Sonnet BioTherapeutics Holdings, Inc. - Quarter Report: 2014 June (Form 10-Q)

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 the quarterly period ended: June 30, 2014

Commission File Number: 001-35570

CHANTICLEER HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

7621 Little Avenue, Suite 414, Charlotte, NC 28226

(Address of principal executive offices) (zip code)

(704) 366-5122

(Registrant’s telephone number, including area code)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yesx 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 the definitions of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 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¨ No x.

The number of shares outstanding of registrant’s common stock, par value $.0001 per share, as of August 5, 2014, was 6,719,433 shares.

Chanticleer Holdings, Inc. and Subsidiaries

INDEX

Part I: FINANCIAL INFORMATION

Item 1: FINANCIAL StatemenTS

Chanticleer Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

See accompanying notes to condensed consolidated financial statements.

Chanticleer Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)      

See accompanying notes to condensed consolidated financial statements.

Chanticleer Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

See accompanying notes to condensed consolidated financial statements.                

Chanticleer Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to condensed consolidated financial statements.                

Chanticleer Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows, continued

(Unaudited)      

See accompanying notes to condensed consolidated financial statements.

Chanticleer Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Organization

Chanticleer Holdings, Inc. (the “Company”) was organized on October 21, 1999, under its original name, Tulvine Systems, Inc., under the laws of the State of Delaware. Tulvine Systems, Inc. had limited operations and was considered a development stage company until July 2005. On April 25, 2005, Tulvine Systems, Inc. formed a wholly owned subsidiary, Chanticleer Holdings, Inc. On May 2, 2005, Tulvine Systems, Inc. merged with and changed its name to Chanticleer Holdings, Inc.

The consolidated financial statements include the accounts of Chanticleer Holdings, Inc. and its subsidiaries, Chanticleer Advisors, LLC, (“Advisors”), Avenel Ventures, LLC ("Ventures"), Chanticleer Holdings Limited ("CHL"), Chanticleer Holdings Australia Pty, Ltd. (“CHA”), Chanticleer Investment Partners, LLC (“CIP”), DineOut SA Ltd. ("DineOut”), Chanticleer and Shaw Foods (Pty) Ltd. (“C&S”), Kiarabrite (Pty) Ltd (“KPL”), Dimaflo (Pty) Ltd (“DFLO”), Tundraspex (Pty) Ltd (“TPL”), Civisign (Pty) Ltd (“CPL”), Dimalogix (Pty) Ltd (“DLOG”), Pulse Time Trade (Pty) Ltd. (“PTT”), Crown Restaurants Kft. (“CRK”), American Roadside Burgers, Inc. (“ARB”), West End Wings Ltd. (“WEW”), JF Restaurants, L.L.C (“JFR”), JF Franchising Systems, L.L.C. (“JFFS”), Tacoma Wings, LLC, Jantzen Beach Wings, LLC, Oregon Owl’s Nest, LLC, Dallas Spoon, LLC, Dallas Spoon Beverage, LLC, Hoot Campbelltown Pty. Ltd., Hoot Surfers Paradise Pty. Ltd. and Hoot Townsville Pty. Ltd. (collectively referred to as the “Company”). On July 11, 2013, the names of DFLO, CPL and DLOG were changed in South Africa to Hooters Umhlanga (Pty.) Ltd., Hooters CapeTown (Pty.) Ltd., and Hooters Emperors Palace (Pty.) Ltd., respectively. On August 30, 2013, January 8, 2014, and June 4, 2014 the names of KPL, C&S and PTT were changed to Hooters SA (Pty) Ltd., Chanticleer South Africa (Pty) Ltd. and Hooters PE, respectively. On April 1, 2014, the Company increased our ownership in the Australian Hooters entities, Hoot Campbelltown Pty. Ltd., Hoot Surfers Paradise Pty. Ltd. and Hoot Townsville Pty. Ltd., from 49% to 60%. All significant inter-company balances and transactions have been eliminated in consolidation. The accompanying consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).

The Company has a calendar year-end reporting date of December 31. The accounts of two of its subsidiaries, JFR and WEW, are consolidated based on either a 52- or 53-week period ending on the Sunday closest to each December 31. No events occurred related to the difference between the Company’s reporting calendar year-end and the Company’s two subsidiaries year-end of December 29, 2013 that materially affected the Company’s financial position, results of operations, or cash flows. For the quarter ended June 30, 2013, the Company and all of its consolidated subsidiaries reported on a calendar quarter-end. For the quarter ended June 30, 2014, the Company and all subsidiaries reported on a calendar quarter-end with the exception of two non-calendar year-end subsidiaries, whose fiscal quarter each consisted of operations commencing December 30, 2013 and ending June 15, 2014 and June 29, 2014, respectively. No events occurred from these periods to June 30, 2014 that materially affect the Company’s financial position, results of operations, or cash flows.

GENERAL

The accompanying condensed consolidated financial statements included in this report have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) 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 condensed consolidated financial statements have not been audited. The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the operating results for the full year.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP 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 consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 31, 2014. Certain amounts for the prior year have been reclassified to conform to the current year presentation.

LIQUIDITY, MANAGEMENT’S PLANS AND GOING CONCERN

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. At June 30, 2014, the Company had current assets of $1,578,372, current liabilities of $9,310,320, and a working capital deficit of $7,731,948. The Company incurred a loss of $2,861,374 during the six months ended June 30, 2014 and had an unrealized loss from available-for-sale securities of $15,527 and foreign currency translation gains of $51,165, resulting in a comprehensive loss of $2,825,736. The Company has historically met its liquidity requirements through the sale of equity and debt securities, sale of certain investments, and has also obtained funding at the subsidiary level for certain locations and joint ventures. The Company anticipates raising additional capital from one or more such sources during the remainder of 2014, although there can be no assurance that it will be able to do so.

The Company's corporate general and administrative expenses were $2,860,453 for the first six months of 2014, including $375,507 non-cash expenses comprised of common stock issued for services and amortization of warrants. The expenses averaged approximately $1.0 million per quarter in 2013. Also, the Company had approximately $1.1 million of non-cash expenses. The Company expects costs to remain flat for the second half of 2014 as we continue to expand our footprint domestically and internationally for 2014 and beyond, however we expect costs to decrease as a percent of sales. Effective October 1, 2011, the Company acquired majority control of the initial three restaurants in South Africa and began consolidating these operations. In August 2012, the Company opened a restaurant in Budapest, Hungary, and earns 80% of the operating results with our operating partner earning 20%. Domestically in 2013 the Company purchased 100% of ARB on September 30, 2013, and 56% of JFR and JFFS, owners of Just Fresh, a Charlotte, North Carolina-based casual dining concept, in December 2013. Effective November 7, 2013, the Company acquired 100% of an existing Hooters restaurant in Nottingham, England. On January 31, 2014, the Company closed the purchases of 100% of two Hooters restaurants in the states of Washington and Oregon and a gaming facility operated through the Oregon Lottery system, as well as Spoon Bar and Kitchen in Dallas, Texas. In March 2013, the Company closed its investment management business, which saved us approximately $50,000 per quarter starting fully in the third quarter of 2013. Historically, the Company also has earned 49% of the operating results with our operating partner earning 51% in our Hooters location opened in January 2012 in Campbelltown, Australia, a suburb of Sydney. During April 2014, the Company purchased an additional 11% of the Hooters location in Campbelltown from our Australian partner, increasing our ownership to 60%. Construction is also recently completed or underway on two additional Hooters Australia locations under the same terms (the Company will hold a 60% interest in each). The first site in Surfers Paradise opened to the public on July 14, 2014 and the second site in Townsville is expected to open late in the third quarter of 2014. The Company also has a 5% interest in Beacher’s Madhouse, a variety show, which opened in Las Vegas, Nevada at the end of 2013.

The Company has a note with a balance at June 30, 2014 of $197,416 owed to its bank which is due on October 10, 2018 with monthly principal and interest payments of $4,406. In April 2013, the Company secured a $500,000 line of credit which became due on August 10, 2014 for which an extension is currently being negotiated and the lender has not demanded payment. As of June 30, 2014, the balance on the line of credit is $500,000. In February 2014 the Company secured a note with a bank for $500,000 which became due on August 10, 2014 for which an extension is currently being negotiated and the lender has not demanded payment. The Company also has $3,000,000 of convertible debt which the Company used for our purchase of the Hooters Nottingham (United Kingdom) location. On August 2, 2013, the Company entered into an agreement with seven individual accredited investors, whereby the Company issued separate 6% Secured Subordinate Convertible Notes for a total of $3,000,000 in a private offering. These investors received 3 year warrants to purchase 300,000 shares of the Company’s common stock at $3.00 per share. The conversion feature of the convertible debt and warrants was recorded as a derivative liability. The Company closed the purchase of Hooters Nottingham on November 6, 2013 and began operating the restaurant on November 7, 2013. In March 2014, the Company received proceeds of $500,000 from convertible debt which was used for continuing the Company’s growth and for working capital. The investor was issued 15% Secured Subordinate Convertible Notes and received five year warrants to purchase up to 30% of the number of shares of common stock issued upon conversion of the 2014 note exercisable at $5.25 per share. The conversion feature of the convertible debt was recorded as a derivative liability. In addition the Company has notes with a balance at June 30, 2014 of $225,000 owed to two outside companies which have matured, an extension for both notes are currently being negotiated and payment has not been demanded. The Company’s South African subsidiaries have bank overdraft and term facilities of $707,700, including a mortgage for a site we purchased in Port Elizabeth for our next Hooters location. ARB had a bank note payable of $10,249 due on August 5, 2014 which has been repaid in full. The Company plans to continue to use limited partnerships or other financing vehicles, if necessary, to fund its share of costs for additional Hooters and other restaurants.

On October 17, 2013, the Company raised $2,500,000 in a private placement, pursuant to which the Company sold to the investors an aggregate of 666,667 Units at a purchase price of $3.75 per unit. Each Unit consists of one share of the Company’s common stock and one five-year warrant, exercisable after twelve months, to purchase one share of common stock at an initial exercise price of $5.00. The Company employed a placement agent for the purpose of the private placement, and paid to the placement agent commissions in the total amount of $150,000 and five year warrants convertible into an aggregate of 40,000 shares.

On November 7, 2013, the Company entered into a Subscription Agreement with three accredited investors, pursuant to which the Company sold to the investors an aggregate of 160,000 Units at a purchase price of $5.00 per Unit, closing a $800,000 private placement. Each Unit consists of one share of the Company’s common stock, $0.001 par value per share and one five- year warrant to purchase one share of common stock. One half (80,000) of the available warrants are available at an initial exercise price of $5.50, while the remaining half (80,000) of the warrants are available at an initial exercise price of $7.00. The Company employed a placement agent for the purpose of the private placement, and has paid to the placement agent commissions in the total amount of $32,000 and five-year warrants subject to the same terms as those issued under the above transaction, convertible into an aggregate of 6,400 shares of common stock.

On January 31, 2013, the Company settled outstanding liabilities of approximately $170,000 from a South African bank, previously presented in our consolidated balance sheets in “other liabilities”. Upon making a payment of approximately $99,000, the Company received a release from all other bank liabilities, resulting in a total gain on extinguishment of debt of approximately $71,000, which is presented in our financial statements as other income.

During the three and six months ended June 30, 2014, the Company raised from private investors $200,000 for 137,500 shares of common stock and 15,000 five-year common stock warrants exercisable at $3.50 per share. Subsequent to June 30, 2014, the Company raised from private investors $440,000 for 220,000 shares of commons stock and 66,000 five-year common stock warrants exercisable at $3.50 per share.

In order to execute the Company’s long-term growth strategy, which includes continued expansion of the Company’s business by acquisition or developing or constructing, the Company will need to raise additional funds through public or private equity offerings, debt financings, or other means.

The current constraints of cash flow from operations and the requirements to raise funds raise substantial doubt about the Company’s ability to continue as a going concern. These condensed consolidated financial statements do not reflect any adjustments that might result from the outcome of these uncertainties.

Revenue Recognition—In accordance with gaming industry practice, we recognize gaming revenues as the net win from gaming activities, net of taxes.

Business combination - For a business combination with an acquisition date on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, the assets acquired, the liabilities assumed, and any non-controlling interest in the acquire are recognized at the acquisition date, measured at their fair values as of that date. In a business combination achieved in stages, the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, are recognized at the full amounts of their fair values. In a bargain purchase in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any non-controlling interest in the acquire, that excess in earnings was recognized as a gain attributable to the Company.

Except for the above changes, there have been no material changes to our significant accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

LOSS PER COMMON SHARE

The Company is required to report both basic earnings per share, which is based on the weighted-average number of shares outstanding and diluted earnings per share, which is based on the weighted-average number of common shares outstanding plus all diluted shares outstanding.

The following table summarizes the number of common shares potentially issuable upon the exercise of certain warrants, convertible notes payable and convertible interest as of June 30, 2014 and 2013, that have been excluded from the calculation of diluted net loss per common share since the effect would be antidilutive.

RECLASSIFICATIONS

Certain amounts in the prior period have been reclassified to conform to the current period presentation. These reclassifications have no effect on previously reported results of operations or loss per share.

Recent Accounting Pronouncements

In March 2013, the FASB issued ASU 2013-05, "Foreign Currency Matters" ("ASU 2013-05"). The amendments in ASU 2013-05 resolve the diversity in practice about whether current literature applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. In addition, the amendments in ASU 2013-05 resolve the diversity in practice for the treatment of business combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign entity. ASU 2013-05 is effective prospectively for fiscal years and interim reporting periods within those years, beginning after December 15, 2013.

Deferred tax liability and asset were recognized for the deferred tax consequences of differences between the tax bases and the recognized values of assets acquired and liabilities assumed in a business combination in accordance with ASC Topic 740, “Income Taxes”.

The FASB has issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which includes amendments that change the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. The guidance is effective for annual periods beginning on or after December 15, 2014. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

There are several other new accounting pronouncements issued by FASB which are not yet effective. Each of these pronouncements has been or will be adopted, as applicable, by the Company. At June 30, 2014, none of these pronouncements are expected to have a material effect on the financial position, results of operations or cash flows of the Company.

The Company completed the following acquisitions:

American Roadside Burgers (“ARB”)

On September 30, 2013, the Company entered into an agreement and plan of merger with ARB, whereby the Company acquired 100% of the outstanding shares of ARB. In exchange, the Company issued 740,000 shares of its common stock and warrants to acquire 740,000 shares of common stock for $5.00 per share. The warrants are exercisable beginning October 1, 2014 until September 30, 2018. In connection with this acquisition and the related management team, the Company acquired a strategic opportunity to participate in a high-growth space with an already established brand. The Company’s plan is to continue to expand the American Roadside chain as future opportunities are presented, which has the potential to bring additional revenue and profits to the Company in the future. During March and April 2014, the Company began doing business as American Burger Co. at the two Charlotte ARB locations.

The acquisition was accounted for using the purchase method in accordance with ASC 805 “Business Combinations”. The condensed consolidated statements of operations include the results of the ARB operations beginning October 1, 2013. The assets acquired and the liabilities assumed were recorded at September 30, 2013 at estimated fair values based on information currently available and based on certain assumptions as to future operations.

West End Wings (“WEW” or “Hooters Nottingham”)

On November 6, 2013, the Company closed the purchase of West End Wings LTD, which is the owner of the Nottingham, England Hooters restaurant location. The purchase price paid by the Company for WEW was $3,150,000.

The acquisition was accounted for using the purchase method in accordance with ASC 805 “Business Combinations”. The condensed consolidated statements of operations include the results of the Hooters Nottingham operations beginning November 7, 2013. The assets acquired and the liabilities assumed were recorded at November 6, 2013 at estimated fair values as determined by the Company’s management.

Just Fresh (“JF”)

On November 5, 2013, the Company entered into a Subscription Agreement with JFR and JFFS, for the purchase of a 51% ownership interest in each entity, for a total purchase price of $560,000. The transaction closed on December 10, 2013 with the execution of an Assignment, Assumption, Joinder, and Amendment Agreement with both JFR and JFFS. On December 11, 2013, the Company purchased an additional 5% interest in both JFR and JFFS from an original interest holder for the total purchase price of $30,000, increasing the Company’s ownership interest in JFR and JFFS to a total of 56%.

Just Fresh currently operates six restaurants in the Charlotte, North Carolina area that offer fresh-squeezed juices, gourmet coffee, fresh-baked goods and premium-quality, made-to-order sandwiches, salads and soups.

Tacoma Wings, Jantzen Beach Wings and Oregon Owl’s Nest (“Hooters Pacific NW”)

On January 31, 2014, pursuant to an Agreement and Plan of Merger executed on December 31, 2013, the Company completed the acquisition of all of the outstanding shares of each of Tacoma Wings, LLC, Jantzen Beach Wings, LLC and Oregon Owl’s Nest, LLC, which owned and operated the Hooters restaurant locations in Tacoma, Washington and Portland, Oregon, respectively. These entities were purchased from Hooters of Washington, LLC and Hooters of Oregon Partners, LLC (collectively, the “Hooters Sellers”) for a total purchase price of 680,272 Company units, with each unit consisting of one share of the Company’s common stock and one five-year warrant to purchase a share of the Company’s common stock. Half of the warrants are exercisable at $5.50 and half of the warrants are exercisable at $7.00. As part of this transaction, the Hooters Sellers were granted registration rights with respect to the Company’s common stock issued and underlying the warrants, and franchise rights and leasehold rights to the locations were transferred to the Company.

Dallas Spoon and Dallas Spoon Beverage (“Spoon”)

Also on January 31, 2014, pursuant to an Agreement and Plan of Merger executed on January 14, 2014, the Company completed the acquisition of all of the outstanding shares of Dallas Spoon, LLC and Dallas Spoon Beverage, LLC from Express Restaurant Holdings, LLC and Express Restaurant Holdings Beverage, LLC. The purchase price of 195,000 Company units was paid to Express Working Capital, LLC (“EWC”); the units consist of one share of the Company’s common stock and one five-year warrant to purchase a share of the Company’s common stock. Half of the warrants are exercisable at $5.50 and half of the warrants are exercisable at $7.00. As part of this transaction, EWC was granted registration rights with respect to the Company’s common stock issued and underlying the warrants, and all leaseholds and other rights were transferred to the Company.

Campbelltown, Surfers Paradise, and Townsville (“Hooters Australia”)

On April 1, 2014, the Company completed the step acquisition of Hooters Australia, increasing the Company’s ownership percentage from 49% to 60%. The location in Campbelltown, a suburb of Sydney, opened in January, 2012, the location in Surfers Paradise, an iconic coastal tourist destination, opened on July 14, 2014 and we expect the location in Townsville, in the northeast part of Australia, to open in late September 2014.

The acquisitions were accounted for using the purchase method of accounting and, accordingly, the condensed consolidated statements of operations include the results of these operations from the dates of acquisition. The assets acquired and the liabilities assumed were recorded at estimated fair values based on information currently available and based on certain assumptions as to future operations as follows:

Unaudited pro forma results of operations for the three and six months ended June 30, 2014 and 2013, as if the Company had acquired majority ownership of the operation on January 1 of each year is as follows. The pro forma results include estimates and assumptions which management believes are reasonable. However, pro forma results are not necessarily indicative of the results that would have occurred if the business combination had been in effect on the dates indicated, or which may result in the future.

Income from operations of unconsolidated affiliates

Effective April 1, 2014, we completed the step acquisition of a 60% controlling interest in our Hooters Australia joint venture resulting in the consolidation of these entities. Prior to the acquisition, we owned 49% of the entities and accounted for the Hooters Australia investment under the equity method of accounting and our share of earnings and losses was recorded in equity in losses from investments in our Consolidated Statements of Operations and Comprehensive Income. The Hooters Australia results of operations for the three months ended June 30, 2014 are reflected in the respective line items in our Consolidated Statements of Operations and Comprehensive Income.

OTHER INVESTMENTS ARE SUMMARIZED AS FOLLOWS AT JUNE 30, 2014 AND DECEMBER 31, 2013.

INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD

Effective April 1, 2014, the Company increased its ownership stake in Hooters restaurant in Campbelltown, Australia from 49% to 60%. In addition, the Company increased its ownership stake to 60% in the two new stores recently completed or under construction in Surfers Paradise (which opened on July 4, 2014), Australia and Townsville, Australia which we expect to open late September 2014. The Company consolidated these entities beginning with the current quarterly report for the quarter ending June 30, 2014.

Also on July 1, 2014, the Company announced the acquisition of 60% of the two other Hooters restaurants in Australia, in Penrith and Parramatta, suburbs of Sydney, as well as 60% interest in the related Australian management company. These entities own, operate, and manage Australian Hooters restaurants and gaming operations. The purchase price was the assumption of $5 million in debt. Also as part of the transaction, the Company will receive 100% of all gaming revenue until the debt is repaid, and thereafter the Company will receive 60% of such revenue for the remainder of the lifetime of the gaming machines.

Activity in investments accounted for using the equity method is summarized as follows:

Equity investments consist of the following at June 30, 2014 and December 31, 2013:

The summarized balance sheets for the three locations in Australia of which we owned 49% at December 31, 2013 follows:

GOODWILL

Goodwill is summarized by location as follows: 

Goodwill resulted from the excess paid over the fair value of the net assets acquired for the three operating restaurants in South Africa effective October 1, 2011, our ARB, Just Fresh and WEW acquisitions as of September 30, 2013, November 6, 2013 and December 10, 2013 respectively, and our acquisitions of Hooters Pacific NW and Spoon as of January 31, 2014.

OTHER INTANGIBLE ASSETS

Franchise cost for the Company’s Hooters restaurants and trademark/trade name for the Company’s Just Fresh and ARB entities consists of the following at June 30, 2014 and December 31, 2013. The Company is amortizing these franchise costs from the opening of each restaurant for the 20-year term of the franchise agreement with HOA and the trademark/trade name over its estimated 10-year useful lives.

Amortization for franchise costs and trade name/trademarks are as follows:

* The Brazil franchise cost and the Australian franchise costs related to 2 restaurants are not being amortized until they are opened.                

Long-term debt and notes payable are summarized as follows.

(a) On April 11, 2013, the Company and Paragon Commercial Bank (“Paragon”) entered into a credit agreement (the “Credit Agreement”). (b) The Credit Agreement provides for an additional $500,000 revolving credit facility with a one-year term from the closing date. The Credit Agreement is available to be drawn at the Company’s discretion to finance investments in new business ventures and for the Company’s general corporate working capital requirements in the ordinary course of business. The note payable originally matured on August 10, 2013 and on November 4, 2013 the note was extended to October 10, 2018 with monthly principal and interest payments of $4,406, whereas the new credit facility (b) expired on August 10, 2014. Borrowings under the Credit Agreement bear monthly interest at the greater of: (i) floor rate of 5.00% or (ii) the Wall Street Journal’s prime plus rate (3.25% as of June 30, 2014) plus 1.00%. All unpaid principal and interest are due one (1) year after the closing date. Any borrowings are secured by a lien on all of the Company’s assets. The obligations under the Credit Agreement are guaranteed by Mike Pruitt, the Company’s Chief Executive Officer.

