UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 20212022
☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission file number: 000-56160
AMERGENT HOSPITALITY GROUP INC.
| Delaware | 84-4842958 | |
| (State or Other Jurisdiction of | (IRS Employer | |
| Incorporation or Organization) | Identification Number) |
| Charlotte, NC | 28226 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(704) 366-5122
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered under Section 12(b) of the Act: None
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or has for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer ☒ | Smaller reporting company ☒ |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the registrant’s $0.0001 par value common stock as of November 5, 2021,15, 2022, was shares.
Amergent Hospitality Group Inc. and Subsidiaries
TABLE OF CONTENTS
| 2 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (the “Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by terms and phrases such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” and “will” and similar expressions and include references to assumptions and relate to our future prospects, developments and business strategies. There are a number of important factors that could cause the actual results to differ materially from those expressed in any forward-looking statement made by us. These factors include, but are not limited to:
| ● | ||
| financing raise substantial doubt about our ability to | |
| ● | ||
| ● | ||
| ● | Decline in global financial markets, inflation and economic downturn; | |
| ● | Continuing impact of business interruptions resulting from the coronavirus COVID-19 global pandemic; | |
| ● | ||
| ● | ||
| ● | ||
| ● | ||
| ● | ||
| ● | Difficulties as acquired restaurants are integrated into our operations and failure to realize anticipated synergies; | |
| ● | Our debt financing agreements expose us to interest rate risks, contain obligations that may limit the flexibility of our operations, and may limit our ability to raise additional capital; and | |
| ● |
We undertake no obligation to update or revise the forward-looking statements included in this Report, whether as a result of new information, future events or otherwise, after the date of this Report. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences are discussed in the section entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein.
Unless otherwise noted, references in this Report to the “Registrant,” “Company,” “Amergent,” “Spin-Off Entity,” “we,” “our” or “us” means Amergent Hospitality Group Inc., a Delaware corporation and our subsidiaries.
| 3 |
PART I
ITEM 1: FINANCIAL STATEMENTS
Amergent Hospitality Group IncInc. and Subsidiaries
Unaudited Financial Statements
Table of Contents
| 4 |
Amergent Hospitality Group IncInc. and Subsidiaries
Condensed Consolidated and Combined Balance Sheets
| September 30, 2021 | December 31, 2020 | |||||||||||||||
| (Unaudited) | September 30, 2022 | December 31, 2021 | ||||||||||||||
| (in thousands except share and per share data) | (Unaudited) | |||||||||||||||
| ASSETS | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash | $ | 1,100,919 | $ | 678,468 | $ | 704 | $ | 646 | ||||||||
| Restricted cash | 1,948,813 | 1,250,336 | — | 1,672 | ||||||||||||
| Investments | 423,262 | 413,268 | 13 | 50 | ||||||||||||
| Accounts and other receivables | 51,157 | 314,043 | 861 | 865 | ||||||||||||
| Inventories | 140,837 | 172,695 | 205 | 182 | ||||||||||||
| Prepaid expenses and other current assets | 301,811 | 290,227 | 372 | 360 | ||||||||||||
| Current assets held for sale | 175,553 | — | ||||||||||||||
| TOTAL CURRENT ASSETS | 4,142,352 | 3,119,037 | 2,155 | 3,775 | ||||||||||||
| Property and equipment, net | 3,001,897 | 3,702,894 | 3,222 | 3,115 | ||||||||||||
| Operating lease asset | 8,971,766 | 9,529,443 | ||||||||||||||
| Operating lease assets | 7,630 | 8,021 | ||||||||||||||
| Intangible assets, net | 3,272,796 | 3,043,885 | 2,932 | 3,129 | ||||||||||||
| Goodwill | 7,809,874 | 8,591,149 | 7,810 | 7,810 | ||||||||||||
| Investments | 15,709 | 365,001 | 16 | 16 | ||||||||||||
| Deposits and other assets | 350,285 | 295,930 | 355 | 352 | ||||||||||||
| Noncurrent assets held for sale | 1,605,135 | — | ||||||||||||||
| TOTAL ASSETS | $ | 29,169,814 | $ | 28,647,339 | $ | 24,120 | $ | 26,218 | ||||||||
| LIABILITIES, REDEEMABLE SHARES, AND STOCKHOLDERS’ DEFICIT | ||||||||||||||||
| LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable and accrued expenses | $ | 6,152,855 | $ | 8,667,268 | $ | 8,122 | $ | 6,844 | ||||||||
| Current maturities of long-term debt, convertible debt and notes payable | 7,080,737 | 2,338,978 | ||||||||||||||
| Current operating lease liabilities | 4,581,582 | 4,209,389 | ||||||||||||||
| Derivative liabilities | — | 184,800 | ||||||||||||||
| Current portion of long-term debt and notes payable (includes debt measured at fair value of $893 and debt discounts of $196 at September 30, 2022) | 3,648 | 3,264 | ||||||||||||||
| Current portion of operating lease liabilities | 4,050 | 4,599 | ||||||||||||||
| Deferred grant income | 1,948,813 | — | — | 1,545 | ||||||||||||
| Current liabilities held for sale | 362,615 | — | ||||||||||||||
| TOTAL CURRENT LIABILITIES | 20,126,602 | 15,400,435 | 15,820 | 16,252 | ||||||||||||
| Long-term operating lease liabilities | 9,683,643 | 10,677,862 | ||||||||||||||
| Operating lease liabilities, net of current portion | 8,239 | 8,644 | ||||||||||||||
| Contract liabilities | 777,420 | 794,989 | 72 | 757 | ||||||||||||
| Deferred tax liabilities | 108,809 | 108,809 | 150 | 150 | ||||||||||||
| Long-term debt, convertible debt and notes payable, net of current maturities | 2,819,348 | 4,353,942 | ||||||||||||||
| Noncurrent liabilities held for sale | 839,395 | — | ||||||||||||||
| Long-term debt and notes payable, net of current portion (includes debt measured at fair value d $599 December 31, 2021) | 7,745 | 6,593 | ||||||||||||||
| TOTAL LIABILITIES | 34,355,217 | 31,336,037 | 32,026 | 32,396 | ||||||||||||
| Commitments and contingencies (see Note 11) | - | |||||||||||||||
| Commitments and contingencies (see Note 12) | - | - | ||||||||||||||
| Convertible Preferred Stock: Series 2: $ stated value; authorized shares; and issued and outstanding at September 30, 2021 and December 31, 2020, respectively | 58,400 | 459,608 | ||||||||||||||
| Convertible Preferred Stock: Series 2: $ stated value; authorized shares; issued and outstanding at both September 30, 2022 and December 31, 2021 | 58 | 58 | ||||||||||||||
| Stockholders’ Deficit: | ||||||||||||||||
| Common stock: $ par value; authorized shares; and shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively | 1,570 | 1,428 | ||||||||||||||
| Common stock: $ par value; authorized shares; shares issued and outstanding at both September 30, 2022 and December 31, 2021 | 2 | 2 | ||||||||||||||
| Additional paid-in-capital | 92,876,775 | 92,433,344 | 93,162 | 92,882 | ||||||||||||
| Accumulated deficit | (96,963,419 | ) | (94,587,482 | ) | (99,865 | ) | (97,963 | ) | ||||||||
| Accumulated other comprehensive loss | (44,801 | ) | (25,916 | ) | ||||||||||||
| Total Amergent Hospitality Group, Inc., Stockholders’ Deficit | (4,129,875 | ) | (2,178,626 | ) | ||||||||||||
| Total Amergent Hospitality Group Inc. Stockholders’ Deficit | (6,701 | ) | (5,079 | ) | ||||||||||||
| Non-controlling interests | (1,113,928 | ) | (969,680 | ) | (1,263 | ) | (1,157 | ) | ||||||||
| TOTAL STOCKHOLDERS’ DEFICIT | (5,243,803 | ) | (3,148,306 | ) | (7,964 | ) | (6,236 | ) | ||||||||
| TOTAL LIABILITIES, REDEEMABLE SHARES AND STOCKHOLDERS’ DEFICIT | $ | 29,169,814 | $ | 28,647,339 | ||||||||||||
| TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT | $ | 24,120 | $ | 26,218 | ||||||||||||
See accompanying notes to the condensed consolidated and combined financial statements
| 5 |
Amergent Hospitality Group IncInc. and Subsidiaries
Condensed Consolidated and Combined Statements of Operations (Unaudited)
| Three Months Ended | Nine Months Ended | Three months ended | Nine months ended | |||||||||||||||||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||||||||||||||
| (Restated) | (Restated) | |||||||||||||||||||||||||||||||
| (in thousands except share and per share data) | (Restated) | (Restated) | ||||||||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||||||||
| Restaurant sales, net | $ | 6,106,261 | $ | 4,509,082 | $ | 15,288,320 | $ | 13,881,380 | $ | 5,176 | $ | 5,627 | $ | 15,257 | $ | 15,288 | ||||||||||||||||
| Gaming income, net | 136,135 | 107,403 | 304,173 | 236,615 | 109 | 136 | 357 | 304 | ||||||||||||||||||||||||
| Franchise income | 116,179 | 85,666 | 314,603 | 183,864 | 116 | 116 | 1,013 | 315 | ||||||||||||||||||||||||
| Total revenue | 6,358,575 | 4,702,151 | 15,907,096 | 14,301,859 | 5,401 | 5,879 | 16,627 | 15,907 | ||||||||||||||||||||||||
| Expenses: | ||||||||||||||||||||||||||||||||
| Restaurant cost of sales | 2,031,666 | 1,498,922 | 4,782,780 | 4,458,983 | 1,675 | 1,850 | 4,868 | 4,783 | ||||||||||||||||||||||||
| Restaurant operating expenses | 3,674,755 | 3,448,843 | 10,100,284 | 10,322,644 | 4,162 | 3,400 | 11,320 | 10,100 | ||||||||||||||||||||||||
| Restaurant pre-opening and closing expenses | — | — | — | 20,730 | ||||||||||||||||||||||||||||
| General and administrative expenses | 1,394,766 | 1,255,918 | 3,755,866 | 3,891,739 | 1,206 | 1,381 | 4,348 | 3,756 | ||||||||||||||||||||||||
| Asset impairment charge | — | 1,136,129 | 1,287,579 | 1,288,599 | ||||||||||||||||||||||||||||
| Asset impairment charges | — | — | — | 1,288 | ||||||||||||||||||||||||||||
| Depreciation and amortization | 350,599 | 277,999 | 1,080,604 | 1,109,608 | 170 | 214 | 593 | 673 | ||||||||||||||||||||||||
| Employee retention credit/other grant income | (1,229,831 | ) | — | (2,703,186 | ) | — | ||||||||||||||||||||||||||
| Employee retention credit and other grant income | (373 | ) | (1,232 | ) | (2,208 | ) | (2,705 | ) | ||||||||||||||||||||||||
| Total expenses | 6,221,955 | 7,617,811 | 18,303,927 | 21,092,303 | 6,840 | 5,613 | 18,921 | 17,895 | ||||||||||||||||||||||||
| Operating income (loss) | 136,620 | (2,915,660 | ) | (2,396,831 | ) | (6,790,444 | ) | |||||||||||||||||||||||||
| Operating (loss) income | (1,439 | ) | 266 | (2,294 | ) | (1,988 | ) | |||||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||||||||
| Interest expense | (165,775 | ) | (177,420 | ) | (481,706 | ) | (499,870 | ) | (230 | ) | (166 | ) | (641 | ) | (482 | ) | ||||||||||||||||
| Change in fair value of derivative liabilities | — | (5,841,517 | ) | 118,664 | 300,000 | — | — | — | 119 | |||||||||||||||||||||||
| Change in the fair value of investment | (100,422 | ) | (199,154 | ) | (220,882 | ) | (1,152,185 | ) | ||||||||||||||||||||||||
| Debt extinguishment expense | — | — | — | (11,808,111 | ) | |||||||||||||||||||||||||||
| Other income (expense) | 18,203 | (25,404 | ) | 164,761 | 150,904 | |||||||||||||||||||||||||||
| Gain on extinguished lease liabilities | 66,821 | — | 385,340 | — | ||||||||||||||||||||||||||||
| Total other income (expense) | (181,173 | ) | (6,243,497 | ) | (33,823 | ) | (13,009,262 | ) | ||||||||||||||||||||||||
| Net loss before income taxes | (44,553 | ) | (9,159,155 | ) | (2,430,654 | ) | (19,799,706 | ) | ||||||||||||||||||||||||
| Change in fair value of investment | (22 | ) | (100 | ) | (38 | ) | (221 | ) | ||||||||||||||||||||||||
| Change in fair value of convertible promissory note | 35 | — | 206 | — | ||||||||||||||||||||||||||||
| Gain on extinguished/settled lease liabilities | — | 67 | 256 | 385 | ||||||||||||||||||||||||||||
| Gain on extinguished trade payable | — | — | 161 | — | ||||||||||||||||||||||||||||
| Other income | 33 | (9 | ) | 344 | 165 | |||||||||||||||||||||||||||
| Total other income | (184 | ) | (208 | ) | 288 | (34 | ) | |||||||||||||||||||||||||
| (Loss) income before income taxes | (1,623 | ) | 58 | (2,006 | ) | (2,022 | ) | |||||||||||||||||||||||||
| Income tax expense | (44,637 | ) | (28,473 | ) | (44,637 | ) | (32,149 | ) | — | (45 | ) | (2 | ) | (45 | ) | |||||||||||||||||
| Consolidated net loss | (89,190 | ) | (9,187,628 | ) | (2,475,291 | ) | (19,831,855 | ) | ||||||||||||||||||||||||
| Less: Net loss (income) attributable to non-controlling interests | (5,047 | ) | 401,529 | 99,354 | 287,840 | |||||||||||||||||||||||||||
| Net loss attributable to Amergent Hospitality Group Inc. | (94,237 | ) | (8,786,099 | ) | (2,375,937 | ) | (19,544,015 | ) | ||||||||||||||||||||||||
| Dividends on redeemable preferred stock | — | — | — | (28,219 | ) | |||||||||||||||||||||||||||
| Net loss attributable to common shareholders of Amergent Hospitality Group Inc. | $ | (94,237 | ) | $ | (8,786,099 | ) | $ | (2,375,937 | ) | $ | (19,572,234 | ) | ||||||||||||||||||||
| Consolidated net (loss) income | (1,623 | ) | 13 | (2,008 | ) | (2,067 | ) | |||||||||||||||||||||||||
| Net loss attributable to Amergent Hospitality Group, Inc. per common share, basic: | $ | (0.01 | ) | $ | (0.62 | ) | $ | (0.16 | ) | $ | (1.45 | ) | ||||||||||||||||||||
| Net loss attributable to Amergent Hospitality Group, Inc. per common share, diluted: | $ | (0.01 | ) | $ | (0.62 | ) | $ | (0.16 | ) | $ | (1.45 | ) | ||||||||||||||||||||
| Less: Net (income) loss attributable to non-controlling interests | 150 | (5 | ) | 107 | 99 | |||||||||||||||||||||||||||
| Net (loss) income attributable to Amergent Hospitality Group Inc. | $ | (1,473 | ) | $ | 8 | $ | (1,901 | ) | $ | (1,968 | ) | |||||||||||||||||||||
| Net (loss) income attributable to Amergent Hospitality Group Inc. per common share, basic | $ | (0.09 | ) | $ | 0.00 | $ | (0.12 | ) | $ | (0.13 | ) | |||||||||||||||||||||
| Net (loss) income attributable to Amergent Hospitality Group Inc. per common share, diluted | $ | (0.09 | ) | $ | 0.00 | $ | (0.12 | ) | $ | (0.13 | ) | |||||||||||||||||||||
| Weighted average shares outstanding, basic | 15,685,540 | 14,282,736 | 15,167,688 | 13,516,339 | 15,706,736 | 15,685,540 | 15,706,736 | 15,167,688 | ||||||||||||||||||||||||
| Weighted average shares outstanding, diluted | 15,685,540 | 14,282,736 | 15,167,688 | 13,516,339 | 15,706,736 | 17,685,540 | 15,706,736 | 15,167,688 | ||||||||||||||||||||||||
See accompanying notes to the condensed consolidated and combined financial statements
| 6 |
Amergent Hospitality Group IncInc. and Subsidiaries
Condensed Consolidated and Combined Statements of Comprehensive Loss (Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| (Restated) | (Restated) | |||||||||||||||
| Net loss attributable to Amergent Hospitality Group | $ | (94,237 | ) | $ | (8,786,099 | ) | $ | (2,375,937 | ) | $ | (19,544,015 | ) | ||||
| Foreign currency translation gain/(loss) | (34,479 | ) | 50,344 | (18,885 | ) | (37,266 | ) | |||||||||
| Comprehensive loss | $ | (128,716 | ) | $ | (8,735,755 | ) | $ | (2,394,822 | ) | $ | (19,581,281 | ) | ||||
| Three months ended | Nine months ended | |||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
| (in thousands) | (Restated) | (Restated) | ||||||||||||||
| Net (loss) income attributable to Amergent Hospitality Group Inc. | $ | (1,473 | ) | $ | 8 | $ | (1,901 | ) | $ | (1,968 | ) | |||||
| Foreign currency translation loss | — | (34 | ) | — | (19 | ) | ||||||||||
| Comprehensive loss | $ | (1,473 | ) | $ | (26 | ) | $ | (1,901 | ) | $ | (1,987 | ) | ||||
See accompanying notes to the condensed consolidated and combined financial statements
| 7 |
Amergent Hospitality Group IncInc. and Subsidiaries
Condensed Consolidated and Combined Statements of Convertible Preferred Stock and Stockholders’ Deficit
Three and Nine Monthsmonths Ended September 30, 2022 and 2021 (Unaudited)
(Temporary equity) Preferred Series 2 | Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | Non- Controlling | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Income (Loss) | Interest | Total | ||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 787 | $ | 459,608 | 14,282,736 | $ | 1,428 | $ | 92,433,344 | $ | (94,587,482 | ) | $ | (25,916 | ) | $ | (969,680 | ) | $ | (3,148,306 | ) | ||||||||||||||||
| Conversion of preferred stock into common | (125 | ) | (73,000 | ) | 250,000 | 25 | 72,975 | — | — | — | 73,000 | |||||||||||||||||||||||||
| Issuance of common stock for services | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock for services, shares | ||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | ||||||||||||||||||||||||||||||||||||
| Non-controlling interest distributions | ||||||||||||||||||||||||||||||||||||
| Preferred unit dividend | ||||||||||||||||||||||||||||||||||||
| Preferred unit dividend, shares | ||||||||||||||||||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||||||||||||||
| Exercise of warrants, shares | ||||||||||||||||||||||||||||||||||||
| Preferred Shares - Series 2 | ||||||||||||||||||||||||||||||||||||
| Issuance of shares, net of transaction costs of $95,000 | ||||||||||||||||||||||||||||||||||||
| Issuance of shares, net of transaction costs of $95,000, shares | ||||||||||||||||||||||||||||||||||||
| Bifurcation of derivative liability | ||||||||||||||||||||||||||||||||||||
| Beneficial conversion feature | ||||||||||||||||||||||||||||||||||||
| Preferred stock deemed dividend | ||||||||||||||||||||||||||||||||||||
| Conversion of Series 2 preferred to common | ||||||||||||||||||||||||||||||||||||
| Conversion of Series 2 preferred to common, shares | ||||||||||||||||||||||||||||||||||||
| Reclassification of non-controlling interest | ||||||||||||||||||||||||||||||||||||
| Cash contribution of merger consideration, net transaction costs of $588,255 | ||||||||||||||||||||||||||||||||||||
| Contribution of warrant portion of merger consideration | ||||||||||||||||||||||||||||||||||||
| Warrants issued for extension of the make-whole provision | ||||||||||||||||||||||||||||||||||||
| Reclassification of warrants and conversion feature | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | 8,792 | — | 8,792 | |||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (2,548,427 | ) | — | (164,285 | ) | (2,712,712 | ) | ||||||||||||||||||||||||
| Balance, March 31, 2021 | 662 | $ | 386,608 | 14,532,736 | $ | 1,453 | $ | 92,506,319 | $ | (97,135,909 | ) | $ | (17,124 | ) | $ | (1,133,965 | ) | $ | (5,779,226 | ) | ||||||||||||||||
| Conversion of preferred stock into common | (562 | ) | (328,208 | ) | 1,124,000 | 112 | 328,096 | — | — | — | 328,208 | |||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | 6,802 | — | 6,802 | |||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | 266,727 | — | 59,884 | 326,611 | |||||||||||||||||||||||||||
| Balance, June 30, 2021 | 100 | $ | 58,400 | 15,656,736 | $ | 1,565 | $ | 92,834,415 | $ | (96,869,182 | ) | $ | (10,322 | ) | $ | (1,074,081 | ) | $ | (5,117,605 | ) | ||||||||||||||||
| Issuance of common stock for services | — | — | 50,000 | 5 | 26,995 | — | — | — | 27,000 | |||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | 15,365 | — | — | — | 15,365 | |||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | (34,479 | ) | — | (34,479 | ) | |||||||||||||||||||||||||
| Non-controlling interest distributions | — | — | — | — | — | — | — | (44,894 | ) | (44,894 | ) | |||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | (94,237 | ) | — | 5,047 | (89,190 | ) | |||||||||||||||||||||||||
| Balance, September 30, 2021 | 100 | $ | 58,400 | 15,706,736 | $ | 1,570 | $ | 92,876,775 | $ | (96,963,419 | ) | $ | (44,801 | ) | $ | (1,113,928 | ) | $ | (5,243,803 | ) | ||||||||||||||||
| (Temporary equity) Convertible Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | Non-Controlling | |||||||||||||||||||||||||||||||
| (in thousands except share data) | Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Interests | Total | |||||||||||||||||||||||||||
| Balance, January 1, 2022 | 100 | $ | 58 | 15,706,736 | $ | 2 | $ | 92,882 | $ | (97,963 | ) | $ | — | $ | (1,157 | ) | $ | (6,236 | ) | |||||||||||||||||
| Share-based compensation expense | — | — | — | — | 6 | — | — | — | 6 | |||||||||||||||||||||||||||
| Issuance of warrants | — | — | — | — | 263 | — | — | — | 263 | |||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (27 | ) | — | (1 | ) | (28 | ) | ||||||||||||||||||||||||
| Balance, March 31, 2022 | 100 | 58 | 15,706,736 | 2 | 93,151 | (97,990 | ) | $ | — | (1,158 | ) | (5,995 | ) | |||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | 5 | — | — | — | 5 | |||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (402 | ) | — | 45 | (357 | ) | |||||||||||||||||||||||||
| Balance, June 30, 2022 | 100 | $ | 58 | 15,706,736 | $ | 2 | $ | 93,156 | $ | (98,392 | ) | $ | — | $ | (1,113 | ) | $ | (6,347 | ) | |||||||||||||||||
| Share-based compensation expense | — | — | — | — | 6 | — | — | — | 6 | |||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (1,473 | ) | — | (150 | ) | (1,623 | ) | ||||||||||||||||||||||||
| Balance, September 30, 2022 | 100 | $ | 58 | 15,706,736 | $ | 2 | $ | 93,162 | $ | (99,865 | ) | $ | — | $ | (1,263 | ) | $ | (7,964 | ) | |||||||||||||||||
| (Temporary equity) Convertible Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | Non- Controlling | |||||||||||||||||||||||||||||||
| (in thousands except share data, restated) | Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Interests | Total | |||||||||||||||||||||||||||
| Balance, January 1, 2021 | 787 | $ | 460 | 14,282,736 | $ | 1 | $ | 92,433 | $ | (94,587 | ) | $ | (26 | ) | $ | (970 | ) | $ | (3,149 | ) | ||||||||||||||||
| Conversion of preferred stock into common stock | (125 | ) | (73 | ) | 250,000 | — | 73 | — | — | — | 73 | |||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | 9 | — | 9 | |||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (2,412 | ) | — | (165 | ) | (2,577 | ) | ||||||||||||||||||||||||
| Balance, March 31, 2021 | 662 | 387 | 14,532,736 | 1 | 92,506 | (96,999 | ) | (17 | ) | (1,135 | ) | (5,644 | ) | |||||||||||||||||||||||
| Conversion of preferred stock into common stock | (562 | ) | (329 | ) | 1,124,000 | 1 | 328 | — | — | — | 329 | |||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | 7 | — | 7 | |||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 437 | — | 60 | 497 | |||||||||||||||||||||||||||
| Balance, June 30, 2021 | 100 | $ | 58 | 15,656,736 | $ | 2 | $ | 92,834 | $ | (96,562 | ) | $ | (10 | ) | $ | (1,075 | ) | $ | (4,811 | ) | ||||||||||||||||
| Issuance of common stock for services | — | — | 50,000 | — | 27 | — | — | — | 27 | |||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | 15 | — | — | — | 15 | |||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | (34 | ) | — | (34 | ) | |||||||||||||||||||||||||
| Non-controlling interest distributions | — | — | — | — | — | — | — | (45 | ) | (45 | ) | |||||||||||||||||||||||||
| Net-income (loss) | — | — | — | — | — | 8 | 5 | 13 | ||||||||||||||||||||||||||||
| Balance, September 30, 2021 | 100 | $ | 58 | 15,706,736 | $ | 2 | $ | 92,876 | $ | (96,554 | ) | $ | (44 | ) | $ | (1,115 | ) | $ | (4,835 | ) | ||||||||||||||||
See accompanying notes to the condensed consolidated and combined financial statements
| 8 |
Amergent Hospitality Group IncInc. and Subsidiaries
Condensed Consolidated and Combined Statements of Stockholders’ Deficit
Three and Nine Months Ended September 30, 2020Cash Flows (Unaudited)
(Temporary equity) Preferred Series 2 | Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | Non- Controlling | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Interest | Total | ||||||||||||||||||||||||||||
| Balance, December 31, 2019 | — | $ | — | 10,404,342 | $ | 1,041 | $ | 71,505,989 | $ | (75,068,385 | ) | $ | (46,437 | ) | $ | 455,781 | $ | (3,152,011 | ) | |||||||||||||||||
| Common stock and warrants issued for: | ||||||||||||||||||||||||||||||||||||
| Preferred unit dividend | — | — | 37,518 | 4 | 19,519 | (28,219 | ) | — | — | (8,696 | ) | |||||||||||||||||||||||||
| Exercise of warrants | — | — | 2,414,022 | 246 | 1,528,867 | (325,366 | ) | — | — | 1,203,747 | ||||||||||||||||||||||||||
| Preferred Shares - Series 2 | ||||||||||||||||||||||||||||||||||||
| Issuance of shares, net of transaction costs of $95,000 | 1,500 | 1,405,000 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Bifurcation of derivative liability | — | (529,000 | ) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Beneficial conversion feature | — | (729,000 | ) | — | — | 729,000 | — | — | — | 729,000 | ||||||||||||||||||||||||||
| Preferred stock deemed dividend | — | 729,000 | — | — | (729,000 | ) | — | — | — | (729,000 | ) | |||||||||||||||||||||||||
| Conversion of Series 2 preferred to common | (713 | ) | (416,392 | ) | 1,426,854 | 143 | 416,249 | — | — | — | 416,392 | |||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | (81,069 | ) | — | (81,069 | ) | |||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (1,771,614 | ) | — | 203,405 | (1,568,209 | ) | |||||||||||||||||||||||||
| Balance, March 31, 2020 | 787 | $ | 459,608 | 14,282,736 | $ | 1,434 | $ | 73,470,624 | $ | (77,193,584 | ) | $ | (127,506 | ) | $ | 659,186 | $ | (3,189,846 | ) | |||||||||||||||||
| Reclassification of non-controlling interest | — | — | — | — | — | 805,909 | — | (805,909 | ) | — | ||||||||||||||||||||||||||
| Cash contribution of merger consideration, net transaction costs of $588,255 | — | — | — | — | 5,411,745 | — | — | — | 5,411,745 | |||||||||||||||||||||||||||
| Contribution of warrant portion of merger consideration | — | — | — | — | 1,628,909 | — | — | — | 1,628,909 | |||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | (6,541 | ) | — | (6,541 | ) | |||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (8,986,302 | ) | — | (89,716 | ) | (9,076,018 | ) | ||||||||||||||||||||||||
| Balance, June 30, 2020 | 787 | $ | 459,608 | 14,282,736 | $ | 1,434 | $ | 80,511,278 | $ | (85,373,977 | ) | $ | (134,047 | ) | $ | (236,439 | ) | $ | (5,231,751 | ) | ||||||||||||||||
| Warrants issued for extension of the make-whole provision | — | — | — | — | 28,060 | — | — | — | 28,060 | |||||||||||||||||||||||||||
| Reclassification of warrants and conversion feature | — | — | — | — | 11,894,000 | — | — | — | 11,894,000 | |||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | 50,344 | — | 50,344 | |||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (8,786,099 | ) | — | (401,529 | ) | (9,187,628 | ) | ||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | (8,786,099 | ) | — | (401,529 | ) | (9,187,628 | ) | ||||||||||||||||||||||||
| Balance, September 30, 2020 | 787 | $ | 459,608 | 14,282,736 | $ | 1,434 | $ | 92,433,338 | $ | (94,160,076 | ) | $ | (83,703 | ) | $ | (637,968 | ) | (2,446,975 | ) | |||||||||||||||||
| Nine months ended | ||||||||
| September 30, 2022 | September 30, 2021 | |||||||
| (in thousands) | (Restated) | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (2,008 | ) | $ | (2,067 | ) | ||
| Adjustments to reconcile net loss to net cash flows used in operating activities: | ||||||||
| Depreciation and amortization | 593 | 673 | ||||||
| Amortization of operating lease assets | 994 | 468 | ||||||
| Asset impairment charges | — | 1,288 | ||||||
| Gain on extinguished/settled lease liabilities | (256 | ) | (385 | ) | ||||
| Gain on extinguished trade payable | (161 | ) | — | |||||
| Share-based compensation | 17 | 15 | ||||||
| Change in fair value of investment | 38 | 221 | ||||||
| Change in fair value of convertible promissory note | (206 | ) | — | |||||
| Amortization of debt discount | 245 | 134 | ||||||
| Issuance of common stock for services | — | 27 | ||||||
| Change in fair value of derivative liabilities | — | (119 | ) | |||||
| Change in operating assets and liabilities: | ||||||||
| Accounts and other receivables | 4 | 255 | ||||||
| Inventories | (23 | ) | 38 | |||||
| Prepaid expenses and other assets | (15 | ) | (4 | ) | ||||
| Accounts payable and accrued expenses | 1,334 | (2,283 | ) | |||||
| Deferred grant income | (1,545 | ) | (51 | ) | ||||
| Deferred rent | — | (42 | ) | |||||
| Derivative liability | — | (66 | ) | |||||
| Operating lease liabilities | (1,557 | ) | (861 | ) | ||||
| Contract liabilities | (685 | ) | (54 | ) | ||||
| Net cash flows used in operating activities | (3,231 | ) | (2,814 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Cash and restricted acquired in connection with acquisition of PizzaRev | — | 2,071 | ||||||
| Purchase of property and equipment | (230 | ) | (32 | ) | ||||
| Proceeds from sale of investments | — | 118 | ||||||
| Net cash flows used in investing activities | (230 | ) | 2,157 | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from long-term debt and notes payable | 2,147 | 2,000 | ||||||
| Payments of long-term debt and notes payable | (292 | ) | (54 | ) | ||||
| Payment of financing cost | (8 | ) | — | |||||
| Distribution to non-controlling interest | (45 | ) | ||||||
| Net cash flows provided by financing activities | 1,847 | 1,901 | ||||||
| Effect of exchange rate changes on cash | — | (13 | ) | |||||
| Net (decrease) increase in cash and restricted cash, including cash classified as current assets held for sale | (1,614 | ) | 1,231 | |||||
| Less: cash classified in current assets held for sale | — | (111 | ) | |||||
| Net increase in cash and restricted cash | (1,614 | ) | 1,121 | |||||
| Cash and restricted cash, beginning of period | 2,318 | 1,929 | ||||||
| Cash and restricted cash, end of period | $ | 704 | $ | 3,050 | ||||
| Supplemental cash flow information: | ||||||||
| Cash paid for interest and income taxes | ||||||||
| Interest | $ | 494 | $ | 321 | ||||
| Income taxes | $ | 28 | $ | — | ||||
| Non-cash operating, investing and financing activities: | ||||||||
| Conversion of Preferred Series 2 stock to common stock | $ | — | $ | 401 | ||||
| Change in operating lease assets and liabilities due to amended leases | $ | 607 | $ | — | ||||
| Issuance of warrants in connection with convertible promissory notes | $ | 263 | $ | — | ||||
| Purchases of property and equipment included in accounts payable and accrued expenses | $ | 273 | $ | — | ||||
| Issuance of convertible promissory note as part of PizzaRev acquisition | — | 1,194 | ||||||
| Initial value of ROU asset and liability recorded at inception | — | 131 | ||||||
| Details of end of period cash and restricted cash: | ||||||||
| Cash | $ | 704 | $ | 1,101 | ||||
| Restricted cash | — | 1,949 | ||||||
| Total cash and restricted cash | $ | 704 | $ | 3,050 | ||||
See accompanying notes to the condensed consolidated and combined financial statements
| 9 |
Amergent Hospitality Group Inc and Subsidiaries
Condensed Consolidated and Combined Statements of Cash Flows (Unaudited)
| Nine months ended | ||||||||
| September 30, 2021 | September 30, 2020 | |||||||
| (Restated) | ||||||||
| Net loss | $ | (2,475,291 | ) | $ | (19,831,855 | ) | ||
| Cash flows from operating activities: | ||||||||
| Adjustments to reconcile net loss to net cash flows from operations | ||||||||
| Depreciation and amortization | 1,080,604 | 1,109,608 | ||||||
| Amortization of operating lease assets | 467,916 | 1,206,985 | ||||||
| Asset impairment charges | 1,287,579 | 1,288,599 | ||||||
| Warrants issued from extension of True-Up Payment | — | 28,060 | ||||||
| Gain from extinguished lease liabilities | (385,340 | ) | — | |||||
| Loss on change in fair value of investments | 220,882 | 1,152,185 | ||||||
| Amortization of debt discount | 134,394 | 89,472 | ||||||
| Loss on extinguishment of Series 1 Preferred | — | 161,899 | ||||||
| Loss on debt extinguishment | — | 11,808,111 | ||||||
| Issuance of common stock for services | 27,000 | — | ||||||
| Share-based compensation | 15,365 | — | ||||||
| Derivative liabilities revaluation | (118,664 | ) | (300,000 | ) | ||||
| Change in assets and liabilities | ||||||||
| Accounts and other receivables | 254,811 | 149,288 | ||||||
| Prepaid expenses and other assets | 37,901 | (232,878 | ) | |||||
| Inventories | (4,460 | ) | 58,791 | |||||
| Accounts payable and accrued expenses | (2,283,232 | ) | (26,761 | ) | ||||
| Deferred grant income | (51,187 | ) | — | |||||
| Operating lease liabilities | (860,984 | ) | (1,482,421 | ) | ||||
| Derivative liability | (66,136 | ) | — | |||||
| Deferred rent | (41,587 | ) | — | |||||
| Deferred revenue | (53,569 | ) | (71,644 | ) | ||||
| Net cash flows from operating activities | (2,813,998 | ) | (4,892,561 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Cash and restricted cash acquired in connection with acquisition | 2,071,000 | — | ||||||
| Purchase of property and equipment | (32,141 | ) | (29,821 | ) | ||||
| Proceeds from sale of investments | 118,416 | — | ||||||
| Net cash flows provided by (used in) investing activities | 2,157,275 | (29,821 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Loan proceeds | 2,000,000 | 2,989,350 | ||||||
| Loan repayments | (53,949 | ) | (2,563,346 | ) | ||||
| Distributions to non-controlling interest | (44,894 | ) | — | |||||
| Proceeds from Series 2 Preferred | — | 1,405,000 | ||||||
| Proceeds from warrant exercises | — | 885,046 | ||||||
| Redemption of Series 1 Preferred | — | (880,289 | ) | |||||
| Merger consideration, net | — | 5,411,745 | ||||||
| Net cash flows provided by financing activities | 1,901,157 | 7,247,506 | ||||||
| Effect of exchange rate of on cash | (12,615 | ) | (14,496 | ) | ||||
| Net increase in cash and restricted cash, including cash classified in current assets held for sale | 1,231,819 | 2,310,628 | ||||||
| Less: cash classified in current assets held for sale | (110,891 | ) | — | |||||
| Net increase in cash and restricted cash | 1,120,928 | 2,310,628 | ||||||
| Cash and restricted cash, beginning of period | 1,928,804 | 501,017 | ||||||
| Cash and restricted cash, end of period | $ | 3,049,732 | $ | 2,811,645 | ||||
| Supplemental cash flow information: | ||||||||
| Cash paid for interest and income taxes | ||||||||
| Interest | $ | 320,794 | $ | 222,173 | ||||
| Income taxes | $ | — | $ | — | ||||
| Non-cash investing and financing activities | ||||||||
| Conversion of Preferred stock - Series 2 to common stock | $ | 401,208 | $ | 416,392 | ||||
| Issuance of convertible promissory note as part of acquisition | $ | 1,194,000 | $ | — | ||||
| Initial value of ROU asset and liability recorded for new lease | $ | 130,775 | $ | — | ||||
| Preferred stock dividends paid through issuance of common stock | $ | — | $ | 19,523 | ||||
| Accrued interest paid through warrant exercise | $ | — | $ | 318,700 | ||||
| Bifurcation of derivative liability from Preferred Stock - Series 2 | $ | — | $ | 529,000 | ||||
| Warrant portion of merger consideration | $ | — | $ | 1,628,909 | ||||
| Equity classification of Oz Rey warrants and conversion feature | $ | — | $ | 11,894,000 | ||||
See accompanying notes to the condensed consolidated and combined financial statements
Amergent Hospitality Group, IncInc. and Subsidiaries
Notes to the Condensed Consolidated and Combined Financial Statements (Unaudited)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
BASIS OF PRESENTATIONNature of Business
Amergent Hospitality Group Inc. (“Amergent”) was incorporated on February 18, 2020 as a wholly-ownedwholly owned subsidiary of Chanticleer Holdings, Inc. (“Chanticleer”) for the purpose of conducting the business of Chanticleer and its subsidiaries after completion of the Spin-Offspin-off of Amergent to the shareholders of Chanticleer (Spin-Off”). The Spin-Off transaction was completed on April 1, 2020 in connection with theChanticleer’s completion of its merger transaction (the “Merger”) of Chanticleer with Sonnet BioTherapeutics, Inc. (“Sonnet”) on that date.. Amergent is in the business of owning, operating and franchising fast casual dining concepts domestically and internationally.concepts.
On March 31, 2020, Chanticleer contributed all its assets and liabilities, including the stock interest in all its subsidiaries (other than Amergent), to Amergent. Based on this being a transaction between entities under common control the carryover basisBasis of accounting was used to record the assets and liabilities contributed to Amergent. Further, as a common control transaction the condensed consolidated and combined financial statements of Amergent reflect the transaction as if the contribution had occurred as of the earliest period presented herein.Presentation
As such, theThe accompanying condensed consolidated and combined financial statements include the accounts of Amergent and its subsidiaries along with Chanticleer and its subsidiaries (collectively “we,” “us,” “our,” or the “Company”). All intercompany and inter-entity balances have been eliminated in consolidationconsolidation.
The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles of the United States (“U.S. GAAP”). Any reference in these notes to applicable guidance is meant to refer to U.S. GAAP as found in the Accounting Standards Codification (“ASC”) and combination.Accounting Standards Updates (“ASU”) promulgated by the Financial Accounting Standards Board (“FASB”).
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include the valuation of options, warrants and convertible notes payable using Black-Scholes and Monte Carlo models, and analysis of the recoverability of goodwill and long-lived assets. Actual results could differ from those estimates, particularly given the significant social and economic disruptions and uncertainties associated with the ongoing COVID-19 pandemic and the COVID-19 control responses.
Certain prior year amounts have been updated to conform to the current period presentation, (see Note 14). The Company has opted to present the financial information on the condensed consolidated balance sheets and condensed consolidated statements of operations, comprehensive loss, convertible preferred stock and stockholders’ deficit and cash flows in thousands.
GENERALGeneral
The accompanying condensed consolidated and combined financial statements included in this reportReport have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting and include all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation. These condensed consolidated and combined financial statements have not been audited. The condensed consolidated and combined balance sheet as of December 31, 20202021 has been derived from the audited consolidated and combined financial statements as of December 31, 20202021 and for the year then ended included in Amergent’s annual reportAnnual Report on Form 10-K filed with the SEC on April 15, 2021.2022. The results of operations for the three and nine-month periodperiods ended September 30, 20212022 are not necessarily indicative of the operating results for the full year ending December 31, 2021.2022.
Certain information and footnote disclosures normally included in unaudited condensed consolidated and combined financial statements prepared in accordance with generally accepted accounting principles of the United States (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations for interim reporting. The Company believes that the disclosures contained herein are adequate to make the information presented not misleading. However, these financial statements should be read in conjunction with the audited consolidated and combined financial statements and notes thereto included in Amergent’s Annual Report on Form 10-K for the year ended December 31, 20202021 (“2021 Form 10-K”) previously filed with the SEC.
There have been no changes to our significant accounting policies described in our 2021 Form 10-K that would have had a significant impact on these unaudited condensed consolidated financial statements and related notes.
LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN
| 10 |
Liquidity, Capital Resources and Going Concern
As of September 30, 2021,2022, the Company’s cash balance was $3.00.7 million, of which $1.9 million was restricted cash, its working capital deficiency was $16.013.7 million, and it had significant near-term commitments and contractual obligations. The level of additional cash needed to fund operations and our ability to conduct business for the next 12 months will be influenced primarily by the following factors:
| ● | our | |
| ● | our ability to qualify for and | |
| ● | our ability to refinance or otherwise extend maturities of current debt obligations; | |
| ● | our ability to manage our operating expenses and maintain gross margins; | |
| ● | popularity of and demand for our fast-casual dining concepts; and | |
| ● | general economic conditions and changes in consumer discretionary income. |
We have typically funded our operating costs, acquisition activities, working capital requirements and capital expenditures with proceeds from the issuances of our common stock government tax credits and other financing arrangements, including convertible debt, lines of credit, notes payable, capital leases, government stimulus funds and other forms of external financing.
The Company plansexpects to have to seek additional capital in the future throughdebt or equity and/or debt financings or other sources in orderfunding to sustain operations. We may seek to work with vendorssupport operations and suppliers on payment plans, settle certain obligationsthere can be no assurances that such funding would be available at a discount, seek forgiveness of Paycheck Protection Program loans and look for other government stimulus programs. Additionally, the Company has significant debt due withincommercially reasonable terms, if at all.
As Amergent executes its business plan over the next twelve12 months, that will needit intends to be refinanced and/or settled.carefully monitor its working capital needs and cash balances relative to the availability of cost-effective debt and equity financing. In the event that capital is not available, Amergent may then have to scale back or freeze its growth plans, sell assets on less than favorable terms, reduce expenses, and/or curtail future acquisition plans to manage its liquidity and capital resources.
| 11 |
On March 10, 2020, the World Health Organization characterized the novel COVID-19 virus as a global pandemic. The COVID-19 outbreak in the United States has resulted in a significant impact throughout the hospitality industry that have continued through September 30, 2021. The Company has been impacted due to restrictions placed by state and local governments that caused temporary restaurant closures or significantly reduced the Company’s ability to operate. It is difficult to estimate the length or severity of this outbreak; however, the Company has made operational changes, as needed, to reduce the impact.
The Company’s history ofcurrent operating losses, combined with its working capital deficit, which includes substantial near term debt repayment obligations and uncertainties regarding the impact of COVID-19, raise substantial doubt about ourits ability to continue as a going concern.
The accompanying condensed consolidated and combined financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
2. SIGNIFICANTRECENTLY ISSUED ACCOUNTING POLICIESPRONOUNCEMENTS
There have been no changes to our significant accounting policies described in the annual report for the year ended December 31, 2020 filed with the SEC on April 15, 2021, that would have had a significant impact on these unaudited condensed consolidated and combined financial statements and related notes.
BASIS OF PRESENTATION
The accompanying condensed consolidated and combined financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Any reference in these notes to applicable guidance is meant to refer to U.S. GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) promulgated by the Financial Accounting Standards Board (“FASB”).
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include analysis of the recoverability of goodwill and long-lived assets. Actual results could differ from those estimates, particularly given the significant social and economic disruptions and uncertainties associated with the ongoing COVID-19 pandemic and the COVID-19 control responses.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures and records certain financial assets and liabilities at fair value on a recurring basis. U.S. GAAP provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority, referred to as Level 1, to quoted prices in active markets for identical assets and liabilities. The next priority, referred to as Level 2, is given to quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are not active; that is, markets in which there are few transactions for the asset or liability. The lowest priority, referred to as Level 3, is given to unobservable inputs. The table below reflects the level of the inputs used in the Company’s fair value calculations:
SCHEDULE OF FAIR VALUE MEASUREMENTS, RECURRING AND NONRECURRING
Quoted Prices in Active Markets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value | |||||||||||||
| September 30, 2021 | ||||||||||||||||
| Assets (Note 4) | ||||||||||||||||
| Common stock of Sonnet | $ | 73,970 | — | $ | — | $ | 73,970 | |||||||||
Quoted Prices in Active Markets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value | |||||||||||||
| December 31, 2020 | ||||||||||||||||
| Assets (Note 4) | ||||||||||||||||
| Common stock of Sonnet | $ | 413,268 | — | $ | — | $ | 413,268 | |||||||||
| Liabilities (Note 10) | ||||||||||||||||
| True-up provision of Convertible Preferred Series 2 | $ | — | $ | — | $ | 184,800 | $ | 184,800 | ||||||||
Inputs used in the Company’s Level 3 calculation of fair value related to the true-up provision of convertible preferred Series 2 are discussed in Note 11.
The Company is required to disclose fair value information about financial instruments when it is practicable to estimate that value. The carrying amounts of the Company’s cash, accounts receivable, other receivables, accounts payable, other current liabilities and notes payable approximate fair value due to the short-term maturities of these financial instruments and/or because related interest rates offered to the Company approximate current rates.
CASH
Cash consists of deposits held at financial institutions and is stated at fair value. The Company limits its credit risk associated with cash by maintaining its bank accounts at major financial institutions.
RESTRICTED CASH
As of September 30, 2021 and December 31, 2020, the Company maintained restricted cash of $1,936,972 and $1,250,336, respectively. The restricted cash is maintained in a segregated bank account. The restrictions on the restricted cash at December 31, 2020 have lapsed (see Note 9) and the restricted cash at September 30, 2021 relates to the acquisition discussed in Note 3.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation. Depreciation and amortization, which includes amortization of assets held under capital leases, are recorded generally using the straight-line method over the estimated useful lives of the respective assets or, if shorter, the term of the lease for certain assets held under a capital lease. Leasehold improvements are amortized over the lesser of the expected lease term or the estimated useful lives of the related assets using the straight-line method. Maintenance and repairs that do not improve or extend the useful lives of the assets are not considered assets and are charged to expense when incurred.
The estimated useful lives used to compute depreciation and amortization are as follows:
SCHEDULE OF PROPERTY AND EQUIPMENT USEFUL LIVES
INTANGIBLE ASSETS
Trade Name/Trademark
The fair value of trade name/trademarks are estimated and compared to the carrying value. The Company estimates the fair value of trademarks using the relief-from-royalty method, which requires assumptions related to projected sales from its annual long-range plan; assumed royalty rates that could be payable if the Company did not own the trademarks; and a discount rate. Certain of the Company’s trade name/trademarks have been determined to have a definite-lived life and are being amortized on a straight-line basis over estimated useful lives of 10 years. The amortization expense of these definite-lived intangibles is included in depreciation and amortization in the Company’s condensed consolidated and combined statements of operations and comprehensive income (loss). Certain of the Company’s trade name/trademarks have been classified as indefinite-lived intangible assets and are not amortized, but instead are reviewed for impairment at least annually or more frequently if indicators of impairment exist.
LONG-LIVED ASSETS
Long-lived assets, such as property and equipment, operating lease assets, and purchased intangible assets subject to depreciation and amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Some of the events or changes in circumstances that would trigger an impairment test include, but are not limited to:
If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
During the third quarter of 2019 and continuing in 2020 and 2021, the Company determined that triggering events occurred some of which were related to the COVID-19 outbreak requiring management to review the certain long-lived assets for impairment. Due to the continued impact of this pandemic on the Company’s business, management has performed an impairment analysis of its long-lived assets at each quarter end in 2020 and through September 30, 2021 and determined that the carrying value of the Company’s trade name/trademark intangible asset, property and equipment and operating lease assets (see Notes 5, 6, and 11 for further discussion) were impaired during the nine-month period ended September 30, 2021. No impairments were recorded for the three-month period ended September 30, 2021. The determination was based on the best judgment of management for the future of the asset and on information known at the time of the assessment.
GOODWILL
Goodwill, which is not subject to amortization, is evaluated for impairment annually as of the end of the Company’s year-end, or more frequently if an event occurs or circumstances change, such as material deterioration in performance or a significant number of store closures, that would indicate an impairment may exist. Goodwill is tested for impairment at a level of reporting referred to as a reporting unit. Management determined that the Company has one reporting unit.
Due to the continued impact of the COVID-19 pandemic on the Company’s business, management has performed an impairment analysis of goodwill as of beginning in the first quarter of 2020 and quarterly thereafter through September 2021.
When evaluating goodwill for impairment, the Company may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If the Company does not perform a qualitative assessment or determines that it is not more likely than not that the fair value of the reporting unit exceeds its carrying amount, a quantitative assessment is performed to calculate the estimated fair value of the reporting unit. If the carrying amount of the reporting unit exceeds the estimated fair value, an impairment charge is recorded to reduce the carrying value to the estimated fair value. The Company’s decision to perform a qualitative impairment assessment is influenced by a number of factors, including the significance of the excess of the reporting unit’s estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments, and the price of our common stock.
Step one of the impairment test is based upon a comparison of the carrying value of net assets, including goodwill balances, to the fair value of net assets. The Company performed a quantitative assessment at September 30, 2021 and determined that goodwill was not impaired due to the excess fair value of the reporting unit over its carrying value based on the best judgement of management for the future of the reporting unit and on information known at the time of the assessment.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in local currency are translated to U.S. dollars using the exchange rates as in effect at the balance sheet date. Results of operations are translated using average exchange rates prevailing throughout the period. Adjustments resulting from the process of translating foreign currency financial statements from functional currency into U.S. dollars are included in accumulated other comprehensive loss within stockholders’ deficit. Foreign currency transaction gains and losses are included in current operating results. The Company has determined that local currency is the functional currency for its foreign operations.
LEASES
We determine if a contract contains a lease at inception. Our material operating leases consist of restaurant locations and office space. Our leases generally have remaining terms of 1-20 years and most include options to extend the leases for additional 5-year periods. Generally, the lease term is the minimum of the non-cancelable period of the lease
or the lease term inclusive of reasonably certain renewal periods up to a term of 20 years. If the estimate of our reasonably certain lease term was changed, our depreciation and rent expense could differ materially.
Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental borrowing rates corresponding to the reasonably certain lease term. We estimated this rate based on prevailing financial market conditions, comparable company and credit analysis, and management judgment. If the estimate of our incremental borrowing rate was changed, our operating lease assets and liabilities could differ materially.
EMPLOYEE RETENTION CREDIT
The Employee Retention Credit (“ERC”) under the CARES Act is a refundable tax credit which encourages businesses to keep employees on the payroll during the COVID-19 pandemic. Eligible employers can qualify for up to $7,000 of credit for each employee based on qualified wages paid after December 31, 2020 and before January 1, 2022. Qualified wages are the wages paid to an employee during an economic hardship, specifically, either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts. The Company recognized $1,178,644 and $2,651,999 of ERC as a contra-expense in the condensed consolidated and combined statements of operations for the three and nine months ended September 30, 2021, respectively.
RESTAURANT REVITALIZATION FUND
The American Rescue Plan Act established the Restaurant Revitalization Fund (RRF) to provide funding to help restaurants and other eligible businesses keep their doors open. This program will provide restaurants with funding equal to their pandemic-related revenue loss up to $10 million per business and no more than $5 million per physical location.Recipients are not required to repay the funding as long as funds are used for eligible uses no later than March 11, 2023. In 2021, and prior to the acquisition (see note 3), Pie Square Holdings, L.L.C. (Pie Squared Holdings) received a grant under the U.S. Small Business Administration’s Restaurant Revitalization Fund (RRF) for approximately $10 million. The proceeds received were mainly used to repay existing debt and to also pay operating expenses. The unused funds received under the RRF at closing of the acquisition were $2.0 million and these were placed into escrow for the benefit of the Company for working capital to be used solely in the operations of the acquired business. The Company recognized $51,187 of RRF as a contra-expense in the condensed consolidated and combined statements of operations for the three and nine months ended September 30, 2021. See additional information regarding RRF funds received in Note 3.
The Company measures and recognizes share-based compensation expense for both employee and nonemployee awards based on the grant date fair value of the awards. The Company recognizes share-based compensation expense on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. The Company recognizes forfeitures as they occur.
The Company estimates the fair value of employee and non-employee stock awards as of the date of grant using the Black-Scholes option pricing model. Management estimates the expected share price volatility based on the historical volatility of the Company. The expected term of the Company’s stock awards has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” stock awards. The risk-free interest rate is determined by reference to the yield curve of a zero-coupon U.S. Treasury bond on the date of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends on common stock and does not expect to pay any cash dividends in the foreseeable future.
INCOME TAXES
Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company has provided a valuation allowance for the full amount of the deferred tax assets in the accompanying consolidated and combined financial statements.
As of September 30, 2021 and December 31, 2020, the Company had no accrued interest or penalties relating to any income tax obligations. The Company currently has no federal or state examinations in progress, nor has it had any federal or state tax examinations since its inception. The last three years of the Company’s tax years are subject to federal and state tax examination.
The Company computes net loss per share using the weighted-average number of common shares outstanding during the period. Basic and diluted net loss per share are the same because the conversion, exercise or issuance of all potential common stock equivalents, which comprise the entire amount of the Company’s outstanding warrants, as described in Note 9, the potential conversion of the convertible debt, as described in Note 7, and the share-based awards outstanding, as described in Note 12, would be anti-dilutive.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In December 2019,May 2021, the FASB issued ASU No. 2019-12, Simplifying the2021-04, Earnings per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Income Taxes (Topic 740)Certain Modifications or Exchanges or Freestanding Equity-Classified Written Call Options. The objectivepronouncement outlines how an entity should account for modifications made to equity-classified written call options, including stock options and warrants to purchase the entity’s own common stock. The guidance in the ASU requires an entity to treat a modification of an equity classified option that does not cause the option to become liability-classified as an exchange of the standardoriginal option for a new option. This guidance applies whether the modification is to improve areas of GAAP by removing certain exceptions permitted by Accounting Standards Codification 740 and clarifying existing guidance to facilitate consistent application. The standard was effective for the Company beginning on January 1, 2021. The adoption of ASU 2019-12structured as of January 1, 2021 did not have a material impact on the condensed consolidated and combined financial statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2020, the FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other Options” to address the complexity associated with applying U.S. GAAP to certain financial instruments with characteristics of liabilities and equity. ASU 2020-06 includes amendmentsan amendment to the guidance on convertible instrumentsterms and conditions of the derivative scope exception for contracts in an entity’s own equityequity-classified written call option or as termination of the original option and simplifies the accounting for convertible instruments which include beneficial conversion features or cash conversion features by removing certain separation models in Subtopic 470-20. Additionally, ASU 2020-06 will require entities to use the “if-converted” method when calculating diluted earnings per share for convertible instruments. ASU 2020-06issuance of a new option. The guidance is effective prospectively for fiscal years beginning after December 15, 2021. The Company adopted this guidance on January 1, 2022, and it did not have a material effect on the condensed consolidated financial statements.
In November 2021, (fiscal year 2022the FASB issued ASU 2021-10, Government Assistance (Topic ASC 832): Disclosures by Business Entities about Government Assistance. This standard requires disclosures about transactions with a government that have been accounted for by analogizing to a grant or contribution accounting model to increase transparency about the types of transactions, the accounting for the Company), including interimtransactions, and the effect of the transactions on an entity’s financial statements. The new standard is effective for annual periods within those fiscal years.beginning after December 15, 2021. The Company is currently evaluatingearly adopted this guidance on January 1, 2022, and it did not have a material effect on the new standard to determine the potential impact on itscondensed consolidated financial condition, results of operations, cash flows, and financial statement disclosures.statements.
We reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact to the condensed consolidated and combined financial statements.
3. ACQUISITION
On August 30, 2021, the Company purchased all of the outstanding membership interests in Pie Squared Holdings pursuant to a Unit Purchase Agreement (Purchase Agreement). Pie Squared Holdings, directly and through its four wholly owned subsidiaries, owns, operates and franchises pizza restaurants operating under the tradename PizzaRev. The PizzaRev stores consist of three company owned stores and nine franchised locations. The purchase price is an 8% secured, convertible promissory note (Note) with a face value of $1,000,000 and a fair value of $1,194,000. Transaction costs of $190,000 were incurred in connection with the acquisition and charged to selling, general and administrative expenses in the condensed consolidated statement of operations and comprehensive income (loss) for the three-month and nine- month periods ended September 30, 2021. Of the total transaction costs, $150,000 were for services provided by a related-party entity which is owned by a major investor of the Company and the Company’s Chief Financial Officer.
Due to the close proximity of timing of the acquisition and our filing of this Quarterly Report on Form 10-Q, the fair value of assets acquired, and liabilities assumed represent a preliminary allocation as our evaluation of facts and circumstances available as of September 30, 2021 is ongoing. Pursuant to Topic 805, the financial statements will not be retrospectively adjusted for any provisional amount changes that occur in subsequent periods. Rather, we will recognize any provisional adjustments as we obtain information not available as of the completion of this preliminary fair value calculation as determined within the measurement period. We will also be required to record, in the same period as the financial statements, the effects to any income statement captions, if any, as a result of any change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. We expect to finalize the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.3. EMPLOYEE RETENTION CREDIT AND RESTAURANT REVITALIZATION FUND
A preliminary estimate of the assets acquired, and liabilities assumed as of the acquisition date consists of the following:Employee Retention Credit
SCHEDULE OF RECOGNIZED IDENTIFIED ASSETS ACQUIRED AND LIABILITIES ASSUMED
| Assets acquired: | ||||
| Cash | $ | 71,000 | ||
| Restricted cash | 2,000,000 | |||
| Property and equipment | 348,000 | |||
| Right of use asset | 1,391,000 | |||
| Tradename/trademark intangible | 410,000 | |||
| Franchise rights intangible | 410,000 | |||
| Goodwill | 51,000 | |||
| Security deposits and other assets | 126,000 | |||
| Total assets acquired | $ | 4,807,000 | ||
| Liabilities assumed | ||||
| Gift card liability | $ | 139,000 | ||
| Deferred revenue | 36,000 | |||
| Deferred grant income | 2,000,000 | |||
| Right of use liability | 1,438,000 | |||
| Total liabilities assumed | $ | 3,613,000 | ||
| Net purchase price | $ | 1,194,000 |
InterestThe Employee Retention Credit (“ERC”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) is a refundable tax credit which encouraged businesses to keep employees on the Notepayroll during the COVID-19 pandemic. Although the program ended on January 1, 2022, the Company performed an analysis during the nine months ended September 30, 2022 and determined that it was eligible for additional credits related to 2021 wages. As of each of September 30, 2022 and December 31, 2021, approximately $0.8 million of ERC is due quarterlyincluded in accounts and other receivables in the condensed consolidated balance sheets. For the three and nine months ended September 30, 2022 the Company recognized $-0- and $500,000.7 of principal is due on Augustmillion, and for the three and nine months ended September 30, 2022, and any remaining unpaid/non- converted amount on August 30, 2023. The Note is convertible at any time, in whole or in part, at2021, the holder’s option but includes a beneficial ownership blocker of 4.99%. The conversion price at any time is the volume weighted average price of the Company’s common stock the 30 trading days immediately prior to delivery of notice of conversion, less a discount of 15%; provided, however, that the conversion price has a floor of $0.50 per share and a cap ofCompany recognized $2.001.2 per share. The Note contains customary provisions preventing dilutionmillion and providing the holder rights$2.7 million, respectively, of ERC as a contra-expense included in employee retention credit and other grant income in the eventcondensed consolidated statements of fundamental transactions. The Note is secured by various security and other instruments creating a first priority lien on all of the membership interests and all of the assets of Pizza Square Holdings and subsidiaries in favor of the sellers. The Note has an estimated fair value of $1,194,000 as determined using a Monte Carlo simulation and the following assumptions:operations.
SCHEDULE OF ESTIMATED FAIR VALUE ASSUMPTIONS
| ||||
In addition to the ERC, the Company received credits under other government/government agency programs of approximately $-0- and $128,000 for the three and nine months ended September 30, 2021, respectively, of which approximately $-0- and $41,000 and $112,000 and $44,000 were recorded as an offset to restaurant operating expenses and as other income, respectively, in the condensed consolidated statements of operations.
Restaurant Revitalization Fund
The American Rescue Plan Act established the Restaurant Revitalization Fund (“RRF”) to provide funding to help restaurants and other eligible businesses keep their doors open. This program provided restaurants with funding equal to their pandemic-related revenue loss up to $10.0 million per business and no more than $5.0 million per physical location. Recipients are not required to repay the funding as long as funds are used for eligible uses no later than March 11, 2023. In 2021 and prior to its acquisition by the acquisition,Company in August 2021, Pie SquareSquared Holdings (see Note 9) received a grant under the U.S. Small Business Administration’s (“U.S. SBA”) RRF for approximately $1010.0 million. The proceeds received were mainly used to repay existing debt and to also pay operating expenses. The unused funds received under the RRF at closing of the acquisition were $2.0 million, and these funds were placed into escrow for the benefit of the Company for working capital to be used solely in the operations of the acquired business. Restricted cash and a deferred grant income liability were recorded for the unused proceeds from the RRF, and grant income is being recognized as the Company expends the funds on eligible costs incurred under the RRF post acquisition. As of September 30, 2022 and December 31, 2021, the Company had restricted cash of nil and $1.7 million, respectively, related to the unused proceeds from the RRF. For the three and nine months ended September 30, 2022, the Company recognized $0.4 million and $1.5 million, respectively, related to the RRF as a contra-expense included in employee retention credit and other grant income and in the condensed consolidated statements of operations. As of September 30, 2022 all RRF funds were utilized.
| 12 |
The Company will periodically would submit to the escrow agent for the acquisition the planned uses of these funds, and the sellers havehad the right to review the planned uses to determine whether, in the sellers’ opinion, the planned uses meetmet the criteria of “eligible uses” under the RRF. If determined to not meet such criteria, then the escrow agent willwould not distribute that portion of the request. Any unused funds on March 11, 2023, or if applicable, the awardee permanently closed before using all funds on authorized purposes, are repayable to the U.S. Small Business Administration.
Restricted cash and a deferred grant income liability has been recorded on the opening balance sheet for the unused proceeds from the RRF, and the liability will be reduced as the restricted cash is used for eligible costs incurred under the RRF post acquisition.
As the Company acquired all the outstanding membership interests in Pie SquareSquared Holdings, the Company assumed all the rights and obligations of Pie Square Holdings that arose from transactions of Pie Square Holdings prior to the sale event, both stated rights and obligations as well as those that are contingent. As noted above, Pie Square Holdings applied for and received an approximately $10 million grant from the U.S. Business Administration under the RRF and used approximately $8 million to repay existing debt of Pie Square Holdings and to fund some of its operating expenses. Under the RRF there is a requirement that the grant monies be for “eligible uses.” The Company, through the structure of the acquisition, is now responsible that the grant proceeds were, in fact, properly obtained and disbursed for “eligible uses.” If it is determined that Pie SquareSquared Holdings obtained the grant improperly or the disbursementthat disbursements of such grant monies were not “eligible uses”uses,” then the Company would be responsible for the ramifications of such actions, including repayment of the approximately $10$10.0 million of grant monies, among other items. Management is in the process of completingcompleted its analysis of this contingency and concluded that, through the date at which includes consultation with outside legal counsel, and expectsthe condensed consolidated financial statements were available to complete such analysis priorbe issued, a liability does not need to the filing of the 2021 annual financial statements.be recorded for this contingency. In connection with the acquisition, the Company obtained an indemnification from the sellers which is inclusive of any matters related to the RRF. As such, an assessment
4. REVENUE
Contract Liabilities
Contract liabilities consist of deferred revenue resulting from initial and renewal franchise license fees paid by franchisees, which are generally recognized on a straight-line basis over the term of the sellers’ indemnificationunderlying franchise agreement, signed underas well as upfront development fees paid by franchisees, which are generally recognized on a straight-line basis over the acquisitionterm of the underlying franchise agreement will also be consideredonce it is executed. The recognition of initial and renewal license fees is accelerated if the franchise or development agreement is terminated. During the nine months ended September 30, 2022, the Company recognized $0.7 million of franchise income as a result of the cancellation of its international Master Franchise Agreements. There were no franchise or development agreement terminations during the three months ended September 30, 2022 and 2021 or the nine months ended September 30, 2021.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The table below reflects the level of the inputs used in the Company’s analysis. Iffair value calculations:
SCHEDULE OF FAIR VALUE MEASUREMENTS, RECURRING AND NONRECURRING
| (in thousands) | Quoted Prices in Active Markets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value | ||||||||||||
| September 30, 2022 | ||||||||||||||||
| Assets (Note 6) | ||||||||||||||||
| Common stock of Sonnet | $ | 16 | $ | — | $ | — | $ | 16 | ||||||||
| Liabilities (Note 9) | ||||||||||||||||
| Convertible note payable | $ | — | $ | — | $ | 893 | $ | 893 | ||||||||
| (in thousands) | Quoted Prices in Active Markets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value | ||||||||||||
| December 31, 2021 | ||||||||||||||||
| Assets (Note 6) | ||||||||||||||||
| Common stock of Sonnet | $ | 50 | $ | — | $ | — | $ | 50 | ||||||||
| Liabilities (Note 9) | ||||||||||||||||
| Convertible note payable | $ | — | $ | — | $ | 1,099 | $ | 1,099 | ||||||||
The Company is required to disclose fair value information about financial instruments when it is determinedpracticable to estimate that a contingency exists asvalue. The carrying amounts of the acquisition dateCompany’s cash, restricted cash, accounts receivable, other receivables, accounts payable, other current liabilities, convertible notes payable (other than the convertible note payable discussed below) and it is probablenotes payable approximate fair value due to the short-term maturities of occurrence, thenthese financial instruments and/or because related interest rates offered to the preliminary purchase price allocation noted above will be revised, and the impact could be material.Company approximate current rates.
The following unaudited pro forma information reflectsCompany evaluated the impact ofconvertible note payable issued in connection with the acquisition of Pie Squared Holdings (see Note 9) in accordance with ASC Topic 815, Derivatives and Hedging, and determined that the conversion price discount creates a derivative. This derivative was not clearly and closely related to the debt host and was required to be separated and accounted for as if it had closed on January 1, 2020.
SCHEDULE OF PRO FORMA ACQUISITION
| Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | |||||||
| Total revenue | $ | 16,229,033 | $ | 17,645,760 | ||||
| Operating loss | $ | (2,829,004 | ) | $ | (10,907,158 | ) | ||
| Net loss | $ | (2,728,921 | ) | $ | (25,551,202 | ) | ||
| Net loss per share (basic and diluted) | $ | (0.18 | ) | $ | (1.89 | ) | ||
a derivative instrument. The unaudited pro forma statement of operations data forCompany elected to initially and subsequently measure the nine months ended September 30, 2021, excludes the approximately $8.0 million of incomeconvertible note payable at fair value, with changes in fair value recognized for RRF grant monies received as discussed above and $3.0in operations. million gain on extinguishment of debt with a related-party, both recorded by Pie Squared.
The estimated fair value of the convertible note payable was determined using a Black-Scholes model and the following assumptions as of September 30, 2022:
SCHEDULE OF ESTIMATED FAIR VALUE ASSUMPTIONS
| Volatility | 140.60 | % | ||
| Risk free rate | 3.92 | % | ||
| Stock price | $ | |||
| Credit spread | 25.70 | % |
The reconciliation of the convertible note payable measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows:
SCHEDULE OF FAIR VALUE LIABILITIES MEASURED ON RECURRING BASIS
| (in thousands) | Nine months ended September 30, 2022 | |||
| Balance at January 1, 2022 | $ | 1,099 | ||
| Change in fair value | (206 | ) | ||
| Balance at September 30, 2022 | $ | 893 | ||
4.6. INVESTMENTS
Investments consist of the following:
SCHEDULE OF INVESTMENT
| September 30, 2021 | December 31, 2020 | |||||||
| Common stock of Sonnet, at fair value | $ | 73,970 | $ | 413,268 | ||||
| Chanticleer Investors, LLC, at cost | 365,001 | 365,001 | ||||||
| Total | $ | 438,971 | $ | 778,269 | ||||
| (in thousands) | September 30, 2022 | December 31, 2021 | ||||||
| Common stock of Sonnet, at fair value (a) | $ | 13 | $ | 50 | ||||
| Chanticleer Investors, LLC, at cost (b) | 16 | 16 | ||||||
| Total | $ | 29 | $ | 66 | ||||
Common Stock of Sonnet
In 2020 the Company received warrants to purchase Sonnet common stock as part of consideration for the Merger with Sonnet (See Note 1). On November 17, 2020, the Company exercised the warrants and holds common stock of Sonnet. Shares were sold in 2021 and the Company received proceeds of $118,416. At September 30, 2021, shares of Sonnet were held.
| (a) | Represents the fair value of the common stock of Sonnet held by the Company after its exercise of warrants received in connection with the Merger. As of September 30, 2022, shares of Sonnet were held. | |
| (b) | Represents the Company’s investment in Chanticleer Investors, LLC, which holds an interest in Hooters of America, the operator and franchisor of the Hooters Brand worldwide. As of the dates presented, the Company’s effective economic interest in Hooters of America was less than 1%. In March 2022, the Company received a dividend from its investment in Hooters of America of approximately $0.1 million, which is included in other income for the nine months ended September 30, 2022 in our condensed consolidated statement of operations. |
Chanticleer Investors LLC
The Company invested $800,000 during 2011 and 2012 in exchange for a 22% ownership stake in Chanticleer Investors, LLC, which in turn held a 3% interest in Hooters of America, the operator and franchisor of the Hooters Brand worldwide. As a result, the Company’s effective economic interest in Hooters of America was approximately 0.6%. Effective June 28, 2019, Hooters of America closed on the sale of a controlling interest in the company. The consideration paid in the sale transaction was a combination of cash proceeds and equity in the newly formed company. The Company netted approximately $48,000 in cash upon the transaction and retained a non-controlling interest in the equity of the newly-formed company.
In June 2019, an analysis of the transaction and the value of the cash received and retained non-controlling interest was performed. The Company concluded that its investment was impaired as of June 30, 2019 and recorded a $435,000 write down of the investment during the year ended December 31, 2019. No further impairment charges were recognized since that time.
Hooters of America redeemed a portion of the Company’s ownership interest and paid $349,293 to the Company in October 2021. After the redemption, the Company’s effective economic interest in Hooters of America was less than 1%.
5.7. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
SCHEDULE OF PROPERTY, PLANT AND EQUIPMENT
| September 30, 2021 | December 31, 2020 | |||||||||||||||
| (in thousands) | September 30, 2022 | December 31, 2021 | ||||||||||||||
| Leasehold improvements | $ | 6,962,366 | $ | 7,301,908 | $ | 5,772 | $ | 5,511 | ||||||||
| Restaurant furniture and equipment | 2,287,064 | 2,132,726 | 2,665 | 2,768 | ||||||||||||
| Construction in progress | 650 | 5,450 | — | 20 | ||||||||||||
| Office and computer equipment | 114,623 | 125,535 | 37 | 33 | ||||||||||||
| Office furniture and fixtures | 99,528 | 59,635 | — | 57 | ||||||||||||
| Property, plant and equipment, gross | 9,464,231 | 9,625,254 | ||||||||||||||
| Property,plant and equipment, gross | 8,474 | 8,389 | ||||||||||||||
| Accumulated depreciation and amortization | (6,462,334 | ) | (5,922,360 | ) | (5,252 | ) | (5,274 | ) | ||||||||
| Property, plant and equipment, net | $ | 3,001,897 | $ | 3,702,894 | $ | 3,222 | $ | 3,115 | ||||||||
Through September 30, 2021, we performed an analysis of the recoverability of the carrying value of our property and equipment. Based on the analysis, an impairment charge of approximately $0.3 million was recorded for the nine months ended September 30, 2021, which is included in asset impairment charges in our condensed consolidated statements of operations. The impairment recognized during the nine months ended September 30, 2021 was primarily the result of the impact of the COVID-19 outbreak in the United States, has resulted inwhich had a significant impact throughout the hospitality industry. The impact has varied by state/geographical area within the United States at various intervals sinceduring the pandemic has been declared. Accordingly,and, therefore, the operating results and cash flows at the store level have varied significantly leading to an analysissignificantly. There were no indicators of impairment at the store level for each quarter end beginning at the end of the first quarter of 2020 and continuing through September 30, 2021. Several stores were permanently or temporarily closed during 2020 and 2021 while others are operating at reduced capacity. Based on the assessment of recoverability, an impairment charge of approximately $255,115 was recorded forrelated to our property and equipment during the nine months ended September 30, 2021. 2022.
NaN
We recognized depreciation expense of $0.2 impairment charge was recorded for the three months ended September 30, 2021. Duringmillion and $0.4 million during the three and nine months ended September 30, 2020, the Company recorded an impairment charge of $555,7022022, respectively, and $685,3330.3 for property and equipment, respectively. During the nine months ended September 30, 2020, the Company recorded an impairment charge of $13,374 for other assets.
Depreciation expense was $260,345million and $814,6750.8 formillion during the three and nine months ended September 30, 2021, respectively. Depreciation expense was $185,825 and $834,909 for the three and nine months ended September 30, 2020, respectively.
6.8. INTANGIBLE ASSETS, NET
GOODWILLGoodwill
A roll-forwardroll forward of goodwill is as follows:
SCHEDULE OF GOODWILL
| (in thousands) | Nine months Ended September 30, 2022 | Year Ended December 31, 2021 | ||||||
| Beginning balance | $ | 7,810 | $ | 8,591 | ||||
| Acquisition of Pie Squared Holdings | — | 51 | ||||||
| Sale of Hooters UK | — | (820 | ) | |||||
| Foreign currency translation loss | — | (12 | ) | |||||
| Ending balance | $ | 7,810 | $ | 7,810 | ||||
| Nine Months Ended September 30, 2021 | Year Ended December 31, 2020 | |||||||
| Beginning balance | $ | 8,591,149 | $ | 8,567,888 | ||||
| Foreign currency translation gain | (11,768 | ) | 23,261 | |||||
| Goodwill acquired in acquisition | 51,000 | — | ||||||
| Goodwill reclassified to noncurrent assets held for sale (Note 14) | (820,507 | ) | — | |||||
| Ending balance | $ | 7,809,874 | $ | 8,591,149 | ||||
The Company performed a qualitative assessment at September 30, 2022 based on the best judgment of management for the future of the reporting unit and on information known at the time of the assessment and determined that it was more likely than not that the fair value of its reporting unit exceeded the carrying amount and, therefore, a quantitative assessment was not deemed necessary, and no impairment was recorded to goodwill.
| 15 |
OTHER INTANGIBLE ASSETSOther Intangible Assets
Franchise and trademark/tradename intangible assets consist of the following:
SCHEDULE OF FINITE-LIVEDFINITE - LIVED INTANGIBLE ASSETS
| (in thousands) | September 30, 2022 | December 31, 2021 | ||||||||
| Trademark, Tradenames: | ||||||||||
| American Roadside Burger | 10 years | $ | 561 | $ | 561 | |||||
| BGR: The Burger Joint | �� | Indefinite | 739 | 739 | ||||||
| Little Big Burger | Indefinite | 1,550 | 1,550 | |||||||
| PizzaRev | 5 years | 410 | 410 | |||||||
| 3,260 | 3,260 | |||||||||
| Acquired Franchise Rights: | ||||||||||
| BGR: The Burger Joint | 7 years | 828 | 828 | |||||||
| PizzaRev | 5 years | 410 | 410 | |||||||
| 1,238 | 1,238 | |||||||||
| Total intangibles at cost | 4,498 | 4,498 | ||||||||
| Accumulated amortization | (1,566 | ) | (1,369 | ) | ||||||
| Intangible assets, net | $ | 2,932 | $ | 3,129 | ||||||
| September 30, 2021 | December 31, 2020 | |||||||||||
| Trademark, Tradenames: | ||||||||||||
| American Roadside Burger | 10 years | $ | 561,191 | $ | 1,786,930 | |||||||
| BGR: The Burger Joint | Indefinite | 739,245 | 739,245 | |||||||||
| Little Big Burger | Indefinite | 1,550,000 | 1,550,000 | |||||||||
| PizzaRev | 5 years | 410,000 | — | |||||||||
| 3,260,436 | 4,076,175 | |||||||||||
| Acquired Franchise Rights: | ||||||||||||
| BGR: The Burger Joint | 7 years | 827,757 | 827,757 | |||||||||
| PizzaRev | 5 years | 410,000 | — | |||||||||
| Franchise License Fees: | ||||||||||||
| Hooters Pacific NW | 20 years | — | 74,507 | |||||||||
| Hooters UK | 5 years | — | 11,001 | |||||||||
| — | 85,508 | |||||||||||
| Total intangibles at cost | 4,498,193 | 4,989,440 | ||||||||||
| Accumulated amortization | (1,225,397 | ) | (1,945,555 | ) | ||||||||
| Intangible assets, net | $ | 3,272,796 | $ | 3,043,885 | ||||||||
As of September 30, 2021, we performed an analysis of the recoverability of the carrying value of our intangible assets. Based on the analysis, an impairment charge of approximately $0.3 million was recorded to trademark/tradenames for ABC: American Burger Company for the nine months ended September 30, 2021, and is included in asset impairment charges in our condensed consolidated statements of operations. There were no indicators of impairment related to our intangible assets during the nine months ended September 30, 2022.
We recognized amortization expense of $0.1 million and $0.2 million during the three and nine months ended September 30, 2022, respectively, and $0.01 million and $0.3 million during the three and nine months ended September 30, 2021, respectively.
Amortization expense for the next five years is as follows (in thousands):
SCHEDULE OF AMORTIZATION OF INTANGIBLE ASSETS
| Year ending December 31: | ||||
| 2022 (remaining three months) | $ | 41 | ||
| 2023 | 164 | |||
| 2024 | 164 | |||
| 2025 | 164 | |||
| 2026 | 110 | |||
| Amortization Expense, net | $ | 643 | ||
An analysis of the recoverability of the carrying value was performed at each quarter end beginning at the end of the first quarter of 2020 and continuing through September 30, 2021. Based on that analysis, an impairment charge of approximately $9. 327,342 was recorded to trademarks/tradenames for ABC: American Burger Company during the nine months ended September 30, 2021. No intangible assets were impaired during the three months ended September 30, 2021. During the three and nine months ended September 30, 2020, an impairment charge of $246,751 was recorded to trademarks/tradenames for BRG: The Burger Joint. No other intangible assets were impaired as of September 30, 2020.
Amortization of intangible assets was $90,254 and $265,929, for the three and nine months ended September 30, 2021 and $92,174 and $274,699 for the three and nine months ended September 30, 2020, respectively.
7. LONG-TERM DEBT AND NOTES PAYABLE
DebtLong-term debt and notes payable are summarized as follows at September 30, 2021 and December 31, 2020:follows:
SCHEDULE OF DEBT AND NOTES PAYABLE
| September 30, 2021 | December 31, 2020 | |||||||
| Notes payable (a) | $ | — | $ | 25,850 | ||||
| Notes payable (b) | — | 27,048 | ||||||
| Contractor note (c) | 348,269 | 348,269 | ||||||
| PPP loans (d) | 4,109,400 | 2,109,400 | ||||||
| UK Bounce Back loan (e) | — | 68,245 | ||||||
| EIDL loans (f) | 300,000 | 299,900 | ||||||
| Convertible debt (g) | 4,037,889 | 4,037,889 | ||||||
| Convertible promissory note (h) | 1,194,000 | — | ||||||
| Total Debt | 9,989,558 | 6,916,601 | ||||||
| Less: discount on convertible debt (g) | (89,473 | ) | (223,681 | ) | ||||
| Total Debt, net of discount | $ | 9,900,085 | $ | 6,692,920 | ||||
| Current portion of long-term debt | $ | 7,080,737 | $ | 2,338,978 | ||||
| Long-term debt, less current portion | $ | 2,819,348 | $ | 4,353,942 | ||||
| (in thousands) | September 30, 2022 | December 31, 2021 | ||||||
| 10% convertible debt (a) | $ | 4,038 | $ | 4,038 | ||||
| 8% convertible debt (b) | 1,350 | — | ||||||
| Convertible promissory note (measured at fair value) (c) | 893 | 1,099 | ||||||
| PPP loans (d) | 4,109 | 4,109 | ||||||
| EIDL loans (e) | 300 | 300 | ||||||
| Contractor note (f) | 348 | 348 | ||||||
| Notes payable (g) | 545 | — | ||||||
| Total Debt | 11,583 | 9,894 | ||||||
| Less: discount on convertible debt (a), (b) | (190 | ) | (37 | ) | ||||
| Total Debt, net of discount | $ | 11,393 | $ | 9,857 | ||||
| Current portion of long-term debt and notes payable | $ | 3,648 | $ | 3,264 | ||||
| Long-term debt and notes payable, less current portion | $ | 7,745 | $ | 6,593 | ||||
| The 10% |
| The Company recorded a debt discount of approximately $ | ||
| In connection with the 8% Convertible Debt transaction described in (b) below, the maturity date of the 10% Convertible Debt was extended to April 1, 2024 and Oz Rey agreed to subordinate payment of its 10% Convertible Debt to payment of the 8% Convertible Debt, which has been accounted for as a loan modification. In addition, Oz Rey received a fee equal to 2.0% of the principal amount of the 8% Convertible Debt issued in the transaction, which has been recorded as a debt discount and is being amortized over the two-year term of the related debt. |
| 17 |
| (b) | In March 2022, the Company commenced a private placement of up to $3.0 million of 8% senior unsecured convertible debentures (the “8% Convertible Debt”) and 3,000,000 common stock warrants. Pursuant to the Securities Purchase Agreement, the Company issued $1.35 million of 8% Convertible Debt and warrants to purchase the number of shares of the Company’s common stock equal to the principal amount of 8% Convertible Debt issued. | |
| The 8% Convertible Debt matures 18 months after issuance and is subject to acceleration in the event of customary events of default. Interest is payable quarterly in cash. The 8% Convertible Debt may be converted by the holders at any time at a fixed conversion price of $0.40 per share, and each warrant entitles the holder to purchase one share of common stock at an exercise price of $0.50 per share. Both the notes and the warrants include a beneficial ownership blocker of 4.99% and contain customary provisions preventing dilution and providing the holders rights in the event of fundamental transactions. Upon the earlier of the maturity date or the one-year anniversary of conversion of the 8% Convertible Debt, holders of 51% of the registerable securities may request the Company to file a registration statement for the securities. The warrants can be exercised on a cashless basis and expire five years from the issuance date. If the Company makes any distribution to the common stockholders, the holders of the warrants will be entitled to participate on an as-if-exercised basis. As of September 30, 2022, the 8% Convertible Debt was convertible into shares of common stock. | ||
| The Company analyzed the 8% Convertible Debt and did not identify any embedded features that require bifurcation from the host and accounting as derivatives. However, as the convertible notes payable were issued with warrants, the net proceeds from the issuance were allocated to the 8% Convertible Debt and the warrants based on their relative fair values, resulting in an allocation of $1.0 million to the 8% Convertible Debt and $0.3 million to the warrants (see Note 11). The Company recorded a debt discount of approximately $0.3 million for the difference between the face value of the 8% Convertible Debt and the amount allocated to the debt at the issuance date and is amortizing this discount over the |
| (c) | On August 30, 2021, the Company purchased all of the outstanding membership interests in Pie Squared | |
| Interest on the convertible promissory note is due quarterly and $ | ||
| (d) | On April 27, 2020, Amergent received a Paycheck Protection Program (“PPP”) loan in the amount of approximately $2.1 million. Due to the Spin-Off and Merger, Amergent was not publicly traded at the time of the loan application or funding. The note bore interest at 1% per year, would have matured in April 2022, and required monthly interest and principal payments of approximately $0.1 million beginning in November 2020 and through maturity. The currently issued guidelines of the program allowed for the loan proceeds to be forgiven if certain requirements were met. Any loan proceeds not forgiven would have been repaid in full. The Company’s initial application for loan forgiveness in the full amount of the loan was denied, however, in March 2022, the U.S. SBA reversed its initial decision. On November 15, 2022 the Company received notice from the SBA that this loan and accrued interest was forgiven in full. | |
| On February 25, 2021, the Company received a second PPP loan in the amount of $2.0 million. Amergent was not listed on a national securities exchange at the time of the loan application or funding. The note bears interest at 1% per year, matures on February 25, 2026, and requires monthly principal and interest payments of approximately $45,000 beginning June 25, 2022 through maturity. During 2022, the Company applied for loan forgiveness in the full amount of the loan. No assurance can be given as to the amount, if any, of forgiveness. The application for forgiveness allowed the Company to defer the timing of repayment until the forgiveness assessment is completed. |
| (e) | On August 4, 2020, the Company obtained two loans under the Economic Injury Disaster Loan (“EIDL”) assistance program from the U.S. SBA in light of the impact of the COVID-19 pandemic on the Company’s business. The principal amount of the loans is $0.3 million, with proceeds to be used for working capital purposes. Interest accrues at the rate of 3.75% per year. Total installment payments of $1,462, including principal and interest, are due monthly. The balance of principal and interest is payable over the next thirty years from the date of the promissory note (August 2050). There are no penalties for prepayment. Based upon guidance issued by the U.S. SBA on June 19, 2020, the EIDL loans are not required to be refinanced by the PPP loan. In March 2022, the U.S. SBA extended the deferral period for the EIDL payments for an additional 12 months. The Company’s | |
| (f) | The Company entered into a promissory note to repay a contractor for the build-out of a new Little Big Burger location. The note bears interest at 12% per year. In connection with and prior to the Merger and Spin-Off, on April 1, 2020, this note was assumed by Amergent. The Company is currently in default on this loan | |
| (g) | In February and March 2022, eight company-owned stores entered into notes payable to Toast Capital Loans. The | |
| In August 2022, the Company entered into a Future Revenue Sales Agreement with Sprout Funding which is being treated as a note payable. The Company received a net $0.2 million and the terms of | ||
| In August 2022, the Company received a loan from a related party of $0.3 million. The lending entity is an entity in which the Company’s |
The Company’s various loan agreements contain financial and non-financial covenants and provisions providing for cross-default. The evaluation of compliance with these provisions is subject to interpretation and the exercise of judgment. Oz Rey has provided a waiver of certain financial covenants through April 30, 2023.
Maturities of our debt as of September 30, 2022 are presented below (in thousands):
SCHEDULE OF FUTURE MINIMUM PAYMENTS
| Year ending December 31: | ||||
| 2022 (remaining three months) | $ | 1,204 | ||
| 2023 | 2,876 | |||
| 2024 | 4,572 | |||
| 2025 | 540 | |||
| 2026 | 90 | |||
| Thereafter | 300 | |||
| Forgiven PPP Loan | 2,109 | |||
| Total debt maturities | 11,691 | |||
| Less: discount on convertible debt | (190 | ) | ||
| Less: fair value adjustment | (107 | ) | ||
| Total debt | $ | 11,393 | ||
810. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are summarized as follows:
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| September 30, 2021 | December 31, 2020 | |||||||||||||||
| (in thousands) | September 30, 2022 | December 31, 2021 | ||||||||||||||
| Accounts payable | $ | 2,463,068 | $ | 3,752,036 | $ | 3,340 | $ | 2,544 | ||||||||
| Accrued expenses | 1,190,798 | 1,436,679 | 2,140 | 1,955 | ||||||||||||
| Accrued taxes (VAT, Sales, Payroll, etc.) | 2,437,347 | 3,356,496 | ||||||||||||||
| Accrued taxes (VAT, sales, payroll, etc.) | 2,292 | 2,149 | ||||||||||||||
| Accrued interest | 61,642 | 122,057 | 350 | 196 | ||||||||||||
| Accounts payable and accrued expenses, total | $ | 6,152,855 | $ | 8,667,268 | $ | 8,122 | $ | 6,844 | ||||||||
As of September 30, 20212022 and December 31, 2020,2021, approximately $2.2 2.1million and $3.0 2.0million, respectively, of employee and employer payroll taxes and associated interest and penalties have been accrued but not remitted to certain taxing authorities by the Company. These accruals are for periods prior to 2019 for cash compensation paid and are reflected as a component of the accrued taxes line above. As a result, the Company is liable for such payroll taxes and any related penalties and interest. The Company will record an additional accrual for such payroll taxes upon receipt of notice from a relevant taxing authority. During the three and nine months ended September 30, 2022, the Company increased its accrual for payroll taxes by $0.1 million. Upon the advice of our tax professionals, we are paying the trust fund portion of the outstanding tax accruals which represents the portion of taxes withheld from our employees but not remitted to the taxing authorities. For our locations that have permanently closed, our tax liability after paying the trust fund balance is approximately $380,0000.8 million and is recorded within accrued taxes on our condensed consolidated balance sheet as of September 30, 2021. 2022. The taxing authorities have indicated that we are still liable for these amounts, however, since the locations are permanently closed and have no assets, they will stop active collection procedures on these amounts.
| 19 |
9.As of September 30, 2022, and December 31, 2021, the Company had STOCKHOLDER’S EQUITYno accrued interest or penalties relating to any income tax obligations.
11. STOCKHOLDERS’ EQUITY
2020 Bridge Financing
Pursuant to a Securities Purchase Agreement dated February 7, 2020, the Company sold shares of a new series of convertible preferred stock of Chanticleer (the “Series 2 Preferred Stock”Preferred”) to an institutional investor for gross proceeds to the Company of $1,500,000 less transaction costs of $95,000. In addition, pursuant to the original agreement with the investors, the Company issued 5-year warrants to purchase an aggregate of 350,000 shares of common stock to the investors at $ per share. Each share of Series 2 Preferred has a stated value of $1,000. Upon issuance, the Company bifurcated and recorded, as a liability, an embedded derivative (more fully described below and in Note 10) in the amount of $529,000. The effective conversion price of the Series 2 Preferred Stock after the bifurcation of the derivative resulted a beneficial conversion feature of $729,000, which was then immediately recorded as a deemed dividend as the preferred stock is immediately convertible.investor. In March 2020, an aggregate of shares of Series 2 Preferred Stock were converted into shares of common stock. In connection with the Merger, (see Note 1), all remaining outstanding shares of the Series 2 Preferred Stock were automatically cancelled and exchanged for substantially similar shares of preferred stock in Amergent,Amergent. theThe shareholders of Chanticleer common stock received shares of Amergent on a 1 for 1 basis (Spin-Off(spin-off shares) and received 1 share of Sonnet common stock for 26 shares of Chanticleer common stock held at the time of the Merger.
On August 17, 2020, the Company and the holders of the Series 2 Preferred Stock entered into a Waiver, Consent, and Amendment to the Certificate of Designations (the “Extension Agreement”) which included provisions for an extension of the true-up payment discussed below from August 7, 2020 to December 10, 2020 and permitted the shares of Amergent obtained by the investor in the Spin-Off to be included in the determination of the True-Up Payment discussed below, with the Company paying all expenses incurred by the institutional investor in connection with the Extension Agreement and certain consideration for the institutional in investor’s willingness to extend the date of the true-up payment. The consideration included $66,000 of cash and warrants to purchase 134,000 shares of the Company’s common stock with a value of $28,060 (see below).
On February 16, 2021, the Company and the holders of the Series 2 Preferred Stock entered into a Waiver, Consent and Amendment to the Certificate of Designations (the “Waiver”). Pursuant to the Waiver, the Company filed the Second Amendment and Restated Certificate of Designations of Series 2 Convertible Preferred Stock (“Amended COD”) with the Delaware Secretary of State (i) providing for the extension of the True-Up Payment to April 1, 2021, (ii) providing for the deduction of proceeds to the original holders from sales of Series 2 Preferred for the True-Up Payment, and (iii) providing for a reduction in amount of cash subject to restriction as discussed below from $1,250,000 to $850,000.
During the nine monthsyear ended September 30,December 31, 2021, the investors converted shares of the Series 2 Preferred Stock into common shares and sold those common shares in the market. In addition, the investors sold their remaining Series 2 Preferred Stock to other investors. The shares sold to the investors no longer contain the True-Up Payment provision discussed below. The new investors converted shares of Series 2 Preferred Stock into shares of common stock during May 2021, and shares of Series 2 Preferred Stock remain outstanding at December 31, 2021 and September 30, 2021.2022.
The Series 2 Preferred Stock is classified in the accompanying condensed consolidated and combined balance sheet at September 30, 2021sheets as temporary equity due to certain contingent redemption features which are outside the control of the Company.
Designations, rights and preferences of Series 2 Preferred Stock:Preferred:
Stated value:value: Each share of Series 2 Preferred Stock had a stated value of $1,000.$.
True-Up Payment: Amergent was required to pay the original holder an amount in cash equal to the dollar value of 125%125% of the stated value of the Series 2 Preferred Stock less the proceeds previously realized by the holder from the sale of all conversion and spin-off shares received by the original holder in Amergent, net of brokerage commissions and any other fees incurred by the holder in connection with the sale of any conversion shares or spin-off shares on April 1, 2021 (which period was extended). TheThis True-Up Payment was settled in July 2021 with a payment of $66,1360.1, million, and the cash accountpreviously held in escrow for repayment is no longer subject to restriction for this matter.
Redemption: IfThe Company determined that the MergerTrue-Up Payment constituted a “make-whole” provision as defined by U.S. GAAP that was not completed within six months of issuance ofrequired to be settled in cash and, as such, was bifurcated from the host instrument, the Series 2 Preferred Stock, the Company would have been requiredPreferred. It was accounted for as a derivative liability prior to redeem all the outstanding Series 2 Preferred Stock for 125% of the aggregate statedsettlement, with changes in fair value recorded in change in fair value of derivative liabilities in the Series 2 Preferred Stock then outstanding plus any default interestcondensed consolidated statement of operations. A $0.1 million increase in fair value was recorded for the three months ended September 30, 2021 and any other fees or liquidated damages then due and owing thereon undera $0.1 million decrease in fair value was recorded for the Certificate of Designations. Additionally, therenine months ended September 30, 2021.
Redemption: There are other triggering events, as defined, that can cause the Series 2 Preferred Stock to be redeemable at the option of the holder, some of which some are outside of the control of the Company.
Conversion at option of holder/ beneficial ownership limitationlimitation: The Series 2 Preferred Stock is convertible at the option of holder at the lesser of (i) $1.00 (subject to adjustment for forward and reverse stock splits, recapitalizations and the like) or (ii) 90% of the five day average volume weighted average price of the common, provided the conversion price has a floor of $0.50$0.50 (subject to adjustment for forward and reverse stock splits, recapitalizations and the like). Conversion is subject to a beneficial ownership limitation of 4.99%4.99%. This limitation was increased by the holder to 9.99%9.99% prior to the Merger.
Forced conversion: The Company had the right to require the holder to convert up to shares of Series 2 Preferred Stock upon delivery of notice three days prior to the Merger, subject to the beneficial ownership limitation and applicable Nasdaq rules. Unconverted shares of Series 2 Preferred Stock automatically were exchanged for an equal number of shares of Series 2 Preferred Stock in Amergent on substantially the same terms.
Liquidation preferencepreference: Upon any liquidation, dissolution or winding-up of the Company, the holder is entitled to receive out of the assets, whether capital or surplus, an amount equal to 125%125% of the stated value plus any default interest and any other fees or liquidated damages then due and owing thereon under the Certificate of Designations, for each share of Series 2 Preferred Stock before any distribution or payment to the holders of common stock.
Voting rights: The holder of Series 2 Preferred Stock has the right to vote together with the holders of common stock as a single class on an as-converted basis on all matters presented to the holders of common stock and shall vote as a separate class on all matters presented to the holders of Series 2 Preferred Stock.Preferred. In addition, without the approval of the holder, the Company is required to obtain the approval of Series 2 Preferred, Stock, as is customary, for certain events and transactions not contemplated by the Merger.
| 20 |
Triggering Events:events: Breach of the Company’s obligations will trigger a redemption event.
Anti-Dilution:Anti-dilution: CustomaryThe Series 2 Preferred provides for customary adjustments in the event of dividends or stock splits and anti-dilution protection.
Warrants
Concurrently with the Preferred Securities Purchase Agreement, the parties entered into a registration rights agreement (the “Preferred Registration Rights Agreement”). Pursuant to the Preferred Registration Rights Agreement, the Company was required to file a registration statement registering the conversion shares no later than 15 days from the closing of this transaction.
At September 30, 2022, the outstanding warrants consisted of the following:
Warrants
SCHEDULE OF OUTSTANDING WARRANTS
| Date Issued | Number of Warrants | Exercise Price | Expiration Date | |||||||
| April 1, 2020 | 2,462,600 | $ | 0.125 | April 1, 2030 | ||||||
| April 1, 2020 | 462,600 | $ | 0.500 | April 1, 2030 | ||||||
| March 30, 2020 | 350,000 | $ | 1.250 | March 30, 2025 | ||||||
| August 17, 2020 | 134,000 | $ | 1.250 | August 17, 2025 | ||||||
| March 15, 2022 | 250,000 | $ | 0.500 | March 15, 2027 | ||||||
| March 21, 2022 | 250,000 | $ | 0.500 | March 21, 2027 | ||||||
| March 22, 2022 | 250,000 | $ | 0.500 | March 22, 2027 | ||||||
| March 24, 2022 | 600,000 | $ | 0.500 | March 24, 2027 | ||||||
| 4,759,200 | ||||||||||
A summary of the warrant activity during the nine months ended September 30, 20212022 is presented below:
SCHEDULE
SUMMARY OF OUTSTANDING WARRANTS ACTIVITY
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Life | ||||||||||
| Outstanding at December 31, 2020 | 3,409,200 | $ | 0.34 | |||||||||
| Granted | — | — | — | |||||||||
| Exercised | — | — | — | |||||||||
| Forfeited/Other Adjustments | — | — | — | |||||||||
| Outstanding at September 30, 2021 | 3,409,200 | $ | 0.34 | |||||||||
| Exercisable September 30, 2021 | 3,409,200 | $ | 0.34 | |||||||||
Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | ||||||||||
| Outstanding at January 1, 2022 | 3,409,200 | $ | 0.34 | |||||||||
| Granted | 1,350,000 | $ | 0.50 | |||||||||
| Outstanding at September 30, 2022 | 4,759,200 | $ | 0.38 | |||||||||
| Exercisable at September 30, 2022 | 4,759,200 | $ | 0.38 | |||||||||
At September 30, 2021,As discussed in Note 9, 1,350,000 warrants were granted in March 2022 in connection with the outstandingissuance of 8% Convertible Debt and are equity-classified in the condensed consolidated financial statements. The net proceeds from the issuance were allocated to the 8% Convertible Debt and the warrants consistedbased on their relative fair values at the issuance date, resulting in an allocation of approximately $0.3 million to the warrants. Assumptions used in calculating the fair value of the warrants at the issuance date include the following:
SCHEDULE OF OUTSTANDING WARRANTS TABLE
| Date issued | Number of warrants | Exercise Price | Expiration Date | |||||||
| April 1, 2020 | 2,462,600 | $ | 0.125 | April 1, 2030 | ||||||
| April 1, 2020 | 462,600 | $ | 0.500 | April 1, 2030 | ||||||
| March 30, 2020 | 350,000 | $ | 1.250 | March 30, 2025 | ||||||
| August 17, 2020 | 134,000 | $ | 1.250 | August 17, 2025 | ||||||
| 3,409,200 | ||||||||||
10. DERIVATIVE LIABILITIES
The derivative liabilities at December 31, 2020 consisted of a True-Up Payment provision of the Series 2 Preferred Stock (See Note 9). The True-Up payment was settled in July 2021 with a cash payment of $66,136.
The table presented below is a summary of changes in the fair market value of the Company’s Level 3 valuations for the nine months ended September 30, 2021.
SUMMARY OF CHANGES IN FAIR VALUE DERIVATIVE LIABILITIESWARRANTS
| True-Up Payment | ||||
| Balance at December 31, 2020 | $ | 184,800 | ||
| Change in fair value during the period | (118,664 | ) | ||
| Settlement of derivative liability | (66,136 | ) | ||
| Balance at September 30, 2021 | $ | — | ||
| Stock price per share | $ | – | ||
| Term | 5.0 years | |||
| Expected volatility | 90.00 | % | ||
| Divided yield | — | |||
| Risk-free interest rate | 2.10% – 2.39 | % |
Options
In August 2021, the Company adopted the 2021 Inducement Plan (the “Plan”). Under the 2021 Inducement Plan, the Company can grant stock options and stock awards. There are shares of common stock reserved for issuance under the Plan. As of September 30, 2022, shares remained available for future grants.
In November 2021, the Company adopted the 2021 Equity Incentive Plan (the “Incentive Plan”). Under the 2021 Incentive Plan, the Company can grant stock options and stock awards. The stockholders of the Company approved the Incentive Plan on December 30, 2021. There are shares of common stock reserved for issuance under the Incentive Plan. As of September 30, 2022, shares remained available for future grants.
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Share-based awards generally vest over a period of , and share-based awards that lapse or are forfeited are available to be granted again. The contractual life of all share-based awards is . The expiration date of the outstanding share-based awards is August 2026.
During the three and nine months ended September 30, 2022, the Company recorded share-based compensation expense of approximately $ and $, respectively, in general and administrative expenses.
SCHEDULE OF SHARE BASED AWARDS
Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | ||||||||||
| Outstanding at September 30, 2022 | 450,000 | $ | 1.38 | |||||||||
| Exercisable at September 30, 2022 | 250,000 | $ | 1.72 | |||||||||
11.12. COMMITMENTS AND CONTINGENCIES
Legal proceedingsIndemnification Agreement and Tail Policy
Indemnification agreement and tail policy
On March 25, 2020, pursuant to the requirements of the Merger Agreement, Chanticleer, Sonnet and Amergent entered into an indemnification agreement (“Indemnification Agreement”) providing that Amergent will fully indemnify and hold harmless each of Chanticleer and Sonnet, and each of their respective directors, officers, stockholders and managers who assumes such role upon or following the closing of the mergerMerger against all actual or threatened claims, losses, liabilities, damages, judgments, fines and reasonable fees, costs and expenses, including attorneys’ fees and disbursements, incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, administrative, investigative or otherwise, related to the Spin-Off Businessbusiness prior to or in connection with its disposition to Amergent. The Indemnification Agreement expires on March 25, 2026.
In addition, pursuant to the Merger Agreement, prior to closing of the Merger, the Spin-Off Entityentity acquired a tail insurance policy in a coverage amount of $3.0 million, prepaid in full by the Spin-Off Entity,entity, at no cost to the indemnitees, and effective for at least six years following the consummation of the disposition, covering the Spin-Off Entity’sentity’s indemnification obligations to the indemnitees (referred to herein as the “Tail Policy”). TheNo claims have arisen to date, and the Company does not anticipate that any potential liability would exceed the insured amount.
Legal Proceedings
Litigation related to leased properties
During 20202021 and 2021the three and nine months ended September 30, 2022, the Company was in arrears on rent due on several of its leases as a result of the COVID-19 pandemic.leases. As a result, the Company has pending litigation related to 8four sites, all of which 5 have permanently closed. The outcome of this litigation could result in the permanent closure of additional restaurant locations as well as the possibility of the Company being required to pay interest and damages, modify certain leases on unfavorable terms and could result in material impairments to the Company’s assets. See Leases section below for discussion of past due rent on abandoned locations.
No amounts in addition to contracted rent that is due have been accrued as of September 30, 2021 and2022 or December 31, 20202021 in the accompanying condensed consolidated and combined balance sheets as management does not believe the outcome will result in additional liabilities to the Company; however, there can be no guarantees.
From time to time, the Company may be involved in other legal proceedings and claims that have arisen in the ordinary course of business are generally covered by insurance. As of September 30, 2021,2022, the Company does not expect the amount of ultimate liability with respect to these matters to be material to the Company’s consolidated financial condition, results of operations or cash flows.
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Leases
The Company’s leases typically contain rent escalations over the lease term.terms. The Company recognizes expense for these leases on a straight-line basis over the lease term.terms. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce our right-of-use asset related to the lease.leases. These incentives are amortized through the right-of-use asset as reductions of expense over the lease term.terms.
Some of the Company’s leases include rent escalations based on inflation indexes and fair market value adjustments. Certain leases contain contingent rental provisions that include a fixed base rent plus an additional percentage of the restaurant’s sales in excess of stipulated amounts. Operating lease liabilities are calculated using the prevailing index or rate at lease commencement. Subsequent escalations in the index or rate and contingent rental payments are recognized as variable lease expenses. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. As part of the lease agreements, the Company is also responsible for payments regarding non-lease components (common area maintenance, operating expenses, etc.) and percentage rent payments based on monthly or annual restaurant sales amounts which are considered variable costs and are not included as part of the lease liabilities.
Related to the adoption of Leases Topic 842, our policy elections were as follows:
Separation of lease and non-lease componentsShort-term policy
The Company elected this expedient to account for lease and non-lease components as a single component for the entire population of operating lease assets.
Short-term policy
The Company has elected the short-term lease recognition exemption for all applicable classes of underlying assets. Leases with an initial term of 12 months or less, that do not include an option to purchase the underlying asset that we arethe Company is reasonably certain to exercise, are not recorded on the balance sheet.
Supplemental balance sheet information related to leases was as follows:follows (in thousands):
SCHEDULE OF OPERATING LEASE INFORMATION
| Operating Leases | Classification | September 30, 2021 | December 31, 2020 | Classification | September 30, 2022 | December 31, 2021 | ||||||||||||||
| Right-of-use assets | Operating lease assets | $ | 8,971,766 | $ | 9,529,443 | Operating lease assets | $ | 7,630 | $ | 8,021 | ||||||||||
| Current lease liabilities | Current operating lease liabilities | $ | 4,581,582 | $ | 4,209,389 | Current operating lease liabilities | $ | 4,050 | $ | 4,599 | ||||||||||
| Non-current lease liabilities | Long-term operating lease liabilities | 9,683,643 | 10,677,862 | Long-term operating lease liabilities | 8,239 | 8,644 | ||||||||||||||
| $ | 14,265,225 | $ | 14,887,251 | �� | $ | 12,289 | $ | 13,243 | ||||||||||||
Lease term and discount rate were as follows:
| September 30, 2021 | December 31, 2020 | September 30, 2022 | December 31, 2021 | |||||||||||||
| Weighted average remaining lease term (years) | 7.30 | 7.70 | 6.2 | 6.7 | ||||||||||||
| Weighted average discount rate | 8.7 | % | 10 | % | 7.8 | % | 8.1 | % | ||||||||
COVID-19 has negatively impacted operating results and cash flows at significantly varying amounts at the store level. Several stores were permanently closed during the year ended December 31, 2020 while others operated at a reduced capacity. Based onAs of September 30, 2021, we performed an assessmentanalysis of the recoverability of our right-of-use assets. Based on the right-of-use asset as of September 30, 2021,analysis, we recorded an impairment charge of approximately $705,1220.7 was recorded during the nine-months then ended. NaN impairment charge was recordedmillion for the three months ended September 30, 2021. Based on an assessment of the recoverability of the right-of-use asset as of September 30, 2020, impairment charges of $333,676 and $343,141 were recorded during the three and nine months then ended, respectively.
During the three and nine months ended September 30, 2021, respectively,which is included in asset impairment charges in our condensed consolidated statements of operations. The impairment recognized during the nine months ended September 30, 2021 was primarily the result of the impact of the COVID-19 outbreak in the United States, which had a significant impact throughout the hospitality industry. Negative impacts to the operating results and cash flows varied significantly at the store level, where some stores operated at a reduced capacity and several stores were permanently closed. There were no indicators of impairment related to our right-of-use assets during the nine months ended September 30, 2022. However, as discussed in Note 13, certain store locations were closed in the subsequent fourth quarter of 2022 and management expects to record impairments on certain right-of-use assets during that period.
During each of the nine months ended September 30, 2022 and 2021, approximately $66,8210.3 and $385,340million of lease liabilities were derecognized due to the Company negotiating the cancellation of its obligations under certain lease agreements.agreements, which is included in gain on extinguished/settled lease liabilities in our condensed consolidated statements of operations. The cancellations resulted from the COVID-19 pandemic. The Company had lease liabilities of $3,249,2272.7 million related to abandoned leases.leases as of September 30, 2022. These lease liabilities are presented as part ofincluded in current operating lease liabilities.liabilities in our condensed consolidated balance sheets.
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During the nine months ended September 30, 2022, the Company amended certain leases and changed its assumptions regarding the exercise of a renewal option, which have been accounted for as lease modifications. The operating lease assets and liabilities were remeasured at the modification dates, resulting in an increase of $0.6 million during the nine months ended September 30, 2022 to both the right-of-use assets and lease liabilities. There were no lease modifications during the nine months ended September 30, 2021.
Rent expense of approximately $0.6 million and $1.7 million was incurred during the three and nine months ended September 30, 2022, respectively. Rent expense of approximately $0.6 million and $1.8 million was incurred during the three and nine months ended September 30, 2021, respectively, of which approximately $0.1 million was variable. Rent expense
Maturities of approximately $0.6 million and $1.8 million was recognized during the three and nine months endedour operating lease liabilities as of September 30, 2020, respectively, of which approximately $0.1 million was variable.2022 are presented below (in thousands):
SCHEDULE OF MATURITIES OF OPERATING LEASE LIABILITIES
| Year ending December 31: | ||||
| 2022 (remaining three months) | $ | 689 | ||
| 2023 | 2,645 | |||
| 2024 | 2,654 | |||
| 2025 | 2,501 | |||
| 2026 | 2,097 | |||
| Thereafter | 5,162 | |||
| Total remaining lease payments | 15,748 | |||
| Less: imputed interest | (3,459 | ) | ||
| Total lease liabilities | $ | 12,289 | ||
PPP Loan
The
As discussed in Note 9, the Company received two PPP loans for amounts oftotaling $2.14.1 million, and $2.0 million. The PPP loan program waswhich were established under the CARES Act and administered by the Small Business Administration (“SBA”).U.S. SBA. On November 15, 2022, the Company received notice from the SBA that the first PPP loan in the amount of $2.1 million had been fully forgiven with accrued interest. The second PPP loan in the amount of $2.0 million is being reviewed by the SBA. The application for the PPP loans requires the Company to, in good faith, certify that the current economic uncertainty made the loan requestrequests necessary to support the ongoing operationoperations of the Company. This certification further requires the Company to take into account current business activity and the Company’s ability to access other sources of liquidity sufficient to support the ongoing operations in a manner that is not significantly detrimental to the business. The receipt of funds from the PPP loans and forgiveness of the PPP loans is dependent on the Company having initially qualified for the PPP loans and qualifying for the forgiveness of such PPP loans based on funds being used for certain expenditures such as payroll costs and rent, as required by the terms of the PPP loans. There is no assurance that the Company’s obligation under the PPP loans will be forgiven. If the PPP loans are not forgiven, the Company will need to repay the PPP loans over the applicable deferral period. The Company has applied for forgiveness of the first loan and will apply for forgiveness of the second loan.
Presently, the U.S. SBA and other governmental communications have indicated that all loans in excess of $2.0 million will be subject to audit and that those audits could take up to seven years to complete. If the U.S. SBA determines that the PPP loans were not properly obtained and/or expenditures supporting forgiveness were not appropriate, the Company would need to repay some or all of the PPP loans and record additional expense which could have a material adverse impact on the business, financial condition and results of operations in a future period.
RRF
As discussed in Note 3, Pie Squared Holdings received an approximately $1010.0 million grant under the RRF and the Company assumed the risks and rewards related to the grant through the acquisition of Pie Squared.Squared Holdings. If it is determined that Pie Squared Holdings obtained the grant improperly or the disbursement of such grant monies was not for “eligible uses”uses,” then the Company would be responsible for the ramifications of such actions including the repayment of the $1010.0 million of grant monies, among other items. See Note 3 for further discussion.
12. SHARE-BASED COMPENSATION
In August 2021, the Company adopted the 2021 Inducement Plan (“the Plan”). Under the 2021 Inducement Plan, the Company can grant stock options and stock awards. There are shares of common stock reserved for issuance under the Plan. As of September 30, 2021, 50,000 shares remained available for future grants.
Share-based awards generally vest over a period of three years, and share-based awards that lapse or are forfeited are available to be granted again. The contractual life of all share-based awards is five years. The expiration date of the outstanding share-based awards is August 2026.
The Company measures share-based awards at their grant-date fair value and records compensation expense on a straight-line basis over the service period of the awards. Share-based compensation is allocated to employees and consultants based on their respective departments.
The Company recorded share-based compensation expense of $ in general and administrative expense during the three and nine months ended September 30, 2021.
SCHEDULE OF STOCK OPTIONS FAIR VALUE ASSUMPTIONS
SCHEDULE OF STOCK OPTIONS ACTIVITY
| Number of Options | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Term (years) | ||||||||||
| Outstanding at December 31, 2020 | - | $ | - | - | ||||||||
| Granted | 450,000 | $ | 1.38 | |||||||||
| Outstanding at September 30, 2021 | 450,000 | $ | 1.38 | |||||||||
| Exercisable at September 30, 2021 | 175,000 | $ | 2.22 | |||||||||
| Vested and expected to vest at September 30, 2021 | 450,000 | $ | 1.38 | |||||||||
The weighted average fair value of share-based awards granted during the nine months ended September 30, 2021 was $. As of September 30, 2021, the unrecognized compensation cost related to outstanding share-based awards was $ million and is expected to be recognized as expense over a weighted-average period of approximately years.
13. Restatement of Previously Issued Condensed Consolidated and Combined Financial Statements (Unaudited)
The Company, while undergoing the audit of its consolidated and combined financial statements as of December 31, 2020 and for the year then ended, re-evaluated the lease term for three restaurants that were permanently closed in 2020 due to the pandemic and determined that the lease terms should no longer have included periods subject to renewal options. Impairment charges had been recorded for these restaurants during the respective quarter that the restaurants were closed, but the 2020 interim unaudited financial statements did not reflect the revised lease terms. This impacted the previously reported amounts for operating lease assets, operating lease liabilities, and rent expense, among other line items in the condensed consolidated and combined interim financial statements.
The following table sets forth the effects of the adjustments on the affected items within the Company’s previously reported Condensed Consolidated and Combined Interim Balance Sheet as of September 30, 2020:
SCHEDULE OF PREVIOUSLY ISSUED INTERIM FINANCIAL STATEMENTS
| September 30, 2020 | ||||||||||||
| As reported | Adjustment | As restated | ||||||||||
| Operating lease assets | $ | 10,117,900 | $ | - | $ | 10,117,900 | ||||||
| Derivative liabilities | $ | 1,195,724 | $ | (694,724 | ) | $ | 501,000 | |||||
| Long-term operating lease liabilities | $ | 15,115,651 | $ | (479,855 | ) | $ | 14,635,796 | |||||
| Accumulated deficit | $ | (95,208,526 | ) | $ | 1,048,450 | $ | (94,160,076 | ) | ||||
| Non-controlling interests | $ | (764,097 | ) | $ | 126,129 | $ | (637,968 | ) | ||||
The following tables sets forth the effects of the adjustments on affected items within the Company’s previously reported Condensed Consolidated and Combined Interim Statements of Operations for the three and nine months ended September 30, 2020:
| Three Months Ended September 30, 2020 | ||||||||||||
| As reported | Adjustment | As restated | ||||||||||
| Restaurant operating expenses | $ | 3,462,279 | $ | (13,436 | ) | $ | 3,448,843 | |||||
| Asset impairment charge | $ | 1,231,352 | $ | (95,223 | ) | $ | 1,136,129 | |||||
| Operating loss | $ | (3,024,319 | ) | $ | 108,659 | $ | (2,915,660 | ) | ||||
| Change in fair value of derivative liabilities * | $ | (6,536,241 | ) | $ | 694,724 | $ | (5,841,517 | ) | ||||
| Other income (expense) | $ | (37,390 | ) | $ | 11,986 | $ | (25,404 | ) | ||||
| Consolidated and combined net loss | $ | (10,002,997 | ) | $ | 815,369 | $ | (9,187,628 | ) | ||||
| Net loss attributable to non-controlling interests | $ | 453,296 | $ | (51,767 | ) | $ | 401,529 | |||||
| Net loss attributable to Amergent Hospitality Group Inc | $ | (9,549,701 | ) | $ | 763,602 | $ | (8,786,099 | ) | ||||
| Net loss per common share, basic and diluted | $ | (0.67 | ) | $ | (0.05 | ) | $ | (0.62 | ) | |||
| Nine Months Ended September 30, 2020 | ||||||||||||
| As reported | Adjustment | As restated | ||||||||||
| Restaurant operating expenses | $ | 10,349,516 | $ | (26,872 | ) | $ | 10,322,644 | |||||
| Asset impairment charge | $ | 1,505,279 | $ | (216,680 | ) | $ | 1,288,599 | |||||
| Operating loss | $ | (7,033,996 | ) | $ | 243,552 | $ | (6,790,444 | ) | ||||
| Change in fair value of derivative liabilities * | $ | (394,724 | ) | $ | 694,724 | $ | 300,000 | |||||
| Other income (expense) | $ | (85,399 | ) | $ | 236,303 | $ | 150,904 | |||||
| Consolidated and combined net loss | $ | (21,006,434 | ) | $ | 1,174,579 | $ | (19,831,855 | ) | ||||
| Net loss attributable to non-controlling interests | $ | 413,969 | $ | (126,129 | ) | $ | 287,840 | |||||
| Net loss attributable to Amergent Hospitality Group Inc | $ | (20,592,465 | ) | $ | 1,048,450 | $ | (19,544,015 | ) | ||||
| Net loss per common share, basic and diluted | $ | (1.53 | ) | $ | 0.08 | $ | (1.45 | ) | ||||
There was no impact to the Company’s cash flows from operating, investing, or financing activities for the periods ended March 31, 2020, June 30, 2020, or September 30, 2020 as a result of these restatements.
14. SUBSEQUENT EVENTS
The Company has evaluated subsequent events from the balance sheet date through the date at which the condensed consolidated and combined financial statements were available to be issued, and there are no other items requiring disclosure exceptother than the following.following:
In October and November 2022, the Company received related party advances in the aggregate of $0.3 million from an entity in which the Chief Financial Officer serves as an officer but has no ownership interest.
In November 2022, the Company received related party advances in the aggregate of $0.2 million from an entity in which our Chairman and Chief Executive Officer has an ownership interest and serves as the Chief Executive Officer. This note and the previous note received in August 2022 have a maturity date of December 15, 2022.
At the end of October and through November 30, 2022, the Company closed five stores.
| ● | A PizzaRev store was closed at the expiration of the lease. | |
| ● | A LBB store in Portland Orgon was closed due to operational and safety concerns. This store was reopened in June but the situation in the area the store is located does not allow for the store to operate safely at nighttime. | |
| ● | A LBB store located in Seattle Washington, an ABC store located in New York and a PizzeRev store located in California were closed due to the stores not being cashflow positive. |
During the fourth quarter of 2022, the Company will review for impairment the right-of-use assets and fixed assets in these stores. The right-of-use assets and fixed assets for these locations at September 30, 2022 was $2.8 million.
The Board of Directors of the Company have set December 30, 2022, for the annual meeting of stockholders.
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On October 8,
14. RESTATEMENT OF PREVIOUSLY ISSUED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company, while undergoing the audit of its consolidated financial statements as of December 31, 2021 the Company, through its wholly owned UK subsidiary, Chanticleer UK Group Limited, sold West End Wings Limited (UK), the Company’s Hooters restaurant located in Nottingham, England, to Hard Four Consultancy Limited (UK)and for the final purchase priceyear then ended, determined that it had over-depreciated certain assets from January 1, 2021 through September 30, 2021 and had incorrectly stated the UK subsidiary’s balances as of £518,295 (approximately $705,710). Accordingly,and for the three and nine month periods ended September 30, 2021. This impacted the previously reported amounts for cash, property and equipment, intangible assets, accounts payable and liabilitiesaccrued expenses, restaurant sales, restaurant cost of West End Wings Limited (UK) are presentedsales, restaurant operating expenses, and depreciation and amortization, among other line items, in the condensed consolidated balance sheet asinterim financial statements.
The following tables set forth the effects of September 30, 2021 as “held for sale.”the adjustment on affected items within the Company’s previously reported Condensed Consolidated Statements of Operations:
SCHEDULE OF PREVIOUSLY ISSUED INTERIM FINANCIAL STATEMENTS
| Three months ended September 30, 2021 | ||||||||||||
| (in thousands, except per share data) | As reported | Adjustment | As restated | |||||||||
| Restaurant sales, net | $ | 6,106 | $ | (479 | ) | $ | 5,627 | |||||
| Restaurant cost of sales | $ | 2,032 | $ | (182 | ) | $ | 1,850 | |||||
| Restaurant operating expenses | $ | 3,675 | $ | (275 | ) | $ | 3,400 | |||||
| General and administrative expenses | $ | 1,395 | $ | (14 | ) | $ | 1,381 | |||||
| Depreciation and amortization | $ | 351 | $ | (137 | ) | $ | 214 | |||||
| Operating income | $ | 137 | $ | 129 | $ | 266 | ||||||
| Other income | $ | 18 | $ | (27 | ) | $ | (9 | ) | ||||
| Consolidated net income | $ | (89 | ) | $ | 102 | $ | 13 | |||||
| Net income attributable to Amergent Hospitality Group, Inc. | $ | (94 | ) | $ | 102 | $ | 8 | |||||
| Net income attributable to Amergent Hospitality Group Inc. per common share, basic | $ | (0.01 | ) | $ | 0.01 | $ | 0.00 | |||||
| Nine months ended September 30, 2021 | ||||||||||||
| (in thousands, except per share data) | As reported | Adjustment | As restated | |||||||||
| Depreciation and amortization | $ | 1,081 | $ | (408 | ) | $ | 673 | |||||
| Operating (loss) income | $ | (2,397 | ) | $ | 408 | $ | (1,988 | ) | ||||
| Consolidated net (loss) income | $ | (2,475 | ) | $ | 408 | $ | (2,067 | ) | ||||
| Net (loss) income attributable to Amergent Hospitality Group Inc. | $ | (2,376 | ) | $ | 408 | $ | (1,968 | ) | ||||
| Net (loss) income attributable to Amergent Hospitality Group Inc. per common share, basic and diluted | $ | (0.16 | ) | $ | 0.03 | $ | (0.13 | ) | ||||
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes and the other financial information included elsewhere in this Quarterly Report on Form 10-Q (“Report”).Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Report, particularly those under “Risk Factors.”
Overview
As of September 30, 2021,2022, we operatedoperate and franchisedfranchise a system-wide total of 3940 fast casual restaurants, of which 30 were27 are company-owned and 18 were13 are owned and operated by franchisees under franchise agreements. During the nine months ended September 30, 2021, there was one company-owned restaurant that was permanently closed because of the COVID-19 pandemic.
American Burger Company (“ABC”) is a fast-casual dining chain consisting of 3two company-owned locations in North Carolina and New York. ABC is known for its diverse menu featuring fresh salads, customized burgers, milk shakes, sandwiches, and beer and wine.
BGR: The Burger Joint (“BGR”) was acquired in March 2015 and consists of 7six company-owned locations in the United States and 9seven franchisee-operated locations in the United States and the Middle East.States.
Little Big Burger (“LBB”) was acquired in September 2015 and consists of 16 company-owned locations in the Portland, Oregon, Seattle, Washington, and Charlotte, North Carolina areas. The newestOne location was temporarily closed until it re-opened at the Universityend of Oregon was acquired in August 2021 and will become operational in December 2021.June 2022 due to lack of available employees. Of the company-owned restaurants, 8eight of those locations are operated under partnership agreements with investors where we control the management and operations of the stores, and the partner suppliedpartners supply the capital to open the storestores in exchange for a non-controlling interest.
Pie Squared Holdings (“PIE”) was acquired onin August 30, 2021. Pie Squared Holdings,PIE, directly and through its four wholly ownedwholly-owned subsidiaries, owns, operates and franchises pizza restaurants operating under the tradename PizzaRev. The PizzaRev stores consist of three company owned storescompany-owned locations, one of which opened on January 4, 2022, and nine franchised locations. Three of these franchised locations were not open at the time of purchase and are not included in our total store count. One additional franchise location is planned to open in 2022.
As of September 30, 2021, we operated 1 Hooters full-service restaurant in the United Kingdom. On October 8, 2021, we sold West End Wings Limited (UK), the Company’s Hooters restaurant located in Nottingham, England, to Hard Four Consultancy Limited (UK) for the final purchase price of £518,295 (approximately $705,710). Accordingly, the assets and liabilities of West End Wings Limited (UK) are presented in the condensed consolidated balance sheet as “held for sale.”
The Jantzen Beach, Oregon gaming location was a former Hooters of America redeemedlocation and is only open for online gaming sales, drinks and a portion of the Company’s ownership interest in the entity and paid $349,293 to the Company inlimited food menu. Our Jaybee’s location was opened October 2021. After the redemption, the Company’s effective economic interest in Hooters of America was less than 1%.8, 2022.
Recent Developmentsdevelopments
PPP LoanIn March 2022, we commenced a private placement of up to $3.0 million of 8% senior unsecured convertible debentures (the “8% Convertible Debt”) and 3,000,000 common stock warrants. Pursuant to the Securities Purchase Agreement, we issued $1.35 million of 8% Convertible Debt and warrants to purchase the number of shares of our common stock equal to the principal amount of 8% Convertible Debt issued. The 8% Convertible Debt matures 18 months after issuance and is subject to acceleration in the event of customary events of default. Interest is payable quarterly in cash. The 8% Convertible Debt may be converted by the holders at any time at a fixed conversion price of $0.40 per share, and each warrant entitles the holder to purchase one share of common stock at an exercise price of $0.50 per share. Both the notes and the warrants include a beneficial ownership blocker of 4.99% and contain customary provisions preventing dilution and providing the holders rights in the event of fundamental transactions. Upon the earlier of the maturity date or the one-year anniversary of conversion of the 8% Convertible Debt, holders of 51% of the registrable securities may request the Company to file a registration statement for the securities. The warrants can be exercised on a cashless basis and expire five years from the issuance date. If the Company makes any distribution to the common stockholders, the holders of the warrants will be entitled to participate on an as-if-exercised basis.
On March 27, 2020, Congress passed “The Coronavirus Aid, Relief, and Economic Security Act” (CARES Act), which includedIn connection with the “Paycheck Protection Program” (PPP) for small businesses. On April 27, 2020, Amergent received a PPP loan of $2.1 million. Due to the Spin-Off and Merger, Amergent was not publicly traded at the timeissuance of the loan application or funding. The note bears interest at 1% per year, matures in8% Convertible Debt, the maturity date of the existing 10% secured convertible debenture (“10% Convertible Debt”) was extended to April 2022,1, 2024, and requires monthly interest and principal paymentsthe holder of approximately $119,000 beginning in November 2020 and through maturity.the existing 10% Convertible Debt agreed to subordinate payment of its 10% Convertible Debt to payment of the 8% Convertible Debt.
On February 25, 2021,In October and November 2022, the Company received a second loanrelated party advances in the aggregate of $2.0$0.3 million underfrom an entity in which the Paycheck Protection Program . The note bears interest at 1% per year, matures on February 25, 2026, and requires monthly principal and interest payments of approximately $44,660 beginning June 25, 2022 through maturity.Chief Financial Officer serves as an officer but has no ownership interest.
The currently issued guidelines of the program allow for the loan proceeds to be forgiven if certain requirements are met. Any loan proceeds not forgiven will be repaid in full. The Company applied for forgiveness of the first loan and the application is under review by the government agency administering the PPP. No assurance can be given as to the amount, if any, of forgiveness. The application for forgiveness allowedIn November 2022, the Company received related party advances in the aggregate of $0.2 million from an entity in which our Chairman and Chief Executive Officer has an ownership interest and serves as the Chief Executive Officer. The total debt to defer the timing of repayment until the forgiveness assessmentthis entity is completed.now $0.5 million.
Employee Retention Credit
The Employee Retention Credit (“ERC”) under the CARES Act is a refundable tax credit which encourages businesses to keep employees on the payroll during the COVID-19 pandemic. Eligible employers can qualify for up to $7,000 of credit for each employee based on qualified wages paid after December 31, 2020 and before January 1, 2022. Qualified wages are the wages paid to an employee for the time that the employee is not providing services due to an economic hardship, specifically, either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts. The Company recognized $1,178,644 and $2,651,999 of ERC as a contra-expense in the condensed consolidated and combined statements of operations for the three and nine months ended September 30, 2021, respectively.
Acquisition
On August 30, 2021, the Company purchased all of the outstanding membership interests in Pie Squared Holdings pursuant to a Unit Purchase Agreement (Purchase Agreement). Pie Squared Holdings, directly and through its four wholly owned subsidiaries, owns, operates and franchises pizza restaurants operating under the tradename PizzaRev. The PizzaRev stores consist of three company owned stores and nine franchised locations. The purchase price is an 8% secured, convertible promissory note (Note) with a face value of $1,000,000 and a fair value of $1,194,000. Transaction costs of $190,000 were incurred in connection with the acquisition and charged to selling, general and administrative expenses in the condensed consolidated statement of operations and comprehensive income (loss) for the three-month and nine- month periods ended September 30, 2021.
Restaurant Revitalization Fund
The American Rescue Plan Act established the Restaurant Revitalization Fund (RRF) to provide funding to help restaurants and other eligible businesses keep their doors open. This program will provide restaurants with funding equal to their pandemic-related revenue loss up to $10 million per business and no more than $5 million per physical location. The Company recognized $51,187 of RRF as a contra-expense in the condensed consolidated and combined statements of operations for the three and nine months ended September 30, 2021, respectively.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 20212022 COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 20202021
Our results of operations are summarized below:
| Three Months Ended | Three months ended | |||||||||||||||||||||||||||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2022 | September 30, 2021 (Restated) | |||||||||||||||||||||||||||||||||||||
| Amount | % of Revenue* | Amount | % of Revenue* | % Change | ||||||||||||||||||||||||||||||||||||
| (in thousands) | Amount | % of Revenue* | Amount | % of Revenue* | % Change | |||||||||||||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||||||||||||||||
| Restaurant sales, net | $ | 6,106,261 | 96.0 | % | $ | 4,509,082 | 95.9 | % | 35.4 | % | $ | 5,176 | 95.9 | % | $ | 5,627 | 95.7 | % | (8.0 | )% | ||||||||||||||||||||
| Gaming income, net | 136,135 | 2.2 | % | 107,403 | 2.3 | % | 26.8 | % | 109 | 2.0 | % | 136 | 2.3 | % | (19.9 | )% | ||||||||||||||||||||||||
| Franchise income | 116,179 | 1.8 | % | 85,666 | 1.8 | % | 35.6 | % | 116 | 2.1 | % | 116 | 2.0 | % | 0.1 | % | ||||||||||||||||||||||||
| Total revenue | 6,358,575 | 4,702,151 | 5,401 | 5,879 | ||||||||||||||||||||||||||||||||||||
| Expenses | ||||||||||||||||||||||||||||||||||||||||
| Expenses: | ||||||||||||||||||||||||||||||||||||||||
| Restaurant cost of sales | 2,031,666 | 33.2 | % | 1,498,922 | 33.2 | % | 35.5 | % | 1,675 | 32.4 | % | 1,850 | 32.9 | % | (9.5 | )% | ||||||||||||||||||||||||
| Restaurant operating expenses | 3,674,755 | 60.2 | % | 3,448,843 | 76.5 | % | 6.6 | % | 4,162 | 80.4 | % | 3,400 | 60.4 | % | 22.4 | % | ||||||||||||||||||||||||
| General and administrative expenses | 1,394,766 | 21.9 | % | 1,255,918 | 26.7 | % | 11.1 | % | 1,206 | 22.3 | % | 1,381 | 23.5 | % | (12.7 | )% | ||||||||||||||||||||||||
| Asset impairment charge | — | — | % | 1,136,129 | 24.2 | % | (100.0 | )% | ||||||||||||||||||||||||||||||||
| Depreciation and amortization | 350,599 | 5.5 | % | 277,999 | 5.9 | % | 26.1 | % | 170 | 3.1 | % | 214 | 3.6 | % | (20.6 | )% | ||||||||||||||||||||||||
| Employee retention credit | (1,229,831 | ) | (19.3 | )% | — | — | % | 100 .0% | ||||||||||||||||||||||||||||||||
| Employee retention credit and other grant income | (373 | ) | (6.9 | )% | (1,232 | ) | (21.0 | )% | (69.7 | )% | ||||||||||||||||||||||||||||||
| Total expenses | 6,221,955 | 97.9 | % | 7,617,811 | 162.0 | % | (18.3 | )% | 6,840 | 5,613 | ||||||||||||||||||||||||||||||
| Operating income (loss) | 136,620 | (2,915,660 | ) | |||||||||||||||||||||||||||||||||||||
| Other (expense) income: | ||||||||||||||||||||||||||||||||||||||||
| Operating (loss) income | (1,439 | ) | 266 | |||||||||||||||||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||||||||||||||||
| Interest expense | (165,775 | ) | (2.6 | )% | (177,420 | ) | (3.8 | )% | (6.6 | )% | (230 | ) | (4.3 | )% | (166 | ) | (3.1 | )% | 38.6 | % | ||||||||||||||||||||
| Change in fair value of derivative liabilities | — | — | % | (5,841,517 | ) | (124.2 | )% | (100.0 | )% | — | — | % | — | — | % | — | % | |||||||||||||||||||||||
| Change in fair value of investment | (100,422 | ) | (1.6 | )% | (199,154 | ) | (4.2 | )% | (49.6 | )% | (22 | ) | (0.4 | )% | (100 | ) | (1.9 | )% | (78.0 | )% | ||||||||||||||||||||
| Debt extinguishment expense | — | — | % | — | — | % | — | % | ||||||||||||||||||||||||||||||||
| Other income (expense) | 18,203 | 0.3 | % | (25,404 | ) | (0.5 | )% | (171.7 | )% | |||||||||||||||||||||||||||||||
| Gain on extinguished lease liabilities | 66,821 | 1.0 | % | — | — | % | 100 | % | ||||||||||||||||||||||||||||||||
| Total other income (expense) | (181,173 | ) | (6,243,495 | ) | ||||||||||||||||||||||||||||||||||||
| Net loss before income taxes | (44,553 | ) | (9,159,155 | ) | ||||||||||||||||||||||||||||||||||||
| Change in fair value of convertible promissory note | 35 | 0.6 | % | — | 100.0 | % | — | % | ||||||||||||||||||||||||||||||||
| Gain on extinguished/settled lease liabilities | — | — | % | 67 | 1.2 | % | (100.0 | )% | ||||||||||||||||||||||||||||||||
| Other income | 33 | 0.6 | % | (9 | ) | (0.2 | )% | (466.7 | )% | |||||||||||||||||||||||||||||||
| Total other income | (184 | ) | (208 | ) | ||||||||||||||||||||||||||||||||||||
| (Loss) income before income taxes | (1,623 | ) | 58 | |||||||||||||||||||||||||||||||||||||
| Income tax expense | (44,637 | ) | (0.7 | )% | (28,473 | ) | (0.6 | )% | 56.8 | % | — | — | % | (45 | ) | (0.8 | )% | (100.0 | )% | |||||||||||||||||||||
| Consolidated net loss | $ | (89,190 | ) | $ | (9,187,628 | ) | ||||||||||||||||||||||||||||||||||
| Consolidated net (loss) income | $ | (1,623 | ) | $ | 13 | |||||||||||||||||||||||||||||||||||
| Nine Months Ended | Nine months ended | |||||||||||||||||||||||||||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2022 | �� | September 30, 2021 (Restated) | ||||||||||||||||||||||||||||||||||||
| Amount | % of Revenue* | Amount | % of Revenue* | % Change | ||||||||||||||||||||||||||||||||||||
| (in thousands) | Amount | % of Revenue* | Amount | % of Revenue* | % Change | |||||||||||||||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||||||||||||||||
| Restaurant sales, net | $ | 15,288,320 | 96.1 | % | $ | 13,881,380 | 97.0 | % | 10.1 | % | $ | 15,257 | 91.8 | % | $ | 15,288 | 96.1 | % | (0.2 | )% | ||||||||||||||||||||
| Gaming income, net | 304,173 | 1.9 | % | 236,615 | 1.7 | % | 28.6 | % | 357 | 2.1 | % | 304 | 1.9 | % | 17.4 | % | ||||||||||||||||||||||||
| Franchise income | 314,603 | 2.0 | % | 183,864 | 1.3 | % | 71.1 | % | 1,013 | 6.1 | % | 315 | 2.0 | % | 221.6 | % | ||||||||||||||||||||||||
| Total revenue | 15,907,096 | 14,301,859 | 16,627 | 15,907 | ||||||||||||||||||||||||||||||||||||
| Expenses | ||||||||||||||||||||||||||||||||||||||||
| Expenses: | ||||||||||||||||||||||||||||||||||||||||
| Restaurant cost of sales | 4,782,780 | 31.3 | % | 4,458,983 | 32.1 | % | 7.3 | % | 4,868 | 31.9 | % | 4,783 | 31.3 | % | 1.8 | % | ||||||||||||||||||||||||
| Restaurant operating expenses | 10,100,284 | 66.1 | % | 10,322,644 | 74.4 | % | (2.2 | )% | 11,320 | 74.2 | % | 10,100 | 66.1 | % | 12.1 | % | ||||||||||||||||||||||||
| Restaurant pre-opening and closing expenses | — | 20,730 | 0.1 | % | (100.0 | )% | ||||||||||||||||||||||||||||||||||
| General and administrative expenses | 3,755,866 | 23.6 | % | 3,891,739 | 27.2 | % | (3.5 | )% | 4,348 | 26.2 | % | 3,756 | 23.6 | % | 15.8 | % | ||||||||||||||||||||||||
| Asset impairment charge | 1,287,579 | 8.1 | % | 1,288,599 | 9.0 | % | (0.1 | )% | ||||||||||||||||||||||||||||||||
| Asset impairment charges | — | — | % | 1,288 | 8.1 | % | (100.0 | )% | ||||||||||||||||||||||||||||||||
| Depreciation and amortization | 1,080,604 | 6.8 | % | 1,109,608 | 7.8 | % | (2.6 | )% | 673 | 3.6 | % | 673 | 4.2 | % | (11.9 | )% | ||||||||||||||||||||||||
| Employee retention credit | (2,703,186 | ) | (17.0 | )% | — | — | % | 100 | % | |||||||||||||||||||||||||||||||
| Employee retention credit and other grant income | (2,208 | ) | (13.3 | )% | (2,705 | ) | (17.0 | )% | (18.4 | )% | ||||||||||||||||||||||||||||||
| Total expenses | 18,303,927 | 115.1 | % | 21,092,303 | 147.5 | % | (13.2 | )% | 18,921 | 17,895 | ||||||||||||||||||||||||||||||
| Operating loss | (2,396,831 | ) | (6,790,444 | ) | (2,294 | ) | (1,988 | ) | ||||||||||||||||||||||||||||||||
| Other (expense) income: | ||||||||||||||||||||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||||||||||||||||
| Interest expense | (481,706 | ) | (3.0 | )% | (499,870 | ) | (3.5 | )% | (3.6 | )% | (641 | ) | (3.9 | )% | (482 | ) | (3.0 | )% | 33.0 | % | ||||||||||||||||||||
| Change in fair value of derivative liabilities | 118,664 | 0.7 | % | 300,000 | 2.1 | % | (60.4 | )% | — | — | % | 119 | 0.7 | % | (100.0 | )% | ||||||||||||||||||||||||
| Change in fair value of investment | (220,882 | ) | (1.4 | )% | (1,152,185 | ) | (8.1 | )% | (80.8 | )% | (38 | ) | (0.2 | )% | (221 | ) | (1.4 | )% | (82.8 | )% | ||||||||||||||||||||
| Debt extinguishment expense | — | — | % | (11,808,111 | ) | (82.6 | )% | (100.0 | )% | |||||||||||||||||||||||||||||||
| Other income (expense) | 164,761 | 1.0 | % | 150,904 | 1.1 | % | 9.2 | % | ||||||||||||||||||||||||||||||||
| Gain on extinguished lease liabilities | 385,340 | 2.4 | % | — | — | % | 100 | % | ||||||||||||||||||||||||||||||||
| Total other income (expense) | (33,823 | ) | (13,009,262 | ) | ||||||||||||||||||||||||||||||||||||
| Net loss before income taxes | (2,430,654 | ) | (19,799,706 | ) | ||||||||||||||||||||||||||||||||||||
| Change in fair value of convertible promissory note | 206 | 1.2 | % | — | — | % | 100.0 | % | ||||||||||||||||||||||||||||||||
| Gain on extinguished/settled lease liabilities | 256 | 1.5 | % | 385 | 2.4 | % | (33.5 | )% | ||||||||||||||||||||||||||||||||
| Gain on extinguished trade payable | 161 | 1.0 | % | — | — | % | 100.0 | % | ||||||||||||||||||||||||||||||||
| Other income | 344 | 2.1 | % | 165 | 1.0 | % | 108.5 | % | ||||||||||||||||||||||||||||||||
| Total other income | 288 | (34 | ) | |||||||||||||||||||||||||||||||||||||
| Loss before income taxes | (2,006 | ) | (2,022 | ) | ||||||||||||||||||||||||||||||||||||
| Income tax expense | (44,637 | ) | (0.3 | )% | (32,149 | ) | (0.2 | )% | 38.8 | % | (2 | ) | — | % | (45 | ) | (0.3 | )% | 99.4 | % | ||||||||||||||||||||
| Consolidated net loss | $ | (2,475,291 | ) | $ | (19,831,855 | ) | $ | (2,008 | ) | $ | (2,067 | ) | ||||||||||||||||||||||||||||
* Restaurant cost of sales and operating expenses and closing expense percentages are based on restaurant sales, net. Other percentages are based on total revenue.
Revenue
Total revenue decreased $(0.5) million or (8.5)% and increased to $6.4$0.7 million or 4.5% for the three and nine months ended September 30, 2021 from $4.7 million for2022, respectively, as compared to the three months ended September 30, 2020.corresponding periods in 2021.
| Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2021 | Three months ended September 30, 2022 | Three months ended September 30, 2021 (Restated) | |||||||||||||||||||||||||||||
| Amount | % of Revenue* | Amount | % of Revenue* | Amount | % of Revenue | Amount | % of Revenue | |||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Restaurant sales, net | 6,106,261 | 96.0 | % | 15,288,320 | 96.1 | % | $ | 5,176 | 95.9 | % | $ | 5,627 | 95.7 | % | ||||||||||||||||||
| Gaming income, net | 136,135 | 2.2 | % | 304,173 | 1.9 | % | 109 | 2.0 | % | 136 | 2.3 | % | ||||||||||||||||||||
| Franchise income | 116,179 | 1.8 | % | 314,603 | 2.0 | % | 116 | 2.1 | % | 116 | 2.0 | % | ||||||||||||||||||||
| Total revenue | 6,358,575 | 100 | % | 15,907,096 | 100 | % | $ | 5,401 | 100.0 | % | $ | 5,879 | 100.0 | % | ||||||||||||||||||
| Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | Nine months ended September 30, 2022 | Nine months ended September 30, 2021 (Restated) | |||||||||||||||||||||||||||||
| Amount | % of Revenue* | Amount | % of Revenue* | Amount | % of Revenue | Amount | % of Revenue | |||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Restaurant sales, net | $ | 4,509,082 | 95.9 | % | $ | 13,881,380 | 97.0 | % | $ | 15,257 | 97.8 | % | $ | 15,288 | 96.1 | % | ||||||||||||||||
| Gaming income, net | 107,403 | 2.3 | % | 236,615 | 1.7 | % | 357 | 2.1 | % | 304 | 1.9 | % | ||||||||||||||||||||
| Franchise income | 85,666 | 1.8 | % | 183,864 | 1.3 | % | 1,013 | 6.1 | % | 315 | 2.0 | % | ||||||||||||||||||||
| Total revenue | $ | 4,702,151 | 100 | % | $ | 14,301,859 | 100 | % | $ | 16,627 | 100.0 | % | $ | 15,907 | 100.0 | % | ||||||||||||||||
| ● | Revenue from restaurant sales | |
| ● | Franchise |
Expenses
Restaurant cost of sales
Restaurant cost of sales decreased $0.2 million or 9.5% and increased to $2.0$0.1 million or 1.8% for the three and nine months ended September 30, 2022, respectively, as compared to the corresponding periods in 2021 from $1.5 millionprimarily due to the 8.0% and 0.0% decreases in restaurant revenue. Restaurant cost of sales as a percentage of restaurant sales have stayed consistent. Restaurant cost of sales decreased to 31.9% for the three and nine months ended September 30, 2020. There was no change in the percent2022, respectively, compared to an increase of restaurant sales between32.9% and 31.3% for the three months ended September 30, 2021 and the three months ended September 30, 2020. The overall decrease in cost of sales was due to the 35.5% increase in restaurant revenue to $6.1 million for the three months ended September 30, 2021 compared to $4.5 million for the three months ended September 30, 2020.
Restaurant cost of sales increased to $4.8 million for the nine months ended September 30, 2021, from $4.5 million for the nine months ended September 30, 2020. The percent of restaurant sales decreased to 31.3% for the nine months ended September 30, 2021 from 32.1% for the nine months ended September 30, 2020. The overall increase in cost of sales was due to the 10.1% increase in restaurant revenue to $15.3 million for the nine months ended September 30, 2021 compared to $13.9 million for the nine months ended September 30, 2020.respectively.
Restaurant operating expenses
Restaurant operating expenses increased to $3.7$0.8 million or 22.4% and $1.2 million or 12.1% for the three months ended September 30, 2021 from $3.5 million for the three months ended September 30, 2020. The overall percentage of restaurant operating expenses dropped from 76.5% in 2020 to 60.2% in 2021 and was driven by the overall increase of revenue as described in the revenue section above, and the corresponding adjustment of labor at the store level and tighter controls of store level operating expenses.
Restaurant operating expenses decreased to $10.1 million for the nine months ended September 30, 2021 from $10.3 million for2022, respectively, as compared to the nine months ended September 30, 2020.corresponding periods in 2021. The overall decrease of restaurant operating expenses was driven by the overall improvement in cost of goods sold and direct labor.
Restaurant pre-opening and closing expenses
Thereincreases were no restaurant pre-opening and closing expenses for the three months ended September 30, 2021 and 2020 as no stores were opened or closed during the three months ended September 30, 2021 and 2020. There were no restaurant pre-opening and closing expenses for the nine months ended September 30, 2021 compared with approximately $21,000 for the nine months ended September 30, 2020. The decrease is primarily due to limited restaurant openings and closingsthe overall increase in payroll cost with cost of living increase across the nine months ended September 30, 2020 and one closing during the nine months ended September 30, 2021. In September 2021, we had three PizzaRev stores and LBB University of Oregon that we were opening but had not incurred any pre-opening expenses.board for our employees.
General and administrative expense (“G&A”)
G&A expenses decreased to $3.7$(0.2) million or (13.5)% and increased $0.6 million or 15.8% for the three and nine months ended September 30, 2022, respectively, as compared to the corresponding periods in 2021 from $3.9primarily due to the net effect of (i) increases in salary and benefits of $0.0 million forand $0.5 million, respectively, primarily due to the nine months ended September 30, 2020. During the nine months endedaddition of two senior management personnel and an increase in our employee headcount from September 30, 2021 audit, legalto September 30, 2022 and professional services increased by $0.2 million due to the first year-end audit subsequent to being spun-off from Chanticleer, professional services and professional fees related to lease related legal and accounting matters. This increase was offset by a $0.1 million decrease in shareholder services and fees due to spin-off from Chanticleer and a decrease of $0.3 million(ii) increases in advertising, insurance and other expenses of $0.0 million and $0.3 million, respectively, primarily due to less need duringincreases in advertising spending as we begin to recover from the covid pandemic There was no significant change in G&A expenses during the three months ended September 30, 2021 when compared to the three months ended September 30, 2020. COVID-19 pandemic.
| 29 |
Significant components of G&A are summarized as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | Three months ended | Nine months ended | |||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||||||||||||||
| (in thousands) | (Restated) | (Restated) | ||||||||||||||||||||||||||||||
| Audit, legal and other professional services | $ | 641,113 | $ | 615,098 | $ | 1,863,580 | $ | 1,722,687 | $ | 418 | $ | 641 | $ | 1,621 | $ | 1,864 | ||||||||||||||||
| Salary and benefits | 587,358 | 455,540 | 1,575,119 | 1,459,628 | 588 | 587 | 2,088 | 1,575 | ||||||||||||||||||||||||
| Advertising, Insurance and other | 141,674 | 225,131 | 259,415 | 558,563 | ||||||||||||||||||||||||||||
| Shareholder services and fees | 3,246 | (51,150 | ) | 10,885 | 116,562 | |||||||||||||||||||||||||||
| Advertising, insurance and other | 183 | 128 | 556 | 259 | ||||||||||||||||||||||||||||
| Stockholder services and fees | 7 | 3 | 24 | 11 | ||||||||||||||||||||||||||||
| Travel and entertainment | 21,375 | 11,299 | 46,867 | 34,299 | 10 | 22 | 59 | 47 | ||||||||||||||||||||||||
| Total G&A Expenses | $ | 1,394,766 | $ | 1,255,918 | $ | 3,755,866 | $ | 3,891,739 | ||||||||||||||||||||||||
| Total G&A expenses | $ | 1,206 | $ | 1,381 | $ | 4,348 | $ | 3,756 | ||||||||||||||||||||||||
Asset impairment charges
We did not record any asset impairment charges during the three and nine months ended September 30, 2022.
Asset impairment charges of $1.3 million were recorded during the nine months ended September 30, 2021. The impairment was comprised of $0.3 million, $0.7 million and $0.3 million of impairment on property and equipment, right of useright-of-use asset and intangible assets, respectively, and was due to ongoing cash flow implications resulting from the ongoing COVID-19 pandemic. These charges were recorded in the first quarter of 2021 and no asset impairment charges were recorded during the three months ended September 30, 2021 as store operating performance began to improve and due to prior impairment taken on underperforming and closed locations.
During the nine months ended September 30, 2020, the Company impaired certain assets in connection with the closure of three locations. In addition, in the 2020 period, the Company recorded an impairment on tradenames/trademarks of $246,751, propertyEmployee retention credit and equipment of $685,333 and right of use asset of $343,141 primarily due to the lower level of cash flow at the store level due to the impact of COVID-19 on operations.
Depreciation and amortizationother grant income
Depreciation and amortization expense was $350,599 and $1,080,604 forEmployee Retention Credit (“ERC”). For each of the three and nine months ended September 30, 2022 and 2021, the Company recognized $0.0 million and $1.5 million, respectively, comparedof ERC as a contra-expense included in employee retention credit and grant income in the condensed consolidated statements of operations. Although the program ended on January 1, 2022, the Company performed an analysis during the current period and determined that it was eligible for additional credits related to $277,9992021 wages.
Restaurant Revitalization Fund (“RRF”). Pie Squared Holdings, which we acquired during August 2021, received a grant under the RRF and $1,109,608$2.0 million of unused funds at the closing of the acquisition were placed into escrow for our benefit. For the three and nine months ended September 30, 2020, respectively.2022, the Company recognized $0.4 million and $1.5 million, respectively, related to the RRF as a contra-expense included in employee retention credit and other grant income in the condensed consolidated statements of operations. As of September 30, 2022, there was no remaining available for future recognition under the RRF.
For additional information, see Note 3 to the condensed consolidated financial statements.
Other Income (Expense)
Other (expense) incomeChange in fair value of derivative liabilities
Interest expense forThere were no derivative liabilities recorded during the three and nine months ended September 30, 2021 of $165,775 and $481,706 was comparable to the comparative periods in 2020 of $177,420 and $499,870.
2022. During the three and nine months ended September 30, 2021, the change in fair value of derivative liabilities was a gain of $118,664, which was$-0- and $0.1 million, respectively, related to the True-Up Payment derivative. Derivative liabilities arewere marked to market on a quarterly basis and fluctuationfluctuations in value are reflective of the fair market value at the point in time thatat which the instruments arewere measured. The True-Up Payment derivative was settled in July 2021 with a cash payment of $0.1 million.
Change in fair value of investment
Our investment represents the fair value of the common stock of Sonnet held by the Company after its exercise of warrants received in connection with the Merger, as defined and described in Note 1 to the condensed consolidated financial statements. We recognized a loss in fair value of $22,000 and $0.1 million during the three months ended September 30, 2022 and 2021, respectively, and $38,000 and $0.2 million during the nine months ended September 30, 2022, respectively, as a result of decreases in Sonnet’s common stock price.
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Change in fair value of convertible promissory note
In August 2021, we issued an 8% secured, convertible promissory note as consideration for the acquisition of Pie Squared Holdings. We have elected to measure the convertible promissory note at fair value, with changes in fair value recognized in operations. We recognized a change in fair value of $35,000 and $0.2 million during the three and nine months ended September 30, 2022, respectively. There were no similar transactions during the three and nine months ended September 30, 2021.
Gain on extinguished/settled lease liabilities
During the three and nine months ended September 30, 2020 the change in fair value of derivative liabilities and warrants was a loss of $5.8 million and2022, we recognized a gain ofon extinguished/settled lease liabilities $-0- and $0.3 million, respectively. The income inrespectively, due to settlements of outstanding lease liabilities. During the three months ended September 30, 2020 was primarily due to a decrease in the Company’s stock price at September 30, 2020 compared to June 30, 2020, thus driving a decrease in the value of the derivative instruments. The True-Up Payment was settled in July 2021 with a payment of $66,136.
On April 1, 2020, the Company exchanged the then existing 8% non-convertible notes for 10% convertible notes. Warrants to purchase common stock were also issued in connection with the issuance of the new notes. The Company recorded a $11.8 million loss on the extinguishment of the 8% notes based on the difference in the carrying value of the old notes and the fair value of the new notes and warrants issued.
In connection with the Merger, the Company obtained warrants to purchase 186,101 shares of Sonnet at $0.001 per share. The warrants were exercised in 2020 and common stock is now held. The share price of Sonnet has decreased since the Merger and a loss on investment of $0.1 million and $0.2 million was recognized for the three- and nine-month periods ended September 30, 2021, respectively. Additionally, shares were sold in 2021 and the Company received proceeds of $0.1 million. The Company recognized a loss of $0.2 million during the three months ended September 30, 2020 and a loss on investment of $1.1 million during the nine months ended September 30, 2020. This common stock will continue to be recorded at fair value until security is sold.2021, we recognized a gain on extinguished/settled lease liabilities $-0- and $0.4 million, respectively,
Gain on extinguished trade payable
During the three and nine months ended September 30, 2022, we recognized a gain on extinguished trade payable of nil and $0.2 million, respectively, due to the settlement of outstanding amounts with a supplier. There were no such settlements during the three and nine months ended September 30, 2021.
Other income
Other income increased (decreased) $0.03 million or 288.9% and $0.2 million or 99.4% for the three and nine months ended September 30, 2022, respectively, compared to the corresponding periods in 2021 primarily due to (i) a gain recognized during the Company recognized gainssecond quarter of 2022 of $0.1 million as a result of a franchise-related litigation settlement and $0.4 million on(ii) a dividend received during the extinguishmentfirst quarter of lease liabilities. No such gains were recorded2022 from our investment in the comparable 2020 periods.Hooters of America of approximately $0.1 million.
STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 20212022 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 20202021
| Nine Months Ended | ||||||||
| September 30, 2021 | September 30, 2020 | |||||||
| Net cash used in operating activities | $ | (2,813,998 | ) | $ | (4,892,561 | ) | ||
| Net cash provided by (used in) investing activities | 2,157,275 | (29,821 | ) | |||||
| Net cash provided by financing activities | 1,901,157 | 7,247,506 | ||||||
| Effect of foreign currency exchange rates | (12,615 | ) | (14,496 | ) | ||||
| $ | 1,231,819 | $ | 2,310,628 | |||||
| Nine months ended | ||||||||
| September 30, 2022 | September 30, 2021 | |||||||
| (in thousands) | (Restated) | |||||||
| Net cash flows used in operating activities | $ | (3,231 | ) | $ | (2,814 | ) | ||
| Net cash flows used in investing activities | (230 | ) | 2,157 | |||||
| Net cash flows provided by financing activities | 1,847 | 1,901 | ||||||
| Effect of exchange rate changes on cash | — | (13 | ) | |||||
| Less: Cash classified in current assets held for sale | — | (111 | ) | |||||
| Net (decrease) increase in cash and restricted cash | $ | (1,614 | ) | $ | 1,121 | |||
Operating activities
Cash used in operating activities for the nine months ended September 30, 2022 was primarily attributable to the net loss of $2.0 million and non-cash income of $0.3 million for a gain on extinguished/settled lease liabilities, $0.2 million for a fair value adjustment to a convertible promissory note and $0.2 million for a gain on extinguished trade payable, offset by non-cash charges to operations of $1.6 million for depreciation and amortization. The balance of the change in cash flows from operating activities was related to net movements in asset and liability accounts.
Cash used in operating activities was approximately $2.8 million for the nine months ended September 30, 2021. The use of cash in the nine months ended September 30, 2021 was primarily attributable to the net loss of $2.5 million and non-cash income of $0.4 million from a gain on extinguished lease liabilities and a fair value adjustment to a derivative of $0.1 million offset by non-cash charges to operations of $1.3 million for asset impairments and $1.5 million for depreciation and amortization. Additionally, the Company recognized a loss on investments of $0.2 million and non-cash expense of $0.1 million related to the amortization of debt discounts. The balance of the change in cash flows from operating activities was related to net movements in asset and liability accounts.
Investing activities
Cash used in operatinginvesting activities was approximately $4.9 million for the nine months ended September 30, 2020. This use of cash was primarily driven by the net loss incurred of $19.8 million offset by non-cash charges to operations of $14.9 million. The non-cash charges in 2020 consist primarily of loss on debt extinguishment of $11.8 million, loss on investments of $1.2 million, asset impairment charges of $1.3 million2022 and depreciation and amortization of property and equipment, intangible assets and right-of-use assets totaling $2.3 million. Additionally, in 2020 net assets and liabilities were reduced by $1.6 million, primarily from a reduction in operating lease liabilities. The Company obtained cash of $6.0 million from the Merger and used a portion to reduce its liabilities in 2020.
Cash provided by investing activities during the nine months ended September 30, 2021 was primarily relatedattributable to cashexpenditures on property and restricted cash acquired in connection with the acquisition of Pie Squared Holdings.equipment.
Financing activities
Cash provided by financing activities for the nine months ended September 30, 20212022 was approximately $1.9primarily attributable to proceeds of $1.4 million comparedrelated to cashthe issuance of 8% senior unsecured convertible debentures and proceeds of $0.8 million related to the issuance of notes payable. Cash provided by financing activities of approximately $7.2 million for the nine months ended September 30, 2020. Cash provided by financing activities during 2021 was primarily relatedattributable to proceeds offrom a $2.0 million PPPPayment Protection Program (“PPP”) loan. The primary drivers of the cash provided by financing activities during 2020 were proceeds from the bridge preferred equity investment, the exercise of warrants, and the Merger Consideration received of $6.0 million.
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LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN
Liquidity, Capital Resources and Going Concern
As of September 30, 2021,2022, our cash balance was $3.0$0.70 million, of which $1.9 million was restricted cash, our working capital deficiency was $16.0$13.7 million and we had significant near-term commitments and contractual obligations. The level of additional cash needed to fund operations and our ability to conduct business for the next 12 months will be influenced primarily by the following factors:
| ● | our | |
| ● | our ability to qualify for and | |
| ● | our ability to refinance or otherwise extend maturities of current debt obligations; | |
| ● | our ability to manage our operating expenses and maintain gross margins; | |
| ● | popularity of and demand for our fast-casual dining concepts; and | |
| ● | general economic conditions and changes in consumer discretionary income. |
We have typically funded our operating costs, acquisition activities, working capital requirements and capital expenditures with proceeds from the issuances of our common stock and other financing arrangements, including convertible debt, lines of credit, notes payable, capital leases, government stimulus funds and other forms of external financing.
On March 10, 2020, the World Health Organization characterized the novel COVID-19 virus as a global pandemic. The COVID-19 outbreak in the United States has resulted in a significant impact throughout the hospitality industry that have continued through September 30, 2021. The Company has been impacted due to restrictions placed by state and local governments that caused temporary restaurant closures or significantly reduced the Company’s ability to operate, restricting some of the Company’s restaurants to take-out only. It is difficult to estimate the length or severity of this outbreak; however, the Company has made operational changes, as needed, to reduce the impact.
As Amergent executes its business plan over the next 12 months, it intends to carefully monitor the impact of its working capital needs and cash balances relative to the availability of cost-effective debt and equity financing. In the event that capital is not available, Amergent may then have to scale back or freeze its operations plans, sell assets on less than favorable terms, reduce expenses, and/or curtail future acquisition plans to manage its liquidity and capital resources.
The Company’sOur current operating losses combined with itsour working capital deficit and uncertainties regarding the impact of COVID-19, raise substantial doubt about our ability to continue as a going concern.
In addition, our business is subject to additional risks and uncertainties including, but not limited to, those described in Item 1A. “Risk Factors.”
The condensed consolidated and combined financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Companywe be unable to continue as a going concern.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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ItemITEM 4: Controls and ProceduresCONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We evaluated, under the supervision and with the participation of the principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”)) as of September 30, 2021,2022, the end of the period covered by this Report. Based on this evaluation, our Chairman, President and Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer) have concluded that our disclosure controls and procedures were not effective at the reasonable assurance level at September 30, 20212022 because of the material weakness in the Company’s internal control over financial reporting that existed at December 31, 20202021 that has not been fully remediated by the end of the three and nine month periodsperiod ended September 30, 2021.2022.
Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met.
Changes in Internal Control over Financial Reporting
Other than the material weakness and remediation activities discussed below, there were no changes in our internal control over financial reporting during the three months ended September 30, 20212022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Material Weakness in Internal Control over Financial Reporting
Material Weaknesses. A material weakness is a control deficiency, or a combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Management identified the following deficiency in its internal control over financial reporting:
| ● | We identified a deficiency related to our financial close process including maintaining a sufficient complement of personnel commensurate with our accounting and financial reporting requirements, as well as development and extension of controls over the recording of closing journal entries, accounting for business combinations, contingencies and proper cut-off of accounts payable and accrued expenses at period end. |
Management determined that the deficiency could potentially result in a material misstatement of the consolidated and combined financial statements in a future annual or interim period that would not be prevented or detected. Therefore, the deficiency constitutes a material weakness in internal control.
Remediation Plans
The Company is committedWe initiated several steps to remediating its material weaknesses as promptly as possible. Implementationevaluate and implement measures designed to improve our internal control over financial reporting in order to remediate the control deficiencies noted above, including recruitment of an accounting consultant and seeking outside advice from other third-party consultants to assist in improving the Company’s remediation plans has commencedinternal control, simplifying its reporting processes and is being overseen byreducing the audit committee. As partrisk of its remediation efforts,undetected errors. In June 2020, the Company hired two third partyan accounting firms with technicalconsultant that has appropriate expertise in accounting experience during 2020 to support management to ensure accurate reporting. Further,and reporting under U.S. GAAP and SEC regulations and has allowed the Company is in the process of designing and implementing procedures for control over theto be better aligned with segregation of duties forduties. With the preparationhiring of approvalthis consultant, the Company will be instituting monthly and recordingquarterly meetings to identify significant, infrequent and unusual transactions as well as ensure timely reporting. Additionally, in September 2020 the Company engaged a third-party accounting and advisory firm to assist with, among other areas, the analysis of journal entriescomplex, infrequent and procedureunusual transactions as well as provide valuation services to obtain the proper cut-off of accounts payable and accrued expenses in a period.Company. However, there can be no assurance as to when thesethis material weaknessesweakness will be remediated or that additional material weaknesses will not arise in the future. Even effective internal control can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. Any failure to remediate the material weaknesses, or the development of new material weaknesses in our internal control over financial reporting, could result in material misstatements in our financial statements, which in turn could have a material adverse effect on our financial condition and the trading price of our common stock and we could fail to meet our financial reporting obligations.
partPART II – Other informationOTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Various subsidiaries of Amergent are delinquent in payment of payroll taxes to taxing authorities. As of September 30, 2021, approximately $2.0$2.1 million of employee and employer taxes (including estimated penalties and interest) was accrued but not remitted in years prior to 2019 to certain taxing authorities by certain of these subsidiaries for cash compensation paid. As a result, these subsidiaries are liable for such payroll taxes. These subsidiaries have received warnings and demands from the taxing authorities and management is prioritizing and working with the taxing authorities to make these payments in order to avoid further penalties and interest. Failure to remit these payments promptly could result in increased penalty fees.
During 20202021 and 2021the three and nine months ended September 30, 2022, the Company was in arrears on rent due on several of its leases as a result of the COVID-19 pandemic. As a result, the Company has pending litigation related to 8four sites, all of which 5 have permanently closed. The outcome of this litigation could result in the permanent closure of additional restaurant locations as well as the possibility of the Company being required to pay interest and damages, modify certain leases on unfavorable terms and could result in material impairments to the Company’s assets.
The Company entered into a promissory note to repay a contractor for the build-out of a new Little Big Burger location. The note has a balance of $348,269, and a stated interest rate of 12% per year. In connection with and prior to the Merger and Spin-Off, on April 1, 2020, this note was assumed by Amergent. The Company is currently in default on this loan and a writ of garnishment was ordered against the Company in 2020 for approximately $445,000.
From time to time, the Company may be involved in other legal proceedings and claims that have arisen in the ordinary course of business are generally covered by insurance. As of September 30, 2021,2022, the Company does not expect the amount of ultimate liability with respect to these matters to be material to the Company’s consolidated financial condition, results of operations or cash flows.
ITEM 1A: RISK FACTORS
In addition to the updates set forth below and other information set forth in this Report, you should carefully consider the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K (our “Form 10-K”) for the year ended December 31, 2021 and any subsequent filings with the Securities and Exchange Commission (“SEC”) made prior to the date hereof, which could materially affect our business, financial condition, results of operations or future results. These risks and uncertainties discussed in our Form 10-K and in any subsequent filings with the SEC made prior to the date hereof are not the only ones facing our business. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially adversely affect our business, cash flows, financial condition and/or results of operations. Please also read the section entitled Cautionary Notice Regarding Forward-Looking Statements included in this Report.
We have identified anot fully remediated the material weakness in our internal control and procedures and internal control over financial reporting. If not remediated, our failure to establish and maintain effective disclosure controls and procedures andreporting that existed at December 31, 2021.
The material weakness in the Company’s internal control over financial reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial obligations, eachthat existed at December 31, 2021 has not been fully remediated by the end of which could have a material adverse effect on our financial condition and the trading price of our common stock.nine month period ended September 30, 2022.
Maintaining effective internal control over financial reporting and effective disclosure controls and procedures are necessary for us to produce reliable financial statements. We have re-evaluated our internal control over financial reporting and our disclosure controls and procedures and concluded that they were not effective asreceived full forgiveness of September 30, 2021 and we concluded there was a material weakness in the designone of our internal control over financial reporting.
A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
We identified a deficiency related to our financial close process including maintaining a sufficient compliment of personnel commensurate with our accounting and financial reporting requirements, as well as development and extension of controls over the recording of journal entries, accounting for business combinations, contingencies and proper cutoff of accounts payable and accrued expenses at period end and in assessing agreements and the accounting treatment required to record the agreements correctly in the financial records.
Management determined that the deficiency could potentially result in a material misstatement of the consolidated and combined financial statements in a future annual or interim period that would not be prevented or detected. Therefore, the deficiency constitutes a material weakness in internal control.
Remediation Plans
We initiated several steps to evaluate and implement measures designed to improve our internal control over financial reporting in order to remediate the control deficiencies noted above, including recruitment of an accounting consultant and seeking outside advice from other third party consultants to assist in improving the Company’s internal control, simplify its reporting processes and reduced the risk of undetected errors. In June 2020, the Company hired an accounting consultant that has appropriate expertise in accounting and reporting under U.S. GAAP and SEC regulations and has allowed the Company to be better aligned with segregation of duties. With the hiring of this consultant, the Company will be instituting monthly and quarterly meetings to identify significant, infrequent and unusual transactions as well as ensure timely reporting. Additionally, in September 2020 the Company engaged a third-party accounting and advisory firm to assist with, among other areas, the analysis of complex, infrequent and unusual transactions as well as provide valuation services to the Company.
The Chief Financial Officer has initiated a preliminary assessment of management’s internal control over financial reporting in accordance with the 2013 integrated framework, as prescribed by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO.
Inherent Limitations on Effectiveness of Controls
An effective internal control system, no matter how well designed, has inherent limitations, including the possibility of human error or overriding of controls, and, therefore, can provide only reasonable assurance with respect to reliable financial reporting. Because of its inherent limitations, our internal control over financial reporting may not prevent or detect all misstatements, including the possibility of human error, the circumvention or overriding of controls, or fraud. Effective internal control can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements.
Small Business Administration Paycheck Protection Program loans.
We may not be entitled to
On November 15, 2022, we received full forgiveness of our recently receivedSmall Business Administration (“SBA”) Paycheck Protection Program Loans, and our application for the Paycheck Protection Program Loans could in the future be determined to have been impermissible.
On March 27, 2020, Congress passed “The Coronavirus Aid, Relief, and Economic Security Act” (CARES Act), which included the “Paycheck Protection Program” (PPP) for small businesses. On(“PPP”) loan originally disbursed through lender Towne Bank on April 27, 2020 Amergent received a PPP loanin the aggregate principal amount of $2.1 million. Due to$2,109,400. The principal amount and accrued interest in the Spin-Off and Merger, Amergent was not publicly traded at the timeamount of the loan application or funding. The note bears interest at 1% per year, matures in April 2022, and requires monthly interest and principal payments of approximately $119,000 beginning in November 2020 and through maturity.
On February 25, 2021, the Company received a second loan of $2.0 million under the PPP. Amergent is not listed on a national securities exchange. The note bears interest at 1% per year, matures on February 25, 2026, and requires monthly principal and interest payments of approximately $44,660 beginning June 25, 2022 through maturity. The loan may be$54,610.02 were forgiven if certain criteria are met. The currently issued guidelines of the program allow for the loan proceeds to be forgiven if certain requirements are met. Any loan proceeds not forgiven will be repaid in full. Amergent applied for forgiveness of the first loan and the application is under review by the government agency administering the PPP. No assurance can be given as to the amount, if any, of forgiveness. The application for forgiveness allowed the Company to defer the timing of repayment until the forgiveness assessment is completed.
We will be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, and we cannot provide any assurance that we will be eligible for loan forgiveness, that we will apply for forgiveness, or that any amount of the PPP Loans will ultimately be forgiven by the SBA. In order to apply for the PPP Loans, we were required to certify, among other things, that the current economic uncertainty made the PPP Loans request necessary to support our ongoing operations. We made this certification in good faith after analyzing, among other things, the maintenance of our workforce, our need for additional funding to continue operations, and our ability to access alternative forms of capital in the current market environment to offset the effects of the COVID-19 pandemic. Following this analysis, we believe that we satisfied all eligibility criteria for the PPP Loans, and that our receipt of the PPP Loans is consistent with the broad objectives of the CARES Act. The certification described above is subject to interpretation. On April 23, 2020, the SBA issued guidance stating that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. The lack of clarity regarding loan eligibility under the Paycheck Protection Program has resulted in significant media coverage and controversy with respect to public companies applying for and receiving loans. If, despite our good-faith belief that given our circumstances we satisfied all eligible requirements for the PPP Loans, we are later determined to have not been in compliance with these requirements or it is otherwise determined that we were ineligible to receive the PPP Loans, we may be required to repay the PPP Loans in their entirety and/or be subject to additional penalties. Should we be audited or reviewed by federal or state regulatory authorities as a result of filing an application for forgiveness of the PPP Loans or otherwise, such audit or review could result in the diversion of management’s time and attention and the incurrence of additional costs. Any of these events could have a material adverse effect on our business, results of operations and financial condition.
We may have to repay the $10 million of grant proceeds received from the Restaurant Revitalization Fund.
If it is determined that Pie Square Holdings obtained the grant improperly or the disbursement of such grant monies were not “eligible uses” then we would be responsible for the ramifications of such actions, including repayment of the approximately $10 million of grant monies, among other items. An assessment of the sellers’ indemnification agreement signed under the acquisition agreement will also be considered in our analysis; however, if it is determined that a contingency exists as of the acquisition date and it is probable of occurrence, then the preliminary purchase price will be revised, and the impact could be material.
The American Rescue Plan Act established the Restaurant Revitalization Fund (RRF) to provide funding to help restaurants and other eligible businesses keep their doors open. This program will provide restaurants with funding equal to their pandemic-related revenue loss up to $10 million per business and no more than $5 million per physical location. Recipients are not required to repay the funding as long as funds are used for eligible uses no later than March 11, 2023.
In 2021, and prior to the acquisition, Pie Square Holdings received a grant under the U.S. Small Business Administration’s Restaurant Revitalization Fund (RRF) for approximately $10 million. The proceeds received were mainly used to repay existing debt and to also pay operating expenses. The unused funds received under the RRF at closing of $2.0 million were placed into escrow for the benefit of the Company for working capital to be used solely in the operations of the acquired business. The Company will periodically submit to the escrow agent the planned uses of these funds, and the sellers have the right to review the planned uses to determine whether, in the sellers’ opinion, the planned uses meet the criteria of “eligible uses” under the RRF. If determined to not meet such criteria, then the escrow agent will not distribute that portion of the request.
As the Company acquired all the outstanding membership interests in Pie Square Holdings, the Company assumed all the rights and obligations of Pie Square Holdings that arose from transactions of Pie Square Holdings prior to the sale event, both stated rights and obligations as well as those that are contingent. As noted above, Pie Square Holdings applied for and received an approximately $10 million grant from the U.S. Business Administration under the RRF and used approximately $8 million to repay existing debt of Pie Square Holdings and to fund some of its operating expenses. Under the RRF there is a requirement that the grant monies be for “eligible uses.” The Company, through the structure of the acquisition, is now responsible that the grant proceeds were, in fact, properly obtained and disbursed for “eligible uses.” If it is determined that Pie Square Holdings obtained the grant improperly or the disbursement of such grant monies were not “eligible uses” then the Company would be responsible for the ramifications of such actions, including repayment of the approximately $10 million of grant monies, among other items. Management is in the process of completing its analysis of this contingency, which includes consultation with outside legal counsel, and expects to complete such analysis prior to the filing of the 2021 annual financial statements. An assessment of the sellers’ indemnification agreement signed under the acquisition agreement will also be considered in the Company’s analysis. If it is determined that a contingency exists as of the acquisition date and it is probable of occurrence, then the preliminary purchase price allocation noted above will be revised, and the impact could be material.
Various subsidiaries of the Company are delinquent in payment of payroll taxesThere is substantial doubt about our ability to taxing authorities prior to the previous year when previous management was in place, andcontinue as a failure to remit these payments promptly or through settlements could have a material adverse effect on our business, financial condition and results of operations.going concern.
As of September 30, 2021, approximately $2.02022, the Company’s cash balance was $0.7 million, of employeeits working capital deficiency was $13.7 million, and employer taxes (including estimated penaltiesit had significant near-term commitments and interest) has been accrued but not remitted in years prior to 2019 to certain taxing authorities by certain subsidiaries of the Company for cash compensation paid. As a result, these subsidiaries of the Company are liable for such payroll taxes. These various subsidiaries of the Company have received warnings and demands from the taxing authorities and management is prioritizing and working with the taxing authorities to make these payments in order to avoid further penalties and interest. Failure to remit these payments promptly could result in increased penalty fees and have a material adverse effect on our business, financial condition, and results of operations.contractual obligations.
Defaults and closuresOur financial statements as of December 31, 2021 were prepared under restaurant leasesthe assumption that we will continue as a resultgoing concern for the next twelve months from the date of the COVID-19 pandemic could result in material impairments toissuance of these financial statements. In addition the Company’s assets.independent registered public accounting firm, in their report on the Company’s December 31, 2021, audited financial statements, raised substantial doubt about the Company’s ability to continue as a going concern.
If an existing or future restaurant is not profitable, and we decideOur ability to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. In addition, as each of our leases expires, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to pay increased occupancy costs or to close restaurants in desirable locations. These potential increased occupancy costs and closed restaurants could have a material adverse effect on our business, financial condition and results of operations.
We are not contractually obligated to guarantee leasing arrangements between franchisees and their landlords.
During 2020 and 2021 the Company was in arrears on rent due on several of its leasescontinue as a going concern is dependent upon our ability to obtain additional financing, drive further operating efficiencies, reduce expenditures and ultimately, create profitable operations. We may not be able to obtain additional capital on reasonable terms. Our financial statements do not include adjustments that would result offrom the COVID-19 pandemic. The Company had lease liabilities of approximately $3.1 million related to abandoned leases at September 30, 2021. As a result, the Company has pending litigation related to 8 sites of which 5 have permanently closed. The outcome of this litigation could result in the permanent closure of additional restaurant locations as well as the possibility of the Company being required to pay interest and damages, modify certain leases on unfavorable terms and could result in material impairments to the Company’s assets.
During the nine months ended September 30, 2021 $0.4 million of lease liabilities were derecognized due to the Company negotiating the cancellation of its obligations under certain lease agreements. The cancellations resulted from the COVID-19 pandemic.
Pandemics or disease outbreaks, such as the recent outbreak of the novel coronavirus (COVID-19 virus), have disrupted, and may continue to disrupt, our business, and have materially affected our operations and results of operations.
Pandemics or disease outbreaks such as the novel coronavirus (COVID-19 virus) have and may continue to have a negative impact on customer traffic at our restaurants, may make it more difficult to staff our restaurants and, in more severe cases, may cause a temporary inability to obtain supplies and/or increase to commodity costs and have caused closures of affected restaurants, sometimes for prolonged periods of time. We have temporarily shifted to a “to-go” only operating model, suspending sit-down dining. We have also implemented closures, modified hours or reductions in onsite staff, resulting in cancelled shifts for some of our employees. COVID-19 may also materially adversely affect our ability to implement our growth plans, including delays in construction of new restaurants, or adversely impact our overall ability to successfully execute our plans to enter into new markets. These changes have negatively impacted our results of operations, and these and any additional changes may materially adversely affect our business or results of operations in the future, and may impact our liquidity or financial condition, particularly if these changes are in place for a significant amount of time. In addition, our operations could be further disrupted if any of our employees or employees of our business partners were suspected of having contracted COVID19 or other illnesses since this could require us or our business partners to quarantine some or all such employees or close and disinfect our impacted restaurant facilities. If a significant percentage of our workforce or the workforce of our business partners are unable to work, including because of illness or travel or government restrictions in connection with pandemics or disease outbreaks, our operations may be negatively impacted, potentially materially adversely affecting our business, liquidity, financial condition or results of operations. Furthermore, such viruses may be transmitted through human contact, and the risk of contracting viruses could continue to cause employees or guests to avoid gathering in public places, which has had, and could further have, adverse effects on our restaurant guest traffic or the ability to adequately staff restaurants, in addition to the measures we have already taken with respect to shifting to a “to-go” only operating model. We could also be adversely affected if government authorities continue to impose restrictions on public gatherings, human interactions, operations of restaurants or mandatory closures, seek voluntary closures, restrict hours of operations or impose curfews, restrict the import or export of products or if suppliers issue mass recalls of products. Additional regulation or requirements with respect to the compensation of our employees could also have an adverse effect on our business. Even if such measures are not implemented and a virus or other disease does not spread significantly within a specific area, the perceived risk of infection or health risk in such area may adversely affect our business, liquidity, financial condition and results of operations. The COVID-19 pandemic and mitigation measures have also had an adverse impact on global economic conditions, which could have an adverse effect on our business and financial condition. Our revenue and operating results may be affected by uncertain or changing economic and market conditions arising in connection with and in response to the COVID-19 pandemic, including prolonged periods of high unemployment, inflation, deflation, prolonged weak consumer demand, a decrease in consumer discretionary spending, political instability or other changes. The significance of the operational and financial impact to us will depend on how long and widespread the disruptions caused by COVID-19, and the corresponding response to contain the virus and treat those affected by it, prove to be. Currently, many states and municipalities in the U.S. and abroad have temporarily suspended the operation of restaurants in light of COVID-19.uncertainty.
We have identifiedsignificant obligations under payables and debt obligations. Our ability to operate as a material weakness ingoing concern are contingent upon successfully obtaining additional financing. Failure to do so would adversely affect our internal control and procedures and internal control over financial reporting. If not remediated, our failureability to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial obligations, each of which could have a material adverse effect on our financial condition and the trading price of our common stock.continue operations.
Maintaining effective internal control over financial reportingIf capital is not available, we may then need to scale back or freeze our organic growth plans, sell our business under unfavorable terms, and effective disclosure controlsreduce expenses to manage our liquidity and procedures are necessary for uscapital resources. We may not be able extend or repay our current obligations, which could impact our ability to produce reliable financial statements. We have re-evaluated our internal control over financial reporting and our disclosure controls and procedures and concluded that they were not effective as of September 30, 2021 and we concluded there was a material weakness in the design of our internal control over financial reporting.
A material weakness is definedcontinue to operate as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.going concern.
The material weakness that we identified related to our financial close process including maintaining a sufficient compliment of personnel commensurate with our accounting and financial reporting requirements as well as development and extension of controls over the recording of journal entries, accounting for business combinations, contingencies and proper cut-off of accounts payable and accrued expenses at period end.
The Company is committed to remediating its material weaknesses as promptly as possible. Implementation of the Company’s remediation plans has commenced and is being overseen by the audit committee. As part of its remediation efforts, the Company hired two third party accounting firms with technical accounting experience during 2020 and a corporate controller with financial reporting experience in 2021 to support management to ensure accurate reporting. Further, the Company is in the process of designing and implementing procedures for control over the segregation of duties for the preparation of, approval and recording of journal entries and procedure to obtain the proper cut-off of accounts payable and accrued expenses in a period. However, there can be no assurance as to when these material weaknesses will be remediated or that additional material weaknesses will not arise in the future. Even effective internal control can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. Any failure to remediate the material weaknesses, or the development of new material weaknesses in our internal control over financial reporting, could result in material misstatements in our financial statements, which in turn could have a material adverse effect on our financial condition and the trading price of our common stock and we could fail to meet our financial reporting obligations.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5: OTHER INFORMATION
Series 2 Preferred StockNone.
| 34 |
Amergent was required to pay the original holder an amount in cash equal to the dollar value of 125% of the stated value of the Series 2 Preferred Stock less the proceeds previously realized by the holder from the sale of all conversion and spin-off shares received by the original holder in Amergent, net of brokerage commissions and any other fees incurred by the holder in connection with the sale of any conversion shares or spin-off shares on April 1, 2021 (which period was extended). The True-Up Payment was settled in July 2021 with a payment of $66,136, and the cash account is no longer subject to restriction for this matter.
During the nine months ended September 30, 2021, the investors converted 637 shares of the Series 2 Preferred Stock into 1,274,000 common shares and sold those common shares in the market. In addition, the investors sold their remaining 150 Series 2 Preferred Stock to other investors. The new investors converted 50 shares of Series 2 Preferred Stock into common stock during May 2021, and 100 Series 2 Preferred Stock remain outstanding at September 30, 2021.
ITEM 6: EXHIBITS
* iXBRL (Inline eXtensibleXBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
** Management Compensatory Contract or Arrangement
*** Furnished, not filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on November 22, 2021.December 13, 2022.
| AMERGENT HOSPITALITY GROUP INC. | ||
| Date: | By: | /s/ Michael D. Pruitt |
| Michael D. Pruitt | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: December 13, 2022 | /s/ | |
| Chief Financial Officer | ||
| (Principal Financial Officer) | ||