Notes
to Condensed Consolidated Financial Statements
(Unaudited)
1.
Nature of Business
Organization
Chanticleer
Holdings, Inc. and its subsidiaries (together, the “Company”) are in the business of owning, operating and franchising
fast casual dining concepts domestically and internationally.
The
consolidated financial statements include the accounts of Chanticleer Holdings, Inc. and its subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation.
The
Company operates on a calendar year-end. The accounts of Hooters Nottingham (“WEW”), are consolidated based on a 13
and 26 week periods ending on the Sunday closest to each March 31. No events occurred related to the difference between the Company’s
reporting calendar period-end and the subsidiary’s period end that materially affected the company’s financial position,
results of operations, or cash flows.
Name
|
|
Jurisdiction
of
Incorporation
|
|
Percent
Owned
|
|
|
Name
|
|
Jurisdiction
of
Incorporation
|
|
Percent
Owned
|
|
CHANTICLEER
HOLDINGS, INC.
|
|
DE,
USA
|
|
|
|
|
|
|
|
|
|
|
Burger
Business
|
|
|
|
|
|
|
|
Just
Fresh
|
|
|
|
|
|
|
American
Roadside Burgers, Inc.
|
|
DE,
USA
|
|
|
100
|
%
|
|
JF
Franchising Systems, LLC
|
|
NC,
USA
|
|
|
56
|
%
|
ARB
Stores
|
|
|
|
|
|
|
|
JF
Restaurants, LLC
|
|
NC,
USA
|
|
|
56
|
%
|
American
Burger Ally, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
American
Burger Morehead, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
West
Coast Hooters
|
|
|
|
|
|
|
American
Roadside McBee, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
Jantzen
Beach Wings, LLC
|
|
OR,
USA
|
|
|
100
|
%
|
American
Roadside Southpark LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
Oregon
Owl’s Nest, LLC
|
|
OR,
USA
|
|
|
100
|
%
|
American
Roadside Burgers Smithtown, Inc.
|
|
DE,
USA
|
|
|
100
|
%
|
|
Tacoma
Wings, LLC
|
|
WA,
USA
|
|
|
100
|
%
|
American
Burger Prosperity, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
BGR
Acquisition, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
South
African Entities
|
|
|
|
|
|
|
BGR
Acquisition 1, LLC
|
|
|
|
|
|
|
|
Chanticleer
South Africa (Pty) Ltd.
|
|
South
Africa
|
|
|
100
|
%
|
BGR
Franchising, LLC
|
|
VA,
USA
|
|
|
100
|
%
|
|
Hooters
Emperors Palace (Pty.) Ltd.
|
|
South
Africa
|
|
|
88
|
%
|
BGR
Operations, LLC
|
|
VA,
USA
|
|
|
100
|
%
|
|
Hooters
On The Buzz (Pty) Ltd
|
|
South
Africa
|
|
|
95
|
%
|
BGR
Arlington, LLC
|
|
VA,
USA
|
|
|
100
|
%
|
|
Hooters
PE (Pty) Ltd
|
|
South
Africa
|
|
|
100
|
%
|
BGR
Cascades, LLC
|
|
VA,
USA
|
|
|
100
|
%
|
|
Hooters
Ruimsig (Pty) Ltd.
|
|
South
Africa
|
|
|
100
|
%
|
BGR
Dupont, LLC
|
|
DC,
USA
|
|
|
100
|
%
|
|
Hooters
SA (Pty) Ltd
|
|
South
Africa
|
|
|
78
|
%
|
BGR
Old Keene Mill, LLC
|
|
VA,
USA
|
|
|
100
|
%
|
|
Hooters
Umhlanga (Pty.) Ltd.
|
|
South
Africa
|
|
|
90
|
%
|
BGR
Old Town, LLC
|
|
VA,
USA
|
|
|
100
|
%
|
|
Hooters
Willows Crossing (Pty) Ltd
|
|
South
Africa
|
|
|
100
|
%
|
BGR
Potomac, LLC
|
|
MD,
USA
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
BGR
Springfield Mall, LLC
|
|
VA,
USA
|
|
|
100
|
%
|
|
European
Entities
|
|
|
|
|
|
|
BGR
Tysons, LLC
|
|
VA,
USA
|
|
|
100
|
%
|
|
Chanticleer
Holdings Limited
|
|
Jersey
|
|
|
100
|
%
|
BGR
Washingtonian, LLC
|
|
MD,
USA
|
|
|
100
|
%
|
|
West
End Wings LTD
|
|
United
Kingdom
|
|
|
100
|
%
|
Capitol
Burger, LLC
|
|
MD,
USA
|
|
|
100
|
%
|
|
Chanticleer
Finance UK (No. 1) Plc
|
|
United
Kingdom
|
|
|
100
|
%
|
BGR
Mosaic, LLC
|
|
VA,
USA
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
BGR
Michigan Ave, LLC
|
|
DC,
USA
|
|
|
100
|
%
|
|
Inactive
Entities
|
|
|
|
|
|
|
BGR
Chevy Chase, LLC
|
|
MD,
USA
|
|
|
100
|
%
|
|
Hoot
Surfers Paradise Pty. Ltd.
|
|
Australia
|
|
|
60
|
%
|
BT
Burger Acquisition, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
Hooters
Brazil
|
|
Brazil
|
|
|
100
|
%
|
BT’s
Burgerjoint Biltmore, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
DineOut
SA Ltd.
|
|
England
|
|
|
89
|
%
|
BT’s
Burgerjoint Promenade, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
Avenel
Financial Services, LLC
|
|
NV,
USA
|
|
|
100
|
%
|
BT’s
Burgerjoint Rivergate LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
Avenel
Ventures, LLC
|
|
NV,
USA
|
|
|
100
|
%
|
BT’s
Burgerjoint Sun Valley, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
Chanticleer
Advisors, LLC
|
|
NV,
USA
|
|
|
100
|
%
|
LBB
Acquisition, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
Chanticleer
Investment Partners, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
Cuarto
LLC
|
|
OR,
USA
|
|
|
100
|
%
|
|
Dallas
Spoon Beverage, LLC
|
|
TX,
USA
|
|
|
100
|
%
|
LBB
Acquisition 1 LLC
|
|
OR,
USA
|
|
|
100
|
%
|
|
Dallas
Spoon, LLC
|
|
TX,
USA
|
|
|
100
|
%
|
LBB
Green Lake LLC
|
|
OR,
USA
|
|
|
50
|
%
|
|
American
Roadside Cross Hill, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
LBB
Hassalo LLC
|
|
OR,
USA
|
|
|
80
|
%
|
|
UK
Bond Company
|
|
United
Kingdom
|
|
|
100
|
%
|
LBB
Platform LLC
|
|
OR,
USA
|
|
|
80
|
%
|
|
|
|
|
|
|
|
|
LBB
Progress Ridge LLC
|
|
OR,
USA
|
|
|
50
|
%
|
|
|
|
|
|
|
|
|
Noveno
LLC
|
|
OR,
USA
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
Octavo
LLC
|
|
OR,
USA
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
Primero
LLC
|
|
OR,
USA
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
Quinto
LLC
|
|
OR,
USA
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
Segundo
LLC
|
|
OR,
USA
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
Septimo
LLC
|
|
OR,
USA
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
Sexto
LLC
|
|
OR,
USA
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
GENERAL
The
accompanying condensed consolidated financial statements included in this report have been prepared by the Company pursuant to
the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting and include all
adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation.
These condensed consolidated financial statements have not been audited. The results of operations for the three month periods
ended March 31, 2017 are not necessarily indicative of the operating results for the full year.
Certain
information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP
have been condensed or omitted pursuant to such rules and regulations for interim reporting. The Company believes that the disclosures
contained herein are adequate to make the information presented not misleading. However, these financial statements should be
read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 31, 2017. Certain amounts for the prior year have
been reclassified to conform to the current year presentation.
LIQUIDITY
AND CAPITAL RESOURCES
As
of March 31, 2017, our cash balance was $0.3 million, our working capital was negative $4.8 million. The level of additional
cash needed to fund operations and our ability to conduct business for the next twelve months will be influenced primarily by
the following factors:
|
●
|
our
ability to access the capital and debt markets to satisfy current obligations and operate the business;
|
|
|
|
|
●
|
our
ability to 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 company stores within our current
markets and restaurant concepts, the majority of which will utilize funds already committed from outside investors. As we execute
our growth plans over the next twelve months, we intend to carefully monitor the impact of growth on our working capital needs
and cash balances relative to the availability of cost-effective debt and equity financing.
We
have obligations that are currently 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, we may then have to scale back or freeze our growth plans, sell assets
on less than favorable terms, reduce expenses, and/or curtail future acquisition plans to manage our liquidity and capital resources.
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.
During
March 2017, we extended the payment terms of our convertible debt obligations. During May 2017, we completed a new $6 million
private placement of 8% debentures and warrants, the proceeds of which were used to repay, settle and release the $5 million
note payable and related obligations to Florida Mezzanine Fund and to provide additional working
capital for new store openings and operations.
The
accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification
of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as
a going concern.
2.
SIGNIFICANT ACCOUNTING POLICIES
There
have been no material changes to our significant accounting policies previously disclosed in the Annual Report on Form 10-K for
the fiscal year ended December 31, 2016.
USE
OF ESTIMATES
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying
notes. Significant estimates include the valuation of the investments in portfolio companies, deferred tax asset valuation allowances,
valuing 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.
LOSS
PER COMMON SHARE
The
Company is required to report both basic earnings per share, which is based on the weighted-average number of shares outstanding,
and diluted earnings per share, which is based on the weighted-average number of common shares outstanding plus all potentially
diluted shares outstanding. The following table summarizes the number of common shares potentially issuable upon the exercise
of certain warrants, convertible notes payable and convertible interest as of March 31, 2017 and 2016 that have been excluded
from the calculation of diluted net loss per common share since the effect would be antidilutive.
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Warrants -W
eighted avg exercise price $4.95
|
|
|
9,072,032
|
|
|
|
9,506,304
|
|
Convertible notes -
Weighted avg conversion price $0.67
|
|
|
5,233,684
|
|
|
|
3,772,674
|
|
Accrued interest on convertible notes
|
|
|
475,137
|
|
|
|
178,770
|
|
Total
|
|
|
14,780,863
|
|
|
|
13,457,748
|
|
On May 4, 2017, the
Company issued 12 million warrants with an exercise price of $0.35. See Note 15 Subsequent Events.
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
November 2015, the FASB issued ASU No. 2015-07 “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”
related to the presentation of deferred income taxes. The guidance requires that deferred tax assets and liabilities be classified
as non-current in a consolidated balance sheet. This guidance was adopted in the first quarter of 2017 and did not materially
affect the Company’s consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02 “Leases,” which supersedes ASC 840 “Leases” and creates
a new topic, ASC 842 “Leases.” This update requires lessees to recognize a lease liability and a lease asset for all
leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required
quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December
15, 2018 and interim periods within those fiscal years, with earlier adoption permitted. This update will be applied using a modified
retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period
presented in the financial statements. The Company has not completed its evaluation of effect this update will have on its consolidated
financial statements, but does expect there could be a material increase in both assets and liabilities reflected on its
consolidated balance sheets as a result of adoption.
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 March 31, 2017, other than the adoption of ASU No. 2016-02 “Leases,”
none of these pronouncements are expected to have a material effect on the financial position, results of operations or cash flows
of the Company.
3.
ACQUISITIONS
2016
Acquisition
The
Company completed one acquisition during 2016, which was the acquisition of a restaurant location in the Harris YMCA in Charlotte,
N.C. to expand our Just Fresh business. The Company allocated the purchase price as of the date of acquisition based on the estimated
fair value of the acquired assets and assumed liabilities. In consideration of the purchased assets, the Company paid a purchase
price totaling $72,215 in cash, of which $1,611 was allocated to acquired inventory and $70,604 to goodwill. The equipment and
other assets used in the operation of the business are property of the YMCA and no other tangible or identifiable intangible assets
other than inventory were acquired, with the balance being allocated to goodwill.
No
proforma information was included as the proforma impact of the acquisition is not material.
4.
DISCONTINUED OPERATIONS
In
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.
There
were no remaining balances attributable to discontinued operations on the accompanying condensed consolidated balance sheets as
of March 31, 2017 or December 31, 2016.
The
major line items comprising the loss of discontinued operations are as follows:
|
|
Period Ended
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
1,505,942
|
|
Restaurant cost of sales
|
|
|
-
|
|
|
|
526,825
|
|
Restaurant operating expenses
|
|
|
-
|
|
|
|
1,303,379
|
|
General and administrative expenses
|
|
|
-
|
|
|
|
86,126
|
|
Depreciation and amortization
|
|
|
-
|
|
|
|
258,215
|
|
Other
|
|
|
-
|
|
|
|
10,778
|
|
Loss of discontinued operations
|
|
|
-
|
|
|
|
(679,381
|
)
|
Loss on write-down of net assets
|
|
|
-
|
|
|
|
-
|
|
Total pretax loss of discontinued operations
|
|
|
-
|
|
|
|
(679,381
|
)
|
Income tax
|
|
|
-
|
|
|
|
-
|
|
Loss on discontinued operations
|
|
$
|
-
|
|
|
$
|
(679,381
|
)
|
5.
PROPERTY AND EQUIPMENT
Property
and equipment consists of the following:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Leasehold improvements
|
|
$
|
10,714,841
|
|
|
$
|
10,363,996
|
|
Restaurant furniture and equipment
|
|
|
6,846,679
|
|
|
|
6,716,926
|
|
Construction in progress
|
|
|
602,522
|
|
|
|
582,265
|
|
Office and computer equipment
|
|
|
68,303
|
|
|
|
68,303
|
|
Land and buildings
|
|
|
844,965
|
|
|
|
826,664
|
|
Office furniture and fixtures
|
|
|
108,030
|
|
|
|
108,030
|
|
|
|
|
19,185,340
|
|
|
|
18,666,184
|
|
Accumulated depreciation and amortization
|
|
|
(7,686,565
|
)
|
|
|
(7,152,491
|
)
|
|
|
$
|
11,498,775
|
|
|
$
|
11,513,693
|
|
Depreciation
and amortization expense was approximately $0.5 million for both periods ended March 31, 2017 and 2016, respectively.
6.
GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
is summarized by location as follows:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Hooters Full Service
|
|
$
|
4,493,548
|
|
|
$
|
4,461,167
|
|
Better Burgers Fast Casual
|
|
|
7,448,848
|
|
|
|
7,448,848
|
|
Just Fresh Fast Casual
|
|
|
495,755
|
|
|
|
495,755
|
|
|
|
$
|
12,438,151
|
|
|
$
|
12,405,770
|
|
The
changes in the carrying amount of goodwill are summarized as follows:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Beginning Balance
|
|
$
|
12,405,770
|
|
|
$
|
12,702,139
|
|
Acquisitions
|
|
|
-
|
|
|
|
70,604
|
|
Adjustments
|
|
|
-
|
|
|
|
62,192
|
|
Foreign currency translation (loss) gain
|
|
|
32,381
|
|
|
|
(429,165
|
)
|
Ending Balance
|
|
$
|
12,438,151
|
|
|
$
|
12,405,770
|
|
Other
intangible assets, consisting of franchise costs, trademarks and tradenames, is summarized by location as follows:
|
|
Estimated Useful Life
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Trademark, Tradenames:
|
|
|
|
|
|
|
|
|
|
|
Just Fresh
|
|
10 years
|
|
$
|
1,010,000
|
|
|
$
|
1,010,000
|
|
American Roadside Burger
|
|
10 years
|
|
|
1,786,930
|
|
|
|
1,786,930
|
|
BGR: The Burger Joint
|
|
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
|
|
|
329,393
|
|
|
|
322,258
|
|
Hooters Pacific NW
|
|
20 years
|
|
|
88,826
|
|
|
|
88,826
|
|
BGR: The Burger Joint
|
|
Indefinite
|
|
|
1,320,000
|
|
|
|
1,320,000
|
|
Hooters UK
|
|
20 years
|
|
|
12,500
|
|
|
|
30,848
|
|
|
|
|
|
|
1,750,719
|
|
|
|
1,761,932
|
|
Total Intangibles at cost
|
|
|
|
|
7,527,649
|
|
|
|
7,538,862
|
|
Accumulated amortization
|
|
|
|
|
(1,085,809
|
)
|
|
|
(1,008,619
|
)
|
Intangible assets, net
|
|
|
|
$
|
6,441,840
|
|
|
$
|
6,530,243
|
|
|
|
Periods Ended
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Amortization expense
|
|
$
|
75,776
|
|
|
$
|
82,235
|
|
7.
LONG-TERM DEBT AND NOTES PAYABLE
Long-term
debt and notes payable are summarized as follows.
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Note Payable, due January 2017, net of discount of $0 and $171,868, respectively
(b)
|
|
$
|
5,000,000
|
|
|
$
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
Note Payable, due April 2017
|
|
|
707,231
|
|
|
|
725,231
|
|
|
|
|
|
|
|
|
|
|
Note Payable, due October 2018
|
|
|
85,974
|
|
|
|
85,974
|
|
|
|
|
|
|
|
|
|
|
Mortgage Note, South Africa, due July 2024
|
|
|
213,685
|
|
|
|
215,962
|
|
|
|
|
|
|
|
|
|
|
Bank overdraft facilities, South Africa, annual renewal
|
|
|
161,647
|
|
|
|
124,598
|
|
|
|
|
|
|
|
|
|
|
Equipment financing arrangements, South Africa
|
|
|
133,984
|
|
|
|
145,430
|
|
|
|
|
|
|
|
|
|
|
Receivables financing facilities (a)
|
|
|
495,898
|
|
|
|
161,899
|
|
Total long-term debt
|
|
$
|
6,798,419
|
|
|
$
|
6,459,094
|
|
Current portion of long-term debt
|
|
|
784,628
|
|
|
|
6,171,649
|
|
Long-term debt, less current portion
|
|
$
|
6,013,791
|
|
|
$
|
287,445
|
|
For
the three months ended March 31, 2017 and 2016 amortization of debt discount was $0 and $42,969 respectively.
a)
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.
Also,
during March 2017 in consideration for proceeds of $150,000, the Company agreed to remit a total of $205,500 from the merchant
accounts of three of its restaurant locations directly to the lender. The Company agreed to make payments of $856.25 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.
b)
On May 4, 2017, pursuant to a Securities Purchase Agreement (“Purchase Agreement”), the Company issued 8% non-convertible
secured debentures in the principal amount of $6,000,000 (“Debentures”) and warrants to purchase 12,000,000 shares
of common stock (“Warrant Shares”) to accredited investors. The Debentures bear interest at a rate of 8% per annum,
payable in cash quarterly in arrears. The Debentures mature on December 31, 2018. The Debentures contain customary financial and
other covenants, including a requirement to maintain positive Earnings before interest, taxes, depreciation and amortization.
The Warrants expire on the tenth anniversary of the Closing Date and have an exercise price equal to $0.35. The Warrants are not
exercisable until six months after the Closing Date. The Warrant Shares have registration rights, and, if not registered, the
holders will have the right to cashless exercise.
In
conjunction with the financing described above, the Company entered into a Satisfaction, Settlement and Release Agreement with
Florida Mezzanine Fund LLLP, a Florida limited liability partnership (“Florida Mezz”), pursuant to which Florida Mezz
agreed to release the Company from all claims and outstanding obligations pursuant to that certain Assumption Agreement dated
June 30, 2014, as amended October 15, 2014 and October 22, 2016, and that certain Agreement dated May 23, 2016, as amended January
30, 2017, in exchange for payment of $5,000,000.
Five
million of the net proceeds from the offering were remitted to Florida Mezz, $500,000 will be reserved to fund the opening of
new stores, and the balance of $206,746, after transaction expenses, will be used for working capital and general corporate purposes.
As
a result of the issuance of the debentures and the settlement of the Florida Mezz obligations subsequent to March 31, 2016, the
$5 million notes payable are no longer outstanding, the company’s’ share repurchase obligation from Florida Mezz has
been terminated and Florida Mezz waived unpaid interest and penalties previously recorded in the Company’s consolidated
financial statements. As a result, as of March 31, 2017, the $5 million note payable has been reclassified from current liabilities
to non-current in the accompanying consolidated balance sheet. In addition, for the Company’s reporting period ended June
30, 2017, the shares subject to repurchase will be reclassified from temporary equity to permanent capital and the amounts accrued
for interest and penalties will be reversed effective as of May 14, 2017. See Note 15 Subsequent Events.
8.
cONVERTIBLE NOTEs PAYABLE
Convertible
Notes payable are summarized as follows:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
6% Convertible notes payable due June 2018
|
|
$
|
3,000,000
|
|
|
$
|
3,000,000
|
|
8% Convertible notes payable due March 2019
|
|
|
100,000
|
|
|
|
100,000
|
|
8% Convertible notes payable due March 2019
|
|
|
150,000
|
|
|
|
150,000
|
|
Discounts on above convertible note
|
|
|
-
|
|
|
|
(46,936
|
)
|
8% Convertible notes payable due March 2019
|
|
|
420,108
|
|
|
|
475,000
|
|
Discounts on above convertible note
|
|
|
(296,086
|
)
|
|
|
-
|
|
Total Convertible notes payable
|
|
|
3,374,022
|
|
|
|
3,678,064
|
|
Current portion of convertible notes payable
|
|
|
-
|
|
|
|
-
|
|
Convertible notes payable, less current portion
|
|
$
|
3,374,022
|
|
|
$
|
3,678,064
|
|
For
the three months ended March 31, 2017 and 2016 amortization of debt discount was $343,022 and $320,190 respectively.
Pursuant
to exchange agreements dated and effective March 10, 2017 by and between the Company and four existing note holders, the Company
exchanged its 8% convertible notes in the aggregate principal amount of $725,000, which notes were in default, for new two-year
2% notes, in the aggregate principal amount of $820,107, representing $725,000 in principal and $97,017 unpaid accrued interest.
The original convertible notes were canceled and new convertible notes issued that may be converted to common stock of the Company,
at the option of the holder, at a conversion price of $0.30 per share. The notes have a two-year term, but may be called by the
holder after the one-year anniversary of the exchange date. During March 2017, subsequent to the exchange agreements, convertible
notes in the amount of $150,000 were converted by the holders into 500,000 shares of common stock.
The
exchange of the convertible notes was accounting for as an extinguishment of the previous debt, resulting in the recognition
of a net loss on extinguishment of $362,822 in the accompanying condensed consolidated financial statements.
In
addition, the lenders of the $3 million 6% convertible debt agreed to waive defaults and extend the note maturity by eighteen
months (to June 30, 2018).
10.
accounts payable and accrued expenses
Accounts
payable and accrued expenses are summarized as follows:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
3,901,520
|
|
|
$
|
3,807,880
|
|
Accrued taxes (VAT, Sales Payroll)
|
|
|
816,266
|
|
|
|
988,056
|
|
Accrued income taxes
|
|
|
16,416
|
|
|
|
71,713
|
|
Accrued interest
|
|
|
531,164
|
|
|
|
685,419
|
|
|
|
$
|
5,265,366
|
|
|
$
|
5,553,068
|
|
Stockholders’
Equity
The
Company had 45,000,000 shares of its $0.0001 par value common stock authorized at both March 31, 2017 and December 31, 2016. The
Company had 22,712,008 and 21,957,147 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively.
The
Company has 5,000,000 shares of its no par value preferred stock authorized at both March 31, 2017 and December 31, 2016.
Beginning
in December 2016, the Company conducted a rights offering of units, each unit consisting of one share of 9% Redeemable Series
1 Preferred Stock (“Series 1 Preferred”) and one Series 1 Warrant (“Series 1 Warrant”) to purchase 10
shares of common stock. Holders of the Series 1 Preferred are entitled to receive cumulative dividends out of legally available
funds at the rate of 9% of the purchase price per year for a term of seven years, payable quarterly on the last day of March,
June, September and December in each year in cash or registered common stock at the election of the Company. Shares of common
stock issued as dividends will be issued at a 10% discount to the five-day volume weighted average price per share of common stock
prior to the date of issuance. Dividends are to be paid prior to any dividend to the holders of common stock. The Series 1 Preferred
is non-voting and has a liquidation preference of $13.50 per share, equal to its purchase price. Chanticleer is required
to redeem the outstanding Series 1 Preferred at the expiration of the seven-year term. The redemption price for any shares of
Series 1 Preferred will be an amount equal to the $13.50 purchase price per share plus any accrued but unpaid dividends to the
date fixed for redemption.
As
of December 31, 2016, 19,050 shares of preferred stock were issued pursuant to the Preferred Stock Units rights offering. In addition,
43,826 additional shares were issued following in February 2017 for a total of 62,876 issued and outstanding as March 31, 2017.
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.
The
shares subject to the repurchase are reflected as a redeemable temporary equity on the accompanying consolidated balance sheet
as of March 31, 2017 and December 31, 2016. In May 2017, Florida Mezzanine fund’s put right terminated in connection with
the Company’s repayment of its principal and the shares will be reclassified as permanent equity as of May 2017 and in future
balance sheets (see Note 15 Subsequent Events).
Options
and Warrants
The
Company’s shareholders have approved the Chanticleer Holdings, Inc. 2014 Stock Incentive Plan (the “2014 Plan”),
authorizing the issuance of options, stock appreciation rights, restricted stock awards and units, performance shares and units,
phantom stock and other stock-based and dividend equivalent awards. Pursuant to the approved 2014 Plan, 4,000,000 shares have
been approved for grant.
As
of March 31, 2017, 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 March 31, 2017 or December 31, 2016. The Company issued 150,000 restricted stock units to an employee
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 in prior periods. A summary of the warrants
outstanding and related activity is presented below:
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Life
|
|
Outstanding January 1, 2017
|
|
|
9,222,032
|
|
|
$
|
4.98
|
|
|
|
1.7
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
0
|
|
Forfeited
|
|
|
(150,000
|
)
|
|
|
6.75
|
|
|
|
-
|
|
Outstanding March 31, 2017
|
|
|
9,072,032
|
|
|
$
|
4.95
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable March 31, 2017
|
|
|
9,072,032
|
|
|
$
|
4.95
|
|
|
|
1.4
|
|
Exercise Price
|
|
Outstanding Number of Warrants
|
|
|
Weighted Average Remaining Life in Years
|
|
|
Exerciseable Number of Warrants
|
|
> $4.00
|
|
|
7,289,631
|
|
|
|
1.3
|
|
|
|
7,289,631
|
|
$3.00-$3.99
|
|
|
499,901
|
|
|
|
2.4
|
|
|
|
499,901
|
|
$2.00-$2.99
|
|
|
779,500
|
|
|
|
2.8
|
|
|
|
779,500
|
|
$1.00-$1.99
|
|
|
503,000
|
|
|
|
4.0
|
|
|
|
503,000
|
|
|
|
|
9,072,032
|
|
|
|
1.4
|
|
|
|
9,072,032
|
|
On
May 4, 2017,
the Company issued 12 million warrants with an exercise price of $0.35. See Note 15 Subsequent Events.
12.
RELATED PARTY TRANSACTIONS
Due
to related parties
The
Company has received non-interest bearing, short-term advances Chanticleer Investors, LCC, a related party, in the amount of $194,350
as of March 31, 2017 and December 31, 2016
The
amount owed to Chanticleer Investors LLC is related to cash distributions received from Chanticleer Investors LLC’s interest
Hooters of America which is payable to the Company’s co-investors in that investment.
13.
SEGMENT INFORMATION
The
Company is in the business of operating restaurants and its operations are organized by geographic region and by brand within
each region. Further each restaurant location produces monthly financial statements at the individual store level. The Company’s
chief operating decision maker reviews revenues and profitability at the at the group level comprised of: Full Service Hooters,
Better Burger Fast Casual, Just Fresh Fast Casual, and Corporate.
The
following are revenues and operating income (loss) from continuing operations by segment as of and for the periods presented.
The Company does not aggregate or review non-current assets at the segment level.
|
|
Three Months Ended
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Revenue:
|
|
|
|
|
|
|
Hooters Full Service
|
|
$
|
3,135,463
|
|
|
$
|
3,173,912
|
|
Better Burgers Fast Casual
|
|
|
5,316,287
|
|
|
|
5,551,651
|
|
Just Fresh Fast Casual
|
|
|
1,383,257
|
|
|
|
1,361,213
|
|
Corporate and Other
|
|
|
24,990
|
|
|
|
25,000
|
|
|
|
$
|
9,859,997
|
|
|
$
|
10,111,776
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
Hooters Full Service
|
|
$
|
(42,846
|
)
|
|
$
|
50,820
|
|
Better Burgers Fast Casual
|
|
|
(169,110
|
)
|
|
|
(68,397
|
)
|
Just Fresh Fast Casual
|
|
|
63,640
|
|
|
|
(73,208
|
)
|
Corporate and Other
|
|
|
(841,072
|
)
|
|
|
(815,298
|
)
|
|
|
$
|
(989,388
|
)
|
|
$
|
(906,083
|
)
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
Hooters Full Service
|
|
$
|
136,180
|
|
|
$
|
129,277
|
|
Better Burgers Fast Casual
|
|
|
376,631
|
|
|
|
365,131
|
|
Just Fresh Fast Casual
|
|
|
79,726
|
|
|
|
75,123
|
|
Corporate and Other
|
|
|
843
|
|
|
|
910
|
|
|
|
$
|
593,380
|
|
|
$
|
570,441
|
|
The
following are revenues and operating income (loss) from continuing operations and non-current assets by geographic region as of
and for the periods presented.
|
|
Three Months Ended
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Revenue:
|
|
|
|
|
|
|
United States
|
|
$
|
7,912,094
|
|
|
$
|
8,229,146
|
|
South Africa
|
|
|
1,384,394
|
|
|
|
1,214,056
|
|
Europe
|
|
|
563,509
|
|
|
|
668,574
|
|
|
|
$
|
9,859,997
|
|
|
$
|
10,111,776
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
(941,072
|
)
|
|
$
|
(865,812
|
)
|
South Africa
|
|
|
(57,061
|
)
|
|
|
(60,057
|
)
|
Europe
|
|
|
8,745
|
|
|
|
19,786
|
|
|
|
$
|
(989,388
|
)
|
|
$
|
(906,083
|
)
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Non-current Assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
26,761,752
|
|
|
$
|
26,812,062
|
|
South Africa
|
|
|
2,517,644
|
|
|
|
2,519,135
|
|
Europe
|
|
|
2,364,896
|
|
|
|
2,361,246
|
|
|
|
$
|
31,644,292
|
|
|
$
|
31,692,443
|
|
14.
COMMITMENTS AND CONTINGENCIES
On
March 26, 2013, our South African operations received Notice of Motion filed in the Kwazulu-Natal High Court, Durban, Republic
of South Africa, filed against Rolalor (PTY) LTD (“Rolalor”) and Labyrinth Trading 18 (PTY) LTD (“Labyrinth”)
by Jennifer Catherine Mary Shaw (“Shaw”). Rolalor and Labyrinth were the original entities formed to operate the Johannesburg
and Durban locations, respectively. On September 9, 2011, the assets and the then-disclosed liabilities of these entities were
transferred to Tundraspex (PTY) LTD (“Tundraspex”) and Dimaflo (PTY) LTD (“Dimaflo”), respectively. The
current entities, Tundraspex and Dimaflo are not parties in the lawsuit. Shaw is requesting that the Respondents, Rolalor and
Labyrinth, be wound up in satisfaction of an alleged debt owed in the total amount of R4,082,636 (approximately $480,000). The
two Notices were defended and argued in the High Court of South Africa (Durban) on January 31, 2014. Madam Justice Steryi dismissed
the action with costs on May 5, 2014. Ms. Shaw 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 March 31, 2017 or December 31, 2016 in the accompanying condensed consolidated
balance sheets.
On
January 28, 2016, our Just Fresh subsidiary was notified that it had been served with a copyright infringement complaint, Kevin
Chelko Photography, Inc. f. JF Restaurants, LLC, Case No. 3:13-CV-60-GCM (W.D. N.C.). The claim was filed in the United States
District Court for the Western District of North Carolina Charlotte Division and seeks unspecified damages related to the use
of certain photographic assets allegedly in violation of the United States copyright laws. On January 19, 2017, the case was dismissed
with no damages being awarded and no amounts have been reflected in the accompanying condensed consolidated balance sheets as
of March 31, 2017 or 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.
15
.
SUBSEQUENT EVENTS
Management
has evaluated all events and transactions that occurred from January 1, 2017 through the date these unaudited condensed consolidated
financial statements were issued for subsequent events requiring recognition or disclosure in the condensed consolidated financial
statements.
Issuance
of $6 Million Non-Convertible Secured Debentures and Warrants; Repayment of $5 Million outstanding Notes to Florida Mezzanine
Fund
On
May 4, 2017 (“Closing Date”), pursuant to a Securities Purchase Agreement (“Purchase Agreement”), Chanticleer
Holdings, Inc., a Delaware corporation (“Chanticleer” or the “Company”) sold and issued 8% non-convertible
secured debentures in the principal amount of $6,000,000 (“Debentures”) and warrants to purchase 12,000,000 shares
of common stock (“Warrant Shares”) to accredited investors. The Debentures bear interest at a rate of 8% per annum,
payable in cash quarterly in arrears. The Debentures mature on December 31, 2018. The Debentures contain customary negative covenants.
The Warrants will expire on the tenth anniversary of the Closing Date and have an exercise price equal to $0.35, subject to adjustment
therein. The Warrants are not exercisable until six months after the Closing Date. The Warrant Shares have registration rights,
and, if not registered, the holders will have the right to cashless exercise.
Upon
the occurrence of an event of default, in addition to holders having acceleration repayment rights, the holders shall have the
right, on a pro-rata basis, to purchase the Company’s subsidiary, Little Big Burger, for $6,500,000. The purchasers were
granted a right of first refusal as to future financing transactions of the Company for the term of the Debentures. Further, the
Company has agreed to appoint one person selected by purchasers holding a majority of interest of the Debentures to its board
of directors.
Pursuant
to the Security Agreement dated May 4, 2017, the Debentures are secured by a second priority lien on all of the Company’s
assets. Pursuant to the Subsidiary Guarantee dated May 4, 2017, all of the Company’s subsidiaries have guaranteed the Company’s
performance of its obligations under the transaction documents.
In
conjunction with the financing described above, the Company entered into a Satisfaction, Settlement and Release Agreement with
Florida Mezzanine Fund LLLP, a Florida limited liability partnership (“Florida Mezz”), pursuant to which Florida Mezz
agreed to release the Company from all claims and outstanding obligations pursuant to that certain Assumption Agreement dated
June 30, 2014, as amended October 15, 2014 and October 22, 2016, and that certain Agreement dated May 23, 2016, as amended January
30, 2017, in exchange for payment of $5,000,000.
Five
million of the net proceeds from the offering were remitted to Florida Mezz, $500,000 will be reserved to fund the opening of
new stores, and the balance of $206,746, after transaction expenses, will be used for working capital and general corporate purposes.
NASDAQ
Hearing and Reverse Split
As
previously reported, we did not regain compliance with NASDAQ Listing Rule 5550(a)(2) and received a delisting determination from
Nasdaq on February 14, 2017. We appealed the Staff’s determination to a hearings panel, which appeal stayed the suspension
of our securities pending the panel’s decision. The hearing was held on March 30, 2017 and the panel extended the deadline
for us to regain compliance with Listing Rule 5550(a)(2) to June 16, 2017.
Our
Board of Directors previously approved a proposal for a reverse stock split at a ratio of 1-for-2 up to 1-for-10 which was included
in our proxy statement filed in April 2017 and will be voted on by our shareholders at the upcoming Annual Meeting on Monday May
15, 2017. The Board retained discretion to determine the exact ratio of the split and to effect the split with the purpose of
increasing the share price of our common stock to or above $1.00. The Company intends to effect the reverse split promptly after
the annual meeting in late May 2017.