10-Q

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 June 28, 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 Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	FAT	The Nasdaq Stock Market LLC
Series B Cumulative Preferred Stock, par value $0.0001 per share	FATBP	The Nasdaq Stock Market LLC
Warrants to purchase Common Stock	FATBW	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 August 3, 2020, there were 11,894,895 shares of common stock outstanding.

FAT BRANDS INC.

QUARTERLY REPORT ON FORM 10-Q

June 28, 2020

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION	3
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)	6
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	42
PART II.	OTHER INFORMATION	43
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	45
SIGNATURES		46

2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

FAT BRANDS INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

	June 28, 2020			December 29, 2019
				(Audited)
Assets
Current assets
Cash	$	1,741		$	25
Restricted cash		1,347			-
Accounts receivable, net of allowance for doubtful accounts of $470 and $595, as of June 28, 2020 and December 29, 2019, respectively		2,469			4,144
Trade notes receivable, net of allowance for doubtful accounts of $103 and $37 as of June 28, 2020 and December 29, 2019, respectively		204			262
Assets classified as held for sale		3,384			5,128
Other current assets		985			929
Total current assets		10,130			10,488
Non-current restricted cash		400			-
Notes receivable – noncurrent, net of allowance for doubtful accounts of $270 and $112, as of June 28, 2020 and December 29, 2019, respectively		1,584			1,802
Due from affiliates		34,729			25,967
Deferred income taxes		3,556			2,032
Operating lease right of use assets		2,776			860
Goodwill		9,450			10,912
Other intangible assets, net		27,557			29,734
Other assets		708			755
Total assets	$	90,890		$	82,550
Liabilities and Stockholders’ Equity
Liabilities
Current liabilities
Accounts payable	$	7,243		$	7,183
Deferred income, current portion		930			895
Accrued expenses		6,192			6,013
Accrued advertising		543			762
Accrued interest payable		806			1,268
Dividend payable on preferred shares (includes amounts due to related parties of $223 and $149 as of June 28, 2020 and December 29, 2019, respectively)		2,110			1,422
Liabilities related to assets classified as held for sale		2,298			3,325
Current portion of operating lease liability		368			241
Current portion of long-term debt		661			24,502
Total current liabilities		21,151			45,611
Deferred income – noncurrent		5,246			5,247
Acquisition purchase price payable		4,259			4,504
Preferred shares, net		15,456			15,327
Deferred dividend payable on preferred shares (includes amounts due to related parties of $129 and $99 as of June 28, 2020 and December 29, 2019, respectively)		828			628
Operating lease liability, net of current portion		2,471			639
Long-term debt, net of current portion		43,925			5,216
Derivative liability from conversion feature of preferred shares		1,142			-
Total liabilities		94,478			77,172
Commitments and contingencies (Note 17)
Stockholders’ equity
Common stock, $.0001 par value; 25,000,000 shares authorized; 11,894,895 and 11,860,299 shares issued and outstanding at June 28, 2020 and December 29, 2019, respectively		9,069			11,414
Accumulated deficit		(12,657	)		(6,036	)
Total stockholders’ equity		(3,588	)		5,378
Total liabilities and stockholders’ equity	$	90,890		$	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 twenty-six weeks ended June 28, 2020 and June 30, 2019 (Unaudited)

	Thirteen Weeks Ended						Twenty-six Weeks Ended
	June 28, 2020			June 30, 2019			June 28, 2020			June 30, 2019
Revenue
Royalties	$	2,213		$	3,663		$	5,522		$	7,127
Franchise fees		273			994			449			1,306
Store opening fees		-			184			-			289
Advertising fees		613			1,031			1,544			2,008
Management fees and other income		8			23			15			38
Total revenue		3,107			5,895			7,530			10,768
Costs and expenses
General and administrative expense		4,104			3,106			7,636			5,820
Impairment of assets		3,174			-			3,174			-
Refranchising loss (gain)		1,006			(467	)		1,544			51
Advertising expense		613			1,031			1,544			2,008
Total costs and expenses		8,897			3,670			13,898			7,879
(Loss) income from operations		(5,790	)		2,225			(6,368	)		2,889
Other income (expense), net
Interest expense, net		(289	)		(834	)		(1,911	)		(2,520	)
Interest expense related to preferred shares		(476	)		(431	)		(928	)		(862	)
Change in fair value-derivative liability		1,264			-			1,264			-
Other expense, net		(49	)		(124	)		(64	)		(100	)
Total other income (expense), net		450			(1,389	)		(1,639	)		(3,482	)
(Loss) income before income tax expense		(5,340	)		836			(8,007	)		(593	)
Income tax (benefit) expense		(1,089	)		1,344			(1,386	)		625
Net loss	$	(4,251	)	$	(508	)	$	(6,621	)	$	(1,218	)
Basic and diluted loss per common share	$	(0.36	)	$	(0.04	)	$	(0.56	)	$	(0.10	)
Basic and diluted weighted average shares outstanding		11,886			11,726			11,878			11,726
Cash dividends declared per common share	$	-		$	-		$	-		$	-

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 twenty-six weeks ended June 28, 2020

	Common Stock
					Additional
			Par		paid-in						Accumulated
	Shares		value		capital			Total			deficit			Total
Balance at December 29, 2019		11,860,299	$	1	$	11,413		$	11,414		$	(6,036	)	$	5,378
Net loss		-		-		-			-			(6,621	)		(6,621	)
Issuance of common stock in lieu of cash directors fees payable		34,596		-		135			135			-			135
Share-based compensation		-		-		16			16			-			16
Fair value of derivative liability		-		-		(2,406	)		(2,406	)					(2,406	)
Correction of recorded conversion rights associated with Series A-1 preferred shares		-		-		(90	)		(90	)		-			(90	)
Balance at June 28, 2020		11,894,895	$	1	$	9,068		$	9,069		$	(12,657	)	$	(3,588	)

For the twenty-six weeks ended June 30, 2019

	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		-		-		-			-			(1,218	)		(1,218	)
Common stock dividend		245,376		-		-			-			-			-
Cash paid in lieu of fractional shares		-		-		(2	)		(2	)		-			(2	)
Issuance of common stock in lieu of cash directors fees payable		34,800		-		180			180			-			180
Share-based compensation		-		-		159			159			-			159
Balance at June 30, 2019		11,826,765	$	1	$	11,093		$	11,094		$	(6,236	)	$	4,858

For the thirteen weeks ended June 28, 2020

	Common Stock
					Additional
			Par		paid-in						Accumulated
	Shares		value		capital			Total			deficit			Total
Balance at March 29, 2020		11,876,659	$	1	$	11,413		$	11,414		$	(8,406	)	$	3,008
Net loss		-		-		-			-			(4,251	)		(4,251	)
Issuance of common stock in lieu of cash directors fees payable		18,236		-		60			60			-			60
Share-based compensation		-		-		1			1			-			1
Fair value of derivative liability						(2,406	)		(2,406	)					(2,406	)
Balance at June 28, 2020		11,894,895	$	1	$	9,068		$	9,069		$	(12,657	)	$	(3,588	)

For the thirteen weeks ended June 30, 2019

	Common Stock
					Additional
			Par		paid-in				Accumulated
	Shares		value		capital		Total		deficit			Total
Balance at March 31, 2019		11,807,349	$	1	$	10,925	$	10,926	$	(5,728	)	$	5,198
Net loss		-		-		-		-		(508	)		(508	)
Issuance of common stock in lieu of cash directors fees payable		19,416		-		90		90		-			90
Share-based compensation		-		-		78		78		-			78
Balance at June 30, 2019		11,826,765	$	1	$	11,093	$	11,094	$	(6,236	)	$	4,858

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

5

FAT BRANDS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

For the twenty-six weeks ended June 28, 2020 and June 30, 2019 (Unaudited)

	Twenty-six Weeks Ended
	June 28, 2020			June 30, 2019
Cash flows from operating activities
Net loss	$	(6,621	)	$	(1,218	)
Adjustments to reconcile net loss to net cash used in operations:
Deferred income taxes		(1,524	)		(330	)
Depreciation and amortization		500			271
Share-based compensation		16			159
Accretion of loan fees and interest		412			1,093
Change in operating right of use assets		399			370
Gain on sale refranchised restaurants		(165	)		(970	)
Accretion of preferred shares		38			32
Accretion of purchase price liability		255			263
Impairment of assets		3,174			-
Fair value of derivative liability		(1,261	)		-
Provision for (recovery of) bad debts		1,069			(91	)
Change in operating assets and liabilities:
Accounts receivable		856			(456	)
Trade notes receivable		-			22
Prepaid expenses and other current assets		(102	)		681
Accounts payable and accrued expense		386			2,337
Accrued advertising		(220	)		(352	)
Accrued interest receivable from affiliate		(1,554	)		(623	)
Tax Sharing Agreement liability		(154	)		(46	)
Accrued interest payable		(462	)		(1,185	)
Deferred income		33			(1,335	)
Dividend payable on preferred shares		889			577
Other		42			(183	)
Total adjustments		2,627			234
Net cash used in operating activities		(3,994	)		(984	)
Cash flows from investing activities
Additions to property and equipment		(52	)		(34	)
Payments received on loans receivable		68			-
Proceeds from sale of refranchised restaurants		698			870
Change in due from affiliates		(7,040	)		(4,091	)
Acquisition of Elevation Burger, net of cash acquired		-			(2,332	)
Net cash used in investing activities		(6,326	)		(5,587	)
Cash flows from financing activities
Proceeds from borrowings and associated warrants, net of issuance costs		38,803			23,053
Repayments of borrowings		(24,224	)		(16,417	)
Payments made on acquisition purchase price liability		(500	)		-
Dividends paid in cash		-			(2	)
Change in operating lease liabilities		(296	)		(176	)
Net cash provided by financing activities		13,783			6,458
Net increase (decrease) in cash and restricted cash		3,463			(113	)
Cash and restricted cash at beginning of period		25			653
Cash and restricted cash at end of period	$	3,488		$	540
Supplemental disclosures of cash flow information:
Cash paid for interest	$	2,526		$	3,436
Cash paid for income taxes	$	17		$	135
Supplemental disclosure of non-cash financing and investing activities:
Issuance of common stock in lieu of cash directors fees payable	$	135		$	180
Income taxes receivable adjusting amounts due from affiliates	$	(154	)	$	(46	)

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

6

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”). The Company’s common stock trades on the Nasdaq Capital Market under the symbol “FAT.” As of June 28, 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 June 28, 2020, the Company owns and franchises eight restaurant brands: Fatburger, Buffalo’s Cafe, Buffalo’s Express, Hurricane Grill & Wings, Ponderosa Steakhouses, Bonanza Steakhouses, Yalla Mediterranean and Elevation Burger. Combined, as of June 28, 2020, these brands franchise over 375 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 a loss from operations of $6,368,000 during the twenty-six weeks ended June 28, 2020 and income from operations of $2,889,000 for the twenty-six weeks ended June 30, 2019, respectively. The Company recognized net losses of $6,621,000 and $1,218,000 during the twenty-six weeks ended June 28, 2020 and June 30, 2019, respectively. The reduction in earnings is primarily due 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 of $246,000 and debt offering costs of $2,440,000 (See Note 10). A portion of the proceeds from the Securitization was used to repay the remaining $26,771,000 in outstanding balance under the Loan and Security Agreement and to pay the Securitization debt offering costs. The remaining proceeds from the Securitization 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 are part of the Company’s refranchising program.

7

Subsequent to the end of the second quarter, 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 Company also granted the underwriters an option to purchase, for a period of 45 calendar days, up to an additional 54,000 shares Series B Preferred Stock and 270,000 of the 2020 Series B Warrants. 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 securities sold in the Offering.

The Offering closed on July 16, 2020 with net proceeds to the Company of $8,211,000, which was net of $790,000 in underwriting and offering costs.

While the Company expects the COVID-19 pandemic 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 limited 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.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Principles of consolidation – The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. The operations of Elevation Burger have been included since its acquisition on June 19, 2019. 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.

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

8

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 customer’s financial conditions prior to entry into a franchise or other agreement and believes that it has adequately provided for any exposure to potential credit losses. As of June 28, 2020, accounts receivable, net of allowance for doubtful accounts, totaled $2,469,000, with no customer representing more than 10% of that amount. As of December 29, 2019, the Company had two customers each representing 20% of accounts receivable, net of allowance for doubtful accounts.

The Company maintains cash deposits in national financial institutions. From time to time the balances for these accounts exceed the Federal Deposit Insurance Corporation’s (“FDIC”) insured amount. Balances on interest bearing deposits at banks in the United States are insured by the FDIC up to $250,000 per account. As of June 28, 2020, the Company had uninsured deposits in the amount of $1,859,000. As of December 29, 2019, the Company had no accounts with uninsured balances.

Restricted Cash – The Company has restricted cash consisting of funds required to be held in trust in connection with the Company’s Securitization. The current portion of restricted cash at June 28, 2020 consisted of $1,347,000. Non-current restricted cash of $400,000 at June 28, 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 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 June 28, 2020 and December 29, 2019, accounts receivable were stated net of an allowance for doubtful accounts of $470,000 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.

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

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.

9

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 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.

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

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

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

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

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

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

During the fourth quarter of 2019, the Company performed a study of other public company restaurant franchisors’ application of ASC 606 and determined that a preferred, alternative industry application exists in which the store opening fee portion of the franchise fees is amortized over the life of the franchise agreement rather than at milestones of standalone performance obligations in the franchise agreements. In order to provide financial reporting consistent with other franchise industry peers, the Company applied this preferred, alternative application of ASC 606 during the fourth quarter of 2019 on a prospective basis. As a result of the adoption of this preferred accounting treatment under ASC 606, the Company discontinued the recognition of store opening fees upon store opening and began accounting for the entire up-front deposit received from franchisees as described above 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, the 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.

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

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

Earnings per share – The Company reports basic earnings or loss per share in accordance with FASB ASC 260, “Earnings Per Share”. Basic earnings per share is computed using the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share is computed using the weighted average number of common shares outstanding plus the effect of dilutive securities during the reporting period. Any potentially dilutive securities that have an anti-dilutive impact on the per share calculation are excluded. During periods in which the Company reports a net loss, diluted weighted average shares outstanding are equal to basic weighted average shares outstanding because the effect of all potentially dilutive securities would be anti-dilutive. As of June 28, 2020 and June 30, 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 16). Unless otherwise noted, earnings per share and other share-based information for 2020 and 2019 have been adjusted retrospectively to reflect the impact of the stock dividend.

Immaterial Adjustments Related to Prior Periods

During the fourth quarter of 2019, the Company identified two immaterial potential adjustments to its previously issued financial statements. These potential adjustments are (1) its assessment of the Series A-1 Fixed Rate Cumulative Preferred Stock and (2) its treatment of the store opening component of its franchise fees under ASC 606. Based on its assessment of the Series A-1 Fixed Rate Cumulative Preferred Stock, the Company determined that an error occurred in the analysis of the rights that the holders of the Series A-1 Fixed Rate Cumulative Preferred Stock have with respect to the conversion of the securities into shares of the Company’s common stock. In our reassessment, the conversion rights did not represent a beneficial conversion feature as we had initially concluded at the time of issuance. A cumulative correction was recorded to additional paid in capital during the first quarter of 2020 in the amount of $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 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 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 the preferential accounting treatment under ASC 606. Based on such analysis of quantitative and qualitative factors, the Company has determined that neither the error nor the adoption of the preferential accounting treatment under ASC 606, in aggregate or individually, were material to any of the reporting periods affected, and no amendments to previously filed 10-Q or 10-K reports with the SEC are required.

Recently Adopted Accounting Standards

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

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

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

NOTE 3. ACQUISITIONS AND SIGNIFICANT TRANSACTIONS

Acquisition of Elevation Burger

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

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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 June 28, 2020, and December 29, 2019, the contingent purchase price payable totaled $680,000 and $633,000, respectively, which includes the accretion of interest expense at an effective interest rate of 18%.

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

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

Cash	$	10
Goodwill		521
Other intangible assets		7,140
Other assets		558
Current liabilities		(91	)
Deferred franchise fees		(758	)
Other liabilities		(187	)
Total net identifiable assets	$	7,193

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

nOTE 4. REFRANCHISING

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

Certain assets designated by the Company for refranchising meet the criteria requiring that they be classified as held for sale. As a result, the following assets have been classified as held for sale on the accompanying consolidated balance sheet as of June 28, 2020 (in thousands):

	June 28, 2020
Property, plant and equipment	$	1,213
Operating lease right of use assets		2,171
Total	$	3,384

Operating lease liabilities related to the assets classified as held for sale in the amount of $2,298,000, have been classified as current liabilities on the accompanying consolidated balance sheet as of June 28, 2020.

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During the thirteen and twenty-six weeks ended June 28, 2020, refranchising operations incurred losses of $1,006,000 and $1,544,000, respectively, compared to a gain of $467,000 and a loss of $51,000, respectively, for the corresponding periods in 2019. The refranchising results for the twenty-six weeks ended June 28, 2020 include a gain of $165,000 relating to the sale and refranchising of two restaurant locations, compared to gains of $970,000 from the sale and refranchising of two restaurant locations in the 2019 period.

During the fiscal year ended December 29, 2019, a franchisee had entered into an agreement with the Company by which it agreed to sell two existing franchised locations to the Company for its refranchising program. Additionally, during the fiscal year, the Company had completed transactions to sell the two locations to new owners. During the second quarter of 2020, as a result of COVID-19, the locations acquired from the existing franchisee became unavailable. The Company is determining alternative operating restaurants that can be used as a replacement for the new owners.

Note 5. NOTES RECEIVABLE

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

Trade notes receivable are created when a settlement is reached relating to a delinquent franchisee account and the entire balance is not immediately paid. Trade notes receivable generally include personal guarantees from the franchisee. The notes are made for the shortest time frame negotiable and will generally carry an interest rate of 6% to 7.5%. Reserve amounts, on the notes, are established based on the likelihood of collection. As of June 28, 2020, the trade notes had been fully reserved. At December 29, 2019, these trade notes receivable totaled $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 carrying value of $1,903,000, which was net of a discount of $397,000. As of June 28, 2020, and December 29, 2019, the balance of the Elevation Note was $1,788,000 and $1,814,000, respectively, which were net of discounts of $308,000 and $352,000, respectively. During the thirteen and twenty-six weeks ended June 28, 2020, the Company recognized $53,000 and $106,000, respectively, in interest income. During the thirteen and twenty-six weeks ended June 30, 2019, the Company recognized $4,200 in interest income.

Note 6. GOODWILL and other intangible assets

Goodwill

Goodwill consists of the following (in thousands):

	June 28, 2020		December 29, 2019
Goodwill:
Fatburger	$	529	$	529
Buffalo’s		5,365		5,365
Hurricane		2,772		2,772
Ponderosa and Bonanza		-		1,462
Yalla		263		263
Elevation Burger		521		521
Total goodwill	$	9,450	$	10,912

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Other Intangible Assets

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

	June 28, 2020			December 29, 2019
Trademarks:
Fatburger	$	2,135		$	2,135
Buffalo’s		27			27
Hurricane		6,840			6,840
Ponderosa and Bonanza		5,518			7,230
Yalla		1,530			1,530
Elevation Burger		4,690			4,690
Total trademarks		20,740			22,452
Franchise agreements:
Hurricane – cost		4,180			4,180
Hurricane – accumulated amortization		(643	)		(482	)
Ponderosa and Bonanza – cost		1,640			1,640
Ponderosa and Bonanza – accumulated amortization		(298	)		(243	)
Elevation Burger – cost		2,450			2,450
Elevation Burger – accumulated amortization		(512	)		(263	)
Total franchise agreements		6,817			7,282
Total Other Intangible Assets	$	27,557		$	29,734

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

Fiscal year:
2020	$	467
2021		932
2022		932
2023		932
2024		932
Thereafter		2,622
Total	$	6,817

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 June 28, 2020, specifically related to goodwill and the trademark assets. Given the uncertainty regarding the severity, duration and long-term effects of COVID-19, making estimates of the fair value of these assets at this time is significantly affected by assumptions related to ongoing operations including but not limited to the timing of lifting of restrictions on restaurant operating hours, in-house dining limitations or other restrictions that largely limited restaurants to take-out and delivery sales, customer engagement with our brands, the short-term and long-term impact on consumer discretionary spending, and overall global economic conditions.

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.

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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, as of June 28, 2020, the Company recorded goodwill impairment charges of $1,462,000 and tradename impairment charges of $1,712,000 relating to the Ponderosa and Bonanza brands.

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 7. DEFERRED INCOME

Deferred income is as follows (in thousands):

	June 28, 2020		December 29, 2019
Deferred franchise fees	$	5,493	$	5,417
Deferred royalties		359		422
Deferred advertising revenue		324		303
Total	$	6,176	$	6,142

Note 8. Income Taxes

Effective October 20, 2017, the Company entered into a Tax Sharing Agreement with FCCG that provides that FCCG will, to the extent permitted by applicable law, file consolidated federal, California and Oregon (and possibly other jurisdictions where revenue is generated, at FCCG’s election) income tax returns with the Company and its subsidiaries. The Company will pay FCCG the amount that its current tax liability would have been had it filed a separate return. To the extent the Company’s required payment exceeds its share of the actual combined income tax liability (which may occur, for example, due to the application of FCCG’s net operating loss carryforwards), the Company will be permitted, in the discretion of a committee of its board of directors comprised solely of directors not affiliated with or 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 $29,529,000 due from FCCG and its affiliates will be applied first to reduce excess income tax payment obligations to FCCG under the Tax Sharing Agreement.

For financial reporting purposes, the Company has recorded a tax benefit as of June 28, 2020, calculated as if the Company files its tax returns on a stand-alone basis. The amount receivable from FCCG determined by this calculation of $154,000 and $46,000 was added to amounts due from FCCG as of June 28, 2020 and June 30, 2019, respectively, (See Note 12.)

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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):

	June 28, 2020			December 29, 2019
Deferred tax assets (liabilities)
Deferred income	$	1,508		$	1,353
Reserves and accruals		208			208
Intangibles		(154	)		(614	)
Deferred state income tax		(135	)		(91	)
Tax credits		477			244
Share-based compensation		192			192
Property and equipment		(137	)		(137	)
Net operating loss carryforwards		1,661			894
Other		(64	)		(17	)
Total	$	3,556		$	2,032

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

	Twenty-six Weeks Ended June 28, 2020			Twenty-six Weeks Ended June 30, 2019
Current
Federal	$	(118	)	$	318
State		22			262
Foreign		233			375
		137			955
Deferred
Federal		(1,312	)		(89	)
State		(211	)		(241	)
		(1,523	)		(330	)
Total income tax (benefit) expense	$	(1,386	)	$	625

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):

	Twenty-six Weeks Ended			Twenty-six Weeks Ended
	June 28, 2020			June 30, 2019
Tax benefit at statutory rate	$	(1,681	)	$	(124	)
State and local income taxes		(150	)		14
Foreign taxes		233			375
Tax credits		(233	)		(375	)
Dividends on preferred stock		361			643
Other		84			92
Total income tax expense (benefit)	$	(1,386	)	$	625

As of June 28, 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 the 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 June 28, 2020.

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NOTE 9. LEASES

The Company has recorded seven operating leases for corporate offices and for certain restaurant properties that are in the process of being refranchised. The Company is not a guarantor to the leases for the restaurant locations. The leases have remaining lease terms ranging from nine months to seven years. Three of the leases also have options to extend the term for 5 to 10 years. The Company recognized lease expense of $720,000 and $702,000 for the twenty-six weeks ended June 28, 2020 and June 30, 2019, respectively. The Company recognized lease expense of $367,000 and $355,000 for the thirteen weeks ended June 28, 2020 and June 30, 2019, respectively. The weighted average remaining lease term of the operating leases (not including optional lease extensions) at June 28, 2020 was 5.6 years.

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

	June 28, 2020		December 29, 2019
Right of use assets	$	4,947	$	4,076
Lease liabilities	$	5,137	$	4,206

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

The contractual future maturities of the Company’s operating lease liabilities as of June 28, 2020, including anticipated lease extensions, are as follows (in thousands):

Fiscal year:
2020	$	545
2021		1,141
2022		1,183
2023		1,223
2024		1,028
Thereafter		4,737
Total lease payments		9,857
Less imputed interest		(4,720	)
Total	$	5,137

Supplemental cash flow information for the twenty-six weeks ended June 28, 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	$	412
Operating lease right of use assets obtained in exchange for new lease obligations:
Operating lease liabilities	$	2,174

Note 10. DEBT

Loan and Security Agreement

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

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The term loan under the Loan and Security Agreement was due to mature on June 30, 2020. Interest on the term loan accrued at an annual fixed rate of 20.0% and was payable quarterly. In connection with the Loan and Security Agreement, the Company issued to Lion a warrant to purchase up to 1,167,404 shares of the Company’s common stock at $0.01 per share (the “Lion Warrant”), exercisable only if the amounts outstanding under the Loan and Security Agreement were not repaid in full by June 30, 2020, as extended. If the Loan and Security Agreement was repaid in full prior to June 30, 2020, the Lion Warrant would be terminated in its entirety.

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

The Loan and Security Agreement was subsequently amended several times which allowed the Company to increase its borrowing by $3,500,000 in connection with the acquisition of Elevation Burger; extended the exercise date of the Lion Warrant to June 30, 2020; extended the due date for certain quarterly payments and imposed associated extension and other loan fees.

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

The Company recognized interest expense on the Loan and Security Agreement of $1,783,000 for the thirteen and twenty-six weeks ended June 28, 2020, which includes $212,000 for amortization of all unaccreted debt offering costs at the time of the repayment and $650,000 in penalties and fees. The Company recognized interest expense on the Loan and Security Agreement of $1,076,000 and $1,796,000 for the thirteen and twenty-six weeks ended June 30, 2019.

Elevation Note

On June 19, 2019, the Company completed the acquisition of Elevation Burger. A portion of the purchase price included the issuance to the Seller of a convertible subordinated promissory note (the “Elevation Note”) with a principal amount of $7,509,816, bearing interest at 6.0% per year and maturing in July 2026. The Elevation Note is convertible under certain circumstances into shares of the Company’s common stock at $12.00 per share. In connection with the valuation of the acquisition of Elevation Burger, the Elevation Note was recorded on the financial statements of the Company at $6,185,000, which is net of a loan discount of $1,295,000 and debt offering costs of $30,000.

As of June 28, 2020, the carrying value of the Elevation Note was $5,778,000 which is net of the loan discount of $1,008,000 and debt offering costs of $61,000. The Company recognized interest expense relating to the Elevation Note during the thirteen weeks ended June 28, 2020 in the amount of $175,000, which included amortization of the loan discount of $70,000 and amortization of $2,000 in debt offering costs. The Company recognized interest expense relating to the Elevation Note during the twenty-six weeks ended June 28, 2020 in the amount of $364,000, which included amortization of the loan discount of $141,000 and amortization of $5,000 in debt offering costs. The Company recognized interest expense of $23,000 on the Elevation Note for the thirteen and twenty-six weeks ended June 30, 2019. The effective interest rate for the Elevation Note during the twenty-six weeks ended June 28, 2020 was 12.7%.

The Elevation Note is a general unsecured obligation of Company and is subordinated in right of payment to all indebtedness of the Company arising under any agreement or instrument to which Company or any of its Affiliates is a party that evidences indebtedness for borrowed money that is senior in right of payment. FCCG has guaranteed payment of the Elevation Note.

Securitization

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

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The new notes consist of the following:

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

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

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

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

The Notes are secured by substantially all of the assets of FAT Royalty, including the equity interests in the FAT Brands Franchising Entities. The restrictions placed on the Company’s subsidiaries require that the Company’s principal and interest obligations have first priority, after the payment of the Management Fee and certain other FAT Royalty expenses (as defined in the Indenture), and amounts are segregated monthly to ensure appropriate funds are reserved to pay the quarterly principal and interest amounts due. The amount of monthly cash flow that exceeds the required monthly debt service is generally remitted to the 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 June 28, 2020, the Company was in compliance with these covenants.

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

The Notes are subject to certain financial and non-financial covenants, including a 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.

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As of June 28, 2020, the recorded balance of the Securitization Notes was $37,420,000, which is net of debt offering costs of $2,347,000 and original issue discount of $233,000. The Company recognized interest expense on the Securitization Notes of $886,000 for the thirteen weeks ended June 28, 2020, which includes $103,000 for amortization of debt offering costs and $7,000 for amortization of the original issue discount. The Company recognized interest expense on the Securitization Notes of $1,173,000 for the twenty-six weeks ended June 28, 2020, which includes $136,000 for amortization of debt offering costs and $12,000 for amortization of the original issue discount. The effective interest rate of the Securitization Notes was 9.4% for the twenty-six weeks ended June 28, 2020.

Paycheck Protection Program Loans

During the thirteen weeks ended July 28, 2020, the Company received loan proceeds in the amount of approximately $1,532,000 under the Paycheck Protection Program (the “PPP 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.

The PPP Loans relate to FAT Brands Inc. as well as five restaurant locations that are 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.

Note 11. PREFERRED STOCK

Series B Cumulative Preferred Stock

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

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

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

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

● After the first anniversary and on or prior to the second anniversary at $27.50 per share

● After the second anniversary and on or prior to the third anniversary at $26.125 per share

● After the third anniversary at $25.00 per share

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

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

● After the first anniversary and on or prior to the second anniversary at $22.00 per share

● After the second anniversary and on or prior to the third anniversary at $22.50 per share

● After the third anniversary and on or prior to the fourth anniversary at $23.00 per share

● After the fourth anniversary at $25.00 per share

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

As of June 28, 2020, there were 57,140 shares of Series B Preferred Stock outstanding.

The Company classified the Series B Preferred Stock as long-term debt because it contains an unconditional obligation requiring the Company to redeem the instruments at the maturity date (October 3, 2024) or upon the election of the holders as described above in cash. The associated Series B Warrants have been recorded as additional paid-in capital. On the issuance date, the Company allocated the proceeds between the Series B Preferred Stock and the Series B Warrants based on the relative fair values of each.

As of June 28, 2020, the net Series B Preferred Stock balance was $1,108,000 including an unaccreted debt discount of $14,000 and unamortized debt offering costs of $306,000. The Company recognized interest expense on the Series B Preferred Stock of $48,000 for the thirteen weeks ended June 28, 2020, which includes amortization of debt offering costs of $18,000. The Company recognized interest expense on the Series B Preferred Stock of $96,000 for the twenty-six weeks ended June 28, 2020, which includes accretion expense of the debt discount of $1,000 and amortization of debt offering costs of $36,000. The year-to-date effective interest rate for the Series B Preferred Stock for 2020 was 17.8%.

On July 13, 2020, the Company entered into an agreement to exchange the 34,284 outstanding Series B Warrants for 285,700 new warrants (the “Series B Offering Warrants”), pursuant to Warrant Exchange Agreements with the holders of the Series B Warrants in consideration of their consent to amend and restate the terms of the Series B Cumulative Preferred Stock .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 (See Note 20).

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

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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 June 28, 2020, 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”) 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 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 stock of the Company, representing an exchange price of $7.20 per share, which was the closing trading price of the common stock on June 26, 2018.

The Company classifies the Series A Preferred Stock as long-term debt because it contains an obligation to issue a variable number of common shares for a fixed monetary amount. As of June 28, 2020, the net Series A Preferred Stock balance was $9,925,000 which is net of an unaccreted debt discount of $65,000 and unamortized debt offering costs of $11,000.

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The Company recognized interest expense on the Series A Preferred Stock of $708,000 for the twenty-six weeks ended June 28, 2020, which includes accretion expense of $11,000 as well as $2,000 for the amortization of debt offering costs. For the thirteen weeks ended June 28, 2020, the Company recognized interest expense of $354,000, which includes accretion expense of $5,000 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 $708,000 for the twenty-six weeks ended June 30, 2019, which includes accretion expense of $11,000 as well as $2,000 for the amortization of debt offering costs. For the thirteen weeks ended June 30, 2019, the Company recognized interest expense of $354,000, which includes accretion expense of $5,500 as well as $1,000 for the amortization of the debt offering costs. The year-to-date effective interest rate for the Series A Preferred Stock for 2020 was 14.3%.

Derivative Liability Relating to the Conversion Feature of the Series A Preferred Stock

As stated above, holders of Series A Preferred Stock have the option to 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 (the “Conversion Option”). 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.

On June 8, 2020, the Conversion Option became exercisable. As of that date, the Company calculated the estimated fair value of the Conversion Option to be $2,406,000 and recorded a derivative liability in that amount, together with an offsetting reduction in Additional Paid-In Capital. As of June 28, 2020, the Company calculated the estimated fair value of the Conversion Option to be $1,142,000 and adjusted the carrying value of the derivative liability accordingly and recognized $1,264,000 as a change in the fair market value of the derivative liability.

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 cash payments. Fog Cutter Capital Group Inc., 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 as of July 13, 2020 (See Note 20).

Series A-1 Fixed Rate Cumulative 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 June 28, 2020, there were 45,000 shares of Series A-1 Preferred Stock issued and outstanding. The Series A-1 Certificate of Designation contains the following terms pertaining to the Series A-1 Preferred Stock:

Dividends. Holders of Series A-1 Preferred Stock will be entitled 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.

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

As of June 28, 2020, there were 45,000 shares of Series A-1 Preferred Stock outstanding.

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

As of June 28, 2020, the net Series A-1 Preferred Stock balance was $4,421,000 which is net of an unaccreted debt discount of $58,000 and unamortized debt offering costs of $21,000.

The Company recognized interest expense on the Series A-1 Preferred Stock of $123,000 for the twenty-six weeks ended June 28, 2020, which was net of an adjustment to the debt discount in the amount of $15,000, as well as $3,000 for the amortization of debt offering costs. The Company recognized interest expense on the Series A-1 Preferred Stock of $74,000 for the thirteen weeks ended June 28, 2020, which included recognized accretion expense of $4,000, as well as $1,000 for the amortization of debt offering costs. The Company recognized interest expense on the Series A-1 Preferred Stock of $154,000 for the twenty-six weeks ended June 30, 2019, which included recognized accretion expense of $16,000, as well as $3,000 for the amortization of debt offering costs. The Company recognized interest expense on the Series A-1 Preferred Stock of $77,000 for the thirteen weeks ended June 30, 2019, which included recognized accretion expense of $8,000, as well as $1,700 for the amortization of debt offering costs. The year-to-date effective interest rate for the Series A-1 Preferred Stock for 2020 was 5.6%.

On July 13, 2020, the Company entered into an agreement to exchange all outstanding shares of Series A-1 Preferred Stock, plus accrued dividends thereon, for shares of newly issued Series B Preferred Stock valued at $25.00 per share pursuant to a Settlement, Redemption and Release Agreement with the holders of such shares (See Note 20).

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 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 previously extended credit to FCCG pursuant to a certain Intercompany Promissory Note (the “Original Note”), dated October 20, 2017, with an initial principal balance of $11,906,000. Subsequent to the issuance of the Original Note, the Company and certain of its 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, has a five-year term with no prepayment penalties, and has a maximum capacity of $35,000,000. All additional borrowings under the Intercompany Agreement are subject to the approval of the 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 June 28, 2020, the balance receivable under the Intercompany Agreement was $29,529,000.

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During the twenty-six weeks ended June 28, 2020, the Company recorded a receivable from FCCG in the amount of $154,000 under the Tax Sharing Agreement, which was added to the intercompany receivable. During the twenty-six weeks ended June 30, 2019, the Company recorded a receivable from FCCG in the amount of $46,000 under the Tax Sharing Agreement (See Note 8).

Effective July 5, 2018, the Company made a preferred capital investment in Homestyle Dining LLC, a Delaware limited liability corporation (“HSD”) in the amount of $4.0 million (the “Preferred Interest”). 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 June 28, 2020, the balance receivable, including accrued and unpaid interest income, under the Preferred Interest was $5,200,000.

Series B Cumulative Preferred Stock

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

As of June 28, 2020, the following reportable related persons participated in the initial closing of the Company’s Preferred Offering:

● Andrew Wiederhorn, the Company’s Chief Executive Officer, acquired 20,000 Series B Units for $500,000 comprised of 20,000 shares of Series B Preferred Stock and 12,000 Series B Warrants to purchase 12,000 shares of the Company’s common stock at $8.50 per share, and

● Squire Junger, a member of the Company’s Board of Directors, acquired 5,000 Series B Units for $125,000 comprised of 5,000 shares of Series B Preferred Stock and 3,000 Series B Warrants to purchase 3,000 shares of the Company’s common stock at $8.50 per share.

● In aggregate, Mr. Wiederhorn, Mr. Junger, and other related parties acquired 33,000 Series B Units for $825,000 comprised of 33,000 shares of Series B Preferred Stock and 19,800 Series B Warrants to purchase 19,800 shares of the Company’s common stock at $8.50 per share.

Note 13. SHAREHOLDERS’ EQUITY

As of June 28, 2020, and December 29, 2019, the total number of authorized shares of common stock was 25,000,000, and there were 11,894,895 and 11,860,299 shares of common stock outstanding, respectively.

Below are the changes to the Company’s common stock during the twenty-six weeks ended June 28, 2020:

● On February 11, 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 16,360 shares of common stock at a value of $4.585 per share to the non-employee members of the board of directors as consideration for accrued directors’ fees.

● On May 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 18,236 shares of common stock at a value of $3.29 per share to the non-employee members of the board of directors as consideration for accrued directors’ fees.

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Note 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 fiscal year ended June 28, 2020 can be summarized as follows:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
Stock options outstanding at December 29, 2019		722,481		$	8.45		8.0
Grants		-			-		-
Forfeited		(127,648	)		7.60		8.3
Expired		-			-		-
Stock options outstanding at June 28, 2020		594,833		$	8.64		7.9
Stock options exercisable at June 28, 2020		296,145		$	9.85		7.7

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 $15,000 and $16,000 during the thirteen and twenty-six weeks ended June 28, 2020, respectively. The Company recognized share-based compensation expense in the amount of $78,000 and $159,000 during the thirteen and twenty-six weeks ended June 30, 2019, respectively. As of June 28, 2020, there remains $59,000 of share-based compensation expense relating to non-vested grants, which will be recognized over the remaining vesting period, subject to future forfeitures.

Note 15. WARRANTS

As of June 28, 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 stock granted to the selling agent in the Company’s initial 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 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.

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● 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 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. 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 (See Note 20).

● Warrants issued on July 3, 2018 to purchase 66,691 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 10). The Placement Agent Warrants were valued at $78,000 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 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 terminate 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 (See Note 11), to purchase 34,284 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. The outstanding Series B Warrants were valued at $21,000 at the date of grant (See Note 20).

The Company’s warrant activity for the thirteen weeks ended June 28, 2020 is as follows:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
Warrants outstanding at December 29, 2019		2,091,652		$	3.57		4.0
Grants		-			-		-
Exercised		-			-		-
Forfeited		(1,167,404	)		0.01		4.8
Expired		-			-		-
Warrants outstanding at June 28, 2020		924,248		$	8.08		3.1
Warrants exercisable at June 28, 2020		877,373		$	8.08		3.0

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The range of assumptions used to establish the value of the warrants using the Black-Scholes valuation model 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

Note 16. DIVIDENDS ON COMMON STOCK

Our Board of Directors did not declare a dividend during the twenty-six weeks ended June 28, 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. No fractional shares were issued, instead the Company paid stockholders cash-in-lieu of shares.

Note 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, and Daniel 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, 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 (collectively, the “Original Defendants”) were named as defendants in a putative securities class action lawsuit entitled Rojany v. FAT Brands, Inc., Case No. BC708539 (the “Rojany Case”), in the Superior Court of the State of California, County of Los Angeles. On July 31, 2018, the Rojany Case was designated as complex, pursuant to Rule 3.400 of the California Rules of Court and assigned the matter to the Complex Litigation Program. On August 2, 2018, the Original Defendants were named defendants in a second putative class action lawsuit, Alden v. FAT Brands, Case No. BC716017 (the “Alden Case”), filed in the same court. On September 17, 2018, the Rojany and Alden Cases were consolidated under the Rojany Case number. On October 10, 2018, plaintiffs Eric Rojany, Daniel Alden, Christopher Hazelton-Harrington and Byron Marin (“Plaintiffs”) filed a First Amended Consolidated Complaint against 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. On November 13, 2018, Defendants filed a Demurrer to First Amended Consolidated Complaint. On January 25, 2019, the Court sustained Defendants’ Demurrer to First Amended Consolidated Complaint with Leave to Amend in Part. Plaintiffs filed a Second Amended Consolidated Complaint on February 25, 2019. On March 27, 2019, Defendants filed a Demurrer to the Second Amended Consolidated Complaint. On July 31, 2019, the Court sustained Defendants’ Demurrer to the Second Amended Complaint in Part, narrowing the scope of the case. Defendants filed their Answer to the Second Amended Consolidated Complaint on November 12, 2019. On January 29, 2020, Plaintiffs filed a Motion for Class Certification. Plaintiffs’ Motion for Class Certification is fully briefed, and the hearing on Plaintiffs’ Motion for Class Certification is set for September 10, 2020. Defendants dispute Plaintiffs’ allegations and will continue to vigorously defend themselves in this litigation.

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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, the Original Defendants were named as defendants in a putative securities class action lawsuit entitled Vignola v. FAT Brands, Inc., Case No. 2:18-cv-07469-PSG-PLA, in the United States District Court for the Central District of 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 Original Defendants. The allegations and claims for relief asserted in Vignola are substantively identical to those asserted in the Rojany Case. Defendants filed a Motion to Dismiss First Amended Class Action Complaint, or, in the Alternative, to Stay the Action In Favor of a Prior Pending Action. On June 14, 2019, the Court denied Defendants’ motion to stay but granted Defendants’ motion to dismiss the First Amended Class Action Complaint, with Leave to Amend. Lead Plaintiffs filed a Second Amended Class Action Complaint 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 Motion 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. The parties are in the process of documenting this settlement.

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 the Rojany and Vignola matters. These proceedings are ongoing 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.

Operating Leases

The Company leases corporate headquarters located in Beverly Hills, California comprising 6,137 square feet of space, pursuant to a lease that expires on 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. As part of the acquisition of Elevation Burger, the Company assumed a lease of 5,057 square feet of space in Falls Church, Virginia that expires on 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 Yalla 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 18. geographic information AND MAJOR FRANCHISEES

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

	Thirteen Weeks Ended				Twenty-six Weeks Ended
	June 28, 2020		June 30, 2019		June 28, 2020		June 30, 2019
United States	$	2,564	$	5,059	$	6,273	$	9,070
Other countries		543		836		1,257		1,698
Total revenues	$	3,107	$	5,895	$	7,530	$	10,768

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

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During the twenty-six weeks ended June 28, 2020 and June 30, 2019, no individual franchisee accounted for more than 10% of the Company’s revenues.

NOTE 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 20. SUBSEQUENT EVENTS

Pursuant to FASB ASC 855, Management has evaluated all events and transactions that occurred from June 28, 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:

Underwritten Public Offering

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 Company also granted the underwriters an option to purchase, for a period of 45 calendar days, up to an additional 54,000 shares Series B Preferred Stock and 270,000 of the 2020 Series B Warrants. 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 securities sold in the Offering.

In connection with the Offering, on July 15, 2020 the Company filed with the Secretary of State of Delaware an Amended and Restated Certificate of Designation of Rights and Preferences of Series B Cumulative Preferred Stock, 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 Warrants (the “Warrant Agency Agreement”). The Warrant Agency Agreement sets forth the terms of the Warrants and includes the form of Warrant Certificate issued to investors in the Offering. The Warrants are 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, Fog Cutter Capital Group Inc., and will expire on July 16, 2025.

The Offering closed on July 16, 2020 with net proceeds to the Company of $8,211,000, which was net of $790,000 in underwriting and offering costs.

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Exchange Transactions

On July 13, 2020, the Company entered into the following additional transactions:

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 entered into an agreement to redeem 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 entered into an agreement to exchange 15,000 outstanding shares of Series A Preferred Stock, plus accrued dividends thereon, held by Fog Cutter Capital Group, Inc. at face value for shares of Series B Preferred Stock valued at $25.00 per share.
4.	The Company entered into an agreement to exchange all outstanding shares of Series A-1 Fixed Rate Cumulative Preferred Stock, plus accrued dividends thereon, for shares of Series B Preferred Stock valued at $25.00 per share pursuant to a Settlement, Redemption and Release Agreement with the holders of such shares; and
5.	The Company entered into an agreement to exchange 34,284 outstanding Series B Warrants issued in October 2019 for 285,700 Warrants (the same class issued in the offering), pursuant to Warrant Exchange Agreements with the holders of the warrants in consideration of their consent to amend and restate the terms of the Series B Cumulative Preferred Stock.

The transactions described above were 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.

Warrant Purchase

On July 30, 2020, the Company entered into a warrant purchase agreement (the “Lender Warrant Purchase Agreement”) to purchase the Lender Warrant for $249,500. Issued by the Company on July 3, 2018, the Lender Warrant grants 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 may be exercised at any time or times beginning on the issue date and ending on the five-year anniversary of the issue date (See Note 15).

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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 twenty-six weeks ended June 28, 2020 and June 30, 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, 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 April 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.

COVID-19

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

As of June 28, 2020, the Company recorded goodwill impairment charges of $1,462,000 and tradename impairment charges of $1,712,000 relating to the Ponderosa 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 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 “Offering”). As of June 28, 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 June 28, 2020, the Company owns eight restaurant brands: Fatburger, Buffalo’s Cafe, Buffalo’s Express, Hurricane Grill & Wings, Ponderosa and Bonanza Steakhouses, Elevation Burger and Yalla Mediterranean that franchise over 375 locations 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.

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 the thirteen weeks and twenty-six weeks ended June 28, 2020 and June 30, 2019. Except for the short period subsequent to its acquisition, the results of Elevation Burger were not included in the operations for the periods ended June 30, 2019 because that subsidiary was acquired by the Company on June 19, 2019.

(In thousands)

	Thirteen Weeks Ended						Twenty-six Weeks Ended
	June 28, 2020			June 30, 2019			June 28, 2020			June 30, 2019
Statement of operations data:
Revenues
Royalties	$	2,213		$	3,663		$	5,522		$	7,127
Franchise fees		273			994			449			1,306
Store opening fees		-			184			-			289
Advertising fees		613			1,031			1,544			2,008
Management fees and other income		8			23			15			38
Total revenues		3,107			5,895			7,530			10,768
Costs and expenses
General and administrative expenses		4,104			3,106			7,636			5,820
Advertising expenses		613			1,031			1,544			2,008
Impairment of assets		3,174			-			3,174			-
Refranchising restaurant losses (gains)		1,006			(467	)		1,544			51
Costs and expenses		8,897			3,670			13,898			7,879
(Loss) income from operations		(5,790	)		2,225			(6,368	)		2,889
Other income (expense), net		450			(1,389	)		(1,639	)		(3,482	)
(Loss) income before income tax expense		(5,340	)		836			(8,007	)		(593	)
Income tax (benefit) expense		(1,089	)		1,344			(1,386	)		625
Net loss	$	(4,251	)	$	(508	)	$	(6,621	)	$	(1,218	)

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For the twenty-six weeks ended June 28, 2020 and June 30, 2019:

Net Loss - Net loss for the twenty-six weeks ended June 28, 2020 totaled $6,621,000 consisting of revenues of $7,530,000 less costs and expenses of $13,898,000, other expense of $1,639,000 and income tax benefit of $1,386,000. Net loss for the twenty-six weeks ended June 30, 2019 totaled $1,218,000 consisting of revenues of $10,768,000 less costs and expenses of $8,849,000, other expense of $2,512,000 and income tax expense of $625,000.

Revenues - Revenues consist of royalties, franchise fees, store opening fees, advertising fees and other revenues. We had revenues of $7,530,000 for the twenty-six weeks ended June 28, 2020 compared to $10,768,000 for the twenty-six weeks ended June 30, 2019. The decrease of $3,238,000 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 franchise and store opening fees (See Note 2 in the accompanying financial statements).

Costs and Expenses – Costs and expenses consist primarily of general and administrative costs, advertising expense impairment charges and refranchising restaurant losses. Our costs and expenses increased from $7,879,000 in the first half of 2019 to $13,898,000 in the first half of 2020.

For the twenty-six weeks ended June 28, 2020, our general and administrative expenses totaled $7,636,000. For the twenty-six weeks ended June 30, 2019, our general and administrative expenses totaled $5,820,000. The increase in the amount of $1,875,000 was primarily the result of an increase in provisions for bad debts in the amount of $1,160,000 related to the effects of the COVID-19 pandemic; an increase in depreciation and amortization of $222,000; an increase in professional fees of $202,000 and an increase in public company related expenses of $180,000.

Advertising expenses totaled $1,544,000 during the first half of 2020 with $2,008,000 during the comparable prior year period, representing a decrease in advertising expense of $464,000. 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 June 28, 2020. As a result of this analysis, as of June 28, 2020, the Company recorded goodwill impairment charges of $1,462,000 and tradename impairment charges of $1,712,000 relating to the Ponderosa and Bonanza brands. There were no impairment charges in the comparable period of 2019.

During the twenty-six weeks ended June 28, 2020, our refranchising efforts resulted in a net loss in the amount of $1,544,000 compared to $51,000 for the twenty-six weeks ended June 30, 2019. The 2019 period included a gain on the sale and refranchising of two locations in the amount of $970,000 while gains on sales during 2020 were $165,000.

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Other Expense – Other net expense for the twenty-six weeks ended June 28, 2020 totaled $1,639,000 and consisted primarily of net interest expense of $2,839,000, which was partially offset by income in the amount of $1,264,000 from the change in fair value of the derivative liability relating to the conversion feature of the Series A Preferred Stock. Other net expense for the twenty-six weeks ended June 30, 2019 totaled $3,482,000 and consisted primarily of net interest expense of $3,382,000.

Income Tax (Benefit) Expense – We recorded an income tax benefit of $1,386,000 for the twenty-six weeks ended June 28, 2020 compared to income tax expense of $625,000 for the twenty-six weeks ended June 30, 2019. These tax results were based on a net loss before taxes of $6,621,000 for 2020 compared to net loss before taxes of $593,000 for 2019. Non-deductible expenses, such as dividends paid on preferred stock, contributed to the higher effective tax rates.

For the thirteen weeks ended June 28, 2020 and June 30, 2019:

Net Loss - Net loss for the thirteen weeks ended June 28, 2020 totaled $4,251,000 consisting of revenues of $3,107,000 less costs and expenses of $8,897,000, other income of $450,000 and income tax benefit of $1,089,000. Net loss for the thirteen weeks ended June 30, 2019 totaled $508,000 consisting of revenues of $5,895,000 less costs and expenses of $3,670,000, other expense of $1,389,000 and income tax expense of $1,344,000.

Revenues - Revenues consist of royalties, franchise fees, store opening fees, advertising fees and other revenue. We had revenues of $3,107,000 for the thirteen weeks ended June 28, 2020 compared to $5,895,000 for the thirteen weeks ended June 30, 2019. The decrease of $2,788,000 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 financial statements). The majority of the decrease in recognized franchise fees was primarily the result of franchisee forfeitures of non-refundable deposits during the 2019 period.

Costs and Expenses – Costs and expenses consist primarily of general and administrative costs, advertising expense and refranchising restaurant gains or losses. Our costs and expenses increased from $3,670,000 in the second quarter of 2019 to $8,897,000 in the second quarter of 2020.

For the thirteen weeks ended June 28, 2020, our general and administrative expenses totaled $4,104,000. For the thirteen weeks ended June 30, 2019, our general and administrative expenses totaled $3,106,000. The increase in the amount of $998,000 was primarily the result of an increase in provisions for bad debts in the amount of $907,000 related to the effects of COVID-19; an increase in depreciation and amortization of $122,000; an increase in professional fees of $144,000 and an increase in public company related expenses of $88,000. These increases were partially offset by a decrease in travel related expenses of $151,000

Advertising expenses totaled $613,000 during the second quarter of 2020, compared with $1,031,000 during the prior year period, representing a decrease in advertising expense of $418,000. 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 June 28, 2020. As a result of this analysis, as of June 28, 2020, the Company recorded goodwill impairment charges of $1,462,000 and tradename impairment charges of $1,712,000 relating to the Ponderosa and Bonanza brands. There were no impairment charges in the comparable period of 2019.

During the second quarter of 2020, our refranchising efforts resulted in a net loss in the amount of $1,005,000 compared to a gain of $467,000 for the thirteen weeks ended June 30, 2019. The 2019 period included a gain on the sale and refranchising of two locations in the amount of $970,000 while gains on sales during 2020 period were $165,000.

Other Income (Expense) – Other income for the thirteen weeks ended June 28, 2020 totaled $450,000 and consisted primarily of income of $1,264,000 from the change in fair value of the derivative liability relating to the conversion feature of the Series A Preferred Stock, which was partially offset by net interest expense of $765,000. Other net expense for the thirteen weeks ended June 30, 2019 totaled $1,389,000 and consisted primarily of net interest expense of $1,265,000.

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Income Tax (Benefit) Expense – We recorded an income tax benefit for the thirteen weeks ended July 28, 2020 of $1,089,000 and a provision for income taxes of $1,344,000 for the thirteen weeks ended June 30, 2019. These tax results were based on a net loss before taxes of $5,340,000 for 2020 compared to net income before taxes of $836,000 for 2019. Non-deductible expenses, such as dividends paid on preferred stock, contributed to the higher effective tax rates.

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 thirteen weeks ended June 28, 2020 consisted of cash 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 June 28, 2020, we had cash and restricted cash of $3,488,000. 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 an indenture and the supplement thereto (collectively, the “Indenture”). Net proceeds from the issuance of the Securitization Notes were $37,314,000, which consists of the combined face amount of $40,000,000, net of discounts of $246,000 and debt offering costs of $2,440,000 (See “Liquidity” in Note 1. Organization and Relationship in the accompanying consolidated financial statements). A portion of the proceeds from the Securitization was used to repay the remaining $26,771,000 in outstanding balance under the Loan and Security Agreement and to pay the debt offering costs related to the Securitization. The remaining proceeds from the Securitization will be used for working capital.

During the thirteen weeks ended June 28, 2020, as a result of COVID-19, the Company received proceeds from the Paycheck Protection Program administered by the Small Business Administration. These loan proceeds totaled $1,532,000 million and relate to FAT Brands Inc. as well as five restaurant locations that are part of the Company’s refranchising program.

While we expect the COVID-19 pandemic to negatively impact our business, results of operations, and financial position, the related financial impact cannot be reasonably estimated at this time. However, we believe that the working capital from the Securitization, Series B Preferred Stock Offering, and PPP proceeds, combined with royalties and franchise fees collected from the limited operations of our franchisees, and disciplined management of our operating expenses will be sufficient to meet our current liquidity needs.

Comparison of Cash Flows

Our cash and restricted cash balance was $3,488,000 as of June 28, 2020, compared to $25,000 as of December 29, 2019.

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The following table summarize key components of our consolidated cash flows for the twenty-six weeks ended June 28, 2020 and June 30, 2019:

(In thousands)

For the Fiscal Years Ended

	June 28, 2020			June 30, 2019
Net cash used in operating activities	$	(3,994	)	$	(984	)
Net cash used in investing activities		(6,326	)		(5,587	)
Net cash provided by financing activities		13,783			6,458
Increase (decrease) in cash flows	$	3,463		$	(113	)

Operating Activities

Net cash used in operating activities was $3,994,000 during the twenty-six weeks ended June 28, 2020 compared to $984,000 for the same period of 2019. Our net loss in 2020 was $6,621,000 compared to a net loss in 2019 of $1,218,000. The adjustments to reconcile these net losses to net cash used in operating activities were $2,627,000 in 2020 compared to $234,000 in 2019. The primary components of the adjustments included:

● A $386,000 positive adjustment to cash due to an increase in accounts payable and accrued expenses of $659,000 compared to an increase of $2,337,000 in 2019;

● A positive adjustment to cash due to reserves for bad debts totaling $1,069,000 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 $3,174,000 due to impairment charges recorded during the twenty-six weeks ended June 28, 2020. There were no impairments recorded during the 2019 period;

● A positive 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 $705,000 compared to $1,388,000 in 2019;

● A positive adjustment to cash due to an increase in dividends payable on preferred stock of $889,000 compared to $577,000 in 2019;

● A positive adjustment to cash due to an increase in deferred income of $33,000 compared to a decrease of $1,335,000 in 2019;

● A negative adjustment to cash due to an increase in accrued interest income due from an affiliate in the amount of $1,554,000 in 2020 compared to $623,000 in the 2019 period;

● 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 $1,261,000. There was no comparable value in 2019; and

● A negative adjustment to cash due to a decrease in accrued interest payable of $462,000 compared to a decrease of $1,185,000 in 2019.

Investing Activities

Net cash used in investing activities totaled $6,326,000 during the twenty-six weeks ended June 28, 2020 compared to a cash used of $5,587,000 during the same period of 2019. During 2020, we made advances to affiliates in the amount of $7,040,000 compared to advances of $4,091,000 during 2019. The Company invested cash of $2,332,000 in 2019 for the acquisition of Elevation Burger.

Financing Activities

Net cash from financing activities totaled $13,783,000 during the twenty-six weeks ended June 28, 2020 compared to $6,458,000 during the same period of 2019. Proceeds from borrowings were $15,750,000 higher in 2020 than in 2019. Our repayments of borrowings were $7,807,000 higher in 2020 than in 2019.

Dividends

Our Board of Directors did not declare any dividends during the twenty-six weeks ended June 28, 2020.

On February 7, 2019, our Board of Directors declared a stock dividend 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 interests based on the market value of the common stock on the record date.

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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.

Securitization

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”).

The new notes consist of the following:

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

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

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

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

The Notes are secured by substantially all of the assets of FAT Royalty, including the equity interests in the FAT Brands Franchising Entities. The restrictions placed on the Company’s subsidiaries require that the Company’s principal and interest obligations have first priority, after the payment of the Management Fee and certain other FAT Royalty expenses (as defined in the Indenture), and amounts are segregated monthly to ensure appropriate funds are reserved to pay the quarterly principal and interest amounts due. The amount of monthly cash flow that exceeds the required monthly debt service is generally remitted to the 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 or the securities laws of any jurisdiction. No Notes or any interest or participation thereof may be reoffered, resold, pledged or otherwise transferred unless such Note meets certain requirements as described in the Indenture.

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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.

Capital Expenditures

As of June 28, 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 is 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. Unamortized non-refundable deposits collected in relation to the sale of franchises are recorded as deferred franchise fees.

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

Store opening fees – Prior to September 29, 2019, 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 (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.

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 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. The Company recorded impairment charges in the amount of $3,174,000 relating to goodwill and other intangible assets as of June 28, 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 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.

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

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

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

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 June 28, 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 re-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 June 28, 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, and Daniel 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, 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 (collectively, the “Original Defendants”) were named as defendants in a putative securities class action lawsuit entitled Rojany v. FAT Brands, Inc., Case No. BC708539 (the “Rojany Case”), in the Superior Court of the State of California, County of Los Angeles. On July 31, 2018, the Rojany Case was designated as complex, pursuant to Rule 3.400 of the California Rules of Court and assigned the matter to the Complex Litigation Program. On August 2, 2018, the Original Defendants were named defendants in a second putative class action lawsuit, Alden v. FAT Brands, Case No. BC716017 (the “Alden Case”), filed in the same court. On September 17, 2018, the Rojany and Alden Cases were consolidated under the Rojany Case number. On October 10, 2018, plaintiffs Eric Rojany, Daniel Alden, Christopher Hazelton-Harrington and Byron Marin (“Plaintiffs”) filed a First Amended Consolidated Complaint against 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. On November 13, 2018, Defendants filed a Demurrer to First Amended Consolidated Complaint. On January 25, 2019, the Court sustained Defendants’ Demurrer to First Amended Consolidated Complaint with Leave to Amend in Part. Plaintiffs filed a Second Amended Consolidated Complaint on February 25, 2019. On March 27, 2019, Defendants filed a Demurrer to the Second Amended Consolidated Complaint. On July 31, 2019, the Court sustained Defendants’ Demurrer to the Second Amended Complaint in Part, narrowing the scope of the case. Defendants filed their Answer to the Second Amended Consolidated Complaint on November 12, 2019. On January 29, 2020, Plaintiffs filed a Motion for Class Certification. Plaintiffs’ Motion for Class Certification is fully briefed, and the hearing on Plaintiffs’ Motion for Class Certification is set for September 10, 2020. Defendants dispute Plaintiffs’ allegations and will continue to vigorously defend themselves in this litigation.

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, the Original Defendants were named as defendants in a putative securities class action lawsuit entitled Vignola v. FAT Brands, Inc., Case No. 2:18-cv-07469-PSG-PLA, in the United States District Court for the Central District of 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 Original Defendants. The allegations and claims for relief asserted in Vignola are substantively identical to those asserted in the Rojany Case. Defendants filed a Motion to Dismiss First Amended Class Action Complaint, or, in the Alternative, to Stay the Action In Favor of a Prior Pending Action. On June 14, 2019, the Court denied Defendants’ motion to stay but granted Defendants’ motion to dismiss the First Amended Class Action Complaint, with Leave to Amend. Lead Plaintiffs filed a Second Amended Class Action Complaint 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 Motion 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. The parties are in the process of documenting this settlement.

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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 the Rojany and Vignola matters. These proceedings are ongoing 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 such factors discussed 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 May 12, 2020, the Company issued a total of 18,236 shares of common stock at a value of $3.29 per share to the non-employee members of the board of directors as consideration for accrued directors’ fees.

The issuance of these shares to the directors are 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.

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
Number	Description	Form	Exhibit	Filing Date	Herewith
10.1	Intercompany Revolving Credit Agreement, dated April 24, 2020, by and between FAT Brands Inc. and Fog Cutter Capital Group, Inc.	10-K	10.11	04/28/2020
31.1	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
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
101.INS	XBRL Instance Document				X (Furnished)
101.SCH	XBRL Taxonomy Extension Schema Document				X (Furnished)
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document				X (Furnished)
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document				X (Furnished)
101.LAB	XBRL Taxonomy Extension Label Linkbase Document				X (Furnished)
101.PRE	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.
August 6, 2020	By	/s/ Andrew A. Wiederhorn
		Andrew A. Wiederhorn
		President and Chief Executive Officer
		(Principal Executive Officer)
August 6, 2020	By	/s/ Rebecca D. Hershinger
		Rebecca D. Hershinger
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

I, Andrew A. Wiederhorn, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of FAT Brands Inc.:
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 6, 2020	/s/ Andrew A. Wiederhorn
	Andrew A. Wiederhorn
	President and Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

I, Rebecca D. Hershinger, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of FAT Brands Inc.:
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 6, 2020	/s/ Rebecca D. Hershinger
	Rebecca D. Hershinger
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATIONS OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Each of the undersigned hereby certifies, in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of FAT Brands Inc., that, to his or her knowledge, the Quarterly Report of FAT Brands Inc. on Form 10-Q for the period ended June 28, 2020 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operation of the company.

