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

Certain statements contained herein and certain statements contained in future filings by the Company with the SEC may not be based on historical facts and are “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. All statements other than statements of historical facts contained in this Form 10-Q may be forward-looking statements. Statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, including, among others, statements regarding the Reorganization Transactions, expected new franchisees, brands, store openings and future capital expenditures are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions.

Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We believe that these factors include, but are not limited to, the following:

These forward-looking statements speak only as of the date of this Form 10 Q. Except as may be required by law, the Company does not undertake, and specifically disclaims any obligation, to publicly release the results of any revisions that may be made to any Forward-Looking Statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

The following discussion and analysis should be read in conjunction with the Financial Statements of FAT Brands Inc. and the notes thereto included elsewhere in this filing. References in this filing to “the Company,” “we,” “our,” and “us” refer to FAT Brands Inc. and its subsidiaries unless the context indicates otherwise.

Executive Overview

Business overview

FAT Brands Inc. is a multi-brand restaurant franchising company that develops, markets, and acquires predominantly fast casual restaurant concepts around the world. 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. Since it requires relatively small investments in tangible assets, this 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.

FAT Brands Inc. was formed on March 21, 2017 as a wholly owned subsidiary of Fog Cutter Capital Group Inc. (“ FCCG ”). As described in more detail below, in connection with our initial public offering, two other subsidiaries of FCCG, Fatburger North America, Inc. (“ Fatburger ”) and Buffalo’s Franchise Concepts, Inc. (“ Buffalo’s ”) were contributed to us by FCCG as operating subsidiaries on October 20, 2017. Fatburger and Buffalo’s were historically under a cost-sharing and reimbursement arrangement with FCCG. After the transfer of these entities to our control, the cost-sharing and reimbursement arrangement with FCCG was terminated and all employees were moved to FAT Brands Inc. or our subsidiaries as appropriate. The historical financial statements are expected to be consistent with the new FAT Brands Inc. entity, in that reimbursement expense and direct employee costs both appear under general and administrative expenses and are expected to be materially the same amounts going forward.

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

We intend to acquire additional restaurant franchising concepts that will allow us to offer additional food categories and expand our geographic footprint.

As of October 20, 2017, we operate the Fatburger, Buffalo’s and Ponderosa restaurant concepts with 292 total locations across 25 states and 19 countries. While our existing footprint covers 18 countries in which we have franchised restaurants open and operational as of October 20, 2017, our overall footprint (including development agreements for proposed stores in new markets and nine countries where our brands previously had a presence that we intend to resell to new franchisees) covers 27 countries. For each of our current restaurant brands and those that we will seek to acquire, the ability to expand the overall concept footprint, both domestically and internationally, is of critical importance and a primary acquisition evaluation criterion. We believe that our restaurant concepts have meaningful growth potential and appeal to a broad base of consumers globally.

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.

Operating segments

Effective with our initial public offering and the acquisitions that followed, our operating segments are:

Key Performance Indicators

To evaluate the performance of our business, we utilize a variety of financial and performance measures, which are typically calculated on a system-wide basis. These key measures include new store openings, average unit volumes and same-store sales growth in addition to the general income statement line items such as revenues, general and administrative expenses, income before income tax expense and net income.

New store openings - The number of new store openings reflects the number of stores opened during a particular reporting period. The total number of new stores per year and the timing of stores openings has, and will continue to have, an impact on our results.

Average unit volumes - Average Unit Volumes for any 12-month period consist of the average sales of all stores over that period that have been open a full year. Average unit volumes are calculated by dividing total sales from all stores open a full year by the number of stores open during that period. The measurement of AUVs allows us to assess changes in guest traffic and per transaction patterns at our stores.

Same-store sales growth - S ame-store sales growth reflects the change in year-over-year sales for the comparable store base, which we define as the number of stores open for at least one full fiscal year. Given our focused marketing efforts and public excitement surrounding each opening, new stores often experience an initial start-up period with considerably higher than average sales volumes, which subsequently decrease to stabilized levels after three to six months. Thus, we do not include stores in the comparable store base until they have been open for at least one full fiscal year. We expect that this trend will continue for the foreseeable future as we continue to open and expand into new markets.

Subsequent Events

Issuance of Common Stock

On October 19, 2017, the Company conducted a forward split of its common stock, par value $0.0001, which increased shares held by FCCG to 8,000,000 shares. On October 20, 2017, the Company completed its initial public offering and issued 2,000,000 additional shares of its common stock at an offering price of $12.00 per share, for an aggregate amount of $24,000,000 (the “ Offering ”). The net proceeds of the Offering were approximately $21,200,000 after deducting the selling agent fees of approximately $1,780,800 and Offering expenses of approximately $1,019,200. Details of the Offering are described in our Regulation A Offering Statement on Form 1-A, and are incorporated herein by this reference. Our common stock trades on the Nasdaq Capital Market under the symbol “FAT.”

The Reorganization Transactions

Subsequent to the closing of the Offering, we completed the following transactions, which are referred to collectively as the “Reorganization Transactions”:

Effective October 20, 2017, FCCG contributed two of its operating subsidiaries, Fatburger North America Inc. and Buffalo’s Franchise Concepts Inc., to us in exchange for an unsecured promissory note with a principal balance of $30,000,000, bearing interest at a rate of 10.0% per annum, and maturing in five years (referred to as the “ Related Party Debt ”). The contribution was consummated pursuant to a Contribution Agreement between us and FCCG. Approximately $9,500,000 of the net proceeds from the Offering was used to repay a portion of Related Party Debt owed to FCCG.

In March 2017, FCCG agreed to acquire Homestyle Dining LLC from Metromedia pursuant to a Membership Interest Purchase Agreement, as amended, which provided for a cash purchase price of $10,550,000 to be paid at closing. Effective October 20, 2017, we provided approximately $10,550,000 of the net proceeds from the Offering to FCCG to consummate the acquisition of Homestyle Dining LLC. In exchange, we received full ownership in Ponderosa, which conduct the worldwide franchising of the Ponderosa Steakhouse Restaurants and the Bonanza Steakhouse Restaurants.

Effective October 20, 2017, we 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 us and our subsidiaries. We will pay to FCCG the amount that our tax liability would have been had we filed a separate return. To the extent our required payment exceeds our share of the actual combined income tax liability (which may occur, for example, due to the application of FCCG’s net operating loss carryforwards), we will be permitted, in the discretion of a committee of our board of directors comprised solely of directors not affiliated with or interested in FCCG, to pay such excess to FCCG by issuing an equivalent amount of our common stock in lieu of cash, valued at the fair market value at the time of such payment. In addition, our inter-company receivable of approximately $13,175,000 due from FCCG to Fatburger and Buffalo’s will be applied first to reduce such excess income tax payment obligation to FCCG under the Tax Sharing Agreement.

On October 20, 2017, the Company granted stock options for 367,500 shares under the 2017 Omnibus Equity Incentive Plan to directors and employees, each with an exercise price equal to $12.00 per share and subject to a three-year vesting requirement.

Agreement to purchase Hurricane Grill & Wings

On November 14, 2017, we entered into a Membership Interest Purchase Agreement (the “ Agreement ”) to purchase the membership interests of Hurricane AMT, LLC, a Florida limited liability corporation (“ Hurricane ”), for a purchase price of $12,500,000. Hurricane is the franchisor of Hurricane Grill & Wings and Hurricane BTW Restaurants. The original Hurricane Grill & Wings opened in Fort Pierce, Florida in 1995 and has expanded to over 60 restaurant locations in Alabama, Arizona, Colorado, Florida, Georgia, Kansas, New York, and Texas.

Results of Operations

Prior to the closing of the Reorganizing Transactions, in which we became the parent company for Fatburger and Buffalo’s, we were under common control with these companies as subsidiaries of FCCG. The following unaudited information presents the combined operating results of Fatburger and Buffalo’s for the 39 weeks and the 13 weeks ended September 24, 2017 and September 25, 2016, respectively.

The following tables summarize key components of our results of operations for the periods indicated:

(In thousands)

(In thousands)

Results of Operations of Fatburger North America

For the 39 Weeks Ended September 24, 2017, as Compared to the 39 Weeks Ended September 25, 2016

Net Income - Net income of Fatburger for the 39 weeks ended September 24, 2017 decreased by $546,000 or 20.1% to $2,171,000 compared to $2,717,000 for the 39 weeks ended September 25, 2016. The decrease was primarily attributable to lower recognized franchise fees in the amount of $1,445,000, partially offset by a reduction in general and administrative expenses of $513,000 and a lower provision for income taxes of $349,000.

Revenues - Fatburger’s revenues consist of royalty fees, franchise fees and management fees. Fatburger had revenues of $5,310,000 and $6,727,000 for the 39 weeks ended September 24, 2017 and September 25, 2016, respectively. The $1,417,000 or 21.1% decrease in revenues from the 39 weeks ended September 25, 2016 to the 39 weeks ended September 24, 2017 was primarily driven by a decrease in franchise fees recognized. The recognition of previously collected franchise fees into income can vary significantly from year to year based upon the number of new store openings and other triggering events.

General and Administrative Expenses - General and administrative expenses of Fatburger consist primarily of payroll, consulting fees and an allocation of corporate overhead from FCCG. General and administrative expenses for the 39 weeks ended September 24, 2017 decreased $513,000 or 21.7% to $1,852,000, as compared to $2,365,000 for the 39 weeks ended September 25, 2016. This was primarily the result of a decrease in allocated corporate overhead from FCCG of $224,000; a reduction in salaries of $220,000; and a reduction in the amount of uncollectable receivables in the amount of $62,000 for the 39 weeks ended September 24, 2017 compared with the 39 weeks ended September 25, 2016.

New Store Openings - For the 39 weeks ended September 24, 2017, our Fatburger franchisees opened 14 stores as compared to 4 stores for the 39 weeks ended September 25, 2016.

Same-store sales growth - Adjusted same-store sales in our core domestic market (representing approximately 69% of revenues for 2016) grew by positive 7.9% for the 39 weeks ended September 24, 2017, compared to growth of 0.4% for the for the 39 weeks ended September 25, 2016. Overall Fatburger same-store sales, including international stores in their local currency were positive 1.1% for the 39 weeks ended September 24, 2017 and negative 5.0% for the 39 weeks ended September 25, 2016. These results reflect the deterioration in macroeconomic conditions in Canada and the Middle East due to the decline in oil prices, as well as increased competition internationally. The same-store sale results exclude two restaurants which were subject to extraordinary adverse operating conditions in 2015, 2016 and 2017 related to construction blocking direct access or visibility to the restaurant and political sanctions affecting the supply chain and the related local economy. The Fatburger restaurant on the Las Vegas Strip was affected by extensive construction on Las Vegas Blvd. The Fatburger restaurant located in Doha, Qatar in the Pearl District was affected by extensive construction and political sanctions affecting the supply chain and related local economy. If these restaurants were included the same-store sales data, the change in same-store sales for our core domestic market would be positive 5.4% for the 39 weeks ended September 24, 2017 and negative 0.6% for the 39 weeks ended September 25, 2016, and same-store sales system-wide would be negative 0.4% for the 39 weeks ended September 24, 2017 and negative 5.4% for the 39 weeks ended September 25, 2016.

For the 13 Weeks Ended September 24, 2017, as Compared to the 13 Weeks Ended September 25, 2016

Net Income - Net income of Fatburger for the 13 weeks ended September 24, 2017 decreased by $476,000 or 39.5% to $728,000 compared to $1,204,000 for the 13 weeks ended September 25, 2016. The decrease was primarily attributable to lower recognized franchise fees in the amount of $924,000, partially offset by a reduction in general and administrative expenses of $203,000 and a lower provision for income taxes of $229,000.

Revenues - Fatburger had revenues of $1,751,000 and $2,629,000 for the 13 weeks ended September 24, 2017 and September 25, 2016, respectively. The $878,000 or 33.4% decrease in revenues from the 13 weeks ended September 25, 2016 to the 13 weeks ended September 24, 2017 was primarily the result of the decrease in recognized franchise fees.

General and Administrative Expenses - General and administrative expenses for the 13 weeks ended September 24, 2017 decreased $203,000 or 26.9% to $552,000 as compared to $755,000 for the 13 weeks ended September 25, 2016. This was primarily the result of a decrease in salary expense of $95,000 and a reduction in the amount of uncollectable receivables of $90,000.

New Store Openings - For the 13 weeks ended September 24, 2017 , our Fatburger franchisees opened 3 stores as compared to 1 store for the 13 weeks ended September 25, 2016 .

Liquidity and Capital Resources of Fatburger North America

Fatburger funds its operations primarily through franchise fees and royalties. We believe that cash provided by operating activities are adequate to fund our working capital obligations for the next 12 months. However, our ability to continue to meet these requirements and obligations will depend on, among other things, our ability to achieve anticipated levels of revenue and cash flow from operations and our ability to manage costs and working capital successfully.

As of September 24, 2017, Fatburger had current assets of $494,000 comprised primarily of accounts receivables. This compares with current assets of $568,000 as of December 25, 2016.

Fatburger had current liabilities of $4,854,000 comprised of deferred income of $1,877,000; accounts payable of $1,421,000 and accrued expenses of $1,556,000, as of September 24, 2017. This compares with current liabilities of $3,547,000 comprised of deferred income of $1,339,000; accounts payable of $1,070,000; and accrued expenses of $1,138,000 as of December 25, 2016.

Off-Balance Sheet Arrangements of Fatburger North America

Fatburger does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Results of Operations of Buffalo’s Franchise Concepts

For the 39 Weeks Ended September 24, 2017, as Compared to the 39 Weeks Ended September 25, 2016

Net Income – Net income of Buffalo’s for the 39 weeks ended September 24, 2017 increased by $18,000 or 3.3% to $570,000, as compared to $552,000 for the 39 weeks ended September 25, 2016. The increase was primarily attributable to an increase in revenue of $74,000 or 5.8%, which was partially offset by increases in general and administrative expenses of $12,000 or 2.4%; a decrease in other income of $36,000 and an increase in the provision for income taxes of $8,000.

Revenues – Buffalo’s revenues consist of royalty fees and the recognition of franchise fees. Buffalo’s had revenues of $1,350,000 and $1,276,000 for the 39 weeks ended September 24, 2017 and September 25, 2016, respectively. The increase in revenue of $74,000 is primarily the result of increases in recognized franchise fees in 2017 of $175,000. This increase was partially reduced by lower royalties in 2017 in the amount of $101,000 due primarily to the closure of two long-standing franchise locations in Atlanta, Georgia and Riyadh, Saudi Arabia.

General and Administrative Expenses – General and administrative expenses of Buffalo’s primarily consist of payroll, consulting fees and an allocation of corporate overhead from FCCG. General and administrative expenses for the 39 weeks ended September 24, 2017 increased by $12,000 or 2.4% to $503,000 as compared to $491,000 for the 39 weeks ended September 25, 2016. This increase was primarily the result of an increase in the corporate overhead allocation of $13,000 and an increase in consulting fees of $108,000 which was partially offset by decreases in salary and wage expenses of $106,000 for the 2017 period compared with the 2016 period.

New Store Openings – There were no new stores opened by our Buffalo’s Cafe franchisees during the 39 weeks ended September 24, 2017, as compared to two new stores opened for the 39 weeks ended September 25, 2016.

Same-store Sales Growth – Same-store sales for Buffalo’s Cafe were positive 1% for the 39 weeks ended September 24, 2017 and positive 2.8% for the 39 weeks ended September 25, 2016. The softening in positive same-store sales for the 39 weeks ended September 24, 2017 was primarily attributable to adverse weather conditions in the Atlanta area in the first quarter of 2017, which had a negative effect on customer traffic. We excluded four restaurants from the calculation of same-store sales because they were subject to extraordinary adverse operating conditions in 2016 and 2017, related to construction blocking direct access or visibility to the restaurant, changes in the alcohol laws or political sanctions affecting the supply chain and the related local economy: Hamilton Mill Atlanta, Canyon, Texas, The Ezdan Mall Doha, Qatar, and the Kingdom Mall Riyadh, Saudi Arabia. If these restaurants were included, the same-store sales system-wide would have been negative 2.2% for the 39 weeks ended September 24, 2017 and negative 2.7% for the 39 weeks ended September 25, 2016.

For the 13 Weeks Ended September 24, 2017, as Compared to the 13 Weeks Ended September 25, 2016

Net Income – Net income of Buffalo’s for the 13 weeks ended September 24, 2017 increased by $167,000 or 121.9% to $304,000, as compared to $137,000 for the 13 weeks ended September 25, 2016. The increase was primarily attributable to an increase in revenue of $305,000 or 93.0%, which was partially offset by increases in general and administrative expenses of $62,000 or 49.6% and an increase in the provision for income taxes of $76,000.

Revenues – Buffalo’s revenues consist of royalty fees and the recognition of franchise fees. Buffalo’s had revenues of $633,000 and $328,000 for the 13 weeks ended September 24, 2017 and September 25, 2016, respectively. The increase in revenue of $305,000 is primarily the result of increases in recognized franchise fees in the 2017 period of $325,000. This increase was partially reduced by lower royalties in the 2017 period in the amount of $20,000 due primarily to the closure of two long-standing franchise locations in Atlanta, Georgia and Riyadh, Saudi Arabia.

General and Administrative Expenses –― General and administrative expenses of Buffalo’s primarily consist of payroll, consulting fees and an allocation of corporate overhead from FCCG. General and administrative expenses for the 13 weeks ended September 24, 2017 increased by $62,000 or 49.6% to $187,000 as compared to $125,000 for the 13 weeks ended September 25, 2016. This increase was primarily the result of an increase in the corporate overhead allocation of $46,000; an increase in consulting fees of $38,000 and an increase in accounting costs of $14,000 which were partially offset by decreases in salary and wage expenses of $31,000 and other net decreases of $5,000.

New Store Openings – There were no new stores opened by our Buffalo’s Cafe franchisees for the 13 weeks ended September 24, 2017 or for the 13 weeks ended September 25, 2016 .

Liquidity and Capital Resources of Buffalo’s Franchise Concepts

Buffalo’s funds its operations primarily through franchise fees and royalties. We believe that cash provided by operating activities are adequate to fund our working capital obligations for the next 12 months. However, our ability to continue to meet these requirements and obligations will depend on, among other things, our ability to achieve anticipated levels of revenue and cash flow from operations and our ability to manage costs and working capital successfully.

As of September 24, 2017, Buffalo’s had current assets of $62,000, comprised primarily of accounts receivables. This compares with current assets of $54,000 as of December 25, 2016. The increase in current assets was due to an increase in accounts receivables.

Buffalo’s had current liabilities of $403,000 comprised primarily of deferred income of $152,000, accounts payable of $171,000 and other accrued expenses of $80,000 as of September 24, 2017. This compares with current liabilities of $438,000 comprised of deferred income of $253,000, accounts payable of $97,000 and accrued expenses of $88,000 as of December 25, 2016.

Off-Balance Sheet Arrangements of Buffalo’s Franchise Concepts

Buffalo’s does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Critical Accounting Policies and Estimates (Fatburger and Buffalo’s)

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. No impairment has been identified for the years ended December 25, 2016 and prior.

Revenue recognition (Fatburger) : Franchise fee revenue from sales of individual franchises is recognized as revenue upon completion of training and the actual opening of a location. Typically, franchise fees are $50,000 for each domestic location and are collected 50% upon signing a deposit agreement and 50% at the signing of a lease and related franchise agreement. International franchise fees are typically $65,000 for each location, and are payable 100% upon signing a deposit agreement. The franchise fee may be adjusted at management’s discretion or in situations involving store transfers. Deposits are nonrefundable upon acceptance of the franchise application. These deposits are recorded as deferred income until the store opens. The company acknowledges that some of its franchisees have not complied with their development timelines for opening franchise stores. These franchise rights are terminated and franchise fee revenue is recognized for non-refundable deposits.

In addition to franchise fee revenue, the Company collects a royalty of 2.5% to 6% of net sales from its franchisees. Royalties are recognized as revenue as the related sales are made by the franchisees. Royalties collected in advance are classified as deferred income until earned.

Revenue recognition (Buffalo’s): Franchise fee revenue from sales of individual franchises is recognized upon completion of training and the actual opening of a location. Typically, franchise fees are $50,000 for each domestic location and are collected 50% upon signing a deposit agreement and 50% at the signing of a lease and related franchise agreement. International franchise fees are typically $65,000 for each location, and are payable 100% upon signing a deposit agreement. The company typically charges a $25,000 co-brand conversion fee, in addition to the initial franchise fee.

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. These deposits are recorded as deferred income until store opens. The company acknowledges some of its franchisees have not compiled with their development timelines for opening franchise stores. These franchise rights are terminated and franchise fee revenue is recognized for non-refundable deposits.

In addition to franchise fee revenue, the company collects a royalty calculated as a percentage of net sales from its franchisees. Royalties are recognized as revenue when the related sales are made by the franchisees.

Advertising (Fatburger): Fatburger requires advertising payments from franchisees of 1.95% of net sales from Fatburger restaurants located in the Los Angeles marketing area and up to 0.95% of net sales from stores located outside of the Los Angeles marketing area. International locations pay 0.20% to 0.95%. The company also receives, from time to time, payments from vendors that are to be used for advertising. Since advertising funds collected are required to be spent for specific advertising purposes, no revenue or expense is recorded for advertising funds. Cumulative advertising expenditures in excess of collections are recorded as current assets and will be reimbursed by future advertising payments from franchises and other Fatburger affiliates. Cumulative collections in excess of advertising expenditures are recorded as accrued expenses and represent advertising funds collected which have not yet been spent on advertising activities.

Advertising (Buffalo’s): Buffalo’s generally requires advertising payments from franchisees of 2.0% of net sales from Buffalo’s Southwest Cafe restaurants. Co-branded restaurants generally pay 0.20% to 1.95%. The company also receives, from time to time, payments from vendors that are to be used for advertising. Since the company acts in a fiduciary role to collect and disburse these advertising funds, no revenue or expense is recorded. Advertising funds are segregated from other Company assets and the balance of the Buffalo’s Creative and Advertising Fund is recorded as an asset by the company with the offsetting advertising obligation recorded as a liability, Buffalo’s Creative and Advertising Fund - Contra.

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 Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue From Contracts With Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods and services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 by one year, making it effective for annual reporting periods beginning after December 15, 2017. The company is currently evaluating the effects adoption of this guidance will have on its financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, requiring a lessee to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with a lease term of more than twelve months. Leases will continue to be classified as either financing or operating, with classification affecting the recognition, measurement and presentation of expenses and cash flows arising from a lease. This ASU is effective for interim and annual period beginning after December 15, 2018 and requires a modified retrospective approach to adoption for lessees related to capital and operating leases existing at, or entered into after, the earliest comparative period presented in the financial statements, with certain practical expedients available. Early adoption is permitted. The company does not currently have any leases that will have an impact on the financial statements or disclosures as a result of the adoption of this ASU.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new guidance is intended to reduce diversity in practice in how transactions are classified in the statement of cash flows. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this standard is not expected to have a material impact on the company’s financial statements.

Results of Operations of Ponderosa

We were not affiliated with the Ponderosa entities until October 20, 2017. However, their future operations will be under our control. We are providing the following data regarding the results of operations of Ponderosa for the 39 weeks and 13 weeks ended September 24, 2017 and September 25, 2016 for informational purposes. The results of Ponderosa’s future operations as part of our consolidated group may be significantly different.

The following tables summarize key components of the results of operations of Ponderosa for the periods indicated: