Notes
to Consolidated Financial Statements
1.
Nature of Business
Organization
Chanticleer
Holdings, Inc. (the “Company”) is in the business of owning, operating and franchising fast casual dining concepts
domestically and internationally. The Company was organized October 21, 1999, under its original name, Tulvine Systems, Inc.,
under the laws of the State of Delaware. On April 25, 2005, Tulvine Systems, Inc. formed a wholly owned subsidiary, Chanticleer
Holdings, Inc., and on May 2, 2005, Tulvine Systems, Inc. merged with, and changed its name to, Chanticleer Holdings, Inc.
The
consolidated financial statements include the accounts of Chanticleer Holdings, Inc. and its subsidiaries presented below (collectively
referred to as the “Company”):
Name
|
|
Jurisdiction
of Incorporation
|
|
Percent
Owned
|
|
Name
|
|
Jurisdiction
of Incorporation
|
|
Percent
Owned
|
CHANTICLEER
HOLDINGS, INC.
|
|
DE,
USA
|
|
100%
|
|
|
|
|
|
|
Burger
Business
|
|
|
|
|
|
Just
Fresh
|
|
|
|
|
American
Roadside Burgers, Inc.
|
|
DE,
USA
|
|
100%
|
|
JF
Franchising Systems, LLC
|
|
NC,
USA
|
|
56%
|
ARB
Stores
|
|
|
|
|
|
JF
Restaurants, LLC
|
|
NC,
USA
|
|
56%
|
American
Burger Ally, LLC
|
|
NC,
USA
|
|
100%
|
|
|
|
|
|
|
American
Burger Morehead, LLC
|
|
NC,
USA
|
|
100%
|
|
West
Coast Hooters
|
|
|
|
|
American
Roadside McBee, LLC
|
|
NC,
USA
|
|
100%
|
|
Jantzen
Beach Wings, LLC
|
|
OR,
USA
|
|
100%
|
American
Roadside Southpark LLC
|
|
NC,
USA
|
|
100%
|
|
Oregon
Owl’s Nest, LLC
|
|
OR,
USA
|
|
100%
|
American
Roadside Burgers Smithtown, Inc.
|
|
DE,
USA
|
|
100%
|
|
Tacoma
Wings, LLC
|
|
WA,
USA
|
|
100%
|
American
Burger Prosperity, LLC
|
|
NC,
USA
|
|
100%
|
|
|
|
|
|
|
BGR
Acquisition, LLC
|
|
NC,
USA
|
|
100%
|
|
South
African Entities
|
|
|
|
|
BGR
Franchising, LLC
|
|
VA,
USA
|
|
100%
|
|
Chanticleer
South Africa (Pty) Ltd.
|
|
South
Africa
|
|
100%
|
BGR
Operations, LLC
|
|
VA,
USA
|
|
100%
|
|
Hooters
Emperors Palace (Pty.) Ltd.
|
|
South
Africa
|
|
88%
|
BGR
Arlington, LLC
|
|
VA,
USA
|
|
100%
|
|
Hooters
On The Buzz (Pty) Ltd
|
|
South
Africa
|
|
95%
|
BGR
Cascades, LLC
|
|
VA,
USA
|
|
100%
|
|
Hooters
PE (Pty) Ltd
|
|
South
Africa
|
|
100%
|
BGR
Dupont, LLC
|
|
DC,
USA
|
|
100%
|
|
Hooters
Ruimsig (Pty) Ltd.
|
|
South
Africa
|
|
100%
|
BGR
Old Keene Mill, LLC
|
|
VA,
USA
|
|
100%
|
|
Hooters
SA (Pty) Ltd
|
|
South
Africa
|
|
78%
|
BGR
Old Town, LLC
|
|
VA,
USA
|
|
100%
|
|
Hooters
Umhlanga (Pty.) Ltd.
|
|
South
Africa
|
|
90%
|
BGR
Potomac, LLC
|
|
MD,
USA
|
|
100%
|
|
Hooters
Willows Crossing (Pty) Ltd
|
|
South
Africa
|
|
100%
|
BGR
Springfield Mall, LLC
|
|
VA,
USA
|
|
100%
|
|
|
|
|
|
|
BGR
Tysons, LLC
|
|
VA,
USA
|
|
100%
|
|
European
Hooters
|
|
|
|
|
BGR
Washingtonian, LLC
|
|
MD,
USA
|
|
100%
|
|
Chanticleer
Holdings Limited
|
|
Jersey
|
|
100%
|
Capitol
Burger, LLC
|
|
MD,
USA
|
|
100%
|
|
|
|
|
|
|
BGR
Mosaic, LLC
|
|
VA,
USA
|
|
100%
|
|
West
End Wings LTD
|
|
United
Kingdom
|
|
100%
|
BGR
Michigan Ave, LLC
|
|
DC,
USA
|
|
100%
|
|
|
|
|
|
|
BGR
Chevy Chase, LLC
|
|
MD,
USA
|
|
100%
|
|
|
|
|
|
|
BGR
Acquisition 1, LLC
|
|
NC,
USA
|
|
100%
|
|
Inactive
Entities
|
|
|
|
|
BT
Burger Acquisition, LLC
|
|
NC,
USA
|
|
100%
|
|
Hoot
Surfers Paradise Pty. Ltd.
|
|
Australia
|
|
60%
|
BT’s
Burgerjoint Biltmore, LLC
|
|
NC,
USA
|
|
100%
|
|
Hooters
Brazil
|
|
Brazil
|
|
100%
|
BT’s
Burgerjoint Promenade, LLC
|
|
NC,
USA
|
|
100%
|
|
DineOut
SA Ltd.
|
|
England
|
|
89%
|
BT’s
Burgerjoint Rivergate LLC
|
|
NC,
USA
|
|
100%
|
|
Avenel
Financial Services, LLC
|
|
NV,
USA
|
|
100%
|
BT’s
Burgerjoint Sun Valley, LLC
|
|
NC,
USA
|
|
100%
|
|
Avenel
Ventures, LLC
|
|
NV,
USA
|
|
100%
|
LBB
Acquisition, LLC
|
|
NC,
USA
|
|
100%
|
|
Chanticleer
Advisors, LLC
|
|
NV,
USA
|
|
100%
|
Cuarto
LLC
|
|
OR,
USA
|
|
100%
|
|
Chanticleer
Investment Partners, LLC
|
|
NC,
USA
|
|
100%
|
LBB
Acquisition 1 LLC
|
|
OR,
USA
|
|
100%
|
|
Dallas
Spoon Beverage, LLC
|
|
TX,
USA
|
|
100%
|
LBB
Green Lake LLC
|
|
OR,
USA
|
|
50%
|
|
Dallas
Spoon, LLC
|
|
TX,
USA
|
|
100%
|
LBB
Hassalo LLC
|
|
OR,
USA
|
|
80%
|
|
American
Roadside Cross Hill, LLC
|
|
NC,
USA
|
|
100%
|
LBB
Platform LLC
|
|
OR,
USA
|
|
80%
|
|
Chanticleer
Finance UK (No. 1) Plc
|
|
United
Kingdom
|
|
100%
|
LBB
Progress Ridge LLC
|
|
OR,
USA
|
|
50%
|
|
|
|
|
|
|
Noveno
LLC
|
|
OR,
USA
|
|
100%
|
|
|
|
|
|
|
Octavo
LLC
|
|
OR,
USA
|
|
100%
|
|
|
|
|
|
|
Primero
LLC
|
|
OR,
USA
|
|
100%
|
|
|
|
|
|
|
Quinto
LLC
|
|
OR,
USA
|
|
100%
|
|
|
|
|
|
|
Segundo
LLC
|
|
OR,
USA
|
|
100%
|
|
|
|
|
|
|
Septimo
LLC
|
|
OR,
USA
|
|
100%
|
|
|
|
|
|
|
Sexto
LLC
|
|
OR,
USA
|
|
100%
|
|
|
|
|
|
|
All
significant inter-company balances and transactions have been eliminated in consolidation.
The
Company operates on a calendar year-end. The accounts of one of the Company’s subsidiaries, Hooters Nottingham (“WEW”),
are consolidated based on either a 52- or 53-week period ending on the Sunday closest to each December 31. No events occurred
related to the difference between the Company’s reporting calendar year end and the Company’s subsidiary year end
that materially affected the company’s financial position, results of operations, or cash flows.
LIQUIDITY,
CAPITAL RESOURCES AND GOING CONCERN
As
of December 31, 2016, our cash balance was $0.3 million, our working capital was negative $10 million and we have significant
near term 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 obtain waivers and 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 moderate organic growth, opening 6-10 new stores within our current markets
and restaurant concepts, the majority of which will be funded by funds already committed from outside investors. 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.
We
have obligations that are currently past due or otherwise payable within the next twelve months from date of issuance of these
financial statements. 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.
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
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying
notes. Significant estimates include the valuation of the investments, deferred tax asset valuation allowances, valuing options
and warrants using the Binomial Lattice and Black Scholes models, intangible asset valuations and useful lives, depreciation and
uncollectible accounts and reserves. Actual results could differ from those estimates.
REVENUE
RECOGNITION
Revenue
is recognized when all of the following criteria have been satisfied:
|
●
|
Persuasive
evidence of an arrangement exists;
|
|
|
|
|
●
|
Delivery
has occurred or services have been rendered;
|
|
|
|
|
●
|
The
seller’s price to the buyer is fixed or determinable; and
|
|
|
|
|
●
|
Collectability
is reasonably assured.
|
Restaurant
Net Sales and Food and Beverage Costs
The
Company records revenue from restaurant sales at the time of sale, net of discounts, coupons, employee meals, and complimentary
meals and gift cards. Sales, value added tax (“VAT”) and goods and services tax (“GST”) collected from
customers and remitted to governmental authorities are presented on a net basis within sales in our consolidated statements of
operations and comprehensive loss. Restaurant cost of sales primarily includes the cost of food, beverages, and merchandise and
disposable paper and plastic goods used in preparing and selling our menu items, and exclude depreciation and amortization. Vendor
allowances received in connection with the purchase of a vendor’s products are recognized as a reduction of the related
food and beverage costs as earned.
