Except as otherwise noted or where the context otherwise requires, the terms "the Company," "we," "us," or "our" refers toBBX Capital, Inc. and its consolidated subsidiaries, and the term "BBX Capital " refers toBBX Capital, Inc. as a standalone entity. Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements based largely on current expectations of the Company that involve a number of risks and uncertainties. All opinions, forecasts, projections, future plans, or other statements, other than statements of historical fact, are forward-looking statements and can be identified by the use of words or phrases such as "plans," "believes," "will," "expects," "anticipates," "intends," "estimates," "our view," "we see," "would," and words and phrases of similar import. The forward-looking statements in this document are also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and involve substantial risks and uncertainties. We can give no assurance that such expectations will prove to be correct. Actual results, performance, or achievements could differ materially from those contemplated, expressed, or implied by the forward-looking statements contained herein. Forward-looking statements are based largely on our expectations and are subject to a number of risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. When considering forward-looking statements, the reader should keep in mind the risks, uncertainties, and other cautionary statements made in this report and in the Company's other reports filed with theSecurities and Exchange Commission ("SEC"). The reader should not place undue reliance on any forward-looking statement, which speaks only as of the date made. This document also contains information regarding the past performance of the Company and its respective investments and operations. The reader should note that prior or current performance is not a guarantee or indication of future performance. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, and all such information should only be viewed as historical data. Future results and the accuracy of forward-looking statements may be affected by various risks and uncertainties, including the risk factors applicable to the Company which are described herein and in the sections entitled "Cautionary Statement Regarding Forward-Looking Statements" and "Risk Factors" in the Company's Information Statement, datedAugust 27, 2020 , included as Exhibit 99.1 to the Company's Form 10 filed with theSEC onAugust 27, 2020 (the Form 10 Information Statement"). These risks and uncertainties also include risks relating to public health issues, including, in particular, the COVID-19 pandemic, as it is not currently possible to accurately assess the expected duration and effects of the pandemic on our business. These include required closures of retail locations, travel and business restrictions, "shelter in place" and "stay at home" orders and advisories, volatility in the global and national economies and equity, credit, and commodities markets, worker absenteeism, quarantines, and other health-related restrictions; the duration and severity of the COVID-19 pandemic and the impact on demand for the Company's products and services, levels of consumer confidence, and supply chains; actions governments, businesses, and individuals take in response to the pandemic and their impact on economic activity and consumer spending, which will impact the Company's ability to successfully resume full business operations; the pace of recovery when the COVID-19 pandemic subsides and the possibility of a resurgence; competitive conditions; the Company's liquidity and the availability of capital; the effects and duration of steps the Company takes in response to the COVID-19 pandemic, including the inability to rehire or replace furloughed employees; risks that the Company may recognize further impairment losses; the risks and uncertainties inherent in the bankruptcy proceedings ofIT'SUGAR LLC and its subsidiaries ("IT'SUGAR") and the inability to predict the effect of IT'SUGAR's reorganization and/or liquidation process on the Company and its results of operation and financial condition, including the risk that additional impairment charges may be required in the future, IT'SUGAR's ability to develop, prosecute, confirm and consummate a plan of reorganization or liquidation, IT'SUGAR's ability, through the Chapter 11 bankruptcy process, to reach agreement with its landlords or other third parties, and the risk that creditors of IT'SUGAR may assert claims against the Company or any of their respective subsidiaries (other than IT'SUGAR) and that the Company or any such subsidiary's assets may become subject to or included in IT'SUGAR's bankruptcy case; risks related to the Company's indebtedness, including the potential for accelerated maturities and debt covenant violations; the risk of heightened litigation as a result of actions taken in response to the COVID-19 pandemic; the impact of the COVID-19 pandemic on consumers, including, but not limited to, their income, their level of discretionary spending both during and after the pandemic, and their views towards the retail industry; and the risk that certain of the Company's operations, including retail locations, may not continue to generate recurring sources of cash during or following the pandemic to the extent anticipated or at all. This Quarterly Report on Form 10-Q also contains a discussion of the recent acquisition byRenin Holding, LLC ("Renin") of Colonial Elegance ("Colonial Elegance"), which is subject to the impact of economic, competitive and other factors affecting Renin and Colonial Elegance, including their operations, 36
-------------------------------------------------------------------------------- markets, marketing strategies, products and services; the risk that the integration of Colonial Elegance may not be completed on a timely basis, or as anticipated; that the anticipated expansion or growth opportunities will not be achieved or if achieved will not be advantageous; that the acquisition will not be cash accretive immediately or at all; that net income may not be generated when anticipated or at all or the acquisition may result in net losses; thatBBX Capital and/or Renin may not realize the anticipated benefits of the acquisition when or to the extent anticipated or at all; the risks associated with the increased indebtedness incurred by Renin to finance the acquisition including, compliance with financial covenants and restrictions on Renin's activities. The risk factors described in Form 10 Information Statement, as well as the other risks and factors detailed in this report and the other reports filed by the Company with theSEC , are not necessarily all of the important factors that could cause the Company's actual results to differ materially from those expressed in any of the forward-looking statements. Other unknown or unpredictable factors could cause the Company's actual results to differ materially from those expressed in any of the forward-looking statements. As a result, the Company cautions that the foregoing factors are not exclusive. Given these uncertainties, you are cautioned not to place undue reliance on forward-looking statements, and you should read this Quarterly Report on Form 10-Q with the understanding that actual future results, levels of activity, performance, and events and circumstances may be materially different from prior results or what the Company expects. The Company qualifies all forward-looking statements by these cautionary statements. Forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q, and the Company undertakes no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this report. Critical Accounting Policies
See the section "Critical Accounting Policies" in Form 10 Information Statement for a discussion of the Company's critical accounting policies.
New Accounting Pronouncements
See Note 1 to the Company's condensed consolidated financial statements included in Item 1 of this report for a discussion of new accounting pronouncements applicable to the Company.
Overview
The Company's goal is to build long-term shareholder value. Since many of the Company's assets do not generate income on a regular or predictable basis, the Company's objective is long-term growth as measured by increases in book value and intrinsic value over time. The Company regularly reviews the performance of its investments and, based upon economic, market, and other relevant factors, considers transactions involving the sale or disposition of all or a portion of its assets, investments, or subsidiaries.
As of
Spin-Off from Bluegreen Vacations Holding Corporation
Prior toSeptember 30, 2020 , Bluegreen Vacations Holding Corporation ("BVH"), formerlyBBX Capital Corporation , was aFlorida -based diversified holding company whose principal holdings were Bluegreen Vacations Corporation ("Bluegreen"),BBX Capital Real Estate ,BBX Sweet Holdings , and Renin". OnSeptember 30, 2020 , BVH completed the spin-off of the Company, which separated BVH's business, activities, and investments into two separate, publicly-traded companies: (i) BVH, which continues to hold its investment in Bluegreen, and (ii)BBX Capital , which continues to hold all of BVH's other businesses and investments, includingBBX Capital Real Estate ,BBX Sweet Holdings , and Renin. The spin-off was consummated onSeptember 30, 2020 with the distribution by BVH to its shareholders all of the outstanding shares ofBBX Capital's Common Stock through the distribution of one share ofBBX Capital's Class A Common Stock for each share of its Class A Common Stock held onSeptember 22, 2020 , the 37 -------------------------------------------------------------------------------- record date for the distribution, and one share ofBBX Capital's ClassB Common Stock for each share of its Class B Common Stock held on the record date. Accordingly, as of the close of business onSeptember 30, 2020 , BVH ceased to have an ownership interest in the Company, and BVH's shareholders who received shares ofBBX Capital's Common Stock in the distribution became shareholders of the Company following the spin-off. In connection with the spin-off,BBX Capital was converted from aFlorida limited liability company into aFlorida corporation and changed its name fromBBX Capital Florida LLC toBBX Capital, Inc. , and BVH changed its name fromBBX Capital Corporation to Bluegreen Vacations Holding Corporation. In addition, in connection with the spin-off, BVH issued a$75.0 million note payable to the Company that accrues interest at a rate of 6% per annum and requires payments of interest on a quarterly basis. Under the terms of the note, BVH will have the option in its discretion to defer interest payments under the note, 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. All outstanding amounts under the note will become due and payable in five years or earlier upon certain other events. InOctober 2020 ,BBX Capital's Class A Common Stock commenced trading on the OTCQX Best Market under the ticker symbol "BBXIA," and its Class B Common Stock commenced trading on the OTC Pink Market under the ticker symbol "BBXIB." Rights Agreement OnSeptember 25, 2020 , the Company adopted a rights agreement ("Rights Agreement") in light of the significant market volatility and uncertainties associated with the COVID-19 pandemic and the impact on the Company and the market price ofBBX Capital's Class A Common Stock and Class B Common Stock. The Rights Agreement provides a deterrent to shareholders from acquiring a 5% or greater ownership interest inBBX Capital's Class A Common Stock, ClassB Common Stock or total combined common stock without the prior approval of the board of directors.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic has resulted in an unprecedented disruption in theU.S. and global economies and the industries in which the Company operates due to, among other things, government ordered "shelter in place" and "stay at home" orders and advisories, travel restrictions, and restrictions on business operations, including government guidance and restrictions with respect to travel, public accommodations, social gatherings, and related matters, as well as 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 three and nine months endedSeptember 30, 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 condensed 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 ofSeptember 30, 2020 , the Company's consolidated cash balances were$96.6 million .
See below for additional discussion 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 three months ended
· Total consolidated revenues of$42.2 million , a 11.5% decrease compared to the same 2019 period. 38
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· Loss from continuing operations before income taxes of
to income from continuing operations before income taxes of
during the same 2019 period.
· Net loss attributable to common shareholders of
income attributable to shareholder of
period.
· Diluted loss per share of
$0.70 for the same 2019 period.
The following summarizes key financial highlights for the nine months ended
· Total consolidated revenues of
same 2019 period.
· Loss from continuing operations before income taxes of
to income from continuing operations before income taxes of
during the same 2019 period.
· Net loss attributable to common shareholders of
income attributable to shareholder of
period.
· Diluted loss per share of
for the same 2019 period.
The Company's consolidated results for the three months ended
· A net decrease in sale activity by
ventures in the 2020 period as compared to the 2019 period.
· A decrease in
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 of
IT'SUGAR in connection with its filing of voluntary petitions to reorganize
under Chapter 11 of the Bankruptcy Code. In addition to the items discussed above for the three months endedSeptember 30, 2020 , the Company's consolidated results for the nine months endedSeptember 30, 2020 compared to the same 2019 period were also significantly impacted by the recognition of impairment losses of$30.7 million in the 2020 period primarily related to goodwill and long-lived assets associated with IT'SUGAR as a result of the impact of the COVID-19 pandemic. Segment Results
Information regarding income before income taxes by reportable segment is set forth in the table below (in thousands):
1 For the Three Months Ended For the Nine Months Ended September 30, September 30, 2020 2019 Change 2020 2019 Change BBX Capital Real Estate$ 961 29,114 (28,153) 4,633 50,641 (46,008) BBX Sweet Holdings (8,215) (115) (8,100) (47,167) (4,281) (42,886) Renin 1,489 480 1,009 3,414 1,551 1,863 Other 814 (114) 928 (2,230) 130 (2,360) Reconciling items and eliminations (5,444) (5,303) (141) (13,077) (16,571) 3,494 (Loss) income before income taxes from continuing operations (10,395) 24,062 (34,457) (54,427) 31,470 (85,897) Benefit (provision) for income taxes 1,633 (6,893) 8,526 10,847 (9,041) 19,888 Net (loss) income from continuing operations (8,762) 17,169 (25,931) (43,580) 22,429 (66,009) Discontinued operations - (3,654) 3,654 (74) (7,177) 7,103 Net (loss) income (8,762) 13,515 (22,277) (43,654) 15,252 (58,906) Less: Net loss attributable to noncontrolling interests 510 97 413 4,822 165 4,657 Net (loss) income attributable to shareholders$ (8,252) 13,612 (21,864) (38,832) 15,417 (54,249) 39
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BBX Capital Real Estate Reportable Segment
Segment DescriptionBBX 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 inFlorida . In addition, BBXRE owns a 50% equity interest in the Altman Companies, a developer and manager of multifamily apartment communities, and also 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 has not to date been as significantly impacted by the COVID-19 pandemic asBBX Sweet Holdings , BBXRE's operations have been impacted by the pandemic, and it is expected that its operations will continue to be impacted by the pandemic in future periods. While recent construction activities have continued at BBXRE's existing projects and sales at its single-family home developments have generally returned to pre-pandemic levels following some disruptions in March andApril 2020 , the effects of the pandemic, including increased unemployment and economic uncertainty generally and in the real estate and credit markets in particular, as well as recent increases in the number of COVID-19 cases inFlorida and throughoutthe United States , have impacted rental activities at BBXRE's multifamily apartment developments and increased uncertainty relating to the expected timing and pricing of future sales of multifamily apartment developments, single-family homes, and developed lots atBBXRE's Beacon Lake Community , as well as the timing and financing of new multifamily apartment developments. While the Company expects that the impact of the COVID-19 pandemic will adversely affect BBXRE's operating results and financial condition for the year endedDecember 31, 2020 , primarily with respect to the expected timing of sales, the Company evaluated various factors, including asset-specific factors, overall economic and market conditions, and the excess of the expected profits associated with 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 as ofSeptember 30, 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 nine months endedSeptember 30, 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 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 impacted by the pandemic. There is no assurance that the real estate market will not be materially adversely impacted by the pandemic or otherwise, that the 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 operating BBXRE's real estate assets, including, but not limited to, an increase in property insurance costs indicated by recently obtained quotes of insurance costs that are higher than 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 further 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. Prior to the pandemic, BBXRE previously disclosed that it anticipated that its operating profits would decline in 2020 as compared to recent prior periods when significant sales of assets were consummated, and BBXRE expects that the effects of the COVID-19 pandemic will result in a further decline in its results of operations for 2020. Further, as BBXRE's primary focus in 2020 had been to source investments in new development opportunities with the goal of 40 -------------------------------------------------------------------------------- building a diversified portfolio of real estate investments that generate profits 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.
As a result of the above factors, including the potential impact of the COVID-19 pandemic on sales of existing projects and investments in new development opportunities, BBXRE's results of operations and financial condition may be materially adversely impacted by the effects of the pandemic in future periods.
The Altman Companies and Related Investments
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, throughSeptember 30, 2020 , the Altman Companies had collected in excess of 97% of the rents at the multifamily apartment communities under its management. While its leasing activities were conducted virtually during March throughMay 2020 , the Altman Companies has reopened its leasing offices for visits by appointment. 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 quarter of 2020. However, in an effort to maintain occupancy at its stabilized communities and increase occupancy at its communities under development, commencing in the second quarter and through the third quarter of 2020, the Altman Companies offered an increased number of concessions to prospective and renewing tenants. BBXRE and the Altman Companies currently believe that market participants for multifamily apartment communities similar to those sponsored and managed by the Altman Companies are generally assuming a short to medium term decline in occupancy and market rents and an increase in rent concessions, with the prospect of a recovery in occupancy and rental rates in 12-24 months. However, 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. Further, while there are indications that the capitalization rates for multifamily apartment communities similar to those sponsored and managed by the Altman Companies have generally remained steady, as the impact of the increased uncertainty in the overall market is generally viewed as having been offset by the impact of the significant decline in interest rates, the impact of the COVID-19 pandemic on economic conditions in general, including uncertainty regarding the severity and duration of such impact, has adversely impacted the level of real estate sales activity and overall credit markets and 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 atLake 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. 41
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During the nine months endedSeptember 30, 2020 , BBXRE continued the development of the lots comprising Phase II of theBeacon Lake Community inSt. Johns County, Florida , which is expected to include approximately 400 single-family homes and 196 townhomes, and an additional 79 lots for single-family homes as part of Phase III of the project and sold to homebuilders 102 single family lots and 70 townhome lots. In addition, as part of BBXRE's efforts to maximize liquidity in light of overall economic conditions, the community development district related to theBeacon Lake Community issued$8.6 million of additional community development 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. As ofSeptember 30, 2020 , BBXRE had entered into purchase agreements with homebuilders to sell developed lots for an additional 320 single-family homes and 126 townhomes as part of Phases II and III and has collected deposits related to these purchase agreements. Following the initial outbreak of COVID-19 inMarch 2020 , unaffiliated homebuilders at theBeacon 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 inMay 2020 and generally returned to pre-pandemic levels subsequent toMay 2020 . Based on that activity, BBXRE currently expects the sale of the remaining developed lots to occur pursuant its purchase 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 theBeacon 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 result in the recognition of impairment losses in future periods. Results of Operations Information regarding the results of operations for BBXRE is set forth below (dollars in thousands): For the Three Months Ended For the Nine Months Ended September 30, September 30, 2020 2019 Change 2020 2019 Change Sales of real estate inventory$ 4,970 370 4,600 14,248 5,030 9,218 Interest income 419 166 253 604 631 (27) Net gains on sales of real estate assets 164 399 (235) 130 11,395 (11,265) Other 329 197 132 1,116 1,321 (205) Total revenues 5,882 1,132 4,750 16,098 18,377 (2,279) Cost of real estate inventory sold 3,367 - 3,367 9,473 2,643 6,830 Recoveries from loan losses, net (807) (1,821) 1,014 (5,844) (4,206) (1,638) Impairment losses - 37 (37) 2,710 37 2,673 Selling, general and administrative expenses 1,715 2,336 (621) 5,176 6,709 (1,533) Total costs and expenses 4,275 552 3,723 11,515 5,183 6,332 Operating profits 1,607 580 1,027 4,583 13,194 (8,611) Equity in net (losses) earnings of unconsolidated joint ventures (646) 28,534 (29,180) 50 37,276 (37,226) Other income - - - - 171 (171) Income before income taxes$ 961 29,114 (28,153) 4,633 50,641 (46,008) 42
--------------------------------------------------------------------------------BBX Capital Real Estate's income before income taxes for the three months endedSeptember 30, 2020 compared to the same 2019 period decreased by$28.2 million primarily due to the following:
· A decrease in equity in net earnings of unconsolidated joint ventures primarily
due to BBXRE recognizing
Bonterra joint venture in 2019 as a result of the sale of its 314 unit
multifamily apartment community in
· A net decrease in recoveries from loan losses; partially offset by,
· An increase in net profits from the sale of developed lots to homebuilders at
the
the 2020 period and no developed lots during the 2019 period; and
· A decrease in selling, general and administrative expenses primarily associated
with lower incentive bonuses and professional fees.BBX Capital Real Estate's income before income taxes for the nine months endedSeptember 30, 2020 compared to the same 2019 period decreased by$46.0 million 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 at Bonterra, Altis at Lakeline, and PGA Design
Center joint ventures and single-family homes by the
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
· 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
the 2020 period and 51 developed lots during the 2019 period;
· A net increase in recoveries from loan losses primarily due to a settlement
with a financial institution servicing loans and guarantors for BBXRE; and
· A decrease in selling, general and administrative expenses primarily due to the
above mentioned cost reductions, a legal settlement with a title company in
2020, and lower operating expenses due to the sale of RoboVault during 2019.
BBX Sweet Holdings Reportable Segment
Segment DescriptionBBX 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 inSouth 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 toSeptember 22, 2020 , the Company consolidated the financial statements of IT'SUGAR and its subsidiaries as a result of its 93% ownership of IT'SUGAR. However, as further discussed below, IT'SUGAR and its subsidiaries filed voluntary petitions to reorganize under Chapter 11 of the Bankruptcy Code in theU.S. Bankruptcy Court for the Southern District of Florida (the "Bankruptcy Court ") onSeptember 22, 2020 , and the Company deconsolidated IT'SUGAR as a result of the filings and the uncertainties surrounding the nature, timing, and specifics of the bankruptcy proceedings. OverviewAlthough 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 inNew Jersey inDecember 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. InMarch 2020 , as a result of various factors, including government-mandated closures and CDC and WHO 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. BetweenMay 2020 andSeptember 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 43
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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 inApril 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 ofBBX Capital (as further described in Note 7 to the Company's condensed consolidated financial statements included in Item 1 of this report), 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 endedSeptember 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, onSeptember 22, 2020 , IT'SUGAR and its subsidiaries filed voluntary petitions to reorganize under Chapter 11 of the Bankruptcy Code in theBankruptcy Court (the cases commenced by such filings, the "Bankruptcy Cases") 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 theBankruptcy Court , substantially all pre-petition liabilities will be subject to settlement under a plan of reorganization, as further described below. In order to successfully exit the Chapter 11 Bankruptcy Cases, IT'SUGAR will need to propose, and obtain confirmation by theBankruptcy 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 stockholders are entitled to any distribution. As provided by the Bankruptcy Code, IT'SUGAR initially has the exclusive right to solicit a plan and plans to submit a Reorganization Plan to theBankruptcy Court in the near future. In connection with the Chapter 11 Bankruptcy Cases, theOffice of the United States Trustee , a division of theDepartment 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 theBankruptcy Court , including the confirmation of the Reorganization Plan. If IT'SUGAR fails to file a Reorganization Plan or if theBankruptcy Court does not confirm a 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 theBankruptcy Court , in lieu of the conversion of the Bankruptcy Cases to Chapter 7 bankruptcy cases, theBankruptcy Court could dismiss the Bankruptcy Cases. At the current time, IT'SUGAR is continuing to operate its retail locations under the supervision of theBankruptcy Court and Creditors' Committee and is negotiating with its creditors in relation to a proposed Reorganization Plan and the terms of amendments to the lease agreements associated with its retail locations. 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, 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 both during the resolution of the bankruptcy proceedings and thereafter. 44
-------------------------------------------------------------------------------- As a result of IT'SUGAR filing the Chapter 11 Bankruptcy Cases and the uncertainties surrounding the nature, timing, and specifics of the bankruptcy proceedings, the Company deconsolidated IT'SUGAR as ofSeptember 22, 2020 and recognized a loss of$3.3 million during the three and nine months endedSeptember 30, 2020 in connection with the deconsolidation, as further discussed in Note 17 to the Company's condensed consolidated financial statements included in Item 1 of this report. Prior to the deconsolidation of IT'SUGAR, the Company recognized$25.3 million of impairment losses during the nine months endedSeptember 30, 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 nine months endedSeptember 30, 2020 as compared to the Company's prior valuation of IT'SUGAR as ofDecember 31, 2019 reflected the impact on the Company's estimated future cash flows of the temporary closure of IT'SUGAR's retail locations commencing inMarch 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 a 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 government mandated closures or operating restrictions, and ii) the ultimate outcome of IT'SUGAR's Chapter 11 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. As a result of the above factors, the Company recognized$25.3 million of impairment losses related to IT'SUGAR's goodwill and long-lived assets during the nine months endedSeptember 30, 2020 , including the recognition of a goodwill impairment loss of$20.3 million based on a decline in the estimated fair value of IT'SUGAR. See Notes 1 and 6 to the Company's condensed consolidated financial statements included in Item 1 of this report for additional information with respect to 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 Chapter 11 bankruptcy cases, which may result in the recognition of additional impairment losses related to theBBX Sweet Holdings' investment in IT'SUGAR that would be material to the Company's financial statements. InApril 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, inOctober 2020 , IT'SUGAR obtained a$4.0 million "debtor in possession" credit facility from a subsidiary ofBBX Capital that was approved by theBankruptcy Court on an interim basis pending a final hearing. As ofNovember 9, 2020 ,$2.0 million had been funded to IT'SUGAR under the DIP credit facility. 45
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See Note 17 to the Company's condensed consolidated financial statements included in Item 1 of this report for additional information with respect to 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. InMarch 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 endedJune 30, 2020 , it commenced a phased reopening of its locations to customer traffic. As ofJuly 1, 2020 , Hoffman's Chocolates had reopened all of its locations, and its sales volumes during the three months endedSeptember 30, 2020 were approximately 71% 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, and its sales during the nine months endedSeptember 30, 2020 were approximately 92% of pre-pandemic levels (as compared to the comparable period in 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 ofSeptember 30, 2020 , Hoffman's Chocolates and Las Olas Confections and Snacks had accrued and unpaid current rental obligations of$0.2 million , which are included in other liabilities in the Company's condensed consolidated statement of financial condition, and they had executed lease amendments with respect to 6 of these locations, including Las Olas Confections and Snacks' manufacturing facility inOrlando, Florida . There is no assurance that the sales volumes of these businesses will improve, and they may be required to close previously reopened locations as a result of governments reimplementing mandated closures or otherwise. There is also no assurance that Hoffman's Chocolates will be able to execute a lease amendment with the landlord of its remaining location for which an agreement has yet to be reached, and due to the uncertainty related to these businesses as a result of the pandemic, there is no assurance they will be in a position to meet their obligations under the terms of lease agreements and amendments that have been executed or are otherwise being negotiated. Results of Operations
Information regarding the results of operations for
For the Three Months Ended For the Nine Months Ended September 30, September 30, 2020 2019 Change 2020 2019 Change Trade sales$ 15,166 28,051 (12,885) 41,743 76,039 (34,296) Cost of trade sales (11,678) (17,229) 5,551 (35,493) (48,862) 13,369 Gross margin 3,488 10,822 (7,334) 6,250 27,177 (20,927) Interest income 2 12 (10) 29 43 (14) Other revenue 77 115 (38) 281 210 71 Interest expense (54) (45) (9) (170) (143) (27) Impairment losses - - - (25,303) - (25,303) Selling, general and administrative expenses (8,483) (11,086) 2,603 (25,123) (31,860) 6,737 Total operating losses (4,970) (182) (4,788) (44,036) (4,573) (39,463) Loss on the deconsolidation of IT'SUGAR, LLC (3,326) - (3,326) (3,326) 0 (3,326) Other income 81 67 14 195 292 (97) Loss before income taxes$ (8,215) (115) (8,100) (47,167) (4,281) (42,886) Gross margin percentage % 23.00 38.58 (15.58) 14.97 35.74 (20.77) SG&A as a percent of trade sales % (55.93) (39.52) (16.41) (60.18) (41.90) (18.28) 46
--------------------------------------------------------------------------------BBX Sweet Holdings loss before income taxes for the three months endedSeptember 30, 2020 compared to the same 2019 period increased by$8.1 million primarily due to the following:
· A decrease in trade sales primarily due to the impacts of the COVID-19 pandemic
described above;
· A significant decline in gross margin percentage as a result of ongoing lease
costs associated with
and
· A loss on the deconsolidation of IT'SUGAR; partially offset by
· A net decrease in selling, general and administrative expenses primarily due
costs reductions implemented as a result of the COVID-19 pandemic.BBX Sweet Holdings' loss before income taxes for the nine months endedSeptember 30, 2020 was$47.2 million compared to$4.3 million during the same 2019 period. The increase was primarily due to the recognition of impairment losses in 2020 due to a decline in the estimated value of the goodwill and long-lived assets associated withBBX Sweet Holdings' reporting units as a result of the impact of the COVID-19 pandemic on market conditions, as well as the factors described above related to the three months endedSeptember 30, 2020 and 2019. Information regarding the results of operations for IT'SUGAR for the three and nine months endedSeptember 30, 2020 and 2019 is set forth below (dollars in thousands): For the Three Months Ended For the Nine Months Ended September 30, September 30, 2020 2019 Change 2020 2019 Change Trade sales$ 12,197 24,677 (12,480) 31,794 63,347 (31,553) Cost of trade sales (9,095) (13,902) 4,807 (26,923) (37,442) 10,519 Gross margin 3,102 10,775 (7,673) 4,871 25,905 (21,034) Selling, general and administrative expenses 7,793 9,567 (1,774) 21,121 26,645 (5,524) Total operating (losses) profits (4,691) 1,208 (5,899) (16,250) (740) (15,510) Interest and other income 54 15 39 125 240 (115) Impairment losses - - - (24,948) - (24,948) Interest expense (34) (23) (11) (109) (80) (29) (Loss) income before income taxes$ (4,671) 1,200 (5,871) (41,182) (580) (40,602) Gross margin percentage % 25.43 43.66 (18.23) 15.32 40.89 (25.57) SG&A as a percent of trade sales % 63.89 38.77 25.12 66.43 42.06 24.37 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 inCanada and two manufacturing and distribution facilities inthe United States andCanada . In addition to its own manufacturing, Renin also sources various products and raw materials fromChina andVietnam . Renin's products are sold through three channels inNorth America : retail, commercial, and direct installation in the greaterToronto area. Overview As ofSeptember 30, 2020 , Renin 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 fromChina andVietnam , 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 been offset by an increase in sales through its retail and commercial channels. However, as a result 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. Although Renin's operations had not been significantly impacted by the pandemic as ofSeptember 30, 2020 , the effects of the pandemic, including a recessionary economic environment, could have a significant adverse impact on Renin's results of operations and financial condition in future periods, particularly if an economic downturn is prolonged in nature and impacts consumer demand or the effects of the pandemic result in material disruptions in the supply chains for its products and raw materials, including further delays in the production and shipment of products 47 -------------------------------------------------------------------------------- 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 fromChina . As a result, disruptions in its supply chain fromChina as a result of various factors, including increased tariffs or 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
InOctober 2020 , Renin acquired substantially all of the assets and assumed certain of the liabilities ofColonial Elegance Inc. ("Colonial Elegance"). Colonial Elegance, which is headquartered inMontreal, Canada , is a supplier and distributor of building products, including barn doors, closet doors, and stair parts, and its customers include various big box retailers inthe United States andCanada 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 was CAD$51.0 million (approximately USD$39.0 million ) plus a payment of CAD$6.7 million (approximately USD$5.1 million ) for excess working capital, with the payment for excess working capital subject to adjustment based on the final determination of the excess working capital amount delivered at closing.BBX Capital made a$5.0 million capital contribution to Renin to partially fund the acquisition, while the remainder of 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 (the "Term Loan") and an operating loan of up to$20.0 million (the "Operating Loan"), both of which mature inOctober 2025 .$30.0 million of proceeds from the Term Loan and approximately$8.0 million of borrowings under the Operating Loan were used to fund most of the purchase price and excess working capital payment related to the acquisition. Amounts outstanding under the Term Loan and Operating Loan bear interest at (i) the Canadian Prime Rate plus a spread between 1.375% to 1.875% per annum, (ii) the United States Base Rate plus a spread between 1.00% to 1.50% per annum, or (iii) LIBOR or Canadian Bankers Acceptance Rate, in each case plus a spread between 2.875% to 3.375% per annum, with the spreads applicable to each rate depending on the Renin's total leverage. In addition to ongoing payments of interest under the Term Loan and Operating Loan, the Term Loan requires quarterly payments of principal based on a stated percentage of the original principal amount of$30.0 million , with approximately 37.5% of the original principal amount due at maturity inOctober 2025 . See Note 18 to the Company's condensed consolidated financial statements included in Item 1 of this report for additional information with respect to Renin's acquisition of Colonial Elegance and its amended and restated credit facility with TD Bank, includingBBX Capital's pledge of its membership interest in Renin. 48
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Results of Operations Information regarding the results of operations for Renin is set forth below (dollars in thousands): For the Three Months Ended For the Nine Months Ended September 30, September 30, 2020 2019 Change 2020 2019 Change Trade sales$ 19,662 16,442 3,220 54,283 51,124 3,159 Cost of trade sales (15,927) (12,983) (2,944) (44,054) (40,989) (3,065) Gross margin 3,735 3,459 276 10,229 10,135 94 Selling, general and administrative expenses 2,135 2,849 (714) 6,788 8,326 (1,538) Total operating profits 1,600 610 990 3,441 1,809 1,632 Other (expense) revenue - - - (3) 152 (155) Interest expense (53) (131) 78 (238) (387) 149 Foreign exchange (loss) gain (58) 1 (59) 214 (23) 237 Income before income taxes$ 1,489 480 1,009 3,414 1,551 1,863 Gross margin percentage % 19.00 21.04 (2.04) 18.84 19.82 (0.98) SG&A as a percent of trade sales % 10.86 17.33 (6.47) 12.50 16.29 (3.78)
Renin's income before income taxes for the three months ended
· An increase in Renin's trade sales resulting primarily from a net increase in
sales to customers in its retail and commercial channels; and
· A decrease in selling, general and administrative expenses primarily due to
lower marketing, travel, and trade show expenses 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; partially offset by
· A decrease in Renin's gross margin percentage which primarily resulted from
increased costs related to the shipment of products and raw materials largely
due to the COVID-19 pandemic. Renin's income before income taxes for the nine months endedSeptember 30, 2020 was$3.4 million compared to$1.6 million during the same 2019 period. The increase was primarily due to reduced selling, general and administrative expenses as described above, including lower marketing, travel, and trade show expenses as a result of travel restrictions associated with the COVID-19 pandemic and lower consulting expenses. For the nine months endedSeptember 30, 2020 , the impact of higher shipping costs on Renin's gross margin percentage was partially offset by the impact of wage subsidies received for employees in its Canadian manufacturing facility during the second quarter of 2020 as a result of the COVID-19 pandemic. Other Other in the Company's segment information includes its investments in other operating businesses, including a restaurant located inSouth Florida that was acquired through a loan foreclosure and an insurance agency. During the nine months endedSeptember 30, 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 includes the following:
·
· Interest income on interest-bearing cash accounts
49
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Corporate General and Administrative Expenses
ThroughSeptember 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. The cost allocation from BVH toBBX Capital's corporate general and administrative expenses for the three months endedSeptember 30, 2020 and 2019 were$4.8 million and$5.4 million , respectively, and$12.7 million and$16.7 million , respectively for the nine months endedSeptember 30, 2020 and 2019. The decrease in the cost allocation for corporate general and administrative expenses for the 2020 period as compared to the same 2019 period primarily reflects the allocation of compensation expense related to BVH's Chief Executive Officer and Chief Financial Officer to Bluegreen as a result of their expanded roles at Bluegreen in the 2020 periods, which resulted in lower executive compensation expenses incurred directly by BVH, as well as an updated estimate of the allocation of annual executive bonus expenses expected to be paid in cash and stock. Provision for Income Taxes The Company estimates its effective annual income tax rate on a quarterly basis based on current and forecasted operating results for the annual period and applies the estimated effective income tax rate to its loss before income taxes reduced by net income or loss attributable to noncontrolling interests in joint ventures taxed as partnerships. The Company's effective income tax rate was approximately 17% and 29% during the three months endedSeptember 30, 2020 and 2019, respectively, and 22% and 29% during the nine months endedSeptember 30, 2020 and 2019, respectively. The Company's effective income tax rate for the three and nine months endedSeptember 30, 2020 and 2019 was impacted by the Company's nondeductible executive compensation allocated from BVH and state income taxes. The effective income tax rate for the 2020 period reflects a current estimated ordinary taxable loss for the year endedDecember 31, 2020 resulting primarily from the effects of the COVID-19 pandemic. Discontinued Operations As described in Note 1 to the Company's condensed consolidated financial statements for the three and nine months endedSeptember 30, 2020 and 2019, Food forThought Restaurant Group ("FFTRG"), a wholly-owned subsidiary of the Company, previously entered into area development and franchise agreements with MOD Pizza related to the development of MOD Pizza franchised restaurant locations throughoutFlorida and, through 2019, had opened nine restaurant locations. InSeptember 2019 , 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. The Company recognized a pre-tax loss from discontinued operations of$0.1 million during the nine months endedSeptember 30, 2020 and pre-tax losses from discontinued operations of$4.8 million and$9.5 million during the three and nine months endedSeptember 30, 2019 . The pre-tax losses during the three and nine months endedSeptember 30, 2019 were primarily attributable to operating losses associated with FFTRG's MOD Pizza restaurant locations, including costs incurred in connection with the opening of two restaurant locations and the recognition of impairment losses of$4.0 million and$6.7 million during the three and nine months endedSeptember 30, 2019 primarily associated with the closing of locations and the termination of the MOD Pizza area development and franchise agreements.
Net Income or Loss Attributable to Noncontrolling Interests
ThroughSeptember 22, 2020 , the Company's condensed consolidated financial statements included the results of operations and financial position of IT'SUGAR, a partially-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 ofSeptember 22, 2020 and derecognized the related noncontrolling interest in IT'SUGAR. 50
-------------------------------------------------------------------------------- Net loss attributable to noncontrolling interests was$0.5 million and$4.8 million during the three and nine months endedSeptember 30, 2020 compared to$0.1 million and$0.2 million for the comparable 2019 periods. The increase in the net loss attributable to noncontrolling interests for the three and nine months endedSeptember 30, 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. Consolidated Cash Flows
A summary of our consolidated cash flows is set forth below (in thousands):
For the Nine Months Ended September 30, 2020 2019 Cash flows (used in) provided by operating activities $ (7,736) 21,372 Cash flows (used in) provided by investing activities (6,434) 39,050 Cash flows provided by (used in) financing activities 89,725
(58,038)
Net increase in cash, cash equivalents and restricted cash $ 75,555 2,384 Cash, cash equivalents and restricted cash at beginning of period 21,287 30,082 Cash, cash equivalents and restricted cash at end of period $ 96,842 32,466
Cash Flows from Operating Activities
The Company's cash used in operating activities increased by$29.1 million during the nine months endedSeptember 30, 2020 compared to the same 2019 period 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 ofBBX 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.
Cash Flows from Investing Activities
The Company's cash used in investing activities increased by$45.5 million during the nine months endedSeptember 30, 2020 compared to the same 2019 period primarily due to lower distributions from unconsolidated real estate joint ventures and decreased proceeds from the sale of real estate, partially offset by lower investments in unconsolidated real estate joint ventures and a decline in purchases of property and equipment.
Cash Flows from Financing Activities
The Company's cash provided by financing activities increased by$147.8 million during the nine months endedSeptember 30, 2020 compared to the same 2019 period, which was primarily due to higher net transfers from Parent in the 2020 period. SeasonalityBBX Sweet Holdings' businesses are subject to seasonal fluctuations in trade sales, which cause fluctuations inBBX Sweet Holdings' quarterly results of operations. Historically, IT'SUGAR generated its strongest retail trade sales during the months from June through August, as well as during the month of December, when families are on vacation.BBX Sweet Holdings' other operating businesses historically generated their strongest trade sales during the fourth quarter in connection with various holidays inthe United States . Due primarily to the closures of IT'SUGAR's retail locations as a result of COVID-19 pandemic and the reduction in consumer demand and families on vacation,BBX Sweet Holdings and IT'SUGAR experienced significantly decreased sales in the second and third quarters of 2020. As a result of the filing of the Bankruptcy Cases by IT'SUGAR, IT'SUGAR's sales and results of operations will not be included in the Company's condensed consolidated statement of operations subsequent toSeptember 22, 2020 . Commitments
The Company's material commitments as of
51
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The following table summarizes the contractual minimum principal and interest payments required on the Company's outstanding debt and payments required on the Company's non-cancelable operating leases by period due date as ofSeptember 30, 2020 (in thousands): Payments Due by Period Unamortized Debt Less than 1 - 3 4 - 5 After 5 Issuance Contractual Obligations (1) 1 year Years Years Years Costs Total Notes payable and other borrowings$ 5,311 850 2,529 28,261 (951) 36,000 Noncancelable operating leases 727 4,788 3,305 6,168 - 14,988 Total contractual obligations 6,038 5,638 5,834 34,429 (951) 50,988 Interest Obligations (2) Notes payable and other borrowings 1,939 4,264 4,094 27,449 - 37,746 Total contractual interest 1,939 4,264 4,094 27,449 - 37,746 Total contractual obligations$ 7,977 9,902 9,928 61,878 (951) 88,734
(1) Does not include BBXRE's obligation under the Altman Companies' operating
agreement to purchase an additional 40% equity interest in
purchase price, subject to certain adjustments, of
does not include contractual obligations of IT'SUGAR, which is no longer
consolidated by the Company as a result of its filing of the Bankruptcy Cases
on
(2) Assumes that the scheduled minimum principal payments are made in accordance
with the table above and the interest rate on variable rate debt remains the
same as the rate atSeptember 30, 2020 .
Off-balance-sheet Arrangements
BBX Capital guarantees certain obligations of its wholly-owned subsidiaries and unconsolidated real estate joint ventures as described in further detail in Note 10 to the Company's condensed consolidated financial statements included in Item 1 of this 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 primarily 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 ofSeptember 30, 2020 andDecember 31, 2019 , the Company's investments in these joint ventures totaled$60.6 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 Note 5 to the Company's condensed consolidated financial statements included in Item 1 of this 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$18.9 million investment in and advances to IT'SUGAR at cost. Although the Company is not obligated to finance the activities of IT'SUGAR in bankruptcy, inOctober 2020 , a subsidiary of the Company entered into a$4.0 million Debtor-in-Possession 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 in bankruptcy, if needed, which could dilute the Company's investment in IT'SUGAR and result in additional impairment charges. 52
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Liquidity and Capital Resources
As ofSeptember 30, 2020 , the Company had cash, cash equivalents, and short-term investments of approximately$96.6 million . Management believes that the Company has sufficient liquidity to fund operations, including anticipated working capital, capital expenditure, and debt service requirements, and 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 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 debtor-in-possession funding to IT'SUGAR during theBankruptcy 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 theBeacon 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, and as a result of the spin-off ofBBX Capital from BVH, the Company will no longer receive capital contributions from BVH. The Company believes that its primary source of liquidity for the foreseeable future will be its available cash, cash equivalents, and short-term investments. In addition, the Company expects to receive quarterly interest payments on the$75.0 million promissory note that was issued by BVH in favor ofBBX Capital in connection with the spin-off. Amounts outstanding under the note 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. The Company 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 the Company's other commitments described above), make additional investments in real estate opportunities, operating businesses, or other opportunities, or 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. InNovember 2018 , BBXRE acquired a 50% membership interest in the Altman Companies, a joint venture between BBXRE andJoel 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 andJoel Altman would primarily be through the equity distributions that BBXRE andJoel Altman receive through their investment in the managing member of such joint ventures. Therefore, as the timing of any such distributions to BBXRE andJoel Altman is generally contingent upon the sale or refinancing of a completed development project, it is anticipated that BBXRE andJoel 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$0.5 million to$1.0 million in the Altman Companies and related joint ventures during the remainder of 2020 relating to planned predevelopment expenditures, ongoing operating costs and potential operating shortfalls related to certain projects. Furthermore, if the Altman 53 -------------------------------------------------------------------------------- Companies closes on development financing for additional projects, BBXRE expects that it would be required to contribute an additional$1.25 million toABBX Guaranty, LLC , a joint venture between BBXRE andJoel Altman that provides guarantees on the indebtedness and construction cost overruns of new real estate joint ventures formed by the Altman Companies. However, at this time, the COVID-19 pandemic has resulted in uncertainty in the ability of the Altman Companies to close on the capital necessary to commence the construction of new projects for the foreseeable future, and an additional contribution toABBX Guaranty, LLC is not anticipated to occur until 2021. Pursuant to the operating agreement of the Altman Companies, BBXRE will also acquire an additional 40% equity interest in the Altman Companies fromJoel Altman for a purchase price of$9.4 million , subject to certain adjustments, inJanuary 2023 , whileJoel 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 inAltman-Glenewinkel Construction that are not owned by the Altman Companies for a purchase price based on prescribed formulas in the operating agreement ofAltman-Glenewinkel Construction . In addition to BBXRE's anticipated investments in the Altman Companies and related joint ventures, BBXRE has entered into two real estate joint ventures,CCB Miramar, LLC andL03/212 Partners, LLC , in which the Company expects to contribute additional capital of approximately$1.5 million during the next twelve to twenty-four months based on the current plans and estimates associated with the related development projects. Subsequent toSeptember 30, 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, cash equivalents, and short-term investments.
Credit Facilities with Future Availability
As of
TD Bank Credit Facility. InMay 2017 , Renin entered into a credit facility with TD Bank that was subsequently renewed inSeptember 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 line of credit 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, inJuly 2020 , the credit facility was also amended to extend the maturity date of the facility fromSeptember 2020 toSeptember 2022 . As ofSeptember 30, 2020 , the outstanding amount under the revolving line of credit was$4.9 million with an effective interest rate of 3.46%. As ofSeptember 30, 2020 , Renin had availability of approximately$8.3 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. In connection with Renin's acquisition of Colonial Elegance inOctober 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 inOctober 2025 . See Note 18 to the Company's condensed consolidated financial statements included in Item 1 of this report for additional information. InOctober 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 customers. The products were committed to be sold by Renin in connection with the customer'sNovember 2020 holiday sale program, while the displays were required in connection 54
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with the rollout of new products with the customer. Renin believes that the supplier is liable for such costs pursuant to the terms of the agreements between Renin and the supplier, and Renin has notified the supplier that it intends to exercise a right of offset of the costs against outstanding amounts due to the supplier of approximately$6.0 million . The costs of the products and related shipping will be recognized in connection with sale to the customer during the fourth quarter of 2020, while the costs of the displays and related shipping will be deferred and amortized over the period in which the Company expects to benefit from their use. Although Renin's right of offset may reduce a portion of the shipping costs incurred related to the products and displays, the supplier may dispute Renin's offset and seek collection for amounts otherwise due to it, and there is no assurance regarding the ultimate resolution of the matter. This matter may adversely impact Renin's compliance with the financial covenants under its outstanding credit facility. If Renin is unable to comply with its covenants, Renin 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.
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