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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: June 30, 2018

 

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 [  ] Smaller reporting company [X]

 

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 August 6, 2018 was 3,706,563 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 June 30, 2018 (Unaudited) and December 31, 2017 3
  Condensed Consolidated Statements of Operations (Unaudited) – For the Three and Six Months Ended June 30, 2018 and 2017 4
  Condensed Consolidated Statements of Comprehensive Loss (Unaudited) - For the Three and Six Months Ended June 30, 2018 and 2017 5
  Condensed Consolidated Statements of Cash Flows (Unaudited) – For the Six Months Ended June 30, 2018 and 2017 6
  Notes to Condensed Consolidated Financial Statements (Unaudited) 8
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
Item 3: Quantitative and Qualitative Disclosures about Market Risk 34
Item 4: Controls and Procedures 35
     
Part II Other Information 36
     
Item 1: Legal Proceedings 36
Item 1A: Risk Factors 36
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 36
Item 3: Defaults Upon Senior Securities 36
Item 4: Mine Safety Disclosures 36
Item 5: Other Information 37
Item 6: Exhibits 37
     
Signatures   38

 

  2

 

 

Part I: FINANCIAL INFORMATION

 

Item 1: FINANCIAL StatemenTS

 

Chanticleer Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

   (Unaudited)     
   June 30, 2018   December 31, 2017 
ASSETS        
Current assets:          
Cash  $1,485,060   $272,976 
Restricted cash   27,082    165,517 
Accounts and other receivables, net   641,602    475,988 
Inventories   345,902    460,756 
Prepaid expenses and other current assets   701,910    324,324 
Assets held for sale, net   2,090,000    100,000 
TOTAL CURRENT ASSETS   5,291,556    1,799,561 
Property and equipment, net   8,236,276    8,548,592 
Goodwill   10,126,609    12,647,806 
Intangible assets, net   5,600,243    5,896,732 
Investment, at cost   800,000    800,000 
Deposits and other assets   452,675    490,328 
TOTAL ASSETS  $30,507,359   $30,183,019 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable and accrued expenses  $6,503,248   $5,797,252 
Current maturities of long-term debt and notes payable net of unamortized discount and deferred financing costs of $586,695 and $1,173,190, respectively   6,157,534    5,741,911 
Current maturities of convertible notes payable   3,000,000    3,000,000 
Due to related parties   191,850    191,850 
TOTAL CURRENT LIABILITIES   15,852,632    14,731,013 
Convertible notes payable, net of unamortized debt premium of $0 and $12,256, respectively   -    212,256 
Redeemable preferred stock: no par value; authorized 5,000,000 shares; 62,876 shares issued and outstanding, net of unamortized discount of $191,306 and $208,697, respectively   657,520    640,129 
Deferred rent   2,037,289    2,156,378 
Deferred tax liabilities   206,365    779,359 
Deferred revenue   1,215,926    175,000 
TOTAL LIABILITIES   19,969,732    18,694,135 
Commitments and contingencies          
Stockholders’ equity:          
Common stock: $0.0001 par value; authorized 45,000,000 shares; issued and outstanding 3,699,270 and 3,045,809 shares, respectively   371    305 
Additional paid-in capital   63,208,218    60,750,330 
Accumulated other comprehensive loss   (106,689)   (934,901)
Accumulated deficit   (53,565,342)   (49,109,303)
Total Chanticleer Holdings, Inc. Stockholders’ Equity   9,536,558    10,706,431 
Non-Controlling Interests   1,001,069    782,453 
TOTAL STOCKHOLDERS’ EQUITY   10,537,627    11,488,884 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $30,507,359   $30,183,019 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

  3

 

 

Chanticleer Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations

 

   Three Months Ended    Six Months Ended 
   June 30, 2018   June 30, 2017   June 30, 2018   June 30, 2017 
Revenue:                    
Restaurant sales, net  $10,185,159   $10,524,787   $19,954,667   $20,177,941 
Gaming income, net   81,122    107,521    174,277    213,588 
Management fee income   24,999    24,993    49,998    49,983 
Franchise income   108,644    108,017    216,497    183,803 
Total revenue   10,399,924    10,765,318    20,395,439    20,625,315 
Expenses:                    
Restaurant cost of sales   3,376,693    3,579,557    6,652,868    6,770,947 
Restaurant operating expenses   5,640,614    5,855,411    11,226,763    11,529,971 
Restaurant pre-opening and closing expenses   96,770    90,760    199,652    105,196 
General and administrative expenses   1,121,666    1,084,422    2,315,083    2,460,042 
Asset impairment charge   54,212    633,962    1,731,267    633,962 
Depreciation and amortization   530,314    602,659    1,070,993    1,196,039 
Total operating expenses   10,820,269    11,846,771    23,196,626    22,696,157 
Operating loss   (420,345)   (1,081,453)   (2,801,187)   (2,070,842)
Other (expense) income                    
Interest expense   (629,858)   (1,079,706)   (1,264,939)   (1,483,842)
Gain (loss) on debt refinancing   -    267,512    -    (95,310)
Other income (expense)   7,605    (22)   5,490    12,212 
Total other expense   (622,253)   (812,216)   (1,259,449)   (1,566,940)
Loss before income taxes   (1,042,598)   (1,893,669)   (4,060,636)   (3,637,782)
Income tax benefit (expense)   236,798    (109,531)   572,995    (113,328)
Consolidated net loss   (805,800)   (2,003,200)   (3,487,641)   (3,751,110)
Less net loss attributable to non-controlling interest:   45,340    56,328    129,747    77,171 
Net loss attributable to Chanticleer Holdings, Inc.  $(760,460)  $(1,946,872)  $(3,357,894)  $(3,673,939)
Dividends on redeemable preferred stock   (28,007)   (27,622)   (55,801)   (51,769)
Net loss attributable to common shareholders of Chanticleer Holdings, Inc.  $(788,467)  $(1,974,494)  $(3,413,695)  $(3,725,708)
                     
Net loss attributable to Chanticleer Holdings, Inc. per common share, basic and diluted:  $(0.23)  $(0.81)  $(1.02)  $(1.65)
Weighted average shares outstanding, basic and diluted   3,494,803    2,432,313    3,331,296    2,257,767 

 

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   Six Months Ended 
   June 30, 2018   June 30, 2017   June 30, 2018   June 30, 2017 
Net loss attributable to Chanticleer Holdings, Inc.  $(760,460)  $(1,946,873)  $(3,357,894)  $(3,673,939)
Foreign currency translation gain   3,271    142,339    828,212    189,170 
Comprehensive loss  $(757,189)  $(1,804,534)  $(2,529,682)  $(3,484,769)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

  5

 

 

Chanticleer Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

 

   Six Months Ended 
   June 30, 2018   June 30, 2017 
Cash flows from operating activities:          
Net loss  $(3,487,641)  $(3,751,110)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   1,070,993    1,196,039 
Loss on extinguishment of debt   -    95,310 
Asset impairment charge   1,731,267    633,962 
Common stock and warrants issued for services   129,767    154,318 
Amortization of debt discount   591,830    408,359 
Change in assets and liabilities:          
Accounts and other receivables   (241,772)   194,426 
Prepaid and other assets   (412,423)   26,460 
Inventory   60,093    (20,693)
Accounts payable and accrued liabilities   849,132    555,875 
Deferred income taxes   (572,994)   73,520 
Deferred rent   (119,089)   178,453 
Net cash used in operating activities   (400,837)   (255,081)
           
Cash flows from investing activities:          
Purchase of property and equipment   (664,801)   (984,301)
Cash paid for acquisitions, net of cash acquired   (30,000)   - 
Net cash used in investing activities   (694,801)   (984,301)
           
Cash flows from financing activities:          
Proceeds from sale of common stock and warrants   1,687,184    - 
Proceeds from sale of preferred stock   -    591,651 
Payments related to sale of preferred stock   -    (258,153)
Loan proceeds   -    6,598,161 
Payment of deferred financing costs   -    (293,294)
Loan repayments   (207,531)   (5,478,494)
Capital lease payments   -    (14,551)
Distributions to non-controlling interest   (42,603)   - 
Contribution of non-controlling interest   750,000    500,000 
Net cash provided by financing activities   2,187,050    1,645,320 
Effect of exchange rate changes on cash   (17,763)   (21,355)
Net increase in cash and restricted cash   1,073,649    384,583 
Cash and restricted cash, beginning of period   438,493    268,575 
Cash and restricted cash, end of period  $1,512,142   $653,158 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

  6

 

 

Chanticleer Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows, continued

 

   Six Months Ended 
   June 30, 2018   June 30, 2017 
         
Supplemental cash flow information:          
Cash paid for interest and income taxes:          
Interest  $272,784   $526,680 
Income taxes   73,112    6,532 
           
Non-cash investing and financing activities:          
Convertible debt settled through issuance of common stock  $200,000   $625,000 
Accrued interest settled through issuance of convertible debt   -    95,107 
Preferred stock dividends paid through issuance of common stock   38,622    15,067 
           
Purchases of businesses:          
Current assets excluding cash  $9,580   $- 
Property and equipment   30,000    - 
Note payable   (9,580)   - 
Cash paid for acquisitions  $30,000   $- 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

  7

 

 

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.

