UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
[X]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For
the fiscal year ended December 31, 2017
OR
[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission
file number 001-38250
FAT
Brands Inc.
(Exact
name of registrant as specified in its charter)
Delaware
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08-2130269
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(State
or other jurisdiction of
incorporation or organization)
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(I.R.S.
Employer
Identification No.)
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9720
Wilshire Blvd., Suite 500
Beverly
Hills, CA 90212
(Address
of principal executive offices, including zip code)
(310)
402-0600
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Common
Stock, $.0001 par value, registered on the NASDAQ Capital Market
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ]
No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ]
No [X]
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
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Accelerated
filer
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Non-accelerated
filer
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[ ] (Do
not check if a smaller reporting company)
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Smaller
reporting company
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[X]
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Emerging
growth company
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[X]
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If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [X]
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As
of June 25, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, there was no
public market for the registrant’s common equity.
As
of March 30, 2018, there were 10,000,000 shares of common stock outstanding
FAT
BRANDS INC.
FORM
10-K
INDEX
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain
statements contained herein and certain statements contained in future filings by the Company with the SEC may not be based on
historical facts and are “Forward-Looking Statements” within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical
facts contained in this Form 10-K may be forward-looking statements. Statements regarding our future results of operations and
financial position, business strategy and plans and objectives of management for future operations, including, among others, statements
regarding expected new franchisees, brands, store openings and future capital expenditures are forward-looking statements. In
some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,”
“expects,” “plans,” “anticipates,” “could,” “intends,” “targets,”
“projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential”
or “continue” or the negative of these terms or other similar expressions.
Forward-looking
statements are subject to significant business, economic and competitive risks, uncertainties and contingencies, many of which
are difficult to predict and beyond our control, which could cause our actual results to differ materially from the results expressed
or implied in such forward-looking statements. These and other risks, uncertainties and contingencies are described in this Annual
Report on Form 10-K, including under “Item 1A. Risk Factors”, and the other reports that we file with the SEC
from time to time.
These
forward-looking statements speak only as of the date of this Form 10-K. Except as may be required by law, the Company does not
undertake, and specifically disclaims any obligation, to publicly release the results of any revisions that may be made to any
Forward-Looking Statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of
such statements.
The
following discussion and analysis should be read in conjunction with the Financial Statements of FAT Brands Inc. and the notes
thereto included elsewhere in this filing. References in this filing to “the Company,” “we,” “our,”
and “us” refer to FAT Brands Inc. and its subsidiaries unless the context indicates otherwise.
PART
I
ITEM
1. BUSINESS
Business
Overview
FAT
Brands Inc. is a multi-brand restaurant franchising company that develops, markets, and acquires predominantly fast casual
restaurant concepts around the world. As a franchisor, we generally do not own or operate restaurant locations, but rather generate
revenue by charging franchisees an initial franchise fee as well as ongoing royalties. This franchisor model provides the opportunity
for strong profit margins and an attractive free cash flow profile, while minimizing large capital investment and much of the
restaurant operating company risk. Our scalable management platform enables us to add new franchise locations and restaurant concepts
to our portfolio with minimal incremental corporate overhead cost, while taking advantage of significant operating synergies.
The acquisition of additional brands and restaurant concepts, as well as expansion of our existing brands, are key elements of
our growth strategy.
FAT
Brands Inc. was formed on March 21, 2017 as a wholly owned subsidiary of Fog Cutter Capital Group Inc. (“
FCCG
”).
On October 20, 2017, we completed our initial public offering and issued 2,000,000 additional shares of our common stock at an
offering price of $12.00 per share, for an aggregate amount of $24,000,000 (the “
Offering
”). The net proceeds
of the Offering were approximately $20,930,000 after deducting the selling agent fees and offering expenses. The shares associated
with the Offering constitute 20 percent of our currently outstanding common stock. Our common stock trades on the Nasdaq Capital
Market under the symbol “FAT.”
Concurrent
with our initial public offering on October 20, 2017, two subsidiaries of FCCG, Fatburger North America, Inc. (“
Fatburger
”)
and Buffalo’s Franchise Concepts, Inc. (“
Buffalo’s
”), were contributed to us by FCCG in exchange
for a $30,000,000 note payable (the “
Related Party Debt
”). FCCG also contributed to us the newly acquired
operating subsidiaries of Homestyle Dining LLC: Ponderosa Franchising Company, Bonanza Restaurant Company, Ponderosa International
Development, Inc. and Puerto Rico Ponderosa, Inc. (collectively, “
Ponderosa
”). These subsidiaries conduct the
worldwide franchising of the Ponderosa Steakhouse Restaurants and the Bonanza Steakhouse Restaurants. We provided $10,550,000
of the net proceeds from the Offering to FCCG to consummate the acquisition of Homestyle Dining LLC.
Effective
with our initial public offering and the transactions that followed, our operating segments are:
(i)
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The
Fatburger Franchise Division which includes our worldwide operations of the Fatburger restaurant concept.
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(ii)
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The
Buffalo’s Franchise Division which includes our worldwide operations of the Buffalo’s Cafe and Buffalo’s
Express concepts.
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(iii)
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The
Ponderosa Franchise Division which includes our worldwide operations of the Ponderosa and Bonanza Steakhouse concepts.
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Fatburger.
Founded in Los Angeles, California in 1947, Fatburger (The Last Great Hamburger Stand
TM
) has, throughout its
history, maintained its reputation as an iconic, all-American, Hollywood favorite hamburger restaurant serving a variety of freshly
made-to-order, customizable, big, juicy, and tasty Fatburgers, Turkeyburgers, Chicken Sandwiches, Veggieburgers, French fries,
onion rings, soft-drinks and milkshakes. With a legacy spanning over 70 years, Fatburger’s dedication to superior quality
inspires robust loyalty amongst its customer base and has long appealed to American cultural and social leaders. We have counted
many celebrities and athletes as past franchisees and customers, and we believe this prestige has been a principal driver of the
brand’s strong growth. Fatburger offers a premier dining experience, demonstrating the same dedication to serving gourmet,
homemade, custom-built burgers as it has since 1947. As of December 31, 2017, there were 154 franchised and sub-franchised Fatburger
locations across 5 states and 16 countries.
Buffalo’s
Cafe.
Established in Roswell, Georgia in 1985, Buffalo’s Cafe (Where Everyone is Family
TM
) is a family-themed
casual dining concept known for its chicken wings and 13 distinctive homemade wing sauces, burgers, wraps, steaks, salads, and
other classic American cuisine. Featuring a full bar and table service, Buffalo’s Cafe offers a distinctive dining experience
affording friends and family the flexibility to share an intimate dinner together or to casually watch sporting events while enjoying
extensive menu offerings. After FCCG acquired the Buffalo’s Cafe brand in 2011, Buffalo’s Express was developed and
launched as a fast-casual, smaller footprint variant of Buffalo’s Cafe offering a limited version of the full menu with
an emphasis on chicken wings, wraps and salads. Current Buffalo’s Express outlets are co-branded with Fatburger locations,
providing our franchisees with complementary concepts that share kitchen space and result in a higher average check (compared
to stand-alone Fatburger locations). As of December 31, 2017, there were 17 franchised Buffalo’s Cafe and 76 co-branded
Fatburger / Buffalo’s Express locations globally.
Ponderosa
& Bonanza Steakhouse.
Ponderosa Steakhouse, founded
in 1965, and Bonanza Steakhouse, founded in 1963, offer the quintessential American steakhouse experience, for which there is
strong and growing demand in international markets, particularly in Asia and the Middle East. Ponderosa and Bonanza Steakhouses
offer guests a high-quality buffet and broad array of great tasting, affordably-priced steak, chicken and seafood entrées.
Buffets at Ponderosa and Bonanza Steakhouses feature a large variety of all you can eat salads, soups, appetizers, vegetables,
breads, hot main courses and desserts. An additional variation of the brand, Bonanza Steak & BBQ, offers a full-service steakhouse
with fresh farm-to-table salad bar and a menu showcase of USDA flame-grilled steaks and house-smoked BBQ, with contemporized interpretations
of traditional American classics. As of December 31, 2017, there were 97 Ponderosa and 18 Bonanza restaurants operating under
franchise and sub-franchise agreements in 18 states in the United States, Canada, Puerto Rico, the United Arab Emirates, Egypt,
Qatar and Taiwan.
We
intend to acquire other restaurant franchising concepts that will allow us to offer additional food categories and expand our
geographic footprint. In evaluating potential acquisitions, we specifically seek concepts with the following characteristics:
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established,
widely-recognized brands;
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steady
cash flows;
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track
records of long-term, sustainable operating performance;
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good
relationships with franchisees;
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sustainable
operating performance;
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geographic
diversification; and
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growth
potential, both geographically and through co-branding initiatives across our portfolio.
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We
approach acquisitions from a value perspective, seeking valuations of approximately six to eight times the target’s 12-month
forward cash flow to ensure that acquisitions are immediately accretive to our earnings. Leveraging our management platform,
we expect to achieve cost synergies post-acquisition by reducing the corporate overhead of the acquired company – most notably
in the legal, accounting and finance functions. Adjusted for these cost synergies, we believe that we will have the opportunity
to acquire complementary restaurant brands with an effective value in excess of the purchase price. We also plan to grow the top
line revenues of newly acquired brands through support from our management and systems platform, including public relations, marketing
and advertising, supply chain assistance, site selection analysis, staff training and operational oversight and support.
Our
franchisee base consisted of 119 franchisees as of December 31, 2017. Of these franchisees, 99 operate in North America and 44
own multiple restaurant locations. System wide, our franchisees operated than 286 restaurants as of December 31, 2017 (235 of
which were located in North America), with store level sales in excess of $298 million in 2017. As of December 31, 2017, we had
a total of 318 new unit development commitments (174 located in North America) which remain to be completed.
The
FAT Brands Difference – Fresh. Authentic. Tasty.
Our
name represents the values that we embrace as a company and the food that we provide to customers – Fresh. Authentic. Tasty
(which we refer to as “
FAT
”). The success of our franchisor model is tied to consistent delivery by our restaurant
operators of freshly prepared, made-to-order food that our customers desire. With the input of our customers and franchisees,
we continually strive to keep a fresh perspective on our brands by enhancing our existing menu offerings and introducing appealing
new menu items. When enhancing our offerings, we ensure that any changes are consistent with the core identity and attributes
of our brands, although we do not intend to adapt our brands to be all things to all people. In conjunction with our restaurant
operators (which means the individuals who manage and/or own our franchised restaurants), we are committed to delivering authentic,
consistent brand experiences that have strong brand identity with customers. Ultimately, we understand that we are only as good
as the last meal served, and we are dedicated to having our franchisees consistently deliver tasty, high-quality food and positive
guest experiences in their restaurants.
In
pursuing acquisitions and entering new restaurant brands, we are committed to instilling our FAT Brands values into new restaurant
concepts. As our restaurant portfolio continues to grow, we believe that both our franchisees and diners will recognize and value
this ongoing commitment as they enjoy a wider concept offering.
Competitive
Strengths
We
believe that our competitive strengths include:
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Management
Platform Built for Growth.
We have developed a robust and comprehensive management and systems platform that supports
the expansion of our existing brands while enabling the accretive and efficient acquisition and integration of additional
restaurant concepts. We dedicate our considerable resources and industry knowledge to promote the success of our franchisees,
offering them multiple support services such as public relations, marketing and advertising, supply chain assistance, site
selection analysis, staff training and operational oversight and support. Furthermore, our platform is scalable and adaptable,
allowing us to incorporate new concepts into the FAT Brands family with minimal incremental corporate costs. We intend to
grow our existing brands as well as make strategic and opportunistic acquisitions that complement our existing portfolio of
concepts providing an entrance into targeted restaurant segments. We believe that our platform is a key differentiator in
pursuing this strategy.
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Lean
Business Model Driving High Free Cash Flow Conversion.
By franchising our restaurant concepts to owner / operators, we
maintain a lean business model requiring minimal capital expenditures. The multi-brand franchisor model also enables us to
efficiently scale the number of restaurant locations with very limited incremental corporate overhead and minimal exposure
to store-level risk, such as long-term real estate commitments and increases in employee wage costs. Our multi-brand approach
also gives us the organizational depth to provide a host of services to our franchisees, which we believe enhances their financial
and operational performance. As a result, new store growth and accelerating financial performance of the FAT Brands network
drive increases in our franchise fee and royalty revenue streams while expanding profit and free cash flow margins.
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Strong
Brands Aligned with FAT Brands Vision.
We have an enviable track record of delivering Fresh, Authentic, and Tasty meals
across our franchise system. Our Fatburger and Buffalo’s concepts have built distinctive brand identities within their
respective segments, providing made-to-order, high-quality food at competitive prices. The Ponderosa and Bonanza brands deliver
an authentic American steakhouse experience with which customers identify. By maintaining alignment with the FAT Brands vision
across an expanding platform, we believe that our concepts will appeal to a broad base of domestic and global consumers.
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Experienced
and Diverse Global Franchisee Network.
We have new restaurant commitments of over 300 locations across our brands. We
anticipate that our current franchisees will open more than 30 new restaurants annually for at least the next four years.
The acquisition of additional restaurant franchisors will also increase the number of restaurants operated by our existing
franchisee network. Additionally, our franchise development team has built an attractive pipeline of new potential franchisees,
with many experienced restaurant operators and new entrepreneurs eager to join the FAT Brands family.
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Ability
to Cross-Sell Existing Franchisees Concepts from the FAT Brands Portfolio.
Our ability to easily, and efficiently, cross-sell
our existing franchisees new brands from our FAT Brands portfolio affords us the ability to grow more quickly and satisfy
our existing franchisees’ demands to expand their organizations. By having the ability to offer our franchisees a variety
of concepts (i.e., a fast-casual better-burger concept, a fast-casual chicken wing concept, a casual dining concept and steakhouse
concepts) from the FAT Brands portfolio, our existing franchisees are able to acquire the rights to, and develop, their respective
markets with a well-rounded portfolio of FAT Brands concept offerings affording them the ability to strategically satisfy
their respective market demands by developing our various concepts where opportunities are available.
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Seasoned
and Passionate Management Team.
Our management team and employees are critical to our success. Our senior leadership team
has more than 200 years of combined experience in the restaurant industry, and many have been a part of our team since the
acquisition of the Fatburger brand in 2003. We believe that our management team has the track record and vision to leverage
the FAT Brands platform to achieve significant future growth. In addition, through their holdings in FCCG, our senior executives
own a significant equity interest in the company, ensuring long-term commitment and alignment with our public shareholders.
Our management team is complemented by an accomplished Board of Directors.
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Growth
Strategy
The
principal elements of our growth strategy include:
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Opportunistically
Acquire New Brands
. Our management platform was developed to cost-effectively and
seamlessly scale with new restaurant concept acquisitions. The recent acquisition of
the Ponderosa and Bonanza brands is a continuation of this growth strategy. We have identified
food categories that appeal to a broad international base of customers, targeting the
chicken, pizza, coffee, sandwich and dessert segments for future growth. We have developed
a strong and actionable pipeline of potential acquisition opportunities to achieve our
objectives. We seek concepts with established, widely-recognized brands; steady cash
flows; track records of long-term, good relationships with franchisees; sustainable operating
performance; geographic diversification; and growth potential, both geographically and
through co-branding initiatives across our portfolio. We approach acquisitions from a
value perspective, targeting modest multiples of franchise-level cash flow valuations
to ensure that acquisitions are immediately accretive to our earnings prior to anticipated
synergies.
On
November 14, 2017, we announced that we had entered into a Membership Interest Purchase Agreement (the “Agreement”)
to purchase all of the right, title and interest in and to the membership interests of Hurricane AMT, LLC, a Florida limited
liability corporation (“Hurricane”) for a purchase price of $12,500,000. Hurricane is the franchisor of Hurricane
Grill & Wings and Hurricane BTW Restaurants. The original Hurricane Grill & Wings opened in Fort Pierce, Fla.,
in 1995 and has expanded to over 60 restaurant locations in Alabama, Arizona, Colorado, Florida, Georgia, Kansas, New
York, and Texas.
We intend to finance this and future acquisitions through a combination
of borrowings or by issuing new equity securities, including preferred stock, if available on terms satisfactory to us.
We are also in discussions with other potential acquisition targets. However, t
here can be no assurance that we
will consummate these acquisitions or acquire any additional restaurant brands, or obtain financing for such acquisitions
on acceptable terms, if at all.
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Accelerate
Same-Store Sales Growth.
Same-store sales growth reflects the change in year-over-year sales for the comparable store
base, which we define as the number of stores open for at least one full fiscal year. To optimize restaurant performance,
we have embraced a multi-faceted same-store sales growth strategy. We utilize customer feedback and closely analyze sales
data to introduce, test and perfect existing and new menu items. In addition, we regularly utilize public relations and experiential
marketing, which we leverage via social media and targeted digital advertising to expand the reach of our brands and to drive
traffic to our stores. Furthermore, we have embraced emerging technology to develop our own brand-specific mobile applications,
allowing guests to find restaurants, order online, earn rewards and join our e-marketing providers. We have also partnered
with third-party delivery service providers, including UberEATS, Grub Hub, Amazon Restaurants and Postmates, which provide
online and app-based delivery services and constitute a new sales channel for our existing locations. Finally, many of our
franchisees are pursuing a robust capital expenditure program to remodel legacy restaurants and to opportunistically co-brand
them with our Buffalo’s Express and / or Fat Bar concepts (serving beer, wine, spirits and cocktails).
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Drive
Store Growth through Co-Branding.
We franchise co-branded Fatburger / Buffalo’s Express locations, giving franchisees
the flexibility of offering multiple concepts, while sharing kitchen space, resulting in a higher average check (compared
to stand-alone Fatburger locations). Franchisees benefit by serving a broader customer base, and we estimate that co-branding
results in a 20%-30% increase in average unit volume compared to stand-alone locations with minimal incremental cost to franchisees.
Our acquisition strategy reinforces the importance of co-branding, as we expect to offer each of the complementary brands
that we acquire to our existing franchisees on a co-branded basis.
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Extend
Brands into New Segments.
We have a strong track record of extending our brands into new segments, and we believe that
we have a significant opportunity to capture new markets by strategically adapting our concepts while reinforcing the brand
identity. In addition to dramatically expanding the traditional Buffalo’s Cafe customer base through Fatburger / Buffalo’s
Express co-branding, we have also begun evaluating opportunities to leverage the Buffalo’s brand by promoting Buffalo’s
Express on a stand-alone basis. Furthermore, we also recently began the roll-out of Fat Bars (serving beer, wine, spirits
and cocktails), which we are opportunistically introducing to select existing Fatburger locations on a modular basis. Similarly,
we plan to create smaller-scale, fast casual Ponderosa and Bonanza concepts, to drive new store growth, particularly internationally.
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Continue
Expanding FAT Brands Internationally.
We have a significant global presence, with international franchised stores in Bahrain,
Canada, China, Egypt, Fiji, India, Indonesia, Iraq, Kuwait, Malaysia, Oman, Pakistan, Panama, Philippines, Qatar, Saudi Arabia,
Taiwan, Tunisia, the United Arab Emirates, and the United Kingdom. We have also recently selected a local franchisee in Japan,
where we expect to open new stores in the near future. We believe that the appeal of our Fresh, Authentic, and Tasty concepts
is global, and we are targeting further penetration of Middle Eastern and Asian markets, particularly through leveraging the
Buffalo’s and Ponderosa brands.
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Attract
New Franchisees in Existing and Unpenetrated Markets.
In addition to the large pipeline of new store commitments from
current franchisees, we believe the existing markets for Fatburger, Buffalo’s Cafe, Buffalo’s Express, and Ponderosa
and Bonanza locations are far from saturated and can support a significant increase in units. Furthermore, new franchisee
relationships represent the optimal way for our brands to penetrate geographic markets where we do not currently operate.
In many cases, prospective franchisees have experience in and knowledge of markets where we are not currently active, facilitating
a smoother brand introduction than we or our existing franchisees could achieve independently. We generate franchisee leads
through various channels, including franchisee referrals, traditional and non-traditional franchise brokers and broker networks,
franchise development advertising, and franchise trade shows and conventions.
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Franchise
Program – FAT Brands
General.
We utilize a franchise development strategy as our primary method for new store growth by leveraging the interest of our
existing franchisees and those potential franchisees with an entrepreneurial spirit looking to launch their own business. We have
a rigorous franchisee qualification and selection process to ensure that each franchisee meets our strict brand standards.
Fatburger
Franchise Agreements.
For Fatburger locations, the current franchise agreement provides for an initial franchise
fee of $50,000 per store ($65,000 per store internationally) and a royalty fee of 2% to 6% of net sales on a 15-year term. For
2017, the average royalty rate was 5.0%. In addition, the franchisee must also pay an advertising fee of approximately 3% of net
sales on local marketing and approximately 1% of net sales on international marketing.
Buffalo’s
Franchise Agreements.
For Buffalo’s Cafe and Buffalo’s Express locations, the current franchise agreement
provides for an initial franchise fee of $50,000 per store and a royalty fee of 2.5% to 6% of gross sales on a 15-year term. For
2017, the average royalty rate was 3.9%. In addition, the Buffalo’s Cafe franchisee agrees to pay an advertising fee of
2% of net sales on local marketing and 2% of net sales to the Buffalo’s Cafe advertising fund. For Buffalo’s Express
locations, the franchisee pays approximately 1% of net sales on local store marketing and approximately 3% of net sales to the
Buffalo’s Express advertising fund.
Ponderosa
Franchise Agreements.
For Ponderosa locations, the current franchise agreement provides for an initial franchise
fee of $40,000 per store and a royalty fee of 0.75% to 4% of net sales on a 15-year term. For 2017, the average royalty rate was
2.8%. In addition, the franchisee must also pay an advertising fee of approximately 0.5% of net sales to a pooled advertising
fund.
Bonanza
Franchise Agreements.
For Bonanza locations, the current franchise agreement provides for an initial franchise fee
of $40,000 per store and a royalty fee of 0.75% to 4% of net sales on a 15-year term. For 2017, the average royalty rate was 1.9%.
In addition, the franchisee must also pay an advertising fee of 0.5% of net sales to a pooled advertising fund.
Development
Agreements.
We use development agreements to facilitate the planned expansion of Fatburger and Buffalo’s restaurants
through single and multiple unit development. During 2017, almost all of our new Fatburger and Buffalo’s openings occurred
as a result of existing development agreements. Each development agreement gives a developer the exclusive right to construct,
own and operate Fatburger or Buffalo’s stores within a defined area. In exchange, the franchisee agrees to open a minimum
number of stores in the area in a prescribed time period. Franchisees that enter into development agreements are required to pay
a fee, which is credited against franchise fees due when the store is opened in the future. Franchisees may forfeit such fees
and lose their rights to future development if they do not maintain the required schedule of openings.
Franchisee
Support – FAT Brands
Marketing
Our
Fresh,
Authentic and Tasty
values are the anchor that inspires our marketing efforts. Our resolve to maintain our premium positioning,
derived from the FAT Brands’ values, is reinforced by our management platform, capital light business model, experienced
and diverse global franchisee network and seasoned and passionate management team. Although our marketing and advertising programs
are concept-specific, we believe that our patrons appreciate the value of their experiences visiting our establishments and, thus,
the core of our marketing strategy is to engage and dialogue with customers at our restaurant locations as well as through social
media.
Our
Fresh,
Authentic and Tasty
values are an invitation for our guests to align with FAT Brands’ commitment to consistently
deliver freshly prepared, made-to-order food that customers desire. We are dedicated to keeping a fresh perspective on our concepts,
perfecting our existing menu offerings as well as introducing appealing new items. We ensure that any changes are consistent with
the core identity of our brands, and we will not adapt our brands to be all things to all people.
Our
marketing initiatives include a robust mix of local community marketing, in-store campaigns, product placements, partnerships,
promotions, social media, influencer marketing, traditional media and word of mouth advertising. Corresponding with the evolutionary
shift in how customers receive content and engage with media and brands today, we have also dramatically increased our focus on
mobile, social, and digital advertising to leverage the content we generate from public relations and experiential marketing in
order to better connect with customers, sharing information about new menu offerings, promotions, new store openings and other
relevant FAT Brands information. Currently, across our brands, we have over 43,500 Twitter followers, 68,000 Instagram followers
and over 1,000,000 Facebook likes,. We communicate with customers in creative and organic ways that fortify our connections with
them and increase brand awareness.
Site
Selection and Development.
Our
franchisees work alongside our corporate real estate committee during the search, review, leasing and development process for
a new restaurant location. Typically, it takes between 60 and 90 days from the time we sign an agreement with a franchisee to
the moment that franchisee signs a lease. When selecting a location, our team aggressively seeks locations with the following
site parameters:
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Average
Daily Traffic:
35,000+ people
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Access:
Easy,
distinguishable, and preferably with signaled entry and intersection; two-to-three curb cuts to center and entry from two
streets
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Activity
Generators:
Going home traffic side, easily accessible for lunchtime traffic (pedestrian and automobile), high-frequency
specialty retail and storefront urban corridors with convenient parking
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Lease
Terms:
Five-year minimum with four five-year options; fixed rates preferred
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Visibility:
Site
and signage must be highly visible from street and/or traffic generators, ideally visible from at least 500 feet in two directions
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Supply
Chain Assistance
FAT
Brands has always been committed to seeking out and working with best-in-class suppliers and distribution networks. Our
Fresh,
Authentic and Tasty
vision guides us in how we source and develop our ingredients, always looking for the best ways to
provide top quality food that is as competitively priced as possible for our franchisees and customers. We utilize a third-party
purchasing and consulting company that provides distribution, rebate collection, product negotiations, audits and sourcing services
focusing on negotiating distributor, vendor and manufacturer contracts, thereby ensuring that our brands receive meaningful buying
power for our franchisees. Our Supply Chain team has developed a reliable supply chain and continues to focus on identifying additional
back-ups to avoid any possible interruption of service and product globally. We have a regional strategy for ground beef supply
to ensure that we are always serving our proprietary blend of freshly ground and never frozen beef in our stores in the continental
United States. Internationally, we utilize the same strategy market-by-market in each country in which our franchisees operate.
Only when a fresh never frozen beef option is unavailable do we procure frozen beef, which is then freshly ground in stores. Domestically,
we have the same, Southern California based, beef supplier for all of our U.S. Fatburger locations. We have the same, South East
United States based, beef supplier for Buffalo’s Cafe. Ponderosa and Bonanza Steakhouses utilize contracted beef suppliers.
Internationally, we have a select group of beef suppliers providing product to our franchisees market-by-market. Additionally,
we utilize the same procurement strategies for our poultry (chicken and turkey), veggie and hotdog offerings.
Domestically,
FAT Brands has distribution agreements with broadline national distributors as well as regional providers. Internationally, our
franchisees have distribution agreements with different providers market-by-market. We utilize distribution centers operated by
our distributors. Our broadline national distributors are the main purchasing link in the United States among many of our suppliers,
and distribute most of our dry, refrigerated and frozen goods, non-alcoholic beverages, paper goods and cleaning supplies. Internationally,
distributors are also used to distribute the majority of products to our franchisees.
Food
Safety and Quality Assurance
. Food safety is a top priority of FAT Brands. As such, we maintain rigorous safety standards
for our menu offerings. We have carefully selected preferred suppliers that adhere to our safety standards, and our franchisees
are required to source their ingredients from these approved suppliers. Furthermore, our commitment to food safety is strengthened
through the direct relationship between our Supply Chain and Field Consultant Assistance teams.
Management
Information Systems.
FAT Brands restaurants utilize a variety of back-office, computerized and manual, point-of-sales
systems (NCR and Micros) and tools, which we believe are scalable to support our growth plans. We utilize these systems following
a multi-faceted approach to monitor restaurants operational performance, food safety, quality control, customer feedback and profitability.
The
point-of-sale systems are designed specifically for the restaurant industry and we use many customized features to evaluate and
increase operational performance, provide data analysis, marketing promotional tracking, guest and table management, high-speed
credit card and gift card processing, daily transaction data, daily sales information, product mix, average transaction size,
order modes, revenue centers and other key business intelligence data. Utilizing these point-of-sale systems back-end, web-based,
enterprise level, software solution dashboards, our home office and Franchise Operations Consultant Support staff are provided
with real-time quick access to detailed business data which allows for our home office and Franchise Operations Consultant Support
staff to closely, and remotely, monitor stores performance and assist in providing focused and timely support to our franchisees.
Furthermore, these systems supply sales, bank deposit and variance data to our accounting department on a daily basis, and we
use this data to generate daily sales information and weekly consolidated reports regarding sales and other key measures for each
restaurant with final reports following the end of each period.
In
addition to utilizing these point-of-sales systems, FAT Brands utilizes The Redbook Digital (and manual) Management System which
provides detailed, real-time (and historical) operational data for all locations, allowing our management team to track product
inventories, equipment temperatures, repair and maintenance schedules, intra-shift team communications, consistency in following
standard operating procedures and tracking of tasks. FAT Brands also utilizes HotSchedules which is a web-based employee scheduling
software program providing franchisees, and their management teams, increased flexibility and awareness of scheduling needs allowing
them to efficiently, and appropriately, manage their labor costs and store staffing requirements/needs. Lastly, FAT Brands utilizes
a proprietary customer feedback system allowing customers to provide feedback in real-time to our entire management team, franchisees
and store managers.
Field
Consultant Assistance.
In
conjunction with utilizing the FAT Brands Management Information Systems, FAT Brands has a team of dedicated Franchise Operations
Consultant Support staff who oversee designated market areas and specific subsets of restaurants. Our Franchise Operations Consultant
Support staff work in the field daily with franchisees, and their management teams, to ensure that the integrity of all FAT Brands
concepts are upheld and that franchisees are utilizing the tools and systems FAT Brands requires in order to optimize and accelerate
franchisee profitability. FAT Brands Franchise Operations Consultant Support staff responsibilities include (but are not limited
to):
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Conducting
announced and un-announced store visits and evaluations
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Continuous
training and re-training of new and existing franchise operations
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Conducting
quarterly workshops for franchisees and their management teams
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Development
and collection of monthly profit and loss statements for each store
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Store
set-up, training, oversight and support for pre- and post- new store openings
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Training,
oversight and implementation of in-store marketing initiatives
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Inspections
of equipment, temperatures, food-handling procedures, customer service, products in store, cleanliness, and team member attitude
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Training,
Pre-Opening Assistance and Opening Support
FAT
Brands offers Executive level and Operational level training programs to its franchisees, pre-opening assistance and opening assistance.
Once open, FAT Brands constantly provides ongoing operational and marketing support to our franchisees by assisting their management
teams in effectively operating their restaurants and increasing their stores financial profitability.
Competition
As
a franchisor, our most important customers are our franchisees, who own and operate FAT Brands restaurants. Our direct competitors
for franchisees include well-established national, regional or local franchisors with franchises in the geographies or restaurant
segments in which we operate or in which we intend to operate.
Our
franchisees compete in the fast casual and casual dining segments of the restaurant industry, a highly competitive industry in
terms of price, service, location, and food quality. The restaurant industry is often affected by changes in consumer trends,
economic conditions, demographics, traffic patterns, and concern about the nutritional content of fast casual foods. Furthermore,
there are many well-established competitors with substantially greater financial resources, including a number of national, regional,
and local fast casual, casual dining, and convenience stores. The restaurant industry also has few barriers to entry and new competitors
may emerge at any time.
Food
Safety
Food
safety is a top priority. As such, we maintain rigorous safety standards for each menu item. We have carefully selected preferred
food suppliers that adhere to our safety standards, and our franchisees are required to source their ingredients from these approved
suppliers.
Seasonality
Our
franchisees have not historically experienced significant seasonal variability in their financial performance.
Intellectual
Property
Upon
completion of the Reorganization Transactions, we will own domestically, and own or be in the process of transferring to us internationally,
valuable intellectual property, including trademarks, service marks, trade secrets and other proprietary information, including
the “Fatburger,” “Buffalo’s Café,” and “Buffalo’s Express” logos and trademarks,
which are of material importance to our business. After completion of the Ponderosa Acquisition, we will own the “Ponderosa
Steakhouse,” “Bonanza Steakhouse,” “Bonanza Steak & BBQ” and “Cole’s Backyard Grill”
logos and trademarks. Depending on the jurisdiction, trademarks and service marks generally are valid as long as they are used
and/or registered.
Employees
As
of December 31, 2017, our company, including FAT Brands Inc. and its subsidiaries, employed approximately 30 people. In addition,
our franchisees for our Fatburger and Buffalo’s Cafe | Express stores employed approximately 5,000 people, none of whom
are to our knowledge represented by a labor union or covered by a collective bargaining agreement. We believe that we and our
franchisees have good relations with our employees.
Government
Regulation
U.S.
Operations.
Our U.S. operations are subject to various federal, state and local laws affecting our business, primarily
laws and regulations concerning the franchisor/franchisee relationship, marketing, food labeling, sanitation and safety. Each
of our franchised restaurants in the U.S. must comply with licensing and regulation by a number of governmental authorities, which
include health, sanitation, safety, fire and zoning agencies in the state and/or municipality in which the restaurant is located.
To date, we have not been materially adversely affected by such licensing and regulation or by any difficulty, delay or failure
to obtain required licenses or approvals.
International
Operations
.
Our restaurants outside the U.S. are subject to national and local laws and regulations which
are similar to those affecting U.S. restaurants. The restaurants outside the U.S. are also subject to tariffs and regulations
on imported commodities and equipment and laws regulating foreign investment, as well as anti-bribery and anti-corruption laws.
See
“Risk Factors” for a discussion of risks relating to federal, state, local and international regulation of our business.
Our
Corporate Information
FAT
Brands Inc. was formed as a Delaware corporation on March 21, 2017. Our corporate headquarters are located at 9720 Wilshire Blvd.,
Suite 500, Beverly Hills, California 90212. Our main telephone number is (310) 402-0600. Our principal Internet website address
is
www.fatbrands.com.
The information on our website is not incorporated by reference into, or a part of, this
Annual Report.
Available
Information
Our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant
to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “
Exchange Act
”), are filed
with the Securities and Exchange Commission (the “
SEC
”). We are subject to the informational requirements of
the Exchange Act and file or furnish reports, proxy statements and other information with the SEC. The public may read and copy
any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC
20549, and may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that
file electronically with the SEC at www.sec.gov. The contents of these websites are not incorporated into this Annual Report.
Further, our references to the URLs for these websites are intended to be inactive textual references only. We also make the documents
listed above available without charge through the Investor Relations Section of our website at
www.fatbrands.com
.
ITEM
1A. RISK FACTORS
Except
for the historical information contained herein or incorporated by reference, this report and the information incorporated by
reference contain forward-looking statements that involve risks and uncertainties. These statements include projections about
our accounting and finances, plans and objectives for the future, future operating and economic performance and other statements
regarding future performance. These statements are not guarantees of future performance or events. Our actual results could differ
materially from those discussed in this report. Factors that could cause or contribute to these differences include, but are not
limited to, those discussed in the following section, as well as those discussed in Part II, Item 7 entitled “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere throughout this report and in any
documents incorporated in this report by reference.
You
should consider carefully the following risk factors and in the other information included or incorporated in this report. If
any of the following risks, either alone or taken together, or other risks not presently known to us or that we currently believe
to not be significant, develop into actual events, then our business, financial condition, results of operations or prospects
could be materially adversely affected. If that happens, the market price of our common stock could decline, and stockholders
may lose all or part of their investment.
Risks
Related to Our Business and Industry
Our
operating and financial results and growth strategies are closely tied to the success of our franchisees.
Our
restaurants are operated by our franchisees, which makes us dependent on the financial success and cooperation of our franchisees.
We have limited control over how our franchisees’ businesses are run, and the inability of franchisees to operate successfully
could adversely affect our operating and financial results through decreased royalty payments. If our franchisees incur too much
debt, if their operating expenses or commodity prices increase or if economic or sales trends deteriorate such that they are unable
to operate profitably or repay existing debt, it could result in their financial distress, including insolvency or bankruptcy.
If a significant franchisee or a significant number of our franchisees become financially distressed, our operating and financial
results could be impacted through reduced or delayed royalty payments. Our success also depends on the willingness and ability
of our franchisees to implement major initiatives, which may include financial investment. Our franchisees may be unable to successfully
implement strategies that we believe are necessary for their further growth, which in turn may harm the growth prospects and financial
condition of the company. Additionally, the failure of our franchisees to focus on the fundamentals of restaurant operations,
such as quality service and cleanliness (even if such failures do not rise to the level of breaching the related franchise documents),
could have a negative impact on our business.
Our
franchisees could take actions that could harm our business and may not accurately report sales.
Our
franchisees are contractually obligated to operate their restaurants in accordance with the operations, safety, and health standards
set forth in our agreements with them and applicable laws. However, although we will attempt to properly train and support all
our franchisees, they are independent third parties whom we do not control. The franchisees own, operate, and oversee the daily
operations of their restaurants, and their employees are not our employees. Accordingly, their actions are outside of our control.
Although we have developed criteria to evaluate and screen prospective franchisees, we cannot be certain that our franchisees
will have the business acumen or financial resources necessary to operate successful franchises at their approved locations, and
state franchise laws may limit our ability to terminate or not renew these franchise agreements. Moreover, despite our training,
support and monitoring, franchisees may not successfully operate restaurants in a manner consistent with our standards and requirements
or may not hire and adequately train qualified managers and other restaurant personnel. The failure of our franchisees to operate
their franchises in accordance with our standards or applicable law, actions taken by their employees or a negative publicity
event at one of our franchised restaurants or involving one of our franchisees could have a material adverse effect on our reputation,
our brands, our ability to attract prospective franchisees, our company-owned restaurants, and our business, financial condition
or results of operations.
Franchisees
typically use a point of sale, or POS, cash register system to record all sales transactions at the restaurant. We require franchisees
to use a specific brand or model of hardware or software components for their restaurant system. Currently, franchisees report
sales manually and electronically, but we do not have the ability to verify all sales data electronically by accessing their POS
cash register systems. We have the right under our franchise agreement to audit franchisees to verify sales information provided
to us, and we have the ability to indirectly verify sales based on purchasing information. However, franchisees may underreport
sales, which would reduce royalty income otherwise payable to us and adversely affect our operating and financial results.
If
we fail to identify, recruit and contract with a sufficient number of qualified franchisees, our ability to open new franchised
restaurants and increase our revenues could be materially adversely affected.
The
opening of additional franchised restaurants depends, in part, upon the availability of prospective franchisees who meet our criteria.
Most of our franchisees open and operate multiple restaurants, and our growth strategy requires us to identify, recruit and contract
with a significant number of new franchisees each year. We may not be able to identify, recruit or contract with suitable franchisees
in our target markets on a timely basis or at all. In addition, our franchisees may not have access to the financial or management
resources that they need to open the restaurants contemplated by their agreements with us, or they may elect to cease restaurant
development for other reasons. If we are unable to recruit suitable franchisees or if franchisees are unable or unwilling to open
new restaurants as planned, our growth may be slower than anticipated, which could materially adversely affect our ability to
increase our revenues and materially adversely affect our business, financial condition and results of operations.
If
we fail to open new domestic and international franchisee-owned restaurants on a timely basis, our ability to increase our revenues
could be materially adversely affected.
A
significant component of our growth strategy includes the opening of new domestic and international franchised restaurants. Our
franchisees face many challenges associated with opening new restaurants, including:
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identification
and availability of suitable restaurant locations with the appropriate size, visibility, traffic patterns, local residential
neighborhoods, local retail and business attractions and infrastructure that will drive high levels of customer traffic and
sales per restaurant;
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competition
with other restaurants and retail concepts for potential restaurant sites and anticipated commercial, residential and infrastructure
development near new or potential restaurants;
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ability
to negotiate acceptable lease arrangements;
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availability
of financing and ability to negotiate acceptable financing terms;
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recruiting,
hiring and training of qualified personnel;
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construction
and development cost management;
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completing
their construction activities on a timely basis;
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obtaining
all necessary governmental licenses, permits and approvals and complying with local, state and federal laws and regulations
to open, construct or remodel and operate our franchised restaurants;
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unforeseen
engineering or environmental problems with the leased premises;
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avoiding
the impact of adverse weather during the construction period; and
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other
unanticipated increases in costs, delays or cost overruns.
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As
a result of these challenges, our franchisees may not be able to open new restaurants as quickly as planned or at all. Our franchisees
have experienced, and expect to continue to experience, delays in restaurant openings from time to time and have abandoned plans
to open restaurants in various markets on occasion. Any delays or failures to open new restaurants by our franchisees could materially
and adversely affect our growth strategy and our results of operations.
Our
strategy includes pursuing opportunistic acquisitions of additional brands, and we may not find suitable acquisition candidates
or successfully operate or integrate any brands that we may acquire.
As
part of our strategy, we intend to opportunistically acquire new brands and restaurant concepts. Although we believe that opportunities
for future acquisitions may be available from time to time, competition for acquisition candidates may exist or increase in the
future. Consequently, there may be fewer acquisition opportunities available to us as well as higher acquisition prices. There
can be no assurance that we will be able to identify, acquire, manage or successfully integrate additional brands or restaurant
concepts without substantial costs, delays or operational or financial problems.
The
difficulties of integration include coordinating and consolidating geographically separated systems and facilities, integrating
the management and personnel of the acquired brands, maintaining employee morale and retaining key employees, implementing our
management information systems and financial accounting and reporting systems, establishing and maintaining effective internal
control over financial reporting, and implementing operational procedures and disciplines to control costs and increase profitability.
In
the event we are able to acquire additional brands or restaurant concepts, the integration and operation of such acquisitions
may place significant demands on our management, which could adversely affect our ability to manage our existing restaurants.
In addition, we may be required to obtain additional financing to fund future acquisitions, but there can be no assurance that
we will be able to obtain additional financing on acceptable terms or at all.
We
may not achieve our target development goals and the addition of new franchised restaurants may not be profitable.
Our
growth strategy depends in part on our ability to add franchisees and our franchisees’ ability to increase our net restaurant
count in domestic and foreign markets. The successful development and retention of new restaurants depends in large part on our
ability to attract franchisee investment commitments and the ability of our franchisees to open new restaurants and operate these
restaurants profitably. We cannot guarantee that we or our current or future franchisees will be able to achieve our expansion
goals or that new restaurants will be operated profitably. Further, there is no assurance that any new restaurant will produce
operating results similar to those of our franchisees’ existing restaurants.
Expansion
into target markets could also be affected by our franchisees’ ability to obtain financing to construct and open new restaurants.
If it becomes more difficult or more expensive for our franchisees to obtain financing to develop new restaurants, the expected
growth of our system could slow and our future revenues and operating cash flows could be adversely impacted.
Opening
new franchise restaurants in existing markets and aggressive development could cannibalize existing sales and may negatively affect
sales at existing franchised restaurants.
We
intend to continue opening new franchised restaurants in our existing markets as a core part of our growth strategy. Expansion
in existing markets may be affected by local economic and market conditions. Further, the customer target area of our franchisees’
restaurants varies by location, depending on a number of factors, including population density, other local retail and business
attractions, area demographics and geography. As a result, the opening of a new restaurant in or near markets in which our franchisees’
restaurants already exist could adversely affect the sales of these existing franchised restaurants. Our franchisees may selectively
open new restaurants in and around areas of existing franchised restaurants. Sales cannibalization between restaurants may become
significant in the future as we continue to expand our operations and could affect sales growth, which could, in turn, materially
adversely affect our business, financial condition or results of operations. There can be no assurance that sales cannibalization
will not occur or become more significant in the future as we increase our presence in existing markets.
The
number of new franchised restaurants that actually open in the future may differ materially from the number of signed commitments
from potential new franchisees.
The
number of new franchised restaurants that actually open in the future may differ materially from the number of signed commitments
from potential new franchisees. Historically, a portion of our commitments sold have not ultimately opened as new franchised restaurants.
The historic conversion rate of signed commitments to new franchised locations may not be indicative of the conversion rates we
will experience in the future and the total number of new franchised restaurants actually opened in the future may differ materially
from the number of signed commitments disclosed at any point in time.
Termination
of development agreements with certain franchisees could adversely impact our revenues.
We
enter into development agreements with certain franchisees that plan to open multiple restaurants in a designated area. These
franchisees are granted certain rights with respect to specified territories, and at their discretion, these franchisees may open
more restaurants than specified in their agreements. The termination of development agreements with a franchisee or a lack of
expansion by these franchisees could result in the delay of the development of franchised restaurants, discontinuation or an interruption
in the operation of one of our brands in a particular market or markets. We may not be able to find another operator to resume
development activities in such market or markets. While termination of development agreements may result in a short-term recognition
of forfeited deposits as revenue, any such delay, discontinuation or interruption would result in a delay in, or loss of, long-term
royalty income to us by way of reduced sales and could materially and adversely affect our business, financial condition or results
of operations.
Our
brands may be limited or diluted through franchisee and third-party activity.
Although
we monitor and regulate franchisee activities through our franchise agreements, franchisees or other third parties may refer to
or make statements about our brands that do not make proper use of our trademarks or required designations, that improperly alter
trademarks or branding, or that are critical of our brands or place our brands in a context that may tarnish our reputation. This
may result in dilution of or harm to our intellectual property or the value of our brands. Franchisee noncompliance with the terms
and conditions of our franchise agreements may reduce the overall goodwill of our brands, whether through the failure to meet
health and safety standards, engage in quality control or maintain product consistency, or through the participation in improper
or objectionable business practices. Moreover, unauthorized third parties may use our intellectual property to trade on the goodwill
of our brands, resulting in consumer confusion or dilution. Any reduction of our brands’ goodwill, consumer confusion, or
dilution is likely to impact sales, and could materially and adversely impact our business and results of operations.
Our
success depends substantially on our corporate reputation and on the value and perception of our brands.
Our
success depends in large part upon our and our franchisees’ ability to maintain and enhance the value of our brands and
our customers’ loyalty to our brands. Brand value is based in part on consumer perceptions on a variety of subjective qualities.
Business incidents, whether isolated or recurring, and whether originating from us, franchisees, competitors, suppliers or distributors,
can significantly reduce brand value and consumer trust, particularly if the incidents receive considerable publicity or result
in litigation. For example, our brands could be damaged by claims or perceptions about the quality or safety of our products or
the quality or reputation of our suppliers, distributors or franchisees, regardless of whether such claims or perceptions are
true. Similarly, entities in our supply chain may engage in conduct, including alleged human rights abuses or environmental wrongdoing,
and any such conduct could damage our or our brands’ reputations. Any such incidents (even if resulting from actions of
a competitor or franchisee) could cause a decline directly or indirectly in consumer confidence in, or the perception of, our
brands and/or our products and reduce consumer demand for our products, which would likely result in lower revenues and profits.
Additionally, our corporate reputation could suffer from a real or perceived failure of corporate governance or misconduct by
a company officer, or an employee or representative of us or a franchisee.
Our
success depends in part upon successful advertising and marketing campaigns and franchisee support of such advertising and marketing
campaigns.
We
believe our brands are critical to our business. We expend resources in our marketing efforts using a variety of media, including
social media. We expect to continue to conduct brand awareness programs and customer initiatives to attract and retain customers.
Additionally, some of our competitors have greater financial resources, which enable them to spend significantly more on marketing
and advertising than us. Should our competitors increase spending on marketing and advertising, or should our advertising and
promotions be less effective than our competitors, our business, financial condition and results of operations could be materially
adversely affected.
The
support of our franchisees is critical for the success of our advertising and marketing campaigns we seek to undertake, and the
successful execution of these campaigns will depend on our ability to maintain alignment with our franchisees. Our franchisees
are required to spend approximately 1%-3% of net sales directly on local advertising or contribute to a local fund managed by
franchisees in certain market areas to fund the purchase of advertising media. Our franchisees are also required to contribute
1% of their net sales to a national fund to support the development of new products, brand development and national marketing
programs. In addition, we, our franchisees and other third parties have contributed additional advertising funds in the past.
While we maintain control over advertising and marketing materials and can mandate certain strategic initiatives pursuant to our
franchise agreements, we need the active support of our franchisees if the implementation of these initiatives is to be successful.
Additional advertising funds are not contractually required, and we, our franchisees and other third parties may choose to discontinue
contributing additional funds in the future. Any significant decreases in our advertising and marketing funds or financial support
for advertising activities could significantly curtail our marketing efforts, which may in turn materially adversely affect our
business, financial condition and results of operations.
Our
inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could adversely impact
our business.
In
recent years, there has been a marked increase in the use of social media platforms, including blogs, chat platforms, social media
websites, and other forms of Internet based communications which allow individuals access to a broad audience of consumers and
other interested persons. The rising popularity of social media and other consumer-oriented technologies has increased the speed
and accessibility of information dissemination. Many social media platforms immediately publish the content their subscribers
and participants post, often without filters or checks on accuracy of the content posted. Information posted on such platforms
at any time may be adverse to our interests and/or may be inaccurate. The dissemination of information via social media could
harm our business, reputation, financial condition, and results of operations, regardless of the information’s accuracy.
The damage may be immediate without affording us an opportunity for redress or correction.
In
addition, social media is frequently used to communicate with our customers and the public in general. Failure by us to use social
media effectively or appropriately, particularly as compared to our brands’ respective competitors, could lead to a decline
in brand value, customer visits and revenue. Other risks associated with the use of social media include improper disclosure of
proprietary information, negative comments about our brands, exposure of personally identifiable information, fraud, hoaxes or
malicious dissemination of false information. The inappropriate use of social media by our customers or employees could increase
our costs, lead to litigation or result in negative publicity that could damage our reputation and adversely affect our results
of operations.
Negative
publicity relating to one of our franchised restaurants could reduce sales at some or all of our other franchised restaurants.
Our
success is dependent in part upon our ability to maintain and enhance the value of our brands, consumers’ connection to
our brands and positive relationships with our franchisees. We may, from time to time, be faced with negative publicity relating
to food quality, public health concerns, restaurant facilities, customer complaints or litigation alleging illness or injury,
health inspection scores, integrity of our franchisees or their suppliers’ food processing, employee relationships or other
matters, regardless of whether the allegations are valid or whether we are held to be responsible. The negative impact of adverse
publicity relating to one franchised restaurant may extend far beyond that restaurant or franchisee involved to affect some or
all of our other franchised restaurants. The risk of negative publicity is particularly great with respect to our franchised restaurants
because we are limited in the manner in which we can regulate them, especially on a real-time basis. The considerable expansion
in the use of social media over recent years can further amplify any negative publicity that could be generated by such incidents.
A similar risk exists with respect to unrelated food service businesses, if consumers associate those businesses with our own
operations. Additionally, employee claims against us based on, among other things, wage and hour violations, discrimination, harassment
or wrongful termination may also create negative publicity that could adversely affect us and divert our financial and management
resources that would otherwise be used to benefit the future performance of our operations. A significant increase in the number
of these claims or an increase in the number of successful claims would have a material adverse effect on our business, financial
condition and results of operations. Consumer demand for our products and our brands’ value could diminish significantly
if any such incidents or other matters create negative publicity or otherwise erode consumer confidence in us or our products,
which would likely result in lower sales and could have a material adverse effect on our business, financial condition and results
of operations.
Failure
to protect our service marks or other intellectual property could harm our business.
We
regard our Fatburger®, Buffalo’s Cafe®, Ponderosa® and Bonanza® service marks, and other service marks and
trademarks related to our franchise restaurant businesses, as having significant value and being important to our marketing efforts.
We rely on a combination of protections provided by contracts, copyrights, patents, trademarks, service marks and other common
law rights, such as trade secret and unfair competition laws, to protect our franchised restaurants and services from infringement.
We have registered certain trademarks and service marks in the U.S. and foreign jurisdictions. However, from time to time we become
aware of names and marks identical or confusingly similar to our service marks being used by other persons. Although our policy
is to oppose any such infringement, further or unknown unauthorized uses or other misappropriation of our trademarks or service
marks could diminish the value of our brands and adversely affect our business. In addition, effective intellectual property protection
may not be available in every country in which our franchisees have, or intend to open or franchise, a restaurant. There can be
no assurance that these protections will be adequate and defending or enforcing our service marks and other intellectual property
could result in the expenditure of significant resources. We may also face claims of infringement that could interfere with the
use of the proprietary knowhow, concepts, recipes, or trade secrets used in our business. Defending against such claims may be
costly, and we may be prohibited from using such proprietary information in the future or forced to pay damages, royalties, or
other fees for using such proprietary information, any of which could negatively affect our business, reputation, financial condition,
and results of operations.
If
our franchisees are unable to protect their customers’ credit card data and other personal information, our franchisees
could be exposed to data loss, litigation, and liability, and our reputation could be significantly harmed.
Privacy
protection is increasingly demanding, and the use of electronic payment methods and collection of other personal information expose
our franchisees to increased risk of privacy and/or security breaches as well as other risks. The majority of our franchisees’
restaurant sales are by credit or debit cards. In connection with credit or debit card transactions in-restaurant, our franchisees
collect and transmit confidential information by way of secure private retail networks. Additionally, our franchisees collect
and store personal information from individuals, including their customers and employees.
Although
our franchisees use secure private networks to transmit confidential information and debit card sales, their security measures
and those of technology vendors may not effectively prohibit others from obtaining improper access to this information. The techniques
used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and are often difficult
to detect for long periods of time, which may cause a breach to go undetected for an extensive period of time. Advances in computer
and software capabilities, new tools, and other developments may increase the risk of such a breach. Further, the systems currently
used for transmission and approval of electronic payment transactions, and the technology utilized in electronic payment themselves,
all of which can put electronic payment at risk, are determined and controlled by the payment card industry, not by us, through
enforcement of compliance with the Payment Card Industry-Data Security Standards. Our franchisees must abide by the Payment Card
Industry-Data Security Standards, as modified from time to time, in order to accept electronic payment transactions. Furthermore,
the payment card industry is requiring vendors to become compatible with smart chip technology for payment cards, referred to
as EMV-Compliant, or else bear full responsibility for certain fraud losses, referred to as the EMV Liability Shift, which could
adversely affect our business. To become EMV-Compliant, merchants must utilize EMV-Compliant payment card terminals at the point
of sale and also obtain a variety of certifications. The EMV Liability Shift became effective on October 1, 2015.
If
a person is able to circumvent our franchisees’ security measures or those of third parties, he or she could destroy or
steal valuable information or disrupt our operations. Our franchisees may become subject to claims for purportedly fraudulent
transactions arising out of the actual or alleged theft of credit or debit card information, and our franchisees may also be subject
to lawsuits or other proceedings relating to these types of incidents. Any such claim or proceeding could cause our franchisees
to incur significant unplanned expenses, which could have an adverse impact on our financial condition, results of operations
and cash flows. Further, adverse publicity resulting from these allegations could significantly harm our reputation and may have
a material adverse effect on us and our franchisees’ business.
We
and our franchisees rely on computer systems to process transactions and manage our business, and a disruption or a failure of
such systems or technology could harm our ability to effectively manage our business.
Network
and information technology systems are integral to our business. We utilize various computer systems, including our franchisee
reporting system, by which our franchisees report their weekly sales and pay their corresponding royalty fees and required advertising
fund contributions. When sales are reported by a franchisee, a withdrawal for the authorized amount is initiated from the franchisee’s
bank on a set date each week based on gross sales during the week ended the prior Sunday. This system is critical to our ability
to accurately track sales and compute royalties and advertising fund contributions and receive timely payments due from our franchisees.
Our operations depend upon our ability to protect our computer equipment and systems against damage from physical theft, fire,
power loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches,
viruses, worms and other disruptive problems. Any damage or failure of our computer systems or network infrastructure that causes
an interruption in our operations could have a material adverse effect on our business and subject us to litigation or actions
by regulatory authorities. Despite the implementation of protective measures, our systems are subject to damage and/or interruption
as a result of power outages, computer and network failures, computer viruses and other disruptive software, security breaches,
catastrophic events, and improper usage by employees. Such events could result in a material disruption in operations, a need
for a costly repair, upgrade or replacement of systems, or a decrease in, or in the collection of, royalties and advertising fund
contributions paid to us by our franchisees. To the extent that any disruption or security breach were to result in a loss of,
or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur
liability which could materially affect our results of operations. It is also critical that we establish and maintain certain
licensing and software agreements for the software we use in our day-to-day operations. A failure to procure or maintain these
licenses could have a material adverse effect on our business operations.
We
may engage in litigation with our franchisees.
Although
we believe we generally enjoy a positive working relationship with the vast majority of our franchisees, the nature of the franchisor-franchisee
relationship may give rise to litigation with our franchisees. In the ordinary course of business, we are the subject of complaints
or litigation from franchisees, usually related to alleged breaches of contract or wrongful termination under the franchise arrangements.
We may also engage in future litigation with franchisees to enforce the terms of our franchise agreements and compliance with
our brand standards as determined necessary to protect our brands, the consistency of our products and the customer experience.
We may also engage in future litigation with franchisees to enforce our contractual indemnification rights if we are brought into
a matter involving a third party due to the franchisee’s alleged acts or omissions. In addition, we may be subject to claims
by our franchisees relating to our franchise disclosure document, including claims based on financial information contained in
our franchise disclosure document. Engaging in such litigation may be costly and time-consuming and may distract management and
materially adversely affect our relationships with franchisees and our ability to attract new franchisees. Any negative outcome
of these or any other claims could materially adversely affect our results of operations as well as our ability to expand our
franchise system and may damage our reputation and brands. Furthermore, existing and future franchise-related legislation could
subject us to additional litigation risk in the event we terminate or fail to renew a franchise relationship.
The
retail food industry in which we operate is highly competitive.
The
retail food industry in which we operate is highly competitive with respect to price and quality of food products, new product
development, advertising levels and promotional initiatives, customer service, reputation, restaurant location, and attractiveness
and maintenance of properties. If consumer or dietary preferences change, if our marketing efforts are unsuccessful, or if our
franchisees’ restaurants are unable to compete successfully with other retail food outlets in new and existing markets,
our business could be adversely affected. We also face growing competition as a result of convergence in grocery, convenience,
deli and restaurant services, including the offering by the grocery industry of convenient meals, including pizzas and entrees
with side dishes. Competition from delivery aggregators and other food delivery services has also increased in recent years, particularly
in urbanized areas. Increased competition could have an adverse effect on our sales, profitability or development plans, which
could harm our financial condition and operating results.
Shortages
or interruptions in the availability and delivery of food and other supplies may increase costs or reduce revenues.
The
food products sold by our franchisees are sourced from a variety of domestic and international suppliers. We, along with our franchisees,
are also dependent upon third parties to make frequent deliveries of food products and supplies that meet our specifications at
competitive prices. Shortages or interruptions in the supply of food items and other supplies to our franchisees’ restaurants
could adversely affect the availability, quality and cost of items we use and the operations of our franchisees’ restaurants.
Such shortages or disruptions could be caused by inclement weather, natural disasters, increased demand, problems in production
or distribution, restrictions on imports or exports, the inability of vendors to obtain credit, political instability in the countries
in which suppliers and distributors are located, the financial instability of suppliers and distributors, suppliers’ or
distributors’ failure to meet our standards, product quality issues, inflation, the price of gasoline, other factors relating
to the suppliers and distributors and the countries in which they are located, food safety warnings or advisories or the prospect
of such pronouncements, the cancellation of supply or distribution agreements or an inability to renew such arrangements or to
find replacements on commercially reasonable terms, or other conditions beyond our control or the control of our franchisees.
A
shortage or interruption in the availability of certain food products or supplies could increase costs and limit the availability
of products critical to our franchisees’ restaurant operations, which in turn could lead to restaurant closures and/or a
decrease in sales and therefore a reduction in royalty fees to us. In addition, failure by a key supplier or distributor to our
franchisees to meet its service requirements could lead to a disruption of service or supply until a new supplier or distributor
is engaged, and any disruption could have an adverse effect on our franchisees and therefore our business. See “Business—Supply
Chain.”
An
increase in food prices may have an adverse impact on our and our franchisees’ profit margins.
Our
franchisees’ restaurants depend on reliable sources of large quantities of raw materials such as protein (including beef
and poultry), cheese, oil, flour and vegetables (including potatoes and lettuce). Raw materials purchased for use in our franchisees’
restaurants are subject to price volatility caused by any fluctuation in aggregate supply and demand, or other external conditions,
such as weather conditions or natural events or disasters that affect expected harvests of such raw materials. As a result, the
historical prices of raw materials used in the operation of our franchisees’ restaurants have fluctuated. We cannot assure
you that we or our franchisees will continue to be able to purchase raw materials at reasonable prices, or that prices of raw
materials will remain stable in the future. In addition, a significant increase in gasoline prices could result in the imposition
of fuel surcharges by our distributors.
Because
our franchisees provide competitively priced food, we may not have the ability to pass through to customers the full amount of
any commodity price increases. If we and our franchisees are unable to manage the cost of raw materials or to increase the prices
of products proportionately, it may have an adverse impact on our and our franchisees’ profit margins and their ability
to remain in business, which would adversely affect our results of operations.
Food
safety and foodborne illness concerns may have an adverse effect on our business.
Foodborne
illnesses, such as E. coli, hepatitis A, trichinosis and salmonella, occur or may occur within our system from time to time. In
addition, food safety issues such as food tampering, contamination and adulteration occur or may occur within our system from
time to time. Any report or publicity linking one of our franchisee’s restaurants, or linking our competitors or our industry
generally, to instances of foodborne illness or food safety issues could adversely affect our brands and reputations as well as
our revenues and profits, and possibly lead to product liability claims, litigation and damages. If a customer of one of our franchisees’
restaurants becomes ill as a result of food safety issues, restaurants in our system may be temporarily closed, which would decrease
our revenues. In addition, instances or allegations of foodborne illness or food safety issues, real or perceived, involving our
franchised restaurants, restaurants of competitors, or suppliers or distributors (regardless of whether we use or have used those
suppliers or distributors), or otherwise involving the types of food served at our franchisees’ restaurants, could result
in negative publicity that could adversely affect our revenues or the sales of our franchisees. The occurrence of foodborne illnesses
or food safety issues could also adversely affect the price and availability of affected ingredients, which could result in disruptions
in our supply chain and/or lower margins for us and our franchisees.
Health
concerns arising from outbreaks of viruses or other diseases may have an adverse effect on our business.
Our
business could be materially and adversely affected by the outbreak of a widespread health epidemic. The occurrence of such an
outbreak of an epidemic illness or other adverse public health developments could materially disrupt our business and operations.
Such events could also significantly impact our industry and cause a temporary closure of restaurants, which would severely disrupt
our operations and have a material adverse effect on our business, financial condition and results of operations.
Furthermore,
viruses may be transmitted through human contact, and the risk of contracting viruses could cause employees or guests to avoid
gathering in public places, which could adversely affect restaurant guest traffic or the ability to adequately staff franchised
restaurants. We could also be adversely affected if jurisdictions in which our franchisees’ restaurants operate impose mandatory
closures, seek voluntary closures or impose restrictions on operations of restaurants. Even if such measures are not implemented
and a virus or other disease does not spread significantly, the perceived risk of infection or health risk may affect our business.
New
information or attitudes regarding diet and health could result in changes in regulations and consumer consumption habits that
could adversely affect our results of operations.
Government
regulation and consumer eating habits may impact our business as a result of changes in attitudes regarding diet and health or
new information regarding the health effects of consuming certain menu offerings. These changes have resulted in, and may continue
to result in, laws and regulations requiring us to disclose the nutritional content of our food offerings, and they have resulted,
and may continue to result in, laws and regulations affecting permissible ingredients and menu offerings. For example, a number
of states, counties and cities have enacted menu labeling laws requiring multi-unit restaurant operators to disclose to consumers
certain nutritional information or have enacted legislation restricting the use of certain types of ingredients in restaurants.
These requirements may be different or inconsistent with requirements under the Patient Protection and Affordable Care Act of
2010 (which we refer to as the “
PPACA
”), which establishes a uniform, federal requirement for certain restaurants
to post nutritional information on their menus. Specifically, the PPACA requires chain restaurants with 20 or more locations operating
under the same name and offering substantially the same menus to publish the total number of calories of standard menu items on
menus and menu boards, along with a statement that puts this calorie information in the context of a total daily calorie intake.
These inconsistencies could be challenging for us to comply with in an efficient manner. The PPACA also requires covered restaurants
to provide to consumers, upon request, a written summary of detailed nutritional information for each standard menu item, and
to provide a statement on menus and menu boards about the availability of this information upon request. An unfavorable report
on, or reaction to, our menu ingredients, the size of our portions or the nutritional content of our menu items could negatively
influence the demand for our products and materially adversely affect our business, financial condition and results of operations.
Compliance
with current and future laws and regulations regarding the ingredients and nutritional content of our menu items may be costly
and time-consuming. Additionally, if consumer health regulations or consumer eating habits change significantly, we may be required
to modify or discontinue certain menu items, and we may experience higher costs associated with the implementation of those changes.
We cannot predict the impact of the new nutrition labeling requirements under the PPACA until final regulations are promulgated.
The risks and costs associated with nutritional disclosures on our menus could also impact our operations, particularly given
differences among applicable legal requirements and practices within the restaurant industry with respect to testing and disclosure,
ordinary variations in food preparation among our own restaurants, and the need to rely on the accuracy and completeness of nutritional
information obtained from third-party suppliers.
Our
business may be adversely impacted by changes in consumer discretionary spending and general economic conditions.
Purchases
at our franchisees’ restaurants are generally discretionary for consumers and, therefore, our results of operations are
susceptible to economic slowdowns and recessions. Our results of operations are dependent upon discretionary spending by consumers
of our franchisees’ restaurants, which may be affected by general economic conditions globally or in one or more of the
markets we serve. Some of the factors that impact discretionary consumer spending include unemployment rates, fluctuations in
the level of disposable income, the price of gasoline, stock market performance and changes in the level of consumer confidence.
These and other macroeconomic factors could have an adverse effect on sales at our franchisees’ restaurants, which could
lead to an adverse effect on our profitability or development plans and harm our financial condition and operating results.
Our
expansion into international markets exposes us to a number of risks that may differ in each country where we have franchised
restaurants.
We
currently have franchised restaurants in Canada, China, UAE, the United Kingdom, Kuwait, Saudi Arabia, Panama, Bahrain, Egypt,
Iraq, Pakistan, Philippines, Indonesia, Malaysia, Qatar and Tunisia, and plan to continue to grow internationally. Expansion in
international markets may be affected by local economic and market as well as geopolitical conditions. Therefore, as we expand
internationally, our franchisees may not experience the operating margins we expect, and our results of operations and growth
may be materially and adversely affected. Our financial condition and results of operations may be adversely affected if global
markets in which our franchised restaurants compete are affected by changes in political, economic or other factors. These factors,
over which neither our franchisees nor we have control, may include:
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recessionary
or expansive trends in international markets;
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changing
labor conditions and difficulties in staffing and managing our foreign operations;
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increases
in the taxes we pay and other changes in applicable tax laws;
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legal
and regulatory changes, and the burdens and costs of our compliance with a variety of foreign laws;
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changes
in inflation rates;
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changes
in exchange rates and the imposition of restrictions on currency conversion or the transfer of funds;
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difficulty
in protecting our brand, reputation and intellectual property;
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difficulty
in collecting our royalties and longer payment cycles;
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expropriation
of private enterprises;
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increases
in anti-American sentiment and the identification of our brands as American brands;
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political
and economic instability; and
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other
external factors.
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Our
international operations subject us to risks that could negatively affect our business.
A
significant portion of our franchised restaurants are operated in countries and territories outside of the United States, including
in emerging markets, and we intend to continue expansion of our international operations. As a result, our business is increasingly
exposed to risks inherent in international operations. These risks, which can vary substantially by country, include political
instability, corruption and social and ethnic unrest, as well as changes in economic conditions (including consumer spending,
unemployment levels and wage and commodity inflation), the regulatory environment, income and non-income based tax rates and laws,
foreign exchange control regimes, consumer preferences and the laws and policies that govern foreign investment in countries where
our franchised restaurants are operated. In addition, our franchisees do business in jurisdictions that may be subject to trade
or economic sanction regimes. Any failure to comply with such sanction regimes or other similar laws or regulations could result
in the assessment of damages, the imposition of penalties, suspension of business licenses, or a cessation of operations at our
franchisees’ businesses, as well as damage to our and our brands’ images and reputations, all of which could harm
our profitability.
Foreign
currency risks and foreign exchange controls could adversely affect our financial results.
Our
results of operations and the value of our foreign assets are affected by fluctuations in currency exchange rates, which may adversely
affect reported earnings. More specifically, an increase in the value of the U.S. dollar relative to other currencies could have
an adverse effect on our reported earnings. Our Canadian franchisees pay us franchise fees as a percentage of sales denominated
in Canadian dollars, which are then converted to U.S. dollars at the prevailing exchange rate. This exposes us to risk of an increase
in the value of the U.S. dollar relative to the Canadian dollar. There can be no assurance as to the future effect of any changes
in currency exchange rates on our results of operations, financial condition or cash flows.
We
depend on key executive management.
We
depend on the leadership and experience of our relatively small number of key executive management personnel, and in particular
key executive management, particularly our Chief Executive Officer, Andrew Wiederhorn. The loss of the services of any of our
executive management members could have a material adverse effect on our business and prospects, as we may not be able to find
suitable individuals to replace such personnel on a timely basis or without incurring increased costs, or at all. We do not maintain
key man life insurance policies on any of our executive officers. We believe that our future success will depend on our continued
ability to attract and retain highly skilled and qualified personnel. There is a high level of competition for experienced, successful
personnel in our industry. Our inability to meet our executive staffing requirements in the future could impair our growth and
harm our business.
Labor
shortages or difficulty finding qualified employees could slow our growth, harm our business and reduce our profitability.
Restaurant
operations are highly service oriented and our success depends in part upon our franchisees’ ability to attract, retain
and motivate a sufficient number of qualified employees, including restaurant managers and other crew members. The market for
qualified employees in our industry is very competitive. Any future inability to recruit and retain qualified individuals may
delay the planned openings of new restaurants by our franchisees and could adversely impact our existing franchised restaurants.
Any such delays, material increases in employee turnover rate in existing franchised restaurants or widespread employee dissatisfaction
could have a material adverse effect on our and our franchisees’ business and results of operations.
In
addition, strikes, work slowdowns or other job actions may become more common in the United States. Although none of the employees
employed by our franchisees are represented by a labor union or are covered by a collective bargaining agreement, in the event
of a strike, work slowdown or other labor unrest, the ability to adequately staff our restaurants could be impaired, which could
result in reduced revenue and customer claims, and may distract our management from focusing on our business and strategic priorities.
Changes
in labor and other operating costs could adversely affect our results of operations.
An
increase in the costs of employee wages, benefits and insurance (including workers’ compensation, general liability, property
and health) could result from government imposition of higher minimum wages or from general economic or competitive conditions.
In addition, competition for qualified employees could compel our franchisees to pay higher wages to attract or retain key crew
members, which could result in higher labor costs and decreased profitability. Any increase in labor expenses, as well as increases
in general operating costs such as rent and energy, could adversely affect our franchisees’ profit margins, their sales
volumes and their ability to remain in business, which would adversely affect our results of operations.
A
broader standard for determining joint employer status may adversely affect our business operations and increase our liabilities
resulting from actions by our franchisees.
In
2015, the National Labor Relations Board (which we refer to as the “
NLRB
”) adopted a new and broader standard
for determining when two or more otherwise unrelated employers may be found to be a joint employer of the same employees under
the National Labor Relations Act. In addition, the general counsel’s office of the NLRB has issued complaints naming McDonald’s
Corporation as a joint employer of workers at its franchisees for alleged violations of the U.S. Fair Labor Standards Act. In
June 2017, the U.S. Department of Labor announced the rescission of these guidelines. However, there can be no assurance that
future changes in law, regulation or policy will cause us or our franchisees to be liable or held responsible for unfair labor
practices, violations of wage and hour laws, or other violations or require our franchises to conduct collective bargaining negotiations
regarding employees of our franchisees. Further, there is no assurance that we or our franchisees will not receive similar complaints
as McDonald’s Corporation in the future, which could result in legal proceedings based on the actions of our franchisees.
In such events, our operating expenses may increase as a result of required modifications to our business practices, increased
litigation, governmental investigations or proceedings, administrative enforcement actions, fines and civil liability.
We
could be party to litigation that could adversely affect us by increasing our expenses, diverting management attention or subjecting
us to significant monetary damages and other remedies.
We
may become involved in legal proceedings involving consumer, employment, real estate related, tort, intellectual property, breach
of contract, securities, derivative and other litigation. Plaintiffs in these types of lawsuits often seek recovery of very large
or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may not be accurately estimated. Regardless
of whether any such claims have merit, or whether we are ultimately held liable or settle, such litigation may be expensive to
defend and may divert resources and management attention away from our operations and negatively impact reported earnings. With
respect to insured claims, a judgment for monetary damages in excess of any insurance coverage could adversely affect our financial
condition or results of operations. Any adverse publicity resulting from these allegations may also adversely affect our reputation,
which in turn could adversely affect our results of operations.
In
addition, the restaurant industry around the world has been subject to claims that relate to the nutritional content of food products,
as well as claims that the menus and practices of restaurant chains have led to customer health issues, including weight gain
and other adverse effects. These concerns could lead to an increase in the regulation of the content or marketing of our products.
We may also be subject to such claims in the future and, even if we are not, publicity about these matters (particularly directed
at the quick service and fast casual segments of the retail food industry) may harm our reputation and adversely affect our business,
financial condition and results of operations.
Changes
in, or noncompliance with, governmental regulations may adversely affect our business operations, growth prospects or financial
condition.
We
and our franchisees are subject to numerous laws and regulations around the world. These laws change regularly and are increasingly
complex. For example, we and our franchisees are subject to:
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The
Americans with Disabilities Act in the U.S. and similar state laws that give civil rights protections to individuals with
disabilities in the context of employment, public accommodations and other areas.
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The
U.S. Fair Labor Standards Act, which governs matters such as minimum wages, overtime and other working conditions, as well
as family leave mandates and a variety of similar state laws that govern these and other employment law matters.
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Laws
and regulations in government mandated health care benefits such as the Patient Protection and Affordable Care Act.
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Laws
and regulations relating to nutritional content, nutritional labeling, product safety, product marketing and menu labeling.
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Laws
relating to state and local licensing.
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Laws
relating to the relationship between franchisors and franchisees.
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Laws
and regulations relating to health, sanitation, food, workplace safety, child labor, including laws prohibiting the use of
certain “hazardous equipment” by employees younger than the age of 18 years of age, and fire safety and prevention.
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Laws
and regulations relating to union organizing rights and activities.
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Laws
relating to information security, privacy, cashless payments, and consumer protection.
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Laws
relating to currency conversion or exchange.
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Laws
relating to international trade and sanctions.
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Tax
laws and regulations.
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Antibribery
and anticorruption laws.
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Environmental
laws and regulations.
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Federal
and state immigration laws and regulations in the U.S.
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Compliance
with new or existing laws and regulations could impact our operations. The compliance costs associated with these laws and regulations
could be substantial. Any failure or alleged failure to comply with these laws or regulations by our franchisees or indirectly
by us could adversely affect our reputation, international expansion efforts, growth prospects and financial results or result
in, among other things, litigation, revocation of required licenses, internal investigations, governmental investigations or proceedings,
administrative enforcement actions, fines and civil and criminal liability. Publicity relating to any such noncompliance could
also harm our reputation and adversely affect our revenues.
Failure
to comply with antibribery or anticorruption laws could adversely affect our business operations.
The
U.S. Foreign Corrupt Practices Act and other similar applicable laws prohibiting bribery of government officials and other corrupt
practices are the subject of increasing emphasis and enforcement around the world. Although we have implemented policies and procedures
designed to promote compliance with these laws, there can be no assurance that our employees, contractors, agents, franchisees
or other third parties will not take actions in violation of our policies or applicable law, particularly as we expand our operations
in emerging markets and elsewhere. Any such violations or suspected violations could subject us to civil or criminal penalties,
including substantial fines and significant investigation costs, and could also materially damage our reputation, brands, international
expansion efforts and growth prospects, business and operating results. Publicity relating to any noncompliance or alleged noncompliance
could also harm our reputation and adversely affect our revenues and results of operations.
Tax
matters, including changes in tax rates, disagreements with taxing authorities and imposition of new taxes could impact our results
of operations and financial condition.
We
are subject to income taxes as well as non-income-based taxes, such as payroll, sales, use, value added, net worth, property,
withholding and franchise taxes in both the U.S. and various foreign jurisdictions. We are also subject to regular reviews, examinations
and audits by the U.S. Internal Revenue Service (which we refer to as the “
IRS
”) and other taxing authorities
with respect to such income and non-income-based taxes inside and outside of the U.S. If the IRS or another taxing authority disagrees
with our tax positions, we could face additional tax liabilities, including interest and penalties. Payment of such additional
amounts upon final settlement or adjudication of any disputes could have a material impact on our results of operations and financial
position.
In
addition, we are directly and indirectly affected by new tax legislation and regulation and the interpretation of tax laws and
regulations worldwide. Changes in legislation, regulation or interpretation of existing laws and regulations in the U.S. and other
jurisdictions where we are subject to taxation could increase our taxes and have an adverse effect on our operating results and
financial condition.
Conflict
or terrorism could negatively affect our business.
We
cannot predict the effects of actual or threatened armed conflicts or terrorist attacks, efforts to combat terrorism, military
action against any foreign state or group located in a foreign state or heightened security requirements on local, regional, national
or international economies or consumer confidence. Such events could negatively affect our business, including by reducing customer
traffic or the availability of commodities.
Risks
Related to Our Company and Our Organizational Structure
We
are included in FCCG’s consolidated group for federal income tax purposes and, as a result, may be liable for any shortfall
in FCCG’s federal income tax payments
For
so long as FCCG continues to own at least 80% of the total voting power and value of our capital stock, we will be included in
FCCG’s consolidated group for federal income tax purposes. By virtue of its controlling ownership and the Tax Sharing Agreement
that we have with FCCG, FCCG effectively controls all of our tax decisions. Moreover, notwithstanding the Tax Sharing Agreement,
federal tax law provides that each member of a consolidated group is jointly and severally liable for the group’s entire
federal income tax obligation. Thus, to the extent FCCG or other members of the group fail to make any federal income tax payments
required of them by law, we are liable for the shortfall. Similar principles generally apply for income tax purposes in some state,
local and foreign jurisdictions.
We
are controlled by FCCG, whose interests may differ from those of our public stockholders.
FCCG
controls approximately 80% of the combined voting power of our Common Stock and will, for the foreseeable future, have significant
influence over corporate management and affairs and be able to control virtually all matters requiring stockholder approval. FCCG
is able to, subject to applicable law, elect a majority of the members of our Board of Directors and control actions to be taken
by us, including amendments to our certificate of incorporation and bylaws and approval of significant corporate transactions,
including mergers and sales of substantially all of our assets. It is possible that the interests of FCCG may in some circumstances
conflict with our interests and the interests of our other stockholders. For example, FCCG may have different tax positions from
us, especially in light of the Tax Sharing Agreement, that could influence its decisions regarding whether and when to dispose
of assets, whether and when to incur new or refinance existing indebtedness. In addition, the determination of future tax reporting
positions, the structuring of future transactions and the handling of any future challenges by any taxing authority to our tax
reporting positions may take into consideration FCCG’s tax or other considerations, which may differ from the considerations
of us or our other stockholders.
Our
anti-takeover provisions could prevent or delay a change in control of our company, even if such change in control would be beneficial
to our stockholders.
Provisions
of our amended and restated certificate of incorporation and bylaws as well as provisions of Delaware law could discourage, delay
or prevent a merger, acquisition or other change in control of our company, even if such change in control would be beneficial
to our stockholders. These provisions include:
|
●
|
net
operating loss protective provisions, which require that any person wishing to become a “5% shareholder” (as defined
in our certificate of incorporation) must first obtain a waiver from our board of directors, and any person that is already
a “5% shareholder” of ours cannot make any additional purchases of our stock without a waiver from our board of
directors;
|
|
|
|
|
●
|
authorizing
the issuance of “blank check” preferred stock that could be issued by our Board of Directors to increase the number
of outstanding shares and thwart a takeover attempt;
|
|
|
|
|
●
|
limiting
the ability of stockholders to call special meetings or amend our bylaws;
|
|
●
|
providing
for a classified board of directors with staggered, three-year terms;
|
|
|
|
|
●
|
requiring
all stockholder actions to be taken at a meeting of our stockholders; and
|
|
|
|
|
●
|
establishing
advance notice and duration of ownership requirements for nominations for election to the board of directors or for proposing
matters that can be acted upon by stockholders at stockholder meetings.
|
These
provisions could also discourage proxy contests and make it more difficult for minority stockholders to elect directors of their
choosing and cause us to take other corporate actions they desire. In addition, because our Board of Directors is responsible
for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace
current members of our management team.
In
addition, the Delaware General Corporation Law, or the DGCL, to which we are subject, prohibits us, except under specified circumstances,
from engaging in any mergers, significant sales of stock or assets or business combinations with any stockholder or group of stockholders
who owns at least 15% of our common stock.
We
may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise
adversely affect holders of our Common Stock, which could depress the price of our Common Stock.
Our
amended and restated certificate of incorporation authorizes us to issue one or more series of preferred stock. Our board of directors
has the authority to determine the preferences, limitations and relative rights of the shares of preferred stock and to fix the
number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders.
Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our Common Stock.
The potential issuance of preferred stock may delay or prevent a change in control of us, discourage bids for our Common Stock
at a premium to the market price, and materially and adversely affect the market price and the voting and other rights of the
holders of our Common Stock.
The
provision of our certificate of incorporation requiring exclusive venue in the Court of Chancery in the State of Delaware for
certain types of lawsuits may have the effect of discouraging lawsuits against our directors and officers.
Our
amended and restated certificate of incorporation requires, to the fullest extent permitted by law, that (i) any derivative action
or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors,
officers or other employees to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision
of the DGCL or our amended and restated certificate of incorporation or the bylaws or (iv) any action asserting a claim against
us governed by the internal affairs doctrine will have to be brought only in the Court of Chancery in the State of Delaware. Although
we believe this provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits
to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers.
A
limited public trading market may cause volatility in the price of our Common Stock.
There
can be no assurance that our Common Stock will continue to be quoted on NASDAQ or that a meaningful, consistent and liquid trading
market will develop. As a result, our stockholders may not be able to sell or liquidate their holdings in a timely manner or at
the then-prevailing trading price of our Common Stock. In addition, sales of substantial amounts of our Common Stock, or the perception
that such sales might occur, could adversely affect prevailing market prices of our common stock and our stock price may decline
substantially in a short time and our stockholders could suffer losses or be unable to liquidate their holdings.
If
our operating and financial performance in any given period does not meet the guidance that we provide to the public, our stock
price may decline.
We
may provide public guidance on our expected operating and financial results for future periods. Any such guidance will be comprised
of forward-looking statements subject to the risks and uncertainties described in our public filings and public statements. Our
actual results may not always be in line with or exceed any guidance we have provided, especially in times of economic uncertainty.
If our operating or financial results for a particular period do not meet any guidance we provide or the expectations of investment
analysts or if we reduce our guidance for future periods, the market price of our Common Stock may decline as well.
Our
ability to pay regular dividends to our stockholders is subject to the discretion of our Board of Directors and may be limited
by our holding company structure and applicable provisions of Delaware law.
Subject
to certain conditions and limitations, we expect to pay cash dividends to the holders of our Common Stock on a quarterly basis.
Our board of directors may, in its sole discretion, decrease the amount or frequency of dividends or discontinue the payment of
dividends entirely. In addition, as a holding company, we will be dependent upon the ability of our operating subsidiaries to
generate earnings and cash flows and distribute them to us so that we may pay dividends to our stockholders. Our ability to pay
dividends will be subject to our consolidated operating results, cash requirements and financial condition, the applicable provisions
of Delaware law which may limit the amount of funds available for distribution to our stockholders, our compliance with covenants
and financial ratios related to existing or future indebtedness, and our other agreements with third parties. In addition, each
of the companies in the corporate chain must manage its assets, liabilities and working capital in order to meet all of its cash
obligations, including the payment of dividends or distributions.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
Our
corporate headquarters, including our principal administrative, sales and marketing, customer support, and research and development
operations, are located in Beverly Hills, California, where we currently lease and occupy 5,478 square feet of space pursuant
to a lease that expires on April 30, 2020.
We
believe that all our existing facilities are in good operating condition and adequate to meet our current and foreseeable needs.
ITEM
3. LEGAL PROCEEDINGS
We
are involved in various legal proceedings occurring in the ordinary course of business which we believe will not have a material
adverse effect on our consolidated financial condition or results of operations.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
PART
II
ITEM
5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Trading
Market and Historical Prices
Beginning
October 23, 2017, our common stock, par value $0.0001 per share (the “Common Stock”), was quoted on the NASDAQ Capital
Market. The approximate number of holders of record (
not including beneficial owners
whose shares are held in street name)
of our common stock was 1,472 as of December 11, 2017.
The
following table sets forth the high and low sales prices for our common stock as quoted on the NASDAQ as applicable, for the period
indicated since our stock has been publicly traded.
2017
|
|
High
|
|
|
Low
|
|
Fourth
quarter
|
|
$
|
13.990
|
|
|
$
|
7.520
|
|
Dividends
During
the year ended December 31, 2017, we did not declare or pay any distributions to shareholders. However, on February 8, 2018, our
Board of Directors declared an initial quarterly dividend of $0.12 per share of common stock, payable on April 16, 2018 to stockholders
of record as of the close of business on March 30, 2018. We also intend to launch a Dividend Reinvestment Plan (“DRIP”),
under which interested stockholders may reinvest all or a portion of their cash dividends in additional common shares of FAT Brands
without paying any brokerage commission or service charge. The DRIP will be administered by our transfer agent. FCCG, our largest
shareholder, intends to reinvest its cash dividend in the Company, thereby allowing us to retain capital to continue our growth
plans.
We
intend to declare quarterly dividends to holders of common stock. However, the declaration and payment of future dividends will
be at the sole discretion of the board of directors and may be discontinued at any time. In determining the amount of any future
dividends, the board of directors will take into account: (i) our consolidated financial results, available cash, future cash
requirements and capital requirements, (ii) any contractual, legal, tax or regulatory restrictions on the payment of dividends
to stockholders, (iii) general economic and business conditions, and (iv) any other factors that the board of directors may deem
relevant. The ability to pay dividends may also be restricted by the terms of any future credit agreement or any future debt or
preferred equity securities of the Company or its subsidiaries.
Equity
Compensation Plan Information
The
2017 Omnibus Equity Incentive 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 purpose of the Plan is
to help attract, motivate and retain qualified personnel and thereby enhance stockholder value. The Plan allows for the board
of directors to award stock incentives to substantially all employees as a retention incentive and to ensure that employees’
compensation incentives are aligned with stock price performance. The Plan provides a maximum of 1,000,000 shares available for
grant.
On
October 20, 2017, the Company granted stock options to purchase 337,500 shares under the Plan to directors and employees, each
with an exercise price equal to $12.00 per share and subject to a three-year vesting requirement, with one-third of the options
vesting each year. In addition, 30,000 options were granted to non-employee consultants under the same terms. Prior to December
31, 2017, options to purchase 5,000 shares were cancelled and became available for grant.
The
information presented in the table below is as of December 31, 2017.
Plan
category
|
|
Number
of securities to be issued
upon
exercise of outstanding options, warrants and rights
|
|
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
|
|
Number
of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column
(a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity
compensation plans approved by security holders
|
|
|
362,500
|
|
|
$
|
12.00
|
|
|
|
637,500
|
|
Equity
compensation plans not approved by security holders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
362,500
|
|
|
$
|
12.00
|
|
|
|
637,500
|
|
The
information above does not include warrants to purchase 80,000 shares of our common stock issued to the selling agent in connection
with the Offering which are exercisable over a five-year period at $15.00 per share beginning April 20, 2018.
Issuer
Purchases of Equity Securities
We
do not have a program in place to repurchase our own securities and as of December 31, 2017, we have not repurchased any of our
equity securities.
Use
of Proceeds
On
October 20, 2017, we completed our initial public offering under Regulation A of the Securities Act of 1933, as amended, and issued
2,000,000 shares of our common stock at an offering price of $12.00 per share, for an aggregate amount of $24,000,000 (the “
Offering
”).
The net proceeds of the Offering were approximately $20,930,000 after deducting the selling agent fees and offering expenses.
None of these expenses consisted of payments made by us to directors, officers or persons owning 10% or more of our common stock
or to their associates, or to our affiliates.
The
Offering was consummated pursuant to our Offering Statement on Form 1-A (File No.024-10737), which was qualified
by the Securities and Exchange Commission on October 20, 2017.
The
net proceeds from the Offering were utilized as follows: (i) $10,550,000 to fund the acquisition of Ponderosa Franchising Company
and Bonanza Restaurant Company, and (ii) $9,500,000 to repay a portion of the Related Party Debt owed to FCCG, which used this
payment primarily to repay indebtedness that it previously incurred in acquiring Buffalo’s Franchise Concepts, Inc.
ITEM
6. SELECTED FINANCIAL DATA.
The
following table presents selected combined financial data for FAT Brands and its subsidiaries. Both Fatburger and Buffalo’s
were historically under common control of FCCG and are the predecessors of FAT Brands for financial reporting purposes. The financial
data presented below was compiled by combining the audited financial information of Fatburger and Buffalo’s for the 2015
and 2016 fiscal years. The 2017 fiscal year data is comprised of a combination of the audited financial information of Fatburger
and Buffalo’s for the period from December 26, 2016 through October 19, 2017, and the audited consolidated financial statements
of FAT Brands Inc. for the period beginning March 21, 2017 (inception) through December 31, 2017, which includes the operating
results of Fatburger, Buffalo’s and Ponderosa for the period from October 20, 2017 (acquisition) through December 31, 2017.
Dollars
in thousands (except per share data)
|
|
Fiscal
Year Ended
|
|
|
Fiscal
Year Ended
|
|
|
Fiscal
Year Ended
|
|
|
|
December
31, 2017
|
|
|
December
25, 2016
|
|
|
December
27, 2015
|
|
Statement
of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
|
|
$
|
6,846
|
|
|
$
|
5,981
|
|
|
$
|
6,461
|
|
Franchise
fees
|
|
|
2,402
|
|
|
|
4,005
|
|
|
|
3,012
|
|
Management
fee
|
|
|
61
|
|
|
|
74
|
|
|
|
83
|
|
Total
revenues
|
|
|
9,309
|
|
|
|
10,060
|
|
|
|
9,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
4,621
|
|
|
|
3,596
|
|
|
|
3,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
4,687
|
|
|
|
6,464
|
|
|
|
6,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
(77
|
)
|
|
|
36
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income tax expense
|
|
|
4,611
|
|
|
|
6,500
|
|
|
|
6,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
2,105
|
|
|
|
2,297
|
|
|
|
2,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,506
|
|
|
$
|
4,203
|
|
|
$
|
3,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
(1)
|
|
$
|
4,839
|
|
|
$
|
6,500
|
|
|
$
|
6,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share data: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares of Common Stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
8,505,263
|
|
|
|
8,000,000
|
|
|
|
8,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net income available to Common Stock per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
0.29
|
|
|
$
|
0.53
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
29,236
|
|
|
$
|
22,368
|
|
|
$
|
22,976
|
|
Due
from affiliates
|
|
$
|
7,963
|
|
|
$
|
11,654
|
|
|
$
|
10,584
|
|
Long-term
obligations
|
|
$
|
18,125
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Stockholders’
equity
|
|
$
|
2,009
|
|
|
$
|
14,814
|
|
|
$
|
12,510
|
|
Dividends
declared per common share
|
|
$
|
-
|
|
|
$
|
n/a
|
|
|
$
|
n/a
|
|
Notes
to Selected Financial Data:
(1)
EBITDA is defined as earnings before interest, taxes, depreciation and amortization. We use the term EBITDA, as opposed to income
from operations, as it is widely used by analysts, investors and other interested parties to evaluate companies in our industry.
We believe that EBITDA is an appropriate measure of operating performance because it eliminates the impact of expenses that do
not relate to business performance.
EBITDA is not a GAAP measure of our financial performance
or liquidity and should not be considered as an alternative to net income (loss) as a measure of financial performance or cash
flows from operations as measures of liquidity, or any other performance measure derived in accordance with GAAP.
A
reconciliation of net income to EBITDA is set forth below:
|
|
Fiscal
Year Ended
|
|
|
Fiscal
Year Ended
|
|
|
Fiscal
Year Ended
|
|
|
|
December
31, 2017
|
|
|
December
25, 2016
|
|
|
December
27, 2015
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,506
|
|
|
$
|
4,203
|
|
|
$
|
3,508
|
|
Depreciation
and amortization expense
|
|
|
23
|
|
|
|
-
|
|
|
|
10
|
|
Interest
expense
|
|
|
205
|
|
|
|
-
|
|
|
|
-
|
|
Income
tax expense
|
|
|
2,105
|
|
|
|
2,297
|
|
|
|
2,811
|
|
EBITDA
|
|
$
|
4,839
|
|
|
$
|
6,500
|
|
|
$
|
6,329
|
|
(2)
For purposes of presenting information about FAT Brand’s common stock, weighted average number of shares outstanding and
earnings or loss per share, outstanding shares of common stock of Fatburger and Buffalo’s prior to their combination with
FAT Brands have been retroactively restated to their FAT Brands equivalents based on the share conversion ratio at the time of
the Offering.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive
Overview
Business
overview
FAT
Brands Inc. is a multi-brand restaurant franchising company that develops, markets, and acquires predominantly fast casual restaurant
concepts around the world. As a franchisor, we generally do not own or operate restaurant locations, but rather generate revenue
by charging franchisees an initial franchise fee as well as ongoing royalties. Since it requires relatively small investments
in tangible assets, this franchisor model provides the opportunity for strong profit margins and an attractive free cash flow
profile while minimizing restaurant operating company risk such as long-term real estate commitments or significant capital investments.
Our scalable management platform enables us to add new franchise and restaurant concepts to our portfolio with minimal incremental
corporate overhead cost, while taking advantage of significant corporate overhead synergies. The acquisition of additional brands
and restaurant concepts as well as expansion of our existing brands are key elements of our growth strategy.
FAT
Brands Inc. was formed on March 21, 2017 as a wholly owned subsidiary of Fog Cutter Capital Group Inc. (“
FCCG
”).
On October 19, 2017, we conducted a forward split of our common stock, par value $0.0001, which increased shares held by FCCG
to 8,000,000 shares. On October 20, 2017, we completed our initial public offering and issued 2,000,000 additional shares of our
common stock at an offering price of $12.00 per share, for an aggregate amount of $24,000,000 (the “
Offering
”).
The net proceeds of the Offering were approximately $20,930,000 after deducting the selling agent fees of $1,853,000 and Offering
expenses of $1,217,000. Our common stock trades on the Nasdaq Capital Market under the symbol “FAT.”
Concurrent
with the closing of the Offering, we completed the following transactions:
|
●
|
FCCG
contributed two of its operating subsidiaries, Fatburger North America Inc. and Buffalo’s Franchise Concepts Inc., to
us in exchange for an unsecured promissory note with a principal balance of $30,000,000, bearing interest at a rate of 10.0%
per annum and maturing in five years (the “
Related Party Debt
”). The contribution was consummated pursuant
to a Contribution Agreement between us and FCCG.
|
|
|
|
|
●
|
In
March 2017, FCCG agreed to acquire Homestyle Dining LLC from Metromedia Company and its affiliate pursuant to a Membership
Interest Purchase Agreement, as amended, which provided for a cash purchase price of $10,550,000 to be paid at closing. Effective
October 20, 2017, we provided $10,550,000 of the net proceeds from the Offering to FCCG to consummate the acquisition of Homestyle
Dining LLC. In exchange, we received full ownership in the Homestyle Dining operating subsidiaries: Ponderosa Franchising
Company, Bonanza Restaurant Company, Ponderosa International Development, Inc. and Puerto Rico Ponderosa, Inc. (collectively,
“
Ponderosa
”). These subsidiaries conduct the worldwide franchising of the Ponderosa Steakhouse
Restaurants and the Bonanza Steakhouse Restaurants.
|
On
November 14, 2017, we entered into a Membership Interest Purchase Agreement (the “
Agreement
”) to purchase the
membership interests of Hurricane AMT, LLC, a Florida limited liability corporation (“
Hurricane
”), for a purchase
price of $12,500,000. Hurricane is the franchisor of Hurricane Grill & Wings and Hurricane BTW Restaurants. The original Hurricane
Grill & Wings opened in Fort Pierce, Florida in 1995 and has expanded to over 60 restaurant locations in Alabama, Arizona,
Colorado, Florida, Georgia, Kansas, New York, and Texas.
We
operate on a 52-week or 53-week fiscal year ending on the last Sunday of the calendar year. In a 52-week fiscal year, each quarter
contains 13 weeks of operations; in a 53-week fiscal year, each of the first, second and third quarters includes 13 weeks of operations
and the fourth quarter includes 14 weeks of operations, which may cause our revenue, expenses and other results of operations
to be higher due to an additional week of operations. The 2017 fiscal year was a 53-week fiscal year.
Fatburger
and Buffalo’s were historically under a cost-sharing and reimbursement arrangement with FCCG. After the transfer of these
entities to our control, the cost-sharing and reimbursement arrangement with FCCG was terminated and all employees were moved
to FAT Brands Inc. or our subsidiaries as appropriate. The historical financial statements are expected to be consistent with
the new FAT Brands Inc. entity, in that reimbursement expense and direct employee costs both appear under general and administrative
expenses and are expected to be materially the same amounts going forward.
Operating
segments
As
of December 31, 2017, we franchise the Fatburger, Buffalo’s and Ponderosa restaurant concepts with 286 total locations across
24 states and 18 countries. While our existing footprint covers 18 countries in which we have franchised restaurants open and
operational as of December 31, 2017, our overall footprint (including development agreements for proposed stores in new markets
and countries where our brands previously had a presence that we intend to resell to new franchisees) covers 25 countries. For
each of our current restaurant brands and those that we will seek to acquire, the ability to expand the overall concept footprint,
both domestically and internationally, is of critical importance and a primary acquisition evaluation criterion. We believe that
our restaurant concepts have meaningful growth potential and appeal to a broad base of consumers globally.
Our
chief operating decision maker (“CODM”) is our Chief Executive Officer. Our CODM reviews financial performance and
allocates resources at an overall level on a recurring basis. However, each of our restaurant concepts is significant to our operations
and is consistently evaluated individually. Therefore, management has determined that the Company has three operating and reportable
segments.
Our operating
segments are:
|
●
|
The
Fatburger Franchise Division which includes our worldwide operations of the Fatburger concept.
|
|
●
|
The
Buffalo’s Franchise Division which includes our worldwide operations of the Buffalo’s Café and Buffalo’s
Express concepts.
|
|
●
|
The
Ponderosa Franchise Division which includes our worldwide operations of the Bonanza and Ponderosa Steakhouse concepts.
|
Key
Performance Indicators
To
evaluate the performance of our business, we utilize a variety of financial and performance measures, which are typically calculated
on a system-wide basis. These key measures include new store openings, average unit volumes and same-store sales growth in addition
to the general income statement line items such as revenues, general and administrative expenses, income before income tax expense
and net income.
New
store openings -
The number of new store openings reflects the number of franchised
restaurant locations opened during a reporting period. The total number of new stores per year and the timing of stores openings
has, and will continue to have, an impact on our results.
Average
unit volumes -
Average Unit Volumes (“AUV”) for any 12-month period consist of the average sales of all stores
over that period that have been open a full year. Average unit volumes are calculated by dividing total sales from all stores
open a full year by the number of stores open during that period. The measurement of AUVs allows us to assess changes in guest
traffic and per transaction patterns at our stores.
Same-store
sales growth -
S
ame-store sales growth reflects
the change in year-over-year sales for the comparable store base, which we define as the number of stores open for at least one
full fiscal year. Given our focused marketing efforts and public excitement surrounding each opening, new stores often experience
an initial start-up period with considerably higher than average sales volumes, which subsequently decrease to stabilized levels
after three to six months. Thus, we do not include stores in the comparable store base until they have been open for at least
one full fiscal year. We expect that this trend will continue for the foreseeable future as we continue to open and expand into
new markets.
Results
of Operations
Results
of Operations of FAT Brands Inc.
The
following table summarize key components of our combined results of operations for the
period
beginning March 21,2017 (inception) through December 31, 2017, which includes the operating results of Fatburger, Buffalo’s
and Ponderosa for the period from October 20, 2017 (acquisition) through December 31, 2017. Because this is our initial year of
operation, comparative information is not available.
(In
thousands)
For
the Fiscal Years Ended
|
|
December
31, 2017
|
|
|
|
|
|
Statement
of operations data:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
Royalties
|
|
$
|
2,023
|
|
Franchise
fees
|
|
|
140
|
|
Management
fee
|
|
|
10
|
|
Total
revenues
|
|
|
2,173
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
2,123
|
|
|
|
|
|
|
Income
from operations
|
|
|
50
|
|
|
|
|
|
|
Other
expense
|
|
|
(256
|
)
|
|
|
|
|
|
Loss
before income tax expense
|
|
|
(206
|
)
|
|
|
|
|
|
Income
tax expense
|
|
|
407
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(613
|
)
|
Net
Loss
-
Net loss for the period from March 21, 2017 (inception) through December 31, 2017 (the “2017 Fiscal Year”)
totaled $613,000 consisting of revenues of $2,173,000 less general and administrative expenses of $2,123,000; other expense of
$256,000 and income taxes of $407,000.
Revenues
-
Revenues consist of royalty fees, franchise fees and management fees. We had revenues of $2,173,000 for the 2017
Fiscal Year. Royalties totaled $2,023,000; Franchise fees totaled $140,000 and management fees were $10,000.
General
and Administrative Expenses
-
General and administrative expenses consist primarily of compensation costs. For year
ended December 31, 2017, our general and administrative expenses totaled $2,123,000 and included compensation costs of $1,337,000.
Other
Income (Expense) –
Other expense for the 2017 Fiscal Year totaled $256,000 and consisted primarily of interest expense
of $405,000 which was partially offset by interest income of $200,000.
Income
Tax Expense –
We recorded a provision for income taxes of $407,000 for the 2017 Fiscal Year. On December 22, 2017, the
Tax Cuts and Jobs Act (the “TCJ Act”) was enacted into law. The reduction in the corporate tax rate under the TCJ
Act required a one-time revaluation of our deferred tax assets and liabilities to reflect their value at the lower corporate tax
rate of 21%. As a result of the Tax Reform Act, we recorded a tax expense of $505,000 due to a remeasurement of deferred tax assets
and liabilities.
Results
of Segment Operations of Fatburger
Fatburger
was historically under control of FCCG and is a predecessor of FAT Brands for financial reporting purposes. To provide comparative
segment financial information for two full fiscal years, the data presented below was compiled using:
|
●
|
the
audited financial statements of Fatburger for the 2016 fiscal year, and
|
|
●
|
for
fiscal 2017, combining the audited financial statements of Fatburger for the pre-acquisition period from December 26, 2016
through October 19, 2017 with the Fatburger segment results included in the audited consolidated financial statements of FAT
Brands Inc. for the period beginning March 21,2017 (inception) through December 31, 2017 (which includes the segment results
of Fatburger from October 20, 2017 through December 31, 2017).
|
The
following table summarize key components of the results of operations for our Fatburger segment for the periods indicated:
(In
thousands)
For
the Fiscal Years Ended
|
|
December
31, 2017
|
|
|
December
25, 2016
|
|
|
|
|
|
|
|
|
Statement
of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Royalties
|
|
$
|
4,782
|
|
|
$
|
4,632
|
|
Franchise
fees
|
|
|
1,869
|
|
|
|
3,750
|
|
Management
fee
|
|
|
61
|
|
|
|
74
|
|
Total
revenues
|
|
|
6,712
|
|
|
|
8,456
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
2,750
|
|
|
|
2,933
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
3,962
|
|
|
|
5,523
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
268
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Income
before income tax expense
|
|
|
4,230
|
|
|
|
5,523
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
2,029
|
|
|
|
1,979
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,201
|
|
|
$
|
3,544
|
|
For
the Year Ended December 31, 2017 Compared to the Year Ended December 25, 2016
Net
Income
-
Net income of Fatburger for the year ended December 31, 2017 decreased by $1,343,000 or 38% to $2,201,000 compared
to $3,544,000 for the year ended December 25, 2016. The decrease was primarily attributable to lower recognized franchise fees
in the amount of $1,881,000, partially offset by a reduction in general and administrative expenses of $183,000 and an increase
in other income of $268,000.
Revenues
-
Fatburger’s revenues consist of royalty fees, franchise fees and management fees. Fatburger had revenues of
$6,712,000 and $8,456,000 for the years ended December 31, 2017 and December 25, 2016, respectively. The $1,744,000 or 21% decrease
in revenues was primarily driven by a decrease in franchise fees recognized in 2017. In 2016, we recognized $2,068,000
more in franchise fees compared to 2017, due to the termination of franchise agreements. The recognition of previously
collected franchise fees into income can vary significantly from year to year based upon the number of new store openings and
other triggering events.
General
and Administrative Expenses
-
General and administrative expenses of Fatburger consist primarily of payroll, consulting
fees and, prior to the Offering, an allocation of corporate overhead from FCCG. General and administrative expenses for the year
ended December 31, 2017 decreased $183,000 or 6% to $2,750,000, as compared to $2,933,000 for the year ended December 25, 2016.
This was primarily the result of a decrease in compensation costs of $411,000 partially offset by an increase in professional
fees of $103,000, an increase in allocated corporate overhead of $85,000 and an increase in bad debt expense of $64,000 for the
year ended December 31, 2017.
Other
Income –
Other income during the year ended December 31, 2017 consisted primarily of interest earned on intercompany
receivables from FCCG in the amount of $84,000 and net settlement income in the amount of $184,000.
Income
tax expense – We recorded a provision for income taxes of $2,029,000 for year ended
December 31, 2017. On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJ Act”)
was enacted into law. The reduction in the corporate tax rate under the TCJ Act required
a one-time revaluation of our deferred tax assets and liabilities to reflect their value
at the lower corporate tax rate of 21%. As a result of the Tax Reform Act, we recorded
a tax expense of $577,000 due to a re-measurement of deferred tax assets and liabilities.
New
Store Openings
-
For the year ended December 31, 2017, our Fatburger franchisees
opened 20 stores as compared to 12 stores for the year ended December 25, 2016.
Same-store
Sales Growth
-
Adjusted
same-store sales in our core domestic market (representing approximately 67% of revenues for 2017) grew by positive 7.4% for the
year ended December 31, 2017, compared to growth of 1.5% for the for the year ended December 25, 2016. Overall Fatburger same-store
sales, including international stores in their local currency were positive 2.3% for the year ended December 31, 2017 and negative
2.7% for the year ended December 25, 2016. These results reflect the deterioration in macroeconomic conditions in Canada and the
Middle East due to the decline in oil prices, as well as increased competition internationally. The same-store sale results exclude
two restaurants which were subject to extraordinary adverse operating conditions in 2015, 2016 and 2017 related to construction
blocking direct access or visibility to the restaurant and political sanctions affecting the supply chain and the related local
economy. The Fatburger restaurant on the Las Vegas Strip was affected by extensive construction on Las Vegas Blvd. The Fatburger
restaurant located in Doha, Qatar in the Pearl District was affected by extensive construction and political sanctions affecting
the supply chain and related local economy. If these restaurants were included the same-store sales data, the change in same-store
sales for our core domestic market would be positive 5.4% for the year ended December 31, 2017 and positive 0.7% for the year
ended December 25, 2016, and same-store sales system-wide would be positive 0.8% for the year ended December 31, 2017 and negative
3.2% for the year ended December 25, 2016.
Average
unit volumes –
Our average unit volumes were $767,717 and $747,892, respectively for the 52 weeks ended December 31,
2017 and December 25, 2016. The 2.7% increase was primarily the result of higher same-store sales from the opening of new stores
and initiatives such as co-branding and adoption of mobile delivery.
Results
of Segment Operations of Buffalo’s.
Buffalo’s
was historically under control of FCCG and is a predecessor of FAT Brands for financial reporting purposes. To provide comparative
segment financial information for two full fiscal years, the data presented below was compiled using:
|
●
|
the
audited financial statements of Buffalo’s for the 2016 fiscal year, and
|
|
●
|
for
2017, combining the audited financial statements of Buffalo’s for the pre-acquisition period from December 26, 2016
through October 19, 2017 with the Buffalo’s segment results included in the audited consolidated financial statements
of FAT Brands Inc. for the period beginning March 21,2017 (inception) through December 31, 2017 (which includes the segment
results of Buffalo’s from October 20, 2017 through December 31, 2017).
|
The
following table summarize key components of the results of operations for our Buffalo’s segment for the periods indicated:
(In
thousands)
For
the Fiscal Years Ended
|
|
December
31, 2017
|
|
|
December
25, 2016
|
|
|
|
|
|
|
|
|
Statement
of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Royalties
|
|
$
|
1,226
|
|
|
$
|
1,349
|
|
Franchise
fees
|
|
|
530
|
|
|
|
255
|
|
Total
revenues
|
|
|
1,756
|
|
|
|
1,604
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
783
|
|
|
|
663
|
|
|
|
|
|
|
|
|
|
|
Income from
operations
|
|
|
973
|
|
|
|
941
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
95
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
Income before
income tax expense
|
|
|
1,068
|
|
|
|
977
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
429
|
|
|
|
318
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
639
|
|
|
$
|
659
|
|
For
the Year Ended December 31, 2017 as Compared to the Year Ended December 25, 2016.
Net
Income –
Buffalo’s net income for the year ended December 31, 2017 decreased slightly to $639,000, compared to
$659,000 for the year ended December 25, 2016. Increases in revenue and other income were offset by similar increases in general
and administrative expenses and income taxes.
Revenues
–
Buffalo’s revenues consist of royalty fees and recognized franchise fees. Buffalo’s had revenues of $1,756,000
and $1,604,000 for the years ended December 31, 2017 and December 25, 2016, respectively. The increase in revenue of $152,000,
or 9.5%, is primarily the result of increases in recognized franchise fees in 2017 of $275,000. This increase was partially reduced
by lower royalties in 2017 in the amount of $123,000 due primarily to the closure of two long-standing franchise locations in
Atlanta, Georgia and Riyadh, Saudi Arabia.
General
and Administrative Expenses –
General and administrative expenses of Buffalo’s primarily consist of payroll, consulting
fees and an allocation of corporate overhead from the parent company. General and administrative expenses for the year ended December
31, 2017 increased by $120,000 or 18% to $783,000 as compared to $663,000 for the year ended December 25, 2016. This increase
was primarily the result of an increase in the corporate overhead allocation of $99,000 and an increase in professional fees of
$151,000 which was partially offset by decreases in salary and wage expense of $142,000 for the 2017 period.
Other
Income -
Other income increased from $36,000 in 2016 to $95,000 in 2017. The increase was primarily the result of interest
income on intercompany receivables from FCCG, which began accruing interest during 2017.
Income
tax expense –
We recorded a provision for income taxes of $429,000 for year ended December 31, 2017. On December 22,
2017, the Tax Cuts and Jobs Act (the “TCJ Act”) was enacted into law. The reduction in the corporate tax rate under
the TCJ Act required a one-time revaluation of our deferred tax assets and liabilities to reflect their value at the lower corporate
tax rate of 21%. As a result of the Tax Reform Act, we recorded a tax expense of $33,000 due to a remeasurement of deferred tax
assets and liabilities.
New
Store Openings –
There were no new stores opened by our Buffalo’s Cafe franchisees during the year ended December
31, 2017, as compared to two new seasonal stores opened for the year ended December 25, 2016.
Same-store
Sales Growth –
Same-store sales for Buffalo’s Cafe were positive 1.4% for the year ended December 31, 2017 and
positive 2.4% for the year ended December 25, 2016. The softening in positive same-store sales for the year ended December 31,
2017 was primarily attributable to adverse weather conditions in the Atlanta area in the first quarter of 2017, which had a negative
effect on customer traffic. We excluded two restaurants from the calculation of same-store sales because they were subject to
extraordinary adverse operating conditions in 2016 and 2017, related to changes in the alcohol laws or political sanctions affecting
the supply chain and the related local economy: Canyon, Texas, and The Ezdan Mall Doha, Qatar. If these restaurants were included,
the same-store sales system-wide would have been negative 1.5% for the year ended December 31, 2017 and positive 0.4% for the
year ended December 35, 2016.
Average
Unit Volumes –
Our average unit volumes were $1,512,653 and $1,538,442, respectively for the years ended December 31,
2017 and December 25, 2016. The 1.7% decline was the result of the changes in alcohol laws and political sanctions described above
for two of the restaurants.
Results
of Segment Operations of Ponderosa
We
were not affiliated with the Ponderosa entities until they became our wholly owned subsidiaries on October 20, 2017. Accordingly,
only the financial results of Ponderosa which occurred subsequent to FCCG’s contribution are presented.
The
following table summarizes key components of the results of operations of our Ponderosa segment for the period indicated:
(In
thousands)
For
the Period from October 20, 2017 (Acquisition) through December 31, 2017
Statement
of operations data:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
Royalties
|
|
$
|
805
|
|
Franchise
fees
|
|
|
2
|
|
Total
revenues
|
|
|
807
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
815
|
|
|
|
|
|
|
Income from
operations
|
|
|
(8
|
)
|
|
|
|
|
|
Other
income (expense)
|
|
|
(18
|
)
|
|
|
|
|
|
Income before
income tax expense
|
|
|
(26
|
)
|
|
|
|
|
|
Income
tax expense
|
|
|
(175
|
)
|
|
|
|
|
|
Net
income
|
|
$
|
151
|
|
Net
Income
-
Net income of Ponderosa for the short period from October 20, 2017 through December 31, 2017 was $151,000.
The primary contributor to the income was the recognition of income tax benefits in the amount of $175,000.
Revenues
-
Ponderosa’s revenues consist of royalty fees and franchise fees. Ponderosa had revenues of $807,000 for the
short period from October 20, 2017 through December 31, 2017, consisting almost entirely of royalties.
General
and Administrative Expense
-
General and administrative expense of Ponderosa consists primarily of payroll costs. General
and administrative expenses for the period from October 20, 2017 through December 31, 2017 totaled $815,000 of which $665,000
was payroll related.
Income
tax benefit –
We recorded an income tax benefit of $175,000 for interim period ended December 31, 2017. On December
22, 2017, the Tax Cuts and Jobs Act (the “TCJ Act”) was enacted into law. The reduction in the corporate tax rate
under the TCJ Act required a one-time revaluation of our deferred tax assets and liabilities to reflect their value at the lower
corporate tax rate of 21%. As a result of the Tax Reform Act, we recorded a tax benefit of $167,000 due to a remeasurement of
deferred tax assets and liabilities.
New
Store Openings
-
For the year ended December 31, 2017, Ponderosa franchisees opened
1 location as compared to 2 locations for the year ended December 26, 2016.
Same-store
Sales Growth –
Domestic same-store sales for Ponderosa were positive 1.1% for the year ended December 31, 2017 and negative
0.7% for the year ended December 26, 2016. Overall systemwide same-store sales were negative 2.7% for the year ended December
31, 2017 and negative 3.3% for the year ended December 26, 2016. International sales were affected negatively in 2017 due to Hurricanes
Maria and Irma, which caused temporary closures and lower sales for 27 stores in the Puerto Rico market.
Average
Unit Volumes –
Our average unit volumes were $1,404,345 and $1,424,645, respectively, for the years ended December 31,
2017 and December 26, 2016. The 1.4% decline was primarily the result of Hurricane Maria, which caused temporary closures for
all the 27 stores in the Puerto Rico market.
Changes
in Financial Condition
Overview
Our
assets, liabilities and stockholders’ equity for the years ended December 31, 2017 can be summarized as follows:
|
|
(dollars
in thousands)
|
|
Total
assets
|
|
$
|
29,236
|
|
Total
liabilities
|
|
$
|
27,227
|
|
Total
stockholders’ equity
|
|
$
|
2,009
|
|
The
significant components of our balance sheet are as follows:
Cash
Our
cash balance was $32,000 as of December 31, 2017. Significant sources and uses of cash during the 2017 fiscal year included:
|
●
|
We
received $20,930,000 in net proceeds from the issuance of stock, net of costs.
|
|
●
|
We
received $1,499,000 of cash provided by operations – comprised primarily of our net loss of $ (613,000), adjusted for
non-cash items.
|
|
●
|
We
used $10,550,000 to acquire Ponderosa.
|
|
●
|
We
used $11,875,000 to partially repay the Related Party Debt.
|
Accounts
Receivable
Accounts
receivable consist primarily of royalty and advertising fees from franchisees reduced by reserves for the estimated amount deemed
uncollectible due to bad debts. As of December 31, 2017, our accounts receivable totaled $918,000 which was net of $679,000 in
reserves.
Trade
Notes Receivable
Trade
notes receivable are created when the settlement of a delinquent franchisee receivable account is reached and the entire balance
is not immediately paid. 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% to 7.5%. Reserve amounts, on the notes,
are established based on the likelihood of collection. As of December 31, 2017, notes receivable totaled approximately $423,000,
which is net of reserves of $34,000.
Due
from Affiliates
We
had open accounts with affiliated entities under the common control of FCCG resulting in net amounts due to us of $7,963,000
as of December 31, 2017. Effective October 20, 2017, the advances began to earn interest at a rate of 10% per annum. These
advances are expected to be recovered from credits for the use of the Parents’ tax net operating losses and from repayments
by the affiliates from proceeds generated by their operations and investments.
Goodwill
and Net Intangible Assets
|
|
December
31, 2017
|
|
|
|
(dollars
in thousands)
|
|
Goodwill
– Fatburger acquisition
|
|
$
|
529
|
|
Goodwill
– Buffalo’s acquisition
|
|
|
5,365
|
|
Goodwill
– Ponderosa acquisition
|
|
|
1,462
|
|
Total
Goodwill
|
|
$
|
7,356
|
|
|
|
|
|
|
Net
Intangible Assets – Fatburger
|
|
|
2,135
|
|
Net
Intangible Assets – Buffalo’s
|
|
|
27
|
|
Net
Intangible Assets – Ponderosa
|
|
|
8,849
|
|
Total
Net Intangible Assets
|
|
$
|
11,011
|
|
Other
Assets
|
|
December
31, 2017
|
|
|
|
(dollars
in thousands)
|
|
Deferred
Income Taxes
|
|
$
|
937
|
|
|
|
|
|
|
Buffalo’s
Creative and Advertising Fund
|
|
$
|
436
|
|
Accounts
Payable and Accrued Liabilities
Accounts
payable and accrued liabilities totaled $4,548,000 at December 31, 2017 and consisted of the following:
|
|
December
31, 2017
|
|
|
|
(dollars
in thousands)
|
|
Accounts
payable
|
|
$
|
2,439
|
|
Accrued
advertising
|
|
|
348
|
|
Accrued
wages and payroll taxes
|
|
|
528
|
|
Coke
refunds payable
|
|
|
255
|
|
Gift
certificate liability
|
|
|
95
|
|
Other
accrued expenses
|
|
|
883
|
|
Total
accounts payable and accrued liabilities
|
|
$
|
4,548
|
|
Deferred
Income
Our
deferred income relating to the collection of unearned franchise fees and royalties was $3,713,000 at December 31, 2017. Of this
amount, $2,781,000 represents non-refundable franchise fees received by our subsidiaries for future franchise locations. These
initial fees generally represent half of the total fee per location. The balance of the franchise fees (approximately an additional
$2.8 million) will be collected in the future when leases on these specific franchise locations are signed and the entire fee
will be recognized in income when the criteria for recognition of this revenue are met.
Note
Payable to FCCG
Concurrent
with the Offering, FCCG contributed Fatburger and Buffalo’s to us in exchange for an unsecured promissory note with a principal
balance of $30,000,000, bearing interest at a rate of 10.0% per annum and maturing in five years. The contribution was consummated
pursuant to a Contribution Agreement between us and FCCG. Approximately $11,875,000 of the note payable owed to FCCG was
subsequently Repaid, resulting in a balance at December 31, 2017 of $18,125,000.
Deferred
Income Taxes
We
entered into a Tax Sharing Agreement with FCCG that provides that FCCG will, to the extent permitted by applicable law, file consolidated
federal, California and Oregon (and possibly other jurisdictions where revenue is generated, at FCCG’s election) income
tax returns with us and our subsidiaries. We will pay to FCCG the amount that our tax liability would have been had we filed a
separate return. To the extent our required payment exceeds our share of the actual combined income tax liability (which may occur,
for example, due to the application of FCCG’s net operating loss carryforwards), we will be permitted, in the discretion
of a committee of our board of directors comprised solely of directors not affiliated with or interested in FCCG, to pay such
excess to FCCG by issuing an equivalent amount of our common stock in lieu of cash, valued at the fair market value at the time
of such payment. In addition, our inter-company receivable of approximately $7,963,000 due from FCCG will be applied first
to reduce such excess income tax payment obligation to FCCG under the Tax Sharing Agreement.
We
account for income taxes as if we filed separately from FCCG. We have determined that it is more likely than not that certain
tax benefits will be available to shelter future tax liabilities and have recorded a deferred tax asset of $937,000.
Liquidity
and Capital Resources
Liquidity
is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund business
operations, acquisitions, and expansion of franchised restaurant locations and for other general business purposes. In addition
to our cash on hand, our primary sources of funds for liquidity during the 2017 fiscal year consisted of cash provided by proceeds
from the sale of common stock.
Franchising
operations are our major source of ongoing liquidity and we expect these sources, including the sale of franchises, to generate
adequate cash flow to meet our liquidity needs for the next fiscal year.
At
December 31, 2017, we had total consolidated indebtedness of $18.1 million, as well as $9.1 million of other liabilities.
Our consolidated indebtedness consisted of the note payable to FCCG of $18,125,000.
Franchise
expansion
We
are involved in a world-wide expansion of franchise locations, which will require significant liquidity, primarily from our franchisees.
If real estate locations of sufficient quality cannot be located and either leased or purchased, the timing of restaurant openings
may be delayed. Additionally, if we or our franchisees cannot obtain capital sufficient to fund this expansion, the timing of
restaurant openings may be delayed.
We
also plan to acquire additional restaurant concepts. These acquisitions typically require capital investments in excess of our
normal cash on hand. We would expect that future acquisitions will necessitate financing with additional debt or equity transactions.
If we are unable to obtain acceptable financing, our ability to acquire additional restaurant concepts may be negatively impacted.
Dividends
During
the year ended December 31, 2017, we did not declare or pay dividends to shareholders. However, on February 8, 2018, our Board
of Directors declared an initial quarterly dividend of $0.12 per share of common stock, payable on April 16, 2018 to stockholders
of record as of the close of business on March 30, 2018. We also intend to launch a Dividend Reinvestment Plan (“DRIP”),
under which interested stockholders may reinvest all or a portion of their cash dividends in additional common shares of FAT Brands
without paying any brokerage commission or service charge. The DRIP will be administered by our transfer agent. FCCG, our largest
shareholder, intends to reinvest its cash dividend in the Company, thereby allowing us to retain capital to continue our growth
plans.
The
declaration and payment of future dividends, as well as the amount thereof, are subject to the discretion of our Board of Directors.
The amount and size of any future dividends will depend upon our future results of operations, financial condition, capital levels,
cash requirements and other factors. There can be no assurance that we will declare and pay dividends in future periods.
Critical
Accounting Policies and Estimates
Revenue
recognition (Fatburger)
:
Franchise fee revenue from sales of individual franchises is recognized as revenue upon completion
of training and the actual opening of a location. Typically, franchise fees are $50,000 for each domestic location and are collected
50% upon signing a deposit agreement and 50% at the signing of a lease and related franchise agreement. International franchise
fees are typically $65,000 for each location and are payable 100% upon signing a deposit agreement.
Revenue
recognition (Buffalo’s): Franchise fee revenue from sales of individual franchises is recognized upon completion of training
and the actual opening of a location. Typically, franchise fees are $50,000 for each domestic location and are collected 50% upon
signing a deposit agreement and 50% at the signing of a lease and related franchise agreement. International franchise fees are
typically $65,000 for each location and are payable 100% upon signing a deposit agreement. The company typically charges a $25,000
co-brand conversion fee, in addition to the initial franchise fee.
Revenue
recognition (Ponderosa): Franchise fee revenue from sales of individual franchises is recognized upon completion of training and
the actual opening of a location. Typically, franchise fees are $40,000 for each domestic location and are collected 100% at the
signing of a lease and related franchise agreement.
For
all our brands, the franchise fee may be adjusted at management’s discretion or in a situation involving store transfers.
Deposits are non-refundable upon acceptance of the franchise application. These deposits are recorded as deferred income until
store opens. Some of our franchisees have not complied with their development timelines for opening franchise stores. These
franchise rights are terminated and franchise fee revenue is recognized for non-refundable deposits.
In
addition to franchise fee revenue, we collect a royalty calculated as a percentage of net sales from our franchisees. Royalties
are recognized as revenue when the related sales are made by the franchisees. Royalties collected in advance of sales are classified
as deferred income until earned.
Advertising
(Fatburger): Fatburger requires advertising payments from franchisees of 1.95% of net sales from Fatburger restaurants located
in the Los Angeles marketing area and up to 0.95% of net sales from stores located outside of the Los Angeles marketing area.
International locations pay 0.20% to 0.95%. The company also receives, from time to time, payments from vendors that are to be
used for advertising. Since advertising funds collected are required to be spent for specific advertising purposes, no revenue
or expense is recorded for advertising funds. Cumulative advertising expenditures in excess of collections are recorded as current
assets and will be reimbursed by future advertising payments from franchises. Cumulative collections in excess of advertising
expenditures are recorded as accrued expenses and represent advertising funds collected which have not yet been spent on advertising
activities.
Advertising
(Buffalo’s): Buffalo’s generally requires advertising payments from franchisees of 2.0% of net sales from Buffalo’s
Southwest Cafe restaurants. Co-branded restaurants generally pay 0.20% to 1.95%. The company also receives, from time to time,
payments from vendors that are to be used for advertising. Since the company acts in a fiduciary role to collect and disburse
these advertising funds, no revenue or expense is recorded. Advertising funds are segregated from other Company assets and the
balance of the Buffalo’s Creative and Advertising Fund is recorded as an asset by the company with the offsetting advertising
obligation recorded as a liability, Buffalo’s Creative and Advertising Fund - Contra.
Advertising
(Ponderosa): Ponderosa requires advertising payments from franchisees of 0.5% of net sales from franchisees. The company also
receives, from time to time, payments from vendors that are to be used for advertising. Since advertising funds collected are
required to be spent for specific advertising purposes, no revenue or expense is recorded for advertising funds. Cumulative advertising
expenditures in excess of collections are recorded as current assets and will be reimbursed by future advertising payments from
franchises. Cumulative collections in excess of advertising expenditures are recorded as accrued expenses and represent advertising
funds collected which have not yet been spent on advertising activities.
Goodwill
and other intangible assets
:
Goodwill and other intangible assets with indefinite lives, such as trademarks, are not amortized
but are reviewed for impairment annually, or more frequently if indicators arise. No impairment has been identified for the 2017
fiscal year.
Income
taxes: We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities
are determined based on the differences between financial reporting and tax reporting bases of assets and liabilities and are
measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Realization
of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain.
We
utilize a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will
be sustained upon tax authority examination, including resolution of related appeals or litigation processes, if any. The second
step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon the ultimate settlement.
Share-based
compensation: We have a non-qualified stock option plan which provides for options to purchase shares of the Company’s common
stock. For grants to employees and directors, we recognize an expense for the value of options granted at their fair value at
the date of grant over the vesting period in which the options are earned. Cancellations or forfeitures are accounted for as they
occur. Fair values are estimated using the Black-Scholes option-pricing model. For grants to non-employees for services, we revalue
the options each reporting period while the services are being performed. The adjusted value of the options is recognized as an
expense over the service period. See Note 12 in our consolidated financial statements for more details on our share-based compensation.
Use
of estimates: The preparation of 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 disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts
of revenues and expenses during the reported periods. Actual results could differ from those estimates.
Recently
Issued Accounting Standards
In
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue From Contracts
With Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the
transfer of promised goods and services to customers. The updated standard will replace most existing revenue recognition guidance
in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect
transition method. These standards are effective for our first quarter of 2018 and we will adopt the standards using the modified
retrospective method.
These
standards require that the transaction price received from customers be allocated to each separate and distinct performance obligation.
The transaction price attributable to each separate and distinct performance obligation is then recognized as the performance
obligations are satisfied. The services we provide related to upfront fees we receive from franchisees such as initial or renewal
fees do not currently contain separate and distinct performance obligations from the franchise right and thus those upfront fees
will be recognized as revenue over the term of each respective franchise agreement. We currently recognize upfront franchise fees
such as initial and renewal fees when the related services have been provided, which is when a store opens for initial fees and
when renewal options become effective for renewal fees. These standards require any unamortized portion of fees received prior
to adoption be presented in our consolidated balance sheet as a contract liability. We are evaluating the effect the adoption
of these standards will have on our future financial reports.
These
standards will also have an impact on transactions currently not included in our revenues and expenses such as franchisee contributions
to and subsequent expenditures from advertising cooperatives that we are required to consolidate and other cost reimbursement
arrangements we have with our franchisees. We do not currently include these contributions and expenditures in our consolidated
statements of operations or cash flows. The new standards will impact the principal/agent determinations in these arrangements
by superseding industry-specific guidance included in current GAAP. When we are the principal in these transactions we will include
the related contributions and expenditures within our consolidated statements of operations and cash flows. As a result
of this change, we expect the increase in both total revenues and total costs and expenses, with no significant impact to net
income.
These
standards will not impact the recognition of our sales-based royalty fees from franchisees, which is generally our largest source
of revenue. We are currently implementing internal controls related to the recognition and presentation of the Company’s
revenues under these new standards.
In
February 2016, the FASB issued ASU 2016-02, Leases, requiring a lessee to recognize on the balance sheet the assets and liabilities
for the rights and obligations created by those leases with a lease term of more than twelve months. Leases will continue to be
classified as either financing or operating, with classification affecting the recognition, measurement and presentation of expenses
and cash flows arising from a lease. This ASU is effective for interim and annual period beginning after December 15, 2018 and
requires a modified retrospective approach to adoption for lessees related to capital and operating leases existing at, or entered
into after, the earliest comparative period presented in the financial statements, with certain practical expedients available.
Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the company’s
consolidated financial statements.
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments. The new guidance is intended to reduce diversity in practice in how transactions are classified in the statement of
cash flows. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December
15, 2017. The adoption of this standard is not expected to have a material impact on the company’s consolidated financial
statements.
In
January 2017, the FASB issued ASU 2017-04,
Intangibles — Goodwill and Other (Topic 350): Simplifying the Accounting for
Goodwill Impairment
, which simplifies the accounting for goodwill impairment. This ASU removes Step 2 of the goodwill impairment
test, which requires hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting
unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The new guidance also requires
disclosure of the amount of goodwill at reporting units with zero or negative carrying amounts. ASU 2017-04 is effective for the
Company beginning January 1, 2020. We elected to early adopt this standard when performing our annual goodwill impairment test
in 2017. The adoption of this ASU did not have a significant financial impact on our consolidated financial statements.
In
May 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting.
This standard provides clarification on when modification accounting should be used for changes to the terms or conditions of
a share-based payment award. This standard does not change the accounting for modifications but clarifies that modification accounting
guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be
required if the changes are considered non-substantive. The amendments in this ASU are effective beginning January 1, 2018, with
early adoption permitted. This ASU is to be applied prospectively on and after the effective date. We adopted this ASU during
2017. The adoption of this ASU did not have a significant financial impact on our consolidated financial statements.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
required.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See
Item 15 of Part IV of this Annual Report on Form 10-K.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There
has been no change of accountants or any disagreements with accountants on any matter of accounting principles or practices, or
financial statement disclosure required to be reported under this item.
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness
of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. The term “disclosure
controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment
in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective
at the reasonable assurance level.
Changes
in Internal Control over Financial Reporting
There
was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d)
and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2017 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
Evaluation
of disclosure controls and procedures
This
annual report does not include a report of management’s assessment regarding internal control over financial reporting or
an attestation report of the company’s registered public accounting firm due to a transition period established by rules
of the Securities and Exchange Commission for newly public companies.
ITEM
9B. OTHER INFORMATION
Nothing
to report.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
Below
is a list of the names and ages, as of December 31, 2017 of our directors and executive officers (the “named executive
officers”), and a description of the business experience of each of them.
Name
|
|
Age
|
|
Position
|
Andrew
A. Wiederhorn
|
|
51
|
|
President
and Chief Executive Officer, Director
|
Ron
Roe
|
|
40
|
|
Senior
Vice President and Chief Financial Officer
|
Donald
J. Berchtold
|
|
72
|
|
President
and Chief Operating Officer, Fatburger
|
Gregg
Nettleton
|
|
61
|
|
President
and Chief Operating Officer, Casual Dining Division
|
Edward
Rensi
|
|
73
|
|
Chairman
of the Board of Directors
|
Marc
L. Holtzman
|
|
57
|
|
Director
|
Squire
Junger
|
|
67
|
|
Director
|
Silvia
Kessel
|
|
72
|
|
Director
|
Jeff
Lotman
|
|
56
|
|
Director
|
James
Neuhauser
|
|
59
|
|
Director
|
Executive
Officers, Key Employees, Directors and Director Nominees
Andrew
A. Wiederhorn
, age 51, has served as a director and President and Chief Executive Officer of FAT Brands Inc. since its formation.
Mr. Wiederhorn has served as the Chairman of the board of directors and Chief Executive Officer of Fatburger North America, Inc.
since 2006 and Buffalo’s Franchise Concepts, Inc. since 2011. He also served as the Chairman of the board of directors and
Chief Executive Officer of Fog Cutter Capital Group Inc. since its formation in 1997. Mr. Wiederhorn previously founded and served
as the Chairman of the board of directors and Chief Executive Officer of Wilshire Financial Services Group Inc. and Wilshire Credit
Corporation. Mr. Wiederhorn received his B.S. degree in Business Administration from the University of Southern California in
1987, with an emphasis in Finance and Entrepreneurship. He previously served on the board of directors of Fabricated Metals, Inc.,
The Boy Scouts of America Cascade Pacific Council, The Boys and Girls Aid Society of Oregon, University of Southern California
Associates, Citizens Crime Commission of Oregon, and Economic Development Council for the City of Beverly Hills Chamber of Commerce.
Mr. Wiederhorn was featured as the Fatburger CEO on the CBS television program “Undercover Boss” in 2013. Mr. Wiederhorn
was selected to our Board of Directors because of his role in our founding and long career in hospitality, and because he possesses
particular knowledge and experience in strategic planning and leadership of complex organizations and hospitality businesses.
Ron
Roe
, age 40, has served as our Chief Financial Officer since 2009, and served as our Vice-President of Finance from 2007 to
2009. Prior to 2007, Mr. Roe was an acquisitions associate for FCCG. He began his career as an investment banking analyst with
Piper Jaffray. Mr. Roe attended UC Berkeley, where he earned a Bachelor of Arts in Economics.
Donald
J. Berchtold
, age 72, served as the President and Chief Operating Officer of Fatburger North America until February
20, 2018, and currently serves as Executive Vice President and Chief Concept Officer. Mr. Berchtold has also served as the
President and Chief Operating Officer of FCCG since 2006, and in various other positions at FCCG prior to 2006. From 1991 to 1999,
Mr. Berchtold served as Senior Vice President of Wilshire Financial Services Group Inc. and its sister company Wilshire Credit
Corporation. Prior to 1990, Mr. Berchtold was the owner-operator of his own business that included a dinner house, catering company
and other food service concepts, and was active in the Restaurants of Oregon Association. Mr. Berchtold holds a BSC degree in
Finance and Marketing from the University of Santa Clara.
Gregg
Nettleton
, age 61, has served as the President and Chief Operating Officer, Casual Dining Division since October 2017. Prior
to joining our company, Mr. Nettleton served as President and Chief Executive Officer of GBS Enterprises, an international management
consulting firm, since 2011. From 2014 to 2016, Mr. Nettleton also concurrently served as the Executive Vice President of Development
of TransX Systems, Inc., an mBaSS mobile platform company, which he developed, positioned and marketed to secure two successful
rounds of funding. From 2004 to 2006, Mr. Nettleton served as a consultant and Board member Black Angus Steakhouses, LLC. From
2002 to 2004, he served as Chief Marketing officer of International House of Pancakes Inc. and received the award for “Turnaround
Chain of the Year” in 2003, and from 2000 to 2001, he served as Interim Chief Marketing Officer of Applebee’s International,
Inc. Mr. Nettleton received his B.S. in Management Science from the State University of New York at Geneseo in Geneseo, New York
and his M.B.A. in Marketing and Sales from Nova University in Ft. Lauderdale, Florida.
Marc
L. Holtzman
, age 57, became a member of the board of directors of FAT Brands Inc. on October 20, 2017. Mr. Holtzman currently
serves as a Chairman of The Bank of Kigali, Rwanda’s largest financial institution, and a director of TeleTech (NASDAQ:
TTEC), the world’s leading provider of analytics-driven technology-enabled services. Following a successful transformation
and sale in July 2017 of Kazkommertsbank (LSE: KKB:LI), Kazakhstan’s largest bank, Mr. Holtzman recently stepped down as
Chief Executive Officer, having joined as Chairman in March 2015. He previously served as Chairman of Meridian Capital HK, a Hong
Kong private equity firm. From 2012 through 2015, he served on the Board of Directors of FTI Consulting, Inc., (NYSE:FCN) a global
financial and strategic consulting firm, and Sistema, Russia’s largest listed private company (London Stock Exchange). Between
2008 and 2012, Mr. Holtzman served as the executive vice chairman of Barclays Capital. From 2006 to 2008, he served as vice chairman
of the investment banking division of ABN AMRO Bank. Between 1989 and 1998, Mr. Holtzman lived and worked in Eastern Europe and
Russia, as co-founder and president of MeesPierson EurAmerica (a firm acquired by ABN AMRO) and as senior adviser to Salomon Brothers.
Mr. Holtzman serves as a director of Sistema JSFC, (LONDON:SSA;GDR), a Russian listed investment company. Between 2003 and 2005,
Mr. Holtzman was President of the University of Denver; and between 1999 and 2003 he served in the Cabinet of Governor Bill Owens
as Colorado’s First Secretary of Technology. Mr. Holtzman holds a B.A. degree in Economics from Lehigh University. Mr. Holtzman
was selected to our Board of Directors because he brings financial experience and possesses particular knowledge and experience
in strategic planning and leadership of complex organizations.
Squire
Junger,
age 67, became a member of the board of directors of FAT Brands Inc. on October 20, 2017. Mr. Junger is a co-founder
and a managing member of Insight Consulting LLC, a management consulting firm based in the Los Angeles area, providing advice
in mergers and acquisitions, corporate divestitures, business integration diagnostics, real estate investment, acquisition, development
and construction and litigation support services. Prior to co-founding Insight in 2003 he was a partner at Arthur Andersen LLP,
which he joined in 1972. Mr. Junger co-developed and managed the west coast Transaction Advisory Services practice at Andersen,
providing comprehensive merger and acquisition consulting services to both financial and strategic buyers and sellers. Mr. Junger
is a certified public accountant in California, and received Bachelor of Science and M.B.A. degrees from Cornell University. Mr.
Junger was selected to our Board of Directors because he brings substantial expertise in financial and strategic planning, mergers
and acquisitions, and leadership of complex organizations.
Silvia
Kessel
, age 72, became a member of the board of directors of FAT Brands Inc. on October 20, 2017. Ms. Kessel is Senior Vice
President, Chief Financial Officer and Treasurer of Metromedia Company. Metromedia Company is a management and investment company
founded by the late John W. Kluge, which manages and invests in a variety of industries, including medical research, restaurants
and outdoor visual displays. Ms. Kessel has served in various executive positions at Metromedia Company and affiliated companies
since 1984. Ms. Kessel has previously served as a director of LDDS Communications Inc. (and its successor) (1993-1996), Orion
Pictures (1993-1997), AboveNet/Metromedia Fiber Network (1997-2001), Big City Radio (1997-2002), and Liquid Audio (1998-2002),
and served on the Board of Governors and Competition Committee of Major League Soccer (1996-2001). Ms. Kessel attended the University
of Miami and received an MBA in Finance from Columbia University. From 1981 to 1988, Ms. Kessel taught Finance at Pace University.
Ms. Kessel was selected to our Board of Directors because she brings substantial expertise in finance, financial and strategic
planning, complex transactions and leadership of complex organizations.
Jeff
Lotman
, age 56, became a member of the board of directors of FAT Brands Inc. on October 20, 2017. Mr. Lotman is the Chief
Executive Officer of Global Icons, LLC, a company which he founded in 1998. Global Icons is a premier brand licensing agency specializing
in the development and extension of corporate brands and trademarks. Prior to launching Global Icons, Mr. Lotman was Chief Operating
Officer for Keystone Foods, a multi-billion dollar manufacturing company that developed and supplied food products for companies
such as McDonald’s and Kraft. Mr. Lotman guided the international expansion of Keystone Foods and established manufacturing
and distribution operations in over a dozen countries. Mr. Lotman has been a featured guest speaker at many leading industry events,
including Entertainment Marketing Conference, Young Presidents’ Organization, SPLICE, Licensing Show, Restaurant Industry
Conference, LA Roadshow, UCLA and others. He has also been profiled numerous times, including in The New York Times, The Los Angeles
Times, The Wall St. Journal, CNBC, and FOX. He is a distinguished member of the Licensing Industry Merchandisers’ Association
(LIMA) and the Licensing Executives Society (LES). Mr. Lotman received a B.A. degree in Business and Marketing from Curry College.
Mr. Lotman was selected to our board of directors because he brings substantial expertise in retail marketing, branding and licensing
opportunities for consumer brands,
James
Neuhauser
, age 59, has served on the board of directors of FAT Brands Inc. since its formation. Mr. Neuhauser is a Senior
Managing Director in the Private Capital Markets Group of Stifel Nicolas & Company. Mr. Neuhauser is also the Managing Member
of Turtlerock Capital, LLC, a company that finances and invests in real estate development projects and he serves as a member
of the board of directors of PHH Corp, a public company (PHH). He previously worked for FBR & Co. for more than 24 years,
including positions as Chief Investment Officer, Head of Investment Banking and Head of the Real Estate and Financial Services
groups in Investment Banking through October 2016. He also served as Head of FBR’s Commitment Committee and was a member
of the firm’s Executive Committee. Prior to joining FBR, Mr. Neuhauser was a Senior Vice President of Trident Financial
Corporation for seven years, where he specialized in managing stock offerings for mutual to stock conversions of thrift institutions.
Before joining Trident, he worked in commercial banking with the Bank of New England. Mr. Neuhauser is a CFA charter holder and
a member of the Society of Financial Analysts. He received a Bachelor of Arts from Brown University and an M.B.A. from the University
of Michigan. Mr. Neuhauser was selected to our Board of Directors because he brings substantial expertise in financial and strategic
planning, investment banking complex financial transactions, mergers and acquisitions, and leadership of complex organizations.
Edward
H. Rensi
, age 73, has served on the board of directors of FAT Brands Inc. since its formation and became Chairman of the Board
on October 20, 2017. Mr. Rensi is the retired president and chief executive officer of McDonald’s USA. Prior to his retirement
in 1997, Mr. Rensi devoted his entire professional career to McDonald’s, joining the company in 1966 as a “grill man”
and part-time manager trainee in Columbus, Ohio. He was promoted to restaurant manager within a year, and went on to hold nearly
every position in the restaurant and field offices, including franchise service positions in Columbus, Ohio and Washington, D.C.
In 1972, he was named Philadelphia district manager, and later became regional manager and regional vice president. In 1978, he
transferred from the field to the company’s home office in Oak Brook, Illinois, as vice president of Operations and Training,
where he was responsible for personnel and product development. In 1980, he became executive vice president and chief operations
officer, and was appointed senior executive vice president in 1982. Mr. Rensi was promoted to president and chief operating office
of McDonald’s USA in 1984. In 1991, he was named chief executive officer. As president and chief executive officer, his
responsibilities included overseeing all domestic company-owned and franchisee operations, in addition to providing direction
relative to sales, profits, operations and service standards, customer satisfaction, product development, personnel, and training.
Mr. Rensi was directly responsible for management of McDonald’s USA, which consisted of eight geographic zones and 40 regional
offices. During his 13-year term as president, McDonald’s experienced phenomenal growth. U.S. sales doubled to more than
$16 billion, the number of the U.S. restaurants grew from nearly 6,600 to more than 12,000, and the number of U.S. franchisees
grew from 1,600 to more than 2,700. Since his retirement, Mr. Rensi has held consulting positions. From January 2014 to July 2015,
Mr. Rensi served as director and interim CEO of Famous Dave’s of America, Inc. Mr. Rensi received his B.S. in Business Education
from Ohio State University in Columbus, Ohio. Mr. Rensi was selected to our Board of Directors because of his long career in hospitality,
and because he possesses particular knowledge and experience in strategic planning and leadership of complex organizations and
hospitality businesses.
Subsequent
to December 31, 2017, we named
Toni M. Bianco
(age 47) as President and Chief Operating Officer of the Company’s
subsidiary, Fatburger North America, Inc. Mr. Bianco succeeds Don Berchtold who will be transitioning to a new role as Executive
Vice President and Chief Concept Officer for FAT Brands, where he will assist in the development of innovative concept designs
across the Company’s portfolio. Mr. Bianco has extensive experience in international franchising and restaurant development.
Prior to joining the Company, Mr. Bianco served as Chief Operations Officer and SVP International/IT of Long John Silver’s
LLC since 2015. Prior to that, Mr. Bianco was employed by PAPA JOHN’S International, where he served as Vice President Asia
from 2014 to 2015; Senior Director International R&D/QA from 2009 to 2014; and Franchise Business Director from 2002 to 2009.
Mr. Bianco received a Bachelor of Arts degree in English Literature and Education from Abilene Christian University, Abilene,
TX.
Family
Relationships
Donald
Berchtold is the former father-in-law of our Chief Executive Officer, Andrew Wiederhorn.
Section
16(a) Beneficial Ownership Reporting Compliance
Based
solely on a review of Forms 3, 4 and 5 and amendments thereto furnished to us for the year ended December 31, 2017, our directors,
officers, or beneficial owners of more than 10% of our common stock timely furnished reports on all Forms 3, 4 and 5, except that
(i) Ron Roe filed one late Form 3 reporting a stock option grant received on October 23, 2017; (ii) Gregg Nettleton filed a late
Form 3 reporting a stock option grant received on October 23, 2017; (iii) Marc L. Holtzman filed a late Form 3 reporting a stock
purchase on October 20, 2017 and a stock option grant received on October 23, 2017; (iv) Squire Junger filed one late Form 4 reporting
a stock purchase on October 20, 2017; Silvia Kessel filed a late Form 3 reporting a stock purchase on October 20, 2017 and a stock
option grant received on October 23, 2017; Jeff Lotman filed a late Form 3 reporting a stock purchase on October 20, 2017 and
a stock option grant received on October 23, 2017; and Edward Rensi filed two late Forms 4 reporting stock purchases made by his
spouse on October 23, 2017 and November 9, 2017, respectively.
Code
of Ethics
We
have adopted a written code of business ethics that applies to our directors, officers and employees, including our principal
executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.
We have posted a current copy of the code under the Corporate Governance section of our website at https://ir.fatbrands.com
.
In addition, we intend to post on our website all disclosures that are required by law or the NASDAQ listing standards concerning
any amendments to, or waivers from, any provision of the code.
Audit
Committee
The
audit committee is responsible for, among other matters:
|
●
|
appointing,
compensating, retaining, evaluating, terminating and overseeing our independent registered public accounting firm;
|
|
●
|
discussing
with our independent registered public accounting firm their independence from management;
|
|
●
|
reviewing
with our independent registered public accounting firm the scope and results of their audit;
|
|
●
|
approving
all audit and permissible non-audit services to be performed by our independent registered public accounting firm;
|
|
●
|
overseeing
the financial reporting process and discussing with management and our independent registered public accounting firm the interim
and annual financial statements that we file with the SEC;
|
|
●
|
reviewing
and monitoring our accounting principles, accounting policies, financial and accounting controls and compliance with legal
and regulatory requirements; and
|
|
●
|
establishing
procedures for the confidential anonymous submission of concerns regarding questionable accounting, internal controls or auditing
matters.
|
Our
audit committee is comprised of Mr. Junger, Ms. Kessel and Mr. Neuhauser, with Mr. Neuhauser serving as the chair. Our board of
directors has affirmatively determined that each member of the audit committee meets the definition of “independent director”
for purposes of serving on an audit committee under Rule 10A-3 and NASDAQ rules. In addition, our board of directors has determined
that each of Ms. Kessel and Mr. Neuhauser qualifies as an “audit committee financial expert,” as such term is defined
in Item 407(d)(5) of Regulation S-K.
The
board of directors adopted a charter for the Audit Committee on October 19, 2017. A copy of the Audit Committee charter is available
in the Corporate Governance section of our website at https://ir.fatbrands.com. The Audit Committee engaged Hutchinson and Bloodgood
LLP, Glendale, California, as our independent registered public accounting firm on April 11, 2017.
ITEM
11. EXECUTIVE COMPENSATION
SUMMARY
COMPENSATION TABLE
Name
and Principal Position
|
|
Year
|
|
|
Salary(1)
|
|
|
Bonus
|
|
|
Stock
Awards
|
|
|
Option
Awards (2)
|
|
|
Non-Equity
Incentive Plan Compensation
|
|
|
Nonqualified
Deferred Compensation Earnings
|
|
|
All
Other Compensation
|
|
|
Total
|
|
Andrew
A. Wiederhorn,
|
|
|
2017
|
|
|
$
|
251,147
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
3,621
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
254,768
|
|
Chief
Executive Officer
|
|
|
2016
|
|
|
|
199,165
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
199,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ron
Roe,
|
|
|
2017
|
|
|
|
161,462
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,621
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
165,083
|
|
Chief
Financial Officer
|
|
|
2016
|
|
|
|
112,030
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
112,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gregg
Nettleton,
|
|
|
2017
|
|
|
|
53,846
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,621
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
57,467
|
|
President
– Casual Dining Division (3)
|
|
|
2016
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Donald
J. Berchtold,
|
|
|
2017
|
|
|
|
251,147
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,621
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
254,768
|
|
President
- Fatburger
|
|
|
2016
|
|
|
|
199,165
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
199,165
|
|
Explanatory
Notes:
(1)
Reflects the dollar amount recognized for financial statement reporting purposes for salary paid or accrued on behalf of the named
executives for the full fiscal years ended December 31, 2017 and December 25, 2016, including amounts relating to predecessor
entities Fatburger and Buffalo’s prior to being contributed as subsidiaries of the Company.
(2)
Reflects the dollar amount recognized for financial statement reporting purposes for the fiscal year ended December 31, 2017,
in accordance with ASC 718 of awards pursuant to the Stock Option Plan. Assumptions used in the calculation of this amount for
fiscal years ended December 31, 2017 are included in footnote 12 to the Company’s audited consolidated financial statements
for the fiscal year ended December 31, 2017, included in Part IV of this Annual Report on Form 10-K.
(3)
Mr. Nettleton became an employee of the Company in 2017.
Executive
Employment Agreements
There
are no employment agreements between the Company and any of its employees.
OUTSTANDING
EQUITY AWARDS AT FISCAL 2017 YEAR END
The
following table summarizes the outstanding equity award holdings of our named executive officers as of December 31, 2017.
|
|
Option
Awards
|
|
|
Stock
Awards
|
|
Name
|
|
Number
of Securities Underlying Unexercised Options (#) Exercisable
|
|
|
Number
of Securities Underlying Unexercised Options (#) Unexercisable
|
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)
|
|
|
Option
Exercise Price($)
|
|
|
Option
Expiration Date
|
|
|
Number
of Shares or Units of Stock That Have Not Vested (#)
|
|
|
Market
Value of Shares or Units of Stock That Have Not Vested($)
|
|
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested(#)
|
|
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested($)
|
|
Andrew
A. Wiederhorn, Chief Executive Officer
|
|
|
-
|
|
|
|
15,000
|
|
|
|
-
|
|
|
$
|
12.00
|
|
|
|
10/19/2027
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Ron
Roe, Chief Financial Officer
|
|
|
-
|
|
|
|
15,000
|
|
|
|
-
|
|
|
|
12.00
|
|
|
|
10/19/2027
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gregg
Nettleton, President – Buffalo’s
|
|
|
-
|
|
|
|
15,000
|
|
|
|
-
|
|
|
|
12.00
|
|
|
|
10/19/2027
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Donald
J. Berchtold, President-Fatburger
|
|
|
-
|
|
|
|
15,000
|
|
|
|
-
|
|
|
|
12.00
|
|
|
|
10/19/2027
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Explanatory
Notes:
Option
Exercises and Stock Vested
None
of the named executives acquired shares of the Company’s stock through exercise of options during the year ended December
31, 2017.
DIRECTOR
COMPENSATION
The
Company uses a combination of cash and stock-based incentive compensation to attract and retain qualified candidates to serve
on the board of directors. In setting director compensation, the Company considers the significant amount of time that our directors
expend in fulfilling their duties to the Company as well as the skill-level required by the Company of members of the board of
directors.
Effective
October 20, 2017, we pay each non-employee director serving on our Board of Directors $40,000 in annual cash compensation, plus
an annual equity award of 15,000 stock options or SAR’s. To the extent that any non-employee director serves on one or more
committees of our Board of Directors, we pay an additional $20,000 in cash compensation annually.
The
terms of the equity award described above are set forth in the 2017 Omnibus Equity Incentive Plan (the “Plan”). The
Plan is a comprehensive incentive compensation plan under which we can grant equity-based and other incentive awards to officers,
employees and directors of, and consultants and advisers to, FAT Brands and its subsidiaries. The Plan provides for a maximum
of 1,000,000 shares available for grant. The Plan is administered by the Compensation Committee of the Board of Directors.
The
non-employee director compensation policy (including the compensation described above) may be amended, modified or terminated
by our Board of Directors at any time in its sole discretion.
The
following table sets forth a summary of the compensation we paid or accrued to our non-employee directors during 2017:
Name
|
|
Fees
Earned
or Paid
in Cash
($)(1) (2)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)(3)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
|
Change
in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings
($)
|
|
|
All
Other
Compensation
($)
|
|
|
Total
($)
|
|
Edward
Rensi
|
|
$
|
15,000
|
|
|
$
|
—
|
|
|
$
|
3,621
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,621
|
|
Marc
L. Holtzman
|
|
$
|
15,000
|
|
|
$
|
—
|
|
|
$
|
3,621
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,621
|
|
Squire
Junger
|
|
$
|
15,000
|
|
|
$
|
—
|
|
|
$
|
3,621
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,621
|
|
Silvia
Kessel
|
|
$
|
15,000
|
|
|
$
|
—
|
|
|
$
|
3,621
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,621
|
|
Jeff
Lotman
|
|
$
|
15,000
|
|
|
$
|
—
|
|
|
$
|
3,621
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,621
|
|
James
Neuhauser
|
|
$
|
15,000
|
|
|
$
|
—
|
|
|
$
|
3,621
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,621
|
|
Explanatory
Notes:
(1)
|
Mr.
Rensi and Mr. Lotman serve on the Nominating Committee. Mr. Holtzman serves on the Compensation Committee and the Nominating
Committee. Mr. Neuhauser serves on the Compensation Committee and the Audit Committee. Ms. Kessel and Mr. Junger serve on
the Audit Committee.
|
|
|
(2)
|
All
director fees were accrued but unpaid during 2017 for each director.
|
|
|
(3)
|
Reflects
the dollar amount recognized for financial statement reporting purposes for the fiscal year ended December 31, 2017 of awards
pursuant to the Plan. Assumptions used in the calculation of this amount for fiscal year ended December 31, 2017 are included
in footnote 12 to the Company’s audited financial statements, included in Part IV of the Company’s Annual Report
on Form 10-K. During 2017, each director was granted options to purchase 15,000 shares of common stock with
a grant date option fair value of $35,550.
|
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
PRINCIPAL
STOCKHOLDERS
The
following table sets forth information with respect to the beneficial ownership of our Common Stock as of March 1, 2018:
|
●
|
each
person known by us to beneficially own more than 5% of our Common Stock;
|
|
●
|
each
of our directors;
|
|
●
|
each
of our named executive officers; and
|
|
●
|
all
of our executive officers and directors as a group.
|
The
number of shares beneficially owned by each stockholder is determined under rules issued by the SEC and includes voting or investment
power with respect to securities. Under these rules, beneficial ownership includes any shares as to which the individual or entity
has sole or shared voting power or investment power. In computing the number of shares beneficially owned by an individual or
entity and the percentage ownership of that person, shares of common stock subject to options, or other rights, including the
redemption right described above, held by such person that are currently exercisable or will become exercisable within 60 days
of the effective date of the disclosure, are considered outstanding, although these shares are not considered outstanding for
purposes of computing the percentage ownership of any other person. Unless otherwise indicated, the address of all listed stockholders
is c/o FAT Brands Inc., 9720 Wilshire Blvd., Suite 500, Beverly Hills, California 90212. Each of the stockholders listed has sole
voting and investment power with respect to the shares beneficially owned by the stockholder unless noted otherwise, subject to
community property laws where applicable.
|
|
Shares
of Common Stock
Beneficially Owned
|
|
Name
of beneficial owner
|
|
Number
|
|
|
Percentage
(3)
|
|
5%
Stockholders
|
|
|
|
|
|
|
|
|
Fog
Cutter Capital Group Inc.
|
|
|
8,000,000
|
|
|
|
80
|
%
|
Named
Executive Officers and Directors
|
|
|
|
|
|
|
|
|
Andrew
A. Wiederhorn
|
|
|
0
|
(1)(2)
|
|
|
*
|
|
Ron
Roe
|
|
|
0
|
(2)
|
|
|
*
|
|
Donald
J. Berchtold
|
|
|
0
|
(2)
|
|
|
*
|
|
Gregg
Nettleton
|
|
|
0
|
(2)
|
|
|
*
|
|
Marc
L. Holtzman
|
|
|
4,000
|
(2)
|
|
|
*
|
|
Squire
Junger
|
|
|
1,500
|
(2)
|
|
|
*
|
|
Silvia
Kessel
|
|
|
2,000
|
(2)
|
|
|
*
|
|
Jeff
Lotman
|
|
|
15,000
|
(2)
|
|
|
*
|
|
James
Neuhauser
|
|
|
0
|
(2)
|
|
|
*
|
|
Edward
Rensi
|
|
|
402
|
(2)(3)
|
|
|
*
|
|
All
directors and executive officers as a group (ten persons)
|
|
|
22,902
|
|
|
|
0
|
%
|
(1)
|
Mr.
Wiederhorn beneficially owns 38.2% of FCCG, and disclaims beneficial ownership of the Company held by FCCG except to the extent
of his pecuniary interest in FCCG.
|
(2)
|
Does
not include non-vested options to purchase 15,000 shares of the Company’s common stock.
|
(3)
|
Includes
402 shares owned by Mr. Rensi’s spouse.
|
*
Represents beneficial ownership of less than 1%.
Equity
Compensation Plan Information
Please
see the information provided under the heading “Equity Compensation Plan Information” in Item 5. MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES included in this Annual Report on Form 10-K
for the year ended December 31, 2017.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Review
and Approval of Related Person Transactions
We
have adopted, by resolution of our Board of Directors, a policy that any transactions between us and any of our affiliates or
related parties, including our executive officers, directors, shareholders who own 5% or more of our common stock, the family
members of those individuals and any of their affiliates, must (1) be approved by a majority of the members of the Board of Directors
and by a majority of the disinterested members of the Board of Directors and (2) be on terms no less favorable to us than could
be obtained from unaffiliated third parties.
Reportable
Related Person Transactions
Other
than the transactions described elsewhere in this Annual Report on Form 10-K between the Company and FCCG, since January
1, 2017, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were
or will be a party:
|
●
|
in
which the amount involved exceeds $120,000; and
|
|
●
|
in
which any director, executive officer, shareholder who beneficially owns 5% or more of our common stock or any member of their
immediate family had or will have a direct or indirect material interest.
|
Director
Independence
The
board has determined that each of the directors, except Mr. Wiederhorn, is independent within the meaning of the applicable rules
and regulations of the Securities and Exchange Commission (“SEC”) and the director independence standards of The NASDAQ
Stock Market, Inc. (“NASDAQ”), as currently in effect. Furthermore, the board has determined that each of the members
of each of the committees of the board is “independent” under the applicable rules and regulations of the SEC and
the director independence standards of NASDAQ, as currently in effect.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Hutchinson
and Bloodgood LLP, Glendale, California, currently serves as our independent registered public accounting firm. The aggregate
accounting fees for the years ended December 31, 2017 are as follows (dollars in thousands):
|
|
December
31, 2017
|
|
Audit
fees
|
|
$
|
205
|
|
Audit
related fees
|
|
$
|
95
|
|
Tax
fees
|
|
$
|
7
|
|
Audit
Committee Pre-Approval Policies and Procedures.
The Audit Committee reviews the independence of our independent registered
public accounting firm on an annual basis and has determined that Hutchinson and Bloodgood LLP is independent. In addition, the
Audit Committee pre-approves all work and fees that are performed by our independent registered public accounting firm.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FAT
Brands Inc.
|
|
|
|
Audited
Financial Statements
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
Consolidated
Balance Sheet as of December 31, 2017
|
F-3
|
Consolidated
Statement of Operations for the period beginning March 21,2017 (inception) and ending December 31, 2017
|
F-4
|
Consolidated
Statement of Changes in Stockholders’ Equity for the period beginning March 21, 2017 and ending December 31, 2017
|
F-5
|
Consolidated
Statement of Cash Flows for the period beginning March 21,2017 (inception) and ending December 31, 2017
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-7
|
|
|
Schedule
II – Valuation and Qualifying Accounts
|
F-18
|
|
|
Fatburger
North America, Inc.
|
|
|
|
Audited
Interim Financial Statements
|
|
Report
of Independent Registered Public Accounting Firm
|
F-19
|
Balance
Sheet as of October
19, 2017
|
F-20
|
Statement
of Income for the period beginning December 26, 2016 and ending October 19, 2017
|
F-21
|
Statement
of Changes in Stockholder’s Equity for the period beginning December 26, 2016 and ending October 19, 2017
|
F-22
|
Statement
of Cash Flows for the period beginning December 26, 2016 and ending October 19,2017
|
F-23
|
Notes
to Consolidated Financial Statements
|
F-24
|
|
|
Audited
Financial Statements
|
|
Report
of Independent Registered Public Accounting Firm
|
F-30
|
Balance
Sheets as of December 25, 2016 and December 27, 2015
|
F-31
|
Statements
of Income for the years ended December 25, 2016 and December 27, 2015
|
F-32
|
Statements
of Changes in Stockholder’s Equity for the years ended December 25, 2016 and December 27, 2015
|
F-33
|
Statements
of Cash Flows for the years ended December 25, 2016 and December 27, 2015
|
F-34
|
Notes
to Financial Statements
|
F-35
|
|
|
Buffalo’s
Franchise Concepts, Inc.
|
|
|
|
Audited
Interim Financial Statements
|
|
Report
of Independent Registered Public Accounting Firm
|
F-41
|
Consolidated
Balance Sheet as of October
19, 2017
|
F-42
|
Consolidated
Statement of Income for the period beginning December 26, 2016 and ending October 19, 2017
|
F-43
|
Consolidated
Statement of Changes in Stockholder’s Equity for the period beginning December 26, 2016 and ending October 19, 2017
|
F-44
|
Consolidated
Statement of Cash Flows for the period beginning December 26, 2016 and ending October
19,2017
|
F-45
|
Notes
to Consolidated Financial Statements
|
F-46
|
|
|
Audited
Financial Statements
|
|
Report
of Independent Registered Public Accounting Firm
|
F-51
|
Consolidated
Balance Sheets as of December 25, 2016 and December 27, 2015
|
F-52
|
Consolidated
Statements of Operations for the years ended December 25, 2016 and December 27, 2015
|
F-53
|
Consolidated
Statements of Changes in Stockholder’s Equity for the years ended December 25, 2016 and December 27, 2015
|
F-54
|
Consolidated
Statements of Cash Flows for the years ended December 25, 2016 and December 27, 2015
|
F-55
|
Notes
to Consolidated Financial Statements
|
F-56
|
|
(b)
|
Exhibits
-
See Exhibit Index immediately following the signature pages.
|
Report
of Independent Registered Public Accounting Firm
Stockholders
and Board of Directors
FAT Brands
Inc.
Beverly
Hills, California
Opinion
on the Consolidated Financial Statements
We
have audited the accompanying consolidated balance sheet of FAT Brands Inc. (the “Company”) and subsidiaries
as of December 31, 2017, and the related consolidated statements of operations, stockholders’ equity, and cash flows for
the period March 21, 2017 (inception) through December 31, 2017, and the related notes to the financial statements (collectively,
the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company and its subsidiaries as of December 31, 2017,
and the results of their operations and their cash flows for the period March 21, 2017 (inception) through December 31, 2017 in
conformity with accounting principles generally accepted in the United States of America.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with
respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
Supplemental
Information
The
supplementary information contained in Schedule II (the Supplemental Information) has been subjected to audit procedures performed
in conjunction with the audit of the Company’s consolidated financial statements. The Supplemental Information is the responsibility
of the Company’s management. Our audit procedures included determining whether the Supplemental Information reconciles to
the consolidated financial statements or the underlying accounting and other records, as applicable, and performing procedures
to test the completeness and accuracy of the information presented in the Supplemental Information. In forming our opinion on
the Supplemental Information, we evaluated whether the Supplemental Information, including its form and content, is presented
in conformity with Rule 17a-5 under the Securities Exchange Act of 1934. In our opinion, the supplementary information contained
in Schedule II is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole.
/
s/
Hutchinson and Bloodgood LLP
We,
or a firm acquired by us in 2012, have continuously served as auditor for the two predecessors of the Company since 2007 and 2011,
respectively.
Glendale,
California
April
2
, 2018
FAT
BRANDS INC.
CONSOLIDATED
BALANCE SHEET
(dollars
in thousands, except share data)
|
|
December
31, 2017
|
|
Assets
|
|
|
|
|
Current
Assets
|
|
|
|
|
Cash
|
|
$
|
32
|
|
Accounts
receivable, net of allowance for $679 for doubtful accounts
|
|
|
918
|
|
Trade
notes receivable, net of allowance of $17 for doubtful accounts
|
|
|
77
|
|
Other
current assets
|
|
|
153
|
|
Total
current assets
|
|
|
1,180
|
|
|
|
|
|
|
Trade
notes receivable – noncurrent, net of allowance of $17 for doubtful accounts
|
|
|
346
|
|
Due
from affiliates
|
|
|
7,963
|
|
Deferred
income taxes
|
|
|
937
|
|
Intangible
assets, net
|
|
|
11,011
|
|
Goodwill
|
|
|
7,356
|
|
Other
assets
|
|
|
7
|
|
Buffalo’s
creative and advertising fund
|
|
|
436
|
|
Total
assets
|
|
$
|
29,236
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
Liabilities
|
|
|
|
|
Accounts
payable
|
|
$
|
2,439
|
|
Deferred
income
|
|
|
1,772
|
|
Accrued
expenses
|
|
|
1,761
|
|
Accrued
advertising
|
|
|
348
|
|
Accrued
interest payable to FCCG
|
|
|
405
|
|
Total
current liabilities
|
|
|
6,725
|
|
|
|
|
|
|
Deferred income
|
|
|
1,941
|
|
Notes payable
to FCCG
|
|
|
18,125
|
|
Buffalo’s
creative and advertising fund-contra
|
|
|
436
|
|
Total
liabilities
|
|
|
27,227
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
-
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
Common stock,
$.0001 par value; 25,000,000 shares authorized; 10,000,000 shares issued and outstanding
|
|
|
2,622
|
|
Accumulated
deficit
|
|
|
(613
|
)
|
Total
stockholders’ equity
|
|
|
2,009
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
29,236
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
FAT
BRANDS INC.
CONSOLIDATED
STATEMENT OF OPERATIONS
(dollars
in thousands, except share data)
For
the period beginning March 21, 2017 (inception) through December 31, 2017
Revenue
|
|
|
|
|
Royalties
|
|
$
|
2,023
|
|
Franchise
fees
|
|
|
140
|
|
Management
fees
|
|
|
10
|
|
Total
revenue
|
|
|
2,173
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
|
|
Compensation
and employee benefits
|
|
|
1,337
|
|
Travel
and entertainment
|
|
|
110
|
|
Professional
fees
|
|
|
117
|
|
Other
|
|
|
559
|
|
Total
general and administrative expenses
|
|
|
2,123
|
|
|
|
|
|
|
Income
from operations
|
|
|
50
|
|
|
|
|
|
|
Non-operating
income (expense)
|
|
|
|
|
Interest
Income
|
|
|
200
|
|
Interest
expense
|
|
|
(405
|
)
|
Other
income (expense), net
|
|
|
(51
|
)
|
Total
non-operating income (expense)
|
|
|
(256
|
)
|
|
|
|
|
|
Loss
before taxes
|
|
|
(206
|
)
|
|
|
|
|
|
Income
tax expense
|
|
|
407
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(613
|
)
|
|
|
|
|
|
Basic
loss per share
|
|
$
|
(0.07
|
)
|
Basic
weighted average shares outstanding
|
|
|
8,505,263
|
|
Diluted
loss per share
|
|
$
|
(0.07
|
)
|
Diluted
weighted average shares outstanding
|
|
|
8,505,263
|
|
Dividends
declared per share
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
FAT
BRANDS INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
(
dollars
in thousands, except share data)
|
|
|
Common
Stock
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 21, 2017 (inception)
|
|
|
100
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward
split of common stock
|
|
|
7,999,900
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
shares
|
|
|
2,000,000
|
|
|
|
20,930
|
|
|
|
-
|
|
|
|
20,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
to FCCG in excess of historical cost basis of assets received
|
|
|
-
|
|
|
|
(18,397
|
)
|
|
|
-
|
|
|
|
(18,397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
(613
|
)
|
|
|
(613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
89
|
|
|
|
-
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2017
|
|
|
10,000,000
|
|
|
$
|
2,622
|
|
|
$
|
(613
|
)
|
|
$
|
2,009
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
FAT
BRANDS INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
(dollars
in thousands)
For
the period beginning March 21, 2017 (inception) through December 31, 2017
Cash
flows from operating activities
|
|
|
|
|
Net
loss
|
|
$
|
(613
|
)
|
Adjustments
to reconcile net loss to net cash provided by operations:
|
|
|
|
|
Deferred
income taxes
|
|
|
232
|
|
Provision
for bad debts
|
|
|
124
|
|
Depreciation
and amortization
|
|
|
23
|
|
Share-based
compensation
|
|
|
89
|
|
Change
in:
|
|
|
|
|
Accounts
receivable
|
|
|
(221
|
)
|
Trade
notes receivable
|
|
|
8
|
|
Prepaid
expenses
|
|
|
(145
|
)
|
Accounts
payables
|
|
|
808
|
|
Accrued
expense
|
|
|
796
|
|
Accrued
advertising
|
|
|
43
|
|
Accrued
interest payable to FCCG
|
|
|
405
|
|
Deferred
income
|
|
|
(50
|
)
|
Total
adjustments
|
|
|
2,112
|
|
Net
cash provided by operating activities
|
|
|
1,499
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
Investment
in subsidiary, net of cash acquired
|
|
|
(10,515
|
)
|
Increase
in other assets
|
|
|
(7
|
)
|
Net
cash used in investing activities
|
|
|
(10,522
|
)
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
Repayments
of loans from FCCG
|
|
|
(11,875
|
)
|
Proceeds
from issuance of common stock from initial public offering,
net of issuance costs
|
|
|
20,930
|
|
Net
cash provided by financing activities
|
|
|
9,055
|
|
|
|
|
|
|
Net
increase in cash
|
|
|
32
|
|
Cash
at beginning of year
|
|
|
-
|
|
Cash
at end of year
|
|
$
|
32
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
Cash
paid for interest
|
|
$
|
-
|
|
Cash
paid for income taxes
|
|
$
|
17
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash financing and investing activities:
|
|
|
|
|
Note
payable issued in exchange for contributed subsidiaries
|
|
$
|
30,000
|
|
Net
non-cash assets received from FCCG
|
|
$
|
11,568
|
|
Income
taxes payable offset against amounts due from affiliates
|
|
$
|
134
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – ORGANIZATION AND RELATIONSHIPS
FAT
Brands Inc. (the “Company”) was formed on March 21, 2017 as a wholly owned subsidiary of Fog Cutter Capital Group
Inc. (“
FCCG
”). On October 20, 2017, the Company completed an initial public offering and issued additional
shares of common stock representing 20 percent of its ownership (the “
Offering
”). The net proceeds of the Offering
were approximately $20,930,000 after deducting the selling agent fees and offering expenses. The Company’s common stock
trades on the Nasdaq Capital Market under the symbol “FAT.”
Concurrent
with the Offering, two subsidiaries of FCCG, Fatburger North America, Inc. (“
Fatburger
”) and Buffalo’s
Franchise Concepts, Inc. (“
Buffalo’s
”) were contributed to the Company by FCCG in exchange for a $30,000,000
note payable (the “Related Party Debt”). FCCG also contributed the newly acquired operating subsidiaries of Homestyle
Dining LLC: Ponderosa Franchising Company, Bonanza Restaurant Company, Ponderosa International Development, Inc. and Puerto Rico
Ponderosa, Inc. (collectively, “
Ponderosa
”). These subsidiaries conduct the worldwide franchising of the Ponderosa
Steakhouse Restaurants and the Bonanza Steakhouse Restaurants. The Company provided $10,550,000 of the net proceeds from the Offering
to FCCG to consummate the acquisition of Homestyle Dining LLC.
At
December 31, 2017, certain Company officers and directors controlled, directly or indirectly, a significant voting majority of
the Company.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of operations
– FAT Brands Inc. is a multi-brand franchising company specializing in fast casual restaurant concepts
around the world through its subsidiaries: Fatburger, Buffalo’s and Ponderosa.
Fatburger
franchises and licenses the right to use the Fatburger name and provides franchisees with operating procedures and methods of
merchandising. The restaurants serve a variety of freshly made-to-order Fatburgers, Turkeyburgers, Chicken Sandwiches, Veggieburgers,
French fries, onion rings, soft-drinks and milkshakes. Upon signing a franchise agreement, the Company is committed to provide
training, some supervision and assistance, and access to operations manuals. As needed, the Company will also provide advice and
written materials concerning techniques of managing and operating the restaurants. The franchises are operated under the name
“Fatburger.”
Buffalo’s
grants store franchise and development agreements for the operation of casual dining restaurants (Buffalo’s Southwest Cafés)
and quick service restaurants outlets (Buffalo’s Express). The restaurants specialize in the sale of Buffalo-Style chicken
wings, chicken tenders, burgers, ribs, wrap sandwiches, and salads. Franchisees are licensed to use the Company’s trade
name, service marks, trademarks, logos, and unique methods of food preparation and presentation.
Ponderosa
and Bonanza Steakhouses offer guests a high-quality buffet and broad array of great tasting, affordably-priced steak, chicken
and seafood entrées. Buffets at Ponderosa and Bonanza Steakhouses feature a large variety of all you can eat salads, soups,
appetizers, vegetables, breads, hot main courses and desserts. Bonanza Steak & BBQ operates full service steakhouses with
fresh farm-to-table salad bar, including a menu showcase of USDA flame-grilled steaks, house-smoked BBQ and contemporized interpretations
of traditional American classics.
The
Company also co-brands its franchise concepts. These co-branded restaurants sell products of multiple affiliated brands and share
back-of-the-house facilities.
Principles
of consolidation
– The accompanying consolidated financial statements include the accounts of the Company from its formation
on March 21, 2017 through December 31, 2017. The operations of Fatburger, Buffalo’s and Ponderosa are included in the consolidated
financial statements beginning October 20, 2017, the date of their contribution by FCCG. Intercompany accounts have been eliminated
in consolidation.
Use
of estimates in the preparation of the consolidated financial statements
– The preparation of the 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 consolidated financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates include the determination of fair values of certain financial instruments for which
there is no active market, the allocation of basis between assets sold and retained, and valuation allowances for notes receivable
and accounts receivable. Estimates and assumptions also affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Franchise
revenue
– Franchise fee revenue from the sale of individual franchises is recognized only when all material services
or conditions relating to the sales have been substantially performed or satisfied. The completion of training and the opening
of a location by the franchisee constitute substantial performance on the part of the Company. Non-refundable deposits collected
in relation to the sale of franchises are recorded as deferred franchise fees until the completion of training and the opening
of the restaurant, at which time the franchise fee revenue is recognized. In addition to franchise fee revenue, the Company collects
a royalty ranging from 3% to 6% of gross sales from restaurants operated by franchisees. Royalty fees are recorded as revenue
as the related sales are made by the franchisees. Costs relating to continuing franchise support are expensed as incurred.
The
Company operates on a 52-week calendar and its fiscal year ends on the Sunday closest to December 31. Consistent with the industry,
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. Accordingly,
the accompanying consolidated financial statements reflect a fiscal year end of December 31, 2017. The use of this fiscal year
means a 53
rd
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.
Advertising
–
The Company requires advertising payments based on a percent of net sales from franchisees. The Company also receives,
from time to time, payments from vendors that are to be used for advertising. Since advertising funds collected are required to
be spent for specific advertising purposes, no revenue or expense is recorded for advertising funds. For Fatburger and Ponderosa,
cumulative advertising expenditures in excess of collections are recorded as current assets and will be reimbursed by future advertising
payments from franchises. Buffalo’s acts in a fiduciary role to collect and disburse advertising funds through the Buffalo’s
Creative and Advertising Fund. As a result, no revenue or expense is recorded by Buffalo’s and the balance of the Fund is
recorded as an asset by Buffalo’s with the offsetting advertising obligation recorded as a liability, Buffalo’s Creative
and Advertising Fund - Contra.
Goodwill
and other intangible assets
– Intangible assets are stated at the estimated fair value at the date of acquisition and
include goodwill, trademarks, and franchise agreements. Goodwill and other intangible assets with indefinite lives, such as trademark,
are not amortized but are reviewed for impairment annually or more frequently if indicators arise. All other intangible assets
are amortized over their estimated weighted average useful lives, which range from nine to twenty-five years. Management assesses
potential impairments to intangible assets at least annually, or when there is evidence that events or changes in circumstances
indicate that the carrying amount of an asset may not be recovered. Judgments regarding the existence of impairment indicators
and future cash flows related to intangible assets are based on operational performance of the acquired businesses, market conditions
and other factors.
Accounts
receivable
– Accounts receivable are recorded at the invoiced amount and are stated net of an allowance for doubtful
accounts. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in
the existing accounts receivable. The allowance is based on historical collection data and current franchisee information. Account
balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery
is considered remote.
Trade
notes receivable – Trade
notes receivable are created when an agreement to settle a delinquent franchisee receivable
account is reached and the entire balance is not immediately paid. Generally, trade notes receivable 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%
to 7.5%. Reserve amounts on the notes are established based on the likelihood of collection.
Share-based
compensation
– The Company has a non-qualified stock option plan which provides for options to purchase shares of the
Company’s common stock. Options issued under the plan may have a variety of terms as determined by the Board of Directors
including the option term, the exercise price and the vesting period. Options granted to employees and directors are valued at
the date of grant and recognized as an expense over the vesting period in which the options are earned. Cancellations or forfeitures
are accounted for as they occur. Stock options issued to non-employees as compensation for services are accounted for based upon
the estimated fair value of the stock option. The Company recognizes this expense over the period in which the services are provided.
Management utilizes the Black-Scholes option-pricing model to determine the fair value of the stock options issued by the Company.
See Note 12 for more details on the Company’s share-based compensation.
Income
taxes
– Effective October 20, 2017, the Company entered into a Tax Sharing Agreement with FCCG that provides that FCCG
will, to the extent permitted by applicable law, file consolidated federal, California and Oregon (and possibly other jurisdictions
where revenue is generated, at FCCG’s election) income tax returns with the Company and its subsidiaries. The Company will
pay FCCG the amount that its tax liability would have been had it filed a separate return. As such, the Company accounts for income
taxes as if it filed separately from FCCG.
The
Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities
are determined based on the differences between financial reporting and tax reporting bases of assets and liabilities and are
measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Realization
of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain.
We
utilize a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will
be sustained upon tax authority examination, including resolution of related appeals or litigation processes, if any. The second
step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon the ultimate settlement.
Earnings
per share
– The Company reports basic earnings per share in accordance with FASB ASC 260, “Earnings Per Share”.
Basic earnings per share is computed using the weighted average number of common shares outstanding during the reporting
period. Diluted earnings per share is computed using the weighted average number of common shares outstanding plus the effect
of dilutive securities during the reporting period. All outstanding stock options and warrants to purchase common stock were excluded
from the computation of diluted net loss per share for the period presented because none of those instruments currently have
exercise prices below the market price of the shares.
NOTE
3 – RECENTLY ISSUED ACCOUNTING STANDARDS
In
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue From Contracts
With Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the
transfer of promised goods and services to customers. The updated standard will replace most existing revenue recognition guidance
in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect
transition method. These standards are effective for the Company in our first quarter of 2018 and will be adopted using the modified
retrospective method.
These
standards require that the transaction price received from customers be allocated to each separate and distinct performance obligation.
The transaction price attributable to each separate and distinct performance obligation is then recognized as the performance
obligations are satisfied. The services provided by the Company related to upfront fees received from franchisees such as initial
or renewal fees do not currently contain separate and distinct performance obligations from the franchise right and thus those
upfront fees will be recognized as revenue over the term of each respective franchise agreement. We currently recognize upfront
franchise fees such as initial and renewal fees when the related services have been provided, which is when a store opens for
initial fees and when renewal options become effective for renewal fees. These standards require any unamortized portion of fees
received prior to adoption be presented in the consolidated balance sheet as a contract liability. The Company is currently evaluating
the impact the adoption of these standards on our future consolidated financial statements.
These standards will also have an impact on transactions currently not included in the Company’s revenues and expenses such
as franchisee contributions to and subsequent expenditures from advertising cooperatives that we are required to consolidate and
other cost reimbursement arrangements we have with our franchisees. We do not currently include these contributions and expenditures
in our consolidated statements of operations or cash flows. The new standards will impact the principal/agent determinations
in these arrangements by superseding industry-specific guidance included in current GAAP. When we are the principal in these transactions
we will include the related contributions and expenditures within our consolidated statements of operations and cash flows.
As a result of this change, we expect the increase in both total revenues and total costs and expenses, with no significant impact
to net Income.
These
standards will not impact the recognition of our sales-based royalty fees from franchisees, which is generally our largest source
of revenue. We are currently implementing internal controls related to the recognition and presentation of the Company’s
revenues under these new standards.
In
February 2016, the FASB issued ASU 2016-02, Leases, requiring a lessee to recognize on the balance sheet the assets and liabilities
for the rights and obligations created by those leases with a lease term of more than twelve months. Leases will continue to be
classified as either financing or operating, with classification affecting the recognition, measurement and presentation of expenses
and cash flows arising from a lease. This ASU is effective for interim and annual period beginning after December 15, 2018 and
requires a modified retrospective approach to adoption for lessees related to capital and operating leases existing at, or entered
into after, the earliest comparative period presented in the financial statements, with certain practical expedients available.
Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s
consolidated financial statements.
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments. The new guidance is intended to reduce diversity in practice in how transactions are classified in the statement of
cash flows. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December
15, 2017. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial
statements.
In
January 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Accounting for
Goodwill Impairment, which simplifies the accounting for goodwill impairment. This ASU removes Step 2 of the goodwill impairment
test, which requires hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting
unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The new guidance also requires
disclosure of the amount of goodwill at reporting units with zero or negative carrying amounts. ASU 2017-04 is effective for the
Company beginning January 1, 2020. The Company elected to early adopt this standard when performing its annual goodwill impairment
test in 2017. The adoption of this ASU did not have a significant financial impact on the Company’s consolidated
financial statements.
In
May 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting.
This standard provides clarification on when modification accounting should be used for changes to the terms or conditions of
a share-based payment award. This standard does not change the accounting for modifications but clarifies that modification accounting
guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be
required if the changes are considered non-substantive. The amendments in this ASU are effective beginning January 1, 2018, with
early adoption permitted and are to be applied prospectively on and after the effective date. The Company adopted this ASU during
2017. The adoption of this ASU did not have a significant financial impact on the Company’s consolidated financial
statements.
NOTE
4 – PONDEROSA ACQUISITION
In
March 2017, FCCG agreed to acquire Homestyle Dining LLC from Metromedia Company and its affiliate (“Metromedia”) pursuant
to a Membership Interest Purchase Agreement, as amended, which provided for a cash purchase price of $10,550,000 to be paid at
closing. Effective October 20, 2017, the Company provided $10,550,000 of the net proceeds from the Offering to FCCG to consummate
the acquisition of Homestyle Dining LLC. In exchange, the Company received full ownership in the Homestyle Dining operating subsidiaries:
Ponderosa Franchising Company, Bonanza Restaurant Company, Ponderosa International Development, Inc. and Puerto Rico Ponderosa,
Inc. (collectively, “
Ponderosa
”). These subsidiaries conduct the worldwide franchising of the Ponderosa Steakhouse
Restaurants and the Bonanza Steakhouse Restaurants and management believes that Ponderosa’s operations will be complimentary
and accretive to the FAT Brand business. The Ponderosa acquisition was accounted for as a business combination using the acquisition
method of accounting.
Fees
and expenses related to the Ponderosa acquisition totaled approximately $20,000 consisting primarily of professional fees, all
of which are classified as selling, general and administrative expenses in the accompanying consolidated statement of operations.
These fees and expenses were funded through cash on hand and proceeds from the Offering. The allocation of consideration to the
net tangible and intangible assets acquired is presented in the table below (in thousands):
|
|
October
20, 2017
|
|
Accounts
receivable
|
|
$
|
441
|
|
Trade
notes receivable
|
|
|
431
|
|
Intangible
assets
|
|
|
8,870
|
|
Deferred
tax liability
|
|
|
(528
|
)
|
Deferred
income
|
|
|
(126
|
)
|
Total
identifiable net assets
|
|
|
9,088
|
|
Goodwill
|
|
|
1,462
|
|
Total
consideration
|
|
$
|
10,550
|
|
The
following table provides information regarding the revenue and earnings of Ponderosa included in the accompanying consolidated
financial statements since October 20, 2017 (in thousands):
|
|
Ponderosa
|
|
|
|
|
|
Revenues
|
|
|
|
|
Royalties
|
|
$
|
805
|
|
Franchise
fees
|
|
|
2
|
|
|
|
|
|
|
Total
revenues
|
|
|
807
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
General
and administrative
|
|
|
815
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(8
|
)
|
|
|
|
|
|
Other
expense
|
|
|
(18
|
)
|
|
|
|
|
|
Loss
before income tax expense
|
|
|
(26
|
)
|
|
|
|
|
|
Income
tax benefit
|
|
|
(175
|
)
|
|
|
|
|
|
Net
income
|
|
$
|
151
|
|
The
following unaudited pro forma information presents the revenue and earnings of Ponderosa as if it had been acquired on December
26, 2016 (the Company’s normal beginning fiscal year) through December 31, 2017 (in thousands):
|
|
Pro
Forma
Ponderosa
|
|
|
|
|
|
Revenues
|
|
|
|
|
Royalties
|
|
$
|
4,234
|
|
Franchise
fees
|
|
|
8
|
|
|
|
|
|
|
Total
revenues
|
|
|
4,242
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
General
and administrative
|
|
|
3,079
|
|
|
|
|
|
|
Income from
operations
|
|
|
1,163
|
|
|
|
|
|
|
Other Income
|
|
|
24
|
|
|
|
|
|
|
Loss before
income tax expense
|
|
|
1,187
|
|
|
|
|
|
|
Income tax
expense
|
|
|
320
|
|
|
|
|
|
|
Net income
|
|
$
|
867
|
|
The
unaudited pro forma income statement reflects actual results for fiscal 2017, as adjusted for an additional $90,000 of amortization
of intangible assets recognized as a result of the acquisition and an adjusted income tax provision to reflect the tax
status of Ponderosa as a subsidiary of the Company. Had the Company owned Ponderosa as of December 26, 2016, the unaudited pro
forma consolidated net income would have been approximately $103,000 instead of a net loss of $613,000.
Note
5. GOODWILL
Goodwill
consist of the following:
|
|
December
31, 2017
|
|
Goodwill:
|
|
|
|
|
Fatburger
|
|
$
|
529
|
|
Buffalo’s
|
|
|
5,365
|
|
Ponderosa
|
|
|
1,462
|
|
Total
goodwill
|
|
$
|
7,356
|
|
Note
6. INTANGIBLE ASSETS
Intangible
assets consist of the following (in thousands):
|
|
December
31, 2017
|
|
Trademarks:
|
|
|
|
|
Fatburger
|
|
$
|
2,135
|
|
Buffalo’s
|
|
|
27
|
|
Ponderosa
|
|
|
7,230
|
|
Total
trademarks
|
|
|
9,392
|
|
|
|
|
|
|
Franchise
agreements:
|
|
|
|
|
Ponderosa
– cost
|
|
|
1,640
|
|
Ponderosa
– accumulated amortization
|
|
|
21
|
|
|
|
|
1,619
|
|
Total
|
|
$
|
11,011
|
|
The
expected future amortization of the Company’s capitalized franchise agreements is as follows (in thousands):
Fiscal year:
|
|
|
|
|
2018
|
$
|
|
111
|
|
2019
|
|
|
111
|
|
2020
|
|
|
111
|
|
2021
|
|
|
110
|
|
2022
|
|
|
110
|
|
Thereafter
|
|
|
1,066
|
|
Total
|
$
|
|
1,619
|
|
Note
7. DEFERRED INCOME
Deferred
income is as follows:
|
|
December
31, 2017
|
|
|
|
|
|
Deferred
franchise fees
|
|
$
|
2,781
|
|
Deferred
royalties
|
|
|
932
|
|
|
|
|
|
|
Total
|
|
$
|
3,713
|
|
Note
8. Income Taxes
Effective
October 20, 2017, the Company entered into a Tax Sharing Agreement with FCCG that provides that FCCG will, to the extent permitted
by applicable law, file consolidated federal, California and Oregon (and possibly other jurisdictions where revenue is generated,
at FCCG’s election) income tax returns with the Company and its subsidiaries. The Company will pay FCCG the amount that
its current tax liability would have been had it filed a separate return. To the extent the Company’s required payment
exceeds its share of the actual combined income tax liability (which may occur, for example, due to the application of FCCG’s
net operating loss carryforwards), the Company will be permitted, in the discretion of a committee of its board of directors comprised
solely of directors not affiliated with or having an interest in FCCG, to pay such excess to FCCG by issuing an equivalent
amount of its common stock in lieu of cash, valued at the fair market value at the time of the payment. In addition, an inter-company
receivable of approximately $7,963,000 due from FCCG will be applied first to reduce such excess income tax payment obligation
to FCCG under the Tax Sharing Agreement.
For
financial reporting purposes, the Company has recorded a tax provision calculated as if the Company files its tax returns on a
stand-alone basis. The taxes payable to FCCG determined by this calculation of $134,000 was offset against amounts due from FCCG
as of December 31, 2017 (see Note 10).
On
December 22, 2017, the Tax Cuts and Jobs Act (the “TCJ Act”) was enacted into law. The TCJ Act provides for significant
changes to the U.S. Internal Revenue Code of 1986, as amended (the “Code”), that impact corporate taxation requirements,
such as the reduction of the federal tax rate for corporations from 35% to 21%.
The
reduction in the corporate tax rate under the TCJ Act required a one-time revaluation of certain tax-related assets to reflect
their value at the lower corporate tax rate of 21%. As a result of the Tax Reform Act, the Company recorded a tax expense of $505,000
due to a remeasurement of deferred tax assets and liabilities for the tax year ended December 31, 2017.
Deferred
taxes reflect the net effect of temporary differences between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for calculating taxes payable on a stand-alone basis. Significant components of the Company’s
deferred tax assets and liabilities are as follows (in thousands):
|
|
December
31, 2017
|
|
Deferred
tax assets (liabilities)
|
|
|
|
|
Deferred
income
|
|
$
|
882
|
|
Reserves
and accruals
|
|
|
451
|
|
Other
|
|
|
1
|
|
Intangibles
|
|
|
(372
|
)
|
Deferred
state income tax
|
|
|
(25
|
)
|
Total
|
|
$
|
937
|
|
Components
of the income tax provision (benefit) are as follows (in thousands):
|
|
Year
Ended
|
|
|
|
December
31, 2017
|
|
Current
|
|
|
|
|
Federal
|
|
$
|
134
|
|
State
|
|
|
24
|
|
Foreign
|
|
|
17
|
|
|
|
|
175
|
|
Deferred
|
|
|
|
|
Federal
|
|
|
320
|
|
State
|
|
|
(88
|
)
|
|
|
|
232
|
|
Total
income tax provision
|
|
$
|
407
|
|
Income
tax provision (benefit) related to continuing operations differ from the amounts computed by applying the statutory income tax
rate of 34% to pretax loss as follows (in thousands):
|
|
December
31, 2017
|
|
|
|
|
|
Tax
provision (benefit) at statutory rate
|
|
$
|
(70
|
)
|
State
and local income taxes
|
|
|
(41
|
)
|
Other
|
|
|
13
|
|
Tax
law changes
|
|
|
505
|
|
Total
income tax provision
|
|
$
|
407
|
|
As
of December 31, 2017, the Company’s subsidiaries’ annual tax filings for the prior three years are open for audit
by Federal and for the prior four years for state tax agencies. The Company is the beneficiary of indemnification agreements
from the prior owners of the subsidiaries for tax liabilities related to periods prior to their contribution. Management
evaluated the Company’s overall tax positions and has determined that no provision for uncertain income tax positions is
necessary as of December 31, 2017.
Note
9. NOTE PAYABLE To FCCG
Effective
October 20, 2017, FCCG contributed two of its operating subsidiaries, Fatburger and Buffalo’s, to the Company in exchange
for an unsecured promissory note with a principal balance of $30,000,000, bearing interest at a rate of 10.0% per annum, and maturing
in five years (the “Related Party Debt”). The contribution was consummated pursuant to a Contribution Agreement between
the Company and FCCG. Approximately $11,875,000 of the note payable to FCCG was subsequently repaid, reducing the balance
to $18,125,000 at December 31, 2017. The Company recognized interest expense of $405,000 for the period ending December 31,
2017.
Note
10. Related Party Transactions
The
Company had open accounts with affiliated entities under the common control of FCCG resulting in net amounts due to the Company
of $7,963,000 as of December 31, 2017. Beginning October 20, 2017, the receivable from FCCG bears interest at a rate of
10% per annum.
Prior
to the Offering, the Company’s operations were insignificant other than structuring the Offering. During this time, FCCG
provided executive administration and accounting services for the Company. The Company reimbursed FCCG for out-of-pocket costs
associated with these services, but there was no allocation of FCCG’s overhead costs. Effective with the Offering, the Company
assumed all direct and indirect administrative functions relating to its business.
During
the period ending December 31, 2017, the Company recognized payables to FCCG in the amount of $134,000 for use of FCCG’s
net operating losses for tax purposes.
NOTE
11. BUFFALO’S CREATIVE AND ADVERTISING FUND
Under
the terms of its franchise agreements, the Company collects fees for creative development and advertising from its franchisees
based on percentages of sales as outlined in franchise agreements. The Company is to oversee all advertising and promotional programs
and is to have sole discretion over expenditures from the fund.
During
the period from October 20, 2017 through December 31, 2017, Buffalo’s collected advertising fees and vender contributions
of approximately $87,000. Advertising expenditures for the same period totaled approximately $50,000. The accompanying consolidated
financial statements reflect the year-end balance of the advertising fund and the related advertising obligation, which were approximately
$435,000 as of December 31, 2017.
Note
12. Stock based incentive plans
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 1,000,000 shares available for grant.
On
October 20, 2017, the Company granted stock options to purchase 337,500 shares under the Plan to directors and employees, each
with an exercise price equal to $12.00 per share and subject to a three-year vesting requirement, with one-third of the options
vesting each year. Options that are not exercised will expire 10 years following the grant date. An additional 30,000 options
were granted to non-employee consultants under the same terms.
The
weighted average fair value of the non-qualified stock options granted during the fiscal year ended December 31, 2017 and the
assumptions used in the Black-Scholes valuation model to record the stock-based compensation are as follows:
Weighted
average fair value per option granted
|
|
$
|
2.37
|
|
Expected
dividend yield
|
|
|
4.00
|
%
|
Expected
volatility
|
|
|
31.73
|
%
|
Risk-free
interest rate
|
|
|
1.60
|
%
|
Expected
term (in years)
|
|
|
5.75
|
|
Weighted
average exercise price per share
|
|
$
|
12.00
|
|
Based
upon this valuation, the Company recognized stock based compensation expense in the amount of $89,000 during the current
period with a related tax benefit of approximately $36,000. There remains $782,000 of related stock based compensation
relating to these non-vested grants, which will be recognized over the remaining vesting period, subject to future forfeitures.
The
Company’s stock option activity for the period ending December 31, 2017 can be summarized as follows:
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
Stock
options outstanding at March 21, 2017 (Inception)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
367,500
|
|
|
$
|
12.00
|
|
|
|
9.8
|
|
Forfeited
|
|
|
(5,000
|
)
|
|
$
|
12.00
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Stock
options outstanding at December 31, 2017
|
|
|
362,500
|
|
|
$
|
12.00
|
|
|
|
9.8
|
|
Stock
options exercisable at December 31, 2017
|
|
|
-
|
|
|
|
|
|
|
|
|
|
The
Company does not have a specific policy regarding the source of shares to be delivered upon the exercise of stock options. As
such, new shares may be issued or shares may be repurchased in the market. As of December 31, 2017, the Company did not expect
to repurchase shares during the next fiscal year.
The
above information does not include warrants to purchase 80,000 shares of the Company’s stock granted to the selling agent
in the Company’s initial public offering (the “Warrants”). The Warrants are exercisable commencing April 20,
2018 through October 20, 2022. The exercise price for the Warrants is $15 per share. The Warrants provide that upon exercise,
the Company may elect to redeem the Warrants in cash by paying the difference between the applicable exercise price and the then-current
fair market value of the Common Stock. At the time of the Offering, the Warrants were valued at approximately $124,000,
using the Black-Scholes model and the following assumptions: market price of shares: $12.00; risk free interest rate: 0.99%;
expected volatility: 31.73%; expected dividend yield: 4%; and expected term: 5 years.
Note
13. Commitments and Contingencies
Litigation
Periodically,
the Company is involved in litigation in the normal course of business. The Company believes that the result of any potential
litigation will not have a material adverse effect on the Company’s financial condition.
Operating
Leases
The
Company leases corporate headquarters located in Beverly Hills, California comprising 5,478 square feet of space, pursuant to
a lease that expires on April 30, 2020.
We
believe that all our existing facilities are in good operating condition and adequate to meet our current and foreseeable needs.
Note
14. geographic information AND MAJOR FRANCHISEES
R
evenues
by geographic area are as follows (in thousands):
|
|
Year
Ended
December
31, 2017
|
|
United
States
|
|
$
|
1,681
|
|
Other
countries
|
|
|
492
|
|
Total
revenues
|
|
$
|
2,173
|
|
Revenues
are shown based on the geographic location of our licensees. All our assets are located in the United States.
During
the period ended December 31, 2017, no individual franchisee accounted for more than 10% of the Company’s revenues.
NOTE
15 – OPERATING SEGMENTS
Operating
segments consist of (i) franchising operations conducted through Fatburger, (ii) franchising operations conducted through Buffalo’s
and (iii) franchising operations conducted through Ponderosa. Each segment operates with its own management and personnel, with
additional centralized support from the Company. The actual cost of the support provided by the Company is allocated to each operating
segment. The following is a summary of each of the operating segments (dollars in thousands):
|
|
Fatburger
|
|
|
Buffalo’s
|
|
|
Ponderosa
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
|
|
$
|
985
|
|
|
$
|
233
|
|
|
$
|
805
|
|
|
$
|
2,023
|
|
Franchise
fees
|
|
|
138
|
|
|
|
-
|
|
|
|
2
|
|
|
|
140
|
|
Management
fees
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
1,133
|
|
|
|
233
|
|
|
|
807
|
|
|
|
2,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
820
|
|
|
|
215
|
|
|
|
815
|
|
|
|
1,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
313
|
|
|
|
18
|
|
|
|
(8)
|
|
|
|
323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(expense)
|
|
|
56
|
|
|
|
96
|
|
|
|
(18)
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income tax expense
|
|
$
|
369
|
|
|
$
|
114
|
|
|
$
|
(26)
|
|
|
$
|
457
|
|
Reconciliation
to consolidated net income (in thousands)
|
|
December
31, 2017
|
|
|
|
|
|
Combined
segment net income before taxes
|
|
$
|
457
|
|
Corporate
expenses
|
|
|
(
273
|
)
|
Corporate
other expense
|
|
|
(390
|
)
|
Income
tax expense
|
|
|
(
407
|
)
|
Net
loss
|
|
$
|
(613
|
)
|
NOTE
16 – SUBSEQUENT EVENTS
Restaurant
openings and Closures
Subsequent
to December 31, 2017, Fatburger franchisees have opened three additional franchise locations and closed two franchise locations.
Buffalo’s franchisees have opened two additional franchise locations and closed zero franchise locations. Ponderosa
franchisees have opened zero additional franchise locations and closed six franchise locations.
FAT
BRANDS INC.
SCHEDULE
II – VALUATION AND QUALIFYING ACCOUNTS
FOR
THE PERIOD BEGINNING MARCH 21, 2017 (INCEPTION) THROUGH DECEMBER 31, 2017
|
|
Dollars
in thousands
|
|
|
|
|
|
|
Balance
at Beginning of Period
|
|
|
Charged
to Costs and Expenses
|
|
|
Deductions
(Recoveries)
|
|
|
Balance
at End of Period
|
|
Allowance
for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
notes and accounts receivable
|
|
$
|
589
|
|
|
$
|
124
|
|
|
$
|
-
|
|
|
$
|
713
|
|
Report
of Independent Registered Public Accounting Firm
Stockholder
and Board of Directors
Fatburger
North America Inc.
Beverly
Hills, California
Opinion
on the Financial Statements
We
have audited the accompanying balance sheet of Fatburger North America, Inc. (the “Company”) as of October
19, 2017, and the related statements of income, stockholder’s equity, and cash flows for the period December 26, 2016 through
October 19, 2017, and the related notes to the financial statements (collectively, the “financial statements”). In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of October 19, 2017, and the results of its operations and its cash flows for the period December 26, 2016 through
October 19, 2017 in conformity with accounting principles generally accepted in the United States of America.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company
in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audit provides a reasonable basis for our opinion.
/s/
Hutchinson and Bloodgood LLP
We,
or a firm acquired by us in 2012, have continuously served as auditor for the Company since 2007.
Glendale,
California
April
2
, 2018
FATBURGER
NORTH AMERICA, INC.
Balance
Sheet
October
19, 2017
|
|
|
Assets
|
|
|
|
Current
assets
|
|
|
|
Cash
|
$
|
-
|
|
Accounts
receivable, net of allowance for doubtful accounts of $463,506
|
|
350,320
|
|
Other
current assets
|
|
8,358
|
|
Total
current assets
|
|
358,678
|
|
|
|
|
|
Due
from affiliates
|
|
7,087,473
|
|
|
|
|
|
Trademarks
|
|
2,134,800
|
|
|
|
|
|
Goodwill
|
|
529,400
|
|
|
|
|
|
Deferred
income taxes
|
|
1,592,694
|
|
Total
assets
|
$
|
11,703,045
|
|
|
|
|
|
Liabilities
and STOCKholder’s Equity
|
|
|
|
Current
liabilities
|
|
|
|
Deferred
income
|
$
|
1,892,397
|
|
Accounts
payable
|
|
1,447,741
|
|
Accrued
expenses
|
|
882,828
|
|
Accrued
advertising
|
|
334,864
|
|
Total
current liabilities
|
|
4,557,830
|
|
|
|
|
|
Deferred
income – noncurrent
|
|
1,480,500
|
|
|
|
|
|
Total
liabilities
|
|
6,038,330
|
|
|
|
|
|
Commitments
and contingencies (Note 6)
|
|
|
|
|
|
|
|
Stockholder’s
equity
|
|
|
|
Common
stock, $.01 par value, 1,000 shares authorized, issued and outstanding
|
|
10
|
|
Additional
paid-in capital
|
|
3,500,000
|
|
Retained
earnings
|
|
2,164,705
|
|
|
|
|
|
Total
stockholder’s equity
|
|
5,664,715
|
|
|
|
|
|
Total
liabilities and stockholder’s equity
|
$
|
11,703,045
|
|
The
accompanying notes are integral part of these financial statements.
FATBURGER
NORTH AMERICA, INC.
Statement
of Income
For
the interim period from December 26, 2016 through October 19, 2017
|
|
|
Revenues
|
|
|
|
Royalties
|
$
|
3,797,297
|
|
Franchise
fees
|
|
1,731,659
|
|
Management
fees
|
|
51,115
|
|
|
|
|
|
Total
revenues
|
|
5,580,071
|
|
|
|
|
|
Expenses
|
|
|
|
General
and administrative
|
|
1,929,551
|
|
|
|
|
|
Total
expenses
|
|
1,929,551
|
|
|
|
|
|
Income
from operations
|
|
3,650,520
|
|
|
|
|
|
Other
income
|
|
211,471
|
|
|
|
|
|
Income
before income tax expense
|
|
3,861,991
|
|
Income
tax expense
|
|
1,344,247
|
|
|
|
|
|
Net
income
|
$
|
2,517,744
|
|
|
|
|
|
Net
income per common share - Basic
|
$
|
2,517.74
|
|
|
|
|
|
Shares
used in computing net income per common share
|
|
1,000
|
|
The
accompanying notes are integral part of these financial statements.
FATBURGER
NORTH AMERICA, INC.
Statement
of Stockholder’s Equity
For
the interim period from December 26, 2016 through October 19, 2017
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 25, 2016
|
|
|
1,000
|
|
|
$
|
10
|
|
|
$
|
3,500,000
|
|
|
$
|
4,326,961
|
|
|
$
|
7,826,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,517,744
|
|
|
|
2,517,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,680,000
|
)
|
|
|
(4,680,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at October 19, 2017
|
|
|
1,000
|
|
|
$
|
10
|
|
|
$
|
3,500,000
|
|
|
$
|
2,164,705
|
|
|
$
|
5,664,715
|
|
The
accompanying notes are integral part of these financial statements.
FATBURGER
NORTH AMERICA, INC.
Statement
of Cash Flows
For
the interim period from December 26, 2016 through October 19, 2017
|
|
|
Cash
flows from operating activities
|
|
|
|
Net
income
|
$
|
2,517,744
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
Deferred
income taxes
|
|
2,172
|
|
Provision
for bad debt expense
|
|
182,465
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
|
(124,130
|
)
|
Accounts
payable
|
|
377,188
|
|
Accrued
expenses
|
|
(254,700
|
)
|
Accrued
advertising
|
|
485,864
|
|
Deferred
income
|
|
(780,871
|
)
|
|
|
|
|
Total
adjustments
|
|
(112,012
|
)
|
|
|
|
|
Net
cash provided by operating activities
|
|
2,405,732
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
Dividends
paid
|
|
(4,680,000
|
)
|
Change
in due from affiliates
|
|
2,274,268
|
|
|
|
|
|
Net
cash used in financing activities
|
|
(2,405,732
|
)
|
|
|
|
|
Net
increase in cash
|
|
-
|
|
Cash,
beginning of year
|
|
-
|
|
Cash,
end of year
|
$
|
-
|
|
|
|
|
|
Supplemental
Disclosure of cash flow Information
|
|
|
|
Cash
paid for income taxes
|
$
|
-
|
|
Supplemental
Disclosure of Noncash INVESTINg and Financing Activities
|
|
|
|
Income
tax payable offset against amounts due from affiliates
|
$
|
1,338,681
|
|
The
accompanying notes are integral part of these financial statements.
FATBURGER
NORTH AMERICA, INC.
Notes
to Financial Statements
For
the interim period from December 26, 2016 through October 19, 2017 (the “
Interim Period
”)
Note
1.
|
Nature
of Business
|
Fatburger
North America, Inc. (the Company), a Delaware corporation, was formed on March 28, 1990 and is a wholly-owned subsidiary of Fog
Cutter Capital Group Inc. (the Parent). Prior to its transfer to the Parent on March 24, 2011, the Company was owned by Fatburger
Holdings, Inc. (Holdings) as the result of a stock purchase transaction in August 2001.
Subsequent
to the date of these financial statements, on October 20, 2017, the Parent contributed the Company to FAT Brands, Inc. as a wholly
owned subsidiary. The Parent owns majority control of FAT Brands Inc. These financial statements have been produced to reflect
the interim period beginning December 26, 2016 and ending on the date prior to the contribution to Fat Brands Inc.
The
Company franchises and licenses the right to use the Fatburger name, operating procedures and method of merchandising to franchisees.
Upon signing a franchise agreement, the Company is committed to provide training, some supervision and assistance, and access
to Operations Manuals. As needed, the Company will also provide advice and written materials concerning techniques of managing
and operating the restaurants. The franchises are operated under the name “Fatburger.” Each franchise agreement term
is typically for 15 years with two additional 10-year options available. Additionally, the Company conducts a multi-market advertising
campaign to enhance the corporate name and image, which is funded through advertising revenues received from its franchisees and
to a lesser extent, other restaurant locations owned and operated by subsidiaries of the Parent.
As
of October 19, 2017, there were 153 franchise restaurant locations operated by third parties in Arizona, California, Colorado,
Nevada, Washington, Canada, China, UAE, the UK, Kuwait, Saudi Arabia, Egypt, Iraq, Pakistan, Philippines, Indonesia, Malaysia,
Qatar, Panama and Tunisia (the Franchisees).
Note
2.
|
Summary
of Significant Accounting Policies
|
Fiscal
Year End:
The Company operates on a 52-week calendar and its fiscal year ends on the Sunday closest to December 31. Consistent
with the industry, 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 method means a 53
rd
week is added to the fiscal year every 5 or 6 years. The
accompanying financial statements reflect the Company’s interim period beginning December 26, 2016 and ending on October
19, 2017, the date prior to the contribution to Fat Brands Inc.
Accounts
Receivable:
Accounts receivable consist primarily of royalty and advertising fees from franchisees reduced by reserves for
the estimated amount deemed uncollectible due to bad debts.
Credit
and Depository Risks:
Financial instruments that potentially subject the Company to concentrations of credit risk consist
principally of cash and accounts receivable. The Company’s customer base consists of franchisees located in Arizona, California,
Colorado, Nevada, Washington, Canada, China, UAE, the UK, Kuwait, Saudi Arabia, Egypt, Iraq, Pakistan, Philippines, Indonesia,
Malaysia, Qatar, Panama and Tunisia. Management reviews each of its customer’s financial conditions prior to signing a franchise
agreement and believes that it has adequately provided for any exposure to potential credit losses.
The
Company maintains cash deposits in national financial institutions. The Company has not experienced any losses in such accounts
and believes its cash balances are not exposed to significant risk of loss.
Compensated
Absences:
Employees of the Parent who provide reimbursed services to the Company earn vested rights to compensation for unused
vacation time. Accordingly, the Company accrues the amount of vacation compensation that employees have earned but not yet taken
at the end of each fiscal year.
Goodwill
and Other Intangible Assets:
Goodwill and other intangible assets with indefinite lives, such as trademarks, are not amortized
but are reviewed for impairment annually, or more frequently if indicators arise. No impairment has been identified for the Interim
Period ended October 19, 2017 and prior.
Revenue
Recognition:
Franchise fee revenue from sales of individual franchises is recognized upon completion of training and the actual
opening of a location. Typically, franchise fees are $50,000 for each domestic location and are collected 50% upon signing a deposit
agreement and 50% at the signing of a lease and related franchise agreement. International franchise fees are typically $65,000
for each location and are payable 100% upon signing a deposit agreement. The franchise fee may be adjusted at management’s
discretion or in situations involving store transfers. Deposits are non-refundable upon acceptance of the franchise application.
These deposits are recorded as deferred income – current and noncurrent based upon the expected franchise restaurant openings
dates. In situations where franchisees have not complied with their development timelines for opening franchise stores, the franchise
rights are terminated and franchise fee revenue is recognized for non-refundable deposits.
During
the Interim Period ended October 19, 2017, fifteen franchise locations were opened and twenty were closed or otherwise left the
franchise system. Of the new franchise locations, four were in Canada, three were in the United States, three were in China, and
one in each of Qatar, the UK, Egypt, Pakistan and Panama. Of the closed locations, three were in Canada, three were in California,
two were in Washington, two were in Bahrain, two were in Saudi Arabia, and one in each of Hawaii, Pakistan, Fiji, China, Indonesia,
India, Oman and Egypt.
In
addition to franchise fee revenue, the Company collects a royalty of 3% to 6% of net sales from its franchisees. Royalties are
recognized as revenue as the related sales are made by the franchisees. Royalties collected in advance are classified as deferred
income until earned.
Segment
information:
The Company owns international and domestic licensed operations. Our chief operating decision maker (“CODM”)
is our Chief Executive Officer; our CODM reviews financial performance and allocates resources at an overall level on a recurring
basis. Therefore, management has determined that the Company has one operating segment and one reportable segment.
Advertising:
The Company requires advertising payments of 1.95% of net sales from Fatburger restaurants located in the Los Angeles marketing
area and up to 0.95% of net sales from stores located outside of the Los Angeles marketing area. International locations pay 0.20%
to 0.95%. The Company also receives, from time to time, payments from vendors that are to be used for advertising. Since advertising
funds collected are required to be spent for specific advertising purposes, no revenue or expense is recorded for advertising
funds.
Cumulative
advertising expenditures in excess of collections are recorded as current assets and will be reimbursed by future advertising
payments from franchises and other Fatburger affiliates.
Income
Taxes:
The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax
assets and liabilities are determined based on the differences between financial reporting and tax reporting bases of assets and
liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected
to reverse. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain.
A
two-step approach is used to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will
be sustained upon tax authority examination, including resolution of related appeals or litigation processes, if any. The second
step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon the ultimate settlement.
Income
Per Common Share
:
Income per share data was computed using the weighted-average number of shares outstanding during
each reporting period.
Use
of Estimates:
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues and expenses during the reported periods. Actual results
could differ from those estimates.
Recently
Issued Accounting Standards:
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) 2014-09, Revenue From Contracts With Customers (Topic 606), requiring an entity to recognize the amount of revenue to which
it expects to be entitled for the transfer of promised goods and services to customers. The updated standard will replace most
existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective
or retrospective with cumulative effect transition method. These standards are effective for the Company in our first quarter
of 2018 and will be adopted using the modified retrospective method.
These
standards require that the transaction price received from customers be allocated to each separate and distinct performance obligation.
The transaction price attributable to each separate and distinct performance obligation is then recognized as the performance
obligations are satisfied. The services provided by the Company related to upfront fees received from franchisees such as initial
or renewal fees do not currently contain separate and distinct performance obligations from the franchise right and thus those
upfront fees will be recognized as revenue over the term of each respective franchise agreement. We currently recognize upfront
franchise fees such as initial and renewal fees when the related services have been provided, which is when a store opens for
initial fees and when renewal options become effective for renewal fees. These standards require any unamortized portion of fees
received prior to adoption be presented in the balance sheet as a contract liability. The Company is evaluating the effect the
adoption of these standards will have on future financial statements.
These standards will also have an impact on transactions currently not included in the Company’s revenues and expenses such
as franchisee contributions to and subsequent expenditures from advertising cooperatives that we are required to consolidate and
other cost reimbursement arrangements we have with our franchisees. We do not currently include these contributions and expenditures
in our Consolidated Statements of Income or Cash Flows. The new standards will impact the principal/agent determinations in these
arrangements by superseding industry-specific guidance included in current GAAP. When we are the principal in these transactions
we will include the related contributions and expenditures within our statements of income and cash flows. As a result of this
change, we expect the increase in both total revenues and total costs and expenses, with no significant impact to net income.
These standards will not impact the recognition of our sales-based royalty fees from franchisees, which is generally our largest
source of revenue. We are currently implementing internal controls related to the recognition and presentation of the Company’s
revenues under these new standards.
In
February 2016, the FASB issued ASU 2016-02, Leases, requiring a lessee to recognize on the balance sheet the assets and liabilities
for the rights and obligations created by those leases with a lease term of more than twelve months. Leases will continue to be
classified as either financing or operating, with classification affecting the recognition, measurement and presentation of expenses
and cash flows arising from a lease. This ASU is effective for interim and annual period beginning after December 15, 2018 and
requires a modified retrospective approach to adoption for lessees related to capital and operating leases existing at, or entered
into after, the earliest comparative period presented in the financial statements, with certain practical expedients available.
Early adoption is permitted. The Company does not currently have any leases that will have an impact on the financial statements
or disclosures as a result of the adoption of this ASU.
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments. The new guidance is intended to reduce diversity in practice in how transactions are classified in the statement of
cash flows. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December
15, 2017. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.
In
January 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Accounting for
Goodwill Impairment, which simplifies the accounting for goodwill impairment. This ASU removes Step 2 of the goodwill impairment
test, which requires hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting
unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The new guidance also requires
disclosure of the amount of goodwill at reporting units with zero or negative carrying amounts. ASU 2017-04 is effective for the
Company beginning January 1, 2020. The Company elected to early adopt this standard when performing its annual goodwill impairment
test in 2017. The adoption of this ASU did not have a significant financial impact on the Company’s financial statements.
Deferred
income is as follows:
|
|
October
19, 2017
|
|
|
|
|
|
Deferred
franchise fees
|
|
$
|
2,366,267
|
|
Deferred
royalties
|
|
|
1,006,630
|
|
Total
|
|
$
|
3,372,897
|
|
The
Company files its Federal and most state income tax returns on a consolidated basis with the Parent. For financial reporting purposes,
the Company has recorded a tax provision calculated as if the Company files all of its tax returns on a stand-alone basis. The
taxes payable to the Parent determined by this calculation of $1,338,681 was offset against amounts due from affiliates as of
October 19, 2017 (see Note 5). Deferred taxes reflect the net effect of temporary differences between the carrying amount of assets
and liabilities for financial reporting purposes and the amounts used for calculating taxes payable on a stand-alone basis. Significant
components of the Company’s deferred tax assets are as follows:
|
|
October
19, 2017
|
|
Current
deferred tax assets (liabilities)
|
|
|
|
|
Deferred
revenue
|
|
$
|
1,187,260
|
|
Reserves
and accruals
|
|
|
423,967
|
|
Deferred
state income tax
|
|
|
(18,533
|
)
|
Total
|
|
$
|
1,592,694
|
|
Components
of the income tax provision (benefit) are as follows:
|
|
Interim
Period Ended
|
|
|
|
October
19, 2017
|
|
Current
|
|
|
|
|
Federal
|
|
$
|
976,631
|
|
State
|
|
|
36,262
|
|
Foreign
|
|
|
38,851
|
|
|
|
|
1,051,744
|
|
Deferred
|
|
|
|
|
Federal
|
|
|
282,365
|
|
State
|
|
|
10,138
|
|
|
|
|
292,503
|
|
Total
income tax provision
|
|
$
|
1,344,247
|
|
The
income tax provision related to continuing operations differ from amounts computed by applying the statutory income tax rate of
34% to pretax income is as follows:
|
|
October
19, 2017
|
|
|
|
|
|
Tax
provision at statutory rate
|
|
$
|
1,313,078
|
|
State
and local income taxes
|
|
|
31,169
|
|
Total
income tax provision
|
|
$
|
1,344,247
|
|
As
of October 19, 2017, the Company’s annual tax filings for the prior three years are open for audit by Federal and for the
prior four years for state tax agencies. Management evaluated the Company’s overall tax positions and has determined that
no provision for uncertain income tax positions is necessary as of October 19, 2017.
Note
5.
|
Related
Party Transactions
|
The
Company had open accounts with affiliated entities under the common control of the Parent resulting in net amounts due to the
Company of $7,087,473 as of October 19, 2017. These advances are expected to be recovered from credits for the use of the Parents’
tax net operating losses, and to the lesser extent, from repayment by the affiliates from proceeds generated by their operations
and investments.
During
the Interim Period ended October 19, 2017, the receivable from affiliates was reduced in the amount of $2,274,268.
Effective
in 2012, the Parent’s operations were structured in such a way that significant direct and indirect administrative functions
were provided to the Company. These services include operational personnel to sell franchise rights, assist with training franchisees
and assisting franchises with opening restaurants. The Parent also provides executive administration and accounting services for
the Company.
The
Company reimbursed the Parent for these expenses in the approximate amounts of $1,097,132 for the Interim Period ended October
19, 2017. Management reviewed the expenses recorded at the Parent and identified the common expenses that shall be allocated to
the subsidiaries. These expenses were allocated based on an estimate of management’s time spent on the activities of the
Parent and its subsidiaries, and further allocated among the subsidiaries pro rata based on each subsidiary’s respective
revenues as a percentage of overall revenues of the subsidiaries. The Company believes that the allocation of expenses is not
materially different from what it would have been if the Company was a stand-alone entity.
During
the Interim Period ended October 19, 2017, the Company recognized payables to the Parent in the amount of $1,338,681 for use of
the Parent’s net operating losses for tax purposes.
During
the Interim Period ended October 19, 2017, the Company declared and paid dividends in the amount of $ 4,680,000 to the Parent.
Note
6.
|
Commitments
and Contingencies
|
Litigation
Periodically,
the Company is involved in litigation in the normal course of business. The Company believes that the result of any potential
litigation will not have a material adverse effect on the Company’s financial condition.
Note
7.
|
geographic
information AND MAJOR FRANCHISEES
|
R
evenues
by geographic area are as follows (dollars in thousands):
|
|
Interim
Period Ended
October 19, 2017
|
|
United
States
|
|
$
|
2,855,347
|
|
Other
countries
|
|
|
2,724,724
|
|
Total
revenues
|
|
$
|
5,580,071
|
|
Revenues
are shown based on the geographic location of our licensees. All of our assets are located in the United States.
During
the interim period ended October 19, 2017, there were no franchisees which accounted for more than 10% of the Company’s
revenues.
Report
of Independent Registered Public Accounting Firm
To
The Board of Directors and Stockholder
Fatburger
North America, Inc.
Beverly
Hills, California
We
have audited the accompanying balance sheets of Fatburger North America, Inc. (Company) as of December 25, 2016 and December 27,
2015 and the related statements of income, stockholder’s equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in
accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Fatburger
North America, Inc. as of December 25, 2016 and December 27, 2015 and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/
Hutchinson and Bloodgood LLP
Glendale,
California
May
5, 2017
FATBURGER
NORTH AMERICA, INC.
Balance
Sheets
December
25, 2016 and December 27, 2015
|
|
2016
|
|
|
2015
|
|
Assets
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
|
$
|
210,872
|
|
Accounts
receivable, net of allowance for doubtful accounts of $281,041 and $128,041 for 2016 and 2015, respectively
|
|
|
408,655
|
|
|
|
350,346
|
|
Other
current assets
|
|
|
8,358
|
|
|
|
8,358
|
|
Advertising
expenditures in excess of collections
|
|
|
151,000
|
|
|
|
746,187
|
|
Total
current assets
|
|
|
568,013
|
|
|
|
1,315,763
|
|
|
|
|
|
|
|
|
|
|
Due
from affiliates
|
|
|
9,361,741
|
|
|
|
8,637,095
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
2,134,800
|
|
|
|
2,134,800
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
529,400
|
|
|
|
529,400
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
1,594,866
|
|
|
|
2,588,408
|
|
Total
assets
|
|
$
|
14,188,820
|
|
|
$
|
15,205,466
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and STOCKholder’s Equity
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Deferred
income
|
|
$
|
1,339,080
|
|
|
$
|
1,584,402
|
|
Accounts
payable
|
|
|
1,070,553
|
|
|
|
1,034,485
|
|
Accrued
expenses
|
|
|
1,137,528
|
|
|
|
1,098,180
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
3,547,161
|
|
|
|
3,717,067
|
|
|
|
|
|
|
|
|
|
|
Deferred
income – noncurrent
|
|
|
2,814,688
|
|
|
|
5,507,500
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
6,361,849
|
|
|
|
9,224,567
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholder’s
equity
|
|
|
|
|
|
|
|
|
Common
stock, $.01 par value, 1,000 shares authorized, issued and outstanding
|
|
|
10
|
|
|
|
10
|
|
Additional
paid in capital
|
|
|
3,500,000
|
|
|
|
3,500,000
|
|
Retained
earnings
|
|
|
4,326,961
|
|
|
|
2,480,889
|
|
|
|
|
|
|
|
|
|
|
Total
stockholder’s equity
|
|
|
7,826,971
|
|
|
|
5,980,899
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholder’s equity
|
|
$
|
14,188,820
|
|
|
$
|
15,205,466
|
|
The
accompanying notes are integral part of these financial statements.
FATBURGER
NORTH AMERICA, INC.
Statements
of Income
Years
Ended December 25, 2016 and December 27, 2015
|
|
2016
|
|
|
2015
|
|
Revenues
|
|
|
|
|
|
|
|
|
Royalties
|
|
$
|
4,632,243
|
|
|
$
|
5,143,702
|
|
Franchise
fees
|
|
|
3,750,374
|
|
|
|
2,305,950
|
|
Management
fees
|
|
|
74,388
|
|
|
|
82,851
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
8,457,005
|
|
|
|
7,532,503
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
2,932,326
|
|
|
|
2,589,604
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
2,932,326
|
|
|
|
2,589,604
|
|
|
|
|
|
|
|
|
|
|
Income
before income tax expense
|
|
|
5,524,679
|
|
|
|
4,942,899
|
|
Income
tax expense
|
|
|
1,978,607
|
|
|
|
2,282,692
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,546,072
|
|
|
$
|
2,660,207
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share - Basic
|
|
$
|
3,546.08
|
|
|
$
|
2,660.21
|
|
|
|
|
|
|
|
|
|
|
Shares
used in computing net income per common share
|
|
|
1,000
|
|
|
|
1,000
|
|
The
accompanying notes are integral part of these financial statements.
FATBURGER
NORTH AMERICA, INC.
Statements
of Stockholder’s Equity
Years
Ended December 25, 2016 and December 27, 2015
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 28, 2014
|
|
|
1,000
|
|
|
$
|
10
|
|
|
$
|
3,500,000
|
|
|
$
|
6,820,682
|
|
|
$
|
10,320,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,660,207
|
|
|
|
2,660,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,000,000
|
)
|
|
|
(7,000,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 27, 2015
|
|
|
1,000
|
|
|
|
10
|
|
|
|
3,500,000
|
|
|
|
2,480,889
|
|
|
|
5,980,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,546,072
|
|
|
|
3,546,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,700,000
|
)
|
|
|
(1,700,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 25, 2016
|
|
|
1,000
|
|
|
$
|
10
|
|
|
$
|
3,500,000
|
|
|
$
|
4,326,961
|
|
|
$
|
7,826,971
|
|
The
accompanying notes are integral part of these financial statements.
FATBURGER
NORTH AMERICA, INC.
Statements
of Cash Flows
Years
Ended December 25, 2016 and December 27, 2015
|
|
2016
|
|
|
2015
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,546,072
|
|
|
$
|
2,660,207
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
993,542
|
|
|
|
299,561
|
|
Provision
for bad debt expense
|
|
|
153,000
|
|
|
|
135,394
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(211,309
|
)
|
|
|
(53,602
|
)
|
Advertising
expenditures in excess of collections
|
|
|
595,187
|
|
|
|
372,610
|
|
Accounts
payable
|
|
|
36,068
|
|
|
|
238,849
|
|
Accrued
expenses
|
|
|
39,348
|
|
|
|
181,237
|
|
Deferred
income
|
|
|
(2,938,134
|
)
|
|
|
245,642
|
|
|
|
|
|
|
|
|
|
|
Total
adjustments
|
|
|
(1,332,298
|
)
|
|
|
1,419,691
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
2,213,774
|
|
|
|
4,079,898
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Dividends
paid
|
|
|
(1,700,000
|
)
|
|
|
(7,000,000
|
)
|
Change
in due from affiliates
|
|
|
(724,646
|
)
|
|
|
3,130,974
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
|
(2,424,646
|
)
|
|
|
(3,869,026
|
)
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
(210,872
|
)
|
|
|
210,872
|
|
Cash,
beginning of year
|
|
|
210,872
|
|
|
|
-
|
|
Cash,
end of year
|
|
$
|
-
|
|
|
$
|
210,872
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of cash flow Information
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
29,973
|
|
|
$
|
152,275
|
|
Supplemental
Disclosure of Noncash INVESTINg and Financing Activities
|
|
|
|
|
|
|
|
|
Note
payable assumed by the Parent
|
|
$
|
-
|
|
|
$
|
152,510
|
|
|
|
|
|
|
|
|
|
|
Income
tax payable offset against amounts due from affiliates
|
|
$
|
920,946
|
|
|
$
|
1,793,283
|
|
The
accompanying notes are integral part of these financial statements.
FATBURGER
NORTH AMERICA, INC.
Notes
to Financial Statements
December
25, 2016 and December 27, 2015
Note
1.
|
Nature
of Business
|
Fatburger
North America, Inc. (the Company), a Delaware corporation, was formed on March 28, 1990 and is a wholly-owned subsidiary of Fog
Cutter Capital Group Inc. (the Parent). Prior to its transfer to the Parent on March 24, 2011, the Company was owned by Fatburger
Holdings, Inc. (Holdings) as the result of a stock purchase transaction on August 2001.
The
Company franchises and licenses the right to use the Fatburger name, operating procedures and method of merchandising to franchisees.
Upon signing a franchise agreement, the Company is committed to provide training, some supervision and assistance, and access
to Operations Manuals. As needed, the Company will also provide advice and written materials concerning techniques of managing
and operating the restaurants. The franchises are operated under the name “Fatburger.” Each franchise agreement term
is typically for 15 years with two additional 10-year options available. Additionally, the Company conducts a multi-market advertising
campaign to enhance the corporate name and image, which is funded through advertising revenues received from its franchisees and
to a lesser extent, other restaurant locations owned and operated by subsidiaries of the Parent.
As
of December 25, 2016, there were 161 franchise restaurant locations operated by third parties in Arizona, California, Colorado,
Hawaii, Nevada, Washington, Canada, China, UAE, the UK, Kuwait, Saudi Arabia, Bahrain, Egypt, Iraq, Pakistan, Philippines, Indonesia,
India, Malaysia, Fiji, Oman, Qatar and Tunisia (the Franchisees).
Note
2.
|
Summary
of Significant Accounting Policies
|
Fiscal
Year End:
The Company operates on a 52-week calendar and its fiscal year ends on the Sunday closest to December 31. Consistent
with the industry, 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. Accordingly, the accompanying financial statements reflect the Company’s fiscal year ends of December 25, 2016
and December 27, 2015. The use of this fiscal year means a 53
rd
week is added to the fiscal year every 5 or 6 years.
Accounts
Receivable:
Accounts receivable consist primarily of royalty and advertising fees from franchisees reduced by reserves for
the estimated amount deemed uncollectible due to bad debts.
Credit
and Depository Risks:
Financial instruments that potentially subject the Company to concentrations of credit risk consist
principally of cash and accounts receivable. The Company’s customer base consists of franchisees located in Arizona, California,
Colorado, Hawaii, Nevada, Washington, Canada, China, UAE, the UK, Kuwait, Saudi Arabia, Bahrain, Egypt, Iraq, Pakistan, Philippines,
Indonesia, India, Malaysia, Fiji, Oman, Qatar and Tunisia. Management reviews each of its customer’s financial conditions
prior to signing a franchise agreement and believes that it has adequately provided for any exposure to potential credit losses.
The
Company maintains cash deposits in national financial institutions. The Company has not experienced any losses in such accounts
and believes its cash balances are not exposed to significant risk of loss.
Note
2.
|
Summary
of Significant Accounting Policies (
Continued
)
|
Compensated
Absences:
Employees of the Parent who provide reimbursed services to the Company earn vested rights to compensation for unused
vacation time. Accordingly, the Company accrues the amount of vacation compensation that employees have earned but not yet taken
at the end of each fiscal year.
Goodwill
and Other Intangible Assets:
Goodwill and other intangible assets with indefinite lives, such as trademarks, are not amortized
but are reviewed for impairment annually, or more frequently if indicators arise. No impairment has been identified for the years
ended December 25, 2016 and prior.
Revenue
Recognition:
Franchise fee revenue from sales of individual franchises is recognized upon completion of training and the actual
opening of a location. Typically, franchise fees are $50,000 for each domestic location and are collected 50% upon signing a deposit
agreement and 50% at the signing of a lease and related franchise agreement. International franchise fees are typically $65,000
for each location, and are payable 100% upon signing a deposit agreement. The franchise fee may be adjusted at management’s
discretion or in situations involving store transfers. Deposits are nonrefundable upon acceptance of the franchise application.
These deposits are recorded as deferred income – current and noncurrent based upon the expected franchise restaurant openings
dates. The Company acknowledges that some of its franchisees have not complied with their development timelines for opening franchise
stores. These franchise rights are terminated and franchise fee revenue is recognized for non-refundable deposits.
During
the year ended December 25, 2016, thirteen franchise locations were opened and ten were closed or otherwise left the franchise
system. Of the new franchise locations, three were in Canada; three were in the United States; two were in Pakistan; and one in
each of Tunisia, China, Philippines, Egypt and Iraq. Of the closed locations, three were in California, and one in each of Nevada,
Washington, Maryland, Pakistan, Indonesia, Kuwait, and Malaysia.
During
the year ended December 27, 2015, eighteen franchise locations were opened and ten were closed or otherwise left the franchise
system. Of the new franchise locations, five were in Canada; four were in California; two were in Malaysia; and one in each of
Tunisia, Kuwait, the UK, Qatar, UAE Fiji, and, Iraq. Of the closed locations, three were in California, and one in each of Nevada,
New York, Michigan, Lebanon, UAE, Bahrain, and Saudi Arabia.
In
addition to franchise fee revenue, the Company collects a royalty of 3% to 6% of net sales from its franchisees. Royalties are
recognized as revenue as the related sales are made by the franchisees. Royalties collected in advance are classified as deferred
income until earned.
Segment
information:
The Company owns international and domestic licensed operations. Our chief operating decision maker (“CODM”)
is our Chief Executive Officer; our CODM reviews financial performance and allocates resources at an overall level on a recurring
basis. Therefore, Management has determined that the Company has one operating segment and one reportable segment.
Advertising:
The Company requires advertising payments of 1.95% of net sales from Fatburger restaurants located in the Los Angeles marketing
area and up to 0.95% of net sales from stores located outside of the Los Angeles marketing area. International locations pay 0.20%
to 0.95%. The Company also receives, from time to time, payments from vendors that are to be used for advertising. Since advertising
funds collected are required to be spent for specific advertising purposes, no revenue or expense is recorded for advertising
funds.
Cumulative
advertising expenditures in excess of collections are recorded as current assets and will be reimbursed by future advertising
payments from franchises and other Fatburger affiliates
Note
2.
|
Summary
of Significant Accounting Policies (
Continued
)
|
Income
Taxes:
The Company accounts for income taxes using the asset and liability approach. The asset and liability approach requires
the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between
the carrying amounts and the tax basis of assets and liabilities. Deferred taxes are classified as current or noncurrent, depending
on the classification of the assets and liabilities to which they relate.
Income
Per Common Share
:
Income per share data was computed using the weighted-average number of shares outstanding during
each year.
Joint
and Several Liabilities:
Joint and several liabilities are recorded for the amount the Company agreed to pay on the basis
of its arrangement among its co-obligors. See note 7 for further detail. The Company has not recorded any obligations under this
arrangement as of December 25, 2016 and December 27, 2015.
Use
of Estimates:
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues and expenses during the reported periods. Actual results
could differ from those estimates.
Joint
and Several Liabilities:
Joint and several liabilities are recorded for the amount the Company agreed to pay on the basis
of its arrangement among its co-obligors and any additional amount the Company expects to pay on behalf of the co-obligors. See
note 7 for further detail. The Company has not recorded any obligations under this arrangement as of December 25, 2016 and December
27, 2015.
Recently
Issued Accounting Standards:
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) 2014-09, Revenue From Contracts With Customers (Topic 606), requiring an entity to recognize the amount of revenue to which
it expects to be entitled for the transfer of promised goods and services to customers. The updated standard will replace most
existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective
or retrospective with cumulative effect transition method. In August 2015, the FASB issued ASU 2015-14, which defers the effective
date of ASU 2014-09 by one year, making it effective for annual reporting periods beginning after December 15, 2017. The Company
is currently evaluating the effects adoption of this guidance will have on its financial statements.
Note
2.
|
Summary
of Significant Accounting Policies (
Continued
)
|
Recently
Issued Accounting Standards (continued):
In February 2016, the FASB issued ASU 2016-02, Leases, requiring a lessee to recognize
on the balance sheet the assets and liabilities for the rights and obligations created by those leases with a lease term of more
than twelve months. Leases will continue to be classified as either financing or operating, with classification affecting the
recognition, measurement and presentation of expenses and cash flows arising from a lease. This ASU is effective for interim and
annual period beginning after December 15, 2018 and requires a modified retrospective approach to adoption for lessees related
to capital and operating leases existing at, or entered into after, the earliest comparative period presented in the financial
statements, with certain practical expedients available. Early adoption is permitted. The Company does not currently have any
leases that will have an impact on the financial statements or disclosures as a result of the adoption of this ASU.
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments. The new guidance is intended to reduce diversity in practice in how transactions are classified in the statement of
cash flows. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December
15, 2017. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.
Deferred
income is as follows:
|
|
December
25, 2016
|
|
|
December
27, 2015
|
|
|
|
|
|
|
|
|
Deferred
franchise fees
|
|
$
|
3,214,016
|
|
|
$
|
5,902,500
|
|
Deferred
royalties
|
|
|
939,752
|
|
|
|
1,189,402
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,153,768
|
|
|
$
|
7,091,902
|
|
The
Company files its Federal and most state income tax returns on a consolidated basis with the Parent. For financial reporting purposes,
the Company has recorded a tax provision calculated as if the Company files all of its tax returns on a stand-alone basis. The
taxes payable to the Parent determined by this calculation of $920,946 and $1,793,283 were offset against amounts due from affiliates
as of December 25, 2016 and December 27, 2015, respectively (see Note 6). As of December 25, 2016, the Parent has estimated aggregate
federal net operating loss carryforwards of $71,370,000 available to offset future federal taxable income generated by the Company.
These carryforwards begin to expire in 2018.
Deferred
taxes reflect the net effect of temporary differences between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for calculating taxes payable on a stand-alone basis. Significant components of the Company’s
deferred tax assets are as follows:
|
|
December
25, 2016
|
|
|
December
27, 2015
|
|
Current
deferred tax assets
|
|
|
|
|
|
|
|
|
Deferred
franchise fees
|
|
$
|
1,132,728
|
|
|
$
|
2,082,014
|
|
Deferred
royalties
|
|
|
331,200
|
|
|
|
419,543
|
|
Allowances
|
|
|
99,048
|
|
|
|
45,164
|
|
Accruals
and other
|
|
|
20,280
|
|
|
|
18,983
|
|
State
tax accrual
|
|
|
11,610
|
|
|
|
22,704
|
|
Total
|
|
$
|
1,594,866
|
|
|
$
|
2,588,408
|
|
Components
of the income tax provision (benefit) are as follows:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December
25, 2016
|
|
|
December
27, 2015
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
920,946
|
|
|
$
|
1,764,078
|
|
State
|
|
|
34,146
|
|
|
|
66,778
|
|
Foreign
|
|
|
29,973
|
|
|
|
152,275
|
|
|
|
|
985,065
|
|
|
|
1,983,131
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
956,783
|
|
|
|
(2,831
|
)
|
State
|
|
|
36,759
|
|
|
|
302,392
|
|
|
|
|
993,542
|
|
|
|
299,561
|
|
Total
income tax provision
|
|
$
|
1,978,607
|
|
|
$
|
2,282,692
|
|
A
reconciliation of the statutory income tax rate to the effective tax rate is as follows:
|
|
December
25, 2016
|
|
|
December
27, 2015
|
|
|
|
|
|
|
|
|
Statutory
rate
|
|
|
34
|
%
|
|
|
34
|
%
|
State
and local income taxes
|
|
|
1
|
|
|
|
7
|
|
Foreign
withholding taxes
|
|
|
1
|
|
|
|
3
|
|
Other
|
|
|
-
|
|
|
|
2
|
|
Effective
tax rate
|
|
|
36
|
%
|
|
|
46
|
%
|
As
of December 25, 2016, the Company’s annual tax filings for the prior three years are open for audit by Federal and for the
prior four years for state tax agencies. Management evaluated the Company’s overall tax positions and has determined that
no provision for uncertain income tax positions is necessary as of December 25, 2016 and December 27, 2015.
During
2014, one of the selling stockholders of an affiliate of the Company, Buffalo’s Franchise Concepts, Inc. made advances to
the Company in the amount of $150,000, which is evidenced by a promissory note with interest at 10% per annum and a stated maturity
date of December 31, 2014. The proceeds from the borrowing were advanced to the Company’s parent and used in relation to
the purchase of one franchise location. During 2015, the unpaid balance of the note was combined with a note payable entered into
by the Parent and the selling stockholder. As a result, the note balance was applied against amounts due from affiliates during
the year ended December 27, 2015.
Note
6.
|
Related
Party Transactions
|
The
Company had open accounts with affiliated entities under the common control of the Parent resulting in net amounts due to the
Company of $9,361,739 and $8,637,095 as of December 25, 2016 and December 27, 2015, respectively.
During
the years ended December 25, 2016 and December 27, 2015, the Company made net cash advances to affiliates in the amount of $6,285,035
and $6,984,203, respectively. These advances are expected to be recovered from credits for the use of the Parents’ tax net
operating losses, and to the lesser extent, from repayment by the affiliates from proceeds generated by their operations and investments.
Effective
in 2012, the Parent’s operations were structured in such a way that significant direct and indirect administrative functions
were provided to the Company. These services include operational personnel to sell franchise rights, assist with training franchisees
and assisting franchises with opening restaurants. The Parent also provides executive administration and accounting services for
the Company.
The
Company reimbursed the Parent for these expenses in the approximate amounts of $1,699,947 and $1,474,404 for the years ended December
25, 2016 and December 27, 2015, respectively. Management reviewed the expenses recorded at the Parent and identified the common
expenses that shall be allocated to the subsidiaries. These expenses were allocated based on an estimate of management’s
time spent on the activities of the Parent and its subsidiaries, and further allocated among the subsidiaries pro rata based on
each subsidiary’s respective revenues as a percentage of overall revenues of the subsidiaries. The Company believes that
the allocation of expenses is not materially different from what it would have been if the Company was a stand-alone entity.
During
the years ended December 25, 2016 and December 27, 2015, the Company recognized payables to the Parent in the amount of $920,946
and $1,793,283, respectively, for use of the Parent’s net operating losses for tax purposes.
During
the years ended December 25, 2016 and December 27, 2015, the Company declared and paid dividends in the amount of $ 1,700,000
and $7,000,000, respectively.
Note
7.
|
Commitments
and Contingencies
|
Litigation
Periodically,
the Company is involved in litigation in the normal course of business. The Company believes that the result of any potential
litigation will not have a material adverse effect on the Company’s financial condition.
On
June 1, 2010, the Company and certain of its affiliates became subject to a judgment payable to GE Capital Franchise Finance Corporation
(GEFFC) for approximately $4,300,000. On October 11, 2011, GEFFC agreed to accept payments in full satisfaction of the obligation
totaling approximately $2,600,000 plus interest at 5%. Subsequently, the Parent made payments totaling approximately $2,000,000,
plus interest to GEFFC. As of December 25, 2016, the balance remaining to be paid on the discounted judgment was approximately
$580,000. No proceeds were received by the Company, however the Company is jointly and severally liable as a co-borrower.
Lease
Guarantees
The
Company had guaranteed the operating lease for one Fatburger restaurant that was to be a joint venture between an affiliate of
the Company and a separate third party. This lease went into default in 2008, and the landlord called the Company on its guarantee.
The Company settled with this landlord for approximately $271,000, to be paid out in monthly installments of $12,000 until paid
in full. The Company fulfilled its obligation and obtained a release from the landlord in 2014.
The
Company had guaranteed the operating lease for one Fatburger restaurant owned by an affiliate of the Company. This lease went
into default in 2008, and the landlord called the Company on its guarantee. The Company settled with this landlord for approximately
$60,000, to be paid out in monthly installments of $2,000 over a period of 30 months beginning in October 2009. The liability
of $60,000 was recorded in the financial statements as of December 28, 2008. The Company made $4,000 in payments after the settlement
and has not heard from the landlord since then. In 2014, the Company wrote off the debt from its balance sheet.
Note
8.
|
geographic
information AND MAJOR FRANCHISEES
|
R
evenues
by geographic area are as follows:
|
|
Year
Ended
December 25, 2016
|
|
|
Year
Ended
December 27, 2015
|
|
United
States
|
|
$
|
3,591,953
|
|
|
$
|
3,875,580
|
|
Other
countries
|
|
|
4,865,052
|
|
|
|
3,656,923
|
|
Total
revenues
|
|
$
|
8,457,005
|
|
|
$
|
7,532,503
|
|
Revenues
are shown based on the geographic location of our licensees. All of our assets are located in the United States.
During
the year ended December 25, 2016, one franchisee accounted for more than 10% of the Company’s revenues, with total revenues
of $1,053,337. During the year ended December 27, 2015, the Company had no single franchisee that accounted for more than 10%
of its revenues.
Report
of Independent Registered Public Accounting Firm
Stockholder
and Board of Directors
Buffalo’s
Franchise Concepts, Inc. and Subsidiary
Beverly
Hills, California
Opinion
on the Consolidated Financial Statements
We
have audited the accompanying consolidated balance sheet of Buffalo’s Franchise Concepts, Inc. (the “Company”)
and subsidiary as of October 19, 2017, and the related statements of income, stockholder’s equity, and cash flows for the
period December 26, 2016 through October 19, 2017, and the related notes to the financial statements (collectively, the “consolidated
financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of the Company and its subsidiary as of October 19, 2017, and the results of their operations
and their cash flows for the period December 26, 2016 through October 19, 2017 in conformity with accounting principles generally
accepted in the United States of America.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with
respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
s
Hutchinson and Bloodgood LLP
We,
or a firm acquired by us in 2012, have continuously served as auditor for the Company since 2011.
Glendale,
California
April
2
, 2018
BUFFALO’S
FRANCHISE CONCEPTS, INC. AND SUBSIDIARY
Consolidated
Balance Sheet
October
19, 2017
Assets
|
|
|
|
Current assets
|
|
|
|
|
Cash
|
|
$
|
35,335
|
|
Accounts
receivable, net of allowance for doubtful accounts of $15,616
|
|
|
31,753
|
|
Other
current assets
|
|
|
11
|
|
Total
current assets
|
|
|
67,099
|
|
|
|
|
|
|
Due from affiliates
|
|
|
904,197
|
|
Trademarks
|
|
|
27,000
|
|
Goodwill
|
|
|
5,365,100
|
|
Deferred tax
assets
|
|
|
104,011
|
|
Buffalo’s
creative and advertising fund
|
|
|
397,995
|
|
Total
assets
|
|
$
|
6,865,402
|
|
|
|
|
|
|
Liabilities
and Stockholder’s Equity
|
|
|
|
|
Current liabilities
|
|
|
|
|
Accounts
payable
|
|
$
|
182,682
|
|
Accrued
expenses
|
|
|
81,570
|
|
Deferred
income
|
|
|
116,958
|
|
Total
current liabilities
|
|
|
381,210
|
|
|
|
|
|
|
Deferred income
– noncurrent
|
|
|
147,980
|
|
Buffalo’s
creative and advertising fund - contra
|
|
|
397,995
|
|
Total
liabilities
|
|
|
927,185
|
|
|
|
|
|
|
Commitments
and contingencies (Notes 6 and 7)
|
|
|
|
|
|
|
|
|
|
Stockholder’s
equity
|
|
|
|
|
Common
stock, $.001 par value, 50,000,000 shares authorized
|
|
|
—
|
|
Additional
paid-in capital
|
|
|
5,138,946
|
|
Retained
earnings
|
|
|
799,271
|
|
Total
stockholder’s equity
|
|
|
5,938,217
|
|
Total
liabilities and stockholder’s equity
|
|
$
|
6,865,402
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
BUFFALO’S
FRANCHISE CONCEPTS, INC. AND SUBSIDIARY
Consolidated
Statement of Operations
For
the interim period from December 26, 2016 through October 19, 2017
Revenues
|
|
|
|
|
Royalties
|
|
$
|
992,855
|
|
Franchise
fees
|
|
|
529,944
|
|
Total
revenues
|
|
|
1,522,799
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
General
and administrative
|
|
|
568,167
|
|
Total
expenses
|
|
|
568,167
|
|
|
|
|
|
|
Income
from operations
|
|
|
954,632
|
|
|
|
|
|
|
Other
income
|
|
|
-
|
|
|
|
|
|
|
Income
before taxes
|
|
|
954,632
|
|
|
|
|
|
|
Income
tax expense
|
|
|
353,330
|
|
|
|
|
|
|
Net
income
|
|
$
|
601,302
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
BUFFALO’S
FRANCHISE CONCEPTS, INC. AND SUBSIDIARY
Consolidated
Statements of Stockholder’s Equity
For
the interim period from December 26, 2016 through October 19, 2017
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Paid-In
|
|
|
Retained
|
|
|
|
|
|
|
Capital
|
|
|
Earnings
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 25, 2016
|
|
$
|
5,138,946
|
|
|
$
|
1,847,969
|
|
|
$
|
6,986,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
—
|
|
|
|
601,302
|
|
|
|
601,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
distribution
|
|
|
—
|
|
|
|
(1,650,000
|
)
|
|
|
(1,650,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
October 19, 2017
|
|
$
|
5,138,946
|
|
|
$
|
799,271
|
|
|
$
|
5,938,217
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
BUFFALO’S
FRANCHISE CONCEPTS, INC. AND SUBSIDIARY
Consolidated
Statement of Cash Flows
For
the interim period from December 26, 2016 through October 19, 2017
Cash
flows from operating activities
|
|
|
|
|
Net
income
|
|
$
|
601,302
|
|
Adjustments
to reconcile net income to net cash flows provided by operating activities:
|
|
|
|
|
Provision
for bad debt expense
|
|
|
15,616
|
|
Deferred
income taxes
|
|
|
146,033
|
|
Changes
in current operating assets and liabilities:
|
|
|
|
|
Accounts
receivable
|
|
|
6,145
|
|
Other
current assets
|
|
|
-
|
|
Accounts
payable
|
|
|
85,298
|
|
Accrued
expenses
|
|
|
(6,086
|
)
|
Deferred
income
|
|
|
(551,319
|
)
|
Total
adjustments
|
|
|
(304,313
|
)
|
Net
cash flows provided by operating activities
|
|
|
296,989
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
Change
in advances to affiliates
|
|
|
1,388,346
|
|
Dividend
distribution
|
|
|
(1,650,000
|
)
|
Net
cash flows used in financing activities
|
|
|
(261,654
|
)
|
|
|
|
|
|
Net
increase in cash
|
|
|
35,335
|
|
|
|
|
|
|
Cash,
beginning of year
|
|
|
—
|
|
|
|
|
|
|
Cash,
end of year
|
|
$
|
35,335
|
|
|
|
|
|
|
Supplemental
Disclosure of cash flow Information
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
-
|
|
|
|
|
|
|
Supplemental
Disclosure of Noncash INVESTING and Financing Activities
|
|
|
|
|
|
|
|
|
|
Income
tax payable offset against amounts due from affiliates
|
|
$
|
187,702
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
BUFFALO’S
FRANCHISE CONCEPTS, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
For
the interim period from December 26, 2016 through October 19, 2017 (the “
Interim Period
”)
Note
1. Nature of business
Buffalo’s
Franchise Concepts, Inc. is a Nevada corporation formed in June 2006. On December 8, 2006, the Nevada corporation acquired all
the issued and outstanding common stock of Buffalo’s Franchise Concepts, Inc., a Georgia corporation (BFCI-GA), which became
a wholly-owned subsidiary. On November 28, 2011, all the issued and outstanding stock of the Nevada corporation was acquired by
Fog Cap Development LLC (Fog Cap), a wholly-owned subsidiary of Fog Cutter Capital Group Inc. (the “Parent”).
Subsequent
to the date of these financial statements, on October 20, 2017, the Parent contributed the Company to FAT Brands, Inc. as a wholly-owned
subsidiary. The Parent owns majority control FAT Brands Inc. These financial statements have been produced to reflect the interim
period beginning December 26, 2017 and ending on the date prior to the contribution to FAT Brands.
Buffalo’s
Franchise Concepts, Inc., through its wholly-owned subsidiary, grants store franchise and development agreements for the operation
of casual dining restaurants (Buffalo’s Southwest Cafés) and quick service restaurants outlets (Buffalo’s Express).
The restaurants specialize in the sale of Buffalo-Style chicken wings, chicken tenders, burgers, ribs, wrap sandwiches, and salads.
Franchisees are licensed to use the Company’s trade name, service marks, trademarks, logos, and unique methods of food preparation
and presentation.
In
2012, the Parent began co-branding its Buffalo’s Express restaurants with Fatburger restaurants, the Parent’s other
fast casual brand. These co-branded restaurants sell products of both brands and share back-of-the-house facilities.
At
October 19, 2017, there were 18 operating Buffalo’s Southwest Cafés restaurants and 72 co-branded Buffalo’s
Express restaurants. All these restaurants were franchise locations except for one Buffalo’s Southwest Café restaurant
which was owned by an affiliate.
Note
2. Summary of significant accounting policies
Principles
of Consolidation:
The accompanying consolidated financial statements include the accounts of Buffalo’s Franchise Concepts,
Inc. and its wholly-owned subsidiary, Buffalo’s Franchise Concepts, Inc., a Georgia corporation, (collectively, the Company).
All significant intercompany accounts have been eliminated in consolidation.
Accounts
Receivable:
Accounts receivable consist of royalty fees from franchisees reduced by reserves for the estimated amount deemed
uncollectible due to bad debts. As of October 19, 2017, the accounts receivable was net of an allowance for doubtful accounts
in the amount of $15,616.
Credit
and Depository Risks:
The Company maintains its cash accounts at high credit quality financial institutions. The balances,
at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes its cash
balances are not exposed to significant risk of loss.
The
Company’s customer base consists of franchisees located in Georgia, Texas, California, Canada, the UK, Qatar, Saudi Arabia,
Tunisia, Malaysia, Panama, and the Philippines. Management reviews each of its customer’s financial conditions prior to
signing a franchise agreement and believes that it has adequately provided for any exposure to potential credit losses.
Fiscal
Year End:
The Company operates on a 52-week calendar year. The fiscal year ends on the Sunday closest to December 31. Consistent
with the industry, Buffalo 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 method means a 53
rd
week is added to the fiscal year every 5 or 6 years. The
accompanying consolidated financial statements reflect the Company’s interim period beginning December 26, 2016 and ending
on October 19, 2017, the date prior to the contribution to FAT Brands.
Goodwill
and Other Intangible Assets:
Goodwill and other intangible assets with indefinite lives, such as trademarks, are not amortized
but are reviewed for impairment annually or more frequently if indicators arise. Intangible assets that are not deemed to have
indefinite lives are amortized over their useful lives and are also reviewed for impairment annually or more frequently if indications
arise. No impairment has been identified as of October 19, 2017.
Franchise
rights are amortized over the remaining lives of the agreements at the date of acquisition. All franchise rights were fully amortized
prior to the Interim Period.
Revenue
Recognition:
The Company recognizes revenues from franchise sales upon commencement of operations by a franchisee. Franchise
fee revenue from sales of individual franchises is recognized upon completion of training and the actual opening of a location.
Typically, franchise fees are $50,000 for each domestic location and are collected 50% upon signing a deposit agreement and 50%
at the signing of a lease and related franchise agreement. International franchise fees are typically $65,000 for each location
and are payable 100% upon signing a deposit agreement. The Company typically charges a $25,000 co-brand conversion fee.
The
franchise fee may be adjusted at management’s discretion or in a situation involving store transfers. Deposits are non-refundable
upon acceptance of the franchise application. These deposits are recorded as deferred income – current and noncurrent based
upon the expected franchise restaurant opening dates. In situations where franchisees have not complied with their development
timelines for opening franchise stores, the franchise rights are terminated and franchise fee revenue is recognized for non-refundable
deposits.
In
addition to franchise fee revenue, the Company collects a royalty calculated as a percentage of net sales from its franchisees.
Royalties are recognized as revenue when the related sales are made by the franchisees.
During
2008 and 2009, the Company received a total of $500,000 from a franchisee of three restaurants in exchange for an exclusive area
agreement for ten counties in the state of Georgia and reduced service fees for the franchisee’s restaurants for a ten-year
period. The franchisee is required to open four new franchise restaurants in the exclusive territory during the ten-year term
of the agreement. The deferred fee is being amortized into income ratably over the ten-year term. Service fee revenues recognized
in the Interim Period pursuant to the agreement totaled $36,375. As of October 19, 2017, there remained deferred fees of $32,333
relating to the exclusive area agreement.
Advertising:
The Company generally requires advertising payments of 2.0% of net sales from Buffalo’s Southwest Café restaurants.
Co-branded restaurants generally pay 0.20% to 1.95%. The Company also receives, from time to time, payments from vendors that
are to be used for advertising. Since the Company acts in a fiduciary role to collect and disburse these advertising funds, no
revenue or expense is recorded.
Advertising
funds are segregated from other Company assets and the balance of the Buffalo’s Creative and Advertising Fund is recorded
as an asset by the Company with the offsetting advertising obligation recorded as a liability, Buffalo’s Creative and Advertising
Fund – Contra.
Income
Taxes:
The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax
assets and liabilities are determined based on the differences between financial reporting and tax reporting bases of assets and
liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected
to reverse. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain.
A
two-step approach is used to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will
be sustained upon tax authority examination, including resolution of related appeals or litigation processes, if any. The second
step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon the ultimate settlement.
Estimates:
The preparation of financial statements in accordance with GAAP requires the use of estimates in determining assets, liabilities,
revenues and expenses. Actual results may differ from those estimates.
Recently
Issued Accounting Standards:
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) 2014-09, Revenue From Contracts With Customers (Topic 606), requiring an entity to recognize the amount of revenue to which
it expects to be entitled for the transfer of promised goods and services to customers. The updated standard will replace most
existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective
or retrospective with cumulative effect transition method. These standards are effective for the Company in our first quarter
of 2018 and will be adopted using the modified retrospective method.
These
standards require that the transaction price received from customers be allocated to each separate and distinct performance obligation.
The transaction price attributable to each separate and distinct performance obligation is then recognized as the performance
obligations are satisfied. The services provided by the Company related to upfront fees received from franchisees such as initial
or renewal fees do not currently contain separate and distinct performance obligations from the franchise right and thus those
upfront fees will be recognized as revenue over the term of each respective franchise agreement. We currently recognize upfront
franchise fees such as initial and renewal fees when the related services have been provided, which is when a store opens for
initial fees and when renewal options become effective for renewal fees. These standards require any unamortized portion of fees
received prior to adoption be presented in the consolidated balance sheet as a contract liability. The Company is evaluating the
effect the adoption of these standards will have on the future financial statements.
These
standards will also have an impact on transactions currently not included in the Company’s revenues and expenses such as
franchisee contributions to and subsequent expenditures from advertising cooperatives that we are required to consolidate and
other cost reimbursement arrangements we have with our franchisees. We do not currently include these contributions and expenditures
in our consolidated statements of income or cash flows. The new standards will impact the principal/agent determinations in these
arrangements by superseding industry-specific guidance included in current GAAP. When we are the principal in these transactions
we will include the related contributions and expenditures within our consolidated statements of income and cash flows. As a result
of this change, we expect the increase in both total revenues and total costs and expenses, with no significant impact to Net
Income. The assets and liabilities held by advertising cooperatives, which have historically been reported as Buffalo’s
Creative and Advertising Fund is recorded as an asset by the Company with the offsetting advertising obligation recorded as a
liability, Buffalo’s Creative and Advertising Fund – Contra, respectively, will be included within the respective
balance sheet caption to which the assets and liabilities relate.
These
standards will not impact the recognition of our sales-based royalty fees from franchisees, which is generally our largest source
of revenue. We are currently implementing internal controls related to the recognition and presentation of the Company’s
revenues under these new standards.
In
February 2016, the FASB issued ASU 2016-02, Leases, requiring a lessee to recognize on the balance sheet the assets and liabilities
for the rights and obligations created by those leases with a lease term of more than twelve months. Leases will continue to be
classified as either financing or operating, with classification affecting the recognition, measurement and presentation of expenses
and cash flows arising from a lease. This ASU is effective for interim and annual period beginning after December 15, 2018 and
requires a modified retrospective approach to adoption for lessees related to capital and operating leases existing at, or entered
into after, the earliest comparative period presented in the financial statements, with certain practical expedients available.
Early adoption is permitted. The Company does not currently have any leases that will have an impact on the consolidated financial
statements or disclosures as a result of the adoption of this ASU.
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments. The new guidance is intended to reduce diversity in practice in how transactions are classified in the statement of
cash flows. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December
15, 2017. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial
statements.
In
January 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Accounting for
Goodwill Impairment, which simplifies the accounting for goodwill impairment. This ASU removes Step 2 of the goodwill impairment
test, which requires hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting
unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The new guidance also requires
disclosure of the amount of goodwill at reporting units with zero or negative carrying amounts. ASU 2017-04 is effective for the
Company beginning January 1, 2020. The Company elected to early adopt this standard when performing its annual goodwill impairment
test in 2017. The adoption of this ASU did not have a significant financial impact on the Company’s financial statements.
Note
3. Related party transactions
The
Company has made cumulative net advances to affiliated entities under the common control of the Parent in the amount of $904,197
as of October 19, 2017. These advances are expected to be recovered through repayment for the use of the Parent’s tax net
operating losses and from proceeds generated by the affiliates’ operations and investments.
Effective
in 2013, the Parent’s operations were structured in such a way that significant direct and indirect administrative functions
were provided to the Company. These services include operational personnel to sell franchise rights, assist with training franchisees
and assisting franchisees with opening restaurants. The Parent also provides executive administration and accounting services
for the Company. Expenses are allocated based on an estimate of management’s time spent on the activities of the Parent
and its subsidiaries, and further allocated among the subsidiaries pro rata based on each subsidiary’s respective revenues
as a percentage of overall revenues of the subsidiaries. The Company believes that the allocation of expenses is not materially
different from what it would have been if the Company was a stand-alone entity. These expenses were $236,108 for the 2017 Interim
Period and were reimbursed to the Parent in cash.
During
the Interim Period, the Company recorded obligations to the Parent in the amount of $187,702 for use of the Parent’s net
operating losses for tax purposes.
During
the Interim Period, the Company declared and paid dividends in the amount of $1,650,000.
Note
4. Income taxes
The
Company files its Federal and most state income tax returns on a consolidated basis with the Parent. For financial reporting purposes,
the Company calculates its tax provision as if the Company files its tax returns on a stand-alone basis. The taxes payable to
the Parent determined by this calculation of $187,702 were offset against the balances due from affiliates as of October 19, 2017.
Deferred
taxes reflect the net effect of temporary differences between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for calculating taxes payable on a stand-alone basis.
Significant
components of the Company’s net deferred tax assets are as follows:
|
|
October
19, 2017
|
|
Net
deferred tax assets (liabilities)
|
|
|
|
|
Deferred
revenue
|
|
$
|
102,028
|
|
Reserves
and accruals
|
|
|
6,285
|
|
Deferred
state income tax
|
|
|
(4,302
|
)
|
Total
|
|
$
|
104,011
|
|
Components
of the income tax provision are as follows for the years ended:
|
|
October
19, 2017
|
|
Current
|
|
|
|
|
Federal
|
|
$
|
136,048
|
|
State
|
|
|
19,594
|
|
|
|
|
155,642
|
|
Deferred
|
|
|
|
|
Federal
|
|
|
173,718
|
|
State
|
|
|
23,969
|
|
|
|
|
197,687
|
|
Total
income tax expense
|
|
$
|
353,329
|
|
Income
tax provision (benefit) related to continuing operations differ from the amounts computed by applying the statutory income tax
rate of 34% to pretax loss as follows:
|
|
October
19, 2017
|
|
|
|
|
|
Tax
provision at statutory rate
|
$
|
|
324,574
|
|
State
taxes
|
|
|
28,755
|
|
Total
income tax provision
|
$
|
|
353,329
|
|
As
of October 19, 2017, the Company’s annual tax filings for the prior three years are open for audit by Federal and for the
prior four years for state tax agencies. Management evaluated the Company’s overall tax positions and has determined that
no provision for uncertain income tax positions is necessary as of October 19, 2017.
Note
5. Buffalo’s creative and advertising fund
Under
the terms of its franchise agreements, the Company collects fees for creative development and advertising from its franchisees
based on percentages of sales as outlined in franchise agreements. The Company is to oversee all advertising and promotional programs
and is to have sole discretion over expenditures from the fund.
During
the Interim Period, the Company collected advertising fees and vender contributions of $430,098. Advertising expenditures for
the same period totaled $222,159. The accompanying consolidated financial statements reflect the year-end balance of the advertising
fund and the related advertising obligation, which was approximately $397,995 as of October 19, 2017.
Note
6. commitments AND CONTINGENCIES
Litigation:
Periodically, the Company is involved in litigation in the normal course of business. The Company believes that the result
of any potential litigation will not have a material adverse effect on the Company’s financial condition.
Note
7. Retirement plan
The
Company has a profit sharing plan (the Plan) with a 401(k) feature covering substantially all employees. There were no contributions
made by the Company under the Plan for the Interim Period.
Note
8. geographic location and major franchisees
R
evenues
by geographic area are as follows:
|
|
Interim
Period Ended
|
|
|
|
October
19, 2017
|
|
|
|
|
|
United
States
|
|
$
|
849,139
|
|
Other
countries
|
|
|
673,660
|
|
Total
revenues
|
|
$
|
1,522,799
|
|
Revenues
are shown based on the geographic location of our licensees. All our assets are located in the United States.
During
the 2017 Interim Period, four franchisees each accounted for more than 10% of the Company’s revenues, with total revenues
of $197,429, $176,428, $230,757 and $325,000.
Report
of Independent Registered Public Accounting Firm
To
The Board of Directors and Stockholder
Buffalo’s
Franchise Concepts, Inc.
Atlanta,
Georgia
We
have audited the accompanying consolidated balance sheets of Buffalo’s Franchise Concepts, Inc. and Subsidiary (Company)
as of December 25, 2016 and December 27, 2015 and the related consolidated statements of operations, stockholder’s equity
and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in
accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of Buffalo’s Franchise Concepts, Inc. and Subsidiary as of December 25, 2016 and December 27, 2015 and the results of their
operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United
States of America.
/s/
Hutchinson and Bloodgood LLP
|
|
|
|
Glendale,
California
|
|
May
5, 2017
|
|
BUFFALO’S
FRANCHISE CONCEPTS, INC. AND SUBSIDIARY
Consolidated
Balance Sheets
December
25, 2016 and December 27, 2015
|
|
2016
|
|
|
2015
|
|
Assets
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
—
|
|
|
$
|
40,899
|
|
Accounts
receivable
|
|
|
53,514
|
|
|
|
44,672
|
|
Other
current assets
|
|
|
11
|
|
|
|
11
|
|
Total
current assets
|
|
|
53,525
|
|
|
|
85,582
|
|
|
|
|
|
|
|
|
|
|
Due
from affiliates
|
|
|
2,292,543
|
|
|
|
1,946,744
|
|
Trademarks
|
|
|
27,000
|
|
|
|
27,000
|
|
Goodwill
|
|
|
5,365,100
|
|
|
|
5,365,100
|
|
Deferred
tax assets
|
|
|
250,044
|
|
|
|
322,294
|
|
Buffalo’s
creative and advertising fund
|
|
|
191,058
|
|
|
|
24,079
|
|
Total
assets
|
|
$
|
8,179,270
|
|
|
$
|
7,770,799
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholder’s Equity
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
97,384
|
|
|
$
|
83,033
|
|
Accrued
expenses
|
|
|
87,656
|
|
|
|
21,967
|
|
Deferred
income
|
|
|
253,333
|
|
|
|
389,333
|
|
Amount
due selling stockholders
|
|
|
—
|
|
|
|
35,890
|
|
Total
current liabilities
|
|
|
438,373
|
|
|
|
530,223
|
|
|
|
|
|
|
|
|
|
|
Deferred
income – noncurrent
|
|
|
562,924
|
|
|
|
687,924
|
|
Buffalo’s
creative and advertising fund - contra
|
|
|
191,058
|
|
|
|
24,079
|
|
Total
liabilities
|
|
|
1,192,355
|
|
|
|
1,242,226
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Notes 6 and 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholder’s
equity
|
|
|
|
|
|
|
|
|
Common
stock, $.001 par value, 50,000,000 shares authorized
|
|
|
—
|
|
|
|
—
|
|
Additional
paid-in capital
|
|
|
5,138,946
|
|
|
|
5,138,946
|
|
Retained
earnings
|
|
|
1,847,969
|
|
|
|
1,389,627
|
|
Total
stockholder’s equity
|
|
|
6,986,915
|
|
|
|
6,528,573
|
|
Total
liabilities and stockholder’s equity
|
|
|
8,179,270
|
|
|
|
7,770,799
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
BUFFALO’S
FRANCHISE CONCEPTS, INC. AND SUBSIDIARY
Consolidated
Statements of Operations
Years
Ended December 25, 2016 and December 27, 2015
|
|
2016
|
|
|
2015
|
|
Revenues
|
|
|
|
|
|
|
|
|
Royalties
|
|
$
|
1,348,910
|
|
|
$
|
1,317,050
|
|
Franchise
fees
|
|
|
255,000
|
|
|
|
706,366
|
|
Total
revenues
|
|
|
1,603,910
|
|
|
|
2,023,416
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
663,212
|
|
|
|
732,402
|
|
Total
expenses
|
|
|
663,212
|
|
|
|
732,402
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
940,698
|
|
|
|
1,291,014
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
35,890
|
|
|
|
85,421
|
|
|
|
|
|
|
|
|
|
|
Income
before taxes
|
|
|
976,588
|
|
|
|
1,376,435
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
318,246
|
|
|
|
528,317
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
658,342
|
|
|
$
|
848,118
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
BUFFALO’S
FRANCHISE CONCEPTS, INC. AND SUBSIDIARY
Consolidated
Statements of Stockholder’s Equity
For
the Years Ended December 25, 2016 and December 27, 2015
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Paid-In
|
|
|
Retained
|
|
|
|
|
|
|
Capital
|
|
|
Earnings
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 28, 2014
|
|
$
|
5,138,946
|
|
|
$
|
941,509
|
|
|
$
|
6,080,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
—
|
|
|
|
848,118
|
|
|
|
848,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
distribution
|
|
|
—
|
|
|
|
(400,000
|
)
|
|
|
(400,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December
27, 2015
|
|
|
5,138,946
|
|
|
|
1,389,627
|
|
|
|
6,528,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
—
|
|
|
|
658,342
|
|
|
|
658,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
distribution
|
|
|
—
|
|
|
|
(200,000
|
)
|
|
|
(200,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 25, 2016
|
|
$
|
5,138,946
|
|
|
$
|
1,847,969
|
|
|
$
|
6,986,915
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
BUFFALO’S
FRANCHISE CONCEPTS, INC. AND SUBSIDIARY
Consolidated
Statements of Cash Flows
For
the Years Ended December 25, 2016 and December 27, 2015
|
|
2016
|
|
|
2015
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
658,342
|
|
|
$
|
848,118
|
|
Adjustments
to reconcile net income to net cash flows provided by operating activities:
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
—
|
|
|
|
10,000
|
|
Deferred
income taxes
|
|
|
72,250
|
|
|
|
272,315
|
|
Changes
in current operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(8,842
|
)
|
|
|
44,278
|
|
Other
current assets
|
|
|
—
|
|
|
|
23,822
|
|
Accounts
payable
|
|
|
14,351
|
|
|
|
(4,462
|
)
|
Accrued
expenses
|
|
|
65,689
|
|
|
|
(5,604
|
)
|
Deferred
income
|
|
|
(261,000
|
)
|
|
|
(658,500
|
)
|
Total
adjustments
|
|
|
(117,552
|
)
|
|
|
(318,151
|
)
|
Net
cash flows provided by operating activities
|
|
|
540,790
|
|
|
|
529,967
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Advances
to affiliates
|
|
|
(345,799
|
)
|
|
|
(60,751
|
)
|
Repayments
of loans from selling stockholders
|
|
|
(35,890
|
)
|
|
|
(28,317
|
)
|
Dividend
distribution
|
|
|
(200,000
|
)
|
|
|
(400,000
|
)
|
Net
cash flows used in financing activities
|
|
|
(581,689
|
)
|
|
|
(489,068
|
)
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
(40,899
|
)
|
|
|
40,899
|
|
|
|
|
|
|
|
|
|
|
Cash,
beginning of year
|
|
|
40,899
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Cash,
end of year
|
|
$
|
—
|
|
|
$
|
40,899
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of cash flow Information
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
2,323
|
|
|
$
|
17,511
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Noncash INVESTING and Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax payable offset against amounts due from affiliates
|
|
$
|
243,673
|
|
|
$
|
238,491
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
BUFFALO’S
FRANCHISE CONCEPTS, INC. AND SUBSIDIARY
Notes
to Consolidated Financial Statements
For
the Years Ended December 25, 2016 and December 27, 2015
Note
1. Nature of business
Buffalo’s
Franchise Concepts, Inc. is a Nevada corporation formed in June 2006. On December 8, 2006, the Nevada corporation acquired all
of the issued and outstanding common stock of Buffalo’s Franchise Concepts, Inc., a Georgia corporation (BFCI-GA), which
became a wholly-owned subsidiary. On November 28, 2011, all of the issued and outstanding stock of the Nevada corporation was
acquired by Fog Cap Development LLC (Fog Cap), a wholly-owned subsidiary of Fog Cutter Capital Group Inc. (the Parent).
Buffalo’s
Franchise Concepts, Inc., through its wholly-owned subsidiary, grants store franchise and development agreements for the operation
of casual dining restaurants (Buffalo’s Southwest Cafés) and quick service restaurants outlets (Buffalo’s Express).
The restaurants specialize in the sale of Buffalo-Style chicken wings, chicken tenders, burgers, ribs, wrap sandwiches, and salads.
Franchisees are licensed to use the Company’s trade name, service marks, trademarks, logos, and unique methods of food preparation
and presentation.
In
2012, the Parent began co-branding its Buffalo’s Express restaurants with Fatburger restaurants, the Parent’s other
fast casual brand. These co-branded restaurants sell products of both brands and share back-of-the-house facilities.
At
December 25, 2016, there were 21 operating Buffalo’s Southwest Cafés restaurants and 64 co-branded Buffalo’s
Express restaurants. All of these restaurants were franchise locations except for one Buffalo’s Southwest Café restaurant
which was owned by an affiliate. At December 27, 2015, there were 19 operating Buffalo’s Southwest Cafés restaurants
and 62 co-branded Buffalo’s Express restaurants.
Note
2. Summary of significant accounting policies
Principles
of Consolidation:
The accompanying consolidated financial statements include the accounts of Buffalo’s Franchise Concepts,
Inc. and its wholly-owned subsidiary, Buffalo’s Franchise Concepts, Inc., a Georgia corporation, (collectively, the Company).
All significant intercompany accounts have been eliminated in consolidation.
Accounts
Receivable:
Accounts receivable consist of royalty fees from franchisees reduced by reserves for the estimated amount deemed
uncollectible due to bad debts. As of December 25, 2016 and December 27, 2015, no allowance for doubtful accounts was recorded
as the collectability of the receivable was reasonably assured.
Credit
and Depository Risks:
The Company maintains its cash accounts at high credit quality financial institutions. The balances,
at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes its cash
balances are not exposed to significant risk of loss.
The
Company’s customer base consists of franchisees located in Georgia, Texas, California, Canada, the UK, the UAE, Qatar, Saudi
Arabia, Pakistan, Tunisia Malaysia, and the Philippines. Management reviews each of its customer’s financial conditions
prior to signing a franchise agreement and believes that it has adequately provided for any exposure to potential credit losses.
Note
2. Summary of significant accounting policies (
Continued
)
Fiscal
Year End:
The Company operates on a 52-week calendar year. The fiscal year ends on the Sunday closest to December 31. Consistent
with the industry, Buffalo 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. Accordingly, the accompanying financial statements reflect the Company’s fiscal year ends of December 25, 2016
and December 27, 2015. The use of this fiscal year means a 53rd week is added to the fiscal year every 5 or 6 years.
Goodwill
and Other Intangible Assets:
Goodwill and other intangible assets with indefinite lives, such as trademarks, are not amortized
but are reviewed for impairment annually or more frequently if indicators arise. Intangible assets that are not deemed to have
indefinite lives are amortized over their useful lives, but are also reviewed for impairment annually or more frequently if indications
arise. No impairment has been identified as of December 25, 2016 and December 27, 2015.
Franchise
rights are amortized over the remaining lives of the agreements at the date of acquisition in December 2011. The weighted average
amortization period is 64 months. Amortization expense for the year ended December 27, 2015 was approximately $10,000 and the
rights were fully amortized as of December 27, 2015.
Revenue
Recognition:
The Company recognizes revenues from franchise sales upon commencement of operations by a franchisee. Franchise
fee revenue from sales of individual franchises is recognized upon completion of training and the actual opening of a location.
Typically, franchise fees are $50,000 for each domestic location and are collected 50% upon signing a deposit agreement and 50%
at the signing of a lease and related franchise agreement. International franchise fees are typically $65,000 for each location,
and are payable 100% upon signing a deposit agreement. The Company typically charges a $25,000 co-brand conversion fee.
The
franchise fee may be adjusted at management’s discretion or in a situation involving store transfers. Deposits are non-refundable
upon acceptance of the franchise application. These deposits are recorded as deferred income – current and noncurrent based
upon the expected franchise restaurant opening dates. The Company acknowledges some of its franchisees have not compiled with
their development timelines for opening franchise stores. These franchise rights are terminated and franchise fee revenue is recognized
for non-refundable deposits.
In
addition to franchise fee revenue, the Company collects a royalty calculated as a percentage of net sales from its franchisees.
Royalties are recognized as revenue when the related sales are made by the franchisees.
During
2008 and 2009, the Company received a total of $500,000 from a franchisee of three restaurants in exchange for an exclusive area
agreement for ten counties in the state of Georgia and reduced service fees for the franchisee’s restaurants for a ten-year
period. The franchisee is required to open four new franchise restaurants in the exclusive territory during the ten-year term
of the agreement.
Segment
information:
The Company owns international and domestic licensed operations. Our chief operating decision maker (“CODM”)
is our Chief Executive Officer; our CODM reviews financial performance and allocates resources at an overall level on a recurring
basis. Therefore, Management has determined that the Company has one operating segment and one reportable segment.
Note
2. Summary of significant accounting policies (
Continued
)
Revenue
Recognition (continued):
The deferred fee is being amortized into income ratably over the ten-year term. Service fee revenues
recognized in 2016 and 2015 pursuant to the agreement were $48,500 each year. As of December 25, 2016 and December 27, 2015, there
remained deferred fees of approximately $80,800 and $129,300, respectively, relating to the exclusive area agreement.
Advertising:
The Company generally requires advertising payments of 2.0% of net sales from Buffalo’s Southwest Café restaurants.
Co-branded restaurants generally pay 0.20% to 1.95%. The Company also receives, from time to time, payments from vendors that
are to be used for advertising. Since the Company acts in a fiduciary role to collect and disburse these advertising funds, no
revenue or expense is recorded.
Advertising
funds are segregated from other Company assets and the balance of the Buffalo’s Creative and Advertising Fund is recorded
as an asset by the Company with the offsetting advertising obligation recorded as a liability, Buffalo’s Creative and Advertising
Fund - Contra.
Income
Taxes:
The Company accounts for income taxes using the asset and liability approach. The asset and liability approach requires
the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between
the carrying amounts and the tax basis of assets and liabilities. Deferred taxes are classified as current or noncurrent, depending
on the classification of the assets and liabilities to which they relate.
Estimates:
The preparation of financial statements in accordance with GAAP requires the use of estimates in determining assets, liabilities,
revenues and expenses. Actual results may differ from those estimates.
Recently
Issued Accounting Standards:
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) 2014-09, Revenue From Contracts With Customers (Topic 606), requiring an entity to recognize the amount of revenue to which
it expects to be entitled for the transfer of promised goods and services to customers. The updated standard will replace most
existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective
or retrospective with cumulative effect transition method. In August 2015, the FASB issued ASU 2015-04, which defers the effective
date of ASU 2014-09 by one year, making it effective for annual reporting periods beginning after December 15, 2017. The Company
is currently evaluating the effects adoption of this guidance will have on its consolidated financial statements.
Recently
Issued Accounting Standards (continued):
In February 2016, the FASB issued ASU 2016-02, Leases, requiring a lessee to recognize
on the balance sheet the assets and liabilities for the rights and obligations created by those leases with a lease term of more
than twelve months. Leases will continue to be classified as either financing or operating, with classification affecting the
recognition, measurement and presentation of expenses and cash flows arising from a lease. This ASU is effective for interim and
annual period beginning after December 15, 2018 and requires a modified retrospective approach to adoption for lessees related
to capital and operating leases existing at, or entered into after, the earliest comparative period presented in the financial
statements, with certain practical expedients available. Early adoption is permitted. The Company does not currently have any
leases that will have an impact on the consolidated financial statements or disclosures as a result of the adoption of this ASU.
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments. The new guidance is intended to reduce diversity in practice in how transactions are classified in the statement of
cash flows. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December
15, 2017. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial
statements.
Note
3. Related party transactions
The
Company has made cumulative advances to affiliated entities under the common control of the Parent in the amount of $2,492,543
and $1,946,744 as of December 25, 2016 and December 27, 2015, respectively. These advances are expected to be recovered through
repayment for the use of the Parent’s tax net operating losses, and to a lesser extent from proceeds generated by the affiliates
operations and investments.
Effective
in 2013, the Parent’s operations were structured in such a way that significant direct and indirect administrative functions
were provided to the Company. These services include operational personnel to sell franchise rights, assist with training franchisees
and assisting franchisees with opening restaurants. The Parent also provides executive administration and accounting services
for the Company. Expenses are allocated based on an estimate of management’s time spent on the activities of the Parent
and its subsidiaries, and further allocated among the subsidiaries pro rata based on each subsidiary’s respective revenues
as a percentage of overall revenues of the subsidiaries. The Company believes that the allocation of expenses is not materially
different from what it would have been if the Company was a stand-alone entity. These expenses were approximately $294,000 and
$240,000, for the years ended December 25, 2016 and December 27, 2015, respectively and were reimbursed to the Parent in cash.
During
the years ended December 25, 2016 and December 27, 2015, the Company recorded obligations to the Parent in the amount of $243,673
and $238,491 for use of the Parent’s net operating losses for tax purposes, respectively.
As
of December 25, 2016, and December 27, 2015, one Buffalo’s Southwest Café was operated by a relative of an officer.
Royalty fees from this related party in 2016 and 2015 were approximately $64,000 and $68,000, respectively.
During
the years ended December 25, 2016 and December 27, 2015, the Company declared and paid dividends in the amount of $200,000 and
$400,000, respectively.
Note
4. Income taxes
The
Company files its Federal and most state income tax returns on a consolidated basis with the Parent. For financial reporting purposes,
the Company calculates its tax provision as if the Company files its tax returns on a stand-alone basis. The taxes payable to
the Parent determined by this calculation of $243,673 and $238,491 were offset against the balances due from affiliates as of
December 25, 2016 and December 27, 2015, respectively. As of December 25, 2016, the Parent has estimated aggregate federal net
operating loss carry forwards of $71,370,000 to offset future federal taxable income generated by the Parent and its subsidiaries,
including the Company. These carryforwards begin to expire in 2018.
Deferred
taxes reflect the net effect of temporary differences between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for calculating taxes payable on a stand-alone basis.
Significant
components of the Company’s net deferred tax assets are as follows:
|
|
December
25, 2016
|
|
|
December
27, 2015
|
|
Net
deferred tax assets
|
|
|
|
|
|
|
|
|
Deferred
franchise fees
|
|
$
|
250,044
|
|
|
$
|
322,294
|
|
Deferred
royalties
|
|
|
27,483
|
|
|
|
43,973
|
|
Reserve
|
|
|
(27,483
|
)
|
|
|
(43,973
|
)
|
Total
|
|
$
|
250,044
|
|
|
$
|
322,294
|
|
Components
of the income tax provision are as follows for the years ended:
|
|
December
25, 2016
|
|
|
December
27, 2015
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
243,673
|
|
|
$
|
238,491
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
2,323
|
|
|
|
17,511
|
|
|
|
|
245,996
|
|
|
|
256,002
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
72,250
|
|
|
|
272,315
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
|
72,250
|
|
|
|
272,315
|
|
Total
income tax expense
|
|
$
|
318,246
|
|
|
$
|
528,317
|
|
A
reconciliation of the statutory income tax rate to the effective tax rate is as follows:
|
|
December
25, 2016
|
|
|
December
27, 2015
|
|
|
|
|
|
|
|
|
Statutory
rate
|
|
|
34
|
%
|
|
|
34
|
%
|
Foreign
withholding taxes
|
|
|
—
|
|
|
|
1
|
|
Effect
of differences in estimated tax rates
|
|
|
(1
|
)
|
|
|
3
|
|
Effective
tax rate
|
|
|
33
|
%
|
|
|
38
|
%
|
As
of December 25, 2016, the Company’s annual tax filings for the prior three years are open for audit by Federal and for the
prior four years for state tax agencies. Management evaluated the Company’s overall tax positions and has determined that
no provision for uncertain income tax positions is necessary as of December 25, 2016 and December 27, 2015.
Note
5. Buffalo’s creative and advertising fund
Under
the terms of its franchise agreements, the Company collects fees for creative development and advertising from its franchisees
based on percentages of sales as outlined in franchise agreements. The Company is to oversee all advertising and promotional programs
and is to have sole discretion over expenditures from the fund.
During
the years ended December 25, 2016 and December 27, 2015, the Company collected advertising fees and vender contributions of approximately
$559,000 and $569,000, respectively. Advertising expenditures for the years 2016 and 2015 totaled approximately $392,000 and $591,000,
respectively. The accompanying consolidated financial statements reflect the year-end balance of the advertising fund and the
related advertising obligation, which were approximately $191,000 and $24,000 as of December 25, 2016 and December 27, 2015, respectively.
Note
6. commitments AND CONTINGENCIES
Litigation:
Periodically, the Company is involved in litigation in the normal course of business. The Company believes that the result
of any potential litigation will not have a material adverse effect on the Company’s financial condition.
Operating
Leases:
The Company entered into an office lease on March 1, 2012 with an unrelated entity. The lease had a one year term
with multiple twelve month extensions, and terminated on June 30, 2016.
Total
rent expense under operating leases for the years ended December 25, 2016 and December 27, 2015 was approximately $5,000 and $18,000,
respectively.
Note
7. Retirement plan
The
Company has a profit sharing plan (the Plan) with a 401(k) feature covering substantially all employees. There were no contributions
made by the Company under the Plan for 2016 and 2015.
Note
8. geographic location and major franchisees
R
evenues
by geographic area are as follows:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December
25, 2016
|
|
|
December
27, 2015
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
1,083,692
|
|
|
$
|
1,116,243
|
|
Other
countries
|
|
|
520,218
|
|
|
|
907,173
|
|
Total
revenues
|
|
$
|
1,603,910
|
|
|
$
|
2,023,416
|
|
Revenues
are shown based on the geographic location of our licensees. All of our assets are located in the United States.
During
the year ended December 25, 2016, three franchisees each accounted for more than 10% of the Company’s revenues, with total
revenues of $345,759, $236,843 and $219,000. During the year ended December 25, 2016, three franchisees each accounted for more
than 10% of the Company’s revenues, with total revenues of $470,000, $231,641 and $222,253.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 as amended, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
FAT
BRANDS INC.
|
|
|
|
|
By:
|
/s/
Andrew A. Wiederhorn
|
|
|
Andrew
A. Wiederhorn
|
|
|
Chief
Executive Officer
|
The
undersigned directors and officers of FAT Brands Inc. do hereby constitute and appoint Andrew A. Wiederhorn and Ron Roe, and each
of them, with full power of substitution and resubstitution, as their true and lawful attorneys and agents, to do any and all
acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for
us and in our names in the capacities indicated below, which said attorney and agent, may deem necessary or advisable to enable
said corporation to comply with the Securities Exchange Act of 1934, as amended and any rules, regulations and requirements of
the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without
limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments
(including post-effective amendments) hereto, and we do hereby ratify and confirm all that said attorneys and agents, or either
of them, shall do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities indicated.
DATE
|
|
NAME
AND TITLE
|
|
|
|
April
2, 2018
|
|
/s/
Andrew A. Wiederhorn
|
|
|
Andrew
A. Wiederhorn
|
|
|
Chief
Executive Officer and Director (Principal Executive Officer)
|
|
|
|
April
2, 2018
|
|
/s/
Ron Roe
|
|
|
Ron
Roe
|
|
|
Chief
Financial Officer (Principal Financial and Accounting Officer)
|
|
|
|
April
2, 2018
|
|
/s/
Edward Rensi
|
|
|
Edward
Rensi, Chairman of the Board
|
|
|
|
April
2, 2018
|
|
/s/
Marc L. Holtzman
|
|
|
Marc
L. Holtzman, Director
|
|
|
|
April
2, 2018
|
|
/s/
Squire Junger
|
|
|
Squire
Junger, Director
|
|
|
|
April
2, 2018
|
|
/s/
Silvia Kessel
|
|
|
Silvia
Kessel, Director
|
|
|
|
April
2, 2018
|
|
/s/
Jeff Lotman
|
|
|
Jeff
Lotman, Director
|
|
|
|
April
2, 2018
|
|
/s/
James Neuhauser
|
|
|
James
Neuhauser, Director
|
EXHIBITS
Exhibit
|
|
|
|
Incorporated
By Reference to
|
|
Filed
|
Number
|
|
Description
|
|
Form
|
|
Exhibit
|
|
Filing
Date
|
|
Herewith
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of the Company, effective October 19, 2017.
|
|
10-Q
|
|
3.1
|
|
12/04/2017
|
|
|
3.2
|
|
Bylaws
of the Company, effective May 21, 2017
|
|
1-A
|
|
3.2
|
|
09/27/2017
|
|
|
4.1
|
|
Common
Stock Purchase Warrant, dated October 20, 2017, issued to Tripoint Global Equities, LLC.
|
|
10-Q
|
|
4.1
|
|
12/04/2017
|
|
|
10.1
|
|
Contribution
Agreement, dated October 20, 2017, between the Company and Fog Cutter Capital Group Inc.
|
|
10-Q
|
|
10.1
|
|
12/04/2017
|
|
|
10.2
|
|
Tax
Sharing Agreement, dated October 20, 2017, between the Company and Fog Cutter Capital Group Inc.
|
|
10-Q
|
|
10.2
|
|
12/04/2017
|
|
|
10.3
|
|
Voting
Agreement, dated October 20, 2017, between the Company and Fog Cutter Capital Group Inc.
|
|
10-Q
|
|
10.3
|
|
12/04/2017
|
|
|
10.4
|
|
Promissory
Note, dated October 20, 2017, issued by the Company to Fog Cutter Capital Group Inc.
|
|
10-Q
|
|
10.4
|
|
12/04/2017
|
|
|
10.5
|
|
Intercompany
Promissory Note, dated October 20, 2017, issued by Fog Cutter Capital Group Inc. to the Company.
|
|
10-Q
|
|
10.5
|
|
12/04/2017
|
|
|
10.6
|
|
Form
of Indemnification Agreement, dated October 20, 2017, between the Company and each director and executive officer.
|
|
1-A
|
|
6.3
|
|
09/06/2017
|
|
|
10.7
|
|
Selling
Agency Agreement, dated October 20, 2017, between the Company and Tripoint Global Equities, LLC.
|
|
1-A
|
|
1.1
|
|
10/03/2017
|
|
|
10.8
|
|
Membership
Interest Purchase Agreement (Hurricane AMT, LLC), dated November 14, 2017, between the Company and Gama Group LLC, Salient
Point Trust, Satovsky Enterprises, LLC, Mapes Holdings LLC and Martin O’Dowd.
|
|
8-K
|
|
2.1
|
|
11/17/2017
|
|
|
10.9
|
|
2017
Omnibus
Equity Incentive Plan
|
|
1-A
|
|
6.1
|
|
09/27/2017
|
|
|
10.10
|
|
Office Lease,
dated November 10, 2016,
by and among Duesenberg Investment Company, LLC, Fatburger North America,
Inc., Fog Cutter Capital Group Inc., and Fatburger Corporation
|
|
1-A
|
|
6.2
|
|
09/06/2017
|
|
|
11.1
|
|
Computation
of Loss Per Common Share
|
|
|
|
|
|
|
|
X
|
21.1
|
|
Significant
Subsidiaries
|
|
|
|
|
|
|
|
X
|
31.1
|
|
Chief
Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
X
|
31.2
|
|
Chief
Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
X
|
32.1
|
|
Certifications
of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
X
|
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