Good afternoon, and welcome to the FAT Brands Incorporated Third Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please not this event is being recorded.

I would now like to turn the conference over to Alexis Tessier. Please go ahead..

Thank you, operator, and good afternoon, everyone. By now, everyone should have access to our earnings release, which can be found on our Investor Relations website at ir.fatbrands.com in the Press Release section. Before we begin, I need to remind everyone that part of our discussion today will include forward-looking statements.

These forward-looking statements are not guarantees of future performance and, therefore, undue reliance should not be placed upon them. Actual results may differ materially from those indicated by these forward-looking statements due to a number of risks and uncertainties.

The company does not undertake to update these forward-looking statements at a later date. For a more detailed discussion of the risks that could impact future operating results and financial conditions, please see today's earnings press release and our recent SEC filings.

During today's call, the company may discuss non-GAAP financial measures, which we believes can be useful in evaluating its performance. The presentation of this additional information should not be considered in isolation nor as a substitute for results prepared in accordance with GAAP.

Reconciliations to comparable GAAP measures are available in today's earnings release. I would now like to turn the call over to Andrew Wiederhorn, President and Chief Executive Officer..

Thank you, Alexis. Good afternoon, everyone, and thank you all for joining us today. Before I discuss our third quarter results, I'd like to provide a brief update on our recent financing activities as we continue to work to lower our cost of capital.

In June, we announced the commencement of an offering of non-convertible preferred stock and common stock purchase warrants. This offering is for up to 1.2 million shares of 8.25% Series-B cumulative preferred stock and warrants, initially exercisable, to purchase an aggregate of 720,000 shares.

The offering is closing on a rolling basis subject to customary closing conditions, and we recently completed the initial closing, which included significant insider purchases.

In addition, by the end of next month or the beginning of January, we expect to complete a whole business securitization transaction that will significantly reduce our cost to capital and provide ample capital to pursue our growth strategy.

In a whole business securitization, companies with predictable cash flows, such as the franchisor like FAT Brands, can be financed in the bond market via a bankruptcy remote vehicle.

As this is senior debt, and cannot be subordinated, this form of asset-backed financing tends to be a cheaper and more flexible source of long-term financing than traditional bank or bond financing. We anticipate this transaction will be rated by one of the public rating agencies.

Our goal is to lower our weighted average cost of capital of approximately 15% to under 10% through a combination of the Series-B and the securitization transaction. Moving now to our quarterly results.

We are pleased with our results in the third quarter, which included revenue growth of nearly 11% and EBITDA growth of over 70% as we continue to execute our brand acquisition strategy. During the quarter, we successfully integrated our most recent acquisition, Elevation Burger, which we purchased in late June.

These franchise locations have been fully assimilated onto our platform and are now operating at full synergy. This transaction is reflective of our acquisition strategy, whereby we seek out brands that can leverage our extensive expertise and resources to drive synergies and propel domestic and international expansion.

We remain confident in our considerable acquisition pipeline and a significant opportunity we have to consolidate franchise brands under the FAT Brands platform. During the quarter, system-wide sales increased 7.5% driven primarily by the improvement at Hurricane since we've taken over the brand as well as by the acquisition of Elevation Burger.

Hurricane has continued its dramatic turnaround since we acquired the brand last summer. At the time of the acquisition, the brand was comping negatively in the mid-single digits.

However, following the launch of a new advertising campaign as well as seasonal many refreshments in the form of LTOs, momentum has continued to build and Hurricane's same-store sales increased to 7.3% in the quarter, and we've seen similar results in our Buffalo's Cafe brand as well.

As we've discussed in previous calls, we are continuing to focus on 4 key strategic initiatives designed to drive sales and traffic growth across our brands. The first is third-party delivery. While this has been a larger driver for some time, we believe we are still in the early stages of growth.

As we've discussed previously, delivery has been implemented in all FAT Brands restaurants, and we are in the process of rolling it out across all our other brands, noting that it is not yet available in all of our markets.

In addition, virtual restaurants are an innovative avenue, and we are pursuing to further drive delivery sales across our portfolio of brands. In partnership with Uber Eats, we've launched over a dozen virtual Hurricane restaurants to date, which means you may be able to order Hurricane delivery in a market where there are no Hurricane restaurants.

This is accomplished by transforming certain of our Fatburger and Buffalo's Express kitchens into virtual kitchens for Hurricane's, which requires very little investment and does not impact operational complexity as the Hurricane delivery menu is very similar to that of Buffalo's Express.

The early results from these virtual restaurants have been strong, and we're in the process of expanding to an additional 85 locations by the end of the year. Our second key strategic initiative is our CapEx remodel program.

Restaurants that have undergone significant remodeling continue to experience material increases in sales that we are, believe are sustainable.

This program is coupled with the conversion of certain locations into co-branded locations, as we see an approximately 20% to 30% increase in average unit volumes after co-branding compared to stand-alone source, with a minimum incremental cost to the franchisee.

Third is the continued menu innovation, particularly in the growing segment of plant-based proteins and Vegan menu offerings.

Building upon our success with the Impossible Burger, we recently introduced DIA Vegan cheese and Vegan Shakes made with Craig's Vegan ice cream in our Fatburger brand, and plan to further expand the offering across our portfolio of concepts. Lastly, we will continue to focus on cross-selling brands to existing franchisees.

We have a very strong network of franchisees around the world who are eager for growth through new physical restaurants as well as through virtual kitchen. Also, our refranchising program has seen considerable traction and momentum. We believe these strategic initiatives will drive increased same-store sales growth across our brands.

On the development front, our franchisees opened 6 new restaurants during the quarter. Fatburger in Cherry Hill, New Jersey, Bakershore, California, Isleta Casino in New Mexico, [indiscernible] Canada and Beijing as well as one Elevation Burger in Kuwait. We ended the quarter with 384 restaurants worldwide across our 8 brands.

Subsequent to the end of the quarter, franchisees have opened 2 additional restaurants in Egypt and Singapore. On a year-to-date basis, we have opened 23 franchise locations, and remain on track to open approximately 38 restaurants this year, including our return to the market with Fatburger in India.

By comparison to 2018, we opened 13 restaurants during the entire year. So quite an accomplishment in terms of growth. Our development pipeline remains strong, consisting of over 200 restaurants worldwide yet to be built. In addition, we continue to actively seek new development deals with both new and existing.

During the quarter, we announced a new 5-year development deal for co-branded locations in Pakistan. We expect our robust pipeline to deal even greater unit expansion in 2020. We expect EBITDA to be, as previously disclosed, in the $9 million to $11 million range for the full year of 2019.

EBITDA, through the first 9 months of the year, was $6 million and $3 million for the third quarter. We anticipate a solid fourth quarter fueled by 3 things. First, existing royalties from the brands we own. Second, store opening fees and incremental royalties from new stores that are opened. And third, our refranchising program.

Our refranchising program allows us to opportunistically acquire and resell franchises or convert operating restaurants into franchise locations, thereby, growing our store count and augmenting our royalty and franchise revenue streams.

We are beginning to recognize incremental income from our refranchising program, which is anticipated to generate additional EBITDA of $1.5 million to $2.5 million on an annualized basis. For 2019, we have adjusted the gain or loss from restaurant refranchising out of our adjusted EBITDA figure.

We will continue to do so for only this fiscal year, as we expect this to become a larger part of our business in the future. We will no longer adjust EBITDA for gain or loss on restaurant refinancing, starting in 2020 and on a go-forward basis.

The combination of these elements and the timing of each gets us to the range of $9 million to $11 million full year figure for 2019. In summary, FAT Brands is well positioned for the considerable opportunities ahead. We have a strong dynamic brand management platform capable of integrating new brands smoothly and in a cost-effective manner.

The strategic initiatives that we have in place will drive same-store sales growth in our existing restaurants. And we have a healthy development pipeline that will fuel organic unit growth for many years to come.

Our brand acquisition pipeline is equally robust, and we have several opportunities for synergistic acquisitions that would leverage our platform. Lastly, we are making significant progress in lowering our cost of capital, and we look forward to updating you on our progress on future calls.

With that, I'd like to turn the call over to our Chief Financial Officer, Rebecca Hershinger, to review our third quarter results in greater detail..

Thanks, Andy. Total revenue in the third quarter of 2019 was $6.5 million, an increase of 10.6% from $5.9 million in the third quarter of 2018. The increase was driven primarily by the acquisition of Elevation Burger and the resulting increase in royalties as well as increases in advertising fees.

As you know, advertising fee revenue is directly offset by advertising expenses, resulting in no impact to our profitability. Revenue, excluding advertising, was $5.3 million in the quarter, an increase of 10.5% from $4.8 million in the third quarter of last year.

Cost and expenses, which include G&A expenses, advertising expenses and refranchising gains were $3.4 million in the quarter, a decrease of 9.1% from the third quarter of 2018. The decrease was driven by a $900,000 refranchising gain with no comparable activity in the third quarter of 2018.

G&A in the quarter totaled $3.2 million compared to $2.7 million in the third quarter of last year. This was driven by increases in compensation expense, professional fees and public company expenses.

Advertising expenses, which again are equal to advertising fee revenue, increased to $1.2 million in the third quarter of 2019 from $1 million in the third quarter last year. EBITDA in the third quarter was $3 million compared to $1.8 million in the third quarter of last year.

As a percentage of total revenue, excluding advertising fee revenue, EBITDA was 56.5% for the third quarter of 2019 versus 36.4% for the third quarter of 2018.

Adjusted EBITDA, which excludes stock-based compensation, noncash lease expense, acquisition costs and refranchising gains, in the third quarter, was $2.3 million compared to $2.2 million in the third quarter last year.

As a percentage of total revenues, again excluding advertising fee revenue, adjusted EBITDA was 42.2% for the third quarter of 2019 versus 46.1% for the third quarter of 2018.

Other expenses were $2.3 million in the third quarter of 2019, including net interest expense of $2 million, depreciation and amortization expense of $258,000 and other expenses of $56,000.

This compares to $1.9 million in other expenses, in the third quarter of 2018, inclusive of $1.4 million in net interest expense, $120,000 in depreciation and amortization and $352,000 in other expense.

This increase in other expenses was predominantly driven by the increase in net interest expense on our higher debt balances as well as increases in depreciation and amortization, both of which were offset by lower other expenses, driven by decreases in acquisition expense.

We recorded a provision for income tax benefit of $372,000 for the third quarter of 2019 as compared to a provision for income taxes of $199,000 in the third quarter of 2018.

Effective October 20, 2017, FAT Brands entered into a tax sharing agreement with our parent company, Fog Cutter Capital Group, whereby Fog Cutter will, to the extent permitted by applicable law, file consolidated federal and state income tax returns with the company and its subsidiaries.

And the company will pay Fog Cutter the amount that its current tax liability would have been, had it filed a separate return. Net income in the quarter was $1.2 million or $0.10 per diluted share as compared to net income of $10,000 in the third quarter of 2018 or $0 cents per diluted share.

In terms of our liquidity and capital resources, we ended the quarter with $311,000 in cash, $24 million in term loan debt, $14.5 million in redeemable preferred stock outstanding and a net of $5.2 million in seller notes and seller receivables related to the Elevation acquisition.

With that, this concludes our prepared remarks, and we are now happy to answer any questions you may have. Operator, please open the line for questions..

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Greg Fortinos, a Private Investor. Please go ahead..

Good quarter. It was a good quarter. Andy, a question.

Are you ready or can you give us an idea of what 2020 is shaping up to be like? What your expectations are as far as EBITDA and other metrics that you've been using?.

We haven't put out guidance yet for 2020 expected to exceed the range that, forecast for 2019. We will give some guidance once the planned securitization is completed and we can lock that in.

I think, it would be helpful to just check that off and then explain how 2020 will look, but it should exceed 2019 based on additional store openings, growth in sales and our refranchising effort..

The next question is from Steve Wallitt with DPC Corp..

So I have two questions for you, Andy. The first one is, can you tell us how much of the Series-B preferred offering you were able to close? And also, what percentage of that came from Insiders? That's the first question.

And I'll ask you the second question also, and that is going back 3 months when you had your last call based on your results today that you reported, do you feel that you underperformed your expectations, performed in line, what your expectations were or did you outperform your expectations? And can you please explain your answer? And specifically, the question is, what your expectations were 3 months ago for what this quarter would look like?.

So with respect to your first question on the Series-B, we've only had 1 closing so far, and that was right after the deal was qualified and we assembled the first list. That was $1.2 million of preferred Series-B Insiders by 80% of that for the, all board members and affiliates.

We expect to have a closing on a regular basis, and hope that that will grow to be more like a couple of million dollars a month, but we'll see how it performs here over the next few months, as we start to market it heavily and we wanted to, again, produce this quarter's results before having another closing and also be able to talk about the securitization.

With respect to your second question. I'm only going to comment that I believe we met our expectations for Q3. And I think that given the guidance that I've put out for Q4, we have a very solid chance of meeting or exceeding that number into the higher end of the range, but we'll see how it goes..

Next question is from Marty Cohen, a Private Investor. Please go ahead..

I know I spoke to you about the last time we spoke. And my question, a big concern of mine is the FCCG FAT merger.

Is there any news as to how we're proceeding?.

There's no official news as to how it's proceeding, but we're working diligently on it. I hope that it will be a 2020 transaction the, we've had discussions with NASDAQ, we had done a lot of work on the tax side. There's some litigation that's slowing it down a little bit at the FCCG level that we want to get pinned down.

We thought we had settled its environmental case. We've talked about it before. So we're trying to work to get it done, but it's going to be next year, knock on wood. It's not going to happen before the end of this year. It's just too complex..

It will happen, though, eventually?.

We expect and hope that it will happen in 2020. It's, I think it's a great result for everybody. It just has to be done properly. It's very complicated on the tax side of it. And again, there's some litigation that we had settled and some other party, not us, backed out of the [indiscernible] agreement. And now it's a little bit of moving target.

I don't want that to be in the middle of a moving target when they emerge..

Okay. So at least it's in the works.

And secondly, have you ever considered starting up the dividend that was cut maybe with a smaller amount of money?.

That's a good question. Thank you for asking it. As soon as the financing, the cost of capital is in line with where it should be, then yes, we will consider that. Again, I think it's important, and before I sense it's just that with super high senior debt costs, doesn't make sense to me.

We expect that the securitization will get done and bringing our cost of capital in line and be very expandable and very efficient. So, and we're way in the middle of that deal. It's not just starting, we're way in the middle of it. So not going with that will get done in Q4, worst-case in January..

All right. And one last one, just a comment. A while ago, the Fatburger brand was put into some of the big bucks stores like Walmart.

Have you ever considered going back into some of the largest supermarkets or some of the big bucks stores and maybe pick up a lot of volume on the, on some of the sales?.

Yes. We sold 10 million patties in Walmart. But we need very little money on that deal. It was like a 2% margin deal cut. Give you some brand awareness, it wasn't profitable. It wasn't like a big moneymaker. It did, it's profitable but not a big money maker. Yes, we have considered licensing across all of our brands.

It's something that we're looking at to pick the right product.

Right now, we're working on some convenience store products, where some of our burgers and wings and things like that could be available in convenience stores, where you cook them in home with cooks on premises, and that's probably got the most momentum today, but it is something on our radar stream to generate that licensing revenue..

All right. Sounds good. And that's pretty much here, except again, also as a stockholder and a long time FCCG stockholder. I just hope you can get that merger done. I think it would really go a long ways to getting our stock up, getting some liquidity in the market, and I just think it's a good thing..

I agree with you..

The next question is from Joe Walden, a Private Investor. Please go ahead..

Yes, I'm a little confused as to the dividends.

Could you please tell me if you're paying a dividend? And if not, if I understood the last gentleman, you're going to start something in, start paying in January? Could you please tell me your plans?.

So we are not paying a dividend presently. We previously paid a cash dividend and then a stock dividend. We're not [indiscernible]. Secondly, once we can announce the significantly lower cost financing is in place, then the board will consider additional dividend, cash dividend, not stock dividends, and I hope to be able to announce that in Q1..

In January? You say quarter one?.

Yes..

This concludes our question-and-answer session. I would like to turn the conference back over to Andy Wiederhorn for any closing remarks..

I want to thank everyone for joining the call today and for your questions and your patience as we execute on our business plan. We're proud to deliver the EBITDA that we have year-to-date for the quarter and excited about fourth quarter numbers and the upcoming financing. Everyone, have a great day or evening, depending on where you are. Thank You..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..