 

Name   Jurisdiction of Incorporation   Percent Owned  
CHANTICLEER HOLDINGS, INC.   DE, USA        
Burger Business            
American Roadside Burgers, Inc.   DE, USA     100 %
ARB Stores            
American Burger Ally, LLC   NC, USA     100 %
American Burger Morehead, LLC   NC, USA     100 %
American Burger Prosperity, LLC   NC, USA     50 %
American Roadside Burgers Smithtown, Inc.   DE, USA     100 %
American Roadside McBee, LLC   NC, USA     100 %
American Roadside Southpark LLC   NC, USA     100 %
BGR Acquisition, LLC   NC, USA     100 %
BGR Franchising, LLC   VA, USA     100 %
BGR Operations, LLC   VA, USA     100 %
BGR Acquisition 1, LLC   NC, USA     100 %
BGR Annapolis, LLC   MD, USA     100 %
BGR Arlington, LLC   VA, USA     100 %
BGR Columbia, LLC   MD, USA     100 %
BGR Dupont, LLC   DC, USA     100 %
BGR Michigan Ave, LLC   DC, USA     100 %
BGR Mosaic, LLC   VA, USA     100 %
BGR Old Keene Mill, LLC   VA, USA     100 %
BGR Springfield Mall, LLC   VA, USA     100 %
BGR Tysons, LLC   VA, USA     100 %
BGR Washingtonian, LLC   MD, USA     100 %
Capitol Burger, LLC   MD, USA     100 %
BT Burger Acquisition, LLC   NC, USA     100 %
BT’s Burgerjoint Rivergate LLC   NC, USA     100 %
BT’s Burgerjoint Sun Valley, LLC   NC, USA     100 %
LBB Acquisition, LLC   NC, USA     100 %
Cuarto LLC   OR, USA     100 %
LBB Acquisition 1 LLC   OR, USA     100 %
LBB Capitol Hill LLC   WA, USA     50 %
LBB Franchising LLC   NC, USA     100 %
LBB Green Lake LLC   OR, USA     50 %
LBB Hassalo LLC   OR, USA     80 %
LBB Lake Oswego LLC   OR, USA     100 %
LBB Magnolia Plaza LLC   NC, USA     50 %
LBB Multnomah Village LLC   OR, USA     50 %
LBB Platform LLC   OR, USA     80 %
LBB Progress Ridge LLC   OR, USA     50 %
LBB Rea Farms LLC   NC, USA     50 %
LBB Wallingford LLC   WA, USA     50 %

 

  8

 

 

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 %
             
Just Fresh            
JF Franchising Systems, LLC   NC, USA     56 %
JF Restaurants, LLC   NC, USA     56 %
             
West Coast Hooters            
Jantzen Beach Wings, LLC   OR, USA     100 %
Oregon Owl’s Nest, LLC   OR, USA     100 %
Tacoma Wings, LLC   WA, USA     100 %
             
South African Entities            
Chanticleer South Africa (Pty) Ltd.   South Africa     100 %
Hooters Emperors Palace (Pty.) Ltd.   South Africa     88 %
Hooters On The Buzz (Pty) Ltd   South Africa     95 %
Hooters Ruimsig (Pty) Ltd.   South Africa     100 %
Hooters SA (Pty) Ltd   South Africa     78 %
Hooters Umhlanga (Pty.) Ltd.   South Africa     90 %
Hooters Willows Crossing (Pty) Ltd   South Africa     100 %
             
European Entities            
Chanticleer Holdings Limited   Jersey     100 %
West End Wings LTD   United Kingdom     100 %
             
Inactive Entities            
American Roadside Cross Hill, LLC   NC, USA     100 %
Avenel Financial Services, LLC   NV, USA     100 %
Avenel Ventures, LLC   NV, USA     100 %
BGR Cascades, LLC   VA, USA     100 %
BGR Chevy Chase, LLC   MD, USA     100 %
BGR Old Town, LLC   VA, USA     100 %
BGR Potomac, LLC   MD, USA     100 %
BT’s Burgerjoint Biltmore, LLC   NC, USA     100 %
BT’s Burgerjoint Promenade, LLC   NC, USA     100 %
Chanticleer Advisors, LLC   NV, USA     100 %
Chanticleer Finance UK (No. 1) Plc   United Kingdom     100 %
Chanticleer Investment Partners, LLC   NC, USA     100 %
Dallas Spoon Beverage, LLC   TX, USA     100 %
Dallas Spoon, LLC   TX, USA     100 %
DineOut SA Ltd.   England     89 %
Hooters Brazil   Brazil     100 %

 

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 U.S. 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 six-month periods ended June 30, 2018 are not necessarily indicative of the operating results for the full year.

 

  9

 

 

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles of the United States (“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, 2017 filed with the SEC on March 30, 2018. Certain amounts for the prior year have been reclassified to conform to the current year presentation.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of June 30, 2018, our cash balance was $1.5 million, our working capital was negative $10.6 million and we have significant near-term commitments and contractual obligations. The level of additional cash needed to fund operations and our ability to conduct business for the next 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 refinance or otherwise extend maturities of current debt obligations;
     
  the level of investment in acquisition of new restaurant businesses and entering new markets;
     
  our ability to manage our operating expenses and maintain gross margins as we grow:
     
  popularity of and demand for our fast-casual dining concepts; and
     
  general economic conditions and changes in consumer discretionary income.

 

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

 

Our operating plans for the next twelve months contemplate opening seven to ten additional company owned stores as well as growing our franchising businesses at Little Big Burger and BGR. We have contractual commitments related to store construction of approximately $1.5 million, of which we expect approximately $1.0 million to be funded by private investors and approximately $0.5 million will be funded internally by the Company. We also have $9.8 million of debt obligations due on demand or within the next 6 months plus interest. In addition, if our lenders were to assess default interest and penalties, our obligations could be accelerated and additional interest and penalties of approximately $1.2 million could potentially be assessed. We expect to be able to refinance our current debt obligations during 2018 and are also exploring the sale of certain assets to reduce debt. In May 2018, the Company completed the sale of 403,214 shares of common stock at a price of $3.50 per common share for proceeds of $1.4 million. In January 2018, the Company received net proceeds of $290,000 from the exercise of 100,000 common stock warrants. During the first six months of 2018, the Company also received $750,000 in contributions from non-controlling interests for new store construction. However, we cannot provide assurance that we will be able to refinance our long-term debt, sell assets or raise additional capital.

 

As we execute our growth plans over the next 12 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. In the event that capital is not available or we are unable to refinance our debt obligations or obtain waivers, we may then have to scale back or freeze our organic growth plans, sell assets on less than favorable terms, reduce expenses, and/or curtail future acquisition plans to manage our liquidity and capital resources. We may also incur financial penalties or other negative actions from our lenders if we are not able to refinance or otherwise extend or repay our current obligations or obtain waivers. These factors raise substantial doubt about our ability to continue as a going concern.

 

  10

 

 

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 be necessary should the Company be unable to continue as a going concern.

 

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, 2017.

 

USE OF ESTIMATES

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include the valuation of the investments in portfolio companies, deferred tax asset valuation allowances, valuing options and warrants using the Binomial Lattice and Black Scholes models, intangible asset valuations and useful lives, depreciation and uncollectible accounts and reserves. Actual results could differ from those estimates.

 

REVENUE RECOGNITION

 

The Company accounts for revenue in accordance with Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers”.

 

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 tax, 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 revenue 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 which are generally earned and recognized upon receipt.

 

Gaming Income

 

The Company receives revenue from operating a gaming facility adjacent to its Hooters restaurant in Jantzen Beach, Oregon. Revenue from gaming is recognized as earned from gaming activities, net of payouts to customers, taxes and government fees. These fees are recognized as they are earned based on the terms of the agreements.

 

Franchise Income

 

The Company grants franchises to operators in exchange for initial franchise license fees and continuing royalty payments. The license granted for each restaurant or area is considered a performance obligation. All other obligations (such as providing assistance during the opening of a restaurant) are combined with the license and were determined to be a single performance obligation. Accordingly, the total transaction price (comprised of the restaurant opening and territory fees) is allocated to each restaurant expected to be opened by the licensee under the contract. There are significant judgments regarding the estimated total transaction price, including the number of stores expected to be opened. We recognize the fee allocated to each restaurant as revenue on a straight-line basis over the restaurant’s license term, which generally begins upon the signing of the contract for area development agreements and upon the signing of a store lease for franchise agreements. The payments for these upfront fees are generally received upon contract execution. Continuing fees, which are based upon a percentage of franchisee revenues and are not subject to any constraints, are recognized on the accrual basis as those sales occur. The payments for these continuing fees are generally made on a weekly basis.

 

  11

 

 

Revenue recognized for the three and six-month periods ended June 30, 2018 under ASC-606 and revenue that would have been recognized had ASC-605 been applied is as follows:

 

   Three Months Ended June 30, 2018   Six Months Ended June 30, 2018 
  

As reported under

ASC-606

  

If reported under

ASC-605

   Increase  

As reported under

ASC-606

  

If reported under

ASC-605

   Increase 
Restaurant sales, net  $10,185,159   $10,185,159    -   $19,954,667   $19,954,667    - 
Gaming income, net   81,122    81,122    -    174,277    174,277    - 
Management fee income   24,999    24,999    -    49,998    49,998    - 
Franchise income   108,644    87,934    20,710    216,497    175,077    41,420 
Total Revenue  $10,399,924   $10,379,214    20,710   $20,395,439   $20,354,019    41,420 

 

Prior to the adoption of ASC-606, the Company’s initial fees were recorded as deferred revenue when received and proportionate amounts were recognized as revenue when certain milestones such as completion of employee training, lease signing and store opening were met with the adoption of ASC 606, such initial fees are deferred and recognized over the franchise license term.

 

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 and convertible notes payable as of June 30, 2018 and 2017 that have been excluded from the calculation of diluted net loss per common share since the effect would be antidilutive.

 

   June 30, 2018   June 30, 2017 
Warrants   2,645,829    1,862,758 
Convertible notes   300,000    366,667 
Total   2,945,829    2,229,425 

 

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”. The FASB has also issued additional related standards (ASU’s 2015-14, 2016-08, 2016-10, 2016-12, 2016-20) all of which superseded the existing revenue recognition guidance and provides a new framework for recognizing revenue. The core principle of the new standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The new standard also requires significantly more comprehensive disclosures than the existing standard. Guidance subsequent to ASU 2014-09 has been issued to clarify various provisions in the standard, including principal versus agent considerations, identifying performance obligations, licensing transactions, as well as various technical corrections and improvements. This standard may be adopted using either a retrospective or modified retrospective method. Early adoption is permitted.

 

The Company adopted the new revenue standard effective January 1, 2018 utilizing the modified retrospective approach. The adoption did not have a significant effect on restaurant sales, gaming income or management fees or to sales-based royalty revenue.

 

However, the pattern and timing of revenue recognition related to the fixed fees associated with our franchise agreements (such as restaurant opening and development area fees) are significantly different from period prior to adoption. Effective for franchise agreements entered into after January 1, 2018, and for existing agreements with terms extending beyond January 1, 2018, the license granted for each restaurant is considered a performance obligation. All other promises (such as providing assistance during the opening of a restaurant) are combined with the license and considered as a single performance obligation. Accordingly, the total transaction price (comprised of the restaurant opening and territory fees) is allocated to each restaurant expected to be opened by the licensee under the contract. We recognize the fee allocated to each restaurant as revenue on a straight-line basis over the restaurant’s license term, which generally begins upon the signing of the license/franchise agreement for area development agreements and upon signing of a store lease for franchise agreements.

 

  12

 

 

The adoption resulted in a decrease to retained earnings of approximately $1.1 million on the transition date with a corresponding increase of $1.1 million in deferred revenue. The Company recognized an additional $21 thousand and $42 thousand in franchise income for the three months and six months ended June 30, 2018, respectively, as a result of the change in accounting policy.

 

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

 

The Company is currently evaluating the impact this standard will have on its consolidated financial statements and are in process of identifying the population of leases to be analyzed and recognized as right to use assets and liabilities on the Company’s consolidated balance sheet upon adoption. The Company has not completed its evaluation or quantified the impact that adoption of ASU 2016-02 will have on its consolidated financial statements. However, management does expect there to be a material increase in both assets and liabilities reflected on its consolidated balance sheets as a result of adoption on January 1, 2019 with the majority of leases currently classified as operating being reflected as right to use assets and capital lease obligations on the consolidated balance sheet under the new standard.

 

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. The Company adopted ASU 2017-04 effective January 1, 2018 and it did not have any effect on the Company’s condensed consolidated financial statements.

 

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 required, by the Company. At June 30, 2018, 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.

 

3. ACQUISITIONS

 

On March 7, 2018, the Company entered into an agreement to purchase two BGR franchise locations in Maryland. The Company has closed on the purchase of one of the locations in the period ended June 30, 2018 and intends to close on the second location pending completion of lease assignments in the second half of 2018.

 

The Company allocated the purchase price as of the date of acquisition for the first store based on the estimated fair value of the acquired assets and assumed liabilities. The purchase accounting was considered preliminary as of June 30, 2018 and is expected to be finalized after the Company closes the purchase of the remaining location contemplated by the agreement.

 

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

 

4. ASSETS HELD FOR SALE

 

The Company entered into Letters of Intent for the sale of its Hooters Nottingham and Hooters Tacoma locations in the first quarter of 2018. Accordingly, the assets of those operations were reclassified to Assets Held for Sale on the accompanying condensed consolidated balance sheet and the Company recognized an impairment charge of $1.7 million for the six months ended June 30, 2018, primarily related to the impairment of goodwill and reversal of approximately $720 thousand of foreign exchange losses previously classified in Other Comprehensive loss. The potential buyer of the Hooters Nottingham facility has indicated that their funding is dependent on the sale of other properties and the transaction may be delayed or may not close. Management is continuing discussions with the potential purchaser and evaluating other alternative to market the property for sale. The letter of intent for the sale or the Tacoma location has expired as of the date of this report. The Company is continuing to explore the disposition of those assets to other potential buyers. Management determined that, as of June 30, 2018, it was appropriate to continue to classify those assets as held for sale and will continue to evaluate the classification as the process continues in the second half of 2018. Management believes that the carrying amount of the assets held for sale reflects the current net realizable value of the properties and that no additional impairment adjustment is warranted at this time.

 

  13

 

 

5. PROPERTY AND EQUIPMENT

 

Property and equipment consists of the following:

 

   June 30, 2018   December 31, 2017 
Leasehold improvements  $9,748,671   $9,941,223 
Restaurant furniture and equipment   5,735,022    5,952,934 
Construction in progress   497,480    176,939 
Office furniture and equipment   148,451    148,451 
    16,129,624    16,219,547 
Accumulated depreciation and amortization   (7,893,348)   (7,670,955)
   $8,236,276   $8,548,592 

 

Depreciation and amortization expense was $0.4 million and $0.8 million for the three and six months ended June 30, 2018 and $0.5 and $1.0 million for the three and six months ended June 30, 2017, respectively.

 

6. GOODWILL AND OTHER INTANGIBLE ASSETS, NET

 

Goodwill consists of the following:

 

   June 30, 2018   December 31, 2017 
Hooters Full Service  $2,182,006   $4,703,203 
Better Burgers Fast Casual   7,448,848    7,448,848 
Just Fresh Fast Casual   495,755    495,755 
   $10,126,609   $12,647,806 

 

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

 

   June 30, 2018   December 31, 2017 
Beginning Balance  $12,647,806   $12,405,770 
Acquisitions   -    - 
Adjustments   (2,495,375)   - 
Foreign currency translation (loss) gain   (25,822)   242,036 
Ending Balance  $10,126,609   $12,647,806 

 

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

 

  

Estimated

Useful Life

  June 30, 2018   December 31, 2017 
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 
Acquired Franchise Rights             
BGR: The Burger Joint  7 years   1,056,000    1,056,000 
              
Franchise License Fees:             
Hooters South Africa  20 years   246,344    273,194 
Hooters Pacific NW  20 years   74,507    74,507 
Hooters UK  5 years   -    13,158 
       320,851    360,859 
Total Intangibles at cost      7,153,781    7,193,789 
Accumulated amortization      (1,553,538)   (1,297,057)
Intangible assets, net     $5,600,243   $5,896,732 

 

Amortization expense for the six months ended June 30, 2018 and 2017 was $0.3 million and $0.2 million, respectively.

 

7. LONG-TERM DEBT AND NOTES PAYABLE

 

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

 

   June 30, 2018   December 31, 2017 
Notes Payable, due December 31, 2018, net of discount of $586,695 and $1,173,390, respectively (a)  $5,413,305   $4,826,610 
           
Notes Payable Paragon Bank (b)   439,761    572,276 
           
Note Payable   75,000    75,000 
           
Note Payable, due March 2019   7,221    - 
           
Receivables financing facilities   52,356    76,109 
           
Bank overdraft facilities, South Africa, annual renewal   159,180    164,619 
           
Equipment financing arrangements, South Africa   10,711    27,297 
Total long-term debt  $6,157,534   $5,741,911 

 

For the six months ended June 30, 2018 and 2017 amortization of debt discount was $586,695 and $432,932, 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 annual 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, or demand repayment at 108% of the outstanding principal balance and any outstanding accrued interest. The warrants have an exercise price of $3.50 (as adjusted for the reverse stock split on May 19, 2017) and a ten-year term. 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%.

 

  15

 

 

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 contractual 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%  $10,790   $4,406 
Note 2  5/10/2019   5.50%   135,177    11,532 
Note 3  8/10/2021   5.50%   293,794    8,500 
           $439,761   $24,438 

 

The Company’s various loan agreements contain financial and non-financial covenants and provisions providing for cross-default. The evaluation of compliance with these provisions is subject to interpretation and the exercise of judgment. The Company concluded that conditions could be interpreted as events of default under one or more of its loan obligations, which could also trigger cross default provisions across its various loan agreements. Management quantified the potential penalties and default interest that could be assessed in the event the loans were deemed to be in default. Accordingly, the Company recorded a liability for potential default interest and penalties of $1.2 million as accrued interest in the accompanying consolidated financial statements of June 30, 2018.

 

8. cONVERTIBLE NOTEs PAYABLE

 

Convertible Notes payable are summarized as follows:

 

   June 30, 2018   December 31, 2017 
         
6% Convertible notes payable due June 2018 (a)  $3,000,000   $3,000,000 
8% Convertible notes payable due March 2019 (b)   -    200,000 
Premium on above convertible note   -    12,256 
           
Total Convertible notes payable   3,000,000    3,212,256 
Current portion of convertible notes payable   3,000,000    3,000,000 
Convertible notes payable, less current portion  $-   $212,256 

 

(a) On August 2, 2013, the Company entered into an agreement with seven individual accredited investors, whereby the Company issued separate 6% Secured Subordinate Convertible Notes for a total of $3,000,000 in a private offering and is collateralized by the assets of the Hooters Nottingham restaurant and a subordinate position to all other assets of the Company. In connection with the Company’s agreement to conduct a capital raise in 2016, the lenders agreed to waive certain existing defaults and extended the original note maturity by eighteen months from December 31, 2016 to June 30, 2018. The Note holders shall receive 10%, pro rata, of the net profit of the Nottingham, England Hooters restaurant, paid quarterly, and 10% of the net proceeds should the location be sold. The Company entered into a letter of intent for the sale of the Hooters Nottingham facility from which the Company planned to settle a portion of the convertible note. However, the potential buyer has indicated that their funding is dependent on the sale of other properties and the transaction may be delayed or may not close as the buyer’s letter of intent has expired. Management is continuing discussions with the potential purchaser and evaluating other alternative to market the property for sale. Pending completion of any sale and/or renegotiation of the obligation, the convertible note has been classified as a current liability on the accompanying condensed consolidated balance sheet.

 

  16

 

 

(b) On February 22, 2018, $200,000 of the Company’s convertible debt was converted into 66,667 shares of Company common stock in accordance with the terms of the convertible debt agreements.

 

For the six months ended June 30, 2018 and 2017 amortization of debt (premium) discount was $(12,256) and $24,573 respectively.

 

9. accounts payable and accrued expenses

 

Accounts payable and accrued expenses are summarized as follows:

 

   June 30, 2018   December 31, 2017 
         
Accounts payable and accrued expenses  $3,288,329   $3,408,691 
Accrued taxes (VAT, Sales, Payroll)   1,607,702    1,096,305 
Accrued income taxes   33,027    83,878 
Accrued interest   1,574,190    1,208,378 
   $6,503,248   $5,797,252 

 

10. Stockholders’ Equity

 

The Company had 45,000,000 shares of its $0.0001 par value common stock authorized at both June 30, 2018 and December 31, 2017. The Company had 3,699,270 and 3,045,809 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively.

 

The Company has 5,000,000 shares of its no par value preferred stock authorized at both June 30, 2018 and December 31, 2017. The Company had 62,876 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively. Holders of the preferred shares are entitled to receive cumulative dividends out of legally available funds at the rate of 9% 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 are issued at a 10% discount to the five-day volume weighted average price per share of common stock prior to payable date. The preferred shares are non-voting, have a liquidation preference of $13.50 per share and contain a required redemption at $13.50 plus any accrued but unpaid dividends upon maturity in 2023.

 

Options and Warrants

 

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

 

As of June 30, 2018, the Company had issued 87,678 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. The Company issued 15,000 restricted stock units to employees in 2016 and none since that date. Approximately 297,322 shares remain available for grant under the plan.

 

The Company also has issued warrants to investors in connection with financing transactions. Fair value of any warrant issuances is valued utilizing the Black-Scholes model. The model includes subjective input assumptions that can materially affect the fair value estimates. The expected stock price volatility for the Company’s warrants was determined by the average of the historical volatilities for the Company’s common stock.

 

  17

 

 

A summary of the warrant activity is presented below:

 

  

Number of

Warrants

  

Weighted

Average Exercise

Price

  

Weighted

Average

Remaining Life

 
Outstanding January 1, 2018   2,362,615   $16.34    2.0 
Granted   403,214   $4.50      
Exercised   (100,000)   3.50      
Forfeited   (20,000)   42.50      
Outstanding June 30, 2018   2,645,829   $14.82    1.9 
                
Exercisable June 30, 2018   2,645,829   $14.82    1.9 

 

Exercise Price 

Outstanding

Number of

Warrants

  

Weighted

Average

Remaining Life

in Years

  

Exercisable

Number of

Warrants

 
> $40.00   474,518    0.5    474,518 
$30.00-$39.99   39,990    1.4    39,990 
$20.00-$29.99   77,950    1.6    77,950 
$10.00-$19.99   50,300    2.8    50,300 
$0.00-$9.99   2,003,071    7.2    2,003,071 
    2,645,829    1.9    2,645,829 

 

The Company accepted subscriptions to purchase 403,214 shares of common stock at a purchase price of $3.50 per Share, for a total gross purchase price of approximately $1,411,249 pursuant to a Securities Purchase Agreement dated May 3, 2018 with institutional and accredited investors in a registered direct offering.

 

The offering was made pursuant to a prospectus supplement filed with the Securities and Exchange Commission on March 8, 2018 and an accompanying prospectus dated October 16, 2017, pursuant to Chanticleer’s shelf registration statement on Form S-3 that was filed with the Securities and Exchange Commission on April 27, 2015, amended on June 3, 2015 and became effective on June 9, 2015.

 

The Company also agreed to issue unregistered 5 ½ year warrants to purchase up to 403,214 shares of common stock to the investors in a concurrent private placement at an exercise price of $4.50 per share. The Company has agreed to register the resale of the common shares underlying the warrants. The warrants are exercisable for cash in full commencing six months after the issuance date. If a registration statement covering the shares underlying the warrants is not available at the time of exercise, the warrants may be exercised on a cashless basis. The warrants qualify for equity accounting.

 

Larry Spitcaufsky, a director of the company and greater than 5% shareholder, subscribed for 70,000 Shares and will receive an equal number of Warrants in the transaction. Michael D. Pruitt, the company’s chairman and Chief Executive Officer also participated in the offering.

 

Oak Ridge Financial Services Group, Inc., a registered broker-dealer acted as placement agent for the offering and received, as compensation, 7% of gross proceeds of the amounts subscribed by institutional investors introduced by Oak Ridge, for an aggregate commission of $36,767 and legal expenses in an amount not to exceed $2,500.

 

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11. RELATED PARTY TRANSACTIONS

 

Due to related parties

 

The Company has received non-interest bearing, short-term advances from Chanticleer Investors, LLC, a related party, in the amount of $191,580 as of June 30, 2018 and December 31, 2017. The amount owed to Chanticleer Investors LLC is related to cash distributions received from Chanticleer Investors LLC’s interest in Hooters of America which is payable to the Company’s co-investors in that investment.

 

Transactions with Board Members

 

Larry Spitcaufsky, a significant shareholder and member of the Company’s board of directors, is also a lender to the Company for $2 million of the Company’s $6 million in notes payable due December 31, 2018. In connection with this Note, the Company made payments of interest to the board member and related entities as required under the Notes for the three and six months ended June 30, 2018 of $39,111 and $80,000, respectively, and $0 during the same periods of 2017.

 

The Company has also entered into a franchise agreement with entities controlled by Mr. Spitcaufsky providing him with the franchise rights for Little Big Burger in the San Diego area and an option for southern California. The Company received royalties of $2,810 and $3,549 during the three and six months ended June 30, 2018, respectively, and $0 in the same periods of 2017. The Company also received franchise fees of $0 during the three and six months ended June 30, 2018 and $60,000 for the three and six month periods of 2017.

 

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   Six Months Ended 
   June 30, 2018   June 30, 2017   June 30, 2018   June 30, 2017 
Revenue:                    
Hooters Full Service  $3,513,223   $3,392,765   $7,044,297   $6,528,228 
Better Burgers Fast Casual   5,801,499    6,010,543    11,162,021    11,326,830 
Just Fresh Fast Casual   1,060,203    1,337,017    2,139,123    2,720,274 
Corporate and Other   24,999    24,993    49,998    49,983 
   $10,399,924   $10,765,318   $20,395,439   $20,625,315 
                     
Operating Income (Loss): (1)                    
Hooters Full Service  $73,791   $(546,770)  $(1,261,764)  $(589,616)
Better Burgers Fast Casual   91,303    110,488    (120,531)   (58,622)
Just Fresh Fast Casual   637    (109,524)   (42,777)   (45,884)
Corporate and Other   (586,076)   (535,648)   (1,376,115)   (1,376,720)
    -    -         - 
   $(420,345)  $(1,081,454)  $(2,801,187)  $(2,070,842)
                     
(1) Note that Operating Income (Loss) includes $1.7 million and $0.6 million of non-cash impairment charges for the six months ended June 30, 2018 and 2017, respectively 
      
Depreciation and Amortization                    
Hooters Full Service  $102,145   $142,758   $208,173   $278,938 
Better Burgers Fast Casual   382,801    379,332    772,083    755,963 
Just Fresh Fast Casual   44,525    79,726    89,050    159,452 
Corporate and Other   843    843    1,687    1,686 
   $530,314   $602,659   $1,070,993   $1,196,039 

 

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.

 

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   Three Months Ended    Six Months Ended 
   June 30, 2018   June 30, 2017   June 30, 2018   June 30, 2017 
Revenue:                    
United States  $8,164,018   $8,598,832   $15,946,418   $16,510,926 
South Africa   1,467,909    1,482,379    2,969,328    2,866,773 
Europe   767,997    684,107    1,479,693    1,247,616 
   $10,399,924   $10,765,318   $20,395,439   $20,625,315 
                     
Operating Income (Loss): (1)                    
United States  $(505,109)  $(1,123,771)  $(1,468,121)  $(2,064,843)
South Africa   10,649    (28,453)   21,195    (85,514)
Europe   74,115    70,770    (1,354,260)   79,515 
   $(420,345)  $(1,081,454)  $(2,801,187)  $(2,070,842)
                     
(1) Note that Operating Income (Loss) includes $1.7 million of non-cash impairment charges 

 

Non-current Assets:    June 30, 2018    December 31, 2017 
United States   $24,207,242   $24,630,101 
South Africa    1,008,561    1,203,610 
Europe    -    2,549,747 
    $25,215,803   $28,383,458 

 

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 and the Company does not expect there to be any material impact on the Company. No amounts have been accrued as of June 30, 2018 or December 31, 2017 in the accompanying condensed consolidated balance sheets.

 

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

 

The Company has contractual commitments related to store construction of approximately $1.5 million, of which we expect approximately $1.0 million to be funded by private investors and approximately $0.5 million will be funded internally by the Company.

 

  20

 

 

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 Annual 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;
     
  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;

 

  21

 

 

  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
     
  Defaults resulting from technical breaches of our secured financing obligations;
     
  Adverse effects on our operations resulting from certain geo-political or other events.

 

You should also consider carefully the Risk Factors contained in Part II, Item 1A of this Quarterly Report and Item 1A of Part I of our Annual Report filed on Form 10-K for the year ended December 31, 2017, which address additional factors that could cause 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.

 

  22

 

 

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 June 30, 2018, our system-wide store count totaled 56 locations, consisting of 42 company-owned locations and 13 franchisee-operated locations as summarized below:

 

   As of June 30, 2018 
   Better Burgers   Just Fresh   Hooters   Corp   Total   % of Total 
Store Count                        
Company   29    5    8    -    42    75.0%
Franchise   14    -    -    -    14    25.0%
Total   43    5    8    -    56    100.0%
                               

 

   As of December 31, 2017 
   Better Burgers   Just Fresh   Hooters   Corp   Total   % of Total 
Store Count                        
Company   28    6    8    -    42    76.4%
Franchise   13    -    -    -    13    23.6%
Total   41    6    8    -    55    100.0%

 

We own, operate and franchise a system-wide total of 43 fast casual restaurants specializing the “Better Burger” category of which 29 are company-owned and 14 are operated by franchisees under franchise agreements. American Burger Company (“ABC”) is a fast-casual dining chain consisting of 7 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 10 company-owned locations in the United States and 12 franchisee-operated locations in the United States and the Middle East. Little Big Burger (“LBB”) consists of 14 locations in Oregon, California and North Carolina, of which 12 are company-owned and 2 are operated by franchisees.

 

We also own and operate Just Fresh, our healthier eating fast casual concept with 5 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.

 

  23

 

 

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2018 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2017

 

Our results of operations are summarized below:

 

   Three Months Ended     
   June 30, 2018   June 30, 2017     
   Amount   % of Revenue*   Amount   % of Revenue*   % Change 
                     
Restaurant sales, net  $10,185,159        $10,524,787         -3.2%
Gaming income, net   81,122         107,521         -24.6%
Management fees   24,999         24,993         0.0%
Franchise income   108,644         108,017         0.6%
Total revenue   10,399,924         10,765,318         -3.4%
                          
Expenses:                         
Restaurant cost of sales   3,376,693    33.2%   3,579,557    34.0%   -5.7%
Restaurant operating expenses   5,640,614    55.4%   5,855,411    55.6%   -3.7%
Restaurant pre-opening and closing expenses   96,770    1.0%   90,760    0.9%   6.6%
General and administrative   1,121,666    10.8%   1,084,422    10.1%   3.4%
Asset impairment charge   54,212    0.5%   633,962    5.9%   - 
Depreciation and amortization   530,314    5.1%   602,659    5.6%   -12.0%
Total expenses   10,820,269    104.0%   11,846,771    110.0%   -8.7%
Operating loss from continuing operations  $(420,345)       $(1,081,453)          

 

* 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 3.4% to $10.4 million for the three months ended June 30, 2018 from $10.8 million for the three months ended June 30, 2017

 

  24

 

 

Revenues by concept and revenue type are further summarized below:

 

   Three Months Ended June 30, 2018 
Revenue  Better Burgers   Just Fresh   Hooters   Corp   Total   % of Total 
Restaurant sales, net  $5,692,855    1,060,203    3,432,101   $-   $10,185,159    97.9%
Gaming income, net   -    -    81,122    -    81,122    0.8%
Management fees   -    -    -    24,999    24,999    0.2%
Franchise income   108,644    -    -    -    108,644    1.0%
Total revenue  $5,801,499   $1,060,203   $3,513,223   $24,999   $10,399,924    100.0%

 

   Three Months Ended March 31, 2017 
Revenue  Better Burgers   Just Fresh   Hooters   Corp   Total   % of Total 
Restaurant sales, net  $5,902,526    1,337,017    3,285,244   $-   $10,524,787    97.8%
Gaming income, net   -    -    107,521    -    107,521    1.0%
Management fees   -    -    -    24,993    24,993    0.2%
Franchise income   108,017    -    -    -    108,017    1.0%
Total revenue  $6,010,543   $1,337,017   $3,392,765   $24,993   $10,765,318    100.0%

 

   % Change in Revenues Compared to Prior Year 
Revenue  Better Burgers   Just Fresh   Hooters   Corp   Total 
Restaurant sales, net   -3.6%   -20.7%   4.5%   -    -3.2%
Gaming income, net   -    -    -24.6%   -    -24.6%
Management fees   -    -    -    0.0%   0.0%
Franchise income   0.6%   -    -    -    0.6%
Total revenue   -3.5%   -20.7%   3.6%   0.0%   -3.4%

 

Restaurant revenues from continuing operations decreased 3.2% to $10.2 million for the three months ended June 30, 2018 from $10.5 million for the three months ended June 30, 2017

 

  Restaurant revenue from the Company’s Better Burger Group decreased 3.6% to $5.7 million for the three months ended June 30, 2018 from $5.9 million for the three months ended June 30, 2017. Revenues increased $0.6 million from the contribution of new stores opened over the past 18 months. Increased revenue from new stores was partially offset by the reduction in revenue of approximately $0.7 million from the closure of underperforming locations. Same store sales (for locations open over 18 months) decreased 2%, with American Burger decreasing 3%, Little Big Burger even with prior year and BGR decreasing 3% from prior year.
     
  Restaurant revenue from the Company’s Just Fresh Group decreased 20.6% to $1.1 million for the three months ended June 30, 2018 from $1.3 million for the three months ended June 30, 2017
     
    Revenues decreased approximately $0.2 million from the closure of two locations. In addition, Just Fresh experienced lower traffic and higher competition, which offset increased delivery and catering activity, contributing to an overall 3% reduction in same store revenues.
     
  Restaurant revenue from the Company’s Hooter’s restaurants increased 4.5% to $3.4 million for the three months ended June 30, 2018 from $3.3 million for the three months ended June 30, 2017. The Hooters locations in all three regions posted increased revenue and results in South Africa and the UK also benefited from favorable movements in foreign currency exchange rates. UK revenues increased 12% and 6% while South Africa increased 9% and 7% on a US dollar and local currency basis, respectively. Revenues in the United States increased 7%, primarily as a result of increased delivery business.

 

  25

 

 

Gaming revenue decreased 24.6% and were affected by increased competition from the opening of a new casino in the area, changes in the local trade area, as well as a reduction in the percentage of gaming revenue retained by the Company which is reset periodically by the state of Oregon based on location performance.

 

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

 

Franchise revenue was essentially flat $109 thousand for the three months ended June 30, 2018 and $108 thousand for the three months ended June 30, 2017. Franchise revenue was favorably impacted by change in revenue recognition under the new accounting guidance adopted on January 1, 2018 which increased franchise revenue by $21 thousand. The prior year period also included upfront franchise fee revenue which would now be recognized over the life of the franchise agreement under the new accounting guidance if the fee had been received in the current period.

 

Cost of Restaurant sales

 

Cost of restaurant sales decreased 5.7% to $3.4 million for the three months ended June 30, 2018 from $3.6 million for the three months ended June 30, 2017.

 

   Three Months Ended     
   June 30, 2018   June 30, 2017     
Cost of Restaurant Sales  Amount   % of Restaurant
Net Sales
   Amount   % of Restaurant
Net Sales
   % Change 
Better Burgers Fast Casual  $1,831,530    32.2%  $1,957,303    33.2%   -6.4%
Just Fresh Fast Casual   363,892    34.3%   520,922    39.0%   -30.1%
Hooters Full Service   1,181,271    34.4%   1,101,332    33.5%   7.3%
   $3,376,693    33.2%  $3,579,557    34.0%   -5.7%

 

Cost of restaurant sales improved to 33.2% of net restaurant revenues for the three months ended June 30, 2018 from 34.0% for the three months ended June 30, 2017. Cost of sales improved from 33.2% to 32.2% for the better burger business and from 39.0% to 34.3% at Just Fresh, while cost of sales increased from 33.5% to 34.4% at our Hooters locations. Cost of sales in the Burger business improved largely due to favorable movements in beef prices, combined with expansion of our Little big Burger brand which runs lower costs than BGR and American Burger. The costs at Just Fresh were higher than normal during the second quarter of 2017 and are more in line with historical rates for the three months ended June 30, 2018. Costs at our Hooters business increased starting in the second half of 2017 due to distribution changes in our US markets and have improved with actions to reduce costs and adjust pricing in the US.

 

Restaurant operating expenses

 

Restaurant operating expenses decreased 3.7% to $5.6 million for the three months ended June 30, 2018 from $5.9 million for the three months ended June 30, 2017.

 

  26

 

 

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

 

   Three Months Ended 
   June 30, 2018   June 30, 2017     
Operating Expenses  Amount   % of Restaurant Net Sales   Amount   % of Restaurant Net Sales   % Change 
Better Burgers Fast Casual  $3,114,191    54.7%  $3,205,086    54.3%   -2.8%
Just Fresh Fast Casual   554,848    52.3%   739,155    55.3%   -24.9%
Hooters Full Service   1,971,575    57.4%   1,911,170    58.2%   3.2%
   $5,640,614    55.4%  $5,855,411    55.6%   -3.7%

 

As a percent of restaurant revenues, operating expenses were essentially flat, decreasing to 55.4% for the three months ended June 30, 2018 from 55.6% for the three months ended June 30, 2017. Operating expenses improved due to the closure of underperforming locations where rent and occupancy costs were higher than our target levels. Operating expenses also improved as a percent of revenue as the new locations that were opened over the past 12 months were in our Little Big Burger and BGR brands which have more favorable personnel and occupancy cost requirements than our other brands. Those improvements were offset by increases in personnel costs primarily associated with higher minimum wage rates and increased service charges from third party delivery services.

 

Restaurant pre-opening and closing expenses

 

Restaurant pre-opening and closing expenses increased to $97 thousand for the three months ended June 30, 2018 from $91 thousand for the three months ended June 30, 2017. We have more new stores under lease and incurring pre-opening rent and other costs. We expect pre-opening expenses to continue to increase throughout 2018 as new store preopening activity increases.

 

General and Administrative Expense (“G&A”)

 

G&A was essentially flat at $1.1 million for the three months ended June 30, 2018 and $1.1 million for the three months ended June 30, 2017.

 

Significant components of G&A are summarized as follows:

 

   Three Months Ended 
   June 30, 2018   June 30, 2017 
Audit, legal and other professional services  $315,791   $308,982 
Salary and benefits   510,225    542,650 
Travel and entertainment   55,973    21,834 
Shareholder services and fees   7,956    35,154 
Advertising, insurance and other   231,721    175,802 
Total G&A Expenses  $1,121,666   $1,084,422 

 

As a percentage of total revenue, G&A increased to 10.8% for the three months ended June 30, 2018 from 10.1% for the three months ended June 30, 2017.

 

For the current year, approximately $0.6 million of G&A is attributable to the cost of operating our Corporate office including salaries, travel, audit, legal, professional fees and other public company and transaction related costs. Approximately $0.5 million is attributable to managing the operations of our restaurants, including regional management, franchising operations, marketing, advertising and other expenses within the Better Burger group, Hooters and Just Fresh.

 

  27

 

 

The reductions in G&A over the past several years were 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. The Company implemented a new enterprise-wide accounting platform and point-of-sale system across the Company’s U.S. based locations, further streamlining and simplifying operational process during the current year, which also contributed to the overhead expense reductions. The Company expects to grow its Burger business without needing to add significant support costs, with overall G&A in future periods expected to remain relatively consist as a percent of revenue.

 

Asset impairment charges

 

Asset impairment charges totaled $0.1 million for the three months ended June 30, 2018 as compared with $0.6 million during the three months ended June 30, 2017. The Company recognized impairment charges related to the closure of one Just Fresh location and one American Burger location in Charlotte. In addition, the Company recognized impairment charges related to its Hooters Nottingham location of approximately $1.5 million. The impairment charges were primarily reflected in the first quarter of 2018 with minor adjustments in the second quarter, and arise primarily from reducing goodwill, leasehold improvements, intangible assets and property and equipment to estimated net realizable value based on management’s intent with regard to the related store locations.

 

Depreciation and amortization

 

Depreciation and amortization expense was essentially unchanged at $0.5 million for the three months ended June 30, 2018 and $0.6 million for the three months ended June 30, 2017. Increased depreciation from new stores and increased amortization of franchise right intangibles were more than offset by reduced deprecation from locations that have been closed with related assets written off in the current and prior years.

 

OTHER INCOME (EXPENSE)

 

Other income (expense) consisted of the following:

 

   Three Months Ended 
Other Income (Expense)  June 30, 2018   June 30, 2017   % Change 
Interest expense  $(629,858)  $(1,079,706)   -41.7%
Loss on debt refinancing   -    267,512    - 
Other income (expense)   7,605    (22)   - 
Total other expense  $(622,253)  $(812,216)   -23.4%

 

Other expense decreased to $0.6 million for the three months ended June 30, 2018 from $0.8 million for the three months ended June 30, 2017. The change in other expenses, net was primarily due to increased non-cash amortization of debt discounts and penalty interest, partially offset by lower interest rates on our notes and convertible debt obligations.

 

During 2017, the Company modified the terms of certain of its convertible notes resulting in a non-cash gain of $0.3 million.

 

  28

 

 

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2018 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2017

 

Our results of operations are summarized below:

 

   Six Months Ended     
   June 30, 2018   June 30, 2017     
   Amount   % of Revenue*   Amount   % of Revenue*   % Change 
                     
Restaurant sales, net  $19,954,667        $20,177,941         -1.1%
Gaming income, net   174,277         213,588         -18.4%
Management fee income   49,998         49,983         0.0%
Franchise income   216,497         183,803         17.8%
Total revenue   20,395,439         20,625,315         -1.1%
                          
Expenses:                         
Restaurant cost of sales   6,652,868    33.3%   6,770,947    33.6%   -1.7%
Restaurant operating expenses   11,226,763    56.3%   11,529,971    57.1%   -2.6%
Restaurant pre-opening and closing expenses   199,652    1.0%   105,196    0.5%   89.8%
General and administrative   2,315,083    11.4%   2,460,042    11.9%   -5.9%
Asset impairment charge   1,731,267    8.5%   633,962    3.1%   - 
Depreciation and amortization   1,070,993    5.3%   1,196,039    5.8%   -10.5%
Total expenses   23,196,626    113.7%   22,696,157    110.0%   2.2%
Operating loss from continuing operations  $(2,801,187)       $(2,070,842)        35.3%

 

 * 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 1.1% to $20.4 million for the six months ended June 30, 2018 from $20.6 million for the six months ended June 30, 2017.

 

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Revenues by concept and revenue type are further summarized below:

 

   Six Months Ended June 30, 2018 
Revenue  Better Burgers   Just Fresh   Hooters   Corp   Total   % of Total 
Restaurant sales, net  $10,945,524    2,139,123    6,870,020   $-   $19,954,667    97.8%
Gaming income, net   -    -    174,277    -    174,277    0.9%
Management fees   -    -    -    49,998    49,998    0.2%
Franchise income   216,497    -    -    -    216,497    1.1%
Total revenue  $11,162,021   $2,139,123   $7,044,297   $49,998   $20,395,439    100.0%

 

   Six Months Ended June 30, 2017 
Revenue  Better Burgers   Just Fresh   Hooters   Corp   Total   % of Total 
Restaurant sales, net  $11,143,027    2,720,274    6,314,640   $-   $20,177,941    97.8%
Gaming income, net   -    -    213,588    -    213,588    1.0%
Management fees   -    -    -    49,983    49,983    0.2%
Franchise income   183,803    -    -    -    183,803    0.9%
Total revenue  $11,326,830   $2,720,274   $6,528,228   $49,983   $20,625,315    100.0%

 

   % Change in Revenues Compared to Prior Year 
Revenue  Better Burgers   Just Fresh   Hooters   Corp   Total 
Restaurant sales, net   -1.8%   -21.4%   8.8%   -    -1.1%
Gaming income, net   -    -    -18.4%   -    -18.4%
Management fees   -    -    -    0.0%   0.0%
Franchise income   17.8%   -    -    -    17.8%
Total revenue   -1.5%   -21.4%   7.9%   0.0%   -1.1%

 

Restaurant revenues from continuing operations decreased 1.1% to $20.0 million for the six months ended June 30, 2018 from $20.2 million for the six months ended June 30, 2017.

 

  Restaurant revenue from the Company’s Better Burger Group decreased 1.8% to $10.9 million for the six months ended June 30, 2018 from $11.1 million for the six months ended June 30, 2017. Revenues increased $1.3 million from the contribution of new stores opened over the past 18 months. Increased revenue from new stores was partially offset by the reduction in revenue of approximately $1.4 million from the closure of underperforming locations Same store sales (for locations open over 18 months) decreased 1.5%, with American Burger decreasing 2%, Little Big Burger increasing 1% and BGR decreasing 3% from prior year.
     
  Restaurant revenue from the Company’s Just Fresh Group decreased 21.4% to $2.1 million for the six months ended June 30, 2018 from $2.7 million for the six months ended June 30, 2017. Revenues decreased approximately $0.4 million from the closure of two locations. In addition, Just Fresh experienced lower traffic and higher competition, which offset increased delivery and catering activity, contributing to an overall 7% reduction in same store revenues.
     
  Restaurant revenue from the Company’s Hooter’s restaurants increased 8.8% to $6.9 million for the six months ended June 30, 2018 from $6.3 million for the six months ended June 30, 2017. The Hooters locations in all three regions posted increased revenue and results in South Africa and the UK also benefited from favorable movements in foreign currency exchange rates. UK revenues increased 19% and 9% while South Africa increased 13% and 6% on a US dollar and local currency basis, respectively. Revenues in the United States increased 10%, primarily as a result of increased delivery business.

 

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Gaming revenue decreased 18.4% and were affected by increased competition from the opening of a new casino in the area, as well as a reduction in the percentage of gaming revenue retained by the Company which is reset periodically by the state of Oregon based on location performance.

 

Management fee revenue was unchanged at $50 thousand for each period. The Company earns management fees for its CEO serving on the Board of Directors of Hooters of America.

 

Franchise revenue increased 17.8 % to $216 thousand for the six months ended June 30, 2018 from $184 thousand for the six months ended June 30, 2017. Franchise revenue was favorably impacted by the change in revenue recognition under the new accounting guidance adopted on January 1, 2018 which increased franchise revenue by $42 thousand. The prior year period also included upfront franchise fee revenue which would now be recognized over the life of the franchise agreement under the new accounting guidance if the fee had been received in the current period.

 

Cost of Restaurant sales

 

Cost of restaurant sales decreased 1.7% to $6.7 million for the six months ended June 30, 2018 from $6.8 million for the six months ended June 30, 2017.

 

   Six Months Ended     
   June 30, 2018   June 30, 2017     
Cost of Restaurant Sales  Amount   % of Restaurant
Net Sales
   Amount   % of Restaurant
Net Sales
   % Change 
Better Burgers Fast Casual  $3,535,331    32.3%  $3,657,763    32.8%   -3.3%
Just Fresh Fast Casual   729,634    34.1%   963,338    35.4%   -24.3%
Hooters Full Service   2,387,903    34.8%   2,149,846    34.0%   11.1%
   $6,652,868    33.3%  $6,770,947    33.6%   -1.7%

 

Cost of restaurant sales improved to 33.3% of net restaurant revenues for the six months ended June 30, 2018 from 33.6% for the six months ended June 30, 2017. Cost of sales improved from 32.8% to 32.3% for the better burger business and from 35.4% to 34.1% at Just Fresh, while cost of sales increased from 34.0% to 34.8% at our Hooters locations. Cost of sales in the Burger business improved largely due to favorable movements in beef prices, combined with expansion of our Little Big Burger brand which runs lower costs than BGR and American Burger. The costs at Just Fresh were higher than normal during the second quarter of 2017 and are more in line with historical rates for the six months ended June 30, 2018. Costs at our Hooters business increased due to distribution changes in our US markets and have improved sequentially from the second half of 2017 as we took steps to reduce costs and adjust pricing in the US and South Africa.

 

Restaurant operating expenses

 

Restaurant operating expenses decreased 2.6% to $11.2 million for the six months ended June 30, 2018 from $11.5 million for the six months ended June 30, 2017.

