How did Checkers account for the Out-of-Court Restructuring, including the forgiveness of debt, in relation to debt issuance costs?
Checkers Franchise · 2025 FDDAnswer from 2025 FDD Document
ction from the related debt balance when incurred and amortized into interest expense using the effective-interest over the life of the related debt. If additional cash is drawn, then a proportional amount of the unamortized basis is reclassed from an asset to discount, and amortized using the effective interest method.
For the fiscal periods ended June 16, 2023 (Predecessor), January 2, 2023 (Predecessor), and January 3, 2022 (Predecessor) the Company amortized $0.9 million, $1.8 million, and $1.6 million, respectively, of financing costs associated with the modified first lien credit agreement (the "First Lien Credit Agreement") and second lien credit agreement (the "Second Lien Credit Agreement"). As the Out-of-Court Restructuring, including the forgiveness of debt, was accounted for under ASC 805 Business Combinations, the Company derecognized previous unamortized debt issuance costs and recognized debt issuance costs incurred for the New Money Loans and Second Out Loans.
For the fiscal period ended January 1, 2024 (Successor), the Company amortized $0.1 million of financing costs associated with the New Money Loans and Second Out Loans issued under the Out-of-Court Restructuring. For the same fiscal period, the Company amortized $0.1 million of financing costs associated with the unfunded commitment associated with the New Money Loans.
Revenue Recognition
"Restaurant sales" includes revenues recognized upon delivery of food to the customer at Company-operated restaurants. "Restaurant sales" are recognized upon sale and are presented net of coupons and discounts, sales tax and other sales-related taxes. Revenue is recognized when the food is purchased by the customer, which is when our performance obligation is satisfied. "Restaurant sales" also includes revenues recognized upon delivery of food to a third-party delivery company. The revenue is recognized as a receivable from the third-party delivery service and collection is made within three to seven business days. Delivery sales are recognized net of commissions, fees, taxes, and discounts.
"Franchise and retail royalty revenue" includes royalties on sales by franchised restaurants and sales of licensed products in retail stores. Royalties are based on a percentage of sales of the franchised restaurant and sales of licensed products in retail stores which are recognized as earned.
"Franchise fees and other income" is comprised of franchise fees, transfer fees, and area development fees that are generated from the sale of rights to develop, own and operate restaurants, as well as sublease rental income and revenues from advertising cooperative funds. As a sublessor for the operation of certain franchised restaurants, fees for sublease income are also included within "franchise fees and other income." The Company accounts for leases using the guidance in ASC 842, Leases, as well as ASC 606, Revenue from Contracts with Customers. See the Note 16. Leases for a discussion on leases.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkers' 2025 Franchise Disclosure Document, the Out-of-Court Restructuring, including the forgiveness of debt, was accounted for under ASC 805 Business Combinations. As a result, Checkers derecognized previous unamortized debt issuance costs. The company then recognized debt issuance costs incurred for the New Money Loans and Second Out Loans.
For the fiscal period ended January 1, 2024 (Successor), Checkers amortized $0.1 million of financing costs associated with the New Money Loans and Second Out Loans issued under the Out-of-Court Restructuring. For the same fiscal period, the company amortized $0.1 million of financing costs associated with the unfunded commitment associated with the New Money Loans.
As part of issuing the New Money Loans, Checkers funded $10 million out of the total $25 million commitment and was required to pay lenders' costs of $1.3 million. Consequently, Checkers allocated financing costs proportionally to the funded and unfunded components. The portion allocated to the funded balance is recorded as a reduction to long-term debt, while the portion allocated to the unfunded balance is recorded as a deferred financing cost asset. As of the date of the Out-of-Court Restructuring, Checkers recognized $0.5 million as a reduction to long-term debt and $0.8 million as a deferred financing cost asset. As of January 1, 2024 (Successor), Checkers had $0.4 million and $0.6 million as a reduction to long-term debt and a deferred financing cost asset, respectively. The deferred financing cost asset is recognized in Other Current Assets on the balance sheet.
In connection with the Out-of-Court Restructuring, Checkers recognized approximately $15.8 million of transaction costs. Transaction costs incurred by the Predecessor during the period from January 3, 2023 to June 16, 2023 (Predecessor) associated with the Out-of-Court Restructuring were approximately $15.6 million, of which $3.7 million were contingent upon completion of the Out-of-Court Restructuring. Of the transaction costs incurred by the Predecessor, $9.0 million were an assumed liability by the Successor at closing. Additionally, $0.2 million of costs were incurred related to the transaction that have been recorded by the Successor. Checkers recorded the transaction costs within general and administrative expenses on the consolidated statements of operations.