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EX-32.2 - Chanticleer Holdings, Inc.ex32-2.htm
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

 

 

 

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, 2016

 

Commission File Number: 001-35570

 

CHANTICLEER HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   20-2932652
(State or Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
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 8, 2016 was 21,957,147 shares.

 

 

 

 
 

 

Chanticleer Holdings, Inc. and Subsidiaries

 

INDEX

 

      Page No.
       
Part I Financial Information  
     
  Item 1: Financial Statements 3
     
    Condensed Consolidated Balance Sheets as of September 30, 2016 (Unaudited) and December 31, 2015 3
    Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) – For the Three and Nine Months Ended September 30, 2016 and 2015 4
    Condensed Consolidated Statements of Cash Flows (Unaudited) – For the Nine Months Ended September 30, 2016 and 2015 6
    Notes to Condensed Consolidated Financial Statements (Unaudited) 7
  Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
  Item 3: Quantitative and Qualitative Disclosures about Market Risk 38
  Item 4: Controls and Procedures 38
     
Part II Other Information  
     
  Item 1: Legal Proceedings 40
  Item 1A: Risk Factors 40
  Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 41
  Item 3: Defaults Upon Senior Securities 41
  Item 4: Mine Safety Disclosures 41
  Item 5: Other Information 41
  Item 6: Exhibits 41
     
Signatures   42

 

2
 

 

Part I: FINANCIAL INFORMATION

 

Item 1: FINANCIAL StatemenTS

 

Chanticleer Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

   (Unaudited)     
   September 30, 2016   December 31, 2015 
ASSETS          
Current assets:          
Cash  $990,756  $1,224,415 
Accounts and other receivables   222,755    862,935 
Inventories   517,594    569,545 
Due from related parties   45,615    45,615 
Prepaid expenses and other current assets   346,852    522,636 
Assets of discontinued operations, current   -    593,430 
TOTAL CURRENT ASSETS   2,123,572    3,818,576 
Property and equipment, net   11,531,222    12,144,064 
Goodwill   12,518,192    12,702,139 
Intangible assets, net   6,571,691    6,776,936 
Investments at fair value   11,480    31,322 
Other investments   1,050,000    1,050,000 
Deposits and other assets   314,759    292,870 
Assets of discontinued operations   -    5,389,300 
TOTAL ASSETS  $34,120,916   $42,205,207 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Accounts payable and accrued expenses  $4,669,498   $4,740,131 
Current maturities of long-term debt and notes payable, net of debt discount of of $42,966 and $171,868, respectively   6,130,583    5,383,003 
Current maturities of convertible notes payable, net of debt discount of $120,820 and $914,724, respectively   3,604,180    2,810,276 
Current maturities of capital leases payable   22,115    39,303 
Due to related parties   209,563    12,963 
Deferred rent   95,297    683,793 
Derivative liabilities   -    1,231,608 
Liabilities of discontinued operations, current   161,168    1,279,955 
TOTAL CURRENT LIABILITIES   14,892,404    16,181,033 
Long-term debt, less current maturities, net of debt discount of $ - and $171,868, respectively   305,105    1,098,641 
Capital leases payable, less current maturities   4,773    15,969 
Deferred rent   2,037,980    1,740,012 
Liabilities of discontinued operations   -    58,648 
Deferred tax liabilities   1,450,089    1,353,771 
TOTAL LIABILITIES   18,690,351    20,448,073 
           
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 21,957,147 and 21,337,247 shares, respectively   2,196    2,134 
Additional paid in capital   56,264,045    55,365,597 
Accumulated other comprehensive loss   (1,247,788)   (987,695)
Non-controlling interest   696,181    389,810 
Accumulated deficit   (40,284,069)   (33,012,712)
TOTAL STOCKHOLDERS' EQUITY   15,430,565    21,757,134 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $34,120,916   $42,205,207 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

3
 

 

Chanticleer Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

 

   Three Months Ended   Nine Months Ended 
   September 30, 2016   September 30, 2015   September 30, 2016   September 30, 2015 
Revenue:                    
Restaurant sales, net  $10,737,961   $9,039,239   $31,068,281   $23,827,503 
Gaming income, net   118,136    94,008    315,647    260,430 
Management fee income - non-affiliates   25,000    25,000    75,000    75,000 
Franchise income   95,542    119,950    381,481    270,948 
Total revenue   10,976,639    9,278,197    31,840,409    24,433,881 
Expenses:                    
Restaurant cost of sales   3,553,684    3,039,197    10,248,770    8,191,634 
Restaurant operating expenses   5,888,509    5,176,174    17,140,692    13,804,201 
Restaurant pre-opening and closing expenses   110,432    141,306    117,987    480,645 
General and administrative expenses   1,351,111    1,651,051    4,400,826    5,163,925 
Depreciation and amortization   590,433    354,119    1,738,815    973,374 
Total expenses   11,494,169    10,361,847    33,647,090    28,613,779 
Operating loss from continuing operations   (517,530)   (1,083,650)   (1,806,681)   (4,179,898)
Other (expense) income                    
Interest expense   (453,151)   (657,906)   (1,704,556)   (2,736,555)
Change in fair value of derivative liabilities   102,507    262,232    1,231,608    833,139 
Loss on extinguishment of debt   -    (145,834)   -    (315,923)
Other income (expense)   32,357    (52,955)   12,388    50,190 
Total other (expense) income   (318,287)   (594,463)   (460,560)   (2,169,149)
Loss from continuing operations before income taxes   (835,817)   (1,678,113)   (2,267,241)   (6,349,047)
Income tax benefit (expense)   (52,474)   (12,954)   (137,867)   30,298 
Loss from continuing operations   (888,291)   (1,691,067)   (2,405,108)   (6,318,749)
Discontinued operations                    
Loss from operation of discontinued operations, net of tax   (68,718)   (4,649,247)   (1,304,627)   (5,578,750)
Loss on write down of net assets   -    -    (3,876,161)   - 
Consolidated net loss   (957,009)   (6,340,314)   (7,585,896)   (11,897,499)
Less: Net loss (income) attributable to non-controlling interest of continuing operations   39,248    1,274    53,612    (13,250)
Less: Net loss attributable to non-controlling interest of discontinued operations   13,744    1,822,328    260,925    2,179,821 
Net loss attributable to Chanticleer Holdings, Inc.  $(904,017)  $(4,516,712)  $(7,271,359)  $(9,730,928)
    -                
Net loss attributable to Chanticleer Holdings, Inc.:                    
Loss from continuing operations  $(849,043)  $(1,689,793)  $(2,351,497)  $(6,331,999)
Loss from discontinued operations   (54,974)   (2,826,919)   (4,919,862)   (3,398,929)
Net loss attributable to Chanticleer Holdings, Inc.  $(904,017)  $(4,516,712)  $(7,271,359)  $(9,730,928)
    -                
Other comprehensive loss:                    
Unrealized loss on available-for-sale securities  $-   $-   $(24,501)  $- 
Foreign currency translation   (126,452)   (572,954)   (235,592)   (891,772)
Total other comprehensive loss   (126,452)   (572,954)   (260,093)   (891,772)
Comprehensive loss  $(1,030,471)  $(5,089,666)  $(7,531,452)  $(10,622,700)
                     
Net loss attributable to Chanticleer Holdings, Inc. per common share, basic and diluted:                    
Continuing operations attributable to common stockholders, basic and diluted  $(0.04)  $(0.11)  $(0.11)  $(0.45)
Discontinued operations attributable to common stockholders, basic and diluted  $(0.00)  $(0.19)  $(0.23)  $(0.24)
Weighted average shares outstanding, basic and diluted   21,957,147    14,802,370    21,607,027    14,059,116 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

4
 

 

Chanticleer Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

 

   Nine Months Ended 
   September 30, 2016   September 30, 2015 
Cash flows from operating activities:          
Net loss  $(7,585,896)  $(11,897,499)
Net loss from discontinued operations   5,180,788    5,578,750 
Net loss from continuing operations   (2,405,108)   (6,318,749)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:          
Depreciation and amortization   1,738,815    973,374 
Loss on extinguishment of debt   -    315,923 
Loss on disposal of property and equipment   -    514,522 
Common stock and warrants issued for services   24,510    231,857 
Common stock and warrants issued for interest   349,000    - 
Amortization of debt discount   925,806    1,356,365 
Amortization of warrants   -    22,375 
Change in assets and liabilities:          
Accounts and other receivables   (34,820)   91,107 
Prepaid and other assets   153,895    48,390 
Inventory   55,173    56,506 
Accounts payable and accrued liabilities   501,078    106,198 
Change in amounts payable to related parties   196,600    766 
Derivative liabilities   (1,231,608)   (833,139)
Deferred income taxes   96,318    (31,834)
Deferred rent   (290,530)   (332,604)
Net cash provided by (used in) operating activities from continuing operations   79,129    (3,798,939)
Net cash used in operating activities from discontinued operations   (75,000)   (1,035,980)
Net cash provided by (used in) operating activities   4,129    (4,834,919)
           
Cash flows from investing activities:          
Purchase of property and equipment   (708,214)   (1,329,389)
Cash paid for acquisitions, net of cash acquired   (72,215)   (9,082,918)
Proceeds from sale of investments   8,902    - 
Net cash used in investing activities from continuing operations   (771,527)   (10,412,307)
           
Cash flows from financing activities:          
Proceeds from sale of common stock and warrants   -    14,920,937 
Loan proceeds   125,000    2,806,837 
Loan repayments   (340,582)   (824,981)
Capital lease payments   (32,897)   (39,822)
Contribution of non-controlling interest   796,911    - 
Net cash provided by financing activities from continuing operations   548,432    16,862,971 
Effect of exchange rate changes on cash   (14,693)   (4,944)
Net increase (decrease) in cash   (233,659)   1,610,802 
Cash, beginning of period   1,224,415    180,534 
Cash, end of period  $990,756   $1,791,336 
           
Supplemental cash flow information:          
Cash paid for interest and income taxes:          
Interest  $279,696   $810,028 
Income taxes   -    54,183 
           
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 
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 

 

See accompanying notes to unaudited 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. and its subsidiaries (together, the “Company”) are in the business of owning, operating and franchising fast casual dining concepts domestically and internationally.

 

The consolidated financial statements include the accounts of Chanticleer Holdings, Inc. and its subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.

 

The Company operates on a calendar year-end. The accounts of Hooters Nottingham (“WEW”), are consolidated based on a 13 and 26 week periods ending on the Sunday closest to each September 30. No events occurred related to the difference between the Company’s reporting calendar period-end and the subsidiary’s period end that materially affected the company’s financial position, results of operations, or cash flows.

 

Name  Jurisdiction of
Incorporation
  Percent
Owned
   Name  Jurisdiction of
Incorporation
  Percent
Owned
 
CHANTICLEER HOLDINGS, INC.  DE, USA              
Burger Business          Just Fresh        
American Roadside Burgers, Inc.  DE, USA   100%  JF Franchising Systems, LLC  NC, USA   56%
ARB Stores          JF Restaurants, LLC  NC, USA   56%
American Burger Ally, LLC  NC, USA   100%           
American Burger Morehead, LLC  NC, USA   100%  West Coast Hooters        
American Roadside McBee, LLC  NC, USA   100%  Jantzen Beach Wings, LLC  OR, USA   100%
American Roadside Southpark LLC  NC, USA   100%  Oregon Owl’s Nest, LLC  OR, USA   100%
American Roadside Burgers Smithtown, Inc.  DE, USA   100%  Tacoma Wings, LLC  WA, USA   100%
American Burger Prosperity, LLC  NC, USA   100%           
BGR Acquisition, LLC  NC, USA   100%  South African Entities        
BGR Acquisition 1, LLC          Chanticleer South Africa (Pty) Ltd.  South Africa   100%
BGR Franchising, LLC  VA, USA   100%  Hooters Emperors Palace (Pty.) Ltd.  South Africa   88%
BGR Operations, LLC  VA, USA   100%  Hooters On The Buzz (Pty) Ltd  South Africa   95%
BGR Arlington, LLC  VA, USA   100%  Hooters PE (Pty) Ltd  South Africa   100%
BGR Cascades, LLC  VA, USA   100%  Hooters Ruimsig (Pty) Ltd.  South Africa   90%
BGR Dupont, LLC  DC, USA   100%  Hooters SA (Pty) Ltd  South Africa   90%
BGR Old Keene Mill, LLC  VA, USA   100%  Hooters Umhlanga (Pty.) Ltd.  South Africa   82%
BGR Old Town, LLC  VA, USA   100%  Hooters Willows Crossing (Pty) Ltd  South Africa   100%
BGR Potomac, LLC  MD, USA   100%           
BGR Springfield Mall, LLC  VA, USA   100%  European Entities        
BGR Tysons, LLC  VA, USA   100%  Chanticleer Holdings Limited  Jersey   100%
BGR Washingtonian, LLC  MD, USA   100%  West End Wings LTD  United Kingdom   100%
Capitol Burger, LLC  MD, USA   100%  Chanticleer Finance UK (No. 1) Plc  United Kingdom   100%
BGR Mosaic, LLC  VA, USA   100%           
BGR Michigan Ave, LLC  DC, USA   100%  Inactive Entities        
BGR Chevy Chase, LLC  MD, USA   100%  Hoot Surfers Paradise Pty. Ltd.  Australia   60%
BT Burger Acquisition, LLC  NC, USA   100%  Hooters Brazil  Brazil   100%
BT's Burgerjoint Biltmore, LLC  NC, USA   100%  DineOut SA Ltd.  England   89%
BT's Burgerjoint Promenade, LLC  NC, USA   100%  Avenel Financial Services, LLC  NV, USA   100%
BT's Burgerjoint Rivergate LLC  NC, USA   100%  Avenel Ventures, LLC  NV, USA   100%
BT's Burgerjoint Sun Valley, LLC  NC, USA   100%  Chanticleer Advisors, LLC  NV, USA   100%
LBB Acquisition, LLC  NC, USA   100%  Chanticleer Investment Partners, LLC  NC, USA   100%
Cuarto LLC  OR, USA   100%  Dallas Spoon Beverage, LLC  TX, USA   100%
LBB Acquisition 1 LLC  OR, USA   100%  Dallas Spoon, LLC  TX, USA   100%
LBB Green Lake LLC  OR, USA   50%  American Roadside Cross Hill, LLC  NC, USA   100%
LBB Hassalo LLC  OR, USA   80%  UK Bond Company  United Kingdom   100%
LBB Platform LLC  OR, USA   80%           
LBB Progress Ridge LLC  OR, USA   50%           
Noveno LLC  OR, USA   100%           
Octavo LLC  OR, USA   100%           
Primero LLC  OR, USA   100%           
Quinto LLC  OR, USA   100%           
Segundo LLC  OR, USA   100%           
Septimo LLC  OR, USA   100%           
Sexto LLC  OR, USA   100%           

 

7
 

 

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 three and nine month periods ended September 30, 2016 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, 2015 filed with the SEC on March 31, 2016 and amended on April 26, 2016. Certain amounts for the prior year have been reclassified to conform to the current year presentation.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of September 30, 2016, our cash balance was $1.0 million. At September 30, 2016, the Company had current assets of $2.1 million, current liabilities of $14.9 million, and a working capital deficit of $12.8 million. The Company has $9.7 million in notes and convertible debt obligations which could potentially be called for payment within the next twelve months. The Company incurred a loss from continuing operations of $2.4 million during the nine months ended September 30, 2016. 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 and reduce operating losses as we grow;
     
  our ability to access the capital and debt markets, including our ability to refinance or extend the maturities of our current obligations;
     
  popularity of and demand for our fast casual dining concepts; and
     
  general economic conditions and changes in consumer discretionary income.

 

Our operating plans for the next twelve months contemplate moderate organic growth, opening 6-10 new stores within our current markets and restaurant concepts. 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.

 

During 2015, we completed two rights offering providing net proceeds of approximately $13.1 million, completed a private placement transaction providing net proceeds of approximately $1.9 million and issued $2.2 million in convertible notes to fund the acquisitions of BGR: The Burger Joint, BT’s Burger Joint, Little Big Burger and for other general corporate purposes.

 

During 2016, we entered into a letter of intent with a US investor to finance the opening of up to 10 Little Big Burger restaurants in the Seattle, Washington area. We also entered into a letter of intent with potential investors to finance the opening of additional Little Big Burger restaurants pursuant to the US governments EB-5 program. During the third quarter of 2016, we closed transactions totaling $750,000 with investors for the opening of Little Big Burger stores in Seattle and Portland.

 

We are currently seeking financing through a proposed public rights offering consisting of non-transferable subscription rights to purchase units, each unit consisting of one share of redeemable preferred stock and one warrant to purchase 10 shares of common stock. A registration statement relating to these securities has been filed with the Securities Exchange Commission but has not yet become effective.

 

8
 

 

If successful, the rights offering proceeds will be used to retire certain of the Company’s current debt obligations, provide funds for store-related growth and for general working capital. If the rights offering proceeds and is fully subscribed, the Company would receive gross proceeds of approximately $13.5 million.

 

There can be no assurances that the Company will be successful in completing the rights offering or any other such equity or debt financing. In the event that such capital is not available, we may then need 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. In addition, we may not be able to payoff or otherwise extend the maturities of our current obligations, or continue to operate as a going concern, which would have an adverse impact on the Company and its shareholders.

 

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, 2015.

 

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

 

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 condensed 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.

 

9
 

 

Management Fee Income

 

The Company receives revenue from management fees from certain non-affiliated companies, including from managing its investment in Hooters of America. Such fees are recognized as revenue as they are earned.

 

Gaming Income

 

The Company receives revenue from operating a gaming facility adjacent to its Hooters restaurant in Jantzen Beach, Oregon. 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 royalty fees, which are based upon a percentage of franchisee revenues, are recognized on the accrual basis as those sales occur.

 

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 potentially diluted 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, 2016 and September 30, 2015 that have been excluded from the calculation of diluted net loss per common share since the effect would be antidilutive.

 

   September 30, 2016   September 30, 2015 
Warrants -Weighted avg exercise price $4.93   9,506,304    9,556,304 
Convertible notes - Weighted avg conversion price $1.05   3,836,342    1,795,961 
Accrued interest on convertible notes   287,770    60,622 
Total   13,630,416    11,412,887 

 

Recent Accounting Pronouncements

 

In 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03 “Simplifying the Presentation of Debt Issuance Costs” which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability consistent with the presentation of debt discounts, however debt issuance costs related to revolving credit agreements may be presented in the balance sheet as an asset. This guidance was adopted in the first quarter of 2016 and had no effect on our consolidated financial statements.

 

In November 2015, the FASB issued ASU No. 2015-07 “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” related to the presentation of deferred income taxes. The guidance requires that deferred tax assets and liabilities be classified as non-current in a consolidated balance sheet. This guidance is effective for us in the first quarter of 2017 and is not expected to materially impact our financial position or net earnings.

 

10
 

 

In February 2016, the FASB issued ASU No. 2016-02 “Leases,” which supersedes ASC 840 “Leases” and creates a new topic, ASC 842 “Leases.” This update requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier adoption permitted. This update will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the effect of this update on its consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09 “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The amendments in this update simplify several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. This update will be effective for the Company in fiscal year 2017, but early adoption is permitted. The Company is currently evaluating the effect of this update on its consolidated financial statements.

 

3. ACQUISITIONS

 

2016 Acquisition

 

The Company completed one acquisition during the nine months ended September 30, 2016, which was the acquisition of a restaurant location in the Harris YMCA in Charlotte, N.C. to expand our Just Fresh business. The Company allocated the purchase price as of the date of acquisition based on the estimated fair value of the acquired assets and assumed liabilities. In consideration of the purchased assets, the Company paid a purchase price totaling $72,215 in cash, of which $1,611 was allocated to acquired inventory and $70,604 to goodwill. The equipment and other assets used in the operation of the business are property of the YMCA and no other tangible or identifiable intangible assets other than inventory were acquired, with the balance being allocated to goodwill.

 

No proforma information was included as the proforma impact of the acquisition is not material.

 

2015 Acquisitions

 

During the year ended December 31, 2015, 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.

 

Acquisition of BGR: The Burger Joint

 

The Company completed the acquisition of BGR: The Burger Joint effective March 15, 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. The fair value of the shares was the closing stock market price on the date the deal acquisition was consummated. No warrants were issued in connection with the acquisition.

 

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 $1.4 million in cash and 424,080 shares of the Company’s common stock valued at $1.0 million. The fair value of the shares was the closing stock market price on, the date the deal acquisition was consummated. No warrants were issued in connection with the acquisition.

 

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Acquisition of Little Big Burger

 

On September 30, 2015, the Company completed the acquisition of various entities operating eight Little Big Burger restaurants in 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. The fair value of the shares was the closing stock market price on the date the deal acquisition was consummated. No warrants were issued in connection with the acquisition.

 

The 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 as follows:

 

   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 
                     
Cash acquired   11,000    8,000    234,638    253,638 
Property and equipment   2,164,023    1,511,270    1,711,990    5,387,283 
Goodwill   663,037    1,040,542    2,938,279    4,641,858 
Trademark/trade name/franchise fee   2,750,000    -    1,550,000    4,300,000 
Inventory, deposits and other assets   296,104    103,451    73,780    473,334 
Accounts held in escrow to satisfy acquired liabilities   -    -    675,000    675,000 
Total assets acquired, less cash   5,884,164    2,663,263    7,183,686    15,731,113 
Liabilities assumed   (607,735)   (262,415)   (949,857)   (1,820,007)
Deferred tax liabilities   -    -    (572,360)   (572,360)
Total consideration paid  $5,276,429   $2,400,848   $5,661,470   $13,338,746 

 

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4. DISCONTINUED OPERATIONS

 

In June 2016, the Company approved a plan to exit the Australia and Eastern Europe markets, authorizing management to sell or close its five Hooters stores in Australia and its one store in Budapest.

 

The Company completed the sale of the Hooters Australia and Budapest stores during the third quarter of 2016, transferring substantially all of the assets and liabilities of those operations to the local operating groups. In both cases, the Company did not receive any proceeds from the transfer, although in the case of Hooters Australia, the Company did retain a five-year option to repurchase a 20% interest in the stores for $1.

 

The carrying amount of major classes of assets and liabilities included as part of discontinued operations are as follows:

 

   September 30, 2016   December 31, 2015 
Cash  $-   $303,471 
Accounts receivable   -    19,328 
Inventory   -    157,079 
Property, plant and equipment   -    4,497,170 
Goodwill and intangible assets   -    505,138 
Other assets   -    500,544 
Valuation allowance   -    - 
Total   -    5,982,730 
           
Accounts payable and accrued liabilites   161,168    889,176 
Due to affiliates   -    390,779 
Deferred rent   -    58,648 
Total   161,168    1,338,603 
           
Net Assets of discontinued operations  $(161,168)  $4,644,127 

 

The major line items constituting pre-tax loss of discontinued operations are as follows:

 

   Nine Months Ended 
   September 30, 2016   September 30, 2015 
         
Revenue  $3,427,928   $5,301,607 
Restaurant cost of sales   1,196,734    1,745,566 
Restaurant operating expenses   2,780,441    3,647,470 
Restaurant pre-opening and closing expenses   -    258,850 
General and administrative expenses   296,343    492,620 
Depreciation and amortization   436,144    231,881 
Other   22,893    14,927 
Loss of discontinued operations   (1,304,627)   (1,089,707)
Loss on write-down of net assets   (3,876,161)   (4,489,043)
Total pretax loss of discontinued operations   (5,180,788)   (5,578,750)
           
Income tax   -    - 
Loss on discontinued operations  $(5,180,788)  $(5,578,750)

 

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5. PROPERTY AND EQUIPMENT

 

Property and equipment consists of the following:

 

   September 30, 2016   December 31, 2015 
Leasehold improvements  $10,336,084   $10,094,130 
Restaurant furniture and equipment   6,664,151    6,243,196 
Construction in progress   207,552    - 
Office and computer equipment   8,025    5,470 
Land and buildings   814,367    708,020 
Office furniture and fixtures   108,030    104,406 
    18,138,209    17,155,222 
Accumulated depreciation and amortization   (6,606,987)   (5,011,158)
   $11,531,222   $12,144,064 

 

Restaurant furnishings and equipment includes assets under capital leases from our South African restaurants totaling $180,525 and $196,100 at cost and $20,413 and $53,497 net book value as of September 30, 2016 and December 31, 2015, respectively.

 

6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

 

Goodwill is summarized by location as follows:

 

   September 30, 2016   December 31, 2015 
American Burger Company  $2,806,990   $2,806,990 
BGR: The Burger Joint   663,037    663,037 
Little Big Burger   2,938,279    2,938,279 
BT's Burger Joint   1,040,542    978,350 
Just Fresh   495,755    425,151 
Hooters South Africa   229,535    206,503 
West End Wings UK   2,393,226    2,733,001 
Hooters Pacific NW   1,950,828    1,950,828 
Total  $12,518,192   $12,702,139 

 

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

 

   Nine Months Ended 
   September 30, 2016   September 30 2015 
Beginning Balance  $12,702,139   $15,617,308 
Acquisitions   70,604    426,038 
Adjustments   62,192    - 
Foreign currency translation (loss) gain   (316,742)   (567,607)
Ending Balance  $12,518,192   $15,475,739 

 

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

 

   Estimated
Useful Life
  September 30, 2016   December 31, 2015 
Trademark, Tradenames:             
Just Fresh  10 years  $1,010,000   $1,010,000 
American Roadside Burger  10 years   1,786,930    1,786,930 
BGR: The Burger Joint  Indefinite   1,430,000    1,430,000 
Little Big Burger  Indefinite   1,550,000    1,550,000 
       5,776,930    5,776,930 
Franchise fees:             
South Africa  20 years   318,713    286,732 
Hooters Pacific NW  20 years   88,826    90,000 
BGR: The Burger Joint  Indefinite   1,320,000    1,320,000 
       1,727,539    1,696,732 
Total Intangibles at cost      7,504,469    7,473,662 
Accumulated amortization      (932,778)   (696,726)
Intangible assets, net     $6,571,691   $6,776,936 

 

   Nine Months Ended 
   September 30, 2016   September 30, 2015 
Amortization expense  $236,052   $229,370 

 

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7. LONG-TERM DEBT AND NOTES PAYABLE

 

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

 

   September 30, 2016   December 31, 2015 
       
         
Note Payable, due January 2017, net of discount of $42,966 and $171,868, respectively  $4,957,034   $4,828,132 
           
Note Payable, due January 2017   771,309    942,918 
           
Note Payable, due October 2018   92,252    132,596 
           
Mortgage Note, South Africa, due July 2024   218,436    208,131 
           
Bank overdraft facilities, South Africa, annual renewal   165,095    180,377 
           
Equipment financing arrangements, South Africa   156,558    189,490 
           
2016 Credit facility, due January 2017   75,004    - 
           
Total long-term debt  $6,435,688   $6,481,644 
Current portion of long-term debt   6,130,583    5,383,003 
Long-term debt, less current portion  $305,105   $1,098,641 

 

The Company entered into a Receivables Financing Agreement with a lender on June 22, 2016. In consideration for proceeds to the Company of $125,000, the Company agreed to remit $156,250 from the merchant accounts of two of its restaurant locations directly to the lender. The daily amounts to be remitted to the lender, and the resulting term under which the borrowings will ultimately be outstanding, are based on remitting approximately 5% of the total daily credit card receipts of the two restaurant locations. It is expected that the $156,250 will be remitted in full within approximately nine months from the date of the advance. The Company granted a security interest in the credit card receivables of the two restaurants, which would be effective in the event of a default.

