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, 2006
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)
4500 Cameron Valley Parkway, Suite 270, Charlotte, NC 28211
-----------------------------------------------------------
(Address of principal executive office) (zip code)
(704) 366-5122
--------------
(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].
Indicate by check mark whether the registrant is a shell company (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 June 30, 2006, was 7,689,461 shares.
Chanticleer Holdings, Inc.
INDEX
Page
No.
Part I Financial Information (unaudited)
Item 1: Condensed Financial Statements
Statements of Net Assets as of June 30, 2006 and
December 31, 2005 3
Statements of Operations - For the Three Months Ended
June 30, 2006 and 2005 4
Statements of Operations - For the Six Months Ended
June 30, 2006 and 2005 5
Statements of Cash Flows - For the Six Months Ended
June 30, 2006 and 2005 6
Statements of Changes in Net Assets - For the Six Months
Ended June 30, 2006 and 2005 7
Financial Highlights for the Six Months Ended June 30,
2006 and 2005 8
Schedules of Investments as of June 30, 2006 and
December 31, 2005 9-10
Notes to Financial Statements 11-14
Item 2: Management's 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 18
Part II Other Information 19-22
Item 1: Legal Proceedings
Item 1A: Risk Factors
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: CONDENSED FINANCIAL STATEMENTS
Chanticleer Holdings, Inc.
Statements of Net Assets
June 30, 2006 and December 31, 2005
2006 2005
----------- -----------
(Unaudited)
ASSETS
Investments:
Non-affiliate investments (cost: 2006 - $1,177,321; 2005 - $222,819) $ 1,316,963 $ 257,000
Affiliate investments (cost: 2006 - $1,100,000) 1,100,000 --
----------- -----------
Total investments 2,416,963 257,000
Cash and cash equivalents 155,840 2,217,525
Accounts receivable 23,758 --
Prepaid expenses and other assets 15,475 27,446
Fixed assets, net 37,357 35,065
----------- -----------
TOTAL ASSETS 2,649,393 2,537,036
----------- -----------
LIABILITIES
Accounts payable 5,595 7,684
Accrued expenses 88 --
Note payable 100,704 --
----------- -----------
TOTAL LIABILITIES 106,387 7,684
----------- -----------
NET ASSETS $ 2,543,006 $ 2,529,352
=========== ===========
Commitments and contingencies Composition of net assets:
Common stock, $.0001 par value. Authorized 200,000,000 shares;
issued and outstanding 7,689,461 shares at June 30, 2006 and
8,606,211 shares at December 31, 2005 $ 769 $ 861
Additional paid in capital 2,799,831 3,716,489
Stock subscription receivable -- (1,000,000)
Accumulated deficit:
Accumulated net operating loss (386,935) (173,179)
Net realized loss on investments (10,301) (49,000)
Net unrealized appreciation of investments 139,642 34,181
----------- -----------
Net assets $ 2,543,006 $ 2,529,352
=========== ===========
Net asset value per share $ 0.3307 $ 0.2939
=========== ===========
See accompanying notes to condensed financial statements.
3
Chanticleer Holdings, Inc.
Statements of Operations
For the Three Months Ended June 30, 2006 and 2005
(Unaudited)
2006 2005
----------- -----------
Income from operations:
Interest and dividend income $ 11,856 $ 2
Management fee income from affiliated investment 14,304 --
----------- -----------
26,160 2
Expenses:
Salaries and wages 49,906 8,224
Professional fees 17,992 21,550
Shareholder services 3,992 305
Interest expense 997 380
General and administrative expense 67,848 521
----------- -----------
140,735 30,980
----------- -----------
Loss before income taxes (114,575) (30,978)
Income taxes -- --
----------- -----------
Net loss from operations (114,575) (30,978)
----------- -----------
Net realized and unrealized gains (losses):
Net realized gain (loss) on investments, with no income tax provision 32,835 (49,000)
Change in unrealized appreciation (depreciation) of investments,
net of deferred tax expense of $0 (28,754) 36,000
----------- -----------
Net decrease in net assets from operations $ (110,494) $ (43,978)
=========== ===========
Net decrease in net assets from operations per share,
basic and diluted $ (0.0144) $ (0.0090)
=========== ===========
Weighted average shares outstanding 7,689,461 4,890,110
=========== ===========
See accompanying notes to condensed financial statements.
4
Chanticleer Holdings, Inc.
Statements of Operations
For the Six Months Ended June 30, 2006 and 2005
(Unaudited)
2006 2005
----------- -----------
Income from operations:
Interest and dividend income $ 29,946 $ 2
Management fee income from affiliated investment 14,304 --
----------- -----------
44,250 2
Expenses:
Salaries and wages 98,457 8,224
Professional fees 20,230 24,550
Shareholder services 6,565 965
Interest expense 997 810
General and administrative expense 131,757 520
----------- -----------
258,006 35,069
----------- -----------
Loss before income taxes (213,756) (35,067)
Income taxes -- --
----------- -----------
Net loss from operations (213,756) (35,067)
----------- -----------
Net realized and unrealized gains (losses):
Net realized gain (loss) on investments, with no income tax provision 38,699 (49,000)
Change in unrealized appreciation (depreciation) of investments,
net of deferred tax expense of $0 105,461 (18,500)
----------- -----------
Net decrease in net assets from operations $ (69,596) $ (102,567)
=========== ===========
Net decrease in net assets from operations per share,
basic and diluted $ (0.0091) $ (0.0231)
=========== ===========
Weighted average shares outstanding 7,683,806 4,447,514
=========== ===========
See accompanying notes to condensed financial statements.
5
Chanticleer Holdings, Inc.
Statements of Cash Flows
For the Six Months Ended June 30, 2006 and 2005
(Unaudited)
2006 2005
----------- -----------
Cash flows from operating activities
Net decrease in net assets from operations $ (69,596) $ (102,567)
Adjustments to reconcile net decrease in net assets from
operations to net cash used in operating activities:
Change in unrealized (appreciation) depreciation of investments (105,461) 18,500
(Gain) loss on sale of investments (38,699) 49,000
Depreciation 3,906 --
(Increase) decrease in accounts receivable (23,758) --
(Increase) decrease in prepaid expenses and other assets 11,971 (10,000)
Increase (decrease) in accounts payable and accrued expenses (2,001) 35,824
----------- -----------
Net cash used in operating activities (223,638) (9,243)
----------- -----------
Cash flows from investing activities
Purchase of investments (2,197,729) --
Proceeds from sale of investments 181,926 --
Purchase of fixed assets (6,198) --
----------- -----------
Net cash used by investing activities (2,022,001) --
----------- -----------
Cash flows from financing activities
Proceeds from sale of common stock 83,250 --
Loan proceeds 100,704 --
Loan from shareholder -- 55,000
----------- -----------
Net cash provided by financing activities 183,954 55,000
----------- -----------
Net increase (decrease) in cash and cash equivalents (2,061,685) 45,757
Cash and cash equivalents, beginning of period 2,217,525 500
----------- -----------
Cash and cash equivalents, end of period $ 155,840 $ 46,257
=========== ===========
Supplemental Cash Flow Information
Cash paid for interest and income taxes
Interest $ 997 $ 810
Income taxes -- --
Non-cash investing and financing activities
Cancellation of stock subscription receivable $ 1,000,000 $ --
Exchange of investment for common stock which was retired -- 56,000
Issue common stock in exchange for assumption of accounts
payable -- 48,017
See accompanying notes to condensed financial statements.
6
Chanticleer Holdings, Inc.
Statements of Changes in Net Assets
For the Six Months Ended June 30, 2006 and 2005
(Unaudited)
2006 2005
----------- -----------
Changes in net assets from operations
Net loss from operations $ (213,756) $ (35,067)
Realized gain (loss) on sale of investments, net 38,699 (49,000)
Change in net unrealized appreciation (depreciation)
of investments, net 105,461 (18,500)
----------- -----------
Net decrease in net assets from operations (69,596) (102,567)
----------- -----------
Capital stock transactions
Common stock issued for cash 83,250 --
Common stock issued for accounts payable -- 48,017
Common stock retired in disposition of investment -- (56,000)
----------- -----------
Net increase (decrease) in net assets from stock transactions 83,250 (7,983)
----------- -----------
Net increase (decrease) in net assets 13,654 (110,550)
Net assets at beginning of year 2,529,352 113,302
----------- -----------
Net assets at end of period $ 2,543,006 $ 2,752
=========== ===========
See accompanying notes to condensed financial statements.
7
Chanticleer Holdings, Inc.
Financial Highlights
For the Six Months Ended June 30, 2006 and 2005
(Unaudited)
2006 2005
---------- ----------
PER SHARE INFORMATION
Net asset value, beginning of period $ 0.2939 $ 0.0300
Net decrease from operations (0.0278) (0.0079)
Net change in realized gains (losses) and unrealized
appreciation (depreciation) of investments, net 0.0187 (0.0152)
Net increase from stock transactions 0.0459 (0.0064)
---------- ----------
Net asset value, end of period $ 0.3307 $ 0.0005
========== ==========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period 2,543,006 2,752
Average net assets 2,587,035 53,890
Ratio of expenses to average net assets 10% 65%
Ratio of net increase (decrease) in net assets from
operations to average net assets 1% 190%
Common stock outstanding at end of period 7,689,461 5,000,000
Weighted average shares outstanding during period 7,683,806 4,447,514
See accompanying notes to condensed financial statements.
8
Chanticleer Holdings, Inc.
Schedule of Investments
As of June 30, 2006
(Unaudited)
Shares/ Quarter Original Fair Percent
Interest Acquired Cost Value Net Assets
NON-AFFILIATE INVESTMENTS
145,000 Jun-04 American Resource Management, Inc. (Pink Sheets: $ 7,540 $ 5,800 0.2%
Sep-05 ARMM); energy resource-based holding company
15,000 Sep-05 Tandy Leather Factory, Inc. (AMEX:TLF); specialty 72,052 102,600 4.0%
Dec-05 retailer and wholesale distributor of leather products,
tools and leather finishes and kits
800,000 Sep-05 Special Projects Group (Pink Sheets:SPLJ) 102,403 120,000 4.7%
distributor and marketer of security and
defense products and training manuals
2,100 Mar-06 Polaris Industries Partners, Inc. (NYSE:PII); 96,465 90,930 3.6%
Jun-06 manufacturer of ATV's, snowmobiles and
motorcycles
Loan Mar-06 ADD-A-MAN, LLC (Privately held); Note receivable 50,000 50,000 2.0%
with interest at 10% due September 2, 2006
33.3% Mar-06 LFM Management, LLC, dba 1st Choice Mortgage 250,000 250,000 9.8%
(Privately held); Direct to consumer brokerage
company
Pending Mar-06 Bouncing Brain Productions, LLC (Privately held); 250,000 250,000 9.8%
Inventor promotion company
Loan Jun-06 Lifestyle Innovations, Inc. (OTCBB:LFSI); note and 100,000 100,000 3.9%
accounts receivable investment of approximately
$1,200,000
37.5% Mar-06 Deep Rock LLC; working interest in two oil and gas 128,216 225,000 8.9%
properties
19,071 Jun-06 SM&A (NASDAQ:WINS); A leading provider of 114,124 116,333 4.6%
business strategy, proposal development and
program services for winning and delivering
competitive procurements.
300 Jun-06 Professionals Direct, Inc. (OTCBB:PFLD); provides 6,522 6,300 0.2%
lawyer liability insurance and underwriting and other
services to insurance companies
---------- ----------- ----------
Total non-affiliate investments 1,177,322 1,316,963 51.7%
---------- ----------- ----------
AFFILIATE INVESTMENT
22.0% Mar-06 Chanticleer Investors LLC (Privately held); 1,100,000 1,100,000 43.3%
Jun-06 Investment LLC
---------- ----------- ----------
Total affiliate investment 1,100,000 1,100,000 43.3%
---------- ----------- ----------
Total investments at June 30, 2006 $2,277,322 2,416,963 95.0%
==========
Cash and other assets, less liabilities 126,043 5.0%
----------- ----------
Net assets at June 30, 2006 $ 2,543,006 100.0%
=========== ==========
See accompanying notes to condensed financial statements.
9
Chanticleer Holdings, Inc.
Schedule of Investments
As of December 31, 2005
Shares/ Quarter Original Fair Percent
Interest Acquired Cost Value Net Assets
NON-AFFILIATE INVESTMENTS
500,000 Jun-04 American Resource Management, Inc. (Pink Sheets: $ 26,000 $ 20,000 1%
Sep-05 ARMM); energy resource-based holding company
20,000 Sep-05 Tandy Leather Factory, Inc. (AMEX:TLF); specialty 96,819 137,000 5%
Dec-05 retailer and wholesale distributor of leather products,
tools and leather finishes and kits
Loan Sep-05 PPCT Holdings, Inc. (Privately held); 100,000 100,000 4%
manufacturer and distributor of security products
and training manuals
---------- ----------- ----------
Total investments at December 31, 2005 $ 222,819 257,000 10%
==========
Cash and other assets, less liabilities 2,272,352 90%
----------- ----------
Net assets at December 31, 2005 $ 2,529,352 100%
=========== ==========
See accompanying notes to condensed financial statements.
10
Chanticleer Holdings, Inc.
Notes to Financial Statements
(Unaudited)
A. Nature of Business and Significant Accounting Policies
(1) Organization - Chanticleer Holdings, Inc. (the "Company", "we", or
"us") was organized October 21, 1999, under the laws of the State of
Delaware. The Company previously had limited operations and in
accordance with SFAS No. 7 was considered a development stage
company until July 2005. 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,
2005, which is included in the Company's Form 10-K.
(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 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"). 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.
11
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.
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.
12
(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 Affiliates and Non-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.
(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.
(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.
13
B. Investments
Investments at June 30, 2006 and December 31, 2005, may be summarized as
follows:
2006 2005
---------- ----------
Investments at cost $2,277,321 $ 222,819
Unrealized appreciation of investments, net 139,642 34,181
---------- ----------
Fair value of investments $2,416,963 $ 257,000
========== ==========
Investments are detailed on schedules on pages 9 and 10, hereof. The valuations
are determined by the Board of Directors based upon applicable quantitative and
qualitative factors.
Activity in investments during the six months ended June 30, 2006, is summarized
as follows:
Investments at cost, December 31, 2005 $ 222,819
Purchases 2,197,729
Sales (143,227)
-----------
Investments at cost, June 30, 2006 $ 2,277,321
===========
Chanticleer Investors, LLC has a 6% note receivable in the amount of $5,000,000.
The Company is the manager of the LLC and receives one-third (2%) of the
interest earned by the LLC as a management fee. In addition, the Company will
receive its pro rata share (22%) of the remaining interest as interest income.
C. Note Payable
The Company has a one-year line-of-credit with a bank in the amount of $250,000
which matures on June 21, 2007. The loan is guaranteed by the Chief Executive
Officer of the Company and is collateralized by all inventory, chattel paper,
accounts, equipment and general intangibles of the Company. The loan has a
balance of $100,704 at June 30, 2006, and bears interest at 8.25% per annum.
D. Stockholders' Equity
The Company has 200,000,000 shares of its $0.0001 par value common stock
authorized and 7,689,461 shares issued and outstanding at June 30, 2006. There
are no warrants or options outstanding.
On May 2, 2005, the Company increased its authorized common stock from
100,000,000 shares to 200,000,000 shares.
During the six months ended June 30, 2006, the Company sold 83,250 shares of its
common stock, pursuant to its Offering Circular under Regulation E promulgated
under the Securities Act of 1933 for proceeds of $83,250. In addition, during
the six months ended June 30, 2006, the Company determined they were not going
to be paid on the stock subscription receivable of $1,000,000 and the related
1,000,000 shares have been returned to counsel to be cancelled.
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 the 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 until we became a BDC
when we began filing reports on Form 10-Q and Form 10-K.
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
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.
15
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 an 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.
The value of our equity interests in public companies for which market
quotations are readily available is based on the closing public market price.
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 $2,543,006 and $2,529,352 at June 30, 2006, and December 31,
2005, respectively. Net asset value per share was $.3307 at June 30, 2006, and
$0.2939 at December 31, 2005.
16
The increase in net assets of $13,654 includes net capital stock transactions in
the amount of $83,250 less the net decrease in net assets from operations of
$69,596.
Three months ended June 30, 2006 compared to the three months ended June 30,
2005
Income from operations amounted to $26,160 in 2006 as compared to $2 in 2005.
The 2006 amount was a result of operating for the full period and also included
investments with a value of $2,416,963 as of June 30, 2006. At June 30, 2005, we
only had investments of $5,000 and net assets of $2,752.
Net loss from operations during the three months ended June 30, 2006, was
$114,575 as compared to $30,978 in the year earlier period. The increased loss
is mainly the result of an increase in payroll of $41,682 and an increase in
general and administrative expenses in the amount of $67,327. These increases
are primarily due to our commencing operations during June 2005.
Net realized and unrealized gains and losses consisted of a realized gain of
$32,835 and unrealized depreciation of $28,754 for a net gain of $4,081 in 2006
as compared to a realized loss of $49,000 and an unrealized gain of $36,000 for
a net loss of $13,000 in 2005.
The above factors resulted in a net decrease in net assets from operations per
share of $.0144 in 2006 as compared to $.0090 in 2005.
Six months ended June 30, 2006 compared to the six months ended June 30, 2005
Income from operations includes interest and dividend income of $29,946 and
management fee income of $14,304 during the 2006 period, as compared to $2 in
the 2005 period. We did not commence operations as a BDC until June 2005. We had
investments of $5,000 and net assets of $2,752 at June 30, 2005, as compared to
investments of $2,416,963 and net assets of $2,543,006 at June 30, 2006.
Expenses increased from $35,069 in 2005 to $258,006 in 2006 ($222,937 increase).
Salaries and wages increased $90,233 and other general and administrative
expenses increased $131,237 in 2006 as compared to the year earlier period.
These increases are consistent with the increased period of operations from part
of one month in 2005 to six months in 2006.
We realized a gain of $38,699 in 2006 as compared to a loss of $49,000 in 2005.
We had an unrealized gain of $105,461 in 2006 as compared to an unrealized loss
of $18,500 in 2005.
The above factors resulted in a net decrease in net assets from operations per
share of $.0091 in 2006 as compared to $.0231 in 2005.
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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.
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, 2006, 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 1A: RISK FACTORS
Not applicable.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None in current quarter.
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
Although the Company does not currently employ a Chief Financial Officer,
Michael D. Pruitt, President and Chief Executive Officer, is also the principal
accounting officer.
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 2, 2006 By: /s/ Michael D. Pruitt
---------------------------
Michael D. Pruitt,
Chief Executive Officer and
Principal Accounting Officer
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