UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES AND EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2019

 

Commission File Number 001-35570

 

CHANTICLEER HOLDINGS, INC.

(Exact name of registrant as specified in the charter)

 

Delaware   20-2932652
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification Number)

 

7621 Little Avenue, Suite 414, Charlotte, NC 28226

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (704) 366-5122

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, $0.0001 par value

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [  ] Yes [X] No.

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [  ] Yes [X] No.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [  ] No.

 

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). [X] Yes [  ] No.

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Yes [  ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [  ] Accelerated filer [  ]

Non-accelerated filer [  ] Smaller reporting company [X]

Emerging growth company [  ]

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [  ] Yes [X] No.

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock   BURG   The NASDAQ Stock Market LLC

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. There were 10,073,545 shares of common stock issued and outstanding as of November 7, 2019.

 

 

 

   
 

 

FORWARD LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements. These statements include projections, predictions, expectations or statements as to beliefs or future events or results or refer to other matters that are not historical facts. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by these statements. The forward-looking statements contained in this Quarterly Report are based on various factors and were derived using numerous assumptions. In some cases, you can identify these forward-looking statements by the words “anticipate”, “estimate”, “plan”, “project”, “continuing”, “ongoing”, “target”, “aim”, “expect”, “believe”, “intend”, “may”, “will”, “should”, “could”, or the negative of those words and other comparable words. You should be aware that those statements reflect only the Company’s predictions. If known or unknown risks or uncertainties should materialize, or if underlying assumptions should prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind when reading this Quarterly Report and not place undue reliance on these forward-looking statements. Factors that might cause such differences include, but are not limited to:

 

our ability to satisfy the required conditions and otherwise complete our planned Merger on a timely basis or at all;
the expected benefits and potential value created by the proposed Merger for our stockholders, including the ownership percentage of our stockholders in the combined organization immediately following the consummation of the proposed Merger if it is completed;
our ability to maintain our operations and obtain additional funding for our operations, if necessary, until the consummation of the proposed Merger;
the accuracy of our estimates regarding expenses, capital requirements and need for additional financing;
our estimates regarding the sufficiency of our cash resources, expenses, including those related to the consummation of the proposed Merger, capital requirements and needs for additional financing, and our ability to obtain additional financing and to continue as a going concern if the Merger is not completed.
The quality of the Company and franchise store operations and changes in sales volume;
Our ability to operate our business and generate profits. We have not been profitable to date;
Inherent risks in expansion of operations, including our ability to acquire additional territories, generate profits from new restaurants, find suitable sites and develop and construct locations in a timely and cost-effective way;
Inherent risks associated with acquiring and starting new restaurant concepts and store locations;
General risk factors affecting the restaurant industry, including current economic climate, costs of labor and food prices;
Intensive competition in our industry and competition with national, regional chains and independent restaurant operators;
Our rights to operate and franchise the Hooters-branded restaurants are dependent on the Hooters’ franchise agreements;
Our ability, and our dependence on the ability of our franchisees, to execute on business plans effectively;
Actions of our franchise partners or operating partners which could harm our business;
Failure to protect our intellectual property rights, including the brand image of our restaurants;
Changes in customer preferences and perceptions;
Increases in costs, including food, rent, labor and energy prices;
Our business and the growth of our Company is dependent on the skills and expertise of management and key personnel;
Constraints could affect our ability to maintain competitive cost structure, including, but not limited to labor constraints;
Work stoppages at our restaurants or supplier facilities or other interruptions of production;
Our food service business and the restaurant industry are subject to extensive government regulation;
We may be subject to significant foreign currency exchange controls in certain countries in which we operate;
Inherent risk in foreign operations and currency fluctuations;
Unusual expenses associated with our expansion into international markets;
The risks associated with leasing space subject to long-term non-cancelable leases;
We may not attain our target development goals and aggressive development could cannibalize existing sales;
Potentially volatile conditions in the global financial markets and economies;
A decline in market share or failure to achieve growth;
Negative publicity about the ingredients we use, or the potential occurrence of food-borne illnesses or other problems at our restaurants;
Breaches of security of confidential consumer information related to our electronic processing of credit and debit card transactions;
Unusual or significant litigation, governmental investigations or adverse publicity, or otherwise;
We may be unable to reach agreements with various taxing authorities on payment plans to pay off back taxes;
Our debt financing agreements expose us to interest rate risks, contain obligations that may limit the flexibility of our operations, and may limit our ability to raise additional capital;
Adverse effects on our results from a decrease in or cessation or claw back of government incentives related to investments; and
Adverse effects on our operations resulting from certain geo-political or other events.

 

You should also consider carefully the Risk Factors contained in Part II, Item 1A of this Quarterly Report and Item 1A of Part I of our Annual Report filed on Form 10-K for the year ended December 31, 2018, which address additional factors that could cause actual results to differ from those set forth in the forward-looking statements and could materially and adversely affect the Company’s business, operating results and financial condition. The risks discussed in this Quarterly Report and the Annual Report are factors that, individually or in the aggregate, the Company believes could cause its actual results to differ materially from expected and historical results. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider such disclosures to be a complete discussion of all potential risks or uncertainties.

 

The forward-looking statements are based on information available to the Company as of the date hereof, and, except to the extent required by federal securities laws, the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, the Company cannot assess the impact of each factor on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

2
 

 

Chanticleer Holdings, Inc. and Subsidiaries

 

INDEX

 

    Page No.
     
Part I Financial Information 4
     
Item 1: Financial Statements 4
     
  Condensed Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018 4
  Condensed Consolidated Statements of Operations (Unaudited) – For the Three and Nine Months ended September 30, 2019 and 2018 5
  Condensed Consolidated Statements of Comprehensive Loss (Unaudited) - For the Three and Nine Months ended September 30, 2019 and 2018 6
  Condensed Consolidated Statements of Equity (Unaudited) – For the Three and Nine Months ended September 30, 2019 and 2018 7
  Condensed Consolidated Statements of Cash Flows (Unaudited) – For the Nine Months ended September 30, 2019 and 2018 8
  Notes to Condensed Consolidated Financial Statements (Unaudited) 10
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
Item 3: Quantitative and Qualitative Disclosures about Market Risk 36
Item 4: Controls and Procedures 36
     
Part II Other Information 36
     
Item 1: Legal Proceedings 36
Item 1A: Risk Factors 37
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 43
Item 3: Defaults Upon Senior Securities 43
Item 4: Mine Safety Disclosures 43
Item 5: Other Information 43
Item 6: Exhibits 43
     
Signatures   44

 

3
 

 

Part I

 

Item 1: Financial Statements

 

Chanticleer Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

   (Unaudited)     
   September 30, 2019   December 31, 2018 
ASSETS          
Current assets:          
Cash  $637,291  $629,871 
Restricted cash   336    335 
Accounts and other receivables, net   223,959    387,239 
Inventories   354,339    478,314 
Prepaid expenses and other current assets   342,960    179,377 
Assets held for sale, net   1,901,376    - 
TOTAL CURRENT ASSETS   3,460,261    1,675,136 
Property and equipment, net   8,159,832    10,467,841 
Operating lease assets   14,524,463    - 
Goodwill   10,498,631    11,280,465 
Intangible assets, net   4,479,905    5,123,159 
Investments   373,198    800,000 
Deposits and other assets   350,725    446,639 
TOTAL ASSETS  $41,847,015   $29,793,240 
           
LIABILITIES AND EQUITY          
Current liabilities:          
Accounts payable and accrued expenses  $7,431,723   $7,386,506 
Current maturities of long-term debt and notes payable   6,682,365    3,740,101 
Current maturities of convertible notes payable   -    3,000,000 
Current operating lease liabilities   3,240,833    - 
Due to related parties   -    185,726 
Liabilities held for sale, net   1,645,253    - 
TOTAL CURRENT LIABILITIES   19,000,174    14,312,333 
Long-term debt   -    3,000,000 
Redeemable preferred stock: no par value, 62,876 shares issued and outstanding, net of discount of $147,827 and $173,914, respectively   700,999    674,912 
Deferred rent   -    2,297,199 
Long-term operating lease liabilities   15,909,551    - 
Deferred revenue   983,488    1,174,506 
Deferred tax liabilities   119,915    76,765 
TOTAL LIABILITIES   36,714,127    21,535,715 
Commitments and contingencies (see Note 13)          
Equity:          
Preferred stock: no par value; authorized 5,000,000 shares; 62,876 issued and outstanding   -    - 
Common stock: $0.0001 par value; authorized 45,000,000 shares; issued and outstanding 10,043,143 and 3,715,444 shares, respectively   1,005    373 
Additional paid in capital   71,222,012    64,756,903 
Accumulated other comprehensive loss   (391,869)   (202,115)
Accumulated deficit   (66,183,302)   (57,124,673)
Total Chanticleer Holdings, Inc, Stockholders’ Equity   4,647,846    7,430,488 
Non-Controlling Interests   485,042    827,037 
TOTAL EQUITY   5,132,888    8,257,525 
TOTAL LIABILITIES AND EQUITY  $41,847,015   $29,793,240 

 

See accompanying notes to condensed consolidated financial statements

 

4
 

 

Chanticleer Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30, 2019   September 30, 2018   September 30, 2019   September 30, 2018 
Revenue:                
Restaurant sales, net  $9,414,626   $9,848,302   $29,703,172   $29,802,969 
Gaming income, net   121,453    111,301    347,074    285,578 
Management fee income   -    24,999    50,000    74,997 
Franchise income   117,361    113,798    461,737    330,295 
Total revenue   9,653,440    10,098,400    30,561,983    30,493,839 
Expenses:                    
Restaurant cost of sales   3,161,379    3,259,223    9,954,144    9,912,091 
Restaurant operating expenses   5,858,495    5,781,284    18,846,454    17,008,047 
Restaurant pre-opening and closing expenses   125,000    113,000    267,888    312,652 
General and administrative expenses   1,572,774    1,092,529    4,784,791    3,407,612 
Asset impairment charge   2,637,969    -    4,007,050    1,731,267 
Depreciation and amortization   531,265    523,680    1,627,682    1,594,673 
Total expenses   13,886,882    10,769,716    39,488,009    33,966,342 
Operating loss   (4,233,442)   (671,316)   (8,926,026)   (3,472,503)
Other expense                    
Interest expense   (162,845)   (630,223)   (542,135)   (1,895,162)
Other income (expense)   109,805    (223,439)   (86,240)   (217,949)
Total other expense   (53,040)   (853,662)   (628,375)   (2,113,111)
Loss before income taxes   (4,286,482)   (1,524,978)   (9,554,401)   (5,585,614)
Income tax benefit (expense)   (4,803)   206,366    (61,213)   779,361 
Consolidated net loss   (4,291,285)   (1,318,612)   (9,615,614)   (4,806,253)
Less: Net loss attributable to non-controlling interests   406,544    80,737    641,002    210,484 
Net loss attributable to Chanticleer Holdings, Inc.  $(3,884,741)  $(1,237,875)  $(8,974,612)  $(4,595,769)
Dividends on redeemable preferred stock   (28,219)   (28,219)   (84,019)   (84,020)
Net loss attributable to common shareholders of Chanticleer Holdings, Inc.  $(3,912,960)  $(1,266,094)  $(9,058,631)  $(4,679,789)
                     
Net loss attributable to Chanticleer Holdings, Inc. per common  share, basic and diluted:  $(0.39)  $(0.34)  $(1.54)  $(1.35)
Weighted average shares outstanding, basic and diluted   9,939,521    3,704,800    5,892,639    3,457,145 

 

See accompanying notes to condensed consolidated financial statements

 

5
 

 

Chanticleer Holdings, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Loss (Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30, 2019   September 30, 2018   September 30, 2019   September 30, 2018 
                 
Net loss attributable to Chanticleer Holdings, Inc.  $(3,884,741)  $(1,237,875)  $(8,974,612)  $(4,595,769)
Foreign currency translation gain (loss)   (159,759)   (30,718)   (189,754)   794,223 
Comprehensive loss  $(4,044,500)  $(1,268,593)  $(9,164,366)  $(3,801,546)

 

See accompanying notes to condensed consolidated financial statements

 

6
 

 

Chanticleer Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Equity (Unaudited)

Three and Nine Months Ended September 30, 2019 and 2018

 

                       Accumulated             
           Additional   Common       Other       Non-     
   Common Stock   Paid-in   Stock   Subscriptions   Comprehensive   Accumulated   Controlling     
   Shares   Amount   Capital   Subscribed   Receivable   Loss   Deficit   Interest   Total 
                                     
Balance, December 31, 2017   3,045,809   $305   $60,750,330   $-   $-   $(934,901)  $(49,109,303)  $782,453   $11,488,884 
                                              
Common stock and warrants issued for:                  -    -                     
Consulting services   1,231    -    3,767    -    -    -    -    -    3,767 
Convertible debt   66,667    7    199,994    -    -    -         -    200,001 
Preferred Unit dividend   8,502    1    19,525    -    -    -    (27,794)   -    (8,268)
Foreign currency translation   -    -    -    -    -    824,941    -    -    824,941 
Shares issued on exercise of warrants   100,000    10    289,990    -    -    -    -    -    290,000 
Net loss   -    -    -    -    -    -    (2,597,432)   (84,407)   (2,681,839)
Cumulative effect of change in accounting principle   -    -    -    -    -    -    (1,042,346)   -    (1,042,346)
Balance, March 31, 2018   3,222,209    323    61,263,606    -    -    (109,960)   (52,776,875)   698,046    9,075,140 
                                              
Common stock and warrants issued for:                                             
Cash proceeds, net   403,214    41    1,372,142    -    -    -    -    -    1,372,183 
Consulting services   55,257    5    150,996    -    -    -         -    151,001 
Preferred Unit dividend   5,790    1    19,098    -    -    -    (28,007)   -    (8,908)
Accrued interest on note payable   12,800    1    43,343    -    -    -    -    -    43,344 
Foreign currency translation   -    -    -    -    -    3,271    -    -    3,271 
Non-controlling interest contributions   -    -    -    -    -    -    -    750,000    750,000 
Non-controlling interest distributions   -    -    -    -    -    -    -    (42,603)   (42,603)
Reclassification of Minority Interest   -    -    353,699    -    -    -    -    (353,699)   - 
Net loss   -    -    -    -    -    -    (760,462)   (45,343)   (805,805)
Balance, June 30, 2018   3,699,270    371    63,202,884    -    -    (106,689)   (53,565,344)   1,006,401    10,537,623 
                                              
Common stock and warrants issued for:                                             
Preferred Unit dividend   7,293    1    19,310    -    -    -    (28,219)   -    (8,908)
Foreign currency translation   -    -    -    -    -    (33,989)   -    -    (33,989)
Non-controlling interest contributions   -    -    -    -    -    -    -    50,000    50,000 
Non-controlling interest distributions   -    -    -    -    -    -    -    (58,557)   (58,557)
Reclassification of Minority Interest   -    -    (4,723)   -    -    -    -    4,723    - 
Net loss   -    -    -    -    -    -    (1,237,875)   (80,737)   (1,318,612)
Balance, September 30, 2018   3,706,563    372    63,217,471    -    -    (140,678)   (54,831,438)   921,830    9,167,557 
                                              
Balance, December 31, 2018   3,715,444    373    64,756,903    -    -    (202,115)   (57,124,673)   827,037    8,257,525 
                                              
Common stock and warrants issued for:                  -    -                     
Preferred Unit dividend   16,342    1    19,521    -    -    -    (27,795)   -    (8,273)
Share-based compensation   -    -    100,707    -    -    -    -    -    100,707 
Foreign currency translation   -    -    -    -    -    37,832    -    -    37,832 
Non-controlling interest contributions   -    -    -    -    -    -    -    575,000    575,000 
Non-controlling interest distributions   -    -    -    -    -    -    -    (10,804)   (10,804)
Reclassification of Minority Interest   -    -    249,104    -    -    -    -    (249,104)   - 
Net loss   -    -    -    -    -    -    (1,873,072)   (115,591)   (1,988,663)
Balance, March 31, 2019   3,731,786    374    65,126,235    -    -    (164,283)   (59,025,540)   1,026,538    6,963,324 
                                              
Common stock and warrants issued for:                                             
Director fees   104,828    10    252,949    -    -    -    -    -    252,959 
Consulting services   36,765    4    117,087    -    -    -    -    -    117,091 
Preferred Unit dividend   11,844    1    19,097    -    -    -    (28,003)   -    (8,905)
Accrued interest on note payable   8,800    1    13,839    -    -    -    -    -    13,840 
Share-based compensation   45,000    5    8,704    -    -    -    -    -    8,709 
Stock issued to settle convertible debt and note payable   3,075,000    308    3,074,692    -    -    -    -    -    3,075,000 
Subscriptions pursuant to rights offering, net   -    -    2,614,623    300    (2,694,530)   -    -    -    (79,607)
Foreign currency translation   -    -    -    -    -    (67,827)   -    -    (67,827)
Shareholder payment for short swing   -    -    1,676    -    -    -    -    -    1,676 
Non-controlling interest distributions   -    -    -    -    -    -    -    (16,777)   (16,777)
Reclassification of Minority Interest   -    -    (18,699)   -    -    -    -    18,699    - 
Net loss   -    -    -    -    -    -    (3,216,799)   (118,867)   (3,335,666)
Balance, June 30, 2019   7,014,023   $703   $71,210,203   $300   $(2,694,530)  $(232,110)  $(62,270,342)  $909,593   $6,923,817 
                                              
Common stock and warrants issued for:                                             
Preferred Unit dividend   19,387    2    19,006    -    -    -    (28,219)   -    (9,211)
Subscriptions pursuant to rights offering, net   3,009,733    300    (308)   (300)   2,694,530    -    -    -    2,694,222 
Share-based compensation   -    -    8,709    -    -    -    -    -    8,709 
Foreign currency translation   -    -    -    -    -    (159,759)   -    -    (159,759)
Non-controlling interest distributions   -    -    -    -    -    -    -    (33,605)   (33,605)
Reclassification of Minority Interest   -    -    (15,598)   -    -    -    -    15,598    - 
Net loss   -    -    -    -    -    -    (3,884,741)   (406,544)   (4,291,285)
Balance, September 30, 2019   10,043,143    1,005    71,222,012    -    -    (391,869)   (66,183,302)   485,042    5,132,888 

 

See accompanying notes to condensed consolidated financial statements

 

7
 

 

Chanticleer Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

   Nine Months Ended 
   September 30, 2019   September 30, 2018 
Cash flows from operating activities:          
Net loss  $(9,615,614)  $(4,806,253)
Adjustments to reconcile net loss to net cash flows from operating activities:          
Depreciation and amortization   1,627,682    1,594,673 
Amortization of operating lease assets   1,330,137    - 
Asset impairment charges   4,007,050    1,731,267 
Write-off investment in HOA   435,000    - 
Common stock and warrants issued for services   24,507    129,767 
Stock based compensation   118,120    - 
(Gain) loss on investments   (11,142)   45,932 
Gain on tax settlements   (265,996)   - 
Amortization of debt discount and discount on preferred stock   26,087    893,873 
Change in assets and liabilities:          
Accounts and other receivables   104,357    114,007 
Prepaid and other assets   (177,591)   2,767 
Inventory   17,389    72,802 
Accounts payable and accrued liabilities   1,012,935    1,346,910 
Change in amounts payable to related parties   (185,726)   (624)
Deferred income taxes   43,150    (779,359)
Operating lease liabilities   (1,348,376)   - 
Deferred revenue   (191,018)   (22,130)
Deferred rent   -    (54,307)
Net cash flows from operating activities   (3,049,049)   269,325 
           
Cash flows from investing activities:          
Purchase of property and equipment   (476,082)   (1,698,747)
Proceeds from tenant improvement allowances   335,075    - 
Cash paid for acquisitions   -    (30,000)
Proceeds from rights offering, net   2,694,530      
Proceeds from sale of assets   173,977    - 
Net cash flows from investing activities   2,727,500    (1,728,747)
           
Cash flows from financing activities:          
Proceeds from sale of common stock and warrants   -    1,687,184 
Loan proceeds   386,051    - 
Loan repayments   (547,036)   (270,579)
Distributions to non-controlling interest   (61,186)   (101,163)
Contributions from non-controlling interest   575,000    800,000 
Net cash flows from financing activities   352,829    2,115,442 
Effect of exchange rate changes on cash   (2,666)   3,091 
Net increase (decrease) in cash and restricted cash, including cash classified within assets held for sale   28,614    659,111 
Less: Net increase in cash and restricted cash classified within assets held for sale   (21,193)   - 
Net increase (decrease) in cash and restricted cash   7,421    659,111 
Cash and restricted cash, beginning of period   630,206    438,493 
Cash and restricted cash, end of period  $637,627   $1,097,604 

 

See accompanying notes to condensed consolidated financial statements

 

8
 

 

Chanticleer Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited), continued

 

   Nine Months Ended 
   September 30, 2019   September 30, 2018 
         
Supplemental cash flow information:          
Cash paid for interest and income taxes:          
Interest  $515,568   $407,573 
Income taxes   97,734    88,748 
           
Non-cash investing and financing activities:          
Convertible debt settled through issuance of common stock  $-   $200,000 
Convertible debt and notes payable settled through subscriptions in the rights offering   3,075,000    - 
Preferred stock dividends paid through issuance of common stock   57,624    57,933 

 

See accompanying notes to condensed consolidated financial statements

 

9
 

 

Chanticleer Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

1. Nature of Business

 

Organization

 

Chanticleer Holdings, Inc. (the “Company”) is in the business of owning, operating and franchising fast casual dining concepts domestically and internationally. The Company was organized October 21, 1999, under its original name, Tulvine Systems, Inc., under the laws of the State of Delaware. On April 25, 2005, Tulvine Systems, Inc. formed a wholly owned subsidiary, Chanticleer Holdings, Inc., and on May 2, 2005, Tulvine Systems, Inc. merged with, and changed its name to, Chanticleer Holdings, Inc.

 

The consolidated financial statements include the accounts of Chanticleer Holdings, Inc. and its subsidiaries.

 

GENERAL

 

The accompanying condensed consolidated financial statements included in this report have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting and include all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation. These condensed consolidated financial statements have not been audited. The results of operations for the three-month and nine-month periods ended September 30, 2019 and 2018 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 generally accepted accounting principles of the United States (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations for interim reporting. The Company believes that the disclosures contained herein are adequate to make the information presented not misleading. However, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on April 1, 2019. Certain amounts for the prior year have been reclassified to conform to the current year presentation.

 

LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN.

 

As of September 30, 2019, our cash balance was $638,000, our working capital was negative $15.5 million (which includes $3.2 million of current operating lease liabilities recorded with the adoption of the new lease accounting standard discussed in Note 2), and we have significant near-term commitments and contractual obligations.

 

10
 

 

As of September 30, 2019, the Company and its subsidiaries have approximately $2.9 million of accrued employee and employer taxes, including penalties and interest, which are due to certain taxing authorities. The Company is currently in discussions with various taxing authorities on settling these liabilities through payment plans that began in the third quarter. We also have $3 million of principal due on the 8% non-convertible secured debentures by the end of December 2019 and the remaining $3 million of principal due by the end of March 2020, plus interest. In addition, if we fail to meet various debt covenants going forward and are notified of the default by the noteholders of the 8% non-convertible secured debentures, we may be assessed additional default interest and penalties which would increase our obligations. In addition, we have approximately $680,000 of other debt obligations coming due over the next twelve months.

 

Our existing cash and cash equivalents will not be sufficient to fund our projected cash needs through the end of the current calendar year or enable us to complete our planned merger with Sonnet discussed in Note 14. In addition, if we experience a delay in completing the Merger (Note 14), we will require even more capital to sustain our operations through such completion. We believe we need to raise approximately $1.5 million through equity financing, asset sales or other strategic transactions in order to enable us to complete the planned merger with Sonnet. There can be no assurances that we will be able to complete any such transaction on acceptable terms or otherwise. The failure to obtain sufficient funds on commercially acceptable terms when needed could have a material adverse effect on our business, results of operations and financial condition and may prevent us from completing the Merger. Accordingly, these factors, among others, raise substantial doubt about our ability to continue as a going concern.

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

Except for the accounting policies for leases discussed in Note 13 that were changed as a result of adopting Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on April 1, 2019, that have had a material impact on our consolidated financial statements and related notes.

 

Use of Estimates

 

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

 

REVENUE RECOGNITION

 

On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The Company generates revenues from the following sources: (i) restaurant sales; (ii) management fee income; (iii) gaming income; and (iv) franchise revenues, consisting of royalties based on a percentage of sales reported by franchise restaurants and initial signing fees.

 

Restaurant Sales, Net

 

The Company records revenue from restaurant sales at the time of sale, net of discounts, coupons, employee meals, and complimentary meals and gift cards. Sales tax and value added tax (“VAT”) collected from customers is excluded from restaurant sales and the obligation is included in taxes payable until the taxes are remitted to the appropriate taxing authorities.

 

11
 

 

Management Fee Income

 

The Company receives management fee revenue from certain non-affiliated companies, including from managing its investment in Hooters of America which is earned and recognized over the performance period.

 

Gaming Income

 

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

 

Franchise Income

 

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

 

Deferred Revenue

 

Deferred revenue consists of contract liabilities resulting from initial and renewal franchise license fees paid by franchisees, which is recognized on a straight-line basis over the term of the underlying franchise agreement, as well as upfront development fees paid by franchisees, which is recognized on a straight-line basis over the term of the underlying franchise agreement once it is executed or if the development agreement is terminated.

 

Contract Balances

 

Opening and closing balances of contract liabilities and receivables from contracts with customers are as follows:

 

   September 30, 2019   December 31, 2018 
         
Accounts Receivable  $178,495   $227,056 
Royalty Receivables   -    5,307 
Gift Card Liability   81,599    87,724 
Deferred Revenue   983,488    1,174,506 

 

The only revenue recognized over time versus point-in-time is the initial/up-front franchise fees and management fees.

 

LEASES

 

On January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842),” along with related clarifications and improvements. This pronouncement requires lessees to recognize a liability for lease obligations, which represents the discounted obligation to make future lease payments, and a corresponding right-of-use asset on the balance sheet. The guidance requires disclosure of key information about leasing arrangements that is intended to give financial statement users the ability to assess the amount, timing, and potential uncertainty of cash flows related to leases. The Company elected the optional transition method to apply the standard as of the effective date and therefore, the Company has not applied the standard to the comparative period presented in its condensed consolidated financial statements.

 

12
 

 

The practical expedients elected in connection with the adoption of Leases Topic 842 were as follows:

 

    Implications as of January 1, 2019
Practical expedient package   The Company has not reassessed whether any expired or existing contracts are, or contain, leases.
    The Company has not reassessed the lease classification for any expired or existing leases.
    The Company has not reassessed initial direct costs for any expired or existing leases.
Hindsight practical expedient   The Company has not elected the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of operating lease assets.

 

Upon adoption of Leases (Topic 842), the Company recorded operating lease right-of-use assets and operating lease liabilities and derecognized deferred rent liabilities (including unamortized tenant improvement allowances) and favorable/unfavorable lease assets and liabilities upon transition. Upon adoption, the Company recorded operating lease liabilities of approximately $22.1 million based on the present value of the remaining rental payments using discount rates as of the effective date. In addition, the Company recorded corresponding operating lease right-of-use assets of approximately $19.8 million, calculated as the initial amount of the Company’s operating lease liabilities adjusted for deferred rent (including unamortized tenant improvement allowances) and unamortized favorable/unfavorable lease assets and lease liabilities. See the table below for the impact of adoption of Topic 842 on the Company’s balance sheet accounts as of the day of adoption, January 1, 2019:

 

   As Previously
Reported
   New Lease
Standard
Adjustment
   As Adjusted 
Operating lease assets  $-   $19,823,202   $19,823,202 
Current operating lease liabilities   -    3,774,148    3,774,148 
Long-term operating lease liabilities   -    18,346,253    18,346,253 
Deferred rent   2,297,199    (2,297,199)   - 

 

LOSS PER COMMON SHARE

 

The Company is required to report both basic earnings per share, which is based on the weighted-average number of shares outstanding and diluted earnings per share, which is based on the weighted-average number of common shares outstanding plus all diluted shares outstanding.

 

The following table summarizes the number of common shares potentially issuable upon the exercise of certain warrants, convertible notes payable and convertible interest as of September 30, 2019 and 2018, which have been excluded from the calculation of diluted net loss per common share since the effect would be antidilutive.

 

   September 30,
2019
   September 30,
2018
 
Warrants   3,586,894    2,571,829 
Convertible notes   -    300,000 
Stock options   32,800    - 
Total   3,619,694    2,871,829 

 

3. ASSETS HELD FOR SALE

 

In August 2019, the Board of Directors approved the sale of the South Africa Hooters locations to the local management group. The assets and liabilities of those operations were reclassified to Assets held for sale and Liabilities held for sale as of September 30, 2019. On October 31, 2019, the Company closed on the sale of three of it’s South Africa Hooters locations and anticipates closing on the remaining two by the end of November 2019.

 

13
 

 

The carrying amount of major class of assets and liabilities included as held for sale at September 30, 2019 are as follows:

 

   September 30,
2019
 
Cash  $21,193 
Accounts receivable   52,826 
Inventory   90,522 
Property, plant and equipment   384,192 
Operating lease assets   956,605 
Goodwill and intangible assets   342,668 
Other assets   53,370 
Total assets held for sale, net   1,901,376 
      
Accounts payable and accrued liabilities   380,017 
Operating lease liabilities   1,009,422 
Debt   255,814 
Total liabilities held for sale, net   1,645,253 
      
Net Assets  $256,123 

 

4. INVESTMENTS

 

Investments at cost consist of the following:

 

   September 30,
2019
   December 31,
2018
 
           
Chanticleer Investors, LLC  $373,000   $800,000 

 

Chanticleer Investors LLC – The Company invested $800,000 during 2011 and 2012 in exchange for a 22% ownership stake in Chanticleer Investors, LLC, which in turn held a 3% interest in Hooters of America, the operator and franchisor of the Hooters Brand worldwide. As a result, the Company’s effective economic interest in Hooters of America was approximately 0.6%. Effective June 28, 2019, Hooters of America closed on the sale of a controlling interest in the company. The consideration paid in the sale transaction was a combination of cash proceeds and equity in the newly formed company. The Company netted approximately $48,000 in cash upon the transaction and retained a non-controlling interest in the equity of the newly formed company. Based on an analysis of the transaction and the value of the cash received and retained non-controlling interest, the Company concluded that its investment was impaired as of June 30, 2019 and recorded a $435,000 write down of the investment.

 

5. PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consists of the following:

 

   September 30,
2019
   December 31,
2018
 
Leasehold improvements  $10,899,144   $12,030,450 
Restaurant furniture and equipment   4,496,256    6,389,305 
Construction in progress   650    1,015,853 
Office and computer equipment   72,533    73,681 
Office furniture and fixtures   164,001    76,486 
    15,632,584    19,585,775 
Accumulated depreciation and amortization   (7,472,752)   (9,117,934)
   $8,159,832   $10,467,841 

 

Depreciation and amortization expense was approximately $419,000 and $437,000 for the three months ended September 30, 2019 and 2018, respectively, and $1,274,000 and $1,189,000 for the nine months ended September 30, 2019 and 2018, respectively.

 

14
 

 

6. INTANGIBLE ASSETS, NET

 

GOODWILL

 

Goodwill consist of the following:

 

   September 30,
2019
   December 31, 2018 
Hooters Full Service  $3,049,783   $3,335,862 
Better Burgers Fast Casual   7,448,848    7,448,848 
Just Fresh Fast Casual   -    495,755 
   $10,498,631   $11,280,465 

 

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

 

   September 30,
2019
   December 31, 2018 
Beginning Balance  $11,280,465   $12,647,806 
Impairment   (495,755)   (1,191,111)
Reclassification to held for sale   (209,794)   - 
Foreign currency translation gain (loss)   (76,285)   (176,230)
Ending Balance  $10,498,631   $11,280,465 

 

During the third quarter of 2019, the Company recorded an impairment to the goodwill balance for Just Fresh based on the sale of 100% of the membership interest of JF Restaurants, LLC for $500,000 in November 2019. See additional discussion in the Note 14.

 

OTHER INTANGIBLE ASSETS

 

Franchise and trademark/tradename intangible assets consist of the following:

 

      September 30, 2019   December 31, 2018 
Trademark, Tradenames:             
Just Fresh  10 years  $868,345   $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 
       5,635,275    5,776,930 
Acquired Franchise Rights             
BGR: The Burger Joint  7 years   827,757    827,757 
              
Franchise License Fees:             
Hooters South Africa*  20 years   -    234,242 
Hooters Pacific NW  20 years   74,507    89,507 
Hooters UK  5 years   11,976    12,422 
       86,483    336,171 
Total Intangible assets at cost      6,549,515    6,940,858 
Accumulated amortization      (2,069,610)   (1,817,699)
Intangible assets, net     $4,479,905   $5,123,159 

 

       Nine Months Ended 
       September 30,
2019
   September 30,
2018
 
Amortization expense      $353,974   $404,054 

 

*Amounts are included in assets held for sale as of September 30, 2019.

 

15
 

 

7. DEBT AND NOTES PAYABLE

 

Debt and notes payable are summarized as follows:

 

   September 30, 2019   December 31, 2018 
         
Notes Payable (a)  $6,000,000   $6,000,000 
Notes Payable Paragon Bank (b)   166,068    319,983 
Note Payable (c)   -    75,000 
Receivables financing facilities (d)   106,671    124,205 
Notes Payable (e)   33,730    144,004 
Notes Payable (f)   45,125    - 
Contractor note - LBB Green Lake (g)   330,771    - 
Bank overdraft facilities and debt facilities, South Africa*   -    76,909 
Total debt   6,682,365    6,740,101 
Current portion of long-term debt   6,682,365    3,740,101 
Long-term debt, less current portion  $-   $3,000,000 

 

*Amounts are included in liabilities held for sale as of September 30, 2019.

 

For the nine months ended September 30, 2019 and 2018, amortization of debt discount was $0 and $880,044, 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 were originally scheduled to mature on December 31, 2018 and contain customary financial and other covenants, including a requirement to maintain positive annual earnings before interest, taxes, depreciation and amortization. The debentures are secured by a second priority security interest on the Company’s assets and the obligation is guaranteed by the Company’s subsidiaries. The debentures contain a mandatory redemption provision that is triggered by an asset sale. Sale of greater than 33% of the Company’s assets will also trigger an event of default. Upon any event of default, in addition to other customary remedies, the holders have the right, at their sole option, to purchase Little Big Burger from the Company, for an aggregate purchase price of $6,500,000. The warrants have an exercise price of $3.50 (as adjusted for the reverse stock split) and a ten-year term. Warrants to purchase 800,000 shares include a beneficial ownership limit upon exercise of 4.99% of the number of shares of the common stock outstanding immediately after giving effect to the issuance of shares of common stock issuable upon exercise of the warrant; warrants to purchase the remaining 400,000 shares were amended to increase the beneficial ownership limit upon exercise to 19.99%. The shares of common stock underlying the warrants have registration rights, and, if the warrant shares were not registered, the holders would have the right to cashless exercise. The registration statement underlying the warrants was declared effective on October 30, 2017.

 

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.

 

The $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 was amortized to interest expense over the 20-month term of the notes (amount was fully amortized at December 31, 2018).

 

16
 

 

The Company entered into an amendment to the 8% non-convertible secured debentures in December 2018. The maturity date was extended to March 31, 2020; provided however, if 50% of the principal balance of the debentures is not paid on or prior to December 31, 2019, the holders of the debentures in the aggregate principal amount greater than $3 million, acting together, may demand full and immediate payment to the Company upon 15 days’ written notice. In addition, each holder received new warrants to purchase 1,200,000 shares of common stock. The warrants have an exercise price of $2.25. This amendment was accounted for as a debt modification and the relative fair value of the warrants, determined using the Black-Scholes model, of $1.5 million was recorded as additional paid-in-capital at December 31, 2018. In connection with the debt modification, $1.5 million of accrued default interest on the 8% non-convertible secured debentures was written off as of December 31, 2018.

 

(b) The Company has one outstanding term loan with Paragon Bank, which is collateralized by all assets of the Company and personally guaranteed by our Chief Executive Officer. The interest rate on the loan is 6.5% and it matures on August 10, 2021.

 

(c) The Company had 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. Effective June 28, 2019, the noteholder converted the outstanding note into subscription rights as part of the Company’s rights offering which expired on June 28, 2019 and closed on July 2, 2019. See additional discussion on the rights offering in Note 10.

 

(d) During February 2017, in consideration for proceeds of $330,000, the Company 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. During October 2018, in consideration for proceeds of $100,000, the Company agreed to make payments of $585 per day for 220 days. During January 2019, in consideration for proceeds of $194,800, the Company agreed to make payments of $585 per day on two separate agreements for 220 days. Lastly, during May 2019, in consideration for proceeds of $99,480, the Company agreed to make payments of $585 per day for 220 days. The Company granted a security interest in the credit card receivables of the specified restaurants in connection with each of the Receivables Financing Agreements. Total outstanding on these advances is $106,671 at September 30, 2019.

 

(e) In connection with the assets acquired from the two BGR franchisees, the Company entered into notes payable of $9,600 and $187,000 during 2018. The notes bear interest at 4% and are due within 12 months of each acquisition date. Principal and interest payments are due monthly. The total outstanding on these two notes is $33,730 at September 30, 2019.

 

(f) During September 2019, the Company entered into two merchant capital advances in the amount of $46,000. The Company agreed to repay these advances through daily payments until those amounts are repaid with the specified interest rate per those agreements.

 

(g) During August 2019, the Company entered into a promissory note to repay the contractor for the build-out of the new Little Big Burger – Green Lake store location. The terms of the promissory note are monthly payments of $100,000 until the note is paid in full with a stated interest rate of 12% per year.

 

The Company’s various loan agreements contain financial and non-financial covenants and provisions providing for cross-default. The evaluation of compliance with these provisions is subject to interpretation and the exercise of judgment.

 

As of September 30, 2019, management concluded that no conditions exist that represent events of technical default under the 8% non-convertible secured debentures. In accordance with the December 2018 amendment, the holders of the 8% non-convertible secured debentures must notify the Company if there is an event of default for the default provisions to be triggered. Conditions may exist whereby the Company has failed a covenant, but the default provisions have not yet been triggered as the Company has not received notice from the noteholders.

 

17
 

 

8. cONVERTIBLE NOTEs PAYABLE

 

Convertible Notes payable are summarized as follows:

 

   September 30, 2019   December 31, 2018 
6% Convertible notes payable due June 2018 (a)  $      -   $3,000,000 
Total Convertible notes payable   -    3,000,000 
Current portion of convertible notes payable   -    3,000,000 
Convertible notes payable, less current portion  $-   $- 

 

(a) On August 2, 2013, the Company entered into an agreement with seven individual accredited investors, whereby the Company issued separate 6% Secured Subordinate Convertible Notes for a total of $3,000,000 in a private offering and is collateralized by the assets of the Hooters Nottingham restaurant and a subordinate position to all other assets of the Company. In connection with the Company’s agreement to conduct a capital raise in 2016, the lenders agreed to waive existing defaults and extended the original note maturity by eighteen months from December 31, 2016 to June 30, 2018. Effective June 28, 2019, the noteholders converted the outstanding notes into subscription rights as part of the Company’s rights offering which expired on June 28, 2019 and closed on July 2, 2019. See additional discussion on the rights offering in Note 10.

 

9. ACCOUNTS PAYABLE AND ACCRUED Expenses

 

Accounts payable and accrued expenses are summarized as follows:

 

   September 30, 2019   December 31, 2018 
Accounts payable and accrued expenses  $3,485,949   $3,591,641 
Accrued taxes (VAT, Sales, Payroll, etc.)   3,394,293    3,243,806 
Accrued income taxes   54,948    61,790 
Accrued interest   496,533    489,269 
   $7,431,723   $7,386,506 

 

As of September 30, 2019, approximately $2.9 million of employee and employer taxes, including penalties and interest, have been accrued but not remitted to certain taxing authorities by the Company for cash compensation paid. As a result, the Company is liable for such payroll taxes and any related penalties and interest. A portion of the proceeds from the rights offering as discussed in Note 10 were used in July 2019 to pay down a portion of these accrued payroll taxes.

 

10. EQUITY

 

The Company had 45,000,000 shares of its $0.0001 par value common stock authorized at both September 30, 2019 and December 31, 2018. The Company had 10,043,143 and 3,715,444 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively.

 

The Company has 5,000,000 shares of its no par value preferred stock authorized at both September 30, 2019 and December 31, 2018. Beginning in December 2016, the Company conducted a rights offering of units, each unit consisting of one share of 9% Redeemable Series 1 Preferred Stock (“Series 1 Preferred”) and one Series 1 Warrant (“Series 1 Warrant”) to purchase 10 shares of common stock. Holders of the Series 1 Preferred are entitled to receive cumulative dividends out of legally available funds at the rate of 9% of the purchase price per year for a term of seven years, payable quarterly on the last day of March, June, September and December in each year in cash or registered common stock. Shares of common stock issued as dividends will be issued at a 10% discount to the five-day volume weighted average price per share of common stock prior to the date of issuance. Dividends will be paid prior to any dividend to the holders of common stock. The Series 1 Preferred is non-voting and has a liquidation preference of $13.50 per share, equal to its purchase price. The Company 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.

 

18
 

 

As of September 30, 2019 and December 31, 2018, 62,876 shares of preferred stock were issued pursuant to the Preferred Stock Units rights offering.

 

In 2019, the Company conducted a rights offering of units to its stockholders of record to purchase common stock at a subscription price of $1.00 per share. The rights offering was made pursuant to the Company’s effective registration statement on Form S-1 on file with the U.S. Securities and Exchange Commission (the “SEC”) and accompanying prospectus filed with the SEC on June 12, 2019.

 

Upon closing of the rights offering in July, a total of 1,894,311 shares of common stock were issued pursuant to record holders’ basic subscription privilege and a total of 4,190,542 shares of common stock were issued pursuant to record holders’ over subscription. The Company accepted subscriptions to purchase 6,084,733 shares in the rights offering upon expiration of the rights offering on June 28, 2019. The Company received $6,009,733 in gross proceeds from the rights offering. $3,075,000 was subscribed by certain record holders’ through the reduction in outstanding debt obligations of the Company. The shares associated with the reduction in outstanding debt obligations were deemed issued at June 30, 2019. The remaining proceeds of approximately $2.7 million, which is net of fees owed to the dealer-managers and other offering costs, were received in early July after the closing of the rights offering.

 

Chardan Capital Markets, LLC and The Oak Ridge Financial Services Group Inc. were the co-dealer-managers on the transaction and the Company agreed to pay the dealer-managers a fee equal to 7% of the gross proceeds of the rights offering (excluding proceeds from the reduction of the debt obligations) and to reimburse the dealer-managers for their expenses up to $75,000 for an aggregate commission of approximately $286,000. Additional offering costs were incurred for legal, accounting and transfer agent services.

 

Restricted Stock Grants, 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, 2019, the Company had 296,129 restricted and unrestricted stock outstanding on a cumulative basis under the plan pursuant to compensatory arrangements with employees, board members and outside consultants. Approximately 107,836 shares remained available for grant in the future. The Company issued 15,000 restricted stock units to an employee in 2016 and 30,000 restricted stock units to an employee in 2018. The fair value of the restricted stock was determined using the quoted market value of the Company’s common stock on the date of grant. As of September 30, 2019, total unrecognized stock-based compensation expense related to non-vested restricted stock units was approximately $24,375. That cost is expected to be recognized over a period of 1.25 years. The restricted stock units vest over the terms specified in each employees’ agreement. The Company issued 32,800 of stock options to employees in 2019. The stock options were valued on the date of grant using the Black-Scholes model. The stock options vest over the terms specified in each employees’ agreement. There was approximately $18,250 of total unrecognized compensation costs related to options granted as of September 30, 2019. That cost is expected to be recognized over a period of 1.50 years.

 

Total stock-based compensation expense for the nine months ended September 30, 2019 and 2018 was $118,120 and $0, respectively.

 

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A summary of the warrant activity for the nine months ended September 30, 2019 is below:

 

   Number of
Warrants
   Weighted Average Exercise Price   Weighted Average Remaining Life 
             
Outstanding December 31, 2018   3,684,762   $9.14    7.1 
Granted   -    -    - 
Exercised   -    -    - 
Forfeited   (97,868)   55.94    - 
Outstanding September 30, 2019   3,586,894    7.86    6.6 
                
Exercisable September 30, 2019   3,586,894   $7.86    6.6 

 

Exercise Price  Outstanding Number of Warrants   Weighted Average Remaining
Life in Years
   Exerciseable Number of Warrants 
> $40.00   235,224    1.0    235,224 
$30.00-$39.99   20,350    0.4    20,350 
$20.00-$29.99   77,950    0.3    77,950 
$10.00-$19.99   50,300    1.7    50,300 
$0.00-$9.99   3,203,070    7.3    3,203,070 
    3,586,894    6.6    3,586,894 

 

A summary of the stock option activity for the nine months ended September 30, 2019 is below:

 

   Number of
Options
   Weighted Average Exercise Price   Weighted Average Remaining Life 
             
Outstanding December 31, 2018   -   $-    - 
Granted   32,800    4.0    4.2 
Exercised   -    -    - 
Forfeited   -    -    - 
Outstanding September 30, 2019   32,800   $4.0    4.2 
                
Exercisable September 30, 2019   12,100   $4.0    4.2 

 

11. RELATED PARTY TRANSACTIONS

 

Due to related parties

 

The Company has received non-interest-bearing loans and advances from related parties. The amounts owed by the Company are as follows:

 

   September 30, 2019   December 31, 2018 
         
Chanticleer Investors, LLC  $             -   $185,726 
   $-   $185,726 

 

The amount from Chanticleer Investors LLC was related to cash distributions received from Chanticleer Investors LLC’s interest Hooters of America which was payable to the Company’s co-investors in that investment. The amount was repaid in the third quarter of 2019.

 

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Transactions with Board Members

 

Larry Spitcaufsky, a significant shareholder and former member of the Company’s Board of Directors, is also a lender to the Company for $2 million of the Company’s $6 million in secured debentures. In connection with the secured debentures, the Company made payments of interest to the board member of $127,890 and $120,000 for the nine months ended September 30, 2019 and 2018, respectively, as required under the Notes.

 

Mr. Spitcaufsky also subscribed for 70,000 shares in connection with the May 3, 2018 Securities Purchase Agreement and received an equal number of warrants in the transaction. Michael D. Pruitt, the Company’s chairman and Chief Executive Officer also participated in the offering.

 

The Company had previously entered into a franchise agreement with entities controlled by Mr. Spitcaufsky providing him with the franchise rights for Little Big Burger in the San Diego area and an option for southern California. In February 2019, Mr. Spitcaufsky closed both of his franchised Little Big Burger restaurants and all agreements were terminated in May 2019.

 

12. SEGMENTS OF BUSINESS

 

The Company is in the business of operating restaurants and its operations are organized by geographic region and by brand within each region. Further each restaurant location produces monthly financial statements at the individual store level. The Company’s chief operating decision maker reviews revenues and profitability at the individual restaurant location level, as well as for Full-Service Hooters, Better Burger Fast Casual and Just Fresh Fast Casual level, and corporate as a group.

 

The following are revenues and operating income (loss) from continuing operations by segment for the three and nine months ended September 30, 2019 and 2018. The Company does not aggregate or review non-current assets at the segment level.

 

   Three Months Ended   Nine Months Ended 
   September 30, 2019   September 30, 2018   September 30, 2019   September 30, 2018 
Revenue:                    
Hooters Full Service  $2,886,269   $3,392,300   $9,576,854   $10,436,597 
Better Burgers Fast Casual   5,823,650    5,692,004    18,010,835    16,854,025 
Just Fresh Fast Casual   943,521    989,097    2,924,294    3,128,220 
Corporate and Other   -    24,999    50,000    74,997 
   $9,653,440   $10,098,400   $30,561,983   $30,493,839 
                     
Operating Income (Loss):                    
Hooters Full Service  $(1,270,738)   87,444    (1,860,995)  $(1,174,320)
Better Burgers Fast Casual   (1,082,494)   (133,466)   (3,056,296)   (253,997)
Just Fresh Fast Casual   (706,332)   (21,280)   (768,918)   (64,057)
Corporate and Other   (1,173,878)   (604,014)   (3,239,817)   (1,980,129)
   $(4,233,442)  $(671,316)  $(8,926,026)  $(3,472,503)
                     
Depreciation and Amortization                    
Hooters Full Service  $76,189    95,509   $259,624   $303,682 
Better Burgers Fast Casual   408,941    382,802    1,229,656    1,154,885 
Just Fresh Fast Casual   45,148    44,525    135,442    133,575 
Corporate and Other   987    844    2,960    2,531 
   $531,265   $523,680   $1,627,682   $1,594,673 

 

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The following are revenues and operating income (loss) from continuing operations by geographic region for the three and nine months ended September 30, 2019 and 2018:

 

   Three Months Ended   Nine Months Ended 
   September 30, 2019   September 30, 2018   September 30, 2019   September 30, 2018 
Revenue:                    
United States  $7,635,120   $8,038,545   $24,441,959   $23,984,963 
South Africa   1,383,906    1,352,340    4,123,148    4,321,668 
Europe   634,414    707,515    1,996,876    2,187,208 
   $9,653,440   $10,098,400   $30,561,983   $30,493,839 
                     
Operating Income (Loss):                    
United States  $(4,380,394)  $(711,846)  $(9,080,259)  $(2,179,967)
South Africa   110,956    29,485    77,682    50,680 
Europe   35,996    11,045    76,551    (1,343,216)
   $(4,233,442)  $(671,316)  $(8,926,026)  $(3,472,503)

 

The following are non-current assets by geographic region as of September 30, 2019 and December 31, 2018:

 

   September 30, 2019 (1)   December 31, 2018 
United States  $35,825,711   $24,795,368 
South Africa*   -    909,514 
Europe   2,561,043    2,413,222 
   $38,386,754   $28,118,104 

 

*Amounts are included in assets held for sale at September 30, 2019.

 

(1)Non-current assets increased due to the adoption of ASC 842 effective January 1, 2019.

 

13. COMMITMENTS AND CONTINGENCIES

 

Legal proceedings

 

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 September 30, 2019 and December 31, 2018 in the accompanying condensed consolidated balance sheets.

 

From time to time, the Company may be involved in legal proceedings and claims that have arisen in the ordinary course of business are generally covered by insurance. As of September 30, 2019, the Company does not expect the amount of ultimate liability with respect to these matters to be material to the Company’s financial condition, results of operations or cash flows.

 

22
 

 

Restaurant construction

 

We have contractual commitments related to store construction of approximately $331,000, of which approximately $125,000 is funded by private investors and approximately $206,000 will be funded internally by the Company. Approximately $126,000 is expected to be returned to the Company via tenant improvement refunds once all conditions are satisfied.

 

Leases

 

The Company determines if a contract contains a lease at inception. The Company’s material operating leases consist of restaurant locations as well as office space. Our leases generally have remaining terms of 1-20 years, most of which include options to extend the leases for additional 5-year periods. Generally, the lease term is the minimum of the noncancelable period of the lease or the lease term inclusive of reasonably certain renewal periods up to a term of 20 years.

 

Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, the Company estimates incremental secured borrowing rates corresponding to the maturities of the leases. The Company estimates this rate based on rates of current debt outstanding, prevailing financial market conditions, comparable company and credit analysis, and management judgment.

 

The Company’s leases typically contain rent escalations over the lease term. The Company recognizes expense for these leases on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce our right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions of expense over the lease term.

 

Some of the Company’s leases include rent escalations based on inflation indexes and fair market value adjustments. Certain leases contain contingent rental provisions that include a fixed base rent plus an additional percentage of the restaurant’s sales in excess of stipulated amounts. Operating lease liabilities are calculated using the prevailing index or rate at lease commencement. Subsequent escalations in the index or rate and contingent rental payments are recognized as variable lease expenses. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. As part of the lease agreements, the Company is also responsible for payments regarding non-lease components (common area maintenance, operating expenses, etc.) and percentage rent payments based on monthly or annual restaurant sales amounts which are considered variable costs and are not included as part of the lease liabilities.

 

Related to the adoption of Leases Topic 842, our policy elections were as follows:

 

Separation of lease and non-lease components

 

The Company elected this expedient to account for lease and non-lease components as a single component for our entire population of operating lease assets.

 

Short-term policy

 

The Company has elected the short-term lease recognition exemption for all applicable classes of underlying assets. Leases with an initial term of 12 months or less, that do not include an option to purchase the underlying asset that we are reasonably certain to exercise, are not recorded on the balance sheet.

 

23
 

 

Supplemental balance sheet information related to leases was as follows:

 

Operating Leases  Classification  September 30, 2019 
Right-of-use assets*  Operating lease assets  $14,524,463 
         
Current lease liabilities*  Current operating lease liabilities   3,240,833 
Non-current lease liabilities*  Long-term operating lease liabilities   15,909,551 
      $19,150,384 

 

*Excludes South Africa as those amounts are recorded as assets and liabilities held for sale at September 30, 2019.

 

Lease term and discount rate were as follows:

 

   September 30, 2019 
Weighted average remaining lease term (years)   9.32 
Weighted average discount rate   10%

 

The components of lease cost were as follows:

 

   Classification  Nine Months ended September 30, 2019 
Operating lease cost  Restaurant operating expenses and Restaurant pre-opening and closing expenses  $2,912,220 
Variable lease cost  Restaurant operating expenses   616,298 
      $3,528,518 

 

Supplemental disclosures of cash flow information related to leases were as follows:

 

   Nine Months ended September 30, 2019 
Cash paid for operating leases  $2,970,632 
Operating lease assets obtained in exchange for operating lease liabilities (1)   19,822,753 

 

(1)Amounts for the nine months ended September 30, 2019 include the transition adjustment for the adoption of Leases Topic 842 discussed in Note 2 to the condensed consolidated financial statements.

 

Maturities of lease liabilities were as follows as of September 30, 2019:

 

   Operating Leases 
November 1, 2019 - October 31, 2020  $3,454,966 
November 1, 2020 - October 31, 2021   3,441,120 
November 1, 2021 - October 31, 2022   3,380,104 
November 1, 2022 - October 31, 2023   2,987,258 
November 1, 2023 - October 31, 2024   2,372,377 
Thereafter   13,592,954 
Total lease payments   29,228,779 
Less: imputed interest   10,078,395 
Present value of lease liabilities  $19,150,384 

 

24
 

 

14. subsequent events

 

On October 10, 2019, the Company entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Sonnet BioTherapeutics, Inc., a New Jersey corporation (“Sonnet”), and Biosub Inc., a Delaware corporation and wholly-owned subsidiary of Chanticleer (“Merger Sub”). Upon the terms and subject to the satisfaction of the conditions described in the Merger Agreement, including approval of the transaction by Chanticleer’s shareholders and Sonnet’s shareholders, Merger Sub will be merged with and into Sonnet (the “Merger”), with Sonnet surviving the Merger as a wholly-owned subsidiary of Chanticleer. The shareholders of Sonnet will become the majority owners of Chanticleer’s outstanding common stock upon the closing of the Merger. Additionally, as part of this transaction, Chanticleer will spin-off its current restaurant operations, including all assets and liabilities, into a newly created entity (the “Spin-Off Entity”), the equity of which will be distributed out to the current stockholders of Chanticleer. Terms of the Merger include a payment of $6,000,000 to Chanticleer from Sonnet, a portion of which is intended to repay certain of Chanticleer’s outstanding indebtedness in conjunction with the spin-off of the existing Chanticleer assets and liabilities.

 

Pursuant to the Merger Agreement, each share of common stock of Sonnet, no par value per share (other than Cancelled Shares (as defined in the Merger Agreement) and Dissenting Shares (as defined in the Merger Agreement)), issued and outstanding immediately prior to the effective time of the Merger (the “Effective Time”) shall be automatically converted into the right to receive an amount of shares of common stock, par value $0.0001 per share, of Chanticleer ( “Chanticleer Common Stock”) equal to the Common Stock Exchange Ratio (as defined in the Merger Agreement) (the “Merger Consideration”). As a result, immediately following the Effective Time, the former Sonnet shareholders will hold approximately 94% of the outstanding shares of Chanticleer Common Stock and the shareholders of Chanticleer will retain ownership of approximately 6% of the outstanding shares of Chanticleer Common Stock. In addition, at the closing of the Merger, Chanticleer will issue to the Spin-Off Entity a warrant to purchase that number of shares of Chanticleer Common Stock equal two percent (2%) of the number of shares of issued and outstanding Chanticleer Common Stock of Chanticleer at Closing. The Warrant will be a five-year warrant, will have an exercise price of $0.01 per share and will not be exercisable for 180 days following the Closing. Upon completion of the Merger, Chanticleer will change its name to Sonnet BioTherapeutics Holdings, Inc.

 

On October 31, 2019, the Company entered into a sale of business agreement for three of its South Africa Hooters locations. The total purchase price was R5,700,000 (approximately $385,000). The net proceeds received by the Company was approximately $170,000. The Company anticipates closing on the sale of the remaining two South Africa Hooters locations by the end of November 2019.

 

On November 6, 2019, the Company sold Just Fresh through the sale of 100% of the membership interest of JF Restaurants, LLC. The purchase price was $500,000 with $125,000 due at closing and the remaining $375,000 in the form of a promissory note to be paid in full by December 31, 2019. The sale agreement included the assumption of trade payables at the closing date. The Company also entered into a Management Services Agreement whereby the Company will continue to act as the manager of JF Restaurants, LLC until the note is repaid in full. As manager, the Company will be entitled to a management fee of 5% of the monthly net cash flow from the operation of the restaurants.

 

25
 

 

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

We are in the business of owning, operating and franchising fast casual and full-service dining concepts in the United States and internationally.

 

We own, operate and franchise a system-wide total of 45 fast casual restaurants specializing the “Better Burger” category of which 34 are company-owned and 11 are operated by franchisees under franchise agreements. American Burger Company (“ABC”) is a fast-casual dining chain consisting of 6 locations in New York and the Carolinas, known for its diverse menu featuring, customized burgers, milk shakes, sandwiches, fresh salads and beer and wine. BGR: The Burger Joint (“BGR”), consists of 9 company-owned locations in the United States and 11 franchisee-operated locations in the United States and the Middle East. Little Big Burger (“LBB”) consists of 19 company-owned locations in Oregon, Washington and North Carolina.

 

We also own and operate Just Fresh, our healthier eating fast casual concept with 5 company-owned locations in Charlotte, North Carolina. Just Fresh offers fresh-squeezed juices, gourmet coffee, fresh-baked goods and premium-quality, made-to-order sandwiches, salads and soups.

 

We own and operate 7 Hooters full-service restaurants in the United States, South Africa, and the United Kingdom. Hooters restaurants are casual beach-themed establishments featuring music, sports on large flat screens, and a menu that includes seafood, sandwiches, burgers, salads, and of course, Hooters original chicken wings and the “nearly world famous” Hooters Girls.

 

As of September 30, 2019, our system-wide store count totaled 57 locations, consisting of 46 company-owned locations and 11 franchisee-operated locations.

 

On October 10, 2019, the Company entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Sonnet BioTherapeutics, Inc., a New Jersey corporation (“Sonnet”), and Biosub Inc., a Delaware corporation and wholly-owned subsidiary of Chanticleer (“Merger Sub”). Upon the terms and subject to the satisfaction of the conditions described in the Merger Agreement, including approval of the transaction by Chanticleer’s shareholders and Sonnet’s shareholders, Merger Sub will be merged with and into Sonnet (the “Merger”), with Sonnet surviving the Merger as a wholly-owned subsidiary of Chanticleer. The shareholders of Sonnet will become the majority owners of Chanticleer’s outstanding common stock upon the closing of the Merger. Additionally, as part of this transaction, Chanticleer will spin-off its current restaurant operations, including all assets and liabilities, into a newly created entity (the “Spin-Off Entity”), the equity of which will be distributed out to the current stockholders of Chanticleer. Terms of the Merger include a payment of $6,000,000 to Chanticleer from Sonnet, a portion of which is intended to repay certain of Chanticleer’s outstanding indebtedness in conjunction with the spin-off of the existing Chanticleer assets and liabilities.

 

Pursuant to the Merger Agreement, each share of common stock of Sonnet, no par value per share (other than Cancelled Shares (as defined in the Merger Agreement) and Dissenting Shares (as defined in the Merger Agreement)), issued and outstanding immediately prior to the effective time of the Merger (the “Effective Time”) shall be automatically converted into the right to receive an amount of shares of common stock, par value $0.0001 per share, of Chanticleer ( “Chanticleer Common Stock”) equal to the Common Stock Exchange Ratio (as defined in the Merger Agreement) (the “Merger Consideration”). As a result, immediately following the Effective Time, the former Sonnet shareholders will hold approximately 94% of the outstanding shares of Chanticleer Common Stock and the shareholders of Chanticleer will retain ownership of approximately 6% of the outstanding shares of Chanticleer Common Stock. In addition, at the closing of the Merger, Chanticleer will issue to the Spin-Off Entity a warrant to purchase that number of shares of Chanticleer Common Stock equal two percent (2%) of the number of shares of issued and outstanding Chanticleer Common Stock of Chanticleer at Closing. The Warrant will be a five-year warrant, will have an exercise price of $0.01 per share and will not be exercisable for 180 days following the Closing. Upon completion of the Merger, Chanticleer will change its name to Sonnet BioTherapeutics Holdings, Inc.

 

On October 31, 2019, the Company entered into a sale of business agreement for three of its South Africa Hooters locations. The total purchase price was R5,700,000 (approximately $385,000). The net proceeds received by the Company was approximately $170,000. The Company anticipates closing on the sale of the remaining two South Africa Hooters locations by the end of November 2019.

 

On November 6, 2019, we sold Just Fresh through the sale of 100% of the membership interest of JF Restaurants, LLC. The purchase price was $500,000 with $125,000 due at closing and the remaining $375,000 in the form of a promissory note to be paid in full by December 31, 2019. The sale agreement included the assumption of trade payables at the closing date. The Company also entered into a Management Services Agreement whereby the Company will continue to act as the manager of JF Restaurants, LLC until the note is repaid in full. As manager, the Company will be entitled to a management fee of 5% of the monthly net cash flow from the operation of the restaurants.

We do not expect that our existing cash and cash equivalents will be sufficient to fund our operations to a potential closing of the Merger. We believe we need to raise approximately $1.5 million in additional cash resources in order to enable us to complete the planned merger with Sonnet and intend to raise such funds through private equity financing or other sources. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. In addition, our expenses may be greater than forecasted and the closing of the Merger could be delayed. Our failure to raise capital or enter into such other arrangements when needed would have a negative impact on our financial condition.

 

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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2018

 

Our results of operations are summarized below:

 

   Three Months Ended     
   September 30, 2019   September 30, 2018     
   Amount   % of Revenue*   Amount   % of Revenue*   % Change 
                     
Restaurant sales, net  $9,414,626        $9,848,302         -4.4%
Gaming income, net   121,453         111,301         9.1%
Management fees   -         24,999         -100.0%
Franchise income   117,361         113,798         3.1%
Total revenue   9,653,440         10,098,400         -4.4%
                          
Expenses:                         
Restaurant cost of sales   3,161,379    33.6%   3,259,223    33.1%   -3.0%
Restaurant operating expenses   5,858,495    62.2%   5,781,284    58.7%   1.3%
Restaurant pre-opening and closing expenses   125,000    1.3%   113,000    1.1%   10.6%
General and administrative   1,572,774    16.3%   1,092,529    10.8%   44.0%
Asset impairment charge   2,637,969    27.3%   -    0.0%   100.0%
Depreciation and amortization   531,265    5.5%   523,680    5.2%   1.4%
Total expenses   13,886,882    143.9%   10,769,716    106.6%   28.9%
Operating loss  $(4,233,442)       $(671,316)          

 

* Restaurant cost of sales, operating expenses and pre-opening and closing expense percentages are based on restaurant sales, net. Other percentages are based on total revenue.

 

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Revenue

 

Total revenue decreased 4.4% to $9.7 million for three months ended September 30, 2019 from $10.1 million for the three months ended September 30, 2018. Revenues by concept are summarized below for each period:

 

   Three Months Ended September 30, 2019 
Revenue  Better Burgers   Just Fresh   Hooters   Corp   Total   % of Total 
Restaurant sales, net  $5,706,289   $943,521   $2,764,816   $    -   $9,414,626    97.5%
Gaming income, net   -    -    121,453    -    121,453    1.3%
Management fees   -    -    -    -    -    0.0%
Franchise income   117,361    -    -    -    117,361    1.2%
Total revenue  $5,823,650   $943,521   $2,886,269   $-   $9,653,440    100.0%

 

   Three Months Ended September 30, 2018 
Revenue  Better Burgers   Just Fresh   Hooters   Corp   Total   % of Total 
Restaurant sales, net  $5,578,206   $989,097   $3,280,999   $-   $9,848,302    97.5%
Gaming income, net   -    -    111,301    -    111,301    1.1%
Management fees   -    -    -    24,999    24,999    0.2%
Franchise income   113,798    -    -    -    113,798    1.1%
Total revenue  $5,692,004   $989,097   $3,392,300   $24,999   $10,098,400    100.0%

 

   % Change in Revenues Compared to Prior Year 
Revenue  Better Burgers   Just Fresh   Hooters   Corp   Total 
Restaurant sales, net   2.3%   -4.6%   -15.7%   -    -4.4%
Gaming income, net   -    -    9.1%   -    9.1%
Management fees   -    -    -    -100.0%   -100.0%
Franchise income   3.1%   -    -    -    3.1%
Total revenue   2.3%   -4.6%   -14.9%   -100.0%   -4.4%

 

  Restaurant revenue from the Company’s Better Burger Group increased 2.3% to $5.7 million for the three months ended September 30, 2019 from $5.6 million for the three months ended September 30, 2018.
     
  Restaurant revenue increased approximately $767,000 for the three months ended September 30, 2019 from the opening of 7 Little Big Burger restaurants during the third and fourth quarters of 2018 and the first three quarters of 2019. In addition, the Company acquired BGR Columbia in October of 2018 which also contributed to the increase in revenue in the third quarter of 2019 (approximately $158,000). This increase in revenue was offset by loss revenue from the store closures (BGR Dupont and BGR Tysons) in the second and third quarters of 2019 and by a decline in same store sales across all brands.
     
  Restaurant revenue from the Company’s Just Fresh Group decreased 4.6% to $900,000 for the three months ended September 30, 2019 from $1.0 million for the three months ended September 30, 2018. The decline in revenues was primarily from a decline in same store sales for the three months ended September 30, 2019.
     
  Restaurant revenue from the Company’s Hooter’s restaurants decreased 15.7% to $2.8 million for the three months ended September 30, 2019 from $3.3 million for the three months ended September 30, 2018. The decrease in Hooters revenue was largely driven by the closure of the Hooters Tacoma store in July 2019.
     
  Gaming revenue increased by 9.1% to $121,000 for the three months ended September 30, 2019 from $111,000 for the three months ended September 30, 2018. The increase in gaming revenue is primarily attributable to normal deviations in levels of play and payouts on the terminals.
     
  Management fee income decreased to $0 for the three months ended September 30, 2019 from $25,000 for the three months ended September 30, 2018. The Company previously derived management fee income from the Company’s CEO serving on the board of Hooters of America. This compensation ended with the sale of Hooters of America in June 2019.
     
  Franchise income increased 3.1% to $117,000 for the three months ended September 30, 2019 from $114,000 for the three months ended September 30, 2018.

 

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Restaurant cost of sales

 

Restaurant cost of sales decreased by 3.0% in total for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 but increased as a percentage of revenue. Cost of sales by concept are summarized below for each period:

 

   Three Months Ended 
   September 30, 2019   September 30, 2018     
Cost of Restaurant Sales  Amount   % of Restaurant Net Sales   Amount   % of Restaurant Net Sales   % Change 
Better Burgers Fast Casual  $1,829,890    32.1%  $1,773,294    31.8%   3.2%
Just Fresh Fast Casual   333,260    35.3%   343,355    34.7%   -2.9%
Hooters Full Service   998,229    36.1%   1,142,574    34.8%   -12.6%
   $3,161,379    33.6%  $3,259,223    33.1%   -3.0%

 

As a percentage of restaurant sales, net, restaurant cost of sales increased to 33.6% for the three months ended September 30, 2019 from 33.1% for the three months ended September 30, 2018.

 

Cost of sales in the Better Burger Group increased slightly to 32.1% from 31.8%, Just Fresh increased to 35.3% from 34.7%, while cost of sales for the Hooters locations increased to 36.1% from 34.8%. Cost of sales as a percentage of revenue increased in all segments due to unfavorable movements in food costs.

 

Restaurant operating expenses

 

Restaurant operating expenses increased 1.3% to $5.9 million for the three months ended September 30, 2019 from $5.8 million for the three months ended September 30, 2018. Restaurant operating expenses by concept are summarized below for each period:

 

   Three Months Ended 
   September 30, 2019   September 30, 2018     
Operating Expenses  Amount   % of Restaurant Net Sales   Amount   % of Restaurant Net Sales   % Change 
Better Burgers Fast Casual  $3,686,444    64.6%  $3,286,899    58.9%   12.2%
Just Fresh Fast Casual   572,509    60.7%   537,968    54.4%   6.4%
Hooters Full Service   1,599,542    57.9%   1,956,417    59.6%   -18.2%
   $5,858,495    62.2%  $5,781,284    58.7%   1.3%

 

As a percent of restaurant revenues, operating expenses increased to 62.2% for the three months ended September 30, 2019 from 58.7% for the three months ended September 30, 2018. Operating expenses in total and as a percentage of restaurant revenue increased due to the opening of new stores in the Better Burger group, increases in wage rates and penalties and interest charges associated with delinquent payroll taxes across all concepts. Operating expenses as a percentage of revenue decreased in the Hooters group due to the closing of Hooters Tacoma in July 2019.

 

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Restaurant pre-opening and closing expenses

 

Restaurant pre-opening and closing expenses increased to $125,000 for the three months ended September 30, 2019 compared with $113,000 for the three months ended September 30, 2018. The Company records rent and other costs to pre-opening expenses while the restaurants are under construction, so these expenses fluctuate depending on the numbers of restaurants under construction. Restaurant closing expenses are included here as well.

 

General and administrative expense (“G&A”)

 

G&A increased 44.0% to $1.6 million for the three months ended September 30, 2019 from $1.1 million for the three months ended September 30, 2018. Significant components of G&A are summarized as follows:

 

   Three Months Ended     
   September 30, 2019   September 30, 2018   % Change 
Audit, legal and other professional services  $514,587   $265,624    93.7%
Salary and benefits   678,186    505,663    34.1%
Travel and entertainment   63,529    53,315    19.2%
Shareholder services and fees   21,742    32,674    -33.5%
Advertising, Insurance and other   294,730    235,253    25.3%
Total G&A Expenses  $1,572,774   $1,092,529    44.0%

 

As a percentage of total revenue, G&A increased to 16.3% for the three months ended September 30, 2019 from 10.8% for the three months ended September 30, 2018.

 

For the three months ended September 30, 2019, approximately $1.1 million is attributable to the cost of operating our Corporate office, including salaries, share-based compensation, travel, audit, legal and other public company related costs. Approximately $500,000 is attributable to managing the operations of our restaurants, including regional management, franchising operations, marketing and advertising within the Better Burger Group, Hooters, and Just Fresh.

 

The increases in G&A during the three months ended September 30, 2019 are primarily related to an increase in Corporate payroll and other one-time costs incurred during the three months ended September 30, 2019. For additional details on these one-time costs, refer to the G&A analysis below of the results of operations for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018.

 

Asset impairment charges

 

Asset impairment charges totaled $2.8 million for the three months ended September 30, 2019 as compared with $0 for the three months ended September 30, 2018. In the third quarter of 2019, the Company recognized impairment charges related to the closure of one of its BGR restaurants which occurred in November as it was determined that the carrying amount of certain assets related to those restaurants were not recoverable as of September 30, 2019. The Company also recognized impairment charges related to its operating lease asset in connection with the Hooters Tacoma location as it was determined that the Company would not be able to sub-lease that space. Lastly, the Company recognized impairment charges in connection with it’s Just Fresh operations based on the sale of 100% of the membership interest of JF Restaurants, LLC for $500,000 in November 2019.

 

Depreciation and amortization

 

Depreciation and amortization expense increased to $531,000 from $524,000 for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 due to the opening of additional Little Big Burger restaurants in 2018 and 2019.

 

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Other expense

 

Other expense consisted of the following:

 

   Three Months Ended 
Other Income (Expense)  September 30, 2019   September 30, 2018   % Change 
Interest expense  $(162,845)  $(630,223)   -74.2%
Other income (expense)   109,805    (223,439)   -149.1%
Total other income (expense)  $(53,040)  $(853,662)   -93.8%

 

Other expense, net decreased to $53,000 for the three months ended September 30, 2019 from an expense of $854,000 for the three months ended September 30, 2018. Interest expense decreased significantly from $630,000 for the three months ended September 30, 2018 to $163,000 for the three months ended September 30, 2019 due to the Company no longer accruing default interest on the $6 million debentures due to the December 2018 amendment along with no further debt discount amortization. The Company recorded a gain of $61,000 from tax settlements related to its South Africa operations.

 

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2018

 

Our results of operations are summarized below:

 

   Nine Months Ended     
   September 30, 2019   September 30, 2018     
   Amount   % of Revenue*   Amount   % of Revenue*   % Change 
                     
Restaurant sales, net