 

For the nine months ended September 30, 2016 and 2015 amortization of debt discount was $128,902 and $128,898, respectively.

 

See Note 16 “Subsequent Events.”

 

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8. cONVERTIBLE NOTEs PAYABLE

 

Convertible notes payable are summarized as follows.

 

   September 30, 2016   December 31, 2015 
         
6% Convertible notes payable issued in August 2013  $3,000,000   $3,000,000 
Discounts on above convertible note   -    (583,341)
Discounts on above convertible note   -    - 
8% Convertible notes payable issued in Nov/Dec 2014   100,000    100,000 
Discounts on above convertible note   -    - 
8% Convertible notes payable issued in January 2015   150,000    150,000 
Discounts on above convertible note   (58,503)   (93,231)
8% Convertible notes payable issued in January 2015   475,000    475,000 
Discounts on above convertible note   (62,317)   (238,152)
Total Convertible notes payable   3,604,180    2,810,276 
Current portion of convertible notes payable   (3,604,180)   (2,810,276)
Convertible notes payable, less current portion  $-   $- 

 

The convertible notes were classified as current liabilities on the accompanying Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015 due to certain technical defaults pursuant to the convertible note agreements.

 

For the Nine Months ended September 30, 2016 and 2015 amortization of debt discount was $793,904 and $1,356,365 respectively.

 

See Note 16 “Subsequent Events.”

 

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9. CAPITAL LEASES PAYABLE

 

Capital leases payable are summarized as follows.:

 

   September 30, 2016   December 31, 2015 
         
Capital lease payable, bearing interest at 11.5%, through August 2017  $3,335   $5,231 
           
Capital lease payable, bearing interest at 11.5%, through December 2017   19,459    26,869 
           
Capital lease payable, bearing interest at 11.5%, through July 2016   -    7,786 
           
Capital lease payable, bearing interest at 11.5%, through November 2016   4,094    15,386 
           
Total capital leases payable   26,888    55,272 
Current maturities   22,115    39,303 
Capital leases payable, less current maturities  $4,773   $15,969 

 

10. accounts payable and accrued expenses

 

Accounts payable and accrued expenses are summarized as follows:

 

   September 30, 2016   December 31, 2015 
         
Accounts payable and accrued expenses  $3,321,895   $3,547,174 
Accrued taxes (VAT, GST, Sales Payroll)   778,413    784,842 
Accrued income taxes   46,827    27,709 
Accrued interest   522,363    380,406 
   $4,669,498   $4,740,131 

 

11. Stockholders’ Equity

 

The Company had 45,000,000 shares of its $0.0001 par value common stock authorized at both September 30, 2016 and December 31, 2015. The Company had 21,957,147 and 21,337,247 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively.

 

The Company has 5,000,000 shares of its no par value preferred stock authorized at both September 30, 2016 and December 31, 2015. No preferred shares have been issued or are outstanding to date.

 

See Note 16 “Subsequent Events.”

 

Options and Warrants

 

The Company’s shareholders have approved the Chanticleer Holdings, Inc. 2014 Stock Incentive Plan (the “2014 Plan”), authorizing the issuance of options, stock appreciation rights, restricted stock awards and units, performance shares and units, phantom stock and other stock-based and dividend equivalent awards. Pursuant to the approved 2014 Plan, 4,000,000 shares have been approved for grant.

 

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As of September 30, 2016, the Company had issued 175,340 restricted and unrestricted shares on a cumulative basis under the plan pursuant to compensatory arrangements with employees, board members and outside consultants. No employee stock options have been issued or are outstanding as of September 30, 2016 and December 31, 2015.

 

The Company also has issued warrants to investors in connection with financing transactions in prior periods. A summary of the warrants outstanding and related activity is presented below:

 

   Number of
Warrants
   Weighted
Average Exercise
Price
   Weighted
Average
Remaining Life
 
Outstanding January 1, 2016   9,506,304   $4.93    1.9 
Granted   -    -      
Exercised   -    -      
Forfeited   -    -      
Outstanding September 30, 2016   9,506,304   $4.93    1.9 
                
Exercisable September 30, 2016   9,506,304   $4.93    1.9 

 

Exercise Price  Outstanding
Number of
Warrants
   Weighted
Average
Remaining Life
in Years
   Exerciseable
Number of
Warrants
 
             
>$4.00   7,439,631    1.8    7,439,631 
$3.00-$3.99   799,901    1.8    799,901 
$2.00-$2.99   954,272    2.8    954,272 
$1.00-$1.99   312,500    3.2    312,500 
    9,506,304         9,506,304 

 

Fair value of any warrant issuances is 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 based on 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 average of historical volatilities for industry peers and Company-specific history. See Note 15 for fair values of warrants requiring liability accounting.

 

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12. RELATED PARTY TRANSACTIONS

 

Due to related parties

 

The Company has received non-interest bearing, short-term advances from related parties as follows:

 

   September 30, 2016   December 31, 2015 
         
Hoot SA I, LLC  $12,963   $12,963 
Chanticleer Investors, LLC   196,600    - 
   $209,563   $12,963 

 

Due from related parties

 

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

 

   September 30, 2016   December 31, 2015 
         
Hoot SA II, III, IV LLC  $45,615   $45,615 
   $45,615   $45,615 

 

13. SEGMENT INFORMATION

 

The Company is in the business of operating restaurants and its operations are organized by geographic region and by brand within each region. Further each restaurant location produces monthly financial statements at the individual store level. The Company’s chief operating decision maker reviews revenues and profitability at the at the group level comprised of: Full Service Hooters, Better Burger Fast Casual, Just Fresh Fast Casual, and Corporate.

 

The following are revenues and operating income (loss) from continuing operations by segment as of and for the periods ended:

 

   Three Months Ended   Nine Months Ended 
   September 30, 2016   September 30, 2015   September 30, 2016   September 30, 2015 
Revenue:                    
Hooters Full Service  $3,682,340   $3,648,509   $10,194,512   $11,067,894 
Better Burgers Fast Casual   5,741,783    4,184,831    17,191,749    9,099,709 
Just Fresh Fast Casual   1,527,516    1,419,857    4,379,148    4,191,278 
Corporate and Other   25,000    25,000    75,000    75,000 
   $10,976,639   $9,278,197   $31,840,409   $24,433,881 
                     
Operating Income (Loss):                    
Hooters Full Service  $37,728   $14,213   $81,473   $(75,793)
Better Burgers Fast Casual   (151,958)   (252,456)   (212,472)   (1,085,720)
Just Fresh Fast Casual   49,942    (2,370)   22,487    34,924 
Corporate and Other   (453,243)   (843,037)   (1,698,170)   (3,053,309)
   $(517,531)  $(1,083,650)  $(1,806,682)  $(4,179,898)
                     
Depreciation and Amortization                    
Hooters Full Service  $143,691   $121,180   $405,617   $396,776 
Better Burgers Fast Casual   362,674    203,865    1,092,898    419,603 
Just Fresh Fast Casual   83,117    27,915    237,487    153,577 
Corporate and Other   951    1,159    2,813    3,418 
   $590,433   $354,119   $1,738,815   $973,374 

 

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The following are revenues and operating income (loss) from continuing operations for the periods ended September 30, 2016 and 2015 and long-lived assets by geographic area as of September 30, 2016 and December 31, 2015:

 

   Three Months Ended   Nine Months Ended 
   September 30, 2016   September 30, 2015   September 30, 2016   September 30, 2015 
Revenue:                    
United States  $8,570,452   $6,872,530   $25,475,352   $17,200,287 
South Africa   1,495,757    1,380,665    4,017,330    4,626,094 
Europe   910,430    1,025,002    2,347,727    2,607,500 
   $10,976,639   $9,278,197   $31,840,409   $24,433,881 
                     
Operating Income (Loss):                    
United States  $(550,833)  $(1,105,160)  $(1,822,815)  $(4,267,634)
South Africa   (35,331)   (18,917)   (152,960)   (43,178)
Europe   68,633    40,427    169,093    130,914 
   $(517,531)  $(1,083,650)  $(1,806,682)  $(4,179,898)

 

Non-current Assets:  September 30, 2016   December 31, 2015 
United States  $26,999,535   $33,106,913 
South Africa   2,547,318    2,428,290 
Europe   2,450,491    2,851,428 
           
   $31,997,344   $38,386,631 

 

14. 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. There has been no activity on this matter since 2014 and no amounts have been reflected in the accompanying consolidated balance sheets as of September 30, 2016 and December 31, 2015.

 

On January 28, 2016, our Just Fresh subsidiary was notified that it had been served with a copyright infringement complaint, Kevin Chelko Photography, Inc. v. JF Restaurants, LLC, Case No. 3:13-CV-60-GCM (W.D. N.C.). The claim was filed in the United States District Court for the Western District of North Carolina Charlotte Division and seeks unspecified damages related to the use of certain photographic assets allegedly in violation of the United States copyright laws. The Company has full insurance coverage and has asserted numerous defenses in answer to the complaint, intends to defend itself fully and vigorously and no liability has been reflected in the accompanying consolidated balance sheets as of September 30, 2016 and December 31, 2015.

 

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Prior to the Company’s acquisition of Little Big Burger, a class action lawsuit was filed in Oregon by certain current and former employees of Little Big Burger asserting that the former owners of Little Big Burger failed to compensate employees for overtime hours and also that an employee had been wrongfully terminated. The plaintiffs and defendants agreed to enter into a settlement agreement pursuant to which the former owners of Little Big Burger will pay a gross settlement of up to $675,000, inclusive of plaintiffs’ attorney’s fees of $225,000. This settlement was approved by the court and all settlement payments were distributed by the sellers and this matter closed prior to September 30, 2016.

 

In connection with our acquisition of Little Big Burger, the sellers agreed that the 1,619,646 shares of the Company’s common stock certain of the sellers received from the Company and an additional $200,000 in cash would be held in escrow until such time as the litigation was fully resolved. The Company reflected the $675,000 settlement amount in accrued liabilities, with an offsetting asset in other current assets, in the accompanying consolidated balance sheets as of December 31, 2015. As of September 30, 2016, the Company did not reflect either a liability or an asset as the lawsuit was fully resolved and all amounts paid by the sellers prior to September 30, 2016.

 

From time to time, the Company may be involved in legal proceedings and claims that have arisen in the ordinary course of business.

 

15. 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, 2016                    
Assets:                    
Available-for-sale securities  $11,480   $11,480   $-   $- 
Liabilities:                    
Embedded conversion feature   -    -    -    - 
Warrants   -              - 
December 31, 2015                    
Assets:                    
Available-for-sale securities  $31,322   $31,322   $-   $- 
Liabilities:                    
Embedded conversion feature   1,094,300    -    -    1,094,300 
Warrants   137,308              137,308 

 

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.

 

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16. SUBSEQUENT EVENTS

 

Management has evaluated all events and transactions that occurred from October 1, 2016 through the date these condensed consolidated financial statements were issued for subsequent events requiring recognition or disclosure in the condensed consolidated financial statements.

 

On October 28, 2016, the Company announced that it filed a registration statement on Form S-1 with the Securities and Exchange Commission (the “SEC”) for a rights offering to its existing shareholders and public warrant holders. The proposed rights offering will consist of non-transferable subscription rights to purchase up to an aggregate of 1,000,000 units, each unit consisting of one share of redeemable Series 1 Preferred Stock and one Series 1 Warrant to purchase 10 shares of common stock, at an exercise price of $13.50 per unit. Holders of the Series 1 Preferred will be entitled to receive cumulative dividends at the rate of 9% of the purchase price per year for a term of seven years, payable quarterly. Each Series 1 Warrant may be exercised at any time within 7-years of issuance by surrendering one share of Series 1 Preferred. Assuming the rights offering is fully subscribed, the Company would receive gross proceeds of approximately $13.5 million. If successful, the rights offering proceeds would be used to retire certain of the Company’s current debt obligations, provide funds for store-related growth and for general working capital. The record date of the rights offering has not yet been determined. There is no guarantee that the rights offering will be consummated, or if it is consummated that it will raise sufficient capital to enable the Company to continue to execute its business strategy as currently contemplated. A registration statement relating to these securities has been filed with the SEC but has not yet become effective. The securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. There will not be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to the registration or qualification under the securities laws of any such state.

 

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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;
     
  ●  Inherent risks in expansion of operations, including our ability to acquire additional territories, generate profits from new restaurants, 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;

 

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  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;
     
  Unusual expenses associated with our expansion into international markets;
     
  The risks associated with leasing space subject to long-term non-cancelable leases;
     
  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;
     
  Negative publicity about the ingredients we use or the potential occurrence of food-borne illnesses or other problems at our restaurants;
     
  Breaches of security of confidential consumer information related to our electronic processing of credit and debit card transactions;
     
  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 claw back of government incentives related to investments; and
     
  Adverse effects on our operations resulting from certain geo-political or other events.

 

You should also consider carefully the Risk Factors contained in Part II, Item 1A of this Quarterly Report and Item 1A of Part I of our Annual Report filed on Form 10-K for the period ended December 31, 2015, 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.

 

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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, operate and franchise a system-wide total of thirty-nine fast casual restaurants specializing the ‘Better Burger’ category of which twenty-seven are company-owned and twelve are operated by franchisees under franchise agreements. American Burger Company (“ABC”) is a fast casual dining chain consisting of nine locations in New York and the Carolinas, known for its diverse menu featuring, customized burgers, milk shakes, sandwiches, fresh salads and beer and wine. BGR: The Burger Joint (“BGR”), consists of ten company-owned locations in the United States and twelve franchisee-operated locations in the United States and the Middle East. Little Big Burger (“LBB”) consists of eight locations in Oregon.

 

We own and operate Just Fresh, our healthier eating fast casual concept with eight 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.

 

We own and operate nine Hooters full service restaurants in the United States, South Africa, 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. In addition, the Company formerly operated six Hooters restaurants in Australia and Hungary. The Company determined it was in its best interest to exit those regions and completed the transfer of ownership of those stores to the local operating managers during the third quarter of 2016. Accordingly, those regions are treated as discontinued operations in the accompanying financial statements and management’s discussion and analysis.

 

As of September 30, 2016, our system-wide store count totaled 56 locations, consisting of 44 company-owned locations and 12 franchisee-operated locations.

 

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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2016 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2015

 

Our results of operations are summarized below:

 

   Three Months Ended     
   September 30, 2016   September 30, 2015     
   Amount   % of Revenue*   Amount   % of Revenue*   % Change 
Restaurant sales, net  $10,737,961        $9,039,239         18.8%
Gaming income, net   118,136         94,008         25.7%
Management fees   25,000         25,000         0.0%
Franchise income   95,542         119,950         -20.3%
Total revenue   10,976,639         9,278,197         18.3%
                          
Expenses:                         
Restaurant cost of sales   3,553,684    33.1%   3,039,197    33.6%   16.9%
Restaurant operating expenses   5,888,509    54.8%   5,176,174    57.3%   13.8%
Restaurant pre-opening and closing expenses   110,432    1.0%   141,306    1.6%   -21.8%
General and administrative   1,351,111    12.3%   1,651,051    17.8%   -18.2%
Depreciation and amortization   590,433    5.4%   354,119    3.8%   66.7%
Total expenses   11,494,169    104.7%   10,361,847    111.7%   10.9%
Loss from continuing operations  $(517,530)       $(1,083,650)          

 

* 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 from continuing operations increased 18.3% to $11.0 million for the three months ended September 30, 2016 from $9.3 million for the three months ended September 30, 2015.

 

The increase resulted primarily from growth in our Better Burger Fast Casual group with the acquisition of BT’s Burger Joint and Little Big Burger in the second half of 2015, combined with sales increases at our American Burger Company restaurants which were open during both periods and the opening of BGR’s new Springfield mall location in Maryland. Revenues also increased in our Just Fresh stores due to a combination of the addition of one new location and menu price increases in early 2016. Those increases were partially offset by foreign currency rate fluctuations at our Hooters locations.

 

Revenues by concept and revenue type and a breakdown of system-wide store count are further summarized below:

 

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   Three Months Ended September 30, 2016   Store Count, end of period 
Revenue  Restaurant   Gaming   Franchise   Management Fee   Total   % of Total   Company   Franchise   Total 
Hooters Full Service  $3,564,204   $118,136   $-   $-   $3,682,340    33.5%   9    -    9 
Better Burgers Fast Casual   5,646,241    -    95,542    -    5,741,783    52.3%   27    12    39 
Just Fresh Fast Casual   1,527,516    -    -    -    1,527,516    13.9%   8    -    8 
Corporate and Other   -    -    -    25,000    25,000    0.3%   -    -    - 
Total Revenue  $10,737,961   $118,136   $95,542   $25,000   $10,976,639    100.0%   44    12    56 

 

   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  $3,554,501   $94,008   $-   $-   $3,648,509    39.3%   8    -    8 
Better Burgers Fast Casual   4,064,881    -    119,950    -    4,184,831    45.1%   15    11    26 
Just Fresh Fast Casual   1,419,857    -    -    -    1,419,857    15.3%   7    -    7 
Corporate and Other   -    -    -    25,000    25,000    0.3%   -    -    - 
Total Revenue  $9,039,239   $94,008   $119,950   $25,000   $9,278,197    100.0%   30    11    41 

 

Restaurant revenues from continuing operations increased 18.8% to $10.7 million for the three months ended September 30, 2016 from $9.0 million for the three months ended September 30, 2015. Revenue increased as the number of company owned stores increased from 30 to 44 and same store sales increased in our US stores; those increases were partially offset by the unfavorable impact of foreign currency translation on our United Kingdom Hooters store.

 

    Restaurant revenue from the Company’s Better Burger Group increased 38.9% to $5.6 million for the three months ended September 30, 2016 from $4.0 million for the three months ended September 30, 2015. The growth in our Better Burger Group was due to increased store count as company-owned restaurants grew from 15 locations at the end of the prior period to 27 locations at the end of the current period. The majority of the growth in revenues and store count resulted from the acquisition of Little Big Burger on September 30, 2015. In addition, revenues from Better Burgers stores open in both periods increased 0.4%, the Company opened one new BGR location at Springfield Mall in Maryland and closed one American Burger location in Colombia, South Carolina.
     
    Restaurant revenue from the Company’s Just Fresh Group increased 7.6% to $1.5 million for the three months ended September 30, 2016 from $1.4 million for the three months ended September 30, 2015. Revenue growth resulted from primarily the addition of one new location in early 2016, as well as an increase in store level revenues of 3.2%.
     
    Restaurant revenue from the Company’s Hooter’s restaurants increased 0.3% to $3.6 million for the three months ended September 30, 2016 from $3.6 million for the three months ended September 30, 2015. Revenue declined 11.2% in United Kingdom on a US dollar basis (3.0% on a local currency basis), and were negatively impacted by the foreign currency movements and local economic trends following the recent “Brexit” vote in that region. Revenue at our South Africa locations decreased overall as revenue from the Port Elizabeth location which was in its grand opening honeymoon period during the third quarter of the prior year, decreased. Excluding Port Elizabeth, same store sales at our South Africa locations increased 1.5% on a local currency basis and 19.7% on a US dollar basis.

 

Gaming revenue increased 25.7% due to increased play as a result of recent upgrades to the VLT terminals, which occurred in late 2015 and early 2016.

 

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Franchise revenue decreased 20.3% to $96 thousand for the three months ended September 30, 2016 from $120 thousand for the three months ended September 30, 2015. The decline in franchise revenue is primarily due to limited new franchising activity in the current period while the BGR groups is undertaking a comprehensive rebranding process to improve their store design and offerings.

 

Management fee revenue was unchanged at $25,000 in each period. The Company earns management fees for its CEO serving on the Board of Directors of Hooters of America.

 

Cost of Restaurant sales

 

Cost of restaurant sales increased 16.9% to $3.6 million for the three months ended September 30, 2016 from $3.0 million for the three months ended September 30, 2015.

 

   Three Months Ended     
   September 30, 2016   September 30, 2015     
Cost of Restaurant Sales   Amount    % of Restaurant Net Sales    Amount    % of Restaurant Net Sales    % Change 
Hooters Full Service  $1,207,122    33.9%  $1,200,871    33.8%   0.5%
Better Burgers Fast Casual   1,816,290    32.2%   1,338,166    32.9%   35.7%
Just Fresh Fast Casual   530,272    34.7%   500,160    35.2%   6.0%
   $3,553,684    33.1%  $3,039,197    33.6%   16.9%

 

Cost of restaurant sales improved to 33.1% of net restaurant revenues for the three months ended September 30, 2016 from 33.6% for the three months ended September 30, 2015. Cost of sales improved in the Better Burger group from 32.9% to 32.2% and Just Fresh improved from 35.2% to 34.7%, and Hooters was essentially flat at 33.9% from 33.8%.

 

The improvements in the Better Burger and Just Fresh groups are attributable to several factors, including purchase price reductions and other efficiencies as a result of our increased scale and purchasing power, menu price increases which have been implemented at most locations during the first half of 2016, and the favorable impact of reductions in beef and other commodity prices during the past year. At Hooters, improvements in the US and South Africa where we have focused on supply chain improvements were offset by higher cost of sales in the United Kingdom, partially attributable to higher import prices.

 

Restaurant operating expenses

 

Restaurant operating expenses increased 13.8% to $5.9 million for the three months ended September 30, 2016 from $5.2 million for the three months ended September 30, 2015 due to the increase in the number of store locations and related restaurant business volumes.

 

Our restaurant operating expenses as a percentage of restaurant sales for each region of operations is included in the following table:

 

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   Three Months Ended 
   September 30, 2016   September 30, 2015     
Operating Expenses  Amount   % of Restaurant Net Sales   Amount   % of Restaurant Net Sales   % Change 
Hooters Full Service  $2,093,605    58.7%  $1,999,275    56.2%   4.7%
Better Burgers Fast Casual   3,028,408    53.6%   2,374,730    58.4%   27.5%
Just Fresh Fast Casual   766,496    50.2%   802,169    56.5%   -4.4%
   $5,888,509    54.8%  $5,176,174    57.3%   13.8%

 

As a percent of restaurant revenues, operating expenses improved to 54.8% for the three months ended September 30, 2016 from 57.3% for the three months ended September 30, 2015. Operating expenses as a percent of revenue improved with the Better Burger group improving from 58.4% to 53.6% and Just Fresh improving from 56.5% to 50.2%. The most significant driver of improved overall operating expenses was in our Better Burger group, where lower operating costs inherent in Little Big Burger’s more efficient operating model created improved operating leverage for the overall group.

 

Operating expense comparisons also benefited from the closure of the American Burger Company’s Columbia, South Carolina location in 2015 which carried higher fixed operating costs than our other stores. Just Fresh also improved due to increased focus on cost controls throughout the system. Hooters operating expenses increased from 56.2% to 58.7% due primarily to revenue and operating expense fluctuations in South Africa and, to a smaller degree, in the United States. In South Africa, operating expenses were reduced from prior year at the store level due to cost cutting measures implemented due to the current economic climate, but increased as a percentage of revenue due to lower revenue levels.

 

Restaurant pre-opening and closing expenses

 

Restaurant pre-opening and closing expenses decreased to $110 thousand for the three months ended September 30, 2016 from $141 thousand for the three months ended September 30, 2015. During 2015, the Company incurred costs related to the opening of the Hooters Port Elizabeth location in South Africa. During 2016, the Company incurred costs related to three Little big Burger stores that are currently under construction and expected to open in late 2016 and early 2017.

 

General and Administrative Expense (“G&A”)

 

G&A decreased 18.2% to $1.4 million for the three months ended September 30, 2016 from $1.7 million for the three months ended September 30, 2015. Significant components of G&A are summarized as follows:

 

   Three Months Ended 
   September 30, 2016   September 30, 2015 
Audit, legal and other professional services  $131,081   $347,707 
Salary and benefits   848,901    702,007 
Consulting and other fees   57,034    255,969 
Travel and entertainment   100,998    122,902 
Shareholder services and fees   46,114    27,361 
Advertising, Insurance and other   166,983    195,105 
Total G&A Expenses  $1,351,111   $1,651,051 

 

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As a percentage of total revenue, G&A decreased to 12.3% for the three months ended September 30, 2016 from 17.8% for the three months ended September 30, 2015.

 

For the current period, approximately 46% of G&A is attributable to Corporate overhead, including salaries, travel, audit, legal and other public company costs. Approximately 36%, 9%, and 9% of total G&A attributable to regional management, franchising, marketing, advertising, and other administrative activities within the Better Burger group, Hooters, and Just Fresh, respectively.

 

The improvement in G&A is primarily due to lower audit, legal, professional and consulting fees. Fees paid to third party professionals and others were a significant portion of the Company’s expenses in 2015 due to the nature of the acquisition and financing transactions occurring last year. During the current period, the Company did not incur significant fees related to acquisitions or financing initiatives.

 

In addition, the company reduced its routine audit, legal and other professional fees from prior levels through increased focus on cost reduction and rationalization of back office operations, while also leveraging the Company’s overhead over a larger business which favorably impacted G&A as a percent of revenue. These reductions were partially offset by increased G&A and marketing expenses in our regional company store and franchising operations where the company’s acquisition significantly increased the operating scale and scope of our business.

 

Depreciation and amortization

 

Depreciation and amortization expense increased 66.7% to $0.6 million for the three months ended September 30, 2016 from $0.4 million for the three months ended September 30, 2015. The increase in depreciation and amortization is due to increased depreciable property and equipment and intangible assets associated with acquired and newly opened restaurants.

 

OTHER INCOME (EXPENSE)

 

Other income (expense) consisted of the following:

 

   Three Months Ended 
Other Income (Expense)  September 30, 2016   September 30, 2015   % Change 
Interest expense  $(453,151)  $(657,906)   -31.1%
Change in fair value of derivative liabilities   102,507    262,232    -60.9%
Loss on extinguishment of debt   -    (145,834)   -100.0%
Total other (expense) income   32,357    (52,955)   -161.1%
Total Other Income (Expense)  $(318,287)  $(594,463)   -46.5%

 

Other expense, net decreased 46.5% to $0.3 million for the three months ended September 30, 2016 from $0.6 million for the three months ended September 30, 2015. The decrease in other expenses, net was primarily due to lower non-cash interest, amortization, derivative liability adjustments and other charges arising from our convertible and other debt obligations.

 

Interest expense decreased 31.1% to $0.5 million for the three months ended September 30, 2016 from $0.7 million for the three months ended September 30, 2015. The reduction in interest are primarily due to lower average outstanding debt balances due to debt conversions occurring in 2015, combined with lower amortization of debt discount.

 

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The Company recognized changes in the fair value of derivative liabilities totaling $0.1 million for the three months ended September 30, 2016 as compared with $0.3 million for the three months ended September 30, 2015. This is a non-cash income or expense associated with our convertible debt and is adjusted quarterly based primarily on the change in the fair value of the price of the Company’s common stock.

 

Loss on extinguishment of debt was zero in the current period and $0.2 million for the three months ended September 30, 2015. During 2015, several of 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 or loss on extinguishments in the current year.

 

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2015

 

Our results of operations are summarized below:

 

   Nine Months Ended     
   September 30, 2016   September 30, 2015     
   Amount   % of
Revenue*
   Amount   % of
Revenue*
   % Change 
                     
Restaurant sales, net  $31,068,281        $23,827,503         30.4%
Gaming income, net   315,647         260,430         21.2%
Management fees -  non-affiliate   75,000         75,000         0.0%
Franchise income   381,481         270,948         40.8%
Total revenue   31,840,409         24,433,881         30.3%
                          
Expenses: