UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
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the quarterly period ended
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Amergent Hospitality Group Inc. and Subsidiaries
TABLE OF CONTENTS
| 2 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (the “Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by terms and phrases such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” and “will” and similar expressions and include references to assumptions and relate to our future prospects, developments and business strategies. There are a number of important factors that could cause the actual results to differ materially from those expressed in any forward-looking statement made by us. These factors include, but are not limited to:
| ● | 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 on a continuous basis; | |
| ● | 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; | |
| ● | whether or not we will be entitled to forgiveness of our Paycheck Protection Program loans; | |
| ● | 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
Table of Contents
| 4 |
Amergent Hospitality Group, Inc and Subsidiaries
Condensed Consolidated and Combined Balance Sheets
June 30, 2021 | December 31, 2020 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Investments | ||||||||
| Accounts and other receivables | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| Property and equipment, net | ||||||||
| Operating lease asset | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Investments | ||||||||
| Deposits and other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES, REDEEMABLE SHARES, AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Current maturities of long-term debt and notes payable | ||||||||
| Current operating lease liabilities | ||||||||
| Derivative liabilities | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| Long-term operating lease liabilities | ||||||||
| Contract liabilities | ||||||||
| Deferred tax liabilities | ||||||||
| Long-term debt and notes payable, net of current maturities | ||||||||
| Convertible debt, net of current maturities | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and contingencies (see Note 10) | ||||||||
| Convertible Preferred Stock: Series 2: $ stated value; authorized shares; and issued and outstanding at June 30, 2021 and December 31, 2020, respectively | ||||||||
| Stockholders’ Deficit: | ||||||||
| Common stock: $ par value; authorized shares; and shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively | ||||||||
| Additional paid-in-capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Amergent Hospitality Group, Inc., Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Non-controlling interests | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS’ DEFICIT | ( | ) | ( | ) | ||||
| TOTAL LIABILITIES, REDEEMABLE SHARES AND STOCKHOLDERS’ DEFICIT | $ | $ | ||||||
See accompanying notes to the condensed consolidated and combined financial statements
| 5 |
Amergent Hospitality Group, Inc and Subsidiaries
Condensed Consolidated and Combined Statements of Operations
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||
| (Restated) | (Restated) | |||||||||||||||
| Revenue: | ||||||||||||||||
| Restaurant sales, net | $ | $ | $ | $ | ||||||||||||
| Gaming income, net | ||||||||||||||||
| Franchise income | ||||||||||||||||
| Management fee income | ||||||||||||||||
| Total revenue | ||||||||||||||||
| Expenses: | ||||||||||||||||
| Restaurant cost of sales | ||||||||||||||||
| Restaurant operating expenses | ||||||||||||||||
| Restaurant pre-opening and closing expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Asset impairment charge | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Employee retention credit | ( | ) | ( | ) | ||||||||||||
| Total expenses | ||||||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of derivative liabilities | ( | ) | ||||||||||||||
| Change in the fair value of investment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Debt extinguishment expense | ( | ) | ( | ) | ||||||||||||
| Other income (expense) | ( | ) | ||||||||||||||
| Gain on extinguished lease liabilities | ||||||||||||||||
| Total other income (expense) | ( | ) | ||||||||||||||
| Income (Loss) before income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax expense | ( | ) | ( | ) | ||||||||||||
| Consolidated net income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Less: Net (income) loss attributable to non-controlling interests | ( | ) | ( | ) | ||||||||||||
| Net income (loss) attributable to Amergent Hospitality Group Inc. | ( | ) | ( | ) | ( | ) | ||||||||||
| Dividends on redeemable preferred stock | ( | ) | ||||||||||||||
| Net income (loss) attributable to common shareholders of Amergent Hospitality Group Inc. | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Net income (loss) attributable to Amergent Hospitality Group, Inc. per common share, basic: | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Net income (loss) attributable to Amergent Hospitality Group, Inc. per common share, diluted: | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Weighted average shares outstanding, basic | ||||||||||||||||
| Weighted average shares outstanding, diluted | ||||||||||||||||
See accompanying notes to the condensed consolidated and combined financial statements
| 6 |
Amergent Hospitality Group, Inc and Subsidiaries
Condensed Consolidated and Combined Statements of Comprehensive Income (Loss)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||
| (Restated) | (Restated) | |||||||||||||||
| Net income (loss) attributable to Amergent Hospitality Group | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Foreign currency translation gain/(loss) | ( | ) | ( | ) | ||||||||||||
| Comprehensive income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
See accompanying notes to the condensed consolidated and combined financial statements
| 7 |
Amergent Hospitality Group, Inc and Subsidiaries
Condensed Consolidated and Combined Statements of Stockholders’ Deficit
Three and Six Months Ended June 30, 2021
| (Temporary equity) | Additional | Accumulated Other | Non- | |||||||||||||||||||||||||||||||||
| Preferred Series 2 | Common Stock | Paid-in | Accumulated | Comprehensive | Controlling | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Income (Loss) | Interest | Total | ||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||
| Conversion of preferred stock into common | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||
| Conversion of preferred stock into common | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | ||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | ||||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||
See accompanying notes to the condensed consolidated and combined financial statements
| 8 |
Amergent Hospitality Group, Inc and Subsidiaries
Condensed Consolidated and Combined Statements of Stockholders’ Deficit
Three and Six Months Ended June 30, 2020
| (Temporary equity) | Additional | Accumulated Other | Non- | |||||||||||||||||||||||||||||||||
| Preferred Series 2 | Common Stock | Paid-in | Accumulated | Comprehensive | Controlling | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Interest | Total | ||||||||||||||||||||||||||||
| Balance, December 31, 2019 | — | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||
| Common stock and warrants issued for: | ||||||||||||||||||||||||||||||||||||
| Preferred unit dividend | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Exercise of warrants | — | ( | ) | |||||||||||||||||||||||||||||||||
| Preferred Shares - Series 2 | ||||||||||||||||||||||||||||||||||||
| Issuance
of shares, net of transaction costs of $ | — | |||||||||||||||||||||||||||||||||||
| Bifurcation of derivative liability | — | ( | ) | — | ||||||||||||||||||||||||||||||||
| Beneficial conversion feature | — | ( | ) | — | ||||||||||||||||||||||||||||||||
| Preferred stock deemed dividend | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Conversion of Series 2 preferred to common | ( | ) | ( | ) | 1,426,854 | |||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance, March 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||
| Reclassification of non-controlling interest | — | — | ( | ) | ||||||||||||||||||||||||||||||||
| Cash contribution of merger consideration, net transaction costs of $588,255 | — | — | ||||||||||||||||||||||||||||||||||
| Contribution of warrant portion of merger consideration | — | — | ||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||
See accompanying notes to the condensed consolidated and combined financial statements
| 9 |
Amergent Hospitality Group, Inc and Subsidiaries
Condensed Consolidated and Combined Statements of Cash Flows
| Six months ended | ||||||||
| June 30, 2021 | June 30, 2020 | |||||||
| (Restated) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Cash flows from operating activities: | ||||||||
| Adjustments to reconcile net loss to net cash flows from operations | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of operating lease assets | ||||||||
| Asset impairment charges | ||||||||
| Gain from extinguished lease liabilities | ( | ) | ||||||
| Loss on investments | ||||||||
| Amortization of debt discount | ||||||||
| Loss on extinguishment of Series 1 Preferred | ||||||||
| Loss on debt extinguishment | ||||||||
| Derivative liabilities revaluation | ( | ) | ( | ) | ||||
| Change in assets and liabilities | ||||||||
| Accounts and other receivables | ||||||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||
| Inventories | ||||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Contract liabilities | ( | ) | ( | ) | ||||
| Net cash flows from operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash flows used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Loan proceeds | ||||||||
| Loan repayments | ( | ) | ( | ) | ||||
| Proceeds from Series 2 Preferred | ||||||||
| Proceeds from warrant exercises | ||||||||
| Redemption of Series 1 Preferred | ( | ) | ||||||
| Merger | ||||||||
| Net cash flows provided by financing activities | ||||||||
| Effect of exchange rate of on cash | ( | ) | ||||||
| Net increase in cash and restricted cash | ||||||||
| Cash and restricted cash, beginning of period | ||||||||
| Cash and restricted cash, end of period | $ | $ | ||||||
| Supplemental cash flow information: | ||||||||
| Cash paid for interest and income taxes | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| Non-cash investing and financing activities | ||||||||
| Conversion of Preferred stock - Series 2 to common stock | $ | $ | ||||||
| Preferred stock dividends paid through issuance of common stock | $ | $ | ||||||
| Accrued interest paid through warrant exercise | $ | $ | ||||||
| Bifurcation of derivative liability from Preferred Stock - Series 2 | $ | $ | ||||||
| Warrant portion of merger consideration | $ | $ | ||||||
See accompanying notes to the condensed consolidated and combined financial statements
| 10 |
Amergent Hospitality Group, Inc and Subsidiaries
Notes to the Condensed Consolidated and Combined Financial Statements
1. NATURE OF BUSINESS
BASIS OF PRESENTATION
Amergent Hospitality Group, Inc. (“Amergent”) was incorporated on February 18, 2020 as a wholly-owned subsidiary of Chanticleer Holdings, Inc. (“Chanticleer”) for the purpose of conducting the business of Chanticleer and its subsidiaries after completion of the Spin-Off of Amergent to the shareholders of Chanticleer (Spin-Off”). The Spin-Off transaction was completed on April 1, 2020 in connection with the merger (the “Merger”) of Chanticleer with Sonnet BioTherapeutics, Inc. (“Sonnet”) on that date. Amergent is in the business of owning, operating and franchising fast casual dining concepts domestically and internationally.
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 condensed 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 condensed consolidated and combined financial statements include the accounts of Amergent and its subsidiaries along with Chanticleer and its subsidiaries (collectively “we,” “us,” “our,” or the “Company”). All intercompany and inter-entity balances have been eliminated in consolidation and combination.
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, 2020 has been derived from the audited consolidated and combined financial statements as of December 31, 2020 and for the year then ended included in Amergent’s annual report filed with the SEC on April 15, 2021. The results of operations for the three and six-month period ended June 30, 2021 are not necessarily indicative of the operating results for the full year ending December 31, 2021.
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, 2020 previously filed with the SEC.
LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN
Liquidity, Capital Resources and Going Concern
As
of June 30, 2021, the Company’s cash balance was $
| ● | our ability to access the capital and debt markets to satisfy current obligations and operate the business; |
| ● | our ability to qualify for and access financial stimulus programs available through federal and state government programs; |
| ● | our ability to refinance or otherwise extend maturities of current debt obligations; |
| ● | our ability to manage our operating expenses and maintain gross margins; |
| ● | popularity of and demand for our fast-casual dining concepts; and |
| ● | general economic conditions and changes in consumer discretionary income. |
| 11 |
Amergent Hospitality Group, Inc and Subsidiaries
Notes to the Condensed Consolidated and Combined Financial Statements
We have typically funded our operating costs, acquisition activities, working capital requirements and capital expenditures with proceeds from the issuances of our common stock, government tax credits and other financing arrangements, including convertible debt, lines of credit, notes payable, capital leases, and other forms of external financing.
The Company plans to seek additional capital in the future through equity and/or debt financings or other sources in order to sustain operations. We may seek to work with vendors and suppliers on payment plans, settle certain obligations at a discount, seek forgiveness of Paycheck Protection Program loans and look for other government stimulus programs. Additionally, the Company has significant debt due within the next twelve months that will need to be refinanced and/or settled. 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.
On March 10, 2020, the World Health Organization characterized the novel COVID-19 virus as a global pandemic. The COVID-19 outbreak in the United States has resulted in a significant impact throughout the hospitality industry that have continued through June 30, 2021. The Company has been impacted due to restrictions placed by state and local governments that caused temporary restaurant closures or significantly reduced the Company’s ability to operate. It is difficult to estimate the length or severity of this outbreak; however, the Company has made operational changes, as needed, to reduce the impact.
The Company’s history of operating losses, combined with its working capital deficit which includes substantial near term debt repayment obligations and uncertainties regarding the impact of COVID-19, raise substantial doubt about our ability to continue as a going concern.
The accompanying condensed consolidated and combined financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
2. SIGNIFICANT ACCOUNTING POLICIES
There have been no changes to our significant accounting policies described in the annual report for the year ended December 31, 2020 filed with the SEC on April 15, 2021, that would have had a significant impact on these unaudited condensed consolidated and combined financial statements and related notes.
BASIS OF PRESENTATION
The accompanying condensed consolidated and combined financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Any reference in these notes to applicable guidance is meant to refer to U.S. GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) promulgated by the Financial Accounting Standards Board (“FASB”).
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include analysis of the recoverability of goodwill and long-lived assets. Actual results could differ from those estimates, particularly given the significant social and economic disruptions and uncertainties associated with the ongoing COVID-19 pandemic and the COVID-19 control responses.
| 12 |
Amergent Hospitality Group, Inc and Subsidiaries
Notes to the Condensed Consolidated and Combined Financial Statements
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 Markets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value | |||||||||||||
| June 30, 2021 | ||||||||||||||||
| Assets (Note 3) | ||||||||||||||||
| Common stock of Sonnet | $ | $ | $ | |||||||||||||
| Liabilities (Note 9) | ||||||||||||||||
| True-up provision of Convertible Preferred Series 2 | $ | $ | $ | $ | ||||||||||||
Quoted Prices in Active Markets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value | |||||||||||||
| December 31, 2020 | ||||||||||||||||
| Assets (Note 3) | ||||||||||||||||
| Common stock of Sonnet | $ | $ | $ | |||||||||||||
| Liabilities (Note 9) | ||||||||||||||||
| True-up provision of Convertible Preferred Series 2 | $ | $ | $ | $ | ||||||||||||
Inputs used in the Company’s Level 3 calculation of fair value are discussed in Note 9.
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.
CASH
Cash
consists of deposits held at financial institutions and is stated at fair value. The Company limits its credit risk associated with cash
by maintaining its bank accounts at major financial institutions. At June 30, 2021, the Company held cash of $
RESTRICTED CASH
As
of June 30, 2021 and December 31, 2020, the Company maintained restricted cash of $
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
| 13 |
Amergent Hospitality Group, Inc and Subsidiaries
Notes to the Condensed Consolidated and Combined Financial Statements
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 | ||
| Restaurant furnishings and equipment | ||
| Furniture and fixtures | ||
| Office and computer equipment |
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
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 third quarter of 2019 and continuing in 2020 and 2021, the Company determined that triggering events occurred some of which were related to the COVID-19 outbreak requiring management to review the certain long-lived assets for impairment. Due to the continued impact of this pandemic on the Company’s business, management has performed an impairment analysis of its long-lived assets at each quarter end in 2020 and through June 30, 2021 and determined that the carrying value of the Company’s trade name/trademark intangible asset, property and equipment and operating lease assets (see Notes 4, 5, and 10 for further discussion) were 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.
| 14 |
Amergent Hospitality Group, Inc and Subsidiaries
Notes to the Condensed Consolidated and Combined Financial Statements
GOODWILL
Goodwill, which is not subject to amortization, is evaluated for impairment annually as of the end of the Company’s year-end, or more frequently if an event occurs or circumstances change, such as material deterioration in performance or a significant number of store closures, that would indicate an impairment may exist. Goodwill is tested for impairment at a level of reporting referred to as a reporting unit. Management determined that the Company has one reporting unit.
Due to the continued impact of the COVID-19 pandemic on the Company’s business, management has performed an impairment analysis of goodwill as of beginning in the first quarter of 2020 and quarterly thereafter through June 2021.
When evaluating goodwill for impairment, the Company may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If the Company does not perform a qualitative assessment or determines that it is not more likely than not that the fair value of the reporting unit exceeds its carrying amount, a quantitative assessment is performed to calculate the estimated fair value of the reporting unit. If the carrying amount of the reporting unit exceeds the estimated fair value, an impairment charge is recorded to reduce the carrying value to the estimated fair value. The Company’s decision to perform a qualitative impairment assessment is influenced by a number of factors, including the significance of the excess of the reporting unit’s estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments, and the price of our common stock.
Step one of the impairment test is based upon a comparison of the carrying value of net assets, including goodwill balances, to the fair value of net assets. The Company performed a quantitative assessment at June 30, 2021 and determined that goodwill was not impaired due to the excess fair value of the reporting unit over its carrying value based on the best judgement of management for the future of the reporting unit and on information known at the time of the assessment.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in local currency are translated to U.S. dollars using the exchange rates as in effect at the balance sheet date. Results of operations are translated using average exchange rates prevailing throughout the period. Adjustments resulting from the process of translating foreign currency financial statements from functional currency into U.S. dollars are included in accumulated other comprehensive loss within stockholders’ equity. Foreign currency transaction gains and losses are included in current earnings. The Company has determined that local currency is the functional currency for its foreign operations.
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
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.
| 15 |
Amergent Hospitality Group, Inc and Subsidiaries
Notes to the Condensed Consolidated and Combined Financial Statements
EMPLOYEE RETENTION AND OTHER CREDITS
The Employee Retention Credit (“ERC”) under the CARES Act is a refundable tax credit which encourages businesses to keep employees on the payroll during the COVID-19 pandemic. Eligible employers can qualify for up to $7,000 of credit for each employee based on qualified wages paid after December 31, 2020 and before January 1, 2022. Qualified wages are the wages paid to an employee during an economic hardship, specifically, either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts. The Company recognized $1,473,355 of ERC as a contra-expense in the condensed consolidated and combined statements of operations for the three and six months ended June 30, 2021.
In addition to the ERC, the Company received credits
under other government/government agency programs of $
INCOME TAXES
Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company has provided a valuation allowance for the full amount of the deferred tax assets in the accompanying consolidated and combined financial statements.
As
of June 30, 2021 and December 31, 2020, the Company had
The Company computes net income (loss) per share using the weighted-average number of common shares outstanding during the period. For periods with a net loss, 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 8, and the potential conversion of the convertible debt, as described in Note 6, would be anti-dilutive.
For the three months ended June 30, 2021, the Company used the two-class method to compute basic net income per common share . Under this method, undistributed earnings are allocated to common stock, the Series 2 Preferred Stock, and the convertible debt to the extent that the Series 2 Preferred Stock and convertible debt may share in earnings. In periods of net loss, losses are not allocated to participating securities as the holders of such securities have no obligation to fund losses. The total earnings allocated to common stock is then divided by the weighted average common shares outstanding to determine the basic earnings per share.
For purposes of calculating diluted loss per common share, the denominator includes both the weighted average common shares outstanding and the number of common stock equivalents if the inclusion of such common stock equivalents would be dilutive. Dilutive common stock equivalents potentially include warrants using the treasury stock method. In addition, the Company considers the potential dilutive impact of its Series 2 Preferred Stock and convertible debt using the treasury stock and if-converted methods, if either is more dilutive than the two-class method. The two-class method was more dilutive for the three months ended June 30, 2021.
| 16 |
Amergent Hospitality Group, Inc and Subsidiaries
Notes to the Condensed Consolidated and Combined Financial Statements
The following table summarizes the computation of basic and diluted net (loss) income per share for the three and six months ended June 30, 2021 and 2020, respectively:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||
| Basic net income (loss) per common share calculation: | ||||||||||||||||
| Net income (loss) attributable to common shareholders | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Less: undistributed earnings to participating securities | ( | ) | ||||||||||||||
| Net income (loss) attributable to common shareholders - basic | ( | ) | ( | ) | ( | ) | ||||||||||
| Weighted average common shares outstanding - basic | ||||||||||||||||
| Net income (loss) per share - basic | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Diluted net income (loss) per common share calculation: | ||||||||||||||||
| Net income (loss) attributable to common shareholders | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Less: undistributed earnings to participating securities | ( | ) | ||||||||||||||
| Net income (loss) attributable to common shareholders - diluted | ( | ) | ( | ) | ( | ) | ||||||||||
| Weighted average common shares outstanding - basic | 15,321,571 | 14,282,736 | 14,904,471 | 13,096,212 | ||||||||||||
| Warrants | ||||||||||||||||
| Weighted average common shares outstanding - diluted | ||||||||||||||||