Delaware
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8742
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20-2932652
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(State or other jurisdiction of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification
No.)
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Joel D. Mayersohn, Esq.
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Clint J. Gage, Esq.
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Bruce C. Rosetto, Esq.
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Roetzel & Andress
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Greenburg Traurig, P.A.
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350 East Las Olas Blvd., Ste. 1150
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5100 Town Center Circle, Suite 400
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Fort Lauderdale, FL 33301
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Boca Raton, FL 37486
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(954) 462-4150
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(561) 955-7600
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Large accelerated filer ¨
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Accelerated filer ¨
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Non-accelerated filer ¨
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Smaller reporting company x
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(Do not check if a smaller reporting company)
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Title of each class of Securities to be
Registered (1)
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Amount
to be
Registered
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Proposed
Maximum
Offering
Price Per
Security
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Proposed
Maximum
Aggregate
Offering
Price
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Amount of
Registration
Fee
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||||||||||||
Units, each consisting of: (2)
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5,750,000
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3.00
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$
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17,250,000
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$
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1,976.85
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||||||||||
(i) one share of common stock; and
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5,750,000
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—
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—
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—
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||||||||||||
(ii) one warrant to purchase one share of common stock; and
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5,750,000
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—
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—
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—
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||||||||||||
Representative’s warrant (3)
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400,000
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—
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—
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—
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||||||||||||
Units issuable upon exercise of the representative’s warrants, each unit consisting of:
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400,000
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$
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3.45
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$
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1,380,000
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$
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158.15
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|||||||||
(i) one share of common stock; and
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400,000
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—
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—
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—
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||||||||||||
(ii)
one warrant to purchase one share of common stock
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400,000
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—
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—
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—
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||||||||||||
Shares of common stock issuable upon exercise of the warrants including the warrants underlying the representative's warrant(2)
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6,150,000
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$
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3.25
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$
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19,987,500
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$
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2,290.57
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|||||||||
Total
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$
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38,617,500
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$
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4,425.57
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(1)
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Offering price computed in accordance with Rule 457(g).
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(2)
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Includes 750,000 units which would be issued, or issuable, upon exercise of the underwriter's over-allotment option.
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(3)
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In connection with the sale of the units, the registrant will issue the representative of the underwriters a warrant to purchase up to 400,000 units.
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i |
Per Unit
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Total
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|||||||
Public offering price
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$ | 3.00 | $ | 15,000,000 | ||||
Underwriting discounts and commissions (1)
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$ | 0.24 | $ | 1,200,000 | ||||
Proceeds to us, before expenses
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$ | 2.76 | $ | 13,800,000 |
(1)
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For a description of the compensation to be received by the underwriters in addition to the underwriting discount, see the "Underwriting," section of this prospectus.
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ii |
Page
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Prospectus Summary
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1
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Special Note Regarding Forward-Looking Statements
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8
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Risk Factors
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9
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Use of Proceeds
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18
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Capitalization
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19
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Dilution
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Market for Common Equity and Related Shareholder Matters
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19
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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20
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Business
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30
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Properties
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33
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Legal Proceedings
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34
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Management
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35
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Certain Relationships and Related Transactions
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38
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Security Ownership of Certain Beneficial Owners
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40
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Underwriting
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42
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Description of Securities
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45
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Transfer Agent and Registrar
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47
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Legal Matters
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47
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Experts
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47
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Where You Can Find More Information
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47
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Index to Financial Statements
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49
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iii |
1 |
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·
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4% of gross revenue is paid to HOA monthly as a continuing royalty fee for the first 18 months a restaurant is open. After this initial period, the rate is calculated based on the last 12 months revenue on a sliding scale. Currently our Durban location is our only location that has been open more than 18 months and the rate for the next 12 months has been set at 4%.
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·
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4% of gross revenue is to be spent on advertising and marketing.
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·
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Open seven locations by December 31, 2014.
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·
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Advise us on locating and opening a completed restaurant, including supplier lists, acceptable site criteria, and architectural plan (at HOA’s option).
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·
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Provide us with management training and pre-opening training for non-management employees.
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·
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Advise us on operation, advertising and promotion.
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·
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Provide us with the requirements for a standardized system for accounting, cost control, and inventory control.
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2 |
Our first location in South Africa opened in December 2009 and as of December 31, 2011 LP’s have been paid $129,877 (36.9%) against their 20% return. Our second location opened in June 2010 and as of December 31, 2011 LP’s have been paid $65,461 (15.9%) against their 20% return. Our third location opened in June 2011 and as of December 31, 2011 LP’s have been paid $18,000 (4.2%) against their 20% return. The payments to investors for our first and second locations were primarily funded from the cash flows of the restaurants. The payments to investors for the third location were funded by the Company as an advance on expected future cash flows.
·
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Brazil - we have acquired development rights for
Hooters in five states of Brazil, which would include Rio de Janeiro. We have partnered with the current local franchisee who
owns the Hooters franchise rights in the state of Sao Paolo and we own 60% of the entity holding the development rights, with
our local partner owning the remaining 40%.
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·
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Hungary - we have applied to HOA for franchise rights in Hungary, where we anticipate we would own 80% of the entity holding the franchise rights, with our local partner owning the remaining 20%. We anticipate that we will contract with our local partner, who we believe is an experienced franchise restaurateur, to manage the day-to-day operations of the locations, although we do not presently have any agreement in writing.
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·
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Australia - we have partnered with the current
Hooters franchisee in a joint venture. The first Hooters restaurant under this joint venture (which would be the third
Hooters restaurant currently open) opened in January 2012 in Campbelltown, a suburb of Sydney. We are in discussions
to purchase from the same franchisee a partial interest in the first two existing Hooters locations in the Sydney area.
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·
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Europe – we have a non-binding letter
of intent with a current franchisee to purchase 100% of an existing Hooters location.
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3 |
The Offering
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||
Securities Offered
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5,000,000 units. Each unit consists of one share of common stock and one redeemable warrant to purchase one share of stock.
Initially, the common stock and the warrants will be quoted only as a unit for a minimum of 30 days unless the representative of the underwriters determines that an earlier date is acceptable. No later than the 45th day following the date of this prospectus. the common stock and the warrant will each be quoted separately, and the units will no longer be quoted. We will notify our security holders regarding the separation of our units through the issuance of a press release and publication of a report on Form 8-K in advance of the date our units separate and the common stock and the warrants begin to be quoted separately.
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Warrants
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The warrant included in the units will be exercisable at any time after they become quoted separately and until either they are redeemed or they expire in accordance with their terms on the fifth anniversary of the date of this prospectus. The exercise price of a warrant is $3.25. Beginning [six] months after the date of this prospectus, the warrants will be redeemable at our option for $_____ per warrant upon 30 days' prior written notice, at any time after our common stock has closed at a price of at least $5.00 per share for at least twenty (20) consecutive trading days. The warrants may only be redeemed if we have a current and effective registration statement available covering the exercise of the warrants.
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4 |
Securities Outstanding After This Offering
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Units | 5,000,000 | |
Common Stock | 7,498,724(1) shares | |
Warrants | 5,400,000(1) | |
Use of Proceeds
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The proceeds from the offering, less fees and expenses incurred by us in connection with the offering, are intended to be used for owning and operating international Hooters franchises and for general corporate purposes, including working capital.
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Risk Factors
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Investing in the units involves significant risks, including, but not limited to, the following: our limited operating history and history of losses; risks inherent in expansion of our operations; our lack of restaurant management experience; continued satisfactory relationship with HOA; and the limited public market for our securities. You should carefully consider the information set forth in the "Risk Factors" section of this prospectus prior to investing in the units.
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(1) The number of shares of our common stock to be outstanding after this offering excludes an aggregate of 4,814,018 additional shares of common stock and warrants issuable under various outstanding warrant agreements with expiration dates between October 1, 2016 and August 9, 2021, and exercise prices ranging from $2.75 to $3.50.
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Unless we specifically state otherwise, the share information is as of _______, 2011 and reflects or assumes no exercise of outstanding options or warrants to purchase shares of our common stock, and no exercise of the over-allotment option. |
5 |
Year Ended | Year Ended | |||||||||||||||||||
December 31, | December 31, | |||||||||||||||||||
2011 | 2010 | 2009 | ||||||||||||||||||
Statement of Operations Data: | As reported | Adjustment | Proforma | As reported | As reported | |||||||||||||||
Revenues | $ | 1,463,820 | $ | 136,301 | $ | 602,978 | ||||||||||||||
Expenses | 2,567,210 | 1,147,866 | 1,416,674 | |||||||||||||||||
Net loss | $ | (1,103,390 | ) | $ | (1,011,565 | ) | $ | (813,696 | ) | |||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Current Assets | $ | 623,681 | $ | 13,300,000 | $ | 13,923,681 | $ | 158,718 | $ | 60,180 | ||||||||||
Working Capital (deficit) | (3,003,625 | ) | 13,300,000 | 10,296,375 | (486,916 | ) | (675,471 | ) | ||||||||||||
Total assets | 5,504,678 | 13,300,000 | 18,804,678 | 1,414,559 | 1,453,669 | |||||||||||||||
Total stockholders’ equity | 1,641,263 | 13,300,000 | 14,941,263 | 82,425 | 718,018 |
6 |
Ja nuary
1, 2011 through December 31, 2011:
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Durban
(1)
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Johannesburg
(2)
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CapeTown
(3)
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Total
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||||||||||||
Net
sales
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$ | 1,367,022 | $ | 2,395,803 | $ | 568,898 | $ | 4,331,723 | ||||||||
Cost
of sales
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589,430 | 982,950 | 227,575 | 1,799,955 | ||||||||||||
Gross
profit
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777,592 | 1,412,853 | 341,323 | 2,531,768 | ||||||||||||
Total
Operating Expenses
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578,023 | 1,183,772 | 305,671 | 2,067,466 | ||||||||||||
EBITDA
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199,569 | 229,081 | 35,652 | 464,302 | ||||||||||||
Interest
expense
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5,054 | 9,291 | 4,682 | 19,027 | ||||||||||||
Amortization
and depreciation
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63,283 | 176,472 | 41,167 | 280,922 | ||||||||||||
Income
taxes
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37,446 | 17,207 | 8,774 | 63,427 | ||||||||||||
105,783 | 202,970 | 54,623 | 363,376 | |||||||||||||
Net
income
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93,786 | 26,111 | (18,971 | ) | 100,926 | |||||||||||
January
1, 2010 through December 31, 2011:
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Durban
(1)
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Johannesburg
(2)
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CapeTown
(3)
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Total
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||||||||||||
Revenues
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$ | 3,319,947 | $ | 4,385,541 | $ | 568,898 | $ | 8,274,386 | ||||||||
Cost
of Goods Sold
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1,205,869 | 1,591,983 | 227,575 | 3,025,427 | ||||||||||||
Gross
Profit
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2,114,078 | 2,793,558 | 341,323 | 5,248,959 | ||||||||||||
Operating
expenses
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1,509,304 | 2,035,776 | 305,671 | 3,850,751 | ||||||||||||
EBITDA
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604,774 | 752,782 | 35,652 | 1,398,208 | ||||||||||||
Interest
expense
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10,079 | 15,415 | 4,682 | 30,176 | ||||||||||||
Amortization
and depreciation
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131,395 | 275,394 | 41,167 | 447,956 | ||||||||||||
Income
taxes
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129,113 | 135,831 | 8,774 | 273,71 8 | ||||||||||||
Net
income
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$ | 334,187 | $ | 331,142 | $ | (18,971 | ) | $ | 646,358 |
7 |
8 |
9 |
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•
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the availability of suitable sites for new locations;
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•
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our ability to negotiate acceptable lease or purchase terms for new locations, obtain adequate financing, on favorable terms, required to construct, build-out and operate new locations and meet construction schedules, and hire and train and retain qualified restaurant managers and personnel;
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•
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managing construction and development costs of new restaurants at affordable levels;
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•
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the establishment of brand awareness in new markets; and
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•
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the ability of our Company to manage this anticipated expansion.
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•
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adverse changes in national, regional or local economic or market conditions;
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•
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increased costs of labor;
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•
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increased costs of food products;
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•
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availability of, and ability to obtain, adequate supplies of ingredients that meet our quality standards;
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•
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increased energy costs;
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•
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management problems;
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•
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increases in the number and density of competitors;
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10 |
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•
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changing consumer tastes, habits and spending priorities;
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•
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changing demographics;
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•
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changes in government regulation; and
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•
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local, regional or national health and safety matters.
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11 |
12 |
13 |
·
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they have specialized knowledge about our company and operations;
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·
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they have specialized skills that are important to our operations; or
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·
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they would be particularly difficult to replace.
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·
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announcements or press releases relating to the biopharmaceutical sector or to our own business or prospects;
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14 |
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·
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regulatory, legislative, or other developments affecting us or the healthcare industry generally;
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·
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sales by holders of restricted securities pursuant to effective registration statements or exemptions from registration; and
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·
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market conditions specific to biopharmaceutical companies, the healthcare industry and the stock market generally.
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15 |
16 |
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·
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quarterly variations in operating results and achievement of key business metrics;
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·
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changes in earnings estimates by securities analysts, if any;
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·
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any differences between reported results and securities analysts’ published or unpublished expectations;
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·
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announcements of new contracts or service offerings by us or our competitors;
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·
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market reaction to any acquisitions, joint ventures or strategic investments announced by us or our competitors;
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·
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shares being sold pursuant to Rule 144 or upon exercise of warrants;
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·
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our ability to obtain working capital financing; and
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·
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general economic or stock market conditions unrelated to our operating performance.
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17 |
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the units that we are offering, assuming gross proceeds of $15.0 million, will be approximately $13.3 million, after deducting underwriting discounts and commissions and estimated offering expenses, or approximately $15.9 million if the underwriter’s over-allotment is exercised in full.
We expect to use any proceeds received from this offering as follows:
• | $10.5 million for investment in Hooters international franchises – presently we have agreements in place for Surfers Paradise (Australia), Brazil and Hungary. Approximately $5.0 million is for purchasing interests in existing international Hooters locations, including ones we presently operate, $5.1 million for buildout and startup costs on eight locations and $0.4 million is for Hooters franchise rights; | |
• | $4.2 million to payoff existing debt – $1.5 million estimated balance of our bank line of credit, which currently has an annual interest rate of 4.5% (0.5 % over Wall Street Journal Prime rate, or floor of 4.5%, whichever is higher) and matures on August 20, 2012;and $2.7 million payoff of convertible debt, which currently has an annual interest rate of 18% and matures from dates ranging between April and August 2012. In lieu of cash repayments, a portion of the convertible debt will be converted into units as part of the offering; | |
• | $0.6 million for general corporate working capital. |
The projected expenditures shown above are only estimates or approximations. We expect the proceeds from this offering together with revenues generated from our business, will be sufficient to cover our anticipated capital requirements for at least the next 24 months. Until we are able to apply the net proceeds of this offering to the uses described above, we intend to invest the proceeds in short term investment grade securities. Any proceeds received from the exercise of warrants will be used for working capital.
18 |
Pro
Forma
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||||||||
Actual
|
As
Adjusted
|
|||||||
Common
stock, 2,498,891 shares at December 31, 2011;
|
||||||||
7,498,891
shares on a pro forma basis
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$ | 301 | $ | 801 | ||||
Additional
paid-in capital
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6,459,506 | 19,759,006 | ||||||
Other
stockholders' equity
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1,214,264 | 1,214,264 | ||||||
Accumulated
deficit
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(6,032,808 | ) | (6,032,808 | ) | ||||
Stockholders'
equity
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$ | 1,641,263 | $ | 14,941,263 |
High
|
Low
|
|||||||
First Quarter, 2012 | $ | 3.70 | $ | 2.20 | ||||
First
Quarter, 2011
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$ | 3.38 | $ | 2.12 | ||||
Second
Quarter, 2011
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$ | 3.20 | $ | 2.09 | ||||
Third
Quarter, 2011
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$ | 3.00 | $ | 2.15 | ||||
Fourth
Quarter, 2011
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$ | 5.00 | $ | 2.40 | ||||
Year
ended December 31, 2010
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||||||||
First
Quarter
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$ | 4.25 | $ | 2.50 | ||||
Second
Quarter
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$ | 4.25 | $ | 2.60 | ||||
Third
Quarter
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$ | 4.25 | $ | 3.50 | ||||
Fourth
Quarter
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$ | 4.25 | $ | 3.01 | ||||
Year
ended December 31, 2009
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||||||||
First
Quarter
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$ | 5.75 | $ | 1.01 | ||||
Second
Quarter
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$ | 5.55 | $ | 3.00 | ||||
Third
Quarter
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$ | 5.40 | $ | 2.25 | ||||
Fourth
Quarter
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$ | 5.50 | $ | 2.05 | ||||
Year
ended December 31, 2008
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||||||||
First
Quarter
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$ | 8.00 | $ | 5.40 | ||||
Second
Quarter
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$ | 7.00 | $ | 5.10 | ||||
Third
Quarter
|
$ | 7.00 | $ | 5.75 | ||||
Fourth
Quarter
|
$ | 7.00 | $ | 5.50 |
19 |
Item 7: | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report that are not historical fact are "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. The words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "believes," "estimates," "projects" or similar expressions are intended to identify these forward-looking statements. These statements are subject to risks and uncertainties beyond our reasonable control that could cause our actual business and results of operations to differ materially from those reflected in our forward-looking statements. The safe harbor provisions provided in the Securities Litigation Reform Act do not apply to forward-looking statements we make in this report. Forward-looking statements are not guarantees of future performance. Our forward-looking statements are based on trends which we anticipate in our industry and our good faith estimate of the effect on these trends of such factors as industry capacity, product demand and product pricing. The inclusion of projections and other forward-looking statements should not be regarded a representation by us or any other person that we will realize our projections or that any of the forward-looking statements contained in this prospectus will prove to be accurate.
Management’s Analysis of Business
We have changed our focus recently from managing investments to owning and operating Hooters franchises internationally. Hooters restaurants are casual beach-themed establishments with sports on television, jukebox music, and the “nearly world famous” Hooters Girls. The menu consists of spicy chicken wings, seafood, sandwiches and salads. Each locations menu can vary with the tastes of the locality it is in. Hooters began in 1983 with its first restaurant in Clearwater, Florida. From the original restaurant and licensee Mr. Robert Brooks, Hooters has become a global brand, with locations in 44 states domestically and over 450 Hooters restaurants worldwide. Besides restaurants, Hooters has also branched out to other areas, including licensing its name to a golf tour and the sale of packaged food in supermarkets.
We expect to either own 100% of the Hooters franchise or partner with a local franchisee in the countries we target. We based this decision on what we believe to be the successful launch of our South African Hooters venture and believe we have aligned partners and operators in various international markets. We are focused on expanding our Hooters operations, and expect to use substantially all the net proceeds from the upcoming offering, in South Africa, Brazil, Hungary, Australia and Europe.
Accordingly, we operate in two business segments; Hooters franchise restaurants and our legacy investment management and consulting services businesses.
LIQUIDITY AND CAPITAL RESOURCES AND GOING CONCERN
Historical information:
At December 31, 2011 and 2010, the Company had current assets of $623,681 and $158,718; current liabilities of $3,627,306 and $645,634; and a working capital deficit of $3,003,625 and $486,916, respectively. The Company incurred a loss of $1,103,390 during the year ended December 31, 2011 and had an unrealized loss from available-for-sale securities of $13,005 and foreign currency translation losses of $6,357, resulting in a comprehensive loss of $1,122,752.
The Company's corporate general and administrative expenses averaged approximately $295,000 per quarter during 2011. In the fourth quarter of 2011, $64,000 was added when we began consolidating the South African operations. The Company expects costs to increase as we expand our footprint internationally in 2012. Effective October 1, 2011, the Company acquired majority control of the restaurants in South Africa and began consolidating these operations. The Company also will share 49% of the profits in our Hooters location opened in January 2012 in Campbelltown, Australia, a suburb of Sydney.
In addition, the Company has a note with a balance at December 31, 2011 of $242,964 owed to its bank which is due in August 2013 and a line of credit with its bank with a balance at December 31, 2011 of $1,165,000 (total available $2,000,000) due on August 20, 2012. We also have convertible notes payable with certain investors with a balance at December 31, 2011 of $1,625,000 due in the second quarter of 2012. The Company plans to continue to use limited partnerships, if the Company’s contemplated raise is not completed, to fund its share of costs for additional Hooters restaurants.
20 |
The Company expects to meet its obligations in 2012 with some or all of the following:
· | File an S-1 Registration during the second quarter of 2012, and, assuming it becomes effective, plans to raise up to $15,000,000 from the sale of common stock and warrant units; | |
· | The Company received $100,000 in January 2012 as a fee for its CEO sitting on the Board of Hooters of America and expect to continue to receive this fee for the next three years based on the current agreement; | |
· | Extend a portion of its existing line of credit; | |
· | Convert its convertible notes payable into common stock. |
If the above events do not occur or if the Company does not raise sufficient capital, substantial doubt about the Company’s ability to continue as a going concern exists. These consolidated financial statements do not reflect any adjustments that might result from the outcome of these uncertainties.
Evaluation of the amounts and certainty of cash flows:
The Company plans to use the funding from the S-1 Registration to complete its expansion plans in South Africa, Brazil, Australia, Hungary and Europe. The Company has used short-term financing to meet the preliminary requirements of its planned expansion, principally in South Africa and Australia. If the Company is unable to obtain the funding from the S-1 Registration, the Company would be required to limit its expansion plans. We would use limited partner funding and other sources of capital to the extent necessary to attempt to fund as much of the planned expansion as possible. There can be no assurance that any of this funding will be available when needed.
Cash requirements and capital expenditures:
In 2012, we expect to open one restaurant in each of the following countries – Australia (in addition to the one already opened in February 2012), Brazil, Hungary and South Africa. The Company expects the total cash requirements for these restaurants to be approximately $3.1 million, of which approximately $350,000 has been paid as of March 27, 2012.
In addition, we expect general and administrative expenses to be approximately $1.3-$1.4 million for 2012.
Discussion and analysis of known trends and uncertainties:
The World economy has been in a state of flux for some time with the debt problems of a number of countries in Europe, the recent recession in the United States, the significant increase to debt in the United States compounded by continuing to give away more than can reasonably be collected, the slowing economy in China and other factors. It is impossible to forecast what this will mean to our expansion plans in South Africa, Brazil, Australia, Poland and Hungary. We feel that we minimize our risks through investment in different geographical areas.
Expected changes in the mix and relative cost of capital resources:
Since the middle of 2010, the Company has utilized high cost capital to finance its international growth. The Company hopes to eliminate the majority of this debt with new equity and further, to use this equity to complete its expansion plans over the next two years.
Other prospective sources for and uses of cash:
If the Company is unable to obtain the funding from its Offering, it will seek other sources of interim funding to maintain its current operations and complete the restaurants already underway.
If the above events do not occur or the Company is unable to develop its business model, substantial doubt about the Company's ability to continue as a going concern exists.
21 |
RESULTS OF OPERATIONS
Revenue
Revenue amounted to $1,463,820 in 2011 and $136,301 in 2010. Cash revenues were $493,167 and $967,418 in 2011 from the management and restaurant businesses, respectively, and $84,218 in 2010 from the management business. The majority of our cash revenues in 2011 for the management business was from a fee of $400,000 received in January 2011 for our services in facilitating the acquisition of HOA and TW and of $91,667 of the Company’s annual payment from HOA of $100,000, which is due in January each year while Mr. Pruitt serves on its board. In 2010 cash revenues were management fees from Investors LLC and Investors II. Non-cash revenues in 2011 and 2010 of $3,235 and $52,083, respectively were recognized from the receipt of securities for our services.
The fair value of the equity instruments for management fees received was determined based upon the stock prices as of the date we reached an agreement with the third party. The terms of the securities are not subject to adjustment after the measurement date. See Note 4 of the consolidated financial statements for details.
Restaurant cost of sales
Restaurant cost of sales totaled $360,810, or 37.3% of restaurant net sales. We expect the percentage to remain approximately the same in 2012 as we expand our business in South Africa and other countries.
Restaurant operating expenses
Restaurant operating expenses totaled $483,946, or 50.0% of restaurant net sales. We expect the percentage of operating expenses to restaurant net sales to decline as we open more Hooters locations, however we have a limited history to be able to forecast a range.
General and Administrative Expense (“G&A”)
G&A amounted to $1,245,752 in 2011 and $935,110 in 2010. The more significant components of G&A are summarized as follows:
2011 | 2010 | |||||||
Professional fees | $ | 104,016 | $ | 106,594 | ||||
Payroll and benefits | 563,323 | 518,162 | ||||||
Consulting and investor relation fees | 261,315 | 17,223 | ||||||
Travel and entertainment | 84,767 | 42,950 | ||||||
Accounting and auditing | 70,450 | 67,914 | ||||||
Director fees | - | 42,500 | ||||||
Bad debt expense | 750 | 24,907 | ||||||
Other G&A | 161,131 | 114,860 | ||||||
$ | 1,245,752 | $ | 935,110 |
G&A costs are expected to increase in 2012 to $325-$350,000 per quarter, with the costs associated with the activities of the restaurant business continuing to grow. Revenue from the restaurants is expected to exceed this increase in expense.
Payroll and benefits increased $45,161 in 2011 from 2010 primarily from the addition of restaurant management personnel in the fourth quarter of 2011.
Consulting and investor relations fees increased $244,092 from 2011 to 2010 as the Company engaged experienced personnel to startup our European subsidiary and to increase the Company’s recognition in the investment arena. Non-cash fees for services were $74,573 and $25,000 in 2011 and 2010, respectively.
Travel and entertainment increased $41,817 as Company personnel, primarily the CEO, traveled to increase our company awareness and lockdown financing and partners for the restaurant locales.
There were no director fees in 2011. Effective December 31, 2010, the Company issued 20,000 shares of its common stock to its outside directors for current and prior director fees. The stock was valued at $42,500 based on the closing price of the common stock on that date.
The Company recognized a bad debt in the amount of $750 in 2011 and $24,907 in 2010. The amount in 2010 was for prior management services of $24,000 and expense advances of $907 owed by Green St. Energy, Inc., a company for which the Company previously provided management services.
22 |
Asset Impairment
In 2010, the Company recorded an impairment of $250,000 for our equity interest in BreezePlay as a result of it not being able to raise sufficient capital to complete its business plan and substantially ceasing operation.
OTHER INCOME (EXPENSE)
Other income (expense) consisted of the following at December 31, 2011 and 2010:
2011 | 2010 | |||||||
Other income (expense): | ||||||||
Equity in earnings (losses) of investments | $ | (76,113 | ) | $ | 58,337 | |||
Realized gains from sale of investments | 19,991 | 106,035 | ||||||
Interest expense | (180,825 | ) | (140,016 | ) | ||||
Interest income | 4,541 | 46,000 | ||||||
Miscellaneous income | 476 | - | ||||||
Other than temporary decline in available-for-sale securities | (147,973 | ) | (40,386 | ) | ||||
$ | (379,903 | ) | $ | 29,970 |
Equity in Earnings of Investments
Equity in earnings of investments includes our share of earnings from investments in which we own at least 20% and are being accounted for using the equity method. This included losses from the Hoot Campbelltown and Hoot SA partnerships in 2011 of $66,857 and $9,256, respectively and income from the Hoot SA partnerships in 2010 of $58,337.
Realized Gains from Sale of Investments
Realized gains are recorded when investments are sold and include transactions in 2011 from a gain on sales of DineOut and in 2010 from a gain on sales of DineOut of $157,807, a loss on sales of Vought Defense Systems of $58,355 and a gain on sales of Healthsport of $6,583.
Interest Expense
Interest expense increased in 2011 from 2010 primarily due to the addition in 2011 of a line of credit for $1,165,000 and convertible notes payable in the amount of $1,625,000, offset by the conversion of $686,500 of convertible notes payable from 2010.
Interest Income
Interest income in 2011 decreased $41,459 as 2011 includes earnings from Investors for one month, compared to 2010 which includes our earnings from Investors for the entire year.
Other than Temporary Decline in Available-for-Sale Securities
The Company determined that its investment in available-for-sale securities had an other than temporary decline in value and recorded a realized loss in the amount of $147,973 and $40,386 in 2011 and 2010, respectively. Valuations were determined based on the quoted market price for the stock when it was determined the decline was not temporary and the decline was recorded. In 2011, the Company recorded an impairment of $147,973 primarily related to the Company’s investment in HiTech Stages ($124,573) and Efftec International ($22,500). In 2010, the Company recorded an impairment of $40,386 primarily related to the Company’s investment in Remodel Auction ($39,100).
23 |
PROVISION FOR INCOME TAXES
The Company recorded income tax expense of $14,608 based on the net profit of one of our South African locations at a 28% corporate income tax rate.
RECENT ACCOUNTING PRONOUNCEMENTS
There are several new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) which are not yet effective. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe any of these accounting pronouncements has had or will have a material impact on the Company’s financial position or operating results. See Note 2 to the consolidated financial statements.
Critical Accounting Policies
The SEC has suggested companies provide additional disclosure and commentary on their most critical accounting policies, which they defined as the ones that are most important to the portrayal of a company’s financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition our most critical accounting policy is the valuation of our investments. The methods, estimates and judgments we use in applying this accounting policy has a significant impact on the results we report in our financial statements.
Leases
Restaurant Operations lease certain properties under operating leases. Many of these lease agreements contain rent holidays, rent escalation clauses and/or contingent rent provisions. Rent expense is recognized on a straight-line basis over the expected lease term, including cancelable option periods when failure to exercise such options would result in an economic penalty. We use a time period for straight-line rent expense calculation that equals or exceeds the time period used for depreciation. In addition, the rent commencement date of the lease term is the earlier of the date when they become legally obligated for the rent payments or the date when they take access to the grounds for build out. Accounting for leases involves significant management judgment.
Investments
We determine fair value to be the amount for which an investment could be exchanged in an orderly disposition over a reasonable period of time between willing parties other than in a forced or liquidation sale. Our evaluation process is intended to provide a consistent basis for determining the fair value of our available-for-sale investments. In summary, for individual securities classified as available-for-sale securities, an enterprise shall determine whether a decline in fair value below the amortized cost basis is other than temporary. If the decline in fair value is judged to be other than temporary, the individual security shall be written down to fair value as a new cost basis and the amount of the write-down shall be included in earnings (accounted for as a realized loss). The new cost basis shall not be changed for subsequent recoveries in fair value. Subsequent increases in the fair value of available-for-sale securities shall be included in other comprehensive income and subsequent decreases in fair value, if not an other-than-temporary impairment, also shall be included in other comprehensive income.
The first step in the analysis is to determine if the security is impaired. All of our available-for-sale securities were listed and we use the closing market price and other factors to determine the amount of impairment if any. The second step, if there is an impairment, is to determine if the impairment is other than temporary. To determine if a decline in the value of an equity security is other than temporary and that a write-down of the carrying value is required, we considered the following:
· | The length of time and the extent to which the market value has been less than the cost; |
· | The financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer such as changes in technology that may impair the earnings potential of the investment or the discontinuance of a segment of the business that may affect the future earnings potential; or |
· | The intent and ability of the holder to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. |
Unless evidence exists to support a realizable value equal to or greater than the carrying value of the investment in equity securities classified as available-for-sale, a write-down to fair value accounted for as a realized loss should be recorded. Such loss should be recognized in the determination of net income of the period in which it occurs and the written down value of the investment in the issuer becomes the new cost basis of the investment.
Investments in which the Company has the ability to exercise significant influence and that, in general, are at least 20 percent owned are stated at cost plus equity in undistributed net earnings (loss), less distributions received. The Company also has equity investments in which it owns less than 20% which are stated at cost. An impairment loss would be recorded whenever a decline in the value of an equity investment or investment carried at cost is below its carrying amount and is determined to be other than temporary. In judging “other than temporary,” the Company considers the length of time and extent to which the fair value of the investment has been less than the carrying amount of the investment, the near-term and long-term operating and financial prospects of the investee, and the Company’s long-term intent of retaining the investment in the investee.
24 |
COMMITMENTS AND CONTINGENCIES
Effective August 1, 2010, the Company extended its office lease agreement for a period of one year at a monthly rental of $2,100, for its office located at 11220 Elm Lane, Suite 103, Charlotte, NC 28277. Since August 1, 2011, the lease has continued at the same rate on a month-to-month basis.
The Company leases the land and building for our four restaurants in South Africa through our subsidiaries. The leases are for five year terms and include options to extend the terms. We lease our restaurant facilities under “triple net” leases that require us to pay minimum rent, real estate taxes, maintenance costs and insurance premiums and, in some instances, percentage rent based on sales in excess of specified amounts.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table presents a summary of our contractual operating lease obligations and commitments as of December 31, 2011:
Payments due by period | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
Long-Term Debt Obligations (1) | $ | 263,921 | $ | 20,250 | $ | 243,671 | $ | - | $ | - | ||||||||||
Operating Lease Obligations (2) | 3,202,977 | 526,787 | 1,213,143 | 1,463,047 | ||||||||||||||||
Purchase Obligations (3) | 550,000 | 550,000 | - | - | - | |||||||||||||||
Total | $ | 4,016,898 | $ | 1,097,037 | $ | 1,456,814 | $ | 1,463,047 | $ | - |
(1) Represents the outstanding principal amounts and interest on all our long-term debt.
(2) Represents operating lease commitments for our four Hooters restaurants in South Africa.
(3) Represents commitments for Hooters international restaurants in Australia
If the raise discussed in Note 14, Subsequent Events, is successful, the Company plans to commit approximately $4,500,000 in Brazil and $3,400,000 in South Africa for additional restaurant locations.
25 |
|
·
|
4% of gross revenue is paid to HOA monthly as a continuing royalty fee for the first 18 months a restaurant is open. After this initial period, the rate is calculated based on the last 12 months revenue on a sliding scale. Currently our Durban location is our only location that has been open more than 18 months and the rate for the next 12 months has been set at 4%.
|
|
·
|
4% of gross revenue is to be spent on advertising and marketing.
|
|
·
|
Open seven locations by December 31, 2014.
|
26 |
|
·
|
Advise us on locating and opening a completed restaurant, including supplier lists, acceptable site criteria, and architectural plan (at HOA’s option).
|
|
·
|
Provide us with management training and pre-opening training for non-management employees.
|
|
·
|
Advise us on operation, advertising and promotion.
|
|
·
|
Provide us with the requirements for a standardized system for accounting, cost control, and inventory control.
|
Our first location in South Africa opened in December 2009 and as of December 31, 2011 LP’s have been paid $129,877 (36.9%) against their 20% return. Our second location opened in June 2010 and as of December 31, 2011 LP’s have been paid $65,461 (15.9%) against their 20% return. Our third location opened in June 2011 and as of December 31, 2011 LP’s have been paid $18,000 (4.2%) against their 20% return. The payments to investors for our first and second locations were primarily funded from the cash flows of the restaurants. The payments to investors for the third location were funded by the Company as an advance on expected future cash flows.
27 |
|
·
|
Brazil - we have acquired development rights for
Hooters in five states of Brazil, which would include Rio de Janeiro. We have partnered with the current local franchisee
who owns the Hooters franchise rights in the state of Sao Paolo and we own 60% of the entity holding the development rights, with
our local partner owning the remaining 40%.
|
|
·
|
Hungary - we have applied to HOA for franchise rights in Hungary, where we anticipate we would own 80% of the entity holding the franchise rights, with our local partner owning the remaining 20%. We anticipate that we will contract with our local partner, who we believe is an experienced franchise restaurateur, to manage the day-to-day operations of the locations, although we do not presently have any agreement in writing.
|
|
·
|
Australia - we have partnered with the current
Hooters franchisee in a joint venture. The first Hooters restaurant under this joint venture (which would be the third
Hooters restaurant currently open) opened in January 2012 in Campbelltown, a suburb of Sydney. We are in discussions
to purchase from the same franchisee a partial interest in the first two existing Hooters locations in the Sydney area.
|
|
·
|
Europe – we have a non-binding letter of
intent with a current franchisee to purchase 100% of an existing Hooters location.
|
28 |
29 |
30 |
NAME
|
AGE
|
POSITION
|
||
Michael
D. Pruitt
|
51
|
President,
CEO and Director since June 2005
|
||
Michael
Carroll
|
63
|
Independent
Director since June 2005
|
||
Brian
Corbman
|
36
|
Independent
Director since August 2005
|
||
Paul
I. Moskowitz
|
55
|
Independent
Director since April 2007
|
||
Keith
Johnson
|
54
|
Independent
Director since November 2009
|
31 |
32 |
Name and Principal Position
|
Year
|
Salary
|
Bonus
|
Total
|
||||||||||
Michael D. Pruitt (CEO since | 2011 | $ | 168,000 | $ | - | $ | 168,000 | |||||||
June 2005)(1) | 2010
|
$ | 154,000 | $ | - | $ | 154,000 | |||||||
2009 | $ | 171,000 | $ | - | $ | 171,000 |
|
(1)
|
The 2009 compensation includes $11,000 in consulting fees during the time Mr. Pruitt had temporarily discontinued his salary.
|
33 |
2011
|
2010
|
|||||||
Chanticleer Investors, LLC
|
$ | - | $ | 6,035 | ||||
Chanticleer Investors II, LLC
|
- | 46,547 | ||||||
Chanticleer Dividend Fund, Inc.
|
74,281 | 30,937 | ||||||
Hoot SA II LLC
|
825 | - | ||||||
Other
|
- | 750 | ||||||
$ | 75,106 | $ | 84,269 |
2011
|
2010
|
|||||||
Avenel Financial Group, a company owned by Mr. Pruitt
|
13,849 | 46,349 | ||||||
Chanticleer Investors, LLC
|
4,045 | - | ||||||
Hoot SA I, LLC
|
15,409 | - | ||||||
Hoot SA III, LLC
|
- | 70,000 | ||||||
Chanticleer Foundation
|
10,750 | - | ||||||
$ | 44,053 | $ | 116,349 |
34 |
2011
|
2010
|
|||||||
Chanticleer Investors, LLC
|
$ | - | $ | 19,875 | ||||
Chanticleer Investors II, LLC
|
- | 11,171 | ||||||
North American Energy Resources, Inc.
|
1,750 | 6,125 | ||||||
Efftec International, Inc.
|
- | 22,500 | ||||||
$ | 1,750 | $ | 59,671 |
35 |
|
·
|
each person known by the Company to beneficially own more than 5% of the outstanding shares of the Company's Common Stock;
|
|
·
|
the Company's executive officer;
|
|
·
|
each of the Company's directors; and
|
|
·
|
all of the Company's directors and its executive officer as a group.
|
Number of Shares of
|
Percentage of Class
|
|||||||||||
Name
|
Common Stock Owned
|
Pre-offering
|
Post-offering
|
|||||||||
Sandor Capital Master Fund LP (1)
|
298,200 | 9.9 | % | 3.7 | % | |||||||
Robert B. Prag (2)
|
298,200 | 9.9 | % | 3.7 | % | |||||||
Michael D. Pruitt (3)
|
404,610 | 13.4 | % | 5.1 | % | |||||||
Michael Carroll
|
11,000 | * | * | |||||||||
Brian Corbman
|
11,100 | * | * | |||||||||
Paul I. Moskowitz
|
6,200 | * | * | |||||||||
Keith Johnson
|
2,000 | * | * | |||||||||
Officers and Directors As a Group (5 Persons)
|
434,910 | 14.4 | % | 5.4 | % |
|
(1)
|
John S. Lemak has investment and voting control over the securities held by Sandor Capital Master Fund LP. Sandor maintains principal offices at 2828 Routh Street, Suite 500, Dallas, TX 75201. The amounts set forth in the table include 174,772 shares of common stock owned by Sandor, 24,700 shares of common stock owned by John S. Lemak, and 98,728 shares of common stock underlying Class A Warrants owned by Sandor. The amounts set forth in the table exclude additional shares underlying Class A Warrants and Class B Warrants owned by Sandor and John S. Lemak, which warrants limit exercise to that number of shares that, when aggregated with the holder’s existing ownership of the Company’s common stock, would result in such holder, together with related persons or entities, owning more than 9.9% of the Company’s issued and outstanding common stock. This information is based solely on information in Schedule 13G. |
36 |
|
(2)
|
Mr. Prag’s address is 2455 El Amigo Road, Del Mar, CA 92014. The amounts set forth in the table include 152,000 shares of common stock owned by Mr. Prag, 28,000 shares of common stock owned by Del Mar Consulting Group, Inc. Retirement Plan Trust (with respect to which Mr. Prag serves as Trustee), and 115,000 shares of common stock underlying Class A Warrants owned by Mr. Prag. The amounts set forth in the table exclude additional shares underlying Class A Warrants and Class B Warrants owned by Mr. Prag and Del Mar Consulting Group, Inc. Retirement Plan Trust, which warrants limit exercise to that number of shares that, when aggregated with the holder’s existing ownership of the Company’s common stock, would result in such holder, together with related persons or entities, owning more than 9.9% of the Company’s issued and outstanding common stock. This information is based solely on information in Schedule 13G. |
|
(3)
|
Includes 62,680 shares of common stock held by Avenel Financial Group, Inc., a corporation controlled by Michael D. Pruitt. The amounts set forth in the table exclude additional shares underlying Class A Warrants and Class B Warrants owned by Mr. Pruitt, which warrants limit exercise to that number of shares that, when aggregated with the holder’s existing ownership of the Company’s common stock, would result in such holder, together with related persons or entities, owning more than 9.9% of the Company’s issued and outstanding common stock.
|
37 |
Underwriter
|
Number of Units
|
|||
Dawson James Securities, Inc.
|
||||
Total
|
5,000,000 |
38 |
|
·
|
Stabilizing transactions consist of bids or purchases made by the representative for the purpose of preventing or slowing a decline in the market price of our securities while this offering is in progress.
|
|
·
|
Short sales and over-allotments occur when the representative, on behalf of the underwriting syndicate, sells more of our units than it purchases from us in this offering. To cover the resulting short position, the representative may exercise the over-allotment option described above or may engage in syndicate covering transactions. There is no contractual limit on the size of any syndicate covering transaction. The underwriters will make available a prospectus in connection with any such short sales. Purchasers of shares sold short by the underwriters are entitled to the same remedies under the federal securities laws as any other purchaser of shares covered by the registration statement.
|
|
·
|
Syndicate covering transactions are bids for or purchases of our securities on the open market by the representative on behalf of the underwriters in order to reduce a short position incurred by the representative.
|
|
·
|
Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the units originally sold by the syndicate member are purchased in a syndicate covering transaction to cover syndicate short positions.
|
|
·
|
If the underwriters commence these activities, they may discontinue them at any time without notice. The underwriters may carry out these transactions on the Over the Counter Market or otherwise.
|
39 |
Per Unit
|
Total Without
Over-Allotment
Option
|
Total With
Over-Allotment
Option
|
||||||||||
Total underwriting discount to be paid by us
|
$ | $ | $ | |||||||||
Non-accountable expense allowance
|
$ | $ | $ |
|
·
|
our history and our prospects;
|
|
·
|
the industry in which we operate;
|
|
·
|
the status and development prospects for our products and services;
|
|
·
|
the previous experience of our executive officers; and
|
|
·
|
the general condition of the securities markets at the time of this offering.
|
40 |
41 |
|
·
|
prior to such date, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;
|
|
·
|
upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (1) by persons who are directors and also officers and (2) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
|
|
·
|
on or after such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 662/3% of the outstanding voting stock which is not owned by the interested stockholder.
|
42 |
43 |
Page
|
|
Report
of Independent Registered Public Accounting Firm |
49
|
Annual Financial Statements | |
Consolidated
Balance Sheets at December 31, 2010 and 2009
|
50
|
Consolidated
Statements of Operations for the Years Ended December 31, 2010 and 2009
|
51
|
Consolidated
Statements of Stockholders’ Equity at December 31, 2010 and 2009
|
52
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2010 and 2009
|
53
|
Notes
to Consolidated Financial Statements
|
55
|
Quarterly Financial Statements | 79 |
Balance
Sheets as of September 30, 2011 and December 31, 2010
|
80
|
Statements
of Operations – For the Three Months Ended September 30, 2011 and 2010
|
81
|
Statements
of Operations – For the Nine Months Ended September 30, 2011 and 2010
|
82
|
Statements
of Cash Flows – For the Nine Months Ended September 30, 2011 and 2010
|
83
|
Notes
to Consolidated Financial Statements
|
85
|
44 |
CREASON & ASSOCIATES, P.L.L.C.
7170 S. Braden Ave., Suite 100
Tulsa, Oklahoma 74136
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Chanticleer Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Chanticleer Holdings, Inc. and Subsidiaries (the "Company") as of December 31, 2011 and 2010, and the related consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows for the years ended December 31, 2011 and 2010. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of Kiarabrite (Pty) Ltd, Dimaflo (Pty) Ltd, Tundraspex (Pty) Ltd, Civisign (Pty) Ltd and Dimalogix (Pty) Ltd (collectively referred to as the South Africa Operations), wholly-owned and majority-owned subsidiaries, which statements reflect total assets and revenues constituting 72 percent and 66 percent, respectively, of the related consolidated totals. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for the South Africa Operations, is based solely on the reports of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audit and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chanticleer Holdings, Inc. and Subsidiaries as of December 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for the years ended December 31, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that Chanticleer Holdings, Inc. and Subsidiaries will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, Chanticleer Holdings, Inc. has incurred substantial net losses and negative cash flows from operations for the past several years, along with negative working capital. In addition, the Company has future plans that may require substantial financial obligations. There can be no assurance that the Company will be able to generate sufficient cash revenues to fund its current operations and fulfill its future commitments. These conditions raise substantial doubt about Chanticleer Holdings, Inc. and Subsidiaries’ ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.
/s/Creason & Associates, P.L.L.C. |
Tulsa, Oklahoma
April 3, 2012
45 |
Chanticleer Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2011 and 2010
2011 | 2010 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 151,928 | $ | 46,007 | ||||
Accounts receivable | 103,982 | 4,258 | ||||||
Inventory | 59,266 | - | ||||||
Due from related parties | 76,591 | 84,269 | ||||||
Prepaid expenses | 231,914 | 24,184 | ||||||
TOTAL CURRENT ASSETS | 623,681 | 158,718 | ||||||
Property and equipment, net | 2,508,823 | 25,563 | ||||||
Intangible assets, net | 470,164 | - | ||||||
Investments at fair value | 318,353 | 352,500 | ||||||
Other investments | 1,579,677 | 853,798 | ||||||
Deposits and other assets | 3,980 | 23,980 | ||||||
TOTAL ASSETS | $ | 5,504,678 | $ | 1,414,559 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Current maturities of long-term debt and notes payable | $ | 1,171,855 | $ | 250,000 | ||||
Convertible notes payable | 1,625,000 | - | ||||||
Accounts payable | 267,475 | 211,432 | ||||||
Accrued expenses | 21,521 | 66,103 | ||||||
Other current liabilities | 496,643 | 1,750 | ||||||
Income taxes payable | 14,608 | - | ||||||
Due to related parties | 30,204 | 116,349 | ||||||
TOTAL CURRENT LIABILITIES | 3,627,306 | 645,634 | ||||||
Long-term debt, less current maturities | 236,109 | 686,500 | ||||||
TOTAL LIABILITIES | 3,863,415 | 1,332,134 | ||||||
Commitments and contingencies (Note 12) | ||||||||
Stockholders' equity: | ||||||||
Common stock: $0.0001 par value; authorized 200,000,000 shares; issued 3,012,121 shares and 2,571,918 shares; and outstanding 2,498,891 and 2,048,688 shares at December 31, 2011 and 2010, respectively | 301 | 257 | ||||||
Additional paid in capital | 6,459,506 | 5,456,067 | ||||||
Other comprehensive income | 48,665 | 68,027 | ||||||
Non-controlling interest | 1,692,019 | 24,175 | ||||||
Accumulated deficit | (6,032,808 | ) | (4,929,418 | ) | ||||
Less treasury stock, 513,230 shares and 523,230 shares at December 31, 2011 and 2010, respectively | (526,420 | ) | (536,683 | ) | ||||
1,641,263 | 82,425 | |||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 5,504,678 | $ | 1,414,559 |
See accompanying notes to consolidated financial statements.
46 |
Chanticleer Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31, 2011 and 2010
2011 | 2010 | |||||||
Revenue: | ||||||||
Restaurant sales, net | $ | 967,418 | $ | - | ||||
Management fee income - non-affiliates | 493,167 | 20,833 | ||||||
Management fee income - affiliates | 3,235 | 115,468 | ||||||
Total revenue | 1,463,820 | 136,301 | ||||||
Expenses: | ||||||||
Restaurant cost of sales | 360,810 | - | ||||||
Restaurant operating expenses | 483,946 | - | ||||||
General and administrative expense | 1,245,752 | 935,110 | ||||||
Asset impairment | - | 250,000 | ||||||
Depreciation and amortization | 87,617 | 11,079 | ||||||
Total expenses | 2,178,125 | 1,196,189 | ||||||
Loss from operations | (714,305 | ) | (1,059,888 | ) | ||||
Other income (expense) | ||||||||
Equity in earnings (losses) of investments | (76,113 | ) | 58,337 | |||||
Realized gains from sales of investments | 19,991 | 106,035 | ||||||
Interest income | 4,541 | 46,000 | ||||||
Miscellaneous income | 476 | - | ||||||
Interest expense | (180,825 | ) | (140,016 | ) | ||||
Other than temporary decline in available-for-sale securities | (147,973 | ) | (40,386 | ) | ||||
Total other income (expense) | (379,903 | ) | 29,970 | |||||
Net loss before income taxes | (1,094,208 | ) | (1,029,918 | ) | ||||
Provision for income taxes | 14,608 | - | ||||||
Net loss before non-controlling interest | (1,108,816 | ) | (1,029,918 | ) | ||||
Non-controlling interest | 5,426 | 18,353 | ||||||
Net loss | (1,103,390 | ) | (1,011,565 | ) | ||||
Other comprehensive income (loss): | ||||||||
Unrealized gain (loss) on available-for-sale securities (none applies to non-controlling interest) | (13,005 | ) | 152,027 | |||||
Foreign translation losses | (6,357 | ) | - | |||||
Other comprehensive loss | $ | (1,122,752 | ) | $ | (859,538 | ) | ||
Net earnings (loss) per share, basic and diluted | $ | (0.47 | ) | $ | (0.51 | ) | ||
Weighted average shares outstanding | 2,370,036 | 1,990,462 |
See accompanying notes to consolidated financial statements.
47 |
Chanticleer Holdings, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2011 and 2010
Accumulated | ||||||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||||||
Additional | Comprehensive | Non- | ||||||||||||||||||||||||||||||
Common Stock | Paid-in | Income | Controlling | Accumulated | Treasury | |||||||||||||||||||||||||||
Shares | Par | Capital | (Loss) | Interest | Deficit | Stock | Total | |||||||||||||||||||||||||
Balance, December 31, 2009 | 2,492,752 | $ | 250 | $ | 5,255,624 | $ | (84,000 | ) | $ | - | $ | (3,917,853 | ) | $ | (536,003 | ) | $ | 718,018 | ||||||||||||||
Common stock issued for: | ||||||||||||||||||||||||||||||||
Consultants | 15,572 | 1 | 24,999 | - | - | - | - | 25,000 | ||||||||||||||||||||||||
Amounts due related party | 33,594 | 3 | 58,787 | - | - | - | - | 58,790 | ||||||||||||||||||||||||
Accounts payable | 10,000 | 1 | 17,499 | - | - | - | - | 17,500 | ||||||||||||||||||||||||
Director fees | 20,000 | 2 | 42,498 | - | - | - | - | 42,500 | ||||||||||||||||||||||||
Beneficial conversion feature of convertible notes payable | - | - | 56,660 | - | - | - | - | 56,660 | ||||||||||||||||||||||||
Available-for-sale securities | - | - | - | 152,027 | - | - | - | 152,027 | ||||||||||||||||||||||||
Purchase treasury stock | - | - | - | - | - | - | (680 | ) | (680 | ) | ||||||||||||||||||||||
Non-controlling interest | - | - | - | - | 42,528 | - | - | 42,528 | ||||||||||||||||||||||||
Net loss | - | - | - | - | (18,353 | ) | (1,011,565 | ) | - | (1,029,918 | ) | |||||||||||||||||||||
Balance, December 31, 2010 | 2,571,918 | 257 | 5,456,067 | 68,027 | 24,175 | (4,929,418 | ) | (536,683 | ) | 82,425 | ||||||||||||||||||||||
Common stock issued for: | ||||||||||||||||||||||||||||||||
Convertible notes payable and accrued interest | 412,286 | 41 | 731,046 | - | - | - | - | 731,087 | ||||||||||||||||||||||||
Services | 27,750 | 3 | 74,570 | - | - | - | - | 74,573 | ||||||||||||||||||||||||
Cash | 167 | - | 500 | - | - | - | - | 500 | ||||||||||||||||||||||||
Available-for-sale securities contributed by CEO | - | - | 125,331 | - | - | - | - | 125,331 | ||||||||||||||||||||||||
Warrants sold, net | - | - | 20,608 | - | - | - | - | 20,608 | ||||||||||||||||||||||||
Amortize warrants | - | - | 35,247 | - | - | - | - | 35,247 | ||||||||||||||||||||||||
Sell treasury stock | - | - | 16,137 | - | - | - | 10,263 | 26,400 | ||||||||||||||||||||||||
Available-for-sale securities | - | - | - | (13,005 | ) | - | - | - | (13,005 | ) | ||||||||||||||||||||||
Non-controlling interest | - | - | - | - | 1,673,270 | - | - | 1,673,270 | ||||||||||||||||||||||||
Foreign translation loss | - | - | - | (6,357 | ) | - | - | - | (6,357 | ) | ||||||||||||||||||||||
Net loss | - | - | - | - | (5,426 | ) | (1,103,390 | ) | - | (1,108,816 | ) | |||||||||||||||||||||
Balance, December 31, 2011 | 3,012,121 | $ | 301 | $ | 6,459,506 | $ | 48,665 | $ | 1,692,019 | $ | (6,032,808 | ) | $ | (526,420 | ) | $ | 1,641,263 |
See accompanying notes to consolidated financial statements.
48 |
Chanticleer Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2011 and 2010
2011 | 2010 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (1,103,390 | ) | $ | (1,011,565 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Other than temporary decline in value of available-for-sale securities | 147,973 | 40,386 | ||||||
Bad debt expense - related party | 750 | 24,907 | ||||||
Non-controlling interest | (5,426 | ) | (18,353 | ) | ||||
Consulting and other services rendered in exchange for investment securities | (1,500 | ) | (33,000 | ) | ||||
Depreciation and amortization | 87,617 | 11,079 | ||||||
Equity in (earnings) loss of investments | 76,113 | (58,337 | ) | |||||
Asset impairment | - | 250,000 | ||||||
Common stock issued for services | 74,573 | 49,375 | ||||||
(Gain) loss on sale of investments | (19,991 | ) | (106,035 | ) | ||||
Beneficial converstion feature of convertible notes payable | - | 56,660 | ||||||
Amortization of warrants | 35,247 | - | ||||||
(Increase) decrease in amounts due from affiliate | (54,217 | ) | (46,547 | ) | ||||
(Increase) decrease in accounts receivable | (73,830 | ) | (4,258 | ) | ||||
(Increase) decrease in prepaid expenses and other assets | (168,393 | ) | - | |||||
(Increase) decrease inventory | 5,988 | - | ||||||
Increase (decrease) in accounts payable and accrued expenses | (58,779 | ) | 89,807 | |||||
Increase (decrease) in income taxes payable | 14,608 | - | ||||||
Increase (decrease) in deferred revenue | (1,750 | ) | (19,083 | ) | ||||
Advance from related parties for working capital | - | 14,650 | ||||||
Net cash used by operating activities | (1,044,407 | ) | (760,314 | ) | ||||
Cash flows from investing activities: | ||||||||
Proceeds from sale of investments | 190,325 | 281,765 | ||||||
Investment distribution | 8,140 | 16,137 | ||||||
Purchase of investments | (1,285,500 | ) | (26,334 | ) | ||||
Acquisition of subsidiaries | (205,000 | ) | - | |||||
Purchase of property and equipment | (388,109 | ) | (4,517 | ) | ||||
Treasury stock proceeds (acquired) | 26,400 | (680 | ) | |||||
Deposit made for investment | - | (20,000 | ) | |||||
Net cash provided (used) by investing activities | (1,653,744 | ) | 246,371 | |||||
Cash flows from financing activities: | ||||||||
Proceeds from sale of common stock | 500 | - | ||||||
Proceeds from sale of common stock warrants, net | 20,608 | - | ||||||
Loan proceeds | 2,790,000 | 541,000 | ||||||
Loan repayment | (7,036 | ) | (4,500 | ) | ||||
Loans to related parties | - | (48,924 | ) | |||||
Loan from related party | - | 70,000 | ||||||
Net cash provided by financing activities | 2,804,072 | 557,576 | ||||||
Net increase in cash and cash equivalents | 105,921 | 43,633 | ||||||
Cash and cash equivalents, beginning of year | 46,007 | 2,374 | ||||||
Cash and cash equivalents, end of year | $ | 151,928 | $ | 46,007 |
See accompanying notes to consolidated financial statements.
49 |
Chanticleer Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows, continued
For the Years Ended December 31, 2011 and 2010
2011 | 2010 | |||||||
Supplemental cash flow information: | ||||||||
Cash paid for interest and income taxes: | ||||||||
Interest | $ | 98,837 | $ | 31,999 | ||||
Income taxes | - | - | ||||||
Non-cash investing and financing activities: | ||||||||
Common stock issued for amounts due related party | $ | - | $ | 58,790 | ||||
Common stock issued for accounts payable | - | 17,500 | ||||||
Reclassification of investment accounted for under the cost method as available-for-sale security | - | 100,000 | ||||||
Due to related party exchanged for convertible note payable | 25,000 | - | ||||||
Convertible notes payable exchanged for common stock | 711,500 | - | ||||||
Accrued interest exchanged for common stock | 10,000 | - | ||||||
Investment contributed byt the Company's CEO | 125,331 | - | ||||||
Common stock issued for prepaid consulting contract | 44,850 | - | ||||||
Acquisition of subsidiaries: | ||||||||
Current assets, excluding cash and cash equivalents | $ | 93,638 | - | |||||
Property and equipment and intangible assets | 2,651,197 | - | ||||||
Total assets excluding cash and cash equivalents | 2,744,835 | - | ||||||
Liabilities assumed | 630,369 | - | ||||||
Non-controlling interest | 1,647,710 | - | ||||||
Prior investment of the Company | 261,756 | - | ||||||
2,523,259 | - | |||||||
Purchase price, net assets acquired - cash paid | $ | 205,000 | - |
See accompanying notes to consolidated financial statements.
50 |
Chanticleer Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. | Nature of Business |
Organization
Chanticleer Holdings, Inc. (the “Company”) was organized October 21, 1999, under its original name, Tulvine Systems, Inc., under the laws of the State of Delaware. The Company previously had limited operations and was considered a development stage company until July 2005. On April 25, 2005, the Company formed a wholly owned subsidiary, Chanticleer Holdings, Inc. 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, Chanticleer Advisors, LLC, (“Advisors”), Avenel Ventures, LLC ("Ventures"), Avenel Financial Services, LLC ("AFS"), Chanticleer Holdings Limited ("CHL"), Chanticleer Holdings Australia Pty, Ltd. (“CHA”), Chanticleer Investment Partners, LLC (“CIP”), DineOut SA Ltd. ("DineOut”), Kiarabrite (Pty) Ltd (“KPL”), Dimaflo (Pty) Ltd (“DFLO”), Tundraspex (Pty) Ltd (“TPL”), Civisign (Pty) Ltd (“CPL”) and Dimalogix (Pty) Ltd (“DLOG”) (collectively referred to as “the Company,” “we,” “us,” or “the Companies”). All significant inter-company balances and transactions have been eliminated in consolidation.
Effective March 23, 2011, the Company's common stock was forward split, 2 shares for each share issued, pursuant to written consent by a majority of the Company's shareholders. All share references have been adjusted as if the split occurred prior to all periods presented.
Information regarding the Company's subsidiaries is as follows:
· | Advisors was formed as a wholly owned Nevada Limited Liability Company on January 18, 2007 to manage related companies, Chanticleer Investors, LLC ("Investors LLC"), Chanticleer Investors II, LLC ("Investors II") and other investments owned by the Company; |
· | Ventures was formed as a wholly owned Nevada Limited Liability Company on December 24, 2008 to provide business management and consulting services to its clients; |
· | CHL was formed as a wholly owned Limited Liability Company in Jersey on March 24, 2009 to own the Company's initial 50% interest in Hooters SA, GP, the general partner of the Hooters restaurant franchises in South Africa; |
· | CHA was formed on September 30, 2011 in Australia as a wholly owned subsidiary to invest in Hooters restaurants in Australia; |
· | CIP was formed as a wholly owned North Carolina limited liability company on September 20, 2011. CIP has not commenced business at December 31, 2011. CIP was formed to manage separate and customized investment accounts for investors. The Company plans to register CIP as a registered investment advisor so that it can market openly to the public; |
· | DineOut was formed as a Private Limited Liability Company in England and Wales on October 29, 2009 to raise capital in Europe (the Company owns approximately 89% of DineOut at December 31, 2011); |
· | KPL was formed on August 30, 2011 in South Africa to manage the Hooters restaurants in South Africa. The Company owns 80% and local management owns 20% at December 31, 2011; | |
· | DFLO was formed on August 16, 2011 in South Africa, is owned 90% by the Company and 10% by local investors at December 31, 2011, and owns the Hooters restaurant in Durban, South Africa; |
51 |
· | TPL was formed on August 18, 2011in South Africa, is owned 95% by the Company and 5% by local investors at December 31, 2011, and owns the Hooters restaurant in Johannesburg, South Africa; |
· | CPL was formed on August 29, 2011 in South Africa, is owned 100% by the Company at December 31, 2011 and owns the Hooters restaurant in Cape town, South Africa; |
· | DLOG was formed on August 27, 2011 in South Africa, is owned 100% by the Company at December 31, 2011 and owns the Hooters restaurant in the Emperor’s Palace in Johannesburg, South Africa; and |
· | AFS was formed as a Nevada Limited Liability Company on February 19, 2009 to provide unique financial services to the restaurant, real estate development, investment advisor/asset management and philanthropic organizations. AFS's business operation was not activated and was discontinued in September 2011. |
GOING CONCERN
At December 31, 2011 and 2010, the Company had current assets of $623,681 and $158,718; current liabilities of $3,627,306 and $645,634; and a working capital deficit of $3,003,625 and $486,916, respectively. The Company incurred a loss of $1,103,390 during the year ended December 31, 2011 and had an unrealized loss from available-for-sale securities of $13,005 and foreign currency translation losses of $6,357, resulting in a comprehensive loss of $1,122,752.
The Company's corporate general and administrative expenses averaged approximately $295,000 per quarter during 2011. In the fourth quarter of 2011, $64,000 was added when we began consolidating the South African operations. The Company expects costs to increase as we expand our footprint internationally in 2012. Effective October 1, 2011, the Company acquired majority control of the restaurants in South Africa and began consolidating these operations. The Company also will share 49% of the profits in our Hooters location opened in January 2012 in Campbelltown, Australia, a suburb of Sydney.
In addition, the Company has a note with a balance at December 31, 2011 of $242,964 owed to its bank which is due in August 2013 and a line of credit with its bank with a balance at December 31, 2011 of $1,165,000 (total available $2,000,000) due on August 20, 2012. We also have convertible notes payable with certain investors with a balance at December 31, 2011 of $1,625,000 due in the second quarter of 2012. The Company plans to continue to use limited partnerships, if the Company’s contemplated raise is not completed, to fund its share of costs for additional Hooters restaurants.
The Company expects to meet its obligations in 2012 with some or all of the following:
· | File an S-1 Registration during the second quarter of 2012, and, assuming it becomes effective, plans to raise up to $15,000,000 from the sale of common stock and warrant units; | |
· | The Company received $100,000 in January 2012 as a fee for its CEO sitting on the Board of Hooters of America and expect to continue to receive this fee for the next three years based on the current agreement; | |
· | Extend a portion of its existing line of credit; | |
· | Convert its convertible notes payable into common stock. |
If the above events do not occur or if the Company does not raise sufficient capital, substantial doubt about the Company’s ability to continue as a going concern exists. These consolidated financial statements do not reflect any adjustments that might result from the outcome of these uncertainties.
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2. | SIGNIFICANT ACCOUNTING POLICIES |
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include the valuation of the investments in portfolio companies and deferred tax asset valuation allowances. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
revenue recognition
Restaurant Net Sales
We record revenue from restaurant sales at the time of sale, net of discounts. Sales revenues are presented net of sales and value added (VAT) taxes. Cost of sales primarily includes the cost of food, beverages, and merchandise and disposable paper and plastic goods used in preparing and selling our menu items, and excludes depreciation and amortization.
Management Fee Income
The Company receives revenue from management fees from both affiliated companies and non-affiliated companies. Our revenue recognition policy provides that revenue is generally realized or realizable and earned when all of the following criteria have been met:
· | Persuasive evidence of an arrangement exists; |
· | Delivery has occurred or services have been rendered; |
· | The seller's price to the buyer is fixed or determinable; and |
· | Collectability is reasonably assured. |
We may collect revenue in both cash and in the equity securities of the company to whom we are providing services. Typically when we are paid cash for services, it is based on a monthly fee and is recorded when earned. When we receive equity securities for our management services, we generally receive the securities in advance for our services to be earned over the life of the contract, generally one year. We value these securities and defer recognition of the revenue over the life of the management contract.
The fair value of the equity instruments received was determined based upon the stock prices as of the date we reached an agreement with the third party and is not subject to adjustment after the measurement date.
ACCOUNTS RECEIVABLE
The Company monitors its exposure for credit losses on its receivable balances and the credit worthiness of its receivables on an ongoing basis and records related allowances for doubtful accounts. Allowances are estimated based upon specific customer balances, where a risk of default has been identified, and also include a provision for non-customer specific defaults based upon historical experience. As of December 31, 2011 and December 31, 2010, the Company has not recorded an allowance for doubtful accounts. If circumstances related to specific customers change, estimates of the recoverability of receivables could also change.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or market, and consist primarily of restaurant food items and supply inventory.
53 |
OPERATING LEASES
The Company leases certain property under operating leases. Many of these lease agreements contain rent holidays, rent escalation clauses and/or contingent rent provisions. Rent expense is recognized on a straight-line basis over the expected lease term, including cancelable option periods when failure to exercise such options would result in an economic penalty. In addition, the rent commencement date of the lease term is the earlier of the date when we become legally obligated for the rent payments or the date when we take access to the property or the grounds for build out.
MARKETABLE EQUITY SECURITIES
Trading securities
The Company's investment in marketable equity securities are carried at fair value and are classified as current assets in the consolidated balance sheets. Unrealized gains and losses, net of tax, are reported in the statement of operations as unrealized gain (loss) on marketable equity securities. Gains and losses are reported in the consolidated statements of operations when realized, based on the disposition of specifically identified investments, using a first-in, first-out method.
Available-for-sale securities
The Company’s investments in marketable equity securities which are classified as available-for-sale are carried at fair value. Investments available for current operations are classified in the consolidated balance sheets as current assets; investments held for long-term purposes are classified as non-current assets. Unrealized gains and losses, net of tax, are reported in other comprehensive income as a separate component of stockholders’ equity. Gains and losses are reported in the consolidated statements of operations when realized, determined based on the disposition of specifically identified investments, using a first-in, first-out method.
Investments identified by the Company as being potentially impaired are subject to further analysis to determine if the impairment is other than temporary. Other than temporary declines in market value from original costs are charged to investment and other income, net, in the period in which the loss occurs. In determining whether investment holdings are other than temporarily impaired, the Company considers the nature, cause, severity and duration of the impairment.
OTHER INVESTMENTS
Investments in which the Company has the ability to exercise significant influence and that, in general, are at least 20 percent owned are stated at cost plus equity in undistributed net earnings (loss), less distributions received. The Company also has equity investments in which it owns less than 20% which are stated at cost. An impairment loss would be recorded whenever a decline in the value of an equity investment or cost investment is below its carrying amount and is determined to be other than temporary. In judging “other than temporary,” the Company considers the length of time and extent to which the fair value of the investment has been less than the carrying amount of the investment, the near-term and long-term operating and financial prospects of the investee, and the Company’s long-term intent of retaining the investment in the investee.
FAIR VALUE MEASUREMENTS
For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.
54 |
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:
Level 1 Quoted prices for identical instruments in active markets.
Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 Significant inputs to the valuation model are unobservable.
We maintain policies and procedures to value instruments using the best and most relevant data available. Our investment committee reviews and approves all investment valuations.
Our available-for-sale equity securities are all valued using Level 1 inputs or Level 2 inputs.
fair value of financial instruments
The Company is required to disclose fair value information about financial instruments when it is practicable to estimate that value. The carrying amounts of the Company’s cash, accounts receivable, inventory, accounts payable, accrued expenses, other current liabilities, convertible notes payable and notes payable approximate their estimated fair value due to the short-term maturities of these financial instruments and because related interest rates offered to the Company approximate current rates.
fixed assets
Fixed assets are stated at cost, less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets (generally five and seven years). The carrying amount of all long-lived assets is evaluated periodically to determine if adjustment to the depreciation and amortization period or the unamortized balance is warranted. Based upon its most recent analysis, the Company believes that no impairment of property and equipment exists at December 31, 2011 and 2010. Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations.
InTANGIBLE ASSETS
Intangible assets are recorded for the initial franchise fees for our restaurants as well as certain costs capitalized upon startup of the restaurants. The Company amortizes these amounts over a 20 year periods, which is the life of the franchise agreement.
Income Taxes
Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company has provided a valuation allowance for the full amount of the deferred tax assets.
As of December 31, 2011 and 2010 the Company had no accrued interest or penalties relating to any tax obligations. The Company currently has no federal or state examinations in progress, nor has it had any federal or state tax examinations since its inception. The last three years of the Company's tax years are subject to federal and state tax examination.
55 |
Stock-based Compensation
The compensation cost relating to share-based payment transactions (including the cost of all employee stock options) is required to be recognized in the financial statements. That cost is measured based on the estimated fair value of the equity or liability instruments issued. A wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans are included. The Company’s financial statements would include an expense for all share-based compensation arrangements granted on or after January 1, 2006 and for any such arrangements that are modified, cancelled or repurchased after that date based on the grant-date estimated fair value.
As of December 31, 2011 and 2010, there were no options outstanding. See Note 9 regarding outstanding warrants.
EARNINGS (LOSS) PER COMMON SHARE
The Company is required to report both basic earnings per share, which is based on the weighted-average number of common shares outstanding, and diluted earnings per share, which is based on the weighted-average number of common shares outstanding plus all potentially dilutive shares outstanding. At December 31, 2011 and 2010, there are no potentially dilutive shares outstanding. Accordingly, no common stock equivalents are included in the earnings (loss) per share calculations and basic and diluted earnings per share are the same for all periods presented.
FOREIGN CURRENCY TRANSLATION
Adjustments resulting from the process of translating foreign functional currency financial statements into U.S. dollars are included in accumulated other comprehensive income in common stockholders’ equity. Foreign currency transaction gains and losses are included in current earnings. Most of our foreign operations use their local currency as the functional currency.
Comprehensive Income
Standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. We are required to (a) classify items of other comprehensive income by their nature in financial statements, and (b) display the accumulated balance of other comprehensive income separately in the equity section of the balance sheet for all periods presented.
concentration of credit risk
Cash is maintained at financial institutions, which at times, may exceed the FDIC insurance limit.
RECLASSIFICATIONS
Certain reclassifications have been made in the financial statements at December 31, 2010 and for the periods then ended to conform to the December 31, 2011 presentation. The reclassifications had no effect on net loss.
Recent Accounting Pronouncements
There are several new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) which are not yet effective. Each of these pronouncements, as applicable, has been or will be adopted by the Company. At March 30, 2012, none of these pronouncements are expected to have a material effect on the financial position, results of operations or cash flows of the Company.
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3. | ACQUISITION OF MAJORITY OWNED HOOTERS RESTAURANTS |
Effective October 1, 2011, the Company acquired majority ownership of a management company and four Hooters restaurants in South Africa. Previously, the Company owned 50% of the restaurants but was not in control and these operations were accounted for using the equity method of accounting. New entities were formed for the operations and the Company’s ownership is as follows: KPL 80%, DFLO 90%, TPL 95%, CPL 100% and DLOG 100%. The restaurant owned by DFLO in Durban opened in January 2010, the restaurant owned by TPL in Johannesburg opened in June 2010 and the restaurant owned by CPL in Cape Town opened in June 2011. The restaurant owned by DLOG opened in February 2012.
The acquisition was accounted for using the purchase method of accounting and, accordingly, the consolidated statements of operations include the results of the South African operations beginning October 1, 2011. The assets acquired and the liabilities assumed were recorded at estimated fair values as determined by the Company’s management based on information currently available and on current assumptions as to future operations. A summary of the estimated fair value of assets acquired and liabilities assumed in the acquisition follows:
Current assets, excluding cash and cash equivalents | $ | 93,638 | ||
Property and equipment and intangible assets | 2,651,197 | |||
Total assets excluding cash and cash equivalents | $ | 2,744,835 | ||
Liabilities assumed | 630,369 | |||
Non-controlling interest | 1,647,710 | |||
Prior investment of the Company | 261,756 | |||
Purchase price (net assets acquired) | $ | 205,000 | ||
Cash paid | $ | 205,000 |
Liabilities assumed includes $496,643 at December 31, 2011 and $524,832 at September 30, 2011 in bank debt of the prior entities which the Company has agreed to repay without interest upon completion of its new financing. The $496,643 at December 31, 2011 in included in other liabilities.
Unaudited pro forma results of operations for the two years ended December 31, 2011 and 2010, as if the Company had acquired majority ownership of the South African Hooters restaurants on January 1, 2010 is as follows. The pro forma results include estimates and assumptions which management believes are reasonable. However, pro forma results are not necessarily indicative of the results that would have occurred if the business combination had been in effect on the dates indicated, or which may result in the future.
2011 | 2010 | |||||||
Net revenues | $ | 4,828,085 | $ | 4,078,964 | ||||
Net earnings (loss) | $ | (971,811 | ) | $ | (466,153 | ) | ||
Net earnings (loss) per share, basic and diluted | $ | (0.41 | ) | $ | (0.23 | ) |
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4. | INVESTMENTS |
INVESTMENTS AT FAIR VALUE CONSIST OF THE FOLLOWING AT DECEMBER 31, 2011 AND 2010
2011 | 2010 | |||||||
Available-for-sale investments at fair value | $ | 318,353 | $ | 352,500 | ||||
Trading securities | - | - | ||||||
Total | $ | 318,353 | $ | 352,500 |
TRADING SECURITIES:
The Company had no transactions in trading securities during 2011. The following table summarizes the activity during 2010.
2010 | ||||
Balance, beginning of year | $ | - | ||
Shares acquired from a related party | 26,334 | |||
Cost of securities sold | (26,334 | ) | ||
Balance, end of year | $ | - | ||
Proceeds from sale of trading securities | $ | 32,917 | ||
Gain from sale of trading securities | $ | 6,583 |
AVAILABLE-FOR-SALE SECURITIES
Activity in our available-for-sale securities may be summarized as follows:
2011 | 2010 | |||||||
Cost at beginning of year | $ | 284,473 | $ | 167,286 | ||||
Contributed to the Company by it's CEO | 125,331 | - | ||||||
Transfer from investments accounted for by the cost method | - | 100,000 | ||||||
Received as management fees | 1,500 | 33,000 | ||||||
Acquired in exchange for DineOut shares | - | 124,573 | ||||||
Proceeds from sale of securities | - | (41,645 | ) | |||||
Realized loss from sale of securities | - | (58,355 | ) | |||||
Other than temporary loss in available-for-sale securities | (147,973 | ) | (40,386 | ) | ||||
Cost at end of year | 263,331 | 284,473 | ||||||
Unrealized gain (loss) | 55,022 | 68,027 | ||||||
Total | $ | 318,353 | $ | 352,500 |
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Our available-for-sale securities consist of the following:
Unrecognized | Realized | Loss | ||||||||||||||||||
Holding | Fair | Holding | on | |||||||||||||||||
Cost | Gains (Losses) | Value | Loss | Sale | ||||||||||||||||
December 31, 2011 | ||||||||||||||||||||
Remodel Auction * | $ | - | $ | - | $ | - | $ | (900 | ) | $ | - | |||||||||
North Carolina Natural Energy * | 1,500 | - | 1,500 | - | - | |||||||||||||||
North American Energy | 126,000 | (42,000 | ) | 84,000 | - | - | ||||||||||||||
North American Energy * | 10,500 | 7,500 | 18,000 | - | - | |||||||||||||||
North American Energy | 125,331 | 89,522 | 214,853 | - | - | |||||||||||||||
Efftec International, Inc. * | - | - | - | (22,500 | ) | - | ||||||||||||||
HiTech Stages | - | - | - | (124,573 | ) | - | ||||||||||||||
$ | 263,331 | $ | 55,022 | $ | 318,353 | $ | (147,973 | ) | $ | - | ||||||||||
December 31, 2010 | ||||||||||||||||||||
Syzygy Entertainment, Ltd. * | $ | - | $ | - | $ | - | $ | (1,286 | ) | $ | - | |||||||||
Remodel Auction * | 900 | 100 | 1,000 | (39,100 | ) | - | ||||||||||||||
North American Energy | 126,000 | (98,000 | ) | 28,000 | - | - | ||||||||||||||
North American Energy * | 10,500 | (4,500 | ) | 6,000 | - | - | ||||||||||||||
Efftec International, Inc. * | 22,500 | 22,500 | 45,000 | - | - | |||||||||||||||
Efftec International, Inc. (warrant) * | - | 22,500 | 22,500 | - | - | |||||||||||||||
Vought Defense System Corp. | - | - | - | - | (58,355 | ) | ||||||||||||||
HiTech Stages | 124,573 | 125,427 | 250,000 | - | - | |||||||||||||||
$ | 284,473 | $ | 68,027 | $ | 352,500 | $ | (40,386 | ) | $ | (58,355 | ) |
* Investments acquired in exchange for management services.
Syzygy Entertainment, Ltd. (“Syzygy”) – During 2007, the Company acquired 342,814 shares of Syzygy for management services and Mr. Pruitt contributed an additional 300,000 shares to the Company. The shares had an initial cost of $1,114,221 which has now been fully impaired.
Remodel Auction Incorporated (“REMC”) – During 2009, the Company acquired 334 shares of REMC for management services with an initial cost of $275,000 which has now been fully impaired.
North Carolina Natural Energy, Inc. (“NCNE”) – NCNE is a successor to REMC whose business was discontinued. NCNE has plans to become involved in some form of natural energy. The Company received 100,000,000 shares of NCNE (less than 1% on a fully diluted basis) for management services during 2011. The shares were valued at $1,500 based on NCNE’s valuation as a shell.
North American Energy Resources, Inc. - During the quarter ended June 30, 2009, the Company exchanged its oil & gas property investments for 700,000 shares of North American Energy Resources, Inc. ("NAEY") which were valued at $126,000 based on the closing price of NAEY on the date of the trade. At December 31, 2011 and 2010, the stock was $0.12 and $0.04 per share and the Company recorded an unrealized loss of $42,000 and $98,000, respectively, based on the Company's determination that the price decline was temporary.
During the first quarter of 2010, the Company received an additional 150,000 shares of NAEY in exchange for management services. The shares were initially valued at $10,500, based on the trading price at the time. At December 31, 2010, the Company recorded an unrealized loss of $4,500 based on the market value of $6,000 at December 31, 2010. At December 31, 2011, the shares were valued at $18,000 and the Company recorded unrealized appreciation of $7,500.
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During June 2011, the Company’s CEO contributed 1,790,440 shares of NAEY to the Company which was valued at $125,331 based on the trading price at the time. Mr. Pruitt did not receive additional compensation as a result of the transfer. At December 31, 2011, the Company recorded unrealized appreciation of $89,522 based on a market value of $214,853.
NAEY appointed a new management team in December 2010 and they are seeking acquisition opportunities for onshore and offshore oil and gas properties. Accordingly, the Company determined that any decline was temporary.
Vought Defense Systems Corp. (“VDSC”) – Initially the Company invested $100,000 for debt with a face value of $1,177,395 of Lifestyle Innovations, Inc. After VDSC was acquired by the company in 2010, we converted our debt into 449,959 shares of VDSC which were sold during 2010 for $41,645, resulting in a loss of $58,355.
EffTec International, Inc. - Effective April 1, 2010, the Company's CEO became a director and the CEO of EffTec International, Inc. The Company received 150,000 shares of EffTec and an option to acquire an additional 150,000 shares at $0.15 per share in exchange for the management services to be provided. The shares were valued at $22,500 based on the trading price of EffTec at the date of the transaction. At December 31, 2010, the shares were valued at $0.30 per share and the $22,500 increase in value plus the value of the option of $22,500 was included in accumulated other comprehensive income (loss). At September 30, 2011, the market value of the Efftec stock dropped to less than $0.01 per share and the Company determined the reduction was other than temporary and impaired its investment to zero.
EffTec developed an Internet-based chiller tool called EffTrack™ that: collects, stores and analyzes chiller operating data, calculates and trends chiller performance, diagnoses the cause of chiller inefficiencies, notifies plant contacts when problems occur, recommends corrective actions, measures the results of corrective actions and provides cost analysis of operational improvements.
HiTech Stages, Ltd. (“HiTech”) – The Company originally acquired 275,000 shares of HiTech in exchange for 150,450 shares of DineOut during the June 2010 quarter. HiTech was unable to raise sufficient capital to fund its business plan and the stock price dropped to near zero at September 30, 2011. The Company determined the decline was other than temporary and fully impaired its investment on September 30, 2011.
OTHER INVESTMENTS ARE SUMMARIZED AS FOLLOWS AT DECEMBER 31, 2011 AND 2010.
2011 | 2010 | |||||||
Investments accounted for under the equity method | $ | 813,079 | $ | 87,200 | ||||
Investments accounted for under the cost method | 766,598 | 766,598 | ||||||
Total | $ | 1,579,677 | $ | 853,798 |
INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD
Activity in investments accounted for using the equity method is summarized as follows.
2011 | 2010 | |||||||
Balance, beginning of year | $ | 87,200 | $ | 82,500 | ||||
Equity in earnings (loss) | (76,113 | ) | 58,337 | |||||
New investments | 810,133 | - | ||||||
Sale of investment | - | (37,500 | ) | |||||
Distributions received | (8,141 | ) | (16,137 | ) | ||||
Balance, end of year | $ | 813,079 | $ | 87,200 |
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Equity investments consist of the following at December 31, 2011 and December 31, 2010:
2011 | 2010 | |||||||
Carrying value: | ||||||||
Hoot SA I, II, III - South Africa | $ | 140,803 | $ | 87,200 | ||||
Hoot Campbelltown Pty. Ltd. (49%) - Australia | 570,134 | - | ||||||
Hoot Surfers Paradise Pty. Ltd. (49%) - Australia | 102,041 | - | ||||||
Brazil | 101 | - | ||||||
$ | 813,079 | $ | 87,200 |
Equity in earnings (loss) and distributions from equity investments during the year ended December, 2011 and 2010 follows. The activity from the South African restaurants is through September 30, 2011 at which time the Company acquired majority ownership and began consolidating these operations.
2011 | 2010 | |||||||
Equity in earnings (loss): | ||||||||
Hoot S.A. I, II, III | (9,256 | ) | 58,337 | |||||
Hoot Campbelltown (49%) | (66,857 | ) | - | |||||
$ | (76,113 | ) | $ | 58,337 | ||||
Distributions: | ||||||||
Hoot S.A. I, LLC (20%) | 6,248 | 16,137 | ||||||
Hoot S.A. II, LLC (20%) | 1,893 | - | ||||||
$ | 8,141 | $ | 16,137 |
The summarized financial data for the South African operations of which we owned 20% at December 31, 2010 follows. The Company acquired majority ownership effective September 30, 2011, accordingly, the amounts in 2011 are for only nine months. In addition, the restaurant at the Hoot Campbelltown location incurred a loss for certain pre-opening expenses before it opened in January 2012, our share of which is included above.
2011 | 2010 | |||||||
Revenue | $ | 3,364,265 | $ | 3,942,663 | ||||
Gross profit | 2,122,073 | 2,717,191 | ||||||
Income from continuing operations | 131,949 | 545,412 | ||||||
Net income | 131,949 | 545,412 |
The summarized balance sheets for the two locations in Australia of which we owned 49% at December 31, 2011 and the Hoot SA limited partnerships of which we owned 20% at December 31, 2010 follows:
2011 | 2010 | |||||||
ASSETS | ||||||||
Current assets | $ | 58,975 | $ | 101,900 | ||||
Non-current assets | 1,646,508 | 1,604,500 | ||||||
TOTAL ASSETS | $ | 1,705,483 | $ | 1,706,400 | ||||
LIABILITIES | ||||||||
Current liabilities | $ | 76,035 | $ | 172,700 | ||||
PARTNER'S EQUITY | 1,629,448 | 1,533,700 | ||||||
TOTAL LIABILITIES AND PARTNERS' EQUITY | $ | 1,705,483 | $ | 1,706,400 |
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Hooters S.A., GP - The Company formed CHL to own the Company's 50% general partner interest in Hooters S.A., GP, the general partner of the Hooters' restaurant franchises in South Africa. The initial restaurant opened in December 2009 in Durban, South Africa and operations commenced in January 2010. In the initial restaurant CHL had a 10% interest in restaurant cash flows until the limited partners receive payout and a 40% interest in restaurant cash flows after limited partner payout. The second location opened in Johannesburg in June 2010 and a third location opened in Cape Town in June of 2011 with similar structures. Effective September 30, 2011, the Company acquired majority control of the South African operations and began consolidating its operations on October 1, 2011.
CHA (Hoot Campbelltown Pty. Ltd and Hoot Surfers Paradise Pty. Ltd.) – CHA entered into a partnership with the current local Hooters franchisee in Australia in which CHA will own 49% and its partner own 51%. The local partner will also manage the restaurants. The first location, Hoot Campbelltown Pty. Ltd. opened in Capmbelltown, a suburb of Sydney, in January 2012. A second location, Hoot Surfers Paradise Pty. Ltd., is underway with plans to open in the second quarter of 2012.
INVESTMENTS ACCOUNTED FOR USING THE COST METHOD
A summary of the activity in investments accounted for using the cost method follows.
2011 | 2010 | |||||||
Investments at cost: | ||||||||
Balance, beginning of year | $ | 766,598 | $ | 1,191,598 | ||||
Impairment | - | (250,000 | ) | |||||
Proceeds from sale of investment | - | (75,000 | ) | |||||
Investment transferred to available-for-sale | ||||||||
securities | - | (100,000 | ) | |||||
Total | $ | 766,598 | $ | 766,598 |
Investments at cost consist of the following at December 31, 2011 and 2010:
2011 | 2010 | |||||||
Chanticleer Investors, LLC | $ | 500,000 | $ | 500,000 | ||||
Edison Nation LLC (FKA Bouncing Brain Productions) | 250,000 | 250,000 | ||||||
Chanticleer Investors II | 16,598 | 16,598 | ||||||
$ | 766,598 | $ | 766,598 |
Chanticleer Investors LLC - The Company sold 1/2 of its investment in Investors LLC in May 2009, which reduced its ownership from 23% to 11.5%. Accordingly, in May 2009, the Company discontinued accounting for this investment using the equity method and began to account for the investment using the cost method. In December 2010, the Company sold an additional $75,000 of its investment at cost.
On April 18, 2006, the Company formed Investors LLC and sold units for $5,000,000. Investors LLC’s principal asset was a convertible note in the amount of $5,000,000 with Hooters of America, Inc. (“HOA”), collateralized by and convertible into 2% of Hooters common stock. The original note included interest at 6% and was due May 24, 2009. The note was extended until November 24, 2010 and included an increase in the interest rate to 8%.
The Company owned $1,150,000 (23%) of Investors LLC until May 29, 2009 when it sold 1/2 of its share for $575,000. Under the original arrangement, the Company received 2% of the 6% interest as a management fee ($25,000 quarterly) and 4% interest on its investment ($11,500 quarterly). Under the extended note and revised operating agreement, the Company receives a management fee of $6,625 quarterly and interest income of $11,500 quarterly.
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On January 24, 2011, Investors LLC and its three partners combined to form HOA Holdings, LLC ("HOA LLC") and completed the acquisition of Hooters of America, Inc. ("HOA") and Texas Wings, Inc. ("TW"). Together HOA LLC has created an operating company with 161 company-owned locations across sixteen states, or nearly half of all domestic Hooters restaurants and over one-third of the locations worldwide.
Investors, LLC had a note receivable in the amount of $5,000,000 from HOA that was repaid at closing. Investors LLC then invested $3,550,000 in HOA LLC (approximately 3.1%) ($500,000 of which is the Company's share). One of the investors in Investors LLC that owned a $1,750,000 share is a direct investor in HOA LLC and will now carry its ownership in HOA LLC directly. The Company now owns approximately 14% of Investors LLC.
Based on the current status of this investment, the Company does not consider the investment to be impaired.
EE Investors, LLC - On January 26, 2006, we acquired an investment in EE Investors, LLC with cash in the amount of $250,000. We acquired 1,205 units (3.378%) in EE Investors, LLC, whose sole asset is 40% of Edison Nation, LLC (formerly Bouncing Brain Productions, LLC). Edison Nation was formed to provide equity capital for new inventions and help bring them to market. The initial business plan included developing the products and working with manufacturers and marketing organizations to sell the products. This has evolved into a less hands-on program which involves selling products with patents to other larger companies and retaining royalties. Edison Nation has now reached cash flow break-even, and in addition has been retained by a number of companies for which they do product searches to supplement its business. Edison Nation plans to repay the majority of its debt in 2012 and expects to subsequently begin making distributions to its owners. Based on the current status of this investment, the Company does not consider the investment to be impaired.
Chanticleer Investors II - The Company paid $16,598 in professional services to form this partnership. Chanticleer Advisors, LLC acts as the managing general partner and receives a management fee based on a percentage of profits.
5. | PROPERTY AND EQUIPMENT |
Property and equipment consists of the following at December 31, 2011 and 2010:
2011 | 2010 | |||||||
Office and computer equipment | $ | 32,179 | $ | 29,371 | ||||
Furniture and fixtures | 67,794 | 47,686 | ||||||
Construction in progress | 296,660 | - | ||||||
Restaurant furnishings and equipment | 2,246,089 | - | ||||||
2,642,722 | 77,057 | |||||||
Accumulated depreciation | (133,899 | ) | (51,494 | ) | ||||
$ | 2,508,823 | $ | 25,563 |
Construction in progress consists of costs incurred as of December 31, 2011 for our Emperor’s Palace location in Johannesburg, South Africa, which opened in February 2012. Restaurant furnishings and equipment consists of leasehold improvements, and bar, kitchen and restaurant equipment used in our three locations opened as of December 31, 2011.
6. | INTANGIBLE ASSETS, NET |
Intangible assets, net at December 31, 2011 consists of franchise fees for the Company’s South African restaurants of $475,376, less amortization of $5,212. The Company is amortizing these costs from the opening of each restaurant for the 20 year term of the franchise agreement with HOA.
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7. | LONG-TERM DEBT AND NOTES PAYABLE |
Long-term debt and notes payable are summarized as follows.
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
$2,000,000 line of credit with a bank, interest at Wall Street Journal Prime +0.5% (minimum of 4.5%) payable monthly; due August 20, 2012; collateralized by a certificate of deposit owned by a shareholder; collateralized by substantially all of the Company's assets and guaranteed by Mr. Pruitt | $ | 1,165,000 | $ | - | ||||
Note payable to a bank due in monthly installments of $1,739 including interest at Wall Street Journal Prime + 1% (minimum of 5.5%); remaining balance due August 10, 2013; collateralized by substantially all of the Company's assets and guaranteed by Mr. Pruitt | 242,964 | 250,000 | ||||||
18% convertible notes payable; interest payable quarterly; due on the six-month anniversary of the date issued; convertible under the same terms as the subsequent capital raised in connection with a public offering of the Company's securities (currently approximately 544,000 shares) | 1,625,000 | - | ||||||
10% convertible notes payable; interest payable quarterly; due January 4, 2012; converted into common stock at the rate of $1.75 per share on March 30, 2011 | - | 686,500 | ||||||
3,032,964 | 936,500 | |||||||
Notes payable and current portion of long-term debt | 2,796,855 | 250,000 | ||||||
Long-term debt, less current portion | $ | 236,109 | $ | 686,500 |
The Company pays the shareholder whose certificate of deposit is used as collateral on the $2,000,000 line of credit 1% of the outstanding balance on the line of credit monthly. In addition, the Company issued warrants to the shareholder, as described in Note 9.
During the three months ended March 31, 2011, the Company issued convertible notes payable with a total principal balance of $25,000 in exchange for an amount due a related party of $25,000. The convertible notes included interest at 10% per annum, which was payable quarterly beginning on April 1, 2010 until maturity on January 4, 2012. The convertible notes were convertible into our common stock at the rate of $1.75 per share. Convertible notes with a face value of $711,500 and accrued interest of $19,588 were converted into 412,286 shares of our common stock on March 30, 2011.
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8. | INCOME TAXES |
Income taxes charged to income were:
2011 | 2010 | |||||||
Foreign - current | $ | 14,608 | $ | - |
The amounts of U.S. and foreign income before income taxes, with a reconciliation of tax at the federal statutory rate (34%) with the provision for income taxes were:
2011 | 2010 | |||||||
Loss (earnings) before income taxes: | ||||||||
United States | $ | 965,303 | $ | 1,069,902 | ||||
Foreign | 123,479 | (58,337 | ) | |||||
$ | 1,088,782 | $ | 1,011,565 | |||||
Computed "expected" income tax expense (benefit) | $ | (370,200 | ) | $ | (343,900 | ) | ||
Foreign taxes below federal statutory rate | 12,300 | - | ||||||
State income taxes, net of federal benefit | (43,600 | ) | (40,500 | ) | ||||
Travel, entertainment and other | 4,008 | 10,100 | ||||||
Valuation allowance | 412,100 | 374,300 | ||||||
Income tax expense (benefit) | $ | 14,608 | $ | - |
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Major components of deferred tax assets and liabilities at December 31, 2011 and 2010 were:
2011 | 2010 | |||||||
Net operating loss carryforwards | $ | 1,688,500 | $ | 1,381,600 | ||||
Capital loss carryforwards | 630,100 | 478,300 | ||||||
Investments | (86,700 | ) | 8,900 | |||||
Foreign operations | 49,000 | - | ||||||
Total deferred tax assets | 2,280,900 | 1,868,800 | ||||||
Valuation allowance | (2,280,900 | ) | (1,868,800 | ) | ||||
Net deferred tax assets | $ | - | $ | - |
The Company has a net operating loss carryforward of approximately $4,443,000 which will expire at various dates beginning in 2024 through 2031, if not utilized. The Company has a capital loss carryforward of $1,658,000 which expires between 2015 and0 2016 if not utilized. The tax basis of investments is less than their book cost by approximately $228,000.
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9. | Stockholders’ Equity |
The Company has 200,000,000 shares of its $0.0001 par value common stock authorized and 3,012,121 and 2,571,918 shares issued and 2,498,891 and 2,048,688 shares outstanding at December 31, 2011 and 2010, respectively. There are no options outstanding.
Effective March 23, 2011, the Company's common stock was forward split, 2 shares for each share issued, pursuant to written consent by a majority of the Company's shareholders. All share references have been adjusted as if the split occurred prior to all periods presented.
2011 Transactions
On March 30, 2011, the Company issued 412,286 shares of its common stock in exchange for convertible notes payable with a balance of $711,500 and accrued interest of $19,588.
On July 28, 2011, the Company issued 10,000 shares of its common stock in exchange for consulting services valued at $21,500.
On September 23, 2011, the Company issued 15,000 shares of its common stock in exchange for consulting services to be performed valued at $44,850.
On September 23, 2011, the Company issued 2,750 shares of its common stock in exchange for services performed and valued at $8,223.
On October 19, 2011, the Company issued 167 shares of its common stock in exchange for cash in the amount of $500.
2010 Transactions
During the year ended December 31, 2010, the Company issued: 15,572 shares of its common stock valued at $25,000 to two consultants for consulting services; 33,594 shares of its common stock valued at $58,790 for amounts due a related party; and issued 10,000 shares for $17,500 in accounts payable. Effective December 31, 2010, the Company issued 20,000 shares of its common stock to its outside directors for directors fees valued at $42,500.
Warrants
On January 6, 2011, the Company filed a Form S-1 Registration Statement under the Securities Act of 1933. The Registration Statement was declared effective on July 14, 2011 and registers one Class A Warrant and one Class B Warrant for each common share of the Company issued and outstanding. The warrants have a subscription price of $0.04 which entitles our shareholders to acquire one Class A Warrant which would entitle the holder to acquire one share of our common stock for $2.75 and one Class B Warrant which would entitle the holder to acquire one share of our common stock for $3.50. The warrants have a five year life. At December 31, 2011, the Company had issued 2,194,509 Class A and Class B warrants. Proceeds from the offering are summarized as follows.
Proceeds from sales of Class A and Class B warrants | $ | 87,780 | ||
Legal and professional fees incurred for offering | (67,172 | ) | ||
$ | 20,608 |
On August 10, 2011, the Company issued two warrants to the shareholder who collateralized the Company's $2,000,000 line of credit discussed in Note 7. The Class A Warrant is for 200,000 shares exercisable at $2.75 per share for 10 years and the Class B Warrant is for 250,000 shares exercisable at $3.50 per share for 10 years. The warrants were valued using Black-Scholes at $906,351. This amount will be amortized to interest expense over the ten year life of the warrants. At December 31, 2011, additional paid-in capital and interest expense include $35,247 in amortization.
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On November 1, 2011, the Company entered into an investor relations consulting agreement. In addition to cash compensation, the consultant is entitled to receive warrants for certain performance goals. These warrants will be accounted for when the goals are accomplished.
10. | RELATED PARTY TRANSACTIONS |
Due to related parties
The Company has received non-interest bearing loans and advances from related parties. The amounts owed by the Company as of December 31, 2011 and 2010 are as follows:
2011 | 2010 | |||||||
Hoot SA III, LLC | $ | - | $ | 70,000 | ||||
Hoot SA I, LLC | 15,409 | - | ||||||
Chanticleer Foundation, Inc. | 10,750 | - | ||||||
Chanticleer Investors, LLC | 4,045 | - | ||||||
Avenel Financial Group | - | 46,349 | ||||||
$ | 30,204 | $ | 116,349 |
Due from related parties
The Company has earned income from and made advances to related parties. The amounts owed to the Company at December 31, 2011 and 2010 is as follows:
2011 | 2010 | |||||||
Chanticleer Investors II, LLC | $ | 1,485 | $ | 46,547 | ||||
Chanticleer Investors, LLC | - | 6,035 | ||||||
Chanticleer Dividend Fund, Inc. | 74,281 | 30,937 | ||||||
Hoot SA II, LLC | 825 | - | ||||||
Other | - | 750 | ||||||
$ | 76,591 | $ | 84,269 |
Management income from affiliates
The Company had management income from its affiliates in 2011 and 2010, as follows:
2011 | 2010 | |||||||
Chanticleer Investors, LLC | $ | - | $ | 26,500 | ||||
Chanticleer Investors II, LLC | 1,485 | 57,718 | ||||||
Efftec International, Inc. | - | 22,500 | ||||||
North American Energy Resources, Inc. | 1,750 | 8,750 | ||||||
$ | 3,235 | $ | 115,468 |
67 |
Chanticleer Investors LLC
Investors LLC collected its note receivable and reinvested $3,550,000 in HOA LLC (See Note 4). The Company received $26,500 in management income from Investors LLC in 2010, before the investment in HOA LLC was completed. There was no management income from Investors LLC in 2011.
Chanticleer Investors II LLC
The Company manages Investors II and earned management income of $1,485 and $57,718 ($46,547 was collected March 15, 2011 and $11,171 was collected in 2010) in 2011 and 2010, respectively.
Chanticleer Dividend Fund, Inc. ("CDF")
On November 10, 2010 the Company formed CDF under the general corporation laws of the State of Maryland. CDF filed a registration statement under Form N-2 to register as a non-diversified, closed-end investment company in January 2011. The Company, through Advisors, will have a role in management of CDF when its registration statement becomes effective.
Hoot SA, LLC; Hoot SA II, LLC; and Hoot SA III, LLC
The Hoot partnerships were formed to help finance the first three Hooters restaurants in South Africa.
Efftec International, Inc. ("Efftec")
The Company's CEO became CEO and the sole director of Efftec during 2010 and the Company received 150,000 common shares and an option to acquire 150,000 shares for management services. The shares and option were initially valued at $22,500, based on the trading price of Efftec at the time.
North American Energy Resources, Inc. ("NAEY")
The Company's CEO became CEO and a director of NAEY during 2010 and the Company received 150,000 common shares for management services. The shares were valued at $10,500, based on the trading price of NAEY at the time. The Company's CEO resigned as CEO of NAEY in December 2010 and remains a director. During June 2011, the Company’s CEO contributed 1,790,440 shares of NAEY to the Company which was valued at $125,331 based on the trading price at the time. Mr. Pruitt did not receive additional compensation as a result of the transfer.
Chanticleer Foundation, Inc.
Chanticleer Foundation, Inc. is a Donor-Advised Fund whose governing body consists of Mr. Pruitt, a director of the Company and an employee of the Company. The Foundation loaned the Company $10,750 during 2011.
Avenel Financial Group, Inc.
Avenel Financial Group, Inc. is a company owned by Mr. Pruitt. Advances previously made to the Company were repaid during 2011.
Other
The Company acquired trading securities from a related party for $26,334 which were sold for $32,917 in 2010.
68 |
11. | SEGMENTS OF BUSINESS |
The Company is organized into two segments as of the end of 2011 and 2010.
Management and consulting services ("Management")
The Company provides management and consulting services for small companies which are generally seeking to become publicly traded. The Company also provides management and investment services for Investors LLC, Investors II and other unaffiliated companies.
Operation of restaurants ("Restaurants")
At December 31, 2011, the Company has majority ownership of four restaurants and a management company in South Africa. Three of the restaurants and the management company were operating at December 31, 2011 and the fourth restaurant opened in February 2012. Majority ownership was acquired effective September 30, 2011 and these operations are consolidated with the Company’s other operations since that date. At December 31, 2011, the Company has 49% ownership of two restaurants in Australia, one of which opened in January 2012 and the second is under construction and expected to open in the second quarter of 2012. The operations in Australia will be accounted for using the equity method. The Company has also begun activity in Hungary, Brazil and Europe, but has not finalized any arrangement.
Financial information regarding the Company's segments is as follows for 2011 and 2010.
Year ended December 31, 2011
Management | Restaurants | Total | ||||||||||
Revenues | $ | 496,402 | $ | 967,418 | $ | 1,463,820 | ||||||
Interest expense | $ | 118,995 | $ | 61,830 | $ | 180,825 | ||||||
Depreciation and amortization | $ | 8,013 | $ | 79,604 | $ | 87,617 | ||||||
Profit (loss) | $ | (1,004,157 | ) | $ | (104,659 | ) | $ | (1,108,816 | ) | |||
Investments and other | - | |||||||||||
Non-controlling interest | 5,426 | |||||||||||
$ | (1,103,390 | ) | ||||||||||
Assets | $ | 471,701 | $ | 3,948,026 | $ | 4,419,727 | ||||||
Investments | 1,084,951 | |||||||||||
$ | 5,504,678 | |||||||||||
Liabilities | $ | 3,522,775 | $ | 340,640 | $ | 3,863,415 | ||||||
Expenditures for non-current assets | $ | 2,807 | $ | 385,302 | $ | 388,109 |
69 |
Year ended December 31, 2010
Management | Restaurants | Total | ||||||||||
Revenues | $ | 136,301 | $ | - | $ | 136,301 | ||||||
Interest expense | $ | 140,016 | $ | - | $ | 140,016 | ||||||
Depreciation and amortization | $ | 11,079 | $ | - | $ | 11,079 | ||||||
Profit (loss) | $ | (949,904 | ) | $ | 58,337 | $ | (891,567 | ) | ||||
Investments and other | (138,351 | ) | ||||||||||
Non-controlling interest | 18,353 | |||||||||||
$ | (1,011,565 | ) | ||||||||||
Assets | $ | 208,261 | $ | 87,200 | $ | 295,461 | ||||||
Investments | 1,119,098 | |||||||||||
$ | 1,414,559 | |||||||||||
Liabilities | $ | 1,332,134 | $ | - | $ | 1,332,134 | ||||||
Expenditures for non-current assets | $ | 4,517 | $ | - | $ | 4,517 |
The following is revenues and long-lived assets by geographic area as of and for the years ended December 31:
Revenue: | 2011 | 2010 | ||||||
United States | $ | 496,402 | $ | 136,301 | ||||
South Africa | 967,418 | - | ||||||
$ | 1,463,820 | $ | 136,301 |
Long-lived assets, end of year: | 2011 | 2010 | ||||||
United States | $ | 1,109,288 | $ | 1,168,641 | ||||
South Africa | 3,112,783 | 87,200 | ||||||
Australia | 672,175 | - | ||||||
Brazil | 101 | - | ||||||
$ | 4,894,347 | $ | 1,255,841 |
The Company used multiple foreign currency exchange rates during the periods presented. For South Africa, for the Statements of Operations we used average rates for the period ranging from 7.94-8.17 Rands per USD, and for the Balance Sheet current assets and liabilities were at 8.12 and non-current assets and liabilities ranging from 6.93-8.07. For Australia, for the Statement of Operations we used an average rate of 1.02 USD per AUD and for the balance sheet we used 1.06 for current assets and liabilities, and 1.02 for non-current assets and liabilities.
12. | COMMITMENTS AND CONTINGENCIES |
Effective August 1, 2010, the Company extended its office lease agreement for its office for a term of one year with monthly lease payments of $2,100. Since August 1, 2011, the office lease continues at the same rate on a month-to-month basis.
70 |
The Company leases the land and buildings for its four restaurants in South Africa through its subsidiaries. The leases are for five year terms and include options to extend the terms. We lease our restaurant facilities under “triple net” leases that require us to pay minimum rent, real estate taxes, maintenance costs and insurance premiums and, in some instances, percentage rent based on sales in excess of specified amounts. Rent obligations for our four restaurants are presented below:
2012 | $ | 526,787 | ||
2013 | 578,252 | |||
2014 | 634,891 | |||
2015 | 697,223 | |||
thereafter | 765,824 | |||
Totals | $ | 3,202,977 |
Rent expense for the years ended December 31, 2011 and December 31, 2010 was $126,909 and $25,200, respectively. Rent expense for the year ended December 31, 2011 for the South African restaurants was $97,691, and is included in the “Restaurant operating expenses” of the Consolidated Statement of Operations. Rent expense for the year ended December 31, 2011 for the management segment was $29,218, and is included in the “General and administrative expense” of the Consolidated Statement of Operations. Rent expense for the year ended December 31, 2010 was all for the management segment.
13. | DISCLOSURES ABOUT FAIR VALUE |
Assets and liabilities measured at fair value on a recurring basis are summarized in the following tables according to FASB ASC 820 pricing levels.
Fair Value Measurement Using | ||||||||||||||||
Quoted prices | ||||||||||||||||
in active | Significant | |||||||||||||||
markets of | other | Significant | ||||||||||||||
identical | observable | Unobservable | ||||||||||||||
Recorded | assets | inputs | Inputs | |||||||||||||
value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
December 31, 2011 | ||||||||||||||||
Assets: | ||||||||||||||||
Available-for-sale securities | $ | 318,353 | $ | 316,853 | $ | 1,500 | $ | - | ||||||||
December 31, 2010 | ||||||||||||||||
Assets: | ||||||||||||||||
Available-for-sale securities | $ | 352,500 | $ | 101,500 | $ | 251,000 | $ | - |
At December 31, 2011 and 2010, the Company's available-for-sale equity securities were valued using Level 1 and Level 2 inputs as summarized above. Level 1 inputs are based on unadjusted prices for identical assets in active markets that the Company can access. Level 2 inputs are based on quoted prices for similar assets other than quoted prices in Level 1, quoted prices in markets that are not yet active, or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets.
The Company does not have any investments that are measured on a recurring basis using Level 3 inputs.
Certain assets are not carried at fair value on a recurring basis, including investments accounted for under the equity and cost methods. Accordingly, such investments are only included in the fair value hierarchy disclosure when the investment is subject to re-measurement at fair value after initial recognition and the resulting re-measurement is reflected in the consolidated financial statements.
71 |
In 2010, the Company considered a cost basis investment to be impaired and recognized an impairment loss of $250,000 in the consolidated statement of operations. This impairment was determined using Level 3 inputs to determine the estimated fair value, which was determined to be less than the recorded amounts.
See Note 4 for further details of the Company's investments.
14. | SUBSEQUENT EVENTS |
CONVERTIBLE NOTES PAYABLE
On January 5, 2012, March 15, 2012 and March 29, 2012, the Company received an additional $100,000, $135,000 and $865,000, respectively, of convertible debt, bringing the total to $2,725,000.
EQUITY RAISE
On February 22, 2012, the Company filed a Form S-1 Registration Statement under the Securities Act of 1933. The Registration Statement, when effective, would seek to raise $15 million with the issuance of 5 million units consisting of Common Stock shares at $3.00 per share and five year warrants at $3.25 per share.
NEW HOOTERS DEVELOPMENT RIGHTS
On March 15, 2012, the Company announced it had secured exclusive rights to operate Hooters restaurants in 3 of the most populated states of Brazil. The Company has partnered with the Nash Group, an established restaurant operating company, forming a joint venture company Chanticleer & Nash Brasil Foods Participações Ltda. ("CNBF"), where Chanticleer will own 60% of the operating entity. The group expects to open its first restaurant in the 3rd quarter 2012. The franchise agreement, signed with CNBF and Hooters of America on March 13, 2012, provides CNBF exclusive rights to open and operate Hooters restaurants in 3 states, including Rio de Janeiro, Minas Gerais and Espirito Santo, over the next 20 years.
The Company’s CEO, Michael Pruitt, converted $25,000 of debt to shares in the Company. The conversion was done on the same terms as other debtholders on March 30, 2011, at a price of $1.75 per share, resulting in common stock issuance of 14,286 shares.
72 |
ITEM 16.
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
|
Exhibit
Number
|
Description
|
|
1.1
|
Form
of Underwriting Agreement (1)
|
|
3.1(a)
|
Certificate
of Incorporation (2)
|
|
3.1(b)
|
Certificate
of Merger, filed May 2, 2005 (3)
|
|
3.1(c)
|
Certificate
of Amendment, filed July 16, 2008
|
|
3.1(d)
|
Certificate
of Amendment, filed March 18, 2011 (4)
|
|
3.2
|
Bylaws
(2)
|
|
4.1
|
Form
of Common Stock Certificate (5)
|
|
4.2
|
Form
of Unit Certificate (1)
|
|
4.3
|
Form
of Warrant Certificate (1)
|
|
4.4
|
Form
of Warrant Agreement (1)
|
|
4.5
|
Form
of Representative’s Warrant (1)
|
|
5
|
Legal
opinion of Counsel (1)
|
|
10.1
|
Revolving
Credit Facility dated August 10, 2011 between the Company and Paragon Commercial Bank (5)
|
|
10.2
|
Form
of Franchise Agreement between the Company and Hooters of America, LLC (5)
|
|
21
|
Subsidiaries
|
|
23.1
|
Consent
of Roetzel & Andress LPA (1)
|
|
23.2
|
Consent
of Creason & Associates, P.L.L.C.
|
(1)
|
To be filed via amendment to this Form S-1.
|
(2)
|
Incorporated by reference to the Registration Statement on Form
10-SB filed on February 15, 2000.
|
(3)
|
Incorporated by reference from Exhibit 2.1 to the Quarterly Report
on Form 10-Q, filed August 15, 2011.
|
(4)
|
Incorporated by reference from Exhibit 3.1 to the Current Report
on Form 8-K, filed on March 18, 2011.
|
|
(5) | Incorporated by reference to the Registration Statement on Form
S-1 filed on December 2, 2011. |
ITEM 17.
|
UNDERTAKINGS
|
73 |
74 |
75 |
CHANTICLEER
HOLDINGS, INC.
|
||
By:
|
/s/
Michael D. Pruitt
|
|
Michael
D. Pruitt
|
||
Chairman,
Chief Executive Officer & Chief Financial Officer
|
SIGNATURES
|
TITLE
|
DATE
|
||
/s /
Michael D. Pruitt
|
Chairman
of the Board of Directors,
CEO,
CFO and Director
|
April
12, 2012
|
||
Michael
D. Pruitt
|
(Principal
Executive Officer and Principal Financial Officer)
|
|||
/s/
Michael Carroll
|
Director
|
April 12, 2012 | ||
Michael
Carroll
|
||||
/s/
Brian Corbman
|
Director
|
April 12, 2012 | ||
Brian
Corbman
|
||||
/s/
Paul I. Moskowitz
|
Director
|
April 12, 2012 | ||
Paul
I. Moskowitz
|
||||
/s/
Keith Johnson
|
Director
|
April 12, 2012 | ||
Keith Johnson
|
76 |
Exhibit
Number
|
Description
|
|
1.1
|
Form
of Underwriting Agreement (1)
|
|
3.1(a)
|
Certificate
of Incorporation (2)
|
|
3.1(b)
|
Certificate
of Merger, filed May 2, 2005 (3)
|
|
3.1(c)
|
Certificate
of Amendment, filed July 16, 2008
|
|
3.1(d)
|
Certificate
of Amendment, filed March 18, 2011 (4)
|
|
3.2
|
Bylaws
(2)
|
|
4.1
|
Form
of Common Stock Certificate (5)
|
|
4.2
|
Form
of Unit Certificate (1)
|
|
4.3
|
Form
of Warrant Certificate (1)
|
|
4.4
|
Form
of Warrant Agreement (1)
|
|
4.5
|
Form
of Representative’s Warrant (1)
|
|
5
|
Legal
opinion of Counsel (1)
|
|
10.1
|
Credit
Facility dated August 10, 2011 between the Company and Paragon Commercial Bank (5)
|
|
10.2
|
Form
of Franchise Agreement between the Company and Hooters of America, LLC (5)
|
|
21
|
Subsidiaries
|
|
23.1
|
Consent
of Roetzel & Andress LPA (1)
|
|
23.2
|
Consent
of Creason & Associates, P.L.L.C.
|
(1)
|
To be filed via amendment to this Form S-1.
|
|
(2)
|
Incorporated by reference to the Registration Statement on Form
10-SB filed on February 15, 2000.
|
(3)
|
Incorporated by reference from Exhibit 2.1 to the Quarterly Report
on Form 10-Q, filed August 15, 2011.
|
(4)
|
Incorporated by reference from Exhibit 3.1 to the Current Report
on Form 8-K, filed on March 18, 2011.
|
|
(5) | Incorporated by reference to the Registration Statement on Form S-1 filed on December 2, 2011. |
77 |