Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the FAT Brands Inc. Second Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded today, August 6, 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 conditions, please see today’s earnings 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 comparable GAAP measures are available in today’s earnings release. I would now like to turn the call over to Andy Wiederhorn, President and CEO.

Andy?.

Thank you, Ashley. Good afternoon, everyone, and thank you all for joining us on the call today. I hope you all are staying safe and healthy. This afternoon, we made our second quarter financial results publicly available.

So please refer to our press release and our earnings supplement, which is available in the Invest section of our website at www.fatbrands.com, both contain details about the quarter, which closed on June 28.

This is our third investor conference call since the beginning of the pandemic, and I want to use this time to briefly discuss the second quarter, revisit our pandemic strategy and then give you business and corporate update through July and go to Q&A.

Our company results are consistent with what the industry as a whole is experiencing, including a more recent uptick in system-wide sales at certain locations open at varying and muted operating capacities as their localities allow. The industry has also seen shift in consumer behavior, which favors takeout, to-go and outdoor dining.

As we’ve discussed in previous calls, we were early adopters of online ordering across all of our brands, and for delivery, we have enterprise agreements in place with 4 major delivery platforms.

While this environment is extremely challenging, our brands and franchisees have been in a position to navigate successfully through this new landscape, and as we’ve highlighted before, the strategy behind this includes providing to our partners, operating practices and procedures that align with local, state and federal regulations; safety, sanitation and social distancing measures to provide comfort to guests and employees; redesigned, simplified menu and serving options; and finally, leadership and guidance on securing PPP and disaster recovery loans, negotiating rent deferrals or concessions, managing the supply chain, procuring PPE and other supplies or equipment to enhance social distancing within the dining rooms.

We continue to work closely with our franchisees to ensure they are empowered as possible and can optimally weather the storm, which they are doing tirelessly. We have seen an uplift in sales as we move from mid-day -- sorry, mid-May to the end of July, up 44% over that time period, actually.

This reflects the easing of shelter-in-place orders and phased reopenings across the country, bolstered by stronger performance at Fatburger, Buffalo’s Café and Hurricane Grill & Wings.

While our operations and supply chain teams continue to consist -- continue to assist our franchisees in all areas relating to managing through the pandemic, our development, construction and training teams remain focused on robust pipeline of new stores we anticipate opening for the rest of the year. It’s a very strong year for new store openings.

Let me give you a quick overview about our development pipeline as of today in comparison to a year ago. During the second quarter, franchisees opened 5 new locations, bringing the year-to-date a total of 15, with an additional 18 stores slated to open by the end of the year.

We plan to end 2020 with 33 new stores in total, and this compares to 2019 when we opened 24 new locations. So despite the effects of the pandemic, our development pipeline has remained strong and a key pillar of our organic growth strategy.

The primary limitation in opening new stores has been the ability of our training team to travel for the elements of training that needs to be done in person. Like many others across multiple industries, the pandemic has meant vectoring into virtual operations, and our teams have conducted virtual training sessions to the extent possible.

Turning now to the second quarter. Total revenue decreased to $3.1 million from $5.9 million in the second quarter of 2019. Our system-wide sales decreased 51% year-over-year, reflecting the impact of the pandemic on our business. Excluding Ponderosa and Bonanza brands, system-wide sales have decreased 29% year-over-year.

Cost and expenses were $8.9 million in the quarter compared to $3.7 million last year. Like our revenue, this increase in cost and expenses reflects the effects of the pandemic with a $3.2 million goodwill and trademark impairment charge related to Ponderosa and Bonanza Steakhouses brands.

So really, the cost -- the actual cost is $5.7 million, not $8.9 million if we subtract out the $3.2 million goodwill impairment. It also reflects a $1 million refranchising loss related to restaurants held for sale and a $907,000 provision for bad debt from franchisees that have closed or will close.

In addition, G&A also includes a full quarter of depreciation and amortization expense related to Elevation Burger, which we acquired in June 2019. The combined effect of lower revenue and higher costs resulted in adjusted EBITDA loss of $361,000 for the quarter. This compares to an adjusted EBITDA profit of $2.0 million in the second quarter of 2019.

Shifting away from our operating performance, we continue to make progress in our liquidity and capital resources.

And following the close of the quarter, we successfully raised a total of $15 million in equity, which includes approximately $9 million in gross proceeds from the underwritten sale of the 8.25% Series B cumulative preferred stock and warrants, both of which began trading on the NASDAQ on July 14, and an additional $6 million from the exchange of a portion of the Series A preferred stock, accrued dividends thereon and into Series B stock as well as the exchange of Series A-1 into Series B.

These transactions simplified our capital structure. I’d also like to note that of the Series B raised, nearly $3 million is owned by company insiders or affiliates, which we believe demonstrates a true sense of confidence in our company.

All in all, these financing activities represent another milestone for us as we position ourselves for future growth opportunities. We also repurchased 509,604 of the company’s $7.20 strike price warrants issued in connection with our 2018 financing, therefore, reducing significantly the number of outstanding warrants.

While we are currently working through a challenging time in our industry, we are a stronger company today due to the progress and strategies we have achieved and executed year-to-date, and we are well positioned to drive our growth both organically and through opportunistic acquisitions in the years ahead.

In fact, there are several acquisition opportunities we are currently considering at this time. While the duration and severity of the ultimate impact of COVID-19 on the industry remains uncertain, we are very excited about the platform and our future, and we are just well positioned to take advantage of these opportunities.

Before we open the call for your questions, I’d like to, once again, extend my heartfelt thank you to all of 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 opportunities in front of us, especially as we participate in the industry’s recovery period. With that, operator, please open the line for questions..

[Operator Instructions] Our first question is from the line of Joe Gomes from NOBLE Capital..

Quick question here on -- there’s been somewhat of a roller coaster ride here on the COVID as we see certain areas seem to become hot spots again. Just wondering how is that impacting, if it has, you guys, I mean some of these rolling hot spots in places like Georgia, Texas and Florida..

Yes. Good question. The short answer is, in those markets, it had very little effect. We peaked out 3, 4 weeks ago, where we had a bigger jump in recovery of weekly sales to around $5 million. And then they’re off to about $4.7 million in weekly sales. You can see that chart in our earnings supplement, which is posted on our website.

But it’s just a little bit, right? That’s a 5%, 6%, 7% off of the peak recovery, but that’s also exacerbated by California closing the dining rooms again. So there’s a modest effect there. I mean our delivery business went from 40% to-go and delivery to 70% to-go and delivery.

So in California, where you have the dining rooms closed again, you’re not getting that incremental amount but certainly a huge uptick in delivery. The East Coast brands, Hurricane Grill & Wings, Buffalo’s Cafe have been very, very strong and resilient using the outdoor dining porches that they already come with.

They’re already built that way to start with. So we’re very fortunate that they have those outdoor beaches or outdoor kind of fake beaches with a bar and sand or the screen porches. We are also readying the franchisees for the winter and using the Game of Thrones’ saying that "Winter is coming." We want them to be ready.

And so we’re encouraging them to order their heaters, order the tents or the plastic walls that they might need to have in place if this continues in some way on the dining room side because it would be awfully hard to get all that stuff if you try and order it October 1..

Right. Okay. And can you just provide us a little bit more update on the Ponderosa and Bonanza brands.

Where are we with those right now today?.

Yes. So across our system right now, about half the Ponderosa and Bonanza restaurants have temporary closures of some kind, either completely closed or the dining rooms indoor are closed, and they don’t really have outdoor dining rooms, so they just have delivery and to-go.

That’s a lot of states in the Midwest that have been on the fence about what to do with the guidelines. So that’s the brand and, of course, it’s been hit the hardest here. And more than half of our total change in system-wide sales year-to-date through -- this is through the end of July, not through the end of June.

But through the end of July, like $49 million out of $92 million of our drop in sales comes from Ponderosa and Bonanza. So a significant amount there. And we’ve also had a few closures there. And hence, we decided to take an impairment on the goodwill of that brand just to right size it with what’s happened there.

The rest of the brands have really been quite resilient. I mean we’ve had a little bit of drop in [indiscernible] or Elevation Burger brands. But Fatburger, Hurricane and Buffalo are very, very strong. They make up 75% of the revenue base. So it’s a little difficult in the Midwest.

And also Puerto Rico, there’s 24 Ponderosas in Puerto Rico, and they make up more than half of the closures. The temporary closures are still closed there..

Okay. And I think in the past, you’ve mentioned that you were probably guessing you’d have anywhere from 10 to 15 permanently closed once we come out of this.

Is that still what you’re looking for?.

Yes, that’s right. We think that resulting from the pandemic, not closing in the ordinary course like your lease is up or something like that, there is about 15 that we’ve targeted that will permanently or have permanently closed from, let’s say, March 1 or March 10 forward. And that’s all pandemic-related, no other reasons there.

And again, those are generally the lower-performing stores. So if you closed 15 out of 370 restaurants, it’s a small percentage, but their contribution to revenue is generally even smaller than that because that’s not the -- that’s not the same contributor that they would be as a unit count percentage..

Right. Okay. And I think last quarter, you talked about the cash burn in the $1 million to $2 million per quarter.

Is that where we still are? Are we seeing some improvement in that? What do you think about that going forward?.

No. It’s significantly better, significantly better. We’re at a breakeven or positive cash flow spot today in terms of total revenues. It’s just a different situation. It’s not negative at all. We’re not burning -- we may not be throwing off as much excess as we did before, but it’s significantly rebounded..

That’s good news..

And April for everybody was a disaster. And then there were reopenings that started in May and continued into June. So it bounced back very quickly. It has -- it certainly has a ways to go. But Hurricane, Fatburger, Buffalo’s Café and even Elevation Burger, all are real contributors to the bottom line.

Ponderosa and Bonanza, maybe 15% of revenues and beaten up badly by that. But we’ve had a significant downside -- we’re not burning cash anymore..

[Operator Instructions] And the next question is from the line of Gregory Fortunoff, a private investor..

Andy, what’s the current cash position?.

A little over $6 million..

Okay. So every quarter, you have an interest payment, I believe.

Can you -- what does that amount to on a monthly basis -- I’m sorry, quarterly basis?.

Yes. So the interest payment is about $775,000 a quarter. We have -- I mean our debt service coverage is like 3x. We have plenty of cash flow. We cover our debt servicing and cover our dividends and all those things..

Okay. That’s great. In your presentation, you said that you saw a 44% improvement in sales. What is the run rate as a percentage of 100? So let’s say like the 2019 run rate is 100.

Where are we now?.

So if you look at it -- so if you look year-to-date, which is not your question, but year-to-date, across all brands, we’re off about 37%. But on a weekly basis, it’s very different brand by brand. We’re off somewhere in the high 20s or very low 30s. So it’s like a 10-point swing from year-to-date. It’s gotten significantly better.

The Fatburger brand is almost flat, like 0.3% off right now. Buffalo’s Cafe is up 1.5%. Hurricane Grill & Wings is off maybe 10% right now. That’s it. Ponderosa is off still like 75% on a weekly basis. That’s really the big hit..

Okay. Last question is just what do you..

And just to emphasize that, Greg. Ponderosa and Bonanza, the royalty -- the dollar royalties are not equal to Hurricane, Fatburger, Buffalo’s Cafe. They have -- on average, it’s a lower royalty rate. It was part of that system. So even if sales are off 33%, that doesn’t mean revenues are off 33%..

Okay. So what are you thinking about the second half? Like, obviously, you don’t have a crystal ball, you don’t know what going to happen with COVID.

But based on the trends you’re seeing now, do you think it’s going to stay like this? Or do you think we have continued improvement? I mean assuming it doesn’t get worse, let’s say it stays where we are..

Yes. I think the key takeaways there are several. One is we still have another 18 restaurants to open between now and the end of the year, which will incrementally drive our revenues by almost -- another $1 million in royalties. A little more than $1 million, Greg, because it’s about 60,000 stores, so -- and times 18.

So that’s a significant bump right there. That’s additional revenues. Second, we’ve had strong new franchise sales development activity. A lot of people are looking at buying franchises as a way to -- maybe I don’t want to go back to work, where I was before, I want to get my own business. So that’s interesting.

The other brands have bounced back so sharply, the casual dining brands, that I don’t really see anything changing there unless there’s some further closures. And I don’t think any of us are hoping for that. I think we’re hoping that we go the other direction here, even though it will probably be slow.

So the only thing I worry about is the winter weather and making sure that we’ve prepared those outdoor dining rooms for the winter. Places like California don’t have that issue. But on the East Coast, you certainly have that issue. So we need to make sure that we’ve gotten set up for that.

And we’re really well positioned, having completed our preferred stock offering earlier in the month or end of last month. We’re very well prepared now to weather the storm, have the liquidity. There are ample acquisition opportunities being presented to us.

And I think that we’ll take advantage of 1 or 2 of those in the near future and use our securitization facility, which as you know is expandable, like an accordion feature and -- with the accordion feature and that low-cost, long-term financing.

It’s a great time to look at long-term healthy brands that we can put into our portfolio, not huge turnaround situation deals. We don’t need the heavy lifting right now, but there are plenty of opportunities where we can make acquisitions that are opportunistic right now.

And I think that’s just the key -- valuations are lower, there’s opportunities being presented to us, and we’re going to take advantage of that..

Okay. And I just want to make sure I heard this right. So as we stand today, no improvement, same levels between cutting expenses and improvement in the revenue, there is no loss. No more expected actual cash loss. You’re going to be flat to up a little on the cash going forward..

Right. We’re not burning cash at the $1 million to $2 million a quarter rate that we were before. We’re not suffering losses. I mean there could always be a change if dining rooms are closed or whatever. But assuming things stay the same, I don’t forecast or see that happening.

And we’re also promoting our virtual restaurants concepts across all our brands. And that’s something as a competitive advantage that other franchisors don’t have, we own 8 different brands. We can let our franchisees sell other brands for delivery and to-go only on the platform, and other guys can’t do that.

So it’s another way to help mitigate any drop in revenue. But I feel very comfortable about where we are. I’m not losing sleep over it. We know we have the problems we discussed like within -- in Ponderosa and Bonanza, but the other brands have really adapted well.

Ponderosa itself has adapted well to having a server scoop up all the food on the salad bar and all-you-can-eat buffets for the guests once they order their entrée rather than self-serve. But it’s whether the states let the dining rooms open again. That’s the only issue, is the dining rooms being open. It’s not the service style.

So I really feel like we’re well positioned to get through this and also be opportunistic..

Okay. But just from a point of view of like what your cash is versus your previous burn, where someone might say, "Oh my God, there’s a couple of months of cash there. --.

Plenty of runway -- plenty of room..

Plenty, right. So if we end the -- if we go to the next quarter, same spot here today, you’re going to have a similar amount of cash in the bank with what you have today..

Correct..

Okay. That’s it. Thanks, Andy. Good job navigating this ridiculous time, hopefully, but this will be the last messy quarter..

I hope so. And I hope you guys a lot of power..

[Operator Instructions] And it looks like there’s no other questions.

Did you want to prompt again or go to closing comments?.

No, I think we can close now. And I’d just like to thank everybody for taking the time to participate in our second quarter earnings discussion and asking questions, and feel free to reach out with us if anything else comes to mind. Thank you all again, and we’ll talk to you in the near future here with more exciting stuff..

That will conclude the conference call for today. We thank you for your participation, and you can now disconnect your lines..