twenty-four Weeks Ended June 13, 2021 (Unaudited) | Twenty-four Weeks Ended June 14, 2020 (Unaudited) | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net Income (loss) | $ | 12,390,053 | $ | (12,529,938 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization expense | 3,788,213 | 3,985,950 | ||||||
| PPP Loans Forgiven | (12,173,690 | ) | - | |||||
| Amortization of deferred financing costs | 129,409 | 208,110 | ||||||
| Loss (gain) on interest rate swap | (113,405 | ) | 415,265 | |||||
| Loss on disposal of assets | - | 3,317,079 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Receivables | (20,080 | ) | 84,051 | |||||
| Inventory | (348,580 | ) | 211,935 | |||||
| Prepaids and other current assets | 748,530 | 734,451 | ||||||
| Deposits | (27,563 | ) | 12,110 | |||||
| Accounts payable | 1,639,982 | (500,820 | ) | |||||
| Accrued expenses | 2,819,227 | (2,150,775 | ) | |||||
| Deferred revenue | 6,975 | 54,622 | ||||||
| Deferred development and franchise fees | 75,184 | (100,337 | ) | |||||
| Deferred rent and tenant allowance | (166,360 | ) | 194,298 | |||||
| Net cash provided by (used in) operating activities | 8,747,894 | (6,063,999 | ) | |||||
| Cash Flows from Investing Activities | ||||||||
| Proceeds on sale of property | - | 4,132,952 | ||||||
| Purchase of property and equipment | (3,145,824 | ) | (2,006,084 | ) | ||||
| Net cash provided by (used in) investing activities | (3,145,824 | ) | 2,126,868 | |||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds on PPP Loans | - | 12,867,043 | ||||||
| Proceeds on Revolving Loans | - | 12,000,000 | ||||||
| Payments on Revolving Loans | - | - | ||||||
| Proceeds on long-term borrowings | - | 3,500,000 | ||||||
| Payments on long-term borrowings | (650,000 | ) | (650,000 | ) | ||||
| Net cash provided by (used in) financing activities | (650,000 | ) | 29,017,043 | |||||
| 8 |
Twin Restaurant Holding, LLC
Unaudited Condensed Interim Consolidated Statements of Cash Flows (continued)
Twenty-four Weeks
Ended June 13, 2021 (Unaudited) | Twenty-four Weeks
Ended June 14, 2020 (Unaudited) | |||||||
| Net change in cash, cash equivalents and restricted cash | 4,952,070 | 25,079,912 | ||||||
| Cash, cash equivalents and restricted cash, beginning of year | 18,506,066 | 9,931,577 | ||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 23,458,136 | $ | 35,011,489 | ||||
| Supplemental disclosure | ||||||||
| Cash paid for interest | $ | 3,017,159 | $ | 3,770,186 | ||||
| Non-Cash Financing Transactions | ||||||||
| PPP loans forgiven | $ | 12,173,690 | ||||||
The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.
| 9 |
Twin Restaurant Holding, LLC
Notes to Unaudited Condensed Interim Consolidated Financial Statements
1. Business
Twin Restaurant Holding, LLC (“TRH”, the “Company”, “we”), a Delaware limited liability company, is principally engaged in the ownership, operation, development, and franchising of the Twin Peaks Restaurant brands. As of June 13, 2021 and December 27, 2020, the Company operated 26 company-operated locations in Arkansas, Colorado, Illinois, Nevada, New Mexico and Texas, and franchised 54 and 53 restaurants, respectively located in Alabama, Arkansas, Arizona, California, Florida, Georgia, Idaho, Indiana, Kansas, Louisiana, Michigan, Mississippi, Missouri, North Carolina, Oklahoma, Ohio, South Carolina, Tennessee, Texas, Washington, Mexico.
On March 29, 2019, Garnett Station Partners, LLC, and associated affiliates and co-investors, formed Twin Restaurant Holding, LLC which, through other wholly owned subsidiaries acquired 100% of the shares of the Company (the 2019 Acquisition).
On October 1, 2021, the Company completed the acquisition of Twin Peaks Buyer LLC (“Twin Peaks”) for a total purchase price of $300.0 million, comprised of $222.1 million in net cash, a note payable in the amount of $10.4 million and 2,847,393 shares of the Company’s Series B Cumulative Preferred Stock (the “Twin Peaks Acquisition”).
COVID-19
Beginning in January 2020, there has been an outbreak of the Coronavirus Disease 2019 (“COVID-19” or “virus”), which has been declared a “pandemic” by the World Health Organization. As of the date of these financial statements, substantially all locations are no longer subject to reduced store hours or capacity limits. The length and severity of the COVID-19 pandemic, along with the financial impact from COVID-19 on the Company, if any, cannot be reasonably estimated at this time. The extent to which the COVID-19 will impact the Company’s financial condition, results of operations and liquidity will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain the virus or treat its impact, among others.
On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property.
It also appropriated funds for the SBA Paycheck Protection Program loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19. The Company applied for and received approximately $12.9 million for the SBA Paycheck Protection Program on April 22, 2020. See Note 7 – Note Payable for details surrounding PPP loans.
2. Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, these Unaudited Condensed Interim Consolidated financial statements contain all normal recurring adjustments considered necessary for a fair presentation of the Company’s financial position at June 13, 2021, the results of operations for the twenty-four weeks ended June 13, 2021 and June 14, 2020, and cash flows for the twenty-four weeks ended June 13, 2021 and June 14, 2020. The results for the twenty-four weeks ended June 13, 2021 are not necessarily indicative of the results to be expected for the full year or any other interim period. These statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 27, 2020
The unaudited condensed interim consolidated financial statements of Twin Restaurant Holding, LLC includes the accounts of Twin Restaurant Holding, LLC and its subsidiaries. Significant inter-company transactions and balances are eliminated in the consolidated financial statements.
Fiscal Year
The Company’s fiscal year is based on a 52 - 53 week reporting period, which ends each year on the last Sunday of December. The fiscal year ended December 27, 2020 consisted of 52 weeks. The Company’s fiscal second quarter ended June 13, 2021 and June 14, 2020, respectively both consisting of 24 weeks each.
| 10 |
Twin Restaurant Holding, LLC
Notes to Unaudited Condensed Interim Consolidated Financial Statements
Use of Estimates and Assumptions
The preparation of unaudited condensed interim consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed interim consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value Measurements
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1 – This level consists of unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 – This level consists of unadjusted quoted prices other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 – This level consists of unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, restricted cash, trade receivables, other receivables, prepaid expenses, accounts payable and accrued expenses and deferred revenue approximate their respective fair value based on the short-term nature of these instruments.
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, and accounts payable. The carrying amounts of cash and cash equivalents, and accounts payable, approximate their fair values because of the short-term maturities or expected settlement dates of these instruments.
The Company follows the provisions of ASC 820 for fair value measurements. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
In addition to the $65,000,000 variable rate loan with Comvest Capital, the Company entered into an interest rate agreement with Regions Bank, effective August 2, 2019, fixing the interest rate at 1.9%. This interest rate protection product, commonly called a swap, provides the Company with the assurance of a floating interest rate of 2.229750% during the term of the bank loan. This swap agreement is re-measured to fair value each reporting period to provide a current value of the interest rate protection product as if the loan were to be repaid at that point in time.
As of June 13, 2021 and December 27, 2020, the Company had a liability of $355,387 and $468,793 related to this agreement. This liability was classified as a level 2 fair value measurement as all significant inputs are based on quoted market prices of investments that are not actively traded and for which certain significant inputs are observable, either directly or indirectly, such as benchmark interest rates and yield curves and/or securities indices.
There were no investment assets or liabilities classified within level 1 or 3 at or during the twenty-four weeks ended June 13, 2021 and year ended December 27, 2020.
Cash and Cash Equivalents
The Company considers all investments in highly liquid instruments, purchased with maturity of three months or less, to be cash equivalents. The Company maintains cash deposits with federally insured financial institutions that may at times exceed federally insured limits. The Company has not incurred any losses from such accounts, and management considers the risk to be minimal. At December 27, 2020 and July 13, 2021, the Company had no cash equivalents.
Restricted Cash
In conjunction with the self-insurance related letter of credit, the Company maintains a $5,000,000 cash collateral account. See note 7 – Note Payable.
| 11 |
Twin Restaurant Holding, LLC
Notes to Unaudited Condensed Interim Consolidated Financial Statements
In conjunction with the acquisition, the Company made a Specified Matters Payment, as per the 2019 Acquistion the purchase agreement, of $10,000,000 to cover insurance retentions/deductibles on open claims at the acquisition date, see Note 8. This payment is held in a Regions bank account held by purchaser and is disbursed based on the examination of legal liabilities that meet the intended criteria of the designated account. In relation to the Restricted Cash, a Restricted Liability has been created to in the same amount to represent future potential outflows.
Accounts Receivable
Accounts receivable consists primarily of Franchise royalties and are analyzed for collectability periodically by management and are carried at net realizable value. The Company continuously evaluates the creditworthiness of its customers’ financial condition and generally does not require collateral. An allowance for doubtful accounts is estimated by management and is adjusted for those trade accounts receivable for which collection is uncertain. Accounts receivables are written-off when deemed uncollectible. At June 13, 2021 and December 27, 2020 there was no allowance for doubtful accounts.
Inventories
Inventories consist primarily of food and drink products, which are valued at the lower of cost, determined principally on the first-in, first-out method “FIFO”, or net realizable value.
Investment in Joint Venture (JV)
Investment in JV is accounted for under the Equity Method per ASC 323 Investments – Equity Method and Joint Ventures (ASC 323) which provides guidance on the criteria for determining whether you have an investment that qualifies for the equity method of accounting and how to account for the investment under US GAAP. Equity method investments are recorded as assets on the balance sheet at their initial cost and adjusted each reporting period by the investor through the income statement. As of June 13, 2021 and December 27, 2020, Investment in JV consisted of a secured convertible promissory note and is considered immaterial to these financial statements.
Leases
The Company reviews all leases for capital or operating classification at their inception. Within the provisions of certain leases, there are rent holidays and escalations in payments over the base lease term, as well as renewal periods. The effects of the holidays and escalations have been reflected in rent expense on a straight-line basis over the expected lease term. Differences between amounts paid and amounts expensed are recorded as deferred rent. The lease term commences on the date when the Company has the right to control the use of the leased property. Certain leases also include contingent rent provisions based on sales levels, which are accrued at the point in time the Company determines that it is probable such sales levels will be achieved.
Tenant improvement allowance incentives may be available to partially offset the cost of developing and opening the related restaurants, pursuant to agreed-upon terms in the lease. Tenant improvement allowances can take the form of cash payments upon the opening of the related restaurants, full or partial credits against minimum or percentage rents otherwise payable by the Company or a combination thereof. All tenant improvement allowances received by the Company are recorded as a deferred lease incentive and amortized over the term of the lease.
| 12 |
Twin Restaurant Holding, LLC
Notes to Unaudited Condensed Interim Consolidated Financial Statements
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation. Depreciation on equipment is provided in amounts sufficient to relate the cost of the assets to operations over their estimated service lives as follows:
| Leasehold improvements | 15 years or lease terms | |
| Furniture and equipment | 3 years | |
| Restaurant equipment | 5 years | |
| Office equipment | 3 years |
Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for major renewals and betterments, which extend the useful lives of the existing property and equipment, are capitalized and depreciated. Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is recognized in the consolidated statement of operations.
Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its’ carrying value.
If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment loss is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
Goodwill
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. The Company tests goodwill for impairment on an annual basis, or more frequently if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount (a triggering event). Upon the occurrence of a triggering event, a quantitative test is necessary, and the Company would perform a one-step impairment test comparing the fair value of the entity with its carrying value. The excess carrying value over fair value, if any, would represent the impairment loss.
In testing goodwill for impairment, Management has the option first to perform a qualitative assessment to determine whether it is more-likely-than-not that goodwill is impaired, or the reporting unit can bypass the qualitative assessment and proceed directly to the quantitative test by comparing the carrying amount, including goodwill, of the entity with its fair value. Management did not note any triggering events as of June 13, 2021 and December 27, 2020 and determined that no impairment has occurred. The goodwill impairment loss, if any, is the amount by which the carrying amount of an entity, including goodwill, exceeds its fair value. Any subsequent increase in goodwill value is not recognized. Goodwill is deemed to be impaired if the carrying amount of goodwill exceeds its fair value.
| 13 |
Twin Restaurant Holding, LLC
Notes to Unaudited Condensed Interim Consolidated Financial Statements
Intangible Assets
Trademarks represent the value of expected future royalty income associated with the ownership of the Company’s brand. Other non-amortizable intangible assets consist of the liquor licenses. Trademarks and the liquor licenses acquired at acquisition are not amortized. Instead, they are tested for impairment annually or upon a triggering event unless it is subsequently determined that the intangible asset has a finite useful life. At each reporting period, trademarks and other non-amortizable intangible assets are assessed to determine if any changes in facts or circumstances require a re-evaluation of the estimated value. Impairment tests for trademarks include comparing the fair value of the respective reporting unit with its carrying value. The Company uses a methodology in conducting these impairment assessments, which includes cash flow analyses that the Company believes are consistent with the assumptions hypothetical marketplace participants would use. Where applicable, an appropriate discount rate is used that is commensurate with the risk inherent in the projected cash flows.
Other intangible assets are amortized over their respective estimated useful lives to their estimated residual values and periodically reviewed for impairment should indicators of possible impairment arise. Amortizable intangible assets consist of favorable leases and franchise agreements, which are amortized on a straight-line basis over six and twenty-one years; respectively, which is representative of the economic benefits the Company expects to receive from the respective agreements.
Management’s annual impairment test for indefinite lived intangibles is performed annually in the third quarter, and Management has determined that no impairment occurred. In addition, whenever events or changes in circumstances indicate that the carrying amount for an asset may not be recoverable, the Company evaluates, for impairment, the carrying value of acquired definite lived intangible assets by comparing the carrying value to the anticipated future undiscounted cash flows expected to be generated from the use of the intangible assets. If the carrying amount is not recoverable, a loss is recorded in the amount the carrying value exceeds the fair market value of the assets.
Impairment of Long-Lived Assets
Long-lived assets, goodwill, and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company does not perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if an impairment is indicated by its carrying value not being recoverable through undiscounted cash flows. Impairment is recognized for the difference between the carrying amount and the fair value of the asset, generally estimated using discounted cash flows. There was no impairment recorded for the fiscal periods ended June 13, 2021 and December 27, 2020.
| 14 |
Twin Restaurant Holding, LLC
Notes to Unaudited Condensed Interim Consolidated Financial Statements
Insurance
We self-insure a significant portion of expected losses under its general liability programs. Accrued liabilities have been recorded based on estimates of the ultimate costs to settle incurred claims, both reported and not yet reported. These recorded estimated liabilities, which are included in Other accruals line item in Note 5 – Accrued Liabilities, are based upon the aggregate of the expected liability for reported claims and the estimated liability for claims incurred but not reported, based on historical claims experience adjusted as necessary based upon management’s reasoned judgment.
Pre-opening Costs
Pre-opening costs include costs associated with the opening and organizing of new stores or conversion of existing stores, including the cost of feasibility studies, pre-opening rent, training, recruiting, and traveling for employees engaged in such pre-opening activities. All such costs are expensed as incurred.
Sales Tax
Sales taxes collected from guests are excluded from revenues. The obligation is included in accrued liabilities until the taxes are remitted to the appropriate taxing authorities.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses were $3,325,146 and $2,367,674 for the twenty-four weeks ended June 13, 2021 and June 14, 2020.
Revenue Recognition
Adoption of New Accounting Standard
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The standards update outlines a single comprehensive model for an entity to utilize to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that will be received in exchange for the goods and services. The ASU and all subsequently issued clarifying ASUs replaced most existing revenue recognition guidance in US GAAP. The ASU also required expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company elected to apply the modified retrospective method of adoption to those contracts which were entered into subsequent to the Date of Acquisition and not completed as of that day.
| 15 |
Twin Restaurant Holding, LLC
Notes to Unaudited Condensed Interim Consolidated Financial Statements
Revenue Recognition Policy
The Company derives its revenues from area development, franchise, royalty and marketing fees from each franchise partner. The Company accounts for revenue from contracts with customers through the following steps:
| ● | Identification of the contract with a customer | |
| ● | Identification of the performance obligations in the contract | |
| ● | Determination of the transaction price | |
| ● | Allocation of the transaction price to the performance obligations in the contract | |
| ● | Recognition of revenue when, or as, the Company satisfies a performance obligation |
The Company has entered into area development agreements with its franchise partners whereby they will open varying numbers of Twin Peaks restaurants within a designated geographic area over the next one to eight years following their respective agreement dates. Area development fees required to be paid are upfront, non-refundable fees which serve as a prepayment for all or a portion of the initial franchise fee for each location to be opened under the area development agreement. The area development fees are recognized ratably over the term of the related franchise agreement beginning at the opening date of the franchise location. Additionally, the Company receives upfront, non-refundable initial franchise fees (when not fully satisfied by the fee paid under the area development agreement) that are recognized ratably over the term of the related franchise agreement beginning at the opening date of the franchise location.
The Company receives variable sales-based royalty fees from the franchisee at the rate of 5% of gross sales, payable on a weekly basis. Royalty fees are recognized in the period in which the related sales occur.
