PART II AND III 2 partiiandiii.htm

 

PART II — INFORMATION REQUIRED IN OFFERING CIRCULAR

 

An offering statement pursuant to Regulation A relating to these securities has been filed with the Securities and Exchange Commission. Information contained in this Preliminary Offering Circular is subject to completion or amendment. These securities may not be sold nor may offers to buy be accepted before the Offering statement filed with the Commission is qualified. This Preliminary Offering Circular shall not constitute an offer to sell or the solicitation of an offer to buy nor may there be any sales of these securities in any state in which such offer, solicitation or sale would be unlawful before registration or qualification under the laws of any such state. We may elect to satisfy our obligation to deliver a Final Offering Circular by sending you a notice within two business days after the completion of our sale to you that contains the URL where the Final Offering Circular or the Offering statement in which such Final Offering Circular was filed may be obtained.

 

Subject to Completion, dated September 6, 2017

Preliminary Offering Circular

 

Up to 2,000,000 Shares

of Common Stock

($24,000,000)

 

FAT Brands Inc.

 

 

 

 

This is the initial public offering of securities of FAT Brands Inc. (which we refer to as the “Company,” “we,” “our” and “us”). We are offering up to 2,000,000 shares of our common stock, par value $0.0001 (which we refer to as the “Common Stock”) at an offering price of $12.00 per share, for an aggregate offering amount of up to $24,000,000 (the “Offering”). There is no minimum number of shares that must be sold by us for the Offering to proceed.

 

The Offering will terminate at the earlier of: (1) the date at which $24,000,000 of shares has been sold, (2) the date which is one year after this Offering being qualified by the U.S. Securities and Exchange Commission (which we refer to as the “SEC” or the “Commission”), or (3) the date on which this Offering is earlier terminated by the Company in its sole discretion (which we refer to as the “Termination Date”). This Offering is being conducted on a “best efforts” basis pursuant to Regulation A of Section 3(6) of the Securities Act of 1933, as amended (the “Securities Act”), for Tier 2 offerings. The Company may undertake one or more closings on a rolling basis; however, it intends to complete one closing. Until we complete a closing, the proceeds for the Offering will be kept in an escrow account, except with respect to those investors using a BANQ online brokerage account. At a closing, the proceeds will be distributed to the Company and the associated shares will be issued to investors. If there are no closings or if funds remain in the escrow account upon termination of this Offering without any corresponding closing, the investments for this Offering will be promptly returned to investors, without deduction and without interest. Wilmington Trust, N.A. will serve as the escrow agent. There is a minimum purchase requirement for an investor of 50 shares of Common Stock in order to participate in the Offering.

 

TriPoint Global Equities, LLC has agreed to act as our exclusive, lead managing selling agent (which we refer to as the “Selling Agent”) to offer the shares to prospective investors on a “best efforts” basis. In addition, the Selling Agent may engage one or more sub-Selling Agents or selected dealers. The Selling Agent is not purchasing the shares offered by us, and is not required to sell any specific number or dollar amount of the shares in the Offering.

 

   
 

 

We expect to commence the offer and sale of the shares as of the date on which the Offering Statement of which this Offering Circular is a part (the “Offering Statement”) is qualified by the SEC. Prior to this Offering, there has been no public market for our common stock. We intend to apply to list our Common Stock on the Nasdaq Capital Market (“NASDAQ”) under the symbol “FAT.” We expect our Common Stock to begin trading on NASDAQ upon consummation of the Offering.

 

Following this Offering, we will be a “controlled company” within the meaning of the corporate governance rules of NASDAQ. See “The Transactions” and “Management—Corporate Governance.”

 

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, and, as such, may elect to comply with certain reduced reporting requirements for this Offering Circular and future filings after this Offering.

 

Investing in our Common Stock involves a high degree of risk. See “Risk Factors” beginning on page 14 for a discussion of certain risks that you should consider in connection with an investment in our Common Stock.

 

   Price to Public  

Selling Agent

Fees (1)

  

Proceeds to

Issuer (2)

 
Per Share  $12.00   $0.90   $24,000,000 
Maximum Offering Amount  $24,000,000   $1,800,000   $21,200,000 

 

(1) We have agreed to pay the Selling Agent a fee of 7.5% of the gross proceeds received by the Company in the Offering and issue a warrant to the Selling Agent to purchase shares of Common Stock equal to 5.0% of the total shares sold in the Offering, exercisable for five years at $13.20 per share. We have also agreed to reimburse certain expenses to the Selling Agent.
(2) We estimate that our total expenses for the Offering will be approximately $1,000,000, along with cash fees payable to the Selling Agent of $1,800,000 assuming the maximum amount is sold in the Offering.

 

THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION DOES NOT PASS UPON THE MERITS OF OR GIVE ITS APPROVAL TO ANY SECURITIES OFFERED OR THE TERMS OF THE OFFERING, NOR DOES IT PASS UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR OTHER SOLICITATION MATERIALS. THESE SECURITIES ARE OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH THE COMMISSION; HOWEVER, THE COMMISSION HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THE SECURITIES OFFERED ARE EXEMPT FROM REGISTRATION.

 

The following would apply only if we are unable to obtain a listing on a national securities exchange and we seek for our Common Stock to trade on a platform of the OTC Markets:

 

GENERALLY NO SALE MAY BE MADE TO YOU IN THIS OFFERING IF THE AGGREGATE PURCHASE PRICE YOU PAY IS MORE THAN 10% OF THE GREATER OF YOUR ANNUAL INCOME OR NET WORTH. DIFFERENT RULES APPLY TO ACCREDITED INVESTORS AND NON-NATURAL PERSONS. BEFORE MAKING ANY REPRESENTATION THAT YOUR INVESTMENT DOES NOT EXCEED APPLICABLE THRESHOLDS, WE ENCOURAGE YOU TO REVIEW RULE 251(d)(2)(i)(C) OF REGULATION A. FOR GENERAL INFORMATION ON INVESTING, WE ENCOURAGE YOU TO REFER TO www.investor.gov.

 

This Offering Circular follows the disclosure format of Part I of Form S-1 pursuant to the general instructions of Part II(a)(1)(ii) of Form 1-A.

 

 

 

The date of this Offering Circular is               2017.

 

   
 

 

 

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We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where such offers and sales are permitted. You should rely only on the information contained in this Offering Circular. We have not authorized anyone to provide you with any information other than the information contained in this Offering Circular. The information contained in this Offering Circular is accurate only as of its date, regardless of the time of its delivery or of any sale or delivery of our securities. Neither the delivery of this Offering Circular nor any sale or delivery of our securities shall, under any circumstances, imply that there has been no change in our affairs since the date of this Offering Circular. This Offering Circular will be updated and made available for delivery to the extent required by the federal securities laws.

 

TABLE OF CONTENTS

 

  Page
Offering Circular Summary 1
Summary Historical and Pro Forma Consolidated Financial Information 10
Risk Factors 14
Cautionary Note Regarding Forward-Looking Statements 34
The Reorganization Transactions 35
Use of Proceeds 37
Capitalization 38
Dividend Policy 39
Dilution 40
Selected Historical Financial and Other Data of Fatburger North America, Inc. and Buffalo’s Franchise Concepts, Inc. and Subsidiary 41
Selected Historical Financial and Other Data of Ponderosa Franchising Company and Bonanza Restaurant Company 48
Unaudited Pro Forma Consolidated Financial Information 52
Management’s Discussion and Analysis of Financial Condition and Results of Operations 58
Letter from our Founder and Chief Executive Officer 67
Business 69
Management 94
Executive Compensation 101
Certain Relationships and Related Party Transactions 104
Principal Stockholders 107
Description of Capital Stock 108
Shares Eligible for Future Sale 111
Plan of Distribution 112
Legal Matters 117
Where You Can Find More Information 117
Index to Financial Statements 118

 

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USE OF MARKET AND INDUSTRY DATA

 

This Offering Circular includes market and industry data that we have obtained from third-party sources, including industry publications, as well as industry data prepared by our management on the basis of its knowledge of and experience in the industries in which we operate (including our management’s estimates and assumptions relating to such industries based on that knowledge). Management has developed its knowledge of such industries through its experience and participation in these industries. While our management believes the third-party sources referred to in this Offering Circular are reliable, neither we nor our management have independently verified any of the data from such sources referred to in this Offering Circular or ascertained the underlying economic assumptions relied upon by such sources. Furthermore, internally prepared and third-party market prospective information, in particular, are estimates only and there will usually be differences between the prospective and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. Also, references in this Offering Circular to any publications, reports, surveys or articles prepared by third parties should not be construed as depicting the complete findings of the entire publication, report, survey or article. The information in any such publication, report, survey or article is not incorporated by reference in this Offering Circular.

 

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OFFERING CIRCULAR SUMMARY

 

This summary highlights selected information contained elsewhere in this Offering Circular. This summary does not contain all of the information that you should consider before deciding to invest in our Common Stock. You should read the entire Offering Circular carefully, including the “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our combined financial statements and the related notes thereto included elsewhere in this Offering Circular, before making an investment decision.

 

In this Offering Circular, unless the context requires otherwise, references to “FAT Brands,” the “company,” “we,” “our” or “us” refer collectively to, following consummation of the Reorganization Transactions, including this Offering, FAT Brands Inc. and, unless otherwise stated, all of its subsidiaries.

 

Our Company

 

FAT Brands is a leading multi-brand restaurant franchising company that develops, markets, and acquires predominantly fast casual restaurant concepts around the world. As a franchisor, we generally do not own or operate restaurant locations, but rather generate revenue by charging franchisees an initial franchise fee as well as ongoing royalties. This asset light franchisor model provides the opportunity for strong profit margins and an attractive free cash flow profile while minimizing restaurant operating company risk, such as long-term real estate commitments or capital investments. Our scalable management platform enables us to add new stores and restaurant concepts to our portfolio with minimal incremental corporate overhead cost, while taking advantage of significant corporate overhead synergies. The acquisition of additional brands and restaurant concepts as well as expansion of our existing brands are key elements of our growth strategy.

 

We currently operate the Fatburger, Buffalo’s Cafe and Buffalo’s Express restaurant concepts, with 181 total locations across eight states and 18 countries as of March 26, 2017. While our existing footprint covers 18 countries in which we have franchised restaurants open and operational as of March 26, 2017, our overall footprint (including development agreements for proposed stores in new markets and nine countries where our brands previously had a presence that we intend to resell to new franchisees) covers 32 countries. For each of our current restaurant brands and those that we will seek to acquire, the ability to expand the overall concept footprint, both domestically and internationally, is of critical importance and a primary acquisition evaluation criterion. We believe that our restaurant concepts have meaningful growth potential and appeal to a broad base of consumers globally.

 

Fatburger. Founded in Los Angeles, California in 1947, Fatburger (The Last Great Hamburger StandTM) has, throughout its history, maintained its reputation as an iconic, all-American, Hollywood favorite hamburger restaurant serving a variety of freshly made-to-order, customizable, big, juicy, and tasty Fatburgers, Turkeyburgers, Chicken Sandwiches, Veggieburgers, French fries, onion rings, soft-drinks and milkshakes. With a legacy spanning over 70 years, Fatburger’s dedication to superior quality inspires robust loyalty amongst its customer base and has long appealed to American cultural and social leaders. We have counted many celebrities and athletes as past franchisees and customers, and we believe this prestige has been a principal driver of the brand’s strong growth. Fatburger offers a premier dining experience, demonstrating the same dedication to serving gourmet, homemade, custom-built burgers as it has since 1947. As of March 26, 2017, there were 162 franchised and sub-franchised Fatburger locations across six states and 18 countries, and Fatburger is one of the fastest growing hamburger restaurant franchises, with 8.2% new store growth in 2016.

 

Buffalo’s Cafe. Established in Roswell, Georgia in 1985, Buffalo’s Cafe (Where Everyone is FamilyTM) is a family-themed casual dining concept known for its chicken wings and 13 distinctive homemade wing sauces, burgers, wraps, steaks, salads, and other classic American cuisine. Featuring a full bar and table service, Buffalo’s Cafe offers a distinctive dining experience affording friends and family the flexibility to share an intimate dinner together or to casually watch sporting events while enjoying extensive menu offerings. After acquiring the Buffalo’s Cafe brand in 2011, we developed and launched Buffalo’s Express, a fast-casual, smaller footprint variant of Buffalo’s Cafe offering a limited version of the full menu with an emphasis on chicken wings, wraps and salads. Current Buffalo’s Express outlets are co-branded with Fatburger locations, providing our franchisees with complementary concepts that share kitchen space and result in a higher average check (compared to stand-alone Fatburger locations). As of March 26, 2017, there were 19 franchised Buffalo’s Cafe and 66 co-branded Fatburger / Buffalo’s Express locations globally. Buffalo’s Cafe achieved 10.0% new store growth in 2016.

 

 

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Ponderosa & Bonanza Steakhouse. In March 2017, our parent company, Fog Cutter Capital Group, Inc., entered into a definitive agreement to acquire the franchisor of the Ponderosa Steakhouse (which we refer to as “Ponderosa”) and Bonanza Steakhouse (which we refer to as “Bonanza”) restaurants, and intends to complete the acquisitions and contribute Ponderosa and Bonanza to us, including one company-owned restaurant, concurrently with the consummation of this Offering. Ponderosa and Bonanza offer the quintessential American steakhouse experience, for which there is strong and growing demand in international markets, particularly in Asia, the Middle East, Europe and Central America. Ponderosa and Bonanza were established in 1965 and 1963, respectively, and as of March 27, 2017, there were 99 Ponderosa and 20 Bonanza restaurants operating under franchise and sub-franchise agreements in 19 states in the United States, Canada, Puerto Rico, the United Arab Emirates, Egypt, Qatar, Taiwan, and two company-owned Ponderosa restaurants in the United States.

 

Beyond our current brand portfolio and the Ponderosa and Bonanza acquisitions, we intend to acquire restaurant concepts that will allow us to offer additional food categories and expand our geographic footprint. In evaluating potential acquisitions, we specifically seek concepts with the following characteristics:

 

  established, widely-recognized brands;
  steady cash flows;
  track records of long-term, sustainable operating performance;
  good relationships with franchisees;
  sustainable operating performance;
  geographic diversification; and
  growth potential, both geographically and through co-branding initiatives across our portfolio.

 

We approach acquisitions from a value perspective, targeting valuations of approximately 6.0x-8.0x 12-month leading cash flow to ensure that acquisitions are immediately accretive to our earnings. Leveraging our scalable management platform, we expect to achieve cost synergies post-acquisition by reducing the corporate overhead of the acquired company – most notably in the legal, accounting and finance functions. Adjusted for these cost synergies, we believe that we will have the opportunity to acquire complementary restaurant brands at a valuation multiple materially below 6.0x-8.0x 12-month leading cash flow. We also plan to grow the top line revenues of newly acquired brands through support from our management and systems platform, including public relations, marketing and advertising, supply chain assistance, site selection analysis, staff training and operational oversight and support.

 

Including Ponderosa and Bonanza, our experienced and diversified franchisee base consists of 127 franchisees, 46 of whom operate multiple locations. With the completion of the Ponderosa and Bonanza acquisitions, our franchisees will operate more than 300 restaurants, with system-wide store level sales in excess of $300 million. Since converting to a franchisor model in 2011, we have improved store-level operations and maintained positive same-store sales growth in our traditional domestic market over each of the last five years while operating less than 1% of total units. Over the same time period, our concepts have also experienced significant growth in total number of locations. As a result, between 2012 and 2016, unadjusted for the acquisition of Ponderosa and Bonanza, the company achieved compound annual growth rates in net revenue, net income, and EBITDA of 9.9%, 40.0% and 35.3%, respectively, reflecting consistent yearly growth over this period. By providing multiple support services that promote the financial and operational health of our franchisees – our direct customers – we believe that we will continue to enable our franchisees to increase their same-store sales and grow their store counts, thereby driving our sustained strong financial performance. For a discussion of how we calculate same-store sales growth, please refer to “Selected Historical Combined Financial and Other Data of Fatburger North America, Inc. and Buffalo’s Franchise Concepts, Inc. and Subsidiary” beginning on page 41.

 

The FAT Brands Difference – Fresh. Authentic. Tasty.

 

Our name represents the values that we embrace as a company and the food that we provide to customers – Fresh. Authentic. Tasty (which we refer to as “FAT”). The success of our franchisor model is tied to consistent delivery by our restaurant operators of freshly prepared, made-to-order food that our customers desire. With the input of our customers and franchisees, we continually strive to keep a fresh perspective on our brands by enhancing our existing menu offerings and introducing appealing new menu items. When enhancing our offerings, we ensure that any changes are consistent with the core identity and attributes of our brands, although we do not intend to adapt our brands to be all things to all people. In conjunction with our restaurant operators (which means the individuals who manage and/or own our franchised restaurants), we are committed to delivering authentic, consistent brand experiences that have strong brand identity with customers. Ultimately, we understand that we are only as good as the last meal served, and we are dedicated to having our franchisees consistently deliver tasty, high-quality food and positive guest experiences in their restaurants.

 

 

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In pursuing acquisitions and entering new restaurant segments, we are committed to instilling our FAT Brands values into new restaurant concepts. As our restaurant portfolio continues to grow, we believe that both our franchisees and diners will recognize and value this ongoing commitment as they enjoy a wider concept offering.

 

Competitive Strengths

 

We believe that our competitive strengths include:

 

  Management Platform Built for Growth. We have developed a robust and comprehensive management and systems platform that supports the expansion of our existing brands while enabling the accretive and efficient acquisition and integration of additional restaurant concepts. We dedicate our considerable resources and industry knowledge to promote the success of our franchisees, offering them multiple support services such as public relations, marketing and advertising, supply chain assistance, site selection analysis, staff training and operational oversight and support. Furthermore, our platform is scalable and adaptable, allowing us to incorporate new concepts into the FAT Brands family with minimal incremental corporate costs. For example, following our acquisition of the Buffalo’s Cafe brand in 2011, we leveraged our platform to refresh the brand, expand the concept into the fast casual segment (through the Buffalo’s Express concept), and grew the brand appeal to a broader base of FAT Brands’ franchisees. As a result, as of March 26, 2017, we had grown the number of co-branded Buffalo’s Express stores from launch to 66 locations while increasing the number of franchisees from 12 to 29. As such, we intend to grow our existing brands as well as make strategic and opportunistic acquisitions that complement our existing portfolio of concepts providing an entrance into targeted restaurant segments. We believe that our platform is a key differentiator in pursuing this strategy.
     
  Capital Light Business Model Driving High Free Cash Flow Conversion. We maintain an asset light business model requiring minimal capital expenditures by franchising our restaurant concepts to our owner / operators. The multi-brand franchisor model also enables us to efficiently scale the number of restaurant locations with very limited incremental corporate overhead and minimal exposure to store-level risk, such as long-term real estate commitments and increases in employee wage costs. Our multi-brand approach also gives us the organizational depth to provide a host of services to our franchisees, which we believe enhances their financial and operational performance. As a result, new store growth and accelerating financial performance of the FAT Brands network drive increases in our franchise fee and royalty revenue streams while expanding profit and free cash flow margins. From 2012 to 2016, our EBITDA margin expanded from 27.2% to 64.3%.
     
  Strong Brands Aligned with FAT Brands Vision. We have an enviable track record of delivering Fresh, Authentic, and Tasty meals across our franchise system. Our current Fatburger and Buffalo’s concepts have built distinctive brand identities within their respective segments, providing made-to-order, high-quality food at competitive prices. The Ponderosa and Bonanza brands, which we will acquire upon consummation of this Offering, deliver an authentic American steakhouse experience with which customers identify. By maintaining alignment with the FAT Brands vision across an expanding platform, we believe that our concepts will appeal to a broad base of domestic and global consumers.
     
  Experienced and Diverse Global Franchisee Network. As of March 26, 2017 and including Ponderosa and Bonanza, our franchise base consisted of 127 franchisees, 46 of whom operate multiple locations. With the completion of the Ponderosa and Bonanza acquisitions, our franchisees will operate more than 300 restaurants, with system-wide sales in excess of $300 million. Based on existing new restaurant commitments of over 300 locations across our brands, we anticipate that our current franchisees will open more than 30 new restaurants annually for at least the next four years. The acquisition of additional restaurant franchisors will also increase the number of restaurants operated by our existing franchisee network. Additionally, our franchise development team has built an attractive pipeline of new potential franchisees, with many experienced restaurant operators and new entrepreneurs eager to join the FAT Brands family.

 

 

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  Ability to Cross-Sell Existing Franchisees Concepts from the FAT Brands Portfolio. Our ability to easily, and efficiently, cross-sell our existing franchisees new brands from our FAT Brands portfolio affords us the ability to grow more quickly and satisfy our existing franchisees’ demands to expand their organizations. By having the ability to offer our franchisees a variety of concepts (i.e., a fast-casual better-burger concept, a fast-casual chicken wing concept, a casual dining concept and steakhouse concepts) from the FAT Brands portfolio, our existing franchisees are able to acquire the rights to, and develop, their respective markets with a well-rounded portfolio of FAT Brands concept offerings affording them the ability to strategically satisfy their respective market demands by developing our various concepts where opportunities are available.
     
  Seasoned and Passionate Management Team. Our management team and employees are critical to our success. Our senior leadership team has more than 200 years of combined experience in the restaurant industry, and many have been a part of our team since the acquisition of the Fatburger brand in 2003. We believe that our management team has the track record and vision to leverage the FAT Brands platform to achieve significant future growth. In addition, through their holdings in FCCG, our senior executives will own a significant equity interest in the company following the consummation of this Offering, ensuring long-term commitment and alignment with our public shareholders. Our management team is complemented by an accomplished Board of Directors.

 

Growth Strategy

 

The principal elements of our growth strategy include:

 

 

Opportunistically Acquire New Brands. Our management platform was developed to cost-effectively and seamlessly scale with new restaurant concept acquisitions. In connection with the Buffalo’s Cafe acquisition, we have also garnered expertise and developed a track record of efficiently on-boarding new brands at minimal incremental corporate cost. The anticipated acquisition of the Ponderosa and Bonanza brands is a continuation of this growth strategy, which will remain a critical facet of our future plan. In particular, we have identified food categories that appeal to a broad international base of customers, targeting the chicken, pizza, coffee, sandwich and dessert segments for future growth. We have developed a strong and actionable pipeline of potential acquisition opportunities to achieve our objectives. We seek concepts with established, widely-recognized brands; steady cash flows; track records of long-term, good relationships with franchisees; sustainable operating performance; geographic diversification; and growth potential, both geographically and through co-branding initiatives across our portfolio. We approach acquisitions from a value perspective, targeting modest multiples of franchise-level cash flow valuations to ensure that acquisitions are immediately accretive to our earnings prior to anticipated synergies.

 

In addition to our pending acquisition of Ponderosa and Bonanza, as of the date of this Offering Circular we have entered into a letter of intent to acquire an additional restaurant concept with approximately 60 franchised stores, and are in discussions to acquire another restaurant concept with approximately 50 stores. However, there can be no assurance that we will enter definitive agreements based on such letter of intent or discussions, consummate such acquisitions or acquire any additional restaurant brands. Furthermore, our acquisitions are subject to a number of risks and uncertainties, including as to when, whether and to what extent the anticipated benefits and cost savings of a particular acquisition will be realized. See “Risk Factors.” 

     
 

Accelerate Same-Store Sales Growth. Same-store sales growth reflects the change in year-over-year sales for the comparable store base, which we define as the number of stores open for at least one full fiscal year. For each of the last five years, we have achieved positive annual same-store sales growth in our traditional domestic market, which represented approximately 69% of our royalty revenue in 2016. To maintain this performance, we have embraced a multi-faceted same-store sales growth strategy. We utilize customer feedback and closely analyze sales data to introduce, test and perfect existing and new menu items. In addition, we regularly utilize public relations and experiential marketing, which we leverage via social media and targeted digital advertising to expand the reach of our brands and to drive traffic to our stores. Furthermore, we have embraced emerging technology to develop our own brand-specific mobile applications, allowing guests to find restaurants, order online, earn rewards and join our e-marketing providers. We have also partnered with third-party delivery service providers, including UberEATS, Grub Hub, Amazon Restaurants and Postmates, which provide online and app-based delivery services and constitute a new sales channel for our existing locations. Finally, many of our franchisees are pursuing a robust capital expenditure program to remodel legacy restaurants and to opportunistically co-brand them with our Buffalo’s Express and / or Fat Bar concepts (serving beer, wine, spirits and cocktails).

 

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  Drive Store Growth through Co-Branding. We franchise co-branded Fatburger / Buffalo’s Express locations, giving franchisees the flexibility of offering multiple concepts, while sharing kitchen space, resulting in a higher average check (compared to stand-alone Fatburger locations). Franchisees benefit by serving a broader customer base, and we estimate that co-branding results in a 20%-30% increase in average unit volume compared to stand-alone locations with minimal incremental cost to franchisees. Our acquisition strategy reinforces the importance of co-branding, as we expect to offer each of the complementary brands that we acquire to our existing franchisees on a co-branded basis.
     
  Extend Brands into New Segments. We have a strong track record of extending our brands into new segments, and we believe that we have a significant opportunity to capture new markets by strategically adapting our concepts while reinforcing the brand identity. In addition to dramatically expanding the traditional Buffalo’s Cafe customer base through Fatburger / Buffalo’s Express co-branding, we have also begun evaluating opportunities to leverage the Buffalo’s brand by promoting Buffalo’s Express on a stand-alone basis. Furthermore, we also recently began the roll-out of Fat Bars (serving beer, wine, spirits and cocktails), which we are opportunistically introducing to select existing Fatburger locations on a modular basis. Similarly, post-acquisition, we plan to create smaller-scale, fast casual Ponderosa and Bonanza concepts, to drive new store growth, particularly internationally.
     
  Continue Expanding FAT Brands Internationally. We have a significant global presence, with international franchised stores in Bahrain, Canada, China, Egypt, Fiji, India, Indonesia, Iraq, Kuwait, Malaysia, Oman, Pakistan, Panama, Philippines, Qatar, Saudi Arabia, Taiwan, Tunisia, the United Arab Emirates, and the United Kingdom. We have also recently selected a local franchisee in Japan, where we expect to open new stores in the near future. We believe that the appeal of our Fresh, Authentic, and Tasty concepts is global, and we are targeting further penetration of Middle Eastern and Asian markets, particularly through leveraging the Buffalo’s and Ponderosa brands.
     
  Enhance Footprint in Existing Markets through Current Franchisee Networks. Including Ponderosa and Bonanza, we had 127 franchisees who collectively operated more than 300 restaurants as of March 26, 2017. As noted, our existing franchisees have made new store commitments of over 300 locations across our brands, and we anticipate that our current franchisees will open more than 30 new stores annually for at least the next four years. Beyond these existing commitments, we have found that many of our franchisees have grown their businesses over time, increasing the number of stores operated in their organizations and expanding their concept offerings across the FAT Brands portfolio of concepts.
     
  Attract New Franchisees in Existing and Unpenetrated Markets. In addition to the large pipeline of new store commitments from current franchisees, we believe the existing markets for Fatburger, Buffalo’s Cafe, Buffalo’s Express, and Ponderosa and Bonanza locations are far from saturated and can support a significant increase in units. Furthermore, new franchisee relationships represent the optimal way for our brands to penetrate geographic markets where we do not currently operate. In many cases, prospective franchisees have experience in and knowledge of markets where we are not currently active, facilitating a smoother brand introduction than we or our existing franchisees could achieve independently. We generate franchisee leads through various channels, including franchisee referrals, traditional and non-traditional franchise brokers and broker networks, franchise development advertising, and franchise trade shows and conventions.

 

 

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Summary Risk Factors

 

We are subject to a number of risks, including risks that may prevent us from achieving our business objectives or that may adversely affect our business, financial condition, results of operations, cash flows and prospects. You should carefully consider the risks discussed in the section entitled “Risk Factors,” including the following risks, before investing in our Common Stock:

 

  Our operating results and growth strategies are closely tied to the success and cooperation of our franchisees, and we have experienced volatility in unit economics of our franchisees in recent years.
     
  Our franchisees could take actions that could harm our business, and may not accurately report sales which drives our royalties.
     
  We may not open new domestic and international franchisee-owned restaurants on a timely basis.
     
  We may not successfully identify, recruit and contract with a sufficient number of qualified franchisees.
     
  We may not achieve our target development goals, aggressive development could cannibalize existing sales and new restaurants and acquisitions of new brands may not be successful or profitable.
     
  Our growth and financial results depend in part on the pending acquisition of Ponderosa and Bonanza, for which we lack history of operations under our ownership, and successfully identifying, closing and integrating future acquisitions of other brands.
     
  Food safety and foodborne illness concerns may have an adverse effect on our business.
     
  Our business may be adversely impacted by changes in consumer discretionary spending and general economic conditions in our franchisee markets.
     
  Our international operations subject us to operating and geographic risks and foreign currency risks that could negatively affect our business and financial results.
     
  We depend on key executive management.
     
  We expect that FCCG will remain a significant stockholder, whose interests may differ from those of our public stockholders.
     
  Given our expected market capitalization, there may be limited trading liquidity in our Common Stock.

 

Our Corporate Information

 

FAT Brands Inc., the issuer of the Common Stock in this Offering, was incorporated as a Delaware corporation on March 21, 2017. Our corporate headquarters are located at 9720 Wilshire Blvd., Suite 500, Beverly Hills, California 90212. Our main telephone number is (310) 402-0600. Our principal Internet website address is www.fatbrands.com. The information on our website is not incorporated by reference into, or a part of, this Offering Circular.

 

 

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Implications of Being an Emerging Growth Company

 

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include the following:

 

  we are required to have only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations disclosure;
     
  we are not required to engage an auditor to report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 (which we refer to as the “Sarbanes-Oxley Act”);
     
  we are not required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board (which we refer to as the “PCAOB”) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);
     
  we are not required to submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay,” “say-on-frequency” and “say-on-golden parachutes;” and
     
  we are not required to disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation.

 

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the consummation of this Offering or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenue, have more than $700 million in market value of our Common Stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period (as such amounts may be adjusted from time-to-time). We may choose to take advantage of some but not all of these reduced burdens. We have elected to adopt the reduced disclosure with respect to financial statements and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations disclosure. As a result of this election, the information that we provide stockholders may be different than you might get from other public companies in which you hold equity.

 

The JOBS Act permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period is irrevocable.

 

 

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The Offering

 

Issuer in this Offering FAT Brands Inc.
   
Securities offered Common Stock
   
Common Stock to be outstanding before this Offering

8,000,000 shares (1)

   
Common Stock to be outstanding after this Offering 10,000,000 shares, assuming the maximum amount of shares are sold (1)
   
Price per share $12.00
   

Maximum Offering amount

2,000,000 shares at $12.00 per share, or $24,000,000. There is no minimum number of shares that must be sold by in the Offering.

