UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended JuneMarch 28, 20202021

OR

Commission file number 001-38250

FAT Brands Inc.

(Exact name of registrant as specified in its charter)

9720 Wilshire Blvd., Suite 500

Beverly Hills, CA 90212

(Address of principal executive offices, including zip code)

(310) 319-1850

(Registrant’s telephone number, including area code)

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

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

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.

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,May 7, 2021, there were 11,894,89512,229,479 shares of common stock outstanding.

FAT BRANDS INC.

QUARTERLY REPORT ON FORM 10-Q

JuneMarch 28, 20202021

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

FAT BRANDS INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

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

FAT BRANDS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except share data)

For the Thirteen Weeks Ended March 28, 2021 and March 29, 2020

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

FAT BRANDS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(dollars in thousands, except share data)

For the Thirteen Weeks Ended March 28, 2021

For the Thirteen Weeks Ended March 29, 2020

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

FAT BRANDS INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(dollars in thousands)

For the Thirteen Weeks Ended March 28, 2021 and March 29, 2020

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

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)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1. ORGANIZATION AND RELATIONSHIPS

Organization and Nature of Business

FAT Brands Inc. (the “Company”“Company or FAT”) was formed onis a leading multi-brand restaurant franchising company that develops, markets, and acquires primarily quick-service, fast casual and casual dining restaurant concepts around the world. Organized in 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 on October 20, 2017 and issued additional shares of common stock representing 20 percent of its ownershipownership. During the fourth quarter of 2020, the Company completed a transaction in which FCCG merged into a wholly owned subsidiary of FAT (the “Offering”“Merger”). The Company’s common stock trades on, and FAT became the Nasdaq Capital Market under the symbol “FAT.” Asindirect parent company of June 28, 2020, FCCG continues to control a significant voting majority of the Company.FCCG.

The Company is a multi-brand franchisor specializing in fast casual and casual dining restaurant concepts around the world. As of JuneMarch 28, 2020,2021, the Company owns and franchises eightnine restaurant brands:brands through various wholly owned subsidiaries: Fatburger, Johnny Rockets, 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 375have approximately 700 locations, including units worldwideunder construction, and have more than 200 additional units under development.

The CompanyEach franchising subsidiary licenses the right to use its brand namesname 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.

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 corporate accounting services. 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 and classifies the operational activities as refranchising gains or losses and the assets and associated liabilities as held-for sale.

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 franchisee and Company revenues. While the disruption to our business from the COVID-19 pandemic is currently expected to be temporary, there is still 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 income from operations of $104,000 during the thirteen weeks ended March 28, 2021 compared to a loss from operations of $6,368,000 during$578,000 for the twenty-sixthirteen weeks ended June 28, 2020 and income from operations of $2,889,000 for the twenty-six weeks ended June 30, 2019, respectively.March 29, 2020. The Company recognized a net lossesloss of $6,621,000 and $1,218,000$2,432,000 during the twenty-sixthirteen weeks ended JuneMarch 28, 2020 and June 30, 2019, respectively.2021 compared to a net loss of $2,370,000 during the thirteen weeks ended March 29, 2020. Net cash used in operations totaled $1,246,000 for the thirteen weeks ended March 28, 2021 compared to $3,371,000 for thirteen weeks ended March 29, 2020. As of March 28, 2021, the Company’s total liabilities exceeded total assets by $45,576,000 compared to $41,883,000 as of December 27, 2020. The reductionchange in earnings is primarily due to reductions in revenues and impairment of assets due tothe Company’s financial position reflects operating improvements as the effects of COVID-19 coupled with higher general and administrative costs.began to stabilize offset by the assumption of certain liabilities related to the Merger in December 2020.

On March 6,In the Company’s 2020 Annual Report on Form 10-K (“2020 Form 10-K”), the Company completed a whole-business securitization (the “Securitization”) throughdisclosed that the creationcombination 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 indenturethe operating performance during the twelve months ended December 27, 2020 and the supplement thereto (collectively,Company’s financial position as of December 27, 2020 raised substantial doubt about the “Indenture”Company’s ability to continue as a going concern as assessed under the framework of FASB’s Accounting Standard Codification (“ASC”). Net proceeds from 205 for the twelve months following the date of the issuance of the Securitization Notes were $37,314,000, which consisted2020 Form 10-K.

Subsequent to the reporting period ended March 28, 2021, on April 26, 2021, the Company completed the issuance and sale in a private offering (the “Offering”) of three tranches of fixed rate secured notes (see Note 21). Proceeds 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 wasOffering were used to repay the remaining $26,771,000 in outstanding balance under the Loan and Security Agreement and to pay thefull its 2020 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.Notes as well as five restaurant locations that are part of the Company’s refranchising program.

