UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Quarter Ended: JUNE 30, 2005
Commission File Number: 0-29507
CHANTICLEER HOLDINGS, INC.
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 20-2932652
-------- ----------
(State or Jurisdiction of (IRS Employer ID No)
Incorporation or Organization)
6836 MORRISON BLVD., SUITE 200, CHARLOTTE, NC 28211
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(Address of principal executive office) (zip code)
(704) 366-5054
--------------
(Issuer's telephone number)
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 preceding 12 months (or for such shorter periods as the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
The number of shares outstanding of registrant's common stock, par value $.0001
per share, as of July 25, 2005 was 5,000,000 shares.
CHANTICLEER HOLDINGS, INC.
INDEX
Page
No.
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Part I Financial Information (unaudited)
Item 1. Financial Statements
Statement of Net Assets as of June 30, 2005 and
December 31, 2004 3
Statements of Operations - For the Three Months
Ended June 30, 2005 and 2004 4
Statements of Operations - For the Six Months
Ended June 30, 2005 and 2004, and from inception
(October 21, 1999) to June 30, 2005 5
Statements of Cash Flows - For the Six Months
Ended June 30, 2005 and 2004, and from inception
(October 21, 1999) to June 30, 2005 6
Statements of Changes in Net Assets - For the Six
Months Ended June 30, 2005 and 2004, and from
inception (October 21, 1999) to June 30, 2005 7
Financial Highlights For the Six Months Ended
June 30, 2005 and 2004, and from inception
(October 21, 1999) to June 30, 2005 8
Schedule of Investments as of June 30, 2005 and
December 31, 2004 9
Notes to Financial Statements 10-14
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations 15-17
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 18
Item 4. Controls and Procedures 19
Part II Other Information 20-23
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
Signatures
Exhibits
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Chanticleer Holdings, Inc.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF NET ASSETS
JUNE 30, DECEMBER 31,
2005 2004
--------- ---------
(Unaudited)
ASSETS
Investments in non-controlled affiliates
(cost $20,000 and $125,000 at June 30,
2005 and December 31, 2004, respectively $ 5,000 $ 128,500
Cash and cash equivalents 46,257 500
Prepaid expenses 10,000 --
--------- ---------
TOTAL ASSETS 61,257 129,000
--------- ---------
LIABILITIES
Accounts payable 3,505 15,698
Advances from shareholders 55,000 --
--------- ---------
TOTAL LIABILITIES 58,505 15,698
--------- ---------
NET ASSETS $ 2,752 $ 113,302
========= =========
Commitments and contingencies Composition of net assets:
Common stock, $.0001 par value. Authorized 200,000,000 shares;
issued and outstanding 5,000,000 shares at June 30, 2005 and
4,000,000 shares at December 31, 2004 $ 500 $ 400
Additional paid in capital 120,637 128,720
Accumulated deficit:
Accumulated net operating loss (54,385) (19,318)
Net realized loss on investments (49,000) --
Net unrealized appreciation (depreciation) of investments (15,000) 3,500
--------- ---------
Net assets $ 2,752 $ 113,302
========= =========
Net asset value per share $ 0.00 $ 0.03
========= =========
See accompanying notes to financial statements.
3
CHANTICLEER HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
--------
2005 2004
----------- -----------
INCOME FROM OPERATIONS:
Investment income $ 2 $ --
----------- -----------
2 --
EXPENSES:
Salaries and wages 8,224 --
Professional fees 21,550 10,550
Interest expense 380 160
Selling, general and administrative expense 826 2,640
----------- -----------
30,980 13,350
----------- -----------
LOSS BEFORE INCOME TAXES (30,978) (13,350)
INCOME TAXES -- --
----------- -----------
NET LOSS FROM OPERATIONS (30,978) (13,350)
----------- -----------
NET REALIZED AND UNREALIZED GAINS (LOSSES):
Net realized loss on investments, net of income tax benefit of $0 (49,000) --
Change in unrealized appreciation (depreciation) of
non-controlled affiliate investments, net of deferred tax
expense of $0 in 2005 and 2004, respectively 36,000 2,000
----------- -----------
Net decrease in net assets from operations $ (43,978) $ (11,350)
=========== ===========
NET DECREASE IN NET ASSETS FROM OPERATIONS PER SHARE,
BASIC AND DILUTED $ (0.01) $ (0.01)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 4,890,110 1,395,604
=========== ===========
See accompanying notes to financial statements.
