Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our financial statements and footnotes thereto incorporated by reference included elsewhere in this Annual Report.
Overview
The Company is a leading multi-brand restaurant company that develops, markets and acquires fast-casual and premium-casual dining restaurant concepts around the world, including corporate-owned stores and franchises. As of December 31, 2021, we were the owner and franchisor of the two following brands:
BurgerFi. BurgerFi is a fast-casual “better burger” concept, renowned for delivering an exceptional, all-natural premium “better burger” experience in a refined, contemporary environment. BurgerFi’s chef-driven menu offerings and eco-friendly restaurant design drive our brand communication. It offers a classic American menu of premium burgers, hot dogs, crispy chicken, frozen custard, hand-cut fries, shakes, beer, wine and more. Originally founded in 2011 in Lauderdale-by-the-Sea, Florida, the purpose was simple – “RedeFining” the way the world eats burgers by providing an upscale burger offering, at a fast-casual price point. BurgerFi is committed to an uncompromising and rewarding dining experience that promises fresh food of transparent quality. Since its inception, BurgerFi has grown to 118 BurgerFi locations, and as of December 31, 2021, was comprised of 25 corporate-owned restaurants and 93 franchised restaurants in 2 countries and 22 states, as well as Puerto Rico.
BurgerFi was named “Best Fast Casual Restaurant” in USA Today’s 10Best 2022 Readers Choice Awards for the second consecutive year, QSR Magazine's Breakout Brand of 2020, Fast Casual's 2021 #1 Brand of the Year and included in Inc. Magazine’s Fastest Growing Private Companies List. In 2021, Consumer Report’s Chain Reaction Report praised BurgerFi for serving “no antibiotic beef” across all its restaurants, and Consumer Reports awarded BurgerFi an "A-Grade Angus Beef" rating for the third consecutive year.
Anthony’s. Anthony’s is a premium pizza and wing brand operating 61 corporate-owned casual restaurant locations, as of December 31, 2021. Anthony’s prides itself on serving fresh, never frozen, high-quality ingredients. The concept is centered around a 900-degree coal fired oven, and its menu offers “well-done” pizza, coal fired chicken wings, homemade meatballs, and a variety of handcrafted sandwiches and salads. The restaurants also feature a deep wine and craft beer selection to round out the menu. The pizzas are prepared using a unique coal fired oven to quickly seal in natural flavors while creating a lightly charred crust. Anthony’s provides a differentiated offering among its casual dining peers driven by its coal fired oven, which enables the use of fresh, high-quality ingredients with quicker ticket times.
Since its inception in 2002, the Anthony’s brand has grown to 61 corporate-owned locations, as of December 31, 2021, primarily along the East coast and has restaurants in eight states, including Florida (28), Pennsylvania (12), New Jersey (8), New York (5), Massachusetts (4), Delaware (2), Maryland (1), and Rhode Island (1).
Anthony’s was named “The Best Pizza Chain in America" by USA Today's Great American Bites and “Top 3 Best Major Pizza Chain” by Mashed in 2021.
Beyond our current brand portfolio, we intend to acquire other restaurant concepts that will allow us to grow and also offer additional food categories. In evaluating potential acquisitions, we specifically seek concepts with, among others, the following characteristics:
•established, recognized brands;
•long-term, sustainable operating performance;
•consistent cash flows; and
•growth potential, both geographically and through co-branding initiatives across our portfolio.
Intending to leverage our developing management platform, we expect to achieve cost synergies post-acquisition by reducing the corporate overhead of the acquired company. We also plan to grow the top line revenues of newly acquired brands through support from our management and systems platform, franchising, marketing and advertising, supply chain assistance, site selection analysis, staff training and operational oversight and support.
Recent Acquisitions
On November 3, 2021, we completed the acquisition of Anthony's, which through its subsidiaries, owns and operates casual dining pizza restaurants under the trade name Anthony’s Coal Fired Pizza & Wings. The results of operations, financial position and cash flows of Anthony's is included in our consolidated financial statements as of the closing date of the acquisition.
Segments
We have two operating and reportable segments: (1) BurgerFi and (2) Anthony’s. Our business generates revenue from the following sources: (i) restaurant sales, (ii) royalty and other fees, consisting primarily of royalties based on a percentage of sales reported by franchised restaurants and paid by franchisees, and (iii) franchise fees, consisting primarily of licensing fees paid by franchisees.
Significant Recent Developments Regarding COVID-19
During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly spreading outbreak of a novel strain of coronavirus designated COVID-19. The pandemic has significantly impacted economic conditions in the United States, where all of our corporate-owned restaurants are located. While the adverse effects of the COVID-19 pandemic have partially subsided, its effects vary by region, and uncertainties arising from the COVID-19 pandemic could continue to disrupt economic conditions and business activities, particularly as new outbreaks and variants of COVID-19 arise. The extent to which the COVID-19 pandemic, including the recent and emerging variants, could affect our business, operations and financial results is uncertain as it will depend upon numerous evolving factors that management may not be able to accurately predict, including the duration and scope of the pandemic and the continued emergence of new strains of COVID-19. The acceptance and effectiveness of vaccines and treatments, along with the length and extent of any continuing economic and market disruptions, are unknown, and therefore, any future impacts on our business, financial condition and/or results of operations cannot be quantified or predicted with specificity.
We believe that we have taken appropriate steps to mitigate the effects of the COVID-19 pandemic on our business, and our business model has, thus far, proven resilient. We continue to actively monitor the effects of the COVID-19 pandemic on our operations, and to the extent that future business activities are adversely affected by the pandemic, we intend to take appropriate actions designed to mitigate these impacts. We continue to adapt to the changing operational and economic environment that has resulted from the COVID-19 pandemic. Our top priority has been to take appropriate actions to protect the health and safety of our employees, customers and business partners, and we continue to monitor evolving health guidelines and respond to changes as appropriate. Notwithstanding moderation of the COVID-19 pandemic and related governmental and other restrictions, we may continue to experience negative effects on our business and operations from possible longer-term changes in consumer and customer behavior and/or from negative economic conditions, including recent inflationary effects on labor and food costs, supply chain disruptions and availability of labor.
We did not experience any material supply chain disruptions as a result of COVID-19 during 2020 or 2021; however, there can be no assurance that we will not experience supply chain challenges in the future. We have implemented price increases to mitigate the inflationary effects of food and labor costs; however, we cannot predict the long-term impact of these negative economic conditions on our restaurant profitability. Although we have experienced some recovery since the initial impact of COVID-19 and are able to meet our obligations as they become due with our cash flow from operations, the long-term impact of COVID-19 on the economy and on our business remains uncertain, the duration and scope of which cannot currently be predicted. In addition, despite a recent decline in cases, hospitalizations and deaths in large portions of the United States, mask mandates, social-distancing, travel restrictions and stay-at-home orders could be reinstated. We may take additional mitigation actions in the future such as raising additional financing, reducing capital spending, or modifying our operating strategies. Some of these measures may have an adverse impact on our business. Refer to the matters discussed under the caption “Risk Factors” beginning on page 10.
Key Metrics
The following key metrics are important indicators of the overall direction of our business, including trends in sales and the effectiveness of our marketing, operating, and growth initiatives for the BurgerFi brand:
| | | | | | | | | | | |
(in thousands, except for percentage data) | Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
Systemwide Restaurant Sales | $ | 166,121 | | | $ | 126,866 | |
Systemwide Restaurant Sales Growth | 31% | | (6)% |
Systemwide Restaurant Same Store Sales Growth | 14% | | (12)% |
Corporate-Owned Restaurant Sales | $ | 33,435 | | | $ | 23,977 | |
Corporate-Owned Restaurant Sales Growth | 39% | | 9% |
Corporate-Owned Restaurant Same Store Sales Growth | 14% | | (15)% |
Franchise Restaurant Sales | $ | 127,165 | | | $ | 97,860 | |
Franchise Restaurant Sales Growth | 30% | | (6)% |
Franchise Restaurant Same Store Sales Growth | 15% | | (11)% |
Digital Channel Orders Growth | 18% | | 93% |
Digital Channel Orders | 2,482 | | 2,193 |
Digital Channel Orders % of Systemwide Sales | 39% | | 43% |
Systemwide Restaurant Sales
Systemwide restaurant sales is presented as informational data in order to understand the aggregation of franchised stores sales, ghost kitchen and corporate-owned store sales performance for stores that are open for the full year. Systemwide restaurant sales growth refers to the percentage change in sales at all franchised restaurants, ghost kitchens and corporate-owned restaurants in one period from the same period in the prior year. Systemwide restaurant same store sales growth refers to the percentage change in sales at all franchised restaurants, ghost kitchens, and corporate-owned restaurants once the restaurant has been in operation after 14 months. See definition below for same store sales.
Corporate-Owned Restaurant Sales
Corporate-owned restaurant sales represent the sales generated only by corporate-owned restaurants that are open for the full year. Corporate-owned restaurant sales growth refers to the percentage change in sales at all corporate-owned restaurants in one period from the same period in the prior year. Corporate-owned restaurant same store sales growth refers to the percentage change in sales at all corporate-owned restaurants once the restaurant has been in operation after 14 months. These measures highlight the performance of existing corporate-owned restaurants.
Franchise Restaurant Sales
Franchise restaurant sales represent the sales generated only by franchisee-owned restaurants that are open for the full year. Franchise restaurant sales growth refers to the percentage change in sales at all franchised restaurants in one period from the same period in the prior year. Franchise restaurant same store sales growth refers to the percentage change in sales at all franchised restaurants once the restaurant has been in operation after 14 months. These measures highlight the performance of existing franchised restaurants.
Same Store Sales
We use the measure of same store sales to evaluate the performance of our store base, which excludes the impact of new stores and closed stores, in both periods under comparison. We include a restaurant in the calculation of same store sales once it has been in operation after 14 months. A restaurant which is temporarily closed (including as a result of the COVID-19 pandemic), is included in the same store sales computation. A restaurant which is closed permanently, such as upon termination of the lease, or other permanent closure, is immediately removed from the same store sales computation. Our calculation of same store sales may not be comparable to others in the industry.
Digital Channel Orders
We use the measure of digital channel orders to measure performance of our investments made in our digital platform and partnerships with third party delivery partners. We believe our digital platform capabilities are a vital element to continuing to serve our customers and will continue to be a differentiator for BurgerFi as compared to some of our competitors. Digital channel orders growth refers to the percentage change in sales through our digital platforms in one period from the same period in the prior year for all franchised and corporate-owned restaurants. Digital channel orders and digital channel orders as percentages of systemwide sales are indicative of the number of orders placed through our digital platforms and the percentage of those digital orders when compared to total number of orders at all our franchised and corporate-owned restaurants.
By providing these key metrics, we believe we are enhancing investors’ understanding of our business as well as assisting investors in evaluating how well we are executing our strategic initiatives.
Results of Operations
To reflect the application of different bases of accounting as a result of the BurgerFi acquisition, the tables provided below separate the Company’s 2020 results via a black line into two distinct periods as follows: (1) up to and including the BurgerFi acquisition closing date (labeled “Predecessor”) and (2) the period after that date through December 31, 2020 (labeled “Successor”). The period after December 15, 2020 is the “Successor” period while the period before December 16, 2020 is the “Predecessor” period.
The historical financial information of OPES (a special purpose acquisition company, or “SPAC”) prior to the BurgerFi acquisition has not been reflected in the Predecessor financial statements as these historical amounts have been determined not to be useful information to a user of the financial statements. SPACs deposit the proceeds from their initial public offerings into a segregated trust account until a business combination occurs, where such funds are then used to pay consideration for the acquiree and/or to pay stockholders who elect to redeem their shares of common stock in connection with the business combination. The operations of a SPAC, until the closing of a business combination, other than income from the trust account investments and transaction expenses, are nominal. Accordingly, no other activity in the Company was reported for the period prior to December 16, 2020 besides BurgerFi’s operations as Predecessor.
As OPES’s historical financial information is excluded from the Predecessor financial information, the businesses, and thus financial results, of the Successor and Predecessor entities, are expected to be largely consistent, excluding the impact on certain financial statement line items that were impacted by the BurgerFi acquisition. Management believes reviewing our operating results for the twelve-months ended December 31, 2020 by combining the results of the Predecessor and Successor periods (“S/P Combined”) is more useful in discussing our overall operating performance when compared to the same period in the current year. Accordingly, in addition to presenting our results of operations as reported in our consolidated financial statements in accordance with generally accepted accounting principles in the United States of America ("GAAP"), the tables below present the non-GAAP combined results for the year. The results of operations of Anthony's is included in our consolidated financial statements from the acquisition date of November 3, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Successor | | | Predecessor | | S/P Combined (non-GAAP) |
(in thousands) | | Year Ended December 31, 2021 | | December 16, 2020 through December 31, 2020 | | | January 1, 2020 through December 15, 2020 | | Year Ended December 31, 2020 |
REVENUE | | | | | | | | | |
Restaurant sales | | $ | 57,790 | | | $ | 1,333 | | | | $ | 23,683 | | | $ | 25,016 | |
Royalty and other fees | | 8,021 | | | 255 | | | | 6,116 | | | 6,371 | |
Royalty - brand development and co-op | | 1,987 | | | 74 | | | | 1,441 | | | 1,515 | |
Franchise fees | | 1,069 | | | 25 | | | | 1,055 | | | 1,080 | |
TOTAL REVENUE | | 68,867 | | | 1,687 | | | | 32,295 | | | 33,982 | |
Restaurant level operating expenses: | | | | | | | | | — | |
Food, beverage and paper costs | | 17,153 | | | 406 | | | | 7,212 | | | 7,618 | |
Labor and related expenses | | 16,272 | | | 304 | | | | 6,187 | | | 6,491 | |
Other operating expenses | | 12,039 | | | 254 | | | | 4,999 | | | 5,253 | |
Occupancy and related expenses | | 4,940 | | | 19 | | | | 2,702 | | | 2,721 | |
Impairment | | 114,797 | | | — | | | | — | | | — | |
General and administrative expenses | | 17,300 | | | 855 | | | | 6,925 | | | 7,780 | |
Depreciation and amortization expense | | 10,060 | | | 348 | | | | 1,062 | | | 1,410 | |
Share-based compensation expense | | 7,573 | | | 818 | | | | — | | | 818 | |
Brand development and co-op advertising expense | | 2,462 | | | 35 | | | | 2,284 | | | 2,319 | |
Pre-opening costs | | 1,905 | | | 48 | | | | 166 | | | 214 | |
TOTAL OPERATING EXPENSES | | 204,501 | | | 3,087 | | | | 31,537 | | | 34,624 | |
OPERATING (LOSS) INCOME | | (135,634) | | | (1,400) | | | | 758 | | | (642) | |
Other income, net | | 2,047 | | | 791 | | | | 2 | | | 793 | |
Gain on change in value of warrant liability | | 13,811 | | | 5,597 | | | | — | | | 5,597 | |
Interest expense | | (1,406) | | | (6) | | | | (125) | | | (131) | |
(Loss) income before income taxes | | (121,182) | | | 4,982 | | | | 635 | | | 5,617 | |
Income tax (expense) benefit | | (312) | | | 366 | | | | — | | | 366 | |
Net (Loss) Income | | (121,494) | | | 5,348 | | | | 635 | | | 5,983 | |
Net Income Attributable to Non-Controlling Interests (predecessor) | | — | | | — | | | | 20 | | | 20 | |
Net (Loss) Income Attributable to common shareholders (successor) and Controlling Interests (predecessor) | | $ | (121,494) | | | $ | 5,348 | | | | $ | 615 | | | $ | 5,963 | |
Sales
The following table presents our corporate-owned restaurant sales by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Successor | | | Predecessor | | S/P Combined (non-GAAP) |
(in thousands) | | Year Ended December 31, 2021 * | | December 16, 2020 through December 31, 2020 | | | January 1, 2020 through December 15, 2020 | | Year Ended December 31, 2020 |
BurgerFi | | | | | | | | | |
Restaurant sales | | 35,371 | | | 1,333 | | | | 23,683 | | | 25,016 | |
Royalty and other fees | | 8,021 | | | 255 | | | | 6,116 | | | 6,371 | |
Royalty - brand development and co-op | | 1,987 | | | 74 | | | | 1,441 | | | 1,515 | |
Franchise fees | | 1,069 | | | 25 | | | | 1,055 | | | 1,080 | |
Total BurgerFi | | $ | 46,448 | | | $ | 1,687 | | | | $ | 32,295 | | | $ | 33,982 | |
Anthony's | | | | | | | | | |
Restaurant sales | | $ | 22,419 | | | $ | — | | | | $ | — | | | $ | — | |
Total Anthony's | | $ | 22,419 | | | $ | — | | | | $ | — | | | $ | — | |
Total Consolidated | | $ | 68,867 | | | $ | 1,687 | | | | $ | 32,295 | | | $ | 33,982 | |
* Amounts for Anthony's are only presented from November 3, 2021, the date of acquisition. |
Comparison of the years ended December 31, 2021 and December 31, 2020 (S/P Combined)
Restaurant Sales
For the year ended December 31, 2021, the Company’s restaurant sales increased by approximately $32.8 million or 131% as compared to the S/P Combined year ended December 31, 2020. This increase was primarily related to the acquisition of Anthony's, which contributed approximately $22.4 million, or 68% of the increase in restaurant sales. The remaining increase of $10.4 million resulted from the operation of eight, net, new BurgerFi corporate-owned restaurants and an increase in same store sales of 14% for BurgerFi during the year ended December 31, 2021 as compared to the S/P Combined year ended December 31, 2020. Same store sales increases were driven by recovering customer demand, the introduction of our SWAG burger (Spicy Wagyu burger) in March 2021, as well as higher average transaction values resulting from price increases which took effect in June 2021.
Royalty and Other Fees
Royalty and other fees increased by approximately $1.7 million, or 26% for the year ended December 31, 2021 as compared to the S/P Combined year ended December 31, 2020. This increase was primarily driven by an increase in our franchisees' sales. For the year ended December 31, 2021, franchisee sales increased by 30% as compared to that of S/P Combined year ended December 31, 2020.
Royalties – Brand Development and Co-op
Royalties – brand development and co-op advertising increased by approximately $0.5 million, or 31% for the year ended December 31, 2021 as compared to the S/P Combined year ended December 31, 2020. This increase was primarily due to the reinstatement of brand development programs that were suspended in 2020 due to the COVID-19 outbreak and an increase in our franchisees’ sales for the year ended December 31, 2021 as compared to the S/P Combined year ended December 31, 2020. For the year ended December 31, 2021, franchisee sales increased by 30% as compared to that of S/P Combined year ended December 31, 2020.
Restaurant Level Operating Expenses
Restaurant level operating expenses are as follows:
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| | | Successor | | | Predecessor | | S/P Combined (non-GAAP) |
| Year Ended December 31, 2021 * | | December 16, 2020 through December 31, 2020 | | | January 1, 2020 through December 15, 2020 | | Year Ended December 31, 2020 |
(in thousands, except for percentage data) | In dollars | As a % of restaurant sales | | In dollars | As a % of restaurant sales | | | In dollars | As a % of restaurant sales | | In dollars | As a % of restaurant sales |
Consolidated: | | | | | | | | | | | | |
Restaurant Sales | $ | 57,790 | | 100 | % | | $ | 1,333 | | 100 | % | | | $ | 23,683 | | 100 | % | | $ | 25,016 | | 100 | % |
Restaurant level operating expenses: | | | | | | | | | | | | |
Food, beverage and paper costs | $ | 17,153 | | 29.7 | % | | $ | 406 | | 30.5 | % | | | $ | 7,212 | | 30.5 | % | | $ | 7,618 | | 30.5 | % |
Labor and related expenses | 16,272 | | 28.2 | % | | 304 | | 22.8 | % | | | 6,187 | | 26.1 | % | | 6,491 | | 25.9 | % |
Other operating expenses | 12,039 | | 20.8 | % | | 254 | | 19.1 | % | | | 4,999 | | 21.1 | % | | 5,253 | | 21.0 | % |
Occupancy and related expenses | 4,940 | | 8.5 | % | | 19 | | 1.4 | % | | | 2,702 | | 11.4 | % | | 2,721 | | 10.9 | % |
Total | $ | 50,404 | | 87.2 | % | | $ | 983 | | 73.8 | % | | | $ | 21,100 | | 89.1 | % | | $ | 22,083 | | 88.3 | % |
| | | | | | | | | | | | |
BurgerFi: | | | | | | | | | | | | |
Restaurant Sales | $ | 35,371 | | 100 | % | | $ | 1,333 | | 100 | % | | | $ | 23,683 | | 100 | % | | $ | 25,016 | | 100 | % |
Restaurant level operating expenses: | | | | | | | | | | | | |
Food, beverage and paper costs | $ | 10,734 | | 30.3 | % | | $ | 406 | | 30.5 | % | | | $ | 7,212 | | 30.5 | % | | $ | 7,618 | | 30.5 | % |
Labor and related expenses | 9,593 | | 27.1 | % | | 304 | | 22.8 | % | | | 6,187 | | 26.1 | % | | 6,491 | | 25.9 | % |
Other operating expenses | 7,718 | | 21.8 | % | | 254 | | 19.1 | % | | | 4,999 | | 21.1 | % | | 5,253 | | 21.0 | % |
Occupancy and related expenses | 3,009 | | 8.5 | % | | 19 | | 1.4 | % | | | 2,702 | | 11.4 | % | | 2,721 | | 10.9 | % |
Total | $ | 31,054 | | 87.8 | % | | $ | 983 | | 73.8 | % | | | $ | 21,100 | | 89.1 | % | | $ | 22,083 | | 88.3 | % |
| | | | | | | | | | | | |
Anthony's: | | | | | | | | | | | | |
Restaurant Sales | $ | 22,419 | | 100 | % | | $ | — | | N/A | | | $ | — | | N/A | | $ | — | | N/A |
Restaurant level operating expenses: | | | | | | | | | | | | |
Food, beverage and paper costs | $ | 6,419 | | 28.6 | % | | $ | — | | N/A | | | $ | — | | N/A | | $ | — | | N/A |
Labor and related expenses | 6,679 | | 29.8 | % | | — | | N/A | | | — | | N/A | | — | | N/A |
Other operating expenses | 4,321 | | 19.3 | % | | — | | N/A | | | — | | N/A | | — | | N/A |
Occupancy and related expenses | 1,931 | | 8.6 | % | | — | | N/A | | | — | | N/A | | — | | N/A |
Total | $ | 19,350 | | 86.3 | % | | $ | — | | N/A | | | $ | — | | N/A | | $ | — | | N/A |
* Amounts for Anthony's are only presented from November 3, 2021, the date of acquisition. As such, expenses as a percentage of sales for Anthony's are not necessarily representative or comparable of that of a full quarter or a full period for Anthony's.
Total restaurant level operating expenses as a percentage of revenue was 87.2% for the year ended December 31, 2021 as compared to 88.3% for the S/P Combined year ended December 31, 2020, a decrease of 110 basis points. This 110 basis points decrease is attributable to a change in our sales mix, more efficiently managing our costs of delivery through third party suppliers and reduced other store operating expenses, and leverage on occupancy costs, which are primarily fixed in nature.
Food, Beverage and Paper Costs
Food, beverage, and paper costs for the year ended December 31, 2021 increased approximately $9.5 million, or 125% as compared to the S/P Combined year ended December 31, 2020. This increase was primarily related to the acquisition of Anthony's, which contributed approximately $6.4 million, or 67% of the increase. The remaining increase of $3.1 million resulted from the operation of eight, net, new BurgerFi corporate-owned restaurants and an increase in same store sales of 14% during the year ended December 31, 2021 as compared to the S/P Combined year ended December 31, 2020. As a percentage of restaurant sales, food, beverage and paper costs were 29.7% for the year ended December 31, 2021 as compared to 30.5% for the S/P Combined year ended December 31, 2020. This 80 basis points decrease primarily resulted from a change in our sales mix and increases in menu pricing during the year ended December 31, 2021, partially offset by higher costs of food and paper products as a result of inflationary pressures.
Labor and Related Expenses
Labor and related expenses for the year ended December 31, 2021 increased by approximately $9.8 million, or 151% as compared to the S/P Combined year ended December 31, 2020. This increase was primarily related to the acquisition of Anthony's, which contributed approximately $6.7 million, or 68% of the increase. The remaining increase of $3.1 million resulted from the operation of eight, net, new BurgerFi corporate-owned restaurants, along with fewer employees in our corporate-owned restaurants during the month of March 2020. As a percentage of corporate restaurant sales, labor and related expenses were 28.2% for the year ended December 31, 2021 as compared to 25.9% for the S/P Combined year ended December 31, 2020. This 230 basis points increase is due to increased labor costs experienced in our restaurants as compared to that of the prior period stemming from staffing challenges resulting from COVID-19 as well as employee salary increases.
Other Operating Expenses
Other operating expenses for the year ended December 31, 2021 increased by approximately $6.8 million, or 129% as compared to the S/P Combined year ended December 31, 2020. This increase was primarily related to the acquisition of Anthony's, which contributed approximately $4.3 million, or 64% of the increase. The remaining increase of $2.5 million resulted from the operation of eight, net, new BurgerFi corporate-owned restaurants. As a percentage of corporate restaurant sales, other operating expenses were 20.8% for the year ended December 31, 2021 as compared to 21.0% for the S/P Combined year ended December 31, 2020. This 20 basis points decrease primarily relates to sales increases during the year ended December 31, 2021, creating leverage on certain store operating costs that are not variable with sales.
Occupancy and Related Expenses
Occupancy and related expenses for the year ended December 31, 2021 increased by approximately $2.2 million, or 82% as compared to the S/P Combined year ended December 31, 2020. This increase was primarily related to the acquisition of Anthony's, which contributed approximately $1.9 million, or 87% of the increase. The remaining increase of $0.3 million resulted from the operation of eight, net, new BurgerFi corporate-owned restaurants. As a percentage of corporate restaurant sales, occupancy and related expenses were 8.5% for the year ended December 31, 2021 as compared to 10.9% for the S/P Combined year ended December 31, 2020. This 240 basis points decrease relates to sale increases during the year ended December 31, 2021, creating leverage on occupancy costs, which are primarily fixed in nature.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2021 increased by approximately $9.5 million, or 122% as compared to the S/P Combined year ended December 31, 2020. This increase partially related to Anthony's general and administrative expenses for two months, which contributed approximately $1.3 million, or 13% of the increase. The remaining increase of $8.2 million was primarily driven by merger and acquisition-related expenses of $3.7 million, legal, professional, and insurance fees and other miscellaneous expenses of $2.8 million, and labor and related costs of $1.7 million during the year ended December 31, 2021 as compared to the S/P Combined year ended December 31, 2020. These increases were a result of investments made related to the acquisition of Anthony's, costs associated with the operation of being a public company beginning in December 2020, and the investments to support the increased development and growth of our restaurants.
Pre-opening Costs
Pre-opening costs were $1.9 million for the year ended December 31, 2021 as compared to $0.2 million during the S/P Combined year ended December 31, 2020 primarily as a result of opening ten new stores during the year ended December 31, 2021 as compared to two stores during the S/P Combined year ended December 31, 2020. Pre-opening costs include all expenses incurred by a restaurant prior to the restaurant's opening for business. These pre-opening costs include costs to relocate and reimburse restaurant management staff members, costs to recruit and train hourly restaurant staff members, wages, travel, and lodging costs for our training team and other support staff members, as well as rent expense. Pre-opening costs can fluctuate significantly from period to period based on the number and timing of restaurant openings and the specific pre-opening costs incurred for each restaurant.
Share-Based Compensation Expense
Stock compensation expense was $7.6 million for the year ended December 31, 2021 as compared to $0.8 million for the S/P Combined year ended December 31, 2020 primarily as a result of restricted stock unit awards under the Company’s 2020 Stock Incentive Plan in 2021. There were very limited awards for the S/P Combined year ended December 31, 2020.
Depreciation and Amortization Expense
Depreciation and amortization expenses were $10.1 million for the year ended December 31, 2021 as compared to $1.4 million for the S/P Combined year ended December 31, 2020. The increase of $8.7 million was primarily due to the amortization of intangible assets during the year ended December 31, 2021. These intangible assets were in relation to the BurgerFi acquisition in December 2020. The remaining increase was primarily attributable to operating more stores than in the prior period.
Brand Development and Co-op Advertising Expense
Brand development and co-op advertising expense increased by approximately $0.1 million, or 6% as compared to the S/P Combined year-ended December 31, 2020. This increase relates to the signing of a new agency during the year ended December 31, 2021.
Other Income, net
Other income increased by approximately $1.3 million for the year ended December 31, 2021 primarily as a result of $2.2 million of debt forgiveness on all of our PPP loans, offset by loss on disposal of assets.
Interest Expense
Interest expense was approximately $1.4 million during the year ended December 31, 2021 as compared to $0.1 million during the S/P Combined year ended December 31, 2020. This increase is primarily due to non-cash interest expense of $0.6 million in relation to our preferred stock and $0.7 million due to an increase in debt as a result of the Anthony's acquisition.
Change in Value of Warrant Liability
The Company recorded a non-cash gain of approximately $13.8 million during the year ended December 31, 2021 related to change in the fair value of the warrant liability as compared to a gain of $5.6 million during the Successor period from December 16, 2020 to December 31, 2020. The increase in the gain is primarily attributable to the decrease in value of the warrant liability primarily due to a decrease in the trading price of our common stock. There were no warrants outstanding in the Predecessor period.
Impairment Expense
As part of the Company's annual goodwill assessment and impairment assessment at the end of each reporting period for long-lived assets and definite-lived intangible assets, the Company recorded asset impairment charges of approximately $114.8 million. This impairment charge was primarily related to a goodwill impairment charge of $106.5 million and a definite-lived intangible asset impairment charge of $7.7 million in relation to the Company's BurgerFi reporting unit. The majority of the goodwill impairment amount was driven by the impact on the Company's market capitalization due to the decrease in stock price, coupled with significant decline to the equity values of our peers. The impairment amount for definite-lived intangible assets was primarily the result of a change in estimate of the remaining life of a licensing agreement.
Income Tax Expense
For the year ended December 31, 2021, the Company recorded income tax expense of $0.3 million, primarily as a result of a valuation allowance on the Company’s deferred tax assets. This resulted in an effective tax rate of less than 1.0%. For the Successor period from December 16, 2020 to December 31, 2020, the Company recorded income tax benefit of $0.4 million.
Prior to the BurgerFi acquisition, the Predecessor had elected to be taxed as a partnership under the provisions of the Internal Revenue Code and similar state provisions. Therefore, there was no income tax recorded by the Company for the comparable Predecessor period from January 1, 2020 to December 15, 2020.
Net (Loss) Income
Net loss was approximately $121.5 million and net income was approximately $6.0 million, for the year ended December 31, 2021 and for the S/P Combined year ended December 31, 2020, respectively. This change is primarily the result of a non-cash impairment charge of approximately $114.8 million during the year ended December 31, 2021, which consisted of impairment of goodwill, long-lived assets, and definite-lived intangible assets. In addition, the Company's general and administrative expenses for the year ended December 31, 2021 increased by approximately $9.5 million, or 122% as compared to the S/P Combined year ended December 31, 2020. $8.2 million of this increase was primarily a result of investments made related to the acquisition of Anthony's, the operation of a public company beginning in December 2020, and the investments to support the increased development and growth of our restaurants.
Non-U.S. GAAP Financial Measures
As appropriate, we supplement our reported U.S. GAAP financial information with certain non-U.S. GAAP financial measures, including earnings before interest, income taxes, depreciation and amortization (“Adjusted EBITDA”). We define Adjusted EBITDA as net (loss) income before the change in value of warrant liability, interest expense (which includes the change in value of preferred stock), income tax (benefit) expense, depreciation and amortization, share-based compensation expense, pre-opening costs, store closure costs, gain on extinguishment of debt, legal settlements, merger, acquisition, and integration costs, and impairment charges.
We use Adjusted EBITDA to evaluate our performance, both internally and as compared with our peers, because this measure excludes certain items that may not be indicative of our core operating results, as well as items that can vary widely across different industries or among companies within the same industry. We believe that this adjusted measure provides a baseline for analyzing trends in our underlying business.
We believe that this non-U.S. GAAP financial measure provides meaningful information and helps investors understand our financial results and assess our prospects for future performance. Because non-U.S. GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies’ non-U.S. GAAP financial measures having the same or similar names. These financial measures should not be considered in isolation from, as substitutes for, or alternative measures of, reported net income or diluted earnings per share, and should be viewed in conjunction with the most comparable U.S. GAAP financial measures and the provided reconciliations thereto. We believe this non-U.S. GAAP financial measure, when viewed together with our U.S. GAAP results and the related reconciliations, provides a more complete understanding of our business. We strongly encourage investors to review our consolidated financial statements and publicly filed reports in their entirety and not rely on any single financial measure.
Below is a reconciliation of Non-GAAP Adjusted EBITDA to the most directly comparable GAAP measure, net (loss) income on a consolidated basis and by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Consolidated | | |
| | | | Successor | | | Predecessor | | S/P Combined (non-GAAP) | | |
(in thousands) | | 12/31/2021 | | 12/16/2020 through 12/31/2020 | | | 1/1/2020 through 12/31/2020 | | 12/31/2020 | | |
Net (Loss) Income Attributable to Common Shareholders (successor) and Controlling Interests (predecessor) | | $ | (121,494) | | | $ | 5,348 | | | | $ | 615 | | | $ | 5,963 | | | |
Gain on change in value of warrant liability | | (13,811) | | | (5,597) | | | | — | | | (5,597) | | | |
Interest expense | | 1,406 | | | 6 | | | | 125 | | | 131 | | | |
Income tax expense (benefit) | | 312 | | | (366) | | | | — | | | (366) | | | |
Depreciation and amortization expense | | 10,060 | | | 348 | | | | 1,062 | | | 1,410 | | | |
Share-based compensation expense | | 7,573 | | | 818 | | | | — | | | 818 | | | |
Pre-opening costs | | 1,905 | | | 48 | | | | 166 | | | 214 | | | |
Store closure (income) costs | | 324 | | | — | | | | (2) | | | (2) | | | |
Gain on extinguishment of debt | | (2,237) | | | (791) | | | | — | | | (791) | | | |
Legal settlements | | 689 | | | — | | | | — | | | — | | | |
Merger, acquisition, and integration costs | | 4,275 | | | — | | | | 428 | | | 428 | | | |
Non-cash impairment charge | | 114,797 | | | — | | | | — | | | — | | | |
Adjusted EBITDA | | $ | 3,799 | | | $ | (186) | | | | $ | 2,394 | | | $ | 2,208 | | | |
| | | | | | | | | | | |
| | BurgerFi | | Anthony's |
| | | | Successor | | | Predecessor | | S/P Combined (non-GAAP) | | |
(in thousands) | | 12/31/2021 | | 12/16/2020 through 12/31/2020 | | | 1/1/2020 through 12/31/2020 | | 12/31/2020 | | 12/31/2021 |
Net (Loss) Income Attributable to Common Shareholders (successor) and Controlling Interests (predecessor) | | $ | (121,352) | | | $ | 5,348 | | | | $ | 615 | | | $ | 5,963 | | | $ | (142) | |
Gain on change in value of warrant liability | | (13,811) | | | (5,597) | | | | — | | | (5,597) | | | — | |
Interest expense | | 673 | | | 6 | | | | 125 | | | 131 | | | 733 | |
Income tax expense (benefit) | | 473 | | | (366) | | | | — | | | (366) | | | (161) | |
Depreciation and amortization expense | | 8,694 | | | 348 | | | | 1,062 | | | 1,410 | | | 1,366 | |
Share-based compensation expense | | 7,573 | | | 818 | | | | — | | | 818 | | | — | |
Pre-opening costs | | 1,905 | | | 48 | | | | 166 | | | 214 | | | — | |
Store closure (income) costs | | 279 | | | — | | | | (2) | | | (2) | | | 45 | |
Gain on extinguishment of debt | | (2,237) | | | (791) | | | | — | | | (791) | | | — | |
Legal settlements | | 689 | | | — | | | | — | | | — | | | — | |
Merger, acquisition, and integration costs | | 4,119 | | | — | | | | 428 | | | 428 | | | 156 | |
Non-cash impairment charge | | 114,797 | | | — | | | | — | | | — | | | — | |
Adjusted EBITDA | | $ | 1,802 | | | $ | (186) | | | | $ | 2,394 | | | $ | 2,208 | | | $ | 1,997 | |
Liquidity, Capital Resources, and COVID-19
Our primary sources of liquidity are cash from operations, cash and cash equivalents on hand. As of December 31, 2021, we maintained a cash and cash equivalents balance of approximately $15 million.
Our primary requirements for liquidity are to fund our working capital needs, operating and finance lease obligations, capital expenditures and general corporate needs. Our requirements for working capital are generally not significant because our guests pay for their food and beverage purchases in cash or on debit or credit cards at the time of the sale and we are able to sell many of our inventory items before payment is due to the supplier of such items. Our ongoing capital expenditures are principally related to opening new restaurants, remodels and maintenance, as well as investments in our digital and corporate infrastructure. We estimate our capital expenditures will be approximately $4 million for the year ending December 31, 2022.
During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly spreading outbreak of a novel strain of coronavirus designated COVID-19. The pandemic has significantly impacted economic conditions in the United States, where all of our Company restaurants are located. While the adverse effects of the COVID-19 pandemic have partially subsided, its effects vary by region, and uncertainties arising from the COVID-19 pandemic could continue to disrupt economic conditions and business activities, particularly as new variants of COVID-19 arise. The extent to which the COVID-19 pandemic, including the recent and emerging variants, could affect our business, operations and financial results is uncertain as it will depend upon numerous evolving factors that management may not be able to accurately predict, including the duration and scope of the pandemic and the continued emergence of new strains of COVID-19. The acceptance and effectiveness of vaccines and treatments, along with the length and extent of any continuing economic and market disruptions, are unknown, and therefore, any future impacts on our business, financial condition and/or results of operations cannot be quantified or predicted with specificity.
We have implemented price increases to mitigate the inflationary effects of food and labor costs, however we cannot predict the long-term impact of these negative economic conditions on our restaurant profitability. Although we have experienced some recovery since the initial impact of COVID-19 and are able to meet our obligations as they become due with our cash flow from operations, the long-term impact of COVID-19 on the economy and on our business remains uncertain, the duration and scope of which cannot currently be predicted. In addition, we continue to monitor the spread of new variants, including the pandemic’s emergence of variants.
We are currently able to pay our obligations as they become due for at least the next 12 months and for the foreseeable future, with our cash flow generated from operations and our cash on hand balance of $15 million. We are committed to constructing four additional restaurants within the next 12 months. The total amount remaining due on these contracts is approximately $1.0 million. We believe that we will be able to pay these commitments from our current cash balance. Should federal, state or municipal government authorities impose mandatory restrictions in excess of what they currently are, we believe that our current cash balance will allow us the liquidity to meet our commitments as they become due.