Management
Fee Income
The
Company receives revenue from management fees from certain non-affiliated companies, including from managing its investment in
Hooters of America.
Gaming
Income
The
Company receives revenue from operating a gaming facility adjacent to its Hooters restaurant in Jantzen Beach, Oregon. The Company
also previously received gaming revenue from gaming machines located in Sydney, Australia. Revenue from gaming is recognized as
earned from gaming activities, net of taxes and other government fees.
Franchise
Income
The
Company accounts for initial franchisee fees in accordance with FASB ASC 952, Franchisors. The Company grants franchises to operators
in exchange for initial franchise license fees and continuing royalty payments. Franchise license fees are deferred when received
and recognized as revenue when the Company has performed substantially all initial services required by the franchise or license
agreement, which is generally upon the opening of a store. Continuing fees, which are based upon a percentage of franchisee revenues,
are recognized on the accrual basis as those sales occur.
Business
combinations
For
business combinations, the assets acquired, the liabilities assumed, and any non-controlling interest are recognized at the acquisition
date, measured at their fair values as of that date. In a business combination achieved in stages, the identifiable assets and
liabilities, as well as the non-controlling interest in the acquiree, are recognized at the full amounts of their fair values.
In a bargain purchase in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair
value of the consideration transferred plus any non-controlling interest in the acquiree, that excess would be recognized in earnings
as a gain attributable to the Company.
Long-lived
Assets
The
Company accounts for long-lived assets in accordance with Accounting Standards Codification (“ASC”) 360, “Accounting
for the Impairment or Disposal of Long-Lived Assets” (“ASC 360”), which requires that long-lived assets be evaluated
for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the useful
life has changed. Some of the events or changes in circumstances that would trigger an impairment test include, but are not limited
to;
|
●
|
significant
under-performance relative to expected and/or historical results (negative comparable sales growth or operating cash flows
for two consecutive years);
|
|
|
|
|
●
|
significant
negative industry or economic trends;
|
|
|
|
|
●
|
knowledge
of transactions involving the sale of similar property at amounts below the company’s carrying value; or
|
|
|
|
|
●
|
the
company’s expectation to dispose of long-lived assets before the end of their estimated useful lives, even though the
assets do not meet the criteria to be classified as “held for sale”.
|
Long-lived
assets are grouped for recognition and measurement of impairment at the lowest level for which identifiable cash flows are largely
independent of the cash flows of other assets. The impairment test for long-lived assets requires us to assess the recoverability
of our long-lived assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly
associated with and arising from the company’s use and eventual disposition of the assets. If the net carrying value of
a group of long-lived assets exceeds the sum of related undiscounted estimated future cash flows, the Company would be required
to record an impairment charge equal to the excess, if any, of net carrying value over fair value.
When
assessing the recoverability of our long-lived assets, which include property and equipment and finite-lived intangible assets,
the company makes assumptions regarding estimated future cash flows and other factors. Some of these assumptions involve a high
degree of judgment and also bear a significant impact on the assessment conclusions. Included among these assumptions are estimating
undiscounted future cash flows, including the projection of comparable sales, operating expenses, capital requirements for maintaining
property and equipment and residual value of asset groups. The Company formulates estimates from historical experience and assumptions
of future performance, based on business plans and forecasts, recent economic and business trends, and competitive conditions.
In the event that our estimates or related assumptions change in the future, the company may be required to record an impairment
charge.
The
Company evaluates the remaining useful lives of long-lived assets and identifiable intangible assets whenever events or circumstances
indicate that a revision to the remaining period of amortization is warranted. Such events or circumstances may include (but are
not limited to): the effects of obsolescence, demand, competition, and/or other economic factors including the stability of the
industry in which the Company operates, known technological advances, legislative actions, or changes in the regulatory environment.
If the estimated remaining useful lives change, the remaining carrying amount of the long-lived assets and identifiable intangible
assets would be amortized prospectively over that revised remaining useful life.
RESTAURANT
PRE-OPENING and closing EXPENSES
Restaurant
pre-opening and closing expenses are non-capital expenditures, and are expensed as incurred. Restaurant pre-opening expenses consist
of the costs of hiring and training the initial hourly work force for each new restaurant, travel, the cost of food and supplies
used in training, grand opening promotional costs, the cost of the initial stocking of operating supplies and other direct costs
related to the opening of a restaurant, including rent during the construction and in-restaurant training period. Restaurant closing
expenses consists of the costs related to the closing of a restaurant location and include write-off of property and equipment,
lease termination costs and other costs directly related to the closure. Pre-opening and closing expenses are expensed as incurred.
LIQUOR
LICENSES
The
costs of obtaining non-transferable liquor licenses that are directly issued by local government agencies for nominal fees are
expensed as incurred. The costs of purchasing transferable liquor licenses through open markets in jurisdictions with a limited
number of authorized liquor licenses are capitalized as indefinite-lived intangible assets and included in other assets. Liquor
licenses are reviewed for impairment annually or when events or changes in circumstances indicate that the carrying amount may
not be recoverable. Annual liquor license renewal fees are expensed over the renewal term.
ACCOUNTS
AND OTHER RECEIVABLES
The
Company monitors its exposure for credit losses on its receivable balances and the credit worthiness of its receivables on an
ongoing basis and records related allowances for doubtful accounts. Allowances are estimated based upon specific customer and
other balances, where a risk of default has been identified, and also include a provision for non-customer specific defaults based
upon historical experience. The majority of the Company’s accounts are from customer credit card transactions with minimal
historical credit risk. As of December 31, 2016 and 2015, the Company has not recorded an allowance for doubtful accounts. If
circumstances related to specific customers change, estimates of the recoverability of receivables could also change.
INVENTORIES
Inventories
are recorded at the lower of cost (first-in, first-out method) or market, and consist primarily of restaurant food items, supplies,
beverages and merchandise.
LEASES
The
Company leases certain property under operating leases. The Company also finances certain property using capital leases, with
the asset and obligation recorded at an amount equal to the present value of the minimum lease payments during the lease term.
Many
of these lease agreements contain rent holidays, rent escalation clauses and/or contingent rent provisions. Rent expense is recognized
on a straight-line basis over the expected lease term, including cancelable option periods when failure to exercise such options
would result in an economic penalty. The Company also may receive tenant improvement allowances in connection with its leases,
which are capitalized as leasehold improvements with a corresponding liability recorded in the deferred rent liability line in
the consolidated balance sheet. The tenant improvement allowance liability is amortized on a straight-line basis over the lease
term. The rent commencement date of the lease term is the earlier of the date when the Company becomes legally obligated for the
rent payments or the date when the Company takes access to the property or the grounds for build out. Certain leases contain percentage
rent provisions where additional rent may become due if the location exceeds certain sales thresholds. The Company recognizes
expense related to percentage rent obligations at such time as it becomes probable that the percent rent threshold will be met.
fair
value of financial instruments
The
Company is required to disclose fair value information about financial instruments when it is practicable to estimate that value.
The carrying amounts of the Company’s cash, accounts receivable, other receivables, accounts payable, accrued expenses,
other current liabilities, convertible notes payable and notes payable approximate their estimated fair value due to the short-term
maturities of these financial instruments and/or because related interest rates offered to the Company approximate current rates.
Property
and Equipment
Property
and equipment are stated at cost, less accumulated depreciation. Depreciation and amortization, which includes amortization of
assets held under capital leases, are recorded generally using the straight-line method over the estimated useful lives of the
respective assets or, if shorter, the term of the lease for certain assets held under a capital lease. Leasehold improvements
are amortized over the lesser of the expected lease term, or the estimated useful lives of the related assets using the straight-line
method.
The
estimated useful lives used to compute depreciation and amortization are as follow:
Leasehold
improvements
|
5-15
years
|
Restaurant
furnishings and equipment
|
3-10
years
|
Furniture
and fixtures
|
3-10
years
|
Office
and computer equipment
|
3-7
years
|
The
carrying amount of all long-lived assets is evaluated periodically to determine if adjustment to the depreciation and amortization
period or the unamortized balance is warranted. Based upon its most recent analysis, the Company believes that no impairment of
property and equipment exists at December 31, 2016 and 2015.
Maintenance
and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When property and equipment are
sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss
is included in operations.
Goodwill
The
Company reviews goodwill for impairment annually or more frequently if indicators of impairment exist. Goodwill is not subject
to amortization and has been assigned to reporting units for purposes of impairment testing. The reporting units are our segments.
A
significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include,
among others: a significant decline in the Company’s expected future cash flows; a sustained, significant decline in our
stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated
competition; the testing for recoverability of a significant asset group within a reporting unit; and slower growth rates. Any
adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material
impact on the Company’s consolidated financial statements.
The
goodwill impairment test involves a two-step process. The first step is a comparison of each reporting unit’s fair value
to its carrying value. The Company estimates fair value using the best information available, including market information and
discounted cash flow projections (also referred to as the income approach). The income approach uses a reporting unit’s
projection of estimated operating results and cash flows that is discounted using a weighted-average cost of capital that reflects
current market conditions. The projection uses management’s best estimates of economic and market conditions over the projected
period including growth rates in sales, costs and number of units, estimates of future expected changes in operating margins and
cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital
expenditures and changes in future working capital requirements. The Company validates its estimates of fair value under the income
approach by comparing the values to fair value estimates using a market approach. A market approach estimates fair value by applying
cash flow and sales multiples to the reporting unit’s operating performance. The multiples are derived from comparable publicly
traded companies with similar operating and investment characteristics of the reporting units.
