FAT Brands: provides Covid-19- and Q4-2019 update

Los Angeles / CA. (fbb) FAT Brands Inc., parent company of Fatburger, provided an update on the business as it relates to the Covid-19 pandemic and reported fiscal fourth quarter and fiscal year 2019 financial results for the 13-week and 52-week periods ending December 29, 2019.

Andy Wiederhorn, President and CEO of FAT Brands, commented, «We are committed to supporting our franchise partners in these challenging times; their health and safety, along with that of their guests, remains our top priority. Our franchisees are complying with all state and local regulations, temporarily closing dining rooms and shifting to a take-out and delivery model only, where it makes sense. We are helping franchisees to acquire personal protective equipment for their staff, so that they may safely serve their communities. In order to facilitate their long-term wellbeing, we have secured extended terms from suppliers on our franchise partners’ behalf, and we are coaching them to access funds provided by the Cares Act and negotiate rent deferrals from their landlords. I’m proud of the way our team and franchisees have come together to successfully navigate this new landscape.»

Wiederhorn continued, «Before the Covid-19 pandemic ramped up in the U.S., we were very excited about the coming year. 2019 had ended with solid business momentum across many of our brands, which had continued through January and February. Furthermore, in March, we completed our whole business securitization transaction, which not only significantly lowered our cost of capital, but also provided ample fuel for our brand acquisition strategy. While the world now looks very different than it did just a few short months ago, the strength of our platform and of our brands remains the same. We are well positioned to weather this crisis, and I am confident that FAT Brands will emerge even stronger than before.»

Covid-19 Business Update Highlights

• Strengthened liquidity position following completion of whole business securitization transaction in March
• Helping franchise partners access funds provided by the Cares Act and negotiate rent deferrals
• Secured extended terms from suppliers on behalf of franchise partners
• Supporting franchisees through the development of enhanced safety, social distancing, and cleaning procedures
• Experiencing significant increases in to-go and delivery orders within the system

Fiscal Fourth Quarter 2019 Highlights

• Total revenues of USD 5.3 million, up 17.3 percent from USD 4.5 million in the fourth quarter of 2018. Excluding advertising revenues, revenues grew 20.8 percent to USD 4.3 million from USD 3.6 million in the fourth quarter of 2018.
  • System-wide sales growth of 8.1 percent y/y
    • System-wide sales growth (excluding Ponderosa + Bonanza) of 18.1 percent y/y
    • United States sales growth of 4.8 percent y/y
    • Canada sales growth of 4.0 percent y/y
    • Other International(1) sales growth of 25.5 percent y/y
  • System-wide same-store sales decline of 0.6 percent y/y
    • System-wide same-store sales decline (excluding Ponderosa + Bonanza) of 0.5 percent y/y
    • United States same-store sales growth of 0.2 percent y/y
    • Canada same-store sales growth of 1.6 percent y/y
    • Other International(1) sales decline of 6.4 percent y/y
  • 5 new franchised store openings during the fourth quarter 2019
    • Store count as of December 29, 2019: 374 stores system-wide
• Net loss of USD 953,000 or USD 0.08 per share on a basic and fully diluted basis, as compared to net loss of USD 2.7 million or USD 0.23 per share on a basic and fully diluted basis in the fourth quarter of 2018
• Ebitda(2) of USD 726,000 as compared to a loss of USD 467,000 in the fourth quarter of 2018
• Adjusted Ebitda(2) of USD 1.8 million as compared to USD 732,000 in the fourth quarter of 2018. The reconciliation of Ebitda to Adjusted Ebitda can be found in the accompanying financial tables.

Fiscal Year 2019 Highlights

• Total revenues of USD 22.5 million, up 26.2 percent from USD 17.8 million in 2018. Excluding advertising revenues, revenues grew 25.5 percent to USD 18.4 million from USD 14.7 million in 2018.
  • System-wide sales growth of 4.0 percent y/y
    • System-wide sales growth (excluding Ponderosa + Bonanza) of 15.0 percent y/y
    • United States sales growth of 2.5 percent y/y
    • Canada sales growth of 4.4 percent y/y
    • Other International(1) sales growth of 10.7 percent y/y
  • System-wide same-store sales decline of 0.7 percent y/y
    • System-wide same-store sales growth (excluding Ponderosa + Bonanza) of 0.9 percent y/y
    • United States same-store sales growth of 0.4 percent y/y
    • Canada same-store sales growth of 2.5 percent y/y
    • Other International(1) sales decline of 8.7 percent y/y
  • 24 new franchised store openings during 2019
    • Store count as of December 29, 2019: 374 stores system-wide
• Net loss of USD 1.0 million or USD 0.09 per share on a basic and fully diluted basis, as compared to net loss of USD 1.8 million or USD 0.16 per share on a basic and fully diluted basis in 2018
• Ebitda(2) of USD 6.8 million as compared to USD 3.1 million in 2018
• Adjusted Ebitda(2) of USD 7.7 million as compared to USD 5.0 million in 2018. 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.

Covid-19 Business Update

The Company’s top priority is ensuring the health and safety of its employees, franchise partners, and communities. In compliance with state and local regulations, dining rooms have been temporarily closed. Many of our franchisees are operating on a take-out and delivery basis only, and we have seen a significant shift to these type of sales in both our burger and chicken wing brands. Across the system, approximately 150 restaurants are temporarily shut down completely, primarily across the steakhouse concepts as well as the Fatburger restaurants located inside casinos.

The Company is supporting franchise partners by coaching them to access funds made available through the Cares Act and negotiating deferred rent from landlords. In addition, the Company is helping franchisees procure PPE for their staff and instituting enhanced cleaning procedures in order to safeguard everyone in the restaurants. Lastly, the Company has secured extended terms from suppliers on behalf of franchise partners.

At the corporate level, the Company has taken measures to reduce expenditures, including layoffs of non-essential team members representing approximately 20 percent of headcount.

The Company has strengthened its liquidity position through the completion of the whole business securitization transaction in March.

Review of Fourth Quarter 2019 Financial Results

Total revenues increased 17.3 percent to USD 5.3 million compared to USD 4.5 million in the fourth quarter of 2018. The increase was primarily driven by a 16.3 percent increase in royalty revenue which includes the contribution of Elevation Burger which we did not own in the prior year period.

Costs and expenses increased 16.3 percent to USD 4.8 million compared to USD 4.1 million in the fourth quarter of 2018. The increase was primarily driven by losses on our refranchising program of USD 1.0 million, the majority of which related to operating losses at certain restaurants to be refranchised, without significant comparable activity in the prior period. The refranchising loss was offset by an 11.7 percent decrease in our general and administrative expenses.

Other expense was USD 1.2 million in the fourth quarter of 2019 as compared to USD 3.8 million in the fourth quarter of 2018. The decrease in other expense was driven primarily by a decrease in interest expense related to prepayment penalties recognized in the fourth quarter of 2018 associated with our term debt which was refinanced in the first quarter of 2019 without comparable activity in the fourth quarter of 2019 as well as other income of USD 13,000 in the fourth quarter of 2019 compared to other expense of USD 991,000 in the prior period.

Net loss improved to USD 953,000 compared to USD 2.7 million in the fourth quarter of 2018. The improvement was primarily driven by growth in total revenue, reductions in general and administrative expenses, and reductions in interest expense compared to the prior period.

Subsequent Events

Subsequent to December 29, 2019, 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 in which FAT Royalty issued new notes pursuant to an asset-backed securitization (the «Securitization Notes») and indenture (the «Indenture»). Net proceeds from the issuance of the Securitization Notes were USD 37,314,000, which consists of the combined face amount of USD 40,000,000, net of discounts of USD 246,000 and debt offering costs of USD 2,440,000. A portion of the proceeds from the Securitization was used to repay the remaining USD 26,771,000 in outstanding balance and accrued interest under our prior term loan. The remaining proceeds from the Securitization will be used for working capital.

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 for at least one full fiscal year regardless of whether the brand during the prior measurement period was owned by FAT Brands or a predecessor. Given our focused marketing efforts and public excitement surrounding each opening, new stores often experience an initial start-up period with considerably higher than average sales volumes, which subsequently decrease to stabilized levels after three to six months. Thus, we do not include stores in the comparable base until they have been open for at least one full fiscal year.

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.