NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND RELATIONSHIPS
Organization and Nature of Business
FAT Brands Inc. (the "Company" or "FAT") is a leading multi-brand restaurant company that develops, markets, acquires and manages quick-service, fast casual, casual dining and polished casual dining restaurant concepts around the world. As of September 25, 2022, the Company owned seventeen restaurant brands: Round Table Pizza, Fatburger, Marble Slab Creamery, Johnny Rockets, Fazoli's, Twin Peaks, Great American Cookies, Hot Dog on a Stick, Buffalo’s Cafe & Express, Hurricane Grill & Wings, Pretzelmaker, Elevation Burger, Native Grill & Wings, Yalla Mediterranean and Ponderosa and Bonanza Steakhouses. As of September 25, 2022, the Company had 2,354 locations. Of this amount, 2,261 stores were franchised, representing approximately 96% of total restaurants.
Each franchising subsidiary licenses the right to use its brand name and provides franchisees with operating procedures and methods of merchandising. Upon signing a franchise agreement, the franchisor is committed to provide training, some supervision and assistance and access to operations manuals. As needed, the franchisor will also provide advice and written materials concerning techniques of managing and operating the restaurants.
The Company's operations have historically been comprised primarily of franchising a growing portfolio of restaurant brands. This growth strategy is centered on expanding the footprint of existing brands and acquiring new brands through a centralized management organization which provides substantially all executive leadership, marketing, training and accounting services. As part of these ongoing franchising efforts, the Company will, from time to time, make opportunistic acquisitions of operating restaurants and may convert them to franchise locations. During the refranchising period the Company may operate the restaurants and classifies the operational activities as refranchising gains or losses and the assets and associated liabilities as held-for sale. Through recent acquisitions, the Company also operates "company-owned" restaurant locations of certain brands.
COVID-19
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues to impact the United States and other countries. As a result, at certain times the Company franchisees temporarily closed some retail locations, modified store operating hours, adopted a “to-go” only operating model or a combination of these actions. These actions have reduced consumer traffic, all resulting in a negative impact to franchisee and Company revenue. While the disruption to our business from the COVID-19 pandemic is currently expected to be temporary, there is still a great deal of uncertainty around the severity and duration of the disruption. We may experience longer-term effects on our business and economic growth and changes in consumer demand in the U.S. and worldwide. The effects of COVID-19 may materially adversely affect our business, results of operations, liquidity and ability to service our existing debt, particularly if these effects continue in place for a significant amount of time.
Liquidity
The Company recognized income from operations of $14.7 million and $3.6 million during the thirty-nine weeks ended September 25, 2022 and September 26, 2021, respectively. The Company has a history of net losses and an accumulated deficit of $107.9 million as of September 25, 2022. Additionally, the Company had negative working capital of $157.0 million. Of this amount, $135.0 million represents the current portion of redeemable preferred stock as discussed in Note 12. Since the Company did not deliver the applicable cash proceeds at the related due dates, the amount accrues interest until the payments are completed. The Company had $23.9 million of unrestricted cash at September 25, 2022 and plans on the combination of cash generated from operations and cash on hand to be sufficient to cover any working capital requirements for the next twelve months from the date of this report. If the Company does not achieve its operating plan, additional forms of financing may be required through the issuance of debt or equity. Although management believes it will have access to financing, no assurances can be given that such financing will be available on acceptable terms, in a timely manner or at all.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation – The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Our revenues are derived from two sales channels, franchised restaurants and company-owned locations, which we operate as one reportable segment.
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of the Company, all adjustments considered necessary for the fair presentation of the Company’s results of operations, financial position and cash flows for the periods presented have been included and are of a normal, recurring nature.
Fiscal year – The Company operates on a 52-week calendar and its fiscal year ends on the last Sunday of the calendar year. Consistent with industry practice, the Company measures its stores’ performance based upon 7-day work weeks. Using the 52-week cycle ensures consistent weekly reporting for operations and ensures that each week has the same days since certain days are more profitable than others. The use of this fiscal year means a 53rd week is added to the fiscal year every 5 or 6 years. In a 52-week year, all four quarters are comprised of 13 weeks. In a 53-week year, one extra week is added to the fourth quarter.
Use of estimates in the preparation of the condensed consolidated financial statements – The preparation of the condensed consolidated financial statements in conformity with 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 condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Financial statement reclassification – Certain account balances from prior periods have been reclassified in these condensed consolidated financial statements to conform to current period classifications.
Employee Retention Credits - On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief and Security Act (the "CARES Act") to provide certain relief as a result of the COVID-19 pandemic. The CARES Act provides tax relief, along with other stimulus measures, including a provision for an Employee Retention Credit ("ERC"). As there is no authoritative guidance under U.S. GAAP on accounting for government assistance to for-profit business entities, the Company accounts for the ERC by analogy to International Accounting Standard, Accounting for Government Grants and Disclosure of Government Assistance ("IAS 20"). In accordance with IAS 20, the Company determined it has reasonable assurance for receipt of the ERC and during the thirteen and thirty-nine weeks ended September 25, 2022 recorded an ERC benefit of $2.2 million and $14.8 million within cost of restaurant and factory revenues and general and administrative expense as a reduction to labor expense in the condensed consolidated statements of operations. The Company recorded a corresponding accrual for the benefit expected to be received within accounts receivable in the condensed consolidated balance sheets as of September 25, 2022.
Recently Issued Accounting Standards
In March 2022, the Financial Accounting Standards Board (the "FASB") issued ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The purpose of this amendment is to enhance disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. It requires that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases. The amendments should be applied prospectively and are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption of the amendments is permitted if an entity has adopted the amendments in ASU 2016-13 described below, including adoption in an interim period. The Company will evaluate ASC No. 2022-02 and does not expect the adoption of this standard will have a material impact on its condensed consolidated financial statements.
