FAT Brands: Reports Q3-2020 Financial Results

Los Angeles / CA. (fbb) FAT Brands Inc., parent company of Fatburger, reported fiscal third quarter 2020 financial results for the 13-week period ending September 27, 2020.

Andy Wiederhorn, President and CEO of FAT Brands, commented, «Thank you to our franchise partners and employees who have shown perseverance as we all continue to battle hardships brought on by the Covid-19 pandemic.»

«Despite the pandemic, the third quarter proved to be transformative for FAT Brands as we successfully closed the acquisition of Johnny Rockets, completed the public offering of our Series B Preferred Stock, and expanded our whole-business securitization facility with the closing of the USD 40 million M-2 tranche of our Series 2020 facility. Johnny Rockets adds substantial scale to our platform with 325 locations around the world, 129 franchise partners and USD 316 million in FY 2019 system-wide sales. We believe there are significant synergies to be realized in the short and long-term and are excited to integrate the iconic Johnny Rockets brand into the Company.»

«In the third quarter, we continued to react to the ever-changing regulatory landscape on a state-by-state and country-by-country basis while executing on our organic growth strategies. Notably, our franchise partners opened six co-branded Fatburger and Buffalo’s Express locations, one Elevation Burger and five Johnny Rockets locations across the globe. As of November 6th, 2020, FAT Brands has opened 45 new stores this fiscal year, including Johnny Rockets, and we expect to open an additional 12 locations across our brands through the end of 2020. We began the roll-out of Chowly, a point-of-sale integrator for third-party delivery platforms, and HNGR, a native online-ordering and delivery-as-a-service platform, across our brands in September which resulted in an increase in the delivery sales of our franchise partners of over 40 percent, from USD 1.3 million in August to USD 1.8 million in September, for select domestic Fatburger and co-branded Fatburger and Buffalo’s Express locations. We believe that our prior efforts coupled with the rollout of HNGR and Chowly will position our franchise partners to maintain strong delivery and to-go sales in the future.»

Wiederhorn continued, «Throughout the third quarter, local restrictions eased across the country and dining rooms continued re-opening, albeit at capacity restrictions. We continue working diligently to optimize operations wherever possible, execute on our Johnny Rockets integration strategy, and support our new store development pipeline.»

Fiscal Third Quarter 2020 Highlights

  • Total revenues declined 37 percent to USD 4.1 million compared to the third quarter of 2019, showing sequential improvement when compared to a decline in the prior quarter of 47 percent.
    • System-wide sales growth of 52.8 percent q/q
      • United States sales growth of 53.2 percent q/q
      • Canada sales growth of 21.7 percent q/q
      • Other International(1) sales growth of 123.0 percent q/q
    • System-wide same-store sales growth of 63.2 percent q/q
      • United States same-store sales growth of 64.2 percent q/q
      • Canada same-store sales growth of 18.2 percent q/q
      • Other International(1) sales growth of 213.6 percent q/q
    • 12 new franchised store openings during the third quarter 2020
      • Store count as of September 27, 2020: 678 stores system-wide
  • Net (Loss) Income of USD (0.6) million or USD (0.05) per share on a basic and fully diluted basis, as compared to net income of USD 1.2 million or USD 0.10 per share on a basic and fully diluted basis in the third quarter of 2019
  • Ebitda(2) of USD 0.1 million inclusive of acquisition costs of USD 0.5 million as compared to USD 3.0 million in the third quarter of 2019
  • Adjusted Ebitda(2) of USD 0.6 million as compared to USD 2.3 million in the third quarter of 2019. The reconciliation of Ebitda to Adjusted Ebitda can be found in the accompanying financial tables.

(1) Excludes Canada, includes Puerto Rico.

(2) Ebitda and Adjusted Ebitda are non-GAAP measures defined below, under «Non-GAAP Measures». A reconciliation of GAAP net income to Ebitda and adjusted Ebitda is included in the accompanying financial tables.

Summary of Third Quarter 2020 Financial Results

Total revenues were USD 4.1 million in the third quarter of 2020 and as compared to USD 6.5 million in the third quarter of 2019. Excluding advertising revenues, revenues were USD 3.3 million, down from USD 5.3 million in the third quarter of 2019. The revenue performance overwhelmingly reflects a decline in royalty revenue related to the impact of Covid-19, as well as lower franchise fees and advertising fees in 2020 compared to the prior year period and decreases in store opening fees related to the preferred application of ASC 606, which the Company adopted in the fourth quarter of 2019.

Costs and expenses increased to USD 4.9 million in the third quarter of 2020 compared to USD 3.6 million in the third quarter of 2019. Excluding refranchising losses of USD 0.3 million in 2020 and refranchising gains of USD 0.9 million in 2019 as well as an impairment charge in 2020 without comparable activity in the prior year, costs and expenses totaled USD 3.8 million and USD 4.6 million in the third quarter of 2020 and 2019, respectively.

Other income was USD 0.2 million in the third quarter of 2020, compared to other expense of USD 2.0 million in the third quarter of 2019, and consisted primarily of a gain in the amount of USD 1.7 million from an adjustment to a contingent purchase price payable which was partially offset by acquisition costs of USD 0.5 million; net interest expense of USD 0.5 million; and a loss of USD 0.4 million from the change in fair value of the derivative liability relating to the conversion feature of the Series A Preferred Stock. In the third quarter of 2019, other expense of USD 2.0 million consisted primarily of net interest.

The combination of the aforementioned revenue and expenses resulted in a net loss of USD 0.6 million in the third quarter of 2020, compared to a net income of USD 1.2 million in the third quarter of 2019.

Recent Events and Liquidity

On July 16, 2020, the Company closed its underwritten public offering (the «Offering») of 360,000 shares of 8.25 percent Series B Cumulative Preferred Stock («Series B Preferred Stock») and 1,899,000 warrants (the «Warrants»), each to purchase one share of Common Stock at an exercise price of USD 5.00 per share, which includes 99,000 Warrants as a result of a partial exercise of the over-allotment option granted to the underwriter.

On September 21, 2020, the Company completed the sale of USD 40 million of Series 2020-2 Fixed Rate Asset-Backed Notes (the «Notes»), increasing the Company’s securitization facility to USD 80 million. The Notes were issued through the Company’s whole business securitization affiliate, FAT Brands Royalty I, LLC.

Concurrent with the completion of the sale of the Notes, the Company successfully completed the acquisition of Johnny Rockets from an affiliate of private equity firm Sun Capital Partners, Inc. for a purchase price of approximately USD 25 million. The transaction was funded with proceeds from the Notes. With the acquisition of Johnny Rockets, FAT Brands now franchises more than 700 restaurants around the globe in more than 30 countries with annual system-wide sales exceeding USD 700 million.

Subsequent to the Offering through the end of the third quarter of 2020, the Company repurchased from various holders 587,018 warrants to purchase shares of the Company’s common stock with a weighted average exercise price of USD 7.01 per share for USD 330,000.

Key Financial Definitions

New store openings: The number of new store openings reflects the number of stores opened during a particular reporting period. The total number of new stores per reporting period and the timing of stores openings has, and will continue to have, an impact on our results.

Same-store sales growth: Same-store sales growth reflects the change in year-over-year sales for the comparable store base, which we define as the number of stores open and in the FAT Brands system for at least one full fiscal year. For stores that were temporarily closed, sales in the current and prior period are adjusted accordingly. Given our focused marketing efforts and public excitement surrounding each opening, new stores often experience an initial start-up period with considerably higher than average sales volumes, which subsequently decrease to stabilized levels after three to six months. Additionally, when we acquire a brand, it may take several months to integrate fully each location of said brand into the FAT Brands platform. Thus, we do not include stores in the comparable base until they have been open and in the FAT Brands system for at least one full fiscal year. For 2020, the comparable store base does not include Elevation Burger and Johnny Rockets stores as we did not own the brands for the full year of 2019.

System-wide sales growth: System wide sales growth reflects the percentage change in sales in any given fiscal period compared to the prior fiscal period for all stores in that brand only when the brand is owned by FAT Brands. Because of acquisitions, new store openings and store closures, the stores open throughout both fiscal periods being compared may be different from period to period.