(3)	Previously paid.

Merriman Capital, Inc.

Dawson James Securities, Inc.

Our first location in South Africa opened in December 2009 and as of December 31, 2011 LP’s have been paid $129,877 (36.9%) against their 20% return. Our second location opened in June 2010 and as of December 31, 2011 LP’s have been paid $65,461 (15.9%) against their 20% return. Our third location opened in June 2011 and as of December 31, 2011 LP’s have been paid $18,000 (4.2%) against their 20% return. The payments to investors for our first and second locations were primarily funded from the cash flows of the restaurants. The payments to investors for the third location were funded by the Company as an advance on expected future cash flows.

•

is presented without giving effect to an amendment to our certificate of incorporation providing for a 1-for-2 reverse stock split, which was approved by our stockholders on May 11, 2012, to be effected prior to the closing of this offering; and

•

assumes no exercise of the over-allotment option granted to the underwriters.

		Three Months Ended March 31,												Year Ended December 31,
		2012												2011				2010
Statement of Operations Data:			As reported											As reported
Revenues		$	1,373,987											$	1,463,820			$	136,301
Expenses			1,942,100												2,567,210				1,147,866
Net loss		$	(568,113	)										$	(1,103,390	)		$	(1,011,565	)
Balance Sheet Data:
							Adjustment				Proforma
Current Assets		$	636,758			$	9,500,000			$	10,136,758			$	623,681			$	158,718
Working Capital (deficit)			(4,142,612	)			13,600,000				9,457,388				(3,003,625	)			(486,916	)
Total assets			6,084,044				9,500,000				15,584,044				5,504,678				1,414,559
Total stockholders’ equity			1,071,175				13,600,000				14,671,175				1,641,263				82,425

·

quarterly variations in our operating results and achievement of key business metrics;

·

changes in the global economy and in the local economies in which we operate;

·

our ability to obtain working capital financing, if necessary;

·

the departure of any of our key executive officers and directors;

·

changes in earnings estimates by securities analysts, if any;

·

any differences between reported results and securities analysts’ published or unpublished expectations;

·

market reaction to any acquisitions, joint ventures or strategic investments announced by us or our competitors ;

·

future sales of our securities;

	·	announcements or press releases relating to the casual dining restaurant sector or to our own business or prospects;
	·	regulatory, legislative, or other developments affecting us or the restaurant industry generally; and

USE OF PROCEEDS

 

We estimate that the net proceeds to us from the sale of the units that we are offering, assuming gross proceeds of $15.0 million, will be approximately $13.6 million, after deducting underwriting discounts and commissions and estimated offering expenses, or approximately $16.3 million if the underwriter’s over-allotment is exercised in full.

 

We expect to use any proceeds received from this offering as follows:

 

	•	$7.8 million for investment in Hooters international franchises – presently we have agreements in place for Surfers Paradise (Australia), Brazil and Hungary. Approximately $5.3 million is for Hooters locations where we have existing rights and $2.5 million is for possible future acquisitions ;
	•	$4.5 million to payoff existing debt – $1.8 million estimated balance of our bank line of credit, which currently has an annual interest rate of 4.5% (0.5 % over Wall Street Journal Prime rate, or floor of 4.5%, whichever is higher) and matures on August 20, 2012;and $2.7 million payoff of convertible debt, which currently has an annual interest rate of 18% and matures from dates ranging between January and August 2012.  In lieu of cash repayments, as agreed to by the holders, we expect approximately $3.0 million of convertible debt and collateral holders will be converted into units as part of the offering;
	•	$1.3 million for general corporate working capital.

 

The projected expenditures shown above are only estimates or approximations.  We expect the proceeds from this offering together with revenues generated from our business, will be sufficient to cover our anticipated capital requirements for at least the next 24 months.  Until we are able to apply the net proceeds of this offering to the uses described above, we intend to invest the proceeds in short term investment grade securities.  Any proceeds received from the exercise of warrants will be used for working capital.

Our net tangible book value at March 31, 2012 was $0.12 per share and was determined by dividing our actual net tangible book value (total book value of tangible assets less total liabilities) on that date, by the number of outstanding shares (2,498,891) on March 31, 2012.

 

Our pro forma net tangible book value at March 31, 2012 was $1.85 per share and gives effect to the sale of 5,000,000 units in this offering, at a public offering price of $3.00 per unit (we have assumed for purposes of this table that the entire $3.00 per unit is attributable to the sale of the common stock included in each unit), and our payment of the underwriting discount, the representative's non-accountable expense allowance, and the estimated offering expenses.

 

 The net proceeds from the sale of the 5,000,000 units represents an immediate increase in net tangible book value per share of $1.73 to the existing stockholders and dilution of $1.27 per share to the new investors. For purposes of the dilution calculation and the following tables, we have allocated the full purchase price of a unit to the shares of common stock included in the unit and nothing to the warrants included in the unit.

 

 The following table illustrates this per share dilution:

 

			Amount				Percent
Assumed public offering price per share		$	3.00
Net tangible book value per share at March 31, 2012		$	0.12
Increase in pro forma net tangible book value per share attributable to new investors		$	1.73				58	%
Pro forma as net tangible book value per share after this offering		$	1.85
Dilution to new investors		$	1.15				38	%

 

If the underwriters' over-allotment option is exercised in full, dilution per share to new investors would be $1.02 per share of common stock. The as adjusted information discussed above is illustrative only and will adjust based on the actual public offering price and other terms of this offering. 

 

In the future, new investors may be subject to additional, substantial dilution if and to the extent significant amounts of our outstanding convertible notes, stock options and warrants are converted or exercised.

 

·

any beneficial owners of common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries, or

·

broker-dealers or other participants who hold or clear shares directly or indirectly through the Depository Trust Company, or its nominee, Cede & Co.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD-LOOKING STATEMENTS

 

Certain statements contained in this prospectus that are not historical fact are "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. The words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "believes," "estimates," "projects" or similar expressions are intended to identify these forward-looking statements. These forward-looking statements should be evaluated with consideration given to the many risks and uncertainties inherent in our business that could cause actual results and events to differ materially from those in the forward-looking statements. These forward-looking statements are based on trends which we anticipate in our industry and are qualified in their entirety by the cautionary statements and risk factor disclosures contained in the section entitled “Risk Factors.” Accordingly, certain important factors may have affected and could in the future affect our actual results and could cause our actual results for subsequent periods to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. New risks emerge from time to time and it is not possible for our management to predict all such risk factors or to assess the impact of such risks on our business. Accordingly, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. The inclusion of projections and other forward-looking statements should not be regarded a representation by us or any other person that we will realize our projections or that any of the forward-looking statements contained in this prospectus will prove to be accurate.

 

Management’s Analysis of Business

 

We have changed our focus recently from managing investments to owning and operating Hooters franchises internationally.  Hooters restaurants are casual beach-themed establishments with sports on television, jukebox music, and the “nearly world famous” Hooters Girls.  The menu consists of spicy chicken wings, seafood, sandwiches and salads.  Each location’s menu can vary with the tastes of the locality it is in.  Hooters began in 1983 with its first restaurant in Clearwater, Florida. From the original restaurant and licensee Mr. Robert Brooks, Hooters has become a global brand, with locations in 44 states domestically and over 450 Hooters restaurants worldwide. Besides restaurants, Hooters has also branched out to other areas, including licensing its name to a golf tour and the sale of packaged food in supermarkets.

 

We expect to either own 100% of the Hooters franchise or partner with a local franchisee in the countries we target.   We based this decision on what we believe to be the successful launch of our South African Hooters venture and believe we have aligned partners and operators in various international markets. We are focused on expanding our Hooters operations, and expect to use substantially all the net proceeds from this offering in South Africa, Brazil, Hungary, Australia and Western Europe.

 

Accordingly, we operate in two business segments; Hooters franchise restaurants and our legacy investment management and consulting services businesses.

  

RESTAURANT OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2012

 

The following is a condensed statement of operations for our restaurant operations, which currently consists of four Hooters locations in South Africa.

 

		(1)				(2)				(3)				(4)
		Durban				Johannesburg				CapeTown				Emperors Palace				Total Restaurants
Revenues		$	261,499			$	492,669			$	163,535			$	431,284			$	1,348,987
Cost of Sales			97,828				176,019				65,028				157,674				496,549
Gross Profit			163,671				316,650				98,507				273,610				852,438
Recurring expenses:
Operating expenses, including management fees eliminated in consolidation			149,166				263,230				119,103				151,708				683,207
General and administrative expenses			-				-				-				-				-
Other expenses (income)			-				-				-				-				-
Interest expense			1,340				2,415				2,111				-				5,866
Depreciation and amortization			16,712				45,293				17,229				26,606				105,840
Income taxes			1,477				-				-				2,339				3,816
			168,695				310,938				138,443				180,653				798,729
Net income (loss) before non-recurring expenses			(5,024	)			5,712				(39,936	)			92,957				53,709
Pre-opening costs			-				-				-				78,287				78,287
Net income (loss)		$	(5,024	)		$	5,712			$	(39,936	)		$	14,670				(24,578	)
Loss from management company not absorbed above																			(4,694	)
Total South Africa restaurants																		$	(29,272	)

 

(1) Durban location opened in December 2009.

(2) Johannesburg location opened in June 2010.

(3) CapeTown location opened in June 2011.

(4) Emperors Palace location opened mid-February 2012.

 

We expect net income for the four stores for the remainder of 2012 to be approximately $50,000-$100,000 per quarter. The Emperor’s Palace location was our first location opened since we took over operational control of these locations, and we expect this location to continue at its current pace.

 

 

LIQUIDITY AND CAPITAL RESOURCES AND GOING CONCERN

 

Historical information:

 

At March 31, 2012 and December 31, 2011, the Company had current assets of $636,758 and $623,681; current liabilities of $4,779,370 and $3,627,306; and a working capital deficit of $4,142,612 and $3,003,625, respectively. The Company incurred a loss of $568,113 during the three months ended March 31, 2012 and had an unrealized loss from available-for-sale securities of $105,618 and foreign currency translation losses of $1,279, resulting in a comprehensive loss of $675,010.

 

The Company's corporate general and administrative expenses averaged approximately $295,000 per quarter during 2011 and increased to $481,000 in the current quarter as we expanded our footprint internationally.

 

Effective October 1, 2011, the Company acquired majority control of the restaurants in South Africa and began consolidating these operations. The Company also will share 49% of the profits in our Hooters location opened in January 2012 in Campbelltown, Australia, a suburb of Sydney.

 

In addition, the Company has a note with a balance at March 31, 2012 of $241,115 owed to its bank which is due in August 2013 and a line of credit with its bank with a balance at March 31, 2012 of $1,178,000 (total available $2,000,000) due on August 20, 2012. We also have convertible notes payable with certain investors with a balance at March 31, 2012 of $2,725,000 with maturity dates from January 22 through June 26, 2012. None of the noteholders whose notes have matured have taken any action to seek to enforce their notes. As of May 1, 2012, there are $975,000 in principal amount of notes that have matured. The notes bear interest at an 18% annualized rate. The Company plans to continue to use outside investors in separate entities (which we refer to as “limited partners”), if the proceeds from this offering combined with cash flow from operations is not sufficient to cover the costs for additional Hooters restaurants in the future.

 

The Company expects to meet its obligations in 2012 with some or all of the following:

·

Proceeds from the sale of the units in this offering

·

The Company received $100,000 in January 2012 as an annual fee for its CEO sitting on the Board of Hooters of America and expects to continue to receive this fee for the next three years based on the current agreement;

·

Borrow additional funds on its existing line of credit;

·

Convert its convertible notes payable into common stock.

 

If any or all of the above events do not occur or if the Company does not raise sufficient capital, substantial doubt about the Company’s ability to continue as a going concern exists. These consolidated financial statements do not reflect any adjustments that might result from the outcome of these uncertainties.

 

Evaluation of the amounts and certainty of cash flows:

 

The Company plans to use the proceeds from this offering to complete its expansion plans in South Africa, Brazil, Australia, Hungary and Western Europe. The Company has used short-term financing to meet the preliminary requirements of its planned expansion, principally in South Africa and Australia. If the Company is unable to complete this offering, the Company would be required to limit its expansion plans. We would use limited partner funding and other sources of capital, including an expansion of our existing line of credit or a new line of credit, private sales of our common stock and other convertible debt, to the extent necessary to attempt to fund as much of the planned expansion as possible. There can be no assurance that any of this funding will be available when needed.

 

Cash requirements and capital expenditures:

 

In 2012, we expect to open one restaurant in each of the following countries – Australia (in addition to the one already opened in February 2012), Brazil, Hungary and South Africa. The Company expects the total cash requirements for these restaurants to be approximately $3.3 million, of which approximately $450,000 has been paid as of March 31, 2012.

 

In addition, we expect general and administrative expenses to be approximately $1.8-$2.0 million for 2012.

 

Discussion and analysis of known trends and uncertainties:

 

The World economy has been in a state of flux for some time with the debt problems of a number of countries in Europe, the recent recession in the United States, the significant increase in the debt of the United States compounded by continuing to give away more than can reasonably be collected, the slowing economy in China and other factors. It is impossible to forecast what this will mean to our expansion plans in South Africa, Brazil, Australia and Hungary. We feel that we minimize our risks through investment in different geographical areas.

 

Expected changes in the mix and relative cost of capital resources:

 

Since the middle of 2010, the Company has utilized high cost capital to finance its international growth. The Company hopes to eliminate the majority of this debt with new equity and further, to use this equity to complete its expansion plans over the next two years.

 

Other prospective sources for and uses of cash:

 

If the Company is unable to obtain the funding from its Offering, it will seek other sources of interim funding to maintain its current operations and complete the restaurants already underway.

 

If the above events do not occur or the Company is unable to develop its business model, substantial doubt about the Company's ability to continue as a going concern exists.

 

 

Comparison of three months ended March 31, 2012 and 2011

 

Revenue

 

Revenue amounted to $1,373,987 in the three months ended March 31, 2012 and $441,313 in the year earlier period.

 

Restaurant sales, net amounted to $1,348,987 for our four locations in South Africa, one of which opened to the public on February 17, 2012.

 

Revenues for the management business for the three months ended March 31, 2012 amounted to $25,000 and $441,313 in the year earlier period. Cash revenues were $25,000 and $416,667 in the three months ended March 31, 2012 and 2011, respectively. The cash revenues for the management business in 2011 was from a fee of $400,000 received in January 2011 for our services in facilitating the acquisition of HOA and TW plus the accrual of $16,667 for the annual $100,000 fee received in January 2012. In the three months ended March 31, 2012 the cash revenue of $25,000 represents three months of the Company’s annual payment from HOA of $100,000, which is due in January each year while Mr. Pruitt serves on its board.  The Company also recorded an accrual of $22,896 for management fees from Investors II in 2011. Non-cash revenues in the three months ended March 31, 2011 of $1,750 was recognized from the receipt of securities for our services.

 

The fair value of the equity instruments for management fees received was determined based upon the stock prices as of the date we reached an agreement with the third party. The terms of the securities are not subject to adjustment after the measurement date. See Note 4 of the consolidated financial statements for details.

 

Restaurant cost of sales

 

Restaurant cost of sales amounted to $496,549, or 36.8% of restaurant net sales. We expect the percentage to remain approximately the same in 2012 as we expand our business in South Africa and other countries.

 

Restaurant operating expenses

 

Restaurant operating expenses amounted to $615,769, or 45.6% of restaurant net sales. We expect the percentage of operating expenses to restaurant net sales to decline as we open more Hooters locations, however we have a limited history to be able to forecast a range.

 

Restaurant pre-opening expenses

 

Restaurant pre-opening expenses amounted to $66,120 incurred for the opening of our location at the Emperor’s Palace Casino in Johannesburg, South Africa in February 2012.

 

 

General and Administrative Expense (“G&A”)

 

G&A amounted to $481,273 in the three months ended March 31, 2012 and $224,458 in the year earlier period. The more significant components of G&A are summarized as follows:

 

		2012				2011
Professional fees		$	59,910			$	18,344
Payroll and benefits			171,017				118,749
Consulting and investor relation fees			118,597				16,644
Travel and entertainment			42,966				13,186
Accounting and auditing			42,700				21,500
Other G&A			46,083				36,035
		$	481,273			$	224,458

   

G&A costs are expected to range from $400-$500,000 per quarter for the remainder of 2012, with the costs associated with the activities of the restaurant business continuing to grow. Revenue from the restaurants is expected to exceed this increase in expense.

 

Payroll and benefits increased $52,268 in 2012 from 2011 primarily from the addition of restaurant management personnel beginning in the fourth quarter of 2011.

 

Consulting and investor relations fees increased $101,953 in 2012 from 2011 as the Company engaged experienced personnel to startup our European subsidiary and Brazil operations and to increase the Company’s recognition in the investment arena. Non-cash amortization of warrant expense for services were $23,495 and $0 in 2012 and 2011, respectively.

 

Travel and entertainment increased $29,780 as Company personnel, primarily the CEO, traveled to increase our company awareness and lockdown financing and partners for the restaurant locales.

 

Depreciation and amortization

 

Depreciation expense for the three months ended March 31, 2012 and 2011 amounted to $102,189 and $2,549, respectively. The restaurant segment for the three months ended March 31, 2012 and 2011 amounted to $99,417 and $0, respectively, and the management business amounted to $2,772 and $2,549, respectively.

 

Amortization expense for the three months ended March 31, 2012 for the restaurant businesses related to franchise fees was $6,423. There was no amortization expense in 2011.

 

 

OTHER INCOME (EXPENSE)

 

Other income (expense) consisted of the following at March 31, 2012 and 2011:

 

		2012				2011
Other income (expense):
Equity in earnings (losses) of investments		$	(10,538	)		$	5,103
Realized gains from sale of investments			-				19,630
Interest expense			(177,218	)			(18,759	)
Interest income			-				4,541
Miscellaneous income			-				476
		$	(187,756	)		$	10,991

 

Equity in Earnings of Investments

 

Equity in earnings of investments includes our share of earnings from investments in which we own at least 20% and are being accounted for using the equity method. This included losses from the Hoot Campbelltown partnership in 2012 of $10,538, and income from the Hoot SA entities in 2011 of $5,103.

 

Realized Gains from Sale of Investments

 

Realized gains are recorded when investments are sold and include transactions in 2011 from a gain on sales of DineOut.

 

Interest Expense

 

Interest expense increased by $158,459 in 2012 from 2011 primarily due to the addition in 2011 of a line of credit with a balance as of March 31, 2012 of $1,178,000 and convertible notes payable in the amount of $1,725,000, offset by the conversion of $686,500 of convertible notes payable from 2010.

 

Interest Income

 

Interest income in 2012 decreased $4,541 as 2011 includes earnings from Investors for one month, compared to 2012 which had none.

 

PROVISION FOR INCOME TAXES

 

The Company recorded income tax expense of $3,816 based on the net profit of two of our South African locations at a 28% corporate income tax rate.

 

 

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010

 

Revenue

 

Revenue amounted to $1,463,820 in 2011 and $136,301 in 2010. Cash revenues were $493,167 and $967,418 in 2011 from the management and restaurant businesses, respectively, and $84,218 in 2010 from the management business. The majority of our cash revenues in 2011 for the management business was from a fee of $400,000 received in January 2011 for our services in facilitating the acquisition of HOA and TW and of $91,667 of the Company’s annual payment from HOA of $100,000, which is due in January each year while Mr. Pruitt serves on its board.  In 2010 cash revenues were management fees from Investors LLC and Investors II. Non-cash revenues in 2011 and 2010 of $3,235 and $52,083, respectively were recognized from the receipt of securities for our services.

 

The fair value of the equity instruments for management fees received was determined based upon the stock prices as of the date we reached an agreement with the third party. The terms of the securities are not subject to adjustment after the measurement date. See Note 4 of the consolidated financial statements for details.

 

Restaurant cost of sales

 

Restaurant cost of sales totaled $360,810, or 37.3% of restaurant net sales. We expect the percentage to remain approximately the same in 2012 as we expand our business in South Africa and other countries.

 

Restaurant operating expenses

 

Restaurant operating expenses totaled $483,946, or 50.0% of restaurant net sales. We expect the percentage of operating expenses to restaurant net sales to decline as we open more Hooters locations, however we have a limited history to be able to forecast a range.

 

General and Administrative Expense (“G&A”)

 

G&A increased to $1,245,752 in 2011 from $935,110 in 2010. The more significant components of G&A are summarized as follows:

 

		2011				2010
Professional fees		$	104,016			$	106,594
Payroll and benefits			563,323				518,162
Consulting and investor relation fees			261,315				17,223
Travel and entertainment			84,767				42,950
Accounting and auditing			70,450				67,914
Director fees			-				42,500
Bad debt expense			750				24,907
Other G&A			161,131				114,860
		$	1,245,752			$	935,110

  

G&A costs are expected to increase in 2012 to $325-$350,000 per quarter, with the costs associated with the activities of the restaurant business continuing to grow. Revenue from the restaurants is expected to exceed this increase in expense.

 

Payroll and benefits increased $45,161 in 2011 from 2010 primarily from the addition of restaurant management personnel in the fourth quarter of 2011.

 

Consulting and investor relations fees increased $244,092 from 2011 to 2010 as the Company engaged experienced personnel to startup our European subsidiary and to increase the Company’s recognition in the investment arena. Non-cash fees for services were $74,573 and $25,000 in 2011 and 2010, respectively.

 

Travel and entertainment increased $41,817 as Company personnel, primarily the CEO, traveled to increase our company awareness and lockdown financing and partners for the restaurant locales.

 

There were no director fees in 2011. Effective December 31, 2010, the Company issued 20,000 shares of its common stock to its outside directors for current and prior director fees. The stock was valued at $42,500 based on the closing price of the common stock on that date.

 

The Company recognized a bad debt in the amount of $750 in 2011 and $24,907 in 2010. The amount in 2010 was for prior management services of $24,000 and expense advances of $907 owed by Green St. Energy, Inc., a company for which the Company previously provided management services.

 

 

Asset Impairment

 

In 2010, the Company recorded an impairment of $250,000 for our equity interest in BreezePlay as a result of it not being able to raise sufficient capital to complete its business plan and substantially ceasing operation.

 

OTHER INCOME (EXPENSE)

 

Other income (expense) consisted of the following at December 31, 2011 and 2010:

 

		2011				2010
Other income (expense):
Equity in earnings (losses) of investments		$	(76,113	)		$	58,337
Realized gains from sale of investments			19,991				106,035
Interest expense			(180,825	)			(140,016	)
Interest income			4,541				46,000
Miscellaneous income			476				-
Other than temporary decline in available-for-sale securities			(147,973	)			(40,386	)
		$	(379,903	)		$	29,970

 

Equity in Earnings of Investments

 

Equity in earnings of investments includes our share of earnings from investments in which we own at least 20% and are being accounted for using the equity method. This included losses from the Hoot Campbelltown and Hoot SA partnerships in 2011 of $66,857 and $9,256, respectively and income from the Hoot SA partnerships in 2010 of $58,337.

 

Realized Gains from Sale of Investments

 

Realized gains are recorded when investments are sold and include transactions in 2011 from a gain on sales of DineOut and in 2010 from a gain on sales of DineOut of $157,807, a loss on sales of Vought Defense Systems of $58,355 and a gain on sales of Healthsport of $6,583.

 

Interest Expense

 

Interest expense increased in 2011 from 2010 primarily due to the addition in 2011 of a line of credit for $1,165,000 and convertible notes payable in the amount of $1,625,000, offset by the conversion of $686,500 of convertible notes payable from 2010.

 

Interest Income

 

Interest income in 2011 decreased $41,459 as 2011 includes earnings from Investors for one month, compared to 2010 which includes our earnings from Investors for the entire year.

 

Other than Temporary Decline in Available-for-Sale Securities

 

The Company determined that its investment in available-for-sale securities had an other than temporary decline in value and recorded a realized loss in the amount of $147,973 and $40,386 in 2011 and 2010, respectively. Valuations were determined based on the quoted market price for the stock when it was determined the decline was not temporary and the decline was recorded. In 2011, the Company recorded an impairment of $147,973 primarily related to the Company’s investment in HiTech Stages ($124,573) and Efftec International ($22,500). In 2010, the Company recorded an impairment of $40,386 primarily related to the Company’s investment in Remodel Auction ($39,100).

 

 

PROVISION FOR INCOME TAXES

 

The Company recorded income tax expense of $14,608 based on the net profit of one of our South African locations at a 28% corporate income tax rate.

 

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

There are several new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) which are not yet effective. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe any of these accounting pronouncements has had or will have a material impact on the Company’s financial position or operating results. See Note 2 to the consolidated financial statements.

 

Critical Accounting Policies

 

The SEC has suggested companies provide additional disclosure and commentary on their most critical accounting policies, which they defined as the ones that are most important to the portrayal of a company’s financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition our most critical accounting policy is the valuation of our investments. The methods, estimates and judgments we use in applying this accounting policy has a significant impact on the results we report in our financial statements.

 

Leases

Restaurant Operations lease certain properties under operating leases. Many of these lease agreements contain rent holidays, rent escalation clauses and/or contingent rent provisions. Rent expense is recognized on a straight-line basis over the expected lease term, including cancelable option periods when failure to exercise such options would result in an economic penalty. We use a time period for straight-line rent expense calculation that equals or exceeds the time period used for depreciation. In addition, the rent commencement date of the lease term is the earlier of the date when they become legally obligated for the rent payments or the date when they take access to the grounds for build out. Accounting for leases involves significant management judgment.

 

Investments

We determine fair value to be the amount for which an investment could be exchanged in an orderly disposition over a reasonable period of time between willing parties other than in a forced or liquidation sale. Our evaluation process is intended to provide a consistent basis for determining the fair value of our available-for-sale investments. In summary, for individual securities classified as available-for-sale securities, an enterprise shall determine whether a decline in fair value below the amortized cost basis is other than temporary. If the decline in fair value is judged to be other than temporary, the individual security shall be written down to fair value as a new cost basis and the amount of the write-down shall be included in earnings (accounted for as a realized loss). The new cost basis shall not be changed for subsequent recoveries in fair value. Subsequent increases in the fair value of available-for-sale securities shall be included in other comprehensive income and subsequent decreases in fair value, if not an other-than-temporary impairment, also shall be included in other comprehensive income.

 

The first step in the analysis is to determine if the security is impaired. All of our available-for-sale securities were listed and we use the closing market price and other factors to determine the amount of impairment if any. The second step, if there is an impairment, is to determine if the impairment is other than temporary. To determine if a decline in the value of an equity security is other than temporary and that a write-down of the carrying value is required, we considered the following:

 

·

The length of time and the extent to which the market value has been less than the cost;

·

The financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer such as changes in technology that may impair the earnings potential of the investment or the discontinuance of a segment of the business that may affect the future earnings potential; or

·

The intent and ability of the holder to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.

 

Unless evidence exists to support a realizable value equal to or greater than the carrying value of the investment in equity securities classified as available-for-sale, a write-down to fair value accounted for as a realized loss should be recorded. Such loss should be recognized in the determination of net income of the period in which it occurs and the written down value of the investment in the issuer becomes the new cost basis of the investment.

 

Investments in which the Company has the ability to exercise significant influence and that, in general, are at least 20 percent owned are stated at cost plus equity in undistributed net earnings (loss), less distributions received. The Company also has equity investments in which it owns less than 20% which are stated at cost. An impairment loss would be recorded whenever a decline in the value of an equity investment or investment carried at cost is below its carrying amount and is determined to be other than temporary. In judging “other than temporary,” the Company considers the length of time and extent to which the fair value of the investment has been less than the carrying amount of the investment, the near-term and long-term operating and financial prospects of the investee, and the Company’s long-term intent of retaining the investment in the investee.

 

 

COMMITMENTS AND CONTINGENCIES

 

Effective August 1, 2010, the Company extended its office lease agreement for a period of one year at a monthly rental of $2,100, for its office located at 11220 Elm Lane, Suite 103, Charlotte, NC 28277. Since August 1, 2011, the lease has continued at the same rate on a month-to-month basis.

 

The Company leases the land and building for our four restaurants in South Africa through our subsidiaries. The leases are for five year terms and include options to extend the terms. We lease our restaurant facilities under “triple net” leases that require us to pay minimum rent, real estate taxes, maintenance costs and insurance premiums and, in some instances, percentage rent based on sales in excess of specified amounts.

 

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

 

The following table presents a summary of our contractual operating lease obligations and commitments as of December 31, 2011:

 

		Payments due by period
Contractual Obligations		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Long-Term Debt Obligations (1)		$	263,921			$	20,250			$	243,671			$	-			$	-
Operating Lease Obligations (2)			3,202,977				526,787				1,213,143				1,463,047
Purchase Obligations (3)			550,000				550,000				-				-				-
Total		$	4,016,898			$	1,097,037			$	1,456,814			$	1,463,047			$	-

 

(1) Represents the outstanding principal amounts and interest on all our long-term debt.

(2) Represents operating lease commitments for our four Hooters restaurants in South Africa.

(3) Represents commitments for Hooters international restaurants in Australia

 

Our first location in South Africa opened in December 2009 and as of December 31, 2011 LP’s have been paid $129,877 (36.9%) against their 20% return. Our second location opened in June 2010 and as of December 31, 2011 LP’s have been paid $65,461 (15.9%) against their 20% return. Our third location opened in June 2011 and as of December 31, 2011 LP’s have been paid $18,000 (4.2%) against their 20% return. The payments to investors for our first and second locations were primarily funded from the cash flows of the restaurants. The payments to investors for the third location were funded by the Company as an advance on expected future cash flows.

 

The Company, concurrently with purchasing the remaining 50% interest in C&S Ltd., has formed a management company to operate the current South African Hooters locations.  The management company currently charges a management fee of 5% of net revenues. We own 80% of the management company, with key management owning the remaining 20%.

Due to related parties

 

The Company has received non-interest bearing loans and advances from related parties. The amounts owed by the Company as of March 31, 2012 and December 31, 2011 are as follows:

 

		2012				2011
Hoot SA I, LLC		$	15,409			$	15,409
Chanticleer Foundation, Inc.			10,750				10,750
Chanticleer Investors, LLC			4,045				4,045
		$	30,204			$	30,204

 

Due from related parties

 

The Company has earned income from and made advances to related parties. The amounts owed to the Company as of March 31, 2012 and December 31, 2011 are as follows:

 

		2012				2011
Chanticleer Investors II, LLC		$	1,485			$	1,485
Chanticleer Dividend Fund, Inc.			74,281				74,281
Hoot SA II and IV, LLC's			1,913				825
		$	77,679			$	76,591

 

Management income from affiliates

 

The Company had management income from its affiliates in the three months ended March 31, 2012 and 2011, as follows:

 

		2012				2011
Chanticleer Investors II, LLC			-				22,896
North American Energy Resources, Inc.			-				1,750
		$	-			$	24,646

Chanticleer Investors LLC

 

Investors LLC loaned the Company $4,045 at March 31, 2012 and December 31, 2011.

 

Chanticleer Investors II LLC

 

The Company manages Investors II and earned management income of $22,896 in 2011. There was no accrual for 2012.

 

Chanticleer Dividend Fund, Inc. ("CDF")

 

On November 10, 2010 the Company formed CDF under the general corporation laws of the State of Maryland. CDF filed a registration statement under Form N-2 to register as a non-diversified, closed-end investment company in January 2011. The Company, through Advisors, will have a role in management of CDF when its registration statement becomes effective.

 

Hoot SA, LLC; Hoot SA II, LLC; Hoot SA III, LLC; and Hoot SA IV, LLC

 

The Hoot partnerships were formed to help finance the first four Hooters restaurants in South Africa.

 

Efftec International, Inc. ("Efftec")

 

The Company's CEO became CEO and the sole director of Efftec during 2010 and the Company received 150,000 common shares and an option to acquire 150,000 shares for management services. The shares and option were initially valued at $22,500, based on the trading price of Efftec at the time.

 

North American Energy Resources, Inc. ("NAEY")

 

The Company's CEO became CEO and a director of NAEY during 2010 and the Company received 150,000 common shares for management services. The shares were valued at $10,500, based on the trading price of NAEY at the time. The Company's CEO resigned as CEO of NAEY in December 2010 and remains a director. During June 2011, the Company’s CEO contributed 1,790,440 shares of NAEY to the Company which was valued at $125,331 based on the trading price at the time. Mr. Pruitt did not receive additional compensation as a result of the transfer.

 

Chanticleer Foundation, Inc.

 

Chanticleer Foundation, Inc. is a Donor-Advised Fund whose governing body consists of Mr. Pruitt, a director of the Company and an employee of the Company. The Foundation loaned the Company $10,750 during 2011.

 

Avenel Financial Group, Inc.

 

Avenel Financial Group, Inc. is a company owned by Mr. Pruitt. Advances previously made to the Company were repaid during 2011. Avenel Financial Group, Inc. invested as a limited partner in the South African Hooters locations. Avenel Financial Group, Inc. invested $14,000, $12,500, and $25,000 in the Durban, Johannesburg, and Capetown locations, respectively, and is entitled to receive approximately 2.0%, 1.5%, and 2.9%, respectively , of the SA Profits of each of the locations. As of March 31, 2012, Avenel Financial Group, Inc. has received an aggregate of $6,441 in SA Profits.

Per Share

Total Without Exercise of Over-Allotment

Total With Full Exercise of Over-Allotment

Public offering price

$

$

$

Underwriting discount

$

$

$

Non-accountable expense allowance

$

$

$

Proceeds before expenses

$

$

$

The underwriters also require that all of our directors and officers and certain stockholders agree not to offer, sell, agree to sell, directly or indirectly, or otherwise dispose of any shares of common stock or any securities convertible into or exchangeable for shares of common stock except for the shares of common stock offered in this offering without the prior written consent of the representatives of the underwriters for a period of ___ days after the date of this prospectus.

 

We have also agreed that for a period of ninety days after the date of this prospectus, we will not issue any additional equity securities without the prior consent of the representatives of the underwriters, subject to certain exceptions as specified in the underwriting agreement. There are no contractually specified conditions for the waiver of lock-up restrictions, and any waiver is at the sole discretion of the representatives of the underwriters, which may be granted or denied by the representatives for any reason.

 

CHANTICLEER HOLDINGS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

	Page
Report of Independent Registered Public Accounting Firm	47
Annual Financial Statements
Consolidated Balance Sheets at December 31, 2011 and 2010	48
Consolidated Statements of Operations for the Years Ended December 31, 2011 and 2010	49
Consolidated Statements of Stockholders’ Equity at December 31, 2011 and 2010	50
Consolidated Statements of Cash Flows for the Years Ended December 31, 2011 and 2010	51
Notes to Consolidated Financial Statements	53
Quarterly Financial Statements
Balance Sheets as of March 31, 2012 and December 31, 2011	75
Statements of Operations – For the Three Months Ended March 31, 2012 and 2011	76
Statements of Cash Flows – For the Three Months Ended March 31, 2012 and 2011	77
Notes to Consolidated Financial Statements	79

 

 

CREASON & ASSOCIATES, P.L.L.C.

7170 S. Braden Ave., Suite 100

Tulsa, Oklahoma 74136

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders

Chanticleer Holdings, Inc.:

 

We have audited the accompanying consolidated balance sheets of Chanticleer Holdings, Inc. and Subsidiaries (the "Company") as of December 31, 2011 and 2010, and the related consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows for the years ended December 31, 2011 and 2010. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of Kiarabrite (Pty) Ltd, Dimaflo (Pty) Ltd, Tundraspex (Pty) Ltd, Civisign (Pty) Ltd and Dimalogix (Pty) Ltd (collectively referred to as the South Africa Operations), wholly-owned and majority-owned subsidiaries, which statements reflect total assets and revenues constituting 72 percent and 66 percent, respectively, of the related consolidated totals. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for the South Africa Operations, is based solely on the reports of the other auditors.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, based on our audit and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chanticleer Holdings, Inc. and Subsidiaries as of December 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for the years ended December 31, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that Chanticleer Holdings, Inc. and Subsidiaries will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, Chanticleer Holdings, Inc. has incurred substantial net losses and negative cash flows from operations for the past several years, along with negative working capital. In addition, the Company has future plans that may require substantial financial obligations. There can be no assurance that the Company will be able to generate sufficient cash revenues to fund its current operations and fulfill its future commitments. These conditions raise substantial doubt about Chanticleer Holdings, Inc. and Subsidiaries’ ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.

 

/s/Creason & Associates, P.L.L.C.

Tulsa, Oklahoma

April 3, 2012

 

 

  

Chanticleer Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31, 2011 and 2010

 

		2011				2010
ASSETS
Current assets:
Cash and cash equivalents		$	151,928			$	46,007
Accounts receivable			103,982				4,258
Inventory			59,266				-
Due from related parties			76,591				84,269
Prepaid expenses			231,914				24,184
TOTAL CURRENT ASSETS			623,681				158,718
Property and equipment, net			2,508,823				25,563
Intangible assets, net			470,164				-
Investments at fair value			318,353				352,500
Other investments			1,579,677				853,798
Deposits and other assets			3,980				23,980
TOTAL ASSETS		$	5,504,678			$	1,414,559
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and notes payable		$	1,171,855			$	250,000
Convertible notes payable			1,625,000				-
Accounts payable			267,475				211,432
Accrued expenses			21,521				66,103
Other current liabilities			496,643				1,750
Income taxes payable			14,608				-
Due to related parties			30,204				116,349
TOTAL CURRENT LIABILITIES			3,627,306				645,634
Long-term debt, less current maturities			236,109				686,500
TOTAL LIABILITIES			3,863,415				1,332,134
Commitments and contingencies (Note 12)
Stockholders' equity:
Common stock:  $0.0001 par value; authorized 200,000,000 shares; issued 3,012,121 shares and 2,571,918 shares; and outstanding 2,498,891 and 2,048,688 shares at December 31, 2011 and 2010, respectively			301				257
Additional paid in capital			6,459,506				5,456,067
Other comprehensive income			48,665				68,027
Non-controlling interest			1,692,019				24,175
Accumulated deficit			(6,032,808	)			(4,929,418	)
Less treasury stock, 513,230 shares and 523,230 shares at December 31, 2011 and 2010, respectively			(526,420	)			(536,683	)
			1,641,263				82,425
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	5,504,678			$	1,414,559

 

See accompanying notes to consolidated financial statements.

 

 

Chanticleer Holdings, Inc. and Subsidiaries

Consolidated Statements of Operations

For the Years Ended December 31, 2011 and 2010

 

		2011				2010
Revenue:
Restaurant sales, net		$	967,418			$	-
Management fee income - non-affiliates			493,167				20,833
Management fee income - affiliates			3,235				115,468
Total revenue			1,463,820				136,301
Expenses:
Restaurant cost of sales			360,810				-
Restaurant operating expenses			483,946				-
General and administrative expense			1,245,752				935,110
Asset impairment			-				250,000
Depreciation and amortization			87,617				11,079
Total expenses			2,178,125				1,196,189
Loss from operations			(714,305	)			(1,059,888	)
Other income (expense)
Equity in earnings (losses) of investments			(76,113	)			58,337
Realized gains from sales of investments			19,991				106,035
Interest income			4,541				46,000
Miscellaneous income			476				-
Interest expense			(180,825	)			(140,016	)
Other than temporary decline in available-for-sale securities			(147,973	)			(40,386	)
Total other income (expense)			(379,903	)			29,970
Net loss before income taxes			(1,094,208	)			(1,029,918	)
Provision for income taxes			14,608				-
Net loss before non-controlling interest			(1,108,816	)			(1,029,918	)
Non-controlling interest			5,426				18,353
Net loss			(1,103,390	)			(1,011,565	)
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale securities (none applies to non-controlling interest)			(13,005	)			152,027
Foreign translation losses			(6,357	)			-
Other comprehensive loss		$	(1,122,752	)		$	(859,538	)
Net earnings (loss) per share, basic and diluted		$	(0.47	)		$	(0.51	)
Weighted average shares outstanding			2,370,036				1,990,462

 

See accompanying notes to consolidated financial statements.

 

 

 

 

Chanticleer Holdings, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

Years ended December 31, 2011 and 2010

 

														Accumulated
														Other
										Additional				Comprehensive				Non-
		Common Stock								Paid-in				Income				Controlling				Accumulated				Treasury
		Shares				Par				Capital				(Loss)				Interest				Deficit				Stock				Total
Balance, December 31, 2009			2,492,752			$	250			$	5,255,624			$	(84,000	)		$	-			$	(3,917,853	)		$	(536,003	)		$	718,018
Common stock issued for:
Consultants			15,572				1				24,999				-				-				-				-				25,000
Amounts due related party			33,594				3				58,787				-				-				-				-				58,790
Accounts payable			10,000				1				17,499				-				-				-				-				17,500
Director fees			20,000				2				42,498				-				-				-				-				42,500
Beneficial conversion feature of convertible notes payable			-				-				56,660				-				-				-				-				56,660
Available-for-sale securities			-				-				-				152,027				-				-				-				152,027
Purchase treasury stock			-				-				-				-				-				-				(680	)			(680	)
Non-controlling interest			-				-				-				-				42,528				-				-				42,528
Net loss			-				-				-				-				(18,353	)			(1,011,565	)			-				(1,029,918	)
Balance, December 31, 2010			2,571,918				257				5,456,067				68,027				24,175				(4,929,418	)			(536,683	)			82,425
Common stock issued for:
Convertible notes payable and accrued interest			412,286				41				731,046				-				-				-				-				731,087
Services			27,750				3				74,570				-				-				-				-				74,573
Cash			167				-				500				-				-				-				-				500
Available-for-sale securities contributed by CEO			-				-				125,331				-				-				-				-				125,331
Warrants sold, net			-				-				20,608				-				-				-				-				20,608
Amortize warrants			-				-				35,247				-				-				-				-				35,247
Sell treasury stock			-				-				16,137				-				-				-				10,263				26,400
Available-for-sale securities			-				-				-				(13,005	)			-				-				-				(13,005	)
Non-controlling interest			-				-				-				-				1,673,270				-				-				1,673,270
Foreign translation loss			-				-				-				(6,357	)			-				-				-				(6,357	)
Net loss			-				-				-				-				(5,426	)			(1,103,390	)			-				(1,108,816	)
Balance, December 31, 2011			3,012,121			$	301			$	6,459,506			$	48,665			$	1,692,019			$	(6,032,808	)		$	(526,420	)		$	1,641,263

 

See accompanying notes to consolidated financial statements.

 

 

Chanticleer Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2011 and 2010

 

		2011				2010
Cash flows from operating activities:
Net loss		$	(1,103,390	)		$	(1,011,565	)
Adjustments to reconcile net loss to net cash used in operating activities:
Other than temporary decline in value of available-for-sale securities			147,973				40,386
Bad debt expense - related party			750				24,907
Non-controlling interest			(5,426	)			(18,353	)
Consulting and other services rendered in exchange for investment securities			(1,500	)			(33,000	)
Depreciation and amortization			87,617				11,079
Equity in (earnings) loss of investments			76,113				(58,337	)
Asset impairment			-				250,000
Common stock issued for services			74,573				49,375
(Gain) loss on sale of investments			(19,991	)			(106,035	)
Beneficial converstion feature of convertible notes payable			-				56,660
Amortization of warrants			35,247				-
(Increase) decrease in amounts due from affiliate			(54,217	)			(46,547	)
(Increase) decrease in accounts receivable			(73,830	)			(4,258	)
(Increase) decrease in prepaid expenses and other assets			(168,393	)			-
(Increase) decrease inventory			5,988				-
Increase (decrease) in accounts payable and accrued expenses			(58,779	)			89,807
Increase (decrease) in income taxes payable			14,608				-
Increase (decrease) in deferred revenue			(1,750	)			(19,083	)
Advance from related parties for working capital			-				14,650
Net cash used by operating activities			(1,044,407	)			(760,314	)
Cash flows from investing activities:
Proceeds from sale of investments			190,325				281,765
Investment distribution			8,140				16,137
Purchase of investments			(1,285,500	)			(26,334	)
Acquisition of subsidiaries			(205,000	)			-
Purchase of property and equipment			(388,109	)			(4,517	)
Treasury stock proceeds (acquired)			26,400				(680	)
Deposit made for investment			-				(20,000	)
Net cash provided (used) by investing activities			(1,653,744	)			246,371
Cash flows from financing activities:
Proceeds from sale of common stock			500				-
Proceeds from sale of common stock warrants, net			20,608				-
Loan proceeds			2,790,000				541,000
Loan repayment			(7,036	)			(4,500	)
Loans to related parties			-				(48,924	)
Loan from related party			-				70,000
Net cash provided by financing activities			2,804,072				557,576
Net increase in cash and cash equivalents			105,921				43,633
Cash and cash equivalents, beginning of year			46,007				2,374
Cash and cash equivalents, end of year		$	151,928			$	46,007

 

See accompanying notes to consolidated financial statements.

 

 

Chanticleer Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows, continued

For the Years Ended December 31, 2011 and 2010

 

		2011				2010
Supplemental cash flow information:
Cash paid for interest and income taxes:
Interest		$	98,837			$	31,999
Income taxes			-				-
Non-cash investing and financing activities:
Common stock issued for amounts due related party		$	-			$	58,790
Common stock issued for accounts payable			-				17,500
Reclassification of investment accounted for under the cost method as available-for-sale security			-				100,000
Due to related party exchanged for convertible note payable			25,000				-
Convertible notes payable exchanged for common stock			711,500				-
Accrued interest exchanged for common stock			10,000				-
Investment contributed byt the Company's CEO			125,331				-
Common stock issued for prepaid consulting contract			44,850				-
Acquisition of subsidiaries:
Current assets, excluding cash and cash equivalents		$	93,638				-
Property and equipment and intangible assets			2,651,197				-
Total assets excluding cash and cash equivalents			2,744,835				-
Liabilities assumed			630,369				-
Non-controlling interest			1,647,710				-
Prior investment of the Company			261,756				-
			2,523,259				-
Purchase price, net assets acquired - cash paid		$	205,000				-

 

See accompanying notes to consolidated financial statements.

 

 

Chanticleer Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

1.

Nature of Business

Organization

 

Chanticleer Holdings, Inc. (the “Company”) was organized October 21, 1999, under its original name, Tulvine Systems, Inc., under the laws of the State of Delaware. The Company previously had limited operations and was considered a development stage company until July 2005. On April 25, 2005, the Company formed a wholly owned subsidiary, Chanticleer Holdings, Inc. On May 2, 2005, Tulvine Systems, Inc. merged with and changed its name to Chanticleer Holdings, Inc.

 

The consolidated financial statements include the accounts of Chanticleer Holdings, Inc. and its subsidiaries, Chanticleer Advisors, LLC, (“Advisors”), Avenel Ventures, LLC ("Ventures"), Avenel Financial Services, LLC ("AFS"), Chanticleer Holdings Limited ("CHL"), Chanticleer Holdings Australia Pty, Ltd. (“CHA”), Chanticleer Investment Partners, LLC (“CIP”), DineOut SA Ltd. ("DineOut”), Kiarabrite (Pty) Ltd (“KPL”), Dimaflo (Pty) Ltd (“DFLO”), Tundraspex (Pty) Ltd (“TPL”), Civisign (Pty) Ltd (“CPL”) and Dimalogix (Pty) Ltd (“DLOG”) (collectively referred to as “the Company,” “we,” “us,” or “the Companies”). All significant inter-company balances and transactions have been eliminated in consolidation.

 

Effective March 23, 2011, the Company's common stock was forward split, 2 shares for each share issued, pursuant to written consent by a majority of the Company's shareholders. All share references have been adjusted as if the split occurred prior to all periods presented.

 

Information regarding the Company's subsidiaries is as follows:

 

·

Advisors was formed as a wholly owned Nevada Limited Liability Company on January 18, 2007 to manage related companies, Chanticleer Investors, LLC ("Investors LLC"), Chanticleer Investors II, LLC ("Investors II") and other investments owned by the Company;

 

·

Ventures was formed as a wholly owned Nevada Limited Liability Company on December 24, 2008 to provide business management and consulting services to its clients;

 

·

CHL was formed as a wholly owned Limited Liability Company in Jersey on March 24, 2009 to own the Company's initial 50% interest in Hooters SA, GP, the general partner of the Hooters restaurant franchises in South Africa;

 

·

CHA was formed on September 30, 2011 in Australia as a wholly owned subsidiary to invest in Hooters restaurants in Australia;

 

·

CIP was formed as a wholly owned North Carolina limited liability company on September 20, 2011. CIP has not commenced business at December 31, 2011. CIP was formed to manage separate and customized investment accounts for investors. The Company plans to register CIP as a registered investment advisor so that it can market openly to the public;

 

·

DineOut was formed as a Private Limited Liability Company in England and Wales on October 29, 2009 to raise capital in Europe (the Company owns approximately 89% of DineOut at December 31, 2011);

 

	·	KPL was formed on August 30, 2011 in South Africa to manage the Hooters restaurants in South Africa. The Company owns 80% and local management owns 20% at December 31, 2011;

·

DFLO was formed on August 16, 2011 in South Africa, is owned 90% by the Company and 10% by local investors at December 31, 2011, and owns the Hooters restaurant in Durban, South Africa;

 

  

·

TPL was formed on August 18, 2011 in South Africa, is owned 95% by the Company and 5% by local investors at December 31, 2011, and owns the Hooters restaurant in Johannesburg, South Africa;

 

·

CPL was formed on August 29, 2011 in South Africa, is owned 100% by the Company at December 31, 2011 and owns the Hooters restaurant in Cape town, South Africa;

 

·

DLOG was formed on August 27, 2011 in South Africa, is owned 100% by the Company at December 31, 2011 and owns the Hooters restaurant in the Emperor’s Palace in Johannesburg, South Africa; and

 

·

AFS was formed as a Nevada Limited Liability Company on February 19, 2009 to provide unique financial services to the restaurant, real estate development, investment advisor/asset management and philanthropic organizations. AFS's business operation was not activated and was discontinued in September 2011.

 

GOING CONCERN

At December 31, 2011 and 2010, the Company had current assets of $623,681 and $158,718; current liabilities of $3,627,306 and $645,634; and a working capital deficit of $3,003,625 and $486,916, respectively. The Company incurred a loss of $1,103,390 during the year ended December 31, 2011 and had an unrealized loss from available-for-sale securities of $13,005 and foreign currency translation losses of $6,357, resulting in a comprehensive loss of $1,122,752.

The Company's corporate general and administrative expenses averaged approximately $295,000 per quarter during 2011. In the fourth quarter of 2011, $64,000 was added when we began consolidating the South African operations. The Company expects costs to increase as we expand our footprint internationally in 2012. Effective October 1, 2011, the Company acquired majority control of the restaurants in South Africa and began consolidating these operations. The Company also will share 49% of the profits in our Hooters location opened in January 2012 in Campbelltown, Australia, a suburb of Sydney.

In addition, the Company has a note with a balance at December 31, 2011 of $242,964 owed to its bank which is due in August 2013 and a line of credit with its bank with a balance at December 31, 2011 of $1,165,000 (total available $2,000,000) due on August 20, 2012. We also have convertible notes payable with certain investors with a balance at December 31, 2011 of $1,625,000 due in the second quarter of 2012. The Company plans to continue to use limited partnerships, if the Company’s contemplated raise is not completed, to fund its share of costs for additional Hooters restaurants.

The Company expects to meet its obligations in 2012 with some or all of the following:

 

	·	File an S-1 Registration during the second quarter of 2012, and, assuming it becomes effective, plans to raise up to $15,000,000 from the sale of common stock and warrant units;

	·	The Company received $100,000 in January 2012 as a fee for its CEO sitting on the Board of Hooters of America and expect to continue to receive this fee for the next three years based on the current agreement;

	·	Extend a portion of its existing line of credit;

·

Convert its convertible notes payable into common stock.

 

If the above events do not occur or if the Company does not raise sufficient capital, substantial doubt about the Company’s ability to continue as a going concern exists. These consolidated financial statements do not reflect any adjustments that might result from the outcome of these uncertainties.

 

 

2.

SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include the valuation of the investments in portfolio companies and deferred tax asset valuation allowances. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

 

revenue recognition

 

Restaurant Net Sales

 

We record revenue from restaurant sales at the time of sale, net of discounts. Sales revenues are presented net of sales and value added (VAT) taxes. Cost of sales primarily includes the cost of food, beverages, and merchandise and disposable paper and plastic goods used in preparing and selling our menu items, and excludes depreciation and amortization.

 

Management Fee Income

 

The Company receives revenue from management fees from both affiliated companies and non-affiliated companies. Our revenue recognition policy provides that revenue is generally realized or realizable and earned when all of the following criteria have been met:

·

Persuasive evidence of an arrangement exists;

·

Delivery has occurred or services have been rendered;

·

The seller's price to the buyer is fixed or determinable; and

·

Collectability is reasonably assured.

 

We may collect revenue in both cash and in the equity securities of the company to whom we are providing services. Typically when we are paid cash for services, it is based on a monthly fee and is recorded when earned. When we receive equity securities for our management services, we generally receive the securities in advance for our services to be earned over the life of the contract, generally one year. We value these securities and defer recognition of the revenue over the life of the management contract.

 

The fair value of the equity instruments received was determined based upon the stock prices as of the date we reached an agreement with the third party and is not subject to adjustment after the measurement date.

 

ACCOUNTS RECEIVABLE

 

The Company monitors its exposure for credit losses on its receivable balances and the credit worthiness of its receivables on an ongoing basis and records related allowances for doubtful accounts. Allowances are estimated based upon specific customer balances, where a risk of default has been identified, and also include a provision for non-customer specific defaults based upon historical experience. As of December 31, 2011 and December 31, 2010, the Company has not recorded an allowance for doubtful accounts. If circumstances related to specific customers change, estimates of the recoverability of receivables could also change.

 

INVENTORIES

 

Inventories are valued at the lower of cost (first-in, first-out method) or market, and consist primarily of restaurant food items and supply inventory.

 

 

OPERATING LEASES

 

The Company leases certain property under operating leases. Many of these lease agreements contain rent holidays, rent escalation clauses and/or contingent rent provisions. Rent expense is recognized on a straight-line basis over the expected lease term, including cancelable option periods when failure to exercise such options would result in an economic penalty. In addition, the rent commencement date of the lease term is the earlier of the date when we become legally obligated for the rent payments or the date when we take access to the property or the grounds for build out.

 

MARKETABLE EQUITY SECURITIES

 

Trading securities

 

The Company's investment in marketable equity securities are carried at fair value and are classified as current assets in the consolidated balance sheets. Unrealized gains and losses, net of tax, are reported in the statement of operations as unrealized gain (loss) on marketable equity securities. Gains and losses are reported in the consolidated statements of operations when realized, based on the disposition of specifically identified investments, using a first-in, first-out method.

 

Available-for-sale securities

 

The Company’s investments in marketable equity securities which are classified as available-for-sale are carried at fair value. Investments available for current operations are classified in the consolidated balance sheets as current assets; investments held for long-term purposes are classified as non-current assets. Unrealized gains and losses, net of tax, are reported in other comprehensive income as a separate component of stockholders’ equity. Gains and losses are reported in the consolidated statements of operations when realized, determined based on the disposition of specifically identified investments, using a first-in, first-out method.

 

Investments identified by the Company as being potentially impaired are subject to further analysis to determine if the impairment is other than temporary. Other than temporary declines in market value from original costs are charged to investment and other income, net, in the period in which the loss occurs. In determining whether investment holdings are other than temporarily impaired, the Company considers the nature, cause, severity and duration of the impairment.

 

OTHER INVESTMENTS

 

Investments in which the Company has the ability to exercise significant influence and that, in general, are at least 20 percent owned are stated at cost plus equity in undistributed net earnings (loss), less distributions received. The Company also has equity investments in which it owns less than 20% which are stated at cost. An impairment loss would be recorded whenever a decline in the value of an equity investment or cost investment is below its carrying amount and is determined to be other than temporary. In judging “other than temporary,” the Company considers the length of time and extent to which the fair value of the investment has been less than the carrying amount of the investment, the near-term and long-term operating and financial prospects of the investee, and the Company’s long-term intent of retaining the investment in the investee.

 

FAIR VALUE MEASUREMENTS

 

For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.

 

 

Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:

 

Level 1

Quoted prices for identical instruments in active markets.

Level 2

Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3

Significant inputs to the valuation model are unobservable.

 

We maintain policies and procedures to value instruments using the best and most relevant data available. Our investment committee reviews and approves all investment valuations.

 

Our available-for-sale equity securities are all valued using Level 1 inputs or Level 2 inputs.

 

fair value of financial instruments

 

The Company is required to disclose fair value information about financial instruments when it is practicable to estimate that value. The carrying amounts of the Company’s cash, accounts receivable, inventory, accounts payable, accrued expenses, other current liabilities, convertible notes payable and notes payable approximate their estimated fair value due to the short-term maturities of these financial instruments and because related interest rates offered to the Company approximate current rates.

 

fixed assets

 

Fixed assets are stated at cost, less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets (generally five and seven years). The carrying amount of all long-lived assets is evaluated periodically to determine if adjustment to the depreciation and amortization period or the unamortized balance is warranted. Based upon its most recent analysis, the Company believes that no impairment of property and equipment exists at December 31, 2011 and 2010. Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations.

 

InTANGIBLE ASSETS

 

Intangible assets are recorded for the initial franchise fees for our restaurants as well as certain costs capitalized upon startup of the restaurants. The Company amortizes these amounts over a 20 year periods, which is the life of the franchise agreement.

 

Income Taxes

 

Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company has provided a valuation allowance for the full amount of the deferred tax assets.

 

As of December 31, 2011 and 2010 the Company had no accrued interest or penalties relating to any tax obligations. The Company currently has no federal or state examinations in progress, nor has it had any federal or state tax examinations since its inception. The last three years of the Company's tax years are subject to federal and state tax examination.

 

  

Stock-based Compensation

 

The compensation cost relating to share-based payment transactions (including the cost of all employee stock options) is required to be recognized in the financial statements. That cost is measured based on the estimated fair value of the equity or liability instruments issued. A wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans are included. The Company’s financial statements would include an expense for all share-based compensation arrangements granted on or after January 1, 2006 and for any such arrangements that are modified, cancelled or repurchased after that date based on the grant-date estimated fair value.

 

As of December 31, 2011 and 2010, there were no options outstanding. See Note 9 regarding outstanding warrants.

 

EARNINGS (LOSS) PER COMMON SHARE

 

The Company is required to report both basic earnings per share, which is based on the weighted-average number of common shares outstanding, and diluted earnings per share, which is based on the weighted-average number of common shares outstanding plus all potentially dilutive shares outstanding. At December 31, 2011 and 2010, there are no potentially dilutive shares outstanding. Accordingly, no common stock equivalents are included in the earnings (loss) per share calculations and basic and diluted earnings per share are the same for all periods presented.

 

FOREIGN CURRENCY TRANSLATION

 

Adjustments resulting from the process of translating foreign functional currency financial statements into U.S. dollars are included in accumulated other comprehensive income in common stockholders’ equity. Foreign currency transaction gains and losses are included in current earnings. Most of our foreign operations use their local currency as the functional currency.

 

Comprehensive Income

 

Standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. We are required to (a) classify items of other comprehensive income by their nature in financial statements, and (b) display the accumulated balance of other comprehensive income separately in the equity section of the balance sheet for all periods presented.

 

concentration of credit risk

 

Cash is maintained at financial institutions, which at times, may exceed the FDIC insurance limit.

 

RECLASSIFICATIONS

 

Certain reclassifications have been made in the financial statements at December 31, 2010 and for the periods then ended to conform to the December 31, 2011 presentation. The reclassifications had no effect on net loss.

 

Recent Accounting Pronouncements

 

There are several new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) which are not yet effective. Each of these pronouncements, as applicable, has been or will be adopted by the Company. At March 30, 2012, none of these pronouncements are expected to have a material effect on the financial position, results of operations or cash flows of the Company.

 

 

3.

ACQUISITION OF MAJORITY OWNED HOOTERS RESTAURANTS

 

Effective October 1, 2011, the Company acquired majority ownership of a management company and four Hooters restaurants in South Africa. Previously, the Company owned 50% of the restaurants but was not in control and these operations were accounted for using the equity method of accounting. New entities were formed for the operations and the Company’s ownership is as follows: KPL 80%, DFLO 90%, TPL 95%, CPL 100% and DLOG 100%. The restaurant owned by DFLO in Durban opened in January 2010, the restaurant owned by TPL in Johannesburg opened in June 2010 and the restaurant owned by CPL in Cape Town opened in June 2011. The restaurant owned by DLOG opened in February 2012.

 

The acquisition was accounted for using the purchase method of accounting and, accordingly, the consolidated statements of operations include the results of the South African operations beginning October 1, 2011. The assets acquired and the liabilities assumed were recorded at estimated fair values as determined by the Company’s management based on information currently available and on current assumptions as to future operations. A summary of the estimated fair value of assets acquired and liabilities assumed in the acquisition follows:

 

Current assets, excluding cash and cash equivalents		$	93,638
Property and equipment and intangible assets			2,651,197
Total assets excluding cash and cash equivalents		$	2,744,835
Liabilities assumed			630,369
Non-controlling interest			1,647,710
Prior investment of the Company			261,756
Purchase price (net assets acquired)		$	205,000
Cash paid		$	205,000

 

Liabilities assumed includes $496,643 at December 31, 2011 and $524,832 at September 30, 2011 in bank debt of the prior entities which the Company has agreed to repay without interest upon completion of its new financing. The $496,643 at December 31, 2011 in included in other liabilities.

 

Unaudited pro forma results of operations for the two years ended December 31, 2011 and 2010, as if the Company had acquired majority ownership of the South African Hooters restaurants on January 1, 2010 is as follows. The pro forma results include estimates and assumptions which management believes are reasonable. However, pro forma results are not necessarily indicative of the results that would have occurred if the business combination had been in effect on the dates indicated, or which may result in the future.

 

		2011				2010
Net revenues		$	4,828,085			$	4,078,964
Net earnings (loss)		$	(971,811	)		$	(466,153	)
Net earnings (loss) per share, basic and diluted		$	(0.41	)		$	(0.23	)

 

 

4.

INVESTMENTS

INVESTMENTS AT FAIR VALUE CONSIST OF THE FOLLOWING AT DECEMBER 31, 2011 AND 2010

 

		2011				2010
Available-for-sale investments at fair value		$	318,353			$	352,500
Trading securities			-				-
Total		$	318,353			$	352,500

 

TRADING SECURITIES:

The Company had no transactions in trading securities during 2011. The following table summarizes the activity during 2010.

 

		2010
Balance, beginning of year		$	-
Shares acquired from a related party			26,334
Cost of securities sold			(26,334	)
Balance, end of year		$	-
Proceeds from sale of trading securities		$	32,917
Gain from sale of trading securities		$	6,583

 

AVAILABLE-FOR-SALE SECURITIES

 

Activity in our available-for-sale securities may be summarized as follows:

 

		2011				2010
Cost at beginning of year		$	284,473			$	167,286
Contributed to the Company by it's CEO			125,331				-
Transfer from investments accounted for by  the cost method			-				100,000
Received as management fees			1,500				33,000
Acquired in exchange for DineOut shares			-				124,573
Proceeds from sale of securities			-				(41,645	)
Realized loss from sale of securities			-				(58,355	)
Other than temporary loss in available-for-sale securities			(147,973	)			(40,386	)
Cost at end of year			263,331				284,473
Unrealized gain (loss)			55,022				68,027
Total		$	318,353			$	352,500

 

 

 

Our available-for-sale securities consist of the following:

 

						Unrecognized								Realized				Loss
						Holding				Fair				Holding				on
		Cost				Gains (Losses)				Value				Loss				Sale
December 31, 2011
Remodel Auction *		$	-			$	-			$	-			$	(900	)		$	-
North Carolina Natural Energy *			1,500				-				1,500				-				-
North American Energy			126,000				(42,000	)			84,000				-				-
North American Energy *			10,500				7,500				18,000				-				-
North American Energy			125,331				89,522				214,853				-				-
Efftec International, Inc. *			-				-				-				(22,500	)			-
HiTech Stages			-				-				-				(124,573	)			-
		$	263,331			$	55,022			$	318,353			$	(147,973	)		$	-
December 31, 2010
Syzygy Entertainment, Ltd. *		$	-			$	-			$	-			$	(1,286	)		$	-
Remodel Auction *			900				100				1,000				(39,100	)			-
North American Energy			126,000				(98,000	)			28,000				-				-
North American Energy *			10,500				(4,500	)			6,000				-				-
Efftec International, Inc. *			22,500				22,500				45,000				-				-
Efftec International, Inc. (warrant) *			-				22,500				22,500				-				-
Vought Defense System Corp.			-				-				-				-				(58,355	)
HiTech Stages			124,573				125,427				250,000				-				-
		$	284,473			$	68,027			$	352,500			$	(40,386	)		$	(58,355	)

 

* Investments acquired in exchange for management services.

 

Syzygy Entertainment, Ltd. (“Syzygy”) – During 2007, the Company acquired 342,814 shares of Syzygy for management services and Mr. Pruitt contributed an additional 300,000 shares to the Company. The shares had an initial cost of $1,114,221 which has now been fully impaired.

 

Remodel Auction Incorporated (“REMC”) – During 2009, the Company acquired 334 shares of REMC for management services with an initial cost of $275,000 which has now been fully impaired.

 

North Carolina Natural Energy, Inc. (“NCNE”) – NCNE is a successor to REMC whose business was discontinued. NCNE has plans to become involved in some form of natural energy. The Company received 100,000,000 shares of NCNE (less than 1% on a fully diluted basis) for management services during 2011. The shares were valued at $1,500 based on NCNE’s valuation as a shell.

 

North American Energy Resources, Inc. - During the quarter ended June 30, 2009, the Company exchanged its oil & gas property investments for 700,000 shares of North American Energy Resources, Inc. ("NAEY") which were valued at $126,000 based on the closing price of NAEY on the date of the trade. At December 31, 2011 and 2010, the stock was $0.12 and $0.04 per share and the Company recorded an unrealized loss of $42,000 and $98,000, respectively, based on the Company's determination that the price decline was temporary.

 

During the first quarter of 2010, the Company received an additional 150,000 shares of NAEY in exchange for management services. The shares were initially valued at $10,500, based on the trading price at the time. At December 31, 2010, the Company recorded an unrealized loss of $4,500 based on the market value of $6,000 at December 31, 2010. At December 31, 2011, the shares were valued at $18,000 and the Company recorded unrealized appreciation of $7,500.

 

 

During June 2011, the Company’s CEO contributed 1,790,440 shares of NAEY to the Company which was valued at $125,331 based on the trading price at the time. Mr. Pruitt did not receive additional compensation as a result of the transfer. At December 31, 2011, the Company recorded unrealized appreciation of $89,522 based on a market value of $214,853.

 

NAEY appointed a new management team in December 2010 and they are seeking acquisition opportunities for onshore and offshore oil and gas properties. Accordingly, the Company determined that any decline was temporary.

 

Vought Defense Systems Corp. (“VDSC”) – Initially the Company invested $100,000 for debt with a face value of $1,177,395 of Lifestyle Innovations, Inc. After VDSC was acquired by the company in 2010, we converted our debt into 449,959 shares of VDSC which were sold during 2010 for $41,645, resulting in a loss of $58,355.

 

EffTec International, Inc. - Effective April 1, 2010, the Company's CEO became a director and the CEO of EffTec International, Inc. The Company received 150,000 shares of EffTec and an option to acquire an additional 150,000 shares at $0.15 per share in exchange for the management services to be provided. The shares were valued at $22,500 based on the trading price of EffTec at the date of the transaction. At December 31, 2010, the shares were valued at $0.30 per share and the $22,500 increase in value plus the value of the option of $22,500 was included in accumulated other comprehensive income (loss). At September 30, 2011, the market value of the Efftec stock dropped to less than $0.01 per share and the Company determined the reduction was other than temporary and impaired its investment to zero.

 

EffTec developed an Internet-based chiller tool called EffTrack™ that: collects, stores and analyzes chiller operating data, calculates and trends chiller performance, diagnoses the cause of chiller inefficiencies, notifies plant contacts when problems occur, recommends corrective actions, measures the results of corrective actions and provides cost analysis of operational improvements.

 

HiTech Stages, Ltd. (“HiTech”) – The Company originally acquired 275,000 shares of HiTech in exchange for 150,450 shares of DineOut during the June 2010 quarter. HiTech was unable to raise sufficient capital to fund its business plan and the stock price dropped to near zero at September 30, 2011. The Company determined the decline was other than temporary and fully impaired its investment on September 30, 2011.

 

OTHER INVESTMENTS ARE SUMMARIZED AS FOLLOWS AT DECEMBER 31, 2011 AND 2010.

 

		2011				2010
Investments accounted for under the equity method		$	813,079			$	87,200
Investments accounted for under the cost method			766,598				766,598
Total		$	1,579,677			$	853,798

 

INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD

 

Activity in investments accounted for using the equity method is summarized as follows.

		2011				2010
Balance, beginning of year		$	87,200			$	82,500
Equity in earnings (loss)			(76,113	)			58,337
New investments			810,133				-
Sale of investment			-				(37,500	)
Distributions received			(8,141	)			(16,137	)
Balance, end of year		$	813,079			$	87,200

 

 

Equity investments consist of the following at December 31, 2011 and December 31, 2010:

  

		2011				2010
Carrying value:
Hoot SA I, II, III - South Africa		$	140,803			$	87,200
Hoot Campbelltown Pty. Ltd. (49%) - Australia			570,134				-
Hoot Surfers Paradise Pty. Ltd. (49%) - Australia			102,041				-
Brazil			101				-
		$	813,079			$	87,200

 

Equity in earnings (loss) and distributions from equity investments during the year ended December, 2011 and 2010 follows. The activity from the South African restaurants is through September 30, 2011 at which time the Company acquired majority ownership and began consolidating these operations.

		2011				2010
Equity in earnings (loss):
Hoot S.A. I, II, III			(9,256	)			58,337
Hoot Campbelltown (49%)			(66,857	)			-
		$	(76,113	)		$	58,337
Distributions:
Hoot S.A. I, LLC (20%)			6,248				16,137
Hoot S.A. II, LLC (20%)			1,893				-
		$	8,141			$	16,137

 

The summarized financial data for the South African operations of which we owned 20% at December 31, 2010 follows. The Company acquired majority ownership effective September 30, 2011, accordingly, the amounts in 2011 are for only nine months. In addition, the restaurant at the Hoot Campbelltown location incurred a loss for certain pre-opening expenses before it opened in January 2012, our share of which is included above.

		2011				2010
Revenue		$	3,364,265			$	3,942,663
Gross profit			2,122,073				2,717,191
Income from continuing operations			131,949				545,412
Net income			131,949				545,412

 

The summarized balance sheets for the two locations in Australia of which we owned 49% at December 31, 2011 and the Hoot SA limited partnerships of which we owned 20% at December 31, 2010 follows:

 

		2011				2010
ASSETS
Current assets		$	58,975			$	101,900
Non-current assets			1,646,508				1,604,500
TOTAL ASSETS		$	1,705,483			$	1,706,400
LIABILITIES
Current liabilities		$	76,035			$	172,700
PARTNER'S EQUITY			1,629,448				1,533,700
TOTAL LIABILITIES AND PARTNERS' EQUITY		$	1,705,483			$	1,706,400

 

 

Hooters S.A., GP - The Company formed CHL to own the Company's 50% general partner interest in Hooters S.A., GP, the general partner of the Hooters' restaurant franchises in South Africa. The initial restaurant opened in December 2009 in Durban, South Africa and operations commenced in January 2010. In the initial restaurant CHL had a 10% interest in restaurant cash flows until the limited partners receive payout and a 40% interest in restaurant cash flows after limited partner payout. The second location opened in Johannesburg in June 2010 and a third location opened in Cape Town in June of 2011 with similar structures. Effective September 30, 2011, the Company acquired majority control of the South African operations and began consolidating its operations on October 1, 2011.

 

CHA (Hoot Campbelltown Pty. Ltd and Hoot Surfers Paradise Pty. Ltd.) – CHA entered into a partnership with the current local Hooters franchisee in Australia in which CHA will own 49% and its partner own 51%. The local partner will also manage the restaurants. The first location, Hoot Campbelltown Pty. Ltd. opened in Capmbelltown, a suburb of Sydney, in January 2012. A second location, Hoot Surfers Paradise Pty. Ltd., is underway with plans to open in the second quarter of 2012.

 

INVESTMENTS ACCOUNTED FOR USING THE COST METHOD

 

A summary of the activity in investments accounted for using the cost method follows.

 

		2011				2010
Investments at cost:
Balance, beginning of year		$	766,598			$	1,191,598
Impairment			-				(250,000	)
Proceeds from sale of investment			-				(75,000	)
Investment transferred to available-for-sale
securities			-				(100,000	)
Total		$	766,598			$	766,598

 

Investments at cost consist of the following at December 31, 2011 and 2010:

 

		2011				2010
Chanticleer Investors, LLC		$	500,000			$	500,000
Edison Nation LLC (FKA Bouncing Brain   Productions)			250,000				250,000
Chanticleer Investors II			16,598				16,598
		$	766,598			$	766,598

 

Chanticleer Investors LLC - The Company sold 1/2 of its investment in Investors LLC in May 2009, which reduced its ownership from 23% to 11.5%. Accordingly, in May 2009, the Company discontinued accounting for this investment using the equity method and began to account for the investment using the cost method. In December 2010, the Company sold an additional $75,000 of its investment at cost.

 

On April 18, 2006, the Company formed Investors LLC and sold units for $5,000,000. Investors LLC’s principal asset was a convertible note in the amount of $5,000,000 with Hooters of America, Inc. (“HOA”), collateralized by and convertible into 2% of Hooters common stock. The original note included interest at 6% and was due May 24, 2009. The note was extended until November 24, 2010 and included an increase in the interest rate to 8%.

 

The Company owned $1,150,000 (23%) of Investors LLC until May 29, 2009 when it sold 1/2 of its share for $575,000. Under the original arrangement, the Company received 2% of the 6% interest as a management fee ($25,000 quarterly) and 4% interest on its investment ($11,500 quarterly). Under the extended note and revised operating agreement, the Company receives a management fee of $6,625 quarterly and interest income of $11,500 quarterly.

 

 

On January 24, 2011, Investors LLC and its three partners combined to form HOA Holdings, LLC ("HOA LLC") and completed the acquisition of Hooters of America, Inc. ("HOA") and Texas Wings, Inc. ("TW"). Together HOA LLC has created an operating company with 161 company-owned locations across sixteen states, or nearly half of all domestic Hooters restaurants and over one-third of the locations worldwide.

 

Investors, LLC had a note receivable in the amount of $5,000,000 from HOA that was repaid at closing. Investors LLC then invested $3,550,000 in HOA LLC (approximately 3.1%) ($500,000 of which is the Company's share). One of the investors in Investors LLC that owned a $1,750,000 share is a direct investor in HOA LLC and will now carry its ownership in HOA LLC directly. The Company now owns approximately 14% of Investors LLC.

 

Based on the current status of this investment, the Company does not consider the investment to be impaired.

 

EE Investors, LLC - On January 26, 2006, we acquired an investment in EE Investors, LLC with cash in the amount of $250,000. We acquired 1,205 units (3.378%) in EE Investors, LLC, whose sole asset is 40% of Edison Nation, LLC (formerly Bouncing Brain Productions, LLC). Edison Nation was formed to provide equity capital for new inventions and help bring them to market. The initial business plan included developing the products and working with manufacturers and marketing organizations to sell the products. This has evolved into a less hands-on program which involves selling products with patents to other larger companies and retaining royalties. Edison Nation has now reached cash flow break-even, and in addition has been retained by a number of companies for which they do product searches to supplement its business. Edison Nation plans to repay the majority of its debt in 2012 and expects to subsequently begin making distributions to its owners. Based on the current status of this investment, the Company does not consider the investment to be impaired.

 

Chanticleer Investors II - The Company paid $16,598 in professional services to form this partnership. Chanticleer Advisors, LLC acts as the managing general partner and receives a management fee based on a percentage of profits.

 

5.

PROPERTY AND EQUIPMENT

 

Property and equipment consists of the following at December 31, 2011 and 2010:

 

		2011				2010
Office and computer equipment		$	32,179			$	29,371
Furniture and fixtures			67,794				47,686
Construction in progress			296,660				-
Restaurant furnishings and equipment			2,246,089				-
			2,642,722				77,057
Accumulated depreciation			(133,899	)			(51,494	)
		$	2,508,823			$	25,563

 

Construction in progress consists of costs incurred as of December 31, 2011 for our Emperor’s Palace location in Johannesburg, South Africa, which opened in February 2012. Restaurant furnishings and equipment consists of leasehold improvements, and bar, kitchen and restaurant equipment used in our three locations opened as of December 31, 2011.

 

6.

INTANGIBLE ASSETS, NET

 

Intangible assets, net at December 31, 2011 consists of franchise fees for the Company’s South African restaurants of $475,376, less amortization of $5,212. The Company is amortizing these costs from the opening of each restaurant for the 20 year term of the franchise agreement with HOA.

 

 

7.

LONG-TERM DEBT AND NOTES PAYABLE

 

Long-term debt and notes payable are summarized as follows.

 

		December 31,				December 31,
		2011				2010
$2,000,000 line of credit with a bank, interest at Wall Street Journal Prime +0.5% (minimum of 4.5%) payable monthly; due August 20, 2012; collateralized by a certificate of deposit owned by a shareholder; collateralized by substantially all of the Company's assets and guaranteed by Mr. Pruitt		$	1,165,000			$	-
Note payable to a bank due in monthly installments of $1,739 including interest at Wall Street Journal Prime + 1% (minimum of 5.5%); remaining balance due August 10, 2013; collateralized by substantially all of the Company's assets and guaranteed by Mr. Pruitt			242,964				250,000
18% convertible notes payable; interest payable quarterly; due on the six-month anniversary of the date issued; convertible under the same terms as the subsequent capital raised in connection with a public offering of the Company's securities (currently approximately 544,000 shares)			1,625,000				-
10% convertible notes payable; interest payable quarterly; due January 4, 2012; converted into common stock at the rate of $1.75 per share on March 30, 2011			-				686,500
			3,032,964				936,500
Notes payable and current portion of long-term debt			2,796,855				250,000
Long-term debt, less current portion		$	236,109			$	686,500

 

The Company pays the shareholder whose certificate of deposit is used as collateral on the $2,000,000 line of credit 1% of the outstanding balance on the line of credit monthly. In addition, the Company issued warrants to the shareholder, as described in Note 9.

 

During the three months ended March 31, 2011, the Company issued convertible notes payable with a total principal balance of $25,000 in exchange for an amount due a related party of $25,000. The convertible notes included interest at 10% per annum, which was payable quarterly beginning on April 1, 2010 until maturity on January 4, 2012. The convertible notes were convertible into our common stock at the rate of $1.75 per share. Convertible notes with a face value of $711,500 and accrued interest of $19,588 were converted into 412,286 shares of our common stock on March 30, 2011.

 

 

8.

INCOME TAXES

 

Income taxes charged to income were:

 

		2011				2010
Foreign - current		$	14,608			$	-

 

The amounts of U.S. and foreign income before income taxes, with a reconciliation of tax at the federal statutory rate (34%) with the provision for income taxes were:

 

		2011				2010
Loss (earnings) before income taxes:
United States		$	965,303			$	1,069,902
Foreign			123,479				(58,337	)
		$	1,088,782			$	1,011,565
Computed "expected" income tax expense (benefit)		$	(370,200	)		$	(343,900	)
Foreign taxes below federal statutory rate			12,300				-
State income taxes, net of federal benefit			(43,600	)			(40,500	)
Travel, entertainment and other			4,008				10,100
Valuation allowance			412,100				374,300
Income tax expense (benefit)		$	14,608			$	-

 

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Major components of deferred tax assets and liabilities at December 31, 2011 and 2010 were:

 

		2011				2010
Net operating loss carryforwards		$	1,688,500			$	1,381,600
Capital loss carryforwards			630,100				478,300
Investments			(86,700	)			8,900
Foreign operations			49,000				-
Total deferred tax assets			2,280,900				1,868,800
Valuation allowance			(2,280,900	)			(1,868,800	)
Net deferred tax assets		$	-			$	-

 

The Company has a net operating loss carryforward of approximately $4,443,000 which will expire at various dates beginning in 2024 through 2031, if not utilized. The Company has a capital loss carryforward of $1,658,000 which expires between 2015 and 2016 if not utilized. The tax basis of investments is less than their book cost by approximately $228,000.

 

 

9.

Stockholders’ Equity

 

The Company has 200,000,000 shares of its $0.0001 par value common stock authorized and 3,012,121 and 2,571,918 shares issued and 2,498,891 and 2,048,688 shares outstanding at December 31, 2011 and 2010, respectively. There are no options outstanding.

 

Effective March 23, 2011, the Company's common stock was forward split, 2 shares for each share issued, pursuant to written consent by a majority of the Company's shareholders. All share references have been adjusted as if the split occurred prior to all periods presented.

 

2011 Transactions

 

On March 30, 2011, the Company issued 412,286 shares of its common stock in exchange for convertible notes payable with a balance of $711,500 and accrued interest of $19,588.

 

On July 28, 2011, the Company issued 10,000 shares of its common stock in exchange for consulting services valued at $21,500.

 

On September 23, 2011, the Company issued 15,000 shares of its common stock in exchange for consulting services to be performed valued at $44,850.

 

On September 23, 2011, the Company issued 2,750 shares of its common stock in exchange for services performed and valued at $8,223.

 

On October 19, 2011, the Company issued 167 shares of its common stock in exchange for cash in the amount of $500.

 

2010 Transactions

 

During the year ended December 31, 2010, the Company issued: 15,572 shares of its common stock valued at $25,000 to two consultants for consulting services; 33,594 shares of its common stock valued at $58,790 for amounts due a related party; and issued 10,000 shares for $17,500 in accounts payable. Effective December 31, 2010, the Company issued 20,000 shares of its common stock to its outside directors for directors fees valued at $42,500.

 

Warrants

 

On January 6, 2011, the Company filed a Form S-1 Registration Statement under the Securities Act of 1933. The Registration Statement was declared effective on July 14, 2011 and registers one Class A Warrant and one Class B Warrant for each common share of the Company issued and outstanding. The warrants have a subscription price of $0.04 which entitles our shareholders to acquire one Class A Warrant which would entitle the holder to acquire one share of our common stock for $2.75 and one Class B Warrant which would entitle the holder to acquire one share of our common stock for $3.50. The warrants have a five year life. At December 31, 2011, the Company had issued 2,194,509 Class A and Class B warrants. Proceeds from the offering are summarized as follows.

 

Proceeds from sales of Class A and Class B warrants		$	87,780
Legal and professional fees incurred for offering			(67,172	)
		$	20,608

 

On August 10, 2011, the Company issued two warrants to the shareholder who collateralized the Company's $2,000,000 line of credit discussed in Note 7. The Class A Warrant is for 200,000 shares exercisable at $2.75 per share for 10 years and the Class B Warrant is for 250,000 shares exercisable at $3.50 per share for 10 years. The warrants were valued using Black-Scholes at $906,351. This amount will be amortized to interest expense over the ten year life of the warrants. At December 31, 2011, additional paid-in capital and interest expense include $35,247 in amortization.

 

 

On November 1, 2011, the Company entered into an investor relations consulting agreement. In addition to cash compensation, the consultant is entitled to receive warrants for certain performance goals. These warrants will be accounted for when the goals are accomplished.

 

10.

RELATED PARTY TRANSACTIONS

 

Due to related parties

 

The Company has received non-interest bearing loans and advances from related parties. The amounts owed by the Company as of December 31, 2011 and 2010 are as follows:

 

		2011				2010
Hoot SA III, LLC		$	-			$	70,000
Hoot SA I, LLC			15,409				-
Chanticleer Foundation, Inc.			10,750				-
Chanticleer Investors, LLC			4,045				-
Avenel Financial Group			-				46,349
		$	30,204			$	116,349

 

Due from related parties

 

The Company has earned income from and made advances to related parties. The amounts owed to the Company at December 31, 2011 and 2010 is as follows:

 

		2011				2010
Chanticleer Investors II, LLC		$	1,485			$	46,547
Chanticleer Investors, LLC			-				6,035
Chanticleer Dividend Fund, Inc.			74,281				30,937
Hoot SA II, LLC			825				-
Other			-				750
		$	76,591			$	84,269

 

Management income from affiliates

 

The Company had management income from its affiliates in 2011 and 2010, as follows:

 

		2011				2010
Chanticleer Investors, LLC		$	-			$	26,500
Chanticleer Investors II, LLC			1,485				57,718
Efftec International, Inc.			-				22,500
North American Energy Resources, Inc.			1,750				8,750
		$	3,235			$	115,468

 

 

Chanticleer Investors LLC

 

Investors LLC collected its note receivable and reinvested $3,550,000 in HOA LLC (See Note 4). The Company received $26,500 in management income from Investors LLC in 2010, before the investment in HOA LLC was completed. There was no management income from Investors LLC in 2011.

 

Chanticleer Investors II LLC

 

The Company manages Investors II and earned management income of $1,485 and $57,718 ($46,547 was collected March 15, 2011 and $11,171 was collected in 2010) in 2011 and 2010, respectively.

 

Chanticleer Dividend Fund, Inc. ("CDF")

 

On November 10, 2010 the Company formed CDF under the general corporation laws of the State of Maryland. CDF filed a registration statement under Form N-2 to register as a non-diversified, closed-end investment company in January 2011. The Company, through Advisors, will have a role in management of CDF when its registration statement becomes effective.

 

Hoot SA, LLC; Hoot SA II, LLC; and Hoot SA III, LLC

 

The Hoot partnerships were formed to help finance the first three Hooters restaurants in South Africa.

 

Efftec International, Inc. ("Efftec")

 

The Company's CEO became CEO and the sole director of Efftec during 2010 and the Company received 150,000 common shares and an option to acquire 150,000 shares for management services. The shares and option were initially valued at $22,500, based on the trading price of Efftec at the time.

 

North American Energy Resources, Inc. ("NAEY")

 

The Company's CEO became CEO and a director of NAEY during 2010 and the Company received 150,000 common shares for management services. The shares were valued at $10,500, based on the trading price of NAEY at the time. The Company's CEO resigned as CEO of NAEY in December 2010 and remains a director. During June 2011, the Company’s CEO contributed 1,790,440 shares of NAEY to the Company which was valued at $125,331 based on the trading price at the time. Mr. Pruitt did not receive additional compensation as a result of the transfer.

 

Chanticleer Foundation, Inc.

 

Chanticleer Foundation, Inc. is a Donor-Advised Fund whose governing body consists of Mr. Pruitt, a director of the Company and an employee of the Company. The Foundation loaned the Company $10,750 during 2011.

 

Avenel Financial Group, Inc.

 

Avenel Financial Group, Inc. is a company owned by Mr. Pruitt. Advances previously made to the Company were repaid during 2011.

 

Other

 

The Company acquired trading securities from a related party for $26,334 which were sold for $32,917 in 2010.

 

 

11.

SEGMENTS OF BUSINESS

 

The Company is organized into two segments as of the end of 2011 and 2010.

 

Management and consulting services ("Management")

The Company provides management and consulting services for small companies which are generally seeking to become publicly traded. The Company also provides management and investment services for Investors LLC, Investors II and other unaffiliated companies.

 

Operation of restaurants ("Restaurants")

At December 31, 2011, the Company has majority ownership of four restaurants and a management company in South Africa. Three of the restaurants and the management company were operating at December 31, 2011 and the fourth restaurant opened in February 2012. Majority ownership was acquired effective September 30, 2011 and these operations are consolidated with the Company’s other operations since that date. At December 31, 2011, the Company has 49% ownership of two restaurants in Australia, one of which opened in January 2012 and the second is under construction and expected to open in the second quarter of 2012. The operations in Australia will be accounted for using the equity method. The Company has also begun activity in Hungary, Brazil and Europe, but has not finalized any arrangement.

 

Financial information regarding the Company's segments is as follows for 2011 and 2010.

 

Year ended December 31, 2011

 

		Management				Restaurants				Total
Revenues		$	496,402			$	967,418			$	1,463,820
Interest expense		$	118,995			$	61,830			$	180,825
Depreciation and amortization		$	8,013			$	79,604			$	87,617
Profit (loss)		$	(1,004,157	)		$	(104,659	)		$	(1,108,816	)
Investments and other											-
Non-controlling interest											5,426
										$	(1,103,390	)
Assets		$	471,701			$	3,948,026			$	4,419,727
Investments											1,084,951
										$	5,504,678
Liabilities		$	3,522,775			$	340,640			$	3,863,415
Expenditures for non-current assets		$	2,807			$	385,302			$	388,109

 

 

 

Year ended December 31, 2010

 

		Management				Restaurants				Total
Revenues		$	136,301			$	-			$	136,301
Interest expense		$	140,016			$	-			$	140,016
Depreciation and amortization		$	11,079			$	-			$	11,079
Profit (loss)		$	(949,904	)		$	58,337			$	(891,567	)
Investments and other											(138,351	)
Non-controlling interest											18,353
										$	(1,011,565	)
Assets		$	208,261			$	87,200			$	295,461
Investments											1,119,098
										$	1,414,559
Liabilities		$	1,332,134			$	-			$	1,332,134
Expenditures for non-current assets		$	4,517			$	-			$	4,517

 

The following is revenues and long-lived assets by geographic area as of and for the years ended December 31:

 

Revenue:		2011				2010
United States		$	496,402			$	136,301
South Africa			967,418				-
		$	1,463,820			$	136,301

 

Long-lived assets, end of year:		2011				2010
United States		$	1,109,288			$	1,168,641
South Africa			3,112,783				87,200
Australia			672,175				-
Brazil			101				-
		$	4,894,347			$	1,255,841

 

The Company used multiple foreign currency exchange rates during the periods presented. For South Africa, for the Statements of Operations we used average rates for the period ranging from 7.94-8.17 Rands per USD, and for the Balance Sheet current assets and liabilities were at 8.12 and non-current assets and liabilities ranging from 6.93-8.07. For Australia, for the Statement of Operations we used an average rate of 1.02 USD per AUD and for the balance sheet we used 1.06 for current assets and liabilities, and 1.02 for non-current assets and liabilities.

 

12.

COMMITMENTS AND CONTINGENCIES

 

Effective August 1, 2010, the Company extended its office lease agreement for its office for a term of one year with monthly lease payments of $2,100. Since August 1, 2011, the office lease continues at the same rate on a month-to-month basis.

 

 

The Company leases the land and buildings for its four restaurants in South Africa through its subsidiaries. The leases are for five year terms and include options to extend the terms. We lease our restaurant facilities under “triple net” leases that require us to pay minimum rent, real estate taxes, maintenance costs and insurance premiums and, in some instances, percentage rent based on sales in excess of specified amounts. Rent obligations for our four restaurants are presented below:

 

2012		$	526,787
2013			578,252
2014			634,891
2015			697,223
thereafter			765,824
Totals		$	3,202,977

 

Rent expense for the years ended December 31, 2011 and December 31, 2010 was $126,909 and $25,200, respectively. Rent expense for the year ended December 31, 2011 for the South African restaurants was $97,691, and is included in the “Restaurant operating expenses” of the Consolidated Statement of Operations. Rent expense for the year ended December 31, 2011 for the management segment was $29,218, and is included in the “General and administrative expense” of the Consolidated Statement of Operations. Rent expense for the year ended December 31, 2010 was all for the management segment.

 

13.

DISCLOSURES ABOUT FAIR VALUE

 

Assets and liabilities measured at fair value on a recurring basis are summarized in the following tables according to FASB ASC 820 pricing levels.

 

		Fair Value Measurement Using
						Quoted prices
						in active				Significant
						markets of				other				Significant
						identical				observable				Unobservable
		Recorded				assets				inputs				Inputs
		value				(Level 1)				(Level 2)				(Level 3)
December 31, 2011
Assets:
Available-for-sale securities		$	318,353			$	316,853			$	1,500			$	-
December 31, 2010
Assets:
Available-for-sale securities		$	352,500			$	101,500			$	251,000			$	-

 

At December 31, 2011 and 2010, the Company's available-for-sale equity securities were valued using Level 1 and Level 2 inputs as summarized above. Level 1 inputs are based on unadjusted prices for identical assets in active markets that the Company can access. Level 2 inputs are based on quoted prices for similar assets other than quoted prices in Level 1, quoted prices in markets that are not yet active, or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets.

 

The Company does not have any investments that are measured on a recurring basis using Level 3 inputs.

 

Certain assets are not carried at fair value on a recurring basis, including investments accounted for under the equity and cost methods. Accordingly, such investments are only included in the fair value hierarchy disclosure when the investment is subject to re-measurement at fair value after initial recognition and the resulting re-measurement is reflected in the consolidated financial statements.

 

 

In 2010, the Company considered a cost basis investment to be impaired and recognized an impairment loss of $250,000 in the consolidated statement of operations. This impairment was determined using Level 3 inputs to determine the estimated fair value, which was determined to be less than the recorded amounts.

 

See Note 4 for further details of the Company's investments.

 

14.

SUBSEQUENT EVENTS

 

CONVERTIBLE NOTES PAYABLE

 

On January 5, 2012, March 15, 2012 and March 29, 2012, the Company received an additional $100,000, $135,000 and $865,000, respectively, of convertible debt, bringing the total to $2,725,000.

 

EQUITY RAISE

 

On February 22, 2012, the Company filed a Form S-1 Registration Statement under the Securities Act of 1933. The Registration Statement, when effective, would seek to raise $15 million with the issuance of 5 million units consisting of Common Stock shares at $3.00 per share and five year warrants at $3.25 per share.

 

NEW HOOTERS DEVELOPMENT RIGHTS

 

On March 15, 2012, the Company announced it had secured exclusive rights to operate Hooters restaurants in 3 of the most populated states of Brazil. The Company has partnered with the Nash Group, an established restaurant operating company, forming a joint venture company Chanticleer & Nash Brasil Foods Participações Ltda. ("CNBF"), where Chanticleer will own 60% of the operating entity. The group expects to open its first restaurant in the 3rd quarter 2012. The franchise agreement, signed with CNBF and Hooters of America on March 13, 2012, provides CNBF exclusive rights to open and operate Hooters restaurants in 3 states, including Rio de Janeiro, Minas Gerais and Espirito Santo, over the next 20 years. 

Chanticleer Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

March 31, 2012 (Unaudited) and December 31, 2011

 

		2012				2011
ASSETS
Current assets:
Cash and cash equivalents		$	182,240			$	151,928
Accounts receivable			29,688				103,982
Inventory			119,903				59,266
Due from related parties			77,679				76,591
Prepaid expenses			227,248				231,914
TOTAL CURRENT ASSETS			636,758				623,681
Property and equipment, net			2,746,611				2,508,823
Intangible assets, net			776,415				470,164
Investments at fair value			212,735				318,353
Other investments			1,707,545				1,579,677
Deposits and other assets			3,980				3,980
TOTAL ASSETS		$	6,084,044			$	5,504,678
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and notes payable		$	1,185,616			$	1,171,855
Convertible notes payable			2,725,000				1,625,000
Accounts payable			327,437				267,475
Accrued expenses			110,813				21,521
Other current liabilities			383,007				496,643
Income taxes payable			17,293				14,608
Due to related parties			30,204				30,204
TOTAL CURRENT LIABILITIES			4,779,370				3,627,306
Long-term debt, less current maturities			233,499				236,109
TOTAL LIABILITIES			5,012,869				3,863,415
Commitments and contingencies (Note 11)
Stockholders' equity:
Common stock:  $0.0001 par value; authorized 200,000,000 shares; issued 3,012,121 shares; and outstanding 2,498,891 shares at March 31, 2012 and December 31, 2011			301				301
Additional paid in capital			6,483,001				6,459,506
Other comprehensive income (loss)			(58,232	)			48,665
Non-controlling interest			1,773,446				1,692,019
Accumulated deficit			(6,600,921	)			(6,032,808	)
Less treasury stock, 513,230 shares at March 31, 2012 and December 31, 2011			(526,420	)			(526,420	)
			1,071,175				1,641,263
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	6,084,044			$	5,504,678

 

See accompanying notes to condensed consolidated financial statements.

 

 

Chanticleer Holdings, Inc. and Subsidiaries

Consolidated Statements of Operations

For the Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

		2012				2011
Revenue:
Restaurant sales, net		$	1,348,987			$	-
Management fee income - non-affiliates			25,000				416,667
Management fee income - affiliates			-				24,646
Total revenue			1,373,987				441,313
Expenses:
Restaurant cost of sales			496,549				-
Restaurant operating expenses			615,769				-
Restaurant pre-opening expenses			66,120				-
General and administrative expense			481,273				224,458
Depreciation and amortization			108,612				2,549
Total expenses			1,768,323				227,007
Earnings (loss) from operations			(394,336	)			214,306
Other income (expense)
Equity in earnings (losses) of investments			(10,538	)			5,103
Realized gains from sales of investments			-				19,630
Interest income			-				4,541
Miscellaneous income			-				476
Interest expense			(177,218	)			(18,759	)
Total other income (expense)			(187,756	)			10,991
Net earnings (loss) before income taxes			(582,092	)			225,297
Provision for income taxes			3,816				-
Net earnings (loss) before non-controlling interest			(585,908	)			225,297
Non-controlling interest			17,795				410
Net earnings (loss)			(568,113	)			225,707
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale securities (none applies to non-controlling interest)			(105,618	)			(14,000	)
Foreign translation income (loss)			(1,279	)			-
Other comprehensive income (loss)		$	(675,010	)		$	211,707
Net earnings (loss) per share, basic and diluted		$	(0.23	)		$	0.11
Weighted average shares outstanding			2,498,891				2,053,269

 

See accompanying notes to condensed consolidated financial statements.

 

 

Chanticleer Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

		2012				2011
Cash flows from operating activities:
Net earnings (loss)		$	(568,113	)		$	225,707
Adjustments to reconcile net earnings (loss) to net cash used in operating activities:
Non-controlling interest			(17,795	)			(410	)
Depreciation and amortization			108,612				2,549
Equity in (earnings) loss of investments			10,538				(5,103	)
(Gain) loss on sale of investments			-				(19,630	)
Amortization of warrants			23,495				-
(Increase) decrease in accounts receivable			74,294				(16,667	)
(Increase) decrease in prepaid expenses and other assets			(15,471	)			(27,485	)
(Increase) decrease inventory			(60,637	)			-
Increase (decrease) in accounts payable and accrued expenses			149,163				(165,142	)
Increase (decrease) in income taxes payable			2,685				-
Increase (decrease) in deferred revenue			-				(1,750	)
Advance from related parties for working capital			-				(28,438	)
Net cash used by operating activities			(293,229	)			(36,369	)
Cash flows from investing activities:
Proceeds from sale of investments			-				184,297
Investment distribution			-				4,539
Purchase of investments			(134,959	)			(27,423	)
Franchise fees incurred			(312,674	)			-
Purchase of property and equipment			(339,977	)			-
Net cash provided (used) by investing activities			(787,610	)			161,413
Cash flows from financing activities:
Loan proceeds, net			1,113,000				-
Loan repayment			(1,849	)			(545	)
Net cash provided (used) by financing activities			1,111,151				(545	)
Net increase in cash and cash equivalents			30,312				124,499
Cash and cash equivalents, beginning of period			151,928				46,007
Cash and cash equivalents, end of period		$	182,240			$	170,506

 

See accompanying notes to condensed consolidated financial statements.

 

 

Chanticleer Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows, continued

For the Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

		2012				2011
Supplemental cash flow information:
Cash paid for interest and income taxes:
Interest		$	67,254			$	65,131
Income taxes			-				-
Non-cash investing and financing activities:
Due to related party exchanged for convertible note payable		$	-			$	25,000
Convertible notes payable exchanged for common stock			-				711,500
Accrued interest exchanged for common stock			-				10,000

 

See accompanying notes to condensed consolidated financial statements.

 

 

Chanticleer Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

1.

Nature of Business

 

Organization

 

Chanticleer Holdings, Inc. (the “Company”) was organized October 21, 1999, under its original name, Tulvine Systems, Inc., under the laws of the State of Delaware. The Company previously had limited operations and was considered a development stage company until July 2005. On April 25, 2005, the Company formed a wholly owned subsidiary, Chanticleer Holdings, Inc. On May 2, 2005, Tulvine Systems, Inc. merged with and changed its name to Chanticleer Holdings, Inc.

  

The consolidated financial statements include the accounts of Chanticleer Holdings, Inc. and its subsidiaries, Chanticleer Advisors, LLC, (“Advisors”), Avenel Ventures, LLC ("Ventures"), Avenel Financial Services, LLC ("AFS"), Chanticleer Holdings Limited ("CHL"), Chanticleer Holdings Australia Pty, Ltd. (“CHA”), Chanticleer Investment Partners, LLC (“CIP”), DineOut SA Ltd. ("DineOut”), Kiarabrite (Pty) Ltd (“KPL”), Dimaflo (Pty) Ltd (“DFLO”), Tundraspex (Pty) Ltd (“TPL”), Civisign (Pty) Ltd (“CPL”) and Dimalogix (Pty) Ltd (“DLOG”) (collectively referred to as “the Company,” “we,” “us,” or “the Companies”). All significant inter-company balances and transactions have been eliminated in consolidation.

 

Further detailed information regarding the Company's subsidiaries can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

Effective March 23, 2011, the Company's common stock was forward split, 2 shares for each share issued, pursuant to written consent by a majority of the Company's shareholders. All share references have been adjusted as if the split occurred prior to all periods presented.

 

GENERAL

 

The consolidated financial statements included in this report have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting and include all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation. These consolidated financial statements have not been audited.

 

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations for interim reporting. The Company believes that the disclosures contained herein are adequate to make the information presented not misleading. However, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report for the period ended December 31, 2011, which is included in the Company’s Form 10-K.

 

GOING CONCERN

 

At March 31, 2012 and December 31, 2011, the Company had current assets of $636,758 and $623,681; current liabilities of $4,779,370 and $3,627,306; and a working capital deficit of $4,142,612 and $3,003,625, respectively. The Company incurred a loss of $568,113 during the three months ended March 31, 2012 and had an unrealized loss from available-for-sale securities of $105,618 and a foreign currency translation losses of $1,279, resulting in a comprehensive loss of $675,010.

 

 

The Company's corporate general and administrative expenses averaged approximately $295,000 per quarter during 2011 and has increased to $481,000 in the current quarter as we expanded our footprint internationally. Effective October 1, 2011, the Company acquired majority control of the restaurants in South Africa and began consolidating these operations. The Company also will share 49% of the profits in our Hooters location opened in January 2012 in Campbelltown, Australia, a suburb of Sydney.

 

In addition, the Company has a note with a balance at March 31, 2012 of $241,115 owed to its bank which is due in August 2013 and a line of credit with its bank with a balance at March 31, 2012 of $1,178,000 (total available $2,000,000) due on August 20, 2012. We also have convertible notes payable with certain investors with a balance at March 31, 2012 of $2,725,000, which have maturity dates from January 22 through June 26 2012. None of the noteholders whose notes have matured have taken any action to seek to enforce their notes. As of May 1, 2012, there are $975,000 of notes that have matured. The notes bear interest at an 18% annualized rate, The Company plans to continue to use limited partnerships, if the Company’s contemplated raise is not completed, to fund its share of costs for additional Hooters restaurants.

 

The Company expects to meet its obligations in 2012 with some or all of the following:

·

Proceeds from the sale of units (consisting of common stock and warrants). The Company filed an S-1 registration statement (which has yet to go effective) to raise up to $15,000,000;

·

The Company received $100,000 in January 2012 as a fee for its CEO sitting on the Board of Hooters of America and expect to continue to receive this annual fee for the next three years based on the current agreement;

·

Borrow additional funds on its existing line of credit;

·

Convert its convertible notes payable into common stock.

 

If any or all of the above events do not occur or if the Company does not raise sufficient capital, substantial doubt about the Company’s ability to continue as a going concern exists. These consolidated financial statements do not reflect any adjustments that might result from the outcome of these uncertainties.

 

2.

SIGNIFICANT ACCOUNTING POLICIES

 

There have been no material changes to its significant accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 except for the following:

 

RESTAURANT PRE-OPENING EXPENSES

 

Restaurant pre-opening expenses, which are expensed as incurred, consist of the costs of hiring and training the initial hourly work force for each new restaurant, travel, the cost of food and supplies used in training, grand opening promotional costs, the cost of the initial stocking of operating supplies and other direct costs related to the opening of a restaurant, including rent during the construction and in-restaurant training period.

 

Recent Accounting Pronouncements

 

There are several new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) which are not yet effective. Each of these pronouncements, as applicable, has been or will be adopted by the Company. At April 30, 2012, none of these pronouncements are expected to have a material effect on the financial position, results of operations or cash flows of the Company.

 

 

3.

ACQUISITION OF MAJORITY OWNED HOOTERS RESTAURANTS

 

Effective October 1, 2011, the Company acquired majority ownership of a management company and four Hooters restaurants in South Africa. Previously, the Company owned 50% of the restaurants but was not in control and these operations were accounted for using the equity method of accounting. New entities were formed for the operations and the Company’s ownership is as follows: KPL 80%, DFLO 90%, TPL 95%, CPL 100% and DLOG 100%. The restaurant owned by DFLO in Durban opened in January 2010, the restaurant owned by TPL in Johannesburg opened in June 2010, the restaurant owned by CPL in Cape Town opened in June 2011and the restaurant owned by DLOG opened in February 2012.

 

The acquisition was accounted for using the purchase method of accounting and, accordingly, the consolidated statements of operations include the results of the South African operations beginning October 1, 2011. The assets acquired and the liabilities assumed were recorded at estimated fair values as determined by the Company’s management based on information currently available and on current assumptions as to future operations. A summary of the estimated fair value of assets acquired and liabilities assumed in the acquisition follows:

 

Current assets, excluding cash and cash equivalents		$	93,638
Property and equipment and intangible assets			2,651,197
Total assets excluding cash and cash equivalents		$	2,744,835
Liabilities assumed			630,369
Non-controlling interest			1,647,710
Prior investment of the Company			261,756
Purchase price (net assets acquired)		$	205,000
Cash paid		$	205,000

 

Liabilities assumed includes $383,007 and $496,643 at March 31, 2012 and December 31, 2011, respectively, in bank debt of the prior entities which the Company has agreed to repay without interest upon completion of its new financing. These amounts are included in other liabilities at March 31, 2012 and December 31, 2011.

 

Unaudited pro forma results of operations for the three months ended March 31, 2011, as if the Company had acquired majority ownership of the South African Hooters restaurants on January 1, 2011 is as follows. The pro forma results include estimates and assumptions which management believes are reasonable. However, pro forma results are not necessarily indicative of the results that would have occurred if the business combination had been in effect on the dates indicated, or which may result in the future.

 

		2011
Net revenues		$	1,399,048
Net earnings		$	276,736
Net earnings per share, basic and diluted		$	0.13

 

 

4.

INVESTMENTS

 

INVESTMENTS AT FAIR VALUE CONSIST OF THE FOLLOWING AT MARCH 31, 2012 AND DECEMBER 31, 2011.

 

		2012				2011
Available-for-sale investments at fair value		$	212,735			$	318,353
Trading securities			-				-
Total		$	212,735			$	318,353

 

AVAILABLE-FOR-SALE SECURITIES

 

Activity in our available-for-sale securities may be summarized as follows:

		2012				2011
Cost at beginning of year		$	263,331			$	284,473
Contributed to the Company by it's CEO			-				125,331
Received as management fees			-				1,500
Other than temporary loss in available-for-sale securities			-				(147,973	)
Cost at end of period			263,331				263,331
Unrealized gain (loss)			(50,596	)			55,022
Total		$	212,735			$	318,353

 

Our available-for-sale securities consist of the following:

 

						Unrecognized								Realized				Loss
						Holding				Fair				Holding				on
		Cost				Gains (Losses)				Value				Loss				Sale
March 31, 2012
North Carolina Natural Energy *		$	1,500			$	-			$	1,500			$	-			$	-
North American Energy			126,000				(70,000	)			56,000				-				-
North American Energy *			10,500				1,500				12,000				-				-
North American Energy			125,331				17,904				143,235				-				-
		$	263,331			$	(50,596	)		$	212,735			$	-			$	-
December 31, 2011
Remodel Auction *		$	-			$	-			$	-			$	(900	)		$	-
North Carolina Natural Energy *			1,500				-				1,500				-				-
North American Energy			126,000				(42,000	)			84,000				-				-
North American Energy *			10,500				7,500				18,000				-				-
North American Energy			125,331				89,522				214,853				-				-
Efftec International, Inc. *			-				-				-				(22,500	)			-
HiTech Stages			-				-				-				(124,573	)			-
		$	263,331			$	55,022			$	318,353			$	(147,973	)		$	-

 

* Investments acquired in exchange for management services.

 

Remodel Auction Incorporated (“REMC”) – During 2009, the Company acquired 334 shares of REMC for management services with an initial cost of $275,000 which has now been fully impaired.

 

 

North Carolina Natural Energy, Inc. (“NCNE”) – NCNE is a successor to REMC whose business was discontinued. NCNE has plans to become involved in some form of natural energy. The Company received 100,000,000 shares of NCNE (less than 1% on a fully diluted basis) for management services during 2011. The shares were valued at $1,500 based on NCNE’s valuation as a shell.

 

North American Energy Resources, Inc. - During the quarter ended June 30, 2009, the Company exchanged its oil & gas property investments for 700,000 shares of North American Energy Resources, Inc. ("NAEY") which were valued at $126,000 based on the closing price of NAEY on the date of the trade. At March 31, 2012 and December 31, 2011, the stock was $0.08 and $0.12 per share, respectively, and the Company had recorded an unrealized loss of $42,000 as of December 31, 2011 and an additional $28,000 in the first quarter of 2012, based on the Company's determination that the price decline was temporary.

 

During the first quarter of 2010, the Company received an additional 150,000 shares of NAEY in exchange for management services. The shares were initially valued at $10,500, based on the trading price at the time. At March 31, 2012 and December 31, 2011, the shares were valued at $12,000 and $18,000.

 

During June 2011, the Company’s CEO contributed 1,790,440 shares of NAEY to the Company which was valued at $125,331 based on the trading price at the time. Mr. Pruitt did not receive additional compensation as a result of the transfer. At March 31, 2012 and December 31, 2011, the shares had a market value of $143,235 and $214,853, respectively.

 

NAEY appointed a new management team in December 2010 and they are seeking acquisition opportunities for onshore and offshore oil and gas properties. Accordingly, the Company determined that any decline was temporary.

 

EffTec International, Inc. - Effective April 1, 2010, the Company's CEO became a director and the CEO of EffTec International, Inc. The Company received 150,000 shares of EffTec and an option to acquire an additional 150,000 shares at $0.15 per share in exchange for the management services to be provided. The shares were valued at $22,500 based on the trading price of EffTec at the date of the transaction. At September 30, 2011, the market value of the Efftec stock dropped to less than $0.01 per share and the Company determined the reduction was other than temporary and impaired its investment to zero.

 

EffTec developed an Internet-based chiller tool called EffTrack™ that: collects, stores and analyzes chiller operating data, calculates and trends chiller performance, diagnoses the cause of chiller inefficiencies, notifies plant contacts when problems occur, recommends corrective actions, measures the results of corrective actions and provides cost analysis of operational improvements.

 

HiTech Stages, Ltd. (“HiTech”) – The Company originally acquired 275,000 shares of HiTech in exchange for 150,450 shares of DineOut during the June 2010 quarter. HiTech was unable to raise sufficient capital to fund its business plan and the stock price dropped to near zero at September 30, 2011. The Company determined the decline was other than temporary and fully impaired its investment on September 30, 2011.

 

OTHER INVESTMENTS ARE SUMMARIZED AS FOLLOWS AT MARCH 31, 2012 AND DECEMBER 31, 2011.

 

		2012				2011
Investments accounted for under the equity method		$	940,947			$	813,079
Investments accounted for under the cost method			766,598				766,598
Total		$	1,707,545			$	1,579,677

 

 

INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD

 

Activity in investments accounted for using the equity method is summarized as follows.

		2012				2011
Balance, beginning of year		$	813,079			$	87,200
Equity in earnings (loss)			(10,538	)			(76,113	)
New investments			138,406				810,133
Distributions received			-				(8,141	)
Balance, end of year		$	940,947			$	813,079

 

Equity investments consist of the following at March 31, 2012 and December 31, 2011:

 

		2012				2011
Carrying value:
Hoot SA I, II, III - South Africa		$	170,803			$	140,803
Hoot Campbelltown Pty. Ltd. (49%) - Australia			559,596				570,134
Hoot Surfers Paradise Pty. Ltd. (49%) - Australia			210,447				102,041
Brazil			101				101
		$	940,947			$	813,079

 

Equity in earnings (loss) and distributions from equity investments during the three months ended March 31, 2012 and 2011 follows. The activity from the South African restaurants is through September 30, 2011 at which time the Company acquired majority ownership and began consolidating these operations

		2012				2011
Equity in earnings (loss):
Hoot S.A. I, II, III (opened June 2011)			-				5,103
Hoot Campbelltown (49%)			(10,538	)			-
		$	(10,538	)		$	5,103
Distributions:
Hoot S.A. I, LLC (20%)			-				2,646
Hoot S.A. II, LLC (20%)			-				1,893
		$	-			$	4,539

 

The summarized financial data below includes the South African operations, of which we owned 20% at March 31, 2011 and the Hoot Campbelltown location in Australia, which we owned 49% of at March 31, 2012. The Company acquired majority ownership of the South African operations effective September 30, 2011.

		2012				2011
Revenue		$	1,108,063			$	957,735
Gross profit			781,253				640,751
Recurring expenses			706,147				589,722
Pre-opening costs			96,613				-
Income (loss) from continuing operations			(21,507	)			51,029
Net income (loss)			(21,507	)			51,029

 

 

The summarized balance sheets for the two locations in Australia of which we owned 49% at March 31, 2012 and December 31, 2011 follows :

 

		2012				2011
ASSETS
Current assets		$	141,377			$	58,975
Non-current assets			2,260,399				1,646,508
TOTAL ASSETS		$	2,401,776			$	1,705,483
LIABILITIES
Current liabilities		$	576,000			$	76,035
PARTNER'S EQUITY			1,825,776				1,629,448
TOTAL LIABILITIES AND PARTNERS' EQUITY		$	2,401,776			$	1,705,483

 

Hooters S.A., GP - The Company formed CHL to own the Company's 50% general partner interest in Hooters S.A., GP, the general partner of the Hooters' restaurant franchises in South Africa. The initial restaurant opened in December 2009 in Durban, South Africa and operations commenced in January 2010. In the initial restaurant CHL had a 10% interest in restaurant cash flows until the limited partners receive payout and a 40% interest in restaurant cash flows after limited partner payout. The second location opened in Johannesburg in June 2010 and a third location opened in Cape Town in June of 2011 with similar structures. Effective September 30, 2011, the Company acquired majority control of the South African operations and began consolidating its operations on October 1, 2011.

 

CHA (Hoot Campbelltown Pty. Ltd and Hoot Surfers Paradise Pty. Ltd.) – CHA entered into a partnership with the current local Hooters franchisee in Australia in which CHA will own 49% and its partner own 51%. The local partner will also manage the restaurants. The first location, Hoot Campbelltown Pty. Ltd. opened in Campbelltown, a suburb of Sydney, in January 2012. A second location, Hoot Surfers Paradise Pty. Ltd., is underway with plans to open in the second quarter of 2012.

 

INVESTMENTS ACCOUNTED FOR USING THE COST METHOD

 

Investments at cost consist of the following at March 31, 2012 and December 31, 2011:

 

Chanticleer Investors, LLC		$	500,000			$	500,000
Edison Nation LLC (FKA Bouncing Brain Productions)			250,000				250,000
Chanticleer Investors II			16,598				16,598
		$	766,598			$	766,598

 

Chanticleer Investors LLC - The Company sold 1/2 of its investment in Investors LLC in May 2009 for its cost of $575,000, which reduced its ownership from 23% to 11.5%. Accordingly, in May 2009, the Company discontinued accounting for this investment using the equity method and began to account for the investment using the cost method. In December 2010, the Company sold an additional $75,000 of its investment at cost.

 

On April 18, 2006, the Company formed Investors LLC and sold units for $5,000,000. Investors LLC’s principal asset was a convertible note in the amount of $5,000,000 with Hooters of America, Inc. (“HOA”), collateralized by and convertible into 2% of Hooters common stock. The original note included interest at 6% and was due May 24, 2009. The note was extended until November 24, 2010 and included an increase in the interest rate to 8%.

 

 

On January 24, 2011, Investors LLC and its three partners combined to form HOA Holdings, LLC ("HOA LLC") and completed the acquisition of Hooters of America, Inc. ("HOA") and Texas Wings, Inc. ("TW"). Together HOA LLC has created an operating company with 161 company-owned locations across sixteen states, or nearly half of all domestic Hooters restaurants and over one-third of the locations worldwide.

 

Investors, LLC had a note receivable in the amount of $5,000,000 from HOA that was repaid at closing. Investors LLC then invested $3,550,000 in HOA LLC (approximately 3.1%) ($500,000 of which is the Company's share). One of the investors in Investors LLC that owned a $1,750,000 share is a direct investor in HOA LLC and will now carry its ownership in HOA LLC directly. The Company now owns approximately 14% of Investors LLC.

 

Based on the current status of this investment, the Company does not consider the investment to be impaired.

 

EE Investors, LLC - On January 26, 2006, we acquired an investment in EE Investors, LLC with cash in the amount of $250,000. We acquired 1,205 units (3.378%) in EE Investors, LLC, whose sole asset is 40% of Edison Nation, LLC (formerly Bouncing Brain Productions, LLC). Edison Nation was formed to provide equity capital for new inventions and help bring them to market. The initial business plan included developing the products and working with manufacturers and marketing organizations to sell the products. This has evolved into a less hands-on program which involves selling products with patents to other larger companies and retaining royalties. Edison Nation has now reached cash flow break-even, and in addition has been retained by a number of companies for which they do product searches to supplement its business. Edison Nation plans to repay the majority of its debt in 2012 and expects to subsequently begin making distributions to its owners. Based on the current status of this investment, the Company does not consider the investment to be impaired.

 

Chanticleer Investors II - The Company paid $16,598 in professional services to form this partnership. Chanticleer Advisors, LLC acts as the managing general partner and receives a management fee based on a percentage of profits.

 

5.

PROPERTY AND EQUIPMENT

 

Property and equipment consists of the following at March 31, 2012 and December 31, 2011:

 

		2012				2011
Office and computer equipment		$	32,179			$	32,179
Furniture and fixtures			70,796				67,794
Construction in progress			-				296,660
Restaurant furnishings and equipment			2,879,724				2,246,089
			2,982,699				2,642,722
Accumulated depreciation			(236,088	)			(133,899	)
		$	2,746,611			$	2,508,823

 

Restaurant furnishings and equipment consists of leasehold improvements, and bar, kitchen and restaurant equipment used in our four locations opened as of March 31, 2012. Construction in progress consisted of costs incurred as of December 31, 2011 for our Emperor’s Palace location in Johannesburg, South Africa, which opened in February 2012 and its assets are currently in the restaurant furnishings and equipment line above. Depreciation expense for the three months ended March 31, 2012 for the restaurant and management businesses was $99,999 and $2,190, respectively. Depreciation expense for the three months ended March 31, 2011 for the restaurant and management businesses was $0 and $2,549, respectively.

 

 

6.

INTANGIBLE ASSETS, NET

 

Intangible assets, net consists of the following at March 31, 2012 and December 31, 2011:

 

		2012				2011
South Africa		$	548,050			$	475,376
Brazil			135,000				-
Hungary			105,000				-
			788,050				475,376
Accumulated amortization			(11,635	)			(5,212	)
		$	776,415			$	470,164

 

Intangible assets, net, consists of franchise fees for the Company’s Hooters restaurants. The Company is amortizing these costs from the opening of each restaurant for the 20 year term of the franchise agreement with HOA. Amortization expense for the three months ended March 31, 2012 for the restaurant businesses was $6,423. There was no amortization expense in 2011.

 

7.

LONG-TERM DEBT AND NOTES PAYABLE

 

Long-term debt and notes payable are summarized as follows.

 

		March 31,				December 31,
		2012				2011
$2,000,000 line of credit with a bank, interest at Wall Street Journal Prime +0.5% (minimum of 4.5%) payable monthly; due August 20, 2012; collateralized by a certificate of deposit owned by a shareholder; collateralized by substantially all of the Company's assets and guaranteed by Mr. Pruitt		$	1,178,000			$	1,165,000
Note payable to a bank due in monthly installments of $1,739 including interest at Wall Street Journal Prime + 1% (minimum of 5.5%); remaining balance due August 10, 2013; collateralized by substantially all of the Company's assets and guaranteed by Mr. Pruitt			241,115				242,964
18% convertible notes payable; interest payable quarterly; due on the six-month anniversary of the date issued which range from January 22-June 26, 2012; convertible under the same terms as the subsequent capital raised in connection with a public offering of the Company's securities (currently approximately 908,000 shares)			2,725,000				1,625,000
			4,144,115				3,032,964
Notes payable and current portion of long-term debt			3,910,616				2,796,855
Long-term debt, less current portion		$	233,499			$	236,109

 

 

The Company pays the shareholder whose certificate of deposit is used as collateral on the $2,000,000 line of credit 1% of the outstanding balance on the line of credit monthly. In addition, the Company issued warrants to the shareholder, as described in Note 8.

 

8.

Stockholders’ Equity

 

The Company has 200,000,000 shares of its $0.0001 par value common stock authorized, 3,012,121 shares issued and 2,498,891 shares outstanding at March 31, 2012 and December 31, 2011.

 

Effective March 23, 2011, the Company's common stock was forward split, 2 shares for each share issued, pursuant to approval of a majority of the Company's shareholders. All share references have been adjusted as if the split occurred prior to all periods presented.

 

2012 Transactions

 

None.

 

2011 Transactions

 

On March 30, 2011, the Company issued 412,286 shares of its common stock in exchange for convertible notes payable with a balance of $711,500 and accrued interest of $19,588.

 

On July 28, 2011, the Company issued 10,000 shares of its common stock in exchange for consulting services valued at $21,500.

 

On September 23, 2011, the Company issued 15,000 shares of its common stock in exchange for consulting services to be performed valued at $44,850.

 

On September 23, 2011, the Company issued 2,750 shares of its common stock in exchange for services performed and valued at $8,223.

 

On October 19, 2011, the Company issued 167 shares of its common stock in exchange for cash in the amount of $500.

 

Warrants

 

On January 6, 2011, the Company filed a Form S-1 Registration Statement under the Securities Act of 1933. The Registration Statement was declared effective on July 14, 2011 and registers one Class A Warrant and one Class B Warrant for each common share of the Company issued and outstanding. The warrants have a subscription price of $0.04 which entitles our shareholders to acquire one Class A Warrant which would entitle the holder to acquire one share of our common stock for $2.75 and one Class B Warrant which would entitle the holder to acquire one share of our common stock for $3.50. The warrants have a five year life. At March 31, 2012 and December 31, 2011, the Company had issued 2,194,509 Class A and Class B warrants. Proceeds from the offering are included in additional paid in capital and are summarized as follows.

 

Proceeds from sales of Class A and Class B warrants		$	87,780
Legal and professional fees incurred for offering			(67,172	)
		$	20,608

 

On August 10, 2011, the Company issued two warrants to the shareholder who collateralized the Company's $2,000,000 line of credit discussed in Note 7. The Class A Warrant is for 200,000 shares exercisable at $2.75 per share for 10 years and the Class B Warrant is for 250,000 shares exercisable at $3.50 per share for 10 years. The warrants were valued using Black-Scholes at $906,351. This amount will be amortized to interest expense over the ten year life of the warrants. At March 31, 2012 and December 31, 2011, additional paid-in capital includes $57,907 and $35,247, respectively, in amortization. Interest expense included $35,247 in 2011 and $22,660 for the three months ended March 31, 2012.

 

 

On November 1, 2011, the Company entered into an investor relations consulting agreement. In addition to cash compensation, the consultant is entitled to receive warrants for certain performance goals. These warrants will be accounted for when the goals are accomplished.

 

On March 28, 2012, the Company issued 250,000 and 50,000 five year warrants at $3.25 and $4.00, respectively for consulting services related to the Company’s expansion into Europe. The warrants were valued using Black-Scholes at $518,599. This amount will be amortized to consulting fees (in G&A on consolidated statements of operations) over the five year life of the warrants. At March 31, 2012, additional paid-in capital and consulting expense include $835 in amortization for the three days in the quarter after the warrants were issued.

 

9.

RELATED PARTY TRANSACTIONS

 

Due to related parties

 

The Company has received non-interest bearing loans and advances from related parties. The amounts owed by the Company as of March 31, 2012 and December 31, 2011 are as follows:

 

		2012				2011
Hoot SA I, LLC		$	15,409			$	15,409
Chanticleer Foundation, Inc.			10,750				10,750
Chanticleer Investors, LLC			4,045				4,045
		$	30,204			$	30,204

 

Due from related parties

 

The Company has earned income from and made advances to related parties. The amounts owed to the Company as of March 31, 2012 and December 31, 2011 are as follows:

 

		2012				2011
Chanticleer Investors II, LLC		$	1,485			$	1,485
Chanticleer Dividend Fund, Inc.			74,281				74,281
Hoot SA II and IV, LLC's			1,913				825
		$	77,679			$	76,591

 

Management income from affiliates

 

The Company had management income from its affiliates in the three months ended March 31, 2012 and 2011, as follows:

 

		2012				2011
Chanticleer Investors II, LLC			-				22,896
North American Energy Resources, Inc.			-				1,750
		$	-			$	24,646

 

 

Chanticleer Investors LLC

 

Investors LLC loaned the Company $4,045 at March 31, 2012 and December 31, 2011.

 

Chanticleer Investors II LLC

 

The Company manages Investors II and earned management income of $22,896 in 2011. There was no accrual for 2012.

 

Chanticleer Dividend Fund, Inc. ("CDF")

 

On November 10, 2010 the Company formed CDF under the general corporation laws of the State of Maryland. CDF filed a registration statement under Form N-2 to register as a non-diversified, closed-end investment company in January 2011. The Company, through Advisors, will have a role in management of CDF when its registration statement becomes effective.

 

Hoot SA, LLC; Hoot SA II, LLC; Hoot SA III, LLC; and Hoot SA IV, LLC

 

The Hoot partnerships were formed to help finance the first four Hooters restaurants in South Africa.

 

Efftec International, Inc. ("Efftec")

 

The Company's CEO became CEO and the sole director of Efftec during 2010 and the Company received 150,000 common shares and an option to acquire 150,000 shares for management services. The shares and option were initially valued at $22,500, based on the trading price of Efftec at the time.

 

North American Energy Resources, Inc. ("NAEY")

 

The Company's CEO became CEO and a director of NAEY during 2010 and the Company received 150,000 common shares for management services. The shares were valued at $10,500, based on the trading price of NAEY at the time. The Company's CEO resigned as CEO of NAEY in December 2010 and remains a director. During June 2011, the Company’s CEO contributed 1,790,440 shares of NAEY to the Company which was valued at $125,331 based on the trading price at the time. Mr. Pruitt did not receive additional compensation as a result of the transfer.

 

Chanticleer Foundation, Inc.

 

Chanticleer Foundation, Inc. is a Donor-Advised Fund whose governing body consists of Mr. Pruitt, a director of the Company and an employee of the Company. The Foundation loaned the Company $10,750 during 2011.

 

Avenel Financial Group, Inc.

 

Avenel Financial Group, Inc. is a company owned by Mr. Pruitt. Advances previously made to the Company were repaid during 2011.

 

10.

SEGMENTS OF BUSINESS

 

The Company is organized into two segments.

 

Management and consulting services ("Management")

The Company provides management and consulting services for small companies which are generally seeking to become publicly traded. The Company also provides management and investment services for Investors LLC, Investors II and other unaffiliated companies.

 

 

Operation of restaurants ("Restaurants")

At March 31, 2012, the Company has majority ownership of four restaurants and a management company in South Africa. Three of the restaurants and the management company were operating for the entire first quarter of 2012 and the fourth restaurant opened in February 2012. Majority ownership was acquired effective September 30, 2011 and these operations are consolidated with the Company’s other operations since that date. At March 31, 2012, the Company has 49% ownership of two restaurants in Australia, one of which opened in January 2012 and the second is under construction and expected to open in the second quarter of 2012. The operations in Australia will be accounted for using the equity method. The Company has also started activity in Hungary, Brazil and Europe, but operations have not yet begun.

 

Financial information regarding the Company's segments is as follows for the three months ended March 31, 2012 and 2011.

 

Three months ended March 31, 2012

 

		Management				Restaurants				Total
Revenues		$	25,000			$	1,348,987			$	1,373,987
Interest expense		$	72,586			$	104,632			$	177,218
Depreciation and amortization		$	2,190			$	106,422			$	108,612
Profit (loss)		$	(447,332	)		$	(138,576	)		$	(585,908	)
Investments and other											-
Non-controlling interest											17,795
										$	(568,113	)
Assets		$	1,481,715			$	3,622,996			$	5,104,711
Investments											979,333
										$	6,084,044
Liabilities		$	4,581,574			$	431,295			$	5,012,869
Expenditures for non-current assets		$	-			$	412,651			$	412,651

 

 

Three months ended March 31, 2011

 

		Management				Restaurants				Total
Revenues		$	441,313			$	-			$	441,313
Interest expense		$	177,218			$	-			$	177,218
Depreciation and amortization		$	2,549			$	-			$	2,549
Profit (loss)		$	200,564			$	5,103			$	205,667
Investments and other											19,630
Non-controlling interest											410
										$	225,707
Assets		$	408,571			$	87,764			$	496,335
Investments											1,105,098
										$	1,601,433
Liabilities		$	565,291			$	-			$	565,291
Expenditures for non-current assets		$	-			$	-			$	-

 

11.

COMMITMENTS AND CONTINGENCIES

 

Effective August 1, 2010, the Company extended its office lease agreement for its office for a term of one year with monthly lease payments of $2,100. Since August 1, 2011, the office lease continues at the same rate on a month-to-month basis.

 

The Company leases the land and buildings for its four restaurants in South Africa through its subsidiaries. The leases are for five year terms and include options to extend the terms. We lease our restaurant facilities under “triple net” leases that require us to pay minimum rent, real estate taxes, maintenance costs and insurance premiums and, in some instances, percentage rent based on sales in excess of specified amounts. Rent obligations for our four restaurants as of March 31are presented below:

 

2013		$	556,967
2014			611,381
2015			671,264
2016			737,168
thereafter			809,699
Totals		$	3,386,479

 

Rent expense for the three months ended March 31, 2012 and March 31, 2011 was $137,791 and $6,300, respectively. Rent expense for the three months ended March 31, 2012 for the South African restaurants was $131,266, and is included in the “Restaurant operating expenses” of the Consolidated Statement of Operations. Rent expense for the three months ended March 31, 2012 for the management segment was $6,525, and is included in the “General and administrative expense” of the Consolidated Statement of Operations. Rent expense for the three months ended March 31, 2011 was all for the management segment.

 

 

12.

DISCLOSURES ABOUT FAIR VALUE

 

Assets and liabilities measured at fair value on a recurring basis are summarized in the following tables according to FASB ASC 820 pricing levels.

 

		Fair Value Measurement Using
						Quoted prices
						in active				Significant
						markets of				other				Significant
						identical				observable				Unobservable
		Recorded				assets				inputs				Inputs
		value				(Level 1)				(Level 2)				(Level 3)
March 31, 2012
Assets:
Available-for-sale securities		$	212,735			$	211,235			$	1,500			$	-
December 31, 2011
Assets:
Available-for-sale securities		$	318,353			$	316,853			$	1,500			$	-

 

At March 31, 2012 and December 31, 2011, the Company's available-for-sale equity securities were valued using Level 1 and Level 2 inputs as summarized above. Level 1 inputs are based on unadjusted prices for identical assets in active markets that the Company can access. Level 2 inputs are based on quoted prices for similar assets other than quoted prices in Level 1, quoted prices in markets that are not yet active, or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets.

 

The Company does not have any investments that are measured on a recurring basis using Level 3 inputs.

 

Certain assets are not carried at fair value on a recurring basis, including investments accounted for under the equity and cost methods. Accordingly, such investments are only included in the fair value hierarchy disclosure when the investment is subject to re-measurement at fair value after initial recognition and the resulting re-measurement is reflected in the consolidated financial statements.

  

See Note 4 for further details of the Company's investments.

 

13.

SUBSEQUENT EVENTS

 

EQUITY RAISE

 

The Company filed a Form S-1 Registration Statement under the Securities Act of 1933. The Registration Statement, when effective, would seek to raise $15 million with the issuance of 5 million units at $3.00 per unit, consisting of one share of Common Stock and one five year redeemable warrant exercisable at $3.25 per share.

 

On April 23, 2012, the Company filed a Form DEF 14 A Proxy Statement for a Special Meeting of the Company’s shareholders on May 11, 2012. At the Special Meeting, stockholders will be asked (i) to authorize the Company to possibly amend its certificate of incorporation (as amended, the “Company Certificate”) to effect a 1-for-2 reverse stock split (the “Reverse Stock Split”); (ii) to authorize the Company to possibly amend the Company Certificate to decrease the number of authorized shares of Company common stock (“Common Stock”) to 20,000,000 shares (the “Decrease in Authorized”); and (iii) to transact any other business that properly comes before the Special Meeting or any adjournments thereof.

 

 

	CHANTICLEER HOLDINGS, INC.
	By:	/s/ Michael D. Pruitt
		Michael D. Pruitt,
		Chief Executive Officer and Chief Financial Officer

 

 

SIGNATURES		TITLE		DATE
		Chairman of the Board of Directors,
/s/ Michael D. Pruitt		CEO, CFO and Director		May 18, 2012
Michael D. Pruitt		(Principal Executive Officer and Principal Financial Officer)
/s/ Michael Carroll		Director		May 18, 2012
Michael Carroll
/s/ Brian Corbin		Director		May 18, 2012
Brian Corbin
/s/ Paul I. Moskowitz		Director		May 18, 2012
Paul I. Moskowitz
/s/ Keith Johnson		Director		May 18, 2012
Keith Johnson