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 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 January 2, 2023, 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 114 BurgerFi locations, and as of January 2, 2023, was comprised of 25 corporate-owned restaurants and 89 franchised restaurants in 2 countries and 23 states, as well as Puerto Rico.
BurgerFi was named "The Very Best Burger" at the 2023 edition of the nationally acclaimed SOBE Wine and Food Festival, "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 and Fast Casual's 2021 #1 Brand of the Year. In 2021, in Consumer Report’s Chain Reaction Report, BurgerFi was praised 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 60 corporate-owned casual restaurant locations, as of January 2, 2023. 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 60 corporate-owned locations, as of January 2, 2023, primarily along the East coast and has restaurants in eight states, including Florida (28), Pennsylvania (11), 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.
Acquisition
On November 3, 2021, we completed 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. 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. Prior to the Anthony's acquisition in November 2021, the Company had one reportable segment.
Key Metrics
Systemwide Restaurant Sales
“Systemwide Restaurant Sales” are not revenues to the Company, however the Company records royalty revenue based as a percentage of 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. 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 under Digital Channel discussion for Same Store Sales.
Corporate-Owned Restaurant Sales
“Corporate-Owned Restaurant Sales” represent the sales generated only by corporate-owned restaurants. 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 and are not recorded as revenue, however, the royalties based on a percentage of these franchise restaurant sales are recorded as revenue. 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 that is temporarily closed, is included in the Same-Store Sales computation. A restaurant that 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” percentage of systemwide sales to evaluate the 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 the Company as compared to some of our competitors. Digital Channel as percentages of systemwide sales are indicative of the sales placed through our digital platforms and the percentage of those digital sales when compared to total sales at all our franchised and corporate-owned restaurants.
Unless otherwise stated, “Systemwide Restaurant Sales”, “Systemwide Sales Growth”, and “Same-Store
Sales” are presented on a systemwide basis, which means they include franchise restaurants and corporate-owned restaurants. Franchise restaurant sales represent sales at all franchise restaurants and are revenues to our franchisees. We do not record franchise sales as revenues; however, our royalty revenues and brand royalty revenues are calculated based on a percentage of franchise sales.
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. 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. :
| | | | | | | | | | | |
(in thousands, except for percentage data) | Year Ended January 2, 20231,2 | | Year Ended December 31, 20213 |
Systemwide Restaurant Sales | $ | 289,640 | | | $ | 166,124 | |
Systemwide Restaurant Sales Growth | — | % | | 31% |
Systemwide Restaurant Same-Store Sales Growth | (2) | % | | 14% |
Corporate-Owned Restaurant Sales | $ | 166,198 | | | $ | 33,435 | |
Corporate-Owned Restaurant Sales Growth | 6 | % | | 39% |
Corporate-Owned Restaurant Same-Store Sales Growth | 2 | % | | 14% |
Franchise Restaurant Sales | $ | 123,442 | | | $ | 127,165 | |
Franchise Restaurant Sales Growth | (7) | % | | 30% |
Franchise Restaurant Same-Store Sales Growth | (6) | % | | 15% |
Digital Channel % of Systemwide Sales | 35 | % | | 39% |
| | | | | | | | | | | | | | | | | | |
| Year Ended January 2, 20231 | | Year Ended December 31, 20213 | |
(in thousands, except for percentage data) | BurgerFi | | Anthony's2 | | BurgerFi3 | |
Systemwide Restaurant Sales | $ | 160,821 | | | $ | 128,819 | | | $ | 166,124 | | |
Systemwide Restaurant Sales Growth | (3) | % | | 5 | % | | 31% | |
Systemwide Restaurant Same-Store Sales Growth | (7) | % | | 5 | % | | 14% | |
Corporate-Owned Restaurant Sales | $ | 37,379 | | | $ | 128,819 | | | $ | 33,435 | | |
Corporate-Owned Restaurant Sales Growth | 10 | % | | 5 | % | | 39% | |
Corporate-Owned Restaurant Same-Store Sales Growth | (11) | % | | 5 | % | | 14% | |
Franchise Restaurant Sales | $ | 123,442 | | | N/A | | $ | 127,165 | | |
Franchise Restaurant Sales Growth | (7) | % | | N/A | | 30% | |
Franchise Restaurant Same-Store Sales Growth | (6) | % | | N/A | | 15% | |
Digital Channel % of Systemwide Sales | 33 | % | | 37 | % | | 39% | |
1.Refer to “Key Metrics Definitions” and “About Non-GAAP Financial Measures” sections below.
2.Included within Systemwide Restaurant Sales Growth, Systemwide Restaurant Same-Store Sales Growth, Corporate-Owned Restaurant Sales Growth and Corporate-Owned Restaurant Same-Store Sales Growth data presented above is information for Anthony's for the respective periods in 2021 which is presented only for informational purposes as Anthony's was not under common ownership until November 2021, the date of acquisition.
3.Includes only BurgerFi
Results of Operations
We present 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 results of operations of Anthony's is included in our consolidated financial statements from the acquisition date of November 3, 2021.
| | | | | | | | | | | | | | |
(in thousands) | | Year Ended January 2, 2023 | | Year Ended December 31, 2021 |
Revenue: | | | | |
Restaurant sales | | $ | 167,201 | | | $ | 57,790 | |
Royalty and other fees | | 9,733 | | | 9,090 | |
Royalty - brand development and co-op | | 1,786 | | | 1,987 | |
Total Revenue | | 178,720 | | | 68,867 | |
Restaurant level operating expenses: | | | | |
Food, beverage and paper costs | | 48,487 | | | 17,153 | |
Labor and related expenses | | 49,785 | | | 16,272 | |
Other operating expenses | | 30,277 | | | 12,039 | |
Occupancy and related expenses | | 15,607 | | | 4,940 | |
General and administrative expenses | | 25,974 | | | 17,300 | |
Depreciation and amortization expense | | 17,138 | | | 10,060 | |
Share-based compensation expense | | 10,239 | | | 7,573 | |
Brand development, co-op and advertising expense | | 3,870 | | | 2,462 | |
Goodwill and intangible asset impairment | | 66,569 | | | 114,797 | |
Asset impairment | | 6,946 | | | — | |
Store closure costs | | 1,949 | | | — | |
Restructuring costs | | 1,459 | | | — | |
Pre-opening costs | | 474 | | | 1,905 | |
Total Operating Expenses | | 278,774 | | | 204,501 | |
Operating Loss | | (100,054) | | | (135,634) | |
Other income, net | | 2,675 | | | 2,047 | |
Gain on change in value of warrant liability | | 2,511 | | | 13,811 | |
Interest expense, net | | (8,659) | | | (1,406) | |
Loss before Income Taxes | | (103,527) | | | (121,182) | |
Income tax benefit (expense) | | 95 | | | (312) | |
Net Loss | | $ | (103,432) | | | $ | (121,494) | |
Sales
The following table presents our corporate-owned restaurant sales by segment:
| | | | | | | | | | | | | | |
| | | | |
Revenue: | | Year Ended January 2, 2023 | | Year Ended December 31, 2021 |
BurgerFi | | $ | 38,382 | | | $ | 35,371 | |
Anthony's | | 128,819 | | | 22,419 | |
Consolidated | | $ | 167,201 | | | $ | 57,790 | |
Comparison of the years ended January 2, 2023 and December 31, 2021
Restaurant Sales
For the year ended January 2, 2023, the Company’s restaurant sales increased by approximately $109.4 million or 189% as compared to the year ended December 31, 2021. This increase was primarily related to the acquisition of Anthony's included for 12 months while in the prior year it was only included for nine weeks, which contributed approximately $106.4 million, or 97% of the increase in restaurant sales. The remaining increase of $3 million resulted from an increase in sales related to new BurgerFi restaurant openings and higher average transaction values, offset by lower same-store sales. For the Anthony’s brand, same-store sales increased 5% primarily due to an increase in average transaction values. For the BurgerFi brand, same-store sales decreased 11% in corporate-owned locations, respectively.
Royalty and Other Fees
Royalty and other fees increased by approximately $0.6 million, or 7% for the year ended January 2, 2023 as compared to the year ended December 31, 2021. This increase was primarily driven by higher franchise fees realized as a result of franchise agreement terminations during the period.
Royalties – Brand Development and Co-op
Royalties – brand development and co-op advertising decreased by approximately $0.2 million, or 10% for the year ended January 2, 2023 as compared to the year ended December 31, 2021. This decrease was primarily due to a decrease in our franchisees’ sales for the year ended January 2, 2023 as compared to the year ended December 31, 2021. Franchise restaurant same-store sales decreased by 6%.
Restaurant Level Operating Expenses
Restaurant level operating expenses are as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended January 2, 2023 | | Year Ended December 31, 2021* |
(in thousands, except for percentage data) | In dollars | As a % of restaurant Sales | | In dollars | As a % of restaurant sales |
Consolidated: | | | | | |
Restaurant sales | $ | 167,201 | | 100 | % | | $ | 57,790 | | 100.0 | % |
Restaurant level operating expenses: | | | | | |
Food, beverage and paper costs | $ | 48,487 | | 29.0 | % | | $ | 17,153 | | 29.7 | % |
Labor and related expenses | 49,785 | | 29.8 | % | | 16,272 | | 28.2 | % |
Other operating expenses | 30,277 | | 18.1 | % | | 12,039 | | 20.8 | % |
Occupancy and related expenses | 15,607 | | 9.3 | % | | 4,940 | | 8.5 | % |
Total | $ | 144,156 | | 86.2 | % | | $ | 50,404 | | 87.2 | % |
| | | | | |
Anthony's*: | | | | | |
Restaurant sales | $ | 128,819 | | 100 | % | | $ | 22,419 | | 100.0 | % |
Restaurant level operating expenses: | | | | | |
Food, beverage and paper costs | $ | 36,618 | | 28.4 | % | | $ | 6,419 | | 28.6 | % |
Labor and related expenses | 38,789 | | 30.1 | % | | 6,679 | | 29.8 | % |
Other operating expenses | 22,237 | | 17.3 | % | | 4,321 | | 19.3 | % |
Occupancy and related expenses | 11,798 | | 9.2 | % | | 1,931 | | 8.6 | % |
Total | $ | 109,442 | | 85.0 | % | | $ | 19,350 | | 86.3 | % |
| | | | | |
BurgerFi: | | | | | |
Restaurant sales | $ | 38,382 | | 100 | % | | $ | 35,371 | | 100.0 | % |
Restaurant level operating expenses: | | | | | |
Food, beverage and paper costs | $ | 11,869 | | 30.9 | % | | $ | 10,734 | | 30.3 | % |
Labor and related expenses | 10,996 | | 28.6 | % | | 9,593 | | 27.1 | % |
Other operating expenses | 8,040 | | 20.9 | % | | 7,718 | | 21.8 | % |
Occupancy and related expenses | 3,809 | | 9.9 | % | | 3,009 | | 8.5 | % |
Total | $ | 34,714 | | 90.4 | % | | $ | 31,054 | | 87.8 | % |
* 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 period for Anthony's.
Total restaurant level operating expenses as a percentage of revenue was 86.2% for the year ended January 2, 2023 and 87.2% the year ended December 31, 2021. Restaurant-level operating expenses for the fiscal year of 2022 were approximately $144.2 million compared to approximately $50.4 million million in the fiscal year 2021; the increase was driven by the inclusion of a full year of Anthony’s operations, while the prior year included only nine weeks. For the Anthony's brand, restaurant-level operating expenses, as a percentage of sales, decreased 1.3% for the fiscal year 2022, compared to the fiscal year 2021, primarily due to lower other operating expenses and reduction in food costs due to continued stabilization of commodity costs, especially in chicken wing prices, partially offset by higher labor costs. For the BurgerFi brand, restaurant-level operating expenses, as a percentage of sales, increased 2.6% for the fiscal year 2022, compared to the fiscal year 2021, primarily due to lower leverage on fixed costs driven by lower same-store sales.
Food, Beverage and Paper Costs
Food, beverage, and paper costs for the year ended January 2, 2023 increased by approximately $31.3 million, or 183% as compared to the year ended December 31, 2021. This increase was primarily related to the acquisition of Anthony's, which contributed approximately $30.2 million, or 96% of the increase. The remaining increase of $1.1 million related to additional BurgerFi locations. As a percentage of corporate restaurant sales, food, beverage and paper costs were 29.0% for the year ended January 2, 2023 as compared to 29.7% for the year ended December 31, 2021. This 0.7% percentage of sales improvement primarily resulted from lower food costs due to continued stabilization of commodity costs, especially in chicken wing prices at Anthony's.
Labor and Related Expenses
Labor and related expenses for the year ended January 2, 2023 increased by approximately $33.5 million, or 206% as compared to the year ended December 31, 2021. This increase was primarily related to the acquisition of Anthony's, which contributed approximately $32.1 million, or 96% of the increase. The remaining increase of $1.4 million related to additional BurgerFi restaurants and higher wages. As a percentage of corporate restaurant sales, labor and related expenses were 29.8% for the year ended January 2, 2023 as compared to 28.2% for the year ended December 31, 2021. This 1.6% percentage of corporate restaurant sales increase is due to lower same-store sales at existing BurgerFi locations and increased labor costs experienced in both of our restaurant brands as compared to that of the prior year stemming from higher wages.
Other Operating Expenses
Other operating expenses for the year ended January 2, 2023 increased by approximately $18.2 million, or 151% as compared to the year ended December 31, 2021. This increase was primarily related to the acquisition of Anthony's, which contributed approximately $17.9 million, or 98% of the increase. The remaining increase of $0.3 million related to BurgerFi. As a percentage of corporate restaurant sales, other operating expenses were 18.1% for the year ended January 2, 2023 as compared to 20.8% for the year ended December 31, 2021. This 2.7% in percentage of corporate restaurant sales improvement primarily relates to sales increases during the year ended January 2, 2023, creating leverage on certain store operating costs that are not variable with sales and cost reduction initiatives.
Occupancy and Related Expenses
Occupancy and related expenses for the year ended January 2, 2023 increased by approximately $10.7 million, or 216% as compared to the year ended December 31, 2021. This increase was primarily related to the acquisition of Anthony's, which contributed approximately $9.9 million, or 93% of the increase. The remaining increase of $0.8 million related to BurgerFi. As a percentage of corporate restaurant sales, occupancy and related expenses, which are primarily fixed in nature, were 9.3% for the year ended January 2, 2023 and 8.5% the year ended December 31, 2021. The increase of 0.8% in percentage of corporate restaurant sales is primarily driven by the result of higher occupancy percent of sales for new BurgerFi restaurants and BurgerFi negative same-store sales resulting in lower leverage on fixed costs.
General and Administrative Expenses
General and administrative expenses for the year ended January 2, 2023 increased by approximately $8.7 million, or 50% as compared to the year ended December 31, 2021. This increase partially related to Anthony's general and administrative expenses, being included for the full year, which contributed approximately $7.8 million, or 89% of the increase. The remaining increase of $0.9 million related to BurgerFi and was primarily driven by higher legal, professional, and insurance fees and labor and related costs during the year ended January 2, 2023 as compared to the year ended December 31, 2021. These increases were a result of investments made related to the integration of Anthony's, costs associated with legal settlements, and insurance costs, partially offset by the absence of merger’s and acquisition costs incurred during 2022 compared to such costs incurred during 2021.
Depreciation and Amortization Expense
Depreciation and amortization expense was $17.1 million for the year ended January 2, 2023 as compared to $10.1 million for the year ended December 31, 2021. The increase of $7.1 million was primarily due to the acquisition of Anthony's for the full year which contributed approximately $6.2 million or 88% of the increase. The remaining increase of $0.9 million was primarily attributable to more assets placed in service as a result of more corporate-owned BurgerFi stores opened during the prior year.
Share-Based Compensation Expense
Share-based compensation expense was $10.2 million for the year ended January 2, 2023 as compared to $7.6 million for the year ended December 31, 2021 primarily as a result of a greater number of unrestricted restricted stock grants and restricted stock unit awards under the Company’s 2020 Omnibus Equity Stock Incentive Plan as compared to the year ended December 31, 2021.
Brand Development, Co-op and Advertising Expense
Brand development and co-op advertising increased by approximately $1.4 million, or 57% for the year ended January 2, 2023 as compared to the year-ended December 31, 2021. This increase primarily relates to the acquisition of Anthony's for the full year which contributed $1.3 million of the increase.
Goodwill and Intangible Asset Impairment
As part of the Company's interim and annual goodwill impairment assessment during fiscal year 2022, the Company recorded goodwill impairment charges of approximately $66.6 million for the year ended January 2, 2023, of which $49.1 million related to the Anthony's reporting unit and $17.5 million related to the BurgerFi reporting unit. These charges were primarily driven by the impact on the Company's market capitalization caused by the decrease in stock price experienced during the period. For the year ended December 31, 2021, the Company recorded a goodwill impairment charge of $114.8 million for the BurgerFi reporting unit. 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. 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 during 2021, coupled with a significant decline in 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.
Asset Impairment
The Company recorded a non-cash asset impairment charge of $6.9 million related to property & equipment and right-of-use assets for certain underperforming stores for the year ended January 2, 2023 of which $6.7 million related to BurgerFi and $0.2 million related to Anthony’s.
Store Closure Costs
Store closure costs were $1.9 million for the year ended January 2, 2023 as compared to $0.1 million during the year ended December 31, 2021 primarily as a result of the Company’s decision to close its commissary during 2022 and, to not open certain stores under development partially offset by the net gain on three store transfers to a franchisee for BurgerFi and the closure of one Anthony’s store in October 2022. Store closure costs include asset impairment expenses, and contract termination expenses including lease termination, rent expense and other expenses incurred by a restaurant after the Company’s decision to cease development or closure of a restaurant. Store closure costs can fluctuate significantly from period to period based on the number and timing of restaurant closures and the specific closing costs incurred for each restaurant.
Restructuring Costs
Restructuring costs for the year ended January 2, 2023 of $1.5 million included severance costs and other termination benefits related to the departure of members of executive management and professional fees and other costs incurred in connection with our Credit Facility requirements to raise additional capital or debt. See Note 9, “Debt,” for further discussion of our credit facilities and indebtedness.
Pre-opening Costs
Pre-opening costs were $0.5 million for the year ended January 2, 2023 as compared to $2 million for the year ended December 31, 2021 primarily as a result of opening three new stores during the year ended January 2, 2023 compared to ten during the year ended December 31, 2021. 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.
Other Income, net
Other income,net for the year ended January 2, 2023 was $2.7 million and related to recording an Employee Retention Credit made available through the amended Coronavirus Aid, Relief, and Economic Security Act legislation. Other income, net was $2.0 million for the year ended December 31, 2021 as a result of $2.2 million of debt forgiveness on all of our PPP loans, offset by loss on disposal of assets.
Change in Value of Warrant Liability
The Company recorded a non-cash gain of approximately $2.5 million during the year ended January 2, 2023 related to change in the fair value of the warrant liability as compared to a gain of $13.8 million during the year ended December 31, 2021. 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.
Interest Expense
Interest expense was approximately $8.7 million during the year ended January 2, 2023 as compared to $1.4 million during the year ended December 31, 2021, an increase of $7.3 million. Interest expense related to the debt assumed as part of the Anthony’s acquisition contributed to $4.1 million of the increase. The remaining increase of $3.2 million in non-cash interest expense related to the accretion in value of redeemable preferred stock.
Income Tax Expense (Benefit)
For the year ended January 2, 2023, the Company recorded an income tax benefit of $0.1 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 year ended December 31, 2021, the Company recorded income tax expense of $0.3 million.
Net Loss
Net loss for the year ended January 2, 2023 was $103.4 million compared to a net loss of $121.5 million for the year ended December 31, 2021. The improvement in net loss of $18.1 million was primarily due to $41.3 million in lower non-cash impairment charges and the results of a full year of Anthony’s operations, while the prior year included only nine weeks. The improvement of $18.1 million in net loss was also partially offset by $11.3 million of lower gains on change in value of warrant liability, $7.3 million increase in interest expense, $7.1 million increase in depreciation and amortization expense, $2.7 million increase in share-based compensation expense and $1.9 million increase in store closure costs.
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 before goodwill and asset impairment charges, gain on change in value of warrant liability, interest expense (which includes non-cash interest on preferred stock and interest accretion on related party notes), income tax benefit (expense), depreciation and amortization expense, share-based compensation expense, pre-opening costs, employee retention credits and PPP loan gain, store closure costs and other, net, legal settlements, restructuring costs and, merger, acquisition and integration costs.
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 on a consolidated basis and by segment for the years ended:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Consolidated | BurgerFi | | Anthony's |
Year Ended (in thousands) | | January 2, 2023 | | December 31, 2021 | | January 2, 2023 | | December 31, 2021 | | January 2, 2023 | | December 31, 2021 |
Net Loss | | $ | (103,432) | | $ | (121,494) | | $ | (50,375) | | $ | (121,352) | | $ | (53,057) | | $ | (142) |
Goodwill and asset impairment charges | | 73,515 | | 114,797 | | 24,195 | | 114,797 | | 49,320 | | — |
Gain on change in value of warrant liability | | (2,511) | | (13,811) | | (2,511) | | (13,811) | | — | | — |
Interest expense | | 8,659 | | 1,406 | | 3,843 | | 673 | | 4,816 | | 733 |
Income tax (benefit) expense | | (95) | | 312 | | 240 | | 473 | | (335) | | (161) |
Depreciation and amortization expense | | 17,138 | | 10,060 | | 9,571 | | 8,694 | | 7,567 | | 1,366 |
Share-based compensation expense | | 10,239 | | 7,573 | | 10,239 | | 7,573 | | — | | — |
Pre-opening costs | | 474 | | 1,905 | | 474 | | 1,905 | | — | | — |
Employee retention credits/ PPP loan gain | | (2,626) | | (2,237) | | (2,626) | | (2,237) | | — | | — |
Store closure costs and other, net | | 1,934 | | 324 | | 1,899 | | 279 | | 35 | | 45 |
Legal settlements | | 1,623 | | 689 | | 1,588 | | 689 | | 35 | | — | |
Restructuring costs | | 1,459 | | — | | 696 | | — | | 763 | | — | |
Merger, acquisition, and integration costs | | 2,787 | | 4,275 | | 2,633 | | 4,119 | | 154 | | 156 | |
Adjusted EBITDA | | $ | 9,164 | | | $ | 3,799 | | | $ | (134) | | | $ | 1,802 | | | $ | 9,298 | | | $ | 1,997 | |
Liquidity and Capital Resources
Our primary sources of liquidity are cash from operations, cash and cash equivalents on hand. As of January 2, 2023, we maintained a cash and cash equivalents balance of approximately $11.9 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 remodels and maintenance as well as investments in our digital and corporate infrastructure. We estimate our capital expenditures will be approximately $1.0 million - $2.0 million for the year ending January 1, 2024 and primarily used for minor remodeling and equipment replacements in existing locations.
We have implemented, and may continue to further implement 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.
We currently believe we are 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 $11.9 million.
The following table presents the summary cash flow information for the periods indicated (in thousands):
| | | | | | | | | | | | | | |
| | Year Ended January 2, 2023 | | Year Ended December 31, 2021 |
Net cash (used in) provided by: | | | | |
Operating activities | | $ | 2,168 | | | $ | (7,467) | |
Investing activities | | (1,549) | | | (5,015) | |
Financing activities | | (3,591) | | | (13,012) | |
Net decrease in cash | | $ | (2,972) | | | $ | (25,494) | |
Cash Flows (Used in) Provided By Operating Activities
During the year ended January 2, 2023, cash flows (used in) provided by operating activities were approximately $2.2 million. The cash flows used in operating activities resulted from results of operations, non-cash items and changes in operating assets and liabilities.
Cash Flows Used in Investing Activities
During the year ended January 2, 2023, cash flows (used in) investing activities were approximately $1.5 million, which was primarily the result of constructing two stores, and minor remodel equipment replacements in existing locations of $2.5 million offset by $1.1 million of proceeds from sale of property & equipment in connection with the sale of three corporate-owned BurgerFi restaurants to franchisees.
Cash Flows Used in Financing Activities
During the year ended January 2, 2023, cash flows (used in) financing activities were approximately $3.6 million, which was primarily related to principal payments on borrowings of approximately $3.3 million.
Credit Agreement
On November 3, 2021, as part of the Anthony's acquisition, the Company joined a credit agreement with a syndicate of commercial banks (as amended, the "Credit Agreement"). The Credit Agreement, which was scheduled to terminate on June 15, 2024, provides the Company with lender financing structured as a $57.8 million term loan and a $4 million revolving loan. 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 incurred interest on outstanding amounts of 4.75% until December 31, 2022. Effective 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 (such amendment herein referred to as the “Twelfth Amendment”). Pursuant to the terms of the Twelfth Amendment, the Borrowers and Guarantors agreed to pay incremental deferred interest of 2% per annum, in the event that the obligations under the Credit Agreement were 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.
The Credit Agreement was further amended on December 7, 2022 (such amendment herein referred to as the “Thirteenth Amendment”) by amending certain covenants of the Credit Agreement and extending the maturity date from June 15, 2024 to September 30, 2025. The amendment also provided for periodic increases to the annual rate of interest changing the rate per annum to (1) 5.75% from January 1, 2023 through June 15, 2023; (2) 6.75% per annum from June 16, 2023 through December 31, 2023; (3) 7.25% per annum from January 1, 2024 through June 15, 2024; and (4) 7.75% per annum from and after June 16, 2024 through maturity. In addition, the 2% incremental deferred interest implemented on March 9, 2022 was reduced to 1% beginning January 3, 2023 and will be eliminated at December 31, 2023. In addition, the terms of the Thirteenth Amendment provided for additional increases to the interest rate by 0.5% commencing on January 1, 2024 through June 15, 2024 and by 0.5% on June 16, 2024 through maturity.
The terms of the Thirteenth Amendment also provided for a change in the timing of paying approximately $0.3 million of deferred interest payments previously scheduled to be paid on June 16, 2023, to be paid monthly from January to June 2023, while deferring the balance of deferred interest amount of approximately $1.3 million from June 15, 2023 to December 31, 2023. The Borrowers and Guarantors also agreed to obtain $5,000,000 in net cash proceeds from (x) a shelf registration and equity issuance by not later than January 2, 2023, or (y) issuance of unsecured subordinated debt by not later than January 30, 2023, referred to as the “Initial New Capital Infusion Covenant”.
Under the terms of the Thirteenth Amendment, certain modifications were made to the accounting definitions in the Credit Agreement to bring such definitions in line with Company practices and needs.
In addition, under the terms of the Thirteenth Amendment, the Borrowers and Guarantors agreed to reset their consolidated senior lease-adjusted leverage ratio and fixed charge coverage ratio as follows:
(a) maintain a quarterly consolidated senior lease-adjusted leverage ratio greater than (i) 7.00 to 1.00 as of the end of the fiscal quarter ending on or about December 31, 2022, (ii) 7.00 to 1.00 as of the end of the fiscal quarter ending on or about March 31, 2023, and (iii) 6.50 to 1.00 as of the end of the fiscal quarter ending on or about June 30, 2023 and the end of each fiscal quarter thereafter;
(b) maintain a quarterly minimum fixed charge coverage ratio of 1.10 to 1.00 as of the end of the fiscal quarter ending on or about December 31, 2022 and the end of each fiscal quarter thereafter; and
(c) the liquidity requirement of the Credit Agreement remains unchanged; provided, that in the event the Company has not received by January 2, 2023 at least $5,000,000 in net cash proceeds as a result of shelf registration and equity issuance then the required liquidity amount as of January 2, 2023 is reduced to $9,500,000.
The consolidated senior lease-adjusted leverage ratio, fixed charge coverage ratio and liquidity are computed in accordance with the Credit Agreement.
If upon delivery of the quarterly financial statements, the consolidated fixed charge coverage ratio as of the end of any fiscal quarter of the Company ending after January 2, 2023 was less than 1.15 to 1.00, then Borrowers and Guarantors agreed to engage a consulting firm to help with certain operational activities and other matters as reasonably determined; provided, that, if after delivery of the quarterly financial statements, (x) the consolidated fixed charge coverage ratio as of the end of each of the two prior consecutive fiscal quarters of Company was greater than 1.15 to 1.00, and (y) the consolidated senior lease-adjusted leverage ratio as of the end of each of the two prior consecutive fiscal quarters of Company was less than the correlative amount of the consolidated senior lease-adjusted leverage ratio required for the financial covenants for such fiscal quarters by 0.25 basis points or more, then retention of the consulting firm shall not be required during the following fiscal quarter.
On February 1, 2023, the Credit Agreement was further amended (such amendment herein referred to as the “Fourteenth Amendment”) to amend the Initial New Capital Infusion Covenant to provide that, not later than February 24, 2023, the Company will obtain $5,000,000 of new indebtedness through the Initial New Capital Infusion, and exchange $10,000,000 of existing debt from a delayed draw term loan, which was part of the Credit Agreement and provided by a related party and significant stockholder, for $10,000,000 in new junior subordinated secured debt, resulting in the Company holding $15,000,000 in junior subordinated secured debt on terms reasonably acceptable to the Required Lenders (as defined in the Credit Agreement), including without limitation, that (1) such indebtedness shall not mature until at least two (2) years after the maturity date of the credit facility of September 30, 2025; (2) no payments of cash interest shall be made on such indebtedness until after the repayment in full of the obligations under the Credit Agreement; and (3) no scheduled or voluntary payments of principal shall be made until after the repayment in full of the obligations under the Credit Agreement.
On February 24, 2023, the Credit Agreement was further amended (such amendment herein referred to as the “Fifteenth Amendment”), whereby, the Borrowers and the Guarantors were released from liability with respect to the Delayed Draw Term Loan in the amount of $10,000,000 under the Credit Agreement (the “Existing Loan”) in consideration of the continuation and amendment and restatement of the Existing Loan under the Note (as such term is defined below). We are in compliance with our financial covenants under the amended Credit Agreement as of February 24, 2023.
On February 24, 2023, the Borrowers also entered into the Note with the Junior Lender, pursuant to which the Junior Lender continued, amended and restated the Existing Loan of $10,000,000, which is junior subordinated secured indebtedness, and also provided $5,100,000 of new junior subordinated secured indebtedness, to the Borrowers (collectively, the “Junior Indebtedness”), which Junior Indebtedness was incurred outside of the Credit Agreement. See also Part III, Item 13 Certain Relationships and Related Transactions, and Director Independence.
The Junior Indebtedness, which accrues interest at 4% per annum (i) is secured by a second lien on substantially all of the assets of the Borrowers and the Guarantors pursuant to the terms of the Note and that certain Guaranty and Security Agreement, dated February 24, 2023, by and among the Guarantors and the Junior Lender, (ii) is subject to the terms of that certain Intercreditor and Subordination Agreement dated February 24, 2023, by and between the Administrative Agent and the Junior Lender and acknowledged by the Borrowers and the Guarantors, and (iii) matures on the date that is the second anniversary of the maturity date under the Credit Agreement (the “Junior Maturity Date”) (September 30, 2027, based on the maturity date under the Credit Agreement of September 30, 2025).
Under the terms of the Note, no payments of cash interest or payments of principal shall be due until the Junior Maturity Date, and no voluntary prepayments may be made on the Junior Indebtedness prior to the Junior Maturity Date until after the repayment in full of the obligations under the Credit Agreement.
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.
As of January 2, 2023 and December 31, 2021, the redeemable preferred stock accreted value was $51.4 million and $47.5 million, respectively and the redemption amount was $53.0 million. During the years ended January 2, 2023 and December 31, 2021, the Company recorded non-cash interest expense on the redeemable preferred stock in the amount of $3.9 million and $0.6 million respectively related to accretion of the preferred stock to its estimated redemption value.
On February 24, 2023, the Company filed the A&R CoD, which among other matters, added a provision providing that in the event the Company fails to timely redeem any shares of Series A Preferred Stock on November 3, 2027, the applicable dividend rate shall automatically increase to the lesser of (A) the sum of 10% plus the 2% applicable default rate (with such aggregate rate increasing by an additional 0.35% per quarter from and after November 3, 2027), or (B) the maximum rate that may be applied under applicable law, unless waived in writing by a majority of the outstanding shares of Series A Junior Preferred Stock.
The A&R CoD also added a provision providing that in the event of a Default, the Company agrees to promptly commence a debt or equity financing transaction or sale process to solicit proposals for the sale of the Company and its subsidiaries (or, alternatively, the sale of material assets) designed to yield the maximum cash proceeds to the Company available for redemption of the Series A Junior Preferred Stock as promptly as practicable, but in any event, within 12 months from the date of the Default. If on or after November 3, 2026, the Company is aware that it is reasonably unlikely to have sufficient cash to timely effect the redemption in full of the Series A Junior Preferred Stock when first due, the Company shall, prior to such anticipated due date, take reasonable steps to engage an investment banking firm of national standing (and other appropriate professionals) to conduct preparatory work for such a financing transaction and sale process of the Company and its subsidiaries to provide for such transaction to occur as promptly as possible after any failure for a timely redemption of the Series A Junior Preferred Stock.
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.
For further discussion of the A&R CoD, including certain board and governance rights included in the A&R CoD, please see Part I, Item 1A Risk Factors “We have significant stockholders whose interests may differ from those of our public stockholders.” and Part III, Item 10 Directors and Executive Officers.
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 at the end of the fourth quarter, 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 the 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 the Company’s future estimates vary adversely from those estimates used, the Company may be required to recognize impairment charges in future years. Refer to Note 5, “Impairment” and Note 13, “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 5, “Impairment” and Note 13, “Fair Value Measurements.”
•Warrant Liability
The fair value of our warrant liability is measured at fair value on a recurring basis, classified as Level 2 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 13, “Fair Value Measurements,” for further disclosure.
•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 4, “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 11, “Income Taxes,” for additional information.
New Accounting Pronouncements
See Note 1, “Organization and Summary of Significant Accounting Policies,” of the notes to the consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” for additional information about new accounting pronouncements.
Item 8. Financial Statements and Supplementary Data.
BURGERFI INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors
BurgerFi International, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of BurgerFi International, Inc. and subsidiaries (the Company) as of January 2, 2023 and the related consolidated statement of operations, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 2, 2023, and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
Change in Accounting Principle
As discussed in Note 10 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2022 due to the adoption of Accounting Standards Codification Topic 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. 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 audit 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 audit, 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 audit 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 audit 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 audit provides a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2022.
Miami, Florida
April 3, 2023
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 sheet of BurgerFi International, Inc. and Subsidiaries (the “Company”) as of December 31, 2021, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the year then ended 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 the results of its operations and its cash flows for the year ended December 31, 2021, 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 audit. 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 audit 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.
Our audit 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 audit 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 audit provides a reasonable basis for our opinion.
/s/ BDO USA, LLP
We served as the Company’s auditor from 2015 to 2022.
West Palm Beach, Florida
April 14, 2022
BurgerFi International Inc., and Subsidiaries
Consolidated Balance Sheets
| | | | | | | | | | | | | | |
(in thousands, except for per share data) | | January 2, 2023 | | December 31, 2021 |
Assets | | | | |
Current Assets | | | | |
Cash and cash equivalents | | $ | 11,917 | | | $ | 14,889 | |
Accounts receivable, net | | 1,766 | | | 1,689 | |
Inventory | | 1,320 | | | 1,387 | |
Asset held for sale | | 732 | | | 732 | |
Other current assets | | 2,724 | | | 2,526 | |
Total Current Assets | | 18,459 | | | 21,223 | |
Property & equipment, net | | 19,371 | | | 29,035 | |
Operating right-of-use assets, net | | 45,741 | | | — | |
Goodwill | | 31,621 | | | 98,000 | |
Intangible assets, net | | 160,208 | | | 168,723 | |
Other assets | | 1,380 | | | 738 | |
Total Assets | | $ | 276,780 | | | $ | 317,719 | |
Liabilities and Stockholders' Equity | | | | |
Current Liabilities | | | | |
Accounts payable - trade and other | | $ | 8,464 | | | $ | 7,841 | |
Accrued expenses | | 10,589 | | | 5,302 | |
Short-term operating lease liability | | 9,924 | | | — | |
Other liabilities | | 6,241 | | | 7,856 | |
Short-term borrowings | | 4,985 | | | 3,331 | |
Total Current Liabilities | | 40,203 | | | 24,330 | |
Non-Current Liabilities | | | | |
Long-term borrowings | | 53,794 | | | 56,797 | |
Redeemable preferred stock, $0.0001 par value, 10,000,000 shares authorized, 2,120,000 shares issued and outstanding, $53 million principal redemption value | | 51,418 | | | 47,525 | |
Long-term operating lease liability | | 40,748 | | | — | |
Related party note payable | | 9,235 | | | 8,724 | |
Warrant liability | | 195 | | | 2,706 | |
Other non-current liabilities | | 1,017 | | | 3,009 | |
Deferred income taxes | | 1,223 | | | 1,353 | |
Total Liabilities | | 197,833 | | | 144,444 | |
Commitments and Contingencies - Note 7 | | | | |
Stockholders' Equity | | | | |
Common stock, $0.0001 par value, 100,000,000 shares authorized, 22,257,772 and 21,303,500 shares issued and outstanding as of January 2, 2023 and December 31, 2021, respectively | | 2 | | | 2 | |
Additional paid-in capital | | 306,096 | | | 296,992 | |
Accumulated deficit | | (227,151) | | | (123,719) | |
Total Stockholders' Equity | | 78,947 | | | 173,275 | |
Total Liabilities and Stockholders' Equity | | $ | 276,780 | | | $ | 317,719 | |
See accompanying notes to consolidated financial statements.
BurgerFi International Inc., and Subsidiaries
Consolidated Statements of Operations
| | | | | | | | | | | | | | | |
(in thousands, except for per share data) | | Year Ended January 2, 2023 | | Year Ended December 31, 2021 | |
Revenue: | | | | | |
Restaurant sales | | $ | 167,201 | | | $ | 57,790 | | |
Royalty and other fees | | 9,733 | | | 9,090 | | |
Royalty - brand development and co-op | | 1,786 | | | 1,987 | | |
| | | | | |
Total Revenue | | 178,720 | | | 68,867 | | |
Restaurant level operating expenses: | | | | | |
Food, beverage and paper costs | | 48,487 | | | 17,153 | | |
Labor and related expenses | | 49,785 | | | 16,272 | | |
Other operating expenses | | 30,277 | | | 12,039 | | |
Occupancy and related expenses | | 15,607 | | | 4,940 | | |
General and administrative expenses | | 25,974 | | | 17,300 | | |
Depreciation and amortization expense | | 17,138 | | | 10,060 | | |
Share-based compensation expense | | 10,239 | | | 7,573 | | |
Brand development, co-op and advertising expense | | 3,870 | | | 2,462 | | |
Goodwill and intangible asset impairment | | 66,569 | | | 114,797 | | |
Asset impairment | | 6,946 | | | — | | |
Store closure costs | | 1,949 | | | — | | |
Restructuring costs | | 1,459 | | | — | | |
Pre-opening costs | | 474 | | | 1,905 | | |
Operating Loss | | (100,054) | | | (135,634) | | |
Other income, net | | 2,675 | | | 2,047 | | |
Gain on change in value of warrant liability | | 2,511 | | | 13,811 | | |
Interest expense, net | | (8,659) | | | (1,406) | | |
Loss before Income Taxes | | (103,527) | | | (121,182) | | |
Income tax benefit (expense) | | 95 | | | (312) | | |
Net Loss | | $ | (103,432) | | | $ | (121,494) | | |
| | | | | |
| | | | | |
| | | | | |
Weighted average common shares outstanding: | | | | | |
Basic | | 22,173,694 | | | 18,408,247 | | |
Diluted | | 22,173,694 | | | 18,624,447 | | |
| | | | | |
Net Loss per common share: | | | | | |
Basic | | $ | (4.66) | | | $ | (6.60) | | |
Diluted | | $ | (4.66) | | | $ | (7.20) | | |
| | | | | |
See accompanying notes to consolidated financial statements.
BurgerFi International Inc., and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total |
(in thousands, except for share data) | | Shares | | Amount | | | |
Balance at December 31, 2020 | | 17,541,838 | | | $ | 2 | | | $ | 261,298 | | | $ | (2,225) | | | $ | 259,075 | |
Share-based compensation | | — | | | — | | | 7,573 | | | — | | | 7,573 | |
Stock issued in acquisition of Anthony's | | 3,362,424 | | | — | | | 28,120 | | | — | | | 28,120 | |
Vested shares issued | | 107,500 | | | — | | | — | | | — | | | — | |
Shares issued for warrant exercises | | 8,069 | | | — | | | 1 | | | — | | | 1 | |
Exchange of unit purchase option units | | 283,669 | | | — | | | — | | | — | | | — | |
Net loss | | — | | | — | | | — | | | (121,494) | | | (121,494) | |
Balance, December 31, 2021 | | 21,303,500 | | 21,303,500 | | $ | 2 | | | $ | 296,992 | | | $ | (123,719) | | | $ | 173,275 | |
Share-based compensation | | — | | | — | | | 10,239 | | | — | | | 10,239 | |
Stock issued in acquisition of Anthony's1 | | 123,131 | | | — | | | — | | | — | | | — | |
Vested shares issued | | 1,001,532 | | | — | | | — | | | — | | | — | |
Shares withheld for taxes | | (170,391) | | | — | | | (1,135) | | | — | | | (1,135) | |
Net loss | | — | | | — | | | — | | | (103,432) | | | (103,432) | |
Balance, January 2, 2023 | | 22,257,772 | | | $ | 2 | | | $ | 306,096 | | | $ | (227,151) | | | $ | 78,947 | |
1Timing of share issuance differs from recognition of related financial statement dollar amounts.
See accompanying notes to consolidated financial statements.
BurgerFi International Inc., and Subsidiaries
Consolidated Statements of Cash Flows | | | | | | | | | | | | | | |
(in thousands) | | Year Ended January 2, 2023 | | Year Ended December 31, 2021 |
Cash Flows Provided By (Used In) Operating Activities | | | | |
Net loss | | $ | (103,432) | | | $ | (121,494) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities | | | | |
Goodwill and intangible asset impairment | | 66,569 | | | 114,797 | |
Asset impairment | | 6,946 | | | — | |
Gain on change in value of warrant liability | | (2,511) | | | (13,811) | |
Depreciation and amortization | | 17,138 | | | 10,060 | |
Share-based compensation | | 10,239 | | | 7,573 | |
Forfeited franchise deposits | | (1,481) | | | (834) | |
Deferred income taxes | | (130) | | | 312 | |
Non-cash interest | | 4,457 | | | 841 | |
Provision for bad debts | | 8 | | | 234 | |
Loss on disposal of property & equipment | | 38 | | | 203 | |
Non-cash store closure costs | | 661 | | | — | |
Non-cash lease cost | | 185 | | | — | |
Gain on extinguishment of debt | | — | | | (2,237) | |
Changes in operating assets and liabilities, net of acquisitions | | | | |
Accounts receivable | | (268) | | | (633) | |
Inventory | | 67 | | | (142) | |
Other assets | | (499) | | | 81 | |
Accounts payable - trade and other | | 224 | | | 303 | |
Accrued expenses | | 3,576 | | | (4,045) | |
Deferred rent | | — | | | 871 | |
Deferred revenue and other liabilities | | 381 | | | 454 | |
Cash Flows Provided By (Used In) Operating Activities | | 2,168 | | | (7,467) | |
Net Cash Flows From Investing Activities | | | | |
Purchase of property & equipment | | (2,517) | | | (10,665) | |
Cash acquired as part of the Anthony's acquisition | | — | | | 5,522 | |
Proceeds from the sale of property & equipment | | 1,087 | | | 80 | |
Other investing activities | | (119) | | | 48 | |
Net Cash Flows Used In Investing Activities | | (1,549) | | | (5,015) | |
Net Cash Flows From Financing Activities | | | | |
Proceeds from borrowings | | 1,500 | | | — | |
Payments on borrowings | | (3,339) | | | (12,168) | |
Payment of direct costs on issuance of common stock | | (1,089) | | | (844) | |
Debt issuance costs | | (486) | | | — | |
Repayments of finance leases | | (177) | | | — | |
Net Cash Flows Used In Financing Activities | | (3,591) | | | (13,012) | |
Net Decrease in Cash and Cash Equivalents | | (2,972) | | | (25,494) | |
Cash and Cash Equivalents, beginning of year | | 14,889 | | | 40,383 | |
Cash and Cash Equivalents, end of year | | $ | 11,917 | | | $ | 14,889 | |
| | | | |
Supplemental cash flow disclosures: | | | | |
Cash paid for interest | | $ | 2,884 | | | $ | 551 | |
Value of common stock issued in Anthony's acquisition | | $ | — | | | $ | 28,965 | |
Value of preferred stock issued in Anthony's acquisition | | $ | — | | | $ | 46,906 | |
Cash paid for income taxes | | $ | — | | | $ | 7 | |
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
1. Organization and Summary of Significant Accounting Policies
Organization
BurgerFi International, Inc. and its wholly owned subsidiaries (“BFI,” the “Company,” 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 and Saudi Arabia. As of January 2, 2023, the Company has 174 franchised and corporate-owned restaurants of the two following brands:
BurgerFi. BurgerFi is a fast-casual “better burger” concept with 114 franchised and corporate-owned restaurants as of January 2, 2023, 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 operated 60 corporate-owned casual restaurant locations, as of January 2, 2023. 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”) assuming the Company will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, during the third quarter of 2022, substantial doubt about the Company’s ability to continue as a going concern was raised due to uncertainty surrounding the Company’s ability to comply with its forecasted financial covenants. The going concern uncertainty was cured by the Credit Agreement, as amended on February 24, 2023. See Note 9, “Debt,” for additional disclosure surrounding the amended Credit Agreement.
On November 3, 2021, the Company 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 its consolidated financial statements as of the closing date of the acquisition.
On July 28, 2022, the Company's Board of Directors approved the change to a 52-53-week fiscal year ending on the Monday nearest to December 31 of each year in order to improve the alignment of financial and business processes following the acquisition of Anthony’s. With this change, the Company’s fiscal year 2022 ended on January 2, 2023. For the year ended December 31, 2021, the BurgerFi brand operated on a calendar year-end and Anthony's operated on a 52-53 week fiscal year ended 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.
Reclassifications
Certain current year amounts primarily in restaurant level operating expenses, general and administrative expenses and brand development, co-op and advertising expense have been reclassified within the consolidated statements of operations and are not comparable to the year ended December 31, 2021.
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.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
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 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
The Company 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 January 2, 2023 and December 31, 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Corporate-owned | Franchised | Total | | Corporate-owned | Franchised | Total |
Total BurgerFi and Anthony's | 85 | | 89 | | 174 | | | 86 | 93 | 179 |
| | | | | | | |
BurgerFi stores, beginning of year | 25 | | 93 | | 118 | | | 17 | | 102 | | 119 | |
BurgerFi stores opened | 3 | | 8 | | 11 | | | 10 | | 6 | | 16 | |
BurgerFi stores transferred/sold | (3) | | 3 | | — | | | (1) | | 1 | | — | |
BurgerFi stores closed | — | | (15) | | (15) | | | (1) | | (16) | | (17) | |
BurgerFi total stores, end of year | 25 | | 89 | | 114 | | | 25 | | 93 | | 118 | |
| | | | | | | |
Anthony's stores, beginning of period | 61 | | — | | 61 | | | — | | — | | — | |
Anthony's stores, acquired | — | | — | | — | | | 61 | | — | | 61 | |
Anthony's stores opened | — | | — | | — | | | — | | — | | — | |
Anthony's stores closed | (1) | | — | | (1) | | | — | | — | | — | |
Anthony's total stores, end of year | 60 | | — | | 60 | | | 61 | | — | | 61 | |
End of year store totals included one international store for both fiscal year’s ended January 2, 2023 and December 31, 2021, respectively.
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 $2.4 million and $1.1 million as of January 2, 2023 and December 31, 2021, 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.
Accounts Receivable, net
Accounts receivable consist of amounts due from vendors for rebates on purchases of goods and materials, 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 $0.2 million at January 2, 2023, and nominal at December 31, 2021.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
Employer Retention Tax Credits
The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27, 2020, made a number of changes to employer retention tax credits previously made available under The Coronavirus Aid, Relief, and Economic Security Act, including modifying and extending the Employee Retention Credit (“ERC”) for the six calendar months ending June 30, 2021. As a result of such legislation, the Company qualified for ERC for the first and second calendar quarters of 2021 and has applied for ERC through amended payroll tax filings for the applicable quarters. We recognized $2.6 million, net of third party preparation fees, in other income, net related to ERC in the Company's consolidated statements of operations for the year ended January 2, 2023 of which approximately $1.4 million had been collected as of January 2, 2023. As of January 2, 2023, the Company had $1.5 million included in other current assets on its consolidated balance sheets.
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 & Equipment, net
Property & 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 its 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, the Company may be monitoring a small number of locations, and future impairment charges could be required if individual restaurant performance does not improve or if the decision is made 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. Right of use assets are amortized based on the expected remaining term of the lease agreement which can range from 5 to 10 years at inception of the lease or renewal term. Refer to leases below for discussion of amortization of right of use assets.
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.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
The Company recorded an impairment charge of approximately $6.9 million during the year ended January 2, 2023, of which $3.1 million related to property & equipment and $3.8 million related to right-of-use assets included in asset impairment on our consolidated statements of operations. For the year ended December 31, 2021 the Company recorded an impairment charge of $8.3 million, of which $7.7 million related to licensing agreements and $0.6 million related to property & equipment included within goodwill and intangible asset impairment on the consolidated statements of operations. 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 through October 2023. Refer to Note 5, “Impairment” and Note 3, “Intangible Assets,” for additional information.
Goodwill and Indefinite-Lived Intangible Assets
The Company accounts for goodwill and indefinite-lived intangible assets in accordance with FASB ASC No. 350, Intangibles—Goodwill and Other (“ASC 350”). ASC 350 requires goodwill and indefinite-lived intangible assets to be reviewed for impairment annually, or more frequently if circumstances indicate a possible impairment. The Company evaluates goodwill at the end of the fourth quarter or more frequently if management believes indicators of impairment exist. Such indicators could include but are not limited to (1) changes in the Company’s business plans, (2) changing economic conditions including a potential decrease in the Company’s stock price and market capitalization, (3) a significant adverse change in legal factors or in business climate, (4) unanticipated competition, or (5) an adverse action or assessment by a regulator.
In evaluating goodwill, 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 the Company’s interim and annual goodwill impairment tests, it determined it was more likely than not that goodwill was impaired at the Anthony's and the BurgerFi reporting units. Accordingly, the Company recorded goodwill impairment charges of approximately $66.6 million during the year ended January 2, 2023. Refer to Note 5, “Impairment,” for additional information.
