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EX-32.1 - Chanticleer Holdings, Inc.ex32-1.htm
EX-31.2 - Chanticleer Holdings, Inc.ex31-2.htm
EX-31.1 - Chanticleer Holdings, Inc.ex31-1.htm
EX-32.2 - Chanticleer Holdings, Inc.ex32-2.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended: September 30, 2015

 

Commission File Number: 001-35570

 

CHANTICLEER HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   20-2932652
(State or Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)

 

7621 Little Avenue, Suite 414, Charlotte, NC 28226

(Address of principal executive offices) (zip code)

 

(704) 366-5122

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ].

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ].

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [  ] Smaller reporting company [ X ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X].

 

The number of shares outstanding of registrant’s common stock, par value $.0001 per share, as of November 16, 2015 was 21,468,021 shares.

 

 

 

 
 

 

Chanticleer Holdings, Inc. and Subsidiaries

 

INDEX

 

    Page No.
Part I Financial Information 3
     
Item 1: Financial Statements 3
     
  Condensed Consolidated Balance Sheets as of September 30, 2015 (Unaudited) and December 31, 2014 3
     
  Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss – For the Three and Nine months Ended September 30, 2015 and 2014 4
     
  Unaudited Condensed Consolidated Statements of Cash Flows – For the Nine months Ended September 30, 2015 and 2014 5
     
  Notes to Unaudited Condensed Consolidated Financial Statements 7
     
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 27
     
Item 3: Quantitative and Qualitative Disclosures about Market Risk 41
     
Item 4: Controls and Procedures 41
     
Part II Other Information 42
     
Item 1: Legal Proceedings 42
Item 1A: Risk Factors 42
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 42
Item 3: Defaults Upon Senior Securities 43
Item 4: Mine Safety Disclosures 43
Item 5: Other Information 43
Item 6: Exhibits 43
     
  Signatures 44

 

2
 

 

PART I – FINANCIAL INFORMATION

 

Item 1: FINANCIAL StatemenTS

 

Chanticleer Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

   September 30, 2015    December, 31, 2014 
ASSETS          
Current assets:          
Cash  $1,805,927   $245,828 
Accounts and other receivables   194,589    313,509 
Inventories   593,778    532,803 
Due from related parties   45,615    46,015 
Prepaid expenses and other current assets   421,508    330,745 
TOTAL CURRENT ASSETS   3,061,417    1,468,900 
Property and equipment, net   17,855,282    13,315,409 
Goodwill   12,269,504    15,617,308 
Intangible assets, net   7,542,395    3,396,503 
Investments at fair value   35,362    35,362 
Other investments   1,550,000    1,550,000 
Deposits and other assets   297,037    408,492 
TOTAL ASSETS  $42,610,997   $35,791,974 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable and accrued expenses  $4,420,370   $5,580,131 
Current maturities of long-term debt and notes payable   1,134,025    1,813,647 
Current maturities of convertible notes payable, net of debt discount of $359,243 and $63,730, respectively   215,757    436,270 
Current maturities of capital leases payable   47,370    42,032 
Due to related parties   212,399    1,299,083 
Deferred rent   686,622    118,986 
Derivative liabilities   1,318,661    1,945,200 
Liabilities of discontinued operations   177,204    177,393 
TOTAL CURRENT LIABILITIES   8,212,408    11,412,742 
Long-term debt, less current maturities, net of debt discount of $214,833 and $343,733, respectively   5,419,925    5,009,283 
Convertible notes payable, net of debt discount of $955,177 and $1,872,587, respectively   2,294,823    1,477,413 
Capital leases payable, less current maturities   25,144    36,628 
Deferred rent   1,784,840    2,196,523 
Deferred tax liabilities   655,050    686,884 
TOTAL LIABILITIES   18,392,190    20,819,473 
Commitments and contingencies (Note 13)          
           
Stockholders’ equity:          
Preferred stock: no par value; authorized 5,000,000 shares; none issued and outstanding   -    - 
Common stock: $0.0001 par value; authorized 45,000,000 shares; issued and outstanding 21,328,830 and 7,249,442 shares, respectively   2,133    725 
Additional paid in capital   55,208,098    32,601,400 
Accumulated other comprehensive loss   (911,900)   (1,657,908)
Non-controlling interest   (527,590)   4,904,471 
Accumulated deficit   (30,607,114)   (20,876,187)
TOTAL STOCKHOLDERS’ EQUITY   24,218,807    14,972,501 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $42,610,997   $35,791,974 

 

See accompanying notes to condensed consolidated financial statements

 

3
 

 

Chanticleer Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30, 2015    September 30, 2014   September 30, 2015    September 30, 2014 
Revenue:                    
Restaurant sales, net  $10,005,324   $8,753,554   $28,907,536   $20,465,510 
Gaming income, net   121,031    141,156    352,881    272,391 
Management fee income - non-affiliates   25,000    417,842    204,124    467,993 
Franchise income   119,950    -    270,948    - 
Total revenue   10,271,305    9,312,552    29,735,489    21,205,894 
Expenses:                    
Restaurant cost of sales   3,358,602    2,927,629    9,937,190    7,097,300 
Restaurant operating expenses   5,998,627    4,997,159    17,451,671    11,846,792 
Restaurant pre-opening and closing expenses   141,306    62,293    739,495    323,274 
General and administrative expenses   1,676,609    1,422,193    5,656,545    4,287,279 
Asset impairment charge   4,489,043    -    4,489,043    - 
Depreciation and amortization   358,307    435,404    1,205,255    1,162,088 
Total expenses   16,022,494    9,844,678    39,479,199    24,716,733 
Loss from operations   (5,751,189)   (532,126)   (9,743,710)   (3,510,839)
Other (expense) income                     
Interest expense   (657,906)   (581,215)   (2,736,555)   (1,268,756)
Change in fair value of derivative liabilities   262,232    221,000    833,139    925,200 
Loss on extinguishment of debt   (145,834)   -    (315,923)   - 
Realized gains on securities   -    -    -    101,472 
Equity in losses of investments   -    -    -    (40,694)
Other income (expense)   (40,262)   438,607    35,064    446,445 
Total other (expense) income   (581,770)   78,392    (2,184,275)   163,667 
Loss from continuing operations before income taxes   (6,332,959)   (453,734)   (11,927,985)   (3,347,172)
Income tax benefit (expense)   (7,356)   19,726    30,298    27,235 
Loss from continuing operations   (6,340,315)   (434,008)   (11,897,687)   (3,319,937)
Gain (loss) from discontinued operations, net of taxes   -    (56,223)   189    (161,196)
Consolidated net loss   (6,340,315)   (490,231)   (11,897,498)   (3,481,133)
Less: Net loss (income) attributable to non-controlling interest   1,823,601    (61,209)   2,166,570    68,318 
Net loss attributable to Chanticleer Holdings, Inc.  $(4,516,715)  $(551,440)  $(9,730,928)  $(3,412,815)
                     
Net loss attributable to Chanticleer Holdings, Inc.:                    
Loss from continuing operations  $(4,516,715)  $(495,217)  $(9,731,117)  $(3,251,619)
Gain (loss) from discontinued operations   -    (56,223)   189    (161,196)
Net loss attributable to Chanticleer Holdings, Inc.  $(4,516,715)  $(551,440)  $(9,730,928)  $(3,412,815)
                     
Other comprehensive loss:                    
Unrealized loss on available-for-sale securities (none applies to non-controlling interest)  $-   $-   $-   $(15,527)
Foreign currency translation (loss) gain   (572,954)   177,219    (891,772)    228,384 
Total other comprehensive loss   (572,954)   177,219    (891,772)    212,857 
Comprehensive loss  $(3,943,761)  $(374,221)  $(10,622,700)  $(3,199,958)
                     
Net loss attributable to Chanticleer Holdings, Inc. per common share, basic and diluted:                    
Continuing operations attributable to common stockholders, basic and diluted  $(0.31)  $(0.07)  $(0.69)  $(0.52)
Discontinued operations attributable to common stockholders, basic and diluted  $-   $(0.01)  $0.00   $(0.03)
Weighted average shares outstanding, basic and diluted   14,802,370    6,628,011    14,059,116    6,279,688 

 

See accompanying notes to condensed consolidated financial statements

 

4
 

 

Chanticleer Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   Nine Months Ended 
   September 30, 2015    September 30, 2014 
Cash flows from operating activities:          
Net loss  $(11,897,498)  $(3,481,133)
Net (income) loss from discontinued operations   (189)   161,196 
Net loss from continuing operations   (11,897,687)   (3,319,937)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   1,205,255    1,243,195 
Deferred income taxes   (31,834)   - 
Equity in losses of investments   -    40,694 
Asset impairment charge   4,489,043    - 
Loss on extinguishment of debt   315,923    - 
Loss on disposal of property and equipment   514,522    - 
Common stock and warrants issued for services   231,857    354,617 
Amortization of debt discount   1,356,365    930,392 
Amortization of warrants   22,375    152,325 
Change in fair value of derivative liabilities   (833,139)   (925,200)
(Increase) decrease in accounts and other receivables   (70,421)   (244,553)
Decrease in prepaid expenses and other assets   (171,450)   (107,161)
Decrease in inventory   2,239    33,845 
Increase in accounts payable and accrued expenses   1,224,599    3,150,118 
(Decrease) increase in deferred rent   (311,104)   - 
Net cash (used in) provided by operating activities from continuing operations   (3,953,457)   1,308,335 
Net cash (used in) provided by operating activities from discontinued operations   (4,500)   (254,790)
Net cash (used in) provided by operating activities   (3,957,957)   1,053,545 
           
Cash flows from investing activities:          
Purchase of property and equipment   (1,518,747)   (3,569,775)
Cash paid for acquisitions, net of cash acquired   (9,082,918)   27,527 
Net cash used in investing activities from continuing operations   (10,601,665)   (3,542,248)
           
Cash flows from financing activities:          
Proceeds from sale of common stock and warrants   14,920,937    835,000 
Loan proceeds   656,837    1,458,308 
Loan repayments   (824,981)   - 
Proceeds from convertible debt   2,150,000    - 
Capital lease payments   (39,822)   (142,906)
Decrease in amounts payable to affiliate   (1,086,684)   - 
Minority interest   333,342    33,500 
Net cash provided by financing activities from continuing operations   16,109,629    2,183,902 
Effect of exchange rate changes on cash   10,092    119,884 
Net increase (decrease) in cash    1,560,099    (184,917)
Cash, beginning of period   245,828    442,694 
Cash, end of period  $1,805,927   $257,777 

 

See accompanying notes to condensed consolidated financial statements

 

5
 

 

Chanticleer Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows, continued

 

(Unaudited)

 

   Nine Months Ended 
   September 30, 2015    September 30, 2014 
         
Supplemental cash flow information:          
Cash paid for interest and income taxes:          
Interest  $810,028   $63,503 
Income taxes  $54,183   $1,776 
           
Non-cash investing and financing activities:          
Purchase of equipment using capital leases  $50,087   $- 
Issuance of stock in connection with business combinations  $4,062,317   $(5,401,639)
Debt discount for fair value of warrants and conversion feature issued in connection with debt  $1,176,108   $- 
Convertible debt settled through issuance of common stock  $2,175,000   $- 
Long-term debt settled through issuance of common stock  $100,000   $- 
           
Purchases of businesses:          
Current assets excluding cash  $476,569   $636,894 
Property and equipment   5,386,141    7,945,152 
Goodwill   4,019,972    11,394,009 
Trade name/trademarks/franchise fees   4,300,000    559,304 
Deposits and other assets   -    136,025 
Liabilities assumed   (1,037,446)   (4,165,235)
Non-controlling interest   -    (4,753,288)
Chanticleer equity   -    (1,028,749)
Common stock issued   (4,062,317)   (5,401,639)
Assumption of debt   -    (5,000,000)
Cash paid   (9,276,429)   (350,000)
Cash acquired  $193,510   $27,527 

 

See accompanying notes to condensed consolidated financial statements

 

6
 

 

Chanticleer Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Nature of Business

 

ORGANIZATION

 

Chanticleer Holdings, Inc. (the “Company”) is in the business of owning, operating and franchising fast casual dining concepts domestically and internationally. The Company was organized October 21, 1999, under its original name, Tulvine Systems, Inc., under the laws of the State of Delaware. On April 25, 2005, Tulvine Systems, Inc. formed a wholly owned subsidiary, Chanticleer Holdings, Inc., and 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 presented below (collectively referred to as the “Company”):

 

Name  Jurisdiction of
Incorporation
  Percent Owned   Name  Jurisdiction of Incorporation  Percent
Owned
 
CHANTICLEER HOLDINGS, INC.  Delaware, USA                
Burger Business          Pacific Northwest Hooters        
American Roadside Burgers, Inc.  Delaware, USA   100%  Oregon Owl’s Nest, LLC  Oregon, USA   100%
ARB Stores          Jantzen Beach Wings, LLC  Oregon, USA   100%
American Roadside McBee, LLC  North Carolina, USA   100%  Tacoma Wings, LLC  Washington, USA   100%
American Burger Morehead, LLC  North Carolina, USA   100%           
American Roadside Morrison, LLC  North Carolina, USA   100%  South African Hooters        
American Burger Ally, LLC  North Carolina, USA   100%  Hooters On The Buzz (Pty) Ltd  South Africa   95%
American Roadside Cross Hill, LLC  North Carolina, USA   100%  Chanticleer South Africa (Pty) Ltd.  South Africa   100%
BGR Acquisition, LLC  North Carolina, USA   100%  Hooters Emperors Palace (Pty.) Ltd.  South Africa   88%
BGR Franchising, LLC  Virginia, USA   100%  Hooters PE (Pty) Ltd  South Africa   100%
BGR Operations, LLC  Virginia, USA   100%  Hooters Ruimsig (Pty) Ltd.  South Africa   90%
BGR Old Town, LLC  Maryland, USA   100%  Hooters Umhlanga (Pty.) Ltd.  South Africa   82%
BGR Dupont, LLC  Virginia, USA   100%  Hooters SA (Pty) Ltd  South Africa   90%
BGR Arlington, LLC  Virginia, USA   100%  Hooters Willows Crossing (Pty) Ltd  South Africa   100%
BGR Old Keene Mill, LLC  Virginia, USA   100%           
BGR Potomac, LLC  Maryland, USA   100%  Australian Hooters        
BGR Cascades, LLC  Virginia, USA   100%  HOTR AUSTRALIA PTY LTD  Australia   80%
BGR Washingtonian, LLC  Maryland, USA   100%  HOTR CAMPBELLTOWN PTY LTD  Australia   80%
BGR Tysons, LLC  Virginia, USA   100%  HOTR GOLD COAST PTY LTD  Australia   80%
BGR Springfield Mall, LLC  Virginia, USA   100%  HOTR PARRAMATTA PTY LTD  Australia   80%
Capitol Burger, LLC  Maryland, USA   100%  HOTR PENRITH PTY LTD  Australia   80%
BT Burger Acquisition, LLC  North Carolina, USA   100%  HOTR TOWNSVILLE PTY LTD  Australia   80%
BT’s Burgerjoint Biltmore, LLC  North Carolina, USA   100%           
BT’s Burgerjoint Promenade, LLC  North Carolina, USA   100%  European Hooters        
BT’s Burgerjoint Sun Valley, LLC  North Carolina, USA   100%  Chanticleer Holdings Limited  Jersey   100%
BT’s Burgerjoint Rivergate LLC  North Carolina, USA   100%  West End Wings LTD  United Kingdom   100%
LBB Acquisition, LLC  North Carolina, USA   100%  Crown Restaurants Kft.  Hungary   80%
Cuarto LLC  Oregon, USA   100%           
Segundo LLC  Oregon, USA   100%  Inactive Entities        
Noveno LLC  Oregon, USA   100%  Hooters Brazil  Brazil   100%
Primero LLC  Oregon, USA   100%  DineOut SA Ltd.  England   89%
Septimo LLC  Oregon, USA   100%  Avenel Financial Services, LLC  Nevada, USA   100%
Quinto LLC  Oregon, USA   100%  Avenel Ventures, LLC  Nevada, USA   100%
Octavo LLC  Oregon, USA   100%  Chanticleer Advisors, LLC  Nevada, USA   100%
Sexto LLC  Oregon, USA   100%  Chanticleer Investment Partners, LLC  North Carolina, USA   100%
           Dallas Spoon Beverage, LLC  Texas, USA   100%
Just Fresh          Dallas Spoon, LLC  Texas, USA   100%
JF Franchising Systems, LLC  North Carolina, USA   56%  Hoot Campbelltown Pty Ltd  Australia   60%
JF Restaurants, LLC  North Carolina, USA   56%  Chanticleer Holdings Australia Pty, Ltd.  Australia   100%
           Hoot Australia Pty Ltd  Australia   60%
           TMIX Management Australia Pty Ltd.  Australia   60%
           Hoot Parramatta Pty Ltd  Australia   60%
           Hoot Penrith Pty Ltd  Australia   60%
           Hoot Gold Coast Pty Ltd  Australia   60%
           Hoot Townsville Pty. Ltd  Australia   60%
           Hoot Surfers Paradise Pty. Ltd.  Australia   60%
           MVLE DARLING HARBOUR PTY LTD  Australia   50%
           MVLE GAMING PTY LTD  Australia   100%

 

7
 

 

All significant inter-company balances and transactions have been eliminated in consolidation.

 

The Company operates on a calendar year-end. The accounts of two subsidiaries, Just Fresh and Hooters Nottingham (“WEW”), are consolidated based on either a 52- or 53-week period ending on the Sunday closest to each December 31. No events occurred related to the difference between the Company’s reporting calendar quarter end and the Company’s two subsidiaries quarter ends that materially affected the company’s financial position, results of operations, or cash flows.

 

GENERAL

 

The accompanying condensed 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 (“SEC”) 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 condensed consolidated financial statements have not been audited. The results of operations for the periods ended September 30, 2015 are not necessarily indicative of the operating results for the full year.

 

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP 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 on Form 10-K for the year ended December 31, 2014 filed with the SEC on April 15, 2015 and amended on April 30, 2015.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of September 30, 2015, our cash balance was $1.8 million and working capital was a deficit of $3.2 million (excluding non-cash derivative liabilities and deferred rent). Cash and working capital as of September improved by $1.6 million and $4.1 million, respectively, as compared with December 31, 2014. The level of additional cash needed to fund operations and our ability to conduct business for the next twelve months will be influenced primarily by the following factors:

 

● the pace of growth in our restaurant businesses and related investments in opening new stores;

 

● the level of investment in acquisition of new restaurant businesses and entering new markets;

 

● our ability to manage our operating expenses and maintain gross margins as we grow:

 

● our ability to access the capital and debt markets;

 

● popularity of and demand for our fast casual dining concepts; and

 

● general economic conditions and changes in consumer discretionary income.

 

We have typically funded our operating costs, acquisition activities, working capital investments and capital expenditures with proceeds from the issuances of our common stock and other financing arrangements, including convertible debt, lines of credit, notes payable and capital leases.

 

Our operating plans for the next twelve months contemplate moderate organic growth, opening 3-4 new stores within our current markets and restaurant concepts. During the first nine months of 2015:

 

  During the first quarter of 2015, we completed a rights offering raising net proceeds of approximately $7.1 million and issued $2.2 million in convertible debt to fund the acquisition of BGR: The Burger Joint and for general corporate purposes.

 

8
 

 

  During the second quarter of 2015, we completed an equity transaction raising net proceeds of approximately $1.9 million to complete the acquisition of BT’s Burger Joints and for general corporate purposes.
     
  During the third quarter of 2015, we completed a rights offering raising net proceeds of approximately $6.0 million to fund the acquisition of Little Big Burger, investments in Australia and general corporate purposes.

 

As we execute our growth plans throughout the balance of 2015 and 2016, we intend to carefully monitor the impact of growth on our working capital needs and cash balances relative to the availability of cost-effective debt and equity financing. We believe the capital resources available to us will be sufficient to fund our ongoing operations and to support our operating plans. We may raise additional capital from the issuance of new debt and equity to continue to execute our growth plans, although there can be no assurance that we will be able to do so. In the event that such capital is not available, we may have to scale back or freeze our organic growth plans, reduce general and administrative expenses and/or curtail future acquisition plans to manage our liquidity and capital resources.

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

There have been no material changes to our significant accounting policies previously disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2014. The Company is now engaged in franchising operations as a result of its acquisition of BGR: The Burger Joint (“BGR”) in March 2015. Accordingly, the Company’s policy regarding revenue recognition has been expanded to address revenue recognition for franchise operations.

 

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, deferred tax asset valuation allowances, valuing options and warrants using the Binomial Lattice and Black Scholes models, intangible asset valuations and useful lives, depreciation and uncollectible accounts and reserves. Actual results could differ from those estimates.

 

REVENUE RECOGNITION

 

Revenue is recognized when all of the following criteria have been satisfied:

 

  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.

 

Restaurant Net Sales and Food and Beverage Costs

 

The Company records revenue from restaurant sales at the time of sale, net of discounts, coupons, employee meals, and complimentary meals and gift cards. Sales, value added tax (“VAT”) and goods and services tax (“GST”) collected from customers and remitted to governmental authorities are presented on a net basis within sales in our consolidated statements of operations. Restaurant 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 exclude depreciation and amortization. Vendor allowances received in connection with the purchase of a vendor’s products are recognized as a reduction of the related food and beverage costs as earned.

 

Management Fee Income

 

The Company receives revenue from management fees from certain non-affiliated companies, including Hooters of America.

 

9
 

 

Gaming Income

 

The Company receives revenue from operating a gaming facility adjacent to its Hooters restaurant in Jantzen Beach, Oregon. The Company also previously received gaming revenue from gaming machines located in Sydney, Australia. Revenue from gaming is recognized as earned from gaming activities, net of taxes and other government fees.

 

Franchise Income

 

The Company accounts for initial franchisee fees in accordance with FASB ASC 952, Franchisors. The Company grants franchises to operators in exchange for initial franchise license fees and continuing royalty payments. Franchise license fees are deferred when received and recognized as revenue when the Company has performed substantially all initial services required by the franchise or license agreement, which is generally upon the opening of a store. Continuing fees, which are based upon a percentage of franchisee and licensee sales are recognized on the accrual basis as those sales occur.

 

BUSINESS COMBINATIONS

 

For business combinations, the assets acquired, the liabilities assumed, and any non-controlling interest are recognized at the acquisition date, measured at their fair values as of that date. In a business combination achieved in stages, the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, are recognized at the full amounts of their fair values. In a bargain purchase in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any non-controlling interest in the acquire, that excess in earnings was recognized as a gain attributable to the Company.

 

AMORTIZATION OF DEBT DISCOUNT

 

The Company has issued various debt with warrants and conversion features for which total proceeds were allocated to individual instruments based on the relative fair value of the each instrument at the time of issuance. The value of the debt was recorded as discount on debt and amortized over the term of the respective debt. For the nine months ended September 30, 2015 and 2014 amortization of debt discount was $1,356,365 and $930,392, respectively.

 

FOREIGN CURRENCY TRANSLATION

 

Assets and liabilities denominated in local currency are translated to US dollars using the exchange rates as in effect at the balance sheet date. Results of operations are translated using average exchange rates prevailing throughout the period. Adjustments resulting from the process of translating foreign currency financial statements from functional currency into U.S. dollars are included in accumulated other comprehensive loss within stockholders’ equity. Foreign currency transaction gains and losses are included in current earnings. The Company has determined that local currency is the functional currency for each of its foreign operations.

 

RESTAURANT PRE-OPENING and closing EXPENSES

 

Restaurant pre-opening and closing expenses are non-capital expenditures, and are expensed as incurred. Restaurant pre-opening expenses 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. Restaurant closing expenses consists of the costs related to the closing of a restaurant location and include write-off of property and equipment, lease termination costs and other costs directly related to the closure. Pre-opening and closing expenses are expensed as incurred.

 

10
 

 

LOSS PER COMMON SHARE

 

The Company is required to report both basic earnings per share, which is based on the weighted-average number of shares outstanding and diluted earnings per share, which is based on the weighted-average number of common shares outstanding plus all dilutive shares outstanding. The following table summarizes the number of common shares potentially issuable upon the exercise of certain warrants, convertible notes payable and convertible interest as of September 30, 2015 and December 31, 2014 that have been excluded from the calculation of diluted net loss per common share since the effect would be antidilutive.

 

   September 30, 2015   September 30, 2014 
Warrants   9,556,304    8,965,048 
Convertible notes payable   3,446,003    1,916,559 
Convertible interest   53,405    88,649 
Total   13,055,712    10,970,256 

 

CONCENTRATION OF CREDIT RISK

 

The Company maintains its cash with major financial institutions. Cash held in U.S. bank institutions is currently insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. No similar insurance or guarantee exists for cash held in Australia, South Africa, Hungary or United Kingdom bank accounts. There was approximately $60,000 and $125,000 aggregate uninsured cash balances at September 30, 2015 and December 31, 2014, respectively.

 

SUBSEQUENT EVENTS

 

Management has evaluated all events and transactions that occurred from September 30, 2015 through the date these condensed consolidated financial statements were issued for subsequent events requiring recognition or disclosure in the condensed consolidated financial statements.

 

RECLASSIFICATIONS

 

Certain amounts in the prior period have been reclassified to conform to the current period presentation. These reclassifications have no effect on previously reported results of operations or loss per share.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which applies to inventory that is measured using first-in, first-out (“FIFO”) or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, last-out (“LIFO”). This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Company is currently evaluating the impact of adopting this guidance.

 

3. ACQUISITIONS

 

During the first nine months of 2105, the Company acquired three businesses to complement and expand its current operations in the better burger fast casual restaurant category. In connection with these acquisitions, the Company acquired strategic opportunities to expand its scale and presence in the better burger category.

 

11
 

 

Acquisition of BGR: The Burger Joint

 

The Company completed the acquisition of BGR: The Burger Joint effective March 15, 2015. As of June 30, 2015, the Company allocated the purchase price as of the date of acquisition based on appraisals and estimated the fair value of the acquired assets and assumed liabilities. In consideration of the purchased assets, the Company paid a purchase price consisting of $4,000,000 in cash, 500,000 shares of the Company’s common stock valued at $1.0 million, and a contractual working capital adjustment of $276,429.

 

Acquisition of BT’s Burger Joint

 

On July 1, 2015, the Company completed the acquisition with BT’s Burgerjoint Management, LLC, a limited liability company organized under the laws of North Carolina (“BT’s”), including the ownership interests of four operating restaurant subsidiaries engaged in the fast casual hamburger restaurant business under the name “BT’s Burger Joint.” In consideration of the purchased assets, the Company paid a purchase price consisting of $1,400,000 in cash and 424,080 shares of the Company’s common stock valued at $1.0 million.

 

Acquisition of Little Big Burger

 

On September 30, 2015, the Company completed the acquisition of various entities operating eight Little Big Burger restaurants in the State of Oregon. In consideration of the purchased assets, the Company paid a purchase price consisting of $3,600,000 in cash and 1,874,063 shares of the Company’s common stock valued at $2.1 million.

 

In connection with each acquisition, the Company determined the purchase price allocation in consideration of all identifiable intangibles. Based on our evaluation, there were no marketing related assets, customer related intangibles or contract based arrangements for which the purchase price would be required to be allocated. The value of any trademark/tradename was calculated using a relief of royalty method considering future franchise opportunities. With respect to customer related intangibles, the Company did not acquire any customer lists or enter into any customer contractual arrangements nor did the Company enter into any licensing or royalty arrangements requiring a further allocation of the purchase price.

 

The premium paid for the businesses represents the economic value which is not captured by other assets such as the reputation of the businesses, the value of its human capital, its future growth potential and its professional management. The acquisition of these businesses will help the Company expand its domestic operations and presence in the Fast Casual burger market.

 

The Company’s acquisitions were accounted for using the purchase method of accounting in accordance with ASC 805 “Business Combinations” and, accordingly, the condensed consolidated statements of operations include the results of these operations from the dates of acquisition. The assets acquired and the liabilities assumed were recorded at estimated fair values based on information currently available and based on certain assumptions as to future operations.

 

The allocation of purchase price presented below is based on preliminary analyses which are still continuing and may be subject to change as such analyses are finalized in future periods:

 

   2015 Acquisitions      
   BGR:              
   The Burger Joint    BT’s Burger Joint    Little Big Burger    Total  
Consideration paid:                    
Common stock  $1,000,000   $1,000,848   $2,061,469   $4,062,317 
Cash   4,276,429    1,400,000    3,600,000    9,276,429 
Total consideration paid   5,276,429    2,400,848    5,661,469    13,338,746 
                     
Property and equipment   2,164,023    1,511,270    1,710,849    5,386,141 
Goodwill   663,037    939,281    2,417,653    4,019,972 
Trademark/trade name/franchise fee   2,750,000    -    1,550,000    4,300,000 
Inventory, deposits ands other assets   296,104    103,451    77,014    476,569 
Total assets acquired, less cash   5,873,164    2,554,002    5,755,516    14,182,682 
Liabilities assumed   (607,735)   (161,154)   (268,557)   (1,037,446)
Common stock and warrants issued   (1,000,000)   (1,000,848)   (2,061,469)   (4,062,317)
Cash paid   (4,276,429)   (1,400,000)   (3,600,000)   (9,276,429)
Cash acquired  $11,000   $8,000   $174,511   $193,511 

 

12
 

 

The allocation of purchase price presented for the Company’s 2014 acquisitions:

 

   2014 Acquisitions  
   Hooters        Hooters Australia    The      
   Pacific NW    Spoon    April 1, 2014   July 1, 2014   Burger Co.    Total  
Consideration paid:                              
Common stock  $2,891,156   $828,750   $-   $-   $300,000   $4,019,906 
Warrants   978,000    280,400    -    123,333    -    1,381,733 
Assumption of debt   -    -    -    5,000,000    -    5,000,000 
Cash   -    -    100,000    -    250,000    350,000 
Total consideration paid   3,869,156    1,109,150    100,000    5,123,333    550,000    10,751,639 
                               
Current assets, excluding cash   112,078    89,817    377,296    47,777    9,926    636,894 
Property and equipment   2,731,031    391,462    2,934,307    1,603,557    284,795    7,945,152 
Goodwill   1,951,909    698,583    -    8,487,138    256,379    11,394,009 
Trademark/trade name/franchise fee   60,937    -    277,867    220,500    -    559,304 
Deposits and other assets   20,275    5,193    90,371    20,186    -    136,025 
Total assets acquired, less cash   4,876,230    1,185,055    3,679,841    10,379,158    551,100    20,671,384 
Liabilities assumed   (1,009,348)   (97,541)   (1,560,710)   (1,496,536)   (1,100)   (4,165,235)
Deferred tax liabilities   -    -              -    - 
Non-controlling interest   -    -    (993,999)   (3,759,289)   -    (4,753,288)
Chanticleer equity   -    -    (1,028,749)   -    -    (1,028,749)
Common stock and warrants issued   (3,869,156)   (1,109,150)   -    (123,333)   (300,000)   (5,401,639)
Assumption of debt   -    -    -    (5,000,000)   -    (5,000,000)
Cash paid   -    -    (100,000)   -    (250,000)   (350,000)
Cash acquired  $2,274   $21,636   $3,617   $-   $-   $27,527 

 

Unaudited pro forma results of operations for the three and nine month periods ended September 30, 2015 and 2014, as if the Company had acquired majority ownership of all operations acquired during 2014 and 2015 on January 1, 2014 is as follows.

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2015   2014   2015   2014 
                 
Total revenues  $11,551,329   $13,473,304   $36,159,199   $37,626,727 
Loss from continuing operations   (2,972,928)   (1,287,982)   (5,255,488)   (2,091,978)
Gain (loss) frorm discontinued operations   2,088    (72,300)   189    (104,973)
Loss attributable to non-controlling interest   69,397    (61,209)   412,366    88,163 
Net loss  $(2,901,443)  $(1,421,491)  $(4,842,933)  $(2,108,788)
Net loss per share, basic and diluted  $(0.20)  $(0.21)  $(0.34)  $(0.34)
Weighted average shares outstanding, basic and diluted   14,802,370    6,628,011    14,059,116    6,279,688 

 

The pro forma results include estimates and assumptions which management believes are reasonable. However, pro forma results do not include any adjustments to reflect expected synergies or profit improvements that might be anticipated post-acquisition, and 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.

 

4. DISCONTINUED OPERATIONS

 

On December 31, 2014, management concluded it was in the best interest of the Company to exit the Spoon business, whereby the Company executed an Asset Purchase Agreement to sell the assets of Spoon Bar & Kitchen back to the original owner. In connection with the sale of Spoon, the Company reacquired 185,000 Stock Units that had been issued at acquisition in exchange for the asset transferred pursuant to the Asset Purchase Agreement. The stock was valued at $446,050 and the carrying value of net assets was valued at $1,109,062, resulting in a loss of $683,012 in December 2014.

 

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The results of operations and related non-recurring costs associated with Spoon have been presented as discontinued operations. Additionally, the assets and liabilities of the discontinued operations have been segregated in the accompanying consolidated balance sheets.

 

The operating results from the discontinued operations for the three and nine months ended September 30, 2015 and 2014 consisted of the following:

 

   Three Months Ended   Nine Months Ended 
     September 30, 2015    September 30, 2014    September 30, 2015    September 30, 2014 
                 
Total revenue  $-   $314,190   $-   $968,103 
                     
Total operating (income) expenses   -    370,413    (189)   1,129,299 
                     
Net (income) loss from discontinued operations  $-   $(56,223)  $189   $(161,196)

 

As of September 30, 2015 and December 31, 2014, liabilities from discontinued operations totaled $177,204 and $177,393, respectively. The Company did not retain any assets related to the discontinued operation.

 

5. PROPERTY AND EQUIPMENT

 

Property and equipment consists of the following:

 

   2015   2014 
         
Restaurant equipment and furniture and fixtures  $11,067,483   $7,827,926 
Leasehold improvements  11,916,630    9,940,517 
Construction in progress  54,602    727,934 
Land and buildings  586,275    437,223 
Office and computer equipment  11,734    51,746 
Other furniture and fixtures  109,450    60,301 
    23,746,173    19,045,647 
Accumulated depreciation and amortization   (5,890,891)   (5,730,238)
   $17,855,282   $13,315,409 

 

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6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

 

Goodwill is summarized by location as follows:

 

   September 30, 2015   December 31, 2014 
South Africa  $226,795   $273,737 
ABC   2,806,990    2,806,990 
WEW   2,800,504    2,868,192 
Just Fresh   425,151    425,151 
Australia   -    7,291,329 
Hooters Pacific NW   1,951,909    1,951,909 
BGR: The Burger Joint   663,037    - 
Little Big Burger   2,417,653    - 
BT’s Burger Joint   977,465    - 
Total  $12,269,504   $15,617,308 

 

The changes in the carrying amount of goodwill are summarized as follows:

 

   Nine Months Ended 
   September 30, 2015    September 30, 2014 
Beginning Balance  $15,617,308   $6,496,756 
Acquisitions   4,058,155    11,000,045 
Impairment   (6,803,537)   - 
Foreign currency translation (loss) gain   (602,422)   41,981 
Ending Balance  $12,269,504   $17,538,782 

 

15
 

  

Other intangible assets, consisting of franchise costs, trademarks and tradenames, is summarized by location as follows:

 

Intangible assets  September 30, 2015   December 31, 2014 
Trademark, Tradenames:          
Just Fresh  $1,010,000   $1,010,000 
American Roadside Burger   1,786,930    1,783,954 
BGR: The Burger Joint   1,430,000    - 
Little Big Burger   1,550,000    - 
    5,776,930    2,793,954 
Franchise fees:          
South Africa   316,086    290,986 
Europe   59,129    106,506 
Australia   353,775    383,529 
Hooters Pacific NW   90,000    90,000 
BGR: The Burger Joint   1,320,000    - 
Chanticleer Holdings *   135,000    135,000 
    2,273,990    1,006,021 
Total Intangibles at cost   8,050,920    3,799,975 
Accumulated amortization   (508,525)   (403,472)
Intangible assets, net  $7,542,395   $3,396,503 

 

* Amortization of the Chanticleer franchise cost will begin with the opening of a related restaurant.

 

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7. LONG-TERM DEBT AND NOTES PAYABLE

 

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

 

       September 30, 2015    December 31, 2014  
Note payable to a bank due in monthly installments of $4,406 including interest at Wall Street Journal Prime plus 1% (minimum of 5.5%); remaining balance due October 10, 2018; collateralized by substantially all of the Company’s assets and guaranteed by an officer of the Company   (a)   $143,870   $176,731 
                
Line of credit to a bank, expired on October 10, 2015.   (b)    -    500,000 
                
Note payable to a bank due interest only at a 5% rate; balloon principal payment due June 10, 2019; collateralized by substantially all of the Company’s assets and guaranteed by an officer of the Company   (c)    971,670    500,000 
                
Loan agreement with an outside company dated December 23, 2013, interest at 1% per month, paid in full in 2015   (d)    -    100,000 
                
Loan agreement with an outside company dated June 20, 2014, interest at 8% annual rate, paid in full in 2015   (e)    -    100,000 
                
Mortage loan dated April, 2014, interest ar South African prime rate + 2.6% (11.85% as of September 30, 2015); due July 31, 2024; secured by a bond on all assets at our Port Elizabeth, South Africa location and partially guaranteed by our CEO and South African COO   (f)    232,677    294,362 
                
Loan agreement with an outside company on July 1, 2014, interest at 12% annual rate, secured by certain secured assets and gaming revenue of the Australian entities, net of discount of $214,834 and $343,733, respectively; matures January 31, 2017   (g)    4,785,166    4,656,267 
                
Bank overdraft facilities; unsecured; maximum facilities $260,000; interest rate 11% at September 30, 2015, with annual renewal each December.   (h)    192,428    151,868 
                
                
Term facility with monthly payments of 45,288 Rand, including interest at South African Prime + 1.0% (10.25% as of September 30, 2015); due June 14, 2016   (i)    27,182    64,309 
                
Term facility with monthly payments of 44,727 Rand including interest at South Afican Prime + 3.0% (12.25% as of September 30, 2015); due November 15, 2019.   (j)    124,183    170,053 
                
Term facility with monthly payments of 33,750 Rand, including interest at South Afican Prime + 3.0% (12.25% as of September 30, 2015); due December 1, 2018.   (k)    76,774    109,340 
                
                
Total long-term debt       $6,553,950   $6,822,930 
Current portion of long-term debt        1,134,025    1,813,647 
Long-term debt, less current portion       $5,419,925   $5,009,283 

 

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(a) and (b) On April 11, 2013, the Company and Paragon Commercial Bank (“Paragon”) entered into a credit agreement (the “Credit Agreement”) which provided for a $500,000 revolving credit facility with a one-year term from the closing date. The note payable originally matured on August 10, 2013 and on November 4, 2013 the note was extended to October 10, 2018 with monthly principal and interest payments of $4,406. The credit facility expired on October 10, 2015. Borrowings under the Credit Agreement bear monthly interest at the greater of: (i) floor rate of 5.00% or (ii) the Wall Street Journal’s prime plus rate (3.25% as of June 30, 2015) plus 1.00%. Any borrowings are secured by a lien on all of the Company’s assets. The obligations under the Credit Agreement are guaranteed by Mike Pruitt, the Company’s Chief Executive Officer.

 

(c) Note with Paragon, due on June 10, 2019. The note bears interest at a 5% annual rate, with principal and interest monthly payments of $11,532 starting in June 2015 until the maturity date.

 

(d) On December 23, 2013, the Company entered into a loan agreement with an outside company for $150,000, originally due on February 23, 2014. Interest is compounded monthly at a rate of 1%. As of February 23, 2014, the Company was not in compliance with the terms of this note due to non-payment of principal and interest. On March 21, 2014 and August 20, 2014, the Company paid the note holder $25,000 each of principal and accrued interest. In March 2015, the Company repaid the loan in full.

 

(e) On June 20, 2014, the Company entered into a loan agreement with an outside company for $100,000, originally due on July 11, 2014. In March 2015, the Company issued 100,000 shares of its common stock to repay the loan, accrued interest and penalties in full. The Company recognized a loss on extinguishment of debt of $45,000 during the three months ended March 31, 2015, representing the difference between the fair value of the shares issued and the carrying value of the outstanding debt and accrued interest.

 

(f) In April 2014, our South African subsidiary entered into a mortgage note with a South African bank for the purchase of the building in Port Elizabeth for our Hooters location. The 10-year note was originally issued in the amount of $330,220 with an annual interest rate of 2.6% above the South African prime rate (prime currently 9.25%). Monthly principal and interest payments of approximately $4,600 commenced in August, 2014. The mortgage note is personally guaranteed by our CEO and South African COO and secured by the assets of the Port Elizabeth building.

 

(g) On July 1, 2014, pursuant to Purchase Agreements executed on June 30, 2014, the Company completed the acquisition of a sixty percent (60%) ownership interest in Hoot Parramatta Pty Ltd, Hoot Australia Pty Ltd, Hoot Penrith Pty Ltd, and TMIX Management Australia Pty Ltd (collectively, the “Australian Entities”), which own, operate, and manage Hooters restaurant locations and gaming operations in Australia. The ownership interest in the Australian Entities was purchased from the respective entities in exchange for the Company agreeing to assume a five million dollar ($5,000,000) debt bearing interest at 12% annually and issuing two hundred fifty thousand (250,000) warrants to purchase shares of our common stock. Originally principal repayments were as follows: $2,000,000 on December 31, 2014, $2,000,000 on June 30, 2015, and $1,000,000 on December 31, 2015. On October 15, 2014, principal repayments were restructured whereby $200,000 was due on December 31, 2014, $50,000 is payable each month from January 2015 through December 2015, $2,000,000 is payable January 31, 2016, $1,200,000 is payable on July 31, 2016 and the remaining $1,000,000 is due by January 31, 2017. The Company and the note holder are currently in discussion to renegotiate the terms of the above payments and other terms of the agreement. The note holder has not demanded the above payments (as of December 31, 2014 through currently) nor will they unless the negotiations terminate. The Company has paid the agreed upon monthly interest payments in 2015 and is currently negotiating a change in payment terms.

 

(h) The Company’s South African subsidiary has local bank financing in the form of term and overdraft facilities with $192,428 and $151,868 outstanding as of September 30, 2015 and December 31, 2014 respectively.

 

(i) The Company’s South African subsidiary has local bank financing in the form of a term loan with monthly payments of approximately $3,500, including interest at South African Prime +1.0%. The term loan matures on June 14, 2016.

 

(j) The Company’s South African subsidiary has local bank financing in the form of a term loan with monthly payments of approximately $3,500, including interest South African Prime +3.0%. The term loan matures on November 15, 2019.

 

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(k) The Company’s South African subsidiary has local bank financing in the form of a term loan with monthly payments of approximately $2,700, including interest at South African Prime + 3.0%. The term loan matures on December 1, 2018.

 

8. CONVERTIBLE NOTES PAYABLE

 

Convertible notes payable are as follows:

 

   September 30. 2015   December 31, 2014 
         
6% Convertible notes payable issued in November 2013  $3,000,000   $3,000,000 
Discounts on above convertible note   (833,340)   (1,583,333)
15% Convertible notes payable issued in March 2014   -    500,000 
Discounts on above convertible note   -    (63,730)
8% Convertible notes payable issued in Nov/Dec 2014   100,000    350,000 
Discounts on above convertible note   (17,029)   (289,254)
8% Convertible notes payable issued in January 2015   150,000    - 
Discounts on above convertible note   (104,808)   - 
8% Convertible notes payable issued in January 2015   575,000    - 
Discounts on above convertible note   (359,243)   - 
    2,510,580    1,913,683 
Current portion of convertible notes payable   215,757   436,270
Convertible notes payable, less current portion  $2,294,823   $1,477,413 

 

In the first nine months of 2015, the Company entered into agreements whereby the Company issued new convertible promissory notes for a total of $2,150,000. In addition, the holders convertible notes in the aggregate amount of $2,175,000 elected to convert their notes to common stock during the first nine months of 2015.

 

In January 2015, the Company issued convertible promissory notes for $1,000,000. The notes accrue interest at 8% per annum until the date the notes are converted. The notes are convertible into the Company’s common stock at 85% of the average of the lowest three closing trading prices over ten days prior the conversion date. The conversion price is subject to a floor of $1.00 per share and a ceiling of $2.00. If not converted, the notes mature three years from the issuance date. The holder could demand payment in full after one year from the issuance date. The Company also issued warrants to purchase 250,000 shares of common stock, exercisable at $2.50 per share for a period of up to 5 years from the note’s original issuance date. The fair value of the embedded conversion feature and the warrants is $670,300 and $202,358, respectively. The resulting debt discount is being amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the straight-line method which approximates the interest method. The amortization of debt discount is included as a component of interest expense in the condensed consolidated statements of operations and comprehensive loss. The embedded conversion feature is accounted for as a derivative liability in the accompanying condensed consolidated balance sheet, with its carrying value marked to market at each balance sheet date. $425,000 of the $1,000,000 note has been converted into common stock during the first nine months of 2015.

 

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In January 2015, the Company also issued a convertible promissory note for a total of $150,000. The note accrues interest at 8% per annum until the date the notes are converted. The notes are convertible into the Company’s common stock at 85% of the average of the lowest three closing trading prices over ten days prior the conversion date. The conversion price is subject to a floor of $1.00 per share and a ceiling of $2.00. If not converted, the note matures three years from the issuance date. The Company also issued warrants to purchase 37,500 shares of common stock, exercisable at $2.50 per share for a period of up to 5 years from the note’s original issuance date. The fair value of the embedded conversion feature and the warrants is $108,600 and $30,314, respectively. The resulting debt discount is being amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the straight-line method which approximates the interest method. The amortization of debt discount is included as a component of interest expense in the condensed consolidated statements of operations and comprehensive loss. The embedded conversion feature is accounted for as a derivative liability in the accompanying condensed consolidated balance sheet, with its carrying value marked to market at each balance sheet date.

 

In January 2015, a convertible debt holder converted $500,000 principal plus accrued interest into 373,333 shares of the Company’s common stock. In addition, another convertible debt holder converted $250,000 principal plus accrued interest into 168,713 shares of the Company’s common stock. In connection with the conversions, the Company recognized a loss on extinguishment of convertible debt, related accrued interest, penalties and derivative liabilities totaling $125,089 during the three months ended March 31, 2015.

 

In March 2015, the Company issued a convertible promissory note for $1,000,000, which was subsequently converted to common stock in June 2015. The note accrued interest at 9% per annum until the date the note was converted. The note was convertible into the Company’s common stock at $2.00 per share. If not converted, the note matured two years from the issuance date. The Company also issued warrants to purchase 320,000 shares of common stock, exercisable at $2.50 per share for a period of up to 5 years from the note’s original issuance date. The fair value of the embedded conversion feature and the warrants on the date of issuance was $455,008 and $315,008, respectively. The resulting debt discount was being amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the straight-line method which approximates the interest method. The amortization of debt discount is included as a component of interest expense in the condensed consolidated statements of operations and comprehensive loss. The embedded conversion feature is accounted for as a component of additional paid-in capital in the accompanying condensed consolidated balance sheet. During June 2015, this $1,000,000 million note was converted into 500,000 shares of common stock at the $2.00 per share contractual conversion price. On the date of conversion, $643,371 of unamortized debt discount was accelerated and recognized as interest expense in the accompanying condensed consolidated statement of operations and comprehensive loss.

 

The fair value of the embedded conversion feature and the warrants were estimated using the Black-Scholes option-pricing model which approximates the Binomial Lattice model. The model includes subjective input assumptions that can materially affect the fair value estimates. The Company determined the fair value of the Binomial Lattice Model and the Black-Scholes Valuation Model to be materially the same. The expected stock price volatility was determined by the historical volatilities for industry peers and used an average of those volatilities. The risk free interest rate was obtained from U.S. Treasury rates for the applicable periods. The contractual terms of the agreement does not provide for and the Company does not expect to declare dividends in the near future. Key assumptions used to apply this pricing model as of the date of issuance, December 31, 2014 and September 30, 2015 are presented in the table below:

 

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   6% Note
Issued on
   15% Note
Issued on
   8% Note
Issued on
   8% Note
Issued on
   8% Notes
Issued on
   8% Notes
Issued on
 
   August 2, 2013   March 19, 2014   November 19, 2014   December 16, 2014   January 5, 2015   January 5, 2015 
Common stock closing price  $4.15   $3.87   $1.70   $1.53   $1.75   $1.75 
Conversion per share price  $3.73   $3.29   $1.45   $1.30   $1.33   $1.33 
Conversion shares   804,764    151,999    172,672    77,061    112,402    749,344 
Expected life (in years)   3.0    1.0    3.0    3.0    3.0    3.0 
Expected volatility   110%   62%   74%   74%   73%   73%
Call option value  $2.82   $1.19   $0.90   $0.81   $0.97   $0.97 
Risk-free interest rate   0.59%   0.15%   1.10%   1.10%   0.90%   0.90%
Dividends   0.00%   0.00%   0.00%   0.00%   0.00%   0.00%

 

   December 31, 2014   December 31, 2014   December 31, 2014   December 31, 2014   December 31, 2014   December 31, 2014 
Common stock closing price  $1.73   $1.73   $1.73   $1.73     NA     NA 
Conversion per share price  $1.49   $1.47   $1.26   $1.26     NA     NA 
Conversion shares   2,008,032    340,020    199,177    77,061     NA     NA 
Expected life (in years)   1.6    0.2    2.9    3.0     NA     NA 
Expected volatility   64%   66%   74%   74%   NA    NA 
Call option value  $0.64   $0.35   $0.77   $0.78     NA     NA 
Risk-free interest rate   0.67%   0.40%   1.10%   1.10%   NA    NA 
Dividends   0.00%   0.00%   0.00%   0.00%   NA    NA 

 

   September 30, 2015   September 30, 2015   September 30, 2015   September 30, 2015   September 30, 2015   September 30, 2015 
Common stock closing price  $1.10     NA     NA   $1.10   $1.10   $1.10 
Conversion per share price  $1.16     NA     NA   $0.95   $0.95   $0.95 
Conversion shares   2,581,978     NA     NA    104,730    157,095    602,199 
Expected life (in years)   0.8     NA     NA    2.2    2.3    2.3 
Expected volatility   73%   NA    NA    77%   77%   77%
Call option value  $0.27     NA     NA   $0.53   $0.53   $0.53 
Risk-free interest rate   0.37%    NA     NA    1.01%   1.01%   1.01%
Dividends   0.00%    NA     NA    0.00%   0.00%   0.00%

 

9.  accounts payable and accrued expenses

 

Accounts payable and accrued expenses are summarized as follows:

 

   September 30, 2015   December 31, 2014 
         
Accounts payable  $3,433,738   $3,382,818 
Accrued taxes (VAT, GST, Sales, Payroll)   650,012    1,604,829 
Accrued income taxes   22,945    92,618 
Accrued interest   313,675    499,866 
   $4,420,370   $5,580,131 

 

10. Stockholders’ Equity

 

The Company has 45,000,000 shares of its $0.0001 par value common stock authorized at both September 30, 2015 and December, 2014, and 21,238,830 and 7,249,442 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively.

 

The Company has 5,000,000 shares of its no par value preferred stock authorized at both September 30, 2015 and December 31, 2014. No shares have been issued or outstanding at either September 30, 2015 or December 31, 2014.

 

In January 2015, a convertible debt holder converted $500,000 principal plus accrued interest into 373,333 shares of the Company’s common stock. In addition, another convertible debt holder converted $250,000 principal plus accrued interest into 168,713 shares of the Company’s common stock. In March 2015, the Company issued 100,000 shares of its common stock to repay $100,000 of long term debt and related accrued interest and penalties. (See Note 7 – Long Term Debt and Notes Payable and Note 8 – Convertible Notes Payable).

 

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On March 16, 2015, the Company completed a rights offering, receiving subscriptions (including both basic and oversubscriptions) for 3,899,742 shares of its common stock for net proceeds of $7,062,325.

 

Effective March 15, 2015, the Company closed the purchase of BGR Holdings, LLC. In consideration of the purchased assets, the Company issued 500,000 shares of the Company’s common stock as a component of the total purchase price (See Note 3- Acquisitions).

 

In June 2015, a convertible debt holder converted $1,000,000 principal into 500,000 shares of the Company’s common stock.

 

On June 19, 2015, the Company entered into an agreement with an institutional investor and accredited investors for a registered direct placement of 860,000 shares of common stock at $2.50 per share. The agreement also provides an overallotment right for the investor(s) to purchase up to 860,000 additional shares of common stock at $2.50 per share during the 75 days following the initial closing.

 

On September 22, 2015, the Company completed a rights offering, receiving subscriptions (including both basic and oversubscriptions) for 4,894,692 shares of its common stock for net proceeds of $6.0 million.

 

From July through September 2015, convertible debt holders converted an aggregate of $425,000 principal into 289,176 shares of the Company’s common stock.

 

During the first nine months of 2015, the Company issued 49,800 shares of common stock and warrants for services valued at $231,857. The recorded value for common stock issued for services was based on the closing market prices for the Company’s common stock. The recorded value of the warrants issued for services valued utilizing the Black-Scholes model.

 

Options and Warrants

 

There are no options outstanding as of September 30, 2015 and December 31, 2014.

 

Fair value of any warrant issuances are valued utilizing the Black-Scholes model. The model includes subjective input assumptions that can materially affect the fair value estimates. The Company determined the fair value of the Binomial Lattice Model and the Black-Scholes Valuation Model to be materially the same. The expected stock price volatility for the Company’s warrants was determined by the historical volatilities for industry peers and used an average of those volatilities.

 

A summary of warrant activity is presented below:

 

   Number of
Warrants
   Weighted
Average
Exercise Price
   Weighted
Average
Remaining Life
 
             
Outstanding January 1, 2015   8,715,804   $5.17    2.2 
Granted   840,500    2.55      
Exercised   -    -      
Forfeited   -    -      
Outstanding September 30, 2015   9,556,304   $4.94    2.3 
                
Exercisable September 30, 2015   9,556,304   $4.94    2.3 

 

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The following table presents information related to stock warrants as of September 30, 2015:

 

Exercise Price    Outstanding
Number of
Warrants
   Weighted
Average
Remaining Life in Years
   Exerciseable Number of Warrants 
              
>$5.00   3,554,514    2.1    3,554,514 
$4.00-$4.99    3,935,117    2.2    3,935,117 
$3.00-$3.99    413,901    3.7    413,901 
$2.00-$2.99    1,340,272    3.1    1,340,272 
$1.00-$1.99    312,500    4.2    312,500 
     9,556,304         9,556,304 

 

Warrant amortization is summarized as follows:

 

   Three Months Ended   Nine Months Ended 
    September 30, 2015    September 30, 2014    September 30, 2015    September 30, 2014 
                     
Interest expense  $407,263   $259,442   $1,356,365   $930,392 
Consulting expense   -    22,375    22,375    152,325 
   $407,263   $281,817   $1,378,740   $1,082,717 

 

11. RELATED PARTY TRANSACTIONS

 

Due to related parties

 

The Company has received non-interest bearing loans and advances from related parties as follows:

 

   September 30, 2015   December 31, 2014 
         
Hoot SA I, LLC  $12,963   $12,196 
Hooters Australia Partner   -    1,087,451 
Chanticleer Investors, LLC   199,436    199,436 
   $212,399   $1,299,083 

 

Due from related parties

 

The Company has made non-interest bearing advances to related parties. The amounts owed to the Company are as follows:

 

 

   September 30, 2015   December 31, 2014 
         
Hoot SA II, III, IV LLC  $45,615   $46,015 
   $45,615   $46,015 

 

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12. SEGMENT INFORMATION

 

The Company operates and reports its results as a single operating segment. Revenues and operating loss by geographic area were as follows:

 

   Three Months Ended   Nine Months Ended 
    September 30, 2015    September 30, 2014    September 30, 2015    September 30, 2014 
Revenue:                    
United States  $6,872,531   $3,642,971   $17,200,288   $9,477,879 
South Africa   1,380,665    1,601,493    4,626,094    4,905,249 
Australia   830,653    2,641,909    4,824,036    3,153,589 
Europe   1,187,456    1,426,179    3,085,071    3,669,177 
   $10,271,305   $9,312,552   $29,735,489   $21,205,894 
                     
Operating Income (Loss):                    
United States  $(1,150,856)  $(673,118)  $(4,267,634)  $(3,247,467)
South Africa   (25,739)   (70,571)   (43,178)   (220,186)
Australia   (4,608,773)   192,556    (5,466,548)   (88,002)
Europe   34,179    19,007    33,650    44,816 
   $(5,751,189)  $(532,126)  $(9,743,710)  $(3,510,839)

 

Non-current assets by geographic area were as follows:

 

    September 30, 2015    December 31, 2014 
Non-current Assets:          
United States  $33,226,470   $15,299,108 
South Africa   2,428,590    2,172,528 
Australia   404,717    13,068,305 
Europe   3,354,803    3,648,133 
Brazil   135,000    135,000 
   $39,549,580   $34,323,074 

 

13. COMMITMENTS AND CONTINGENCIES

 

On March 26, 2013, our South African operations received Notice of Motion filed in the Kwazulu-Natal High Court, Durban, Republic of South Africa, filed against Rolalor (PTY) LTD (“Rolalor”) and Labyrinth Trading 18 (PTY) LTD (“Labyrinth”) by Jennifer Catherine Mary Shaw (“Shaw”). Rolalor and Labyrinth were the original entities formed to operate the Johannesburg and Durban locations, respectively. On September 9, 2011, the assets and the then-disclosed liabilities of these entities were transferred to Tundraspex (PTY) LTD (“Tundraspex”) and Dimaflo (PTY) LTD (“Dimaflo”), respectively. The current entities, Tundraspex and Dimaflo are not parties in the lawsuit. Shaw is requesting that the Respondents, Rolalor and Labyrinth, be wound up in satisfaction of an alleged debt owed in the total amount of R4,082,636 (approximately $480,000). The two Notices were defended and argued in the High Court of South Africa (Durban) on January 31, 2014. Madam Justice Steryi dismissed the action with costs on May 5, 2014. Ms. Shaw has appealed this decision, and a court date has been set for February 1, 2016.

 

In connection with our 2011 acquisitions of the South African entities (whereby, on October 1, 2011, Rolalor, Alimenta 177(Pty.) Ltd. and Labyrinth transferred their respective net assets to the newly formed entities controlled by the Company), the Company believes the purchase and sale with the seller was accomplished in accordance with the laws and regulations of the taxing authorities in South Africa. However, there can be no absolute assurance as to whether the business acquired continues to have any outstanding tax and regulatory filing requirements, (i.e. not filed certain corporate tax returns for previous years) as well as whether the local authorities could seek to recover any unpaid taxes, interest, penalties, or other amounts due from the Company, its shareholders or others. The Company is not aware of any existing obligations that remain outstanding for which the Company may be required to settle. In connection with acquiring the net assets of the business, the Company may be entitled to be reimbursed by the seller for any pre-acquisition obligations of the business that may arise post-acquisition.

 

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In addition to the matters disclosed above, the Company may be involved in legal proceedings and claims that have arisen in the ordinary course of business. These actions, when ultimately concluded and settled, will not, in the opinion of management, have a material adverse effect upon the financial position, results of operations or cash flows of the company.

 

14. 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)   
September 30, 2015                    
Assets:                    
Available-for-sale securities  $35,362   $35,362   $-   $- 
Liabilities:                    
Embedded conversion feature  $1,150,300   $-   $-   $1,150,300 
Warrants  $168,361             $168,361 
December 31, 2014                    
Assets:                    
Available-for-sale securities  $35,362   $35,362   $-   $- 
Liabilities:                    
Embedded conversion feature  $1,610,900   $-   $-   $1,610,900 
Warrants  $334,300   $-   $-   $334,300 

 

At September 30, 2015 and December 31, 2014, the Company’s available-for-sale equity securities were valued using Level 1 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 derivative liabilities are measured at fair value using quoted market prices and estimated volatility factors based on historical quoted market prices for the Company’s common stock, and are classified within Level 3 of the valuation hierarchy.

 

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.

 

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15. Australia administration transactions

 

On July 14, 2015, voluntary administrators were appointed to review the affairs and assess the financial condition of the Hooters Australia stores. The initiation of voluntary administration followed the request of the Company because the Company believed its operating partner had been mismanaging the business. The Company believed that the Administration process would be the most effective means to objectively evaluate the state of the business and enhance the Company’s position and ability to restore the operational and financial performance of the Hooters Australia stores.

 

From July 14, 2015 through the end of September, the Hooters Australia stores operated under the management of administrators which were appointed by the directors of the Australia entities to facilitate the Administration process. In August, 2015, the Company entered into definitive agreements to invest additional consideration into the Australia business to increase its ownership in the Australia Hooters stores from 60% to 80% and to obtain the assets of those stores free of any prior liabilities or liens. In addition, the Company agreed to purchase the Margaritaville property in Australia which it did not previously control.

 

The Company and a new local partner, PCS Investments, Pty (“PCS”) closed on the purchase of the five Hooters Australia stores in early October 2015, with the Company contributing $1.0 million in additional capital for 80% ownership and PCS investing $0.3 million for 20% ownership in the five Hooters stores. The Company did not complete the purchase the Margaritaville site as the administrator was unable to provide an acceptable lease transfer for the property. Effective early October, the Company resume management and operating control for the Hooters stores.

 

During the Administration period from July 14, 2015 through early October, 2015, the Company’s control was temporarily restricted and management did not recognize revenue or expenses related to the operation of the stores during this brief period. Effective with the resumption of control in early October, 2015, the Company resume normal operations and recognition of revenue.

 

In connection with the Administration process, the Company evaluated its long-lived assets for impairment and evaluated the carrying value of all other assets and liabilities related to the Australia stores to their net realizable value. As a result of that analysis, management concluded that the goodwill balance had been impaired and that certain other balances were no longer valid or realizable as a consequence of the Administration process. As a result, the Company recorded a net impairment charge of $4.5 million during the three months ended September 30, 2015.

 

16. SUBSEQUENT EVENTS

 

During October 2015, the Company issued 100,000 common shares for the conversion of a convertible note payable.

 

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ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. These statements include projections, predictions, expectations or statements as to beliefs or future events or results or refer to other matters that are not historical facts. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by these statements. The forward-looking statements contained in this Quarterly Report are based on various factors and were derived using numerous assumptions. In some cases, you can identify these forward-looking statements by the words “anticipate”, “estimate”, “plan”, “project”, “continuing”, “ongoing”, “target”, “aim”, “expect”, “believe”, “intend”, “may”, “will”, “should”, “could”, or the negative of those words and other comparable words. You should be aware that those statements reflect only the Company’s predictions. If known or unknown risks or uncertainties should materialize, or if underlying assumptions should prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind when reading this Quarterly Report and not place undue reliance on these forward-looking statements. Factors that might cause such differences include, but are not limited to:

 

  Operating losses may continue for the foreseeable future; we may never be profitable;

 

27
 

 

  Inherent risks in expansion of operations, including our ability to acquire additional territories, generate profits from new restaurants and franchise operations, find suitable sites and develop and construct locations in a timely and cost-effective way;
     
  Inherent risks associated with acquiring and starting new restaurant concepts and store locations:
     
  General risk factors affecting the restaurant industry, including current economic climate, costs of labor and food prices;
     
  Intensive competition in our industry and competition with national, regional chains and independent restaurant operators;
     
  Our rights to operate and franchise the Hooters-branded restaurants are dependent on the Hooters’ franchise agreements;
     
  We do not have full operational control over the businesses of our franchise partners or operations where we hold less 100% ownership;
     
  Failure to protect our intellectual property rights, including the brand image of our restaurants;
     
  Our business has been adversely affected by declines in discretionary spending and may be affected by changes in consumer preferences;
     
  Increases in costs, including food, labor and energy prices;
     
  Our business and the growth of our Company is dependent on the skills and expertise of management and key personnel;
     
  Constraints could affect our ability to maintain competitive cost structure, including, but not limited to labor constraints;
     
  Work stoppages at our restaurants or supplier facilities or other interruptions of production;
     
  Our food service business and the restaurant industry are subject to extensive government regulation;
     
  We may be subject to significant foreign currency exchange controls in certain countries in which we operate;
     
  Inherent risk in foreign operations and currency fluctuations;
     
  We may not attain our target development goals and aggressive development could cannibalize existing sales;
     
  Current conditions in the global financial markets and the distressed economy;
     
  A decline in market share or failure to achieve growth;
     
  Unusual or significant litigation, governmental investigations or adverse publicity, or otherwise;
     
  Our debt financing agreements expose us to interest rate risks, contain obligations that may limit the flexibility of our operations, and may limit our ability to raise additional capital;
     
  Adverse effects on our results from a decrease in or cessation or clawback of government incentives related to investments; and
     
  Adverse effects on our operations resulting from certain geo-political or other events.

 

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You should also consider carefully the Risk Factors contained in Item 1A of Part I of this Quarterly Report filed on Form 10-Q and Item 1A of Part I of our Annual Report filed on Form 10-K for the period ended December 31, 2014, which address additional factors that could cause its actual results to differ from those set forth in the forward-looking statements and could materially and adversely affect the Company’s business, operating results and financial condition. The risks discussed in this Quarterly Report and the Annual Report are factors that, individually or in the aggregate, the Company believes could cause its actual results to differ materially from expected and historical results. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider such disclosures to be a complete discussion of all potential risks or uncertainties.

 

The forward-looking statements are based on information available to the Company as of the date hereof, and, except to the extent required by federal securities laws, the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, the Company cannot assess the impact of each factor on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

Management’s Analysis of Business

 

We are in the business of owning, operating and franchising fast casual and full service dining concepts in the United States and internationally.

 

We own and operate fifteen Hooters full service restaurants in the United States, Australia, South Africa, Hungary and the United Kingdom. Hooters restaurants are casual beach-themed establishments featuring music, sports on large flat screens, and a menu that includes seafood, sandwiches, burgers, salads, and of course, Hooters original chicken wings and the “nearly world famous” Hooters Girls.

 

We own, operate and franchise a system-wide total of thirty-nine fast casual restaurants specializing the “Better Burger” category of which twenty-six are company-owned and thirteen are operated by franchisees under franchise agreements. American Burger Company (“ABC”) is a fast casual dining chain consisting of five locations in New York and the Carolinas, known for its diverse menu featuring fresh salads, customized burgers, milk shakes, sandwiches, and beer and wine. BGR: The Burger Joint (“BGR”), was acquired in March 2015 and consists of nine company-owned locations in the United States and thirteen franchisee-operated locations in the United States and the Middle East. BT’s Burger Joint (“BT”) was acquired in July 2015 and consists of four locations in North Carolina. On September 30, 2015, Little Big Burger (“LBB”) was acquired, adding eight locations in Oregon.

 

We also own and operate Just Fresh, our healthier eating fast casual concept with seven company owned locations in Charlotte, North Carolina. Just Fresh offers fresh-squeezed juices, gourmet coffee, fresh-baked goods and premium-quality, made-to-order sandwiches, salads and soups.

 

As of September, 30, 2015, system-wide store count totaled 61 locations, consisting of 48 company-owned locations and 13 franchisee-operated locations.

 

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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED September 30, 2015 COMPARED TO THE THREE MONTHS ENDED September 30, 2014

 

Our results of operations are summarized below:

 

   Three Months Ended September 30,      
   2015   2014     
   Amount     % of
Revenue*
   Amount     % of
Revenue*
   % Change 
                     
Restaurant sales, net  $10,005,324        $8,753,554         14.3%
Gaming income, net   121,031         141,156         -14.3%
Management fees - non-affiliate   25,000         417,842         -94.0%
Frachise income   119,950         -         - 
Total revenue   10,271,305         9,312,552         10.3%
                          
Expenses:                         
Restaurant cost of sales   3,358,602    33.6%   2,927,629    33.4%   14.7%
Restaurant operating expenses   5,998,627    60.0%   4,997,159    57.1%   20.0%
Restaurant pre-opening and closing expenses   141,306    1.4%   62,293    0.7%   126.8%
General and administrative   1,676,609    16.3%   1,422,193    15.3%   17.9%
Asset impairment charge   4,489,043    43.7%   -    0.0%   - 
Depreciation and amortization   358,307    3.5%   435,404    4.7%   -17.7%
Total expenses   16,022,494    156.0%   9,844,678    105.7%   61.7%
Loss from operations  $(5,751,189)       $(532,126)          

 

* Restaurant cost of sales, operating expenses and pre-opening and closing expense percentages are based on restaurant sales, net.

Other percentages are based on total revenue.

 

Revenue

 

Total revenue increased 10.3% to $10.3 million for the three months ended September 30, 2015 from $9.3 million for the three months ended September 30, 2014.

 

Revenues by concept, revenue type and store count are summarized below for each period:

 

   Three Months Ended September 30, 2015   Store Count, end of period 
Revenue  Restaurant   Gaming   Franchise   Mgmt Fee   Total   % of Total   Company   Franchise   Total 
Hooters Full Service  $4,520,586   $121,031   $-   $-   $4,641,617    45.3%   15    -    15 
Better Burgers Fast Casual   4,064,881    -    119,950    -    4,184,831    40.7%   26    13    39 
Other Fast Casual   1,419,857    -    -    -    1,419,857    13.8%   7    -    7 
Corporate and Other   -    -    -    25,000    25,000    0.2%   -    -    - 
Total Revenue  $10,005,324   $121,031   $119,950   $25,000   $10,271,305    100.0%   48    13    61 

 

30
 

 

   Three Months Ended September 30, 2014    Store Count, end of period 
Revenue  Restaurant   Gaming   Franchise   Mgmt Fee   Total   % of Total   Company   Franchise   Total 
Hooters Full Service  $6,732,422   $141,156   $-   $-   $6,873,578    73.8%   13    -    13 
Better Burgers Fast Casual   797,172    -    -    -    797,172    8.6%   6    -    6 
Other Fast Casual   1,223,960    -    -    -    1,223,960    13.1%   6    -    6 
Corporate and Other   -    -    -    417,842    417,842    4.5%   -    -    - 
Total Revenue  $8,753,554   $141,156   $-   $417,842   $9,312,552    100.0%   25    -    25 

 

Restaurant sales increased 14.3% for the nine months ended September 30, 2015 as compared with the nine months ended September 30, 2014. Revenue increases from growth in store count and favorable same store sales were offset by lower revenues from Australia and by foreign currency translation.

 

Revenue from the Company’s Hooter’s restaurants declined to $4.5 million for the three months ended September 30, 2015 from $6.7 million for the three months ended September 30, 2014. The temporary cessation of revenues from the Hooters stores in Australia during the Administration period from July 14, 2015 through the end of the quarter accounted for approximately $2.0 million of the decline. The Company resumed normal operations and recognition of restaurant revenue from the five Hooters stores in Australia in early October 2015.

 

Gaming revenue decreased slightly as increased gaming revenue in the United States were partially offset by the cessation of gaming revenue in Australia during the current quarterly period.

 

Management fee income decreased $0.4 million due to timing. In the prior year period, the Company recognized $0.4 million in management fees in connection with the distribution from Hooters of America in September 2014. In the current year, the Company received and will recognize management fees related to the current year Hooters of America distribution in October 2015.

 

Franchise income was $0.1 million for the three months ended September 30, 2015 compared with zero in the prior year. The Company commenced franchise operations in March 2015 with the acquisition of BGR.

 

We expect revenue to increase with the resumption of normal operations in Australia in October, additional revenue from LBB starting in October, and incremental revenue from several planned new store openings. Management expects the Company to generate total revenues of approximately $55 million on an annualized basis going forward with a current portfolio of 48 company owned and 13 franchisee-owned restaurants system-wide.

 

Restaurant cost of sales

 

Restaurant cost of sales increased 14.7% to $3.4 million for the three months ended September 30, 2015 from $2.9 million for the three months ended September 30, 2014. Restaurant revenues increased 14.3% over the same period.

 

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   Three Months Ended September 30,      
   2015   2014     
Cost of Restaurant Sales  Amount   % of Restaurant Net Sales   Amount   % of Restaurant Net Sales   % Change 
Hooters Full Service  $1,520,277    33.6%  $2,190,615    32.5%   -30.6%
Better Burgers Fast Casual   1,338,165    32.9%   293,021    36.8%   356.7%
Other Fast Casual   500,160    35.2%   443,993    36.3%   12.7%
   $3,358,602    33.6%  $2,927,629    33.4%   14.7%

 

As a percentage of restaurant sales, cost of sales were essentially flat, increasing to 33.6% for the three months ended September 30, 2015 from 33.4% for the three months ended September 30, 2014.

 

Cost of restaurant sales improved significantly for the Fast Casual stores as the Company continued to focus on driving cost of food, paper and other products lower by leveraging the increasing scale and purchasing volumes of the combined company. Cost of sales for the Better Burger group improved from 36.8% to 32.9% while cost of sales at Just Fresh improved from 36.3% to 35.2%.

 

Cost of restaurant sales improved as a percent of revenues at the Hooter’s restaurants in the United States, South Africa and Europe when compared with the prior year quarter. Those improvements, however, were more than offset by higher costs in Australia. The higher costs in Australia arose primarily from our temporary operation of the Sydney Margaritaville restaurant during Administration. Costs for Hooters Australia, and accordingly for the Hooters group as a whole, are expected to improve in future periods with resumption of normal operations at the five Hooters stores in October 2015.

 

Restaurant operating expenses

 

Restaurant operating expenses increased 20.0% to $6.0 million for the three months ended September 30, 2015 from $5.0 for the three months ended September 30, 2014. The increase was primarily driven by increased store locations in the Better Burger group.

 

   Three Months Ended September 30,      
   2015   2014     
Operating Expenses  Amount   % of Restaurant Net Sales   Amount   % of Restaurant Net Sales   % Change 
Hooters Full Service  $2,821,729    62.4%  $3,767,193    56.0%   -25.1%
Better Burgers Fast Casual   2,374,730    58.4%   577,069    72.4%   311.5%
Other Fast Casual   802,169    56.5%   652,898    53.3%   22.9%
   $5,998,628    60.0%  $4,997,160    57.1%   20.0%

 

As a percent of restaurant sales, operating expenses increased from 57.1% to 60.0% due to higher operating expenses as a percent of revenue incurred in the temporary operation of the Margaritaville restaurant during the administration process. Operating expenses for Hooters Australia, and accordingly for the Hooters group as a whole, are expected to improve in future periods with resumption of normal operations at the five Hooters stores in October 2015.

 

32
 

 

As a percent of restaurant net sales, the operating expenses improved in the Better Burger Group with increased efficiencies and the ability to leverage the increased scope of operations.

 

Restaurant pre-opening and closing expenses

 

Restaurant pre-opening and closing expenses totaled $141 thousand for the three months ended September 30, 2015 compared to $62 thousand for the three months ended September 30, 2014. The primary activity during the current period was the opening of a new Hooters location in Port Elizabeth, South Africa in August 2015.

 

General and Administrative Expense (“G&A”)

 

G&A increased 17.9% to $1.7 million for the three months ended September 30, 2015 from $1.4 million for the three months ended September 30, 2014. Significant components of G&A are summarized as follows:

 

   Three Months Ended September 30,      
General and Administrative Expenses  2015   2014   % Change 
Professional fees  $347,707   $264,288    31.6%
Salary and benefits   702,007    395,786    77.4%
Consulting and investor relations fees   255,969    292,583    -12.5%
Travel and entertainment   122,902    87,185    41.0%
Shareholder services and fees   27,361    28,848    -5.2%
Other G&A   220,663    353,503    -37.6%
 Total G&A Expenses  $1,676,609   $1,422,193    17.9%

 

As a percentage of restaurant revenue, G&A was 16.8% for the three months ended September 30, 2015 compared with 16.2% for the three months ended September 30, 2014. G&A increased modestly even as the scope of operations and number of restaurant locations more than doubled from 25 to 61 stores over the past twelve months.

 

G&A as a percent of revenue for the current quarterly period was negatively impacted by the temporary decline in Australia revenues combined with non-recurring costs related to the acquisition transactions and Australia administration. G&A in the current quarterly period includes approximately $195 thousand of legal, banking, consulting and other non-recurring professional fees related to the acquisition transactions, capital transactions and the Australia administration process. Excluding those non-recurring expenses, G&A was approximately 14.4% of total revenue.

 

We expect the G&A costs associated with restaurant operations and corporate overhead to continue to decline as a percent of revenues in future periods through a combination of expense rationalization, the absence of non-recurring transaction-related expenses, and increased revenue.

 

Asset impairment charge

 

In connection with the reorganization of our Australian subsidiaries, the Company recognized a non-cash charge of $4.5 million for the period ending September 30, 2015. The Company did not incur asset impairments in 2014.

 

Depreciation and amortization

 

Depreciation and amortization expense decreased 17.7% to $358 thousand for the three months ended September 30, 2015 from $435 thousand for the three months ended September 30, 2014, primarily due to Australia and certain assets becoming fully depreciated.

 

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OTHER INCOME (EXPENSE)

 

Other income (expense) consisted of the following:

 

   Three Months Ended September 30,  
Other Income (Expense)  2015   2014   % Change 
Interest expense  $(657,906)  $(581,215)   13.2%
Change in fair value of derivative liabilities   262,232    221,000    18.7%
Loss on extinguishment of debt   (145,834)   -      
Other income (expense)   (40,262)   438,607    -109.2%
Total Other Income (Expense)  $(581,770)  $78,392    -842.1%

 

Interest expense increased 13.2% to $0.7 million for the three months ended September 30, 2015 from $0.6 million for the three months ended September 30, 2014 due to an increase in convertible notes outstanding.

 

Change in fair value of derivative liability was $0.3 million for the three months ended September 30, 2015 and $0.2 million for the three months ended September 30, 2014. The liability is a non-cash income or expense associated with our convertible debt and is adjusted quarterly based on the change in the fair value of the derivative price of the Company’s common stock.

 

Loss on extinguishment of debt $0.1 million was for the three months ended September 30, 2015 and zero for the three months ended September 30, 2014. During the current period, the holder of a convertible note elected to exercise their right to convert the note to common stock resulting in a non-cash loss based on the difference between the fair value of the common stock issued and the carrying value of the convertible note and related discount balances.

 

Other income (expense) was a $40 thousand loss for the three months ended September 30, 2015 compared to income of $0.4 million for the prior year period. The prior year includes a distribution from Hooters of America. In the current year, the distribution was received and will be recognized during the fourth quarter of 2015.

 

NET GAIN (LOSS) FROM DISCONTINUED OPERATIONS

 

Net gain from discontinued operations was zero for the three months ended September 30, 2015 compared to a net loss of $56 thousand for the three months ended September 30, 2014. The Company discontinued the operations of its Spoon business in December 2014 and had no activity in the current period.

 

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RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2014

 

Our results of operations are summarized below:

 

   Nine Months Ended September 30,      
   2015     2014       
   Amount     % of Revenue*   Amount     % of Revenue*   %
Change
 
                     
Restaurant sales, net  $28,907,536        $20,465,510         41.3%
Gaming income, net   352,881         272,391         29.5%
Management fees - non-affiliate   204,124         467,993         -56.4%
Frachise income   270,948         -           
Total revenue   29,735,489         21,205,894         40.2%
                          
Expenses:                         
Restaurant cost of sales   9,937,190    34.4%   7,097,300    34.7%   40.0%
Restaurant operating expenses   17,451,671    60.4%   11,846,792    57.9%   47.3%
Restaurant pre-opening and closing expenses   739,495    2.6%   323,274    1.6%   128.8%
General and administrative   5,656,545    19.0%   4,287,279    20.2%   31.9%
Asset impairment charge   4,489,043    15.1%   -    -    - 
Depreciation and amortization   1,205,255    4.1%   1,162,088    5.5%   3.7%
Total expenses   39,479,199    132.8%   24,716,733    116.6%   59.3%
Loss from operations  $(9,743,701)       $(3,510,839)        174.6%

 

* Restaurant cost of sales, operating expenses and pre-opening and closing expense percentages are based on restaurant sales, net. Other percentages are based on total revenue.

 

Revenue

 

Total revenue increased 40.2% to $29.7 million for the nine months ended September 30, 2015 from $21.2 million for the nine months ended September 30, 2014.

 

Revenues by concept, revenue type and store count are summarized below for each period:

 

   Nine Months Ended September 30, 2015   Store Count, end of period 
Revenue  Restaurant   Gaming   Franchise   Mgmt Fee   Total   % of Total   Company   Franchise   Total 
Hooters Full Service  $15,887,497   $352,881   $-   $129,124   $16,369,502    55.0%   15    -    15 
Better Burgers Fast Casual   8,828,761    -    270,948    -    9,099,709    30.6%   26    13    39 
Other Fast Casual   4,191,278    -    -    -    4,191,278    14.1%   7    -    7 
Corporate and Other   -    -    -    75,000    75,000    0.3%   -    -    - 
Total Revenue  $28,907,536   $352,881   $270,948   $204,124   $29,735,489    100.0%   48    13    61 

 

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   Nine Months Ended September 30, 2014   Store Count, end of period 
Revenue  Restaurant   Gaming   Franchise   Management Fee   Total   % of Total   Company   Franchise   Total 
Hooters Full Service  $14,623,681   $272,391   $-   $-   $14,896,072    70.2%   13    -    13 
Better Burgers Fast Casual   2,201,747    -    -    -    2,201,747    10.4%   6    -    6 
Other Fast Casual   3,640,082    -    -    -    3,640,082    17.2%   6    -    6 
Corporate and Other   -    -    -    467,993    467,993    2.2%   -    -    - 
Total Revenue  $20,465,510   $272,391   $-   $467,993   $21,205,894    100.0%   25    -    25 

 

Restaurant sales increased 41.3% to $28.9 million for the nine months ended September 30, 2015 from $20.5 for the nine months ended September 30, 2014. Revenue increased from growth and store count and favorable same store sales comparisons were partially offset by lower revenues from Australia and by foreign currency translations.

 

Revenue from the Company’s Hooter’s restaurants increased to $15.9 million for the nine months ended September 30, 2015 from $14.6 million for the nine months ended September 30, 2014. The comparisons were impacted by differences in the periods of consolidation for the Hooters Australia stores, the opening of 2 new stores as well as by foreign currency translation differences. The 2014 period includes revenue from Hooters Australia beginning with the acquisition of 2 stores on April 1, 2014 and another 2 stores on July 1, 2014. The 2015 period included revenue from all stores through July 14, 2015 (including a fifth store that opened in late May 2015), but does not include approximately $2.0 million of revenue for the period July 14, 2015 through September 30, 2015 while the stores were in Administration. The Company resumed normal operations and recognition of restaurant revenue from all five Hooters stores in Australia in early October 2015.

 

Gaming revenue increased primarily on increased gaming revenue in the United States and the impact of timing differences discussed above for the Hooters Australia operations.

 

Management fee income decreased $0.3 million due to timing. In the prior year period, the Company recognized $0.4 million in management fees in connection with the distribution from Hooters of America in September 2014. In the current year, the Company received and will recognize management fees related to the current year Hooters of America distribution in October 2015.

 

Franchise income was $0.3 million for the nine months ended September 30, 2015 compared with zero in the prior year. The Company commenced franchise operations in March 2015 with the acquisition of BGR.

 

We expect revenue to increase with the resumption of normal operations in Australia in October, additional of revenue from LBB starting in October, and incremental revenue from several planned new store openings. Management expects Company to generate total revenues of approximately $55 million on an annualized basis going forward with a current portfolio of 48 company owned and 13 franchisee-owned restaurants system-wide.

 

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Restaurant cost of sales

 

Restaurant cost of sales increased 40.5% to $9.9 million for the nine months ended September 30, 2015 from $7.1 for the nine months ended September 30, 2014. Restaurant revenues increased 41.3% over the same period.

 

   Nine Months Ended September 30,      
   2015   2014     
Cost of Restaurant Sales  Amount   % of Restaurant Net Sales   Amount   % of Restaurant Net Sales   % Change 
Hooters Full Service  $5,488,021    34.5%  $4,949,103    33.8%   10.9%
Better Burgers Fast Casual   2,974,273    33.7%   850,217    38.6%   249.8%
Other Fast Casual   1,474,896    35.2%   1,297,980    35.7%   13.6%
Corporate and Other                         
   $9,937,190    34.4%  $7,097,300    34.7%   40.0%

 

As a percentage of restaurant sales, net, restaurant cost of sales decreased to 34.4% for the nine months ended September 30, 2015 from 34.7% for the nine months ended September 30, 2014.

 

Cost of restaurant sales improved significantly for the Fast Casual stores as the Company continued to focus on driving cost of food, paper and other products lower by leveraging the increasing scale and purchasing volumes of the combined company. Cost of sales for the Better Burger group improved from 38.6% to 33.7% while cost of sales at Just Fresh improved from 35.7% to 35.2%.

 

Cost of restaurant sales improved as a percent of revenues at the Hooter’s restaurants in the United States, South Africa and Europe when compared with the prior year period. Those improvements, however, were more than offset by higher costs in Australia. Costs for Hooters Australia, and accordingly for the Hooters group as a whole, are expected to improve in future periods with resumption of normal operations at the five Hooters stores in October 2015.

 

Restaurant operating expenses

 

Restaurant operating expenses increased 47.3% to $17.5 million for the nine months ended September 30, 2015 from $11.9 million for the nine months ended September 30, 2014 due to the increase in the number of store locations and related restaurant business volumes.

 

   Nine Months Ended September 30,      
   2015   2014     
Operating Expenses  Amount   % of Restaurant Net Sales   Amount   % of Restaurant Net Sales   % Change 
Hooters Full Service  $9,839,496    61.9%  $8,243,497    56.4%   19.4%
Better Burgers Fast Casual   5,365,131    60.8%   1,698,098    77.1%   215.9%
Other Fast Casual   2,247,045    53.6%   1,905,199    52.3%   17.9%
   $17,451,672    60.4%  $11,846,794    57.9%   47.3%

 

As a percent of restaurant sales operating expenses increased from 57.9% to 60.4% due to higher operating expenses as a percent of revenue incurred in the temporary operation of the Margaritaville restaurant during the administration process. Operating expenses for Hooters Australia, and accordingly for the Hooters group as a whole, are expected to improve in future periods with resumption of normal operations at the five Hooters stores in October 2015.

 

37
 

  

As a percent of restaurant net sales, the operating expenses improved in the Better Burger Group from 77.1% to 60.8% due to increased efficiencies and the ability to leverage the increased scope of operations.

 

Restaurant pre-opening and closing expenses

 

Restaurant pre-opening and closing expenses totaled $0.7 million for the nine months ended September 30, 2015 from $0.3 million for the nine months ended September 30, 2014. The increased expense was due primarily to the Company’s opening of the Townsville Hooters location in Australia, Port Elizabeth Hooters location in South Africa and the closing of our ABC location in Columbia, South Carolina.

 

General and Administrative Expense (“G&A”)

 

G&A increased 31.9% to $5.7 million for the nine months ended September 30, 2015 from $4.3 million for the nine months ended September 30, 2014. Significant components of G&A are summarized as follows:

 

 

   Nine Months Ended September 30,      
General and Administrative Expenses  2015   2014   % Change 
Professional fees  $1,265,501   $899,285    40.7%
Salary and benefits   1,817,696    1,238,820    46.7%
Consulting and investor relations fees   1,378,254    1,083,031    27.3%
Travel and entertainment   275,515    221,490    24.4%
Shareholder services and fees   65,636    103,334    -36.5%
Other G&A   853,943    741,319    15.2%
Total G&A Expenses  $5,656,545   $4,287,279    31.9%

 

As a percentage of restaurant revenue, G&A decreased to 19.6% for the nine months ended September 30, 2015 from 20.9 % for the nine months ended September 30, 2014. The improvement in G&A as a percent of revenue is primarily due to the growth in revenues and store locations, allowing us to scale our overhead costs over a larger business.

 

G&A as a percent of revenue for the current period was negatively impacted by the temporary decline in Australia revenues combined with the incurrence of non-recurring costs related to the acquisition transactions and Australia administration during 2015. G&A in the current nine month period includes approximately $1.0 million of legal, banking, consulting and other non-recurring professional fees related to the acquisition transactions, capital transactions and Australia administration process. Excluding those non-recurring expenses, G&A was approximately 15.7% of total revenue.

 

We expect the G&A costs associated the restaurant operations and corporate overhead to continue to decline as a percent of revenues in future periods through a combination of expense rationalization, the absence of non-recurring transaction-related expenses, and increased revenue.

 

Asset impairment charge

 

In connection with the reorganization of our Australian subsidiaries, the Company recognized a non-cash charge of $4.5 million for the period ending September 30, 2015. The Company did not incur asset impairments in 2014.

 

Depreciation and amortization

 

Depreciation and amortization expense increased 3.7% to $1,205,255 for the nine months ended September 30, 2015 from $1,162,088 for the nine months ended September 30, 2014 due to increased depreciable property and equipment and franchise fees associated with acquired and newly opened restaurants.

 

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OTHER INCOME (EXPENSE)

 

Other income (expense) consisted of the following:

  

   Nine Months Ended September 30,  
Other Income (Expense)  2015   2014   % Change 
Interest expense  $(2,736,555)  $(1,268,756)   115.7%
Change in fair value of derivative liabilities   833,139    925,200    -10.0%
Loss on extinguishment of debt   (315,923)   -    - 
Realized gains on securities   -    101,472    -100.0%
Equity in losses of investments   -    (40,694)   -100.0%
Other income   35,064    446,445    -92.1%
Total Other (Expense) Income  $(2,184,275)  $163,667    -1434.6%

 

Interest expense increased 115.7% to $2.7 million for the nine months ended September 30, 2015 from $1.3 million for the nine months ended September 30, 2014. The Company increased its debt obligations and related interest expenses in connection with the Company’s growth strategy and recent business combinations, which included the assumption of $5 million in additional long term debt for the acquisition of the Australia entities. The nine months ended September 30, 2015 also included one-time accelerated non-cash amortization of debt discount of approximately $0.6 million related to conversion of a note payable of $1 million.

 

Change in fair value of derivative liability was $0.8 million for the nine months ended September 30, 2015 and $0.9 million for the nine months ended September 30, 2014. The liability is a non-cash income or expense associated with our convertible debt and is adjusted quarterly based on the change in the fair value of the derivative price of the Company’s common stock

 

Loss on extinguishment of debt was $0.3 million for the nine months ended September 30, 2015 and zero for the nine months ended September 30, 2014. During 2015, several or the Company’s convertible notes and one of the Company’s term debt instruments were converted by the holders into shares of the Company’s common stock. In connection with the conversions, the Company recognized a loss on extinguishment of convertible debt, related accrued interest, penalties and derivative liabilities. The Company did not have any debt conversions in the prior year.

 

The Company sold a marketable security in the 2014, realizing a gain of $101,472 for the nine months ended September 30, 2014. The Company did not sell any marketable securities in the current year.

 

The Company recognized losses in connection with its minority ownership of the Hooters stores in Australia during the first quarter of 2014. From April 1, 2014 forward, the company increased its ownership and began consolidating Australia and does not have any equity investments subsequent to that date.

 

Other income was a $35 thousand loss for the nine months ended September 30, 2015 compared to income of $0.4 million for the prior year period. The prior year includes a distribution from Hooters of America. In the current year, the distribution was received and will be recognized during the fourth quarter of 2015.

 

NET GAIN (LOSS) FROM DISCONTINUED OPERATIONS

 

Net gain from discontinued operations was $189 for the nine months ended September 30, 2015 compared to a loss of $161 thousand for the nine months ended September 30, 2014. The Company discontinued the operations of its Spoon business in December 2014.

 

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LIQUIDITY AND CAPITAL RESOURCES

 

As of September 30, 2015, our cash balance was $1.8 million and working capital was a deficit of $3.2 million (excluding non-cash derivative liabilities and deferred rent). Cash and working capital as of September improved by $1.6 million and $4.1 million, respectively, as compared with December 31, 2014. The level of additional cash needed to fund operations and our ability to conduct business for the next twelve months will be influenced primarily by the following factors:

 

● the pace of growth in our restaurant businesses and related investments in opening new stores;

 

● the level of investment in acquisition of new restaurant businesses and entering new markets;

 

● our ability to manage our operating expenses and maintain gross margins as we grow:

 

● our ability to access the capital and debt markets;

 

● popularity of and demand for our fast casual dining concepts; and

 

● general economic conditions and changes in consumer discretionary income.

 

We have typically funded our operating costs, acquisition activities, working capital investments and capital expenditures with proceeds from the issuances of our common stock and other financing arrangements, including convertible debt, lines of credit, notes payable and capital leases.

 

Our operating plans for the next twelve months contemplate moderate organic growth, opening 3-4 new stores within our current markets and restaurant concepts. During the first nine months of 2015:

 

  During the first quarter of 2015, we completed a rights offering raising net proceeds of approximately $7.1 million and issued $2.2 million in convertible debt to fund the acquisition of BGR: The Burger Joint and for general corporate purposes.
     
  During the second quarter of 2015, we completed an equity transaction raising net proceeds of approximately $1.9 million to complete the acquisition of BT’s Burger Joints and for general corporate purposes.
     
  During the third quarter of 2015, we completed a rights offering raising net proceeds of approximately $6.0 million to fund the acquisition of Little Big Burger, investments in Australia and general corporate purposes.

 

As we execute our growth plans throughout the balance of 2015 and 2016, we intend to carefully monitor the impact of growth on our working capital needs and cash balances relative to the availability of cost-effective debt and equity financing. We believe the capital resources available to us will be sufficient to fund our ongoing operations and to support our operating plans. We may raise additional capital from the issuance of new debt and equity to continue to execute our growth plans, although there can be no assurance that we will be able to do so. In the event that such capital is not available, we may have to scale back or freeze our organic growth plans, reduce general and administrative expenses and/or curtail future acquisition plans to manage our liquidity and capital resources.

 

CRITICAL ACCOUNTING POLICIES

 

Our condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates and assumptions are affected by the application of our accounting policies. Critical accounting policies are those that require application of management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain and may change in subsequent periods. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our 2014 Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission on April 14, 2015, in the Notes to the Consolidated Financial Statements, Note 1, and the Critical Accounting Policies section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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Item 3: QUANTITATIVE and QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

Item 4: Controls and Procedures

 

Evaluation of disclosure controls and procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), as of December 31, 2014. Our management has determined that, as of September 30, 2015, the Company’s disclosure controls and procedures were ineffective.

 

Management evaluated our internal control over financial reporting as of September 30, 2015. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. As a result of this assessment and based on the criteria in this framework, management has concluded that, as of September 30, 2015, our internal control over financial reporting was ineffective.

 

Material Weaknesses

 

A material weakness is a control deficiency, or a combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

Management identified the following material weaknesses in its internal control over financial reporting:

 

  Lack of sufficient qualified personnel to design, implement, and maintain an effective control environment as it relates to financial reporting. Given the significant expansion of the business and all of our operations, we did not yet integrate an effective control environment with the sufficient complement of personnel with the appropriate level of accounting knowledge, experience, and training in U.S. GAAP to assess the completeness and accuracy of certain accounting and reporting matters.
     
  Period-end financial reporting process. Given the significant expansion of the business and all of our operations we did not design or maintain effective control over the period-end financial reporting process, including control with respect to the preparation, review, supervision, and monitoring of accounting operations and financial reporting. More specifically, due to the expansion of our business, we did not yet prepare timely accounting reconciliations nor did we have adequate financial reporting personnel to prepare timely and accurate financial statements, including related disclosures.

 

The material weaknesses described above could result in misstatements that would result in a material misstatement of the consolidated financial statements in a future annual or interim period that would not be prevented or detected.

 

Remediation Plans

 

We have initiated several steps and plan to continue to evaluate and implement measures designed to improve our internal control over financial reporting in order to remediate the material weaknesses, noted specifically above.

 

While our evaluation of the appropriate remediation plans is still ongoing, efforts to date have included recruiting additional experienced accounting personnel at certain of our acquired businesses and improving certain processes. The Company also engages third party consultants with expertise in the preparation of financial reporting and other financial aspects of the business, as well as continuing to integrate the Company’s subsidiaries accounting personnel and processes.

 

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Changes in Internal Control over Financial Reporting

 

As a result of the acquisitions, the Company is evaluating additional changes to processes and policies to further standardize the internal control over financial reporting with respect to the monitoring, reporting and consolidation of the financial results of the acquired operations into the Company’s financial statements. Except for the activities described above, there were no changes in the Company’s internal control over financial reporting that occurred during the period ended September 30, 2015, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1: LEGAL PROCEEDINGS

  

We are subject to various legal proceedings from time to time in the ordinary course of business, which may not be required to be disclosed under this Item 1. For the nine month period ending September 30, 2015 covered by this Quarterly Report, there have been no reportable legal proceedings or material developments to previously reported legal proceedings.

  

ITEM 1A: RISK FACTORS

We rely in part on our franchisees. Disputes with our franchisees, or failures by our franchisees to operate successfully, to develop or finance new stores or build them on suitable sites or open them on schedule, could adversely affect our growth and our operating results.

 

Our franchisees could take actions that could harm our business.

 

A portion of our growth strategy depends on opening new stores both domestically and internationally. Our ability to expand our store base is influenced by factors beyond our and our franchisees’ control, which may slow store development and impair our strategy.

  

Other than the addition of the foregoing risk factors, there have been no material changes to our risk factors as previously disclosed in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2014. Readers should carefully consider the other risk factors discussed in “Risk Factors” in Item 1A of Part I of the Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. The risks described in this Quarterly Report and the Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

 

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

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ITEM 3: DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4: MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5: OTHER INFORMATION

 

None.

 

ITEM 6: EXHIBITS

 

Exhibit No.   Description
     
31.1   Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
     
31.2   Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
     
32.1   Certification of Principal Executive Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
     
32.2   Certification of Principal Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

 

101.    
INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are furnished and not filed.

 

43
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  CHANTICLEER HOLDINGS, INC.
     
Date:  November 16, 2015 By: /s/ Michael D. Pruitt
    Michael D. Pruitt
    Chief Executive Officer
    (Principal Executive Officer)
     
    /s/ Eric S. Lederer
    Eric S. Lederer
    Chief Financial Officer