Note 4 – Debt

Overview

On April 1, 2015, in connection with the Merger, the Company assumed approximately $11 million of debt obligations known as the FFCC Notes, Restaurant Loans, Partner Note 1, Private Investor Notes and capital lease obligations. In assuming the FFCC Notes, the Company was required to place $5 million in a control account as cash collateral, which has been classified as restricted cash on the balance sheet.

On May 20, 2014, the Company entered into a $2.5 million senior note agreement known as the AB Notes, which includes warrants valued at $0.5 million that were recorded as a debt discount within other long-term liabilities on the balance sheet. Additionally, on April 15, 2014, the Company entered into a $5 million senior note agreement known as the MILFAM Note, which includes warrants valued at $1 million that were recorded as a debt discount within other long-term liabilities on the balance sheet. The Company incurred approximately $0.5 million in debt issuance costs in connection with the AB Notes and MILFAM Note agreements that are classified as deferred financing costs within other assets on the balance sheet. The amortization expense for the three and six-month periods ended June 29, 2015 for the deferred financing costs amounted to approximately $34,000 and $67,000, respectively. As of June 29, 2015, the balance of the deferred financing costs amounted to approximately $245,000.

During the second quarter of 2015, the Company repaid one of the Restaurant Loans in the amount of $315,910, debt obligations known as Partner Note 1 in the amount of $3,288,860 and Private Investor Notes in the amount of $2,057,330. Additionally, the Company paid off the Merger capital lease obligations in the amount of $103,424.

As of June 29, 2015, the Company had the following outstanding borrowing obligations (in thousands):

FFCC Notes	$	4,560
New Restaurant Loans		301
MILFAM Note, net of debt discount		5,000
AB Note, net of debt discount		2,500

Total long-term debt, net of debt discount		12,361

Less: current portion		(527	)

Non-current portion of long-term debt		11,833

Unamortized debt discount		(953	)

Long term debt	$	10,880

FFCC Notes

In connection with the Merger of Associates, the Company assumed certain debt obligations known as the FFCC Notes. The “FFCC Notes” collectively refers to the Secured Promissory Notes dated on or about May 9, 2013, made by Partners, as borrower, in favor of First Franchise Capital Corporation (“FFCC”), as lender, in the original aggregate principal amount of $5.4 million. The FFCC Notes have a term of 60 months, commencing on June 10, 2013, and accrue interest on the outstanding balance at the rate of 5.93%. Payments of principal and interest of $60,000 are due monthly with one balloon payment of $3.2 million due June 10, 2018. Under each of the FFCC Notes, a late fee equal to 10% of the amount past due will be assessed on any late payments, reduced to 5% on any amount paid after the maturity date. The FFCC Notes are secured by all of the assets of the Partners, including, without limitation, the restaurants it operates. The FFCC Notes may be prepaid with a prepayment fee of 1.0% of the outstanding principal balance.

In connection with the Merger, the Company agreed to guarantee the obligations of Partners under FFCC Notes and the related loan documents (the “Loan Documents”) previously entered into by the Partners with FFCC. Additionally, the Company and FFCC entered into a Master Amendment to the Loan Documents modifying and amending certain terms of the Loan Documents. Accordingly, the Company entered into a Guaranty in favor of FFCC, pursuant to which the Company placed $5.0 million in a control account as cash collateral to secure the Company’s obligations under the Guaranty, which has been classified as restricted cash on the balance sheet. As of June 29, 2015, the Company is in compliance with all covenant requirements and total amount due on these notes is $4.6 million.

Restaurant Loans

Associates financed the construction of and equipment for a new franchise restaurant which opened in the first quarter of 2015, together with two new restaurant loans, collectively referred to as “Restaurant Loans”.

On April 15, 2015, the Company repaid in full the first restaurant loan in the amount of $0.3 million under the Promissory Note dated October 10, 2014 made by the Partners, as borrower, in favor of related third party lender in the principal amount of $0.3 million. The Company assumed the loan in connection with the Merger. The loan accrued interest at the rate of five percent (5 %) per annum, and the maturity date of the loan was January 31, 2015. No principal or interest payments were due under the loan until the Maturity Date. Past due principal and interest, to the extent permitted by law, accrued interest at eleven percent (11%).

As of June 29, 2015, the Company has one restaurant loan dated October 8, 2014 made by the Partners as borrower with the principal amount of $0.6 million. The Company assumed this in connection with the Merger. The loan has a fully earned non-refundable loan fee rate equal to 6.0% or $36,000 of the original principal, matures in November 2015 and is collateralized by certain equipment. Minimum monthly loan payments ranging from $40,000 - $50,000 are required in accordance with the repayment terms. As of June 29, 2015, the Company is in compliance with all covenant requirements and total amount due on the loan is $0.3 million.

MILFAM Note

On April 14, 2014, the Company entered into a $5.0 million Senior Secured Promissory Note Purchase Agreement with MILFAM II L. P. (the “MILFAM Note” and the “MILFAM Note Agreement”, respectively) which includes warrants valued at $1.0 million. The Company elected to pay the first interest payment at eleven percent (11%) in kind of approximately $277,000 in the form of additional promissory notes in 2014. In 2015, we elected to repay the first interest payment in cash which reduced the principal balance down to the original amount and paid the second interest payment of $237,000 in cash.

The debt discount relates to the relative value of the warrants which was approximately $1.0 million on issuance date. The amortization expense for the three month and six-month periods ended June 29, 2015 for the debt discount amounted to $87,000 and $175,000, respectively. As of June 29, 2015, the balance of the debt discount amounted to approximately $609,000. As of June 29, 2015, the Company is in compliance with all covenant requirements, and the total amount due note is $5.0 million.

AB Notes

On May 20, 2014, the Company entered into a $2.5 million Senior Secured Note Purchase Agreement with AB Opportunity Fund LLC and AB Value Partners, L.P. (the “AB Notes”, the “AB Note Agreement”, and the “AB Entities”, respectively), which includes warrants valued at $0.5 million. The Company elected to pay the first interest payment at eleven percent (11%) in kind of approximate $138,000 in the form of additional promissory notes in 2014. In 2015, they elected to repay the first interest payment in cash which reduced the principal balance down to the original amount and paid the second interest payment of approximately $ 119,000 in cash.

The debt discount relates to the relative value of the warrants which was approximately $0.5 million on issuance date. The amortization expense for the three month and six-month periods ended June 29, 2015 for the debt discount amounted to approximately $44,000 and $88,000, respectively. As of June 29, 2015, the balance of the debt discount amounted to approximately $345,000. As of June 29, 2015, the Company is in compliance with all covenant requirements and the total amount due on these notes is $2.5 million.

Repayments of Debt Obligations

“Partner Note 1” was repaid in full by the Company on April 14, 2015 in the amount of $3.3 million and refers to the Term Note dated March 20, 2009, made by Robert J. Dourney, as borrower, in favor of a third party lender, in the principal amount of $3.3 million, which was transferred to Associates prior to the consummation of the Merger. The Company assumed Partner Note 1 in connection with the Merger. Partner Note 1 accrued interest at the rate of five percent (5%) per annum, and had a maturity date of March 30, 2016 (the “PN 1 Maturity Date”). Commencing on June 30, 2009 and until the PN 1 Maturity Date, Mr. Dourney agreed to make quarterly payments of accrued interest in arrears at the annual rate of five percent (5%), quarterly principal payments of $30,000 from June 30, 2011, through March 30, 2012, quarterly principal payments of $60,000 from June 30, 2012 through December 30, 2015, and a final balloon payment of the remaining outstanding balance on March 31, 2016. Past due principal and interest, to the extent permitted by law, would accrue interest at twelve percent (12%). Partner Note 1 was secured by all of the assets of Mr. Dourney and was non-assignable without the lender's consent.

“Private Investor Notes” were repaid in full by the Company on April 6, 2015 in the amount of $2,057,330 and collectively refers to the Promissory Note dated June 1, 2013, made by the Partners, as borrower, in favor of a third party lender, in the principal amount of $1.5 million, and the Promissory Note dated June 1, 2013, made by the Partners in favor of another third party lender,, in the principal amount of $0.5 million. The Company assumed the Private Investor Notes in connection with the Merger. The maturity date of the Private Investor Notes was May 31, 2016 (the “PIN Maturity Date”). The Private Investor Notes accrued interest at a rate equal to LIBOR plus eight percent (8%) per annum %) Interest was due to be paid quarterly. No principal payments were due under the Private Investor Notes until the PIN Maturity Date.

On June 3, 2015, the Company repaid in full two capital leases financed by a financial institution in the amount of $103,424. Total obligations under the capital leases were $131,000 and were collateralized by various restaurant equipment pieces acquired on the leases. The Company assumed leases in connection with the Merger. As of June 29, 2015, the terms of the lease have been satisfied in full.

If only the baseline repayments are made, the annual aggregate principal amount of the term loans repaid would be as follows:

Fiscal Year Ending:
December 28, 2015	$	527
January 2, 2016		473
January 1, 2017		8,002
December 31, 2018		3,359

Total	$	12,361