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, 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: 000-56160

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 November 15, 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 September 30, 2022 (Unaudited) and December 31, 2021	5
	Condensed Consolidated Statements of Operations (Unaudited) – For the three and nine months ended September 30, 2022 and 2021	6
	Condensed Consolidated Statements of Comprehensive Loss (Unaudited) – For the three and nine months ended September 30, 2022 and 2021	7
	Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit (Unaudited) – For the three and nine months ended September 30, 2022 and 2021	8
	Condensed Consolidated Statements of Cash Flows (Unaudited) – For the nine months ended September 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	26
Item 3:	Quantitative and Qualitative Disclosures about Market Risk	32
Item 4:	Controls and Procedures	33

Part II	Other Information	34

Item 1:	Legal Proceedings	34
Item 1A:	Risk Factors	34
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3:	Defaults Upon Senior Securities	34
Item 4:	Mine Safety Disclosures	34
Item 5:	Other Information	34
Item 6:	Exhibits	35

Signatures		36

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 and 2023, 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 second 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.

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

Amergent Hospitality Group Inc. and Subsidiaries

Condensed Consolidated Balance Sheets


	September 30, 2022			December 31, 2021
(in thousands except share and per share data)	(Unaudited)
ASSETS
Current assets:
Cash	$	704		$	646
Restricted cash		—			1,672
Investments		13			50
Accounts and other receivables		861			865
Inventories		205			182
Prepaid expenses and other current assets		372			360
TOTAL CURRENT ASSETS		2,155			3,775
Property and equipment, net		3,222			3,115
Operating lease assets		7,630			8,021
Intangible assets, net		2,932			3,129
Goodwill		7,810			7,810
Investments		16			16
Deposits and other assets		355			352
TOTAL ASSETS	$	24,120		$	26,218

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable and accrued expenses	$	8,122		$	6,844
Current portion of long-term debt and notes payable (includes debt measured at fair value of $893 and debt discounts of $196 at September 30, 2022)		3,648			3,264
Current portion of operating lease liabilities		4,050			4,599
Deferred grant income		—			1,545
TOTAL CURRENT LIABILITIES		15,820			16,252

Operating lease liabilities, net of current portion		8,239			8,644
Contract liabilities		72			757
Deferred tax liabilities		150			150
Long-term debt and notes payable, net of current portion (includes debt measured at fair value d $599 December 31, 2021)		7,745			6,593
TOTAL LIABILITIES		32,026			32,396

Commitments and contingencies (see Note 12)		-			-

Convertible Preferred Stock: Series 2: $1,000 stated value; authorized 1,500 shares; 100 issued and outstanding at both September 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 September 30, 2022 and December 31, 2021		2			2
Additional paid-in-capital		93,162			92,882
Accumulated deficit		(99,865	)		(97,963	)
Total Amergent Hospitality Group Inc. Stockholders’ Deficit		(6,701	)		(5,079	)
Non-controlling interests		(1,263	)		(1,157	)
TOTAL STOCKHOLDERS’ DEFICIT		(7,964	)		(6,236	)
TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT	$	24,120		$	26,218

See accompanying notes to the condensed consolidated financial statements

Amergent Hospitality Group Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited)


	Three months ended						Nine months ended
	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
(in thousands except share and per share data)				(Restated)						(Restated)
Revenue:
Restaurant sales, net	$	5,176		$	5,627		$	15,257		$	15,288
Gaming income, net		109			136			357			304
Franchise income		116			116			1,013			315
Total revenue		5,401			5,879			16,627			15,907
Expenses:
Restaurant cost of sales		1,675			1,850			4,868			4,783
Restaurant operating expenses		4,162			3,400			11,320			10,100
General and administrative expenses		1,206			1,381			4,348			3,756
Asset impairment charges		—			—			—			1,288
Depreciation and amortization		170			214			593			673
Employee retention credit and other grant income		(373	)		(1,232	)		(2,208	)		(2,705	)
Total expenses		6,840			5,613			18,921			17,895
Operating (loss) income		(1,439	)		266			(2,294	)		(1,988	)
Other income (expense):
Interest expense		(230	)		(166	)		(641	)		(482	)
Change in fair value of derivative liabilities		—			—			—			119
Change in fair value of investment		(22	)		(100	)		(38	)		(221	)
Change in fair value of convertible promissory note		35			—			206			—
Gain on extinguished/settled lease liabilities		—			67			256			385
Gain on extinguished trade payable		—			—			161			—
Other income		33			(9	)		344			165
Total other income		(184	)		(208	)		288			(34	)
(Loss) income before income taxes		(1,623	)		58			(2,006	)		(2,022	)
Income tax expense		—			(45	)		(2	)		(45	)
Consolidated net (loss) income		(1,623	)		13			(2,008	)		(2,067	)

Less: Net (income) loss attributable to non-controlling interests		150			(5	)		107			99
Net (loss) income attributable to Amergent Hospitality Group Inc.	$	(1,473	)	$	8		$	(1,901	)	$	(1,968	)

Net (loss) income attributable to Amergent Hospitality Group Inc. per common share, basic	$	(0.09	)	$	0.00		$	(0.12	)	$	(0.13	)
Net (loss) income attributable to Amergent Hospitality Group Inc. per common share, diluted	$	(0.09	)	$	0.00		$	(0.12	)	$	(0.13	)

Weighted average shares outstanding, basic		15,706,736			15,685,540			15,706,736			15,167,688
Weighted average shares outstanding, diluted		15,706,736			17,685,540			15,706,736			15,167,688

See accompanying notes to the condensed consolidated financial statements

Amergent Hospitality Group Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)


	Three months ended						Nine months ended
	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
(in thousands)				(Restated)						(Restated)
Net (loss) income attributable to Amergent Hospitality Group Inc.	$	(1,473	)	$	8		$	(1,901	)	$	(1,968	)
Foreign currency translation loss		—			(34	)		—			(19	)
Comprehensive loss	$	(1,473	)	$	(26	)	$	(1,901	)	$	(1,987	)

See accompanying notes to the condensed consolidated financial statements

Amergent Hospitality Group Inc. and Subsidiaries

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit

Three and Nine months Ended September 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	)
Share-based compensation expense		—		—		—		—		6		—			—		—			6
Net loss		—		—		—		—		—		(1,473	)		—		(150	)		(1,623	)
Balance, September 30, 2022		100	$	58		15,706,736	$	2	$	93,162	$	(99,865	)	$	—	$	(1,263	)	$	(7,964	)


	(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	)
Issuance of common stock for services		—			—			50,000		—		27		—			—			—			27
Share-based compensation expense		—			—			—		—		15		—			—			—			15
Foreign currency translation		—			—			—		—		—		—			(34	)		—			(34	)
Non-controlling interest distributions		—			—			—		—		—		—			—			(45	)		(45	)
Net-income (loss)		—			—			—		—		—		8						5			13
Balance, September 30, 2021		100		$	58			15,706,736	$	2	$	92,876	$	(96,554	)	$	(44	)	$	(1,115	)	$	(4,835	)

See accompanying notes to the condensed consolidated financial statements

Amergent Hospitality Group Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)


	Nine months ended
	September 30, 2022			September 30, 2021
(in thousands)				(Restated)
Cash flows from operating activities:
Net loss	$	(2,008	)	$	(2,067	)
Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation and amortization		593			673
Amortization of operating lease assets		994			468
Asset impairment charges		—			1,288
Gain on extinguished/settled lease liabilities		(256	)		(385	)
Gain on extinguished trade payable		(161	)		—
Share-based compensation		17			15
Change in fair value of investment		38			221
Change in fair value of convertible promissory note		(206	)		—
Amortization of debt discount		245			134
Issuance of common stock for services		—			27
Change in fair value of derivative liabilities		—			(119	)
Change in operating assets and liabilities:
Accounts and other receivables		4			255
Inventories		(23	)		38
Prepaid expenses and other assets		(15	)		(4	)
Accounts payable and accrued expenses		1,334			(2,283	)
Deferred grant income		(1,545	)		(51	)
Deferred rent		—			(42	)
Derivative liability		—			(66	)
Operating lease liabilities		(1,557	)		(861	)
Contract liabilities		(685	)		(54	)
Net cash flows used in operating activities		(3,231	)		(2,814	)

Cash flows from investing activities:
Cash and restricted acquired in connection with acquisition of PizzaRev		—			2,071
Purchase of property and equipment		(230	)		(32	)
Proceeds from sale of investments		—			118
Net cash flows used in investing activities		(230	)		2,157

Cash flows from financing activities:
Proceeds from long-term debt and notes payable		2,147			2,000
Payments of long-term debt and notes payable		(292	)		(54	)
Payment of financing cost		(8	)		—
Distribution to non-controlling interest					(45	)
Net cash flows provided by financing activities		1,847			1,901
Effect of exchange rate changes on cash		—			(13	)
Net (decrease) increase in cash and restricted cash, including cash classified as current assets held for sale		(1,614	)		1,231
Less: cash classified in current assets held for sale		—			(111	)
Net increase in cash and restricted cash		(1,614	)		1,121
Cash and restricted cash, beginning of period		2,318			1,929
Cash and restricted cash, end of period	$	704		$	3,050

Supplemental cash flow information:
Cash paid for interest and income taxes
Interest	$	494		$	321
Income taxes	$	28		$	—

Non-cash operating, investing and financing activities:
Conversion of Preferred Series 2 stock to common stock	$	—		$	401
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	$	273		$	—
Issuance of convertible promissory note as part of PizzaRev acquisition		—			1,194
Initial value of ROU asset and liability recorded at inception		—			131

Details of end of period cash and restricted cash:
Cash	$	704		$	1,101
Restricted cash		—			1,949
Total cash and restricted cash	$	704		$	3,050

See accompanying notes to the condensed consolidated financial statements

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, (see Note 14). 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 nine-month periods ended September 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.

Liquidity, Capital Resources and Going Concern

As of September 30, 2022, the Company’s cash balance was $0.7 million, its working capital deficiency was $13.7 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.

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 nine months ended September 30, 2022 and determined that it was eligible for additional credits related to 2021 wages. As of each of September 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 nine months ended September 30, 2022 the Company recognized $-0- and $.7 million, and for the three and nine months ended September 30, 2021, the Company recognized $1.2 million and $2.7 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 $-0- and $128,000 for the three and nine months ended September 30, 2021, respectively, of which approximately $-0- and $41,000 and $112,000 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 September 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 nine months ended September 30, 2022, the Company recognized $0.4 million and $1.5 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. As of September 30, 2022 all RRF funds were utilized.

The Company periodically would submit to the escrow agent for the acquisition the planned uses of these funds, and the sellers had the right to review the planned uses to determine whether, in the sellers’ opinion, the planned uses met the criteria of “eligible uses” under the RRF. If determined to not meet such criteria, then the escrow agent would not distribute that portion of the request. 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 nine months ended September 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 September 30, 2022 and 2021 or the nine months ended September 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
September 30, 2022
Assets (Note 6)
Common stock of Sonnet	$	16	$	—	$	—	$	16
Liabilities (Note 9)
Convertible note payable	$	—	$	—	$	893	$	893


(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.

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 Black-Scholes model and the following assumptions as of September 30, 2022:

Volatility		140.60	%
Risk free rate		3.92	%
Stock price	$	0.08
Credit spread		25.70	%

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)	Nine months ended September 30, 2022
Balance at January 1, 2022	$	1,099
Change in fair value		(206	)
Balance at September 30, 2022	$	893

6. INVESTMENTS

Investments consist of the following:

SCHEDULE OF INVESTMENT


(in thousands)	September 30, 2022		December 31, 2021
Common stock of Sonnet, at fair value ^(a)	$	13	$	50
Chanticleer Investors, LLC, at cost ^(b)		16		16
Total	$	29	$	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 September 30, 2022, 8,718 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 nine months ended September 30, 2022 in our condensed consolidated statement of operations.

7. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consists of the following:


(in thousands)	September 30, 2022			December 31, 2021
Leasehold improvements	$	5,772		$	5,511
Restaurant furniture and equipment		2,665			2,768
Construction in progress		—			20
Office and computer equipment		37			33
Office furniture and fixtures		—			57
Property,plant and equipment, gross		8,474			8,389
Accumulated depreciation and amortization		(5,252	)		(5,274	)
Property, plant and equipment, net	$	3,222		$	3,115

Through September 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 nine months ended September 30, 2021, which is included in asset impairment charges in our condensed consolidated statements of operations. The impairment recognized during the nine months ended September 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 nine months ended September 30, 2022.

We recognized depreciation expense of $0.2 million and $0.4 million during the three and nine months ended September 30, 2022, respectively, and $0.3 million and $0.8 million during the three and nine months ended September 30, 2021, respectively.

8. INTANGIBLE ASSETS, NET

Goodwill

A roll forward of goodwill is as follows:

SCHEDULE OF GOODWILL


(in thousands)	Nine months Ended September 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 September 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.

Other Intangible Assets

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

(in thousands)		September 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			(1,566	)		(1,369	)
Intangible assets, net		$	2,932		$	3,129

As of September 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 nine months ended September 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 nine months ended September 30, 2022.

We recognized amortization expense of $0.1 million and $0.2 million during the three and nine months ended September 30, 2022, respectively, and $0.01 million and $0.3 million during the three and nine months ended September 30, 2021, respectively.

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

Year ending December 31:
2022 (remaining three months)	$	41
2023		164
2024		164
2025		164
2026		110
Amortization Expense, net	$	643

9. LONG-TERM DEBT AND NOTES PAYABLE

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

SCHEDULE OF DEBT AND NOTES PAYABLE

(in thousands)	September 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)		893			1,099
PPP loans (d)		4,109			4,109
EIDL loans (e)		300			300
Contractor note (f)		348			348
Notes payable (g)		545			—
Total Debt		11,583			9,894
Less: discount on convertible debt (a), (b)		(190	)		(37	)
Total Debt, net of discount	$	11,393		$	9,857

Current portion of long-term debt and notes payable	$	3,648		$	3,264
Long-term debt and notes payable, less current portion	$	7,745		$	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 September 30, 2022, $2.1 million of the 10% Convertible Debt was convertible into approximately 20,500,000 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.

	(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 September 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 11). 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 September 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 March 31, 2023. 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 September 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 bore interest at 1% per year, would have matured in April 2022, and required monthly interest and principal payments of approximately $0.1 million beginning in November 2020 and through maturity. The currently issued guidelines of the program allowed for the loan proceeds to be forgiven if certain requirements were met. Any loan proceeds not forgiven would have been 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. On November 15, 2022 the Company received notice from the SBA that this loan and accrued interest was forgiven in full.

		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.

	(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 September 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.

		In August 2022, the Company entered into a Future Revenue Sales Agreement with Sprout Funding which is being treated as a note payable. The Company received a net $0.2 million and the terms of the note require 180 payments of $1,359 for each working day of the week. The terms of the note are open ended until all amounts under the note are repaid with an expected maturity date of February 2024. The implied interest rate is 80%.

		In August 2022, the Company received a loan from a related party of $0.3 million. The lending entity is an entity in which the Company’s Chairman and Chief Executive Officer has an ownership interest and serves as the Chief Executive Officer. The terms of the note require payment at December 15, 2022 and 1% interest.

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 September 30, 2022 are presented below (in thousands):

SCHEDULE OF FUTURE MINIMUM PAYMENTS

Year ending December 31:
2022 (remaining three months)	$	1,204
2023		2,876
2024		4,572
2025		540
2026		90
Thereafter		300
Forgiven PPP Loan		2,109
Total debt maturities		11,691
Less: discount on convertible debt		(190	)
Less: fair value adjustment		(107	)
Total debt	$	11,393

10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses are summarized as follows:

(in thousands)	September 30, 2022		December 31, 2021
Accounts payable	$	3,340	$	2,544
Accrued expenses		2,140		1,955
Accrued taxes (VAT, sales, payroll, etc.)		2,292		2,149
Accrued interest		350		196
Accounts payable and accrued expenses, total	$	8,122	$	6,844

As of September 30, 2022 and December 31, 2021, approximately $2.1 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 nine months ended September 30, 2022, the Company increased its accrual for payroll taxes by $0.1 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 September 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.

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

11. 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 September 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 September 30, 2021 and a $0.1 million decrease in fair value was recorded for the nine months ended September 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.

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 September 30, 2022, the outstanding warrants consisted of the following:

SCHEDULE OF OUTSTANDING WARRANTS

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

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

SUMMARY OF WARRANTS ACTIVITY

	Number of Warrants		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)
Outstanding at January 1, 2022		3,409,200	$	0.34		7.2
Granted		1,350,000	$	0.50		4.5
Outstanding at September 30, 2022		4,759,200	$	0.38		6.1

Exercisable at September 30, 2022		4,759,200	$	0.38		6.1

As discussed in Note 9, 1,350,000 warrants were granted in March 2022 in connection with the issuance of 8% Convertible Debt and are equity-classified in the condensed consolidated financial statements. The net proceeds from the issuance were allocated to the 8% Convertible Debt and the warrants based on their relative fair values at the issuance date, resulting in an allocation of approximately $0.3 million to the warrants. Assumptions used in calculating the fair value of the warrants at the issuance date include the following:

Stock price per share	$	0.37 – 0.40
Term		5.0 years
Expected volatility		90.00	%
Divided yield		—
Risk-free interest rate		2.10% – 2.39	%

Options

In August 2021, the Company adopted the 2021 Inducement Plan (the “Plan”). Under the 2021 Inducement Plan, the Company can grant stock options and stock awards. There are 500,000 shares of common stock reserved for issuance under the Plan. As of September 30, 2022, 50,000 shares remained available for future grants.

In November 2021, the Company adopted the 2021 Equity Incentive Plan (the “Incentive Plan”). Under the 2021 Incentive Plan, the Company can grant stock options and stock awards. The stockholders of the Company approved the Incentive Plan on December 30, 2021. There are 2,000,000 shares of common stock reserved for issuance under the Incentive Plan. As of September 30, 2022, 2,000,000 shares remained available for future grants.

Share-based awards generally vest over a period of three years, and share-based awards that lapse or are forfeited are available to be granted again. The contractual life of all share-based awards is five years. The expiration date of the outstanding share-based awards is August 2026.

During the three and nine months ended September 30, 2022, the Company recorded share-based compensation expense of approximately $6,000 and $17,000, respectively, in general and administrative expenses.

The following table summarizes the share-based awards as of September 30, 2022:

SCHEDULE OF SHARE BASED AWARDS

	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)
Outstanding at September 30, 2022		450,000	$	1.38		3.8

Exercisable at September 30, 2022		250,000	$	1.72		3.8

12. COMMITMENTS AND CONTINGENCIES

Indemnification Agreement and Tail Policy

On March 25, 2020, pursuant to the requirements of the Merger Agreement, Chanticleer, Sonnet and Amergent entered into an indemnification agreement (“Indemnification Agreement”) providing that Amergent will fully indemnify and hold harmless each of Chanticleer and Sonnet, and each of their respective directors, officers, stockholders and managers who assumes such role upon or following the closing of the Merger against all actual or threatened claims, losses, liabilities, damages, judgments, fines and reasonable fees, costs and expenses, including attorneys’ fees and disbursements, incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, administrative, investigative or otherwise, related to the Spin-Off business prior to or in connection with its disposition to Amergent. The Indemnification Agreement expires on March 25, 2026.

In addition, pursuant to the Merger Agreement, prior to closing of the Merger, the Spin-Off entity acquired a tail insurance policy in a coverage amount of $3.0 million, prepaid in full by the Spin-Off entity, at no cost to the indemnitees, and effective for at least six years following the consummation of the disposition, covering the Spin-Off entity’s indemnification obligations to the indemnitees (referred to herein as the “Tail Policy”). No claims have arisen to date, and the Company does not anticipate that any potential liability would exceed the insured amount.

Legal Proceedings

Litigation related to leased properties

During 2021 and the three and nine months ended September 30, 2022, the Company was in arrears on rent due on several of its leases. As a result, the Company has pending litigation related to four sites, all of which have permanently closed. The outcome of this litigation could result in the permanent closure of additional restaurant locations as well as the possibility of the Company being required to pay interest and damages, modify certain leases on unfavorable terms and could result in material impairments to the Company’s assets. See Leases section below for discussion of past due rent on abandoned locations.

No amounts in addition to contracted rent that is due have been accrued as of September 30, 2022 or December 31, 2021 in the accompanying condensed consolidated balance sheets as management does not believe the outcome will result in additional liabilities to the Company; however, there can be no guarantees.

From time to time, the Company may be involved in other legal proceedings and claims that have arisen in the ordinary course of business are generally covered by insurance. As of September 30, 2022, the Company does not expect the amount of ultimate liability with respect to these matters to be material to the Company’s consolidated financial condition, results of operations or cash flows.

Leases

The Company’s leases typically contain rent escalations over the lease terms. The Company recognizes expense for these leases on a straight-line basis over the lease terms. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce our right-of-use asset related to the leases. These incentives are amortized through the right-of-use asset as reductions of expense over the lease terms.

Some of the Company’s leases include rent escalations based on inflation indexes and fair market value adjustments. Certain leases contain contingent rental provisions that include a fixed base rent plus an additional percentage of the restaurant’s sales in excess of stipulated amounts. Operating lease liabilities are calculated using the prevailing index or rate at lease commencement. Subsequent escalations in the index or rate and contingent rental payments are recognized as variable lease expenses. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. As part of the lease agreements, the Company is also responsible for payments regarding non-lease components (common area maintenance, operating expenses, etc.) and percentage rent payments based on monthly or annual restaurant sales amounts which are considered variable costs and are not included as part of the lease liabilities.

Related to the adoption of Leases Topic 842, our policy elections were as follows:

Short-term policy

The Company has elected the short-term lease recognition exemption for all applicable classes of underlying assets. Leases with an initial term of 12 months or less, that do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise, are not recorded on the balance sheet.

Supplemental balance sheet information related to leases was as follows (in thousands):

SCHEDULE OF OPERATING LEASE INFORMATION

Operating Leases	Classification	September 30, 2022		December 31, 2021
Right-of-use assets	Operating lease assets	$	7,630	$	8,021

Current lease liabilities	Current operating lease liabilities	$	4,050	$	4,599
Non-current lease liabilities	Long-term operating lease liabilities		8,239		8,644
		$	12,289	$	13,243

Lease term and discount rate were as follows:

	September 30, 2022			December 31, 2021
Weighted average remaining lease term (years)		6.2			6.7
Weighted average discount rate		7.8	%		8.1	%

As of September 30, 2021, we performed an analysis of the recoverability of our right-of-use assets. Based on the analysis, we recorded an impairment of approximately $0.7 million for the nine months ended September 30, 2021, which is included in asset impairment charges in our condensed consolidated statements of operations. The impairment recognized during the nine months ended September 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. Negative impacts to the operating results and cash flows varied significantly at the store level, where some stores operated at a reduced capacity and several stores were permanently closed. There were no indicators of impairment related to our right-of-use assets during the nine months ended September 30, 2022. However, as discussed in Note 13, certain store locations were closed in the subsequent fourth quarter of 2022 and management expects to record impairments on certain right-of-use assets during that period.

During each of the nine months ended September 30, 2022 and 2021, approximately $0.3 million of lease liabilities were derecognized due to the Company negotiating the cancellation of its obligations under certain lease agreements, which is included in gain on extinguished/settled lease liabilities in our condensed consolidated statements of operations. The cancellations resulted from the COVID-19 pandemic. The Company had lease liabilities of $2.7 million related to abandoned leases as of September 30, 2022. These lease liabilities are included in current operating lease liabilities in our condensed consolidated balance sheets.

During the nine months ended September 30, 2022, the Company amended certain leases and changed its assumptions regarding the exercise of a renewal option, which have been accounted for as lease modifications. The operating lease assets and liabilities were remeasured at the modification dates, resulting in an increase of $0.6 million during the nine months ended September 30, 2022 to both the right-of-use assets and lease liabilities. There were no lease modifications during the nine months ended September 30, 2021.

Rent expense of approximately $0.6 million and $1.7 million was incurred during the three and nine months ended September 30, 2022, respectively. Rent expense of approximately $0.6 million and $1.8 million was incurred during the three and nine months ended September 30, 2021, respectively, of which approximately $0.1 million was variable.

Maturities of our operating lease liabilities as of September 30, 2022 are presented below (in thousands):

Year ending December 31:
2022 (remaining three months)	$	689
2023		2,645
2024		2,654
2025		2,501
2026		2,097
Thereafter		5,162
Total remaining lease payments		15,748
Less: imputed interest		(3,459	)
Total lease liabilities	$	12,289

PPP Loan

As discussed in Note 9, the Company received two PPP loans totaling $4.1 million, which were established under the CARES Act and administered by the U.S. SBA. On November 15, 2022, the Company received notice from the SBA that the first PPP loan in the amount of $2.1 million had been fully forgiven with accrued interest. The second PPP loan in the amount of $2.0 million is being reviewed by the SBA. The application for the PPP loans requires the Company to, in good faith, certify that the current economic uncertainty made the loan requests necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account current business activity and the Company’s ability to access other sources of liquidity sufficient to support the ongoing operations in a manner that is not significantly detrimental to the business. The receipt of funds from the PPP loans and forgiveness of the PPP loans is dependent on the Company having initially qualified for the PPP loans and qualifying for the forgiveness of such PPP loans based on funds being used for certain expenditures such as payroll costs and rent, as required by the terms of the PPP loans. There is no assurance that the Company’s obligation under the PPP loans will be forgiven. If the PPP loans are not forgiven, the Company will need to repay the PPP loans over the applicable deferral period.

Presently, the U.S. SBA and other governmental communications have indicated that all loans in excess of $2.0 million will be subject to audit and that those audits could take up to seven years to complete. If the U.S. SBA determines that the PPP loans were not properly obtained and/or expenditures supporting forgiveness were not appropriate, the Company would need to repay some or all of the PPP loans and record additional expense which could have a material adverse impact on the business, financial condition and results of operations in a future period.

RRF

As discussed in Note 3, Pie Squared Holdings received an approximately $10.0 million grant under the RRF and the Company assumed the risks and rewards related to the grant through the acquisition of Pie Squared Holdings. If it is determined that Pie Squared Holdings obtained the grant improperly or the disbursement of such grant monies was not for “eligible uses,” then the Company would be responsible for the ramifications of such actions including the repayment of the $10.0 million of grant monies, among other items.

13. SUBSEQUENT EVENTS

The Company has evaluated subsequent events from the balance sheet date through the date at which the condensed consolidated financial statements were available to be issued, and there are no items requiring disclosure other than the following:

In October and November 2022, the Company received related party advances in the aggregate of $0.3 million from an entity in which the Chief Financial Officer serves as an officer but has no ownership interest.

In November 2022, the Company received related party advances in the aggregate of $0.2 million from an entity in which our Chairman and Chief Executive Officer has an ownership interest and serves as the Chief Executive Officer. This note and the previous note received in August 2022 have a maturity date of December 15, 2022.

At the end of October and through November 30, 2022, the Company closed five stores.

	●	A PizzaRev store was closed at the expiration of the lease.
	●	A LBB store in Portland Orgon was closed due to operational and safety concerns. This store was reopened in June but the situation in the area the store is located does not allow for the store to operate safely at nighttime.
	●	A LBB store located in Seattle Washington, an ABC store located in New York and a PizzeRev store located in California were closed due to the stores not being cashflow positive.

During the fourth quarter of 2022, the Company will review for impairment the right-of-use assets and fixed assets in these stores. The right-of-use assets and fixed assets for these locations at September 30, 2022 was $2.8 million.

The Board of Directors of the Company have set December 30, 2022, for the annual meeting of stockholders.

14. RESTATEMENT OF PREVIOUSLY ISSUED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company, while undergoing the audit of its consolidated financial statements as of December 31, 2021 and for the year then ended, determined that it had over-depreciated certain assets from January 1, 2021 through September 30, 2021 and had incorrectly stated the UK subsidiary’s balances as of and for the three and nine month periods ended September 30, 2021. This impacted the previously reported amounts for cash, property and equipment, intangible assets, accounts payable and accrued expenses, restaurant sales, restaurant cost of sales, restaurant operating expenses, and depreciation and amortization, among other line items, in the condensed consolidated interim financial statements.

The following tables set forth the effects of the adjustment on affected items within the Company’s previously reported Condensed Consolidated Statements of Operations: