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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 June 30, 2022

 

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

 

For the transition period from __________ to __________

 

Commission file number: 000-56145

 

AMERGENT HOSPITALITY GROUP INC.

 

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

 

7529 Red Oak Lane    
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 August [12], 2022, 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 Balance Sheets as of June 30, 2022 (Unaudited) and December 31, 2021 5
  Condensed Consolidated Statements of Operations (Unaudited) – For the three and six months ended June 30, 2022 and 2021 6
  Condensed Consolidated Statements of Comprehensive Loss (Unaudited) – For the three and six months ended June 30, 2022 and 2021 7
  Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit (Unaudited) – For the three and six months ended June 30, 2022 and 2021 8
  Condensed Consolidated Statements of Cash Flows (Unaudited) – For the six months ended June 30, 2022 and 2021 9
  Notes to Condensed Consolidated Financial Statements (Unaudited) 10
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 27
Item 3: Quantitative and Qualitative Disclosures about Market Risk 33
Item 4: Controls and Procedures 34
     
Part II Other Information 35
     
Item 1: Legal Proceedings 35
Item 1A: Risk Factors 35
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 35
Item 3: Defaults Upon Senior Securities 35
Item 4: Mine Safety Disclosures 35
Item 5: Other Information 35
Item 6: Exhibits 36
     
Signatures 37

 

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:

 

  We have a history of operating losses, and our estimates regarding the sufficiency of our cash resource and capital requirements and needs for additional financing raise substantial doubt about our ability to continue as a going concern;
     
  We may not be able to extend or repay our indebtedness owed to our secured lenders, which would have a material adverse effect on our financial condition and ability to continue as a going concern;
     
  We require additional financing to support our working capital and execute our operating plans for fiscal 2022, which may not be available or may be costly and dilutive;
     
  Decline in global financial markets, inflation and economic downturn;
     
  Continuing impact of 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;
     
  The risks associated with leasing space subject to long-term non-cancelable leases;
     
  Breaches of security of confidential consumer information related to our electronic processing of credit and debit card transactions;
     
  Whether or not we will receive 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;
     
  Difficulties as acquired restaurants are integrated into our operations and failure to realize anticipated synergies;
     
  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
     
  Sale of common stock or derivative securities by us in private placements or public offerings as well as the conversion of existing debt securities could result in substantial dilution to our existing stockholders.

 

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

Unaudited Financial Statements

Table of Contents

 

 

Page

Number

Condensed Consolidated Balance Sheets 5
Condensed Consolidated Statements of Operations 6
Condensed Consolidated Statements of Comprehensive Loss 7
Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit 8
Condensed Consolidated Statements of Cash Flows 9
Notes to the Condensed Consolidated Financial Statements 10

 

4
 

 

Amergent Hospitality Group Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

           
   June 30,
2022
  

December 31,

2021

 
(in thousands except share and per share data)  (Unaudited)   (Note 1) 
ASSETS          
Current assets:          
Cash  $966   $646 
Restricted cash       1,672 
Investments   34    50 
Accounts and other receivables   904    865 
Inventories   190    182 
Prepaid expenses and other current assets   497    360 
TOTAL CURRENT ASSETS   2,591    3,775 
Property and equipment, net   3,062    3,115 
Operating lease assets   7,962    8,021 
Intangible assets, net   2,973    3,129 
Goodwill   7,810    7,810 
Investments   16    16 
Deposits and other assets   353    352 
TOTAL ASSETS  $24,767   $26,218 
           
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT          
Current liabilities:          
Accounts payable and accrued expenses  $6,707   $6,844 
Current portion of long-term debt and notes payable   3,661    3,264 
Current portion of operating lease liabilities   4,180    4,599 
Deferred grant income   373    1,545 
TOTAL CURRENT LIABILITIES   14,921    16,252 
           
Operating lease liabilities, net of current portion   8,604    8,644 
Contract liabilities   80    757 
Deferred tax liabilities   150    150 
Long-term debt and notes payable, net of current portion (includes debt measured at fair value of $428 and $599 at June 30, 2022 and December 31, 2021, respectively)   7,301    6,593 
TOTAL LIABILITIES   31,056    32,396 
           
Commitments and contingencies (see Note 13)   -     -  
           
Convertible Preferred Stock: Series 2: $1,000 stated value; authorized 1,500 shares; 100 issued and outstanding at both June 30, 2022 and December 31, 2021   58    58 
           
Stockholders’ Deficit:          
Common stock: $0.0001 par value; authorized 50,000,000 shares; 15,706,736 shares issued and outstanding at both June 30, 2022 and December 31, 2021   2    2 
Additional paid-in-capital   93,156    92,882 
Accumulated deficit   (98,392)   (97,963)
Total Amergent Hospitality Group Inc. Stockholders’ Deficit   (5,234)   (5,079)
Non-controlling interests   (1,113)   (1,157)
TOTAL STOCKHOLDERS’ DEFICIT   (6,347)   (6,236)
TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT  $24,767   $26,218 

 

See accompanying notes to the condensed consolidated financial statements

 

5
 

 

Amergent Hospitality Group Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited)

 

                     
   Three months ended   Six months ended 
  

June 30, 2022

  

June 30, 2021

  

June 30, 2022

  

June 30, 2021

 
(in thousands except share and per share data)      (Restated)       (Restated) 
Revenue:                    
Restaurant sales, net  $5,323   $5,217   $10,081   $9,661 
Gaming income, net   145    111    248    169 
Franchise income   108    105    897    199 
Total revenue   5,576    5,433    11,226    10,029 
Expenses:                    
Restaurant cost of sales   1,701    1,617    3,193    2,933 
Restaurant operating expenses   3,679    3,455    7,158    6,701 
General and administrative expenses   1,806    1,208    3,142    2,375 
Asset impairment charges               1,288 
Depreciation and amortization   201    227    423    459 
Employee retention credit and other grant income   (1,287)   (1,473)   (1,835)   (1,473)
Total expenses   6,100    5,034    12,081    12,283 
Operating (loss) income   (524)   399    (855)   (2,254)
Other income (expense):                    
Interest expense   (224)   (158)   (411)   (318)
Change in fair value of derivative liabilities       (66)       119 
Change in fair value of investment   (12)   (124)   (16)   (120)
Change in fair value of convertible promissory note   55        171     
Gain on extinguished/settled lease liabilities   256    275    256    319 
Gain on extinguished trade payable           161     
Other income   92    171    311    174 
Total other income   167    98    472    174 
(Loss) income before income taxes   (357)   497    (383)   (2,080)
Income tax expense           (2)    
Consolidated net (loss) income   (357)   497    (385)   (2,080)
                     
Less: Net (income) loss attributable to non-controlling
interests
   (45)   (60)   (44)   104 
Net (loss) income attributable to Amergent Hospitality Group Inc.  $(402)  $437   $(429)  $(1,976)
                     
Net (loss) income attributable to Amergent Hospitality Group Inc. per common share, basic  $(0.03)  $0.01   $(0.03)  $(0.13)
Net (loss) income attributable to Amergent Hospitality Group Inc. per common share, diluted  $(0.03)  $0.01   $(0.03)  $(0.13)
                     
Weighted average shares outstanding, basic   15,706,736    15,321,571    15,706,736    14,904,471 
Weighted average shares outstanding, diluted   15,706,736    17,280,625    15,706,736    14,904,471 

 

See accompanying notes to the condensed consolidated financial statements

 

6
 

 

Amergent Hospitality Group Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)

 

                     
   Three months ended   Six months ended 
   June 30, 2022   June 30, 2021  

June 30, 2022

   June 30, 2021 
(in thousands)      (Restated)       (Restated) 
Net (loss) income attributable to Amergent Hospitality Group Inc.  $(402)  $437   $(429)  $(1,976)
Foreign currency translation gain       7        16 
Comprehensive (loss) income  $(402)  $444   $(429)  $(1,960)

 

See accompanying notes to the condensed consolidated financial statements

 

7
 

 

Amergent Hospitality Group Inc. and Subsidiaries

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit

Three and Six Months Ended June 30, 2022 and 2021 (Unaudited)

 

                                              
   (Temporary equity) Convertible Preferred Stock   Common Stock   Additional Paid-in

  

Accumulated
   Accumulated Other
Comprehensive
   Non-Controlling     
(in thousands except share data)  Shares   Amount   Shares   Amount  

Capital

   Deficit  

Loss

  

Interests

   Total 
Balance, January 1, 2022   100   $58    15,706,736   $2   $92,882   $(97,963)  $   $(1,157)  $(6,236)
Share-based compensation expense                   6                6 
Issuance of warrants                   263                263 
Net loss                       (27)       (1)   (28)

Balance, March 31, 2022

   100    58    15,706,736    2    93,151    (97,990)  $    (1,158)   (5,995)
Share-based compensation expense                   5                5 
Net loss                       (402)       45    (357)

Balance, June 30, 2022

   100   $58    15,706,736   $2   $93,156   $(98,392)  $   $(1,113)  $(6,347)

 

   (Temporary equity) Convertible Preferred Stock   Common Stock   Additional Paid-in

   Accumulated   Accumulated Other Comprehensive

  

Non- Controlling

     
(in thousands except share data, restated)  Shares   Amount   Shares   Amount  

Capital

   Deficit   Loss   Interests   Total 
Balance, January 1, 2021   787   $460    14,282,736   $1   $92,433   $(94,587)  $(26)  $(970)  $(3,149)
Conversion of preferred stock into common stock   (125)   (73)   250,000        73                73 
Foreign currency translation                           9        9 
Net loss                       (2,412)       (165)   (2,577)

Balance, March 31, 2021

   662    387    14,532,736    1    92,506    (96,999)   (17)   (1,135)   (5,644)
Conversion of preferred stock into common stock   (562)   (329)   1,124,000    1    328                329 
Foreign currency translation                           7        7 
Net income                       437        60    497 

Balance, June 30, 2021

   100   $58    15,656,736   $2   $92,834   $(96,562)  $(10)  $(1,075)  $(4,811)

 

See accompanying notes to the condensed consolidated financial statements

 

8
 

 

Amergent Hospitality Group Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

           
   Six months ended 
   June 30, 2022   June 30, 2021 
(in thousands)      (Restated) 
Cash flows from operating activities:          
Net loss  $(385)  $(2,080)
Adjustments to reconcile net loss to net cash flows used in operating activities:          
Depreciation and amortization   423    459 
Amortization of operating lease assets   666    429 
Asset impairment charges       1,288 
Gain on extinguished/settled lease liabilities   (256)   (319)
Gain on extinguished trade payable   (161)    
Share-based compensation   11     
Change in fair value of investment   16    120 
Change in fair value of convertible promissory note   (171)    
Amortization of debt discount   91    90 
Change in fair value of derivative liabilities       (119)
Change in operating assets and liabilities:          
Accounts and other receivables   (39)   153 
Inventories   (8)   10 
Prepaid expenses and other assets   (138)   (72)
Accounts payable and accrued expenses   220    (348)
Deferred grant income   (1,172)    
Operating lease liabilities   (1,066)   (742)
Contract liabilities   (677)   (36)
Net cash flows used in operating activities   (2,646)   (1,167)
           
Cash flows from investing activities:          
Purchase of property and equipment   (154)   (15)
Net cash flows used in investing activities   (154)   (15)
           
Cash flows from financing activities:          
Proceeds from long-term debt and notes payable   1,647    2,000 
Payments of long-term debt and notes payable   (190)   (53)
Payment of financing costs   (9)    
Net cash flows provided by financing activities   1,448    1,947 
Effect of exchange rate changes on cash       9 
Net (decrease) increase in cash and restricted cash   (1,352)   774 
Cash and restricted cash, beginning of period   2,318    1,929 
Cash and restricted cash, end of period  $966   $2,703 
           
Supplemental cash flow information:          
Cash paid for interest and income taxes          
Interest  $268   $294 
Income taxes  $28   $ 
           
Non-cash operating, investing and financing activities:          
Conversion of Preferred Series 2 stock to common stock  $   $402 
Change in operating lease assets and liabilities due to amended leases  $607   $ 
Issuance of warrants in connection with convertible promissory notes  $263   $ 
Purchases of property and equipment included in accounts payable and accrued expenses  $60   $ 
Settled lease liabilities included in accounts payable and accrued expenses  $256   $ 
           
Details of end of period cash and restricted cash:          
Cash  $966   $2,262 
Restricted cash       441 
Total cash and restricted cash  $966   $2,703 

 

See accompanying notes to the condensed consolidated financial statements

 

9
 

 

Amergent Hospitality Group Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

Nature of Business

 

Amergent Hospitality Group Inc. (“Amergent”) was incorporated on February 18, 2020 as a wholly-owned subsidiary of Chanticleer Holdings, Inc. (“Chanticleer”) for the purpose of conducting the business of Chanticleer and its subsidiaries after completion of the spin-off of Amergent to the shareholders of Chanticleer (Spin-Off”). The Spin-Off transaction was completed on April 1, 2020 in connection with Chanticleer’s completion of its merger transaction (the “Merger”) with Sonnet BioTherapeutics, Inc. (“Sonnet”). Amergent is in the business of owning, operating and franchising fast casual dining concepts.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements include the accounts of Amergent and its subsidiaries (collectively “we,” “us,” “our,” or the “Company”). All intercompany and inter-entity balances have been eliminated in consolidation.

 

The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles of the United States (“U.S. GAAP”). Any reference in these notes to applicable guidance is meant to refer to U.S. GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) promulgated by the Financial Accounting Standards Board (“FASB”).

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include the valuation of options, warrants and convertible notes payable using Black-Scholes and Monte Carlo models, and analysis of the recoverability of goodwill and long-lived assets. Actual results could differ from those estimates, particularly given the significant social and economic disruptions and uncertainties associated with the ongoing COVID-19 pandemic and the COVID-19 control responses.

 

Certain prior year amounts have been updated to conform to the current period presentation. The Company has opted to present the financial information on the condensed consolidated balance sheets and condensed consolidated statements of operations, comprehensive loss, convertible preferred stock and stockholders’ deficit and cash flows in thousands.

 

General

 

The accompanying condensed consolidated financial statements included in this Report have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting and include all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation. These condensed consolidated financial statements have not been audited. The condensed consolidated balance sheet as of December 31, 2021 has been derived from the audited consolidated financial statements as of December 31, 2021 and for the year then ended included in Amergent’s Annual Report on Form 10-K filed with the SEC on April 15, 2022. The results of operations for the three and six-month periods ended June 30, 2022 are not necessarily indicative of the operating results for the full year ending December 31, 2022.

 

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles of the United States (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations for interim reporting. The Company believes that the disclosures contained herein are adequate to make the information presented not misleading. However, these financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Amergent’s Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”) previously filed with the SEC.

 

There have been no changes to our significant accounting policies described in our 2021 Form 10-K that would have had a significant impact on these unaudited condensed consolidated financial statements and related notes.

 

10
 

 

Liquidity, Capital Resources and Going Concern

 

As of June 30, 2022, the Company’s cash balance was $1.0 million, its working capital deficiency was $12.3 million and it had significant near-term commitments and contractual obligations. The level of additional cash needed to fund operations and our ability to conduct business for the next 12 months will be influenced primarily by the following factors:

 

  our ability to access the capital and debt markets to satisfy current obligations and operate the business;

 

  our ability to qualify for and access financial stimulus programs available through federal and state government programs;

 

  our ability to refinance or otherwise extend maturities of current debt obligations;

 

  our ability to manage our operating expenses and maintain gross margins;

 

  popularity of and demand for our fast-casual dining concepts; and

 

  general economic conditions and changes in consumer discretionary income.

 

We have typically funded our operating costs, acquisition activities, working capital requirements and capital expenditures with proceeds from the issuances of our common stock and other financing arrangements, including convertible debt, lines of credit, notes payable, capital leases, government stimulus funds and other forms of external financing.

 

The Company expects to have to seek additional debt or equity funding to support operations and there can be no assurances that such funding would be available at commercially reasonable terms, if at all.

 

As Amergent executes its business plan over the next 12 months, it intends to carefully monitor its working capital needs and cash balances relative to the availability of cost-effective debt and equity financing. In the event that capital is not available, Amergent may then have to scale back or freeze its growth plans, sell assets on less than favorable terms, reduce expenses, and/or curtail future acquisition plans to manage its liquidity and capital resources.

 

In early March 2020, the COVID-19 pandemic was declared to be a National Public Health Emergency. The global COVID-19 pandemic continues to adversely impact the economies in which we operate. As a result of rising case rates toward the end of 2020 and certain jurisdictions implementing restrictions that reduced dining room capacity or mandated the closure of dining rooms, the Company began fiscal 2021 with significant limitations on its operations which, throughout the fiscal year, varied widely from time to time, state to state and city to city, however, nonetheless negatively impacted sales. Once COVID-19 vaccines were approved and moved into wider distribution in the United States in early to mid-2021, public health conditions improved and almost all of the COVID-19 restrictions on businesses eased.

 

While cases continue to decline and staffing continues to improve, overall consumer and business activity remains muted in certain markets as consumer behaviors have changed due to the COVID-19 pandemic and some businesses have yet to bring employees back into their offices. The Company’s restaurant operations have been, and could again in the future, be disrupted by team member staffing issues because of illness, exclusion, fear of contracting COVID-19 or caring for family members due to COVID-19, legal requirements for employee vaccinations or COVID testing, lack of labor supply, competitive labor pressures, or for other reasons. Furthermore, inflation has been and is elevated across the Company’s business, including food costs, due in part to the supply chain impacts of the pandemic. The Company remains in regular contact with its major suppliers and while, to date, it has not experienced significant disruptions in its supply chain due to the COVID-19 pandemic, the Company could see significant future disruptions should the impacts of the pandemic continue. Currently, national, state and local jurisdictions have removed their capacity restrictions on businesses and, therefore, the Company’s restaurants are serving customers in its dining rooms without social distancing requirements. However, it is possible additional outbreaks could lead to restrictive measures that could impact the Company’s guest demand and dining room capacity.

 

For further information regarding the COVID-19 pandemic, see the discussion included in our 2021 Form 10-K.

 

11
 

 

The Company’s current operating losses, combined with its working capital deficit, raise substantial doubt about its ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In May 2021, the FASB issued ASU 2021-04, Earnings per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges or Freestanding Equity-Classified Written Call Options. The pronouncement outlines how an entity should account for modifications made to equity-classified written call options, including stock options and warrants to purchase the entity’s own common stock. The guidance in the ASU requires an entity to treat a modification of an equity classified option that does not cause the option to become liability-classified as an exchange of the original option for a new option. This guidance applies whether the modification is structured as an amendment to the terms and conditions of the equity-classified written call option or as termination of the original option and issuance of a new option. The guidance is effective prospectively for fiscal years beginning after December 15, 2021. The Company adopted this guidance on January 1, 2022, and it did not have a material effect on the condensed consolidated financial statements.

 

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic ASC 832): Disclosures by Business Entities about Government Assistance. This standard requires disclosures about transactions with a government that have been accounted for by analogizing to a grant or contribution accounting model to increase transparency about the types of transactions, the accounting for the transactions, and the effect of the transactions on an entity’s financial statements. The new standard is effective for annual periods beginning after December 15, 2021. The Company early adopted this guidance on January 1, 2022, and it did not have a material effect on the condensed consolidated financial statements.

 

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

 

3. EMPLOYEE RETENTION CREDIT AND RESTAURANT REVITALIZATION FUND

 

Employee Retention Credit

 

The Employee Retention Credit (“ERC”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) is a refundable tax credit which encouraged businesses to keep employees on the payroll during the COVID-19 pandemic. Although the program ended on January 1, 2022, the Company performed an analysis during the current period and determined that it was eligible for additional credits related to 2021 wages. As of each of June 30, 2022 and December 31, 2021, approximately $0.8 million of ERC is included in accounts and other receivables in the condensed consolidated balance sheets. For the three and six months ended June 30, 2022 and 2021, the Company recognized $0.7 million and $1.5 million, respectively, of ERC as a contra-expense included in employee retention credit and other grant income in the condensed consolidated statements of operations.

 

In addition to the ERC, the Company received credits under other government/government agency programs of approximately $68,000 and $128,000 for the three and six months ended June 30, 2021, respectively, of which approximately $27,000 and $41,000 and $85,000 and $44,000 were recorded as an offset to restaurant operating expenses and as other income, respectively, in the condensed consolidated statements of operations.

 

Restaurant Revitalization Fund

 

The American Rescue Plan Act established the Restaurant Revitalization Fund (“RRF”) to provide funding to help restaurants and other eligible businesses keep their doors open. This program provided restaurants with funding equal to their pandemic-related revenue loss up to $10.0 million per business and no more than $5.0 million per physical location. Recipients are not required to repay the funding as long as funds are used for eligible uses no later than March 11, 2023. In 2021 and prior to its acquisition by the Company in August 2021, Pie Squared Holdings (see Note 9) received a grant under the U.S. Small Business Administration’s (“U.S. SBA”) RRF for approximately $10.0 million. The proceeds received were mainly used to repay existing debt and to also pay operating expenses. The unused funds received under the RRF at closing of the acquisition were $2.0 million, and these funds were placed into escrow for the benefit of the Company for working capital to be used solely in the operations of the acquired business. Restricted cash and a deferred grant income liability were recorded for the unused proceeds from the RRF, and grant income is being recognized as the Company expends the funds on eligible costs incurred under the RRF post acquisition. As of June 30, 2022 and December 31, 2021, the Company had restricted cash of nil and $1.7 million, respectively, related to the unused proceeds from the RRF. For the three and six months ended June 30, 2022, the Company recognized $0.6 million and $1.1 million, respectively, related to the RRF as a contra-expense included in employee retention credit and other grant income and in the condensed consolidated statements of operations.

 

12
 

 

The Company periodically submits to the escrow agent for the acquisition the planned uses of these funds, and the sellers have the right to review the planned uses to determine whether, in the sellers’ opinion, the planned uses meet the criteria of “eligible uses” under the RRF. If determined to not meet such criteria, then the escrow agent will not distribute that portion of the request. Any unused funds on March 11, 2023, or if applicable, the awardee permanently closed before using all funds on authorized purposes, are repayable to the U.S. SBA. As the Company acquired all the outstanding membership interests in Pie Squared Holdings, the Company is now responsible that the grant proceeds were, in fact, properly obtained and disbursed for “eligible uses.” If it is determined that Pie Squared Holdings obtained the grant improperly or that disbursements of such grant monies were not “eligible uses,” then the Company would be responsible for the ramifications of such actions, including repayment of the approximately $10.0 million of grant monies, among other items. Management completed its analysis of this contingency and concluded that, through the date at which the condensed consolidated financial statements were available to be issued, a liability does not need to be recorded for this contingency. In connection with the acquisition, the Company obtained an indemnification from the sellers which is inclusive of any matters related to the RRF.

 

4. REVENUE

 

Contract Liabilities

 

Contract liabilities consist of deferred revenue resulting from initial and renewal franchise license fees paid by franchisees, which are generally recognized on a straight-line basis over the term of the underlying franchise agreement, as well as upfront development fees paid by franchisees, which are generally recognized on a straight-line basis over the term of the underlying franchise agreement once it is executed. The recognition of initial and renewal license fees is accelerated if the franchise or development agreement is terminated. During the six months ended June 30, 2022, the Company recognized $0.7 million of franchise income as a result of the cancellation of its international Master Franchise Agreements. There were no franchise or development agreement terminations during the three months ended June 30, 2022 and 2021 or the six months ended June 30, 2021.

 

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The table below reflects the level of the inputs used in the Company’s fair value calculations:

                     
(in thousands)  Quoted Prices in Active Markets (Level 1)   Significant Observable Inputs (Level 2)   Significant Unobservable Inputs (Level 3)   Total Fair
Value
 
June 30, 2022                    
Assets (Note 6)                    
Common stock of Sonnet  $34   $   $   $34 
Liabilities (Note 9)                    
Convertible note payable  $   $   $928   $928 

 

                     
(in thousands)  Quoted Prices in Active Markets
(Level 1)
   Significant Observable Inputs (Level 2)   Significant Unobservable Inputs (Level 3)   Total Fair
Value
 
December 31, 2021                    
Assets (Note 6)                    
Common stock of Sonnet  $50   $   $   $50 
Liabilities (Note 9)                    
Convertible note payable  $   $   $1,099   $1,099 

 

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

 

13
 

 

The Company evaluated the convertible note payable issued in connection with the acquisition of Pie Squared Holdings (see Note 9) in accordance with ASC Topic 815, Derivatives and Hedging, and determined that the conversion price discount creates a derivative. This derivative was not clearly and closely related to the debt host and was required to be separated and accounted for as a derivative instrument. The Company elected to initially and subsequently measure the convertible note payable at fair value, with changes in fair value recognized in operations.

 

The estimated fair value of the convertible note payable was determined using a Monte Carlo simulation and the following assumptions as of June 30, 2022:

Volatility   105.00%
Risk free rate   1.5% - 2.82%
Stock price  $0.26 
Credit spread   26.28%

 

The reconciliation of the convertible note payable measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows:

(in thousands) 

Six months ended

June 30, 2022

 
Balance at January 1, 2022  $1,099 
Change in fair value   (171)
Balance at June 30, 2022  $928 

 

6. INVESTMENTS

 

Investments consist of the following:

           
(in thousands)  June 30, 2022   December 31, 2021 
Common stock of Sonnet, at fair value (a)  $34   $50 
Chanticleer Investors, LLC, at cost (b)   16    16 
Total  $50   $66 

 

  (a) Represents the fair value of the common stock of Sonnet held by the Company after its exercise of warrants received in connection with the Merger. As of June 30, 2022, 122,064 shares of Sonnet were held.
     
  (b) Represents the Company’s investment in Chanticleer Investors, LLC, which holds an interest in Hooters of America, the operator and franchisor of the Hooters Brand worldwide. As of the dates presented, the Company’s effective economic interest in Hooters of America was less than 1%. In March 2022, the Company received a dividend from its investment in Hooters of America of approximately $0.1 million, which is included in other income for the six months ended June 30, 2022 in our condensed consolidated statement of operations.

 

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7. PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consists of the following:

           
(in thousands)  June 30, 2022   December 31, 2021 
Leasehold improvements  $5,385   $5,511 
Restaurant furniture and equipment   2,717    2,768 
Construction in progress   45    20 
Office and computer equipment   37    33 
Office furniture and fixtures       57 
Property,plant and equipment, gross   8,184    8,389 
Accumulated depreciation and amortization   (5,122)   (5,274)
Property, plant and equipment, net  $3,062   $3,115 

 

As of June 30, 2021, we performed an analysis of the recoverability of the carrying value of our property and equipment. Based on the analysis, an impairment charge of approximately $0.3 million was recorded for the six months ended June 30, 2021, which is included in asset impairment charges in our condensed consolidated statements of operations. The impairment recognized during the six months ended June 30, 2021 was primarily the result of the impact of the COVID-19 outbreak in the United States, which had a significant impact throughout the hospitality industry. The impact varied by state/geographical area within the United States at various intervals during the pandemic and, therefore, the operating results and cash flows at the store level varied significantly. There were no indicators of impairment related to our property and equipment during the six months ended June 30, 2022.

 

We recognized depreciation expense of $0.2 million and $0.3 million during the three and six months ended June 30, 2022, respectively, and $0.1 million and $0.3 million during the three and six months ended June 30, 2021, respectively.

 

8. INTANGIBLE ASSETS, NET

 

Goodwill

 

A rollforward of goodwill is as follows:

           
(in thousands) 

Six Months Ended

June 30, 2022

  

Year Ended

December 31, 2021

 
Beginning balance  $7,810   $8,591 
Acquisition of Pie Squared Holdings       51 
Sale of Hooters UK       (820)
Foreign currency translation loss       (12)
Ending balance  $7,810   $7,810 

 

The Company performed a qualitative assessment at June 30, 2022 based on the best judgment of management for the future of the reporting unit and on information known at the time of the assessment, and determined that it was more likely than not that the fair value of its reporting unit exceeded the carrying amount and, therefore, a quantitative assessment was not deemed necessary and no impairment was recorded to goodwill.

 

15
 

 

Other Intangible Assets

 

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

 

(in thousands)      June 30, 2022   December 31, 2021 
Trademark, Tradenames:               
American Roadside Burger   10 years   $561   $561 
BGR: The Burger Joint   Indefinite    739    739 
Little Big Burger   Indefinite    1,550    1,550 
PizzaRev   5 years    410    410 
         3,260    3,260 
Acquired Franchise Rights:               
BGR: The Burger Joint   7 years    828    828 
PizzaRev   5 years    410    410 
         1,238    1,238 
Total intangibles at cost        4,498    4,498 
Accumulated amortization        (1,525)   (1,369)
Intangible assets, net       $2,973   $3,129 

 

As of June 30, 2021, we performed an analysis of the recoverability of the carrying value of our intangible assets. Based on the analysis, an impairment charge of approximately $0.3 million was recorded to trademark/tradenames for ABC: American Burger Company for the six months ended June 30, 2021, and is included in asset impairment charges in our condensed consolidated statements of operations. There were no indicators of impairment related to our intangible assets during the six months ended June 30, 2022.

 

We recognized amortization expense of $0.1 million and $0.2 million during the three and six months ended June 30, 2022, respectively, and $0.1 million and $0.2 million during the three and six months ended June 30, 2021, respectively.

 

Amortization expense for the next five years is as follows (in thousands):

 

Year ending December 31:   
2022 (remaining six months)  $82 
2023   164 
2024   164 
2025   164 
2026   110 
 Amortization Expense, net  $684 

 

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9. LONG-TERM DEBT AND NOTES PAYABLE

 

Long-term debt and notes payable are summarized as follows:

 

(in thousands)  June 30, 2022   December 31, 2021 
10% convertible debt (a)  $4,038   $4,038 
8% convertible debt (b)   1,350     
Convertible promissory note (measured at fair value) (c)   928    1,099 
PPP loans (d)   4,109    4,109 
EIDL loans (e)   300    300 
Contractor note (f)   348    348 
Notes payable (g)   133     
Total Debt   11,206    9,894 
Less: discount on convertible debt (a), (b)   (244)   (37)
Total Debt, net of discount  $10,962   $9,857 
           
Current portion of long-term debt and notes payable  $3,661   $3,264 
Long-term debt and notes payable, less current portion  $7,301   $6,593 

 

  (a) In connection with and prior to the Spin-Off and Merger, on April 1, 2020, pursuant to an agreement among Chanticleer, Oz Rey, LLC (“Oz Rey”) and certain original holders of the 8% non-convertible debentures that were satisfied during 2020, the Company issued a 10% secured convertible debenture (the “10% Convertible Debt”) to Oz Rey in exchange for the 8% non-convertible debentures. The principal amount of the 10% Convertible Debt is $4.0 million and is payable in full on April 1, 2024, subject to extension by the holders in two-year intervals for up to 10 years from the issuance date upon Amergent meeting certain conditions. Interest is payable quarterly in cash. In connection with the exchange of the debentures, Amergent issued warrants to Oz Rey and the original 8% non-convertible debenture holders to purchase 2,925,200 shares of common stock. The exercise price is $0.125 for 2,462,600 warrants and $0.50 for 462,500 warrants. The warrants can be exercised on a cashless basis and expire 10 years from the issuance date.
     
    The 10% Convertible Debt was previously amended to fix the conversion rate into common stock at $0.10 per share. There is also a limitation on Oz Rey’s ability to convert the debenture into common stock such that only the portion of the balance for which the Company has sufficient available shares, considering all other outstanding instruments at the time of conversion on a fully diluted basis, can be converted. Oz Rey may, however, upon reasonable notice to the Company, require the Company to include in its proxy materials, for any annual meeting of stockholders being held by the Company, a proposal to amend the Company’s certificate of incorporation to increase the Company’s authorized shares to a number sufficient to allow for conversion of all shares underlying the debenture, on a fully diluted basis. Oz Rey also agreed that the Company would not be required under any circumstances to make a cash payment to settle the conversion feature not exercisable due to the authorized share cap or in an event that the Company was unable to deliver shares under the conversion feature. As of June 30, 2022, $2.4 million of the 10% Convertible Debt was convertible into approximately 23,500,000 shares of common stock.
     
    The Company recorded a debt discount of approximately $0.4 million for the difference between the face value of the 10% Convertible Debt and the estimated fair value at the April 1, 2020 issuance date and amortized this discount over the two-year term of the notes.
     
    In connection with the 8% Convertible Debt transaction described in (b) below, the maturity date of the 10% Convertible Debt was extended to April 1, 2024 and Oz Rey agreed to subordinate payment of its 10% Convertible Debt to payment of the 8% Convertible Debt, which has been accounted for as a loan modification. In addition, Oz Rey received a fee equal to 2.0% of the principal amount of the 8% Convertible Debt issued in the transaction, which has been recorded as a debt discount and is being amortized over the two-year term of the related debt.

 

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  (b) In March 2022, the Company commenced a private placement of up to $3.0 million of 8% senior unsecured convertible debentures (the “8% Convertible Debt”) and 3,000,000 common stock warrants. Pursuant to the Securities Purchase Agreement, the Company issued $1.35 million of 8% Convertible Debt and warrants to purchase the number of shares of the Company’s common stock equal to the principal amount of 8% Convertible Debt issued.
     
    The 8% Convertible Debt matures 18 months after issuance and is subject to acceleration in the event of customary events of default. Interest is payable quarterly in cash. The 8% Convertible Debt may be converted by the holders at any time at a fixed conversion price of $0.40 per share, and each warrant entitles the holder to purchase one share of common stock at an exercise price of $0.50 per share. Both the notes and the warrants include a beneficial ownership blocker of 4.99% and contain customary provisions preventing dilution and providing the holders rights in the event of fundamental transactions. Upon the earlier of the maturity date or the one-year anniversary of conversion of the 8% Convertible Debt, holders of 51% of the registerable securities may request the Company to file a registration statement for the securities. The warrants can be exercised on a cashless basis and expire five years from the issuance date. If the Company makes any distribution to the common stockholders, the holders of the warrants will be entitled to participate on an as-if-exercised basis. As of June 30, 2022, the 8% Convertible Debt was convertible into 3,375,000 shares of common stock.
     
    The Company analyzed the 8% Convertible Debt and did not identify any embedded features that require bifurcation from the host and accounting as derivatives. However, as the convertible notes payable were issued with warrants, the net proceeds from the issuance were allocated to the 8% Convertible Debt and the warrants based on their relative fair values, resulting in an allocation of $1.0 million to the 8% Convertible Debt and $0.3 million to the warrants (see Note 12). The Company recorded a debt discount of approximately $0.3 million for the difference between the face value of the 8% Convertible Debt and the amount allocated to the debt at the issuance date and is amortizing this discount over the 18-month term of the related debt.

 

  (c) On August 30, 2021, the Company purchased all of the outstanding membership interests in Pie Squared Holdings. The purchase price was funded through the issuance of an 8% secured, convertible promissory note with a face value of $1.0 million and a fair value of $1.2 million at the acquisition date. The note is convertible at any time, in whole or in part, at the holder’s option but includes a beneficial ownership blocker of 4.99%. The conversion price at any time is the volume weighted average price of the Company’s common stock the 30 trading days immediately prior to delivery of notice of conversion, less a discount of 15%; provided, however, that the conversion price has a floor of $0.50 per share and a cap of $2.00 per share. As of June 30, 2022, the note was convertible into 2,000,000 shares of common stock.
     
    Interest on the convertible promissory note is due quarterly and $0.5 million of principal is due on August 30, 2022. Any remaining unpaid/non-converted amount is due on August 30, 2023. The Company elected to measure the convertible promissory note at fair value, with changes in the fair value recorded within change in fair value of convertible promissory note in the condensed consolidated statements of operations. See Note 5 for additional information on the valuation of the convertible promissory note as of June 30, 2022.
     
  (d) On April 27, 2020, Amergent received a Paycheck Protection Program (“PPP”) loan in the amount of approximately $2.1 million. Due to the Spin-Off and Merger, Amergent was not publicly traded at the time of the loan application or funding. The note bears interest at 1% per year, matures in April 2022, and requires monthly interest and principal payments of approximately $0.1 million beginning in November 2020 and through maturity. The currently issued guidelines of the program allow for the loan proceeds to be forgiven if certain requirements are met. Any loan proceeds not forgiven will be repaid in full. The Company’s initial application for loan forgiveness in the full amount of the loan was denied, however, in March 2022, the U.S. SBA reversed its initial decision and will once again review the Company’s application for loan forgiveness. No assurance can be given as to the amount, if any, of forgiveness. The application for forgiveness allowed the Company to defer the timing of repayment until the forgiveness assessment is completed.
     
    On February 25, 2021, the Company received a second PPP loan in the amount of $2.0 million. Amergent was not listed on a national securities exchange at the time of the loan application or funding. The note bears interest at 1% per year, matures on February 25, 2026, and requires monthly principal and interest payments of approximately $45,000 beginning June 25, 2022 through maturity. During 2022, the Company applied for loan forgiveness in the full amount of the loan. No assurance can be given as to the amount, if any, of forgiveness. The application for forgiveness allowed the Company to defer the timing of repayment until the forgiveness assessment is completed.

 

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  (e) On August 4, 2020, the Company obtained two loans under the Economic Injury Disaster Loan (“EIDL”) assistance program from the U.S. SBA in light of the impact of the COVID-19 pandemic on the Company’s business. The principal amount of the loans is $0.3 million, with proceeds to be used for working capital purposes. Interest accrues at the rate of 3.75% per year. Total installment payments of $1,462, including principal and interest, are due monthly. The balance of principal and interest is payable over the next thirty years from the date of the promissory note (August 2050). There are no penalties for prepayment. Based upon guidance issued by the U.S. SBA on June 19, 2020, the EIDL loans are not required to be refinanced by the PPP loan. In March 2022, the U.S. SBA extended the deferral period for the EIDL payments for an additional 12 months. The Company’s installment payments will begin August 4, 2023.
     
  (f) The Company entered into a promissory note to repay a contractor for the build-out of a new Little Big Burger location. The note bears interest at 12% per year. In connection with and prior to the Merger and Spin-Off, on April 1, 2020, this note was assumed by Amergent. The Company is currently in default on this loan and a writ of garnishment was ordered against the Company in 2020 for approximately $0.4 million. The additional $0.1 million is included in accounts payable and accrued expenses at June 30, 2022 and December 31, 2021.
     
  (g) In February and March 2022, eight company-owned stores entered into notes payable to Toast Capital Loans. The terms of the notes require payment of 13.2% of daily credit card sales of the eight stores until the notes are paid in full. The terms of the notes are 270 days and the implied intertest rate is approximately 15% per year.

 

The Company’s various loan agreements contain financial and non-financial covenants and provisions providing for cross-default. The evaluation of compliance with these provisions is subject to interpretation and the exercise of judgment. Oz Rey has provided a waiver of certain financial covenants through April 30, 2023.

 

Maturities of our debt as of June 30, 2022 are presented below (in thousands):

 

Year ending December 31:   
2022 (remaining six months)  $3,397 
2023   2,383 
2024   4,579 
2025   547 
2026   98 
Thereafter   274 
Total debt maturities   11,278 
Less: discount on convertible debt   (244)
Less: fair value adjustment   (72)
Total debt  $10,962 

 

10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses are summarized as follows:

(in thousands)  June 30, 2022   December 31, 2021 
Accounts payable  $2,239   $2,544 
Accrued expenses   1,940    1,955 
Accrued taxes (VAT, sales, payroll, etc.)   2,236    2,149 
Accrued interest   292    196 
Accounts payable and accrued expenses, total  $6,707   $6,844 

 

As of June 30, 2022 and December 31, 2021, approximately $2.2 million and $2.0 million, respectively, of employee and employer payroll taxes and associated interest and penalties have been accrued but not remitted to certain taxing authorities by the Company. These accruals are for periods prior to 2019 for cash compensation paid and are reflected as a component of the accrued taxes line above. As a result, the Company is liable for such payroll taxes and any related penalties and interest. The Company will record an additional accrual for such payroll taxes upon receipt of notice from a relevant taxing authority. During the three and six months ended June 30, 2022, the Company increased its accrual for payroll taxes by $0.2 million. Upon the advice of our tax professionals, we are paying the trust fund portion of the outstanding tax accruals which represents the portion of taxes withheld from our employees but not remitted to the taxing authorities. For our locations that have permanently closed, our tax liability after paying the trust fund balance is approximately $0.8 million and is recorded within accrued taxes on our condensed consolidated balance sheet as of June 30, 2022. The taxing authorities have indicated that we are still liable for these amounts, however, since the locations are permanently closed and have no assets, they will stop active collection procedures on these amounts.

 

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As of June 30, 2022 and December 31, 2021, the Company had no accrued interest or penalties relating to any income tax obligations.

 

11. INCOME OR LOSS PER COMMON SHARE

 

The Company computes net income or 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 12, the potential conversion of the convertible debt, as described in Note 9, and share-based compensation awards, as described in Note 12, 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 convertible preferred stock and the convertible debt to the extent that the Series 2 convertible 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 convertible 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.

 

The following table summarizes the computation of basic and diluted net income per share for the three months ended June 30, 2021:

 

      
(in thousands, except share and per share data, restated) 

Three months ended

June 30, 2021

 
Basic net income per common share calculation:     
Net income attributable to common shareholders  $437 
Less: undistributed earnings to participating securities   (293)
Net income attributable to common shareholders, basic  $144 
Weighted average common shares outstanding, basic   15,321,571 
Net income per common share, basic  $0.01 
Diluted net income per common share calculation:     
Net income attributable to common shareholders  $437 
Less: undistributed earnings to participating securities   (293)
Net income attributable to common shareholders, diluted  $144 
Weighted average common shares outstanding, basic   15,321,571 
Warrants   1,959,054 
Weighted average common shares outstanding, diluted   17,280,625 
Net income per common share, diluted  $0.01 

 

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12. STOCKHOLDERS’ EQUITY

 

2020 Bridge Financing

 

Pursuant to a Securities Purchase Agreement dated February 7, 2020, the Company sold 1,500 shares of a new series of convertible preferred stock of Chanticleer (the “Series 2 Preferred”) to an institutional investor. In March 2020, an aggregate of 713 shares of Series 2 Preferred were converted into shares of common stock. In connection with the Merger, all remaining outstanding shares of the Series 2 Preferred were automatically cancelled and exchanged for substantially similar shares of preferred stock in Amergent. The shareholders of Chanticleer common stock received shares of Amergent on a 1 for 1 basis (spin-off shares) and received 1 share of Sonnet common stock for 26 shares of Chanticleer common stock held at the time of the Merger.

 

During the year ended December 31, 2021, the investors converted 637 shares of the Series 2 Preferred into 1,274,000 common shares and sold those common shares in the market. In addition, the investors sold their remaining 150 Series 2 Preferred to other investors. The shares sold to the investors no longer contain the True-Up Payment provision discussed below. The new investors converted 50 shares of Series 2 Preferred into 100,000 shares of common stock during May 2021, and 100 shares of Series 2 Preferred remain outstanding at December 31, 2021 and June 30, 2022.

 

The Series 2 Preferred is classified in the accompanying condensed consolidated balance sheets as temporary equity due to certain contingent redemption features which are outside the control of the Company.

 

Designations, rights and preferences of Series 2 Preferred:

 

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

 

True-Up Payment: Amergent was required to pay the original holder an amount in cash equal to the dollar value of 125% of the stated value of the Series 2 Preferred less the proceeds previously realized by the holder from the sale of all conversion and spin-off shares received by holder in Amergent, net of brokerage commissions and any other fees incurred by the holder in connection with the sale of any conversion shares or spin-off shares on April 1, 2021 (which period was extended). This True-Up Payment was settled in July 2021 with a payment of $0.1 million, and the cash previously held in escrow for repayment is no longer subject to restriction for this matter.

 

The Company determined that the True-Up Payment constituted a “make-whole” provision as defined by U.S. GAAP that was required to be settled in cash and, as such, was bifurcated from the host instrument, the Series 2 Preferred. It was accounted for as a derivative liability prior to settlement, with changes in fair value recorded in change in fair value of derivative liabilities in the condensed consolidated statement of operations. A $0.1 million increase in fair value was recorded for the three months ended June 30, 2021 and a $0.1 million decrease in fair value was recorded for the six months ended June 30, 2021.

 

Redemption: There are triggering events, as defined, that can cause the Series 2 Preferred to be redeemable at the option of the holder, some of which are outside the control of the Company.

 

Conversion at option of holder/ beneficial ownership limitation: The Series 2 Preferred is convertible at the option of holder at the lesser of (i) $1.00 (subject to adjustment for forward and reverse stock splits, recapitalizations and the like) or (ii) 90% of the five day average volume weighted average price of the common, provided the conversion price has a floor of $0.50 (subject to adjustment for forward and reverse stock splits, recapitalizations and the like). Conversion is subject to a beneficial ownership limitation of 4.99%. This limitation was increased by the holder to 9.99% prior to the Merger.

 

Liquidation preference: Upon any liquidation, dissolution or winding-up of the Company, the holder is entitled to receive out of the assets, whether capital or surplus, an amount equal to 125% of the stated value plus any default interest and any other fees or liquidated damages then due and owing thereon under the Certificate of Designations, for each share of Series 2 Preferred before any distribution or payment to the holders of common stock.

 

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

 

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Triggering events: Breach of the Company’s obligations will trigger a redemption event.

 

Anti-dilution: The Series 2 Preferred provides for customary adjustments in the event of dividends or stock splits and anti-dilution protection.

 

Warrants

 

At June 30, 2022, the outstanding warrants consisted of the following:

 

Date Issued  Number of Warrants   Exercise Price   Expiration Date
April 1, 2020   2,462,600   $0.125   April 1, 2030
April 1, 2020   462,600   $0.500   April 1, 2030
March 30, 2020   350,000   $1.250   March 30, 2025
August 17, 2020   134,000   $1.250   August 17, 2025
March 15, 2022   250,000   $0.500   March 15, 2027
March 21, 2022   250,000   $0.500   March 21, 2027
March 22, 2022   250,000   $0.500   March 22, 2027
March 24, 2022   600,000   $0.500   March 24, 2027
    4,759,200         

 

A summary of the warrant activity during the six months ended June 30, 2022 is presented below:

  

Number of

Warrants

  

Weighted

Average

Exercise Price

  

Weighted

Average

Remaining

Contractual

Term (years)

 
Outstanding at January 1, 2022   3,409,200   $0.34    7.6 
Granted   1,350,000   $0.50    5.0 
Outstanding at June 30, 2022   4,759,200   $0.38    6.4