If
the fair value of the reporting unit is higher than its carrying value, goodwill is deemed not to be impaired, and no further
testing is required. If the carrying value of the reporting unit is higher than its fair value, there is an indication that impairment
may exist and the second step must be performed to measure the amount of impairment loss. The amount of impairment is determined
by comparing the implied fair value of reporting unit goodwill to the carrying value of the goodwill in the same manner as if
the reporting unit was being acquired in a business combination. Specifically, fair value is allocated to all of the assets and
liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that would calculate
the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, the Company would
record an impairment loss for the difference. The Company’s Hooters Full Service segment has a goodwill balance of approximately
$4.5 million assigned to this reporting unit. A significant reduction in future revenues for the Hooters unit could potentially
impair goodwill. As of December 31, 2016, goodwill is not impaired at any of our reporting units.
InTANGIBLE
ASSETS
Trade
Name/Trademark
The
fair value of trade name/trademarks are estimated and compared to the carrying value. The Company estimates the fair value of
trademarks using the relief-from-royalty method, which requires assumptions related to projected sales from its annual long-range
plan; assumed royalty rates that could be payable if the Company did not own the trademarks; and a discount rate. Certain of the
Company’s trade name/trademarks have been determined to have a definite-lived life and are being amortized on a straight-line
basis over estimated useful lives of 10 years. The amortization expense of these definite-lived intangibles is included in depreciation
and amortization in the Company’s consolidated statement of operations and comprehensive loss. Certain of the Company’s
trade name/trademarks have been classified as indefinite-lived intangible assets and are not amortized, but instead are reviewed
for impairment at least annually or more frequently if indicators of impairment exist.
Franchise
Cost
Intangible
assets are recorded for the initial franchise fees for our Hooter’s restaurants. The Company amortizes these amounts over
a 20-year period, which is the life of the franchise agreement.
DERIVATIVE
LIABILITIES
In
connection with the issuance of a secured convertible promissory note, the terms of the convertible note included an embedded
conversion feature; which provided for the settlement of the convertible promissory note into shares of common stock at a rate,
which was determined to be variable. The Company determined that the conversion feature was an embedded derivative instrument
pursuant to ASC 815 “Derivatives and Hedging”.
The
accounting treatment of derivative financial instruments required that the Company record the conversion option and related warrants
at their fair values as of the inception date of the agreements and at fair value as of each subsequent balance sheet date. Any
change in fair value was recorded as a change in the fair value of derivative liabilities in the statement of operations. The
Company reassesses the classification at each balance sheet date. If the classification changes as a result of events during the
period, the contract is reclassified as of the date of the event that caused the reclassification. As of December 31, 2016, the
conversion feature expired.
ACQUIRED
ASSETS AND ASSUMED LIABILITIES
Pursuant
to ASC No. 805-10-25, if the initial accounting for a business combination is incomplete by the end of the reporting period in
which the combination occurs, but during the allowed measurement period not to exceed one year from the acquisition date, the
company retrospectively adjusts the provisional amounts recognized at the acquisition date by means of adjusting the amount recognized
for goodwill.
Income
Taxes
Deferred
income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment. The Company has provided a valuation allowance for the full amount of the deferred
tax assets.
As
of December 31, 2016 and 2015, the Company had no accrued interest or penalties relating to any income tax obligations. The Company
currently has no federal or state examinations in progress, nor has it had any federal or state tax examinations since its inception.
The last three years of the Company’s tax years are subject to federal and state tax examination.
Stock-based
Compensation
The
compensation cost relating to share-based payment transactions (including the cost of all employee stock options) is required
to be recognized in the financial statements. That cost is measured based on the estimated fair value of the equity or liability
instruments issued. A wide range of share-based compensation arrangements including share options, restricted share plans, performance-based
awards, share appreciation rights and employee share purchase plans are included.
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 diluted shares
outstanding.
The
following table summarizes the number of common shares potentially issuable upon the exercise of certain warrants, convertible
notes payable and convertible interest as of December 31, 2016 and 2015, which have been excluded from the calculation of diluted
net loss per common share since the effect would be antidilutive.
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Warrants -W
eighted avg
exercise price $4.93
|
|
|
9,222,032
|
|
|
|
9,506,304
|
|
Convertible notes -
Weighted avg conversion price $1.05
|
|
|
3,725,000
|
|
|
|
3,757,188
|
|
Accrued interest on convertible notes
|
|
|
458,762
|
|
|
|
123,526
|
|
Total
|
|
|
13,405,794
|
|
|
|
13,387,018
|
|
ADVERTISING
Advertising
costs are expensed as incurred. Advertising expenses which are included in restaurant operating expenses in the accompanying consolidated
statement of operations, totaled $0.7 million and $0.7 million for the years ended December 31, 2016 and 2015, respectively. Advertising
expense primarily includes local advertising.
AMORTIZATION
OF DEBT DISCOUNT
The
Company has issued various debt with warrants and conversion features for which total proceeds were allocated to individual instruments
based on the relative fair value of each instrument at the time of issuance. The value of the debt was recorded as discount on
debt and amortized over the term of the respective debt. For the year ended December 31, 2016 and 2015 amortization of debt discount
was $1.0 million and $2.4 million, respectively.
FOREIGN
CURRENCY TRANSLATION
Assets
and liabilities denominated in local currency are translated to U.S. dollars using the exchange rates as in effect at the balance
sheet date. Results of operations are translated using average exchange rates prevailing throughout the period. Adjustments resulting
from the process of translating foreign currency financial statements from functional currency into U.S. dollars are included
in accumulated other comprehensive loss within stockholders’ equity. Foreign currency transaction gains and losses are included
in current earnings. The Company has determined that local currency is the functional currency for each of its foreign operations.
Comprehensive
Income (LOSS)
Standards
for reporting and displaying comprehensive income (loss) and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements requires that all items that are required to be recognized under accounting standards
as components of comprehensive income (loss) be reported in a financial statement that is displayed with the same prominence as
other financial statements. We are required to (a) classify items of other comprehensive income (loss) by their nature in financial
statements, and (b) display the accumulated balance of other comprehensive income (loss) separately in the equity section of the
balance sheet for all periods presented. Other comprehensive income (loss) items include foreign currency translation adjustments,
and the unrealized gains and losses on our marketable securities classified as held for sale.
concentration
of credit risk
The
Company maintains its cash with major financial institutions. Cash held in U.S. bank institutions is currently insured by the
Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. No similar insurance or guarantee
exists for cash held in South Africa or the United Kingdom bank accounts. There was approximately $35 thousand and $165 thousand
in aggregate uninsured cash balances at December 31, 2016 and 2015, respectively.
RECLASSIFICATIONS
Certain
reclassifications have been made in the financial statements at December 31, 2015 and for the period then ended to conform to
the December 31, 2016 presentation, including the reclassification of discontinued operations. The reclassifications had no effect
on net loss.
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” which provides a single, comprehensive accounting model for revenue
arising from contracts with customers. This guidance supersedes most of the existing revenue recognition guidance, including industry-specific
guidance. Under this model, revenue is recognized at an amount that a company expects to be entitled to upon transferring control
of goods or services to a customer. The new guidance also requires additional disclosures about the nature, timing and uncertainty
of revenue and cash flow arising from customer contracts, including significant judgments and changes in judgments. The new guidance
will be effective for the Company beginning in calendar 2018 and may be applied retrospectively to all prior periods presented
or through a cumulative adjustment to the opening retained earnings balance in the year of adoption. The Company is currently
evaluating the effect of this update on its consolidated financial statements, but believes it will not have a material impact
on operations.
In
April 2015, FASB issued ASU No. 2015-03 “Simplifying the Presentation of Debt Issuance Costs” which requires that
debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying
amount of that debt liability consistent with the presentation of debt discounts, however debt issuance costs related to revolving
credit agreements may be presented in the balance sheet as an asset. This guidance was adopted in the first quarter of 2016 and
had no effect on the Company’s consolidated financial statements.
In
November 2015, the FASB issued ASU No. 2015-07 “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”
related to the presentation of deferred income taxes. The guidance requires that deferred tax assets and liabilities be classified
as non-current in a consolidated balance sheet. This guidance is effective for us in the first quarter of 2017 and is not expected
to materially affect the Company’s consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02 “Leases,” which supersedes ASC 840 “Leases” and creates
a new topic, ASC 842 “Leases.” This update requires lessees to recognize a lease liability and a lease asset for all
leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required
quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December
15, 2018 and interim periods within those fiscal years, with earlier adoption permitted. This update will be applied using a modified
retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period
presented in the financial statements. The Company has not completed its evaluation of effect this update will have on its consolidated
financial statements, but does expect there could be a material increase in both assets and liabilities reflect on its consolidated
balance sheets as a result of adoption.
In
March 2016, the FASB issued ASU No. 2016-09 “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting”. The amendments in this update simplify several aspects of the accounting for employee share-based payment
transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification
in the statement of cash flows. This update will be effective for the Company in fiscal year 2017, but early adoption is permitted.
The Company is currently evaluating the effect of this update on its consolidated financial statements.
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 is currently evaluating the effect of this update on its 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 applicable, by the Company. At December 31, 2016, 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
The
Company’s acquisitions were accounted for using the purchase method of accounting in accordance with ASC 805 “Business
Combinations” and, accordingly, the condensed consolidated statements of operations include the results of these operations
from the dates of acquisition. The assets acquired and the liabilities assumed were recorded at estimated fair values based on
information currently available and based on certain assumptions as to future operations.
In
connection with the acquisition of the restaurants, the Company analyzed each acquisition to determine the purchase price allocation
in consideration of all identifiable intangibles. Based on our evaluation, there were no marketing related assets, customer related
intangibles or contract based arrangements for which the purchase price would be required to be allocated. For marketing related
assets, the Company did not acquire any trademarks or trade names (for Hooters acquisitions) or enter into any non-compete agreements.
The Company is however required to pay royalties based on future sales. For acquisitions other than Hooters restaurants, the value
of any trademark/tradename, was calculated using a relief of royalty method considering future franchise opportunities, and the
value was determined to be de minimus. With respect to customer related intangibles, the Company did not acquire any customer
lists or enter into any customer contractual arrangements nor did the Company enter into any licensing or royalty arrangements
requiring a further allocation of the purchase price. The premium paid for the businesses represents the economic value that is
not captured by other assets such as the reputation of the businesses, the value of its human capital, its future growth potential
and its professional management. The acquisition of these businesses will help the Company expand its domestic operations and
presence.
During
the years ended December 31, 2016 and 2015, the Company acquired several businesses to complement and expand its fast casual restaurant
businesses. In connection with these acquisitions, the Company acquired strategic opportunities to expand its scale and presence
in the geographic markets where it operates, to expand into new markets, and to strengthen the Company’s full service and
fast casual restaurant businesses.
2016
Acquisition
The
Company completed one acquisition during 2016, which was the acquisition of a restaurant location in the Harris YMCA in Charlotte,
N.C. to expand our Just Fresh business. The Company allocated the purchase price as of the date of acquisition based on the estimated
fair value of the acquired assets and assumed liabilities. In consideration of the purchased assets, the Company paid a purchase
price totaling $72,215 in cash, of which $1,611 was allocated to acquired inventory and $70,604 to goodwill. The equipment and
other assets used in the operation of the business are property of the YMCA and no other tangible or identifiable intangible assets
other than inventory were acquired, with the balance being allocated to goodwill.
No
proforma information was included as the proforma impact of the acquisition is not material.
2015
Acquisitions
During
the year ended December 31, 2015, the Company acquired three businesses to complement and expand its current operations in the
Better Burger fast casual restaurant category. In connection with these acquisitions, the Company acquired strategic opportunities
to expand its scale and presence in the Better Burger category.
Acquisition
of BGR: The Burger Joint
The
Company completed the acquisition of BGR: The Burger Joint effective March 15, 2015. The Company allocated the purchase price
as of the date of acquisition based on appraisals and estimated the fair value of the acquired assets and assumed liabilities.
In consideration of the purchased assets, the Company paid a purchase price consisting of $4.0 million in cash, 500,000 shares
of the Company’s common stock valued at $1.0 million, and a contractual working capital adjustment of $276,429. The fair
value of the shares was the closing stock market price on the date the acquisition was consummated.
Acquisition
of BT’s Burger Joint
On
July 1, 2015, the Company completed the acquisition with BT’s Burgerjoint Management, LLC, a limited liability company organized
under the laws of North Carolina (“BT’s”), including the ownership interests of four operating restaurant subsidiaries
engaged in the fast casual hamburger restaurant business under the name “BT’s Burger Joint”. In consideration
of the purchased assets, the Company paid a purchase price consisting of $1.4 million in cash and 424,080 shares of the Company’s
common stock valued at $1.0 million. The fair value of the shares was the closing stock market price on, the date the deal acquisition
was consummated.
Acquisition
of Little Big Burger
On
September 30, 2015, the Company completed the acquisition of various entities operating eight Little Big Burger restaurants in
Oregon. In consideration of the purchased assets, the Company paid a purchase price consisting of $3.6 in cash and 1,874,063 shares
of the Company’s common stock valued at $2.1 million. The fair value of the shares was the closing stock market price on
the date the acquisition was consummated.
The
acquisitions were accounted for using the purchase method of accounting in accordance with ASC 805 “Business Combinations”
and, accordingly, the consolidated statements of operations and comprehensive loss include the results of these operations from
the dates of acquisition. The assets acquired and the liabilities assumed were recorded at estimated fair values based on information
currently available and based on certain assumptions as to future operations as follows:
|
|
2015 Acquisitions
|
|
|
|
BGR: The Burger Joint
|
|
|
BT’s Burger Joint
|
|
|
Little Big Burger
|
|
|
Total
|
|
Consideration paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
$
|
1,000,000
|
|
|
$
|
1,000,848
|
|
|
$
|
2,061,469
|
|
|
$
|
4,062,317
|
|
Cash
|
|
|
4,276,429
|
|
|
|
1,400,000
|
|
|
|
3,600,000
|
|
|
|
9,276,429
|
|
Total consideration paid
|
|
$
|
5,276,429
|
|
|
$
|
2,400,848
|
|
|
$
|
5,661,469
|
|
|
$
|
13,338,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash acquired
|
|
|
11,000
|
|
|
|
8,000
|
|
|
|
234,638
|
|
|
|
253,638
|
|
Property and equipment
|
|
|
2,164,023
|
|
|
|
1,511,270
|
|
|
|
1,711,990
|
|
|
|
5,387,283
|
|
Goodwill
|
|
|
663,037
|
|
|
|
1,040,542
|
|
|
|
2,938,279
|
|
|
|
4,641,858
|
|
Trademark/trade name/franchise fee
|
|
|
2,750,000
|
|
|
|
-
|
|
|
|
1,550,000
|
|
|
|
4,300,000
|
|
Inventory, deposits and other assets
|
|
|
296,104
|
|
|
|
103,451
|
|
|
|
73,779
|
|
|
|
473,334
|
|
Accounts held in escrow to satisfy acquired liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
675,000
|
|
|
|
675,000
|
|
Total assets acquired, less cash
|
|
|
5,884,164
|
|
|
|
2,663,263
|
|
|
|
7,183,686
|
|
|
|
15,731,113
|
|
Liabilities assumed
|
|
|
(607,735
|
)
|
|
|
(262,415
|
)
|
|
|
(949,857
|
)
|
|
|
(1,820,007
|
)
|
Deferred tax liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
(572,360
|
)
|
|
|
(572,360
|
)
|
Total consideration paid
|
|
$
|
5,276,429
|
|
|
$
|
2,400,848
|
|
|
$
|
5,661,469
|
|
|
$
|
13,338,746
|
|
4.
INVESTMENTS
Investments
at cost consist of the following at December 31, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Chanticleer Investors, LLC
|
|
$
|
800,000
|
|
|
$
|
800,000
|
|
Chanticleer
Investors LLC –
The Company invested $800,000 during 2011 and 2012 in exchange for a 22% ownership stake in Chanticleer
Investors, LLC., which in turn holds a 3% interest in Hooters of America, the operator and franchisor of the Hooters Brand worldwide.
In
November 2015, the Company received a cash distribution totaling $543,130 on its 3% equity interest in Hooters of America, of
which $324,054 is included in management fee income and $219,076 in other income in the accompanying consolidated statements of
operations and comprehensive loss. Hooters of America did not make distributions in 2016, instead retaining its cash flow for
investment in additional company store locations.
5.
DISCONTINUED OPERATIONS
In
June 2016, the Company approved a plan to exit the Australia and Eastern Europe markets, authorizing management to sell or close
its five Hooters stores in Australia and its one store in Budapest.
The
Company completed the sale of the Hooters Australia and Budapest stores during the third quarter of 2016, transferring substantially
all of the assets and liabilities of those operations to the local operating groups. In both cases, the Company did not receive
any proceeds from the transfer, although in the case of Hooters Australia, the Company retained a five-year option to repurchase
a 20% interest in the stores for $1.
The
carrying amount of major classes of assets and liabilities included as part of discontinued operations are as follows:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Cash
|
|
$
|
-
|
|
|
$
|
303,471
|
|
Accounts receivable
|
|
|
-
|
|
|
|
19,328
|
|
Inventory
|
|
|
-
|
|
|
|
157,079
|
|
Property, plant and equipment
|
|
|
-
|
|
|
|
4,497,168
|
|
Goodwill and intangible assets
|
|
|
-
|
|
|
|
505,138
|
|
Other assets
|
|
|
-
|
|
|
|
500,546
|
|
Valuation allowance
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
-
|
|
|
|
5,982,730
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilites
|
|
|
-
|
|
|
|
889,177
|
|
Due to affiliates
|
|
|
-
|
|
|
|
390,779
|
|
Deferred rent
|
|
|
-
|
|
|
|
58,647
|
|
Total
|
|
|
-
|
|
|
|
1,338,603
|
|
|
|
|
|
|
|
|
|
|
Net Assets of discontinued operations
|
|
$
|
-
|
|
|
$
|
4,644,127
|
|
The
major line items comprising the loss of discontinued operations are as follows:
|
|
Year Ended
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,427,928
|
|
|
$
|
7,043,222
|
|
Restaurant cost of sales
|
|
|
1,196,734
|
|
|
|
2,281,649
|
|
Restaurant operating expenses
|
|
|
2,780,441
|
|
|
|
5,137,605
|
|
Restaurant pre-opening and closing expenses
|
|
|
-
|
|
|
|
258,850
|
|
General and administrative expenses
|
|
|
296,343
|
|
|
|
616,740
|
|
Depreciation and amortization
|
|
|
436,144
|
|
|
|
667,453
|
|
Other
|
|
|
22,893
|
|
|
|
(34,328
|
)
|
Loss of discontinued operations
|
|
|
(1,304,627
|
)
|
|
|
(1,884,747
|
)
|
Loss on write-down of net assets
|
|
|
(3,762,253
|
)
|
|
|
(4,489,043
|
)
|
Total pretax loss of discontinued operations
|
|
|
(5,066,880
|
)
|
|
|
(6,373,790
|
)
|
Income tax
|
|
|
-
|
|
|
|
-
|
|
Loss on discontinued operations
|
|
$
|
(5,066,880
|
)
|
|
$
|
(6,373,790
|
)
|
6.