4
CHANTICLEER HOLDINGS, INC.
(A Development Stage Company)
Statements of Operations
(Unaudited)
FROM
SIX MONTHS ENDED INCEPTION
JUNE 30, (OCTOBER 21, 1999)
-------- TO JUNE 30,
2005 2004 2005
----------- ----------- -----------
INCOME FROM OPERATIONS:
Investment income $ 2 $ -- $ 2
----------- ----------- -----------
2 -- 2
EXPENSES:
Salaries and wages 8,224 -- 8,224
Professional fees 24,550 10,550 38,870
Interest expense 810 160 1,708
Selling, general and administrative expense 1,485 2,640 5,585
----------- ----------- -----------
35,069 13,350 54,387
----------- ----------- -----------
LOSS BEFORE INCOME TAXES (35,067) (13,350) (54,385)
INCOME TAXES -- -- --
----------- ----------- -----------
NET LOSS FROM OPERATIONS (35,067) (13,350) (54,385)
----------- ----------- -----------
NET REALIZED AND UNREALIZED GAINS (LOSSES):
Net realized loss on investments, net of
income tax benefit of $0 (49,000) -- (49,000)
Change in unrealized appreciation (depreciation) of
non-controlled affiliate investments, net of deferred
tax expense of $0 in 2005 and 2004, respectively (18,500) 2,000 (15,000)
----------- ----------- -----------
Net decrease in net assets from operations $ (102,567) $ (11,350) $ (118,385)
=========== =========== ===========
NET DECREASE IN NET ASSETS FROM OPERATIONS PER SHARE,
BASIC AND DILUTED $ (0.02) $ (0.01) $ (0.07)
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 4,447,514 1,395,604 1,671,477
=========== =========== ===========
See accompanying notes to financial statements.
5
CHANTICLEER HOLDINGS, INC.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
FROM
SIX MONTHS ENDED INCEPTION
JUNE 30, (OCTOBER 21, 1999)
-------- TO JUNE 30,
2005 2004 2005
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net decrease in net assets from operations $(102,567) $ (11,350) $(118,385)
Adjustments to reconcile net decrease in net assets
from operations to net cash used in operating
activities:
Change in unrealized depreciation (appreciation)
of investments 18,500 (2,000) 15,000
Loss on sale of investments 49,000 -- 49,000
Increase in prepaid expenses (10,000) -- (10,000)
Increase in accounts payable 35,824 13,350 51,522
--------- --------- ---------
Net cash used in operating activities (9,243) -- (12,863)
--------- --------- ---------
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Proceeds from sale of common stock -- -- 1,000
Loan from shareholders 55,000 -- 55,000
Contribution by shareholder -- -- 3,120
--------- --------- ---------
Net cash provided by financing activities 55,000 -- 59,120
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 45,757 -- 46,257
CASH AND CASH EQUIVALENTS, beginning of period 500 500 --
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 46,257 $ 500 $ 46,257
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH PAID FOR INTEREST AND INCOME TAXES:
Interest $ -- $ -- $ --
Income taxes -- -- --
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Exchange of investment for common stock which
were retired 56,000 -- 56,000
Issue common stock in exchange for assumption
of accounts payable 48,017 -- 48,017
Issue common stock in acquisition of investment -- 125,000 125,000
See accompanying notes to financial statements.
6
CHANTICLEER HOLDINGS, INC.
(A Development Stage Company)
Statements of Changes in Net Assets
(Unaudited)
FROM
SIX MONTHS ENDED INCEPTION
JUNE 30, (OCTOBER 21, 1999)
-------- TO JUNE 30,
2005 2004 2005
--------- --------- ---------
CHANGES IN NET ASSETS FROM OPERATIONS:
Net loss from operations $ (35,067) $ (13,350) $ (54,385)
Net realized loss on sale of investments, net (49,000) -- (49,000)
Change in net unrealized appreciation
(depreciation) of investments, net (18,500) 2,000 (15,000)
--------- --------- ---------
Net decrease in net assets from operations (102,567) (11,350) (118,385)
--------- --------- ---------
CAPITAL STOCK TRANSACTIONS
Common stock issued for cash -- -- 1,000
Common stock issued for accounts payable 48,017 -- 48,017
Common stock issued in acquisition of investments -- 125,000 125,000
Cash contributed by stockholder -- -- 3,120
Common stock retired in disposition of investment (56,000) -- (56,000)
--------- --------- ---------
Net increase (decrease) in net assets from stock
transactions (7,983) 125,000 121,137
--------- --------- ---------
Net increase (decrease) in net assets (110,550) 113,650 2,752
Net assets at beginning of period 113,302 500 --
--------- --------- ---------
Net assets at end of period $ 2,752 $ 114,150 $ 2,752
========= ========= =========
See accompanying notes to financial statements.
7
CHANTICLEER HOLDINGS, INC.
(A Development Stage Company)
Financial Highlights
(Unaudited)
FROM
SIX MONTHS ENDED INCEPTION
JUNE 30, (OCTOBER 21, 1999)
-------- TO JUNE 30,
2005 2004 2005
--------- ----------- ---------
PER SHARE INFORMATION
Net asset value, beginning of period $ 0.03 $ -- $ --
Net decrease from operations (0.01) (0.01) (0.03)
Net change in realized losses and unrealized
appreciation (depreciation) of investments, net (0.01) -- (0.04)
Net increase (decrease) from stock transactions (0.01) 0.04 0.07
--------- ----------- ---------
Net asset value, end of period $ -- $ 0.03 $ --
========= =========== =========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period 2,752 114,150 2,752
Average net assets 53,890 74,208 18,218
Ratio of expenses to average net assets 65% 62% 299%
Ratio of net loss to average net assets 190% 52% 650%
See accompanying notes to financial statements.
8
CHANTICLEER HOLDINGS, INC.
(A Development Stage Company)
Schedule of Investments
(Unaudited)
Date of Original Fair
Shares Acquisition Cost Value
AS OF JUNE 30, 2005
200,000 Jun-04 American Resource Management, Inc. (Pink Sheets: $ 20,000 $ 5,000
ARMM); energy resource-based holding company
------------ ------------
Total investments at June 30, 2005 $ 20,000 $ 5,000
============
Cash and other assets, less liabilities (2,248)
------------
Net assets at June 30, 2005 $ 2,752
============
AS OF DECEMBER 31, 2004
200,000 Jun-04 American Resource Management, Inc. (Pink Sheets: $ 20,000 $ 6,000
ARMM); energy resource-based holding company
35,000 Jun-04 Sanguaro Holdings Corp. (Pink Sheets:SGUJ); 105,000 122,500
energy company developing sour gas treatment
process
------------ ------------
Total investments at December 31, 2004 $ 125,000 $ 128,500
============
Cash and other assets, less liabilities (15,198)
------------
Net assets at December 31, 2004 $ 113,302
============
See accompanying notes to financial statements.
9
CHANTICLEER HOLDINGS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
A. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(1) ORGANIZATION - Chanticleer Holdings, Inc. (a development stage company)
(the "Company", "we", or "us" and formerly Tulvine Systems, Inc.) was
organized October 21, 1999, under the laws of the State of Delaware.
The Company has had limited operations and in accordance with SFAS No.