August 6, 2020	By	/s/ Andrew A. Wiederhorn
		Andrew A. Wiederhorn
		President and Chief Executive Officer
		(Principal Executive Officer)
August 6, 2020	By	/s/ Rebecca D. Hershinger
		Rebecca D. Hershinger
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

A signed original of this written statement required by Section 906 has been provided to FAT Brands Inc. and will be retained by FAT Brands Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 28, 2020	Aug. 03, 2020
Cover [Abstract]
Entity Registrant Name	Fat Brands, Inc
Entity Central Index Key	0001705012
Document Type	10-Q
Document Period End Date	Jun. 28, 2020
Amendment Flag	false
Current Fiscal Year End Date	--12-27
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Non-accelerated Filer
Entity Small Business Flag	true
Entity Emerging Growth Company	true
Entity Ex Transition Period	true
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		11,894,895
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2020

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Jun. 28, 2020	Dec. 29, 2019
Current assets
Cash	$ 1,741	$ 25
Restricted cash	1,347
Accounts receivable, net of allowance for doubtful accounts of $470 and $595, as of June 28, 2020 and December 29, 2019, respectively	2,469	4,144
Trade notes receivable, net of allowance for doubtful accounts of $103 and $37 as of June 28, 2020 and December 29, 2019, respectively	204	262
Assets classified as held for sale	3,384	5,128
Other current assets	985	929
Total current assets	10,130	10,488
Non-current restricted cash	400
Notes receivable - noncurrent, net of allowance for doubtful accounts of $270 and $112, as of June 28, 2020 and December 29, 2019, respectively	1,584	1,802
Due from affiliates	34,729	25,967
Deferred income taxes	3,556	2,032
Operating lease right of use assets	2,776	860
Goodwill	9,450	10,912
Other intangible assets, net	27,557	29,734
Other assets	708	755
Total assets	90,890	82,550
Current liabilities
Accounts payable	7,243	7,183
Deferred income, current portion	930	895
Accrued expenses	6,192	6,013
Accrued advertising	543	762
Accrued interest payable	806	1,268
Dividend payable on preferred shares (includes amounts due to related parties of $223 and $149 as of June 28, 2020 and December 29, 2019, respectively)	2,110	1,422
Liabilities related to assets classified as held for sale	2,298	3,325
Current portion of operating lease liability	368	241
Current portion of long-term debt	661	24,502
Total current liabilities	21,151	45,611
Deferred income - noncurrent	5,246	5,247
Acquisition purchase price payable	4,259	4,504
Preferred shares, net	15,456	15,327
Deferred dividend payable on preferred shares (includes amounts due to related parties of $129 and $99 as of June 28, 2020 and December 29, 2019, respectively)	828	628
Operating lease liability, net of current portion	2,471	639
Long-term debt, net of current portion	43,925	5,216
Derivative liability from conversion feature of preferred shares	1,142
Total liabilities	94,478	77,172
Commitments and contingencies (Note 17)
Stockholders' equity
Common stock, $.0001 par value; 25,000,000 shares authorized; 11,894,895 and 11,860,299 shares issued and outstanding at June 28, 2020 and December 29, 2019, respectively	9,069	11,414
Accumulated deficit	(12,657)	(6,036)
Total stockholders' equity	(3,588)	5,378
Total liabilities and stockholders' equity	$ 90,890	$ 82,550

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Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Jun. 28, 2020	Dec. 29, 2019
Statement of Financial Position [Abstract]
Accounts receivable, allowance for doubtful accounts	$ 470	$ 595
Notes receivable, net of allowance	103	37
Notes receivable - noncurrent, net of allowance for doubtful accounts	270	112
Dividends payable to related parties, current	223	149
Dividends payable to related parties, noncurrent	$ 129	$ 99
Common stock, par value	$ 0.0001	$ 0.0001
Common stock, shares authorized	25,000,000	25,000,000
Common stock, shares issued	11,894,895	11,860,299
Common stock, shares outstanding	11,894,895	11,860,299

XML

Consolidated Statements of Operations (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 28, 2020	Jun. 30, 2019	Jun. 28, 2020	Jun. 30, 2019
Revenue
Royalties	$ 2,213	$ 3,663	$ 5,522	$ 7,127
Franchise fees	273	994	449	1,306
Store opening fees		184		289
Advertising fees	613	1,031	1,544	2,008
Management fees and other income	8	23	15	38
Total revenue	3,107	5,895	7,530	10,768
Costs and expenses
General and administrative expense	4,104	3,106	7,636	5,820
Impairment of assets	3,174		3,174
Refranchising loss (gain)	1,006	(467)	1,544	51
Advertising expense	613	1,031	1,544	2,008
Total costs and expenses	8,897	3,670	13,898	7,879
(Loss) income from operations	(5,790)	2,225	(6,368)	2,889
Other income (expense), net
Interest expense, net	(289)	(834)	(1,911)	(2,520)
Interest expense related to preferred shares	(476)	(431)	(928)	(862)
Change in fair value-derivative liability	1,264		1,264
Other expense, net	(49)	(124)	(64)	(100)
Total other income (expense), net	450	(1,389)	(1,639)	(3,482)
(Loss) income before income tax expense	(5,340)	836	(8,007)	(593)
Income tax (benefit) expense	(1,089)	1,344	(1,386)	625
Net loss	$ (4,251)	$ (508)	$ (6,621)	$ (1,218)
Basic and diluted loss per common share	$ (0.36)	$ (0.04)	$ (0.56)	$ (0.10)
Basic and diluted weighted average shares outstanding	11,886	11,726	11,878	11,726
Cash dividends declared per common share

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Consolidated Statements of Stockholders' Equity (Unaudited) - USD ($) $ in Thousands	Common Stock [Member]	Par Value [Member]	Additional Paid-In Capital [Member]	Accumulated Deficit [Member]	Total
Balance, Beginning at Dec. 30, 2018	$ 10,757	$ 1	$ 10,756	$ (5,018)	$ 5,739
Balance, Beginning, shares at Dec. 30, 2018	11,546,589
Net loss				(1,218)	(1,218)
Common stock dividend
Common stock dividend, shares	245,376
Cash paid in lieu of fractional shares	$ (2)		(2)		(2)
Issuance of common stock in lieu of cash directors fees payable	$ 180		180		180
Issuance of common stock in lieu of cash directors fees payable, shares	34,800
Share-based compensation	$ 159		159		159
Balance, Ending at Jun. 30, 2019	$ 11,094	1	11,093	(6,236)	4,858
Balance, Ending, shares at Jun. 30, 2019	11,826,765
Balance, Beginning at Mar. 31, 2019	$ 10,926	1	10,925	(5,728)	5,198
Balance, Beginning, shares at Mar. 31, 2019	11,807,349
Net loss				(508)	(508)
Issuance of common stock in lieu of cash directors fees payable	$ 90		90		90
Issuance of common stock in lieu of cash directors fees payable, shares	19,416
Share-based compensation	$ 78		78		78
Balance, Ending at Jun. 30, 2019	$ 11,094	1	11,093	(6,236)	4,858
Balance, Ending, shares at Jun. 30, 2019	11,826,765
Balance, Beginning at Dec. 29, 2019	$ 11,414	1	11,413	(6,036)	5,378
Balance, Beginning, shares at Dec. 29, 2019	11,860,299
Net loss				(6,621)	(6,621)
Issuance of common stock in lieu of cash directors fees payable	$ 135		135		135
Issuance of common stock in lieu of cash directors fees payable, shares	34,596
Share-based compensation	$ 16		16		16
Fair value of derivative liability	(2,406)		(2,406)		(2,406)
Correction of recorded conversion rights associated with Series A-1 preferred shares	(90)		(90)		(90)
Balance, Ending at Jun. 28, 2020	$ 9,069	1	9,068	(12,657)	(3,588)
Balance, Ending, shares at Jun. 28, 2020	11,894,895
Balance, Beginning at Mar. 29, 2020	$ 11,414	1	11,413	(8,406)	3,008
Balance, Beginning, shares at Mar. 29, 2020	11,876,659
Net loss				(4,251)	(4,251)
Issuance of common stock in lieu of cash directors fees payable	$ 60		60		60
Issuance of common stock in lieu of cash directors fees payable, shares	18,236
Share-based compensation	$ 1		1		1
Fair value of derivative liability	(2,406)		(2,406)		(2,406)
Balance, Ending at Jun. 28, 2020	$ 9,069	$ 1	$ 9,068	$ (12,657)	$ (3,588)
Balance, Ending, shares at Jun. 28, 2020	11,894,895

XML

Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Jun. 28, 2020	Jun. 30, 2019
Cash flows from operating activities
Net loss	$ (6,621)	$ (1,218)
Adjustments to reconcile net loss to net cash used in operations:
Deferred income taxes	(1,524)	(330)
Depreciation and amortization	500	271
Share-based compensation	16	159
Accretion of loan fees and interest	412	1,093
Change in operating right of use assets	399	370
Gain on sale refranchised restaurants	(165)	(970)
Accretion of preferred shares	38	32
Accretion of purchase price liability	255	263
Impairment of assets	3,174
Fair value of derivative liability	(1,264)
Provision for (recovery of) bad debts	1,069	(91)
Change in operating assets and liabilities:
Accounts receivable	856	(456)
Trade notes receivable		22
Prepaid expenses and other current assets	(102)	681
Accounts payable and accrued expense	386	2,337
Accrued advertising	(220)	(352)
Accrued interest receivable from affiliate	(1,554)	(623)
Tax Sharing Agreement liability	(154)	(46)
Accrued interest payable	(462)	(1,185)
Deferred income	33	(1,335)
Dividend payable on preferred shares	889	577
Other	42	(183)
Total adjustments	2,627	234
Net cash used in operating activities	(3,994)	(984)
Cash flows from investing activities
Additions to property and equipment	(52)	(34)
Payments received on loans receivable	68
Proceeds from sale of refranchised restaurants	698	870
Change in due from affiliates	(7,040)	(4,091)
Acquisition of Elevation Burger, net of cash acquired		(2,332)
Net cash used in investing activities	(6,326)	(5,587)
Cash flows from financing activities
Proceeds from borrowings and associated warrants, net of issuance costs	38,803	23,053
Repayments of borrowings	(24,224)	(16,417)
Payments made on acquisition purchase price liability	(500)
Dividends paid in cash		(2)
Change in operating lease liabilities	(296)	(176)
Net cash provided by financing activities	13,783	6,458
Net increase (decrease) in cash and restricted cash	3,463	(113)
Cash and restricted cash at beginning of period	25	653
Cash and restricted cash at end of period	3,488	540
Supplemental disclosures of cash flow information:
Cash paid for interest	2,526	3,436
Cash paid for income taxes	17	135
Supplemental disclosure of non-cash financing and investing activities:
Issuance of common stock in lieu of cash directors fees payable	135	180
Income taxes receivable adjusting amounts due from affiliates	$ (154)	$ (46)

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Organization and Relationships

6 Months Ended

Jun. 28, 2020

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Organization and Relationships

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”). The Company’s common stock trades on the Nasdaq Capital Market under the symbol “FAT.” As of June 28, 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 June 28, 2020, the Company owns and franchises eight restaurant brands: Fatburger, Buffalo’s Cafe, Buffalo’s Express, Hurricane Grill & Wings, Ponderosa Steakhouses, Bonanza Steakhouses, Yalla Mediterranean and Elevation Burger. Combined, as of June 28, 2020, these brands franchise over 375 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 a loss from operations of $6,368,000 during the twenty-six weeks ended June 28, 2020 and income from operations of $2,889,000 for the twenty-six weeks ended June 30, 2019, respectively. The Company recognized net losses of $6,621,000 and $1,218,000 during the twenty-six weeks ended June 28, 2020 and June 30, 2019, respectively. The reduction in earnings is primarily due 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 of $246,000 and debt offering costs of $2,440,000 (See Note 10). A portion of the proceeds from the Securitization was used to repay the remaining $26,771,000 in outstanding balance under the Loan and Security Agreement and to pay the Securitization debt offering costs. The remaining proceeds from the Securitization 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 are part of the Company’s refranchising program.

Subsequent to the end of the second quarter, 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 Company also granted the underwriters an option to purchase, for a period of 45 calendar days, up to an additional 54,000 shares Series B Preferred Stock and 270,000 of the 2020 Series B Warrants. 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 securities sold in the Offering.

The Offering closed on July 16, 2020 with net proceeds to the Company of $8,211,000, which was net of $790,000 in underwriting and offering costs.

While the Company expects the COVID-19 pandemic 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 limited 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.

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Summary of Significant Accounting Policies

6 Months Ended

Jun. 28, 2020

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Principles of consolidation – The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. The operations of Elevation Burger have been included since its acquisition on June 19, 2019. 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.

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

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 customer’s financial conditions prior to entry into a franchise or other agreement and believes that it has adequately provided for any exposure to potential credit losses. As of June 28, 2020, accounts receivable, net of allowance for doubtful accounts, totaled $2,469,000, with no customer representing more than 10% of that amount. As of December 29, 2019, the Company had two customers each representing 20% of accounts receivable, net of allowance for doubtful accounts.

The Company maintains cash deposits in national financial institutions. From time to time the balances for these accounts exceed the Federal Deposit Insurance Corporation’s (“FDIC”) insured amount. Balances on interest bearing deposits at banks in the United States are insured by the FDIC up to $250,000 per account. As of June 28, 2020, the Company had uninsured deposits in the amount of $1,859,000. As of December 29, 2019, the Company had no accounts with uninsured balances.

Restricted Cash – The Company has restricted cash consisting of funds required to be held in trust in connection with the Company’s Securitization. The current portion of restricted cash at June 28, 2020 consisted of $1,347,000. Non-current restricted cash of $400,000 at June 28, 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 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 June 28, 2020 and December 29, 2019, accounts receivable were stated net of an allowance for doubtful accounts of $470,000 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.

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

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.

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. 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.

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

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

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

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

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

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

During the fourth quarter of 2019, the Company performed a study of other public company restaurant franchisors’ application of ASC 606 and determined that a preferred, alternative industry application exists in which the store opening fee portion of the franchise fees is amortized over the life of the franchise agreement rather than at milestones of standalone performance obligations in the franchise agreements. In order to provide financial reporting consistent with other franchise industry peers, the Company applied this preferred, alternative application of ASC 606 during the fourth quarter of 2019 on a prospective basis. As a result of the adoption of this preferred accounting treatment under ASC 606, the Company discontinued the recognition of store opening fees upon store opening and began accounting for the entire up-front deposit received from franchisees as described above 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, the 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.

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

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

Earnings per share – The Company reports basic earnings or loss per share in accordance with FASB ASC 260, “Earnings Per Share”. Basic earnings per share is computed using the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share is computed using the weighted average number of common shares outstanding plus the effect of dilutive securities during the reporting period. Any potentially dilutive securities that have an anti-dilutive impact on the per share calculation are excluded. During periods in which the Company reports a net loss, diluted weighted average shares outstanding are equal to basic weighted average shares outstanding because the effect of all potentially dilutive securities would be anti-dilutive. As of June 28, 2020 and June 30, 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 16). Unless otherwise noted, earnings per share and other share-based information for 2020 and 2019 have been adjusted retrospectively to reflect the impact of the stock dividend.

Immaterial Adjustments Related to Prior Periods

During the fourth quarter of 2019, the Company identified two immaterial potential adjustments to its previously issued financial statements. These potential adjustments are (1) its assessment of the Series A-1 Fixed Rate Cumulative Preferred Stock and (2) its treatment of the store opening component of its franchise fees under ASC 606. Based on its assessment of the Series A-1 Fixed Rate Cumulative Preferred Stock, the Company determined that an error occurred in the analysis of the rights that the holders of the Series A-1 Fixed Rate Cumulative Preferred Stock have with respect to the conversion of the securities into shares of the Company’s common stock. In our reassessment, the conversion rights did not represent a beneficial conversion feature as we had initially concluded at the time of issuance. A cumulative correction was recorded to additional paid in capital during the first quarter of 2020 in the amount of $90,000.

The Company originally adopted ASC 606 on January 1, 2018. During the fourth quarter of 2019, the Company performed a study of other public company restaurant franchisors’ application of ASC 606 and determined that a preferred, alternative industry application exists in which the store opening fee portion of the franchise fees is amortized over the life of the franchise agreement rather than at milestones of standalone performance obligations in the franchise agreements. In order to provide financial reporting consistent with other franchise industry peers, the Company applied this preferred, alternative application of ASC 606 during the fourth quarter of 2019 on a prospective basis 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 the preferential accounting treatment under ASC 606. Based on such analysis of quantitative and qualitative factors, the Company has determined that neither the error nor the adoption of the preferential accounting treatment under ASC 606, in aggregate or individually, were material to any of the reporting periods affected, and no amendments to previously filed 10-Q or 10-K reports with the SEC are required.

Recently Adopted Accounting Standards

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

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

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

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Acquisitions and Significant Transactions

6 Months Ended

Jun. 28, 2020

Business Combinations [Abstract]

Acquisitions and Significant Transactions

NOTE 3. ACQUISITIONS AND SIGNIFICANT TRANSACTIONS

Acquisition of Elevation Burger

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

The purchase price consists of $50,000 in cash, a contingent warrant to purchase 46,875 shares of the Company’s common stock at an exercise price of $8.00 per share (the “Elevation Warrant”), and the issuance to the Seller of a convertible subordinated promissory note (the “Elevation Note”) with a principal amount of $7,509,816, bearing interest at 6.0% per year and maturing in July 2026. The Elevation Warrant is only exercisable in the event that the Company merges with FCCG. The Seller Note is convertible under certain circumstances into shares of the Company’s common stock at $12.00 per share. In connection with the purchase, the Company also loaned $2,300,000 in cash to the Seller under a subordinated promissory note (the “Elevation Buyer Note”) bearing interest at 6.0% per year and maturing in August 2026. The balance owing to the Company under the Elevation Buyer Note may be used by the Company to offset amounts owing to the Seller under the Elevation Note under certain circumstances. In addition, the Seller will be entitled to receive earn-out payments of up to $2,500,000 if Elevation Burger realizes royalty fee revenue in excess of certain amounts. As of the date of the acquisition, the fair market value of this contingent consideration totaled $531,000. As of June 28, 2020, and December 29, 2019, the contingent purchase price payable totaled $680,000 and $633,000, respectively, which includes the accretion of interest expense at an effective interest rate of 18%.

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

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

Cash	$	10
Goodwill		521
Other intangible assets		7,140
Other assets		558
Current liabilities		(91	)
Deferred franchise fees		(758	)
Other liabilities		(187	)
Total net identifiable assets	$	7,193

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

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Refranchising

6 Months Ended

Jun. 28, 2020

Refranchising

Refranchising

nOTE 4. REFRANCHISING

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

Certain assets designated by the Company for refranchising meet the criteria requiring that they be classified as held for sale. As a result, the following assets have been classified as held for sale on the accompanying consolidated balance sheet as of June 28, 2020 (in thousands):

	June 28, 2020
Property, plant and equipment	$	1,213
Operating lease right of use assets		2,171
Total	$	3,384

Operating lease liabilities related to the assets classified as held for sale in the amount of $2,298,000, have been classified as current liabilities on the accompanying consolidated balance sheet as of June 28, 2020.

During the thirteen and twenty-six weeks ended June 28, 2020, refranchising operations incurred losses of $1,006,000 and $1,544,000, respectively, compared to a gain of $467,000 and a loss of $51,000, respectively, for the corresponding periods in 2019. The refranchising results for the twenty-six weeks ended June 28, 2020 include a gain of $165,000 relating to the sale and refranchising of two restaurant locations, compared to gains of $970,000 from the sale and refranchising of two restaurant locations in the 2019 period.

During the fiscal year ended December 29, 2019, a franchisee had entered into an agreement with the Company by which it agreed to sell two existing franchised locations to the Company for its refranchising program. Additionally, during the fiscal year, the Company had completed transactions to sell the two locations to new owners. During the second quarter of 2020, as a result of COVID-19, the locations acquired from the existing franchisee became unavailable. The Company is determining alternative operating restaurants that can be used as a replacement for the new owners.

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Notes Receivable

6 Months Ended

Jun. 28, 2020

Receivables [Abstract]

Notes Receivable

Note 5. NOTES RECEIVABLE

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

Trade notes receivable are created when a settlement is reached relating to a delinquent franchisee account and the entire balance is not immediately paid. Trade notes receivable generally include personal guarantees from the franchisee. The notes are made for the shortest time frame negotiable and will generally carry an interest rate of 6% to 7.5%. Reserve amounts, on the notes, are established based on the likelihood of collection. As of June 28, 2020, the trade notes had been fully reserved. At December 29, 2019, these trade notes receivable totaled $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 carrying value of $1,903,000, which was net of a discount of $397,000. As of June 28, 2020, and December 29, 2019, the balance of the Elevation Note was $1,788,000 and $1,814,000, respectively, which were net of discounts of $308,000 and $352,000, respectively. During the thirteen and twenty-six weeks ended June 28, 2020, the Company recognized $53,000 and $106,000, respectively, in interest income. During the thirteen and twenty-six weeks ended June 30, 2019, the Company recognized $4,200 in interest income.

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Goodwill and Other Intangible Assets

6 Months Ended

Jun. 28, 2020

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Other Intangible Assets

Note 6. GOODWILL and other intangible assets

Goodwill

Goodwill consists of the following (in thousands):

	June 28, 2020		December 29, 2019
Goodwill:
Fatburger	$	529	$	529
Buffalo’s		5,365		5,365
Hurricane		2,772		2,772
Ponderosa and Bonanza		-		1,462
Yalla		263		263
Elevation Burger		521		521
Total goodwill	$	9,450	$	10,912

Other Intangible Assets

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

	June 28, 2020			December 29, 2019
Trademarks:
Fatburger	$	2,135		$	2,135
Buffalo’s		27			27
Hurricane		6,840			6,840
Ponderosa and Bonanza		5,518			7,230
Yalla		1,530			1,530
Elevation Burger		4,690			4,690
Total trademarks		20,740			22,452
Franchise agreements:
Hurricane – cost		4,180			4,180
Hurricane – accumulated amortization		(643	)		(482	)
Ponderosa and Bonanza – cost		1,640			1,640
Ponderosa and Bonanza – accumulated amortization		(298	)		(243	)
Elevation Burger – cost		2,450			2,450
Elevation Burger – accumulated amortization		(512	)		(263	)
Total franchise agreements		6,817			7,282
Total Other Intangible Assets	$	27,557		$	29,734

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

Fiscal year:
2020	$	467
2021		932
2022		932
2023		932
2024		932
Thereafter		2,622
Total	$	6,817

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 June 28, 2020, specifically related to goodwill and the trademark assets. Given the uncertainty regarding the severity, duration and long-term effects of COVID-19, making estimates of the fair value of these assets at this time is significantly affected by assumptions related to ongoing operations including but not limited to the timing of lifting of restrictions on restaurant operating hours, in-house dining limitations or other restrictions that largely limited restaurants to take-out and delivery sales, customer engagement with our brands, the short-term and long-term impact on consumer discretionary spending, and overall global economic conditions.

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, as of June 28, 2020, the Company recorded goodwill impairment charges of $1,462,000 and tradename impairment charges of $1,712,000 relating to the Ponderosa and Bonanza brands.

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.

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Deferred Income

6 Months Ended

Jun. 28, 2020

Contract with Customer, Liability [Abstract]

Deferred Income

Note 7. DEFERRED INCOME

Deferred income is as follows (in thousands):

	June 28, 2020		December 29, 2019
Deferred franchise fees	$	5,493	$	5,417
Deferred royalties		359		422
Deferred advertising revenue		324		303
Total	$	6,176	$	6,142

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Income Taxes

6 Months Ended

Jun. 28, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Note 8. Income Taxes

Effective October 20, 2017, the Company entered into a Tax Sharing Agreement with FCCG that provides that FCCG will, to the extent permitted by applicable law, file consolidated federal, California and Oregon (and possibly other jurisdictions where revenue is generated, at FCCG’s election) income tax returns with the Company and its subsidiaries. The Company will pay FCCG the amount that its current tax liability would have been had it filed a separate return. To the extent the Company’s required payment exceeds its share of the actual combined income tax liability (which may occur, for example, due to the application of FCCG’s net operating loss carryforwards), the Company will be permitted, in the discretion of a committee of its board of directors comprised solely of directors not affiliated with or 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 $29,529,000 due from FCCG and its affiliates will be applied first to reduce excess income tax payment obligations to FCCG under the Tax Sharing Agreement.

For financial reporting purposes, the Company has recorded a tax benefit as of June 28, 2020, calculated as if the Company files its tax returns on a stand-alone basis. The amount receivable from FCCG determined by this calculation of $154,000 and $46,000 was added to amounts due from FCCG as of June 28, 2020 and June 30, 2019, respectively, (See Note 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):

	June 28, 2020			December 29, 2019
Deferred tax assets (liabilities)
Deferred income	$	1,508		$	1,353
Reserves and accruals		208			208
Intangibles		(154	)		(614	)
Deferred state income tax		(135	)		(91	)
Tax credits		477			244
Share-based compensation		192			192
Property and equipment		(137	)		(137	)
Net operating loss carryforwards		1,661			894
Other		(64	)		(17	)
Total	$	3,556		$	2,032

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

	Twenty-six Weeks Ended June 28, 2020			Twenty-six Weeks Ended June 30, 2019
Current
Federal	$	(118	)	$	318
State		22			262
Foreign		233			375
		137			955
Deferred
Federal		(1,312	)		(89	)
State		(211	)		(241	)
		(1,523	)		(330	)
Total income tax (benefit) expense	$	(1,386	)	$	625

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):

	Twenty-six Weeks Ended			Twenty-six Weeks Ended
	June 28, 2020			June 30, 2019
Tax benefit at statutory rate	$	(1,681	)	$	(124	)
State and local income taxes		(150	)		14
Foreign taxes		233			375
Tax credits		(233	)		(375	)
Dividends on preferred stock		361			643
Other		84			92
Total income tax expense (benefit)	$	(1,386	)	$	625

As of June 28, 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 the 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 June 28, 2020.

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Leases

6 Months Ended

Jun. 28, 2020

Leases [Abstract]

Leases

NOTE 9. LEASES

The Company has recorded seven operating leases for corporate offices and for certain restaurant properties that are in the process of being refranchised. The Company is not a guarantor to the leases for the restaurant locations. The leases have remaining lease terms ranging from nine months to seven years. Three of the leases also have options to extend the term for 5 to 10 years. The Company recognized lease expense of $720,000 and $702,000 for the twenty-six weeks ended June 28, 2020 and June 30, 2019, respectively. The Company recognized lease expense of $367,000 and $355,000 for the thirteen weeks ended June 28, 2020 and June 30, 2019, respectively. The weighted average remaining lease term of the operating leases (not including optional lease extensions) at June 28, 2020 was 5.6 years.

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

	June 28, 2020		December 29, 2019
Right of use assets	$	4,947	$	4,076
Lease liabilities	$	5,137	$	4,206

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

The contractual future maturities of the Company’s operating lease liabilities as of June 28, 2020, including anticipated lease extensions, are as follows (in thousands):

Fiscal year:
2020	$	545
2021		1,141
2022		1,183
2023		1,223
2024		1,028
Thereafter		4,737
Total lease payments		9,857
Less imputed interest		(4,720	)
Total	$	5,137

Supplemental cash flow information for the twenty-six weeks ended June 28, 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	$	412
Operating lease right of use assets obtained in exchange for new lease obligations:
Operating lease liabilities	$	2,174

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Debt

6 Months Ended

Jun. 28, 2020

Debt Disclosure [Abstract]

Debt

Note 10. DEBT

Loan and Security Agreement

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

The term loan under the Loan and Security Agreement was due to mature on June 30, 2020. Interest on the term loan accrued at an annual fixed rate of 20.0% and was payable quarterly. In connection with the Loan and Security Agreement, the Company issued to Lion a warrant to purchase up to 1,167,404 shares of the Company’s common stock at $0.01 per share (the “Lion Warrant”), exercisable only if the amounts outstanding under the Loan and Security Agreement were not repaid in full by June 30, 2020, as extended. If the Loan and Security Agreement was repaid in full prior to June 30, 2020, the Lion Warrant would be terminated in its entirety.

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

The Loan and Security Agreement was subsequently amended several times which allowed the Company to increase its borrowing by $3,500,000 in connection with the acquisition of Elevation Burger; extended the exercise date of the Lion Warrant to June 30, 2020; extended the due date for certain quarterly payments and imposed associated extension and other loan fees.

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

The Company recognized interest expense on the Loan and Security Agreement of $1,783,000 for the thirteen and twenty-six weeks ended June 28, 2020, which includes $212,000 for amortization of all unaccreted debt offering costs at the time of the repayment and $650,000 in penalties and fees. The Company recognized interest expense on the Loan and Security Agreement of $1,076,000 and $1,796,000 for the thirteen and twenty-six weeks ended June 30, 2019.

Elevation Note

On June 19, 2019, the Company completed the acquisition of Elevation Burger. A portion of the purchase price included the issuance to the Seller of a convertible subordinated promissory note (the “Elevation Note”) with a principal amount of $7,509,816, bearing interest at 6.0% per year and maturing in July 2026. The Elevation Note is convertible under certain circumstances into shares of the Company’s common stock at $12.00 per share. In connection with the valuation of the acquisition of Elevation Burger, the Elevation Note was recorded on the financial statements of the Company at $6,185,000, which is net of a loan discount of $1,295,000 and debt offering costs of $30,000.

As of June 28, 2020, the carrying value of the Elevation Note was $5,778,000 which is net of the loan discount of $1,008,000 and debt offering costs of $61,000. The Company recognized interest expense relating to the Elevation Note during the thirteen weeks ended June 28, 2020 in the amount of $175,000, which included amortization of the loan discount of $70,000 and amortization of $2,000 in debt offering costs. The Company recognized interest expense relating to the Elevation Note during the twenty-six weeks ended June 28, 2020 in the amount of $364,000, which included amortization of the loan discount of $141,000 and amortization of $5,000 in debt offering costs. The Company recognized interest expense of $23,000 on the Elevation Note for the thirteen and twenty-six weeks ended June 30, 2019. The effective interest rate for the Elevation Note during the twenty-six weeks ended June 28, 2020 was 12.7%.

The Elevation Note is a general unsecured obligation of Company and is subordinated in right of payment to all indebtedness of the Company arising under any agreement or instrument to which Company or any of its Affiliates is a party that evidences indebtedness for borrowed money that is senior in right of payment. FCCG has guaranteed payment of the Elevation Note.

Securitization

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

The new notes consist of the following:

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

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

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

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

The Notes are secured by substantially all of the assets of FAT Royalty, including the equity interests in the FAT Brands Franchising Entities. The restrictions placed on the Company’s subsidiaries require that the Company’s principal and interest obligations have first priority, after the payment of the Management Fee and certain other FAT Royalty expenses (as defined in the Indenture), and amounts are segregated monthly to ensure appropriate funds are reserved to pay the quarterly principal and interest amounts due. The amount of monthly cash flow that exceeds the required monthly debt service is generally remitted to the 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 June 28, 2020, the Company was in compliance with these covenants.

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

The Notes are subject to certain financial and non-financial covenants, including a 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 June 28, 2020, the recorded balance of the Securitization Notes was $37,420,000, which is net of debt offering costs of $2,347,000 and original issue discount of $233,000. The Company recognized interest expense on the Securitization Notes of $886,000 for the thirteen weeks ended June 28, 2020, which includes $103,000 for amortization of debt offering costs and $7,000 for amortization of the original issue discount. The Company recognized interest expense on the Securitization Notes of $1,173,000 for the twenty-six weeks ended June 28, 2020, which includes $136,000 for amortization of debt offering costs and $12,000 for amortization of the original issue discount. The effective interest rate of the Securitization Notes was 9.4% for the twenty-six weeks ended June 28, 2020.

Paycheck Protection Program Loans

During the thirteen weeks ended July 28, 2020, the Company received loan proceeds in the amount of approximately $1,532,000 under the Paycheck Protection Program (the “PPP 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.

The PPP Loans relate to FAT Brands Inc. as well as five restaurant locations that are 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.

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Preferred Stock

6 Months Ended

Jun. 28, 2020

Equity [Abstract]

Preferred Stock

Note 11. PREFERRED STOCK

Series B Cumulative Preferred Stock

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

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

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

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

● After the first anniversary and on or prior to the second anniversary at $27.50 per share

● After the second anniversary and on or prior to the third anniversary at $26.125 per share

● After the third anniversary at $25.00 per share

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

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

● After the first anniversary and on or prior to the second anniversary at $22.00 per share

● After the second anniversary and on or prior to the third anniversary at $22.50 per share

● After the third anniversary and on or prior to the fourth anniversary at $23.00 per share

● After the fourth anniversary at $25.00 per share

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

As of June 28, 2020, there were 57,140 shares of Series B Preferred Stock outstanding.

The Company classified the Series B Preferred Stock as long-term debt because it contains an unconditional obligation requiring the Company to redeem the instruments at the maturity date (October 3, 2024) or upon the election of the holders as described above in cash. The associated Series B Warrants have been recorded as additional paid-in capital. On the issuance date, the Company allocated the proceeds between the Series B Preferred Stock and the Series B Warrants based on the relative fair values of each.

As of June 28, 2020, the net Series B Preferred Stock balance was $1,108,000 including an unaccreted debt discount of $14,000 and unamortized debt offering costs of $306,000. The Company recognized interest expense on the Series B Preferred Stock of $48,000 for the thirteen weeks ended June 28, 2020, which includes amortization of debt offering costs of $18,000. The Company recognized interest expense on the Series B Preferred Stock of $96,000 for the twenty-six weeks ended June 28, 2020, which includes accretion expense of the debt discount of $1,000 and amortization of debt offering costs of $36,000. The year-to-date effective interest rate for the Series B Preferred Stock for 2020 was 17.8%.

On July 13, 2020, the Company entered into an agreement to exchange the 34,284 outstanding Series B Warrants for 285,700 new warrants (the “Series B Offering Warrants”), pursuant to Warrant Exchange Agreements with the holders of the Series B Warrants in consideration of their consent to amend and restate the terms of the Series B Cumulative Preferred Stock .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 (See Note 20).

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

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

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

(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 June 28, 2020, 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”) 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 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 stock of the Company, representing an exchange price of $7.20 per share, which was the closing trading price of the common stock on June 26, 2018.

The Company classifies the Series A Preferred Stock as long-term debt because it contains an obligation to issue a variable number of common shares for a fixed monetary amount. As of June 28, 2020, the net Series A Preferred Stock balance was $9,925,000 which is net of an unaccreted debt discount of $65,000 and unamortized debt offering costs of $11,000.

The Company recognized interest expense on the Series A Preferred Stock of $708,000 for the twenty-six weeks ended June 28, 2020, which includes accretion expense of $11,000 as well as $2,000 for the amortization of debt offering costs. For the thirteen weeks ended June 28, 2020, the Company recognized interest expense of $354,000, which includes accretion expense of $5,000 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 $708,000 for the twenty-six weeks ended June 30, 2019, which includes accretion expense of $11,000 as well as $2,000 for the amortization of debt offering costs. For the thirteen weeks ended June 30, 2019, the Company recognized interest expense of $354,000, which includes accretion expense of $5,500 as well as $1,000 for the amortization of the debt offering costs. The year-to-date effective interest rate for the Series A Preferred Stock for 2020 was 14.3%.

Derivative Liability Relating to the Conversion Feature of the Series A Preferred Stock

As stated above, holders of Series A Preferred Stock have the option to 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 (the “Conversion Option”). 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.

On June 8, 2020, the Conversion Option became exercisable. As of that date, the Company calculated the estimated fair value of the Conversion Option to be $2,406,000 and recorded a derivative liability in that amount, together with an offsetting reduction in Additional Paid-In Capital. As of June 28, 2020, the Company calculated the estimated fair value of the Conversion Option to be $1,142,000 and adjusted the carrying value of the derivative liability accordingly and recognized $1,264,000 as a change in the fair market value of the derivative liability.

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 cash payments. Fog Cutter Capital Group Inc., 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 as of July 13, 2020 (See Note 20).

Series A-1 Fixed Rate Cumulative 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 June 28, 2020, there were 45,000 shares of Series A-1 Preferred Stock issued and outstanding. The Series A-1 Certificate of Designation contains the following terms pertaining to the Series A-1 Preferred Stock:

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

As of June 28, 2020, there were 45,000 shares of Series A-1 Preferred Stock outstanding.

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

As of June 28, 2020, the net Series A-1 Preferred Stock balance was $4,421,000 which is net of an unaccreted debt discount of $58,000 and unamortized debt offering costs of $21,000.

The Company recognized interest expense on the Series A-1 Preferred Stock of $123,000 for the twenty-six weeks ended June 28, 2020, which was net of an adjustment to the debt discount in the amount of $15,000, as well as $3,000 for the amortization of debt offering costs. The Company recognized interest expense on the Series A-1 Preferred Stock of $74,000 for the thirteen weeks ended June 28, 2020, which included recognized accretion expense of $4,000, as well as $1,000 for the amortization of debt offering costs. The Company recognized interest expense on the Series A-1 Preferred Stock of $154,000 for the twenty-six weeks ended June 30, 2019, which included recognized accretion expense of $16,000, as well as $3,000 for the amortization of debt offering costs. The Company recognized interest expense on the Series A-1 Preferred Stock of $77,000 for the thirteen weeks ended June 30, 2019, which included recognized accretion expense of $8,000, as well as $1,700 for the amortization of debt offering costs. The year-to-date effective interest rate for the Series A-1 Preferred Stock for 2020 was 5.6%.

On July 13, 2020, the Company entered into an agreement to exchange all outstanding shares of Series A-1 Preferred Stock, plus accrued dividends thereon, for shares of newly issued Series B Preferred Stock valued at $25.00 per share pursuant to a Settlement, Redemption and Release Agreement with the holders of such shares (See Note 20).

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.

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Related Party Transactions

6 Months Ended

Jun. 28, 2020

Related Party Transactions [Abstract]

Related Party Transactions

Note 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 previously extended credit to FCCG pursuant to a certain Intercompany Promissory Note (the “Original Note”), dated October 20, 2017, with an initial principal balance of $11,906,000. Subsequent to the issuance of the Original Note, the Company and certain of its 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, has a five-year term with no prepayment penalties, and has a maximum capacity of $35,000,000. All additional borrowings under the Intercompany Agreement are subject to the approval of the 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 June 28, 2020, the balance receivable under the Intercompany Agreement was $29,529,000.

During the twenty-six weeks ended June 28, 2020, the Company recorded a receivable from FCCG in the amount of $154,000 under the Tax Sharing Agreement, which was added to the intercompany receivable. During the twenty-six weeks ended June 30, 2019, the Company recorded a receivable from FCCG in the amount of $46,000 under the Tax Sharing Agreement (See Note 8).

Effective July 5, 2018, the Company made a preferred capital investment in Homestyle Dining LLC, a Delaware limited liability corporation (“HSD”) in the amount of $4.0 million (the “Preferred Interest”). 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 June 28, 2020, the balance receivable, including accrued and unpaid interest income, under the Preferred Interest was $5,200,000.

Series B Cumulative Preferred Stock

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

As of June 28, 2020, the following reportable related persons participated in the initial closing of the Company’s Preferred Offering:

● Andrew Wiederhorn, the Company’s Chief Executive Officer, acquired 20,000 Series B Units for $500,000 comprised of 20,000 shares of Series B Preferred Stock and 12,000 Series B Warrants to purchase 12,000 shares of the Company’s common stock at $8.50 per share, and

● Squire Junger, a member of the Company’s Board of Directors, acquired 5,000 Series B Units for $125,000 comprised of 5,000 shares of Series B Preferred Stock and 3,000 Series B Warrants to purchase 3,000 shares of the Company’s common stock at $8.50 per share.

● In aggregate, Mr. Wiederhorn, Mr. Junger, and other related parties acquired 33,000 Series B Units for $825,000 comprised of 33,000 shares of Series B Preferred Stock and 19,800 Series B Warrants to purchase 19,800 shares of the Company’s common stock at $8.50 per share.

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Shareholders' Equity

6 Months Ended

Jun. 28, 2020

Equity [Abstract]

Shareholders' Equity

Note 13. SHAREHOLDERS’ EQUITY

As of June 28, 2020, and December 29, 2019, the total number of authorized shares of common stock was 25,000,000, and there were 11,894,895 and 11,860,299 shares of common stock outstanding, respectively.

Below are the changes to the Company’s common stock during the twenty-six weeks ended June 28, 2020:

● On February 11, 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 16,360 shares of common stock at a value of $4.585 per share to the non-employee members of the board of directors as consideration for accrued directors’ fees.

● On May 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 18,236 shares of common stock at a value of $3.29 per share to the non-employee members of the board of directors as consideration for accrued directors’ fees.

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Share-Based Compensation

6 Months Ended

Jun. 28, 2020

Equity [Abstract]

Share-Based Compensation

Note 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 fiscal year ended June 28, 2020 can be summarized as follows:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
Stock options outstanding at December 29, 2019		722,481		$	8.45		8.0
Grants		-			-		-
Forfeited		(127,648	)		7.60		8.3
Expired		-			-		-
Stock options outstanding at June 28, 2020		594,833		$	8.64		7.9
Stock options exercisable at June 28, 2020		296,145		$	9.85		7.7

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 $15,000 and $16,000 during the thirteen and twenty-six weeks ended June 28, 2020, respectively. The Company recognized share-based compensation expense in the amount of $78,000 and $159,000 during the thirteen and twenty-six weeks ended June 30, 2019, respectively. As of June 28, 2020, there remains $59,000 of share-based compensation expense relating to non-vested grants, which will be recognized over the remaining vesting period, subject to future forfeitures.

