UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2020

 

[  ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from __________ to __________

 

Commission file number: 000-56145

 

AMERGENT HOSPITALITY GROUP, INC.

 

Delaware   84-4842958
(State or Other Jurisdiction of   (IRS Employer
Incorporation or Organization)   Identification Number)

 

7621 Little Avenue Suite 414    
Charlotte, NC   28226
(Address of Principal Executive Offices)   (Zip Code)

 

(704) 366-5122

(Registrant’s Telephone Number, Including Area Code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered under Section 12(g) of the Act: Common Stock

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
N/A   N/A   N/A

 

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or has for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
   
Non-accelerated filer [X]

Smaller reporting company [X]

 

Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

The number of shares outstanding of the registrant’s $0.001 par value common stock as of August 18, 2020, was 14,282,736 shares.

 

 

 

 
 

 

Amergent Hospitality Group, Inc. and Subsidiaries

 

TABLE OF CONTENTS

 

    Page No.
     
Part I Financial Information 4
     
Item 1: Financial Statements 4
     
  Condensed Consolidated and Combined Balance Sheets as of June 30, 2020 (Unaudited) and December 31, 2019 4
  Condensed Consolidated and Combined Statements of Operations (Unaudited) – For the three and six months ended June 30, 2020 and 2019 5
  Condensed Consolidated and Combined Statements of Comprehensive Loss (Unaudited) - For the three and six months ended June 30, 2020 and 2019 6
  Condensed Consolidated and Combined Statements of Stockholders’ Equity (Unaudited) – For the three and six months ended June 2020 and 2019 7
  Condensed Consolidated and Combined Statements of Cash Flows (Unaudited) – For the six months ended June 30, 2020 and 2019 8
  Notes to Condensed Consolidated and Combined Financial Statements (Unaudited) 10
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 28
Item 3: Quantitative and Qualitative Disclosures about Market Risk 33
Item 4: Controls and Procedures 33
     
Part II Other Information 34
     
Item 1: Legal Proceedings 34
Item 1A: Risk Factors 35
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 49
Item 3: Defaults Upon Senior Securities 51
Item 4: Mine Safety Disclosures 51
Item 5: Other Information 51
Item 6: Exhibits 51
   
Signatures   52

 

 2 

 

  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (the “Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by terms and phrases such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” and “will” and similar expressions and include references to assumptions and relate to our future prospects, developments and business strategies. There are a number of important factors that could cause the actual results to differ materially from those expressed in any forward-looking statement made by us. These factors include, but are not limited to:

 

● the accuracy of our estimates regarding expenses, capital requirements and need for additional financing;

 

● our ability to operate our business and generate profits. We have not been profitable to date;

 

● decline in global financial markets and economic downturn resulting from the coronavirus COVID-19 global pandemic,

 

● Business interruptions resulting from the coronavirus COVID-19 global pandemic;

 

● Our ability to remediate weaknesses we identified in our disclosure controls and procedures and our internal control over financial reporting in a timely enough manner to eliminate the risks posed by such material weaknesses in future periods;

 

● general risk factors affecting the restaurant industry, including current economic climate, costs of labor and food prices;

 

● intensive competition in our industry and competition with national, regional chains and independent restaurant operators;

 

● our rights to operate and franchise the Hooters-branded restaurants are dependent on the Hooters’ franchise agreements;

 

● our ability, and our dependence on the ability of our franchisees, to execute on business plans effectively;

 

● actions of our franchise partners or operating partners which could harm our business;

 

● failure to protect our intellectual property rights, including the brand image of our restaurants;

 

● changes in customer preferences and perceptions;

 

● increases in costs, including food, rent, labor and energy prices;

 

● constraints could affect our ability to maintain competitive cost structure, including, but not limited to labor constraints;

 

● work stoppages at our restaurants or supplier facilities or other interruptions of production;

 

● the risks associated with leasing space subject to long-term non-cancelable leases;

 

● we may not attain our target development goals and aggressive development could cannibalize existing sales;

 

● negative publicity about the ingredients we use, or the potential occurrence of food-borne illnesses or other problems at our restaurants;

 

● breaches of security of confidential consumer information related to our electronic processing of credit and debit card transactions;

 

● we may be unable to reach agreements with various taxing authorities on payment plans to pay off back taxes; and

 

● our debt financing agreements expose us to interest rate risks, contain obligations that may limit the flexibility of our operations, and may limit our ability to raise additional capital.

 

We undertake no obligation to update or revise the forward-looking statements included in this Report, whether as a result of new information, future events or otherwise, after the date of this Report. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences are discussed in the section entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein.

 

Unless otherwise noted, references in this Report to the “Registrant,” “Company,” “Amergent,” “Spin-Off Entity,” “we,” “our” or “us” means Amergent Hospitality Group, Inc., a Delaware corporation and our subsidiaries..

 

 3 

 

 

Part I

 

Item 1: Financial Statements

 

Amergent Hospitality Group Inc. and Subsidiaries

Condensed Consolidated and Combined Balance Sheets

 

   (Unaudited)     
   June 30, 2020   December 31, 2019 
ASSETS          
Current assets:          
Cash  $2,951,069   $500,681 
Restricted cash   1,250,336    336 
Accounts and other receivables, net   67,218    131,887 
Inventories   266,641    287,111 
Prepaid expenses and other current assets   638,605    249,579 
TOTAL CURRENT ASSETS   5,173,869    1,169,594 
Property and equipment, net   4,879,244    5,630,490 
Operating lease assets   11,007,038    11,668,026 
Goodwill   8,507,245    8,567,888 
Intangible assets, net   3,473,599    3,656,995 
Investments   1,077,159    381,397 
Deposits and other assets   297,424    309,462 
Assets of discontinued operations   30,084    149,000 
TOTAL ASSETS  $34,445,662   $31,532,852 
           
LIABILITIES, REDEEMABLE SHARES, AND STOCKHOLDERS’ DEFICIT          
Current liabilities:          
Accounts payable and accrued expenses  $8,303,793   $8,165,195 
Current maturities of long-term debt and notes payable   1,554,119    6,630,961 
Current operating lease liabilities   3,183,302    3,299,309 
Derivative liabilities   6,553,483    -- 
TOTAL CURRENT LIABILITIES   19,594,697    18,095,465 
           
Redeemable preferred stock Series 1: no par value; 0 and 62,876 shares issued and outstanding, net of discount of $0 and $139,131 at June 30, 2020 and December 31, 2019, respectively   --    709,695 
Long-term operating lease liabilities   13,832,826    14,382,354 
Deferred revenue   911,359    959,445 
Deferred tax liabilities   102,305    102,304 
Long-term debt and notes payable   1,241,066    -- 
Convertible debt, net of debt discount of $322,752 at June 30, 2020   3,715,137    -- 
Liabilities of discontinued operations   179,625    435,600 
TOTAL LIABILITIES   39,577,015    34,684,863 
           
Commitments and contingencies (see Note 11)          
           
Convertible Preferred Stock: Series 2: $1,000 stated value; authorized 1,500 and no shares; 787 and no shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively   459,608    -- 
           
Stockholders’ Deficit:          
Common stock: $0.0001 par value; authorized 50,000,000 and 45,000,000 shares; 14,282,736 and 10,404,342 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively   1,434    1,041 
Additional paid-in capital   80,511,278    71,505,989 
Accumulated deficit   (85,658,825)   (75,068,385)
Accumulated other comprehensive loss   (134,047)   (46,437)
Total Amergent Hospitality Group, Inc., Stockholders’ Deficit   (5,280,160)   (3,607,792)
Non-Controlling Interests   (310,801)   455,781 
TOTAL STOCKHOLDERS’ DEFICIT   (5,590,961)   (3,152,011)
TOTAL LIABILITIES, REDEEMABLE SHARES, AND STOCKHOLDERS’ DEFICIT  $34,445,662   $31,532,852 

 

See accompanying notes to condensed consolidated and combined financial statements

 

 4 

 

 

Amergent Hospitality Group, Inc. and Subsidiaries

Condensed Consolidated and Combined Statements of Operations

(Unaudited)

 

    Three Months Ended     Six Months Ended  
    June 30, 2020     June 30, 2019     June 30, 2020     June 30, 2019  
Revenue:                                
Restaurant sales, net   $ 3,880,841     $ 8,018,685     $ 9,372,298     $ 15,568,531  
Gaming income, net     29,463       109,536       129,212       225,621  
Franchise income     8,166       25,000       98,198       50,000  
Management fee income     -       197,719       -       344,376  
Total revenue     3,918,470       8,350,940       9,599,708       16,188,528  
Expenses:                                
Restaurant cost of sales     1,162,291       2,648,289       2,960,061       5,070,364  
Restaurant operating expenses     3,261,393       5,258,333       6,887,237       10,412,816  
Restaurant pre-opening and closing expenses     -       76,713       20,730       142,888  
General and administrative expenses     1,460,668       1,519,909       2,635,821       2,858,790  
Asset impairment charge     273,927       1,277,590       273,927       1,369,081  
Depreciation and amortization     415,778       471,956       831,609       931,313  
Total expenses     6,574,057       11,252,790       13,609,385       20,785,252  
Operating loss     (2,655,587 )     (2,901,850 )     (4,009,677 )     (4,596,724 )
Other (expense) income:                                
Interest expense     (159,460 )     (160,203 )     (322,448 )     (371,973 )
Change in fair value of derivative liabilities     6,443,380       -       6,141,517       -  
Change in fair value of investment     (953,033 )     -       (953,033 )     -  
Debt extinguishment expense     (11,808,111 )     -       (11,808,111 )     -  
Other expense     (70,748 )     (343,884 )     (48,009 )     (311,374 )
Total other expense     (6,547,972 )     (504,087 )     (6,990,084 )     (683,347 )
Loss before income taxes     (9,203,559 )     (3,405,937 )     (10,999,761 )     (5,280,071 )
Income tax expense     (7,352 )     (5,829 )     (3,676 )     (56,410 )
Loss from continuing operations     (9,210,911 )     (3,411,766 )     (11,003,437 )     (5,336,481 )
Discontinued operations                                
Income from discontinued operations, net of tax     -       76,100       -       12,152  
Consolidated net loss     (9,210,911 )     (3,335,666 )     (11,003,437 )     (5,324,329 )
Less: Net loss (income) attributable to non-controlling interests     89,716       (8,294)       (39,327 )     213,205  
Less: Net loss attributable to non-controlling interest of discontinued operations     -       127,161       -       21,253  
                                 
Net loss attributable to Amergent Hospitality Group Inc.     (9,121,195 )     (3,216,799 )     (11,042,764 )     (5,089,871 )
Dividends on redeemable preferred stock     -       (28,006 )     (28,219 )     (55,800 )
Net loss attributable to common shareholders of Amergent Hospitality Group Inc.   $ (9,121,195 )   $ (3,244,805 )   $ (11,070,983 )   $ (5,145,671 )
                                 

Net loss attributable to Amergent Hospitality Group, Inc. per common share, basic and diluted:

  $ (0.64 )   $ (0.83 )   $ (0.85 )   $ (1.34 )
Weighted average shares outstanding, basic and diluted     14,282,736       3,926,879       13,096,212       3,835,661  

 

See accompanying notes to condensed consolidated and combined financial statements

 

 5 

 

 

Amergent Hospitality Group, Inc. and Subsidiaries

Condensed Consolidated and Combined Statements of Comprehensive Loss

(Unaudited)

 

   Three Months Ended   Six Months Ended 
   June 30, 2020   June 30, 2019   June 30, 2020   June 30, 2019 
                 
Net loss attributable to Amergent Hospitality Group, Inc.  $(9,121,195)  $(3,216,799)  $(11,042,764)  $(5,089,871)
Foreign currency translation gain / (loss)   (6,541)   (67,827)   (87,610)   (29,995)
Total other comprehensive income (loss)   (6,541)   (67,827)   (87,610)   (29,995)
Comprehensive loss  $(9,127,736)  $(3,284,626)  $(11,130,374)  $(5,119,866)

 

See accompanying notes to condensed consolidated and combined financial statements

 

 6 

 

 

Amergent Hospitality Group, Inc. and Subsidiaries

Condensed Consolidated and Combined Statements of Stockholders’ Equity (Deficit)

Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

 

    (Temporary Equity)                   Additional     Common          

Accumulated

Other

          Non-        
    Preferred Series 2       Common Stock     Paid-in     Stock     Subscriptions     Comprehensive     Accumulated     Controlling        
    Shares     Amount       Shares     Amount     Capital     Subscribed     Receivable     Loss     Deficit     Interest     Total  
Balance, December 31 , 2018     -       -         3,715,444       373       64,756,903       -       -       (202,115 )     (57,124,673 )     827,037       8,257,525  
Common stock and warrants issued for:                                                                                          
Preferred Unit dividend     -       -         16,342       1       19,521       -       -       -       (27,795 )     -       (8,273 )
Share-based compensation     -       -         -       -       100,707       -       -       -       -       -       100,707  
Foreign currency translation     -       -         -       -       -       -       -       37,832       -       -       37,832  
Non-controlling interest contributions     -       -         -       -       -       -       -       -       -       575,000       575,000  
Non-controlling interest distributions     -       -         -       -       -       -       -       -       -       (10,804 )     (10,804 )
Reclassification of Minority Interest     -       -         -       -       249,104       -       -       -       -       (249,104 )     -  
Net loss     -       -         -       -       -       -       -       -       (1,873,072 )     (115,591 )     (1,988,663 )
Balance, March 30, 2019     -       -         3,731,786       374       65,126,235       -       -       (164,283 )     (59,025,540 )     1,026,538       6,963,324  
                                                                                           
Common stock and warrants issued for:                                                                                          
Director Fees     -       -         104,828       10       252,949       -       -       -       -       -       252,959  
Consulting Services     -       -         36,765       4       117,087       -       -       -       -       -       117,091  
Preferred Unit dividend     -       -         11,844       1       19,097       -       -       -       (28,005 )     -       (8,907 )
Accrued interest on note payable     -       -         8,800       1       13,839       -       -       -       -       -       13,840  
Share-based compensation     -       -         45,000       5       8,704       -       -       -       -       -       8,709  
Stock issued to settle convertible debt and note payable     -       -         3,075,000       308       3,074,692       -       -       -       -       -       3,075,000  
Subscriptions pursuant to rights offering, net     -       -         -       -       2,614,623       300       (2,694,530 )     -       -       -       (79,607 )
Foreign currency translation     -       -         -       -       -       -       -       (67,827 )     -       -       (67,827 )
Shareholder payment for short swing     -       -         -       -       1,676       -       -       -       -       -       1,676  
Non-controlling interest distributions     -       -         -       -       -       -       -       -       -       (16,779 )     (16,779 )
Reclassification of Minority Interest     -       -         -       -       (18,699 )     -       -       -       -       18,699       -  
Net loss     -       -         -       -       -       -       -       -       (3,216,799 )     (118,867 )     (3,335,666 )
Balance, June 30, 2019     -       -         7,014,023       703       71,210,203       300       (2,694,530 )     (232,110 )     (62,270,344 )     909,591       6,923,813  
                                                                                           
Balance, December 31, 2019     -       -         10,404,342       1,041       71,505,989       -       -       (46,437 )     (75,068,385 )      455,781       (3,152,011 )
Common stock:                                                                                          
Series 1 Preferred Unit dividend     -       -                                                                            
Exercise of warrants     -       -         37,518       4       19,519       -       -       -       (28,219 )     -       (8,696 )
Preferred Unit dividend     -       -         2,414,022       246       1,528,867       -       -       -       (325,366 )     -       1,203,747  
Preferred Shares - Series 2:                                                                                          
Issuance of shares, net of transaction costs of $95,000     1,500       1,405,000         -       -       -       -       -       -       -       -       -  
Bifurcation of derivative liability     -       (529,000 )       -       -       -       -       -       -       -       -       -  
Beneficial conversion feature     -       (729,000 )       -       -       729,000       -       -       -       -       -       729,000  
Preferred stock deemed dividend     -       729,000         -       -       (729,000 )     -       -       -       -       -       (729,000 )
Conversion of Series 2 preferred to common     (713 )     (416,392 )       1,426,854       143       416,249       -       -       -       -       -       416,392  
Foreign currency translation     -       -         -       -       -       -       -       (81,069 )     -       -       (81,069 )
Non-controlling interest distributions     -       -         -       -       -       -       -       -       -       -       -  
Net loss     -       -         -       -       -       -       -       -       (1,921,569 )     129,043       (1,792,526 )
Balance, March 31, 2020     787       459,608         14,282,736       1,434       73,470,624       -       -       (127,506 )     (77,343,539 )     584,824       (3,414,163 )
                                                                                           
Reclassification of non-controlling interest     -       -         -       -       -       -       -       -       805,909       (805,909 )     -  
Cash contribution of merger consideration, net transaction costs of $588,255     -       -         -       -       5,411,745       -       -       -       -       -       5,411,745  
Contribution of warrant portion of merger consideration     -       -         -       -       1,628,909       -       -       -       -       -       1,628,909  
Foreign currency translation     -       -         -       -       -       -       -       (6,541 )     -       -       (6,541 )
Net loss     -       -         -       -       -       -       -       -       (9,121,195 )     (89,716 )     (9,210,911 )
Balance, June 30, 2020     787       459,608         14,282,736       1,434       80,511,278       -       -       (134,047 )     (85,658,825 )     (310,801 )     (5,590,961 )

 

See accompanying notes to condensed consolidated and combined financial statements

 

 7 

 

 

Amergent Hospitality Group, Inc. and Subsidiaries

Condensed Consolidated and Combined Statements of Cash Flows

(Unaudited)

 

   Six Months Ended 
   June 30, 2020   June 30, 2019 
Cash flows from operating activities:          
Net loss from continuing operations  $(11,003,437)  $(5,336,481)
Net income from discontinued operations   -    12,152
Net loss   (11,003,437)   (5,324,329)
           
