SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2018
Commission File Number 001-35570
CHANTICLEER HOLDINGS, INC.
(Exact name of registrant as specified in the charter)
|(State or other jurisdiction of||(I.R.S. Employer|
|incorporation or organization)||Identification Number)|
7621 Little Avenue, Suite 414, Charlotte, NC 28226
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (704) 366-5122
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 par value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ] Yes [X] No.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes [X] No.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No.
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). [X] Yes [ ] No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No.
The aggregate market value of the voting stock held by non-affiliates was $10.7 million based on the closing sale price of the Company’s Common Stock as reported on the NASDAQ Stock Market on June 30, 2018.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. There were 3,731,786 shares of common stock issued and outstanding as of March 18, 2019.
Chanticleer Holdings, Inc.
Form 10-K Index
|Item 1A:||Risk Factors||8|
|Item 3:||Legal Proceedings||20|
|Item 4:||Mine Safety Disclosures||21|
|Item 5:||Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities||21|
|Item 6:||Selected Financial Data||21|
|Item 7:||Management’s Discussion and Analysis of Financial Condition and Results of Operation||22|
|Item 7A:||Quantitative and Qualitative Disclosures about Market Risk||30|
|Item 8:||Financial Statements and Supplementary Data||30|
|Item 9:||Changes in and Disagreements with Accountants on Accounting and Financial Disclosure||65|
|Item 9A:||Controls and Procedures||65|
|Item 9B:||Other Information||66|
|Item 10:||Directors, Executive Officers and Corporate Governance||66|
|Item 11:||Executive Compensation||67|
|Item 12:||Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters||67|
|Item 13:||Certain Relationships and Related Transactions, and Director Independence||67|
|Item 14:||Principal Accounting Fees and Services||67|
|Item 15:||Exhibits and Financial Statement Schedules||67|
This Annual Report on Form 10-K contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. These statements include projections, predictions, expectations or statements as to beliefs or future events or results or refer to other matters that are not historical facts. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by these statements. The forward-looking statements contained in this Annual Report are based on various factors and were derived using numerous assumptions. In some cases, you can identify these forward-looking statements by the words “anticipate”, “estimate”, “plan”, “project”, “continuing”, “ongoing”, “target”, “aim”, “expect”, “believe”, “intend”, “may”, “will”, “should”, “could”, or the negative of those words and other comparable words. You should be aware that those statements reflect only the Company’s predictions. If known or unknown risks or uncertainties should materialize, or if underlying assumptions should prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind when reading this Annual Report and not place undue reliance on these forward-looking statements. Factors that might cause such differences include, but are not limited to:
|●||The quality of the Company and franchise store operations and changes in sales volume;|
|●||Our ability to operate our business and generate profits. We have not been profitable to date;|
|●||Inherent risks in expansion of operations, including our ability to acquire additional territories, generate profits from new restaurants, find suitable sites and develop and construct locations in a timely and cost-effective way;|
|●||Inherent risks associated with acquiring and starting new restaurant concepts and store locations;|
|●||General risk factors affecting the restaurant industry, including current economic climate, costs of labor and food prices;|
|●||Intensive competition in our industry and competition with national, regional chains and independent restaurant operators;|
|●||Our rights to operate and franchise the Hooters-branded restaurants are dependent on the Hooters’ franchise agreements;|
|●||Our ability, and our dependence on the ability of our franchisees, to execute on business plans effectively;|
|●||Actions of our franchise partners or operating partners which could harm our business;|
|●||Failure to protect our intellectual property rights, including the brand image of our restaurants;|
|●||Changes in customer preferences and perceptions;|
|●||Increases in costs, including food, rent, labor and energy prices;|
|●||Our business and the growth of our Company is dependent on the skills and expertise of management and key personnel;|
|●||Constraints could affect our ability to maintain competitive cost structure, including, but not limited to labor constraints;|
|●||Work stoppages at our restaurants or supplier facilities or other interruptions of production;|
|●||Our food service business and the restaurant industry are subject to extensive government regulation;|
|●||We may be subject to significant foreign currency exchange controls in certain countries in which we operate;|
|●||Inherent risk in foreign operations and currency fluctuations;|
|●||Unusual expenses associated with our expansion into international markets;|
|●||The risks associated with leasing space subject to long-term non-cancelable leases;|
|●||We may not attain our target development goals and aggressive development could cannibalize existing sales;|
|●||Potentially volatile conditions in the global financial markets and economies;|
|●||A decline in market share or failure to achieve growth;|
|●||Negative publicity about the ingredients we use, or the potential occurrence of food-borne illnesses or other problems at our restaurants;|
|●||Breaches of security of confidential consumer information related to our electronic processing of credit and debit card transactions;|
|●||Unusual or significant litigation, governmental investigations or adverse publicity, or otherwise;|
|●||Our debt financing agreements expose us to interest rate risks, contain obligations that may limit the flexibility of our operations, and may limit our ability to raise additional capital;|
|●||Adverse effects on our results from a decrease in or cessation or claw back of government incentives related to investments; and|
|●||Adverse effects on our operations resulting from certain geo-political or other events.|
You should also consider carefully the Risk Factors contained in Item 1A of Part I of this Annual Report, which address additional factors that could cause its actual results to differ from those set forth in the forward-looking statements and could materially and adversely affect the Company’s business, operating results and financial condition. The risks discussed in this Annual Report are factors that, individually or in the aggregate, the Company believes could cause its actual results to differ materially from expected and historical results. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider such disclosures to be a complete discussion of all potential risks or uncertainties.
The forward-looking statements are based on information available to the Company as of the date hereof, and, except to the extent required by federal securities laws, the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, the Company cannot assess the impact of each factor on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Item 1: Business
Chanticleer Holdings, Inc. (“Chanticleer” or the “Company”) is in the business of owning, operating and franchising fast casual dining concepts domestically and internationally. The Company was organized October 21, 1999, under its original name, Tulvine Systems, Inc., under the laws of the State of Delaware. On April 25, 2005, Tulvine Systems, Inc. formed a wholly owned subsidiary, Chanticleer Holdings, Inc., and on May 2, 2005, Tulvine Systems, Inc. merged with, and changed its name to, Chanticleer Holdings, Inc.
The consolidated financial statements include the accounts of Chanticleer Holdings, Inc. and its subsidiaries (collectively referred to as the “Company”).
Better Burgers Fast Casual
We operate and franchise a system-wide total of 49 fast casual restaurants specializing in the “Better Burger” category of which 34 are company-owned and 15 are owned and operated by franchisees under franchise agreements.
American Burger Company (“ABC”) is a fast-casual dining chain consisting of 7 locations in North Carolina, South Carolina and New York, known for its diverse menu featuring fresh salads, customized burgers, milk shakes, sandwiches, and beer and wine.
BGR: The Burger Joint (“BGR”) was acquired in March 2015 and consists of 11 company-owned locations in the United States and 12 franchisee-operated locations in the United States and the Middle East (2 of the franchisee-operated locations were purchased by the Company in 2018 and became company-owned locations).
Little Big Burger (“LBB”) was acquired in September 2015 and consists of 16 company-owned locations in the Portland, Oregon and Charlotte, North Carolina areas and 3 franchisee-operated locations in California and Texas. Of the company-owned restaurants, 8 of those locations are operated under partnership agreements with investors where we control the management and operations of the stores and the partner supplies the capital to open the store in exchange for a noncontrolling interest.
We plan to accelerate expansion of our Better Burger business through a combination of company-owned stores, franchising and partnerships primarily in the United States. Within the Burger group, we plan to focus our resources on growing Little Big Burger, where we are realizing industry-leading margins and returns on capital from our current store locations. We are also considering opportunities to expand the Better Burger business internationally, primarily focusing on those regions where we operate Hooters restaurants to leverage our local infrastructure and management teams across multiple brands.
Just Fresh Fast Casual
We operate Just Fresh, our healthier eating fast casual concept with 5 company owned locations in Charlotte, North Carolina. Just Fresh offers fresh-squeezed juices, gourmet coffee, fresh-baked goods and premium-quality, made-to-order sandwiches, salads and soups. We currently hold a 56% controlling interest in Just Fresh.
Our plans for Just Fresh include maximizing cash flow from our current locations while we evaluate the optimal growth strategy for the brand. As we have allocated most of our current internal and financial resources on growing Little Big Burger, we do not anticipate opening new Just Fresh locations in the near term. However, we believe the Just Fresh tradename and operating model provides significant untapped potential for future growth as a company or franchise model and intend to formalize the longer-term growth strategy for this brand over the coming year.
Hooters Full Service
Hooters restaurants are casual beach-themed establishments featuring music, sports on large flat screens, and a menu that includes seafood, sandwiches, burgers, salads, and of course, Hooters original chicken wings and the “nearly world famous” Hooters Girls.
We own and operate 8 Hooters full-service restaurants in the United States, South Africa, and the United Kingdom. Chanticleer started initially as an investor in Hooters of America and, subsequently evolved into a franchisee operator. We continue to hold a minority investment stake in Hooters of America and operate Hooters restaurants in our regions. However, we do not currently intend to invest in growing the Hooters segment and instead plan to utilize the cash flows from this segment to support growth in our other fast casual brands.
Restaurant Geographic Locations
We currently operate ABC, BGR and LBB restaurants in the United States as our Better Burger Group. ABC is in North Carolina, South Carolina and New York. BGR operates company restaurants in the mid-Atlantic region of the United States, as well as franchise locations across the US and internationally. LBB operates in Oregon, Washington and North Carolina, as well as franchise locations in California and Texas.
We operate Just Fresh restaurants in the Charlotte, North Carolina area.
We operate Hooters restaurants in Tacoma, Washington and Portland, Oregon. We also operate gaming machines in Portland, Oregon under license from the Oregon Lottery Commission.
We currently own and operate 5 Hooters restaurants in South Africa: Durban, Pretoria, and Johannesburg (3 locations).
We currently own and operate one Hooters restaurant in the United Kingdom located in Nottingham, England.
The restaurant industry is extremely competitive. We compete with other restaurants on the taste, quality and price of our food offerings. Additionally, we compete with other restaurants on service, ambience, location and overall customer experience. We believe that we compete primarily with local and regional sports bars and national casual dining and quick casual establishments, and to a lesser extent with quick service restaurants in general. Many of our competitors are well-established national, regional or local chains and many have greater financial and marketing resources than we do. We also compete with other restaurant and retail establishments for site locations and restaurant employees.
We have trademarks and trade names associated with Just Fresh, American Burger, BGR and Little Big Burger. We believe that the trademarks, service marks and other proprietary rights that we use in our restaurants have significant value and are important to our brand-building efforts and the marketing of our restaurant concepts. Although we believe that we have sufficient rights to all of our trademarks and service marks, we may face claims of infringement that could interfere with our ability to market our restaurants and promote our brand. Any such litigation may be costly and divert resources from our business. Moreover, if we are unable to successfully defend against such claims, we may be prevented from using our trademarks or service marks in the future and may be liable for damages.
We also use the “Hooters” mark and certain other service marks and trademarks used in our Hooters restaurants pursuant to our franchise agreements with Hooters of America.
We are subject to a variety of federal, state and local environmental laws and regulations. Such laws and regulations have not had a significant impact on our capital expenditures, earnings or competitive position.
Our locations are subject to licensing and regulation by a number of government authorities, which may include health, sanitation, safety, fire, building and other agencies in the countries, states or municipalities in which the restaurants are located. Opening sites in new areas could be delayed by license and approval processes or by more requirements of local government bodies with respect to zoning, land use and environmental factors. Our agreements with our franchisees require them to comply with all applicable federal, state and local laws and regulations.
Each restaurant requires appropriate licenses from regulatory authorities allowing it to sell liquor, beer and wine, and each restaurant requires food service licenses from local health authorities. Our licenses to sell alcoholic beverages may be suspended or revoked at any time for cause, including violation by us or our employees of any law or regulation pertaining to alcoholic beverage control. We are subject to various regulations by foreign governments related to the sale of food and alcoholic beverages and to health, sanitation and fire and safety standards. Compliance with these laws and regulations may lead to increased costs and operational complexity and may increase our exposure to governmental investigations or litigation.
We must comply with regulations adopted by the Federal Trade Commission (the “FTC”) and with several state and foreign laws that regulate the offer and sale of franchises. The FTC’s Trade Regulation Rule on Franchising (“FTC Rule”) and certain state and foreign laws require that we furnish prospective franchisees with a franchise disclosure document containing information prescribed by the FTC Rule and applicable state and foreign laws and regulations. We register the disclosure document in domestic and foreign jurisdictions that require registration for the sale of franchises. Our domestic franchise disclosure document complies with FTC Rule and various state disclosure requirements, and our international disclosure documents comply with applicable requirements.
We also must comply with state and foreign laws that regulate some substantive aspects of the franchisor-franchisee relationship. These laws may limit a franchisor’s ability to: terminate or not renew a franchise without good cause; interfere with the right of free association among franchisees; disapprove the transfer of a franchise; discriminate among franchisees regarding charges, royalties and other fees; and place new stores near existing franchises. Bills intended to regulate certain aspects of franchise relationships have been introduced into the United States Congress on several occasions during the last decade, but none have been enacted.
We are subject to state and federal employment laws that govern our relationship with our employees, such as minimum wage requirements, overtime and working conditions and citizenship requirements. Many of our employees are paid at rates which are influenced by changes in the federal and state wage regulations. Accordingly, changes in the wage regulations could increase our labor costs. The work conditions at our facilities are regulated by the Occupational Safety and Health Administration and are subject to periodic inspections by this agency. In addition, the enactment of recent legislation and resulting new government regulation relating to healthcare benefits may result in additional cost increases and other effects in the future.
We are also subject to regulations in Oregon where we operate gaming machines. Gaming operations are generally highly regulated and conducted under the permission and oversight of the state or local gaming commission, lottery or other government agencies.
We are subject to a variety of consumer protection and similar laws and regulations at the federal, state and local level. Failure to comply with these laws and regulations could subject us to financial and other penalties.
The sales of our restaurants may peak at various times throughout the year due to certain promotional events, weather and holiday related events. For example, our restaurants in South Africa generally peak in our winter months during their summer holidays. In contrast, our domestic fast casual restaurants tend to peak in the Spring, Summer and Fall months when the weather is milder. Quarterly results also may be affected by the timing of the opening of new stores and the closing of existing stores. For these reasons, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
Our principal executive offices are located at 7621 Little Avenue, Suite 414, Charlotte, NC 28226. Our web site is www.chanticleerholdings.com.
At December 31, 2018, our locations had approximately 876 employees, including 233 in South Africa, 49 in the United Kingdom, and 594 in the United States. Approximately 57 of our South African employees are represented by a labor union. We have experienced no work stoppage and believe that our employee relationships are good.
We make available free of charge through our website, www.chanticleerholdings.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports and statements filed pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Furthermore, the SEC maintains a free website (www.sec.gov) which includes reports, proxy and information statements, and other information regarding us and other issuers that file electronically with the SEC. Our website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. Additionally, we make available free of charge on our internet website: our Code of Ethics; the charter of our Nominating Committee; the charter of our Compensation Committee; and the charter of our Audit Committee.
Item 1A: Risk Factors
Investing in our common stock involves risks. Prospective investors in our common stock should carefully consider, among other things, the following risk factors in connection with the other information and financial statements contained in this Report. We have identified the following factors that could cause actual results to differ materially from those projected in any forward-looking statements we may make from time to time.
We operate in a continually changing business environment in which new risk factors emerge from time to time. We can neither predict these new risk factors, nor can we assess the impact, if any, of these new risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statement. If any of these risks, or combination of risks, actually occurs, our business, financial condition and results of operations could be seriously and materially harmed, and the trading price of our common stock could decline. All forward-looking statements in this document are based on information available to us as of the date hereof, and we assume no obligations to update any such forward-looking statements.
Risks Related to Our Company and Industry
We have not been profitable to date and operating losses could continue.
We have incurred operating losses and generated negative cash flows since our inception and have financed our operations principally through equity investments and borrowings. Future profitability is difficult to predict with certainty. Failure to achieve profitability could materially and adversely affect the value of our Company and our ability to effect additional financings. The success of the business depends on our ability to increase revenues to offset expenses. If our revenues fall short of projections or we are unable to reduce operating expenses, our business, financial condition and operating results will be materially adversely affected.
Our financial statements have been prepared assuming a going concern.
Our financial statements as of December 31, 2018 were prepared under the assumption that we will continue as a going concern for the next twelve months from the date of issuance of these financial statements. Our independent registered public accounting firm has issued a report that includes an explanatory paragraph referring to our losses from operations and expressing substantial doubt in our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to obtain additional financing, re-negotiate or extend existing indebtedness, obtain further operating efficiencies, reduce expenditures and ultimately, create profitable operations. We may not be able to refinance or extend our debt or obtain additional capital on reasonable terms. Our financial statements do not include adjustments that would result from the outcome of this uncertainty.
The prior year acquisitions, as well as future acquisitions, may have unanticipated consequences that could harm our business and our financial condition.
Any acquisition that we pursue, whether successfully completed or not, involves risks, including:
|●||material adverse effects on our operating results, particularly in the fiscal quarters immediately following the acquisition as the acquired restaurants are integrated into our operations;|
|●||risks associated with entering into markets or conducting operations where we have no or limited prior experience;|
|●||problems retaining key personnel;|
|●||potential impairment of tangible and intangible assets and goodwill acquired in the acquisition;|
|●||potential unknown liabilities;|
|●||difficulties of integration and failure to realize anticipated synergies; and|
|●||disruption of our ongoing business, including diversion of management’s attention from other business concerns.|
Future acquisitions of restaurants or other businesses, which may be accomplished through a cash purchase transaction, the issuance of our equity securities or a combination of both, could result in potentially dilutive issuances of our equity securities, the incurrence of debt and contingent liabilities and impairment charges related to goodwill and other intangible assets, any of which could harm our business and financial condition.
There are risks inherent in expansion of operations, including our ability to generate profits from new restaurants, find suitable sites and develop and construct locations in a timely and cost-effective way.
We cannot project with certainty the number the number of new restaurants we and our franchisees will open. In addition, our franchise agreements with Hooters of America (“HOA”) provide that we must exercise our option to open additional restaurants within each of our territories by a certain date set forth in the development schedule and that each such restaurant must be open by such date. If we fail to timely exercise any option or if we fail to open any additional restaurant by the required restaurant opening date, all of our rights to develop the rest of the option territory will expire automatically and without further notice.
Our failure to effectively develop locations in new territories would adversely affect our ability to execute our business plan by, among other things, reducing our revenues and profits and preventing us from realizing our strategy. Furthermore, we cannot assure you that our new restaurants will generate revenues or profit margins consistent with those currently operated by us.
The number of openings and the performance of new locations will depend on various factors, including:
|●||the availability of suitable sites for new locations;|
|●||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;|
|●||managing construction and development costs of new restaurants at affordable levels;|
|●||the establishment of brand awareness in new markets; and|
|●||the ability of our Company to manage expansion.|
Additionally, competition for suitable restaurant sites in target markets is intense. Restaurants we open in new markets may take longer to reach expected sales and profit levels on a consistent basis and may have higher construction, occupancy or operating costs than restaurants we open in existing markets, thereby affecting our overall profitability.
New markets may have competitive conditions, consumer tastes and discretionary spending patterns that are more difficult to predict or satisfy than our existing markets. We may need to make greater investments than we originally planned in advertising and promotional activity in new markets to build brand awareness. We may find it more difficult in new markets to hire, motivate and keep qualified employees who share our vision, passion and culture. We may also incur higher costs from entering new markets if, for example, we assign regional managers to manage comparatively fewer restaurants than in more developed markets.
We may not be able to successfully develop critical market presence for our brand in new geographical markets, as we may be unable to find and secure attractive locations, build name recognition or attract new customers. Inability to fully implement or failure to successfully execute our plans to enter new markets could have a material adverse effect on our business, financial condition and results of operations.
Not all of these factors are within our control or the control of our partners, and there can be no assurance that we will be able to accelerate our growth or that we will be able to manage the anticipated expansion of our operations effectively.
We have debt financing arrangements that could have a material adverse effect on our financial health and our ability to obtain financing in the future and may impair our ability to react quickly to changes in our business.
Our exposure to debt financing could limit our ability to satisfy our obligations, limit our ability to operate our business and impair our competitive position. For example, it could:
|●||increase our vulnerability to adverse economic and industry conditions, including interest rate fluctuations, because a portion of our borrowings are at variable rates of interest;|
|●||require us to dedicate significant future cash flows to the repayment of debt, reducing the availability of cash to fund working capital, capital expenditures or other general corporate purposes;|
|●||limit our flexibility in planning for, or reacting to, changes in our business and industry; and|
|●||limit our ability to obtain additional debt or equity financing due to applicable financial and restrictive covenants contained in our debt agreements.|
We may also incur additional indebtedness in the future, which could materially increase the impact of these risks on our financial condition and results of operations.
We may not be able to refinance our current debt obligations. Failure to successfully recapitalize the business could have a material adverse effect on our business, financial condition and results of operations.
The Company and various subsidiaries of the Company are delinquent in payment of payroll taxes to taxing authorities and failure to remit these payments promptly could have a material adverse effect on our business, financial condition and results of operations.
As of December 31, 2018, approximately $2.3 million of employee and employer taxes (including estimated penalties and interest) has been accrued but not remitted to certain taxing authorities by the Company and certain subsidiaries of the Company for cash compensation paid. As a result, the Company and its subsidiaries are liable for such payroll taxes. The Company and its have received warnings and demands from the taxing authorities and management is prioritizing these payments in order to avoid further penalties and interest. Failure to remit these payments promptly could result in increased penalty fees and have a material adverse effect on our business, financial condition and results of operations.
Litigation and unfavorable publicity could negatively affect our results of operations as well as our future business.
We are subject to potential for litigation and other customer complaints concerning our food safety, service and/or other operational factors. Guests may file formal litigation complaints that we are required to defend, whether we believe them to be true or not. Substantial, complex or extended litigation could have an adverse effect on our results of operations if we incur substantial defense costs and our management is distracted. Employees may also, from time to time, bring lawsuits against us regarding injury, discrimination, wage and hour, and other employment issues. Additionally, potential disputes could subject us to litigation alleging non-compliance with franchise, development, support service, or other agreements. Additionally, we are subject to the risk of litigation by our stockholders as a result of factors including, but not limited to, performance of our stock price.
In certain states we are subject to “dram shop” statutes, which generally allow a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. Some dram shop litigation against restaurant companies has resulted in significant judgments, including punitive damages. We carry liquor liability coverage as part of our existing comprehensive general liability insurance, but we cannot provide assurance that this insurance will be adequate in the event we are found liable in a dram shop case.
In recent years there has been an increase in the use of social media platforms and similar devices that allow individuals’ access to a broad audience of consumers and other interested persons. The availability of information on social media platforms is virtually immediate in its impact. A variety of risks are associated with the use of social media, including the improper disclosure of proprietary information, negative comments about our Company, exposure of personally identifiable information, fraud or outdated information. The inappropriate use of social media platforms by our guests, employees or other individuals could increase our costs, lead to litigation, or result in negative publicity that could damage our reputation, and create an adverse change in the business climate that impairs goodwill. If we are unable to quickly and effectively respond, we may suffer declines in guest traffic, which could materially affect our financial condition and results of operations.
Food safety and foodborne illness concerns could have an adverse effect on our business.
We cannot guarantee that our internal controls and training will be fully effective in preventing all food safety issues at our restaurants, including any occurrences of foodborne illnesses such as salmonella, E. coli and hepatitis A. In addition, there is no guarantee that our franchise restaurants will maintain the high levels of internal controls and training we require at our company-operated restaurants.
Furthermore, we and our franchisees rely on third-party vendors, making it difficult to monitor food safety compliance and increasing the risk that foodborne illness would affect multiple locations rather than a single restaurant. Some foodborne illness incidents could be caused by third-party vendors and transporters outside of our control. New illnesses resistant to our current precautions may develop in the future, or diseases with long incubation periods could arise, that could give rise to claims or allegations on a retroactive basis. One or more instances of foodborne illness in any of our restaurants or markets or related to food products we sell could negatively affect our restaurant revenue nationwide if highly publicized on national media outlets or through social media.
This risk exists even if it were later determined that the illness was wrongly attributed to us or one of our restaurants. Several other restaurant chains have experienced incidents related to foodborne illnesses that have had a material adverse effect on their operations. The occurrence of a similar incident at one or more of our restaurants, or negative publicity or public speculation about an incident, could have a material adverse effect on our business, financial condition and results of operations.
We operate in the highly competitive restaurant industry. If we are not able to compete effectively, it will have a material adverse effect on our business, financial condition and results of operations.
We face significant competition from restaurants in the fast-casual dining and traditional fast food segments of the restaurant industry. These segments are highly competitive with respect to, among other things, taste, price, food quality and presentation, service, location and the ambience and condition of each restaurant. Our competition includes a variety of locally owned restaurants and national and regional chains offering dine-in, carry-out, delivery and catering services. Many of our competitors have existed longer and have a more established market presence with substantially greater financial, marketing, personnel and other resources than we do. Among our competitors are a number of multi-unit, multi-market, fast casual restaurant concepts, some of which are expanding nationally. As we expand, we will face competition from these restaurant concepts as well as new competitors that strive to compete with our market segments. These competitors may have, among other things, lower operating costs, better locations, better facilities, better management, more effective marketing and more efficient operations. Additionally, we face the risk that new or existing competitors will copy our business model, menu options, presentation or ambience, among other things.
Any inability to successfully compete with the restaurants in our markets and other restaurant segments will place downward pressure on our customer traffic and may prevent us from increasing or sustaining our revenue and profitability. Consumer tastes, nutritional and dietary trends, traffic patterns and the type, number and location of competing restaurants often affect the restaurant business, and our competitors may react more efficiently and effectively to those conditions. Several of our competitors compete by offering menu items that are specifically identified as low in carbohydrates, gluten-free or healthier for consumers. In addition, many of our traditional fast food restaurant competitors offer lower-priced menu options or meal packages or have loyalty programs. Our sales could decline due to changes in popular tastes, “fad” food regimens, such as low carbohydrate diets, and media attention on new restaurants. If we are unable to continue to compete effectively, our traffic, sales and restaurant contribution could decline which would have a material adverse effect on our business, financial condition and results of operations.
Our rights to operate and franchise Hooters-branded restaurants are dependent on the Hooters’ franchise agreements.
Our rights to operate and franchise Hooters-branded restaurants, and our ability to conduct our business are derived principally from the rights granted or to be granted to us by Hooters in our franchise agreements. As a result, our ability to continue operating in our current capacity is dependent on the continuation and renewal of our contractual relationship with Hooters.
In the event Hooters does not grant us franchises to acquire additional locations or terminates our existing franchise agreements, we would be unable to operate and/or expand our Hooters-branded restaurants, identify our business with Hooters or use any of Hooters’ intellectual property. As the Hooters brand and our relationship with Hooters are among our competitive strengths, the failure to grant or the expiration or termination of the franchise agreements would materially and adversely affect our business, results of operations, financial condition and prospects.
Our business depends on our relationship with Hooters and changes in this relationship may adversely affect our business, results of operations and financial condition.
Pursuant to the franchise agreements, Hooters has the ability to exercise substantial influence over the conduct of our business. We must comply with Hooters’ high-quality standards. We cannot transfer the equity interests of our subsidiaries without Hooters’ consent, and Hooters has the right to control many of the locations’ daily operations.
Notwithstanding the foregoing, Hooters has no obligation to fund our operations. In addition, Hooters does not guarantee any of our financial obligations, including trade payables or outstanding indebtedness, and has no obligation to do so. If the terms of the franchise agreements excessively restrict our ability to operate our business or if we are unable to satisfy our obligations under the franchise agreements, our business, results of operations and financial condition would be materially and adversely affected.
We do not have full operational control over the franchisee-operated restaurants.
We are and will be dependent on our franchisees to maintain quality, service and cleanliness standards, and their failure to do so could materially affect our brands and harm our future growth. Our franchisees have flexibility in their operations, including the ability to set prices for our products in their restaurants, hire employees and select certain service providers. In addition, it is possible that some franchisees may not operate their restaurants in accordance with our quality, service and cleanliness, health or product standards. Although we intend to take corrective measures if franchisees fail to maintain high quality service and cleanliness standards, we may not be able to identify and rectify problems with sufficient speed and, as a result, our image and operating results may be negatively affected.
A failure by Hooters to protect its intellectual property rights, including its brand image, could harm our results of operations.
The profitability of our Hooters business depends in part on consumers’ perception of the strength of the Hooters brand. Under the terms of our franchise agreements, we are required to assist Hooters with protecting its intellectual property rights in our jurisdictions. Nevertheless, any failure by Hooters to protect its proprietary rights in the world could harm its brand image, which could affect our competitive position and our results of operations.
Our business could be adversely affected by declines in discretionary spending and may be affected by changes in consumer preferences.
Our success depends, in part, upon the popularity of our food products. Shifts in consumer preferences away from our restaurants or cuisine could harm our business. Also, our success depends to a significant extent on discretionary consumer spending, which is influenced by general economic conditions and the availability of discretionary income. Accordingly, we may experience declines in sales during economic downturns or during periods of uncertainty. A continuing decline in the amount of discretionary spending could have a material adverse effect on our sales, results of operations, and business and financial condition.
Increases in costs, including food, labor and energy prices, will adversely affect our results of operations.
Our profitability is dependent on our ability to anticipate and react to changes in our operating costs, including food, labor, occupancy (including utilities and energy), insurance and supply costs. Various factors beyond our control, including climatic changes and government regulations, may affect food costs. Specifically, our dependence on frequent, timely deliveries of fresh meat and produce subject us to the risks of possible shortages or interruptions in supply caused by adverse weather or other conditions which could adversely affect the availability and cost of any such items. In the past, we have been able to recover some of our higher operating costs through increased menu prices. There have been, and there may be in the future, delays in implementing such menu price increases, and competitive pressures may limit our ability to recover such cost increases in their entirety.
Our ability to maintain consistent price and quality throughout our restaurants depends in part upon our ability to acquire specified food products and supplies in sufficient quantities from third-party vendors, suppliers and distributors at a reasonable cost. We do not control the businesses of our vendors, suppliers and distributors, and our efforts to specify and monitor the standards under which they perform may not be successful. If any of our vendors or other suppliers are unable to fulfill their obligations to our standards, or if we are unable to find replacement providers in the event of a supply or service disruption, we could encounter supply shortages and incur higher costs to secure adequate supplies, which would have a material adverse effect on our business, financial condition and results of operations.
Furthermore, if our current vendors or other suppliers are unable to support our expansion into new markets, or if we are unable to find vendors to meet our supply specifications or service needs as we expand, we could likewise encounter supply shortages and incur higher costs to secure adequate supplies, which could have a material adverse effect on our business, financial condition and results of operations.
Changes in employment laws and minimum wage standards may adversely affect our business.
Labor is a primary component in the cost of operating our restaurants. If we face labor shortages or increased labor costs because of increased competition for employees, higher employee turnover rates, increases in the federal, state or local minimum wage or other employee benefits costs (including costs associated with health insurance coverage), our operating expenses could increase, and our growth could be negatively impacted.
In addition, our success depends in part upon our ability to attract, motivate and retain enough well-qualified restaurant operators and management personnel, as well as a sufficient number of other qualified employees, including customer service and kitchen staff, to keep pace with our expansion schedule. In addition, restaurants have traditionally experienced relatively high employee turnover rates. Although we have not yet experienced significant problems in recruiting or retaining employees, our ability to recruit and retain such individuals may delay the planned openings of new restaurants or result in higher employee turnover in existing restaurants, which could have a material adverse effect on our business, financial condition and results of operations.
Various federal and state employment laws govern the relationship with our employees and impact operating costs. These laws include employee classification as exempt or non-exempt for overtime and other purposes, minimum wage requirements, unemployment tax rates, workers’ compensation rates, immigration status and other wage and benefit requirements. Significant additional government-imposed increases in the following areas could have a material adverse effect on our business, financial condition and results of operations:
|●||Mandatory health benefits;|
|●||Paid leaves of absence, including paid sick leave; and|
We could also become subject to fines, penalties and other costs related to claims that we did not fully comply with all recordkeeping obligations of federal and state immigration compliance laws. These factors could have a material adverse effect on our business, financial condition and results of operations.
We are subject to risks arising under federal and state labor laws.
We are subject to risks under federal and state labor laws, including disputes concerning whether and when a union can be organized, and once unionized, collective bargaining rights, various issues arising from union contracts, and matters relating to a labor strike. Labor laws are complex and differ vastly from state to state.
We are subject to the risks associated with leasing space subject to long-term non-cancelable leases.
We lease all the real property and we expect the new restaurants we open in the future will also be leased. We are obligated under non-cancelable leases for our restaurants and our corporate headquarters. Our restaurant leases generally require us to pay a proportionate share of real estate taxes, insurance, common area maintenance charges and other operating costs. Some restaurant leases provide for contingent rental payments based on sales thresholds, although we generally do not expect to pay significant contingent rent on these properties based on the thresholds in those leases. Additional sites that we lease are likely to be subject to similar long-term non-cancelable leases.
If an existing or future restaurant is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. In addition, as each of our leases expires, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to pay increased occupancy costs or to close restaurants in desirable locations. These potential increased occupancy costs and closed restaurants could have a material adverse effect on our business, financial condition and results of operations.
Our business and the growth of our Company are dependent on the skills and expertise of management and key personnel.
During the upcoming stages of our Company’s anticipated growth, we are entirely dependent upon the management skills and expertise of our management and key personnel. We do not have employment agreements with many of our executive officers. The loss of services of our executive officers could dramatically affect our business prospects. Certain of our employees are particularly valuable to us because:
|●||they have specialized knowledge about our company and operations;|
|●||they have specialized skills that are important to our operations; or|
|●||they would be particularly difficult to replace.|
If the services of any key management personnel ceased to be available to us, our growth prospects or future operating results may be adversely impacted.
Our food service business, gaming revenues and the restaurant industry are subject to extensive government regulation.
We are subject to extensive and varied country, federal, state and local government regulation, including regulations relating to public health, gambling, safety and zoning codes. We operate each of our locations in accordance with standards and procedures designed to comply with applicable codes and regulations. However, if we could not obtain or retain food or other licenses, it would adversely affect our operations. Although we have not experienced, and do not anticipate experiencing any significant difficulties, delays or failures in obtaining required licenses, permits or approvals, any such problem could delay or prevent the opening of, or adversely impact the viability of, a particular location or group of restaurants.
We may be subject to significant foreign currency exchange controls in certain countries in which we operate.
Certain foreign economies have experienced shortages in foreign currency reserves and their respective governments have adopted restrictions on the ability to transfer funds out of the country and convert local currencies into U.S. dollars. This may increase our costs and limit our ability to convert local currency into U.S. dollars and transfer funds out of certain countries. Any shortages or restrictions may impede our ability to convert these currencies into U.S. dollars and to transfer funds, including for the payment of dividends or interest or principal on our outstanding debt. If any of our subsidiaries are unable to transfer funds to us due to currency restrictions, we are responsible for any resulting shortfall.
Our foreign operations subject us to risks that could negatively affect our business.
Most of our Hooters restaurants and some of our franchisee-owned restaurants operate in foreign countries and territories outside of the U.S. As a result, our business is exposed to risks inherent in foreign operations. These risks, which can vary substantially by market, include political instability, corruption, social and ethnic unrest, changes in economic conditions (including wage and commodity inflation, consumer spending and unemployment levels), the regulatory environment, tax rates and laws and consumer preferences as well as changes in the laws and policies that govern foreign investment in countries where our restaurants are operated.
In addition, our results of operations and the value of our foreign assets are affected by fluctuations in foreign currency exchange rates, which may adversely affect reported earnings. More specifically, an increase in the value of the United States Dollar relative to other currencies, such as the British Pound and the South African Rand could have an adverse effect on our reported earnings. There can be no assurance as to the future effect of any such changes on our results of operations, financial condition or cash flows.
We may not attain our target development goals and aggressive development could cannibalize existing sales.
Our growth strategy depends in large part on our ability to increase our net restaurant count. The successful development of new units will depend in large part on our ability and the ability of our franchisees to open new restaurants and to operate these restaurants on a profitable basis. We cannot guarantee that we, or our franchisees, will be able to achieve our expansion goals or that new restaurants will be operated profitably. Further, there is no assurance that any new restaurant will produce operating results like those of our existing restaurants. Other risks that could impact our ability to increase our net restaurant count include prevailing economic conditions and our, or our franchisees’/partners’, ability to obtain suitable restaurant locations, obtain required permits and approvals in a timely manner and hire and train qualified personnel.
Our franchisee operators also frequently depend upon financing from banks and other financial institutions in order to construct and open new restaurants. If it becomes more difficult or expensive for our franchisees/partners to obtain financing to develop new restaurants, our planned growth could slow, and our future revenue and cash flows could be adversely impacted.
In addition, the new restaurants could impact the sales of our existing restaurants nearby. It is not our intention to open new restaurants that materially cannibalize the sales of our existing restaurants. However, as with most growing retail and restaurant operations, there can be no assurance that sales cannibalization will not occur or become more significant in the future as we increase our presence in existing markets over time.
Changing conditions in the global economy and financial markets may materially adversely affect our business, results of operations and ability to raise capital.
Our business and results of operations may be materially affected by conditions in the financial markets and the economy generally. The demand for our products could be adversely affected in an economic downturn and our revenues may decline under such circumstances. In addition, we may find it difficult, or we may not be able, to access the credit or equity markets, or we may experience higher funding costs in the event of adverse market conditions. Future instability in these markets could limit our ability to access the capital we require to fund and grow our business.
Changes to accounting rules or regulations may adversely affect the reporting of our results of operations.
Changes to existing accounting rules or regulations may impact the reporting of our future results of operations or cause the perception that we are more highly leveraged. Other new accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future. For instance, new accounting rules will require lessees to capitalize operating leases in their financial statements in future periods which will require us to record significant right of use assets and lease obligations on our balance sheet. This and other future changes to accounting rules or regulations could have a material adverse effect on the reporting of our business, financial condition and results of operations. In addition, many existing accounting standards require management to make subjective assumptions, such as those required for stock compensation, tax matters, franchise accounting, acquisitions, litigation, and asset impairment calculations. Changes in accounting standards or changes in underlying assumptions, estimates and judgments by our management could significantly change our reported or expected financial performance.
We may not be able to adequately protect our intellectual property, which could harm the value of our brand and have a material adverse effect on our business, financial condition and results of operations.
Our intellectual property is material to the conduct of our business. Our ability to implement our business plan successfully depends in part on our ability to further build brand recognition using our trademarks, tradenames and other proprietary intellectual property, including our name and logos and the unique ambience of our restaurants. While it is our policy to protect and defend vigorously our rights to our intellectual property, we cannot predict whether steps taken by us to protect our intellectual property rights will be adequate to prevent misappropriation of these rights or the use by others of restaurant features based upon, or otherwise similar to, our restaurant concept. It may be difficult for us to prevent others from copying elements of our concept and any litigation to enforce our rights will likely be costly and may not be successful. Although we believe that we have sufficient rights to all our trademarks and service marks, we may face claims of infringement that could interfere with our ability to market our restaurants and promote our brand. Any such litigation may be costly and could divert resources from our business. Moreover, if we are unable to successfully defend against such claims, we may be prevented from using our trademarks or service marks in the future and may be liable for damages, which in turn could have a material adverse effect on our business, financial condition and results of operations.
In addition, we license certain of our proprietary intellectual property, including our name and logos, to third parties. For example, we grant our franchisees and licensees a right to use certain of our trademarks in connection with their operation of the applicable restaurant. If a franchisee or other licensee fails to maintain the quality of the restaurant operations associated with the licensed trademarks, our rights to, and the value of, our trademarks could potentially be harmed. Negative publicity relating to the franchisee or licensee could also be incorrectly associated with us, which could harm our business. Failure to maintain, control and protect our trademarks and other proprietary intellectual property would likely have a material adverse effect on our business, financial condition and results of operations and on our ability to enter into new franchise agreements.
We may incur costs resulting from breaches of security of confidential consumer information related to our electronic processing of credit and debit card transactions.
Most of our restaurant sales are by credit or debit cards. Other restaurants and retailers have experienced security breaches in which credit and debit card information has been stolen. We may in the future become subject to claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, and we may also be subject to lawsuits or other proceedings relating to these types of incidents. In addition, most states have enacted legislation requiring notification of security breaches involving personal information, including credit and debit card information. Any such claim or proceeding could cause us to incur significant unplanned expenses, which could have a material adverse effect on our business, financial condition and results of operations. Further, adverse publicity resulting from these allegations may have a material adverse effect on our business and results of operations.
We rely heavily on information technology, and any material failure, weakness, interruption or breach of security could prevent us from effectively operating our business.
We rely heavily on information systems, including point-of-sale processing in our restaurants, for management of our supply chain, payment of obligations, collection of cash, credit and debit card transactions and other processes and procedures. Our ability to efficiently and effectively manage our business depends significantly on the reliability and capacity of these systems. Our operations depend upon our ability to protect our computer equipment and systems against damage from physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, viruses and other disruptive problems. The failure of these systems to operate effectively, maintenance problems, upgrading or transitioning to new platforms, or a breach in security of these systems could result in delays in customer service and reduce efficiency in our operations. Remediation of such problems could result in significant, unplanned capital investments.
Adverse weather conditions could affect our sales.
Adverse weather conditions, such as regional winter storms, floods, severe thunderstorms and hurricanes, could affect our sales at restaurants in locations that experience these weather conditions, which could materially adversely affect our business, financial condition or results of operations.
The uncertainty surrounding the implementation and effect of Brexit may impact our UK operations.
The uncertainty surrounding the implementation and effect of Brexit, including the commencement of the exit negotiation period, the terms and conditions of such exit, the uncertainty in relation to the legal and regulatory framework that would apply to the UK and its relationship with the remaining members of the EU (including, in relation to trade) during a withdrawal process and after any Brexit is effected, has caused and is likely to cause increased economic volatility and market uncertainty globally. It is too early to ascertain the long-term effects. To date, the only measurable impact is attributable to the decline in the pound sterling as measured against the U.S. dollar.
Negative publicity could reduce sales at some or all our restaurants.
We may, from time to time, be faced with negative publicity relating to food quality and integrity, the safety, sanitation and welfare of our restaurant facilities, customer complaints, labor issues, or litigation alleging illness or injury, health inspection scores, integrity of our or our suppliers’ food processing and other policies, practices and procedures, employee relationships and welfare or other matters at one or more of our restaurants. Negative publicity may adversely affect us, regardless of whether the allegations are valid or whether we are held to be responsible. The risk of negative publicity is particularly great with respect to our franchised restaurants because we are limited in the manner in which we can regulate them, especially on a real-time basis and negative publicity from our franchised restaurants may also significantly impact company-operated restaurants. A similar risk exists with respect to food service businesses unrelated to us, if customers mistakenly associate such unrelated businesses with our operations. Employee claims against us based on, among other things, wage and hour violations, discrimination, harassment or wrongful termination may also create not only legal and financial liability but negative publicity that could adversely affect us and divert our financial and management resources that would otherwise be used to benefit the future performance of our operations. These types of employee claims could also be asserted against us, on a co-employer theory, by employees of our franchisees. A significant increase in the number of these claims or an increase in the number of successful claims could materially adversely affect our business, financial condition, results of operations and cash flows.
The interests of our franchisees may conflict with ours or yours in the future and we could face liability from our franchisees or related to our relationship with our franchisees.
Franchisees, as independent business operators, may from time to time disagree with us and our strategies regarding the business or our interpretation of our respective rights and obligations under the franchise agreement and the terms and conditions of the franchisee/franchisor relationship or have interests adverse to ours. This may lead to disputes with our franchisees and we expect such disputes to occur from time to time in the future as we continue to offer franchises. Such disputes may result in legal action against us. To the extent we have such disputes, the attention, time and financial resources of our management and our franchisees will be diverted from our restaurants, which could have a material adverse effect on our business, financial condition, results of operations and cash flows even if we have a successful outcome in the dispute.
In addition, various state and federal laws govern our relationship with our franchisees and our potential sale of a franchise. A franchisee and/or a government agency may bring legal action against us based on the franchisee/franchisor relationships that could result in the award of damages to franchisees and/or the imposition of fines or other penalties against us.
We have significant obligations under notes payable and convertible debt obligations and we may be deemed in default under certain provisions of our notes payable and convertible debt obligations. Our ability to operate as a going concern are contingent upon successfully obtaining additional financing and renegotiating terms of existing indebtedness in the near future. Failure to do so would adversely affect our ability to continue operations.
If capital is not available or we are not able to agree on reasonable terms with our lenders, we may then need to scale back or freeze our organic growth plans, sell assets under unfavorable terms, reduce expenses, and/or curtail future acquisition plans to manage our liquidity and capital resources. We may not be able refinance or otherwise extend or repay our current obligations, which could impact our ability to continue to operate as a going concern.
In the event that management proceeds with asset sales and/or store closures rather than continuing to hold and operate all its assets long term, management’s assessment of the fair value, and ultimate recoverability, of goodwill, intangibles, and other long-lived assets would be impacted and the Company could incur significant noncash charges and cash exit costs in future periods.
We have approximately $14.3 million in current liabilities. In the event that additional working capital is not available, we may be forced to scale back or freeze our growth plans, sell assets on less than favorable terms, reduce expenses, and/or curtail future acquisition plans to manage our liquidity and capital resources. In the event that management elects to proceed with asset sales and/or store closures in the future rather than continue to hold and operate all its assets long term, management’s assessment of the fair value, and ultimate recoverability, of goodwill, intangibles, and other long-lived assets would be impacted and the Company could incur significant noncash charges and cash exit costs in future periods.
We have remedied defaults under the 8% non-convertible secured debentures. However, we may not be able to refinance, extend or repay our substantial indebtedness owed to our secured lenders, which would have a material adverse effect on our financial condition and ability to continue as a going concern.
We have approximately $14.3 million in current liabilities. Six million of principal is due on our debt obligations within the next 12 months and an additional $3 million is due within the succeeding 3 months, plus interest. If we are unable to repay these obligations at maturity and we are otherwise unable to extend the maturity dates or refinance these obligations, we would be in default. We cannot provide any assurances that we will be able to raise the necessary amount of capital to repay these obligations or that we will be able to extend the maturity dates or otherwise refinance these obligations. Upon a default, our secured lenders would have the right to exercise their rights and remedies to collect, which would include foreclosing on our assets. Accordingly, a default would have a material adverse effect on our business, and we would likely be forced to seek bankruptcy protection.
Proceeds from asset sales are subject to a right of mandatory redemption of our 8% non-convertible secured debenture holders, in principal amount of $6,000,000, thereby limiting our flexibility to allocate proceeds from asset sales to payment of other debt obligations or working capital.
Management is actively considering the possible benefits of selling certain of its operating assets to reduce debt and provide additional working capital to fund future growth of its domestic burger business, as well as possibly closing certain underperforming store locations to improve operating cash flow. Proceeds from asset sales are subject to a right of mandatory redemption of our 8% non-convertible secured debenture holders, in principal amount of $6,000,000, thereby limiting our flexibility to allocate proceeds from asset sales to payment of other debt obligations or working capital.
Risks Related to Our Common Stock
Our stock price has experienced price fluctuations and may continue to do so, resulting in a substantial loss in your investment.
The current market for our common stock has been characterized by volatile prices. As a result, investors in our common stock may experience a decrease in the value of their securities, including decreases unrelated to our operating performance or prospects. The market price of our common stock is likely to be highly unpredictable and subject to wide fluctuations in response to various factors, many of which are beyond our control. These factors include:
|●||quarterly variations in our operating results and achievement of key business metrics;|
|●||changes in the global economy and in the local economies in which we operate;|
|●||our ability to obtain working capital financing, if necessary;|
|●||the departure of any of our key executive officers and directors;|
|●||changes in the federal, state, and local laws and regulations to which we are subject;|
|●||changes in earnings estimates by securities analysts, if any;|
|●||any differences from reported results and securities analysts published or unpublished expectations;|
|●||market reaction to any acquisitions, joint ventures or strategic investments announced by us or our competitors;|
|●||future sales of our securities;|
|●||announcements or press releases relating to the casual dining restaurant sector or to our own business or prospects;|
|●||negative media and social media coverage;|
|●||regulatory, legislative, or other developments affecting us or the restaurant industry generally; and|
|●||market conditions specific to casual dining restaurant, the restaurant industry and the stock market generally.|
Our common stock could be further diluted as the result of the issuance of additional shares of common stock, convertible securities, warrants or options.
In the past, we have issued common stock, convertible securities (such as convertible notes) and warrants in order to raise capital. We have also issued common stock as compensation for services and incentive compensation for our employees, directors and certain vendors. We have shares of common stock reserved for issuance upon the exercise of certain of these securities and may increase the shares reserved for these purposes in the future. Our issuance of additional common stock, convertible securities, options and warrants could affect the rights of our stockholders, could reduce the market price of our common stock or could result in adjustments to exercise prices of outstanding warrants (resulting in these securities becoming exercisable for, as the case may be, a greater number of shares of our common stock), or could obligate us to issue additional shares of common stock to certain of our stockholders.
Shares eligible for future sale may adversely affect the market.
From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act, subject to certain limitations. In general, pursuant to Rule 144, stockholders who have been non-affiliates for the preceding three months may sell shares of our common stock freely after six months subject only to the current public information requirement. Affiliates may sell shares of our common stock after six months subject to the Rule 144 volume, manner of sale, current public information and notice requirements. Any substantial sales of our common stock pursuant to Rule 144 may have a material adverse effect on the market price of our common stock.
We do not expect to pay cash dividends in the foreseeable future and therefore investors should not anticipate cash dividends on their investment.
Our board of directors does not intend to pay cash dividends in the foreseeable future but instead intends to retain any and all earnings to finance the growth of the business. To date, we have not paid any cash dividends and there can be no assurance that cash dividends will ever be paid on our common stock.
We may issue additional shares of our common stock, which could depress the market price of our common stock and dilute your ownership.
Market sales of large amounts of our common stock, or the potential for those sales even if they do not actually occur, may have the effect of depressing the market price of our common stock. In addition, if our future financing needs require us to issue additional shares of common stock or securities convertible into common stock, the amount of common stock available for resale could be increased which could stimulate trading activity and cause the market price of our common stock to drop, even if our business is doing well. Furthermore, the issuance of any additional shares of our common stock, or securities convertible into our common stock could be substantially dilutive to holders of our common stock.
Director and officer liability is limited.
As permitted by Delaware law, our bylaws limit the liability of our directors for monetary damages for breach of a director’s fiduciary duty except for liability in certain instances. As a result of our bylaw provisions and Delaware law, stockholders may have limited rights to recover against directors for breach of fiduciary duty.
Failure to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.
As a publicly traded company, we are required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which requires management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. We have identified internal control weaknesses and may need to undertake various actions, such as implementing new internal controls, new systems and procedures and hiring additional accounting or internal audit staff, which could increase our operating expenses. In addition, we may identify additional deficiencies in our internal control over financial reporting as part of that process.
In addition, if we are unable to resolve internal control deficiencies in a timely manner, investors could lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected.
Item 2: Properties
The Company, through its subsidiaries, leases the land and buildings for our 5 restaurants in South Africa, 1 restaurant in Nottingham, United Kingdom, and 43 restaurant locations in the U.S. The terms for our leases vary from two to twenty years and have options to extend. We lease some of 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. We also lease our corporate office space in Charlotte, North Carolina.
Our office and restaurant facilities are suitable and adequate for our business as it is presently conducted.
Item 3: Legal proceedings
On March 26, 2013, our South African operations received Notice of Motion filed in the Kwazulu-Natal High Court, Durban, Republic of South Africa, filed against Rolalor (PTY) LTD (“Rolalor”) and Labyrinth Trading 18 (PTY) LTD (“Labyrinth”) by Jennifer Catherine Mary Shaw (“Shaw”). Rolalor and Labyrinth were the original entities formed to operate the Johannesburg and Durban locations, respectively. On September 9, 2011, the assets and the then-disclosed liabilities of these entities were transferred to Tundraspex (PTY) LTD (“Tundraspex”) and Dimaflo (PTY) LTD (“Dimaflo”), respectively. The current entities, Tundraspex and Dimaflo are not parties in the lawsuit. Shaw is requesting that the Respondents, Rolalor and Labyrinth, be wound up in satisfaction of an alleged debt owed in the total amount of R4,082,636 (approximately $480,000). The two Notices were defended and argued in the High Court of South Africa (Durban) on January 31, 2014. Madam Justice Steryi dismissed the action with costs on May 5, 2014. Ms. Shaw appealed this decision and in December 2016, the Court dismissed the Labyrinth case with costs payable to the Company and allowed the Rolalor case to proceed to liquidation. The Company did not object to the proposed liquidation of Rolalor as the entity has no assets and the Company does not expect there to be any material impact on the Company. No amounts have been accrued as of December 31, 2018 or 2017 in the accompanying consolidated balance sheets.
From time to time, the Company may be involved in legal proceedings and claims that have arisen in the ordinary course of business are generally covered by insurance. As of December 31, 2018, the Company does not expect the amount of ultimate liability with respect to these matters to be material to the company’s financial condition, results of operations or cash flows.
Item 4: mine safety disclosures
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the NASDAQ Capital Market under the symbol “BURG”.
Number of Shareholders and Total Outstanding Shares
As of March 18, 2019, there were 3,731,786, shares of our common stock issued and outstanding, respectively, and approximately 181 shareholders of record at our transfer agent. Because many shares of common stock are held by brokers and other institutions on behalf of individual stockholders and those shares change hands from time to time, we do not receive a precise tally of the total number of shareholders on a regular basis. However, our best estimate of the total holders of our common stock ranges from approximately 2,200 to approximately 2,500 shareholders.
As of May 19, 2017, the Company effected a one-for-ten reverse stock split of the Company’s shares of common stock. As a result of reverse stock split, each ten shares of common stock issued and outstanding were combined into one share of common stock. No fractional shares were issued in connection with the reverse stock split. The Company rounded fractional shares up to the nearest whole number.
The reverse stock split had no impact on the par value per share of the Company’s common stock or the number of authorized shares. All current and prior period amounts related to shares, share prices and earnings per share contained in the accompanying unaudited condensed consolidated financial statements have been restated to give retrospective presentation for the reverse stock split.
Recent Sales of Unregistered Securities
Unregistered sales of our common stock during the first three quarters of 2018 were reported in Item 2 of Part II of the Form 10-Q filed for each quarter or on Current Report on Form 8-K. There were no unregistered sales of common stock during the fourth quarter of 2018 to be reported.
Item 6: Selected Financial Data
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our results of operations and financial condition together with the Selected Financial Data and our audited consolidated financial statements as of and for the year ended December 31, 2018 including the notes thereto, included in this Report. The discussion below contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in Item 1A. “Risk Factors”. Actual results may differ materially from those contained in any forward-looking statements. Forward-looking statements speak only as of the date they are made. We undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur, and you are urged to review and consider disclosures that we make in this and other reports that discuss factors germane to our business.
We are in the business of owning, operating and franchising fast casual and full-service dining concepts in the United States and internationally.
We own, operate and franchise a system-wide total of 49 fast casual restaurants specializing the “Better Burger” category of which 34 are company-owned and 15 are operated by franchisees under franchise agreements. American Burger Company (“ABC”) is a fast-casual dining chain consisting of 7 locations in New York and the Carolinas, known for its diverse menu featuring, customized burgers, milk shakes, sandwiches, fresh salads and beer and wine. BGR: The Burger Joint (“BGR”), consists of 11 company-owned locations in the United States and 12 franchisee-operated locations in the United States and the Middle East. Little Big Burger (“LBB”) consists of 16 company-owned locations in Oregon, Washington and North Carolina and 3 franchisee-operated locations in California and Texas.
We also own and operate Just Fresh, our healthier eating fast casual concept with 5 company owned locations in Charlotte, North Carolina. Just Fresh offers fresh-squeezed juices, gourmet coffee, fresh-baked goods and premium-quality, made-to-order sandwiches, salads and soups.
We own and operate 8 Hooters full-service restaurants in the United States, South Africa, and the United Kingdom. Hooters restaurants are casual beach-themed establishments featuring music, sports on large flat screens, and a menu that includes seafood, sandwiches, burgers, salads, and of course, Hooters original chicken wings and the “nearly world famous” Hooters Girls.
As of December 31, 2018, our system-wide store count totaled 62 locations, consisting of 47 company-owned locations and 15 franchisee-operated locations.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2018 COMPARED TO THE YEAR ENDED DECEMBER 31, 2017
Our results of operations are summarized below:
|December 31, 2018||December 31, 2017|
|Amount||% of Revenue*||Amount||% of Revenue*||% Change|
|Restaurant sales, net||$||39,665,763||$||40,495,166||-2.0||%|
|Gaming income, net||402,611||442,521||-9.0||%|
|Management fee income||100,000||100,000||0.0||%|
|Restaurant cost of sales||13,288,422||33.5||%||13,692,921||33.8||%||-3.0||%|
|Restaurant operating expenses||23,565,526||59.4||%||23,432,124||57.9||%||0.6||%|
|Restaurant pre-opening and closing expenses||412,979||1.0||%||319,282||0.8||%||29.3||%|
|General and administrative||4,578,788||11.3||%||4,545,496||11.0||%||0.7||%|
|Asset impairment charge||1,959,510||4.8||%||2,395,616||5.8||%||-18.2||%|
|Depreciation and amortization||2,163,585||5.3||%||2,282,801||5.5||%||-5.2||%|
|Operating loss from continuing operations||$||(5,355,101||)||$||(5,235,377||)|
* Restaurant cost of sales, operating expenses and pre-opening and closing expense percentages are based on restaurant sales, net. Other percentageas are based on total revenue.
Total revenue decreased 2.0% to $40.6 million for the year ended December 31, 2018 from $41.4 million for the year ended December 31, 2017. Revenues by concept are summarized below for each period:
|Year Ended December 31, 2018|
|Revenue||Better Burgers||Just Fresh||Hooters||Corp||Total||% of Total|
|Restaurant sales, net||$||22,172,187||$||4,054,270||$||13,439,306||$||-||$||39,665,763||97.7||%|
|Gaming income, net||-||-||402,611||-||402,611||1.0||%|
|Year Ended December 31, 2017|
|Revenue||Better Burgers||Just Fresh||Hooters||Corp||Total||% of Total|
|Restaurant sales, net||$||22,369,395||$||5,060,072||$||13,065,699||$||-||$||40,495,166||97.7||%|
|Gaming income, net||-||-||442,521||-||442,521||1.1||%|
|% Change in Revenues Compared to Prior Year|
|Revenue||Better Burgers||Just Fresh||Hooters||Corp||Total|
|Restaurant sales, net||-0.9||%||-19.9||%||2.9||%||-||-2.0||%|
|Gaming income, net||-||-||-9.0||%||-||-9.0||%|
|●||Revenue from the Company’s Better Burger Group decreased 0.6% to $22.6 million for the year ended December 31, 2018 from $22.8 million for the year ended December 31, 2017.|
|Revenues increased $1.7 million from the opening of 4 Little Big Burger restaurants and 1 BGR restaurant during 2018 along with the acquisition of BGR Annapolis and BGR Columbia in 2018. However, the increased revenue from new stores was completely offset by the closure of underperforming locations at BGR and American Burger in 2017 and 2018 which led to a decrease in total revenue for the Better Burger Group.|
|●||Revenue from the Company’s Just Fresh Group decreased 19.9% to $4.1 million for the year ended December 31, 2018 from $5.1 million for the year ended December 31, 2017. The decline in revenues was primarily from the closure of 1 underperforming location in the fourth quarter of 2017 and another location in the first quarter of 2018.|
|●||Revenue from the Company’s Hooter’s restaurants increased 2.5% to $13.8 million for the year ended December 31, 2018 from $13.5 million for the year ended December 31, 2017. The increase in Hooters revenue was largely driven by improved sales in the Pacific Northwest restaurant locations.|
|●||Gaming revenue decreased by 9.0% to $403,000 for the year ended December 31, 2018 from $442,000 for the year ended December 31, 2017. The decline in gaming revenue is partially attributable to increased competition from a new casino property in the area.|
|●||Management fee income was unchanged at $100,000 for the years ended December 31, 2018 and 2017. The Company derives management fee income from serving as general partner for its investment in HOA LLC and as compensation for the Company’s CEO serving on the board of Hooters of America.|
|●||Franchise income increased 12.7% to $445,000 for the year ended December 31, 2018 from $395,000 for the year ended December 31, 2017. The increase is attributable to the Company beginning to collect royalties from the Little Big Burger franchisees and the adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) which resulted in additional franchise revenue being recorded during the year.|
Restaurant cost of sales
Restaurant cost of sales decreased 3.0% to $13.3 million for the year ended December 31, 2018 from $13.7 million for the year ended December 31, 2017. Cost of sales by concept are summarized below for each period:
|December 31, 2018||December 31, 2017|
|Cost of Restaurant Sales||Amount||% of Restaurant Net Sales||Amount||% of Restaurant Net Sales||% Change|
|Better Burgers Fast Casual||$||7,162,578||32.3||%||$||7,398,092||33.1||%||-3.2||%|
|Just Fresh Fast Casual||1,401,205||34.6||%||1,767,032||34.9||%||-20.7||%|
|Hooters Full Service||4,724,639||35.2||%||4,527,797||34.7||%||4.3||%|
As a percentage of restaurant sales, net, restaurant cost of sales improved to 33.5% for the year ended December 31, 2018 from 33.8% for the year ended December 31, 2017.
|●||Cost of sales in the Better Burger Group improved from 33.1% to 32.3%, Just Fresh improved from 34.9% to 34.6%, while cost of sales for the Hooters locations increased from 34.7% to 35.2%. Cost of sales in the Better Burger business improved largely due to favorable movements in beef prices, combined with expansion of our Little Big Burger brand which runs lower costs than BGR and American Burger.|
|●||Cost of sales in the Just Fresh business remained relatively consistent percentage-wise compared with fiscal year 2017.|
|●||Costs of sales in the Hooters business improved in our US locations, while costs increased in our UK and South Africa locations as food and alcohol costs increased.|
Restaurant operating expenses
Restaurant operating expenses increased 0.6% to $23.6 million for the year ended December 31, 2018 from $23.4 million for the year ended December 31, 2017. Restaurant operating expenses by concept are summarized below for each period:
|December 31, 2018||December 31, 2017|
|Operating Expenses||Amount||% of Restaurant Net Sales||Amount||% of Restaurant Net Sales||% Change|
|Better Burgers Fast Casual||$||13,299,693||60.0||%||$||12,892,870||57.6||%||3.2||%|
|Just Fresh Fast Casual||2,208,083||54.5||%||2,774,812||54.8||%||-20.4||%|
|Hooters Full Service||8,057,750||60.0||%||7,764,442||59.4||%||3.8||%|
As a percent of restaurant revenues, operating expenses increased to 59.4% for the year ended December 31, 2018 from 57.9% for the year ended December 31, 2017. Operating expenses increased due to the opening of new stores in the Better Burger group, increases in wage rates and delivery services charges and penalties and interest charges associated with delinquent payroll taxes across all concepts.
Restaurant pre-opening and closing expenses
Restaurant pre-opening and closing expenses increased to $413,000 for the year ended December 31, 2018 compared with $319,000 for the year ended December 31, 2017. The Company has more new Little Big Burger restaurants under lease due to new restaurant openings and other locations still under construction. The Company records rent and other costs to pre-opening expenses while the restaurants are under construction.
General and administrative expense (“G&A”)
G&A increased 1.0% to $4.6 million for the year ended December 31, 2018 from $4.5 million for the year ended December 31, 2017. Significant components of G&A are summarized as follows:
|December 31, 2018||December 31, 2017||% Change|
|Audit, legal and other professional services||$||1,250,414||$||1,159,850||7.81||%|
|Salary and benefits||2,064,693||2,192,825||-5.84||%|
|Travel and entertainment||198,291||195,883||1.23||%|
|Shareholder services and fees||68,708||129,287||-46.86||%|
|Advertising, Insurance and other||996,682||867,651||14.87||%|
|Total G&A Expenses||$||4,578,788||$||4,545,496||0.73||%|
As a percentage of total revenue, G&A increased to 11.3% for the year ended December 31, 2018 from 11.0% for the year ended December 31, 2017.
For the current year, approximately $2.7 million is attributable to the cost of operating our Corporate office, including salaries, travel, audit, legal and other public company related costs. Approximately $1.9 million is attributable to managing the operations of our restaurants, including regional management, franchising operations, marketing and advertising within the Better Burger Group, Hooters, and Just Fresh.
Asset impairment charges
Asset impairment charges totaled $2.0 million for the year ended December 31, 2018 as compared with $2.4 million for the year ended December 31, 2017. The Company recognized impairment charges related to the closure of one Just Fresh location and one American Burger location in Charlotte, North Carolina. In addition, the Company recognized impairment charges related to its Hooters Nottingham location of approximately $1.5 million. The impairment charges were primarily reflected in the first half of 2018, primarily from reducing goodwill based on management’s intent with regard to the related store location. The Company no longer has a Letter of Intent to sell the Hooters Nottingham location.
During the year ended December 31, 2017, the Company recognized impairment charges related to the closure of three BGR store locations in the Washington D.C. area, one Just Fresh location in Charlotte and one Hooters location in South Africa. In addition, the Company recognized impairment charges related to one of its Hooters locations in the United States. The impairment charges are primarily non-cash and arise from writing leasehold improvements, intangible assets and property and equipment to estimated net realizable value based on management’s intent to close or sell the related store locations. The Company also had intangible assets representing the fair value of customer contracts acquired in connection with BGR’s franchise business. The Company previously determined this intangible asset to be indefinite lived based on the Company’s expectations of franchisee renewals. During 2017, management revised the expected life of the BGR franchise intangible and determined that the asset was impaired, resulting in an impairment charge of $264,000.
Depreciation and amortization
Depreciation and amortization expense decreased from $2.3 million for the year ended December 31, 2017 to $2.2 million for the year ended December 31, 2018. The decrease is primarily attributable to a decrease in depreciation expense from restaurant closures in 2017 and 2018 as the assets in those stores were primarily written off at closure.
Other income (expense)
Other income (expense) consisted of the following:
|Other Income (Expense)||December 31, 2018||December 31, 2017||% Change|
|Loss on extinguishment of debt||-||(95,310||)||-100.0||%|
|Other income (expense)||(17,926||)||112,984||-115.9||%|
|Total other expense||$||(2,545,390||)||$||(2,575,287||)||-1.2||%|
Other expense, net decreased to $2.5 million for the year ended December 31, 2018 from $2.6 million for the year ended December 31, 2017.
Interest expense was relatively unchanged at $2.5 million for the year ended December 31, 2018 compared to $2.6 million for the year ended December 31, 2017.
Other expense was $18,000 for the year ended December 31, 2018 compared to income of $113,000 for the prior year period. In the current year, the Company wrote down an investment which is included in other expenses.
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2018 COMPARED TO THE YEAR ENDED DECEMBER 31, 2017
|December 31, 2018||December 31, 2017|
|Net Cash Provided by (used in) Operating Activities||$||575,217||$||(724,432||)|
|Net Cash Used in Investing Activities||(2,442,864||)||(1,164,302||)|
|Net Cash Provided by Financing Activities||2,070,263||2,081,536|
|Effect of foreign currency exchange rates on cash||(10,903||)||(22,884||)|
Cash provided by operating activities was $575,000 for the year ended December 31, 2018 compared to cash used in activities of $724,000 in the prior year period. The primary drivers of the increase in cash provided by operating activities was the increase in accounts payable and accrued expenses.
Cash used in investing activities for the year ended December 31, 2018 was $2,443,000 compared to $1,164,000 in the prior year period. The primary drivers of the increase in cash used in investing activities was an increase in capital expenditures as it relates to the new Little Big Burgers that were opened in 2018.
Cash provided by financing activities for the year ended December 31, 2018 was $2,070,000 compared to cash provided by financing activities of $2,081,000 in the prior year period. The primary drivers of the cash provided by financing activities during 2018 was proceeds from the sale of common stock and warrants and the contributions from non-controlling members.
LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN
As of December 31, 2018, our cash balance was $630,000, our working capital was negative $12.6 million, and we have significant near-term commitments and contractual obligations. The level of additional cash needed to fund operations and our ability to conduct business for the next twelve months will be influenced primarily by the following factors:
|●||our ability to access the capital and debt markets to satisfy current obligations and operate the business;|
|●||our ability to refinance or otherwise extend maturities of current debt obligations;|
|●||the level of investment in acquisition of new restaurant businesses and entering new markets;|
|●||our ability to manage our operating expenses and maintain gross margins as the Company grows;|
|●||popularity of and demand for the Company’s fast-casual dining concepts; and|
|●||general economic conditions and changes in consumer discretionary income.|
We have typically funded our operating costs, acquisition activities, working capital requirements and capital expenditures with proceeds from the issuances of our common stock and other financing arrangements, including convertible debt, lines of credit, notes payable, capital leases, and other forms of external financing.
Our operating plan for the next twelve months contemplates opening at least four additional company owned stores as well as growing our franchising businesses at Little Big Burger and BGR. We have contractual commitments related to store construction of approximately $803,000, of which we expect approximately $125,000 to be funded by private investors and approximately $678,000 will be funded internally by the Company. Of the $678,000 to be funded by the Company, $439,000 is expected to be returned to the Company via tenant improvement refunds. We also have $6 million of principal due on our debt obligations within the next 12 months and $9 million due within the next 15 months plus interest. In addition, if we fail to meet various debt covenants going forward and are notified of the default by the noteholders of the 8% non-convertible secured debentures, we may be assessed additional default interest and penalties which would increase our obligations. We expect to be able to refinance our current debt obligations during 2019 and are also exploring the sale of certain assets and raising additional capital. In May 2018, the Company completed the sale of 403,214 shares of common stock at a price of $3.50 per common share for proceeds of $1.4 million. Refer to Note 16 regarding the sale of certain assets in 2019. However, we cannot provide assurance that we will be able to refinance our long-term debt or sell assets or raise additional capital.
As we execute our growth plans over the next 12 months, we intend to carefully monitor the impact of growth on our working capital needs and cash balances relative to the availability of cost-effective debt and equity financing. In the event that capital is not available, or we are unable to refinance our debt obligations or obtain waivers, we may then have to scale back or freeze our organic growth plans, sell assets on less than favorable terms, reduce expenses, and/or curtail future acquisition plans to manage our liquidity and capital resources. We may also incur financial penalties or other negative actions from our lenders if we are not able to refinance or otherwise extend or repay our current obligations or obtain waivers.
In addition, our business is subject to additional risks and uncertainties, including, but not limited to, those described in Item 1A. “Risk Factors”.
Critical Accounting Policies
The Company’s significant accounting policies are more fully described in Note 1 of Notes to the Consolidated Financial Statements in Item 8. The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions to determine certain assets, liabilities, revenues and expenses. Management bases these estimates and assumptions upon the best information available at the time of the estimates or assumptions. The Company’s estimates and assumptions could change materially as conditions within and beyond our control change. Accordingly, actual results could differ materially from estimates. The Company believes that the following are its most significant accounting policies:
On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method applied to those contracts which were not completed as of December 31, 2017. The Company elected a practical expedient to aggregate the effect of all contract modifications that occurred before the adoption date, which did not have a material impact to our consolidated financial statements. Results for reporting periods beginning on or after January 1, 2018 are presented under Accounting Standards Codification Topic 606 (“ASC 606”). Prior period amounts were not revised and continue to be reported in accordance with ASC Topic 605 (“ASC 605”), the accounting standard then in effect.
Upon adoption, the Company recorded a decrease to opening stockholders’ equity of $1,042,000 with a corresponding increase of $1,042,000 in deferred revenue. Additional franchise income of $83,000 was recognized during the year-ended December 31, 2018 under ASC 606, compared to what would have been recognized under ASC 605.
Prior to the adoption of ASC 606, the Company’s initial franchise fees were recorded as deferred revenue when received and proportionate amounts were recognized as revenue when certain milestones such as completion of employee training, lease signing, and store opening were achieved. With the adoption of ASC 606, such initial franchise fees are deferred and recognized over the franchise license term as discussed further below.
The Company generates revenues from the following sources: (i) restaurant sales; (ii) management fee income; (iii) gaming income; and (iv) franchise revenues, consisting of royalties based on a percentage of sales reported by franchise restaurants and initial signing fees.
Restaurant Sales, Net
The Company records revenue from restaurant sales at the time of sale, net of discounts, coupons, employee meals, and complimentary meals and gift cards. Sales tax and value added tax (“VAT”) collected from customers and remitted to governmental authorities are presented on a net basis within revenue in our consolidated statements of operations.
Management Fee Income
The Company receives revenue from management fees from certain non-affiliated companies, including from managing its investment in Hooters of America which are generally earned and recognized over the performance period.
The Company receives revenue from operating a gaming facility adjacent to its Hooters restaurant in Jantzen Beach, Oregon. Revenue from gaming is recognized as earned from gaming activities, net of payouts to customers, taxes and government fees. These fees are recognized as they are earned based on the terms of the agreements.
The Company grants franchises to operators in exchange for initial franchise license fees and continuing royalty payments. The license granted for each restaurant or area is considered a performance obligation. All other obligations (such as providing assistance during the opening of a restaurant) are combined with the license and were determined to be a single performance obligation. Accordingly, the total transaction price (comprised of the restaurant opening and territory fees) is allocated to each restaurant expected to be opened by the licensee under the contract. There are significant judgments regarding the estimated total transaction price, including the number of stores expected to be opened. We recognize the fee allocated to each restaurant as revenue on a straight-line basis over the restaurant’s license term, which generally begins upon the signing of the contract for area development agreements and upon the signing of a store lease for franchise agreements. The payments for these upfront fees are generally received upon contract execution. Continuing fees, which are based upon a percentage of franchisee revenues and are not subject to any constraints, are recognized on the accrual basis as those sales occur. The payments for these continuing fees are generally made on a weekly basis.
Deferred revenue consists of contract liabilities resulting from initial and renewal franchise license fees paid by franchisees, which are recognized on a straight-line basis over the term of the underlying franchise agreement, as well as upfront development fees paid by franchisees, which are recognized on a straight-line basis over the term of the underlying franchise agreement once it is executed or if the development agreement is terminated.
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 we become legally obligated for the rent payments or the date when we take access to the grounds for build out. Accounting for leases involves significant management judgment.
Goodwill and indefinite lived intangibles
Generally accepted accounting principles in the United States require the Company to perform goodwill and indefinite lived intangible asset impairment tests annually and more frequently when negative conditions or a triggering event arise. After an assessment of certain qualitative factors, if it is determined to be more likely than not that the fair value of a reporting unit is less than its carrying amount, entities must perform the quantitative analysis of the goodwill impairment test. Otherwise, the quantitative test(s) become optional. As allowed under the amended guidance, the Company chose not to assess the qualitative factors of its reporting units and, instead, performed the quantitative tests.
The fair value of trade name/trademarks are estimated and compared to the carrying value. The Company estimates the fair value of trademarks using the relief-from-royalty method, which requires assumptions related to projected sales from its annual long-range plan; assumed royalty rates that could be payable if the Company did not own the trademarks; and a discount rate. The Company recognizes an impairment loss when the estimated fair value of the trade name/trademarks is less than its carrying value.
Intangible assets are recorded for the initial franchise fees for our Hooter’s restaurants. The Company amortizes these amounts over a 20-year period, which is the life of the franchise agreement. The Company also has intangible assets representing the acquisition date fair value of customer contracts acquired in connection with BGR’s franchise business. The Company previously determined this intangible asset to be indefinite lived based on the Company’s expectations of franchisee renewals. During 2017, management reevaluated the expected life of the BGR franchise intangible and determined that the asset was impaired, resulting in an impairment charge of $264 thousand. Management also revised its estimated useful life of the related intangible asset and began amortizing the related asset over the weighted average life of the underlying franchise agreements.
COMMITMENTS AND CONTINGENCIES
The Company, through its subsidiaries, leases the land and buildings for our 5 restaurants in South Africa, 1 restaurant in Nottingham, United Kingdom, and 43 restaurant locations in the U.S. The terms for our restaurant leases vary from two to twenty years and have options to extend. We lease some of our restaurant facilities under “triple net” leases that require us to pay minimum rent, real estate taxes, maintenance costs and insurance premiums and, in some instances, percentage rent based on sales in excess of specified amounts.
We also lease our corporate office space in Charlotte, North Carolina.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table presents a summary of our contractual operating lease obligations, debt and other contractual commitments as of December 31, 2018:
|Long-Term Debt Obligations||$||6,000,000||$||3,000,000||$||3,000,000||$||-||$||-||$||-||$||-|
|Convertible Debt Obligations||3,000,000||3,000,000||-||-||-||-||-|
|Operating Lease Obligations||21,462,746||4,041,976||3,659,620||3,230,270||2,483,514||1,940,765||6,106,601|
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Item 8: Financial Statements and Supplementary Data
CHANTICLEER HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|Report of Independent Registered Public Accounting Firm||31|
|Consolidated Balance Sheets at December 31, 2018 and 2017||32|
|Consolidated Statements of Operations for the Years Ended December 31, 2018 and 2017||33|
|Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2018 and 2017||34|
|Consolidated Statements of Stockholders’ Equity at December 31, 2018 and 2017||35|
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017||36-37|
|Notes to Consolidated Financial Statements||38-64|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Chanticleer Holdings, Inc. and Subsidiaries
Charlotte, North Carolina
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Chanticleer Holdings, Inc. and Subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive loss, equity, and cash flows for the years then ended, and the related notes, (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company incurred approximately $7.2 million of net losses in each of the years ended December 31, 2018 and 2017, and the Company has working capital deficits of approximately $12.6 million and $12.9 million as of December 31, 2018 and 2017, respectively. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s evaluations of the events and conditions and management’s plans regarding those matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Cherry Bekaert LLP
We have served as the Company’s auditor since 2015.
Charlotte, North Carolina
April 1, 2019
Chanticleer Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
|December 31, 2018||December 31, 2017|
|Accounts and other receivables, net||387,239||475,988|
|Prepaid expenses and other current assets||179,377||324,324|
|Assets held for sale, net||-||100,000|
|TOTAL CURRENT ASSETS||1,675,136||1,799,561|
|Property and equipment, net||10,467,841||8,548,592|
|Intangible assets, net||5,123,159||5,896,732|
|Deposits and other assets||446,639||490,328|
|LIABILITIES AND EQUITY|
|Accounts payable and accrued expenses||$||7,386,506||$||5,797,252|
|Current maturities of long-term debt and notes payable, net of unamortized discount and deferred financing costs of $0 and $1,173,190, respectively||3,740,101||5,741,911|
|Current maturities of convertible notes payable||3,000,000||3,000,000|
|Due to related parties||185,726||191,850|
|TOTAL CURRENT LIABILITIES||14,312,333||14,731,013|
|Long-term debt, net of current maturities||3,000,000||-|
|Convertible notes payable, net of unamortized premium of $0 and $12,256, respectively||-||212,256|
|Redeemable preferred stock: no par value, 62,876 shares issued and outstanding, net of discount of $173,914 and $208,697, respectively||674,912||640,129|
|Deferred tax liabilities||76,765||779,359|
|Commitments and contingencies|
|Common stock subject to repurchase obligation; 0 and 56,290 shares issued and outstanding, respectively||-||-|
|Preferred stock: no par value; authorized 5,000,000 shares; 62,876 issued and outstanding||-||-|
|Common stock: $0.0001 par value; authorized 45,000,000 shares; issued and outstanding 3,715,444 and 3,045,809 shares, respectively||373||305|
|Additional paid in capital||64,756,903||60,750,330|
|Accumulated other comprehensive loss||(202,115||)||(934,901||)|
|Total Chanticleer Holdings, Inc, Stockholders’ Equity||7,430,488||10,706,431|
|TOTAL LIABILITIES AND EQUITY||$||29,793,240||$||30,183,019|
See accompanying notes to consolidated financial statements
Chanticleer Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations
|December 31, 2018||December 31, 2017|
|Restaurant sales, net||$||39,665,763||$||40,495,166|
|Gaming income, net||402,611||442,521|
|Management fee income||100,000||100,000|
|Restaurant cost of sales||13,288,422||13,692,921|
|Restaurant operating expenses||23,565,526||23,432,124|
|Restaurant pre-opening and closing expenses||412,979||319,282|
|General and administrative expenses||4,578,788||4,545,496|
|Asset impairment charge||1,959,510||2,395,616|
|Depreciation and amortization||2,163,585||2,282,801|
|Other (expense) income|
|Loss on debt refinancing||-||(95,310||)|
|Other income (expense)||(17,926||)||112,984|
|Total other expense||(2,545,390||)||(2,575,287||)|
|Loss before income taxes||(7,900,491||)||(7,810,664||)|
|Income tax benefit||701,224||644,429|
|Consolidated net loss||(7,199,267||)||(7,166,235||)|
|Less: Net loss attributable to non-controlling interests||344,847||371,464|
|Net loss attributable to Chanticleer Holdings, Inc.||$||(6,854,420||)||$||(6,794,771||)|
|Dividends on redeemable preferred stock||(118,604||)||(108,206||)|
|Net loss attributable to common shareholders of Chanticleer Holdings, Inc.||$||(6,973,024||)||$||(6,902,977||)|
|Net loss attributable to Chanticleer Holdings, Inc. per common share, basic and diluted:||$||(1.98||)||$||(2.73||)|
|Weighted average shares outstanding, basic and diluted||3,520,125||2,525,037|
See accompanying notes to consolidated financial statements
Chanticleer Holdings, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Loss
|December 31, 2018||December 31, 2017|
|Net loss attributable to Chanticleer Holdings, Inc.||$||(6,854,420||)||$||(6,794,771||)|
|Foreign currency translation gain||732,786||220,757|
|Total other comprehensive income||732,786||220,757|
See accompanying notes to consolidated financial statements
Chanticleer Holdings, Inc. and Subsidiaries
Consolidated Statements of Equity
|Balance, December 31, 2016||2,139,425||$||213||$||55,926,196||$||(1,155,658||)||$||(42,206,325||)||$||791,417||$||13,355,843|
|Common stock and warrants issued for:|
|Cash proceeds, net||499,856||50||939,662||-||-||-||939,712|
|Prefered Unit dividend||20,782||2||54,002||-||(108,207||)||-||(54,203||)|
|Convetible debt beneficial conversion feature||-||-||274,167||-||-||-||274,167|
|Warrants issued with notes payable||-||-||1,837,397||-||-||-||1,837,397|
|Foreign currency translation||-||-||-||220,757||-||-||220,757|
|Shares subject to repurchase||56,290||6||348,990||-||-||-||348,996|
|Non-controlling interest contributions||-||-||362,500||-||-||362,500||725,000|
|Round-up shares in reverse split||806||-||-||-||-||-||-|
|Balance, December 31, 2017||3,045,809||305||60,750,330||(934,901||)||(49,109,303||)||782,453||11,488,884|
|Common stock and warrants issued for:|
|Cash proceeds, net||403,214||41||1,372,142||-||-||-||1,372,183|
|Prefered Unit dividend||30,466||4||77,452||-||(118,604||)||-||(41,148||)|
|Accrued interest on debt||12,800||2||43,343||-||-||-||43,345|
|Foreign currency translation||-||-||-||732,786||-||-||732,786|
|Shares issued on exercise of warrants||100,000||10||289,990||-||-||-||290,000|
|Warrants issued in debt modification||-||-||1,494,999||-||-||-||1,494,999|
|Shareholder payment for short swing||-||-||5,546||5,546|
|Non-controlling interest contributions||-||-||-||-||-||900,000||900,000|
|Non-controlling interest distributions||-||-||-||-||-||(142,225||)||(142,225||)|
|Reclassification of Minority Interest||-||-||368,344||-||-||(368,344||)||-|
|Cumulative effect of change in accounting principle||-||-||-||-||(1,042,346||)||-||(1,042,346||)|
|Balance, December 31, 2018||3,715,444||$||373||$||64,756,903||$||(202,115||)||$||(57,124,673||)||$||827,037||$||8,257,525|
See accompanying notes to consolidated financial statements
Chanticleer Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
|December 31, 2018||December 31, 2017|
|Cash flows from operating activities:|
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities:|
|Depreciation and amortization||2,163,585||2,282,801|
|Asset impairment charge||1,959,510||2,395,616|
|Loss on debt refinancing||-||95,310|
|Loss on investments||68,101||-|
|Common stock and warrants issued for services||154,768||280,669|
|Common stock and warrants issued for interest||-||-|
|Amortization of debt discount||1,195,918||788,187|
|Change in assets and liabilities:|
|Accounts and other receivables||91,798||35,154|
|Prepaid and other assets||116,154||22,157|
|Accounts payable and accrued liabilities||2,626,504||1,039,179|
|Change in amounts payable to related parties||(6,124||)||(2,500||)|
|Deferred income taxes||(702,594||)||(706,195||)|
|Net cash provided by (used in) operating activities||575,218||(724,432||)|
|Cash flows from investing activities:|
|Purchase of property and equipment||(2,392,864||)||(1,625,460||)|
|Cash paid for acquisitions||(50,000||)||-|
|Proceeds from sale of property||-||461,158|
|Net cash used in investing activities||(2,442,864||)||(1,164,302||)|
|Cash flows from financing activities:|
|Proceeds from sale of common stock and warrants||1,667,729||939,712|
|Proceeds from sale of redeemable preferred stock, net of offerring costs of $243,480||-||348,171|
|Payment of deferred financing costs||-||(293,294||)|
|Payments on capital leases||-||(28,405||)|
|Distributions to non-controlling interest||(142,225||)||-|
|Contributions from non-controlling interest||900,000||725,000|
|Net cash provided by financing activities||2,070,262||2,081,536|
|Effect of exchange rate changes on cash||(10,903||)||(22,884||)|
|Net increase in cash and restricted cash||191,713||169,918|
|Cash and restricted cash, beginning of year||438,493||268,575|
|Cash and restricted cash, end of year||$||630,206||$||438,493|
See accompanying notes to consolidated financial statements
Chanticleer Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows, continued
|December 31, 2018||December 31, 2017|
|Supplemental cash flow information:|
|Cash paid for interest and income taxes:|
|Non-cash investing and financing activities:|
|Convertible debt settled through issuance of common stock||$||200,000||$||625,000|
|Accrued interest settled through issuance of convertible debt||43,345||74,763|
|Preferred stock dividends paid through issuance of common stock||77,452||54,002|
|Commons stock issued in connection with working capital adjustment||-||27,018|
|Debt issued to fund acquisitions||196,366||-|
|Fixed asset additions included in accounts payable and accrued expenses at year end||510,788||-|
|Default interest liability paid in connection with warrants issued as part of debt modification||1,494,999||-|
See accompanying notes to consolidated financial statements
Chanticleer Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Business
Chanticleer Holdings, Inc. (the “Company”) is in the business of owning, operating and franchising fast casual dining concepts domestically and internationally. The Company was organized October 21, 1999, under its original name, Tulvine Systems, Inc., under the laws of the State of Delaware. On April 25, 2005, Tulvine Systems, Inc. formed a wholly owned subsidiary, Chanticleer Holdings, Inc., and on May 2, 2005, Tulvine Systems, Inc. merged with, and changed its name to, Chanticleer Holdings, Inc.
The consolidated financial statements include the accounts of Chanticleer Holdings, Inc. and its subsidiaries presented below (collectively referred to as the “Company”):
|Name||Jurisdiction of Incorporation||Percent Owned|
|CHANTICLEER HOLDINGS, INC.||DE, USA|
|American Roadside Burgers, Inc.||DE, USA||100%|
|American Burger Ally, LLC||NC, USA||100%|
|American Burger Morehead, LLC||NC, USA||100%|
|American Burger Prosperity, LLC||NC, USA||50%|
|American Roadside Burgers Smithtown, Inc.||DE, USA||100%|
|American Roadside McBee, LLC||NC, USA||100%|
|American Roadside Southpark LLC||NC, USA||100%|
|BGR Acquisition, LLC||NC, USA||100%|
|BGR Franchising, LLC||VA, USA||100%|
|BGR Operations, LLC||VA, USA||100%|
|BGR Acquisition 1, LLC||NC, USA||100%|
|BGR Annapolis, LLC||MD, USA||100%|
|BGR Arlington, LLC||VA, USA||100%|
|BGR Columbia, LLC||MD, USA||100%|
|BGR Dupont, LLC||DC, USA||100%|
|BGR Michigan Ave, LLC||DC, USA||100%|
|BGR Mosaic, LLC||VA, USA||100%|
|BGR Old Keene Mill, LLC||VA, USA||100%|
|BGR Springfield Mall, LLC||VA, USA||100%|
|BGR Tysons, LLC||VA, USA||100%|
|BGR Washingtonian, LLC||MD, USA||100%|
|Capitol Burger, LLC||MD, USA||100%|
|BT Burger Acquisition, LLC||NC, USA||100%|
|BT’s Burgerjoint Rivergate LLC||NC, USA||100%|
|BT’s Burgerjoint Sun Valley, LLC||NC, USA||100%|
|LBB Acquisition, LLC||NC, USA||100%|
|Cuarto LLC||OR, USA||100%|
|LBB Acquisition 1 LLC||OR, USA||100%|
|LBB Capitol Hill LLC||WA, USA||50%|
|LBB Franchising LLC||NC, USA||100%|
|LBB Green Lake LLC||OR, USA||50%|
|LBB Hassalo LLC||OR, USA||80%|
|LBB Lake Oswego LLC||OR, USA||100%|
|LBB Magnolia Plaza LLC||NC, USA||50%|
|LBB Multnomah Village LLC||OR, USA||50%|
|LBB Platform LLC||OR, USA||80%|
|LBB Progress Ridge LLC||OR, USA||50%|
|LBB Rea Farms LLC||NC, USA||50%|
|LBB Wallingford LLC||WA, USA||50%|
|Noveno LLC||OR, USA||100%|
|Octavo LLC||OR, USA|