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EX-32.2 - Sonnet BioTherapeutics Holdings, Inc.ex32-2.htm
EX-32.1 - Sonnet BioTherapeutics Holdings, Inc.ex32-1.htm
EX-31.2 - Sonnet BioTherapeutics Holdings, Inc.ex31-2.htm
EX-31.1 - Sonnet BioTherapeutics 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, 2017

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer [  ] Accelerated Filer [  ] Non-Accelerated Filer (do not check if Smaller Reporting Company) [  ]
Smaller Reporting Company [X] Emerging Growth Company [  ]  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

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 9, 2017 was 3,025,643 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, 2017 (Unaudited) and December 31, 2016 3
    Condensed Consolidated Statements of Operations (Unaudited) – For the Three Months and Nine Months Ended September 30, 2017 and 2016 4
    Condensed Consolidated Statements of Comprehensive Loss (Unaudited) – For the Three Months and Nine Months Ended September 30, 2017 and 2016 5
    Condensed Consolidated Statements of Cash Flows (Unaudited) – For the Nine Months Ended September 30, 2017 and 2016 6
    Notes to Condensed Consolidated Financial Statements (Unaudited) 8
       
  Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
  Item 3: Quantitative and Qualitative Disclosures about Market Risk 39
  Item 4: Controls and Procedures 39
       
Part II Other Information 41
       
  Item 1: Legal Proceedings 41
  Item 1A: Risk Factors 41
  Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 42
  Item 3: Defaults Upon Senior Securities 42
  Item 4: Mine Safety Disclosures 42
  Item 5: Other Information 42
  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, 2017   December 31, 2016 
ASSETS          
Current assets:          
Cash  $295,462  $268,575 
Restricted cash   250,861    -   
Accounts and other receivables   275,205    524,481 
Inventories   463,866    539,550 
Prepaid expenses and other current assets   333,593    461,074 
Assets held for sale, net   725,644    -   
TOTAL CURRENT ASSETS   2,344,631    1,793,680 
Property and equipment, net   9,006,200    11,513,693 
Goodwill   12,603,545    12,405,770 
Intangible assets, net   6,310,949    6,530,243 
Investments   800,000    800,000 
Deposits and other assets   499,264    442,737 
TOTAL ASSETS  $31,564,589   $33,486,123 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable and accrued expenses  $5,384,918   $5,553,068 
Current maturities of long-term debt and notes payable   771,032    6,171,649 
Current maturities of capital leases payable   4,210    18,449 
Due to related parties   194,350    194,350 
Deferred rent   89,571    173,775 
TOTAL CURRENT LIABILITIES   6,444,081    12,111,291 
Long-term debt, less current portion, net of discount and deferred financing costs of $1,466,739 and $0, respectively   5,142,343    287,445 
Convertible notes payable, net of debt discount (premium)
of ($14,704) and $46,936, respectively
   3,214,704    3,678,064 
Redeemable preferred stock: no par value, 62,876 and 19,050 shares issued and outstanding, net of discount of $226,089 and $0, respectively   631,433    257,175 
Deferred rent   2,006,715    1,961,751 
Deferred tax liabilities   1,591,284    1,485,554 
TOTAL LIABILITIES   19,030,560    19,781,280 
Commitments and contingencies          
Common stock subject to repurchase obligation; 0 and 56,290 shares issued and outstanding, respectively   -      349,000 
Stockholders’ equity:          
Preferred stock: no par value; authorized 5,000,000 shares; 62,876 and 19,050 issued issued and outstanding, respectively   -      -   
Common stock: $0.0001 par value; authorized 45,000,000 shares; issued and outstanding 2,514,157 and 2,139,424 shares, respectively   251    213 
Additional paid in capital   59,506,252    55,926,196 
Accumulated other comprehensive loss   (934,703)   (1,155,658)
Accumulated deficit   (46,942,691)   (42,206,325)
Total Chanticleer Holdings, Inc, Stockholder’s Equity   11,629,109    12,564,426 
Non-Controlling Interests   904,920    791,417 
TOTAL STOCKHOLDERS’ EQUITY   12,534,029    13,355,843 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $31,564,589   $33,486,123 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

3

 

 

Chanticleer Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations

 

   Three Months Ended   Nine Months Ended 
   September 30, 2017   September 30, 2016   September 30, 2017   September 30, 2016 
Revenue:                    
Restaurant sales, net  $10,479,275   $10,737,961   $30,657,215   $31,068,281 
Gaming income, net   115,268    118,136    328,855    315,647 
Management fee income   24,999    25,000    74,982    75,000 
Franchise income   105,823    95,542    289,626    381,481 
Total revenue   10,725,365    10,976,639    31,350,678    31,840,409 
Expenses:                    
Restaurant cost of sales   3,605,212    3,553,684    10,376,160    10,248,770 
Restaurant operating expenses   6,119,561    5,888,509    17,649,532    17,140,692 
Restaurant pre-opening and closing expenses   34,349    110,432    139,545    117,987 
General and administrative expenses   952,959    1,351,112    3,413,001    4,400,826 
Asset impairment charge   838,928    -      1,472,890    -   
Depreciation and amortization   572,798    590,433    1,768,837    1,738,815 
Total expenses   12,123,807    11,494,170    34,819,965    33,647,090 
Operating loss from continuing operations   (1,398,442)   (517,531)   (3,469,287)   (1,806,681)
Other (expense) income                    
Interest expense   (309,538)   (453,150)   (1,218,379)   (1,704,556)
Change in fair value of derivative liabilities   -      102,507    -      1,231,608 
Gain (loss) on debt refinancing   -      -      (95,310)   -   
Other income (expense)   37,839    32,357    50,050    12,388 
Total other expense   (271,699)   (318,286)   (1,263,639)   (460,560)
Loss from continuing operations before income taxes   (1,670,141)   (835,817)   (4,732,926)   (2,267,241)
Income tax expense   (56,070)   (52,474)   (169,398)   (137,867)
Loss from continuing operations   (1,726,211)   (888,291)   (4,902,324)   (2,405,108)
Discontinued operations                    
Loss from discontinued operations, net of tax   -      (68,718)   -      (1,304,627)
Loss on write down of net assets   -      -      -      (3,876,161)
Consolidated net loss   (1,726,211)   (957,009)   (4,902,324)   (7,585,896)
Less: Net loss attributable to non-controlling interest of continuing operations   168,772    39,248    245,943    53,612 
Less: Net loss attributable to non-controlling interest of discontinued operations   -      13,744    -      260,925 
Net loss attributable to Chanticleer Holdings, Inc.  $(1,557,439)  $(904,017)  $(4,656,381)  $(7,271,359)
                       
Net loss attributable to Chanticleer Holdings, Inc.:                    
Loss from continuing operations  $(1,557,439)  $(849,043)  $(4,656,381)  $(2,351,497)
Loss from discontinued operations   -      (54,974)   -      (4,919,862)
Net loss attributable to Chanticleer Holdings, Inc.  $(1,557,439)  $(904,017)  $(4,656,381)  $(7,271,359)
Dividends on redeemable preferred stock   (28,219)   -      (79,988)   -   
Net loss attributable to common shareholders of Chanticleer Holdings, Inc.  $(1,585,658)  $(904,017)  $(4,736,369)  $(7,271,359)
                     
Net loss attributable to Chanticleer Holdings, Inc. per common                    
share, basic and diluted:  $(0.63)  $(0.41)  $(2.10)  $(3.37)
Continuing operations attributable to common stockholders, basic and diluted  $(0.63)  $(0.39)  $(2.10)  $(1.09)
Discontinued operations attributable to common stockholders, basic and diluted  $-     $(0.02)  $-     $(2.28)
Weighted average shares outstanding, basic and diluted   2,501,534    2,195,715    2,258,013    2,160,703 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

4

 

 

Chanticleer Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Comprehensive Loss

 

   Three Months Ended   Nine Months Ended 
   September 30, 2017   September 30, 2016   September 30, 2017   September 30, 2016 
                 
Net loss attributable to Chanticleer Holdings, Inc.  $(1,557,439)  $(904,017)  $(4,656,381)  $(7,271,359)
Unrealized loss on available-for-sale securities, net of tax   -      -      -      (24,501)
Foreign currency translation gain (loss)   31,785    (126,452)   220,955    (235,592)
Total other comprehensive income (loss)   31,785    (126,452)   220,955    (260,093)
Comprehensive loss  $(1,525,654)  $(1,030,469)  $(4,435,426)  $(7,531,452)

 

See accompanying notes to unaudited condensed consolidated financial statements

 

5

 

 

Chanticleer Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

 

   Nine Months Ended 
   September 30, 2017   September 30, 2016 
Cash flows from operating activities:          
Net loss  $(4,902,324)  $(7,585,896)
Net loss from discontinued operations   -      5,180,788 
Net loss from continuing operations   (4,902,324)   (2,405,108)
Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities:          
Depreciation and amortization   1,768,837    1,738,815 
Asset impairment charge   1,472,890    -   
Loss on debt refinancing   95,310    -   
Common stock and warrants issued for services   217,816    24,510 
Common stock and warrants issued for interest   -      349,000 
Amortization of debt discount   501,126    925,806 
Change in assets and liabilities:          
Accounts and other receivables   249,255    (34,820)
Prepaid and other assets   50,667    153,895 
Inventory   23,872    55,173 
Accounts payable and accrued liabilities   320,135    501,078 
Change in amounts payable to related parties   -      196,600 
Derivative liabilities   -      (1,231,608)
Deferred income taxes   105,729    96,318 
Deferred rent   109,219    (290,530)
Net cash provided by operating activities from continuing operations   12,532    79,129 
Net cash used in operating activities from discontinued operations   -      (75,000)
Net cash provided by operating activities   12,532    4,129 
           
Cash flows from investing activities:          
Purchase of property and equipment   (1,323,066)   (708,214)
Cash paid for acquisitions, net of cash acquired   -      (72,215)
Proceeds from sale of investments   -      8,902 
Net cash used in investing activities from continuing operations   (1,323,066)   (771,527)
           
Cash flows from financing activities:          
Proceeds from sale of preferred stock   591,651    -   
Payments related to sale of preferred stock   (243,480)   -   
Loan proceeds   6,594,535    125,000 
Payment of deferred financing costs   (293,294)     
Loan repayments   (5,706,774)   (340,582)
Proceeds from convertible debt   -      -  
Capital lease payments   (20,916)   (32,897)
Contribution of non-controlling interest   675,000    796,911 
Net cash provided by financing activities from continuing operations   1,596,722    548,432 
Effect of exchange rate changes on cash   (8,440)   (14,693)
Net increase (decrease) in cash and restricted cash   277,748    (233,659)
Cash and restricted cash, beginning of period   268,575    1,224,415 
Cash and restricted cash, end of period  $546,323   $990,756 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

6

 

 

Chanticleer Holdings, Inc. and Subsidiaries

Unaudited Consolidated Statements of Cash Flows, continued

 

   Nine Months Ended 
   September 30, 2017   September 30, 2016 
         
Supplemental cash flow information:          
Cash paid for interest and income taxes:          
Interest  $601,972   $270,696 
Income taxes   6,532    -   
           
Non-cash investing and financing activities:          
Convertible debt settled through issuance of common stock  $625,000   $-   
Accrued interest settled through issuance of convertible debt   95,107    -   
Preferred stock dividends paid through issuance of common stock   34,377    -   
Commons stock issued in connection with working capital adjustment   27,018    -   
           
Purchases of businesses:          
Current assets excluding cash  $-     $1,611 
Goodwill   -      70,604 
Cash paid for acquisitions  $-     $72,215 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

7

 

 

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 calendar quarter end. 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  NC, USA   100%  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   100%
BGR Dupont, LLC  DC, USA   100%  Hooters SA (Pty) Ltd  South Africa   78%
BGR Old Keene Mill, LLC  VA, USA   100%  Hooters Umhlanga (Pty.) Ltd.  South Africa   90%

 

8

 

 

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%           
LBB Wallingford, LLC  WA, USA   50%           
LBB Capitol Hill, LLC  WA, USA   50%           
LBB Franchising, LLC  NC, USA   100%           
LBB Multnomah Village LLC  OR, USA   50%           

 

9

 

 

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 month and nine months periods ended September 30, 2017 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, 2016 filed with the SEC on March 31, 2017. Certain amounts for the prior year have been reclassified to conform to the current year presentation.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of September 30, 2017, our unrestricted cash balance was $0.3 million and, our working capital was negative $4.1 million. We incurred losses from continuing operations of $4.9 million and cash provided by operating activities was $13 thousand for the nine months ended September 30, 2017. Our debt, preferred stock, accounts payable and accrual obligations total approximately $15.3 million. 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:

 

  our ability to access the capital and debt markets to satisfy current obligations and operate the business;
     
  our ability to continue to extend, refinance or recapitalize our debt obligations;
     
  the level of investment in new restaurant businesses and entering new markets;
     
  our ability to manage our operating expenses and generate positive cash flow as we grow:
     
  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 deficits and expenditures with proceeds from the issuances of our common stock and other financing arrangements, including common stock, convertible debt, lines of credit, notes payable, capital leases, and other forms of external financing.

 

Our operating plans for the next twelve months contemplate moderate organic growth, opening 2-3 new company stores per quarter, the majority of which will utilize partnership funds from outside investors. We also are evaluating asset sales and divestitures of our non-burger brands as well as the closing of underperforming locations within our burger business. As we execute our plans over the next twelve months, 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 have approximately $6.4 million in current liabilities payable within the next twelve months and approximately $15 million in obligations that will have to be paid or refinanced within the next twenty-four months. In the event that additional working capital is not available, we may then have to scale back or freeze our growth plans, sell assets on unfavorable terms, reduce expenses, and/or curtail future acquisition plans and current operations to manage our liquidity and capital resources. We also have financial covenants and debt service obligations and may incur financial penalties or other negative actions from our lenders that could significantly impact the business if we are not able to meet those obligations.

 

10

 

 

During March 2017, we extended the payment terms of our convertible debt obligations. During May 2017, we completed a $6 million private placement of 8% debentures and warrants, the proceeds of which were used to repay, settle and release the $5 million note payable and related obligations to Florida Mezzanine Fund and to provide additional working capital for new store openings and operations. During October 2017, we entered into a $1 million private placement of common stock and warrants, the proceeds of which were used to fund working capital and current payment obligations.

 

Management is actively considering the possible benefits of selling certain of its operating assets to reduce debt and provide additional working capital to fund future growth of its domestic burger business, as well as possibly closing certain underperforming store locations to improve operating cash flow. Our evaluations are at a preliminary stage, no decisions have been made, and we can provide no assurance that the Company will proceed with asset sales, or that such asset sales could be completed on favorable terms, or at all. In the event that management does elect to proceed with asset sales in the future rather than continue to hold and operate all its assets long term, management’s assessment of the fair value, and ultimate recoverability, of goodwill, intangibles, and other long-lived assets could be impacted and the Company could incur significant noncash charges and cash exit costs in future periods.

 

There can be no assurance that we will be successful in implementing our plans, obtaining additional debt or equity financing at reasonable terms, if at all, or selling any of our operating assets. Accordingly, this raises substantial doubt about our ability to continue on a going concern for a period of one year from the issuance of these condensed consolidated financial statements.

 

The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might become necessary should the Company decide to liquidate assets or be unable to continue as a going concern.

 

REVERSE SPLIT

 

As of May 19, 2017, the Company effected a one-for-ten reverse stock split of the Company’s shares of common stock. As a result of reverse stock split, each ten shares of common stock issued and outstanding were combined into one share of common stock. No fractional shares were issued in connection with the reverse stock split. The Company rounded fractional shares up to the nearest whole number.

 

The reverse stock split had no impact on the par value per share of the Company’s common stock or the number of authorized shares. All current and prior period amounts related to shares, share prices and earnings per share contained in the accompanying unaudited condensed consolidated financial statements have been restated to give retrospective presentation for the reverse stock split.

 

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, 2016.

 

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 warrants using the Black Scholes models, intangible asset valuations and useful lives, depreciation and uncollectible accounts and reserves. Actual results could differ from those estimates.

 

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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 and comprehensive loss. 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 from managing its investment in Hooters of America.

 

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 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, 2017 and 2016 that have been excluded from the calculation of diluted net loss per common share since the effect would be antidilutive.

 

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   September 30, 2017   September 30, 2016 
Warrants   1,862,758    950,630 
Convertible notes   366,667    383,634 
Accrued interest on convertible notes   -      28,777 
Total   2,229,425    1,363,041 

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers (as subsequently amended)” which provides a single, comprehensive accounting model for revenue arising from contracts with customers. This guidance supersedes most of the existing revenue recognition guidance, including industry-specific guidance. Under this model, revenue is recognized at an amount that a company expects to be entitled to upon transferring control of goods or services to a customer. The new guidance also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flow arising from customer contracts, including significant judgments and changes in judgments. The new guidance will be effective for the Company beginning in calendar 2018 and may be applied retrospectively to all prior periods presented or through a cumulative adjustment to the opening retained earnings balance in the year of adoption. The Company is currently evaluating the effect of this update on its consolidated financial statements and expects to use the modified retrospective approach upon adoption and believes that the primary change on the Company’s revenue recognition practices will be to recognize initial franchise fees over the life of the related franchise agreements, which will result in those franchise fees to be recognized over a longer timeframe.

 

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 was adopted in the first quarter of 2017 and did not materially affect the Company’s consolidated financial statements.

 

 

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 has not completed its evaluation of effect this update will have on its consolidated financial statements, but does expect there could be a material increase in both assets and liabilities reflected on its consolidated balance sheets as a result of adoption as of January 1, 2019.

 

In January 2017, the FASB issued ASU No. 2017-04 “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The new guidance simplifies the test for goodwill impairment. Currently, the fair value of the reporting unit is compared with the carrying value of the reporting unit (identified as “Step 1”). If the fair value of the reporting unit is lower than its carrying amount then, the implied fair value of goodwill is calculated. If the implied fair value of goodwill is lower than the carrying value of goodwill an impairment is recognized (identified as “Step 2”). The new standard eliminates Step 2 from the impairment test; therefore, a goodwill impairment will be recognized as the difference of the fair value and the carrying value of the reporting unit. The new standard becomes effective on January 1, 2020 with early adoption permitted.

 

There are several other new accounting pronouncements issued by FASB, which are not yet effective. Each of these pronouncements has been or will be adopted, as applicable, by the Company. At September 30, 2017, other than the adoption of ASU No. 2016-02 “Leases,” none of these pronouncements are expected to have a material effect on the financial position, results of operations or cash flows of the Company.

 

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3. ACQUISITIONS

 

2016 Acquisition

 

The Company completed one acquisition during 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.

 

4. DISCONTINUED OPERATIONS

 

In September 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 retained a five-year option to repurchase a 20% interest in the stores for $1.

 

There were no remaining balances attributable to discontinued operations on the accompanying condensed consolidated balance sheets as of September 30, 2017 or December 31, 2016.

 

The major line items comprising the loss of discontinued operations are as follows:

 

Major line items constituting pre-tax loss of discontinued operations:

 

    Three Months Ended     Nine Months Ended  
    September 30, 2017     September 30, 2016     September 30, 2017     September 30, 2016  
                         
Revenue   $ -     $ 457,527     $ -     $ 3,427,928  
Restaurant cost of sales     -       154,191       -       1,196,734  
Restaurant operating expenses     -       329,884       -       2,780,441  
General and administrative expenses     -       42,169       -       296,343  
Depreciation and amortization     -       -       -       436,144  
Other        -       1             22,893  
Loss of discontinued operations     -       (68,718 )             (1,304,627 )
Loss on write-down of net assets     -       -          -       (3,876,161 )
Total pretax loss of discontinued operations     -       (68,718 )             (5,180,788 )
Income tax     -       -       -       -  
Loss on discontinued operations   $ -     $ (68,718 )   $ -     $ (5,180,788 )

 

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5. PROPERTY AND EQUIPMENT

 

Property and equipment consists of the following:

 

   September 30, 2017   December 31, 2016 
Leasehold improvements  $10,156,225   $10,363,996 
Restaurant furniture and equipment   5,979,837    6,716,926 
Construction in progress   325,706    582,265 
Office and computer equipment   68,303    68,303 
Land and buildings   -    826,664 
Office furniture and fixtures   108,030    108,030 
    16,638,101    18,666,184 
Accumulated depreciation and amortization   (7,631,901)   (7,152,491)
   $9,006,200   $11,513,693 

 

During 2017, the Company recognized asset impairment charges totaling $1.5 million related to the closure of two BGR locations and the potential sale of two Hooters locations. Property and equipment was written down by $2.3 million to reflect the asset held for sale, or closed, of net realizable value.

 

6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

 

Goodwill is summarized by operating segment as follows:

 

   September 30, 2017   December 31, 2016 
Hooters Full Service  $4,658,942   $4,461,167 
Better Burgers Fast Casual   7,448,848    7,448,848 
Just Fresh Fast Casual   495,755    495,755 
   $12,603,545   $12,405,770 

 

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

 

   September 30, 2017   December 31, 2016 
Beginning Balance  $12,405,770   $12,702,139 
Acquisitions   -    70,604 
Adjustments   -    62,192 
Foreign currency translation (loss) gain   197,775    (429,165)
Ending Balance  $12,603,545   $12,405,770 

 

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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, 2017   December 31, 2016 
            
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:             
Hooters South Africa  20 years   325,900    322,258 
Hooters Pacific NW  20 years   74,507    88,826 
BGR: The Burger Joint  Indefinite   1,320,000    1,320,000 
Hooters UK  5 years   13,042    30,848 
       1,733,449    1,761,932 
Total Intangibles at cost      7,510,379    7,538,862 
Accumulated amortization      (1,199,430)   (1,008,619)
Intangible assets, net     $6,310,949   $6,530,243 

 

The Company reviews goodwill for impairment annually or more frequently if indicators of impairment exist. Goodwill is not subject to amortization and has been assigned to reporting units for purposes of impairment testing. The reporting units are our segments.

 

A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in the Company’s expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; the testing for recoverability of a significant asset group within a reporting unit; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on the Company’s consolidated financial statements.

 

The goodwill impairment test involves a two-step process. The first step is a comparison of each reporting unit’s fair value to its carrying value. The Company estimates fair value using the best information available, including market information and discounted cash flow projections (also referred to as the income approach). The income approach uses a reporting unit’s projection of estimated operating results and cash flows that is discounted using a weighted-average cost of capital that reflects current market conditions. The projection uses management’s best estimates of economic and market conditions over the projected period including growth rates in sales, costs and number of units, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements. The Company validates its estimates of fair value under the income approach by comparing the values to fair value estimates using a market approach. A market approach estimates fair value by applying cash flow and sales multiples to the reporting unit’s operating performance. The multiples are derived from comparable publicly traded companies with similar operating and investment characteristics of the reporting units.

 

If the fair value of the reporting unit is higher than its carrying value, goodwill is deemed not to be impaired, and no further testing is required. If the carrying value of the reporting unit is higher than its fair value, there is an indication that impairment may exist and the second step must be performed to measure the amount of impairment loss. The amount of impairment is determined by comparing the implied fair value of reporting unit goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. Specifically, fair value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, the Company would record an impairment loss for the difference.

 

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Management tested its long-lived assets for impairment as of September 30, 2017 comparing each reporting unit’s fair value to its carrying value. That assessment included the assumption that management would continue to hold and operate each segment and generate cash flows over a period of years. Those cash flows were discounted using the income approach and compared to the carrying value of each segment. Management also evaluated the fair value of the reporting segments using the market value approach, comparing the carrying value to fair value based on multiples of current earnings and other indicators of value for each reporting unit. Management determined that the estimated fair value of its reporting units was greater than the carrying value of the reporting units and that the Company’s goodwill, intangibles and long-lived assets were not impaired as of September 30, 2017.

 

However, management noted that the margin between the estimated fair value and carrying value of the reporting units was very narrow and that the impairment assessment in future periods would be sensitive to changes in estimates of cash flow, discount rates and other assumptions increasing the risk that an impairment could be triggered in future periods. The Company is also considering various strategies to improve cash flow and reduce long term debt, which could include selling certain of its operating assets, as well as possibly closing certain underperforming store locations to improve operating cash flow.

 

Those strategic evaluations are at a preliminary stage as of the date of this report, no decisions have been made, and management can provide no assurance that the Company will proceed with any asset sales, or that such asset sale can be completed on favorable terms, or at all.

 

In the event that management does elect to proceed with asset sales and/or effect store closures in the future rather than continue to hold and operate all its assets long term, management’s assessment of the fair value, and ultimate recoverability, of goodwill, intangibles, property and equipment and other assets would be impacted and the Company could incur significant noncash impairment charges and cash exit costs in future periods.

 

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7. LONG-TERM DEBT AND NOTES PAYABLE

 

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

 

   September 30, 2017   December 31, 2016 
         
Note Payable, due December 2018, net of discount of $1,466,739 and $0, respectively (a)  $4,533,261   $- 
           
Note Payable,  due January 2017  (a)   -    5,000,000 
           
Notes Payable Paragon Bank (b)   637,270    811,205 
           
Note Payable  (c )   75,000    - 
           
Receivables financing facilities  (d)   186,728    161,899 
           
Mortgage Note, South Africa, due July 2024 (e)   209,901    215,962 
           
Bank overdraft facilities, South Africa, annual renewal   167,209    124,598 
           
Equipment financing arrangements, South Africa   104,006    145,430 
           
Total long-term debt  $5,913,375   $6,459,094 
Current portion of long-term debt   771,032    6,171,649 
Long-term debt, less current portion  $5,142,343   $287,445 

 

For the nine months ended September 30, 2017 and 2016 amortization of debt discount was $502,053 and $128,901 respectively.

 

a) On May 4, 2017, pursuant to a Securities Purchase Agreement, the Company issued 8% non-convertible secured debentures in the principal amount of $6,000,000 and warrants to purchase 1,200,000 shares of common stock (as adjusted for the Company’s subsequent one-for-ten reverse stock split) to accredited investors. The debentures bear interest at a rate of 8% per annum, payable in cash quarterly in arrears. The debentures mature on December 31, 2018 and contain customary financial and other covenants, including a requirement to maintain positive earnings before interest, taxes, depreciation and amortization. The debentures are secured by a second priority security interest on the Company’s assets and the obligation is guaranteed by the Company’s subsidiaries. The debentures contain a mandatory redemption provision that is triggered by an asset sale. Sale of greater than 33% of the Company’s assets will also trigger an event of default. Upon any event of default, in addition to other customary remedies, the holders have the right, at their sole option, to purchase Little Big Burger from the Company, for an aggregate purchase price of $6,500,000. The warrants have an exercise price of $3.50 (as adjusted for the reverse stock split) and a ten-year term. The warrants are not exercisable until November 4, 2017. Warrants to purchase 800,000 shares include a beneficial ownership limit upon exercise of 4.99% of the number of shares of the common stock outstanding immediately after giving effect to the issuance of shares of common stock issuable upon exercise of the warrant; warrants to purchase the remaining 400,000 shares were amended to increase the beneficial ownership limit upon exercise to 19.99%.

 

In conjunction with the financing described above, the Company entered into a Satisfaction, Settlement and Release Agreement with Florida Mezzanine Fund LLLP, a Florida limited liability partnership (“Florida Mezz”), pursuant to which Florida Mezz agreed to release the Company from all claims and outstanding obligations pursuant to that certain Assumption Agreement dated September 30, 2014, as amended October 15, 2014 and October 22, 2016, and that certain Agreement dated May 23, 2016, as amended January 30, 2017, in exchange for payment of $5,000,000.

 

Five million of the net proceeds from the offering were remitted to Florida Mezz, $500,000 was reserved to fund the opening of new stores, and the balance of $206,746, after transaction expenses, was used for working capital and general corporate purposes. As of September 30, 2017, $250,861 of the proceeds restricted to fund the opening of new stores remains unexpended, and has been presented as restricted cash in the accompanying condensed consolidated balance sheet.

 

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As a result of the issuance of the debentures and the settlement of the Florida Mezz obligations subsequent to March 31, 2016, the $5 million notes payable are no longer outstanding, the Company’s share repurchase obligation from Florida Mezz has been terminated and Florida Mezz waived unpaid interest and penalties previously recorded in the Company’s consolidated financial statements which resulted in the Company recognizing a gain of $267,512. As a result, as of September 30, 2017, the shares subject to repurchase were reclassified from temporary equity to permanent capital and the amounts accrued for interest and penalties reversed effective as of May 14, 2017.

 

The new $6 million loan was accounted for as a new borrowing with consideration allocated between the loan and the warrants based upon the relative fair value of the loan and the warrants. The Company valued the warrants associated with the new debt obligation using the Black Sholes model, which resulted in the allocation of $1.7 million to additional paid in capital with a corresponding offset to debt discount. In addition, there were $0.3 million in debt origination costs that are also accounted for as an offset to outstanding debt. The resulting debt discount of $2.0 million is being amortized to interest expense over the 20-month term of the notes.

 

b) The Company has three term loans with Paragon Bank, all of which are collateralized by all assets of the Company and personally guaranteed by our Chief Executive Officer. The outstanding balance, interest rate and maturity date of each loan is as follows:

 

   Maturity date  Interest rate   Principal balance   Monthly principal and interest payment 
Note 1  9/10/2018   5.50%  $49,089   $4,406 
Note 2  5/10/2019   5.25%   231,573    11,532 
Note 3  8/10/2021   5.25%   356,608    8,500 
           $637,270   $24,438 

 

(c ) The Company has a promissory note payable on demand in the amount of $75,000 with 800 shares of restricted company common stock to be paid to the lender each month while the note is outstanding.

 

d) During February 2017, in consideration for proceeds of $330,000, the Company agreed to remit a total of $412,500 from the merchant accounts of eight of its restaurant locations directly to a lender. The Company originally agreed to make payments of $1,965 per day for 210 days. As of October 2017, the daily payment amount was modified to $1,200 per day and the term was extended to February 2018, with total remittance over the life of the loan unchanged. Also, during March 2017 in consideration for proceeds of $150,000, the company agreed to remit a total of $205,500 from the merchant accounts of three of its restaurant locations directly to the lender. The Company agreed to make payments of $856 per day for 240 days. The Company granted a security interest in the credit card receivables of the specified restaurants in connection with the Receivables Financing Agreements.

 

(e) The Company’s mortgage note is secured by the Company’s land and building used for the Hooters Port Elizabeth facility. The Company has entered into a contract to sell land and building and closed the Port Elizabeth Hooters location during the third calendar quarter of 2017. The Company estimates it would receive gross proceeds of approximately 6 million Rand (approximately $470,000 USD net estimated proceeds after broker commissions) at closing which is expected to occur before the end of calendar 2017. The Company expects to pay the mortgage note in full at closing using the net proceeds from the sale of the property. The net assets and liabilities related to Port Elizabeth location have been reclassified to Assets Held for Sale in the accompanying unaudited condensed consolidated balance sheet as of September 30, 2017 and an impairment loss of $738,000 related to this property has been reflected in the accompanying unaudited condensed statement of operations for the periods ended September 30, 2017. There can be no assurance that the transaction will close and the estimated net proceeds and impairment loss remain subject to adjustment until finalization of the transaction.

 

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8. cONVERTIBLE NOTEs PAYABLE

 

Convertible Notes payable are summarized as follows:

 

   September 30, 2017   December 31, 2016 
         
6% Convertible notes payable due June 2018  $3,000,000   $3,000,000 
Discounts on above convertible note   -    - 
8% Convertible notes payable due March 2019   100,000    100,000 
Premium on above convertible note   7,352    - 
8% Convertible notes payable due March 2019   100,000    150,000 
Premium (discount) on above convertible note   7,352    (46,936)
8% Convertible notes payable due March 2019   -    475,000 
Total Convertible notes payable   3,214,704    3,678,064 
Current portion of convertible notes payable   -    - 
Convertible notes payable, less current portion  $3,214,704   $3,678,064 

 

For the nine months ended September 30, 2017 and 2016 amortization of debt premium was $27,014 and amortization of debt discount was $793,904, respectively.

 

Pursuant to exchange agreements dated and effective March 10, 2017 by and between the Company and four existing note holders, the Company exchanged its 8% convertible notes in the aggregate principal amount of $725,000, which notes were in default, for new two-year 2% notes, in the aggregate principal amount of $820,107, representing $725,000 in principal and $95,107 unpaid accrued interest. The original convertible notes were canceled and new convertible notes issued that may be converted to common stock of the Company, at the option of the holder, at a conversion price of $3.00 per share. The notes have a two-year term, but may be called by the holder after the one-year anniversary of the exchange date. During March 2017, subsequent to the exchange agreements, convertible notes in the amount of $150,000 were converted by the holders into 50,000 shares of common stock. During April and May 2017, convertible notes in the amount of $475,000, plus related accrued interest balances, were converted by the holders into 187,798 shares of common stock.

 

The exchange of the convertible notes was accounting for as an extinguishment of the previous debt, resulting in the recognition of a net loss on extinguishment of $362,822 in the accompanying condensed consolidated financial statements, which was recorded during March 2017. In addition, the lenders of the $3 million 6% convertible debt agreed to waive defaults and extend the note maturity by eighteen months to December 2018.

 

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9. accounts payable and accrued expenses

 

Accounts payable and accrued expenses are summarized as follows:

 

   September 30, 2017   December 31, 2016 
         
Accounts payable and accrued expenses  $3,917,069   $3,807,880 
Accrued taxes (VAT, Sales Payroll)   1,019,079    988,056 
Accrued income taxes   66,731    71,713 
Accrued interest   382,039    685,419 
   $5,384,918   $5,553,068 

 

10. Stockholders’ Equity

 

The Company had 45,000,000 shares of its $0.0001 par value common stock authorized at both September 30, 2017 and December 31, 2016. The Company had 2,514,157 and 2,190,014 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively (including 56,290 shares that were previously classified as shares subject to repurchase obligations as of December 31, 2016). All current and prior period amounts related to shares, share prices and earnings per share contained in the accompanying unaudited condensed consolidated financial statements, have been restated to give retrospective presentation for the reverse stock split (See Note 1).

 

The Company has 5,000,000 shares of its no par value preferred stock authorized at both September 30, 2017 and December 31, 2016.

 

Beginning in December 2016, the Company conducted a rights offering of units, each unit consisting of one share of 9% Redeemable Series 1 Preferred Stock (“Series 1 Preferred”) and one Series 1 Warrant (“Series 1 Warrant”) to purchase 10 shares of common stock. Holders of the Series 1 Preferred are entitled to receive cumulative dividends out of legally available funds at the rate of 9% of the purchase price per year for a term of seven years, payable quarterly on the last day of March, June, September and December in each year in cash or registered common stock at the election of the Company. Shares of common stock issued as dividends will be issued at a 10% discount to the five-day volume weighted average price per share of common stock prior to the date of issuance. Dividends are to be paid prior to any dividend to the holders of common stock. The Series 1 Preferred is non-voting and has a liquidation preference of $13.50 per share, equal to its purchase price. Chanticleer is required to redeem the outstanding Series 1 Preferred at the expiration of the seven-year term. The redemption price for any shares of Series 1 Preferred will be an amount equal to the $13.50 purchase price per share plus any accrued but unpaid dividends to the date fixed for redemption.

 

As of December 31, 2016, 19,050 shares of preferred stock were issued pursuant to the Preferred Stock Units rights offering. In addition, 43,826 additional shares were issued following in February 2017 for a total of 62,876 issued and outstanding as September 30, 2017.

 

In connection with the payment of past due interest on its $5 million note payable, the Company issued 56,290 shares of its common stock to the lender. Concurrently, the Company entered into a put agreement with Florida Mezzanine Fund during 2016, which provided the lender the right to require the Company to repurchase those shares at a price of $0.62 cents per share. This put right originally expired in January 2017 and was subsequently extended to September 30, 2017. The shares subject to the repurchase were reflected as a redeemable temporary equity on the accompanying consolidated balance sheet as of December 31, 2016. In May 2017, Florida Mezzanine fund’s put right terminated in connection with the Company’s repayment of its principal and the shares were reclassified as permanent equity in the accompanying consolidated balance sheet as of September 30, 2017.

 

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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, 400,000 shares have been approved for grant.

 

As of September 30, 2017, the Company had issued 32,534 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, 2017 or December 31, 2016. The Company issued 15,000 restricted stock units to an employee during 2016. Approximately 367,466 shares remained available for grant in the future.

 

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, 2017   922,203   $49.80    1.7 
Granted   1,200,000   $3.50    9.6 
Exercised   -    -    - 
Expired   (259,445)   51.01    - 
Outstanding September 30, 2017   1,862,758   $19.79    2.3 
                
Exercisable September 30, 2017   1,862,758   $19.79    2.3 

 

Exercise Price  Outstanding Number of Warrants   Weighted Average Remaining Life in Years   Exercisable Number of Warrants 
> $40.00   484,518    1.22    484,518 
$30.00-$39.99   49,990    1.89    49,990 
$20.00-$29.99   77,950    2.32    77,950 
$10.00-$19.99   50,300    3.53    50,300 
$0.00-$9.99   1,200,000    9.59    1,200,000 
    1,862,758    2.31    1,862,758 

 

11. RELATED PARTY TRANSACTIONS

 

Due to related parties

 

The Company has received non-interest bearing, short-term advances from Chanticleer Investors, LCC, a related party, in the amount of $194,350 as of September 30, 2017 and December 31, 2016. The amount owed to Chanticleer Investors LLC is related to cash distributions received from Chanticleer Investors LLC’s interest Hooters of America which is payable to the Company’s co-investors in that investment.

 

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12. 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 presented. The Company does not aggregate or review non-current assets at the segment level.

 

   Three Months Ended   Nine Months Ended 
   September 30, 2017   September 30, 2016   September 30, 2017   September 30, 2016 
Revenue:                
Hooters Full Service  $3,619,510   $3,682,340   $10,147,738   $10,194,512 
Better Burgers Fast Casual   5,850,061    5,741,783    17,176,891    17,191,749 
Just Fresh Fast Casual   1,230,795    1,527,516    3,951,069    4,379,148 
Corporate and Other   24,999    25,000    74,980    75,000 
   $10,725,365   $10,976,639   $31,350,678   $31,840,409 

 

Operating Income (Loss):                    
Hooters Full Service  $(485,844)  $37,728   $(1,075,460)  $81,473 
Better Burgers Fast Casual   (399,256)   (151,958)   (457,878)   (212,472)
Just Fresh Fast Casual   (28,301)   49,942    (74,185)   22,487 
Corporate and Other   (485,041)   (453,243)   (1,861,764)   (1,698,169)
   $(1,398,442)  $(517,531)  $(3,469,287)  $(1,806,681)

 

Depreciation and Amortization                    
Hooters Full Service  $128,858   $143,691   $407,795   $405,617 
Better Burgers Fast Casual   387,621    362,674    1,143,584    1,092,898 
Just Fresh Fast Casual   55,476    83,117    214,928    237,487 
Corporate and Other   843    951    2,530    2,813 
   $572,798   $590,433   $1,768,837   $1,738,815 

 

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The following are revenues and operating income (loss) from continuing operations and non-current assets by geographic region as of and for the periods presented.

 

   Three Months Ended   Nine Months Ended 
   September 30, 2017   September 30, 2016   September 30, 2017   September 30, 2016 
Revenue:                
United States  $8,353,055   $8,570,452   $24,863,979   $25,475,352 
South Africa   1,502,349    1,495,757    4,369,122    4,017,330 
Europe   869,961    910,430    2,117,577    2,347,727 
   $10,725,365   $10,976,639   $31,350,678   $31,840,409 
                     
Operating Income (Loss):                    
United States  $(1,401,618)  $(550,833)  $(2,832,502)  $(1,822,814)
South Africa   (50,060)   (35,331)   (769,536)   (152,960)
Europe   53,236    68,633    132,751    169,093 
   $(1,398,442)  $(517,531)  $(3,469,287)  $(1,806,681)

 

Non-current Assets:    September 30, 2017     December 31, 2016  
United States   $25,491,405   $26,812,062 
South Africa    1,200,622    2,519,135 
Europe    2,527,931    2,361,246 
    $29,219,958   $31,692,443 

 

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 appealed this decision and in December 2016, the Court dismissed the Labyrinth case with costs payable to the Company, and allowed the Rolalor case to proceed to liquidation. The Company did not object to the proposed liquidation of Rolalor as the entity has no assets. Mrs. Shaw has since applied to the High Court for Rolalor to be re registered to seek to set aside the transfer by Rolalor [Pty] Limited, which is now in final liquidation, of its assets to Tundraspex [Pty] Limited. This request to re-register Rolalor is being opposed by Tundraspex [Pty] Limited. No amounts have been accrued as of September 30, 2017 or December 31, 2016 in the accompanying condensed consolidated balance sheets.

 

On January 28, 2016, our Just Fresh subsidiary was notified that it had been served with a copyright infringement complaint, Kevin Chelko Photography, Inc. f. 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. On January 19, 2017, the case was dismissed with no damages being awarded and no amounts have been reflected in the accompanying condensed consolidated balance sheets as of September 30, 2017 or December 31, 2016.

 

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The Company is 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.

 

16. SUBSEQUENT EVENTS

 

Management has evaluated all events and transactions that occurred from July 1, 2017 through the date these unaudited condensed consolidated financial statements were issued for subsequent events requiring recognition or disclosure in the condensed consolidated financial statements.

 

On October 12, 2017, the Company entered into a Securities Purchase Agreement with institutional and accredited investors in a registered direct offering for the sale of 499,857 shares of common stock (the “Shares”) at a purchase price of $2.00 per share, for a total gross purchase price of $999,714. The Securities Purchase Agreement contains customary representations, warranties and covenants. The company also agreed to issue unregistered 5 ½ year warrants to purchase up to 499,857 shares of common stock (“Warrants”) to the investors in a concurrent private placement at an exercise price of $3.50 per share. The company has agreed to register the resale of the common shares underlying the Warrants and the registration was declared effective in October, 2017. The Warrants are exercisable for cash in full commencing six months after the issuance date.

 

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 Annual 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:

 

  The quality of Company and franchise store operations and changes in sales volume;
     
  Our ability to operate our business and generate profits. We have not been profitable to date;
     
  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;

 

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  Our rights to operate and franchise the Hooters-branded restaurants are dependent on the Hooters’ franchise agreements;
     
  Our ability, and our dependence on the ability of our franchisees, to execute on our and their business plans effectively;
     
  Actions of our franchise partners or operating partners which could harm our business;
     
  Failure to protect our intellectual property rights, including the brand image of our restaurants;
     
  Changes in customer preferences and perceptions;
     
  Increases in costs, including food, rent, 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;
     
  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 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 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, 2016, 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. As of September 30, 2017, our system-wide store count totaled 57 locations, consisting of 44 company-owned locations and 13 franchisee-operated locations as summarized below:

 

   As of September 30, 2017 
   Better Burgers   Just Fresh   Hooters   Corp   Total   % of Total 
Store Count                              
Company   29    7    8    -    44    77.2%
Franchise   13    -    -    -    13    22.8%
Total   42    7    8    -    57    100.0%

 

    As of September 30, 2016 
    Better Burgers    Just Fresh    Hooters    Corp     Total    % of Total 
Store Count                              
Company   27    8    9    -    44    78.6%
Franchise   12    -    -    -    12    21.4%
Total   39    8    9    -    56    100.0%

 

We own, operate and franchise a system-wide total of 42 fast casual restaurants specializing in the “Better Burger” category of which 29 are company-owned and 13 are operated by franchisees under franchise agreements. American Burger Company (“ABC”) is a fast-casual dining chain consisting of 9 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 9 company-owned locations in the United States and 13 franchisee-operated locations in the United States and the Middle East. Little Big Burger (“LBB”) consists of 11 company-owned locations in Oregon.

 

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We also own and operate Just Fresh, our healthier eating fast casual concept with 7 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 8 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.

 

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2016

 

Our results of operations are summarized below:

 

   Three Months Ended     
   September 30, 2017   September 30, 2016     
   Amount   % of Revenue*   Amount   % of Revenue*   % Change 
                     
Restaurant sales, net  $10,479,275        $10,737,961         -2.4%
Gaming income, net   115,268         118,136         -2.4%
Management fees   24,999         25,000         0.0%
Franchise income   105,823         95,542         10.8%
Total revenue   10,725,365         10,976,639         -2.3%
                          
Expenses:                         
Restaurant cost of sales   3,605,212    34.4%   3,553,684    33.1%   1.4%
Restaurant operating expenses   6,119,561    58.4%   5,888,509    54.8%   3.9%
Restaurant pre-opening and closing expenses   34,349    0.3%   110,432    1.0%   -68.9%
General and administrative   952,959    8.9%   1,351,112    12.3%   -29.5%
Asset impairment charge   838,928    7.8%   -    0.0%   - 
Depreciation and amortization   572,798    5.3%   590,433    5.4%   -3.0%
Total expenses   12,123,807    113.0%   11,494,170    104.7%   5.5%
Operating loss from continuing operations  $(1,398,442)       $(517,531)          

 

*  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.

 

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Revenue

 

Total revenue from continuing operations decreased 2.3% to $10.7 million for the three months ended September 30, 2017 from $11.0 million for the three months ended September 30, 2016.

 

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

 

   Three Months Ended September 30, 2017 
Revenue  Better Burgers   Just Fresh   Hooters   Corp   Total   % of Total 
Restaurant sales, net  $5,744,240   $1,230,795   $3,504,240   $-   $10,479,275    97.7%
Gaming income, net   -    -    115,268    -    115,268    1.1%
Management fees   -    -    -    24,999    24,999    0.2%
Franchise income   105,823    -    -    -    105,823    1.0%
Total revenue  $5,850,063   $1,230,795   $3,619,508   $24,999   $10,725,365    100.0%

 

   Three Months Ended September 30, 2016 
Revenue   Better Burgers    Just Fresh    Hooters    Corp     Total    % of Total 
Restaurant sales, net  $5,646,241   $1,527,516   $3,564,204   $-   $10,737,961    97.8%
Gaming income, net   -    -    118,136    -    118,136    1.1%
Management fees   -    -    -    25,000    25,000    0.2%
Franchise income   95,542    -    -    -    95,542    0.9%
Total revenue  $5,741,783   $1,527,516   $3,682,340   $25,000   $10,976,639    100.0%

 

   % Change in Revenues Compared to Prior Year
Revenue   Better Burgers    Just Fresh    Hooters    Corp     Total 
Restaurant sales, net   1.7%   -19.4%   -1.7%   -    -2.4%
Gaming income, net   -    -    -2.4%   -    -2.4%
Management fees   -    -    -    0.0%   0.0%
Franchise income   10.8%   -    -    -    10.8%
Total revenue   1.9%   -19.4%   -1.7%   0.0%   -2.3%

 

Restaurant revenues from continuing operations decreased 2.4% to $10.5 million for the three months ended September 30, 2017 from $10.7 million for the three months ended September 30, 2016.

 

  Restaurant revenue from the Company’s Better Burger Group increased 1.7% to $5.7 million for the three months ended September 30, 2017 from $5.6 million for the three months ended September 30, 2016. The increase was attributable the opening of one new Little Big Burger store during the first quarter of 2017, two new Little Big Burger stores and one new BGR store during the second quarter of 2017. The increases attributable to new store openings were partially offset by lower revenue from stores open during both periods and by the closure of taxes stores in September 2017.
     
  Restaurant revenue from the Company’s Just Fresh Group decreased 19.4% to $1.2 million for the three months ended September 30, 2017 from $1.5 million for the three months ended September 30, 2016. Revenues decreased at all Just Fresh locations due to increased local competition and were also negatively impacted by a reduction in operating days at the East Boulevard location, which was reduced from seven days per week to five, and the decision to not renew the Charlotte Knights location.
     
  Restaurant revenue from the Company’s Hooter’s restaurants decreased 1.7% to $3.5 million for the three months ended September 30, 2017 from $3.6 million for the three months ended September 30, 2016. Revenue increased by 2.5% in South Africa in US Dollars and 4.5% in local currency. In the United Kingdom, revenue decreased 4.4% in US dollars, and increased 5.7% in local currency. Revenue from Hooters in United States declined 2.3%.

 

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Gaming revenue decreased 2.4%, primarily due to the opening of a new casino property in the area.

 

Franchise revenue consisted of recurring royalties in both periods and increased 10.8% 4.5% to $105 thousand for the three months ended September 30, 2017 from $95 thousand for the three months ended September 30, 2016.

 

Management fee revenue was unchanged at $25 thousand in each period. The Company earns $100 thousand annually for its CEO serving on the Board of Directors of Hooters of America.

 

Cost of Restaurant sales

 

Cost of restaurant sales increased 1.5% to $3.6 million for the three months ended September 30, 2017 from $3.6 million for the three months ended September 30, 2016.

 

   Three Months Ended     
   September 30, 2017   September 30, 2016     
Cost of Restaurant Sales  Amount   % of Restaurant Net Sales   Amount   % of Restaurant Net Sales   % Change 
Better Burgers Fast Casual  $1,954,779    34.0%  $1,816,289    32.2%   7.6%
Just Fresh Fast Casual   421,041    34.2%   530,272    34.7%   -20.6%
Hooters Full Service   1,229,392    35.1%   1,207,123    33.9%   1.8%
   $3,605,212    34.4%  $3,553,684    33.1%   1.4%

 

Cost of restaurant sales increased to 34.4% as a percent of net restaurant revenues for the three months ended September 30, 2017 from 33.1% for the three months ended September 30, 2016. The increase in cost of restaurant sales was partially due to increased revenues associated with new stores opened in the past twelve months combined with increases in the cost of beef, chicken wings and other commodities. In addition, our Hooters business in the United States was required to change food distributors in the current period, which negatively impacted food costs.

 

Excluding the impact of the change in distributors at the US Hooters locations, costs of restaurant sales would have been approximately 33.8% instead of 34.4%. Management is working with the new distributor to reduce costs and increase menu pricing to offset the impact in future periods and also expects to see a reduction in costs as beef prices are expected to decline over the remainder of the year.

 

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Restaurant operating expenses

 

Restaurant operating expenses increased 3.9% to $6.1 million for the three months ended September 30, 2017 from $5.9 million for the three months ended September 30, 2016.

 

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

 

   Three Months Ended 
   September 30, 2017   September 30, 2016     
Operating Expenses  Amount   % of Restaurant Net Sales   Amount   % of Restaurant Net Sales   % Change 
Better Burgers Fast Casual  $3,340,846    58.2%  $3,028,408    53.6%   10.3%
Just Fresh Fast Casual   692,280    56.2%   766,496    50.2%   -9.7%
Hooters Full Service   2,086,435    59.5%   2,093,605    58.7%   -0.3%
   $6,119,561    58.4%  $5,888,509    54.8%   3.9%

 

As a percent of restaurant revenues, operating expenses increased to 58.4% for the three months ended September 30, 2017 from 54.8% for the three months ended September 30, 2016. Operating expenses increased due to the opening of new stores combined with the impact increasing wage rates in the Portland area. In addition, in those locations where revenues declined as compared to the prior year period, fixed operating expenses, including rent and utilities, increased as a percent of revenue.

 

Restaurant pre-opening and closing expenses

 

Restaurant pre-opening and closing expenses decreased to $35 thousand for the three months ended September 30, 2017 from $110 for the three months ended September 30, 2016. The preopening costs in the current period were primarily related to pre-opening payroll and other expenses for our Little Big Burger in Charlotte and BGR in Northern Virginia which are both scheduled to open in the fourth quarter.

 

General and Administrative Expense (“G&A”)

 

G&A decreased 29.5% to $1.0 million for the three months ended September 30, 2017 from $1.4 million for the three months ended September 30, 2016. Significant components of G&A are summarized as follows:

 

   Three Months Ended 
   September 30, 2017   September 30, 2016 
Audit, legal and other professional services  $153,058   $188,115 
Salary and benefits   532,491    848,901 
Travel and entertainment   59,411    100,998 
Shareholder services and fees   22,639    46,114 
Advertising, Insurance and other   185,360    166,984 
Total G&A Expenses  $952,959   $1,351,112 

 

As a percentage of total revenue, G&A decreased to 8.9% for the three months ended September 30, 2017 from 12.3% for the three months ended September 30, 2016.

 

The reduction in G&A is primarily due to reductions in regional management and corporate office staffing as the Company has continued to streamline and integrate its back office functions and regional management structure over the past year. The Company implemented a new enterprise-wide accounting platform and point of sale system across the company’s US based locations further streamlining and simplifying operational process during the current year, which also contributed to the overhead expense reductions.

 

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For the current period, approximately 53% of the Company’s consolidated G&A is attributable to operating the Corporate office primarily comprised of public company costs (officer salaries, audit, legal, insurance and related expenses) and store support services (accounting, human resources, IT and related expenses).

 

Approximately 47% of total consolidated G&A is attributable to regional management, franchising, marketing, advertising, and other administrative activities within the Better Burger group, Hooters, and Just Fresh.

 

Asset impairment charges

 

Asset impairment charges totaled $0.9 million for the three months ended September 30, 2017 as compared with $0 during the three months ended September 30, 2016. During the third quarter of 2017, the Company recognized impairment charges related to the closure of two BGR store locations in the Washington DC area, as well as impairment charges related to two stores currently being offered for sale. The impairment charges primarily arise from writing down leasehold improvements and property and equipment to estimated net realizable value based on management’s intent to close or sell the related store locations.

 

Depreciation and amortization

 

Depreciation and amortization expense was essentially unchanged at $0.6 million for the three months ended September 30, 2017 and 2016.

 

OTHER INCOME (EXPENSE)

 

Other income (expense) consisted of the following:

 

   Three Months Ended 
Other Income (Expense)  September 30, 2017   September 30, 2016   % Change 
Interest expense  $(309,538)  $(453,150)   -31.7%
Change in fair value of derivative liabilities   -    102,507    -100.0%
Total other expense   37,839    32,357    16.9%
Total other expense  $(271,699)  $(318,286)   -14.6%

 

Other expense, net decreased 14.6% to $272 thousand for the three months ended September 30, 2017 from $318 thousand for the three months ended September 30, 2016. The change in other expenses, net was primarily related to lower interest expenses were partially offset by the $0.1 million noncash income from the change in fair value of non-cash derivative liabilities in the prior year.

 

Interest expense decreased 31.7% to $0.3 million for the three months ended September 30, 2017 from $0.5 million for the three months ended September 30, 2016. The reduction in interest is primarily due to lower non-cash amortization of debt discounts and reduction in convertible debt outstanding during the current period.

 

The Company recognized changes in the fair value of derivative liabilities totaling $0.1 million for the three months ended September 30, 2016. 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. The Company did not have any changes in fair value derivative liabilities in the current period.

 

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RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2016

 

Our results of operations are summarized below:

 

   Nine Months Ended     
   September 30, 2017   September 30, 2016     
   Amount   % of Revenue*   Amount   % of Revenue*   % Change 
                     
Restaurant sales, net  $30,657,215        $31,068,281         -1.3%
Gaming income, net   328,855         315,647         4.2%
Management fee income   74,982         75,000         0.0%
Franchise income   289,626         381,481         -24.1%
Total revenue   31,350,678         31,840,409         -1.5%
                          
Expenses:                         
Restaurant cost of sales   10,376,160    33.8%   10,248,770    33.0%   1.2%
Restaurant operating expenses   17,649,532    57.6%   17,140,692    55.2%   3.0%
Restaurant pre-opening and closing expenses   139,545    0.5%   117,987    0.4%   18.3%
General and administrative   3,413,001    10.9%   4,400,826    13.8%   -22.4%
Asset impairment charge   1,472,890    4.7%   -    0.0%   - 
Depreciation and amortization   1,768,837    5.6%   1,738,815    5.5%   1.7%
Total expenses   34,819,965    111.1%   33,647,090    105.7%   3.5%
Operating loss from continuing operations  $(3,469,287)       $(1,806,681)        92.0%

 

* 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 decreased 1.5% to $31.4 million for the nine months ended September 30, 2017 from $31.8 million for the nine months ended September 30, 2016.

 

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

 

   Nine Months Ended September 30, 2017
Revenue  Better Burgers   Just Fresh   Hooters   Corp   Total  

% of

Total

 
Restaurant sales, net  $16,887,265   $3,951,069   $9,818,881   $-   $30,657,215    97.8%
Gaming income, net   -    -    328,855    -    328,855    1.0%
Management fees   -    -    -    74,982    74,982    0.3%
Franchise income   289,626    -    -    -    289,626    0.9%
Total revenue  $17,176,891   $3,951,069   $10,147,736   $74,982   $31,350,678    100.0%

 

   Nine Months Ended September 30, 2016
Revenue  Better Burgers   Just Fresh   Hooters   Corp   Total  

% of

Total

 
Restaurant sales, net  $16,810,268   $4,379,148   $9,878,865   $-   $31,068,281    97.6%
Gaming income, net   -    -    315,647    -    315,647    1.0%
Management fees   -    -    -    75,000    75,000    0.2%
Franchise income   381,481    -    -    -    381,481    1.2%
Total revenue  $17,191,749   $4,379,148   $10,194,512   $75,000   $31,840,409    100.0%

 

   % Change in Revenues Compared to Prior Year
Revenue 

Better

Burgers

   Just Fresh   Hooters   Corp   Total 
Restaurant sales, net   0.5%   -9.8%   -0.6%   -    -1.3%
Gaming income, net   -    -    4.2%   -    4.2%
Management fees   -    -    -    0.0%   0.0%
Franchise income   -24.1%   -    -    -    -24.1%
Total revenue   -0.1%   -9.8%   -0.5%   0.0%   -1.5%

 

Restaurant revenues from continuing operations decreased 1.3% to $30.7 million for the nine months ended September 30, 2017 from $31.1 million for the nine months ended September 30, 2016.

 

  Restaurant revenue from the Company’s Better Burger Group increased 0.5% to $16.9 million for the nine months ended September 30, 2017 from $16.8 million for the nine months ended September 30, 2016. The increases attributable to new store openings were partially offset by an 18.8% decrease in revenue from stores open during both periods and the closure of two stores in September 2017. Year to date revenues were also impacted by the loss of approximately 4 operating days due to unusual weather in the Pacific Northwest, combined with slower than normal traffic in January and February in the Charlotte and Washington DC markets. Those decreases were partially offset by approximately $1.4 million increase in restaurant revenue from three new Little Big Burger stores and one new BGR stores opened during the first half of 2017.
     
  Restaurant revenue from the Company’s Just Fresh Group decreased 9.8% to $4.0 million for the nine months ended September 30, 2017 from $4.4 million for the nine months ended September 30, 2016. Revenues decreased at all Just Fresh locations due to increased local competition and were also negatively impacted by a reduction in operating days at the East Boulevard location, which was reduced from seven days per week to five, and the decision to not renew the Charlotte Knights location.

 

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  Restaurant revenue from the Company’s Hooter’s restaurants decreased 0.6% to $9.8 million for both the nine months ended September 30, 2017 from $9.9 million for the nine months ended September 30, 2016. Revenue increased by 10.8% in South Africa primarily due to favorable foreign currency rates as compared with the prior year. In the United Kingdom, revenue declined 9.8%, due to unfavorable foreign currency exchange rates as compared to prior year. Revenue from Hooters in the United States declined 5.2%, primarily as a result of unfavorable weather in the Pacific Northwest during the current year with the loss of approximately 4 operating days and slower than normal traffic during January and February combined with slightly slower traffic in the second half of the year.

 

Gaming revenue increased 4.2% due to increased play as a result of recent upgrades to the VLT terminals at our Hooters locations in the Pacific Northwest over the past year. The favorable effects of the upgrades were partially offset by unfavorable weather early in the year and the opening of a new casino property in the area.

 

Franchise revenue decreased 24.1% to $289 thousand for the nine months ended September 30, 2017 from $381 thousand for the Nine Months ended September 30, 2016. 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, combined with a decline in international royalties.

 

Management fee revenue was unchanged at $75 thousand in each period. The Company earns $100 thousand annually for its CEO serving on the Board of Directors of Hooters of America.

 

Cost of Restaurant sales

 

Cost of restaurant sales increased 1.2% to $10.4 million for the nine months ended September 30, 2017 from $10.2 million for the nine months ended September 30, 2016.

 

   Nine Months Ended     
   September 30, 2017   September 30, 2016     
Cost of Restaurant Sales  Amount  

% of
Restaurant

Net Sales

   Amount  

% of

Restaurant Net

Sales

   % Change 
Better Burgers Fast Casual  $5,612,542    33.2%  $5,418,665    32.2%   3.6%
Just Fresh Fast Casual   1,384,379    35.0%   1,527,196    34.9%   -9.4%
Hooters Full Service   3,379,239    34.4%   3,302,909    33.4%   2.3%
   $10,376,160    33.8%  $10,248,770    33.0%   1.2%

 

Cost of restaurant sales increased to 33.8% of net restaurant revenues for the nine months ended September 30, 2017 compared to 33.0% for the nine months ended September 30, 2016. The increase in cost of restaurant sales was partially due to increased revenues associated with new stores opened in the past twelve months combined with increases in the cost of beef, chicken wings and other commodities. In addition, our Hooters business in the United States was required to change food distributors in the current period, which negatively impacted food costs.

 

Excluding the impact of the change in distributors at the US Hooters locations, costs of restaurant sales would have been approximately 33.6% instead of 33.8%. Management is working with the new distributor to reduce costs and increase menu pricing to offset the price increase in future periods and also expects to see a reduction in costs as beef prices are expected to decline over the remainder of the year.

 

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Restaurant operating expenses

 

Restaurant operating expenses increased 3.0% to $17.6 million for the nine months ended September 30, 2017 from $17.1 million for the nine months ended September 30, 2016.

 

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

 

   Nine Months Ended 
   September 30, 2017   September 30, 2016     
Operating Expenses  Amount  

% of

Restaurant

Net Sales

   Amount  

% of

Restaurant

Net Sales

  

%

Change

 
Better Burgers Fast Casual  $9,614,202    56.9%  $9,118,556    54.2%   5.4%
Just Fresh Fast Casual   2,140,407    54.2%   2,238,596    51.1%   -4.4%
Hooters Full Service   5,894,923    60.0%   5,783,540    58.5%   1.9%
   $17,649,532    57.6%  $17,140,692    55.2%   3.0%

 

As a percent of restaurant revenues, operating expenses increased to 57.6% for the nine months ended September 30, 2017 from 55.2% for the nine months ended September 30, 2016. Operating expenses increased due to the opening of new stores combined with the impact increasing wage rates in the Portland area. In addition, in those locations where revenues declined as compared to the prior year period, fixed operating expenses, including rent and utilities, increased as a percent of revenue.

 

Restaurant pre-opening and closing expenses

 

Restaurant pre-opening and closing expenses increased to $140 thousand for the nine months ended September 30, 2017 from $118 thousand for the nine months ended September 30, 2016. The preopening costs in the current period were primarily related to pre-opening payroll and other expenses for our Little Big Burger openings in Portland and our BGR opening in northern Virginia during the current quarter.

 

General and Administrative Expense (“G&A”)

 

G&A decreased 22.4% to $3.4 million for the nine months ended September 30, 2017 from $4.4 million for the nine months ended September 30, 2016. Significant components of G&A are summarized as follows:

 

   Nine Months Ended 
   September 30, 2017   September 30, 2016 
Audit, legal and other professional services  $883,786   $984,339 
Salary and benefits   1,620,980    2,162,323 
Travel and entertainment   141,310    247,048 
Shareholder services and fees   109,612    63,655 
Advertising, Insurance and other   657,313    943,461 
Total G&A Expenses  $3,413,001   $4,400,826 

 

As a percentage of total revenue, G&A decreased to 10.9% for the nine months ended September 30, 2017 from 13.8% for the nine months ended September 30, 2016.

 

The reduction in G&A is primarily due to reductions in regional management and corporate office staffing as the Company has continued to streamline and integrate its back office functions and regional management structure over the past year. The Company implemented a new enterprise-wide accounting platform and point of sale system across the company’s US based locations further streamlining and simplifying operational process during the current year, which also contributed to the overhead expense reductions.

 

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For the current period, approximately 57% of the Company’s consolidated G&A is attributable to operating the Corporate office primarily comprised of public company costs (officer salaries, audit, legal, insurance and related expenses) and store support services (accounting, human resources, IT and related expenses).

 

Approximately 43% of total consolidated G&A is attributable to regional management, franchising, marketing, advertising, and other administrative activities within the Better Burger group, Hooters, and Just Fresh.

 

Asset impairment charges

 

Asset impairment charges totaled $1.5 million for the nine months ended September 30, 2017 as compared with $0 during the nine months ended September 30, 2016. During the 2017, the Company recognized impairment charges related to the closure of two BGR store locations in the Washington DC area, as well as impairment charges related to two stores currently being offered for sale. The impairment charges primarily arise from writing down leasehold improvements and property and equipment to estimated net realizable value based on management’s intent to close or sell the related store locations.

 

Depreciation and amortization

 

Depreciation and amortization expense was essentially unchanged at $1.8 and $1.7 million for the nine months ended September 30, 2017 and 2016, respectively.

 

OTHER INCOME (EXPENSE)

 

Other income (expense) consisted of the following:

 

   Nine Months Ended 
Other Income (Expense)  September 30, 2017   September 30, 2016   % Change 
Interest expense  $(1,218,379)  $(1,704,556)   -28.5%
Change in fair value of derivative liabilities   -    1,231,608    -100.0%
Loss on extinguishment of debt   (95,310)   -    - 
Other income   50,050    12,388    304.0%
Total other expense  $(1,263,639)  $(460,560)   174.4%

 

Other expense, net increased to a net expense of $1.3 million for the nine months ended September 30, 2017 from $0.5 million. The change in other expenses, net was primarily as a result of lower interest expense which was partially offset by the $1.1 million noncash income from change in fair value of non-cash derivative liabilities in the prior year and a net loss on refinancing of the Florida Mezzanine debt and several convertible debt obligations during 2017.

 

Interest expense decreased 28.5% to $1.2 million for the nine months ended September 30, 2017 from $1.7 million for the nine months ended September 30, 2016. The reduction in interest is primarily due to lower non-cash amortization of debt discounts and the reduction in convertible debt outstanding during the current period.

 

The Company recognized changes in the fair value of derivative liabilities totaling $1.2 million for the nine months ended September 30, 2016. 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. The Company did not have any changes in fair value derivative liabilities in the current period.

 

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In connection with the refinancing of the $5 million Florida Mezzanine Fund debt in May 2017, the Company recognized a gain of $268 thousand from Florida Mezz waiving the unpaid interest and penalties previously owed to them. In connection with the modification of convertible note obligations in March 2017, the Company recognized net loss on extinguishment of $363 thousand during the first quarter of 2017, resulting in a net loss of $95 thousand for the nine months ended September 30, 2017.

 

LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN

 

As of September 30, 2017, our unrestricted cash balance was $0.3 million and, our working capital was negative $4.1 million. We incurred losses from continuing operations of $4.9 million and cash provided by operating activities was $12 thousand for the nine months ended September 30, 2017. Our debt, preferred stock, accounts payable and accrual obligations total approximately $15.3 million. 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:

 

  our ability to access the capital and debt markets to satisfy current obligations and operate the business;
     
  our ability to continue to extend, refinance or recapitalize our debt obligations;
     
  the level of investment in new restaurant businesses and entering new markets;
     
  our ability to manage our operating expenses and generate positive cash flow as we grow:
     
  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 deficits and expenditures with proceeds from the issuances of our common stock and other financing arrangements, including common stock, convertible debt, lines of credit, notes payable, capital leases, and other forms of external financing.

 

Our operating plans for the next twelve months contemplate moderate organic growth, opening 2-3 new company stores per quarter, the majority of which will utilize partnership funds from outside investors. We also are evaluating asset sales and divestitures of our non-burger brands as well as the closing of underperforming locations within our burger business. As we execute our plans over the next twelve months, 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 have approximately $6.4 million in current liabilities payable within the next twelve months and approximately $15 million in obligations that will have to be paid or refinanced within the next twenty-four months. In the event that additional working capital is not available, we may then have to scale back or freeze our growth plans, sell assets on unfavorable terms, reduce expenses, and/or curtail future acquisition plans and current operations to manage our liquidity and capital resources. We also have financial covenants and debt service obligations and may incur financial penalties or other negative actions from our lenders that could significantly impact the business if we are not able to meet those obligations.

 

During March 2017, we extended the payment terms of our convertible debt obligations. During May 2017, we completed a $6 million private placement of 8% debentures and warrants, the proceeds of which were used to repay, settle and release the $5 million note payable and related obligations to Florida Mezzanine Fund and to provide additional working capital for new store openings and operations. During October 2017, we entered into a $1 million private placement of common stock and warrants, the proceeds of which were used to fund working capital and current payment obligations.

 

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Management is actively considering the possible benefits of selling certain of its operating assets to reduce debt and provide additional working capital to fund future growth of its domestic burger business, as well as possibly closing certain underperforming store locations to improve operating cash flow. Our evaluations are at a preliminary stage, no decisions have been made, and we can provide no assurance that the Company will proceed with asset sales, or that such asset sales could be completed on favorable terms, or at all. In the event that management does elect to proceed with asset sales in the future rather than continue to hold and operate all its assets long term, management’s assessment of the fair value, and ultimate recoverability, of goodwill, intangibles, and other long-lived assets could be impacted and the Company could incur significant noncash charges and cash exit costs in future periods.

 

There can be no assurance that we will be successful in implementing our plans, obtaining additional debt or equity financing at reasonable terms, if at all, or selling any of our operating assets. Accordingly, this raises substantial doubt about our ability to continue on a going concern for a period of one year from the issuance of these condensed consolidated financial statements.

 

In addition, our business is subject to additional risks and uncertainties, including, but not limited to, those described Part II, Item 1A of this Quarterly Report and in Item 1A of Part I of our Annual Report filed on Form 10-K for the period ended December 31, 2016. “Risk Factors”.

 

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 2016 Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission on March 31, 2017, 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.

 

Item 3: QUANTITATIVE and QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

Item 4: Controls and Procedures

 

Evaluation of disclosure controls and procedures

 

Under the PCAOB standards, a control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit the attention by those responsible for oversight of the company’s financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

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 terms are 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 September 30, 2017. Our management has determined that, as of September 30, 2017 the Company’s disclosure controls and procedures were not effective.

 

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Management’s report on internal control over financial reporting

 

Management Responsibility for Internal Control over Financial Reporting. Management is responsible for establishing and maintaining effective internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with the United States’ generally accepted accounting principles (US GAAP), including those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with US GAAP and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

Management’s Evaluation of Internal Control over Financial Reporting. Management evaluated our internal control over financial reporting as of September 30, 2017. 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 September 30, 2017, 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 deficiencies in its internal control over financial reporting during the prior year:

 

  As the Company completed multiple acquisitions in a short period of time over the past two years, it has operated multiple accounting systems using disparate charts of accounts and inconsistent financial close procedures and timetables. The lack of consistency makes it more difficult to ensure that the consolidated financial records are completed timely and on a consistent basis each reporting period, which increases the risk of undetected errors.
     
  The Company’s financial close procedures are not formally documented across the organization to the degree necessary to ensure that financial statements are prepared consistently and accurately each reporting period.
     
  The Company’s information systems, as well as the organization and storage of critical financial records, were not deemed adequate to ensure the timely ability to recover from a disaster or prevent the accidental loss of critical financial records.
     
  The Company’s financial statements include complex transactions and financial instruments that are subject to extensive technical accounting standards that increase the risk of undetected errors and where the Company’s internal resources do not possess deep technical specialization.
     
  The Company performs extensive reconciliation and manual review procedures to ensure that the financial statements results are accurately presented; however, there is inconsistent and informal documentation of these review procedures.

 

Management determined that the deficiencies, evaluated in the aggregate, could potentially result in a material misstatement of the consolidated financial statements in a future annual or interim period that would not be prevented or detected. Therefore, the deficiencies constitute material weaknesses in internal control. Based on that evaluation, management determined that our internal control over financial reporting was not effective as of September 30, 2017.

 

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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 control deficiencies noted above.

 

While our evaluation of the appropriate remediation plans is still ongoing, efforts to date have included recruiting additional qualified personnel with experience in financial reporting and internal control.

 

During 2016, the Company took steps to standardize its chart of accounts and accounting procedures. During the first half of 2017, the Company implemented a new enterprise wide accounting system and point of sale systems at the majority of its US based operations to further standardize accounting procedures and reporting and address the information system weaknesses identified.

 

While the changes implemented have significantly improved the Company’s internal controls, simplified its reporting processes and reduced the risk of undetected errors, management determined that additional testing of the new internal controls and formalization of documentation would be required before updating managements’ conclusions regarding the effectiveness of its internal controls over financial reporting.

 

Changes in Internal Control over Financial Reporting — The Company has implemented changes to its accounting systems internal 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. During the three months ended September 30, 2017, the Company made changes to its accounting systems and its internal control over financial reporting to improve its internal control over financial reporting in future periods.

 

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 three month period ending September 30, 2017 covered by this Quarterly Report, there have been no reportable legal proceedings or material developments to previously reported legal proceedings.

 

ITEM 1A: RISK FACTORS

 

In the event that management proceeds with asset sales and/or store closures rather than continuing to hold and operate all its assets long term, management’s assessment of the fair value, and ultimate recoverability, of goodwill, intangibles, and other long-lived assets would be impacted and the Company could incur significant noncash charges and cash exit costs in future periods.

 

We have approximately $6.4 million in current liabilities payable within the next twelve months from date of issuance of these financial statements and approximately $15 million in obligations payable within the next twenty-four months. In the event that additional working capital is not available, we may be forced to scale back or freeze our growth plans, sell assets on less than favorable terms, reduce expenses, and/or curtail future acquisition plans to manage our liquidity and capital resources. In the event that management elects to proceed with asset sales and/or store closures in the future rather than continue to hold and operate all its assets long term, management’s assessment of the fair value, and ultimate recoverability, of goodwill, intangibles, and other long-lived assets would be impacted and the Company could incur significant noncash charges and cash exit costs in future periods.

 

We have remedied defaults under our debt obligations. However, we may not be able to refinance, extend or repay our substantial indebtedness owed to our secured lenders, which would have a material adverse affect on our financial condition and ability to continue as a going concern.

 

We have approximately $6.4 million in current liabilities payable within the next twelve months from date of issuance of these financial statements and approximately $15 million in obligations payable within the next twenty-four months.. If we are unable to repay these obligations at maturity and we are otherwise unable to extend the maturity dates or refinance these obligations, we would be in default. We cannot provide any assurances that we will be able to raise the necessary amount of capital to repay these obligations or that we will be able to extend the maturity dates or otherwise refinance these obligations. Upon a default, our secured lenders would have the right to exercise their rights and remedies to collect, which would include foreclosing on our assets. Accordingly, a default would have a material adverse effect on our business and we would likely be forced to seek bankruptcy protection.

 

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Proceeds from asset sales are subject to a right of mandatory redemption of our 8% non-convertible secured debenture holders, in principal amount of $6,000,000, thereby limiting our flexibility to allocate proceeds from asset sales to payment of other debt obligations or working capital.

 

Management is actively considering the possible benefits of selling certain of its operating assets to reduce debt and provide additional working capital to fund future growth of its domestic burger business, as well as possibly closing certain underperforming store locations to improve operating cash flow. Proceeds from asset sales are subject to a right of mandatory redemption of our 8% non-convertible secured debenture holders, in principal amount of $6,000,000, thereby limiting our flexibility to allocate proceeds from asset sales to payment of other debt obligations or working capital.

 

On June 12, 2017, we received notification from Nasdaq that we regained compliance with the minimum bid price rule and we are in compliance with other applicable requirements required for listing on The Nasdaq Capital Market. Accordingly, our securities will continue to be listed on The Nasdaq Capital Market.

 

There have been no other 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 31,2016 (“Risk Factors”). Readers should carefully consider these Risk Factors, which could materially affect our business, financial condition or future results. These Risk Factors 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

 

We did not issue or sell any other unregistered equity securities during the period covered by this report that were not previously reported on a Current Report on Form 8-K.

 

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4: MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5: OTHER INFORMATION

 

None.

 

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ITEM 6: EXHIBITS

 

Exhibit No.   Description
 4.1   Form of Warrant issued October 16, 2017 (Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K, as filed October 13, 2017)
     
10.1   Amendment to Securities Purchase Agreement by and between Chanticleer Holdings, Inc. and holders of 8% Non-convertible Secured Debentures executed August 7, 2017 (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, as filed August 9, 2017)
     
10.2   Form of Securities Purchase Agreement dated October 12, 2016 by and between the Company and accredited investors (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K, as filed October 13, 2017)
     
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

 

*XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

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

 

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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 13, 2017 By: /s/ Michael D. Pruitt
    Michael D. Pruitt
    Chief Executive Officer
    (Principal Executive Officer)
     
    /s/ Eric S. Lederer
    Eric S. Lederer
    Chief Financial Officer
    (Principal Accounting Officer)

 

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