PROPERTY AND EQUIPMENT
Property
and equipment consists of the following at December 31, 2016 and 2015:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Leasehold improvements
|
|
$
|
10,363,996
|
|
|
$
|
10,094,130
|
|
Restaurant furniture and equipment
|
|
|
6,716,926
|
|
|
|
6,243,196
|
|
Construction in progress
|
|
|
582,265
|
|
|
|
-
|
|
Office and computer equipment
|
|
|
68,303
|
|
|
|
5,470
|
|
Land and buildings
|
|
|
826,664
|
|
|
|
708,020
|
|
Office furniture and fixtures
|
|
|
108,030
|
|
|
|
104,406
|
|
|
|
|
18,666,184
|
|
|
|
17,155,222
|
|
Accumulated depreciation and amortization
|
|
|
(7,152,491
|
)
|
|
|
(5,011,158
|
)
|
|
|
$
|
11,513,693
|
|
|
$
|
12,144,064
|
|
Depreciation
and amortization expense was $2,029,804 and $1,468,144 for the years ended December 31, 2016 and 2015, respectively.
7.
INTANGIBLE ASSETS, NET
GOODWILL
Goodwill
consist of the following at December 31, 2016 and December 31, 2015:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Hooters Full Service
|
|
$
|
4,461,167
|
|
|
$
|
4,890,332
|
|
Better Burgers Fast Casual
|
|
|
7,448,848
|
|
|
|
7,386,656
|
|
Just Fresh Fast Casual
|
|
|
495,755
|
|
|
|
425,151
|
|
|
|
$
|
12,405,770
|
|
|
$
|
12,702,139
|
|
The
changes in the carrying amount of goodwill are summarized as follows:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Beginning Balance
|
|
$
|
12,702,139
|
|
|
$
|
8,325,979
|
|
Acquisitions
|
|
|
70,604
|
|
|
|
4,579,666
|
|
Adjustments
|
|
|
62,192
|
|
|
|
-
|
|
Foreign currency translation (loss) gain
|
|
|
(429,165
|
)
|
|
|
(203,506
|
)
|
Ending Balance
|
|
$
|
12,405,770
|
|
|
$
|
12,702,139
|
|
An
evaluation was completed effective December 31, 2016 at which time the Company determined that no impairment was necessary for
any of the Company’s goodwill balances.
OTHER
INTANGIBLE ASSETS
Franchise
and trademark/tradename intangible assets consist of the following at December 31, 2016 and December 31, 2015:
|
|
Estimated
Useful Life
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Trademark, Tradenames:
|
|
|
|
|
|
|
|
|
|
|
Just Fresh
|
|
10 years
|
|
$
|
1,010,000
|
|
|
$
|
1,010,000
|
|
American Roadside Burger
|
|
10 years
|
|
|
1,786,930
|
|
|
|
1,786,930
|
|
BGR: The Burger Joint
|
|
Indefinte
|
|
|
1,430,000
|
|
|
|
1,430,000
|
|
Little Big Burger
|
|
Indefinte
|
|
|
1,550,000
|
|
|
|
1,550,000
|
|
|
|
|
|
|
5,776,930
|
|
|
|
5,776,930
|
|
Franchise fees:
|
|
|
|
|
|
|
|
|
|
|
Hooters South Africa
|
|
20 years
|
|
|
322,258
|
|
|
|
286,732
|
|
Hooters Pacific NW
|
|
20 years
|
|
|
88,826
|
|
|
|
90,000
|
|
BGR: The Burger Joint
|
|
Indefinite
|
|
|
1,320,000
|
|
|
|
1,320,000
|
|
Hooters UK
|
|
20 years
|
|
|
30,848
|
|
|
|
-
|
|
|
|
|
|
|
1,761,932
|
|
|
|
1,696,732
|
|
Total Intangibles at cost
|
|
|
|
|
7,538,862
|
|
|
|
7,473,662
|
|
Accumulated amortization
|
|
|
|
|
(1,008,619
|
)
|
|
|
(696,726
|
)
|
Intangible assets, net
|
|
|
|
$
|
6,530,243
|
|
|
$
|
6,776,936
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Amortization expense
|
|
|
|
$
|
311,893
|
|
|
$
|
229,370
|
|
8.
LONG-TERM DEBT AND NOTES PAYABLE
Long-term
debt and notes payable are summarized as follows.
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Note Payable, due January 2017, net of discount of $0 and $171,868, respectively (a)
|
|
$
|
5,000,000
|
|
|
$
|
4,828,132
|
|
|
|
|
|
|
|
|
|
|
Note Payable, due April 2017 (b)
|
|
|
725,231
|
|
|
|
942,918
|
|
|
|
|
|
|
|
|
|
|
Note Payable, due October 2018 (c )
|
|
|
85,974
|
|
|
|
132,596
|
|
|
|
|
|
|
|
|
|
|
Mortgage Note, South Africa, due July 2024 (d)
|
|
|
215,962
|
|
|
|
208,131
|
|
|
|
|
|
|
|
|
|
|
Bank overdraft facilities, South Africa, annual renewal (e )
|
|
|
124,598
|
|
|
|
180,377
|
|
|
|
|
|
|
|
|
|
|
Equipment financing arrangements, South Africa (f)
|
|
|
145,430
|
|
|
|
189,490
|
|
|
|
|
|
|
|
|
|
|
Receivable financing facilities (g)
|
|
|
161,899
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
6,459,094
|
|
|
$
|
6,481,644
|
|
Current portion of long-term debt
|
|
|
6,171,649
|
|
|
|
5,383,003
|
|
Long-term debt, less current portion
|
|
$
|
287,445
|
|
|
$
|
1,098,641
|
|
(a)
The Company has a note payable of $5 million with Florida Mezzanine Fund. The note obligation was assumed in connection with Company’s
acquisition of Hooter’s Australia, which the Company subsequently discontinued. The note, which bears interest at an annualized
rate of 12%, was originally due and payable effective December 31, 2016. In connection with the Company’s agreement to conduct
capital raise and apply a portion of the proceeds to the note, the lender has agreed to waive defaults and extend the note maturity
by eighteen months. The Company is continuing to negotiate with the lender for changes to the current payment and other terms.
While the lender has not demanded repayment, discussions are ongoing and it is unclear if the lender agrees that the Company met
all terms of the extension as of December 31, 2016; therefore, the note continues to be reflected as a current liability on the
December 31, 2016 balance sheet.
In
connection with the payment of past due interest, the Company issued 562,900 shares of its common stock to the lender. Concurrently,
the Company entered into a put agreement with Florida Mezzanine Fund during 2016 which provides the lender the right to require
the Company to repurchase those shares at a price of $0.62 cents per share. This put right originally expired in January 2017
and was subsequently extended to March 31, 2017, and may likely be extended beyond that date in connection with other discussion
with the lender. The shares subject to the repurchase obligation have been reflected as a redeemable temporary equity on the accompanying
consolidated balance sheet as of December 31, 2016.
(b)
The Company has a $1 million term note payable with Paragon Bank with a current balance of $0.7 million. The note bears interest
at 5.0%, and is payable in monthly installments of principal and interest of $8,500 with a $392,325 balloon payment due at maturity.
Paragon’s note is collateralized by substantially all of the Company’s assets and guaranteed by an officer of the
Company. The notes matured in January 2017 and Paragon has extended the maturity through April 2017.
(c)
The Company has a note payable with Paragon due on October 10, 2018, bearing interest at a 5% annual rate, with principal and
interest monthly payments of $11,532. Paragon’s note is collateralized by substantially all of the Company’s assets
and guaranteed by an officer of the Company.
(d)
In April 2014, our South African subsidiary entered into a mortgage note with a South African bank for the purchase of the building
in Port Elizabeth for our Hooters location. The 10-year note as originally entered into for $330,220 with an annual interest rate
of 2.6% above the South African prime rate (prime currently 9.25%). Monthly principal and interest payments are approximately
$4,600. The mortgage note is personally guaranteed by our CEO and South African COO and secured by the assets of the Port Elizabeth
building.
(e)
The Company’s South African subsidiary has local bank financing in the form of term and overdraft facilities, which are
payable on demand and renew annually.
(f)
The Company’s South African subsidiary has three local equipment financing arrangements in the form of term loans. The obligations
bear interest at South African Prime plus 3.0% with monthly payments through maturity are various dates in 2018 and 2019.
(g)
The Company entered into two Receivables Financing Agreements during 2016. During the third calendar quarter of 2016, in consideration
for proceeds to the Company of $125,000, the Company agreed to remit a total of $156,250 from the merchant accounts of two of
its restaurant locations directly to the lender over an estimated nine-month period. The daily amounts to be remitted to the lender,
and the resulting term under which the borrowings will ultimately be outstanding, are based on remitting approximately 5% of the
total daily credit card receipts of the two restaurant locations resulting the in $156,250 being paid in full approximately nine
months from inception.
During
the fourth quarter of 2016, in consideration for additional proceeds of $150,000, the Company added this amount to the aforementioned
agreement and agreed to remit a total of $270,773 from the merchant accounts of one of its restaurant locations directly to a
lender. The Company agreed to make payments of $1,547 per day for 175 business days.
The
Company granted a security interest in the credit card receivables of the specified restaurants in connection with the Receivables
Financing Agreements.
9.
cONVERTIBLE NOTEs PAYABLE
Convertible
Notes payable are summarized as follows:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
6% Convertible notes payable issued in August 2013 (a)
|
|
$
|
3,000,000
|
|
|
$
|
3,000,000
|
|
Discounts on above convertible note
|
|
|
-
|
|
|
|
(583,341
|
)
|
Discounts on above convertible note
|
|
|
-
|
|
|
|
-
|
|
8% Convertible notes payable issued in Nov/Dec 2014 (b)
|
|
|
100,000
|
|
|
|
100,000
|
|
Discounts on above convertible note
|
|
|
-
|
|
|
|
-
|
|
8% Convertible notes payable issued in January 2015 (c )
|
|
|
150,000
|
|
|
|
150,000
|
|
Discounts on above convertible note
|
|
|
(46,936
|
)
|
|
|
(93,231
|
)
|
8% Convertible notes payable issued in January 2015 (d)
|
|
|
475,000
|
|
|
|
475,000
|
|
Discounts on above convertible note
|
|
|
-
|
|
|
|
(238,152
|
)
|
Total Convertible notes payable
|
|
|
3,678,064
|
|
|
|
2,810,276
|
|
Current portion of convertible notes payable
|
|
|
-
|
|
|
|
(2,810,276
|
)
|
Convertible notes payable, less current portion
|
|
$
|
3,678,064
|
|
|
$
|
-
|
|
(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. The funding from the
private offering was used exclusively for the acquisition of the Nottingham, England Hooters restaurant location. The Notes, which
had reached maturity on December 31, 2016, contained the following principal terms:
|
●
|
the
principal amount of the Note shall be repaid within 36 months of the issuance date at a non-compounded 6% interest rate per
annum;
|
|
|
|
|
●
|
the
Note holders shall receive 10%, pro rata, of the net profit of the Nottingham, England Hooters restaurant, paid quarterly
for the life of the location, and 10% of the net proceeds should the location be sold;
|
|
●
|
the
consortium of investors received a total of 300,000 three-year warrants, exercisable at $3.00 per share;
|
|
|
|
|
●
|
the
Note holder may convert his or her Note into shares of the Company’s common stock (at 90% of the average closing price
ten days prior to conversion, unless a public offering is pending at the time of the conversion notice, which would result
in the conversion price being the same price as the offering). The conversion price is subject to a floor of $1.00 per share;
|
|
|
|
|
●
|
the
Note holder has the right to redeem the Note for a period of sixty days following the eighteen-month anniversary of the issuance
of the Note, unless a capital raise is conducted within eighteen months after the issuance of the Note. In connection with
the issuance of the Note, the Company also issued warrants for the purchase of 300,000 shares of the Company’s common
stock at an exercise price of $3.00 per share through August 2, 2016.
|
In
connection with the Company’s agreement to conduct capital raise and apply a portion of the proceeds to the notes, the lenders
agreed to waive defaults and extend the note maturity by eighteen months (to June 30, 2018). The notes were classified as current
liabilities as of December 31, 2015. The notes have been reflected as a non-current liability on the December 31, 2016 balance
sheet as the waiver and extension was received prior to the issuance of the consolidated financial statements.
(b)
During November and December 2014, the Company entered into agreements whereby the Company issued 3-year convertible notes in
the amounts of $250,000 and $100,000, respectively. The notes accrue annualized interest of 8% until the date the notes are converted.
The notes are convertible into the Company’s common stock (at 85% of lowest three (3) trading prices for the common stock
during the ten (10) trading day period ending on the last complete Trading Day prior to the Conversion Date. The Company also
issued 5 year warrants of 62,500 and 25,000, respectively, with an exercise price of $2.50 per share. In March 2015, the debt
holder converted $250,000 principal plus accrued interest into 168,713 shares of the Company’s common stock. In connection
with the conversion, the Company recognized a loss on extinguishment of convertible debt, related accrued interest, penalties
and derivative liabilities totaling $88,724.
In
March 2017, subsequent to the date of these financial statements, the Company and the lenders agreed to exchange the convertible
notes for a new note with a 2-year term (due March, 2019), interest at 2%, and a $0.30 conversion price (see Note 16 - Subsequent
Events). The notes have been reflected as a non-current liability on the December 31, 2016 balance sheet as the waiver and extension
was received prior to the issuance of the consolidated financial statements.
(c)
In January 2015, the Company issued a convertible promissory note for a total of $150,000. The note accrues interest at 8% per
annum until the date the notes are converted. The notes are convertible into the Company’s common stock at 85% of the average
of the lowest three closing trading prices over ten days prior the conversion date. The conversion price is subject to a floor
of $1.00 per share and a ceiling of $2.00. If not converted, the note matures three years from the issuance date. The Company
also issued warrants to purchase 37,500 shares of common stock, exercisable at $2.50 per share for a period of up to 5 years from
the note’s original issuance date. The fair value of the embedded conversion feature and the warrants was $108,600 and $30,314,
respectively. The resulting debt discount is being amortized over the earlier of (i) the term of the debt or (ii) conversion of
the debt, using the straight-line method which approximates the interest method. The amortization of debt discount is included
as a component of interest expense in the consolidated statements of operations and comprehensive loss. The embedded conversion
feature is accounted for as a derivative liability in the accompanying condensed consolidated balance sheet, with its carrying
value marked to market at each balance sheet date.
In
March 2017, subsequent to the date of these financial statements, the Company and the lenders agreed to exchange the convertible
notes for a new note with a 2-year term due March, 2019, interest at 2%, and a $0.30 conversion price (see Note 16 - Subsequent
Events). The notes have been reflected as a non-current liability on the December 31, 2016 balance sheet as the waiver and extension
was received prior to the issuance of the consolidated financial statements.
(d)
In January 2015, the Company issued convertible promissory notes for $1,000,000. The notes accrue interest at 8% per annum until
the date the notes are converted. The notes are convertible into the Company’s common stock at 85% of the average of the
lowest three closing trading prices over ten days prior the conversion date. The conversion price is subject to a floor of $1.00
per share and a ceiling of $2.00. If not converted, the notes mature three years from the issuance date. The holder could demand
payment in full after one year from the issuance date. The Company also issued warrants to purchase 250,000 shares of common stock,
exercisable at $2.50 per share for a period of up to 5 years from the note’s original issuance date. The fair value of the
embedded conversion feature and the warrants was $670,300 and $202,358, respectively. The resulting debt discount is being amortized
over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the straight-line method which approximates
the interest method. The amortization of debt discount is included as a component of interest expense in the condensed consolidated
statements of operations and comprehensive loss. The embedded conversion feature is accounted for as a derivative liability in
the accompanying consolidated balance sheet, with its carrying value marked to market at each balance sheet date. $525,000 of
the $1,000,000 note has been converted into common stock during 2015. In connection with the conversions, the Company recognized
a loss on extinguishment of convertible debt, related accrued interest, penalties and derivative liabilities totaling $145,833
during 2015.
In
March 2017, subsequent to the date of these financial statements, the Company and the lenders agreed to exchange the convertible
notes for a new note with a 2-year term (due March, 2019), interest at 2%, and a $0.30 conversion price (see Note 16 - Subsequent
Events). The notes have been reflected as a non-current liability on the December 31, 2016 balance sheet as the waiver and extension
was received prior to the issuance of the consolidated financial statements.
In
addition, in March 2015, the Company issued a convertible promissory note for $1,000,000. During June 2015, this $1,000,000 million
note was converted into 500,000 shares of common stock at the $2.00 per share contractual conversion price. The note accrued interest
at 9% per annum until the date the note was converted. The note was convertible into the Company’s common stock at $2.00
per share. If not converted, the note matured two years from the issuance date. The Company also issued warrants to purchase 320,000
shares of common stock, exercisable at $2.50 per share for a period of up to 5 years from the note’s original issuance date.
The fair value of the embedded conversion feature and the warrants on the date of issuance was $455,008 and $315,008, respectively.
The resulting debt discount was being amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using
the straight-line method which approximates the interest method. The amortization of debt discount is included as a component
of interest expense in the consolidated statements of operations and comprehensive loss. The embedded conversion feature is accounted
for as a component of additional paid-in capital in the accompanying consolidated balance sheet. On the date of conversion, $643,371
of unamortized debt discount was accelerated and recognized as interest expense in the accompanying condensed consolidated statement
of operations and comprehensive loss.
10.
ACCOUNTS PAYABLE AND ACCRUED Expenses
Accounts
payable and accrued expenses are summarized as follows:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
3,807,880
|
|
|
$
|
3,547,174
|
|
Accrued taxes (VAT, Sales Payroll)
|
|
|
988,056
|
|
|
|
784,842
|
|
Accrued income taxes
|
|
|
71,713
|
|
|
|
27,709
|
|
Accrued interest
|
|
|
685,419
|
|
|
|
380,406
|
|
|
|
$
|
5,553,068
|
|
|
$
|
4,740,131
|
|
11.
INCOME TAXES
The
breakout of the loss from continuing operations before income taxes between domestic and foreign operations is below:
|
|
2016
|
|
|
2015
|
|
Income (Loss) from continuing operations before income taxes
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(4,155,057
|
)
|
|
$
|
(7,828,941
|
)
|
Foreign
|
|
|
7,486
|
|
|
|
(65,346
|
)
|
|
|
$
|
(4,147,571
|
)
|
|
$
|
(7,894,285
|
)
|
The
Income Tax (benefit) provision from continuing operations consists of the following:
Foreign
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
66,680
|
|
|
$
|
93,037
|
|
Deferred
|
|
|
55,670
|
|
|
|
135,280
|
|
Change in Valuation Allowance
|
|
|
(55,670
|
)
|
|
|
(135,280
|
)
|
U.S. Federal
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
(1,614,833
|
)
|
|
|
(1,838,235
|
)
|
Change in Valuation Allowance
|
|
|
1,734,224
|
|
|
|
1,922,815
|
|
State & Local
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
(167,597
|
)
|
|
|
(216,263
|
)
|
Change in Valuation Allowance
|
|
|
179,989
|
|
|
|
226,214
|
|
|
|
$
|
198,463
|
|
|
$
|
187,568
|
|
The
(benefit) provision for income tax, from continuing operations, using statutory U.S. federal tax rate of 34% is reconciled to
the company’s effective tax rate as follows:
|
|
2016
|
|
|
2015
|
|
Computed “expected” income tax benefit
|
|
$
|
(1,410,174
|
)
|
|
$
|
(2,684,057
|
)
|
State income taxes, net of federal benefit
|
|
|
(146,357
|
)
|
|
|
(315,771
|
)
|
Foreign rate differential
|
|
|
-
|
|
|
|
87,657
|
|
Prior year true-ups other deferred tax balances
|
|
|
(337,713
|
)
|
|
|
322,936
|
|
Permanent Items
|
|
|
27,219
|
|
|
|
11,698
|
|
Capital loss expiration
|
|
|
-
|
|
|
|
333,837
|
|
Convertible Debt Issuances and conversions
|
|
|
-
|
|
|
|
482,018
|
|
Foreign Tax Expense
|
|
|
66,680
|
|
|
|
93,037
|
|
Other
|
|
|
140,265
|
|
|
|
(157,536
|
)
|
Change in valuation allowance
|
|
|
1,858,543
|
|
|
|
2,013,749
|
|
Effective Rate
|
|
$
|
198,463
|
|
|
$
|
187,568
|
|
Deferred
income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial
reporting and the amounts used for tax purposes. Major components of deferred tax assets for continuing operations at December
31, 2016 and 2015 were:
|
|
2016
|
|
|
2015
|
|
Net operating loss carryforwards
|
|
$
|
9,291,804
|
|
|
$
|
8,612,906
|
|
Capital loss carryforwards
|
|
|
152,772
|
|
|
|
154,700
|
|
Section 1231 loss carryforwards
|
|
|
111,506
|
|
|
|
15,080
|
|
Charitable contribution carryforwards
|
|
|
33,998
|
|
|
|
16,815
|
|
Derivative liability
|
|
|
0
|
|
|
|
468,011
|
|
Other
|
|
|
260,086
|
|
|
|
190,551
|
|
Restaurant startup costs
|
|
|
89,159
|
|
|
|
137,893
|
|
Accrued Expenses
|
|
|
686,321
|
|
|
|
36,182
|
|
Deferred occupancy liabilities
|
|
|
261,181
|
|
|
|
290,500
|
|
Total deferred Tax Assets
|
|
|
10,886,827
|
|
|
|
9,922,638
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(765,187
|
)
|
|
|
(978,583
|
)
|
Convertible debt
|
|
|
(17,611
|
)
|
|
|
(811,177
|
)
|
Investments
|
|
|
(80,246
|
)
|
|
|
(90,200
|
)
|
Intangibles and Goodwill
|
|
|
(536,891
|
)
|
|
|
(282,547
|
)
|
Total deferred tax liabilities
|
|
|
(1,399,935
|
)
|
|
|
(2,162,507
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
9,486,892
|
|
|
|
7,760,131
|
|
Valuation Allowance
|
|
|
(10,972,446
|
)
|
|
|
(9,113,900
|
)
|
|
|
$
|
(1,485,554
|
)
|
|
$
|
(1,353,771
|
)
|
Excluded from the above table
of deferred tax assets are approximately $2,940,000 and $3,213,000 for net operating loss carryforwards and related valuation
allowances for discontinued operations at December 31, 2016 and 2015, respectively.
As of December 31, 2016 and
2015, the company has U.S. federal and state net operating loss carryovers of approximately $32,893,000 and $29,635,000 respectively,
which will expire at various dates beginning in 2031 through 2036, if not utilized. As of December 31, 2016 and 2015 the company
has foreign net operating loss carryovers of approximately $1,352,000 (for South Africa) and $2,284,000 ($701,000 for Hungary,
$1,175,000 for South Africa, and $408,000 for Australia) respectively. Depending on the jurisdiction, some of these net operating
loss carryovers will begin to expire within 5 years, while other net operating losses can be carried forward indefinitely as long
as the company is trading. The company has a capital loss carryforward of $407,000 which expires between 2016 and 2017 if not
utilized. In accordance with Section 382 of the internal revenue code, deductibility of the company’s U.S. net operating
loss carryovers may be subject to an annual limitation in the event of a change of control as defined under the Section 382 regulations.
Quarterly ownership changes for the past 3 years were analyzed and it was determined that there was no change of control as of
December 31, 2016.
In assessing the realization
of deferred tax assets, Management considers whether it is more likely than not that some portion or all of the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration of all
of the information available, Management believes that significant uncertainty exists with respect to future realization of the
deferred tax assets and has therefore established a full valuation allowance. For the years ended December 31, 2016 and December
31, 2015 the change in valuation allowance related to continuing operations was approximately $1,858,543 and $2,013,749, respectively.
The company evaluated the
provisions of ASC 740 related to the accounting for uncertainty in income taxes recognized in their financial statements. ASC
740 prescribes a comprehensive model for how a company should recognize, present, and disclose uncertain positions that the company
has taken or expects to take in its return. For those benefits to be recognized, a tax position must be more-likely-than- not
to be sustained upon examination by taxing authorities. Differences between two positions taken or expected to be taken in a tax
return and the benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits”.
A liability is recognized for an unrecognized tax benefit because it represents an enterprise’s potential future obligation
to the taxing-authority for a tax position that was not recognized as a result of applying the provisions of ASC 740.
Interest related to uncertain
tax positions are required to be calculated, if applicable, and would be classified as “interest expense” in the two
statements of operations. Penalties would be recognized as a component of “general and administrative expenses”. As
of December 31, 2016 and 2015 no interest or penalties were required to be reported.
No
provision was made for U.S. or foreign taxes on approximately $1,267,000 of undistributed earnings of the Company as such earnings
are considered to be permanently reinvested. Such earnings have been, and will continue to be, reinvested, but could become subject
to additional tax if they were remitted as dividends, loaned to the Company, or if the Company should sell its interests in the
foreign entities. It is not practicable to determine the amount of additional tax, if any, that might be payable on the undistributed
earnings or on any book-tax basis differences. Earnings from the U.K. subsidiary are no longer considered to be permanently reinvested.
Therefore, for deferred tax purposes only, the company has deemed the earnings to be repatriated to the parent company as a dividend.
This deemed dividend is fully offset by the company’s net operating losses, so there is no deferred tax expense on the deemed
repatriation.
12.
STOCKHOLDERS’ EQUITY
The
Company had 45,000,000 shares of its $0.0001 par value common stock authorized at both December 31, 2016 and December 31, 2015.
The Company had 21,394,247 and 21,337,247 shares issued and outstanding at December 31, 2016 and December 31, 2015, respectively.
The
Company has 5,000,000 shares of its no par value preferred stock authorized at both December 31, 2016 and December 31, 2015.
Beginning
in December 2016, the Company conducted a rights offering of units, each unit consisting of one share of 9% Redeemable Series
1 Preferred Stock (“Series 1 Preferred”) and one Series 1 Warrant (“Series 1 Warrant”) to purchase 10
shares of common stock. Holders of the Series 1 Preferred are entitled to receive cumulative dividends out of legally available
funds at the rate of 9% of the purchase price per year for a term of seven years, payable quarterly on the last day of March,
June, September and December in each year in cash or registered common stock. Shares of common stock issued as dividends will
be issued at a 10% discount to the five-day volume weighted average price per share of common stock prior to the date of issuance.
Dividends will be paid prior to any dividend to the holders of common stock. The Series 1 Preferred in non-voting and has a liquidation
preference of $13.50 per share, equal to its purchase price. Chanticleer is required to redeem the outstanding Series 1 Preferred
at the expiration of the seven-year term.. The redemption price for any shares of Series 1 Preferred will be an amount equal to
the $13.50 purchase price per share plus any accrued but unpaid dividends to the date fixed for redemption.
As
of December 31, 2016, 19,050 shares of preferred stock were issued pursuant to the Preferred Stock Units rights offering. In addition,
43,826 additional shares were issued following in February 2016 for a total of 62,876 issued and outstanding as the date of this
report (See Note 16 Subsequent Events).
In
connection with the payment of past due interest on its $5 million note payable, the Company issued 562,900 shares of its common
stock to the lender. Concurrently, the Company entered into a put agreement with Florida Mezzanine Fund during 2016 which provides
the lender the right to require the Company to repurchase those shares at a price of $0.62 cents per share. This put right originally
expired in January 2017 and was subsequently extended to March 31, 2017, and may conceivably be extended beyond that date in connection
with ongoing discussion with the lender. The shares subject to the repurchase obligation have been reflected as a redeemable temporary
equity on the accompanying consolidated balance sheet as of December 31, 2016.
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 December 31, 2016, the Company had issued 325,340 restricted and unrestricted shares on a cumulative basis under the plan pursuant
to compensatory arrangements with employees, board members and outside consultants. No employee stock options have been issued
or are outstanding as of December 31, 2016 and December 31, 2015. The Company issued 150,000 restricted stock units to employees
during 2016. Approximately 3,674,660 shares remained available for grant in the future.
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 historical volatilities
for industry peers and used an average of those volatilities.
A
summary of the warrant activity during the years ended December 31, 2016 and 2015 is presented below:
|
|
Number
of Warrants
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Life
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 1, 2016
|
|
|
9,506,304
|
|
|
$
|
4.93
|
|
|
|
1.5
|
|
Granted
|
|
|
190,500
|
|
|
|
1.35
|
|
|
|
7.0
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
(474,772
|
)
|
|
|
(2.63
|
)
|
|
|
-
|
|
Outstanding December 31, 2016
|
|
|
9,222,032
|
|
|
$
|
4.98
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable December 31, 2016
|
|
|
9,222,032
|
|
|
$
|
4.98
|
|
|
|
1.7
|
|
Exercise Price
|
|
Outstanding
Number of Warrants
|
|
|
Weighted
Average Remaining Life in Years
|
|
|
Exerciseable
Number of Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> $4.00
|
|
|
7,439,631
|
|
|
|
1.5
|
|
|
|
7,439,631
|
|
$3.00-$3.99
|
|
|
499,901
|
|
|
|
2.6
|
|
|
|
499,901
|
|
$2.00-$2.99
|
|
|
779,500
|
|
|
|
3.1
|
|
|
|
779,500
|
|
$1.00-$1.99
|
|
|
503,000
|
|
|
|
4.3
|
|
|
|
503,000
|
|
|
|
|
9,222,032
|
|
|
|
|
|
|
|
9,222,032
|
|
13.