The following table presents the summary cash flow information for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | | | Successor | | | Predecessor |
| Year Ended December 31, 2021 | | December 16, 2020 through January 1, 2020 | | | January 1, 2020 through December 15, 2020 |
Net cash (used in) provided by: | | | | | | | |
Operating activities | | $ | (7,467) | | | $ | (938) | | | | $ | 2,696 | |
Investing activities | | (5,015) | | | (27,549) | | | | 620 | |
Financing activities | | (13,012) | | | — | | | | (2,943) | |
Net (decrease) increase in cash | | $ | (25,494) | | | $ | (28,487) | | | | $ | 373 | |
Cash Flows Used in Operating Activities
During the year ended December 31, 2021, cash flows used in operating activities were approximately $7.5 million. The cash flows used in operating activities resulted from a net loss of $121.5 million, which was primarily related to non-cash impairment charges of $114.8 million related to goodwill, definite-lived intangible assets and long-lived assets, depreciation and amortization of $10.1 million, and share-based compensation of $7.6 million, offset by a gain on change in value of warrant liability of $13.8 million. Additionally, changes in operating assets and liabilities resulted in a net asset increase, which was mainly due to a decrease in accrued expenses, primarily as a result of payment of acquisition-related costs associated with the Anthony's acquisition as well as payment of accrued compensation, offset by an increase in deferred rent and other liabilities. Our deferred rent and other liabilities increase is due to the opening of new corporate-owned restaurants during the year ended December 31, 2021 as well as several restaurants under construction as of December 31, 2021.
Cash Flows Used in Investing Activities
During the year ended December 31, 2021, cash flows used in investing activities were approximately $5.0 million, which was primarily the result of construction costs of $10.7 million, offset by a cash increase from the acquisition of Anthony's of approximately $5.5 million.
Cash Flows Used in Financing Activities
During the year ended December 31, 2021, cash flows used in financing activities were approximately $13.0 million, which was primarily related to a $3.0 million repayment and termination of one of the Company's lines of credit and payments on notes payable of approximately $9.2 million.
Credit Agreement
On November 3, 2021 and as part of the Anthony's acquisition, the Company joined a credit agreement with a syndicate of commercial banks providing Anthony's with up to $71.8 million in financing ("Credit Agreement"). The Credit Agreement, which terminates on June 15, 2024, provides the Company with lender financing structured as a $57.8 million term loan, a $4 million revolving loan, and a $10 million delayed draw term loan facility (the “Delayed Draw Term Loan Facility”) provided by a related party and a significant shareholder. The terms of the Credit Agreement require the Company to repay the principal of the term loan in quarterly installments of approximately $0.8 million with the balance due at the maturity date. The principal amount of revolving loans is due and payable in full on the maturity date. The loan and revolving line of credit are secured by substantially all of the Company’s assets and incurs interest on outstanding amounts at 4.75% per annum through June 15, 2023 and 6.75% from June 16, 2023 through maturity while the Delayed Draw Term Loan Facility is a non-interest bearing loan. Pursuant to the terms of an amendment to the Credit Agreement effective as of March 9, 2022, certain of the covenants of (i) the Company and Plastic Tripod, Inc., as the borrowers (the "Borrowers"), and (ii) the subsidiary guarantors (the "Guarantors") party to the Credit Agreement were amended, and the Borrowers and Guarantors agreed to pay incremental deferred interest of 2% per annum, in the event that the Credit Agreement is not repaid on or prior to June 15, 2023; provided, however, that if no event of default has occurred and is continuing then (1) no incremental deferred interest will be due if all of the obligations under the Credit Agreement have been paid on or prior to December 31, 2022, and (2) only 50% of the incremental deferred interest will be owed if all of the obligations under the Credit Agreement have been paid from and after January 1, 2023 and on or prior to March 31, 2023.
Redeemable Preferred Stock
On November 3, 2021, and as part of the Anthony's acquisition, the Company issued 2,120,000 shares of redeemable preferred stock as Series A Junior Preferred Stock. The Series A Junior Preferred Stock is redeemable on November 3, 2027 and accrues dividends at 7.00% per annum compounded quarterly from June 15, 2024 with such rate increasing by an additional 0.35% per quarter commencing with the three month period ending September 30, 2024 and (b) in the event that the Credit Agreement is refinanced or repaid in full prior to June 15, 2024 and the Series A Junior Preferred Stock is not redeemed in full on such date, from and after such date, shall accrue dividends at 5.00% per annum, compounded quarterly, until June 15, 2024.
The Series A Junior Preferred Stock ranks senior to the Common Stock and may be redeemed at the option of the Company at any time and must be redeemed by the Company in limited circumstances. The Series A Junior Preferred Stock shall not have voting rights or conversion rights. The Series A Junior Preferred Stock is measured at fair value with changes in fair value reported as interest expense in the accompanying consolidated statement of operations.
Critical Accounting Policies and Use of Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as related disclosures. On an ongoing basis, the Company evaluates its estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
The Company reviews its financial reporting and disclosure practices and accounting policies quarterly to confirm that they provide accurate and transparent information relative to the current economic and business environment. The Company believes that of its significant accounting policies, the following involve a higher degree of judgment and/or complexity:
•Goodwill
We review goodwill for impairment annually, or more frequently if circumstances indicate a possible impairment. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. If management concludes that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, management conducts a quantitative goodwill impairment test. The Company estimates the fair values of its reporting unit using a combination of the income, or discounted cash flows approach and the market approach, which utilizes comparable companies’ data. If the estimated fair value of the reporting unit is less than its carrying value, a goodwill impairment exists for the reporting unit and an impairment loss is recorded. The estimated fair value of goodwill is subject to change as a result of many factors including, among others, any changes in our business plans, changing economic conditions and the competitive environment. Refer to Note 14 Fair Value Measurements for more information.
•Long-lived assets and definite-lived intangible assets
We evaluate our long-lived assets and definite-lived intangible assets for impairment at the end of each reporting period or whenever events or changes in circumstances indicate that the carrying value of the assets or asset group may not be recoverable. Indefinite-lived intangible assets are tested for impairment at least annually, or more frequently if events or changes in circumstances indicate that the assets may be impaired. Factors considered include, but are not limited to, negative cash flow, significant underperformance relative to historical or projected future operating results, significant changes in the manner in which an asset is being used, an expectation that an asset will be disposed of significantly before the end of its previously estimated useful life and significant negative industry or economic trends.
To estimate future cash flows, we make certain assumptions about expected future operating performance, such as revenue growth rates, royalties, gross margins, and operating expense in relation to the current economic environment and the Company’s future expectations. Estimates of future cash flows are highly subjective judgments based on the Company’s experience and knowledge of its operations. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value.
For more information, refer to Note 6 Impairment and Note 14 Fair Value Measurements.
•Warrant Liability
The fair value of our warrant liability is measured at fair value on a non-recurring basis, classified as Level 3 in the fair value hierarchy. The fair value is calculated using the Black-Scholes option-pricing model. The Black-Scholes model requires us to make assumptions and judgments about the variables used in the calculation, including the expected term, expected volatility, risk-free interest rate, dividend rate and service period. Refer to Note 14 Fair Value Measurements for more information.
•Acquisitions
The determination of the fair value of net assets acquired in an acquisition requires estimates and judgments of future cash flow expectations for the acquired business and the related identifiable tangible and intangible assets. Fair values of net assets acquired are calculated using expected cash flows and industry-standard valuation techniques. For current assets and current liabilities, book value is generally assumed to equal fair value.
Due to the time required to gather and analyze the necessary data for each acquisition, U.S. GAAP provides a “measurement period” of up to one year in which to finalize these fair value determinations. During the measurement period, preliminary fair value estimates may be revised if new information is obtained about the facts and circumstances existing as of the date of acquisition, or based on the final net assets and working capital of the acquired business, as prescribed in the applicable purchase agreement. Such adjustments may result in the recognition of, or an adjustment to the fair values of, acquisition-related assets and liabilities and/or consideration paid, and are referred to as “measurement period adjustments.” Measurement period adjustments are recorded to goodwill. Other revisions to fair value estimates for acquisitions are reflected as income or expense, as appropriate.
Consideration paid generally consists of cash and, from time to time, shares, and potential future payments that are contingent upon the acquired business achieving certain levels of earnings in the future, also referred to as “acquisition-related contingent consideration” or “earn-outs.” Earn-out liabilities are measured at their estimated fair values as of the date of acquisition. Subsequent to the date of acquisition, if future Earn-out payments are expected to differ from Earn-out payments estimated as of the date of acquisition, any related fair value adjustments, including those related to finalization of completed earn-out arrangements, are recognized in the period that such expectation is considered probable. Changes in the fair value of Earn-out liabilities for the Company’s traditional earn-outs, other than those related to measurement period adjustments, as described above, are recorded within other income or expense in the consolidated statements of operations.
Refer to Note 5 Acquisitions for additional information.
•Income Taxes
We make certain estimates and judgments in the calculation of our provision for income taxes, in the resulting tax liabilities, and in the recoverability of deferred tax assets. We record valuation allowances against our deferred tax assets, when necessary. Realization of deferred tax assets is dependent on future taxable earnings and is therefore uncertain. Refer to Note 12 Income Taxes for additional information.
New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires lessees to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months and disclose certain information about the leasing arrangements. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The Company will elect the package of practical expedients, as well as the hindsight practical expedient, permitted under the new guidance, which includes allowing the Company to continue utilizing historical classification of leases. In preparation for the adoption, the Company is implementing new accounting systems, business processes and internal controls to assist in the application of the new guidance. As an emerging growth company, this guidance is effective for our fiscal years beginning after December 15, 2021. The adoption of the standard will result in the recognition of right-of-use assets and lease liabilities for operating leases which will result in additional assets and corresponding liabilities of approximately $60 million to $65 million on the consolidated balance sheet, with no material impact to its consolidated statement of operations, stockholders’ equity, or cash flows. Our assessment is ongoing and subject to finalization such that the actual impact may differ from the estimated range.
The FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“Topic 326”) in June 2016, subsequently amended by various standard updates. This guidance replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information when determining credit loss estimates and requires financial assets to be measured net of expected credit losses at the time of initial recognition. As an emerging growth company, this guidance will be effective for our fiscal years beginning after December 15, 2022.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (“Topic 740”) as part of its Simplification Initiative. This guidance provides amendments to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for annual and interim reporting periods beginning after December 15, 2020, and early adoption is permitted. The adoption of this standard did not have an impact on our consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04 Reference Rate Reform (“Topic 848”) to provide optional guidance for a limited period of time, from March 12, 2020 through December 31, 2022, to ease the burden of financial reporting due to reference rate reform. An entity can elect to utilize the guidance at any time during the period. The Company is currently evaluating the effect this guidance will have on the consolidated financial statements and related disclosures.
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), an amendment that simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The amendment simplifies accounting for convertible instruments by removing major separation models required under current accounting guidance. In addition, the amendment removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the exception, and also simplifies the diluted earnings per share calculation in certain areas. The amendment is effective beginning after December 15, 2023 for smaller reporting companies. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.
Sale of Dania Beach Restaurant to Franchisee
In February 2020, the Company entered into an asset purchase agreement with an unrelated third-party for the sale of substantially all of the assets used in connection with the operation of BF Dania Beach, LLC for an aggregate purchase price of $1.3 million. From January to March 2020, the Company received three cash deposits totaling $0.9 million in connection with this transaction. The closing of this transaction has been delayed due to additional negotiation that has been on-going through the report date of April 14, 2022. In the event the transaction is terminated, the Company will resume operation of the restaurant, and return the $0.9 million to the unrelated third-party purchaser. Assets used in the operations of BF Dania Beach, LLC have been classified as held for sale and the deposit is included within the December 31, 2021 consolidated balance sheet.
Item 8. Financial Statements and Supplementary Data.
BURGERFI INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
BurgerFi International, Inc.
North Palm Beach, Florida
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of BurgerFi International, Inc. and Subsidiaries (the “Company” or “Successor”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, changes in stockholders’/members’ equity and cash flows for the year ended December 31, 2021, and the period from December 16, 2020 to December 31, 2020, and of BurgerFi International, LLC and Subsidiaries (“Predecessor”) for the period from January 1, 2020 to December 15, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for the year ended December 31, 2021, for the period from December 16, 2020 to December 31, 2020, and the results of the Predecessor's operations and its cash flows for the period from January 1, 2020 to December 15, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
Certified Public Accountants
We have served as the Company’s auditor since 2015.
West Palm Beach, Florida
April 14, 2022
BurgerFi International Inc., and Subsidiaries
Consolidated Balance Sheets
| | | | | | | | | | | | | | |
(in thousands, except for per share data) | | December 31, 2021 | | December 31, 2020 |
ASSETS | | | | |
CURRENT ASSETS | | | | |
Cash | | $ | 14,889 | | | $ | 37,150 | |
Cash - restricted | | — | | | 3,233 | |
Accounts receivable, net | | 1,689 | | | 718 | |
Inventory | | 1,387 | | | 268 | |
Asset held for sale | | 732 | | | 732 | |
Other current assets | | 2,526 | | | 1,607 | |
TOTAL CURRENT ASSETS | | 21,223 | | | 43,708 | |
PROPERTY & EQUIPMENT, net | | 29,035 | | | 8,004 | |
DUE FROM RELATED COMPANIES | | — | | | 74 | |
GOODWILL | | 98,000 | | | 119,542 | |
INTANGIBLE ASSETS, net | | 168,723 | | | 116,824 | |
DEFERRED INCOME TAXES | | — | | | 713 | |
OTHER ASSETS | | 738 | | | 251 | |
TOTAL ASSETS | | $ | 317,719 | | | $ | 289,116 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | |
CURRENT LIABILITIES | | | | |
Accounts payable - trade and other | | $ | 7,841 | | | $ | 1,678 | |
Accrued expenses | | 5,302 | | | 1,203 | |
Other liabilities | | 6,481 | | | 430 | |
Short-term borrowings | | 3,331 | | | 4,450 | |
Other deposit | | 907 | | | 907 | |
Deferred revenue, current | | 468 | | | 490 | |
TOTAL CURRENT LIABILITIES | | 24,330 | | | 9,158 | |
NON-CURRENT LIABILITIES | | | | |
Long-term borrowings | | 56,797 | | | 1,522 | |
Redeemable preferred stock, $0.0001 par value, 10,000,000 shares authorized, 2,120,000 shares issued and outstanding, $53 million redemption value | | 47,525 | | | — | |
Related party note | | 8,724 | | | — | |
Warrant liability | | 2,706 | | | 16,516 | |
Deferred revenue, net of current portion | | 2,109 | | | 2,816 | |
Deferred rent | | 900 | | | 29 | |
Deferred income taxes | | 1,353 | | | — | |
TOTAL LIABILITIES | | 144,444 | | | 30,041 | |
COMMITMENTS AND CONTINGENCIES - Note 8 | | | | |
STOCKHOLDERS' EQUITY | | | | |
Common stock, $0.0001 par value, 100,000,000 shares authorized, 21,303,500 and 17,541,838 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively | | 2 | | | 2 | |
Additional paid-in capital | | 296,992 | | | 261,298 | |
Accumulated deficit | | (123,719) | | | (2,225) | |
TOTAL STOCKHOLDERS' EQUITY | | 173,275 | | | 259,075 | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 317,719 | | | $ | 289,116 | |
See accompanying notes to consolidated financial statements.
BurgerFi International Inc., and Subsidiaries
Consolidated Statements of Operations
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Successor | | | Predecessor |
(in thousands, except for per share data) | | Year Ended December 31, 2021 | | December 16, 2020 through December 31, 2020 | | | January 1, 2020 through December 15, 2020 |
REVENUE | | | | | | | |
Restaurant sales | | $ | 57,790 | | | $ | 1,333 | | | | $ | 23,683 | |
Royalty and other fees | | 8,021 | | | 255 | | | | 6,116 | |
Royalty - brand development and co-op | | 1,987 | | | 74 | | | | 1,441 | |
Franchise fees | | 1,069 | | | 25 | | | | 1,055 | |
TOTAL REVENUE | | 68,867 | | | 1,687 | | | | 32,295 | |
Restaurant level operating expenses: | | | | | | | |
Food, beverage and paper costs | | 17,153 | | | 406 | | | | 7,212 | |
Labor and related expenses | | 16,272 | | | 304 | | | | 6,187 | |
Other operating expenses | | 12,039 | | | 254 | | | | 4,999 | |
Occupancy and related expenses | | 4,940 | | | 19 | | | | 2,702 | |
Impairment | | 114,797 | | | — | | | | — | |
General and administrative expenses | | 17,300 | | | 855 | | | | 6,925 | |
Depreciation and amortization expense | | 10,060 | | | 348 | | | | 1,062 | |
Share-based compensation expense | | 7,573 | | | 818 | | | | — | |
Brand development and co-op advertising expense | | 2,462 | | | 35 | | | | 2,284 | |
Pre-opening costs | | 1,905 | | | 48 | | | | 166 | |
TOTAL OPERATING EXPENSES | | 204,501 | | | 3,087 | | | | 31,537 | |
OPERATING (LOSS) INCOME | | (135,634) | | | (1,400) | | | | 758 | |
Other income, net | | 2,047 | | | 791 | | | | 2 | |
Gain on change in value of warrant liability | | 13,811 | | | 5,597 | | | | — | |
Interest expense | | (1,406) | | | (6) | | | | (125) | |
(Loss) income before income taxes | | (121,182) | | | 4,982 | | | | 635 | |
Income tax (expense) benefit | | (312) | | | 366 | | | | — | |
Net (Loss) Income | | (121,494) | | | 5,348 | | | | 635 | |
Net Income Attributable to Non-Controlling Interests (predecessor) | | — | | | — | | | | 20 | |
Net (Loss) Income Attributable to common shareholders (successor) and Controlling Interests (predecessor) | | $ | (121,494) | | | $ | 5,348 | | | | $ | 615 | |
| | | | | | | | | | | | | | |
Weighted average common shares outstanding: | | | | |
Basic | | 18,408,247 | | | 17,541,838 | |
Diluted | | 18,624,447 | | | 21,426,115 | |
| | | | |
Net (loss) income per common share: | | | | |
Basic | | $ | (6.60) | | | $ | 0.30 | |
Diluted | | $ | (7.20) | | | $ | (0.01) | |
See accompanying notes to consolidated financial statements.
BurgerFi International Inc., and Subsidiaries
Consolidated Statements of Changes in Stockholders’/Members’ Equity
| | | | | | | | | | | | | | | | | | | | |
| | Predecessor |
(in thousands) | | Controlling Interest | | Noncontrolling Interest | | Total Members’ Equity |
Balance, December 31, 2019 | | $ | 2,492 | | | $ | 15 | | | $ | 2,507 | |
Net Income | | 615 | | | 20 | | | 635 | |
Distributions | | (5,972) | | | (35) | | | (6,007) | |
Balance, December 15, 2020 | | $ | (2,865) | | | $ | — | | | $ | (2,865) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor |
| | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total |
(in thousands, except for share data) | | Shares | | Amount | | | |
Balance at December 16, 2020 | | 17,541,838 | | | $ | 1 | | | $ | 53,594 | | | $ | (7,573) | | | $ | 46,022 | |
Share-based compensation | | — | | | — | | | 818 | | | — | | | 818 | |
Stock issued in acquisition of BurgerFi | | — | | | 1 | | | 103,679 | | | — | | | 103,680 | |
Contingent consideration in acquisition of BurgerFi | | — | | | — | | | 103,207 | | | — | | | 103,207 | |
Net income (December 16, 2020 to December 31, 2020) | | — | | | — | | | — | | | 5,348 | | | 5,348 | |
Balance, December 31, 2020 | | 17,541,838 | | | $ | 2 | | | $ | 261,298 | | | $ | (2,225) | | | $ | 259,075 | |
Share-based compensation | | — | | | — | | | 7,381 | | | — | | | 7,381 | |
Stock issued in acquisition of Anthony's | | 3,362,424 | | | — | | | 28,120 | | | — | | | 28,120 | |
Shares issued for share-based compensation | | 107,500 | | | — | | | 192 | | | — | | | 192 | |
Shares issued for warrant exercises | | 8,069 | | | | | 1 | | | — | | | 1 | |
Exchange of UPO units | | 283,669 | | | | | — | | | — | | | — | |
Net loss | | — | | | — | | | — | | | (121,494) | | | (121,494) | |
Balance, December 31, 2021 | | 21,303,500 | | | $ | 2 | | | $ | 296,992 | | | $ | (123,719) | | | $ | 173,275 | |
BurgerFi International Inc., and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Successor | | | Predecessor |
(in thousands) | | Year Ended December 31, 2021 | | December 16, 2020 through December 31, 2020 | | | January 1, 2020 through December 15, 2020 |
CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES | | | | | | | |
Net (loss) income | | $ | (121,494) | | | $ | 5,348 | | | | $ | 635 | |
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities | | | | | | | |
Impairment | | 114,797 | | | — | | | | — | |
Gain on change in value of warrant liability | | (13,811) | | | (5,597) | | | | — | |
Depreciation and amortization | | 10,060 | | | 348 | | | | 1,062 | |
Share-based compensation | | 7,573 | | | 818 | | | | — | |
Gain on extinguishment of debt | | (2,237) | | | (791) | | | | — | |
Forfeited franchise deposits | | (834) | | | — | | | | (693) | |
Deferred income taxes | | 312 | | | (370) | | | | — | |
Other non-cash interest | | 841 | | | — | | | | — | |
Provision for bad debts | | 234 | | | — | | | | 133 | |
Loss on disposal of property and equipment | | 203 | | | — | | | | — | |
Changes in operating assets and liabilities, net of acquisitions | | | | | | | |
Accounts receivable | | (633) | | | (339) | | | | 6 | |
Inventory | | (142) | | | (8) | | | | (10) | |
Other assets | | 81 | | | (552) | | | | 121 | |
Accounts payable - trade | | 303 | | | (275) | | | | 751 | |
Accrued expenses | | (4,045) | | | 284 | | | | 218 | |
Deferred rent | | 871 | | | — | | | | — | |
Deferred revenue and other liabilities | | 454 | | | 196 | | | | 473 | |
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | | (7,467) | | | (938) | | | | 2,696 | |
NET CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | |
Purchase of restaurant from franchisee | | — | | | — | | | | (385) | |
Deposit on sale | | — | | | — | | | | 907 | |
Purchase of property and equipment | | (10,665) | | | (265) | | | | (3,244) | |
Assets acquired, net, as part of the BurgerFi acquisition | | — | | | (27,210) | | | | — | |
Cash acquired as part of the Anthony's acquisition | | 5,522 | | | — | | | | — | |
Proceeds from sale of store | | 80 | | | — | | | | — | |
Advances to related companies | | — | | | (74) | | | | (7,863) | |
Repayments from related companies | | 74 | | | — | | | | 11,205 | |
Purchase of trademarks | | (26) | | | — | | | | — | |
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES | | (5,015) | | | (27,549) | | | | 620 | |
NET CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | |
Proceeds on borrowings | | — | | | — | | | | 5,393 | |
Payments on borrowings | | (12,168) | | | — | | | | (2,329) | |
Payment of direct costs on issuance of common stock | | (844) | | | — | | | | — | |
Members’ distributions | | — | | | — | | | | (6,007) | |
NET CASH USED IN FINANCING ACTIVITIES | | (13,012) | | | — | | | | (2,943) | |
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | (25,494) | | | (28,487) | | | | 373 | |
CASH AND CASH EQUIVALENTS, beginning of period | | 40,383 | | | 68,870 | | | | 2,417 | |
CASH AND CASH EQUIVALENTS, end of period | | $ | 14,889 | | | $ | 40,383 | | | | $ | 2,790 | |
| | | | | | | | |
Supplemental cash flow disclosures: | | |
Value of common stock issued and option shares assumed in Anthony's acquisition | | $ | 28,965 | |
Value of preferred stock issued in Anthony's acquisition | | 46,906 |
Cash paid for interest | | 551 |
Cash paid for income taxes paid | | 7 |
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
1. Organization and Summary of Significant Accounting Policies
Organization
BurgerFi International, Inc. and its wholly owned subsidiaries (“BFI,” the “Company,” or “Successor,” also “we,” “us,” and “our”), is a multi-brand restaurant company that develops, markets and acquires fast-casual and premium-casual dining restaurant concepts around the world, including corporate-owned stores and franchises located in the United States, Puerto Rico and Saudi Arabia. As of December 31, 2021, the Company has 179 franchised and corporate-owned restaurants of the two following brands:
BurgerFi. BurgerFi is a fast-casual “better burger” concept with 118 franchised and corporate-owned restaurants as of December 31, 2021, offering burgers, hot dogs, crispy chicken, frozen custard, hand-cut fries, shakes, beer, wine and more.
Anthony’s. Anthony’s is a pizza and wing brand that operates 61 corporate-owned casual restaurant locations, as of December 31, 2021. The concept is centered around a coal fired oven, and its menu offers “well-done” pizza, coal fired chicken wings, homemade meatballs, and a variety of handcrafted sandwiches and salads.
Basis of presentation
The accompanying Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”).
On December 16, 2020 (the "Closing Date"), the Company consummated its merger with Opes Acquisition Corp. ("OPES"). This acquisition (the "BurgerFi acquisition") qualified as a business combination under ASC 805, and OPES was the legal and accounting acquirer in the transaction. The Company’s 2020 financial statement presentation distinguishes the Company’s financial performance into two distinct periods, the period up to the Closing Date (labeled “Predecessor”) and the period including and after that date (labeled “Successor”). The BurgerFi acquisition was accounted for using the acquisition method of accounting, and the Successor financial statements reflect a new basis of accounting that is based on the fair value of the net assets acquired.
As a result of the application of the acquisition method of accounting for the BurgerFi acquisition, the accompanying consolidated financial statements include a black line division which indicates that the Predecessor and Successor reporting entities shown are presented on a different basis and are therefore, not comparable.
The historical financial information of OPES (a special purpose acquisition company, or “SPAC”) prior to the BurgerFi acquisition has not been reflected in the Predecessor financial statements as these historical amounts have been determined to be not useful information to a user of the financial statements. SPACs deposit the proceeds from their initial public offerings into a segregated trust account until a business combination occurs, where such funds are then used to pay consideration for the acquiree and/or to pay stockholders who elect to redeem their shares of common stock in connection with the business combination. The operations of a SPAC, until the closing of a business combination, other than income from the trust account investments and transaction expenses, are nominal. Accordingly, no other activity in the Company was reported for the period prior to December 16, 2020 besides BurgerFi’s operations as Predecessor.
On November 3, 2021, we completed the acquisition of Hot Air, Inc. (the "Anthony's acquisition"), which through its subsidiaries, owns and operates casual dining pizza restaurants under the trade name Anthony’s Coal Fired Pizza & Wings ("Anthony's"). The results of operations, financial position and cash flows of Anthony's is included in our consolidated financial statements as of the closing date of the acquisition.
The Company operates on a calendar year-end. Anthony's uses a 52-week or 53-week fiscal year-end and its fiscal year ends on the Monday closest to December 31. Differences arising from the different fiscal year-ends were not deemed material for the year ended December 31, 2021.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
Reclassifications
Certain reclassifications have been made to the prior year presentation to conform to the current year presentation.
Principles of Consolidation
The consolidated financial statements present the consolidated financial position, results from operations and cash flows of BurgerFi International, Inc., and its wholly owned subsidiaries. All material balances and transactions between the entities have been eliminated in consolidation.
The Successor consolidated financial statements include all amounts of the Company and its subsidiaries. The Predecessor consolidated financial statements include all amounts of BurgerFi International, LLC and its subsidiaries. All intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Corporate-owned stores and Franchised stores
BurgerFi has prepared its Franchise Disclosure Document as required by the United States Federal Trade Commission and has registered or will register in those states where required in order to legally sell its franchises. It is currently BurgerFi’s plan to offer franchises for sale in those states where demographics of the population represent a demand for the services. BurgerFi grants franchises to independent operators who in turn pay an initial franchise fee, royalties and other fees as stated in the franchise agreement. Store activity for the years ended December 31, 2021 and 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 * |
| Corporate-owned | Franchised | Total | | Corporate-owned | Franchised | Total |
Total BurgerFi and Anthony's | 86 | | 93 | | 179 | | | 17 | 102 | 119 |
| | | | | | | |
BurgerFi stores, beginning of year | 17 | | 102 | | 119 | | | 13 | | 117 | | 130 | |
BurgerFi stores opened | 10 | | 6 | | 16 | | | 2 | | 9 | | 11 | |
BurgerFi stores transferred/sold | (1) | | 1 | | — | | | 2 | | (2) | | — | |
BurgerFi stores closed | (1) | | (16) | | (17) | | | — | | (22) | | (22) | |
BurgerFi total stores, end of year | 25 | | 93 | | 118 | | | 17 | | 102 | | 119 | |
| | | | | | | |
Anthony's stores acquired | 61 | | — | | 61 | | | — | | — | | — | |
Anthony's total stores, end of year | 61 | | — | | 61 | | | — | | — | | — | |
* As Anthony's was acquired on November 3, 2021, Anthony's store activity is not included in the presentation above for 2020. |
End of year store totals included 1 and 2 international stores at December 31, 2021 and 2020, respectively.
Liquidity and COVID-19
Our primary sources of liquidity are cash from operations and cash on hand. As of December 31, 2021, we maintained a cash and cash equivalents balance of approximately $15 million.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
Our primary requirements for liquidity are to fund our working capital needs, operating and finance lease obligations, capital expenditures and general corporate needs. Our requirements for working capital are generally not significant because our guests pay for their food and beverage purchases in cash or on debit or credit cards at the time of the sale and we are able to sell many of our inventory items before payment is due to the supplier of such items. Our ongoing capital expenditures are principally related to opening new restaurants, remodels and maintenance, as well as investments in our digital and corporate infrastructure.
We believe our existing cash and cash equivalents will be sufficient to fund our operating and finance lease obligations, capital expenditures, and working capital needs for at least the next 12 months and the foreseeable future.
During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly spreading outbreak of a novel strain of coronavirus designated COVID-19. The pandemic has significantly impacted economic conditions in the United States, where all of our Company restaurants are located. While the adverse effects of the COVID-19 pandemic have partially subsided, its effects vary by region, and uncertainties arising from the COVID-19 pandemic could continue to disrupt economic conditions and business activities, particularly as new variants of COVID-19 arise. The extent to which the COVID-19 pandemic, including the recent and emerging variants, could affect our business, operations and financial results is uncertain as it will depend upon numerous evolving factors that management may not be able to accurately predict, including the duration and scope of the pandemic and the continued emergence of new strains of COVID-19. The acceptance and effectiveness of vaccines and treatments, along with the length and extent of any continuing economic and market disruptions, are unknown, and therefore, any future impacts on our business, financial condition and/or results of operations cannot be quantified or predicted with specificity.
Segment Reporting
The Company owns and operates BurgerFi and Anthony's restaurants in the United States, and also has domestic and international franchisees. The Company has two operating and reportable segments:
•BurgerFi, which includes our operations of corporate-owned and franchised BurgerFi restaurants, which offer a fast-casual “better burger” concept; and
•Anthony's, which includes our operations of casual dining pizza restaurants under the name Anthony’s Coal Fired Pizza & Wings.
The chief operating decision makers (“CODMs”) are the Chief Executive Officer (CEO), Chief Financial Officer (CFO), and Executive Chairman as they assess the performance of the reportable segments and make all the significant strategic decisions, including the allocation of resources.
Cash and Cash Equivalents
The Company considers highly liquid investments with maturities of three months or less as cash equivalents. Cash and cash equivalents also include approximately $1.1 million and $11,000 as of December 31, 2021 and December 31, 2020, respectively, of amounts due from commercial credit card companies, such as Visa, MasterCard, Discover, and American Express, which are generally received within a few days of the related transactions. At times, the balances in the cash and cash equivalents accounts may exceed federal insured limits. The Federal Deposit Insurance Corporation insures eligible accounts up to $250,000 per depositor at each financial institution. The Company limits uninsured balances to only large, well-known financial institutions and believes that it is not exposed to significant credit risk on cash and cash equivalents.
Restricted Cash
Restricted cash consists of (i) cash held in escrow in an amount equal to the PPP loans as required by the SBA upon a change of control, and (ii) cash proceeds from the BurgerFi acquisition, withheld for working capital purposes. The Company is the custodian of these account balances, but these accounts are in place for specific, restricted purposes, which typically are resolved within twelve months. The Company classifies the restricted cash accounts as current assets.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
Accounts Receivable
Accounts receivable consist of amounts due from franchisees for training and royalties and are stated at the amount invoiced. Accounts receivable are stated at the amount management expects to collect from balances outstanding at year end. Management provides for probable uncollectible amounts through a charge to earnings and a credit to allowance for uncollectible accounts based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for uncollectible accounts and a credit to accounts receivable. The allowance for uncollectible accounts was approximately $31,000 at December 31, 2021, and $0 at December 31, 2020.
Inventories
Inventories primarily consist of food and beverages. Inventories are accounted for at lower of cost or net realizable value using the first-in, first-out (FIFO) method. Spoilage is expensed as incurred.
Property and Equipment
Property and equipment are carried at cost, net of accumulated depreciation. Depreciation is provided by the straight-line method over an estimated useful life. Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful life of the asset and the term of the related lease. The estimated lives for kitchen equipment and other equipment, computers and office equipment, furniture and fixtures, and vehicles range from five to seven years. Maintenance and repairs which are not considered to extend the useful lives of the assets are charged to operations as incurred. Expenditures for additions and improvements are capitalized. Expenditures for renewals and betterments, which materially extend the useful lives of assets or increase their productivity, are capitalized. The Company capitalizes construction costs during construction of the restaurant and will begin to depreciate them once the restaurant is placed in service. Wage costs directly related to and incurred during a restaurant’s construction period are capitalized. Interest costs incurred during a restaurant’s construction period are capitalized. Upon sale or retirement, the cost of assets and related accumulated depreciation and amortization are removed from the accounts and any resulting gains or losses are included in operating expense.
Impairment of Long-Lived Assets and Definite-Lived Intangible Assets
The Company assesses the potential impairment of our long-lived assets on an annual basis or whenever events or changes in circumstances indicate the carrying value of the assets or asset group may not be recoverable. Factors considered include, but are not limited to, negative cash flow, significant underperformance relative to historical or projected future operating results, significant changes in the manner in which an asset is being used, an expectation that an asset will be disposed of significantly before the end of its previously estimated useful life and significant negative industry or economic trends. At any given time, we may be monitoring a small number of locations, and future impairment charges could be required if individual restaurant performance does not improve or we make the decision to close or relocate a restaurant. If such assets are considered to be impaired, the impairment to be recognized is measured at the amount by which the carrying amount of the assets exceeds the fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Definite-lived intangible assets are amortized on a straight-line basis using the following estimated useful lives of the related classes of intangibles: 7 years for franchise agreements, 30 years for trade names, 10 years for the license agreement (adjusted to 22 months at December 31, 2021), and 10 years for the VegeFi product.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
The Company reviews definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable. Indefinite-lived intangible assets are tested for impairment at least annually, or more frequently if events or changes in circumstances indicate that the assets may be impaired. Our annual impairment test for indefinite-lived intangible assets may be completed through a qualitative assessment to determine if the fair value of the indefinite-lived intangible assets is more likely than not greater than the carrying amount. If we elect to bypass the qualitative assessment, or if a qualitative assessment indicates it is more likely than not that the estimated carrying value exceeds the fair value, we test for impairment using a quantitative process. If the Company determines that impairment of its intangible assets may exist, the amount of impairment loss is measured as the excess of carrying value over fair value. Our estimates in the determination of the fair value of indefinite-lived intangible assets include the anticipated future revenue of corporate-owned and franchised restaurants and the resulting cash flows.
Based on our review of long-lived assets, we performed impairment testing. Based on our impairment testing, we determined it was more likely than not that certain long-lived assets relating to our property and equipment and definite-lived intangible assets were impaired at the BurgerFi reporting unit. Accordingly, the Company recorded an impairment charge of approximately $8.3 million during the year ended December 31, 2021. Additionally, as a result of impairment of the Company's licensing agreements at December 31, 2021, the Company reevaluated the useful life of 10 years and determined that such useful life be adjusted to 22 months. Refer to Note 6 Impairment.
Goodwill
The Company accounts for goodwill in accordance with FASB ASC No. 350, Intangibles—Goodwill and Other (“ASC 350”). ASC 350 requires goodwill to be reviewed for impairment annually, or more frequently if circumstances indicate a possible impairment. The Company evaluates goodwill in the fourth quarter or more frequently if management believes indicators of impairment exist. Such indicators could include but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator.
The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. If management concludes that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, management conducts a quantitative goodwill impairment test. This impairment test involves comparing the fair value of the reporting unit with its carrying value (including goodwill). The Company estimates the fair values of its reporting unit using a combination of the income, or discounted cash flows approach and the market approach, which utilizes comparable companies’ data. If the estimated fair value of the reporting unit is less than its carrying value, a goodwill impairment exists for the reporting unit and an impairment loss is recorded.
Based on the results of our annual goodwill impairment test, we determined it was more likely than not that goodwill was impaired at the BurgerFi reporting unit. Accordingly, the Company recorded a goodwill impairment charge of approximately $106.5 million during the year ended December 31, 2021. Refer to Note 6 Impairment.
The estimated fair value of goodwill is subject to change as a result of many factors including, among others, any changes in our business plans, changing economic conditions, a potential decrease in our stock price and market capitalization, and the competitive environment. Should actual cash flows and our future estimates vary adversely from those estimates we use, we may be required to recognize impairment charges in future years.
The following table represents changes to the Company's goodwill during the year ended December 31, 2021:
| | | | | |
(in thousands) | |
Goodwill as of December 31, 2020 | $ | 119,542 | |
Adjustments to other current liabilities | 4,439 | |
Goodwill impairment for BurgerFi reporting unit | (106,476) | |
Goodwill acquired in connection with the Anthony's acquisition | 80,495 | |
Goodwill as of December 31, 2021 | $ | 98,000 | |
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
For details on the goodwill acquired in connection with the Anthony's acquisition, as well as the measurement period adjustment to goodwill (which related to other current liabilities) associated with the purchase price accounting for the BurgerFi acquisition, refer to Note 5 Acquisitions. As it relates to impairment of goodwill, refer to Note 6 Impairment.
Deferred Financing Costs
Deferred financing costs relate to the Company’s debt instruments, the short and long-term portions of which are reflected as deductions from the carrying amounts of the related debt instrument, including the Company’s Credit Agreement. Deferred financing costs are amortized over the terms of the related debt instruments using the effective interest method. For the year ended December 31, 2021, the Company deferred $1.0 million of financing costs in connection with its Credit Agreement. Amortization expense associated with deferred financing costs, which is included within interest expense, net, totaled $0.1 million for the year ended December 31, 2021. See Note 10 Debt.
Share-Based Compensation
The Company has granted share-based compensation awards to certain employees under the 2020 Omnibus Equity Incentive Plan (the “Plan”). The Company measures the cost of employee services received in exchange for an equity award, which may include grants of employee stock options and restricted stock units, based on the fair value of the award at the date of grant. The Company recognizes share-based compensation expense over the requisite service period unless the awards are subject to performance conditions, in which case we recognize compensation expense over the requisite service period to the extent performance conditions are considered probable. The Company will determine the grant date fair value of stock options using a Black-Scholes-Merton option pricing model (the “Black-Scholes Model”). The grant date fair value of restricted stock unit awards (“RSU Awards”) and performance-based awards are determined using the fair market value of the Company’s common stock on the date of grant, as set forth in the applicable plan document, unless the awards are subject to market conditions, in which case we use a Monte Carlo simulation model. The Monte Carlo simulation model utilizes multiple input variables to estimate the probability that market conditions will be achieved.
Warrant Liability
The Company has certain warrants which include provisions that affect the settlement amount. Such variables are outside of those used to determine the fair value of a fixed-for-fixed instrument, and as such, the warrants are accounted for as liabilities in accordance with ASC 815-40, Derivatives and Hedging, with changes in fair value included in the consolidated statement of operations.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy is required to prioritize the inputs used to measure fair value. The three levels of the fair value hierarchy are described as follows:
•Level 1 – Quoted prices in active markets for identical assets or liabilities.
•Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
•Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Net (Loss) Income per Common Share
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
Net (loss) income per common share is computed by dividing net income by the weighted average number of common shares outstanding for the period. The Company has considered the effect of (1) warrants outstanding to purchase 15,063,800 shares of common stock and (2) 75,000 shares of common stock and warrants to purchase 75,000 shares of common stock in the unit purchase option, (3) 1,503,698 shares of restricted stock unit grants in the calculation of income per share, and (4) the impact of any dividends associated with our redeemable preferred stock.
The historical partnership equity structure of BurgerFi did not include outstanding member units and as such, earnings per share information is omitted for the Predecessor period.
Reconciliation of Net (Loss) Income per Common Share
Basic and diluted net (loss) income per common share is calculated as follows:
| | | | | | | | | | | |
| | | Successor |
(in thousands, except for per share data) | Year Ended December 31, 2021 | | December 16, 2020 through December 31, 2020 |
Numerator: | | | |
Net (loss) income available to common shareholders | $ | (121,494) | | | $ | 5,348 | |
Reversal of gain on change in value of warrant liability | $ | (12,619) | | | $ | (5,597) | |
Net loss available to common shareholders - diluted | $ | (134,113) | | | $ | (249) | |
| | | |
Denominator: | | | |
Weighted-average shares outstanding | 18,408,247 | | | 17,541,838 | |
Effect of dilutive securities | | | |
Warrants | 211,854 | | | 3,468,872 | |
UPOs | 4,346 | | | 415,405 | |
Diluted weighted-average shares outstanding | 18,624,447 | | | 21,426,115 | |
| | | |
Basic net (loss) income per common share | $ | (6.60) | | | $ | 0.30 | |
Diluted net loss per common share | $ | (7.20) | | | $ | (0.01) | |
For the year ended December 31, 2021, there were dilutive warrants and UPOs during the interim period, as such the reversal of the change in value of warrant liability is included for that period only to calculate the net loss available to common shareholders - diluted. The diluted weighted shares outstanding for the year ended December 31, 2021 represent the average dilutive warrant and UPOs share equivalents for the year ended December 31, 2021 including the impact of the dilutive warrants and UPOs share equivalents during the interim period for which the warrant and UPOs were dilutive.
Concentration of Risk
Management believes there is no concentration of risk with any single franchisee or small group of franchisees whose failure or nonperformance would materially affect the Company’s results of operations. The Company had no customers which accounted for 10% or more of consolidated revenue for the year ended December 31, 2021, or for the Successor period from December 16, 2020 to December 31, 2020, or for the Predecessor period from January 1, 2020 to December 15, 2020. As of December 31, 2021, the Company had one main in-line distributor of food, packaging and beverage products, excluding breads, that provided approximately 90% of the Company's restaurants purchasing in the U.S. and three additional in-line distributors of beverages that, in the aggregate, provided approximately 5% of the Company's restaurant purchasing in the U.S. We believe that our vulnerability to risk concentrations related to significant vendors and sources of our raw materials is mitigated as we believe that there are other vendors who would be able to service our requirements. However, if a disruption of service from any of our main in-line distributors was to occur, we could experience short-term increases in our costs while distribution channels were adjusted.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
The Company's restaurants are principally located throughout the United States. The Company has corporate-owned and franchised locations in 26 states, with the largest number in Florida. We believe the risk of geographic concentration is not significant. We could be adversely affected by changing consumer preferences resulting from concerns over nutritional or safety aspects of ingredients we sell or the effects of food safety events or disease outbreaks.
The Company is subject to credit risk through its accounts receivable consisting primarily of amounts due from franchisees for royalties and franchise fees. This concentration of credit risk is mitigated, in part, by the number of franchisees and the short-term nature of the franchise receivables.
Revenue Recognition
Revenue consists of restaurant sales and franchise licensing revenue. Generally, revenue is recognized as performance obligations transfer to the customer in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
Restaurant Revenue
Revenue from restaurant sales is presented net of discounts and recognized when food, beverage and retail products are sold. Sales tax collected from customers is excluded from restaurant sales and the obligation is included in sales tax payable until the taxes are remitted to the appropriate taxing authorities. Sales from our gift cards are deferred and recognized upon redemption for goods or services. Revenue from restaurant sales is generally paid at the time of sale. Credit cards and delivery service partners sales are generally collected shortly after the sale occurs.
The revenue from electronic gift cards is deferred when purchased by the customer and revenue is recognized when the gift cards are redeemed. The Company is a Delaware corporation and is subject to Delaware escheatment laws. Delaware escheatment laws state that gift cards are presumed to be abandoned after five years and the balance remitted should represent the maximum cost to the issuer of merchandise.
The Company contracts with delivery service partners for delivery of goods and services to customers. The Company has determined that the delivery service partners are agents, and the Company is the principal. Therefore, restaurant sales through delivery services are recognized at gross sales and delivery service revenue is recorded as expense.
Franchise Revenue
The franchise agreements require the franchisee to pay an initial, non-refundable fee and sometimes continuing fees based upon a percentage of sales. Generally, payment for the initial franchise fee is received upon execution of the licensing agreement. Owners can make a deposit equal to 50% of the total franchise fee to reserve the right to open additional locations. The remaining balance of the franchise fee is due upon signing by the franchisee of the applicable location’s lease or mortgage. Franchise deposits received in advance for locations not expected to open within one year are classified as long-term liabilities, while franchise deposits received in advance for locations expected to open within one year are classified as short-term liabilities.
Franchise revenue is comprised of certain initial franchise fees and ongoing sales-based royalty fees from a franchised BurgerFi restaurant. Generally, the licenses granted to develop, open and operate each BurgerFi franchise in a specified territory are the predominant performance obligations transferred to the licensee in our contracts, and represent symbolic intellectual property. Ancillary promised services, such as training and assistance during the initial opening of a BurgerFi restaurant are typically combined with the licenses and considered as one performance obligation per BurgerFi franchise. Certain initial services such as site selection and lease review are considered distinct services that are recognized at a point in time when the performance obligations have been provided, generally when the BurgerFi franchise has been opened. We determine the transaction price for each contract and allocate it to the distinct services based on their standalone selling price based on the costs to provide the service and a profit margin. On an annual basis, we perform a review to reevaluate the amount of this initial franchise fee revenue that is recognized.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
The remainder of the transaction price is recognized over the remaining term of the franchise agreement once the BurgerFi restaurant has been opened. Because we are transferring licenses to access our intellectual property during a contractual term, revenue is recognized on a straight-line basis over the license term. These payments are initially deferred and recognized as revenue as the performance obligations are satisfied.
Franchise agreements and deposit agreements outline a schedule for store openings. Failure to meet the schedule can result in forfeiture of deposits made. Forfeiture of deposits is recognized as terminated franchise fee revenue once contracts have been terminated for failure to comply. All terminations are communicated to the franchisee in writing using formal termination letters. Additionally, a franchise store that is already open may terminate before its lease term has ended, in which case the remainder of the transaction price is recognized as terminated franchise fee revenue.
Revenue from sales-based royalties (i.e. royalty and other fees, brand development and advertising co-op royalty) is recognized as the related sales occur. The sales-based royalties are invoiced and collected from the franchisees on a weekly basis. Rebates from vendors received on franchisee’s sales are also recognized as revenue from sales-based royalties.
Contract Balances
Opening and closing balances of contract liabilities and receivables from contracts with customers for the years ended December 31, 2021 and 2020 are as follows:
| | | | | | | | | | | |
(in thousands) | Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
Franchising receivables | $ | 212 | | | $ | 480 | |
Gift card liability | 2,587 | | | 430 | |
Deferred revenue, current | 468 | | | 490 | |
Deferred revenue, long-term | 2,109 | | | 2,816 | |
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
Franchise Revenue
Revenue recognized during the period ended which were included in the balance of deferred revenue at the beginning of the period are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor |
(in thousands) | Year Ended December 31, 2021 | | December 16, 2020 through December 31, 2020 | | | January 1, 2020 through December 15, 2020 |
Franchise Fees | $ | 1,069 | | | $ | 41 | | | | $ | 1,023 | |
An analysis of deferred revenue is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Successor | | | Predecessor |
(in thousands) | | December 31, 2021 | | December 31, 2020 * | | | December 15, 2020 |
Balance, beginning of period | | $ | 3,306 | | | $ | 3,053 | | | | $ | 4,688 | |
Initial franchise fees received | | 290 | | | 278 | | | | 413 | |
Revenue recognized for stores open during period | | (235) | | | (25) | | | | (362) | |
Revenue recognized related to franchise agreement termination | | (834) | | | — | | | | (693) | |
Other deferred revenue | | 50 | | | — | | | | — | |
Balance, end of period | | $ | 2,577 | | | $ | 3,306 | | | | $ | 4,046 | |
* Beginning balance for the Successor period is reflective of a fair value adjustment. |
Presentation of Sales Taxes
The Company collects sales tax from customers and remits the entire amount to the respective states. The Company’s accounting policy is to exclude the tax collected and remitted from revenue and cost of sales. Sales tax payable amounted to approximately $1.1 million and $0.2 million at December 31, 2021 and 2020, respectively, and is presented in accrued expenses and other current liabilities in the accompanying consolidated balance sheets.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expense for the year ended December 31, 2021 was $0.9 million. Advertising expense for the Successor period from December 16, 2020 to December 31, 2020 and for the Predecessor period from January 1, 2020 to December 15, 2020 was $23,000 and $0.5 million, respectively.
Brand Development Royalties and Expenses
The Company’s franchise agreements provide for franchisee contributions of a percentage of gross restaurant sales, which are recognized as royalty income. Amounts collected are required to be used for advertising and related costs, including reasonable costs of administration. For the year ended December 31, 2021, the Company had brand development royalties of approximately $1.5 million and brand development expenses of approximately $1.7 million. For the Successor period from December 16, 2020 to December 31, 2020, and for the Predecessor period from January 1, 2020 to December 15, 2020, the Company had brand development royalties of approximately $55,000 and $1.2 million, respectively, and approximately $35,000 and $1.6 million of brand development expenses, respectively.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
Advertising Co-Op Royalties and Expenses
Many of the Company's South Florida franchises contribute a percentage of gross restaurant sales, which are recognized as royalty income. Amounts collected are required to be used for local advertising and related costs, including reasonable costs of administration. For the year ended December 31, 2021, the Company had advertising co-op royalties of approximately $0.5 million and advertising co-op expenses of approximately $0.8 million. For the Successor period from December 16, 2020 to December 31, 2020, and for the Predecessor period from January 1, 2020 to December 15, 2020, the Company had advertising co-op royalties of approximately $19,000 and $0.3 million, respectively, and approximately $0 and $0.6 million of advertising co-op expenses, respectively.
Pre-opening Costs
The Company follows ASC Topic 720-15, “Start-up Costs,” which provides guidance on the financial reporting of start-up costs and organization costs. In accordance with this ASC Topic, costs of pre-opening activities and organization costs are expensed as incurred. Pre-opening costs include all expenses incurred by a restaurant prior to the restaurant's opening for business. These pre-opening costs include costs to relocate and reimburse restaurant management staff members, costs to recruit and train hourly restaurant staff members, wages, travel, and lodging costs for our training team and other support staff members, as well as rent expense. Pre-opening costs can fluctuate significantly from period to period based on the number and timing of restaurant openings and the specific pre-opening costs incurred for each restaurant.
Pre-opening costs expensed for the year ended December 31, 2021 were $1.9 million. Pre-opening costs expensed for the Successor period from December 16, 2020 to December 31, 2020 and for the Predecessor period from January 1, 2020 to December 15, 2020 were $48,000 and $0.2 million, respectively.
Deferred Rent
Rent expense on non-cancelable leases containing known future scheduled rent increases or free rent periods is recorded on a straight-line basis over the respective lease term. The lease term begins when the Company has the right to control the use of the leased property and includes the initial non-cancelable lease term plus any periods covered by renewal options that the Company is reasonably assured of exercising. The difference between rent expense and rent paid is accounted for as deferred rent and is amortized over the lease term.
Operating Leases
The Company leases restaurant locations that have terms expiring between May 2022 and February 2033. The initial obligation period is generally 10 years. The restaurant facilities primarily have renewal clauses for two 5-year periods or one 10-year period, exercisable at the option of the Company. The Company includes one 5-year renewal option in its lease term.
Certain lease agreements contain one or more of the following: tenant improvement allowances, rent holidays, rent escalation clauses and/or contingent rent provisions. The Company includes scheduled rent escalation clauses for the purpose of recognizing straight-line rent. Certain of these leases require the payment of contingent rentals based on a percentage of gross revenue, as defined in such leases, and certain other rent escalation clauses are based on the change in the Consumer Price Index. The Company received cash incentives from certain landlords for specified leasehold improvements which are deferred and accreted on a straight-line basis over the related lease term as a reduction of rent expense.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
Business Combinations
The determination of the fair value of net assets acquired in a business combination requires estimates and judgments of future cash flow expectations for the acquired business and the related identifiable tangible and intangible assets. Fair values of net assets acquired are calculated using expected cash flows and industry-standard valuation techniques. For current assets and current liabilities, book value is generally assumed to equal fair value. Goodwill is the amount by which consideration paid exceeds the fair value of acquired net assets. A bargain purchase gain results when the fair value of an acquired business’ net assets exceeds its purchase price. Acquisition costs are expensed as incurred and are included within general and administrative expenses in the consolidated statements of operations.
Due to the time required to gather and analyze the necessary data for each acquisition, U.S. GAAP provides a “measurement period” of up to one year in which to finalize these fair value determinations. During the measurement period, preliminary fair value estimates may be revised if new information is obtained about the facts and circumstances existing as of the date of acquisition, or based on the final net assets and working capital of the acquired business, as prescribed in the applicable purchase agreement. Such adjustments may result in the recognition of, or an adjustment to the fair values of, acquisition-related assets and liabilities and/or consideration paid, and are referred to as “measurement period adjustments." Measurement period adjustments are recorded to goodwill. Other revisions to fair value estimates for acquisitions are reflected as income or expense, as appropriate.
Consideration paid generally consists of cash and, from time to time, shares, and potential future payments that are contingent upon the acquired business achieving certain levels of earnings in the future, also referred to as “acquisition-related contingent consideration” or “earn-outs.” Earn-out liabilities are measured at their estimated fair values as of the date of acquisition. Subsequent to the date of acquisition, if future Earn-out payments are expected to differ from Earn-out payments estimated as of the date of acquisition, any related fair value adjustments, including those related to finalization of completed earn-out arrangements, are recognized in the period that such expectation is considered probable. Changes in the fair value of Earn-out liabilities for the Company’s traditional earn-outs, other than those related to measurement period adjustments, as described above, are recorded within other income or expense in the consolidated statements of operations.
Income Taxes
The Company accounts for income taxes under the asset and liability method. A deferred tax asset or liability is recognized whenever there are (1) future tax effects from temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and (2) operating loss, capital loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the years in which those differences are expected to be recovered or settled.
Deferred tax assets are recognized to the extent the Company believes these assets will more likely than not be realized. In evaluating the realizability of deferred tax assets, the Company considers all available positive and negative evidence, including the interaction and the timing of future reversals of existing temporary differences, projected future taxable income, recent operating results and tax-planning strategies. When considered necessary, a valuation allowance is recorded to reduce the carrying amount of the deferred tax assets to their anticipated realizable value.
Prior to the BurgerFi acquisition, the Company, with the consent of its members, had elected to be taxed as a partnership under the provisions of the Internal Revenue Code and similar state provisions. Partnerships are generally not subject to federal and state income taxes; the partners reflect their respective share of the Company’s taxable income or loss on their individual tax returns. Therefore, there was no federal income tax recorded by the Company for the period from January 1, 2020 through December 15, 2020. In this period, there were neither liabilities nor deferred tax assets relating to uncertain income tax provisions taken or expected to be taken on the tax returns.
Income tax uncertainties
We measure income tax uncertainties in accordance with a two-step process of evaluating a tax position. We first determine if it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. A tax position that meets the more-likely-than-not recognition threshold is then measured, for purposes of financial statement recognition, as the largest amount that has a greater than 50% likelihood of being realized upon effective settlement. We currently have no unrecognized tax benefits at December 31, 2021 or 2020.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
We accrue interest related to uncertain tax positions in “Interest expense” and penalties in “General and administrative expenses.” At December 31, 2021 and 2020, we had no amounts accrued for interest and for penalties.
The statute of limitations for the Company’s state tax returns varies, but generally the Company’s federal and state income tax returns from its 2017 fiscal year forward remain subject to examination.
New Accounting Pronouncements
In February 2016, the FASB issued guidance which requires lessees to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months and disclose certain information about the leasing arrangements. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The Company will elect the package of practical expedients, as well as the hindsight practical expedient, permitted under the new guidance, which includes allowing the Company to continue utilizing historical classification of leases. In preparation for the adoption, the Company has implemented new accounting systems, business processes and internal controls to assist in the application of the new guidance. As an emerging growth company, this guidance is effective for our fiscal years beginning after December 15, 2021. The adoption of the standard will result in the recognition of right-of-use assets and lease liabilities for operating leases which will result in additional assets and corresponding liabilities of approximately $60 million to $65 million on the consolidated balance sheet, with no material impact to its consolidated statement of operations, stockholders’ equity, or cash flows. Our assessment is ongoing and subject to finalization such that the actual impact may differ from the estimated range.
In June 2016, the FASB issued guidance which was subsequently amended by various standard updates. This guidance replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information when determining credit loss estimates and requires financial assets to be measured net of expected credit losses at the time of initial recognition. As an emerging growth company, this guidance will be effective for our fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of the adoption of the new standard on the consolidated financial statements.
In July 2021, the FASB issued guidance that requires lessors to classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if (a) the lease would have been classified as a sales-type lease or a direct financing lease in accordance with lease classification criteria and (b) the lessor would have otherwise recognized a day-one loss. As a public company, this amendment is effective for our fiscal years beginning after December 15, 2022, with early adoption permitted. This guidance may be applied either retrospectively to leases that commenced or were modified on or after the adoption of lease guidance we adopted in 2019 or prospectively to leases that commence or are modified on or after the date that this new guidance is applied. The Company is currently evaluating the impact of adoption of the new standard on the consolidated financial statements.
In October 2021, the FASB issued guidance which requires entities to recognize contract assets and contract liabilities in a business combination. As a public company, this standard will be effective for our fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and will be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the standard is permitted. The Company is currently evaluating the impact of the adoption of the new standard on the consolidated financial statements.
2. Restricted Cash
Restricted cash consisted of the following:
| | | | | | | | | | | |
(in thousands) | December 31, 2021 | | December 31, 2020 |
Paycheck Protection Program (“PPP”) amount held in escrow | $ | — | | | $ | 2,237 | |
Cash proceeds from the BurgerFi acquisition, withheld for working capital purposes | — | | | 996 | |
Total Restricted Cash | $ | — | | | $ | 3,233 | |
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
3. Property & Equipment
Property and equipment consisted of the following:
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2021 | | December 31, 2020 |
Leasehold improvements | | $ | 19,900 | | | $ | 5,477 | |
Kitchen equipment and other equipment | | 7,810 | | | 1,548 | |
Computers and office equipment | | 1,425 | | | 208 | |
Furniture and fixtures | | 2,340 | | | 792 | |
Vehicles | | 88 | | | 27 | |
| | 31,563 | | | 8,052 | |
Less: Accumulated depreciation and amortization | | (2,528) | | | (48) | |
Property and equipment – net | | $ | 29,035 | | | $ | 8,004 | |
Depreciation expense for the year ended December 31, 2021 was $2.5 million. Depreciation expense for the Successor period from December 16, 2020 to December 31, 2020 was $48,000. Depreciation expense for the Predecessor period from January 1, 2020 to December 15, 2020 was $1.0 million. In conjunction with the BurgerFi acquisition and Anthony's acquisition, the basis of all property and equipment was recognized at fair value in purchase accounting.
The Company's long-lived assets are reviewed for impairment at the end of each reporting period and whenever there are triggering events that require us to perform this review. The Company recorded $0.6 million of property and equipment impairment during the year ended December 31, 2021. Refer to Note 6 Impairment.
4. Intangible Assets
The following is a summary of the components of intangible assets and the related amortization expense:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
(in thousands) | | Amount | | Accumulated Amortization | | Net Carrying Value | | Amount | | Accumulated Amortization | | Net Carrying Value |
Franchise agreements | | $ | 24,839 | | | $ | 3,696 | | | $ | 21,143 | | | $ | 24,839 | | | $ | 147 | | | $ | 24,692 | |
Trade names / trademarks | | 143,750 | | | 3,220 | | | 140,530 | | | 83,033 | | | 115 | | | 82,918 | |
Liquor license | | 6,678 | | | — | | | 6,678 | | | 235 | | | — | | | 235 | |
License agreement | | 1,176 | | | 925 | | | 251 | | | 8,882 | | | 37 | | | 8,845 | |
VegeFi product | | 135 | | | 14 | | | 121 | | | 135 | | | 1 | | | 134 | |
| | $ | 176,578 | | | $ | 7,855 | | | $ | 168,723 | | | $ | 117,124 | | | $ | 300 | | | $ | 116,824 | |
Liquor license is considered to have an indefinite life, and in addition to the Company's definite-lived intangible assets, is reviewed for impairment at the end of each reporting period and whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company recorded $7.7 million of intangible asset impairment for the year ended December 31, 2021, in relation to the Company's license agreement. See Note 6 Impairment.
Amortization expense for the year ended December 31, 2021 was $7.6 million. Amortization expense for the Successor period from December 16, 2020 to December 31, 2020 was $0.3 million. The intangible assets for the Predecessor period were determined to be indefinite life intangibles. As such, no amortization expense was recognized for the period from January 1, 2020 to December 15, 2020. The estimated aggregate amortization expense for intangible assets over the next five years ending December 31 and thereafter is as follows:
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
| | | | | |
(in thousands) | |
2022 | $ | 8,490 | |
2023 | 8,467 | |
2024 | 8,353 | |
2025 | 8,353 | |
2026 | 8,353 | |
Thereafter | 120,029 | |
Total | $ | 162,045 | |
5. Acquisitions
Acquisition of BurgerFi International, LLC
On December 16, 2020, the Company consummated its merger with OPES. This acquisition qualified as a business combination under ASC 805. Accordingly, the Company recorded all assets acquired and liabilities assumed at their acquisition-date fair values, with any excess recognized as goodwill.
The aggregate value of the consideration paid by OPES in the BurgerFi acquisition was approximately $236.9 million.
| | | | | |
Consideration Paid | |
| |
(in thousands) | |
Cash | $ | 30,000 | |
Common Stock | 103,680 | |
Contingent consideration | 103,207 | |
Total Consideration | $ | 236,887 | |
The total consideration includes a) a cash payment of $30.0 million, b) the issuance of 6,603,773 common stock shares valued at approximately $103.7 million, and c) contingent earnout consideration (Contingent Consideration) valued at approximately $103.2 million.
The former members of BurgerFi International, LLC may be entitled to an additional 9,356,459 shares of Successor common stock (“Earnout Share Consideration”) if prior to December 16, 2022, 2023, and 2023, the last reported closing prices of the Company's common stock in any 20 trading days within any consecutive 30 trading day period is greater than or equal to $19.00, $22.00, and $25.00 per share, respectively, in which case the Company shall issue 3,947,368, 3,409,091, and 2,000,000 shares of common stock, respectively.
The fair values of the contingent consideration were determined using the trading price of the Company’s common stock at the Closing Date and using a Monte Carlo simulation model. The contingent consideration is assessed to be non-compensatory and recorded in additional paid-in capital as reflected in the consolidated statement of changes in stockholders’ / members’ equity.
The input variables are noted in the table below:
| | | | | |
| 2020 |
Risk-free interest rate | 0.37 | % |
Expected life in years | 3 |
Expected volatility | 60 | % |
Expected dividend yield * | 0 | % |
* The Monte Carlo method assumes a reinvestment of dividends. | |
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
The Monte Carlo simulation model utilized multiple input variables to estimate the probability that the stock price targets will be achieved. Based on the features of the earnout, a Monte-Carlo Simulation was used to value the Contingent Consideration. The traded price of the common stock was simulated in each trial using Geometric Brownian Motion, and the simulated path was then analyzed to determine which, if any, earnout tranches would be payable within the given trial. The estimated payments were calculated by multiplying the shares earned for a given tranche by the simulated price as of the date that the earnout tranche was earned. The result was present valued using the risk-free rate. The average of all trials resulted in the valuation conclusion, which was determined to be approximately $103.2 million.
The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date, which have been finalized during the measurement period:
| | | | | | | | |
(in thousands) | | Fair Value December 16, 2020 |
Cash | | $ | 2,179 | |
Cash - restricted | | 611 | |
Accounts receivable | | 378 | |
Inventory | | 260 | |
Other current assets | | 1,235 | |
Property and equipment | | 8,520 | |
Intangible assets | | 117,124 | |
Other assets | | 199 | |
Accounts payable, accrued expenses, and other current liabilities | | (7,740) | |
Revolving line of credit | | (3,012) | |
Current portion of deferred franchise fees | | (521) | |
Other deposit | | (907) | |
Deferred initial franchise fees, net of current portion | | (2,531) | |
Notes payable | | (2,889) | |
Fair Value of Tangible and Identifiable Intangible assets and liabilities assumed | | $ | 112,906 | |
Consideration paid | | 236,887 | |
Goodwill | | $ | 123,981 | |
Goodwill is recognized as the excess of consideration over the net assets acquired of BurgerFi and represents the value derived by BurgerFi’s market share and expected growth in the market.
Acquired personal property assets consist of leasehold improvements, kitchen equipment, and restaurant furniture and fixtures, computer and point of sale systems, and audio and video equipment (“Personal Property”), which were valued on in-use basis. The Company enlisted a third-party consultant to assist in the valuation of the Personal Property (the “Valuation”).
Identifiable intangible assets acquired consist of customer relationships of franchise agreements, trade names and trademarks, liquor licenses, license agreements, and the VegeFi product. The above were valued using the multi-period excess earnings method.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
Identifiable intangible assets acquired consisted of customer relationships of $24.8 million, trade names of $83.0 million and license agreements of $8.9 million. The customer relationships were valued using the multi-period excess earnings method. The Company determined the useful life of the customer relationships to be 7 years. This is based on the average remaining terms of our franchise agreements with our franchisees. The trade names were valued using the relief-from-royalty method. The Company determined the useful life of the trade names to be 30 years. The license agreements and the customer relationships were valued using the multi-period excess earnings method. The Company determined the useful life of the license agreements to be 10 years. The identifiable intangible assets are amortized using the straight-line method over their respective useful lives.
The allocation of the excess purchase price was based upon preliminary estimates and assumptions and was subject to revision when the Company received final information. Accordingly, the measurement period for such purchase price allocations ended on December 15, 2021 or twelve months from the date of acquisition. Adjustments to goodwill during the measurement period were made to reflect the facts and circumstances in existence as of the Closing Date and include updates to estimates of provisional amounts recorded as of the Closing Date. The adjustments primarily related to updating the fair value recorded for a provisional estimate of lease guarantees provided by the Company. The adjustment resulted in an increase to goodwill and other liabilities on the accompanying consolidated balance sheet. The following table represents changes to goodwill from the initial purchase price allocation:
| | | | | |
(in thousands) | |
Goodwill as of December 31, 2020 | $ | 119,542 | |
Adjustments to other current liabilities (measurement period adjustments) | $ | 4,439 | |
Goodwill as of December 31, 2021 (prior to impairment charges recorded) | $ | 123,981 | |
Acquisition of Hot Air, Inc.
On November 3, 2021, the Company acquired 100% of the outstanding common shares and voting interest of Anthony's. The results of Anthony's operations have been included in the consolidated financial statements since that date. Anthony's, through its subsidiaries, owns and operates casual dining pizza restaurants under the trade name Anthony's Coal Fired Pizza & Wings. As of the acquisition date, Anthony's had 61 restaurants open and operational in Florida, Delaware, Pennsylvania, New Jersey, New York, Massachusetts, Maryland, and Rhode Island.
The acquisition-date fair value of the consideration transferred totaled $75.9 million, which consisted of the following:
| | | | | |
Consideration Paid | |
| |
(in thousands) | |
Common Stock | $ | 25,562 | |
Preferred Stock | 46,906 | |
Option Consideration Shares | 3,403 | |
Total Consideration | $ | 75,871 | |
The fair value of the common shares issued and option consideration shares was determined based on the closing market price of the Company’s common shares on the day preceding the acquisition date. The fair value of the preferred stock was determined using a discounted cash flow methodology. The expected future redemption payment was forecasted based on the contractual PIK (payment in kind) interest and estimated redemption date of December 31, 2024.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. The Company determined the fair value of certain intangible assets. The Company is in the process of finalizing its assessment of the fair value of the assets acquired and liabilities assumed; thus, the provisional measurements of intangible assets, goodwill and deferred income taxes are subject to change. The allocation of the excess purchase price was based upon preliminary estimates and assumptions and is subject to revision. The measurement period for such purchase price allocations end on November 3, 2022 or twelve months from the date of acquisition.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
| | | | | | | | |
(in thousands) | | Fair Value November 3, 2021 |
Cash | | $ | 5,522 | |
Accounts receivable | | 597 | |
Inventory | | 986 | |
Other current assets | | 1,662 | |
Property and equipment | | 13,534 | |
Intangible assets | | 67,344 | |
Accounts payable, accrued expenses, and other current liabilities | | (15,451) | |
Long-term borrowings | | (77,063) | |
Deferred tax liability | | $ | (1,755) | |
Fair Value of Tangible and Identifiable Intangible assets and liabilities assumed | | $ | (4,624) | |
Consideration paid | | 75,871 | |
Goodwill | | $ | 80,495 | |
Of the $67.3 million of acquired intangible assets, $60.7 million was assigned to registered trademarks with a 30-year useful life and $6.6 million was assigned to acquired liquor licenses with an indefinite life. The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of Anthony's. None of the goodwill is expected to be deductible for income tax purposes.
The Company recognized $3.1 million of acquisition-related costs that were expensed in the current period. These costs are included in the consolidated statement of operations within General and administrative expenses. The Company also recognized $0.8 million in costs associated with issuing and registering the shares issued as consideration in the Anthony's acquisition. Those costs were deducted from the recognized proceeds of issuance within stockholders’ equity.
The accounting for the Anthony's acquisition is considered provisional because we have not finalized certain aspects of the purchase price allocation including the utilization of the U.S. federal and state net operating loss carryforwards which may be subject to a substantial annual limitation under Sections 382 and 383 of the IRC and corresponding provisions of state law, due to ownership changes that have occurred previously as well as the valuation of certain assets and contingencies.
The amounts of revenue and net loss for Anthony's included in the Company’s consolidated statement of operations for the period from November 3, 2021, the acquisition date, through December 31, 2021 are as follows:
| | | | | |
(in thousands) | 2021 |
Revenue | $ | 22,419 | |
Net Loss | (142) | |
Proforma Information (Unaudited)
The following represents the unaudited proforma consolidated statement of operations as if the BurgerFi acquisition and Anthony's acquisition had been included in the consolidated results of the Company for the entire years ending December 31, 2021 and 2020:
| | | | | | | | | | | |
(in thousands) | 2021 | | 2020 |
Revenue | $ | 168,906 | | | $ | 107,160 | |
Net Loss | (138,490) | | | (19,890) | |
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Anthony's to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment, and intangible assets had been applied on January 1, 2020, together with the consequential tax effects.
6. Impairment
The Company recognized a non-cash impairment charge of approximately $114.8 million during the year ended December 31, 2021. This consisted of the following:
| | | | | |
(in thousands) | 2021 |
Goodwill | $ | 106,476 | |
Definite-lived intangible assets | 7,706 | |
Long-lived assets | 615 | |
Total non-cash impairment charge | $ | 114,797 | |
Based on the results of our annual goodwill impairment test, we determined it was more likely than not that goodwill was impaired at the BurgerFi reporting unit. Accordingly, the Company recorded a goodwill impairment charge of approximately $106.5 million for the year ended December 31, 2021. The majority of the goodwill impairment was driven by the impact on the Company's market capitalization due to the decrease in stock price, coupled with significant declines to the equity values of our peers.
Based on our review at the end of each reporting period of definite-lived intangible assets, we performed impairment testing for the related asset group for which there are independently identifiable cash flows. Based on our impairment testing at December 31, 2021, we determined that it was more likely than not that our definite-lived intangible assets related to the Company's licensing agreements were impaired at the BurgerFi reporting unit, and accordingly, the Company recorded impairment charges of approximately $7.7 million for the year ended December 31, 2021. The impairment amount was primarily the result of lower cash flow estimates associated with the licensing agreements as well as a change in estimate of the related useful life.
Based on our review at the end of each reporting period of long-lived assets, we performed impairment testing for the related asset group for which there are independently identifiable cash flows. Based on our impairment testing, we determined it was more likely than not that certain long-lived assets relating to our property and equipment at certain corporate-owned restaurants were impaired at the BurgerFi reporting unit, and accordingly, the Company recorded impairment charges of approximately $0.6 million for the year ended December 31, 2021.
As it relates to determining the fair values of the assets we performed impairment testing for, refer to Note 14 Fair Value Measurements.
7. Related Party Transactions
The Company is affiliated with various entities through common control and ownership. The accompanying consolidated balance sheets reflect amounts related to periodic advances between the Company and these entities for working capital and other needs as due from related companies or due to related companies, as appropriate. The amounts due from related companies are not expected to be repaid within one year and accordingly, are classified as non-current assets in the accompanying consolidated balance sheets. These advances are unsecured and non-interest bearing.
There were no amounts due from or due to related companies as of December 31, 2021. As of December 31, 2020, there were approximately $74,000 included as due from related companies in the consolidated balance sheet.
For the year ended December 31, 2021, the Company received royalty revenue from franchisees related to a significant shareholder totaling approximately $0.3 million. For the Successor period from December 16, 2020 to December 31, 2020 and the Predecessor period from January 1, 2020 to December 15, 2020, the Company received royalty revenue from franchisees related through common control and ownership totaling approximately $17,000 and $0.3 million, respectively.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
The Company leases building space for its corporate office from an entity under common ownership with a significant shareholder. This lease had a 36-month term, effective January 1, 2020. For the year ended December 31, 2021, rent expense was approximately $0.2 million. For the Successor period from December 16, 2020 to December 31, 2020 and the Predecessor period from January 1, 2020 to December 15, 2020, rent expense was approximately $1,000 and $0.2 million, respectively. In January 2022, we exercised our right to terminate this North Palm Beach lease effective as of July 2022. Pursuant to an amended lease we entered into in February 2022, we also lease approximately 16,500 square feet (expanding to approximately 18,500 square feet in July 2022) in Fort Lauderdale, Florida, for a term expiring in 2032, with an option to renew. This building space for our new combined BurgerFi and Anthony’s corporate office is leased from an entity controlled by the Company's Executive Chairman.
The Company also leases building space for a restaurant located in Virginia from an entity (i) in which the Company's Executive Chairman of the Board has an indirect minority ownership interest, and (ii) which is managed by an entity in which the Company's Executive Chairman of the Board has an indirect ownership interest. This lease, entered into on October 21, 2020, is for a ten-year term effective on the earlier to occur of the date the tenant opened for business and 180 days from the date the landlord delivered possession of the premises to the tenant. Rent expense for the years ended December 31, 2021 and 2020 was $46,000 and $0, respectively.
In April 2021, the Company entered into an independent contractor agreement with a corporation (the “Consultant”) for which the Chief Operating Officer (the "Consultant Principal") of Lionheart Capital, LLC, an entity controlled by the Company’s Executive Chairman of the Board, serves as President. Pursuant to the terms of the agreement, the Consultant shall provide certain strategic advisory services to the Company in exchange for total annual cash compensation and expense reimbursements of $0.1 million, payable in twelve (12) equal monthly payments beginning in April 2021. The Consultant also received an additional $29,000 of cash compensation for services provided in April 2021. In addition, in July 2021, the Consultant Principal received an award of 50,000 restricted stock units, which shall vest in five equal annual installments, subject to the Company achieving certain annual revenue targets starting in 2021, and in November 2021, the Consultant Principal received a $250,000 bonus in connection with the Company's Anthony's acquisition. For the year ended December 31, 2021, 10,000 of these units vested, resulting in stock compensation expense of $0.2 million, which has been recorded in connection with the vesting of these restricted stock units. Further, effective January 3, 2022, the Consultant Principal was granted 37,959 unrestricted shares of common stock of the Company.
In connection with the acquisition of Anthony's, the Company issued redeemable preferred stock and assumed certain liabilities, including the Delayed Draw Term Loan Facility, which was provided by a related party and a significant shareholder. The Delayed Draw Term Loan is a non-interest bearing loan which matures on June 15, 2024. Refer to Note 9 Redeemable Preferred Stock and Note 10 Debt.
8. Commitments and Contingencies
Leases
The Company has entered into various operating leases. For the year ended December 31, 2021, the Successor period from December 16, 2020 to December 31, 2020, and the Predecessor period from January 1, 2020 to December 15, 2020, rent expense was approximately $4.9 million, $19,000, and $2.7 million, respectively. These lease agreements expire on various dates through 2033 and have renewal options. Approximate future minimum payments on these operating leases for the years ended December 31 are as follows:
| | | | | |
(in thousands) | |
2022 | $ | 11,159 | |
2023 | 12,911 | |
2024 | 11,287 | |
2025 | 9,520 | |
2026 | 7,733 | |
Thereafter | 22,542 | |
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
Sale Commitment
In February 2020, the Company entered into an asset purchase agreement with an unrelated third party for the sale of substantially all of the assets used in connection with the operation of BF Dania Beach, LLC for an aggregate purchase price of $1.3 million. During January to April 2020, the Company received three cash deposits totaling $0.9 million in connection with this transaction. The closing of this transaction has been delayed due to additional negotiation that has been on-going through the report date of April 14, 2022. In the event the transaction is terminated, the Company will keep operating the restaurant, and return the $0.9 million to the unrelated third-party purchaser. Assets used in the operations of BF Dania Beach, LLC totaling $0.7 million have been classified as held for sale in the consolidated balance sheets as of December 31, 2021 and 2020.
Contingencies
Eric Gilbert v. BurgerFi International, Inc., Ophir Sternberg, et al. (Court of Chancery of the State of Delaware, Case No. 2022-0185- , filed on February 25, 2022). Mr. Gilbert filed a class action lawsuit against BurgerFi International, Inc. and each of the members of the Board of Directors alleging that the Company’s Amended and Restated Bylaws improperly contains a provision restricting written consents by the shareholders. Mr. Gilbert is seeking an amendment to the bylaws, as well as attorney’ fees and costs. At this preliminary stage, it is difficult to provide an evaluation of the likelihood of an unfavorable outcome or a reasonable estimate of the amount or range of potential loss. Based on the information known to date, the Company’s potential liability appears to be reasonably possible, but the amount of potential loss cannot be reasonably estimated; any losses, however, may be material to the Company's financial position and results of operations.
BurgerFi International, LLC v Shree at Philly Downtown, LLC, et. al. (U.S. District Court for the Southern District of Florida, Case No. 15-81544-CIV filed November 10, 2015). BurgerFi filed this suit against Shree at Philly Downtown LLC, a franchisee and its principals (collectively, “Shree”). BurgerFi seeks declaratory judgments and damages in an amount to be proven at trial for various breaches of the applicable franchise agreements resulting from the Shree’s closure of the New Brunswick, New Jersey restaurant, its failure to open the Secaucus, New Jersey restaurant, and its operational defaults at the Philadelphia, Pennsylvania restaurant. In April 2016, Shree filed a counterclaim, asserting that it had no responsibility for its losses, and instead, alleged that we have engaged in breach of contract, fraud, misrepresentation, conversion in connection with the operation of the restaurant, and various other allegations, seeking damages of over $5 million. We denied any wrongdoing. On December 30, 2016, the court stayed the case pending the resolution of the bankruptcy filings made by some of the defendants. No further action has occurred. Management is unable to determine the likelihood of a loss or range of loss, if any, which may result from the case described above, therefore, no contingent liability has been recorded as of December 31, 2021; any losses, however, may be material to the Company's financial position and results of operations.
Corey Winograd v BurgerFi International, LLC (Fifteenth Judicial Circuit Court of Palm Beach County, Florida, Case No. 502019-CA015256, filed December 1, 2019). Corey Winograd, the former chief executive officer of the Company, filed this suit against BurgerFi for certain alleged breaches of an employment agreement, claiming damages in excess of $15 million. BurgerFi filed a motion to dismiss the complaint on February 13, 2020. On May 20, 2020, the motion to dismiss was heard, which was granted in part and denied in part. The portion of the complaint not dismissed was answered by BurgerFi with affirmative defenses raised on July 7, 2020. The plaintiff served various discovery requests (including notices of non-party subpoenas) on July 9, 2020 as well as a motion to strike BurgerFi’s affirmative defenses on July 16, 2020. BurgerFi filed objections to the non-party subpoenas on July 20, 2020. On September 11, 2020, BurgerFi filed a motion to dismiss and certain claims were dismissed by the court. The complaint now involves claims for alleged breach of contract (count I) and alleged action for equitable relief including an accounting and constructive lien (count II). On September 4, 2020, the parties met for mediation but were unable to resolve this matter. We believe that all claims are meritless, and we plan to vigorously defend these allegations. Management is unable to determine the likelihood of a loss or range of loss, if any, which may result from the case described above, therefore, no contingent liability has been recorded as of December 31, 2021; any losses, however, may be material to the Company's financial position and results of operations.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
Second 82nd SM, LLC v. BF NY 82, LLC, BurgerFi International, LLC and BurgerFi International, Inc. (in the Supreme Court of the State of New York County of New York, having index No. 654907/2021 filed August 11, 2021). A lawsuit was filed by Second 82nd SM, LLC (“Landlord”) against BF NY 82, LLC (“Tenant”) whereby Landlord brought a seven-count lawsuit for, among other things, breach of the lease agreement and underlying guaranty of the lease. The amount of damages Landlord is seeking is over $0.5 million, which constitutes back rent, late charges, real estate taxes, illuminated sign charges and water/sewer charges. On November 3, 2021, the Company filed a Motion to Dismiss the Complaint. On November 17, 2021, the Tenant filed an Answer to Landlord’s Complaint and a cross claim against the Company, which the Company answered on December 7, 2021. On December 22, 2021, the Company filed its Response in Opposition to Landlord’s Motion for Summary Judgment and Memo in further Support of its Motion to Dismiss. The parties continue to discuss a settlement, including turning over possession of the premises to the Landlord. The Company is unable to predict the ultimate outcome of this matter, however, losses may be material to the Company’s financial position and results of operations.
Lion Point Capital Allegation. Beginning March 9, 2021 through March 11, 2022, the Company received letters from counsel to Lion Point Capital, LLC, a shareholder of the Company, alleging that the Company failed to timely register Lion Point’s shares in violation of the Registration Rights Agreement, which allegedly resulted in losses of $11 million. The Company responded to each claim denying that any breach had occurred or that Lion Point incurred any damages caused by the delay in the filing of the Registration Statement. We believe that all claims are meritless, and we plan to vigorously defend these allegations. While no further action has occurred, management is unable to determine the likelihood of a loss or range of loss, if any, which may result from the cases described above, therefore, no contingent liability has been recorded as of December 31, 2021; any losses, however, may be material to the Company's financial position and results of operations.
John Rosatti, as Trustee of the John Rosatti Revocable Trust U/A/D 08/27/2001 (the "JR Trust") v. BurgerFi International, Inc. (In the Circuit Court for the Eleventh Judicial Circuit, Florida, File No. 146578749). On March 28, 2022, the JR Trust filed a suit against BurgerFi alleging that the JR Trust suffered losses in excess of $750,000 relating to BurgerFi’s alleged failure to timely file a registration rights agreement. The Company believes this case is without merit and intends to defend the case vigorously. Management is unable to determine the likelihood of a loss or range of loss, if any, which may result from the case, therefore, no contingent liability has been recorded as of December 31, 2021; any losses, however, may be material to the Company's financial position and results of operations.
Burger Guys of Dania Pointe, et. al. v. BFI, LLC (in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida, Case No. 50-2021-CA -006501-XXXX-MB filed May 21, 2021). In response to a demand letter issued by the Company to Gino Gargiulo, a former franchisee, demanding that Mr. Gargiulo pay the balance owed under an asset purchase agreement wherein BurgerFi sold the Dania Beach, Florida BurgerFi location to Mr. Gargiulo, Mr. Gargiulo claims that no further monies are owed under the asset purchase agreement and alleges that the Company is responsible for one of Gargiulo’s failed franchises in Sunny Isles, Florida, losses he has allegedly sustained at his Dania Beach location, and reimbursement of expenses in connection with his marketing company. Mr. Gargiulo seeks damages in excess of $2 million in the aggregate. We believe that all claims are meritless, and we plan to vigorously defend these allegations. The parties attended mediation on January 20, 2022, but it ended in an impasse. Management is unable to determine the likelihood of a loss or range of loss, if any, which may result from the cases described above, therefore, no contingent liability has been recorded as of December 31, 2021; any losses, however, may be material to the Company's financial position and results of operations.
Employment Related Claims.
In July 2021, the Company received a demand letter from the attorney of one of our now former hourly restaurant employees. The letter alleges that the former employee was sexually harassed by one of her co-workers. The demand letters claim that we discriminated and retaliated against the former employee based on her gender and age and also alleged intentional infliction of emotional distress, negligent hiring, negligent training, and negligent supervision.
In February 2020, a former employee filed a charge of discrimination with the EEOC alleging age discrimination. In June 2021, the claimant filed a demand for arbitration. The parties agreed to mediate the matter before commencing the arbitration proceedings but were unable to resolve the case.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
While we believe that all claims of the two above mentioned Employment Related Claims, which are covered under the Company’s insurance policies, are meritless, and we plan to defend these allegations, it is reasonably possible that the Company may ultimately be required to pay substantial damages to the claimants, which could be up to $0.8 million or more in aggregate compensatory damages, attorneys’ fees and costs. Management believes that any liability, in excess of applicable insurance coverages or accruals, which may result from these claims, would not be significant to the Company’s financial position or results of operations.
General Liability and Other Claims.
The Company is subject to other legal proceedings and claims that arise during the normal course of business, including landlord disputes and slip and fall cases. While we intend to vigorously defend these matters, it is reasonably possible that the Company may be required to pay substantial damages to the claimants, which could be up to $0.4 million or more in aggregate compensatory damages, attorney’s fees and costs related to such identified matters. Management believes that any liability, in excess of applicable insurance coverages or accruals, which may result from these claims, would not be significant to the Company’s financial position or results of operations.
9. Redeemable Preferred Stock
On November 3, 2021, and as part of the Anthony's acquisition, the Company issued 2,120,000 shares of redeemable preferred stock, par value $0.0001 per share, as Series A Preferred Stock (the "Series A Junior Preferred Stock"). The Series A Junior Preferred Stock is redeemable on November 3, 2027 and accrues dividends at 7.00% per annum compounded quarterly from June 15, 2024 with such rate increasing by an additional 0.35% per quarter commencing with the three month period ending September 30, 2024 and (b) in the event that the Credit Facility is refinanced or repaid in full prior to June 15, 2024 and the Series A Junior Preferred Stock is not redeemed in full on such date, from and after such date, shall accrue dividends at 5.00% per annum, compounded quarterly, until June 15, 2024.
The Series A Junior Preferred Stock ranks senior to the Common Stock and may be redeemed at the option of the Company at any time and must be redeemed by the Company in limited circumstances. The Series A Junior Preferred Stock shall not have voting rights or conversion rights. The Series A Junior Preferred Stock is measured at fair value with changes in fair value reported as interest expense in the accompanying consolidated statement of operations.
As of December 31, 2021, the fair value of the redeemable preferred stock was $47.5 million and the redemption amount was $53 million. During the year ended December 31, 2021, as it relates to fair value adjustment, the Company recorded interest expense on the redeemable preferred stock in the amount of $0.6 million.
10. Debt
| | | | | | | | | | | |
(in thousands) | December 31, 2021 | | December 31, 2020 |
Term loan | $ | 57,761 | | | $ | — | |
Related party note | 10,000 | | | — | |
Revolving line of credit | 2,500 | | | 3,012 | |
Notes payable | 706 | | | 555 | |
Other notes payable, no recourse to the general credit of the Company | 168 | | | 168 | |
Paycheck Protection Program (“PPP”) | — | | | 2,237 | |
Total Debt | $ | 71,135 | | | $ | 5,972 | |
Less: Unamortized debt discount to related party note | (1,276) | | | — | |
Less: Unamortized debt issuance costs | (1,007) | | | — | |
Total Debt, net | 68,852 | | | 5,972 | |
Less: Short-term borrowings | (3,331) | | | (4,450) | |
Total Long-term borrowings and related party note | $ | 65,521 | | | $ | 1,522 | |
Credit Agreement
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
On November 3, 2021, and in connection with the acquisition of Anthony's, the Company joined a credit agreement with a syndicate of commercial banks providing Anthony's with up to $71.8 million in financing (“Credit Agreement”), which is reflective of the $8.3 million that the Company paid down at the acquisition date. The Credit Agreement, which terminates on June 15, 2024, provides the Company with lender financing structured as a $57.8 million term loan, a $4 million revolving loan, and a $10 million delayed draw term loan facility (the “Delayed Draw Term Loan Facility”) provided by a related party and a significant shareholder. The terms of the Credit Agreement require the Company to repay the principal of the term loan in quarterly installments with the balance due at the maturity date, as follows:
| | | | | | | | |
in thousands | | |
2022 | | $ | 3,254 | |
2023 | | 3,254 | |
2024 | | 51,253 | |
Total | | $ | 57,761 | |
The loan and revolving line of credit are secured by substantially all of the Company’s assets and incurs interest on outstanding amounts at 4.75% per annum through 6/15/2023 and 6.75% from 6/16/2023 through maturity. The Delayed Draw Term Loan Facility is a non-interest bearing loan and accordingly has been recorded at fair value which resulted in a debt discount of approximately $1.3 million which is being amortized over the period of the Delayed Draw Term Loan Facility. For the year ended December 31, 2021, the Company recorded $0.1 million as amortization of the debt discount which is included within interest expense in the accompanying consolidated statements of operations. Pursuant to the terms of an amendment to the Credit Agreement effective as of March 9, 2022, certain of the covenants of (i) the Company and Plastic Tripod, Inc., as the borrowers (the "Borrowers"), and (ii) the subsidiary guarantors (the "Guarantors") party to the Credit Agreement were amended, and the Borrowers and Guarantors agreed to pay incremental deferred interest of 2% per annum, in the event that the Credit Agreement is not repaid on or prior to June 15, 2023; provided, however, that if no event of default has occurred and is continuing then (1) no incremental deferred interest will be due if all of the obligations under the Credit Agreement have been paid on or prior to December 31, 2022, and (2) only 50% of the incremental deferred interest will be owed if all of the obligations under the Credit Agreement have been paid from and after January 1, 2023 and on or prior to March 31, 2023.
For the year ended December 31, 2021, the Company deferred $1.0 million of financing costs in connection with its Credit Agreement. Amortization expense associated with deferred financing costs, in the amount of $0.1 million for the year ended December 31, 2021 is included in interest expense in the accompanying consolidated statements of operations.
Notes Payable
Note payable relates to a note payable to an individual, issued in connection with the Company’s acquisition of a franchised restaurant, which requires monthly payments of $9,000 over a seven-year amortization including 7% interest, with a maturity date of May 1, 2027. The other notes payable relates to an Economic Injury Disaster Loan from the Small Business Administration (“SBA”) and is primarily for one corporate-owned restaurant.
Line of Credit
The Company had a revolving line of credit agreement (“LOC”) of $5 million. In January 2021, the Company terminated the LOC and paid the total amount due of $3 million. As of December 31, 2020, the outstanding balance on the LOC was $3 million. The annual interest on advances under the LOC was equal to the LIBOR Daily Floating rate plus 0.75%.
PPP Loans
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
On May 11, 2020, the Company received loan proceeds in the amount of $2.2 million under the Paycheck Protection Program (“PPP”). During the year ended December 31, 2021, all PPP loans amounting to $2.2 million were forgiven by the SBA. The SBA may undertake a review of a loan of any size during the six‐year period following forgiveness of the loan; however, loans in excess of $2 million are subject to a mandatory audit. The audit will include the loan forgiveness application, as well as whether the Company met the eligibility requirements of the program and received the proper loan amount. The timing and outcome of any SBA review is not known.
The following table represents the future annual principal obligations under our various debt instruments as of December 31, 2021:
| | | | | |
in thousands | |
2022 | $ | 3,332 | |
2023 | 3,339 | |
2024 | 63,845 | |
2025 | 98 | |
2026 | 105 | |
Thereafter | 416 | |
Total | $ | 71,135 | |
11. Supplemental Disclosure of Noncash Investing and Financing Activities
On April 1, 2020, the Company acquired a restaurant from a franchisee, with financing on a note payable of $0.6 million. As described in Note 5 Acquisitions, consideration issued in the BurgerFi acquisition included shares of stock valued at $103.7 million, and contingent consideration valued at $103.2 million.
As described in Note 5 Acquisitions, consideration issued in the Anthony's acquisition included redeemable preferred stock of approximately $53 million (carrying value of approximately $46.9 million at November 3, 2021 and fair value of approximately $47.5 million at December 31, 2021) and shares of common stock of approximately $29.0 million. The fair value of the preferred stock was determined using a discounted cash flow methodology. The expected future redemption payment was forecasted based on the contractual PIK (payment in kind) interest and estimated redemption date of December 31, 2024.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
12. Income Taxes
The provision for (benefit) from income taxes is set forth below:
| | | | | | | | | | | |
| | | Successor |
(in thousands) | Year Ended December 31, 2021 | | December 16, 2020 through December 31, 2020 |
Current: | | | |
U.S. Federal | $ | — | | | $ | 4 | |
State | — | | | — | |
Total current income tax expense | — | | | 4 | |
Deferred: | | | |
U.S. Federal | (7,833) | | | (314) | |
State | (2,192) | | | (56) | |
Total deferred income tax benefit | (10,025) | | | (370) | |
Valuation allowance | 10,337 | | | — | |
| 312 | | | (370) | |
Income tax expense (benefit) | $ | 312 | | | $ | (366) | |
The reconciliation of income tax computed at the U.S. federal statutory rate of 21% to our effective tax rate is set forth below:
| | | | | | | | | | | |
| | | Successor |
(in thousands) | Year Ended December 31, 2021 | | December 16, 2020 through December 31, 2020 |
Income tax provision at the U.S. federal statutory rate | $ | (25,407) | | | $ | 1,046 | |
Permanent differences | 402 | | | (181) | |
Share-based compensation | 496 | | | — | |
State income taxes, net of federal benefit | (1,888) | | | (56) | |
Change in derivative liability | (2,900) | | | (1,175) | |
Goodwill impairment | 19,820 | | | — | |
True-up | 42 | | | — | |
Change in valuation allowance | 10,337 | | | — | |
Change in rate | (406) | | | — | |
Tax credits | (184) | | | — | |
Total income tax (benefit) expense | $ | 312 | | | $ | (366) | |
The components of the Company's deferred tax assets (liabilities) at December 31, 2021 and December 31, 2020 are set forth below:
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
| | | | | | | | | | | |
| | | Successor |
(in thousands) | Year Ended December 31, 2021 | | December 16, 2020 through December 31, 2020 |
Deferred tax assets (liabilities): | | | |
Allowance for doubtful accounts | $ | 57 | | | $ | 33 | |
Goodwill | 2,794 | | | — | |
Deferred franchise fees | 684 | | | 752 | |
Deferred rent | 239 | | | 7 | |
Stock compensation | 1,250 | | | 203 | |
Net operating losses, Federal | 11,215 | | | 1,550 | |
Net operating losses, State | 2,066 | | | — | |
Deferred payroll taxes | 217 | | | — | |
Interest expense | 3,540 | | | — | |
Tax credits | 713 | | | — | |
Other | 1,075 | | | 151 | |
Gross deferred tax assets | 23,850 | | | 2,696 | |
Valuation allowance | (11,383) | | | — | |
Net deferred tax assets | 12,467 | | | 2,696 | |
Fixed assets | (520) | | | (1,876) | |
Intangible assets | (13,300) | | | (87) | |
Goodwill | — | | | (20) | |
Deferred tax liabilities | (13,820) | | | (1,983) | |
Total net deferred tax (liabilities) assets | $ | (1,353) | | | $ | 713 | |
As of December 31, 2021, the Company’s federal net operating loss carryforwards for income tax purposes was $53.4 million. On a tax-effected basis, the Company also had net operating losses of $2.1 million related to various state jurisdictions. $44.9 million of the federal net operating loss carryforwards will be carried forward indefinitely and will be available to offset 80% of taxable income. The remaining amount of the federal net operating loss carryforwards will expire at varying dates through 2037.
Pursuant to Sections 382 and 383 of the IRC and corresponding provisions of state law, the utilization of net operating loss carryforwards and tax credits may be limited as a result of a cumulative change in stock ownership of more than 50% over a three year period. The Company underwent such a change and consequently, the utilization of a portion of the net operating loss carryforwards and tax credits is subject to certain limitations.
In assessing the realizability of deferred income tax assets, ASC 740 requires that a more likely than not standard be met. If the Company determines that it is more likely than not that deferred income tax assets will not be realized, a valuation allowance must be established. The realization of deferred tax assets depends on the generation of future taxable income during the periods in which the temporary differences become deductible. Management considers reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies when making this determination. The Company has experienced cumulative losses in recent years which is significant negative evidence that is difficult to overcome in order to reach a determination that a valuation allowance is not required. Based on the Company's evaluation of its deferred tax assets, a valuation allowance of approximately $11.4 million has been recorded against the deferred tax asset.
The following table summarizes the Company's unrecognized tax benefits at December 31, 2021 and December 30, 2020:
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
| | | | | | | | | | | |
| | | Successor |
(in thousands) | Year Ended December 31, 2021 | | December 16, 2020 through December 31, 2020 |
Beginning balance | $ | — | | | $ | — | |
Additions based on tax positions related to the current year | $ | — | | | $ | — | |
Additions for tax positions of prior years | $ | 660 | | | $ | — | |
Ending balance | $ | 660 | | | $ | — | |
The Company had outstanding federal refund claims of approximately $0.7 million as of December 31, 2021. In March 2022, the Company received approximately $0.7 million of those refund claims.
13. Stockholders' Equity
Common Stock
The Company is authorized to issue 100,000,000 shares of common stock with a par value of $0.0001 per share. Holders of the Company’s common stock are entitled to one vote for each share. At December 31, 2021 and December 31, 2020, there were 21,303,500 shares and 17,541,838 shares of common stock outstanding, respectively.
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock with a par value of $0.0001 per share with such designation, rights and preferences as may be determined from time to time by the Company’s Board of Directors.
On November 3, 2021, and as part of the Anthony's acquisition, the Company issued 2,120,000 shares of redeemable preferred stock. As of December 31, 2020, there were no shares of preferred stock issued or outstanding. See Note 9 Redeemable Preferred Stock.
Warrants
As of December 31, 2021, the Company had the following warrants and options outstanding: 15,063,800 warrants outstanding, each exercisable for one share of common stock at an exercise price of $11.50 including 11,468,800 in Public Warrants, 3,000,000 in Private Placement Warrants, 445,000 in Private Warrants and 150,000 in Working Capital Warrants, 75,000 Unit Purchase Option “UPO” units that are exercisable for one share of common stock at an exercise price of $10.00 and warrants exercisable for one share of common stock at an exercise price of $11.50. The Public Warrants expire in December 2025.
During the year ended December 31, 2021, the Company exchanged 675,000 UPO units for 283,669 common shares in a cashless exercise, issued 100 shares for warrants exercised in cash and issued 7,969 shares in cashless warrant exercises.
The Public Warrants became exercisable 30 days after the completion of the BurgerFi acquisition, provided that the Company has an effective registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the Public Warrants and a current prospectus relating to them is available. Warrant holders may, during any period when the Company shall have failed to maintain an effective registration statement, exercise warrants on a cashless basis pursuant to the exemption provided by Section 3(a)(9) of the Securities Act, provided that such exemption is available. If that exemption, or another exemption, is not available, holders will not be able to exercise their warrants on a cashless basis.
The Company may redeem the Public Warrants:
•in whole and not in part;
•at a price of $0.01 per warrant;
•at any time during the exercise period;
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
•upon a minimum of 30 days' prior written notice of redemption; and
•if, and only if, the last sale price of the Company's common stock equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period ending on the third business day prior to the date on which the Company sends the notice of redemption to the warrant holders.
•if, and only if, there is a current registration statement in effect with respect to the shares of common stock underlying such warrants.
If the Company calls the Public Warrants for redemption, management will have the option to require all holders that wish to exercise the Public Warrants to do so on a “cashless basis,” as described in the warrant agreement. The exercise price and number of shares of common stock issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, or recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuance of common stock at a price below its exercise price. Additionally, in no event will the Company be required to net cash settle the warrants.
The Private Placement Warrants are identical to the Public Warrants, except that the Private Placement Warrants and the common stock issuable upon the exercise of the Private Placement Warrants became transferable, assignable or salable after the completion of the BurgerFi acquisition, subject to certain limited exceptions. Additionally, the Private Placement Warrants will be exercisable on a cashless basis and be non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Placement Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants. Due to this provision, the Private Placement Warrants are accounted for as liabilities.
The Private Warrants are identical to the Public Warrants, except that the Private Warrants and the common stock issuable upon the exercise of the Private Warrants became transferable, assignable or salable after the completion of the BurgerFi acquisition, subject to certain limited exceptions. Additionally, the Private Warrants may be exercisable on a cashless basis and be non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants. Due to this provision, the Private Warrants are accounted for as liabilities.
The Working Capital Warrants are identical to the Public Warrants, except that the Working Capital Warrants and the common stock issuable upon the exercise of the Working Capital Warrants became transferable, assignable or salable after the completion of the BurgerFi acquisition, subject to certain limited exceptions. Additionally, the Working Capital Warrants will be exercisable on a cashless basis and be non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Working Capital Warrants are held by someone other than the initial purchasers or their permitted transferees, the Working Capital Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants. Due to this provision, the Working Capital Warrants are accounted for as liabilities.
Unit Purchase Options
The Company has an outstanding Unit Purchase Option Agreement with an investor, to purchase up to 750,000 Units (Units include 1 common share and 1 warrant per Unit) exercisable at $10.00 per Unit. The unit purchase option may be exercised for cash or on a cashless basis, at the holder’s option, and expires on March 17, 2023. The option grants to holders demand and “piggyback” rights for periods of five and seven years, respectively, from March 13, 2018 with respect to the registration under the Securities Act of the securities directly and indirectly issuable upon exercise of the option. The Company will bear all fees and expenses attendant to registering the securities, other than underwriting commissions which will be paid for by the holders themselves. The exercise price and number of units issuable upon exercise of the option may be adjusted in certain circumstances including in the event of a stock dividend, or the Company’s recapitalization, reorganization, merger or consolidation. However, the option will not be adjusted for issuances of common stock at a price below its exercise price. During the year ended December 31, 2021, the Company exchanged 675,000 UPO units for 283,669 common shares in a cashless exercise and issued 7,969 shares in cashless warrant exercises.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
Share-Based Compensation
The Company has the ability to grant stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards and performance compensation awards to current or prospective employees, directors, officers, consultants or advisors under the Plan. The Plan was established to benefit the Company and its stockholders, by assisting the Company to attract, retain and provide incentives to key management employees, directors, and consultants of the Company, and to align the interests of such service providers with those of the Company’s stockholders. Accordingly, the Plan provides for the granting of Non-qualified Stock Options, Incentive Stock Options, Restricted Stock Unit Awards, Restricted Stock Awards, Stock Appreciation Rights, Performance Stock Awards, Performance Unit Awards, Unrestricted Stock Awards, Distribution Equivalent Rights or any combination of the foregoing.
The initial aggregate number of Shares that may be issued under the Plan shall not exceed Two Million (2,000,000) Shares. The aggregate number of Shares reserved for Awards under the Plan (other than Incentive Stock Options) shall automatically increase on January 1 of each year, for a period of not more than ten (10) years, commencing on January 1 of the year following the year after the date the Plan became effective in an amount equal to five percent (5%) of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, provided that the Committee may determine prior to the first day of the applicable fiscal year to lower the amount of such annual increase. On January 3, 2022, the Company filed a Registration Statement with the SEC to register 1,065,175 additional shares of common stock, $0.0001 par value per share, of the Company under the Plan, pursuant to the “evergreen” provision of the Plan providing for an automatic increase in the number of shares reserved for issuance under the Plan.
As of December 31, 2021 and 2020, there were approximately 126,302 and 700,000 shares of common stock available for future grants under the 2020 Plan, respectively.
Restricted Stock Unit Awards
The Company grants RSU Awards with service, performance and market conditions. The RSU Awards granted with service conditions generally vest over 4 years. The market conditions include an index to the market value of the stock price of BurgerFi, and the performance conditions are based on key performance indicators, as identified in the employment agreements. The fair value of restricted stock units granted is determined using the fair market value of the Company’s common stock on the date of grant, as set forth in the applicable plan document.
The following table summarizes activity of restricted stock units during 2021:
| | | | | | | | | | | |
| Number of Restricted Stock Units | | Weighted Average Grant Date Fair Value |
Non-vested at December 31, 2020 | 1,250,000 | | | $ | 15.28 | |
Granted | 1,445,600 | | | 13.02 | |
Vested | (118,750) | | | 12.85 | |
Forfeited | (793,152) | | | 13.68 | |
Non-vested at December 31, 2021 | 1,783,698 | | | $ | 14.18 | |
Share-based compensation recognized during year ended December 31, 2021 was approximately $7.6 million, inclusive of restricted stock unit grants of $7.4 million and stock grants of $0.2 million. Share-based compensation recognized for financial reporting purposes during the Successor period December 16, 2020 through December 31, 2020 was $0.8 million, comprised of restricted stock unit grants. As of December 31, 2021, there was approximately $19.6 million of total unrecognized compensation cost related to unvested restricted stock units or performance-based restricted stock unit awards to be recognized over a weighted average period of 1-4 years.
The unrecognized portion of share-based compensation for unvested market condition restricted stock units (included in above) is approximately $1.2 million over 1.47 years. As detailed below, the fair value of the market condition restricted stock units was determined using a Monte Carlo simulation model.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
Performance-Based Restricted Stock Unit Awards
The Company grants performance-based awards (restricted stock units) to certain officers and key employees. The vesting of these awards is contingent upon meeting one or more defined operational or financial goals (a performance condition) or common stock share prices (a market condition) or employment conditions.
The fair values of the performance condition awards granted were determined using the fair market value of the Company’s common stock on the date of grant. Share-based compensation expense recorded for performance condition awards is reevaluated at each reporting period based on the probability of the achievement of the goal. Certain goals were achieved as of December 31, 2021. Accordingly, the Company recognized share-based compensation expense of approximately $4.6 million in relation to these awards during the year ended December 31, 2021.
The fair value of market condition awards granted were estimated using the Monte Carlo simulation model. The Monte Carlo simulation model utilizes multiple input variables to estimate the probability that the market conditions will be achieved and is applied to the trading price of our common stock on the date of grant. In July 2021, the Company modified the terms related to certain market condition awards that the Compensation Committee previously approved. As a result of this modification, the Company recorded additional share-based compensation of $54,000 during the year ended December 31, 2021 for these modifications.
The input variables are noted in the table below:
| | | | | | | | | | | |
| 2021 | | 2020 |
Risk-free interest rate | 1.03 | % | | 0.18 | % |
Expected life in years | 2.99 | | 3 |
Expected volatility | 65.9 | % | | 65.9 | % |
Expected dividend yield * | 0 | % | | 0 | % |
* The Monte Carlo method assumes a reinvestment of dividends. |
Share-based compensation expense is recorded ratably for market condition awards during the requisite service period and is not reversed, except for forfeitures, at the vesting date regardless of whether the market condition is met. During the year ended December 31, 2021 and the Successor period, $1.5 million and $33,000, respectively, was recognized ratably as share-based compensation expense for the market condition awards.
Service-Based Restricted Stock Unit Awards
The Company grants service-based awards (restricted stock units) to certain officers and key employees. The vesting of these awards is contingent upon meeting the requisite service period. The fair value of restricted stock unit awards is determined using the publicly-traded price of our common stock on the grant date. During the year ended December 31, 2021 and the Successor period, $1.3 million and $0.8 million, respectively, was recognized ratably as share-based compensation expense for the market condition awards.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
The following table summarizes activity of the restricted stock units during 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Performance Condition | | Service Condition | | Market Condition |
| Restricted Stock Units | | Weighted Average Grant Date Fair Value | | Restricted Stock Units | | Weighted Average Grant Date Fair Value | | Restricted Stock Units | | Weighted Average Grant Date Fair Value |
Non-vested at December 31, 2020 | 950,000 | | | $ | 15.70 | | | 200,000 | | | $ | 15.70 | | | 100,000 | | | $ | 10.45 | |
Granted | 888,600 | | | 14.65 | | 97,000 | | | 12.74 | | 460,000 | | | 9.91 |
Vested | (58,750) | | | 15.66 | | | (45,000) | | | 8.81 | | | (15,000) | | | 14.01 | |
Forfeited | (528,152) | | | 15.20 | | | — | | | — | | | (265,000) | | | 10.63 | |
Non-vested at December 31, 2021 | 1,251,698 | | | $ | 15.15 | | | 252,000 | | | $ | 15.79 | | | 280,000 | | | $ | 8.42 | |
14. Fair Value Measurements
Fair values of financial instruments are estimated using public market prices, quotes from financial institutions, and other available information. The fair values of cash equivalents, receivables, net, accounts payable and short-term debt approximate their carrying amounts due to their short duration.
The following tables summarize the fair values of financial instruments measured at fair value on a recurring basis as of December 31, 2021 and 2020.
| | | | | | | | | | | |
| Items Measured at Fair Value at December 31, 2021 |
(in thousands) | Quoted prices in active market for identical assets (liabilities) (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) |
Redeemable preferred stock | $ | — | | $ | 47,525 | | $ | — | |
Related party note | — | | 8,724 | | — | |
Warrant liability | — | | — | | 2,706 | |
Total | $ | — | | $ | 56,249 | | $ | 2,706 | |
| | | |
| Items Measured at Fair Value at December 31, 2020 |
(in thousands) | Quoted prices in active market for identical assets (liabilities) (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) |
Warrant liability | $ | — | | $ | — | | $ | 16,516 | |
Total | $ | — | | $ | — | | $ | 16,516 | |
The fair value of the preferred stock was determined using a discounted cash flow methodology. The expected future redemption payment was forecasted based on the contractual PIK (payment in kind) interest and estimated redemption date of December 31, 2024.
The fair value of the related party note, which is classified as Level 2 in the fair value hierarchy, is determined based on market prices or, if market prices are not available, the present value of the underlying cash flows discounted at our incremental borrowing rates.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
The fair value of non-financial assets measured at fair value on a non-recurring basis, classified as Level 2 in the fair value hierarchy, is determined based on third-party market appraisals. The fair value of our warrant liability is measured at fair value on a non-recurring basis, classified as Level 3 in the fair value hierarchy. The fair value of the private placement warrants, private warrants, and working capital warrants are determined using the publicly-traded price of our common stock on the valuation dates of $5.67 on December 31, 2021 and $13.69 on December 31, 2020. The fair value is calculated using the Black-Scholes option-pricing model. The Black-Scholes model requires us to make assumptions and judgments about the variables used in the calculation, including the expected term, expected volatility, risk-free interest rate, dividend rate and service period.
The fair value of private warrants for the Successor period from December 16, 2020 to December 31, 2020 were estimated using a Dynamic Black-Scholes model. This process relies upon inputs such as shares outstanding, estimated stock prices, strike price, risk free interest rate and volatility assumptions. The calculated warrant price for private warrants was $0.75 and $4.60 on December 31, 2021 and December 31, 2020, respectively.
The input variables for the Black-Scholes are noted in the table below:
| | | | | | | | |
| 2021 | 2020 |
Risk-free interest rate | 1.11 | % | 0.36 | % |
Expected life in years | 3.96 | 5 |
Expected volatility | 41.8 | % | 30.0 | % |
Expected dividend yield | 0 | % | 0 | % |
Assets and liabilities that are measured at fair value on a non-recurring basis include our long-lived assets and definite-lived intangible assets that we performed impairment testing for. In determining fair value, we used an income-based approach. As a number of assumptions and estimates were involved that are largely unobservable, they are classified as Level 3 inputs within the fair value hierarchy. Assumptions used in these forecasts are consistent with internal planning, and include revenue growth rates, royalties, gross margins, and operating expense in relation to the current economic environment and the Company’s future expectations.
15. Segment Information
Prior to the Anthony's acquisition in November 2021, the Company had one operating and reportable segment. As such, segment information is presented for the year ended December 31, 2021, but not prior periods as all information in prior periods relates to the BurgerFi brand. Following the Anthony's acquisition, the Company has two operating and reportable segments:
•BurgerFi, which includes our operations of corporate-owned and franchised BurgerFi restaurants, which offer a fast-casual “better burger” concept; and
•Anthony's, which includes our operations of casual dining pizza restaurants under the name Anthony’s Coal Fired Pizza & Wings.
The CODMs are the CEO, CFO, and Executive Chairman as they assess the performance of the reportable segments and make all the significant strategic decisions, including the allocation of resources.
External sales are derived principally from food and beverage sales, royalty and franchise revenue. We do not rely on any major customers as a source of sales, and the customers and long-lived assets of our reportable segments are predominantly in the U.S. There were no material transactions among reportable segments.
The following tables present revenue, capital expenditures, depreciation and amortization, pre-opening costs, interest expense, and net (loss) income by segment:
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2021 and 2020
| | | | | | | | |
(in thousands) | | Year Ended December 31, 2021 * |
Revenue: | | |
BurgerFi | | $ | 46,448 | |
Anthony's | | 22,419 | |
Total | | $ | 68,867 | |
| | |
Capital expenditures: | | |
BurgerFi | | $ | 10,348 | |
Anthony's | | 317 | |
Total | | $ | 10,665 | |
| | |
Depreciation and amortization: | | |
BurgerFi | | $ | 8,694 | |
Anthony's | | 1,366 | |
Total | | $ | 10,060 | |
| | |
Pre-opening costs: | | |
BurgerFi | | $ | 1,905 | |
Anthony's | | — | |
Total | | $ | 1,905 | |
| | |
Interest expense: | | |
BurgerFi | | $ | 673 | |
Anthony's | | 733 | |
Total | | $ | 1,406 | |
| | |
Net (loss) income: | | |
BurgerFi | | $ | (121,352) | |
Anthony's | | (142) | |
Total | | $ | (121,494) | |
* Amounts for Anthony's are only presented from November 3, 2021, the date of acquisition. |
Total assets by segment are as follows:
| | | | | | | | | | | | | | |
(in thousands) | | Year Ended December 31, 2021 * | | Year Ended December 31, 2020 |
Total assets: | | | | |
BurgerFi | | $ | 161,675 | | | $ | 289,116 | |
Anthony's | | 156,044 | | | N/A |
Total | | $ | 317,719 | | | $ | 289,116 | |
* Amounts for Anthony's are only presented from November 3, 2021, the date of acquisition. |