AMERGENT HOSPITALITY GROUP, INC.
The following discussion and analysis of our financial condition and results of
operations should be read together with our financial statements and the related
notes and the other financial information included elsewhere in this Quarterly
Report on Form 10-Q ("Report"). This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including those discussed below and elsewhere in this
Report, particularly those under "Risk Factors."
Overview
As ofSeptember 30, 2021 , we operated and franchised a system-wide total of 39 fast casual restaurants, of which 30 were company-owned and 18 were owned and operated by franchisees under franchise agreements. During the nine months endedSeptember 30, 2021 , there was one company-owned restaurant that was permanently closed because of the COVID-19 pandemic.American Burger Company ("ABC") is a fast-casual dining chain consisting of 3 locations inNorth Carolina andNew York .ABC is known for its diverse menu featuring fresh salads, customized burgers, milk shakes, sandwiches, and beer and wine.
Little Big Burger ("LBB") was acquired inSeptember 2015 and consists of 16 company-owned locations in thePortland, Oregon ,Seattle, Washington , andCharlotte, North Carolina areas. The newest location at theUniversity of Oregon was acquired inAugust 2021 and will become operational inDecember 2021 . Of the company-owned restaurants, 8 of those locations are operated under partnership agreements with investors where we control the management and operations of the stores, and the partner supplied the capital to open the store in exchange
for a non-controlling interest.
As ofSeptember 30, 2021 , we operated 1 Hooters full-service restaurant in theUnited Kingdom . OnOctober 8, 2021 , we soldWest End Wings Limited (UK ), the Company's Hooters restaurant located inNottingham, England , toHard Four Consultancy Limited (UK ) for the final purchase price of £518,295 (approximately$705,710 ). Accordingly, the assets and liabilities ofWest End Wings Limited (UK ) are presented in the condensed consolidated balance sheet as "held for sale."Hooters of America redeemed a portion of the Company's ownership interest in the entity and paid$349,293 to the Company inOctober 2021 . After the redemption, the Company's effective economic interest inHooters of America was less than 1%. Recent Developments PPP Loan OnMarch 27, 2020 ,Congress passed "The Coronavirus Aid, Relief, and Economic Security Act" (CARES Act), which included the "Paycheck Protection Program" (PPP) for small businesses. OnApril 27, 2020 , Amergent received a PPP loan of$2.1 million . Due to the Spin-Off and Merger, Amergent was not publicly traded at the time of the loan application or funding. The note bears interest at 1% per year, matures inApril 2022 , and requires monthly interest and principal payments of approximately$119,000 beginning inNovember 2020 and through maturity.
On
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 applied for forgiveness of the first loan and the
application is under review by the government agency administering the PPP. 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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Employee Retention Credit
The Employee Retention Credit ("ERC") under the CARES Act is a refundable tax
credit which encourages businesses to keep employees on the payroll during the
COVID-19 pandemic. Eligible employers can qualify for up to $7,000 of credit for
each employee based on qualified wages paid after December 31, 2020 and before
January 1, 2022 . Qualified wages are the wages paid to an employee for the time
that the employee is not providing services due to an economic hardship,
specifically, either (1) a full or partial suspension of operations by order of
a governmental authority due to COVID-19, or (2) a significant decline in gross
receipts. The Company recognized $1,178,644 and $2,651,999 of ERC as a
contra-expense in the condensed consolidated and combined statements of
operations for the three and nine months ended September 30, 2021 , respectively.
Acquisition
OnAugust 30, 2021 , the Company purchased all of the outstanding membership interests inPie Squared Holdings pursuant to a Unit Purchase Agreement (Purchase Agreement).Pie Squared Holdings , directly and through its four wholly owned subsidiaries, owns, operates and franchises pizza restaurants operating under the tradename PizzaRev. The PizzaRev stores consist of three company owned stores and nine franchised locations. The purchase price is an 8% secured, convertible promissory note (Note) with a face value of$1,000,000 and a fair value of$1,194,000 . Transaction costs of$190,000 were incurred in connection with the acquisition and charged to selling, general and administrative expenses in the condensed consolidated statement of operations and comprehensive income (loss) for the three-month and nine- month periods endedSeptember 30, 2021 .
The American Rescue Plan Act established theRestaurant Revitalization Fund (RRF) to provide funding to help restaurants and other eligible businesses keep their doors open. This program will provide restaurants with funding equal to their pandemic-related revenue loss up to$10 million per business and no more than$5 million per physical location. The Company recognized$51,187 of RRF as a contra-expense in the condensed consolidated and combined statements of operations for the three and nine months endedSeptember 30, 2021 , respectively.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
Our results of operations are summarized below:
Three Months Ended
September 30, 2021 September 30, 2020
% of
Amount % of Revenue* Amount Revenue* % Change
Restaurant sales, net $ 6,106,261 96.0 % $ 4,509,082 95.9 % 35.4 %
Gaming income, net 136,135 2.2 % 107,403 2.3 % 26.8 %
Franchise income 116,179 1.8 % 85,666 1.8 % 35.6 %
Total revenue 6,358,575 4,702,151
Expenses
Restaurant cost of sales 2,031,666 33.2 % 1,498,922 33.2 % 35.5 %Restaurant operating expenses 3,674,755 60.2 %
3,448,843 76.5 % 6.6 % General and administrative expenses 1,394,766 21.9 % 1,255,918 26.7 % 11.1 % Asset impairment charge - - % 1,136,129 24.2 % (100.0 )%
Depreciation and amortization 350,599 5.5 % 277,999 5.9 % 26.1 % Employee retention credit (1,229,831 ) (19.3 )% - - % 100 .0% Total expenses 6,221,955 97.9 % 7,617,811 162.0 % (18.3 )% Operating income (loss) 136,620 (2,915,660 ) Other (expense) income: Interest expense (165,775 ) (2.6 )% (177,420 ) (3.8 )% (6.6 )% Change in fair value of derivative liabilities - - % (5,841,517 ) (124.2 )% (100.0 )% Change in fair value of investment (100,422 ) (1.6 )% (199,154 ) (4.2 )% (49.6 )% Debt extinguishment expense - - % - - % - % Other income (expense) 18,203 0.3 % (25,404 ) (0.5 )% (171.7 )% Gain on extinguished lease liabilities 66,821 1.0 % - - % 100 % Total other income (expense) (181,173 ) (6,243,495 ) Net loss before income taxes (44,553 )
(9,159,155 ) Income tax expense (44,637 ) (0.7 )% (28,473 ) (0.6 )% 56.8 % Consolidated net loss$ (89,190 ) $ (9,187,628 ) 31 Nine Months Ended September 30, 2021 September 30, 2020 Amount % of Revenue* Amount % of Revenue* % Change Restaurant sales, net$ 15,288,320 96.1 %$ 13,881,380 97.0 % 10.1 % Gaming income, net 304,173 1.9 % 236,615 1.7 % 28.6 % Franchise income 314,603 2.0 % 183,864 1.3 % 71.1 % Total revenue 15,907,096 14,301,859 Expenses Restaurant cost of sales 4,782,780 31.3 % 4,458,983 32.1 % 7.3 %
Restaurant operating expenses 10,100,284 66.1 % 10,322,644 74.4 % (2.2 )% Restaurant pre-opening and closing expenses - 20,730 0.1 % (100.0 )% General and administrative expenses 3,755,866 23.6 % 3,891,739 27.2 % (3.5 )% Asset impairment charge 1,287,579 8.1 % 1,288,599 9.0 % (0.1 )% Depreciation and amortization 1,080,604 6.8 % 1,109,608 7.8 % (2.6 )% Employee retention credit (2,703,186 ) (17.0 )%
- - % 100 %
Total expenses 18,303,927 115.1 % 21,092,303 147.5 % (13.2 )%
Operating loss (2,396,831 ) (6,790,444 )
Other (expense) income:
Interest expense (481,706 ) (3.0 )% (499,870 ) (3.5 )% (3.6 )%
Change in fair value of
derivative liabilities 118,664 0.7 % 300,000 2.1 % (60.4 )%
Change in fair value of
investment (220,882 ) (1.4 )% (1,152,185 ) (8.1 )% (80.8 )%Debt extinguishment expense - - % (11,808,111 ) (82.6 )% (100.0 )% Other income (expense) 164,761 1.0 % 150,904 1.1 % 9.2 % Gain on extinguished lease liabilities 385,340 2.4 % - - % 100 % Total other income (expense) (33,823 ) (13,009,262 ) Net loss before income taxes (2,430,654 )
(19,799,706 ) Income tax expense (44,637 ) (0.3 )% (32,149 ) (0.2 )% 38.8 % Consolidated net loss$ (2,475,291 ) $ (19,831,855 )
* Restaurant cost of sales, operating expenses and closing expense percentages are based on restaurant sales, net. Other percentages are based on total revenue.
