BurgerFi International, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Leases

Leases

9 Months Ended

Oct. 03, 2022

The Company has entered into various lease agreements. For the three and nine months ended October 3, 2022 rent expense was approximately $4.0 million, and $11.8 million. For the three and nine months ended September 30, 2021 rent expense was approximately $1.0 million, and $2.8 million. These lease agreements expire on various dates through 2033 and have renewal options.

On January 1, 2022, we adopted ASU 2016-02. Results for reporting periods beginning on or after January 1, 2022 are presented under Accounting Standards Codification Topic 842 (“ASC 842”). Prior period amounts were not revised and continue to be reported in accordance with ASC Topic 840, the accounting standard then in effect.

Upon transition, on January 1, 2022, we recorded the following increases (decreases) to the respective line items on the Condensed Consolidated Balance Sheet:


(in thousands)	Adjustment as of January 2, 2022
Prepaid expenses	$	(773)
Operating right-of-use asset, net	57,385
Finance right-of-use asset, net	855
Deferred rent	(900)
Short-term operating lease liability	9,457
Short-term finance lease liability	143
Long-term operating lease liability	49,149
Long-term finance lease liability	712

The Company currently leases all of its corporate-owned restaurants, corporate offices, and certain equipment. The Company evaluates contracts entered into to determine whether the contract involves the use of property or equipment and evaluates whether it controls the use of the asset, which is determined by assessing whether all economic benefits from the use of the asset is obtained, and whether the Company has the right to direct the use of the asset. Once the Company has identified a lease, the lease is accounted for under the requirements of ASC 842.

Upon the possession of a leased asset, the Company determines its classification as an operating or finance lease. The Company's real estate leases are classified as operating leases, and the Company's equipment leases are classified as finance leases. Generally, the real estate leases have initial terms ranging from 10 years to 15 years and typically include two five-year renewal options. Renewal options are generally not recognized as part of the right-of-use assets and lease liabilities as it is not reasonably certain at commencement date that the Company would exercise the options to extend the lease. The real estate leases typically provide for fixed minimum rent payments or variable rent payments based on a percentage of monthly sales or annual changes to the Consumer Price Index. Fixed minimum rent payments are recognized on a straight-line basis over the lease term from the date the Company takes possession of the leased property. Lease expense incurred before a corporate-owned store opens is recorded in pre-opening costs in the condensed consolidated statements of operations. Once a corporate-owned store opens, the straight-line lease expense is recorded in occupancy and related expenses in the condensed consolidated statements of operations. Many of the leases also require the Company to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in occupancy and related expenses in the condensed consolidated statements of operations.

A summary of finance and operating lease right-of-use assets and liabilities as of October 3, 2022 is as follows:


(in thousands)	Classification	October 3, 2022
Operating leases	Operating right-of-use asset, net	$	49,804
Finance leases	Property & equipment, net	914
Total right-of-use assets		$	50,718

Operating leases:
	Short-term operating lease liability	$	9,505
	Long-term operating lease liability	41,372
Finance leases:
	Short-term borrowings, including finance leases	156
	Long-term borrowings, including finance leases	819
Total lease liabilities		$	51,852

The components of lease expense for the three and nine months ended October 3, 2022 is as follows:


(in thousands)	Classification	Three Months Ended October 3, 2022		Nine Months Ended October 3, 2022
Operating lease cost	Occupancy and related expenses Pre-opening costs Store closure costs	$	3,202	$	9,796
Finance lease cost:
Amortization of right-of-use assets	Depreciation and amortization expense	62		196
Interest on lease liabilities	Interest expense	15		48
Less: Sublease income	Occupancy and related expenses	(47)		(141)
Total lease cost		$	3,232	$	9,899

The maturity of the Company's operating and finance lease liabilities as of October 3, 2022 is as follows:


(in thousands)	Operating Leases		Finance Leases
10/4/2022 - 12/31/2022	$	3,103	$	57
01/01/2023 - 12/31/2023	12,178		200
01/01/2024 - 12/31/2024	10,432		184
01/01/2025 - 12/31/2025	8,927		170
01/01/2026 - 12/31/2026	7,110		159
Thereafter	19,581		404
Total undiscounted lease payments	61,331		1,174
Less: present value adjustment	10,454		199
Total net lease liabilities	$	50,877	$	975

As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company gives consideration to its recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating its incremental borrowing rates.

As of October 3, 2022, the Company had additional operating lease commitments of $2.2 million for non-cancelable leases without a possession date.

A summary of lease terms and discount rates for finance and operating leases is as follows:


	Nine Months Ended
	October 3, 2022
Weighted-average remaining lease term (in years)
Operating leases	6.3
Finance leases	6.5
Weighted-average discount rate
Operating leases	6.0	%
Finance leases	6.0	%