In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates (“ASU 2019-10”). The purpose of this amendment is to create a two-tier rollout of major updates, staggering the effective dates between larger public companies and all other entities. This granted certain classes of companies, including Smaller Reporting Companies (“SRCs”), additional time to implement major FASB standards, including ASU 2016-13. Larger public companies will have an effective date for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All other entities are permitted to defer adoption of ASU 2016-13, and its related amendments, until fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Under the current SEC definitions, the Company meets the definition of an SRC and is adopting the deferral period for ASU 2016-13. The guidance requires a modified retrospective transition approach through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company does not expect the adoption of this standard will have a material impact on its condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments, and later amended the ASU in 2019, as described above. This guidance replaces the current incurred loss impairment methodology. Under the new guidance, on initial recognition and at each reporting period, an entity is required to recognize an allowance that reflects its current estimate of credit losses expected to be incurred over the life of the financial instrument based on historical experience, current conditions and reasonable and supportable forecasts.
NOTE 3. MERGERS AND ACQUISITIONS
Nestle Toll House Cafe by Chip
On May 24, 2022, the Company agreed to acquire the franchised chain of stores known as Nestlé® Toll House® Café by Chip® from Crest Foods, Inc., consisting of all royalties generated under the Nestlé® Toll House® Café by Chip® brand, and the franchisor has agreed to cause the network to rebrand the stores as Great American Cookies, subject to the cooperation of the individual franchisees. Nestlé® Toll House® Café by Chip® is a franchised chain of stores with approximately 85 cafés across the United States. The Company paid an initial installment of the purchase price of $1.8 million. The final purchase price will be calculated on or before January 31, 2024.
Acquisition of Fazoli's
On December 15, 2021, the Company completed the acquisition of Fazoli's for a total cash purchase price of $137.1 million. Founded in 1988 in Lexington, KY, Fazoli’s is a premium quick service restaurant Italian chain priding itself on serving premium quality Italian food, fast, fresh and friendly. Menu offerings include freshly prepared pasta entrees, Submarinos® sandwiches, salads, pizza and desserts – along with its unlimited signature breadsticks.
Acquisition of Native Grill & Wings
On December 15, 2021, the Company completed the acquisition of Native Grill & Wings (“Native”) for a total cash purchase price of $20.1 million. Based in Chandler, Arizona, Native Grill & Wings is a family-friendly, polished sports grill with franchised locations throughout Arizona, Illinois and Texas. Native serves over 20 award-winning wing flavors that guests can order by the individual wing, as well as an extensive menu of pizza, burgers, sandwiches, salads and more.
Acquisition of Twin Peaks
On October 1, 2021, the Company completed the acquisition of Twin Peaks Buyer, LLC (“Twin Peaks”) for a total purchase price of $310.3 million. Twin Peaks is the franchisor and operator of a chain of sports lodge themed restaurants.
Acquisition of Global Franchise Group
On July 22, 2021, the Company completed the acquisition of LS GFG Holdings Inc. (“GFG”), for a total purchase price of $444.9 million. GFG is a franchisor of five quick service restaurant brands (Round Table Pizza, Great American Cookies, Marble Slab Creamery, Pretzelmaker and Hot Dog on a Stick).
Proforma Information
The table below presents the combined proforma revenue and net loss of the Company and Fazoli's, Twin Peaks and GFG (the "Material Acquired Entities") for the thirteen and thirty-nine weeks ended September 26, 2021, assuming the acquisitions had occurred on December 28, 2020 (the beginning of the Company’s 2021 fiscal year), pursuant to ASC 805-10-50-Business Combinations (Topic 805) (in millions). This proforma information does not purport to represent what the actual results of operations of the Company would have been had the acquisition of the Material Acquired Entities occurred on this date nor does it purport to predict the results of operations for future periods.
| | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | Thirty-Nine Weeks Ended |
| | September 26, 2021 | | September 26, 2021 |
Revenue | | 87.4 | | | $ | 259.3 | |
Net loss | | (5.5) | | | $ | (19.8) | |
NOTE 4. REFRANCHISING
As part of its ongoing franchising efforts, the Company may, from time to time, make opportunistic acquisitions of operating restaurants in order to convert them to franchise locations or acquire existing franchise locations to resell to another franchisee across all of its brands.
The Company meets all of the criteria requiring that acquired assets used in the operation of certain restaurants be classified as held-for-sale. As a result, the following assets have been classified as held-for-sale on the accompanying condensed consolidated balance sheets as of September 25, 2022 and December 26, 2021 (in millions):
| | | | | | | | | | | |
| September 25, 2022 | | December 26, 2021 |
| | | |
| Property and equipment | $ | 0.7 | | | $ | 0.8 | |
| Operating lease right-of-use assets | 4.3 | | | 4.7 | |
| Total | $ | 5.0 | | | $ | 5.5 | |
Operating lease liabilities related to the assets classified as held-for-sale in the amount of $4.4 million and $4.8 million have been classified as current liabilities on the accompanying condensed consolidated balance sheets as of September 25, 2022 and December 26, 2021, respectively.
The following table highlights the operating results of the Company's refranchising program (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Weeks Ended | | Thirty-Nine Weeks Ended |
| September 25, 2022 | | September 26, 2021 | | September 25, 2022 | | September 26, 2021 |
| Restaurant costs and expenses, net of revenue | $ | (0.1) | | | $ | (0.2) | | | $ | (1.1) | | | $ | (0.9) | |
| Gain on store sales or closures | — | | | 0.5 | | | — | | | 1.6 | |
| Refranchising (loss) gain | $ | (0.1) | | | $ | 0.3 | | | $ | (1.1) | | | $ | 0.7 | |
NOTE 5. TRADE AND OTHER NOTES RECEIVABLE
Notes receivable consist of trade notes receivable, the Elevation Buyer Note and the Twin Peaks - Hollywood Note. Trade notes receivable are created when a settlement is reached relating to a delinquent franchisee account and the entire balance is not immediately paid. Trade notes receivable generally include personal guarantees from the franchisee. The notes are made for the shortest time frame negotiable and will generally carry an interest rate of 6.0% to 7.5%. Reserve amounts, on the notes, are established based on the likelihood of collection. As of September 25, 2022 and December 26, 2021 trade notes receivable was fully reserved.
The Elevation Buyer Note was funded in connection with the purchase of Elevation Burger. The Company loaned $2.3 million in cash to the Seller under a subordinated promissory note bearing interest at 6.0% per annum and maturing in August 2026. This Note is subordinated in right of payment to all indebtedness of the Seller arising under any agreement or instrument to which the Seller or any of its affiliates is a party that evidences indebtedness for borrowed money that is senior in right of payment to the Elevation Buyer Note, whether existing on the effective date of the Elevation Buyer Note or arising thereafter. The balance owing to the Company under the Elevation Buyer Note may be used by the Company to offset amounts owing to the Seller under the Elevation Note under certain circumstances. As part of the total consideration for the Elevation acquisition, the Elevation Buyer Note was recorded at a carrying value of $1.9 million, which was net of a discount of $0.4 million. As of September 25, 2022 and December 26, 2021, the balance of the Elevation Note was $1.5 million and $1.7 million, respectively, which were net of discounts of $0.1 million and $0.2 million, respectively. During the thirteen and thirty-nine weeks ended September 25, 2022, the Company recognized $42,283 and $132,160 in interest income on the Elevation Buyer Note, respectively. During the thirteen and thirty-nine weeks ended September 26, 2021, the Company recognized $49,000 and $151,000 in interest income on the Elevation Buyer Note, respectively.
The Twin Peaks - Hollywood note was funded in connection with the development of a Twin Peaks restaurant. The note was fully repaid in 2022. As of December 26, 2021, the amount of the secured note was $1.5 million.
NOTE 6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following (in millions):
| | | | | | | | | | | |
| September 25, 2022 | | December 26, 2021 |
| Real estate | $ | 60.6 | | | $ | 60.5 | |
| Equipment | 36.0 | | | 22.9 | |
| $ | 96.6 | | | $ | 83.4 | |
| Accumulated Depreciation | (11.7) | | | (2.9) | |
| Property and equipment, net | $ | 84.9 | | | $ | 80.5 | |
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Changes in Carrying Value of Goodwill and Other Intangible Assets (in millions)
| | | | | | | | | | | | | | | | | |
| Amortizing Intangible Assets | | Non-Amortizing Intangible Assets |
| | Goodwill | | Trademarks |
| December 26, 2021 | $ | 175.6 | | | $ | 295.1 | | | $ | 477.2 | |
| Amortization | (11.3) | | | — | | | — | |
| Additions | 1.8 | | | — | | | — | |
| Adjustment to preliminary purchase price | (0.3) | | | (1.3) | | | — | |
| September 25, 2022 | $ | 165.8 | | | $ | 293.8 | | | $ | 477.2 | |
Gross Carrying Value and Accumulated Amortization of Other Intangible Assets (in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 25, 2022 | | December 26, 2021 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Amortizing intangible assets | | | | | | | | | | | | |
| Franchise agreements | | $ | 109.2 | | | (12.5) | | | $ | 96.7 | | | $ | 109.4 | | | $ | (5.7) | | | $ | 103.7 | |
| Customer relationships | | 73.9 | | | (6.6) | | | 67.3 | | | 73.9 | | | (2.4) | | | 71.5 | |
| Other | | 2.1 | | | (0.3) | | | 1.8 | | 0.4 | | | — | | | 0.4 | |
| | $ | 185.2 | | | $ | (19.4) | | | $ | 165.8 | | | $ | 183.7 | | | $ | (8.1) | | | $ | 175.6 | |
| | | | | | | | | | | | |
| Non-amortizing intangible assets | | | | | | | | |
| Trademarks | | | | | | 477.2 | | | | | | | 477.2 | |
| Total amortizing and non-amortizing intangible assets, net | | $ | 643.0 | | | | | | | $ | 652.8 | |
The expected future amortization of the Company’s capitalized franchise agreements is as follows (in millions):
| | | | | |
| Fiscal year: | |
| Remaining 2022 | $ | 3.8 | |
| 2023 | 15.0 | |
| 2024 | 14.7 | |
| 2025 | 14.5 | |
| 2026 | 14.5 | |
| Thereafter | 103.3 | |
| Total | $ | 165.8 | |
A review of the carrying value of goodwill as of September 25, 2022 and September 26, 2021 did not result in any impairment charges for the thirty-nine weeks ended as of that date.
NOTE 8. DEFERRED INCOME
Deferred income was as follows (in millions):
| | | | | | | | | | | |
| September 25,
2022 | | December 26,
2021 |
| | | |
| Deferred franchise fees | $ | 22.5 | | | $ | 19.8 | |
| Deferred royalties | 0.1 | | | 0.2 | |
| Deferred vendor incentives | 0.2 | | | 0.3 | |
| Total | $ | 22.8 | | | $ | 20.3 | |
NOTE 9. INCOME TAXES
The following table presents the Company’s provision (benefit) for income taxes (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | Thirty-Nine Weeks Ended |
| | September 25, 2022 | | September 26, 2021 | | September 25, 2022 | | September 26, 2021 |
| Provision (benefit) for income taxes | | $ | 0.5 | | | $ | (1.2) | | | $ | 4.8 | | | $ | (3.3) | |
| Effective tax rate | | (2.3) | % | | 24.6 | % | | (9.5) | % | | 21.6 | % |
The difference between the statutory tax rate of 21% and the effective tax rate of (2.3)% and (9.5)% in the thirteen and thirty-nine weeks ended September 25, 2022, respectively, was primarily due to increases in the valuation allowance, nondeductible expenses and the impact of state income taxes.
The difference between the statutory tax rate of 21% and the effective tax rate in the thirteen and thirty-nine weeks ended September 26, 2021 was primarily due to the impact of state income taxes and the forgiveness of loans under the Paycheck Protection Program (the “PPP Loans”).
NOTE 10. LEASES
The Company recognized lease expense of $4.6 million and $1.4 million for the thirteen weeks ended September 25, 2022 and September 26, 2021, respectively. The Company recognized lease expense of $13.9 million and $2.8 million for the thirty-nine weeks ended September 25, 2022 and September 26, 2021, respectively.
Operating lease right-of-use assets and operating lease liabilities relating to the operating leases are as follows (in millions):
| | | | | | | | | | | |
| September 25,
2022 | | December 26,
2021 |
| | | |
| Operating lease right-of-use assets | $ | 95.2 | | | $ | 98.6 | |
| Right-of-use assets classified as held-for-sale | 4.3 | | | 4.7 | |
| Total right-of-use assets | $ | 99.5 | | | $ | 103.3 | |
| | | |
| Operating lease liabilities | $ | 104.4 | | | $ | 107.3 | |
| Lease liabilities related to assets held-for-sale | 4.4 | | | 4.8 | |
| Total operating lease liabilities | $ | 108.8 | | | $ | 112.1 | |
The contractual future maturities of the Company’s operating lease liabilities as of September 25, 2022, including anticipated lease extensions, are as follows (in millions):
| | | | | |
| Fiscal year: | |
| Remainder of 2022 | $ | 4.2 | |
| 2023 | 16.2 | |
| 2024 | 15.1 | |
| 2025 | 14.5 | |
| 2026 | 13.3 | |
| Thereafter | 163.6 | |
| Total lease payments | $ | 226.9 | |
| Less imputed interest | (118.1) | |
| Total | $ | 108.8 | |
The current portion of the operating lease liability as of September 25, 2022 was $14.4 million.
Supplemental cash flow information for the thirty-nine weeks ended September 25, 2022 related to leases was as follows (in millions):
| | | | | | | | | | | |
| Thirty-Nine Weeks Ended |
| September 25, 2022 | | September 26, 2021 |
| Cash paid for amounts included in the measurement of operating lease liabilities: | | | |
| Operating cash flows from operating leases | $ | 12.2 | | | $ | 2.3 | |
NOTE 11. DEBT
Long-term debt consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 25, 2022 | | December 26, 2021 |
| Final Maturity | | Anticipated Call Date | | Rate | | Face Value | | Book Value | | Book Value |
| Senior Debt | | | | | | | | | | | |
| 2021 FB Royalty Securitization | 4/25/2051 | | 7/25/2023 | | 4.75 | % | | $ | 97.1 | | | $ | 95.3 | | | $ | 95.4 | |
| 2021 GFG Royalty Securitization | 7/25/2051 | | 7/25/2023 | | 6.00 | % | | 209.0 | | | 206.3 | | | 205.6 | |
| 2021 Twin Peaks Securitization | 7/25/2051 | | 7/25/2023 | | 7.00 | % | | 150.0 | | | 147.3 | | | 146.8 | |
| 2021 Fazoli's/Native Securitization | 7/25/2051 | | 7/25/2023 | | 6.00 | % | | 128.8 | | | 124.3 | | | 122.8 | |
| 2022 FB Royalty Securitization | 4/25/2051 | | 7/25/2023 | | 4.75 | % | | 30.0 | | | 27.7 | | | — | |
| Senior Subordinated Debt | | | | | | | | | | | |
| 2021 FB Royalty Securitization | 4/25/2051 | | 7/25/2023 | | 8.00 | % | | 32.4 | | | 31.8 | | | 31.8 | |
| 2021 GFG Royalty Securitization | 7/25/2051 | | 7/25/2023 | | 7.00 | % | | 84.0 | | | 82.0 | | | 81.5 | |
| 2021 Twin Peaks Securitization | 7/25/2051 | | 7/25/2023 | | 9.00 | % | | 50.0 | | | 47.2 | | | 46.6 | |
| 2021 Fazoli's/Native Securitization | 7/25/2051 | | 7/25/2023 | | 7.00 | % | | 25.0 | | | 23.3 | | | 22.7 | |
| Subordinated Debt | | | | | | | | | | | |
| 2021 FB Royalty Securitization | 4/25/2051 | | 7/25/2023 | | 9.00 | % | | 15.0 | | | 14.2 | | | 14.1 | |
| 2021 GFG Royalty Securitization | 7/25/2051 | | 7/25/2023 | | 9.50 | % | | 57.0 | | | 53.4 | | | 52.6 | |
| 2021 Twin Peaks Securitization | 7/25/2051 | | 7/25/2023 | | 10.00 | % | | 50.0 | | | 45.2 | | | 44.2 | |
| 2021 Fazoli's/Native Securitization | 7/25/2051 | | 7/25/2023 | | 9.00 | % | | 40.0 | | | 36.2 | | | 35.2 | |
| Total Securitized Debt | | | | | | | 968.3 | | | 934.2 | | | 899.3 | |
| Elevation Note | 7/19/2026 | | N/A | | 6.00 | % | | 6.5 | | | 4.1 | | | 5.6 | |
| Equipment Notes | 5/5/2027 to 3/7/2029 | | N/A | | 7.99% to 8.49% | | 0.7 | | | 0.7 | | | — | |
| Twin Peaks Construction Loan | 3/12/2023 with One Six-Month Extension | | N/A | | 8.00 | % | | 1.5 | | | 1.5 | | | — | |
| Total debt | | | | | | | 977.0 | | | 940.5 | | | 904.9 | |
| Current portion of long-term debt | | | | | | | — | | | (2.4) | | | (0.6) | |
| Long-term debt | | | | | | | $ | 977.0 | | | $ | 938.1 | | | $ | 904.3 | |
Terms of Outstanding Debt
2021 FAT Royalty Securitization
On April 26, 2021, FAT Brands Royalty I, LLC (“FB Royalty”), a special purpose, wholly-owned subsidiary of FAT Brands Inc., completed the issuance and sale of three tranches of fixed rate secured notes (the “2021 FAT Royalty Securitization
Notes”) with a total aggregate principal amount of $144.5 million. The 2021 FB Royalty Securitization Notes are generally secured by a security interest in substantially all the assets of FB Royalty and its subsidiaries.
On July 6, 2022, FB Royalty issued an additional $76.5 million aggregate principal amount of three tranches of fixed rate senior secured notes as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Closing Date | Class | | Seniority | | Principal Balance | | Coupon | | Final Legal Maturity Date |
| 7/6/2022 | A-2 | | Senior | | $42.7 | | 4.75% | | 7/25/2051 |
| 7/6/2022 | B-2 | | Senior Subordinated | | $14.2 | | 8.00% | | 7/25/2051 |
| 7/6/2022 | M-2 | | Subordinated | | $19.6 | | 9.00% | | 7/25/2051 |
Of the $76.5 million aggregate principal amount, $30.0 million was sold privately during the third quarter, resulting in net proceeds of $27.1 million (net of debt offering costs of $0.6 million and original issue discount of $2.3 million). The remaining $46.5 million in aggregate principal was issued to FAT Brands Inc. and has been eliminated in consolidation. [pending execution of put preferred for debt exchange if signed prior to filing]
2021 GFG Royalty Securitization
In connection with the acquisition of GFG, on July 22, 2021, FAT Brands GFG Royalty I, LLC ("GFG Royalty"), a special purpose, wholly-owned subsidiary of FAT Brands, completed the issuance and sale of three tranches of fixed rate secured notes (the "2021 GFG Royalty Securitization Notes") with a total aggregate principal amount of $350.0 million. Immediately following the closing of the acquisition of GFG the Company contributed the franchising subsidiaries of GFG to GFG Royalty, pursuant to a Contribution Agreement. The GFG Securitization Notes are generally secured by a security interest in substantially all the assets of GFG Royalty and its subsidiaries.
2021 Twin Peaks Securitization
In connection with the acquisition of Twin Peaks on October 1, 2021, the Company completed the issuance and sale in a private offering through its special purpose, wholly-owned subsidiary, FAT Brands Twin Peaks I, LLC, of three tranches of fixed rate secured notes (the "Twin Peaks Securitization Notes") with a total aggregate principal amount of $250.0 million. Immediately following the closing of the acquisition of Twin Peaks the Company contributed the franchising subsidiaries of Twin Peaks to FAT Brands Twin Peaks I, LLC, pursuant to a Contribution Agreement. The Twin Peaks Securitization Notes are generally secured by a security interest in substantially all the assets of FAT Brands Twin Peaks I, LLC and its subsidiaries.
2021 Fazoli's / Native Securitization
In connection with the acquisition of Fazoli's and Native Grill & Wings on December 15, 2021, the Company completed the issuance and sale in a private offering through its special purpose, wholly-owned subsidiary, FAT Brands Fazoli's Native I, LLC, of three tranches of fixed rate secured notes (the "Fazoli's/Native Securitization Notes") with a total aggregate principal amount of $193.8 million. Immediately following the closing of the acquisition of Fazoli's and Native the Company contributed the franchising subsidiaries of these entities to FAT Brands Fazoli's Native I, LLC, pursuant to a Contribution Agreement. The Fazoli's/Native Securitization Notes are generally secured by a security interest in substantially all the assets of FAT Brands Fazoli's Native I, LLC and its subsidiaries.
Terms and Debt Covenant Compliance
The 2021 FAT Royalty Securitization Notes, the 2021 GFG Royalty Securitization Notes, the 2021 Twin Peaks Securitization Notes and the 2021 Fazoli's/Native Securitization Notes (collectively, the "Securitization Notes"), require that the principal (if any) and interest obligations be segregated to ensure appropriate funds are reserved to pay the quarterly principal and interest amounts due. The amount of monthly cash flow that exceeds the required monthly interest reserve is generally remitted to the
Company. Interest payments are required to be made on a quarterly basis and, unless repaid on or before July 25, 2023, additional interest equal to 1.0% per annum will accrue on the then outstanding principal balance of each tranche.
The material terms of the Securitization Notes contain covenants which are standard and customary for these types of agreements, including the following financial covenants: (i) debt service coverage ratio, (ii) leverage ratio and (iii) senior leverage ratio. As of September 25, 2022, the Company was in compliance with these covenants.
Elevation Note
On June 19, 2019, the Company completed the acquisition of Elevation Burger. A portion of the purchase price included the issuance to the Seller of a convertible subordinated promissory note (the “Elevation Note”) with a principal amount of $7.5 million, bearing interest at 6.0% per annum and maturing in July 2026. The Elevation Note is convertible, under certain circumstances, into shares of the Company’s common stock at $12.00 per share. The annualized effective interest rate for the Elevation Note during the thirty-nine weeks ended September 25, 2022 was 12.3%. In June 2022, pursuant to the claw-back provision of the purchase agreement, the balance of the Elevation Note was reduced by $1.0 million to $6.5 million.
The Elevation Note is a general unsecured obligation of Company and is subordinated in right of payment to all senior indebtedness of the Company.
Equipment Financing (Twin Peaks)
During fiscal year 2022, an indirect subsidiary of the Company entered into certain equipment financing arrangements to borrow up to $1.0 million, the proceeds of which will be used to purchase certain equipment for a new Twin Peaks restaurant and to retrofit existing restaurants with equipment (the "Equipment Financing"). The Equipment Financing has maturity dates between May 5, 2027, and March 7, 2029, and bear interest at fixed rates between 7.99% and 8.49% per annum. The Equipment Financing is secured by certain equipment of the Twin Peaks restaurant.
Construction Loan Agreement (Twin Peaks)
On July 12, 2022, an indirect subsidiary of the Company entered into a construction loan agreement to borrow up to $4.5 million, the proceeds of which will be used for a new corporate Twin Peaks in Northlake, TX (the "Construction Loan"). The Construction Loan has an initial maturity of March 12, 2023, with an optional six-month extension, bearing interest at a fixed rate of 8% per year and is secured by land and building.
NOTE 12. SERIES B CUMULATIVE PREFERRED STOCK
GFG Preferred Stock Consideration
On July 22, 2021, the Company completed the acquisition of GFG. A portion of the consideration paid included 3,089,245 newly issued shares of the Company’s Series B Preferred Stock (the "GFG Preferred Stock Consideration"). Additionally, on July 22, 2021, the Company entered into a Put/Call Agreement with the GFG sellers, pursuant to which the Company may purchase, or the GFG sellers may require the Company to purchase, the GFG Preferred Stock Consideration for $67.5 million plus any accrued but unpaid dividends on or before August 20, 2022 (extended from the original date of April 22, 2022), subject to the other provisions of the Put/Call Agreement. Since the Company did not deliver the applicable cash proceeds to the GFG Sellers by that date, the amount accrues interest at the rate of 5% per annum until repayment is completed. On March 22, 2022, the Company received a put notice on the GFG Preferred Stock Consideration and reclassified the GFG Preferred Stock Consideration to current liabilities on its condensed consolidated balance sheet.
On September 16, 2022, the Company entered into an agreement with one of the GFG sellers who holds 1,544,623 put preferred shares. Pursuant to the agreement, the closing date of the redemption was extended from April 22, 2022 to July 23, 2023 and, effective August 23, 2022, the interest rate applicable to such holder's 1,544,623 put shares was increased from 5% to 10% per annum, payable monthly in arrears. In September 2022, the Company paid $0.8 million for the interest that had accrued through August 2022.
Twin Peaks Preferred Stock Consideration
On October 1, 2021, the Company completed the acquisition of Twin Peaks. A portion of the consideration paid included 2,847,393 shares of the Company’s Series B Cumulative Preferred Stock (the "Twin Peaks Preferred Stock Consideration").
The Twin Peaks seller agreed to a lock-up period with respect to the Twin Peaks Preferred Stock Consideration, during which time the seller could not offer, sell or transfer any interest in these shares. The lock-up provisions restricted 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 with the seller of Twin Peaks referenced below.
On October 1, 2021, the Company and the Seller entered into a 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 $42.5 million, and the Secondary Put/Call Shares at any time until September 30, 2022, for a cash payment of $25.0 million, plus any accrued but unpaid dividends on such shares. Unpaid balances, when due, accrue interest at a rate of 10.0% per annum until repayment is completed. On October 7, 2021, the Company received a put notice on the Initial Put/Call Shares and the Secondary Put/Call Shares. The Company has classified the Twin Peaks Preferred Stock Consideration as a current liability on its condensed consolidated balance sheet.
NOTE 13. SHARE-BASED COMPENSATION
Effective September 30, 2017, the Company adopted the 2017 Omnibus Equity Incentive Plan (the “Plan”). The Plan was amended on October 19, 2021 to increase the number of shares available for issuance under the Plan. The Plan is a comprehensive incentive compensation plan under which the Company can grant equity-based and other incentive awards to officers, employees and directors of, and consultants and advisers to, FAT Brands Inc. and its subsidiaries. The Plan provides a maximum of 4,000,000 shares available for grant.
The Company has periodically issued stock options under the Plan. All of the stock options issued by the Company to date have included a vesting period of three years, with one-third of each grant vesting annually. As of September 25, 2022, there were 2,575,936 shares of stock options outstanding with a weighted average exercise price of $10.50.
During the thirteen weeks ended September 26, 2021, the Company granted a total of 300,000 shares of its common stock to three employees (the “Grant Shares”). The Grant Shares vest one-third each year on the anniversary date of the grant. The grantees are entitled to any common dividends relating to the Grant Shares during the vesting period. The Grant Shares were valued at $2.8 million as of the date of grant. The related compensation expense will be recognized over the vesting period. There were no new grants during the thirty-nine weeks ended September 25, 2022.
The Company recognized share-based compensation expense in the amount of $2.0 million and $0.3 million, during the thirteen weeks ended September 25, 2022 and September 26, 2021, respectively. The Company recognized share-based compensation expense in the amount of $6.1 million and $0.5 million during the thirty-nine weeks ended September 25, 2022, and September 26, 2021, respectively. As of September 25, 2022, there remains $8.1 million of related share-based compensation expense relating to non-vested grants, which will be recognized over the remaining vesting period, subject to future forfeitures.
NOTE 14. WARRANTS
The Company’s warrant activity for the thirty-nine weeks ended September 25, 2022 was as follows:
| | | | | | | | | | | | | | | | | |
| | Number of
Shares | | Weighted
Average
Exercise Price | | Weighted
Average
Remaining
Contractual
Life (Years) |
| Warrants exercisable at December 26, 2021 | 1,707,670 | | | $ | 4.72 | | | 3.2 |
| Exercised | (31,399) | | | $ | 3.60 | | | 3.3 |
| Warrants outstanding and exercisable at September 25, 2022 | 1,676,271 | | | $ | 4.44 | | | 2.7 |
During the thirty-nine weeks ended September 25, 2022, 31,399 warrants were exercised in exchange for 31,399 shares of common stock with net proceeds to the Company of $0.1 million.
NOTE 15. DIVIDENDS ON COMMON STOCK
On July 12, 2022, the Board of Directors declared a cash dividend of $0.14 per share of Class A common stock and Class B common stock, payable on September 1, 2022 to stockholders of record as of August 16, 2022, for a total of $2.3 million.
NOTE 16. COMMITMENTS AND CONTINGENCIES
Litigation and Investigations
James Harris and Adam Vignola, derivatively on behalf of FAT Brands, Inc. v. Squire Junger, James Neuhauser, Edward Rensi, Andrew Wiederhorn, Fog Cutter Holdings, LLC and Fog Cutter Capital Group, Inc., and FAT Brands Inc., nominal defendant (Delaware Chancery Court, Case No. 2021-0511)
On June 10, 2021, plaintiffs James Harris and Adam Vignola (“Plaintiffs”), putative stockholders of the Company, filed a shareholder derivative action in the Delaware Court of Chancery nominally on behalf of the Company against the Company’s directors (Squire Junger, James Neuhauser, Edward Rensi and Andrew Wiederhorn (the “Individual Defendants”)), and the Company’s majority stockholders, Fog Cutter Holdings, LLC and Fog Cutter Capital Group, Inc. (collectively with the Individual Defendants, “Defendants”). Plaintiffs assert claims of breach of fiduciary duty, unjust enrichment and waste of corporate assets arising out of the Company’s December 2020 merger with Fog Cutter Capital Group, Inc. On August 5, 2021, Defendants filed a motion to dismiss Plaintiffs’ complaint (the “Motion”). Argument on the Motion was heard on February 11, 2022. At the conclusion of the argument, the Court indicated that it would deny the Motion with respect to most claims and most Defendants, but would reserve final decision until after more fully considering the arguments as to the unjust enrichment claim and one of the Individual Defendants. On May 25, 2022, the Court ultimately denied the Motion in its entirety. Defendants dispute the allegations of the lawsuit and intend to vigorously defend against the claims. As discovery is ongoing, we cannot predict the outcome of this lawsuit. This lawsuit does not assert any claims against the Company. However, subject to certain limitations, we are obligated to indemnify our directors in connection with the lawsuit and any related litigation or settlements amounts, which may be time-consuming, result in significant expense and divert the attention and resources of our management. An unfavorable outcome may exceed coverage provided under our insurance policies, could have an adverse effect on our financial condition and results of operations and could harm our reputation.
James Harris and Adam Vignola, derivatively on behalf of FAT Brands, Inc. v. Squire Junger, James Neuhauser, Edward Rensi, Andrew Wiederhorn and Fog Cutter Holdings, LLC, and FAT Brands Inc., nominal defendant (Delaware Chancery Court, Case No. 2022-0254)
On March 17, 2022, plaintiffs James Harris and Adam Vignola (“Plaintiffs”), putative stockholders of the Company, filed a shareholder derivative action in the Delaware Court of Chancery nominally on behalf of the Company against the Company’s directors (Squire Junger, James Neuhauser, Edward Rensi and Andrew Wiederhorn (the “Individual Defendants”)), and the Company’s majority stockholder, Fog Cutter Holdings, LLC (collectively with the Individual Defendants, “Defendants”). Plaintiffs assert claims of breach of fiduciary duty in connection with the Company’s June 2021 recapitalization transaction. On May 27, 2022, Defendants filed a motion to dismiss Plaintiff's complaint (the "Motion"). The hearing for the Motion is set for November 17, 2022, at 1:00 pm ET. Defendants dispute the allegations of the lawsuit and intend to vigorously defend against the claims. As this matter is still in the early stages, we cannot predict the outcome of this lawsuit. This lawsuit does not assert any claims against the Company. However, subject to certain limitations, we are obligated to indemnify our directors in connection with the lawsuit and any related litigation or settlements amounts, which may be time-consuming, result in significant expense and divert the attention and resources of our management. An unfavorable outcome may exceed coverage provided under our insurance policies, could have an adverse effect on our financial condition and results of operations and could harm our reputation.
Robert J. Matthews, et al., v. FAT Brands, Inc., Andrew Wiederhorn, Ron Roe, Rebecca Hershinger and Ken Kuick (United States District Court for the Central District of California, Case No. 2:22-cv-01820)
On March 18, 2022, plaintiff Robert J. Matthews, a putative investor in the Company, filed a putative class action lawsuit against the Company, Andrew Wiederhorn, Ron Roe, Rebecca Hershinger and Ken Kuick, asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), alleging that the defendants are responsible for false and misleading statements and omitted material facts in the Company’s reports filed with the SEC under the 1934 Act related to the LA Times story published on February 19, 2022 about the company and its management. The plaintiff alleges that the Company’s public statements wrongfully inflated the trading price of the Company’s common stock, preferred stock and warrants. The plaintiff is seeking to certify the complaint as a class action and is seeking compensatory damages in an amount to be determined at trial. On April 25, 2022, Kerry Chipman, a putative investor in the Company, filed a
putative class action lawsuit against the Company, Andrew Wiederhorn, Ron Roe, Rebecca Hershinger and Ken Kuick in the United States District Court for the Central Division of California, asserting substantially the same claims as those made by Matthews in the above-referenced lawsuit. On May 2, 2022, the Court entered an order consolidating the actions filed by Matthews and Chipman under the caption In re FAT Brands Inc. Securities Litigation. On June 13, 2022, the Court appointed plaintiff Robert Matthews as lead plaintiff and The Rosen Law Firm, P.A., as lead counsel in the consolidated action. Plaintiffs filed their Consolidated Amended Complaint on June 27, 2022. On July 19, 2022, the parties entered into a stipulation to stay the litigation so that they can engage in voluntary mediation. In August 2022, after mediation the Company reached an agreement in principle to settle this matter for a cash payment by the Company of $2.5 million and issuance of $0.5 million in Class A common stock. The Stipulation of Settlement and other documents pertinent to the settlement, along with a motion for preliminary approval thereof, were filed with the court on September 23, 2022. The hearing on the motion for preliminary approval is set for October 24, 2022, at 9:00 am PT. Upon final approved by the court, the settlement will provide a full release of all claims by the settlement class members against all defendants, including the Company and the named officers and directors, will expressly deny any liability, wrongdoing or responsibility by any of the defendants, and will result in the dismissal of the litigation with prejudice.
Government Investigations
The U.S. Attorney’s Office for the Central District of California (the “U.S. Attorney”) and the U.S. Securities and Exchange Commission informed the Company in December 2021 that they have opened investigations relating to the Company and our Chief Executive Officer, Andrew Wiederhorn, and are formally seeking documents and materials concerning, among other things, the Company’s December 2020 merger with Fog Cutter Capital Group Inc., transactions between these entities and Mr. Wiederhorn, and compensation, extensions of credit and other benefits or payments received by Mr. Wiederhorn or his family. The Company is cooperating with the government regarding these matters, and we believe that the Company is not currently a target of the U.S. Attorney’s investigation. At this early stage, the Company is not able to reasonably estimate the outcome or duration of the government investigations.
Stratford Holding LLC v. Foot Locker Retail Inc. (U.S. District Court for the Western District of Oklahoma, Case No. 5:12-cv-772-HE)
In 2012 and 2013, two property owners in Oklahoma City, Oklahoma sued numerous parties, including Foot Locker Retail Inc. and our subsidiary Fog Cutter Capital Group Inc. ("FCCG") (now known as Fog Cutter Acquisition, LLC), for alleged environmental contamination on their properties, stemming from dry cleaning operations on one of the properties. The property owners seek damages in the range of $12.0 million to $22.0 million. From 2002 to 2008, a former FCCG subsidiary managed a lease portfolio, which included the subject property. FCCG denies any liability, although it did not timely respond to one of the property owners’ complaints and several of the defendants’ cross-complaints and thus is in default. The parties are currently conducting discovery, and the matter is scheduled for trial for June 2023. The Company is unable to predict the ultimate outcome of this matter, however, reserves have been recorded on the balance sheet relating to this litigation. There can be no assurance that the defendants will be successful in defending against these actions.
SBN FCCG LLC v FCCGI (Los Angeles Superior Court, Case No. BS172606)
SBN FCCG LLC (“SBN”) filed a complaint against FCCG in New York state court for an indemnification claim (the “NY case”) stemming from an earlier lawsuit in Georgia regarding a certain lease portfolio formerly managed by a former FCCG subsidiary. In February 2018, SBN obtained a final judgment in the NY case for a total of $0.7 million, which included $0.2 million in interest dating back to March 2012. SBN then obtained a sister state judgment in Los Angeles Superior Court, Case No. BS172606 (the “California case”), which included the $0.7 million judgment from the NY case, plus additional statutory interest and fees, for a total judgment of $0.7 million. In May 2018, SBN filed a cost memo, requesting an additional $12,411 in interest to be added to the judgment in the California case, for a total of $0.7 million. In May 31, 2019, the parties agreed to settle the matter for $0.6 million, which required the immediate payment of $0.1 million, and the balance to be paid in August 2019. FCCG wired $0.1 million to SBN in May 2019, but has not yet paid the remaining balance of $0.5 million. The parties have not entered into a formal settlement agreement, and they have not yet discussed the terms for the payment of the remaining balance.
The Company is involved in other claims and legal proceedings from time-to-time that arise in the ordinary course of business, including those involving the Company’s franchisees. The Company does not believe that the ultimate resolution of these actions will have a material adverse effect on its business, financial condition, results of operations, liquidity or capital resources. As of September 25, 2022 and December 26, 2021, the Company had accrued an aggregate of $5.1 million for the specific matters mentioned above and claims and legal proceedings involving franchisees as of that date.
NOTE 17. GEOGRAPHIC INFORMATION AND MAJOR FRANCHISEES
Revenue by geographic area was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | Thirty-Nine Weeks Ended |
| | September 25, 2022 | | September 26, 2021 | | September 25, 2022 | | September 26, 2021 |
| United States | | $ | 100.9 | | | $ | 26.3 | | | $ | 296.7 | | | $ | 37.4 | |
| Other countries | | 2.3 | | | 3.5 | | | 6.7 | | | 7.3 | |
| Total revenue | | $ | 103.2 | | | $ | 29.8 | | | $ | 303.4 | | | $ | 44.7 | |
Revenue is shown based on the geographic location of our company-owned and franchisees’ restaurants. All assets are located in the United States.
During the thirty-nine weeks ended September 25, 2022 and September 26, 2021, no individual franchisee accounted for more than 10% of the Company’s revenue.
NOTE 18. SUBSEQUENT EVENTS
Management has evaluated all events and transactions that occurred subsequent to September 25, 2022 through the date of issuance of these condensed consolidated financial statements. During this period, the Company did not have any significant subsequent events.