Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the FAT Brands First Quarter 2019 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. The lines will be open for your questions following the presentation. Please note that this conference is being recorded today May 14, 2019.

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 conference over to Rebecca Hershinger..

Thank you, operator, and good afternoon, everyone. By now you should all 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.

We do not undertake to update these forward-looking statements at a later date and refer you to today's earnings press release and our recent SEC filings for a more detailed discussion of the risks that could impact future operating results and financial conditions.

During today's call, we may discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or 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 Chief Executive Officer..

Thank you, Rebecca. Good afternoon, everyone and thank you all for joining us today. First quarter results include 26.4% system-wide sales growth, which was driven primarily by the acquisition of Hurricane Grill & Wings as well as the strength of our flagship Fatburger brand.

Although, we don't plan to report same-store sales brand by brand over the long term, given the number of brands we think more color this quarter is particularly helpful to see the full picture. Strong momentum continued at Fatburger with domestic same-store sales growth of 2.8% and worldwide growth of 1.8%.

Hurricane has seen a dramatic turnaround, since we took over the brand in the middle of last year. At the time of the acquisition, the brand was comping negatively 4.4%. Hurricane comp store sales are now 4.2% positive in the first quarter following the launch of a very successful advertising campaign, which helped fuel this recovery.

The steakhouse brands were negatively impacted by inclement weather in the first quarter like many restaurants. More importantly, 25 of our 98 restaurants are located in Puerto Rico and are lapping the very strong performance last year following Hurricane Maria.

There our restaurants served as a home base to many impacted residents and aid workers leading to sales increases of 17.6% a year ago. Now returning to more normal levels, the resulting same-store sales fell by 9.7% and excluding Puerto Rico, the brand's same-store sales fell by 5.5% in the first quarter.

We are encouraging our steakhouse franchisees to commit to an advertising program similar to what we ran for Hurricane and Buffalo's and we believe those direct marketing efforts will right-size the sales and traffic trends for Ponderosa and Bonanza.

Looking ahead, we continue to focus on four key strategic initiatives designed to drive sales and traffic growth across our brands. First, we will continue to focus on third-party delivery which has been incredibly successful for us.

We were a pioneer partner in the delivery space testing all kinds of programs with Postmates and Uber Eats and we believe we are still in the beginning stages of deliveries potential.

Delivery has been implemented in all of our Fatburger restaurants and we are mid-stream in implementing it across our other brands, noting that it is not yet available in every market where we have restaurants. Second, our CapEx remodel program is underway.

Restaurants that have undergone significant remodels have experienced material increases in sales that we believe are sustainable. This program is coupled with the conversion of certain locations into co-branded locations.

We estimate that co-branding results in a 20% to 30% increase in average unit volumes compared to stand-alone stores, with minimum incremental cost to the franchisee. Third, we will continue to innovate our menus across the brands with products such as the Impossible Burger from Impossible Foods.

We have the Impossible Burger in our Fatburger, Buffalo's and Buffalo's Express, Hurricane and Yalla brands and we are currently working through plans to extend the reach into our steakhouse brands. Lastly, we will continue to focus on cross-selling the brands to existing franchisee.

We have a very strong network of franchisees around the world who are eager for growth. We believe that these strategic initiatives will drive increased same-store sales growth across our brands.

On the development front, our franchisees opened five new restaurants during the quarter, four co-branded Fatburger, Buffalo's Express locations in Westminster, California, Dubai, Dundee, Scotland and Tunisia; and one Hurricane BTW in Gainesville, Florida.

We ended the quarter with 341 restaurants around the world across our seven brands consisting of 334 franchise restaurants and the seven Yalla-managed restaurants that we are in the process of converting to franchisees. We now have Yalla approved for franchising by the state of California, so we are beginning effort to actively market Yalla.

Subsequent to the end of the quarter, franchisees have opened an additional three restaurants, two Fatburgers, one in Beijing; and one in Tempe, Arizona; and one co-branded Fatburger Buffalo's Express location in Monrovia, California.

Combining the eight stores we've opened through today with the six additional stores we anticipate opening through the end of Q2, we will have 14 open stores during the first half of 2019. By comparison, we opened 13 franchise locations during the entire full year of 2018.

We are confident that we remain on track to open approximately 30 units this year. Our development pipeline remains strong, consisting of over 200 restaurants around the world yet to be built. In addition, we continue to actively seek new development deals with both new and existing franchisees.

During the quarter, we announced several new development deals, including deals with new and existing franchisees to open 10 co-branded Fatburger Buffalo's Express locations across the U.S.; a 60-unit development deal with a new partner to open restaurants throughout India over the next 10 years; and a 6-store multiunit development deal in Shanghai with an existing master franchisee.

More recently, we announced a 3-unit development deal for co-branded Fatburger Buffalo's Express locations in the Dallas-Fort Worth market, a 10-unit development deal for co-branded locations in Canada. And as you can clearly see our robust pipeline continues to grow and we expect this pipeline to fuel even greater expansion in 2020.

In addition to organic growth, we continue to see synergistic acquisitions. In 2018, we demonstrated our management platform's capability to seamlessly and cost-effectively scale with new brands through the successful acquisition of Hurricane Grill & Wings and Yalla Mediterranean.

We continue to believe there is a massive opportunity to consolidate franchise brand onto the FAT Brands platform and we are seeking growth capital to fuel this acquisition strategy and lower our cost of capital. We expect to be able to announce a new financing transaction shortly as well as a new acquisition.

We continue to expect adjusted EBITDA of between $9 million and $11 million for the full year 2019. Adjusted EBITDA in the first quarter of 2019 was $1.5 million. And let me help you bridge the gap to get there.

Franchise fees and store openings were lighter in Q1 due to a back-ended weight with new unit opening cadence in 2019, meaning more stores later in the year. As you know, we can only recognize store opening fees as revenue, once the stores have been opened.

Inclusive of smooth annualized store opening and franchise fees, adjusted EBITDA in the quarter would have been closer to $1.8 million or annualized at $7.2 million. We anticipated store openings in 2009 will lift our royalties by approximately $1.5 million on an annualized basis or $750,000 in the remainder of 2019.

Additionally, we are beginning to recognize income from our refranchising program, which should equal another $1.5 million to $2.5 million in 2019 and on a recurring basis.

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.

The combination of these elements and the timing of each of these gets us to the $9 million to $11 million full year figure. In summary, we remain excited about the opportunities ahead for FAT Brands. We're well positioned for growth with a strong and dynamic brand management platform capable of smoothly and cost-effectively integrating new brands.

We have several strategic initiatives in place that we believe will drive same-store sales growth in our existing restaurants. And we have a robust and growing development pipeline that will fuel organic unit growth for many years to come. We look forward to updating you on our progress on future calls.

And with that, I would like to turn the call over to our Chief Financial Officer, Rebecca Hershinger again to review our first quarter results in detail..

Thanks, Andy. Total revenue in the first quarter of 2019 was $4.9 million, an increase of 36% from $3.6 million in the first quarter of 2018. The increase was driven primarily by the acquisition of Hurricane and the resulting increase in royalties as well as increases in store opening fees and advertising fees.

As you know, advertising fee revenue is directly offset by advertising expenses, relating in no impact to our P&L. Revenue excluding advertising was $3.9 million in the first quarter, an increase of 30.4% from $3 million in the first quarter of 2018.

Cost and expenses were $4.1 million in the quarter an increase of $1.4 million from the first quarter of 2018. These costs include G&A expenses, advertising expenses and refranchising restaurant cost and expenses net of revenue. In the first quarter of 2019 G&A totaled $2.6 million compared to $2 million in the first quarter of 2018.

Advertising expenses, which are equal to advertising fee revenue, increased from $596,000 in the first quarter of 2018 to $976,000 in the first quarter of 2019.

The loss from the operations of the Yalla restaurants are recorded on a net basis and totaled $518,000 during the first quarter of 2019, with no comparable activity in the first quarter of 2018, as we did not begin operating the brand until December of 2018.

Adjusted EBITDA in the first quarter was $1.5 million versus $1.1 million in the first quarter last year. As a percentage of total revenues, excluding advertising fees, adjusted EBITDA increased 340 basis points year-over-year, to 39% for the first quarter of 2019 from 35.6% for the first quarter of 2018.

Other expenses were $2.2 million in the first quarter of 2019, consisting primarily of net interest expense of $2.1 million. This compares to $248,000 in other expenses in the first quarter of 2018, inclusive of $214,000 in net interest expense.

Approximately, $1 million of our interest expense in 2019 consisted of expenses related to the acceleration of the recognition of debt offering cost expenses and debt discount accretion expenses, both related to the refinancing of the term loans in January of this year.

The remainder of the increase in net interest expense quarter-over-quarter was driven by our higher debt balances. We recorded an income tax benefit of $718,000 for the first quarter of 2019, as compared to a provision for income taxes of $184,000 in the first quarter of 2018.

Effective October 20, 2017, the company 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 loss was $710,000 in the first quarter of 2019 or $0.06 per diluted share as compared to net income of $509,000 in the first quarter of 2018, or $0.05 per diluted share.

In terms of our liquidity and capital resources, we ended the quarter with $590,000 in cash and cash equivalents, $20 million in term loan debt and $14.5 million in redeemable preferred stock outstanding.

Also during the quarter, our Board of Directors declared a stock dividend, equal to 2.13% of our common stock, representing the number of shares equal to $0.12 per share of common stock, based on the closing price of February 6, 2019.

The stock dividend was paid on February 28, 2019, to stockholders of record as of the close of business on February 19, 2019. The company issued 245,376 shares of common stock at a per share price of $5.64 in satisfaction of this dividend.

The declaration in payment of any future dividend, as well as the amount thereof are subject to the discussion of our Board of Directors. This concludes our prepared remarks. We are now happy to answer any questions you may have. Operator, please open the line for questions..

Thank you. At this time, we will be conducing a question-and-answer session. [Operator Instructions] Our first question comes from the line of Martin Cowen [ph] with -- a private investor. Please proceed with your question..

Thank you. Hi, Andy. I hope cold find you well. And my question ….

Hi, Martin..

Hi. My question is basically the same question I've asked you the last several times I've spoken to you on conference call. And that is the FCCG proposed merger of FAT Brands.

Is it proceeding, is it moving along, just anything happening?.

Yeah. Thanks for bringing that up. Yes, it is proceeding. FCCG is going through the required audit process to be able to consider putting the companies together and the timeline to complete that during this calendar year.

There are certain SEC requirements for the number of historical years that we need to have an audit done and that -- because combining the two companies needs certain significant stats and so we're in the middle of that. We hope to have that completed over the summer. And unit position to announce something by the end of September..

So, it looks like this merger will happen eventually..

It looks like it will happen this calendar year after we announce it, provided both Boards of Directors approve it and have all the third-party evaluations and things done that are necessary and the audits. Then have to get shareholder vote.

I think it will pass the shareholder vote, but it takes about 60 days to give notice -- I'm joking, right? And so, it should be completed in November-ish and either take effect at that time or at the end of the calendar year we have to figure that out so..

Yeah. My personal opinion is that once this merger -- hoping is that it will take the side of the Squibb Myers. And with so few shares there's no volume on the FAT Brands and if you thought kind of shareholders that myself would better off for 100 years waiting something positive might happen and maybe we'll be rewarded finally..

I hope so. I think so. I think so as well. Thanks for your question..

Okay. Thank you, Andy. .

Our next question comes from the line of Steve Wallet [ph] with DBC Corp. Please proceed with your question..

Hi, Andy. I actually have three questions for you. The first one is, can you explain why the Fat Brands' shareholders would benefit from the Fog Capital Merger that's being proposed? My second question is, I've been on all your conference calls and you seem very positive about the company and its prospects.

And I guess, my question is why is our stock at an all-time low when the U.S.

stock market is more or less at an all-time high? And the third question is, in this past quarter or even going back a quarter before, if you like, what do you think the areas the company has exceeded your expectations? And what areas, do you think the company has not exceeded your expectations or came below your expectations?.

Thanks for those questions. Okay. So let's just take them in order here. As far as the merger goes, the merger will generate more flow as market -- was indicated a minute ago because there are a number of public Fog Cutter shareholders and there are -- adding those public shareholders to the flow will increase the flow, number one.

Number two, completing the merger brings the very valuable NOL at Fog Cutter into FAT Brands. Once the two entities are merged then Fog Cutter no longer needs to be an 80% or more shareholder.

So provided that we print some improved earnings that can show that this platform is continuing to grow, we should see the price appreciate significantly and have the opportunity to do some follow-on offering for further growth and that would increase our flow.

My goal is to get us out of micro-cap land as quickly as possible and into small-cap land by growing our EBITDA and we have a clear path to do that this year. And getting the merger done will eliminate Fog Cutter from having to be an 80% or more shareholder, so that tax benefit increases -- comes into the company we eliminate the 80% ceiling.

Second question about why is the stock price low? Clearly there is no real sponsorship here of the stock. You don't have institutional investors taking large positions in the stock because it's hard to get. And there's only 1.7 million shares really out there that are not in two or three hands.

And so when someone wants to buy a big position that's been a problem.

I think announcing a much lower cost of capital, which we hope to do shortly and a new credit facility announcing another acquisition and printing another quarter or two of earnings that shows that we're hitting that $9 million to $11 million run rate, should improve our stock price significantly.

We know that franchisors generally trade between 10 and 20 times. And clearly there's room for that here and room for the stock to appreciate. In terms of the business itself, the business itself is actually running pretty darn good. Franchise sales are really strong.

Our development pipeline is very strong for this year, of course, developing twice as many sorts last year. But our 2020 development pipeline is even stronger. We have just an awful lot of stores that are going to come online over the next 12 months not just the next six months. And so as we add those stores it just builds to the royalty base.

Every 10 stores is another $600,000 or $700,000 of royalties. We have 30 stores that's another $2 million and so on. So I think you're going to see significant growth there just new stores. As far as same-store sales, we know that the metrics have been challenging at Ponderosa and Bonanza.

It's an unfair comparison when you have a quarter where you're up 14-plus percent and then you don't have that growth again because it rolls off from the Hurricane stuff. And so on that basis, I think it's harder there.

We haven't gotten the advertising program in place with the franchisees at Ponderosa and Bonanza that we have at Hurricane and Buffalo's and Fatburger and that's been the challenge. I think it will get there over the summer and get them rolling on advertising.

Historically they were not advertising other than in their own local markets with local spends and that's been a disappointment. It's been kind of pushing on a string or pulling on a tough rope to get that going but we do have a plan.

We have been able to show how well it's worked at the other brands and I'm confident that the franchisees will get onboard here. Thank you..

Okay. What – yes, just one follow-up. What seems to be the delay for lack of a better word for this lower cost funding? Like what still needs to be done because it seems -- I know it just seems -- on our last call you were confident that you were going to have that closed before this next earnings report..

I agree that it's taken a long time. It was frustrating that we didn't close the financing in December that the lender had committed to provide us with and that dragged on into January and a little bit into February. We switched courses on the investment banking side. We waited for the audits to be completed at the end of the quarter.

And then prepared the materials and started to go out to market with all that information. And so now we're actively in that process and we expect that it will come together as soon as possible.

From a economic standpoint, the deal that we agreed to -- the short-term financing that we agreed to at the end of January carried a minimum of six months of interest anyway at this high rate. It's very high rate. So it's not costing us any more or any less. We just want to get it done so we can make some more acquisitions.

And like I said, I think you're going to be pleased with one that we make very shortly.

Any further questions?.

Our next question comes from the line of Gregory Frechnoff [ph], a private investor. Please proceed with your question..

Hi, Andy.

How are you?.

Hey, Greg.

How you’re doing Greg?.

Things are good..

Good. Thanks..

Andy, a couple of things.

Just to allay seems like -- it appears around the interest and maybe in your mind percentage-wise what are the odds that you're getting? Is it high 90s? Is it 50s like where you're thinking?.

I have a very high percentage 80% to 90% that the new financing will be at a significantly lower cost and be completed shortly..

Okay. Andy can you talk about a top that you know is near and dear to my heart, which is the dividends. You and I have discussed it. What are your plans for dividend going forward? If you can discuss it. I don’t know if you're ready to it but..

Dividends is a full Board decision and discussion that takes place on a quarterly basis. Given the high cost of financing today, we haven't -- wanted to pay a cash dividend while we're borrowing money at a discounted rate and especially with future acquisitions in mind right now. So the dividend is something that we're seriously considering.

It's a growth company whether it makes sense to continue it. Because the share price has been so low or so depressed, it’s hard to want to pay some people in cash and some people in stock. And then to pay everyone in stock is sort of an equal payment but creates a little bit more of a earnings per share headache going forward or a bigger hurdle.

So for now we're waiting to get the financing in place before we address another dividend payment..

Okay. Last question.

On a normalized basis assuming you get the financing where you think you'll get it, do you know what your interest run rate will be? Or have you done that math yet versus the 2.1 it was this quarter?.

Yes. So it depends on, of course, let's just say that the financing comes in at a significantly lower rate. It also depends on how much financing we take on in the first round or second round. We don't want to borrow much more than we need to invest and then have a dry facility for additional acquisitions.

And so if we can get that accomplished in the structure that we're discussing, then we can really manage the interest expense properly. But if you think about it from if we borrow $25 million or $30 million and it's $2.5 million or $3 million of expense for the year that's significantly lower than where it is today.

And then in future, borrowings would be accretive because they'll be adding significant additional EBITDA. So, I think that that's our goal right. If we do a $50 million or $60 million facility and we can borrow somewhere in the let's say 9% to 11% or 12% range just to have a range on it, then you really have significant interest coverage.

You're under four times levered which is a goal of ours to stay under four times levered. And so we'd have another $25 million to $35 million to put to work which would generate another $5 million to $7 million EBITDA.

So, if we're $9 million to $11 million and we can add $5 million to $7 million we could be upwards in the $16 million to $18 million range on a run rate basis and that should get us out of micro-cap land and into small-cap land. And so our goal is to get that run rate before the end of the year..

Okay. So, it looks like you have a lot of good things on the rise and I hope they will happen and certainly if everything works out as far as you work. And I think we're in good shape. I'm looking forward to seeing all those things come to fruition and keep up the good work. Thank you very much..

Thank you, Greg..

Our next question comes from the line of Lenny Dunn with Mutual Trust Company. Please proceed with your question..

Good afternoon. Some of my questions have sort of been answered. But you'd make me a lot more comfortable if you add a little tighter picture for the time horizon on this debt refinancing.

Would -- I'd be unrealistic to expect you to be able to announce something in the next 30 days?.

Well, we want to announce it as soon as it's closed not until it's closed. So, I think we hope to finish it in the quarter, but I don't want to say June 15 versus June 30. But I think it would be realistic to think we could announce something by the end of the quarter..

So, by the end of the quarter. Not when you put the earnings out but by June 30th would be very realistic..

Right. As soon as we complete it, we'll file an 8-K and we'll announce it and certainly not going to be August 15th when we're announcing Q2 results. It would be as soon as it's completed. So, I think everyone will stay tuned. There's no one who cares about it more than me..

Okay.

Well that I understand because right now you're paying users right? So, June 30th -- and also does that make sense to digest your current acquisitions before you would borrow money to do more acquisitions? And then what the cash flows from your current business take care of the future acquisitions?.

Well, I understand the concept here. We've been acquiring one company pretty much every six months. So, it's not been a super rapid-fire acquisition path. With the right cost of capital, these acquisitions will be very accretive. We're certainly not going to acquire or buy it off more than we can chew and make that integration difficult.

Ponderosa and Bonanza was the most difficult acquisition because it wasn't as automated as some of the other franchise companies are and so it took a little bit more heavy lifting. Hurricane Grill & Wings was pretty seamless. Yalla was very small and very easy.

I recognize that organic growth is free in the sense that we're not spending money to acquire another brand.

And if we see that the organic growth really, really ramps up at the levels that it's possible, it might grow in 2020 then it might make sense to slow down the acquisitions because there's so much new business coming at us where we're not paying.

But I really want to get the stock price to where it should be and get ourselves to where we have a bigger institutional following.

And so I think making another acquisition or two that gets our EBITDA closer to $20 million will help drive that and then things will sort of be a self-fulfilling prophecy of having better research coverage, having more flow, having more institutional investors.

And again every quarter the Board is examining, should we make an acquisition or should we rely on organic growth, what's in our pipeline and things like that? So I think those are all very good points to raise..

Okay. And the other thing is I want to address the dividend. If you're looking at it from a standpoint of shareholders which I represent, paying a regular stock dividend even if it's more dilutive at a lower share price that may take some of the pain away from the shareholders who are suffering, seeing new lows on a regular basis.

And it also builds loyalty. So people are less likely to want to sell, if they continue to accumulate shares. So I would strongly encourage you to do the stock dividend at least now. I mean you can go to a cash dividend may be in some future date, but certainly you don’t want to pay a cash dividend till the balance sheet looks better.

But if you pay the stock dividend, yes it's a little more dilution but the dilution is going to existing shareholders who are suffering again with a very low share price. So have a little mercy on us..

I hear you loud and clear..

Our next question comes from the line of Ian McMillan, [ph] a private investor..

Let me just applaud the last questionnaire. He hit a lot of points in my opinion that a shareholder being thought of right now. Personally I bought the stock because I believe the brands -- FAT Brands is a good brand, that's undervalued especially at current prices.

I would suggest that if you do not want to pay the dividend which I'm starting to kind of feel that way. I would suggest, if you won't do anything that you cut it some, but you don’t cut it to the bone because then new prices are going to suffer even more and you're going to anger shareholders even greatly -- even more greatly.

I also would suggest that on your new brands that you're buying like Yalla, that you take a chance and look at online influencers. You could hire me. I could be the Yalla yeller. I'll do what it takes to help you guys. I want to be an investor for the long term. Dividends matter, dilution matters.

But I agree with the last guy that dilution is -- I'll take it. I'll take it. Just don’t stop that dividend and if you do, it will be a problem. Other than that, I just appreciate just taking our little concern. Appreciate it..

Thank you for giving me your feedback and your comments..

Yes, sir..

Our next question is a follow-up question from Gregory Frechoff [ph] a Private Investor. Please proceed with your question..

[Technical Difficulty].

Greg, it's hard to hear you? Greg, I don’t think we can hear anything you're saying..

Okay. Ladies and gentlemen this does conclude the question-and-answer session. And I would like to turn the call back to Andy Wiederhorn for closing remarks..

I want to thank everyone for joining the call today. I appreciate all the feedback, the support. Shareholder support has really been very strong here. It's unfortunate that our stock price has continued to suffer here. Fortunately, the brands are really doing pretty well and the pipeline is very, very strong.

And what's ahead of the pipeline deals that have not yet been closed. We didn't talk much about, but there's a lot of it. So we feel very good about that. I believe the financing will come in place here soon. And we are pursuing the sale financing from December to recover our costs there. We are quite excited about that as everyone is.

And we really have this platform set up to add brands and add unit count and with very little incremental overhead. As you saw, our net operating margin increased to 39% from 35% and that – and we'll do see more and more of that because the fixed costs are being absorbed by the additional revenue from new store growth and the acquisitions.

So, thank you again for participating. And I look forward to updating you as soon as possible when we have some news to relay to you. Thank you, operator..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..