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 ofMarch 31, 2022 , we operate and franchise a system-wide total of 42 fast casual restaurants, of which 29 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 2 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") was acquired in
Little Big Burger ("LBB") was acquired inSeptember 2015 and consists of 16 company-owned locations in thePortland, Oregon ,Seattle, Washington , andCharlotte, North Carolina areas. One location was temporarily closed atMarch 31, 2022 due to lack of available employees. 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 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 4 wholly-owned subsidiaries, owns, operates and franchises pizza restaurants operating under the tradename PizzaRev. The PizzaRev stores consist of 3 company-owned locations, one of which opened onJanuary 4, 2022 , and 9 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. 28
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
Our results of operations are summarized below:
Three months ended
March 31, 2022 March 31, 2021
(in thousands) Amount % of Revenue* Amount % of Revenue* % Change
Revenue:
Restaurant sales, net $ 4,758 84.2 % $ 4,444 96.8 % 7.1 %
Gaming income, net 103 1.8 % 57 1.2 % 80.7 %
Franchise income 789 14.0 % 92 2.0 % 757.6 %
Total revenue 5,650 4,593
Expenses:
Restaurant cost of sales 1,492 31.4 % 1,316 29.6 % 13.4 %
Restaurant operating
expenses 3,479 73.1 % 3,245 73.0 % 7.2 %
General and administrative
expenses 1,336 23.6 % 1,166 25.4 % 14.6 %
Asset impairment charges - 0.0 % 1,288 28.0 % (100.0 )%
Depreciation and
amortization 222 3.9 % 232 5.1 % (4.3 )%
Grant income (548 ) (9.7 )% - - % 100.0 %
Total expenses 5,981 7,247
Operating loss (331 ) (2,654 )
Other income (expense):
Interest expense (187 ) (3.3 )% (157 ) (3.4 )% 19.1 %
Change in fair value of
derivative liabilities - - % 185 4.0 % (100.0 )%
Change in fair value of
investment (4 ) (0.1 )% 4 0.1 % (200.0 )%
Change in fair value of
convertible promissory note 116 2.1 % - - % 100.0 %
Gain on extinguished lease
liabilities - - % 43 0.9 % (100.0 )%
Gain on extinguished trade
payable 161 2.8 % - - % 100.0 %
Other income 219 3.9 % 2 - % 10,850.0 %
Total other income 305 77
Loss before income taxes (26 ) (2,577 )
Income tax expense (2 ) - % - - % 100.0 %
Consolidated net loss $ (28 ) $ (2,577 ) * 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 to
Three months ended
March 31, 2022
(in thousands) Amount % of RevenueRestaurant sales, net$ 4,758 84.2 % Gaming income, net 103 1.8 % Franchise income 789 14.0 % Total revenue$ 5,650 100.0 % Three months ended March 31, 2021 (in thousands) Amount % of Revenue Restaurant sales, net$ 4,444 96.8 % Gaming income, net 57 1.2 % Franchise income 92 2.0 % Total revenue$ 4,593 100.0 %
? Revenue from restaurant sales increased 7.1% 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.
? Gaming income increased 80.7% to
31, 2022, compared to
The primary reason for this increase was due to the effect of COVID-19
pandemic recovery.
? Franchise income increased 757.6% to
2021, which is primarily due to
Franchise Agreement 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 Agreement.
Restaurant cost of sales
Restaurant cost of sales increased to $1.5 million for the three months ended
March 31, 2022 from $1.3 million for the three months ended March 31, 2021 . The
restaurant cost of sales as a percentage of restaurant sales increased to 31.4%
for the three months ended March 31, 2022 from 29.6% for the three months ended
March 31, 2021 . The overall increase in restaurant cost of sales was due to the
7.1% increase in restaurant revenue to $4.8 million for the three months ended
March 31, 2022 compared to $4.4 million for the three months ended March 31,
2021 . The increase in restaurant cost of sales as a percentage of restaurant
sales is a result of rising food costs.
Restaurant operating expenses
Restaurant operating expenses increased to$3.5 million for the three months endedMarch 31, 2022 from$3.2 million for the three months endedMarch 31, 2021 . The increase in restaurant operating expenses was driven by the overall increase in revenue, as described in the revenue section above. In addition, we operated 29 company-owned restaurants during the three months endedMarch 31, 2022 , compared to 26 company-owned restaurants during the three months endedMarch 31, 2021 . 30
General and administrative expense ("G&A")
G&A expenses were approximately$1.3 million during the three months endedMarch 31, 2022 and$1.2 million during the three months endedMarch 31, 2021 . During the three months endedMarch 31, 2022 , salary and benefits increased by$0.2 million due to the addition of two senior management personnel and advertising, insurance and other expenses increased by$0.1 million due to an increase in advertising spending as we begin to recover from the COVID-19 pandemic. These increases were offset by a decrease of$0.1 million in audit, legal and other professional services, as the three months endedMarch 31, 2021 included the first year-end audit subsequent to being spun-off from Chanticleer, as well as professional services and fees related to lease-related legal and accounting matters. Significant components of G&A are summarized as follows: Three months ended (in thousands) March 31, 2022 March 31, 2021 Change Audit, legal and other professional services $ 465 $ 607 $ (142 ) Salary and benefits 657 438 219 Advertising, insurance and other 179 112 67 Stockholder services and fees 13 4 9 Travel and entertainment 22 5 17 Total G&A expenses $ 1,336 $ 1,166 $ 170 Asset impairment charges
We did not record any asset impairment charges during the three months ended
Asset impairment charges of$1.3 million were recorded during the three months endedMarch 31, 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. Grant income Grant income of$0.5 million from theRestaurant Revitalization Fund ("RRF") was recognized during the three months endedMarch 31, 2022 .Pie Squared Holdings , which we acquired duringAugust 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.
We did not receive any grant income during the three months ended
Other income (expense) Interest expense increased 19.1% to$0.2 million for the three months endedMarch 31, 2022 , compared to$0.2 million for the three months endedMarch 31, 2021 . The increase in interest expense is primarily the result of new borrowings, including the 8% secured, convertible promissory note of$1.0 million issued as consideration for the acquisition ofPie Squared Holdings inAugust 2021 ,$1.4 million of 8% senior unsecured convertible debentures issued inMarch 2022 , and$0.3 million in notes payable issued inMarch 2022 . There were no derivative liabilities recorded during the three months endedMarch 31, 2022 . During the three months endedMarch 31, 2021 , the change in fair value of derivative liabilities was a$0.2 million gain 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$66,136 . 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 during the three months endedMarch 31, 2022 . There were no similar transactions during the three months endedMarch 31, 2021 . 31 There were no cancelled lease obligations during the three months endedMarch 31, 2022 . During the three months endedMarch 31, 2021 , we recognized a gain on extinguished lease liabilities of$43,000 due to the derecognition of operating lease liabilities resulting from our negotiation of the cancellation of our obligations under certain lease arrangements. The cancellations resulted from the COVID-19 pandemic. During the three months endedMarch 31, 2022 , we recognized a gain on extinguished trade payable of$0.2 million due to the settlement of outstanding amounts with a supplier. There were no such settlements during the three months endedMarch 31, 2021 . Other income increased$0.2 million to$0.2 million for the three months endedMarch 31, 2022 , compared to$2,000 for the three months endedMarch 31, 2021 , which was primarily due to a dividend received from our investment inHooters of America of approximately$0.1 million and rebates of$0.1 million .
STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED
Three months ended
(in thousands) March 31, 2022 March 31, 2021Net cash used in operating activities $ (707 ) $ (684 ) Net cash used in investing activities (57 ) (2 ) Net cash provided by financing activities 1,597
1,955
Effect of foreign currency exchange rates -
7
$ 833 $ 1,276
Cash used in operating activities was approximately $0.7 million for each of the
three months ended March 31, 2022 and 2021. The use of cash in the three months
ended March 31, 2022 was primarily attributable to the net loss of $28,000 and
non-cash income of $0.1 million for a fair value adjustment to a convertible
promissory note, offset by non-cash charges to operations of $0.6 million for
depreciation and amortization. The balance of the change in cash flows from
operating activities was related to net movements in asset and liability
accounts. The use of cash in the three months ended March 31, 2021 was primarily
attributable to the net loss of $2.8 million and non-cash income of $0.2 million
for a fair value adjustment to a derivative, offset by non-cash charges to
operations of $1.3 million for asset impairments and $0.5 million for
depreciation and amortization. The balance of the change in cash flows from
operating activities was related to net movements in asset and liability
accounts. The cash movements in asset and liability accounts from the three
months ended March 31, 2021 to the three months ended March 31, 2022 can be
attributed primarily to a $0.4 million decrease in cash for payments of accounts
payable and accrued expenses, offset by a $0.4 million increase in cash due to
collection of other receivables consisting primarily of grant income.
Cash used in investing activities for the three months ended
Cash provided by financing activities for the three months endedMarch 31, 2022 was approximately$1.6 million , compared to cash provided by financing activities of approximately$2.0 million for the three months endedMarch 31, 2021 . The primary drivers of the cash provided by financing activities during 2022 were proceeds of$1.4 million related to the issuance of 8% senior unsecured convertible debentures and proceeds of$0.3 million related to the issuance of notes payable. The primary driver of the cash provided by financing activities during 2021 was proceeds from a$2.0 million Payment Protection Program ("PPP") loan.
LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN
As ofMarch 31, 2022 , our cash balance was$3.1 million , of which$0.6 million was restricted cash, our working capital deficiency was$12.0 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 ability to access the capital and debt markets to satisfy current obligations and operate the business; 32
? 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. In earlyMarch 2020 , the COVID-19 pandemic was declared to be a National Public Health Emergency, and theCenters for Disease Control and Prevention , as well as state and local legislative bodies and health departments, began issuing orders related to social distancing requirements, reduced restaurant seating capacity and other restrictions which resulted in a significant reduction in traffic at our restaurants. As ofmid-March 2020 , the ordinances tightened, and dine-in capacity was eliminated or severely restricted. ByApril 2020 , at the request of most state and local legislative bodies, we closed all of our dining rooms and began to operate in a take-out and delivery only capacity. In earlyMay 2020 , states began allowing the re-opening of dining rooms in a limited capacity and by the end ofJune 2020 , we had re-opened dining rooms in approximately 95% of our restaurants while adhering to social distancing restrictions, which limited the number of guests we could serve in our restaurants at one time. DuringNovember 2020 , rising case rates resulted in certain jurisdictions implementing restrictions that again reduced dining room capacity or mandated the closure of dining rooms. As a result, we began fiscal 2021 with significant limitations on our operations which, over the course of the fiscal year, varied widely from time to time, state to state and city to city; however, nonetheless negatively impacted our sales. Once COVID-19 vaccines were approved and moved into wider distribution inthe United States in early to mid-2021, public health conditions improved and almost all of the COVID-19 restrictions on businesses eased. While cases continue to decline and staffing continues to improve, overall consumer and business activity remains muted in certain markets as consumer behaviors have changed due to the COVID-19 pandemic and some businesses have yet to bring employees back into their offices. Our restaurant operations have been, and could again in the future, be disrupted by team member staffing issues because of illness, exclusion, fear of contracting COVID-19 or caring for family members due to COVID-19, legal requirements for employee vaccinations or COVID testing, lack of labor supply, competitive labor pressures, or for other reasons. Furthermore, inflation has been and is elevated across our business, including food costs, due in part to the supply chain impacts of the pandemic. We remain in regular contact with our major suppliers and while, to date, we have not experienced significant disruptions in our supply chain due to the COVID-19 pandemic, we could see significant future disruptions should the impacts of the pandemic continue. Currently, national, state and local jurisdictions have removed their capacity restrictions on businesses and, therefore, our restaurants are serving customers in our dining rooms without social distancing requirements. However, it is possible additional outbreaks could lead to restrictive measures that could impact our guest demand and dining room capacity.
Our current operating losses, combined with our 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 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 we be unable to continue as a going concern.
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