UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 29, 201927, 2020

 

OR

 

[  ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 001-38250

 

 

FAT Brands Inc.

(Exact name of registrant as specified in its charter)

 

Delaware 82-1302696

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

9720 Wilshire Blvd., Suite 500

Beverly Hills, CA 90212

(Address of principal executive offices, including zip code)

 

(310) 319-1850

(Registrant’s telephone number, including area code)

 

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

 

Title of each class Trading SymbolSymbol(s) Name of each exchange on which registered
Common Stock, $0.0001 par value $0.0001 per share FATThe Nasdaq Stock Market LLC
Series B Cumulative Preferred Stock, par value $0.0001 per shareFATBPThe Nasdaq Stock Market LLC
Warrants to purchase Common StockFATBW The Nasdaq Stock Market LLC

 

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 [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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.

 

Large accelerated filer[  ]Accelerated filer[  ]
    
Non-accelerated filer[X]Smaller reporting company[X]
    
Emerging growth company[X]  

 

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 6, 2019,12, 2020, there were 11,843,90711,926,264 shares of common stock outstanding.

 

 

 

 
 

 

FAT BRANDS INC.

QUARTERLY REPORT ON FORM 10-Q

September 29, 201927, 2020

 

TABLE OF CONTENTS

 

PART I.FINANCIAL INFORMATION3
Item 1.Consolidated Financial Statements (Unaudited)3
   
 FAT Brands Inc. and Subsidiaries: 
 Consolidated Balance Sheets (Unaudited)3
 Consolidated Statements of Operations (Unaudited)4
 Consolidated Statements of Stockholders’ Equity (Unaudited)5
 Consolidated Statements of Cash Flows (Unaudited)67
 Notes to Consolidated Financial Statements (Unaudited)78
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations3035
Item 3.Quantitative and Qualitative Disclosures About Market Risk3845
Item 4.Controls and Procedures3845
   
PART II.OTHER INFORMATION3946
Item 1.Legal Proceedings3946
Item 1A.Risk Factors4047
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds4047
Item 3.Defaults Upon Senior Securities4047
Item 4.Mine Safety Disclosures4047
Item 5.Other Information4047
Item 6.Exhibits4148
   
SIGNATURES4249

 

2

 

PART I — FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

FAT BRANDS INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

 September 29, 2019 December 30, 2018  September 27, 2020 December 29, 2019 
 (Unaudited) (Audited)  (Unaudited) (Audited) 
Assets                
Current assets                
Cash $311  $653  $12,110  $25 
Accounts receivable, net of allowance for doubtful accounts of $609 and $595, respectively  5,121   1,779 
Current portion of notes receivable, net of allowance of $37 and $37, respectively  255   65 
Restricted cash  1,758   - 
Accounts receivable, net of allowance for doubtful accounts of $670 and $595, as of September 27, 2020 and December 29, 2019, respectively  4,453   4,144 
Trade and other notes receivable, net of allowance for doubtful accounts of $0 and $37 as of September 27, 2020 and December 29, 2019, respectively  206   262 
Assets classified as held for sale  2,272   -   11,048   5,128 
Other current assets  964   1,042   1,611   929 
Total current assets  8,923   3,539   31,186   10,488 
                
Notes receivable –net of allowance for doubtful accounts of $86 and $112, respectively  1,882   212 
Noncurrent restricted cash  400   - 
Notes receivable – noncurrent, net of allowance for doubtful accounts of $0 and $112, as of September 27, 2020 and December 29, 2019, respectively  1,604   1,802 
Due from affiliates  22,886   15,514   38,732   25,967 
Deferred income taxes  2,159   2,236 
Deferred income tax asset, net  -   2,032 
Operating lease right of use assets  1,018   -   4,708   860 
Goodwill  11,992   10,391   19,141   10,912 
Other intangible assets, net  29,967   23,289   52,959   29,734 
Other assets  755   2,779   863   755 
Total assets $79,582  $57,960  $149,593  $82,550 
                
Liabilities and Stockholders’ Equity                
Liabilities                
Current liabilities        
Accounts payable $7,008  $4,415  $8,159  $7,183 
Accrued expenses  5,510   3,705   8,373   6,013 
Deferred income, current portion  1,812   895 
Accrued advertising  694   369   271   762 
Accrued interest payable  1,255   2,250   864   1,268 
Deferred income  907   1,076 
Dividend payable on mandatorily redeemable preferred shares (includes amounts due to related parties of $111 and $42 as of September 29, 2019 and December 30, 2018, respectively)  1,083   391 
Dividend payable on preferred shares (includes amounts due to related parties of $8 and $149 as of September 27, 2020 and December 29, 2019, respectively)  272   1,422 
Liabilities related to assets classified as held for sale  1,459   -   9,959   3,325 
Current portion of operating lease liability  402   -   585   241 
Current portion of long-term debt  24,383   15,400   1,571   24,502 
Total current liabilities  42,701   27,606   31,866   45,611 
                
Deferred income - noncurrent  5,469   6,621 
Deferred income – noncurrent  8,872   5,247 
Acquisition purchase price payable  4,373   3,497   2,704   4,504 
Preferred shares, net  7,945   15,327 
Deferred dividend payable on preferred shares (includes amounts due to related parties of $0 and $99 as of September 27, 2020 and December 29, 2019, respectively)  418   628 
Deferred income tax liability, net  2,367   - 
Operating lease liability, net of current portion  639   -   4,298   639 
Mandatorily redeemable preferred shares, net  14,239   14,191 
Deferred dividend payable on mandatorily redeemable preferred shares (includes amounts due to related parties of $84 and $39 as of September 29, 2019 and December 30, 2018, respectively)  528   228 
Long-term debt, net of current portion  5,472   -   78,440   5,216 
Other liabilities  -   78   201   - 
Total liabilities  73,421   52,221   137,111   77,172 
                
Commitments and contingencies (Note 18)        
Commitments and contingencies (Note 17)        
                
Stockholders’ equity                
Common stock, $.0001 par value; 25,000,000 shares authorized; 11,843,907 and 11,546,589 shares issued and outstanding at September 29, 2019 and December 30, 2018, respectively  11,243   10,757 
Preferred stock, $.0001 par value; 5,000,000 shares authorized; 663,127 and 0 shares issued and outstanding at September 27, 2020 and December 29, 2019, respectively  13,041   - 
Common stock, $.0001 par value; 25,000,000 shares authorized; 11,926,264 and 11,860,299 shares issued and outstanding at September 27, 2020 and December 29, 2019, respectively  12,666   11,414 
Accumulated deficit  (5,082)  (5,018)  (13,225)  (6,036)
Total stockholders’ equity  6,161   5,739   12,482   5,378 
Total liabilities and stockholders’ equity $79,582  $57,960  $149,593  $82,550 

 

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

3

FAT BRANDS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)

 

For the thirteen and thirty-nine weeks ended September 29, 201927, 2020 and September 30, 201829, 2019 (Unaudited)

 

  Thirteen Weeks Ended  Thirty-nine Weeks Ended 
  September 29, 2019  September 30, 2018  September 29, 2019  September 30, 2018 
             
Revenue                
Royalties $3,937  $3,370  $11,064  $8,802 
Franchise fees  1,272   1,343   2,578   2,041 
Store opening fees  109   100   398   205 
Advertising fees  1,151   1,038   3,159   2,264 
Management fees and other income  15   13   54   45 
Total revenue  6,484   5,864   17,253   13,357 
                 
Costs and expenses                
Compensation expense  1,637   1,495   4,860   4,285 
Professional fees expense  787   513   1,833   1,071 
Public company expense  280   198   829   679 
Advertising expense  1,151   1,038   3,159   2,264 
Refranchising (gain)  (902)  -   (851)  - 
Other  460   511   1,184   1,181 
Total costs and expenses  3,413   3,755   11,014   9,480 
                 
Income from operations  3,071   2,109   6,239   3,877 
                 
Other expense, net                
Interest expense, net  (1,544)  (991)  (4,064)  (1,427)
Interest expense related to mandatorily redeemable preferred shares  (431)  (437)  (1,293)  (515)
Depreciation and amortization  (258)  (120)  (536)  (193)
Other expense, net  (56)  (352)  (157)  (355)
Total other expense, net  (2,289)  (1,900)  (6,050)  (2,490)
                 
Income before provision for income taxes (benefit)  782   209   189   1,387 
                 
Provision for income taxes (benefit)  (372)  199   253   495 
                 
Net income (loss) $1,154  $10  $(64) $892 
                 
Basic income (loss) per common share $0.10  $0.00  $(0.01) $0.08 
Basic weighted average shares outstanding  11,827,706   11,558,190   11,568,560   10,722,044 
Diluted income (loss) per common share $0.10  $0.00  $(0.01) $0.08 
Diluted weighted average shares outstanding  11,827,706   11,575,132   11,568,560   10,730,394 
Cash dividends declared per common share $0.00  $0.00  $0.00  $0.24 
  Thirteen Weeks Ended  Thirty-nine Weeks Ended 
  September 27, 2020  September 29, 2019  September 27, 2020  September 29, 2019 
             
Revenue                
Royalties $3,156  $3,937  $8,678  $11,064 
Franchise fees  122   1,272   571   2,578 
Store opening fees  -   109   -   398 
Advertising fees  803   1,151   2,347   3,159 
Management fees and other income  8   15   23   54 
Total revenue  4,089   6,484   11,619   17,253 
                 
Costs and expenses                
General and administrative expense  2,990   3,422   10,626   9,242 
Impairment of assets  753   -   3,927   - 
Refranchising loss (gain)  325   (902)  1,869   (851)
Advertising expense  814   1,151   2,358   3,159 
Total costs and expenses  4,882   3,671   18,780   11,550 
                 
(Loss) income from operations  (793)  2,813   (7,161)  5,703 
                 
Other income (expense), net                
Interest expense, net  (123)  (1,544)  (2,034)  (4,064)
Interest expense related to preferred shares  (323)  (431)  (1,251)  (1,293)
Change in fair value-derivative liability  (374)  -   887   - 
Loss on extinguishment of debt  (88)  -   (88)  - 
Gain on contingent consideration payable adjustment  1,680   -   1,680   - 
Other expense, net  (566)  (56)  (627)  (157)
Total other income (expense), net  206   (2,031)  (1,433)  (5,514)
                 
(Loss) income before income tax (benefit) expense  (587)  782   (8,594)  189 
                 
Income tax (benefit) expense  (19)  (372)  (1,405)  253 
                 
Net (loss) income $(568) $1,154  $(7,189) $(64)
                 
Basic and diluted (loss) income per common share $(0.05) $0.10  $(0.60) $(0.01)
Basic and diluted weighted average shares outstanding  11,910,719   11,827,706   11,888,618   11,568,560 

 

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

4

FAT BRANDS INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(dollars in thousands, except share data)

Unaudited

 

For the thirty-nine weeks ended September 29, 201927, 2020

 

  Common Stock       
        Additional          
     Par  paid-in     Accumulated    
  Shares  value  capital  Total  deficit  Total 
                   
Balance at December 30, 2018  11,546,589  $1  $10,756  $10,757  $(5,018) $5,739 
Net loss  -   -   -   -   (64)  (64)
Common stock dividend  245,376   -   -   -   -   - 
Cash paid in lieu of fractional shares  -   -   (2)  (2)  -   (2)
Issuance of common stock in lieu of director fees payable  51,942   -   270   270   -   270 
Share-based compensation  -   -   218   218   -   218 
                         
Balance at September 29, 2019  11,843,907  $1  $11,242  $11,243  $(5,082) $6,161 
  Common Stock  Preferred Stock       
        Additional  Total        Additional  Total       
     Par  paid-in  Common     Par  paid-in  Preferred  Accumulated    
  Shares  value  capital  Stock  Shares  value  capital  Stock  deficit  Total 
                               
Balance at December 29, 2019  11,860,299  $1  $11,413  $11,414   -  $-  $-  $-  $(6,036) $5,378 
Net loss  -   -   -   -   -   -   -   -   (7,189)  (7,189)
Issuance of common stock in lieu of cash director fees payable  65,965   -   240   240   -   -   -   -   -   240 
Issuance of Series B preferred stock      -   -   -   360,000   -   6,033   6,033   -   6,033 
Exchange of original Series B preferred stock for newly issued Series B preferred stock  -   -   -   -   60,677   -   1,224   1,224   -   1,224 
Exchange of Series A preferred stock for newly issued Series B preferred stock  -   -   -   -   74,449   -   1,861   1,861   -   1,861 
Exchange of Series A-1 preferred stock for newly issued Series B preferred stock  -   -   -   -   168,001   -   4,200   4,200   -   4,200 
Share-based compensation  -   -   61   61   -   -   -   -   -   61 
Extinguishment of derivative liability  -   -   (887)  (887)  -   -   -   -   -   (887)
Grant of warrants to purchase stock  -   -   2,258   2,258   -   -   -   -   -   2,258 
Repurchase of warrants  -   -   (330)  (330)  -   -   -   -   -   (330)
Dividends declared on Series B preferred stock  -   -   -   -   -   -   (277)  (277)  -   (277)
Correction of recorded conversion rights associated with Series A-1 preferred shares  -   -   (90)  (90)  -   -   -   -   -   (90)
                                         
Balance at September 27, 2020  11,926,264  $1  $12,665  $12,666   663,127  $-  $13,041  $13,041  $(13,225) $12,482 

 

For the thirty-nine weeks ended September 30, 201829, 2019

 

  Common Stock       
  Shares  Par value  

Additional

paid-in
capital

  Total  

Accumulated

deficit

  Total 
                   
Balance at December 31, 2017  10,000,000  $1  $2,621  $2,622  $(613) $2,009 
                         
Cumulative-effect adjustment from adoption of ASU 2014-09, Revenue from Contracts with Customers  -   -   -   -   (2,672)  (2,672)
Net income  -   -   -   -   892   892 
Dividends on common stock  -   -   (2,551)  (2,551)  -   (2,551)
Issuance of common stock in lieu of director fees payable  52,254   -   420   420   -   420 
Issuance of common stock in payment of related party note  989,395   -   7,272   7,272   -   7,272 
Issuance of common stock in lieu of dividend payable to Fog Cutter Capital Group, Inc.  311,365   -   1,920   1,920   -   1,920 
Issuance of warrants to purchase common stock  -   -   774   774   -   774 
Stock offering costs  -   -   (50)  (50)      (50)
Value of common stock beneficial conversion feature of Series A-1 Preferred Stock  -   -   90   90   -   90 
Share-based compensation  -   -   370   370   -   370 
                         
Balance at September 30, 2018  11,353,014  $1  $10,866  $10,867  $(2,393) $8,474 
  Common Stock  Preferred Stock       
        Additional  Total        Additional  Total       
     Par  paid-in  Common     Par  paid-in  Preferred  Accumulated    
  Shares  value  capital  Stock  Shares  value  capital  Stock  deficit  Total 
                               
Balance at December 30, 2018  11,546,589  $1  $10,756  $10,757   -  $ -  $-  $-  $(5,018) $5,739 
Net loss  -   -   -   -   -   -   -   -   (64)  (64)
Issuance of common stock in lieu of cash director fees payable  51,942   -   270   270   -   -   -   -   -   270 
Share-based compensation  -   -   218   218   -   -   -   -   -   218 
Common stock dividend  245,376   -   -   -   -   -   -   -   -   - 
Cash paid in lieu of fractional shares  -   -   (2)  (2)  -   -   -   -   -   (2)
                                         
Balance at September 29, 2019  11,843,907  $1  $11,242  $11,243  -  $-  $-  $-  $(5,082) $6,161 

5

For the thirteen weeks ended September 27, 2020

  Common Stock  Preferred Stock       
        Additional  Total        Additional  Total       
     Par  paid-in  Common     Par  paid-in  Preferred  Accumulated    
  Shares  value  capital  Stock  Shares  value  capital  Stock  deficit  Total 
                               
Balance at June 28, 2020  11,894,895  $1  $9,068  $9,069   -  $-  $-  $-  $(12,657) $(3,588)
Net loss  -   -   -   -   -   -   -   -   (568)  (568)
Issuance of common stock in lieu of cash directors fees payable  31,369   -   105   105   -   -   -   -   -   105 
Issuance of Series B preferred stock  -   -   -   -   360,000   -   6,033   6,033   -   6,033 
Exchange of original Series B preferred stock for newly issued Series B preferred stock  -   -   -   -   60,677   -   1,224   1,224   -   1,224 
Exchange of Series A preferred stock for newly issued Series B preferred stock  -   -   -   -   74,449   -   1,861   1,861   -   1,861 
Exchange of Series A-1 preferred stock for newly issued Series B preferred stock  -   -   -   -   168,001   -   4,200   4,200   -   4,200 
Share-based compensation  -   -   45   45   -   -   -   -   -   45 
Extinguishment of derivative liability  -   -   1,516   1,516   -   -   -   -   -   1,516 
Grant of warrants to purchase stock  -   -   2,261   2,261   -   -   -   -   -   2,261 
Repurchase of warrants  -   -   (330)  (330)  -   -   -   -   -   (330)
Dividends declared on Series B preferred stock  -   -   -   -   -   -   (277)  (277)  -   (277)
                                         
Balance at September 27, 2020  11,926,264  $1  $12,665  $12,666   663,127  $-  $13,041  $13,041  $(13,225) $12,482 

 

For the thirteen weeks ended September 29, 2019

 

  Common Stock       
        Additional          
     Par  paid-in     Accumulated    
  Shares  value  capital  Total  deficit  Total 
                   
Balance at June 30, 2019  11,826,765  $1  $11,093  $11,094  $(6,236) $4,858 
Net income  -   -   -   -   1,154   1,154 
Issuance of common stock in lieu of director fees payable  17,142   -   90   90   -   90 
Share-based compensation  -   -   59   59   -   59 
                         
Balance at September 29, 2019  11,843,907  $1  $11,242  $11,243  $(5,082) $6,161 

For the thirteen weeks ended September 30, 2018

  Common Stock       
  Shares  Par value  

Additional

paid-in
capital

  Total  

Accumulated

deficit

  Total 
                   
Balance at July 1, 2018  11,184,767  $1  $8,989  $8,990  $(2,403) $6,587 
Net income  -   -   -   -   10   10 
Issuance of stock in lieu of director fees payable  10,482   -   90   90   -   90 
Issuance of stock in lieu of dividend payable to Fog Cutter Capital Group, Inc.  157,765   -   960   960   -   960 
Stock offering costs  -   -   (50)  (50)      (50)
Value of common stock beneficial conversion feature of Series A-1 Preferred Stock  -   -   90   90   -   90 
Issuance of warrants to purchase common stock  -   -   662   662   -   662 
Share-based compensation  -   -   125   125   -   125 
                         
Balance at September 30, 2018  11,353,014  $1  $10,866  $10,867  $(2,393) $8,474 
  Common Stock  Preferred Stock       
        Additional  Total        Additional  Total       
     Par  paid-in  Common     Par  paid-in  Preferred  Accumulated    
  Shares  value  capital  Stock  Shares  value  capital  Stock  deficit  Total 
                               
Balance at June 30, 2019  11,826,765  $1  $11,093  $11,094   -  $ -  $-  $-  $(6,236) $4,858 
Net income  -   -   -   -   -   -   -   -   1,154   1,154 
Issuance of common stock in lieu of cash directors fees payable  17,142   -   90   90   -   -   -   -   -   90 
Share-based compensation  -   -   59   59   -   -   -   -   -   59 
                                         
Balance at September 29, 2019  11,843,907  $1  $11,242  $11,243  -  $-  $-  $-  $(5,082) $6,161 

 

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

6

FAT BRANDS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

 

For the thirty-nine weeks ended September 29, 201927, 2020 and September 30, 201829, 2019 (Unaudited)

 

  Thirty-nine weeks ended 
  September 29, 2019  September 30, 2018 
Cash flows from operating activities        
Net (loss) income $(64) $892 
Adjustments to reconcile net (loss) income to net cash provided by operations:        
Deferred income taxes  77   (22)
Depreciation and amortization  535   193 
Share-based compensation  218   370 
Accretion of debt discount  1,718   413 
Change in operating right of use assets  510   - 
Gain on sale refranchised restaurants  (2,249)  - 
Accretion of mandatorily redeemable preferred shares  48   18 
Accretion of purchase price liability  426   - 
Recovery of bad debts  (91)  - 
Change in:      - 
Accounts receivable  (731)  (805)
Trade notes receivable  21   64 
Other current assets  59   (362)
Accounts payable and accrued expense  3,375   1,033 
Accrued advertising  80   (475)
Accrued interest payable  (941)  259 
Deferred income  (2,129)  (1,665)
Dividend payable on mandatorily redeemable preferred shares  992   447 
Other  (281)  - 
Total adjustments  1,637   (532)
Net cash provided by operating activities  1,573   360 
         
Cash flows from investing activities        
Additions to property and equipment  (49)  (139)
Proceeds from sale of refranchised restaurants  1,710   - 
Payments made in connection with acquisition, net  (2,332)  (7,677)
Net cash used in investing activities  (671)  (7,816)
         
Cash flows from financing activities        
Proceeds from borrowings and associated warrants, net of issuance costs  23,022   17,096 
Issuance of mandatorily redeemable preferred shares and associated warrants  -   7,984 
Repayments of borrowings  (16,500)  (10,853)
Change in due from affiliates  (7,371)  (4,262)
Change in operating lease liabilities  (287)  - 
Dividends  (2)  (632)
Other  (106)  (50)
Net cash (used in) provided by financing activities  (1,244)  9,283 
         
Net (decrease) increase in cash  (342)  1,827 
Cash at beginning of period  653   32 
Cash at end of period $311  $1,859 
         
Supplemental disclosures of cash flow information:        
Cash paid for interest $4,576  $1,551 
Cash paid for income taxes $190  $184 
         
Supplemental disclosure of non-cash financing and investing activities:        
Note payable to Fog Cutter Capital Group, Inc. converted to common and preferred stock $-  $9,272 
Dividends reinvested in common stock $-  $1,920 
Director fees converted to common stock $270  $420 
Income taxes payable adjusting amounts due from affiliates $211  $74 
  Thirty-nine Weeks Ended 
  September 27, 2020  September 29, 2019 
Cash flows from operating activities        
Net loss $(7,189) $(64)
Adjustments to reconcile net loss to net cash (used in) provided by operations:        
Deferred income taxes  (1,633)  77 
Depreciation and amortization  763   535 
Share-based compensation  61   218 
Accretion of loan fees and interest  589   1,718 
Change in operating lease right of use assets  750   510 
Loss on extinguishment of debt  88   - 
Gain on contingent consideration payable adjustment  (1,680)  - 
Net loss (gain) on disposition of refranchising restaurants  55   (2,249)
Accretion of preferred shares  47   48 
Accretion of purchase price liability  381   426 
Impairment of assets  3,927   - 
Change in fair value of derivative liability  (887)  - 
Provision for (recovery of) bad debts  900   (91)
Change in operating assets and liabilities:        
Accounts receivable  130   (731)
Trade and other notes receivable  -   21 
Prepaid expenses and other current assets  (295)  59 
Accounts payable  312   2,863 
Accrued expenses  (87)  512 
Accrued advertising  (382)  80 
Accrued interest receivable from affiliate  (2,613)  (1,332)
Tax Sharing Agreement liability  (158)  (30)
Accrued interest payable  (404)  (941)
Deferred income  (446)  (2,129)
Dividend payable on preferred shares  (809)  992 
Other  74   (281)
Total adjustments  (1,317)  275 
Net cash (used in) provided by operating activities  (8,506)  211 
         
Cash flows from investing activities        
Additions to property and equipment  (239)  (49)
Payments received on loans receivable  69   - 
Proceeds from disposition of refranchised restaurants  1,093   1,710 
Change in due from affiliates  (10,103)  (6,009)
Acquisition of subsidiary, net of cash acquired  (23,944)  (2,332)
Net cash used in investing activities  (33,124)  (6,680)
         
Cash flows from financing activities        
Proceeds from borrowings and associated warrants, net of issuance costs  74,045   23,022 
Repayments of borrowings  (24,224)  (16,500)
Proceeds from preferred stock offering and associated warrants, net of issuance costs  8,021   - 
Payments made on acquisition purchase price liability  (500)  - 
Redemption of preferred stock  (500)  - 
Dividends paid in cash  (175)  (2)
Repurchase of warrants  (330)  - 
Change in operating lease liabilities  (464)  (287)
Other  -   (106)
Net cash provided by financing activities  55,873   6,127 
         
Net increase (decrease) in cash and restricted cash  14,243   (342)
Cash and restricted cash at beginning of period  25   653 
Cash and restricted cash at end of period $14,268  $311 
         
Supplemental disclosures of cash flow information:        
Cash paid for interest $5,420  $4,576 
Cash paid for income taxes $84  $190 
         
Supplemental disclosure of non-cash financing and investing activities:        
Issuance of preferred stock in lieu of cash preferred dividends payable $450  $- 
Issuance of common stock in lieu of cash director fees payable $240  $270 
Income taxes receivable to adjust amounts due from affiliates $(158) $30 

 

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

 

67

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

NOTE 1. ORGANIZATION AND RELATIONSHIPS

 

Organization and Nature of Business

 

FAT Brands Inc. (the “Company”) was formed on March 21, 2017 as a wholly owned subsidiary of Fog Cutter Capital Group Inc. (“FCCG”). On October 20, 2017, the Company completed an initial public offering and issued additional shares of common stock representing 20 percent of its ownership (the “Offering”“Initial Public Offering”). The Company’s common stock trades on the Nasdaq Capital Market under the symbol “FAT.” As of September 29, 2019,27, 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 September 29, 2019,27, 2020, the Company owns and franchises eightnine restaurant brands: Fatburger, Johnny Rockets, Buffalo’s Cafe, Buffalo’s Express, Hurricane Grill & Wings, Ponderosa Steakhouses, Bonanza Steakhouses, Yalla Mediterranean and Elevation Burger. Combined, as of September 27, 2020, these brands havefranchise over 380 locations open700 units worldwide and have more than 200 additional units 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, 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. We may experience longer-term effects on our business and economic growth and changes in 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 incomea loss from operations of $3,071,000 and $2,109,000 during the thirteen weeks ended September 29, 2019 and September 30, 2018, respectively, and $6,239,000 and $3,877,000$7,161,000 during the thirty-nine weeks ended September 27, 2020 and income from operations of $5,703,000 for the thirty-nine weeks ended September 29, 2019 and September 30, 2018, respectively. Despite the profitability of the brands and their operations, the2019. The Company recognized net incomelosses of $1,154,000$7,189,000 and a net loss of $64,000 during the thirteen weeks and the thirty-nine weeks ended September 27, 2020 and September 29, 2019, respectively. The reduction in earnings for 2020 is primarily due to:to reductions in revenues and impairment of assets due to the effects of 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 and debt offering costs (See Note 10). A portion of the proceeds from the Securitization was used to repay the remaining $26,771,000 in outstanding debt balance under the Lion Loan and Security Agreement and to pay the Securitization debt offering costs with the remaining proceeds being used for working capital.

On September 21, 2020, FAT Royalty completed the sale of an additional $40 million of Series 2020-2 Fixed Rate Asset-Backed Notes (the “Series M-2 Notes”), increasing the Company’s Securitization Notes to $80 million. Net proceeds from the issuance of the Series M-2 Notes were $35,241,000, which consist of the face amount of $40,000,000, net of discounts of $3,200,000 and debt offering costs of $1,559,000. Approximately $24,838,000 of the proceeds from the Series M-2 Notes were used to acquire Johnny Rockets, with the remaining proceeds from the Securitizations are being used for working capital.

Higher net interest expense during 2019 as compared to the prior year periods related to higher debt balances which include our term loan debt that matures on June 30, 2020 (See Note 11); and
Higher effective income tax rates during 2019 as compared to the prior year periods primarily due to the non-deductibility of dividends on the Company’s preferred stock. (See Note 9).8

During the second quarter of 2020, the Company received loan proceeds in the amount of $1,532,000 from the Paycheck Protection Program administered by the Small Business Administration (“PPP”) in response to economic difficulties resulting from the outbreak of COVID-19. These loan proceeds relate to FAT Brands Inc. as well as five restaurant locations that were part of the Company’s refranchising program.

On July 13, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) to issue and sell in a public offering (the “Offering”) 360,000 shares of 8.25% Series B Cumulative Preferred Stock (“Series B Preferred Stock”) and 1,800,000 warrants (the “2020 Series B Warrants”) to purchase common stock at $5.00 per share. The Offering closed on July 16, 2020 with net proceeds to the Company of $8,021,000, which was net of $979,000 in underwriting and offering costs.

 

While the Company anticipates refinancingexpects the term loan debt that matures on June 30, 2020COVID-19 pandemic to negatively impact its business, results of operations, and financial position, the related financial impact cannot be reasonably estimated at a lower cost of capital prior to that date, ifthis time. However, the Company is unable to obtain acceptable financing,believes that the working capital from the Securitization, Series B Preferred Stock Offering, and PPP proceeds, combined with royalties and franchise fees collected from the operations of its ability to fund the organic growthfranchisees, and disciplined management of the Company or to acquire additional restaurant concepts mayCompany’ operating expenses, will be negatively impacted.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 – The Company operates its franchising business on a 52 or a 53 week52-week calendar and theits fiscal year ends on the last Sunday of December.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 53rd53rd 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.

With minor exceptions, the fiscal year 2019Company’s operations are comprised exclusively of franchising a growing portfolio of restaurant brands. This growth strategy is centered on expanding the footprint of existing brands and acquiring new brands through a centralized management organization which provides substantially all executive leadership, marketing, training and accounting services. As part of these ongoing franchising efforts, the Company will, from time to time, make opportunistic acquisitions of operating restaurants in order to convert them to franchise locations. During the refranchising period, the Company may operate the restaurants and classifies the operational activities as refranchising gains or losses and the fiscal year 2018 consist of 52 weeks.assets and associated liabilities as held-for sale.

Principles of consolidation – The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries: Fatburger North America, Inc. (“Fatburger”); Buffalo’s Franchise Concepts, Inc. (“Buffalo’s”); Ponderosa Franchising Company, Bonanza Restaurant Company, Ponderosa International Development, Inc. and Puerto Rico Ponderosa, Inc. (collectively, “Ponderosa”); Hurricane AMT, LLC (“Hurricane”); Yalla Mediterranean Franchising Company, LLC and Yalla Acquisition, LLC (collectively, the “Yalla Business”) and EB Franchises, LLC (“Elevation Burger”).

subsidiaries. The accounts of Hurricane have been consolidated since its acquisition by the Company on July 3, 2018. The accounts of the Yalla Business have been consolidated since December 3, 2018. The accountsoperations of Elevation Burger have been consolidatedincluded since its acquisition on June 19, 2019.2019 and Johnny Rockets has been included since its acquisition on September 21, 2020. Intercompany accounts have been eliminated in consolidation.

 

Use of estimates in the preparation of the consolidated financial statements – 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 disclosure 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.

 

9

Financial statement reclassification – Certain account balances from prior periods have been reclassified in these consolidated financial statements to conform to current period classifications.

 

Cash -Credit and Depository Risks – Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. Management reviews each of its franchisee’s financial condition prior to entry into a franchise or other agreement, as well as through the term of the agreement, and believes that it has adequately provided for any exposure to potential credit losses. As of September 27, 2020, accounts receivable, net of allowance for doubtful accounts, totaled $4,453,000, with no franchisee representing more than 10% of that amount. As of December 29, 2019, the Company had two franchisees each representing 20% of accounts receivable, net of allowance for doubtful accounts.

The Company’sCompany maintains cash is maintained at multipledeposits in national financial institutions and frominstitutions. From time to time the balances for one or more of itsthese accounts may exceed the Federal Deposit Insurance Corporation’s (“FDIC’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 September 27, 2020, the Company had uninsured deposits in the amount of $13,009,000. As of December 29, 2019, the Company had no accounts that exceededwith uninsured balances.

Restricted Cash – The Company has restricted cash consisting of funds required to be held in trust in connection with the insured limit. AsCompany’s Securitization. The current portion of restricted cash at September 27, 2020 consisted of $1,758,000. Non-current restricted cash of $400,000 at September 27, 2020 represents interest reserves required to be set aside for the duration of the securitized debt. There were no restricted cash balances as of December 30, 2018, the Company had one account with a balance that exceeded the insured limit.29, 2019.

 

Accounts receivable – Accounts receivable are recorded at the invoiced amount and are stated net of an allowance for doubtful accounts. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the existing accounts receivable. The allowance is based on historical collection data and current franchisee information. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of September 27, 2020, and December 29, 2019, accounts receivable were stated net of an allowance for doubtful accounts of $670,000 and $595,000, respectively.

 

Trade 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 6% to 7.5%. Reserve amounts on the notes are established based on the likelihood of collection. As of September 27, 2020, there were no trade notes receivables recorded on the financial statements.

 

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 continue to be accrued.are recorded as expenses in the Company’s consolidated statement of operations.

 

Goodwill and other intangible assets – Intangible assets are stated at the estimated fair value at the date of 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 range from nine to 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 carrying amount of an 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 acquired businesses, market conditions and other factors.

Fair Value Measurements - The Company determines the fair market values of its financial assets and liabilities, as well as non-financial assets and liabilities that are recognized or disclosed at fair value on a recurring basis, based on the fair value hierarchy established in U.S. GAAP. As necessary, the Company measures its financial assets and liabilities using inputs from the following three levels of the fair value hierarchy:

Level 1 inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities.
Level 3 inputs are unobservable and reflect the Company’s own assumptions.

10

Other than the derivative liability, the Company does not have a material amount of financial assets or liabilities that are required to be measured at fair value on a recurring basis under U.S. GAAP (See Note 11). None of the Company’s non-financial assets or non-financial liabilities are required to be measured at fair value on a recurring basis. Assets recognized or disclosed at fair value in the consolidated financial statements on a nonrecurring basis include items such as property and equipment, operating lease assets, goodwill and other intangible assets, which are measured at fair value if determined to be impaired.

The Company has not elected to use fair value measurement for any assets or liabilities for which fair value measurement is not presently required by U.S. GAAP. However, the Company believes the fair values of cash equivalents, restricted cash, accounts receivable, assets held for sale and accounts payable approximate their carrying amounts.

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 CaliforniaOregon (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.

 

Royalties: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 includes 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 on a straight-line basis. 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 between franchisees. 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, at which point the 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 (generally 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.

11

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 in Franchise 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 collectthe Company collects 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.

Franchise Fees: 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 feesThe Company recognizes store opening fees in the amount of $35,000 to $60,000 from the up-front fees collected from franchisees. The amount of the fee is dependent on brand and location (domestic versus international stores). The remaining balance of the up-front fees are then amortized as franchise fees over the life of the franchise agreement. If the fees collected are less than the respective store opening fee amounts, the full up-front fees are recognized at opening. The store opening fees are 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 are higher due to the additional cost of travel.

 

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 consolidated onreflected 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 1514 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 the inclusion of all potentially dilutive securities would be anti-dilutive. As of September 27, 2020, and September 29, 2019, there were no potentially dilutive securities excluded from the calculation of diluted loss per common share due to a loss for the period.

 

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 17)16). Unless otherwise noted, earnings per share and other share-based information for 20192020 and 20182019 have been adjusted retrospectively to reflect the impact of thethat stock dividend.

 

Recently Adopted Accounting StandardsImmaterial Adjustments Related to Prior Periods

 

In June 2018,During the Financial Accounting Standards Board (“FASB”)fourth quarter of 2019, the Company identified two immaterial potential adjustments to its previously issued Accounting Standards Update (“ASU”) No. 2018-07,Compensation – Stock Compensation (Topic 718): Improvementsfinancial statements. These potential adjustments are related to Nonemployee Share-Based Payment Accounting. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Prior to this update, Topic 718 applied only to share-based transactions to employees. Consistent with the accounting requirements for employee share-based payment awards, nonemployee share-based payment awards within the scope of Topic 718 are measured at grant-date fair value(1) its assessment of the equity instrumentsSeries 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 entity is obligatederror occurred in the analysis of the rights that the holders of the Series A-1 Fixed Rate Cumulative Preferred Stock have with respect to issue when the good has been delivered orconversion of the service has been rendered and any other conditions necessary to earnsecurities into shares of the right to benefit fromCompany’s common stock. In our reassessment, the instruments have been satisfied. The Company adopted Topic 718 on December 31, 2018. The adoption of this accounting standardconversion rights did not haverepresent a material effect onbeneficial conversion feature as we had initially concluded at the Company’s consolidated financial statements.

In July 2018,time of issuance. A cumulative correction was recorded to additional paid in capital during the FASB issued ASU 2018-09,Codification Improvements.This ASU makes amendments to multiple codification Topics. The transition and effective date guidance is based on the facts and circumstancesfirst quarter of each amendment. Some of the amendments in this ASU do not require transition guidance and will be effective upon issuance of this ASU. The Company adopted ASU 2018-09 on December 31, 2018. The adoption of this ASU did not have a material effect on the Company’s financial position, results of operations, and disclosures.

In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842), requiring a lessee to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with a lease term of more than twelve months. Leases will continue to be classified as either financing or operating, with classification affecting the recognition, measurement and presentation of expenses and cash flows arising from a lease. This ASU is effective for interim and annual periods beginning after December 15, 2018 and requires a modified retrospective approach to adoption for lessees related to capital and operating leases existing at, or entered into after, the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company adopted Topic 842 using the modified retrospective approach, using a date of initial application of December 31, 2018. The Company also elected the package of practical expedients permitted under the standard, which allowed the company to carry forward historical lease classifications. The adoption of this standard on December 31, 2018 resulted in the Company recording Operating Lease Right of Use Assets and Operating Lease Liabilities on its consolidated financial statements as of that date2020 in the amount of $4,313,000$90,000.

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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 $4,225,000, respectively. Thedetermined 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 effective December 31, 2018.

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 this standard did not have a significant effectthe preferential accounting treatment under ASC 606. Based on such analysis of quantitative and qualitative factors, the amountCompany has determined that neither the error nor the adoption of lease expense recognized by the Company.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.

 

Adopting the new accounting standard for leases affected various financial statement line items for the thirteen and thirty-nine weeks ended September 29, 2019. The following table provides the affected amounts as reported in these unaudited consolidated financial statements compared with what they would have been if the previous accounting guidance had remained in effect.

As of September 29, 2019 (in thousands)

  Amounts As Reported  Amounts Under Previous Accounting Guidance 
Unaudited Consolidated Balance Sheet:        
Operating lease right of use assets $1,018  $     - 
Operating lease right of use assets classified as held for sale $1,426  $- 
Operating lease liabilities $1,041  $- 
Operating lease liabilities associated with operating lease right of use assets classified as held for sale $1,459  $- 

Recently IssuedAdopted 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.” This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently assessing the effect thatadopted this ASU willon December 30, 2019. The adoption of this standard did not have a material effect on itsthe Company’s financial position, results of operations and disclosures.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). For public companies, the amendments inThe Company adopted this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning afteron December 15, 2019, with early30, 2019. The adoption permitted. Implementation should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The effects of this standard did not have a material effect on the Company’s financial position, results of operations or cash flows areflows.

The FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes: This standard removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocations 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 expected to be material.have a material effect on the Company’s financial position, results of operations or cash flows.

 

NOTE 3. ACQUISITIONS AND SIGNIFICANT TRANSACTIONS

 

Acquisition of Johnny Rockets

On September 21, 2020, the Company completed the acquisition of Johnny Rockets Holding Co., a Delaware corporation (“Johnny Rockets”) for a cash purchase price of approximately $24.8 million. The purchase price was subject to certain post-closing adjustments, including with respect to net working capital, Johnny Rockets’ cash on hand, tax liabilities and outstanding indebtedness as of the closing and certain transaction expenses payable at closing, all of which were estimated at closing and, pursuant to the stock purchase agreement, will be finalized no later than no later than 75 days after the closing. The transaction was funded with proceeds from an increase in the Company’s securitization facility (See Note 10). Fees and expenses related to the Johnny Rockets acquisition totaled approximately $574,000, consisting primarily of professional fees, all of which are classified as other expenses in the accompanying consolidated statement of operations. These fees and expenses were funded through cash on hand and proceeds from borrowings.

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Immediately following the closing of the acquisition of Johnny Rockets, the Company contributed the franchising subsidiaries of Johnny Rockets to FAT Royalty I, LLC pursuant to a Contribution Agreement. (See Note 10).

The preliminary assessment of the fair value of the net assets and liabilities acquired by the Company through the acquisition of Johnny Rockets was estimated at $24,838,000. This preliminary assessment of fair value of the net assets and liabilities as well as the final purchase price were estimated at closing and are subject to change. The preliminary allocation of the consideration to the preliminary valuation of net tangible and intangible assets acquired is presented in the table below (in thousands):

Cash $894 
Accounts receivable  1,193 
Assets held for sale  11,126 
Goodwill  9,691 
Other intangible assets  26,400 
Other assets  412 
Accounts payable  (1,169)
Accrued expenses  (2,486)
Deferred franchise fees  (4,988)
Deferred tax liability  (6,032)
Operating lease liability  (10,028)
Other liabilities  (175)
Total net identifiable assets $24,838 

Revenues of $134,000 and net income $19,000 attributed to Johnny Rockets from the date of acquisition are included in the accompanying consolidated statements of operations for thirteen and thirty-nine weeks ended September 27, 2020.

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Proforma Information

The table below presents the proforma revenue and net (loss) income of the Company for the thirteen and thirty-nine weeks ended September 27, 2020 and September 29, 2019, assuming the acquisition of Johnny Rockets had occurred on December 31, 2018 (the beginning of the Company’s 2019 fiscal year), pursuant to ASC 805-10-50 (in thousands). This proforma information does not purport to represent what the actual results of operations of the Company would have been had the acquisition of Johnny Rockets occurred on this date nor does it purport to predict the results of operations for future periods.

  Thirteen Weeks Ended  Thirty-nine Weeks Ended 
  September 27, 2020  September 29, 2019  September 27, 2020  September 29, 2019 
             
Revenues $5,722  $11,039  $17,209  $30,004 
Net (loss) income $(702) $2,771  $(8,694) $3,604 

The proforma information above reflects the combination of the Company’s results as disclosed in the accompanying consolidated statements of operations for thirteen and thirty-nine weeks ended September 27, 2020 and the unaudited results of Johnny Rockets for the thirteen and thirty-nine weeks ended September 27, 2020 and September 29, 2019 with the following adjustments:

Revenue – The unaudited proforma revenues and net (loss) income present franchise fee revenue and advertising revenue in accordance with ASC 606 in a manner consistent with the Company’s application thereof. As a non-public company, Johnny Rockets had not yet been required to adopt ASC 606.
Overhead allocations from the former parent company have been adjusted to the estimated amount the Company would have allocated for the thirteen and thirty-nine weeks ended September 27, 2020 and September 29, 2019.
Former parent company management fees have been eliminated from the proforma.
Amortization of intangible assets has been adjusted to reflect the preliminary fair value at the assumed acquisition date.
Depreciation on assets treated as held for sale by the Company has been eliminated.
The proforma adjustments also include advertising expenses in accordance with ASC 606.
The proforma interest expense has been adjusted to exclude actual Johnny Rockets interest expense incurred prior to the acquisition. All interest-bearing liabilities were paid off at closing.
The proforma interest expense has been adjusted to include proforma interest expense that would have been incurred relating to the acquisition financing obtained by the Company.
Non-recurring, non-operating gains and losses have been eliminated from the proforma statements.

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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.internationally at the time of the acquisition.

 

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 September 27, 2020, and December 29, 2019, the contingent purchase price payable totaled $609,000$704,000 and $633,000, respectively, which includes the accretion of interest expense at an effective interest rate of 18.0%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):

 

Cash $18  $10 
Accounts receivable  50 
Goodwill  521 
Other intangible assets  7,140 
Other assets  446   558 
Intangible assets  7,140 
Goodwill  1,601 
Amounts payable to franchising agent  (1,065)
Current liabilities  (91)
Deferred franchise fees  (758)  (758)
Other liabilities  (239)  (187)
Total net identifiable assets $7,193  $7,193 

 

TheDescriptions of the Company’s assessment of fair value is preliminary and is based on information that was available to management at the time these unaudited consolidated financial statements were prepared. 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 dateimpairment 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.

Yalla Mediterranean Transactions

On December 3, 2018, the Company entered into an Intellectual Property Purchase Agreementgoodwill 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 September 29, 2019, the purchase price payable totaled $2,070,000 which includes the accretion of interest expense at an effective interest rate of 20.9%.

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. As of September 29, 2019, the purchase price payable totaled $1,695,000 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 presentedthis acquisition related to COVID-19 are in the table below (in thousands):Note 6.

Cash $82 
Accounts receivable  77 
Inventory  95 
Other assets  90 
Property and equipment  2,521 
Intangible assets  1,530 
Goodwill  263 
Accounts payable and accrued expenses  (1,168)
Total net identifiable assets $3,490 

Acquisition of Hurricane AMT, LLC

On July 3, 2018, the Company completed the acquisition of Hurricane AMT, LLC, a Florida limited liability company (“Hurricane”), for a purchase price of $12,500,000. Hurricane is the franchisor of Hurricane Grill & Wings and Hurricane BTW Restaurants. The purchase price of $12,500,000 was delivered through the payment of $8,000,000 in cash and the issuance to the Sellers of $4,500,000 of equity units of the Company valued at $10,000 per unit, or a total of 450 units. Each unit consists of (i) 100 shares of the Company’s newly designated Series A-1 Fixed Rate Cumulative Preferred Stock (the “Series A-1 Preferred Stock”) and (ii) a warrant to purchase 127 shares of the Company’s Common Stock at $7.83 per share (the “Hurricane Warrants”).

The allocation of consideration to the net tangible and intangible assets acquired is presented in the table below (in thousands):

Cash $358 
Accounts receivable  352 
Other assets  883 
Intangible assets  11,020 
Goodwill  2,772 
Accounts payable and accrued expenses  (643)
Deferred franchise fees  (1,885)
Other liabilities  (357)
Total net identifiable assets $12,500 

 

nOTE 4. REFRANCHISING

 

With minor exceptions, the Company’s operations are comprised exclusively of franchising a growing portfolio of restaurant brands. This growth strategy is centered on expanding the footprint of existing brands and acquiring new brands through a centralized management organization which provides substantially all executive leadership, marketing, training and accounting services. As part of itsthese ongoing franchising efforts, the Company will, from time to time, make opportunistic acquisitions of operating restaurants in order to convert them to franchise locationslocations. During the refranchising period, the Company may operate the restaurants and classifies the operational activities as refranchising gains or acquire existing franchise locations to resell to another franchisee.losses and the assets and associated liabilities as held-for sale.

 

During the first quarter of 2019,Assets designated by the Company met all offor refranchising meet the criteria requiring that certain assets used in the operation of certain restaurantsthey be classified as held for sale. As a result, the following remaining assets have been classified as held for sale on the accompanying consolidated balance sheet as of September 27, 2020 and December 29, 2019 (in thousands):

 

 September 29, 2019  September 27, 2020 December 29, 2019 
        
Property, plant and equipment $846 
Property and equipment $1,106  $1,912 
Operating lease right of use assets  1,426   9,942   3,216 
Total $2,272  $11,048  $5,128 

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Operating lease liabilities related to the assets classified as held for sale in the amount of $1,459,000,$9,959,000 and $3,325,000, have been classified as current liabilities on the accompanying consolidated balance sheetsheets as of September 27, 2020 and December 29, 2019.

During the thirteen and thirty-nine weeks ended September 29, 2019,27, 2020, refranchising operations incurred losses of $325,000 and $1,869,000, respectively, compared to gains of $902,000 and $851,000, respectively, for the corresponding periods in 2019. The refranchising results for the thirty-nine weeks ended September 27, 2020, included operating restaurants incurred restaurant costs and expenses, net of revenue of $377,000 and $1,398,000, respectively, with no comparable activityfood sales, in the amount of $1,114,000, a gain of $560,000 relating to the sale and refranchising of four restaurant locations, a loss of $615,000 on the closure and disposition of three restaurant locations and the establishment of a reserve of $700,000 relating to a prior periods (in thousands) as well as gainsale. The 2019 period included gains on the sale and refranchising sales:of two restaurants in the amount of $2,249,000 which were partially offset by restaurant operating expenses, net of food sales, in the amount of $1,398,000.

  Thirteen Weeks Ended
September 29, 2019
  Thirty-nine weeks ended
September 29, 2019
 
Restaurant costs and expenses, net of revenue $(377) $(1,398)
Gain on store sales  1,279   2,249 
Refranchising gain $902  $851 

 

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 receivable 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 September 27, 2020, there were no trade notes receivable. At December 29, 2019, these trade notes receivable totaled $378,000, which was$250,000, 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 net carrying value of $1,903,000, which was net of a discount of $397,000. As of September 27, 2020, and December 29, 2019, the balance of the Elevation Note was $1,882,000,$1,809,000 and $1,814,000, which were net of a discountdiscounts of $374,000.$288,000 and $352,000, respectively. During the thirteen and thirty-nine weeks ended September 27, 2020, the Company recognized $52,000 and $158,000, respectively, in interest income. During the thirteen and thirty-nine weeks ended September 29, 2019, the Company recognized $55,000 and $59,000 in interest income, respectively, with no comparable activity in 2018.respectively.

 

Note 6. GOODWILL and other intangible assets

Goodwill

 

Goodwill consists of the following (in thousands):

 

 September 29, 2019 December 30, 2018  September 27, 2020 December 29, 2019 
Goodwill:                
Fatburger $529  $529  $529  $529 
Buffalo’s  5,365   5,365   5,365   5,365 
Hurricane  2,772   2,772   2,772   2,772 
Ponderosa  1,462   1,462 
Ponderosa and Bonanza  -   1,462 
Yalla  263   263   263   263 
Johnny Rockets  9,691   - 
Elevation Burger  1,601   -   521   521 
Total Goodwill $11,992  $10,391 
Total goodwill $19,141  $10,912 

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Note 7. OTHER INTANGIBLE ASSETSOther Intangible Assets

 

IntangibleOther intangible assets consist of trademarks and franchise agreements that were classified as identifiable intangible assets at the followingtime 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):

 

 September 29, 2019 December 30, 2018  September 27, 2020 December 29, 2019 
Trademarks:                
Fatburger $2,135  $2,135  $2,135  $2,135 
Buffalo’s  27   27   27   27 
Hurricane  6,840   6,840   6,840   6,840 
Ponderosa  7,230   7,230 
Ponderosa and Bonanza  5,518   7,230 
Yalla  1,530   1,530   777   1,530 
Johnny Rockets  19,900   - 
Elevation Burger  4,690   -   4,690   4,690 
Total trademarks  22,452   17,762   39,887   22,452 
                
Franchise agreements:                
Hurricane – cost  4,180   4,180   4,180   4,180 
Hurricane – accumulated amortization  (403)  (161)  (723)  (482)
Ponderosa – cost  1,640   1,640 
Ponderosa – accumulated amortization  (215)  (132)
Ponderosa and Bonanza – cost  1,640   1,640 
Ponderosa and Bonanza – accumulated amortization  (326)  (243)
Johnny Rockets – cost  6,500   - 
Johnny Rockets – accumulated amortization  (12)  - 
Elevation Burger – cost  2,450   -   2,450   2,450 
Elevation Burger – accumulated amortization  (137)  -   (637)  (263)
Total franchise agreements  7,515   5,527   13,072   7,282 
Total Other Intangible Assets $29,967  $23,289 
Total other intangible assets $52,959  $29,734 

 

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

 

Fiscal year:       
2019 $233 
2020  932  $381 
2021  932   1,523 
2022  932   1,523 
2023  932   1,523 
2024  1,523 
Thereafter  3,554   6,599 
Total $7,515  $13,072 

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 September 27, 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 and extent of restrictions on restaurant operating hours, in-house dining limitations or other restrictions that have 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.

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In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The fair value technique used in this instance is classified as Level 3, where unobservable inputs are used when little or no market data is available. In performing the quantitative test for impairment of goodwill, the Company used the income approach method of valuation that includes the discounted cash flow method to determine the fair value of goodwill and intangible assets. Significant assumptions made by management in estimating fair value under the discounted cash flow model include future trends in sales, operating expenses, overhead expenses, depreciation, capital expenditures and changes in working capital, along with an appropriate discount rate based on the Company’s estimated cost of equity capital and after-tax cost of debt.

In performing the impairment review of the tradename, the Company used the relief of royalty method under the income approach method of valuation. Significant assumptions used to determine fair value under the relief of royalty method include future trends in sales, a royalty rate and a discount rate to be applied to the forecast revenue stream.

In performing the impairment review of the franchise agreement assets, the Company used the residual earnings method under the income approach method of valuation. Significant assumptions used to determine fair value under the residual earnings method include future trends in sales, a royalty rate and a discount rate to be applied to the forecast revenue stream.

As a result of these analyses, when considering the available facts, assessments and judgments, during the thirty-nine weeks ended September 27, 2020, the Company recorded goodwill impairment charges of $1,462,000 and tradename impairment charges of $2,465,000 relating to the Ponderosa, Yalla and Bonanza brands. The Company had not recognized impairment charges on its goodwill or intangible assets prior to the second quarter of 2020.

Because of the risks and uncertainties related to the COVID-19 pandemic events, the negative effects on the operations of our franchisees could prove to be worse than we currently estimate and lead us to record additional non-cash goodwill or other intangible asset impairment charges in the future periods.

 

Note 8.7. DEFERRED INCOME

 

Deferred income is as follows (in thousands):

 

 September 29, 2019 December 30, 2018  September 27, 2020 December 29, 2019 
          
Deferred franchise fees $5,514  $6,711  $9,890  $5,417 
Deferred royalties  481   653   275   422 
Deferred advertising revenue  381   333 
Deferred vendor incentives  519   303 
Total $6,376  $7,697  $10,684  $6,142 

 

Note 9.8. 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 CaliforniaOregon (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 having 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. An inter-company receivable of approximately $22,886,000$33,382,000 due from FCCG and its affiliates will be applied first to reduce excess income tax payment obligations to FCCG under the Tax Sharing Agreement.

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For financial reporting purposes, the Company has recorded a tax provisionbenefit as of September 27, 2020, calculated as if the Company files its tax returns on a stand-alone basis. The amount payable toreceivable from FCCG determined by this calculation of $211,000$158,000 and $30,000 was subtracted fromadded to amounts due from FCCG as of September 27, 2020 and September 29, 2019, respectively. (See Note 13).12.)

 

Deferred taxes reflect the net 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):

 

 September 29, 2019 December 30, 2018  September 27, 2020 December 29, 2019 
Deferred tax assets (liabilities)        
Deferred tax (liabilities) assets        
Deferred income $1,910  $1,779  $1,372  $1,353 
Reserves and accruals  467   346   218   208 
Intangibles  (556)  (532)  (6,420)  (614)
Deferred state income tax  (85)  (72)  (19)  (91)
Tax credits  -   126   313   244 
Share-based compensation  134   131   193   192 
NOL carryforward  68   - 
Interest expense  384   439 
Fixed assets  (164)  - 
Property and equipment  (125)  (137)
Net operating loss carryforwards  2,069   894 
Other  1  19   32   (17)
Total $2,159  $2,236  $(2,367) $2,032 

 

Components of the provision for income taxestax (benefit) expense are as follows (in thousands):

 

 Thirty-nine weeks ended
September 29, 2019
 Thirty-nine weeks ended
September 30, 2018
  Thirty-nine Weeks
Ended
September 27, 2020
 Thirty-nine Weeks
Ended
September 29, 2019
 
Current                
Federal $116  $49  $(118) $116 
State  30   142   33   30 
Foreign  30   318   313   30 
  176   509   228   176 
Deferred                
Federal  139   78   (1,359)  139 
State  (62)  (92)  (274)  (62)
  77   (14)  (1,633)  77 
Total provision for income taxes $253  $495 
Total income tax (benefit) expense $(1,405) $253 

 

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

 

 Thirty-nine weeks ended Thirty-nine weeks ended  Thirty-nine Weeks
Ended
 Thirty-nine Weeks
Ended
 
 September 29, 2019 September 30, 2018  September 27, 2020 September 29, 2019 
          
Provision for income taxes at statutory rate $40  $291 
Tax benefit at statutory rate $(1,805) $40 
State and local income taxes  -   39   (190)  - 
Foreign taxes  30   319   313   30 
Tax credits  112   (297)  (92)  112 
Dividends on mandatorily redeemable preferred stock  51   - 
Share based compensation  -   146 
Dividends on preferred stock  123   51 
Impairment of goodwill  266   - 
Other  20   (3)  (20)  20 
Total provision for income taxes $253  $495 
Total income tax (benefit) expense $(1,405) $253 

20

 

As of September 29, 2019,27, 2020, the Company’s subsidiaries’ annual tax filings for the prior three years are open for audit by Federal and for the prior four years for state tax agencies. The Company is the beneficiary of indemnification agreements from the prior owners of thecertain of its subsidiaries for tax liabilities related to periods prior to its ownership of the subsidiaries. Management evaluated the Company’s overall tax positions and has determined that no provision for uncertain income tax positions is necessary as of September 29, 2019.27, 2020.

 

NOTE 10.9. LEASES

 

The Company records sixhas recorded fifteen operating leases for its corporate offices and for certain restaurant properties that are in the process of being refranchised. The Company is not a guarantor to the leases of the restaurants that are being refranchised.refranchised and classified as held for sale. The leases have remaining lease terms ranging from 0.6 yearsthree months to 6.0 years. Two of the leases also have options to extend the term for 5 to 10eighteen years. The Company recognized lease expense of $1,089,000$1,092,000 and $243,000$1,089,000 for the thirty-nine weeks ended September 29, 201927, 2020 and September 30, 2018,29, 2019, respectively. The Company recognized lease expense of $355,000$372,000 and $84,000$355,000 for the thirteen weeks ended September 29, 201927, 2020 and September 30, 2018,29, 2019, respectively. The weighted average remaining lease term of the operating leases (not including optional lease extensions) at September 29, 201927, 2020 was 4.57.8 years.

 

Operating lease right of use assets and operating lease liabilities relating to the operating leases as of September 29, 2019 are as follows (in thousands):

 

 September 29, 2019 December 30, 2018  September 27, 2020 December 29, 2019 
          
Right of use assets $2,444  $-  $14,650  $4,076 
Lease liabilities $2,500  $-  $14,842  $4,206 

 

The operating lease rightAt the adoption of use assets and operating lease liabilities include obligations relating toASC 842, the optional term extensions available on five of the leases based on management’s intention to exercise the options. The weighted average 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 the Company’s incremental borrowing rate at that time. Subsequent to the adoption of ASC 842, the Company calculated the carrying value of new right of use assets and lease liabilities at the then prevailing incremental borrowing rate which ranged from 8.7% to 9.1% during the nine months ended September 27, 2020.

The contractual future maturities of the Company’s operating lease liabilities as of September 29, 2019,27, 2020, including anticipated lease extensions, are as follows (in thousands):

 

Fiscal year:      
2019 $240 
2020  763  $676 
2021  512   2,951 
2022  516   3,124 
2023  535   3,227 
2024  3,137 
Thereafter  2,434   7,645 
Total lease payments  5,000   20,760 
Less imputed interest  2,500   (5,918)
Total $2,500  $14,842 

 

Supplemental cash flow information for the thirty-nine weeks ended September 29, 201927, 2020 related to leases is as follows (in thousands):

 

Cash paid for amounts included in the measurement of operating lease liabilities:       
Operating cash flows from operating leases $867  $633 
Operating lease right of use assets obtained in exchange for new lease obligations:        
Operating lease liabilities $187  $12,168 

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Note 11.10. DEBT

 

Term LoanSecuritization

 

On July 3, 2018,March 6, 2020, the Company as borrower,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 notes (the “Securitization Notes”) pursuant to an indenture and certainthe supplement thereto, each dated March 6, 2020 (collectively, the “Indenture”).

The Securitization Notes issued in March 2020 consist of the Company’s subsidiariesfollowing (the “Series AB Notes”):

Note Public
Rating
 Seniority Issue Amount  Coupon  First Call Date Final Legal Maturity Date
               
A-2 BB Senior $20,000,000   6.50% 4/27/2021 4/27/2026
B-2 B Senior Subordinated $20,000,000   9.00% 4/27/2021 4/27/2026

Net proceeds from the issuance of the Series AB Notes were $37,314,000, which consists of the combined face amount of $40,000,000, net of discounts of $246,000 and affiliatesdebt offering costs of $2,440,000. The discount and offering costs will be accreted as guarantors, entered into a newadditional interest expense over the expected term of the Series AB Notes.

A portion of the proceeds from the Series AB Notes were used to repay the remaining $26,771,000 in outstanding balance under the Loan and Security Agreement (the “Loan and Security Agreement”) with FB Lending, LLCThe Lion Fund, L.P. and The Lion Fund II, L.P. (collectively, “Lion”) and to pay Securitization debt offering costs. The remaining proceeds from the Securitization were available for working capital.

On September 21, 2020, FAT Royalty completed the sale of an additional $40 million face amount of Series 2020-2 Fixed Rate Asset-Backed Notes (the “Lender”“Series M-2 Notes”). Pursuant, increasing the Company’s Securitization Notes to $80 million.

The Series M-2 Notes consist of the following:

Note Seniority Issue Amount  Coupon  First Call Date Final Legal Maturity Date
               
M-2 Subordinated $40,000,000   9.75% 4/27/2021 4/27/2026

Net proceeds from the issuance of the Series M-2 Notes were $35,241,000, which consists of the face amount of $40,000,000, net of discounts of $3,200,000 and debt offering costs of $1,559,000. The discount and offering costs will be accreted as additional interest expense over the expected term of the Series M-2 Notes.

The Series M-2 Notes are subordinate to the Loan Agreement,Series A-2 Notes and Series B-2 Notes. All Securitization Notes issued under the Base Indenture are secured by an interest in substantially all of the assets of FAT Royalty, including the Johnny Rockets companies, that have been contributed to FAT Royalty and are obligations only of FAT Royalty under the Base Indenture and not obligations of the Company.

While the Securitization Notes are outstanding, scheduled payments of principal and interest are required to be made on a quarterly basis, with the scheduled principal payments of $1,000,000 per quarter on each of the Series A-2 and Series B-2 Notes and $200,000 per quarter on the Series M-2 Notes beginning the second quarter of 2021. 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, October 2023 for the B-2 Notes and April 2026 for the Series M-2 Notes (the “Anticipated Repayment Dates”). If the Company borrowed $16.0 million in a term loan (“Term Loan”) fromhas not repaid or refinanced the Lender. The Company used a portion of the loan proceeds to fund (i) the cash payment of $8.0 millionSecuritization Notes prior to the members of Hurricaneapplicable Anticipated Repayment Date, additional interest expense will begin to accrue and closing costsall additional proceeds will be utilized for additional principal amortization, as defined in connection with the acquisition of Hurricane, and (ii) to repay borrowings of $2.0 million plus interest and fees owing under the Company’s existing loan facility with TCA Global Credit Master Fund, LP. The Company used the remaining proceeds for general working capital purposes.Indenture.

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In connection with the Loan Agreement, the Company also issued warrants to purchase up to 509,604 sharesSecuritization, FAT Royalty and each of the Company’s Common Stock at $7.20 per share toFranchise Entities (as defined in the Lender (the “Lender Warrant”). Warrants were also issued to certain loan placement agents to purchase 66,691 shares of the Company’s common stock at $7.20 per share (the “Placement Agent Warrants”) (See Note 16).

As security for its obligations under the Loan Agreement, the Company granted a lien on substantially all of its assets to the Lender. In addition, certain of the Company’s subsidiaries and affiliatesIndenture) entered into a Guaranty (the “Guaranty”) in favorManagement Agreement with the Company, dated as of the Lender,Closing Date (the “Management Agreement”), pursuant to which they guaranteed the obligationsCompany agreed to act as manager of FAT Royalty and each of the Company underFranchise Entities. The Management Agreement provides for a management fee payable monthly by FAT Royalty to the Loan Agreement and granted as security for their guaranty obligations a lien on substantially all of their assets.

On January 29, 2019, the Company refinanced the FB Lending term loan. The payoff amount was $18,095,000 which included principal in the amount of $16,400,000$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 accruedoperational functions on behalf of the Franchise Entities pursuant to the Management Agreement.

The Notes are secured by substantially all of the assets of FAT Royalty, including the equity interests in the Franchise 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 prepayment feescertain 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 $1,695,000. Duringmonthly cash flow that exceeds the required monthly debt service is generally remitted to the Company. Once the required obligations are satisfied, there are no further restrictions, including payment of dividends, on the cash flows of the subsidiaries.

The Notes have not been and will not be registered under the Securities Act of 1933, as amended (the “Securities Act”), or the securities laws of any jurisdiction.

The Notes are subject to certain financial and non-financial covenants, including a 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 September 27, 2020, the Company was in compliance with these covenants.

As of September 27, 2020, the recorded balance of the Securitization Notes was $72,791,000, which is net of debt offering costs of $3,797,000 and original issue discount of $3,412,000. The Company recognized interest expense on the Securitization Notes of $930,000 for the thirteen weeks ended September 27, 2020, which includes $109,000 for amortization of debt offering costs and $21,000 for amortization of the original issue discount. The Company recognized interest expense on the Securitization Notes of $2,103,000 for the thirty-nine weeks ended September 29, 2019, the Company recorded interest expense27, 2020, which includes $246,000 for amortization of $0 and $1,337,000, respectively, primarily relating to the charge off of unaccreted debt discount of $349,000 and unamortized debt offering costs and $33,000 for amortization of $651,000, with no comparable activity in the prior period.original issue discount. The average effective interest rate of the Securitization Notes was 9.7% for the Term Loan was 29.8%. The Lender Warrant will remain outstanding until it is exercised or expires (See Note 16).thirty-nine weeks ended September 27, 2020.

Loan and Security Agreement

 

On January 29, 2019, the Company as borrower, and its subsidiaries and affiliates as guarantors, entered into a newthe Loan and Security Agreement (the “Loan and Security Agreement”) with The Lion Fund, L.P. and The Lion Fund II, L.P. (“Lion”).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 matureswas due to mature on June 30, 2020. Interest on the term loan accruesaccrued at an annual fixed rate of 20.0% and iswas payable quarterly. The Company may 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 is 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 Stockcommon stock at $0.01 per share (the “Lion Warrant”), exercisable only if the amounts outstanding under the Loan and Security Agreement arewere not repaid in full prior to October 1, 2019.by June 30, 2020, as extended. If the Loan and Security Agreement iswas repaid in full prior to October 1, 2019,June 30, 2020, the Lion Warrant will terminatewould 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.

 

23

The Loan and Security Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict 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 includes customary events of default that include, 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 result 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,was subsequently amended several times which allowed 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 becomes effective if the amounts outstanding under the Loan and Security Agreement are not repaid in full prior to October 1, 2019, no value was assigned to it as of the grant date. The Company intends to refinance the debt prior to the beginning of the exercise period of the Lion Warrant.

On June 19, 2019, the Company amendedincrease its existing loan facility with Lion. The Company entered into a First Amendment to Loan and Security Agreement (the “First Amendment”), which amends the Loan and Security Agreement originally dated January 29, 2019. Pursuant to the First Amendment, the Company increased its borrowingsborrowing 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 expensesBurger; extended the exercise date of the transactions. The First Amendment also addedLion Warrant to June 30, 2020; extended the acquired Elevation-related entities as guarantorsdue date for certain quarterly payments and imposed associated extension and other loan parties.

fees.

 

On July 24, 2019,March 6, 2020, the Company entered into a first amendment torepaid the Lion Warrant, which extendsLoan 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 date on whichprepayment, the Lion Warrant was initially exercisable from October 1, 2019 to June 30, 2020, which coincides with the maturity date of the loans made under the Loan Agreement. The Lender Warrant is only exercisable if the amounts outstanding under the Loan Agreement are not repaidcancelled 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 “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 fails to make any quarterly interest payment by the fifth business day after the end of each fiscal quarter.

As of September 29, 2019, the total principal amount due under the Loan and Security Agreement was $24,000,000 and the net carrying value of obligation under the Loan and Security Agreement was $23,745,000, which is net of unamortized debt offering costs of $255,000.its entirety.

 

The Company recognized interest expense on the Loan and Security Agreement of $3,608,000$1,783,000 for the thirty-nine weeks ended September 29, 2019,27, 2020, which includes $167,000$212,000 for amortization of all unaccreted debt offering costs at the time of the repayment and a $500,000 loan extension fee, with no comparable activity$650,000 in 2018.penalties and fees. The Company recognized interest expense on the Loan and Security Agreement of $1,812,000 and $3,608,000 for the thirteen and thirty-nine weeks ended September 29, 2019, which included $82,000 for the amortization of debt offering costs and a $500,000 loan extension fee, with no comparable activity in 2018. The effective interest rate for the facility under the Loan and Security Agreement is 20.9%.respectively.

 

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,$7,510,000, 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 September 29, 2019,27, 2020, the carrying value of the Elevation Note was $6,055,000$5,849,000 which is net of the loan discount of $1,222,000$940,000 and debt offering costs of $55,000.$58,000. The Company recognized interest expense relating to the Elevation Note during the thirteen weeks ended September 27, 2020 in the amount of $153,000, which included amortization of the loan discount of $69,000 and amortization of $3,000 in debt offering costs. The Company recognized interest expense relating to the Elevation Note during the thirty-nine weeks ended September 29, 201927, 2020 in the amount of $162,000,$517,000, which included amortization of the loan discount of $73,000$210,000 and de minimis amortization of $8,000 in debt offering costs, with no comparable activity is 2018.costs. The Company recognized interest expense relating toof $139,000 and $162,000 on the Elevation Note duringfor the thirteen and thirty-nine weeks ended September 29, 2019, in the amount of $139,000, which included amortization of the loan discount of $64,000 and de minimis amortization of debt offering costs, with no comparable activity in 2018.Therespectively. The effective interest rate for the Elevation Note is 7.7%during the thirty-nine weeks ended September 27, 2020 was 11.9%.

 

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.

Paycheck Protection Program Loans

During the thirty-nine weeks ended September 27, 2020, the Company received loan proceeds in the amount of approximately $1,532,000 under the Paycheck Protection Program (the “PPP Loans”) and Economic Injury Disaster Loan Program (the “EIDL Loans”). The Paycheck Protection Program, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period.

At inception, the PPP Loans and EIDL Loans related to FAT Brands Inc. as well as five restaurant locations that were part of the Company’s refranchising program. While the Company currently believes that its use of the loan proceeds will meet the conditions for forgiveness of the loans, there can be no assurance that the Company will be eligible for forgiveness of the loan, in whole or in part. Any unforgiven portion of the PPP Loans is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. As of September 27, 2020, the balance remaining on the PPP Loans and EIDL Loans was $1,180,000 related to FAT Brands Inc. as the five restaurant locations were closed or refranchised during the second and third quarters of 2020 (Note 4).

24

Note 12. MANDaTORilY REDEEMABLE11. PREFERRED STOCK

Series B Cumulative Preferred Stock

On July 13, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) to issue and sell in a public offering (the “Offering”) 360,000 shares of 8.25% Series B Cumulative Preferred Stock (“Series B Preferred Stock”) and 1,800,000 warrants, plus 99,000 additional warrants pursuant to the underwriter’s overallotment option (the “2020 Series B Offering Warrants”), to purchase common stock at $5.00 per share. In the Underwriting Agreement, the Company agreed to pay the underwriters an underwriting discount of 8.0% of the gross proceeds received by the Company in the Offering and issue five-year warrants exercisable for 1% of the number of Series B Preferred Stock shares and the number of 2020 Series B Offering Warrants sold in the Offering.

In connection with the Offering, on July 15, 2020 the Company filed an Amended and Restated Certificate of Designation of Rights and Preferences of Series B Cumulative Preferred Stock with the Secretary of State of Delaware, designating a total of 850,000 shares of Series B Preferred Stock (the “Certificate of Designation”), and on July 16, 2020 entered into a Warrant Agency Agreement with VStock Transfer, LLC, to act as the Warrant Agent for the Series B Offering Warrants (the “Warrant Agency Agreement”).

The Certificate of Designation amends and restates the terms of the Series B Cumulative Preferred Stock issued in October 2019 (the “Original Series B Preferred”). At the time of the Offering, there were 57,140 shares of the Original Series B Preferred outstanding, together with warrants to purchase 34,284 shares of the Company’s common stock at an exercise price of $8.50 per share (the “Series B Warrants”).

The Offering closed on July 16, 2020 with net proceeds to the Company of $8,021,000, which was net of $979,000 in underwriting and offering costs.

Holders of Series B Cumulative Preferred Stock shall be entitled to receive, when, as and if declared by the FAT Board or a duly authorized committee thereof, in its sole discretion, out of funds of the Company legally available for the payment of distributions, cumulative preferential cash dividends at a rate per annum equal to the 8.25% multiplied by $25.00 per share stated liquidation preference of the Series B Preferred Stock. The dividends shall accrue without interest and accumulate, whether or not earned or declared, on each issued and outstanding share of the Series B Preferred Stock from (and including) the original date of issuance of such share and shall be payable monthly in arrears on a date selected by the Company each calendar month that is no later than twenty (20) days following the end of each calendar month.

If the Company fails to pay dividends on the Series B Preferred Stock in full for any twelve accumulated, accrued and unpaid dividend periods, the dividend rate shall increase to 10% until the Company has paid all accumulated accrued and unpaid dividends on the Series B Preferred Stock in full and has paid accrued dividends during the two most recently completed dividend periods in full, at which time the 8.25% dividend rate shall be reinstated

The Company may redeem the Series B Preferred Stock, in whole or in part, at the option of the Company, for cash, at the following redemption price per share, plus any unpaid dividends:

(i)After July 16, 2020 and on or prior to July 16, 2021: $27.50 per share.
(ii)After July 16, 2021 and on or prior to July 16, 2022: $27.00 per share.
(iii)After July 16, 2022 and on or prior to July 16, 2023: $26.50 per share.
(iv)After July 16, 2023 and on or prior to July 16, 2024: $26.00 per share.
(v)After July 16, 2024 and on or prior to July 16, 2025: $25.50 per share.
(vi)After July 16, 2025: $25.00 per share.

As a result of the amended and restated terms of the Series B Cumulative Preferred Stock, the Company classified the Series B Preferred Stock as equity as of July 15, 2020.

25

Concurrent with the Offering, the holders of the outstanding 57,140 shares of Original Series B Preferred became subject to the new terms of the Certificate of Designation. At the time of the amendment and restatement of the Certificate of Designation, the adjusted basis of the Original Series B Preferred on the Company’s books was $1,112,000, net of unamortized debt discounts and debt offering costs. As a result of the amendment and restatement of the Certificate of Designation, the recorded value of the new Series B Stock was $1,136,000 with $292,000 allocated to the 2020 Series B Offering Warrants, resulting in an aggregate loss on the exchange of $296,000. The original holders were also issued 3,537 shares of new Series B Preferred Shares in payment of $88,000 accrued and outstanding dividends relating to the Original Series B Preferred at a price of $25 per share.

The Company entered into an agreement to exchange 15,000 shares of Series A Fixed Rate Cumulative Preferred Stock owned by FCCG for 60,000 shares of Series B Preferred Stock valued at $1,500,000, pursuant to a Settlement, Redemption and Release Agreement. At the time of the exchange, the adjusted basis of the Series A Preferred on the Company’s books was $1,489,000, net of unamortized debt discounts and debt offering costs, and the Company recognized a loss on the exchange in the amount of $11,000. The Company also agreed to issue 14,449 shares of Series B Preferred Stock valued at $361,224 as consideration for accrued dividends due to FCCG.

The Company entered into an agreement to exchange all of the outstanding shares of Series A-1 Fixed Rate Cumulative Preferred Stock for 168,000 shares of Series B Preferred Stock valued at $4,200,000, pursuant to a Settlement, Redemption and Release Agreement with the holders of such shares. At the time of the exchange, the adjusted basis of the Series A Preferred on the Company’s books was $4,421,000, net of unamortized debt discounts and debt offering costs, and the Company recognized a gain on the exchange in the amount of $221,000.

As of September 27, 2020, the Series B Preferred Stock consisted of 663,127 shares outstanding with a balance of $13,041,000. The Company declared preferred dividends to the holders of the Series B Preferred Stock totaling $277,000 during the thirteen and thirty-nine weeks ended September 27, 2020.

 

Series A Fixed Rate Cumulative Preferred Stock

 

On June 8, 2018, the Company 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 Certificate 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 the $100.00 per share stated liquidation preference of the Series A Preferred Stock, in the amount of (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, theThe 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:

(i)On or prior to June 30, 2021: $115.00 per share.
(ii)After June 30, 2021 and on or prior to June 30, 2022: $110.00 per share.
(iii)After June 30, 2022: $100.00 per share.

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 holder elects to receive Common Stock, the shares will be issued based on the 20-day volume weighted average price of the Common Stock immediately preceding the date of the holder’s redemption notice.

As of September 29, 2019, there were 100,000 shares of Series A Preferred stock outstanding, issued in the following two transactions:

 

 (i)On June 7, 2018, the Company entered into a Subscription Agreement for the issuance and sale (the “Offering”“Series A Offering”) of 800 units (the “Units”), with each Unit consisting of (i) 100 shares of the Company’s newly designated Series A Fixed Rate Cumulative Preferred Stock (the “Series A Preferred Stock”) and (ii) warrants (the “Series A Warrants”) to purchase 127 shares of the Company’s Common Stockcommon stock at $7.83 per share. The sales price of each Unit was $10,000, resulting in gross proceeds to the Company from the initial closing of $8,000,000 and the issuance of 80,000 shares of Series A Preferred Stock and Series A Warrants to purchase 102,125 shares of common stock (the “Subscription Warrants”).

 (ii)On June 27, 2018, the Company entered into a Note Exchange Agreement, as amended, under which it agreed with FCCG to exchange all but $950,000 of the remaining balance of the Company’s outstanding Promissory Note issued to the FCCG on October 20, 2017, in the original principal amount of $30,000,000 (the “Note”). At the time, the Note had an estimated outstanding balance of principal plus accrued interest of $10,222,000 (the “Note Balance”). On June 27, 2018, $9,272,053 of the Note Balance was exchanged for shares of capital stock of the Company and warrants in the following amounts (the “Exchange Shares”):

 $2,000,000 of the Note Balance was exchanged for 200 Units consisting of 20,000 shares of Series A Fixed Rate Cumulative Preferred Stock of the Company at $100 per share and Series A Warrants to purchase 25,530 of the Company’s common stock at an exercise price of $7.83 per share (the “Exchange Warrants”); and
   
 $7,272,053 of the Note Balance was exchanged for 1,010,420 shares of Common Stockcommon stock of the Company, representing an exchange price of $7.20 per share, which was the closing trading price of the Common Stockcommon stock on June 26, 2018.

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On July 13, 2020, the Company entered into the following transactions pertaining to the outstanding Series A Preferred Stock:

1.The Company entered into an agreement to redeem 80,000 outstanding shares of the Series A Preferred Stock, plus accrued dividends thereon, held by Trojan Investments, LLC pursuant to a Stock Redemption Agreement that provides for the redemption at face value of a portion of such shares for cash from the proceeds of the Offering and the balance to be redeemed in $2 million tranches every six months, with the final payment due by December 31, 2021.
2.The Company redeemed 5,000 outstanding shares of Series A Preferred Stock, plus accrued dividends thereon, held by Ridgewood Select Value Fund LP and its affiliate at face value for cash from the proceeds of the Offering.
3.The Company exchanged 15,000 outstanding shares of Series A Preferred Stock, plus accrued dividends thereon, held by FCCG at face value for shares of Series B Preferred Stock valued at $25.00 per share.

 

The Company classifies the Series A Preferred Stock as long-term debt because it contains an unconditional obligation requiring the Company to redeem the instruments at $100.00 per share on the Mandatory Redemption Date. debt.

As of September 29, 2019, the net27, 2020, there were 80,000 shares of Series A Preferred Stock outstanding, with a balance was $9,906,000 including an unaccreted debt discount of $82,000 and unamortized$7,945,000 which is net of debt offering costs of $12,000.$7,000.

 

The Company recognized interest expense on the Series A Preferred Stock of $1,056,000 for the thirty-nine weeks ended September 27, 2020, which includes accretion expense of $14,000 as well as $2,000 for the amortization of debt offering costs. For the thirteen weeks ended September 27, 2020, the Company recognized interest expense of $350,000, which includes accretion expense of $4,000. The Company recognized interest expense on the Series A Preferred Stock of $1,062,000 for the thirty-nine weeks ended September 29, 2019, which includes accretion expense of $17,000 as well as $2,000 for the amortization of debt offering costs. For the thirteen weeks ended September 29, 2019, the Company recognized interest expense of $354,000, which includes accretion expense of $6,000 as well as $1,000 for the amortization of the debt offering costs. The Company recognized interest expense on the Series A Preferred Stock of $352,000 and $430,000 for the thirteen and thirty-nine weeks ended September 30, 2018, respectively. Also, the Company recognized accretion expense on the Series A Preferred Stock of $6,000 and $8,000 for the thirteen and thirty-nine weeks ended September 30, 2018, respectively, as well as, $1,000 during the thirteen and thirty-nine weeks ended September 30, 2018 for the amortization of debt offering costs.

Theyear-to-date effective interest rate for the Series A Preferred Stock is 14.2%for 2020 was 14.9%.

Derivative Liability Relating to the Conversion Feature of the Series A-1 Fixed Rate CumulativeA Preferred Stock

 

On July 3, 2018, the Company filed with the Secretary of State of the State 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 September 29, 2019, 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-1A Preferred Stock will be entitledhad the option to receive cumulative dividends on the $100.00 per share stated liquidation preference of the 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-1A 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 maycould be settled in cash or Common Stockcommon stock of the Company, at the option of the holder.holder (the “Conversion Option”). If a holder electselected to receive Common Stock,common stock, the shares willwould be issued as payment forbased on the 20-day volume weighted average price of the common stock immediately preceding the date of the holder’s redemption at the rate of $12.00 per share of Common Stock.notice.

 

On June 8, 2020, the Conversion Option became exercisable. As of September 29, 2019, there werethat date, the Company calculated the estimated fair value of the Conversion Option to be $2,403,000 and recorded a derivative liability in that amount, together with an offsetting reduction in Additional Paid-In Capital.

On July 13, 2020, the Company entered into agreements with each of the holders of the Series A Preferred Stock regarding the redemption of their shares. Holders of 85,000 of the outstanding shares agreed to a full redemption in periodic cash payments. FCCG, the holder of the remaining 15,000 outstanding shares, agreed to redeem its Series A Preferred Stock in exchange for newly issued Series B Preferred Stock of the Company. As a result of these agreements, the Conversion Option was terminated for all holders as of July 13, 2020. Immediately prior to the termination, the fair value of the Conversion Option was determined to be $1,516,000 and resulted in the recognition of $887,000 in income from the decrease in the value of the derivative liability. With the termination of the Conversion Option, the $1,516,000 remaining balance in derivative liability was written off with an offsetting credit to Additional Paid-in Capital.

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Series A-1 Fixed Rate Cumulative Preferred Stock

On July 3, 2018, the Company filed a Certificate of Designation of Rights and Preferences of Series A-1 Fixed Rate Cumulative Preferred Stock (the “Series A-1 Certificate of Designation”) with the Secretary of State of the State of Delaware, designating a total of 200,000 shares of Series A-1 Fixed Rate Cumulative Preferred Stock (the “Series A-1 Preferred Stock”). The Company issued 45,000 shares of Series A-1 Preferred Stock outstanding.

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

On July 13, 2020, the Company entered into a Settlement, Redemption and Release Agreement (the “Series A-1 Agreement”) with the holders of the Series A-1 Preferred Stock, to redeemexchange all outstanding shares of Series A-1 Preferred Stock for shares of newly issued Series B Preferred. The Series A-1 Agreement also included a negotiated $300,000 reduction in the instruments at $100.00 per shareredemption value of the Series A-1 Preferred Stock. The Company recognized a $221,000 gain as a result of the reduction during the thirteen weeks ended September 27, 2020.

Prior to the exchange, the Company recognized interest expense on the Series A-1 Mandatory Redemption Date.

AsPreferred Stock of $87,000 for the thirty-nine weeks ended September 29, 2019,27, 2020, which included a net reduction in the netdebt discount of $15,000, as well as $3,000 in amortization of debt offering costs. The Company recognized a recovery of previously accrued interest expense on the Series A-1 Preferred Stock balance was $4,333,000 including an unaccreted debt discount of $141,000 and unamortized debt offering costs of $26,000.

$36,000 for the thirteen weeks ended September 27, 2020. The Company recognized interest expense on the Series A-1 Preferred Stock of $232,000 for the thirty-nine weeks ended September 29, 2019, which included recognized accretion expense of $24,000, as well as $5,000 for the amortization of debt offering costs, with no comparable activity in 2018. The Company recognized interest expense on the Series A-1 Preferred Stock of $78,000 for the thirteen weeks ended September 29, 2019, which included recognized accretion expense of $8,000, as well as $2,000 for the amortization of debt offering costs. The Company recognized interest expense on the Series A-1 Preferred Stock of $67,500 for the thirteen and thirty-nine weeks ended September 30, 2018. Also, the Company recognized accretion expense on the Series A-1 Preferred Stock of $8,000 for the thirteen and thirty-nine weeks ended September 30, 2018, as well as, $2,000 during the thirteen and thirty-nine weeks ended September 30, 2018 for the amortization of debt offering costs.

The effective interest rate for the Series A-1 Preferred Stock is 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 or its representatives.

 

Note 13.12. Related Party Transactions

 

Due from Affiliates

On April 24, 2020, the Company entered into an Intercompany Revolving Credit Agreement with FCCG (“Intercompany Agreement”). The Company had open accountspreviously extended credit to FCCG pursuant to a certain Intercompany Promissory Note (the “Original Note”), dated October 20, 2017, with affiliated entities under the common controlan initial principal balance of FCCG resulting in net amounts due$11,906,000. Subsequent to the issuance of the Original Note, the Company and certain of $22,886,000 as of September 29, 2019. The receivable from FCCGits direct or indirect subsidiaries made additional intercompany advances. Pursuant to the Intercompany Agreement, the revolving credit facility bears interest at a rate of 10% per annum. Duringannum, has a five-year term with no prepayment penalties, and has a maximum capacity of $35,000,000. All additional borrowings under the thirty-nine weeks ended September 29, 2019, $1,350,000Intercompany Agreement are subject to the approval of accrued interest income was addedthe Board 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 income, and other adjustments through December 29, 2019. As of September 27, 2020, the balance receivable from FCCG.under the Intercompany Agreement was $33,382,000.

 

The balance of Due From Affiliates includesEffective 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 made effective July 5, 2018 (the “Preferred Interest”). FCCG owns all of the common interests in HSD. The holder of the Preferred Interest is entitled to a 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 unconditionally guaranteed repayment of the Preferred Interest in the event HSD fails to do so. As of September 27, 2020, the balance receivable, including accrued and unpaid interest income, under the Preferred Interest was $5,350,000.

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During the thirty-nine weeks ended September 27, 2020 and September 29, 2019, the Company recorded a payable toreceivables from FCCG in the amount of $211,000$158,000 and $30,000, respectively, under the Tax Sharing Agreement.Agreement, which was added to the intercompany receivable. (See Note 9)8).

Note 14.13. SHAREHOLDERS’ EQUITYEquity

 

As of September 29, 201927, 2020, and December 30, 2018,29, 2019, the total number of authorized shares of common stock was 25,000,000, and there were 11,843,90711,926,264 and 11,546,589 (unadjusted for the issuance of shares related to the common stock dividend during the first quarter of 2019)11,860,299 shares of common stock outstanding, respectively.

 

Below are the changes to the Company’s common stock during the thirty-nine weeks ended September 29, 2019:27, 2020:

 

 On February 7, 2019,11, 2020, the Company declared a stock dividend equalnon-employee members of the board of directors elected to 2.13% on itsreceive their compensation in shares of the Company’s common stock representing the numberin lieu of shares equal to $0.12 per share of common stock based on the closing price as of February 6, 2019. The stock dividend was paid on February 28, 2019 to stockholders of record as of the close of business on February 19, 2019. The Company issued 245,376 shares of common stock at a per share price of $5.64 in satisfaction of the dividend. The number of common shares issued prior to the record date of the stock dividend have been adjusted retrospectively for the effects of the stock dividend.
On February 22, 2019,cash. As such, the Company issued a total of 15,38416,360 shares of common stock at a value of $5.85$4.585 per share to the non-employee members of the board of directors as consideration for accrued directors’ fees.
   
 On May 21, 2019,12, 2020, the non-employee members of the board of directors elected to receive their compensation in shares of the Company’s common stock in lieu of cash. As such, the Company issued a total of 19,41613,677 shares of common stock at a value of $4.64$3.29 per share to the non-employee members of the board of directors as consideration for accrued directors’ fees.
   
 On September 24, 2019,August 4, 2020, certain non-employee members of the board of directors elected to receive their compensation in shares of the Company’s common stock in lieu of cash. As such, the Company issued a total of 17,14235,928 shares of common stock at a value of $5.25$3.34 per share to thethese non-employee members of the board of directors as consideration for accrued directors’ fees.

 

Note 15.14. SHARE-BASED COMPENSATION

 

Effective September 30, 2017, the Company adopted the 2017 Omnibus Equity Incentive Plan (the “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 Plan provides a maximum of 1,021,250 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 the thirty-nine weeksfiscal year ended September 29, 201927, 2020 can be summarized as follows:

 

 Number of Shares Weighted Average
Exercise Price
 Weighted Average Remaining Contractual
Life (Years)
  Number of Shares Weighted
Average
Exercise
Price
 Weighted Average Remaining Contractual
Life (Years)
 
Stock options outstanding at December 30, 2018  681,633  $8.84   8.4 
Stock options outstanding at December 29, 2019  722,481  $8.45   7.7 
Grants  106,908  $5.64   9.9   -  $-   - 
Forfeited  (45,636) $8.35   9.0   (158,284) $7.98   8.0 
Expired  -  $-   -   -  $-   - 
Stock options outstanding at September 29, 2019  742,905  $7.76   8.8 
Stock options exercisable at September 29, 2019  125,097  $11.48   8.1 
Stock options outstanding at September 27, 2020  564,197  $8.58   7.7 
Stock options exercisable at September 27, 2020  289,337  $9.58   7.5 

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The assumptions used in the Black-Scholes valuation model to record the stock-based compensation are as follows:

 

   Including
Non-Employee
Options
 
Expected dividend yield  4.00% - 10.43%
Expected volatility  30.23% - 31.73%
Risk-free interest rate  1.52% - 2.85%
Expected term (in years)  5.50 – 5.75 

The Company recognized share-based compensation expense in the amount of $45,000 and $61,000 during the thirteen and thirty-nine weeks ended September 27, 2020, respectively. The Company recognized share-based compensation expense in the amount of $59,000 and $218,000 during the thirteen and thirty-nine weeks ended September 29, 2019, respectively. The Company recognized share-based compensation expense in the amount of $125,000 and $370,000 during the thirteen and thirty-nine weeks ended September 30, 2018. As of September 29, 2019,27, 2020, there remains $213,000$32,000 of related share-based compensation expense relating to these non-vested grants, which will be recognized over the remaining vesting period, subject to future forfeitures.

 

Note 16.15. WARRANTS

 

Warrant Repurchases

On July 30, 2020, the Company entered into an agreement (the “Lender Warrant Purchase Agreement”) to reacquire for $249,500, warrants that had been issued on July 3, 2018 and which granted the right to purchase 509,604 shares of the Company’s common stock at an exercise price of $7.20 per share (the “Lender Warrant”). The Lender Warrant was issued as part of the former $16 million credit facility with FB Lending, LLC, which was repaid on January 29, 2019. The Lender Warrant was valued at $592,000 at the date of grant and may have been exercised at any time beginning on the issue date and ending on July 3, 2023.

On August 11, 2020, the Company purchased a portion of the outstanding Placement Agent Warrants for $12,626. The reacquired Placement Agent Warrants were issued on July 3, 2018 and granted the right to purchase 25,787 shares of the Company’s common stock at an exercise price of $7.20 per share. As of September 27, 2020, there were remaining outstanding Placement Agent Warrants granting rights to purchase 40,904 shares of the Company’s common stock at an exercise price of $7.20 per share.

Between August 19, 2020 and September 17, 2020, the Company engaged in several open market purchases of the 2020 Series B Offering Warrants. For payment of total consideration of $67,894, the Company acquired warrants which had been issued on July 16, 2020 and which granted the right to purchase a total of 51,627 shares of the Company’s common stock at an exercise price of $5.00 per share. As a result of these transactions, the remaining outstanding 2020 Series B Offering Warrants grant rights to purchase 2,132,573 shares of the Company’s common stock, beginning on the earlier of one year from the date of issuance or the consummation of a consolidation, merger or other similar business combination transaction involving the Company and its parent company, FCCG.

Warrant Exchange

In connection with the July 13, 2020 Offering of 8.25% Series B Cumulative Preferred Stock, the Company entered into agreements with certain holders of the Original Series B Preferred to exchange the 34,224 outstanding Series B Warrants for 285,200 new Series B Offering Warrants valued at $292,000, pursuant to Warrant Exchange Agreements, in consideration of their consent to amend and restate the terms of the Series B Cumulative Preferred Stock. As a result of the warrant exchange the Company recognized a loss of $271,000. (See Note 11)

The original Series B Warrants had been issued between October 3, 2019 and December 29, 2019, in connection with the sale of Original Series B Preferred and granted the right to purchase 34,284 shares of the Company’s common stock at an exercise price of $8.50 per share, exercisable for a period of five years from October 3, 2019.

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Outstanding Warrants

As of September 27, 2020, the Company had issued the following outstanding warrants to purchase shares of its common stock:

 

 Warrants issued on October 20, 2017 to purchase 81,700 shares of the Company’s common stock granted to the selling agent in the Company’s initial public offeringInitial Public Offering (the “Common Stock Warrants”). The Common Stock Warrants are exercisable commencing April 20, 2018 through October 20, 2022. The exercise price for the Common Stock Warrants is $14.69 per share, and the Common Stock Warrants were valued at $124,000 at the date of grant. The Common Stock Warrants provide that upon exercise, the Company may elect to redeem the Common Stock Warrants in cash by paying the difference between the applicable exercise price and the then-current fair market value of the common stock.
   
 Warrants issued on June 7, 2018 to purchase 102,125 shares of the Company’s common stock at an exercise price of $7.83 per share (the “Subscription Warrants”). The Subscription Warrants were issued as part of the Subscription Agreement (see Note 12)11). The Subscription Warrants were valued at $87,000 at the date of grant. The Subscription Warrants may be exercised at any time or times beginning on the issue date and ending on the five-year anniversary of the issue date.

 Warrants issued on June 27, 2018 to purchase 25,530 shares of the Company’s common stock at an exercise price of $7.83 per share (the “Exchange Warrants”). The Exchange Warrants were issued as part of the Exchange (See Note 12)11). The Exchange Warrants were valued at $25,000 at the date of grant. The Exchange Warrants may be exercised at any time or times beginning on the issue date and ending on the five-year anniversary of the issue date.
   
 Warrants issued on July 3, 2018 to purchase 57,439 shares of the Company’s common stock at an exercise price of $7.83 per share (the “Hurricane Warrants”). The Hurricane Warrants were issued as part of the acquisition of Hurricane. The Hurricane Warrants were valued at $58,000 at the date of grant. The Hurricane Warrants may be exercised at any time or times beginning on the issue date and ending on the five-year anniversary of the issue date.
   
 Warrants issued on July 3, 2018 to purchase 509,604 shares of the Company’s common stock at an exercise price of $7.20 per share (the “Lender Warrant”). The Lender Warrant was issued as part of the $16 million credit facility with FB Lending, LLC (See Note 11). The Lender Warrant was valued at $592,000 at the date of grant. The Lender Warrant may be exercised at any time or times beginning on the issue date and ending on the five-year anniversary of the issue date.
Warrants issued on July 3, 2018 to purchase 66,69140,904 shares of the Company’s common stock at an exercise price of $7.20 per share (the “Placement Agent Warrants”). The Placement Agent Warrants were issued to the placement agents of the $16 million credit facility with FB Lending, LLC (See Note 11)10). The remaining Placement Agent Warrants werehad been valued at $78,000$48,000 at the date of grant. The Placement Agent Warrants may be exercised at any time or times beginning on the issue date and ending on the five-year anniversary of the issue date.
Warrants issued on January 29, 2019, in connection with the Loan and Security Agreement (See Note 11), to purchase up to 1,167,404 shares of the Company’s Common Stock at an exercise price of $0.01 per share (the “Lion Warrant”), exercisable at any time between July 1, 2020 and January 29, 2024, but only if the amounts outstanding under the Loan and Security Agreement are not repaid in full on or before June 30, 2020. If the Loan and Security Agreement is repaid in full on or before June 30, 2020, the Lion Warrant will terminate in its entirety. The Lion Warrants were not valued at the date of grant due to the contingency relating to their exercise.

 

 Warrants issued on June 19, 2019, in connection with the acquisition of Elevation Burger (See Note 3), to purchase 46,875 shares of the Company’s common stock at an exercise price of $8.00 per share (the “Elevation Warrant”), exercisable for a period of five years, but only in the event of a merger of the Company and FCCG, commencing on the second business day following the potential merger and ending on the five year anniversary thereafter, at which time the Elevation Warrant shall terminatethereafter. The Elevation Warrants were not valued at the date of grant due to the contingency relating to their exercise.
Warrants issued between October 3, 2019 and December 29, 2019, in connection with the sale of Series B Units, to purchase 60 shares of the Company’s common stock at an exercise price of $8.50 per share (the “Series B Warrants”), exercisable for a period of five years from October 3, 2019. These warrants have not yet been presented by the holders for exchange with 2020 Series B Offering Warrants (See Note 11).
Warrants issued on July 16, 2020, in connection with Series B Preferred Stock Offering (See Note 11), to purchase 2,132,573 shares of the Company’s common stock at an exercise price of $5.00 per share (the “2020 Series B Offering Warrants”), exercisable beginning on the earlier of one year from the date of issuance or the consummation of a consolidation, merger or other similar business combination transaction involving the Company (or any of its subsidiaries) and its parent company, FCCG, and will expire on July 16, 2025. The Series B Offering Warrants were valued at $2,162,000 at the date of grant.
Warrants issued on July 16, 2020, to purchase 2020 Series B Offering Warrants, which would grant the holder the right to purchase 18,990 shares of the Company’s common stock at an exercise price of $5.00 per share (the “2020 Series B Offering Warrants”), exercisable beginning on the earlier of one year from the date of issuance or the consummation of a consolidation, merger or other similar business combination transaction involving the Company (or any of its subsidiaries) and its parent company, FCCG, and will expire on July 16, 2025. The exercise price to purchase the 2020 Series B Offering Warrant is $0.01 per underlying share of common stock. These warrants were valued at $64,000 at the date of grant.

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The Company’s warrant activity for the thirty-ninethirteen weeks ended September 29, 2019, as adjusted for the February 2019 stock dividend,27, 2020 is as follows:

 

  Number of Shares  Weighted Average
Exercise Price
  Weighted Average Remaining Contractual
Life (Years)
 
Warrants outstanding at December 30, 2018  843,089  $8.06   3.7 
Grants  1,214,279  $0.32   4.4 
Exercised  -  $-   - 
Forfeited  -  $-   - 
Expired  -  $-   - 
Warrants outstanding at September 29, 2019  2,057,368  $3.49   4.1 
Warrants exercisable at September 29, 2019  843,089  $8.23   3.7 
  Number of
Shares
  Weighted
Average
Exercise Price
  Weighted
Average
Remaining
Contractual
Life (Years)
 
Warrants outstanding at December 29, 2019  2,091,652  $3.57   3.6 
Grants  2,203,190  $4.96   4.8 
Forfeited  (1,788,646) $2.51   3.8 
Warrants outstanding at September 27, 2020  2,506,196  $5.58   4.5 
Warrants exercisable at September 27, 2020  307,758  $9.57   2.6 

 

The range of assumptions used into establish the value of the warrants using the Black-Scholes valuation model to record basis of the warrants as of the grant dates are as follows:

 

  Warrants 
Expected dividend yield  4.00% - 6.63%
Expected volatility  30.23% - 31.73%
Risk-free interest rate  0.99% - 1.91%
Expected term (in years)  3.80 - 5.00 

In addition to the warrants to purchase common stock described above, the Company has also granted the following warrants on other securities to the underwriters in connection with the Series B Preferred Stock Offering (See Note 11):

Warrants issued on July 16, 2020, to purchase 3,600 shares of the Company’s Series B Preferred Stock at an exercise price of $24.95 per share, exercisable beginning on the earlier of one year from the date of issuance or the consummation of a consolidation, merger or other similar business combination transaction involving the Company (or any of its subsidiaries) and its parent company, FCCG, and will expire on July 16, 2025. The Series B Offering Warrants were valued at $2,000 at the date of grant.

 

Note 17.16. DIVIDENDS ON COMMON STOCK

Our Board of Directors did not declare a dividend on common stock during the thirty-nine weeks ended September 27, 2020.

 

The Company declared a stock dividend on February 7, 2019 equal to 2.13% on its common stock, representing the number of shares equal to $0.12 per share of common stock based on the closing price as of February 6, 2019. The stock dividend was paid on February 28, 2019 to stockholders of record as of the close of business on February 19, 2019. The Company issued 245,376 shares of common stock at a per share price of $5.64 in satisfaction of the stock dividend. As noNo fractional shares were issued, instead the Company paid stockholders cash in lieucash-in-lieu of fractional shares.

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Note 18.17. Commitments and Contingencies

 

Litigation

Eric Rojany, et al. v. FAT Brands Inc., et al., Superior Court of California for the County of Los Angeles, Case No. BC708539, andDaniel Alden, et al. v. FAT Brands Inc., et al., Superior Court of California for the County of Los Angeles, Case No. BC716017.

 

On June 7, 2018, plaintiff Eric Rojany, a putative investor in the Company, filed a putative class action lawsuit against the Company,FAT Brands, Inc., Andrew Wiederhorn, Ron Roe, James Neuhauser, Edward H. Rensi, Marc L. Holtzman, Squire Junger, Silvia Kessel, Jeff Lotman, Fog Cutter Capital Group Inc., and Tripoint Global Equities, LLC and members of(collectively, the Company’s board of directors,“Original Defendants”) were named as defendants in a putative securities class action lawsuit entitledRojany v. FAT Brands, Inc., Case No. BC708539 (the “Rojany Case”), in the Superior Court of the State of California, for the County of Los Angeles, Angeles. On July 31, 2018, the Rojany Case No. BC708539. The complaint asserted claims under Sections 12(a)(2) and 15was designated as complex, pursuant to Rule 3.400 of the Securities ActCalifornia Rules of 1933, alleging thatCourt and assigned the defendants were responsible for false and misleading statements and omitted material facts in connection withmatter to the Company’s initial public offering, which resulted in declines in the price of the Company’s common stock. Plaintiff alleged that he intended to certify the complaint as a class action and sought compensatory damages in an amount to be determined at trial.Complex Litigation Program. On August 2, 2018, plaintiff Daniel Alden, another putative investorthe Original Defendants were named defendants in the Company, filed a second putative class action lawsuit, against the same defendants, entitledAlden v. FAT Brands Inc., Case No. BC716017 (the “Alden Case”), filed in the same court, Case No. BC716017.court. On September 17, 2018, the RojanyandAldenCases were consolidated under theRojany case caption andCase number. On October 10, 2018, plaintiffs Eric Rojany, Daniel Alden, Christopher Hazelton-Harrington and Byron Marin (“Plaintiffs”) filed a First Amended Consolidated Complaint (“FAC”) against the Company,FAT Brands, Inc., Andrew Wiederhorn, Ron Roe, James Neuhauser, Edward H. Rensi, Fog Cutter Capital Group Inc., and Tripoint Global Equities, LLC (collectively, “Defendants”), thereby removing Marc L. Holtzman, Squire Junger, Silvia Kessel and Jeff Lotman as defendants. The FAC asserted the same claims as asserted in the original complaint. On November 13, 2018, Defendants filed a demurrerDemurrer to the FAC.First Amended Consolidated Complaint. On January 25, 2019, the Court sustained Defendants’ demurrerDemurrer to the FAC,First Amended Consolidated Complaint with leaveLeave to amendAmend in part. On February 25, 2019,Part. Plaintiffs filed a Second Amended Consolidated Complaint (“SAC”) against Defendants.on February 25, 2019. On March 27, 2019, Defendants filed a demurrerDemurrer to the SAC.Second Amended Consolidated Complaint. On July 31, 2019, the Court overruled in part and sustained in part Defendants’ demurrerDemurrer to the SAC, with leave to amend. On September 20, 2019, Plaintiffs served an initial setSecond Amended Complaint in Part, narrowing the scope of requests for production of documents. At a status conference held on October 28, 2019, Plaintiffs indicated that they would not file a further amended complaint, and instead would rely upon the SAC as the operative complaint. The deadline forcase. Defendants to file an answerfiled their Answer to the SAC isSecond Amended Consolidated Complaint on November 12, 2019. TheThereafter, plaintiffs Alden, Hazelton-Harrington and Marin, voluntarily dismissed their claims without prejudice, leaving only plaintiff Rojany as the putative class representative plaintiff (“Plaintiff”). On January 29, 2020, Plaintiff filed a Motion for Class Certification. On October 8, 2020, the Court scheduled a status conferencedenied Plaintiff’s Motion for January 9, 2020, at which time the parties shall present a proposed pretrial schedule for the case.

The CompanyClass Certification. Defendants dispute Plaintiff’s allegations and other defendants dispute the allegations of the lawsuit and intendwill continue to vigorously defend against the claims.themselves in this litigation. Defendants estimate that Plaintiff’s individual compensatory rescissory damages do not exceed $5,000 (inclusive of interest, but exclusive of any recoverable costs and fees).

 

Adam Vignola, et al. v. FAT Brands Inc., et al., United States District Court for the Central District of California, Case No. 2:18-cv-07469.

 

On August 24, 2018, plaintiff Adam Vignola,the Original Defendants were named as defendants in a putative investor in the Company, filed a putativesecurities class action lawsuit against the Company, Andrew Wiederhorn, Ron Roe, Fog Cutter Capital Group, Inc., Tripoint Global Equities, LLC and members of the Company’s board of directors, entitledVignola v. FAT Brands, Inc., Case No. 2:18-cv-07469-PSG-PLA, in the United States District Court for the Central District of California, Case No. 2:18-cv-07469. The complaint asserted claims under Sections 12(a)(2) and 15 of the Securities Act of 1933, alleging that the defendants are responsible for false and misleading statements and omitted material facts in connection with the Company’s initial public offering, which resulted in declines in the price of the Company’s common stock. The plaintiff alleged that he intended to certify the complaint as a class action and is seeking compensatory damages in an amount to be determined at trial.California. On October 23, 2018, Charles Jordan and David Kovacs (collectively, “Lead Plaintiffs”) moved to be appointed lead plaintiffs, and the Court granted Lead Plaintiffs’ motion on November 16, 2018. On January 15, 2019, Lead Plaintiffs filed a First Amended Class Action Complaint against the Defendants, thereby removing Marc L. Holtzman, Squire Junger, Silvia Kessel and Jeff Lotman as defendants, assertingOriginal Defendants. The allegations and claims for relief asserted in Vignola are substantively identical to those asserted in the FAC filed inRojany. On March 18, 2019,Case. Defendants filed a motionMotion to dismiss the FACDismiss First Amended Class Action Complaint, or, in the alterative,Alternative, to stayStay the action in favorAction In Favor ofRojany. a Prior Pending Action. On June 14, 2019, the Court denied theDefendants’ motion to stay andbut granted theDefendants’ motion to dismiss the First Amended Class Action Complaint, with leaveLeave to amend. On August 5, 2019,Amend. Lead Plaintiffs filed a Second Amended Class Action Complaint (“SAC”) reducing the scope of the allegations previously asserted.on August 5, 2019. On September 9, 2019, Defendants’ filed a Motion to Dismiss the Second Amended Class Action Complaint. On December 17, 2019, the Court granted Defendants’ Motion to Dismiss the Second Amended Class Action Complaint in Part, Without Leave to Amend. The allegations remaining in Vignola are substantively identical to those remaining in the Rojany Case. Defendants filed their Answer to the Second Amended Class Action Complaint on January 14, 2020. On December 27, 2019, Lead Plaintiffs filed a motionMotion for Class Certification. By order entered March 16, 2020, the Court denied Lead Plaintiffs’ Motion for Class Certification. By order entered April 1, 2020, the Court set various deadlines for the case, including a fact discovery cut-off of December 29, 2020, expert discovery cut-off of February 23, 2021 and trial date of March 30, 2021. On July 16, 2020, the parties reached an agreement in principle to settle this case, pursuant to which lead plaintiffs will dismiss their claims against defendants with prejudice in exchange for a payment by or on behalf of defendants of $75,000. On September 25, 2020, the SAC. The hearing on Defendants’ motionparties executed a Settlement Agreement and Mutual Release memorializing the aforementioned agreement in principle to dismisssettle this case. On October 13, 2020, the SAC is set for December 16, 2019. All discovery and other proceedings inCourt ordered the stipulated dismissal of this action, remain stayed by operation of the Private Securities Litigation Reform Act of 1995.with prejudice, in its entirety.

 

The Company and other defendants dispute the allegations of the lawsuit and intend to vigorously defend against the claims.

The Company is obligated to indemnify its officers and directors to the extent permitted by applicable law in connection with the above actions, and has insurance for such individuals, to the extent of the limits of the applicable insurance policies and subject to potential reservations of rights. The Company is also obligated to indemnify Tripoint Global Equities, LLC under certain conditions relating to theRojany andVignolamatters. These proceedings are in their early stagesongoing and the Company is unable to predict the ultimate outcome of these matters. There can be no assurance that the defendants will be successful in defending against these actions.

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The Company is involved in other claims and legal proceedings from time-to-time that arise in the ordinary course of business. The Company does not believe that the ultimate resolution of these actions will have a material adverse effect on its business, financial condition, results of operations, liquidity or capital resources.

 

Operating Leases

 

The Company leases corporate headquarters located in Beverly Hills, California comprising 5,4786,137 square feet of space, pursuant to a lease that expires on April 30, 2020,September 29, 2025, as well as an additional 2,915 square feet of space pursuant to a lease amendment that expires on February 29, 2024. The Company leases 1,775 square feet of space in Plano, Texas for pursuant to a lease that expires on March 31, 2021. TheAs part of the acquisition of Elevation Burger, the Company also leasesassumed a lease of 5,057 square feet of space in Falls Church, Virginia pursuant to a lease that expires on April 30,December 31, 2020. The Company subleases approximately 2,500 square feet of this lease to an unrelated third party. The Company is not a guarantor to the leases of the restaurants that are being refranchised.

 

The Company believes that all existing facilities are in good operating condition and adequate to meet current and foreseeable needs.

 

Note 19.18. geographic information AND MAJOR FRANCHISEES

 

Revenues by geographic area are as follows (in thousands):

 

 Thirteen Weeks Ended Thirty-nine weeks ended  Thirteen Weeks Ended Thirty-nine Weeks Ended 
 

September 29,

2019

 

September 30,

2018

 

September 29,

2019

 

September 30,

2018

  September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019 
United States $5,364  $4,155  $14,435  $9,798  $3,500  $5,364  $9,773  $14,435 
Other countries  1,120   1,709   2,818   3,559   589   1,120   1,846   2,818 
Total revenues $6,484  $5,864  $17,253  $13,357  $4,089  $6,484  $11,619  $17,253 

 

Revenues are shown based on the geographic location of our franchisees’ restaurants. All our assets are located in the United States.

 

During the thirteen and thirty-nine weeks ended September 29, 201927, 2020 and September 30, 2018,29, 2019, no individual franchisee accounted for more than 10% of the Company’s revenues.

 

NOTE 20.19. OPERATING SEGMENTS

 

With minor exceptions, the Company’s operations are comprised exclusively of franchising a growing portfolio of restaurant brands. This growth strategy is centered on expanding the footprint of existing brands and acquiring new brands through a centralized management organization which provides substantially all executive leadership, marketing, training and accounting services. While there are variations in the brands, the nature of the Company’s business is fairly consistent across its portfolio. Consequently, management assesses the progress of the Company’s operations as a whole, rather than by brand or location, which become more significant as the number of brands has increased.

 

As part of its ongoing franchising efforts, the Company will, from time to time, make opportunistic acquisitions of operating restaurants in order to convert them to franchise locations. During the refranchising period, the Company may operate the restaurants.

The Company’s chief operating decision maker (“CODM”) is the Chief Executive Officer. The CODM reviews financial performance and allocates resources at an overall level on a recurring basis. Therefore, management has determined that the Company has one operating and reportable segment.

 

NOTE 21.20. SUBSEQUENT EVENTS

 

Pursuant to FASB ASC 855, Management has evaluated all events and transactions that occurred from September 29, 201927, 2020 through the date of issuance of these financial statements. During this period, the Company did not have any significant subsequent events other than those described below:

Series B Preferred Stock and Warrantsevents.

 

On October 3, 2019, FAT Brands Inc. (the “Company”) completed the initial closing of its continuous public offering (the “Offering”) of up to $30,000,000 of units (the “Units”) at $25.00 per Unit, with each 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.

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Through the date of the issuance of these financial statements, the Company completed the sale of 47,080 Units for gross proceeds of $1,177,000. Of this amount, 33,000 units were acquired by Related Parties and other insiders for gross proceeds to the Company of $825,000.

The Offering is being conducted pursuant to an Offering Statement qualified by the Securities and Exchange Commission (“SEC”) under Regulation A of Section 3(6) of the Securities Act of 1933, as amended, for Tier 2 offerings. The Offering will continue until the earlier of $30,000,000 of Units have been sold or one year after the date the Offering Statement has being qualified by the SEC, unless the Offering is earlier terminated by the Company in its sole discretion.

TriPoint Global Equities, LLC and Digital Offering, LLC are acting as the Company’s exclusive selling agents (the “Selling Agents”) for the Offering on a “best efforts” basis. On October 3, 2019, the Company entered into a Selling Agency Agreement with the Selling Agents, under which the Company agreed to pay the Selling Agents a fee of 7.28% of the gross proceeds received by the Company in the Offering plus a five-year warrant to purchase Units exercisable for 1.25% of the total Units sold in the offering.

In connection with the Offering, the Company filed with the Secretary of State of Delaware a Certificate of Designation of Rights and Preferences of Series B Cumulative Preferred Stock, designating a total of 1,200,000 shares of Series B Preferred Stock, and entered into a Warrant Agency Agreement with VStock Transfer, LLC, to act as the Warrant Agent for the Series B Warrants.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our results of operations, financial condition and liquidity and capital resources should be read in conjunction with our financial statements and related notes for the thirteen and thirty-nine weeks ended September 29, 201927, 2020 and September 30, 2018,29, 2019, as applicable. Certain statements made or incorporated by reference in this report and our other filings with the Securities and Exchange Commission, in our press releases and in statements made by or with the approval of authorized personnel constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are subject to the safe harbor created thereby. Forward-looking statements reflect intent, belief, current expectations, estimates or projections about, among other things, our industry, management’s beliefs, and future events and financial trends affecting us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are reasonable, such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors.factors, including but not limited to, COVID-19. These differences can arise as a result of the risks described in the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K filed on March 29,2019April 28, 2020 “Item 1A. Risk Factors” and elsewhere in this report, as well as other factors that may affect our business, results of operations, or financial condition. Forward-looking statements in this report speak only as of the date hereof, and forward-looking statements in documents incorporated by reference speak only as of the date of those documents. Unless otherwise required by law, we undertake no obligation to publicly update or revise these forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward-looking statements contained in this report will, in fact, transpire.

OverviewCOVID-19

 

The management’s discussion and analysis is based on our financial statements,In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which have been prepared in accordance with accounting principles generally accepted incontinues to spread throughout the United States of America. The preparationand 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 financial statements requires usactions. These actions have reduced consumer traffic, all resulting in a negative impact to make certain estimates and judgments that affectCompany revenues. While the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believeddisruption to our business from the COVID-19 pandemic is currently expected to be reasonable undertemporary, there is a great deal of uncertainty around the circumstances,severity and duration of the resultsdisruption, and also the longer-term effects on our business and economic growth and consumer demand in the U.S. and worldwide. In the future, the effects of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual resultsCOVID-19 may differ from these estimates under different assumptions and conditions.

The following discussion and analysis of financial condition andcontinue to materially adversely affect our business, results of operations, shouldliquidity and ability to service our existing debt, particularly if these effects continue in place for a significant amount of time.

During the thirty-nine weeks ended September 27, 2020, the Company recorded goodwill impairment charges of $1,462,000 and tradename impairment charges of $2,465,000 relating to the Ponderosa, Yalla and Bonanza brands. As additional information becomes available regarding the potential impact and the duration of the negative financial effects of the current pandemic, the Company may determine that additional impairment adjustments to the recorded value of trademarks, goodwill and other intangible assets may be read together with our Consolidated Financial Statements and Notes thereto, which appear elsewhere herein.necessary.

Executive Overview

 

Business overview

 

FAT Brands Inc., formed in March 2017 as a wholly owned subsidiary of Fog Cutter Capital Group, Inc. (“FCCG”), is a leading multi-brand restaurant franchising company that develops, markets, and acquires predominantly fast casual restaurant concepts around the world. On October 20, 2017, we completed an initial public offering and issued additional shares of common stock representing 20 percent of our ownership (the “Initial Public Offering”). As of September 27, 2020, FCCG continues to control a significant voting majority of the Company.

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

As of September 29, 2019,27, 2020, the Company owns eightnine restaurant brands: Fatburger, Johnny Rockets, Buffalo’s Cafe, Buffalo’s Express, Hurricane Grill & Wings, Ponderosa and Bonanza Steakhouses, Elevation Burger and Yalla Mediterranean, and Elevation Burger, that havefranchise over 380700 restaurant locations open and more than 200 under development.worldwide.

Operating segments

 

With minor exceptions, our operations are comprised exclusively of franchising a growing portfolio of restaurant brands. Our growth strategy is centered on expanding the footprint of existing brands and acquiring new brands through a centralized management organization which provides substantially all executive leadership, marketing, training and accounting services. While there are variations in the brands, the nature of our business is fairly consistent across our portfolio. Consequently, our management assesses the progress of our operations as a whole, rather than by brand or location, which has become more significant as the number of brands has increased.

 

As part of our ongoing franchising efforts, we will, from time to time, make opportunistic acquisitions of operating restaurants in order to convert them to franchise locations. During the refranchising period, the Company may operate the restaurants.

Our chief operating decision maker (“CODM”) is our Chief Executive Officer. Our CODM reviews financial performance and allocates resources at an overall level on a recurring basis. Therefore, management has determined that the Company has one operating and reportable segment.

Results of Operations

We operate on a 52-week or 53-week fiscal year ending on the last Sunday of the calendar year. In a 52-week fiscal year, each quarter contains 13 weeks of operations. In a 53-week fiscal year, each of the first, second and third quarters includes 13 weeks of operations and the fourth quarter includes 14 weeks of operations, which may cause our revenue, expenses and other results of operations to be higher due to an additional week of operations. The 2020 and 2019 fiscal years are each 52-week years.

 

Results of Operations of FAT Brands Inc.

 

The following table summarizes key components of our combined results of operations for thethirteen weeks and thirty-nine weeks ended September 29, 201927, 2020 and September 30, 2018.29, 2019. The results of Hurricane, Elevation and YallaBurger were not included in the operatingconsolidated operations of the Company prior to its acquisition, which occurred on June 19, 2019. The results forof Johnny Rockets are included in the thirteen and twenty-six week periods endedconsolidation financial statements of the Company beginning September 30, 2018 because those transactions occurred subsequent to that date.21, 2020.

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(In thousands)

 

 Thirteen Weeks Ended Thirty-nine weeks ended  Thirteen Weeks Ended Thirty-nine Weeks Ended 
 September 29, 2019 September 30, 2018 September 29, 2019 September 30, 2018  September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019 
Statement of operations data:                                
                                
Revenues                                
Royalties $3,937  $3,370  $11,064  $8,802  $3,156  $3,937  $8,678  $11,064 
Franchise fees  1,272   1,343   2,578   2,041   122   1,272   571   2,578 
Store opening fees  109   100   398   205   -   109   -   398 
Advertising fees  1,151   1,038   3,159   2,264   803   1,151   2,347   3,159 
Management fees and other income  15   13   54   45   8   15   23   54 
Total revenues  6,484   5,864   17,253   13,357   4,089   6,484   11,619   17,253 
                                
Costs and expenses                                
General and administrative expenses  3,164   2,717   8,706   7,216   2,990   3,422   10,626   9,242 
Advertising expenses  1,151   1,038   3,159   2,264   814   1,151   2,358   3,159 
Refranchising (gain) / loss  (902)  -   (851)  - 
Impairment of assets  753   -   3,927   - 
Refranchising restaurant losses (gains)  325   (902)  1,869   (851)
Costs and expenses  3,413   3,755   11,014   9,480   4,882   3,671   18,780   11,550 
                                
Income from operations  3,071   2,109   6,239   3,877 
(Loss) income from operations  (793)  2,813   (7,161)  5,703 
                                
Other expense, net  (2,289)  (1,900)  (6,050)  (2,490)
Other income (expense), net  206   (2,031)  (1,433)  (5,514)
                                
Income before income tax expense  782   209   189   1,387 
(Loss) income before income tax (benefit) expense  (587)  782   (8,594)  189 
                                
Income tax expense  (372)  199   253   495 
Income tax (benefit) expense  (19)  (372)  (1,405)  253 
                                
Net income (loss) $1,154  $10  $(64) $892 
Net (loss) income $(568) $1,154  $(7,189) $(64)

For the thirty-nine weeks ended September 29, 201927, 2020 and September 30, 2018:29, 2019:

Net IncomeLoss- Net loss for the thirty-nine weeks ended September 27, 2020 totaled $7,189,000 consisting of revenues of $11,619,000 less costs and expenses of $18,780,000, other expense of $1,433,000 and income tax benefit of $1,405,000. Net loss for the thirty-nine weeks ended September 29, 2019 totaled $64,000 consisting of revenues of $17,253,000 less costs and expenses of $11,014,000,$11,550,000, other expense of $6,050,000$5,514,000 and income tax expense of $253,000. Net income for the thirty-nine weeks ended September 30, 2018 totaled $892,000 consisting of revenues of $13,357,000 less costs and expenses of $9,480,000, other expense of $2,490,000 and income tax expense of $495,000.

 

Revenues- Revenues consist of royalties, franchise fees, store opening fees, advertising fees and other revenues. We had revenues of $11,619,000 for the thirty-nine weeks ended September 27, 2020 compared to $17,253,000 for the thirty-nine weeks ended September 29, 2019 compared to $13,357,000 for2019. The decrease of $5,634,000 reflects the thirty-nine weeks ended September 30, 2018. The increase of $3,896,000 was primarily the result of an increase in royalties of $2,262,000 which was largely the resultnegative effects of the acquisitionCOVID-19 pandemic on royalties from restaurant sales and the adoption of Hurricane; an increase ina preferred application of ASC 606 related to the recognition of franchise and store opening fees of $730,000 and an increase(See Note 2 in advertising revenue of $895,000.the accompanying consolidated financial statements).

 

Costs and Expenses- Costs and expenses consist primarily of general and administrative costs, advertising expense, impairment charges and refranchising gains.restaurant losses(gains). Our costs and expenses increased from $9,480,000$11,550,000 in the first thirty-nine weeks ended September 30, 2018of 2019 to $11,014,000$18,780,000 in the comparable period of 2019.2020.

 

For the thirty-nine weeks ended September 29, 2019,27, 2020, our general and administrative expenses totaled $8,706,000. For$10,626,000, compared to $9,242,000 for the thirty-nine weeks ended September 30, 2018, our general and administrative expenses totaled $7,216,000.29, 2019. The increase in the amount of $1,490,000$1,384,000 was primarily the result of increasesan increase in compensation expenses and professional fees.

During the thirty-nine weeks ended September 29, 2019, the refranchising efforts resulted in gains of $851,000. We did not have comparable refranchising activityprovisions for bad debts in the prior period.amount of $1,150,000 related to the effects of the COVID-19 pandemic; an increase in depreciation and amortization of $228,000; and an increase in public company related expenses of $382,000.

 

Advertising expenses totaled $2,358,000 during the first thirty-nine weeks of 2020 with $3,159,000 during the thirty-nine weeks ended September 29,comparable 2019 with $2,264,000 during the prior year period, representing an increasea decrease in advertising expense of $895,000.$801,000. These expenses vary in relation to the advertising revenue recognized.and have been affected by the decrease in customer activity due to the COVID-19 pandemic.

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 September 27, 2020. We have previously recorded goodwill impairment charges of $1,462,000 and tradename impairment charges of $1,712,000 relating to the Ponderosa and Bonanza brands on June 28, 2020. As of September 27, 2020, we determined that an additional $753,000 of impairment loss was necessary relating to the Yalla brand. There were no impairment charges in the comparable period of 2019.

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During the thirty-nine weeks ended September 27, 2020, our refranchising efforts resulted in a net loss in the amount of $1,869,000 compared to gains of $851,000 for the thirty-nine weeks ended September 29, 2019. The 2020 period included operating expenses, net of food sales, in the amount of $1,114,000, a gain of $560,000 relating to the sale and refranchising of four restaurant locations, a loss of $615,000 on the closure and disposition of three restaurant locations and the establishment of a reserve of $700,000 relating to a prior sale. The 2019 period included gains on the sale and refranchising of two locations in the amount of $2,249,000 which were partially offset by restaurant operating expenses, net of food sales, in the amount of $1,398,000.

 

Other Expense (net) - Other net expense for the thirty-nine weeks ended September 27, 2020 totaled $1,433,000 and consisted primarily of net interest expense of $3,285,000 and costs related to the acquisition of Johnny Rockets in the amount of $574,000, which were partially offset by income in the amount of $887,000 from the change in fair value of the derivative liability relating to the conversion feature of the Series A Preferred Stock; and a revaluation of a contingent purchase price payable, resulting in a gain of $1,680,000. Other net expense for the thirty-nine weeks ended September 29, 2019 totaled $6,050,000 and consisted primarily of net interest expense of $5,357,000. Other expense

Income Tax (Benefit) Expense - We recorded an income tax benefit of $1,405,000 for the thirty-nine weeks ended September 30, 2018 totaled $2,490,000 and consisted primarily of net interest expense of $1,942,000. An increase in total debt outstanding and the related costs resulted in the higher interest expense.

Income Tax Expense –We recorded27, 2020 compared to income tax expense of $253,000 for the thirty-nine weeks ended September 29, 2019 and a provision for income taxes of $495,000 for the thirty-nine weeks ended September 30, 2018.2019. These tax results were based on a net incomeloss before taxes of $189,000$8,594,000 for 20192020 compared to net income before taxes of $1,387,000$189,000 for 2018. Non-deductible expenses, such as dividends paid on preferred stock, contributed to the higher tax expense for 2019 as a percentage of pre-tax income.2019.

 

For the thirteen weeks ended September 29, 201927, 2020 and September 30, 2018:29, 2019:

Net (Loss) Income- Net loss for the thirteen weeks ended September 27, 2020 totaled $568,000 consisting of revenues of $4,089,000 less costs and expenses of $4,882,000, other income of $206,000 and income tax benefit of $19,000. Net income for the thirteen weeks ended September 29, 2019 totaled $1,154,000 consisting of revenues of $6,484,000 less costs and expenses of $3,413,000,$3,671,000, other expense of $2,289,000$2,031,000 and an income tax benefit of $372,000. Net income for the thirteen weeks ended September 30, 2018 totaled $10,000 consisting of revenues of $5,864,000 less costs and expenses of $3,755,000, other expense of $1,900,000 and income taxes of $199,000.

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Revenues- Revenues consist of royalties, franchise fees, store opening fees, advertising fees and other revenue. We had revenues of $4,089,000 for the thirteen weeks ended September 27, 2020 compared to $6,484,000 for the thirteen weeks ended September 29, 2019. The decrease of $2,268,000 reflects the negative effects of the COVID-19 pandemic on royalties from restaurant sales and the adoption of a preferred application of ASC 606 related to the recognition of store opening fees (See Note 2 in the accompanying consolidated financial statements). The majority of the decrease in recognized franchise fees from 2019 compared to $5,864,000 for the thirteen weeks ended September 30, 2018. The increase of $620,0002020 was primarily the result of an increase in royalties of $567,000 which was largely the result of the acquisitionrecognition of Hurricane; an decreaserevenue from franchisee forfeitures of non-refundable deposits during the 2019 period without comparable activity in franchise fees and store opening fees of $62,000 and an increase in advertising revenue of $113,000.2020.

 

Costs and Expenses- Costs and expenses consist primarily of general and administrative costs, advertising expense and restaurant refranchising gains.gains or losses. Our costs and expenses decreasedincreased from $3,755,000$3,671,000 in the third quarter of 20182019 to $3,413,000$4,882,000 in the third quarter of 2019.2020.

 

For the thirteen weeks ended September 29, 2019,27, 2020, our general and administrative expenses totaled $3,164,000. For$2,990,000, compared to $3,422,000 for the thirteen weeks ended September 30, 2018, our general and administrative expenses totaled $2,717,000.29, 2019. The increasedecrease in the amount of $447,000$432,000 was primarily the result of decreases in compensation, travel and professional fees, partially offset by increases in compensation expensesoccupancy costs and professional fees.

During the third quarter of 2019, our refranchising efforts resulted in gains of $902,000. We did not have comparable refranchising activity in the prior year period.public company related expenses.

 

Advertising expenses totaled $1,151,000$814,000 during the third quarter of 2019,2020, compared with $1,038,000$1,151,000 during the prior year period, representing an increasea decrease in advertising expense of $113,000.$337,000. These expenses vary in relation to the advertising revenue recognized.

 

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 September 27, 2020. As a result of this analysis, during the thirteen weeks ended September 27, 2020, the Company recorded an impairment loss of $753,000 relating to the Yalla trademarks. There were no impairment charges in the comparable period of 2019.

During the third quarter of 2020, our refranchising efforts resulted in a net loss in the amount of $325,000 compared to a gain of $902,000 for the thirteen weeks ended September 29, 2019. The 2020 period included operating expenses, net of food sales, in the amount of $330,000, a gain of $1,320,000 relating to the sale and refranchising of two restaurant locations, a loss of $615,000 on the closure and disposition of three restaurant locations and the establishment of a reserve of $700,000 relating to a prior sale. The 2019 period included a gain on the sale and refranchising in the amount of $1,279,000, offset by offset by restaurant operating expenses, net of food sales, in the amount of $377,000.

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Other Expense –Income (Expense) -Other income for the thirteen weeks ended September 27, 2020 totaled $206,000 and consisted primarily of a gain in the amount of $1,680,000 from the revaluation of a contingent purchase price payable, which was partially offset by acquisition costs in the Johnny Rockets transaction of $574,000; net interest expense of $446,000; and a loss of $374,000, from the change in fair value of the derivative liability relating to the conversion feature of the Series A Preferred Stock. Net other expense for the thirteen weeks ended September 29, 2019 totaled $2,289,000$2,031,000 and consisted primarily of net interest expense of $1,975,000. Other expense for the thirteen weeks ended September 30, 2018 totaled $1,900,000 and consisted primarily of net interest expense of $1,428,000. An increase in total debt outstanding and the related costs resulted in the higher interest expense.

 

Income Tax (Benefit) Expense -We recorded an income tax benefit for the thirteen weeks ended July 28, 2020 of $19,000 and an income tax benefit of $372,000 for the thirteen weeks ended September 29, 2019 and a provision for income taxes of $199,000 for the thirteen weeks ended September 30, 2018.2019. These tax results were based on a net incomeloss before taxes of $782,000$587,000 for 20192020 compared to net income before taxes of $209,000$782,000 for 2018.2019. The tax benefit recorded during the third quarter reflectsof 2019 reflected updated income tax related estimates and partially reversed tax provisions recorded in prior quarters.

 

Liquidity and Capital Resources

 

Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund business operations, acquisitions, and expansion of franchised restaurant locations and for other general business purposes. In addition to our cash on hand, our primary sources of funds for liquidity during the thirty-nine weeks ended September 29, 201927, 2020 consisted of cash flow from operations of $1,573,000.provided by borrowings.

 

We are involved in a world-wide expansion of franchise locations, which will require significant liquidity, primarily from our franchisees. If real estate locations of sufficient quality cannot be located and either leased or purchased, the timing of restaurant openings may be delayed. Additionally, if we or our franchisees cannot obtain capital sufficient to fund this expansion, the timing of restaurant openings may be delayed.

 

We also plan to acquire additional restaurant concepts. These acquisitions typically require capital investments in excess of our normal cash on hand. We would expect that future acquisitions will necessitate financing with additional debt or equity transactions. If we are unable to obtain acceptable financing, our ability to acquire additional restaurant concepts may be negatively impacted.

As of September 27, 2020, we had cash and restricted cash of $14,268,000.

On March 6, 2020, we 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 and debt offering costs. A portion of the proceeds from the Securitization was used to repay the remaining $26,771,000 in outstanding balance under the Lion Loan and Security Agreement and to pay the Securitization debt offering costs.

On September 21, 2020, the FAT Royalty completed the sale of an additional $40 million of Series 2020-2 Fixed Rate Asset-Backed Notes (the “Series M-2 Notes”), increasing the Company’s Securitization Notes to $80 million. Net proceeds from the issuance of the Series M-2 Notes were $35,241,000, which consist of the face amount of $40,000,000, net of discounts of $3,200,000 and debt offering costs of $1,559,000. Approximately $24,838,000 of the proceeds from the Series M-2 Notes were used to acquire Johnny Rockets. The remaining proceeds from the Securitizations are being used for working capital.

During the second quarter of 2020, the Company received loan proceeds in the amount of $1,532,000 from the Paycheck Protection Program administered by the Small Business Administration (“PPP”) in response to economic difficulties resulting from the outbreak of COVID-19. These loan proceeds relate to FAT Brands Inc. as well as five restaurant locations that were part of the Company’s refranchising program.

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On July 13, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) to issue and sell in a public offering (the “Offering”) 360,000 shares of 8.25% Series B Cumulative Preferred Stock (“Series B Preferred Stock”) and 1,800,000 warrants (the “2020 Series B Warrants”) to purchase common stock at $5.00 per share. The Offering closed on July 16, 2020 with net proceeds to the Company of $8,021,000, which was net of $979,000 in underwriting and offering costs.

While the Company expects the COVID-19 pandemic to continue to negatively impact its business, results of operations, and financial position, the related financial impact cannot be reasonably estimated at this time. However, the Company believes that the working capital from the Securitization, Series B Preferred Stock Offering, and PPP proceeds, combined with royalties and franchise fees collected from the operations of its 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.

Comparison of Cash Flows

 

Our cash and restricted cash balance was $311,000$14,268,000 as of September 29, 2019,27, 2020, compared to $653,000$25,000 as of December 30, 2018.29, 2019.

The following table summarize key components of our consolidated cash flows for the thirty-nine weeks ended September 29, 201927, 2020 and September 30, 201829, 2019:

 

(In thousands)

For the Thirty-nine weeks endedFiscal Years Ended

 

 September 29, 2019  September 30, 2018  September 27, 2020  September 29, 2019 
          
Net cash provided by operating activities $1,573  $360 
Net cash (used in) provided by operating activities $(8,506) $211 
Net cash used in investing activities  (671)  (7,816)  (33,124)  (6,680)
Net cash (used in) provided by financing activities  (1,244)  9,283 
Net cash provided by financing activities  55,873   6,127 
Increase (decrease) in cash flows $(342) $1,827  $14,243  $(342)

 

Operating Activities

 

Net cash provided byused in operating activities increased $1,213,000was $8,506,000 during the thirty-nine weeks ended September 29, 201927, 2020 compared to cash provided by operating activities of $211,000 for the same period in 2018. There were variations in the components of the cash from operations between the two periods.2019. Our net loss in 20192020 was $64,000$7,189,000 compared to a net incomeloss in the 2018 period2019 of $892,000. Non-cash items included$64,000. The adjustments to reconcile these net losses to net cash used in the reported net loss for the thirty-nine weeks ended September 29, 2019 netted to positive $1,637,000 and had the effect of increasing the net cashor provided by operating activities.

activities were a negative adjustment of $1,317,000 in 2020 compared to a positive adjustment of $275,000 in 2019. The primary components of thesethe adjustments included:

 

An upward adjustment due to accretion expense of a long-term loan, mandatorily redeemable preferred shares, and acquisition purchase price payable of $2,240,000 in 2019 compared to $431,000 for the comparable 2018 period;
An upwardA $312,000 positive adjustment to cash due to an increase in accounts payable, and accrued expenses of $3,375,000 in 2019 compared to an increase of $1,033,000$2,863,000 in 2019;
A positive adjustment to cash due to reserves for bad debts totaling $900,000 in 2020 compared to a negative cash adjustment in 2019 of $91,000 for recoveries of bad debt reserves;
A positive adjustment to cash of $3,927,000 due to impairment charges recorded during the 2018thirty-nine weeks ended September 27, 2020. There were no impairments recorded during the 2019 period;
A downwardpositive adjustment to cash due to accretion expense related to each of the following: (i) the term loan, (ii) the preferred shares, and (iii) the acquisition purchase price payables totaling $1,017,000 compared to $2,192,000 in 2019;
A negative adjustment to cash due to a decrease in accrued interestdividends payable on preferred stock of $941,000 in 2019$809,000 compared to an upwarda positive adjustment of $259,000 in the 2018 period, primarily due to the payoff of our term loan$992,000 in 2019;
A downward adjustment for the recognized gain on sale of refranchised restaurants of $2,249,000. There was no comparable activity in the 2018 quarterly period. The cash received relating to the sales is classified in Investing Activities;
A downwardnegative adjustment to cash due to a decrease in deferred income of $446,000 compared to a decrease of $2,129,000 in 20192019;
A negative adjustment to cash due to a gain on the adjustment of contingent consideration payable of $1,680,000, without comparable activity in 2019;
A negative adjustment to cash due to a change in the fair value of the derivative liability resulting from the conversion feature of preferred stock in the amount of $887,000. There was no comparable value in 2019; and
A negative adjustment to cash due to a change in accrued interest receivable from and affiliate in the amount of $2,613,000 for 2020, compared to $1,665,000a decrease of $1,332,000 in the 2018 period, due to the recognition of income related to cash collected in prior periods.2019

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Investing Activities

 

Net cash used in investing activities totaled $671,000$33,124,000 during the thirty-nine weeks ended September 29, 201927, 2020 compared to $7,816,000a cash used of $6,680,000 during the comparable 2018 period. The 2019 expenditures primarily includedsame period of 2019. We invested cash of $23,944,000 (net of cash acquired) in the netJohnny Rockets transaction during the thirty-nine weeks ended September 27, 2020, compared to a cash used to acquire Elevation Burgerinvestment of $2,332,000 which was partially offset by cash proceeds fromin 2019 for the saleacquisition of refranchised restaurantsElevation Burger. During 2020, we made advances to affiliates in the amount of $1,710,000. The 2018 expenditure related primarily$10,103,000 compared to the acquisitionadvances of Hurricane.$6,009,000 during 2019.

 

Financing Activities

 

Net cash used infrom financing activities increased by $10,527,000totaled $55,873,000 during the thirty-nine weeks ended September 29, 201927, 2020 compared to $6,127,000 during the comparable 2018 period. Duringsame period of 2019. Proceeds from borrowings were $51,023,000 higher in 2020 than in 2019 due to our net cash used in financing activities included the repayment of our term loan in the amount of $16,500,000 and increases in amounts due from affiliates of $7,371,000, which were partially offset by proceeds from a new loan in the amount of $23,022,000. During the 2018 period, our net cash provided by financing activities was comprised primarily from the issuance of$80,000,000 whole business securitization. We also issued preferred stock in the amount2020, resulting in net cash proceeds of $7,984,000 and proceeds from borrowings in the amount of $17,096,000. These amounts were partially offset by the repayment$8,021,000. Our repayments of borrowings were $7,724,000 higher in the amount of $10,853,000 and increases2020 than in amounts due from affiliates of $4,262,000.2019.

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Dividends

 

Our Board of Directors did not declare any dividends on our common stock during the thirty-nine weeks ended September 27, 2020.

On February 7, 2019, our Board of Directors declared a stock dividend on February 7, 2019 equal to 2.13% on its common stock, representing the number of shares equal to $0.12 per share of common stock based on the closing price as of February 6, 2019. The stock dividend was paid on February 28, 2019 to stockholders of record as of the close of business on February 19, 2019. The Company issued 245,376 shares of common stock at a per share price of $5.64 in satisfaction of the stock dividend. No fractional shares were issued, instead the Company paid stockholders cash totaling $1,670 for fractional sharesinterests based on the market value of the common stock on the record date.

 

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 and other factors. There can be no assurance that we will declare and pay dividends in future periods.

 

Loan and Security AgreementSecuritization

 

On January 29, 2019,March 6, 2020, we refinancedcompleted a whole-business securitization (the “Securitization”) through the Term Loan. creation of a bankruptcy-remote issuing entity, FAT Brands Royalty I, LLC (“FAT Royalty”) in which FAT Royalty issued notes (the “Securitization Notes”) pursuant to an indenture and the supplement thereto (collectively, the “Indenture”).

The CompanySecuritization Notes issued in March 2020 consist of the following (the “Series AB Notes”):

Note Public
Rating
 Seniority Issue Amount  Coupon  First Call Date Final Legal Maturity Date
               
A-2 BB Senior $20,000,000   6.50% 4/27/2021 4/27/2026
B-2 B Senior Subordinated $20,000,000   9.00% 4/27/2021 4/27/2026

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Net proceeds from the issuance of the Series AB 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 borrower, and its subsidiaries and affiliates as guarantors, entered into a newadditional interest expense over the expected term of the Series AB Notes.

A portion of the proceeds from the Series AB Notes were used to repay the remaining $26,771,000 in outstanding balance under the Loan and Security Agreement (the “Loan and Security Agreement”) with The Lion Fund, L.P. and The Lion Fund II, L.P. (“Lion”(collectively, “Lion”). Pursuant and to pay Securitization debt offering costs. The remaining proceeds from the Securitization were available for working capital.

On September 21, 2020, FAT Royalty completed the sale of an additional $40 million of Series 2020-2 Fixed Rate Asset-Backed Notes (the “Series M-2 Notes”), increasing our Securitization Notes to $80 million.

The Series M-2 Notes consist of the following:

Note Seniority Issue Amount  Coupon  First Call Date Final Legal Maturity Date
               
M-2 Subordinated $40,000,000   9.75% 4/27/2021 4/27/2026

Net proceeds from the issuance of the Series M-2 Notes were $35,241,000, which consists of the face amount of $40,000,000, net of discounts of $3,200,000 and debt offering costs of $1,559,000. The discount and offering costs will be accreted as additional interest expense over the expected term of the Series AB Notes. We used approximately $24,838,000 to acquire Johnny Rockets and the balance of the proceeds were available as working capital.

The Series M-2 Notes are subordinate to the LoanSeries A-2 Notes and Security Agreement, we borrowed $20.0 million from Lion,Series B-2 Notes. All Securitization Notes issued under the Base Indenture are secured by an interest in substantially all of the assets of FAT Royalty, including the Johnny Rockets companies, contributed to FAT Royalty and utilizedare obligations only of FAT Royalty under the proceeds to repay the existing $16.0 million term loan from FB Lending, LLC plus accrued interestBase Indenture and fees, and to provide additional general working capital tonot obligations of the Company.

 

The obligation underWhile the LoanSecuritization Notes are outstanding, scheduled payments of principal and Security Agreement maturesinterest are required to be made on June 30, 2020. Interesta quarterly basis, with the scheduled principal payments of $1,000,000 per quarter on each of the Series A-2 and Series B-2 Notes and $200,000 per quarter on the term loan accrues at an annual fixed rateSeries M-2 Notes beginning the second quarter of 20.0%2021. 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, October 2023 for the B-2 Notes and is payable quarterly. We may prepayApril 2026 for the Series M-2 Notes (the “Anticipated Repayment Dates”). If we have not repaid or refinanced the Securitization Notes prior to the applicable Anticipated Repayment Date, additional interest expense will begin to accrue and all or a portion ofadditional proceeds will be utilized for additional amortization, as defined in the outstanding principal and accrued 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.Indenture.

 

In connection with the LoanSecuritization, FAT Royalty and Security Agreement, we issued to Lion a warrant to purchase up to 1,167,404 shareseach 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 are not repaid in full by June 30, 2020. If the Loan and Security Agreement is repaid in full by June 30, 2020, the Lion Warrant will terminate in its entirety.

As security for its obligations under the Loan Agreement, we granted a lien on substantially all our assets to Lion. In addition, certain of our subsidiaries and affiliates entered into a Guaranty (the “Guaranty”) in favor of Lion, pursuant to which they guaranteed our obligations 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 contains customary affirmative and negative covenants, including covenants that limit or restrict our 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 includes customary events of default that include, among other things, non-payment, inaccuracy of representations and warranties, covenant breaches, events that result in a material adverse effectFranchise Entities (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 result in the acceleration of our obligations under the Loan and Security Agreement and an increase in the interest rate by 5.0% per annum.

On June 19, 2019, we amended our existing loan facility with Lion. WeIndenture) entered into a First AmendmentManagement Agreement with the Company, dated as of the Closing Date (the “Management Agreement”), pursuant to Loanwhich we agreed to act as manager of FAT Royalty and Securityeach of the Franchise Entities. The Management Agreement (the “First Amendment”), which amends the Loan and Security Agreement originally dated January 29, 2019. Pursuantprovides for a management fee payable monthly by FAT Royalty to the First Amendment,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 Franchise Entities pursuant to the Management Agreement.

The Notes are secured by substantially all of the assets of FAT Royalty, including the equity interests in the Franchise Entities. The restrictions placed on the FAT Royalty subsidiaries require that the Securitization 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 Company. Once the required obligations are satisfied, there are no further restrictions, including payment of dividends, on the cash flows of the subsidiaries. As of September 27, 2020, we increased our borrowings by $3,500,000were in ordercompliance with these covenants.

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The Notes have not been and will not be registered under the Securities Act or the securities laws of any jurisdiction.

The Notes are subject to fundcertain financial and non-financial covenants, including a debt service coverage ratio calculation, as defined in the Elevation Buyer NoteIndenture. 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, we may voluntarily prepay, in connectionpart or in full, the Notes in accordance 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.

We agreed to pay Lion an extension fee of $500,000provisions 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 “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 we fail to make any quarterly interest payment by the fifth business day after the end of each fiscal quarter beginning in the third quarter of 2019.Indenture.

Capital Expenditures

 

As of September 29, 2019,27, 2020, we do not have any material commitments for capital expenditures.

 

Critical Accounting Policies and Estimates

 

Franchise Fees: The franchise arrangement is documented in the form of a franchise agreement. The franchise arrangement requires us 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 includes the transfer of the franchise license. The services provided by us 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 on a straight-line basis. 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 between franchisees. 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, at which point the franchise fee revenue is recognized for non-refundable deposits.

Store opening fees – Prior to September 29, 2019, we recognized store opening fees in the amount of $35,000 to $60,000 per store from the up-front fees collected from franchisees upon store opening. The amount of the fee was dependent on brand and location (generally 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 our out-of-pocket costs 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, we 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, we 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, we 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 in Franchise 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”, in Note 2 of the accompanying financial statements.)

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.

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

Advertising:We require advertising payments based on a percent of net sales from franchisees. We also receive, 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 consolidated statement of operations. Assets and liabilities associated with the related advertising fees are reflected in the Company’s consolidated balance sheets.

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Fair Value Measurements - The Company determines the fair market values of its financial assets and liabilities, as well as non-financial assets and liabilities that are recognized or disclosed at fair value on a recurring basis, based on the fair value hierarchy established in U.S. GAAP. As necessary, the Company measures its financial assets and liabilities using inputs from the following three levels of the fair value hierarchy:

Level 1 inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities.
Level 3 inputs are unobservable and reflect the Company’s own assumptions.

Other than the derivative liability, the Company does not have a material amount of financial assets or liabilities that are required to be measured at fair value on a recurring basis under U.S. GAAP (See Note 11). None of the Company’s balance sheet.non-financial assets or non-financial liabilities are required to be measured at fair value on a recurring basis. Assets recognized or disclosed at fair value in the consolidated financial statements on a nonrecurring basis include items such as property and equipment, operating lease assets, goodwill and other intangible assets, which are measured at fair value if determined to be impaired.

The Company has not elected to use fair value measurement for any assets or liabilities for which fair value measurement is not presently required. However, the Company believes the fair values of cash equivalents, restricted cash, accounts receivable, assets held for sale and accounts payable approximate their carrying amounts due to their short duration.

 

Goodwill and other intangible assets: 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. NoThe Company recorded impairment has been identifiedcharges in the amount of $3,927,000 relating to goodwill and other intangible assets as of September 29, 2019.27, 2020.

Assets classified as held for sale –Assets are classified as held for sale when we commit 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 expenses continue to be accrued.recorded as expenses in the Company’s consolidated statement of operations.

Income taxes: We account 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.

 

We utilize a two-step approach 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.

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Share-based compensation: We have a stock option plan which provides for options to purchase shares of our common stock. For grants to employees and directors, we recognize an expense for the value of options granted at their fair value at the date of grant over the vesting period in which the options are earned. Cancellations or forfeitures are accounted for as they occur. Fair values are estimated using the Black-Scholes option-pricing model. For grants to non-employees for services, we revalue the options each reporting period while the services are being performed. The adjusted value of the options is recognized as an expense over the service period. See Note 1514 in our consolidated financial statements for more details on our share-based compensation.

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Use of estimates: The preparation of 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 disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates.

Recently Adopted Accounting Standards

In June 2018, the FASB issued ASU No.2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Prior to this update, Topic 718 applied only to share-based transactions to employees. Consistent with the accounting requirements for employee share-based payment awards, nonemployee share-based payment awards within the scope of Topic 718 are measured at grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. The Company adopted Topic 718 on December 31, 2018. The adoption of this accounting standard did not have a material effect on the Company’s consolidated financial statements.

In July 2018, the FASB issued ASU 2018-09, Codification Improvements. This ASU makes amendments to multiple codification Topics. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments in this ASU do not require transition guidance and will be effective upon issuance of this ASU. The Company adopted ASU 2018-09 on December 31, 2018. The adoption of this ASU did not have a material effect on the Company’s financial position, results of operations, and disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), requiring a lessee to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with a lease term of more than twelve months. Leases will continue to be classified as either financing or operating, with classification affecting the recognition, measurement and presentation of expenses and cash flows arising from a lease. This ASU is effective for interim and annual period beginning after December 15, 2018 and requires a modified retrospective approach to adoption for lessees related to capital and operating leases existing at, or entered into after, the earliest comparative period presented in the financial statements, with certain practical expedients available. The adoption of this standard on December 31, 2018 resulted in the Company recording Right of Use Assets and Lease Liabilities on its consolidated financial statements in the amount of $4,313,000 and $4,225,000, respectively. The adoption of this standard did not have a significant effect on the amount of lease expense recognized by the Company.

 

Recently Issued 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.” This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently assessing the effect thatadopted this ASU willon December 30, 2019. The adoption of this standard did not have a material effect on itsthe Company’s financial position, results of operations and disclosures.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). For public companies, the amendments inThe Company adopted this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning afteron December 15, 2019, with early30, 2019. The adoption permitted. Implementation should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The effects of this standard did not have a material effect on the Company’s financial position, results of operations or cash flows areflows.

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 expected to be material.have a material effect on the Company’s financial position, results of operations or cash flows.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Required.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of disclosure controls and procedures

 

Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities and Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of September 29, 2019,27, 2020, have concluded that our disclosure controls and procedures were effective and designed to ensure that material information relating to us and our combined subsidiaries is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

 

We do not expect that our disclosure controls and procedures will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedures are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. We considered these limitations during the development of its disclosure controls and procedures and will continually reevaluatere-evaluate them to ensure they provide reasonable assurance that such controls and procedures are effective.

 

Changes in internal control over financial reporting

 

There were no significant changes in our internal control over financial reporting in connection with an evaluation that occurred during the thirteen weeks ended September 29, 201927, 2020 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

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PART II — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Eric Rojany, et al. v. FAT Brands Inc., et al., Superior Court of California for the County of Los Angeles, Case No. BC708539, andDaniel Alden, et al. v. FAT Brands Inc., et al., Superior Court of California for the County of Los Angeles, Case No. BC716017.

 

On June 7, 2018, plaintiff Eric Rojany, a putative investor in the Company, filed a putative class action lawsuit against the Company,FAT Brands, Inc., Andrew Wiederhorn, Ron Roe, James Neuhauser, Edward H. Rensi, Marc L. Holtzman, Squire Junger, Silvia Kessel, Jeff Lotman, Fog Cutter Capital Group Inc., and Tripoint Global Equities, LLC and members of(collectively, the Company’s board of directors,“Original Defendants”) were named as defendants in a putative securities class action lawsuit entitledRojany v. FAT Brands, Inc., Case No. BC708539 (the “Rojany Case”), in the Superior Court of the State of California, for the County of Los Angeles, Angeles. On July 31, 2018, the Rojany Case No. BC708539. The complaint asserted claims under Sections 12(a)(2) and 15was designated as complex, pursuant to Rule 3.400 of the Securities ActCalifornia Rules of 1933, alleging thatCourt and assigned the defendants were responsible for false and misleading statements and omitted material facts in connection withmatter to the Company’s initial public offering, which resulted in declines in the price of the Company’s common stock. Plaintiff alleged that he intended to certify the complaint as a class action and sought compensatory damages in an amount to be determined at trial.Complex Litigation Program. On August 2, 2018, plaintiff Daniel Alden, another putative investorthe Original Defendants were named defendants in the Company, filed a second putative class action lawsuit, against the same defendants, entitledAlden v. FAT Brands Inc., Case No. BC716017 (the “Alden Case”), filed in the same court, Case No. BC716017.court. On September 17, 2018, the RojanyandAldenCases were consolidated under theRojany case caption andCase number. On October 10, 2018, plaintiffs Eric Rojany, Daniel Alden, Christopher Hazelton-Harrington and Byron Marin (“Plaintiffs”) filed a First Amended Consolidated Complaint (“FAC”) against the Company,FAT Brands, Inc., Andrew Wiederhorn, Ron Roe, James Neuhauser, Edward H. Rensi, Fog Cutter Capital Group Inc., and Tripoint Global Equities, LLC (collectively, “Defendants”), thereby removing Marc L. Holtzman, Squire Junger, Silvia Kessel and Jeff Lotman as defendants. The FAC asserted the same claims as asserted in the original complaint. On November 13, 2018, Defendants filed a demurrerDemurrer to the FAC.First Amended Consolidated Complaint. On January 25, 2019, the Court sustained Defendants’ demurrerDemurrer to the FAC,First Amended Consolidated Complaint with leaveLeave to amendAmend in part. On February 25, 2019,Part. Plaintiffs filed a Second Amended Consolidated Complaint (“SAC”) against Defendants.on February 25, 2019. On March 27, 2019, Defendants filed a demurrerDemurrer to the SAC.Second Amended Consolidated Complaint. On July 31, 2019, the Court overruled in part and sustained in part Defendants’ demurrerDemurrer to the SAC, with leave to amend. On September 20, 2019, Plaintiffs served an initial setSecond Amended Complaint in Part, narrowing the scope of requests for production of documents. At a status conference held on October 28, 2019, Plaintiffs indicated that they would not file a further amended complaint, and instead would rely upon the SAC as the operative complaint. The deadline forcase. Defendants to file an answerfiled their Answer to the SAC isSecond Amended Consolidated Complaint on November 12, 2019. TheThereafter, plaintiffs Alden, Hazelton-Harrington and Marin, voluntarily dismissed their claims without prejudice, leaving only plaintiff Rojany as the putative class representative plaintiff (“Plaintiff”). On January 29, 2020, Plaintiff filed a Motion for Class Certification. On October 8, 2020, the Court scheduled a status conferencedenied Plaintiff’s Motion for January 9, 2020, at which time the parties shall present a proposed pretrial schedule for the case.

The CompanyClass Certification. Defendants dispute Plaintiff’s allegations and other defendants dispute the allegations of the lawsuit and intendwill continue to vigorously defend against the claims.themselves in this litigation. Defendants estimate that Plaintiff’s individual compensatory rescissory damages do not exceed $5,000 (inclusive of interest, but exclusive of any recoverable costs and fees).

 

Adam Vignola, et al. v. FAT Brands Inc., et al., United States District Court for the Central District of California, Case No. 2:18-cv-07469.

 

On August 24, 2018, plaintiff Adam Vignola,the Original Defendants were named as defendants in a putative investor in the Company, filed a putativesecurities class action lawsuit against the Company, Andrew Wiederhorn, Ron Roe, Fog Cutter Capital Group, Inc., Tripoint Global Equities, LLC and members of the Company’s board of directors, entitledVignola v. FAT Brands, Inc., Case No. 2:18-cv-07469-PSG-PLA, in the United States District Court for the Central District of California, Case No. 2:18-cv-07469. The complaint asserted claims under Sections 12(a)(2) and 15 of the Securities Act of 1933, alleging that the defendants are responsible for false and misleading statements and omitted material facts in connection with the Company’s initial public offering, which resulted in declines in the price of the Company’s common stock. The plaintiff alleged that he intended to certify the complaint as a class action and is seeking compensatory damages in an amount to be determined at trial.California. On October 23, 2018, Charles Jordan and David Kovacs (collectively, “Lead Plaintiffs”) moved to be appointed lead plaintiffs, and the Court granted Lead Plaintiffs’ motion on November 16, 2018. On January 15, 2019, Lead Plaintiffs filed a First Amended Class Action Complaint against the Defendants, thereby removing Marc L. Holtzman, Squire Junger, Silvia Kessel and Jeff Lotman as defendants, assertingOriginal Defendants. The allegations and claims for relief asserted in Vignola are substantively identical to those asserted in the FAC filed inRojany. On March 18, 2019,Case. Defendants filed a motionMotion to dismiss the FACDismiss First Amended Class Action Complaint, or, in the alterative,Alternative, to stayStay the action in favorAction In Favor ofRojany. a Prior Pending Action. On June 14, 2019, the Court denied theDefendants’ motion to stay andbut granted theDefendants’ motion to dismiss the First Amended Class Action Complaint, with leaveLeave to amend. On August 5, 2019,Amend. Lead Plaintiffs filed a Second Amended Class Action Complaint (“SAC”) reducing the scope of the allegations previously asserted.on August 5, 2019. On September 9, 2019, Defendants’ filed a Motion to Dismiss the Second Amended Class Action Complaint. On December 17, 2019, the Court granted Defendants’ Motion to Dismiss the Second Amended Class Action Complaint in Part, Without Leave to Amend. The allegations remaining in Vignola are substantively identical to those remaining in the Rojany Case. Defendants filed their Answer to the Second Amended Class Action Complaint on January 14, 2020. On December 27, 2019, Lead Plaintiffs filed a motionMotion for Class Certification. By order entered March 16, 2020, the Court denied Lead Plaintiffs’ Motion for Class Certification. By order entered April 1, 2020, the Court set various deadlines for the case, including a fact discovery cut-off of December 29, 2020, expert discovery cut-off of February 23, 2021 and trial date of March 30, 2021. On July 16, 2020, the parties reached an agreement in principle to settle this case, pursuant to which lead plaintiffs will dismiss their claims against defendants with prejudice in exchange for a payment by or on behalf of defendants of $75,000. On September 25, 2020, the SAC. The hearing on Defendants’ motionparties executed a Settlement Agreement and Mutual Release memorializing the aforementioned agreement in principle to dismisssettle this case. On October 13, 2020, the SAC is set for December 16, 2019. All discovery and other proceedings inCourt ordered the stipulated dismissal of this action, remain stayed by operation of the Private Securities Litigation Reform Act of 1995.with prejudice, in its entirety.

The Company and other defendants dispute the allegations of the lawsuit and intend to vigorously defend against the claims.

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The Company is obligated to indemnify its officers and directors to the extent permitted by applicable law in connection with the above actions, and has insurance for such individuals, to the extent of the limits of the applicable insurance policies and subject to potential reservations of rights. The Company is also obligated to indemnify Tripoint Global Equities, LLC under certain conditions relating to theRojany andVignolamatters. These proceedings are in their early stagesongoing and the Company is unable to predict the ultimate outcome of these matters. There can be no assurance that the defendants will be successful in defending against these actions.

 

The Company is involved in other claims and legal proceedings from time-to-time that arise in the ordinary course of business. The Company does not believe that the ultimate resolution of these actions will have a material adverse effect on its business, financial condition, results of operations, liquidity or capital resources.

 

ITEM 1A. RISK FACTORS

 

You should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” and elsewhere in our Annual Report on Form 10-K filed on April 28, 2020, which could materially affect our business, financial condition, cash flows or future results. There have been no material changes in our risksuch factors includeddiscussed in our Annual Report. The risks described in our Annual Report are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Common Stock

On September 24, 2019,August 4, 2020, the Company issued a total of 17,14235,928 shares of common stock at a value of $5.25$3.34 per share to certain of the non-employee members of the board of directors as consideration for accrued directors’ fees. upon the election of each director to receive his cash director fees in the form of common stock of the Company at market value at the time the election is made.


The issuance of these shares to the directors arewas exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act and Rule 506 promulgated under Regulation D under the Securities Act as transactions by an issuer not involving a public offering. The directors acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof.

On October 3 and October 11, 2019, the Company completed the sale of an aggregate of 47,080 Units at $25.00 per Unit, with each Unit comprised of one share of 8.25% Series B Cumulative Preferred Stock and 0.60 warrants to purchase common stock at $8.50 per share, exercisable for five years, for gross proceeds of $1,177,000. The offering of Units is being conducted pursuant to an Offering Statement qualified by the SEC under Regulation A of Section 3(6) of the Securities Act of 1933, as amended, for Tier 2 offerings. TriPoint Global Equities, LLC and Digital Offering, LLC acted as the Company’s exclusive selling agents for the offering on a “best efforts” basis. The Company agreed to pay the selling agents a fee of 7.28% of the gross proceeds received by the Company in the offering plus a five-year warrant to purchase Units exercisable for 1.25% of the total Units sold in the offering.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

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ITEM 6. EXHIBITS

 

Exhibit   Incorporated By Reference to Filed   Incorporated By Reference toFiled
Number Description Form Exhibit Filing Date Herewith Description Form Exhibit Filing Date Herewith
              
2.1 Stock Purchase Agreement, dated August 12, 2020, by and between FAT Brands Inc. and Sundae Group Holdings I, LLC 8-K 2.1 08/17/2020  
3.1 

Certificate of Designation or Rights and Preferences of Series B Cumulative Preferred Stock

 

8-K

 3.1 10/09/2019   Amended and Restated Certificate of Designation of Rights and Preferences of Series B Cumulative Preferred Stock, filed on July 15, 2020 8-K 3.1 07/16/2020  
4.1 First Amendment to the Warrant Agreement, dated July 24, 2019, by and between FAT Brands Inc. and The Lion Fund, L.P. and The Lion Fund II, L.P. 8-K 4.1 07/29/2019   Series 2020-2 Supplement to Base Indenture, dated September 21, 2020, by and among FAT Brands Royalty I, LLC, and UMB Bank, N.A., as trustee. 

8-K

 

 4.2 09/25/2020  
4.2 Supplement Number One to Base Indenture, dated September 21, 2020, by and among FAT Brands Royalty I, LLC, and UMB Bank, N.A., as trustee. 8-K 4.3 09/25/2020  
10.1 Second Amendment to Loan and Security Agreement, dated July 24, 2019, by and among FAT Brands Inc., the Guarantors named therein, and The Lion Fund, L.P. and The Lion Fund II, L.P., as Lenders 8-K 10.1 07/29/2019   Warrant Agency Agreement, dated July 16, 2020, between the Company and VStock Transfer, LLC, to act as the Warrant Agent (including the form of Warrant Certificate) 8-K 10.1 07/16/2020  
10.2 Selling Agency Agreement, dated October 3, 2019 (including form of Selling Agent Warrant) 8-K 10.1 10/09/2019   Stock Redemption Agreement, dated July 13, 2020, by and between FAT Brands Inc. and Trojan Investments LLC       

X

10.3 Warrant Agency Agreement, dated October 3, 2019 (including form of Warrant Certificate) 8-K 10.2 10/09/2019  
31.1 Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   X Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002       X
31.2 Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   X Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002       X
32.1 Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   X Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002       X
                
101.INS XBRL Instance Document X
(Furnished)
 XBRL Instance Document       X (Furnished)
101.SCH XBRL Taxonomy Extension Schema
Document
 X
(Furnished)
 XBRL Taxonomy Extension Schema Document       X (Furnished)
101.CAL XBRL Taxonomy Extension Calculation Linkbase
Document
 X
(Furnished)
 XBRL Taxonomy Extension Calculation Linkbase Document       X (Furnished)
101.DEF XBRL Taxonomy Extension Definition Linkbase
Document
 X
(Furnished)
 XBRL Taxonomy Extension Definition Linkbase Document       X (Furnished)
101.LAB XBRL Taxonomy Extension Label Linkbase
Document
 X
(Furnished)
 XBRL Taxonomy Extension Label Linkbase Document       X (Furnished)
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document X
(Furnished)
 XBRL Taxonomy Extension Presentation Linkbase Document       X (Furnished)

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 FAT BRANDS INC.
  
November 8, 201912, 2020By/s/ Andrew A. Wiederhorn
  Andrew A. Wiederhorn
  President and Chief Executive Officer
  (Principal Executive Officer)
  
November 8, 201912, 2020By/s/ Rebecca D. Hershinger
  Rebecca D. Hershinger
  Chief Financial Officer
  (Principal Financial and Accounting Officer)

 

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