Fat Brands, Inc 8-K/A, filed Dec 7, 2020
Fat Brands, Inc (FATAQ)
About this 8-K/A
Fat Brands, Inc filed this 8-K/A on December 7, 2020, reporting on events of September 21, 2020.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 21, 2020
FAT Brands Inc.
(Exact name of Registrant as Specified in Its Charter)
| Delaware | 001-38250 | 82-1302696 | ||
| (State
or Other Jurisdiction of Incorporation) |
(Commission File Number) |
(IRS
Employer Identification No.) |
9720 Wilshire Blvd., Suite 500 Beverly Hills, CA |
90212 | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s Telephone Number, Including Area Code: (310) 319-1850
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instructions A.2. below):
| [ ] | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| [ ] | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| [ ] | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| [ ] | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.0001 per share |
FAT | The Nasdaq Stock Market LLC | ||
| Series B Cumulative Preferred Stock, par value $0.0001 per share | FATBP | The Nasdaq Stock Market LLC | ||
| Warrants to purchase Common Stock | FATBW | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).
Emerging growth company [X]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [X]
EXPLANATORY NOTE
As previously reported under Items 1.01 and 2.01 of the Current Report on Form 8-K filed by FAT Brands Inc. (“FAT”) on September 25, 2020, FAT completed its acquisition of the Johnny Rockets branded restaurants and franchising business through the acquisition of Johnny Rockets Holding Co., a Delaware corporation, from Sundae Group Holdings I, LLC pursuant to a Stock Purchase Agreement (the “Purchase Agreement”) dated August 12, 2020. The Johnny Rockets branded restaurants and franchising business (“Johnny Rockets”) operates through The Johnny Rockets Group, Inc., a Delaware corporation and the wholly-owned subsidiary of Johnny Rockets Holding Co, and its subsidiaries. The results of Johnny Rockets have been included in FAT’s consolidated financial statements since the date of acquisition.
This Current Report on Form 8-K/A amends the original Form 8-K to provide the historical financial statements of Johnny Rockets required under Item 9.01(a) and the pro forma financial information required under Item 9.01(b).
Item 9.01. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired.
The audited financial statements of Johnny Rockets for the years ended December 29, 2019 and December 30, 2018 are included as Exhibit 99.1 to this Current Report on Form 8-K/A and are incorporated by reference herein.
The unaudited financial statements of Johnny Rockets for the interim twenty-six week period ended June 28, 2020 are included as Exhibit 99.2 to this Current Report on Form 8-K/A and are incorporated by reference herein.
(b) Pro Forma Financial Information.
The unaudited pro forma consolidated financial statements of FAT and Johnny Rockets with respect to the year ended December 29, 2019 and the twenty-six weeks ended June 28, 2020 are included as Exhibit 99.3 to this Current Report on Form 8-K/A and are incorporated by reference herein.
(d) Exhibits.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: December 7, 2020
| FAT Brands Inc. | ||
| By: | /s/ Andrew A. Wiederhorn | |
| Andrew A. Wiederhorn | ||
| Chief Executive Officer | ||
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated September 10, 2020 with respect to the consolidated financial statements of The Johnny Rockets Group, Inc. for the years ended December 29, 2019 and December 30, 2018, included in this Form 8-K/A of FAT Brands Inc. We consent to the incorporation by reference of said report in the Registration Statements of FAT Brands Inc. on Form S-8 (File No. 333-239031) and Form S-1 (File No. 333-239032).
| /s/ GRANT THORNTON LLP | |
| Hartford, Connecticut | |
| December 7, 2020 |
Exhibit 99.1
Consolidated Financial Statements and Report of Independent Certified Public Accountants
The Johnny Rockets Group, Inc. and Subsidiaries
As of and for the years ended December 29, 2019 and December 30, 2018
Contents
| Page | |
| Report of Independent Certified Public Accountants | 1-2 |
| Consolidated Financial Statements | |
| Consolidated Balance Sheets | 3-4 |
| Consolidated Statements of Operations | 5 |
| Consolidated Statements of Shareholder’s Equity (deficit) | 6 |
| Consolidated Statements of Cash Flows | 7 |
| Notes to Consolidated Financial Statements | 8-31 |
| grant thornton llp | REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS |
| 90 State House Square, 10th Floor | |
| Hartford, CT 06103-3702 |
| D | +1 860 781 6700 | |
| F | +1 860 240 4360 | |
| S | linkd.in/grantthorntonus | |
| twitter.com/grantthorntonus |
To the Board of Managers
The Johnny Rockets Group, Inc.
We have audited the accompanying consolidated financial statements of The Johnny Rockets Group, Inc. (a Delaware corporation) and subsidiaries, which comprise the consolidated balance sheets as of December 29, 2019 and December 30, 2018, and the related consolidated statements of operations, changes in shareholder’s equity (deficit), and cash flows for the years then ended, and the related notes to the financial statements.
Management’s responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
| GT.COM | Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd (GTIL). GTIL and each of its member firms are separate legal entities and are not a worldwide partnership. |
| 1 |
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Johnny Rockets Group, Inc. and subsidiaries as of December 29, 2019 and December 30, 2018, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Emphasis of matter
As discussed in Note 1 to the consolidated financial statements, the Company incurred a net loss of $10,741,000 during the year ended December 29, 2019 and as of that date, the Company’s current liabilities exceeded its current assets by $838,000 and its total liabilities exceeded its total assets by $59,894,000. The Company has a net working capital deficiency and has experienced a significant reduction in its revenue volume, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions are described in Note 1. Without additional funding, there is significant doubt about the Company’s ability to continue as a going concern for the next 12 months. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.
/s/ Grant Thornton LLP
Hartford, Connecticut
September 10, 2020
| 2 |
THE JOHNNY ROCKETS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollar amounts in thousands)
| Assets | ||||||||
| December 29, 2019 | December 30, 2018 | |||||||
| Current assets: | ||||||||
| Cash | $ | 401 | $ | 278 | ||||
| Receivables, net | 1,860 | 1,998 | ||||||
| Inventories | 76 | 79 | ||||||
| Prepaid expenses and other current assets | 422 | 370 | ||||||
| Total current assets | 2,759 | 2,725 | ||||||
| Property and equipment, net | 1,914 | 2,745 | ||||||
| Goodwill | 7,393 | 7,393 | ||||||
| Intangible assets, net | 32,199 | 35,795 | ||||||
| Other assets | 14 | 124 | ||||||
| Total assets | $ | 44,279 | $ | 48,782 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 3 |
THE JOHNNY ROCKETS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets - Continued
(Dollar amounts in thousands, except par value)
| Liabilities and Shareholder’s Equity (Deficit) | ||||||||
| December 29, 2019 | December 30, 2018 | |||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 753 | $ | 1,784 | ||||
| Due to affiliates | 362 | 32 | ||||||
| Accrued salaries and benefits | 594 | 808 | ||||||
| Accrued expenses | 1,816 | 2,349 | ||||||
| Deferred franchise fees, current portion | 57 | 223 | ||||||
| Capital leases, current portion | 15 | 14 | ||||||
| Total current liabilities | 3,597 | 5,210 | ||||||
| Deferred franchise fees, net of current portion | 233 | 416 | ||||||
| Capital leases, net of current portion | 27 | 43 | ||||||
| Long-term debt related party | 99,764 | 90,547 | ||||||
| Other long-term liabilities | 552 | 1,739 | ||||||
| Total liabilities | 104,173 | 97,955 | ||||||
| Commitments and contingencies (Note 16) | ||||||||
| Shareholder’s equity (deficit): | ||||||||
| Common stock, $0.01 par value: 10,000 shares authorized, 1,000 shares issued and outstanding | - | - | ||||||
| Additional paid-in-capital | 15,992 | 15,972 | ||||||
| Accumulated deficit | (75,886 | ) | (65,145 | ) | ||||
| Total shareholder’s equity (deficit) | (59,894 | ) | (49,173 | ) | ||||
| Total liabilities and shareholder’s equity (deficit) | $ | 44,279 | $ | 48,782 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
THE JOHNNY ROCKETS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollar amounts in thousands)
| For the Year Ended | For the Year Ended | |||||||
| December 29, 2019 | December 30, 2018 | |||||||
| Revenues: | ||||||||
| Restaurant sales | $ | 17,655 | $ | 24,620 | ||||
| Franchise royalties | 13,612 | 14,419 | ||||||
| Initial country and franchise fees and rental income | 1,250 | 1,243 | ||||||
| Total revenues | 32,517 | 40,282 | ||||||
| Operating expenses: | ||||||||
| Cost of sales | 4,145 | 5,710 | ||||||
| Labor costs | 6,261 | 9,099 | ||||||
| Operating expenses | 7,392 | 11,503 | ||||||
| General and administrative expenses | 11,935 | 12,792 | ||||||
| Depreciation and amortization | 4,158 | 4,261 | ||||||
| Provision for impairment of long-lived assets | 743 | 485 | ||||||
| Impairment of goodwill and other intangibles | - | 15,125 | ||||||
| Loss on disposal of assets, net | 16 | 2,056 | ||||||
| Store closure provisions | (1,138 | ) | 2,913 | |||||
| Other losses | 7 | - | ||||||
| Total operating expenses | 33,519 | 63,944 | ||||||
| Loss from operations | (1,002 | ) | (23,662 | ) | ||||
| Other expense: | ||||||||
| Interest expense, net | 8,904 | 7,194 | ||||||
| Loss before income taxes | (9,906 | ) | (30,856 | ) | ||||
| Provision for income tax expense | 835 | 387 | ||||||
| Net Loss | $ | (10,741 | ) | $ | (31,243 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
| 5 |
THE JOHNNY ROCKETS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholder’s Equity (Deficit)
(Dollar amounts in thousands, except share data)
For the years ended December 29, 2019 and December 30, 2018
| Number of | Common | Additional paid-in | Accumulated | |||||||||||||||||
| shares | stock | capital | deficit | Total | ||||||||||||||||
| Balance at December 31, 2017 | 1,000 | $ | - | $ | 15,866 | $ | (33,902 | ) | $ | (18,036 | ) | |||||||||
| Net loss | (31,243 | ) | (31,243 | ) | ||||||||||||||||
| Share-based compensation | - | - | 106 | - | 106 | |||||||||||||||
| Balance at December 30, 2018 | 1,000 | $ | - | $ | 15,972 | $ | (65,145 | ) | $ | (49,173 | ) | |||||||||
| Net Loss | - | - | - | (10,741 | ) | (10,741 | ) | |||||||||||||
| Share-based compensation | - | - | 20 | - | 20 | |||||||||||||||
| Balance at December 29, 2019 | 1,000 | $ | - | $ | 15,992 | $ | (75,886 | ) | $ | (59,894 | ) | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 6 |
THE JOHNNY ROCKETS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
| For the Year Ended | For the Year Ended | |||||||
| December 29, 2019 | December 30, 2018 | |||||||
| Operating activities: | ||||||||
| Net Loss | $ | (10,741 | ) | $ | (31,243 | ) | ||
| Adjustments to reconcile net loss to cash provided by operating activities: | ||||||||
| Depreciation and amortization | 4,158 | 4,261 | ||||||
| Interest expense on in-kind notes | 8,792 | 7,178 | ||||||
| Impairment of goodwill / intangible assets | - | 15,125 | ||||||
| Provision for bad debts | 239 | 756 | ||||||
| Share-based compensation | 20 | 106 | ||||||
| Impairment loss for long-lived assets | 743 | 485 | ||||||
| Loss on disposal of assets | 29 | 2,056 | ||||||
| Provision for store closures | (1,138 | ) | 1,560 | |||||
| Deferred taxes, net | - | (424 | ) | |||||
| Net change in operating assets and liabilities: | ||||||||
| Receivables, net | (101 | ) | 536 | |||||
| Inventories | 3 | 79 | ||||||
| Other assets | 58 | 659 | ||||||
| Accounts payable | (1,031 | ) | 200 | |||||
| Due to affiliates | 330 | (341 | ) | |||||
| Accrued expenses and other long-term liabilities | (796 | ) | (833 | ) | ||||
| Deferred franchise fees | (349 | ) | 86 | |||||
| Net cash provided by operating activities | 216 | 246 | ||||||
| Investing activities: | ||||||||
| Purchases of property and equipment | (516 | ) | (593 | ) | ||||
| Proceeds from sales of property and equipment | 13 | - | ||||||
| Net cash used in investing activities | (503 | ) | (593 | ) | ||||
| Financing activities: | ||||||||
| Repayment of related party debt | (2,076 | ) | (13,210 | ) | ||||
| Proceeds from related party debt | 2,501 | 13,868 | ||||||
| Repayments of capital lease obligations | (15 | ) | (12 | ) | ||||
| Repayments of debt | - | (73 | ) | |||||
| Net cash provided by financing activities | 410 | 573 | ||||||
| Net increase in cash | 123 | 226 | ||||||
| Cash, beginning of year | 278 | 52 | ||||||
| Cash, end of year | $ | 401 | $ | 278 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | 11 | $ | 18 | ||||
| Cash paid for income taxes | $ | 10 | $ | 22 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 7 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
NOTE 1 - NATURE OF OPERATIONS
Business entity
The Johnny Rockets Group, Inc., a Delaware corporation, and its subsidiaries (collectively, the “Company” or “JRG”) develop, operate, and franchise restaurants under the name “Johnny Rockets, The Original Hamburger.” The restaurants are casual-themed, all-American style diners that primarily serve hamburgers, shakes, and American fries.
On June 6, 2013 (the “Acquisition Date”), Burger Acquisition Co. entered into a Membership Interest Purchase Agreement (the “Agreement”), whereby Burger Acquisition Co., a Delaware corporation and wholly owned subsidiary of Neapolitan Group, LLC (the “Parent”), agreed to purchase all of the outstanding membership interests of JR Group Holdings, LLC (“JRGHL”), a Delaware limited liability company, becoming the single member of JRGHL, the parent of Johnny Rockets Group, Inc. and its subsidiaries. Neapolitan Group, LLC is also a Delaware limited liability company and a wholly owned subsidiary of Sundae Group Holdings I, LLC, a Delaware limited liability company (the “Ultimate Parent”).
On June 20, 2016, the Parent of Johnny Rockets Holding Co. (“JRHC”) (f/k/a Burger Acquisition Co.) distributed 100% of JRHC shares to Sundae Group Holdings I, LLC.
Liquidity / Going Concern
For the years ended December 29, 2019 and December 30, 2018, JRG incurred losses of $10,741 and $31,243, respectively. In addition, the company had cash flows from operations of only $216 in 2019 and $246 in 2018.
As a result of the COVID 19 Pandemic and the related restrictions to “in restaurant dining”, the general impact it has had on the economy, and the ability and willingness of customers to eat out, the Company’s 2020 forecasted revenue and cash flows has been significantly impacted by this unique business disruption. The affect has been seen at all corporate and franchise locations across the world, it has required a significant number of restaurant locations to close temporarily or depend on only takeout and delivery sales after closing their in-house dining. This has resulted in significant reductions to revenue and cash flows and has required additional liquidity be added to the business. Since the start of the 2020 fiscal year through June 28, 2020 the Company borrowed $4 million in additional funding on its related party PIK Notes. Based on the Company’s latest forecasts, management expects that it will need to rely on its equity owners, or others, for additional debt or capital funding to support operations through the next twelve months. The equity owners have not committed to provide this funding, nor are there any assurances that such funding will be available.
Based on the latest 2020 forecast management estimates that the company will utilize cash of $5.9 million from operations and projects a net loss of $18.5 million. Management has projected that in addition to the funding already received in 2020, it will need an additional $2.5 million to $3 million through the end of 2020. Based on all the uncertainty with the pandemic, the projected 2021 cash shortfall cannot currently be determined. If sufficient funding is not received, the Company will need to curtail certain operations, close locations, or take other measures to limit its losses and use of cash.
| 8 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
NOTE 1 - NATURE OF OPERATIONS – Continued
Liquidity / Going Concern - Continued
On August 12, 2020 JRG’s parent signed a stock purchase agreement in which it agreed to sell 100% of the issued and outstanding Equity Interests of Johnny Rockets Holding Co., the parent of JRG, for $24.6 million. The target closing date for the transaction is September 15, 2020. The purchase price will be paid in cash net of any adjustments to a targeted working capital amount, closing cash and transaction expenses. Prior to the closing all related party debt will be either cancelled or contributed to equity and the Stock Option Plan and all issued options will be terminated.
Currently the total impact of COVID 19 is uncertain and that creates significant risk to the latest forecast. Any resurgence in infection rates, additional impact on the economy, and how quick customers are willing and able to visit restaurants could have significant impact on the forecasted revenue and cash flows and either increase or decrease the need for additional funding.
As a result of the significant economic uncertainties since the declaration of the COVID 19 pandemic, management has concluded that there is significant doubt that the Company will be able continue to operate as a going concern for the next 12 months. No adjustments have been made to the consolidated financial statements related to these uncertainties.
Operations
At December 29, 2019, there were 11 Company-owned restaurants and 336 franchised restaurants. Company-owned restaurants are located in California, Maryland, Nevada, New Jersey, New York, Virginia, and Washington, D.C. Franchised restaurants are located in 29 states, Washington DC, and in Australia, Bahrain, Bangladesh, Bolivia, Brazil, Canada, Chile, Costa Rica, Cyprus, Ecuador, Honduras, Indonesia, Italy, Kuwait, Mexico, Nigeria, Norway, Oman, Panama, Paraguay, Peru, Poland, Qatar, Saudi Arabia, South Korea, Spain, Tunisia, and the United Arab Emirates.
The following is a summary of JRG’s Company-operated and franchised units:
| Domestic | International | Total | ||||||||||
| Company Units: | ||||||||||||
| Beginning of the period | 20 | - | 20 | |||||||||
| Openings | - | - | - | |||||||||
| Acquired from (by) franchisees | - | - | - | |||||||||
| Closings | (7 | ) | - | (7 | ) | |||||||
| End of year, December 30, 2018 | 13 | - | 13 | |||||||||
| Openings | - | - | - | |||||||||
| Acquired from (by) franchisees | - | - | - | |||||||||
| Closings | (2 | ) | - | (2 | ) | |||||||
| End of year, December 29, 2019 | 11 | - | 11 | |||||||||
| 9 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
NOTE 1 - NATURE OF OPERATIONS – Continued
Operations - Continued
| Domestic | International | Total | ||||||||||
| Franchised Units: | ||||||||||||
| Beginning of the period | 170 | 199 | 369 | |||||||||
| Openings | 2 | 35 | 37 | |||||||||
| Acquired from (by) franchisees | - | - | - | |||||||||
| Closings | (10 | ) | (37 | ) | (47 | ) | ||||||
| End of year, December 30, 2018 | 162 | 197 | 359 | |||||||||
| Openings | 7 | 21 | 28 | |||||||||
| Acquired from (by) franchisees | - | - | - | |||||||||
| Closings | (27 | ) | (25 | ) | (52 | ) | ||||||
| End of year, December 29, 2019 | 142 | 193 | 335 | |||||||||
NOTE 2 - SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements are prepared under the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America and include the accounts of JRG and two wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Fiscal Period
JRG’s fiscal year ends on the Sunday closest to December 31 in any given year.
Use of Estimates in the Preparation of Financial Statements
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates and the underlying assumptions affect the amount of assets and liabilities reported, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates used in preparing these consolidated financial statements include revenue recognition, accounting policies, reserves, recoverability of accounts receivable, valuation of goodwill, intangible and other long-lived assets, valuation of stock-based compensation, and assumptions used in the income tax valuation allowances and tax contingency reserves. Management believes that such estimates have been based on reasonable and supportable assumptions and the resulting estimates are reasonable. Actual amounts could differ from these estimates and they may be adjusted as more information becomes available.
| 10 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
| NOTE 2 - | SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued |
Revenue Recognition
The Company recognizes revenue from Company owned restaurants food and beverage sales as services are rendered and payment is received at the point of sale. Taxes collected from customers and remitted to government authorities are presented on a net basis and excluded from revenue.
Relating to its franchising activities, the Company receives country fees, franchise fees, area development fees, and continuing royalties. The Company recognizes country fees, franchise fees and area development fees revenue when it has completed performance of substantially all obligations specified in the related underlying agreements. For domestic franchisees, completion of substantially all obligations occurs upon the opening of each restaurant specified in the underlying agreement. Obligations include site selection, construction support, and marketing support. Payments received from franchisees prior to the completion of these obligations are reflected as current and noncurrent deferred franchise fees in the accompanying consolidated balance sheets. For international franchisees, the Company completes substantially all obligations prior to and upon entering into an area development agreement. However, each agreement is reviewed to ensure proper revenue recognition. Royalties are generally contractually earned at amounts equal to approximately 5% of franchised restaurant net sales and are recognized as such sales occur.
Gift Cards
The Company sells gift cards primarily at restaurant locations and are redeemable at the Company’s locations. The gift cards sold have no stated expiration dates and are subject to potential escheatment laws in the various jurisdictions in which the Company operates. Deferred gift card income is recorded in accrued expenses on the consolidated balance sheets. The Company recognizes revenue from gift cards when it is redeemed by the customer.
Preopening Costs
Preopening costs, which consist of payroll, supplies, and other direct expenses incurred in connection with opening new restaurants, are expensed as incurred
Cash
JRG maintains cash balances at financial institutions, and at times, balances may exceed federally insured limits. JRG has never experienced any losses related to these balances. Short-term liquid investments with original maturities of three months or less at the time of purchase are reported as cash equivalents and are carried at cost.
Fair Value of Financial Instruments
The carrying amounts of JRG’s cash, receivables, prepaid expenses, accounts payable and accrued expenses approximate fair value due to their short-term nature.
| 11 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
| NOTE 2 - | SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued |
Receivables and Allowance for Doubtful Accounts
Receivables include royalties, franchise fees, contractual marketing fees, credit cards, rents and other miscellaneous items. Receivables are stated at cost less an allowance for doubtful accounts. Management provides for probable uncollectible amounts through a charge to earnings based on a percentage of the outstanding balance and an assessment of the 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 doubtful accounts. For the years ended December 29, 2019 and December 30, 2018 the Company wrote off $714 and $207 of receivables, respectively. There were allowances for doubtful accounts of $222 and $759 as of December 29, 2019 and December 30, 2018, respectively.
Receivables, net consisted of the following:
| December 29, 2019 | December 30, 2018 | |||||||
| Franchise receivable, net | $ | 1,562 | $ | 1,539 | ||||
| Credit card receivable | 211 | 305 | ||||||
| Other receivables | 87 | 154 | ||||||
| Total | $ | 1,860 | $ | 1,998 | ||||
At December 29, 2019, one customer accounted for more than 10% of franchise receivable. At December 30, 2018 one customer accounted for more than 30% of franchise receivable. No individual customer accounted for more than 10% of consolidated revenue from continuing operations for the years ended December 29, 2019 and December 30, 2018.
Concentrations of Risk
JRG’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash in financial institutions. JRG places its cash with high credit quality institutions. At times, such deposits may be in excess of the FDIC insurance limit. JRG has not experienced any losses and does not believe it is exposed to any significant risk on cash. In addition, JRG is subject to credit risk through franchise receivables; however, JRG periodically evaluates the financial strength of its franchisees and believes its allowance for doubtful accounts and management of accounts are adequate to cover its credit risk exposure.
JRG currently relies on a single supplier to distribute food, packaging, and supplies to restaurants. Although they could use alternative distributors, a change in distributor could cause a delay in receipt of food, packaging, or supplies and possibly result in lost sales, which could adversely impact the results of operations.
| 12 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
| NOTE 2 - | SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued |
Inventories
Inventories, consisting principally of food and beverages, are stated at the lower of cost (first in, first out method) or net realizable value. Inventories are reviewed for spoilage and excess or obsolete products and reserved accordingly.
Long-lived Assets
Long-lived assets, such as property and equipment, and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances that require a long-lived asset or asset group to be tested for possible impairment, JRG first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
Whenever events or changes in circumstances indicate that the carrying amount of a restaurant may not be recoverable, JRG will test the restaurant for impairment. JRG evaluates restaurants by reviewing historical cash flows and reviews estimates of future cash flows, assumptions of future same-store sales and projected operating expenses. Based on the best information available, it writes down the assets of an impaired restaurant to its estimated fair market value, which becomes the new cost basis. Estimated fair market value is based on its experience selling similar properties and local market conditions, less cost to sell, for properties to be disposed of. In addition, restaurants scheduled for closing are reviewed for impairment and depreciable lives are adjusted. The impairment evaluation is based on the estimated cash flows from continuing use through the expected disposal date, and the expected terminal value.
The
Company recorded impairment expense of $743 and $485 for the years ended December 29, 2019
and December 30, 2018, respectively.
Provision for Store Closures
Store closure costs include costs of disposing of the assets as well as other facility-related expenses and are expensed as incurred. Additionally, at the date of the closure, JRG records a liability for any remaining operating lease obligations after the expected closure date, net of estimated sublease income, if any.
Considerable management judgment is necessary to estimate future cash flows, including cash flows from continuing use, terminal value, closure costs and sublease income. Accordingly, actual results could vary significantly from estimates.
| 13 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
| NOTE 2 - | SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued |
Property and Equipment
Property and equipment are stated at cost and is depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining lease terms. For leases with renewal periods at JRG’s option, JRG generally uses the original lease term, excluding the option periods, to determine estimated useful lives. If failure to exercise a renewal option imposes an economic penalty on JRG, such that management determines at the inception of the lease that renewal is reasonably assured, JRG includes the renewal option period in the determination of appropriate estimated useful lives.
The estimated useful service lives are as follows:
| Leasehold improvements | lesser of lease term or 10 to 20 years | |
| Equipment, furniture, and fixtures | lesser of lease term or 1 to 10 years | |
| Computer | 1 to 5 years |
Smallwares, including plates, glassware, and silverware, are capitalized and included in property and equipment when a restaurant is initially opened. Smallwares are not depreciated and subsequent replacements of smallwares are expensed when purchased. Periodically, JRG evaluates the reasonableness of the smallwares balances to determine that their carrying value approximates replacement cost. For the year ended December 30, 2018 JRG wrote off the remaining $108 in smallwares.
Goodwill and Intangible Assets
Goodwill and intangible assets deemed to have indefinite lives are not amortized, they are subject to annual impairment testing. JRG has goodwill with an indefinite life, which is all attributable to the franchise reporting unit. Trade names, of which the majority is allocated to the franchise reporting unit and a small portion is allocated to the corporate restaurant reporting unit, and international franchise agreements are finite-lived intangible assets that are being amortized over estimated lives of 14.5 and 13.5 years, respectively. The Company performs its annual impairment testing on the anniversary date of the acquisition and annually thereafter, or more frequently if events and circumstances indicate that the asset might be impaired. The goodwill impairment test employed by the Company includes quantitative and qualitative assessments. The quantitative goodwill impairment test consists of comparing the fair value of a reporting unit to the carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Fair value is determined using a discounted cash flow analysis and a market multiple approach.
For the years ended December 29, 2019 and December 30, 2018 JRG performed the impairment analysis by using the quantitative assessment for Goodwill. For the year ended December 29, 2019 there was no impairment. For the year ended December 30, 2018 this resulted in the carrying value exceeding the fair market value of the unit and an impairment of $7,476 being recorded.
| 14 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
| NOTE 2 - | SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued |
Goodwill and Intangible Assets - Continued
Amortizable intangibles are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require an amortizable intangible to be tested for possible impairment, JRG compares undiscounted cash flows expected to be generated by that business unit or the specific assets related to the intangible to its carrying value. If the carrying value of the intangible is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds the fair value. Fair value is determined using the royalty relief method for the trade name intangible and excess earnings income approach for the domestic and international franchise agreements.
JRG determined that there were no events or circumstances for the year ended December 29, 2019 and there were events and circumstances for the year ending December 30, 2018 that indicated the amortizing intangibles may be impaired. As result of the testing JRG recorded impairment expense related to the franchise reporting unit of $1.7 million for domestic franchise agreements and $5.1 million for trade names. For the corporate restaurant reporting unit $842 of impairment expense was recorded for trade names. JRG has also reviewed the useful lives of these intangible assets and reduced the remaining lives to 9 and 10 years for international franchise agreements and trade names, respectively.
Subsequent to year end the COVID-19 Pandemic has had a significant impact on intangibles (See note 17).
Accrued Disposition Reserves
JRG records a liability, net of estimated sublease income, for the remaining minimum lease payments associated with closed stores on the cease-use date. The liabilities are included in accrued expenses and other long-term liabilities.
The following is a summary of activity of accrued disposition reserves:
| December 29, 2019 | December 30, 2018 | |||||||
| Beginning of the year | $ | (1,560 | ) | $ | - | |||
| Provisions for closings, net | 964 | (1,560 | ) | |||||
| Payments | 596 | - | ||||||
| Total | $ | - | $ | (1,560 | ) | |||
For the year ended December 29, 2019 there are no amounts outstanding because the leases for the closed locations were terminated during 2019. The amounts outstanding as of December 30, 2018 are $313 current and $1,247 long term.
| 15 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
| NOTE 2 - | SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued |
Income Taxes
JRG accounts for income taxes using the liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
JRG records deferred tax assets to the extent it believes there will be sufficient future taxable income to utilize those assets prior to their expiration. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all the deferred tax assets will not be realized. To the extent deferred tax assets may be unable to be utilized, JRG records a valuation allowance against the potentially unrealizable amount and records a charge against earnings. The calculation of JRG tax liabilities involves dealing with uncertainties in the application of complex tax regulations in several different tax jurisdictions. JRG is periodically reviewed by tax authorities regarding the amount of taxes due. These reviews include questions regarding the timing and amount of deductions. In evaluating the exposure associated with various filing positions, JRG records estimated reserves for probable exposures.
Due to ever-changing tax laws and income tax rates, significant judgment is required to estimate the effective tax rate that will apply to tax differences that are expected to reverse in the future. JRG must also make estimates about the sufficiency of taxable income in future periods to offset any deductions related to deferred tax assets currently recorded. These estimates could have a significant impact on the consolidated financial statements.
Advertising
JRG has its Company-operated and franchised restaurants share in the cost of various advertising and marketing programs. Advertising and marketing contributions are generally determined based on a percentage of revenues and to the extent contributions exceed advertising and promotional expenditures, the unspent contributions are recorded as a liability and included in other accrued liabilities in the accompanying consolidated balance sheets. The cost for local advertising for Company-operated restaurants is expensed as incurred. Advertising costs of $699 and $911 are included in the consolidated statements of operations for the years ended December 29, 2019 and December 30, 2018, respectively.
Leases and Deferred Straight-line Rent Payable
JRG leases all its restaurant properties. Leases are evaluated and classified as operating or capital leases for financial reporting purposes. The lease term used for lease evaluation includes option periods only in instances in which the exercise of the option period can be reasonably assured and failure to exercise such options would result in an economic penalty. Leasehold improvements that are acquired subsequent to the inception of a lease are amortized over the lesser of the useful life of the asset or a term that includes option periods that are reasonably assured at the date of the purchase.
| 16 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
| NOTE 2 - | SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued |
Leases and Deferred Straight-line Rent Payable - Continued
For leases that contain rent escalations, JRG records the total rent payable during the lease term on a straight-line basis over the term of the lease and records the difference between the rents paid and the straight-line rent as deferred rent payable.
Certain leases contain provisions that require additional rental payments based upon restaurant sales volume (“Contingent Rent”). Contingent Rent is accrued each period as the liabilities are incurred utilizing prorated periodic sales targets.
Commitments and Contingencies
Liabilities for loss contingencies which arise from claims, assessments, litigation, fines, penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount can reasonably be estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
New Accounting Pronouncement
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (for example, assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this Update. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date, in response to stakeholders’ requests to defer the effective date of the guidance in Update 2014-09. The amendments in this Update defer the effective date of Update 2014-09 for all entities by one year. The amendments in this Update are effective for the Company’s annual reporting periods beginning after December 15, 2018. Early application is not permitted, although a nonpublic entity may elect to apply this guidance earlier, based on certain criteria. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which does not change the core principle of the Topic 606, but instead clarifies the implementation guidance on principal versus agent considerations. In June 2020, the FASB issued ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842), in response to stakeholders requests to defer the effective date of the guidance for one year due to the impacts of the Coronavirus Disease 2019 pandemic. The amendments in this Update defer, for one year the required effective date of Revenue for certain entities that have not yet issued their financial statements (or made financial statements available for issuance) reflecting the adoption of Revenue. Those entities may elect to adopt the guidance for annual reporting periods beginning after December 15, 2019, and for interim reporting periods within annual reporting periods beginning after December 15, 2020. JRG will defer implementation as allowed until the annual 2020 reporting period and is still determining the impact on the consolidated financial statements.
| 17 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
| NOTE 2 - | SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued |
New Accounting Pronouncement - Continued
In February 2016, the FASB released ASU 2016-02, Leases, completing its project to overhaul lease accounting. The ASU codifies ASC 842, Leases, which will replace the guidance in ASC 840. Early adoption is permitted for all entities. Under the revised guidance, lessees will be required to recognize most leases “on balance sheet.” The new guidance retains a dual lease accounting model for purposes of income statement recognition, continuing the distinction between what are currently known as “capital” and “operating” leases for lessees. Lessors will focus on whether control of the underlying asset has transferred to the lessee to assess lease classification. A new definition of a “lease” could cause some contracts formerly accounted for under ASC 840 to fall outside the scope of ASC 842, and vice versa. In June 2020, the FASB issued ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842), in response to stakeholders requests to defer the effective date of the guidance for one year due to the impacts of the Coronavirus Disease 2019 pandemic. The amendments in this Update defer the effective date for one year for entities in the “all other” category and public NFP entities that have not yet issued their financial statements (or made financial statements available for issuance) reflecting the adoption of Leases. Therefore, under the amendments, Leases is effective for entities within the “all other” category for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Additionally, Leases is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, for public NFP entities that have not yet issued financial statements (or made available for issuance) reflecting the adoption of Leases. Early application continues to be permitted, which means that an entity may choose to implement Leases before those deferred effective dates. JRG is still reviewing the guidance to determine the impact on the consolidated financial statements.
NOTE 3 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid and other current assets consisted of the following:
| December 29, 2019 | December 30, 2018 | |||||||
| Prepaid rent | $ | 12 | $ | 7 | ||||
| Prepaid insurance | 188 | 139 | ||||||
| Other prepaid expenses | 222 | 224 | ||||||
| Total | $ | 422 | $ | 370 | ||||
| 18 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
| December 29, 2019 | December 30, 2018 | |||||||
| Leasehold improvements | $ | 1,786 | $ | 2,686 | ||||
| Restaurant equipment | 1,883 | 1,974 | ||||||
| Assets under capital leases | 77 | 77 | ||||||
| Office equipment & furniture | 140 | 139 | ||||||
| Computers & software | 160 | 44 | ||||||
| Construction-in-process | 134 | 110 | ||||||
| 4,180 | 5,030 | |||||||
| Less: Accumulated depreciation | (2,266 | ) | (2,285 | ) | ||||
| Total | $ | 1,914 | $ | 2,745 | ||||
Major renewals and improvements that extend the useful life of an asset are capitalized. Replacements and maintenance and repairs which do not extend the lives of the assets are expensed as incurred. Depreciation expense was $562 and $1,182 for the years ended December 29, 2019 and December 30, 2018, respectively.
NOTE 5 – OTHER ASSETS
Other assets consisted of the following:
| December 29, 2019 | December 30, 2018 | |||||||
| Long-term franchise receivable | $ | - | $ | 24 | ||||
| Certificate of deposit - restricted | - | 72 | ||||||
| Security deposits and other | 14 | 20 | ||||||
| Other assets | - | 8 | ||||||
| Total | $ | 14 | $ | 124 | ||||
| 19 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
NOTE 6 - INTANGIBLE ASSETS, NET
Intangible assets, net and their respective amortization years as of December 29, 2019 were:
| Accumulated | ||||||||||||
| Gross | Amortization | Net | ||||||||||
| Amortizable intangible assets: | ||||||||||||
| International franchise agreements (13.5 years) | $ | 2,070 | $ | (741 | ) | $ | 1,329 | |||||
| Trade names and trademarks (14.5 years) | 49,787 | (18,917 | ) | 30,870 | ||||||||
| $ | 51,857 | $ | (19,658 | ) | $ | 32,199 | ||||||
| Unamortizable intangible assets: | ||||||||||||
| Goodwill | $ | 7,393 | ||||||||||
Intangible assets and their respective amortization years as of December 30, 2018 were:
| Accumulated | ||||||||||||
| Gross | Amortization | Net | ||||||||||
| Amortizable intangible assets: | ||||||||||||
| International franchise agreements (20 years) | $ | 2,070 | $ | (575 | ) | $ | 1,495 | |||||
| Trade names and trademarks (20 years) | 49,787 | (15,487 | ) | 34,300 | ||||||||
| $ | 51,857 | $ | (16,062 | ) | $ | 35,795 | ||||||
| Unamortizable intangible assets: | ||||||||||||
| Goodwill | $ | 7,393 | ||||||||||
JRG amortization expense included in depreciation and amortization on the consolidated statements of operations was $3,596 and $3,079, for the years ended December 29, 2019 and December 30, 2018, respectively, net of $2 of amortization of unfavorable lease liability for the year ended December 30, 2018. For the year ending December 30, 2018 JRG had goodwill impairment expense of $7,476, trade names and trademarks impairment expense of $5,943, and domestic franchise agreements impairment expense of $1,706, which was the complete net book value at December 30, 2018. The December 30, 2018 gross amounts were reduced by the impairment expense.
| 20 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
NOTE 6 - INTANGIBLE ASSETS, NET – Continued
Future amortization expense related to these intangible assets as of December 29, 2019 is:
| Intangible | ||||
| Assets | ||||
| Fiscal years ending: | ||||
| 2020 | $ | 3,596 | ||
| 2021 | 3,596 | |||
| 2022 | 3,596 | |||
| 2023 | 3,596 | |||
| 2024 | 3,596 | |||
| Thereafter | 14,219 | |||
| $ | 32,199 | |||
Subsequent to year end the COVID-19 Pandemic has had a significant impact on intangibles (See note 17).
NOTE 7 – ACCRUED EXPENSES
Accrued expenses consisted of the following:
| December 29, 2019 | December 30, 2018 | |||||||
| Gift cards outstanding | $ | 484 | $ | 487 | ||||
| Accrued taxes | 122 | 186 | ||||||
| Accrued disposition reserves | - | 314 | ||||||
| Lease termination payable | - | 391 | ||||||
| Accrued audit expense | 226 | 173 | ||||||
| Other | 984 | 798 | ||||||
| Total | $ | 1,816 | $ | 2,349 | ||||
NOTE 8 – OTHER LONG-TERM LIABILITIES
Other long-term liabilities consisted of the following:
| December 29, 2019 | December 30, 2018 | |||||||
| Accrued rent | $ | 515 | $ | 492 | ||||
| Accrued disposition reserves | - | 1,247 | ||||||
| Other | 37 | - | ||||||
| Total | $ | 552 | $ | 1,739 | ||||
| 21 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
NOTE 9 - DEBT
As of December 29, 2019, the Company has three related-party, payment in kind (“PIK”) secured promissory note agreements, one with Sun Ice Cream Finance, LP., a second note with Sundae Group Holdings I, LLC was issued on June 20, 2016 in conjunction with the settlement of the term debt with Cerberus Business Finance (“Senior Debt”), and a third with Sun Ice Cream Finance III, LP was issued on December 28, 2017 in conjunction with a payment of the due to affiliates balance.
The first PIK note with Sun Ice Cream Finance, LP has a principal balance of $12,600 and was issued on June 6, 2013, with a maturity date of April 24, 2018, as part of the Acquisition. Interest on the note is payment in kind. Payment of the note and the associated accrued interest are due upon maturity of the note. Prepayments can be made at any time. Interest will accrue on the unpaid principal amount at a rate equal to LIBOR plus 4.75% per annum and compound quarterly. On the last business day of each quarter, the accrued interest is added to the principal amount of the PIK note. On February 28, 2018 the maturity date of the note was extended to June 6, 2019. On March 7, 2019 the maturity date of the note was extended to June 6, 2021 and the interest rate was changed to LIBOR plus 5.00% per annum. Accrued PIK interest of $342 and $329 and principal amounts of $19,055 and $17,680 are included on the consolidated balance sheets as of December 29, 2019 and December 30, 2018, respectively. On July 31, 2020 the maturity date was extended to June 6, 2024.
On June 20, 2016 Neapolitan Group Holdings, LLC issued a new PIK note to Johnny Rockets Holding Co., JR Group Holdings, LLC and JRG as obligor with a maturity date of June 20, 2021. The note with a principal balance of $41,045 was issued in exchange for the complete $40,255 principal and interest due on the Cerberus Credit Facility and $790 in accrued Consulting fees due to Sun Capital Partners Management V, LLC. The Cerberus debt was paid in full by Neapolitan from the proceeds collected from the sale of other affiliated subsidiaries. Following the issuance of the note Neapolitan assigned the note to Sundae Group Holdings I, LLC, the new parent of Johnny Rockets Holding Co. Interest will accrue on the unpaid principal amount at a rate equal to 9.75% per annum and compound quarterly. On the last business day of each quarter, the accrued interest is added to the principal amount of the PIK note. Accrued PIK interest of $1,368 and $1,283 and principal amounts of $56,293 and $51,097 are included on the consolidated balance sheets as of December 29, 2019 and December 30, 2018, respectively. On July 31, 2020 the maturity date was extended to June 20, 2024.
On December 18, 2017 Sun Ice Cream Finance III, LP. issued a new PIK note to Johnny Rockets Holding Co., JR Group Holdings, LLC and JRG as obligor with a maturity date of December 18, 2022. The note with a principal balance of $3,174 was issued to fund the payment of the due to affiliates balance. Interest will accrue on the unpaid principal amount at a rate equal to 10% per annum and compound quarterly on the last business day of each quarter, the accrued interest is added to the principal amount of the PIK note. On January 16, 2018 the agreement was amended to allow for additional term loans up to $19,000 at the discretion of the lender. In 2018 there was additional borrowings of $13,868. The funds were used to pay down the FIC Holdings, LLC note and fund the buyout of non-performing restaurant leases. On January 28, 2019 the agreement was amended to allow for additional term loans up to $19,543 at the discretion of the lender. In 2019 there was additional borrowings of $2,501. The funds were used to pay off the FIC Holdings, LLC note. Accrued PIK interest of $553 and $405 and principal amounts of $22,153 and $17,678 are included on the consolidated balance sheets as of December 29, 2019 and December 30, 2018, respectively. On March 25, 2020 in response to the COVID-19 pandemic the agreement was amended to allow for additional term loans up to $29,543 at the discretion of the lender.
| 22 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
NOTE 9 – DEBT - Continued
There was a fourth PIK note with Friendly’s Ice Cream, LLC that was assumed by FIC Holdings, LLC on June 20, 2016 when Friendly’s Ice Cream, LLC merged with FIC Holdings, LLC. The note was issued on June 6, 2013, with a principal balance of $14,000 and a maturity date of June 6, 2018, as part of the Acquisition. Interest on the note is payment in kind and interest compounds annually by adding the accrued and unpaid interest to the principal amount of the note and accruing interest on the increased principal amount thereafter. Payment of the note and the associated accrued interest are due upon maturity of the note. Prepayments can be made at any time. Interest accrued on the principal amount of the note at a rate equal to 1.73% per annum. On January 16, 2018 the maturity date of the note was extended to June 6, 2019. During 2018 the outstanding balance was paid down using additional borrowings of $13,210 from the Sun Ice Cream Finance III, LP note. Accrued PIK interest of $2 and principal amount of $2,073 are included on the consolidated balance sheets as of December 30, 2018. The remaining balance and accrued interest were paid off in January 2019 with additional funds borrowed against the Sun Ice Cream Finance III LP note.
JRG had a note payable with the landlord of its new corporate office space for $87. The funds were used to pay the costs associated with moving to the new office location. The note had an 8% interest rate and was payable in 96 equal monthly payments with the final payment due April 1, 2024. In 2018 this note was paid off in conjunction with the early termination of the lease.
JRG issued a letter of credit for $72 to the landlord of one of the corporate restaurants. In conjunction with the letter of credit the bank required JRG to deposit $72 in a certificate of deposit as collateral. The certificate is included in other assets for the year ended December 30, 2018. The letter of credit and certificate of deposit were canceled in 2019 after termination of the lease.
Debt consisted of the following:
| December 29, 2019 | December 30, 2018 | |||||||
| Payment in kind note (related party) | $ | 97,501 | $ | 88,528 | ||||
| Accrued interest on payment in kind note | 2,263 | 2,019 | ||||||
| Total related party debt | 99,764 | 90,547 | ||||||
| Less: current portion | - | - | ||||||
| Long-term debt | $ | 99,764 | $ | 90,547 | ||||
| 23 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
NOTE 9 – DEBT - Continued
Annual maturities of total debt as of December 29, 2019 are as follows:
| Year | Amount | |||
| 2020 | $ | - | ||
| 2021 | - | |||
| 2022 | 22,706 | |||
| 2023 | - | |||
| 2024 | 77,058 | |||
| Thereafter | - | |||
| $ | 99,764 | |||
Prior to the closing of the equity sale (See note 17) all related party debt will either be cancelled or contributed to equity
NOTE 10 - LEASES
JRG leases its restaurant facilities and certain equipment under non-cancelable operating leases expiring at various dates through 2029. Certain leases provide for monthly rent expense equal to a fixed payment plus a variable amount calculated using net sales over a breaking point. Certain leases are subject to annual adjustments for inflation and contain renewal options. Rent expense is recorded on a straight-line basis over the term of the lease. JRG’s rent expense for the years ended December 29, 2019 and December 30, 2018 was approximately $3,051 and $4,933, respectively, (including contingent rental amounts of approximately $213 and $222 for the years ended December 29, 2019 and December 30, 2018, respectively and sublease rental expense of approximately $266 and $721 for the years ended December 29, 2019 and December 30, 2018, respectively).
JRG subleases certain facilities in connection with franchising. Sublease rental income is recorded on a straight-line basis over the term of the sublease. JRG’s sublease rent income for the year ended December 29, 2019 and December 30, 2018 was approximately $298 and $718, respectively, and is recorded in initial franchise fees and rental income in the consolidated statements of operations.
| 24 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
NOTE 10 – LEASES – Continued
Future minimum lease payments under non-cancelable leases related to continuing operations with an original term in excess of one year as of December 29, 2019 are:
| Operating | Capital | |||||||
| Year | Leases | Leases | ||||||
| 2020 | $ | 2,026 | 19 | |||||
| 2021 | 1,829 | 19 | ||||||
| 2022 | 1,791 | 10 | ||||||
| 2023 | 1,645 | - | ||||||
| 2024 | 1,470 | - | ||||||
| Thereafter | 3,348 | - | ||||||
| $ | 12,109 | 48 | ||||||
| Less amounts representing interest | (6 | ) | ||||||
| Present value of minimum lease payments | 42 | |||||||
| Less current maturities of capital leases | (15 | ) | ||||||
| Long-term maturities of capital leases | $ | 27 | ||||||
JRG capital leases reflected in the accompanying consolidated balance sheet have effective interest rates ranging from 10.00% to 17.00% and are payable in monthly installments through 2022. Maturities of such obligations as of December 29, 2019 were:
| Year | ||||
| 2020 | 15 | |||
| 2021 | 17 | |||
| 2022 | 10 | |||
| 2023 | - | |||
| 2024 | - | |||
| Thereafter | - | |||
| Total | $ | 42 | ||
| 25 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
NOTE 11 - INCOME TAXES
Significant components of the provision for income taxes for the years ended December 29, 2019 and December 30, 2018 are as follows:
| December 29, 2019 | December 29, 2018 | |||||||
| Current provision: | ||||||||
| Federal | $ | - | $ | (15 | ) | |||
| State | 6 | 10 | ||||||
| Foreign | 829 | 816 | ||||||
| Total current | 835 | 811 | ||||||
| Deferred benefit: | ||||||||
| Federal | - | 15 | ||||||
| State | - | (439 | ) | |||||
| Total deferred | - | (424 | ) | |||||
| Income tax expense | $ | 835 | $ | 387 |
The effective tax rate differs from the statutory rate due principally to nondeductible items, Federal Insurance Contributions Act tax credit, valuation allowance, foreign tax withholding and state income taxes.
| 26 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
NOTE 11 - INCOME TAXES - Continued
Deferred tax assets and liabilities are determined as the difference between the consolidated financial statement and tax basis of the assets and liabilities multiplied by the enacted tax rates in effect for the year in which the differences are expected to reverse. Significant deferred tax assets (liabilities) at December 29, 2019 and December 30, 2018 were:
| December 29, 2019 | December 30, 2018 | |||||||
| Deferred tax assets: | ||||||||
| Operating loss carryforwards | $ | 5,962 | $ | 5,841 | ||||
| Tax credit carryforwards | 9,797 | 9,136 | ||||||
| Property and equipment | 871 | 714 | ||||||
| Accrued expenses | 457 | 598 | ||||||
| Interest expense | 5,493 | 3,146 | ||||||
| Other | 312 | 763 | ||||||
| Total deferred tax assets | 22,892 | 20,198 | ||||||
| Deferred tax liabilities: | ||||||||
| Intangible assets | (8,931 | ) | (9,675 | ) | ||||
| Other | - | (5 | ) | |||||
| Total deferred tax liabilities | (8,931 | ) | (9,680 | ) | ||||
| Net deferred tax assets (liabilities) | 13,961 | 10,518 | ||||||
| Valuation allowance | (13,961 | ) | (10,518 | ) | ||||
| Net deferred tax liability | $ | - | $ | - | ||||
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act contains numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses arising in taxable years beginning after December 31, 2017. The CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company is currently evaluating the impact of the CARES Act, but at present does not expect that the NOL carryback provision of the CARES Act would result in a cash benefit due to the existence of previously incurred losses.
At December 29, 2019, the Company had cumulative federal and state net operating loss carryforwards totaling $18,498 and $28,144, respectively, which have various expiration dates some of which do not expire. In addition, the Company had alternative minimum tax (AMT) credit, foreign tax credit and general business tax credit carryforwards of approximately $9,797. The Company’s AMT credits became refundable over a four-year period starting in 2018 due to the Tax Cuts and Jobs Act, and then subsequently became entirely refundable in 2019 due to the CARES Act. The Company’s foreign tax and general business tax credits expire at various dates through 2039.
| 27 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
NOTE 11 - INCOME TAXES - Continued
Due to the “change of ownership” provisions of the Tax Reform Act of 1986, utilization of the Company’s net operating loss carryforwards is subject to an annual limitation against taxable income in future periods. As a result of the annual limitation, a portion of these carryforwards may expire before ultimately becoming available to reduce future income tax liabilities. The Company has not performed a detailed analysis to determine the amount of any limitation.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future income during the periods in which the related temporary differences become deductible and the NOL and tax credit carryforwards are utilizable. Based on the earnings history during the current and prior two years, management has determined that it is not more likely than not that the Company will realize the benefits of its net deferred tax assets. The Company recorded a valuation allowance of $13,961 and $10,518 as of December 29, 2019 and December 30, 2018, respectively.
JRG accounts for uncertainty in income taxes in accordance with ASC 740, Income Taxes. This standard clarifies the accounting for uncertainty in income taxes recognized in financial statements by prescribing a recognition threshold and measurement attribute for financial statement recognition and measurement based upon the technical merits of the position.
JRG is subject to U.S. federal income tax as well as income tax in multiple state tax jurisdictions. JRG is currently open to audit by the Internal Revenue Service for the years ended January 1, 2017 and later. JRG and its subsidiaries’ state income tax returns are open to audit for the years ended January 3, 2016 and later.
NOTE 12 - RETIREMENT BENEFIT PLAN
JRG’s 401(k) plan allows eligible employees to receive matching contributions of up to one thousand five hundred dollars per calendar year. To be eligible to participate in the 401(k) plan, employees must have completed 6 months of service with the Company. The Company recorded $60 and $25 in expense associated with the matching contributions under the plan for the years ended December 29, 2019 and December 30, 2018, respectively.
NOTE 13 - SHAREHOLDER’S EQUITY
All of the outstanding stock of JRG is owned by a sole shareholder. As of December 29, 2019, ten thousand shares were authorized, with one thousand shares outstanding.
NOTE 14 – STOCK-BASED COMPENSATION
JRG adopted the Stock Option Plan (the “Plan”) in 2014, which is shareholder-approved, that permits the grant of stock options to its key employees up to 90 thousand shares. JRG believes that such awards better align the interests of its employees with those of its shareholder. Option awards are granted with an exercise price determined by the Board Committee at the date of grant; those option awards generally vest based on five years of continuous service and have 10-year contractual terms. Certain option and share awards provide for accelerated vesting if there is a change in control, as defined in the Plan.
| 28 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
NOTE 14 – STOCK-BASED COMPENSATION - Continued
The fair value of each option award is estimated on the date of grant using the Black-Scholes model that uses the assumptions noted in the table below. Expected volatilities are based on the historical equity volatilities of JRG’s guideline public companies. JRG used the simplified method to determine the expected term given the absence of historical exercise behavior. The risk-free rate for the options is calculated based on an extrapolated yield of the five year and seven-year U.S. Treasury Bonds. Due to JRG being privately held, it estimated a Discount for Lack of Marketability (“DLOM”) for the options using a put-option model.
| 2019 | ||||
| Expected volatility | 51.00 | % | ||
| Expected term (in years) | 6.25 | |||
| Risk-free rate | 1.44 | % | ||
| Forfeiture rate | 70.0 | % | ||
A summary of option activity under the Plan as of December 29, 2019 and December 30, 2018, and changes during the years then ended is presented below:
| Options | Shares | Weighted Average Exercise Price | ||||||
| Outstanding at December 31, 2017 | 2 | $ | 30.60 | |||||
| Exercisable at December 30, 2018 | - | - | ||||||
| Granted | 118 | 29.46 | ||||||
| Exercised | - | - | ||||||
| Forfeited or expired | (36 | ) | 30.63 | |||||
| Outstanding at December 30, 2018 | 84 | 28.99 | ||||||
| Exercisable at December 29, 2019 | - | - | ||||||
| Granted | 8 | 37.10 | ||||||
| Exercised | - | - | ||||||
| Forfeited or expired | (63 | ) | 28.83 | |||||
| Outstanding at December 29, 2019 | 29 | $ | 31.66 | |||||
| 29 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
NOTE 14 – STOCK-BASED COMPENSATION - Continued
As of December 29, 2019, and December 30, 2018, there was $45 and $345, respectively, of total unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 5 years. Stock compensation expense is included in general and administrative expenses.
At or prior to the closing of the equity sale (See note 17) all issued options and the Option Plan will be terminated.
NOTE 15 - RELATED PARTY TRANSACTIONS
JRG has four subordinated secured promissory note agreements payable to related parties (See Note 9).
The Company has a Consulting Services Agreement (the “Consulting Agreement”) with Sun Capital Partners Management V, LLC, a Delaware limited liability company (the “Consultant”), an investment fund affiliated with the Parent. This agreement was modified effective April 1, 2019 increasing the required minimum fees going forward from $350 or 4% of EBITDA to the following. The Consultant is paid annual fees (the “Consulting Fee”) equal to the greater of (i) $600 (the “Yearly Minimum Fee”) or (ii) the lesser of (x) 6.0% (such percentage, the “Applicable Percentage”) of EBITDA as defined in the amendment for the applicable fiscal year and (y) $750 in any fiscal year (the “Annual Cap”). The Company pays the Consulting Fee in quarterly installments in advance equal to the greater of (i) twenty five percent (25%) of the Yearly Minimum Fee or (ii) the Applicable Percentage of EBITDA for the immediately preceding fiscal quarter. The 2019 amendment is still covered by the April 27, 2017 modification reducing the Yearly Minimum Fee by 20% to $480, the Applicable Percentage to 4.8% and the Annual Cap to $600. Additionally, the Consultant is reimbursed for the cost of all reasonable out-of-pocket fees and expenses incurred by the Consultant and its affiliates in the performance of services covered by the Consulting Agreement and all matters related thereto. The Company reimburses such expenses on a quarterly basis in arrears. Consulting Fees of $430 and $280 and expense reimbursements of $67 and $35 were recorded as general and administrative expenses for the years ended December 29, 2019 and December 30, 2018, respectively.
JRG entered into a shared services agreement on July 27, 2016 with FIC Restaurants, Inc (FIC). FIC has the same parent company Sundae Group Holdings I, LLC. This agreement is designed to allow both Companies to utilize common management and support functions to make both groups more cost effective. The agreement provides guidelines on how to allocate the costs of these services between each entity. Net expenses of $2,336 and $3,640 were allocated to JRG for the years ended December 29, 2019 and December 30, 2018, respectively. With JRG closing their corporate offices in 2018, the JRG employees are now working from the FIC corporate offices and JRG is being allocated rent and overhead costs.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
JRG is party to various legal proceedings arising in the ordinary course of business which management believes, after consultation with legal counsel, will not have a material adverse effect on JRG’s consolidated financial position or future operating results.
| 30 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
For the years ended December 29, 2019 and December 30, 2018
(In thousands)
NOTE 17 - SUBSEQUENT EVENTS
In March 2020 the effects of the COVID-19 Pandemic and related government-imposed restrictions related to restaurant dining along with the general impact on the economy and customers has had a significant impact on the revenue and cash flows of the business. (See Note 1 Liquidity). As a result of the COVID-19 impact JRG assessed the impairment impact it had on all of it’s intangible assets as of March 29, 2020. This will result in the Trade Name intangible being written down $17,014 in 2020 and the International Franchise Agreements intangible’s net book value of $1,287 being fully written off in 2020. Goodwill was not impaired.
On April 1, 2020 the Consulting Services Agreement with Sun Capital Partners Management V, LLC, (See Note 15), was amended eliminating the annual fee paid to the Consultant effective on that date.
On August 12, 2020 Sundae Group Holdings, I, LLC signed a stock purchase agreement with FAT Brands Inc., a Delaware corporation to sell 100% of the issued and outstanding Equity Interests of Johnny Rockets Holding Co., the parent of JRG for $24.6 million. The target closing date for the transaction is September 15, 2020. The purchase price will be paid in cash net of any adjustments to a targeted working capital amount, closing cash and transaction expenses. Prior to the closing all related party debt will be either cancelled or contributed to equity and the Stock Option Plan and all issued options will be terminated.
JRG has evaluated subsequent events through the date of issuance, September 10, 2020, and identified no additional events requiring adjustment to or disclosure in these consolidated financial statements.
| 31 |
Exhibit 99.2
Consolidated Financial Statements
The Johnny Rockets Group, Inc. and Subsidiaries
As of June 28, 2020 and December 29, 2019 and for the twenty-six weeks ended June 28, 2020 and June 30, 2019
Contents
| Page | |
| Consolidated Financial Statements | |
| Consolidated Balance Sheets | 1-2 |
| Consolidated Statements of Operations | 3 |
| Consolidated Statements of Shareholder’s Equity (deficit) | 4 |
| Consolidated Statements of Cash Flow | 5 |
| Notes to Consolidated Financial Statements | 6-26 |
THE JOHNNY ROCKETS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollar amounts in thousands)
| June 28, 2020 | December 29, 2019 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 923 | $ | 401 | ||||
| Receivables, net | 1,217 | 1,860 | ||||||
| Inventories | 64 | 76 | ||||||
| Prepaid expenses and other current assets | 439 | 422 | ||||||
| Total current assets | 2,643 | 2,759 | ||||||
| Property and equipment, net | 2,249 | 1,914 | ||||||
| Goodwill | 7,393 | 7,393 | ||||||
| Intangible assets, net | 12,629 | 32,199 | ||||||
| Other assets | 14 | 14 | ||||||
| Total assets | $ | 24,928 | $ | 44,279 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 1 |
THE JOHNNY ROCKETS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets - Continued
(Dollar amounts in thousands, except par value)
| June 28, 2020 | December 29, 2019 | |||||||
| (Unaudited) | ||||||||
| Liabilities and Shareholder’s Equity (Deficit) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,137 | $ | 753 | ||||
| Due to affiliates | 151 | 362 | ||||||
| Accrued salaries and benefits | 232 | 594 | ||||||
| Accrued expenses | 1,552 | 1,816 | ||||||
| Deferred franchise fees, current portion | 60 | 57 | ||||||
| Capital leases, current portion | 16 | 15 | ||||||
| Total current liabilities | 3,148 | 3,597 | ||||||
| Deferred franchise fees, net of current portion | 156 | 233 | ||||||
| Capital leases, net of current portion | 19 | 27 | ||||||
| Long-term debt related party | 108,451 | 99,764 | ||||||
| Other long-term liabilities | 556 | 552 | ||||||
| Total liabilities | 112,330 | 104,173 | ||||||
| Commitments and contingencies (Note 15) | ||||||||
| Shareholder’s equity (deficit): | ||||||||
| Common stock, $0.01 par value: 10,000 shares authorized, 1,000 shares issued and outstanding | - | - | ||||||
| Additional paid-in-capital | 15,992 | 15,992 | ||||||
| Accumulated deficit | (103,394 | ) | (75,886 | ) | ||||
| Total shareholder’s equity (deficit) | (87,402 | ) | (59,894 | ) | ||||
| Total liabilities and shareholder’s equity (deficit) | $ | 24,928 | $ | 44,279 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 2 |
THE JOHNNY ROCKETS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollar amounts in thousands)
(Unaudited)
| Twenty-six weeks ended | ||||||||
| June 28, 2020 | June 30, 2019 | |||||||
| Revenues: | ||||||||
| Restaurant sales | $ | 3,383 | $ | 8,637 | ||||
| Franchise royalties | 2,998 | 6,685 | ||||||
| Initial country and franchise fees and rental income | 118 | 662 | ||||||
| Total revenues | 6,499 | 15,984 | ||||||
| Operating expenses: | ||||||||
| Cost of sales | 789 | 2,052 | ||||||
| Labor costs | 1,438 | 3,144 | ||||||
| Operating expenses | 2,635 | 3,663 | ||||||
| General and administrative expenses | 4,384 | 5,857 | ||||||
| Depreciation and amortization | 1,540 | 2,102 | ||||||
| Impairment of intangibles | 18,300 | - | ||||||
| Other losses | 11 | - | ||||||
| Total operating expenses | 29,097 | 16,818 | ||||||
| Loss from operations | (22,598 | ) | (834 | ) | ||||
| Other expense: | ||||||||
| Interest expense, net | 4,688 | 4,372 | ||||||
| Total other expense, net | 4,688 | 4,372 | ||||||
| Loss before income taxes | (27,286 | ) | (5,206 | ) | ||||
| Provision for income tax expense | 222 | 424 | ||||||
| Net Loss | $ | (27,508 | ) | $ | (5,630 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
| 3 |
THE JOHNNY ROCKETS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholder’s Equity (Deficit)
(Dollar amounts in thousands, except share data)
(Unaudited)
For the twenty-six weeks ended June 28, 2020 and June 30, 2019
| Additional | ||||||||||||||||||||
| Number of | Common | paid-in | Accumulated | |||||||||||||||||
| shares | stock | capital | deficit | Total | ||||||||||||||||
| Balance at December 30, 2018 | 1,000 | $ | - | $ | 15,972 | $ | (65,145 | ) | $ | (49,173 | ) | |||||||||
| Net loss | (5,630 | ) | (5,630 | ) | ||||||||||||||||
| Share-based compensation | - | - | - | - | ||||||||||||||||
| Balance at June 30, 2019 | 1,000 | $ | - | $ | 15,972 | $ | (70,775 | ) | $ | (54,803 | ) | |||||||||
| Balance at December 29, 2019 | 1,000 | $ | - | $ | 15,992 | $ | (75,886 | ) | $ | (59,894 | ) | |||||||||
| Net Loss | - | (27,508 | ) | (27,508 | ) | |||||||||||||||
| Share-based compensation | - | - | - | - | ||||||||||||||||
| Balance at June 30, 2020 | 1,000 | $ | - | $ | 15,992 | $ | (103,394 | ) | $ | (87,402 | ) | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
THE JOHNNY ROCKETS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
(Unaudited)
| Twenty-six weeks ended | ||||||||
| June 28, 2020 | June 30, 2019 | |||||||
| Operating activities: | ||||||||
| Net Loss | $ | (27,508 | ) | $ | (5,630 | ) | ||
| Adjustments to reconcile net loss to cash used in operating activities: | ||||||||
| Depreciation and amortization | 1,540 | 2,102 | ||||||
| Interest expense on in-kind notes | 4,687 | 4,306 | ||||||
| Impairment of intangible assets | 18,300 | - | ||||||
| Provision for bad debts | 312 | 61 | ||||||
| Net change in operating assets and liabilities: | ||||||||
| Receivables, net | 331 | 377 | ||||||
| Inventories | 12 | - | ||||||
| Other assets | (17 | ) | (215 | ) | ||||
| Accounts payable | 384 | (748 | ) | |||||
| Due to affiliates | (211 | ) | 598 | |||||
| Accrued expenses and other long-term liabilities | (622 | ) | (969 | ) | ||||
| Deferred franchise fees | (74 | ) | (155 | ) | ||||
| Net cash used in operating activities | (2,866 | ) | (273 | ) | ||||
| Investing activities: | ||||||||
| Purchases of property and equipment | (605 | ) | (156 | ) | ||||
| Proceeds from sales of property and equipment | - | - | ||||||
| Net cash used in investing activities | (605 | ) | (156 | ) | ||||
| Financing activities: | ||||||||
| Repayment of related party debt | - | (2,076 | ) | |||||
| Proceeds from related party debt | 4,000 | 2,501 | ||||||
| Repayments of capital lease obligations | (7 | ) | (7 | ) | ||||
| Net cash provided by financing activities | 3,993 | 418 | ||||||
| Net increase (decrease) in cash | 522 | (11 | ) | |||||
| Cash, beginning of period | 401 | 278 | ||||||
| Cash, end of period | $ | 923 | $ | 267 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | 4 | $ | 5 | ||||
| Cash paid for income taxes | $ | 2 | $ | 10 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 5 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
As of June 28, 2020 and December 29, 2019
and for the twenty-six weeks ended June 28, 2020 and June 30, 2019
(In thousands)
NOTE 1 - NATURE OF OPERATIONS
Business entity
The Johnny Rockets Group, Inc., a Delaware corporation, and its subsidiaries (collectively, the “Company” or “JRG”) develop, operate, and franchise restaurants under the name “Johnny Rockets, The Original Hamburger.” The restaurants are casual-themed, all-American style diners that primarily serve hamburgers, shakes, and American fries.
On June 6, 2013 (the “Acquisition Date”), Burger Acquisition Co. entered into a Membership Interest Purchase Agreement (the “Agreement”), whereby Burger Acquisition Co., a Delaware corporation and wholly owned subsidiary of Neapolitan Group, LLC (the “Parent”), agreed to purchase all of the outstanding membership interests of JR Group Holdings, LLC (“JRGHL”), a Delaware limited liability company, becoming the single member of JRGHL, the parent of Johnny Rockets Group, Inc. and its subsidiaries. Neapolitan Group, LLC is also a Delaware limited liability company and a wholly owned subsidiary of Sundae Group Holdings I, LLC, a Delaware limited liability company (the “Ultimate Parent”).
On June 20, 2016, the Parent of Johnny Rockets Holding Co. (“JRHC”) (f/k/a Burger Acquisition Co.) distributed 100% of JRHC shares to Sundae Group Holdings I, LLC.
Liquidity / Going Concern
For the twenty-six weeks ended June 28, 2020 and June 30, 2019, JRG incurred losses of $27,508 and $5,630, respectively. In addition, the company had negative cash flows from operations of $2,866 and $273, respectively.
As a result of the COVID 19 Pandemic and the related restrictions to “in restaurant dining”, the general impact it has had on the economy, and the ability and willingness of customers to eat out, the Company’s 2020 forecasted revenue and cash flows has been significantly impacted by this unique business disruption. The affect has been seen at all corporate and franchise locations across the world, it has required a significant number of restaurant locations to close temporarily or depend on only takeout and delivery sales after closing their in-house dining. This has resulted in significant reductions to revenue and cash flows and has required additional liquidity be added to the business. Since the start of the 2020 fiscal year through June 28, 2020 the Company borrowed $4 million in additional funding on its related party PIK Notes. Based on the Company’s latest forecasts, management expects that it will need to rely on its equity owners, or others, for additional debt or capital funding to support operations through the next twelve months. The equity owners have not committed to provide this funding, nor are there any assurances that such funding will be available.
Based on the latest 2020 forecast management estimates that the company will utilize cash of $5.9 million from operations and projects a net loss of $18.5 million. Management has projected that in addition to the funding already received in 2020, it will need an additional $2.5 million to $3 million through the end of 2020. Based on all the uncertainty with the pandemic, the projected 2021 cash shortfall cannot currently be determined. If sufficient funding is not received, the Company will need to curtail certain operations, close locations, or take other measures to limit its losses and use of cash.
| 6 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
As of June 28, 2020 and December 29, 2019
and for the twenty-six weeks ended June 28, 2020 and June 30, 2019
(In thousands)
NOTE 1 - NATURE OF OPERATIONS – Continued
Liquidity / Going Concern - Continued
On August 12, 2020 JRG’s parent signed a stock purchase agreement in which it agreed to sell 100% of the issued and outstanding Equity Interests of Johnny Rockets Holding Co., the parent of JRG, for $24.6 million. The target closing date for the transaction is September 15, 2020. The purchase price will be paid in cash net of any adjustments to a targeted working capital amount, closing cash and transaction expenses. Prior to the closing all related party debt will be either cancelled or contributed to equity and the Stock Option Plan and all issued options will be terminated.
Currently the total impact of COVID 19 is uncertain and that creates significant risk to the latest forecast. Any resurgence in infection rates, additional impact on the economy, and how quick customers are willing and able to visit restaurants could have significant impact on the forecasted revenue and cash flows and either increase or decrease the need for additional funding.
As a result of the significant economic uncertainties since the declaration of the COVID 19 pandemic, management has concluded that there is significant doubt that the Company will be able continue to operate as a going concern for the next 12 months. No adjustments have been made to the consolidated financial statements related to these uncertainties.
Operations
At June 28, 2020, there were 9 Company-owned restaurants and 323 franchised restaurants. Company-owned restaurants are located in California, Maryland, Nevada, New Jersey, New York and Virginia. Franchised restaurants are located in 28 states, Washington DC, and in Australia, Bahrain, Bangladesh, Bolivia, Brazil, Canada, Chile, Costa Rica, Cyprus, Ecuador, Honduras, Indonesia, Italy, Kuwait, Mexico, Nigeria, Norway, Oman, Panama, Peru, Poland, Qatar, Saudi Arabia, South Korea, Spain, Tunisia, and the United Arab Emirates.
The following is a summary of JRG’s Company-operated and franchised units:
| Domestic | International | Total | ||||||||||
| Company Units: | ||||||||||||
| Beginning of the period | 13 | - | 13 | |||||||||
| Openings | - | - | - | |||||||||
| Closings | (2 | ) | - | (2 | ) | |||||||
| End of the period, June 30, 2019 | 11 | - | 11 | |||||||||
| Beginning of the period | 11 | - | 11 | |||||||||
| Openings | - | - | - | |||||||||
| Closings | (2 | ) | - | (2 | ) | |||||||
| End of the period, June 28, 2020 | 9 | - | 9 | |||||||||
| 7 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - Continued
As of June 28, 2020 and December 29, 2019
and for the twenty-six weeks ended June 28, 2020 and June 30, 2019
(In thousands)
NOTE 1 - NATURE OF OPERATIONS – Continued
Operations - Continued
| Domestic | International | Total | ||||||||||
| Franchised Units: | ||||||||||||
| Beginning of the period | 162 | 197 | 359 | |||||||||
| Openings | 3 | 5 | 8 | |||||||||
| Closings | (18 | ) | (13 | ) | (31 | ) | ||||||
| End of the period, June 30, 2019 | 147 | 189 | 336 | |||||||||
| Beginning of the period | 142 | 193 | 335 | |||||||||
| Openings | 1 | 7 | 8 | |||||||||
| Closings | (8 | ) | (12 | ) | (20 | ) | ||||||
| End of the period, June 28, 2020 | 135 | 188 | 323 | |||||||||
NOTE 2 - SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements are prepared under the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America and include the accounts of JRG and two wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Fiscal Period
JRG’s fiscal year ends on the Sunday closest to December 31 in any given year.
Use of Estimates in the Preparation of Financial Statements
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates and the underlying assumptions affect the amount of assets and liabilities reported, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates used in preparing these consolidated financial statements include revenue recognition, accounting policies, reserves, recoverability of accounts receivable, valuation of goodwill, intangible and other long-lived assets, valuation of stock-based compensation, and assumptions used in the income tax valuation allowances and tax contingency reserves. Management believes that such estimates have been based on reasonable and supportable assumptions and the resulting estimates are reasonable. Actual amounts could differ from these estimates and they may be adjusted as more information becomes available.
| 8 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - Continued
As of June 28, 2020 and December 29, 2019
and for the twenty-six weeks ended June 28, 2020 and June 30, 2019
(In thousands)
| NOTE 2 - | SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued |
Revenue Recognition
The Company recognizes revenue from Company owned restaurants food and beverage sales as services are rendered and payment is received at the point of sale. Taxes collected from customers and remitted to government authorities are presented on a net basis and excluded from revenue.
Relating to its franchising activities, the Company receives country fees, franchise fees, area development fees, and continuing royalties. The Company recognizes country fees, franchise fees and area development fees revenue when it has completed performance of substantially all obligations specified in the related underlying agreements. For domestic franchisees, completion of substantially all obligations occurs upon the opening of each restaurant specified in the underlying agreement. Obligations include site selection, construction support, and marketing support. Payments received from franchisees prior to the completion of these obligations are reflected as current and noncurrent deferred franchise fees in the accompanying consolidated balance sheets. For international franchisees, the Company completes substantially all obligations prior to and upon entering into an area development agreement. However, each agreement is reviewed to ensure proper revenue recognition. Royalties are generally contractually earned at amounts equal to approximately 5% of franchised restaurant net sales and are recognized as such sales occur.
Gift Cards
The Company sells gift cards primarily at restaurant locations and are redeemable at the Company’s locations. The gift cards sold have no stated expiration dates and are subject to potential escheatment laws in the various jurisdictions in which the Company operates. Deferred gift card income is recorded in accrued expenses on the consolidated balance sheets. The Company recognizes revenue from gift cards when it is redeemed by the customer.
Preopening Costs
Preopening costs, which consist of payroll, supplies, and other direct expenses incurred in connection with opening new restaurants, are expensed as incurred
Cash
JRG maintains cash balances at financial institutions, and at times, balances may exceed federally insured limits. JRG has never experienced any losses related to these balances. Short-term liquid investments with original maturities of three months or less at the time of purchase are reported as cash equivalents and are carried at cost.
Fair Value of Financial Instruments
The carrying amounts of JRG’s cash, receivables, prepaid expenses, accounts payable and accrued expenses approximate fair value due to their short-term nature.
| 9 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - Continued
As of June 28, 2020 and December 29, 2019
and for the twenty-six weeks ended June 28, 2020 and June 30, 2019
(In thousands)
| NOTE 2 - | SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued |
Receivables and Allowance for Doubtful Accounts
Receivables include royalties, franchise fees, contractual marketing fees, credit cards, rents and other miscellaneous items. Receivables are stated at cost less an allowance for doubtful accounts. Management provides for probable uncollectible amounts through a charge to earnings based on a percentage of the outstanding balance and an assessment of the 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 doubtful accounts. For the twenty-six weeks ended June 28, 2020 and June 30, 2019 the Company wrote off $67 and $63 of receivables, respectively. There were allowances for doubtful accounts of $562 and $222 as of June 28, 2020 and December 29, 2019, respectively.
Receivables, net consisted of the following:
| June 28, 2020 | December 29, 2019 | |||||||
| Franchise receivable, net | $ | 1,163 | $ | 1,562 | ||||
| Credit card receivable | 39 | 211 | ||||||
| Other receivables | 15 | 87 | ||||||
| Total | $ | 1,217 | $ | 1,860 | ||||
At June 28, 2020, two customers accounted for more than 22% of franchise receivable. At December 29, 2019 one customer accounted for more than 10% of franchise receivable. No individual customer accounted for more than 10% of consolidated revenue from continuing operations for the twenty-six weeks ended June 28, 2020 and June 30, 2019, respectively.
Concentrations of Risk
JRG’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash in financial institutions. JRG places its cash with high credit quality institutions. At times, such deposits may be in excess of the FDIC insurance limit. JRG has not experienced any losses and does not believe it is exposed to any significant risk on cash. In addition, JRG is subject to credit risk through franchise receivables; however, JRG periodically evaluates the financial strength of its franchisees and believes its allowance for doubtful accounts and management of accounts are adequate to cover its credit risk exposure.
JRG currently relies on a single supplier to distribute food, packaging, and supplies to restaurants. Although they could use alternative distributors, a change in distributor could cause a delay in receipt of food, packaging, or supplies and possibly result in lost sales, which could adversely impact the results of operations.
| 10 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - Continued
As of June 28, 2020 and December 29, 2019
and for the twenty-six weeks ended June 28, 2020 and June 30, 2019
(In thousands)
| NOTE 2 - | SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued |
Inventories
Inventories, consisting principally of food and beverages, are stated at the lower of cost (first in, first out method) or net realizable value. Inventories are reviewed for spoilage and excess or obsolete products and reserved accordingly.
Long-lived Assets
Long-lived assets, such as property and equipment, and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances that require a long-lived asset or asset group to be tested for possible impairment, JRG first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
Whenever events or changes in circumstances indicate that the carrying amount of a restaurant may not be recoverable, JRG will test the restaurant for impairment. JRG evaluates restaurants by reviewing historical cash flows and reviews estimates of future cash flows, assumptions of future same-store sales and projected operating expenses. Based on the best information available, it writes down the assets of an impaired restaurant to its estimated fair market value, which becomes the new cost basis. Estimated fair market value is based on its experience selling similar properties and local market conditions, less cost to sell, for properties to be disposed of. In addition, restaurants scheduled for closing are reviewed for impairment and depreciable lives are adjusted. The impairment evaluation is based on the estimated cash flows from continuing use through the expected disposal date, and the expected terminal value.
Provision for Store Closures
Store closure costs include costs of disposing of the assets as well as other facility-related expenses and are expensed as incurred. Additionally, at the date of the closure, JRG records a liability for any remaining operating lease obligations after the expected closure date, net of estimated sublease income, if any.
Considerable management judgment is necessary to estimate future cash flows, including cash flows from continuing use, terminal value, closure costs and sublease income. Accordingly, actual results could vary significantly from estimates.
| 11 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - Continued
As of June 28, 2020 and December 29, 2019
and for the twenty-six weeks ended June 28, 2020 and June 30, 2019
(In thousands)
| NOTE 2 - | SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued |
Property and Equipment
Property and equipment are stated at cost and is depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining lease terms. For leases with renewal periods at JRG’s option, JRG generally uses the original lease term, excluding the option periods, to determine estimated useful lives. If failure to exercise a renewal option imposes an economic penalty on JRG, such that management determines at the inception of the lease that renewal is reasonably assured, JRG includes the renewal option period in the determination of appropriate estimated useful lives.
The estimated useful service lives are as follows:
| Leasehold improvements | lesser of lease term or 10 to 20 years | |
| Equipment, furniture, and fixtures | lesser of lease term or 1 to 10 years | |
| Computer | 1 to 5 years |
Goodwill and Intangible Assets
Goodwill and intangible assets deemed to have indefinite lives are not amortized, they are subject to annual impairment testing. JRG has goodwill with an indefinite life, which is all attributable to the franchise reporting unit. Trade names, which the majority is allocated to the franchise reporting unit and a small portion is allocated to the corporate restaurant reporting unit, and international franchise agreements are finite-lived intangible assets that are being amortized over estimated lives of 14.5 and 13.5 years, respectively. The Company performs its annual impairment testing on the anniversary date of the acquisition and annually thereafter, or more frequently if events and circumstances indicate that the asset might be impaired. The goodwill impairment test employed by the Company includes quantitative and qualitative assessments. The quantitative goodwill impairment test consists of comparing the fair value of a reporting unit to the carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Fair value is determined using a discounted cash flow analysis and a market multiple approach.
For the twenty-six weeks ended June 30, 2019 JRG did not perform an impairment analysis for Goodwill. During the twenty-six weeks ended June 28, 2020, JRG determined that the COVID-19 pandemic was a triggering event and performed an impairment analysis after an analysis was performed on the amortizing intangibles. The results show the fair market value was above carrying value and there was no impairment.
Amortizable intangibles are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require an amortizable intangible to be tested for possible impairment, JRG compares undiscounted cash flows expected to be generated by that business unit or the specific assets related to the intangible to its carrying value. If the carrying value of the intangible is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds the fair value. Fair value is determined using the royalty relief method for the trade name intangible and excess earnings income approach for the domestic and international franchise agreements.
| 12 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - Continued
As of June 28, 2020 and December 29, 2019
and for the twenty-six weeks ended June 28, 2020 and June 30, 2019
(In thousands)
| NOTE 2 - | SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued |
Goodwill and Intangible Assets - Continued
JRG determined there were no events and circumstances for the twenty-six weeks ended June 30, 2019 that indicated the amortizing intangibles may be impaired. During the twenty-six weeks ended June 28, 2020, JRG determined that the COVID-19 pandemic was a triggering event and performed an impairment analysis. As result of the testing JRG recorded impairment expense related to the franchise reporting unit of $16,135 for trade names and $1,287 for international franchise agreements, this was the remaining net book value. For the corporate reporting unit, it recorded impairment expense of $878 for trade names.
Accrued Disposition Reserves
JRG records a liability, net of estimated sublease income, for the remaining minimum lease payments associated with closed stores on the cease-use date. The liabilities are included in accrued expenses and other long-term liabilities. There were no liabilities as of June 28, 2020 and December 29, 2019.
Income Taxes
JRG accounts for income taxes using the liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
JRG records deferred tax assets to the extent it believes there will be sufficient future taxable income to utilize those assets prior to their expiration. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all the deferred tax assets will not be realized. To the extent deferred tax assets may be unable to be utilized, JRG records a valuation allowance against the potentially unrealizable amount and records a charge against earnings. The calculation of JRG tax liabilities involves dealing with uncertainties in the application of complex tax regulations in several different tax jurisdictions. JRG is periodically reviewed by tax authorities regarding the amount of taxes due. These reviews include questions regarding the timing and amount of deductions. In evaluating the exposure associated with various filing positions, JRG records estimated reserves for probable exposures.
Due to ever-changing tax laws and income tax rates, significant judgment is required to estimate the effective tax rate that will apply to tax differences that are expected to reverse in the future. JRG must also make estimates about the sufficiency of taxable income in future periods to offset any deductions related to deferred tax assets currently recorded. These estimates could have a significant impact on the consolidated financial statements.
| 13 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - Continued
As of June 28, 2020 and December 29, 2019
and for the twenty-six weeks ended June 28, 2020 and June 30, 2019
(In thousands)
| NOTE 2 - | SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued |
Advertising
JRG has its Company-operated and franchised restaurants share in the cost of various advertising and marketing programs. Advertising and marketing contributions are generally determined based on a percentage of revenues and to the extent contributions exceed advertising and promotional expenditures, the unspent contributions are recorded as a liability and included in other accrued liabilities in the accompanying consolidated balance sheets. The cost for local advertising for Company-operated restaurants is expensed as incurred. Advertising costs of $145 and $311 are included in the consolidated statements of operations for the twenty-six weeks ended June 28, 2020 and June 30, 2019, respectively.
Leases and Deferred Straight-line Rent Payable
JRG leases all its restaurant properties. Leases are evaluated and classified as operating or capital leases for financial reporting purposes. The lease term used for lease evaluation includes option periods only in instances in which the exercise of the option period can be reasonably assured and failure to exercise such options would result in an economic penalty. Leasehold improvements that are acquired subsequent to the inception of a lease are amortized over the lesser of the useful life of the asset or a term that includes option periods that are reasonably assured at the date of the purchase.
For leases that contain rent escalations, JRG records the total rent payable during the lease term on a straight-line basis over the term of the lease and records the difference between the rents paid and the straight-line rent as deferred rent payable.
Certain leases contain provisions that require additional rental payments based upon restaurant sales volume (“Contingent Rent”). Contingent Rent is accrued each period as the liabilities are incurred utilizing prorated periodic sales targets.
Commitments and Contingencies
Liabilities for loss contingencies which arise from claims, assessments, litigation, fines, penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount can reasonably be estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
| 14 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - Continued
As of June 28, 2020 and December 29, 2019
and for the twenty-six weeks ended June 28, 2020 and June 30, 2019
(In thousands)
| NOTE 2 - | SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued |
New Accounting Pronouncement
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (for example, assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this Update. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date, in response to stakeholders’ requests to defer the effective date of the guidance in Update 2014-09. The amendments in this Update defer the effective date of Update 2014-09 for all entities by one year. The amendments in this Update are effective for think the Company’s annual reporting periods beginning after December 15, 2018. Early application is not permitted, although a nonpublic entity may elect to apply this guidance earlier, based on certain criteria. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which does not change the core principle of the Topic 606, but instead clarifies the implementation guidance on principal versus agent considerations. In June 2020, the FASB issued ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842), in response to stakeholders requests to defer the effective date of the guidance for one year due to the impacts of the Coronavirus Disease 2019 pandemic. The amendments in this Update defer, for one year the required effective date of Revenue for certain entities that have not yet issued their financial statements (or made financial statements available for issuance) reflecting the adoption of Revenue. Those entities may elect to adopt the guidance for annual reporting periods beginning after December 15, 2019, and for interim reporting periods within annual reporting periods beginning after December 15, 2020. JRG will defer implementation as allowed until the annual 2020 reporting period and is still determining the impact on the consolidated financial statements.
| 15 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - Continued
As of June 28, 2020 and December 29, 2019
and for the twenty-six weeks ended June 28, 2020 and June 30, 2019
(In thousands)
| NOTE 2 - | SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued |
New Accounting Pronouncement - Continued
In February 2016, the FASB released ASU 2016-02, Leases, completing its project to overhaul lease accounting. The ASU codifies ASC 842, Leases, which will replace the guidance in ASC 840. Early adoption is permitted for all entities. Under the revised guidance, lessees will be required to recognize most leases “on balance sheet.” The new guidance retains a dual lease accounting model for purposes of income statement recognition, continuing the distinction between what are currently known as “capital” and “operating” leases for lessees. Lessors will focus on whether control of the underlying asset has transferred to the lessee to assess lease classification. A new definition of a “lease” could cause some contracts formerly accounted for under ASC 840 to fall outside the scope of ASC 842, and vice versa. In June 2020, the FASB issued ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842), in response to stakeholders requests to defer the effective date of the guidance for one year due to the impacts of the Coronavirus Disease 2019 pandemic. The amendments in this Update defer the effective date for one year for entities in the “all other” category and public NFP entities that have not yet issued their financial statements (or made financial statements available for issuance) reflecting the adoption of Leases. Therefore, under the amendments, Leases is effective for entities within the “all other” category for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Additionally, Leases is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, for public NFP entities that have not yet issued financial statements (or made available for issuance) reflecting the adoption of Leases. Early application continues to be permitted, which means that an entity may choose to implement Leases before those deferred effective dates. JRG is still reviewing the guidance to determine the impact on the consolidated financial statements.
NOTE 3 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid and other current assets consisted of the following:
| June 28, 2020 | December 29, 2019 | |||||||
| Prepaid rent | $ | 11 | $ | 12 | ||||
| Prepaid insurance | 190 | 188 | ||||||
| Other prepaid expenses | 238 | 222 | ||||||
| Total | $ | 439 | $ | 422 | ||||
| 16 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - Continued
As of June 28, 2020 and December 29, 2019
and for the twenty-six weeks ended June 28, 2020 and June 30, 2019
(In thousands)
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
| June 28, 2020 | December 29, 2019 | |||||||
| Leasehold improvements | $ | 1,786 | $ | 1,786 | ||||
| Restaurant equipment | 1,883 | 1,883 | ||||||
| Assets under capital leases | 77 | 77 | ||||||
| Office equipment & furniture | 140 | 140 | ||||||
| Computers & software | 160 | 160 | ||||||
| Construction-in-process | 740 | 134 | ||||||
| 4,786 | 4,180 | |||||||
| Less: Accumulated depreciation | (2,537 | ) | (2,266 | ) | ||||
| Total | $ | 2,249 | $ | 1,914 | ||||
Major renewals and improvements that extend the useful life of an asset are capitalized. Replacements and maintenance and repairs which do not extend the lives of the assets are expensed as incurred. Depreciation expense was $270 and $303 for the twenty-six weeks ended June 28, 2020 and June 30, 2019, respectively.
NOTE 5 - INTANGIBLE ASSETS, NET
Intangible assets, net and their respective amortization years as of June 28, 2020 were:
| Accumulated | ||||||||||||
| Gross | Amortization | Net | ||||||||||
| Amortizable intangible assets: | ||||||||||||
| International franchise agreements (13.5 years) | $ | - | $ | - | $ | - | ||||||
| Trade names and trademarks (14.5 years) | 32,774 | (20,145 | ) | 12,629 | ||||||||
| $ | 32,774 | $ | (20,145 | ) | $ | 12,629 | ||||||
| Unamortizable intangible assets: | ||||||||||||
| Goodwill | $ | 7,393 | ||||||||||
| 17 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - Continued
As of June 28, 2020 and December 29, 2019
and for the twenty-six weeks ended June 28, 2020 and June 30, 2019
(In thousands)
NOTE 5 - INTANGIBLE ASSETS, NET - Continued
Intangible assets, net and their respective amortization years as of December 29, 2019 were:
| Accumulated | ||||||||||||
| Gross | Amortization | Net | ||||||||||
| Amortizable intangible assets: | ||||||||||||
| International franchise agreements (13.5 years) | $ | 2,070 | $ | (741 | ) | $ | 1,329 | |||||
| Trade names and trademarks (14.5 years) | 49,787 | (18,917 | ) | 30,870 | ||||||||
| $ | 51,857 | $ | (19,658 | ) | $ | 32,199 | ||||||
| Unamortizable intangible assets: | ||||||||||||
| Goodwill | $ | 7,393 | ||||||||||
JRG amortization expense included in depreciation and amortization on the consolidated statements of operations was $1,270 and $1,798, for the twenty-six weeks ended June 28, 2020 and June 30, 2019, respectively. For the twenty-six weeks ending June 28, 2020 JRG had trade names and trademarks impairment expense of $17,013, and franchise agreements impairment expense of $1,287, which was the complete net book value at March 29, 2020. For the twenty-six weeks ended June 30, 2019 there was no impairment expense. The June 28, 2020 gross amounts were reduced by the impairment expense.
Future amortization expense related to these intangible assets as of June 28, 2020 is:
| Intangible | ||||
| Assets | ||||
| Fiscal years ending: | ||||
| June 29, 2020 through January 3, 2021 | $ | 743 | ||
| 2021 | 1,486 | |||
| 2022 | 1,486 | |||
| 2023 | 1,486 | |||
| 2024 | 1,486 | |||
| Thereafter | 5,942 | |||
| $ | 12,629 | |||
| 18 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - Continued
As of June 28, 2020 and December 29, 2019
and for the twenty-six weeks ended June 28, 2020 and June 30, 2019
(In thousands)
NOTE 6 – ACCRUED EXPENSES
Accrued expenses consisted of the following:
| June 28, 2020 | December 29, 2019 | |||||||
| Gift cards outstanding | $ | 486 | $ | 484 | ||||
| Accrued taxes | 46 | 122 | ||||||
| Accrued audit expense | 212 | 226 | ||||||
| Other | 808 | 984 | ||||||
| Total | $ | 1,552 | $ | 1,816 | ||||
NOTE 7 – OTHER LONG-TERM LIABILITIES
Other long-term liabilities consisted of the following:
| June 28, 2020 | December 29, 2019 | |||||||
| Accrued rent | $ | 522 | $ | 515 | ||||
| Other | 34 | 37 | ||||||
| Total | $ | 556 | $ | 552 | ||||
NOTE 8 - DEBT
As of June 28, 2020, the Company has three related-party, payment in kind (“PIK”) secured promissory note agreements, one with Sun Ice Cream Finance, LP., a second note with Sundae Group Holdings I, LLC and a third with Sun Ice Cream Finance III, LP.
The first PIK note with Sun Ice Cream Finance, LP has a principal balance of $12,600 and was issued on June 6, 2013, with a maturity date of April 24, 2018, as part of the Acquisition. Interest on the note is payment in kind. Payment of the note and the associated accrued interest are due upon maturity of the note. Prepayments can be made at any time. Interest will accrue on the unpaid principal amount at a rate equal to LIBOR plus 4.75% per annum and compound quarterly. On the last business day of each quarter, the accrued interest is added to the principal amount of the PIK note. On February 28, 2018 the maturity date of the note was extended to June 6, 2019. On March 7, 2019 the maturity date of the note was extended to June 6, 2021 and the interest rate was changed to LIBOR plus 5.00% per annum. Accrued PIK interest of $321 and $342 and principal amounts of $19,742 and $19,055 are included on the consolidated balance sheets as of June 28, 2020 and December 29, 2019, respectively. On July 31, 2020 the maturity date was extended to June 6, 2024.
| 19 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - Continued
As of June 28, 2020 and December 29, 2019
and for the twenty-six weeks ended June 28, 2020 and June 30, 2019
(In thousands)
NOTE 8 – DEBT - Continued
On June 20, 2016 Neapolitan Group Holdings, LLC issued a new PIK note to Johnny Rockets Holding Co., JR Group Holdings, LLC and JRG as obligor with a maturity date of June 20, 2021. The note with a principal balance of $41,045 was issued in exchange for the complete $40,255 principal and interest due on the Cerberus Credit Facility and $790 in accrued Consulting fees due to Sun Capital Partners Management V, LLC. The Cerberus debt was paid in full by Neapolitan from the proceeds collected from the sale of other affiliated subsidiaries. Following the issuance of the note Neapolitan assigned the note to Sundae Group Holdings I, LLC, the new parent of Johnny Rockets Holding Co. Interest will accrue on the unpaid principal amount at a rate equal to 9.75% per annum and compound quarterly. On the last business day of each quarter, the accrued interest is added to the principal amount of the PIK note. Accrued PIK interest of $1,420 and $1,368 and principal amounts of $59,078 and $56,293 are included on the consolidated balance sheets as of June 28, 2020 and December 29, 2019, respectively. On July 31, 2020 the maturity date was extended to June 20, 2024.
On December 18, 2017 Sun Ice Cream Finance III, LP. issued a new PIK note to Johnny Rockets Holding Co., JR Group Holdings, LLC and JRG as obligor with a maturity date of December 18, 2022. The note with a principal balance of $3,174 was issued to fund the payment of the due to affiliates balance. Interest will accrue on the unpaid principal amount at a rate equal to 10% per annum and compound quarterly on the last business day of each quarter, the accrued interest is added to the principal amount of the PIK note. On January 16, 2018 the agreement was amended to allow for additional term loans up to $19,000 at the discretion of the lender. In 2018 there was additional borrowings of $13,868. The funds were used to pay down the FIC Holdings, LLC note and fund the buyout of non-performing restaurant leases. On January 28, 2019 the agreement was amended to allow for additional term loans up to $19,543 at the discretion of the lender. In 2019 there was additional borrowings of $2,501. The funds were used to pay off the FIC Holdings, LLC note. On March 25, 2020 in response to the COVID-19 pandemic the agreement was amended to allow for additional term loans up to $29,543 at the discretion of the lender. Through June 28, 2020 there was additional borrowings of $4,000 to provide working capital. Accrued PIK interest of $611 and $553 and principal amounts of $27,279 and $22,153 are included on the consolidated balance sheets as of June 28, 2020 and December 29, 2019, respectively.
Debt consisted of the following:
| June 28, 2020 | December 29, 2019 | |||||||
| Payment in kind note (related party) | $ | 106,099 | $ | 97,501 | ||||
| Accrued interest on payment in kind note | 2,352 | 2,263 | ||||||
| Total related party debt | 108,451 | 99,764 | ||||||
| Less: current portion | - | - | ||||||
| Long-term debt | $ | 108,451 | $ | 99,764 | ||||
| 20 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - Continued
As of June 28, 2020 and December 29, 2019
and for the twenty-six weeks ended June 28, 2020 and June 30, 2019
(In thousands)
NOTE 8 – DEBT - Continued
Annual maturities of total debt as of June 28, 2020 are as follows:
| Full Fiscal Year | Amount | |||
| 2020 | $ | - | ||
| 2021 | - | |||
| 2022 | 27,890 | |||
| 2023 | - | |||
| 2024 | 80,561 | |||
| Thereafter | - | |||
| $ | 108,451 | |||
Prior to the closing of the equity sale (See note 16) all related party debt will either be cancelled or contributed to equity.
NOTE 9 - LEASES
JRG leases its restaurant facilities and certain equipment under non-cancelable operating leases expiring at various dates through 2029. Certain leases provide for monthly rent expense equal to a fixed payment plus a variable amount calculated using net sales over a breaking point. Certain leases are subject to annual adjustments for inflation and contain renewal options. Rent expense is recorded on a straight-line basis over the term of the lease. JRG’s rent expense for the twenty-six weeks ended June 28, 2020 and June 30, 2019 was approximately $1,165 and $1,677, respectively, (including contingent rental amounts of approximately $18 and $99 for the twenty-six weeks ended June 28, 2020 and June 30, 2019, respectively and sublease rental expense of approximately $5 and $221 for the twenty-six weeks ended June 28, 2020 and June 30, 2019, respectively).
JRG subleases certain facilities in connection with franchising. Sublease rental income is recorded on a straight-line basis over the term of the sublease. The last sublease expired in 2019. JRG’s sublease rent income for the twenty-six weeks ended June 30, 2019 was approximately $257 and is recorded in initial franchise fees and rental income in the consolidated statements of operations.
| 21 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - Continued
As of June 28, 2020 and December 29, 2019
and for the twenty-six weeks ended June 28, 2020 and June 30, 2019
(In thousands)
NOTE 9 – LEASES – Continued
Future minimum lease payments under non-cancelable leases related to continuing operations with an original term in excess of one year as of June 28, 2020 are:
| Operating | Capital | |||||||
| Leases | Leases | |||||||
| Fiscal years ending: | ||||||||
| June 29, 2020 through January 3, 2021 | $ | 880 | 10 | |||||
| 2021 | 1,781 | 19 | ||||||
| 2022 | 1,791 | 10 | ||||||
| 2023 | 1,645 | - | ||||||
| 2024 | 1,470 | - | ||||||
| Thereafter | 3,348 | - | ||||||
| $ | 10,915 | 39 | ||||||
| Less amounts representing interest | (4 | ) | ||||||
| Present value of minimum lease payments | 35 | |||||||
| Less current maturities of capital leases | (16 | ) | ||||||
| Long-term maturities of capital leases | $ | 19 | ||||||
JRG capital leases reflected in the accompanying consolidated balance sheet have effective interest rates ranging from 10.00% to 17.00% and are payable in monthly installments through 2022. Maturities of such obligations as of June 28, 2020 are:
| Fiscal years ending: | ||||
| June 29, 2020 through January 3, 2021 | 8 | |||
| 2021 | 17 | |||
| 2022 | 10 | |||
| 2023 | - | |||
| 2024 | - | |||
| Thereafter | - | |||
| Total | $ | 35 | ||
| 22 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - Continued
As of June 28, 2020 and December 29, 2019
and for the twenty-six weeks ended June 28, 2020 and June 30, 2019
(In thousands)
NOTE 10 - INCOME TAXES
Income tax expense for the twenty-six weeks ended June 28, 2020 was approximately $229, or -0.8% of the pre-tax loss. The effective tax rate for the twenty-six weeks ended June 28, 2020 differed from the U.S. federal statutory rate primarily due to the impact of foreign withholding taxes and to a change in the valuation allowance that offset the tax benefit on the current period pre-tax loss.
