Quarterly report pursuant to Section 13 or 15(d)

ACQUISITIONS

v2.4.0.8
ACQUISITIONS
 9 Months Ended
Sep. 30, 2014
Business Combinations [Abstract]  
Business Combination Disclosure [Text Block]
3.
ACQUISITIONS
 
The Company completed the following acquisitions:
 
·
American Roadside Burgers, effective September 30, 2013;
 
·
West End Wings, LTD (Hooters Nottingham), effective November 7, 2013;
 
·
56% ownership interest in Just Fresh, effective December 10, 2013;
 
·
Tacoma Wings, LLC, Jantzen Beach Wings, LLC and Oregon Owl’s Nest, LLC, effective January 31, 2014; and
 
·
Dallas Spoon, LLC and Dallas Spoon Beverage, LLC, effective January 31, 2014.
 
·
Hoot Campbelltown Pty. Ltd., Hoot Surfers Paradise Pty. Ltd. and Hoot Townsville Pty. Ltd., step acquisition from 49% to 60% effective April 1, 2014.
 
·
60% ownership interest in Hoot Parramatta Pty Ltd, Hoot Australia Pty Ltd, Hoot Penrith Pty Ltd, and TMIX Management Australia Pty Ltd., effective July 1, 2014.
 
·
The Burger Company, LLC, effective September 9, 2014.
 
In connection with the acquisition of the restaurants, the Company analyzed each acquisition to determine the purchase price allocation in consideration of all identifiable intangibles.  Based on our evaluation, there were no marketing related assets, customer related intangibles or contract based arrangements for which the purchase price would be required to be allocated.  For marketing related assets, the Company did not acquire any trademarks or trade names (for Hooters acquisitions) or enter into any non-compete agreements. The Company is however required to pay royalties based on future sales. For acquisitions other than Hooters restaurants, the value of any trademark/tradename, was calculated using a relief of royalty method considering future franchise opportunities, and the value was determined to be de minimus. With respect to customer related intangibles, the Company did not acquire any customer lists or enter into any customer contractual arrangements nor did the Company enter into any licensing or royalty arrangements requiring a further allocation of the purchase price. The premium paid for the businesses represents the economic value which is not captured by other assets such as the reputation of the businesses, the value of its human capital, its future growth potential and its professional management. The acquisition of these businesses will help the Company expand its domestic operations and presence.
 
American Roadside Burgers (“ARB”)
 
On September 30, 2013, the Company entered into an agreement and plan of merger with ARB, whereby the Company acquired 100% of the outstanding shares of ARB. In exchange, the Company issued 740,000 shares of its common stock and warrants to acquire 740,000 shares of common stock for $5.00 per share. The warrants are exercisable beginning October 1, 2014 until September 30, 2018. In connection with this acquisition and the related management team, the Company acquired a strategic opportunity to participate in a high-growth space with an already established brand. The Company plans to continue to expand the American Roadside chain as future opportunities are presented, which has the potential to bring revenue and profits to the Company. During March and April 2014, the Company began doing business as American Burger Co. at the two Charlotte ARB locations.
 
The shares issued in connection with the acquisition were valued based on the Company’s closing stock market price on September 30, 2013, the date the acquisition was consummated. For the fair value of the warrants issued, we used the following inputs in the application of the Black-Scholes Option Pricing model:
 
·
Current equity value: Our common stock, ticker HOTR on NASDAQ closing price on September 30, 2013, the valuation date, was $4.88.
 
·
Strike price of the warrants: Per the warrant agreement, the strike price was $5.00.
 
·
Time to maturity: The term of the warrants was calculated based on the time until the expiration date, which per the warrant agreement is five years.
 
·
Volatility of the underlying asset: The volatility utilized in the analysis of the warrants was 55.0%, based on our analysis of industry peers.
 
·
Risk-free rate of interest of: The risk-free interest rate was based on the rate of treasury securities with a similar term as the warrants, and was 1.39%.
 
The Black-Scholes option valuation model is used to estimate the fair value of the warrants or options granted. The model includes subjective input assumptions that can materially affect the fair value estimates. The Company determined the fair value of the Binomial Lattice Model and the Black-Scholes Valuation Model to be materially the same. The expected stock price volatility for the Company’s warrants was determined by the historical volatilities for industry peers and used an average of those volatilities.  The risk free interest rate was obtained from U.S. Treasury rates for the applicable periods. The contractual terms of the agreement does not provide for and the Company does not expect to declare dividends in the near future.
 
There is inherent uncertainty in our forecasts and projections, and if we had made different assumptions and estimates than those described previously, the determined fair value of our common stock as of each of the valuation dates could have been materially different.
 
On September 9, 2014, the Company purchased 100% of the net assets of The Burger Company located in Charlotte, North Carolina, a similar concept to our ARB restaurants, for a purchase price of $550,000, which consisted of $250,000 in cash and $300,000 in the Company’s common stock.
 
West End Wings (“WEW” or “Hooters Nottingham”)
 
On November 6, 2013, the Company closed the purchase of West End Wings LTD, which is the owner of the Nottingham, England Hooters restaurant location. The purchase price paid by the Company for WEW was $3,150,000.
 
The acquisition was accounted for using the purchase method of accounting in accordance with ASC 805 “Business Combinations”. The condensed consolidated statements of operations include the results of the Hooters Nottingham operations beginning November 7, 2013. The assets acquired and the liabilities assumed were recorded at November 6, 2013 at estimated fair values as determined by the Company’s management.
 
In connection with the acquisition of West End Wings, the Company analyzed the acquisition to determine the purchase price allocation in consideration of all identifiable intangibles.  Based on our evaluation, there were no marketing related assets or customer related intangibles for which the purchase price would be required to be allocated.  The Company is however required to pay royalties based on future sales. For marketing-related assets, the Company did not acquire the rights to any trademarks or trade names or enter into any non-compete agreements. The value of any franchise rights was determined to be de minimis given the franchise agreement provides no significant territorial exclusiveness and given the nominal value of any required franchise fees. The premium paid for the business represents the economic value which is not captured by other assets such as the reputation of the business, the value of its human capital, its future growth potential and its professional management. The acquisition of this business will help the Company expand its international operations.
 
Just Fresh (“JF”)
 
On November 5, 2013, the Company entered into a Subscription Agreement with JFR and JFFS, for the purchase of a 51% ownership interest in each entity, for a total purchase price of $560,000. The transaction closed on December 10, 2013 with the execution of an Assignment, Assumption, Joinder, and Amendment Agreement with both JFR and JFFS. On December 11, 2013, the Company purchased an additional 5% interest in both JFR and JFFS from an original interest holder for the total purchase price of $30,000, increasing the Company’s ownership interest in JFR and JFFS to a total of 56%.
 
Just Fresh currently operates six restaurants in the Charlotte, North Carolina area that offer fresh-squeezed juices, gourmet coffee, fresh-baked goods and premium-quality, made-to-order sandwiches, salads and soups.
 
Tacoma Wings, Jantzen Beach Wings and Oregon Owl’s Nest (“Hooters Pacific NW”)
 
On January 31, 2014, pursuant to an Agreement and Plan of Merger executed on December 31, 2013, the Company completed the acquisition of all of the outstanding shares of each of Tacoma Wings, LLC, Jantzen Beach Wings, LLC and Oregon Owl’s Nest, LLC, which owned and operated the Hooters restaurant locations in Tacoma, Washington and Portland, Oregon, respectively. These entities were purchased from Hooters of Washington, LLC and Hooters of Oregon Partners, LLC (collectively, the “Hooters Sellers”) for a total purchase price of 680,272 Company units, with each unit consisting of one share of the Company’s common stock and one five-year warrant to purchase a share of the Company’s common stock. Half of the warrants are exercisable at $5.50 and half of the warrants are exercisable at $7.00. As part of this transaction, the Hooters Sellers were granted registration rights with respect to the Company’s common stock issued and underlying the warrants, and franchise rights and leasehold rights to the locations were transferred to the Company.
 
Dallas Spoon and Dallas Spoon Beverage (“Spoon”)
 
Also on January 31, 2014, pursuant to an Agreement and Plan of Merger executed on January 14, 2014, the Company completed the acquisition of all of the outstanding shares of Dallas Spoon, LLC and Dallas Spoon Beverage, LLC from Express Restaurant Holdings, LLC and Express Restaurant Holdings Beverage, LLC. The purchase price of 195,000 Company units was paid to Express Working Capital, LLC (“EWC”); the units consist of one share of the Company’s common stock and one five-year warrant to purchase a share of the Company’s common stock. Half of the warrants are exercisable at $5.50 and half of the warrants are exercisable at $7.00. As part of this transaction, EWC was granted registration rights with respect to the Company’s common stock issued and underlying the warrants, and all leaseholds and other rights were transferred to the Company.
 
For the acquisitions of Hooters Pacific NW and Spoon, the fair value of the shares was the closing stock market price on January 31, 2014, the date the deal acquisition was consummated. The fair value of the warrants issued was determined using the Black-Scholes model. The model includes subjective input assumptions that can materially affect the fair value estimates. The Company determined the fair value of the Binomial Lattice Model and the Black-Scholes Valuation Model to be materially the same. The expected stock price volatility for the Company’s warrants was determined by the historical volatilities for industry peers and used an average of those volatilities.  The risk free interest rate was obtained from U.S. Treasury rates for the applicable periods. The contractual terms of the agreement does not provide for and the Company does not expect to declare dividends in the near future.
 
The assumptions were as follows:
 
Acquisitions of Hooters Pacific NW and Spoon:
 
Assumptions:
 
 
 
Risk-free interest rate
 
1.49
%
Expected life
 
5 years
 
Expected volatility
 
50.0
%
Dividends
 
0
%
 
Campbelltown, Penrith, Parramatta, Surfers Paradise, and Townsville (“Hooters Australia”)
 
On April 1, 2014, the Company completed the step acquisition of Hooters Australia, increasing the Company’s ownership percentage from 49% to 60%. The location in Campbelltown, a suburb of Sydney, opened in January 2012; the location in Surfers Paradise, an iconic coastal tourist destination, opened on July 14, 2014; and we expect the location in Townsville, in the northeast part of Australia, to open in late 2014. On July 1, 2014, the Company acquired 60% of the two other Hooters restaurants in Australia, in Penrith and Parramatta, suburbs of Sydney, as well as a 60% interest in the related Australian management company. These entities own, operate, and manage Australian Hooters restaurants and gaming operations. The purchase price was the assumption of $5 million in debt. Also as part of the transaction, the Company will receive 100% of all gaming revenue until the debt is repaid, and thereafter the Company will receive 60% of such revenue for the remainder of the lifetime of the gaming machines.
 
The acquisitions were accounted for using the purchase method of accounting in accordance with ASC 805 “Business Combinations” and, accordingly, the condensed consolidated statements of operations include the results of these operations from the dates of acquisition. The assets acquired and the liabilities assumed were recorded at estimated fair values based on information currently available and based on certain assumptions as to future operations as follows:
 
 
 
2014 Acquisitions
 
 
 
 
 
Hooters
 
 
 
Hooters Australia
 
The
 
 
 
 
 
Pacific NW
 
Spoon
 
April 1, 2014
 
July 1, 2014
 
Burger Co.
 
Total
 
Consideration paid:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
 
$
2,891,156
 
$
828,750
 
$
-
 
$
-
 
$
300,000
 
$
4,019,906
 
Warrants
 
 
978,000
 
 
280,400
 
 
-
 
 
515,600
 
 
-
 
 
1,774,000
 
Assumption of debt
 
 
-
 
 
-
 
 
-
 
 
5,123,333
 
 
-
 
 
5,123,333
 
Cash
 
 
-
 
 
-
 
 
100,000
 
 
-
 
 
250,000
 
 
350,000
 
Total consideration paid
 
 
3,869,156
 
 
1,109,150
 
 
100,000
 
 
5,638,933
 
 
550,000
 
 
11,267,239
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets, excluding cash
 
 
112,078
 
 
89,817
 
 
377,296
 
 
47,777
 
 
9,926
 
 
636,894
 
Property and equipment
 
 
2,731,031
 
 
391,462
 
 
2,934,307
 
 
1,603,557
 
 
284,795
 
 
7,945,152
 
Goodwill
 
 
1,951,909
 
 
698,583
 
 
-
 
 
9,002,738
 
 
256,379
 
 
11,909,609
 
Trademark/trade name/franchise fee
 
 
60,937
 
 
-
 
 
277,867
 
 
220,500
 
 
-
 
 
559,304
 
Deposits and other assets
 
 
20,275
 
 
5,193
 
 
90,371
 
 
20,186
 
 
-
 
 
136,025
 
Total assets acquired, less cash
 
 
4,876,230
 
 
1,185,055
 
 
3,679,841
 
 
10,894,758
 
 
551,100
 
 
21,186,984
 
Liabilities assumed
 
 
(1,009,348)
 
 
(97,541)
 
 
(1,560,710)
 
 
(1,496,536)
 
 
(1,100)
 
 
(4,165,235)
 
Deferred tax liabilities
 
 
-
 
 
-
 
 
 
 
 
 
 
 
-
 
 
-
 
Non-controlling interest
 
 
-
 
 
-
 
 
(993,999)
 
 
(3,759,289)
 
 
-
 
 
(4,753,288)
 
Chanticleer equity
 
 
-
 
 
-
 
 
(1,028,749)
 
 
-
 
 
-
 
 
(1,028,749)
 
Common stock and warrants issued
 
 
(3,869,156)
 
 
(1,109,150)
 
 
-
 
 
(5,638,933)
 
 
(300,000)
 
 
(10,917,239)
 
Cash paid
 
 
-
 
 
-
 
 
(100,000)
 
 
-
 
 
(250,000)
 
 
(350,000)
 
Cash received in excess of cash paid
 
$
2,274
 
$
21,636
 
$
3,617
 
$
-
 
$
-
 
$
27,527
 
 
 
 
2013 Acquisitions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ARB
 
WEW
 
JF
 
Total
 
Consideration paid:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
 
$
3,611,126
 
$
-
 
$
-
 
$
3,611,126
 
Warrants
 
 
1,710,077
 
 
-
 
 
-
 
 
1,710,077
 
Cash
 
 
-
 
 
3,150,000
 
 
590,000
 
 
3,740,000
 
Total consideration paid
 
 
5,321,203
 
 
3,150,000
 
 
590,000
 
 
9,061,203
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets, excluding cash
 
 
281,574
 
 
151,546
 
 
42,206
 
 
475,326
 
Property and equipment
 
 
3,000,122
 
 
20,493
 
 
242,531
 
 
3,263,146
 
Goodwill
 
 
2,550,611
 
 
3,159,500
 
 
425,151
 
 
6,135,262
 
Trademark/trade name/franchise fee
 
 
1,784,443
 
 
-
 
 
1,010,000
 
 
2,794,443
 
Deposits and other assets
 
 
98,035
 
 
-
 
 
-
 
 
98,035
 
Total assets acquired, less cash
 
 
7,714,785
 
 
3,331,539
 
 
1,719,888
 
 
12,766,212
 
Liabilities assumed
 
 
(1,490,288)
 
 
(372,824)
 
 
(282,317)
 
 
(2,145,429)
 
Deferred tax liabilities
 
 
(956,000)
 
 
-
 
 
(384,000)
 
 
(1,340,000)
 
Non-controlling interest
 
 
-
 
 
-
 
 
(463,571)
 
 
(463,571)
 
Chanticleer equity
 
 
-
 
 
-
 
 
-
 
 
-
 
Common stock and warrants issued
 
 
(5,321,203)
 
 
-
 
 
-
 
 
(5,321,203)
 
Cash paid
 
 
-
 
 
(3,150,000)
 
 
(590,000)
 
 
(3,740,000)
 
Cash received in excess of cash paid
 
$
52,706
 
$
191,285
 
$
-
 
$
243,991
 
 
Unaudited pro forma results of operations for the three and nine months ended September 30, 2014 and 2013, as if the Company had acquired majority ownership of the operation on January 1 of each year 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.
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
Net revenues
 
$
11,437,149
 
$
10,241,985
 
$
27,100,251
 
$
25,911,456
 
Loss from continuing operations
 
 
(516,733)
 
 
(1,691,741)
 
 
(3,361,231)
 
 
(3,718,031)
 
Income (loss) attributable to non-controlling interest
 
 
75,697
 
 
(8,232)
 
 
(39,342)
 
 
(39,842)
 
Net loss
 
$
(441,036)
 
$
(1,699,973)
 
$
(3,400,573)
 
$
(3,757,873)
 
Net loss per share, basic and diluted
 
$
(0.07)
 
$
(0.46)
 
$
(0.54)
 
$
(1.02)
 
Weighted average shares outstanding, basic and diluted
 
 
6,628,011
 
 
3,704,526
 
 
6,279,688
 
 
3,701,804
 
 
The following table includes information for the nine months ended September 30, 2014 Company’s 2014 acquisitions.
 
 
 
Hooters
 
 
 
Hooters
 
The
 
 
 
 
 
Pacific NW
 
Spoon
 
Australia
 
Burger Co.
 
Totals
 
Revenues
 
$
3,168,058
 
$
968,103
 
$
3,153,589
 
$
81,539
 
$
7,371,289
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
 
 
885,720
 
 
403,235
 
 
897,033
 
 
33,305
 
 
2,219,293
 
Other expenses
 
 
2,380,300
 
 
722,354
 
 
2,344,558
 
 
30,847
 
 
5,478,059
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
 
$
(97,962)
 
$
(157,486)
 
$
(88,002)
 
$
17,387
 
$
(326,063)
 
 
Income from operations of unconsolidated affiliates
 
Effective April 1, 2014, we completed the step acquisition of a 60% controlling interest in our Hooters Australia joint venture resulting in the consolidation of these entities. Prior to the acquisition, we owned 49% of the entities and accounted for the Hooters Australia investment under the equity method of accounting and our share of earnings and losses was recorded in equity in losses from investments in our Consolidated Statements of Operations and Comprehensive Income. The Hooters Australia results of operations for the three months ended September 30, 2014 are reflected in the respective line items in our Consolidated Statements of Operations and Comprehensive Income.