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 of
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 October andNovember 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. InNovember 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. The total debt to this entity is now$0.5 million . 26
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
Our results of operations are summarized below:
Three months ended
September 30, 2022
% of % of
(in thousands) Amount Revenue* Amount Revenue* % Change
Revenue:
Restaurant sales, net $ 5,176 95.9 % $ 5,627 95.7 % (8.0 )%
Gaming income, net 109 2.0 % 136 2.3 % (19.9 )%
Franchise income 116 2.1 % 116 2.0 % 0.1 %
Total revenue 5,401 5,879
Expenses:
Restaurant cost of sales 1,675 32.4 % 1,850 32.9 % (9.5 )%
Restaurant operating
expenses 4,162 80.4 % 3,400 60.4 % 22.4 %
General and administrative
expenses 1,206 22.3 % 1,381 23.5 % (12.7 )%
Depreciation and
amortization 170 3.1 % 214 3.6 % (20.6 )%
Employee retention credit
and other grant income (373 ) (6.9 )% (1,232 ) (21.0 )% (69.7 )%
Total expenses 6,840 5,613
Operating (loss) income (1,439 )
266
Other income (expense): Interest expense (230 ) (4.3 )% (166 ) (3.1 )% 38.6 % Change in fair value of derivative liabilities - - % - - % - % Change in fair value of investment (22 ) (0.4 )% (100 ) (1.9 )% (78.0 )% Change in fair value of convertible promissory note 35 0.6 % - 100.0 % - % Gain on extinguished/settled lease liabilities - - % 67 1.2 % (100.0 )% Other income 33 0.6 % (9 ) (0.2 )% (466.7 )% Total other income (184 ) (208 ) (Loss) income before income taxes (1,623 )
58
Income tax expense - - % (45 ) (0.8 )% (100.0 )% Consolidated net (loss) income$ (1,623 ) $ 13 27 Nine months ended September 30, 2022 September 30, 2021 (Restated) % of % of (in thousands) Amount Revenue* Amount Revenue* % Change Revenue: Restaurant sales, net$ 15,257 91.8 %$ 15,288 96.1 % (0.2 )% Gaming income, net 357 2.1 %
304 1.9 % 17.4 % Franchise income 1,013 6.1 % 315 2.0 % 221.6 % Total revenue 16,627 15,907 Expenses: Restaurant cost of sales 4,868 31.9 % 4,783 31.3 % 1.8 % Restaurant operating expenses 11,320 74.2 % 10,100 66.1 % 12.1 % General and administrative expenses 4,348 26.2 % 3,756 23.6 % 15.8 % Asset impairment charges - - % 1,288 8.1 % (100.0 )% Depreciation and amortization 673 3.6 % 673 4.2 % (11.9 )% Employee retention credit and other grant income (2,208 ) (13.3 )% (2,705 ) (17.0 )% (18.4 )% Total expenses 18,921 17,895 Operating loss (2,294 ) (1,988 ) Other income (expense): Interest expense (641 ) (3.9 )% (482 ) (3.0 )% 33.0 % Change in fair value of derivative liabilities - - % 119 0.7 % (100.0 )% Change in fair value of investment (38 ) (0.2 )% (221 ) (1.4 )% (82.8 )% Change in fair value of convertible promissory note 206 1.2 % - - % 100.0 % Gain on extinguished/settled lease liabilities 256 1.5 % 385 2.4 % (33.5 )% Gain on extinguished trade payable 161 1.0 % - - % 100.0 % Other income 344 2.1 % 165 1.0 % 108.5 % Total other income 288 (34 ) Loss before income taxes (2,006 ) (2,022 ) Income tax expense (2 ) - % (45 ) (0.3 )% 99.4 % Consolidated net loss$ (2,008 ) $ (2,067 )
* Restaurant cost of sales and operating expenses percentages are based on restaurant sales, net. Other percentages are based on total revenue.
28 Revenue
Total revenue decreased$(0.5) million or (8.5)% and increased$0.7 million or 4.5% for the three and nine months endedSeptember 30, 2022 , respectively, as compared to the corresponding periods in 2021. Three months ended Three months ended September 30, 2022 September 30, 2021 (Restated) % of % of Amount Revenue Amount Revenue (in thousands) Restaurant sales, net$ 5,176 95.9 % $ 5,627 95.7 % Gaming income, net 109 2.0 % 136 2.3 % Franchise income 116 2.1 % 116 2.0 % Total revenue$ 5,401 100.0 % $ 5,879 100.0 % Nine months ended Nine months ended September 30, 2022 September 30, 2021 (Restated) % of % of Amount Revenue Amount Revenue (in thousands) Restaurant sales, net$ 15,257 97.8 %$ 15,288 96.1 % Gaming income, net 357 2.1 % 304 1.9 % Franchise income 1,013 6.1 % 315 2.0 % Total revenue$ 16,627 100.0 %$ 15,907 100.0 %
? Revenue from restaurant sales decreased
million or (0.2)% for the three and nine months ended
respectively, as compared to the corresponding periods in 2021 primarily due
to a net decrease of three company owned stores. As of
2021, the Company had 27 and 30 company owned stores, respectively.
? Franchise income increased $nil or 0.0% and
three and nine months ended
the corresponding periods in 2021. The increase during the nine -month period
was primarily due to
as 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 decreased $0.2 million or 9.5% and increased $0.1
million or 1.8% for the three and nine months ended September 30, 2022 ,
respectively, as compared to the corresponding periods in 2021 primarily due to
the 8.0% and 0.0% decreases in restaurant revenue. Restaurant cost of sales as a
percentage of restaurant sales have stayed consistent. Restaurant cost of sales
decreased to 31.9% for the three and nine months ended September 30, 2022 ,
respectively, compared to an increase of 32.9% and 31.3% for the three and nine
months ended September 30, 2021 , respectively.
Restaurant operating expenses
Restaurant operating expenses increased$0.8 million or 22.4% and$1.2 million or 12.1% for the three and nine months endedSeptember 30, 2022 , respectively, as compared to the corresponding periods in 2021. The increases were primarily due to the overall increase in payroll cost with cost of living increase across the board for our employees.
General and administrative expense ("G&A")
G&A expenses decreased$(0.2) million or (13.5)% and increased$0.6 million or 15.8% for the three and nine months endedSeptember 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$0.0 million and$0.5 million , respectively, primarily due to the addition of two senior management personnel and an increase in our employee headcount fromSeptember 30, 2021 toSeptember 30, 2022 and (ii) increases in advertising, insurance and other expenses of$0.0 million and$0.3 million , respectively, primarily due to increases in advertising spending as we begin to recover from the COVID-19 pandemic. 29
Significant components of G&A are summarized as follows:
Three months ended Nine months ended
September 30 , September
2022 30, 2021 2022 30, 2021
(in thousands) (Restated) (Restated)
Audit, legal and other professional
services $ 418 $ 641 $ 1,621 $ 1,864
Salary and benefits 588 587 2,088 1,575
Advertising, insurance and other 183 128
556 259
Stockholder services and fees 7 3 24 11
Travel and entertainment 10 22 59 47
Total G&A expenses $ 1,206 $ 1,381 $ 4,348 $ 3,756
Asset impairment charges
We did not record any asset impairment charges during the three and nine months
ended
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 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 nine months ended
September 30, 2022 and 2021, the Company recognized $0.0 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 nine months ended September 30, 2022 , the Company recognized
$0.4 million and $1.5 million , respectively, related to the RRF as a
contra-expense included in employee retention credit and other grant income in
the condensed consolidated statements of operations. As of September 30, 2022 ,
there was no remaining available for future recognition under the RRF.
For additional information, see Note 3 to the condensed consolidated financial statements.
Other Income (Expense)
Change in fair value of derivative liabilities
There were no derivative liabilities recorded during the three and nine months endedSeptember 30, 2022 . During the three and nine months endedSeptember 30, 2021 , the change in fair value of derivative liabilities was a gain of$-0 - 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$22,000 and$0.1 million during the three months endedSeptember 30, 2022 and 2021, respectively, and$38,000 and$0.2 million during the nine months endedSeptember 30, 2022 , respectively, as a result of decreases in Sonnet's common stock price. 30
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$35,000 and$0.2 million during the three and nine months endedSeptember 30, 2022 , respectively. There were no similar transactions during the three and nine months endedSeptember 30, 2021 .
Gain on extinguished/settled lease liabilities
During the three and nine months endedSeptember 30, 2022 , we recognized a gain on extinguished/settled lease liabilities$-0 - and$0.3 million , respectively, due to settlements of outstanding lease liabilities. During the three and nine months endedSeptember 30, 2021 , we recognized a gain on extinguished/settled lease liabilities$-0 - and$0.4 million , respectively,
Gain on extinguished trade payable
During the three and nine months endedSeptember 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 nine months endedSeptember 30, 2021 . Other income
Other income increased (decreased)$0.03 million or 288.9% and$0.2 million or 99.4% for the three and nine months endedSeptember 30, 2022 , respectively, compared to the corresponding periods in 2021 primarily due to (i) a gain recognized during the second quarter of 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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