(c) In addition, in February 2014 the Company secured a note with Paragon for $500,088 due on August 10, 2014. The note bears interest at a 5% annual rate, payments of interest only are due monthly until the due date.

This increases the Company’s aggregate obligation to Paragon to approximately $1.2 million at June 30, 2014. The Company is currently negotiating with the lender to extend the above debts (b and c) with an expiration date of August 10, 2014. The lender has not issued a formal notice of default to the Company.

(d) ARB entered into a term note with TD Bank in 2008 for $300,000, which has a balance of $10,249 at June 30, 2014 and has a maturity date of August 4, 2014. The interest rate is 1.75% above the Wall Street Journal prime rate (3.25%), and the monthly principal and interest payment is $4,836, subject to adjustment by TD Bank, except for the last payment which shall be the unpaid balance at maturity. The term note is personally guaranteed by two former shareholders of ARB, and TD Bank has a first lien on all ARB’s assets.

(e) On December 23, 2013, the Company entered into a loan agreement with an outside company for $150,000, due on February 23, 2014. Interest is compounded monthly at a rate of 1%. As of February 23, 2014, the Company was not in compliance with the terms of this note due to non-payment of principal and interest. On March 21, 2014, the Company paid the note holder $25,000 of principal and $4,751 of accrued interest. However, the note holder has not issued a formal notice of default to the Company.

(f) On June 20, 2014, the Company entered into a loan agreement with an outside company for $100,000, due on July 11, 2014. Interest is at an 8% annual rate. The Company is currently negotiating with the lender to extend the above debt. The lender has not issued a formal notice of default to the Company.

(i) In April 2014, our South African subsidiary entered into a mortgage note with a South African bank for the purchase of the building in Port Elizabeth for our Hooters location. The 10-year note is for $330,220 with an annual interest rate of 2.6% above the South African prime rate (prime currently 9.25%). Monthly principal and interest payments of approximately $4,600 commence in August, 2014. The mortgage note is personally guaranteed by our CEO and South African COO and secured by the assets of the Port Elizabeth building.

Convertible notes payable at June 30, 2014 and December 31, 2013 are as follows:

On August 2, 2013, the Company entered into an agreement with seven individual accredited investors, whereby the Company issued separate 6% Secured Subordinate Convertible Notes (“Notes”) for a total of $3,000,000 in a private offering collateralized by the assets of the Hooters Nottingham restaurant. The funding from the private offering was used exclusively for the acquisition of the Hooters Nottingham restaurant location (acquisition described in Note 3). The Notes have the following principal terms:

The Company completed the purchase of Hooters Nottingham on November 6, 2013 and began operating the restaurant on November 7, 2013.

The fair value of the embedded conversion feature and the warrants is $2,265,600 and $884,600, respectively, and the aggregated total equal $3,150,200. Consequently, upon issuance of the Note, a debt discount of $3,000,000 was recorded and the original difference of $150,200, representing the fair value of the conversion feature and the warrants in excess of the debt discount, was immediately charged to interest expense. The debt discount will be amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the straight-line method which approximates the interest method. The amortization of debt discount is included as a component of interest expense in the consolidated statements of operations.

made

The fair value of the embedded conversion feature and the warrants each was estimated using the Black-Scholes option-pricing model which approximated the Binomial Lattice model. Key assumptions used to apply this pricing model during the three and six months ended June 30, 2014 were as follows:

The expected stock price volatility for the Company’s stock options was determined by the historical volatilities of comparable companies. Risk free interest rates were obtained from U.S. Treasury rates for the applicable periods.

In March 2014, the Company entered into an agreement whereby the Company issued a convertible promissory note for a total of $500,000. The note accrues monthly interest of 1.25% until the date the note is converted. The note is convertible into the Company’s common stock (at 85% if the offering price in future offering or 85% of the VWAP). The conversion price is subject to a floor of $3.00 per share. If not converted, the note matures one year from the issuance date.

In connection with the issuance of the March 2014 convertible promissory note, the Company also issued to the investors warrants to purchase up to 30% of the number of shares of Common Stock issued upon conversion of the 2014 note, exercisable at $5.25 per share for a period of up to 5 years from the Note's original issuance date.

The Company accounted for the issuance of the convertible promissory note and the warrants attached to the note in accordance with ASC 815 “Derivatives and Hedging.” Accordingly, the warrants and the embedded conversion option of the convertible notes are recorded as derivative liabilities at their fair market value and are marked to market through earnings at the end of each reporting period. The gross proceeds from the sale of the note are recorded net of a discount of $9,442. The debt discount relates to the beneficial conversion feature embedded in the conversion option and the fair value of the warrants attached to the notes. The debt discount is charged back to interest expense ratably over the term of the convertible note.

At June 30, 2014 the Company has an outstanding loan payable to its Australian partner of $1,571,646 in connection with Surfers Paradise and Townsville construction costs. The Company has agreed to repay the unsecured obligation before the end of 2014. Approximately $230,000 was repaid in July and August 2014.

The Company has 45,000,000 shares of its $0.0001 par value common stock authorized at both June 30, 2014 and December 31, 2013, and 6,499,433 shares issued and 5,387,897 shares outstanding at June 30, 2014 and December 31, 2013, respectively.

2014 Transactions

On January 31, 2014, pursuant to an Agreement and Plan of Merger executed on December 31, 2013, the Company completed the acquisition of all of the outstanding shares of Tacoma Wings, LLC, Jantzen Beach Wings, LLC and Oregon Owl’s Nest, LLC, which owned and operated the Hooters restaurant locations in Tacoma, Washington and Portland, Oregon and a gaming facility operated through the Oregon Lottery system (collectively “Hooters Pacific NW”) for a total purchase price of 680,272 Company units, valued at approximately $3.9 million, with each unit consisting of one share of the Company’s common stock and one five-year warrant to purchase a share of the Company’s common stock. Half of the warrants are exercisable at $5.50 and half of the warrants are exercisable at $7.00. As a part of this transaction, the sellers were granted registration rights with respect to the Company’s common stock issued and underlying the warrants.

Also on January 31, 2014, pursuant to an Agreement and Plan of Merger executed on January 14, 2014, the Company completed the acquisition of all of the outstanding shares of Dallas Spoon, LLC and Dallas Spoon Beverage, LLC from Express Restaurant Holdings, LLC and Express Restaurant Holdings Beverage, LLC. The purchase price of 195,000 Company units, valued at approximately $1.1 million, was paid to Express Working Capital, LLC (“EWC”); the units consist of one share of the Company’s common stock and one five-year warrant to purchase a share of the Company’s common stock. Half of the warrants are exercisable at $5.50 and half of the warrants are exercisable at $7.00. As part of this transaction, EWC was granted registration rights with respect to the Company’s common stock issued and underlying the warrants.

During the first three and six months ended June 30, 2014 the Company issued 40,000 and 98,764 shares valued at $101,900 and $330,757, respectively, for investor relations services.

During the three and six months ended June 30, 2014, the Company raised from private investors $200,000 for 137,500 shares of common stock and 15,000 five-year common stock warrants exercisable at $3.50 per share. Subsequent to June 30, 2014, the Company raised from private investors $440,000 for 220,000 shares of commons stock and 66,000 five-year common stock warrants exercisable at $3.50 per share.

2013 Transactions

On April 22, 2013, the Company issued 4,000 shares of the Company’s common stock in exchange for investor relations services to be performed over a 12 month period, valued at $7,720.

In September 2013, the Company issued 25,000 shares of common stock valued at $117,000 for services for a five month agreement. The Company has expensed $93,600, representing four of five months in 2013 and will expense the final month in 2014.

On September 30, 2013, the Company closed the purchase of ARB and issued 740,000 units which consisted of one share of common stock and one common stock warrant valued at $3,611,126 and $1,710,077, respectively.

On October 17, 2013, the Company raised $2,500,000 in a private placement, pursuant to which the Company sold to the Investors an aggregate of 666,667 Units at a purchase price of $3.75 per unit. Each unit consists of one share of the Company’s common stock, $0.001 par value per share and one five-year warrant, exercisable after twelve months, to purchase one share of common stock at an initial exercise price of $5.00.

The Company employed a placement agent for the purpose of the private placement, and has paid to the placement agent commissions in the total amount of $150,000 and five year warrants convertible into an aggregate of 80,000 shares valued at approximately $312,000 using the Black-Scholes model.

During October 2013, 15,000 common stock shares valued at $62,500 were issued for investor relations services.

On November 5, 2013, the Company entered into a Subscription Agreement with JFR and JFFS for the purchase of a 51% ownership interest in each entity, for a total purchase price of $560,000. The transaction closed on December 10, 2013 with the execution of an Assignment, Assumption, Joinder, and Amendment Agreement with both JFR and JFFS. On December 11, 2013, the Company purchased an additional 5% interest in both JFR and JFFS from an original interest holder for the total purchase price of $30,000, increasing the Company’s ownership interest in JFR and JFFS to a total of 56%.

On November 7, 2013, the Company entered into a Subscription Agreement with three accredited investors, pursuant to which the Company sold to the Investors an aggregate of 160,000 Units at a purchase price of $5.00 per Unit, closing an $800,000 private placement. Each unit consists of one share of the Company’s common stock, $0.001 par value per share and one five-year warrant to purchase one share of common stock. One half (80,000) of the available warrants are available at an initial exercise price of $5.50, while the remaining half (80,000) of the warrants are available at an initial exercise price of $7.00. The Company has paid a placement fee by issuing an aggregate of 80,000 five- year warrants valued at approximately $312,000 using the Black-Scholes model.

On November 26, 2013, the Company finalized a Subscription Agreement (the “Beacher’s Subscription Agreement”) with Beachers’ LV, LLC (“Beachers”), whereby the Company subscribed for five units, with each Unit consisting of a 1% membership interest in Beachers. The total capital contribution made by the Company to Beachers was $500,000. In connection with the Subscription Agreement, the Company executed a Right to Purchase Agreement with Madhouse Worldwide Investments, LLC (“MWI”) whereby the Company issued fifty three thousand three hundred and thirty four (53,334) shares of the Company’s common stock, valued at approximately $260,000, to MWI or its assigns, in exchange for a two-year option to purchase up to 25% of any ownership interest in any future Beacher’s nightclub to be offered to third party investors, and a three-year exclusive option to propose funding, participate in funding, and open future Beacher’s nightclubs in South Africa, Australia, and the United Kingdom. The Company also issued an aggregate of 50,000 five-year warrants valued at approximately $176,000 using the Black-Scholes model.

On October 12, 2012, Francis Howard (“Howard”), individually and on behalf of all others similarly situated, filed a lawsuit against the Company, Michael D. Pruitt, Eric S. Lederer, Michael Carroll, Paul I. Moskowitz, Keith Johnson (the “Individual Defendants”), Merriman Capital, Inc., Dawson James Securities, Inc. (the “Underwriter Defendants”), and Creason & Associates P.L.L.C. (“Creason”), in the U.S. District Court for the Southern District of Florida.  The class action lawsuit alleges violations of Section 11 of the Securities Act against all Defendants, violations of Section 12(a)(2) of the Securities Act against only the Underwriter Defendants, and violations of Section 15 against the Individual Defendants.  Howard seeks unspecified damages, reasonable costs and expenses incurred in this action, and such other and further relief as the Court deems just and proper.  On October 31, 2012, the Company and the Individual Defendants retained Stanley Wakshlag at Kenny Nachwalter, P.A. to represent them in this litigation. On December 12, 2012, Howard filed a Motion to Appoint himself lead Plaintiff and to approve his selection of The Rosen Law Firm, P.A. as his counsel.  An Order appointing Francis Howard and the Rosen Law Firm as lead Plaintiff and lead Plaintiff’s counsel was entered on January 4, 2013.   On February 19, 2013, Plaintiff filed an Amended Complaint alleging similar claims to those previously asserted.  On May 20, 2013, the Plaintiff filed a Notice of Voluntary Dismissal without prejudice of Defendants Dawson James Securities, Inc. and Merriman Capital, Inc. On September 17, 2013, Judge Cohn denied the Defendants’ Motions to Dismiss and ordered that Defendants file Answers to Plaintiff’s Amended Class Action Complaint by October 8, 2013, and that the trial be set for the two-week period commencing May 12, 2014. The Company and Individual Defendants filed an Answer to Plaintiff’s Amended Class Action Complaint on October 7, 2013.  A Scheduling Order was entered on October 8, 2013 after a Scheduling Conference was held, whereby a timeframe was set for Disclosures, Mediation, Joinder of Parties and Amendment of Pleadings, Discovery, and Pre-Trial Motions. The parties have made initial disclosures, and document requests and interrogatories have been served. On December 18, 2013, the parties filed a Joint Status Report Relating to Mediation, whereby the parties disclosed details of a class-wide settlement of this action. The parties have agreed on a total settlement amount of $850,000, with $837,500 to be paid by the Company’s insurance carrier and $12,500 to be paid by Creason, subject to court approval. All parties have executed a definitive settlement agreement consistent with terms previously disclosed, which was  filed with the court on March 31, 2014, along with a request seeking preliminary approval of the settlement. Preliminary approval was received from the court on April 23, 2014. The final hearing is set for August 14, 2014. The amount of $837,500 was paid by the Company’s insurance carrier into an escrow account. The Company has and will continue to vigorously defend itself in this matter.

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 has appealed this decision.

On April 1, 2013, the Company received a subpoena from the SEC, requesting various corporate documents relating to operations.  The Company intends to fully cooperate with the subpoena.

In connection with our 2011 acquisitions of the South African entities (whereby, on October 1, 2011, Rolalor, Alimenta 177(Pty.) Ltd. and Labyrinth transferred their respective net assets to the newly formed entities controlled by the Company), the Company believes the purchase and sale with the seller was accomplished in accordance with the laws and regulations of the taxing authorities in South Africa. However, there can be no absolute assurance as to whether the business acquired continues to have any outstanding tax and regulatory filing requirements, (i.e. not filed certain corporate tax returns for previous years) as well as whether the local authorities could seek to recover any unpaid taxes, interest, penalties, or other amounts due from the Company, its shareholders or others.  The Company is not aware of any existing obligations that remain outstanding for which the Company may be required to settle. In connection with acquiring the net assets of the business, the Company may be entitled to be reimbursed by the seller for any pre-acquisition obligations of the business that may arise post-acquisition.

In addition to the matters disclosed above, the Company may be involved in legal proceedings and claims which have arisen in the ordinary course of business. These actions, when ultimately concluded and settled, will not, in the opinion of management, have a material adverse effect upon the financial position, results of operations or cash flows of the company. 

Assets and liabilities measured at fair value on a recurring basis are summarized in the following tables according to FASB ASC 820 pricing levels.

At June 30, 2014 and December 31, 2013, the Company's available-for-sale equity securities were valued using Level 1 inputs as summarized above. Level 1 inputs are based on unadjusted prices for identical assets in active markets that the Company can access.

The derivative liabilities are measured at fair value using quoted market prices and estimated volatility factors based on historical quoted market prices for the Company’s common stock, and are classified within Level 3 of the valuation hierarchy.

Certain assets are not carried at fair value on a recurring basis, including investments accounted for under the equity and cost methods. Accordingly, such investments are only included in the fair value hierarchy disclosure when the investment is subject to re-measurement at fair value after initial recognition and the resulting re-measurement is reflected in the consolidated financial statements.

The following table provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets measured at fair value on a recurring basis using significant unobservable inputs during the three and six months ended June 30, 2014. The Company did not have any warrants or conversion feature financial assets for the three and six months ended June 30, 2013.

On July 1, 2014, pursuant to Purchase Agreements executed on June 30, 2014, the Company completed the acquisition of a sixty percent (60%) ownership interest in Hoot Parramatta Pty Ltd, Hoot Australia Pty Ltd, Hoot Penrith Pty Ltd, and TMIX Management Australia Pty Ltd (collectively, the “Australian Entities”), which own, operate, and manage Hooters restaurant locations and gaming operations in Australia. The ownership interest in the Australian Entities was purchased from the respective entities in exchange for the Company agreeing to assume a five million dollar ($5,000,000) debt and issuing two hundred fifty thousand (250,000) warrants to purchase shares of our common stock.

The Company is currently seeking to raise funds privately either through debt or equity financing. Subsequent to June 30, 2104, the Company has received $440,000 through the private sale of equity securities in transactions exempt from registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. The Company anticipates raising additional capital from the sale of equity or debt securities as well as seeking funding related to its other investments during the remainder of 2014, although there can be no assurance that it will be able to do so.

ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

Forward-looking statements appear in this report, including, but not limited to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in other written and oral statements made by or on behalf of us. These forward-looking statements include, but are not limited to, statements relating to our goals, strategies, expectations, competitive environment, regulation, availability of resources, future events and future financial performance. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements typically can be identified by such words as “anticipate,” “estimate,” “forecast,” “project,” “intend,” “expect,” “believe,” “should,” “could,” “may” or other similar words or expressions. We caution readers that such forward-looking statements involve risks and uncertainties, including, but not limited to, the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2013 and in other reports and statements that we file with the SEC. Such forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied herein, including, but not limited to, the following:

Our forward-looking statements are based upon our beliefs and assumptions using information available at the time the statements are made. We caution the reader not to place undue reliance on our forward-looking statements (i) as these statements are neither a prediction nor a guarantee of future events or circumstances and (ii) the assumptions, beliefs, expectations and projections about future events may differ materially from actual results. We undertake no obligation to publicly update any forward-looking statement to reflect developments occurring after the statement is made, except as otherwise required by law.

Management’s Analysis of Business

Our business focus is operating Hooters franchises internationally and several restaurant and bar concepts domestically. We previously have operated in two business segments – Hooters franchise restaurants and investment management and consulting services businesses. However, we announced our intention to exit investment management and consulting services businesses in the first quarter of fiscal 2013 and we effectuated such exit during the second quarter of fiscal 2013. We own and operate Hooters franchises, both domestically and internationally, and various fast casual restaurant brands domestically, along with several other domestic restaurant and bar concepts, including the American Roadside Burgers (currently doing business as American Burger Co. at the two Charlotte ARB locations) chain and a majority interest in the Just Fresh restaurant chain.  Hooters restaurants are casual beach-themed establishments with sports on television, jukebox music, and the “nearly world famous” Hooters Girls.  The menu consists of spicy chicken wings, seafood, sandwiches and salads.  The menu of each location can vary with the local tastes.  Hooters began in 1983 with its first restaurant in Clearwater, Florida. From the original restaurant and licensee Mr. Robert Brooks, Hooters has become a global brand, with locations in 44 states domestically and over 430 Hooters restaurants worldwide. Besides restaurants, Hooters has also branched out to other areas, including licensing its name to a golf tour and the sale of packaged food in supermarkets. American Roadside Burgers (“ARB”) is a 10-year-old fast casual dining chain, known for its diverse menu featuring fresh salads, customized burgers, milk shakes, sandwiches, and beer and wine. Each restaurant features a nostalgic "made in America" theme. The first ARB location opened in 2006 in Smithtown, N.Y. and has since expanded to 2 locations in Charlotte, N.C. (currently doing business as American Burger Co.), 1 location in Columbia, S.C. and the newest location is in Greenville, S.C. The Just Fresh restaurant chain first opened in 1994 and currently operates six company owned locations throughout North Carolina that offer fresh-squeezed juices, gourmet coffee, fresh-baked goods and premium-quality, made-to-order sandwiches, salads and soups. The founders of Just Fresh modeled their concept around the idea that a fresher, more nutritional diet can have positive effects on physical health and overall wellness.

We expect to either own 100% of the restaurant or franchise location, or partner with a local individual in the countries or regions we target.   We based this decision on what we believe to be the successful launch of our South African Hooters venture and believe we have aligned partners and operators in various domestic and international markets. We are focused on expanding our Hooters, ARB, and Just Fresh operations, and expect to invest in the United States, South Africa, Brazil, Australia and Europe.

Effective September 30, 2013, we acquired 100% of the outstanding shares of ARB pursuant to an agreement and plan of merger with ARB.

Effective November 7, 2013, we acquired 100% of an existing Hooters restaurant in Nottingham, England.

On December 10, 2013, we closed the purchase of a majority ownership interest in JF Restaurants, LLC and JF Franchising Systems, LLC, the owners of the Just Fresh Restaurant chain. On December 11, 2013, we purchased an additional 5% interest in the entities owning Just Fresh, bringing the Company’s ownership interest to 56% in each entity.

On January 31, 2014, we closed the purchases of 100% of two Hooters restaurants in the states of Washington and Oregon and a gaming facility operated through the Oregon Lottery system, as well as the seafood restaurant Spoon Bar and Kitchen in Dallas, Texas.

On April 1, 2014, we completed the step acquisition of Hooters Australia, increasing the Company’s ownership percentage from 49% to 60% for three Hooters Australia locations, two of which currently are open and the third location is under construction.

On July 1, 2014, we completed the acquisition of 60% of two additional Australian Hooters restaurants and gaming operations as well as 60% interest in the related Australian management company.

LIQUIDITY AND CAPITAL RESOURCES AND GOING CONCERN

Historical information:

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. At June 30, 2014, the Company had current assets of $1,578,372, current liabilities of $9,310,320, and a working capital deficit of $7,731,948. The Company incurred a loss of $2,861,374 during the six months ended June 30, 2014 and had an unrealized loss from available-for-sale securities of $15,527 and foreign currency translation gains of $51,165, resulting in a comprehensive loss of $2,825,736. The Company has historically met its liquidity requirements through the sale of equity and debt securities, sale of certain investments, and has also obtained funding at the subsidiary level for certain locations and joint ventures. The Company anticipates raising additional capital from one or more such sources during the remainder of 2014, although there can be no assurance that it will be able to do so.

The Company's corporate general and administrative expenses were $2,860,453 for the first six months of 2014, including $375,507 non-cash expenses comprised of common stock issued for services and amortization of warrants. The expenses averaged approximately $1.0 million per quarter in 2013, including approximately $1.1 million non-cash expenses. The Company expects costs to remain flat for the second half of 2014 as we continue to expand our footprint domestically and internationally for 2014 and beyond, however we expect costs to decrease as a percent of sales. Effective October 1, 2011, the Company acquired majority control of the initial three restaurants in South Africa and began consolidating these operations. In August 2012, the Company opened a restaurant in Budapest, Hungary, and earns 80% of the operating results with our operating partner earning 20%. Domestically in 2013 the Company purchased 100% of ARB on September 30, 2013, and 56% of JFR and JFFS, owners of Just Fresh, a Charlotte, North Carolina-based casual dining concept, in December 2013. Effective November 7, 2013, the Company acquired 100% of an existing Hooters restaurant in Nottingham, England. On January 31, 2014, the Company closed the purchases of 100% of two Hooters restaurants in the states of Washington and Oregon and a gaming facility operated through the Oregon Lottery system, as well as Spoon Bar and Kitchen in Dallas, Texas. In March 2013, the Company closed its investment management business, which saved us approximately $50,000 per quarter starting fully in the third quarter of 2013. The Company also has earned 49% of the operating results with our operating partner earning 51% in our Hooters location opened in January 2012 in Campbelltown, Australia, a suburb of Sydney. During April 2014, the Company purchased an additional 11% of the Hooters location in Campbelltown from our Australian partner, increasing our ownership to 60%. Construction is also recently completed or underway on two additional Hooters Australia locations under the same terms (the Company will hold a 60% interest in each). The first site in Surfers Paradise opened to the public on July 14, 2014 and the second site in Townsville site is expected to open late in the third quarter of 2014. The Company also has a 5% interest in Beacher’s Madhouse, a variety show, which opened in Las Vegas, Nevada at the end of 2013.

The Company has a note with a balance at June 30, 2014 of $197,416 owed to its bank which is due on October 10, 2018 with monthly principal and interest payments of $4,406. In April 2013, the Company secured a $500,000 line of credit which became due on August 10, 2014 for which an extension is currently being negotiated. As of June 30, 2014, the balance on the line of credit is $500,000. In February 2014 the Company secured a note with a bank for $500,000 due on August 10, 2014 for which an extension is currently being negotiated. The Company also has $3,000,000 of convertible debt which the Company used for our purchase of the Hooters Nottingham (United Kingdom) location On August 2, 2013, the Company entered into an agreement with seven individual accredited investors, whereby the Company issued separate 6% Secured Subordinate Convertible Notes for a total of $3,000,000 in a private offering. These investors received 3 year warrants to purchase 300,000 shares of the Company’s common stock at $3.00 per share. The conversion feature of the convertible debt and warrants was recorded as a derivative liability. The Company closed the purchase of Hooters Nottingham on November 6, 2013 and began operating the restaurant on November 7, 2013. In March 2014, the Company received proceeds of $500,000 from convertible debt which was used for continuing the Company’s growth and for working capital. The investor was issued 15% Secured Subordinate Convertible Notes and received five year warrants to purchase up to 30% of the number of shares of common stock issued upon conversion of the 2014 note exercisable at $5.25 per share. The conversion feature of the convertible debt was recorded as a derivative liability. In addition the Company has a note with at balance at June 30, 2014 of $225,000 owed to two outside companies which have matured, an extension for both notes are currently being negotiated and payment has not been demanded. The Company’s South African subsidiaries have bank overdraft and term facilities of $707,700, including a mortgage for a site we purchased in Port Elizabeth for our next Hooters location. ARB has a bank note payable of $10,249 due on August 5, 2014 which has been repaid in full. The Company plans to continue to use limited partnerships or other financing vehicles, if necessary, to fund its share of costs for additional Hooters and other restaurants.

On October 17, 2013, the Company raised $2,500,000 in a private placement, pursuant to which the Company sold to the investors an aggregate of 666,667 Units at a purchase price of $3.75 per unit. Each Unit consists of one share of the Company’s common stock and one five-year warrant, exercisable after twelve months, to purchase one share of common stock at an initial exercise price of $5.00. The Company employed a placement agent for the purpose of the private placement, and paid to the placement agent commissions in the total amount of $150,000 and five year warrants convertible into an aggregate of 40,000 shares.

On November 7, 2013, the Company entered into a Subscription Agreement with three accredited investors, pursuant to which the Company sold to the investors an aggregate of 160,000 Units at a purchase price of $5.00 per Unit, closing a $800,000 private placement. Each Unit consists of one share of the Company’s common stock, $0.001 par value per share and one five- year warrant to purchase one share of common stock. One half (80,000) of the available warrants are available at an initial exercise price of $5.50, while the remaining half (80,000) of the warrants are available at an initial exercise price of $7.00. The Company employed a placement agent for the purpose of the private placement, and has paid to the placement agent commissions in the total amount of $32,000 and five-year warrants subject to the same terms as those issued under the above transaction, convertible into an aggregate of 6,400 shares of common stock.

On January 31, 2013, the Company settled outstanding liabilities of approximately $170,000 from a South African bank, previously presented in our consolidated balance sheets in “other liabilities”. Upon making a payment of approximately $99,000, the Company received a release from all other bank liabilities, resulting in a total gain on extinguishment of debt of approximately $71,000, which is presented in our financial statements as other income.

During the three and six months ended June 30, 2014, the Company raised from private investors $200,000 for 137,500 shares of common stock and 15,000 five-year common stock warrants exercisable at $3.50 per share. Subsequent to July 1, 2014, the Company raised from private investors $440,000 for 220,000 shares of commons stock and 66,000 five-year common stock warrants exercisable at $3.50 per share.

In order to execute the Company’s long-term growth strategy, which includes continued expansion of the Company’s business by acquisition or developing or constructing, the Company will need to raise additional funds through public or private equity offerings, debt financings, or other means.

The current constraints of cash flow from operations and the requirements to raise funds raise substantial doubt about the Company’s ability to continue as a going concern. These condensed consolidated financial statements do not reflect any adjustments that might result from the outcome of these uncertainties.

RESULTS OF OPERATIONS

Comparison of three months ended June 30, 2014 and 2013

Revenue and expenses from operations are summarized below. 

Revenue

Restaurant revenues increased $ 5,177,889 (315.5%) from the second quarter of 2013 to the second quarter of 2014. The increase was largely attributable to acquisitions as discussed in Note 3.

Gaming income, net increased by $75,724 from the second quarter of 2013 to the second quarter of 2014 as the result of the Company’s acquisition on January 31, 2014 of the Hooters restaurant and attached gaming facility in Oregon, run by the state’s lottery commission. On July 1, 2014, we announced the acquisition of 60% of the two other Hooters in Australia, in Penrith and Parramatta, suburbs of Sydney, as well as the Australian management company. The purchase price was the assumption of $5 million in debt. Also as part of the transaction, the Company receives 100% of the gaming revenue until the debt is repaid, and thereafter the Company will receive 60% for the remainder of the lifetime of the gaming machines.

We expect gaming income, net to increase significantly in the second half of 2014, however we have a limited history to be able to forecast a range.

Revenues for the management business were flat for the three months ended June 30, 2014 and June 30, 2013, amounting to $25,151 and $25,000, respectively.

Restaurant cost of sales

Restaurant cost of sales amounted to $2,454,626, or 36.0% of restaurant net sales in the three months ended June 30, 2014 and $635,348, or 38.7% of restaurant net sales in the year earlier period. We expect the percentage to remain approximately the same in 2014 as we continue to expand our business both domestically and internationally.

Restaurant operating expenses

Restaurant operating expenses amounted to $4,012,399 or 58.8% of restaurant net sales in the three months ended June 30, 2014 as compared to $932,250, or 56.8% of restaurant net sales in the three months ended June 30, 2013. We expect the percentage of operating expenses to restaurant net sales to decline in the second half of 2014 as we open more restaurant locations, however we have a limited history to be able to forecast a range.

Restaurant pre-opening expenses

Restaurant pre-opening expenses for the three months ended June 30, 2014 and 2013 amounted to $260,981 and 10,201, respectively. The increase in 2014 was due primarily to rent expenses incurred before opening of the two newly constructed Hooters in Australia, one locations which opened in Surfers Paradise in July 2014 and the other in Townsville expected to open in late September 2014.

General and Administrative Expense (“G&A”)

G&A amounted to $1,245,660 or 18.3% of restaurant net sales in the three months ended June 30, 2014 and $645,648 or 39.3% of restaurant net sales in the year earlier period. The more significant components of G&A are summarized as follows:

G&A costs are expected to be approximately $1.4 million per quarter for the second half of 2014, including approximately $0.3 million of non-cash G&A costs. We expect the costs associated with the activities of the restaurant business and corporate activities continuing to grow, but we expect the G&A as a percentage of sales to decline.

Professional fees increased $140,887 in the second quarter of 2014 compared to the second quarter of 2013 because we expanded our footprint domestically and internationally, incurred costs both for legal fees related to our shareholder lawsuit and accounting fees related to our substantial growth.

Payroll and benefits increased $228,967 in the second quarter of 2014 compared to the second quarter of 2013 primarily due to the addition of restaurant management personnel starting in the fourth quarter of 2013 and additional corporate employees commencing employment with the Company in the last two quarters of 2013.

Consulting and investor relations fees increased $100,962 in the second quarter of 2014 compared to the second quarter of 2013 primarily due to the Company seeking to increase our footprint in the investment and restaurant arenas. Non-cash fees for services totaled $124,275 and $39,239 in the second quarter of 2014 and 2013, respectively.

Travel and entertainment increased $18,075 in the second quarter of 2014 compared to the second quarter of 2013 as Company personnel, primarily the CEO and Director of Restaurant Training, traveled to increase our Company awareness, visit our restaurant locations, and secure financing and partners for the restaurant locales.

Shareholder services and fees increased $20,926 in the second quarter of 2014 compared to the second quarter of 2013 primarily from additional fees for issuances of securities and related filings with the SEC.

Depreciation and amortization

Depreciation expense for the three months ended June 30, 2014 and 2013 amounted to $334,981 and $124,478, respectively. Depreciation expense for the restaurant operations for the three months ended June 30, 2014 and 2013 amounted to $332,381 and $123,393, respectively. Corporate depreciation expense for the three months ended June 30, 2014 and 2013 amounted to $2,600 and $1,085, respectively.

Amortization expense for the three months ended June 30, 2014 and 2013 for the restaurant businesses related to franchise fees and trade names and trademarks was $77,506 and $5,398, respectively.

OTHER INCOME (EXPENSE)

Other income (expense) consisted of the following for the three months ended June 30, 2014 and 2013: 

Income from operations of unconsolidated affiliates

Effective April 1, 2014, we completed the step acquisition of a 60% controlling interest in our Hooters Australia joint venture resulting in the consolidation of these entities. Prior to the acquisition, we owned 49% of the entities and accounted for the Hooters Australia investment under the equity method of accounting and our share of earnings and losses was recorded in equity in losses from investments in our Consolidated Statements of Operations and Comprehensive Income. The Hooters Australia results of operations for the three months ended June 30, 2014 are reflected in the respective line items in our Consolidated Statements of Operations and Comprehensive Income. 

Equity in Earnings of Investments

Equity in earnings of investments includes our share of earnings from investments in which we own at least 20% and are being accounted for using the equity method. This included losses from the Hoot Campbelltown partnership in the 2013 first quarter period of $18,806.

Change in Fair Value of Derivative Liability

Change in fair value of derivative liability increased by $272,100 from the second quarter of 2013 to the second quarter of 2014, related to the warrants issued with our convertible debt. The liability is a non-cash income or expense and will be adjusted quarterly based on the Company’s stock price.

Interest Expense

Interest expense increased by $332,317 from the second quarter of 2013 to the second quarter of 2014, as the Company increased its debt obligations in the second half of 2013 to fund the Company’s growth.

Comparison of six months ended June 30, 2014 and 2013 

Revenue

Revenue amounted to $12,547,256 for the six months ended June 30, 2014 and $3,333,165 for the six months ended June 30, 2013.

Restaurant revenues increased $ 9,082,705 (276.68%) from the six months ended June 30, 2013 to the first six months of 2014. The increase was largely attributable to acquisitions as discussed in Note 3.

Gaming income, net increased by $131,235 from the six months ended June 30, 2013 to the six months ended June 30, 2014 as the result of the Company’s acquisition on January 31, 2014 of the Hooters restaurant and attached gaming facility in Oregon, run by the state’s lottery commission. On July 1, 2014, we announced the acquisition of 60% of the two other Hooters in Australia, in Penrith and Parramatta, suburbs of Sydney, as well as the Australian management company. The purchase price was the assumption of $5 million in debt. Also as part of the transaction, the Company receives 100% of the gaming revenue until the debt is repaid, and thereafter the Company will receive 60% for the remainder of the lifetime of the gaming machines.

We expect gaming income, net to increase significantly in the second half of 2014, however we have a limited history to be able to forecast a range.

Revenues for the management business were flat for the six months ended June 30, 2014 and June 30, 2013, amounted to $50,151 and $50,000, respectively.

Restaurant cost of sales

Restaurant cost of sales amounted to $4,437,907, or 35.9% of restaurant net sales for the six months ended June 30, 2014 and $1,263,236, or 38.5% of restaurant net sales for the six months ended June 30, 2013. We expect the percentage to remain approximately the same in 2014 as we continue to expand our business both domestically and internationally.

Restaurant operating expenses

Restaurant operating expenses amounted to $7,294,226, or 59.0% of restaurant net sales for the six months ended June 30, 2014 and $1,912,405, or 58.2% of restaurant net sales for the six months ended June 30, 2013. We expect the percentage of operating expenses to restaurant net sales to decline as we open more restaurant locations. However, our limited history prevents us from being able to forecast a range.

Restaurant pre-opening expenses

Restaurant pre-opening expenses for the six months ended June 30, 2014 and 2013 amounted to $260,981 and $410,201, respectively. The increase in 2014 was incurred primarily for the two openings in Australia, one location which opened in Surfers Paradise in July 2014 and the other location which is expected to open in Townsville in late September 2014.

General and Administrative Expense (“G&A”)

G&A amounted to $2,860,453 for the six months ended June 30, 2014 and $1,365,848 for the six months ended June 30, 2013. The more significant components of G&A are summarized as follows:

G&A costs are expected to be approximately $1.4 million per quarter for the remainder of 2014, including approximately $0.3 million of non-cash G&A costs. We expect the costs associated with the activities of the restaurant business and corporate activities to continue to grow, while we expect the G&A as a percentage of sales to decline.

Professional fees increased $298,481 in the first six months of 2014 compared to the first six months of 2013 because we expanded our footprint domestically and internationally, incurred costs both for legal fees related to our shareholder lawsuit and accounting fees related to our substantial growth.

Payroll and benefits increased $400,389 in the first quarter of from 2014 compared to the first six months of 2014 compared to the first six months of 2013 primarily due to the addition of restaurant management personnel starting in the fourth quarter of 2013 and additional corporate employees commencing employment with the Company in the last two quarters of 2013.

Consulting and investor relations fees increased $512,162 in the first six months of 2014 compared to the first six months of 2013 primarily due to the Company seeking to increase our footprint in the investment and restaurant arenas. Non-cash fees for services totaled $375,507 and $65,796 in the first six months of 2014 and 2013, respectively.

Travel and entertainment increased $75,596 in the first six months of 2014 compared to the first six months of 2013 as Company personnel, primarily the CEO and Director of Restaurant Training, traveled to increase our Company awareness, visit our restaurant locations, and secure financing and partners for the restaurant locales.

Shareholder services and fees increased $39,730 in the first six months of 2014 compared to the first six months of 2013 primarily from additional fees for securities issuances and related filings with the SEC.

Depreciation and amortization

Depreciation expense for the six months ended June 30, 2014 and 2013 amounted to $622,649 and $233,569, respectively. The restaurant segment for the six months ended June 30, 2014 and 2013 amounted to $617,928 and $230,294, respectively, and the management business amounted to $4,721 and $3,275, respectively.

Amortization expense for the six months ended June 30, 2014 and 2013 for the restaurant businesses related to franchise fees was $154,726 and $10,531, respectively.

OTHER INCOME (EXPENSE)

Other income (expense) consisted of the following for the six months ended June 30, 2014 and 2013: