FAT Brands(FATBB) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Consolidated Financial Statements (Unaudited) Financial statements reflect a net loss of $6.6 million and a stockholders' deficit of $3.6 million due to the COVID-19 pandemic's impact Consolidated Balance Sheets (Unaudited) Total assets grew to $90.9 million while a rise in debt led to a stockholders' deficit of $3.6 million Consolidated Balance Sheet Highlights (in thousands) | Account | June 28, 2020 | December 29, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash & Restricted Cash | $3,488 | $25 | | Total Current Assets | $10,130 | $10,488 | | Goodwill | $9,450 | $10,912 | | Total Assets | $90,890 | $82,550 | | Liabilities & Equity | | | | Total Current Liabilities | $21,151 | $45,611 | | Long-term Debt, net | $43,925 | $5,216 | | Total Liabilities | $94,478 | $77,172 | | Total Stockholders' Equity (Deficit) | ($3,588) | $5,378 | Consolidated Statements of Operations (Unaudited) Revenues fell to $7.5 million, resulting in a net loss of $6.6 million due to asset impairments and COVID-19 impacts Statement of Operations Summary (in thousands, except per share data) | Metric | Twenty-six weeks ended June 28, 2020 | Twenty-six weeks ended June 30, 2019 | | :--- | :--- | :--- | | Total Revenue | $7,530 | $10,768 | | Total Costs and Expenses | $13,898 | $7,879 | | Impairment of Assets | $3,174 | $0 | | (Loss) Income from Operations | ($6,368) | $2,889 | | Net Loss | ($6,621) | ($1,218) | | Basic and Diluted Loss per Share | ($0.56) | ($0.10) | Consolidated Statements of Stockholders' Equity (Unaudited) Stockholders' equity declined to a deficit of $3.6 million, driven by a net loss and derivative liability adjustments - Stockholders' equity fell into a deficit of ($3,588,000) at June 28, 2020, from an equity position of $5,378,000 at December 29, 2019[15] - The main drivers for the decrease in equity were the net loss of $6,621,000 and a fair value adjustment of derivative liability of $2,406,000[15] Consolidated Statements of Cash Flows (Unaudited) Financing activities provided $13.8 million in cash, offsetting operational and investing outflows for a net cash increase Cash Flow Summary (in thousands) | Cash Flow Activity | Twenty-six weeks ended June 28, 2020 | Twenty-six weeks ended June 30, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | ($3,994) | ($984) | | Net cash used in investing activities | ($6,326) | ($5,587) | | Net cash provided by financing activities | $13,783 | $6,458 | | Net increase (decrease) in cash | $3,463 | ($113) | Notes to Consolidated Financial Statements (Unaudited) Notes detail the COVID-19 impact, a $40 million debt securitization, a PPP loan, and subsequent equity financing - The COVID-19 pandemic has negatively impacted the company, causing franchisees to close or modify operations, resulting in reduced revenues[26] - In March 2020, the company completed a $40 million whole-business securitization, using the net proceeds of $37.3 million to repay existing debt and for working capital[28] - Subsequent to quarter-end, in July 2020, the company raised net proceeds of $8.2 million from a public offering of Series B Preferred Stock and warrants[32][197] - Due to the adverse effects of COVID-19, the company recorded goodwill impairment charges of $1,462,000 and tradename impairment charges of $1,712,000[88] Management's Discussion and Analysis of Financial Condition and Results of Operations Performance declined due to COVID-19, prompting asset impairments and new financing to ensure liquidity - The COVID-19 pandemic has materially and adversely affected business operations and revenues due to franchisee store closures and reduced consumer traffic[206] - The company's asset-light franchisor model focuses on generating revenue from franchise fees and royalties, with a growth strategy centered on acquisitions[210] - A significant increase in G&A expenses was primarily due to a $1.16 million provision for bad debts related to the effects of the COVID-19 pandemic[222] - The company believes that working capital from its recent Securitization, Series B Preferred Stock Offering, and PPP loan will be sufficient to meet liquidity needs for the next year[242] Results of Operations Revenues decreased by $3.2 million while expenses surged, leading to a $6.4 million operating loss Comparison of Results for the Twenty-six Weeks Ended (in thousands) | Metric | June 28, 2020 | June 30, 2019 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $7,530 | $10,768 | ($3,238) | | General & Administrative Expenses | $7,636 | $5,820 | $1,816 | | Impairment of Assets | $3,174 | $0 | $3,174 | | (Loss) Income from Operations | ($6,368) | $2,889 | ($9,257) | | Net Loss | ($6,621) | ($1,218) | ($5,403) | - The decrease in revenue was attributed to the negative effects of the COVID-19 pandemic on restaurant sales and a change in accounting for franchise fees[220] - The company recorded goodwill impairment charges of $1,462,000 and tradename impairment charges of $1,712,000 for the Ponderosa and Bonanza brands[224] Liquidity and Capital Resources Liquidity was bolstered by a $37.3 million securitization and a $1.5 million PPP loan, ensuring sufficient capital - In March 2020, the company completed a whole-business securitization, issuing $40 million in notes and receiving net proceeds of $37.3 million[240][254] - The company received a $1,532,000 loan under the Paycheck Protection Program (PPP) during the quarter[241] Cash Flow Comparison for the Twenty-six Weeks Ended (in thousands) | Cash Flow Activity | June 28, 2020 | June 30, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | ($3,994) | ($984) | | Net cash used in investing activities | ($6,326) | ($5,587) | | Net cash provided by financing activities | $13,783 | $6,458 | Quantitative and Qualitative Disclosures About Market Risk This section is not required for the reporting period - Not Required[282] Controls and Procedures Disclosure controls and procedures were deemed effective with no significant changes to internal controls - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of June 28, 2020[283] - No significant changes were made to the internal control over financial reporting during the thirteen weeks ended June 28, 2020[285] PART II. OTHER INFORMATION Legal Proceedings The company is defending two securities class action lawsuits, one of which has an agreement in principle to settle - The company is involved in two putative securities class action lawsuits: Rojany v. FAT Brands, Inc. and Vignola v. FAT Brands, Inc.[287][289] - On July 16, 2020, the parties in the Vignola case reached an agreement in principle to settle for $75,000[289] - In the Rojany case, a hearing on the Plaintiffs' Motion for Class Certification is set for September 10, 2020[288] Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's Annual Report - There have been no material changes in risk factors from those discussed in the Annual Report on Form 10-K filed on April 28, 2020[293] Unregistered Sales of Equity Securities and Use of Proceeds The company issued 18,236 shares of common stock to non-employee directors as compensation for accrued fees - On May 12, 2020, the Company issued 18,236 shares of common stock at $3.29 per share to non-employee directors for accrued fees[294] - The issuance was exempt from registration under Section 4(a)(2) of the Securities Act[295] Defaults Upon Senior Securities None reported - None[296] Mine Safety Disclosures Not applicable - Not applicable[297] Other Information None reported - None[298] Exhibits Filed exhibits include CEO/CFO certifications, XBRL data, and an intercompany credit agreement - Exhibits filed include CEO and CFO certifications (31.1, 31.2, 32.1) and XBRL data (101 series)[300][301] - The Intercompany Revolving Credit Agreement with Fog Cutter Capital Group, Inc. dated April 24, 2020, was incorporated by reference[300]