Adjustments to reconcile net loss to net cash flows from operating activities:          
Depreciation and amortization   831,609    931,313 
Amortization of operating lease assets   530,066    931,722 
Asset impairment charges   273,927    1,369,081 
Write-off investment in HOA   -    435,000 
Common stock and warrants issued for services   -    23,747 
Stock based compensation   -    111,087 
Loss on investments   933,147    29,239 
Gain on tax settlements   -    (204,162)
Amortization of debt discount   35,137    17,391 
Deferred income taxes   -    43,150 
Loss on extinguishment of  redeemable Series 1 Preferred   161,899    - 
Loss on debt extinguishment   11,808,111    - 
Gain on derivative liabilities revaluation   (6,142,517)   - 
Change in assets and liabilities:          
Accounts and other receivables   182,587    (144,400)
Prepaid and other assets   (393,321)   (124,321)
Inventories   9,787    19,584 
Accounts payable and accrued expenses   220,904    2,706,048 
Change in amounts payable to related parties   -    (244,084)
Operating lease liabilities   (665,535)   (941,131)
Deferred revenue   (48,086)   (166,975)
Net cash flows from operating activities   (3,265,722)   (532,040)
Net cash used in operating activities from discontinued operations   -    178,728 
Net cash provided by (used in) operating activities   (3,265,722)   (353,312)
           
Cash flows from investing activities:          
Purchase of property and equipment   (27,740)   (387,608)
Proceeds from tenant improvement allowances   -    141,860 
Proceeds from sale of assets   -    173,977 
Net cash flows from investing activities   (27,740)   (71,771)
Net cash used in investing activities from discontinued operations   -    (131,011
Net cash used in investing activities   (27,740)   (202,782)
           
Cash flows from financing activities:          
Proceeds from Series 2 Preferred   1,405,000    - 
Proceeds from warrant exercises   885,046    - 
Redemption of Series 1 Preferred   (880,289)   - 
Loan proceeds   2,689,450    304,174 
Loan repayments   (2,482,474)   (347,680)
Merger consideration, net   5,411,745    - 
Distributions to non-controlling interest   -    (27,583)
Contributions from non-controlling interest   -    575,000 
Net cash flows from financing activities   7,028,478    503,911 
Net cash used in financing activities from discontinued operations   -    - 
Effect of exchange rate changes on cash   (34,628)   1,319 
Net increase (decrease) in cash and restricted cash   3,700,388    (50,864)
Cash and restricted cash, beginning of period   501,017    630,206 
Cash and restricted cash, end of period  $4,201,405   $579,342 

 

See accompanying notes to condensed consolidated and combined financial statements

 

 8 

 

 

Amergent Hospitality Group, Inc. and Subsidiaries

Condensed Consolidated and Combined Statements of Cash Flows

(Unaudited)

 

Supplemental cash flow information:                
Cash paid for interest and income taxes:                
Interest   $ 164,388     $ 312,438  
Income taxes   $ -     $ 92,576  
                 
Non-cash investing and financing activities:                
Convertible debt and notes payable settle through subscriptions in the rights offering   $ -     $ 3,075,000  
Subscriptions receivable from rights offering, net   $ -     $ 2,694,530  
Preferred stock dividends paid through issuance of common stock   $ 19,523     $ 38,618  
Conversion of Preferred stock - Series 2 to common stock   $ 416,392     $ -  
Accrued interest paid through warrant exercise   $ 318,700     $ -  
Bifurcation of derivative liability from Preferred Stock - Series 2   $ 529,000     $ -  
Warrant portion of merger consideration   $ 1,628,909     $ -  

 

See accompanying notes to condensed consolidated and combined financial statements

 

 9 

 

 

Amergent Hospitality Group, Inc. and Subsidiaries

Notes to Condensed Consolidated and Combined 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. The spin-off transaction was completed on April 1, 2020. Amergent is in the business of owning, operating and franchising fast casual dining concepts domestically and internationally.

 

On March 31, 2020, Chanticleer contributed all its assets and liabilities, including the stock interest in all its subsidiaries (other than Amergent), to Amergent. Based on this being a transaction between entities under common control the carryover basis of accounting was used to record the assets and liabilities contributed to Amergent. Further, as a common control transaction the consolidated and combined financial statements of Amergent reflect the transaction as if the contribution had occurred as of the earliest period presented herein.

 

As such, the accompanying consolidated and combined financial statements include the accounts of Amergent and its subsidiaries along with Chanticleer and its subsidiaries (collectively “we,” “us,” “our,” or the “Company”). All intercompany and inter-entity balances have been eliminated in consolidation and combination.

 

Organization, MERGER, SPIN-OFF, REVERSE SPLIT

 

On April 1, 2020, Chanticleer completed its merger transaction with Sonnet BioTherapeutics, Inc. (“Sonnet”), in accordance with the terms of the Agreement and Plan of Merger, dated as of October 10, 2019, among Chanticleer, Sonnet, Biosub Inc. (“Merger Sub”), and Sonnet Sub, as amended by Amendment No. 1 thereto, dated as of February 7, 2020 (as so amended, the “Merger Agreement”), pursuant to which Merger Sub merged with and into Sonnet Sub, with Sonnet Sub surviving as a wholly-owned subsidiary of Chanticleer (the “Merger”). On April 1, 2020, in connection with the Merger, Chanticleer changed its name to “Sonnet BioTherapeutics Holdings, Inc.”

 

In connection with and prior to the Merger, Chanticleer contributed and transferred to Amergent, a newly-formed, wholly-owned subsidiary of Chanticleer, all of the assets and liabilities relating to Chanticleer’s restaurant business. On March 16, 2020, the board of directors of Chanticleer declared a dividend with respect to the shares of Chanticleer’s common stock outstanding at the close of business on March 26, 2020 of one share of the Amergent common stock held by Chanticleer for each outstanding share of Chanticleer common stock. The dividend, which together with the contribution and transfer of Chanticleer’s restaurant business described above, is referred to as the “Spin-Off.” Prior to the Spin-Off, Amergent engaged in no business or operations.

 

The Spin-Off of Amergent to the stockholders of record on March 26, 2020 occurred prior to the Merger on April 1, 2020 (“Spin-Off Date”). As a result of the Spin-Off, Amergent emerged as successor to the business, operations, assets and liabilities of pre-merger Chanticleer. Additionally, Amergent’s shareholder base and their holdings (on a pro-rata basis) are substantially identical to that of pre-merger Chanticleer.

 

In connection with the Merger on April 1, 2020, Amergent received proceeds from Sonnet of $6,000,000 as well as a warrant to purchase 2% of the outstanding common shares of Sonnet (186,161 shares) for $0.01 per share (“Merger Consideration”). Amergent simultaneously entered into agreements to refinance a note payable and issue warrants to the note holder. See Note 7 for additional information on the note refinancing.

  

GENERAL

 

The accompanying condensed consolidated and combined 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 and combined financial statements have not been audited. The condensed consolidated and combined balance sheet as of December 31, 2019 has been derived from the audited consolidated and combined financial statements as of December 31, 2019 and for the year then ended included in Amergent’s annual report filed with the SEC on July 2, 2020 in connection with Amergent’s finalized Form 10/A. The results of operations for the three and six-month periods ended June 30, 2020 are not necessarily indicative of the operating results for the full year ending December 31, 2020.

 

Certain information and footnote disclosures normally included in unaudited condensed consolidated and combined financial statements prepared in accordance with generally accepted accounting principles of the United States (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations for interim reporting. The Company believes that the disclosures contained herein are adequate to make the information presented not misleading. However, these financial statements should be read in conjunction with the audited consolidated and combined financial statements and notes thereto included in Amergent’s Annual Report for the year ended December 31, 2019 previously filed with the SEC.

 

 10 

 

 

LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN

 

Liquidity, Capital Resources and Going Concern

 

As of June 30, 2020, the Company’s cash balance was $4,201,405, of which $1,250,000 was restricted cash, its working capital deficiency was $14,420,828, 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 refinance or otherwise extend maturities of current debt obligations;

 

  the level of investment in acquisition of new restaurant businesses and entering new markets;

 

  our ability to manage our operating expenses and maintain gross margins as we grow;
  our ability to actively trade our common stock;

 

  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, and other forms of external financing.

 

On February 7, 2020, the Company entered into a Securities Purchase Agreement for the sale (the “Bridge Financing”) of up to 1,500 shares of a new series of convertible preferred stock of the Company (the “Series 2 Preferred Stock”) with an institutional investor for gross proceeds to the Company of up to $1,500,000 (the “Preferred Securities Purchase Agreement”). The transaction occurred in two closings, the first of which, for 1,000 shares, occurred in mid-February 2020, and the second of which, for 500 shares, occurred in March 2020. In March 2020, an aggregate of 713 shares of Series 2 Preferred Stock were converted into 1,426,854 shares of common stock. In connection with the Merger, all outstanding shares of the Series 2 Preferred Stock were automatically cancelled and exchanged for substantially similar shares of preferred stock in Amergent.

 

On March 10, 2020, the World Health Organization characterized the novel COVID-19 virus as a global pandemic. The COVID-19 outbreak in the United States has resulted in a significant impact throughout the hospitality industry. The Company has been impacted due to restrictions placed by state and local governments that caused temporary restaurant closures or significantly reduced the Company’s ability to operate, restricting the Company’s restaurants to take-out only. It is difficult to estimate the length or severity of this outbreak; however, the Company has made operational changes, as needed, to reduce the impact. However, there can be no certainty regarding the length and severity of the outbreak and such its ultimate financial impact on the Company’s operations.

