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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

 

For the quarterly period ended September 30, 2021

 

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

 

For the transition period from __________ to __________

 

Commission file number: 000-56160

 

AMERGENT HOSPITALITY GROUP INC.

 

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

 

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(b) of the Act: None

 

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

 

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

 

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

 

Large accelerated filer Accelerated filer ☐
   
Non-accelerated filer Smaller reporting company
   
  Emerging growth company

 

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

 

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

 

The number of shares outstanding of the registrant’s $0.0001 par value common stock as of November 5, 2021, was 15,706,736 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 September 30, 2021 (Unaudited) and December 31, 2020 5
  Condensed Consolidated and Combined Statements of Operations (Unaudited) – For the three and nine months ended September 30, 2021 and 2020 6
  Condensed Consolidated and Combined Statements of Comprehensive Loss (Unaudited) - For the three and nine months ended September 30, 2021 and 2020 7
  Condensed Consolidated and Combined Statements of Stockholders’ Deficit (Unaudited) – For the three and nine months ended September 30, 2021 and 2020 8
  Condensed Consolidated and Combined Statements of Cash Flows (Unaudited) – For the three and nine months ended September 30, 2021 and 2020 10
  Notes to Condensed Consolidated and Combined Financial Statements (Unaudited) 11
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
Item 3: Quantitative and Qualitative Disclosures about Market Risk 37
Item 4: Controls and Procedures 37
     
Part II Other Information 38
     
Item 1: Legal Proceedings 38
Item 1A: Risk Factors 38
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 43
Item 3: Defaults Upon Senior Securities 43
Item 4: Mine Safety Disclosures 43
Item 5: Other Information 43
Item 6: Exhibits 43
     
Signatures 44

 

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, integrate acquired businesses and generate profits. We have not been profitable to date on a continuous basis;
     
  contingent liabilities that may arise from acquired businesses; 
     
  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 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, including but not limited to defaults and closures under restaurant leases as a result of the COVID-19 pandemic;
     
  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; and
     
  we may have to repay the $10 million of grant proceeds received from the Restaurant Revitalization Fund.

 

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

 

  Page Number
Condensed Consolidated and Combined Balance Sheets 5
Condensed Consolidated and Combined Statements of Operations 6
Condensed Consolidated and Combined Statements of Comprehensive Loss 7
Condensed Consolidated and Combined Statements of Stockholders’ Deficit 8
Condensed Consolidated and Combined Statements of Cash Flows 10
Notes to the Condensed Consolidated and Combined Financial Statements 11

 

4

 

 

Amergent Hospitality Group, Inc and Subsidiaries

Condensed Consolidated and Combined Balance Sheets

 

   September 30, 2021   December 31, 2020 
   (Unaudited)     
ASSETS          
Current assets:          
Cash  $1,100,919   $678,468 
Restricted cash   1,948,813    1,250,336 
Investments   423,262    413,268 
Accounts and other receivables   51,157    314,043 
Inventories   140,837    172,695 
Prepaid expenses and other current assets   301,811    290,227 
Current assets held for sale   175,553     
TOTAL CURRENT ASSETS   4,142,352    3,119,037 
Property and equipment, net   3,001,897    3,702,894 
Operating lease asset   8,971,766    9,529,443 
Intangible assets, net   3,272,796    3,043,885 
Goodwill   7,809,874    8,591,149 
Investments   15,709    365,001 
Deposits and other assets   350,285    295,930 
Noncurrent assets held for sale   1,605,135     
TOTAL ASSETS  $29,169,814   $28,647,339 
           
LIABILITIES, REDEEMABLE SHARES, AND
STOCKHOLDERS’ DEFICIT
          
Current liabilities:          
Accounts payable and accrued expenses  $6,152,855   $8,667,268 
Current maturities of long-term debt, convertible debt and notes payable   7,080,737    2,338,978 
Current operating lease liabilities   4,581,582    4,209,389 
Derivative liabilities       184,800 
Deferred grant income   1,948,813     
Current liabilities held for sale   362,615     
TOTAL CURRENT LIABILITIES   20,126,602    15,400,435 
           
Long-term operating lease liabilities   9,683,643    10,677,862 
Contract liabilities   777,420    794,989 
Deferred tax liabilities   108,809    108,809 
Long-term debt, convertible debt and notes payable, net of current maturities   2,819,348    4,353,942 
Noncurrent liabilities held for sale   839,395     
TOTAL LIABILITIES   34,355,217    31,336,037 
           
Commitments and contingencies (see Note 11)   -      
           
Convertible Preferred Stock: Series 2: $1,000 stated value; authorized 1,500 shares; 100 and 787 issued and outstanding at September 30, 2021 and December 31, 2020, respectively   58,400    459,608 
           
Stockholders’ Deficit:          
Common stock: $0.0001 par value; authorized 50,000,000 shares; 15,706,736 and 14,282,736 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively   1,570    1,428 
Additional paid-in-capital   92,876,775    92,433,344 
Accumulated deficit   (96,963,419)   (94,587,482)
Accumulated other comprehensive loss   (44,801)   (25,916)
Total Amergent Hospitality Group, Inc., Stockholders’ Deficit   (4,129,875)   (2,178,626)
Non-controlling interests   (1,113,928)   (969,680)
TOTAL STOCKHOLDERS’ DEFICIT   (5,243,803)   (3,148,306)
TOTAL LIABILITIES, REDEEMABLE SHARES AND STOCKHOLDERS’ DEFICIT  $29,169,814   $28,647,339 

 

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 (Unaudited)

 

                 
   Three Months Ended   Nine Months Ended 
   September 30, 2021   September 30, 2020   September 30, 2021   September 30, 2020 
       (Restated)       (Restated) 
Revenue:                    
Restaurant sales, net  $6,106,261   $4,509,082   $15,288,320   $13,881,380 
Gaming income, net   136,135    107,403    304,173    236,615 
Franchise income   116,179    85,666    314,603    183,864 
Total revenue   6,358,575    4,702,151    15,907,096    14,301,859 
Expenses:                    
Restaurant cost of sales   2,031,666    1,498,922    4,782,780    4,458,983 
Restaurant operating expenses   3,674,755    3,448,843    10,100,284    10,322,644 
Restaurant pre-opening and closing expenses               20,730 
General and administrative expenses   1,394,766    1,255,918    3,755,866    3,891,739 
Asset impairment charge       1,136,129    1,287,579    1,288,599 
Depreciation and amortization   350,599    277,999    1,080,604    1,109,608 
Employee retention credit/other grant income   (1,229,831)       (2,703,186)    
Total expenses   6,221,955    7,617,811    18,303,927    21,092,303 
Operating income (loss)   136,620    (2,915,660)   (2,396,831)   (6,790,444)
Other income (expense):                    
Interest expense   (165,775)   (177,420)   (481,706)   (499,870)
Change in fair value of derivative liabilities       (5,841,517)   118,664    300,000
Change in the fair value of investment   (100,422)   (199,154)   (220,882)   (1,152,185)
Debt extinguishment expense               (11,808,111)
Other income (expense)   18,203    (25,404)   164,761    150,904 
Gain on extinguished lease liabilities   66,821        385,340     
Total other income (expense)   (181,173)   (6,243,497)   (33,823)   (13,009,262)
Net loss before income taxes   (44,553)   (9,159,155)   (2,430,654)   (19,799,706)
Income tax expense   (44,637)   (28,473)   (44,637)   (32,149)
Consolidated net loss   (89,190)   (9,187,628)   (2,475,291)   (19,831,855)
Less: Net loss (income) attributable to non-controlling interests   (5,047)   401,529    99,354    287,840 
Net loss attributable to Amergent Hospitality Group Inc.   (94,237)   (8,786,099)   (2,375,937)   (19,544,015)
Dividends on redeemable preferred stock               (28,219)
Net loss attributable to common shareholders of Amergent Hospitality Group Inc.  $(94,237)  $(8,786,099)  $(2,375,937)  $(19,572,234)
                     
Net loss attributable to Amergent Hospitality Group, Inc. per common share, basic:  $(0.01)  $(0.62)  $(0.16)  $(1.45)
Net loss attributable to Amergent Hospitality Group, Inc. per common share, diluted:  $(0.01)  $(0.62)  $(0.16)  $(1.45)
Weighted average shares outstanding, basic   15,685,540    14,282,736    15,167,688    13,516,339 
Weighted average shares outstanding, diluted   15,685,540    14,282,736    15,167,688    13,516,339 

 

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 Loss (Unaudited)

 

                 
   Three Months Ended   Nine Months Ended
   September 30, 2021   September 30, 2020   September 30, 2021   September 30, 2020 
       (Restated)       (Restated) 
Net loss attributable to Amergent Hospitality Group  $(94,237)  $(8,786,099)  $(2,375,937)  $(19,544,015)
Foreign currency translation gain/(loss)   (34,479)   50,344    (18,885)   (37,266)
Comprehensive loss  $(128,716)  $(8,735,755)  $(2,394,822)  $(19,581,281)

 

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 Nine Months Ended September 30, 2021 (Unaudited)

 

                                              
  

(Temporary equity)

Preferred Series 2

   Common Stock  

Additional

Paid-in

   Accumulated  

Accumulated

Other

Comprehensive

  

Non-

Controlling

     
   Shares   Amount   Shares   Amount   Capital   Deficit   Income (Loss)   Interest   Total 
Balance, December 31, 2020   787   $459,608    14,282,736   $1,428   $92,433,344   $(94,587,482)  $(25,916)  $(969,680)  $(3,148,306)
Conversion of preferred stock into common   (125)   (73,000)   250,000    25    72,975                73,000 
Foreign currency translation                           8,792        8,792 
Net loss                       (2,548,427)       (164,285)   (2,712,712)
Balance, March 31, 2021   662   $386,608    14,532,736   $1,453   $92,506,319   $(97,135,909)  $(17,124)  $(1,133,965)  $(5,779,226)
Conversion of preferred stock into common   (562)   (328,208)   1,124,000    112    328,096                328,208 
Foreign currency translation                           6,802        6,802 
Net income (loss)                       266,727        59,884    326,611 
Balance, June 30, 2021   100   $58,400    15,656,736   $1,565   $92,834,415   $(96,869,182)  $(10,322)  $(1,074,081)  $(5,117,605)
Issuance of common stock for services           50,000    5    26,995                27,000 
Share-based compensation expense                   15,365                15,365 
Foreign currency translation                           (34,479)       (34,479)
Non-controlling interest distributions                               (44,894)   (44,894)
Net income (loss)                       (94,237)       5,047    (89,190)
Balance, September 30, 2021   100   $58,400    15,706,736   $1,570   $92,876,775   $(96,963,419)  $(44,801)  $(1,113,928)  $(5,243,803)

 

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 Nine Months Ended September 30, 2020 (Unaudited)

 

  

(Temporary equity)

Preferred Series 2

   Common Stock   Additional
Paid-in
   Accumulated  

Accumulated Other

Comprehensive

  

Non-

Controlling

     
   Shares   Amount    Shares   Amount   Capital   Deficit   Loss   Interest   Total 
Balance, December 31, 2019      $     10,404,342   $1,041   $71,505,989   $(75,068,385)  $(46,437)  $455,781   $(3,152,011)
Common stock and warrants issued for:                                              
Preferred unit dividend            37,518    4    19,519    (28,219)           (8,696)
Exercise of warrants            2,414,022    246    1,528,867    (325,366)           1,203,747 
Preferred Shares - Series 2                                              
Issuance of shares, net of transaction costs of $95,000   1,500    1,405,000                              
Bifurcation of derivative liability       (529,000 )                            
Beneficial conversion feature       (729,000 )           729,000                729,000 
Preferred stock deemed dividend       729,000             (729,000)               (729,000)
Conversion of Series 2 preferred to common   (713)   (416,392 )   1,426,854    143    416,249                416,392 
Foreign currency translation                            (81,069)       (81,069)
Net loss                        (1,771,614)       203,405    (1,568,209)
Balance, March 31, 2020   787   $459,608     14,282,736   $1,434   $73,470,624   $(77,193,584)  $(127,506)  $659,186   $(3,189,846)
Reclassification of non-controlling interest                        805,909        (805,909)    
Cash contribution of merger consideration, net transaction costs of $588,255                    5,411,745                5,411,745 
Contribution of warrant portion of merger consideration                    1,628,909                1,628,909 
Foreign currency translation                            (6,541)       (6,541)
Net loss                        (8,986,302)       (89,716)   (9,076,018)
Balance, June 30, 2020   787   $459,608     14,282,736   $1,434   $80,511,278   $(85,373,977)  $(134,047)  $(236,439)  $(5,231,751)
Warrants issued for extension of the make-whole provision                    28,060                28,060 
Reclassification of warrants and conversion feature                    11,894,000                11,894,000 
Foreign currency translation                            50,344        50,344 
Net loss                        (8,786,099)       (401,529)   (9,187,628)
Balance, September 30, 2020   787   $459,608     14,282,736   $1,434   $92,433,338   $(94,160,076)  $(83,703)  $(637,968)   (2,446,975)

 

See accompanying notes to the condensed consolidated and combined financial statements

 

9

 

 

Amergent Hospitality Group, Inc and Subsidiaries

Condensed Consolidated and Combined Statements of Cash Flows (Unaudited)

 

           
   Nine months ended 
   September 30, 2021   September 30, 2020 
       (Restated) 
Net loss  $(2,475,291)  $(19,831,855)
Cash flows from operating activities:          
Adjustments to reconcile net loss to net cash flows from operations          
Depreciation and amortization   1,080,604    1,109,608 
Amortization of operating lease assets   467,916    1,206,985 
Asset impairment charges   1,287,579    1,288,599 
Warrants issued from extension of True-Up Payment       28,060 
Gain from extinguished lease liabilities   (385,340)    
Loss on change in fair value of investments   220,882    1,152,185 
Amortization of debt discount   134,394    89,472 
Loss on extinguishment of Series 1 Preferred       161,899 
Loss on debt extinguishment       11,808,111 
Issuance of common stock for services   27,000     
Share-based compensation   15,365     
Derivative liabilities revaluation   (118,664)   (300,000)
Change in assets and liabilities          
Accounts and other receivables   254,811    149,288 
Prepaid expenses and other assets   37,901    (232,878)
Inventories   (4,460)   58,791 
Accounts payable and accrued expenses   (2,283,232)   (26,761)
Deferred grant income   (51,187)    
Operating lease liabilities   (860,984)   (1,482,421)
Derivative liability   (66,136)    
Deferred rent   (41,587)    
Deferred revenue   (53,569)   (71,644)
Net cash flows from operating activities   (2,813,998)   (4,892,561)
           
Cash flows from investing activities:          
Cash and restricted cash acquired in connection with acquisition   2,071,000     
Purchase of property and equipment   (32,141)   (29,821)
Proceeds from sale of investments   118,416     
Net cash flows provided by (used in) investing activities   2,157,275    (29,821)
           
Cash flows from financing activities:          
Loan proceeds   2,000,000    2,989,350 
Loan repayments   (53,949)   (2,563,346)
Distributions to non-controlling interest   (44,894)    
Proceeds from Series 2 Preferred       1,405,000 
Proceeds from warrant exercises       885,046 
Redemption of Series 1 Preferred       (880,289)
Merger consideration, net       5,411,745 
Net cash flows provided by financing activities   1,901,157    7,247,506 
Effect of exchange rate of on cash   (12,615)   (14,496)
Net increase in cash and restricted cash, including cash classified in current assets held for sale   1,231,819    2,310,628 
Less: cash classified in current assets held for sale   

(110,891

)   

 
Net increase in cash and restricted cash   

1,120,928

    

2,310,628

 
Cash and restricted cash, beginning of period   1,928,804    501,017 
Cash and restricted cash, end of period  $3,049,732   $2,811,645 
           
Supplemental cash flow information:          
Cash paid for interest and income taxes          
Interest  $320,794   $222,173 
Income taxes  $   $ 
           
Non-cash investing and financing activities          
Conversion of Preferred stock - Series 2 to common stock  $401,208   $416,392 
Issuance of convertible promissory note as part of acquisition  $1,194,000   $ 
Initial value of ROU asset and liability recorded for new lease  $130,775   $ 
Preferred stock dividends paid through issuance of common stock  $   $19,523 
Accrued interest paid through warrant exercise  $   $318,700 
Bifurcation of derivative liability from Preferred Stock - Series 2  $   $529,000 
Warrant portion of merger consideration  $   $1,628,909 
Equity classification of Oz Rey warrants and conversion feature  $   $11,894,000 

 

See accompanying notes to the condensed consolidated and combined financial statements

 

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 nine-month period ended September 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 September 30, 2021, the Company’s cash balance was $3.0 million, of which $1.9 million was restricted cash, its working capital deficiency was $16.0 million and it had significant near-term commitments and contractual obligations. The level of additional cash needed to fund operations and our ability to conduct business for the next 12 months will be influenced primarily by the following factors:

 

  our eligibility to access the capital and debt markets to satisfy current obligations and operate the business;
     
  our ability to qualify for and utilize 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

 

 

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 September 30, 2021. The Company has been impacted due to restrictions placed by state and local governments that caused temporary restaurant closures or significantly reduced the Company’s ability to operate. It is difficult to estimate the length or severity of this outbreak; however, the Company has made operational changes, as needed, to reduce the impact.

 

The Company’s history 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

 

 

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 
September 30, 2021                    
Assets (Note 4)                    
Common stock of Sonnet  $73,970       $   $73,970 

 

  

Quoted Prices in Active Markets

(Level 1)

   Significant Observable Inputs (Level 2)   Significant Unobservable Inputs (Level 3)   Total Fair Value 
December 31, 2020                    
Assets (Note 4)                    
Common stock of Sonnet  $413,268       $   $413,268 
Liabilities (Note 10)                    
True-up provision of Convertible Preferred Series 2  $   $   $184,800   $184,800 

 

Inputs used in the Company’s Level 3 calculation of fair value related to the true-up provision of convertible preferred Series 2 are discussed in Note 11.

 

The Company is required to disclose fair value information about financial instruments when it is practicable to estimate that value. The carrying amounts of the Company’s cash, accounts receivable, other receivables, accounts payable, other current liabilities and notes payable approximate fair value due to the short-term maturities of these financial instruments and/or because related interest rates offered to the Company approximate current rates.

 

CASH

 

Cash consists of deposits held at financial institutions and is stated at fair value. The Company limits its credit risk associated with cash by maintaining its bank accounts at major financial institutions.

 

RESTRICTED CASH

 

As of September 30, 2021 and December 31, 2020, the Company maintained restricted cash of $1,936,972 and $1,250,336, respectively. The restricted cash is maintained in a segregated bank account. The restrictions on the restricted cash at December 31, 2020 have lapsed (see Note 9) and the restricted cash at September 30, 2021 relates to the acquisition discussed in Note 3.

 

PROPERTY AND EQUIPMENT

 

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

 

13

 

 

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 

 

INTANGIBLE ASSETS

 

Trade Name/Trademark

 

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

 

LONG-LIVED ASSETS

 

Long-lived assets, such as property and equipment, operating lease assets, and purchased intangible assets subject to depreciation and amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Some of the events or changes in circumstances that would trigger an impairment test include, but are not limited to:

 

  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 September 30, 2021 and determined that the carrying value of the Company’s trade name/trademark intangible asset, property and equipment and operating lease assets (see Notes 5, 6, and 11 for further discussion) were impaired during the nine-month period ended September 30, 2021. No impairments were recorded for the three-month period ended September 30, 2021. The determination was based on the best judgment of management for the future of the asset and on information known at the time of the assessment.

 

GOODWILL

 

Goodwill, which is not subject to amortization, is evaluated for impairment annually as of the end of the Company’s year-end, or more frequently if an event occurs or circumstances change, such as material deterioration in performance or a significant number of store closures, that would indicate an impairment may exist. Goodwill is tested for impairment at a level of reporting referred to as a reporting unit. Management determined that the Company has one reporting unit.

 

14

 

 

Due to the continued impact of the COVID-19 pandemic on the Company’s business, management has performed an impairment analysis of goodwill as of beginning in the first quarter of 2020 and quarterly thereafter through September 2021.

 

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

 

Step one of the impairment test is based upon a comparison of the carrying value of net assets, including goodwill balances, to the fair value of net assets. The Company performed a quantitative assessment at September 30, 2021 and determined that goodwill was not impaired due to the excess fair value of the reporting unit over its carrying value based on the best judgement of management for the future of the reporting unit and on information known at the time of the assessment.

 

FOREIGN CURRENCY TRANSLATION

 

Assets and liabilities denominated in local currency are translated to U.S. dollars using the exchange rates as in effect at the balance sheet date. Results of operations are translated using average exchange rates prevailing throughout the period. Adjustments resulting from the process of translating foreign currency financial statements from functional currency into U.S. dollars are included in accumulated other comprehensive loss within stockholders’ deficit. Foreign currency transaction gains and losses are included in current operating results. The Company has determined that local currency is the functional currency for its foreign operations.

 

LEASES

 

We determine if a contract contains a lease at inception. Our material operating leases consist of restaurant locations and office space. Our leases generally have remaining terms of 1-20 years and most include options to extend the leases for additional 5-year periods. Generally, the lease term is the minimum of the non-cancelable period of the lease

or the lease term inclusive of reasonably certain renewal periods up to a term of 20 years. If the estimate of our reasonably certain lease term was changed, our depreciation and rent expense could differ materially.

 

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

 

EMPLOYEE RETENTION CREDIT

 

The Employee Retention Credit (“ERC”) under the CARES Act is a refundable tax credit which encourages businesses to keep employees on the payroll during the COVID-19 pandemic. Eligible employers can qualify for up to $7,000 of credit for each employee based on qualified wages paid after December 31, 2020 and before January 1, 2022. Qualified wages are the wages paid to an employee during an economic hardship, specifically, either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts. The Company recognized $1,178,644 and $2,651,999 of ERC as a contra-expense in the condensed consolidated and combined statements of operations for the three and nine months ended September 30, 2021, respectively.

 

15

 

 

RESTAURANT REVITALIZATION FUND

 

The American Rescue Plan Act established the Restaurant Revitalization Fund (RRF) to provide funding to help restaurants and other eligible businesses keep their doors open. This program will provide restaurants with funding equal to their pandemic-related revenue loss up to $10 million per business and no more than $5 million per physical location. Recipients are not required to repay the funding as long as funds are used for eligible uses no later than March 11, 2023. In 2021, and prior to the acquisition (see note 3), Pie Square Holdings, L.L.C. (Pie Squared Holdings) received a grant under the U.S. Small Business Administration’s Restaurant Revitalization Fund (RRF) for approximately $10 million. The proceeds received were mainly used to repay existing debt and to also pay operating expenses. The unused funds received under the RRF at closing of the acquisition were $2.0 million and these were placed into escrow for the benefit of the Company for working capital to be used solely in the operations of the acquired business. The Company recognized $51,187 of RRF as a contra-expense in the condensed consolidated and combined statements of operations for the three and nine months ended September 30, 2021. See additional information regarding RRF funds received in Note 3.

 

SHARE-BASED COMPENSATION

 

The Company measures and recognizes share-based compensation expense for both employee and nonemployee awards based on the grant date fair value of the awards. The Company recognizes share-based compensation expense on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. The Company recognizes forfeitures as they occur.

 

The Company estimates the fair value of employee and non-employee stock awards as of the date of grant using the Black-Scholes option pricing model. Management estimates the expected share price volatility based on the historical volatility of the Company. The expected term of the Company’s stock awards has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” stock awards. The risk-free interest rate is determined by reference to the yield curve of a zero-coupon U.S. Treasury bond on the date of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends on common stock and does not expect to pay any cash dividends in the foreseeable future.

 

INCOME TAXES

 

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

 

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

 

As of September 30, 2021 and December 31, 2020, the Company had no accrued interest or penalties relating to any income tax obligations. The Company currently has no federal or state examinations in progress, nor has it had any federal or state tax examinations since its inception. The last three years of the Company’s tax years are subject to federal and state tax examination.

 

LOSS PER COMMON SHARE

 

The Company computes net loss per share using the weighted-average number of common shares outstanding during the period. Basic and diluted net loss per share are the same because the conversion, exercise or issuance of all potential common stock equivalents, which comprise the entire amount of the Company’s outstanding warrants, as described in Note 9, the potential conversion of the convertible debt, as described in Note 7, and the share-based awards outstanding, as described in Note 12, would be anti-dilutive.

 

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The objective of the standard is to improve areas of GAAP by removing certain exceptions permitted by Accounting Standards Codification 740 and clarifying existing guidance to facilitate consistent application. The standard was effective for the Company beginning on January 1, 2021. The adoption of ASU 2019-12 as of January 1, 2021 did not have a material impact on the condensed consolidated and combined financial statements.

 

16

 

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In August 2020, the FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other Options to address the complexity associated with applying U.S. GAAP to certain financial instruments with characteristics of liabilities and equity. ASU 2020-06 includes amendments to the guidance on convertible instruments and the derivative scope exception for contracts in an entity’s own equity and simplifies the accounting for convertible instruments which include beneficial conversion features or cash conversion features by removing certain separation models in Subtopic 470-20. Additionally, ASU 2020-06 will require entities to use the “if-converted” method when calculating diluted earnings per share for convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021 (fiscal year 2022 for the Company), including interim periods within those fiscal years. The Company is currently evaluating the new standard to determine the potential impact on its financial condition, results of operations, cash flows, and financial statement disclosures.

 

We reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact to the condensed consolidated and combined financial statements.

 

3. ACQUISITION

 

On August 30, 2021, the Company purchased all of the outstanding membership interests in Pie Squared Holdings pursuant to a Unit Purchase Agreement (Purchase Agreement). Pie Squared Holdings, directly and through its four wholly owned subsidiaries, owns, operates and franchises pizza restaurants operating under the tradename PizzaRev. The PizzaRev stores consist of three company owned stores and nine franchised locations. The purchase price is an 8% secured, convertible promissory note (Note) with a face value of $1,000,000 and a fair value of $1,194,000. Transaction costs of $190,000 were incurred in connection with the acquisition and charged to selling, general and administrative expenses in the condensed consolidated statement of operations and comprehensive income (loss) for the three-month and nine- month periods ended September 30, 2021. Of the total transaction costs, $150,000 were for services provided by a related-party entity which is owned by a major investor of the Company and the Company’s Chief Financial Officer.

 

Due to the close proximity of timing of the acquisition and our filing of this Quarterly Report on Form 10-Q, the fair value of assets acquired, and liabilities assumed represent a preliminary allocation as our evaluation of facts and circumstances available as of September 30, 2021 is ongoing. Pursuant to Topic 805, the financial statements will not be retrospectively adjusted for any provisional amount changes that occur in subsequent periods. Rather, we will recognize any provisional adjustments as we obtain information not available as of the completion of this preliminary fair value calculation as determined within the measurement period. We will also be required to record, in the same period as the financial statements, the effects to any income statement captions, if any, as a result of any change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. We expect to finalize the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.

 

A preliminary estimate of the assets acquired, and liabilities assumed as of the acquisition date consists of the following:

 

Assets acquired:     
Cash  $71,000 
Restricted cash   2,000,000 
Property and equipment   348,000 
Right of use asset   1,391,000 
Tradename/trademark intangible   410,000 
Franchise rights intangible   410,000 
Goodwill   51,000 
Security deposits and other assets   126,000 
Total assets acquired  $4,807,000 
      
Liabilities assumed     
Gift card liability  $139,000 
Deferred revenue   36,000 
Deferred grant income   2,000,000 
Right of use liability   1,438,000 
Total liabilities assumed  $3,613,000 
      
Net purchase price  $1,194,000 

 

17

 

 

Interest on the Note is due quarterly and $500,000 of principal is due on August 30, 2022, and any remaining unpaid/non- converted amount on August 30, 2023. The Note is convertible at any time, in whole or in part, at the holder’s option but includes a beneficial ownership blocker of 4.99%. The conversion price at any time is the volume weighted average price of the Company’s common stock the 30 trading days immediately prior to delivery of notice of conversion, less a discount of 15%; provided, however, that the conversion price has a floor of $0.50 per share and a cap of $2.00 per share. The Note contains customary provisions preventing dilution and providing the holder rights in the event of fundamental transactions. The Note is secured by various security and other instruments creating a first priority lien on all of the membership interests and all of the assets of Pizza Square Holdings and subsidiaries in favor of the sellers. The Note has an estimated fair value of $1,194,000 as determined using a Monte Carlo simulation and the following assumptions:

 

  

2021

 
Volatility   90.00%
Risk free rate   0.08% - 0.20%
Stock price   0.52 
Credit spread   6.35%

 

In 2021, and prior to the acquisition, Pie Square Holdings received a grant under the U.S. Small Business Administration’s RRF for approximately $10 million. The proceeds received were mainly used to repay existing debt and to also pay operating expenses. The unused funds received under the RRF at closing of $2.0 million were placed into escrow for the benefit of the Company for working capital to be used solely in the operations of the acquired business. The Company will periodically submit to the escrow agent the planned uses of these funds, and the sellers have the right to review the planned uses to determine whether, in the sellers’ opinion, the planned uses meet the criteria of “eligible uses” under the RRF. If determined to not meet such criteria, then the escrow agent will not distribute that portion of the request. Any unused funds on March 11, 2023, or if applicable, the awardee permanently closed before using all funds on authorized purposes, are repayable to the U.S. Small Business Administration.

 

Restricted cash and a deferred grant income liability has been recorded on the opening balance sheet for the unused proceeds from the RRF, and the liability will be reduced as the restricted cash is used for eligible costs incurred under the RRF post acquisition.

 

As the Company acquired all the outstanding membership interests in Pie Square Holdings, the Company assumed all the rights and obligations of Pie Square Holdings that arose from transactions of Pie Square Holdings prior to the sale event, both stated rights and obligations as well as those that are contingent. As noted above, Pie Square Holdings applied for and received an approximately $10 million grant from the U.S. Business Administration under the RRF and used approximately $8 million to repay existing debt of Pie Square Holdings and to fund some of its operating expenses. Under the RRF there is a requirement that the grant monies be for “eligible uses.” The Company, through the structure of the acquisition, is now responsible that the grant proceeds were, in fact, properly obtained and disbursed for “eligible uses.” If it is determined that Pie Square Holdings obtained the grant improperly or the disbursement of such grant monies were not “eligible uses” then the Company would be responsible for the ramifications of such actions, including repayment of the approximately $10 million of grant monies, among other items. Management is in the process of completing its analysis of this contingency, which includes consultation with outside legal counsel, and expects to complete such analysis prior to the filing of the 2021 annual financial statements. In connection with the acquisition, the Company obtained an indemnification from the sellers which is inclusive of any matters related to the RRF. As such, an assessment of the sellers’ indemnification agreement signed under the acquisition agreement will also be considered in the Company’s analysis. If it is determined that a contingency exists as of the acquisition date and it is probable of occurrence, then the preliminary purchase price allocation noted above will be revised, and the impact could be material.

 

18

 

 

The following unaudited pro forma information reflects the impact of the acquisition as if it had closed on January 1, 2020.

 

 

   Nine months ended September 30, 2021  

Nine months ended

September 30, 2020

 
Total revenue  $16,229,033   $17,645,760 
Operating loss  $(2,829,004)  $(10,907,158)
Net loss  $(2,728,921)  $(25,551,202)
Net loss per share (basic and diluted)  $(0.18)  $(1.89)

 

The unaudited pro forma statement of operations data for the nine months ended September 30, 2021, excludes the approximately $8.0 million of income recognized for RRF grant monies received as discussed above and $3.0 million gain on extinguishment of debt with a related-party, both recorded by Pie Squared.

 

4. INVESTMENTS

 

Investments consist of the following:

 

   September 30, 2021   December 31, 2020 
Common stock of Sonnet, at fair value  $73,970   $413,268 
Chanticleer Investors, LLC, at cost   365,001    365,001 
Total  $438,971   $778,269 

 

Common Stock of Sonnet

 

In 2020 the Company received warrants to purchase Sonnet common stock as part of consideration for the Merger with Sonnet (See Note 1). On November 17, 2020, the Company exercised the warrants and holds common stock of Sonnet. Shares were sold in 2021 and the Company received proceeds of $118,416. At September 30, 2021, 122,064 shares of Sonnet were held.

 

Chanticleer Investors LLC

 

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

 

In June 2019, an analysis of the transaction and the value of the cash received and retained non-controlling interest was performed. The Company concluded that its investment was impaired as of June 30, 2019 and recorded a $435,000 write down of the investment during the year ended December 31, 2019. No further impairment charges were recognized since that time.

 

Hooters of America redeemed a portion of the Company’s ownership interest and paid $349,293 to the Company in October 2021. After the redemption, the Company’s effective economic interest in Hooters of America was less than 1%.

 

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5. PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consists of the following:

 

   September 30, 2021   December 31, 2020 
Leasehold improvements  $6,962,366   $7,301,908 
Restaurant furniture and equipment   2,287,064    2,132,726 
Construction in progress   650    5,450 
Office and computer equipment   114,623    125,535 
Office furniture and fixtures   99,528    59,635 
Property, plant and equipment, gross   9,464,231    9,625,254 
Accumulated depreciation and amortization   (6,462,334)   (5,922,360)
Property, plant and equipment, net  $3,001,897   $3,702,894 

 

The COVID-19 outbreak in the United States has resulted in a significant impact throughout the hospitality industry. The impact has varied by state/geographical area within the United States at various intervals since the pandemic has been declared. Accordingly, the operating results and cash flows at the store level have varied significantly leading to an analysis of impairment at the store level for each quarter end beginning at the end of the first quarter of 2020 and continuing through September 30, 2021. Several stores were permanently or temporarily closed during 2020 and 2021 while others are operating at reduced capacity. Based on the assessment of recoverability, an impairment charge of approximately $255,115 was recorded for property and equipment during the nine months ended September 30, 2021. No impairment charge was recorded for the three months ended September 30, 2021. During the three and nine months ended September 30, 2020, the Company recorded an impairment charge of $555,702 and $685,333 for property and equipment, respectively. During the nine months ended September 30, 2020, the Company recorded an impairment charge of $13,374 for other assets.

 

Depreciation expense was $260,345 and $814,675 for the three and nine months ended September 30, 2021, respectively. Depreciation expense was $185,825 and $834,909 for the three and nine months ended September 30, 2020, respectively.

 

6. INTANGIBLE ASSETS, NET

 

GOODWILL

 

A roll-forward of goodwill is as follows:

 

   Nine
Months Ended
September 30, 2021
  

Year Ended

December 31, 2020

 
Beginning balance  $8,591,149   $8,567,888 
Foreign currency translation gain   (11,768)   23,261 
Goodwill acquired in acquisition   51,000     
Goodwill reclassified to noncurrent assets held for sale (Note 14)   (820,507)    
Ending balance  $7,809,874   $8,591,149 

 

OTHER INTANGIBLE ASSETS

 

Franchise and trademark/tradename intangible assets consist of the following:

 

       September 30, 2021   December 31, 2020 
Trademark, Tradenames:               
American Roadside Burger   10 years   $561,191   $1,786,930 
BGR: The Burger Joint   Indefinite    739,245    739,245 
Little Big Burger   Indefinite    1,550,000    1,550,000 
PizzaRev   5 years    410,000     
         3,260,436    4,076,175 
Acquired Franchise Rights:               
BGR: The Burger Joint   7 years    827,757    827,757 
PizzaRev   5 years    410,000     
                
Franchise License Fees:               
Hooters Pacific NW   20 years        74,507 
Hooters UK   5 years        11,001 
             85,508 
Total intangibles at cost        4,498,193    4,989,440 
Accumulated amortization        (1,225,397)   (1,945,555)
Intangible assets, net       $3,272,796   $3,043,885 

 

20

 

 

An analysis of the recoverability of the carrying value was performed at each quarter end beginning at the end of the first quarter of 2020 and continuing through September 30, 2021. Based on that analysis, an impairment charge of approximately $327,342 was recorded to trademarks/tradenames for ABC: American Burger Company during the nine months ended September 30, 2021. No intangible assets were impaired during the three months ended September 30, 2021. During the three and nine months ended September 30, 2020, an impairment charge of $246,751 was recorded to trademarks/tradenames for BRG: The Burger Joint. No other intangible assets were impaired as of September 30, 2020.

 

Amortization of intangible assets was $90,254 and $265,929, for the three and nine months ended September 30, 2021 and $92,174 and $274,699 for the three and nine months ended September 30, 2020, respectively.

 

7. DEBT AND NOTES PAYABLE

 

Debt and notes payable are summarized as follows at September 30, 2021 and December 31, 2020:

 

   September 30, 2021   December 31, 2020 
Notes payable (a)  $   $25,850 
Notes payable (b)       27,048 
Contractor note (c)   348,269    348,269 
PPP loans (d)   4,109,400    2,109,400 
UK Bounce Back loan (e)       68,245 
EIDL loans (f)   300,000    299,900 
Convertible debt (g)   4,037,889    4,037,889 
Convertible promissory note (h)   1,194,000     
Total Debt   9,989,558    6,916,601 
Less: discount on convertible debt (g)   (89,473)   (223,681)
Total Debt, net of discount  $9,900,085   $6,692,920 
           
Current portion of long-term debt  $7,080,737   $2,338,978 
Long-term debt, less current portion  $2,819,348   $4,353,942 

 

(a) 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 bore interest at 4% and were due within 12 months of each acquisition date. Principal and interest payments were due monthly and were fully repaid in 2021.

 

(b) 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 were repaid with the specified interest rate per those agreements. These notes were fully repaid in 2021.

 

(c) The Company entered into a promissory note to repay a contractor for the build-out of a new Little Big Burger location. The note has a balance of $348,269, and a stated interest rate of 12% per year. In connection with and prior to the Merger and Spin-Off, on April 1, 2020, this note was assumed by Amergent. The Company is currently in default on this loan and a writ of garnishment was ordered against the Company in 2020 for approximately $445,000. The additional $95,000 is included in accounts payable and accrued expenses at September 30, 2021 and December 31, 2020.

 

(d) On April 27, 2020, Amergent received a $2.1 million loan under the first round of the Payment Protection Program (PPP Loan). 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. The Company has currently applied for loan forgiveness in the full amount of the loan, but no assurance can be given as to the amount, if any, of forgiveness. The application for forgiveness allowed the Company to defer the timing of repayment until the forgiveness assessment is completed. See Note 11 for additional information.

 

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On February 25, 2021, the Company received a second PPP Loan of $2.0 million. The note bears interest at 1% per year, matures on February 25, 2026, and requires monthly principal and interest payments of approximately $44,660 beginning June 25, 2022 through maturity. The loan may be forgiven if certain criteria are met. No assurance can be given as to the amount, if any, of forgiveness.

 

(e) On November 24, 2020, Amergent received approximately $68,200 through the Bounce Back Loan Scheme in the United Kingdom. The loan has a term of six years that can be extended to 10 years. No payments are required and no interest is accrued for the first twelve months after the loan is received. After the first year, the loan accrues interest at 2.5% per year. The note has been reclassified to noncurrent assets held for sale at September 30, 2021 (see note 14).

 

(f) On August 4, 2020, the Company obtained two loans under the Economic Injury Disaster Loan (“EIDL”) assistance program from the Small Business Administration (“SBA”) in light of the impact of the COVID-19 pandemic on the Company’s business. The principal amount of the loans is $300,000, with proceeds to be used for working capital purposes. Interest accrues at the rate of 3.75% per year. Total installment payments, including principal and interest, are due monthly beginning August 4, 2021 in the amount of $1,762. The balance of principal and interest is payable over the next thirty years from the date of the promissory note (August 2050). There are no penalties for prepayment. Based upon guidance issued by the SBA on June 19, 2020, the EIDL loans are not required to be refinanced by the PPP Loan.

 

(g) On April 1, 2020, pursuant to an agreement among Chanticleer, Oz Rey and certain original holders of the 8% non-convertible debentures previously outstanding, 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. Prior to August 17, 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.

 

  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, the amendment provides a limitation on Oz Rey’s ability to convert the debenture into common stock so that the conversion would not result in the issuance of common stock exceeding the amount of authorized shares. 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 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. As a result of these modifications, the warrants are no longer liability classified and the conversion feature is no longer required to be bifurcated from the debt host as of the date of the amendment.

 

  In connection with the exchange of the debentures, Amergent issued warrants to Oz Rey and the original 8% non-convertible debenture holders to purchase 2,925,200 shares of common stock. The exercise price is $0.125 for 2,462,600 warrants and $0.50 for 462,500 warrants. The warrants can be exercised on a cashless basis and expire 10 years from the issuance date. The warrants were equity classified at September 30, 2021 and December 31, 2020.

 

  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 $44,550 and $134,394 was recorded as interest expense during the three and nine months ended September 30, 2021, respectively.

 

(h) On August 30, 2021, the Company purchased all of the outstanding membership interests in Squared Holdings pursuant to a Unit Purchase Agreement (Purchase Agreement) (see note 3). The purchase price was an 8% secured, convertible promissory note with a face value of $1,000,000 and a fair value of $1,194,000. Interest on the note is due quarterly and $500,000 of principal is due on August 30, 2022, and any remaining unpaid amount is due on August 30, 2023.

 

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  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. The Company’s lender has provided a waiver of certain financial covenants through September 30, 2021.

 

8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses are summarized as follows:

 

   September 30, 2021   December 31, 2020 
Accounts payable  $2,463,068   $3,752,036 
Accrued expenses   1,190,798    1,436,679 
Accrued taxes (VAT, Sales, Payroll, etc.)   2,437,347    3,356,496 
Accrued interest   61,642    122,057 
Accounts payable and accrued expenses, total  $6,152,855   $8,667,268 

 

As of September 30, 2021 and December 31, 2020, approximately $2.2 million and $3.0 million, respectively, of employee and employer payroll taxes and associated interest and penalties have been accrued but not remitted to certain taxing authorities by the Company. These accruals are for periods prior to 2019 for cash compensation paid and are reflected as a component of the accrued taxes line above. As a result, the Company is liable for such payroll taxes and any related penalties and interest. Upon the advice of our tax professionals, we are paying the trust fund portion of the outstanding tax accruals which represents the portion of taxes withheld from our employees but not remitted to the taxing authorities. For our locations that have permanently closed, our tax liability after paying the trust fund balance is approximately $380,000 and is recorded within accrued taxes on our condensed consolidated balance sheet as of September 30, 2021. The taxing authorities have indicated that we are still liable for these amounts, however, since the locations are permanently closed and have no assets, they will stop active collection procedures on these amounts.

 

9. STOCKHOLDER’S EQUITY

 

2020 Bridge Financing

 

Pursuant to a Securities Purchase Agreement dated February 7, 2020, the Company sold 1,500 shares of a new series of convertible preferred stock of Chanticleer (the “Series 2 Preferred 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 the original agreement with the investors, the Company issued 5-year warrants to purchase an aggregate of 350,000 shares of common stock to the investors at $1.25 per share. Each share of Series 2 Preferred has a stated value of $1,000. Upon issuance, the Company bifurcated and recorded, as a liability, an embedded derivative (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 (see Note 1), all remaining outstanding shares of the Series 2 Preferred Stock were automatically cancelled and exchanged for substantially similar shares of preferred stock in Amergent, the shareholders of Chanticleer common stock received shares of Amergent on a 1 for 1 basis (Spin-Off shares) and received 1 share of Sonnet common stock for 26 shares of Chanticleer common stock held at the time of the Merger.

 

On August 17, 2020, the Company and the holders of the Series 2 Preferred Stock entered into a Waiver, Consent, and Amendment to the Certificate of Designations (the “Extension Agreement”) which included provisions for an extension of the true-up payment discussed below from August 7, 2020 to December 10, 2020 and permitted the shares of Amergent obtained by the investor in the Spin-Off to be included in the determination of the True-Up Payment discussed below, with the Company paying all expenses incurred by the institutional investor in connection with the Extension Agreement and certain consideration for the institutional in investor’s willingness to extend the date of the true-up payment. The consideration included $66,000 of cash and warrants to purchase 134,000 shares of the Company’scommon stock with a value of $28,060 (see below).

 

On February 16, 2021, the Company and the holders of the Series 2 Preferred Stock entered into a Waiver, Consent and Amendment to the Certificate of Designations (the “Waiver”). Pursuant to the Waiver, the Company filed the Second Amendment and Restated Certificate of Designations of Series 2 Convertible Preferred Stock (“Amended COD”) with the Delaware Secretary of State (i) providing for the extension of the True-Up Payment to April 1, 2021, (ii) providing for the deduction of proceeds to the original holders from sales of Series 2 Preferred for the True-Up Payment, and (iii) providing for a reduction in amount of cash subject to restriction as discussed below from $1,250,000 to $850,000.

 

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During the nine months ended September 30, 2021, the investors converted 637 shares of the Series 2 Preferred Stock into 1,274,000 common shares and sold those common shares in the market. In addition, the investors sold their remaining 150 Series 2 Preferred Stock to other investors. The new investors converted 50 shares of Series 2 Preferred Stock into common stock during May 2021, and 100 Series 2 Preferred Stock remain outstanding at September 30, 2021.

 

The Series 2 Preferred Stock is classified in the accompanying condensed consolidated and combined balance sheet at September 30, 2021 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 original holder an amount in cash equal to the dollar value of 125% of the stated value of the Series 2 Preferred Stock less the proceeds previously realized by the holder from the sale of all conversion and spin-off shares received by the original holder in Amergent, net of brokerage commissions and any other fees incurred by the holder in connection with the sale of any conversion shares or spin-off shares on April 1, 2021 (which period was extended). The True-Up Payment was settled in July 2021 with a payment of $66,136, and the cash account is no longer subject to restriction for this matter.

 

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.

 

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Warrants

 

A summary of the warrant activity during the nine months ended September 30, 2021 is presented below:

 

   Number of Warrants   Weighted Average Exercise Price   Weighted Average Remaining Life 
Outstanding at December 31, 2020