| Acquisition of Fat Patty's |
Note 4. Acquisition of Fat Patty’s
On August 3, 2018, the
Company entered into an asset purchase agreement with CSA, Inc., a West Virginia corporation (“CSA”), CSA Investments,
LLC, a West Virginia limited liability company (“CSA Investments”), CSA of Teays Valley, Inc., a West Virginia corporation
(“CSA Teays Valley”), CSA, Inc. of Ashland, a Kentucky corporation (“CSA Ashland”), Fat Patty’s,
LLC, a West Virginia limited liability company (“FPLLC”), and Clint Artrip, an individual (“Artrip”; together
with CSA, CSA Investments, CSA Teays Valley, and CSA Ashland, FPLLC, the “Sellers”), pursuant to which the Company
agreed to acquire all of the assets associated with Fat Patty’s (the “Fat Patty’s Acquisition”). The Company
agreed to pay the Sellers $12,352,000 for the assets, of which $12,000,000 was to be paid to the Sellers at closing, $40,000 was
to be paid to the Sellers within 10 days after the closing and the remaining $312,000 will be paid to the Sellers on the first
anniversary of the closing. The closing of the Fat Patty’s Acquisition occurred on August 30, 2018, however, as discussed
below, the Company entered into a separate related agreement with a third party that resulted in a direct transfer of the Properties
(as defined below) from the Sellers to the third party. Accordingly, in substance, the Company only acquired the net assets detailed
below for a purchase price of $852,000.
In connection with the
Fat Patty’s Acquisition, the Company entered into a secured convertible promissory note with Seenu G. Kasturi on August 30,
2018 pursuant to which the Company borrowed $622,929 from Mr. Kasturi to help finance the Fat Patty’s Acquisition. All principal
and accrued but unpaid interest is due and payable by the Company in full on the earlier of (i) the fifth (5th) anniversary
of the date of the note, or (ii) the date that Mr. Kasturi demands repayment in full by providing written notice thereof to the
Company. Interest accrues at the rate of six percent (6%) per annum and is payable in full on the maturity date. Mr. Kasturi has
the right, at any time during the term of the note and from time to time, to convert all of any portion of the outstanding principal
of the note, together with accrued and unpaid interest payable thereon, into shares of the Company’s common stock at a conversion
rate of $1.36 per share. The note is secured by all of the assets of the Company.
Also
on August 3, 2018, the Company entered into a purchase and sale agreement with Store Capital Acquisitions, LLC, a Delaware
limited liability company (“Store Capital”), pursuant to which the Company agreed to sell all of the real property
acquired in the Fat Patty’s Acquisition to Store Capital (the “Property Acquisition”). The real property consists
of the four properties upon which the restaurants acquired in the Asset Acquisition are located (collectively, the “Properties”).
Store Capital agreed to pay the Company $11,500,000 for the Properties at closing. Title to the Properties was transferred directly
from the applicable Sellers to Store Capital, and the purchase price for the Properties was paid by Store Capital directly to Sellers.
Accordingly, the Company never took title to, or ownership of, the Properties. As a result, the ultimate purchase price paid by
the Company was $852,000, which was the difference between the $12,352,000 purchase price for the assets that the Company agreed
to pay to the Sellers and the $11,500,000 purchase price for the Properties that was paid by Store Capital. The closing of the
Property Acquisition occurred on August 30, 2018.
In connection with the
Property Acquisition, the Company entered into a master lease agreement (the “Master Lease”) with Store Capital on
August 30, 2018 pursuant to which the Company leased each of the Properties from Store Capital. The initial term of the lease expires
on August 31, 2038. The Company has the option to extend the term of the lease for four additional successive periods of five years
each. The aggregate base annual rent is $876,875 and is subject to annual increases commencing September 1, 2019 in an amount equal
to the lesser of: (i) 1.75%, or (ii) 1.25 times the change in the Consumer Price Index. The Company is responsible for all costs
and obligations relating to the Properties.
The acquisition of Fat
Patty’s was accounted for as a business combination using the acquisition method of accounting in accordance with Accounting
Standard Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”), with the Company considered
the acquirer of Fat Patty’s. In accordance with ASC 805, the assets acquired and the liabilities assumed have been measured
at fair value based on a report issued by a third-party valuation firm with the remaining purchase price, if any, recorded as goodwill.
For purposes of measuring
the estimated fair value, where applicable, of the assets acquired and the liabilities assumed as reflected in the Company’s
condensed consolidated financial statements, the guidance in ASC Topic 820, Fair Value Measurements and Disclosures (“ASC
820”) has been applied, which establishes a framework for measuring fair value. In accordance with ASC 820, fair value is
an exit price and is defined as “the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.” The Company incurred $82,929 of acquisition-related
transaction costs. Under ASC 805, acquisition-related transaction costs and acquisition-related restructuring charges are not included
as components of consideration transferred but are accounted for as expenses in the period in which the costs are incurred. Accordingly,
the Company recognized $82,929 of acquisition-related transaction costs during the year ended December 31, 2018. The acquisition-related
transaction costs were recorded in general and administrative expenses.
The assets acquired and
liabilities assumed were comprised of the following:
| Cash |
|
$ |
7,100 |
|
| Inventory |
|
|
91,424 |
|
| Intangible assets |
|
|
788,840 |
|
| Equipment |
|
|
614,295 |
|
| Total assets acquired |
|
|
1,501,659 |
|
| |
|
|
|
|
| Gift card liabilities |
|
|
(24,707 |
) |
| Total liabilities assumed |
|
|
(24,707 |
) |
| |
|
|
|
|
| Gain on bargain purchase |
|
|
(624,952 |
) |
| Net assets acquired with note payable and deferred compensation liability |
|
$ |
852,000 |
|
The estimates of fair values
recorded are Level 3 inputs that have been determined by management based upon various market and income analyses and recent asset
appraisals. The Company made certain adjustments to the amounts initially allocated to intangible assets and gift card liabilities
after evaluating additional information that was present on the date the acquisition was completed.
The fair value of the identifiable
assets acquired and liabilities assumed of $1,476,952 exceeded the purchase price of Fat Patty’s by $624,952. Consequently,
the Company reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that
the valuation procedures and resulting measures were appropriate. As a result, the Company recognized a gain of $624,952 during
the year ended December 31, 2018 in connection with the acquisition. The Sellers of Fat Patty’s received cash without any
earnouts or indemnification holdbacks, which was the primary motivation for the sale of Fat Patty’s. This was the primary
reason the acquisition resulted in a bargain purchase. The gain was recorded in the other income in the Company’s condensed
consolidated statements of operations.
The following table summarizes
certain financial information for the three- and nine-month periods ended September 30, 2019
contained in the Company’s condensed consolidated financial statements and certain unaudited pro forma financial information
for the three- and nine-month periods ended September 30, 2018 as if the acquisition
of Fat Patty’s had occurred on January 1, 2018:
| |
|
Three Months
Ended
September 30, 2019 |
|
|
Three Months
Ended
September 30, 2018 |
|
|
Nine Months
Ended
September 30, 2019 |
|
|
Nine Months
Ended
September 30, 2018 |
|
| Revenue |
|
$ |
4,042,644 |
|
|
$ |
4,323,019 |
|
|
$ |
12,820,432 |
|
|
$ |
12,515,636 |
|
| (Loss) / income from continuing operations |
|
|
(421,961 |
) |
|
|
(13,051 |
) |
|
|
(986,970 |
) |
|
|
1,256,629 |
|
| Net income / (loss) |
|
|
(597,514 |
) |
|
|
548,218 |
|
|
|
(1,303,318 |
) |
|
|
1,892,553 |
|
| Net income / (loss) per share – basic |
|
$ |
(0.08 |
) |
|
$ |
0.08 |
|
|
$ |
(0.18 |
) |
|
$ |
0.28 |
|
| Net income / (loss) per share – fully diluted |
|
$ |
(0.08 |
) |
|
$ |
0.08 |
|
|
$ |
(0.18 |
) |
|
$ |
0.28 |
|
The results of operations
for Fat Patty’s were included in the Company’s results of operations beginning August 30, 2018. The actual amounts
of revenue and net income for Fat Patty’s that were included in the Company’s condensed consolidated statements of
operations for the three-month period ended September 30, 2019 were $2,101,667 and $110,399, respectively, and the actual amounts
of revenue and net income for Fat Patty’s that were included in the Company’s condensed consolidated statements of
operations for the nine-month period ended September 30, 2019 were $7,130,639 and $720,887, respectively.
The unaudited pro forma
financial information has been presented for informational purposes only and is not necessarily
indicative of the actual results that would have occurred had the acquisition been consummated on January 1, 2018 or of the future
results of the combined entities. For additional information about the Company’s acquisition of Fat Patty’s,
please refer to the Company’s Current Reports on Form 8-K filed with the SEC on August 9, 2018 and September 5, 2018.
|