7 is considered a development stage company. The Company was formed to
serve as a vehicle to effect a merger, exchange of capital stock, asset
acquisition or other business combination with a domestic or foreign
private business. On April 25, 2005, the Company formed a wholly owned
subsidiary, Chanticleer Holdings, Inc. On May 2, 2005, Tulvine Systems,
Inc. merged with and changed its name to Chanticleer Holdings, Inc.
On April 10, 2005, the Company's sole shareholder returned 2,950,000
shares of the Company's common stock in exchange for the Company's
investment in Sanguaro Holdings Corp. Simultaneously, nine individuals
assumed certain of the Company's liabilities in the amount of $48,017
in exchange for 3,950,000 shares of the Company's common stock.
(2) GENERAL - The financial statements included in this report have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission for interim reporting and include
all adjustments (consisting only of normal recurring adjustments) that
are, in the opinion of management, necessary for a fair presentation.
These financial statements have not been audited.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed
or omitted pursuant to such rules and regulations for interim
reporting. The Company believes that the disclosures contained herein
are adequate to make the information presented not misleading.
However, these financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's
Annual Report for the period ended December 31, 2004, which is
included in the Company's Form 10-KSB.
(3) INVESTMENT COMPANY - On May 23, 2005, the Company filed a notification
on Form N54a with the U.S. Securities and Exchange Commission, (the
"SEC") indicating our election to be regulated as a business
development company under the Investment Company Act of 1940 (the "1940
Act"). In connection with this election, the Company has adopted
corporate resolutions and intends to operate as a closed-end management
investment company as a business
10
development company (a "BDC"). Under this recent election, the Company
has been organized to provide investors with an opportunity to
participate, with a modest amount in venture capital, in investments
that are generally not available to the public and that typically
require substantially larger financial commitments. In addition, the
Company will provide professional management and administration that
might otherwise be unavailable to investors if they were to engage
directly in venture capital investing. The Company has decided to be
regulated as a business development company under the 1940 Act, and
will operate as a non-diversified company as that term is defined in
Section 5(b)(2) of the 1940 Act. The Company will at all times conduct
its business so as to retain its status as a BDC. The Company may not
change the nature of its business so as to cease to be, or withdraw
its election as, a BDC without the approval of the holders of a
majority of its outstanding voting stock as defined under the 1940
Act.
As a BDC, the Company is required to invest at least 70% of its total
assets in qualifying assets, which generally, are securities of
private companies or securities of public companies whose securities
are not eligible for purchase on margin (which includes many companies
with thinly traded securities that are quoted in the pink sheets or
the NASD Electronic Quotation Service.) We must also offer to provide
significant managerial assistance to these portfolio companies.
Qualifying assets may also include:
O Cash,
O Cash equivalents,
O U.S. Government securities, or
O High-quality debt investments maturing in one year or less
from the date of investment.
An eligible portfolio company generally is a United States company
that is not an investment company and that:
o Does not have a class of securities registered on an exchange
or included in the Federal Reserve Board's over-the-counter
margin list;
o Is actively controlled by a BDC and has an affiliate of a BDC
on its board of directors; or
o Meets such other criteria as may be established by the SEC.
The Company may invest a portion of the remaining 30% of its total
assets in debt and/or equity securities of companies that may be
larger or more stabilized than target portfolio companies.
BDC's are required to implement certain accounting provisions that are
different from those to which other reporting companies are required
to comply. These requirements may result in presentation of financial
information in a manner that is more or less favorable than the manner
permitted by other reporting companies. In connection with the
implementation of accounting changes to comply with the required
reporting of financial information, we must also comply with SFAS No.
154, "Accounting Changes and Error Corrections" ("SFAS 154").
11
The Company has prepared its financial statements as if it had been a
BDC from inception.
BDC's, as governed under the 1940 Act may not avail themselves of any
of the provisions of Regulation S-B, including any of the streamlined
reporting permitted thereunder.
(4) CASH AND CASH EQUIVALENTS - For purposes of the statement of cash
flows, the Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents.
(5) INVESTMENTS IN NON CONTROLLED AFFILIATES - Pursuant to the requirements
of the 1940 Act, our Board of Directors is responsible for determining,
in good faith, the fair value of our securities and assets for which
market quotations are not readily available. In making its
determination, the Board of Directors will consider valuation
appraisals provided by an independent valuation service provider, when
considered necessary. Equity securities in public companies that carry
certain restrictions on resale are generally valued at a discount from
the market value of the securities as quoted on a national securities
exchange or by a national securities association.
The Board of Directors bases its determination upon, among other
things, applicable quantitative and qualitative factors. These factors
may include, but are not limited to, type of securities, nature of
business, marketability, market price of unrestricted securities of
the same issue (if any), comparative valuation of securities of
publicly-traded companies in the same or similar industries, current
financial conditions and operating results, sales and earnings growth,
operating revenues, competitive conditions and current and prospective
conditions in the overall stock market.
Without a readily available market value, the value of our portfolio of
equity securities may differ significantly from the values that would
be placed on the portfolio if a ready market existed for such equity
securities. All equity securities owned at June 30, 2005, and December
31, 2004, were listed securities, although they had limited trading
volume.
(6) USE OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
12
(7) INCOME TAXES - Deferred income taxes are provided on the liability
method whereby deferred tax assets are recognized for deductible
temporary differences and operating loss and tax credit carryforwards
and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment. Due to its limited operations,
the Company has provided a valuation allowance for the full amount of
the deferred tax assets.
B. UNCERTAINTY
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has been in the development stage
since inception (October 21, 1999) and had not commenced any formal business
operations until May 23, 2005, when it filed a notification on Form N54a with
the U.S. Securities and Exchange Commission, (the "SEC") indicating its election
to be regulated as a business development company under the Investment Company
Act of 1940 (the "1940 Act"). In connection with this election, the Company has
adopted corporate resolutions and intends to operate as a closed-end management
investment company as a business development company (a "BDC").
All activity to date relates to the Company's formation and proposed fund
raising. The ability of the Company to continue as a going concern during the
next year depends on the Company's success in executing these plans. The
financial statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.
C. STOCKHOLDERS' EQUITY
The Company has 200,000,000 shares of its $0.0001 par value common stock
authorized and 5,000,000 shares issued. There are no warrants or options
outstanding.
The Company issued 4,000,000 shares of its common stock in a non-cash exchange
for marketable securities valued at $125,000 on June 21, 2004. The unregistered
common shares are restricted pursuant to Rule 144.
On December 31, 2004, the 1,000,000 shares that were issued in 1999 to the
original stockholder were cancelled.
13
On May 2, 2005, the Company increased its authorized common stock from
100,000,000 shares to 200,000,000 shares.
On April 10, 2005, our sole shareholder returned 2,950,000 shares of our common
stock to us in exchange for our investment in Sanguaro Holdings Corp. At the
time of the exchange the Company had an unrealized loss of $49,000 on its
investment in Sanguaro Holding Corp. Accordingly, the unrealized loss of $49,000
was reclassified as a realized loss. Simultaneously, nine individuals assumed
certain of our liabilities in the amount of $48,017 in exchange for 3,950,000
shares of our common stock.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and notes thereto included elsewhere in this Form 10-Q. This Form
10-Q contains forward-looking statements regarding the plans and objectives of
management for future operations. This information may involve known and unknown
risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from future results,
performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend," or "project" or the negative of these words or other
variations on these words or comparable terminology. These forward-looking
statements are based on assumptions that may be incorrect, and we cannot assure
you that these projections included in these forward-looking statements will
come to pass. Our actual results could differ materially from those expressed or
implied by the forward-looking statements as a result of various factors.
