The following discussion and analysis should be read together with the Company's
audited consolidated financial statements and related notes included in Item 8
of this Annual Report on Form 10-K, including the basis of presentation for the
consolidated financial statements prior to September 30, 2020 (the date of the
spin-off of the Company from Bluegreen Vacations Holding Corporation) which
reflect combined financial statements of BBX Capital, Inc. and its subsidiaries
and do not necessarily reflect what the results of operations, financial
position, or cash flows would have been had BBX Capital, Inc. and its
subsidiaries been a separate entity or what the results of operations, financial
position, or cash flows will be in the future. The following discussion contains
forward-looking statements, including those that reflect our plans, estimates,
and beliefs. Our actual results could differ materially from those discussed in
the forward-looking statements. Factors that could cause or contribute to these
differences include, without limitation, those discussed below and elsewhere in
this Annual Report on Form 10-K, particularly in "Risk Factors" and "Cautionary
Note Regarding Forward-Looking Statements."
Overview
BBX Capital, Inc. (referred to together with its subsidiaries as the "Company,"
"we," "us," or "our," and without its subsidiaries as "BBX Capital") is a
Florida-based diversified holding company whose principal holdings are BBX
Capital Real Estate LLC ("BBX Capital Real Estate" or "BBXRE"), BBX Sweet
Holdings, LLC ("BBX Sweet Holdings"), and Renin Holdings, LLC ("Renin").
As of December 31, 2020, the Company had total consolidated assets of
approximately $447.7 million and shareholders' equity of approximately
$309.2 million. Net (loss) income attributable to shareholders for the years
ended December 31, 2020, 2019, and 2018 was approximately ($42.3) million,
$13.7 million, and ($9.2) million, respectively.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic has resulted in an unprecedented disruption in the U.S.
and global economies and the industries in which the Company operates due to,
among other things, (i) government ordered "shelter in place" and "stay at home"
orders and advisories, travel restrictions, and restrictions on business
operations, (ii) government guidance and restrictions with respect to travel,
public accommodations, social gatherings, and related matters, and (iii) the
general public's reaction to the pandemic. The disruptions arising from the
pandemic and the reaction of the general public had a significant adverse impact
on the Company's financial condition and operations during the year ended
December 31, 2020. The duration and severity of the pandemic and related
disruptions, as well as the adverse impact on economic and market conditions,
are uncertain; however, given the nature of these circumstances, the adverse
impact of the pandemic on the Company's consolidated results of operations, cash
flows, and financial condition in 2020 has been, and is expected to continue to
be, material. Furthermore, although the duration and severity of the effects of
the pandemic are uncertain, demand for many of the Company's products and
services may remain weak for a significant length of time, and the Company
cannot predict if or when the industries in which the Company operates will
return to pre-pandemic levels.
Although the impact of the COVID-19 pandemic on the Company's principal holdings
and management's efforts to mitigate the effects of the pandemic has varied, as
described in further detail below, BBX Capital and its subsidiaries have sought
to take steps to manage expenses through cost saving initiatives and reductions
in employee head count and actions to increase liquidity and strengthen the
Company's financial position, including reducing planned capital expenditures.
As of December 31, 2020, the Company's consolidated cash balances were
$90.0 million.
See below for additional discussions related to the current and estimated
impacts of the COVID-19 pandemic on the Company's principal holdings.
Summary of Consolidated Results of Operations
Consolidated Results
The following summarizes key financial highlights for the year ended
December 31, 2020 compared to the same 2019 period:
· Total consolidated revenues were $173.2 million, a 15.0% decrease compared to
2019.
· Loss from continuing operations before income taxes was $58.2 million compared
to income from continuing operations before income taxes of $29.0 million
during 2019.
· Net loss attributable to common shareholders was $42.3 million compared to net
income attributable to common shareholders of $13.7 million during 2019.
· Diluted loss per share was $2.19 per diluted share compared to earnings per
share of $0.71 during 2019.
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The Company's consolidated results for the year ended December 31, 2020 compared
to the same 2019 period were significantly impacted by the following:
· A net decrease in sale activity by BBX Capital Real Estate and its joint
ventures in the 2020 period as compared to the 2019 period.
· The recognition of impairment losses of $30.8 million in the 2020 period
primarily related to goodwill and long-lived assets associated with IT'SUGAR as
a result of the impact of the COVID-19 pandemic and a loss of $3.3 million in
the 2020 period resulting from the Company's deconsolidation of IT'SUGAR in
connection with its filing of voluntary petitions to reorganize under Chapter
11 of the Bankruptcy Code.
· A decrease in BBX Sweet Holdings' revenues primarily attributable to the impact
of the COVID-19 pandemic on its operations.
· A net decrease in selling, general and administrative expenses primarily
attributable to cost mitigating activities implemented in the 2020 period in
response to the COVID-19 pandemic, including permanent and temporary reductions
in workforce.
· The recognition of a loss by Renin in connection with an ongoing dispute with a
supplier.
The following summarizes key financial highlights for the year ended
December 31, 2019 compared to the same 2018 period:
· Total consolidated revenues were $203.7 million, a 2.3% decrease compared to
2018.
· Income from continuing operations before income taxes was $29.0 million
compared to a loss from continuing operations before income taxes of
$3.0 million during 2018.
· Net income attributable to common shareholders was $13.7 million compared to a
net loss attributable to common shareholders of $9.2 million during 2018.
The Company's consolidated results for the year ended December 31, 2019 compared
to 2018 were significantly impacted by the following:
· A net increase in sale activity in BBX Capital Real Estate's portfolio in 2019,
including the Altis Bonterra joint venture's sale of its multifamily apartment
community in Hialeah, Florida, which resulted in the recognition of
$29.2 million of equity earnings from the joint venture in 2019, and the sale
of various real estate assets, which resulted in an increase in the gains on
sales of real estate assets of $9.1 million in 2019 as compared to 2018.
· A decrease in operating losses generated by BBX Sweet Holdings in 2019, which
primarily reflects the impact of various strategic initiatives implemented by
the Company during 2018, including the closure of a manufacturing facility and
a reduction in corporate personnel and infrastructure, and various impairment
losses and other costs recognized in 2018 in connection with such initiatives.
Segment Results
BBX Capital reports the results of its business activities through the following
reportable segments: BBX Capital Real Estate, BBX Sweet Holdings, and Renin.
Information regarding income (loss) before income taxes by reportable segment is
set forth in the table below (in thousands):
For the Years Ended December 31,
2020 2019 2018
BBX Capital Real Estate 9,988 52,696 30,214
BBX Sweet Holdings (47,473) (5,122) (14,986)
Renin (3,572) 1,808 2,461
Other (2,915) 349 346
Reconciling items and eliminations (14,275) (20,746) (21,057)
(Loss) income from continuing operations
before income taxes (58,247) 28,985 (3,022)
Benefit (provision) for income taxes 11,231 (8,334) (2,865)
(Loss) income from continuing operations (47,016) 20,651 (5,887)
Discontinued operations (74) (7,138) (3,580)
Net (loss) income (47,090) 13,513 (9,467)
Less: Net loss attributable to
noncontrolling interests 4,803 224 266
Net (loss) income attributable to
shareholders $ (42,287) 13,737 (9,201)
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BBX Capital Real Estate Reportable Segment
Segment Description
BBX Capital Real Estate (or BBXRE) is engaged in the acquisition, development,
construction, ownership, financing, and management of real estate and
investments in real estate joint ventures, including investments in multifamily
rental apartment communities, single-family master-planned for sale housing
communities, and commercial properties located primarily in Florida. In
addition, BBXRE owns a 50% equity interest in the Altman Companies, a developer
and manager of multifamily apartment communities, and manages the legacy assets
acquired in connection with the Company's sale of BankAtlantic in 2012,
including portfolios of loans receivable, real estate properties, and judgments
against past borrowers.
Overview
Although BBXRE's operations were impacted by the COVID-19 pandemic during 2020
and there is no assurance that they will not be impacted in the future, BBXRE's
operations are not currently being significantly impacted by the pandemic.
Following the initial outbreak of COVID-19 in March 2020, construction
activities continued at BBXRE's existing projects, while sales activities at
BBXRE's single-family for sale housing developments and rental activities at its
multifamily apartment developments were temporarily impacted. Further, the
effects of the pandemic, including economic uncertainty generally and in the
real estate and credit markets in particular, increased uncertainty relating to
the expected timing and pricing of sales of its current multifamily apartment
developments and the expected timing and financing of new multifamily apartment
developments. However, throughout the remainder of 2020 and to date in 2021,
BBXRE has experienced a progressive recovery in its operations, which management
believes is primarily attributable to demand for single-family and multifamily
apartment housing in many of the markets in Florida in which BBXRE operates. In
particular, sales at its single-family home developments and leasing and rent
collections at its multifamily apartment developments have returned to
pre-pandemic levels in most (but not all) locations. In addition, while the sale
of existing projects and the commencement of new projects were delayed in 2020
as a result of a temporary decline in investment activity, BBXRE believes that
there has generally been a recovery in investor demand for the acquisition of
stabilized multifamily apartment communities and the availability of financing
of debt and equity capital for new multifamily apartment developments.
As previously indicated, while BBXRE is not currently being significantly
impacted by the COVID-19 pandemic, the pandemic has nevertheless resulted in
significant uncertainty in the overall economy, and an increase in COVID-19
cases or the emergence of variant coronavirus strains could result in further
disruptions to the U.S. and global economies. As a result, there is no assurance
that the real estate market will not be materially adversely impacted by the
pandemic or otherwise, that sales prices of single-family homes will not
materially decline, that rents will be paid when due or at all, or that market
rents will not materially decline. Further, while government efforts to delay or
forestall evictions and the availability of judicial remedies have not to date
materially impacted BBXRE's operations, they may in the future have an adverse
impact on both market values and BBXRE's operating results. In addition, the
effects of the pandemic may impact the costs of developing and operating BBXRE's
real estate assets, including, but not limited to, an increase in commodity and
labor prices and property insurance costs as compared to pre-pandemic levels,
which could also have an adverse impact on market values and BBXRE's operating
results. BBXRE will continue to monitor economic and market conditions and may
recognize impairment losses in future periods as a result of various factors,
including, but not limited to, material declines in overall real estate values,
sales prices for single-family homes, and/or rental rates for multifamily
apartments. As a result of these factors, BBXRE's results of operations and
financial condition may be materially adversely impacted by the effects of the
pandemic in future periods.
Further, as BBXRE is focused on sourcing investments in new development
opportunities with the goal of building a diversified portfolio of real estate
investments that generate recurring earnings and cash flows in future periods,
the effects of the COVID-19 pandemic may impact BBXRE over a longer term to the
extent that its ability to identify new development opportunities that meet its
investment criteria or source debt or equity capital from unaffiliated third
parties is adversely impacted. While BBXRE may be able to identify opportunistic
investments in a recessionary environment that could be funded with available
cash, there is no certainty that such opportunities will be identified, that
such opportunities will meet the Company's investment criteria, or that required
funds will be available for that purpose.
The Altman Companies and Related Investments
In 2018, BBXRE acquired a 50% membership interest in the Altman Companies, a
joint venture between the Company and Mr. Altman engaged in the development,
construction, and management of multifamily apartment communities. As of
December 31, 2020, BBXRE had investments in eight active developments sponsored
by the Altman Companies, comprised of four developments that are in lease-up or
have stabilized, three developments that are under construction, and one project
that is currently in predevelopment stages.
To date, the COVID-19 pandemic has not significantly impacted construction
activities which remain ongoing at the existing projects sponsored by the Altman
Companies, and as a result, the Altman Companies continues to generate
development and general contractor fees from such projects. In addition, while
there was a slowdown in rent collections during the second and third quarters of
2020, the Altman Companies had collected in excess of 98% of the rents at the
multifamily apartment communities under its management during the fourth quarter
of 2020. While its leasing activities were conducted virtually during
March through May 2020, the Altman Companies
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has reopened its leasing offices for visits by appointment. Further, although
the Altman Companies experienced a decline in tenant demand and in the volume of
new leases during the second quarter of 2020, it generally experienced an
increase in the volume of new leases at its communities during the third and
fourth quarters of 2020. As a result, of the four active developments in which
BBXRE has invested which are in lease-up or have stabilized, the stabilized
community was 97% leased as of December 31, 2020, while the three communities
which are in lease-up have stabilized or are expected to be stabilized in 2021
either on schedule or ahead of schedule based on current leasing velocity.
However, in an effort to maintain occupancy at its stabilized communities and
increase occupancy at its communities under development, commencing in the
second quarter of 2020, the Altman Companies offered increased concessions to
prospective and renewing tenants, although such concessions have declined in
volume in recent months.
As noted above, following the initial months of the COVID-19 pandemic, the
Altman Companies observed a decline in real estate sales activity as a result of
uncertainty in the real estate and overall credit markets. However, in spite of
the overall slowdown in activity, there have been indications that the
capitalization rates for multifamily apartment communities similar to those
sponsored and managed by the Altman Companies have generally remained steady or
even decreased, as evidenced by the Altis Boca Raton joint venture's sale of its
multifamily apartment community during the fourth quarter of 2020. Further,
throughout the remainder of 2020 and to date in 2021, the Altman Companies has
observed what it believes to be a recovery in overall investor demand for the
acquisition of stabilized multifamily apartment communities.
Following the initial outbreak of COVID-19, the Altman Companies observed a
decline in the availability of debt and equity capital for new multifamily
apartment developments. Further, as its pipeline of potential development
opportunities included several proposed projects in the greater Orlando, Florida
area, which has been significantly impacted by the pandemic, the Altman
Companies was required to reevaluate certain projects in its development
pipeline and identify new development opportunities in an effort to rebuild its
pipeline. However, in June 2020, the Altis Ludlam Trail joint venture, which is
sponsored by the Altman Companies, obtained entitlements, closed on development
financing, and commenced development of a 312 unit multifamily apartment
community in South Florida with 7,500 square feet of retail space. (In addition
to its investment in the managing member of the Altis Ludlam Trail joint
venture, BBXRE also invested an additional $8.5 million as preferred equity in
the joint venture.) In addition, throughout the remainder of 2020 and to date in
2021, the Altman Companies has observed what it believes to be an increase in
the availability of debt and equity capital for new developments, and it has
identified various new potential development opportunities, which are primarily
located in South Florida and the greater Tampa, Florida area, both of which are
experiencing increased demand for multifamily housing.
Notwithstanding the foregoing, the impact of the COVID-19 pandemic on the
economy remains uncertain, and the effects of the pandemic, including a
prolonged economic downturn, high unemployment, the expiration of or a decrease
in government benefits to individuals, and government-mandated moratoriums on
tenant evictions, could ultimately have a longer term and more significant
impact on rental rates, occupancy levels, and rent collections, including an
increase in tenant delinquencies and/or requests for rent abatements. These
effects would impact the amount of rental revenues generated from the
multifamily apartment communities sponsored and managed by the Altman Companies,
the extent of management fees earned by the Altman Companies, and the ability of
the related joint ventures to stabilize and successfully sell such communities.
Furthermore, a decline in rental revenues at developments sponsored by the
Altman Companies could require it, as the sponsor and managing member, to fund
operating shortfalls in certain circumstances. In addition, the effects of the
pandemic may impact the costs of developing and operating multifamily apartment
communities, including, but not limited to, increases in commodity prices as a
result of, among other things, supply chain disruptions and material shortages,
labor prices, and property insurance costs as compared to pre-pandemic levels,
which could also have an adverse impact on market values and the Altman
Companies' operating results. Further, the impact of the COVID-19 pandemic on
economic conditions in general, including uncertainty regarding the severity and
duration of such impact, may ultimately have a significant adverse impact on
capitalization rates and real estate values in future periods, particularly if
there is a prolonged economic downturn. If there is a significant adverse impact
on real estate values as a result of lower rental revenues, higher
capitalization rates, or otherwise, the joint ventures sponsored by the Altman
Companies may be unable to sell their respective multifamily apartment
developments within the time frames previously anticipated and/or for the
previously forecasted sales prices, if at all, which may impact the profits
expected to be earned by BBXRE from its investment in the managing member of
such projects and the ability of the joint ventures to repay or refinance
construction loans on such projects and could result in the recognition of
impairment losses related to BBXRE's investment in such projects. Furthermore,
the Altman Companies may be unable to close on the equity and/or debt financing
necessary to commence the construction of new projects, including the
development of Altis Lake Willis, which could result in increased operating
losses at the Altman Companies due to a decline in development, general
contractor, and management fees, the recognition of impairment losses by BBXRE
and/or the Altman Companies related to their current investments in
predevelopment expenditures and land acquired for development, and the
recognition of impairment losses related to BBXRE's overall investment in the
Altman Companies, as the profitability and value of the Altman Companies is
directly correlated with its ability to source new development opportunities.
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Beacon Lake Master Planned Development
During the year ended December 31, 2020, BBXRE substantially completed the
development of the lots comprising Phase II of the Beacon Lake Community in St.
Johns County, Florida, which is expected to include approximately 479
single-family homes and 196 townhomes, and sold 157 single family lots and 70
townhome lots to homebuilders. In addition, as part of BBXRE's efforts to
maximize liquidity in light of overall economic conditions, the community
development district related to the Beacon Lake Community issued $8.6 million of
additional community development district bonds. The funds from the issuance
were primarily used to reimburse BBXRE for its funding of ongoing development
costs related to Phases II and III of the development. As of December 31, 2020,
BBXRE had entered into agreements with homebuilders to sell developed lots for
an additional 265 single-family homes and 126 townhomes as part of Phase II and
sell 299 undeveloped lots as part of Phase IV and has collected deposits related
to these purchase agreements. With respect to Phase III, BBXRE expects to
commence land development in 2021 and sell a portion of these developed lots to
an unaffiliated homebuilder, and it is exploring investment alternatives for the
remaining lots in Phase III, including the possible construction, leasing, and
management of a portfolio of rental homes.
Following the initial outbreak of COVID-19 in March 2020, the unaffiliated
homebuilders at the Beacon Lake Community experienced a decline in the volume of
sales traffic and home sales and requested extensions of their existing
agreements for the purchase of additional developed lots from BBXRE, and BBXRE
agreed to such extensions. Subsequently, sales activity significantly increased
in May 2020 and generally returned to pre-pandemic levels or greater subsequent
to May 2020. Based on that activity, BBXRE currently expects the sale of the
remaining developed lots to occur pursuant to its agreements with the
homebuilders under the modified takedown schedules. However, there is no
assurance that this will be the case, and the effects of the COVID-19 pandemic
on the economy and demand for single-family housing remain uncertain and could
result in further requests by homebuilders to extend the timing of their
purchase of developed lots and/or failure of the homebuilders to meet their
obligations under these contracts. In addition, a decline in home prices as a
result of the economic impacts associated with the COVID-19 pandemic could
result in a decrease in contractually owed contingent revenues expected to be
earned by BBXRE in connection with sales of homes by homebuilders on developed
lots previously sold to them, as well as a decrease in the expected sales prices
for the unsold lots comprising the remainder of the Beacon Lakes Community.
Although BBXRE does not currently expect that there will be a significant
decrease in the sales prices or fair value of its unsold lots, a significant
decline in the demand and pricing for single-family homes could have such an
effect and result in the recognition of impairment losses in future periods.
Other Joint Venture Activity
In June 2019, BBXRE invested $4.2 million in the Sky Cove joint venture, which
was formed to develop Sky Cove at Westlake, a residential community comprised of
204 single-family homes in Loxahatchee, Florida. During the year ended
December 31, 2020, the joint venture closed on 47 single-family homes, and BBXRE
recognized $0.1 million of equity earnings and received $1.1 million of
distributions from the venture. As of December 31, 2020, the joint venture had
agreements to sell an additional 137 single-family homes.
In February 2021, BBXRE invested $4.9 million in the Sky Cove South joint
venture, which was formed to develop Sky Cove South at Westlake, a residential
community that will be adjacent to Sky Cove at Westlake and is expected to be
comprised of 197 single-family homes.
As of December 31, 2020, BBXRE had invested $7.4 million in a joint venture with
CC Homes to develop Marbella, a residential community comprised of 158
single-family homes in Miramar, Florida. As of December 31, 2020, the joint
venture had executed contracts to sell 91 single-family homes and expects to
commence closing on sales during the second half of 2021.
Impairments
As a result of the COVID-19 pandemic and the related impact on the overall
market, the Company evaluated various factors, including asset-specific factors,
overall economic and market conditions, and the excess of the expected profits
associated with BBXRE's real estate assets in relation to their carrying
amounts, and concluded that, except as discussed below, there had not been a
significant decline in the fair value of most of BBXRE's real estate assets
during the year ended December 31, 2020 that should be recognized as an
impairment loss. As part of this evaluation, the Company considered the sales at
its single-family home developments (which have returned to pre-pandemic
levels), continued collection of rent at its multifamily apartment developments,
and indications that there has not to date been a significant decline in sales
prices for single family homes or an increase in capitalization rates for
multifamily apartment communities. However, the Company recognized $2.7 million
of impairment losses during the year ended December 31, 2020 primarily related
to a decline in the estimated fair values of certain of BBXRE's investments in
joint ventures, including (i) a joint venture that is developing an office
tower, as the market for commercial office space has been more significantly
impacted by the pandemic compared to the single family and multifamily markets
in which BBXRE primarily invests, and (ii) a joint venture invested in a
multifamily apartment community in which BBXRE purchased its interest following
the stabilization of the underlying asset at a purchase price calculated based
on assumptions related to the timing and pricing of the sale of the asset, both
of which have been adversely impacted by the pandemic.
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Results of Operations
Information regarding the results of operations for BBX Capital Real Estate is
set forth below (dollars in thousands):
Change Change
For the Years Ended December 31, 2020 vs 2019 vs
2020 2019 2018 2019 2018
Sales of real
estate inventory $ 20,363 5,049 21,771 15,314 (16,722)
Interest income 1,240 750 2,277 490 (1,527)
Net gains on
sales of real
estate assets 255 13,616 4,563 (13,361) 9,053
Other 1,454 1,619 2,541 (165) (922)
Total revenues $ 23,312 21,034 31,152 2,278 (10,118)
Cost of real
estate inventory
sold 13,171 2,643 14,116 10,528 (11,473)
Recoveries from
loan losses, net (8,876) (5,428) (8,653) (3,448) 3,225
Impairment losses 2,742 47 571 2,695 (524)
Selling, general
and
administrative
expenses 6,758 9,144 9,210 (2,386) (66)
Total costs and
expenses 13,795 6,406 15,244 7,389 (8,838)
Operating profits 9,517 14,628 15,908 (5,111) (1,280)
Equity in net
earnings of
unconsolidated
joint ventures 465 37,898 14,194 (37,433) 23,704
Other income 6 170 112 (164) 58
Income before
income taxes $ 9,988 52,696 30,214 (42,708) 22,482
BBX Capital Real Estate's income before income taxes for the year ended
December 31, 2020 compared to the 2019 period decreased by $42.7 million, or
81.0%, primarily due to the following:
· A decrease in equity in net earnings of unconsolidated joint ventures primarily
due to sales of real estate during the 2019 period, including the sale of real
estate assets by the Altis Bonterra, Altis Lakeline, and PGA Design Center
joint ventures and single-family homes by the Chapel Trail joint venture;
· A decrease in net gains on sales of real estate assets primarily due to BBXRE's
sale of various real estate assets during the 2019 period, including RoboVault
and land parcels at PGA Station; and
· The recognition of impairment losses during the 2020 period; partially offset
by
· An increase in net profits from the sale of developed lots to homebuilders at
the Beacon Lake Community development, as BBXRE sold 227 developed lots during
the 2020 period and 51 developed lots during the 2019 period;
· A net increase in recoveries from loan losses primarily due to settlements with
guarantors and a financial institution servicing loans for BBXRE; and
· A decrease in selling, general, and administrative expenses primarily due to
lower incentive bonuses and professional fees, a legal settlement with a title
company in 2020, and lower operating expenses due to the sale of RoboVault
during 2019.
BBX Capital Real Estate's income before income taxes for the year ended
December 31, 2019 compared to the 2018 period increased by $22.5 million, or
74.4%, primarily due to the following:
· A net increase in equity in earnings of unconsolidated joint ventures and gains
on sales of real estate assets primarily associated with the sales in 2019
described above, including the Altis Bonterra's sale of its 314 unit
multifamily apartment community located in Hialeah, Florida, which resulted in
the recognition of $29.2 million of equity earnings by BBXRE; partially offset
by
· The recognition of a $3.1 million net gain upon the sale of a student housing
complex in 2018;
· A decrease in interest income and recoveries from loan losses primarily due to
the overall decline in the balance of the legacy asset portfolio, as several
significant nonaccrual commercial loans were repaid in 2018; and
· A decrease in net profits from the sale of developed lots to homebuilders at
the Beacon Lake Community development, as BBXRE sold 51 developed lots in 2019
and 251 in 2018.
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BBX Sweet Holdings Reportable Segment
BBX Sweet Holdings is engaged in the ownership and management of operating
businesses in the confectionery industry, including Hoffman's Chocolates, a
retailer of gourmet chocolates with retail locations in South Florida, and Las
Olas Confections and Snacks, a manufacturer and wholesaler of chocolate and
other confectionery products.
BBX Sweet Holdings also owns approximately 93% of the equity interests in
IT'SUGAR, a specialty candy retailer whose products include bulk candy, candy in
giant packaging, and licensed and novelty items. Prior to September 22, 2020,
the Company consolidated the financial statements of IT'SUGAR and its
subsidiaries based on its 93% ownership of IT'SUGAR. However, as further
discussed below, on September 22, 2020, IT'SUGAR and its subsidiaries filed
voluntary petitions to reorganize under Chapter 11 of Title 11 of the U.S. Code
(the "Bankruptcy Code") in the U.S. Bankruptcy Court for the Southern District
of Florida (the "Bankruptcy Court") (the cases commenced by such filings, the
"Bankruptcy Cases"), and as a result of the filings and the uncertainties
surrounding the nature, timing, and specifics of the bankruptcy proceedings, the
Company deconsolidated IT'SUGAR on September 22, 2020.
Overview
Although BBX Sweet Holdings' results from operations were improved for the first
two months of 2020 as compared to 2019, reflecting, among other things,
IT'SUGAR's opening of a three story candy department store at American Dream in
New Jersey in December 2019 and the opening of three other stores in 2019, BBX
Sweet Holdings has been materially adversely impacted by the effects of the
COVID-19 pandemic.
In March 2020, as a result of various factors, including government-mandated
closures and Center for Disease Control and World Health Organization advisories
in connection with the COVID-19 pandemic, IT'SUGAR closed all of its retail
locations and furloughed all store employees and the majority of its corporate
employees. Between May 2020 and September 2020, IT'SUGAR reopened nearly all of
its approximately 100 locations that were open prior to the pandemic as part of
a phased reopening plan which included revised store floor plans, increased
sanitation protocols, and the gradual recall of furloughed store and corporate
employees to full or part-time employment. However, from time to time, IT'SUGAR
has been required to close previously reopened locations as a result of various
factors, including government- mandated closures and staffing shortages.
IT'SUGAR ceased paying rent to the landlords of its closed locations in April
2020 and engaged in negotiations with its landlords for rent abatements,
deferrals, and other modifications for both the period of time that the
locations were closed and the subsequent period that the locations have been
opened and operating under conditions which have been affected by the pandemic.
In addition to its unpaid rental obligations, IT'SUGAR ceased paying various
outstanding obligations to its vendors.
Although IT'SUGAR was able to reopen its retail locations and received an
advance of $2.0 million from a subsidiary of BBX Capital under an existing line
of credit, IT'SUGAR was unable to maintain sufficient liquidity to sustain its
operations as (i) it was unable to obtain significant rent abatements or
deferrals from its landlords and amended payment terms from its vendors and (ii)
its sales volumes had not sufficiently improved and stabilized following the
reopening of its locations. In particular, although a significant portion of its
retail locations were reopened during the three months ended September 30, 2020,
IT'SUGAR's total revenues for the period declined by approximately 50.4% as
compared to the comparable period in 2019. As a result, on September 22, 2020,
IT'SUGAR and its subsidiaries filed voluntary petitions to reorganize under
Chapter 11 of the Bankruptcy Code in the Bankruptcy Court.
Under Section 362 of the Bankruptcy Code, the filing of bankruptcy petitions
automatically stays most actions against IT'SUGAR, including most actions to
collect pre-petition indebtedness or to exercise control of the property of
IT'SUGAR. Accordingly, absent an order of the Bankruptcy Court, substantially
all pre-petition liabilities will be subject to treatment under a plan of
reorganization, as further described below.
In order to successfully exit the Bankruptcy Cases, IT'SUGAR must propose, and
obtain confirmation by the Bankruptcy Court of a plan of reorganization or
liquidation (the "Reorganization Plan") that satisfies the requirements of the
Bankruptcy Code. The Reorganization Plan will determine the rights and claims of
various creditors and security holders, and under the priority rules established
by the Bankruptcy Code, certain post-petition liabilities and pre-petition
liabilities will be given priority over pre-petition indebtedness and need to be
satisfied before unsecured creditors or holders of equity interests are entitled
to any distribution. As provided by the Bankruptcy Code, IT'SUGAR initially has
the exclusive right to solicit a plan and currently intends to submit a
Reorganization Plan to the Bankruptcy Court in the first quarter of 2021. In
connection with the Bankruptcy Cases, the Office of the United States Trustee, a
division of the Department of Justice, has appointed an official committee of
unsecured creditors (the "Creditors' Committee"), which has a right to be heard
on all matters that come before the Bankruptcy Court, including the confirmation
of the Reorganization Plan.
If the Bankruptcy Court does not confirm a final Reorganization Plan filed by
IT'SUGAR, the Bankruptcy Cases could be converted to cases under Chapter 7 of
the Bankruptcy Code. Under Chapter 7 bankruptcy cases, a trustee would be
appointed to collect IT'SUGAR's assets, reduce them to cash, and distribute the
proceeds to IT'SUGAR's creditors in accordance with the statutory scheme of the
Bankruptcy Code. Alternatively, if IT'SUGAR's Reorganization Plan is not
confirmed by the Bankruptcy Court, in lieu of the conversion of the Bankruptcy
Cases to Chapter 7 bankruptcy cases, the Bankruptcy Court could dismiss the
Bankruptcy Cases.
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At the current time, IT'SUGAR is continuing to operate its retail locations
under the supervision of the Bankruptcy Court and the participation of the
Creditors' Committee and is negotiating with its creditors in relation to a
proposed Reorganization Plan, as well as the terms of amendments to the lease
agreements associated with its retail locations. Subsequent to its filing of the
Bankruptcy Cases, IT'SUGAR has executed lease amendments in relation to many of
its existing retail locations, opened 9 new "temporary" retail locations in
select U.S. locations, closed certain other locations, and continues to
negotiate with its landlords. However, all lease modifications and amendments
are subject to confirmation of IT'SUGAR's proposed Reorganization Plan.
IT'SUGAR's "temporary" retail locations required initial capital investments
that were significantly lower than the investments required for IT'SUGAR's
typical retail locations, as IT'SUGAR repurposed retail spaces that were
recently vacated by the prior tenants and utilized in many cases existing
fixtures from certain of its other recently closed locations, and are being
leased pursuant to lease agreements which have terms ranging from 13-21 months
and provide for the payment of rent based on a percentage of sales. IT'SUGAR is
also currently evaluating additional locations in which to potentially open
similar "temporary" retail locations.
Although IT'SUGAR's sales volumes continue to be impacted by the effects of the
COVID-19 pandemic and there is no assurance that its sales will not further
decline in future periods, IT'SUGAR's sales since the filing of the Bankruptcy
Cases have steadily improved as compared to the second and third quarters of
2020. As compared to an overall decline in sales of 50.4% for the three months
ended September 30, 2020, IT'SUGAR's revenues for the three months ended
December 31, 2020 had declined by approximately 31.5% as compared to the
comparable period in 2019.
In April 2020, BBX Capital, through a wholly-owned subsidiary of BBXRE,
purchased IT'SUGAR's revolving line of credit and equipment note from the
respective lenders for the aggregate outstanding principal balance of the loans
of $4.3 million plus accrued interest and subsequently advanced an additional
$2.0 million to IT'SUGAR pursuant to the terms of the loans. In addition, in
October 2020, IT'SUGAR obtained a $4.0 million "debtor in possession" ("DIP")
credit facility from the same subsidiary of BBX Capital that was approved by the
Bankruptcy Court. As of December 31, 2020, the $4.0 million available under the
DIP credit facility had been funded to IT'SUGAR and remains outstanding.
At this time, it is not possible to predict the ultimate effect of the
reorganization process on IT'SUGAR's business and creditors or when, or if,
IT'SUGAR may emerge from bankruptcy. While the reorganization process may
improve IT'SUGAR's result of operations, cash flows, and financial condition if
it obtains relief in relation to its pre-petition liabilities and it is able to
negotiate amendments to its lease agreements that lower its ongoing occupancy
costs while its business continues to be impacted by the effects of the COVID-19
pandemic, there is no assurance that it will obtain such relief, and the
ultimate impact of the Bankruptcy Cases and the reorganization process on
IT'SUGAR and its results of operations, cash flows, or financial condition
remains uncertain. Further, the effects of the COVID-19 pandemic on demand,
sales levels, and consumer behavior, as well as the current recessionary
economic environment, have had and could continue to have a material adverse
effect on IT'SUGAR's business, results of operations, and financial condition
during the bankruptcy proceedings and thereafter.
As a result of IT'SUGAR filing the Bankruptcy Cases and the uncertainties
surrounding the nature, timing, and specifics of the bankruptcy proceedings, the
Company deconsolidated IT'SUGAR as of September 22, 2020 and recognized a loss
of $3.3 million during the year ended December 31, 2020 in connection with the
deconsolidation, as further discussed in the Company's consolidated financial
statements included in Item 8 - Note 23 to this annual report. Prior to the
deconsolidation of IT'SUGAR, the Company recognized $24.9 million of impairment
losses during the year ended December 31, 2020 related to IT'SUGAR's goodwill
and long-lived assets as a result of the effects of the pandemic, including the
recognition of a goodwill impairment loss of $20.3 million based on a decline in
the estimated fair value of IT'SUGAR. The decline in the estimated fair value of
IT'SUGAR during the year ended December 31, 2020 as compared to the Company's
prior valuation of IT'SUGAR as of December 31, 2019 reflected the impact on the
Company's estimated future cash flows of the temporary closure of IT'SUGAR's
retail locations commencing in March 2020, including the liabilities incurred by
IT'SUGAR during the shutdown, and considered scenarios in which IT'SUGAR's
business and sales volumes would stabilize following the phased reopening of its
retail locations. The Company's estimated discount rate applicable to IT'SUGAR's
cash flows was also increased to reflect, among other things, changes in market
conditions, the uncertainty of the duration and severity of the economic
downturn, uncertainty related to the retail environment and consumer behavior,
uncertainty related to IT'SUGAR's ability to stabilize its operations and
implement its long-term strategies for its business, and the deterioration in
IT'SUGAR's financial condition as a result of the effects of the COVID-19
pandemic, including its lack of sufficient liquidity for its operations during
2020.
The Company's assessment of IT'SUGAR's assets for impairment, as well as its
estimate of the fair value of its investment in IT'SUGAR in connection with the
deconsolidation of IT'SUGAR, required the Company to make estimates based on
facts and circumstances as of each reporting date and assumptions about current
and future economic and market conditions. These assumptions included the
stabilization of IT'SUGAR following the phased reopening of its retail locations
in 2020 and its ability to access and operate in its retail locations in spite
of ongoing negotiations with the landlords of these locations related to unpaid
rents. Further, the Company's estimated fair value of its investment in IT'SUGAR
at the time of its filing of the Bankruptcy Cases included assumptions related
to relief of pre-petition obligations and improved occupancy costs as a result
of renegotiated lease agreements for its retail locations. In addition, the
Company's estimates assumed that there would not be a material permanent decline
in the demand for IT'SUGAR's products and that IT'SUGAR will ultimately in the
future return to its full operations and implement its long-term strategy to
reinvest in and grow its business. However, as it is difficult to predict (i)
the severity, magnitude, and duration, as well as the economic consequences, of
the COVID-19 pandemic, which are uncertain and rapidly changing and may involve
the re-implementation of
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government mandated closures or operating restrictions, and (ii) the ultimate
outcome of IT'SUGAR's Bankruptcy Cases, these estimates and assumptions may
change over time, which may result in the recognition of additional impairment
losses related to the Company's investment in IT'SUGAR that would be material to
the Company's financial statements. Changes in assumptions that could materially
impact the Company's estimates related to IT'SUGAR that could result in the
recognition of impairment losses in future periods include, but are not limited
to, IT'SUGAR's Chapter 11 Bankruptcy Cases being converted to Chapter 7
bankruptcy cases, IT'SUGAR not obtaining expected relief during the
reorganization, a material permanent decline in demand for IT'SUGAR's products,
IT'SUGAR abandoning its long-term strategy to reinvest and grow its business as
a result of changes in consumer demand, and significant additional closures
following the initial reopening of locations as a result of additional outbreaks
of COVID-19.
See Notes 1, 2, 8, 9, and 23 to the Company's consolidated financial statements
included in Item 8 of this annual report for additional information with respect
to (i) the Company's recognition of impairment losses related to IT'SUGAR,
including the Company's significant estimates and assumptions related to
IT'SUGAR and the fact that such assumptions may change over time as a result of
the COVID-19 pandemic and the ultimate outcome of IT'SUGAR's Bankruptcy Cases,
which may result in the recognition of additional impairment losses related to
the BBX Sweet Holdings' investment in IT'SUGAR that would be material to the
Company's financial statements, and (ii) IT'SUGAR's Bankruptcy Cases and the
Company's issuance of DIP financing to IT'SUGAR.
Hoffman's Chocolates and Las Olas Confections and Snacks
In addition to the material adverse impact of the COVID-19 pandemic on
IT'SUGAR's operations, BBX Sweet Holdings' other operations have also been
impacted by the pandemic. In March 2020, Hoffman's Chocolates closed all of its
retail locations to customer traffic and limited sales to curbside pickup (where
allowable by government mandates) and online customers, and during the three
months ended June 30, 2020, it commenced a phased reopening of its locations to
customer traffic. As of July 1, 2020, Hoffman's Chocolates had reopened all of
its locations, and its sales volumes during the six months ended December 31,
2020 were approximately 72% of pre-pandemic levels (as compared to the
comparable period in 2019). Although Las Olas Confections and Snacks experienced
a decline in sales through the second quarter of 2020, its manufacturing and
distribution processes were not materially impacted by the pandemic during the
year ended December 31, 2020, and its sales during the year ended December 31,
2020 increased by approximately 6% as compared to its sales during the year
ended December 31, 2019.
Hoffman's Chocolates and Las Olas Confections and Snacks have also been engaged
in negotiations with the landlords of their respective retail and manufacturing
locations for rent abatements, deferrals, and other modifications. As of
December 31, 2020, Hoffman's Chocolates and Las Olas Confections and Snacks had
accrued and unpaid current rental obligations of $0.1 million, which are
included in other liabilities in the Company's consolidated statement of
financial condition, and they had executed lease amendments with respect to all
but one of these locations, including Las Olas Confections and Snacks'
manufacturing facility in Orlando, Florida. Subsequent to December 31, 2020,
Hoffman's Chocolates executed a lease amendment with respect to its remaining
location. There is no assurance that Hoffman's Chocolates' sales volumes will
improve or that their respective sales volumes will not decline in future
periods as a result of the effects of the pandemic. Further, previously reopened
locations may be required to be closed as a result of governments reimplementing
mandated closures or otherwise, and due to the uncertainty related to these
businesses as a result of the pandemic, there is no assurance they will be in a
position to meet their obligations under the terms of lease agreements and
amendments that have been executed.
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Results of Operations
Information regarding the results of operations for BBX Sweet Holdings is set
forth below (dollars in thousands):
Change Change
For the Years Ended December 31, 2020 vs 2019 vs
2020 2019 2018 2019 2018
Trade sales $ 49,155 105,406 101,187 (56,251) 4,219
Cost of trade
sales (41,482) (67,703) (65,829) 26,221 (1,874)
Gross margin 7,673 37,703 35,358 (30,030) 2,345
Interest income 29 56 61 (27) (5)
Other revenue 281 324 10 (43) 314
Interest expense (193) (196) (308) 3 112
Impairment losses (25,303) (142) (4,147) (25,161) 4,005
Selling, general
and
administrative
expenses (26,855) (43,203) (46,130) 16,348 2,927
Total operating
losses (44,368) (5,458) (15,156) (38,910) 9,698
Loss on the
deconsolidation
of IT'SUGAR, LLC (3,326) - - (3,326) -
Other income 221 336 170 (115) 166
Loss before
income taxes $ (47,473) (5,122) (14,986) (42,351) 9,864
Gross margin
percentage % 15.61 35.77 34.94 (20.16) 0.83
SG&A as a percent
of trade sales % 54.63 40.99 45.59 13.64 (4.60)
BBX Sweet Holdings loss before income taxes for the year ended December 31, 2020
compared to the same 2019 period increased by $42.4 million primarily due to the
following:
· The recognition of impairment losses in the 2020 period due to a decline in the
estimated value of the goodwill and long-lived assets associated with BBX Sweet
Holdings' reporting units, including IT'SUGAR, as a result of the impact of the
COVID-19 pandemic on market conditions;
· A decrease in trade sales primarily due to the impacts of the COVID-19 pandemic
and the deconsolidation of IT'SUGAR as described above;
· A significant decline in gross margin percentage as a result of (i) ongoing
lease costs associated with BBX Sweet Holdings' retail and manufacturing
locations and (ii) lower sales of high margin products; and
· The recognition of a loss of $3.3 million in the 2020 period resulting from the
deconsolidation of IT'SUGAR; partially offset by
· A net decrease in selling, general and administrative expenses primarily due
the deconsolidation of IT'SUGAR and costs reductions implemented as a result of
the COVID-19 pandemic.
BBX Sweet Holdings' loss before income taxes for the year ended December 31,
2019 compared to the same 2018 period decreased by $9.9 million, or 65.8%,
primarily due to the following:
· The recognition of impairment losses in 2018 in connection with the
implementation of various strategic initiatives in 2018, including the closure
of facilities and reductions in corporate personnel and infrastructure, and
ongoing losses from BBX Sweet Holdings' businesses;
· A net decrease in selling, general and administrative expenses primarily due to
the above mentioned initiatives, which resulted in lower ongoing operating
costs and the recognition of severance and other expenses in 2018 that did not
reoccur in 2019, partially offset by costs associated with new IT'SUGAR
locations opened in 2019 and 2018, including the FAO Schweetz location in New
York City, the Grand Bazaar location in Las Vegas, and the American Dream
location in New Jersey; and
· A net increase in gross margin primarily due to sales from the new IT'SUGAR
locations described above and improvements in Las Olas Confections and Snacks'
gross margin percentage as a result of improved efficiencies in its
manufacturing facility and the closure of its manufacturing facility in Utah.
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Information regarding the results of operations for IT'SUGAR that were included
in the Company's consolidated financial statements is set forth below (dollars
in thousands):
Change Change
For the Years Ended December 31, 2020 vs 2019 vs
2020 2019 2018 2019 2018
Trade sales $ 31,794 85,275 79,618 (53,481) 5,657
Cost of trade
sales (26,923) (50,748) (46,718) 23,825 (4,030)
Gross margin 4,871 34,527 32,900 (29,656) 1,627
Interest income 8 10 11 (2) (1)
Interest expense (109) (114) (40) 5 (74)
Impairment losses (24,948) (142) - (24,806) (142)
Selling, general
and
administrative
expenses (21,121) (36,521) (35,404) 15,400 (1,117)
Total operating
losses (41,299) (2,240) (2,533) (39,059) 293
Other income 117 276 149 (159) 127
Loss income
before income
taxes $ (41,182) (1,964) (2,384) (39,218) 420
Gross margin
percentage % 15.32 40.49 41.32 (25.17) (0.83)
SG&A as a percent
of trade sales % 66.43 42.83 44.47 23.60 (1.64)
The activity for the year ended December 31, 2020 is for the period beginning on
January 1, 2020 through September 22, 2020, the date that the Company
deconsolidated IT'SUGAR.
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Renin Reportable Segment
Segment Description
Renin is engaged in the design, manufacture, and distribution of sliding doors,
door systems and hardware, and home décor products and operates through its
headquarters in Canada and three manufacturing and distribution facilities in
the United States and Canada. In addition to its own manufacturing, Renin also
sources various products and materials from China, Brazil, and certain other
countries. Renin's products are sold through three channels in North America:
retail, commercial, and direct installation in the greater Toronto area. As
described below, Renin acquired substantially all of the assets and assumed
certain of the liabilities of Colonial Elegance, Inc. ("Colonial Elegance") in
October 2020.
Overview
As of December 31, 2020, Renin's had not been significantly impacted by the
COVID-19 pandemic, and it has continued to operate both of its manufacturing and
distribution facilities, source various products and raw materials from China,
Brazil, and certain other countries, and sell its products through various
channels. Although Renin has experienced a decline in sales to certain customers
as a result of concerns related to the pandemic, these declines have generally
been offset by an overall increase in sales through its retail and commercial
channels. However, as a result of the effects of the pandemic, Renin has
experienced increased costs related to the shipment of products and raw
materials, which has impacted its product costs and gross margin, and Renin
expects this increase in costs to continue and worsen during 2021.
Although Renin's operations had not been significantly impacted by the pandemic
as of December 31, 2020, the effects of the pandemic, including a recessionary
economic environment and increased costs, could have a significant adverse
impact on Renin's results of operations and financial condition in future
periods, particularly if (i) an economic downturn is prolonged in nature and
impacts consumer demand or (ii) the effects of the pandemic result in material
disruptions in the supply chains for its products and raw materials, including
additional delays in the production and shipment of products and raw materials
from foreign suppliers and continued increases in shipping costs. Further, while
Renin has begun to diversify its supply chain and transfer the assembly of
certain products from foreign suppliers to its own manufacturing facilities,
Renin continues to source products and raw materials from China. As a result,
disruptions in its supply chain from China as a result of various factors,
including closures or delays in the supply chain, could have a material impact
on Renin's cost of product and ability to meet customer demand.
Acquisition of Colonial Elegance
In October 2020, Renin acquired substantially all of the assets and assumed
certain of the liabilities of Colonial Elegance. Headquartered in Montreal,
Canada, Colonial Elegance is a supplier and distributor of building products,
including barn doors, closet doors, and stair parts, and its customers include
various big box retailers in the United States and Canada which are
complementary to and expand Renin's existing customer base. Renin believes the
acquisition of Colonial Elegance will establish Renin as a leader in barn doors
and closet doors products, support the expansion of the growing door hardware
and stair parts business, and provide a promising avenue for continued growth.
In addition, Renin believes that the increased scale of the combined businesses
will result in better overall service and selection for its customers and
improved logistics and cost efficiencies for Renin.
The base purchase price for the acquisition of Colonial Elegance was
$38.8 million. In addition to the base purchase price, Renin acquired excess
working capital held by Colonial Elegance above an agreed upon target working
capital amount of $9.9 million for $4.3 million, which resulted in total
purchase consideration of $43.1 million. BBX Capital made a $5.0 million capital
contribution to Renin to partially fund the acquisition of Colonial Elegance,
while the remainder of the acquisition was funded by Renin using borrowings
under its amended and restated credit facility with TD Bank, as described below.
Amendment and Restatement of TD Bank Credit Facility
In connection with the acquisition of Colonial Elegance, Renin amended and
restated its credit facility with TD Bank to include a $30.0 million term loan,
increase the availability under its existing revolving operating loan with TD
Bank to $20 million, and extend the maturity of the facility to October 2025.
Renin utilized $30.0 million of proceeds under the term loan and approximately
$8.0 million of proceeds under the revolving operating loan in connection with
the acquisition of Colonial Elegance.
See Note 3 to the Company's consolidated financial statements included in Item 8
of this annual report for additional information with respect to Renin's
acquisition of Colonial Elegance and Note 11 to the Company's consolidated
financial statements included in Item 8 of this annual report for additional
information with respect to Renin's amended and restated credit facility with TD
Bank.
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Supplier Dispute
In October 2020, Renin incurred approximately $6.0 million in costs for the
expedited shipment of products to Renin from a foreign supplier and an
additional $2.0 million in costs for the expedited shipment of product displays
from the same supplier. The supplier had failed to deliver both the products and
displays on the contractually agreed upon delivery schedule, and Renin incurred
these costs, which were significantly in excess of the shipping costs that would
have been incurred had such products been delivered on schedule, based on its
belief that the costs were necessary in order for Renin to meet its obligations
to one of its major customers. The products were committed to be sold by Renin
in connection with the customer's November 2020 holiday sale program, while the
displays were required to be delivered in connection with the rollout of new
products with the customer. Renin believes that the supplier is liable to Renin
for damages related to the increased costs pursuant to the terms of the
agreements between Renin and the supplier and has notified the supplier that it
is exercising a right of offset of the costs against outstanding amounts due to
the supplier of approximately $8.1 million in order to recover its damages.
However, the supplier is disputing that it is liable for the additional shipping
costs and has demanded that Renin pay any outstanding amounts due to it.
As the supplier is disputing that it is liable to Renin for damages and there is
no assurance regarding the ultimate resolution of the matter and whether Renin's
assertion that it is entitled to damages will be sustained, Renin recognized the
cost of the products and related shipping costs upon the sale of such products
in cost of trade sales in the Company's statement of operations and
comprehensive income during the year ended December 31, 2020, while the costs of
the displays and related shipping were deferred and will be amortized over the
period in which the Company expects to benefit from their use. As of
December 31, 2020, this matter did not impact Renin's compliance with the
financial covenants under its outstanding credit facility with TD Bank. However,
if Renin is unable to sustain its assertion that it is entitled to damages from
the supplier and is ultimately required to pay the supplier for outstanding
amounts due to it, Renin may be unable to comply with its covenants, If Renin is
unable to comply with its covenants, it would be required to seek a waiver from
the bank, and if unable to obtain a waiver, might lose availability under its
line of credit, be required to provide additional collateral, or repay all or a
portion of its borrowings, any of which could have a material adverse effect on
the Company's liquidity, financial position, and results.
Results of Operations
Information regarding the results of operations for Renin is set forth below
(dollars in thousands):
Change Change
For the Years Ended December 31, 2020 vs 2019 vs
2020 2019 2018 2019 2018
Trade sales $ 93,036 67,537 68,417 25,499 (880)
Cost of trade
sales (83,563) (54,243) (55,483) (29,320) 1,240
Gross margin 9,473 13,294 12,934 (3,821) 360
Interest expense (615) (498) (638) (117) 140
Selling, general
and
administrative
expenses (11,735) (11,066) (9,903) (669) (1,163)
Total operating
(losses) profits (2,877) 1,730 2,393 (4,607) (663)
Other (expense)
income (3) 153 - (156) 153
Foreign exchange
(loss) gain (692) (75) 68 (617) (143)
(Loss) income
before income
taxes (3,572) 1,808 2,461 (5,380) (653)
Gross margin
percentage % 10.18 19.68 18.90 (9.50) 0.78
SG&A as a percent
of trade sales % 12.61 16.39 14.47 (3.78) 1.92
Renin's loss before income taxes for the year ended December 31, 2020 was
$3.6 million compared to income before income taxes of $1.8 million for the same
2019 period. The decrease in earnings of $5.4 million was primarily due to the
following:
· An increase in cost of sales and a corresponding decrease in gross margin
percentage which primarily resulted from $6.0 million of additional freight
costs for the expedited shipment of products to Renin from a foreign supplier,
as described above;
· An increase in selling, general, and administrative expenses primarily due to
costs incurred in connection with the acquisition of Colonial Elegance and
subsequent ongoing expenses related to Colonial Elegance's operations,
partially offset by lower
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marketing, travel, and trade show expenses in 2020 as a result of travel
restrictions associated with the COVID-19 pandemic and lower consulting expenses
related to costs incurred in 2019 associated with the procurement of raw
materials; and
· Higher foreign exchange losses due to the impact of changes in foreign exchange
rates between the U.S. and Canadian dollar on monetary assets and liabilities
held in Canadian dollars as of December 31, 2020; partially offset by
· An increase in trade sales primarily resulting from sales generated by Colonial
Elegance from October 22, 2020 through December 31, 2020 and sales to Renin's
existing customers across its retail and commercial channels.
Renin's income before income taxes for the year ended December 31, 2019 compared
to the same 2018 period decreased by $0.7 million, or 26.5%, primarily due to
the following:
· An increase in selling, general and administrative expenses primarily due to
consulting expenses related to the procurement of raw materials, severance
expenses, and higher employee compensation expenses associated with the accrual
of performance bonuses; and
· A decrease in trade sales primarily resulting from higher volume rebates and
promotional spend on customers in Renin's retail channel; partially offset by
· An improvement in Renin's gross margin percentage which reflects improved
pricing for the procurement of raw materials in 2019 and a barn door promotion
to sell excess inventory in 2018 that was not repeated in 2019, partially
offset by the impact of tariffs on products imported from China.
Other
Other in the Company's segment information includes its investments in other
operating businesses, including a restaurant located in South Florida that was
acquired through a loan foreclosure and an insurance agency.
Loss before income tax for the other businesses was $2.9 million for the year
ended December 31, 2020, and $0.3 million for each of the years ended
December 31, 2019 and 2018. During the year ended December 31, 2020, the Company
recognized $2.7 million of impairment losses related to certain of these
investments primarily resulting from the effects of the COVID-19 pandemic on the
estimated value of the businesses.
Reconciling Items and Eliminations
Reconciling items and eliminations in the Company's segment information
primarily includes the following:
· BBX Capital's corporate general and administrative expenses;
· Interest income on interest-bearing cash accounts; and
· Interest expense capitalized in connection with real estate construction.
Corporate General and Administrative Expenses
Through September 30, 2020, BBX Capital's corporate general and administrative
expenses consisted primarily of an allocation of the cost of services provided
by BVH to the Company for various support functions, including executive
compensation, legal, accounting, human resources, investor relations, and
executive offices, while subsequent to September 30, 2020, its corporate general
and administrative expenses consisted of the actual costs of these functions, as
many of these functions were transferred to BBX Capital in connection with the
spin-off. BBX Capital's corporate general and administrative expenses for the
years ended December 31, 2020, 2019, and 2018 were $15.8 million, $20.8 million,
and $21.2 million, respectively. The decrease in the corporate general and
administrative expenses for the 2020 period as compared to the prior periods in
2019 and 2018 primarily reflects (i) compensation expense related to BVH's Chief
Executive Officer and Chief Financial Officer moving to Bluegreen as a result of
their expanded roles at Bluegreen in the 2020 period, which resulted in lower
executive compensation expenses incurred directly by BVH and a lower allocation
of such costs to BBX Capital during 2020, and (ii) an overall decrease in
corporate general and administrative expenses as part of various cost reduction
initiatives implemented in 2019 and 2020.
(Provision) Benefit for Income Taxes from Continuing Operations
The provision for income taxes from continuing operations for the year ended
December 31, 2020 reflected the Company's effective tax rate of 19% on income
before income taxes from continuing operations. The effective tax rate was lower
than the expected federal income tax rate of 21.0% primarily due to
nondeductible executive compensation, noncontrolling interests in subsidiaries
not consolidated for income tax purposes, and nondeductible goodwill
impairments, partially offset by state income taxes.
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The provision for income taxes for the year ended December 31, 2019 reflected
the Company's effective tax rate of 29% on income before income taxes from
continuing operations. The effective tax rate was higher than the expected
federal income tax rate of 21.0% primarily due to nondeductible executive
compensation and state income taxes.
The provision for income taxes for the year ended December 31, 2018 reflected
the Company's effective tax rate of (96%) on income before income taxes from
continuing operations. The effective tax rate was higher than the expected
federal income tax rate of 21% primarily due to nondeductible goodwill
impairment, nondeductible executive compensation, which included a $2.8 million
adjustment associated with the Company's completion of its analysis of its
accounting for the enactment of the Tax Reform Act in December 2017, and state
income taxes.
Discontinued Operations
MOD Pizza Restaurant Operations
In 2016, Food for Thought Restaurant Group ("FFTRG"), a wholly-owned subsidiary
of BBX Capital, entered into area development and franchise agreements with MOD
Super Fast Pizza ("MOD Pizza") related to the development of up to approximately
60 MOD Pizza franchised restaurant locations throughout Florida. Through 2019,
FFTRG had opened nine restaurant locations. In September 2019, due to FFTRG's
overall operating performance and the Company's goal of streamlining its
investment verticals, the Company entered into an agreement with MOD Pizza to
terminate the area development and franchise agreements and transferred seven of
its restaurant locations, including the related assets, operations, and lease
obligations, to MOD Pizza. In addition, the Company closed the remaining two
locations and terminated the related lease agreements. FFTRG's operations as a
franchisee of MOD Pizza are presented as discontinued operations in the
Company's consolidated financial statements.
The net losses before taxes from the Company's MOD Pizza franchise operations
for the years ended December 31, 2019 and 2018 were $9.4 million and
$4.5 million, respectively. The net losses for the year ended December 31, 2019
included aggregate impairment losses of $6.7 million related to the transfer of
the seven restaurant locations to MOD Pizza and the closure of the two
restaurant locations.
The net losses in the 2018 period were primarily attributable to selling,
general, and administrative expenses, including compensation expenses associated
with store employees and operations, human resource, marketing, and finance
personnel that were hired in connection with establishing initial restaurant
operations, depreciation expense associated with leasehold improvements,
furniture, and fixtures at restaurant locations, and costs associated with store
openings and the review of potential restaurant sites. During the year ended
December 31, 2018, the selling, general and administrative expenses were
partially offset by sales generated from the five restaurant locations opened
during 2018 and the two restaurant locations opened during the fourth quarter of
2017.
Net Income Attributable to Noncontrolling Interests
Through September 22, 2020, the Company's consolidated financial statements
included the results of operations and financial position of IT'SUGAR, a 93%
owned subsidiary in which it held a controlling financial interest, and as a
result, the Company was previously required to attribute net income or loss to
the noncontrolling interest in IT'SUGAR. As a result of the filing of the
Bankruptcy Cases by IT'SUGAR and its subsidiaries, the Company deconsolidated
IT'SUGAR as of September 22, 2020 and derecognized the related noncontrolling
interest in IT'SUGAR.
Net loss attributable to noncontrolling interests was $4.8 million, $0.2 million
and $0.3 million, respectively during years ended December 31, 2020, 2019 and
2018. The increase in the net loss attributable to noncontrolling interests for
the year ended December 31, 2020 as compared to the same 2019 periods was
primarily due to increased operating losses at IT'SUGAR, including the
recognition of impairment losses related to its goodwill and long lived assets.
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Consolidated Cash Flows
A summary of our consolidated cash flows is set forth below (in thousands):
For the Years Ended December 31,
2020 2019 2018
Cash flows (used in) provided by operating
activities $ (6,183) 22,669 11,207
Cash flows (used in) provided by investing
activities (52,399) 35,963 1,574
Cash flows provided by (used in) financing
activities 127,682 (67,427) (10,084)
Net increase (decrease) in cash, cash
equivalents and restricted cash $ 69,100 (8,795) 2,697
Cash, cash equivalents and restricted cash at
beginning of period 21,287 30,082 27,385
Cash, cash equivalents and restricted cash at
end of period $ 90,387 21,287 30,082
Cash Flows provided by/used in Operating Activities
The Company's operating cash flows decreased $28.9 million during the year ended
December 31, 2020 compared to the same period in 2019. The decrease was
primarily due to lower distributions from unconsolidated real estate joint
ventures and increased operating losses as a result of the impacts of the
COVID-19 pandemic, including a decline in trade sales primarily reflecting the
closure of BBX Sweet Holdings' retail locations and subsequent impact on
consumer demand, partially offset by higher sales of real estate inventory by
BBXRE during the 2020 period as compared to the 2019 period and higher trade
sales and operating income at Renin partially due to the acquisition of Colonial
Elegance.
The Company's operating cash flows increased $11.5 million during the year ended
December 31, 2019 compared to the same period in 2018. The increase was
primarily due to increase in operating distributions from real estate joint
ventures partially offset by a decrease in proceeds from the sale of developed
lots at the Beacon Lake Community development and an increase in spending on the
development of real estate inventory at Beacon Lake.
Cash Flows provided by/used in Investing Activities
Cash provided by investing activities decreased by $88.4 million during the year
ended December 31, 2020 compared to the same period in 2019. The decrease
primarily reflects $42.1 million of cash paid for the acquisition of Colonial
Elegance, lower distributions from unconsolidated real estate joint ventures,
decreased proceeds from the sale of real estate and funding of
debtor-in-possession loans receivable to IT'SUGAR, partially offset by lower
investments in unconsolidated real estate joint ventures, higher loan recoveries
and a decline in purchases of property and equipment.
Cash provided by investing activities increased by $34.4 million during the year
ended December 31, 2019 compared to the same period in 2018. The increase
primarily reflects a $19.4 million increase in distributions from unconsolidated
real estate joint ventures, $17.3 million of higher proceeds from the sale of
real estate and property and equipment, and a $4.0 million net decrease in
investments in unconsolidated real estate joint ventures, partially offset by a
$13.1 million decrease in proceeds from net loan recoveries.
Cash Flows provided by/used in Financing Activities
Cash provided by financing activities increased by $195.1 million during the
year ended December 31, 2020 compared to the same period in 2019. The increase
was primarily due to higher net transfers from BVH and an increase in borrowings
to fund the acquisition of Colonial Elegance in the 2020 period.
Cash used in financing activities increased by $57.3 million during the year
ended December 31, 2019 compared to the same period in 2018. The increase was
primarily the result of $65.4 million of net transfers to BVH compared to net
transfers from BVH of $7.6 million during 2018. The increase in cash used from
financing activities was partially offset by a $14.1 million decrease in
repayments of notes payable.
Liquidity and Capital Resources
As of December 31, 2020, the Company had cash and cash equivalents of
approximately $90.0 million. Management believes that the Company has sufficient
liquidity to fund operations, including anticipated working capital, capital
expenditure, and debt service requirements, and to respond to the challenges
related to the COVID-19 pandemic for the foreseeable future, subject to
mitigation and cost reduction efforts and management's determination of whether
and/or the extent to which it will fund the operations and commitments of its
subsidiaries. As discussed in this report, the Company has sought to take
various mitigating measures to manage through the current challenges resulting
from the COVID-19 pandemic, including cost and capital expenditure reductions at
its
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subsidiaries. However, management is continuing to evaluate the potential
operating deficits and liquidity requirements of its subsidiaries as a result of
the impact of the COVID-19 pandemic and may determine not to provide additional
funding or capital to subsidiaries whose operations it believes may not be
sustainable, including additional DIP funding to IT'SUGAR during the Bankruptcy
Court proceedings.
The Company's principal sources of liquidity have historically been its
available cash and short-term investments, distributions from unconsolidated
real estate joint ventures, proceeds received from sales of real estate,
including lot sales at the Beacon Lake Community development, and contributions
from BVH. However, the COVID-19 pandemic has impacted and resulted in
uncertainty regarding many of these sources of liquidity. Further, as a result
of the spin-off of BBX Capital from BVH, the Company will no longer receive
capital contributions from BVH, although it expects to receive quarterly
interest payments on the $75.0 million promissory note that was issued by BVH in
favor of BBX Capital in connection with the spin-off, subject to BVH's right to
defer interest payments under the terms of the promissory note. Based on these
factors, the Company believes that its primary source of liquidity for the
foreseeable future will be its available cash and cash equivalents.
Amounts outstanding under the $75.0 million BVH promissory note receivable
accrue interest at a rate of 6% per annum, with interest payments scheduled to
occur on a quarterly basis. However, BVH may elect to defer such quarterly
interest payments, with interest on the entire outstanding balance thereafter to
accrue at a cumulative, compounded rate of 8% per annum until such time as BVH
is current on all accrued payments under the note, including deferred interest.
BBX Capital believes that its current financial condition will allow it to meet
its anticipated near-term liquidity needs. The Company may also seek additional
liquidity from outside sources, including traditional bank financing, secured or
unsecured indebtedness, or the issuance of equity and/or debt securities.
However, these alternatives may not be available to the Company on attractive
terms, or at all. The inability to raise funds through the sources discussed
above would have a material adverse effect on the Company's business, results of
operations, and financial condition.
Anticipated and Potential Liquidity Requirements
The Company has historically used its available funds for operations and general
corporate purposes (including working capital, capital expenditures, debt
service requirements, and lease obligations), to make additional investments in
real estate opportunities, operating businesses, or other opportunities, or to
make distributions to BVH. While the Company will continue to evaluate
opportunistic investments, the Company currently expects to use its available
funds primarily for operations and general corporate purposes and to fund
operating deficits resulting from the COVID-19 pandemic. However, as discussed
above, the Company's management intends to evaluate the operating deficits and
liquidity requirements of its subsidiaries as a result of the impact of the
COVID-19 pandemic on operations and general economic conditions and may make a
determination that it will not provide additional funding or capital to certain
of its subsidiaries.
In November 2018, BBXRE acquired a 50% membership interest in the Altman
Companies, a joint venture between BBXRE and Mr. Altman engaged in the
development, construction, and management of multifamily apartment communities.
Although the Altman Companies generates revenues from the performance of
development, general contractor, leasing, and property management services to
the joint ventures that are formed to invest in the development projects that it
originates, it is expected that any profits generated for BBXRE and Mr. Altman
would primarily be through the equity distributions that BBXRE and Mr. Altman
receive through their investment in the managing member of such joint ventures.
Therefore, as the timing of any such distributions to BBXRE and Mr. Altman is
generally contingent upon the sale or refinancing of a completed development
project, it is anticipated that BBXRE and Mr. Altman will be required to
contribute capital to the Altman Companies for its ongoing operating costs and
predevelopment expenditures, as well as to the managing member of newly formed
joint ventures. At the current time, BBXRE anticipates that it will invest
approximately $3.5 million to $4.5 million in the Altman Companies and certain
related joint ventures during the year ended December 31, 2021 relating to
planned predevelopment expenditures, ongoing operating costs, and potential
operating shortfalls related certain existing projects, and based on its current
pipeline of new potential development projects, BBXRE currently estimates that
it may invest an additional $3.0 million to $4.0 million in the managing member
of newly formed joint ventures for new projects. As previously disclosed, BBXRE
may also consider opportunistically making increased equity investments in one
or more of such new projects originated by the Altman Companies. Furthermore, if
the Altman Companies closes on development financing for additional projects,
BBXRE expects that it would be required to contribute an additional
$1.25 million to ABBX Guaranty, LLC, a joint venture between BBXRE and Mr.
Altman that provides guarantees on the indebtedness and construction cost
overruns of new real estate joint ventures formed by the Altman Companies. Based
on its current pipeline of new potential development projects, BBXRE expects
that it will make this contribution to ABBX Guaranty, LLC in 2021.
Pursuant to the operating agreement of the Altman Companies, BBXRE will also
acquire an additional 40% equity interest in the Altman Companies from Mr.
Altman for a purchase price of $9.4 million, subject to certain adjustments, in
January 2023, while Mr. Altman can also, at his option or in other predefined
circumstances, require BBXRE to purchase his remaining 10% equity interest in
the Altman Companies for $2.4 million. In addition, in certain circumstances,
BBXRE may acquire the 40% membership interests in Altman-
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Glenewinkel Construction that are not owned by the Altman Companies for a
purchase price based on prescribed formulas in the operating agreement of
Altman-Glenewinkel Construction.
In addition to BBXRE's anticipated investments in the Altman Companies and
related joint ventures, BBXRE expects that it may be required to contribute
additional capital of approximately $1.0 million to one of its existing joint
ventures during the next twelve to twenty-four months based on the current plans
and estimates associated with the related development project. Further, in
February 2021, BBXRE invested $4.9 million in the Sky Cove South joint venture,
which was formed to develop Sky Cove South at Westlake, a residential community
that will be adjacent to Sky Cove at Westlake and is expected to be comprised of
197 single-family homes.
In October 2020, the Company contributed $5.0 million to Renin to partially fund
Renin's acquisition of Colonial Elegance, as further described in this report,
and the Company will continue to evaluate opportunistic investments which may
involve the use of its available cash and cash equivalents.
The Company owns all of IT'SUGAR's Class A Preferred Units and 90.4% of its
Class B Common Units and has loans outstanding to IT'SUGAR of approximately
$10.0 million, including DIP financing provided to IT'SUGAR in connection with
its bankruptcy proceedings.
In October 2020, BBX Capital's board of directors approved a share repurchase
program which authorized the repurchase of up to $10.0 million of shares of BBX
Capital's Class A Common Stock and Class B Common Stock. The stock repurchase
authorization does not obligate the Company to repurchase any specific number of
shares and may be suspended, modified, or terminated at any time by BBX
Capital's board of directors without prior notice. As of December 31, 2020, the
Company had approximately 19,317,687 shares of common stock outstanding, and
there had been no purchases of Class A Common Stock or Class B Common Stock
under this program.
Credit Facilities with Future Availability
As of December 31, 2020, BBX Capital and certain of its subsidiaries had the
following credit facilities with future availability, subject to eligible
collateral and the terms of the facilities, as applicable.
Toronto-Dominion Commercial Bank. In May 2017, Renin entered into a credit
facility with TD Bank that was subsequently renewed in September 2019 and 2018.
Under the terms and conditions of the credit facility, TD Bank agreed to provide
term loans for up to $1.7 million and loans under a revolving credit facility
for up to approximately $16.3 million subject to certain terms and conditions.
During the first quarter of 2020, Renin received a waiver from TD Bank of its
breach of the quarterly debt service coverage ratio under the facility, and the
credit facility was amended to replace the existing debt service coverage ratio
with an interest coverage ratio. In connection with the amendment to the credit
facility, Renin repaid the outstanding balance of the term loan with borrowings
from the revolving line of credit. Further, in July 2020, the credit facility
was also amended to extend the maturity date of the facility from September 2020
to September 2022.
In connection with Renin's acquisition of Colonial Elegance in October 2020, the
credit facility with TD Bank was amended and restated to include a $30.0 million
term loan (the "Term Loan") and an operating loan of up to $20.0 million (the
"Operating Loan"), with the Operating Loan serving as a continuation of the
existing revolving line of credit under the prior credit facility. Both the Term
Loan and Operating Loan mature in October 2025. For additional information, see
Item 8 - Note 14 of this Annual Report.
As of December 31, 2020, the outstanding amounts under the term loan and
revolving credit facility were $30.0 million and $15.6 million, respectively,
with effective interest rates of 3.34% and 3.89%, respectively.
As of December 31, 2020, Renin had availability of approximately $4.4 million
under the above revolving line of credit, subject to eligible collateral and the
terms of the facility, as applicable. However, the potential effects of the
COVID-19 pandemic on Renin's operations could impact its ability to remain in
compliance with the financial covenants under these facilities and limit the
extent of availability under the facilities, including under the terms of the
facilities as amended and restated as described below, in future periods.
As described above, Renin is currently engaged in a dispute with one of its
suppliers and recognized costs related to this dispute during the year ended
December 31, 2020. As of December 31, 2020, this matter did not impact Renin's
compliance with the financial covenants under its outstanding credit facility
with TD Bank. However, if Renin is unable to sustain its assertion that it is
entitled to damages from the supplier and is ultimately required to pay the
supplier for outstanding amounts due to it, Renin may be unable to comply with
its covenants. If Renin is unable to comply with its covenants, it would be
required to seek a waiver from TD bank, and if unable to obtain a waiver, might
lose availability under its line of credit, be required to provide additional
collateral, or repay all or a portion of its borrowings, any of which could have
a material adverse effect on the Company's liquidity, financial position, and
results.
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Off-balance-sheet Arrangements
BBX Capital guarantees certain obligations of its wholly-owned subsidiaries and
unconsolidated real estate joint ventures, which are described in further detail
in Item 8 - Note 14 of this Annual Report.
The Company has investments in joint ventures involved in the development of
multifamily rental apartment communities, as well as single-family master
planned for sale housing communities. The Company's investments in these joint
ventures are accounted for under the equity method of accounting, and as a
result, the Company does not recognize the assets and liabilities of these joint
ventures in its financial statements. As of December 31, 2020 and 2019, the
Company's investments in these joint ventures totaled $58.1 million and
$57.3 million, respectively. These unconsolidated real estate joint ventures
generally finance their activities with a combination of debt financing and
equity. The Company generally does not directly guarantee the financing of these
joint ventures, other than as described in further detail in Item 8 - Note 14 of
this Annual Report, and the Company's maximum exposure to losses from these
joint ventures is its equity investment. The Company is typically not obligated
to fund additional capital to its joint ventures; however, the Company's
interest in a joint venture may be diluted if the Company elects not to fund a
joint venture capital call.
The Company owns all of IT'SUGAR's Class A Preferred Units and 90.4% of its
Class B Common Units and accounts for its $23.0 million of investments in and
advances to IT'SUGAR at cost. Although the Company is not obligated to finance
the activities of IT'SUGAR during the pendency of the Bankruptcy Cases, in
October 2020, a subsidiary of the Company entered into a $4.0 million DIP credit
facility with IT'SUGAR and the Company may advance additional funds to IT'SUGAR
in order to maintain its ownership interest. In the future, the Company may
decide not to advance additional funds to IT'SUGAR during the pendency of the
Bankruptcy Cases, if needed, which could dilute the Company's investment in
IT'SUGAR and result in additional impairment charges.
Critical Accounting Policies
Management views critical accounting policies as accounting policies that are
important to the understanding of our financial statements and also involve
estimates and judgments about inherently uncertain matters. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the consolidated statements
of financial condition and assumptions that affect the recognition of income and
expenses on the consolidated statements of operations and comprehensive income
(loss) for the periods presented. On an ongoing basis, management evaluates its
estimates, including, but not limited to, those that relate to the determination
of: the recognition of revenue; the recovery of the carrying value of real
estate inventories; the fair value of assets measured at, or compared to, fair
value on a non-recurring basis, such as assets held for sale, intangible assets,
other long-lived assets and goodwill; the valuation of assets and liabilities
assumed in the acquisition of a business; the amount of deferred tax valuation
allowance and accounting for uncertain tax positions; and the estimate of
contingent liabilities related to litigation and other claims and assessments.
The accounting policies and estimates that we have identified as critical
accounting policies are: the recognition of revenue; evaluating goodwill for
impairment; and evaluating long-lived assets and definite lived intangible
assets for impairment. Management bases its estimates on historical experience
and on various other assumptions that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ materially from these estimates under
different assumptions and conditions. If actual results significantly differ
from management's estimates, our results of operations and financial condition
could be materially and adversely impacted.
Revenue Recognition - Variable Consideration on Trade Sales and Sales of Real
Estate Inventory
The Company's trade sales are generally sold with a right of return, and the
Company may provide other sales credits or incentives, such as volume discounts
or rebates. Additionally, the Company is entitled to contingent consideration on
certain single-family lot sales to builders. These programs are accounted for as
variable consideration when determining the amount of revenue to recognize upon
transfer of control. Estimates of contingent consideration, returns, and
incentives are calculated using the expected value method and updated at the end
of each reporting period when additional information becomes available. Variable
consideration estimates are based on historical experience adjusted for current
economic conditions and sales trends. These estimates rely on assumptions and
judgments regarding issues where the outcome is unknown, and actual results or
values may differ significantly from these estimates. A significant change in
the timing of revenue recognized could occur if actual variable consideration is
significantly different than our estimates.
Evaluating Goodwill for Impairment
The process of evaluating goodwill for impairment involves the determination of
the fair value of the Company's reporting units. Inherent in such fair value
determinations are certain judgments and estimates relating to future cash
flows, including the Company's interpretation of current economic indicators and
market valuations, and assumptions about the Company's strategic plans with
regard to its operations. Due to the uncertainties associated with such
evaluations, actual results could differ materially from such estimates.
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During the year ended December 31, 2020, the Company concluded that the effects
of the COVID-19 pandemic, including the recessionary economic environment and
the impact on certain of the Company's operations, indicated that it was more
likely than not that the fair values of certain of its reporting units with
goodwill had declined below the respective carrying amounts of such reporting
units as of March 31, 2020. As a result, the Company tested the goodwill
associated with such reporting units for impairment by estimating the fair
values of the respective reporting units as of March 31, 2020 and recognized
goodwill impairment losses of $20.3 million associated with IT'SUGAR and
$2.1 million associated with certain of its other reporting units. On
September 22, 2020, the Company deconsolidated IT'SUGAR as a result of IT'SUGAR
filing the Bankruptcy Cases and derecognized the remaining IT'SUGAR goodwill
balance of approximately $14.9 million as of that date. The Company's goodwill
as of December 31, 2020 was $8.3 million.
Evaluating Long-lived Assets and Definite-lived Intangible Assets for Impairment
The Company evaluates its long-lived assets and definite-lived intangible
assets, including property and equipment, and real estate held-for-investment,
for potential impairment whenever events or changes in circumstances indicate
that the carrying amounts of such assets may not be recoverable. The carrying
amounts of assets are not considered recoverable when the carrying amounts
exceed the undiscounted cash flows estimated to be generated by those assets. As
the carrying amounts of these assets are dependent upon estimates of future
earnings that they are expected to generate, these assets may be impaired if
cash flows decrease significantly or do not meet expectations, in which case
they would be written down to their fair value. The estimates of useful lives
and expected cash flows require us to make significant judgments regarding
future periods that are subject to a number of factors, many of which may be
beyond our control. As a result of the Company's testing of its long-lived
assets for impairment, the Company recognized impairment losses of $5.4 million
during the year ended December 31, 2020 related primarily to leasehold
improvements and right-of-use assets associated with certain of IT'SUGAR's
retail locations. The recognition of these impairment losses primarily resulted
from the effects of the COVID-19 pandemic on the estimated cash flows expected
to be generated by the related assets. The Company's property and equipment,
operating lease assets and definite-lived intangible asset balances were
$7.8 million, $13.5 million and $22.4 million as of December 31, 2020,
respectively.
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