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Warrants

6 Months Ended

Jun. 28, 2020

Other Liabilities Disclosure [Abstract]

Warrants

Note 15. WARRANTS

As of June 28, 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 stock granted to the selling agent in the Company’s initial 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 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 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. 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 (See Note 20).

● Warrants issued on July 3, 2018 to purchase 66,691 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 10). The Placement Agent Warrants were valued at $78,000 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 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 terminate 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 (See Note 11), to purchase 34,284 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. The outstanding Series B Warrants were valued at $21,000 at the date of grant (See Note 20).

The Company’s warrant activity for the thirteen weeks ended June 28, 2020 is as follows:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
Warrants outstanding at December 29, 2019		2,091,652		$	3.57		4.0
Grants		-			-		-
Exercised		-			-		-
Forfeited		(1,167,404	)		0.01		4.8
Expired		-			-		-
Warrants outstanding at June 28, 2020		924,248		$	8.08		3.1
Warrants exercisable at June 28, 2020		877,373		$	8.08		3.0

The range of assumptions used to establish the value of the warrants using the Black-Scholes valuation model 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

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Dividends on Common Stock

6 Months Ended

Jun. 28, 2020

Equity [Abstract]

Dividends on Common Stock

Note 16. DIVIDENDS ON COMMON STOCK

Our Board of Directors did not declare a dividend during the twenty-six weeks ended June 28, 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. No fractional shares were issued, instead the Company paid stockholders cash-in-lieu of shares.

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Commitments and Contingencies

6 Months Ended

Jun. 28, 2020

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Note 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, and Daniel 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, 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 (collectively, the “Original Defendants”) were named as defendants in a putative securities class action lawsuit entitled Rojany v. FAT Brands, Inc., Case No. BC708539 (the “Rojany Case”), in the Superior Court of the State of California, County of Los Angeles. On July 31, 2018, the Rojany Case was designated as complex, pursuant to Rule 3.400 of the California Rules of Court and assigned the matter to the Complex Litigation Program. On August 2, 2018, the Original Defendants were named defendants in a second putative class action lawsuit, Alden v. FAT Brands, Case No. BC716017 (the “Alden Case”), filed in the same court. On September 17, 2018, the Rojany and Alden Cases were consolidated under the Rojany Case number. On October 10, 2018, plaintiffs Eric Rojany, Daniel Alden, Christopher Hazelton-Harrington and Byron Marin (“Plaintiffs”) filed a First Amended Consolidated Complaint against 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. On November 13, 2018, Defendants filed a Demurrer to First Amended Consolidated Complaint. On January 25, 2019, the Court sustained Defendants’ Demurrer to First Amended Consolidated Complaint with Leave to Amend in Part. Plaintiffs filed a Second Amended Consolidated Complaint on February 25, 2019. On March 27, 2019, Defendants filed a Demurrer to the Second Amended Consolidated Complaint. On July 31, 2019, the Court sustained Defendants’ Demurrer to the Second Amended Complaint in Part, narrowing the scope of the case. Defendants filed their Answer to the Second Amended Consolidated Complaint on November 12, 2019. On January 29, 2020, Plaintiffs filed a Motion for Class Certification. Plaintiffs’ Motion for Class Certification is fully briefed, and the hearing on Plaintiffs’ Motion for Class Certification is set for September 10, 2020. Defendants dispute Plaintiffs’ allegations and will continue to vigorously defend themselves in this litigation.

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, the Original Defendants were named as defendants in a putative securities class action lawsuit entitled Vignola v. FAT Brands, Inc., Case No. 2:18-cv-07469-PSG-PLA, in the United States District Court for the Central District of 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 Original Defendants. The allegations and claims for relief asserted in Vignola are substantively identical to those asserted in the Rojany Case. Defendants filed a Motion to Dismiss First Amended Class Action Complaint, or, in the Alternative, to Stay the Action In Favor of a Prior Pending Action. On June 14, 2019, the Court denied Defendants’ motion to stay but granted Defendants’ motion to dismiss the First Amended Class Action Complaint, with Leave to Amend. Lead Plaintiffs filed a Second Amended Class Action Complaint 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 Motion 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. The parties are in the process of documenting this settlement.

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 the Rojany and Vignola matters. These proceedings are ongoing 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.

Operating Leases

The Company leases corporate headquarters located in Beverly Hills, California comprising 6,137 square feet of space, pursuant to a lease that expires on 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. As part of the acquisition of Elevation Burger, the Company assumed a lease of 5,057 square feet of space in Falls Church, Virginia that expires on 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 Yalla 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.

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Geographic Information and Major Franchisees

6 Months Ended

Jun. 28, 2020

Geographic Information And Major Franchisees

Geographic Information and Major Franchisees

Note 18. geographic information AND MAJOR FRANCHISEES

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

	Thirteen Weeks Ended				Twenty-six Weeks Ended
	June 28, 2020		June 30, 2019		June 28, 2020		June 30, 2019
United States	$	2,564	$	5,059	$	6,273	$	9,070
Other countries		543		836		1,257		1,698
Total revenues	$	3,107	$	5,895	$	7,530	$	10,768

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

During the twenty-six weeks ended June 28, 2020 and June 30, 2019, no individual franchisee accounted for more than 10% of the Company’s revenues.

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Operating Segments

6 Months Ended

Jun. 28, 2020

Segment Reporting [Abstract]

Operating Segments

NOTE 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.

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Subsequent Events

6 Months Ended

Jun. 28, 2020

Subsequent Events [Abstract]

Subsequent Events

NOTE 20. SUBSEQUENT EVENTS

Pursuant to FASB ASC 855, Management has evaluated all events and transactions that occurred from June 28, 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:

Underwritten Public Offering

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 Company also granted the underwriters an option to purchase, for a period of 45 calendar days, up to an additional 54,000 shares Series B Preferred Stock and 270,000 of the 2020 Series B Warrants. 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 securities sold in the Offering.

In connection with the Offering, on July 15, 2020 the Company filed with the Secretary of State of Delaware an Amended and Restated Certificate of Designation of Rights and Preferences of Series B Cumulative Preferred Stock, 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 Warrants (the “Warrant Agency Agreement”). The Warrant Agency Agreement sets forth the terms of the Warrants and includes the form of Warrant Certificate issued to investors in the Offering. The Warrants are 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, Fog Cutter Capital Group Inc., and will expire on July 16, 2025.

The Offering closed on July 16, 2020 with net proceeds to the Company of $8,211,000, which was net of $790,000 in underwriting and offering costs.

Exchange Transactions

On July 13, 2020, the Company entered into the following additional transactions:

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 entered into an agreement to redeem 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 entered into an agreement to exchange 15,000 outstanding shares of Series A Preferred Stock, plus accrued dividends thereon, held by Fog Cutter Capital Group, Inc. at face value for shares of Series B Preferred Stock valued at $25.00 per share.
4.	The Company entered into an agreement to exchange all outstanding shares of Series A-1 Fixed Rate Cumulative Preferred Stock, plus accrued dividends thereon, for shares of Series B Preferred Stock valued at $25.00 per share pursuant to a Settlement, Redemption and Release Agreement with the holders of such shares; and
5.	The Company entered into an agreement to exchange 34,284 outstanding Series B Warrants issued in October 2019 for 285,700 Warrants (the same class issued in the offering), pursuant to Warrant Exchange Agreements with the holders of the warrants in consideration of their consent to amend and restate the terms of the Series B Cumulative Preferred Stock.

The transactions described above were 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.

Warrant Purchase

On July 30, 2020, the Company entered into a warrant purchase agreement (the “Lender Warrant Purchase Agreement”) to purchase the Lender Warrant for $249,500. Issued by the Company on July 3, 2018, the Lender Warrant grants 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 may be exercised at any time or times beginning on the issue date and ending on the five-year anniversary of the issue date (See Note 15).

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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 28, 2020

Accounting Policies [Abstract]

Nature of Operations

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

Principles of Consolidation

Principles of consolidation – The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. The operations of Elevation Burger have been included since its acquisition on June 19, 2019. Intercompany accounts have been eliminated in consolidation.

Use of Estimates in the Preparation of the Consolidated Financial Statements

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.

Financial Statement Reclassification

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

Credit and Depository Risks

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 customer’s financial conditions prior to entry into a franchise or other agreement and believes that it has adequately provided for any exposure to potential credit losses. As of June 28, 2020, accounts receivable, net of allowance for doubtful accounts, totaled $2,469,000, with no customer representing more than 10% of that amount. As of December 29, 2019, the Company had two customers each representing 20% of accounts receivable, net of allowance for doubtful accounts.

The Company maintains cash deposits in national financial institutions. From time to time the balances for these accounts exceed the Federal Deposit Insurance Corporation’s (“FDIC”) insured amount. Balances on interest bearing deposits at banks in the United States are insured by the FDIC up to $250,000 per account. As of June 28, 2020, the Company had uninsured deposits in the amount of $1,859,000. As of December 29, 2019, the Company had no accounts with uninsured balances.

Restricted Cash

Restricted Cash – The Company has restricted cash consisting of funds required to be held in trust in connection with the Company’s Securitization. The current portion of restricted cash at June 28, 2020 consisted of $1,347,000. Non-current restricted cash of $400,000 at June 28, 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 29, 2019.

Accounts Receivable

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 June 28, 2020 and December 29, 2019, accounts receivable were stated net of an allowance for doubtful accounts of $470,000 and $595,000, respectively.

Trade Notes Receivable

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.

Assets Classified as Held for Sale

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

Goodwill and Other Intangible Assets

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

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 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.

Income Taxes

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

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

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

Franchise Fees

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

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

Store Opening Fees

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

During the fourth quarter of 2019, the Company performed a study of other public company restaurant franchisors’ application of ASC 606 and determined that a preferred, alternative industry application exists in which the store opening fee portion of the franchise fees is amortized over the life of the franchise agreement rather than at milestones of standalone performance obligations in the franchise agreements. In order to provide financial reporting consistent with other franchise industry peers, the Company applied this preferred, alternative application of ASC 606 during the fourth quarter of 2019 on a prospective basis. As a result of the adoption of this preferred accounting treatment under ASC 606, the Company discontinued the recognition of store opening fees upon store opening and began accounting for the entire up-front deposit received from franchisees as described above 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

Royalties – In addition to franchise fee revenue, the 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.

Advertising

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

Share-based Compensation

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

Earnings Per Share

Earnings per share – The Company reports basic earnings or loss per share in accordance with FASB ASC 260, “Earnings Per Share”. Basic earnings per share is computed using the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share is computed using the weighted average number of common shares outstanding plus the effect of dilutive securities during the reporting period. Any potentially dilutive securities that have an anti-dilutive impact on the per share calculation are excluded. During periods in which the Company reports a net loss, diluted weighted average shares outstanding are equal to basic weighted average shares outstanding because the effect of all potentially dilutive securities would be anti-dilutive. As of June 28, 2020 and June 30, 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 16). Unless otherwise noted, earnings per share and other share-based information for 2020 and 2019 have been adjusted retrospectively to reflect the impact of the stock dividend.

Immaterial Adjustments Related to Prior Periods

Immaterial Adjustments Related to Prior Periods

During the fourth quarter of 2019, the Company identified two immaterial potential adjustments to its previously issued financial statements. These potential adjustments are (1) its assessment of the Series A-1 Fixed Rate Cumulative Preferred Stock and (2) its treatment of the store opening component of its franchise fees under ASC 606. Based on its assessment of the Series A-1 Fixed Rate Cumulative Preferred Stock, the Company determined that an error occurred in the analysis of the rights that the holders of the Series A-1 Fixed Rate Cumulative Preferred Stock have with respect to the conversion of the securities into shares of the Company’s common stock. In our reassessment, the conversion rights did not represent a beneficial conversion feature as we had initially concluded at the time of issuance. A cumulative correction was recorded to additional paid in capital during the first quarter of 2020 in the amount of $90,000.

The Company originally adopted ASC 606 on January 1, 2018. During the fourth quarter of 2019, the Company performed a study of other public company restaurant franchisors’ application of ASC 606 and determined that a preferred, alternative industry application exists in which the store opening fee portion of the franchise fees is amortized over the life of the franchise agreement rather than at milestones of standalone performance obligations in the franchise agreements. In order to provide financial reporting consistent with other franchise industry peers, the Company applied this preferred, alternative application of ASC 606 during the fourth quarter of 2019 on a prospective basis 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 the preferential accounting treatment under ASC 606. Based on such analysis of quantitative and qualitative factors, the Company has determined that neither the error nor the adoption of the preferential accounting treatment under ASC 606, in aggregate or individually, were material to any of the reporting periods affected, and no amendments to previously filed 10-Q or 10-K reports with the SEC are required.

Recently Adopted Accounting Standards

Recently Adopted Accounting Standards

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

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

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

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Acquisitions and Significant Transactions (Tables)

6 Months Ended

Jun. 28, 2020

Elevation Burger [Member]

Schedule of Allocation of Tangible and Intangible Assets Acquired

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	$	10
Goodwill		521
Other intangible assets		7,140
Other assets		558
Current liabilities		(91	)
Deferred franchise fees		(758	)
Other liabilities		(187	)
Total net identifiable assets	$	7,193

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Refranchising (Tables)

6 Months Ended

Jun. 28, 2020

Refranchising

Schedule of Remaining Assets Classified as Held for Sale

As a result, the following assets have been classified as held for sale on the accompanying consolidated balance sheet as of June 28, 2020 (in thousands):

	June 28, 2020
Property, plant and equipment	$	1,213
Operating lease right of use assets		2,171
Total	$	3,384

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Goodwill and Other Intangible Assets (Tables)

6 Months Ended

Jun. 28, 2020

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Goodwill

Goodwill consists of the following (in thousands):

	June 28, 2020		December 29, 2019
Goodwill:
Fatburger	$	529	$	529
Buffalo’s		5,365		5,365
Hurricane		2,772		2,772
Ponderosa and Bonanza		-		1,462
Yalla		263		263
Elevation Burger		521		521
Total goodwill	$	9,450	$	10,912

Schedule of Intangible Assets

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

	June 28, 2020			December 29, 2019
Trademarks:
Fatburger	$	2,135		$	2,135
Buffalo’s		27			27
Hurricane		6,840			6,840
Ponderosa and Bonanza		5,518			7,230
Yalla		1,530			1,530
Elevation Burger		4,690			4,690
Total trademarks		20,740			22,452
Franchise agreements:
Hurricane – cost		4,180			4,180
Hurricane – accumulated amortization		(643	)		(482	)
Ponderosa and Bonanza – cost		1,640			1,640
Ponderosa and Bonanza – accumulated amortization		(298	)		(243	)
Elevation Burger – cost		2,450			2,450
Elevation Burger – accumulated amortization		(512	)		(263	)
Total franchise agreements		6,817			7,282
Total Other Intangible Assets	$	27,557		$	29,734

Schedule of Future Amortization

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

Fiscal year:
2020	$	467
2021		932
2022		932
2023		932
2024		932
Thereafter		2,622
Total	$	6,817

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Deferred Income (Tables)

6 Months Ended

Jun. 28, 2020

Contract with Customer, Liability [Abstract]

Schedule of Deferred Income

Deferred income is as follows (in thousands):

	June 28, 2020		December 29, 2019
Deferred franchise fees	$	5,493	$	5,417
Deferred royalties		359		422
Deferred advertising revenue		324		303
Total	$	6,176	$	6,142

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Income Taxes (Tables)

6 Months Ended

Jun. 28, 2020

Income Tax Disclosure [Abstract]

Schedule of Components of Deferred Tax Assets and Liabilities

Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):

	June 28, 2020			December 29, 2019
Deferred tax assets (liabilities)
Deferred income	$	1,508		$	1,353
Reserves and accruals		208			208
Intangibles		(154	)		(614	)
Deferred state income tax		(135	)		(91	)
Tax credits		477			244
Share-based compensation		192			192
Property and equipment		(137	)		(137	)
Net operating loss carryforwards		1,661			894
Other		(64	)		(17	)
Total	$	3,556		$	2,032

Schedule of Components of the Income Tax (Benefit) Expense

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

	Twenty-six Weeks Ended June 28, 2020			Twenty-six Weeks Ended June 30, 2019
Current
Federal	$	(118	)	$	318
State		22			262
Foreign		233			375
		137			955
Deferred
Federal		(1,312	)		(89	)
State		(211	)		(241	)
		(1,523	)		(330	)
Total income tax (benefit) expense	$	(1,386	)	$	625

Schedule of Statutory Income Tax Rate to Pretax Income

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):

	Twenty-six Weeks Ended			Twenty-six Weeks Ended
	June 28, 2020			June 30, 2019
Tax benefit at statutory rate	$	(1,681	)	$	(124	)
State and local income taxes		(150	)		14
Foreign taxes		233			375
Tax credits		(233	)		(375	)
Dividends on preferred stock		361			643
Other		84			92
Total income tax expense (benefit)	$	(1,386	)	$	625

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Leases (Tables)

6 Months Ended

Jun. 28, 2020

Leases [Abstract]

Summary of Operating Lease Right of Use Assets and Operating Lease Liabilities Relating to Operating Leases

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

	June 28, 2020		December 29, 2019
Right of use assets	$	4,947	$	4,076
Lease liabilities	$	5,137	$	4,206

Schedule of Contractual Future Maturities of Operating Lease Liabilities

The contractual future maturities of the Company’s operating lease liabilities as of June 28, 2020, including anticipated lease extensions, are as follows (in thousands):

Fiscal year:
2020	$	545
2021		1,141
2022		1,183
2023		1,223
2024		1,028
Thereafter		4,737
Total lease payments		9,857
Less imputed interest		(4,720	)
Total	$	5,137

Summary of Supplemental Cash Flow Information Related to Leases

Supplemental cash flow information for the twenty-six weeks ended June 28, 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	$	412
Operating lease right of use assets obtained in exchange for new lease obligations:
Operating lease liabilities	$	2,174

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Debt (Tables)

6 Months Ended

Jun. 28, 2020

Debt Disclosure [Abstract]

Schedule of Securitization of Notes

The new notes consist of the following:

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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Share-Based Compensation (Tables)

6 Months Ended

Jun. 28, 2020

Equity [Abstract]

Schedule of Stock Option Activity

The Company’s stock option activity for fiscal year ended June 28, 2020 can be summarized as follows:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
Stock options outstanding at December 29, 2019		722,481		$	8.45		8.0
Grants		-			-		-
Forfeited		(127,648	)		7.60		8.3
Expired		-			-		-
Stock options outstanding at June 28, 2020		594,833		$	8.64		7.9
Stock options exercisable at June 28, 2020		296,145		$	9.85		7.7

Schedule of Assumptions Used for Stock-based Compensation

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

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Warrants (Tables)

6 Months Ended

Jun. 28, 2020

Other Liabilities Disclosure [Abstract]

Summary of Warrant Activity

The Company’s warrant activity for the thirteen weeks ended June 28, 2020 is as follows:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
Warrants outstanding at December 29, 2019		2,091,652		$	3.57		4.0
Grants		-			-		-
Exercised		-			-		-
Forfeited		(1,167,404	)		0.01		4.8
Expired		-			-		-
Warrants outstanding at June 28, 2020		924,248		$	8.08		3.1
Warrants exercisable at June 28, 2020		877,373		$	8.08		3.0

Schedule of Assumptions Used for Stock-based Compensation, Warrants

The range of assumptions used to establish the value of the warrants using the Black-Scholes valuation model 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

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Geographic Information and Major Franchisees (Tables)

6 Months Ended

Jun. 28, 2020

Geographic Information And Major Franchisees

Schedule of Revenues by Geographic Area

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

	Thirteen Weeks Ended				Twenty-six Weeks Ended
	June 28, 2020		June 30, 2019		June 28, 2020		June 30, 2019
United States	$	2,564	$	5,059	$	6,273	$	9,070
Other countries		543		836		1,257		1,698
Total revenues	$	3,107	$	5,895	$	7,530	$	10,768

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Organization and Relationships (Details Narrative)					3 Months Ended		6 Months Ended
	Jul. 16, 2020 USD ($)	Jul. 13, 2020 $ / shares shares	Mar. 06, 2020 USD ($)	Oct. 20, 2017	Jun. 28, 2020 USD ($)	Jun. 30, 2019 USD ($)	Jun. 28, 2020 USD ($) Integer shares	Jun. 30, 2019 USD ($)
Ownership percentage, description				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"). The Company's common stock trades on the Nasdaq Capital Market under the symbol "FAT." As of June 28, 2020, FCCG continues to control a significant voting majority of the Company.
Initial public offering percentage				20.00%
Franchising brands and locations, description							The Company owns and franchises eight restaurant brands: Fatburger, Buffalo's Cafe, Buffalo's Express, Hurricane Grill & Wings, Ponderosa Steakhouses, Bonanza Steakhouses, Yalla Mediterranean and Elevation Burger. Combined, as of June 28, 2020, these brands have over 360 locations and more than 200 under development.
Number of franchise brands | Integer							8
Number of franchise units worldwide | Integer							375
Number of franchises minimum, under development | Integer							200
(Loss) income from operations					$ (5,790,000)	$ 2,225,000	$ (6,368,000)	$ 2,889,000
Net losses					(4,251,000)	$ (508,000)	$ (6,621,000)	$ (1,218,000)
Option to purchase shares | shares
Series B Preferred Stock [Member]
Debt discount
Subsequent Event [Member] | Underwriting Agreement [Member]
Net proceeds offering amount	$ 8,211,000
Underwriting and offering costs	$ 790,000
Subsequent Event [Member] | Underwriting Agreement [Member] | 2020 Series B Warrants [Member]
Number of warrants to purchase common stock | shares		1,800,000
Warrants purchase price per share | $ / shares		$ 5.00
Underwriting discount percentage		8.00%
Warrants exercisable		1.00%
Subsequent Event [Member] | Underwriting Agreement [Member] | 2020 Series B Warrants [Member]
Option to purchase shares | shares		270,000
Subsequent Event [Member] | Underwriting Agreement [Member] | Series B Preferred Stock [Member]
Number of shares issued | shares		360,000
Preferred stock percentage		8.25%
Option to purchase shares | shares		54,000
Securitization Notes [Member]
Proceeds from issuance of secured debt			$ 37,314,000
Debt face amount			40,000,000		37,420,000		37,420,000
Debt discount			246,000
Debt offering costs			2,440,000		2,347,000		$ 2,347,000
Repayment of secured debt			$ 26,771,000
PPP Loans [Member]
Loan proceeds					$ 1,532,000

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Summary of Significant Accounting Policies (Details Narrative) - USD ($) $ in Thousands		3 Months Ended	6 Months Ended	9 Months Ended	12 Months Ended
	Feb. 07, 2019	Mar. 29, 2020	Jun. 28, 2020	Sep. 29, 2019	Dec. 29, 2019
Accounts receivable, net of allowance for doubtful accounts			$ 2,469		$ 4,144
FDIC insured amount			250
Uninsured balance			1,859
Restricted cash			1,347
Non-current restricted cash			400
Accounts receivable, allowance for doubtful accounts			$ 470		$ 595
Number of common stock share issued	245,376
Additional paid in capital		$ 90
Domestic Versus and International Stores [Member]
Store opening description			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.
Minimum [Member]
Rate for trade notes			6.00%
Store opening fees				$ 35
Royalty fee percentage			0.75%
Maximum [Member]
Rate for trade notes			7.50%
Store opening fees				$ 60
Royalty fee percentage			6.00%
Tax Sharing Agreement [Member]
Income tax likely being realized			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.
Lower Rate Range [Member]
Rate for trade notes			6.00%
Upper Rate Range [Member]
Rate for trade notes			7.50%
Lower Range [Member]
Estimated useful lives of intangible assets			9 years
Upper Range [Member]
Estimated useful lives of intangible assets			25 years
Accounts Receivable [Member] | No Customer [Member]
Concentration risk, percentage			10.00%
No Customers [Member]
Accounts receivable, net of allowance for doubtful accounts			$ 2,469
Two Customers [Member] | Accounts Receivable [Member]
Concentration risk, percentage					20.00%

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Acquisitions and Significant Transactions (Details Narrative)		6 Months Ended		12 Months Ended
	Jun. 19, 2019 USD ($) Integer $ / shares shares	Jun. 28, 2020 USD ($)	Jun. 30, 2019 USD ($)	Dec. 29, 2019 USD ($)
Payment of cash to acquire business		$ 500,000
Notes receivable				$ 250,000
Maximum [Member]
Debt, interest rate percentage		7.50%
Elevation Note [Member]
Debt, interest rate percentage		12.70%
Elevation Burger [Member] | Elevation Note [Member]
Principal amount of note	$ 7,509,816
Debt, interest rate percentage	6.00%
Maturity date	Jul. 31, 2026
Share price | $ / shares	$ 12.00
Elevation Burger [Member]
Purchase price of business	$ 10,050,000
Number of locations | Integer	44
Payment of cash to acquire business	$ 50,000
Number of warrants to purchase common stock | shares	46,875
Exercise price per share | $ / shares	$ 8.00
Fair market value of contingent consideration	$ 531,000
Purchase price payable amount		$ 680,000		$ 633,000
Effective accretion interest rate		18.00%		18.00%
Purchase price of acquisition	7,193,000
Elevation Burger [Member] | Maximum [Member]
Earn-out payable	2,500,000
Elevation Burger [Member] | Elevation Buyer Note [Member]
Purchase price of business	$ 1,903,000	$ 1,788,000		$ 1,814,000
Debt, interest rate percentage	6.00%
Maturity date	Aug. 31, 2026
Notes receivable	$ 2,300,000

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Acquisitions and Significant Transactions - Schedule of Allocation of Tangible and Intangible Assets Acquired (Details) - USD ($) $ in Thousands	Jun. 28, 2020	Dec. 29, 2019	Jun. 19, 2019
Goodwill	$ 9,450	$ 10,912
Elevation Burger [Member]
Cash			$ 10
Goodwill			521
Other intangible assets			7,140
Other assets			558
Current liabilities			(91)
Deferred franchise fees			(758)
Other liabilities			(187)
Total net identifiable assets			$ 7,193

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Refranchising (Details Narrative) - USD ($) $ in Thousands	3 Months Ended	6 Months Ended
	Jun. 28, 2020	Jun. 28, 2020	Dec. 29, 2019
Refranchising
Operating lease liabilities related to the assets classified as held for sale	$ 2,298	$ 2,298	$ 3,325
Refranchising operations incurred losses	1,006	1,544
Gain on refranchising operations	467	467
Loss on refranchising operations	$ 51	51
Gain on sale of refranchising business		$ 165

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Refranchising - Schedule of Remaining Assets Classified as Held for Sale (Details) - USD ($) $ in Thousands	Jun. 28, 2020	Dec. 29, 2019
Refranchising
Property, plant and equipment	$ 1,213
Operating lease right of use assets	2,171
Total	$ 3,384	$ 5,128

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Notes Receivable (Details Narrative) - USD ($)		3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 19, 2019	Jun. 28, 2020	Jun. 30, 2019	Jun. 28, 2020	Jun. 30, 2019	Dec. 29, 2019
Trade notes receivable						$ 250,000
Trade notes receivable, reserves						123,000
Interest income on notes receivable		$ 53,000	$ 4,200	$ 106,000	$ 4,200
Elevation Burger [Member]
Net carrying value of total consideration	$ 10,050,000
Elevation Burger [Member] | Elevation Buyer Note [Member]
Debt, interest rate percentage	6.00%
Trade notes receivable	$ 2,300,000
Maturity date	Aug. 31, 2026
Net carrying value of total consideration	$ 1,903,000			1,788,000		1,814,000
Debt discount	$ 397,000	$ 308,000		$ 308,000		$ 352,000
Minimum [Member]
Debt, interest rate percentage		6.00%		6.00%
Maximum [Member]
Debt, interest rate percentage		7.50%		7.50%

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Goodwill and Other Intangible Assets (Details Narrative) - Ponderosa and Bonanza Brands [Member] $ in Thousands	6 Months Ended
	Jun. 28, 2020 USD ($)
Goodwill impairment charges	$ 1,462
Tradename impairment charges	$ 1,712

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Goodwill and Other Intangible Assets - Schedule of Goodwill (Details) - USD ($) $ in Thousands	Jun. 28, 2020	Dec. 29, 2019
Total goodwill	$ 9,450	$ 10,912
Fatburger [Member]
Total goodwill	529	529
Buffalo's [Member]
Total goodwill	5,365	5,365
Hurricane [Member]
Total goodwill	2,772	2,772
Ponderosa and Bonanza [Member]
Total goodwill		1,462
Yalla [Member]
Total goodwill	263	263
Elevation Burger [Member]
Total goodwill	$ 521	$ 521

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Goodwill and Other Intangible Assets - Schedule of Intangible Assets (Details) - USD ($) $ in Thousands	Jun. 28, 2020	Dec. 29, 2019
Total trademarks	$ 20,740	$ 22,452
Total franchise agreements	6,817	7,282
Total Other Intangible Assets	27,557	29,734
Fatburger [Member]
Total trademarks	2,135	2,135
Buffalo's [Member]
Total trademarks	27	27
Hurricane [Member]
Total trademarks	6,840	6,840
Hurricane [Member] | Franchise Agreements [Member]
Cost	4,180	4,180
Accumulated amortization	(643)	(482)
Ponderosa and Bonanza [Member]
Total trademarks	5,518	7,230
Ponderosa and Bonanza [Member] | Franchise Agreements [Member]
Cost	1,640	1,640
Accumulated amortization	(298)	(243)
Yalla [Member]
Total trademarks	1,530	1,530
Elevation Burger [Member]
Total trademarks	4,690	4,690
Elevation Burger [Member] | Franchise Agreements [Member]
Cost	2,450	2,450
Accumulated amortization	$ (512)	$ (263)

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Goodwill and Other Intangible Assets - Schedule of Future Amortization (Details) - USD ($) $ in Thousands	Jun. 28, 2020	Dec. 29, 2019
Goodwill and Intangible Assets Disclosure [Abstract]
2020	$ 467
2021	932
2022	932
2023	932
2024	932
Thereafter	2,622
Total	$ 6,817	$ 7,282

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Deferred Income - Schedule of Deferred Income (Details) - USD ($) $ in Thousands	Jun. 28, 2020	Dec. 29, 2019
Contract with Customer, Liability [Abstract]
Deferred franchise fees	$ 5,493	$ 5,417
Deferred royalties	359	422
Deferred advertising revenue	324	303
Total	$ 6,176	$ 6,142

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Income Taxes (Details Narrative) - USD ($) $ in Thousands	Jun. 29, 2020	Jun. 28, 2020	Jun. 30, 2019
Fog Cutter Capital Group Inc [Member]
Due from related party		$ 154	$ 46
Tax Sharing Agreement [Member]
Due from related party	$ 29,529

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Income Taxes - Schedule of Components of Deferred Tax Assets and Liabilities (Details) - USD ($) $ in Thousands	Jun. 28, 2020	Dec. 29, 2019
Income Tax Disclosure [Abstract]
Deferred income	$ 1,508	$ 1,353
Reserves and accruals	208	208
Intangibles
Deferred state income tax
Tax credits	477	244
Share-based compensation	192	192
Property and equipment
Net operating loss carryforwards	1,661	894
Other
Total	$ 3,556	$ 2,032

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Income Taxes - Schedule of Components of the Income Tax (Benefit) Expense (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 28, 2020	Jun. 30, 2019	Jun. 28, 2020	Jun. 30, 2019
Income Tax Disclosure [Abstract]
Current: Federal			$ (118)	$ 318
Current: State			22	262
Current: Foreign			233	375
Current income tax expense (benefit), total			137	955
Deferred: Federal			(1,312)	(89)
Deferred: State			(211)	(241)
Deferred: income tax expense (benefit), total			(1,523)	(330)
Total income tax (benefit) expense	$ (1,089)	$ 1,344	$ (1,386)	$ 625

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Income Taxes - Schedule of Statutory Income Tax Rate to Pretax Income (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 28, 2020	Jun. 30, 2019	Jun. 28, 2020	Jun. 30, 2019
Income Tax Disclosure [Abstract]
Tax benefit at statutory rate			$ (1,681)	$ (124)
State and local income taxes			(150)	14
Foreign taxes			233	375
Tax credits			(233)	(375)
Dividends on preferred stock			361	643
Other			84	92
Total income tax expense (benefit)	$ (1,089)	$ 1,344	$ (1,386)	$ 625

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Leases (Details Narrative) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 28, 2020 USD ($)	Jun. 30, 2019 USD ($)	Jun. 28, 2020 USD ($) Integer	Jun. 30, 2019 USD ($)
Number of leased properties | Integer			7
Lease expense | $	$ 367	$ 355	$ 720	$ 702
Weighted average remaining lease term	5 years 7 months 6 days		5 years 7 months 6 days
Weighted average discount rate	15.90%		15.90%
Minimum [Member]
Leases remaining term	9 months		9 months
Lease options to extend	3 years		3 years
Maximum [Member]
Leases remaining term	7 years		7 years
Lease options to extend	10 years		10 years

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Leases - Summary of Operating Lease Right of Use Assets and Operating Lease Liabilities Relating to Operating Leases (Details) - USD ($) $ in Thousands	Jun. 28, 2020	Dec. 29, 2019
Right of use assets	$ 2,776	$ 860
Corporate Offices and For Certain Restaurant Properties [Member]
Right of use assets	4,947	4,076
Lease liabilities	$ 5,137	$ 4,206

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Leases - Schedule of Contractual Future Maturities of Operating Lease Liabilities (Details) - Corporate Offices and For Certain Restaurant Properties [Member] - USD ($) $ in Thousands	Jun. 28, 2020	Dec. 29, 2019
2020	$ 545
2021	1,141
2022	1,183
2023	1,223
2024	1,028
Thereafter	4,737
Total lease payments	9,857
Less imputed interest	(4,720)
Total	$ 5,137	$ 4,206

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Leases - Summary of Supplemental Cash Flow Information Related to Leases (Details) - Corporate Offices and For Certain Restaurant Properties [Member] $ in Thousands	6 Months Ended
	Jun. 28, 2020 USD ($)
Cash paid for amounts included in the measurement of operating lease liabilities: Operating cash flows from operating leases	$ 412
Operating lease right of use assets obtained in exchange for new lease obligations: Operating lease liabilities	$ 2,174

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Debt (Details Narrative) - USD ($)					3 Months Ended		6 Months Ended
	Jun. 28, 2020	Mar. 06, 2020	Jun. 19, 2019	Jan. 29, 2019	Jun. 28, 2020	Jun. 30, 2019	Jun. 28, 2020	Jun. 30, 2019	Jun. 29, 2019
Interest expense					$ 289,000	$ 834,000	$ 1,911,000	$ 2,520,000
Elevation Note [Member]
Debt, interest rate percentage	12.70%				12.70%		12.70%
Interest expense					$ 175,000	23,000	$ 364,000	23,000
Amortization of debt offering costs					2,000		5,000
Amortization of debt discount					70,000		141,000
Securitization Notes [Member]
Debt principle amount	$ 37,420,000	$ 40,000,000			37,420,000		37,420,000
Interest expense					886,000		1,173,000
Amortization of debt offering costs					103,000		136,000
Debt discount		246,000
Debt offering costs	2,347,000	2,440,000			2,347,000		2,347,000
Proceeds from issuance of debt		37,314,000
Original issue discount	$ 233,000
Amortization of original issue discount					$ 7,000		$ 12,000
Effective interest rate percentage	9.40%				9.40%		9.40%
PPP Loans [Member]
Debt, interest rate percentage	1.00%				1.00%		1.00%
Proceeds from issuance of debt					$ 1,532,000
Debt description					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.
Elevation Burger [Member] | Elevation Note [Member]
Debt instrument, maturity date			Jul. 31, 2026
Debt, interest rate percentage			6.00%
Principal amount of note			$ 7,509,816
Share price			$ 12.00
Debt outstanding amount	$ 5,778,000		$ 6,185,000		$ 5,778,000		$ 5,778,000
Debt discount	1,008,000		1,295,000		1,008,000		1,008,000
Debt offering costs	$ 61,000		$ 30,000		61,000		61,000
Loan and Security Agreement [Member]
Increase in borrowings									$ 3,500,000
Debt, penalties and fees					650,000		650,000
Interest expense					1,783,000	$ 1,076,000	1,783,000	$ 1,796,000
Amortization of debt offering costs					$ 212,000		$ 212,000
Loan and Security Agreement [Member] | Securitization Notes [Member]
Debt outstanding amount		26,771,000
Loan and Security Agreement [Member] | Lion Fund, L.P. and The Lion Fund II, L.P [Member]
Proceeds from loan				$ 20,000,000
Debt instrument, maturity date				Jun. 30, 2020
Debt, interest rate percentage				20.00%
Warrants issued to purchase shares				1,167,404
Exercise price per share				$ 0.01
Loan and Security Agreement [Member] | Lion Fund, L.P. and The Lion Fund II, L.P [Member] | FB Lending, LLC [Member]
Repayment of debt				$ 16,000,000
Original beginning warrant exercise date				Jun. 30, 2020
Lion Loan and Security Agreement [Member]
Repayment of debt		26,771,000
Debt principle amount		24,000,000
Accrued interest		2,120,000
Debt, penalties and fees		$ 651,000
Management Agreement [Member] | Securitization Notes [Member]
Debt description		The Management Agreement provides for a management fee payable monthly by FAT Royalty to the Company in the amount of $200,000, subject to three percent (3%) annual increases (the "Management Fee"). The primary responsibilities of the manager are to perform certain franchising, distribution, intellectual property and operational functions on behalf of the FAT Brands Franchise Entities pursuant to the Management Agreement.

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Debt - Schedule of Securitization of Notes (Details) $ in Thousands	Mar. 06, 2020 USD ($)
Securitization Note A-2 [Member]
Public Rating	BB
Seniority	Senior
Issue Amount	$ 20,000
Coupon	6.50%
First Call Date	Apr. 27, 2021
Final Legal Maturity Date	Apr. 27, 2026
Securitization Note B-2 [Member]
Public Rating	B
Seniority	Senior Subordinated
Issue Amount	$ 20,000
Coupon	9.00%
First Call Date	Apr. 27, 2021
Final Legal Maturity Date	Apr. 27, 2026

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Preferred Stock (Details Narrative)								3 Months Ended		6 Months Ended
	Jul. 13, 2020 $ / shares shares	Oct. 04, 2019 USD ($) PerUnit $ / shares shares	Oct. 03, 2019 USD ($) PerUnit $ / shares shares	Jul. 03, 2018 $ / shares shares	Jun. 27, 2018 USD ($) $ / shares shares	Jun. 08, 2018 $ / shares shares	Jun. 07, 2018 USD ($) $ / shares shares	Jun. 28, 2020 USD ($) $ / shares shares	Jun. 30, 2019 USD ($)	Jun. 28, 2020 USD ($) $ / shares shares	Jun. 30, 2019 USD ($)	Jun. 08, 2020 USD ($)	Oct. 20, 2017 USD ($)
Interest expense								$ 476,000	$ 431,000	$ 928,000	$ 862,000
Change in fair value of derivative liability								1,264,000		1,264,000
Fog Cutter Capital Group Inc [Member]
Amount of related party debt					$ 950,000
Related party debt prior to conversion					10,222,000
Subsequent Event [Member] | Holders [Member]
Share price | $ / shares	$ 25.00
Warrant Exchange Agreements [Member]
Warrant Outstanding | shares	285,700
Subscription Agreement [Member]
Number of stock sold value							$ 10,000
Sale of units in transactions | shares							800
Issuance of public offering							$ 8,000,000
Subscription Agreement [Member] | Warrant [Member]
Number of shares eligible for warrants | shares							102,125
Note Exchange Agreement [Member]
Debt face amount													$ 30,000,000
Converted to preferred stock					$ 2,000,000
Number of shares converted | shares					200
Note Exchange Agreement [Member] | Fog Cutter Capital Group Inc [Member]
Amount of related party debt					$ 9,272,053
Note Exchange Agreement [Member] | Warrant [Member]
Warrants price per share | $ / shares					$ 7.83
Number of shares eligible for warrants | shares					25,530
Conversion Option [Member]
Fair value of derivative liability								$ 1,142,000		1,142,000		$ 2,406,000
Change in fair value of derivative liability										$ 1,264,000
Series B Preferred Stock [Member]
Comprised of one share percentage		8.25%	8.25%
Number of warrants exercisable to purchase common shares offered in the Series B Preferred offering | shares										720,000
Annual cumulative dividend per share | $ / shares										$ 2.0625
Equivalent preferred stock percentage										8.25%
Liquidation preference shares | $ / shares								$ 25.00		$ 25.00
Preferred stock, shares outstanding | shares								57,140		57,140
Maturity date								Oct. 03, 2024
Preferred stock, carrying value
Debt discount
Unamortized debt offering costs
Interest expense								48,000		96,000
Amortization of debt offering costs								$ 18,000		36,000
Accretion expense										$ 1,000
Effective interest rate								17.80%		17.80%
Series B Preferred Stock [Member] | First Anniversary and on Prior to the Second Anniversary [Member]
Redemption price per share | $ / shares								$ 27.50		$ 27.50
Accrued and unpaid dividends redemption price per share | $ / shares								22.00		22.00
Series B Preferred Stock [Member] | Second Anniversary and on Prior to the Third Anniversary [Member]
Redemption price per share | $ / shares								26.125		26.125
Accrued and unpaid dividends redemption price per share | $ / shares								22.50		22.50
Series B Preferred Stock [Member] | After the Third Anniversary [Member]
Redemption price per share | $ / shares								25.00		25.00
Series B Preferred Stock [Member] | After the Third Anniversary and On Prior to the Fourth Anniversary [Member]
Accrued and unpaid dividends redemption price per share | $ / shares								23.00		23.00
Series B Preferred Stock [Member] | After the Fourth Anniversary [Member]
Accrued and unpaid dividends redemption price per share | $ / shares								$ 25.00		$ 25.00
Series B Warrant [Member]
Warrants to purchase common stock per unit | PerUnit		0.60	0.60
Warrants price per share | $ / shares		$ 8.50	$ 8.50
Exercisable period		5 years	5 years
Series B Warrant [Member] | Warrant Exchange Agreements [Member]
Warrant Outstanding | shares	34,284
Series B Warrant [Member] | Warrant Exchange Agreements [Member] | Subsequent Event [Member]
Warrant Outstanding | shares	34,284
Series B Offering Warrants [Member] | Warrant Exchange Agreements [Member] | Subsequent Event [Member]
Warrant Outstanding | shares	285,700
Series A Preferred Stock [Member]
Liquidation preference shares | $ / shares						$ 100.00
Redemption price per share | $ / shares						$ 100.00
Preferred stock, shares outstanding | shares								100,000		100,000
Preferred stock, carrying value								$ 9,925,000		$ 9,925,000
Debt discount								65,000		65,000
Unamortized debt offering costs								11,000		11,000
Interest expense								354,000	354,000	708,000	708,000
Amortization of debt offering costs								1,000	1,000	2,000	2,000
Accretion expense								$ 5,000	5,500	$ 11,000	11,000
Number of shares designated | shares						100,000
Cash dividend rate						9.90%
Deferred dividend rate						4.00%
Series A Preferred Stock [Member] | Holders [Member]
Number of shares issued | shares	85,000
Series A Preferred Stock [Member] | FCCG [Member] | Holders [Member]
Number of shares issued | shares	15,000
Series A Preferred Stock [Member] | On Or Prior to June 30, 2021 [Member]
Redemption price per share | $ / shares								$ 115.00		$ 115.00
Series A Preferred Stock [Member] | After June 30, 2021 and On Or Prior to June 30, 2022 [Member]
Redemption price per share | $ / shares								110.00		110.00
Series A Preferred Stock [Member] | After June 30, 2022 [Member]
Redemption price per share | $ / shares								100.00		100.00
Series A Preferred Stock [Member] | Subscription Agreement [Member]
Number of shares issued | shares							80,000
Series A Fixed Rate Cumulative Preferred Stock [Member] | Subscription Agreement [Member]
Number of shares designated | shares							100
Series A Fixed Rate Cumulative Preferred Stock [Member] | Note Exchange Agreement [Member]
Number of shares converted | shares					20,000
Conversion price per share | $ / shares					$ 100
Series A Warrants [Member] | Subscription Agreement [Member]
Warrants price per share | $ / shares							$ 7.83
Number of shares eligible for warrants | shares							127
Exchange Shares [Member] | Note Exchange Agreement [Member] | Common Stock [Member]
Amount of related party debt					$ 7,272,053
Number of shares converted | shares					1,010,420
Conversion price per share | $ / shares					$ 7.20
Series A-1 Preferred Stock [Member]
Liquidation preference shares | $ / shares				$ 100.00
Redemption price per share | $ / shares								100.00		100.00
Accrued and unpaid dividends redemption price per share | $ / shares								$ 100.00		$ 100.00
Preferred stock, shares outstanding | shares								45,000		45,000
Preferred stock, carrying value								$ 4,421,000		$ 4,421,000
Debt discount								58,000		58,000
Unamortized debt offering costs								21,000		21,000
Interest expense								74,000	77,000	123,000	154,000
Amortization of debt offering costs								1,000	1,700	3,000	3,000
Accretion expense								$ 4,000	$ 8,000	$ 15,000	$ 16,000
Warrant Outstanding | shares								0.056		0.056
Number of shares designated | shares				200,000
Cash dividend rate				6.00%
Share price | $ / shares								$ 11.75		$ 11.75
Maximum [Member]
Sale of units in transactions | shares										1,200,000
Series B Preferred Offering [Member] | Series B Unit [Member]
Price per unit | $ / shares		$ 25.00	$ 25.00
Sale of units in transactions | shares		43,080	43,080
Series B Preferred Offering [Member] | Maximum [Member] | Series B Unit [Member]
Number of stock sold value		$ 30,000,000	$ 30,000,000

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Related Party Transactions (Details Narrative)			6 Months Ended
	Oct. 04, 2019 USD ($) PerUnit $ / shares shares	Oct. 03, 2019 USD ($) PerUnit $ / shares shares	Jun. 28, 2020 USD ($) $ / shares shares	Apr. 24, 2020 USD ($)	Jun. 30, 2019 USD ($)	Feb. 07, 2019 $ / shares	Jul. 05, 2018 USD ($)	Oct. 20, 2017 USD ($)
Common stock price per shares | $ / shares						$ 5.64
Andrew Wiederhorn [Member]
Class of warrants or rights to purchase common stock			12,000
Squire Junger [Member]
Class of warrants or rights to purchase common stock			3,000
Mr. Wiederhorn, Mr. Junger, and Other Related Parties [Member]
Class of warrants or rights to purchase common stock			19,800
Series B Unit [Member] | Andrew Wiederhorn [Member]
Stock issued during period acquisition, shares			20,000
Stock issued during period acquisition, value | $			$ 500,000
Series B Unit [Member] | Squire Junger [Member]
Stock issued during period acquisition, shares			5,000
Stock issued during period acquisition, value | $			$ 125,000
Series B Unit [Member] | Mr. Wiederhorn, Mr. Junger, and Other Related Parties [Member]
Stock issued during period acquisition, shares			33,000
Stock issued during period acquisition, value | $			$ 825,000
Common stock price per shares | $ / shares			$ 8.50
Series B Preferred Stock [Member]
Comprised of one share percentage	8.25%	8.25%
Series B Preferred Stock [Member] | Andrew Wiederhorn [Member]
Stock issued during period acquisition, shares			20,000
Common stock price per shares | $ / shares			$ 8.50
Series B Preferred Stock [Member] | Squire Junger [Member]
Stock issued during period acquisition, shares			5,000
Common stock price per shares | $ / shares			$ 8.50
Series B Preferred Stock [Member] | Mr. Wiederhorn, Mr. Junger, and Other Related Parties [Member]
Stock issued during period acquisition, shares			33,000
Series B Warrant [Member]
Warrants to purchase common stock per unit | PerUnit	0.60	0.60
Warrants price per share | $ / shares	$ 8.50	$ 8.50
Exercisable period	5 years	5 years
Series B Warrant [Member] | Andrew Wiederhorn [Member]
Class of warrants or rights to purchase common stock			12,000
Series B Warrant [Member] | Squire Junger [Member]
Class of warrants or rights to purchase common stock			3,000
Series B Warrant [Member] | Mr. Wiederhorn, Mr. Junger, and Other Related Parties [Member]
Class of warrants or rights to purchase common stock			19,800
Series B Preferred Offering [Member] | Series B Unit [Member]
Price per unit | $ / shares	$ 25.00	$ 25.00
Sale of preferred stock	43,080	43,080
Sale of preferred stock, value | $	$ 1,077,000	$ 1,077,000
Maximum [Member]
Debt, interest rate percentage			7.50%
Sale of preferred stock			1,200,000
Maximum [Member] | Series B Preferred Offering [Member] | Series B Unit [Member]
Number of stock sold value | $	$ 30,000,000	$ 30,000,000
Fog Cutter Capital Group Inc [Member]
Balance receivable | $			$ 154,000		$ 46,000
Accrued interest income receivable | $			5,200,000
Homestyle Dining LLC [Member]
Debt face amount | $							$ 4,000,000
Debt, interest rate percentage							15.00%
Intercompany Revolving Credit Agreement [Member]
Balance receivable | $			$ 29,529,000
Intercompany Revolving Credit Agreement [Member] | FCCG [Member] | Subsequent To October 20, 2017 [Member] | Additional Intercompany advances [Member]
Debt, interest rate percentage				10.00%
Intercompany Revolving Credit Agreement [Member] | FCCG [Member] | Intercompany Promissory Note [Member]
Debt face amount | $				$ 21,067,000				$ 11,906,000
Intercompany Revolving Credit Agreement [Member] | FCCG [Member] | Intercompany Promissory Note [Member] | Maximum [Member]
Debt face amount | $				$ 35,000,000

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Shareholders' Equity (Details Narrative) - $ / shares	May 12, 2020	Feb. 11, 2020	Jun. 28, 2020	Dec. 29, 2019	Feb. 07, 2019
Common stock, shares authorized			25,000,000	25,000,000
Common stock, shares outstanding			11,894,895	11,860,299
Share issued price per share					$ 5.64
Non-Employees [Member]
Number of shares issued	18,236	16,360
Share issued price per share	$ 3.29	$ 4.585

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Share-Based Compensation (Details Narrative) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 28, 2020	Jun. 30, 2019	Jun. 28, 2020	Jun. 30, 2019
Options vesting period			3 years
Options vesting description			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
Stock based compensation expense	$ 15	$ 78	$ 16	$ 159
Stock based compensation to non-vested grants			$ 59
2017 Omnibus Equity Incentive Plan [Member] | Maximum [Member]
Number of shares available for grant	1,021,250		1,021,250

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Share-Based Compensation - Schedule of Stock Option Activity (Details)	6 Months Ended
	Jun. 28, 2020 $ / shares shares
Equity [Abstract]
Number of Shares, Stock options outstanding, beginning balance | shares	722,481
Number of Shares, Grants | shares
Number of Shares, Forfeited | shares	(127,648)
Number of Shares, Expired | shares
Number of Shares, Stock options outstanding, ending balance | shares	594,833
Number of Shares, Stock options exercisable, ending balance | shares	296,145
Weighted Average Exercise Price, Stock options outstanding, beginning balance | $ / shares	$ 8.45
Weighted Average Exercise Price, Grants | $ / shares
Weighted Average Exercise Price, Forfeited | $ / shares	7.60
Weighted Average Exercise Price, Expired | $ / shares
Weighted Average Exercise Price, Stock options outstanding, ending balance | $ / shares	8.64
Weighted Average Exercise Price, Stock options exercisable, ending balance | $ / shares	$ 9.85
Weighted Average Remaining Contractual Life (Years), Stock options outstanding, beginning balance	8 years
Weighted Average Remaining Contractual Life (Years), Grants	0 years
Weighted Average Remaining Contractual Life (Years), Forfeited	8 years 3 months 19 days
Weighted Average Remaining Contractual Life (Years), Expired	0 years
Weighted Average Remaining Contractual Life (Years), Stock options outstanding, ending balance	7 years 10 months 25 days
Weighted Average Remaining Contractual Life (Years), Stock options exercisable, ending balance	7 years 8 months 12 days

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Share-Based Compensation - Schedule of Assumptions Used for Stock-based Compensation (Details) - Including Non-Employee Options [Member]	6 Months Ended
	Jun. 28, 2020
Minimum [Member]
Expected dividend yield	4.00%
Expected volatility	30.23%
Risk-free interest rate	1.52%
Expected term (in years)	5 years 6 months
Maximum [Member]
Expected dividend yield	10.43%
Expected volatility	31.73%
Risk-free interest rate	2.85%
Expected term (in years)	5 years 9 months

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Warrants (Details Narrative) - USD ($) $ / shares in Units, $ in Thousands			3 Months Ended
	Jun. 19, 2019	Oct. 20, 2017	Dec. 29, 2019	Jul. 03, 2018	Jun. 27, 2018	Jun. 07, 2018
Elevation Burger [Member]
Number of shares eligible for warrants	46,875
Warrants price per share	$ 8.00
Common Stock Warrants [Member]
Number of shares eligible for warrants		81,700
Warrants price per share		$ 14.69
Common stock warrants value		$ 124
Warrants exercisable date, description		Exercisable commencing April 20, 2018 through October 20, 2022.
Subscription Warrants [Member]
Number of shares eligible for warrants						102,125
Warrants price per share						$ 7.83
Common stock warrants value						$ 87
Exchange Warrants [Member]
Number of shares eligible for warrants					25,530
Warrants price per share					$ 7.83
Common stock warrants value					$ 25
Hurricane Warrants [Member]
Number of shares eligible for warrants				57,439
Warrants price per share				$ 7.83
Common stock warrants value				$ 58
Lender Warrant [Member]
Number of shares eligible for warrants				509,604
Warrants price per share				$ 7.20
Common stock warrants value				$ 592
Lender Warrant [Member] | FB Lending, LLC [Member]
Term loan borrowings				$ 16,000
Placement Agent Warrants [Member]
Number of shares eligible for warrants				66,691
Warrants price per share				$ 7.20
Common stock warrants value				$ 78
Placement Agent Warrants [Member] | FB Lending, LLC [Member]
Term loan borrowings				$ 16,000
Elevation Warrant [Member] | Elevation Burger [Member]
Number of shares eligible for warrants	46,875
Warrants price per share	$ 8.00
Warrants exercisable, term	5 years
Series B Warrants [Member] | Elevation Burger [Member]
Number of shares eligible for warrants			34,284
Warrants price per share			$ 8.50
Common stock warrants value			$ 21
Warrants exercisable date, description			Exercisable for a period of five years from October 3, 2019

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Warrants - Summary of Warrant Activity (Details) - Warrant [Member]	6 Months Ended
	Jun. 28, 2020 $ / shares shares
Number of Shares, Warrants Outstanding, Beginning balance | shares	2,091,652
Number of Shares, Warrants Grants | shares
Number of Shares, Warrants Exercised | shares
Number of Shares, Warrants Forfeited | shares	(1,167,404)
Number of Shares, Warrants Expired | shares
Number of Shares, Warrants Outstanding, Ending balance | shares	924,248
Number of Shares, Warrants Exercisable Ending Balance | shares	877,373
Weighted Average Exercise Price, Warrants outstanding, Beginning balance | $ / shares	$ 3.57
Weighted Average Exercise Price, Warrants Grants | $ / shares
Weighted Average Exercise Price, Warrants Exercised | $ / shares
Weighted Average Exercise Price, Warrants Forfeited | $ / shares	0.01
Weighted Average Exercise Price, Warrants Expired | $ / shares
Weighted Average Exercise Price, Warrants outstanding, Ending balance | $ / shares	8.08
Weighted Average Exercise Price, Warrants exercisable ending balance | $ / shares	$ 8.08
Weighted Average Remaining Contractual Life (Years), Warrants outstanding, Beginning balance	4 years
Weighted Average Remaining Contractual Life (Years), Warrants Grants	0 years
Weighted Average Remaining Contractual Life (Years), Warrants Exercised	0 years
Weighted Average Remaining Contractual Life (Years), Warrants Forfeited	4 years 9 months 18 days
Weighted Average Remaining Contractual Life (Years), Warrants Expired	0 years
Weighted Average Remaining Contractual Life (Years), Warrants outstanding, Ending balance	3 years 1 month 6 days
Weighted Average Remaining Contractual Life (Years), Warrants exercisable	3 years

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Warrants - Schedule of Assumptions Used for Stock-based Compensation, Warrants (Details)	Jun. 28, 2020 Integer
Expected Dividend Yield [Member] | Minimum [Member]
Warrants, measurement input, percentage	4.00
Expected Dividend Yield [Member] | Maximum [Member]
Warrants, measurement input, percentage	6.63
Expected Volatility [Member] | Minimum [Member]
Warrants, measurement input, percentage	30.23
Expected Volatility [Member] | Maximum [Member]
Warrants, measurement input, percentage	31.73
Risk-free Interest Rate [Member] | Minimum [Member]
Warrants, measurement input, percentage	0.99
Risk-free Interest Rate [Member] | Maximum [Member]
Warrants, measurement input, percentage	1.91
Expected Term [Member] | Minimum [Member]
Warrants, expected term	3 years 9 months 18 days
Expected Term [Member] | Maximum [Member]
Warrants, expected term	5 years

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Dividends on Common Stock (Details Narrative)	Feb. 07, 2019 $ / shares shares
Equity [Abstract]
Common stock dividend rate	2.13%
Dividend declared per share	$ 0.12
Dividend payable date	Feb. 28, 2019
Dividend payable record date	Feb. 19, 2019
Number of common stock share issued | shares	245,376
Share issued price per share	$ 5.64

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Commitments and Contingencies (Details Narrative)		6 Months Ended
	Jul. 16, 2020 USD ($)	Jun. 28, 2020 ft²
Elevation Subleases [Member] | Unrelated Third party [Member]
Square feet of space		2,500
Beverly Hills, California [Member]
Square feet of space		6,137
Operating lease expiration date		Sep. 29, 2025
Additional square feet of space		2,915
Additional operating lease expiration date		Feb. 29, 2024
Plano,TX [Member]
Square feet of space		1,775
Operating lease expiration date		Mar. 31, 2021
Falls Church, VA [Member]
Square feet of space		5,057
Operating lease expiration date		Dec. 31, 2020
Subsequent Event [Member]
Prejudice in exchange for payment amount | $	$ 75,000

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Geographic Information and Major Franchisees (Details Narrative)	6 Months Ended
	Jun. 28, 2020	Jun. 30, 2019
Geographic Information And Major Franchisees
Franchise revenue percentage description	No individual franchisee accounted for more than 10% of the Company's revenues.	No individual franchisee accounted for more than 10% of the Company's revenues.

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Geographic Information and Major Franchisees - Schedule of Revenues by Geographic Area (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 28, 2020	Jun. 30, 2019	Jun. 28, 2020	Jun. 30, 2019
Total revenues	$ 3,107	$ 5,895	$ 7,530	$ 10,768
United States [Member]
Total revenues	2,564	5,059	6,273	9,070
Other Countries [Member]
Total revenues	$ 543	$ 836	$ 1,257	$ 1,698

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Operating Segments (Details Narrative)	6 Months Ended
	Jun. 28, 2020 Integer
Segment Reporting [Abstract]
Number of operating segment	1
Number of reportable segment	1

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Subsequent Events (Details Narrative) - USD ($)				6 Months Ended
	Jul. 16, 2020	Jul. 15, 2020	Jul. 13, 2020	Jun. 28, 2020	Jul. 30, 2020	Oct. 04, 2019	Oct. 03, 2019	Feb. 07, 2019	Jul. 03, 2018
Option to purchase shares
Share issued price per share								$ 5.64
Lender Warrant [Member]
Number of warrants to purchase common stock									509,604
Warrants price per share									$ 7.20
Series B Warrant [Member]
Warrants price per share						$ 8.50	$ 8.50
Warrant Exchange Agreements [Member]
Warrants outstanding			285,700
Warrant Exchange Agreements [Member] | Series B Warrant [Member]
Warrants outstanding			34,284
Subsequent Event [Member] | Series B Preferred Stock [Member]
Preferred stock, designated shares		850,000
Subsequent Event [Member] | Series B Preferred Stock [Member] | Fog Cutter Capital Group, Inc. [Member]
Share issued price per share			$ 25.00
Subsequent Event [Member] | Series A Preferred Stock [Member] | Trojan Investments, LLC [Member]
Stock issued during the period redeemed			80,000
Stock issued during the period redeemed, value			$ 2,000,000
Subsequent Event [Member] | Series A Preferred Stock [Member] | Ridgewood Select Value Fund LP [Member]
Stock issued during the period redeemed			5,000
Subsequent Event [Member] | Series A Preferred Stock [Member] | Fog Cutter Capital Group, Inc. [Member]
Number of shares exchange, shares			15,000
Subsequent Event [Member] | Underwriting Agreement [Member]
Net proceeds offering amount	$ 8,211,000
Underwriting and offering costs	$ 790,000
Subsequent Event [Member] | Underwriting Agreement [Member] | Series B Preferred Stock [Member]
Number of shares issued			360,000
Preferred stock percentage			8.25%
Option to purchase shares			54,000
Subsequent Event [Member] | Underwriting Agreement [Member] | 2020 Series B Warrants [Member]
Number of warrants to purchase common stock			1,800,000
Warrants price per share			$ 5.00
Option to purchase shares			270,000
Underwriting discount percentage			8.00%
Warrants exercisable			1.00%
Subsequent Event [Member] | Warrant Agency Agreement [Member]
Warrant description	Entered into a Warrant Agency Agreement with VStock Transfer, LLC, to act as the Warrant Agent for the Warrants (the "Warrant Agency Agreement"). The Warrant Agency Agreement sets forth the terms of the Warrants and includes the form of Warrant Certificate issued to investors in the Offering. The Warrants are 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, Fog Cutter Capital Group Inc., and will expire on July 16, 2025.
Subsequent Event [Member] | Settlement, Redemption and Release Agreement [Member] | Series B Preferred Stock [Member]
Share issued price per share			$ 25.00
Subsequent Event [Member] | Warrant Exchange Agreements [Member] | Series B Warrant [Member]
Warrants outstanding			34,284
Subsequent Event [Member] | Lender Warrant Purchase Agreement [Member]
Warrant purchase amount					$ 249,500