FAT Brands(FATBB) - 2021 Q4 - Annual Report

Part I Business FAT Brands Inc. operates as a global, multi-brand restaurant franchisor, leveraging an asset-light model with 17 brands and 2,369 locations - FAT Brands operates a multi-brand restaurant portfolio with 17 brands across four categories: Quick Service, Fast Casual, Casual Dining, and Polished Casual Dining[22] - The company's business model is primarily an "asset light" franchisor model, generating revenue from initial franchise fees and ongoing royalties, which minimizes operating risks like real estate commitments and capital investments[18][44] Company Scale as of December 26, 2021 | Metric | Value | | :--- | :--- | | Total Restaurants (including under construction) | 2,369 | | Franchised Restaurants | 2,240 (95%) | | Company-Owned Restaurants | 129 (5%) | | Number of Franchisees | 761 | | System-Wide Sales (Fiscal 2021) | $1.1 billion | - Key growth strategies include organically growing the new store pipeline (over 800 restaurants under development), acquiring new brands, accelerating same-store sales, driving growth through co-branding and virtual kitchens, optimizing the capital structure, and expanding internationally[46][47][50] Risk Factors The company faces significant risks from the COVID-19 pandemic, franchisee dependence, substantial debt, integration challenges, and ongoing government investigations - The COVID-19 pandemic has disrupted and is expected to continue to disrupt business through store closures, reduced hours, and supply chain issues, potentially affecting financial results for an extended period[85][86] - The company's operating results are closely tied to the financial success and cooperation of its franchisees. Financial distress among a significant number of franchisees could adversely impact royalty payments[95] - The company has significant outstanding indebtedness ($938.2 million as of December 26, 2021) under whole-business securitization facilities, requiring substantial cash flow to service debt obligations and exposing it to default risk[106][107] - The company faces risks from pending government investigations by the U.S. Attorney's Office and the SEC concerning the 2020 merger with Fog Cutter Capital Group Inc. and transactions involving the CEO, which could result in significant legal expenses, penalties, and reputational damage[138][197] - The dual-class stock structure concentrates approximately 55.2% of voting power with Fog Cutter Holdings LLC (controlled by CEO Andrew Wiederhorn), limiting the influence of Class A common stockholders on corporate matters[169][171] Properties FAT Brands leases its corporate headquarters and several offices, owns a 40,000 sq. ft. manufacturing facility, and operates 126 mostly leased restaurant locations Key Corporate & Subsidiary Facilities | Location | Type | Size (sq. ft.) | Ownership | | :--- | :--- | :--- | :--- | | Beverly Hills, CA | Corporate HQ | ~16,000 | Leased | | Atlanta, GA | Office & Warehouse | ~25,000 | Leased | | Atlanta, GA | Manufacturing Facility | ~40,000 | Owned | | Dallas, TX | Office | ~8,300 | Leased | | Lexington, KY | Office | ~19,200 | Leased | | Chandler, AZ | Office | 5,825 | Leased | - As of December 26, 2021, the company owned and operated 126 restaurant locations, with the vast majority of these premises being leased[191] Legal Proceedings The company faces multiple legal challenges, including shareholder lawsuits, government investigations by the U.S. Attorney and SEC, and environmental litigation, with $5.1 million accrued for contingencies - The U.S. Attorney's Office and the SEC have opened investigations into the company and its CEO, Andrew Wiederhorn, concerning the December 2020 merger with Fog Cutter Capital Group Inc., transactions between the entities, and compensation and benefits received by Mr. Wiederhorn and his family[197] - Two shareholder derivative lawsuits have been filed against the company's directors and majority stockholders, alleging breach of fiduciary duty related to the 2020 merger with Fog Cutter and a 2021 recapitalization transaction[193][195] - A putative class action lawsuit was filed against the company and executives, alleging violations of the Securities Exchange Act of 1934 due to false and misleading statements that allegedly inflated the stock price[196] - Subsidiary Fog Cutter Acquisition, LLC is a defendant in an environmental contamination lawsuit with plaintiffs seeking damages ranging from $12 million to $22 million[198] - As of December 26, 2021, the company had accrued an aggregate of $5.1 million for specific legal matters and other claims[202] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[203] Part II Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A and B common stocks trade on NASDAQ, with 2,791,785 securities under outstanding options and no stock repurchase program - The company's Class A Common Stock and Class B Common Stock are traded on the NASDAQ Capital Market under the symbols 'FAT' and 'FATBB', respectively[206] Equity Compensation Plan Information (as of December 26, 2021) | Plan category | Number of securities to be issued upon exercise | Weighted-average exercise price | Number of securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 2,791,785 | $10.50 | 908,215 | - The company does not have a program in place to repurchase its own common or preferred stock and has not repurchased any of these securities as of December 26, 2021[214] Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2021 saw total revenues surge to $118.9 million due to major acquisitions, but also a net loss of $31.6 million and significant debt from securitization facilities - The COVID-19 pandemic continues to pose a risk, with potential for negative impacts on revenue, liquidity, and debt serviceability if disruptions persist[217] - Fiscal 2021 revenue increased by $100.8 million year-over-year, with $85.5 million of the increase attributed to the acquisitions of GFG, Twin Peaks, Fazoli's, and Native Grill & Wings (the "2021 Acquisition Entities")[226] - Net loss for fiscal 2021 was $31.6 million, compared to a net loss of $14.9 million in 2020. The increase was driven by higher costs and expenses related to acquisitions, including general and administrative expenses, cost of revenues, and interest expense[223] - The company financed its 2021 acquisitions primarily through four separate whole-business securitization debt issuances, significantly increasing its total debt[242] Results of Operations Total revenues surged to $118.9 million in 2021 due to acquisitions, leading to an operating income of $0.8 million, but a net loss of $31.6 million primarily from increased interest expense Consolidated Results of Operations (in thousands) | | Fiscal Year Ended Dec 26, 2021 | Fiscal Year Ended Dec 27, 2020 | | :--- | :--- | :--- | | Total Revenues | $118,881 | $18,118 | | Royalties | $42,658 | $13,420 | | Restaurant sales | $41,563 | $— | | Factory revenue | $13,470 | $— | | Total Costs and Expenses | $118,057 | $34,384 | | General and administrative | $50,249 | $14,876 | | Cost of restaurant and factory revenues | $44,242 | $— | | Income (Loss) from Operations | $824 | ($16,266) | | Other Expense, net | ($35,944) | ($2,283) | | Net Loss | ($31,583) | ($14,860) | - The $100.8 million increase in revenue was primarily due to $85.5 million generated by the 2021 acquisitions (GFG, Twin Peaks, Fazoli's, Native) and a $15.3 million improvement from Johnny Rockets and recovery from the COVID-19 pandemic[226] - Costs and expenses increased by $83.7 million, with the 2021 Acquisition Entities accounting for $73.7 million of this increase[227] - Other expense, net, increased to $35.9 million in 2021 from $2.3 million in 2020, primarily due to a rise in net interest expense to $29.1 million and a $7.6 million loss on extinguishment of debt[234] Liquidity and Capital Resources Liquidity was driven by $815.2 million in financing activities, primarily $900 million+ in securitization debt for acquisitions, increasing cash to $99.9 million despite a $135.0 million preferred stock put option Consolidated Cash Flows (in thousands) | | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $682 | ($11,484) | | Net cash used in investing activities | ($723,200) | ($36,575) | | Net cash provided by financing activities | $815,228 | $55,245 | | Increase (decrease) in cash flows | $92,710 | $7,186 | - During fiscal 2021, the company financed acquisitions through four separate whole-business securitization facilities, issuing notes with an aggregate principal balance of $938.2 million[242][107] - The company raised a total of $25.1 million in net proceeds from two public offerings of its 8.25% Series B Cumulative Preferred Stock in June and November 2021[249][250] - The company has $135.0 million of put options on its Series B Cumulative Preferred Stock due in fiscal 2022, which it may address through contractual extension options or capital market activities[240] Critical Accounting Policies and Estimates Critical accounting policies involve significant estimates for franchise fee and royalty recognition, annual impairment testing of goodwill and intangibles (with a $1.0 million charge in 2021), and valuation of assets held for sale - Franchise fee revenue is recognized over the term of the franchise agreement on a straight-line basis, as the services provided are considered a single performance obligation[263] - Goodwill and other indefinite-lived intangible assets are tested for impairment annually or more frequently if indicators arise. The company recorded impairment charges of $1.0 million in 2021 and $9.3 million in 2020[268] - Assets are classified as held for sale when a plan to sell is committed. These assets are valued at the lower of their carrying amount or fair value less costs to sell and are not depreciated[269] - The preparation of financial statements requires management to make significant estimates and assumptions, particularly concerning the fair values of goodwill and intangible assets, allowances for doubtful accounts, and deferred tax asset valuation[272][411] Quantitative and Qualitative Disclosures about Market Risk This disclosure is not required as FAT Brands is classified as a smaller reporting company - Not required as FAT Brands is considered a smaller reporting company[277] Financial Statements and Supplementary Data This section refers to Item 15 of Part IV, containing the full audited consolidated financial statements and supplementary data - The financial statements and supplementary data are located in Item 15 of Part IV of the Annual Report[278] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with its accountants on accounting or financial disclosure matters - There have been no changes in or disagreements with accountants on accounting and financial disclosure[279] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 26, 2021, with no material changes - Management concluded that the company's disclosure controls and procedures were effective as of December 26, 2021[280] - Management concluded that the company's internal control over financial reporting was effective as of December 26, 2021, based on the COSO framework[285] - No material changes in internal control over financial reporting occurred during the fourth quarter of 2021[287] Other Information On March 22, 2022, the company received a put notice on the GFG Preferred Stock Consideration, as detailed in Note 14 - The Company received a put notice on the GFG Preferred Stock Consideration on March 22, 2022[288] Part III Directors, Executive Officers and Corporate Governance This section details the executive officers and directors, including family relationships, board committee structures, and the company's adopted code of ethics - The executive team is led by Andrew A. Wiederhorn (President and CEO) and Kenneth J. Kuick (CFO). The Board of Directors is chaired by Edward H. Rensi, former CEO of McDonald's USA[293][294] - Family relationships exist within the executive team: Thayer Wiederhorn (COO), Taylor Wiederhorn (CDO), and Mason Wiederhorn (Creative Director) are sons of CEO Andrew A. Wiederhorn[308] - The Board of Directors has three standing committees: Audit, Compensation, and Nominating and Corporate Governance. The members of each committee are specified[313] - The company has adopted a code of business ethics applicable to all directors, officers, and employees[312] Executive Compensation CEO Andrew A. Wiederhorn's total compensation was approximately $2.9 million in fiscal 2021, with other executives receiving similar amounts, and non-employee directors receiving cash and equity awards 2021 Summary Compensation Table (in $) | Name and Principal Position | Salary | Bonus | Option Awards | All other Compensation | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Andrew A. Wiederhorn, CEO | 546,615 | 1,500,000 | 607,000 | 221,294 | 2,874,909 | | Robert G. Rosen, EVP, Capital Markets | 395,866 | 480,000 | 607,000 | — | 2,339,866 | | Kenneth J. Kuick, CFO | 253,077 | 200,000 | 607,000 | 25,000 | 2,125,077 | - CEO Andrew Wiederhorn's employment agreement, effective July 1, 2021, provides for a $750,000 annual base salary, a target bonus of up to 100% of base salary, and personal use of private aircraft transportation not to exceed 100 flight hours per year[330][331][336] - Non-employee directors receive annual compensation of $80,000 cash, an additional $40,000 for committee service, and an annual equity award of options to acquire 30,636 shares of common stock[343] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of February 28, 2022, CEO Andrew A. Wiederhorn, through Fog Cutter Holdings, LLC, controls 55.3% of total voting power due to the dual-class stock structure Principal Stockholders' Voting Power (as of February 28, 2022) | Name of beneficial owner | Class A Owned % | Class B Owned % | Percent of Total Voting Power | | :--- | :--- | :--- | :--- | | Fog Cutter Holdings LLC | 46.5% | 55.4% | 55.3% | | Andrew A. Wiederhorn | 47.2% | 55.5% | 55.5% | | LS Global Franchise L.P. | 14.9% | * | * | | Geode Capital Holdings LLC | * | 6.1% | 6.1% | - The company has a dual-class stock structure. Each share of Class A common stock has one vote, while each share of Class B common stock has 2,000 votes, concentrating control with Class B holders[352][171] - All directors and executive officers as a group beneficially own a significant portion of the company's stock, including options to purchase 306,360 shares of Class A common stock that are vested or will vest within 60 days[356] Certain Relationships and Related Transactions, and Director Independence The company has engaged in related party transactions with its former parent and employs CEO Andrew Wiederhorn's family members, while all directors except the CEO are independent - The company engaged in transactions with its former parent, Fog Cutter Capital Group Inc., prior to their merger. Details are incorporated by reference from the notes to the financial statements[361] - Certain family members of CEO Andrew Wiederhorn are employed by the company in executive capacities[361][308] - The Board of Directors has determined that all directors are independent, except for CEO Andrew Wiederhorn[362] Principal Accounting Fees and Services Baker Tilly US, LLP served as the independent auditor, with total fees of approximately $1.55 million in 2021, a significant increase from $0.37 million in 2020 Accountant Fees (in thousands) | Fee Type | Dec 26, 2021 | Dec 27, 2020 | | :--- | :--- | :--- | | Audit fees | $1,128 | $329 | | Audit related fees | $418 | $45 | | Other fees | $— | $— | | Total | $1,546 | $374 | - The Audit Committee reviews the independence of the accounting firm annually and pre-approves all audit and permissible non-audit services[363] Part IV Exhibits, Financial Statement Schedules This section presents the audited consolidated financial statements, including the auditor's report highlighting critical audit matters related to goodwill and intangible asset valuation, and notes detailing acquisitions and debt Report of Independent Registered Public Accounting Firm Baker Tilly US, LLP issued an unqualified opinion on the consolidated financial statements, highlighting critical audit matters regarding goodwill and intangible asset impairment and valuation - The auditor, Baker Tilly US, LLP, issued an unqualified opinion on the consolidated financial statements[371] - A critical audit matter was the Goodwill and Intangible Asset Impairment Assessment, particularly for the Yalla Mediterranean reporting unit, due to the significant estimates and subjective judgments involved in forecasting future revenue and selecting a discount rate[375][376] - A second critical audit matter was the valuation of intangible assets (trademarks, franchise agreements, customer relationships) acquired in the four major 2021 acquisitions, which involved a high degree of judgment in forecasting revenue, royalty rates, and discount rates[379][380] Consolidated Financial Statements Fiscal 2021 consolidated financial statements show total assets surging to $1.27 billion and liabilities to $1.23 billion due to acquisitions, resulting in a net loss of $31.6 million Consolidated Balance Sheets (in thousands) | | Dec 26, 2021 | Dec 27, 2020 | | :--- | :--- | :--- | | Total Current Assets | $118,511 | $24,423 | | Goodwill | $295,128 | $10,909 | | Other intangible assets, net | $652,788 | $47,711 | | Total Assets | $1,270,032 | $121,144 | | Total Current Liabilities | $198,488 | $73,177 | | Long-term debt, net | $904,265 | $73,852 | | Total Liabilities | $1,227,232 | $163,027 | | Total Stockholders' Deficit | ($21,655) | ($41,883) | Consolidated Statements of Operations (in thousands) | | 2021 | 2020 | | :--- | :--- | :--- | | Total Revenue | $118,881 | $18,118 | | Total Costs and Expenses | $118,057 | $34,384 | | Income (Loss) from Operations | $824 | ($16,266) | | Net Loss | ($31,583) | ($14,860) | | Basic and Diluted Loss Per Share | ($2.15) | ($1.25) | Notes to Consolidated Financial Statements Notes detail the impact of 2021 acquisitions, nearly $1 billion in securitization debt, redeemable preferred stock terms, and $5.1 million accrued for legal contingencies including government investigations - Note 3 (Acquisitions): The company completed four major acquisitions in 2021 (Fazoli's, Native Grill & Wings, Twin Peaks, GFG) for a combined purchase price of approximately $912.4 million, paid in cash and stock[435][439][442][447] - Note 12 (Debt): The company financed its 2021 acquisitions through four separate whole-business securitization transactions, issuing notes with a combined face value of approximately $938.3 million[498][503][507][513] - Note 14 (Redeemable Preferred Stock): The company issued Series B Preferred Stock as part of the GFG and Twin Peaks acquisitions, valued at $67.3 million and $67.5 million respectively. These shares are classified as redeemable due to put/call agreements that may require cash settlement[548][549][551] - Note 20 (Commitments and Contingencies): The company is facing government investigations from the U.S. Attorney and SEC, multiple shareholder lawsuits, and other legal proceedings, for which it has accrued an aggregate of $5.12 million as of year-end 2021[581][585][588]