Subsequentfees and expenses related to the end of the second quarter, on July 13, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) to issue and sellOffering, resulting 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, whichapproximately $57 million (see Note 11). The Offering alleviated the substantial doubt about the Company’s ability to continue as a going concern that was net of $790,000disclosed in underwriting and offering costs.the 2020 Form 10-K.

WhileThe Company utilized a portion of the net proceeds from the Offering to repay a portion of indebtedness assumed as a result of the Merger (see Notes 11 and 21).

In addition to the liquidity provided by the successful completion of the Offering, the Company expectshas experienced significant improvement in its operating performance subsequent to December 27, 2020, as COVID-19 vaccinations have become more prevalent in the COVID-19 pandemic to negatively impactUnited States and federal, state and local restrictions have eased in many of the markets where its business, results of operations, and financial position, the related financial impact cannot be reasonably estimated at this time. However,franchisees operate. As a result, 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 expensesliquidity position 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. BothThe first reporting period for each of fiscal years 2020 and 2019 are 52-week years.2021 were 13 weeks.

Principles of consolidation – The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. The operations of Elevation BurgerJohnny Rockets have been included since its acquisition on June 19, 2019.September 21, 2020 and the operations of FCCG have been included since the merger on December 24, 2020. Intercompany accounts have been eliminated in consolidation.

Use of estimates in the preparation of the consolidated financial statements – The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the determination of fair values of certain financial instrumentsintangibles for which there is no active market, the allocation of basis between assets acquired, sold or retained, and valuation allowances for notes and accounts receivable, and accounts receivable.deferred tax assets. 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.classifications including measurement period adjustments to the preliminary purchase price allocations relating to the acquisition of Johnny Rockets and the Merger in accordance with ASU 2015-16. During the first quarter of 2021, adjustments were made to provisional amounts reclassifying $1,203,000 between goodwill and additional paid in capital on the consolidated balance sheet. These adjustments did not impact the Company’s consolidated statement of operations during the current period or during prior periods.

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’sfranchisee’s financial conditionscondition prior to entry into a franchise or other agreement, as well as periodically through the term of the agreement, and believes that it has adequately provided for any exposureexposures to potential credit losses. As of JuneMarch 28, 2021 and December 27, 2020, accounts receivable, net of allowance for doubtful accounts, totaled $2,469,000,$4,466,000 and $4,208,000, with no customerfranchisee 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.amount at either date.

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 JuneMarch 28, 2021 and December 27, 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.$3,931,238 and $6,047,299, respectively.

Restricted Cash – The Company has restricted cash consisting of funds required to be held in trust in connection with the Company’s Securitization.securitized debt. The current portion of restricted cash at Juneas of March 28, 2021 and December 27, 2020 consisted of $1,347,000.$3,353,000 and $2,867,000, respectively. Non-current restricted cash of $400,000 at Juneas of March 28, 2021 and December 27, 2020, represents interest reserves required to be set aside for the duration of the securitized debt. There were no restricted cash balances as of December 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 JuneMarch 28, 20202021 and December 29, 2019,27, 2020, accounts receivable werewas stated net of an allowance for doubtful accounts of $470,000$762,000 and $595,000,$739,000, 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:

Other than thea derivative liability that existed during part of 2020 and the contingent consideration payable liabilities incurred in connection with the acquisition of certain of our brands, 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)12). 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,would, 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 willwould pay FCCG the amount that its tax liability would have been had it filed a separate return. As such, prior to the Merger, the Company accountsaccounted for income taxes as if it filed separately from FCCG. The Tax Sharing Agreement was cancelled in connection with the Merger.

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 isincludes 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.agreement on a straight-line basis. Unamortized non-refundable deposits collected in relation to the sale of franchises are recorded as deferred franchise fees.

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

Store opening fees – Prior to September 29, 2019, the Company recognized store opening fees in the amount of $35,000 to $60,000 from the up-front fees collected from franchisees upon store opening. The amount of the fee was dependent on brand and location (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 1415 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“Earnings Per Share”Share”. Basic earnings per share is computed using the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share is computed using the weighted average number of common shares outstanding plus the effect of dilutive securities during the reporting period. Any potentially dilutive securities that have an anti-dilutive impact on the per share calculation are excluded. During periods in which the Company reports a net loss, diluted weighted average shares outstanding are equal to basic weighted average shares outstanding because the effect of the inclusion of all potentially dilutive securities would be anti-dilutive. As of JuneMarch 28, 20202021 and June 30, 2019,March 29, 2020, there were no potentially dilutive securities excluded fromconsidered in the calculation of diluted loss per common share due to a losslosses for theeach 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 AdoptedIssued Accounting Standards

In August 2018,June 2016, the FASB issued ASU 2018-13,2016-13, Fair Value MeasurementFinancial Instruments-Credit Losses (Topic 820)326)-Measurement of Credit Losses on Financial Instruments, and later amended the ASU in 2019, as described below. This guidance replaces the current incurred loss impairment methodology. Under the new guidance, on initial recognition and at each reporting period, an entity is required to recognize an allowance that reflects its current estimate of credit losses expected to be incurred over the life of the financial instrument based on historical experience, current conditions and reasonable and supportable forecasts.

In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Disclosure Framework – ChangesEffective Dates (“ASU 2019-10”). The purpose of this amendment is to create a two-tier rollout of major updates, staggering the Disclosure Requirementseffective dates between larger public companies and all other entities. This granted certain classes of companies, including Smaller Reporting Companies (“SRCs”), additional time to implement major FASB standards, including ASU 2016-13. Larger public companies will have an effective date for Fair Value Measurement.” Thisfiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All other entities are permitted to defer adoption of ASU adds, modifies2016-13, and removes several disclosure requirements relativeits related amendments, until the earlier of fiscal periods beginning after December 15, 2022. Under the current SEC definitions, the Company meets the definition of an SRC and is adopting the deferral period for ASU 2016-13. The guidance requires a modified retrospective transition approach through a cumulative-effect adjustment to retained earnings as of the three levelsbeginning of inputs used to measure fair value in accordance with Topic 820, “Fair Value Measurement.”the period of adoption. The Company adopted thisis currently evaluating the impact of the adoption of ASU 2016-13 on December 30, 2019. Theits consolidated financial statements but does not expect that the adoption of this standard did notwill have a material effectimpact on the Company’sits consolidated 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.statements.

NOTE 3. ACQUISITIONSMERGERS AND SIGNIFICANT TRANSACTIONSACQUISITIONS

Merger with Fog Cutter Capital Group Inc.

On December 10, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with FCCG, Fog Cutter Acquisition, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company (“Merger Sub”), and Fog Cutter Holdings, LLC, a Delaware limited liability company (“Holdings”).

Pursuant to the Merger Agreement, FCCG agreed to merge with and into Merger Sub, with Merger Sub surviving as a wholly owned subsidiary of the Company (the “Merger”). Upon closing of the Merger, the former stockholders of FCCG became direct stockholders of the Company holding, in the aggregate, 9,679,288 shares of the Company’s common stock (the same number of shares of common stock held by FCCG immediately prior to the Merger) and will receive certain limited registration rights with respect to the shares received in the Merger. As a result of the Merger, FCCG’s wholly owned subsidiaries, Homestyle Dining, LLC, Fog Cap Development LLC, Fog Cap Acceptance Inc. and BC Canyon LLC, became indirect wholly owned subsidiaries of the Company (the “Merged Entities”).

Under the Merger Agreement, Holdings has agreed to indemnify the Company for breaches of FCCG’s representations and warranties, covenants and certain other matters specified in the Merger Agreement, subject to certain exceptions and qualifications. Holdings has also agreed to hold a minimum fair market value of shares of Common Stock of the Company to ensure that it has assets available to satisfy such indemnification obligations if necessary.

In connection with the Merger, the Company declared a special stock dividend (the “Special Dividend”) payable on the record date only to holders of our Common Stock, other than FCCG, consisting of 0.2319998077 shares of the Company’s 8.25% Series B Cumulative Preferred Stock (liquidation preference $25.00 per share) (the “Series B Preferred Stock”) for each outstanding share of Common Stock held by such stockholders, with the value of any fractional shares of Series B Preferred Stock being paid in cash. FCCG did not receive any portion of the Special Dividend, which had a record date of December 21, 2020 and payment date of December 23, 2020. The Special Dividend was expressly conditioned upon the satisfaction or valid waiver of the conditions to closing of the Merger set forth in the Merger Agreement. The Special Dividend was intended to reflect consideration for the potential financial impact of the Merger on the common stockholders other than FCCG, including the assumption of certain debts and obligations of FCCG by the Company by virtue of the Merger.

The Company undertook the Merger primarily to simplify its corporate structure and eliminate limitations that restrict the Company’s ability to issue additional Common Stock for acquisitions and capital raising. FCCG holds a substantial amount of net operating loss carryforwards (“NOLs”), which could only be made available to the Company as long as FCCG owned at least 80% of FAT Brands. With the Merger, the NOLs will be held directly by the Company, which will then have greater flexibility in managing its capital structure. In addition, after the Merger the Company will no longer be required to compensate FCCG for utilizing its NOLs under the Tax Sharing Agreement previously in effect between the Company and FCCG.

The Merger is treated under ASC 805-50-30-6 which indicates that when there is a transfer of assets or exchange of shares between entities under common control, the receiving entity shall recognize those assets and liabilities at their net carrying amounts at the date of transfer. As such, on the date of the Merger, all of the transferred assets and assumed liabilities of FCCG and the Merged Entities are recorded on the Company’s books at FCCG’s book value. The consolidation of the operations of FCCG and the Merged Entities with the Company is presented on a prospective basis from the date of transfer as there has not been a change in the reporting entity.

The Merger resulted in the following assets and liabilities being included in the consolidated financial statements of the Company as of the Merger date (in thousands):

A net loss of $432,000 attributed to the Merged Entities is included in the accompanying consolidated statements of operations for the thirteen weeks ended March 28, 2021. There were no revenues attributed to the Merged Entities during the period.

Proforma Information

The table below presents the proforma revenue and net loss of the Company for the thirteen weeks ended March 29, 2020, assuming the Merger had occurred on December 30, 2019 (the beginning of the Company’s 2020 fiscal year), pursuant to ASC 805-10-50 (in thousands). This proforma information does not purport to represent what the actual results of operations of the Company would have been had the Merger occurred on that date, nor does it purport to predict the results of operations for future periods.

The proforma information above reflects the combination of the Company’s results as disclosed in the accompanying consolidated statements of operations for the thirteen weeks ended March 29, 2020, together with the results of the Merged Entities for the thirteen weeks ended March 29, 2020, with the following adjustment:

Acquisition of Elevation BurgerJohnny Rockets

On June 19, 2019,September 21, 2020, the Company completed the acquisition of EB Franchises, LLC,Johnny Rockets Holding Co., a Virginia limited liability company, and its related companies (collectively, “Elevation Burger”Delaware corporation (“Johnny Rockets”) for a cash purchase price of up to $10,050,000. Elevation Burger is the franchisor of Elevation Burger restaurants,approximately $24.7 million. The transaction was funded with 44 locationsproceeds from an increase in the U.S. and internationally.Company’s securitization facility (See Note 11).

The purchase price consists of $50,000 in cash, a contingent warrant to purchase 46,875 shares ofImmediately following 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 dateclosing 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, indemnifyJohnny Rockets, the Company against claims and losses incurred or suffered bycontributed the Company asfranchising subsidiaries of Johnny Rockets to FAT Royalty I, LLC pursuant to a result of, among other things, any inaccuracy of any representation or warranty of the Seller contained in the purchase documents.Contribution Agreement. (See Note 11).

The preliminary assessment of the fair value of the net assets and liabilities acquired by the Company forthrough the acquisition of Elevation BurgerJohnny Rockets was estimated at $7,193,000.$24,730,000. This preliminary assessment of fair value of the net assets and liabilities as well as the final purchase price were estimated at closing and are subject to change. Under Sections 382 and 383 of the Internal Revenue Code, if an ownership change occurs with respect to a “loss corporation”, as defined, there are annual limitations on the amount of the NOLs and certain other deductions and credits which are available to the Company (the “Section 382 and 383 Limitations”). The portion of the NOLs and other tax benefits accumulated by Johnny Rockets prior to the Acquisition are subject to these Section 382 and 382 Limitations. Analysis of these Section 382 and 383 Limitations are ongoing. The preliminary allocation of the consideration to the preliminary valuation of net tangible and intangible assets acquired is presented in the table below (in thousands):

Revenues of $2,257,000 and net loss of $26,000 attributed to Johnny Rockets are included in the accompanying consolidated statements of operations for the thirteen weeks ended March 28, 2021. The net loss attributed to Johnny Rockets includes allocations of corporate overhead in accordance with the Company’s allocation methodology.

The values of goodwill and other intangible assets were initially considered as of the acquisition date. Descriptions of the Company’s assessmentsubsequent assessments of impairment of the goodwill and other intangible assets acquired in this acquisition related to COVID-19 are located in Note 6.

Proforma Information

The table below presents the proforma revenue and net (loss) income of the Company for the thirteen weeks ended March 29, 2020, assuming the acquisition of Johnny Rockets had occurred on December 30, 2019 (the beginning of the Company’s 2020 fiscal year), pursuant to ASC 805-10-50 (in thousands). This proforma information does not purport to represent what the actual results of operations of the Company would have been had the acquisition of Johnny Rockets occurred on this date nor does it purport to predict the results of operations for future periods.

The proforma information above reflects the combination of the Company’s unaudited results as disclosed in the accompanying consolidated statements of operations for the thirteen weeks March 29, 2020, together with the unaudited results of Johnny Rockets for the thirteen weeks ended March 29, 2020, with the following adjustments:

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 theThe Company for refranchising meetmeets all of the criteria requiring that theyacquired assets used in the operation of certain restaurants be classified as held for sale. As a result, the following assets have been classified as held for sale on the accompanying consolidated balance sheetsheets as of JuneMarch 28, 2021 and December 27, 2020 (in thousands):

Operating lease liabilities related to the assets classified as held for sale in the amount of $2,298,000,$9,656,000 and $9,892,000, have been classified as current liabilities on the accompanying consolidated balance sheet as of JuneMarch 28, 2020.

During the thirteen2021 and twenty-six weeks ended June 28,December 27, 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.respectively.

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 quarterRestaurant operating costs, net 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 replacementfood sales, totaled $427,000 and $539,000 for the new owners.thirteen weeks ended March 28, 2021 and March 29, 2020, respectively.

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).in 2019. 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.circumstances (See Note 11). 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 JuneMarch 28, 2020,2021 and December 29, 2019,27, 2020, the balance of the Elevation Note was $1,788,000$1,850,000 and $1,814,000,$1,830,000, respectively, which werewas net of discounts of $308,000$247,000 and $352,000,$267,000, respectively. During the thirteen and twenty-six weeks ended JuneMarch 28, 2021 and March 29, 2020, the Company recognized $53,000$52,000 and $106,000, respectively,$53,000 in interest income. Duringincome on the thirteen and twenty-six weeks ended June 30, 2019, the Company recognized $4,200 in interest income.Elevation Buyer Note, respectively.

Note 6. GOODWILL and other intangible assets

Goodwill

Goodwill consists of the following (in thousands):

Other Intangible AssetsNote 7. OTHER INTANGIBLE ASSETS

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

The Company reviewed the carrying value of its other intangible assets as of December 27, 2020 and recognized impairment charges as deemed necessary at that time. A subsequent review of the carrying value as of March 28, 2021 did not result in additional impairment charges for the thirteen weeks ended as of that date. There were also no impairment charges during the thirteen weeks ended March 29, 2020.

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

In response to the adverse effects of COVID-19, we considered whether goodwill and other intangible assets needed to be evaluated for impairment as of 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.

Note 7.8. DEFERRED INCOME

Deferred income is as follows (in thousands):

Note 8.9. Income Taxes

Effective October 20, 2017, the Company entered into a Tax Sharing Agreement with FCCG that providesprovided that FCCG will,would, 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. TheUnder the Tax Sharing Agreement, the Company willwould 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 bewas applied first to reduce excess income tax payment obligations to FCCG under the Tax Sharing Agreement.

For financial reporting purposes, The Tax Sharing Agreement was terminated in connection with the Company has recorded a tax benefit asMerger during the fourth quarter 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.)

2020.

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 payablepayable. Deferred tax assets are reduced by a valuation allowance if, based on a stand-alone basis. Significant componentsthe weight of available evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the Company’s deferred tax assets will not be realized. As of March 28, 2021 and liabilities areDecember 27, 2020, the Company recorded a valuation allowance against its deferred tax assets in the amount of $678,000 and $513,000, respectively, as follows (in thousands):it determined that these amounts would not likely be realized.

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

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):

As of JuneMarch 28, 2020,2021, the Company’s and its subsidiaries’ annual tax filings for the prior three years are open for audit by Federal and generally, for the prior four years for state tax agencies.agencies, based on the filing date for each return. 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 JuneMarch 28, 2020.2021.

NOTE 9.10. LEASES

TheAs of March 28, 2021, the Company has recorded seventhirteen 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 months2.6 to seven years. Three of the leases also have options to extend the term for 5 to 1017.8 years. The Company recognized lease expense of $720,000$810,000 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$347,000 for the thirteen weeksmonths ended JuneMarch 28, 20202021 and June 30, 2019,March 29, 2020, respectively. The weighted average remaining lease term of the operating leases (not including optional lease extensions) at Juneas of March 28, 20202021 was 5.67.4 years.

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