UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 24, 2017March 29, 2020

OR

Commission file number 001-38250

FAT Brands Inc.

(Exact name of registrant as specified in its charter)

9720 Wilshire Blvd., Suite 500

Beverly Hills, CA 90212

(Address of principal executive offices, including zip code)

(310) 402-0600319-1850

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ] No [X]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [X]

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes [  ] No [X]

As of November 30, 2017,May 22, 2020, there were 10,000,00011,894,895 shares of common stock outstandingoutstanding.

EXPLANATORY NOTE

On May 13, 2020, FAT Brands Inc. (the “Company”, “we” and “our”) filed a Current Report on Form 8-K with the U.S. Securities and Exchange Commission (the “SEC”) indicating its reliance on the SEC order issued on March 4, 2020 (Release No. 34-88318) under Section 36 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), granting exemptions from specified provisions of the Exchange Act and certain rules thereunder, as amended and superseded by Release No. 34-88465 issued on March 25, 2020 (collectively, the “Order”).

The Company filed the Form 8-K indicating its intension to rely on the Order permitting extensions in filings due to circumstances related to the novel coronavirus pandemic (“COVID-19”). As stated in the Form 8-K, the Company required additional time to finalize its Quarterly Report on Form 10-Q as of and for the quarter ended March 29, 2020, (the “Quarterly Report”) by the original deadline of May 13, 2020 due to the outbreak of, and local, state and federal governmental responses to, COVID-19. The Company’s operations have experienced disruptions due to the circumstances surrounding the COVID-19 pandemic including, but not limited to, suggested and mandated social distancing and shelter-in-place orders. The COVID-19-related shelter-in-place orders and resulting office closures have severely limited access to our facilities by our financial reporting and accounting staff and the staff of our auditor, and thus impacted the Company’s ability to fulfill required quarterly review processes and procedures on a timely basis.

In light of the impact of the factors described above, the Company was unable to compile and review certain information required in order to permit it to timely file the Quarterly Report by May 13, 2020, the original filing deadline, without unreasonable effort or expense. The Company relied on the Order in furnishing the Form 8-K by the original filing deadline of the Quarterly Report.

FAT BRANDS INC.

QUARTERLY REPORT ON FORM 10-Q

September 24, 2017March 29, 2020

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

FAT BRANDS INC.

CONSOLIDATED BALANCE SHEETSHEETS

(dollars in thousands, except share data)

The accompanying notes are an integral part of these consolidated financial statements.

FAT BRANDS INC.

STATEMENTCONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(dollars in thousands)thousands, except per share data)

Period from March 21, 2017 (inception) to September 24, 2017

For the thirteen weeks ended March 29, 2020 and March 31, 2019 (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

FAT BRANDS INC.

STATEMENTCONSOLIDATED STATEMENTS OF STOCKHOLDER’SSTOCKHOLDERS’ EQUITY

(Unaudited)

((dollars in thousands, except share data)

Period fromUnaudited

For the thirteen weeks ended March 21, 2017 (inception) to September 24, 201729, 2020

For the thirteen weeks ended March 31, 2019

The accompanying notes are an integral part of these consolidated financial statements.

FAT BRANDS INC.

STATEMENTCONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(dollars in thousands)

Period from March 21, 2017 (inception) to September 24, 2017

For the thirteen weeks ended March 29, 2020 and March 31, 2019 (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1 - BASIS OF PRESENTATION1. ORGANIZATION AND ACCOUNTING POLICIESRELATIONSHIPS

Organization and Nature of Business

FAT Brands Inc. (the “Company”“Company”) was formed as a Delaware corporation on March 21, 2017 as a wholly owned subsidiary of Fog Cutter Capital Group Inc. (“FCCG”FCCG”). TheOn October 20, 2017, the Company was formed for the purpose of completing acompleted an initial public offering and related transactions,issued additional shares of common stock representing 20 percent of its ownership (the “Offering”). The Company’s common stock trades on the Nasdaq Capital Market under the symbol “FAT.” As of March 29, 2020, FCCG continues to control a significant voting majority of the Company.

The Company is a multi-brand franchisor specializing in fast casual and casual dining restaurant concepts around the world. As of March 29, 2020, the Company owns and franchises eight restaurant brands: Fatburger, Buffalo’s Cafe, Buffalo’s Express, Hurricane Grill & Wings, Ponderosa Steakhouses, Bonanza Steakhouses, Yalla Mediterranean and Elevation Burger. Combined, as of March 29, 2020, these brands have over 370 locations and more than 200 under development.

The Company licenses the right to use its brand names and provides franchisees with operating procedures and methods of merchandising. Upon signing a franchise agreement, the franchisor is committed to provide training, some supervision and assistance, and access to operations manuals. As needed, the franchisor will also provide advice and written materials concerning techniques of managing and operating the restaurants.

COVID-19

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues to spread throughout the United States and other countries. As a result, Company franchisees have temporarily closed some retail locations, reduced or modified store operating hours, adopted a “to-go” only operating model, or a combination of these actions. These actions have reduced consumer traffic, all resulting in a negative impact to Company revenues. While the disruption to our business from the COVID-19 pandemic is currently expected to be temporary, there is a great deal of uncertainty around the severity and duration of the disruption, and also the longer-term effects on our business and economic growth and consumer demand in the U.S. and worldwide. The effects of COVID-19 may materially adversely affect our business, results of operations, liquidity and ability to service our existing debt, particularly if these effects continue in place for a significant amount of time.

Liquidity

The Company recognized a loss from operations of $578,000 during the thirteen weeks ended March 29, 2020 and income from operations of $665,000 for the thirteen weeks ended March 31, 2019, respectively. The Company recognized net losses of $2,370,000 and $710,000 during the thirteen weeks ended March 29, 2020 and March 31, 2019, respectively. The reduction in earnings is primarily due to reductions in revenues due to COVID-19 coupled with higher general and administrative costs.

On March 6, 2020, the Company completed a whole-business securitization (the “Securitization”) through the creation of a bankruptcy-remote issuing entity, FAT Brands Royalty I, LLC (“FAT Royalty”) in which FAT Royalty issued new notes (the “Securitization Notes”) pursuant to an indenture and the supplement thereto (collectively, the “Indenture”). Net proceeds from the issuance of the Securitization Notes were $37,314,000, which consisted of the combined face amount of $40,000,000, net of discounts of $246,000 and debt offering costs of $2,440,000 (See Note 10). A portion of the proceeds from the Securitization was used to repay the remaining $26,771,000 in outstanding balance under the Loan and Security Agreement and to acquire and continue certain businesses previously conducted by subsidiaries of FCCG. These planned transactions have occurred subsequentpay the Securitization debt offering costs. The remaining proceeds from the Securitization will be used for working capital.

Subsequent to the effective date of the accompanying financial statements, andMarch 29, 2020, as a result of COVID-19, the Company received proceeds from the Payroll Protection Program administered by the Small Business Administration. These loan proceeds relate to FAT Brands Inc. as well as five restaurant locations that are part of the Company’s refranchising program.

While the Company expects COVID-19 to negatively impact its business, results of operations, and financial statements reflectposition, the related financial impact cannot be reasonably estimated at this time. However, the Company believes that the Company has engaged only in organizational activitiesworking capital from the Securitization combined with receipts collected from the limited operations of its inception through September 24, 2017.franchisees, and disciplined management of the Company’ operating expenses will be sufficient for the twelve months of operations following the issuance of this Form 10-Q.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Nature of operations –Each franchising subsidiary licenses the right to use its brand name and provides franchisees with operating procedures and methods of merchandising. Upon signing a franchise agreement, the franchisor is committed to provide training, some supervision and assistance, and access to operations manuals. As needed, the franchisor will also provide advice and written materials concerning techniques of managing and operating the restaurants.

The Company operates on a 52-week calendar and its fiscal year ends on the last Sunday of the calendar year. Consistent with the industry practice, the Company measures its stores’ performance based upon 7-day work weeks. Using the 52-week cycle ensures consistent weekly reporting for operations and ensures that each week has the same days, since certain days are more profitable than others. The use of this fiscal year means a 53^rd week is added to the fiscal year every 5 or 6 years. In a 52-week year, all four quarters are comprised of 13 weeks. In a 53-week year, one extra week is added to the fourth quarter. Both fiscal 2020 and 2019 are 52-week years.

Principles of consolidation – The accompanying interimconsolidated financial statements include the accounts of the Company are unaudited and its subsidiaries. The accounts of Yalla Mediterranean have been prepared in conformity with the requirementsincluded since its acquisition on December 3, 2018. The operations of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), particularly Rule 10-01 thereof, which governs the presentation of interim financial statements. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The accompanying interim financial statements should be read in conjunction with the disclosures contained in the Company’s Offering Circular filed with the Securities and Exchange Commission on October 23, 2017 (the “Offering Circular”). ThereElevation Burger have been no changes to the Company’s significant accounting policies as describedincluded since its acquisition on June 19, 2019. Intercompany accounts have been eliminated in the Offering Circular.consolidation.

InUse of estimates in the Company’s opinion, all adjustments, comprised of normal recurring accruals necessary for the fair presentationpreparation of the interimconsolidated financial statements have been included in the accompanying financial statements. Operating results for the period from the Company’s inception through September 24, 2017 are not indicative of the results that may be expected for the remainder of the period ending December 31, 2017.

– The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosuresdisclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the determination of fair values of certain financial instruments for which there is no active market, the allocation of basis between assets acquired, sold or retained, and valuation allowances for notes receivable and accounts receivable. Estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

At September 24, 2017, certain Company officers and directors had indirect majority voting control of the Company.

NOTE 2 - DEFERRED OFFERING COSTSFinancial statement reclassification – Certain account balances from prior periods have been reclassified in these consolidated financial statements to conform to current period classifications.

During the period from inception through September 24, 2017,Credit and Depository Risks – Financial instruments that potentially subject the Company incurred coststo concentrations of credit risk consist principally of cash and accounts receivable. Management reviews each of its customer’s financial conditions prior to entry into a franchise or other agreement and believes that it has adequately provided for any exposure to potential credit losses. As of March 29, 2020, accounts receivable, net of allowance for doubtful accounts, totaled $2,288,000 with no customer representing more than 10% of that amount. As of December 29, 2019, the Company had two customers each representing 20% of accounts receivable, net of allowance for doubtful accounts.

The Company maintains cash deposits in connection with its organization and initial public offeringnational financial institutions. From time to time the balances for these accounts exceed the Federal Deposit Insurance Corporation’s (“FDIC”) insured amount. Balances on interest bearing deposits at banks in the United States are insured by the FDIC up to $250,000 per account. As of March 29, 2020, the Company had uninsured deposits in the amount of $232,000. Of this$4,938,000. As of December 29, 2019, the Company had no accounts with a combined uninsured balance.

Restricted Cash –The Company has restricted cash consisting of funds required to be held in trust in connection with the Company’s Securitization. Current portion of restricted cash at March 29, 2020. consisted of $688,000 of funds required to be held in trust in connection with the Company’s securitized debt with no similar balances as of December 29, 2019. Non-current restricted cash of $400,000 at March 29, 2020, represents interest reserves required to be set aside for the duration of the securitized debt with no similar balances as of December 29, 2019.

Accounts receivable – Accounts receivable are recorded at the invoiced amount $8,000 was paymentand are stated net of an allowance for internet rights todoubtful accounts. The allowance for doubtful accounts is the trade name. The funds for these expenditures were provided by an advance from FCCGCompany’s best estimate of $201,000 and accounts payable in the amount of $31,000.probable credit losses in the existing accounts receivable. The deferred offering costs will be nettedallowance is based on historical collection data and current franchisee information. Account balances are charged off against the proceedsallowance after all means of the initial public offeringcollection have been exhausted and the intercompany advance will be repaid at that time.

NOTE 3 - SUBSEQUENT EVENTSpotential for recovery is considered remote.

IssuanceTrade notes receivable –Trade notes receivable are created when an agreement is reached to settle a delinquent franchisee receivable account and the entire balance is not immediately paid. Generally, trade notes receivable include personal guarantees from the franchisee. The notes are made for the shortest time frame negotiable and will generally carry an interest rate of Common Stock6% to 7.5%. Reserve amounts on the notes are established based on the likelihood of collection.

Assets classified as held for sale –Assets are classified as held for sale when the Company commits to a plan to sell the asset, the asset is available for immediate sale in its present condition and an active program to locate a buyer at a reasonable price has been initiated. The sale of these assets is generally expected to be completed within one year. The combined assets are valued at the lower of their carrying amount or fair value, net of costs to sell and included as current assets on the Company’s consolidated balance sheet. Assets classified as held for sale are not depreciated. However, interest attributable to the liabilities associated with assets classified as held for sale and other related expenses are recorded as expenses in the Company’s consolidated statement of operations.

On October 19, 2017,Goodwill and other intangible assets – Intangible assets are stated at the Company conducted a forward splitestimated fair value at the date of its common stock, par value $0.0001,acquisition and include goodwill, trademarks, and franchise agreements. Goodwill and other intangible assets with indefinite lives, such as trademarks, are not amortized but are reviewed for impairment annually or more frequently if indicators arise. All other intangible assets are amortized over their estimated weighted average useful lives, which increased shares held by FCCGrange from nine to 8,000,000 shares. On October 20, 2017,twenty-five years. Management assesses potential impairments to intangible assets at least annually, or when there is evidence that events or changes in circumstances indicate that the Company completed its initial public offering and issued 2,000,000 additional shares of its common stock at an offering price of $12.00 per share, for an aggregatecarrying amount of $24,000,000 (the “Offering”). The net proceedsan asset may not be recovered. Judgments regarding the existence of impairment indicators and future cash flows related to intangible assets are based on operational performance of the Offering were approximately $21,200,000 after deducting the selling agent fees of approximately $1,780,800acquired businesses, market conditions and Offering expenses of approximately $1,019,200. The shares associated with the Offering constitute 20 percent of the currently outstanding common stock of the Company. The common stock of the Company trades on the Nasdaq Capital Market under the symbol “FAT.”other factors.

The Reorganization TransactionsIncome taxes

In connection with the closing of the Offering, the Company completed the following transactions, which are referred to collectively as the “Reorganization Transactions”:

Effective October 20, 2017, FCCG contributed two of its operating subsidiaries, Fatburger North America Inc. (“Fatburger”) and Buffalo’s Franchise Concepts Inc., (“Buffalo’s”) to the Company 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 (the “Related Party Debt”). The contribution was consummated pursuant to a Contribution Agreement between the Company and FCCG. Approximately $9,500,000 of the net proceeds from the Offering was used to repay a portion of Related Party Debt owed to FCCG.

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 provided for a cash purchase price of $10,550,000 to be paid at closing. Effective October 20, 2017, the Company provided approximately $10,550,000 of the net proceeds from the Offering to FCCG to consummate the acquisition of Homestyle Dining LLC. In exchange, the Company received full ownership in the Homestyle Dining operating subsidiaries: Ponderosa Franchising Company, Bonanza Restaurant Company, Ponderosa International Development, Inc. and Puerto Rico Ponderosa, Inc. (collectively, “Ponderosa”). These subsidiaries conduct the worldwide franchising of the Ponderosa Steakhouse Restaurants and the Bonanza Steakhouse Restaurants.

– Effective October 20, 2017, the Company entered into a Tax Sharing Agreement with FCCG that provides that FCCG will, to the extent permitted by applicable law, file consolidated federal, California and Oregon (and possibly other jurisdictions where revenue is generated, at FCCG’s election) income tax returns with the Company and its subsidiaries. The Company will pay FCCG the amount that its tax liability would have been had it filed a separate return. As such, the Company accounts for income taxes as if it filed separately from FCCG.

The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on the differences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain.

A two-step approach is utilized to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon tax authority examination, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon the ultimate settlement.

Franchise Fees: The franchise arrangement is documented in the form of a franchise agreement. The franchise arrangement requires the Company to perform various activities to support the brand that do not directly transfer goods and services to the franchisee, but instead represent a single performance obligation, which is the transfer of the franchise license. The services provided by the Company are highly interrelated with the franchise license and are considered a single performance obligation. Franchise fee revenue from the sale of individual franchises is recognized over the term of the individual franchise agreement. Unamortized non-refundable deposits collected in relation to the sale of franchises are recorded as deferred franchise fees.

The franchise fee may be adjusted at management’s discretion or in a situation involving store transfers. Deposits are non-refundable upon acceptance of the franchise application. In the event a franchisee does not comply with their development timeline for opening franchise stores, the franchise rights may be terminated, and franchise fee revenue is recognized for non-refundable deposits.

Store opening fees – Prior to September 29, 2019, the Company recognized store opening fees in the amount of $35,000 to $60,000 from the up-front fees collected from franchisees upon store opening. The amount of the fee was dependent on brand and location (domestic versus international stores). The remaining balance of the up-front fees were then amortized as franchise fees over the life of the franchise agreement. If the fees collected were less than the respective store opening fee amounts, the full up-front fees were recognized at store opening. The store opening fees were based on out-of-pocket costs to the Company for each store opening and are primarily comprised of labor expenses associated with training, store design, and supply chain setup. International fees recognized were higher due to the additional cost of travel.

During the fourth quarter of 2019, the Company performed a study of other public company restaurant franchisors’ application of ASC 606 and determined that a preferred, alternative industry application exists in which the store opening fee portion of the franchise fees is amortized over the life of the franchise agreement rather than at milestones of standalone performance obligations in the franchise agreements. In order to provide financial reporting consistent with other franchise industry peers, the Company applied this preferred, alternative application of ASC 606 during the fourth quarter of 2019 on a prospective basis. As a result of the adoption of this preferred accounting treatment under ASC 606, the Company discontinued the recognition of store opening fees upon store opening and began accounting for the entire up-front deposit received from franchisees as described above inFranchise Fees.A cumulative adjustment to store opening fees and franchise fees was recorded in the fourth quarter of 2019 for store opening fees recognized during the first three quarters of 2019. (See “Immaterial Adjustments Related to Prior Periods”,below.)

Royalties –In addition to franchise fee revenue, we collect a royalty calculated as a percentage of net sales from our franchisees. Royalties range from 0.75% to 6% and are recognized as revenue when the related sales are made by the franchisees. Royalties collected in advance of sales are classified as deferred income until earned.

Advertising – The Company requires advertising payments from franchisees based on a percent of net sales. The Company also receives, from time to time, payments from vendors that are to be used for advertising. Advertising funds collected are required to be spent for specific advertising purposes. Advertising revenue and associated expense is recorded on the Company’s consolidated statement of operations. Assets and liabilities associated with the related advertising fees are reflected in the Company’s consolidated balance sheet.

Share-based compensation– The Company has a stock option plan which provides for options to purchase shares of the Company’s common stock. Options issued under the plan may have a variety of terms as determined by the Board of Directors including the option term, the exercise price and the vesting period. Options granted to employees and directors are valued at the date of grant and recognized as an expense over the vesting period in which the options are earned. Cancellations or forfeitures are accounted for as they occur. Stock options issued to non-employees as compensation for services are accounted for based upon the estimated fair value of the stock option. The Company recognizes this expense over the period in which the services are provided. Management utilizes the Black-Scholes option-pricing model to determine the fair value of the stock options issued by the Company. See Note 14 for more details on the Company’s share-based compensation.

Earnings per share – The Company reports basic earnings or loss per share in accordance with FASB ASC 260, “Earnings Per Share”. Basic earnings per share is computed using the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share is computed using the weighted average number of common shares outstanding plus the effect of dilutive securities during the reporting period. Any potentially dilutive securities that have an anti-dilutive impact on the per share calculation are excluded. During periods in which the Company reports a net loss, diluted weighted average shares outstanding are equal to basic weighted average shares outstanding because the effect of all potentially dilutive securities would be anti-dilutive.

The Company declared a stock dividend on February 7, 2019 and issued 245,376 shares of common stock in satisfaction of the stock dividend (See Note 16). Unless otherwise noted, earnings per share and other share-based information for 2019 and 2018 have been adjusted retrospectively to reflect the impact of the stock dividend.

Immaterial Adjustments Related to Prior Periods

During the fourth quarter of 2019, the Company identified two immaterial potential adjustments to its previously issued financial statements. These potential adjustments are (1) its assessment of the Series A-1 Fixed Rate Cumulative Preferred Stock and (2) its treatment of the store opening component of its franchise fees under ASC 606.

Based on its assessment of the Series A-1 Fixed Rate Cumulative Preferred Stock, the Company determined that an error occurred in the analysis of the rights that the holders of the Series A-1 Fixed Rate Cumulative Preferred Stock have with respect to the conversion of the securities into shares of the Company’s common stock. In our reassessment, the conversion rights did not represent a beneficial conversion feature as we had initially concluded at the time of issuance.

The Company originally adopted ASC 606 on January 1, 2018. During the fourth quarter of 2019, the Company performed a study of other public company restaurant franchisors’ application of ASC 606 and determined that a preferred, alternative industry application exists in which the store opening fee portion of the franchise fees is amortized over the life of the franchise agreement rather than at milestones of standalone performance obligations in the franchise agreements. In order to provide financial reporting consistent with other franchise industry peers, the Company applied this preferred, alternative application of ASC 606 during the fourth quarter of 2019 on a prospective basis.

In accordance with SEC Staff Accounting Bulletin (“SAB”) No. 99, Materiality, codified in ASC 250 (“ASC 250”), Presentation of Financial Statements, and SAB 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Consolidated Statements of Income, Balance Sheets, Shareholders Equity and Cash Flows, also codified in ASC 250, management assessed the materiality of (1) the error in its treatment of the beneficial conversion feature related to the Series A-1 Fixed Rate Cumulative Preferred Stock and (2) the adoption of the preferential accounting treatment under ASC 606. Based on such analysis of quantitative and qualitative factors, the Company has determined that neither the error nor the adoption of the preferential accounting treatment under ASC 606, in aggregate or individually, were material to any of the reporting periods affected, and no amendments to previously filed 10-Q or 10-K reports with the SEC are required.

Recently Adopted Accounting Standards

In August 2018, the FASB issued ASU 2018-13,Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU adds, modifies and removes several disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, “Fair Value Measurement.” The Company adopted this ASU on December 30, 2019. The adoption of this standard did not have a material effect on the Company’s financial position, results of operations or cash flows.

The FASB issued ASU No. 2018-15,Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40).The new guidance reduces complexity for the accounting for costs of implementing a cloud computing service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The Company adopted this ASU on December 30, 2019. The adoption of this standard did not have a material effect on the Company’s financial position, results of operations or cash flows.

The FASB issued ASU 2019-12,Simplifying the Accounting for Income Taxes:This standard removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. It also adds guidance in certain areas, including the recognition of franchise taxes, recognition of deferred taxes for tax goodwill, allocation of taxes to members of a consolidated group, computation of annual effective tax rates related to enacted changes in tax laws, and minor improvements related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. The Company adopted this ASU on December 30, 2019. The adoption of this standard did not have a material effect on the Company’s financial position, results of operations or cash flows.

NOTE 3. ACQUISITIONS AND SIGNIFICANT TRANSACTIONS

Acquisition of Elevation Burger

On June 19, 2019, the Company completed the acquisition of EB Franchises, LLC, a Virginia limited liability company, and its related companies (collectively, “Elevation Burger”) for a purchase price of up to $10,050,000. Elevation Burger is the franchisor of Elevation Burger restaurants, with 44 locations in the U.S. and internationally.

The purchase price consists of $50,000 in cash, a contingent warrant to purchase 46,875 shares of the Company’s common stock at an exercise price of $8.00 per share (the “Elevation Warrant”), and the issuance to the Seller of a convertible subordinated promissory note (the “Elevation Note”) with a principal amount of $7,509,816, bearing interest at 6.0% per year and maturing in July 2026. The Elevation Warrant is only exercisable in the event that the Company merges with FCCG. The Seller Note is convertible under certain circumstances into shares of the Company’s common stock at $12.00 per share. In connection with the purchase, the Company also loaned $2,300,000 in cash to the Seller under a subordinated promissory note (the “Elevation Buyer Note”) bearing interest at 6.0% per year and maturing in August 2026. The balance owing to the Company under the Elevation Buyer Note may be used by the Company to offset amounts owing to the Seller under the Elevation Note under certain circumstances. In addition, the Seller will be entitled to receive earn-out payments of up to $2,500,000 if Elevation Burger realizes royalty fee revenue in excess of certain amounts. As of the date of the acquisition, the fair market value of this contingent consideration totaled $531,000. As of March 29, 2020 and December 29, 2019, the contingent purchase price payable totaled $656,000 and $633,000, respectively, which includes the accretion of interest expense at an effective interest rate of 18%.

The purchase documents contain customary representations and warranties of the Seller and provides that the Seller will, subject to certain limitations, indemnify the Company against claims and losses incurred or suffered by the Company as a result of, among other things, any inaccuracy of any representation or warranty of the Seller contained in the purchase documents.

The preliminary assessment of the fair value of the net assets and liabilities acquired by the Company for the acquisition of Elevation Burger was estimated at $7,193,000. The allocation of the consideration to the preliminary valuation of net tangible and intangible assets acquired is presented in the table below (in thousands):

The assessment of fair value is preliminary and is based on information that was available to management and through the end of the fiscal quarter. If additional information becomes available to management related to assets acquired or liabilities assumed subsequent to this preliminary assessment of fair value but not later than one year after the date of the acquisition, measurement period adjustments will be recorded in the period in which they are determined, as if they had been completed at the acquisition date. Descriptions of the Company’s assessment of impairment related to COVID-19 of the goodwill and other intangible assets acquired in this acquisition are located in Note 6.

Yalla Mediterranean Transactions

On December 3, 2018, the Company entered into an Intellectual Property Purchase Agreement and License (the “IP Agreement”), and Master Transaction Agreement (the “Master Agreement”) with Yalla Mediterranean, LLC (“Yalla Med”), under which the Company agreed to acquire the intellectual property of the restaurant business of Yalla Mediterranean, LLC (the “Yalla Business”) and to acquire in the future seven restaurants currently owned by Yalla Med. Yalla Med owns and operates a fast-casual restaurant business under the brand name “Yalla Mediterranean,” specializing in fresh and healthy Mediterranean menu items, with seven upscale fast casual restaurants located in Northern and Southern California.

The Company, through a subsidiary, acquired the intellectual property used in connection with the Yalla Business pursuant to the IP Agreement. Under the terms of the IP Agreement, the purchase price for the intellectual property will be paid in the form of an earn-out, calculated as the greater of $1,500,000 or 400% of Yalla Income, which includes gross franchise royalties as well as other items, as defined in the IP Agreement. The seller can require the Company to pay the purchase price in up to two installments during the ten-year period following the acquisition. At the time of the acquisition, the purchase price recorded for the intellectual property was $1,790,000. As of March 29, 2020, and December 29, 2019, the purchase price payable totaled $2,239,000 and $2,154,000, respectively, which includes the accretion of interest expense at an effective interest rate of 19%.

Additionally, pursuant to the Master Agreement, the Company agreed to acquire the assets, agreements and other properties of each of the seven existing Yalla Mediterranean restaurants during a marketing period specified in the Master Agreement (the “Marketing Period”). The purchase price will be the greater of $1,000,000 or the sum of (i) the first $1,750,000 of gross sale proceeds received from the sale of the Yalla Mediterranean restaurants to franchisee/purchasers, plus (ii) the amount, if any, by which fifty percent (50%) of the net proceeds (after taking into consideration operating income or loss and transaction costs and expenses) from the sale of the Yalla Mediterranean restaurants exceeds $1,750,000. At the time of the acquisition, the purchase price recorded for the net tangible assets relating to the seven existing Yalla Mediterranean restaurants was $1,700,000. During the first quarter of 2020, the Company made a $500,000 payment against the acquisition price. As of March 29, 2020, and December 29, 2019, the purchase price payable totaled $1,239,000 and $1,718,000, respectively, which includes the accretion of interest expense at an effective interest rate of 5.4%.

The Company also entered into a Management Agreement under which its subsidiary will manage the operations of the seven Yalla Mediterranean restaurants and market them for sale to franchisees during the Marketing Period. Once a franchisee/purchaser has been identified, Yalla Med will transfer legal ownership of the specific restaurant to the Company’s subsidiary, which will then transfer the restaurant to the ultimate franchisee/purchaser who will own and operate the location. During the term of the Management Agreement, the Company’s subsidiary is responsible for operating expenses and has the right to receive operating income from the restaurants.

Based on the structure of the transactions outlined in the Master Agreement, the IP Agreement, and the Management Agreement, the Company has accounted for the transactions as a business combination under ASC 805.

The preliminary allocation of the total consideration recognized of $3,490,000 to the net tangible and intangible assets acquired in the Yalla Business is presented in the table below (in thousands):

Descriptions of the Company’s assessment of impairment related to COVID-19 of the goodwill and other intangible assets acquired in this transaction are located in Note 6.

nOTE 4. REFRANCHISING

As part of its ongoing franchising efforts, the Company may, from time to time, make opportunistic acquisitions of operating restaurants in order to convert them to franchise locations or acquire existing franchise locations to resell to another franchisee across all of its brands.

During the first quarter of 2019, the Company met all of the criteria requiring that certain assets used in the operation of certain restaurants be classified as held for sale. As a result, the following assets have been classified as held for sale on the accompanying consolidated balance sheet as of March 29, 2020 (in thousands):

Operating lease liabilities related to the assets classified as held for sale in the amount of $3,299,000, have been classified as current liabilities on the accompanying consolidated balance sheet as of March 29, 2020.

During the thirteen weeks ended March 29, 2020, the operating restaurants incurred restaurant costs and expenses, net of revenue of $539,000, compared to $518,000 in the prior period. There were no sales of refranchised restaurants by the Company during the thirteen weeks ended March 29, 2020 or March 31, 2019.

During the fiscal year ended December 29, 2019, a franchisee had entered into an agreement with the Company by which it agreed to sell two existing franchised locations to the Company for its refranchising program. Additionally, during the fiscal year, the Company had completed transactions to sell the two locations to new owners. During the thirteen weeks ended March 29, 2020, as a result of COVID-19, the locations acquired from the existing franchisee became unavailable. The Company is evaluating the impact of the event and determining which existing operating restaurants will be used as a replacement for the new owners (See Note 20).

Note 5. NOTES RECEIVABLE

Notes receivable consist of trade notes receivable and the Elevation Buyer Note.

Trade notes receivable are created when a settlement is reached relating to a delinquent franchisee account and the entire balance is not immediately paid. Trade notes receivable generally include personal guarantees from the franchisee. The notes are made for the shortest time frame negotiable and will generally carry an interest rate of 6% to 7.5%. Reserve amounts, on the notes, are established based on the likelihood of collection. As of March 29, 2020, and December 29, 2019, these trade notes receivable totaled $250,000, which was net of reserves of $123,000.

The Elevation Buyer Note was funded in connection with the purchase of Elevation Burger (See Note 3). The Company loaned $2,300,000 in cash to the Seller under a subordinated promissory note bearing interest at 6.0% per year and maturing in August 2026. This Note is subordinated in right of payment to all indebtedness of the Seller arising under any agreement or instrument to which the Seller or any of its affiliates is a party that evidences indebtedness for borrowed money that is senior in right of payment to the Elevation Buyer Note, whether existing on the effective date of the Elevation Buyer Note or arising thereafter. The balance owing to the Company under the Elevation Buyer Note may be used by the Company to offset amounts owing to the Seller under the Elevation Note under certain circumstances. As part of the total consideration for the Elevation acquisition, the Elevation Buyer Note was recorded at a carrying value of $1,903,000, which was net of a discount of $397,000. As of March 29, 2020, and December 29, 2019, the balance of the Elevation Note was $1,790,000 and $1,814,000, which was net of a discount of $330,000 and $352,000, respectively. During the thirteen weeks ended March 29, 2020, the Company recognized $53,000 in interest income, with no comparable activity in 2019.

Note 6. GOODWILL and other intangible assets

Goodwill

Goodwill consists of the following (in thousands):

Other Intangible Assets

Other intangible assets consist of trademarks and franchise agreements that were classified as identifiable intangible assets at the time of the brands’ acquisition by the Company or by FCCG prior to FCCG’s contribution of the brands to the Company at the time of the initial public offering (in thousands):

The expected future amortization of the Company’s capitalized franchise agreements is as follows (in thousands):

In response to the adverse effects of COVID-19, we considered whether goodwill and other intangible assets needed to be evaluated for impairment as of March 29, 2020, specifically related to goodwill and the trademark assets. Given the uncertainty regarding the severity, duration and long-term effects of COVID-19, making estimates of the fair value of these assets at this time is significantly affected by assumptions related to ongoing operations including but not limited to the timing of lifting of restrictions on restaurant operating hours, in-house dining limitations or other restrictions that largely limited restaurants to take-out and delivery sales, customer engagement with our brands, the short-term and long-term impact on consumer discretionary spending, and overall global economic conditions. We considered the available facts and made qualitative and quantitative assessments and judgments for what we believed represent reasonably possible outcomes. Although the fair values of certain assets have declined since the time that the most recent annual impairment tests were conducted, we concluded it is more likely than not that neither goodwill nor tradename assets were impaired as of March 29, 2020. However, COVID-19 pandemic events will continue to evolve over time and the negative effects on the operations of our franchisees could prove to be worse than we currently estimate and lead us to record non-cash goodwill or other intangible asset impairment charges in the future periods.

Note 7. DEFERRED INCOME

Deferred income is as follows (in thousands):

Note 8. Income Taxes

Effective October 20, 2017, the Company entered into a Tax Sharing Agreement with FCCG that provides that FCCG will, to the extent permitted by applicable law, file consolidated federal, California and Oregon (and possibly other jurisdictions where revenue is generated, at FCCG’s election) income tax returns with the Company and its subsidiaries. The Company will pay FCCG the amount that its current tax liability would have been had it filed a separate return. To the extent the Company’s required payment exceeds its share of the actual combined income tax liability (which may occur, for example, due to the application of FCCG’s net operating loss carryforwards), the Company will be permitted, in the discretion of a committee of its board of directors comprised solely of directors not affiliated with or interestedhaving an interest in FCCG, to pay such excess to FCCG by issuing an equivalent amount of its common stock in lieu of cash, valued at the fair market value at the time of the payment. In addition, anAn inter-company receivable of approximately $13,175,000$26,854,000 due from FCCG to Fatburger and Buffalo’sits affiliates will be applied first to reduce such excess income tax payment obligationobligations to FCCG under the Tax Sharing Agreement.

On October 20, 2017,For financial reporting purposes, the Company granted stock optionshas recorded a tax benefit calculated as if the Company files its tax returns on a stand-alone basis. The amount receivable from FCCG determined by this calculation of $121,000 was added to purchase 367,500 shares underamounts due from FCCG as of March 29, 2020. (See Note 12.)

Deferred taxes reflect the 2017 Omnibus Equity Incentive Plannet effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for calculating taxes payable on a stand-alone basis. Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):

Components of the income tax benefit are as follows (in thousands):

Income tax provision related to directorscontinuing operations differ from the amounts computed by applying the statutory income tax rate to pretax income as follows (in thousands):

As of March 29, 2020, the Company’s subsidiaries’ annual tax filings for the prior three years are open for audit by Federal and employees, each with an exercise price equalfor the prior four years for state tax agencies. The Company is the beneficiary of indemnification agreements from the prior owners of the subsidiaries for tax liabilities related to $12.00 per shareperiods prior to its ownership of the subsidiaries. Management evaluated the Company’s overall tax positions and subject to a three-year vesting requirement.has determined that no provision for uncertain income tax positions is necessary as of March 29, 2020.

AgreementNOTE 9. LEASES

The Company has recorded eight operating leases for corporate offices and for certain restaurant properties that are in the process of being refranchised. The Company is not a guarantor to Purchase Hurricane Grill & Wingsthe leases for the restaurant locations. The leases have remaining lease terms ranging from four months to 7.5 years. Five of the leases also have options to extend the term for 5 to 10 years. The Company recognized lease expense of $352,000 and $347,000 for the thirteen weeks ended March 29, 2020 and March 31, 2019, respectively. The weighted average remaining lease term of the operating leases (not including optional lease extensions) at March 29, 2020 was 5.7 years.

Operating lease right of use assets and operating lease liabilities relating to the operating leases are as follows (in thousands):

The operating lease right of use assets and operating lease liabilities include obligations relating to the optional term extensions available on the five restaurant leases based on management’s intention to exercise the options. At adoption of ASC 842, the discount rate used to calculate the carrying value of the right of use assets and lease liabilities was 15.9% as this was consistent with our incremental borrowing rate at the time.

The contractual future maturities of the Company’s operating lease liabilities as of March 29, 2020, including anticipated lease extensions, are as follows (in thousands):

Supplemental cash flow information for the fiscal year ended March 29, 2020 related to leases is as follows (in thousands):

Note 10. DEBT

Loan and Security Agreement

On November 14, 2017,January 29, 2019, the Company as borrower, and its subsidiaries and affiliates as guarantors, entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with The Lion Fund, L.P. and The Lion Fund II, L.P. (collectively, “Lion”). Pursuant to the Loan and Security Agreement, the Company borrowed $20.0 million from Lion, and utilized the proceeds to repay the existing $16.0 million term loan from FB Lending, LLC plus accrued interest and fees, and provide additional general working capital to the Company.

The term loan under the Loan and Security Agreement was due to mature on June 30, 2020. Interest on the term loan accrued at an annual fixed rate of 20.0% and was payable quarterly. The Company was allowed to prepay all or a portion of the outstanding principal and accrued and unpaid interest under the Loan and Security Agreement at any time upon prior notice to Lion without penalty, other than a make-whole provision providing for a minimum of six months’ interest. The Company was required to prepay all or a portion of the outstanding principal and accrued unpaid interest under the Loan and Security Agreement in connection with certain dispositions of assets, extraordinary receipts, issuances of additional debt or equity, or a change of control of the Company.

In connection with the Loan and Security Agreement, the Company issued to Lion a warrant to purchase up to 1,167,404 shares of the Company’s Common Stock at $0.01 per share (the “Lion Warrant”), exercisable only if the amounts outstanding under the Loan and Security Agreement were not repaid in full prior to October 1, 2019. If the Loan and Security Agreement was repaid in full prior to October 1, 2019, the Lion Warrant would be terminated in its entirety.

As security for its obligations under the Loan Agreement, the Company granted a lien on substantially all of its assets to Lion. In addition, certain of the Company’s subsidiaries and affiliates entered into a Guaranty (the “Guaranty”) in favor of Lion, pursuant to which they guaranteed the obligations of the Company under the Loan and Security Agreement and granted as security for their guaranty obligations a lien on substantially all of their assets.

The Loan and Security Agreement contained customary affirmative and negative covenants, including covenants that limited or restricted the Company’s ability to, among other things, incur other indebtedness, grant liens, merge or consolidate, dispose of assets, pay dividends or make distributions, in each case subject to customary exceptions. The Loan and Security Agreement also included customary events of default that included, among other things, non-payment, inaccuracy of representations and warranties, covenant breaches, events that result in a material adverse effect (as defined in the Loan and Security Agreement), cross default to other material indebtedness, bankruptcy, insolvency and material judgments. The occurrence and continuance of an event of default could have resulted in the acceleration of the Company’s obligations under the Loan and Security Agreement and an increase in the interest rate by 5.0% per annum.

On the issuance date, the Company evaluated the allocation of the proceeds between the Loan and Security Agreement and the Lion Warrant based on the relative fair values of each. Since the Lion Warrant only was to become effective if the amounts outstanding under the Loan and Security Agreement were not repaid in full prior to October 1, 2019, no value was assigned to it as of the grant date. The Company intended to refinance the debt prior to the beginning of the exercise period of the Lion Warrant.

On June 19, 2019, the Company amended its existing loan facility with Lion. The Company entered into a First Amendment to Loan and Security Agreement (the “First Amendment”), which amended the Loan and Security Agreement originally dated January 29, 2019. Pursuant to the First Amendment, the Company increased its borrowings by $3,500,000 in order to fund the Elevation Buyer Note in connection with the acquisition of Elevation, acquire other assets and pay fees and expenses of the transactions. The First Amendment also added the acquired Elevation-related entities as guarantors and loan parties.

On July 24, 2019, the Company entered into a Membership Interest Purchasefirst amendment to the Lion Warrant, which extended the date on which the Lion Warrant was initially exercisable from October 1, 2019 to June 30, 2020, which coincided with the maturity date of the loans made under the Loan Agreement. The Lender Warrant was only exercisable if the amounts outstanding under the Loan Agreement were not repaid in full prior to the Exercise Date.

The Company agreed to pay the Lenders an extension fee of $500,000 in the form of an increase in the principal amount loaned under the Loan and Security Agreement, and on July 24, 2019 entered into a second amendment to the Loan Agreement (the “Agreement”“Second Amendment”) to reflect this increase. Under the Second Amendment, the parties also agreed to amend the Loan and Security Agreement to provide for a late fee of $400,000 payable if the Company failed to make any quarterly interest payment by the fifth business day after the end of each fiscal quarter.

From January 6, 2020 through February 21, 2020, the Company entered into a series of amendments to the Lion Loan and Security Agreement (the “Third Through Seventh Amendments”), which granted five successive extensions of the due date for the payment of the quarterly interest payment which was originally due January 6, 2020 (the “January Quarterly Interest”). The final result of the Third Through Seventh Amendments, extended the due date for the payment of the January Quarterly Interest payment to March 13, 2020. The Company agreed to pay Lion a total extension fee of $650,000 with the interest payment. Upon payment of the January Quarterly Interest and the extension fee, Lion agreed to waive other late fees which may accrue relating to the payment and waive any default or event of default relating to the conversion of EB Franchises, LLC from a Virginia limited liability company to a Delaware limited liability company.

On March 6, 2020, the Company repaid the Lion Loan and Security Agreement in full by making a total payment of approximately $26,771,000. This consisted of $24,000,000 in principle, approximately $2,120,000 in accrued interest and $651,000 in penalties and fees. As a result of the prepayment, the Lion Warrant was cancelled in its entirety.

The Company recognized interest expense on the Loan and Security Agreement of $1,783,000 for the thirteen weeks ended March 29, 2020, which includes $212,000 for amortization of all unaccreted debt offering costs at the time of the repayment and $650,000 in penalties and fees, representing an effective interest rate of 44.3%. The Company recognized interest expense on the Loan and Security Agreement of $720,000 for the thirteen weeks ended March 31, 2019, which included $32,000 for amortization of debt offering costs, representing an effective interest rate of 20.9%.

Elevation Note

On June 19, 2019, the Company completed the acquisition of Elevation Burger. A portion of the purchase price included the issuance to the Seller of a convertible subordinated promissory note (the “Elevation Note”) with a principal amount of $7,509,816, bearing interest at 6.0% per year and maturing in July 2026. The Elevation Note is convertible under certain circumstances into shares of the Company’s common stock at $12.00 per share. In connection with the valuation of the acquisition of Elevation Burger, the Elevation Note was recorded on the financial statements of the Company at $6,185,000, which is net of a loan discount of $1,295,000 and debt offering costs of $30,000. As of March 29, 2020, the carrying value of the Elevation Note was $5,772,000 which is net of the loan discount of $1,078,000 and debt offering costs of $63,000. The Company recognized interest expense relating to the Elevation Note during the thirteen weeks ended March 29, 2020 in the amount of $189,000, which included amortization of the loan discount of $71,000 and amortization of $3,000 in debt offering costs, with no comparable activity in the first quarter of 2019. The effective interest rate for the Elevation Note during the thirteen weeks ended March 29, 2020 was 13.1%.

The Company is required to make fully amortizing payments of $110,000 per month during the term of the Elevation Note. The Elevation Note is a general unsecured obligation of Company and is subordinated in right of payment to all indebtedness of the Company arising under any agreement or instrument to which Company or any of its Affiliates is a party that evidences indebtedness for borrowed money that is senior in right of payment. FCCG has guaranteed payment of the Elevation Note.

Securitization

On March 6, 2020, the Company completed a whole-business securitization (the “Securitization”) through the creation of a bankruptcy-remote issuing entity, FAT Brands Royalty I, LLC (“FAT Royalty”) in which FAT Royalty issued new notes (the “Securitization Notes”) pursuant to an indenture and the supplement thereto (collectively, the “Indenture”).

The new notes consist of the following:

Net proceeds from the issuance of the Securitization Notes were $37,314,000, which consists of the combined face amount of $40,000,000, net of discounts of $246,000 and debt offering costs of $2,440,000. The discount and offering costs will be accreted as additional interest expense over the expected term of the Securitization Notes.

A portion of the proceeds from the Securitization was used to repay the remaining $26,771,000 in outstanding balance under the Loan and Security Agreement with Lion and to pay Securitization debt offering costs. The remaining proceeds from the Securitization will be used for working capital.

While the Securitization Notes are outstanding, scheduled payments of principal and interest are required to be made on a quarterly basis. It is expected that the Securitization Notes will be repaid prior to the Final Legal Maturity Date, with the anticipated repayment date occurring in January 2023 for the A-2 Notes and October 2023 for the B-2 Notes (the “Anticipated Repayment Dates”). If the Company has not repaid or refinanced the Securitization Notes prior to the applicable Anticipated Repayment Date, additional interest expense will begin to accrue and all additional proceeds will be trapped for full amortization, as defined in the Indenture.

In connection with the Securitization, FAT Royalty and each of the FAT Brands Franchising Entities (as defined in the Indenture) entered into a Management Agreement with the Company, dated as of the Closing Date (the “Management Agreement”), pursuant to which the Company agreed to act as manager of FAT Royalty and each of the FAT Brands Franchise Entities. The Management Agreement provides for a management fee payable monthly by FAT Royalty to the Company in the amount of $200,000, subject to three percent (3%) annual increases (the “Management Fee”). The primary responsibilities of the manager are to perform certain franchising, distribution, intellectual property and operational functions on behalf of the FAT Brands Franchise Entities pursuant to the Management Agreement.

The Notes are secured by substantially all of the right, titleassets of FAT Royalty, including the equity interests in the FAT Brands Franchising Entities. The restrictions placed on the Company’s subsidiaries require that the Company’s principal and interest obligations have first priority, after the payment of the Management Fee and certain other FAT Royalty expenses (as defined in the Indenture), and amounts are segregated monthly to ensure appropriate funds are reserved to pay the quarterly principal and interest amounts due. The amount of monthly cash flow that exceeds the required monthly debt service is generally remitted to the membership interestsCompany. Once the required obligations are satisfied, there are no further restrictions, including payment of Hurricane AMT, LLC,dividends, on the cash flows of the subsidiaries. As of March 29, 2020, the Company was in compliance with these covenants.

The Notes have not been and will not be registered under the Securities Act or the securities laws of any jurisdiction. No Notes or any interest or participation thereof may be reoffered, resold, pledged or otherwise transferred unless such Note meets certain requirements as described in the Indenture.

The Notes are subject to certain financial and non-financial covenants, including a Florida limited liability corporation (“Hurricane”)debt service coverage ratio calculation, as defined in the Indenture. In the event that certain covenants are not met, the Notes may become partially or fully due and payable on an accelerated schedule. In addition, the Company may voluntarily prepay, in part or in full, the Notes in accordance with the provisions in the Indenture.

As of March 29, 2020, the recorded balance of the Securitization Notes was $37,309,000, which is net of debt offering costs of $2,450,000 and original issue discount of $241,000. The Company recognized interest expense on the Securitization Notes of $288,000 for a purchase pricethe thirteen weeks ended March 29, 2020, which includes $33,000 for amortization of $12,500,000. Hurricane isdebt offering costs and $5,000 for amortization of the franchisororiginal issue discount. The effective interest rate of Hurricane Grill & Wings and Hurricane BTW Restaurants. The original Hurricane Grill & Wings opened in Fort Pierce, Florida in 1995 and has expanded to over 60 restaurant locations in Alabama, Arizona, Colorado, Florida, Georgia, Kansas, New York, and Texas.the Securitization Notes was 9.3% for the thirteen weeks ended March 29, 2020.

NOTE 4 – COMMITMENTS, CONTINGENCIES & OFF-BALANCE SHEET RISKNote 11. PREFERRED STOCK

LitigationSeries B Cumulative Preferred Stock

On October 3 and October 4, 2019, the Company completed the initial closing of its continuous public offering (the “Series B Preferred Offering”) of up to $30,000,000 of units (the “Series B Units”) at $25.00 per Series B Unit, with each Series B Unit comprised of one share of 8.25% Series B Cumulative Preferred Stock (“Series B Preferred Stock”) and 0.60 warrants (the “Series B Warrants”) to purchase common stock at $8.50 per share, exercisable for five years.

The offering includes up to 1,200,000 shares of Series B Preferred Stock and Series B Warrants initially exercisable to purchase up to an aggregate of 720,000 shares of our common stock. The shares of Series B Preferred Stock and Series B Warrants will be issued separately but can only be purchased together in the Series B Preferred Offering. Each Warrant will be immediately exercisable and will expire on the five-year anniversary of the date of issuance.

The Company will pay cumulative dividends on the Series B Preferred Stock from and including the date of original issuance in the amount of $2.0625 per share each year, which is equivalent to 8.25% of the $25.00 liquidation preference per share. Dividends on the Series B Preferred Stock will be payable quarterly in arrears based on the Company’s fiscal quarters.

The Company may not redeem the Series B Preferred Stock before the first anniversary of the initial issuance date. After the first anniversary of the initial issuance date the Company has the option to redeem the Series B Preferred Stock, in whole or in part, for cash plus any accrued and unpaid dividends to the date of redemption at the following redemption price per share:

The Series B Preferred Stock will mature on the five-year anniversary of the initial issuance date or the earlier liquidation, dissolution or winding-up of the Company. Upon maturity, the holders of Series B Preferred Stock will be entitled to receive cash redemption of their shares in an amount equal to $25.00 per share plus any accrued and unpaid dividends.

Holders of Series B Preferred Stock have the option to cause the Company to redeem all or any portion of their Series B Preferred Stock following the first anniversary of the initial issuance date for cash at the following redemption prices per share, plus any accrued and unpaid dividends:

The rights of holders of Series B Preferred Stock to receive their liquidation preference also will be subject to the proportionate rights of our Series A Fixed Rate Cumulative Preferred Stock and any other class or series of our capital stock ranking in parity with the Series B Preferred Stock as to liquidation.

As of March 29, 2020, there were 57,140 shares of Series B Preferred Stock outstanding.

The Company classified the Series B Preferred Stock as long-term debt because it contains an unconditional obligation requiring the Company to redeem the instruments at the maturity date or upon the election of the holders as described above in cash. The associated Series B Warrants have been recorded as additional paid-in capital. On the issuance date, the Company allocated the proceeds between the Series B Preferred Stock and the Series B Warrants based on the relative fair values of each.

As of March 29, 2020, the net Series B Preferred Stock balance was $1,090,000 including an unaccreted debt discount of $15,000 and unamortized debt offering costs of $324,000. The Company recognized interest expense on the Series B Preferred Stock of $48,000 for the fiscal quarter ended March 29, 2020, which includes accretion expense of the debt discount of $1,000 and amortization of debt offering costs of $19,000. The effective interest rate for the Series B Preferred Stock for 2020 was 17.7%.

As of September 24, 2017,Series A Fixed Rate Cumulative Preferred Stock

On June 8, 2018, the Company was not involved in any adversarial legal proceedings.filed a Certificate of Designation of Rights and Preferences of Series A Fixed Rate Cumulative Preferred Stock (“Series A Preferred Stock”) with the Secretary of State of the State of Delaware (the “Certificate of Designation”), designating a total of 100,000 shares of Series A Preferred Stock. The subsidiaries acquiredCertificate of Designation contains the following terms pertaining to the Series A Preferred Stock:

Dividends– Holders of Series A Preferred Stock will be entitled to receive cumulative dividends on October 20, 2017 are involved in various legal proceedings occurringthe $100.00 per share stated liquidation preference of the Series A Preferred Stock, in the ordinary courseamount of business which management believes(i) cash dividends at a rate of 9.9% per year, plus (ii) deferred dividends equal to 4.0% per year, payable on the Mandatory Redemption Date (defined below).

Voting Rights – As long as any shares of Series A Preferred Stock are outstanding and remain unredeemed, the Company may not, without the majority vote of the Series A Preferred Stock, (a) alter or change adversely the rights, preferences or voting power given to the Series A Preferred Stock, (b) enter into any merger, consolidation or share exchange that adversely affects the rights, preferences or voting power of the Series A Preferred Stock, (c) authorize or increase any other series or class of stock that has rights senior to the Series A Preferred Stock, or (d) waive or amend the dividend restrictions in Sections 3(d) or 3(e) of the Certificate of Designation. The Series A Preferred Stock will not have any other voting rights, except as may be provided under applicable law.

Liquidation and Redemption - Upon (i) the five-year anniversary of the initial issuance date (June 8, 2023), or (ii) the earlier liquidation, dissolution or winding-up of the Company (the “Series A Mandatory Redemption Date”), the holders of Series A Preferred Stock will be entitled to cash redemption of their shares in an amount equal to $100.00 per share plus any accrued and unpaid dividends.

In addition, prior to the Series A Mandatory Redemption Date, the Company may optionally redeem the Series A Preferred Stock, in whole or in part, at the following redemption prices per share, plus any accrued and unpaid dividends:

Holders of Series A Preferred Stock may also optionally cause the Company to redeem all or any portion of their shares of Series A Preferred Stock beginning any time after the two-year anniversary of the initial issuance date for an amount equal to $100.00 per share plus any accrued and unpaid dividends, which amount may be settled in cash or Common Stock of the Company, at the option of the holder. If a material adverse effectholder elects to receive Common Stock, the shares will be issued based on the financial condition or operations20-day volume weighted average price of the Company.Common Stock immediately preceding the date of the holder’s redemption notice.

As of March 29, 2020, there were 100,000 shares of Series A Preferred stock outstanding, issued in the following two transactions:

The Company classifies the Series A Preferred Stock as long-term debt because it contains an obligation to issue a variable number of common shares for a fixed monetary amount. As of March 29, 2020, the net Series A Preferred Stock balance was $9,919,000 which is net of an unaccreted debt discount of $71,000 and unamortized debt offering costs of $10,000.

The Company recognized interest expense on the Series A Preferred Stock of $355,000 for the thirteen weeks ended March 29, 2020, which includes accretion expense of $6,000 and $1,000 for the amortization of debt offering costs, representing an effective interest rate of 14.3%. The Company recognized interest expense on the Series A Preferred Stock of $354,000 for the thirteen weeks ended March 31, 2019, which includes accretion expense of $5,000 as well as $1,000 for the amortization of debt offering costs, representing an effective interest rate of 14.2%%.

LiquiditySeries A-1 Fixed Rate Cumulative Preferred Stock

FollowingOn July 3, 2018, the completionCompany filed with the Secretary of State of the Offering, franchising operationsState of Delaware a Certificate of Designation of Rights and Preferences of Series A-1 Fixed Rate Cumulative Preferred Stock (the “Series A-1 Certificate of Designation”), designating a total of 200,000 shares of Series A-1 Fixed Rate Cumulative Preferred Stock (the “Series A-1 Preferred Stock”). As of March 29, 2020, there were 45,000 shares of Series A-1 Preferred Stock issued and outstanding. The Series A-1 Certificate of Designation contains the following terms pertaining to the Series A-1 Preferred Stock:

Dividends. Holders of Series A-1 Preferred Stock will becomebe entitled to receive cumulative dividends on the major source$100.00 per share stated liquidation preference of liquiditythe Series A-1 Preferred Stock, in the amount of cash dividends at a rate of 6.0% per year.

Voting Rights. As long as any shares of Series A-1 Preferred Stock are outstanding and remain unredeemed, the Company may not, without the majority vote of the Series A-1 Preferred Stock, (a) materially and adversely alter or change the rights, preferences or voting power given to the Series A-1 Preferred Stock, (b) enter into any merger, consolidation or share exchange that materially and adversely affects the rights, preferences or voting power of the Series A-1 Preferred Stock, or (c) waive or amend the dividend restrictions in Sections 3(d) or 3(e) of the Certificate of Designation. The Series A-1 Preferred Stock will not have any other voting rights, except as may be provided under applicable law.

Liquidation and Redemption. Upon (i) the five-year anniversary of the initial issuance date (July 3, 2023), or (ii) the earlier liquidation, dissolution or winding-up of the Company (the “Series A-1 Mandatory Redemption Date”), the holders of Series A-1 Preferred Stock will be entitled to cash redemption of their shares in an amount equal to $100.00 per share plus any accrued and unpaid dividends. In addition, prior to the Mandatory Redemption Date, the Company may optionally redeem the Series A-1 Preferred Stock, in whole or in part, at par plus any accrued and unpaid dividends.

Holders of Series A-1 Preferred Stock may also optionally cause the Company to redeem all or any portion of their shares of Series A-1 Preferred Stock beginning any time after the two-year anniversary of the initial issuance date for an amount equal to $100.00 per share plus any accrued and unpaid dividends, which amount may be settled in cash or Common Stock of the Company, at the option of the holder. If a holder elects to receive Common Stock, shares will be issued as payment for redemption at the rate of $11.75 per share of Common Stock.

As of March 29, 2020, there were 45,000 shares of Series A-1 Preferred Stock outstanding.

The Company classifies the Series A-1 Preferred Stock as long-term debt because it contains an obligation to issue a variable number of common shares for a fixed monetary amount.

As of March 29, 2020, the net Series A-1 Preferred Stock balance was $4,415,000 which is net of an unaccreted debt discount of $62,000 and unamortized debt offering costs of $23,000.

The Company recognized interest expense on the Series A-1 Preferred Stock of $50,000 for the Company. Management expects these sources, includingthirteen weeks ended March 29, 2020, which was net of an adjustment to the saledebt discount in the amount of new franchises, to generate adequate cash flow to meet the Company’s liquidity needs$19,000 as well as $2,000 for the 2017 fiscal year. Asamortization of debt offering costs, representing an effective interest rate of 4.6%. The Company recognized interest expense on the Series A-1 Preferred Stock of $77,000 for the thirteen weeks ended March 31, 2019, which included recognized accretion expense of $8,000, as well as $2,000 for the amortization of debt offering costs, representing an effective interest rate of 6.9%.

The issuance of the Series A Preferred Stock and Series A-1 Preferred Stock was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D of the Securities Act and in reliance on similar exemptions under applicable state laws. Each of the investors in the Offering represented that it is an accredited investor within the meaning of Rule 501(a) of Regulation D and was acquiring the securities for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof. The securities were offered without any general solicitation by the Company contemplates significant acquisitions, other sources of liquidity will be considered, including borrowings or placements of securities.its representatives.

Note 12. Related Party Transactions

Fatburger Debt CovenantDue from Affiliates

On June 1, 2010, FatburgerApril 24, 2020, the Company entered into an Intercompany Revolving Credit Agreement with FCCG (“Intercompany Agreement”). The Company had previously extended credit to FCCG pursuant to a certain Intercompany Promissory Note (the “Original Note”), dated October 20, 2017, with an initial principal balance of $11,906,000. Subsequent to the issuance of the Original Note, the Company and certain of its affiliates becamedirect or indirect subsidiaries made additional intercompany advances in the aggregate amount of $10,523,000. Pursuant to the Intercompany Agreement, the revolving credit facility bears interest at a rate of 10% per annum, has a five-year term with no prepayment penalties, and has a maximum capacity of $35,000,000. All additional borrowings under the Intercompany Agreement are subject to a judgment payable to GE Capital Franchise Finance Corporation (GEFFC) for approximately $4,300,000. No proceeds from the original loan had been received by Fatburger, however it is jointly and severally liable as a co-borrower. On October 11, 2011, GEFFC agreed to accept payments in full satisfactionapproval of the obligation totaling approximately $2,600,000 plusBoard of Directors, in advance, on a quarterly basis and may be subject to other conditions as set forth by the Company. The initial balance under the Intercompany Agreement totaled $21,067,000 including the balance of the Original Note, borrowings subsequent to the Original Note, accrued and unpaid interest at 5%income, and other adjustments through December 29, 2019. As of March 29, 2020, the balance receivable under the Intercompany Agreement was $26,854,000.

During the thirteen weeks ended March 29, 2020, the Company recorded a receivable from FCCG in the amount of $121,000 under the Tax Sharing Agreement, which was added to the intercompany receivable. During the thirteen weeks ended March 31, 2019, the Company recorded a receivable from FCCG in the amount of $467,000 under the Tax Sharing Agreement. (See Note 8).

Effective July 5, 2018, the Company made a preferred capital investment in Homestyle Dining LLC, a Delaware limited liability corporation (“HSD”) in the amount of $4.0 million (the “Preferred Interest”). Subsequently, FCCG made payments totaling approximately $2,000,000, plus interest to GEFFC. The borrowers have not madeowns all of the payments required by the settlement agreement. On November 28, 2016, GEFFC sold the debt to an unrelated third party. On June 21, 2017, the debt was purchased by a limited partnershipcommon interests in which Andrew Wiederhorn, the CEOHSD. The holder of the Company,Preferred Interest is entitled to a general partner. Fog Cutter Capital Group Inc.15% priority return on the outstanding balance of the investment (the “Preferred Return”). Any available cash flows from HSD on a quarterly basis are to be distributed to pay the accrued Preferred Return and repay the Preferred Interest until fully retired. On or before the five-year anniversary of the investment, the Preferred Interest is to be fully repaid, together with all previously accrued but unpaid Preferred Return. FCCG has agreedunconditionally guaranteed repayment of the Preferred Interest in the event HSD fails to indemnify FAT Brands Inc.do so. As of March 29, 2020, the balance receivable, including accrued and Subsidiaries from costs and liabilities which may arise from this matter.unpaid interest income, under the Preferred Interest was $5,050,000.

DividendsSeries B Cumulative Preferred Stock

The Company intends to declare quarterly dividends to holders of common stock. The declaration and payment of future dividends, if any, will be at the sole discretion of the board of directors and may be discontinued at any time. In determining the amount of any future dividends, the board of directors will take into account: (i) the Company’s consolidated financial results, available cash, future cash requirements and capital requirements, (ii) contractual, legal, tax and regulatory restrictions on, and implications of, the payment of dividends to stockholders, (iii) general economic and business conditions, and (iv) any other factors that the board of directors may deem relevant. The 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 the Company or its subsidiaries.

No dividends have been declared or paid as of September 24, 2017.

Franchising operations

The Company is pursuing a growth strategy through developing additional franchising opportunities. Franchise development involves substantial risks that the Company intends to manage; however, it cannot be assured that present or future development will perform in accordance with the Company’s expectations or that any franchising activities will generate the Company’s expected returns on investment. The Company’s inability to expand franchises in accordance with planned expansion or to manage that growth could have a material adverse effect on the Company’s operations and financial condition. In addition, if its franchisees are unsuccessful in obtaining capital sufficient to fund this expansion, the timing of restaurant openings may be delayed and the Company’s operating results may be harmed.

Other

Following the Reorganization Transactions, the Company and its subsidiaries are parties to various operating leases for office space which expire through April 30, 2020. The leases provide for varying minimum annual rental payments including rent increases and free rent periods. The Company has future minimum rental payments under non-cancelable operating leases with initial or remaining terms of one year or more of approximately $796,000 as of September 24, 2017.

There were no other off balance sheet arrangements in effect during the period from March 21, 2017, (inception) through September 24, 2017.

NOTE 5 – STOCK OPTIONS AND RIGHTS

On October 19,3 and October 4, 2019, the Company completed the initial closing of its continuous public offering (the “Series B Preferred Offering”) of up to $30,000,000 of units (the “Series B Units”) at $25.00 per Series B Unit, with each Series B Unit comprised of one share of 8.25% Series B Cumulative Preferred Stock (“Series B Preferred Stock”) and 0.60 warrants (the “Series B Warrants”) to purchase common stock at $8.50 per share, exercisable for five years. At the initial closing of the Preferred Offering, the Company completed the sale of 43,080 Series B Units for gross proceeds of $1,077,000.

As of March 29, 2020, the following reportable related persons participated in the initial closing of the Company’s Preferred Offering:

Note 13. SHAREHOLDERS’ EQUITY

As of March 29, 2020, and December 29, 2019, the total number of authorized shares of common stock was 25,000,000, and there were 11,876,659 and 11,860,299 shares of common stock outstanding, respectively.

Below are the changes to the Company’s common stock during the thirteen weeks ended March 29, 2020:

Note 14. SHARE-BASED COMPENSATION

Effective September 30, 2017, the Company adopted and approved the 2017 Omnibus Equity Incentive Plan (the “Plan”“Plan”). The Plan is a comprehensive incentive compensation plan under which the Company can grant equity-based and other incentive awards to officers, employees and directors of, and consultants and advisers to, FAT Brands Inc. and its subsidiaries. The purpose of the Plan is to help attract, motivate and retain such persons and thereby enhance stockholder value. The Plan allows for management and the board of directors to award stock incentives to substantially all employees as a retention incentive and to ensure that employees’ compensation incentives are aligned with stock price performance. The Plan provides for a maximum of 1,000,0001,021,250 shares available for grant.

All of the stock options issued by the Company to date have included a vesting period of three years, with one-third of each grant vesting annually. The Company’s stock option activity for fiscal year ended March 29, 2020 can be summarized as follows: