BURGERFI BECOMES A PUBLIC COMPANY – HISTORY, PERHAPS MISUNDERSTOOD, PLUS STRUCTURAL DETAILS

THE SPAC STRUCTURE (ONCE AGAIN)

We have written before about the pending merger of BurgerFi into OPES, as both entities take advantage of the markets appetite for blank check (SPAC) companies. The SPAC approach has been around for decades but it has emerged, in a zero interest rate world, as one of the most dynamic segments of the capital markets. Investors will have invested over $60 billion this year without knowing what company they will own. They are betting on the founders of the SPAC to find an attractive acquisition, which will be usually be bought using a lot of debt. This approach works for all stakeholders: (1) the sponsors (2) the underwriters (3) the target company to be acquired and (4) the SPAC investors. The sponsors, underwriters and the target company have a good chance to do well both short and long term. The investors in the SPAC are protected until just before the acquisition closes, have a decent chance of doing well in the short term, especially in the current environment, but are carrying a heavy “promotional” load in the long run. This is like buying a mutual fund with a small sales charge up front but most likely a 20%-40% promotional “load” before exiting the investment.

• The sponsors buy a lot of very cheap stock as the SPAC is formed, typically for pennies/share, sometimes also getting further stock options. They may or may not “average up” by purchasing more stock as the SPAC goes public. In any event, their average purchase price is a small fraction of what the public pays.
• The underwriters receive a hefty commission for raising the SPAC capital, and they get stock and/or options as well, so they are guaranteed compensation plus have a free long term stake.
• The company acquired becomes publicly held, receives capital for growth, ownership may or may not get an initial payout but they continue to have a major stake. Especially these days, the purchase price is more than adequate because competition is intense for attractive targets. Going public by way of a SPAC is often a unique alternative for a company with “hair on it”, either very speculative or with a checkered history. A very strong company with great management can go directly to a high quality underwriter and has no to tolerate the promotional dilution involved in the SPAC approach.
• The investors in the SPAC typically receive a “Unit” consisting of stock plus warrants. The stock can be redeemed at cost of the unit, before the proposed merger takes place, and the investor retains the warrant so has some upside at no cost. Currently, most SPACs are trading above the issue price. If the stock market turns down, the investor can redeem his cash, getting out “whole”, which happened in the first quarter of 2020, therefore protected in the short run. Longer term, the dilution of corporate ownership by the sponsor and underwriter is substantial, which in turns provides a very high valuation for investors to live with.

EXPANDED CONTEXT OF THE OPES/BFI TRANSACTION – NEW OPES IS NOT THE OLD OPES

We stand by our previous analysis of the current BurgerFi fundamentals and the current balance sheet structure, which our readers can explore by way of SEARCH (for “OPES”) on our Home Page.

We have, by way of further scrutiny of the voluminous SEC filings and conversations with industry sources, discovered that the OPES Acquisition Corp. that merged last week with BurgerFi was a completely different group than formed the original OPES. The background of the original Founders does not seem currently important other than to say that they were heavily involved in a variety of Mexican companies, primarily in energy, consumer finance and infrastructure. It was that group that purchased 2,875,000 shares for $25,000 (less than $.01/sh), took OPES public by raising $116M with the sale of SPAC Units (a share of stock plus a warrant) for $10/sh in March, 2018 and embarked on a search for an acquisition vehicle.

After two years of searching for an attractive vehicle, with a previously granted time extension having only six months to run, the original group was “bought out” in March, 2020, by current Chairman, Ophir Sternberg and affiliates, including Lionheart Equities, LLC, a Miami based real estate firm he founded. (To avoid confusion, we point out that Lionheart Equities, a current shareholder, is apparently unaffiliated with Lion Point Capital, an original OPES shareholder, still owning 945,938 shares.) In terms of disposition of the original 2,875,000 founders’ common shares, it appears that 1,610,000 of those shares were transferred to Sternberg affiliate, Lionheart Equities, where they reside today.

THE TRANSACTION PROCESS FROM MARCH ’20 TO TODAY

There were seven potential targets described in the proxy filing, in a variety of industries. We assume that these were virtually all in the time period before Ophir Sternberg got involved, because the process moved very quickly from March to June, 2020, when the first OPES/BFI meeting took place to an agreement announced.

Prior to Sternberg’s involvement, the allowed time for consummation of a deal had been extended by stockholders from 9/16/18 to 11/15/19. By the earlier date $23.6M of IPO proceeds had been redeemed. On 11/15/19, after $2.4M of redemptions, the period was extended to 1/15/20.  On 1/15/20, after $191k of redemptions, an extension to 3/16/20 was granted. On 3/16/20, after the pandemic had generated $47M of redemptions, an extension went to  6/18/20. The original OPES founders were no doubt encouraged to move on, since the “bankroll” in escrow was now under $50M. Sternberg’s new group no doubt started their process thinking about smaller targets than originally considered.

On March 18, 2020, the first contact, as described in the proxy material, was when OPES chairman, Sternberg, contacted John Rosatti, CEO and Founder of BurgerFi, presenting the possibility of exploring a business combination. They had known each other personally but had not any previous business relationship.

June 8, 2020, after negotiations as described in the proxy material, non-binding Letter of Intent was jointly announced by OPES and BurgerFi.

On June 30, 2020, a joint announcement detailed the definitive agreement. Stockholders had already extended the allowed time to 9/16/20. It was extended again to 1/15/21, and it doesn’t matter anymore.

RISKS, AS DEFINED IN THE PROXY MATERIAL

We like to keep articles concise, but while we’re at it, we found the risks as described in the proxy material interesting. Setting aside the “normal” risks associated with operating a multi-unit restaurant franchising companies, things like ”availability of locations”, “supply disruptions”, “labor costs”, “competition” , yada,yada,  we present below some of the most significant “structural” risks as presented within the 150 page OPES/BFI proxy material.

“BurgerFi will have controlling stockholders whose interest may differ from those its public shareholders.”

“The Post-Combination Company’s anti-takeover provisions could prevent or delay a change in control of the company, even if such change in control would be beneficial to its stockholders”.

“The Post-Combination company will incur relatively outsized costs as a result of becoming a public company.”

“As a ‘smaller reporting company’ we are permitted to provide less disclosure than large public companies which may make our common stock less attractive to investors.”

“The unaudited pro forma financial information included in this proxy may not be representative of the Company’s results following the Business Combination”

“If our due diligence investigation of BurgerFi was inadequate, then OPES stockholders could lose some or all of their investment.”

“If those OPES security holders who have registration rights exercise their right, it may have an adverse effect on the market price of OPES’s securities.”

“Provisions in our Certificate of Incorporation, Bylaws and Delaware law may inhibit a takeover of us, which could limit the price investors might be willing to pain the future of our Common Stock and could entrench management.”

“If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.”

“A significant number of shares of our Common Stock are subject to issuance upon exercise of the outstanding Warrants, which upon such exercise may result in dilution to our security holders.”

“Sales of a substantial number of shares by our existing stockholders could cause our stock price to decline.”

REGISTRATION RIGHTS FOR LARGE SHAREHOLDERS

It remains pertinent that Lion Point had originally been granted a Forward Purchase Contract to purchase 3,000,000 units (a share and a warrant) at $10.00 per unit once a business combination had taken place. On June 29, 2020 the original Lion Point agreed to purchase 2,000,000 units and the newly involved Lionheart Equities would purchase 1,000,000 units. The Sternberg affiliates will therefore have “averaged up” their 1,610,000 Founders’ shares by buying another 1M shares at $10.00/share with an option to purchase another million shares at $11.50. Together, Lion Point and Lionheart would provide $30,000,000 to the newly public BFI. As described further below, BFI agreed to register a total of 5,029,376 shares to be owned by Lion Point. This includes 862,500 of Founders’ shares, 4,00,000 shares from the newly purchased Units and 166,876 shares from previously purchased Units. Lion Point is entitled to make up to two demands for registration and those shares will have “priority registration rights” (as described on Page 9 and again on page 14 below).

Even more important are the larger number of registration rights, as detailed on page 14 of the proxy:

“ In connection with the Business Combination, all of the parties to the Original Registration Rights Agreement (and those parties who as a result of the transfer of Founders’ Shares became a party to the Original Registration Rights Agreement)……will enter into a new registration rights agreement covering the registration of 28,618,773 shares of Common Stock…..The Post-Combination Company will be obligated to file a registration statement with the SEC within thirty (30) days after the Closing of the Business Combination to register the shares for resale, which must be effective within 90 calendar days following the filing date, or in the event the registration statement receives a “full review” by the SEC, the 120th calendar date following the filing date. In the event the SEC requires a cutback in the number of shares being registered, the shares will be cut back on a pro rata basis, except that the 5,029,376 shares of Lion Point that are being registered will not be reduced. In addition, Lion Point is entitled to make up to two demands that we register the shares and all holders have “piggy-back” registration rights with respect to registration statements filed subsequent to the consummation of the Business Combination. The form of the New Registration Rights Agreement is attached as Exhibit C to the Acquisition Agreement.

“Lock-Ups: In connection with the Business Combination, the Members (previous BurgerFi shareholders) shall enter into a lock-up agreement with OPES pursuant to which the (i) Closing Payment Shares shall be subject to a lock-up until the earlier of (x) six months after the Closing Date of the Business Combination, and (y) if, subsequent to the Closing Date, the Post-Combination Company consummates a liquidation, merger, stock exchange or other similar transaction which results in all of the Post-Combination Company’s stockholders having the right to exchange their shares of common stock for cash, securities or other property, the date such transaction is consummated; and (ii) the Earnout Share Consideration shall be subject to a lock-up for a period of six months from the date the applicable Earnout Tranche is earned (provided that the Members shall be permitted to undertake block trades during each such lockup period).”

CONCLUSION

We have written before about the operating fundamentals at BurgerFi, as described so far in publicly filed documents. A very broad overview of newly public BFI includes a pro forma 9 month combined  $2.953 million loss, which included $551k from OPES (pre-merger) and $3.54M in D&A at BFI. BFI, on its own for the nine months, had an operating loss, but positive EBITDA in the area of $1M.  There are about 17.6M shares outstanding,  valued at today’s price of about $15.00/sh at $264M. Subtracting the $43M of cash on the balance sheet, the business, net of cash, is valued at about $221M.

It is not surprising that smart, successful, financially well connected entrepreneurs view SPACs as an opportunity to make a major score. Underwriters are willing to tell your story, investors are willing,  the music is playing, so why not dance? The reward/risk equation is very seductive for SPAC founders. That’s why Founders of SPACs include multi-billionaires by the names of Branson and Foley and Sternlicht. I guess you can never be too rich, though I’ve been told “you can’t take it with you”.

As the OPES/BurgerFi transactional process illustrates, however, there are risks for all involved. Enthusiasm in the capital markets can be fickle, in which case the sponsors may not get the liquidity they hope for, the acquired companies may not be equipped to deal with the short term performance pressures of public ownership, and investors in the SPAC may overstay their welcome. In the specific case of BFI, there are currently 17.6M shares outstanding, of which about 6M are in the public float. As described above, however, holders of 27M shares have registration rights. The actual operating results will therefore need to reinforce the story, or there will likely not be adequate demand for over $250M worth of new common shares.

Roger Lipton