We registered our common stock on a Form 10-SB registration statement filed
pursuant to the Securities Exchange Act of 1934 (the "Exchange Act") and Rule
12(g) thereof. We filed with the Securities and Exchange Commission periodic and
episodic reports under Rule 13(a) of the Exchange Act, including quarterly
reports on Form 10-QSB and annual reports on Form 10-KSB. As a reporting company
under the Exchange Act, we may register additional securities on Form S-8
(provided that we are then in compliance with the reporting requirements of the
Exchange Act) and on Form S-3 (provided that we have during the prior 12 month
period timely filed all reports required under the Exchange Act).
We were formed to engage in a merger with or acquisition of an unidentified
foreign or domestic private company that desired to become a reporting company
whose securities have been registered under the Exchange Act. We may have been
deemed to meet the definition of a "blank check" company contained in Section
(7)(b)(3) of the Securities Act of 1933, as amended.
On May 23, 2005, we filed a notification on Form N54a with the U.S. Securities
and Exchange Commission, (the "SEC") indicating our election to be regulated as
a business development company (a "BDC") under the Investment Company Act of
1940 (the "1940 Act"). In connection with this election, we have adopted
corporate resolutions and intend to operate as a closed-end management
investment company as a BDC. Under this recent election, we have been organized
to provide investors with an opportunity to participate, with a modest amount in
venture capital, in investments that are generally not available to the public
and that typically require substantially larger financial commitments. In
addition, we will provide professional management and administration that might
otherwise be unavailable to investors if they were to engage directly in venture
capital investing. We have decided to be regulated as a business development
15
company under the 1940 Act, and will operate as a non-diversified company as
that term is defined in Section 5(b)(2) of the 1940 Act. We will at all times
conduct our business so as to retain our status as a BDC. We may not change the
nature of our business so as to cease to be, or withdraw our election as, a BDC
without the approval of the holders of a majority of our outstanding voting
stock as defined under the 1940 Act.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements.
Critical accounting policies are those that are both important to the
presentation of our financial condition and results of operations and require
management's most difficult, complex, or subjective judgments. Our most critical
accounting policy relates to the valuation of our investments.
Pursuant to the requirements of the Investment Company Act of 1940 (the "1940
Act"), our Board of Directors is responsible for determining in good faith the
fair value of our investments for which market quotations are not readily
available. Although the securities of our portfolio companies may be quoted on
the OTC Bulletin Board or the Pink Sheets, our Board of Directors is required to
determine the fair value of such securities if the validity of the market
quotations appears to be questionable, or if the number of quotations is such as
to indicate that there is a thin or illiquid market in the security.
We will determine fair value to be the amount for which an investment could be
exchanged in an orderly disposition over a reasonable period of time between
willing parties other than in a forced or liquidation sale. Our valuation policy
will consider the fact that no ready market may exist for substantially all of
the securities in which we invest. Our investment policy is intended to provide
a consistent basis for determining the fair value of the portfolio. We will
record unrealized depreciation on investments when we believe that an investment
has become impaired, including where realization of an equity security is
doubtful. We will record unrealized appreciation if we believe that the
underlying portfolio company has appreciated in value and, therefore, our equity
security has also appreciated in value. The value of investments in publicly
traded securities is determined using quoted market prices discounted for
restriction on resale, if any.
Our equity interests in portfolio companies for which there is no liquid public
market will be valued using industry valuation benchmarks, and then the value
will be assigned a discount reflecting the illiquid nature of the investment, as
well as, our minority, non-control position. When as external event such as a
purchase transaction, public offering, or subsequent equity sale occurs, the
pricing indicated by the external event is used to corroborate our valuation.
The determined values will generally be discounted to account for restrictions
on resale and minority ownership positions.
16
The value of our equity interests in public companies for which market
quotations are readily available is based on the closing public market price on
the balance sheet date. Securities that carry certain restrictions on sale will
typically be valued at a discount from the public market value for the security.
FINANCIAL CONDITION
Our net assets were $2,752 and $113,302 at June 30, 2005, and December 31, 2004,
respectively. Net asset value per share was $0.00 at June 30, 2005, and $0.03 at
December 31, 2004.
The decline in net assets includes a net loss from operations of $35,067; a
realized loss on the exchange of an investment of $49,000; a change in net
unrealized depreciation of investments of $18,500; a decline in common stock and
additional paid in capital as a result of the exchange of one of our investments
for 2,950,000 shares of our common stock in the amount of $56,000; and reduced
by the assumption of $48,017 of our liabilities in exchange for 3,950,000 shares
of our common stock.
THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2004
Net loss from operations during the three months ended June 30, 2005, was
$30,978 as compared to $13,350 in the year earlier period. The increased loss is
primarily the result of an increase in payroll of $8,224 and an increase in
professional fees of $11,000. These increases are primarily due to our
commencing operations during June 2005.
Net realized and unrealized gains and losses consisted of a realized loss of
$49,000 when we exchanged an investment for 2,950,000 shares of our common stock
and an unrealized appreciation in the amount of $36,000 during the current year
period, as compared to an appreciation of $2,000 during the prior year period.
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2004
Net loss from operations during the six months ended June 30, 2005, was $35,067
as compared to $13,350 in the year earlier period. The increased loss is
primarily the result of an increase in payroll of $8,224 and an increase in
professional fees of $14,000. These increases are primarily due to our
commencing operations during June 2005.
Net realized and unrealized gains and losses consisted of a realized loss of
$49,000 when we exchanged an investment for 2,950,000 shares of our common stock
and an unrealized depreciation in the amount of $18,500 during the current year
period, as compared to an appreciation of $2,000 during the prior year period.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is the risk of loss arising from adverse changes in market rates and
prices. We are primarily exposed to equity price risk. Equity price risk arises
from exposure to securities that represent an ownership interest in our
portfolio companies. The value of our equity securities and our other
investments are based on quoted market prices or our Board of Directors' good
faith determination of their fair value (which is based, in part, on quoted
market prices). Market prices of common equity securities, in general, are
subject to fluctuations, which could cause the amount to be realized upon sale
or exercise of the instruments to differ significantly from the current reported
value. The fluctuations may result from perceived changes in the underlying
economic characteristics of our portfolio companies, the relative price of
alternative investments, general market conditions and supply and demand
imbalances for a particular security.
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ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
----------------------------------------------------
Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed
in the reports that are filed or submitted under the Exchange Act is
recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to
be disclosed in the reports that are filed under the Exchange Act is
accumulated and communicated to management, including the principal
executive officer, as appropriate, to allow timely decisions regarding
required disclosure. Under the supervision of and with the
participation of management, including the principal executive officer,
the Company has evaluated the effectiveness of the design and operation
of its disclosure controls and procedures as of June 30, 2005, and,
based on its evaluation, our principal executive officer has concluded
that these controls and procedures are effective.
(b) Changes in Internal Controls
--------------------------------
There have been no significant changes in internal controls or in other
factors that could significantly affect these controls subsequent to
the date of the evaluation described above, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
The Company commenced operations as a 1940 Act BDC in June 2005. As the
new business plan is implemented, the Company expects to expand current
internal controls.
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PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On April 10, 2005, we issued 3,950,000 shares of our common stock, in exchange
for an assumption of $48,017 of our liabilities, to 9 individuals or entities in
a private transaction, not an underwriting or public offering, public sale of
stock or other public distribution and therefore exempt from registration
pursuant to Rule 4(2) and Regulation D.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
The following exhibits are filed with this report on Form 10-Q.
Exhibit 31 Certification pursuant to 18 U.S.C. Section 1350
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 Certification pursuant to 18 U.S.C. Section 1350
Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CHANTICLEER HOLDINGS, INC.
Date: August 12, 2005 By: /s/ Michael D. Pruitt
-----------------------
Michael D. Pruitt,
Chief Executive Officer and
Principal Accounting Officer
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