FAT BRANDS, INC. (FAT) – RESEARCH COVERAGE TO BE ESTABLISHED IN JANUARY, 2021

Fat Brands, Inc. (FAT) has been publicly held since late 2017, with only about two million shares publicly outstanding and over 80% of the total owned by Fog Cutter Capital Group Inc. Management has had the objective of establishing a platform to support a portfolio of restaurant franchising companies to spread the administrative and promotional costs, as well as use best practices to improve the individual brands.

The first brand owned was namesake, California based Fatburger. The Company, as of 12/31/2019 owned 9 brands: Fatburger, Johnny Rocket’s, Buffalo’s Café, Buffalo’s Express, Hurricane Grill and Wings, Elevation Burger, Yalla Mediterranean, Ponderosa & Bonanza, together franchising over 700 units worldwide.

There has been limited interest in this small capitalization franchising company over the last three years, but there have been several important fundamental developments within the last six months that have substantially enlarged the Company and could broaden the following. The developments are: (1) Purchase of Johnny Rocket’s (2) New long term financing (3) Recently announced merger with parent Company, Fog Cutter.

(1) Johnny Rocket’s, with 322 total operating locations (almost all franchised) increased the total number of systemwide locations in the FAT portfolio to 702.

(2) The Company raised $89M during  Q2 and Q3, by securitization of future royalties, and the issuance of preferred stock, which not only paid for Johnny Rocket’s ($25M) but has provided a structure for future acquisitions.

(3) The Company announced last week a plan to merge with Fog Cutter Capital. FAT will be the surviving Company and individual shareholders of Fog Cutter will own common shares of FAT with the total outstanding unchanged. Presumably to offset the elimination of the $38M receivable from Fog Cutter, each share of FAT common will receive .232 shares of FAT Brands’ 8.25% Series B Cumulative Preferred Stock (FATBP) which have recently been trading in the area of $18-20/share.

The most important advantages of the Fog Cutter transaction are (1) Fog Cutter no longer has to own over 80% of FAT to maintain its $100M tax loss carryforward, so FAT can use its stock for acquisitions (2) FAT gets the use of the tax loss carryforward (3) The public float of FAT increases to 46% of the fully diluted shares (4) Intercompany balance sheet items are eliminated.

We intend to present a more extensive analysis of Fat Brands, Inc. in early 2021. For the moment, the Company’s recent Investor Presentation has indicated that Pro Forma 2019 Royalties increased by 91% to $28.5M with the acquisition of Johnny Rocket’s. Without Johnny Rocket’s, royalties increased 23% to $14.9M and Pro Forma Adjusted EBITDA was up 54% to $7.7M. While 2020’s Covid-related limitations have predictably affected results, a total of 57 new locations will have opened across the portfolio, up from 52 in 2019. A total of six ghost kitchens will also have opened. Management has indicated that the post-covid projected EBITDA should be in the area of $14.5M on $33.8M of revenue. From a balance sheet standpoint, the post-merger total debt will be $85M and there will be a total of $38M in Preferred stock. As of 9/30/20 there is $12M of cash on the balance sheet.

We have been impressed by management’s ability to successfully establish a portfolio of brands that, in anything like a normal environment, can collectively provide a predictable stream of royalty revenues. The balance sheet is leveraged but seems manageable based on expectations. Assuming expectations prove to be realistic, management’s demonstrated financial agility should allow them to raise capital even more opportunistically and build on the current base.

We look forward to covering this evolving multi-brand franchising situation and will report further to our readers in early 2021.

Roger Lipton