The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes, (“ASC 740”). Under the provisions of ASC 740, management is required to evaluate whether a valuation allowance should be established against its deferred tax assets. We currently have a full valuation allowance against our deferred tax assets. As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets. For the twenty-six weeks ended June 28, 2020, there was no material change from fiscal year ended 2019 in the amount of the Company’s deferred tax assets that are more likely than not to be realized in future years.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act contains numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses arising in taxable years beginning after December 31, 2017. Due to the existence of previously incurred losses, the NOL carryback provisions of the CARES Act did not result in a cash benefit to the Company, however, we do anticipate increased interest expense deductions for tax purposes in 2020 and 2021 as a result of the relaxation of the limitations on the deductibility of interest.
The Company is subject to U.S. federal income tax as well as income tax of multiple state tax jurisdictions. The tax years 2016-2019 remain open to examination by the Internal Revenue Service, and the tax years 2015-2019 remain open to examination by state tax authorities.
NOTE 11 - RETIREMENT BENEFIT PLAN
JRG’s 401(k) plan allows eligible employees to receive matching contributions of up to one thousand five hundred dollars per calendar year. To be eligible to participate in the 401(k) plan, employees must have completed 6 months of service with the Company. The Company recorded $14 and $17 in expense associated with the matching contributions under the plan for the twenty-six weeks ended June 28, 2020 and June 30, 2019, respectively.
NOTE 12 – SHAREHOLDER’S EQUITY
All of the outstanding stock of JRG is owned by a sole shareholder. As of June 28, 2020, ten thousand shares were authorized, with one thousand shares outstanding.
| 23 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - Continued
As of June 28, 2020 and December 29, 2019
and for the twenty-six weeks ended June 28, 2020 and June 30, 2019
(In thousands)
NOTE 13 – STOCK-BASED COMPENSATION
JRG adopted the Stock Option Plan (the “Plan”) in 2014, which is shareholder-approved, that permits the grant of stock options to its key employees up to 90 thousand shares. JRG believes that such awards better align the interests of its employees with those of its shareholder. Option awards are granted with an exercise price determined by the Board Committee at the date of grant; those option awards generally vest based on five years of continuous service and have 10-year contractual terms. Certain option and share awards provide for accelerated vesting if there is a change in control, as defined in the Plan.
The fair value of each option award is estimated on the date of grant using the Black-Scholes model that uses the assumptions noted in the table below. Expected volatilities are based on the historical equity volatilities of JRG’s guideline public companies. JRG used the simplified method to determine the expected term given the absence of historical exercise behavior. The risk-free rate for the options is calculated based on an extrapolated yield of the five year and seven-year U.S. Treasury Bonds. Due to JRG being privately held, it estimated a Discount for Lack of Marketability (“DLOM”) for the options using a put-option model. There were no options issued in the twenty-six weeks ending June 28, 2020.
A summary of option activity under the Plan for the twenty-six weeks ended June 28, 2020 and June 30, 2019 is presented below:
| Options | Shares | Weighted Average Exercise Price |
||||||
| Outstanding at December 30, 2018 | 84 | $ | 28.99 | |||||
| Exercisable at June 30, 2019 | - | - | ||||||
| Granted | 8 | 37.10 | ||||||
| Exercised | - | - | ||||||
| Forfeited or expired | (30 | ) | 27.58 | |||||
| Outstanding at June 30, 2019 | 62 | 30.73 | ||||||
| Outstanding at December 29, 2019 | 29 | 31.66 | ||||||
| Exercisable at June 28, 2020 | - | - | ||||||
| Granted | - | - | ||||||
| Exercised | - | - | ||||||
| Forfeited or expired | - | - | ||||||
| Outstanding at June 28, 2020 | 29 | 31.66 | ||||||
| 24 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - Continued
As of June 28, 2020 and December 29, 2019
and for the twenty-six weeks ended June 28, 2020 and June 30, 2019
(In thousands)
NOTE 13 – STOCK-BASED COMPENSATION - Continued
As of June 28, 2020, and December 29, 2019, there was $45 and $45, respectively, of total unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 5 years. Stock compensation expense is included in general and administrative expenses.
At or prior to the closing of the equity sale (See note 16) all issued options and the Option Plan will be terminated.
NOTE 14 - RELATED PARTY TRANSACTIONS
JRG has three subordinated secured promissory note agreements payable to related parties (See Note 8).
The Company has a Consulting Services Agreement (the “Consulting Agreement”) with Sun Capital Partners Management V, LLC, a Delaware limited liability company (the “Consultant”), an investment fund affiliated with the Parent. This agreement was modified effective April 1, 2019 increasing the required minimum fees going forward from $350 or 4% of EBITDA to the following. The Consultant is paid annual fees (the “Consulting Fee”) equal to the greater of (i) $600 (the “Yearly Minimum Fee”) or (ii) the lesser of (x) 6.0% (such percentage, the “Applicable Percentage”) of EBITDA as defined in the amendment for the applicable fiscal year and (y) $750 in any fiscal year (the “Annual Cap”). The Company pays the Consulting Fee in quarterly installments in advance equal to the greater of (i) twenty five percent (25%) of the Yearly Minimum Fee or (ii) the Applicable Percentage of EBITDA for the immediately preceding fiscal quarter. The 2019 amendment is still covered by the April 27, 2017 modification reducing the Yearly Minimum Fee by 20% to $480, the Applicable Percentage to 4.8% and the Annual Cap to $600. The agreement was amended again on April 1, 2020 eliminating the fee effective on that date. Additionally, the Consultant is reimbursed for the cost of all reasonable out-of-pocket fees and expenses incurred by the Consultant and its affiliates in the performance of services covered by the Consulting Agreement and all matters related thereto. The Company reimburses such expenses on a quarterly basis in arrears. Consulting Fees of $120 and $220 and expense reimbursements of $374 and $14 were recorded as general and administrative expenses for the twenty-six weeks ended June 28, 2020 and June 30, 2019, respectively.
At or prior to the closing of the equity sale (See note 16) the Consulting Services Agreement will be terminated.
JRG entered into a shared services agreement on July 27, 2016 with FIC Restaurants, Inc (FIC). FIC has the same parent company Sundae Group Holdings I, LLC. This agreement is designed to allow both Companies to utilize common management and support functions to make both groups more cost effective. The agreement provides guidelines on how to allocate the costs of these services between each entity. Net expenses of $1,100 and $1,176 were allocated to JRG for the twenty-six weeks ended June 28, 2020 and June 30, 2019, respectively. With JRG closing their corporate offices in 2018, the JRG employees are now working from the FIC corporate offices and JRG is being allocated rent and overhead costs.
At the closing of the equity sale (See note 16) this agreement will be replaced by the shared services defined in the Stock Purchase Agreement.
| 25 |
The Johnny Rockets Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - Continued
As of June 28, 2020 and December 29, 2019
and for the twenty-six weeks ended June 28, 2020 and June 30, 2019
(In thousands)
NOTE 15 - COMMITMENTS AND CONTINGENCIES
JRG is party to various legal proceedings arising in the ordinary course of business which management believes, after consultation with legal counsel, will not have a material adverse effect on JRG’s consolidated financial position or future operating results.
NOTE 16 - SUBSEQUENT EVENTS
On August 12, 2020 Sundae Group Holdings, I, LLC signed a stock purchase agreement with FAT Brands Inc., a Delaware corporation to sell 100% of the issued and outstanding Equity Interests of Johnny Rockets Holding Co., the parent of JRG for $24.6 million. The target closing date for the transaction is September 15, 2020. The purchase price will be paid in cash net of any adjustments to a targeted working capital amount, closing cash and transaction expenses. Prior to the closing all related party debt will be either cancelled or contributed to equity and the Stock Option Plan and all issued options will be terminated.
JRG has evaluated subsequent events through the date of issuance, September 10, 2020, and identified no additional events requiring adjustment to or disclosure in these consolidated financial statements.
| 26 |
Exhibit 99.3
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
On September 21, 2020, FAT Brands, Inc. (the “Company” or “FAT”) completed the acquisition of Johnny Rockets Holding Co., a Delaware corporation for a cash purchase price of approximately $24.8 million pursuant to a Stock Purchase Agreement (the “Purchase Agreement”) dated August 12, 2020. The Johnny Rockets branded restaurants and franchising business (“Johnny Rockets”) operates through The Johnny Rockets Group, Inc., a Delaware corporation and is the wholly owned subsidiary of Johnny Rockets Holding Co. The purchase price was subject to certain post-closing adjustments, including with respect to net working capital, Johnny Rockets’ cash on hand, tax liabilities and outstanding indebtedness as of the closing and certain transaction expenses payable at closing, all of which were estimated at closing and, pursuant to the stock purchase agreement, will be finalized according to a specified schedule after the closing pursuant to the Purchase Agreement (the “Acquisition”).
The following consolidated financial information presents the unaudited pro forma consolidated balance sheet and unaudited pro forma consolidated statement of continuing operations of the Company, its subsidiaries and Johnny Rockets as of and for the twenty-six weeks ended June 28, 2020, and for the year ended December 29, 2019 (the “Pro Forma Financial Statements”). The Pro Forma Financial Statements are based on historical financial statements of the entities, as adjusted to give effect to the Acquisition. The unaudited pro forma consolidated statements of operations for the twenty-six weeks ended June 28, 2020 and for the year ended December 29, 2019 give effect to the Acquisition as if it had occurred on December 31, 2018 (the beginning of the Company’s 2019 fiscal year). The unaudited pro forma consolidated balance sheet as of June 28, 2020 gives effect to the Acquisition as if it had occurred on June 28, 2020.
The pro forma adjustments related to the Acquisition are described in the notes to the Pro Forma Financial Statements. These pro forma adjustments are based upon available information and methodologies that are factually supportable and specifically related to the Acquisition. The Pro Forma Financial Statements include various estimates and may not be indicative of what our operations or financial position would have been had the Acquisition taken place on the dates indicated, or that may be expected to occur in the future.
The Pro Forma Financial Statements do not purport to represent what the consolidated results of operations actually would have been if the Acquisition had occurred on December 31, 2018 or what those results will be for any future periods. For example, historical impairment charges included in the pro forma consolidated statements of operation may not be incurred at all or in similar magnitudes in the future. The pro forma adjustments are based on information current as of December 4, 2020 (being the latest practicable date prior to the filing of this Form 8-K/A) and does not adjust to reflect any matters not directly attributable to the Acquisition. No adjustment, therefore, has been made for actions that may be taken following the completion of the Acquisition, such as any of our integration plans related to Johnny Rockets. As a result, the actual amounts recorded in the future consolidated financial statements of the Company will differ from the amounts reflected in the Pro Forma Financial Statements, and the differences may be material.
FAT Brands Inc.
Unaudited Pro Forma Consolidated Balance Sheet
As of June 28, 2020
(In thousands)
| FAT Brands Inc. and Subsidiaries | The Johnny Rockets Group, Inc. and Subsidiaries | Acquisition Adjustments (Note 5) | Pro Forma Consolidated Balance | |||||||||||||
| Assets | ||||||||||||||||
| Current assets | ||||||||||||||||
| Cash | $ | 1,741 | $ | 923 | $ | (29 | ) | $ | 2,635 | |||||||
| Restricted cash | 1,347 | - | - | 1,347 | ||||||||||||
| Accounts receivable, net | 2,469 | 1,217 | (24 | ) | 3,662 | |||||||||||
| Trade notes receivable, net | 204 | - | - | 204 | ||||||||||||
| Inventories | - | 64 | (64 | ) | - | |||||||||||
| Assets classified as held for sale | 3,384 | - | 11,297 | 14,681 | ||||||||||||
| Prepaid expenses and other current assets | 985 | 439 | (27 | ) | 1,397 | |||||||||||
| Total current assets | 10,130 | 2,643 | 11,153 | 23,926 | ||||||||||||
| Non-current restricted cash | 400 | - | - | 400 | ||||||||||||
| Property and equipment, net | - | 2,249 | (2,249 | ) | - | |||||||||||
| Due from affiliates | 34,729 | - | - | 34,729 | ||||||||||||
| Trade notes receivable | 1,584 | - | - | 1,584 | ||||||||||||
| Deferred income taxes | 3,556 | - | (3,556 | ) | - | |||||||||||
| Operating lease right of use assets | 2,776 | - | - | 2,776 | ||||||||||||
| Goodwill | 9,450 | 7,393 | 2,298 | 19,141 | ||||||||||||
| Other intangible assets, net | 27,557 | 12,629 | 13,982 | 54,168 | ||||||||||||
| Other assets | 708 | 14 | (14 | ) | 708 | |||||||||||
| Total assets | $ | 90,890 | $ | 24,928 | $ | 21,614 | $ | 137,432 | ||||||||
| Liabilities and Stockholder’s Deficit | ||||||||||||||||
| Liabilities | ||||||||||||||||
| Accounts payable | $ | 7,243 | $ | 1,137 | $ | 32 | $ | 8,412 | ||||||||
| Accrued expenses | 7,541 | 1,552 | 934 | 10,027 | ||||||||||||
| Accrued salaries and benefits | - | 232 | (232 | ) | - | |||||||||||
| Deferred income | 930 | 60 | 1,420 | 2,410 | ||||||||||||
| Due to affiliates | - | 151 | (151 | ) | - | |||||||||||
| Dividends payable on preferred shares | 2,110 | - | - | 2,110 | ||||||||||||
| Liabilities related to assets held for sale | 2,298 | - | 10,199 | 12,497 | ||||||||||||
| Current portion operating lease liabilities | 368 | - | - | 368 | ||||||||||||
| Current portion of long-term debt | 661 | - | - | 661 | ||||||||||||
| Capital leases, current portion | - | 16 | - | 16 | ||||||||||||
| Total current liabilities | 21,151 | 3,148 | 12,202 | 36,501 | ||||||||||||
| Deferred income - noncurrent | 5,246 | 156 | 3,563 | 8,965 | ||||||||||||
| Preferred shares | 15,456 | - | - | 15,456 | ||||||||||||
| Deferred tax liabilities | - | - | 2,476 | 2,476 | ||||||||||||
| Acquisition purchase price payable | 4,259 | - | - | 4,259 | ||||||||||||
| Long-term debt related party | - | 108,451 | (108,451 | ) | - | |||||||||||
| Deferred dividend payable on preferred shares | 828 | - | - | 828 | ||||||||||||
| Operating lease liability | 2,471 | - | - | 2,471 | ||||||||||||
| Capital leases, net of current portion | - | 19 | (19 | ) | - | |||||||||||
| Long-term debt, net | 43,925 | - | 24,838 | 68,763 | ||||||||||||
| Derivative liability from conversion feature of preferred shares | 1,142 | - | - | 1,142 | ||||||||||||
| Other long-term liabilities | - | 556 | (397 | ) | 159 | |||||||||||
| Total liabilities | 94,478 | 112,330 | (65,788 | ) | 141,020 | |||||||||||
| Commitments and contingencies | - | - | - | - | ||||||||||||
| Stockholder’s deficit | ||||||||||||||||
| Common stock | 9,069 | 15,992 | (15,992 | ) | 9,069 | |||||||||||
| Accumulated deficit | (12,657 | ) | (103,394 | ) | 103,394 | (12,657 | ) | |||||||||
| Total stockholder’s deficit | (3,588 | ) | (87,402 | ) | 87,402 | (3,588 | ) | |||||||||
| Total liabilities and stockholder’s deficit | $ | 90,890 | $ | 24,928 | $ | 21,614 | $ | 137,432 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
FAT
Brands Inc.
Unaudited Pro Forma Consolidated Statement of Operations
For the twenty-six weeks ended June 28, 2020
(In thousands, except per share information)
| FAT Brands Inc. and Subsidiaries | The Johnny Rockets Group, Inc. and Subsidiaries | Acquisition Adjustments (Note 5) | Pro Forma Consolidated Balance | |||||||||||||
| Revenue | ||||||||||||||||
| Franchise royalties | $ | 5,522 | $ | 2,998 | $ | - | $ | 8,520 | ||||||||
| Franchise fees, initial country fees, and rental income | 449 | 118 | 408 | 975 | ||||||||||||
| Advertising fees | 1,544 | - | 543 | 2,087 | ||||||||||||
| Restaurant sales | - | 3,383 | (3,383 | ) | - | |||||||||||
| Other | 15 | - | - | 15 | ||||||||||||
| Total revenue | 7,530 | 6,499 | (2,432 | ) | 11,597 | |||||||||||
| Costs and expenses | ||||||||||||||||
| General and administrative expenses | 7,636 | 4,384 | (2,889 | ) | 9,131 | |||||||||||
| Depreciation and amortization | 1,540 | (1,540 | ) | |||||||||||||
| Impairment of intangibles | 3,174 | 18,300 | 21,474 | |||||||||||||
| Refranchising loss | 1,544 | - | (99 | ) | 1,445 | |||||||||||
| Advertising expense | 1,544 | - | 687 | 2,231 | ||||||||||||
| Cost of sales | - | 789 | (789 | ) | - | |||||||||||
| Labor costs | - | 1,438 | (1,438 | ) | - | |||||||||||
| Operating expenses | - | 2,635 | (2,635 | ) | - | |||||||||||
| Other losses | - | 11 | - | 11 | ||||||||||||
| Total costs and expenses | 13,898 | 29,097 | (8,003 | ) | 34,292 | |||||||||||
| Loss from operations | (6,368 | ) | (22,598 | ) | 6,271 | (22,695 | ) | |||||||||
| Other expense, net | ||||||||||||||||
| Interest expense, net | (1,911 | ) | (4,688 | ) | 3,065 | (3,534 | ) | |||||||||
| Interest expense related to preferred shares | (928 | ) | - | - | (928 | ) | ||||||||||
| Change in fair value of derivative liability | 1,264 | - | - | 1,264 | ||||||||||||
| Other expense, net | (64 | ) | - | 30 | (34 | ) | ||||||||||
| Total other expense, net | (1,639 | ) | (4,688 | ) | 3,095 | (3,232 | ) | |||||||||
| Loss before provision for income tax expense (benefit) | (8,007 | ) | (27,286 | ) | 9,366 | (25,927 | ) | |||||||||
| Provision for income tax (benefit) expense | (1,386 | ) | 222 | (116 | ) | (1,280 | ) | |||||||||
| Net loss | $ | (6,621 | ) | $ | (27,508 | ) | $ | 9,482 | $ | (24,647 | ) | |||||
| Basic and diluted loss per common share | $ | (0.56 | ) | $ | N/A | $ | N/A | $ | (2.08 | ) | ||||||
| Basic and diluted weighted average shares outstanding | 11,878,000 | N/A | N/A | 11,878,000 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
FAT
Brands Inc.
Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended December 29, 2019
(In thousands, except per share information)
| FAT Brands Inc. and Subsidiaries | The Johnny Rockets Group, Inc. and Subsidiaries | Acquisition Adjustments (Note 5) |
Pro Forma Consolidated Balance | |||||||||||||
| Revenue | ||||||||||||||||
| Franchise royalties | $ | 14,895 | $ | 13,612 | $ | - | $ | 28,507 | ||||||||
| Franchise fees, initial country fees, and rental income | 3,433 | 1,250 | (228 | ) | 4,455 | |||||||||||
| Advertising fees | 4,111 | - | 1,037 | 5,148 | ||||||||||||
| Restaurant sales | - | 17,655 | (17,655 | ) | - | |||||||||||
| Other | 66 | - | - | 66 | ||||||||||||
| Total revenue | 22,505 | 32,517 | (16,846 | ) | 38,176 | |||||||||||
| Costs and expenses | ||||||||||||||||
| General and administrative expenses | 11,472 | 11,935 | (8,944 | ) | 14,463 | |||||||||||
| Depreciation and amortization | - | 4,158 | (4,158 | ) | - | |||||||||||
| Impairment of long-lived assets | - | 743 | - | 743 | ||||||||||||
| Refranchising loss (income) | 219 | - | (3,490 | ) | (3,271 | ) | ||||||||||
| Advertising expense | 4,111 | - | 1,736 | 5,847 | ||||||||||||
| Cost of sales | - | 4,145 | (4,145 | ) | - | |||||||||||
| Labor costs | - | 6,261 | (6,261 | ) | - | |||||||||||
| Operating expenses | - | 7,392 | (7,392 | ) | - | |||||||||||
| Store closure provisions | - | (1,138 | ) | 1,138 | - | |||||||||||
| Loss on disposal of assets, net | 16 | (16 | ) | |||||||||||||
| Other losses | - | 7 | 16 | 23 | ||||||||||||
| Total costs and expenses | 15,802 | 33,519 | (31,516 | ) | 17,805 | |||||||||||
| Income from operations | 6,703 | (1,002 | ) | 14,670 | 20,371 | |||||||||||
| Other expense, net | ||||||||||||||||
| Interest expense, net | (4,757 | ) | (8,904 | ) | 5,681 | (7,980 | ) | |||||||||
| Interest expense related to preferred shares | (1,773 | ) | - | - | (1,773 | ) | ||||||||||
| Other expense, net | (681 | ) | - | (574 | ) | (1,255 | ) | |||||||||
| Total other expense, net | (7,211 | ) | (8,904 | ) | 5,107 | (11,008 | ) | |||||||||
| (Loss) income before provision for income tax expense | (508 | ) | (9,906 | ) | 19,777 | 9,363 | ||||||||||
| Provision for income tax expense | 510 | 835 | 1,929 | 3,274 | ||||||||||||
| Net (loss) income | $ | (1,018 | ) | $ | (10,741 | ) | $ | 17,848 | $ | 6,089 | ||||||
| Basic and diluted (loss) income per common share | $ | (0.09 | ) | $ | N/A | $ | N/A | $ | 0.52 | |||||||
| Basic and diluted weighted average shares outstanding | 11,823,000 | N/A | N/A | 11,823,000 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
FAT Brands, Inc. (the “Company” or “FAT”) is a multi-brand franchisor specializing in fast casual and casual dining restaurant concepts around the world. As of December 4, 2020, the Company owns and franchises nine restaurant brands: Fatburger, Johnny Rockets, Buffalo’s Cafe, Buffalo’s Express, Hurricane Grill & Wings, Ponderosa Steakhouses, Bonanza Steakhouses, Yalla Mediterranean and Elevation Burger. Combined, as of December 4, 2020, these brands franchise over 700 units worldwide and have more than 200 additional units under development.
The Company licenses the right to use its brand names and provides franchisees with operating procedures and methods of merchandising. Upon signing a franchise agreement, the franchisor is committed to provide training, some supervision and assistance, and access to operations manuals. As needed, the franchisor will also provide advice and written materials concerning techniques of managing and operating the restaurants.
With minor exceptions, the Company’s operations are comprised exclusively of franchising a growing portfolio of restaurant brands. This growth strategy is centered on expanding the footprint of existing brands and acquiring new brands through a centralized management organization which provides substantially all executive leadership, marketing, training and accounting services. As part of these ongoing franchising efforts, the Company will, from time to time, make opportunistic acquisitions of operating restaurants in order to convert them to franchise locations. During the refranchising period, the Company may operate the restaurants and classifies the operational activities as refranchising gains or losses and the assets and associated liabilities as held-for sale. Assets designated by the Company for refranchising meet the criteria requiring that they be classified as held for sale.
On September 21, 2020, the Company completed the acquisition of Johnny Rockets Holding Co., a Delaware corporation (“Johnny Rockets”) for a cash purchase price of approximately $24.8 million. The purchase price was subject to certain post-closing adjustments, including with respect to net working capital, Johnny Rockets’ cash on hand, tax liabilities and outstanding indebtedness as of the closing and certain transaction expenses payable at closing, all of which were estimated at closing and, pursuant to the stock purchase agreement, will be finalized no later than no later than 75 days after the closing (the “Acquisition”).
NOTE 1. BASIS OF PRESENTATION
The Pro Forma Financial Statements are based on historical financial statements of the entities, as adjusted to give effect to the Acquisition. The pro forma consolidated statements of operations for the twenty-six weeks ended June 28, 2020 and for the year ended December 29, 2019 give effect to the Acquisition as if it had occurred on December 31, 2018 (the beginning of the Company’s 2019 fiscal year). The unaudited pro forma consolidated balance sheet as of June 28, 2020 gives effect to the Acquisition as if it had occurred on June 28, 2020. In addition to the historical financial statements included as exhibits to this Form 8-K/A, the Pro Forma Financial Statements should be read in conjunction with the Company’s Form 10-K as of December 29, 2019, the Form 10-Q as of June 28, 2020 and the Form 8-K filed with the SEC on September 25, 2020.
NOTE 2. PRELIMINARY PURCHASE PRICE ALLOCATION
The Pro Forma Financial Statements include various assumptions, including those related to the preliminary purchase price allocation of the assets acquired and liabilities assumed of Johnny Rockets based on preliminary estimates of fair value by management and third-party experts. The final purchase price allocation may vary based on final appraisals, valuations and analyses of the fair value of the acquired assets and assumed liabilities as well as final post-closing adjustments, if any. Accordingly, the pro forma adjustments are preliminary and may be subject to change.
The preliminary assessment of the fair value of the net assets and liabilities acquired by the Company through the acquisition of Johnny Rockets was estimated at $24,838,000. The preliminary allocation of the consideration to the net tangible and intangible assets acquired is presented in the table below (in thousands):
| Cash | $ | 894 | ||
| Accounts receivable | 1,193 | |||
| Assets held for sale | 11,126 | |||
| Goodwill | 9,691 | |||
| Other intangible assets | 26,400 | |||
| Other assets | 412 | |||
| Accounts payable | (1,169 | ) | ||
| Accrued expenses | (2,486 | ) | ||
| Deferred franchise fees | (4,988 | ) | ||
| Deferred tax liability | (6,032 | ) | ||
| Operating lease liability | (10,028 | ) | ||
| Other liabilities | (175 | ) | ||
| Total net identifiable assets | $ | 24,838 |
NOTE 3. IDENTIFIABLE INTANGIBLE ASSETS
Our preliminary valuation estimates of the identifiable intangible assets acquired in connection with the Acquisition are based on initial valuations performed by management and third-party experts. However, these estimates are preliminary, as we have not completed our analysis of all the facts surrounding the business acquired and therefore have not finalized the accounting for these transactions. Our preliminary estimate of identifiable intangible assets total $26,400,000 consisting of trademarks in the amount of $19,900,000 and franchise agreements in the amount of $6,500,000.
NOTE 4. GOODWILL
Our preliminary valuation estimate of goodwill in the amount of $9,691,000 is based on the excess of the estimated purchase price paid for Johnny Rockets over the estimated fair market value of the identifiable assets and liabilities acquired. These estimates are preliminary and will be refined once the valuation process is completed.
NOTE 5. PRO FORMA ADJUSTMENTS
The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the Pro Forma Financial Statements:
Adjustments to the pro forma consolidated balance sheet
| Certain accounts of Johnny Rockets have been reclassified to conform to FAT Brands’ account presentation. These reclassifications did not have any effect on the reported total assets, liabilities or stockholder’s deficit as of June 28, 2020. | |
| Working capital – Net adjustments were made to certain accounts, such as cash, accounts receivable, accounts payable, accrued liabilities other assets and other liabilities in order to adjust the Johnny Rockets balance as of June 28, 2080 to the actual balance acquired. These adjustments had the effect of reducing net assets in the amount of $476,000. | |
| Due to related parties – Under the terms of the Acquisition, amounts payable by Johnny Rockets to its affiliates were cancelled. As a result, the pro forma adjustments eliminate $108,602,000 of amounts due to affiliates. | |
| Assets classified as held for sale – The Pro Forma Financial Statements reflect the reclassification of assets related to restaurant locations owned by Johnny Rockets to “assets classified as held for sale”. Property and equipment with a pre-Acquisition carrying value of $2,249,000 were transferred from other assets to assets classified as held for sale and marked to a fair market value of $1,098,000. Assets classified as held for sale also include operating lease right of use assets in the amount of $10,199,000 relating to restaurant locations being refranchised. (See “Operating leases” below) | |
| Operating leases – As a non-public company, Johnny Rockets was not yet required to adopt ASU 2016-02, Leases (Topic 842), requiring a lessee to recognize on the balance sheet the assets and liabilities for the rights and obligations created by leases with a term of more than twelve months. However, as a part of the FAT consolidated group, Johnny Rockets adopted ASU 2016-02 as of the Acquisition date. Accordingly, the Pro Forma Financial Statements have been adjusted to record an operating lease right of use asset in the amount of $10,199,000 and an operating lease liability in the same amount. All of the leases relate to restaurant locations being marketed for sale and refranchising. As such, the right of use asset is included in “assets classified as held for sale” and the lease liability is included in “liabilities related to assets classified as held for sale”. |
| Deferred Income – The terms of the Acquisition required the buyer to assume the deferred income liabilities associated with the acquired franchise agreements. As a non-public company, Johnny Rockets was not yet required to adopt ASU 2014-09, Revenue from Contracts with Customers (Topic 606). However, as a part of the FAT consolidated group, Johnny Rockets adopted ASU 2014-09 as of the Acquisition date. As a result, an adjustment increasing deferred income by $4,983,000 has been included in the Pro Forma Financial Statements. | |
| Long-term debt – The pro forma adjustment to long-term debt reflects the Company borrowing $24,838,000 million to finance the Acquisition. The adjustment represents the amounts relevant to the Acquisition of the Series M-2 portion of a whole business securitization and is comprised of principal of $28,192,000 with a coupon rate of 9.75%, less original issue discount of $2,255,000 and debt offering costs of $1,099,000. The effective interest rate on the Acquisition financing is approximately 13.0%. | |
| Deferred income taxes – Preliminary analysis of the effect of the Acquisition on deferred income taxes resulted in a deferred liability increase in the amount of $6,032,000. This amount is considered preliminary and will likely be adjusted as future analysis is performed. | |
| Shareholder’s equity – The shareholder’s equity of Johnny Rockets has been adjusted to reflect the net asset value acquired by FAT and has been eliminated in consolidation in the Pro Forma Financial Statements. |
Adjustments to the pro forma statements of operations
| Certain accounts of Johnny Rockets have been reclassified to conform to FAT Brands’ presentation. These reclassifications did not have any effect on the reported net loss of Johnny Rockets for the twenty-six weeks ended June 28, 2020 or fiscal year ended December 29, 2019. | |
| Refranchising loss – Reclassifications of income and expense relating to the operation of Johnny Rockets’ company owned restaurants have been made to reflect the FAT presentation of refranchising operations. Restaurant related cost of sales, labor costs, restaurant general and administrative costs and restaurant operating expenses, net of food sales, have been combined under “refranchising loss” in the “cost and expenses” section of the proforma statements of operations. | |
| Franchise fees – The Johnny Rockets franchise fees have been adjusted to reflect the adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606). As a non-public company, Johnny Rockets was not yet required to adopt ASU 2014-09. However, had the Acquisition occurred on December 31, 2018, Johnny Rockets would have adopted ASU 2014-09 as of that date. This required the recapture and deferral of the unearned portion of previously recognized franchise fees and established an amortization schedule to recognize these fees into income over the remaining life of the franchise agreements. | |
| Advertising fees – For the interim period ending June 28, 2020 and the year ended December 29, 2019, the pro forma adjustments include advertising revenue and expense in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606). As a non-public company, Johnny Rockets was not yet required to adopt ASU 2014-09. However, had the Acquisition occurred on December 31, 2018, Johnny Rockets would have adopted ASU 2014-09 as of that date. | |
| Depreciation expense – Depreciation expense relating to assets now classified as held for sale has been eliminated as property under that classification is not subject to depreciation. | |
| Selling, general and administrative expenses – The Acquisition did not include the entire Johnny Rockets workforce or historical overhead structure. FAT estimates that retained personnel and other general and administrative expenses will total approximately $2.4 million annually, with the balance of Johnny Rockets administrative and operational requirements being provided through FAT’s existing infrastructure. |
| Interest expense, net – The pro forma interest expense has been adjusted by the elimination of the actual Johnny Rockets interest expense incurred on amounts payable to its affiliates. These obligations were cancelled at the Acquisition Date. The affiliated interest adjustment was partially offset by an adjustment to record the interest expense on the $24.8 million borrowing used to finance the acquisition by FAT. | |
| Recovery of provision for store closures – During the year ended December 29, 2019, Johnny Rockets recognized $1,138,000 in recovered reserves established in prior periods for expenses related to store closures. This recovery has been eliminated in the Pro Forma Financial Statements as part of the revaluation to market at Acquisition. | |
| Amortization of intangible assets – The pro forma adjustments reflect amortization expense based on the updated preliminary estimated values of the intangible assets. The amortization of acquired franchise agreements is calculated over the average remaining term of these contracts of 11 years. | |
| Other expense – For the year ended December 29, 2019, other expense has been adjusted for costs incurred in completing the Acquisition of Johnny Rockets. | |
| Income tax expense (benefit) – The change in income tax expense (benefit) resulting from the estimated effects of the net pro forma adjustments on consolidated tax attributes is calculated using an effective tax rate of 28%. |