NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1. ORGANIZATION AND RELATIONSHIPS
Organization
and Nature of Business
FAT
Brands Inc. (the “Company or FAT”) is a leading multi-brand restaurant franchising company that develops, markets,
and acquires primarily quick-service, fast casual and casual dining restaurant concepts around the world. Organized in March 2017
as a wholly owned subsidiary of Fog Cutter Capital Group, Inc. (“FCCG”), the Company completed an initial public offering
on October 20, 2017 and issued additional shares of common stock representing 20 percent of its ownership. During the fourth quarter
of 2020, the Company completed a transaction in which FCCG merged into a wholly owned subsidiary of FAT (the “Merger”),
and FAT became the indirect parent company of FCCG.
As
of March 28, 2021, the Company owns and franchises nine restaurant brands through various wholly owned subsidiaries: Fatburger,
Johnny Rockets, Buffalo’s Cafe, Buffalo’s Express, Hurricane Grill & Wings, Ponderosa Steakhouses, Bonanza Steakhouses,
Yalla Mediterranean and Elevation Burger. Combined, these brands have approximately 700 locations, including units under
construction, and more than 200 under development.
Each
franchising subsidiary licenses the right to use its brand name and provides franchisees with operating procedures and methods
of merchandising. Upon signing a franchise agreement, the franchisor is committed to provide training, some supervision and assistance,
and access to operations manuals. As needed, the franchisor will also provide advice and written materials concerning techniques
of managing and operating the restaurants.
With
minor exceptions, the Company’s operations are comprised exclusively of franchising a growing portfolio of restaurant brands.
This growth strategy is centered on expanding the footprint of existing brands and acquiring new brands through a centralized
management organization which provides substantially all executive leadership, marketing, training, and corporate
accounting services. As part of its ongoing franchising efforts, the Company will, from time to time, make opportunistic
acquisitions of operating restaurants in order to convert them to franchise locations. During the refranchising period, the Company
may operate the restaurants and classifies the operational activities as refranchising gains or losses and the assets and associated
liabilities as held-for sale.
COVID-19
In
March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues
to spread throughout the United States and other countries. As a result, Company franchisees temporarily closed some retail locations,
modified store operating hours, adopted a “to-go” only operating model, or a combination of these actions. These actions
reduced consumer traffic, all resulting in a negative impact to franchisee and Company revenues. While the disruption to our business
from the COVID-19 pandemic is currently expected to be temporary, there is still a great deal of uncertainty around the severity
and duration of the disruption. We may experience longer-term effects on our business and economic growth and changes in consumer
demand in the U.S. and worldwide. The effects of COVID-19 may materially adversely affect our business, results of operations,
liquidity and ability to service our existing debt, particularly if these effects continue in place for a significant amount of
time.
Liquidity
The
Company recognized income from operations of $104,000 during the thirteen weeks ended March 28, 2021 compared to a loss from operations
of $578,000 for the thirteen weeks ended March 29, 2020. The Company recognized a net loss of $2,432,000 during the thirteen weeks
ended March 28, 2021 compared to a net loss of $2,370,000 during the thirteen weeks ended March 29, 2020. Net cash used in operations
totaled $1,246,000 for the thirteen weeks ended March 28, 2021 compared to $3,371,000 for thirteen weeks ended March 29, 2020.
As of March 28, 2021, the Company’s total liabilities exceeded total assets by $45,576,000 compared to $41,883,000 as of
December 27, 2020. The change in the Company’s financial position reflects operating improvements as the effects
of COVID-19 began to stabilize offset by the assumption of certain liabilities related to the Merger in December 2020.
In
the Company’s 2020 Annual Report on Form 10-K (“2020 Form 10-K”), the Company disclosed that the combination
of the operating performance during the twelve months ended December 27, 2020 and the Company’s financial position as of
December 27, 2020 raised substantial doubt about the Company’s ability to continue as a going concern as assessed under
the framework of FASB’s Accounting Standard Codification (“ASC”) 205 for the twelve months following the date
of the issuance of the 2020 Form 10-K.
Subsequent
to the reporting period ended March 28, 2021, on
April 26, 2021, the Company completed the issuance and sale in a private offering (the “Offering”) of three tranches
of fixed rate secured notes (see Note 21). Proceeds of the Offering were used to repay in full its 2020 Securitization Notes as
well as fees and expenses related to the Offering, resulting in net proceeds to the Company of approximately $57 million (see
Note 11). The Offering alleviated the substantial doubt about the Company’s ability to continue as a going concern
that was disclosed in the 2020 Form 10-K.
The
Company utilized a portion of the net proceeds from the
Offering to repay a portion of indebtedness assumed as a result of the Merger (see Notes 11 and 21).
In
addition to the liquidity provided by the successful completion of the Offering, the Company has experienced significant
improvement in its operating performance subsequent to December 27, 2020, as COVID-19 vaccinations have become more prevalent
in the United States and federal, state and local restrictions have eased in many of the markets where its franchisees operate.
As a result, the Company believes that its liquidity position will be sufficient for the twelve months of operations following
the issuance of this Form 10-Q.
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of operations – The Company operates on a 52-week calendar and its fiscal year ends on the last Sunday of the calendar
year. Consistent with the industry practice, the Company measures its stores’ performance based upon 7-day work weeks. Using
the 52-week cycle ensures consistent weekly reporting for operations and ensures that each week has the same days, since certain
days are more profitable than others. The use of this fiscal year means a 53rd week is added to the fiscal year every
5 or 6 years. In a 52-week year, all four quarters are comprised of 13 weeks. In a 53-week year, one extra week is added to the
fourth quarter. The first reporting period for each of fiscal years 2020 and 2021 were 13 weeks.
Principles
of consolidation – The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries.
The operations of Johnny Rockets have been included since its acquisition on September 21, 2020 and the operations of FCCG have
been included since the merger on December 24, 2020. 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 intangibles for which there is no active
market, the allocation of basis between assets acquired, sold or retained, valuation allowances for notes and accounts receivable,
and deferred tax assets. Estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Financial
statement reclassification – Certain account balances from prior periods have been reclassified in these consolidated
financial statements to conform to current period classifications including measurement period adjustments to the preliminary
purchase price allocations relating to the acquisition of Johnny Rockets and the Merger in accordance with ASU 2015-16. During
the first quarter of 2021, adjustments were made to provisional amounts reclassifying $1,203,000 between goodwill and additional
paid in capital on the consolidated balance sheet. These adjustments did not impact the Company’s consolidated statement
of operations during the current period or during prior periods.
Credit
and Depository Risks – Financial instruments that potentially subject the Company to concentrations of credit risk consist
principally of cash and accounts receivable. Management reviews each of its franchisee’s financial condition prior to entry
into a franchise or other agreement, as well as periodically through the term of the agreement, and believes that it has adequately
provided for exposures to potential credit losses. As of March 28, 2021 and December 27, 2020, accounts receivable, net
of allowance for doubtful accounts, totaled $4,466,000 and $4,208,000, with no franchisee representing more than 10% of that amount
at either date.
The
Company maintains cash deposits in national financial institutions. From time to time the balances for these accounts exceed the
Federal Deposit Insurance Corporation’s (“FDIC”) insured amount. Balances on interest bearing deposits at banks
in the United States are insured by the FDIC up to $250,000 per account. As of March 28, 2021 and December 27, 2020, the Company
had uninsured deposits in the amount of $3,931,238 and $6,047,299, respectively.
Restricted
Cash – The Company has restricted cash consisting of funds required to be held in trust in connection with the Company’s
securitized debt. The current portion of restricted cash as of March 28, 2021 and December 27, 2020 consisted of
$3,353,000 and $2,867,000, respectively. Non-current restricted cash of $400,000 as of March 28, 2021 and December 27, 2020, represents
interest reserves required to be set aside for the duration of the securitized debt.
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. As of March 28, 2021 and December 27, 2020, accounts receivable was stated net of an allowance for doubtful
accounts of $762,000 and $739,000, respectively.
Assets
classified as held for sale – Assets are classified as held for sale when the Company commits to a plan to sell the
asset, the asset is available for immediate sale in its present condition and an active program to locate a buyer at a reasonable
price has been initiated. The sale of these assets is generally expected to be completed within one year. The combined assets
are valued at the lower of their carrying amount or fair value, net of costs to sell and included as current assets on the Company’s
consolidated balance sheet. Assets classified as held for sale are not depreciated. However, interest attributable to the liabilities
associated with assets classified as held for sale and other related expenses are recorded as expenses in the Company’s
consolidated statement of operations.
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 trademarks,
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.
Fair
Value Measurements - The Company determines the fair market values of its financial assets and liabilities, as well as non-financial
assets and liabilities that are recognized or disclosed at fair value on a recurring basis, based on the fair value hierarchy
established in U.S. GAAP. As necessary, the Company measures its financial assets and liabilities using inputs from the following
three levels of the fair value hierarchy:
●
|
Level
1 inputs are quoted prices in active markets for identical assets or liabilities.
|
●
|
Level
2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets
for similar assets or liabilities.
|
●
|
Level
3 inputs are unobservable and reflect the Company’s own assumptions.
|
Other
than a derivative liability that existed during part of 2020 and the contingent consideration payable liabilities incurred
in connection with the acquisition of certain of our brands, the Company does not have a material amount of financial assets
or liabilities that are required to be measured at fair value on a recurring basis under U.S. GAAP (See Note 12). None of the
Company’s non-financial assets or non-financial liabilities are required to be measured at fair value on a recurring basis.
Income
taxes – Effective October 20, 2017, the Company entered into a Tax Sharing Agreement with FCCG that provides that FCCG
would, 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 would
pay FCCG the amount that its tax liability would have been had it filed a separate return. As such, prior to the Merger, the Company
accounted for income taxes as if it filed separately from FCCG. The Tax Sharing Agreement was cancelled in connection with
the Merger.
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 utilized 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.
Franchise
Fees: The franchise arrangement is documented in the form of a franchise agreement. The franchise arrangement requires the
Company to perform various activities to support the brand that do not directly transfer goods and services to the franchisee,
but instead represent a single performance obligation, which includes the transfer of the franchise license. The services provided
by the Company are highly interrelated with the franchise license and are considered a single performance obligation. Franchise
fee revenue from the sale of individual franchises is recognized over the term of the individual franchise agreement on a straight-line
basis. Unamortized non-refundable deposits collected in relation to the sale of franchises are recorded as deferred franchise
fees.
The
franchise fee may be adjusted at management’s discretion or in a situation involving store transfers between franchisees.
Deposits are non-refundable upon acceptance of the franchise application. In the event a franchisee does not comply with their
development timeline for opening franchise stores, the franchise rights may be terminated, at which point the franchise fee revenue
is recognized for non-refundable deposits.
Royalties
– In addition to franchise fee revenue, the Company collects a royalty calculated as a percentage of net sales from
our franchisees. Royalties range from 0.75% to 6% and 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
– The Company requires advertising payments from franchisees based on a percent of net sales. The Company also receives,
from time to time, payments from vendors that are to be used for advertising. Advertising funds collected are required to be spent
for specific advertising purposes. Advertising revenue and associated expense is recorded on the Company’s consolidated
statement of operations. Assets and liabilities associated with the related advertising fees are reflected in the Company’s
consolidated balance sheet.
Share-based
compensation – The Company has a 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
15 for more details on the Company’s share-based compensation.
Earnings
per share – The Company reports basic earnings or loss 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. Any potentially dilutive securities that have an anti-dilutive
impact on the per share calculation are excluded. During periods in which the Company reports a net loss, diluted weighted average
shares outstanding are equal to basic weighted average shares outstanding because the effect of the inclusion of all potentially
dilutive securities would be anti-dilutive. As of March 28, 2021 and March 29, 2020, there were no potentially dilutive securities
considered in the calculation of diluted loss per common share due to losses for each period.
Recently
Issued Accounting Standards
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial
Instruments, and later amended the ASU in 2019, as described below. This guidance replaces the current incurred
loss impairment methodology. Under the new guidance, on initial recognition and at each reporting period, an entity is required
to recognize an allowance that reflects its current estimate of credit losses expected to be incurred over the life of the financial
instrument based on historical experience, current conditions and reasonable and supportable forecasts.
In
November 2019, the FASB issued ASU No. 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging
(Topic 815), and Leases (Topic 842): Effective Dates (“ASU 2019-10”). The purpose of this amendment is to create
a two-tier rollout of major updates, staggering the effective dates between larger public companies and all other entities. This
granted certain classes of companies, including Smaller Reporting Companies (“SRCs”), additional time to implement
major FASB standards, including ASU 2016-13. Larger public companies will have an effective date for fiscal years beginning after
December 15, 2019, including interim periods within those fiscal years. All other entities are permitted to defer adoption of
ASU 2016-13, and its related amendments, until the earlier of fiscal periods beginning after December 15, 2022. Under the current
SEC definitions, the Company meets the definition of an SRC and is adopting the deferral period for ASU 2016-13. The guidance
requires a modified retrospective transition approach through a cumulative-effect adjustment to retained earnings as of the beginning
of the period of adoption. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial
statements but does not expect that the adoption of this standard will have a material impact on its consolidated financial statements.
NOTE
3. MERGERS AND ACQUISITIONS
Merger
with Fog Cutter Capital Group Inc.
On
December 10, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with FCCG, Fog
Cutter Acquisition, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company (“Merger Sub”),
and Fog Cutter Holdings, LLC, a Delaware limited liability company (“Holdings”).
Pursuant
to the Merger Agreement, FCCG agreed to merge with and into Merger Sub, with Merger Sub surviving as a wholly owned subsidiary
of the Company (the “Merger”). Upon closing of the Merger, the former stockholders of FCCG became direct stockholders
of the Company holding, in the aggregate, 9,679,288 shares of the Company’s common stock (the same number of shares of common
stock held by FCCG immediately prior to the Merger) and will receive certain limited registration rights with respect to the shares
received in the Merger. As a result of the Merger, FCCG’s wholly owned subsidiaries, Homestyle Dining, LLC, Fog Cap Development
LLC, Fog Cap Acceptance Inc. and BC Canyon LLC, became indirect wholly owned subsidiaries of the Company (the “Merged Entities”).
Under
the Merger Agreement, Holdings has agreed to indemnify the Company for breaches of FCCG’s representations and warranties,
covenants and certain other matters specified in the Merger Agreement, subject to certain exceptions and qualifications. Holdings
has also agreed to hold a minimum fair market value of shares of Common Stock of the Company to ensure that it has assets available
to satisfy such indemnification obligations if necessary.
In
connection with the Merger, the Company declared a special stock dividend (the “Special Dividend”) payable on the
record date only to holders of our Common Stock, other than FCCG, consisting of 0.2319998077 shares of the Company’s 8.25%
Series B Cumulative Preferred Stock (liquidation preference $25.00 per share) (the “Series B Preferred Stock”) for
each outstanding share of Common Stock held by such stockholders, with the value of any fractional shares of Series B Preferred
Stock being paid in cash. FCCG did not receive any portion of the Special Dividend, which had a record date of December 21, 2020
and payment date of December 23, 2020. The Special Dividend was expressly conditioned upon the satisfaction or valid waiver of
the conditions to closing of the Merger set forth in the Merger Agreement. The Special Dividend was intended to reflect consideration
for the potential financial impact of the Merger on the common stockholders other than FCCG, including the assumption of certain
debts and obligations of FCCG by the Company by virtue of the Merger.
The
Company undertook the Merger primarily to simplify its corporate structure and eliminate limitations that restrict the Company’s
ability to issue additional Common Stock for acquisitions and capital raising. FCCG holds a substantial amount of net operating
loss carryforwards (“NOLs”), which could only be made available to the Company as long as FCCG owned at least 80%
of FAT Brands. With the Merger, the NOLs will be held directly by the Company, which will then have greater flexibility in managing
its capital structure. In addition, after the Merger the Company will no longer be required to compensate FCCG for utilizing its
NOLs under the Tax Sharing Agreement previously in effect between the Company and FCCG.
The
Merger is treated under ASC 805-50-30-6 which indicates that when there is a transfer of assets or exchange of shares between
entities under common control, the receiving entity shall recognize those assets and liabilities at their net carrying amounts
at the date of transfer. As such, on the date of the Merger, all of the transferred assets and assumed liabilities of FCCG and
the Merged Entities are recorded on the Company’s books at FCCG’s book value. The consolidation of the operations
of FCCG and the Merged Entities with the Company is presented on a prospective basis from the date of transfer as there has
not been a change in the reporting entity.
The
Merger resulted in the following assets and liabilities being included in the consolidated financial statements of the Company
as of the Merger date (in thousands):
Prepaid assets
|
|
$
|
33
|
|
Deferred tax assets
|
|
|
20,402
|
|
Other assets
|
|
|
100
|
|
Accounts payable
|
|
|
(926
|
)
|
Accrued expense
|
|
|
(6,846
|
)
|
Current portion of debt
|
|
|
(12,486
|
)
|
Litigation reserve
|
|
|
(3,980
|
)
|
Due to affiliates
|
|
|
(43,653
|
)
|
Total net identifiable
liabilities (net deficit)
|
|
$
|
(47,356
|
)
|
A
net loss of $432,000 attributed to the Merged Entities is included in the accompanying consolidated statements of operations for
the thirteen weeks ended March 28, 2021. There were no revenues attributed to the Merged Entities during the period.
Proforma
Information
The
table below presents the proforma revenue and net loss of the Company for the thirteen weeks ended March 29, 2020, assuming the
Merger had occurred on December 30, 2019 (the beginning of the Company’s 2020 fiscal year), pursuant to ASC 805-10-50 (in
thousands). This proforma information does not purport to represent what the actual results of operations of the Company would
have been had the Merger occurred on that date, nor does it purport to predict the results of operations for future periods.
|
|
Thirteen
Weeks Ended
|
|
|
|
March
28, 2021
|
|
|
March
29, 2020
|
|
|
|
(Actual)
|
|
|
(Proforma)
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,649
|
|
|
$
|
4,423
|
|
Net loss
|
|
$
|
(2,432
|
)
|
|
$
|
(4,612
|
)
|
The
proforma information above reflects the combination of the Company’s results as disclosed in the accompanying consolidated
statements of operations for the thirteen weeks ended March 29, 2020, together with the results of the Merged Entities for the
thirteen weeks ended March 29, 2020, with the following adjustment:
|
●
|
FCCG
historically made loan advances to Andrew A. Wiederhorn, its CEO and significant stockholder (the “Stockholder Loan”).
Prior to the Merger, the Stockholder Loan was cancelled, and the balance recorded as a loss by FCCG on forgiveness
of loan to stockholder. Had the Merger been completed as of the assumed proforma date of December 31, 2018 (the beginning
of the Company’s 2019 fiscal year), the Stockholder Loan would have been cancelled prior to that date and there would
have been no further advances made. As a result, the proforma information above eliminates the loss by FCCG on forgiveness
of loan to stockholder and the related interest income recorded by FCCG in its historical financial statements.
|
Acquisition
of Johnny Rockets
On
September 21, 2020, the Company completed the acquisition of Johnny Rockets Holding Co., a Delaware corporation (“Johnny
Rockets”) for a cash purchase price of approximately $24.7 million. The transaction was funded with proceeds from an increase
in the Company’s securitization facility (See Note 11).
Immediately
following the closing of the acquisition of Johnny Rockets, the Company contributed the franchising subsidiaries of Johnny Rockets
to FAT Royalty I, LLC pursuant to a Contribution Agreement. (See Note 11).
The
preliminary assessment of the fair value of the net assets and liabilities acquired by the Company through the acquisition of
Johnny Rockets was estimated at $24,730,000. This preliminary assessment of fair value of the net assets and liabilities as well
as the final purchase price were estimated at closing and are subject to change. Under Sections 382 and 383 of the Internal
Revenue Code, if an ownership change occurs with respect to a “loss corporation”, as defined, there are annual limitations
on the amount of the NOLs and certain other deductions and credits which are available to the Company (the “Section 382
and 383 Limitations”). The portion of the NOLs and other tax benefits accumulated by Johnny Rockets prior to the Acquisition
are subject to these Section 382 and 382 Limitations. Analysis of these Section 382 and 383 Limitations are ongoing. The preliminary
allocation of the consideration to the preliminary valuation of net tangible and intangible assets acquired is presented in the
table below (in thousands):
Cash
|
|
$
|
812
|
|
Accounts receivable
|
|
|
1,452
|
|
Assets held for sale
|
|
|
10,765
|
|
Goodwill
|
|
|
258
|
|
Other intangible assets
|
|
|
26,900
|
|
Deferred tax assets
|
|
|
4,039
|
|
Other assets
|
|
|
438
|
|
Accounts payable
|
|
|
(1,113
|
)
|
Accrued expenses
|
|
|
(3,740
|
)
|
Deferred franchise fees
|
|
|
(4,988
|
)
|
Operating lease liability
|
|
|
(10,028
|
)
|
Other liabilities
|
|
|
(65
|
)
|
Total net identifiable
assets
|
|
$
|
24,730
|
|
Revenues
of $2,257,000 and net loss of $26,000 attributed to Johnny Rockets are included in the accompanying consolidated statements of
operations for the thirteen weeks ended March 28, 2021. The net loss attributed to Johnny Rockets includes allocations of corporate
overhead in accordance with the Company’s allocation methodology.
The
values of goodwill and other intangible assets were initially considered as of the acquisition date. Descriptions of the Company’s
subsequent assessments of impairment of the goodwill and other intangible assets acquired in this acquisition related to COVID-19
are in Note 6.
Proforma
Information
The
table below presents the proforma revenue and net (loss) income of the Company for the thirteen weeks ended March 29, 2020, assuming
the acquisition of Johnny Rockets had occurred on December 30, 2019 (the beginning of the Company’s 2020 fiscal year), pursuant
to ASC 805-10-50 (in thousands). This proforma information does not purport to represent what the actual results of operations
of the Company would have been had the acquisition of Johnny Rockets occurred on this date nor does it purport to predict the
results of operations for future periods.
|
|
Thirteen
Weeks Ended
|
|
|
|
March
28, 2021
|
|
|
March
29, 2020
|
|
|
|
(Actual)
|
|
|
(Proforma)
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,649
|
|
|
$
|
7,674
|
|
Net (loss) income
|
|
$
|
(2,432
|
)
|
|
$
|
(2,357
|
)
|
The
proforma information above reflects the combination of the Company’s unaudited results as disclosed in the accompanying
consolidated statements of operations for the thirteen weeks March 29, 2020, together with the unaudited results of Johnny Rockets
for the thirteen weeks ended March 29, 2020, with the following adjustments:
|
●
|
Revenue
– The unaudited proforma revenues and net (loss) income present franchise fee revenue and advertising revenue in accordance
with ASC 606 in a manner consistent with the Company’s application thereof. As a non-public company, Johnny Rockets
had not yet been required to adopt ASC 606.
|
|
●
|
Overhead
allocations from the former parent company have been adjusted to the estimated amount the Company would have allocated for
the thirteen weeks ended March 29, 2020.
|
|
●
|
Former
parent company management fees have been eliminated from the proforma.
|
|
●
|
Amortization
of intangible assets has been adjusted to reflect the preliminary fair value at the assumed acquisition date.
|
|
●
|
Depreciation
on assets treated as held for sale by the Company has been eliminated.
|
|
●
|
The
proforma adjustments also include advertising expenses in accordance with ASC 606.
|
|
●
|
The
proforma interest expense has been adjusted to exclude actual Johnny Rockets interest expense incurred prior to the acquisition.
All interest-bearing liabilities were paid off at closing.
|
|
●
|
The
proforma interest expense has been adjusted to include proforma interest expense that would have been incurred relating to
the acquisition financing obtained by the Company.
|
|
●
|
Non-recurring
gains and losses have been eliminated from the proforma statements.
|
nOTE
4. REFRANCHISING
As
part of its ongoing franchising efforts, the Company may, from time to time, make opportunistic acquisitions of operating restaurants
in order to convert them to franchise locations or acquire existing franchise locations to resell to another franchisee across
all of its brands.
The
Company meets all of the criteria requiring that acquired assets used in the operation of certain restaurants be classified
as held for sale. As a result, the following assets have been classified as held for sale on the accompanying consolidated balance
sheets as of March 28, 2021 and December 27, 2020 (in thousands):
|
|
March
28, 2021
|
|
|
December
27, 2020
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
1,355
|
|
|
$
|
1,352
|
|
Operating lease
right of use assets
|
|
|
9,215
|
|
|
|
9,479
|
|
Total
|
|
$
|
10,570
|
|
|
$
|
10,831
|
|
Operating
lease liabilities related to the assets classified as held for sale in the amount of $9,656,000 and $9,892,000, have been classified
as current liabilities on the accompanying consolidated balance sheet as of March 28, 2021 and December 27, 2020, respectively.
Restaurant
operating costs, net of food sales, totaled $427,000 and $539,000 for the thirteen weeks ended March 28, 2021 and March 29, 2020,
respectively.
Note
5. NOTES RECEIVABLE
The
Elevation Buyer Note was funded in connection with the purchase of Elevation Burger in 2019. The Company loaned $2,300,000 in
cash to the Seller under a subordinated promissory note bearing interest at 6.0% per year and maturing in August 2026. The balance
owing to the Company under the Elevation Buyer Note may be used by the Company to offset amounts owing to the Seller under the
Elevation Note under certain circumstances (See Note 11). As part of the total consideration for the Elevation acquisition, the
Elevation Buyer Note was recorded at a carrying value of $1,903,000, which was net of a discount of $397,000. As of March 28,
2021 and December 27, 2020, the balance of the Elevation Note was $1,850,000 and $1,830,000, respectively, which was net of discounts
of $247,000 and $267,000, respectively. During the thirteen weeks ended March 28, 2021 and March 29, 2020, the Company recognized
$52,000 and $53,000 in interest income on the Elevation Buyer Note, respectively.
Note
6. GOODWILL
Goodwill
consists of the following (in thousands):
|
|
March
28,
2021
|
|
|
December
27,
2020
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
Fatburger
|
|
$
|
529
|
|
|
$
|
529
|
|
Buffalo’s
|
|
|
5,365
|
|
|
|
5,365
|
|
Hurricane
|
|
|
2,772
|
|
|
|
2,772
|
|
Yalla
|
|
|
261
|
|
|
|
261
|
|
Elevation Burger
|
|
|
521
|
|
|
|
521
|
|
Johnny
Rockets
|
|
|
258
|
|
|
|
1,461
|
|
Total
goodwill
|
|
$
|
9,706
|
|
|
$
|
10,909
|
|
The
Company reviewed the carrying value of its goodwill as of December 27, 2020 and recognized impairment charges as deemed
necessary at that time. A subsequent review of the carrying value as of March 28, 2021 did not result in additional impairment
charges for the thirteen weeks ended as of that date. There were also no impairment charges during the thirteen weeks ended
March 29, 2020.
Note
7. OTHER INTANGIBLE ASSETS
Other
intangible assets consist of trademarks and franchise agreements that were classified as identifiable intangible assets at the
time of the brands’ acquisition by the Company or by FCCG prior to FCCG’s contribution of the brands to the Company
at the time of the initial public offering (in thousands):
|
|
March
28,
2021
|
|
|
December
27,
2020
|
|
Trademarks:
|
|
|
|
|
|
|
|
|
Fatburger
|
|
$
|
2,135
|
|
|
$
|
2,135
|
|
Buffalo’s
|
|
|
27
|
|
|
|
27
|
|
Hurricane
|
|
|
6,840
|
|
|
|
6,840
|
|
Ponderosa
|
|
|
300
|
|
|
|
300
|
|
Yalla
|
|
|
776
|
|
|
|
776
|
|
Elevation Burger
|
|
|
4,690
|
|
|
|
4,690
|
|
Johnny
Rockets
|
|
|
20,300
|
|
|
|
20,300
|
|
Total
trademarks
|
|
|
35,068
|
|
|
|
35,068
|
|
|
|
|
|
|
|
|
|
|
Franchise agreements:
|
|
|
|
|
|
|
|
|
Hurricane –
cost
|
|
|
4,180
|
|
|
|
4,180
|
|
Hurricane –
accumulated amortization
|
|
|
(884
|
)
|
|
|
(804
|
)
|
Ponderosa –
cost
|
|
|
1,477
|
|
|
|
1,477
|
|
Ponderosa –
accumulated amortization
|
|
|
(362
|
)
|
|
|
(337
|
)
|
Elevation Burger
– cost
|
|
|
2,450
|
|
|
|
2,450
|
|
Elevation Burger
– accumulated amortization
|
|
|
(886
|
)
|
|
|
(761
|
)
|
Johnny Rockets –
cost
|
|
|
6,600
|
|
|
|
6,600
|
|
Johnny
Rockets – accumulated amortization
|
|
|
(312
|
)
|
|
|
(162
|
)
|
Total
franchise agreements
|
|
|
12,263
|
|
|
|
12,643
|
|
Total
Other Intangible Assets
|
|
$
|
47,331
|
|
|
$
|
47,711
|
|
The
Company reviewed the carrying value of its other intangible assets as of December 27, 2020 and recognized impairment charges as
deemed necessary at that time. A subsequent review of the carrying value as of March 28, 2021 did not result in additional
impairment charges for the thirteen weeks ended as of that date. There were also no impairment charges during the thirteen
weeks ended March 29, 2020.
The
expected future amortization of the Company’s franchise agreements is as follows (in thousands):
Fiscal year:
|
|
|
|
2021
|
|
$
|
1,141
|
|
2022
|
|
|
1,522
|
|
2023
|
|
|
1,522
|
|
2024
|
|
|
1,217
|
|
2025
|
|
|
1,023
|
|
Thereafter
|
|
|
5,838
|
|
Total
|
|
$
|
12,263
|
|
Note
8. DEFERRED INCOME
Deferred
income is as follows (in thousands):
|
|
March
28,
2021
|
|
|
December
27,
2020
|
|
|
|
|
|
|
|
|
Deferred franchise fees
|
|
$
|
10,742
|
|
|
$
|
10,003
|
|
Deferred royalties
|
|
|
262
|
|
|
|
291
|
|
Deferred vendor
incentives
|
|
|
315
|
|
|
|
692
|
|
Total
|
|
$
|
11,319
|
|
|
$
|
10,986
|
|
Note
9. Income Taxes
Effective
October 20, 2017, the Company entered into a Tax Sharing Agreement with FCCG that provided that FCCG would, 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. Under the Tax Sharing Agreement,
the Company would pay FCCG the amount that its current tax liability would have been had it filed a separate return. An inter-company
receivable due from FCCG and its affiliates was applied first to reduce excess income tax payment obligations to FCCG under the
Tax Sharing Agreement. The Tax Sharing Agreement was terminated in connection with the Merger during the fourth quarter
of 2020.
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. Deferred tax assets are reduced by a valuation allowance if, based
on the weight of available evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all
of the deferred tax assets will not be realized. As of March 28, 2021 and December 27, 2020, the Company recorded a valuation
allowance against its deferred tax assets in the amount of $678,000 and $513,000, respectively, as it determined that these amounts
would not likely be realized.
Income
tax provision related to continuing operations differ from the amounts computed by applying the statutory income tax rate to pretax
income as follows (in thousands):
|
|
Thirteen
Weeks Ended
|
|
|
Thirteen
Weeks Ended
|
|
|
|
March
28, 2021
|
|
|
March
29, 2020
|
|
|
|
|
|
|
|
|
Tax
benefit at statutory rate
|
|
$
|
(538
|
)
|
|
$
|
(590
|
)
|
State
and local income taxes
|
|
|
(5
|
)
|
|
|
(38
|
)
|
Foreign
taxes
|
|
|
826
|
|
|
|
121
|
|
Tax
credits
|
|
|
(826
|
)
|
|
|
(121
|
)
|
Dividends
on preferred stock
|
|
|
237
|
|
|
|
280
|
|
Valuation
allowance
|
|
|
165
|
|
|
|
-
|
|
Other
|
|
|
12
|
|
|
|
50
|
|
Total
income tax (benefit) expense
|
|
$
|
(129
|
)
|
|
$
|
(298
|
)
|
As
of March 28, 2021, the Company’s and its subsidiaries’ annual tax filings for the prior three years are open
for audit by Federal and generally, for the prior four years for state tax agencies, based on the filing date for each
return. The Company is the beneficiary of indemnification agreements from the prior owners of the subsidiaries for tax liabilities
related to periods prior to its ownership of the subsidiaries. Management evaluated the Company’s overall tax positions
and has determined that no provision for uncertain income tax positions is necessary as of March 28, 2021.
NOTE
10. LEASES
As
of March 28, 2021, the Company has thirteen operating leases for corporate offices and for certain restaurant properties that
are in the process of being refranchised. The leases have remaining terms ranging from 2.6 to 17.8 years. The Company recognized
lease expense of $810,000 and $347,000 for the thirteen months ended March 28, 2021 and March 29, 2020, respectively. The weighted
average remaining lease term of the operating leases as of March 28, 2021 was 7.4 years.
Operating
lease right of use assets and operating lease liabilities relating to the operating leases are as follows (in thousands):
|
|
March
28,
2021
|
|
|
December
27,
2020
|
|
|
|
|
|
|
|
|
Right of use assets
|
|
$
|
13,340
|
|
|
$
|
13,948
|
|
Lease liabilities
|
|
$
|
14,297
|
|
|
$
|
14,651
|
|
The
weighted average discount rate used to calculate the carrying value of the right of use assets and lease liabilities was 9.4%
which is based on the Company’s incremental borrowing rate at the time the lease is acquired.
The
contractual future maturities of the Company’s operating lease liabilities as of March 28, 2021, including anticipated lease
extensions, are as follows (in thousands):
Fiscal year:
|
|
|
|
2021
|
|
$
|
2,321
|
|
2022
|
|
|
3,182
|
|
2023
|
|
|
3,275
|
|
2024
|
|
|
3,137
|
|
2025
|
|
|
2,791
|
|
Thereafter
|
|
|
4,855
|
|
Total lease payments
|
|
|
19,561
|
|
Less
imputed interest
|
|
|
5,264
|
|
Total
|
|
$
|
14,297
|
|
Supplemental
cash flow information for the thirteen weeks ended March 28, 2021 related to leases is as follows (in thousands):
Cash paid for amounts included in the measurement of operating
lease liabilities:
|
|
|
|
Operating
cash flows from operating leases
|
|
$
|
810
|
|
Note
11. DEBT
Securitization
On
March 6, 2020, the Company completed a whole-business securitization (the “Securitization”) through the creation of
a bankruptcy-remote issuing entity, FAT Brands Royalty I, LLC (“FAT Royalty”), in which FAT Royalty issued $20 million
of Series 2020-1 Fixed Rates Senior Secured Notes, Class A-2 and $20 million of Series 2020-1 Fixed Rate Senior Subordinated Notes,
Class B-2 (collectively the “Series A-2 and B-2 Notes”) pursuant to an indenture and the supplement thereto, each
dated March 6, 2020 (collectively, the “Indenture”).
The
Series A-2 and B-2 Notes have the following terms:
Note
|
|
Public
Rating
|
|
Seniority
|
|
Issue
Amount
|
|
|
Coupon
|
|
|
First
Call Date
|
|
Final
Legal Maturity Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A-2
|
|
BB
|
|
Senior
|
|
$
|
20,000,000
|
|
|
|
6.50
|
%
|
|
4/27/2021
|
|
4/27/2026
|
Series B-2
|
|
B
|
|
Senior Subordinated
|
|
$
|
20,000,000
|
|
|
|
9.00
|
%
|
|
4/27/2021
|
|
4/27/2026
|
Net
proceeds from the issuance of the Series A-2 and B-2 Notes were $37,389,000, which consisted of the combined face amount of $40,000,000,
net of discounts of $246,000 and debt offering costs of $2,365,000. The discount and offering costs are accreted as additional
interest expense over the expected term of the Series A-2 and B-2 Notes.
On
September 21, 2020, FAT Royalty completed the sale of an additional $40 million of Series 2020-2 Fixed Rate Asset-Backed Notes
(the “Series M-2 Notes”), pursuant to the Indenture as amended by the Series 2020-2 Supplement.
The
Series M-2 Notes consist of the following:
Note
|
|
Seniority
|
|
|
Issue
Amount
|
|
|
Coupon
|
|
|
First
Call Date
|
|
Final
Legal Maturity Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
M-2
|
|
|
Subordinated
|
|
|
$
|
40,000,000
|
|
|
|
9.75
|
%
|
|
4/27/2021
|
|
4/27/2026
|
Net
proceeds from the issuance of the Series M-2 Notes were $35,371,000, which consists of the face amount of $40,000,000, net of
discounts of $3,200,000 and debt offering costs of $1,429,000. The discount and offering costs are accreted as additional interest
expense over the expected term of the Series M-2 Notes.
The
Series M-2 Notes are subordinate to the Series A-2 and B-2 Notes. The Series A-2 and B-2 Notes and the Series M-2 Notes (collectively,
the “2020 Securitization Notes”) issued under the Indenture, as amended, are secured by an interest in substantially
all of the assets of FAT Royalty, including the Johnny Rockets companies, that have been contributed to FAT Royalty and are obligations
only of FAT Royalty under the Indenture and not obligations of the Company.
While
the 2020 Securitization Notes are outstanding, scheduled payments of principal and interest are required to be made on a quarterly
basis, with the scheduled principal payments of $1,000,000 per quarter on each of the Series A-2 and Series B-2 Notes and $200,000
per quarter on the Series M-2 Notes beginning the second quarter of 2021.
In
connection with the Securitization, FAT Royalty and each of the Franchise Entities (as defined in the Indenture) entered into
a Management Agreement with the Company, dated as of the Closing Date (the “Management Agreement”), pursuant to which
the Company agreed to act as manager of FAT Royalty and each of the Franchise Entities. The Management Agreement provides for
a management fee payable monthly by FAT Royalty to the Company in the amount of $200,000, subject to three percent (3%) annual
increases (the “Management Fee”). The primary responsibilities of the manager are to perform certain franchising,
distribution, intellectual property and operational functions on behalf of the Franchise Entities pursuant to the Management Agreement.
The
2020 Securitization Notes are secured by substantially all of the assets of FAT Royalty, including the equity interests in the
Franchise Entities. The restrictions placed on the Company’s subsidiaries require that FAT Royalty’s principal and
interest obligations have first priority, after the payment of the Management Fee and certain other FAT Royalty expenses (as defined
in the Indenture), and amounts are segregated monthly to ensure appropriate funds are reserved to pay the quarterly principal
and interest amounts due. The amount of monthly cash flow that exceeds the required monthly debt service is generally remitted
to the Company. Once the required obligations are satisfied, there are no further restrictions, including payment of dividends,
on the cash flows of the subsidiaries.
The
2020 Securitization Notes have not been and will not be registered under the Securities Act of 1933, as amended (the “Securities
Act”), or the securities laws of any jurisdiction.
The
2020 Securitization Notes are subject to certain financial and non-financial covenants, including a debt service coverage ratio
calculation, as defined in the Indenture. If certain covenants are not met, the 2020 Securitization Notes may become partially
or fully due and payable on an accelerated schedule. In addition, FAT Royalty may voluntarily prepay, in part or in full, the
2020 Securitization Notes in accordance with the provisions in the Indenture. As of March 28, 2021, FAT Royalty was in compliance
with these covenants.
As
of March 28, 2021, the recorded balance of the 2020 Securitization Notes was $73,682,000, which is net of debt offering costs
of $3,216,000 and original issue discount of $3,102,000. As of December 27, 2020, the recorded balance of the 2020 Securitization
Notes was $73,369,000, which was net of debt offering costs of $3,374,000 and original issue discount of $3,257,000. The Company
recognized interest expense on the 2020 Securitization Notes of $2,063,000 for the thirteen weeks ended March 28, 2021, which
includes $158,000 for amortization of debt offering costs and $155,000 for amortization of the original issue discount. The average
effective interest rate of the 2020 Securitization Notes, including the amortization of debt offering costs and original issue
discount, was 11.2% for the thirteen weeks ended March 28, 2021.
The
2020 Securitization Notes were repaid in full in April 2021 (see Note 21).
Loan
and Security Agreement
On
January 29, 2019, the Company as borrower, and its subsidiaries and affiliates as guarantors, entered into the Loan and Security
Agreement with Lion. Pursuant to the Loan and Security Agreement, the Company borrowed $20.0 million from Lion, and utilized the
proceeds to repay the existing $16.0 million term loan from FB Lending, LLC plus accrued interest and fees, and provide additional
general working capital to the Company.
The
term loan under the Loan and Security Agreement was due to mature on June 30, 2020. Interest on the term loan accrued at an annual
fixed rate of 20.0% and was payable quarterly.
The
Loan and Security Agreement was subsequently amended several times which allowed the Company to increase its borrowing by $3,500,000
in connection with the acquisition of Elevation Burger; extended the exercise date of the Lion Warrant to June 30, 2020; extended
the due date for certain quarterly payments and imposed associated extension and other loan fees.
On
March 6, 2020, the Company repaid the Lion Loan and Security Agreement in full by making a total payment of approximately $26,771,000.
This consisted of $24,000,000 in principle, approximately $2,120,000 in accrued interest and $651,000 in penalties and fees.
The
Company recognized interest expense on the Loan and Security Agreement of $1,783,000 for the thirteen weeks ended March 29, 2020,
which includes $212,000 for amortization of all unaccreted debt offering costs at the time of the repayment and $650,000 in penalties
and fees.
Elevation
Note
On
June 19, 2019, the Company completed the acquisition of Elevation Burger. A portion of the purchase price included the issuance
to the Seller of a convertible subordinated promissory note (the “Elevation Note”) with a principal amount of $7,510,000,
bearing interest at 6.0% per year and maturing in July 2026. The Elevation Note is convertible under certain circumstances into
shares of the Company’s common stock at $12.00 per share. In connection with the valuation of the acquisition of Elevation
Burger, the Elevation Note was recorded on the financial statements of the Company at $6,185,000, which is net of a loan discount
of $1,295,000 and debt offering costs of $30,000.
As
of March 28, 2021, the carrying value of the Elevation Note was $5,987,000 which is net of the loan discount of $807,000 and debt
offering costs of $53,000. As of December 27, 2020, the carrying value of the Elevation Note was $5,919,000 which is net of the
loan discount of $872,000 and debt offering costs of $56,000. The Company recognized interest expense relating to the Elevation
Note during the thirteen months ended March 28, 2021 in the amount of $171,000, which included amortization of the loan discount
of $65,000 and amortization of $3,000 in debt offering costs. The Company recognized interest expense relating to the Elevation
Note during the thirteen weeks ended March 29, 2020 in the amount of $189,000, which included amortization of the loan discount
of $71,000 and amortization of $3,000 in debt offering costs. The effective interest rate for the Elevation Note during the thirteen
weeks ended March 28, 2021 was 11.5%.
The
Elevation Note is a general unsecured obligation of Company and is subordinated in right of payment to all indebtedness of the
Company arising under any agreement or instrument to which Company or any of its Affiliates is a party that evidences indebtedness
for borrowed money that is senior in right of payment.
Paycheck
Protection Program Loans
During
2020, the Company received loan proceeds in the amount of approximately $1,532,000 under the Paycheck Protection Program (the
“PPP Loans”) and Economic Injury Disaster Loan Program (the “EIDL Loans”). The Paycheck Protection Program,
established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to
qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans
and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including
payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the
borrower terminates employees or reduces salaries during the eight-week period.
At
inception, the PPP Loans and EIDL Loans related to FAT Brands Inc. as well as five restaurant locations that were part of the
Company’s refranchising program. While the Company currently believes that its use of the loan proceeds will meet the conditions
for forgiveness of the loans, there can be no assurance that the Company will be eligible for forgiveness of the loans, in whole
or in part. Any unforgiven portion of the PPP Loans is payable over two years at an interest rate of 1%, with a deferral of payments
for the first six months. As of March 28, 2021 and December 27, 2020, the balance remaining on the PPP Loans and EIDL Loans was
$1,186,000 and $1,183,000 related to FAT Brands Inc., as the five restaurant locations were closed or refranchised during the
second and third quarters of 2020.
Subsequent
to March 28, 2021, the PPP Loans and EIDL Loans were forgiven (see Note 21).
Assumed
Debt from Merger
The
following debt of FCCG (the “FCCG Debt”) was assumed by Fog Cutter Acquisition LLC, a subsidiary of the Company, as
part of the Merger (in thousands):
|
|
March
28, 2021
|
|
Note
payable to a private lender. The note bears interest at a fixed rate of 12% and is unsecured. Interest is due monthly in arrears.
The note matures on May 21, 2021.
|
|
$
|
1,978
|
|
|
|
|
|
|
Note payable to a
private lender. The note bears interest at a fixed rate of 12% and is unsecured. Interest is due monthly in arrears. The note
matures on May 21, 2021.
|
|
|
2,871
|
|
|
|
|
|
|
Note payable to a
private lender. The note bears interest at a fixed rate of 15%. The note matures May 21, 2021.
|
|
|
17
|
|
|
|
|
|
|
Note payable to a
private lender. The note bears interest at a fixed rate of 12%. Interest is due monthly in arrears. The note matures May 21,
2021.
|
|
|
779
|
|
|
|
|
|
|
Consideration
payable to former FCCG shareholders issued in redemption of fractional shares of FCCG’s stock. The consideration is
unsecured and non-interest bearing and is due and payable on May 21, 2021.
|
|
|
6,864
|
|
|
|
|
|
|
Total
|
|
$
|
12,509
|
|
Subsequent
to March 28, 2021, the FCCG
Debt was repaid in full (see Note 21).
Note
12. PREFERRED STOCK
Series
B Cumulative Preferred Stock
On
July 13, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) to issue and sell
in a public offering (the “Offering”) 360,000 shares of 8.25% Series B Cumulative Preferred Stock (“Series B
Preferred Stock”) and 1,800,000 warrants, plus 99,000 additional warrants pursuant to the underwriter’s overallotment
option (the “2020 Series B Offering Warrants”), to purchase common stock at $5.00 per share. In the Underwriting Agreement,
the Company agreed to pay the underwriters an underwriting discount of 8.0% of the gross proceeds received by the Company in the
Offering and issue five-year warrants exercisable for 1% of the number of Series B Preferred Stock shares and the number of 2020
Series B Offering Warrants sold in the Offering.
In
connection with the Offering, on July 15, 2020 the Company filed an Amended and Restated Certificate of Designation of Rights
and Preferences of Series B Cumulative Preferred Stock with the Secretary of State of Delaware, designating a total of 850,000
shares of Series B Preferred Stock (the “Certificate of Designation”), and on July 16, 2020 entered into a Warrant
Agency Agreement with VStock Transfer, LLC, to act as the Warrant Agent for the Series B Offering Warrants (the “Warrant
Agency Agreement”).
The
Certificate of Designation amends and restates the terms of the Series B Cumulative Preferred Stock issued in October 2019 (the
“Original Series B Preferred”). At the time of the Offering, there were 57,140 shares of the Original Series B Preferred
outstanding, together with warrants to purchase 34,284 shares of the Company’s common stock at an exercise price of $8.50
per share (the “Series B Warrants”).
The
Offering closed on July 16, 2020 with net proceeds to the Company of $8,122,000, which was net of $878,000 in underwriting and
offering costs.
Holders
of Series B Cumulative Preferred Stock shall be entitled to receive, when, as and if declared by the FAT Board or a duly authorized
committee thereof, in its sole discretion, out of funds of the Company legally available for the payment of distributions, cumulative
preferential cash dividends at a rate per annum equal to the 8.25% multiplied by $25.00 per share stated liquidation preference
of the Series B Preferred Stock. The dividends shall accrue without interest and accumulate, whether or not earned or declared,
on each issued and outstanding share of the Series B Preferred Stock from (and including) the original date of issuance of such
share and shall be payable monthly in arrears on a date selected by the Company each calendar month that is no later than twenty
(20) days following the end of each calendar month.
If
the Company fails to pay dividends on the Series B Preferred Stock in full for any twelve accumulated, accrued and unpaid dividend
periods, the dividend rate shall increase to 10% until the Company has paid all accumulated accrued and unpaid dividends on the
Series B Preferred Stock in full and has paid accrued dividends during the two most recently completed dividend periods in full,
at which time the 8.25% dividend rate shall be reinstated.
The
Company may redeem the Series B Preferred Stock, in whole or in part, at the option of the Company, for cash, at the following
redemption price per share, plus any unpaid dividends:
|
(i)
|
After
July 16, 2020 and on or prior to July 16, 2021: $27.50 per share.
|
|
(ii)
|
After
July 16, 2021 and on or prior to July 16, 2022: $27.00 per share.
|
|
(iii)
|
After
July 16, 2022 and on or prior to July 16, 2023: $26.50 per share.
|
|
(iv)
|
After
July 16, 2023 and on or prior to July 16, 2024: $26.00 per share.
|
|
(v)
|
After
July 16, 2024 and on or prior to July 16, 2025: $25.50 per share.
|
|
(vi)
|
After
July 16, 2025: $25.00 per share.
|
As
a result of the amended and restated terms of the Series B Cumulative Preferred Stock, the Company classified the Series B Preferred
Stock as equity as of July 15, 2020.
Concurrent
with the Offering, the holders of the outstanding 57,140 shares of Original Series B Preferred became subject to the new terms
of the Certificate of Designation. As a result, the recorded value of the new Series B Stock was $1,136,000 with $292,000 allocated
to the 2020 Series B Offering Warrants. The original holders were also issued 3,537 shares of new Series B Preferred Shares in
payment of $88,000 accrued and outstanding dividends relating to the Original Series B Preferred at a price of $25 per share.
The
Company entered into an agreement to exchange 15,000 shares of Series A Fixed Rate Cumulative Preferred Stock owned by FCCG for
60,000 shares of Series B Preferred Stock valued at $1,500,000, pursuant to a Settlement, Redemption and Release Agreement. The
Company also agreed to issue 14,449 shares of Series B Preferred Stock valued at $361,224 as consideration for accrued dividends
due to FCCG.
The
Company entered into an agreement to exchange all of the outstanding shares of Series A-1 Fixed Rate Cumulative Preferred Stock
for 168,001 shares of Series B Preferred Stock valued at $4,200,000, pursuant to a Settlement, Redemption and Release Agreement
with the holders of such shares.
In
connection with the acquisition of FCCG by the Company, in December 2020 the Company declared a special stock dividend (the “Special
Dividend”) payable only to holders of our Common Stock, other than FCCG, on the record date, consisting of 0.2319998077
shares of Series B Cumulative Preferred Stock for each outstanding share of Common Stock held by such stockholders. The Special
Dividend was paid on December 23, 2020 and resulted in the issuance of 520,145 additional shares of Series B Preferred Stock with
a market value on the payment date of approximately $8,885,000.
As
of March 28, 2021, the Series B Preferred Stock consisted of 1,183,272 shares outstanding with a balance of $21,267,000. The Company
declared preferred dividends to the holders of the Series B Preferred Stock totaling $610,000 during the thirteen weeks ended
March 28, 2021.
Series
A Fixed Rate Cumulative Preferred Stock
On
June 8, 2018, the Company filed a Certificate of Designation of Rights and Preferences of Series A Fixed Rate Cumulative Preferred
Stock (“Series A Preferred Stock”) with the Secretary of State of the State of Delaware (the “Certificate of
Designation”), designating a total of 100,000 shares of Series A Preferred Stock.
The
Company issued 100,000 shares of Series A Preferred stock in the following two transactions:
|
(i)
|
On
June 7, 2018, the Company entered into a Subscription Agreement for the issuance and sale (the “Series A Offering”)
of 800 units (the “Units”), with each Unit consisting of (i) 100 shares of the Company’s newly designated
Series A Fixed Rate Cumulative Preferred Stock (the “Series A Preferred Stock”) and (ii) warrants (the “Series
A Warrants”) to purchase 127 shares of the Company’s common stock at $7.83 per share. The sales price of each
Unit was $10,000, resulting in gross proceeds to the Company from the initial closing of $8,000,000 and the issuance of 80,000
shares of Series A Preferred Stock and Series A Warrants to purchase 102,125 shares of common stock (the “Subscription
Warrants”).
|
|
(ii)
|
On
June 27, 2018, the Company entered into a Note Exchange Agreement, as amended, under which it agreed with FCCG to exchange
all but $950,000 of the remaining balance of the Company’s outstanding Promissory Note issued to the FCCG on October
20, 2017, in the original principal amount of $30,000,000 (the “Note”). At the time, the Note had an estimated
outstanding balance of principal plus accrued interest of $10,222,000 (the “Note Balance”). On June 27, 2018,
$9,272,053 of the Note Balance was exchanged for shares of capital stock of the Company and warrants in the following amounts
(the “Exchange Shares”):
|
|
●
|
$2,000,000
of the Note Balance was exchanged for 200 Units consisting of 20,000 shares of Series A Fixed Rate Cumulative Preferred Stock
of the Company at $100 per share and Series A Warrants to purchase 25,530 of the Company’s common stock at an exercise
price of $7.83 per share (the “Exchange Warrants”); and
|
|
●
|
$7,272,053
of the Note Balance was exchanged for 1,010,420 shares of common stock of the Company, representing an exchange price of $7.20
per share, which was the closing trading price of the common stock on June 26, 2018.
|
On
July 13, 2020, the Company entered into the following transactions pertaining to the outstanding Series A Preferred Stock:
|
1.
|
The
Company entered into an agreement to redeem 80,000 outstanding shares of the Series A Preferred Stock, plus accrued dividends
thereon, held by Trojan Investments, LLC pursuant to a Stock Redemption Agreement that provides for the redemption at face
value of a portion of such shares for cash from the proceeds of the Offering and the balance to be redeemed in $2 million
tranches every six months, with the final payment due by December 31, 2021.
|
|
|
|
|
2.
|
The
Company redeemed 5,000 outstanding shares of Series A Preferred Stock, plus accrued dividends thereon, held by Ridgewood Select
Value Fund LP and its affiliate at face value for cash from the proceeds of the Offering.
|
|
|
|
|
3.
|
The
Company exchanged 15,000 outstanding shares of Series A Preferred Stock, plus accrued dividends thereon, held by FCCG at face
value for shares of Series B Preferred Stock valued at $25.00 per share.
|
The
Company classifies the Series A Preferred Stock as debt.
As
of March 28, 2021, there were 80,000 shares of Series A Preferred Stock outstanding, with a balance of $7,970,000 which is net
of debt offering costs and discounts of $30,000.
The
Company recognized interest expense on the Series A Preferred Stock of $288,000 for the thirteen weeks ended March 28, 2021, which
includes accretion expense of $9,000 as well as $1,000 for the amortization of debt offering costs. The Company recognized interest
expense on the Series A Preferred Stock of $355,000 for the thirteen weeks ended March 29, 2020, which includes accretion expense
of $6,000 and $1,000 for the amortization of debt offering costs. The year-to-date effective interest rate for the Series A Preferred
Stock for 2021 was 14.5%.
Note
13. Related Party Transactions
During
the thirteen weeks ended March 28, 2021, there were no reportable related party transactions. For the thirteen weeks ended March
29, 2020, the Company reported the following:
Due
from Affiliates
On
April 24, 2020, the Company entered into an Intercompany Revolving Credit Agreement with FCCG (“Intercompany Agreement”).
The Company had previously extended credit to FCCG pursuant to a certain Intercompany Promissory Note (the “Original Note”),
dated October 20, 2017, with an initial principal balance of $11,906,000. Subsequent to the issuance of the Original Note, the
Company and certain of its direct or indirect subsidiaries made additional intercompany advances in the aggregate amount of $10,523,000.
Pursuant to the Intercompany Agreement, the revolving credit facility bore interest at a rate of 10% per annum, had a five-year
term with no prepayment penalties, and had a maximum capacity of $35,000,000. All additional borrowings under the Intercompany
Agreement were subject to the approval of the Board of Directors, in advance, on a quarterly basis and may have been subject to
other conditions as set forth by the Company. The initial balance under the Intercompany Agreement totaled $21,067,000 including
the balance of the Original Note, borrowings subsequent to the Original Note, accrued and unpaid interest income, and other adjustments
through December 29, 2019. As of March 29, 2020, the balance receivable under the Intercompany Agreement was $26,854,000.
During
the thirteen weeks ended March 29, 2020, the Company recorded a receivable from FCCG in the amount of $121,000 under the Tax Sharing
Agreement, which was added to the intercompany receivable.
Series
B Cumulative Preferred Stock
On
October 3 and October 4, 2019, the Company completed the initial closing of its continuous public offering (the “Series
B Preferred Offering”) of up to $30,000,000 of units (the “Series B Units”) at $25.00 per Series B Unit, with
each Series B Unit comprised of one share of 8.25% Series B Cumulative Preferred Stock (“Series B Preferred Stock”)
and 0.60 warrants (the “Series B Warrants”) to purchase common stock at $8.50 per share, exercisable for five years.
At the initial closing of the Preferred Offering, the Company completed the sale of 43,080 Series B Units for gross proceeds of
$1,077,000.
As
of March 29, 2020, the following reportable related persons participated in the initial closing of the Company’s Preferred
Offering:
|
●
|
Andrew
Wiederhorn, the Company’s Chief Executive Officer, acquired 20,000 Series B Units for $500,000 comprised of 20,000 shares
of Series B Preferred Stock and 12,000 Series B Warrants to purchase 12,000 shares of the Company’s Common Stock at
$8.50 per share, and
|
|
|
|
|
●
|
Squire
Junger, a member of the Company’s Board of Directors, acquired 5,000 Series B Units for $125,000 comprised of 5,000
shares of Series B Preferred Stock and 3,000 Series B Warrants to purchase 3,000 shares of the Company’s Common Stock
at $8.50 per share.
|
|
|
|
|
●
|
In
aggregate, Mr. Wiederhorn, Mr. Junger, and other related parties acquired 33,000 Series B Units for $825,000 comprised of
33,000 shares of Series B Preferred Stock and 19,800 Series B Warrants to purchase 19,800 shares of the Company’s Common
Stock at $8.50 per share.
|
Note
14. SHAREHOLDERS’ EQUITY
As
of March 28, 2021 and December 27, 2020, the total number of authorized shares of common stock was 25,000,000, and there were
12,029,264 and 11,926,264 shares of common stock outstanding, respectively.
Below
are the changes to the Company’s common stock during the thirteen weeks ended March 28, 2021:
|
●
|
The
Company issued 103,000 shares of common stock between February 10, 2021 and February 17, 2021 in satisfaction of the exercise
of certain 2020 Series B Offering Warrants. The proceeds to the Company from the exercise of the options totaled $515,000.
|
Note
15. SHARE-BASED COMPENSATION
Effective
September 30, 2017, the Company adopted the 2017 Omnibus Equity Incentive Plan (the “Plan”). The Plan is a comprehensive
incentive compensation plan under which the Company can grant equity-based and other incentive awards to officers, employees and
directors of, and consultants and advisers to, FAT Brands Inc. and its subsidiaries. The Plan provides a maximum of 1,021,250
shares available for grant.
All
of the stock options issued by the Company to date have included a vesting period of three years, with one-third of each grant
vesting annually. The Company’s stock option activity for thirteen weeks ended March 28, 2021 is summarized as follows:
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average Remaining Contractual
Life (Years)
|
|
Stock options outstanding
at December 27, 2020
|
|
|
656,105
|
|
|
$
|
8.21
|
|
|
|
7.5
|
|
Grants
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Stock options
outstanding at March 28, 2021
|
|
|
656,105
|
|
|
$
|
8.21
|
|
|
|
7.5
|
|
Stock options
exercisable at March 28,2021
|
|
|
453,566
|
|
|
$
|
9.34
|
|
|
|
7.1
|
|
The
range of assumptions used in the Black-Scholes valuation model to record the stock-based compensation are as follows:
|
|
|
Including
Non-Employee
Options
|
|
Expected dividend yield
|
|
|
0%
- 10.43
|
%
|
Expected volatility
|
|
|
30.23%
- 31.73
|
%
|
Risk-free interest rate
|
|
|
0.32%
- 2.85
|
%
|
Expected term (in years)
|
|
|
5.50
– 5.75
|
|
The
Company recognized share-based compensation expense in the amount of $37,000 and $15,000, respectively, during the thirteen weeks
ended March 28, 2021 and March 29, 2020. As of March 28, 2021, there remains $124,000 of related share-based compensation expense
relating to non-vested grants, which will be recognized over the remaining vesting period, subject to future forfeitures.
Note
16. WARRANTS
Outstanding
Warrants
As
of March 28, 2021, the Company had the following outstanding warrants to purchase shares of its common stock:
|
●
|
Warrants
issued on October 20, 2017 to purchase 81,700 shares of the Company’s common stock granted to the selling agent in the
Company’s Initial Public Offering (the “Common Stock Warrants”). The Common Stock Warrants are exercisable
commencing April 20, 2018 through October 20, 2022. The exercise price for the Common Stock Warrants is $14.69 per share,
and the Common Stock Warrants were valued at $124,000 at the date of grant. The Common Stock Warrants provide that upon exercise,
the Company may elect to redeem the Common Stock Warrants in cash by paying the difference between the applicable exercise
price and the then-current fair market value of the common stock.
|
|
●
|
Warrants
issued on June 7, 2018 to purchase 102,125 shares of the Company’s common stock at an exercise price of $7.83 per share
(the “Subscription Warrants”). The Subscription Warrants were issued as part of the Subscription Agreement (see
Note 12). The Subscription Warrants were valued at $87,000 at the date of grant. The Subscription Warrants may be exercised
at any time or times beginning on the issue date and ending on the five-year anniversary of the issue date.
|
|
●
|
Warrants
issued on June 27, 2018 to purchase 25,530 shares of the Company’s common stock at an exercise price of $7.83 per share
(the “Exchange Warrants”). The Exchange Warrants were issued as part of the Exchange (See Note 12). The Exchange
Warrants were valued at $25,000 at the date of grant. The Exchange Warrants may be exercised at any time or times beginning
on the issue date and ending on the five-year anniversary of the issue date.
|
|
|
|
|
●
|
Warrants
issued on July 3, 2018 to purchase 57,439 shares of the Company’s common stock at an exercise price of $7.83 per share
(the “Hurricane Warrants”). The Hurricane Warrants were issued as part of the acquisition of Hurricane. The Hurricane
Warrants were valued at $58,000 at the date of grant. The Hurricane Warrants may be exercised at any time or times beginning
on the issue date and ending on the five-year anniversary of the issue date.
|
|
|
|
|
●
|
Warrants
issued on July 3, 2018 to purchase 40,904 shares of the Company’s common stock at an exercise price of $7.20 per share
(the “Placement Agent Warrants”). The Placement Agent Warrants were issued to the placement agents of the $16
million credit facility with FB Lending, LLC (See Note 11). The remaining Placement Agent Warrants had been valued at $48,000
at the date of grant. The Placement Agent Warrants may be exercised at any time or times beginning on the issue date and ending
on the five-year anniversary of the issue date.
|
|
●
|
Warrants
issued on June 19, 2019, in connection with the acquisition of Elevation Burger (See Note 3), to purchase 46,875 shares of
the Company’s common stock at an exercise price of $8.00 per share (the “Elevation Warrant”), exercisable
for a period of five years, but only in the event of a merger of the Company and FCCG, commencing on the second business day
following the potential merger and ending on the five year anniversary thereafter. The Elevation Warrants were not valued
at the date of grant due to the contingency relating to their exercise.
|
|
|
|
|
●
|
Warrants
issued between October 3, 2019 and December 29, 2019, in connection with the sale of Series B Units, to purchase 60 shares
of the Company’s common stock at an exercise price of $8.50 per share (the “Series B Warrants”), exercisable
for a period of five years from October 3, 2019. These warrants have not yet been presented by the holders for exchange with
2020 Series B Offering Warrants (See Note 12).
|
|
|
|
|
●
|
Warrants
issued on July 16, 2020, in connection with Series B Preferred Stock Offering (See Note 12), to purchase 1,796,910 shares
of the Company’s common stock at an exercise price of $5.00 per share (the “2020 Series B Offering Warrants”),
exercisable beginning on December 24 ,2020, and will expire on July 16, 2025. The Series B Offering Warrants were valued at
$1,926,000 at the date of grant. Subsequent to March 28, 2021, on May 3, 2021, the exercise price of the 2020 Series B Offering
Warrants decreased from $5.00 per share to $4.8867 per share based on the cash dividend payable to holders of the Company’s
common stock as of such date (See Note 17).
|
|
|
|
|
●
|
Warrants
issued on July 16, 2020, to purchase 2020 Series B Offering Warrants (the “Series B Underwriter Warrants”), which
would grant the holder the right to purchase 18,990 shares of the Company’s common stock at an exercise price of $5.00
per share, exercisable beginning on December 24, 2020 and expiring on July 16, 2025. The exercise price to purchase the 2020
Series B Offering Warrant is $0.01 per underlying share of common stock. These warrants were valued at $64,000 at the date
of grant.
|
The
Company’s warrant activity for the thirteen weeks ended March 28, 2021 is as follows:
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Warrants outstanding at December 27, 2020
|
|
|
2,273,533
|
|
|
$
|
5.68
|
|
|
|
4.1
|
|
Grants
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(103,000
|
)
|
|
$
|
(5.00
|
)
|
|
|
(4.3
|
)
|
Warrants outstanding at March 28,
2021
|
|
|
2,170,533
|
|
|
$
|
5.71
|
|
|
|
4.0
|
|
Warrants exercisable at March 28,
2021
|
|
|
2,170,533
|
|
|
$
|
5.71
|
|
|
|
4.0
|
|
The
range of assumptions used to establish the value of the warrants using the Black-Scholes valuation model are as follows:
|
|
Warrants
|
|
Expected
dividend yield
|
|
|
4.00%
- 6.63
|
%
|
Expected
volatility
|
|
|
30.23%
- 31.73
|
%
|
Risk-free
interest rate
|
|
|
0.99%
- 1.91
|
%
|
Expected
term (in years)
|
|
|
3.80
- 5.00
|
|
In
addition to the warrants to purchase common stock described above, the Company has also granted the following warrants on other
securities to the underwriters in connection with the Series B Preferred Stock Offering (See Note 12):
|
●
|
Warrants
issued on July 16, 2020, to purchase 3,600 shares of the Company’s Series B Preferred Stock at an exercise price of
$24.95 per share (the “Series B Preferred Warrants”), exercisable beginning on the earlier of one year from the
date of issuance or the consummation of a consolidation, merger or other similar business combination transaction involving
the Company (or any of its subsidiaries) and its parent company, FCCG, and will expire on July 16, 2025. The Series B Preferred
Warrants were valued at $2,000 at the date of grant.
|
Note
17. DIVIDENDS ON COMMON STOCK
During
the thirteen weeks ended March 28, 2021, there were no dividends declared or paid on the Company’s common stock. Subsequent
to the end of that period, on April 20, 2021, the Board of Directors declared a cash dividend of $0.13 per share of common
stock, payable on May 7, 2021 to shareholders of record as of May 3, 2021, for a total of $1,590,000.
Note
18. Commitments and Contingencies
Litigation
Stratford
Holding LLC v. Foot Locker Retail Inc. (U.S. District Court for the Western District of Oklahoma, Case No. 5:12-cv-00772-HE)
In
2012 and 2013, two property owners in Oklahoma City, Oklahoma sued numerous parties, including Foot Locker Retail Inc. and our
subsidiary Fog Cutter Capital Group Inc. (now known as Fog Cutter Acquisition, LLC), for alleged environmental contamination on
their properties, stemming from dry cleaning operations on one of the properties. The property owners seek damages in the range
of $12 million to $22 million. From 2002 to 2008, a former Fog Cutter subsidiary managed a lease portfolio, which included the
subject property. Fog Cutter denies any liability, although it did not timely respond to one of the property owners’ complaints
and several of the defendants’ cross-complaints and thus is in default. The parties are currently conducting discovery,
and the matter is scheduled for trial for November 2021. The Company is unable to predict the ultimate outcome of this matter,
however, reserves have been recorded on the balance sheet relating to this litigation. There can be no assurance that the defendants
will be successful in defending against these actions.
SBN
FCCG LLC v FCCGI (Los Angeles Superior Court, Case No. BS172606)
SBN
FCCG LLC (“SBN”) filed a complaint against Fog Cutter Capital Group, Inc. (“FCCG”) in New York state court
for an indemnification claim (the “NY case”) stemming from an earlier lawsuit in Georgia regarding a certain lease
portfolio formerly managed by a former FCCG subsidiary. In February 2018, SBN obtained a final judgment in the NY case for a total
of $651,290, which included $225,030 in interest dating back to March 2012. SBN then obtained a sister state judgment in Los Angeles
Superior Court, Case No. BS172606 (the “California case”), which included the $651,290 judgment from the NY case,
plus additional statutory interest and fees, for a total judgment of $656,543. In May 2018, SBN filed a cost memo, requesting
an additional $12,411 in interest to be added to the judgment in the California case, for a total of $668,954. In May 2019, the
parties agreed to settle the matter for $580,000, which required the immediate payment of $100,000, and the balance to be paid
in August 2019. FCCG wired $100,000 to SBN in May 2019, but has not yet paid the remaining balance of $480,000. The parties have
not entered into a formal settlement agreement, and they have not yet discussed the terms for the payment of the remaining balance.
The
Company is involved in other claims and legal proceedings from time-to-time that arise in the ordinary course of business, including
those involving the Company’s franchisees. The Company does not believe that the ultimate resolution of these actions will
have a material adverse effect on its business, financial condition, results of operations, liquidity or capital resources. As
of March 28,2021, the Company had accrued an aggregate of $5.68 million for the specific matters mentioned above and claims and
legal proceedings involving franchisees as of that date.
Operating
Leases
The
Company leases corporate headquarters located in Beverly Hills, California comprising 12,281 square feet of space, pursuant to
a lease that expires on September 29, 2025, as well as an additional 2,915 square feet of space pursuant to a lease amendment
that expires on February 29, 2024.
The
Company is operating ten restaurant locations which are now being marketed as part of its refranchising efforts. Each location
is subject to a real estate lease.
The
Company believes that all existing facilities are in good operating condition and adequate to meet current and foreseeable needs.
Additional information related to the Company’s operating leases are disclosed in Note 10.
Note
19. geographic information AND MAJOR FRANCHISEES
Revenues
by geographic area are as follows (in thousands):
|
|
Thirteen
Weeks Ended
March
28, 2021
|
|
|
Thirteen
Weeks Ended
March
29, 2020
|
|
United States
|
|
$
|
4,830
|
|
|
$
|
3,709
|
|
Other countries
|
|
|
1,819
|
|
|
|
714
|
|
Total revenues
|
|
$
|
6,649
|
|
|
$
|
4,423
|
|
Revenues
are shown based on the geographic location of our licensee restaurants. All Company assets are located in the United States.
During
the thirteen weeks ended March 28, 2021 and March 29, 2020, no individual franchisee accounted for more than 10% of the Company’s
revenues.
NOTE
20. OPERATING SEGMENTS
With
minor exceptions, the Company’s operations are comprised exclusively of franchising a growing portfolio of restaurant brands.
The Company’s growth strategy is centered on expanding the footprint of existing brands and acquiring new brands through
a centralized management organization which provides substantially all executive leadership, marketing, training and corporate
accounting services. While each brand could be considered an individual business segment, the nature of the Company’s
business is consistent across our portfolio. Consequently, while management assesses the progress of its operations by brand,
these operations may be aggregated into one reportable segment in the Company’s financial statements.
As
part of its ongoing franchising efforts, the Company will, from time to time, make opportunistic acquisitions of operating restaurants
in order to convert them to franchise locations. During the refranchising period, the Company may operate the restaurants.
The
chief operating decision maker (“CODM”) is the Chief Executive Officer. The CODM reviews financial performance and
allocates resources at an overall level on a recurring basis. Therefore, management has determined that the Company has one reportable
segment.
NOTE
21. SUBSEQUENT EVENTS
Management
has evaluated all events and transactions that occurred subsequent to March 28, 2021 through the date of issuance
of these consolidated financial statements. During this period, the Company did not have any significant subsequent events
except as follows:
Securitization
On
April 26, 2021 (the “Closing Date”), FB Royalty completed the issuance and sale in a private offering (the “Offering”
as defined in Note 1) of three tranches of fixed rate senior secured notes as follows: (i) 4.75% Series 2021-1 Fixed Rate
Senior Secured Notes, Class A-2, in an initial principal amount of $97,104,000; (ii) 8.00% Series 2021-1 Fixed Rate Senior Subordinated
Secured Notes, Class B-2, in an initial principal amount of $32,368,000; and (iii) 9.00% Series 2021-1 Fixed Rate Subordinated
Secured Notes, Class M-2, in an initial principal amount of $15,000,000 (collectively, the “2021 Securitization Notes”).
The
2021 Securitization Notes were issued in a securitization transaction pursuant to which substantially all of the assets held by
the Issuer and its subsidiaries, including the Company, were pledged as collateral to secure the 2021 Securitization Notes. On
the Closing Date, FAT used a portion of the net proceeds of the Offering to repay in full the 2020 Securitization Notes (see Note
11).
The
restrictions placed on the Company and other FB Royalty subsidiaries require that the 2021 Securitization Notes principal and
interest obligations have first priority and amounts are segregated weekly to ensure appropriate funds are reserved to pay the
quarterly principal and interest amounts due. The amount of weekly cash flow that exceeds the required weekly interest reserve
is generally remitted to the FAT.
Common
stock dividend
On
April 20, 2021, the Board of Directors declared a cash dividend of $0.13 per share of common stock, payable on May 7, 2021 to
shareholders of record as of May 3, 2021, totaling $1,590,000.
Retirement
of Fog Cutter debt
In
April 2021, obligations totaling approximately $12,509,000 owed by Fog Cutter Capital Group to various lenders and beneficiaries
were paid in full (see Note 11).
Forgiveness
of PPP Loans
On
April 26, 2021, the Company received confirmation that the entire balance remaining on the PPP Loans, plus accrued interest, had
been forgiven under the terms of the program.