ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 December 31, 2022, we operated and franchised a system-wide total of 34 fast casual restaurants of which 23 are company-owned and included in our consolidated financial statements, and 11 are owned and operated by franchisees under franchise agreements.
American Burger Company (“ABC”) was a fast-casual dining chain consisting of locations in North Carolina and New York, known for its diverse menu featuring fresh salads, customized burgers, milk shakes, sandwiches, and beer and wine. As of December 31, 2022, all locations are closed.
The Burger Joint (“BGR”) consists of five company-owned locations in the United States and seven franchisee-operated locations in the United States.
Little Big Burger (“LBB”) consists of 14 company-owned locations in the Portland, Oregon and Charlotte, North Carolina areas. One location was temporarily closed until it re-opened at the end of June 2022 due to lack of available employees. Of the company-owned restaurants, 10 of those locations are operated under partnership agreements with investors we have determined we are the primary beneficiary as we control the management and operations of the stores, and the partner supplies the capital to open the store in exchange for a non-controlling interest.
We acquired Pie Squared Holdings LLC (“PIE” or “Pie Squared Holdings”) on August 30, 2021. Pie Squared Holdings, directly and through its four wholly owned subsidiaries, owns, operates and franchises pizza restaurants operating under the tradename PizzaRev. At December 31, 2022, the company had one company-owned location and four franchised locations.
Our Jantzen Beach, Oregon location was a former Hooters of America location. This location is now home to our Jaybee’s Chicken Place, serving a selection of fast casual chicken. Next door to Jaybee’s is The Nest and The Roost, offering video gaming, pool tables and drinks. These locations opened on October 8, 2022.
Acquisition
On August 30, 2021, the Company purchased all of the outstanding membership interests in Pie Squared Holdings LLC (“Pie Squared Holdings”) pursuant to a Unit Purchase Agreement (“Purchase Agreement”). The purchase price is an 8% secured, convertible promissory note (“Note”) with a face value of $1.0 million and a fair value of $1.2 million at the acquisition date. Transaction costs of $0.2 million were incurred in connection with the acquisition and charged to general and administrative expenses in the consolidated statement of operations for the year ended December 31, 2021.
Recent Developments
In March 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 to April 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.
During the year ended December 31, 2022, the Company received related party advances in the aggregate of $0.6 million from an entity in which the Chief Financial Officer serves as an officer but has no ownership interest.
In January 2023, the Company entered into an asset purchase agreement with Boudreaux’s Cajun Kitchen, Inc. to acquire the Houston, Texas based brand and its four restaurant locations for an aggregate purchase price of $3.8 million. In March 2023, the transaction closed for cash consideration of $1.3 million and a convertible promissory note of $2.5 million. In connection with the transaction, the Company paid an affiliate of Oz Rey an aggregate fee of $0.3 million. The convertible promissory note accrues interest at a rate of 6.0% per annum and will mature two years from the date of closing, with $1.3 million of the principal balance of the note due and payable in July 2023. The note may be converted, at the option of the holder, into shares of common stock at a conversion price of $0.50 per share. The convertible promissory note may be prepaid in whole or in part at any time, without premium or penalty.
In February 2023, the Company closed a $2.5 million Series B convertible preferred stock (the “Series B Preferred”) and warrant financing with an affiliate of Oz Rey. The Company issued 125 shares of Series B Preferred and warrants to purchase up to 1,250,000 shares of common stock at a $0.0001 par value. The warrants have a term of 10 years and an initial exercise price of $1.00 per share of common stock, which is subject to adjustment for customary provisions such as stock splits, stock dividends and distributions.
The Series B Preferred is convertible into shares of common stock at the option of the investors at a conversion price of $0.50 per share and will accrue dividends in an amount equal to 12% on an annual basis, payable in cash or in shares of common stock based on 30-day volume-weighted average price of common stock on the trading market. The Company has the right to redeem the Series B Preferred subject to certain terms.
Recent Business Trends
Throughout 2022, we faced varying degrees of COVID-19 pandemic related pressures. In spite of this, our sales have continued to increase from when compared to the corresponding quarters in 2021. Our revenue for fiscal years 2022 and 2021 was $21.3 million and $20.7 million, respectively. This represents an annual increase in revenue of 3.1%.
Looking forward to 2023, we anticipate continued inflationary pressures on our restaurant cost of sales and restaurant operating expenses. We also face a tight and competitive labor market throughout all locations. Our management team has and will continue to innovatively approach these challenges.
Future Plans
The Company has three core restaurant groups: Boudreaux’s Cajun Restaurants, Little Big Burger, The Burger Joint, as well as a one-off gaming concept.
In March 2023, we finalized the purchase of Boudreaux’s Cajun Kitchen with four locations in Houston, Texas. We anticipate expanding this restaurant concept throughout the southern United States.
For the Little Big Burger concept, we do not anticipate opening new units in the near term.
We are actively pursuing the sale of additional The Burger Joint franchises and finding additional Company managed location opportunities.
The Company will continue looking for acquisition opportunities that will add value to our core concepts.
In 2022, the Company closed several underperforming stores. We believe that the remaining stores are cash flow positive at the store level. Our challenge remains the cost of being a public company. We plan to continue to find acquisition candidates and to add to our concepts so that, company-wide, we become cash flow positive.
COVID-19 Pandemic Update
Since at least March 2020, when it was first characterized as a global pandemic, COVID-19 dramatically impacted and continues to impact the global health and economic environments, including millions of confirmed cases and deaths, business slowdowns or shutdowns (including shutdowns or severe restrictions of capacity in our dining rooms at various points in time), labor shortfalls, supply chain challenges, regulatory challenges, inflationary pressures and market volatility. 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 and negatively impacted our sales. Once COVID-19 vaccines were approved and moved into wider distribution in the United States in early to mid-2021, public health conditions improved and almost all of the COVID-19 restrictions on businesses eased.
We may face future business disruptions and related risks resulting from the COVID-19 pandemic or from another pandemic, epidemic or infectious disease outbreak, or from broader macroeconomic trends, any of which could have a significant impact on our business. In addition, while all of our restaurants had open dining rooms as of December 31, 2022, we continue to experience staffing challenges, including higher wage inflation, overtime costs and other labor related costs. We also continue to experience inflationary pressures, which resulted in increased commodity prices and impacted our business and results of operations during the year ended December 31, 2022. We expect these pressures to continue during fiscal year 2023.
PPP Loan
On March 27, 2020, Congress passed The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which included the Paycheck Protection Program (“PPP”) for small businesses. On April 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 bore interest at 1% per year, was due to mature in April 2022, and required monthly interest and principal payments of approximately $0.1 million beginning in November 2020 and through maturity. On February 25, 2021, the Company received a second PPP loan in the amount of $2.0 million. The note bore interest at 1% per year, was due to mature on February 25, 2026, and required monthly principal and interest payments of approximately $45,000 beginning June 25, 2022 through maturity. On November 15, 2022 and December 16, 2022, the Company received notice from the SBA that the first and second PPP loans, respectively, had been fully forgiven with accrued interest.
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 current period and determined that it was eligible for additional credits related to 2021 wages. As of each of December 31, 2022 and December 31, 2021, approximately $0.8 million of ERC is included in accounts and other receivables in the consolidated balance sheets. The Company recognized $0.7 million and $2.5 million for the years ended December 31, 2022 and 2021, respectively, of ERC as a contra-expense included in employee retention credit and other grant income in the consolidated statements of operations.
In addition to the ERC, the Company received credits under other government/government agency programs of approximately $128,000 for the year ended December 31, 2021, of which approximately $84,000 were recorded as an offset to restaurant operating expenses and $44,000 as other income, respectively, in the 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 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 December 31, 2022 and 2021, the Company had restricted cash of nil and $1.7 million, respectively, related to the unused proceeds from the RRF. The Company recognized $1.5 million and $0.5 million for the years ended December 31, 2022 and 2021, respectively, related to the RRF as a contra-expense included in employee retention credit and other grant income and in the consolidated statements of operations. As of December 31, 2022, all RRF funds were utilized.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2022 COMPARED TO THE YEAR ENDED DECEMBER 31, 2021
Our results of operations are summarized below:
Year Ended December 31,
(in thousands)
Amount
% of Revenue*
Amount
% of Revenue*
% Change
Revenue:
Restaurant sales, net
Gaming income, net
Franchise income
Total revenue
Expenses:
Restaurant cost of sales
Restaurant operating expenses
Restaurant pre-opening and closing expenses
General and administrative expenses
Asset impairment charges
Depreciation and amortization
Employee retention credit and other grant income
Total expenses
Operating loss
Other income (expense):
Interest expense
Change in fair value of derivative liabilities
Change in fair value of investment
Change in fair value of convertible promissory note
Gain on sale of subsidiary
Gain on extinguished/settled lease liabilities
Gain on extinguished trade payable
Gain on loan forgiveness
Other income
Total other income
Loss before income taxes
Income tax expense
Consolidated net loss
* Restaurant cost of sales and operating expenses percentages are based on restaurant sales, net. Other percentages are based on total revenue.
Revenue
Total revenue increased $0.6 million or 3.1% during the year ended December 31, 2022 as compared to the year ended December 31, 2021.
Year Ended December 31, 2022
Year Ended December 31, 2021
Amount
% of Revenue
Amount
% of Revenue
(in thousands)
Restaurant sales, net
Gaming income, net
Franchise income
Total revenue
Revenue from restaurant sales decreased $0.1 million or 0.6% for the year ended December 31, 2022, as compared to the year ended December 31, 2021, due to a net decrease of six company owned stores. As of December 31, 2022 and 2021, the Company had 20 and 29 company owned stores, respectively.
Franchise income increased $0.7 million or 148.5% for the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily due to $0.7 million of franchise income recognized in March 2022 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 $0.7 million as a result of the termination of the international Master Franchise Agreements.
Expenses
Restaurant cost of sales
Restaurant cost of sales increased $0.2 million or 3.3% for the year ended December 31, 2022, as compared to the year ended December 31, 2021. Restaurant cost of sales as a percentage of restaurant sales increased to 32.4% for the year ended December 31, 2022 compared to 31.2% for the year ended December 31, 2021 primarily due to rising food costs.
Restaurant operating expenses
Restaurant operating expenses increased $1.8 million or 13.8% for the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily due to an overall increase in payroll cost with cost-of-living increases across the board for our employees.
General and administrative expense (“G&A”)
G&A expenses increased $0.4 million or 7.2% for the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily due to the net effect of (i) increase in salary and benefits of $0.7 million, primarily due to the addition of two senior management personnel and an increase in our employee headcount from December 31, 2021 to December 31, 2022 (ii) a decrease in audit, legal and other professional services of $0.4 million primarily due to a decrease in necessary legal and professional services in 2022 compared to 2021.
Significant components of G&A are summarized as follows:
Year Ended December 31,
(in thousands)
Audit, legal and other professional services
Salary and benefits
Advertising, insurance and other
Stockholder services and fees
Travel and entertainment
Total G&A expenses
Asset impairment charges
Asset impairment charges of an aggregate $3.2 million were recorded during the year ended December 31, 2022, which consisted of an impairment on (i) right-of-use asset of $1.8 million (ii) property and equipment of $0.8 million, (iii) trademark/tradenames of $0.3 million, and (iv) franchise rights of $0.3 million, primarily due to ongoing cash flow implications from the change in consumer dining habits in the aftermath of the COVID-19 pandemic.
Asset impairment charges of $1.5 million were recorded during the year ended December 31, 2021. During the year ended December 31, 2021, we recorded an impairment on trademark/tradenames of approximately $0.3 million, property and equipment of approximately $0.4 million and right-of-use asset of approximately $0.7 million primarily due to ongoing cash flow implications resulting from the COVID-19 pandemic.
Employee retention credit and other grant income
Employee Retention Credit (“ERC”) . For the years ended December 31, 2022 and 2021, the Company recognized $0.7 million and $2.5 million, respectively, of ERC as a contra-expense included in employee retention credit and grant income in the consolidated statements of operations. Although the program ended on January 1, 2022, the Company performed an analysis during 2022 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 years ended December 31, 2022 and 2021, the Company recognized $1.5 million and $0.5 million, respectively, related to the RRF as a contra-expense included in employee retention credit and other grant income in the consolidated statements of operations. As of December 31, 2022, there was no remaining available for future recognition under the RRF.
For additional information, see Note 4 to the consolidated financial statements.
Other Income (Expense)
Interest expense
Interest expense was $0.9 million for the year ended December 31, 2022, compared to $0.7 million for the year ended December 31, 2021. This is consistent with the rising interest rates on new borrowings in 2022.
Change in fair value of derivative liabilities
There were no derivative liabilities recorded during the year ended December 31, 2022. During the year ended December 31, 2021, the change in fair value of derivative liabilities was a gain of $0.1 million 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 in July 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. We recognized a loss in fair value of $38,000 and $0.2 million during the years ended December 31, 2022 and 2021, respectively as a result of decreases in Sonnet’s common stock price.
Change in fair value of convertible promissory note
In August 2021, we issued an 8% secured, convertible promissory note as consideration for the acquisition of Pie 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 $0.1 million during the years ended December 31, 2022 and 2021, respectively.
Gain on extinguished/settled lease liabilities
During the years ended December 31, 2022 and 2021, we recognized a gain on extinguished/settled lease liabilities of $0.3 million and $0.4 million. The gain recognized during the year ended December 31, 2022 was the result settlements of outstanding lease liabilities. The gain recognized during the year ended December 31, 2021 was due to the derecognition of operating lease liabilities resulting from our negotiation of the cancellation of our obligations under certain lease agreements resulting from the COVID-19 pandemic.
Gain on extinguished trade payable
During the year ended December 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 trade payable extinguishments during the year ended December 31, 2021.
Gain on loan forgiveness
During the year ended December 31, 2022, we recognized a gain on loan forgiveness of $4.2 million due to the forgiveness of the PPP loans, plus accrued interest. There was no loan forgiveness during the year ended December 31, 2021.
Other income (expense)
Other income increased $43,000 or 13.9% for the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily due to (i) a gain of $0.1 million recognized as a result of franchise-related litigation settlement and (ii) a dividend received during 2022 from our investment in Hooters of America of approximately $0.1 million.
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2022 COMPARED TO THE YEAR ENDED DECEMBER 31, 2021
Year Ended December 31,
(in thousands)
Net cash flows used in operating activities
Net cash flows (used in) provided by investing activities
Net cash flows provided by financing activities
Effect of exchange rate changes on cash
Net (decrease) increase in cash and restricted cash
Operating activities
Cash used in operating activities was primarily attributable to the net effect of (i) non-cash income of $4.2 million related to the gain recognized on the forgiveness of our PPP loans, (ii) a net loss of $3.3 million, (iii) asset impairment charges of $3.2 million, (iv) $2.0 million related to depreciation and amortization, (v) $0.3 million related to the gain on extinguished/settled lease liabilities and (vi) $0.2 million recognized for a gain on extinguished trade payable. 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 $4.5 million for the year ended December 31, 2021. This use of cash was primarily driven by the net loss incurred of $3.5 million offset by non-cash charges to operations of $3.2 million. The non-cash charges in 2021 consist primarily of asset impairment charges of $1.5 million, depreciation and amortization of property and equipment, intangible assets and right-of-use assets totaling $2.0 million and amortization of debt discount of $0.2 million, offset by gain on extinguished lease liabilities of $0.4 million and gain on sale of subsidiary of $0.1 million. The balance of the change in cash flows from operating activities was related to net movements in asset and liability accounts.
Investing activities
Cash used in investing activities during the year ended December 31, 2022 was primarily attributable to outflows from the purchase of property and equipment.
Cash provided by investing activities during the year ended December 31, 2021 was primarily related to $2.0 million cash and restricted cash acquired in connection with the acquisition of Pie Squared Holdings, $0.6 million net proceeds from the sale of the UK subsidiary and $0.5 million proceeds from the sale of investments.
Financing activities
Cash provided by financing activities for the year ended December 31, 2022 was primarily attributable to proceeds of $1.4 million related to the issuance of 8% senior unsecured convertible debentures and proceeds of $1.1 million related to the issuance of notes payable, partially offset by $0.4 million in payments of long-term debt and notes payable.
Cash provided by financing activities for the year ended December 31, 2021 was primarily attributable to proceeds from the $2.0 million PPP loan.
LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN
As of December 31, 2022, our cash balance was $0.4 million, of which none was restricted, our working capital deficiency was $16.3 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;
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.
As we execute our business plan over the next 12 months, we intend to carefully monitor the impact of our 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, we may then have to scale back or freeze our operations plans, sell assets on less than favorable terms, reduce expenses, and/or curtail future acquisition plans to manage our liquidity and capital resources.
Our current operating losses combined with our working capital deficit 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 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.
CRITICAL ACCOUNTING POLICIES
Our reported results of operations and financial position are dependent upon the application of certain accounting policies and estimates that require subjective or complex judgments. Such estimates are inherently uncertain and changes in such estimates could have a significant impact on reported results and balances for the periods presented as well as future periods. The following is a description of what we consider to be our most critical accounting policies.
Leases
We determine if a contract contains a lease at inception. Our material operating leases consist of restaurant locations and office space. Our leases generally have remaining terms of 1-20 years and most include options to extend the leases for additional 5-year periods. Generally, the lease term is the minimum of the noncancelable period of the lease or the lease term inclusive of reasonably certain renewal periods up to a term of 20 years. If the estimate of our reasonably certain lease term was changed, our depreciation and rent expense could differ materially.
Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental borrowing rates corresponding to the reasonably certain lease term. As we have no committed credit facilities, secured or otherwise, we estimate this rate based on prevailing financial market conditions, comparable company and credit analysis, and management judgment. If the estimate of our incremental borrowing rate was changed, our operating lease assets and liabilities could differ materially.
Estimated Lease Termination and Other Closing Costs
Once we have determined that a restaurant location is to be closed, we estimate the expected proceeds to be received from such disposal and impair the carrying value of the net assets of such locations to this estimate and report these net assets as assets held for sale. Our estimate of disposal proceeds is dependent upon multiple assumptions including our ability to identify a buyer as well as the general market for commercial real estate at the expected time of disposal. Actual results could significantly differ from these estimates, which could result in a significant impact to reported operations in future periods. Assets that have been impaired to their estimated disposal proceeds are maintained at the lower of this new carrying value or the most recently developed estimate of eventual proceeds.
Intangible Assets
Trademark/Tradenames
Certain of the Company’s trademark/tradenames have been classified as indefinite-lived intangible assets and are not amortized, but instead are reviewed for impairment at least annually or more frequently if indicators of impairment exist. Definite lived intangible assets are assessed for impairment using methods discussed below in the long-lived assets section. The Company’s indefinite-lived intangible assets are tested for impairment at least annually by estimating their fair value and comparing it to the asset’s carrying value. The Company estimates the fair value of indefinite-lived tradenames using the relief-from-royalty method, which requires assumptions related to projected sales from its annual long-range plan; assumed royalty rates that could be payable if the Company did not own the trademarks; and a discount rate.
Long-Lived Assets
Long-lived assets, such as property and equipment, operating lease assets, and purchased intangible assets subject to depreciation and amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Some of the events or changes in circumstances that would trigger an impairment test include, but are not limited to:
significant under-performance relative to expected and/or historical results (negative comparable sales growth or operating cash flows for two consecutive years);
significant negative industry or economic trends;
knowledge of transactions involving the sale of similar property at amounts below the Company’s carrying value; or
the Company’s expectation to dispose of long-lived assets before the end of their estimated useful lives, even though the assets do not meet the criteria to be classified as “Held for Sale.”
If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
Due to the continued impact of this pandemic on the Company’s business, management performed an impairment analysis of its long-lived assets as of each quarter end during 2021 and determined that the carrying value of the Company’s trademark/tradenames intangible asset, property and equipment and operating lease assets were impaired for an aggregate amount $1.5 million for the years ended December 31, 2021. The determination was based on the best judgment of management for the future of the assets and on information known at the time of the assessment. During 2022, primarily as a result of multiple permanent store closures, the Company determined that triggering events occurred requiring management to review certain long-lived assets for impairment and determined that the carrying value of the Company’s trademark/tradenames intangible asset, acquired franchise rights intangible asset, property and equipment and operating lease assets were impaired. resulting in an aggregate impairment charge of $3.2 million for the year ended December 31, 2022. The determinations were based on the best judgment of management for the future of the assets and on information known at the time of the assessment.
Goodwill
Goodwill is not subject to amortization but is tested at least annually or when impairment indicators are present. When evaluating goodwill for impairment, the Company may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. Management has determined that the Company only has one reporting unit. If the Company does not perform a qualitative assessment or determines that it is not more likely than not that the fair value of the reporting unit exceeds its carrying amount, a quantitative assessment is performed to calculate the estimated fair value of the reporting unit. If the carrying amount of the reporting unit exceeds the estimated fair value, an impairment charge is recorded to reduce the carrying value to the estimated fair value. The Company’s decision to perform a qualitative impairment assessment is influenced by a number of factors, including the significance of the excess of the reporting unit’s estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments, and the price of our common stock. Impairment is measured as the excess of carrying value of the goodwill to its estimated fair value. Due to the ongoing impact of the COVID-19 pandemic on the Company’s business during 2021 and changing consumer habits, macroeconomic trends and poor performance and the ultimate closure of certain stores during 2022, management performed an impairment analysis of goodwill as of each quarter end during 2022 and 2021, the result of the analysis was that due to the negative carrying value of the reporting unit no impairment was recorded in either year.
Business Combination Accounting
Accounting for assets acquired, liabilities assumed and consideration transferred in a business combination requires Amergent’s management to exercise judgment and make estimates and assumptions regarding fair value. The Company acquired Pie Squared Holdings during the year ended December 31, 2021, resulting in the Company recording the assets acquired and liabilities assumed at fair value on the acquisition date, as well as fair valuing the convertible promissory note issued as consideration for the business combination. The Company elected the fair value option to account for the convertible promissory note. The convertible promissory note was initially recorded at fair value at the acquisition date and will be subsequently remeasured to fair value at each reporting date, with changes recognized in the consolidated statement of operations until the liability is repaid or converted into common stock.
In addition, the Company assumed all the rights and obligations of Pie Squared Holdings that arose from transactions of Pie Squared Holdings prior to the business combination, both stated rights and obligations as well as those that are contingent. Pie Squared Holdings applied for and received an approximately $10.0 million grant from the U.S. SBA under the RRF and used approximately $8.0 million to repay existing debt of Pie Squared Holdings and to fund some of its operating expenses. Under the RRF there is a requirement that the grant monies be for “eligible uses.” The Company, through the structure of the acquisition, 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 the disbursement 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, at this time, 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.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to the consolidated financial statements included elsewhere in this Form 10-K.