The Company receives variable sales-based marketing fees from the franchisee at the rate of 2.5% of gross sales, payable on a weekly basis. Marketing fees are recognized in the period in which the related sales occur.
The Company receives rebate income from purchases from vendors which is recorded in other revenue. Rebate income is recognized as purchases are made by franchise owners from vendors and rebates are earned.
The Company’s agreements generally do not include any significant financing components.
Performance Obligations
The Company typically satisfies its performance obligations as the franchise partner utilizes the franchise right and as services are rendered each month. Substantially all of the Company’s revenue is satisfied over time.
Royalty and marketing fees are recognized over time using the “sales-based royalty” exception, which states that revenue will be recognized at the later of when the subsequent sales occur or when the satisfaction or partial satisfaction of the performance obligation to which the royalty relates occurs.
The aggregate amount of transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) for executed agreements includes deferred revenue yet to be recognized from area development and initial franchise fees. The Company recognized $150 and $100 thousand in revenue for the twenty-four weeks ending June 13, 2021 and June 14, 2020, respectively. As of June 13, 2021 and December 27, 2020, the Company’s remaining performance obligations approximated $2.3 million and $2.5 million, of which approximately 6% will be recognized over the next twelve months and the remaining 94% thereafter.
In this balance, the Company does not include the value of unsatisfied performance obligations related to those agreements for which it recognizes revenue at the amount for which it has the right to invoice for services performed. Additionally, this balance does not include revenue related to performance obligations that are part of an agreement with an original expected duration of one year or less. Lastly, this balance does not include variable consideration recognized using the sales-based royalty exception.
| 16 |
Twin Restaurant Holding, LLC
Notes to Unaudited Condensed Interim Consolidated Financial Statements
As part of the adoption of Topic 606, the Company has elected the following practical expedients provided for in the standard.
| 1) | The Company is excluding from its transaction price all sales and similar taxes collected from its customers. | |
| 2) | The portfolio approach has been elected by the Company as it expects any effects of adoption would not be materially different in application at the portfolio level compared with the application at an individual agreement level. | |
| 3) | The Company has elected the “right to invoice” expedient which states that for performance obligations satisfied over time, if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date, the entity may recognize revenue in the amount to which the entity has a right to invoice. | |
| 4) | The Company has elected not to disclose information about its remaining performance obligations for any agreement that has an original expected duration of one year or less. | |
| 5) | The Company has elected not to disclose information about its remaining performance obligations for variable consideration that is a sales-based royalty promised in exchange for a license of intellectual property. | |
| 6) | The Company has elected to disclose rebates in the “Other Revenue” line. Rebates are based on volume purchases with the specified vendors. |
The Company records food and beverage revenues from company-owned stores upon sale to the customer. Neither the type of service sold, nor the location of sale significantly impacts the nature, amount, timing, or uncertainty of revenue and cash flows.
The Company records a liability in the period in which a gift card is sold. As gift cards are redeemed, the liability is reduced. When gift cards are redeemed at a franchisee-operated restaurant, the revenue and related administrative costs are recognized by the franchisee. The Company recognizes revenue and related administrative costs when gift cards are redeemed at Company-operated restaurants. The gift card breakage approximates 20% and has been immaterial to date.
The company does not currently incur direct incremental costs to obtain new Franchise Agreements.
Deferred Development and Franchise Fees
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of accounting within the contract. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied by transferring the promised good or service to the customer. The Company identifies performance obligations at contract inception so that it can monitor and account for the obligations over the life of the contract. Remaining performance obligations represent the portion of the transaction price in a contract allocated to products and services not yet transferred to the customer. As of June 13, 2021, and December 27, 2020 the aggregate amount of the contractual transaction prices allocated to remaining performance obligations was approximately $2.6 and $2.5 million.
| 17 |
Twin Restaurant Holding, LLC
Notes to Unaudited Condensed Interim Consolidated Financial Statements
The Company expects to recognize revenue for its remaining performance obligations as of June 13, 2021 and December 27, 2020 in future periods as follows:
| June 13, 2021 | December 27, 2020 | |||||||
| Within one year | $ | 159,334 | $ | 159,334 | ||||
| Between one and three years | 478,002 | 478,002 | ||||||
| Thereafter | 1,962,743 | 1,887,559 | ||||||
| Total Value of Remaining Performance Obligations | $ | 2,600,079 | $ | 2,524,895 | ||||
Income Taxes
The Company is a limited liability company and is not required to pay federal income tax. Accordingly, no federal income tax expense has been recorded in the unaudited condensed interim consolidated financial statements. The Company’s federal taxable income or loss has been included in the member’s respective income tax return. The Company is subject to state income taxes as applicable.
The Company applies FASB ASC 740-10 - Income Taxes in establishing standards for accounting for uncertain tax positions. The Company evaluates uncertain tax positions with the presumption of audit detection and applies a “more likely than not” standard to evaluate the recognition of tax benefits or provisions. ASC 740-10 applies a two-step process to determine the amount of tax benefits or provisions to record in the financial statements. First, the Company determines whether any amount may be recognized and then determines how much of a tax benefit or provision should be recognized. As of June 13, 2021 and December 27, 2020, the Company has no uncertain tax positions.
Recent Accounting Pronouncements
In January 2017, the FASB issued Accounting Standards Update ASU 2017-04, Intangibles – Goodwill and Other, which simplifies the test for goodwill impairment by removing the second step of the two-step impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. For nonpublic entities, the standard is effective for annual periods beginning after December 15, 2022 with early application permitted for tests performed after January 1, 2017. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
| 18 |
Twin Restaurant Holding, LLC
Notes to Unaudited Condensed Interim Consolidated Financial Statements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses (“ASU 2018-19”), which clarifies that receivables arising from operating leases are accounted for using lease guidance and not as financial instruments. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”), which clarifies the treatment of certain credit losses. In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief (“ASU 2019-05”), which provides an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost. In November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses (“ASU 2019-11”), which provides guidance around how to report expected recoveries. ASU 2016-13, ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2019-11 (collectively, “ASC 326”) are effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. The standard requires lessors to classify leases as either sales-type, finance or operating. A sales-type lease occurs if the lessor transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing lease. If the lessor does not convey risks and rewards or control, an operating lease results. In November 2019, the FASB issued ASU 2019-10, deferring the effective date of this standards update to fiscal years beginning after December 15, 2020. In June 2020, the FASB issued ASU 2020-05, which permitted private entities that have not yet issued their financial statements or made financial statements available for issuance as of June 3, 2020 to adopt Topic 842 for annual reporting periods beginning after December 15, 2021, and for interim reporting periods within annual reporting periods beginning after December 15, 2022. The Company is currently assessing the impact adoption of this standard will have on its Consolidated Financial Statements.
3. Property and Equipment
Property and equipment consists of the following at June 13, 2021 and December 27, 2020:
| June 13, 2021 | December 27, 2020 | |||||||
| Land | $ | 1,584,020 | $ | - | ||||
| Leasehold improvements | 25,768,428 | 25,761,938 | ||||||
| Furniture and equipment | 8,824,636 | 8,683,524 | ||||||
| Construction in progress | 4,287,579 | 2,641,967 | ||||||
| 40,233,253 | 37,087,429 | |||||||
| Accumulated depreciation | (13,573,108 | ) | (10,915,184 | ) | ||||
| $ | 26,660,144 | $ | 26,172,245 | |||||
Depreciation expense for property and equipment for the twenty-four weeks ended June 13, 2021 and June 14, 2020 was $2,657,613 and $2,884,933.
4. Sale Leaseback Transactions
During fiscal 2020, the Company executed a sale leaseback of one property for proceeds of $4,132,951. The company recognized a loss on the sale of $36,310. The lease term is 20 years and the annual base rent is $250,000.
| 19 |
Twin Restaurant Holding, LLC
Notes to Unaudited Condensed Interim Consolidated Financial Statements
5. Accrued Liabilities
Accrued liabilities consist of the following at June 13, 2021 and December 27, 2020:
June 13, 2021 | December 27, 2020 | |||||||
| Payroll | $ | 2,197,279 | $ | 1,238,475 | ||||
| Sales and use tax | 2,081,408 | 1,741,120 | ||||||
| Real and personal property taxes | 661,527 | 1,168,169 | ||||||
| Marketing Fund Accrual | 2,967,669 | 1,065,696 | ||||||
| Other accruals | 1,452,919 | 1,624,896 | ||||||
| $ | 9,360,801 | $ | 6,838,356 | |||||
6. Intangible Assets
Intangible assets at June 13, 2021 and December 27, 2020, consist of the following:
June 13, 2021
| In thousands | Useful Life | Gross Amount | Accumulated Amortization | Net Amount | ||||||||||
| Franchise Relationships | 21 years | $ | 22,000 | $ | 2,336 | $ | 19,663 | |||||||
| Favorable Leases | 6 years | 7,765 | 3,128 | 4,637 | ||||||||||
| Total definite-lived intangibles | $ | 29,765 | $ | 5,466 | $ | 24,300 | ||||||||
| In thousands | Useful Life | Gross Amount | Accumulated Impairment | Net Amount | ||||||||||
| Trademarks | Indefinite | $ | 64,000 | $ | - | $ | 64,000 | |||||||
| Liquor Licenses | Indefinite | 375 | - | 375 | ||||||||||
| Total indefinite-lived intangibles | $ | 64,375 | $ | - | $ | 64,375 | ||||||||
December 27, 2020
| In thousands | Useful Life | Gross Amount | Accumulated Amortization | Net Amount | ||||||||||
| Franchise Relationships | 21 years | $ | 22,000 | $ | 1,853 | $ | 20,147 | |||||||
| Favorable Leases | 6 years | 7,765 | 2,480 | 5,285 | ||||||||||
| Total definite-lived intangibles | $ | 29,765 | $ | 4,333 | $ | 25,432 | ||||||||
| In thousands | Useful Life | Gross Amount | Accumulated Impairment | Net Amount | ||||||||||
| Trademarks | Indefinite | $ | 64,000 | $ | - | $ | 64,000 | |||||||
| Liquor Licenses | Indefinite | 375 | - | 375 | ||||||||||
| Total indefinite-lived intangibles | $ | 64,375 | $ | - | $ | 64,375 | ||||||||
Amortization expense was $1,130,600 and $1,101,017 for the 24 weeks ended June 13, 2021 and June 14, 2020. Estimated amortization expense for the subsequent five years is as follows:
| Years ending December 2x, | ||||
| Remaining 2021 | $ | 1,320 | ||
| 2022 | 2,450 | |||
| 2023 | 2,450 | |||
| 2024 | 2,124 | |||
| 2025 | 1,048 | |||
| Therafter | 14,908 | |||
| $ | 24,300 | |||
| 20 |
Twin Restaurant Holding, LLC
Notes to Unaudited Condensed Interim Consolidated Financial Statements
7. Notes Payable
At the Date of Acquisition, the Company paid off its existing debt agreements and entered into a new debt facility (the “Credit Agreement”) to facilitate the acquisition. As of December 29, 2019 the Credit Agreement provide for, among other things, (a) a term loan with a commitment of $64,350,000 (Term Loan), (b) a revolver of $12,000,000 (Revolver), and (c) development line of credit (DLOC) of $23,000,000, all of which are due March 29, 2024.
On March 10, 2020, the Company borrowed from the DLOC in the amount of $3,500,000 consisting of LIBOR loans with an interest period of six months. The Company received the borrowing on March 13, 2020. On March 16, 2020, the Company borrowed from the revolver in the amount of $12,000,000 consisting of LIBOR loans with an interest period of six months. The Company received the borrowing on March 19,2020.
On October 8, 2020 the Company Amended the Credit Agreement to obtain a waiver of debt covenants that were unable to be maintained due to the impact of Covid-19 on operations. The amendment adjusted the leverage to EBITDA ratios, increased the interest rate, and reduced the DLOC capacity to $12,000,000. At the execution of the Amendment the Company repaid the $12,000,000 outstanding on the Revolver.
As of June 13, 2021 and December 27, 2020 the DLOC Commitment of $3,500,000 and the term loan of $62,400,000 and $63,050,000 were outstanding, respectively.
Interest on all borrowings under the Credit Agreement is paid monthly . The Credit Agreement bears interest at LIBOR plus 7.5% (amended from 5.75%, and will reduce in accordance with meeting certain leverage ratios back to 5.75%) with a LIBOR floor of 1.25%. The term loan requires quarterly principal payments of $325,000. The DLOC draw period ends on October 15, 2021 and payments commence on January 1, 2022. The revolver has no required payments.
The Credit Agreement is secured by substantially all assets of the Company and its subsidiaries. The agreement requires, among other things, maintenance by the Company of minimum levels of leverage to EBITDA ratio. As of June 13, 2021 and December 27, 2020, the Company was in compliance with all covenants.
In conjunction with the Credit Agreement borrowings, $1,327,500 in transaction fees were capitalized as deferred financing costs, to be amortized over the term of the debt agreement using the effective interest method.
June 13, 2021 | December 27, 2020 | |||||||
| Term Note, | $ | 62,400,000 | $ | 63,050,000 | ||||
| DLOC, 1% Amortization beginning 2022 | 3,500,000 | - | ||||||
| Deferred financing fees – net | (728,360 | ) | (857,769 | ) | ||||
| Total debt | 65,171,640 | 65,692,231 | ||||||
| Less: current portion of long-term debt | (1,300,000 | ) | (1,300,000 | ) | ||||
| Long-Term Debt | $ | 63,871,640 | $ | 64,392,231 | ||||
| 21 |
Twin Restaurant Holding, LLC
Notes to Unaudited Condensed Interim Consolidated Financial Statements
As of December 27, 2020, future principal payment obligations on notes payable are as follows:
| For the fiscal year ending | ||||
| Remaining 2021 | $ | 650,000 | ||
| 2022 | 1,440,000 | |||
| 2023 | 1,370,000 | |||
| 2024 | 62,440,000 | |||
| $ | 65,900,000 | |||
In April of 2021, the Company obtained a $5,000,000 letter of credit from a nationally recognized bank as part the Company’s general liability self-insurance retention. In conjunction with the letter of credit, the Company maintains a $5,000,000 cash collateral account with the issuing bank which is included in cash on the balance sheet as of June 13, 2021.
Paycheck Protection Program
On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property.
It also appropriated funds for the SBA Paycheck Protection Program (PPP) loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19.
The Company applied for and received approximately $12.9 million for the SBA Paycheck Protection Program on April 22, 2020. Prior to December 27, 2020 the Company applied for forgiveness of $12.2 million of the loan and repaid $0.7 million of the loan related to a location that was permanently closed post-Covid and therefore not eligible for forgiveness. The PPP loan carries an interest rate of 1.00%. The Company accrued interest of $84,877 in fiscal year 2020 but no interest payments were required in fiscal year 2020. The PPP loan has a two-year repayment schedule for any unforgiven amounts, no principal payments were required in fiscal year 2020.
The application for these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on adherence to the forgiveness criteria. The PPP loan is subject to any new guidance and new requirements released by the Department of the Treasury who has indicated that all companies that have received funds in excess of $2.0 million will be subject to a government (SBA) audit to further ensure PPP loans are limited to eligible borrowers in need. See subsequent events footnote for more. During the quarter ended June 13, 2021, all remaining PPP loans totaling $12.2m were forgiven. The Company recorded the derecognition of this liability as of the forgiveness dates. A corresponding gain on PPP loan forgiveness has been recorded in the Consolidated Statement of Operations recorded in Other income.
| 22 |
Twin Restaurant Holding, LLC
Notes to Unaudited Condensed Interim Consolidated Financial Statements
8. Commitment and Contingencies
Operating leases
The Company leases various restaurant locations, which generally have renewal clauses of 5 to 20 years exercisable at the Company’s option, under non-cancelable operating leases expiring in June 2030.
The Company’s restaurant leases generally provide for fixed rental payments plus real estate taxes, insurance and other expenses. In addition, several of the Company’s leases provide for contingent rental payments between 2% and 6% of the restaurant’s gross sales once certain thresholds are met.
Future minimum lease payments under non-cancelable operating leases as of June 13, 2021 are as follows:
| For the fiscal year ending | ||||
| Remaining 2021 | $ | 2,667,490 | ||
| 2022 | 4,886,942 | |||
| 2023 | 4,448,801 | |||
| 2024 | 3,537,463 | |||
| 2025 | 3,322,366 | |||
| Thereafter | 16,553,049 | |||
| $ | 35,416,110 | |||
Rent expense for the twenty-four weeks ending June 13, 2021 and June 14, 2020, respectively was $2,400,117 and $3,409,727. The Company includes rent expense associated with the construction period of its restaurants in restaurant pre-opening costs in the accompanying statements of operations.
Contingencies
The Company may be a party to routine claims brought against it in the ordinary course of business. The Company estimates whether such liabilities are probable to occur and whether reasonable estimates can be made and accrues liabilities when both conditions are met.
| 23 |
Twin Restaurant Holding, LLC
Notes to Unaudited Condensed Interim Consolidated Financial Statements
During the fiscal year ended December 29, 2019, charges of discrimination were filed with the United States Equal Employment Opportunity Commission through the Chicago District Office, which were pending as of December 27, 2020. The majority of the charges of discrimination claim discrimination based on retaliation and sex, additionally, some claim discrimination based on race, age, disability and/or color. The Company settled with the claimants subsequent to the date of these financial statements. The settlement was fully funded by Restricted Cash on the balance sheet.
The accompanying unaudited condensed interim consolidated financial statements include a Restricted Cash asset and a Restricted Cash liability accrual for $9.5 million related to pending lawsuits. The remaining corresponding restricted cash balance is payable by the Company to the sellers at the later of March 29, 2022 or the date on which no action relating to any Specified Matter as per the 2019 Acquistionis pending and no other action relating to any Specified Matter has been asserted or threatened.
9. Related Party Transactions
At the acquisition date the Company contracted in separate transition service agreements with the former owner in which $5,000 is received per period or $65,000 and $50,000 for Fiscal Year 2020 and 2019 for certain accounting and legal services. The Company also contracted with the former owner for certain transportation costs in the amount of $0 and $23,000 per period or $293,000 and $230,000 for Fiscal Year’s 2021, 2020 and 2019, respectively. The agreements are for a period of from one to five years and are cancellable with 90 days notice. The agreement was canceled in Fiscal Year 2020.
The Company had related party payables of $270 thousand and $247 thousand at June 13, 2021 and December 27, 2020, respectively. These balances consist primarily of amounts due to Front Burner Restaurants, LP, for transaction services agreements and intercompany payables.
Certain franchise restaurant locations have investors that include key employees of the Company and follow the standard franchise agreement.
| 24 |
Twin Restaurant Holding, LLC
Notes to Unaudited Condensed Interim Consolidated Financial Statements
11. Employee Benefit Plan
The Company has a 401(k)-defined contribution plan (“the Plan”). Participation in the Plan is available to all employees meeting certain eligibility requirements. The Plan allows employees to contribute the maximum amount allowable under IRS regulations. The Company made matching contributions to the Plan totaling $57,631 and $44,502 during the twenty-four weeks ending June 13, 2021 and June 14, 2020, respectively.
12. Subsequent Events
On October 1, 2021, FAT Brands, Inc. completed its previously announced acquisition from Twin Peaks Holdings, LLC (the “Seller”) of Twin Peaks and its subsidiaries, which franchise and operate a chain of sports lodge restaurants. FAT Brands Inc. acquired Twin Peaks Holdings, LLC. and its direct and indirect subsidiaries including Twin Restaurant Holding, LLC. FAT Brands Inc. completed the issuance and sale in a private offering through its special purpose, wholly-owned subsidiary, FAT Brands Twin Peaks I, LLC (the “Issuer”), of an aggregate principal amount of $250,000,000 of Series 2021-1 Fixed Rate Secured Notes (the “Notes”). The net proceeds from the sale of the Notes were used by the Company to finance the cash portion of the purchase price for the acquisition of Twin Peaks Buyer, LLC and its direct and indirect subsidiaries (collectively, “Twin Peaks”) in the transaction. Immediately following the closing of the acquisition, the Company contributed to the Issuer 100% of its ownership interest in Twin Peaks Buyer, LLC, including all of its subsidiaries and operations, pursuant to a Contribution Agreement dated October 1, 2021.
The purchase price for the acquisition was 300,000,000, paid for by the Company in the form of $222,1,500,000 in cash, $10,350,000 Note Payable and 2,847,393 shares of the Company’s Series B Cumulative Preferred Stock (the “Preferred Stock Consideration”). The Company agreed to register for resale the Preferred Stock Consideration and maintain the effectiveness of such registration for up to six years. The Seller has agreed to a lock-up period following the Closing with respect to the Preferred Stock Consideration, during which time the Seller may not offer, sell or transfer any interest in such shares. The lock-up provisions restrict sales until March 31, 2022 for 1,793,858 shares (the “Initial Put/Call Shares”) and September 30, 2022 for the remaining 1,053,535 shares (the “Secondary Put/Call Shares”), subject to certain exceptions set forth in the Put/Call Agreement (as defined below).
On the Closing Date, the Company and the Seller entered into a Put/Call Agreement (the “Put/Call Agreement”) pursuant to which the Company was granted the right to call from the Seller, and the 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 $42,500,000, and the Secondary Put/Call Shares at any time until September 30, 2022 for a cash payment of $25,000,000, plus any accrued but unpaid dividends on such shares. If the Company does not deliver the applicable cash proceeds to the Seller when due, the amounts then due will accrue interest at the rate of 10.0% per annum.
Management has evaluated subsequent events through October 15, 2021, the date the Unaudited Condensed Interim Consolidated Financial Statements were available for issuance and other than as described in Notes 1, 2, 4 and 6, there have been no material events impacting the Company.
| 25 |
Exhibit 99.3
Unaudited Pro Forma Condensed Combined Financial Statements
On October 1, 2021, the Company completed the acquisition of Twin Peaks Buyer LLC (“Twin Peaks”) for a total purchase price of $300.0 million, comprised of $222.1 million in net cash, a note payable in the amount of $10.4 million and 2,847,393 shares of the Company’s Series B Cumulative Preferred Stock (the “Twin Peaks Acquisition”).
On July 22, 2021, FAT Brands, Inc. (the “Company”) completed the acquisition of GFG Holding Inc. (“GFG”) for a total purchase price of $447.7 million paid by the Company in the form of $355.2 million in cash, 3,089,245 shares of the Company’s Series B Cumulative Preferred Stock and 1,964,865 shares of the Company’s Common Stock (the “GFG Acquisition” and, together with the Twin Peaks Acquisition, the “Acquisitions”).
The following unaudited pro forma condensed combined balance sheet as of June 27, 2021 gives effect to the Acquisitions as if they had occurred on June 27, 2021, and the following unaudited pro forma condensed combined statements of operations for the twenty-six weeks ended June 27, 2021 and for the year ended December 27, 2021 give effect to the Acquisitions as if they had occurred on December 30, 2019 (the “Pro Forma Financial Statements”). The Pro Forma Financial Statements are based on historical financial information of the entities, as adjusted to give effect to the Acquisitions. The Pro Forma Financial Statements have been prepared in accordance with Article 11 of Regulation S-X.
The following Pro Forma Financial Statements do not reflect the financial condition at the date or results of operations of the Company for the periods indicated. The assumptions used and pro forma adjustments derived from such assumptions are based on currently available information, and in many cases are based on estimates and preliminary information. The assumptions underlying the pro forma adjustments are described in the accompany notes to the unaudited pro forma combined financial statements. However, the Pro Forma Financial Statements may not be indicative of our future performance and do not necessarily reflect what our financial condition and results of operations would have been had the acquisition to which the pro forma adjustments relate occurred on the dates indicated above.
Unaudited Pro Forma Combined Balance Sheet
As of June 27, 2021
(in thousands)
| Historical Results | Historical Results | ||||||||||||||||||||||||||||||||
| Fat Brands, Inc. | GFG | GFG Transaction Accounting Adjustments (Note 5) | Pro Forma | TP | TP Transaction Accounting Adjustments (Note 5) | Pro Forma Combined | |||||||||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||||||||||||
| Current assets: | |||||||||||||||||||||||||||||||||
| Cash | $ | 48,124 | $ | 5,874 | $ | (20,851 | ) | (a) | $ | 33,147 | $ | 18,458 | $ | (7,939 | ) | (h) | $ | 43,666 | |||||||||||||||
| Restricted cash | 4,096 | - | 4,605 | (b) | 8,701 | 5,000 | (1,250 | ) | (i) | 12,451 | |||||||||||||||||||||||
| Accounts Receivable | 5,583 | 5,080 | - | 10,663 | 1,684 | - | 12,347 | ||||||||||||||||||||||||||
| Trade and other notes receivable | 217 | - | - | 217 | - | - | 217 | ||||||||||||||||||||||||||
| Inventory | - | 2,002 | - | 2,002 | 1,296 | - | 3,298 | ||||||||||||||||||||||||||
| Other receivables | - | 457 | (457 | ) | (c) | - | - | - | - | ||||||||||||||||||||||||
| Assets classified as held for sale | 7,735 | 5,069 | (5,069 | ) | (d) | 7,735 | - | - | 7,735 | ||||||||||||||||||||||||
| Prepaids and other current assets | - | 910 | (910 | ) | (c) | - | 791 | - | 791 | ||||||||||||||||||||||||
| Other current assets | 2,486 | - | 1,367 | (c) | 3,853 | - | - | 3,853 | |||||||||||||||||||||||||
| Total current assets | 68,241 | 19,392 | (21,315 | ) | 66,318 | 27,229 | (9,189 | ) | 84,358 | ||||||||||||||||||||||||
| Noncurrent restricted cash | 1,800 | - | - | 1,800 | - | - | 1,800 | ||||||||||||||||||||||||||
| Notes receivable | 1,583 | - | - | 1,583 | - | - | 1,583 | ||||||||||||||||||||||||||
| Other intangible assets, net | 46,950 | 314,170 | (36,470 | ) | (d) | 324,650 | 88,675 | 99,500 | (d) | 512,825 | |||||||||||||||||||||||
| Amortizable intangible assets, net | - | 6,779 | (6,779 | ) | (c) | - | - | - | - | ||||||||||||||||||||||||
| Goodwill | 9,706 | - | 190,590 | (e) | 200,296 | 2,634 | 82,413 | (e) | 285,343 | ||||||||||||||||||||||||
| Deferred income tax asset, net | 33,555 | - | (32,278 | ) | (c) | 1,277 | - | - | 1,277 | ||||||||||||||||||||||||
| Operating lease right of use assets | 4,913 | - | 10,839 | (f) | 15,752 | - | 27,005 | (f) | 42,757 | ||||||||||||||||||||||||
| Fixed assets | - | 5,793 | 2,581 | (d) | 8,374 | 26,660 | 8,548 | (d) | 43,582 | ||||||||||||||||||||||||
| Other assets | 2,420 | 540 | - | 2,960 | 11,584 | (9,493 | ) | 5,051 | |||||||||||||||||||||||||
| Total assets | $ | 169,168 | $ | 346,674 | $ | 107,168 | $ | 623,010 | $ | 156,782 | $ | 198,784 | $ | 978,576 | |||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||||
| Current liabilities: | |||||||||||||||||||||||||||||||||
| Accounts payable | $ | 8,410 | $ | 7,579 | $ | - | $ | 15,989 | $ | 6,082 | $ | - | $ | 22,071 | |||||||||||||||||||
| Accrued expenses and other liabilities | 21,235 | - | - | 21,235 | 9,361 | - | 30,596 | ||||||||||||||||||||||||||
| Accrued interest payable | 1,473 | - | - | 1,473 | - | - | 1,473 | ||||||||||||||||||||||||||
| Accrued Advertising | 1,980 | - | - | 1,980 | - | - | 1,980 | ||||||||||||||||||||||||||
| Deferred income, current portion | 1,684 | 3,252 | (2,402 | ) | (d) | 2,534 | 3,268 | (2,268 | ) | 3,534 | |||||||||||||||||||||||
| Dividend payable on preferred shares | 1,397 | - | - | 1,397 | - | - | 1,397 | ||||||||||||||||||||||||||
| Liabilities related to assets classified as held for sale | 7,131 | - | - | 7,131 | - | - | 7,131 | ||||||||||||||||||||||||||
| Current portion of operating lease liability | 929 | - | 3,755 | (f) | 4,684 | - | 4,801 | (f) | 9,485 | ||||||||||||||||||||||||
| Current portion of preferred shares, net | 7,980 | - | - | 7,980 | - | - | 7,980 | ||||||||||||||||||||||||||
| Current portion of long-term debt | 913 | 286 | (286 | ) | (g) | 913 | 1,300 | (1,300 | ) | (j) | 913 | ||||||||||||||||||||||
| Other | 18 | - | - | 18 | - | - | 18 | ||||||||||||||||||||||||||
| Total current liabilities | 53,150 | 11,117 | 1,067 | 65,334 | 20,011 | 1,233 | 86,578 | ||||||||||||||||||||||||||
| Deferred income - noncurrent | 9,691 | - | - | 9,691 | - | - | (d) | 9,691 | |||||||||||||||||||||||||
| Long-term debt, net of current portion | 146,140 | 234,264 | 104,668 | (g) | 485,072 | 63,872 | 173,062 | (j) | 722,006 | ||||||||||||||||||||||||
| Operating lease liability, net of current portion | 4,508 | - | 9,314 | (d)(f) | 13,822 | - | 19,184 | (f) | 33,006 | ||||||||||||||||||||||||
| Deferred Tax Liability | - | 32,278 | (32,278 | ) | (c) | - | - | - | - | ||||||||||||||||||||||||
| Other liabilities | 58 | 912 | - | 970 | 9,847 | (9,493 | ) | 1,324 | |||||||||||||||||||||||||
| Acquisition purchase price payable | 776 | - | - | 776 | - | 10,350 | 11,126 | ||||||||||||||||||||||||||
| Total liabilities | 214,323 | 278,571 | 82,771 | 575,665 | 93,730 | 194,336 | 863,731 | ||||||||||||||||||||||||||
| Redeemable preferred stock | - | - | 67,500 | (a) | 67,500 | - | 67,500 | (h) | 135,000 | ||||||||||||||||||||||||
| Stockholders’ equity: | |||||||||||||||||||||||||||||||||
| Preferred stock | 29,092 | - | - | 29,092 | - | - | 29,092 | ||||||||||||||||||||||||||
| Common stock | (45,086 | ) | - | 25,000 | (a) | (20,086 | ) | - | - | (20,086 | ) | ||||||||||||||||||||||
| Accumulated deficit | (29,254 | ) | (92,667 | ) | 92,667 | (29,254 | ) | (6,816 | ) | 6,816 | (29,254 | ) | |||||||||||||||||||||
| Noncontrolling interests | 93 | - | - | 93 | - | - | 93 | ||||||||||||||||||||||||||
| Additional paid in capital | - | 160,770 | (160,770 | ) | - | 69,868 | (69,868 | ) | - | ||||||||||||||||||||||||
| Total Stockholders’ equity | (45,155 | ) | 68,103 | (43,103 | ) | (20,155 | ) | 63,052 | (63,052 | ) | (20,155 | ) | |||||||||||||||||||||
| Total liabilities, non-controlling interests and stockholders’ equity | $ | 169,168 | $ | 346,674 | $ | 107,168 | $ | 623,010 | $ | 156,782 | $ | 198,784 | $ | 978,576 | |||||||||||||||||||
Unaudited Pro Forma Combined Statement of Operations
For the Six Months Ended June 27, 2021
(in thousands, except share and per share amounts)
| Historical Results | Historical Results | |||||||||||||||||||||||||||||||||||
| Fat Brands, Inc. | GFG | GFG Transaction Accounting Adjustments (Note 5) | Pro Forma | TP | TP Transaction Accounting Adjustments (Note 5) | Pro Forma as Adjusted | ||||||||||||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||||||||||||
| Royalties | $ | 11,057 | $ | 15,770 | $ | - | $ | 26,827 | $ | 5,763 | $ | - | $ | 32,590 | ||||||||||||||||||||||
| Restaurant sales | 234 | - | 21,782 | (aa) | 22,016 | 47,532 | - | 69,548 | ||||||||||||||||||||||||||||
| Company store revenue | - | 21,782 | (21,782 | ) | (aa) | - | - | - | - | |||||||||||||||||||||||||||
| Factory revenue | - | 16,114 | - | 16,114.0 | - | - | 16,114 | |||||||||||||||||||||||||||||
| Advertising fees | 2,560 | - | - | 2,560.0 | 2,965 | - | 5,525 | |||||||||||||||||||||||||||||
| Franchise fees | 1,022 | 559 | - | 1,581.0 | 150 | - | 1,731 | |||||||||||||||||||||||||||||
| Licensing and other revenue | - | 381 | - | 381.2 | - | - | 381 | |||||||||||||||||||||||||||||
| Management fees and other income | 58 | - | - | 58.0 | 360 | - | 418 | |||||||||||||||||||||||||||||
| Total revenues | 14,931 | 54,606 | - | 69,537 | 56,770 | - | 126,307 | |||||||||||||||||||||||||||||
| Costs and expenses | ||||||||||||||||||||||||||||||||||||
| General and administrative expense | 10,408 | 27,727 | (1,494 | ) | (aa) | 36,641 | 4,832 | - | 41,473 | |||||||||||||||||||||||||||
| Restaurant operating expenses | 244 | - | 11,661 | (aa) | 11,905 | 40,003 | - | 51,908 | ||||||||||||||||||||||||||||
| Cost of revenues | - | 11,661 | (11,661 | ) | (aa) | - | - | - | - | |||||||||||||||||||||||||||
| Cost of sales | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
| Labor expenses | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
| Loss on asset disposal | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
| Advertising expense | 2,560 | - | - | 2,560 | 3,325 | - | 5,885 | |||||||||||||||||||||||||||||
| Depreciation and amortization | - | 1,705 | 3,609 | (aa)(cc) | 5,314 | 3,788 | (48 | ) | (cc) | 9,054 | ||||||||||||||||||||||||||
| Refranchising (gain) loss | (429 | ) | - | - | (429 | ) | - | - | (429 | ) | ||||||||||||||||||||||||||
| Other expense (income) | - | (710 | ) | 710 | (aa) | - | - | - | - | |||||||||||||||||||||||||||
| Total other income (expense) | 12,783 | 40,383 | 2,825 | 55,991 | 51,948 | (48 | ) | 107,891 | ||||||||||||||||||||||||||||
| Income (Loss) from operations | 2,148 | 14,223 | (2,825 | ) | 13,547 | 4,822 | 48 | 18,416 | ||||||||||||||||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||||||||||||||
| Interest expense, net | (4,866 | ) | (11,876 | ) | (42 | ) | (bb) | (16,784 | ) | (2,831 | ) | (7,169 | ) | (ee) | (26,784 | ) | ||||||||||||||||||||
| Net loss on extinguishment of debt | (6,405 | ) | - | - | (6,405 | ) | - | - | (6,405 | ) | ||||||||||||||||||||||||||
| Interest expense related to preferred shares | (552 | ) | - | - | (552 | ) | - | - | (552 | ) | ||||||||||||||||||||||||||
| Other expense | (809 | ) | 4,565 | - | 3,756 | 10,399 | - | 14,155 | ||||||||||||||||||||||||||||
| Other income (expense) | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
| Total other income (expense) | (12,632 | ) | (7,311 | ) | (42 | ) | (19,985 | ) | 7,568 | (7,169 | ) | (19,586 | ) | |||||||||||||||||||||||
| (Loss) income before income tax expense | (10,484 | ) | 6,912 | (2,866 | ) | (6,438 | ) | 12,390 | (7,121 | ) | (1,169 | ) | ||||||||||||||||||||||||
| Income tax expense (benefit) | (2,121 | ) | 1,032 | (745 | ) | (dd) | (1,834 | ) | - | (1,852 | ) | (dd) | (3,686 | ) | ||||||||||||||||||||||
| Net income | (8,363 | ) | 5,880 | (2,121 | ) | (4,604 | ) | 12,390 | (5,270 | ) | 2,517 | |||||||||||||||||||||||||
| Net loss attributable to noncontrolling interest | (5 | ) | - | - | (5 | ) | - | - | (5 | ) | ||||||||||||||||||||||||||
| Net income attributable to the Company | $ | (8,358 | ) | $ | 5,880 | $ | (2,121 | ) | $ | (4,599 | ) | $ | 12,390 | $ | (5,270 | ) | $ | 2,522 | ||||||||||||||||||
| Basic and diluted loss per common share | $ | (0.69 | ) | $ | - | $ | - | $ | (0.33 | ) | $ | - | $ | 0.18 | ||||||||||||||||||||||
| Basic and diluted weighted average shares outstanding | 12,122,938 | - | - | 14,087,803 | - | 14,087,803 | ||||||||||||||||||||||||||||||
Unaudited Pro Forma Combined Condensed Statement of Operations
For the Year Ended December 27, 2020
(in thousands, except share and per share amounts)
| Historical Results | Historical Results | |||||||||||||||||||||||||||||||||||
| Fat Brands, Inc. | GFG | GFG Transaction Accounting Adjustments (Note 5) | Pro Forma | TP | TP Transaction Accounting Adjustments (Note 5) | Pro Forma as Adjusted | ||||||||||||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||||||||||||
| Royalties | $ | 13,420 | $ | 24,840 | $ | - | $ | 38,260 | $ | - | $ | 803 | (aa) | $ | 39,063 | |||||||||||||||||||||
| Restaurant sales | - | - | 63,729 | (aa) | 63,729 | 75,538 | - | 139,267 | ||||||||||||||||||||||||||||
| Company store revenue | - | 63,729 | (63,729 | ) | (aa) | - | - | - | - | |||||||||||||||||||||||||||
| Factory revenue | - | 24,267 | - | 24,267 | - | - | 24,267 | |||||||||||||||||||||||||||||
| Advertising fees | 3,527 | - | - | 3,527 | - | 6,084 | (aa) | 9,611 | ||||||||||||||||||||||||||||
| Marketing fees | - | - | - | - | 6,084 | (6,084 | ) | (aa) | - | |||||||||||||||||||||||||||
| Franchise fees | 1,130 | 888 | - | 2,018 | - | 8,643 | (aa) | 10,661 | ||||||||||||||||||||||||||||
| Franchise and royalty fees | - | - | - | - | 9,446 | (9,446 | ) | (aa) | - | |||||||||||||||||||||||||||
| Licensing and other revenue | - | 612 | (612 | ) | - | - | - | - | ||||||||||||||||||||||||||||
| Management fees and other income | 41 | - | 612 | 653 | 1,322 | - | 1,975 | |||||||||||||||||||||||||||||
| Total revenues | 18,118 | 114,336 | - | 132,454 | 92,390 | - | 224,844 | |||||||||||||||||||||||||||||
| Costs and expenses | ||||||||||||||||||||||||||||||||||||
| General and Adminstrative expense | 14,876 | 73,987 | 3,230 | (aa) | 92,093 | 9,958 | - | 102,051 | ||||||||||||||||||||||||||||
| Cost of revenues | - | 23,099 | - | 23,099 | - | - | 23,099 | |||||||||||||||||||||||||||||
| Advertising expense | 5,218 | - | - | 5,218 | - | - | 5,218 | |||||||||||||||||||||||||||||
| Restaurant operating expenses | - | - | - | - | 25,391 | 49,946 | (aa) | 75,337 | ||||||||||||||||||||||||||||
| Cost of sales | - | - | - | - | 20,810 | (20,810 | ) | (aa) | - | |||||||||||||||||||||||||||
| Labor expenses | - | - | - | - | 29,136 | (29,136 | ) | (aa) | - | |||||||||||||||||||||||||||
| Refranchising (gain) loss | 3,827 | - | - | 3,827 | - | - | 3,827 | |||||||||||||||||||||||||||||
| Depreciation and amortization | - | 4,074 | 6,819 | (aa)(cc) | 10,893 | 8,232 | (253 | ) | (cc) | 18,872 | ||||||||||||||||||||||||||
| Impairment of assets | 9,295 | 24,476 | - | 33,771 | - | - | 33,771 | |||||||||||||||||||||||||||||
| Other expense (income) | - | 4,402 | (4,402 | ) | (aa) | - | - | - | - | |||||||||||||||||||||||||||
| Total costs and expenses | 33,216 | 130,038 | 5,647 | 168,901 | 93,527 | (253 | ) | 262,175 | ||||||||||||||||||||||||||||
| Income (Loss) from operations | (15,098 | ) | (15,702 | ) | (5,647 | ) | (36,447 | ) | (1,137 | ) | 253 | (37,331 | ) | |||||||||||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||||||||||||||
| Interest expense, net | (3,375 | ) | (20,911 | ) | (2,924 | ) | (bb) | (27,210 | ) | (6,892 | ) | (13,108 | ) | (ee) | (47,210 | ) | ||||||||||||||||||||
| Interest expense related to preferred shares | (1,544 | ) | - | - | (1,544 | ) | - | - | (1,544 | ) | ||||||||||||||||||||||||||
| Change in fair value of derivative liability | 887 | - | - | 887 | (344 | ) | - | 543 | ||||||||||||||||||||||||||||
| Gain on contingent consideration payable adjustment | 1,680 | - | - | 1,680 | - | - | 1,680 | |||||||||||||||||||||||||||||
| Earnout liability adjustment | - | - | - | - | 5,200 | - | 5,200 | |||||||||||||||||||||||||||||
| Net loss on extinguishment of debt | (88 | ) | - | - | (88 | ) | - | - | (88 | ) | ||||||||||||||||||||||||||
| Loss on disposal of assets | - | - | - | - | (3,051 | ) | - | (3,051 | ) | |||||||||||||||||||||||||||
| Other expense | (1,011 | ) | (94 | ) | - | (1,105 | ) | (4,051 | ) | - | (5,156 | ) | ||||||||||||||||||||||||
| Total other income (expense) | (3,451 | ) | (21,005 | ) | (2,924 | ) | (27,380 | ) | (9,138 | ) | (13,108 | ) | (49,626 | ) | ||||||||||||||||||||||
| Income (Loss) before income tax expense | (18,549 | ) | (36,707 | ) | (8,571 | ) | (63,827 | ) | (10,275 | ) | (12,855 | ) | (86,957 | ) | ||||||||||||||||||||||
| Income tax expense (benefit) | (3,689 | ) | (8,375 | ) | (2,228 | ) | (dd) | (14,292 | ) | - | (3,342 | ) | (17,635 | ) | ||||||||||||||||||||||
| Net income | $ | (14,860 | ) | $ | (28,332 | ) | $ | (6,343 | ) | $ | (49,535 | ) | $ | (10,275 | ) | $ | (9,512 | ) | $ | (69,322 | ) | |||||||||||||||
| Basic and diluted loss per common share | $ | (1.25 | ) | $ | - | $ | - | $ | (3.57 | ) | $ | - | $ | - | $ | (5.00 | ) | |||||||||||||||||||
| Basic and diluted weighted average shares outstanding | 11,897,952 | - | - | 13,862,817 | - | - | 13,862,817 | |||||||||||||||||||||||||||||
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
NOTE 1 – BASIS OF PRESENTATION
The Pro Forma Financial Statements are based on historical financial statements of the entities, as adjusted to give effect to the Acquisitions. The pro forma condensed combined balance sheet as of June 27, 2021 gives effect to the Acquisitions as if they had occurred on June 27, 2021. The pro forma condensed combined statements of operations for the twenty-six weeks ended June 27, 2021 and for the year ended December 27, 2020 give effect to the Acquisitions as if they had occurred on December 30, 2019 (the beginning of the Company’s 2020 fiscal year). In addition to the historical financial statements included as exhibits to this Form 8-K/A, the Pro Forma Financial Statements should be read in conjunction with the Company’s Form 10-K as of December 27, 2020, the Form 10-Q as of June 27, 2021, the Form 8-K filed with the SEC on July 26, 2021, the Form 8-K/A filed with the SEC on October 5, 2021 and the Form 8-K filed with the SEC on October 6, 2021.
NOTE 2 – PRELIMINARY PURCHASE PRICE ALLOCATION
The Pro Forma Financial Statements include various assumptions, including those related to the preliminary purchase price allocations of the assets acquired and liabilities assumed of GFG and Twin Peaks on preliminary estimates of fair value by management and third-party valuation experts. The final purchase price allocations may vary based on final appraisals, valuations and analyses of the fair value of the acquired assets and assumed liabilities as well as final post-closing adjustments, if any. Accordingly, the pro forma adjustments are preliminary and may be subject to change.
The preliminary assessment of the fair value of the net assets and liabilities acquired by the Company through the GFG Acquisition was estimated at $447.7 million. The preliminary allocation of the consideration to the net tangible and intangible assets acquired is presented in the table below (in millions):
| Cash | $ | 5.9 | ||
| Accounts receivable | 5.1 | |||
| Inventory | 2.0 | |||
| Other receivables | 0.5 | |||
| Prepaids and other current assets | 0.9 | |||
| Other intangible assets | 277.7 | |||
| Goodwill | 190.6 | |||
| Other assets | 0.5 | |||
| Fixed assets | 8.4 | |||
| Accounts payable | (7.6 | ) | ||
| Above market leases | (2.2 | ) | ||
| Deferred income, current portion | (0.9 | ) | ||
| Deferred tax liability | (32.3 | ) | ||
| Other liabilities | (0.9 | ) | ||
| Total net identifiable assets | $ | 447.7 |
The preliminary assessment of the fair value of the net assets and liabilities acquired by the Company through the Twin Peaks Acquisition was estimated at $310.3 million. The preliminary allocation of the consideration to the net tangible and intangible assets acquired is presented in the table below (in millions):
| Cash | $ | 9.8 | ||
| Accounts receivable | 1.7 | |||
| Inventory | 1.3 | |||
| Prepaids and other current assets | 0.8 | |||
| Goodwill | 85.0 | |||
| Other intangible assets, net | 188.2 | |||
| Below market leases | 3.0 | |||
| Other assets | 2.1 | |||
| Fixed assets | 35.2 | |||
| Accounts payable | (6.1 | ) | ||
| Accrued expenses and other liabilities | (9.4 | ) | ||
| Deferred income - noncurrent | (1.0 | ) | ||
| Other liabilities | (0.3 | ) | ||
| Total net identifiable assets | $ | 310.3 |
NOTE 3 – IDENTIFIABLE INTANGIBLE ASSETS
Our preliminary valuation estimates of the identifiable intangible assets acquired in connection with the GFG Acquisition are based on initial valuations performed by management and third-party experts. However, these estimates are preliminary, as we have not completed our analysis of all the facts surrounding the business acquired and therefore have not finalized the accounting for these transactions. Our preliminary estimate of identifiable intangible assets total $277.7 million, comprised of $149.8 million in trademarks, $84.6 million in customer relationships and $43.3 million in franchise agreements.
Our preliminary valuation estimates of the identifiable intangible assets acquired in connection with the Twin Peaks Acquisition are based on initial valuations performed by management and third-party experts. However, these estimates are preliminary, as we have not completed our analysis of all the facts surrounding the business acquired and therefore have not finalized the accounting for these transactions. Our preliminary estimate of identifiable intangible assets total $188.2 million, comprised of $161.8 million in trademarks, $26.0 million in franchise agreements and $0.4 million in liquor licenses.
NOTE 4 – GOODWILL
Our preliminary valuation estimates of goodwill in the amount of $190.6 related to the GFG Acquisition and $85.0 million related to the Twin Peaks acquisition are based on the excess of the estimated purchase price paid for GFG and Twin Peaks over the estimated fair market value of the identifiable assets and liabilities acquired. These estimates are preliminary and will be refined once the valuation process is completed.
NOTE 5 – PRO FORMA ADJUSTMENTS
The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the Pro Forma Financial Statements:
Balance Sheet Pro Forma Adjustments
(a)
|
Consideration of $447.7 million for the GFG Acquisition was in the form of $355.2 million in cash, 3,089,245 shares of the Company’s Series B Cumulative Preferred Stock ($67.5 million) and 1,964,865 shares of the Company’s Common Stock ($25.0 million). | |
| (b) | Represents $4.6 million of restricted cash consisting of funds required to be held in trust in connection with the issuance of the GFG Notes (see (g) below). | |
| (c) | Represents reclassifications that have been made to the historical presentation to conform to the financial statement presentation of the Company. | |
| (d) | Reflects the adjustment of historical tangible and intangible assets acquired by the Company to their estimated fair values. The estimates of fair value may differ from amounts the Company will calculate after completing a detailed valuation analysis, and the difference could have a material effect on the accompanying unaudited pro forma condensed combined financial statements. | |
| (e) | Reflects adjustment to record goodwill resulting from the Acquisitions. | |
| (f) | As non-public companies, GFG and Twin Peaks were not yet required to adopt ASU 2016-02, Leases (Topic 842), requiring a lessee to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases with a term of more than twelve months. However, as a part of the Company’s consolidated group, GFG and Twin Peaks adopted ASU 2016-02 as of the dates of the Acquisitions. Accordingly, the Pro Forma Financial Statements have been adjusted to record an operating lease right of use asset and an operating lease liability. GFG has certain operating leases for corporate offices and for certain restaurant properties that are in the process of being refranchised. Twin Peaks has certain operating leases for corporate offices and for company-owned restaurant properties. | |
| (g) | The net increase to debt reflects the issuance of new debt of $350.0 million of fixed rate asset backed notes comprised of aggregate principal amounts of $209.0 million of Class A-2 notes bearing interest at 6.00%, $84.0 million of Class B-2 notes bearing interest at 7.00% and $57.0 million of Class M-2 notes bearing interest at 9.50% (net proceeds of $338.9 million), collectively, the “GFG Notes.” GFG’s outstanding debt was also extinguished upon consummation of the GFG Acquisition. | |
(h)
|
Consideration of $300.0 million for the Twin Peaks Acquisition was in the form of $222.1 million in net cash, a $10.4 million promissory note and 2,847,393 shares of the Company’s Series B Cumulative Preferred Stock ($67.5 million). | |
(i)
|
Represents $3.8 million of restricted cash consisting of funds required to be held in trust in connection with the issuance of the TP Notes (see (j) below). | |
(j)
|
The net increase to debt reflects the issuance of new debt of $250.0 million of fixed rate asset backed notes comprised of aggregate principal amounts of $150.0 million of Class A-2 notes bearing interest at 7.00%, $50.0 million of Class B-2 notes bearing interest at 9.00% and $50.0 million of Class M-2 notes bearing interest at 10.00% (net proceeds of $236.9 million), collectively, the “Twin Peaks Notes.” Twin Peak’s outstanding debt was also extinguished upon consummation of the Twin Peaks Acquisition. |
Statement of Operations Pro Forma Adjustments
| (aa) | Represents reclassifications that have been made to the historical presentation of GFG and Twin Peaks to conform to the financial statement presentation of the Company and the presentation of depreciation and amortization expense separately due to its materiality. | |
(bb)
|
Represents the net increase to interest expense resulting from interest on the GFG Notes to finance the GFG Acquisition. | |
| (cc) | Represents the adjustment to reflect the amortization related to amortizing intangible assets (see (d) above). | |
| (dd) | Represents the income tax expense effect based on a statutory income tax rate of 26%. | |
| (ee) | Represents the net increase to interest expense resulting from interest on the Twin Peaks Notes to finance the Twin Peaks Acquisition. |