 

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

 

   Six Months Ended 
   June 30, 2018   June 30, 2017     
Operating Expenses  Amount   % of Restaurant Net Sales   Amount   % of Restaurant Net Sales   % Change 
Better Burgers Fast Casual  $6,138,611    56.1%  $6,273,355    56.3%   -2.1%
Just Fresh Fast Casual   1,131,470    52.9%   1,448,127    53.2%   -21.9%
Hooters Full Service  3,956,682    57.6%   3,808,489    60.3%   3.9%
   $11,226,763    56.3%  $11,529,971    57.1%   -2.6%

 

As a percent of restaurant revenues, operating expenses decreased to 56.3% for the six months ended June 30, 2018 from 57.1% for the six months ended June 30, 2017. Operating expenses improved due to the closure of underperforming locations where rent and occupancy costs were higher than our target levels. Operating expenses also improved as a percent of revenue as the new locations that were opened over the past 12 months were in our Little Big Burger and BGR brands which have more favorable personnel and occupancy cost requirements than our other brands. Those improvements were partially offset by increases in personnel costs primarily associated with higher minimum wage rates and increased service charges from third party delivery services.

 

Restaurant pre-opening and closing expenses

 

Restaurant pre-opening and closing expenses increased to $200 thousand for the six months ended June 30, 2018 from $105 thousand for the six months ended June 30, 2017. We have more new stores under lease and incurring pre-opening rent and other costs. We expect pre-opening expenses to continue to increase throughout 2018 as new store preopening activity increases.

 

General and Administrative Expense (“G&A”)

 

G&A decreased to $2.3 million for the six months ended June 30, 2018 from $2.5 million for the six months ended June 30, 2017.

 

Significant components of G&A are summarized as follows:

 

   Six Months Ended 
   June 30, 2018   June 30, 2017 
Audit, legal and other professional services  $710,634   $675,888 
Salary and benefits   1,017,075    1,088,489 
Travel and entertainment   90,899    81,899 
Shareholder services and fees   19,394    86,973 
Advertising, insurance and other   477,081    526,793 
Total G&A Expenses  $2,315,083   $2,460,042 

 

As a percentage of total revenue, G&A decreased to 11.4% for the six months ended June 30, 2018 from 11.9% for the six months ended June 30, 2017.

 

For the current year, approximately $1.3 million for our G&A is attributable to the cost of operating our Corporate office including salaries, travel, audit, legal and other public company and transaction related costs. Approximately $1.0 million is attributable to managing the operations of our restaurants, including regional management, franchising operations, marketing and advertising within the Better Burger group, Hooters and Just Fresh.

 

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The reductions in G&A over the past several years were 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. The Company implemented a new enterprise-wide accounting platform and point-of-sale system across the Company’s U.S. based locations further streamlining and simplifying operational process during the current year, which also contributed to the overhead expense reductions. The Company expects to grow its Burger business without needing to add significant support costs, with overall G&A in future periods expected to remain relatively consist as a percent of revenue.

 

Asset impairment charges

 

Asset impairment charges totaled $1.7 million for the six months ended June 30, 2018 as compared with $0.6 during the six months ended June 30, 2017. The Company recognized impairment charges related to the closure of one Just Fresh location and one American Burger location in Charlotte. In addition, the Company recognized impairment charges related to its Hooters Nottingham location of approximately $1.5 million. The impairment charges were primarily reflected in the first quarter of 2018 with minor adjustments in the second quarter, and arise primarily from reducing goodwill, leasehold improvements, intangible assets and property and equipment to estimated net realizable value based on management’s intent with regard to the related store locations.

 

Depreciation and amortization

 

Depreciation and amortization expense was essentially unchanged at $1.1 million for the six months ended June 30, 2018 and $1.2 million for the six months ended June 30, 2017. Increased depreciation from new stores and increased amortization of franchise right intangibles were more than offset by reduced deprecation from locations that have been closed with related assets written off in the current and prior years.

 

OTHER INCOME (EXPENSE)

 

Other income (expense) consisted of the following:

 

   Six Months Ended 
Other Income (Expense)  June 30, 2018   June 30, 2017   % Change 
Interest expense  $(1,264,939)  $(1,483,842)   -14.8%
Loss on extinguishment of debt   -    (95,310)   - 
Other income (expense)   5,490    12,212    -55.0%
Total other expense  $(1,259,449)  $(1,566,940)   -19.6%

 

Other expense decreased to $1.3 million for the six months ended June 30, 2018 from $1.6 million for the six months ended June 30, 2017. The change in other expenses, net was primarily due to increased non-cash amortization of debt discounts and penalty interest, partially offset by lower interest rates on our notes and convertible debt obligations.

 

During 2017, the Company modified the terms of certain of its convertible notes resulting in a non-cash loss of $95 thousand.

 

LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN

 

As of June 30, 2018, our cash balance was $1.5 million, our working capital was negative $10.6 million and we have significant near-term commitments and contractual obligations. The level of additional cash needed to fund operations and our ability to conduct business for the next 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 refinance or otherwise extend maturities of current debt obligations;
     
  the level of investment in acquisition of new restaurant businesses and entering new markets;

 

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  our ability to manage our operating expenses and maintain gross margins 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 requirements and capital expenditures with proceeds from the issuances of our common stock and other financing arrangements, including convertible debt, lines of credit, notes payable, capital leases, and other forms of external financing.

 

Our operating plans for the next twelve months contemplate opening seven to ten additional company owned stores as well as growing our franchising businesses at Little Big Burger and BGR. We have contractual commitments related to store construction of approximately $1.5 million, of which we expect approximately $1.0 million to be funded by private investors and approximately $0.5 million will be funded internally by the Company. We also have $9.8 million of debt obligations due on demand or within the next 6 months plus interest. In addition, if our lenders were to assess default interest and penalties, our obligations could be accelerated and additional interest and penalties of approximately $1.2 million could potentially be assessed. We expect to be able to refinance our current debt obligations during 2018 and are also exploring the sale of certain assets to reduce debt. In May 2018, the Company completed the sale of 403,214 shares of common stock at a price of $3.50 per common share for proceeds of $1.4 million. In January 2018, the Company received net proceeds of $290,000 from the exercise of 100,000 common stock warrants. During the first six months or 2018, the Company also received $750,000 in contributions from non-controlling interests for new store construction. However, we cannot provide assurance that we will be able to refinance our long-term debt, sell assets or raise additional capital.

 

As we execute our growth plans over the next 12 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. In the event that capital is not available or we are unable to refinance our debt obligations or obtain waivers, we may then have to scale back or freeze our organic growth plans, sell assets on less than favorable terms, reduce expenses, and/or curtail future acquisition plans to manage our liquidity and capital resources. We may also incur financial penalties or other negative actions from our lenders if we are not able to refinance or otherwise extend or repay our current obligations or obtain waivers. These factors raise substantial doubt about our ability to continue as a going concern.

 

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 be necessary should the Company be unable to continue as a going concern.

 

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, 2017.

 

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 June 30, 2018, 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.

 

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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 of 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 June 30, 2018. Our management has determined that, as of June 30, 2018 the Company’s disclosure controls and procedures were not effective.

 

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 June 30, 2018. 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 June 30, 2018, 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:

 

The Company performs extensive reconciliation and manual review procedures to ensure that the financial statements results are accurately presented. However, the financial close procedures are not formally documented and were inconsistently applied across the organization for periods prior to mid-2017 at which time management implement a new centralized accounting system and standardized the close process across all its domestic operations.
   
The Company’s financial statements include significant and unusual transactions as well as complex 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.

 

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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 were not effective as of December 31, 2017,

 

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 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. The Company outsourced certain day-to-day accounting processes and controls and took advantage of more robust and advanced accounting software for our multiple concepts and entities.

 

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

 

Changes in Internal Control over Financial Reporting — The Company 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 in prior periods.

 

During the three months ended June 30, 2018, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1: LEGAL PROCEEDINGS

 

We are subject to various legal proceedings from time to time in the ordinary course of business, which may not be required to be disclosed under this Item 1. For the three month period ending June 30, 2018 covered by this Quarterly Report, there have been no reportable legal proceedings or material developments to previously reported legal proceedings.

 

ITEM 1A: RISK FACTORS

 

There have been no material changes to our risk factors as previously disclosed in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31,2017 (“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

 

Not applicable

 

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

 

The Company was technically in default of certain provisions of its various debt agreements as of June 30, 2018.

 

ITEM 4: MINE SAFETY DISCLOSURES

 

Not applicable.

 

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ITEM 5: OTHER INFORMATION

 

None.

 

ITEM 6: EXHIBITS

 

Exhibit No.   Description
     
4.1   Form of Investor Warrant (Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K dated May 8, 2018)
     
10.1   Form of Securities Purchase Agreement dated May 3, 2018 (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated May 8, 2018)
     
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: August 13, 2018 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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