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 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 ofJune 30, 2022 , we operate and franchise a system-wide total of 41 fast casual restaurants, of which 28 are company-owned and 13 are owned and operated by franchisees under franchise agreements.American Burger Company ("ABC") is a fast-casual dining chain consisting of two company-owned locations inNorth Carolina andNew York .ABC is known for its diverse menu featuring fresh salads, customized burgers, milk shakes, sandwiches, and beer and wine.
The Burger Joint ("BGR") consists of six company-owned locations and seven
franchisee-operated locations in
Little Big Burger ("LBB") consists of 16 company-owned locations in thePortland, Oregon ,Seattle, Washington , andCharlotte, North Carolina areas. One location was temporarily closed until it re-opened at the end ofJune 2022 due to lack of available employees. Of the company-owned restaurants, eight of those locations are operated under partnership agreements with investors where we control the management and operations of the stores, and the partners supply the capital to open the stores in exchange for a non-controlling interest.Pie Squared Holdings ("PIE") was acquired inAugust 2021 . PIE, 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 locations, one of which opened onJanuary 4, 2022 , and nine franchised locations. Three of these franchised locations were not open at the time of purchase and are not included in our total store count. One additional franchise location is planned to open in 2022.
The
Recent developments InMarch 2022 , we 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, we issued$1.35 million of 8% Convertible Debt and warrants to purchase the number of shares of our 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 registrable 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. In connection with the issuance of the 8% Convertible Debt, the maturity date of the existing 10% secured convertible debenture ("10% Convertible Debt") was extended toApril 1, 2024 , and the holder of the existing 10% Convertible Debt agreed to subordinate payment of its 10% Convertible Debt to payment of the 8% Convertible Debt.
In
27
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED
Our results of operations are summarized below:
Three months ended
June 30, 2022 June 30, 2021 (Restated)
% of % of
(in thousands) Amount Revenue* Amount Revenue* % Change
Revenue:
Restaurant sales, net $ 5,323 95.5 % $ 5,217 96.0 % 2.0 %
Gaming income, net 145 2.6 % 111 2.1 % 30.6 %
Franchise income 108 1.9 % 105 1.9 % 2.9 %
Total revenue 5,576 5,433
Expenses:Restaurant cost of sales 1,701 32.0 % 1,617 31.0 % 5.2 % Restaurant operating expenses 3,679 69.1 % 3,455 66.2 % 6.5 % General and administrative expenses 1,806 32.4 % 1,208 22.2 % 49.5 % Depreciation and amortization 201 3.6 % 227 4.2 % (11.5 )% Employee retention credit and other grant income (1,287 ) (23.1 )% (1,473 ) (27.1 )% (12.6 )% Total expenses 6,100 5,034 Operating (loss) income (524 ) 399 Other income (expense): Interest expense (224 ) (4.0 )% (158 ) (2.9 )% 41.8 % Change in fair value of derivative liabilities - - % (66 ) (1.2 )% (100.0 )% Change in fair value of investment (12 ) (0.2 )% (124 ) (2.3 )% (90.3 )% Change in fair value of
convertible promissory note 55 1.0 % - - % 100.0 % Gain on extinguished/settled lease liabilities 256 4.6 % 275 5.1 % (6.9 )% Other income 92 1.6 % 171 3.1 % (46.2 )% Total other income 167 98 (Loss) income before income taxes (357 ) 497 Income tax expense - - % - - % - % Consolidated net (loss) income$ (357 ) $ 497 28 Six months ended June 30, 2022 June 30, 2021 (Restated) % of % of (in thousands) Amount Revenue* Amount Revenue* % Change Revenue: Restaurant sales, net$ 10,081 89.8 %$ 9,661 96.3 % 4.3 % Gaming income, net 248 2.2 % 169 1.7 % 46.7 % Franchise income 897 8.0 % 199 2.0 % 350.8 % Total revenue 11,226 10,029 Expenses:
Restaurant cost of sales 3,193 31.7 % *2,933 30.4 % *8.9 % Restaurant operating expenses 7,158 71.0 % *6,701 69.4 % *6.8 % General and administrative expenses 3,142 28.0 % 2,375 23.7 % 32.3 % Asset impairment charges - - % 1,288 12.8 % (100.0 )% Depreciation and amortization 423 3.8 % 459 4.6 % (7.8 )% Employee retention credit and other grant income (1,835 ) (16.3 )% (1,473 ) (14.7 )% 24.6 % Total expenses 12,081 12,283 Operating loss (855 ) (2,254 ) Other income (expense): Interest expense (411 ) (3.7 )% (318 ) (3.2 )% 29.2 % Change in fair value of derivative liabilities - - % 119 1.2 % (100.0 )% Change in fair value of investment (16 ) (0.1 )% (120 ) (1.2 )% (86.7 )% Change in fair value of
convertible promissory note 171 1.5 % - - % 100.0 % Gain on extinguished/settled lease liabilities 256 2.3 % 319 3.2 % (19.7 )% Gain on extinguished trade payable 161 1.4 % - - % 100.0 % Other income 311 2.8 % 174 1.7 % 78.7 % Total other income 472 174 Loss before income taxes (383 ) (2,080 ) Income tax expense (2 ) - % - - % 100.0 % Consolidated net loss$ (385 ) $ (2,080 )
* Restaurant cost of sales and operating expenses percentages are based on restaurant sales, net. Other percentages are based on total revenue.
29 Revenue
Total revenue increased
Three months ended Three months ended
June 30, 2022 June 30, 2021 (Restated)
% of % of
Amount Revenue Amount Revenue
(in thousands)
Restaurant sales, net $ 5,323 95.5 % $ 5,217 96.0 %
Gaming income, net 145 2.6 % 111 2.1 %
Franchise income 108 1.9 % 105 1.9 %
Total revenue $ 5,576 100.0 % $ 5,433 100.0 %
Six months ended Six months ended
June 30, 2022 June 30, 2021 (Restated)
% of % of
Amount Revenue Amount Revenue
(in thousands)
Restaurant sales, net $ 10,081 89.8 % $ 9,661 96.3 %
Gaming income, net 248 2.2 % 169 1.7 %
Franchise income 897 8.0 % 199 2.0 %
Total revenue $ 11,226 100.0 % $ 10,029 100.0 %
? Revenue from restaurant sales increased
or 4.3% for the three and six months ended
compared to the corresponding periods in 2021 primarily due to increased
occupancy and declining hesitancy from the public to dine in public locations
as a result of the rebound from the COVID-19 pandemic.
? Franchise income increased
three and six months ended
corresponding periods in 2021. The increase during the six-month period was
primarily due to
a result of the Company terminating its international Master Franchise
Agreements as the requirements in the agreement had not been met and all
international stores had been closed. The Master Franchisee notified the
Company that it would not be reopening these stores. In addition, contract
liabilities decreased
international Master Franchise Agreements.
Expenses Restaurant cost of sales
Restaurant cost of sales increased$0.1 million or 5.2% and$0.3 million or 8.9% for the three and six months endedJune 30, 2022 , respectively, as compared to the corresponding periods in 2021 primarily due to the 2.0% and 4.3% increases in restaurant revenue. Restaurant cost of sales as a percentage of restaurant sales increased to 32.0% and 31.7% for the three and six months endedJune 30, 2022 , respectively, compared to 31.0% and 30.4% for the three and six months endedJune 30, 2021 , respectively, primarily as a result of rising food costs.
Restaurant operating expenses
Restaurant operating expenses increased$0.2 million or 6.5% and$0.5 million or 6.8% for the three and six months endedJune 30, 2022 , respectively, as compared to the corresponding periods in 2021. The increases were primarily due to the overall increase in revenue as described above and additional company-operated restaurants. As ofJune 30, 2022 , we operated 28 company-owned restaurants, as compared to 26 company-owned restaurants as ofJune 30, 2021 .
General and administrative expense ("G&A")
G&A expenses increased$0.6 million or 49.5% and$0.8 million or 32.3% for the three and six months endedJune 30, 2022 , respectively, as compared to the corresponding periods in 2021 primarily due to the net effect of (i) increases in salary and benefits of$0.3 million and$0.5 million , respectively, primarily due to the addition of two senior management personnel and an increase in our employee headcount fromJune 30, 2021 toJune 30, 2022 and (ii) increases in advertising, insurance and other expenses of$0.2 million and$0.3 million , respectively, primarily due to increases in advertising spending as we begin to recover from the COVID-19 pandemic. 30
Significant components of G&A are summarized as follows:
Three months ended Six months ended
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
(in thousands) (Restated) (Restated)
Audit, legal and other
professional services $ 738 $ 621 $ 1,203 $ 1,229
Salary and benefits 843 558 1,500 996
Advertising, insurance and
other 194 6 373 118
Stockholder services and
fees 4 4 17 8
Travel and entertainment 27 19 49 24
Total G&A expenses $ 1,806 $ 1,208 $ 3,142 $ 2,375
Asset impairment charges
We did not record any asset impairment charges during the three and six months
ended
Asset impairment charges of$1.3 million were recorded during the first quarter of 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 cash flow implications resulting from the ongoing COVID-19 pandemic.
Employee retention credit and other grant income
Employee Retention Credit ("ERC"). For each of the three and six months ended
June 30, 2022 and 2021, the Company recognized $0.7 million and $1.5 million ,
respectively, of ERC as a contra-expense included in employee retention credit
and grant income in the condensed consolidated statements of operations.
Although the program ended on January 1, 2022 , the Company performed an analysis
during the current period and determined that it was eligible for additional
credits related to 2021 wages.
Restaurant Revitalization Fund ("RRF"). Pie Squared Holdings , which we acquired
during August 2021 , received a grant under the RRF and $2.0 million of unused
funds at the closing of the acquisition were placed into escrow for our benefit.
For the three and six months ended June 30, 2022 , the Company recognized $0.6
million and $1.1 million , respectively, related to the RRF as a contra-expense
included in employee retention credit and other grant income in the condensed
consolidated statements of operations. As of June 30, 2022 , there was $0.4
million remaining available for future recognition recognition under the RRF.
For additional information, see Note 3 to the condensed consolidated financial statements.
Other Income (Expense)
Change in fair value of derivative liabilities
There were no derivative liabilities recorded during the three and six months endedJune 30, 2022 . During the three and six months endedJune 30, 2021 , the change in fair value of derivative liabilities was a gain (loss) of$(0.1) million and$0.1 million , respectively, related to the True-Up Payment derivative. Derivative liabilities were marked to market on a quarterly basis and fluctuations in value are reflective of the fair market value at the point in time at which the instruments were measured. The True-Up Payment derivative was settled inJuly 2021 with a cash payment of$0.1 million .
Change in fair value of investment
Our investment 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 defined and described in Note 1 to the condensed consolidated financial statements. We recognized a loss in fair value of$12,000 and$0.1 million during the three months endedJune 30, 2022 and 2021, respectively, and$16,000 and$0.1 million during the six months endedJune 30, 2022 , respectively, as a result of decreases in Sonnet's common stock price. 31
Change in fair value of convertible promissory note
InAugust 2021 , we issued an 8% secured, convertible promissory note as consideration for the acquisition ofPie Squared Holdings . We have elected to measure the convertible promissory note at fair value, with changes in fair value recognized in operations. We recognized a change in fair value of$0.1 million and$0.2 million during the three and six months endedJune 30, 2022 , respectively. There were no similar transactions during the three and six months endedJune 30, 2021 .
Gain on extinguished trade payable
During the three and six months endedJune 30, 2022 , we recognized a gain on extinguished trade payable of nil and$0.2 million , respectively, due to the settlement of outstanding amounts with a supplier. There were no such settlements during the three and six months endedJune 30, 2021 .
Other income
Other income increased (decreased)($0.1) million or (46.2%) and$0.1 million or 78.7% for the three and six months endedJune 30, 2022 , respectively, compared to the corresponding periods in 2021 primarily due to (i) a gain recognized during the three months endedJune 30, 2022 of$0.1 million as a result of a franchise-related litigation settlement and (ii) a dividend received during the first quarter of 2022 from our investment inHooters of America of approximately$0.1 million .
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