   

Proposed NASDAQ listing

We intend to apply to list our Common Stock on the Nasdaq Capital Market under the symbol “FAT.” Our Common Stock will not commence trading on NASDAQ until all of the following conditions are met: (i) the Offering is completed; and (ii) we have filed a post-qualification amendment to the Offering Statement and a registration statement on Form 8-A (“Form 8-A”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and such post-qualification amendment is qualified by the SEC and the Form 8-A has become effective. Pursuant to applicable rules under Regulation A, the Form 8-A will not become effective until the SEC qualifies the post-qualification amendment. We intend to file the post-qualification amendment and request its qualification immediately prior to the termination of the Offering in order that the Form 8-A may become effective as soon as practicable. Even if we meet the minimum requirements for listing on NASDAQ, we may wait before terminating the Offering and commencing the trading of our Common Stock on NASDAQ in order to raise additional proceeds. As a result, you may experience a delay between the closing of your purchase of shares of our Common Stock and the commencement of exchange trading of our Common Stock on NASDAQ.
   
Use of proceeds

We estimate that the net proceeds to us from this Offering, after deducting Selling Agent fees and estimated offering expenses, will be approximately $21,200,000, assuming the maximum amount of shares are sold.

 

We intend to use the net proceeds that we receive from this Offering as follows: (i) $10,550,000 to fund the acquisition of Ponderosa Franchising Company and Bonanza Restaurant Company, and (ii) $9,500,000 to repay a portion of the Related Party Debt owed to FCCG, which will use this payment to repay indebtedness that it previously incurred in acquiring Buffalo’s Franchise Concepts, Inc.. See “Use of Proceeds.” These amounts assume that at least $20,050,000 in net proceeds is raised in the Offering. If less than this amount is raised in the Offering, the repayment of Related Party Debt will be reduced accordingly, and FCCG intends to repay the balance of its indebtedness and fund the purchase of Homestyle Dining LLC from other sources.

 

 

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Controlled company

Following this Offering we will be a “controlled company” within the meaning of the corporate governance rules of NASDAQ. However we do not intend to rely on these exemptions and intend to have the same requisite independent directors and board committee structure as non-controlled companies. See “Management—Corporate Governance.”

   
Dividend policy We intend to distribute as dividends to holders of our Common Stock, on a quarterly basis, substantially all of our distributable earnings, net of applicable corporate taxes and amounts payable under the Tax Sharing Agreement, in excess of amounts determined by our Board of Directors to be necessary or appropriate to be retained in the Company to provide for the conduct of our businesses, to make appropriate investments in our businesses, and to comply with the terms of debt instruments that we may enter into, other agreements and applicable law. Our targeted quarterly dividend will be 4% of the price per share in this Offering, or $0.48 per share annually ($0.12 per share quarterly), which amount may be raised or lowered in the future without advance notice. See “Dividend Policy.”
   
Tax Sharing Agreement

We will enter into a Tax Sharing Agreement with FCCG that provides that FCCG will file consolidated federal, California and Oregon (and possibly other jurisdictions where revenue is generated, at FCCG’s election) income tax returns with us and our subsidiaries. We will pay to FCCG the amount that our tax liability would have been had we filed a separate return and not been consolidated with FCCG. To the extent our required payment exceeds our share of the actual consolidated income tax liability (which may occur due to the application of FCCG’s net operating loss carryforwards), we will be permitted to reimburse FCCG in cash or, at the election of a committee of our Board of Directors comprised solely of disinterested directors (directors not affiliated with or interested in FCCG), we may issue to FCCG an equivalent amount of our Common Stock in lieu of cash, valued at the fair market value of our Common Stock at the time of such payment. In addition, our inter-company credit of approximately $11,660,000 due from FCCG will be applied first to reduce such excess income tax payment obligation to FCCG under the Tax Sharing Agreement. See “Certain Relationships and Related Party Transactions—Tax Sharing Agreement.”

   
Risk factors Investing in shares of our Common Stock involves a high degree of risk. See “Risk Factors” beginning on page 14 of this Offering Circular for a discussion of factors you should carefully consider before investing in shares of our Common Stock.
   

Proposed NASDAQ symbol

We intend to apply to list the shares of our Common Stock on the Nasdaq Capital Market under the symbol “FAT.”

 

(1) Excludes:

 

  1,000,000 shares available for future issuance under our 2017 Omnibus Equity Incentive Plan, and stock options to purchase 367,500 shares which we expect to issue under the Plan to directors and employees upon consummation of this Offering.  
       
  up to 100,000 shares issuable upon exercise of the warrants to be issued to the Selling Agent in connection with this Offering, exercisable at $13.20 per share.  

 

 

 9 
   

 

 

Summary Historical and Pro Forma Consolidated Financial Data

 

The following tables present the summary historical financial data for Fatburger North America, Inc. and Buffalo’s Franchise Concepts, Inc.. Fatburger North America, Inc. and Buffalo’s Franchise Concepts, Inc. were historically under common control of FCCG and are the predecessors of the issuer, FAT Brands Inc., for financial reporting purposes.

 

The summary statement of operations data for each of the 13 weeks ended March 26, 2017 and March 27, 2016, and the summary balance sheet data as of March 26, 2017 are derived from the unaudited financial statements of Fatburger North America, Inc. and the unaudited financial statements of Buffalo’s Franchise Concepts, Inc. contained herein. The summary statement of operations data for each of the years in the two-year period ended December 25, 2016 and December 27, 2015, and the summary balance sheet data as of December 25, 2016 and December 27, 2015 are derived from the audited financial statements of Fatburger North America, Inc. and the audited financial statements of Buffalo’s Franchise Concepts, Inc. contained herein. The historical financial data of Fatburger North America, Inc. and Buffalo’s Franchise Concepts, Inc. have been consolidated on a pro forma basis through mathematical addition to show how FAT Brands Inc. would have performed as an operating entity for the periods presented. In the opinion of our management, such financial data reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation financial position and results of operations for those periods.

 

The summary unaudited pro forma financial data for the fiscal year ended December 25, 2016 gives effect to (i) the Reorganization Transactions, (ii) the Ponderosa Acquisition (defined below in “The Reorganization Transactions”), and (iii) the consummation of this Offering as if all such transactions had occurred on December 25, 2016. The unaudited pro forma consolidated financial information includes various estimates which are subject to material change and may not be indicative of what our operations or financial position would have been had this Offering and related transactions taken place on the dates indicated, or that may be expected to occur in the future. See “Unaudited Pro Forma Consolidated Financial Information” for a complete description of the adjustments and assumptions underlying the summary unaudited pro forma consolidated financial data.

 

The results of operations for the periods presented below are not necessarily indicative of the results to be expected for any future period and the results for any interim period are not necessarily indicative of the results that may be expected for a full fiscal year. The information set forth below should be read together with the “Selected Historical Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the accompanying notes appearing elsewhere in this Offering Circular.

 

 

 10 
   

 

 

(In thousands, except net income per share data)

 

   13 weeks ended March 26, 2017   13 weeks ended March 27, 2016 
   FBNA   BFCI   Combined   FBNA   BFCI   Combined 
                         
Statement of operations data:                              
                               
Revenues                              
Royalties  $1,153   $308   $1,461   $1,210   $352   $1,562 
Sales of franchises   795    105    900    775    130    905 
Management fee   15    -    15    29    -    29 
Total revenues   1,963    413    2,376    2,014    482    2,496 
                               
Selling, general and administrative expenses   580    140    720    730    176    906 
                               
Income from operations   1,383    273    1,656    1,284    306    1,590 
                               
Other income (expense)             -              - 
Interest income (expense)   -    -    -    -    -    - 
Other income (expense)   1    -    1    (24)   36    12 
Total other income (expense)   1    -    1    (24)   36    12 
                               
Income before income tax expense   1,384    273    1,657    1,260    342    1,602 
                               
Income tax expense   497    96    593    496    117    613 
                               
Net income  $887   $177   $1,064   $764   $225   $989 
                               
EBITDA (1)  $1,384   $273   $1,657   $1,260   $342   $1,602 
                               
Pro forma net income per share data (unaudited) (2)                              
Pro forma weighted average shares of Common Stock outstanding:                              
Basic   10,000    10,000    10,000    10,000    10,000    10,000 
Diluted   10,000    10,000    10,000    10,000    10,000    10,000 
Pro forma net income available to Common Stock per share:                              
Basic  $0.09   $0.02   $0.11   $0.08   $0.02   $0.10 
Diluted  $0.09   $0.02   $0.11   $0.08   $0.02   $0.10 

 

(1) EBITDA is defined as earnings before interest, taxes, depreciation and amortization. We use the term EBITDA, as opposed to income from operations, as it is widely used by analysts, investors and other interested parties to evaluate companies in our industry. We believe that EBITDA is an appropriate measure of operating performance because it eliminates the impact of expenses that do not relate to business performance. EBITDA is not a measure of our financial performance or liquidity that is determined in accordance with generally accepted accounting principles (“GAAP”), and should not be considered as an alternative to net income (loss) as a measure of financial performance or cash flows from operations as measures of liquidity, or any other performance measure derived in accordance with GAAP.

 

 

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A reconciliation of net income to EBITDA is set forth below:

 

    13 weeks ended March 26, 2017     13 weeks ended March 27, 2016
    FBNA     BFCI     Combined     FBNA     BFCI     Combined
                                   
(in thousands)                                              
                                               
Net income   $ 887     $ 177     $ 1,044     $ 764     $ 225     $ 989
Depreciation expense     -       -       -       -       -       -
Interest income (expense)     -       -       -       -       -       -
Income tax expense     497       96       593       496       117       613
EBITDA   $ 1,384     $ 273     $ 1,657     $ 1,260     $ 342     $ 1,602

 

(2) The unaudited pro forma net income data give effect to the Reorganization Transactions, the Ponderosa Acquisition, and the sale of shares of our Common Stock by us in this Offering at the initial public offering price of $ per share and the use of proceeds contemplated hereby. For a detailed presentation of the unaudited pro forma information, including a description of the transactions and assumptions underlying the pro forma adjustments giving rise to these results, see the section entitled “Unaudited Pro Forma Consolidated Financial Information” included elsewhere in this Offering Circular.

 

(In thousands)

 

    March 26, 2017
    FBNA   BFCI   Combined
            (unaudited)
Combined balance sheet data:                        
                         
Cash     -       -       -  
Total assets     13,863       8,245       22,108  
Total liabilities     5,649       1,181       6,830  
Total stockholders’ equity     8,214       7,064       15,278  

 

 

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(In thousands, except net income (loss) per share data)

 

   Fiscal year ended
December 25, 2016
   Fiscal year ended
December 27, 2015
   Fiscal year ended
December 28, 2014
 
   FBNA   BFCI   Combined   FBNA   BFCI   Combined   FBNA   BFCI   Combined 
           (unaudited)           (unaudited)           (unaudited) 
Statement of operations data:                                    
                                     
Revenues                                             
Royalties  $4,632   $1,349   $5,981   $5,144   $1,317   $6,461   $5,350   $1,271   $6,621 
Sales of franchises   3,750    255    4,005    2,306    706    3,012    2,353    115    2,468 
Management fee   75        75    83        83    24        24 
Total revenues   8,457    1,604    10,061    7,533    2,023    9,556    7,727    1,386    9,113 
                                              
Selling, general and administrative expenses   2,932    663    3,595    2,590    732    3,322    2,646    834    3,480 
                                              
Income from operations   5,525    941    6,466    4,943    1,291    6,234    5,081    552    5,633 
                                              
Other income (expense)                                          
Interest income (expense)                               (5)   (5)
Other income (expense)       36    36        85    85        61    61 
Total other income (expense)       36    36        85    85        56    56 
                                              
Income before income tax expense   5,525    977    6,502    4,943    1,376    6,319    5,081    608    5,689 
                                              
Income tax expense (benefit)   1,979    319    2,298    2,283    528    2,811    2,145    (15)   2,130 
                                              
Net income  $3,546   $658   $4,204   $2,660   $848   $3,508   $2,936   $623   $3,559 
                                              
EBITDA (1)  $5,525   $977   $6,502   $4,943   $1,376   $6,319   $5,081   $613   $5,694 
                                              
Pro forma net income per share data (unaudited) (2)                                             
Pro forma weighted average shares of Common Stock outstanding:                                             
Basic   10,000    10,000    10,000    10,000    10,000    10,000    10,000    10,000    10,000 
Diluted   10,000    10,000    10,000    10,000    10,000    10,000    10,000    10,000    10,000 
Pro forma net income available to Common Stock per share:                                             
Basic  $0.35   $0.07   $0.42   $0.27   $0.08   $0.35   $0.29   $0.06   $0.35 
Diluted  $0.35   $0.07   $0.42   $0.27   $0.08   $0.35   $0.29   $0.06   $0.35 

 

(1) EBITDA is defined as earnings before interest, taxes, depreciation and amortization. We use the term EBITDA, as opposed to income from operations, as it is widely used by analysts, investors and other interested parties to evaluate companies in our industry. We believe that EBITDA is an appropriate measure of operating performance because it eliminates the impact of expenses that do not relate to business performance. EBITDA is not a GAAP measure of our financial performance or liquidity and should not be considered as an alternative to net income (loss) as a measure of financial performance or cash flows from operations as measures of liquidity, or any other performance measure derived in accordance with GAAP.

 

A reconciliation of net income to EBITDA is set forth below:

 

    Fiscal year ended December 25, 2016     Fiscal year ended December 27, 2015  
    FBNA     BFCI     Combined     FBNA     BFCI     Combined  
                                     
(in thousands)                                                
                                                 
Net income   $ 3,546     $ 658     $ 4,204     $ 2,660     $ 848     $ 3,508  
Depreciation expense     -                                          
Interest income (expense)     -                                          
Income tax expense     1,979       317       2,298       2,283       528       2,811  
EBITDA   $ 5,525     $ 977     $ 6,502     $ 4,943     $ 1,376     $ 6,319  

 

(2) The unaudited pro forma net income data give effect to the Reorganization Transactions, the Ponderosa Acquisition, and the sale of shares of our Common Stock by us in this Offering at the initial public offering price of $ per share and the use of proceeds contemplated hereby. For a detailed presentation of the unaudited pro forma information, including a description of the transactions and assumptions underlying the pro forma adjustments giving rise to these results, see the section entitled “Unaudited Pro Forma Consolidated Financial Information” included elsewhere in this Offering Circular.

 

(In thousands)

 

    Fiscal year ended
December 25, 2016
    Fiscal year ended
December 27, 2015
    Fiscal year ended
December 25, 2014
    FBNA     BFCI     Combined     FBNA     BFCI     Combined     FBNA     BFCI     Combined
                (unaudited)                 (unaudited)                 (unaudited)
Combined balance sheet data:                                                                      
                                                                       
Cash   $ -     $ -     $ -     $ 211     $ 41     $ 252     $ -     $ -     $ -
Total assets     14,189       8,179       22,368       15,205       7,771       22,976       19,032       8,041       27,073
Total liabilities     6,362       1,192       7,554       9,225       1,242       10,467       8,711       1,961       10,672
Total stockholders’ equity     7,827       6,987       14,814       5,981       6,529       12,510       10,321       6,080       16,401

 

 

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RISK FACTORS

 

You should carefully consider the risks described below, together with all of the other information included in this Offering Circular, before making an investment decision. Our business, financial condition, results of operations, cash flows and prospects could be materially and adversely affected by any of these risks or uncertainties. In that case, the trading price of our Common Stock could decline, and you may lose all or part of your investment. You should carefully review the risks described below as they identify important factors that could cause our actual results to differ materially from our forward looking statements and historical trends.

 

Risks Related to Our Business and Industry

 

Our operating and financial results and growth strategies are closely tied to the success of our franchisees.

 

Substantially all of our restaurants are operated by our franchisees, which makes us dependent on the financial success and cooperation of our franchisees. We have limited control over how our franchisees’ businesses are run, and the inability of franchisees to operate successfully could adversely affect our operating and financial results through decreased royalty payments. If our franchisees incur too much debt, if their operating expenses or commodity prices increase or if economic or sales trends deteriorate such that they are unable to operate profitably or repay existing debt, it could result in their financial distress, including insolvency or bankruptcy. If a significant franchisee or a significant number of our franchisees become financially distressed, our operating and financial results could be impacted through reduced or delayed royalty payments. Our success also depends on the willingness and ability of our franchisees to implement major initiatives, which may include financial investment. Our franchisees may be unable to successfully implement strategies that we believe are necessary for their further growth, which in turn may harm the growth prospects and financial condition of the company. Additionally, the failure of our franchisees to focus on the fundamentals of restaurant operations, such as quality service and cleanliness (even if such failures do not rise to the level of breaching the related franchise documents), could have a negative impact on our business.

 

Our franchisees could take actions that could harm our business and may not accurately report sales.

 

Our franchisees are contractually obligated to operate their restaurants in accordance with the operations, safety, and health standards set forth in our agreements with them and applicable laws. However, although we will attempt to properly train and support all of our franchisees, franchisees are independent third parties whom we do not control. The franchisees own, operate, and oversee the daily operations of their restaurants, and their employees are not our employees. Accordingly, their actions are outside of our control. Although we have developed criteria to evaluate and screen prospective franchisees, we cannot be certain that our franchisees will have the business acumen or financial resources necessary to operate successful franchises at their approved locations, and state franchise laws may limit our ability to terminate or not renew these franchise agreements. Moreover, despite our training, support and monitoring, franchisees may not successfully operate restaurants in a manner consistent with our standards and requirements, or may not hire and adequately train qualified managers and other restaurant personnel. The failure of our franchisees to operate their franchises in accordance with our standards or applicable law, actions taken by their employees or a negative publicity event at one of our franchised restaurants or involving one of our franchisees could have a material adverse effect on our reputation, our brands, our ability to attract prospective franchisees, our company-owned restaurants, and our business, financial condition or results of operations.

 

Franchisees typically use a point of sale, or POS, cash register system to record all sales transactions at the restaurant. We require franchisees to use a particular brand or model of hardware or software components for their restaurant system. Currently, franchisees report sales manually and electronically, but we do not have the ability to verify all sales data electronically by accessing their POS cash register systems. We have the right under our franchise agreement to audit franchisees to verify sales information provided to us, and we have the ability to indirectly verify sales based on purchasing information. However, franchisees may underreport sales, which would reduce royalty income otherwise payable to us and adversely affect our operating and financial results.

 

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If we fail to identify, recruit and contract with a sufficient number of qualified franchisees, our ability to open new franchised restaurants and increase our revenues could be materially adversely affected.

 

The opening of additional franchised restaurants depends, in part, upon the availability of prospective franchisees who meet our criteria. Most of our franchisees open and operate multiple restaurants, and our growth strategy requires us to identify, recruit and contract with a significant number of new franchisees each year. We may not be able to identify, recruit or contract with suitable franchisees in our target markets on a timely basis or at all. In addition, our franchisees may not have access to the financial or management resources that they need to open the restaurants contemplated by their agreements with us, or they may elect to cease restaurant development for other reasons. If we are unable to recruit suitable franchisees or if franchisees are unable or unwilling to open new restaurants as planned, our growth may be slower than anticipated, which could materially adversely affect our ability to increase our revenues and materially adversely affect our business, financial condition and results of operations.

 

If we fail to open new domestic and international franchisee-owned restaurants on a timely basis, our ability to increase our revenues could be materially adversely affected.

 

A significant component of our growth strategy includes the opening of new domestic and international franchised restaurants. Our franchisees opened 14 new restaurants in 2016. Our franchisees face many challenges associated with opening new restaurants, including:

 

  identification and availability of suitable restaurant locations with the appropriate size, visibility, traffic patterns, local residential neighborhoods, local retail and business attractions and infrastructure that will drive high levels of customer traffic and sales per restaurant;
     
  competition with other restaurants and retail concepts for potential restaurant sites and anticipated commercial, residential and infrastructure development near new or potential restaurants;
     
  ability to negotiate acceptable lease arrangements;
     
  availability of financing and ability to negotiate acceptable financing terms;
     
  recruiting, hiring and training of qualified personnel;
     
  construction and development cost management;
     
  completing their construction activities on a timely basis;
     
  obtaining all necessary governmental licenses, permits and approvals and complying with local, state and federal laws and regulations to open, construct or remodel and operate our franchised restaurants;
     
  unforeseen engineering or environmental problems with the leased premises;
     
  avoiding the impact of adverse weather during the construction period; and
     
  other unanticipated increases in costs, delays or cost overruns.

 

As a result of these challenges, our franchisees may not be able to open new restaurants as quickly as planned or at all. Our franchisees have experienced, and expect to continue to experience, delays in restaurant openings from time to time and have abandoned plans to open restaurants in various markets on occasion. Any delays or failures to open new restaurants by our franchisees could materially and adversely affect our growth strategy and our results of operations.

 

 15 
   

 

We may experience difficulties in integrating Ponderosa and Bonanza with our existing business.

 

The pending acquisition of Ponderosa and Bonanza involves the integration of these brands and their related companies with our existing business and financial accounting and reporting systems. The difficulties of integration include:

 

  coordinating and consolidating geographically separated systems and facilities;
     
  integrating the management and personnel of the acquired brands, maintaining employee morale and retaining key employees;
     
  implementing our management information systems and financial accounting and reporting systems;
     
  establishing and maintaining effective internal control over financial reporting; and
     
  implementing operational procedures and disciplines to control costs and increase profitability.

 

The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of our business and that of our Ponderosa and Bonanza, and the loss of key personnel. The diversion of management’s attention and any delays or difficulties encountered in connection with the acquisition and the integration of the Ponderosa and Bonanza operations could have an adverse effect on our business, results of operations and financial condition after the acquisition.

 

Achieving the anticipated benefits of the acquisition will depend in part upon whether we can integrate Ponderosa and Bonanza in an efficient and effective manner. We may not accomplish this integration process smoothly or successfully. If management is unable to successfully integrate the acquired brands, the anticipated benefits of the acquisition may not be realized.

 

Our strategy includes pursuing opportunistic acquisitions of additional brands, and we may not find suitable acquisition candidates or successfully operate or integrate any brands that we may acquire.

 

As part of our strategy, we intend to opportunistically acquire new brands and restaurant concepts. Although we believe that opportunities for future acquisitions may be available from time to time, competition for acquisition candidates may exist or increase in the future. Consequently, there may be fewer acquisition opportunities available to us as well as higher acquisition prices. There can be no assurance that we will be able to identify, acquire, manage or successfully integrate additional brands or restaurant concepts without substantial costs, delays or operational or financial problems. In the event we are able to acquire additional brands or restaurant concepts, the integration and operation of such acquisitions may place significant demands on our management, which could adversely affect our ability to manage our existing restaurants. We may be required to obtain additional financing to fund future acquisitions. There can be no assurance that we will be able to obtain additional financing on acceptable terms or at all.

 

We may not achieve our target development goals and the addition of new franchised restaurants may not be profitable.

 

Our growth strategy depends in part on our ability to add franchisees and our franchisees’ ability to increase our net restaurant count in domestic and foreign markets. The successful development and retention of new restaurants depends in large part on our ability to attract franchisee investment commitments and the ability of our franchisees to open new restaurants and operate these restaurants profitably. We cannot guarantee that we or our current or future franchisees will be able to achieve our expansion goals or that new restaurants will be operated profitably. Further, there is no assurance that any new restaurant will produce operating results similar to those of our franchisees’ existing restaurants.

 

Expansion into target markets could also be affected by our franchisees’ ability to obtain financing to construct and open new restaurants. If it becomes more difficult or more expensive for our franchisees to obtain financing to develop new restaurants, the expected growth of our system could slow and our future revenues and operating cash flows could be adversely impacted.

 

 16 
   

 

Opening new franchise restaurants in existing markets and aggressive development could cannibalize existing sales and may negatively affect sales at existing franchised restaurants.

 

We intend to continue opening new franchised restaurants in our existing markets as a core part of our growth strategy. Expansion in existing markets may be affected by local economic and market conditions. Further, the customer target area of our franchisees’ restaurants varies by location, depending on a number of factors, including population density, other local retail and business attractions, area demographics and geography. As a result, the opening of a new restaurant in or near markets in which our franchisees’ restaurants already exist could adversely affect the sales of these existing franchised restaurants. Our franchisees may selectively open new restaurants in and around areas of existing franchised restaurants. Sales cannibalization between restaurants may become significant in the future as we continue to expand our operations and could affect sales growth, which could, in turn, materially adversely affect our business, financial condition or results of operations. There can be no assurance that sales cannibalization will not occur or become more significant in the future as we increase our presence in existing markets.

 

The number of new franchised restaurants that actually open in the future may differ materially from the number of signed commitments from potential new franchisees.

 

The number of new franchised restaurants that actually open in the future may differ materially from the number of signed commitments from potential new franchisees. Historically, a portion of our commitments sold have not ultimately opened as new franchised restaurants. The historic conversion rate of signed commitments to new franchised locations may not be indicative of the conversion rates we will experience in the future and the total number of new franchised restaurants actually opened in the future may differ materially from the number of signed commitments disclosed at any point in time.

 

Termination of development agreements with certain franchisees could adversely impact our revenues.

 

We enter into development agreements with certain franchisees that plan to open multiple restaurants in a designated area. These franchisees are granted certain rights with respect to specified territories, and at their discretion, these franchisees may open more restaurants than specified in their agreements. In fiscal years 2016, 2015 and 2014 we derived 39.8%, 31.5% and 27.1%, respectively, of our franchise and development fees from development agreements. The termination of development agreements with a franchisee or a lack of expansion by these franchisees could result in the delay of the development of franchised restaurants, discontinuation or an interruption in the operation of one of our brands in a particular market or markets. We may not be able to find another operator to resume development activities in such market or markets. While termination of development agreements may result in a short-term recognition of forfeited deposits as revenue, any such delay, discontinuation or interruption would result in a delay in, or loss of, long-term royalty income to us by way of reduced sales and could materially and adversely affect our business, financial condition or results of operations.

 

Our brands may be limited or diluted through franchisee and third party activity.

 

Although we monitor and regulate franchisee activities through our franchise agreements, franchisees or other third parties may refer to or make statements about our brands that do not make proper use of our trademarks or required designations, that improperly alter trademarks or branding, or that are critical of our brands or place our brands in a context that may tarnish our reputation. This may result in dilution of or harm to our intellectual property or the value of our brands. Franchisee noncompliance with the terms and conditions of our franchise agreements may reduce the overall goodwill of our brands, whether through the failure to meet health and safety standards, engage in quality control or maintain product consistency, or through the participation in improper or objectionable business practices. Moreover, unauthorized third parties may use our intellectual property to trade on the goodwill of our brands, resulting in consumer confusion or dilution. Any reduction of our brands’ goodwill, consumer confusion, or dilution is likely to impact sales, and could materially and adversely impact our business and results of operations.

 

 17 
   

 

Our success depends substantially on our corporate reputation and on the value and perception of our brands.

 

Our success depends in large part upon our and our franchisees’ ability to maintain and enhance the value of our brands and our customers’ loyalty to our brands. Brand value is based in part on consumer perceptions on a variety of subjective qualities. Business incidents, whether isolated or recurring, and whether originating from us, franchisees, competitors, suppliers or distributors, can significantly reduce brand value and consumer trust, particularly if the incidents receive considerable publicity or result in litigation. For example, our brands could be damaged by claims or perceptions about the quality or safety of our products or the quality or reputation of our suppliers, distributors or franchisees, regardless of whether such claims or perceptions are true. Similarly, entities in our supply chain may engage in conduct, including alleged human rights abuses or environmental wrongdoing, and any such conduct could damage our or our brands’ reputations. Any such incidents (even if resulting from actions of a competitor or franchisee) could cause a decline directly or indirectly in consumer confidence in, or the perception of, our brands and/or our products and reduce consumer demand for our products, which would likely result in lower revenues and profits. Additionally, our corporate reputation could suffer from a real or perceived failure of corporate governance or misconduct by a company officer, or an employee or representative of us or a franchisee.

 

Our success depends in part upon effective advertising and marketing campaigns, which may not be successful, and franchisee support of such advertising and marketing campaigns.

 

We believe our brands are critical to our business. We expend resources in our marketing efforts using a variety of media, including social media. We expect to continue to conduct brand awareness programs and customer initiatives to attract and retain customers. Additionally, some of our competitors have greater financial resources, which enable them to spend significantly more on marketing and advertising than us. Should our competitors increase spending on marketing and advertising, or should our advertising and promotions be less effective than our competitors, our business, financial condition and results of operations could be materially adversely affected.

 

The support of our franchisees is critical for the success of our advertising and marketing campaigns we seek to undertake, and the successful execution of these campaigns will depend on our ability to maintain alignment with our franchisees. Our franchisees are required to spend approximately 1%-3% of net sales directly on local advertising or contribute to a local fund managed by franchisees in certain market areas to fund the purchase of advertising media. Our franchisees are also required to contribute 1% of their net sales to a national fund to support the development of new products, brand development and national marketing programs. In addition, we, our franchisees and other third parties have contributed additional advertising funds in the past. While we maintain control over advertising and marketing materials and can mandate certain strategic initiatives pursuant to our franchise agreements, we need the active support of our franchisees if the implementation of these initiatives is to be successful. Additional advertising funds are not contractually required, and we, our franchisees and other third parties may choose to discontinue contributing additional funds in the future. Any significant decreases in our advertising and marketing funds or financial support for advertising activities could significantly curtail our marketing efforts, which may in turn materially adversely affect our business, financial condition and results of operations.

 

Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could adversely impact our business.

 

In recent years, there has been a marked increase in the use of social media platforms, including blogs, chat platforms, social media websites, and other forms of Internet based communications which allow individuals access to a broad audience of consumers and other interested persons. The rising popularity of social media and other consumer oriented technologies has increased the speed and accessibility of information dissemination. Many social media platforms immediately publish the content their subscribers and participants post, often without filters or checks on accuracy of the content posted. Information posted on such platforms at any time may be adverse to our interests and/or may be inaccurate. The dissemination of information via social media could harm our business, reputation, financial condition, and results of operations, regardless of the information’s accuracy. The damage may be immediate without affording us an opportunity for redress or correction.

 

In addition, social media is frequently used to communicate with our customers and the public in general. Failure by us to use social media effectively or appropriately, particularly as compared to our brands’ respective competitors, could lead to a decline in brand value, customer visits and revenue. Other risks associated with the use of social media include improper disclosure of proprietary information, negative comments about our brands, exposure of personally identifiable information, fraud, hoaxes or malicious dissemination of false information. The inappropriate use of social media by our customers or employees could increase our costs, lead to litigation or result in negative publicity that could damage our reputation and adversely affect our results of operations.

 

 18 
   

 

Negative publicity relating to one of our franchised restaurants could reduce sales at some or all of our other franchised restaurants.

 

Our success is dependent in part upon our ability to maintain and enhance the value of our brands, consumers’ connection to our brands and positive relationships with our franchisees. We may, from time to time, be faced with negative publicity relating to food quality, public health concerns, restaurant facilities, customer complaints or litigation alleging illness or injury, health inspection scores, integrity of our franchisees or their suppliers’ food processing, employee relationships or other matters, regardless of whether the allegations are valid or whether we are held to be responsible. The negative impact of adverse publicity relating to one franchised restaurant may extend far beyond that restaurant or franchisee involved to affect some or all of our other franchised restaurants. The risk of negative publicity is particularly great with respect to our franchised restaurants because we are limited in the manner in which we can regulate them, especially on a real-time basis. The considerable expansion in the use of social media over recent years can further amplify any negative publicity, and do so very quickly, that could be generated by such incidents. A similar risk exists with respect to unrelated food service businesses, if consumers associate those businesses with our own operations. Additionally, employee claims against us based on, among other things, wage and hour violations, discrimination, harassment or wrongful termination may also create negative publicity that could adversely affect us and divert our financial and management resources that would otherwise be used to benefit the future performance of our operations. A significant increase in the number of these claims or an increase in the number of successful claims would have a material adverse effect on our business, financial condition and results of operations. Consumer demand for our products and our brands’ value could diminish significantly if any such incidents or other matters create negative publicity or otherwise erode consumer confidence in us or our products, which would likely result in lower sales and could have a material adverse effect on our business, financial condition and results of operations.

 

Failure to protect our service marks or other intellectual property could harm our business.

 

We regard our Fatburger®, Buffalo’s Cafe®, Ponderosa® and Bonanza® service marks, and other service marks and trademarks related to our franchise restaurant businesses, as having significant value and being important to our marketing efforts. We rely on a combination of protections provided by contracts, copyrights, patents, trademarks, service marks and other common law rights, such as trade secret and unfair competition laws, to protect our franchised restaurants and services from infringement. We have registered certain trademarks and service marks in the U.S. and foreign jurisdictions. However, from time to time we become aware of names and marks identical or confusingly similar to our service marks being used by other persons. Although our policy is to oppose any such infringement, further or unknown unauthorized uses or other misappropriation of our trademarks or service marks could diminish the value of our brands and adversely affect our business. In addition, effective intellectual property protection may not be available in every country in which our franchisees have, or intend to open or franchise, a restaurant. There can be no assurance that these protections will be adequate and defending or enforcing our service marks and other intellectual property could result in the expenditure of significant resources. We may also face claims of infringement that could interfere with the use of the proprietary knowhow, concepts, recipes, or trade secrets used in our business. Defending against such claims may be costly, and we may be prohibited from using such proprietary information in the future or forced to pay damages, royalties, or other fees for using such proprietary information, any of which could negatively affect our business, reputation, financial condition, and results of operations.

 

If our franchisees are unable to protect their customers’ credit card data and other personal information, our franchisees could be exposed to data loss, litigation, and liability, and our reputation could be significantly harmed.

 

Privacy protection is increasingly demanding, and the use of electronic payment methods and collection of other personal information expose our franchisees to increased risk of privacy and/or security breaches as well as other risks. The majority of our franchisees’ restaurant sales are by credit or debit cards. In connection with credit or debit card transactions in-restaurant, our franchisees collect and transmit confidential information by way of secure private retail networks. Additionally, our franchisees collect and store personal information from individuals, including their customers and employees.

 

 19 
   

 

Although our franchisees use secure private networks to transmit confidential information and debit card sales, our security measures and those of technology vendors may not effectively prohibit others from obtaining improper access to this information. The techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and are often difficult to detect for long periods of time, which may cause a breach to go undetected for an extensive period of time. Advances in computer and software capabilities, new tools, and other developments may increase the risk of such a breach. Further, the systems currently used for transmission and approval of electronic payment transactions, and the technology utilized in electronic payment themselves, all of which can put electronic payment at risk, are determined and controlled by the payment card industry, not by us, through enforcement of compliance with the Payment Card Industry-Data Security Standards. Our franchisees must abide by the Payment Card Industry-Data Security Standards, as modified from time to time, in order to accept electronic payment transactions. Furthermore, the payment card industry is requiring vendors to become compatible with smart chip technology for payment cards, referred to as EMV-Compliant, or else bear full responsibility for certain fraud losses, referred to as the EMV Liability Shift, which could adversely affect our business. To become EMV-Compliant, merchants must utilize EMV-Compliant payment card terminals at the point of sale and also obtain a variety of certifications. The EMV Liability Shift became effective on October 1, 2015.

 

If a person is able to circumvent our franchisees’ security measures or those of third parties, he or she could destroy or steal valuable information or disrupt our operations. Our franchisees may become subject to claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, and our franchisees may also be subject to lawsuits or other proceedings relating to these types of incidents. Any such claim or proceeding could cause our franchisees to incur significant unplanned expenses, which could have an adverse impact on our financial condition, results of operations and cash flows. Further, adverse publicity resulting from these allegations could significantly harm our reputation and may have a material adverse effect on us and our franchisees’ business.

 

We and our franchisees rely on computer systems to process transactions and manage our business, and a disruption or a failure of such systems or technology could harm our ability to effectively manage our business.

 

Network and information technology systems are integral to our business. We utilize various computer systems, including our franchisee reporting system, by which our franchisees report their weekly sales and pay their corresponding royalty fees and required advertising fund contributions. When sales are reported by a franchisee, a withdrawal for the authorized amount is initiated from the franchisee’s bank on a set date each week based on gross sales during the week ended the prior Sunday. This system is critical to our ability to accurately track sales and compute royalties and advertising fund contributions and receive timely payments due from our franchisees. Our operations depend upon our ability to protect our computer equipment and systems against damage from physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, viruses, worms and other disruptive problems. Any damage or failure of our computer systems or network infrastructure that causes an interruption in our operations could have a material adverse effect on our business and subject us to litigation or actions by regulatory authorities. Despite the implementation of protective measures, our systems are subject to damage and/or interruption as a result of power outages, computer and network failures, computer viruses and other disruptive software, security breaches, catastrophic events, and improper usage by employees. Such events could result in a material disruption in operations, a need for a costly repair, upgrade or replacement of systems, or a decrease in, or in the collection of, royalties and advertising fund contributions paid to us by our franchisees. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability which could materially affect our results of operations. It is also critical that we establish and maintain certain licensing and software agreements for the software we use in our day-to-day operations. A failure to procure or maintain these licenses could have a material adverse effect on our business operations.

 

 20 
   

 

We may engage in litigation with our franchisees.

 

Although we believe we generally enjoy a positive working relationship with the vast majority of our franchisees, the nature of the franchisor-franchisee relationship may give rise to litigation with our franchisees. In the ordinary course of business, we are the subject of complaints or litigation from franchisees, usually related to alleged breaches of contract or wrongful termination under the franchise arrangements. We may also engage in future litigation with franchisees to enforce the terms of our franchise agreements and compliance with our brand standards as determined necessary to protect our brands, the consistency of our products and the customer experience. We may also engage in future litigation with franchisees to enforce our contractual indemnification rights if we are brought into a matter involving a third party due to the franchisee’s alleged acts or omissions. In addition, we may be subject to claims by our franchisees relating to our franchise disclosure document, including claims based on financial information contained in our franchise disclosure document. Engaging in such litigation may be costly and time-consuming and may distract management and materially adversely affect our relationships with franchisees and our ability to attract new franchisees. Any negative outcome of these or any other claims could materially adversely affect our results of operations as well as our ability to expand our franchise system and may damage our reputation and brands. Furthermore, existing and future franchise-related legislation could subject us to additional litigation risk in the event we terminate or fail to renew a franchise relationship.

 

The retail food industry in which we operate is highly competitive.

 

The retail food industry in which we operate is highly competitive with respect to price and quality of food products, new product development, advertising levels and promotional initiatives, customer service, reputation, restaurant location, and attractiveness and maintenance of properties. If consumer or dietary preferences change, if our marketing efforts are unsuccessful, or if our franchisees’ restaurants are unable to compete successfully with other retail food outlets in new and existing markets, our business could be adversely affected. We also face growing competition as a result of convergence in grocery, convenience, deli and restaurant services, including the Offering by the grocery industry of convenient meals, including pizzas and entrees with side dishes. Competition from delivery aggregators and other food delivery services has also increased in recent years, particularly in urbanized areas. Increased competition could have an adverse effect on our sales, profitability or development plans, which could harm our financial condition and operating results.

 

Shortages or interruptions in the availability and delivery of food and other supplies may increase costs or reduce revenues.

 

The food products sold by our franchisees are sourced from a variety of domestic and international suppliers. We, along with our franchisees, are also dependent upon third parties to make frequent deliveries of food products and supplies that meet our specifications at competitive prices. Shortages or interruptions in the supply of food items and other supplies to our franchisees’ restaurants could adversely affect the availability, quality and cost of items we use and the operations of our franchisees’ restaurants. Such shortages or disruptions could be caused by inclement weather, natural disasters, increased demand, problems in production or distribution, restrictions on imports or exports, the inability of vendors to obtain credit, political instability in the countries in which suppliers and distributors are located, the financial instability of suppliers and distributors, suppliers’ or distributors’ failure to meet our standards, product quality issues, inflation, the price of gasoline, other factors relating to the suppliers and distributors and the countries in which they are located, food safety warnings or advisories or the prospect of such pronouncements, the cancellation of supply or distribution agreements or an inability to renew such arrangements or to find replacements on commercially reasonable terms, or other conditions beyond our control or the control of our franchisees.

 

A shortage or interruption in the availability of certain food products or supplies could increase costs and limit the availability of products critical to our franchisees’ restaurant operations, which in turn could lead to restaurant closures and/or a decrease in sales and therefore a reduction in royalty fees to us. In addition, failure by a key supplier or distributor to our franchisees to meet its service requirements could lead to a disruption of service or supply until a new supplier or distributor is engaged, and any disruption could have an adverse effect on our franchisees and therefore our business. See “Business—Supply Chain.”

 

 21 
   

 

An increase in food prices may have an adverse impact on our and our franchisees’ profit margins.

 

Our franchisees’ restaurants depend on reliable sources of large quantities of raw materials such as protein (including beef and poultry), cheese, oil, flour and vegetables (including potatoes and lettuce). Raw materials purchased for use in our franchisees’ restaurants are subject to price volatility caused by any fluctuation in aggregate supply and demand, or other external conditions, such as weather conditions or natural events or disasters that affect expected harvests of such raw materials. As a result, the historical prices of raw materials used in the operation of our franchisees’ restaurants have fluctuated. We cannot assure you that we or our franchisees will continue to be able to purchase raw materials at reasonable prices, or that prices of raw materials will remain stable in the future. In addition, a significant increase in gasoline prices could result in the imposition of fuel surcharges by our distributors.

 

Because our franchisees provide competitively priced food, we may not have the ability to pass through to customers the full amount of any commodity price increases. If we and our franchisees are unable to manage the cost of raw materials or to increase the prices of products proportionately, it may have an adverse impact on our and our franchisees’ profit margins and their ability to remain in business, which would adversely affect our results of operations.

 

Food safety and foodborne illness concerns may have an adverse effect on our business.

 

Foodborne illnesses, such as E. coli, hepatitis A, trichinosis and salmonella, occur or may occur within our system from time to time. In addition, food safety issues such as food tampering, contamination and adulteration occur or may occur within our system from time to time. Any report or publicity linking one of our franchisee’s restaurants, or linking our competitors or our industry generally, to instances of foodborne illness or food safety issues could adversely affect our brands and reputations as well as our revenues and profits, and possibly lead to product liability claims, litigation and damages. If a customer of one of our franchisees’ restaurants becomes ill as a result of food safety issues, restaurants in our system may be temporarily closed, which would decrease our revenues. In addition, instances or allegations of foodborne illness or food safety issues, real or perceived, involving our franchised restaurants, restaurants of competitors, or suppliers or distributors (regardless of whether we use or have used those suppliers or distributors), or otherwise involving the types of food served at our franchisees’ restaurants, could result in negative publicity that could adversely affect our revenues or the sales of our franchisees. The occurrence of foodborne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, which could result in disruptions in our supply chain and/or lower margins for us and our franchisees.

 

Health concerns arising from outbreaks of viruses or other diseases may have an adverse effect on our business.

 

Our business could be materially and adversely affected by the outbreak of a widespread health epidemic. The occurrence of such an outbreak of an epidemic illness or other adverse public health developments could materially disrupt our business and operations. Such events could also significantly impact our industry and cause a temporary closure of restaurants, which would severely disrupt our operations and have a material adverse effect on our business, financial condition and results of operations.

 

Furthermore, viruses may be transmitted through human contact, and the risk of contracting viruses could cause employees or guests to avoid gathering in public places, which could adversely affect restaurant guest traffic or the ability to adequately staff franchised restaurants. We could also be adversely affected if jurisdictions in which our franchisees’ restaurants operate impose mandatory closures, seek voluntary closures or impose restrictions on operations of restaurants. Even if such measures are not implemented and a virus or other disease does not spread significantly, the perceived risk of infection or health risk may affect our business.

 

New information or attitudes regarding diet and health could result in changes in regulations and consumer consumption habits that could adversely affect our results of operations.

 

Government regulation and consumer eating habits may impact our business as a result of changes in attitudes regarding diet and health or new information regarding the health effects of consuming certain menu offerings. These changes have resulted in, and may continue to result in, laws and regulations requiring us to disclose the nutritional content of our food offerings, and they have resulted, and may continue to result in, laws and regulations affecting permissible ingredients and menu offerings. For example, a number of states, counties and cities have enacted menu labeling laws requiring multi-unit restaurant operators to disclose to consumers certain nutritional information, or have enacted legislation restricting the use of certain types of ingredients in restaurants. These requirements may be different or inconsistent with requirements under the Patient Protection and Affordable Care Act of 2010 (which we refer to as the “PPACA”), which establishes a uniform, federal requirement for certain restaurants to post nutritional information on their menus. Specifically, the PPACA requires chain restaurants with 20 or more locations operating under the same name and offering substantially the same menus to publish the total number of calories of standard menu items on menus and menu boards, along with a statement that puts this calorie information in the context of a total daily calorie intake. These inconsistencies could be challenging for us to comply with in an efficient manner. The PPACA also requires covered restaurants to provide to consumers, upon request, a written summary of detailed nutritional information for each standard menu item, and to provide a statement on menus and menu boards about the availability of this information upon request. An unfavorable report on, or reaction to, our menu ingredients, the size of our portions or the nutritional content of our menu items could negatively influence the demand for our products and materially adversely affect our business, financial condition and results of operations.

 

 22 
   

 

Compliance with current and future laws and regulations regarding the ingredients and nutritional content of our menu items may be costly and time-consuming. Additionally, if consumer health regulations or consumer eating habits change significantly, we may be required to modify or discontinue certain menu items, and we may experience higher costs associated with the implementation of those changes. We cannot predict the impact of the new nutrition labeling requirements under the PPACA until final regulations are promulgated. The risks and costs associated with nutritional disclosures on our menus could also impact our operations, particularly given differences among applicable legal requirements and practices within the restaurant industry with respect to testing and disclosure, ordinary variations in food preparation among our own restaurants, and the need to rely on the accuracy and completeness of nutritional information obtained from third-party suppliers.

 

Our business may be adversely impacted by changes in consumer discretionary spending and general economic conditions.

 

Purchases at our franchisees’ restaurants are generally discretionary for consumers and, therefore, our results of operations are susceptible to economic slowdowns and recessions. Our results of operations are dependent upon discretionary spending by consumers of our franchisees’ restaurants, which may be affected by general economic conditions globally or in one or more of the markets we serve. Some of the factors that impact discretionary consumer spending include unemployment rates, fluctuations in the level of disposable income, the price of gasoline, stock market performance and changes in the level of consumer confidence. These and other macroeconomic factors could have an adverse effect on sales at our franchisees’ restaurants, which could lead to an adverse effect on our profitability or development plans, and harm our financial condition and operating results.

 

Our expansion into international markets exposes us to a number of risks that may differ in each country where we have franchised restaurants.

 

We currently have franchised restaurants in Canada, China, UAE, the United Kingdom, Kuwait, Saudi Arabia, Bahrain, Egypt, Iraq, Pakistan, Philippines, Indonesia, India, Malaysia, Fiji, Oman, Qatar and Tunisia, and plan to continue to grow internationally. Expansion in international markets may be affected by local economic and market as well as geopolitical conditions. Therefore, as we expand internationally, our franchisees may not experience the operating margins we expect, and our results of operations and growth may be materially and adversely affected. Our financial condition and results of operations may be adversely affected if global markets in which our franchised restaurants compete are affected by changes in political, economic or other factors. These factors, over which neither our franchisees nor we have control, may include:

 

  recessionary or expansive trends in international markets;
     
  changing labor conditions and difficulties in staffing and managing our foreign operations;
     
  increases in the taxes we pay and other changes in applicable tax laws;
     
  legal and regulatory changes, and the burdens and costs of our compliance with a variety of foreign laws;
     
  changes in inflation rates;
     
  changes in exchange rates and the imposition of restrictions on currency conversion or the transfer of funds;
     
  difficulty in protecting our brand, reputation and intellectual property;
     
  difficulty in collecting our royalties and longer payment cycles;
     
  expropriation of private enterprises;
     
  increases in anti-American sentiment and the identification of our brands as American brands;
     
  political and economic instability; and
     
  other external factors.

 

 23 
   

 

Our international operations subject us to risks that could negatively affect our business.

 

A significant portion of our franchised restaurants are operated in countries and territories outside of the United States, including in emerging markets, and we intend to continue expansion of our international operations. As a result, our business is increasingly exposed to risks inherent in international operations. These risks, which can vary substantially by country, include political instability, corruption and social and ethnic unrest, as well as changes in economic conditions (including consumer spending, unemployment levels and wage and commodity inflation), the regulatory environment, income and non-income based tax rates and laws, foreign exchange control regimes, consumer preferences and the laws and policies that govern foreign investment in countries where our franchised restaurants are operated. In addition, our franchisees do business in jurisdictions that may be subject to trade or economic sanction regimes. Any failure to comply with such sanction regimes or other similar laws or regulations could result in the assessment of damages, the imposition of penalties, suspension of business licenses, or a cessation of operations at our franchisees’ businesses, as well as damage to our and our brands’ images and reputations, all of which could harm our profitability.

 

Foreign currency risks and foreign exchange controls could adversely affect our financial results.

 

Our results of operations and the value of our foreign assets are affected by fluctuations in currency exchange rates, which may adversely affect reported earnings. More specifically, an increase in the value of the U.S. dollar relative to other currencies could have an adverse effect on our reported earnings. Our Canadian franchisees pay us franchise fees as a percentage of sales denominated in Canadian dollars, which are then converted to U.S. dollars at the prevailing exchange rate. This exposes us to risk of an increase in the value of the U.S. dollar relative to the Canadian dollar. There can be no assurance as to the future effect of any changes in currency exchange rates on our results of operations, financial condition or cash flows.

 

We depend on key executive management.

 

We depend on the leadership and experience of our relatively small number of key executive management personnel, and in particular key executive management, particularly our Chief Executive Officer, Andrew Wiederhorn. The loss of the services of any of our executive management members could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace such personnel on a timely basis or without incurring increased costs, or at all. We do not maintain key man life insurance policies on any of our executive officers. We believe that our future success will depend on our continued ability to attract and retain highly skilled and qualified personnel. There is a high level of competition for experienced, successful personnel in our industry. Our inability to meet our executive staffing requirements in the future could impair our growth and harm our business.

 

Labor shortages or difficulty finding qualified employees could slow our growth, harm our business and reduce our profitability.

 

Restaurant operations are highly service oriented and our success depends in part upon our franchisees’ ability to attract, retain and motivate a sufficient number of qualified employees, including restaurant managers and other crew members. The market for qualified employees in our industry is very competitive. Any future inability to recruit and retain qualified individuals may delay the planned openings of new restaurants by our franchisees and could adversely impact our existing franchised restaurants. Any such delays, material increases in employee turnover rate in existing franchised restaurants or widespread employee dissatisfaction could have a material adverse effect on our and our franchisees’ business and results of operations.

 

In addition, strikes, work slowdowns or other job actions may become more common in the United States. Although none of the employees employed by our franchisees are represented by a labor union or are covered by a collective bargaining agreement, in the event of a strike, work slowdown or other labor unrest, the ability to adequately staff our restaurants could be impaired, which could result in reduced revenue and customer claims, and may distract our management from focusing on our business and strategic priorities.

 

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Changes in labor and other operating costs could adversely affect our results of operations.

 

An increase in the costs of employee wages, benefits and insurance (including workers’ compensation, general liability, property and health) could result from government imposition of higher minimum wages or from general economic or competitive conditions. In addition, competition for qualified employees could compel our franchisees to pay higher wages to attract or retain key crew members, which could result in higher labor costs and decreased profitability. Any increase in labor expenses, as well as increases in general operating costs such as rent and energy, could adversely affect our franchisees’ profit margins, their sales volumes and their ability to remain in business, which would adversely affect our results of operations.

 

A broader standard for determining joint employer status may adversely affect our business operations and increase our liabilities resulting from actions by our franchisees.

 

In 2015, the National Labor Relations Board (which we refer to as the “NLRB”) adopted a new and broader standard for determining when two or more otherwise unrelated employers may be found to be a joint employer of the same employees under the National Labor Relations Act. In addition, the general counsel’s office of the NLRB has issued complaints naming McDonald’s Corporation as a joint employer of workers at its franchisees for alleged violations of the U.S. Fair Labor Standards Act. In June 2017, the U.S. Department of Labor announced the rescission of these guidelines. However, there can be no assurance that future changes in law, regulation or policy will cause us or our franchisees to be liable or held responsible for unfair labor practices, violations of wage and hour laws, or other violations or require our franchises to conduct collective bargaining negotiations regarding employees of our franchisees. Further, there is no assurance that we or our franchisees will not receive similar complaints as McDonald’s Corporation in the future, which could result in legal proceedings based on the actions of our franchisees. In such events, our operating expenses may increase as a result of required modifications to our business practices, increased litigation, governmental investigations or proceedings, administrative enforcement actions, fines and civil liability.

 

We could be party to litigation that could adversely affect us by increasing our expenses, diverting management attention or subjecting us to significant monetary damages and other remedies.

 

We may become involved in legal proceedings involving consumer, employment, real estate related, tort, intellectual property, breach of contract, securities, derivative and other litigation. Plaintiffs in these types of lawsuits often seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may not be accurately estimated. Regardless of whether any such claims have merit, or whether we are ultimately held liable or settle, such litigation may be expensive to defend and may divert resources and management attention away from our operations and negatively impact reported earnings. With respect to insured claims, a judgment for monetary damages in excess of any insurance coverage could adversely affect our financial condition or results of operations. Any adverse publicity resulting from these allegations may also adversely affect our reputation, which in turn could adversely affect our results of operations.

 

In addition, the restaurant industry around the world has been subject to claims that relate to the nutritional content of food products, as well as claims that the menus and practices of restaurant chains have led to customer health issues, including weight gain and other adverse effects. These concerns could lead to an increase in the regulation of the content or marketing of our products. We may also be subject to such claims in the future and, even if we are not, publicity about these matters (particularly directed at the quick service and fast casual segments of the retail food industry) may harm our reputation and adversely affect our business, financial condition and results of operations.

 

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Changes in, or noncompliance with, governmental regulations may adversely affect our business operations, growth prospects or financial condition.

 

We and our franchisees are subject to numerous laws and regulations around the world. These laws change regularly and are increasingly complex. For example, we and our franchisees are subject to:

 

  The Americans with Disabilities Act in the U.S. and similar state laws that give civil rights protections to individuals with disabilities in the context of employment, public accommodations and other areas.
     
  The U.S. Fair Labor Standards Act, which governs matters such as minimum wages, overtime and other working conditions, as well as family leave mandates and a variety of similar state laws that govern these and other employment law matters.
     
  Laws and regulations in government mandated health care benefits such as the Patient Protection and Affordable Care Act.
  Laws and regulations relating to nutritional content, nutritional labeling, product safety, product marketing and menu labeling.
     
  Laws relating to state and local licensing.
     
  Laws relating to the relationship between franchisors and franchisees.
     
  Laws and regulations relating to health, sanitation, food, workplace safety, child labor, including laws prohibiting the use of certain “hazardous equipment” by employees younger than the age of 18 years of age, and fire safety and prevention.
     
  Laws and regulations relating to union organizing rights and activities.
     
  Laws relating to information security, privacy, cashless payments, and consumer protection.
     
  Laws relating to currency conversion or exchange.
     
  Laws relating to international trade and sanctions.
     
  Tax laws and regulations.
     
  Antibribery and anticorruption laws.
     
  Environmental laws and regulations.
     
  Federal and state immigration laws and regulations in the U.S.

 

Compliance with new or existing laws and regulations could impact our operations. The compliance costs associated with these laws and regulations could be substantial. Any failure or alleged failure to comply with these laws or regulations by our franchisees or indirectly by us could adversely affect our reputation, international expansion efforts, growth prospects and financial results or result in, among other things, litigation, revocation of required licenses, internal investigations, governmental investigations or proceedings, administrative enforcement actions, fines and civil and criminal liability. Publicity relating to any such noncompliance could also harm our reputation and adversely affect our revenues.

 

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Failure to comply with antibribery or anticorruption laws could adversely affect our business operations.

 

The U.S. Foreign Corrupt Practices Act and other similar applicable laws prohibiting bribery of government officials and other corrupt practices are the subject of increasing emphasis and enforcement around the world. Although we have implemented policies and procedures designed to promote compliance with these laws, there can be no assurance that our employees, contractors, agents, franchisees or other third parties will not take actions in violation of our policies or applicable law, particularly as we expand our operations in emerging markets and elsewhere. Any such violations or suspected violations could subject us to civil or criminal penalties, including substantial fines and significant investigation costs, and could also materially damage our reputation, brands, international expansion efforts and growth prospects, business and operating results. Publicity relating to any noncompliance or alleged noncompliance could also harm our reputation and adversely affect our revenues and results of operations.

 

Tax matters, including changes in tax rates, disagreements with taxing authorities and imposition of new taxes could impact our results of operations and financial condition.

 

We are subject to income taxes as well as non-income based taxes, such as payroll, sales, use, value added, net worth, property, withholding and franchise taxes in both the U.S. and various foreign jurisdictions. We are also subject to regular reviews, examinations and audits by the U.S. Internal Revenue Service (which we refer to as the “IRS”) and other taxing authorities with respect to such income and non-income based taxes inside and outside of the U.S. If the IRS or another taxing authority disagrees with our tax positions, we could face additional tax liabilities, including interest and penalties. Payment of such additional amounts upon final settlement or adjudication of any disputes could have a material impact on our results of operations and financial position.

 

In addition, we are directly and indirectly affected by new tax legislation and regulation and the interpretation of tax laws and regulations worldwide. Changes in legislation, regulation or interpretation of existing laws and regulations in the U.S. and other jurisdictions where we are subject to taxation could increase our taxes and have an adverse effect on our operating results and financial condition.

 

Conflict or terrorism could negatively affect our business.

 

We cannot predict the effects of actual or threatened armed conflicts or terrorist attacks, efforts to combat terrorism, military action against any foreign state or group located in a foreign state or heightened security requirements on local, regional, national or international economies or consumer confidence. Such events could negatively affect our business, including by reducing customer traffic or the availability of commodities.

 

Risks Related to Our Company and Our Organizational Structure

 

We will be included in FCCG’s consolidated group for federal income tax purposes and, as a result, may be liable for any shortfall in FCCG’s federal income tax payments

 

For so long as FCCG continues to own at least 80% of the total voting power and value of our capital stock, we expect to be included in FCCG’s consolidated group for federal income tax purposes. By virtue of its controlling ownership and the Tax Sharing Agreement that we anticipate entering into with FCCG, FCCG will effectively control all our tax decisions. Moreover, notwithstanding the Tax Sharing Agreement, federal tax law provides that each member of a consolidated group is jointly and severally liable for the group’s entire federal income tax obligation. Thus, to the extent FCCG or other members of the group fail to make any federal income tax payments required of them by law, we would be liable for the shortfall. Similar principles generally apply for income tax purposes in some state, local and foreign jurisdictions.

 

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We are controlled by FCCG, whose interests may differ from those of our public stockholders.

 

Immediately following this Offering and the application of net proceeds from this Offering, FCCG will control approximately 80% of the combined voting power of our Common Stock, assuming the sale of the maximum number of shares in the Offering. FCCG will, for the foreseeable future, have significant influence over corporate management and affairs, and will be able to control virtually all matters requiring stockholder approval. FCCG is able to, subject to applicable law, elect a majority of the members of our Board of Directors and control actions to be taken by us, including amendments to our certificate of incorporation and bylaws and approval of significant corporate transactions, including mergers and sales of substantially all of our assets. It is possible that the interests of FCCG may in some circumstances conflict with our interests and the interests of our other stockholders, including you. For example, FCCG may have different tax positions from us, especially in light of the Tax Sharing Agreement, that could influence its decisions regarding whether and when to dispose of assets, whether and when to incur new or refinance existing indebtedness. In addition, the determination of future tax reporting positions, the structuring of future transactions and the handling of any future challenges by any taxing authority to our tax reporting positions may take into consideration FCCG’s tax or other considerations, which may differ from the considerations of us or our other stockholders. See “Certain Relationships and Related Party Transactions—Tax Sharing Agreement.”

 

We are a “controlled company” within the meaning of the NASDAQ listing standards and, as a result, will qualify for exemptions from certain corporate governance requirements. You may not have the same protections afforded to stockholders of companies that are subject to such requirements.

 

Because of the aggregate voting power of FCCG, we are considered a “controlled company” for the purposes of the listing standards of The Nasdaq Stock Market LLC. As such, we are exempt from certain corporate governance requirements of NASDAQ, including (i) the requirement that a majority of the board of directors consist of independent directors, (ii) the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors and (iii) the requirement that we have a compensation committee that is composed entirely of independent directors. We do not intend to rely on these exemptions and intend to have the same requisite independent directors and board committee structure as non-controlled companies, but we may in the future choose to not maintain a majority of independent directors or compensation and nominating and corporate governance committees consisting entirely of independent directors. Accordingly, in the future you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of NASDAQ.

 

Our anti-takeover provisions could prevent or delay a change in control of our company, even if such change in control would be beneficial to our stockholders.

 

Provisions of our amended and restated certificate of incorporation and amended and restated bylaws, as they will be in effect upon consummation of this Offering, as well as provisions of Delaware law could discourage, delay or prevent a merger, acquisition or other change in control of our company, even if such change in control would be beneficial to our stockholders. These provisions include:

 

 

net operating loss protective provisions, which require that any person wishing to become a “5% shareholder” (as defined in our certificate of incorporation) must first obtain a waiver from our board of directors, and any person that is already a “5% shareholder” of ours cannot make any additional purchases of our stock without a waiver from our board of directors;

     
  authorizing the issuance of “blank check” preferred stock that could be issued by our Board of Directors to increase the number of outstanding shares and thwart a takeover attempt;
     
  limiting the ability of stockholders to call special meetings or amend our bylaws;
     
 

providing for a classified board of directors with staggered, three-year terms;

     
  requiring all stockholder actions to be taken at a meeting of our stockholders; and
     
  establishing advance notice and duration of ownership requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

 

These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions you desire. In addition, because our Board of Directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team.

 

In addition, the Delaware General Corporation Law, or the DGCL, to which we are subject, prohibits us, except under specified circumstances, from engaging in any mergers, significant sales of stock or assets or business combinations with any stockholder or group of stockholders who owns at least 15% of our common stock.

 

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We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our Common Stock, which could depress the price of our Common Stock.

 

Our amended and restated certificate of incorporation will authorize us to issue one or more series of preferred stock. Our board of directors will have the authority to determine the preferences, limitations and relative rights of the shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our Common Stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discourage bids for our Common Stock at a premium to the market price, and materially and adversely affect the market price and the voting and other rights of the holders of our Common Stock.

 

The provision of our certificate of incorporation requiring exclusive venue in the Court of Chancery in the State of Delaware for certain types of lawsuits may have the effect of discouraging lawsuits against our directors and officers.

 

Our amended and restated certificate of incorporation will require, to the fullest extent permitted by law, that (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of the DGCL or our amended and restated certificate of incorporation or the bylaws or (iv) any action asserting a claim against us governed by the internal affairs doctrine will have to be brought only in the Court of Chancery in the State of Delaware. Although we believe this provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers.

 

Risks Related to This Offering and Ownership of Our Common Stock

 

If the ownership of our common stock continues to be highly concentrated, it may prevent you and other minority stockholders from influencing significant corporate decisions and may result in conflicts of interest.

 

Following the consummation of this Offering, FCCG will own approximately 80% of our outstanding Common Stock. As a result, FCCG will indirectly beneficially own shares sufficient for majority votes over all matters requiring stockholder votes, including: the election of directors; mergers, consolidations and acquisitions; the sale of all or substantially all of our assets and other decisions affecting our capital structure; amendments to our certificate of incorporation or our bylaws; and our winding up and dissolution. This concentration of ownership may delay, deter or prevent acts that would be favored by our other stockholders. The interests of FCCG may not always coincide with our interests or the interests of our other stockholders. This concentration of ownership may also have the effect of delaying, preventing or deterring a change in control of us. Also, FCCG may seek to cause us to take courses of action that, in its judgment, could enhance its investment in us, but which might involve risks to our other stockholders or adversely affect us or our other stockholders, including investors in this Offering. As a result, the market price of our Common Stock could decline or stockholders might not receive a premium over the then-current market price of our common stock upon a change in control. In addition, this concentration of share ownership may adversely affect the trading price of our Common Stock because investors may perceive disadvantages in owning shares in a company with significant stockholders.

 

A limited public trading market may cause volatility in the price of our Common Stock.

 

While we plan to apply for the listing of our Common Stock on the Nasdaq Capital Market, there can be no assurance that our Common Stock will continue to be quoted on NASDAQ or that a meaningful, consistent and liquid trading market will develop. As a result, our stockholders may not be able to sell or liquidate their holdings in a timely manner or at the then-prevailing trading price of our Common Stock. In addition, sales of substantial amounts of our Common Stock, or the perception that such sales might occur, could adversely affect prevailing market prices of our common stock and our stock price may decline substantially in a short time and our stockholders could suffer losses or be unable to liquidate their holdings.

 

We do not know whether a market will develop for our Common Stock or what the market price of our Common Stock will be and as a result it may be difficult for you to sell your shares of our Common Stock.

 

Before this Offering, there was no public trading market for our Common Stock. If a market for our Common Stock does not develop or is not sustained, it may be difficult for you to sell your shares of Common Stock at an attractive price or at all. We cannot predict the prices at which our Common Stock will trade. It is possible that in one or more future periods our results of operations may be below the expectations of public market analysts and investors and, as a result of these and other factors, the price of our Common Stock may fall.

 

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If our operating and financial performance in any given period does not meet the guidance that we provide to the public, our stock price may decline.

 

We may provide public guidance on our expected operating and financial results for future periods. Any such guidance will be comprised of forward-looking statements subject to the risks and uncertainties described in this Offering Circular and in our other public filings and public statements. Our actual results may not always be in line with or exceed any guidance we have provided, especially in times of economic uncertainty. If, in the future, our operating or financial results for a particular period do not meet any guidance we provide or the expectations of investment analysts or if we reduce our guidance for future periods, the market price of our Common Stock may decline as well.

 

If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our Common Stock, the price of our Common Stock could decline.

 

The trading market for our Common Stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We do not currently have and may never obtain research coverage by industry or financial analysts. If no or few analysts commence coverage of us, the trading price of our stock would likely decrease. Even if we do obtain analyst coverage, if one or more of the analysts covering our business downgrade their evaluations of our stock, the price of our Common Stock could decline. If one or more of these analysts cease to cover our Common Stock, we could lose visibility in the market for our stock, which in turn could cause our Common Stock price to decline.

 

Our common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

 

After this Offering, the market price for our common stock is likely to be volatile, in part because our shares have not been traded publicly. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:

 

  low same-store sales growth compared to market expectations;
     
  delays in the planned openings of new stores;
     
  quarterly variations in our operating results compared to market expectations;
     
  changes in preferences of our customers;
     
  adverse publicity about us, the industries we participate in or individual scandals;
     
  announcements of new offerings or significant price reductions by us or our competitors;
     
  stock price performance of our competitors;
     
  changes in the price and availability of food commodities, particularly beef and poultry;
     
 

fluctuations in stock market prices and volumes, which could be exacerbated by the relatively small number of publicly owned shares;

     
  changes in senior management or key personnel;
     
  changes in financial estimates by securities analysts;
     
  the market’s reaction to our reduced disclosure as a result of being an “emerging growth company” under the JOBS Act;
     
  negative earnings or other announcements by us or other restaurant companies;
     
  defaults on indebtedness, incurrence of additional indebtedness, or issuances of additional capital stock;
     
  global economic, legal and regulatory factors unrelated to our performance; and
     
  the other factors listed in this “Risk Factors” section.

 

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The initial public offering price of our Common Stock will be determined by negotiations between us and the Selling Agent based upon a number of factors and may not be indicative of prices that will prevail following the closing of this Offering. Volatility in the market price of our common stock may prevent investors from being able to sell their Common Stock at or above the initial public offering price. As a result, you may suffer a loss on your investment.

 

In addition, stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies in our industry. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.

 

Substantial future sales of our Common Stock, or the perception in the public markets that these sales may occur, may depress our stock price.

 

Sales of substantial amounts of our Common Stock in the public market after this Offering, or the perception that these sales could occur, could adversely affect the price of our Common Stock and could impair our ability to raise capital through the sale of additional shares. Upon the closing of this Offering, we will have shares of Common Stock outstanding (or if the Offering is increased). The shares of Common Stock issued in this Offering will be freely tradable without restriction under the Securities Act, except for any shares of our common stock that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available.

 

We and each of our directors, executive officers and holders of substantially all of our outstanding common stock, which collectively will hold 80% of our outstanding capital stock after giving effect to the sale of the maximum shares in this Offering, have agreed with the Selling Agent, subject to certain exceptions, not to dispose of or hedge any shares of common stock or securities convertible into or exchangeable for, or that represent the right to receive, shares of common stock during the period from the date of this Offering Circular continuing through the date 180 days after the date of this Offering Circular, except with the prior written consent of the Selling Agent. See “Plan of Distribution.” All of our shares of common stock outstanding as of the date of this Offering Circular may be sold in the public market by existing stockholders following the expiration of the applicable lock-up period, subject to applicable limitations imposed under federal securities laws.

 

We intend to file one or more registration statements on Form S-8 under the Securities Act to register all shares of Common Stock issued or issuable upon exercise of outstanding options under our stock plans. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market following the expiration of the applicable lock-up period. We expect that the initial registration statement on Form S-8 will cover shares of our Common Stock.

 

See “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling shares of our common stock after this Offering.

 

In the future, we may also issue additional securities if we need to raise capital, which could constitute a material portion of our then-outstanding shares of common stock.

 

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Taking advantage of the reduced disclosure requirements applicable to “emerging growth companies” may make our Common Stock less attractive to investors.

 

The JOBS Act provides that, so long as a company qualifies as an “emerging growth company,” it will, among other things:

 

  be exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that its independent registered public accounting firm provide an attestation report on the effectiveness of its internal control over financial reporting;
     
  be exempt from the “say on pay” and “say on golden parachute” advisory vote requirements of the Dodd-Frank Wall Street Reform and Customer Protection Act (which we refer to as the “Dodd-Frank Act”);
     
  be exempt from certain disclosure requirements of the Dodd-Frank Act relating to compensation of its executive officers and be permitted to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Securities Exchange Act of 1934, as amended (which we refer to as the “Exchange Act”); and
     
  be exempt from any rules that may be adopted by the PCAOB requiring mandatory audit firm rotations or a supplement to the auditor’s report on the financial statements.

 

We currently intend to take advantage of each of the exemptions described above. We have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 107(b) of the JOBS Act. We could be an emerging growth company for up to five years after this Offering. We cannot predict if investors will find our Common Stock less attractive if we elect to rely on these exemptions, or if taking advantage of these exemptions would result in less active trading or more volatility in the price of our Common Stock.

 

We will incur increased costs as a result of becoming a public company and in the administration of our organizational structure.

 

As a public company, we will incur significant legal, accounting, insurance and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act and related rules implemented by the U.S. Securities and Exchange Commission (which we refer to as the “SEC”). Following the consummation of this Offering, we will incur ongoing periodic expenses in connection with the administration of our organizational structure. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any significant degree of certainty. In estimating these costs however, we took into account expenses related to insurance, legal, accounting, and compliance activities, as well as other expenses not currently incurred. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

 

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Failure to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.

 

We are not currently required to comply with the rules of the SEC implementing Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. Though we will be required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. However, as an emerging growth company, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.

 

To comply with the requirements of being a public company, we have undertaken various actions, and may need to take additional actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff or consultants. Testing and maintaining internal control can divert our management’s attention from other matters that are important to the operation of our business. Additionally, when evaluating our internal control over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404. If we identify any material weaknesses in our internal control over financial reporting or are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting once we are no longer an emerging growth company, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Common Stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

 

Our ability to pay regular dividends to our stockholders is subject to the discretion of our Board of Directors and may be limited by our holding company structure and applicable provisions of Delaware law.

 

Following consummation of this Offering, subject to certain conditions and limitations, we expect to pay cash dividends to the holders of our Common Stock on a quarterly basis. Our board of directors may, in its sole discretion, decrease the amount or frequency of dividends or discontinue the payment of dividends entirely. In addition, as a holding company, we will be dependent upon the ability of our operating subsidiaries to generate earnings and cash flows and distribute them to us so that we may pay dividends to our stockholders. Our ability to pay dividends will be subject to our consolidated operating results, cash requirements and financial condition, the applicable provisions of Delaware law which may limit the amount of funds available for distribution to our stockholders, our compliance with covenants and financial ratios related to existing or future indebtedness, and our other agreements with third parties. In addition, each of the companies in the corporate chain must manage its assets, liabilities and working capital in order to meet all of its cash obligations, including the payment of dividends or distributions.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Offering Circular contains forward-looking statements. All statements other than statements of historical facts contained in this Offering Circular may be forward-looking statements. Statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, including, among others, statements regarding the Reorganization Transactions, expected new franchisees, brands, store openings and future capital expenditures are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions.

 

Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We believe that these factors include, but are not limited to, the following:

 

  our inability to manage our growth;
     
  the actions of our franchisees;
     
  our inability to maintain good relationships with our franchisees;
     
  our inability to successfully add franchisees, brands and new stores, and timely develop and expand our operations;
     
  our inability to protect our brands and reputation;
     
  our ability to adequately protect our intellectual property;
     
  success of our advertising and marketing campaigns;
     
  our inability to protect against security breaches of confidential guest information;
     
  our business model being susceptible to litigation;
     
  competition from other restaurants;
     
  shortages or interruptions in the supply or delivery of food products;
     
  our vulnerability to increased food commodity costs;
     
  our failure to prevent food safety and food-borne illness incidents;
     
  changes in consumer tastes and nutritional and dietary trends;
     
  our dependence on key executive management;
     
  our inability to identify qualified individuals for our workforce;
     
  our vulnerability to labor costs;
     
  our inability to comply with governmental regulation;
     
  violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery and anti-kickback laws;
     
  our inability to maintain sufficient levels of cash flow, or access to capital, to meet growth expectations; and
     
  FCCG’s control of us.

 

The forward-looking statements in this Offering Circular are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, and many of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those presented in the forward-looking statements.

 

These forward-looking statements speak only as of the date of this Offering Circular. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Offering Circular after we distribute this Offering Circular, whether as a result of any new information, future events or otherwise.

 

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THE REORGANIZATION TRANSACTIONS

 

Existing Structure

 

FAT Brands Inc. is currently 100% owned by Fog Cutter Capital Group Inc. (which we refer to as “FCCG”), and was formed on March 21, 2017 to serve as the eventual holding company of all of our brands and the issuer of the Common Stock to be issued in this Offering.

 

The Reorganization Transactions

 

In connection with the closing of this Offering, we intend to consummate the following transactions, which we refer to collectively as the “Reorganization Transactions”:

 

  FCCG will contribute to us its two operating subsidiaries, Fatburger North America Inc. and Buffalo’s Franchise Concepts Inc., in exchange for an unsecured promissory note with a principal balance of $30,000,000, bearing interest at a rate of 10.0% per annum, and maturing in five years.
     
  FCCG will consummate the acquisition of Homestyle Dining LLC, and will immediately contribute Ponderosa Franchising Company and Bonanza Restaurant Company (including related intellectual property) to us as new operating subsidiaries (which we refer to as the “Ponderosa Acquisition”). FCCG agreed in March 2017 to acquire Homestyle Dining LLC from Metromedia Company and its affiliate (“Metromedia”) pursuant to a Membership Interest Purchase Agreement, as amended, which provides for a cash purchase price of $10,550,000 to be paid at closing. The Purchase Agreement also contains customary representations, warranties and covenants of Metromedia, and customary indemnification provisions under which Metromedia has agreed to indemnify FCCG, subject to certain caps and thresholds, for any liabilities and losses arising out of any inaccuracy in, or breaches of, the representations, warranties and covenants of Metromedia in the Purchase Agreement. A copy of the Purchase Agreement is filed as an exhibit to our Regulation A Offering Statement on Form 1-A, and is incorporated herein by this reference.
     
 

We will apply the net proceeds of this Offering as follows:

 

(i) $10,550,000 will be used to fund the Ponderosa Acquisition by FCCG; and

 

(ii) $9,500,000 will be used to repay a portion of Related Party Debt owed to FCCG, which will use this payment to repay indebtedness that it previously incurred in acquiring Buffalo’s Franchise Concepts, Inc.

 

These amounts assume that at least $20,050,000 in net proceeds is raised in this Offering. If less than this amount is raised, the repayment of Related Party Debt will be reduced accordingly, and FCCG intends to repay the balance of its indebtedness and fund the purchase of Homestyle Dining LLC from other sources.

     
  We will enter into a Tax Sharing Agreement with FCCG that provides that FCCG will file consolidated federal, California and Oregon (and possibly other jurisdictions where revenue is generated, at FCCG’s election) income tax returns with us and our subsidiaries. We will pay to FCCG the amount that our tax liability would have been had we filed a separate return and not been consolidated with FCCG. To the extent our required payment exceeds our share of the actual consolidated income tax liability (which may occur due to the application of FCCG’s net operating loss carryforwards), we will be permitted to reimburse FCCG in cash or, at the election of a committee of our Board of Directors comprised solely of disinterested directors (directors not affiliated with or interested in FCCG), we may issue to FCCG an equivalent amount of our Common Stock in lieu of cash, valued at the fair market value of our Common Stock at the time of such payment. In addition, our inter-company credit of approximately $11,660,000 due from FCCG will be applied first to reduce such excess income tax payment obligation to FCCG under the Tax Sharing Agreement.

 

Concurrently with or shortly following the closing of this Offering, we also expect to enter into a credit facility with a third-party lender, providing for debt financing of between $35,000,000 and $50,000,000. Upon consummation of such credit facility, we intend to repay the remaining Related Party Debt, which is expected to total approximately $20,000,000 after giving effect to the Reorganization Transactions described above.

 

Organizational Structure Following this Offering

 

Immediately following the completion of the Reorganization Transactions, including this Offering:

 

  FAT Brands Inc. will be a holding company for four major franchised restaurant brands, Fatburger, Buffalo Cafe / Buffalo’s Express, Ponderosa Steakhouse and Bonanza Steakhouse.
     
  Approximately 20% of our Common Stock will be owned by investors in this Offering and 80% will be owned by FCCG.

 

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The following diagram shows our organizational structure after giving effect to the Reorganization Transactions, including this Offering:

 

 

 

 36 
   

 

USE OF PROCEEDS

 

We estimate that the net proceeds to us of the sale of the maximum shares of Common Stock that we are offering will be approximately $21,200,000, assuming an initial public offering price of $12.00 per share, and after deducting the estimated cash Selling Agent fees of $1,800,000 and estimated Offering expenses of $1,000,000. However, there is no minimum number of shares that must be sold by us for the Offering to proceed.

 

We intend to use the net proceeds that we receive from this Offering as follows: (i) $10,550,000 to fund the acquisition of Homestyle Dining LLC by FCCG, which will immediately contribute Ponderosa Franchising Company, Bonanza Restaurant Company (including related intellectual property) to us as new operating subsidiaries, and (ii) $9,500,000 to repay a portion of the Related Party Debt owed by us to FCCG (see “The Reorganization Transactions”). FCCG will use such payment to repay indebtedness that it incurred in acquiring Buffalo’s Franchise Concepts, Inc.. These amounts assume that at least $20,050,000 in net proceeds is raised in the Offering. If less than this amount is raised in the Offering, the repayment of Related Party Debt will be reduced accordingly, and FCCG intends to repay the balance of its indebtedness and fund the purchase of Homestyle Dining LLC from other sources. We will use any net proceeds in excess of $20,050,000 for our general corporate purposes.

 

The Related Party Debt will be unsecured, bear interest at a rate of 10.0% per annum, and mature in five years.

 

Our director and Chief Executive Officer, Andrew Wiederhorn, is also Chairman and Chief Executive Officer of FCCG. The stockholders of FCCG, including Mr. Wiederhorn, will indirectly benefit from the proceeds of this Offering.

 

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CAPITALIZATION

 

The following table sets forth the cash and capitalization as of March 26, 2017, as follows:

 

  of Fatburger North America, Inc. and Buffalo’s Franchise Concepts, Inc., and Subsidiaries on a historical combined basis, as predecessor entities, and
     
  of FAT Brands Inc. and its subsidiaries on a pro forma, as adjusted basis to give effect to the Reorganization Transactions, including our issuance and sale of 2,000,000 shares of Common Stock in this Offering at an assumed initial public offering price of $12.00 per share, after (i) deducting the estimated cash Selling Agent fees of $1,800,000 and estimated Offering expenses of $1,000,000, and (ii) the application of the proceeds from the Offering, each as described under “Use of Proceeds.”

 

For more information, please see “The Reorganization Transactions,” “Use of Proceeds” and “Unaudited Pro Forma Consolidated Financial Information” elsewhere in this Offering Circular. You should read this information in conjunction with our combined financial statements and the related notes appearing at the end of this Offering Circular and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other financial information contained in this Offering Circular.

 

    As of March 26, 2017  
    Historical     Pro Forma as
Adjusted(1)
 
    (Unaudited)  
(in thousands, except per share data)            
Cash and cash equivalents   $ -       1,150  
                 
Note payable – affiliate     -       20,500  
Common Stock, par value $0.0001 per share, 25,000 shares authorized and shares issued and outstanding on a pro forma as adjusted basis     -          
Members’/stockholders’ equity:     -          
Members’ equity (Predecessor Entities Combined)                
Common Stock, par value $0.001 per share, 25,000 shares authorized and 10,000 shares issued and outstanding on a pro forma as adjusted basis     -       -  
Additional paid-in capital     8,639       8,639  
Accumulated earnings     6,677       6,677  
Public stockholders’ equity                
Common Stock, par value $0.001 per share, 25,000 shares authorized and 10,000 shares issued and outstanding on a pro forma as adjusted basis     -       20  
Additional paid-in capital     -       23,980  
                 
Total capitalization   $ 15,316     $ 59,816  

 

(1) The table above excludes:

 

1,000,000 shares available for future issuance under our 2017 Omnibus Equity Incentive Plan, and options to purchase 367,500 shares which we expect to issue under the Plan to directors and employees upon consummation of this Offering.

   
up to 100,000 shares issuable upon exercise of the warrants to be issued to the Selling Agent in connection with this Offering, exercisable at $13.20 per share.

 

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DIVIDEND POLICY

 

We intend to distribute as dividends to holders of our Common Stock, on a quarterly basis, substantially all of our distributable earnings, net of applicable corporate taxes and amounts payable under the Tax Sharing Agreement, in excess of amounts determined to be necessary or appropriate to be retained by our Board of Directors to provide for the conduct of our businesses, to make appropriate investments in our businesses, and to comply with the terms of debt instruments that we may enter into, other agreements and applicable law.

 

Our targeted quarterly dividend will be 4% of the price per share in this Offering, or $0.48 per share annually ($0.12 per share quarterly), which amount may be raised or lowered in the future without advance notice. The declaration and payment of all future dividends, if any, will be at the sole discretion of our Board of Directors and may be discontinued at any time. In determining the amount of any future dividends, our Board of Directors will take into account: (i) our consolidated financial results, available cash, and cash requirements and capital requirements, (ii) contractual, legal, tax and regulatory restrictions on, and implications of, the payment of dividends by us to our stockholders, (iii) general economic and business conditions, and (iv) any other factors that our Board of Directors may deem relevant. Our ability to pay dividends may also be restricted by the terms of any future credit agreement or any future debt or preferred equity securities of us or our subsidiaries.

 

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DILUTION

 

Dilution is the amount by which the Offering price paid by the purchasers of the Common Stock in this Offering exceeds the pro forma net tangible book value per share of Common Stock after the Offering. Our net tangible book value as of March 26, 2017, assuming that our operating subsidiaries were owned by us as of such date, was $7.2 million. Net tangible book value per share is determined at any date by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of Common Stock deemed to be outstanding at that date.

 

If you invest in our Common Stock in this Offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the pro forma net tangible book value per share of our Common Stock after this Offering.

 

Pro forma net tangible book value per share is determined at any date by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of Common Stock, after giving effect to the Reorganization Transactions and the sale of the maximum number of shares in this Offering. Our pro forma net tangible book value as of March 26, 2017 would have been approximately negative $12.1 million, or negative $1.21 per share of Common Stock. This amount represents an immediate increase in pro forma net tangible book value of $2.12 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of approximately $13.21 per share to new investors purchasing shares of Common Stock in this Offering. We determine dilution by subtracting the pro forma net tangible book value per share after this Offering from the amount of cash that a new investor paid for a share of Common Stock. The following table illustrates this dilution:

 

Assumed initial public offering price per share           $ 12.00  
Pro forma net tangible book value per share as of March 26, 2017 before this Offering(1)   $ 0.72          
Decrease per share attributable to Reorganization Transactions     (3.00 )        
Acquisition of intangible assets     (1.05 )        
Increase per share attributable to investors in this Offering     2.12          
Pro forma net tangible book value per share after this Offering (1)             (1.21
Dilution per share to new Common Stock investors           $ 13.21  

 

(1) The computation of pro forma net tangible book value as of March 26, 2017 before and after this Offering is set forth below:

 

(in thousands, except per share data)      
Numerator        
Book value of tangible assets   $ 14,052  
Less: total liabilities     (6,830 )
Pro forma net tangible book value before this Offering(a)   $ 7,222  
         
Offering proceeds     21,200  
Reorganization Transactions     (30,000 )
Acquisition of intangible assets     (10,491 )
Pro forma net tangible book value after this Offering(a)   $ (12,069 )
         
Denominator        
Existing stockholders     8,000  
New investors     2,000  
Shares of Common Stock to be outstanding after this Offering     10,000  

 

(a) Excludes 367,500 shares of Common Stock issuable upon the exercise of stock options expected to be issued at the Offering under the 2017 Omnibus Equity Incentive Plan.

 

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SELECTED HISTORICAL COMBINED FINANCIAL AND OTHER DATA OF

FATBURGER NORTH AMERICA, INC. AND

BUFFALO’S FRANCHISE CONCEPTS, INC. AND SUBSIDIARY

 

The following tables present the summary historical financial and other data for Fatburger North America, Inc. and Buffalo’s Franchise Concepts, Inc., Fatburger North America, Inc. and Buffalo’s Franchise Concepts, Inc. were historically under common control of FCCG and are the predecessors of the issuer, FAT Brands Inc., for financial reporting purposes. The selected statement of operations data for each of the 13 weeks ended March 26, 2017 and March 27, 2016, and the summary balance sheet data as of March 26, 2017 are derived from the unaudited financial statements of Fatburger North America, Inc. and the unaudited financial statements of Buffalo’s Franchise Concepts, Inc. contained herein. The selected statement of operations and combined statement of operations data for each of the years ended December 25, 2016 and December 27, 2015, and the selected balance sheet data and combined balance sheet data as of December 25, 2016 and December 27, 2015 are derived from the audited financial statements of Fatburger North America, Inc. and the audited consolidated financial statements of Buffalo’s Franchise Concepts, Inc. and Subsidiary contained herein. The selected statement of operations and combined statement of operations data for each of the years ended December 28, 2014, December 29, 2013 and December 25, 2012, and the selected balance sheet data and combined balance sheet data as of December 28, 2014, December 29, 2013 and December 25, 2012 are derived from the audited financial statements of Fatburger North America, Inc. and the audited consolidated financial statements of Buffalo’s Franchise Concepts, Inc. and Subsidiary that are not contained herein.

 

The historical financial and other data of Fatburger North America, Inc. and Buffalo’s Franchise Concepts, Inc. have been combined on a pro forma basis through mathematical addition to show how FAT Brands Inc. would have performed if simply combined as one operating entity for the periods presented. All same-store sales growth percentages were calculated on a local currency basis to exclude the effect of currency fluctuations. In the opinion of our management, such financial and other data reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation financial position and results of operations for those periods.

 

The results of operations for the periods presented below are not necessarily indicative of the results to be expected for any future period and the results for any interim period are not necessarily indicative of the results that may be expected for a full fiscal year. The information set forth below should be read together with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and the financial statements and the combined financial statements, and the accompanying notes included elsewhere in this Offering Circular.

 

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(In thousands, except net income per share data)

 

   13 weeks ended
March 26, 2017
   13 weeks ended
March 27, 2016
 
   FBNA   BFCI   Combined   FBNA   BFCI   Combined 
                         
Statement of operations data:                              
                               
Revenues                              
Royalties  $1,153   $308   $1,461   $1,210   $352   $1,562 
Sales of franchises   795    105    900    775    130    905 
Management fee   15    -    15    29    -    29 
Total revenues   1,963    413    2,377    2,014    482    2,496 
                               
Selling, general and administrative expenses   580    140    720    730    176    906 
                               
Income from operations   1,383    273    1,656    1,284    306    1,590 
                               
Other income (expense)             -              - 
Interest income (expense)   -    -    -    -    -    - 
Other income (expense)   1    -    1    (24)   36    12 
Total other income (expense)   1    -    1    (24)   36    12 
                               
Income before income tax expense   1,384    273    1,657    1,260    342    1,602 
                               
Income tax expense   497    96    593    496    117    613 
                               
Net income  $887   $177   $1,064   $764   $225   $989 
                               
EBITDA (1)  $1,384   $273   $1,657   $1,260   $342   $1,602 
                               
Pro forma net income per share data (unaudited) (2)                              
Pro forma weighted average shares of Common Stock outstanding:                              
Basic   10,000    10,000    10,000    10,000    10,000    10,000 
Diluted   10,000    10,000    10,000    10,000    10,000    10,000 
Pro forma net income available to Common Stock per share:                              
Basic  $0.09   $0.02   $0.11   $0.08   $0.02   $0.10 
Diluted  $0.09   $0.02   $0.11   $0.08   $0.02   $0.10 

 

 

(1) EBITDA is defined as earnings before interest, taxes, depreciation and amortization. We use the term EBITDA, as opposed to income from operations, as it is widely used by analysts, investors and other interested parties to evaluate companies in our industry. We believe that EBITDA is an appropriate measure of operating performance because it eliminates the impact of expenses that do not relate to business performance. EBITDA is not a GAAP measure of our financial performance or liquidity and should not be considered as an alternative to net income (loss) as a measure of financial performance or cash flows from operations as measures of liquidity, or any other performance measure derived in accordance with GAAP.

 

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A reconciliation of net income to EBITDA is set forth below:

 

    13 weeks ended March 26, 2017     13 weeks ended March 27, 2016  
    FBNA     BFCI     Combined     FBNA     BFCI     Combined  
                                     
(in thousands)                                                
                                                 
Net income   887     177       1,064    $   764     225     989  
Depreciation expense     -             -       -       -       -  
Interest income (expense)     -             -       -       -       -  
Income tax expense     497       96       593       496       117       613  
EBITDA   1,384     273     1,657     1,260     342     1,602  

 

 

(2)       The unaudited pro forma net income data give effect to the Reorganization Transactions, the Ponderosa Acquisition, and assume the sale of 2,000,000 shares of our Common Stock by us in this Offering at the initial public offering price of $12.00 per share and the use of proceeds contemplated hereby. For a detailed presentation of the unaudited pro forma information, including a description of the transactions and assumptions underlying the pro forma adjustments giving rise to these results, see the section entitled “Unaudited Pro Forma Consolidated Financial Information” included elsewhere in this Offering Circular.

 

(in thousands)

    March 26, 2017
    FBNA   BFCI   Combined
            (unaudited)
Combined balance sheet data:                        
                         
Cash                        
Total assets     13,863       8,245       22,108  
Total liabilities     5,649       1,181