The estimated fair value of goodwill is subject to change as a result of many factors including, among others, any changes in the Company’s business plans, changing economic conditions, a potential decrease in its stock price and market capitalization, and the competitive environment. Should actual cash flows and the Company’s future estimates vary adversely from those estimates used, the Company may be required to recognize impairment charges in future years.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
The following table represents changes to the Company's goodwill during the year ended January 2, 2023 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | |
| | Reporting Unit |
(in thousands) | | BurgerFi | | Anthony's | | Total Goodwill |
Balance, December 31, 2020 | | $ | 119,542 | | | $ | — | | | $ | 119,542 | |
Goodwill acquired in connection with Anthony’s acquisition | | — | | | 80,495 | | | 80,495 | |
Adjustment to goodwill acquired | | 4,439 | | | — | | | 4,439 | |
Impairment Loss | | (106,476) | | | — | | | (106,476) | |
Balance, December 31, 2021 | | $ | 17,505 | | | $ | 80,495 | | | $ | 98,000 | |
Adjustment to goodwill acquired | | — | | | 190 | | | 190 | |
Impairment Loss | | (17,505) | | | (49,064) | | | (66,569) | |
Balance January 2, 2023 | | $ | — | | | $ | 31,621 | | | $ | 31,621 | |
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 Anthony’s acquisition, refer to Note 4, “Acquisitions.” As it relates to impairment of goodwill, refer to Note 5, “Impairment.”
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. The 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 to be greater than the carrying amount. If the Company elects 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, it tests 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. The Company’s 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.
The Company’s liquor licenses are considered to have an indefinite life with a value of $6.7 million for both years ended January 2, 2023 and December 31, 2021 and is included in intangible assets, net on our consolidated balance sheets. Refer to Note 3, “Intangible Assets,” for additional information.
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 years ended January 2, 2023 and December 31, 2021, the Company deferred $0.9 million and $1.0 million, respectively of financing costs in connection with its Credit Agreement. Amortization expense associated with deferred financing costs, which is included within interest expense, net, totaled $0.5 million for the year ended January 2, 2023 and $0.1 million for the year ended December 31, 2021. See Note 9, “Debt,” for additional information.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
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 the Company recognizes compensation expense over the requisite service period to the extent performance conditions are considered probable. Forfeitures are recognized as they occur. 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 the Monte Carlo simulation model is used. 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.
Restructuring Costs
Restructuring costs for the year ended January 2, 2023 of $1.5 million included $0.8 million in severance costs and other termination benefits related to the departure of certain members of the leadership team notified prior to January 2, 2023 and $0.7 million in professional fees and other costs incurred in connection with the Company’s Credit Facility requirements to raise additional capital or debt. See Note 9, “Debt,” for further discussion of the Company’s credit facilities and indebtedness. The Company expects restructuring costs to be settled from operating cash flows within the next 12 months.
Net Loss per Common Share
Net loss per common share is computed by dividing net loss 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, (2) 75,000 shares of common stock and warrants to purchase 75,000 shares of common stock in the unit purchase option, (3) 1,495,600 shares of restricted stock unit grants in the calculation of income per share, and (4) the impact of any dividends associated with its redeemable preferred stock and they have not been included in the calculation of net loss per common share as it would be anti-dilutive.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
Reconciliation of Net Loss per Common Share
Basic and diluted net loss per common share is calculated as follows:
| | | | | | | | | | | |
(in thousands, except for per share data) | Year Ended January 2, 2023 | | Year Ended December 31, 2021 |
Numerator: | | | |
Net loss available to common shareholders | $ | (103,432) | | | $ | (121,494) | |
Reversal of gain on change in value of warrant liability | $ | — | | | $ | (12,619) | |
Net loss available to common shareholders - diluted | $ | (103,432) | | | $ | (134,113) | |
| | | |
Denominator: | | | |
Weighted-average shares outstanding | 22,173,694 | | | 18,408,247 | |
Effect of dilutive securities | | | |
Warrants | — | | | 211,854 | |
UPOs | — | | | 4,346 | |
Diluted weighted-average shares outstanding | 22,173,694 | | | 18,624,447 | |
| | | |
Basic net loss per common share | $ | (4.66) | | | $ | (6.60) | |
Diluted net loss per common share | $ | (4.66) | | | $ | (7.20) | |
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 January 2, 2023, or for the year ended December 31, 2021. As of January 2, 2023, the Company had two main in-line distributors of food, packaging and beverage products that provided approximately 80% of the Company's restaurants purchasing of those products in the U.S. We believe that the Company’s vulnerability to risk concentrations related to significant vendors and sources of its raw materials is mitigated as it believes that there are other vendors who would be able to service its requirements. However, if a disruption of service from any of its main in-line distributors was to occur, the Company could experience short-term increases in its costs while distribution channels were adjusted.
The Company's restaurants are principally located throughout the United States. The Company has corporate-owned and franchised locations in 23 states, with the largest number in Florida. We believe the risk of geographic concentration is not significant. The Company could be adversely affected by changing consumer preferences resulting from concerns over nutritional or safety aspects of ingredients it sells 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 vendors for rebates, 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.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
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. 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 gift cards is included in unearned revenue when purchased by the customer and revenue is recognized when the gift cards are redeemed. Unearned revenues include liabilities established for the value of the gift cards when sold and are included in other current liabilities on the Company’s consolidated balance sheets. The Company estimates the amount of gift cards for which the likelihood of redemption is remote, referred to as “breakage,” using historical gift card redemption patterns. The estimated breakage is recognized over the expected period of redemption as the remaining gift card values are redeemed and is immaterial. If actual redemption patterns vary from these estimates, actual gift card breakage income may differ from the amounts recorded. Estimates of the redemption period and breakage rate applied are updated periodically.
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 commission is recorded as expense.
Franchise Revenue
The franchise agreements require the franchisee to pay an initial, non-refundable fee and continuing fees based upon a percentage of sales. Generally, payment for the initial franchise fee is received upon execution of the franchise 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.
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 the Company’s contracts, and represent symbolic intellectual property. Certain initial services such as training, 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 the costs to provide the service and a profit margin. On an annual basis, the Company performs a review to reevaluate the amount of this initial franchise fee revenue that is recognized.
The remainder of the transaction price is recognized over the remaining term of the franchise agreement once the BurgerFi restaurant has been opened. Because the Company transfers licenses to access its intellectual property during a contractual term, revenue is recognized on a straight-line basis over the license term.
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.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
Contract Balances
Opening and closing balances of contract liabilities and receivables from contracts with customers for the years ended January 2, 2023 and December 31, 2021 are as follows:
| | | | | | | | | | | |
(in thousands) | Year Ended January 2, 2023 | | Year Ended December 31, 2021 |
Franchising receivables | $ | 168 | | | $ | 212 | |
Gift card liability | $ | 1,847 | | | $ | 2,587 | |
Unearned revenue, current | $ | 84 | | | $ | 468 | |
Unearned revenue, long-term | $ | 1,008 | | | $ | 2,109 | |
Franchise Revenue
Revenue recognized during the years ended are as follows:
| | | | | | | | | | | |
(in thousands) | Year Ended January 2, 2023 | | Year Ended December 31, 2021 |
Franchise Fees | $ | 1,806 | | | $ | 1,069 | |
An analysis of unearned revenue is as follows:
| | | | | | | | | | | | | | |
(in thousands) | | January 2, 2023 | | December 31, 2021 |
Balance, beginning of period | | $ | 2,577 | | | $ | 3,306 | |
Initial/Transfer franchise fees received | | 364 | | | 290 | |
Revenue recognized for stores open and transfers during period | | (325) | | | (235) | |
Revenue recognized related to franchise agreement terminations | | (1,481) | | | (834) | |
Other unearned revenue (recognized) received | | (43) | | | 50 | |
Balance, end of period | | $ | 1,092 | | | $ | 2,577 | |
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 $1.0 million and $1.1 million at January 2, 2023 and December 31, 2021, 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 years ended January 2, 2023 and December 31, 2021 was $2.4 million and $0.9 million, respectively and are included in other operating expenses for specific store related advertising costs and brand development, co-op and advertising expense on the consolidated statements of operations. Anthony’s includes nine weeks of advertising costs in 2021 and a full year in 2022 as a result of the acquisition on November 3, 2021.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
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 January 2, 2023, the Company had brand development royalties of approximately $1.4 million and brand development expenses of approximately $1.8 million. For the year ended December 31, 2021, the Company had brand development royalties of approximately $1.5 million and approximately $1.7 million of brand development expenses.
Advertising Co-Op Royalties and Expenses
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 administering the advertising program. For the year ended January 2, 2023, the Company had advertising co-op royalties of approximately $0.4 million and advertising co-op expenses of approximately $0.8 million. For the year ended December 31, 2021, the Company had advertising co-op royalties of approximately $0.5 million and approximately $0.8 million of advertising co-op expenses.
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 the Company’s 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 years ended January 2, 2023 and December 31, 2021 were $0.5 million and $1.9 million, respectively.
Leases
The Company currently leases all of its corporate-owned restaurants, corporate offices, and certain equipment. The Company’s leases are accounted for under the requirements of ASC Topic 842, “Leases”, effective January 1, 2022.
Upon the possession of a leased asset, the Company determines its classification as an operating or finance lease. The Company's real estate leases are classified as operating leases, and the Company's equipment leases are classified as finance leases. Generally, the real estate leases have initial terms averaging 10 years and typically include two five-year renewal options. Renewal options are generally not recognized as part of the initial right-of-use assets and lease liabilities as it is not reasonably certain at commencement date that the Company would exercise the options to extend the lease. The real estate leases typically provide for fixed minimum rent payments or variable rent payments based on a percentage of monthly sales or annual changes to the Consumer Price Index. Fixed minimum rent payments are recognized on a straight-line basis over the lease term from the date the Company takes possession of the leased property. Lease expense incurred before a corporate-owned store opens is recorded in pre-opening costs in the consolidated statements of operations. Once a corporate-owned store opens, the straight-line lease expense is recorded in occupancy and related expenses in the consolidated statements of operations. Many of the leases also require the Company to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in occupancy and related expenses in the consolidated statements of operations. The Company from time to time enters into sublease agreements as lessor which are immaterial for the years ended January 2, 2023 and December 31, 2021. See Note 10, “Leases,” for further discussion.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
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.
The Company measures 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 had $0.2 million and $0.7 million unrecognized tax benefits at January 2, 2023 and December 31, 2021, respectively.
The Company accrues interest related to uncertain tax positions in “Interest expense” and penalties in “General and administrative expenses.” At January 2, 2023 and December 31, 2021, there were no amounts accrued for interest or 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 2019 fiscal year forward remain subject to examination.
New Accounting Pronouncements
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 was effective for the Company’s fiscal year beginning after January 3, 2023, including interim periods and will be applied prospectively to business combinations. It is not possible to determine the future impact of the application of this standard to future transactions.
2. Property & Equipment
Property & equipment consisted of the following:
| | | | | | | | | | | | | | |
(in thousands) | | January 2, 2023 | | December 31, 2021 |
Leasehold improvements | | $ | 17,029 | | | $ | 19,900 | |
Kitchen equipment and other equipment | | 8,196 | | | 7,810 | |
Computers and office equipment | | 1,468 | | | 1,425 | |
Furniture and fixtures | | 2,677 | | | 2,340 | |
Vehicles | | 37 | | | 88 | |
| | 29,407 | | | 31,563 | |
Less: Accumulated depreciation and amortization | | (10,036) | | | (2,528) | |
Property & equipment – net | | $ | 19,371 | | | $ | 29,035 | |
Depreciation expense for the years ended January 2, 2023 and December 31, 2021 was $8.7 million and $2.5 million.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
The Company's long-lived assets are reviewed for impairment annually and whenever there are triggering events that require us to perform this review. The Company recorded $3.1 million and $0.6 million of property & equipment impairment during the years ended January 2, 2023 and December 31, 2021, respectfully. Refer to Note 5, “Impairment,” for further discussion.
3. Intangible Assets
The following is a summary of the components of intangible assets and the related amortization expense:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | January 2, 2023 | | December 31, 2021 |
(in thousands) | | Amount | | Accumulated Amortization | | Net Carrying Value | | Amount | | Accumulated Amortization | | Net Carrying Value |
Franchise agreements | | $ | 24,839 | | | $ | 7,245 | | | $ | 17,594 | | | $ | 24,839 | | | $ | 3,696 | | | $ | 21,143 | |
Trade names / trademarks | | 143,726 | | | 8,010 | | | 135,716 | | | 143,750 | | | 3,220 | | | 140,530 | |
Liquor license | | 6,678 | | | — | | | 6,678 | | | 6,678 | | | — | | | 6,678 | |
License agreement | | 1,176 | | | 1,063 | | | 113 | | | 1,176 | | | 925 | | | 251 | |
VegeFi product | | 135 | | | 28 | | | 107 | | | 135 | | | 14 | | | 121 | |
| | $ | 176,554 | | | $ | 16,346 | | | $ | 160,208 | | | $ | 176,578 | | | $ | 7,855 | | | $ | 168,723 | |
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 a $7.7 million impairment charge for the year ended December 31, 2021, in relation to the Company's license agreement. No impairment charge was recorded for the year ended January 2, 2023 related to this license agreement. See Note 5 “Impairment,” for further information.
Amortization expense for the years ended January 2, 2023 and December 31, 2021 was $8.5 million and $7.6 million, respectively. The estimated aggregate amortization expense for intangible assets over the next five years ending January 2 and thereafter is as follows:
| | | | | |
(in thousands) | |
2023 | $ | 8,467 | |
2024 | 8,353 | |
2025 | 8,353 | |
2026 | 8,353 | |
2027 | 8,204 | |
Thereafter | 111,800 | |
Total | $ | 153,530 | |
4. Acquisitions
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.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
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 measurement period for such purchase price allocations ended on November 3, 2022 or twelve months from the date of acquisition and the allocation below is final.
| | | | | | | | |
(in thousands) | | Fair Value November 3, 2021 |
Cash | | $ | 5,522 | |
Accounts receivable | | 597 | |
Inventory | | 986 | |
Other current assets | | 1,662 | |
Property & 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 year ended December 31, 2021. 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 during the year ended December 31, 2021. Those costs were deducted from the recognized proceeds of issuance within stockholders’ equity.
During the year ended January 2, 2023, the Company adjusted its preliminary estimate of the fair value of net assets acquired by $0.2 millions. The adjustments to the preliminary estimate of net assets acquired resulted in a corresponding increase in estimated goodwill and include updates to estimates of provisional amounts recorded for certain accruals and receivables as of the Anthony's closing date.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
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 Anthony's acquisition had been included in the consolidated results of the Company for the entire year ending December 31, 2021:
| | | | | | | | | |
(in thousands) | | | Year Ended December 31, 2021 |
Revenue | | | $ | 168,906 | |
Net Loss | | | (138,490) | |
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, 2021, together with the consequential tax effects.
5. Impairment
The Company recognized a non-cash impairment charge of approximately $73.5 million during the year ended January 2, 2023 and $114.8 million for the year ended December 31, 2021. This consisted of the following:
| | | | | | | | | | | |
(in thousands) | Year Ended January 2, 2023 | | Year Ended December 31, 2021 |
Goodwill | $ | 66,569 | | | $ | 106,476 | |
Definite-lived intangible assets | — | | | 7,706 | |
Long-lived assets | 3,100 | | | 615 | |
Right-of-use assets | 3,846 | | | — | |
Total non-cash impairment charge | $ | 73,515 | | | $ | 114,797 | |
Based on the results of the Company’s interim and annual goodwill impairment tests, the Company determined it was more likely than not that goodwill was impaired for the Anthony's and BurgerFi reporting units. Accordingly, for the BurgerFi reporting unit the Company recorded goodwill impairment charges of approximately $17.5 million and $106.5 million for the years ended January 2, 2023 and December 31, 2021. We also recognized impairment charges for Anthony’s reporting unit’s goodwill for the year ended January 2, 2023 of $49.1 million. 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 its peers.
Based on the Company’s review at the end of each reporting period of its long-lived assets and definite-lived intangible assets, it performed impairment testing for the related asset group for which there are independently identifiable cash flows. Based on its impairment testing, the Company determined that certain long-lived assets relating to its right-of-use assets, and property & equipment at certain corporate-owned restaurants were impaired at the BurgerFi and Anthony’s reporting units, and accordingly, the Company recorded impairment charges of approximately $6.9 million for the year ended January 2, 2023. For the year ended December 31, 2021, the Company recorded impairment charges of approximately $7.7 million for the BurgerFi reporting unit and none for Anthony’s. 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.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
As it relates to determining the fair values of the assets impaired such as goodwill and definite lived intangible assets, refer to Note 13, “Fair Value Measurements.” The Company utilized the income approach to fair value it’s long-lived and right-of-use assets and based on the weight of unobservable inputs classifies their fair value measurements as level 3 of the fair value hierarchy.
6 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 was approximately $0.3 million and a nominal amount due from related companies as of January 2, 2023 and December 31, 2021.
For the years ended January 2, 2023 and December 31, 2021, the Company received royalty revenue from franchisees related to a significant shareholder totaling approximately $0.1 million and $0.3 million.
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 years ended January 2, 2023 and December 31, 2021, rent expense was approximately $0.1 million and $0.2 million. In January 2022, the Company exercised its right to terminate this North Palm Beach lease effective as of July 2022.
The Company leases building space for its new combined BurgerFi and Anthony’s corporate office from an entity controlled by Ophir Sternberg, its Executive Chairman. In February 2022, the Company amended the lease agreement to, among other things, (1) extend the term to ten years beginning March 1, 2022 expiring in 2032, and (2) expand its square footage from approximately 16,500 square feet to approximately 18,500 square feet. For the year ended January 2, 2023 rent expense was approximately $0.5 million.
In addition, in April 2021, the Company entered into an independent contractor agreement with a company (the “Consultant”) for which the Chief Operating Officer (the “Consultant Principal”) of Lionheart Capital, LLC, an entity controlled by Ophir Sternberg, the Executive Chairman of the Board, serves as President. Pursuant to the terms of the agreement, the Consultant Principal 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. For the years ended January 2, 2023 and December 31, 2021, the Consultant Principal received $0.1 million and a nominal amount of cash compensation and expense reimbursement for services provided in each year, respectively. In 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. In November 2021, the Consultant Principal received a $0.25 million bonus in connection with the Company's Anthony's Acquisition. As of January 2, 2023, 10,000 of these units vested. On January 3, 2022, the Company granted the Consultant Principal approximately 38,000 unrestricted shares of common stock of the Company. The Company recorded share-based compensation expense of $0.4 million and $0.2 million for the years ended January 2, 2023 and December 31, 2021, respectively.
On November 3, 2021, and as part of the Anthony's acquisition, the Company issued redeemable preferred stock and assumed certain liabilities, which were incurred from a related party and a significant shareholder. Refer to Note 8, “Redeemable Preferred Stock” and Note 9, “Debt,” for further discussion including recent amendments to these instruments executed subsequent to January 2, 2023,
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
7. Commitments and Contingencies
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 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 ongoing. In the event the transaction is terminated, the Company would resume 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 January 2, 2023 and December 31, 2021.
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 stockholders. Mr. Gilbert sought an amendment to the bylaws, as well as attorney’ fees and costs. On March 23, 2022, BurgerFi made conforming amendments to its bylaws to remove the provision restricting written consent by the stockholders. On March 24, 2022, the Court of Chancery entered a stipulated order pursuant to which plaintiff voluntarily dismissed the action with prejudice as to himself only. The Court of Chancery retained jurisdiction solely for the purpose of deciding the anticipated application of plaintiff’s counsel for an award of attorneys’ fees and reimbursement of expenses in connection with the corrective actions. The Company subsequently agreed to pay $150 thousand to plaintiff’s counsel for attorneys’ fees and expenses in full satisfaction of the claim for attorneys’ fees and expenses in the action and to finally settle the matter, which amount is included in accrued expenses in the accompanying consolidated balance sheets.
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 approximately $1.5 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 possible settlement, including turning over possession of the premises and payment of certain rent amounts 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, L.P.(“Lion Point”) v. BurgerFi International, Inc. (Supreme Court of the State of New York County of New York, Index No. 653099/2022, filed August 26, 2022. A lawsuit filed by Lion Point against the Company, alleging that the Company failed to timely register Lion Point’s shares in violation of the registration rights agreement to which Lion Point is a party, which allegedly resulted in losses in excess of $26 million. In November 2022, as amended in February 2023, the Company filed its answer to the complaint and continues to believe that all claims are meritless and plans 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 cases described above, therefore, no contingent liability has been recorded as of January 2, 2023; 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 January 2, 2023 and December 31, 2021
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 $10 million relating to BurgerFi’s alleged failure to timely file a registration rights agreement. The parties entered into a settlement agreement on January 11, 2023, whereby (i) the Company agreed to pay Mr. Rosatti $0.5 million in cash and issue him 200,000 shares of BFI common stock and, (ii) Mr. Rosatti agreed to transfer the assets and liabilities of the five former JR Trust stores to the Company. This settlement agreement, which the Company values on a net basis to be approximately $0.8 million of value transferred to Mr. Rosatti, resolved all remaining disputes between the parties, and Mr. Rosatti withdrew the related lawsuits against the Company.
Burger Guys of Dania Pointe, et. al. v. BFI, LLC (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 BurgerFi 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 filed suit against BurgerFi claiming, in addition to other matters, that no further monies are owed under the asset purchase agreement and alleges that the Company is responsible for one of Mr. 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. The parties attended mediation on January 20, 2022, which ended in an impasse. Mr. Gargiulo amended his complaint in April 2022, which, among other matters, amended the defendant parties. In October 2022, the Company filed an additional motion to dismiss the amended complaint and a motion to stay discovery. In January 2023, Mr. Gargiulo filed a third amended complaint. In March 2023, the Company filed an answer to Mr. Gargiulo’s complaint and a counterclaim against Mr. Gargiulo relating to the breach of the asset purchase agreement discussed above. The matter is scheduled for trial in the second half of 2023. We believe that all Mr. Gargiulo claims are meritless, and the Company plans 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 cases described above, therefore, no contingent liability has been recorded as of January 2, 2023; any losses, however, may be material to the Company's financial position and results of operations.
All Round Food Bakery Products, Inc. v. BurgerFi International, LLC and Neri’s Bakery Products, Inc. et al (Supreme Court Westchester County, New York (Index Number 52170-2020)). In a suit filed in February 2020, the plaintiff, All Round Food Bakery Products, Inc. (“All Round Food”) alleges breach of contract and lost profits in excess of $1 million over the course of the supply agreement with the Company and Neri’s Bakery Products, Inc. (“Neri’s” and together with the Company, the “Defendants”). The Defendants assert, among other matters, that the supply agreement amongst the parties, whereby All Round Food was warehousing BurgerFi products produced by Neri’s, was terminated when All Round Food failed to cure its material breach of the supply agreement after due notice. The parties attended mediation to attempt to resolve the dispute, however, no resolution was reached. The parties have been ordered to attend an additional mediation on March 22, 2023. We believe that all claims are meritless, and the Company plans 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 cases described above, therefore, no contingent liability has been recorded as of January 2, 2023; 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 its now former hourly restaurant employees. The letter alleges that the former employee was sexually harassed by one of her co-workers. The demand letter claims that the Company 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. While the Company entered into a partial settlement with the former employee in December 2022 for a de minimus cash amount relating solely to the discrimination claim, the other claims remain.
While the Company believes that all claims of the above mentioned Employment Related Claims, which are covered under the Company’s insurance policies, are meritless, and it plans 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.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
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, slip and fall cases, and various food related matters. While it intends to vigorously defend these matters, it is reasonably possible that the Company may be required to pay substantial damages to the claimants. 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.
Purchase Commitments
From time to time, the Company enters into purchase commitments for food commodities in the normal course of business. As of January 2, 2023, it has entered into $3.1 million in conditional purchase obligations over the next 12 months.
8. 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% 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% per annum, compounded quarterly, until June 15, 2024.
As of January 2, 2023 and December 31, 2021, the value of the redeemable preferred stock was $51.4 million and $47.5 million, respectively and the principal redemption amount was $53.0 million. During the years ended January 2, 2023 and December 31, 2021, the Company recorded non-cash interest expense on the redeemable preferred stock in the amount of $3.9 million and $0.6 million respectively related to accretion of the preferred stock to its estimated redemption value.
On February 24, 2023, the Company filed an amended and restated certificate of designation, (the “A&R CoD”), which among other matters, added a provision providing that in the event the Company fails to timely redeem any shares of Series A Preferred Stock on November 3, 2027, the applicable dividend rate shall automatically increase to the lesser of (A) the sum of 10% plus the 2% applicable default rate (with such aggregate rate increasing by an additional 0.35% per quarter from and after November 3, 2027), or (B) the maximum rate that may be applied under applicable law, unless waived in writing by a majority of the outstanding shares of Series A Junior Preferred Stock.
The A&R CoD also added a provision providing that in the event the Company fails to timely redeem any shares of Series A Junior Preferred Stock in connection with a Qualified Financing (as defined in the A&R CoD) on November 3, 2027 (a “Default”), the Company agrees to promptly commence a debt or equity financing transaction or sale process to solicit proposals for the sale of the Company and its subsidiaries (or, alternatively, the sale of material assets) designed to yield the maximum cash proceeds to the Company available for redemption of the Series A Junior Preferred Stock as promptly as practicable, but in any event, within 12 months from the date of the Default. If on or after November 3, 2026, the Company is aware that it is reasonably unlikely to have sufficient cash to timely effect the redemption in full of the Series A Junior Preferred Stock when first due, the Company shall, prior to such anticipated due date, take reasonable steps to engage an investment banking firm of national standing (and other appropriate professionals) to conduct preparatory work for such a financing transaction and sale process of the Company and its subsidiaries to provide for such transaction to occur as promptly as possible after any failure for a timely redemption of the Series A Junior Preferred Stock.
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.
For further discussion of the A&R CoD, including certain board and governance rights included in the A&R CoD, please see Part I, Item 1A Risk Factors “We have significant stockholders whose interests may differ from those of our public stockholders.” and Part III, Item 10 Directors and Executive Officers.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
9. Debt | | | | | | | | | | | |
(in thousands) | January 2, 2023 | | December 31, 2021 |
Term loan | $ | 54,507 | | | $ | 57,761 | |
Related party note payable | 10,000 | | | 10,000 | |
Revolving line of credit | 4,000 | | | 2,500 | |
Other notes payable | 780 | | | 874 | |
Finance lease liability | 933 | | | — | |
Total Debt | $ | 70,220 | | | $ | 71,135 | |
Less: Unamortized debt discount to related party note | (765) | | | (1,276) | |
Less: Unamortized debt issuance costs | (1,441) | | | (1,007) | |
Total Debt, net | 68,014 | | | 68,852 | |
Less: Short-term borrowings, including finance leases | (4,985) | | | (3,331) | |
Total Long-term borrowings, including finance leases and related party note | $ | 63,029 | | | $ | 65,521 | |
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
Credit Agreement
On November 3, 2021, as further amended as described below and as part of the Anthony’s acquisition, the Company joined a credit agreement with a syndicate of commercial banks (as amended, the “Credit Agreement”). The Credit Agreement, which was scheduled to terminate on June 15, 2024, provides the Company with lender financing structured as a $57.8 million term loan and a $4.0 million revolving loan. 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 incurred interest on outstanding amounts of 4.75% until December 31, 2022.
Effective 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 (such amendment herein referred to as the “Twelfth Amendment”). Pursuant to the terms of the Twelfth Amendment, the Borrowers and Guarantors agreed to pay incremental deferred interest of 2% per annum, in the event that the obligations under the Credit Agreement were 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.
The Credit Agreement was further amended on December 7, 2022 (such amendment herein referred to as the “Thirteenth Amendment”) by amending certain covenants of the Credit Agreement and extending the maturity date from June 15, 2024 to September 30, 2025. The amendment also provided for periodic increases to the annual rate of interest changing the rate per annum to (1) 5.75% from January 1, 2023 through June 15, 2023; (2) 6.75%per annum from June 16, 2023 through December 31, 2023; (3) 7.25% per annum from January 1, 2024 through June 15, 2024; and (4) 7.75% per annum from and after June 16, 2024 through maturity. In addition, the 2% incremental deferred interest implemented on March 9, 2022 was reduced to 1% beginning January 3, 2023 and will be eliminated at December 31, 2023.
The terms of the Thirteenth Amendment also provided for a change in the timing of paying approximately $0.3 million of deferred interest payments previously scheduled to be paid on June 16, 2023 to be paid monthly from January to June 2023, while deferring the balance of deferred interest amount of approximately $1.3 million from June 15, 2023 to December 31, 2023. The Borrowers and Guarantors also agreed to obtain $5,000,000 in net cash proceeds from (x) a shelf registration and equity issuance by not later than January 2, 2023, or (y) issuance of unsecured subordinated debt by not later than January 30, 2023, referred to as the “Initial New Capital Infusion Covenant”.
Under the terms of the Thirteenth Amendment, certain modifications were made to the accounting definitions in the Credit Agreement to bring such definitions in line with Company practices and needs.
In addition, under the terms of the Thirteenth Amendment, the Borrowers and Guarantors agreed to reset their consolidated senior lease-adjusted leverage ratio and fixed charge coverage ratio as follows:
(a) maintain a quarterly consolidated senior lease-adjusted leverage ratio greater than (i) 7.00to 1.00 as of the end of the fiscal quarter ending on or about December 31, 2022, (ii) 7.00 to 1.00 as of the end of the fiscal quarter ending on or about March 31, 2023, and (iii) 6.50 to 1.00 as of the end of the fiscal quarter ending on or about June 30, 2023 and the end of each fiscal quarter thereafter;
(b) maintain a quarterly minimum fixed charge coverage ratio of 1.10 to 1.00 as of the end of the fiscal quarter ending on or about December 31, 2022 and the end of each fiscal quarter thereafter; and
(c) the liquidity requirement of the Credit Agreement remains unchanged; provided, that in the event the Company has not received by January 2, 2023 at least $5,000,000 in net cash proceeds as a result of shelf registration and equity issuance then the required liquidity amount as of January 2, 2023 is reduced to $9,500,000.
The consolidated senior lease-adjusted leverage ratio, fixed charge coverage ratio and liquidity are computed in accordance with the Credit Agreement.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
If upon delivery of the quarterly financial statements, the consolidated fixed charge coverage ratio as of the end of any fiscal quarter of the Company ending after January 2, 2023 was less than 1.15 to 1.00, then Borrowers and Guarantors agreed to engage a consulting firm to help with certain operational activities and other matters as reasonably determined by the lenders; provided, that, if after delivery of the quarterly financial statements, (x) the consolidated fixed charge coverage ratio as of the end of each of the two prior consecutive fiscal quarters of the Company was greater than 1.15 to 1.00, and (y) the consolidated senior lease-adjusted leverage ratio as of the end of each of the two prior consecutive fiscal quarters of the Company was less than the correlative amount of the consolidated senior lease-adjusted leverage ratio required for the financial covenants for such fiscal quarters by 0.25 basis points or more, then retention of the consulting firm shall not be required during the following fiscal quarter.
The terms of the amended 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 | | |
2023 | | $ | 3,254 | |
2024 | | 3,254 |
2025 | | 47,999 |
Total | | 54,507 |
The Delayed Draw Term Loan Facility is a non-interest bearing loan and accordingly was recorded at fair value as part of the Anthony’s acquisition 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 years ended January 2, 2023 and December 31, 2021, the Company recorded $0.5 million and $0.1 million, respectively as amortization of the debt discount which is included within interest expense in the accompanying consolidated statements of operations. The Company had $9.2 million outstanding under the Delayed Draw Term Loan Facility as of January 2, 2023 included in related party note payable in the consolidated balance sheets.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
On February 1, 2023, the Credit Agreement was further amended through the Fourteenth Amendment to amend the Initial New Capital Infusion Covenant to provide that, not later than February 24, 2023, the Company will obtain $5,000,000 of new indebtedness through the Initial New Capital Infusion, and exchange $10,000,000 of existing debt from delayed draw term loan, which was part of the Credit Agreement and provided by a related party and significant stockholder, for $10,000,000 in new junior subordinated secured debt, resulting in the Company holding $15,000,000 in junior subordinated secured debt on terms reasonably acceptable to the Required Lenders (as defined in the Credit Agreement),including , without limitation, that (1) such indebtedness shall not mature until at least two (2) years after the maturity date of the credit facility of September 30, 2025; (2) no payments of cash interest shall be made on such indebtedness until after the repayment in full of the obligations under the Credit Agreement; and (3) no scheduled or voluntary payments of principal shall be made until after the repayment in full of the obligations under the Credit Agreement.
On February 24, 2023, the Credit Agreement was further amended through Fifteenth Amendment, whereby, the Borrowers and the Guarantors were released from liability with respect to the Delayed Draw Term Loan in the amount of $10,000,000 under the Credit Agreement (the “Existing Loan”) in consideration of the continuation and amendment and restatement of the Existing Loan under the Note (as such term is defined below). The Company was in compliance with its financial covenants under the amended Credit Agreement as of January 2, 2023.
On February 24, 2023, the Borrowers entered into the Note with Junior Lender, pursuant to which the Junior Lender continued, amended and restated the Existing Loan of $10,000,000, which is junior subordinated secured indebtedness, and also provided $5,100,000 of new junior subordinated secured indebtedness, to the Borrowers (collectively, the “Junior Indebtedness”), which Junior Indebtedness was incurred outside of the Credit Agreement. See also Part III, Item 13 Certain Relationships and Related Transactions, and Director Independence.
The Junior Indebtedness, which accrues interest at 4% per annum (i) is secured by a second lien on substantially all of the assets of the Borrowers and the Guarantors pursuant to the terms of the Note and that certain Guaranty and Security Agreement, dated February 24, 2023, by and among the Guarantors and the Junior Lender, (ii) is subject to the terms of that certain Intercreditor and Subordination Agreement dated February 24, 2023, by and between the Administrative Agent and the Junior Lender and acknowledged by the Borrowers and the Guarantors, and (iii) matures on the date that is the second anniversary of the maturity date under the Credit Agreement (the “Junior Maturity Date”) (September 30, 2027, based on the maturity date under the Credit Agreement of September 30, 2025).
Under the terms of the Note, no payments of cash interest or payments of principal shall be due until the Junior Maturity Date, and no voluntary prepayments may be made on the Junior Indebtedness prior to the Junior Maturity Date until after the repayment in full of the obligations under the Credit Agreement.
The loan and revolving line of credit are secured by substantially all of the Company’s assets and incur interest on outstanding amounts at the following rates per annum through maturity:
| | | | | |
Time Period | Interest Rate |
Through December 31, 2022 | 6.75 | % |
From January 1, 2023 through June 15 2023 | 6.75 | % |
From June 16, 2023 through December 31, 2023 | 6.75 | % |
From January 1, 2024 through June 15, 2024 | 7.25 | % |
From June 16, 2024 through maturity | 7.75 | % |
For the years ended January 2, 2023 and December 31, 2021, the Company deferred $0.9 million and $1.0 million respectively of financing costs in connection with Credit Agreement. Amortization expense associated with deferred financing costs, in the amounts of $0.5 million for the year ended January 2, 2023 and $0.1 million, for the year ended December 31, 2021 is included in interest expense in the accompanying consolidated statements of operations.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
Other Notes Payable
Other notes 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.
PPP Loans
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 PPP and received the proper loan amount. The timing and outcome of any SBA review is not known.
10. Leases
The Company has entered into various lease agreements. For the years ended January 2, 2023 and December 31, 2021, rent expense was approximately $16.2 million and $5.2 million, respectively. The Company’s lease agreements expire on various dates through 2032 and have renewal options.
On January 1, 2022, the Company adopted ASU 2016-02. Results for reporting periods beginning on or after January 1, 2022 are presented under Accounting Standards Codification Topic 842 (“ASC 842”). Prior period amounts were not revised and continue to be reported in accordance with ASC Topic 840, the accounting standard then in effect.
Upon transition, on January 1, 2022, the Company recorded the following increases (decreases) to the respective line items on the Condensed Consolidated Balance Sheet:
| | | | | |
(in thousands) | Adjustment as of January 2, 2022 |
Prepaid expenses | $ | (773) | |
Operating right-of-use asset, net | 57,385 | |
Finance right-of-use asset, net | 855 | |
Deferred rent | (900) | |
Short-term operating lease liability | 9,457 | |
Short-term finance lease liability | 143 | |
Long-term operating lease liability | 49,149 | |
Long-term finance lease liability | 712 | |
A summary of finance and operating lease right-of-use assets and liabilities as of January 2, 2023 is as follows:
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
| | | | | | | | | | | |
(in thousands) | Classification | | Year Ended January 2, 2023 |
Operating leases | Operating right-of-use asset, net | | $ | 45,741 | |
Finance leases | Property & equipment, net | | 852 | |
Total right-of-use assets | | | $ | 46,593 | |
| | | |
Operating leases: | | | |
| Short-term operating lease liability | | $ | 9,924 | |
| Long-term operating lease liability | | 40,748 | |
Finance leases: | | | |
| Short-term borrowings, including finance leases | | 150 | |
| Long-term borrowings, including finance leases | | 783 | |
Total lease liabilities | | | $ | 51,604 | |
The components of lease expense for the year ended January 2, 2023 is as follows:
| | | | | | | | |
(in thousands) | Classification | Year Ended January 2, 2023 |
Operating lease cost | Occupancy and related expenses Pre-opening costs Store closure costs | $ | 12,969 | |
Operating lease impairment | Asset impairment | 3,846 |
| | |
Finance lease cost: | | |
Amortization of right-of-use assets | Depreciation and amortization expense | 258 | |
Interest on lease liabilities | Interest expense | 63 | |
| | |
Less: Sublease income | Occupancy and related expenses | (194) | |
Total lease cost | | $ | 16,942 | |
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
The maturity of the Company's operating and finance lease liabilities as of January 2, 2023 is as follows:
| | | | | | | | | | | |
(in thousands) | Operating Leases | | Finance Leases |
2023 | $ | 12,653 | | | $ | 200 | |
2024 | 11,040 | | | 184 | |
2025 | 9,544 | | | 170 | |
2026 | 7,728 | | | 159 | |
2027 | 6,318 | | | 152 | |
2028 and thereafter | 13,442 | | | 253 | |
Total undiscounted lease payments | 60,726 | | | 1,118 | |
Less: present value adjustment | (10,054) | | | (185) | |
Total net lease liabilities | $ | 50,672 | | | $ | 933 | |
As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date of the lease in determining the present value of lease payments. The Company gives consideration to its recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating its incremental borrowing rates.
A summary of lease terms and discount rates for finance and operating leases is as follows:
| | | | | |
| Year Ended January 2, 2023 |
|
Weighted-average remaining lease term (in years): | |
Operating leases | 6.02 years |
Finance leases | 6.30 years |
Weighted-average discount rate: | |
Operating leases | 6.0 | % |
Finance leases | 6.1 | % |
11. Income Taxes
The provision for (benefit) from income taxes is set forth below:
| | | | | | | | | | | |
(in thousands) | January 2, 2023 | | December 31, 2021 |
Current: | | | |
U.S. Federal | $ | — | | | $ | — | |
State | 35 | | | — | |
Total current income tax expense | 35 | | | — | |
Deferred: | | | |
U.S. Federal | (10,002) | | | (7,833) | |
State | (1,469) | | | (2,192) | |
Total deferred income tax benefit | (11,471) | | | (10,025) | |
Valuation allowance | 11,341 | | | 10,337 | |
| (130) | | | 312 | |
Income tax (benefit) expense | $ | (95) | | | $ | 312 | |
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
The reconciliation of income tax computed at the U.S. federal statutory rate of 21% to the Company’s effective tax rate is set forth below:
| | | | | | | | | | | |
(in thousands) | January 2, 2023 | | December 31, 2021 |
Income tax provision at the U.S. federal statutory rate | $ | (21,741) | | | $ | (25,407) | |
Permanent differences | 870 | | | 402 | |
Share-based compensation | (463) | | | 496 | |
State income taxes, net of federal benefit | (1,640) | | | (1,888) | |
Change in warrant liability | (527) | | | (2,900) | |
Goodwill impairment | 11,471 | | | 19,820 | |
True-up | 1,983 | | | 42 | |
Change in valuation allowance | 11,342 | | | 10,337 | |
Change in rate | (249) | | | (406) | |
Tax credits | (1,141) | | | (184) | |
Total income tax (benefit) expense | $ | (95) | | | $ | 312 | |
The components of the Company's deferred tax liabilities at January 2, 2023 and December 31, 2021 are set forth below:
| | | | | | | | | | | |
(in thousands) | January 2, 2023 | | December 31, 2021 |
Deferred tax assets (liabilities): | | | |
Allowance for doubtful accounts | $ | 40 | | | $ | 57 | |
Goodwill | 4,625 | | | 2,794 | |
Fixed Assets | 2,164 | | | — | |
Deferred franchise fees | 277 | | | 684 | |
Deferred rent | — | | | 239 | |
Stock compensation | 1,730 | | | 1,250 | |
Net operating losses, Federal | 13,649 | | | 11,215 | |
Net operating losses, State | 2,691 | | | 2,066 | |
Deferred payroll taxes | — | | | 217 | |
Interest expense | 5,351 | | | 3,540 | |
Lease liability | 13,104 | | | — | |
Tax credits | 1,854 | | | 713 | |
Other | 1,599 | | | 1,075 | |
Gross deferred tax assets | 47,084 | | | 23,850 | |
Valuation allowance | (22,629) | | | (11,383) | |
Net deferred tax assets | 24,455 | | | 12,467 | |
Intangible assets | (13,878) | | | (13,300) | |
Lease ROU asset | (11,800) | | | — | |
Fixed assets | — | | | (520) | |
Deferred tax liabilities | (25,678) | | | (13,820) | |
Total net deferred tax (liabilities) assets | $ | (1,223) | | | $ | (1,353) | |
| | | |
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
As of January 2, 2023, the Company’s federal net operating loss carryforwards for income tax purposes was $64.9 million. On a tax-effected basis, the Company also had net operating losses of $2.7 million related to various state jurisdictions. $55.4 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 Internal Revenue Code of 1986, as amended, 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 $22.6 million has been recorded against the deferred tax asset.
The following table summarizes the Company's unrecognized tax benefits at January 2, 2023 and December 31, 2021:
| | | | | | | | | | | |
(in thousands) | January 2, 2023 | | December 31, 2021 |
Beginning balance | $ | 660 | | | $ | — | |
Additions based on tax positions related to the current year | — | | | — | |
Additions for tax positions of prior years | — | | | 660 | |
Reductions for positions of prior years | (431) | | | — | |
Ending balance | $ | 229 | | | $ | 660 | |
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 2019 fiscal year forward remain subject to examination.
12. 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 January 2, 2023 and December 31, 2021, there were 22,257,772 shares and 21,303,500 shares of common stock outstanding, respectively.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
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.
As of January 2, 2023 and December 31, 2021 there were 2,120,000 shares of preferred stock outstanding. See Note 8, “Redeemable Preferred Stock,” for further information.
Warrants
As of January 2, 2023 and 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. There were no warrants exercised during the year ended January 2, 2023.
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;
•upon a minimum of 30 days' prior written notice of redemption;
•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; and
•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.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
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 had 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 could have been exercised for cash or on a cashless basis, at the holder’s option, however, it expired on on March 17, 2023 without being exercised. There were no UPO exchanges during the year ended January 2, 2023. 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.
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 31st 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. On January 5, 2023, the Company filed a Registration Statement with the SEC to register 1,112,889 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 January 2, 2023 and December 31, 2021, there were approximately 600,000 and 126,000 shares of common stock available for future grants under the 2020 Plan, respectively.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
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 grant 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 the year ended January 2, 2023:
| | | | | | | | | | | |
| Number of Restricted Stock Units | | Weighted Average Grant Date Fair Value |
Non-vested at December 31, 2021 | 1,783,698 | | | $ | 14.18 | |
Granted | 587,847 | | | 4.55 | |
Vested | (477,799) | | | 13.08 | |
Forfeited | (448,146) | | | 10.85 | |
Non-vested at January 2, 2023 | 1,445,600 | | | $ | 11.68 | |
Share-based compensation recognized during the year ended January 2, 2023 was approximately $10.2 million, inclusive of restricted stock unit grants of $6.4 million and stock grants of $3.9 million. Share-based compensation recognized during the year ended December 31, 2021 was approximately $7.6 million, comprised of restricted stock unit grants. As of January 2, 2023, there was approximately $11.9 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 1.3 to 2.8 years.
The unrecognized portion of share-based compensation for unvested market condition restricted stock units (included in above) is approximately $0.5 million over 1.28 years. As detailed below, the fair value of the market condition restricted stock units was determined using a Monte Carlo simulation model.
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 January 2, 2023. Accordingly, the Company recognized share-based compensation expense of approximately $3.7 million in relation to these awards during the year ended January 2, 2023 and $4.6 million 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 the Company’s common stock on the date of grant. In January 2022 and July 2021, the Company modified the terms related to certain market condition awards that the Compensation Committee previously approved. As a result of these modifications, the Company recorded additional share-based compensation of $0.2 million during the year ended January 2, 2023 and $0.1 million for the year ended December 31, 2021 for these modifications.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
The input variables are noted in the table below:
| | | | | | | | | | | |
| Year Ended January 2, 2023 | | Year Ended December 31, 2021 |
Risk-free interest rate | 0.4% - 4.1% | | 1.03 | % |
Expected life in years | 2.0 years | | 3.0 years |
Expected volatility | 57.3% - 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 derived service period and is not reversed, except for forfeitures, at the vesting date regardless of whether the market condition is met. During the years ended January 2, 2023 and December 31, 2021, $0.6 million and $1.5 million, 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 its common stock on the grant date. During the years ended January 2, 2023 and December 31, 2021, $2.1 million and $1.3 million, respectively, was recognized ratably as share-based compensation expense for the service-based awards.
The following table summarizes activity of the restricted stock units during the year ended January 2, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2021 | 1,251,698 | | | $ | 15.15 | | | 252,000 | | | $ | 15.79 | | | 280,000 | | | $ | 8.42 | |
Granted | 282,000 | | | 4.12 | | 115,847 | | | 6.26 | | 190,000 | | | 4.13 |
Vested | (241,952) | | | 15.14 | | | (205,847) | | | 11.33 | | | (30,000) | | | 8.41 | |
Forfeited | (240,646) | | | 13.14 | | | — | | | — | | | (207,500) | | | 8.20 | |
Non-vested at January 2, 2023 | 1,051,100 | | | $ | 12.62 | | | 162,000 | | | $ | 14.65 | | | 232,500 | | | $ | 5.34 | |
13. 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 January 2, 2023 and December 31, 2021.
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
| | | | | | | | | | | |
| Items Measured at Fair Value at January 2, 2023 |
(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 | — | | 195 | | — | |
Total | $ | — | | $ | 195 | | $ | — | |
| | | |
| 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) |
Warrant liability | — | | | 2,706 | |
Total | $ | — | | $ | — | | $ | 2,706 | |
The fair value of non-financial assets measured at fair value on a non-recurring basis, classified as Level 3 in the fair value hierarchy, is determined based on the income approach or third-party market appraisals.
In estimating our fair value disclosures for financial instruments, we use the following methods and assumptions:
Cash and cash equivalents: The carrying amount reported in the Consolidated Balance Sheets for these items approximates fair value due to their liquid nature.
Accounts receivable, inventory, other current assets, accounts payable, accrued expenses and other current liabilities: The carrying value reported on the consolidated balance sheets for these items approximates their fair value, which is the likely amount for which the receivable or liability with short settlement periods would be transferred from/to a market participant with a similar credit standing as the Company’s.
Long-term borrowings: The fair value of the Company’s long-term borrowings under the Credit Agreement approximates $53.2 million and it’s carrying value was $58.5 million. The fair value is estimated using Level 2 inputs based on quoted prices for those or similar instruments. Refer to Note 9, “Debt,”for further discussion.
The fair value of the Company warrant liability is measured at fair value on a recurring basis, classified as Level 2 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 its common stock on the valuation dates of $1.26 on January 2, 2023 and $5.67 on December 31, 2021. 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 calculated warrant price for private warrants was $0.05 and $0.75 on January 2, 2023 and December 31, 2021. The input variables for the Black-Scholes are noted in the table below:
| | | | | | | | |
| January 2, 2023 | December 31, 2021 |
Risk-free interest rate | 4.14 | % | 1.11 | % |
Expected life in years | 3.0 years | 3.96 years |
Expected volatility | 68.0 | % | 41.8 | % |
Expected dividend yield | 0 | % | 0 | % |
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
Assets and liabilities that are measured at fair value on a non-recurring basis include the Company’s long-lived assets and definite-lived intangible assets. In determining fair value, the Company uses 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.
14. Segment Information
Prior to the Anthony's acquisition in November 2021, the Company had one operating and reportable segment. Following the Anthony's acquisition, the Company has two operating and reportable segments:
•BurgerFi, which includes operations of corporate-owned and franchised BurgerFi restaurants, which offer a fast-casual “better burger” concept; and
•Anthony's, which includes operations of casual dining pizza restaurants under the name Anthony’s Coal Fired Pizza & Wings.
The CODM includes 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. The Company does not rely on any major customers as a source of sales, and the customers and long-lived assets of its 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 by segment:
BurgerFi International Inc., and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended January 2, 2023 and December 31, 2021
| | | | | | | | | | | | | | |
(in thousands) | | Year Ended January 2, 2023 | | Year Ended December 31, 2021 |
Revenue: | | | | |
BurgerFi | | $ | 49,901 | | | $ | 46,448 | |
Anthony's* | | 128,819 | | | 22,419 | |
Total | | $ | 178,720 | | | $ | 68,867 | |
| | | | |
Capital expenditures: | | | | |
BurgerFi | | $ | 1,428 | | | $ | 10,348 | |
Anthony's* | | 1,090 | | | 317 | |
Total | | $ | 2,517 | | | $ | 10,665 | |
| | | | |
Depreciation and amortization: | | | | |
BurgerFi | | $ | 9,571 | | | $ | 8,694 | |
Anthony's | | 7,567 | | | 1,366 | |
Total | | $ | 17,138 | | | $ | 10,060 | |
| | | | |
Pre-opening costs: | | | | |
BurgerFi | | $ | 474 | | | $ | 1,905 | |
Anthony's | | — | | | — | |
Total | | $ | 474 | | | $ | 1,905 | |
| | | | |
Interest expense: | | | | |
BurgerFi | | $ | 3,843 | | | $ | 673 | |
Anthony's | | 4,816 | | | 733 | |
Total | | $ | 8,659 | | | $ | 1,406 | |
| | | | |
Net loss: | | | | |
BurgerFi | | $ | (50,375) | | | $ | (121,352) | |
Anthony's* | | (53,057) | | | (142) | |
Total | | $ | (103,432) | | | $ | (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 January 2, 2023 | | Year Ended December 31, 2021 |
Total assets: | | | | |
BurgerFi | | $ | 136,811 | | | $ | 161,675 | |
Anthony's | | 139,969 | | | 156,044 | |
Total | | $ | 276,780 | | | $ | 317,719 | |