10-Q: FAT Brands Reports Widened Q2 Loss Amid Revenue Decline and Mounting Legal Costs

FAT Brands Inc. reported a significantly increased net loss and declining revenue for the second quarter of 2025, driven by higher general and administrative expenses and ongoing legal challenges, despite a recent spin-off of its Twin Peaks and Smokey Bones brands.

Summary

• Net loss attributable to FAT Brands Inc. widened to $100.2 million for the twenty-six weeks ended June 29, 2025, compared to $77.7 million for the same period in 2024.
• Total revenue decreased by 5.0% to $288.9 million for the twenty-six weeks ended June 29, 2025, down from $304.0 million in the prior year, primarily due to lower restaurant sales from underperforming Smokey Bones closures and lower same-store sales.
• Loss from operations increased significantly to $24.1 million for the twenty-six weeks ended June 29, 2025, compared to $4.1 million in the same period of 2024.
• General and administrative expenses surged by 30.0% to $77.5 million for the twenty-six weeks ended June 29, 2025, mainly due to increased share-based compensation related to Twin Hospitality Group Inc. and higher professional fees for pending litigation.
• Cash and restricted cash decreased to $43.9 million as of June 29, 2025, from $67.4 million at December 29, 2024.
• The company had negative working capital of $264.6 million as of June 29, 2025.
• Dividends on Series B Cumulative Preferred Stock have been paused starting April 2025, though they will continue to accrue. No common stock dividends were declared or paid in the first two quarters of 2025.

Sentiment

Score: 2

Explanation: The company reported significantly widened losses, declining revenue, negative working capital, and a substantial accumulated deficit. While there are some positive developments like the DOJ dismissal and settlement of derivative suits, the overall financial health, high debt load, and ongoing SEC litigation present considerable challenges and uncertainty. The pausing of preferred dividends further underscores financial strain.

Positives

• Net cash used in operating activities slightly decreased to $40.1 million for the twenty-six weeks ended June 29, 2025, from $42.6 million in the prior year.
• Net cash used in investing activities significantly decreased to $2.4 million for the twenty-six weeks ended June 29, 2025, from $18.2 million in the prior year, primarily due to decreased property and equipment purchases.
• The U.S. Department of Justice moved to dismiss the indictment against the company and its former executives without prejudice on July 29, 2025.
• The company completed the spin-off of Twin Hospitality Group Inc. (Twin Peaks and Smokey Bones brands) on January 29, 2025, which could streamline operations.
• Settlement in principle reached for Harris I and Harris II derivative litigations in January 2025, with stipulations signed in July 2025, pending court approval.

Negatives

• Net loss attributable to FAT Brands Inc. increased to $100.2 million for the twenty-six weeks ended June 29, 2025, from $77.7 million in the prior year.
• Total revenue decreased by 5.0% to $288.9 million for the twenty-six weeks ended June 29, 2025, compared to $304.0 million in the prior year.
• Loss from operations widened to $24.1 million for the twenty-six weeks ended June 29, 2025, from $4.1 million in the prior year.
• Basic and diluted loss per common share worsened to $(5.91) for the twenty-six weeks ended June 29, 2025, from $(4.80) in the prior year.
• General and administrative expenses increased by 30.0% to $77.5 million for the twenty-six weeks ended June 29, 2025, driven by share-based compensation and professional fees.
• The company has a history of net losses and an accumulated deficit of $553.6 million as of June 29, 2025.
• Negative working capital stood at $264.6 million as of June 29, 2025.
• Cash and restricted cash decreased by $23.5 million from December 29, 2024, to June 29, 2025.
• Dividends on Series B Cumulative Preferred Stock have been paused since April 2025, though they accrue.
• The SEC filed a complaint against the company and its former executives in May 2024, alleging multiple violations, seeking injunctive relief, disgorgement, and civil monetary penalties.

Risks

• Inability to achieve operating plan may require additional financing through debt or equity, with no assurance of availability on acceptable terms.
• Significant liquidity is required for world-wide expansion of franchise locations, dependent on franchisees' ability to obtain capital and suitable real estate.
• Future acquisitions may necessitate additional debt or equity financing, impacting the ability to acquire new concepts if financing is unavailable.
• Liabilities of $91.8 million related to redeemable preferred stock put options, which accrue interest until repayment.
• Ongoing legal proceedings, including the SEC complaint and derivative lawsuits, could result in significant financial penalties, disgorgement, and defense costs that may exceed insurance coverage.
• Litigation may be time-consuming and divert management's attention and resources.
• The company is obligated to indemnify current and former directors for defense costs in certain lawsuits, which could adversely affect financial condition.
• Uncertain outcome of various lawsuits, including environmental contamination and indemnification claims, with potential for significant losses.

Future Outlook

The company plans to use a combination of cash flows from operations, cash on hand, and proceeds from issued/repurchased securitized notes to cover working capital requirements for the next twelve months. Additional forms of financing (debt or equity) may be required if the operating plan is not achieved, though availability on acceptable terms is not assured. The company intends to continue its growth strategy through expanding existing brands and acquiring new restaurant concepts. The company may continue to refranchise corporate-owned restaurants, as permitted by recent debt amendments. The declaration and payment of future dividends are subject to Board discretion and financial performance, with no assurance of future common or preferred dividends.

Management Comments

• "We plan on the combination of cash flows from operations, cash on hand, $73.5 million of issued but not sold aggregate principal amount of fixed rate secured notes and $75.4 million aggregate principal amount of repurchased but not re-sold fixed rate secured notes to be sufficient to cover any working capital requirements for the next twelve months from the date of this report."
• "If the Company does not achieve its operating plan, additional forms of financing may be required through the issuance of debt or equity. Although management believes it will have access to financing, no assurances can be given that such financing will be available on acceptable terms, in a timely manner or at all."
• "We believe that we have sufficient liquidity to meet our liquidity needs and capital resource requirements for at least the next twelve months primarily through currently available cash and cash equivalents, cash flows from operations and access to the capital markets."
• "The declaration and payment of future dividends, as well as the amount thereof, are subject to the discretion of our Board of Directors. The amount and size of any future dividends will depend upon our future results of operations, financial condition, capital levels, cash requirements, contractual restrictions and other factors. There can be no assurance that we will declare and pay dividends in future periods."

Industry Context

The company operates in the multi-brand restaurant franchising sector, which typically offers strong profit margins and free cash flow due to its asset-light model, minimizing real estate and capital investment risks. The strategy of expanding existing brands and acquiring new concepts with a centralized management platform aims to leverage corporate overhead synergies. The closure of underperforming company-owned locations and the refranchising efforts align with a focus on the asset-light franchisor model, a common strategy in the industry to improve profitability and reduce operational risk. The spin-off of Twin Hospitality Group Inc. reflects a trend towards segmenting businesses to unlock value or focus on core competencies, potentially allowing Twin Hospitality to operate more independently while FAT Brands maintains control.

Comparison to Industry Standards

• NA

Management Changes

Corporate Governance

Legal Proceedings

• U.S. Attorney and SEC investigations opened in December 2021 concerning the company's 2020 merger with Fog Cutter Capital Group Inc., transactions with former CEO Andrew Wiederhorn, and his compensation.
• The U.S. Department of Justice indicted the company on May 10, 2024, for two Sarbanes-Oxley Act violations for extending $2.65 million in credit to former CEO Andrew Wiederhorn in 2019 and 2020; the indictment was dismissed without prejudice on July 29, 2025.
• The SEC filed a complaint in May 2024 against the company, former CEO Andrew Wiederhorn, former CFO Rebecca Hershinger, and SVP of Finance Ron Roe, alleging violations related to undisclosed related party transactions, executive salaries, inadequate books/controls, false statements on liquidity, and a personal loan to the CEO; the SEC seeks injunctive relief, disgorgement, and civil monetary penalties.
• James Harris and Adam Vignola, derivatively on behalf of FAT Brands, Inc. v. Squire Junger, et al. (Harris I, Delaware Chancery Court, Case No. 2021-0511-NAC): Stockholder derivative action filed June 10, 2021, alleging breach of fiduciary duty, unjust enrichment, and waste related to the December 2020 merger; agreed in principle to settle in January 2025, stipulation signed July 2025, subject to court approval.
• James Harris and Adam Vignola, derivatively on behalf of FAT Brands, Inc. v. Squire Junger, et al. (Harris II, Delaware Chancery Court, Case No. 2022-0254-NAC): Stockholder derivative action filed March 17, 2022, alleging breach of fiduciary duty related to the June 2021 recapitalization; agreed in principle to settle in January 2025, stipulation signed July 2025, subject to court approval.
• Richard Collura v. Andrew A. Wiederhorn, et al. (Delaware Chancery Court, Case No. 2024-1305-NAC): Stockholder derivative action filed December 2024 against current and former officers and directors, alleging an unlawful scheme to distribute money to former CEO and family, causing stock price decline; the company is not a defendant but indemnifies directors.
• Mitchell Kates v. FAT Brands, Inc., Andrew Wiederhorn, Kenneth J. Kuick and Robert G. Rosen (United States District Court for the Central District of California, Case No. 2:24-cv-04775-MWF-MAA): Putative class action lawsuit filed June 7, 2024, alleging false and misleading statements and omissions related to government investigations, inflating stock price; defendants moved to dismiss on June 6, 2025, with a hearing set for September 15, 2025.
• Stratford Holding LLC v. Foot Locker Retail Inc. (U.S. District Court for the Western District of Oklahoma, Case No. 5:12-cv-772-HE): Environmental contamination lawsuit from 2012/2013, seeking $12.0 million to $22.0 million in damages; the company's subsidiary Fog Cutter Acquisition, LLC is in default for not timely responding; reserves recorded.
• SBN FCCG LLC v FCCGI (Los Angeles Superior Court, Case No. BS172606): Indemnification claim with a $0.7 million judgment from a New York case; parties agreed to settle for $0.6 million in May 2019, with $0.5 million remaining unpaid.
• SBN FCCG LLC v FCCGI (Supreme Court of the State of New York, County of New York, Index No. 650197/2023): Indemnification claim filed January 13, 2023, alleging $12 million in incurred costs; motion to dismiss granted March 11, 2024, but SBN filed a notice of appeal on April 10, 2024.
• The company accrued an aggregate of $5.1 million for specific matters and claims involving franchisees as of June 29, 2025.

Related Party Transactions

• The SEC complaint alleges the company failed to disclose certain related party transactions and the salaries of former CEO Andrew Wiederhorn's adult children working at the company.
• The SEC complaint also alleges the company directly or indirectly extended credit to former CEO Andrew Wiederhorn in the form of a personal loan.
• The DOJ indictment (later dismissed) was for extending credit to former CEO Andrew Wiederhorn in the amount of $2.65 million in 2019 and 2020.

Stakeholder Impact

• Shareholders: Experienced a significant net loss per share, suspension of preferred dividends, and no common stock dividends, indicating reduced returns and financial strain. The ongoing legal proceedings create uncertainty and potential for further financial impact. The spin-off of Twin Hospitality Group Inc. may affect the value proposition of FAT Brands shares.
• Employees: Increased share-based compensation expense related to Twin Hospitality Group Inc. may benefit some employees, but the company's overall financial performance and restaurant closures (e.g., Smokey Bones locations) could raise concerns about job security.
• Customers: Closure of underperforming Smokey Bones locations and conversion of one location to Twin Peaks may impact customer access to those brands in certain areas.
• Franchisees: The company's refranchising efforts and focus on the asset-light model suggest continued support for the franchise system, but lower same-store sales could impact franchisee profitability.
• Creditors: The company's high debt load, negative working capital, and increased interest expense, along with the extension of anticipated call/repayment dates on securitization notes, indicate potential challenges in debt servicing, though the company states it is in compliance with covenants. The $91.8 million in redeemable preferred stock liabilities also represents a significant obligation.

Next Steps

• Continue to defend vigorously against the SEC complaint.
• Seek court approval and non-objection from the United States for the settlement of Harris I and Harris II derivative litigations.
• Monitor the outcome of the Kates v. FAT Brands, Inc. class action lawsuit, with a motion to dismiss hearing set for September 15, 2025.
• Monitor the appeal in the SBN FCCG LLC v FCCGI indemnification claim.
• Manage liquidity using available cash, issued/repurchased notes, and potentially seek additional financing if operating plan targets are not met.
• Continue refranchising efforts, particularly for Fazoli's restaurants.
• Board of Directors to determine future dividend declarations based on financial performance and capital requirements.
• Recognize remaining share-based compensation expense of $0.7 million over approximately 2.7 years.
• Unexercised common stock warrants will be automatically exercised via cashless exercise on October 14, 2025.

Key Dates

Recommendation

The company's financial performance shows significant deterioration with a widening net loss, declining revenue, and substantial negative working capital. The high debt burden and ongoing, complex legal challenges, including a major SEC complaint, create considerable uncertainty and risk. While the DOJ indictment was dismissed and some derivative suits are settling, the overall financial health and legal overhang suggest a challenging outlook, making the stock a high-risk investment with limited near-term upside potential. The suspension of preferred dividends further signals financial stress.

Keywords

Restaurant franchising, Multi-brand restaurant, FAT Brands, SEC filing, Quarterly report, Financial results, Net loss, Revenue decline, Liquidity, Debt, Legal proceedings, Share-based compensation, Corporate governance, Twin Peaks, Smokey Bones, Franchise operations, QSR, Casual dining