Notes
to Condensed Consolidated Financial Statements
(Unaudited)
1.
Nature of Business
Organization
Chanticleer
Holdings, Inc. and its subsidiaries (together, the “Company”) are in the business of owning, operating and franchising
fast casual dining concepts domestically and internationally.
The
consolidated financial statements include the accounts of Chanticleer Holdings, Inc. and its subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation.
The
Company operates on a calendar year-end. The accounts of Hooters Nottingham (“WEW”), are consolidated based on a 13
and 26 week periods ending on the Sunday closest to each calendar quarter end. No events occurred related to the difference between
the Company’s reporting calendar period-end and the subsidiary’s period end that materially affected the company’s
financial position, results of operations, or cash flows.
Name
|
|
Jurisdiction
of
Incorporation
|
|
Percent
Owned
|
|
|
Name
|
|
Jurisdiction
of
Incorporation
|
|
Percent
Owned
|
|
CHANTICLEER
HOLDINGS, INC.
|
|
DE,
USA
|
|
|
|
|
|
|
|
|
|
|
|
|
Burger
Business
|
|
|
|
|
|
|
|
Just
Fresh
|
|
|
|
|
|
|
American
Roadside Burgers, Inc.
|
|
DE,
USA
|
|
|
100
|
%
|
|
JF
Franchising Systems, LLC
|
|
NC,
USA
|
|
|
56
|
%
|
ARB
Stores
|
|
|
|
|
|
|
|
JF
Restaurants, LLC
|
|
NC,
USA
|
|
|
56
|
%
|
American
Burger Ally, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
American
Burger Morehead, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
West
Coast Hooters
|
|
|
|
|
|
|
American
Roadside McBee, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
Jantzen
Beach Wings, LLC
|
|
OR,
USA
|
|
|
100
|
%
|
American
Roadside Southpark LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
Oregon
Owl’s Nest, LLC
|
|
OR,
USA
|
|
|
100
|
%
|
American
Roadside Burgers Smithtown, Inc.
|
|
DE,
USA
|
|
|
100
|
%
|
|
Tacoma
Wings, LLC
|
|
WA,
USA
|
|
|
100
|
%
|
American
Burger Prosperity, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
BGR
Acquisition, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
South
African Entities
|
|
|
|
|
|
|
BGR
Acquisition 1, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
Chanticleer
South Africa (Pty) Ltd.
|
|
South
Africa
|
|
|
100
|
%
|
BGR
Franchising, LLC
|
|
VA,
USA
|
|
|
100
|
%
|
|
Hooters
Emperors Palace (Pty.) Ltd.
|
|
South
Africa
|
|
|
88
|
%
|
BGR
Operations, LLC
|
|
VA,
USA
|
|
|
100
|
%
|
|
Hooters
On The Buzz (Pty) Ltd
|
|
South
Africa
|
|
|
95
|
%
|
BGR
Arlington, LLC
|
|
VA,
USA
|
|
|
100
|
%
|
|
Hooters
PE (Pty) Ltd
|
|
South
Africa
|
|
|
100
|
%
|
BGR
Cascades, LLC
|
|
VA,
USA
|
|
|
100
|
%
|
|
Hooters
Ruimsig (Pty) Ltd.
|
|
South
Africa
|
|
|
100
|
%
|
BGR
Dupont, LLC
|
|
DC,
USA
|
|
|
100
|
%
|
|
Hooters
SA (Pty) Ltd
|
|
South
Africa
|
|
|
78
|
%
|
BGR
Old Keene Mill, LLC
|
|
VA,
USA
|
|
|
100
|
%
|
|
Hooters
Umhlanga (Pty.) Ltd.
|
|
South
Africa
|
|
|
90
|
%
|
BGR
Old Town, LLC
|
|
VA,
USA
|
|
|
100
|
%
|
|
Hooters
Willows Crossing (Pty) Ltd
|
|
South
Africa
|
|
|
100
|
%
|
BGR
Potomac, LLC
|
|
MD,
USA
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
BGR
Springfield Mall, LLC
|
|
VA,
USA
|
|
|
100
|
%
|
|
European
Entities
|
|
|
|
|
|
|
BGR
Tysons, LLC
|
|
VA,
USA
|
|
|
100
|
%
|
|
Chanticleer
Holdings Limited
|
|
Jersey
|
|
|
100
|
%
|
BGR
Washingtonian, LLC
|
|
MD,
USA
|
|
|
100
|
%
|
|
West
End Wings LTD
|
|
United
Kingdom
|
|
|
100
|
%
|
Capitol
Burger, LLC
|
|
MD,
USA
|
|
|
100
|
%
|
|
Chanticleer
Finance UK (No. 1) Plc
|
|
United
Kingdom
|
|
|
100
|
%
|
BGR
Mosaic, LLC
|
|
VA,
USA
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
BGR
Michigan Ave, LLC
|
|
DC,
USA
|
|
|
100
|
%
|
|
Inactive
Entities
|
|
|
|
|
|
|
BGR
Chevy Chase, LLC
|
|
MD,
USA
|
|
|
100
|
%
|
|
Hoot
Surfers Paradise Pty. Ltd.
|
|
Australia
|
|
|
60
|
%
|
BT
Burger Acquisition, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
Hooters
Brazil
|
|
Brazil
|
|
|
100
|
%
|
BT’s
Burgerjoint Biltmore, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
DineOut
SA Ltd.
|
|
England
|
|
|
89
|
%
|
BT’s
Burgerjoint Promenade, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
Avenel
Financial Services, LLC
|
|
NV,
USA
|
|
|
100
|
%
|
BT’s
Burgerjoint Rivergate LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
Avenel
Ventures, LLC
|
|
NV,
USA
|
|
|
100
|
%
|
BT’s
Burgerjoint Sun Valley, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
Chanticleer
Advisors, LLC
|
|
NV,
USA
|
|
|
100
|
%
|
LBB
Acquisition, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
Chanticleer
Investment Partners, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
Cuarto
LLC
|
|
OR,
USA
|
|
|
100
|
%
|
|
Dallas
Spoon Beverage, LLC
|
|
TX,
USA
|
|
|
100
|
%
|
LBB
Acquisition 1 LLC
|
|
OR,
USA
|
|
|
100
|
%
|
|
Dallas
Spoon, LLC
|
|
TX,
USA
|
|
|
100
|
%
|
LBB
Green Lake LLC
|
|
OR,
USA
|
|
|
50
|
%
|
|
American
Roadside Cross Hill, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
LBB
Hassalo LLC
|
|
OR,
USA
|
|
|
80
|
%
|
|
UK
Bond Company
|
|
United
Kingdom
|
|
|
100
|
%
|
LBB
Platform LLC
|
|
OR,
USA
|
|
|
80
|
%
|
|
|
|
|
|
|
|
|
LBB
Progress Ridge LLC
|
|
OR,
USA
|
|
|
50
|
%
|
|
|
|
|
|
|
|
|
Noveno
LLC
|
|
OR,
USA
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
Octavo
LLC
|
|
OR,
USA
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
Primero
LLC
|
|
OR,
USA
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
Quinto
LLC
|
|
OR,
USA
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
Segundo
LLC
|
|
OR,
USA
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
Septimo
LLC
|
|
OR,
USA
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
Sexto
LLC
|
|
OR,
USA
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
LBB
Wallingford,
LLC
|
|
WA
,
USA
|
|
|
50
|
%
|
|
|
|
|
|
|
|
|
LBB
Capitol Hill, LLC
|
|
WA,
USA
|
|
|
50
|
%
|
|
|
|
|
|
|
|
|
LBB
Franchising, LLC
|
|
NC,
USA
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
LBB Multnomah Village LLC
|
|
OR, USA
|
|
|
50
|
%
|
|
|
|
|
|
|
|
|
GENERAL
The
accompanying condensed consolidated financial statements included in this report have been prepared by the Company pursuant to
the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting and include all
adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation.
These condensed consolidated financial statements have not been audited. The results of operations for the three month and nine
months periods ended September 30, 2017 are not necessarily indicative of the operating results for the full year.
Certain
information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP
have been condensed or omitted pursuant to such rules and regulations for interim reporting. The Company believes that the disclosures
contained herein are adequate to make the information presented not misleading. However, these financial statements should be
read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 31, 2017. Certain amounts for the prior year have
been reclassified to conform to the current year presentation.
LIQUIDITY
AND CAPITAL RESOURCES
As
of September 30, 2017, our unrestricted cash balance was $0.3 million and, our working capital was negative $4.1 million.
We incurred losses from continuing operations of $4.9 million and cash provided by operating activities was $13
thousand for the nine months ended September 30, 2017. Our debt, preferred stock, accounts payable and accrual obligations total
approximately $15.3 million. The level of additional cash needed to fund operations and our ability to conduct business for the
next twelve months will be influenced primarily by the following factors:
|
●
|
our
ability to access the capital and debt markets to satisfy current obligations and operate the business;
|
|
|
|
|
●
|
our
ability to continue to extend, refinance or recapitalize our debt obligations;
|
|
|
|
|
●
|
the
level of investment in new restaurant businesses and entering new markets;
|
|
|
|
|
●
|
our
ability to manage our operating expenses and generate positive cash flow as we grow:
|
|
|
|
|
●
|
popularity
of and demand for our fast-casual dining concepts; and
|
|
|
|
|
●
|
general
economic conditions and changes in consumer discretionary income.
|
We
have typically funded our operating costs, acquisition activities, working capital deficits and expenditures with proceeds from
the issuances of our common stock and other financing arrangements, including common stock, convertible debt, lines of credit,
notes payable, capital leases, and other forms of external financing.
Our
operating plans for the next twelve months contemplate moderate organic growth, opening 2-3 new company stores per quarter, the
majority of which will utilize partnership funds from outside investors. We also are evaluating asset sales and divestitures of
our non-burger brands as well as the closing of underperforming locations within our burger business. As we execute our plans
over the next twelve months, we intend to carefully monitor the impact of growth on our working capital needs and cash balances
relative to the availability of cost-effective debt and equity financing.
We
have approximately $6.4 million in current liabilities payable within the next twelve months and approximately $15 million in
obligations that will have to be paid or refinanced within the next twenty-four months. In the event that additional working capital
is not available, we may then have to scale back or freeze our growth plans, sell assets on unfavorable terms, reduce expenses,
and/or curtail future acquisition plans and current operations to manage our liquidity and capital resources. We also have financial
covenants and debt service obligations and may incur financial penalties or other negative actions from our lenders that could
significantly impact the business if we are not able to meet those obligations.
During
March 2017, we extended the payment terms of our convertible debt obligations. During May 2017, we completed a $6 million private
placement of 8% debentures and warrants, the proceeds of which were used to repay, settle and release the $5 million note payable
and related obligations to Florida Mezzanine Fund and to provide additional working capital for new store openings and operations.
During October 2017, we entered into a $1 million private placement of common stock and warrants, the proceeds of which were used
to fund working capital and current payment obligations.
Management
is actively considering the possible benefits of selling certain of its operating assets to reduce debt and provide additional
working capital to fund future growth of its domestic burger business, as well as possibly closing certain underperforming store
locations to improve operating cash flow. Our evaluations are at a preliminary stage, no decisions have been made, and we can
provide no assurance that the Company will proceed with asset sales, or that such asset sales could be completed on favorable
terms, or at all. In the event that management does elect to proceed with asset sales in the future rather than continue to hold
and operate all its assets long term, management’s assessment of the fair value, and ultimate recoverability, of goodwill,
intangibles, and other long-lived assets could be impacted and the Company could incur significant noncash charges and cash exit
costs in future periods.
There
can be no assurance that we will be successful in implementing our plans, obtaining additional debt or equity financing at reasonable
terms, if at all, or selling any of our operating assets. Accordingly, this raises substantial doubt about our ability to continue
on a going concern for a period of one year from the issuance of these condensed consolidated financial statements.
The
accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification
of recorded asset amounts and classification of liabilities that might become necessary should the Company decide to liquidate
assets or be unable to continue as a going concern.
REVERSE
SPLIT
As
of May 19, 2017, the Company effected a one-for-ten reverse stock split of the Company’s shares of common stock. As a result
of reverse stock split, each ten shares of common stock issued and outstanding were combined into one share of common stock. No
fractional shares were issued in connection with the reverse stock split. The Company rounded fractional shares up to the nearest
whole number.
The
reverse stock split had no impact on the par value per share of the Company’s common stock or the number of authorized shares.
All current and prior period amounts related to shares, share prices and earnings per share contained in the accompanying unaudited
condensed consolidated financial statements have been restated to give retrospective presentation for the reverse stock split.
2.
SIGNIFICANT ACCOUNTING POLICIES
There
have been no material changes to our significant accounting policies previously disclosed in the Annual Report on Form 10-K for
the fiscal year ended December 31, 2016.
USE
OF ESTIMATES
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying
notes. Significant estimates include the valuation of the investments in portfolio companies, deferred tax asset valuation allowances,
valuing warrants using the Black Scholes models, intangible asset valuations and useful lives, depreciation and uncollectible
accounts and reserves. Actual results could differ from those estimates.
REVENUE
RECOGNITION
Revenue
is recognized when all of the following criteria have been satisfied:
|
●
|
Persuasive
evidence of an arrangement exists;
|
|
|
|
|
●
|
Delivery
has occurred or services have been rendered;
|
|
|
|
|
●
|
The
seller’s price to the buyer is fixed or determinable; and
|
|
|
|
|
●
|
Collectability
is reasonably assured.
|
Restaurant
Net Sales and Food and Beverage Costs
The
Company records revenue from restaurant sales at the time of sale, net of discounts, coupons, employee meals, and complimentary
meals and gift cards. Sales, value added tax (“VAT”) and goods and services tax (“GST”) collected from
customers and remitted to governmental authorities are presented on a net basis within sales in our consolidated statements of
operations and comprehensive loss. Restaurant cost of sales primarily includes the cost of food, beverages, and merchandise and
disposable paper and plastic goods used in preparing and selling our menu items, and exclude depreciation and amortization. Vendor
allowances received in connection with the purchase of a vendor’s products are recognized as a reduction of the related
food and beverage costs as earned.
Management
Fee Income
The
Company receives revenue from management fees from certain non-affiliated companies, including from managing its investment in
Hooters of America.
Gaming
Income
The
Company receives revenue from operating a gaming facility adjacent to its Hooters restaurant in Jantzen Beach, Oregon. The Company
also previously received gaming revenue from gaming machines located in Sydney, Australia. Revenue from gaming is recognized as
earned from gaming activities, net of taxes and other government fees.
Franchise
Income
The
Company accounts for initial franchisee fees in accordance with FASB ASC 952, Franchisors. The Company grants franchises to operators
in exchange for initial franchise license fees and continuing royalty payments. Franchise license fees are deferred when received
and recognized as revenue when the Company has performed substantially all initial services required by the franchise or license
agreement, which is generally upon the opening of a store. Continuing fees, which are based upon a percentage of franchisee revenues,
are recognized on the accrual basis as those sales occur.
LOSS
PER COMMON SHARE
The
Company is required to report both basic earnings per share, which is based on the weighted-average number of shares outstanding,
and diluted earnings per share, which is based on the weighted-average number of common shares outstanding plus all potentially
diluted shares outstanding. The following table summarizes the number of common shares potentially issuable upon the exercise
of certain warrants, convertible notes payable and convertible interest as of September 30, 2017 and 2016 that have been excluded
from the calculation of diluted net loss per common share since the effect would be antidilutive.
|
|
September
30, 2017
|
|
|
September
30, 2016
|
|
Warrants
|
|
|
1,862,758
|
|
|
|
950,630
|
|
Convertible
notes
|
|
|
366,667
|
|
|
|
383,634
|
|
Accrued
interest on convertible notes
|
|
|
-
|
|
|
|
28,777
|
|
Total
|
|
|
2,229,425
|
|
|
|
1,363,041
|
|
Recent
Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09 “Revenue from Contracts with Customers (as subsequently amended)” which provides a single, comprehensive
accounting model for revenue arising from contracts with customers. This guidance supersedes most of the existing revenue recognition
guidance, including industry-specific guidance. Under this model, revenue is recognized at an amount that a company expects to
be entitled to upon transferring control of goods or services to a customer. The new guidance also requires additional disclosures
about the nature, timing and uncertainty of revenue and cash flow arising from customer contracts, including significant judgments
and changes in judgments. The new guidance will be effective for the Company beginning in calendar 2018 and may be applied retrospectively
to all prior periods presented or through a cumulative adjustment to the opening retained earnings balance in the year of adoption.
The Company is currently evaluating the effect of this update on its consolidated financial statements and expects to use the
modified retrospective approach upon adoption and believes that the primary change on the Company’s revenue recognition
practices will be to recognize initial franchise fees over the life of the related franchise agreements, which will result
in those franchise fees to be recognized over a longer timeframe.
In
November 2015, the FASB issued ASU No. 2015-07 “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”
related to the presentation of deferred income taxes. The guidance requires that deferred tax assets and liabilities be classified
as non-current in a consolidated balance sheet. This guidance was adopted in the first quarter of 2017 and did not materially
affect the Company’s consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02 “Leases,” which supersedes ASC 840 “Leases” and creates
a new topic, ASC 842 “Leases.” This update requires lessees to recognize a lease liability and a lease asset for all
leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required
quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December
15, 2018 and interim periods within those fiscal years, with earlier adoption permitted. This update will be applied using a modified
retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period
presented in the financial statements. The Company has not completed its evaluation of effect this update will have on its consolidated
financial statements, but does expect there could be a material increase in both assets and liabilities reflected on its
consolidated balance sheets as a result of adoption as of January 1, 2019.
In
January 2017, the FASB issued ASU No. 2017-04 “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment.” The new guidance simplifies the test for goodwill impairment. Currently, the fair value of the reporting
unit is compared with the carrying value of the reporting unit (identified as “Step 1”). If the fair value of the
reporting unit is lower than its carrying amount then, the implied fair value of goodwill is calculated. If the implied fair value
of goodwill is lower than the carrying value of goodwill an impairment is recognized (identified as “Step 2”). The
new standard eliminates Step 2 from the impairment test; therefore, a goodwill impairment will be recognized as the difference
of the fair value and the carrying value of the reporting unit. The new standard becomes effective on January 1, 2020 with early
adoption permitted.
There
are several other new accounting pronouncements issued by FASB, which are not yet effective. Each of these pronouncements has
been or will be adopted, as applicable, by the Company. At September 30, 2017, other than the adoption of ASU No. 2016-02 “Leases,”
none of these pronouncements are expected to have a material effect on the financial position, results of operations or cash flows
of the Company.
3.
ACQUISITIONS
2016
Acquisition
The
Company completed one acquisition during 2016, which was the acquisition of a restaurant location in the Harris YMCA in Charlotte,
N.C. to expand our Just Fresh business. The Company allocated the purchase price as of the date of acquisition based on the estimated
fair value of the acquired assets and assumed liabilities. In consideration of the purchased assets, the Company paid a purchase
price totaling $72,215 in cash, of which $1,611 was allocated to acquired inventory and $70,604 to goodwill. The equipment and
other assets used in the operation of the business are property of the YMCA and no other tangible or identifiable intangible assets
other than inventory were acquired, with the balance being allocated to goodwill.
No
proforma information was included as the proforma impact of the acquisition is not material.
4.
DISCONTINUED OPERATIONS
In
September 2016, the Company approved a plan to exit the Australia and Eastern Europe markets, authorizing management to sell or
close its five Hooters stores in Australia and its one store in Budapest.
The
Company completed the sale of the Hooters Australia and Budapest stores during the third quarter of 2016, transferring substantially
all of the assets and liabilities of those operations to the local operating groups. In both cases, the Company did not receive
any proceeds from the transfer, although in the case of Hooters Australia, the Company retained a five-year option to repurchase
a 20% interest in the stores for $1.
There
were no remaining balances attributable to discontinued operations on the accompanying condensed consolidated balance sheets as
of September 30, 2017 or December 31, 2016.
The
major line items comprising the loss of discontinued operations are as follows:
Major
line items constituting pre-tax loss of discontinued operations:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
457,527
|
|
|
$
|
-
|
|
|
$
|
3,427,928
|
|
Restaurant cost of sales
|
|
|
-
|
|
|
|
154,191
|
|
|
|
-
|
|
|
|
1,196,734
|
|
Restaurant operating expenses
|
|
|
-
|
|
|
|
329,884
|
|
|
|
-
|
|
|
|
2,780,441
|
|
General and administrative expenses
|
|
|
-
|
|
|
|
42,169
|
|
|
|
-
|
|
|
|
296,343
|
|
Depreciation and amortization
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
436,144
|
|
Other
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
22,893
|
|
Loss of discontinued operations
|
|
|
-
|
|
|
|
(68,718
|
)
|
|
|
|
|
|
|
(1,304,627
|
)
|
Loss on write-down of net assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,876,161
|
)
|
Total pretax loss of discontinued operations
|
|
|
-
|
|
|
|
(68,718
|
)
|
|
|
|
|
|
|
(5,180,788
|
)
|
Income tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss on discontinued operations
|
|
$
|
-
|
|
|
$
|
(68,718
|
)
|
|
$
|
-
|
|
|
$
|
(5,180,788
|
)
|
5.
PROPERTY AND EQUIPMENT
Property
and equipment consists of the following:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Leasehold
improvements
|
|
$
|
10,156,225
|
|
|
$
|
10,363,996
|
|
Restaurant
furniture and equipment
|
|
|
5,979,837
|
|
|
|
6,716,926
|
|
Construction
in progress
|
|
|
325,706
|
|
|
|
582,265
|
|
Office
and computer equipment
|
|
|
68,303
|
|
|
|
68,303
|
|
Land
and buildings
|
|
|
-
|
|
|
|
826,664
|
|
Office
furniture and fixtures
|
|
|
108,030
|
|
|
|
108,030
|
|
|
|
|
16,638,101
|
|
|
|
18,666,184
|
|
Accumulated
depreciation and amortization
|
|
|
(7,631,901
|
)
|
|
|
(7,152,491
|
)
|
|
|
$
|
9,006,200
|
|
|
$
|
11,513,693
|
|
During 2017, the
Company recognized asset impairment charges totaling $1.5 million related to the closure of two BGR locations and the
potential sale of two Hooters locations. Property and equipment was written down by $2.3 million to reflect the asset held
for sale, or closed, of net realizable value.
6.
GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
is summarized by operating segment as follows:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Hooters
Full Service
|
|
$
|
4,658,942
|
|
|
$
|
4,461,167
|
|
Better
Burgers Fast Casual
|
|
|
7,448,848
|
|
|
|
7,448,848
|
|
Just
Fresh Fast Casual
|
|
|
495,755
|
|
|
|
495,755
|
|
|
|
$
|
12,603,545
|
|
|
$
|
12,405,770
|
|
The
changes in the carrying amount of goodwill are summarized as follows:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Beginning
Balance
|
|
$
|
12,405,770
|
|
|
$
|
12,702,139
|
|
Acquisitions
|
|
|
-
|
|
|
|
70,604
|
|
Adjustments
|
|
|
-
|
|
|
|
62,192
|
|
Foreign
currency translation (loss) gain
|
|
|
197,775
|
|
|
|
(429,165
|
)
|
Ending
Balance
|
|
$
|
12,603,545
|
|
|
$
|
12,405,770
|
|
Other
intangible assets, consisting of franchise costs, trademarks and tradenames, is summarized by location as follows:
|
|
Estimated
Useful Life
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
Trademark,
Tradenames:
|
|
|
|
|
|
|
|
|
|
|
Just
Fresh
|
|
10
years
|
|
$
|
1,010,000
|
|
|
$
|
1,010,000
|
|
American
Roadside Burger
|
|
10
years
|
|
|
1,786,930
|
|
|
|
1,786,930
|
|
BGR:
The Burger Joint
|
|
Indefinite
|
|
|
1,430,000
|
|
|
|
1,430,000
|
|
Little
Big Burger
|
|
Indefinite
|
|
|
1,550,000
|
|
|
|
1,550,000
|
|
|
|
|
|
|
5,776,930
|
|
|
|
5,776,930
|
|
Franchise
fees:
|
|
|
|
|
|
|
|
|
|
|
Hooters
South Africa
|
|
20
years
|
|
|
325,900
|
|
|
|
322,258
|
|
Hooters
Pacific NW
|
|
20
years
|
|
|
74
,507
|
|
|
|
88,826
|
|
BGR:
The Burger Joint
|
|
Indefinite
|
|
|
1,320,000
|
|
|
|
1,320,000
|
|
Hooters
UK
|
|
5
years
|
|
|
13,042
|
|
|
|
30,848
|
|
|
|
|
|
|
1,733,449
|
|
|
|
1,761,932
|
|
Total
Intangibles at cost
|
|
|
|
|
7,510,379
|
|
|
|
7,538,862
|
|
Accumulated
amortization
|
|
|
|
|
(1,199,430
|
)
|
|
|
(1,008,619
|
)
|
Intangible
assets, net
|
|
|
|
$
|
6,310,949
|
|
|
$
|
6,530,243
|
|
The
Company reviews goodwill for impairment annually or more frequently if indicators of impairment exist. Goodwill is not subject
to amortization and has been assigned to reporting units for purposes of impairment testing. The reporting units are our segments.
A
significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include,
among others: a significant decline in the Company’s expected future cash flows; a sustained, significant decline in our
stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated
competition; the testing for recoverability of a significant asset group within a reporting unit; and slower growth rates. Any
adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material
impact on the Company’s consolidated financial statements.
The
goodwill impairment test involves a two-step process. The first step is a comparison of each reporting unit’s fair value
to its carrying value. The Company estimates fair value using the best information available, including market information and
discounted cash flow projections (also referred to as the income approach). The income approach uses a reporting unit’s
projection of estimated operating results and cash flows that is discounted using a weighted-average cost of capital that reflects
current market conditions. The projection uses management’s best estimates of economic and market conditions over the projected
period including growth rates in sales, costs and number of units, estimates of future expected changes in operating margins and
cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital
expenditures and changes in future working capital requirements. The Company validates its estimates of fair value under the income
approach by comparing the values to fair value estimates using a market approach. A market approach estimates fair value by applying
cash flow and sales multiples to the reporting unit’s operating performance. The multiples are derived from comparable publicly
traded companies with similar operating and investment characteristics of the reporting units.
If
the fair value of the reporting unit is higher than its carrying value, goodwill is deemed not to be impaired, and no further
testing is required. If the carrying value of the reporting unit is higher than its fair value, there is an indication that impairment
may exist and the second step must be performed to measure the amount of impairment loss. The amount of impairment is determined
by comparing the implied fair value of reporting unit goodwill to the carrying value of the goodwill in the same manner as if
the reporting unit was being acquired in a business combination. Specifically, fair value is allocated to all of the assets and
liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that would calculate
the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, the Company would
record an impairment loss for the difference.
Management
tested its long-lived assets for impairment as of September 30, 2017 comparing each reporting unit’s fair value to its carrying
value. That assessment included the assumption that management would continue to hold and operate each segment and generate cash
flows over a period of years. Those cash flows were discounted using the income approach and compared to the carrying value of
each segment. Management also evaluated the fair value of the reporting segments using the market value approach, comparing the
carrying value to fair value based on multiples of current earnings and other indicators of value for each reporting unit. Management
determined that the estimated fair value of its reporting units was greater than the carrying value of the reporting units and
that the Company’s goodwill, intangibles and long-lived assets were not impaired as of September 30, 2017.
However,
management noted that the margin between the estimated fair value and carrying value of the reporting units was very narrow
and that the impairment assessment in future periods would be sensitive to changes in estimates of cash flow, discount rates and
other assumptions increasing the risk that an impairment could be triggered in future periods. The Company is also considering
various strategies to improve cash flow and reduce long term debt, which could include selling certain of its operating assets,
as well as possibly closing certain underperforming store locations to improve operating cash flow.
Those
strategic evaluations are at a preliminary stage as of the date of this report, no decisions have been made, and management can
provide no assurance that the Company will proceed with any asset sales, or that such asset sale can be completed on favorable
terms, or at all.
In
the event that management does elect to proceed with asset sales and/or effect store closures in the future rather than continue
to hold and operate all its assets long term, management’s assessment of the fair value, and ultimate recoverability, of
goodwill, intangibles, property and equipment and other assets would be impacted and the Company could incur significant noncash
impairment charges and cash exit costs in future periods.
7.
LONG-TERM DEBT AND NOTES PAYABLE
Long-term
debt and notes payable are summarized as follows.
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Note
Payable, due December 2018, net of discount of $1,466,739 and $0, respectively (a)
|
|
$
|
4,533,261
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Note
Payable, due January 2017 (a)
|
|
|
-
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
Notes
Payable Paragon Bank (b)
|
|
|
637,270
|
|
|
|
811,205
|
|
|
|
|
|
|
|
|
|
|
Note
Payable (c )
|
|
|
75,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Receivables
financing facilities (d)
|
|
|
186,728
|
|
|
|
161,899
|
|
|
|
|
|
|
|
|
|
|
Mortgage
Note, South Africa, due July 2024 (e)
|
|
|
209,901
|
|
|
|
215,962
|
|
|
|
|
|
|
|
|
|
|
Bank
overdraft facilities, South Africa, annual renewal
|
|
|
167,209
|
|
|
|
124,598
|
|
|
|
|
|
|
|
|
|
|
Equipment
financing arrangements, South Africa
|
|
|
104,006
|
|
|
|
145,430
|
|
|
|
|
|
|
|
|
|
|
Total
long-term debt
|
|
$
|
5,913,375
|
|
|
$
|
6,459,094
|
|
Current
portion of long-term debt
|
|
|
771,032
|
|
|
|
6,171,649
|
|
Long-term
debt, less current portion
|
|
$
|
5,142,343
|
|
|
$
|
287,445
|
|
For
the nine months ended September 30, 2017 and 2016 amortization of debt discount was $502,053 and $128,901 respectively.
a)
On May 4, 2017, pursuant to a Securities Purchase Agreement, the Company issued 8% non-convertible secured debentures in the
principal amount of $6,000,000 and warrants to purchase 1,200,000 shares of common stock (as adjusted for the Company’s
subsequent one-for-ten reverse stock split) to accredited investors. The debentures bear interest at a rate of 8% per annum, payable
in cash quarterly in arrears. The debentures mature on December 31, 2018 and contain customary financial and other covenants,
including a requirement to maintain positive earnings before interest, taxes, depreciation and amortization. The debentures are
secured by a second priority security interest on the Company’s assets and the obligation is guaranteed by the Company’s
subsidiaries. The debentures contain a mandatory redemption provision that is triggered by an asset sale. Sale of greater than
33% of the Company’s assets will also trigger an event of default. Upon any event of default, in addition to other customary
remedies, the holders have the right, at their sole option, to purchase Little Big Burger from the Company, for an aggregate purchase
price of $6,500,000. The warrants have an exercise price of $3.50 (as adjusted for the reverse stock split) and a ten-year term.
The warrants are not exercisable until November 4, 2017. Warrants to purchase 800,000 shares include a beneficial ownership limit
upon exercise of 4.99% of the number of shares of the common stock outstanding immediately after giving effect to the issuance
of shares of common stock issuable upon exercise of the warrant; warrants to purchase the remaining 400,000 shares were amended
to increase the beneficial ownership limit upon exercise to 19.99%.
In
conjunction with the financing described above, the Company entered into a Satisfaction, Settlement and Release Agreement with
Florida Mezzanine Fund LLLP, a Florida limited liability partnership (“Florida Mezz”), pursuant to which Florida Mezz
agreed to release the Company from all claims and outstanding obligations pursuant to that certain Assumption Agreement dated
September 30, 2014, as amended October 15, 2014 and October 22, 2016, and that certain Agreement dated May 23, 2016, as amended
January 30, 2017, in exchange for payment of $5,000,000.
Five
million of the net proceeds from the offering were remitted to Florida Mezz, $500,000 was reserved to fund the opening
of new stores, and the balance of $206,746, after transaction expenses, was used for working capital and general corporate
purposes. As of September 30, 2017, $250,861 of the proceeds restricted to fund the opening of new stores remains unexpended,
and has been presented as restricted cash in the accompanying condensed consolidated balance sheet.
As
a result of the issuance of the debentures and the settlement of the Florida Mezz obligations subsequent to March 31, 2016, the
$5 million notes payable are no longer outstanding, the Company’s share repurchase obligation from Florida Mezz has been
terminated and Florida Mezz waived unpaid interest and penalties previously recorded in the Company’s consolidated financial
statements which resulted in the Company recognizing a gain of $267,512. As a result, as of September 30, 2017, the shares subject
to repurchase were reclassified from temporary equity to permanent capital and the amounts accrued for interest and penalties
reversed effective as of May 14, 2017.
The
new $6 million loan was accounted for as a new borrowing with consideration allocated between the loan and the warrants based
upon the relative fair value of the loan and the warrants. The Company valued the warrants associated with the new debt obligation
using the Black Sholes model, which resulted in the allocation of $1.7 million to additional paid in capital with a corresponding
offset to debt discount. In addition, there were $0.3 million in debt origination costs that are also accounted for as an offset
to outstanding debt. The resulting debt discount of $2.0 million is being amortized to interest expense over the 20-month term
of the notes.
b)
The Company has three term loans with Paragon Bank, all of which are collateralized by all assets of the Company and personally
guaranteed by our Chief Executive Officer. The outstanding balance, interest rate and maturity date of each loan is as follows:
|
|
Maturity
date
|
|
Interest
rate
|
|
|
Principal
balance
|
|
|
Monthly
principal and interest payment
|
|
Note
1
|
|
9/10/2018
|
|
|
5.50
|
%
|
|
$
|
49,089
|
|
|
$
|
4,406
|
|
Note 2
|
|
5/10/2019
|
|
|
5.25
|
%
|
|
|
231,573
|
|
|
|
11,532
|
|
Note
3
|
|
8/10/2021
|
|
|
5.25
|
%
|
|
|
356,608
|
|
|
|
8,500
|
|
|
|
|
|
|
|
|
|
$
|
637,270
|
|
|
$
|
24,438
|
|
(c
) The Company has a promissory note payable on demand in the amount of $75,000 with 800 shares of restricted company common stock
to be paid to the lender each month while the note is outstanding.
d)
During February 2017, in consideration for proceeds of $330,000, the Company agreed to remit a total of $412,500 from the merchant
accounts of eight of its restaurant locations directly to a lender. The Company originally agreed to make payments of $1,965 per
day for 210 days. As of October 2017, the daily payment amount was modified to $1,200 per day and the term was extended to February
2018, with total remittance over the life of the loan unchanged. Also, during March 2017 in consideration for proceeds of $150,000,
the company agreed to remit a total of $205,500 from the merchant accounts of three of its restaurant locations directly to the
lender. The Company agreed to make payments of $856 per day for 240 days. The Company granted a security interest in the credit
card receivables of the specified restaurants in connection with the Receivables Financing Agreements.
(e)
The Company’s mortgage note is secured by the Company’s land and building used for the Hooters Port Elizabeth facility.
The Company has entered into a contract to sell land and building and closed the Port Elizabeth Hooters location during the third
calendar quarter of 2017. The Company estimates it would receive gross proceeds of approximately 6 million Rand (approximately
$470,000 USD net estimated proceeds after broker commissions) at closing which is expected to occur before the end of calendar
2017. The Company expects to pay the mortgage note in full at closing using the net proceeds from the sale of the property. The
net assets and liabilities related to Port Elizabeth location have been reclassified to Assets Held for Sale in the accompanying
unaudited condensed consolidated balance sheet as of September 30, 2017 and an impairment loss of $738,000 related to this
property has been reflected in the accompanying unaudited condensed statement of operations for the periods ended September 30,
2017. There can be no assurance that the transaction will close and the estimated net proceeds and impairment loss remain subject
to adjustment until finalization of the transaction.
8.
cONVERTIBLE NOTEs PAYABLE
Convertible
Notes payable are summarized as follows:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
6%
Convertible notes payable due June 2018
|
|
$
|
3,000,000
|
|
|
$
|
3,000,000
|
|
Discounts
on above convertible note
|
|
|
-
|
|
|
|
-
|
|
8%
Convertible notes payable due March 2019
|
|
|
100,000
|
|
|
|
100,000
|
|
Premium
on above convertible note
|
|
|
7,352
|
|
|
|
-
|
|
8%
Convertible notes payable due March 2019
|
|
|
100,000
|
|
|
|
150,000
|
|
Premium
(discount) on above convertible note
|
|
|
7,352
|
|
|
|
(46,936
|
)
|
8%
Convertible notes payable due March 2019
|
|
|
-
|
|
|
|
475,000
|
|
Total
Convertible notes payable
|
|
|
3,214,704
|
|
|
|
3,678,064
|
|
Current
portion of convertible notes payable
|
|
|
-
|
|
|
|
-
|
|
Convertible
notes payable, less current portion
|
|
$
|
3,214,704
|
|
|
$
|
3,678,064
|
|
For
the nine months ended September 30, 2017 and 2016 amortization of debt premium was $27,014 and amortization of debt discount was
$793,904, respectively.
Pursuant
to exchange agreements dated and effective March 10, 2017 by and between the Company and four existing note holders, the Company
exchanged its 8% convertible notes in the aggregate principal amount of $725,000, which notes were in default, for new two-year
2% notes, in the aggregate principal amount of $820,107, representing $725,000 in principal and $95,107 unpaid accrued interest.
The original convertible notes were canceled and new convertible notes issued that may be converted to common stock of the Company,
at the option of the holder, at a conversion price of $3.00 per share. The notes have a two-year term, but may be called by the
holder after the one-year anniversary of the exchange date. During March 2017, subsequent to the exchange agreements, convertible
notes in the amount of $150,000 were converted by the holders into 50,000 shares of common stock. During April and May 2017, convertible
notes in the amount of $475,000, plus related accrued interest balances, were converted by the holders into 187,798 shares of
common stock.
The
exchange of the convertible notes was accounting for as an extinguishment of the previous debt, resulting in the recognition of
a net loss on extinguishment of $362,822 in the accompanying condensed consolidated financial statements, which was recorded during
March 2017. In addition, the lenders of the $3 million 6% convertible debt agreed to waive defaults and extend the note maturity
by eighteen months to December 2018.
9.
accounts payable and accrued expenses
Accounts
payable and accrued expenses are summarized as follows:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
3,917,069
|
|
|
$
|
3,807,880
|
|
Accrued
taxes (VAT, Sales Payroll)
|
|
|
1,019,079
|
|
|
|
988,056
|
|
Accrued
income taxes
|
|
|
66,731
|
|
|
|
71,713
|
|
Accrued
interest
|
|
|
382,039
|
|
|
|
685,419
|
|
|
|
$
|
5,384,918
|
|
|
$
|
5,553,068
|
|
10.
Stockholders’ Equity
The
Company had 45,000,000 shares of its $0.0001 par value common stock authorized at both September 30, 2017 and December 31, 2016.
The Company had 2,514,157 and 2,190,014 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
(including 56,290 shares that were previously classified as shares subject to repurchase obligations as of December 31, 2016).
All current and prior period amounts related to shares, share prices and earnings per share contained in the accompanying unaudited
condensed consolidated financial statements, have been restated to give retrospective presentation for the reverse stock split
(See Note 1).
The
Company has 5,000,000 shares of its no par value preferred stock authorized at both September 30, 2017 and December 31, 2016.
Beginning
in December 2016, the Company conducted a rights offering of units, each unit consisting of one share of 9% Redeemable Series
1 Preferred Stock (“Series 1 Preferred”) and one Series 1 Warrant (“Series 1 Warrant”) to purchase 10
shares of common stock. Holders of the Series 1 Preferred are entitled to receive cumulative dividends out of legally available
funds at the rate of 9% of the purchase price per year for a term of seven years, payable quarterly on the last day of March,
June, September and December in each year in cash or registered common stock at the election of the Company. Shares of common
stock issued as dividends will be issued at a 10% discount to the five-day volume weighted average price per share of common stock
prior to the date of issuance. Dividends are to be paid prior to any dividend to the holders of common stock. The Series 1 Preferred
is non-voting and has a liquidation preference of $13.50 per share, equal to its purchase price. Chanticleer is required to redeem
the outstanding Series 1 Preferred at the expiration of the seven-year term. The redemption price for any shares of Series 1 Preferred
will be an amount equal to the $13.50 purchase price per share plus any accrued but unpaid dividends to the date fixed for redemption.
As
of December 31, 2016, 19,050 shares of preferred stock were issued pursuant to the Preferred Stock Units rights offering. In addition,
43,826 additional shares were issued following in February 2017 for a total of 62,876 issued and outstanding as September 30,
2017.
In
connection with the payment of past due interest on its $5 million note payable, the Company issued 56,290 shares of its common
stock to the lender. Concurrently, the Company entered into a put agreement with Florida Mezzanine Fund during 2016, which provided
the lender the right to require the Company to repurchase those shares at a price of $0.62 cents per share. This put right originally
expired in January 2017 and was subsequently extended to September 30, 2017. The shares subject to the repurchase were reflected
as a redeemable temporary equity on the accompanying consolidated balance sheet as of December 31, 2016. In May 2017, Florida
Mezzanine fund’s put right terminated in connection with the Company’s repayment of its principal and the shares were
reclassified as permanent equity in the accompanying consolidated balance sheet as of September 30, 2017.
Options
and Warrants
The
Company’s shareholders have approved the Chanticleer Holdings, Inc. 2014 Stock Incentive Plan (the “2014 Plan”),
authorizing the issuance of options, stock appreciation rights, restricted stock awards and units, performance shares and units,
phantom stock and other stock-based and dividend equivalent awards. Pursuant to the approved 2014 Plan, 400,000 shares have been
approved for grant.
As
of September 30, 2017, the Company had issued 32,534 restricted and unrestricted shares on a cumulative basis under the plan pursuant
to compensatory arrangements with employees, board members and outside consultants. No employee stock options have been issued
or are outstanding as of September 30, 2017 or December 31, 2016. The Company issued 15,000 restricted stock units to an employee
during 2016. Approximately 367,466 shares remained available for grant in the future.
The
Company also has issued warrants to investors in connection with financing transactions in prior periods. A summary of the warrants
outstanding and related activity is presented below:
|
|
Number
of Warrants
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Life
|
|
Outstanding
January 1, 2017
|
|
|
922,203
|
|
|
$
|
49.80
|
|
|
|
1.7
|
|
Granted
|
|
|
1,200,000
|
|
|
$
|
3.50
|
|
|
|
9.6
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(259,445
|
)
|
|
|
51.01
|
|
|
|
-
|
|
Outstanding
September 30, 2017
|
|
|
1,862,758
|
|
|
$
|
19.79
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
September 30, 2017
|
|
|
1,862,758
|
|
|
$
|
19.79
|
|
|
|
2.3
|
|
Exercise
Price
|
|
Outstanding
Number of Warrants
|
|
|
Weighted
Average Remaining Life in Years
|
|
|
Exercisable
Number of Warrants
|
|
>
$40.00
|
|
|
484,518
|
|
|
|
1.22
|
|
|
|
484,518
|
|
$30.00-$39.99
|
|
|
49,990
|
|
|
|
1.89
|
|
|
|
49,990
|
|
$20.00-$29.99
|
|
|
77,950
|
|
|
|
2.32
|
|
|
|
77,950
|
|
$10.00-$19.99
|
|
|
50,300
|
|
|
|
3.53
|
|
|
|
50,300
|
|
$0.00-$9.99
|
|
|
1,200,000
|
|
|
|
9.59
|
|
|
|
1,200,000
|
|
|
|
|
1,862,758
|
|
|
|
2.31
|
|
|
|
1,862,758
|
|
11.
RELATED PARTY TRANSACTIONS
Due
to related parties
The
Company has received non-interest bearing, short-term advances from Chanticleer Investors, LCC, a related party, in the
amount of $194,350 as of September 30, 2017 and December 31, 2016. The amount owed to Chanticleer Investors LLC is related to
cash distributions received from Chanticleer Investors LLC’s interest Hooters of America which is payable to the Company’s
co-investors in that investment.
12.
SEGMENT INFORMATION
The
Company is in the business of operating restaurants and its operations are organized by geographic region and by brand within
each region. Further each restaurant location produces monthly financial statements at the individual store level. The Company’s
chief operating decision maker reviews revenues and profitability at the at the group level comprised of: Full Service Hooters,
Better Burger Fast Casual, Just Fresh Fast Casual, and Corporate.
The
following are revenues and operating income (loss) from continuing operations by segment as of and for the periods presented.
The Company does not aggregate or review non-current assets at the segment level.
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2017
|
|
|
September
30, 2016
|
|
|
September
30, 2017
|
|
|
September
30, 2016
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hooters
Full Service
|
|
$
|
3,619,510
|
|
|
$
|
3,682,340
|
|
|
$
|
10,147,738
|
|
|
$
|
10,194,512
|
|
Better
Burgers Fast Casual
|
|
|
5,850,061
|
|
|
|
5,741,783
|
|
|
|
17,176,891
|
|
|
|
17,191,749
|
|
Just
Fresh Fast Casual
|
|
|
1,230,795
|
|
|
|
1,527,516
|
|
|
|
3,951,069
|
|
|
|
4,379,148
|
|
Corporate
and Other
|
|
|
24,999
|
|
|
|
25,000
|
|
|
|
74,980
|
|
|
|
75,000
|
|
|
|
$
|
10,725,365
|
|
|
$
|
10,976,639
|
|
|
$
|
31,350,678
|
|
|
$
|
31,840,409
|
|
Operating
Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hooters
Full Service
|
|
$
|
(485,844
|
)
|
|
$
|
37,728
|
|
|
$
|
(1,075,460
|
)
|
|
$
|
81,473
|
|
Better
Burgers Fast Casual
|
|
|
(399,256
|
)
|
|
|
(151,958
|
)
|
|
|
(457,878
|
)
|
|
|
(212,472
|
)
|
Just
Fresh Fast Casual
|
|
|
(28,301
|
)
|
|
|
49,942
|
|
|
|
(74,185
|
)
|
|
|
22,487
|
|
Corporate
and Other
|
|
|
(485,041
|
)
|
|
|
(453,243
|
)
|
|
|
(1,861,764
|
)
|
|
|
(1,698,169
|
)
|
|
|
$
|
(1,398,442
|
)
|
|
$
|
(517,531
|
)
|
|
$
|
(3,469,287
|
)
|
|
$
|
(1,806,681
|
)
|
Depreciation
and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hooters
Full Service
|
|
$
|
128,858
|
|
|
$
|
143,691
|
|
|
$
|
407,795
|
|
|
$
|
405,617
|
|
Better
Burgers Fast Casual
|
|
|
387,621
|
|
|
|
362,674
|
|
|
|
1,143,584
|
|
|
|
1,092,898
|
|
Just
Fresh Fast Casual
|
|
|
55,476
|
|
|
|
83,117
|
|
|
|
214,928
|
|
|
|
237,487
|
|
Corporate
and Other
|
|
|
843
|
|
|
|
951
|
|
|
|
2,530
|
|
|
|
2,813
|
|
|
|
$
|
572,798
|
|
|
$
|
590,433
|
|
|
$
|
1,768,837
|
|
|
$
|
1,738,815
|
|
The
following are revenues and operating income (loss) from continuing operations and non-current assets by geographic region as of
and for the periods presented.
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2017
|
|
|
September
30, 2016
|
|
|
September
30, 2017
|
|
|
September
30, 2016
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
8,353,055
|
|
|
$
|
8,570,452
|
|
|
$
|
24,863,979
|
|
|
$
|
25,475,352
|
|
South
Africa
|
|
|
1,502,349
|
|
|
|
1,495,757
|
|
|
|
4,369,122
|
|
|
|
4,017,330
|
|
Europe
|
|
|
869,961
|
|
|
|
910,430
|
|
|
|
2,117,577
|
|
|
|
2,347,727
|
|
|
|
$
|
10,725,365
|
|
|
$
|
10,976,639
|
|
|
$
|
31,350,678
|
|
|
$
|
31,840,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
(1,401,618
|
)
|
|
$
|
(550,833
|
)
|
|
$
|
(2,832,502
|
)
|
|
$
|
(1,822,814
|
)
|
South
Africa
|
|
|
(50,060
|
)
|
|
|
(35,331
|
)
|
|
|
(769,536
|
)
|
|
|
(152,960
|
)
|
Europe
|
|
|
53,236
|
|
|
|
68,633
|
|
|
|
132,751
|
|
|
|
169,093
|
|
|
|
$
|
(1,398,442
|
)
|
|
$
|
(517,531
|
)
|
|
$
|
(3,469,287
|
)
|
|
$
|
(1,806,681
|
)
|
Non-current
Assets:
|
|
|
September 30, 2017
|
|
|
|
December 31, 2016
|
|
United
States
|
|
$
|
25,491,405
|
|
|
$
|
26,812,062
|
|
South
Africa
|
|
|
1,200,622
|
|
|
|
2,519,135
|
|
Europe
|
|
|
2,527,931
|
|
|
|
2,361,246
|
|
|
|
$
|
29,219,958
|
|
|
$
|
31,692,443
|
|
13.
COMMITMENTS AND CONTINGENCIES
On
March 26, 2013, our South African operations received Notice of Motion filed in the Kwazulu-Natal High Court, Durban, Republic
of South Africa, filed against Rolalor (PTY) LTD (“Rolalor”) and Labyrinth Trading 18 (PTY) LTD (“Labyrinth”)
by Jennifer Catherine Mary Shaw (“Shaw”). Rolalor and Labyrinth were the original entities formed to operate the Johannesburg
and Durban locations, respectively. On September 9, 2011, the assets and the then-disclosed liabilities of these entities were
transferred to Tundraspex (PTY) LTD (“Tundraspex”) and Dimaflo (PTY) LTD (“Dimaflo”), respectively. The
current entities, Tundraspex and Dimaflo are not parties in the lawsuit. Shaw is requesting that the Respondents, Rolalor and
Labyrinth, be wound up in satisfaction of an alleged debt owed in the total amount of R4,082,636 (approximately $480,000). The
two Notices were defended and argued in the High Court of South Africa (Durban) on January 31, 2014. Madam Justice Steryi dismissed
the action with costs on May 5, 2014. Ms. Shaw appealed this decision and in December 2016, the Court dismissed the Labyrinth
case with costs payable to the Company, and allowed the Rolalor case to proceed to liquidation. The Company did not object to
the proposed liquidation of Rolalor as the entity has no assets. Mrs. Shaw has since applied to the High Court for Rolalor to
be re registered to seek to set aside the transfer by Rolalor [Pty] Limited, which is now in final liquidation, of its assets
to Tundraspex [Pty] Limited. This request to re-register Rolalor is being opposed by Tundraspex [Pty] Limited. No amounts have
been accrued as of September 30, 2017 or December 31, 2016 in the accompanying condensed consolidated balance sheets.
On
January 28, 2016, our Just Fresh subsidiary was notified that it had been served with a copyright infringement complaint, Kevin
Chelko Photography, Inc. f. JF Restaurants, LLC, Case No. 3:13-CV-60-GCM (W.D. N.C.). The claim was filed in the United States
District Court for the Western District of North Carolina Charlotte Division and seeks unspecified damages related to the use
of certain photographic assets allegedly in violation of the United States copyright laws. On January 19, 2017, the case was dismissed
with no damages being awarded and no amounts have been reflected in the accompanying condensed consolidated balance sheets as
of September 30, 2017 or December 31, 2016.
The Company is
involved in legal proceedings and claims that have arisen in the ordinary course of business. These actions, when ultimately concluded
and settled, will not, in the opinion of management, have a material adverse effect upon the financial position, results of operations
or cash flows of the company.
16.
SUBSEQUENT EVENTS
Management
has evaluated all events and transactions that occurred from July 1, 2017 through the date these unaudited condensed consolidated
financial statements were issued for subsequent events requiring recognition or disclosure in the condensed consolidated financial
statements.
On
October 12, 2017, the Company entered into a Securities Purchase Agreement with institutional and accredited investors in a registered
direct offering for the sale of 499,857 shares of common stock (the “Shares”) at a purchase price of $2.00 per share,
for a total gross purchase price of $999,714. The Securities Purchase Agreement contains customary representations, warranties
and covenants. The company also agreed to issue unregistered 5 ½ year warrants to purchase up to 499,857 shares of common
stock (“Warrants”) to the investors in a concurrent private placement at an exercise price of $3.50 per share. The
company has agreed to register the resale of the common shares underlying the Warrants and the registration was declared effective
in October, 2017. The Warrants are exercisable for cash in full commencing six months after the issuance date.