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 franchising company that develops, markets and acquires
primarily quick-service, fast casual and casual dining restaurant concepts around the world. Organized in March 2017 as a wholly owned
subsidiary of Fog Cutter Capital Group, Inc. (“FCCG”), the Company completed an initial public offering on October 20, 2017
and issued additional shares of common stock representing 20 percent of its ownership. During the fourth quarter of 2020, the Company
completed a transaction in which FCCG merged into a wholly owned subsidiary of FAT (the “Merger”) and FAT became the indirect
parent company of FCCG.
As
of June 27, 2021, the Company owns and franchises nine restaurant brands through various wholly owned subsidiaries: Fatburger, Johnny
Rockets, Buffalo’s Cafe, Buffalo’s Express, Hurricane Grill & Wings, Ponderosa Steakhouses, Bonanza Steakhouses, Yalla
Mediterranean and Elevation Burger. Combined, these brands have approximately 700 locations, including units under construction, and
more than 200 under development.
Each
franchising subsidiary licenses the right to use its brand name and provides franchisees with operating procedures and methods of merchandising.
Upon signing a franchise agreement, the franchisor is committed to provide training, some supervision and assistance and access to operations
manuals. As needed, the franchisor will also provide advice and written materials concerning techniques of managing and operating the
restaurants.
With
minor exceptions, the Company’s operations are comprised exclusively of franchising a growing portfolio of restaurant brands. This
growth strategy is centered on expanding the footprint of existing brands and acquiring new brands through a centralized management organization
which provides substantially all executive leadership, marketing, training and corporate accounting services. As part of its ongoing
franchising efforts, the Company will, from time to time, make opportunistic acquisitions of operating restaurants in order to convert
them to franchise locations. During the refranchising period, the Company will generally operate the restaurants and classifies the operational
activities as refranchising gains or losses and the assets and associated liabilities as held-for sale.
COVID-19
In
March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues to spread
throughout the United States and other countries. As a result, Company franchisees temporarily closed some retail locations, modified
store operating hours, adopted a “to-go” only operating model or a combination of these actions. These actions reduced consumer
traffic, all resulting in a negative impact to franchisee and Company 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 $2.1
million during the twenty-six weeks ended
June 27, 2021 compared to a loss from operations of $6.4
million for the twenty-six weeks ended June 28,
2020. The Company recognized a net loss of $8.4
million during the twenty-six weeks ended
June 27, 2021 compared to a net loss of $6.6
million during the twenty-six weeks ended June 28, 2020. A
one-time net charge of $6.4
million relating to the refinance of the Company’s debt
was included in the net loss for 2021. Net cash used in operations totaled $4.9
million for the twenty-six weeks ended June 27,
2021 compared to $4.0
million for twenty-six weeks ended June 28, 2020.
As of June 27, 2021, the Company’s total liabilities exceeded total assets by $45.2
million compared to $41.9
million as of December 27, 2020.
In
the Company’s 2020 Annual Report on Form 10-K (“2020 Form 10-K”), the Company disclosed that the combination
of the operating performance during the twelve months ended December 27, 2020 and the Company’s financial position as of December
27, 2020 raised substantial doubt about the Company’s ability to continue as a going concern as assessed under the framework of
FASB’s Accounting Standard Codification (“ASC”) 205 for the twelve months following the date of the issuance of the
2020 Form 10-K.
On
April 26, 2021, the Company completed the issuance and sale in a private offering (the “Offering”) of three tranches of fixed
rate secured notes. Proceeds of the Offering were used to repay in full its 2020 Securitization Notes as well as fees and expenses related
to the Offering, resulting in net proceeds to the Company of approximately $57 million (see Note 11).
The
Company utilized a portion of the net proceeds from the Offering to repay approximately $12.5 million of indebtedness assumed as a result
of the Merger (see Note 11).
The
change in the Company’s financial position reflects operating improvements as the effects of COVID-19 began to stabilize. In addition
to the liquidity provided by the successful completion of the Offering, the Company has experienced improvement in its operating performance
subsequent to December 27, 2020 as COVID-19 vaccinations have become more prevalent in the United States and federal, state and local
restrictions have eased in many of the markets where its franchisees operate. Management believes that the Company will be in compliance
with its debt covenants and has sufficient sources of cash to meet its liquidity needs for the next twelve months.
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. The operations of Johnny Rockets have been included since its acquisition on September 21, 2020 and the operations
of FCCG have been included since the merger on December 24, 2020. All intercompany accounts and transactions have been eliminated in
consolidation. The Company operates its business as one operating and 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 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 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 including measurement period adjustments to the preliminary purchase price allocations relating to the acquisition of
Johnny Rockets and the Merger in accordance with ASU 2015-16. During the first half of 2021, adjustments were made to provisional
amounts reclassifying $1.5
million between goodwill and additional paid
in capital on the condensed consolidated balance sheet. These adjustments did not impact the Company’s condensed consolidated statement
of operations during the current or prior periods.
Recently
Issued Accounting Standards
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial
Instruments, and later amended the ASU in 2019, as described below. This guidance replaces the current incurred loss impairment methodology.
Under the new guidance, on initial recognition and at each reporting period, an entity is required to recognize an allowance that reflects
its current estimate of credit losses expected to be incurred over the life of the financial instrument based on historical experience,
current conditions and reasonable and supportable forecasts.
In
November 2019, the FASB issued ASU No. 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic
815), and Leases (Topic 842): Effective Dates (“ASU 2019-10”). The purpose of this amendment is to create a two-tier
rollout of major updates, staggering the effective dates between larger public companies and all other entities. This granted certain
classes of companies, including Smaller Reporting Companies (“SRCs”), additional time to implement major FASB standards,
including ASU 2016-13. Larger public companies will have an effective date for fiscal years beginning after December 15, 2019, including
interim periods within those fiscal years. All other entities are permitted to defer adoption of ASU 2016-13, and its related amendments,
until the earlier of fiscal periods beginning after December 15, 2022. Under the current SEC definitions, the Company meets the definition
of an SRC and is adopting the deferral period for ASU 2016-13. The guidance requires a modified retrospective transition approach through
a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company does not expect the adoption
of this standard will have a material impact on its condensed consolidated financial statements.
NOTE
3. MERGERS AND ACQUISITIONS
Merger
with Fog Cutter Capital Group Inc.
On
December 10, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with FCCG, Fog Cutter
Acquisition, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company (“Merger Sub”), and Fog
Cutter Holdings, LLC, a Delaware limited liability company (“Holdings”).
Pursuant
to the Merger Agreement, FCCG agreed to merge with and into Merger Sub, with Merger Sub surviving as a wholly owned subsidiary of the
Company (the “Merger”). Upon closing of the Merger, the former stockholders of FCCG became direct stockholders of the Company
holding, in the aggregate, 9,679,288 shares of the Company’s common stock (the same number of shares of common stock held by FCCG
immediately prior to the Merger) and received certain limited registration rights with respect to the shares received in the Merger.
As a result of the Merger, FCCG and certain of its wholly owned subsidiaries, Homestyle Dining, LLC, Fog Cap Development LLC, Fog Cap
Acceptance Inc. and BC Canyon LLC, became indirect wholly owned subsidiaries of the Company (the “Merged Entities”).
Under
the Merger Agreement, Holdings has agreed to indemnify the Company for breaches of FCCG’s representations and warranties, covenants
and certain other matters specified in the Merger Agreement, subject to certain exceptions and qualifications. Holdings has also agreed
to hold a minimum fair market value of shares of Common Stock of the Company to ensure that it has assets available to satisfy such indemnification
obligations if necessary.
In
connection with the Merger, the Company declared a special stock dividend (the “Special Dividend”) payable on the record
date to holders of our Common Stock, other than FCCG, consisting of 0.2319998077 shares of the Company’s 8.25% Series B Cumulative
Preferred Stock (liquidation preference $25.00 per share) (the “Series B Preferred Stock”) for each outstanding share of
Common Stock held by such stockholders, with the value of any fractional shares of Series B Preferred Stock being paid in cash. FCCG
did not receive any portion of the Special Dividend, which had a record date of December 21, 2020 and payment date of December 23, 2020.
The Special Dividend was expressly conditioned upon the satisfaction or valid waiver of the conditions to closing of the Merger set forth
in the Merger Agreement. The Special Dividend was intended to reflect consideration for the potential financial impact of the Merger
on the common stockholders other than FCCG, including the assumption of certain debts and obligations of FCCG by the Company by virtue
of the Merger.
The
Company undertook the Merger primarily to simplify its corporate structure and eliminate limitations that restrict the Company’s
ability to issue additional Common Stock for acquisitions and capital raising. FCCG holds a substantial amount of net operating loss
carryforwards (“NOLs”), which could only be made available to the Company as long as FCCG owned at least 80% of FAT Brands.
With the Merger, the NOLs will be held directly by the Company, which will then have greater flexibility in managing its capital structure.
In addition, after the Merger the Company will no longer be required to compensate FCCG for utilizing its NOLs under the Tax Sharing
Agreement previously in effect between the Company and FCCG.
The
Merger is treated under ASC 805-50-30-6, which provides that when there is a transfer of assets or exchange of shares between entities
under common control, the receiving entity shall recognize those assets and liabilities at their net carrying amounts at the date of
transfer. As such, on the date of the Merger, all of the transferred assets and assumed liabilities of the Merged Entities were recorded
on the Company’s books at the Merged Entities’ book value. The consolidation of the operations of the Merged Entities with
the Company is presented on a prospective basis from the date of transfer.
The
Merger resulted in the following assets and liabilities being included in the condensed consolidated financial statements of the Company
as of the Merger date (in thousands):
SCHEDULE OF ALLOCATION OF TANGIBLE AND INTANGIBLE ASSETS ACQUIRED
|
|
|
Dec
10, 2020
|
|
Prepaid
assets
|
|
$
|
33
|
|
Cash
|
|
|
|
|
Accounts
receivable
|
|
|
|
|
Assets
held for sale
|
|
|
|
|
Goodwill
|
|
|
|
|
Other
intangible assets
|
|
|
|
|
Deferred
tax assets
|
|
|
20,402
|
|
Other
assets
|
|
|
100
|
|
Accounts
payable
|
|
|
(926
|
)
|
Accrued
expense
|
|
|
(7,094
|
)
|
Current
portion of debt
|
|
|
(12,486
|
)
|
Litigation
reserve
|
|
|
(3,980
|
)
|
Due
to affiliates
|
|
|
(43,653
|
)
|
Deferred
franchise fees
|
|
|
|
|
Operating
lease liability
|
|
|
|
|
Other
liabilities
|
|
|
|
|
Total
net identifiable liabilities (net deficit)
|
|
$
|
(47,604
|
)
|
Proforma
Information
The
table below presents the proforma revenue and net loss of the Company for the thirteen and twenty-six weeks ended June 28, 2020, assuming
the Merger had occurred on December 30, 2019 (the beginning of the Company’s 2020 fiscal year), pursuant to ASC 805-10-50 (in thousands).
This proforma information does not purport to represent what the actual results of operations of the Company would have been had the
Merger occurred on that date, nor does it purport to predict the results of operations for future periods.
SCHEDULE OF PROFORMA REVENUE AND NET (LOSS) INCOME
|
|
Thirteen
Weeks Ended
June
28, 2020
|
|
|
Twenty-six
Weeks
Ended
June
28, 2020
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,107
|
|
|
$
|
7,530
|
|
Net
loss
|
|
$
|
(5,673
|
)
|
|
$
|
(10,285
|
)
|
The
proforma information above reflects the combination of the Company’s results as disclosed in the accompanying condensed consolidated
statements of operations for the thirteen and twenty-six weeks ended June 28, 2020, together with the results of the Merged Entities
for the thirteen and twenty-six weeks ended June 28, 2020, with the following adjustment:
|
●
|
FCCG
historically made loan advances to Andrew A. Wiederhorn, its CEO and significant stockholder (the “Stockholder Loan”).
Prior to the Merger, the Stockholder Loan was cancelled, and the balance recorded as a loss by FCCG on forgiveness of loan to stockholder.
Had the Merger been completed as of the assumed proforma date of December 30, 2019 (the beginning of the Company’s 2020 fiscal
year), the Stockholder Loan would have been cancelled prior to that date and there would have been no further advances made. As a
result, the proforma information above eliminates the loss by FCCG on forgiveness of loan to stockholder and the related interest
income recorded by FCCG in its historical financial statements.
|
Acquisition
of Johnny Rockets
On
September 21, 2020, the Company completed the acquisition of Johnny Rockets Holding Co., a Delaware corporation (“Johnny Rockets”)
for a cash purchase price of approximately $24.7 million. The transaction was funded with proceeds from an increase in the Company’s
securitization facility (See Note 11).
Immediately
following the closing of the acquisition of Johnny Rockets, the Company contributed the franchising subsidiaries of Johnny Rockets to
FAT Royalty I, LLC pursuant to a Contribution Agreement. (See Note 11).
The
preliminary assessment of the fair value of the net assets and liabilities acquired by the Company through the acquisition of Johnny
Rockets was estimated at $24.7 million. This preliminary assessment of fair value of the net assets and liabilities as well as the final
purchase price were estimated at closing and are subject to change. Under Sections 382 and 383 of the Internal Revenue Code, if an ownership
change occurs with respect to a “loss corporation”, as defined, there are annual limitations on the amount of the NOLs and
certain other deductions and credits which are available to the Company (the “Section 382 and 383 Limitations”). The portion
of the NOLs and other tax benefits accumulated by Johnny Rockets prior to the Acquisition are subject to these Section 382 and 382 Limitations.
Analysis of these Section 382 and 383 Limitations are ongoing. The preliminary allocation of the consideration to the preliminary valuation
of net tangible and intangible assets acquired is presented in the table below (in thousands):
SCHEDULE OF ALLOCATION OF TANGIBLE AND INTANGIBLE ASSETS ACQUIRED
Cash
|
|
$
|
812
|
|
Accounts
receivable
|
|
|
1,452
|
|
Assets
held for sale
|
|
|
10,765
|
|
Goodwill
|
|
|
258
|
|
Other
intangible assets
|
|
|
26,900
|
|
Deferred
tax assets
|
|
|
4,039
|
|
Other
assets
|
|
|
438
|
|
Accounts
payable
|
|
|
(1,113
|
)
|
Accrued
expenses
|
|
|
(3,740
|
)
|
Deferred
franchise fees
|
|
|
(4,988
|
)
|
Operating
lease liability
|
|
|
(10,028
|
)
|
Other
liabilities
|
|
|
(65
|
)
|
Total
net identifiable assets
|
|
$
|
24,730
|
|
The
values of goodwill and other intangible assets were initially considered as of the acquisition date. Descriptions of the Company’s
subsequent assessments of impairment of the goodwill and other intangible assets acquired in this acquisition related to COVID-19 are
in Note 6.
Proforma
Information
The
table below presents the proforma revenue and net (loss) income of the Company for the thirteen and twenty-six weeks ended June 28, 2020,
assuming the acquisition of Johnny Rockets had occurred on December 30, 2019 (the beginning of the Company’s 2020 fiscal year),
pursuant to ASC 805-10-50 (in thousands). This proforma information does not purport to represent what the actual results of operations
of the Company would have been had the acquisition of Johnny Rockets occurred on this date nor does it purport to predict the results
of operations for future periods.
SCHEDULE OF PROFORMA REVENUE AND NET (LOSS) INCOME
|
|
Thirteen
Weeks Ended
June
28, 2020
|
|
|
Twenty-six
Weeks Ended
June
28, 2020
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,923
|
|
|
$
|
11,597
|
|
Net
loss
|
|
$
|
(5,158
|
)
|
|
$
|
(7,515
|
)
|
The
proforma information above reflects the combination of the Company’s unaudited results as disclosed in the accompanying condensed
consolidated statements of operations for the thirteen and twenty-six weeks ended June 28, 2020, together with the unaudited results
of Johnny Rockets for the thirteen and twenty-six weeks ended June 28, 2020, with the following adjustments:
|
●
|
Revenue
– The unaudited proforma revenue and net (loss) income present franchise fee revenue and advertising revenue in accordance
with ASC 606 in a manner consistent with the Company’s application thereof. As a non-public company, Johnny Rockets had not
yet been required to adopt ASC 606.
|
|
●
|
Overhead
allocations from the former parent company have been adjusted to the estimated amount the Company would have allocated for the thirteen
and twenty-six weeks ended June 28, 2020.
|
|
●
|
Former
parent company management fees have been eliminated from the proforma.
|
|
●
|
Amortization
of intangible assets has been adjusted to reflect the preliminary fair value at the assumed acquisition date.
|
|
●
|
Depreciation
on assets treated as held for sale by the Company has been eliminated.
|
|
●
|
The
proforma adjustments include advertising expenses in accordance with ASC 606.
|
|
●
|
The
proforma interest expense has been adjusted to exclude actual Johnny Rockets interest expense incurred prior to the acquisition.
All interest-bearing liabilities were paid off at closing.
|
|
●
|
The
proforma interest expense has been adjusted to include proforma interest expense that would have been incurred relating to the acquisition
financing obtained by the Company.
|
|
●
|
Non-recurring
gains and losses have been eliminated from the proforma statements.
|
nOTE
4. REFRANCHISING
As
part of its ongoing franchising efforts, the Company may, from time to time, make opportunistic acquisitions of operating restaurants
in order to convert them to franchise locations or acquire existing franchise locations to resell to another franchisee across all of
its brands.
The
Company meets all of the criteria requiring that acquired assets used in the operation of certain restaurants be classified as held for
sale. As a result, the following assets have been classified as held for sale on the accompanying condensed consolidated balance sheets
as of June 27, 2021 and December 27, 2020 (in thousands):
SCHEDULE
OF REMAINING ASSETS CLASSIFIED AS HELD FOR SALE
|
|
June 27,
2021
|
|
|
December
27,
2020
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
$
|
1,025
|
|
|
$
|
1,352
|
|
Operating
lease right of use assets
|
|
|
6,710
|
|
|
|
9,479
|
|
Total
|
|
$
|
7,735
|
|
|
$
|
10,831
|
|
Operating
lease liabilities related to the assets classified as held for sale in the amount of $7.1
million and $9.9
million have been classified as current liabilities
on the accompanying condensed consolidated balance sheets as of June 27, 2021 and December 27, 2020, respectively.
Refranchising
gains in the first half of 2021 were comprised of $1.1
million in net gains related to refranchised
restaurants, partially offset by $0.7
million of
restaurant operating costs, net of food sales. Refranchising losses in the first half of 2020 were comprised of $1.7
million of
restaurant operating costs, net of food sales, less $0.2
million in net gains related to refranchised
restaurants.
Refranchising
gains in the second quarter of 2021 were comprised of $1.1
million in net gains related to refranchised
restaurants, partially offset by $0.2
million of
restaurant operating costs, net of food sales. Refranchising losses in the second quarter of 2020 were comprised of restaurant operating
costs, net of food sales.
During
the thirteen weeks ended June 27, 2021, one restaurant location was sold to an entity which is 49%
owned by a subsidiary of the Company. The 51%
owner of the entity is not affiliated with the Company. In addition to its significant equity interest in the restaurant, the Company
provides virtually all of the management functions associated with the operation of the business. As a result, the assets, liabilities
and operating results of the restaurant are included in the Company’s condensed consolidated financial statements, subject
to the noncontrolling interests of the non-affiliated investor.
Note
5. NOTE RECEIVABLE
The
Elevation Buyer Note was funded in connection with the purchase of Elevation Burger in 2019. The Company loaned $2.3
million in cash to the Seller under a subordinated
promissory note bearing interest at 6.0%
per year and maturing in August
2026. The balance owing to the Company under
the Elevation Buyer Note may be used by the Company to offset amounts owing to the Seller under the Elevation Note under certain circumstances
(See Note 11). As part of the total consideration for the Elevation acquisition, the Elevation Buyer Note was recorded at a carrying
value of $1.9
million, which was net of a discount of $0.4
million. As of June 27, 2021 and December 27,
2020, the balance of the Elevation Note was $1.8
million, which was net of discounts of $0.2
million and $0.3
million, respectively. During the thirteen and
twenty-six weeks ended June 27, 2021, the Company recognized $50,000
and $102,000
in interest income on the Elevation Buyer Note,
respectively. During the thirteen and twenty-six weeks ended June 28, 2020, the Company recognized $53,000
and $106,000,
respectively, in interest income on the Elevation Buyer Note.
Note
6. GOODWILL
Goodwill
consisted of the following (in thousands):
SCHEDULE
OF GOODWILL
|
|
June
27,
2021
|
|
|
December
27,
2020
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
Fatburger
|
|
$
|
529
|
|
|
$
|
529
|
|
Buffalo’s
|
|
|
5,365
|
|
|
|
5,365
|
|
Hurricane
|
|
|
2,772
|
|
|
|
2,772
|
|
Yalla
|
|
|
261
|
|
|
|
261
|
|
Elevation
Burger
|
|
|
521
|
|
|
|
521
|
|
Johnny
Rockets
|
|
|
258
|
|
|
|
1,461
|
|
Total
goodwill
|
|
$
|
9,706
|
|
|
$
|
10,909
|
|
A
review of the carrying value of goodwill as of June 27, 2021 did not result in any impairment charges for the twenty-six weeks ended
as of that date. When considering the available facts, assessments and judgments, as of June 28, 2020, the Company recorded goodwill
impairment charges of $1.5 million relating to the Ponderosa and Bonanza brands for the twenty-six weeks ended as of that date.
Because
of the risks and uncertainties related to the COVID-19 pandemic events, the negative effects on the operations of the Company’s
franchisees could prove to be worse than currently estimated and result in the need to record additional goodwill impairment charges
in future periods.
Note
7. OTHER INTANGIBLE ASSETS
Other
intangible assets consist of trademarks and franchise agreements that were classified as identifiable intangible assets at the time of
the brands’ acquisition by the Company or by FCCG prior to FCCG’s contribution of the brands to the Company at the time of
the initial public offering (in thousands):
SCHEDULE OF INTANGIBLE ASSETS
|
|
June
27,
2021
|
|
|
December
27,
2020
|
|
Trademarks:
|
|
|
|
|
|
|
|
|
Fatburger
|
|
$
|
2,135
|
|
|
$
|
2,135
|
|
Buffalo’s
|
|
|
27
|
|
|
|
27
|
|
Hurricane
|
|
|
6,840
|
|
|
|
6,840
|
|
Ponderosa
|
|
|
300
|
|
|
|
300
|
|
Yalla
|
|
|
776
|
|
|
|
776
|
|
Elevation
Burger
|
|
|
4,690
|
|
|
|
4,690
|
|
Johnny
Rockets
|
|
|
20,300
|
|
|
|
20,300
|
|
Total
trademarks
|
|
|
35,068
|
|
|
|
35,068
|
|
|
|
|
|
|
|
|
|
|
Franchise
agreements:
|
|
|
|
|
|
|
|
|
Hurricane
– cost
|
|
|
4,180
|
|
|
|
4,180
|
|
Hurricane
– accumulated amortization
|
|
|
(965
|
)
|
|
|
(804
|
)
|
Ponderosa
– cost
|
|
|
1,477
|
|
|
|
1,477
|
|
Ponderosa
– accumulated amortization
|
|
|
(388
|
)
|
|
|
(337
|
)
|
Elevation
Burger – cost
|
|
|
2,450
|
|
|
|
2,450
|
|
Elevation
Burger – accumulated amortization
|
|
|
(1,010
|
)
|
|
|
(761
|
)
|
Johnny
Rockets – cost
|
|
|
6,600
|
|
|
|
6,600
|
|
Johnny
Rockets – accumulated amortization
|
|
|
(462
|
)
|
|
|
(162
|
)
|
Total
franchise agreements
|
|
|
11,882
|
|
|
|
12,643
|
|
Total
Other Intangible Assets
|
|
$
|
46,950
|
|
|
$
|
47,711
|
|
The
Company reviewed the carrying value of its other intangible assets as of June 27, 2021 and June 28, 2020. During the twenty-six weeks
ended June 27, 2021, no impairment charges for other intangible assets were deemed necessary. When considering the available facts, assessments
and judgments as of June 28, 2020, the Company recorded non-cash tradename impairment charges of $1.7 million relating to the Ponderosa
and Bonanza brands for the twenty-six weeks ended as of that date.
Because
of the risks and uncertainties related to the COVID-19 pandemic events, the negative effects on the operations of the Company’s
franchisees could prove to be worse than currently estimated and result in the need to record additional other intangible asset impairment
charges in future periods.
The
expected future amortization of the Company’s franchise agreements as of June 27, 2021 is as follows (in thousands):
SCHEDULE OF FUTURE AMORTIZATION
Fiscal
year:
|
|
|
|
|
Remaining
2021
|
|
$
|
761
|
|
2022
|
|
|
1,522
|
|
2023
|
|
|
1,522
|
|
2024
|
|
|
1,217
|
|
2025
|
|
|
1,023
|
|
Thereafter
|
|
|
5,837
|
|
Total
|
|
$
|
11,882
|
|
Note
8. DEFERRED INCOME
Deferred
income was as follows (in thousands):
SCHEDULE
OF DEFERRED INCOME
|
|
June
27,
2021
|
|
|
December
27,
2020
|
|
|
|
|
|
|
|
|
Deferred
franchise fees
|
|
$
|
10,548
|
|
|
$
|
10,003
|
|
Deferred
royalties
|
|
|
189
|
|
|
|
291
|
|
Deferred
vendor incentives
|
|
|
638
|
|
|
|
692
|
|
Total
|
|
$
|
11,375
|
|
|
$
|
10,986
|
|
Note
9. INCOME TAXES
The
following table presents the Company’s benefit for income taxes (in thousands):
SCHEDULE
OF BENEFIT FOR INCOME TAXES
|
|
June
27, 2021
|
|
|
June
28, 2020
|
|
|
June
27, 2021
|
|
|
June
28, 2020
|
|
|
|
Thirteen
Weeks Ended
|
|
|
Twenty-six
Weeks Ended
|
|
|
|
June
27, 2021
|
|
|
June
28, 2020
|
|
|
June
27, 2021
|
|
|
June
28, 2020
|
|
Benefit
for income taxes
|
|
$
|
(1,992
|
)
|
|
$
|
(1,089
|
)
|
|
$
|
(2,121
|
)
|
|
$
|
(1,386
|
)
|
Effective
tax rate
|
|
|
25.1
|
%
|
|
|
20.4
|
%
|
|
|
20.2
|
%
|
|
|
17.3
|
%
|
The difference between the statutory tax rate
of 21% and the effective tax rate in the thirteen weeks ended June 27, 2021 was primarily due to the impact of state income taxes and
the forgiveness of loans under the Paycheck Protection Program (the “PPP Loans”) (see Note 11).
NOTE
10. LEASES
As
of June 27, 2021, the Company has twelve
operating leases for corporate offices, two
Company owned stores and for certain restaurant properties that are in the process of being refranchised. The leases have
remaining terms ranging from 2.3
to 7.9
years. The Company recognized lease expense of
$0.7 million
and $0.4 million
for the thirteen weeks ended June 27, 2021 and June 28, 2020, respectively. For the twenty-six weeks ended June 27, 2021 and June 28,
2020, the Company recognized lease expense of $1.5
million and $0.7
million, respectively. The weighted average remaining
lease term of the operating leases as of June 27, 2021 was 5.5
years.
Operating
lease right of use assets and operating lease liabilities relating to the operating leases are as follows (in thousands):
SUMMARY
OF OPERATING LEASE RIGHT OF USE ASSETS AND OPERATING LEASE LIABILITIES RELATING TO OPERATING LEASES
|
|
June
27,
2021
|
|
|
December
27,
2020
|
|
|
|
|
|
|
|
|
Right
of use assets
|
|
$
|
11,623
|
|
|
$
|
13,948
|
|
Lease
liabilities
|
|
$
|
12,568
|
|
|
$
|
14,651
|
|
The
weighted average discount rate used to calculate the carrying value of the right of use assets and lease liabilities was 9.3% which is
based on the Company’s incremental borrowing rate at the time the lease is acquired.
The
contractual future maturities of the Company’s operating lease liabilities as of June 27, 2021, including anticipated lease extensions,
are as follows (in thousands):
SCHEDULE
OF CONTRACTUAL FUTURE MATURITIES OF OPERATING LEASE LIABILITIES
Fiscal
year:
|
|
|
|
|
2021
|
|
$
|
1,491
|
|
2022
|
|
|
3,059
|
|
2023
|
|
|
3,148
|
|
2024
|
|
|
3,007
|
|
2025
|
|
|
2,656
|
|
Thereafter
|
|
|
2,693
|
|
Total
lease payments
|
|
|
16,054
|
|
Less
imputed interest
|
|
|
3,486
|
|
Total
|
|
$
|
12,568
|
|
Supplemental
cash flow information for the twenty-six weeks ended June 27, 2021 related to leases was as follows (in thousands):
SUMMARY
OF SUPPLEMENTAL CASH FLOW INFORMATION RELATED TO LEASES
Cash
paid for amounts included in the measurement of operating lease liabilities:
|
|
|
|
|
Operating
cash flows from operating leases
|
|
$
|
1,296
|
|
Operating
lease right of use assets obtained in exchange for new lease obligations:
|
|
|
|
|
Operating
lease liabilities
|
|
$
|
-
|
|
Note
11. DEBT
Securitization
On
April 26, 2021 (the “Closing Date”), FAT Brands Royalty I, LLC, a Delaware limited liability company (“FB Royalty”),
a special purpose, wholly-owned subsidiary of FAT Brands, completed the Offering of three tranches of fixed rate senior secured notes
(collectively, the “2021 Securitization Notes”) as follows:
SCHEDULE
OF SECURITIZATION OF NOTES
Closing
Date
|
|
Class
|
|
|
Seniority
|
|
Principal
Balance
|
|
|
Coupon
|
|
|
Weighted
Average
Life
(Years)
|
|
|
Non-Call
Period
(Months)
|
|
|
Anticipated
Call
Date
|
|
Final
Legal
Maturity
Date
|
4/26/2021
|
|
|
A-2
|
|
|
Senior
|
|
$
|
97,104,000
|
|
|
|
4.75
|
%
|
|
|
2.25
|
|
|
|
6
|
|
|
7/25/2023
|
|
4/25/2051
|
4/26/2021
|
|
|
B-2
|
|
|
Senior
Subordinated
|
|
$
|
32,368,000
|
|
|
|
8.00
|
%
|
|
|
2.25
|
|
|
|
6
|
|
|
7/25/2023
|
|
4/25/2051
|
4/26/2021
|
|
|
M-2
|
|
|
Subordinated
|
|
$
|
15,000,000
|
|
|
|
9.00
|
%
|
|
|
2.25
|
|
|
|
6
|
|
|
7/25/2023
|
|
4/25/2051
|
Net proceeds from the issuance of the 2021 Securitization
Notes totaled $140.8 million, which consisted of the combined face amount of $144.5 million (net of debt offering costs of $3.0 million
and original issue discount of $0.7 million). As of June 27, 2021, the carrying value of the 2021 Securitization Notes was $140.9 million
(net of debt offering costs of $2.9 million and original issue discount of $0.7 million). The Company recognized interest expense on
the 2021 Securitization Notes of $1.6 million for the thirteen and twenty-six weeks ended June 27, 2021, which includes $0.1 million
for amortization of debt offering costs and $34,000 for amortization of the original issue discount. The average annualized effective
interest rate of the 2021 Securitization Notes, including the amortization of debt offering costs and original issue discount, was 6.7%
for the time the debt was outstanding during the twenty-six weeks ended June 27, 2021.
The 2021 Securitization Notes require that the
principal and interest obligations have first priority and amounts are segregated weekly to ensure appropriate funds are reserved to
pay the quarterly principal and interest amounts due. The amount of weekly cash flow that exceeds the required weekly interest reserve
is generally remitted to the 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 each tranche. The material terms of the 2021 Securitization
Notes also include, among other things, the following financial covenants: (i) debt service coverage ratio, (ii) leverage ratio and (iii)
senior leverage ratio. As of June 27, 2021, we were in compliance with these covenants.
The 2021 Securitization Notes are generally secured
by a security interest in substantially all the assets of FB Royalty and its subsidiaries.
The
payoff amount totaled $83.7 million, which included principle of $80.0 million, accrued interest of $2.2 million and prepayment premiums
of $1.5 million. FB Royalty recognized a loss on extinguishment of debt of $7.8 million in connection with the refinance.
The
Company recognized interest expense on the 2020 Securitization Notes of $0.5
million and $0.9
million for the thirteen weeks ended June 27,
2021 and June 28, 2020, respectively. The Company recognized interest expense related to the 2020 Securitization Notes of $2.6
million and $1.2
million for the twenty-six weeks ended June 27,
2021 and June 28, 2020, respectively.
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 year and maturing in July
2026. The Elevation Note is convertible under
certain circumstances into shares of the Company’s common stock at $12.00
per share. In connection with the valuation of
the acquisition of Elevation Burger, the Elevation Note was recorded on the condensed consolidated financial statements of the
Company at $6.2
million (net of a loan discount of $1.3
million and debt offering costs of $30,000).
As
of June 27, 2021, the carrying value of the Elevation Note was $5.9 million (net of the loan discount of $0.7 million and debt offering
costs of $51,000). As of December 27, 2020, the carrying value of the Elevation Note was $5.9 million (net of the loan discount of $0.9
million and debt offering costs of $56,000). The Company recognized interest expense relating to the Elevation Note during the thirteen
and twenty-six weeks ended June 27, 2021 in the amount of $169,000 and $340,000, respectively, which included amortization of the loan
discount of $64,000 and $130,000, and amortization of $3,000 and $5,000 in debt offering costs, respectively. The Company recognized
interest expense relating to the Elevation Note during the thirteen and twenty-six weeks ended June 28, 2020 in the amount of $175,000
and $364,000, respectively, which included amortization of the loan discount of $70,000 and $141,000, and amortization of $2,000 and
$5,000 in debt offering costs, respectively.
The
annualized effective interest rate for the Elevation Note during the twenty-six weeks ended June 27, 2021 was 11.4%.
The
Elevation Note is a general unsecured obligation of Company and is subordinated in right of payment to all senior indebtedness
of the Company.
Assumed
Debt from Merger
In
connection with the Merger, certain debts of FCCG totaling $12.5 million (the “FCCG Debt”) were assumed by Fog Cutter Acquisition
LLC.
During
the thirteen weeks ended June 27, 2021, the FCCG Debt was paid in full in the amount of $12.5 million, including accrued interest. The
Company recognized interest expense relating to the FCCG Debt of $78,000 and $241,000 during the thirteen and twenty-six weeks ended
July 27, 2021, respectively.
The
FCCG Debt as of December 27, 2020 was as follows (in thousands):
SCHEDULE
OF FCCG MERGER
|
|
December
27, 2020
|
|
Note
payable to a private lender. The note bore interest at a fixed rate of 12% per
annum and was unsecured. Interest was due monthly in arrears. The note was scheduled to mature on May 21, 2021.
|
|
$
|
1,977
|
|
|
|
|
|
|
Note
payable to a private lender. The note bore interest at a fixed rate of 12% per
annum and was unsecured. Interest was due monthly in arrears. The note was scheduled to mature on May 21, 2021.
|
|
|
2,871
|
|
|
|
|
|
|
Note
payable to a private lender. The note bore interest at a fixed rate of 15%
per annum. The note was scheduled to mature May 21, 2021.
|
|
|
17
|
|
|
|
|
|
|
Note
payable to a private lender. The note bore interest at a fixed rate of 12%
per annum. Interest was due monthly in arrears. The note was scheduled to mature May 21, 2021.
|
|
|
762
|
|
|
|
|
|
|
Consideration
payable to former FCCG stockholders issued in redemption of fractional shares of FCCG’s stock. The consideration was
unsecured and non-interest bearing and was due and payable on May
21, 2021.
|
|
|
6,864
|
|
|
|
|
|
|
Total
|
|
$
|
12,491
|
|
Loan
and Security Agreement
On
January 29, 2019, the Company as borrower, and its subsidiaries and affiliates as guarantors, entered into the Loan and Security Agreement
with The Lion Fund, L.P (“Lion”). Pursuant to the Loan and Security Agreement, the Company borrowed $20.0 million from Lion,
and utilized the proceeds to repay the existing $16.0 million term loan from FB Lending, LLC plus accrued interest and fees, and provide
additional general working capital to the Company.
The
term loan under the Loan and Security Agreement was due to mature on June 30, 2020. Interest on the term loan accrued at an annual fixed
rate of 20.0% and was payable quarterly.
The
Loan and Security Agreement was subsequently amended several times which allowed the Company to increase its borrowing by $3.5 million
in connection with the acquisition of Elevation Burger; extended the exercise date of the Lion Warrant to June 30, 2020; extended the
due date for certain quarterly payments and imposed associated extension and other loan fees.
On
March 6, 2020, the Company repaid the Lion Loan and Security Agreement in full by making a total payment of approximately $26.8 million.
This consisted of $24.0 million in principle, approximately $2.1 million in accrued interest and $0.7 million in penalties and fees.
The
Company recognized interest expense on the Loan and Security Agreement of $1.8 million for the twenty-six weeks ended June 28, 2020,
which includes $0.2 million for amortization of all unaccreted debt offering costs at the time of the repayment and $0.7 million in penalties
and fees.
Paycheck
Protection Program Loans
During
2020, the Company received loan proceeds in the amount of approximately $1.5 million under the PPP
Loans and Economic Injury Disaster Loan Program (the “EIDL Loans”). The Paycheck Protection Program, established
as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses
for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable
after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities,
and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries
during the eight-week period.
At
inception, the PPP Loans and EIDL Loans related to FAT Brands Inc. and five restaurant locations that were part of the Company’s
refranchising program. As of December 27, 2020, the balance remaining on the PPP Loans and EIDL Loans had been reduced to $1.2
million due to the closure or refranchising of
the five restaurant locations during the second and third quarters of 2020. During the thirteen weeks ended June 27, 2021, the Company
received confirmation that the entire balance remaining on the PPP Loans, plus accrued interest, had been forgiven under the terms of
the program. The Company recognized interest expense of $4,000
and a gain on extinguishment of debt in
the amount of $1.2
million relating to the PPP Loans and EIDL Loans
during the twenty-six weeks ended June 27, 2021.
Note
12. PREFERRED STOCK
Series
B Cumulative Preferred Stock
On
July 13, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) to issue and sell in a public
offering (the “Offering”) 360,000
shares of 8.25%
Series B Cumulative Preferred Stock (“Series
B Preferred Stock”) and 1,800,000
warrants to purchase common stock at $5.00
per share, plus 99,000
additional warrants pursuant to the underwriter’s
overallotment option (the “2020 Series B Offering Warrants”).
The
Offering closed on July 16, 2020 with net proceeds to the Company of $8.1 million (net of $0.9 million in underwriting and offering costs).
In addition to the shares issued in the Offering,
the Company concurrently engaged in the following transactions:
|
●
|
The holders of the outstanding 57,140 shares of Original Series
B Preferred became subject to the new terms of the Certificate of Designation and received an additional 3,537 shares of Series B
Preferred stock in payment of previously accrued dividends.
|
|
|
|
|
●
|
The Company entered into an agreement to exchange 15,000 shares
of Series A Fixed Rate Cumulative Preferred Stock owned by FCCG, including accrued dividends thereon, for 74,449 shares of Series
B Preferred Stock.
|
|
|
|
|
●
|
The Company exchanged all of the outstanding shares of Series A-1
Fixed Rate Cumulative Preferred Stock for 168,001 shares of Series B Preferred Stock.
|
In
December 2020, in connection with the acquisition of FCCG by the Company, the Company declared a special stock
dividend (the “Special Dividend”) payable only to holders of the Company’s Common Stock, other than FCCG, on the record
date, consisting of 0.2319998077 shares of Series B Cumulative Preferred Stock for each outstanding share of Common Stock held by such
stockholders. The Special Dividend was paid on December 23, 2020 and resulted in the issuance of 520,145
additional
shares of Series B Preferred Stock with a market value on the payment date of approximately $8.9
million.
On
June 22, 2021, the Company closed a second underwritten public offering of 460,000
shares of 8.25%
Series B Cumulative Preferred Stock at a price
to the public of $20.00
per share. The net proceeds to the Company totaled
$8.3 million (net of $0.9 million in underwriting discounts and other offering expenses).
As
of June 27, 2021, the Series B Preferred Stock consisted of 1,643,272
shares outstanding with a balance of $29.1
million. The Company paid preferred dividends
to the holders of the Series B Preferred Stock totaling $0.6
million and $1.2
million during the thirteen weeks and twenty-six
weeks ended June 27, 2021.
Series
A Fixed Rate Cumulative Preferred Stock
On
June 8, 2018, the Company filed a Certificate of Designation of Rights and Preferences of Series A Fixed Rate Cumulative Preferred Stock
(“Series A Preferred Stock”) with the Secretary of State of the State of Delaware (the “Certificate of Designation”),
designating a total of 100,000 shares of Series A Preferred Stock.
The
Company issued 100,000 shares of Series A Preferred stock in the following two transactions:
|
(i)
|
On
June 7, 2018, the Company entered into a Subscription Agreement for the issuance and sale (the “Series A Offering”) of
800 units (the “Units”), with each Unit consisting of (i) 100 shares of the Company’s newly designated Series A
Fixed Rate Cumulative Preferred Stock (the “Series A Preferred Stock”) and (ii) warrants (the “Series A Warrants”)
to purchase 127 shares of the Company’s common stock at $7.83 per share. The sales price of each Unit was $10,000, resulting
in gross proceeds to the Company from the initial closing of $8.0 million and the issuance of 80,000 shares of Series A Preferred
Stock and Series A Warrants to purchase 102,125 shares of common stock (the “Subscription Warrants”).
|
|
(ii)
|
On
June 27, 2018, the Company entered into a Note Exchange Agreement, as amended, under which it agreed with FCCG to exchange $2.0
million of the remaining balance of the Company’s outstanding Promissory Note issued to the FCCG on October 20, 2017 for 200 Units consisting of 20,000 shares of Series A Fixed Rate Cumulative Preferred Stock of the Company at $100
per share and Series A Warrants to purchase 25,530 of the Company’s common stock at an exercise price of $7.83 per share (the “Exchange
Warrants”).
|
On
July 13, 2020, the Company entered into the following transactions pertaining to the outstanding Series A Preferred Stock:
|
1.
|
The
Company entered into an agreement to redeem 80,000 outstanding shares of the Series A Preferred Stock, plus accrued dividends thereon,
held by Trojan Investments, LLC pursuant to a Stock Redemption Agreement that provides for the redemption at face value of a portion
of such shares for cash from the proceeds of the Offering and the balance to be redeemed in $2 million tranches every six months,
with the final payment due by December 31, 2021.
|
|
|
|
|
2.
|
The
Company redeemed 5,000 outstanding shares of Series A Preferred Stock, plus accrued dividends thereon, held by Ridgewood Select Value
Fund LP and its affiliate at face value for cash from the proceeds of the Offering.
|
|
|
|
|
3.
|
The
Company exchanged 15,000
outstanding shares of Series A Preferred Stock,
plus accrued dividends thereon, held by FCCG at face value for shares of Series B Preferred Stock.
|
The
Company classifies the Series A Preferred Stock as debt.
As
of June 27, 2021, there were 80,000 shares of Series A Preferred Stock outstanding, with a balance of $8.0 million.
The
Company recognized interest expense on the Series A Preferred Stock of $264,000 and $354,000 for the thirteen weeks ended June 27, 2021
and June 28, 2020, respectively. The Company recognized interest expense on the Series A Preferred Stock of $552,000 and $708,000 for
the twenty-six weeks ended June 27, 2021 and June 28, 2020. The year-to-date effective interest rate for the Series A Preferred Stock
for 2021 was 13.9%.
Derivative
Liability Relating to the Conversion Feature of the Series A Preferred Stock
Holders
of Series A Preferred Stock had the option to cause the Company to redeem all or any portion of their shares of Series A Preferred Stock
beginning any time after the two-year anniversary of the initial issuance date for an amount equal to $100.00 per share plus any accrued
and unpaid dividends, which amount could be settled in cash or common stock of the Company, at the option of the holder (the “Conversion
Option”). If a holder elected to receive common stock, the shares would be issued based on the 20-day volume weighted average price
of the common stock immediately preceding the date of the holder’s redemption notice.
On
June 8, 2020, the Conversion Option became exercisable. As of that date, the Company calculated the estimated fair value of the Conversion
Option to be $2.4 million and recorded a derivative liability in that amount, together with an offsetting reduction in Additional Paid-In
Capital. As of June 28, 2020, the Company calculated the estimated fair value of the Conversion Option to be $1.1 million and adjusted
the carrying value of the derivative liability accordingly and recognized income of $1.3 million from the change in the fair market value
of the derivative liability.
On
July 13, 2020, the Company entered into agreements with each of the holders of the Series A Preferred Stock regarding the redemption
of their shares. Holders of 85,000 of the outstanding shares agreed to a full redemption in cash payments. Fog Cutter Capital Group Inc.,
the holder of the remaining 15,000 outstanding shares, agreed to redeem its Series A Preferred Stock in exchange for newly issued Series
B Preferred Stock of the Company. As a result of these agreements, the Conversion Option was terminated as of July 13, 2020.
NOTE
13. ACQUISITION PURCHASE PRICE PAYABLE
On
June 21, 2021, the Company settled in full, the acquisition purchase price payable relating to the acquisition of Yalla Mediterranean.
At the time of the settlement, the payable had a book value of $2.1
million. The Company paid cash of $1.1
million and agreed to issue 62,500
shares of its common stock, with a market value
of $0.8
million ($13.05
per share) in satisfaction of the obligation.
The Company recognized a gain on the extinguishment of the debt in the amount of $0.2
million during the thirteen weeks ended June
27, 2021.
Note
14. RELATED PARTY TRANSACTIONS
During
the twenty-six weeks ended June 27, 2021, there were no reportable related party transactions. For the twenty-six weeks ended June 28,
2020, the Company reported the following:
Due
from Affiliates
On
April 24, 2020, the Company entered into an Intercompany Revolving Credit Agreement with FCCG (“Intercompany Agreement”).
The Company had previously extended credit to FCCG pursuant to a certain Intercompany Promissory Note (the “Original Note”),
dated October 20, 2017, with an initial principal balance of $11.9 million. Subsequent to the issuance of the Original Note, the Company
and certain of its direct or indirect subsidiaries made additional intercompany advances. Pursuant to the Intercompany Agreement, the
revolving credit facility bears interest at a rate of 10% per annum, has a five-year term with no prepayment penalties, and has a maximum
capacity of $35.0 million. All additional borrowings under the Intercompany Agreement are subject to the approval of the Board of Directors,
in advance, on a quarterly basis and may be subject to other conditions as set forth by the Company. The initial balance under the Intercompany
Agreement totaled $21.1 million including the balance of the Original Note, borrowings subsequent to the Original Note, accrued and unpaid
interest income and other adjustments through December 29, 2019. As of June 28, 2020, the balance receivable under the Intercompany
Agreement was $29.5 million.
During
the twenty-six weeks ended June 28, 2020, the Company recorded a receivable from FCCG in the amount of $0.2
million under the Tax Sharing Agreement, which
was added to the intercompany receivable.
Effective
July 5, 2018, the Company made a preferred capital investment in Homestyle Dining LLC, a Delaware limited liability corporation (“HSD”)
in the amount of $4.0
million (the “Preferred Interest”).
FCCG owns all of the common interests in HSD. The holder of the Preferred Interest is entitled to a 15%
per annum
priority return on the outstanding balance of the investment (the “Preferred Return”). Any available cash flows from HSD
on a quarterly basis are to be distributed to pay the accrued Preferred Return and repay the Preferred Interest until fully retired.
On or before the five-year anniversary of the investment, the Preferred Interest is to be fully repaid, together with all previously
accrued but unpaid Preferred Return. FCCG has unconditionally guaranteed repayment of the Preferred Interest in the event HSD fails to
do so. As of June 28, 2020, the balance receivable, including accrued and unpaid interest income, under the Preferred Interest was $5.2
million.
Note
15. STOCKHOLDERS’ EQUITY
As
of June 27, 2021 and December 27, 2020, the total number of authorized shares of common stock was 25,000,000, and there were 12,491,528
and 11,926,264 shares of common stock issued and outstanding, respectively.
Below
are the changes to the Company’s common stock during the twenty-six weeks ended June 27, 2021:
|
●
|
Warrants
to purchase 289,227 shares of common stock were exercised during the twenty-six weeks ended June 27, 2021. The proceeds to the Company
from the exercise of the warrants totaled $1.1 million.
|
|
|
|
|
●
|
Between
April 6, 2021 and May 18, 2021, the Company granted 300,000
restricted shares of common stock to certain
senior executives of the Company. The shares vest over three
years in equal installments at the anniversary
date of grant. The value of the restricted stock grant was $2.8
million and will be amortized as
expense over the vesting period.
|
|
|
|
|
●
|
On
June 21, 2021, the Company entered into an agreement to issue 62,500 shares of common stock with a market value of $0.8 million in
partial payment of the acquisition purchase price payable relating to the acquisition of Yalla Mediterranean (See Note 13). The shares
were issued on June 30, 2021.
|
|
|
|
|
●
|
On
April 20, 2021, the Board of Directors declared a cash dividend of $0.13
per share of common stock, payable on May
7, 2021 to stockholders of record as of May 3, 2021, for a total of $1.6
million.
|
|
|
|
|
●
|
On
June 1, 2021, the Board of Directors declared a cash dividend of $0.13
per share of common stock, payable on June
21, 2021 to stockholders of record as of June 14, 2021, for a total of $1.6
million.
|
Note
16. SHARE-BASED COMPENSATION
Effective
September 30, 2017, the Company adopted the 2017 Omnibus Equity Incentive Plan (the “Plan”). The Plan is a comprehensive
incentive compensation plan under which the Company can grant equity-based and other incentive awards to officers, employees and directors
of, and consultants and advisers to, FAT Brands Inc. and its subsidiaries. The Plan provides a maximum of 1,021,250 shares available
for grant.
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 June 27, 2021, there were 656,105 stock options outstanding
with a weighted average exercise price of $9.34 per share.
During
the thirteen weeks ended June 27, 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.
The
Company recognized share-based compensation expense in the amount of $0.2 million and $1,000, during the thirteen weeks ended June 27,
2021 and June 28, 2020, respectively. The Company recognized share-based compensation expense in the amount of $0.2 million and $16,000,
during the twenty-six weeks ended June 27, 2021 and June 28, 2020, respectively. As of June 27, 2021, there remains $2.7 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
17. WARRANTS
The
Company’s warrant activity for the thirteen weeks ended June 27, 2021 was as follows:
SUMMARY OF WARRANT ACTIVITY
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Warrants outstanding at December 27, 2020
|
|
|
|
2,273,533
|
|
|
$
|
5.68
|
|
|
|
3.8
|
|
Grants
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
|
(300,437
|
)
|
|
$
|
(5.05
|
)
|
|
|
(4.0
|
)
|
Warrants outstanding at June 27, 2021
|
|
|
|
1,973,096
|
|
|
$
|
5.57
|
|
|
|
3.7
|
|
Warrants exercisable at June 27, 2021
|
|
|
|
1,954,106
|
|
|
$
|
5.58
|
|
|
|
3.7
|
|
Note
18. DIVIDENDS ON COMMON STOCK
On
April 20, 2021, the Board of Directors declared a cash dividend of $0.13
per share of common stock, payable on May
7, 2021 to stockholders of record as of
May
3, 2021, for a total of $1.6
million.
On
June 1, 2021, the Board of Directors declared a cash dividend of $0.13
per share of common stock, payable on June
21, 2021 to stockholders of record as of
June
14, 2021, for a total of $1.6
million.
Note
19. COMMITMENTS AND CONTINGENCIES
Litigation
James
Harris and Adam Vignola 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, putative stockholders of the Company, filed a derivative action in Delaware
nominally on the Company’s behalf against the Company’s current directors and our current and former majority stockholders
alleging claims of breach of fiduciary duty, unjust enrichment and waste arising out of the Company’s December 2020 merger with
Fog Cutter Capital Group, Inc. Mr. Vignola was previously involved in litigation against the Company, having filed a putative class action
lawsuit relating to the Company’s 2017 initial public offering, which lawsuit was voluntarily dismissed by stipulation in 2020.
The defendants dispute the allegations of the new lawsuit and intend to vigorously defend against the claims. However, this matter is
in the early stages and we cannot predict the outcome of this lawsuit. 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.
Stratford
Holding LLC v. Foot Locker Retail Inc. (U.S. District Court for the Western District of Oklahoma, Case No. 5:12-cv-00772-HE)
In
2012 and 2013, two property owners in Oklahoma City, Oklahoma sued numerous parties, including Foot Locker Retail Inc. and our subsidiary
Fog Cutter Capital Group Inc. (now known as Fog Cutter Acquisition, LLC), for alleged environmental contamination on their properties,
stemming from dry cleaning operations on one of the properties. The property owners seek damages in the range of $12 million to $22 million.
From 2002 to 2008, a former Fog Cutter subsidiary managed a lease portfolio, which included the subject property. Fog Cutter denies any
liability, although it did not timely respond to one of the property owners’ complaints and several of the defendants’ cross-complaints
and thus is in default. The parties are currently conducting discovery, and the matter is scheduled for trial for November 2021. The
Company is unable to predict the ultimate outcome of this matter, however, reserves have been recorded on the balance sheet relating
to this litigation. There can be no assurance that the defendants will be successful in defending against these actions.
SBN
FCCG LLC v FCCGI (Los Angeles Superior Court, Case No. BS172606)
SBN
FCCG LLC (which we refer to as “SBN”) filed a complaint against Fog Cutter Capital Group, Inc. (which we refer to as “FCCG”)
in New York state court for an indemnification claim (which we refer to as 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 (which we refer to as the “California case”), which included
the $0.7 million judgment from the NY case, plus additional statutory interest and fees, for a total judgment of $0.7 million. In May
2018, SBN filed a cost memo, requesting an additional $12,411 in interest to be added to the judgment in the California case, for a total
of $0.7 million. In May 2019, the parties agreed to settle the matter for $0.6 million, which required the immediate payment of $0.1
million, and the balance to be paid in August 2019. FCCG wired $0.1 million to SBN in May 2019, but has not yet paid the remaining balance
of $0.5 million. The parties have not entered into a formal settlement agreement and they have not yet discussed the terms for the payment
of the remaining balance.
The
Company is involved in other claims and legal proceedings from time-to-time that arise in the ordinary course of business. 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.
Note
20. GEOGRAPHIC INFORMATION AND MAJOR FRANCHISEES
Revenue
by geographic area was as follows (in thousands):
SCHEDULE OF REVENUES BY GEOGRAPHIC AREA
|
|
Thirteen Weeks Ended
|
|
|
Twenty-six Weeks Ended
|
|
|
|
June 27, 2021
|
|
|
June 28, 2020
|
|
|
June 27, 2021
|
|
|
June 28, 2020
|
|
United States
|
|
$
|
6,316
|
|
|
$
|
2,564
|
|
|
$
|
11,146
|
|
|
$
|
6,273
|
|
Other countries
|
|
|
1,966
|
|
|
|
543
|
|
|
|
3,785
|
|
|
|
1,257
|
|
Total revenue
|
|
$
|
8,282
|
|
|
$
|
3,107
|
|
|
$
|
14,931
|
|
|
$
|
7,530
|
|
Revenue
is shown based on the geographic location of our franchisees’ restaurants. All assets are located in the United States.
During
the twenty-six weeks ended June 27, 2021 and June 28, 2020, no individual franchisee accounted for more than 10% of the Company’s
revenue.
NOTE
21. SUBSEQUENT EVENTS
Management
has evaluated all events and transactions that occurred subsequent to June 27, 2021 through the date of issuance of these condensed consolidated
financial statements. During this period, the Company did not have any significant subsequent events, except as follows:
Acquisition
of Global Franchise Group
On
July 22, 2021, the Company completed the acquisition of LS GFG Holdings Inc. (“GFG”), a franchisor and operator of a portfolio
of five quick service restaurant concepts (Round Table Pizza, Great American Cookies, Hot Dog on a Stick, Marble Slab Creamery and Pretzelmaker),
for a total purchase price of $442.5 million, comprised of $350.0 million in cash, $67.5 million in shares of the Company’s Series
B Cumulative Preferred Stock and $25.0 million in shares of the Company’s Common Stock, subject to certain customary adjustments,
including with respect to working capital, to be finalized no later than 90 days after closing.
In
connection with the acquisition of GFG, on July 22, 2021, FAT Brands GFG Royalty I, LLC, a Delaware limited liability company (“GFG
Royalty”), a special purpose, wholly-owned subsidiary of the Company, completed the issuance and sale in a private offering (the
“GFG Offering”) of three tranches of fixed rate senior secured notes. The GFG notes were issued in a securitization
transaction in which substantially all of the franchising and operating assets of GFG are pledged as collateral to secure the GFG Notes
and have the following terms:
SCHEDULE OF
SECURITIZATION TRANSACTION OF NOTES
Closing
Date
|
|
Class
|
|
|
Seniority
|
|
Principal
Balance
|
|
|
Coupon
|
|
|
Weighted
Average
Life
(Years)
|
|
|
Non-Call
Period
(Months)
|
|
|
Anticipated
Call Date
|
|
Final Legal
Maturity
Date
|
7/22/2021
|
|
|
A-2
|
|
|
Senior
|
|
$
|
209,000,000
|
|
|
|
6.00
|
%
|
|
|
2.01
|
|
|
|
6
|
|
|
7/25/2023
|
|
7/25/2051
|
7/22/2021
|
|
|
B-2
|
|
|
Senior Subordinated
|
|
$
|
84,000,000
|
|
|
|
7.00
|
%
|
|
|
2.01
|
|
|
|
6
|
|
|
7/25/2023
|
|
7/25/2051
|
7/22/2021
|
|
|
M-2
|
|
|
Subordinated
|
|
$
|
57,000,000
|
|
|
|
9.50
|
%
|
|
|
2.01
|
|
|
|
6
|
|
|
7/25/2023
|
|
7/25/2051
|
In
connection with the acquisition of GFG, on July 22, 2021, the Company issued 3,089,245
and 1,964,865
shares of Series B Cumulative Preferred Stock
and Common Stock, respectively. 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 3,089,245 shares of Series B Cumulative
Preferred Stock for $67.5 million plus accrued but unpaid dividends on or before April 22, 2022.