 

On March 27, 2020, Congress passed “The Coronavirus Aid, Relief, and Economic Security Act” (CARES Act), which included the “Paycheck Protection Program” (PPP) for small businesses. On April 27, 2020, Amergent received a PPP loan in the amount of $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 $119,000 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.

 

As a result of the Merger on April 1, 2020, Amergent received $6,000,000 in gross proceeds from Sonnet and a warrant to purchase 186,161 shares of Sonnet’s common stock, as well as paid down and refinanced certain debt obligations.

 

Even considering the additional liquidity obtained on April 1, 2020 in connection with the Merger and through the PPP loan proceeds received on April 27, 2020, there can be no assurances that Amergent will not need to seek additional debt or equity funding or 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 and uncertainties regarding the impact of COVID-19, raise substantial doubt about our ability to continue as a going concern.

 

 11 

 

 

The accompanying unaudited condensed consolidated and combined financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

There have been no changes to our significant accounting policies described in the Annual Report for the year ended December 31, 2019, filed with the SEC on July 2, 2020, in connection with the Company’s Form 10/A, that would have had a significant impact on these unaudited condensed consolidated and combined financial statements and related notes.

 

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 the valuation of the investments, deferred tax asset valuation allowances, valuing derivatives, options and warrants using the Binomial Lattice and Black-Scholes models, intangible asset valuations and useful lives, depreciation and uncollectible accounts and reserves. Actual results could differ from those estimates.

 

REVENUE RECOGNITION

 

The Company generates revenues from the following sources: (i) restaurant sales; (ii) management fee income; (iii) gaming income; and (iv) franchise revenues, consisting of royalties based on a percentage of sales reported by franchise restaurants and initial signing fees.

 

Restaurant Sales, Net

 

The Company records revenue from restaurant sales at the time of sale, net of discounts, coupons, employee meals, and complimentary meals and gift cards. Sales tax and value added tax (“VAT”) collected from customers and remitted to governmental authorities are presented on a net basis within revenue in our consolidated and combined statements of operations.

 

Management Fee Income

 

The Company received revenue from management fees from certain non-affiliated companies in 2019, including from managing its investment in Hooters of America, which are generally earned and recognized over the performance period. No management fee income has been recognized during the three and six month period ending June 30, 2020.

 

 12 

 

 

Gaming Income

 

The Company receives revenue from operating a gaming facility adjacent to its Hooters restaurant in Jantzen Beach, Oregon. Revenue from gaming is recognized as earned from gaming activities, net of payouts to customers, taxes and government fees. These fees are recognized as they are earned based on the terms of the agreements.

 

Franchise Income

 

The Company grants franchises to operators in exchange for initial franchise license fees and continuing royalty payments. The license granted for each restaurant or area is considered a performance obligation. All other obligations (such as providing assistance during the opening of a restaurant) are combined with the license and were determined to be a single performance obligation. Accordingly, the total transaction price (comprised of the restaurant opening and territory fees) is allocated to each restaurant expected to be opened by the licensee under the contract. There are significant judgments regarding the estimated total transaction price, including the number of stores expected to be opened. We recognize the fee allocated to each restaurant as revenue on a straight-line basis over the restaurant’s license term, which generally begins upon the signing of the contract for area development agreements and upon the signing of a store lease for franchise agreements. The payments for these upfront fees are generally received upon contract execution. Continuing fees, which are based upon a percentage of franchisee revenues and are not subject to any constraints, are recognized on the accrual basis as those sales occur. The payments for these continuing fees are generally made on a weekly basis.

 

Deferred Revenue

 

Deferred revenue consists of contract liabilities 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 or if the development agreement is terminated.

 

RESTAURANT PRE-OPENING and closing EXPENSES

 

Restaurant pre-opening and closing expenses are non-capital expenditures and are expensed as incurred. Restaurant pre-opening expenses consist of the costs of hiring and training the initial hourly work force for each new restaurant, travel, the cost of food and supplies used in training, grand opening promotional costs, the cost of the initial stocking of operating supplies and other direct costs related to the opening of a restaurant, including rent during the construction and in-restaurant training period. Restaurant closing expenses consists of the costs related to the closing of a restaurant location and include write-off of property and equipment, lease termination costs and other costs directly related to the closure, and have been treated as an asset impairment charge in the income statement. Pre-opening and closing expenses are expensed as incurred.

 

LIQUOR LICENSES

 

The costs of obtaining non-transferable liquor licenses that are directly issued by local government agencies for nominal fees are expensed as incurred. The costs of purchasing transferable liquor licenses through open markets in jurisdictions with a limited number of authorized liquor licenses are capitalized as indefinite-lived intangible assets and included in other assets. Liquor licenses are reviewed for impairment annually or when events or changes in circumstances indicate that the carrying amount may not be recoverable. Annual liquor license renewal fees are expensed over the renewal term.

 

ACCOUNTS AND OTHER RECEIVABLES

 

The Company monitors its exposure for credit losses on its receivable balances and the credit worthiness of its receivables on an ongoing basis and records related allowances for doubtful accounts. Allowances are estimated based upon specific customer and other balances where a risk of default has been identified, and also include a provision for non-customer specific defaults based upon historical experience. The majority of the Company’s accounts are from customer credit card transactions with minimal historical credit risk. As of June 30, 2020 and December 31, 2019, the Company has not recorded an allowance for doubtful accounts. If circumstances related to specific customers change, estimates of the recoverability of receivables could also change.

 

 13 

 

 

INVENTORIES

 

Inventories are recorded at the lower of cost (first-in, first-out method) or net realizable value, and consist primarily of restaurant food items, supplies, beverages and merchandise.

 

LEASES

 

We determine if a contract contains a lease at inception. Our material operating leases consist of restaurant locations and office space. Our leases generally have remaining terms of 1-20 years and most include options to extend the leases for additional 5-year periods. Generally, the lease term is the minimum of the non-cancelable period of the lease or the lease term inclusive of reasonably certain renewal periods up to a term of 20 years. If the estimate of our reasonably certain lease term was changed, our depreciation and rent expense could differ materially.

 

Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental borrowing rates corresponding to the reasonably certain lease term. We estimated this rate based on prevailing financial market conditions, comparable company and credit analysis, and management judgment. If the estimate of our incremental borrowing rate was changed, our operating lease assets and liabilities could differ materially.

 

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:

 

    Quoted Prices in Active    

Significant

Observable

   

Significant

Unobservable

    Total  
   

Markets

(Level 1)

   

Inputs

(Level 2)

   

Inputs

(Level 3)

   

Fair

Value

 
June 30, 2020                                
Assets: (Note 4)                                
Warrants to purchase common stock of Sonnet       $ 675,876     $ -     $ 675,876  
        $ 675,876     $ -     $ 675,876  
Liabilities: (Note 10)                                
Warrants   $ -     $ -     $ 406,000     $ 406,000  
Conversion feature of note     -       -       4,708,000       4,708,000  

Make Whole Provision of Convertible Preferred Series 2

    -       -       1,439,483       1,439,483  
    $     $ -     $ 6,553,483     $ 6,553,483  

 

Inputs used in the Company’s Level 3 calculation of fair value are discussed in Note 10.

 

The Company is required to disclose fair value information about financial instruments when it is practicable to estimate that value. The carrying amounts of the Company’s cash, accounts receivable, other receivables, accounts payable, other current liabilities, convertible notes payable 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.

 

 14 

 

 

Property and Equipment

 

Property and equipment are stated at cost, less accumulated depreciation. Depreciation and amortization, which includes amortization of assets held under capital leases, are recorded generally using the straight-line method over the estimated useful lives of the respective assets or, if shorter, the term of the lease for certain assets held under a capital lease. Leasehold improvements are amortized over the lesser of the expected lease term, or the estimated useful lives of the related assets using the straight-line method. Maintenance and repairs that do not improve or extend the useful lives of the assets are not considered assets and are charged to expense when incurred.

 

The estimated useful lives used to compute depreciation and amortization are as follows:

 

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

 

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 the three and six months ended June 30, 2020 the Company determined that triggering events occurred related to the COVID-19 outbreak required management to review the Company’s long-lived assets for impairment. Based on the analysis performed, management determined potential impairment indicators existed related to the Company’s operating lease assets during the period ended June 30, 2020. See Note 11.

 

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.

 

As discussed in Note 1, in March 2020, the World Health Organization declared coronavirus COVID-19 a global pandemic. Due to the continued impact of this pandemic on the Company’s business management has performed an updated impairment analysis of goodwill as of June 30, 2020.

 

 15 

 

 

When evaluating goodwill for impairment based on the COVID-19 pandemic, the Company may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If we do not perform a qualitative assessment, or if we determine that it is not more likely than not that the fair value of the reporting unit exceeds its carrying amount, we perform a quantitative assessment and calculate the estimated fair value of the reporting unit. If the carrying amount of the reporting unit exceeds the estimated fair value, an impairment charge is recorded to reduce the carrying value to the estimated fair value. The Company’s decision to perform a qualitative impairment assessment is influenced by a number of factors, including the significance of the excess of the reporting unit’s estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments, and the price of our common stock.

 

The Company performed a quantitative assessment and determined that goodwill was not impaired as of June 30, 2020 due to the excess fair value of the reporting unit over its carrying value and the best judgement of management for the future of the units are not defined based on information known at the time of the assessment. Step one of the impairment test is based upon a comparison of the carrying value of net assets, including goodwill balances, to the fair value of net assets. Fair value is measured using a discounted cash flow model approach. The Company reviewed and adjusted the revenues for the remaining portion of 2020, as well as adjusted the ongoing operating cost structure to reflect management’s best estimate of the performance of the Company for the remaining portion of 2020. Then, the Company reviewed the projected performance of the business into 2021 and beyond. Additionally, the Company evaluated the key input factors in the models used to determine whether a moderate change in any input factor or combination of factors would significantly change the results of the tests. As a result of this impairment test the Company determined that the fair value of the reporting unit over book value was in excess of $1.5 million.

 

InTANGIBLE ASSETS

 

Trade Name/Trademark

 

The fair value of trade name/trademarks are estimated and compared to the carrying value. The Company estimates the fair value of trademarks using the relief-from-royalty method, which requires assumptions related to projected sales from its annual long-range plan; assumed royalty rates that could be payable if the Company did not own the trademarks; and a discount rate. Certain of the Company’s trade name/trademarks have been determined to have a definite-lived life and are being amortized on a straight-line basis over estimated useful lives of 10 years. The amortization expense of these definite-lived intangibles is included in depreciation and amortization in the Company’s condensed consolidated statement of operations and comprehensive loss. Certain of the Company’s trade name/trademarks have been classified as indefinite-lived intangible assets and are not amortized, but instead are reviewed for impairment at least annually or more frequently if indicators of impairment exist.

 

As discussed in Note 1, in March 2020, the World Health Organization declared coronavirus COVID-19 a global pandemic. Due to the continued impact of this pandemic on the Company’s business, management has performed an updated impairment analysis of its tradename/trademarks as of June 30, 2020 and determined that the carrying value of the asset was not impaired. The determination was based on the best judgment of management for the future of the asset and on information known at the time of the assessment.

 

Franchise Costs

 

Intangible assets are recorded for the initial franchise fees for our Hooter’s restaurants. The Company amortizes these amounts over a 20-year period, which is the life of the franchise agreement. The Company also has intangible assets representing the acquisition date fair value of customer contracts acquired in connection with BGR’s franchise business. The Company also amortizes these amounts over its estimated useful life of the related intangible asset and began amortizing the related asset over the weighted average life of the underlying franchise agreements.

 

 16 

 

 

Income Taxes

 

Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

In connection with the Merger and Spin-Off, Amergent performed an analysis of the existing net operating loss carryforwards of Chanticleer and, based on the rules of the Internal Revenue Code (“IRC”), has preliminarily determined that Amergent expects to have approximately $20,100,000 of net operating loss carryforwards available to the Company as of April 1, 2020 to offset future taxable income of the Company. Approximately $7,200,000 of the net operating loss carryforwards available will be limited by section 382 of the IRC. Management expects to complete its analysis of the net operating loss carryforward once the Company’s 2019 income tax returns are filled with the Internal Revenue Service but does not expect a significant change in the amount of available net operating loss carryforwards. There were no other income tax implications to Amergent as a result of the Merger and Spin-off.

 

The Company has provided a valuation allowance for the full amount of the deferred tax assets in the accompanying condensed combined and consolidated financial statements.

 

As of June 30, 2020, and 2019, 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.

 

Stock-based Compensation

 

The compensation cost relating to share-based payment transactions (including the cost of all employee stock options) is required to be recognized in the financial statements. That cost is measured based on the estimated fair value of the equity or liability instruments issued. A wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans are included.

 

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, and the potential conversion of the convertible debt, as described in Note 7, would be anti-dilutive.

 

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 each of its foreign operations.

 

Comprehensive Income (LOSS)

 

Standards for reporting and displaying comprehensive income (loss) and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements requires that all items that are required to be recognized under accounting standards as components of comprehensive income (loss) be reported in a financial statement that is displayed with the same prominence as other financial statements. We are required to (a) classify items of other comprehensive income (loss) by their nature in financial statements, and (b) display the accumulated balance of other comprehensive income (loss) separately in the equity section of the balance sheet for all periods presented. Other comprehensive income (loss) items include foreign currency translation adjustments.

 

 17 

 

 

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

On January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842),” along with related clarifications and improvements. This pronouncement requires lessees to recognize a liability for lease obligations, which represents the discounted obligation to make future lease payments, and a corresponding right-of-use asset on the balance sheet. The guidance requires disclosure of key information about leasing arrangements that is intended to give financial statement users the ability to assess the amount, timing, and potential uncertainty of cash flows related to leases. The Company elected the optional transition method to apply the standard as of the effective date and therefore, the Company has not applied the standard to the comparative period presented in its condensed consolidated financial statements.

 

The practical expedients elected in connection with the adoption of Leases Topic 842 were as follows:

 

    Implications as of January 1, 2019
Practical expedient package   The Company has not reassessed whether any expired or existing contracts are, or contain, leases.
    The Company has not reassessed the lease classification for any expired or existing leases.
    The Company has not reassessed initial direct costs for any expired or existing leases.
Hindsight practical expedient   The Company has not elected the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of operating lease assets.

 

Upon adoption of Leases (Topic 842), the Company recorded operating lease right-of-use assets and operating lease liabilities and derecognized deferred rent liabilities (including unamortized tenant improvement allowances) and favorable/unfavorable lease assets and liabilities upon transition. Upon adoption, the Company recorded operating lease liabilities of approximately $22.1 million based on the present value of the remaining rental payments using discount rates as of the effective date. In addition, the Company recorded corresponding operating lease right-of-use assets of approximately $19.8 million, calculated as the initial amount of the Company’s operating lease liabilities adjusted for deferred rent (including unamortized tenant improvement allowances) and unamortized favorable/unfavorable lease assets and lease liabilities. As of June 30, 2020, the Company maintained an operating lease right-of-use assets of approximately $11 million, and operating lease liabilities (current and long-term) of approximately $17.2 million.

 

In June 2016, the Financial Accounting Standards Board “FASB” issued Accounting Standards Update “ASU” 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The adoption of ASU 2016-13 did not result in a material change to our consolidated and combined financial statements.

 

In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40)”: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which clarifies the accounting for implementation costs in cloud computing arrangements. The adoption of ASU 2018-15 did not result in a material change to our consolidated and combined 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 and combined financial statements.

 

3. DISCONTINUED OPERATIONS

 

The Company sold Just Fresh and its South Africa Hooters locations in 2019. Because of the sale, the Company has reclassified the operations of Just Fresh and the South Africa Hooters locations to discontinued operations as of June 30, 2020 and December 31, 2019, and for the three and six months ended June 30, 2020 and 2019.

 

 18 

 

 

The carrying amount of major classes of assets and liabilities included as part of discontinued operations are as follows:

 

    (Unaudited)        
   

Six Months

June 30, 2020

   

Year Ended

December 31, 2019

 
Other receivable   $ 30,084     $ 149,000  
Total assets     30,084       149,000  
                 
Accounts payable and accrued expenses     179,625       435,600  
Total liabilities     179,625       435,600  
                 
Net assets of discontinued operations   $ (149,521 )   $ (286,600 )

 

The major line items comprising the loss of discontinued operations are as follows:

 

   (Unaudited)   (Unaudited) 
   Three Months   Three Months 
   June 30, 2020   June 30, 2019 
Restaurant revenues  $                -   $2,359,833 
Expenses:          
Administrative expenses   -    194,490 
Cost of sales   -    866,897 
Depreciation and amortization   -    82,060 
Restaurant operating expenses   -    1,299,082 
Other (income) expense   -    (158,796)
    -    2,283,733 
Income (Loss) of discontinued operations  $-   $76,100 

 

   (Unaudited)   (Unaudited) 
   Six Months   Six Months 
   June 30, 2020   June 30, 2019 
Restaurant revenues  $                -   $4,720,015 
Expenses:          
Administrative expenses   -    353,227 
Cost of sales   -    1,722,401 
Depreciation and amortization   -    165,104 
Restaurant operating expenses   -    2,575,143 
Other (income) expense   -    (108,012)
    -    4,707,863 
Income (Loss) of discontinued operations  $-   $12,152 

 

Cash flows from discontinued operations is as follows:

 

   Six Months Ended 
   June 30, 2020   June 30, 2019 
         
Cash flows provided by (used in) Operating Activities  $   $166,576 
Cash flows provided by (used in) Investing Activities       (131,011)
Cash flows provided by (used in) Financing Activities        
Net Cash Provided by (Used in) Discontinued Operations  $   $35,565 

 

4. INVESTMENTS

 

Investments consist of the following at June 30, 2020 and December 31, 2019:

 

  

(Unaudited)

June 30, 2020

   December 31, 2019 
Warrants to purchase common stock of Sonnet  $675,876   $ 
Chanticleer Investors, LLC   

401,284

    381,397 
Total  $

1,077,159

   $381,397 

 

Warrant to purchase common stock of Sonnet

 

Upon consummation of the Merger discussed in Note 1, the Company received a warrant to purchase 2% of the common stock of Sonnet as part of the Merger Consideration. Amergent cannot exercise the warrant until 180 days after the closing of the Merger.

 

The estimated fair value of the warrant to purchase 2% of the common stock of Sonnet (186,161 shares) was $1,628,909 as of April 1, 2020 and $675,876 as of June 30, 2020. The warrant has an exercise price of $0.01 per share and is exercisable beginning on September 28, 2020 through April 1, 2025. The estimated fair value of the warrant was determined based on the $8.76 and $3.64 closing stock price of a common share of Sonnet as of April 1, 2020 and June 30, 2020, respectively, net of the $0.01 exercise price multiplied by the 186,161 shares issuable upon exercise of the warrant. This value is also equal to the value under the Black-Scholes option pricing model with the following inputs:

 

As of April 1, 2020    
Fair value of Sonnet common stock  $8.76 
Exercise price  $0.01 
Term   5 years 
Volatility   102.7%
Risk-free interest rate   0.37%

 

As of June 30, 2020    
Fair value of Sonnet common stock  $3.64 
Exercise price  $0.01 
Term   4.75 years 
Volatility   104.35%
Risk-free interest rate   0.29%

 

The fair value of the warrant as of April 1, 2020 of $1,628,909 was recorded as an increase in additional paid-in-capital as of the Merger date. The $953,033 decrease in fair value through June 30, 2020 was recorded as an investment loss in the accompanying condensed combined and consolidated statement of operations for the three and six months ended June 30, 2020.

 

Chanticleer Investors LLC

 

The Company invested $800,000 during 2011 and 2012 in exchange for a 22% ownership stake in Chanticleer Investors, LLC, which in turn held a 3% interest in Hooters of America, the operator and franchisor of the Hooters Brand worldwide. As a result, the Company’s effective economic interest in Hooters of America was approximately 0.6%. Effective June 28, 2019, Hooters of America closed on the sale of a controlling interest in the company. The consideration paid in the sale transaction was a combination of cash proceeds and equity in the newly formed company. The Company netted approximately $48,000 in cash upon the transaction and retained a non-controlling interest in the equity of the newly-formed company.

 

 19 

 

 

5. PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consists of the following at June 30, 2020 and December 31, 2019:

 

  

(Unaudited)

June 30, 2020

  

December 31, 2019

 
Leasehold improvements  $7,682,654   $7,926,789 
Restaurant furniture and equipment   3,187,180    3,032,859 
Construction in progress   -    650 
Office and computer equipment   60,304    62,304 
Office furniture and fixtures   279,675    169,034 
    11,209,813    11,191,636 
Accumulated depreciation and amortization   (6,330,569)   (5,561,146)
   $

4,879,244

   $5,630,490 

 

6. INTANGIBLE ASSETS, NET

 

GOODWILL

 

Goodwill consist of the following at June 30, 2020 and December 31, 2019:

 

  

(Unaudited)

June 30, 2020

   December 31, 2019 
Beginning Balance  $

8,567,888

   $10,564,353 
Impairment   -    (2,025,720)
Foreign currency translation gain (loss)   (60,643)   29,255 
Ending Balance  $

8,507,245

   $8,567,888 

 

OTHER INTANGIBLE ASSETS

 

Franchise and trademark/tradename intangible assets consist of the following at June 30, 2020 and December 31, 2019:

 

      

(Unaudited)

June 30, 2020

   December 31, 2019 
Trademark, Tradenames:               
American Roadside Burger   10 years   $1,786,930   $1,786,930 
BGR: The Burger Joint   Indefinite    985,996    985,996 
Little Big Burger   Indefinite    1,550,000    1,550,000 
         4,322,926    4,322,926 
Acquired Franchise Rights               
BGR: The Burger Joint   7 years    827,757    827,757 
                
Franchise License Fees:               
Hooters Pacific NW   20 years    74,507    74,507 
Hooters UK   5 years    12,046    12,917 
         86,553    87,424 
Total Intangibles at cost        5,237,236    5,238,107 
Accumulated amortization        (1,763,637)   (1,581,112)
Intangible assets, net       $

3,473,599

   $3,656,995 

 

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7. DEBT AND NOTES PAYABLE

 

Debt and notes payable are summarized as follows:

 

  

(Unaudited)

June 30, 2020

   December 31, 2019 
         
Notes Payable (a)  $   $6,000,000 
Notes Payable TowneBank (b)       142,746 
Receivables financing facilities (c)   144,430    23,958 
Notes Payable (d)   25,850    25,580 
Notes Payable (e)   108,423    90,408 
Contractor note (f)   348,269    348,269 
PPP loan (g)   2,168,213     
Convertible debt (h)   4,037,889     
Total debt   6,833,074    6,630,961 
Less: discount on convertible debt (h)   (322,752)   - 
Current portion of long-term debt   1,554,119    6,630,961 
Long-term debt, less current portion  $4,956,203   $- 

 

(a) On May 4, 2017, pursuant to a Securities Purchase Agreement, the Company issued 8% non-convertible secured debentures in the principal amount of $6,000,000 and warrants to purchase 1,199,978 shares of common stock to accredited investors. The debentures bore an interest at a rate of 8% per annum and were payable in cash quarterly in arrears.

 

The Company lowered the strike price for several classes of warrants to $0.50 to allow for warrant holders to exercise their warrants in order to induce the exercise thereof and raise capital for the Company. See Note 9 for further discussion of warrant modification.

 

In connection with and prior to the Merger and Spin-Off, on April 1, 2020, pursuant to an agreement among Chanticleer, Oz Rey LLC, a Texas limited liability company (“Oz Rey”), the Company and certain other original holders of the 8% non-convertible secured debentures, the Company was released from all of its obligations under the 8% non-convertible secured debentures, and the 8% non-convertible secured debentures were cancelled. In exchange, Amergent (i) issued a 10% convertible secured debenture in principal amount of $4,037,889 to Oz Rey, (ii) issued warrants to purchase 2,925,200 of shares of common stock of Amergent to Oz Rey and certain of the original holders of the 8% non-convertible secured debentures, and (iii) remitted payment of $650,000 prior to March 31, 2020 and an additional $1,350,000 plus reimbursement of certain expenses to the purchasers on April 1, 2020. See further discussion in (h) below.

 

(b) The Company had one outstanding term loan with TowneBank, all of which was collateralized by all assets of the Company and personally guaranteed by our Chief Executive Officer. In connection with and prior to the Merger and Spin-Off, on April 1, 2020, the Company paid off the outstanding balance owed to TowneBank in full.

 

(c) During January 2020, in consideration for proceeds of $194,800, the Company agreed to make payments of $585 per day on two separate agreements for 220 days. The Company granted a security interest in the credit card receivables of the specified restaurants in connection with each of the Receivables Financing Agreements. Total outstanding on these advances is $144,430 and $23,958 at June 30, 2020 and December 31, 2019, respectively. In connection with and prior to the Merger and Spin-Off, on April 1, 2020, these notes were assumed by Amergent.

 

(d) In connection with the assets acquired from the two BGR franchisees, the Company entered into notes payable of $9,600 and $187,000 during 2018. The notes bear interest at 4% and are due within 12 months of each acquisition date. Principal and interest payments are due monthly. The total outstanding on these two notes is $25,850 and $25,580 at June 30, 2020 and December 31, 2019, respectively. In connection with and prior to the Merger and Spin-Off, on April 1, 2020, these notes were assumed by Amergent.

 

(e) During September 2019 and October 2019, the Company entered into two merchant capital advances in the amount of $46,000 and $84,700, respectively. The Company agreed to repay these advances through daily payments until those amounts are repaid with the specified interest rate per those agreements. Total outstanding on these advances is $108,423 and $90,408 as of June 30, 2020 and December 31, 2019, respectively. In connection with and prior to the Merger and Spin-Off, on April 1, 2020, these notes were assumed by Amergent.

 

(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 had a balance of $348,269 as of both June 30, 2020 and December 31, 2019, and a stated interest rate of 12% per year. In connection with and prior to the Merger and Spin-Off, on April 1, 2020, this note was assumed by Amergent.

 

(g) On March 27, 2020, Congress passed “The Coronavirus Aid, Relief, and Economic Security Act” (CARES Act), which included the “Paycheck Protection Program” (PPP) for small businesses. On April 27, 2020, Amergent received a 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 $119,000 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.

 

(h) In connection with and prior to the Spin-Off and Merger, on April 1, 2020, pursuant to an agreement among Chanticleer, Oz Rey and certain original holders of the 8% non-convertible debentures (see (a) above), the Company issued a 10% secured convertible debenture to Oz Rey in exchange for the 8% non-convertible debentures. The principal amount of the 10% secured convertible debenture is $4,037,889, 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. At June 30, 2020, the 10% secured convertible debenture was convertible at any time by Oz Rey into common stock at the lower of $0.10 per share and the volume weighted average price on the last 10 trading days immediately prior to conversion. The 10% secured convertible debenture is also subject to adjustment if Amergent sells securities below this price (down round protection), among other triggers. 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.

 

At June 30, 2020, Amergent did not have an adequate amount of authorized common stock to cover shares issuable upon exercise of the warrants and conversion of the 10% convertible notes. As such, the warrants were liability classified and the conversion feature has been bifurcated from the host debt instrument and accounted for as a derivative and recorded as a liability in the accompanying condensed consolidated and combined balance sheet at June 30, 2020, with the change in the liability for the warrants and the conversion feature from the April 1, 2020 issuance date through June 30, 2020 recorded in the accompanying condensed consolidated and combined statement of operations for the three and six month periods then ended.

 

The warrants issued had an estimated fair value of $935,000 as of April 1, 2020 using a Monte Carlo simulation to determine the value. The fair value of the conversion feature was $11,231,000 as of April 1, 2020 using a Monte Carlo simulation to determine the value. The estimated carrying value of the 10% convertible secured debentures without the conversion feature was $3,680,000, and with the conversion feature was $14,911,000.

 

The exchange of the notes has been accounted for as the extinguishment of the 8% non-convertible notes with the difference in the carrying value of the 8% non-convertible notes ($4,037,889) and the fair value of the 10% convertible notes and warrants ($15,846,000) at the date of the exchange recorded as a debt extinguishment charge of $11,808,111 in the accompanying condensed consolidated and combined statement of operations for the three and six month periods ended June 30, 2020.

 

The estimated fair value of the warrants and conversion feature at June 30, 2020 are $406,000 and $4,708,000, respectively. The change in value from the issuance date through June 30, 2020 of $7,052,000 has been recorded as other income and included in change in fair value of derivative liabilities and warrants in the accompanying condensed consolidated and combined statements of operations for both the three and six month periods ended June 30, 2020. See note 10 for further discussion of determining the estimated fair value of these instruments.

 

The Company recorded a debt discount of approximately $358,000 for the difference between the face value of the 10% secured convertible debenture and the estimated fair value at the April 1, 2020 issuance date and is amortizing this discount over the two-year period of the notes. Amortization of approximately $35,000 was recorded as interest expense during both the three and six month periods ended June 30, 2020.

 

On August 17, 2020, the Company and Oz Rey amended the 10% secured convertible debenture to fix the conversion rate into common stock at $0.10 per share. Further, Oz Rey agreed not to convert any portion of the 10% secured convertible debenture that would cause the number of shares on a fully-diluted basis issued after the conversion to exceed the authorized share level. Oz Rey may however, upon reasonably notice to the Company, require the Company to include in its proxy materials, for any annual meeting of shareholders 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 require the Company 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. Oz Rey also agreed to waive any event of default under the debenture that occurred or existed prior to August 17, 2020.

 

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.

 

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Redeemable Preferred Stock – Series 1

 

Beginning in December 2016, the Company conducted a rights offering of units, each unit consisting of one share of 9% Redeemable Series 1 Preferred Stock (“Series 1 Preferred”) and one Series 1 Warrant (“Series 1 Warrant”) to purchase 10 shares of common stock. In connection with the Merger, on April 1, 2020, all outstanding Series 1 Preferred units, comprised of shares of Series 1 Preferred and Series 1 Warrants, were redeemed and extinguished for their cash redemption price of $0.50 per unit. The difference between the carrying value of the Series 1 Preferred and the cash redemption amount of $161,899 was recognized as a loss on extinguishment and included in other expense during the three and six months ended June 30, 2020.

 

8. ACCOUNTS PAYABLE AND ACCRUED Expenses

 

Accounts payable and accrued expenses are summarized as follows:

 

    (Unaudited)        
    June 30, 2020     December 31, 2019  
Accounts payable and accrued expenses   $ 4,937,393     $ 4,230,640  
Accrued taxes (VAT, Sales, Payroll, etc.)     3,000,229       3,319,928  
Accrued income taxes     5,948       (1,906 )
Accrued interest     360,223       616,533  
    $ 8,303,793     $ 8,165,195  

 

As of June 30, 2020, approximately $2.7 million of employee and employer taxes and associated interest and penalties that have been accrued but not remitted to certain taxing authorities by the Company prior to 2019 for cash compensation paid. As a result, the Company is liable for such payroll taxes and any related penalties and interest.

 

9. STOCKHOLDER’S EQUITY

 

The Company had 50,000,000 and 45,000,000 shares of $0.0001 par value common stock authorized at June 30, 2020 and December 31, 2019, respectively. The Company had 14,282,736 and 10,404,342 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively.

 

The Company has 5,000,000 shares of its no par value preferred stock authorized at both June 30, 2020 and December 31, 2019. The Company had 787 shares of convertible Series 2 Preferred outstanding as of June 30, 2020 and 62,876 shares of Series 1 Preferred outstanding as of December 31, 2019.

 

As a result of the Merger, the following reflects the net equity contribution of Merger Consideration to the Company which reflects the gross proceeds received, offset of the direct costs incurred for the transaction, the difference between the redemption payment and carrying value of the Redeemable Preferred Stock - Series 1, and redemption of certain warrants.

 

Contributed cash portion of Merger Consideration   $ 6,000,000  
Contribution of Sonnet warrant portion of Merger Consideration     1,628,909  
Transaction cost incurred     (588,255 )
    $ 7,040,654  

 

 22 

 

 

2019 Rights Offering

 

In 2019 the Company conducted a rights offering of units to its stockholders of record to purchase common stock at a subscription price of $1.00 per share. The rights offering was made pursuant to Chanticleer’s effective registration statement on Form S-1 on file with the U.S. Securities and Exchange Commission (the “SEC”) and accompanying prospectus filed with the SEC on June 12, 2019.

 

Upon closing of the rights offering in July 2019, a total of 1,894,308 shares of common stock were issued pursuant to record holders’ basic subscription privilege and a total of 4,190,524 shares of common stock were issued pursuant to record holders’ over subscription. The Company accepted subscriptions to purchase 6,084,728 shares in the rights offering upon expiration of the rights offering on June 28, 2019. The Company received $6,009,733 in gross proceeds from the rights offering and $3,075,000 was subscribed by certain record holders’ through the reduction in outstanding debt obligations of the Company. The shares associated with the reduction in outstanding debt obligations were deemed issued at June 30, 2019. The remaining proceeds of approximately $2.7 million, which is net of fees owed to the dealer-managers and other offering costs, were received in early July 2019 after the closing of the rights offering.

 

Chardan Capital Markets, LLC and The Oak Ridge Financial Services Group Inc. were the co-dealer-managers on the transaction and the Company agreed to pay the dealer-managers a fee equal to 7% of the gross proceeds of the rights offering (excluding proceeds from the reduction of the debt obligations) and to reimburse the dealer-managers for their expenses up to $75,000 for an aggregate commission of approximately $286,000. Additional offering costs were incurred for legal, accounting and transfer agent services.

 

2020 Bridge Financing

 

Pursuant to a Securities Purchase Agreement dated February 7, 2020, Chanticleer sold 1,500 shares of a new series of convertible preferred stock of Chanticleer (the “Series 2 Preferred Stock”) to an institutional investor for gross proceeds to the Company of $1,500,000 less transaction costs of $95,000. In addition, pursuant to Chanticleer’s original agreement with the investors, Amergent issued 5-year warrants to purchase an aggregate of 350,000 shares of Amergent’s 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 derivate (more fully described below and in Note 10) in the amount of $529,000. The effective conversion price of the Series 2 Preferred Stock after the bifurcation of the derivative resulted a beneficial conversion feature of $729,000, which was then immediately recorded as a deemed dividend as the preferred stock is immediately convertible. In March 2020, an aggregate of 713 shares of Series 2 Preferred Stock were converted into 1,426,854 shares of common stock. In connection with the Merger, all remaining outstanding shares of the Series 2 Preferred Stock were automatically cancelled and exchanged for substantially similar shares of preferred stock in Amergent.

 

The Series 2 Preferred Stock is classified in the accompanying condensed consolidated and combined balance sheet at June 30, 2020 as temporary equity due to certain contingent redemption features which are outside the control of the Company.

 

Designations, rights and preferences of Series 2 Preferred Stock:

 

Stated value. Each share of Series 2 Preferred Stock had a stated value of $1,000.

 

True-Up payment. Amergent was required to pay the holder an amount in cash equal to the dollar value of 125% of the stated value of the Series 2 Preferred Stock less the proceeds previously realized by the holder from the sale of all conversion shares received by holder in the Company and Amergent, net of brokerage commissions and any other fees incurred by the holder in connection with the sale of any conversion shares on the first trading day after the six month anniversary of the issuance of the Series 2 Preferred Stock. As further discussed in Note 12, the Company and the Series 2 Preferred Stockholder extended the payment date to December 10, 2020 (“Amended True-Up Date”) in consideration for certain cash and warrants. Amergent will maintain a segregated cash collateral account until the True-Up Payment is satisfied in full. The True-Up Payment will be paid by the Amergent out of (i) the proceeds from the exercise by Amergent of the warrants to purchase shares of the Company’s common stock to be held by the Spin-Off Entity after the consummation of the transactions contemplated by the Merger Agreement (the “merger”) or (ii) the segregated cash account. Non-payment of the True-Up Payment when it is due will trigger default interest rate of 18% per year.

 

 23 

 

 

The Company determined that the True-Up payment constituted a “make-whole” provision as defined by U.S. GAAP that is required to be settled in cash and as such, was bifurcated from the host instrument, the Series 2 Preferred Stock, and accounted for as a derivative liability. The fair value of the derivative was estimated using a Monte Carlo model and a liability of $529,000 was recorded at the Series 2 Preferred Stock issuance date. The fair value was updated as of June 30, 2020 and a liability of $1,439,483 was recorded in the accompanying condensed combined and consolidated balance sheet, with the $910,483 increase in the liability recorded as an expense in the accompanying interim combined and consolidated statement of operations for the three and six months ended June 30, 2020. See Note 10 for further information.

 

Redemption. If the Merger was not completed within six months of issuance of the Series 2 Preferred Stock, the Company would have been required to redeem all the outstanding Series 2 Preferred Stock for 125% of the aggregate stated value of the Series 2 Preferred Stock then outstanding plus any default interest and any other fees or liquidated damages then due and owing thereon under the Certificate of Designations. Additionally, there are other triggering events, as defined, that can cause the Series 2 Preferred Stock to be redeemable at the option of the holder of which some are outside of the control of the Company.

 

Conversion at option of holder/ beneficial ownership limitation. The Series 2 Preferred Stock is convertible at the option of holder at the lesser of (i) $1.00 (subject to adjustment for forward and reverse stock splits, recapitalizations and the like) or (ii) 90% of the five day average volume weighted average price of the common, provided the conversion price has a floor of $0.50 (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 Stock upon delivery of notice three days prior to the Merger, subject to the beneficial ownership limitation and applicable Nasdaq rules. Unconverted shares of Series 2 Preferred Stock automatically were exchanged for an equal number of shares of Series 2 Preferred Stock in Amergent on substantially the same terms.

 

Liquidation 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 Stock before any distribution or payment to the holders of common stock.

 

Voting rights. The holder of Series 2 Preferred Stock has the right to vote together with the holders of common stock as a single class on an as-converted basis on all matters presented to the holders of common stock and shall vote as a separate class on all matters presented to the holders of Series 2 Preferred Stock. In addition, without the approval of the holder, the Company is required to obtain the approval of Series 2 Preferred Stock, as is customary, for certain events and transactions not contemplated by the merger.

 

Triggering Events. Breach of Company’s obligations will trigger a redemption event.

 

Anti-Dilution. Customary adjustments in the event of dividends or stock splits and anti-dilution protection.

 

Concurrently with the Preferred Securities Purchase Agreement, the parties entered into a registration rights agreement (the “Preferred Registration Rights Agreement”). Pursuant to the Preferred Registration Rights Agreement, the Company was required to file a registration statement registering the conversion shares no later than 15 days from the closing of this transaction.

 

On August 17, 2020, Amergent and the holders of Series 2 Preferred entered into a Waiver, Consent and Amendment to Certificate of Designations extending the True-Up Date to December 10, 2020. An Amended and Restated Certificate of Designations of Series 2 Convertible Preferred Stock that provides for the extension of the True-Up Date to December 10, 2020 and provides that the Amergent may not access any portion of funds held in the segregated account until the obligations under Series 2 Preferred are satisfied in full, was filed on August 17, 2020.

 

Options and Warrants

 

The Company’s shareholders approved the Chanticleer Holdings, Inc. 2014 Stock Incentive Plan (the “2014 Plan”), authorizing the issuance of options, stock appreciation rights, restricted stock awards and units, performance shares and units, phantom stock and other stock-based and dividend equivalent awards. Pursuant to the approved 2014 Plan, 400,010 were approved for grant. This Plan did not survive the Merger. Amergent intends to adopt a new equity incentive plan subject to shareholder approval in the near future.

 

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As of and in connection with the Merger and Spin-Off all restricted and unrestricted stock options were cancelled.

 

In March 2020, the Company lowered the strike price for certain warrants from within several classes of warrants to $0.50 as an inducement to incentivize the warrant holders to exercise their warrants. The Company accounted for the warrant inducement as a deemed dividend based on the difference in the Black-Scholes value of the warrants immediately before and immediately after the inducement. The significant assumptions used in the Company included common stock volatility of between 88% - 95%, risk free rate between 1.7% and 0.84%, a weighted average term between 6.5 and 8 years and the stock price of the Company as of the date of inducement. Based on the Black-Scholes values calculated the Company recorded a deemed dividend to additional paid in capital and retained earnings on the inducement of approximately $325,000 and received proceeds from the warrants exercised of approximately $1.2 million.

 

In connection with the Merger and Spin-Off on April 1, 2020, 261,050 warrants were redeemed by the Company for $66,900 and 525,554 warrants remained with the Company. Additionally, 3,275,200 warrants were issued of which 2,925,000 warrants were issued with an exercise price ranging between $.125 and $.50 in connection with the issuance of the Company’s 10% convertible note agreement and 350,000 warrants with an exercise price of $1.25 were issued to the Company’s bridge financing investor.

 

A summary of the warrant activity during the six months ended June 30, 2020 is presented below:

 

   Number of Warrants   Weighted Average Exercise Price  

Weighted Average Remaining

Life

 
Outstanding December 31, 2019   3,306,238   $6.00    6.8 
Granted   3,275,200    0.30    9.2 
Exercised   (2,414,022)   0.50    - 
Forfeited / Other Adjustments   (892,216)   -    - 
Outstanding June 30, 2020   3,275,200    0.30    9.2 
                
Exercisable June 30, 2020   3,275,200   $0.30    9.2 

 

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10. Derivative liabilitITIES

 

The derivative liabilities at June 30, 2020 consist of a make-whole provision of the Series 2 Preferred Stock (See Note 9), warrants issued in connection with the 10% convertible note and the conversion feature of such note (See Note 7(h)).There were no derivative liabilities at December 31, 2019.

 

As discussed in Note 7(h), warrants were issued in connection with the 10% convertible note. The Company does not have an adequate amount of authorized common shares issuable upon exercise of the warrants and conversion of the 10% convertible note. As such, the warrants are liability classified and the conversion feature has been bifurcated from the host debt instrument and both instruments are accounted for as derivatives.

 

The table presented below is a summary of changes in the fair market value of the Company’s Level 3 valuations for the six months ended June 30, 2020.

 

   Make-Whole Provision   Warrants   Debt Conversion Feature   Total 
Balance at December 31, 2019  $   $   $   $ 
Inception of the instrument   529,000    935,000    11,231,000    12,695,000 
Change in fair value during the period   910,483    (529,000)   (6,523,000)   (6,141,517)
Balance at June 30, 2020  $1,439,483   $406,000   $4,708,000   $6,553,483 

 

Assumptions used in calculating the fair value of the warrants at the issuance date and as of June 30, 2020 include the following:

 

June 30, 2020    
Stock price per share  $0.15 
Term   9.75 years 
Expected volatility   102%
Dividend yield   %
Risk-free interest rate   0.64%

 

April 1, 2020 Issuance Date    
Stock price per share  $0.34 
Term   10.0 years 
Expected volatility   102.0%
Dividend yield   %
Risk-free interest rate   0.62%

 

The Company also considered the probability, timing and amount of future capital raises.

 

Assumptions used in calculating the fair value of the convertible notes at the issuance date and as of June 30, 2020 include the following:

 

June 30, 2020    
Face value  $4,037,889 
Term   1.75 years 
Expected Volatility   127%
Risk-free interest rate   0.16%
Coupon   10.0%
Coupon price   0.10%
Credit Spread   15.0%

 

April 1, 2020 Issuance Date    
Face value  $4,037,889 
Term   2.0 years 
Expected Volatility   120.0%
Risk-free interest rate   0.23%
Coupon   10.0%
Coupon price   0.10%
Credit Spread   15.0%

 

The Company also considered the probability, timing and amount of future capital raises. 

 

Assumptions used in calculating the fair value of the make-whole provision at the issuance date and as of June 30, 2020 include the following:

 

June 30, 2020    
Term   0.11 years 
Expected Volatility   83%
Dividend yield   %
Risk-free interest rate   0.16%

 

Issuance Date    
Term   0.50 years 
Expected Volatility   83%
Dividend yield   %
Risk-free interest rate   0.13%

 

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11. COMMITMENTS AND CONTINGENCIES

 

Legal proceedings

 

On March 26, 2013, our South African operations received Notice of Motion filed in the Kwazulu-Natal High Court, Durban, Republic of South Africa, filed against Rolalor (PTY) LTD (“Rolalor”) and Labyrinth Trading 18 (PTY) LTD (“Labyrinth”) by Jennifer Catherine Mary Shaw (“Shaw”). It was requested that the Respondents, Rolalor and Labyrinth, be wound up in satisfaction of an alleged debt owed in the total amount of R4,082,636 (approximately $480,000). The outcome of the case resulted in the proposed liquidation of Rolalor in which the Company did not object as the entity has no assets. The Company does not expect there to be a material impact as a result of the proceedings, as the South African entities were sold and the buyers retained any and all liabilities.