Notes
to the Condensed Consolidated Financial Statements (Unaudited)
1.
NATURE OF BUSINESS
BASIS
OF PRESENTATION
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.
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.
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 filed with the SEC on April 15, 2022. The results of operations for the three-month period ended March 31, 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 unaudited condensed 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 previously filed with the SEC.
LIQUIDITY,
CAPITAL RESOURCES AND GOING CONCERN
As
of March 31, 2022, the Company’s cash balance was $3.1 million, of which $0.6 million was restricted cash, its working capital
deficiency was $12.0 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 ability to access the
capital and debt markets to satisfy current obligations and operate the business; |
|
● |
our ability to qualify
for and access financial stimulus programs available through federal and state government programs; |
|
● |
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.
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.
In
early March 2020, the COVID-19 pandemic was declared to be a National Public Health Emergency, and the Centers for Disease Control and
Prevention, as well as state and local legislative bodies and health departments, began issuing orders related to social distancing requirements,
reduced restaurant seating capacity and other restrictions which resulted in a significant reduction in traffic at the Company’s
restaurants. As of mid-March 2020, the ordinances tightened, and dine-in capacity was eliminated or severely restricted. By April 2020,
at the request of most state and local legislative bodies, the Company closed all of its dining rooms and began to operate in a take-out
and delivery only capacity. In early May 2020, states began allowing the re-opening of dining rooms in a limited capacity and by the
end of June 2020, the Company had re-opened dining rooms in approximately 95% of its restaurants while adhering to social distancing
restrictions, which limited the number of guests it could serve in its restaurants at one time. During November 2020, rising case rates
resulted in certain jurisdictions implementing restrictions that again reduced dining room capacity or mandated the closure of dining
rooms. As a result, the Company began fiscal 2021 with significant limitations on its operations which, over the course of the fiscal
year, varied widely from time to time, state to state and city to city; however, nonetheless negatively impacted its sales. Once COVID-19
vaccines were approved and moved into wider distribution in the United States in early to mid-2021, public health conditions improved
and almost all of the COVID-19 restrictions on businesses eased.
While
cases continue to decline and staffing continues to improve, overall consumer and business activity remains muted in certain markets
as consumer behaviors have changed due to the COVID-19 pandemic and some businesses have yet to bring employees back into their offices.
The Company’s restaurant operations have been, and could again in the future, be disrupted by team member staffing issues because
of illness, exclusion, fear of contracting COVID-19 or caring for family members due to COVID-19, legal requirements for employee vaccinations
or COVID testing, lack of labor supply, competitive labor pressures, or for other reasons. Furthermore, inflation has been and is elevated
across the Company’s business, including food costs, due in part to the supply chain impacts of the pandemic. The Company remains
in regular contact with its major suppliers and while, to date, it has not experienced significant disruptions in its supply chain due
to the COVID-19 pandemic, the Company could see significant future disruptions should the impacts of the pandemic continue. Currently,
national, state and local jurisdictions have removed their capacity restrictions on businesses and, therefore, the Company’s restaurants
are serving customers in its dining rooms without social distancing requirements. However, it is possible additional outbreaks could
lead to restrictive measures that could impact the Company’s guest demand and dining room capacity.
The
Company’s current operating losses, combined with its working capital deficit and uncertainties regarding the impact of COVID-19,
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.
SIGNIFICANT ACCOUNTING POLICIES
There
have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the year ended December
31, 2021 filed with the SEC on April 15, 2022, that would have had a significant impact on these unaudited condensed consolidated
financial statements and related notes.
BASIS
OF PRESENTATION
The
accompanying condensed consolidated financial statements have been prepared in conformity with 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”).
Certain
prior year amounts have been updated to conform to the current period presentation. The Company has opted to present the financial information
on the condensed consolidated balance sheets and condensed consolidated statements of operations, comprehensive loss, stockholders’
deficit and cash flows in thousands.
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 valuing 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.
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
(in thousands) | |
Quoted Prices in Active Markets (Level 1) | | |
Significant Observable Inputs (Level 2) | | |
Significant Unobservable Inputs (Level 3) | | |
Total Fair Value | |
March 31, 2022 | |
| | | |
| | | |
| | | |
| | |
Assets (Note 4) | |
| | | |
| | | |
| | | |
| | |
Common stock of Sonnet | |
$ | 46 | | |
$ | — | | |
$ | — | | |
$ | 46 | |
Liabilities (Note 3) | |
| | | |
| | | |
| | | |
| | |
Convertible note payable | |
$ | — | | |
$ | — | | |
$ | 983 | | |
$ | 983 | |
(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 4) | |
| | | |
| | | |
| | | |
| | |
Common stock of Sonnet | |
$ | 50 | | |
$ | — | | |
$ | — | | |
$ | 50 | |
Common stock of Sonnet | |
$ | 50 | | |
$ | — | | |
$ | — | | |
$ | 50 | |
Liabilities (Note 3) | |
| | | |
| | | |
| | | |
| | |
Convertible note payable | |
$ | — | | |
$ | — | | |
$ | 1,099 | | |
$ | 1,099 | |
Convertible note payable | |
$ | — | | |
$ | — | | |
$ | 1,099 | | |
$ | 1,099 | |
Inputs
used in the Company’s Level 3 calculation of fair value for the convertible note payable are discussed in Note 3.
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 above) 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.
SEGMENTS
Operating
segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief
operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company operates
under four brands but views its operations and manages its business in one segment – fast casual dining.
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 March 31, 2022 and December 31, 2021, the Company maintained restricted cash of $0.6 million and $1.7 million, respectively. The restricted
cash balance relates to the unused proceeds from the Restaurant Revitalization Fund grant received by Pie Squared Holdings discussed
below in the restaurant revitalization fund section.
For
purposes of the condensed consolidated cash flow statements, the restricted cash is aggregated with cash of $2.5 million and $2.4
million to arrive at total cash and restricted cash of $3.1
million and $3.2
million at March 31, 2022 and 2021, respectively.
PROPERTY
AND EQUIPMENT
Property
and equipment are stated at cost, less accumulated depreciation. Depreciation and amortization are recorded generally using the straight-line
method over the estimated useful lives of the respective assets. 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
Leasehold improvements | |
| 5-15 years | |
Restaurant furnishings and equipment | |
| 3-10 years | |
Furniture and fixtures | |
| 3-10 years | |
Office and computer equipment | |
| 3-7 years | |
INTANGIBLE
ASSETS
Trademark/Tradenames
Certain
of the Company’s trademark/tradenames have been determined to have a definite life and are being amortized on a straight-line basis
over estimated useful lives of 3-10 years. The amortization expense of these definite-lived intangibles is included in depreciation and
amortization in the Company’s condensed consolidated statements of operations and comprehensive loss. Certain of the Company’s
trademark/tradenames have been classified as indefinite-lived intangible assets and are not amortized. Definite-lived intangible assets
are assessed for impairment using the methods discussed below in the long-lived assets section. The Company’s indefinite-lived
intangible assets are tested for impairment at least annually by estimating their fair values and comparing them to the assets’
carrying values. 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.
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:
|
● |
significant under-performance
relative to expected and/or historical results (negative comparable sales growth or operating cash flows for two consecutive years); |
|
● |
significant negative industry
or economic trends; |
|
● |
knowledge of transactions
involving the sale of similar property at amounts below the Company’s carrying value; or |
|
● |
the Company’s expectation
to dispose of long-lived assets before the end of their estimated useful lives, even though the assets do not meet the criteria to
be classified as “Held for Sale.” |
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 2021, the Company determined that events occurred, some of which were related to the COVID-19 pandemic, requiring management to
review certain long-lived assets for impairment. Refer to Notes 5, 6 and 10 for further discussion. There were no such indicators of impairment
of long-lived assets during the three months ended March 31, 2022.
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.
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 performed a qualitative assessment at March 31, 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, goodwill was not impaired.
CONVERTIBLE
NOTES PAYABLE
The
Company analyzes its convertible debt instruments for embedded attributes that may require bifurcation from the host and accounting as
derivatives. At the inception of each instrument, the Company performs an analysis of the embedded features requiring bifurcation and
may elect, if eligible, to account for the entire instrument at fair value. If the fair value option were to be elected, any changes
in fair value would be recognized in the accompanying condensed consolidated statements of operations until the instrument is settled.
The Company elected to account for its convertible note payable issued in August 2021 in connection with the Pie Squared Holdings acquisition
(see Note 7) at fair value and, as such, has recognized the change in fair value in the condensed consolidated statement of operations
and comprehensive loss for the three months ended March 31, 2022. For the convertible notes payable issued in March 2022, the Company
performed an analysis of embedded features and did not identify any features that require bifurcation. However, as those convertible
notes payable were issued with warrants, the net proceeds received were allocated to the convertible notes payable and the warrants based
on their relative fair values at the issuance date.
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
three months ended March 31, 2022, the Company recognized $0.7 million of franchise income as a result of the cancellation of its international
Master Franchise Agreement. There were no franchise or development agreement terminations during the three months ended March 31, 2021.
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’ equity. Foreign currency transaction gains and losses are included in current earnings.
The Company has determined that local currency is the functional currency for its foreign operations. The foreign subsidiary was sold
in 2021 and there are no foreign assets held at March 31, 2022 or December 31, 2021.
LEASES
We
determine if a contract contains a lease at inception. Our material operating leases consist of restaurant locations.
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.
Assumptions made at the lease commencement date are re-evaluated upon the occurrence of certain events, such as a change in the likelihood
that the Company will exercise a renewal option or a change in the estimated use of a lease incentive. Changes in assumptions are accounted
for as lease modifications, and operating lease assets and liabilities are remeasured at the modification date.
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. The program ended
on January 1, 2022. Approximately $0.1 million and $0.8 million of ERC is included in accounts and other receivables in the condensed
consolidated balance sheets as of March 31, 2022 and December 31, 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 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 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
have been 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. The Company recognized $0.5 million related to the RRF as a contra-expense in grant income
in the condensed consolidated statement of operations for the three months ended March 31, 2022.
The
Company periodically submits to the escrow agent for the acquisition 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.
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. SBA. 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, at this time, 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.
SHARE-BASED
COMPENSATION
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 zero 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 bases. 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 condensed consolidated
financial statements.
As
of March 31, 2022 and December 31, 2021, 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.
LOSS
PER COMMON SHARE
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 share-based compensation awards, as described in Note 9, would be anti-dilutive.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The
reconciliation of the convertible note payable issued in connection with the acquisition of Pie Squared Holdings 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) | |
Three months
ended
March 31, 2022 | |
Balance at January 1, 2022 | |
$ | 1,099 | |
Change in fair value | |
| (116 | ) |
Balance at March 31, 2022 | |
$ | 983 | |
The
Company evaluated the convertible note payable 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 Monte Carlo simulation and the following assumptions as of March 31, 2022:
SCHEDULE
OF ESTIMATED FAIR VALUE ASSUMPTIONS
Volatility |
|
| 90.00 | % |
Risk free rate |
|
| 0.35% – 1.90 | % |
Stock price |
|
$ | 0.37 | |
Credit spread |
|
| 25.43 | % |
4.
INVESTMENTS
Investments
consist of the following:
SCHEDULE
OF INVESTMENT
(in thousands) | |
March 31, 2022 | | |
December 31, 2021 | |
Common stock of Sonnet, at fair value (a) | |
$ | 46 | | |
$ | 50 | |
Chanticleer Investors, LLC, at cost (b) | |
| 16 | | |
| 16 | |
Total | |
$ | 62 | | |
$ | 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 March 31, 2022, 122,064 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%. During the three months
ended March 31, 2022, the Company received a dividend from its investment in Hooters of America of approximately $0.1 million, which
is included in other income in our condensed consolidated
statement of operations. |
5.
PROPERTY AND EQUIPMENT, NET
Property
and equipment, net consists of the following:
SCHEDULE
OF PROPERTY, PLANT AND EQUIPMENT
(in thousands) | |
March 31, 2022 | | |
December 31, 2021 | |
Leasehold improvements | |
$ | 5,535 | | |
$ | 5,511 | |
Restaurant furniture and equipment | |
| 2,768 | | |
| 2,768 | |
Construction in progress | |
| 41 | | |
| 20 | |
Office and computer equipment | |
| 37 | | |
| 33 | |
Office furniture and fixtures | |
| 63 | | |
| 57 | |
Property,plant
and equipment, gross | |
| 8,444 | | |
| 8,389 | |
Accumulated depreciation and amortization | |
| (5,403 | ) | |
| (5,274 | ) |
Property,
plant and equipment, net | |
$ | 3,041 | | |
$ | 3,115 | |
As
of March 31, 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 three months ended March 31, 2021. The impairment recognized during the three months ended March
31, 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.
Depreciation
expense was $0.1 million for each of the three months ended March 31, 2022 and 2021.
6.
INTANGIBLE ASSETS, NET
GOODWILL
A
rollforward of goodwill is as follows:
SCHEDULE
OF GOODWILL
(in thousands) | |
Three Months Ended
March 31, 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 | |
OTHER
INTANGIBLE ASSETS
Franchise
and trademark/tradename intangible assets consist of the following:
SCHEDULE
OF FINITE - LIVED INTANGIBLE ASSETS
(in thousands) | |
| |
March 31, 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 | |
| |
| (1,460 | ) | |
| (1,369 | ) |
Intangible assets, net | |
| |
$ | 3,038 | | |
$ | 3,129 | |
As
of March 31, 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 three months ended March 31, 2021.
Amortization
of intangible assets was $0.1
million for each of the three months ended March
31, 2022 and 2021. Amortization expense for the next five years is as follows (in thousands):
SCHEDULE
OF AMORTIZATION OF INTANGIBLE ASSETS
Year ending December 31: | |
| | |
2022 (remaining nine months) | |
$ | 147 | |
2023 | |
| 164 | |
2024 | |
| 164 | |
2025 | |
| 164 | |
2026 | |
| 110 | |
Amortization, net | |
$ | 749 | |
7.
LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt
and notes payable are summarized as follows:
SCHEDULE OF DEBT AND NOTES PAYABLE
(in thousands) | |
March 31, 2022 | | |
December 31, 2021 | |
10% convertible debt (a) | |
$ | 4,038 | | |
$ | 4,038 | |
10% convertible debt (a) | |
$ | 4,038 | | |
$ | 4,038 | |
8% convertible debt (b) | |
| 1,350 | | |
| — | |
Convertible promissory note (measured at fair value) (c) | |
| 983 | | |
| 1,099 | |
PPP loans (d) | |
| 4,109 | | |
| 4,109 | |
EIDL loans (e) | |
| 300 | | |
| 300 | |
Contractor note (f) | |
| 348 | | |
| 348 | |
Notes payable (g) | |
| 256 | | |
| — | |
Total Debt | |
| 11,384 | | |
| 9,894 | |
Less: discount on convertible debt (a), (b) | |
| (293 | ) | |
| (37 | ) |
Total Debt, net of discount | |
$ | 11,091 | | |
$ | 9,857 | |
| |
| | | |
| | |
Current portion of long-term debt and notes payable | |
$ | 3,651 | | |
$ | 3,264 | |
Long-term debt and notes payable, less current portion | |
$ | 7,440 | | |
$ | 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 payable in full on April 1, 2022, 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 March 31, 2022, $2.4 million of the 10% Convertible Debt was convertible into approximately 23,500,000 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. Amortization of approximately $37,000 and $45,000
was recorded as interest expense during the three months ended March 31, 2022 and 2021, respectively. |
|
|
|
|
|
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, totaling $27,000, which has been recorded as a debt discount
and is being amortized over the two-year term of the related debt. Amortization for the three months ended March 31, 2022 is nominal. |
|
|
|
|
(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 March 31, 2022, the 8% Convertible Debt was convertible into 3,375,000 shares of common stock. |
|
|
|
|
|
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 9). 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. Amortization of approximately $6,000
was recorded as interest expense during the
three months ended March 31, 2022. |
|
|
|
|
(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. The note contains customary provisions preventing dilution and providing
the holder rights in the event of fundamental transactions, and it 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 Pie Squared Holdings and subsidiaries in favor of the sellers. As
of March 31, 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 August 30, 2022. Any remaining unpaid/non-converted amount is due on August 30, 2023. The Company has elected to measure the convertible promissory note at fair value, with changes being recognized in the condensed consolidated statements of operations. See Note 3 for additional information on the valuation of the convertible promissory note as of March 31, 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 bears interest at 1% per year, matures in April 2022, and requires
monthly interest and principal payments of approximately $0.1 million beginning in November 2020 and through maturity. 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 had applied for loan forgiveness in the full amount of the loan, but the request was
initially denied. The Company discussed the forgiveness request with the government agency that granted the loan and in March 2022,
the U.S. SBA reversed its initial decision and will once again review the Company’s application for loan forgiveness. 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. |
|
|
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. The loan may be forgiven if certain criteria are met. No assurance
can be given as to the amount, if any, of forgiveness. |
|
|
|
|
(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 March 31, 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. |
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.
Future
minimum payments are as follows (in thousands):
SCHEDULE
OF FUTURE MINIMUM PAYMENTS
Year ending December 31: | |
| | |
2022 (remaining nine months) | |
$ | 3,520 | |
2023 | |
| 2,383 | |
2024 | |
| 4,579 | |
2025 | |
| 547 | |
2026 | |
| 98 | |
Thereafter | |
| 274 | |
Less: discount on convertible debt | |
| (293 | ) |
Less: fair value adjustment | |
| (17 | ) |
Debt | |
| 11,091 | |
Less: current maturities of long-term debt and notes payable | |
| (3,651 | ) |
Long-term debt and notes payable | |
$ | 7,440 | |
8.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses are summarized as follows:
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
(in thousands) | |
March 31, 2022 | | |
December 31, 2021 | |
Accounts payable | |
$ | 2,357 | | |
$ | 2,544 | |
Accrued expenses | |
| 2,130 | | |
| 1,955 | |
Accrued taxes (VAT, sales, payroll, etc.) | |
| 2,080 | | |
| 2,149 | |
Accrued interest | |
| 232 | | |
| 196 | |
Accounts payable and
accrued expenses, total | |
$ | 6,799 | | |
$ | 6,844 | |
As
of March 31, 2022 and December 31, 2021, approximately $1.9 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. 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 March 31, 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.
9.
STOCKHOLDER’S 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 for gross proceeds to the Company of $1.5 million
less transaction costs of $0.1 million. 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 $1.25 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 in the amount
of $0.5 million. The effective conversion price of the Series 2 Preferred after the bifurcation of the derivative resulted in a beneficial
conversion feature of $0.7 million, which was then immediately recorded as a deemed dividend as the preferred stock is immediately convertible.
In March 2020, an aggregate of 713 shares of Series 2 Preferred were converted into 1,426,849 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.
On
August 17, 2020, the Company and the holders of the Series 2 Preferred 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 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 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 $1.3 million to $0.9 million.
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. 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 March 31, 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 is 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 is no longer subject to restriction for this matter. Prior to the settlement, the True-Up Payment was accounted for as a derivative and a $0.2 million change in fair value was recorded for
the three months ended March 31, 2021.
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 for the three months ended March 31, 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.
Forced
conversion: The Company had the right to require the holder to convert up to 1,400 shares of Series 2 Preferred 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 automatically were exchanged for an equal number of shares of Series 2 Preferred in Amergent on substantially the
same terms.
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 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
March 31, 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 three months ended March 31, 2022 is presented below:
SUMMARY
OF WARRANTS ACTIVITY
| |
Number of Warrants | | |
Weighted
Average
Exercise Price | | |
Weighted
Average Remaining Life | |
Outstanding at January 1, 2022 | |
| 3,409,200 | | |
$ | 0.34 | | |
| 7.6 | |
Granted | |
| 1,350,000 | | |
$ | 0.50 | | |
| 5.0 | |
Exercised | |
| — | | |
$ | — | | |
| — | |
Forfeited/Other Adjustments | |
| — | | |
$ | — | | |
| — | |
Outstanding at March 31, 2022 | |
| 4,759,200 | | |
$ | 0.38 | | |
| 6.6 | |
| |
| | | |
| | | |
| | |
Exercisable at March 31, 2022 | |
| 4,759,200 | | |
$ | 0.38 | | |
| 6.6 | |
As
discussed in Note 7, 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 March 31, 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 March 31, 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.
The
Company recorded share-based compensation expense of approximately $6,000 in general and administrative expenses during the three months
ended March 31, 2022.
The
following table summarizes the share-based awards as of March 31, 2022:
SCHEDULE
OF SHARE BASED AWARDS
| |
Number of Options | | |
Weighted
Average
Exercise Price | | |
Weighted
Average Remaining Contractual
Term | |
Outstanding at March 31, 2022 | |
| 450,000 | | |
$ | 1.38 | | |
| 4.3 | |
| |
| | | |
| | | |
| | |
Exercisable at March 31, 2022 | |
| 175,000 | | |
$ | 2.22 | | |
| 4.3 | |
There
were no options granted, exercised or forfeited during the three months ended March 31, 2022. As of March 31, 2022, the unrecognized
compensation cost related to outstanding share-based awards was approximately $43,000 and is expected to be recognized as expense over
a weighted-average period of approximately 1.5 years.
10.
COMMITMENTS AND CONTINGENCIES
Legal
proceedings
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 will expire on March 25, 2026.
In
addition, pursuant to 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.
Litigation
related to leased properties
During
2021 and the three months ended March 31, 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 seven sites of which four 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 have been accrued as of March 31, 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 March 31, 2022, the Company does not expect the amount of ultimate liability with respect to these
matters to be material to the Company’s 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 | |
March 31, 2022 | | |
December 31, 2021 | |
Right-of-use assets | |
Operating lease assets | |
$ | 8,336 | | |
$ | 8,021 | |
| |
| |
| | | |
| | |
Current lease liabilities | |
Current operating lease liabilities | |
| 4,425 | | |
| 4,599 | |
Non-current lease liabilities | |
Long-term operating lease liabilities | |
| 8,897 | | |
| 8,644 | |
| |
| |
$ | 13,322 | | |
$ | 13,243 | |
Lease
term and discount rate were as follows:
| |
March 31, 2022 | | |
December 31, 2021 | |
Weighted average remaining lease term (years) | |
| 6.5 | | |
| 6.7 | |
Weighted average discount rate | |
| 7.8 | % | |
| 8.1 | % |
As
of March 31, 2021, we performed an analysis of the recoverability of our right-of-use assets. Based on the analysis, an impairment charge of approximately $0.7
million was recorded for the three months ended March 31, 2021. The impairment recognized during the three months ended March 31,
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.
During
the three months ended March 31, 2022, no lease liabilities were derecognized. During the three months ended March 31, 2021, approximately
$43,000 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. The Company had lease liabilities of $2.5 million related to abandoned
leases as of March 31, 2022. These lease liabilities are presented as part of current operating lease liabilities.
During
the three months ended March 31, 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 to both the right-of-use assets and lease liabilities. There were no lease modifications
during the three months ended March 31, 2021.
Rent
expense of approximately $0.5 million was incurred during the three months ended March 31, 2022, of which approximately $13,000 was variable.
Rent expense of approximately $0.6 million was recognized the three months ended March 31, 2021, of which approximately $0.1 million
was variable.
PPP
loan
The
Company received two PPP loans totaling $4.1 million, which were established under the CARES Act and administered by the U.S. 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 2, 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.
11.
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.
12.
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. This impacted the previously reported amounts for property and equipment and depreciation
and amortization, among other line items, in the condensed consolidated interim financial statements.
The
following table sets forth the effects of the adjustment on affected items within the Company’s previously reported Condensed Consolidated
Balance Sheet:
SCHEDULE OF PREVIOUSLY ISSUED INTERIM FINANCIAL STATEMENTS
(in thousands) | |
As reported | | |
Adjustment | | |
As restated | |
| |
March 31, 2021 | |
(in thousands) | |
As reported | | |
Adjustment | | |
As restated | |
Property and equipment, net | |
$ | 3,172 | | |
$ | 136 | | |
$ | 3,308 | |
Accumulated deficit | |
$ | (97,136 | ) | |
$ | 136 | | |
$ | (97,000 | ) |
The
following table sets forth the effects of the adjustment on affected items within the Company’s previously reported Condensed Consolidated
Statement of Operations:
| |
As reported | | |
Adjustment | | |
As restated | |
| |
Three months ended March 31, 2021 | |
| |
As reported | | |
Adjustment | | |
As restated | |
Depreciation and amortization | |
$ | 368 | | |
$ | (136 | ) | |
$ | 232 | |
Operating (loss) income | |
$ | (2,790 | ) | |
$ | 136 | | |
$ | (2,654 | ) |
Consolidated net (loss) income | |
$ | (2,713 | ) | |
$ | 136 | | |
$ | (2,577 | ) |
Net (loss) income attributable to Amergent Hospitality Group Inc. | |
$ | (2,548 | ) | |
$ | 136 | | |
$ | (2,412 | ) |
Net (loss) income attributable to Amergent Hospitality Group Inc. per common share, basic and diluted | |
$ | (0.18 | ) | |
$ | 0.01 | | |
$ | (0.17 | ) |