Good afternoon ladies and gentlemen. And thank you for standing by. Welcome to the FAT Brands’ First Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note that this conference call is being recorded today, May 28, 2020.

On the call today from FAT Brands are President and Chief Executive Officer, Andy Wiederhorn; and Chief Financial Officer, Rebecca Hershinger. I would now like to turn the call over to Ashley DeSimone of ICR to begin..

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

Andy?.

Thank you, Alexis. Good afternoon, everyone, and thank you all for joining us on the call today. I hope you are all safe and healthy as we continue to navigate through the COVID-19 pandemic.

On today's call, I'll provide a business update, discuss what we are seeing related to the pandemic, touch briefly on the first quarter numbers and highlight specific actions we have taken to further strengthen our balance sheet before opening the call to questions.

We had ended 2019 with solid momentum across most of our brands that continued into January and February of this year. March was a challenging month across the restaurant industry, and we all began feeling the impact of the pandemic.

In compliance with state and local orders, our franchisees closed dining rooms and were forced to rely solely on the off-premise channel. Prior to the pandemic, many of our franchisees, especially in the burger and wings brand have had strong to-go and delivery presence utilizing platforms such as Uber Eats, Postmates and Grubhub.

These franchisees subsequently have experienced substantial uplift as customers relied heavily on these services during the shelter-in-place mandate.

Overall, for the week ending as of May 24, Sunday, bolstered by the strength of the to- to-go and delivery channel, our burger brands, which account for roughly half of our revenues on a normalized non-COVID-19 basis have been more resilient off only 6.9% for Fatburger on a same-store sales basis and 26% for Fatburger system-wide.

The difference is that some of the stores like those in casinos have been completely closed. So they bring down the overall average to date. Hurricane is off 10.4% and 16.8%, respectively, compared to the prior year on a same-store sales basis and in total sales. Buffalo's is off approximately 20% through May 10.

Our steakhouse brands have been most negatively impacted by COVID-19 as those brands did not have a robust to go or delivery component. As a result, many of those restaurants were temporarily closed.

Reopening for Ponderosa and Bonanza is occurring now using a modified version of either table service or cafeteria style service where restaurant staff serves the guest rather than self serve.

Across the system, as of now, approximately 90 of our 372 restaurants remain temporarily closed, the majority of which are in the steakhouse brands and the Fatburgers located inside casinos. Overall, since the beginning of the pandemic, only five locations have permanently closed.

Three of those closures are not directly related to the restaurant's operating performance during the pandemic. Two of those restaurants were located in casinos in Nevada that have been self closed the entire casino, whereas a third location would have likely closed even without the pandemic, given its high monthly rent expense.

During our call about a month ago, I spoke about three primary ways we had been helping out our franchisees to navigate these challenging times. First, we helped our franchisees to acquire personal protective equipment for their staff. And develop enhanced cleaning and social distancing procedures in the restaurants.

So that franchise could safely continue to serve their communities through the to-go model. Second, we encourage our franchisees to shore up their own financial position by applying for PPP loans and negotiating rent deferrals with their landlords. Third, we negotiated extended credit terms from the distributors of food suppliers like U.S.

Foods, PFG, Sysco on behalf of the franchisees. Our senior management team has been meeting on a daily basis to collaborate regarding solutions to help our franchisees and our Board of Directors is meeting on a weekly basis to stay abreast of the company's progress.

With those three elements in place, over this past month, our focus has been on preparations for reopening.

Our operations team been assessing each individual market to understand local requirements reopening and develop best practices areas such as sanitation of workstations, food and beverage preparation areas and customer dynamics, employee safety and training and restaurant reconfigurations will allow for adequate social distancing.

While our operations and supply chain teams have been focused on assisting our franchisees with their reopening plans, our development, construction and training teams has been focused on a robust pipeline of new stores, which we anticipate will fuel the organic growth of the company.

During the first quarter of 2020, franchisees opened seven new stores worldwide. And as of today, franchisees opened an additional three locations, including a ghost kitchen in Chicago, bringing our 2020 year-to-date total to 10 locations. There are still another 22 domestic stores scheduled to open by 2020.