RELATED PARTY TRANSACTIONS
Due
to related parties
The
Company has received non-interest bearing loans and advances from related parties. The amounts owed by the Company as of December
31, 2016 and 2015 are as follows:
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Hoot SA I, LLC
|
|
$
|
-
|
|
|
$
|
12,963
|
|
Chanticleer Investors, LLC
|
|
|
194,350
|
|
|
|
-
|
|
|
|
$
|
194,350
|
|
|
$
|
12,963
|
|
The
amount from Chanticleer Investors LLC is related to cash distributions received from Chanticleer Investors LLC’s interest
Hooters of America which is payable to the Company’s co-investors in that investment.
14.
SEGMENTS OF BUSINESS
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 individual restaurant location level, as well as for
Full Service Hooters, Better Burger Fast Casual and Just Fresh Fast Casual level, and corporate as a group.
The
following are revenues and operating income (loss) from continuing operations by segment as of and for the years ended December
31, 2016 and 2015. The Company does not aggregate or review non-current assets at the segment level.
|
|
Year
Ended
|
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Hooters Full Service
|
|
$
|
13,328,809
|
|
|
$
|
14,887,874
|
|
Better Burgers Fast Casual
|
|
|
22,588,557
|
|
|
|
14,542,094
|
|
Just Fresh Fast Casual
|
|
|
5,684,635
|
|
|
|
5,498,790
|
|
Corporate
and Other
|
|
|
100,000
|
|
|
|
424,829
|
|
|
|
$
|
41,702,001
|
|
|
$
|
35,353,587
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
Hooters Full Service
|
|
$
|
116,843
|
|
|
$
|
(194,442
|
)
|
Better Burgers Fast Casual
|
|
|
(372,401
|
)
|
|
|
(1,356,984
|
)
|
Just Fresh Fast Casual
|
|
|
(33,529
|
)
|
|
|
(33,248
|
)
|
Corporate
and Other
|
|
|
(2,330,801
|
)
|
|
|
(3,495,125
|
)
|
|
|
$
|
(2,619,888
|
)
|
|
$
|
(5,079,799
|
)
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
Hooters Full Service
|
|
$
|
534,210
|
|
|
$
|
541,799
|
|
Better Burgers Fast Casual
|
|
|
1,481,005
|
|
|
|
969,331
|
|
Just Fresh Fast Casual
|
|
|
323,108
|
|
|
|
182,173
|
|
Corporate
and Other
|
|
|
3,374
|
|
|
|
4,211
|
|
|
|
$
|
2,341,697
|
|
|
$
|
1,697,514
|
|
The
following are revenues and operating income (loss) from continuing operations and non-current assets by geographic region as of
and for the years ended December 31, 2016 and 2015.
|
|
Year
Ended
|
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
Revenue:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
33,374,791
|
|
|
$
|
25,528,468
|
|
South Africa
|
|
|
5,409,648
|
|
|
|
6,430,524
|
|
Europe
|
|
|
2,917,562
|
|
|
|
3,394,595
|
|
|
|
$
|
41,702,001
|
|
|
$
|
35,353,587
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(2,712,766
|
)
|
|
$
|
(5,114,687
|
)
|
South Africa
|
|
|
(114,971
|
)
|
|
|
(162,228
|
)
|
Europe
|
|
|
207,849
|
|
|
|
197,116
|
|
|
|
$
|
(2,619,888
|
)
|
|
$
|
(5,079,799
|
)
|
Non-current Assets:
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
United States
|
|
$
|
26,812,062
|
|
|
$
|
33,417,290
|
|
South Africa
|
|
|
2,519,135
|
|
|
|
2,186,644
|
|
Europe
|
|
|
2,361,246
|
|
|
|
2,782,697
|
|
|
|
$
|
31,692,443
|
|
|
$
|
38,386,631
|
|
15.
COMMITMENTS AND CONTINGENCIES
The
Company, through its subsidiaries, leases the land and buildings for our 6 restaurants in South Africa, 1 restaurant in Nottingham,
United Kingdom, and 36 restaurants in the U.S. The South Africa leases are for five-year terms and include options to extend the
terms. The terms for our U.S. restaurant leases vary from two to ten years and have options to extend. We lease some of our restaurant
facilities under “triple net” leases that require us to pay minimum rent, real estate taxes, maintenance costs and
insurance premiums and, in some instances, percentage rent based on sales in excess of specified amounts. We also lease our corporate
office space in Charlotte, North Carolina.
Rent
obligations for are presented below:
|
|
Total
|
|
12/31/2017
|
|
$
|
3,887,253
|
|
12/31/2018
|
|
|
3,782,172
|
|
12/31/2019
|
|
|
3,682,395
|
|
12/31/2020
|
|
|
3,239,564
|
|
12/31/2021
|
|
|
2,711,403
|
|
thereafter
|
|
|
8,587,216
|
|
|
|
$
|
25,890,003
|
|
Rent
expense for the years ended December 31, 2016 and December 31, 2015 was $3.4 million and $3.0 million respectively. Rent expense
for the years ended December 31, 2016 and 2015 for the Company’s restaurants was $3.3 million and $3.0 million, respectively,
and is included in the “Restaurant operating expenses” of the Consolidated Statements of Operations and Comprehensive
Loss. Rent expense for the years ended December 31, 2016 and 2015 for the non-restaurants was $50 thousand and $35 thousand, and
is included in the “General and administrative expense” of the Consolidated Statements of Operations and Comprehensive
Loss.
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 December 31, 2016 or 2015 in the accompanying consolidated balance sheets.
On
January 28, 2016, our Just Fresh subsidiary was notified that it had been served with a copyright infringement complaint, Kevin
Chelko Photography, Inc. f. JF Restaurants, LLC, Case No. 3:13-CV-60-GCM (W.D. N.C.). The claim was filed in the United States
District Court for the Western District of North Carolina Charlotte Division and seeks unspecified damages related to the use
of certain photographic assets allegedly in violation of the United States copyright laws. On January 19, 2017, the case was dismissed
with no damages being awarded and no amounts have been reflected in the accompanying consolidated balance sheets as of December
31, 2016, or December 31, 2015.
Prior
to the Company’s acquisition of Little Big Burger, a class action lawsuit was filed in Oregon by certain current and former
employees of Little Big Burger asserting that the former owners of Little Big Burger failed to compensate employees for overtime
hours and also that an employee had been wrongfully terminated. The plaintiffs and defendants agreed to enter into a settlement
agreement pursuant to which the former owners of Little Big Burger will pay a gross settlement of up to $675,000, inclusive of
plaintiffs’ attorney’s fees of $225,000. This settlement was approved by the court and all settlement payments were
distributed by the sellers and this matter closed prior to September 30, 2016.
In
connection with our acquisition of Little Big Burger, the sellers agreed that the 1,619,646 shares of the Company’s common
stock certain of the sellers received from the Company and an additional $200,000 in cash would be held in escrow until such time
as the litigation was fully resolved. The Company reflected the $675,000 settlement amount in accrued liabilities, with an offsetting
asset in other current assets, in the accompanying consolidated balance sheets as of December 31, 2015. As of December 31, 2016,
the lawsuit had been fully resolved and all amounts paid by the sellers. Accordingly, no amounts are reflected in the Company’s
consolildated balance sheet as of December 31, 2016.
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.
16.
SUBSEQUENT EVENTS
Rights
Offering and Preferred Units
As
of December 31, 2016, the Company had issued 19,050 units, each unit consisting of one share of Series 1 Preferred Stock and one
Series 1 warrants to purchase 10 shares of Common Stock at a strike price of $1.35 and a 7-year term. The preferred stock is presented
as a liability as it is subject to mandatory redemption on the accompanying consolidated balance sheet as of December 31, 2016
(see Note 12 “Stockholder’s Equity).
Subsequent
to December 31, 2016 the Company continued its rights offering through February 10, 2017. The total subscription proceeds received
by the Company amounted to $848,826 before payment of the dealer-manager and placement agent fees and other offering expenses
and the Company issued a total of 62,875 units representing 62,875 shares of Series 1 Preferred Stock and 62,875 warrants which
entitle the holders to purchase 628,750 shares of common stock at a price of $13.50 with a 7-year term.
Receivables
Financing Facilities
During
February 2017, in consideration for proceeds of $330,000, the Company agreed to remit a total of $412,500 from the merchant accounts
of eight of its restaurant locations directly to a lender. The Company agreed to make payments of $1,965 per day for 210 days.
The Company has the option to payoff the loan early by remitting a total of $372,900 by the 120
th
day.
During
March 2017 in consideration for proceeds of $150,000, the Company agreed to remit a total of $205,500 from the merchant accounts
of three of its restaurant locations directly to the lender. The Company agreed to make payments of $856.25 per day for 240 days.
The
Company granted a security interest in the credit card receivables of the specified restaurants in connection with the Receivables
Financing Agreements.
Convertible
Note Exchanges
Pursuant
to exchange agreements dated and effective March 10, 2017 by and between the Company and four existing note holders, the Company
exchanged its 8% convertible notes (see Note 9 - Convertible Debt) in the aggregate principal amount of $725,000, which notes
were in default, for new two-year 2% notes, in the aggregate principal amount of $820,107, representing principal and unpaid accrued
interest. The original convertible notes were canceled and the new convertible notes may be converted to common stock of the Company,
at the option of the holder, at a conversion price of $0.30 per share and may be called by the holder after the one-year anniversary
of the exchange date.