|9 Months Ended|
Sep. 30, 2021
|IT'SUGAR Bankruptcy [Abstract]|
17. IT’SUGAR Bankruptcy
Bankruptcy and Deconsolidation of IT’SUGAR
In March 2020, as a result of various factors, including government-mandated closures and Center for Disease Control and World Health Organization advisories in connection with the COVID-19 pandemic, IT’SUGAR closed all of its retail locations and furloughed all store employees and the majority of its corporate employees. Between May 2020 and September 2020, IT’SUGAR reopened nearly all of its approximately 100 locations that were open prior to the pandemic as part of a phased reopening plan which included revised store floor plans, increased sanitation protocols, and the gradual recall of furloughed store and corporate employees to full or part-time employment.
IT’SUGAR ceased paying rent to the landlords of its closed locations in April 2020 and engaged in negotiations with its landlords for rent abatements, deferrals, and other modifications for both the period of time that the locations were closed and the subsequent period during which the locations were open and operating under conditions affected by the pandemic. During that period, in addition to its unpaid rental obligations, IT’SUGAR ceased paying various outstanding obligations to its vendors.
Although IT’SUGAR reopened its retail locations and received an advance of $2.0 million from a subsidiary of BBX Capital under an existing credit facility, IT’SUGAR was unable to maintain sufficient liquidity to sustain its operations. In particular, although a significant portion of its retail locations were reopened during the three months ended September 30, 2020, IT’SUGAR’s total revenues for the period had declined by approximately 50.4% as compared to the comparable period in 2019. As a result, on September 22, 2020, IT’SUGAR and its subsidiaries filed voluntary petitions to reorganize under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court.
In connection with the Bankruptcy Cases, on October 7, 2020, IT’SUGAR obtained approval by the Bankruptcy Court of a $4.0 million debtor-in-possession (“DIP”) credit facility to be made available by a wholly-owned subsidiary of the Company, and the entire $4.0 million available under the DIP credit facility was funded to IT’SUGAR during the three months ended December 31, 2020.
As a result of the filings, the uncertainties surrounding the nature, timing, and specifics of the Bankruptcy Cases, and the Company’s resulting loss of control and significant influence over IT’SUGAR, the Company determined that IT’SUGAR was a VIE in which the Company was not the primary beneficiary and deconsolidated IT’SUGAR in connection with the filings. Following the deconsolidation of IT’SUGAR, the Company accounted for its investment in IT’SUGAR at cost less impairment, if any, and continued to include IT’SUGAR’s results of operations and cash flows as continuing operations in the Company’s financial statements for the periods in which IT’SUGAR was consolidated as the Company continued to hold a substantive equity investment in IT’SUGAR. Additionally, as a result of the Company deconsolidating IT’SUGAR, IT’SUGAR’s notes payable to the Company, which had a total balance of $10.1 million as of December 31, 2020, were not eliminated in consolidation and are included in investments in and advances to IT’SUGAR in the Company’s condensed consolidated statements of financial condition as of December 31, 2020.
Emergence from Bankruptcy and Reconsolidation of IT’SUGAR
Emergence from Bankruptcy
In April 2021, IT’SUGAR filed its proposed plan of reorganization with the Bankruptcy Court. Following approval of the proposed plan by IT’SUGAR’s unsecured creditors, the Bankruptcy Court entered an order (the “Confirmation Order”) on June 16, 2021 confirming the plan of reorganization filed by IT’SUGAR, as modified by the Confirmation Order (the “Plan”), and the Plan became effective on June 17, 2021 (the “Effective Date”).
Pursuant to the terms of the Plan, claims against IT’SUGAR were treated as follows:
The $4.0 million DIP credit facility and a $6.0 million pre-petition line of credit held by the Company’s wholly-owned subsidiary were repaid in full through the Exit Facility (as defined and described below);
A secured equipment note held by the Company’s wholly-owned subsidiary was assumed, ratified, and reinstated on the Effective Date;
Each holder of an allowed construction / mechanic’s lien claim received payment in full in cash on the Effective Date or, in some cases, will receive such payment as soon as practicable after the Effective Date;
Each holder of an allowed general unsecured claim received, in full satisfaction of such claims, a one-time lump sum distribution equal to 15% of its claim on the Effective Date or, in some cases, received such payment soon after the Effective Date; and
Holders of subordinated claims did not receive any distributions in respect thereof.
Payments of claims made pursuant to the Plan, along with the payment of administrative expenses and professional fees, were funded by IT’SUGAR’s cash on-hand and net proceeds from the Exit Facility provided by the Company.
On the Effective Date, the Company’s wholly-owned subsidiary entered into a secured exit credit facility with IT’SUGAR (the “Exit Facility”) which provided for advances to IT’SUGAR of up to $13.0 million. The Company’s wholly-owned subsidiary advanced $13.0 million to IT’SUGAR under the Exit Facility, less the repayment of the $4.0 million DIP credit facility due from IT’SUGAR and the $6.0 million pre-petition line of credit due from IT’SUGAR (both of which were superseded and replaced by the Exit Facility). Amounts outstanding under the Exit Facility bear interest at 5% per annum. In addition to monthly payments of interest due under the facility, the Exit Facility requires monthly payments of principal of $325,000 commencing on January 1, 2022. The Exit Facility matures on April 1, 2025. The Exit Facility had an outstanding balance of $11.0 million as of September 30, 2021, which was eliminated in the Company’s condensed consolidated financial statements as of September 30, 2021.
Ownership and Reconsolidation of IT’SUGAR
Pursuant to the terms of the Plan, the Company’s equity interests in IT’SUGAR were revested on the Effective Date, and all organizational documents of IT’SUGAR were assumed, ratified, and reinstated.
As a result of the confirmation and effectiveness of the Plan and the revesting of its equity interests in IT’SUGAR, the Company was deemed to have reacquired a controlling financial interest in IT’SUGAR and consolidated the results of IT’SUGAR into its consolidated financial statements as of the Effective Date, the date that the Company reacquired control of IT’SUGAR.
Allocation of IT’SUGAR’s Fair Value upon Consolidation
The Company accounted for the consolidation of IT’SUGAR upon the revesting of its equity interests under the acquisition method of accounting, which requires that the assets acquired and liabilities assumed associated with an acquiree be recognized at their fair values at the consolidation date. As a result, the Company remeasured the carrying value of its equity interests in IT’SUGAR at fair value as of the Effective Date, with the remeasurement adjustment recognized in the Company’s statement of operations, and recognized goodwill based on the difference between (i) the fair values of IT’SUGAR’s identifiable assets and liabilities at the consolidation date and (ii) the fair values of the Company’s interests in IT’SUGAR and the noncontrolling interests in IT’SUGAR.
The following table summarizes the provisional allocation of IT’SUGAR’s fair value upon consolidation based on the Company’s current preliminary valuation, including the fair values of the assets acquired and liabilities assumed at the consolidation date (in thousands):
(1)Identifiable intangible assets primarily represents the estimated fair value of IT’SUGAR’s trademark, which is being amortized over an estimated expected useful life of 15 years.
(2)Includes a net intangible liability of $8.7 million related to off market rents related to certain of IT’SUGAR’s retail locations that is expected to be recognized over a weighted average lease term of approximately 8 years.
(3)The gain is comprised of the remeasurement of the Company’s equity interest in IT’SUGAR at fair value.
(4)Notes payable and other borrowings reflects amounts due to the Company’s wholly-owned subsidiary that have been eliminated in consolidation as of and subsequent to the consolidation date.
The provisional fair values reported in the above table were estimated by the Company using available market information and applicable valuation methods. As considerable judgment is involved in estimates of fair value, the provisional fair values presented above are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methods could have a material effect on the estimated fair value amounts.
As management is still in the process of completing its valuation analysis, the Company’s accounting for the consolidation is not complete as of the date of this report. As a result, the amounts reported in the above table, including the estimated fair value of the Company’s interest in IT’SUGAR as of the consolidation date, are provisional amounts that may be updated in subsequent periods to reflect the completion of the Company’s valuation analysis and any additional information obtained during the measurement period.
The following summarizes the Company’s methodologies for estimating the provisional fair values of certain assets and liabilities associated with the consolidation of IT’SUGAR and the fair value of BBX Capital’s existing investment in IT’SUGAR:
Property and Equipment – Property and equipment acquired consists primarily of leasehold improvements at IT’SUGAR’s retail locations. The fair value of IT’SUGAR’s property and equipment was estimated based on the replacement cost approach.
Identifiable Intangible Assets – The primary identifiable intangible asset acquired consists of IT’SUGAR’s trademark. The fair value of the acquired trademark was estimated using the relief-from-royalty method, a form of the income approach. Under this approach, the fair value was estimated by calculating the present value using a risk-adjusted discount rate of the expected future royalty payments that would have to be paid if the IT’SUGAR trademark was not owned.
Operating Lease Assets and Lease Liabilities – Operating lease assets and lease liabilities were measured based on the present value of the fixed lease payments included in IT’SUGAR’s lease agreements pursuant to the provisions of Accounting Standards Codification 842, Leases. In addition, IT’SUGAR’s operating lease assets have been adjusted to reflect an estimate of favorable or unfavorable terms of IT’SUGAR’s lease agreements when compared with market terms. These adjustments were estimated by calculating the present value using a risk-adjusted discount rate of the difference between the contractual amounts to be paid pursuant to the lease agreements and the estimate of market lease rates at the consolidation date.
Goodwill – Goodwill recognized in connection with the consolidation of IT’SUGAR reflects the difference between the (i) the fair values of IT’SUGAR’s identifiable assets and liabilities at the consolidation date and (ii) the fair values of the Company’s existing interests and any noncontrolling interests in IT’SUGAR at the consolidation date.
Remeasurement of Existing Investment in IT’SUGAR – As part of the acquisition method of accounting, the Company is required to remeasure the carrying value of its existing interests in IT’SUGAR at fair value as of the consolidation date, with the remeasurement adjustment recognized in the Company’s condensed consolidated statement of operations and comprehensive income. The Company applied an income approach utilizing a discounted cash flow methodology to estimate the provisional fair value of its investment in IT’SUGAR as of the consolidation date. The Company’s discounted cash flow methodology established a provisional estimate of the fair value of IT’SUGAR by estimating the present value of the projected future cash flows to be generated from IT’SUGAR. The discount rate applied to the projected future cash flows to arrive at the present value is intended to reflect all risks of ownership and the associated risks of realizing the stream of projected future cash flows associated with IT’SUGAR. The most significant assumptions used in the discounted cash flow methodology to estimate the preliminary fair value of IT’SUGAR were the terminal value, the discount rate, and the forecast of future cash flows.
Redeemable Noncontrolling Interest – Represents a 9.65% redeemable noncontrolling interest in IT'SUGAR’s Class B Units.
The consolidated assets and liabilities and results of operations of IT’SUGAR are included in the Company’s condensed consolidated financial statements for the nine months ended September 30, 2021 commencing on June 17, 2021 and are included in the Company’s condensed consolidated financial statements for the three months ended September 30, 2021 for the entirety of such period. The Company’s condensed financial statements for the three and nine months ended September 30, 2020 includes the operations of IT’SUGAR through September 22, 2020, as the Company deconsolidated IT’SUGAR on such date. The following table shows IT’SUGAR’s trade sales and income before income taxes included in the Company’s condensed consolidated statements of operations and comprehensive income for the dates indicated (in thousands):
The following unaudited pro forma financial data presents the Company’s revenues and earnings for the three and nine months ended September 30, 2021 and 2020 as if the Company consolidated IT’SUGAR as a result of its emergence from bankruptcy on January 1, 2020 (in thousands):
The unaudited pro forma financial data for the nine months ended September 30, 2020 includes $3.7 million in legal, advisory, and other costs related to the bankruptcy proceedings, while the unaudited pro forma financial data for the nine months September 30, 2021 excludes gains related to the extinguishment of certain of IT’SUGAR’s obligations pursuant to the Plan and the gain recognized by the Company upon the consolidation of IT’SUGAR.
The unaudited pro forma financial data reported in the above table does not purport to represent what the actual results of the Company’s operations would have been assuming that the consolidation date was January 1, 2020, nor does it purport to predict the Company’s results of operations for future periods.
The entire disclosure for the description and amounts of reorganization under Chapter 11 of the US Bankruptcy Code.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef