Price Graph
Price
Yield
These terms and conditions govern your use of the website alphaminr.com and its related services.
These Terms and Conditions (“Terms”) are a binding contract between you and Alphaminr, (“Alphaminr”, “we”, “us” and “service”). You must agree to and accept the Terms. These Terms include the provisions in this document as well as those in the Privacy Policy. These terms may be modified at any time.
Your subscription will be on a month to month basis and automatically renew every month. You may terminate your subscription at any time through your account.
We will provide you with advance notice of any change in fees.
You represent that you are of legal age to form a binding contract. You are responsible for any
activity associated with your account. The account can be logged in at only one computer at a
time.
The Services are intended for your own individual use. You shall only use the Services in a
manner that complies with all laws. You may not use any automated software, spider or system to
scrape data from Alphaminr.
Alphaminr is not a financial advisor and does not provide financial advice of any kind. The service is provided “As is”. The materials and information accessible through the Service are solely for informational purposes. While we strive to provide good information and data, we make no guarantee or warranty as to its accuracy.
TO THE EXTENT PERMITTED BY APPLICABLE LAW, UNDER NO CIRCUMSTANCES SHALL ALPHAMINR BE LIABLE TO YOU FOR DAMAGES OF ANY KIND, INCLUDING DAMAGES FOR INVESTMENT LOSSES, LOSS OF DATA, OR ACCURACY OF DATA, OR FOR ANY AMOUNT, IN THE AGGREGATE, IN EXCESS OF THE GREATER OF (1) FIFTY DOLLARS OR (2) THE AMOUNTS PAID BY YOU TO ALPHAMINR IN THE SIX MONTH PERIOD PRECEDING THIS APPLICABLE CLAIM. SOME STATES DO NOT ALLOW THE EXCLUSION OR LIMITATION OF INCIDENTAL OR CONSEQUENTIAL OR CERTAIN OTHER DAMAGES, SO THE ABOVE LIMITATION AND EXCLUSIONS MAY NOT APPLY TO YOU.
If any provision of these Terms is found to be invalid under any applicable law, such provision shall not affect the validity or enforceability of the remaining provisions herein.
This privacy policy describes how we (“Alphaminr”) collect, use, share and protect your personal information when we provide our service (“Service”). This Privacy Policy explains how information is collected about you either directly or indirectly. By using our service, you acknowledge the terms of this Privacy Notice. If you do not agree to the terms of this Privacy Policy, please do not use our Service. You should contact us if you have questions about it. We may modify this Privacy Policy periodically.
When you register for our Service, we collect information from you such as your name, email address and credit card information.
Like many other websites we use “cookies”, which are small text files that are stored on your computer or other device that record your preferences and actions, including how you use the website. You can set your browser or device to refuse all cookies or to alert you when a cookie is being sent. If you delete your cookies, if you opt-out from cookies, some Services may not function properly. We collect information when you use our Service. This includes which pages you visit.
We use Google Analytics and we use Stripe for payment processing. We will not share the information we collect with third parties for promotional purposes. We may share personal information with law enforcement as required or permitted by law.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 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 10,043,143 shares of common stock issued and outstanding as of August 6, 2019.
Chanticleer Holdings, Inc. and Subsidiaries
INDEX
| 2 |
Chanticleer Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
| (Unaudited) | ||||||||
| June 30, 2019 | December 31, 2018 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 579,006 | $ | 629,871 | ||||
| Restricted cash | 336 | 335 | ||||||
| Accounts and other receivables, net | 518,930 | 387,239 | ||||||
| Inventories | 421,045 | 478,314 | ||||||
| Prepaid expenses and other current assets | 249,853 | 179,377 | ||||||
| TOTAL CURRENT ASSETS | 1,769,170 | 1,675,136 | ||||||
| Property and equipment, net | 9,012,388 | 10,467,841 | ||||||
| Operating lease assets | 17,712,994 | - | ||||||
| Goodwill | 11,274,818 | 11,280,465 | ||||||
| Intangible assets, net | 4,887,580 | 5,123,159 | ||||||
| Investments | 365,000 | 800,000 | ||||||
| Deposits and other assets | 401,659 | 446,639 | ||||||
| TOTAL ASSETS | $ | 45,423,609 | $ | 29,793,240 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 9,527,741 | $ | 7,386,506 | ||||
| Current maturities of long-term debt and notes payable | 6,619,671 | 3,740,101 | ||||||
| Current maturities of convertible notes payable | - | 3,000,000 | ||||||
| Current operating lease liabilities | 3,594,747 | - | ||||||
| Due to related parties | 137,408 | 185,726 | ||||||
| TOTAL CURRENT LIABILITIES | 19,879,567 | 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 $156,523 and $173,914, respectively | 692,303 | 674,912 | ||||||
| Deferred rent | - | 2,297,199 | ||||||
| Long-term operating lease liabilities | 16,800,480 | - | ||||||
| Deferred revenue | 1,007,531 | 1,174,506 | ||||||
| Deferred tax liabilities | 119,915 | 76,765 | ||||||
| TOTAL LIABILITIES | 38,499,796 | 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 7,014,023 and 3,715,444 shares, respectively | 703 | 373 | ||||||
| Additional paid in capital | 71,210,203 | 64,756,903 | ||||||
| Common stock subscribed, unissued | 300 | - | ||||||
| Subscriptions receivable | (2,694,530 | ) | - | |||||
| Accumulated other comprehensive loss | (232,110 | ) | (202,115 | ) | ||||
| Accumulated deficit | (62,270,344 | ) | (57,124,673 | ) | ||||
| Total Chanticleer Holdings, Inc, Stockholders’ Equity | 6,014,222 | 7,430,488 | ||||||
| Non-Controlling Interests | 909,591 | 827,037 | ||||||
| TOTAL EQUITY | 6,923,813 | 8,257,525 | ||||||
| TOTAL LIABILITIES AND EQUITY | $ | 45,423,609 | $ | 29,793,240 | ||||
See accompanying notes to consolidated financial statements
| 3 |
Chanticleer Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2019 | June 30, 2018 | June 30, 2019 | June 30, 2018 | |||||||||||||
| Revenue: | ||||||||||||||||
| Restaurant sales, net | $ | 10,378,518 | $ | 10,185,159 | $ | 20,288,546 | $ | 19,954,667 | ||||||||
| Gaming income, net | 109,536 | 81,122 | 225,621 | 174,277 | ||||||||||||
| Management fee income | 25,000 | 24,999 | 50,000 | 49,998 | ||||||||||||
| Franchise income | 197,719 | 108,644 | 344,376 | 216,497 | ||||||||||||
| Total revenue | 10,710,773 | 10,399,924 | 20,908,543 | 20,395,439 | ||||||||||||
| Expenses: | ||||||||||||||||
| Restaurant cost of sales | 3,515,186 | 3,376,693 | 6,792,765 | 6,652,868 | ||||||||||||
| Restaurant operating expenses | 6,557,415 | 5,640,614 | 12,987,959 | 11,226,763 | ||||||||||||
| Restaurant pre-opening and closing expenses | 76,713 | 96,770 | 142,888 | 199,652 | ||||||||||||
| General and administrative expenses | 1,714,399 | 1,121,666 | 3,212,017 | 2,315,083 | ||||||||||||
| Asset impairment charge | 1,277,590 | 54,212 | 1,369,081 | 1,731,267 | ||||||||||||
| Depreciation and amortization | 554,016 | 530,314 | 1,096,417 | 1,070,993 | ||||||||||||
| Total expenses | 13,695,319 | 10,820,269 | 25,601,127 | 23,196,626 | ||||||||||||
| Operating loss | (2,984,546 | ) | (420,345 | ) | (4,692,584 | ) | (2,801,187 | ) | ||||||||
| Other expense | ||||||||||||||||
| Interest expense | (167,520 | ) | (629,858 | ) | (379,290 | ) | (1,264,939 | ) | ||||||||
| Other income (expense) | (177,771 | ) | 7,605 | (196,045 | ) | 5,490 | ||||||||||
| Total other expense | (345,291 | ) | (622,253 | ) | (575,335 | ) | (1,259,449 | ) | ||||||||
| Loss before income taxes | (3,329,837 | ) | (1,042,598 | ) | (5,267,919 | ) | (4,060,636 | ) | ||||||||
| Income tax benefit (expense) | (5,829 | ) | 236,798 | (56,410 | ) | 572,995 | ||||||||||
| Consolidated net loss | (3,335,666 | ) | (805,800 | ) | (5,324,329 | ) | (3,487,641 | ) | ||||||||
| Less: Net loss attributable to non-controlling interests | 118,867 | 45,340 | 234,458 | 129,747 | ||||||||||||
| Net loss attributable to Chanticleer Holdings, Inc. | $ | (3,216,799 | ) | $ | (760,460 | ) | $ | (5,089,871 | ) | $ | (3,357,894 | ) | ||||
| Dividends on redeemable preferred stock | (28,006 | ) | (28,007 | ) | (55,800 | ) | (55,801 | ) | ||||||||
| Net loss attributable to common shareholders of Chanticleer Holdings, Inc. | $ | (3,244,805 | ) | $ | (788,467 | ) | $ | (5,145,671 | ) | $ | (3,413,695 | ) | ||||
| Net loss attributable to Chanticleer Holdings, Inc. per common share, basic and diluted: | $ | (0.83 | ) | $ | (0.23 | ) | $ | (1.34 | ) | $ | (1.02 | ) | ||||
| Weighted average shares outstanding, basic and diluted | 3,926,879 | 3,494,803 | 3,835,661 | 3,331,296 | ||||||||||||
See accompanying notes to consolidated financial statements
| 4 |
Chanticleer Holdings, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Loss (Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2019 | June 30, 2018 | June 30, 2019 | June 30, 2018 | |||||||||||||
| Net loss attributable to Chanticleer Holdings, Inc. | $ | (3,216,799 | ) | $ | (760,460 | ) | $ | (5,089,871 | ) | $ | (3,357,894 | ) | ||||
| Foreign currency translation gain (loss) | (67,827 | ) | 3,271 | (29,995 | ) | 828,212 | ||||||||||
| Total other comprehensive income | (67,827 | ) | 3,271 | (29,995 | ) | 828,212 | ||||||||||
| Comprehensive loss | $ | (3,284,626 | ) | $ | (757,189 | ) | $ | (5,119,866 | ) | $ | (2,529,682 | ) | ||||
See accompanying notes to consolidated financial statements
| 5 |
Chanticleer Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Equity (Unaudited)
Three and Six Months Ended June 30, 2019 and 2018
| Accumulated | ||||||||||||||||||||||||||||||||||||
| Additional | Common | Other | Non- | |||||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Stock | Subscriptions | Comprehensive | Accumulated | Controlling | ||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Subcribed | 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 | |||||||||||||||||||||||||
| 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 | - | - | - | (28,005 | ) | - | (8,907 | ) | |||||||||||||||||||||||||
| 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 | - | - | - | - | - | - | - | (16,779 | ) | (16,779 | ) | |||||||||||||||||||||||||
| 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 | ) | $ | (62,270,344 | ) | $ | 909,591 | $ | 6,923,813 | ||||||||||||||||
See accompanying notes to consolidated financial statements
| 6 |
Chanticleer Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
| Six Months Ended | ||||||||
| June 30, 2019 | June 30, 2018 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (5,324,329 | ) | $ | (3,487,641 | ) | ||
| Adjustments to reconcile net loss to net cash flows from operating activities: | ||||||||
| Depreciation and amortization | 1,096,417 | 1,070,993 | ||||||
| Amortization of operating lease assets | 931,722 | - | ||||||
| Asset impairment charges | 1,369,081 | 1,731,267 | ||||||
| Write-off investment in HOA | 435,000 | - | ||||||
| Common stock and warrants issued for services | 23,747 | 129,767 | ||||||
| Stock based compensation | 111,087 | - | ||||||
| Loss on investments | 29,239 | - | ||||||
| Gain on tax settlements | (204,162 | ) | - | |||||
| Amortization of debt discount and discount on preferred stock | 17,391 | 591,830 | ||||||
| Change in assets and liabilities: | ||||||||
| Accounts and other receivables | (137,789 | ) | (241,772 | ) | ||||
| Prepaid and other assets | (78,295 | ) | (412,423 | ) | ||||
| Inventory | 41,205 | 60,093 | ||||||
| Accounts payable and accrued liabilities | 2,449,648 | 849,132 | ||||||
| Change in amounts payable to related parties | (48,318 | ) | - | |||||
| Deferred income taxes | 43,150 | (572,994 | ) | |||||
| Operating lease liabilities | (941,131 | ) | - | |||||
| Deferred revenue | (166,975 | ) | - | |||||
| Deferred rent | - | (119,089 | ) | |||||
| Net cash flows from operating activities | (353,312 | ) | (400,837 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | (518,619 | ) | (664,801 | ) | ||||
| Proceeds from tenant improvement allowances | 141,860 | - | ||||||
| Cash paid for acquisitions | - | (30,000 | ) | |||||
| Proceeds from sale of assets | 173,977 | - | ||||||
| Net cash flows from investing activities | (202,782 | ) | (694,801 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sale of common stock and warrants | - | 1,687,184 | ||||||
| Loan proceeds | 304,174 | - | ||||||
| Loan repayments | (347,680 | ) | (207,531 | ) | ||||
| Distributions to non-controlling interest | (27,583 | ) | (42,603 | ) | ||||
| Contributions from non-controlling interest | 575,000 | 750,000 | ||||||
| Net cash flows from financing activities | 503,911 | 2,187,050 | ||||||
| Effect of exchange rate changes on cash | 1,319 | (17,763 | ) | |||||
| Net increase (decrease) in cash and restricted cash | (50,864 | ) | 1,073,649 | |||||
| Cash and restricted cash, beginning of period | 630,206 | 438,493 | ||||||
| Cash and restricted cash, end of period | $ | 579,342 | $ | 1,512,142 | ||||
See accompanying notes to consolidated financial statements
| 7 |
Chanticleer Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited), continued
| Six Months Ended | ||||||||
| June 30, 2019 | June 30, 2018 | |||||||
| Supplemental cash flow information: | ||||||||
| Cash paid for interest and income taxes: | ||||||||
| Interest | $ | 312,438 | $ | 272,784 | ||||
| Income taxes | 92,576 | 73,112 | ||||||
| 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 | - | ||||||
| Subscriptions receivable from rights offering, net | 2,694,530 | - | ||||||
| Preferred stock dividends paid through issuance of common stock | 38,618 | 38,622 | ||||||
See accompanying notes to consolidated financial statements
| 8 |
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 six-month periods ended June 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 June 30, 2019, our cash balance was $579,000, our working capital was negative $18.1 million (which includes $3.6 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. The level of additional cash needed to fund operations and our ability to conduct business for the next twelve months will be influenced primarily by the following factors:
| ● | our ability to access the capital and debt markets to satisfy current obligations and operate the business; | |
| ● | our ability to refinance or otherwise extend maturities of current debt obligations; | |
| ● | our ability to establish and manage payment plans with various taxing authorities to pay off back taxes; | |
| ● | the level of investment in acquisition of new restaurant businesses and entering new markets; | |
| ● | our ability to manage our operating expenses and maintain gross margins as we grow; | |
| ● | popularity of and demand for our fast-casual dining concepts; and | |
| ● | general economic conditions and changes in consumer discretionary income. |
We have typically funded our operating costs, acquisition activities, working capital requirements and capital expenditures with proceeds from the issuances of our common stock and other financing arrangements, including convertible debt, lines of credit, notes payable, capital leases, and other forms of external financing.
| 9 |
Our operating plan for the next twelve months contemplates opening at least two additional company owned stores as well as growing our franchising businesses at Little Big Burger and BGR. We have contractual commitments related to store construction of approximately $386,000, of which approximately $125,000 is funded by private investors and approximately $261,000 will be funded internally by the Company. Approximately $322,000 is expected to be returned to the Company via tenant improvement refunds once all conditions are satisfied. We also have $6.6 million of principal due on our debt obligations within the next 12 months, 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. We are evaluating our current debt obligations during 2019 and are also exploring the sale of certain assets and raising additional capital. In February 2019, we sold the assets associated with American Roadside McBee, LLC for net proceeds of approximately $173,000 and we sold 54% of the ownership interests in BGR Arlington, LLC and BGR Washingtonian, LLC for net proceeds of approximately $450,000. However, we cannot provide assurance that we will be able to refinance our long-term debt or sell assets or raise additional capital.
As we execute our growth plans over the next 12 months, we intend to carefully monitor the impact of growth on our working capital needs and cash balances relative to the availability of cost-effective debt and equity financing. In the event that capital is not available, or we are unable to refinance our debt obligations or obtain waivers, we may then have to scale back or freeze our organic growth plans, sell assets on less than favorable terms, reduce expenses, and/or curtail future acquisition plans to manage our liquidity and capital resources. We may also incur financial penalties or other negative actions from our lenders if we are not able to refinance or otherwise extend or repay our current obligations or obtain waivers. As of June 30, 2019, the Company and its subsidiaries have approximately $3.4 million of accrued employee and employer taxes, including penalties and interest, which are due to certain taxing authorities. These factors raise substantial doubt about our ability to continue as a going concern. The Company is currently in discussions with various taxing authorities on settling these liabilities through payment plans beginning in the third quarter of 2019.
The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
2. SIGNIFICANT ACCOUNTING POLICIES
Except for the accounting policies for leases discussed in Note 10 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.
| 10 |
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:
| June 30, 2019 | December 31, 2018 | |||||||
| Accounts Receivable | $ | 432,650 | $ | 227,056 | ||||
| Royalty Receivables | - | 5,307 | ||||||
| Gift Card Liability | 86,718 | 87,724 | ||||||
| Deferred Revenue | 1,007,531 | 1,174,506 | ||||||
The only revenue recognized over time versus point-in-time is the initial/up-front franchise fees and the 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.
| 11 |
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 June 30, 2019 and 2018, which have been excluded from the calculation of diluted net loss per common share since the effect would be antidilutive.
| June 30, 2019 | June 30, 2018 | |||||||
| Warrants | 3,605,034 | 2,645,829 | ||||||
| Convertible notes | - | 300,000 | ||||||
| Stock options | 32,800 | - | ||||||
| Total | 3,637,834 | 2,945,829 | ||||||
3. ACQUISITIONS
On March 7, 2018, the Company entered into an agreement to purchase two BGR franchise locations in Maryland. The Company closed on the purchase of the Annapolis, MD location in the first quarter of 2018 and the Company closed on the Colombia, MD location as of October 1, 2018.
| 12 |
Total consideration consisted of $30,000 in cash paid and a seller note of $9,600 upon the closing of the first location (reflected in the accompanying condensed consolidated financial statements) and $20,000 in cash and a seller note of $187,000 upon closing of the second location in October.
The Company allocated the purchase price as of the date of acquisition based on the estimated fair value of the acquired assets and assumed liabilities. The purchase accounting for this acquisition was completed as of December 31, 2018.
4. INVESTMENTS
Investments at cost consist of the following:
| June 30, 2019 | December 31, 2018 | |||||||
| Chanticleer Investors, LLC | $ | 365,000 | $ | 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. The Company recorded a $435,000 write down of the investment.
5. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
| June 30, 2019 | December 31, 2018 | |||||||
| Leasehold improvements | $ | 11,129,013 | $ | 12,030,450 | ||||
| Restaurant furniture and equipment | 5,848,191 | 6,389,305 | ||||||
| Construction in progress | 297,993 | 1,015,853 | ||||||
| Office and computer equipment | 69,803 | 73,681 | ||||||
| Office furniture and fixtures | 73,838 | 76,486 | ||||||
| 17,418,838 | 19,585,775 | |||||||
| Accumulated depreciation and amortization | (8,406,450 | ) | (9,117,934 | ) | ||||
| $ | 9,012,388 | $ | 10,467,841 | |||||
Depreciation and amortization expense was approximately $432,000 and $392,000 for the three months ended June 30, 2019 and 2018, respectively, and $855,000 and $799,000 for the six months ended June 30, 2019 and 2018, respectively.
6. INTANGIBLE ASSETS, NET
GOODWILL
Goodwill consist of the following:
| June 30, 2019 | December 31, 2018 | |||||||
| Hooters Full Service | $ | 3,330,215 | $ | 3,335,862 | ||||
| Better Burgers Fast Casual | 7,448,848 | 7,448,848 | ||||||
| Just Fresh Fast Casual | 495,755 | 495,755 | ||||||
| $ | 11,274,818 | $ | 11,280,465 | |||||
| 13 |
The changes in the carrying amount of goodwill are summarized as follows:
| June 30, 2019 | December 31, 2018 | |||||||
| Beginning Balance | $ | 11,280,465 | $ | 12,647,806 | ||||
| Impairment | - | (1,191,111 | ) | |||||
| Foreign currency translation gain (loss) | (5,647 | ) | (176,230 | ) | ||||
| Ending Balance | $ | 11,274,818 | $ | 11,280,465 | ||||
OTHER INTANGIBLE ASSETS
Franchise and trademark/tradename intangible assets consist of the following:
| June 30, 2019 | December 31, 2018 | |||||||||
| Trademark, Tradenames: | ||||||||||
| Just Fresh | 10 years | $ | 1,010,000 | $ | 1,010,000 | |||||
| American Roadside Burger | 10 years | 1,786,930 | 1,786,930 | |||||||
| BGR: The Burger Joint | Indefinite | 1,430,000 | 1,430,000 | |||||||
| Little Big Burger | Indefinite | 1,550,000 | 1,550,000 | |||||||
| 5,776,930 | 5,776,930 | |||||||||
| Acquired Franchise Rights | ||||||||||
| BGR: The Burger Joint | 7 years | 827,757 | 827,757 | |||||||
| Franchise License Fees: | ||||||||||
| Hooters South Africa | 20 years | 239,958 | 234,242 | |||||||
| Hooters Pacific NW | 20 years | 89,507 | 89,507 | |||||||
| Hooters UK | 5 years | 12,364 | 12,422 | |||||||
| 341,829 | 336,171 | |||||||||
| Total Intangibles at cost | 6,946,516 | 6,940,858 | ||||||||
| Accumulated amortization | (2,058,936 | ) | (1,817,699 | ) | ||||||
| Intangible assets, net | $ | 4,887,580 | $ | 5,123,159 | ||||||
| Six Months Ended | ||||||||
| June 30, 2019 | June 30, 2018 | |||||||
| Amortization expense | $ | 241,237 | $ | 263,025 | ||||
7. DEBT AND NOTES PAYABLE
Debt and notes payable are summarized as follows:
| June 30, 2019 | December 31, 2018 | |||||||
| Notes Payable (a) | $ | 6,000,000 | $ | 6,000,000 | ||||
| Notes Payable Paragon Bank (b) | 225,217 | 319,983 | ||||||
| Note Payable (c) | - | 75,000 | ||||||
| Receivables financing facilities (d) | 256,092 | 124,205 | ||||||
| Notes Payable (e) | 49,635 | 144,004 | ||||||
| Bank overdraft facilities, South Africa, annual renewal | 88,727 | 76,909 | ||||||
| Total debt | 6,619,671 | 6,740,101 | ||||||
| Current portion of long-term debt | 6,619,671 | 3,740,101 | ||||||
| Long-term debt, less current portion | $ | - | $ | 3,000,000 | ||||
For the six months ended June 30, 2019 and 2018, amortization of debt discount was $0 and $586,695, respectively.
| 14 |
(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).
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 and are not exercisable for a period of six months. 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.
(b) The Company has two outstanding term loans with Paragon Bank, all of which are collateralized by all assets of the Company and personally guaranteed by our Chief Executive Officer. The outstanding balance, interest rate and maturity date of each loan is as follows:
| Maturity date | Interest rate | Principal balance | ||||||||
| Note 1 | 5/10/2019 | 5.25 | % | $ | 11,551 | |||||
| Note 2 | 8/10/2021 | 6.50 | % | 213,666 | ||||||
| $ | 225,217 | |||||||||
(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.
| 15 |
(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 $256,092 at June 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 $49,635 at June 30, 2019.
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 June 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.
8. cONVERTIBLE NOTEs PAYABLE
Convertible Notes payable are summarized as follows:
| June 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:
| June 30, 2019 | December 31, 2018 | |||||||
| Accounts payable and accrued expenses | $ | 4,781,325 | $ | 3,591,641 | ||||
| Accrued taxes (VAT, Sales, Payroll, etc.) | 4,206,363 | 3,243,806 | ||||||
| Accrued income taxes | 43,520 | 61,790 | ||||||
| Accrued interest | 496,533 | 489,269 | ||||||
| $ | 9,527,741 | $ | 7,386,506 | |||||
As of June 30, 2019, approximately $3.4 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 payroll taxes accrued at June 30, 2019.
| 16 |
10. EQUITY
The Company had 45,000,000 shares of its $0.0001 par value common stock authorized at both June 30, 2019 and December 31, 2018. The Company had 3,939,023 and 3,715,444 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively.
The Company has 5,000,000 shares of its no par value preferred stock authorized at both June 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.
As of June 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 6,084,853 shares in the rights offering upon expiration of the rights offering on June 28, 2019. The Company received $6,009,853 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 are deemed issued at June 30, 2019 and included in common stock issued and outstanding on the balance sheet. 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. These proceeds are reflected as subscription receivables within the equity portion of the Company’s June 30, 2019 balance sheet. In addition, the stock subscriptions accepted upon expiration of the rights offering on June 28, 2019, excluding those related to the reduction in outstanding debt obligations, are reflected as common stock subscribed, unissued on the balance sheet at June 30, 2019.
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.
| 17 |
As of June 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 June 30, 2019, total unrecognized stock-based compensation expense related to non-vested restricted stock units was approximately $29,250. That cost is expected to be recognized over a period of 1.50 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 $22,100 of total unrecognized compensation costs related to options granted as of March 31, 2019. That cost is expected to be recognized over a period of 1.75 years.
Total stock-based compensation expense for the six months ended June 30, 2019 and 2018 was $111,087 and $0, respectively.
A summary of the warrant activity for the six months ended June 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 | (79,728 | ) | 60.70 | - | ||||||||
| Outstanding June 30, 2019 | 3,605,034 | 8.00 | 6.8 | |||||||||
| Exercisable June 30, 2019 | 3,605,034 | $ | 8.00 | 6.8 | ||||||||
| Exercise Price | Outstanding Number of Warrants | Weighted Average Remaining Life in Years | Exerciseable Number of Warrants | |||||||||
| > $40.00 | 235,224 | 1.3 | 235,224 | |||||||||
| $30.00-$39.99 | 38,490 | 0.5 | 38,490 | |||||||||
| $20.00-$29.99 | 77,950 | 0.6 | 77,950 | |||||||||
| $10.00-$19.99 | 50,300 | 2.0 | 50,300 | |||||||||
| $0.00-$9.99 | 3,203,070 | 7.5 | 3,203,070 | |||||||||
| 3,605,034 | 6.8 | 3,605,034 | ||||||||||
A summary of the stock option activity for the six months ended June 30, 2019 is below:
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Life | ||||||||||
| Outstanding December 31, 2018 | - | $ | - | - | ||||||||
| Granted | 32,800 | 4.0 | 4.4 | |||||||||
| Exercised | - | - | - | |||||||||
| Forfeited | - | - | - | |||||||||
| Outstanding June 30, 2019 | 32,800 | $ | 4.0 | 4.4 | ||||||||
| Exercisable June 30, 2019 | 7,650 | $ | 4.0 | 4.4 | ||||||||
| 18 |
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:
| June 30, 2019 | December 31, 2018 | |||||||
| Chanticleer Investors, LLC | $ | 137,408 | $ | 185,726 | ||||
| $ | 137,408 | $ | 185,726 | |||||
The amount from Chanticleer Investors LLC is related to cash distributions received from Chanticleer Investors LLC’s interest in Hooters of America which is payable to the Company’s co-investors in that investment.
Transactions with Board Members
Larry Spitcaufsky, a significant shareholder and member of the Company’s Board of Directors, is also a lender to the Company for $2 million of the Company’s $6 million in secured debentures. In connection with the secured debentures, the Company made payments of interest to the board member of $87,890 and $80,000 for the six months ended June 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 six months ended June 30, 2019 and 2018. The Company does not aggregate or review non-current assets at the segment level.
| 19 |
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2019 | June 30, 2018 | June 30, 2019 | June 30, 2018 | |||||||||||||
| Revenue: | ||||||||||||||||
| Hooters Full Service | $ | 3,344,002 | $ | 3,513,223 | $ | 6,690,585 | $ | 7,044,297 | ||||||||
| Better Burgers Fast Casual | 6,328,877 | 5,801,499 | 12,187,185 | 11,162,021 | ||||||||||||
| Just Fresh Fast Casual | 1,012,894 | 1,060,203 | 1,980,773 | 2,139,123 | ||||||||||||
| Corporate and Other | 25,000 | 24,999 | 50,000 | 49,998 | ||||||||||||
| $ | 10,710,773 | $ | 10,399,924 | $ | 20,908,543 | $ | 20,395,439 | |||||||||
| Operating Income (Loss): | ||||||||||||||||
| Hooters Full Service | $ | (599,821 | ) | $ | 73,791 | (590,257 | ) | $ | (1,261,764 | ) | ||||||
| Better Burgers Fast Casual | (1,281,727 | ) | 91,303 | (1,973,802 | ) | (120,531 | ) | |||||||||
| Just Fresh Fast Casual | (32,828 | ) | 637 | (62,586 | ) | (42,777 | ) | |||||||||
| Corporate and Other | (1,070,170 | ) | (586,076 | ) | (2,065,939 | ) | (1,376,115 | ) | ||||||||
| $ | (2,984,546 | ) | $ | (420,345 | ) | $ | (4,692,584 | ) | $ | (2,801,187 | ) | |||||
| Depreciation and Amortization | ||||||||||||||||
| Hooters Full Service | $ | 90,900 | $ | 102,145 | $ | 183,435 | $ | 208,173 | ||||||||
| Better Burgers Fast Casual | 416,983 | 382,801 | 820,715 | 772,083 | ||||||||||||
| Just Fresh Fast Casual | 45,147 | 44,525 | 90,294 | 89,050 | ||||||||||||
| Corporate and Other | 986 | 843 | 1,973 | 1,687 | ||||||||||||
| $ | 554,016 | $ | 530,314 | $ | 1,096,417 | $ | 1,070,993 | |||||||||
The following are revenues and operating income (loss) from continuing operations by geographic region for the three and six months ended June 30, 2019 and 2018:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2019 | June 30, 2018 | June 30, 2019 | June 30, 2018 | |||||||||||||
| Revenue: | ||||||||||||||||
| United States | $ | 8,654,100 | $ | 8,164,018 | $ | 16,806,839 | $ | 15,946,418 | ||||||||
| South Africa | 1,346,939 | 1,467,909 | 2,739,242 | 2,969,328 | ||||||||||||
| Europe | 709,734 | 767,997 | 1,362,462 | 1,479,693 | ||||||||||||
| $ | 10,710,773 | $ | 10,399,924 | $ | 20,908,543 | $ | 20,395,439 | |||||||||
| Operating Income (Loss): | ||||||||||||||||
| United States | $ | (2,970,515 | ) | $ | (505,109 | ) | $ | (4,699,865 | ) | $ | (1,468,121 | ) | ||||
| South Africa | (49,868 | ) | 10,649 | (33,274 | ) | 21,194 | ||||||||||
| Europe | 35,837 | 74,115 | 40,555 | (1,354,260 | ) | |||||||||||
| $ | (2,984,546 | ) | $ | (420,345 | ) | $ | (4,692,584 | ) | $ | (2,801,187 | ) | |||||
The following are non-current assets by geographic region as of June 30, 2019 and December 31, 2018:
| Non-current Assets: | June 30, 2019 (1) | December 31, 2018 | ||||||
| United States | $ | 39,310,602 | $ | 24,795,368 | ||||
| South Africa | 1,691,809 | 909,514 | ||||||
| Europe | 2,652,028 | 2,413,222 | ||||||
| $ | 43,654,439 | $ | 28,118,104 | |||||
| (1) | Non -current assets increased due to the adoption of ASC 842 effective January 1, 2019. |
| 20 |
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 June 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 June 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.
Restaurant construction
The Company has contractual commitments related to store construction of approximately $386,000, of which approximately $125,000 is funded by private investors and approximately $261,000 will be funded internally by the Company. After completion of construction at each location, approximately $322,000 is expected to be returned to the Company via tenant improvement refunds.
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.
| 21 |
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.
Supplemental balance sheet information related to leases was as follows:
| Operating Leases | Classification | June 30, 2019 | ||||
| Right-of-use assets | Operating lease assets | $ | 17,712,994 | |||
| Current lease liabilities | Current operating lease liabilities | 3,594,747 | ||||
| Non-current lease liabilities | Long-term operating lease liabilities | 16,800,480 | ||||
| $ | 20,395,227 | |||||
Lease term and discount rate were as follows:
| June 30, 2019 | ||||
| Weighted average remaining lease term (years) | 9.27 | |||
| Weighted average discount rate | 10 | % | ||
The components of lease cost were as follows:
| Classification |
Six Months ended
June 30, 2019 |
|||||
| Operating lease cost | Restaurant operating expenses and Restaurant pre-opening and closing expenses | $ | 1,969,468 | |||
| Variable lease cost | Restaurant operating expenses | 418,976 | ||||
| $ | 2,388,444 | |||||
Supplemental disclosures of cash flow information related to leases were as follows:
| Six Months ended June 30, 2019 | ||||
| Cash paid for operating leases | $ | 1,978,877 | ||
| Operating lease assets obtained in exchange for operating lease liabilities (1) | 19,822,753 | |||
| (1) | Amounts for the six months ended June 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 June 30, 2019:
| Operating Leases | ||||
| July 1, 2019 - June 30, 2020 | $ | 3,761,567 | ||
| July 1, 2020 - June 30, 2021 | 3,743,669 | |||
| July 1, 2021 - June 30, 2022 | 3,698,299 | |||
| July 1, 2022 - June 30, 2023 | 3,238,152 | |||
| July 1, 2023 - June 30, 2024 | 2,876,735 | |||
| Thereafter | 14,337,079 | |||
| Total lease payments | 31,655,501 | |||
| Less: imputed interest | 11,260,274 | |||
| Present value of lease liabilities | $ | 20,395,227 | ||
14. subsequent events
The Company made the decision to close one BGR location and one domestic Hooters location in July 2019.
| 22 |
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. These statements include projections, predictions, expectations or statements as to beliefs or future events or results or refer to other matters that are not historical facts. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by these statements. The forward-looking statements contained in this Annual Report are based on various factors and were derived using numerous assumptions. In some cases, you can identify these forward-looking statements by the words “anticipate”, “estimate”, “plan”, “project”, “continuing”, “ongoing”, “target”, “aim”, “expect”, “believe”, “intend”, “may”, “will”, “should”, “could”, or the negative of those words and other comparable words. You should be aware that those statements reflect only the Company’s predictions. If known or unknown risks or uncertainties should materialize, or if underlying assumptions should prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind when reading this Annual Report and not place undue reliance on these forward-looking statements. Factors that might cause such differences include, but are not limited to:
| ● | The quality of 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; |
| 23 |
| ● | 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.
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 46 fast casual restaurants specializing the “Better Burger” category of which 34 are company-owned and 12 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 10 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 18 company-owned locations in Oregon, Washington and North Carolina and 1 franchisee-operated location in Texas. In addition, 1 company-owned location is currently under construction.
| 24 |
We also own and operate Just Fresh, our healthier eating fast casual concept with 5 company-owned locations in Charlotte, North Carolina. Just Fresh offers fresh-squeezed juices, gourmet coffee, fresh-baked goods and premium-quality, made-to-order sandwiches, salads and soups.
We own and operate 8 Hooters full-service restaurants in the United States, South Africa, and the United Kingdom. Hooters restaurants are casual beach-themed establishments featuring music, sports on large flat screens, and a menu that includes seafood, sandwiches, burgers, salads, and of course, Hooters original chicken wings and the “nearly world famous” Hooters Girls.
As of June 30, 2019, our system-wide store count totaled 59 locations, consisting of 47 company-owned locations and 12 franchisee-operated locations.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2019 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2018
Our results of operations are summarized below:
| Three Months Ended | ||||||||||||||||||||
| June 30, 2019 | June 30, 2018 | |||||||||||||||||||
| Amount | % of Revenue* | Amount | % of Revenue* | % Change | ||||||||||||||||
| Restaurant sales, net | $ | 10,378,518 | $ | 10,185,159 | 1.9 | % | ||||||||||||||
| Gaming income, net | 109,536 | 81,122 | 35.0 | % | ||||||||||||||||
| Management fees | 25,000 | 24,999 | 0.0 | % | ||||||||||||||||
| Franchise income | 197,719 | 108,644 | 82.0 | % | ||||||||||||||||
| Total revenue | 10,710,773 | 10,399,924 | 3.0 | % | ||||||||||||||||
| Expenses: | ||||||||||||||||||||
| Restaurant cost of sales | 3,515,186 | 33.9 | % | 3,376,693 | 33.2 | % | 4.1 | % | ||||||||||||
| Restaurant operating expenses | 6,557,415 | 63.2 | % | 5,640,614 | 55.4 | % | 16.3 | % | ||||||||||||
| Restaurant pre-opening and closing expenses | 76,713 | 0.7 | % | 96,770 | 1.0 | % | -20.7 | % | ||||||||||||
| General and administrative | 1,714,399 | 16.0 | % | 1,121,666 | 10.8 | % | 52.8 | % | ||||||||||||
| Asset impairment charge | 1,277,590 | 11.9 | % | 54,212 | 0.5 | % | 2256.7 | % | ||||||||||||
| Depreciation and amortization | 554,016 | 5.2 | % | 530,314 | 5.1 | % | 4.5 | % | ||||||||||||
| Total expenses | 13,695,319 | 127.9 | % | 10,820,269 | 104.0 | % | 26.6 | % | ||||||||||||
| Operating loss | $ | (2,984,546 | ) | $ | (420,345 | ) | ||||||||||||||
* 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.
| 25 |
Revenue
Total revenue increased 3.0% to $10.7 million for three months ended June 30, 2019 from $10.4 million for the three months ended June 30, 2018. Revenues by concept are summarized below for each period:
| Three Months Ended June 30, 2019 | ||||||||||||||||||||||||
| Better Burgers | Just Fresh | Hooters | Corp | Total | % of Total | |||||||||||||||||||
| Revenue | ||||||||||||||||||||||||
| Restaurant sales, net | $ | 6,131,158 | $ | 1,012,894 | $ | 3,234,466 | $ | - | $ | 10,378,518 | 96.9 | % | ||||||||||||
| Gaming income, net | - | - | 109,536 | - | 109,536 | 1.0 | % | |||||||||||||||||
| Management fees | - | - | - | 25,000 | 25,000 | 0.2 | % | |||||||||||||||||
| Franchise income | 197,719 | - | - | - | 197,719 | 1.8 | % | |||||||||||||||||
| Total revenue | $ | 6,328,877 | $ | 1,012,894 | $ | 3,344,002 | $ | 25,000 | $ | 10,710,773 | 100.0 | % | ||||||||||||
| Three Months Ended June 30, 2018 | ||||||||||||||||||||||||
| Better Burgers | Just Fresh | Hooters | Corp | Total | % of Total | |||||||||||||||||||
| Revenue | ||||||||||||||||||||||||
| Restaurant sales, net | $ | 5,692,855 | $ | 1,060,203 | $ | 3,432,101 | $ | - | $ | 10,185,159 | 97.9 | % | ||||||||||||
| Gaming income, net | - | - | 81,122 | - | 81,122 | 0.8 | % | |||||||||||||||||
| Management fees | - | - | - | 24,999 | 24,999 | 0.2 | % | |||||||||||||||||
| Franchise income | 108,644 | - | - | - | 108,644 | 1.0 | % | |||||||||||||||||
| Total revenue | $ | 5,801,499 | $ | 1,060,203 | $ | 3,513,223 | $ | 24,999 | $ | 10,399,924 | 100.0 | % | ||||||||||||
| % Change in Revenues Compared to Prior Year | ||||||||||||||||||||
| Better Burgers | Just Fresh | Hooters | Corp | Total | ||||||||||||||||
| Revenue | ||||||||||||||||||||
| Restaurant sales, net | 7.7 | % | -4.5 | % | -5.8 | % | - | 1.9 | % | |||||||||||
| Gaming income, net | - | - | 35.0 | % | - | 35.0 | % | |||||||||||||
| Management fees | - | - | - | - | 0.0 | % | ||||||||||||||
| Franchise income | 82.0 | % | - | - | - | 82.0 | % | |||||||||||||
| Total revenue | 9.1 | % | -4.5 | % | -4.8 | % | 0.0 | % | 3.0 | % | ||||||||||
| ● | Restaurant revenue from the Company’s Better Burger Group increased 7.7% to $6.1 million for the three months ended June 30, 2019 from $5.7 million for the three months ended June 30, 2018. | |
| Restaurant revenue increased approximately $503,000 for the three months ended June 30, 2019 from the opening of 6 Little Big Burger restaurants during the third and fourth quarters of 2018 and the first and second quarters of 2019. In addition, the Company acquired BGR Columbia in October of 2018 which also contributed to the increase in revenue in the second quarter of 2019 (approximately $177,000). This increase in revenue was offset by the closure of American Roadside McBee in the first quarter of 2019 and by a decline in same store sales across all brands. | ||
| ● | Restaurant revenue from the Company’s Just Fresh Group decreased 4.5% to $1.0 million for the three months ended June 30, 2019 from $1.1 million for the three months ended June 30, 2018. The decline in revenues was primarily from a decline in same store sales for the three months ended June 30, 2019. | |
| ● | Restaurant revenue from the Company’s Hooter’s restaurants decreased 5.8% to $3.2 million for the three months ended June 30, 2019 from $3.4 million for the three months ended June 30, 2018. The decrease in Hooters revenue was largely driven by a decline in same store sales and unfavorable movements in exchange rates. There was a large decline in same store sales in the Nottingham Hooters restaurant and a slight decline in the domestic Hooters restaurants which was partially offset by a slight increase in sales in the South African Hooters. | |
| ● | Gaming revenue increased by 35.0% to $110,000 for the three months ended June 30, 2019 from $81,000 for the three months ended June 30, 2018. The increase in gaming revenue is primarily attributable to normal deviations in levels of play and payouts on the terminals. |
| 26 |
| ● | Management fee income was unchanged at $25,000 for the three months ended June 30, 2019 and 2018. The Company derives management fee income from serving as general partner for its investment in HOA LLC and as compensation for the Company’s CEO serving on the board of Hooters of America. This compensation will end going forward with the sale of Hooters of America in June 2019. | |
| ● | Franchise income increased 82.0% to $198,000 for the three months ended June 30, 2019 from $109,000 for the three months ended June 30, 2018. The increase is attributable to the Company recognizing revenue from the Little Big Burger franchisees that was previously deferred due to the termination of agreements. |
Restaurant cost of sales
Restaurant cost of sales remained consistent in total for the three months ended June 30, 2019 compared to the three months ended June 30, 2018. Cost of sales by concept are summarized below for each period:
| Three Months Ended | ||||||||||||||||||||
| June 30, 2019 | June 30, 2018 | |||||||||||||||||||
| Cost of Restaurant Sales | Amount |
% of Restaurant
Net Sales |
Amount |
% of Restaurant
Net Sales |
% Change | |||||||||||||||
| Better Burgers Fast Casual | 2,000,040 | 32.6 | % | $ | 1,831,530 | 32.2 | % | 9.2 | % | |||||||||||
| Just Fresh Fast Casual | 345,471 | 34.1 | % | 363,892 | 34.3 | % | -5.1 | % | ||||||||||||
| Hooters Full Service | 1,169,675 | 36.2 | % | 1,181,271 | 34.4 | % | -1.0 | % | ||||||||||||
| $ | 3,515,186 | 33.9 | % | $ | 3,376,693 | 33.2 | % | 4.1 | % | |||||||||||
As a percentage of restaurant sales, net, restaurant cost of sales increased to 33.9% for the three months ended June 30, 2019 from 33.2% for the three months ended June 30, 2018.
Cost of sales in the Better Burger Group increased slightly to 32.6% to 32.2%, Just Fresh improved from 34.3% to 34.1%, while cost of sales for the Hooters locations increased from 34.4% to 36.2%. Cost of sales in the Better Burger Group and Hooters Group increased due to unfavorable movements in food costs. Cost of sales in the Just Fresh business improved slightly due to favorable movements in food costs.
Restaurant operating expenses
Restaurant operating expenses increased 16.3% to $6.6 million for the three months ended June 30, 2019 from $5.6 million for the three months ended June 30, 2018. Restaurant operating expenses by concept are summarized below for each period:
| Three Months Ended | ||||||||||||||||||||
| June 30, 2019 | June 30, 2018 | |||||||||||||||||||
| Operating Expenses | Amount | % of Restaurant Net Sales | Amount |
% of Restaurant
Net Sales |
% Change | |||||||||||||||
| Better Burgers Fast Casual | $ | 3,995,554 | 65.2 | % | $ | 3,114,191 | 54.7 | % | 28.3 | % | ||||||||||
| Just Fresh Fast Casual | 570,358 | 56.3 | % | 554,848 | 52.3 | % | 2.8 | % | ||||||||||||
| Hooters Full Service | 1,991,503 | 61.6 | % | 1,971,575 | 57.4 | % | 1.0 | % | ||||||||||||
| $ | 6,557,415 | 63.2 | % | $ | 5,640,614 | 55.4 | % | 16.3 | % | |||||||||||
As a percent of restaurant revenues, operating expenses increased to 63.2% for the three months ended June 30, 2019 from 55.4% for the three months ended June 30, 2018. Operating expenses 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.
| 27 |
Restaurant pre-opening and closing expenses
Restaurant pre-opening and closing expenses decreased to $77,000 for the three months ended June 30, 2019 compared with $97,000 for the three months ended June 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 52.8% to $1.7 million for the three months ended June 30, 2019 from $1.1 million for the three months ended June 30, 2018. Significant components of G&A are summarized as follows:
| Three Months Ended | ||||||||||||
| June 30, 2019 | June 30, 2018 | % Change | ||||||||||
| Audit, legal and other professional services | $ | 518,637 | $ | 315,791 | 64.2 | % | ||||||
| Salary and benefits | 689,551 | 510,225 | 35.1 | % | ||||||||
| Travel and entertainment | 84,316 | 55,973 | 50.6 | % | ||||||||
| Shareholder services and fees | 27,290 | 7,956 | 243.0 | % | ||||||||
| Advertising, Insurance and other | 394,605 | 231,721 | 70.3 | % | ||||||||
| Total G&A Expenses | $ | 1,714,399 | $ | 1,121,666 | 52.8 | % | ||||||
As a percentage of total revenue, G&A increased to 16.0% for the three months ended June 30, 2019 from 10.8% for the three months ended June 30, 2018.
For the three months ended June 30, 2019, approximately $1.2 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 June 30, 2019 are primarily related to an increase in Corporate payroll and other one-time costs incurred during the three months ended June 30, 2019. For additional details on these one-time costs, refer to the G&A analysis below of the results of operations for the six months ended June 30, 2019 compared to the six months ended June 30, 2018.
Asset impairment charges
Asset impairment charges totaled $1.3 million for the three months ended June 30, 2019 as compared with $54,000 for the three months ended June 30, 2018. In the second quarter of 2019, the Company recognized impairment charges related to the closure of one of its BGR restaurants. The Company also recognized impairment charges related to the closure of another BGR restaurant and domestic Hooters restaurant which occurred in July as it was determined that the carrying amount of certain assets related to those restaurants were not recoverable as of June 30, 2019.
Depreciation and amortization
Depreciation and amortization expense increased to $554,000 from $530,000 for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 due to the opening of additional Little Big Burger restaurants in 2018 and 2019.
| 28 |
Other expense
Other expense consisted of the following:
| Three Months Ended | ||||||||||||
| Other Income (Expense) | June 30, 2019 | June 30, 2018 | % Change | |||||||||
| Interest expense | $ | (167,520 | ) | $ | (629,858 | ) | -73.4 | % | ||||
| Other income (expense) | (177,771 | ) | 7,605 | -2437.6 | % | |||||||
| Total other income (expense) | $ | (345,291 | ) | $ | (622,253 | ) | -44.5 | % | ||||
Other expense, net decreased to $346,000 for the three months ended June 30, 2019 from an expense $622,000 for the three months ended June 30, 2018. Interest expense decreased significantly from $630,000 for the three months ended June 30, 2018 to $168,000 for the three months ended June 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 $204,000 from tax settlements related to its South Africa operations. Lastly, the Company recorded a loss of $435,000 in connection with the write down of its investment in HOA.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2019 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2018
Our results of operations are summarized below:
| Six Months Ended | ||||||||||||||||||||
| June 30, 2019 | June 30, 2018 | |||||||||||||||||||
| Amount | % of Revenue* | Amount | % of Revenue* | % Change | ||||||||||||||||
| Restaurant sales, net | $ | 20,288,546 | $ | 19,954,667 | 1.7 | % | ||||||||||||||
| Gaming income, net | 225,621 | 174,277 | 29.5 | % | ||||||||||||||||
| Management fee income | 50,000 | 49,998 | 0.0 | % | ||||||||||||||||
| Franchise income | 344,376 | 216,497 | 59.1 | % | ||||||||||||||||
| Total revenue | 20,908,543 | 20,395,439 | 2.5 | % | ||||||||||||||||
| Expenses: | ||||||||||||||||||||
| Restaurant cost of sales | 6,792,765 | 33.5 | % | 6,652,868 | 33.3 | % | 2.1 | % | ||||||||||||
| Restaurant operating expenses | 12,987,959 | 64.0 | % | 11,226,763 | 56.3 | % | 15.7 | % | ||||||||||||
| Restaurant pre-opening and closing expenses | 142,888 | 0.7 | % | 199,652 | 1.0 | % | -28.4 | % | ||||||||||||
| General and administrative | 3,212,017 | 15.4 | % | 2,315,083 | 11.4 | % | 38.7 | % | ||||||||||||
| Asset impairment charge | 1,369,081 | 6.5 | % | 1,731,267 | 8.5 | % | -20.9 | % | ||||||||||||
| Depreciation and amortization | 1,096,417 | 5.2 | % | 1,070,993 | 5.3 | % | 2.4 | % | ||||||||||||
| Total expenses | 25,601,127 | 122.4 | % | 23,196,626 | 113.7 | % | 10.4 | % | ||||||||||||
| Operating loss from continuing operations | $ | (4,692,584 | ) | $ | (2,801,187 | ) | ||||||||||||||
* 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.
| 29 |
Revenue
Total revenue increased 2.5% to $20.9 million for the six months ended June 30, 2019 from $20.4 million for the six months ended June 30, 2018. Revenues by concept are summarized below for each period:
| Six Months Ended June 30, 2019 | ||||||||||||||||||||||||
| Better Burgers | Just Fresh | Hooters | Corp | Total | % of Total | |||||||||||||||||||
| Revenue | ||||||||||||||||||||||||
| Restaurant sales, net | $ | 11,842,809 | $ | 1,980,773 | $ | 6,464,964 | $ | - | $ | 20,288,546 | 97.0 | % | ||||||||||||
| Gaming income, net | - | - | 225,621 | - | 225,621 | 1.1 | % | |||||||||||||||||
| Management fees | - | - | - | 50,000 | 50,000 | 0.2 | % | |||||||||||||||||
| Franchise income | 344,376 | - | - | - | 344,376 | 1.6 | % | |||||||||||||||||
| Total revenue | $ | 12,187,185 | $ | 1,980,773 | $ | 6,690,585 | $ | 50,000 | $ | 20,908,543 | 100.0 | % | ||||||||||||
| Six Months Ended June 30, 2018 | ||||||||||||||||||||||||
| Better Burgers | Just Fresh | Hooters | Corp | Total | % of Total | |||||||||||||||||||
| Revenue | ||||||||||||||||||||||||
| Restaurant sales, net | $ | 10,945,524 | $ | 2,139,123 | $ | 6,870,020 | $ | - | $ | 19,954,667 | 97.8 | % | ||||||||||||
| Gaming income, net | - | - | 174,277 | - | 174,277 | 0.9 | % | |||||||||||||||||
| Management fees | - | - | - | 49,998 | 49,998 | 0.2 | % | |||||||||||||||||
| Franchise income | 216,497 | - | - | - | 216,497 | 1.1 | % | |||||||||||||||||
| Total revenue | $ | 11,162,021 | $ | 2,139,123 | $ | 7,044,297 | $ | 49,998 | $ | 20,395,439 | 100.0 | % | ||||||||||||
| % Change in Revenues Compared to Prior Year | ||||||||||||||||||||
| Better Burgers | Just Fresh | Hooters | Corp | Total | ||||||||||||||||
| Revenue | ||||||||||||||||||||
| Restaurant sales, net | 8.2 | % | -7.4 | % | -5.9 | % | - | 1.7 | % | |||||||||||
| Gaming income, net | - | - | 29.5 | % | - | 29.5 | % | |||||||||||||
| Management fees | - | - | - | - | 0.0 | % | ||||||||||||||
| Franchise income | 59.1 | % | - | - | - | 59.1 | % | |||||||||||||
| Total revenue | 9.2 | % | -7.4 | % | -5.0 | % | 0.0 | % | 2.5 | % | ||||||||||
| ● | Restaurant revenue from the Company’s Better Burger Group increased 8.2% to $11.8 million for the six months ended June 30, 2019 from $10.9 million for the six months ended June 30, 2018. | |
| Restaurant revenue increased approximately $1.2 million for the six months ended June 30, 2019 from the opening of 6 Little Big Burger restaurants during the third and fourth quarters of 2018 and the first and second quarters of 2019. In addition, the Company acquired BGR Columbia in October of 2018 which also contributed to the increase in revenue for the six months ended June 30, 2019 (approximately $338,000). This increase in revenue was offset by the closure of American Roadside McBee in the first quarter of 2019 and by a decline in same store sales across all brands. | ||
| ● | Restaurant revenue from the Company’s Just Fresh Group decreased 7.4% to $2.0 million for the six months ended June 30, 2019 from $2.1 million for the six months ended June 30, 2018. The decline in revenues was primarily from a decline in same store sales for the six months ended June 30, 2019. | |
| ● | Restaurant revenue from the Company’s Hooter’s restaurants decreased 5.9% to $6.5 million for the six months ended June 30, 2019 from $6.9 million for the six months ended June 30, 2018. The decrease in Hooters revenue was largely driven by a decline in same store sales for the six months ended June 30, 2019 and unfavorable movements in exchange rates. There was a slight decline in same store sales in the Nottingham Hooters and domestic Hooters restaurants which was partially offset by a slight increase in sales in the South African Hooters. | |
| ● | Gaming revenue increased by 29.5% to $226,000 for the six months ended June 30, 2019 from $174,000 for the six months ended June 30, 2018. The increase in gaming revenue is primarily attributable to normal deviations in levels of play and payouts on the terminals. |
| 30 |
| ● | Management fee income was unchanged at $50,000 for the six months ended June 30, 2019 and 2018. The Company derives management fee income from serving as general partner for its investment in HOA LLC and as compensation for the Company’s CEO serving on the board of Hooters of America. This compensation will end going forward with the sale of Hooters of America in June 2019. | |
| ● | Franchise income increased 59.1% to $344,000 for the six months ended June 30, 2019 from $216,000 for the six months ended June 30, 2018. The increase is attributable to the Company recognizing revenue from the Little Big Burger franchisees that was previously deferred due to the termination of agreements. |
Restaurant cost of sales
Restaurant cost of sales remained consistent in total for the three months ended June 30, 2019 compared to the three months ended June 30, 2018. Cost of sales by concept are summarized below for each period:
| Six Months Ended | ||||||||||||||||||||
| June 30, 2019 | June 30, 2018 | |||||||||||||||||||
| Cost of Restaurant Sales | Amount |
% of Restaurant
Net Sales |
Amount |
% of Restaurant
Net Sales |
% Change | |||||||||||||||
| Better Burgers Fast Casual | $ | 3,808,377 | 32.2 | % | $ | 3,535,331 | 32.3 | % | 7.7 | % | ||||||||||
| Just Fresh Fast Casual | 679,240 | 34.3 | % | 729,634 | 34.1 | % | -6.9 | % | ||||||||||||
| Hooters Full Service | 2,305,148 | 35.7 | % | 2,387,903 | 34.8 | % | -3.5 | % | ||||||||||||
| $ | 6,792,765 | 33.5 | % | $ | 6,652,868 | 33.3 | % | 2.1 | % | |||||||||||
As a percentage of restaurant sales, net, restaurant cost of sales increased to 33.5% for the six months ended June 30, 2019 from 33.3% for the six months ended June 30, 2018.
Cost of sales in the Better Burger Group remained consistent at 32.2% compared to 32.3%, Just Fresh increased slightly from 34.1% to 34.3%, while cost of sales for the Hooters locations increased from 34.8% to 35.7%. Cost of sales in the Just Fresh and Hooters group increased slightly due to unfavorable movements in food costs.
Restaurant operating expenses
Restaurant operating expenses increased 15.7% to $13.0 million for the six months ended June 30, 2019 from $11.2 million for the six months ended June 30, 2018. Restaurant operating expenses by concept are summarized below for each period:
| Six Months Ended | ||||||||||||||||||||
| June 30, 2019 | June 30, 2018 | |||||||||||||||||||
| Operating Expenses | Amount |
% of Restaurant
Net Sales |
Amount |
% of Restaurant
Net Sales |
% Change | |||||||||||||||
| Better Burgers Fast Casual | $ | 7,879,798 | 66.5 | % | $ | 6,138,611 | 56.1 | % | 28.4 | % | ||||||||||
| Just Fresh Fast Casual | 1,119,182 | 56.5 | % | 1,131,470 | 52.9 | % | -1.1 | % | ||||||||||||
| Hooters Full Service | 3,988,979 | 61.7 | % | 3,956,682 | 57.6 | % | 0.8 | % | ||||||||||||
| $ | 12,987,959 | 64.0 | % | $ | 11,226,763 | 56.3 | % | 15.7 | % | |||||||||||
As a percent of restaurant revenues, operating expenses increased to 64.0% for the six months ended June 30, 2019 from 56.3% for the six months ended June 30, 2018. Operating expenses 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.
| 31 |
Restaurant pre-opening and closing expenses
Restaurant pre-opening and closing expenses decreased to $143,000 for the six months ended June 30, 2019 compared with $200,000 for the six months ended June 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 recorded here as well.
General and administrative expense (“G&A”)
G&A increased 38.7% to $3.2 million for the six months ended June 30, 2019 from $2.3 million for the six months ended June 30, 2018. Significant components of G&A are summarized as follows:
| Six Months Ended | ||||||||||||
| June 30, 2019 | June 30, 2018 | % Change | ||||||||||
| Audit, legal and other professional services | $ | 981,305 | $ | 710,634 | 38.1 | % | ||||||
| Salary and benefits | 1,378,643 | 1,017,075 | 35.5 | % | ||||||||
| Travel and entertainment | 137,977 | 90,899 | 51.8 | % | ||||||||
| Shareholder services and fees | 47,402 | 19,394 | 144.4 | % | ||||||||
| Advertising, Insurance and other | 666,690 | 477,081 | 39.7 | % | ||||||||
| Total G&A Expenses | $ | 3,212,017 | $ | 2,315,083 | 38.7 | % | ||||||
As a percentage of total revenue, G&A increased to 15.4% for the six months ended June 30, 2019 from 11.4% for the six months ended June 30, 2018.
For the six months ended June 30, 2019, approximately $2.2 million is attributable to the cost of operating our Corporate office, including salaries, travel, audit, legal and other public company related costs. Approximately $1.0 million is attributable to managing the operations of our restaurants, including regional management, franchising operations, marketing and advertising within the Better Burger Group, Hooters, and Just Fresh.
The increases in G&A during 2019 are primarily related to an increase in Corporate payroll and other one-time costs incurred during the six months ended June 30, 2019. These one-time costs include, $132,000 in consulting/legal fees associated with the union labor issue in Portland, $100,000 in advertising/marketing fees associated with brand segmentation studies, strategies and various other Corporate initiatives, $109,000 in share-based compensation related to restricted stock units and stock options awarded to employees, and $156,000 in additional other consulting/legal fees. The majority of these costs are non-recurring, and the Company expects its investment in the initiatives highlighted above to drive an increase in revenue across all segments in the third and fourth quarters of 2019.
Asset impairment charges
Asset impairment charges totaled $1.4 million for the six months ended June 30, 2019 as compared with $1.7 million for the six months ended June 30, 2018. For the six months ended June 30, 2019, the Company recognized impairment charges related to the closure of two of its stores in the Better Burger Group. The Company also recognized impairment charges related to the closure of another BGR restaurant and domestic Hooters restaurant which occurred in July as it was determined that the carrying amount of certain assets related to those restaurants were not recoverable as of June 30, 2019. For the six months ended June 30, 2018, the Company recognized impairment charges related to the closure of one Just Fresh location and one American Burger location in Charlotte.
Depreciation and amortization
Depreciation and amortization expense remained consistent at $1.1 million for the six months ended June 30, 2019 compared to the three months ended June 30, 2018.
| 32 |
Other expense
Other expense consisted of the following:
| Six Months Ended | ||||||||||||
| Other Income (Expense) | June 30, 2019 | June 30, 2018 | % Change | |||||||||
| Interest expense | $ | (379,290 | ) | $ | (1,264,939 | ) | -70.0 | % | ||||
| Other income (expense) | (196,045 | ) | 5,490 | -3670.9 | % | |||||||
| Total other expense | $ | (575,335 | ) | $ | (1,259,449 | ) | -54.3 | % | ||||
Other expense, net decreased to $576,000 for the six months ended June 30, 2019 from $1.3 million for the six months ended June 30, 2018. Interest expense decreased significantly from $1.3 million for the six months ended June 30, 2018 to $380,000 for the six months ended June 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 $204,000 from tax settlements related to its South Africa operations. Lastly, the Company recorded a loss of $435,000 in connection with the write down of its investment in HOA.
STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2019 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2018
| Period Ended | ||||||||
| June 30, 2019 | June 30, 2018 | |||||||
| Net cash flows from operating activities | $ | (353,312 | ) | $ | (400,837 | ) | ||
| Net cash flows from investing activities | (202,782 | ) | (694,801 | ) | ||||
| Net cash flows from financing activities | 503,911 | 2,187,050 | ||||||
| Effect of foreign currency exchange rates on cash | 1,319 | (17,763 | ) | |||||
| $ | (50,864 | ) | $ | 1,073,649 | ||||
Net cash flows from operating activities was ($353,000) for the six months ended June 30, 2019 compared to ($400,000) in the prior year comparable period. The primary drivers of the decrease in net cash flows from operating activities was the operational losses from the six months ending June 30, 2019 partially offset by an increase in accounts payable and accrued liabilities.
Net cash flows from investing activities for the six months ended June 30, 2019 was ($203,000) compared to ($695,000) in the prior year comparable period. The primary drivers of the net cash flows from investing activities was capital expenditures as it relates to the new Little Big Burgers under construction in the first six months of 2019 which was partially offset by cash received from tenant improvement allowances and net proceeds from the sale of assets of American Roadside McBee.
Net cash flows from financing activities for the six months ended June 30, 2019 was $504,000 compared to $2.2 million in the prior year comparable period. The primary drivers of the net cash flows from financing activities for the six months ended June 30, 2019 was the contributions from non-controlling interests.
LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN
As of June 30, 2019, our cash balance was $579,000, our working capital was negative $18.1 million (which includes $3.6 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. The level of additional cash needed to fund operations and our ability to conduct business for the next twelve months will be influenced primarily by the following factors:
| ● | our ability to access the capital and debt markets to satisfy current obligations and operate the business; | |
| ● | our ability to refinance or otherwise extend maturities of current debt obligations; | |
| ● | our ability to establish and manage payment plans with various taxing authorities to pay off back taxes; | |
| ● | the level of investment in acquisition of new restaurant businesses and entering new markets; | |
| ● | our ability to manage our operating expenses and maintain gross margins as we grow; | |
| ● | popularity of and demand for our fast-casual dining concepts; and | |
| ● | general economic conditions and changes in consumer discretionary income. |
| 33 |
We have typically funded our operating costs, acquisition activities, working capital requirements and capital expenditures with proceeds from the issuances of our common stock and other financing arrangements, including convertible debt, lines of credit, notes payable, capital leases, and other forms of external financing.
Our operating plan for the next twelve months contemplates opening at least two additional company owned stores as well as growing our franchising businesses at Little Big Burger and BGR. We have contractual commitments related to store construction of approximately $386,000, of which approximately $125,000 is funded by private investors and approximately $261,000 will be funded internally by the Company. After completion of construction at each location, approximately $322,000 is expected to be returned to the Company via tenant improvement refunds. We also have $6.6 million of principal due on our debt obligations within the next 12 months, 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. We are evaluating refinancing our current debt obligations during 2019 and are also exploring the sale of certain assets and raising additional capital. In February 2019, we sold the assets associated with American Roadside McBee, LLC for net proceeds of approximately $173,000 and we sold 54% of the ownership interests in BGR Arlington, LLC and BGR Washingtonian, LLC for net proceeds of approximately $450,000. However, we cannot provide assurance that we will be able to refinance our long-term debt or sell assets or raise additional capital.
As we execute our growth plans over the next 12 months, we intend to carefully monitor the impact of growth on our working capital needs and cash balances relative to the availability of cost-effective debt and equity financing. In the event that capital is not available, or we are unable to refinance our debt obligations or obtain waivers, we may then have to scale back or freeze our organic growth plans, sell assets on less than favorable terms, reduce expenses, and/or curtail future acquisition plans to manage our liquidity and capital resources. We may also incur financial penalties or other negative actions from our lenders if we are not able to refinance or otherwise extend or repay our current obligations or obtain waivers. As of June 30, 2019, the Company and its subsidiaries have approximately $3.4 million of accrued employee and employer taxes, including penalties and interest, which are due to certain taxing authorities. These factors raise substantial doubt about our ability to continue as a going concern. The Company is currently in discussions with various taxing authorities on settling these liabilities through payment plans beginning in the third quarter of 2019.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 4: Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
During the quarter ended June 30, 2019, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
We are subject to various legal proceedings from time to time in the ordinary course of business, which may not be required to be disclosed under this Item 1. For the three-month period ending June 30, 2019 covered by this Quarterly Report, there have been no reportable legal proceedings or material developments to previously reported legal proceedings.
| 34 |
There have been no material changes to our risk factors as previously disclosed in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018 (“Risk Factors”). Readers should carefully consider these Risk Factors, which could materially affect our business, financial condition or future results. These Risk Factors are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None noted.
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
None.
| Exhibit No. | Description | |
| 31.1 | Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS* | XBRL Instance Document | |
| 101.SCH* | XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are furnished and not filed.
| 35 |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on August 14, 2019.
| CHANTICLEER HOLDINGS, INC. | ||
| Date: August 14, 2019 | By: | /s/ Michael D. Pruitt |
| Michael D. Pruitt | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| /s/ Patrick Harkleroad | ||
| Patrick Harkleroad | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) | ||
| 36 |
No information found
* THE VALUE IS THE MARKET VALUE AS OF THE LAST DAY OF THE QUARTER FOR WHICH THE 13F WAS FILED.
| FUND | NUMBER OF SHARES | VALUE ($) | PUT OR CALL |
|---|
| DIRECTORS | AGE | BIO | OTHER DIRECTOR MEMBERSHIPS |
|---|
No information found
No Customers Found
No Suppliers Found
Price
Yield
| Owner | Position | Direct Shares | Indirect Shares |
|---|