By comparison, in 2019, our franchisees opened a total of 24 new locations. So we're well ahead of that number by the time we get to the end of the year.

So despite the effects of the pandemic, our development pipeline has remained strong and the primary limitation in opening new stores has been the ability of the training teams to travel for the elements of training that need to be done in person.

Like many of us across many industries, the pandemic has meant vectoring to virtual operations and our teams have conducted virtual training sessions to the extent that, that's possible.

Turning now to the first quarter, total revenue decreased 9.2% to $4.4 million, and our system-wide sales decreased 10.5% from the first quarter of 2019, primarily due to the beginning of the negative impact of COVID-19 at the end of March as well as the preferred application of ASC 606 in the fourth quarter of 2019, in which the store opening fees are amortized over the life of the franchise agreement.

Costs and expenses were $5 million in the quarter, an increase of roughly $800,000 from the first quarter of 2019.

The increase in cost is due to increases in our public company expenses, depreciation and amortization expenses related to the contribution of Elevation Burger, which we did not own in the prior period and nominal increase in compensation expense due to some hires that were made throughout 2019.

The combined effects of the lower revenues and higher costs resulted in an adjusted EBITDA in the first quarter of 2020 of $283,000, compared to $1.5 million in the first quarter of last year. Shifting from our operating performance to our liquidity and capital reserves, we ended the quarter with $5.7 million in cash and cash equivalents.

In early March, we announced our $40 million whole business securitization transaction which significantly lowered our cost of capital. The proceeds were used primarily to repay our expensive term loan, decreasing our annual interest expense by approximately $2 million a year.

The closing of the securitization resulted in net proceeds to the company of over $10 million after deal fees and the repayment of the term loan and accrued interest. In addition to the significant reduction in quarterly cash interest payments, given the lower cost of capital, the excess proceeds added working capital to our balance sheet.

The structure includes an accordion feature that can be accessed in the future to grow our brand portfolio.

While we are currently working through a challenging time in our industry, we are a stronger company today due to the securitization, and we are well positioned to drive our growth, both organically and through opportunistic acquisitions in the months ahead with several transactions in mind.

While the duration and severity of the ultimate impact from COVID-19 on the industry remains uncertain, we are excited and optimistic about the future.

Before we open the call for questions, I'd like to once again extend my heartfelt thank you to all our team members, franchise partners and their employees as they have done an outstanding job during these unprecedented times in adapting and rising to meet the challenges our industry faces.

I'm very proud of our team and our partners and remain excited for the opportunity in front of us, especially as we see the industry recover. With that, operator, please open the line for questions..

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Joe Gomes with NOBLE Capital. Please proceed with your question..

Good afternoon and thanks for taking the questions. .

Hi, Joe..

First one, just on the franchisees, how are they experiencing with the hiring as they are reopening.

I saw a University Chicago study the other day that suggested that 68% of the unemployed are bringing home more in unemployment pay than they would if they went back to work, and that is causing some issues, obviously, with firms that are trying to reopen.

So just trying to get a handle on how that is – how the franchise – what the franchisees are experiencing, how they are dealing with that. .

So it's a good question. It's often talked about questions in the last 60 days, obviously, because of the unemployment claims and the PPP money, et cetera. We're not getting any material noise from our franchisees that they're having problems getting their employees to come back to work.

I think that the – this concept of you're making more money on unemployment than you're making – working is a little bit more of a talking point than it is in reality because if you have now 30-something million Americans out of work, I think, the restaurant employees are concerned that they may – somebody else may get their job if they don't go back to work when the restaurants open.

It's not a wise move to sit at home, collect your check for a few weeks and assume that job will still be there. So there's going to be some of that. There's going to be some of that. There's going to be some shifting, but we're not hearing of a big problem.

Now we haven't – we still have California to reopen, right? The other states like Georgia, Florida, Texas, have opened back up, and we haven't really gotten that feedback. But unless something is different in California, that’s the color we have on..

Okay. Thanks for that. And maybe you could talk a little bit. In 2019, you announced a number of development deals, India, Texas, Shanghai.

Have any of the new stores that were open you said in the first quarter and subsequent, are any of the part of these new development deals? Or what’s the status of those deals that you announced last year?.

Yes, good question. And we have – so we do have some large development deals. We did open the store in India. We did – we’re about to open store in Texas.

We have seven stores right now ready to open right now, fully built, but that’s – they’ve really completed their construction and training period between the time the pandemic kicked in and everyone was ordered to shelter-in-place.

And now – and so we have some pent-up demand and our training and opening teams are scrambling to get all these restaurants open over the next 30 days. And some of those are in Texas, as you suggest, and India had already opened. But we have additional development deals going on.

I mean we’re in negotiations for a number of new restaurants right now in Asia that are international development deals. We’ve got a very strong U.S. pipeline. So growth is there for us in the deals that we made already and new deals that you haven’t heard about yet..

Okay, great. And I know this comes up every once in a while here, but maybe you could just speak a little bit about the Fog Cutter merger, remind us how that’s going to benefit FAT Brands shareholders. If I recall correctly, there was a big NOL. I know there’s an intercompany receivable out there.

If you could just kind of go over some of all of that and how that’s going to benefit the Fat Brands shareholders..

Understood so – and I appreciate you asking the question. It is this something I want to talk about. We have a number of initiatives to complete before the end of the year. FAT Brands has had an outstanding preferred stock offering in the market since the fall of last year.

We’ve now withdrawn that preferred stock offering because we’re going to file a new preferred stock offering that’s going to be a tradable preferred, it’ll be filed shortly in the next few days.

That will raise the company some additional capital to complete some acquisitions we anticipate coming into the system here over Q2 or Q3, really Q3, I think. The significance of that is, we – when we buy a company, we’ll pay some cash and usually some sort of seller note or some preferred stock.

We can’t issue common stock today because it would mess up the ownership structure where Fog Cutter owns a little bit over 80% of FAT Brands so that the Fog Cutter NOL can be utilized to shelter Fat Brands taxable income. If we issued more commons that Fog Cutter would drop below 80%, not to create a problem for using the NOL.

The merger will make that issue go away because the NOL will come into the Fab Brands entity structure and the 80% requirement will go away. So that’s very important because it will allow us to make acquisitions using common stock, to issue more common stock to raise capital, et cetera, and we still get the full benefit of the NOL.

So all of those things are good. We are actively working on the merger today. We’ve been working on it for a while, but we’ve really figured out the last few details to try to put that forward over the summer for the respective boards and the fairness opinion and all the things you have to get, it has not been negotiated yet.

We’re not ready to announce it, but I think it’s something that the FAT Brands shareholders will be happy about and Fog Cutter shareholders will be happy about. And I am looking forward to that, but that’s a big initiative to get done over the summer so that we’re well positioned for that..

Great. And just one more for me, and then I’ll get back in the queue. You talked about the accordion feature of the securitization.

How much is that?.

Yes. So the accordion feature allowed – the way the securitization is structured today, whole business securitization, we can do two things. We could issue a subordinate bond. Right now, we have $40 million of bonds, $20 million that are senior rated BB and $20 million that are subordinate rated single B.

And we could issue an unrated bond subordinate to the two senior bonds. Or we could expand the size of the existing bonds and make each bond greater than $20 million by dropping a new acquisition into the transaction, if we were to do that, we’d have to get the bonds re-rated as part of the issuance or the expansion of the A or B bond.

C bond doesn’t have to be rated. So it’s a little bit different. But we have the ability to go either direction and the securitization vehicle is perfect for growing the business. We fully intend on expanding it with some of the acquisitions that we’re looking at. And there’s no limit on how big it can get.

It’s a function of the right amount of capital at FAT Brands and the right amount of leverage in debt service coverage inside the securitization to meet the covenants and make the rating agencies comfortable that the rating will be equally as strong as it is now or improve..

Great. Thank you very much..

Thank you, Joe..

[Operator Instructions] We do have a follow- up question from the line of Joe Gomes from NOBLE Capital. Please proceed with your question..

If nobody else is going to ask any questions, I’ll ask a couple of more, if that’s okay. Bonanza and Ponderosa.

Just trying to kind of wrap my head around what you guys are looking at here is the future of those two brands? Again, as you mentioned, they don’t have – they did not have a robust to go or delivery, so that really hurt them over this past six weeks or two months.

And that was a brand that I think the store count had been modestly declining over time anyway. So just trying to get a better feel of what your thoughts are on the future of those brands and what we can do around them..

Sure. So Ponderosa and Bonanza represent less than 20% of our revenue. We acquired those brands as part of the IPO, and it gave us scale to get public. The steakhouse business with an all you can eat salad bar buffet, has COVID-19 issues in terms of the service style, we were able to pivot quickly and go to either table service.

So you can tell us what you want up to buffet as many times as you want, we’ll go get you another salad or more pasta or whatever as you order your steak to pay for that or switch to a little bit more of a cafeteria style where we have an attendant that will just serve up the dishes on the buffet that you’d like, instead of each person touching the spoon or serving themselves and whatever.

That really hasn’t been that difficult to pivot to. Well – and those brands, we’ve implemented – we’ve taken the opportunity to try to help the franchisees improve their food costs, for buffet food cost has been higher than we’d like to see it. And that’s because the franchisees historically have allowed a lot of proteins to be on the salad bar.

So you have the dilemma. When we bought the brand, the marketing wasn’t really rightsized. They were offering all you can eat salad bar or buffet for $9.95 at $2 per steak, right? Who wants to pay $4 per steak? Wonder what kind of steak it is. It should be $13.95 all you can eat steak and salad bar. So that marketing, we pivoted to.

We got the franchisees to agree to start marketing their business. They have – in two years since we’ve owned it, they have done no marketing.

And now they just agreed to finally, after following the successes at Hurricane and Buffalo’s of turning those brands around after we acquired them by great marketing efforts by our team and our brand and we expect the same thing to happen at Ponderosa and Bonanza.

So rightsizing the menu, getting the proteins off the bar will improve their margin and spending that savings on marketing will make sense.

We don’t want a situation where people come in, they eat all the proteins on the salad bar like chicken wings, meatloaf, ham, whatever, and then they take the steak homes and they’re sort of getting two meals for the price of one. So it’s something that needed to be done.

The franchisees are taking advantage of this opportunity for closing to reposition some of them that remodeled a little bit, painted and spruced up the restaurants. So that’s really the plan for Ponderosa and Bonanza today, start marketing right side of the food cost..

Okay. And how many – I know I think you had mentioned previously that you thought about 10 locations were going to get remodeled in 2020 prior to the whole COVID.

Is that still a good number? You think there’s going to be more than that?.

I think that’s still a good number. I do think that, look, we expect that we’re going to lose 10 to 15 restaurants over the course of the year because of COVID-19. That’s not a terrible number out of 370, right? It could have been a lot worse. But we expect that there’ll be some.

And I think the majority of those will be in the Ponderosa and Bonanza category. But I also think that those guys that remain are going to do really well with repositioning the brand as we’ve been talking about starting the marketing. Usually, when you – we always had as much as 5% closures, 4% closures in a year.

And those – but that 4% closures are not 4% of your revenue goes away. The ones that close are usually the ones you have very low sales doing 2% of your sales, even though it’s 4% by unit count. So I’m not really concerned about it. I think we’re in a pretty good shape there. We never want to see a store closed, but sometimes they’re very old locations.

It was interesting to see in Nevada, Station casinos, where we have a number of stores in different Stations Casino properties. They closed two casinos entirely, just shut them down and they’re not reopening them.

Maybe they’re going to remodel them and they’ll open later, but we lost a couple of Fatburgers in that situation strictly attributed to the COVID-19 shutdown of those casinos because they weren’t planned to be shut down before we know. So we’re going to see 10 to 15 restaurants probably go away, but we’re building 32 new ones this year. So it’s okay..

Right, good. And one last one.

Do you have on you, what a fully diluted share count is?.

I don’t have it in front of me, but we can get back to you with that..

That will be appreciated. Thank you very much again for taking the question. And we’re – hopefully, we’re past the worst of this, and we can start showing some of that growth you’re talking about..

I think it's all – thank you, again, Joe. I think it's all about consumer behavior. We just need to get through the vaccine stage here for consumer behavior to level out. I think we're going to see different consumer behavior by different brand. The fast casual brands, where there's a lot to go in delivery.

And even in the fast casual restaurants, if you came in to eat in the restaurant, say, we're serving your food in a bag, you can walk out with, if you can't find a table that's socially distant.

So it just gives the customer more comfort to know that, hey the employees are in PPE and when I get my food, if I can't – if I'm not comfortable sitting in the restaurant for whatever reason, I'm not married to that choice. I can just take my bag and go someone else and eat it or get in my car or whatever.

So that's important on the casual dining brand – fast casual brand. On the casual dining brand, we – fortunately, it's the summer, and those stores have big presence in South and in Florida and Georgia, Texas and also in New York and they also have screen porches and there's outdoor seating and stuff.

So we've been able to move the bars to the outside of the restaurant instead of inside, so we don't have the social distancing problem. And we're really seeing strong bounce back in sales at Hurricane and Buffalo's, strong bounce back in alcohol, strong comping numbers, they've been very resilient.

I think we'll have to see how consumer behavior settles out, but so far, the results have been very, very positive. So let's hope that we get to a point where consumers have comfort. Thank goodness we are not in the travel business right now.

Again the hospitality business and the restaurant business is hard enough, but really feel fortunate that we're not in fine dining. We don't have exposure where an operator can't make money if you can't have 100% feeding for a turn of dinner or turn of lunch here.

Our operators can make money if they only go back to 80% of sales or 85% sales or 90% sales instead of 100% for the balance of the year, they're going to be fine, and they'll be repositioned and ready to go as consumer behavior settles down, very optimistic. One more thing I just want to say, and then you can ask for one last question.

I think the opportunity to make acquisitions right now is very important and available to us. There are – we're seeing chains constantly looking for deals. And I think we have to be thoughtful of how to integrate those chains, which chains are sustainable and will not present a COVID-19 problem, but valuations are down there.

We know what chains have been resilient here and where we should continue to add to our portfolio. So I think it's a really good time to go shopping for the right kind of brand, nothing creative, but the right kind of brands that will help us grow the platform because we've built this platform and sort of geared up.

It has – there's a cost to being a public company, there's a cost of having the platform. And as we add more revenue to the platform, most of it falls to the bottom line. We have increasing EBITDA percentage just from the economies of scale of having the platform. So this is really going to be an active next 12 months from now.

And having the securitization in place was the first thing we had to do to get our financing right sized, and now it is. So I think we're going to have some great opportunity.

Operator, do you want to check if there are any other questions?.

Absolutely. [Operator Instructions] Our next question comes from the line of [indiscernible] Private Investor. Please proceed with your question..

Hey, Andy, how are you?.

Hi, Greg..

A couple of questions.

First of all, what's the run rate now as far as cash burn? Like are you burning now? Are you back to where you're positive? What should we expect from that?.

Well, the company is – so it's a little bit hard to answer that question in terms of the fact that restaurants are reopening like crazy right now. So the burn is declining. When – if you think about the bounce back of revenue, we could be burning $1 million to $2 million a quarter if we were to stay shut, we're not shut anymore.

We have – 75% of the restaurants are back open or are open with delivery only. So we're seeing that decline rapidly.

I think we have to wait another three or four weeks to see how – when all the restaurants are – when the dining rooms are open, like in California, then I think we'll have a better measurement of what it looks like now, but we have ample liquidity for the time being..

So if it stays at this rate, like you talked about as of May, I think what you said May 24 or something, will it be one to two? Will it be like….

Well at this rate, it will be on the lower end of that, not the higher. It will be the lower end. And I mean, it's really a function of – it's just an unfair measurement today because California is still shut.

In California, we have all the fabric restaurants in California that have no in restaurant dining, they're only delivered to go and all the casinos are closed. That's all going to bounce back, casinos in Nevada that's going to bounce back quickly. So we'll know in another month or so, we'll, I think, be able to have much better information on it..

Is there an estimate of when California is going to open? Has that been discussed?.

It has not – I mean, the problem is you have the state, the county and the cities, and they're all giving you different dates. LA county said July 4, but the cities are saying it could be weeks..

Okay.

So along the same lines of the – and I don't know if you – how you count $1 million to $2 million, does that include interest? Or is that just overhead?.

That's just – that's all of it. That's it..

Okay. That's everything altogether. Okay. I know this doesn't really matter because it is what it is.

But prior to the COVID, were the numbers trending where you thought or higher or?.

So things were really good. I mean, January and February were really good and Ponderosa and Bonanza were banking in cash to begin an advertising and marketing campaign. Because we finally got the franchisees to agree to contribute to a marketing program that would follow along the lines of what we did at Hurricane. So things are fine.

We have a very active pipeline. We have a couple of big development deals that we have not announced yet out for signature. And so I think that business is fine. The numbers were very positive. It's just going to be a function of consumer behavior here between now and the next six months. And I think really, we're not giving guidance.

We're not going to make financial forecasts, of course, because there's just no way to be accurate with it. But pretty soon, as a group, we're all going to focus on 2021 and not focus on 2020 because the numbers are just going to be hard to nail in advance. And we feel – we have a very active pipeline for 2021 also, a number of new stores planned.

And with these acquisitions that we're looking at….

I'm sorry. Andy, sorry about that. Another – just two more questions, and I'll let you go.

As far as deals go, can you give us an idea of size and scale any of that? I mean, do you have any idea of – I mean I know you must have an idea of what you're looking at, but are they just tuck-ins or things like significant size deals relative to where we are now?.

I would say that they're both. There are several deals that we're looking at. One or two are kind of easy add-ons like elevation size, and there are a couple that are significantly larger that would move the needle for us.

If we come to definitive terms, I think they – and they would fit in the securitization beautifully and whether we get three deals done, two deals done, one deal done, we're going to get some stuff done here in the near-term and I think we'll see a lot of additional opportunities.

I mean, if you read some of the forecasts, people forecast the 25% of restaurants are going to close. A lot of that will be independent, of course.

But there's going to be a lot of opportunity either for brands coming in and saying, hey I need some liquidity and I need a way out or there's going to be a lot of locations available that will be interesting conversions for us, in particular, that hopefully will be reasonable real estate prices..

Okay. One last question. Let me put you on spot. I'll put you on spot for a second. So I've been buying the stock. I've bought some lower and a little higher. And at these levels, just curious about what you and the Board are thinking about insider buy, I know you've been restricted for a while based on earnings.

But now that's out of the way, you have – I think you probably have a little bit of a runway here. Any discussions amongst the board members about….

Board has always been – everyone has been very supportive of buying stock, and the Board has taken all of their payments in – for – ever since the IPO in all their fees in the form of shares. So they're heavily, heavily invested in shares everyone's been restricted since December 15, December 14.

So this is the first time that people aren't restricted as we come out of this. But everybody's got to look at their own portfolio, their own cash position to figure out what makes sense, given how things have changed here a little bit, but everyone is taking their annual fees stock, not the cash, which has been very helpful..

Okay. Well, listen, I hope a lot of the restaurant companies have rallied back quite a bit. I hope that people start to – as you do some acquisitions and get a little bigger people realize that you're in that space, and I appreciate the brand that you've built, and hopefully, it works out.

So hopefully, if things will get better, open up and just keep doing – keep up the good work. Thank you..

Thank you very much, Greg.

Operator?.

As there are no further questions left at this time, I would like to turn the floor back over to management for any closing remarks..

Everyone, thank you very much for taking time to participate in our earnings call today. Hope that all of you and your families remain healthy and safe, and look forward to giving you further updates as we progress through Q2. Thank you very much..

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day..