32 Revenue
Total revenue increased to
Three Months Ended Nine Months Ended
September 30, 2021 September 30, 2021
Amount % of Revenue* Amount % of Revenue*Restaurant sales, net 6,106,261 96.0 % 15,288,320
96.1 %
Gaming income, net 136,135 2.2 % 304,173 1.9 %
Franchise income 116,179 1.8 % 314,603 2.0 %
Total revenue 6,358,575 100 % 15,907,096 100 %
Three Months Ended Nine Months Ended
September 30, 2020 September 30, 2020
Amount % of Revenue* Amount % of Revenue*Restaurant sales, net$ 4,509,082 95.9 %$ 13,881,380
97.0 % Gaming income, net 107,403 2.3 % 236,615 1.7 % Franchise income 85,666 1.8 % 183,864 1.3 % Total revenue$ 4,702,151 100 %$ 14,301,859 100 %
? Revenue from restaurant sales increased 35.4% to
months ended
ended
increased occupancy and declining hesitancy from the public to dine in public
locations as a result of the rebound from the COVID-19 pandemic. Revenue from
restaurant sales increased 10.1% to
in
? Gaming income increased 26.8% to
months ended
ended
effect of the COVID-19 pandemic recovery.
? Franchise Income increased 35.6% to
nine months ended
months ended
to our franchise stores recovering from the effects of the COVID-19 pandemic
during the second and third quarter of 2021 based on declining hesitancy from
the public to dine in public locations.
Restaurant cost of sales
Restaurant cost of sales increased to $2.0 million for the three months ended
September 30, 2021 from $1.5 million for the three months ended September 30,
2020 . There was no change in the percent of restaurant sales between for the
three months ended September 30, 2021 and the three months ended September 30,
2020 . The overall decrease in cost of sales was due to the 35.5% increase in
restaurant revenue to $6.1 million for the three months ended September 30, 2021
compared to $4.5 million for the three months ended September 30, 2020 .
Restaurant cost of sales increased to $4.8 million for the nine months ended
September 30, 2021 from $4.5 million for the nine months ended September 30,
2020 . The percent of restaurant sales decreased to 31.3% for the nine months
ended September 30, 2021 from 32.1% for the nine months ended September 30,
2020 . The overall increase in cost of sales was due to the 10.1% increase in
restaurant revenue to $15.3 million for the nine months ended September 30, 2021
compared to $13.9 million for the nine months ended September 30, 2020 .
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Restaurant operating expenses
Restaurant operating expenses increased to$3.7 million for the three months endedSeptember 30, 2021 from$3.5 million for the three months endedSeptember 30, 2020 . The overall percentage of restaurant operating expenses dropped from 76.5% in 2020 to 60.2% in 2021 and was driven by the overall increase of revenue as described in the revenue section above, and the corresponding adjustment of labor at the store level and tighter controls of store level operating expenses. Restaurant operating expenses decreased to$10.1 million for the nine months endedSeptember 30, 2021 from$10.3 million for the nine months endedSeptember 30, 2020 . The overall decrease of restaurant operating expenses was driven by the overall improvement in cost of goods sold and direct labor.
Restaurant pre-opening and closing expenses
There were no restaurant pre-opening and closing expenses for the three months endedSeptember 30, 2021 and 2020 as no stores were opened or closed during the three months endedSeptember 30, 2021 and 2020. There were no restaurant pre-opening and closing expenses for the nine months endedSeptember 30, 2021 compared with approximately$21,000 for the nine months endedSeptember 30, 2020 . The decrease is primarily due to limited restaurant openings and closings in the nine months endedSeptember 30, 2020 and one closing during the nine months endedSeptember 30, 2021 . InSeptember 2021 , we had three PizzaRev stores andLBB University of Oregon that we were opening but had not incurred any pre-opening expenses.
General and administrative expense ("G&A")
G&A expenses decreased to$3.7 million for the nine months endedSeptember 30, 2021 , from$3.9 million for the nine months endedSeptember 30, 2020 . During the nine months endedSeptember 30, 2021 , audit, legal and professional services increased by$0.2 million due to the first year-end audit subsequent to being spun-off from Chanticleer, professional services and professional fees related to lease related legal and accounting matters. This increase was offset by a$0.1 million decrease in shareholder services and fees due to spin-off from Chanticleer and a decrease of$0.3 million in advertising, insurance and other expenses due to less need during the covid pandemic There was no significant change in G&A expenses during the three months endedSeptember 30, 2021 when compared to the three months endedSeptember 30, 2020 . Significant components of G&A are summarized as follows: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Audit, legal and other professional services$ 641,113 $ 615,098 $ 1,863,580 $ 1,722,687 Salary and benefits 587,358 455,540 1,575,119 1,459,628 Advertising, Insurance and other 141,674 225,131 259,415 558,563 Shareholder services and fees 3,246 (51,150 ) 10,885 116,562 Travel and entertainment 21,375 11,299 46,867 34,299 Total G&A Expenses$ 1,394,766 $ 1,255,918 $ 3,755,866 $ 3,891,739 Asset impairment charges Asset impairment charges of$1.3 million were recorded during the nine months endedSeptember 30, 2021 . The impairment was comprised of$0.3 million ,$0.7 million and$0.3 million of impairment on property and equipment, right of use asset and intangible assets, respectively, and was due to ongoing cash flow implications resulting from the ongoing COVID-19 pandemic. These charges were recorded in the first quarter of 2021 and no asset impairment charges were recorded during the three months endedSeptember 30, 2021 as store operating performance began to improve and due to prior impairment taken on underperforming and closed locations. During the nine months endedSeptember 30, 2020 , the Company impaired certain assets in connection with the closure of three locations. In addition, in the 2020 period, the Company recorded an impairment on tradenames/trademarks of$246,751 , property and equipment of$685,333 and right of use asset of$343,141 primarily due to the lower level of cash flow at the store level due to the impact of COVID-19 on operations. 34
Depreciation and amortization
Depreciation and amortization expense was$350,599 and$1,080,604 for the three and nine months endedSeptember 30, 2021 , respectively, compared to$277,999 and$1,109,608 for the three and nine months endedSeptember 30, 2020 , respectively. Other (expense) income
Interest expense for the three and nine months ended
During the nine months endedSeptember 30, 2021 the change in fair value of derivative liabilities was a gain of$118,664 , which was related to the True-Up Payment derivative. Derivative liabilities are marked to market on a quarterly basis and fluctuation in value are reflective of the fair market value at the point in time that the instruments are measured. During the three and nine months endedSeptember 30, 2020 the change in fair value of derivative liabilities and warrants was a loss of$5.8 million and a gain of$0.3 million , respectively. The income in the three months endedSeptember 30, 2020 was primarily due to a decrease in the Company's stock price atSeptember 30, 2020 compared toJune 30, 2020 , thus driving a decrease in the value of the derivative instruments. The True-Up Payment was settled inJuly 2021 with a payment of$66,136 . OnApril 1, 2020 , the Company exchanged the then existing 8% non-convertible notes for 10% convertible notes. Warrants to purchase common stock were also issued in connection with the issuance of the new notes. The Company recorded a$11.8 million loss on the extinguishment of the 8% notes based on the difference in the carrying value of the old notes and the fair value of the new notes
and warrants issued. In connection with the Merger, the Company obtained warrants to purchase 186,101 shares of Sonnet at$0.001 per share. The warrants were exercised in 2020 and common stock is now held. The share price of Sonnet has decreased since the Merger and a loss on investment of$0.1 million and$0.2 million was recognized for the three- and nine-month periods endedSeptember 30, 2021 , respectively. Additionally, shares were sold in 2021 and the Company received proceeds of$0.1 million . The Company recognized a loss of$0.2 million during the three months endedSeptember 30, 2020 and a loss on investment of$1.1 million during the nine months endedSeptember 30, 2020 . This common stock will continue to be recorded at fair value until security is sold.
During the three and nine months ended
STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED
Nine Months Ended
September 30, 2021 September 30, 2020 Net cash used in operating activities $ (2,813,998 ) $ (4,892,561 ) Net cash provided by (used in) investing activities 2,157,275 (29,821 ) Net cash provided by financing activities 1,901,157 7,247,506 Effect of foreign currency exchange rates (12,615
) (14,496 )
$ 1,231,819 $ 2,310,628
Cash used in operating activities was approximately $2.8 million for the nine
months ended September 30, 2021 . The use of cash in the nine months ended
September 30, 2021 was primarily attributable to the net loss of $2.5 million
and non-cash income of $0.4 million from a gain on extinguished lease
liabilities and a fair value adjustment to a derivative of $0.1 million offset
by non-cash charges to operations of $1.3 million for asset impairments and $1.5
million for depreciation and amortization. Additionally, the Company recognized
a loss on investments of $0.2 million and non-cash expense of $0.1 million
related to the amortization of debt discounts. The balance of the change in cash
flows from operating activities was related to net movements in asset and
liability accounts.
Cash used in operating activities was approximately $4.9 million for the nine
months ended September 30, 2020 . This use of cash was primarily driven by the
net loss incurred of $19.8 million offset by non-cash charges to operations of
$14.9 million . The non-cash charges in 2020 consist primarily of loss on debt
extinguishment of $11.8 million , loss on investments of $1.2 million , asset
impairment charges of $1.3 million and depreciation and amortization of property
and equipment, intangible assets and right-of-use assets totaling $2.3 million .
Additionally, in 2020 net assets and liabilities were reduced by $1.6 million ,
primarily from a reduction in operating lease liabilities. The Company obtained
cash of $6.0 million from the Merger and used a portion to reduce its
liabilities in 2020.
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Cash provided by investing activities during the nine months ended September 30,
2021 was primarily related to cash and restricted cash acquired in connection
with the acquisition of Pie Squared Holdings .
Cash provided by financing activities for the nine months ended September 30,
2021 was approximately $1.9 million compared to cash provided by financing
activities of approximately $7.2 million for the nine months ended September 30,
2020 . Cash provided by financing activities during 2021 was primarily related to
proceeds of $2.0 million PPP loan. The primary drivers of the cash provided by
financing activities during 2020 were proceeds from the bridge preferred equity
investment, the exercise of warrants, and the Merger Consideration receivedof$6.0 million .
LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN
Liquidity, Capital Resources and Going Concern
As ofSeptember 30, 2021 , our cash balance was$3.0 million , of which$1.9 million was restricted cash, our working capital deficiency was$16.0 million and we had significant near-term commitments and contractual obligations. The level of additional cash needed to fund operations and our ability to conduct business for the next 12 months will be influenced primarily by the following factors:
? our eligibility to access the capital and debt markets to satisfy current
obligations and operate the business;
? our ability to qualify for and utilize financial stimulus programs available
through federal and state government programs;
? our ability to refinance or otherwise extend maturities of current debt
obligations;
? our ability to manage our operating expenses and maintain gross margins;
? popularity of and demand for our fast-casual dining concepts; and
? general economic conditions and changes in consumer discretionary income.
We have typically funded our operating costs, acquisition activities, working capital requirements and capital expenditures with proceeds from the issuances of our common stock and other financing arrangements, including convertible debt, lines of credit, notes payable, capital leases, and other forms of external financing. OnMarch 10, 2020 , theWorld Health Organization characterized the novel COVID-19 virus as a global pandemic. The COVID-19 outbreak inthe United States has resulted in a significant impact throughout the hospitality industry that have continued throughSeptember 30, 2021 . The Company has been impacted due to restrictions placed by state and local governments that caused temporary restaurant closures or significantly reduced the Company's ability to operate, restricting some of the Company's restaurants to take-out only. It is difficult to estimate the length or severity of this outbreak; however, the Company has made operational changes, as needed, to reduce the impact. As Amergent executes its business plan over the next 12 months, it intends to carefully monitor the impact of 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 operations plans, sell assets on less than favorable terms, reduce expenses, and/or curtail future acquisition plans to manage its liquidity and capital resources.
The Company's current operating losses, combined with its working capital deficit and uncertainties regarding the impact of COVID-19, raise substantial doubt about our ability to continue as a going concern.
In addition, our business is subject to additional risks and uncertainties, including, but not limited to, those described in Item 1A. "Risk Factors."
The consolidated and combined financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
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