Notes
to the Condensed Consolidated Financial Statements (Unaudited)
1.
NATURE OF BUSINESS AND BASIS OF PRESENTATION
Nature
of Business
Amergent
Hospitality Group Inc. (“Amergent”) was incorporated on February 18, 2020 as a wholly owned subsidiary of Chanticleer
Holdings, Inc. (“Chanticleer”) for the purpose of conducting the business of Chanticleer and its subsidiaries after
completion of the spin-off of Amergent to the shareholders of Chanticleer (Spin-Off”). The Spin-Off transaction was completed
on April 1, 2020 in connection with Chanticleer’s completion of its merger transaction (the “Merger”) with Sonnet
BioTherapeutics, Inc. (“Sonnet”). Amergent is in the business of owning, operating and franchising fast casual dining
concepts.
Basis
of Presentation
The
accompanying condensed consolidated financial statements include the accounts of Amergent and its subsidiaries (collectively “we,”
“us,” “our,” or the “Company”). All intercompany and inter-entity balances have been eliminated in
consolidation.
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 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.
General
The
accompanying condensed consolidated financial statements included in this Report 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 financial statements have not been audited. The condensed consolidated balance sheet as of December 31, 2021 has been derived
from the audited consolidated financial statements as of December 31, 2021 and for the year then ended included in Amergent’s Annual
Report on Form 10-K filed with the SEC on April 15, 2022. The results of operations for the three and nine-month periods ended September
30, 2022 are not necessarily indicative of the operating results for the full year ending December 31, 2022.
Certain
information and footnote disclosures normally included in consolidated 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 financial statements and
notes thereto included in Amergent’s Annual Report on Form 10-K for the year ended December 31, 2021 (“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
As
of September 30, 2022, the Company’s cash balance was $0.7 million, its working capital deficiency was $13.7 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:
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our
ability to access the capital and debt markets to satisfy current obligations and operate the business; |
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our
ability to qualify for and access financial stimulus programs available through federal and state government programs; |
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our
ability to refinance or otherwise extend maturities of current debt obligations; |
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● |
our
ability to manage our operating expenses and maintain gross margins; |
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● |
popularity
of and demand for our fast-casual dining concepts; and |
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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.
The
Company expects to have to seek additional debt or equity funding to support operations and there can be no assurances that such funding
would be available at commercially reasonable terms, if at all.
As
Amergent executes its business plan over the next 12 months, it intends to 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.
The
Company’s current operating losses, combined with its working capital deficit, raise substantial doubt about its ability to continue
as a going concern. The accompanying condensed consolidated 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In
May 2021, the FASB issued ASU 2021-04, 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 Certain Modifications or Exchanges or Freestanding Equity-Classified Written Call Options.
The pronouncement 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 original option for
a new option. This guidance applies whether the modification is structured as an amendment to the terms and conditions of the equity-classified
written call option or as termination of the original option and issuance 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, the 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 transactions,
and the effect of the transactions on an entity’s financial statements. The new standard is effective for annual periods beginning
after December 15, 2021. The Company early adopted this guidance on January 1, 2022, and it did not have a material effect on the condensed
consolidated financial 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 financial statements.
3.
EMPLOYEE RETENTION CREDIT AND RESTAURANT REVITALIZATION FUND
Employee
Retention Credit
The
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 payroll 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 included 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 $.7 million, and for the three and nine months ended September 30,
2021, the Company recognized $1.2
million and $2.7
million, respectively, of ERC as a contra-expense included in employee retention credit and other grant income in the condensed
consolidated statements of operations.
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 Company in August
2021, Pie Squared Holdings (see Note 9) received a grant under the U.S. Small Business Administration’s (“U.S. SBA”)
RRF for approximately $10.0 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.
The
Company periodically would submit to the escrow agent for the acquisition the planned uses of these funds, and the sellers had the right
to review the planned uses to determine whether, in the sellers’ opinion, the planned uses met the criteria of “eligible
uses” under the RRF. If determined to not meet such criteria, then the escrow agent would not distribute that portion of the request.
As the Company acquired all the outstanding membership interests in Pie Squared Holdings, the Company is now responsible that the grant
proceeds were, in fact, properly obtained and disbursed for “eligible uses.” If it is determined that Pie Squared Holdings
obtained the grant improperly or that disbursements 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 $10.0 million of grant monies, among other
items. Management completed its analysis of this contingency and concluded that, through the date at which the condensed consolidated
financial statements were available to be issued, a liability does not need to 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.
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 underlying franchise agreement, as well as upfront development fees paid by
franchisees, which are generally recognized on a straight-line basis over the term of the underlying franchise agreement once 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 fair 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 practicable to estimate that value. The
carrying amounts of the Company’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 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.
The
Company evaluated the convertible 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 a derivative instrument. The
Company elected to initially and subsequently measure the convertible note payable at fair value, with changes in fair value recognized
in operations.
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 | |
$ | 0.08 | |
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 | |
6.
INVESTMENTS
Investments
consist of the following:
SCHEDULE
OF INVESTMENT
| |
| | |
| |
(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 | |
|
(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, 8,718 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. |
7.
PROPERTY AND EQUIPMENT, NET
Property
and equipment, net consists of the following:
SCHEDULE
OF PROPERTY, PLANT AND EQUIPMENT
| |
| | |
| |
(in thousands) | |
September 30, 2022 | | |
December 31, 2021 | |
Leasehold improvements | |
$ | 5,772 | | |
$ | 5,511 | |
Restaurant furniture and equipment | |
| 2,665 | | |
| 2,768 | |
Construction in progress | |
| — | | |
| 20 | |
Office and computer equipment | |
| 37 | | |
| 33 | |
Office furniture and fixtures | |
| — | | |
| 57 | |
Property,plant and equipment, gross | |
| 8,474 | | |
| 8,389 | |
Accumulated depreciation and amortization | |
| (5,252 | ) | |
| (5,274 | ) |
Property, plant and equipment,
net | |
$ | 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, which had a significant
impact throughout the hospitality industry. The impact varied by state/geographical area within the United States at various intervals
during the pandemic and, therefore, the operating results and cash flows at the store level varied significantly. There were no indicators
of impairment related to our property and equipment during the nine months ended September 30, 2022.
We
recognized depreciation expense of $0.2 million and $0.4 million during the three and nine months ended September 30, 2022, respectively,
and $0.3 million and $0.8 million during the three and nine months ended September 30, 2021, respectively.
8.
INTANGIBLE ASSETS, NET
Goodwill
A
roll 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 | |
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.
Other
Intangible Assets
Franchise
and trademark/tradename intangible assets consist of the following:
SCHEDULE
OF FINITE - 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 | |
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 | |
9.
LONG-TERM DEBT AND NOTES PAYABLE
Long-term
debt and notes payable are summarized as follows:
SCHEDULE OF DEBT AND NOTES PAYABLE
(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 | |
|
(a) |
In
connection with and prior to the Spin-Off and Merger, on April 1, 2020, pursuant to an agreement among Chanticleer, Oz Rey, LLC (“Oz
Rey”) and certain original holders of the 8% non-convertible debentures that were satisfied during 2020, the Company issued
a 10% secured convertible debenture (the “10% Convertible Debt”) to Oz Rey in exchange for the 8% non-convertible debentures.
The principal amount of the 10% Convertible Debt is $4.0 million and is payable in full on April 1, 2024, subject to extension by
the holders in two-year intervals for up to 10 years from the issuance date upon Amergent meeting certain conditions. Interest is
payable quarterly in cash. In connection with the exchange of the debentures, Amergent issued warrants to Oz Rey and the original
8% non-convertible debenture holders to purchase 2,925,200 shares of common stock. The exercise price is $0.125 for 2,462,600 warrants
and $0.50 for 462,500 warrants. The warrants can be exercised on a cashless basis and expire 10 years from the issuance date. |
|
|
|
|
|
The
10% Convertible Debt was previously amended to fix the conversion rate into common stock at $0.10 per share. There is also a limitation
on Oz Rey’s ability to convert the debenture into common stock such that only the portion of the balance for which the Company
has sufficient available shares, considering all other outstanding instruments at the time of conversion on a fully diluted basis,
can be converted. Oz Rey may, however, upon reasonable notice to the Company, require the Company to include in its proxy materials,
for any annual meeting of stockholders being held by the Company, a proposal to amend the Company’s certificate of incorporation
to increase the Company’s authorized shares to a number sufficient to allow for conversion of all shares underlying the debenture,
on a fully diluted basis. Oz Rey also agreed that the Company would not be required under any circumstances to make a cash payment
to settle the conversion feature not exercisable due to the authorized share cap or in an event that the Company was unable to deliver
shares under the conversion feature. As of September 30, 2022, $2.1 million of the 10% Convertible Debt was convertible into approximately
20,500,000 shares of common stock. |
|
|
|
|
|
The
Company recorded a debt discount of approximately $0.4 million for the difference between the face value of the 10% Convertible Debt
and the estimated fair value at the April 1, 2020 issuance date and amortized this discount over the two-year term of the notes.
|
|
|
|
|
|
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. |
|
(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 3,375,000 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 18-month term of the related debt. |
|
(c) |
On
August 30, 2021, the Company purchased all of the outstanding membership interests in Pie Squared Holdings. The purchase price was
funded through the issuance of an 8% secured, convertible promissory note with a face value of $1.0 million and a fair value of $1.2
million at the acquisition date. The note is convertible at any time, in whole or in part, at 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 of $2.00 per share. As of September 30, 2022, the note was convertible
into 2,000,000 shares of common stock. |
|
|
|
|
|
Interest
on the convertible promissory note is due quarterly and $0.5 million of principal is due on March 31, 2023. Any remaining unpaid/non-converted
amount is due on August 30, 2023. The Company elected to measure the convertible promissory note at fair value, with changes in the
fair value recorded within change in fair value of convertible promissory note in the condensed consolidated statements of operations.
See Note 5 for additional information on the valuation of the convertible promissory note as of September 30, 2022. |
|
|
|
|
(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 installment payments will
begin August 4, 2023. |
|
|
|
|
(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 and a writ of garnishment was ordered against the Company in 2020 for approximately
$0.4 million. The additional $0.1 million is included in accounts payable and accrued expenses at September 30, 2022 and December
31, 2021. |
|
|
|
|
(g) |
In
February and March 2022, eight company-owned stores entered into notes payable to Toast Capital Loans. The terms of the notes require
payment of 13.2% of daily credit card sales of the eight stores until the notes are paid in full. The terms of the notes are 270
days and the implied intertest rate is approximately 15% per year. |
|
|
|
|
|
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 the note require 180
payments of $1,359
for each working day of the week. The terms of the note are open ended until all amounts under the note are repaid with an expected
maturity date of February 2024. The implied interest rate is 80%.
|
|
|
|
|
|
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
Chairman and Chief Executive Officer has an ownership interest and serves as the Chief Executive Officer. The terms of the note require
payment at December 15, 2022 and 1% interest. |
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 | |
10.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses are summarized as follows:
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
(in thousands) | |
September 30, 2022 | | |
December 31, 2021 | |
Accounts payable | |
$ | 3,340 | | |
$ | 2,544 | |
Accrued expenses | |
| 2,140 | | |
| 1,955 | |
Accrued taxes (VAT, sales, payroll, etc.) | |
| 2,292 | | |
| 2,149 | |
Accrued interest | |
| 350 | | |
| 196 | |
Accounts payable and accrued expenses, total | |
$ | 8,122 | | |
$ | 6,844 | |
As
of September 30, 2022 and December 31, 2021, approximately $2.1 million and $2.0 million, 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
$0.8 million and is recorded within accrued taxes on our condensed consolidated balance sheet as of September 30, 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.
As
of September 30, 2022, and December 31, 2021, the Company had no 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 1,500 shares of a new series of convertible preferred stock
of Chanticleer (the “Series 2 Preferred”) to an institutional investor. In March 2020, an aggregate of 713 shares of Series
2 Preferred were converted into shares of common stock. In connection with the Merger, all remaining outstanding shares of the Series
2 Preferred were automatically cancelled and exchanged for substantially similar shares of preferred stock in Amergent. The shareholders
of Chanticleer common stock received shares of Amergent on a 1 for 1 basis (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.
During
the year ended December 31, 2021, the investors converted 637 shares of the Series 2 Preferred 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 to other investors. The shares
sold to the investors no longer contain the True-Up Payment provision discussed below. The new investors converted 50 shares of Series
2 Preferred into 100,000 shares of common stock during May 2021, and 100 shares of Series 2 Preferred remain outstanding at December
31, 2021 and September 30, 2022.
The
Series 2 Preferred is classified in the accompanying condensed consolidated balance sheets 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:
Stated
value: Each share of Series 2 Preferred 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% of the stated value
of the Series 2 Preferred less the proceeds previously realized by the holder from the sale of all conversion and spin-off shares received
by 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). This True-Up Payment was settled in July 2021 with a payment
of $0.1 million, and the cash previously held in escrow for repayment is no longer subject to restriction for this matter.
The
Company determined that the True-Up Payment constituted a “make-whole” provision as defined by U.S. GAAP that was required
to be settled in cash and, as such, was bifurcated from the host instrument, the Series 2 Preferred. It was accounted for as a derivative
liability prior to settlement, with changes in fair value recorded in change in fair value of derivative liabilities in the condensed
consolidated statement of operations. A $0.1 million increase in fair value was recorded for the three months ended September 30, 2021
and a $0.1 million decrease in fair value was recorded for the nine months ended September 30, 2021.
Redemption:
There are triggering events, as defined, that can cause the Series 2 Preferred to be redeemable at the option of the holder, some of
which are outside the control of the Company.
Conversion
at option of holder/ beneficial ownership limitation: The Series 2 Preferred 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 (subject to adjustment for forward
and reverse stock splits, recapitalizations and the like). Conversion is subject to a beneficial ownership limitation of 4.99%. This
limitation was increased by the holder to 9.99% prior to the Merger.
Liquidation
preference: 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% 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 before any distribution or payment
to the holders of common stock.
Voting
rights: The holder of Series 2 Preferred 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. In addition, without the approval of the holder, the Company is required to obtain the approval
of Series 2 Preferred, as is customary, for certain events and transactions not contemplated by the Merger.
Triggering
events: Breach of the Company’s obligations will trigger a redemption event.
Anti-dilution:
The Series 2 Preferred provides for customary adjustments in the event of dividends or stock splits and anti-dilution protection.
Warrants
At
September 30, 2022, the outstanding warrants consisted of the following:
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, 2022 is presented below:
SUMMARY
OF WARRANTS ACTIVITY
| |
Number of Warrants | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Term (years) | |
Outstanding at January 1, 2022 | |
| 3,409,200 | | |
$ | 0.34 | | |
| 7.2 | |
Granted | |
| 1,350,000 | | |
$ | 0.50 | | |
| 4.5 | |
Outstanding at September 30, 2022 | |
| 4,759,200 | | |
$ | 0.38 | | |
| 6.1 | |
| |
| | | |
| | | |
| | |
Exercisable at September 30, 2022 | |
| 4,759,200 | | |
$ | 0.38 | | |
| 6.1 | |
As
discussed in Note 9, 1,350,000 warrants were granted in March 2022 in connection with the issuance 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 based 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:
SUMMARY
OF CHANGES IN FAIR VALUE WARRANTS
Stock price per share | |
$ | 0.37 – 0.40 | |
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 500,000 shares of common stock reserved for issuance under the Plan. As of September 30, 2022,
50,000 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 2,000,000 shares of common stock reserved for issuance under the Incentive Plan. As of September 30, 2022, 2,000,000 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.
During
the three and nine months ended September 30, 2022, the Company recorded share-based compensation expense of approximately $6,000 and
$17,000, respectively, in general and administrative expenses.
The
following table summarizes the share-based awards as of September 30, 2022:
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 | | |
| 3.8 | |
| |
| | | |
| | | |
| | |
Exercisable at September 30, 2022 | |
| 250,000 | | |
$ | 1.72 | | |
| 3.8 | |
12.
COMMITMENTS AND CONTINGENCIES
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 Merger 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 business 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 entity acquired a tail insurance policy in a
coverage amount of $3.0 million, prepaid in full by the Spin-Off 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’s indemnification obligations to the indemnitees
(referred to herein as the “Tail Policy”). No 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
2021 and the three and nine months ended September 30, 2022, the Company was in arrears on rent due on several of its leases. As a result,
the Company has pending litigation related to four sites, all of which 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, 2022 or December 31, 2021 in the accompanying
condensed consolidated 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, 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.
Leases
The
Company’s leases typically contain rent escalations over the lease terms. The Company recognizes expense for these leases on a
straight-line basis over the lease terms. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned
and reduce our right-of-use asset related to the leases. These incentives are amortized through the right-of-use asset as reductions
of expense over the lease 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:
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 the Company is reasonably certain to exercise,
are not recorded on the balance sheet.
Supplemental
balance sheet information related to leases was as follows (in thousands):
SCHEDULE OF OPERATING LEASE INFORMATION
Operating Leases | |
Classification | |
September 30, 2022 | | |
December 31, 2021 | |
Right-of-use assets | |
Operating lease assets | |
$ | 7,630 | | |
$ | 8,021 | |
| |
| |
| | | |
| | |
Current lease liabilities | |
Current operating lease liabilities | |
$ | 4,050 | | |
$ | 4,599 | |
Non-current lease liabilities | |
Long-term operating lease liabilities | |
| 8,239 | | |
| 8,644 | |
| |
| |
$ | 12,289 | | |
$ | 13,243 | |
Lease
term and discount rate were as follows:
| |
September 30, 2022 | | |
December 31, 2021 | |
Weighted average remaining lease term (years) | |
| 6.2 | | |
| 6.7 | |
Weighted average discount rate | |
| 7.8 | % | |
| 8.1 | % |
As
of September 30, 2021, we performed an analysis of the recoverability of our right-of-use assets. Based on the analysis, we recorded
an impairment of approximately $0.7 million 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, 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 $0.3 million of lease liabilities were derecognized due to the
Company negotiating the cancellation of its obligations under certain lease 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 $2.7 million related to abandoned leases as of September 30, 2022. These lease liabilities are included
in current operating lease liabilities in our condensed consolidated balance sheets.
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.
Maturities
of our operating lease liabilities as of September 30, 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
As
discussed in Note 9, the Company received two PPP loans totaling $4.1 million, which were established under the CARES Act and administered
by the 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 requests necessary
to support the ongoing operations 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.
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 $10.0 million grant under the RRF and the Company assumed the risks
and rewards related to the grant through the acquisition of Pie 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,” then the Company would be responsible
for the ramifications of such actions including the repayment of the $10.0 million of grant monies, among other items.
13.
SUBSEQUENT EVENTS
The
Company has evaluated subsequent events from the balance sheet date through the date at which the condensed consolidated financial statements
were available to be issued, and there are no items requiring disclosure other than the 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.
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 and for the year 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 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 accrued expenses, restaurant sales, restaurant cost of sales, restaurant
operating expenses, and depreciation and amortization, among other line items, in the condensed consolidated interim financial statements.
The
following tables set forth the effects of 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 | |
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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 | ) |