UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2013
Commission File Number 000-29507
CHANTICLEER HOLDINGS, INC.
(Exact name of registrant as specified in the charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
20-2932652
(I.R.S. Employer
Identification Number)
11220 Elm Lane, Suite 203, Charlotte, NC 28277
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(704) 366-5122
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 par value
Common Stock Warrants, $5.00 exercise price
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days. 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). Yes x No ¨.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No.
The aggregate market value of the voting stock held by non-affiliates was $8,955,981 based on the closing sale price of the Company’s
Common Stock as reported on the NASDAQ Stock Market on June 28, 2013.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. There were
6,287,365 shares of common stock issued and outstanding as of March 15, 2014.
Chanticleer Holdings, Inc.
Form 10-K Index
Business
Risk Factors
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operation
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Part I
Item 1:
Item 1A:
Item 2:
Item 3:
Item 4:
Part II
Item 5:
Item 6:
Item 7:
Item 7A:
Item 8:
Item 9:
Item 9A:
Item 9B:
Part III
Item 10:
Item 11:
Item 12:
Item 13:
Item 14:
Part IV
Exhibits and Financial Statement Schedules
Item 15:
Signatures
Exhibit Index
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PART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of The Private Securities Litigation
Reform Act of 1995. These statements include projections, predictions, expectations or statements as to beliefs or future events or results or
refer to other matters that are not historical facts. Forward-looking statements are subject to known and unknown risks, uncertainties and other
factors that could cause the actual results to differ materially from those contemplated by these statements. The forward-looking statements
contained in this Annual Report are based on various factors and were derived using numerous assumptions. In some cases, you can identify
these forward-looking statements by the words “anticipate”, “estimate”, “plan”, “project”, “continuing”, “ongoing”, “target”, “aim”, “expect”,
“believe”, “intend”, “may”, “will”, “should”, “could”, or the negative of those words and other comparable words. You should be aware that
those statements reflect only the Company’s predictions. If known or unknown risks or uncertainties should materialize, or if underlying
assumptions should prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You
should bear this in mind when reading this Annual Report and not place undue reliance on these forward-looking statements. Factors that
might cause such differences include, but are not limited to:
· Operating losses continuing for the foreseeable future; we may never be profitable;
·
Inherent risks in expansion of operations, including our ability to acquire additional territories, generate profits from new
restaurants, find suitable sites and develop and construct locations in a timely and cost-effective way;
· General risk factors affecting the restaurant industry, including current economic climate, costs of labor and food prices;
·
Intensive competition in our industry and competition with national, regional chains and independent restaurant operators;
· Our rights to operate and franchise Hooters-branded restaurants are dependent on the Hooters’ franchise agreements;
· Our business depends on our relationship with Hooters;
· We do not have full operational control over the businesses of our franchise partners;
·
Failure by Hooters to protect its intellectual property rights, including its brand image;
· Our business has been adversely affected by declines in discretionary spending and may be affected by changes in consumer
preferences;
·
Increases in costs, including food, labor and energy prices;
· Our business and the growth of our Company is dependent on the skills and expertise of management and key personnel;
· Constraints could effect our ability to maintain competitive cost structure, including, but not limited to labor constraints;
· Work stoppages at our restaurants or supplier facilities or other interruptions of production;
· Our food service business and the restaurant industry are subject to extensive government regulation;
· We may be subject to significant foreign currency exchange controls in certain countries in which we operate;
·
Inherent risk in foreign operation;
· We may not attain our target development goals and aggressive development could cannibalize existing sales;
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· Current conditions in the global financial markets and the distressed economy;
· A decline in market share or failure to achieve growth;
· Unusual or significant litigation, governmental investigations or adverse publicity, or otherwise;
· Adverse effects on our operations resulting from the current class action litigation in which the Company is one of several
defendants;
· Adverse effects on our results from a decrease in or cessation or clawback of government incentives related to investments; and
· Adverse effects on our operations resulting from certain geo-political or other events.
You should also consider carefully the Risk Factors contained in Item 1A of Part I of this Annual Report, which address additional
factors that could cause its actual results to differ from those set forth in the forward-looking statements and could materially and adversely
affect the Company’s business, operating results and financial condition. The risks discussed in this Annual Report are factors that,
individually or in the aggregate, the Company believes could cause its actual results to differ materially from expected and historical results.
You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider such disclosures to
be a complete discussion of all potential risks or uncertainties.
The forward-looking statements are based on information available to the Company as of the date hereof, and, except to the extent
required by federal securities laws, the Company undertakes no obligation to update any forward-looking statement to reflect events or
circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, the Company
cannot assess the impact of each factor on its business or the extent to which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements.
Effective May 11, 2012, the Company effected a reverse split of its common stock, 1 share for each 2 shares issued, pursuant to a
majority vote of the Company's shareholders. All share references in this Annual Report on Form 10-K have been adjusted as if the split
occurred prior to all periods presented.
ITEM 1:
BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
The focus of Chanticleer Holdings, Inc. (“Chanticleer” or the “Company”) is operating Hooters franchises internationally and several
restaurant and bar concepts domestically. The Company was organized October 21, 1999, under its original name, Tulvine Systems, Inc.,
under the laws of the State of Delaware. The Company previously 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., and on May 2,
2005, Tulvine Systems, Inc. merged with and changed its name to Chanticleer Holdings, Inc.
The consolidated financial statements in this Annual Report on Form 10-K include the accounts of the Company 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 Food (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”), and JF Franchising Systems, L.L.C. (“JFFS) (collectively referred
to as “the Company,” “we,” “us,” or “the Companies”). 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 and January 8, 2014, the names of KPL and C&S were changed to Hooters SA (Pty) Ltd. and Chanticleer South Africa (Pty) Ltd.,
respectively. All significant inter-company balances and transactions have been eliminated in consolidation.
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Information regarding the Company's subsidiaries is as follows:
· Advisors was formed as a wholly owned Nevada limited liability company on January 18, 2007 to manage related companies,
Chanticleer Investors, LLC ("Investors LLC"), Chanticleer Investors II, LLC ("Investors II").The Company announced its
intention to exit the Investors II business on March 22, 2013,and effectuated such exit during the second quarter of fiscal 2013.
· Ventures was formed as a wholly owned Nevada limited liability company on December 24, 2008 to provide business
management and consulting services to its clients.
· CHL was formed as a wholly owned limited liability company in Jersey on March 24, 2009 to own the Company's initial 50%
interest in Hooters SA, GP, the general partner of the Hooters restaurant franchises in South Africa.
· CHA was formed on September 30, 2011 in Australia as a wholly owned subsidiary to invest in Hooters restaurants in Australia.
· CIP was formed as a wholly owned North Carolina limited liability company on September 20, 2011. CIP was formed to manage
separate and customized investment accounts for investors. The Company registered CIP as a registered investment advisor with
the state of North Carolina so that it can market openly to the public (the Company exited this business during the second quarter
of 2013).
· DineOut was formed as a private limited liability company in England and Wales on October 29, 2009 to raise capital in Europe
for Hooters South African stores. The Company owns approximately 89% of DineOut at December 31, 2013.
· KPL was formed on August 30, 2011 in South Africa to manage the Hooters restaurants in South Africa. The Company owns
90% and local management owns 10% at December 31, 2013.
· C&S was formed in 2009 in South Africa, is owned 100% by the Company at December 31, 2013 and 2012, and holds the
Hooters of America (“HOA”) franchise rights in South Africa.
· DFLO was formed on August 16, 2011 in South Africa, is owned 82% by the Company and 18% by outside investors at
December 31, 2013 and owns the Hooters restaurant in Durban, South Africa.
·
·
TPL was formed on August 18, 2011 in South Africa, is owned 88% by the Company and 12% by outside investors at December
31, 2013 and owns the Hooters restaurant in Johannesburg, South Africa.
PTT was formed on October 23, 2013 in South Africa, is owned 100% by the Company at December 31, 2013 and owns the
Hooters restaurant in Pretoria, South Africa.
· CPL was formed on August 29, 2011 in South Africa, is owned 90% by the Company and 10% by outside investors at December
31, 2013 and owns the Hooters restaurant in Cape Town, South Africa.
· DLOG was formed on August 27, 2011 in South Africa, is owned 88% by the Company and 12% by outside investors at
December 31, 2013 and owns the Hooters restaurant in the Emperor’s Palace in Johannesburg, South Africa.
· CRK was formed on October 12, 2011 in Hungary, is owned 80% by the Company and 20% by a local investor at December 31,
2013. CRK’s business purpose is owning and operating restaurants in Hungary (including the Budapest, Hungary location which
opened in August 2012) and Poland (the Company has not opened a restaurant to date in Poland).
· ARB, a Delaware corporation, was acquired on September 20, 2013 through a reverse merger between ARB and Chanticleer
Roadside Burgers International, L.L.C., a single member limited liability company with Chanticleer as its sole member. It is owned
100% by Chanticleer at December 31, 2013 and owns the American Roadside Burger restaurant franchise.
· WEW, a United Kingdom entity, was acquired on November 6, 2013. It is 100% owned by the Company at December 31, 2013
and owns the Hooters restaurant in Nottingham, England.
·
JFR and JFFS, both North Carolina limited liability companies, were acquired on December 10, 2013. These entities are 56%
owned by the Company and 44% owned by various investors and owns the Just Fresh restaurant franchise.
5
Information regarding the Company’s unconsolidated affiliates is as follows:
·
Investors LLC is a limited liability company formed in 2006 through which the Company raised $5,000,000 and began its
relationship with Hooters of America, Inc. (“HOA”). Initially structured as a loan transaction, the loan was repaid in early 2011
and $3,550,000 was invested in HOA Holdings, LLC (“HOA LLC”). HOA LLC completed the acquisition of HOA and Texas
Wings, Inc. (“TW”) in early 2011 and created an operating company with 161 company-owned locations across sixteen states, or
nearly half of all domestic Hooters restaurants and over one-third of the locations worldwide. Investors LLC owns approximately
3.1% of HOA LLC and the Company owns approximately 22% of Investors LLC as of December 31, 2013.
· Chanticleer Dividend Fund, Inc. (“CDF”) was formed on November 10, 2010 in Maryland. CDF filed a registration statement in
January 2011 under Form N-2 with plans to register as a non-diversified, closed-end investment company. Advisors will have a
role in management of CDF when its registration statement becomes effective. CDF is actively seeking business opportunities,
including for growth capital in the restaurant industry.
· Chanticleer Foundation, Inc. (“CF”) is a non-profit organization formed for charitable purposes. CF is controlled by its board,
which consists of Mr. Pruitt, a director of the Company and an employee of the Company.
While our current business focus is operating Hooters franchises internationally, along with several restaurant and bar concepts
domestically, we have previously 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 effectuated such exit during the second quarter of fiscal 2013.
Restaurant Brands
Hooters
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 450 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.
Chanticleer currently owns, in whole or part, the exclusive franchise rights to develop and operate Hooters restaurants in South Africa,
Hungary, Poland, Brazil, and the United Kingdom and has joint ventured with the current Hooters franchisee in Australia, while evaluating
several additional international opportunities. The Company currently owns and operates in whole or part of eight Hooters restaurants in its
international franchise territories: Pretoria, Durban, Johannesburg (two restaurants), and Cape Town; Campbelltown in Australia; Budapest in
Hungary; and Nottingham in the United Kingdom. As of January 31, 2014, we also own two Hooters restaurants in Tacoma, Washington and
Portland, Oregon.
We expect to either own 100% of the Hooters franchise or partner with a local franchisee in the countries 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 international markets. We are focused on expanding our Hooters operations in the following areas: United Kingdom,
South Africa, Brazil, Hungary, Poland and Australia. We also may expand in the United States if the opportunity presents itself.
American Roadside Burgers
In September 2013, we acquired all of the outstanding shares of American Roadside Burgers, Inc. (“ARB”). ARB focuses on American
food menu offerings, which include its signature burgers, turkey and veggie burgers, chicken sandwiches, wings, a variety of salads, and
homemade milkshakes. ARB is a fast casual concept, with a warm and relaxing atmosphere and a strong focus on customer service. Each
restaurant features a nostalgic “Made in America” feel with sustainable features throughout, including reclaimed barn siding on the walls and
floors and chairs made from recycled materials. The first ARB location opened in 2006 in Smithtown, New York, and it has expanded to two
locations in Charlotte, North Carolina, one location in Columbia, South Carolina and one location in Greenville, South Carolina.
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Just Fresh
In November 2013, we acquired a majority (51%) interest in each of JF Restaurants, LLC, and JF Franchising Systems, LLC, owners of
Just Fresh, a Charlotte, North Carolina - based casual dining concept. Just Fresh opened its first café in 1993 and has expanded to five
restaurants in the Charlotte, North Carolina area. The menu consists of fresh, health-conscious items such as salads, wraps, sandwiches,
soups, freshly baked items, and smoothies. In December 2013, we acquired an additional five percent (5%) interest in each of JF Restaurants,
LLC and JF Franchising Systems, LLC.
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 with appropriate 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, Hungary, Australia and Europe.
South Africa
We currently own and operate five Hooters locations in South Africa: Cape Town, Durban, Pretoria, and Johannesburg (two locations),
which are owned by five companies which we control. In order to obtain investor funds to pay for the initial costs involved in commencing
operations for certain of the South Africa locations, we agreed to allocate a portion of the profits from each restaurant such that the investors in
Cape Town, Durban, and the first Johannesburg location received 40% of the net profits after taxation (the “SA Profits”) until they have
received a return of their investment and a pre-tax annual compounded return on that investment of 20% (the “SA Return”). Once the
investors have received the SA Return, the investors are thereafter entitled to receive 10% of the SA Profits. As of December 31, 2013 there
are no cumulative profits and therefore nothing has been accrued.
We formed KPL, a management company to operate the current South African Hooters locations. At December 31, 2013, we own 90%
of the management company, with one member of local management owning the remaining 10%. The management company currently
charges a management fee of 5% of net revenues to the Hooters locations in South Africa.
Eastern Europe
We currently own 80% of CRK, the entity which holds the franchise rights and operates the Hooters restaurant in Budapest, Hungary,
and our local partner owns the remaining 20%. Our local partner, who is an experienced franchise restaurateur, manages the day-to-day
operations of the current location and will manage future locations. In addition to Hungary, we are also seeking a site in Poland.
United Kingdom
We currently own 100% of West End Wings, Ltd, the entity that holds the franchise rights and operates the restaurant in Nottingham,
England (“Hooters Nottingham”).
United States
We currently own 100% of the American Roadside Burgers restaurant chain, with two locations in Charlotte, North Carolina, one location
in Smithtown, New York, one location in Greenville, South Carolina, and one in Columbia, South Carolina.
We also own 56% of the Just Fresh restaurant chain, with five locations, all of which are located in Charlotte, North Carolina.
As of January 31, 2014, we also own two Hooters restaurants in Tacoma, Washington and Portland, Oregon (“Hooters Pacific NW”).
Other Countries or Continents
We are currently targeting the following countries or continents for the opening of additional restaurants:
· Brazil - we have acquired development rights for Hooters in five states of Brazil, which would include Rio de Janeiro. We will partner
with the current local franchisee who owns the Hooters franchise rights in the state of Sao Paolo. We will own 60% of the entity
holding the development rights and our local partner would own the remaining 40%.
7
· Australia - we have partnered with the current Hooters franchisee in a joint venture in which we own 49% and our partner owns
51%. The first Hooters restaurant under this joint venture (which would be the third Hooters restaurant currently open in Australia)
opened in January 2012 in Campbelltown, a suburb of Sydney. We are in discussions to purchase from the same franchisee a partial
interest in the first two existing Hooters locations in the Sydney area. We plan on opening our second and third jointly-owned
Australian Hooters in the second quarter of 2014 in Surfers Paradise and Townsville. We have no involvement in the day-to-day
operations, and have no further obligations to fund additional losses.
Acquisition of Hooters Restaurants
Our trend toward focusing on Hooters began when the Company and our partners completed the acquisition of HOA and TW in 2011.
Investors LLC and its three partners, H.I.G. Capital, KarpReilly, LLC and Kelly Hall, president of TW, the largest Hooters franchisee in the
United States at the time, combined to form HOA LLC which created an operating company with 161 company-owned locations across
sixteen states, or nearly half of all domestic Hooters restaurants and over one-third of the locations worldwide. The Company now owns
approximately 22% of Investors LLC, and Investors LLC owns approximately 3% interest in HOA LLC.
The Company received a payment of $400,000 at closing for its services and expense reimbursement in facilitating the acquisition of
HOA and TW. In addition, for a minimum of four years, ending in January, 2015, the Company will receive annual payments of $100,000
due in January each year while Mr. Pruitt serves on its board.
As of December 31, 2013, the Company has not received any return of capital from our equity interest in HOA LLC.
Acquisition of American Roadside Burgers, Inc.
On September 30, 2013, the Company entered into an Agreement and Plan of Merger with American Roadside Burgers, Inc. (“ARB”),
whereby the Company acquired 100% of the outstanding shares of ARB. In exchange, the Company issued 740,000 HOTR Units to the
current shareholders of ARB on a pro-rata basis, with each Unit consisting of one share of Company common stock and one five-year, $5
warrant, exercisable after twelve months.
Acquisition of West End Wings LTD
On November 6, 2013, the Company finalized the purchase of West End Wings LTD (“WEW”), which is the owner of the Nottingham,
England Hooters restaurant location. The purchase price paid by the Company for WEW was $3,150,000.
Acquisition of JF Restaurants, L.L.C. and JF Franchise Systems, L.L.C.
On November 5, 2013, the Company entered into a Subscription Agreement with JF Restaurants, L.L.C. (“JFR”) and JF Franchising
Systems, L.L.C. (“JFFS”), for the purchase of a 51%ownership interest in each entity, for a total purchase price of $560,000. The purchase
was finalized 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%.
Acquisitions Occurring after December 31, 2013
On January 31, 2014, we 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.
Also on January 31, 2014, we completed the acquisition of Spoon Bar & Kitchen through the purchase of all of the outstanding shares of
Dallas Spoon, LLC and Dallas Spoon Beverage, LLC. Spoon Bar & Kitchen is a fine dining seafood restaurant located in Dallas, Texas.
8
Competition
The restaurant industry is extremely competitive. We compete with other restaurants on the taste, quality and price of our food offerings.
Additionally, we compete with other restaurants on service, ambience, location, and overall customer experience. We believe that the unique
atmosphere of our restaurants and the focus on quality and flavor of our food enable us to differentiate ourselves from our competitors. We
believe that we compete primarily with local and regional sports bars and national casual dining and quick casual establishments, and to a
lesser extent with quick service restaurants in general. Many of our competitors are well-established national, regional or local chains and
many have greater financial and marketing resources than we do. We also compete with other restaurant and retail establishments for site
locations and restaurant employees.
Proprietary Rights
We either own or have a license to use the “Hooters” mark and certain other service marks and trademarks used in our Hooters
restaurants. We believe that the trademarks, service marks and other proprietary rights that we use in our restaurants have significant value and
are important to our brand-building efforts and the marketing of our restaurant concepts. Although we believe that we have sufficient rights to
all of our trademarks and service marks, we may face claims of infringement that could interfere with our ability to market our restaurants and
promote our brand. Any such litigation may be costly and divert resources from our business. Moreover, if we are unable to successfully
defend against such claims, we may be prevented from using our trademarks or service marks in the future and may be liable for damages.
Government Regulation
The restaurant industry is subject to numerous federal, state and local governmental regulations, including those relating to the
preparation and sale of food and alcoholic beverages, sanitation, public health, fire codes, zoning, and building requirements. Each restaurant
requires appropriate licenses from regulatory authorities allowing it to sell liquor, beer and wine, and each restaurant requires food service
licenses from local health authorities. Our licenses to sell alcoholic beverages may be suspended or revoked at any time for cause, including
violation by us or our employees of any law or regulation pertaining to alcoholic beverage control. We are subject to various regulations by
foreign governments related to the sale of food and alcoholic beverages and to health, sanitation, and fire and safety standards. Compliance
with these laws and regulations may lead to increased costs and operational complexity and may increase our exposure to governmental
investigations or litigation.
Corporate Information
Our principal executive offices are located at 11220 Elm Lane, Suite 203, Charlotte, NC 28277. Our web site is
www.chanticleerholdings.com.
EMPLOYEES
At December 31, 2013, we had 433 full-time employees: 335 in South Africa, 23 in Hungary, 24 in the United Kingdom, and 51 in the
United States. Approximately 25 of our South African employees are represented by a labor union. We have experienced no work stoppage
and believe that our employee relationships are good.
ITEM 1A:
RISK FACTORS
The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us
or that we currently believe are immaterial may also impair our business. If the following risks actually occur, our business, financial
condition and results of operations could be materially adversely affected and the trading price of our common stock could decline.
Risks Related to Our Company and Industry
We have not been profitable to date and expect our operating losses to continue for the foreseeable future; we may never be profitable.
We have incurred operating losses and generated negative cash flows since our inception and have financed our operations principally
through equity investments and borrowings. At this time, our ability to generate sufficient revenues to fund operations is uncertain. For the
fiscal year ended December 31, 2013, we had net revenue of $8,247,487 and incurred a net loss of $5,214,119. Our total accumulated deficit
through December 31, 2013, was $14,472,816.
9
As a result of our brief operating history, revenue is difficult to predict with certainty. Current and projected expense levels are based
largely on estimates of future revenue. We expect expenses to increase in the future as we expand our activities. We cannot assure you that we
will be profitable in the future. Accordingly, the extent of our future losses and the time required to achieve profitability, if ever, is uncertain.
Failure to achieve profitability could materially and adversely affect the value of our Company and our ability to effect additional financings.
The success of the business depends on our ability to increase revenues to offset expenses. If our revenues fall short of projections, our
business, financial condition and operating results will be materially adversely affected.
Our financial statements have been prepared assuming a going concern.
Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern. Our
financial statements as of December 31, 2013, were prepared under the assumption that we will continue as a going concern for the next
twelve months. Our independent registered public accounting firm has issued a report that includes an explanatory paragraph referring to our
losses from operations and expressing substantial doubt in our ability to continue as a going concern without additional capital becoming
available. Our ability to continue as a going concern is dependent upon our ability to obtain additional financing, obtain further operating
efficiencies, reduce expenditures and ultimately, create profitable operations. Such financings may not be available or may not be available on
reasonable terms. Our financial statements do not include adjustments that result from the outcome of this uncertainty.
The recent acquisitions of ARB, Just Fresh, the Hooters NW Pacific restaurants, Hooters Nottingham, and Spoon Bar & Kitchen, as
well as other future acquisitions, may have unanticipated consequences that could harm our business and our financial condition.
Consistent with our growth strategy, we have recently acquired a 100% ownership interest in ARB, 100% of Hooters Nottingham, a 56%
ownership interest in entities owning Just Fresh and a 100% ownership interest in entities owning Spoon Bar & Kitchen as part of our
expansion into new restaurant and bar concepts domestically. We also recently acquired the Hooters restaurants in Tacoma, Washington and
Portland, Oregon. We may seek to selectively acquire additional restaurants and bar concepts as part of this strategy. To do so, we would need
to identify suitable acquisition candidates, negotiate acceptable acquisition terms and obtain appropriate financing. Any such acquisition that
we pursue, whether or not successfully completed, may involve risks, including:
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material adverse effects on our operating results, particularly in the fiscal quarters immediately following the acquisition as the
acquired restaurants and bar concepts are integrated into our operations;
risks associated with entering into markets or conducting operations where we have no or limited prior experience;
problems retaining key personnel;
potential impairment of tangible and intangible assets and goodwill acquired in the acquisition;
potential unknown liabilities;
difficulties of integration and failure to realize anticipated synergies; and
disruption of our ongoing business, including diversion of management’s attention from other business concerns.
Future acquisitions of restaurants and bar concepts or other acquisitions, which may be accomplished through a cash purchase transaction,
the issuance of our equity securities or a combination of both, could result in potentially dilutive issuances of our equity securities, the
incurrence of debt and contingent liabilities and impairment charges related to goodwill and other intangible assets, any of which could harm
our business and financial condition.
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There are risks inherent in expansion of operations, including our ability to acquire additional territories, generate profits from new
restaurants, find suitable sites and develop and construct locations in a timely and cost-effective way.
We cannot project with certainty the number of territories we will be able to acquire or the number of new restaurants we and our partners
will open in accordance with our present plans and within the timeline or the budgets that we currently project. In addition, our franchise
agreements with Hooters of America, Inc. (“HOA”) provide that we must exercise our option to open additional restaurants within each of our
territories by a certain date set forth in the development schedule and that each such restaurant must be open by such date. If we fail to timely
exercise any option or if we fail to open any additional restaurant by the required restaurant opening date, all of our rights to develop the rest of
the option territory will expire automatically and without further notice.
Our failure to effectively develop locations in new territories would adversely affect our ability to execute our business plan by, among
other things, reducing our revenues and profits and preventing us from realizing our strategy. Furthermore, we cannot assure you that our new
restaurants will generate revenues or profit margins consistent with those currently operated by us.
The number of openings and the performance of new locations will depend on various factors, including:
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the availability of suitable sites for new locations and our ability to secure HOA’s approval of a proposed site;
our ability to negotiate acceptable lease or purchase terms for new locations, obtain adequate financing, on favorable terms,
required to construct, build-out and operate new locations and meet construction schedules, and hire and train and retain
qualified restaurant managers and personnel;
managing construction and development costs of new restaurants at affordable levels;
the establishment of brand awareness in new markets; and
the ability of our Company to manage this anticipated expansion.
While the impact varies with the location and the qualifications of our partners, tight credit markets are generally making financing for
construction and operation of restaurants more difficult to obtain on favorable terms. Additionally, competition for suitable restaurant sites in
target markets is intense. Not all of these factors are within our control or the control of our partners, and there can be no assurance that we
will be able to accelerate our growth or that we will be able to manage the anticipated expansion of our operations effectively.
Litigation and unfavorable publicity could negatively affect our results of operations as well as our future business.
We are subject to litigation and other customer complaints concerning our food safety, service, and/or other operational factors. Guests
may file formal litigation complaints that we are required to defend, whether or not we believe them to be true. Substantial, complex or
extended litigation could have an adverse effect on our results of operations if we incur substantial defense costs and our management is
distracted. Employees may also, from time to time, bring lawsuits against us regarding injury, discrimination, wage and hour, and other
employment issues. Additionally, potential disputes could subject us to litigation alleging non-compliance with franchise, development,
support service, or other agreements. Additionally, we are subject to the risk of litigation by our stockholders as a result of factors including,
but not limited to, performance of our stock price.
In certain states we are subject to “dram shop” statutes, which generally allow a person injured by an intoxicated person the right to
recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. Some dram shop litigation
against restaurant companies has resulted in significant judgments, including punitive damages. We carry liquor liability coverage as part of
our existing comprehensive general liability insurance, but we cannot provide assurance that this insurance will be adequate in the event we are
found liable in a dram shop case.
In recent years there has been an increase in the use of social media platforms and similar devices which allow individuals access to a
broad audience of consumers and other interested persons. The availability of information on social media platforms is virtually immediate in
its impact. A variety of risks are associated with the use of social media, including the improper disclosure of proprietary information, negative
comments about our Company, exposure of personally identifiable information, fraud, or outdated information. The inappropriate use of social
media platforms by our guests, employees, or other individuals could increase our costs, lead to litigation, or result in negative publicity that
could damage our reputation. If we are unable to quickly and effectively respond, we may suffer declines in guest traffic which could
materially affect our financial condition and results of operations.
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There is intensive competition in our industry, and we will be competing with national, regional chains and independent restaurant
operators.
The restaurant industry is intensely competitive. Moreover, the retail food industry in general is highly competitive and includes highly
sophisticated national and regional chains. Our sector is highly competitive with respect to, among other things, taste, price, food quality and
presentation, service, location and the ambiance and condition of each restaurant. While we strive to differentiate ourselves through the items
we offer on our menu and the environment in which they are offered, we will, nonetheless, be required to compete with national and regional
chains and with independent operators for market share, access to desirable locations and recruitment of personnel. No assurances can be
given that we will have the financial resources, distribution ability, depth of key personnel or marketing expertise to compete successfully in
these markets.
In addition, although our franchise agreements grant us certain rights to develop restaurants within the specified territories, HOA has
reserved the right to develop, open and operate and to authorize others to develop, open and operate Hooters restaurants outside of our
“protected territory.” Our “protected territory” is limited to a radius of 8 kilometers from any restaurant location we open. Therefore, HOA or
one of its franchisees could effectively compete against us even in the territories in which we develop our restaurants, which could have a
material adverse effect on our business and results of operations.
Our rights to operate and franchise Hooters-branded restaurants are dependent on the Hooters’ franchise agreements.
Our rights to operate and franchise Hooters-branded restaurants, and our ability to conduct our business, derive principally from the rights
granted or to be granted to us by Hooters in our franchise agreements. As a result, our ability to continue operating in our current capacity is
dependent on the continuation and renewal of our contractual relationship with Hooters.
In the event Hooters does not grant us franchises to acquire additional locations or terminates our existing franchise agreements, we
would be unable to operate and/or expand our Hooters-branded restaurants, identify our business with Hooters nor use any of Hooters’
intellectual property. As the Hooters brand and our relationship with Hooters are among our competitive strengths, the failure to grant or the
expiration or termination of the franchise agreements would materially and adversely affect our business, results of operations, financial
condition and prospects.
Our business depends on our relationship with Hooters and changes in this relationship may adversely affect our business, results of
operations and financial condition.
Pursuant to the franchise agreements, Hooters has the ability to exercise substantial influence over the conduct of our business. We must
comply with Hooters’ high quality standards. We cannot transfer the equity interests of our subsidiaries without Hooters’ consent, and
Hooters has the right to control many of the locations’ daily operations.
Notwithstanding the foregoing, Hooters has no obligation to fund our operations. In addition, Hooters does not guarantee any of our
financial obligations, including trade payables or outstanding indebtedness, and has no obligation to do so. If the terms of the franchise
agreements excessively restrict our ability to operate our business or if we are unable to satisfy our obligations under the franchise agreements,
our business, results of operations and financial condition would be materially and adversely affected.
We do not have full operational control over the businesses of our Hooters or Just Fresh franchise partners.
We are and will be dependent on our partners to maintain Hooters’ and Just Fresh’s quality, service and cleanliness standards, and their
failure to do so could materially affect the Hooters or Just Fresh brands and harm our future growth. We do not presently have formal written
agreements in place with any of our partners regarding these types of matters. Although we intend to exercise significant control over partners
through written agreements in the future, our partners will continue to have some flexibility in the operations, including the ability to set prices
for our products in their restaurants, hire employees and select certain service providers. In addition, it is possible that some partners may not
operate their restaurants in accordance with our quality, service and cleanliness, health or product standards. Although we intend to take
corrective measures if partners fail to maintain Hooters’ or Just Fresh’s high quality, service and cleanliness standards, we may not be able to
identify and rectify problems with sufficient speed and, as a result, our image and operating results may be negatively affected.
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A failure by Hooters to protect its intellectual property rights, including its brand image, could harm our results of operations.
The profitability of our business depends in part on consumers’ perception of the strength of the Hooters brand. Under the terms of our
franchise agreements, we are required to assist Hooters with protecting its intellectual property rights in our jurisdictions. Nevertheless, any
failure by Hooters to protect its proprietary rights in the world could harm its brand image, which could affect our competitive position and our
results of operations.
Our business has been adversely affected by declines in discretionary spending and may be affected by changes in consumer
preferences.
Our success depends, in part, upon the popularity of our food products. Shifts in consumer preferences away from our restaurants or
cuisine could harm our business. Also, our success depends to a significant extent on discretionary consumer spending, which is influenced
by general economic conditions and the availability of discretionary income. Accordingly, we may experience declines in sales during
economic downturns or during periods of uncertainty. A continuing decline in the amount of discretionary spending could have a material
adverse effect on our sales, results of operations, business and financial condition.
Increases in costs, including food, labor and energy prices, will adversely affect our results of operations.
Our profitability is dependent on our ability to anticipate and react to changes in our operating costs, including food, labor, occupancy
(including utilities and energy), insurance and supplies costs. Various factors beyond our control, including climatic changes and government
regulations, may affect food costs. Specifically, our dependence on frequent, timely deliveries of fresh meat and produce subject us to the risks
of possible shortages or interruptions in supply caused by adverse weather or other conditions which could adversely affect the availability
and cost of any such items. In the past, we have been able to recover some of our higher operating costs through increased menu prices. There
have been, and there may be in the future, delays in implementing such menu price increases, and competitive pressures may limit our ability to
recover such cost increases in their entirety. The recent volatility in certain commodity markets, such as those for energy, grains and dairy
products, which have experienced significant increases in prices, may have an adverse effect on us and may cause franchisees in our industry
to delay construction of new restaurants and/or cause potential new franchisees to reconsider entering into franchise agreements. The extent of
the impact may depend on our ability to increase our menu prices and the timing thereof.
Our business and the growth of our Company are dependent on the skills and expertise of management and key personnel.
During the upcoming stages of our Company’s anticipated growth, we will be entirely dependent upon the management skills and
expertise of our management and key personnel, including Michael Pruitt, our current Chairman and Chief Executive Officer. Mr. Pruitt also
sits on HOA’s board of directors. We do not have employment agreements with any of our officers. The loss of services of Mr. Pruitt or other
executive officers would dramatically affect our business prospects. Certain of our employees are particularly valuable to us because:
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they have specialized knowledge about our company and operations;
they have specialized skills that are important to our operations; or
they would be particularly difficult to replace.
In the event that the services of Mr. Pruitt or any key management personnel ceased to be available to us, our growth prospects or future
operating results may be adversely impacted.
Our food service business and the restaurant industry are subject to extensive government regulation.
We are subject to extensive and varied country, federal, state and local government regulation, including regulations relating to public
health and safety and zoning codes. We operate each of our locations in accordance with standards and procedures designed to comply with
applicable codes and regulations. However, if we could not obtain or retain food or other licenses, it would adversely affect our operations.
Although we have not experienced, and do not anticipate, any significant difficulties, delays or failures in obtaining required licenses, permits
or approvals, any such problem could delay or prevent the opening of, or adversely impact the viability of, a particular restaurant or group of
restaurant.
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We may be subject to significant foreign currency exchange controls in certain countries in which we operate.
Certain foreign economies have experienced shortages in foreign currency reserves and their respective governments have adopted
restrictions on the ability to transfer funds out of the country and convert local currencies into U.S. dollars. This may increase our costs and
limit our ability to convert local currency into U.S. dollars and transfer funds out of certain countries. Any shortages or restrictions may
impede our ability to convert these currencies into U.S. dollars and to transfer funds, including for the payment of dividends or interest or
principal on our outstanding debt. In the event that any of our subsidiaries are unable to transfer funds to us due to currency restrictions, we
are responsible for any resulting shortfall.
Our foreign operations subject us to risks that could negatively affect our business.
We expect most of our Hooters restaurants will be operated in foreign countries and territories outside of the U.S., and we intend to
continue expansion of our international operations. As a result, our business is increasingly exposed to risks inherent in foreign operations.
These risks, which can vary substantially by market, include political instability, corruption, social and ethnic unrest, changes in economic
conditions (including wage and commodity inflation, consumer spending and unemployment levels), the regulatory environment, tax rates and
laws and consumer preferences as well as changes in the laws and policies that govern foreign investment in countries where our restaurants
are operated. For example, it was discovered that our South African CFO had falsified audit documents and misappropriated funds. Although
we have implemented various controls to prevent such misconduct from occurring in the future, this remains an inherent risk in doing business
in a foreign country.
In addition, our results of operations and the value of our foreign assets are affected by fluctuations in foreign currency exchange rates,
which may adversely affect reported earnings. More specifically, an increase in the value of the United States Dollar relative to other
currencies, such as the Australian Dollar, the Brazilian Real, the British Pound, the Euro, and the South African Rand could have an adverse
effect on our reported earnings. There can be no assurance as to the future effect of any such changes on our results of operations, financial
condition or cash flows.
We may not attain our target development goals and aggressive development could cannibalize existing sales.
Our growth strategy depends in large part on our ability to increase our net restaurant count in markets outside the United States. The
successful development of new units will depend in large part on our ability and the ability of our franchisees/partners to open new restaurants
and to operate these restaurants on a profitable basis. We cannot guarantee that we, or our franchisees/partners, will be able to achieve our
expansion goals or that new restaurants will be operated profitably. Further, there is no assurance that any new restaurant will produce
operating results similar to those of our existing restaurants. Other risks which could impact our ability to increase our net restaurant count
include prevailing economic conditions and our, or our franchisees’/partners’, ability to obtain suitable restaurant locations, obtain required
permits and approvals in a timely manner and hire and train qualified personnel.
Our franchisees/partners also frequently depend upon financing from banks and other financial institutions in order to construct and open
new restaurants. If it becomes more difficult or expensive for our franchisees/partners to obtain financing to develop new restaurants, our
planned growth could slow and our future revenue and cash flows could be adversely impacted.
In addition, the new restaurants could impact the sales of our existing restaurants nearby. It is not our intention to open new restaurants
that materially cannibalize the sales of our existing restaurants. However, as with most growing retail and restaurant operations, there can be
no assurance that sales cannibalization will not occur or become more significant in the future as we increase our presence in existing markets
over time.
Current conditions in the global financial markets and the distressed economy may materially adversely affect our business, results of
operations and ability to raise capital.
Our business and results of operations may be materially affected by conditions in the financial markets and the economy generally. The
stress being experienced by global financial markets that began in late 2007 continued and substantially increased during 2008 and into 2009.
The volatility and disruption in the financial markets have reached unprecedented levels. The availability and cost of credit has been materially
affected. These factors, combined with volatile oil prices, depressed home prices and increasing foreclosures, falling equity market values,
declining business and consumer confidence and the risks of increased inflation and unemployment, have precipitated an economic slowdown
and severe recession. These events and the continuing market upheavals may have an adverse effect on us, our suppliers and our customers.
The demand for our products could be adversely affected in an economic downturn and our revenues may decline under such circumstances.
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Furthermore, the fixed-income markets are experiencing a period of both extreme volatility and limited market liquidity, which has
affected a broad range of asset classes and sectors. Equity markets have also been experiencing heightened volatility. We may find it difficult,
or we may not be able, to access the credit or equity markets, or we may experience higher funding costs as a result of the current adverse
market conditions. Continued instability in these markets may limit our ability to access the capital we require to fund and grow our business.
Changes in financial accounting standards and subjective assumptions, estimates and judgments by management related to complex
accounting matters could significantly affect our financial results.
Changes in financial accounting standards can have a significant effect on our reported results and may affect our reporting of transactions
completed before the new rules are required to be implemented. Many existing accounting standards require management to make subjective
assumptions, such as those required for stock compensation, tax matters, franchise acquisitions, litigation, and asset impairment calculations.
Changes in accounting standards or changes in underlying assumptions, estimates and judgments by our management could significantly
change our reported or expected financial performance.
We could be adversely impacted if our information technology and computer systems do not perform properly or if we fail to protect our
customers’ credit card information or our employees’ personal data.
We rely heavily on information technology to conduct our business, and any material failure, interruption of service, or compromised data
security could adversely affect our operations. While we expend significant resources to ensure that our information technology operates
securely and effectively, any security breaches could result in disruptions to operations or unauthorized disclosure of confidential information.
Additionally, if our customers’ credit card or other personal information or our employees’ personal data are compromised our operations
could be adversely affected, our reputation could be harmed, and we could be subjected to litigation or the imposition of penalties.
Adverse weather conditions could affect our sales.
Adverse weather conditions, such as regional winter storms, floods, severe thunderstorms and hurricanes, could affect our sales at
restaurants in locations that experience these weather conditions, which could materially adversely affect our business, financial condition or
results of operations.
Health concerns arising from outbreaks of viruses may have an adverse effect on our business.
The United States and other countries have experienced, or may experience in the future, outbreaks of neurological diseases or other
diseases or viruses, such as norovirus, influenza and H1N1. If a virus is transmitted by human contact, our employees or customers could
become infected, or could choose, or be advised, to avoid gathering in public places, any one of which could materially adversely affect our
business, financial condition or results of operations.
Risks Related to Our Common Stock
We are subject to securities class action and other litigation, which may harm our business and results of operations.
We are currently involved in a class action lawsuit brought on behalf of our stockholders, alleging violations of Section 11, Section
12(a)(2) and Section 15 of the Securities Act. The plaintiff seeks unspecified damages, reasonable costs and expenses incurred in this action,
and such other and further relief as the court deems just and proper. We hired highly experienced counsel to mitigate damages and assist in a
proper resolution. On December 18, 2013, we filed a Joint Status Report Relating to Mediation, which described an agreement in principle to a
class-wide settlement of the action. Subject to negotiation, execution of definitive documentation and court approval, the parties have agreed on
a total settlement amount of $850,000, of which $837,500 is to be contributed by our insurance carrier and $12,500 is to be contributed by
Creason & Associates, P.L.L.C. We have requested a period of sixty days to negotiate, draft and execute the definitive settlement
documentation. In addition, we may, in the future, be subject to other litigation, which can be lengthy, expensive, and divert management’s
attention and resources. Results cannot be predicted with certainty and an adverse outcome in litigation could result in monetary damages or
injunctive relief that could seriously harm our business, results of operations, financial condition or cash flows.
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Our stock price has experienced price fluctuations and may continue to do so resulting in a substantial loss in your investment.
The current market for our common stock has been characterized by volatile prices with minimal volume. Although we have our common
stock listed on The NASDAQ Capital Market, an active trading market for our common stock may never develop or if it develops, it may not
be sustained, which could affect your ability to sell our common stock and could depress the market price of the common stock.
In addition, the stock market can be highly volatile. As a result, the market price of our common stock can be similarly volatile, and
investors in our common stock may experience a decrease in the value of their securities, including decreases unrelated to our operating
performance or prospects. The market price of our common stock is likely to be highly unpredictable and subject to wide fluctuations in
response to various factors, many of which are beyond our control. These factors include:
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quarterly variations in our operating results and achievement of key business metrics;
changes in the global economy and in the local economies in which we operate;
our ability to obtain working capital financing, if necessary;
the departure of any of our key executive officers and directors;
changes in the federal, state, and local laws and regulations to which we are subject;
changes in earnings estimates by securities analysts, if any;
any differences between reported results and securities analysts’ published or unpublished expectations;
market reaction to any acquisitions, joint ventures or strategic investments announced by us or our competitors;
future sales of our securities;
announcements or press releases relating to the casual dining restaurant sector or to our own business or prospects;
regulatory, legislative, or other developments affecting us or the restaurant industry generally; and
market conditions specific to casual dining restaurant, the restaurant industry and the stock market generally.
We may not be able to maintain the listing of our common stock on The NASDAQ Capital Market, which may limit the ability of
purchasers to resell our common stock in the secondary market.
Our common stock is listed on the NASDAQ Capital Market. However, we might not continue to meet the criteria for continued listing of
our common stock in the future. On September 9, 2012, NASDAQ placed a trading halt on our company, due to the misconduct of our
previous South African CFO and subsequent discovery of his misallocation of funds and production of fraudulent audit documents. After
completing a thorough audit and providing all documentation required by NASDAQ, we resumed trading on January 16, 2013. Although we
have implemented controls designed to prevent misconduct, we cannot guarantee continued listing of our common stock in the future. A
company having securities listed on the NASDAQ Capital Market must make all required filings on a timely basis with the SEC and also meet
the qualitative and quantitative continued listing criteria of the NASDAQ Capital Market. In the event we are unable to meet this criteria and
become delisted, quotations for trading of our common stock would likely be conducted in the over-the-counter markets. In such case, an
investor would likely find it more difficult to dispose of our common stock or to obtain accurate market quotations for our common stock,
either of which could result in a substantial loss of your investment.
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Our common stock could be further diluted as the result of the issuance of additional shares of common stock, convertible securities,
warrants or options.
In the past, we have issued common stock, convertible securities (such as convertible notes) and warrants in order to raise capital. We
have also issued common stock as compensation for services and incentive compensation for our employees and directors. We have shares of
common stock reserved for issuance upon the exercise of certain of these securities and may increase the shares reserved for these purposes in
the future. Our issuance of additional common stock, convertible securities, options and warrants could affect the rights of our stockholders,
could reduce the market price of our common stock or could result in adjustments to exercise prices of outstanding warrants (resulting in these
securities becoming exercisable for, as the case may be, a greater number of shares of our common stock), or could obligate us to issue
additional shares of common stock to certain of our stockholders.
Shares eligible for future sale may adversely affect the market.
From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary
brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act, subject to certain limitations. In general,
pursuant to Rule 144, stockholders who have been non-affiliates for the preceding three months may sell shares of our common stock freely
after six months subject only to the current public information requirement. Affiliates may sell shares of our common stock after six months
subject to the Rule 144 volume, manner of sale, current public information and notice requirements. Of the approximately 6,287,365 shares of
our common stock outstanding as of March 15, 2014, approximately 4.5 million shares are freely tradable without restriction as of that date.
Any substantial sales of our common stock pursuant to Rule 144 may have a material adverse effect on the market price of our common stock.
While our public warrants are outstanding, it may be more difficult to raise additional equity capital.
We have warrants which are publicly traded on NASDAQ under the symbol “HOTRW.” During the term that the public warrants are
outstanding, the holders of the public warrants will be given the opportunity to profit from a rise in the market price of our common stock. We
may find it more difficult to raise additional capital while these public warrants are outstanding. At any time during which these public
warrants are likely to be exercised, we may be able to obtain additional capital on more favorable terms from other sources.
We do not expect to pay cash dividends in the foreseeable future and therefore investors should not anticipate cash dividends on their
investment.
Our board of directors does not intend to pay cash dividends in the foreseeable future, but instead intends to retain any and all earnings to
finance the growth of the business. To date, we have not paid any cash dividends and there can be no assurance that cash dividends will ever
be paid on our common stock.
We may issue additional shares of our common stock, which could depress the market price of our common stock and dilute your
ownership.
Market sales of large amounts of our common stock, or the potential for those sales even if they do not actually occur, may have the effect
of depressing the market price of our common stock. In addition, if our future financing needs require us to issue additional shares of common
stock or securities convertible into common stock, the amount of common stock available for resale could be increased which could stimulate
trading activity and cause the market price of our common stock to drop, even if our business is doing well. Furthermore, the issuance of any
additional shares of our common stock, or securities convertible into our common stock could be substantially dilutive to holders of our
common stock.
Director and officer liability is limited.
As permitted by Delaware law, our bylaws limit the liability of our directors for monetary damages for breach of a director’s fiduciary
duty except for liability in certain instances. As a result of our bylaw provisions and Delaware law, stockholders may have limited rights to
recover against directors for breach of fiduciary duty.
ITEM 1B:
UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2:
PROPERTIES
Effective August 1, 2010, the Company renewed its office lease agreement for a period of one year at a monthly rental of $2,100, for its
office located at 11220 Elm Lane, Suite 103, Charlotte, NC 28277. Since August 1, 2011, the lease has continued on a month-to-month basis.
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The Company, through its subsidiaries, leases the land and buildings for our five restaurants in South Africa, one restaurant in
Nottingham, United Kingdom, thirteen restaurants in the U.S., and one restaurant in Hungary. The South Africa leases are for five-year terms
and the Hungary lease is for a ten-year term, and all of these leases include options to extend the terms. The terms for our U.S. restaurants
vary from five to ten years and have options to extend. We lease some of our restaurant facilities under “triple net” leases that require us to pay
minimum rent, real estate taxes, maintenance costs and insurance premiums and, in some instances, percentage rent based on sales in excess of
specified amounts.
Our office and restaurant facilities are suitable and adequate for our business as it is presently conducted.
ITEM 3:
LEGAL PROCEEDINGS
On October 12, 2012, Francis Howard (“Plaintiff”), 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., 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 the Underwriter Defendants, and violations of Section 15 against the
Individual Defendants. Plaintiff 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 February 19, 2013, Plaintiff filed an amended complaint alleging similar claims to those
previously asserted. On May 20, 2013, Plaintiff filed a notice of voluntary dismissal without prejudice of the Underwriter Defendants. On
September 17, 2013, the Court 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. The parties then made initial disclosures, and document requests and interrogatories
were 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 & Associates, P.L.L.C., 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. The Company will continue to vigorously defend itself in this matter.
As of December 31, 2013, based on the agreed settlement amount and amounts that the Company’s insurance carrier and Creason &
Associates P.L.L.C. have committed to pay, no amounts have been accrued for by the Company for 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 toTundraspex (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. We still await Madam Justice Steyri’s judgement on the matter, no indication of timing of decision or further process has
been given. The Company intends to vigorously defend itself in this matter.
Given that the outcome of litigation is inherently uncertain and the early stage of this action, the Company can neither comment on the
probability of potential liabilities, nor provide an estimate of such. As of December 31, 2013, no amounts have been accrued for related to this
matter.
On April 1, 2013, the Company received a subpoena from the Securities and Exchange Commission, requesting various corporate
documents relating to operations. The Company has fully cooperated with the Securities and Exchange Commission in relation to this
subpoena and intends to continue to cooperate fully.
ITEM 4:
MINE SAFETY DISCLOSURES
Not applicable.
18
Part II
ITEM 5:
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our common stock is currently listed on NASDAQ under the ticker “HOTR", prior to June 21, 2012 our common stock traded on the
“OTC Bulletin Board” or “OTCBB” system under the symbol "CCLR". All OTCBB prices reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
The market high and low prices on the OTCBB for the period ending June 20, 2012 and NASDAQ from June 21, 2012 forward are as
follows:
PERIOD ENDED
Through March 28, 2014
QUARTER ENDED
*March 31, 2013
June 30, 2013
September 30, 2013
December 31, 2013
March 31, 2012
June 30, 2012
*September 30, 2012
*December 31, 2012
$
$
$
HIGH
LOW
5.33 $
3.34
3.64 $
3.48
5.17
5.84
7.40 $
8.00
2.92
3.64
1.40
1.60
2.73
4.10
4.40
4.00
4.36
3.64
*NASDAQ trading halted from September 11, 2012 through January 15, 2013
Number of Shareholders and Total Outstanding Shares
As of March 15, 2014 and December 31, 2013, there were 6,287,365 and 5,387,897 shares issued and outstanding, respectively, held by
approximately 280 shareholders of record. Effective May 11, 2012, the Company effected a reverse split of its common stock, 1 share for each
2 shares issued, pursuant to a majority vote of the Company's shareholders. All share references have been adjusted as if the split occurred
prior to all periods presented.
Dividends on Common Stock
We have not previously declared a cash dividend on our common stock and we do not anticipate the payment of dividends in the near
future.
Recent Sales of Unregistered Securities
Sales of our common stock during the first three quarters of 2013 were reported in Item 2 of Part II of the Form 10-Q filed for each
quarter, and stock transactions in the fourth quarter of 2013 as follows:
On October 7, 2013, the Company sold 426,667 Company units, at a purchase price of $3.75 per unit, to eleven investors for a total of
$1,600,000. Each unit consisted of one share of the Company’s Common Stock and one five-year Company warrant with an exercise price of
$5.00, exercisable after twelve months. On October 17, 2013, the Company sold an additional 240,000 of these Company units, at a purchase
price of $3.75 per unit, to eleven investors for an additional $900,000. For this combined $2,500,000 private placement of 666,667 Company
units, the Company employed Dragonfly Capital of Charlotte, North Carolina as placement agent for these private placements. Dragonfly
Capital received commissions totaling $150,000 and also received five-year Company warrants convertible into an aggregate of 40,000 shares.
19
On November 7, 2013, the Company sold 160,000 Company units, at a purchase price of $5.00 per unit, to three accredited investors for a
total of $800,000. Each unit consisted of one share of the Company’s Common Stock and one five-year Company warrant to purchase one
share of the Company’s Common Stock, exercisable after twelve months. One half (80,000) of the warrants had an exercise price of $5.50,
and the remaining half (80,000) of the warrants had an exercise price of $7.00. The Company employed Palladium Capital Partners of New
York as placement agent for this private placement. Palladium Capital Partners received commissions totalling $32,000 and also received five-
year Company warrants, subject to the same terms as those issued in the transaction, convertible into an aggregate of 6,400 shares of Common
Stock.
On December 2, 2013, the Company entered into a binding letter of intent to acquire all of the outstanding shares of Dallas Spoon, LLC
and Dallas Spoon Beverage in exchange for the Company’s issuance of 195,000 Company units. Each Company unit consists of one share of
the Company’s Common Stock and one five-year Company warrant to purchase one share of the Company’s Common Stock. One half
(97,500) of the warrants have an exercise price of $5.50, and the remaining half (97,500) of the warrants have an exercise price of $7.00. This
transaction was completed on January 31, 2014.
During the fourth quarter of 2013, 93,334 common stock shares valued at $445,270 were issued in exchange for investor relations and
consulting services.
Repurchase of Equity Securities by the Issuer and Affiliated Purchasers
None.
ITEM 6:
SELECTED FINANCIAL DATA
Not applicable.
20
ITEM 7:
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of The Private Securities Litigation
Reform Act of 1995. These statements include projections, predictions, expectations or statements as to beliefs or future events or results or
refer to other matters that are not historical facts. Forward-looking statements are subject to known and unknown risks, uncertainties and other
factors that could cause the actual results to differ materially from those contemplated by these statements. The forward-looking statements
contained in this Annual Report are based on various factors and were derived using numerous assumptions. In some cases, you can identify
these forward-looking statements by the words “anticipate”, “estimate”, “plan”, “project”, “continuing”, “ongoing”, “target”, “aim”, “expect”,
“believe”, “intend”, “may”, “will”, “should”, “could”, or the negative of those words and other comparable words. You should be aware that
those statements reflect only the Company’s predictions. If known or unknown risks or uncertainties should materialize, or if underlying
assumptions should prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You
should bear this in mind when reading this Annual Report and not place undue reliance on these forward-looking statements. Factors that
might cause such differences include, but are not limited to:
· Operating losses continuing for the foreseeable future; we may never be profitable;
·
Inherent risks in expansion of operations, including our ability to acquire additional territories, generate profits from new
restaurants, find suitable sites and develop and construct locations in a timely and cost-effective way;
· General risk factors affecting the restaurant industry, including current economic climate, costs of labor and food prices;
·
Intensive competition in our industry and competition with national, regional chains and independent restaurant operators;
· Our rights to operate and franchise Hooters-branded restaurants are dependent on the Hooters’ franchise agreements;
· Our business depends on our relationship with Hooters;
· We do not have full operational control over the businesses of our franchise partners;
·
Failure by Hooters to protect its intellectual property rights, including its brand image;
· Our business has been adversely affected by declines in discretionary spending and may be affected by changes in consumer
preferences;
·
Increases in costs, including food, labor and energy prices;
· Our business and the growth of our Company is dependent on the skills and expertise of management and key personnel;
· Constraints could effect our ability to maintain competitive cost structure, including, but not limited to labor constraints;
· Work stoppages at our restaurants or supplier facilities or other interruptions of production;
· Our food service business and the restaurant industry are subject to extensive government regulation;
· We may be subject to significant foreign currency exchange controls in certain countries in which we operate;
·
Inherent risk in foreign operation;
21
· We may not attain our target development goals and aggressive development could cannibalize existing sales;
· Current conditions in the global financial markets and the distressed economy;
· A decline in market share or failure to achieve growth;
· Unusual or significant litigation, governmental investigations or adverse publicity, or otherwise;
· Adverse effects on our operations resulting from the current class action litigation in which the Company is one of several
defendants;
· Adverse effects on our results from a decrease in or cessation or clawback of government incentives related to investments;
and
· Adverse effects on our operations resulting from certain geo-political or other events.
You should also consider carefully the Risk Factors contained in Item 1A of Part I of this Annual Report, which address additional
factors that could cause its actual results to differ from those set forth in the forward-looking statements and could materially and adversely
affect the Company’s business, operating results and financial condition. The risks discussed in this Annual Report are factors that,
individually or in the aggregate, the Company believes could cause its actual results to differ materially from expected and historical results.
You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider such disclosures to
be a complete discussion of all potential risks or uncertainties.
The forward-looking statements are based on information available to the Company as of the date hereof, and, except to the extent
required by federal securities laws, the Company undertakes no obligation to update any forward-looking statement to reflect events or
circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, the Company
cannot assess the impact of each factor on its business or the extent to which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements.
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
effectuated such exit during the second quarter of fiscal 2013. We own and operate Hooters franchises internationally and various fast casual
restaurant brands domestically, including the American Roadside Burgers 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 American
Roadside Burgers location opened in 2006 in Smithtown, N.Y. and has since expanded to 2 locations in Charlotte, N.C., 1 location in
Columbia, S.C. and the newest location is in Greenville, S.C. The Just Fresh (“Just Fresh”) restaurant chain first opened in 1994 and currently
operates 5 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.
22
Effective 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.
On December 10, 2013, the Company finalized 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, the Company purchased an additional 5% interest in
Just Fresh, bringing the Company’s ownership interest to 56%.
We have previously operated in two business segments: (1) restaurant ownership and management and (2) 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 effectuated such exit during the second quarter of fiscal 2013.
LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN
Historical information:
At December 31, 2013, the Company had current assets of $1,713,133, current liabilities of $5,531,983 , and a working capital deficit of
$3,818,850 (including non-cash derivative liability of $2.146.000). The Company incurred a loss of $5,214,119 during the year ended
December 31, 2013 and had an unrealized gain from available-for-sale securities of $3,984 and foreign currency translation gain of $90,384,
resulting in a comprehensive loss of $5,119,751. In December, 2013, the company’s fifth Hooters location in South Africa was opened; a
majority of the funds to open the location came from our South African subsidiaries cash from operations as well as debt. We expect to
continue this trend in our other targeted regions as we open more restaurants. The Company has historically met its liquidity requirements
through the sale of equity and debt securities, including up to a $10 million convertible debt transaction currently being negotiated, cash from
operations and its revolving credit facility.
The Company's corporate general and administrative expenses averaged approximately $1.0 million per quarter in 2013, including
approximately $1.1 million non-cash. The Company expects costs to increase as we expand our footprint domestically and internationally in
2014. Domestically in 2013 the Company purchased 100% of ARB on September 30, 2013, and 56% of Just Fresh in December 2013.
Effective November 7, 2013, the Company acquired 100% of an existing Hooters restaurant in Nottingham, England. On January 31, 2014
we closed the purchases of 100% of two Hooters restaurants in the states of Washington and Oregon, 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. Effective October 1, 2011, the Company acquired majority control of the 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%. The Company also earns 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, with plans for two additional
Hooters Australia locations under the same terms to open in the second quarter of 2014. The Company also has a 5% interest in Beacher’s
Madhouse, which opened in Las Vegas, Nevada at the end of 2013.
In addition, the Company has a note with a balance at December 31, 2013 of $218,119 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 is due in
April 2014. As of December 31, 2013, the balance on the line of credit is $28,000. In addition, in February 2014 the Company secured a note
with a bank for $500,000 due on August 10, 2014. The Company also has $3,000,000 of convertible debt which the Company used for our
purchase of Hooters Nottingham (United Kingdom). 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 three million dollars
($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 was recorded as a derivative liability. The Company executed the purchase of
Hooters Nottingham on November 6, 2013 and began operating the restaurant on November 7, 2013. The Company’s South African
subsidiaries have bank overdraft and term facilities of $347,286 and ARB has a bank note payable of $38,614. 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.
23
On September 30, 2013, the Company acquired American Roadside Burgers, Inc. (“ARB”) and 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 per share. The warrants are exercisable beginning
October 1, 2014 until September 30, 2018. The merger agreement provided for the merger of Chanticleer Roadside Burgers International, LLC
(a single-member LLC, of which the Company is the sole member) with and into ARB, with ARB continuing as the surviving entity and
subsidiary of the Company.
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 above 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 40,000 shares.
On November 4, 2013, the Company entered into a Subscription Agreement with JF Restaurants, LLC (“JFR”), JF Franchising Systems,
LLC (“JFFS”) (collectively “Just Fresh”), and the Preferred Members (the “Members” or collectively, the “Sellers”) for the purchase of a 51%
ownership interest in each entity. The total purchase price was $560,000, which included payment of the Sellers’ outstanding debt obligations
and reimbursement of several Members for previous debt payments. With the signing of the Subscription Agreement, Chanticleer paid Sellers’
outstanding debt in the amount of approximately $434,325 towards the purchase consideration. The final closing was held on December 10,
2013. On December 11, 2013, the Company purchased an additional 5% from an existing Member, securing the Company’s ownership of a
56% ownership interest.
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
financials as other income.
In order to execute the Company’s long-term growth strategy, which may include selected acquisitions of businesses that may bolster the
expansion of the Company’s business; the Company will need to raise additional funds through public or private equity offerings, debt
financings, or other means.
There is no assurance that these events will occur or the Company will be able to raise sufficient capital. These matters raise substantial
doubt about the Company’s ability to continue as a going concern.
The accompanying audited condensed consolidated financial statements have been prepared in conformity with GAAP, which
contemplates continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of
business. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable
or settlement values. The audited condensed consolidated financial statements do not include any adjustment that might result from the
outcome of this uncertainty.
Evaluation of the amounts and certainty of cash flows:
The Company has used short-term financing to meet the preliminary requirements of its planned expansion, principally in South Africa,
Europe and Australia. If the Company is unable to obtain necessary additional funding, the Company would be required to limit its expansion
plans. We would use limited partner funding and other sources of capital to the extent necessary to attempt to fund as much of the planned
expansion as possible. There can be no assurance that any of this funding will be available when needed.
24
Cash requirements and capital expenditures:
In 2014, we expect to open or acquire one restaurant in each of the following countries or continents – Brazil, Europe and South Africa,
and two restaurants in Australia. The Company expects the total cash requirements for these restaurants to be approximately $5.0 million.
In addition, we expect general and administrative expenses to be approximately $3.5-$4.0 million for 2014.
Discussion and analysis of known trends and uncertainties:
The world economy has been in a state of flux for some time with the debt problems of a number of countries in Europe, the recent
recession in the United States and the continuing global financial uncertainty. It is impossible to forecast what this will mean to our expansion
plans in South Africa, Brazil, Australia, Poland and Hungary. We feel that we minimize our risks through our investment in geographically
diverse areas around the world.
Expected changes in the mix and relative cost of capital resources:
Since the middle of 2010, the Company has utilized high cost capital to finance its international growth. The Company hopes to eliminate
the majority of this debt with new equity and further, to use this equity to complete its expansion plans over the next two years. The Company
has recently secured additional convertible debt for the purchase of a Hooters restaurant in Nottingham, England, and may use convertible debt
in the future.
RESULTS OF OPERATIONS
Revenue
Revenue amounted to $8,247,487 in 2013 and $6,852,323 in 2012. Revenues were $103,452 and $8,144,035 in 2013 from the
management and restaurant businesses, respectively, and $100,000 and $6,752,323 in 2012. Restaurant revenues increased approximately
$1.4 million primarily from the purchase of ARB at September 30, 2013, the purchase of our Nottingham Hooters in November 2013, and the
opening of our fifth South African Hooters location in December 2013.
Restaurant cost of sales
Restaurant cost of sales for 2013 and 2012 totaled $3,031,457 (37.2%) and $2,761,949 (40.9%), respectively of restaurant net sales. We
expect the percentage to remain flat as we expand our domestic and international locations.
Restaurant operating expenses
Restaurant operating expenses for 2013 and 2012 totaled $4,909,580 (60.2%) and $$3,785,034 (56.1%) of restaurant net sales. We
expect the percentage of operating expenses to restaurant net sales to decline as we expand our domestic and international locations.
25
General and Administrative Expense (“G&A”)
G&A amounted to $4,233,629 in 2013 and $2,309,405 in 2012. The more significant components of G&A are summarized as follows:
Legal fees
Payroll and benefits
Consulting and investor relation fees
Travel and entertainment
Other professional fees
Shareholder services and fees
Other G&A
2013
2012
$
$
462,491 $
990,580
1,678,231
211,442
269,100
87,943
533,842
4,233,629 $
218,562
737,339
534,855
173,333
276,200
119,565
249,551
2,309,405
G&A costs are expected to be approximately $1 million per quarter in 2014, with the costs associated with the activities of the restaurant
business and corporate continuing to grow. In 2013, approximately $1.1 million of G&A was non-cash, and we expect this trend to continue.
Legal fees increased $243,929 from 2013 to 2012 as we expanded our footprint domestically and internationally and incurred costs of
approximately $200,000 during 2013 for legal fees related to our shareholder lawsuit.
Payroll and benefits increased $253,241 in 2013 from 2012 primarily from the addition of restaurant management personnel starting in the
fourth quarter of 2013 and additional corporate employees starting in the fourth quarter of 2012.
Consulting and investor relations fees increased $1,143,376 from 2013 to 2012 primarily from the Company seeking to increase our
footprint in the investment and restaurant arenas. We also issued stock and warrants for certain rights as part of the Beacher’s deal which
collectively was valued at $436,270 and expensed in the fourth quarter of 2013. Non-cash fees for services totaled $1,097,197 and $110,965
in 2013 and 2012, respectively.
Travel and entertainment increased $38,109 from 2013 to 2012 as Company personnel, primarily the CEO, CFO and Director of
Restaurant Training, traveled to increase our company awareness, visit our restaurant locations, and secure financing and partners for the
restaurant locales.
Other professional fees decreased $7,100 from 2013 to 2012 as we expanded our footprint both domestically and internationally, engaged
a larger audit firm in the fourth quarter of 2012, offset by a decrease in costs related to our South African audits.
Shareholder services and fees decreased $31,622 from 2013 to 2012 primarily from initial fees associated with being a listed company on
NASDAQ in 2012.
OTHER INCOME (EXPENSE)
Other income (expense) consisted of the following at December 31, 2013 and 2012:
Other income (expense):
Equity in losses of investments
Interest expense
Interest and other income
Change in fair value of derivative liability
2013
2012
$
$
(125,017) $
(757,733)
82,411
119,600
(680,739) $
(14,803)
(474,926)
23
-
(489,706)
26
Equity in Losses of Investments
Equity in losses 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. We currently own 49% of three Hooters locations in Australia, with our operating partner owning the remaining
51%. The 2013 and 2012 amounts represent our 49% share of losses on our Hooters Australian locations (Campbelltown which opened in
January 2012 and our second and third locations expected to be opened in the second quarter of 2014). The 2013 losses from Hooters
Australia includes $53,289 of startup expenses incurred for the two locations not yet opened. The 2012 loss relates only to the Campbelltown
location.
Realized Gains from Sale of Investments
Realized gains are recorded when investments are sold and a gain of $4,897 was realized in 2013 from the sale of shares of North
Carolina Natural Energy, Inc. (“NCNE”), now known as Appalachian Mountain Brewery (“AMB”). AMB is a successor to NCNE and is
currently traded under the ticker HOPS (began trading under this symbol on January 7, 2014, previously it was traded under ticker NCNE).
There were no realized gains in 2012.
Gain on extinguishment of debt
Gain on extinguishment of debt of $70,900 was recorded upon settlement of certain debts related to our South African subsidiary.
Interest Expense
Interest expense increased by $282,807 in 2013 from 2012 due to the payoff of primarily all our prior debt with the completion of our
secondary raise in June 2012, offset by an increase in non-cash interest in the amount of $566,867 related to the warrants issued with our
2013 convertible debt.
Change in Fair Value of Derivative Liability
Change in fair value of derivative liability increased by $119,600 in 2013 from 2012, 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.
LOSS FROM DISCONTINUED OPERATIONS
Loss from discontinued operations was $25,215 and $293,977 for the years ended December 31, 2013 and December 31, 2012,
respectively. The primary reasons for the decrease in loss was management fee income earned of $53,710 for 2013 compared to $30,743 for
2012, and the exiting of the management business late in the first quarter of 2013, therefore a minimal amount of expenses related to winding
down the operations was incurred during the last three quarters of 2013.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-02, Comprehensive Income (Topic
220): Reporting of Amounts Reclassified Out of Accumulated Other Income. The standard was intended to improve the reporting of
reclassifications out of accumulated other comprehensive income of various components. The amendments in this update were effective for
annual and interim periods beginning after December 15, 2012. The adoption of ASC No. 2013-12 did not have a material impact on the
Company’s consolidated financial statements.
The FASB has issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net
Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task
Force). The amendments in this ASU state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in
the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit
carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available
at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the
disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to
use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and
should not be combined with deferred tax assets. The amendments in this ASU are effective for fiscal years, and interim periods within those
years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within
those years, beginning after December 15, 2014. Early adoption is permitted. The amendments should be applied prospectively to all
unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of this standard is not expected to
have a material impact on the Company’s consolidated financial position and results of operations.
27
There are several new accounting pronouncements issued by FASB which are not yet effective. Each of these pronouncements, as
applicable, has been or will be adopted by the Company. At March 15, 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.
CRITICAL ACCOUNTING POLICIES
The SEC has suggested companies provide additional disclosure and commentary on their most critical accounting policies, which they
defined as the ones that are most important to the portrayal of a company’s financial condition and operating results, and require management
to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.
Based on this definition our most critical accounting policy is the valuation of our investments. The methods, estimates and judgments we use
in applying this accounting policy has a significant impact on the results we report in our financial statements.
Investments
We 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 evaluation process is intended to provide a consistent basis for
determining the fair value of our available-for-sale investments. In summary, for individual securities classified as available-for-sale securities,
an enterprise shall determine whether a decline in fair value below the amortized cost basis is other than temporary. If the decline in fair value
is judged to be other than temporary, the individual security shall be written down to fair value as a new cost basis and the amount of the
write-down shall be included in earnings (accounted for as a realized loss). The new cost basis shall not be changed for subsequent recoveries
in fair value. Subsequent increases in the fair value of available-for-sale securities shall be included in other comprehensive income and
subsequent decreases in fair value, if not an other-than-temporary impairment, also shall be included in other comprehensive income.
The first step in the analysis is to determine if the security is impaired. All of our available-for-sale securities were listed and we use the
closing market price and other factors to determine the amount of impairment if any. The second step, if there is an impairment, is to determine
if the impairment is other than temporary. To determine if a decline in the value of an equity security is other than temporary and that a write-
down of the carrying value is required, we considered the following:
·
·
·
The length of time and the extent to which the market value has been less than the cost;
The financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the
issuer such as changes in technology that may impair the earnings potential of the investment or the discontinuance of a segment of the
business that may affect the future earnings potential; or
The intent and ability of the holder to retain its investment in the issuer for a period of time sufficient to allow for any anticipated
recovery in market value.
Unless evidence exists to support a realizable value equal to or greater than the carrying value of the investment in equity securities
classified as available-for-sale, a write-down to fair value accounted for as a realized loss should be recorded. Such loss should be recognized
in the determination of net income of the period in which it occurs and the written down value of the investment in the issuer becomes the new
cost basis of the investment.
Investments in which the Company has the ability to exercise significant influence and that, in general, are at least 20 percent owned are
stated at cost plus equity in undistributed net earnings (loss), less distributions received. The Company also has equity investments in which it
owns less than 20% which are stated at cost. An impairment loss would be recorded whenever a decline in the value of an equity investment
or investment carried at cost is below its carrying amount and is determined to be other than temporary. In judging “other than temporary,” the
Company considers the length of time and extent to which the fair value of the investment has been less than the carrying amount of the
investment, the near-term and long-term operating and financial prospects of the investee, and the Company’s long-term intent of retaining the
investment in the investee.
28
Leases
Restaurant Operations lease certain properties under operating leases. Many of these lease agreements contain rent holidays, rent
escalation clauses and/or contingent rent provisions. Rent expense is recognized on a straight-line basis over the expected lease term, including
cancelable option periods when failure to exercise such options would result in an economic penalty. We use a time period for straight-line rent
expense calculation that equals or exceeds the time period used for depreciation. In addition, the rent commencement date of the lease term is
the earlier of the date when they become legally obligated for the rent payments or the date when they take access to the grounds for build out.
Accounting for leases involves significant management judgment.
Intangible Assets
Goodwill
Generally accepted accounting principles in the United States require the Company to perform a goodwill impairment test annually and
more frequently when negative conditions or a triggering event arise. In September 2011, the FASB issued amended guidance that simplified
how entities test goodwill for impairment. After an assessment of certain qualitative factors, if it is determined to be more likely than not that
the fair value of a reporting unit is less than its carrying amount, entities must perform the quantitative analysis of the goodwill impairment test.
Otherwise, the quantitative test(s) become optional. As allowed under the amended guidance, the Company chose not to assess the qualitative
factors of its reporting units and, instead, performed the quantitative tests.
Trade Name/Trademark
The fair value of trade name/trademarks are estimated and compared to the carrying value. The Company estimates the fair value of
trademarks using the relief-from-royalty method, which requires assumptions related to projected sales from its annual long-range plan;
assumed royalty rates that could be payable if the Company did not own the trademarks; and a discount rate. The Company recognizes an
impairment loss when the estimated fair value of the trade name/trademarks is less than its carrying value. The Company finalized the purchase
price allocation for ARB and JF during its fourth quarter of 2013, the Company excluded the trade name/trademark related to ARB and JF
from its annual impairment test, however, the Company did perform a qualitative assessment of the ARB and JF’s trade name/ trademark in
accordance with ASC Topic 350, Intangibles - Goodwill and Other, and no indicators of impairment were identified. However, if in the future
there are declines in the Company’s market capitalization (reflected in our stock price) as well as in the market capitalization of other
companies in the restaurant industry, declines in sales at our restaurants, and significant adverse changes in the operating environment for the
restaurant industry may result in future impairment. The Company’s trade name/trademarks have been determined to have a definite-lived life
and is being amortized on a straight-line basis over estimated useful lives of 10 years. The amortization expense of these definite-lived
intangibles is included in depreciation and amortization in the Company’s consolidated statement of operations.
Franchise Cost
Intangible assets are recorded for the initial franchise fees for our restaurants. The Company amortizes these amounts over a 20 year
period, which is the life of the franchise agreement.
COMMITMENTS AND CONTINGENCIES
Effective August 1, 2010, the Company extended its office lease agreement for a period of one year at a monthly rental of $2,100, for its
office located at 11220 Elm Lane, Suite 103, Charlotte, NC 28277. Since August 1, 2011, the lease has continued at the same rate on a month-
to-month basis.
The Company leases the land and building for our five restaurants in South Africa and one restaurant in each of Hungary and England, as
well as the ten total locations throughout the United States through our subsidiaries. The South Africa leases are for five year terms and the
Hungary and Nottingham leases are for 10 years and all include options to extend the terms. The US restaurants lease terms range from 5 to
10 years and have options to extend. We lease some of our restaurant facilities under “triple net” leases that require us to pay minimum rent,
real estate taxes, maintenance costs and insurance premiums and, in some instances, percentage rent based on sales in excess of specified
amounts.
29
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table presents a summary of our contractual operating lease obligations and commitments as of December 31, 2013:
Payments due by period
Contractual Obligations
Long-Term Debt Obligations (1)
Operating Lease Obligations (2)
Capital Lease Obligations (3)
Total
$
Total
4,226,019 $
9,980,272
165,080
$ 14,371,371 $
Less than 1 year
1-3 years
3-5 years
More than 5
years
4,014,019 $
1,598,671
59,162
5,671,852 $
212,000 $
3,072,157
105,918
3,390,075 $
- $
1,285,213
-
1,285,213 $
-
4,024,231
-
4,024,231
(1) Represents the outstanding principal amounts and interest on all our long-term debt.
(2) Represents operating lease commitments for our 17 restaurants around the world.
(3) Represents capital lease commitments on principal and interest for five Hooters restaurants in South Africa.
ITEM 7A:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
30
ITEM 8:
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANTICLEER HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDTED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2013 and 2012
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2013 and 2012
Consolidated Statements of Stockholders’ Equity at December 31, 2013 and 2012
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013 and 2012
Notes to Consolidated Financial Statements
31
Page
32
33
34
35
36
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the
Board of Directors and Shareholders
of Chanticleer Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Chanticleer Holdings, Inc. and Subsidiaries (the “Company”) as of
December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash
flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are
free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Chanticleer Holdings, Inc. and Subsidiaries, as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As
more fully described in Note 1, the Company has incurred significant losses and needs to raise additional funds to meet its obligations and
sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s
plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Marcum llp
Marcum LLP
New York, NY
March 31, 2014
32
Chanticleer Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2013 and 2012
ASSETS
Current assets:
Cash
Accounts receivable
Other receivable
Inventories
Due from related parties
Prepaid expenses
Assets of discontinued operations
TOTAL CURRENT ASSETS
Property and equipment, net
Goodwill
Intangible assets, net
Investments at fair value
Other investments
Deposits and other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and notes payable
Derivative liability
Accounts payable and accrued expenses
Other current liabilities
Current maturities of capital leases payable
Deferred rent
Due to related parties
Liabilities of discontinued operations
TOTAL CURRENT LIABILITIES
Convertible notes payable, net of discount of $2,583,333
Capital leases payable, less current maturities
Deferred rent
Deferred tax liabilities
Other liabilities
Long-term debt, less current maturities
TOTAL LIABILITIES
Commitments and contingencies (Note 15)
Stockholders' equity:
Common stock: $0.0001 par value; authorized 45,000,000 shares; issued and outstanding 5,387,897
and 3,698,896 shares at December 31, 2013 and 2012, respectively
Additional paid in capital
Other comprehensive (loss) income
Non-controlling interest
Accumulated deficit
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
33
$
$
$
2013
2012
442,694 $
227,181
50,380
381,408
116,305
494,241
924
1,713,133
5,620,189
6,496,756
3,424,632
55,112
2,491,963
285,821
20,087,606 $
700,168 $
2,146,000
2,424,373
135,286
59,162
53,303
12,191
1,500
5,531,983
416,667
105,918
1,055,138
1,340,000
220,341
178,565
8,848,612
1,223,803
161,073
85,473
227,023
117,899
170,769
44,335
2,030,375
2,316,146
396,487
559,832
56,949
2,116,915
169,727
7,646,431
236,110
-
1,108,305
361,586
27,965
10,825
13,733
14,328
1,772,852
-
60,518
98,448
-
186,060
-
2,117,878
541
25,404,994
(88,370)
394,645
(14,472,816)
11,238,994
20,087,606 $
370
14,898,423
(181,741)
70,198
(9,258,697)
5,528,553
7,646,431
$
Chanticleer Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Loss
For the Years Ended December 31, 2013 and 2012
Revenue:
Restaurant sales, net
Management fee income - non-affiliates
Total revenue
Expenses:
Restaurant cost of sales
Restaurant operating expenses
Restaurant pre-opening expenses
General and administrative expense
Depreciation and amortization
Total expenses
Loss from operations
Other income (expense)
Equity in earnings (losses) of investments
Interest and other income
Interest expense
Change in fair value of derivative liabilities
Total other expense
Loss from continuing operations before income taxes
Provision for income taxes
Loss from continuing operations
Loss from discontinued operations, net of taxes
Consolidated net loss
Less: Net loss attributable to non-controlling interest
Net loss attributable to Chanticleer Holdings, Inc.
Net loss attributable to Chanticleer Holdings, Inc.:
Loss from continuing operations
Loss from discontinued operations
Other comprehensive loss:
Unrealized gain (loss) on available-for-sale securities (none applies to non-controlling interest)
Foreign translation gains
Other comprehensive loss
Net loss per attributable to Chanticleer Holdings, Inc. per common share, basic and diluted:
Continuing operations attributable to common shareholders, basic and diluted
Discontinued operations attributable to common shareholders, basic and diluted
Weighted average shares outstanding
See accompanying notes to consolidated financial statements.
34
2013
2012
$
8,144,035 $
103,452
8,247,487
6,752,323
100,000
6,852,323
3,031,457
4,909,580
56,902
4,233,629
622,274
12,853,842
(4,606,355)
(125,017)
82,411
(757,733)
119,600
(680,739)
(5,287,094)
40,935
(5,328,029)
(25,215)
(5,353,244)
139,125
(5,214,119) $
2,761,949
3,785,034
204,126
2,309,405
383,454
9,443,968
(2,591,645)
(14,803)
23
(474,926)
-
(489,706)
(3,081,351)
19,205
(3,100,556)
(293,977)
(3,394,533)
227,968
(3,166,565)
(5,188,904) $
(25,215)
(5,214,119) $
(2,872,588)
(293,977)
(3,166,565)
3,984
90,384
(5,119,751) $
(261,404)
29,013
(3,398,956)
(1.19) $
(0.01) $
4,365,468
(1.13)
(0.12)
2,541,696
$
$
$
$
$
$
Chanticleer Holdings, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2013 and 2012
Balance, January 1, 2012
Common stock issued for:
Services
Conversion of notes payable amd accrued interest
Purchase of non-controlling interest
Acquisition of non-controlling interest for cash
Reclassification of non-controlling interest
Cash, net of expenses
Available-for-sale securities
Warrants issued for consulting services
Foreign translation gain
Treasury stock cancelled
Net loss
Balance, December 31, 2012
Common stock issued for:
Services
Purchase of American Roadside Burgers, Inc.
Cash, net of expenses
Fair value of warrants issued for purchase of
American Roadside Burgers, Inc.
Warrants issued with convertible debt
Unrealized loss on available for sale securities
Warrants issued for consulting services
Foreign translation gain
Purchase of Just Fresh
Net loss
Balance, December 31, 2013
Common Stock
Shares
Par
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
Non-
Controlling
Accumulated
Treasury
(Loss)
Interest
Deficit
Stock
Total
1,506,061
$
151
$
6,459,656
$
50,650
$
593,863
$
(6,092,132) $
(526,420) $
485,768
5,000
423,828
219,248
-
-
1,801,374
-
-
-
1
42
22
-
-
180
-
-
-
32,399
1,907,196
986,651
-
(1,181,569)
7,051,284
-
169,200
-
(256,615)
-
3,698,896
(26)
-
370
(526,394)
-
14,898,423
-
-
-
-
-
-
(261,404)
-
29,013
-
-
(181,741)
-
-
(986,651)
(490,615)
1,181,569
-
-
-
-
-
(227,968)
70,198
-
-
-
-
-
-
-
-
-
-
(3,166,565)
(9,258,697)
-
-
-
-
-
-
-
-
-
526,420
-
-
122,334
740,000
826,667
-
-
-
-
-
-
-
5,387,897
$
14
74
83
-
-
-
-
-
-
-
541
$
569,976
3,611,052
3,073,314
-
1,710,077
884,600
-
657,552
-
-
-
25,404,994
(1,837)
95,208
$
(88,370) $
1,710,077
884,600
(1,837)
657,552
95,208
463,572
(5,353,244)
$ 11,238,994
-
463,572
(139,125)
394,645
(5,214,119)
$ (14,472,816) $
32,400
1,907,238
22
(490,615)
-
7,051,464
(261,404)
169,200
29,013
-
(3,394,533)
5,528,553
569,990
3,611,126
3,073,397
See accompanying notes to consolidated financial statements.
35
Chanticleer Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2013 and 2012
Cash flows from operating activities:
Net loss
Less: net loss from discontinued operations
Net loss from continuing operations
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Equity in losses of investments
Common stock issued for services
Loss (gain) on sale of investments
Amortization of debt discount
Warrants issued for consulting services
Warrant liability adjustment
Gain on debt extinguishment
Increase in amounts due from affiliate
Increase in accounts receivable
Increase in other receivable
Increase in prepaid expenses and other assets
Increase in inventory
Increase (decrease) in accounts payable and accrued expenses
Increase in deferred rent
Net cash used in operating activities from continuing operations
Net cash provided by (used in) operating activities from discontinued operations
Net cash used in operating activities
Cash flows from investing activities:
Cash acquired in acquisitions
Investment return of capital
Purchase of investments
Franchise costs
Purchase of property and equipment
Net cash used in investing activities from continuing operations
Cash flows from financing activities:
Proceeds from sale of common stock
Loan proceeds
Loan repayments
Capital lease payments
Non-controlling interest investment
Other liabilities
Net cash provided by financing activities from continuing operations
Effect of exchange rate changes on cash
Net increase in cash and cash equivalents
Cash, beginning of year
Cash, end of year
See accompanying notes to consolidated financial statements.
36
2013
2012
$
(5,328,029) $
(25,215)
(5,353,244)
(3,101,215)
(293,318)
(3,394,533)
622,274
125,017
569,990
-
566,867
486,272
(119,600)
(70,900)
52
7,455
179,919
(165,356)
5,966
464,932
(56,426)
(2,736,782)
32,583
(2,704,199)
383,454
14,803
32,400
16,598
-
169,200
-
-
(77,643)
(52,359)
(43,364)
(125,368)
(121,950)
785,966
58,886
(2,353,910)
(24,471)
(2,378,381)
243,991
99,934
(674,084)
(76,822)
(3,658,224)
(4,065,205)
-
-
(1,202,936)
(239,684)
(1,173,801)
(2,616,421)
3,073,397
3,622,000
(756,299)
(45,356)
-
-
5,893,742
94,553
(781,109)
1,223,803
442,694 $
7,051,464
2,915,000
(3,939,098)
(45,814)
90,000
(46,282)
6,025,270
28,206
1,058,674
165,129
1,223,803
$
Chanticleer Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows, continued
For the Years Ended December 31, 2013 and 2012
Supplemental cash flow information:
Cash paid for interest and income taxes:
Interest
Income taxes
Non-cash investing and financing activities:
Convertible notes payable exchanged for common stock
Common stock issued for Hoot limited partner units
Purchase of equipment using capital leases
Acquisition of subsidiaries:
Current assets, excluding cash and cash equivalents
Property and equipment
Goodwill
Trade name/trademark
Deposits and other assets
Liabilities assumed
Deferred tax liabilities
Non-controlling interest
Common stock and warrants issued
Cash paid
Cash received in excess of cash paid in acquisitions
See accompanying notes to consolidated financial statements.
37
2013
2012
92,049 $
25,928
273,468
-
- $
-
121,980
1,907,238
986,651
-
475,326 $
3,263,146
6,100,269
2,794,443
98,035
(2,110,436)
(1,340,000)
(463,571)
(5,321,203)
(3,740,000)
(243,991) $
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
Chanticleer Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1.
NATURE OF BUSINESS
ORGANIZATION
Chanticleer Holdings, Inc. (the “Company”) was organized October 21, 1999, under its original name, Tulvine Systems, Inc., under the
laws of the State of Delaware. The Company previously had limited operations and was considered a development stage company until July
2005. 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.
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”), and JF Franchising Systems, L.L.C. (“JFFS”) (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 and January 8, 2014, the names
of KPL and C&S were changed to Hooters SA (Pty) Ltd. and Chanticleer South Africa (Pty) Ltd., respectively. 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 (“GAAP”).
The Company has a calendar year-end reporting date of December 31.The accounts of two of its subsidiaries JF Restaurants ,L.L.C. and West
End Wings, Ltd are consolidated based on either a 52- or 53-week period ending on the Saturday 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 28, 2013 that materially affected the company’s financial position, results of operations, or cash flows. For the year ended
December 31, 2012, the Company and all of it consolidated subsidiaries reported on a calendar year end. The Fiscal year end of the
Company’s two non-calendar year- end subsidiaries for 2013 consisted of their operations from the date they were acquired in 2013.
Information regarding the Company's subsidiaries is as follows:
· Advisors was formed as a wholly owned Nevada limited liability company on January 18, 2007 to manage related companies,
Chanticleer Investors, LLC ("Investors LLC"), Chanticleer Investors II, LLC ("Investors II").The Company announced its
intention to exit the Investors II business on March 22, 2013, and effectuated such exit during the second quarter of fiscal 2013.
· Ventures was formed as a wholly owned Nevada limited liability company on December 24, 2008 to provide business
management and consulting services to its clients.
· CHL was formed as a wholly owned limited liability company in Jersey on March 24, 2009 to own the Company's initial 50%
interest in Hooters SA, GP, the general partner of the Hooters restaurant franchises in South Africa.
· CHA was formed on September 30, 2011 in Australia as a wholly owned subsidiary to invest in Hooters restaurants in Australia.
· CIP was formed as a wholly owned North Carolina limited liability company on September 20, 2011. CIP was formed to manage
separate and customized investment accounts for investors. The Company registered CIP as a registered investment advisor with
the state of North Carolina so that it can market openly to the public (the Company exited this business during the second quarter
of 2013).
· DineOut was formed as a private limited liability company in England and Wales on October 29, 2009 to raise capital in Europe
for Hooters South African stores. The Company owns approximately 89% of DineOut at December 31, 2013.
38
· KPL was formed on August 30, 2011 in South Africa to manage the Hooters restaurants in South Africa. The Company owns
90% and local management owns 10% at December 31, 2013.
· C&S was formed in 2009 in South Africa, is owned 100% by the Company at December 31, 2013 and 2012, and holds the
Hooters of America (“HOA”) franchise rights in South Africa.
· DFLO was formed on August 16, 2011 in South Africa, is owned 82% by the Company and 18% by outside investors at
December 31, 2013 and owns the Hooters restaurant in Durban, South Africa.
·
TPL was formed on August 18, 2011 in South Africa, is owned 88% by the Company and 12% by outside investors at December
31, 2013 and owns the Hooters restaurant in Johannesburg, South Africa.
· CPL was formed on August 29, 2011 in South Africa, is owned 90% by the Company and 10% by outside investors at December
31, 2013 and owns the Hooters restaurant in Cape Town, South Africa.
· DLOG was formed on August 27, 2011 in South Africa, is owned 88% by the Company and 12% by outside investors at
December 31, 2013 and owns the Hooters restaurant in the Emperor’s Palace in Johannesburg, South Africa.
·
PTT was formed on October 23, 2013 in South Africa, is owned 100% by the Company at December 31, 2013 and owns the
Hooters restaurant in Pretoria, South Africa.
· CRK was formed on October 12, 2011 in Hungary, is owned 80% by the Company and 20% by a local investor at December 31,
2013. CRK’s business purpose is owning and operating restaurants in Hungary (including the Budapest, Hungary location which
opened in August 2012) and Poland. The Company has not opened a restaurant to date in Poland.
· ARB, a Delaware corporation, was acquired on September 20, 2013 through a reverse merger between ARB and Chanticleer
Roadside Burgers International, L.L.C., a single member limited liability company with Chanticleer as its sole member. It is owned
100% by Chanticleer at December 31, 2013 and owns the American Roadside Burger restaurant franchise.
· WEW, a United Kingdom entity, was acquired on November 6, 2013. It is 100% owned by the Company at December 31, 2013
and owns the Hooters restaurant in Nottingham, England.
·
JFR and JFFS, both North Carolina limited liability companies, were acquired on November 4, 2013. These entities are 56%
owned by the Company and 44% owned by various investors and owns the Just Fresh restaurant franchise.
GOING CONCERN
At December 31, 2013, the Company had current assets of $1,713,133, current liabilities of $5,531,983, and a working capital deficit of
$3,818,850. The Company incurred a loss of $5,214,119 during the year ended December 31, 2013 and had an unrealized gain from available-
for-sale securities of $3,984 and foreign currency translation gain of $90,384, resulting in a comprehensive loss of $5,119,751. The Company
has historically met its liquidity requirements through the sale of equity and debt securities, including up to a $10 million convertible debt
transaction currently being negotiated, cash from operations and its revolving credit facility.
The Company's corporate general and administrative expenses averaged approximately $1.0 million per quarter in 2013, including
approximately $1.1 million non-cash.. The Company expects costs to increase as we expand our footprint domestically and internationally in
2014. Domestically in 2013 the Company purchased 100% of ARB on September 30, 2013, and 56% of Just Fresh in December 2013.
Effective November 7, 2013, the Company acquired 100% of an existing Hooters restaurant in Nottingham, England. On January 31, 2014
we closed the purchases of 100% of two Hooters restaurants in the states of Washington and Oregon, 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. 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%. The Company also earns 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, with plans for two
additional Hooters Australia locations under the same terms to open in the second 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.
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In addition, the Company has a note with a balance at December 31, 2013 of $218,119 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 is due in
April 2014. As of December 31, 2013, the balance on the line of credit is $28,000. In addition, in February 2014 the Company secured a note
with a bank for $500,000 due on August 10, 2014. The Company also has $3,000,000 of convertible debt which the Company used for our
purchase of the Hooters Nottingham (United Kingdom) purchase. 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 three million
dollars ($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 was recorded as a derivative liability The Company executed the
purchase of Hooters Nottingham on November 6, 2013 and began operating the restaurant on November 7, 2013. The Company’s South
African subsidiaries have bank overdraft and term facilities of $347,286 and ARB has a bank note payable of $38,614. 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 September 30, 2013, the Company acquired American Roadside Burgers, Inc. (“ARB”) and 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 per share. The warrants are exercisable beginning
October 1, 2014 until September 30, 2018. The merger agreement provides that Chanticleer Roadside Burgers International, LLC (a single-
member LLC, of which the Company is the sole member) shall merge with and into ARB, with ARB continuing as the surviving entity and
subsidiary of the Company.
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.
On November 4, 2013, the Company entered into a Subscription Agreement with JF Restaurants, LLC (“JFR”), JF Franchising Systems,
LLC (“JFFS”) (collectively “Just Fresh”), and the Preferred Members (the “Members” or collectively, the “Sellers”) for the purchase of a 51%
ownership interest in each entity. The total purchase price was $560,000, which included payment of the Sellers’ outstanding debt obligations
and reimbursement of several Members for previous debt payments. With the signing of the Subscription Agreement, Chanticleer paid Sellers’
outstanding debt in the amount of approximately $434,325 towards the purchase consideration. The final closing was held on December 10,
2013. On December 11, 2013, the Company purchased an additional 5% from an existing Member, securing the Company’s ownership of a
56% ownership interest.
The Company employed a placement agent for the purpose of the above 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 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. The
aggregate purchase price we received from the sale of the Units was $800,000. 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
financials as other income.
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.
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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 exists. These consolidated financial statements do not reflect any adjustments that might result from the
outcome of these uncertainties.
2.
SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Significant estimates include the valuation of the investments in portfolio companies and deferred tax asset
valuation allowances. Actual results could differ from those estimates.
REVENUE RECOGNITION
Restaurant Net Sales and Food and Beverage Costs
The Company records revenue from restaurant sales at the time of sale, net of discounts, coupons, employee meals, and
complimentary meals and gift cards. Sales and value added (VAT) taxes collected from customers and remitted to governmental
authorities are presented on a net basis within sales in our consolidated statements of operations. Cost of sales primarily includes the
cost of food, beverages, and merchandise and disposable paper and plastic goods used in preparing and selling our menu items, and
exclude depreciation and amortization. Vendor allowances received in connection with the purchase of a vendor’s products are
recognized as a reduction of the related food and beverage costs as earned
Management Fee Income
The Company receives revenue from management fees from both affiliated companies and non-affiliated companies. The
Company’s revenue recognition policy provides that revenue is generally realized or realizable and earned when all of the following
criteria have been met:
Persuasive evidence of an arrangement exists;
·
· Delivery has occurred or services have been rendered;
·
· Collectability is reasonably assured.
The seller's price to the buyer is fixed or determinable; and
The Company may collect revenue in both cash and in the equity securities of the company to whom the Company are providing
services. Typically when the Company is paid cash for services, it is based on a monthly fee and is recorded when earned. When the
Company receives equity securities for our management services, the Company generally receives the securities in advance for our
services to be earned over the life of the contract, generally one year. The Company values these securities and defers recognition of
the revenue over the life of the management contract.
The fair value of the equity instruments received was determined based upon the stock prices as of the date we reached an
agreement with the third party and is not subject to adjustment after the measurement date.
RESTAURANT PRE-OPENING EXPENSES
Restaurant pre-opening expenses are non-capital expenditures, which are expensed as incurred, consist of the costs of hiring and
training the initial hourly work force for each new restaurant, travel, the cost of food and supplies used in training, grand opening
promotional costs, the cost of the initial stocking of operating supplies and other direct costs related to the opening of a restaurant,
including rent during the construction and in-restaurant training period.
LIQUOR LICENSES
The costs of obtaining non-transferable liquor licenses that are directly issued by local government agencies for nominal fees are
expensed as incurred. The costs of purchasing transferable liquor licenses through open markets in jurisdictions with a limited number
of authorized liquor licenses are capitalized as indefinite-lived intangible assets and included in other assets. Liquor licenses are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Annual liquor license renewal fees are expensed over the renewal term.
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ACCOUNTS RECEIVABLE
The Company monitors its exposure for credit losses on its receivable balances and the credit worthiness of its receivables on an
ongoing basis and records related allowances for doubtful accounts. Allowances are estimated based upon specific customer and other
balances, where a risk of default has been identified, and also include a provision for non-customer specific defaults based upon
historical experience. As of December 31, 2013 and December 31, 2012, the Company has not recorded an allowance for doubtful
accounts. If circumstances related to specific customers change, estimates of the recoverability of receivables could also change.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or market, and consist primarily of restaurant food items,
supplies, beverages and merchandise
OPERATING LEASES
The Company leases certain property under operating leases. Differences between amounts paid and amounts expensed are
recorded as deferred rent. Capital leases are recorded as an asset and an obligation at an amount equal to the present value of the
minimum lease payments during the lease term. Many of these lease agreements contain rent holidays, rent escalation clauses and/or
contingent rent provisions. Rent expense is recognized on a straight-line basis over the expected lease term, including cancelable option
periods when failure to exercise such options would result in an economic penalty. The Company also may receive tenant improvement
allowances in connection with its leases which are capitalized as leasehold improvements with a corresponding liability recorded in the
deferred occupancy liability line in the consolidated balance sheet. The tenant improvement allowance liability is amortized on a
straight-line basis over the lease term. In addition, the rent commencement date of the lease term is the earlier of the date when we
become legally obligated for the rent payments or the date when we take access to the property or the grounds for build out.
MARKETABLE EQUITY SECURITIES
Available-for-sale securities
The Company’s investments in marketable equity securities which are classified as available-for-sale are carried at fair value.
Investments available for current operations are classified in the consolidated balance sheets as current assets; investments held for
long-term purposes are classified as non-current assets. Unrealized gains and losses, net of tax, are reported in other comprehensive
income as a separate component of stockholders’ equity. Gains and losses are reported in the consolidated statements of operations
when realized, determined based on the disposition of specifically identified investments, using a first-in, first-out method.
Investments identified by the Company as being potentially impaired are subject to further analysis to determine if the impairment
is other than temporary. Other than temporary declines in market value from original costs are charged to investment and other income,
net, in the period in which the loss occurs. In determining whether investment holdings are other than temporarily impaired, the
Company considers the nature, cause, severity and duration of the impairment.
OTHER INVESTMENTS
Investments in which the Company has the ability to exercise significant influence and that, in general, are at least 20 percent
owned are stated at cost plus equity in undistributed net earnings (loss), less distributions received. The Company also has equity
investments in which it owns less than 20% which are stated at cost. An impairment loss would be recorded whenever a decline in the
value of an equity investment or cost investment is below its carrying amount and is determined to be other than temporary. In judging
“other than temporary,” the Company considers the length of time and extent to which the fair value of the investment has been less
than the carrying amount of the investment, the near-term and long-term operating and financial prospects of the investee, and the
Company’s long-term intent of retaining the investment in the investee.
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FAIR VALUE MEASUREMENTS
For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price we would receive to sell an
asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active
markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and,
in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction
that occurs at the measurement date.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market
assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:
Level 1
Level 2
Level 3
Quoted prices for identical instruments in active markets.
Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets
that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are
observable.
Significant inputs to the valuation model are unobservable.
We maintain policies and procedures to value instruments using the best and most relevant data available. Our investment
committee reviews and approves all investment valuations.
Our available-for-sale equity securities are all valued using Level 1 inputs or Level 2 inputs.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose fair value information about financial instruments when it is practicable to estimate that value.
The carrying amounts of the Company’s cash, accounts receivable, inventory, accounts payable, accrued expenses, other current
liabilities, convertible notes payable and notes payable approximate their estimated fair value due to the short-term maturities of these
financial instruments and because related interest rates offered to the Company approximate current rates.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation. Depreciation and amortization, which includes
amortization of assets held under capital leases, are recorded generally using the straight-line method over the estimated useful lives of
the respective assets or, if shorter, the term of the lease for certain assets held under a capital lease. Leasehold improvements are
amortized over the lesser of the expected lease term, or the estimated useful lives of the related assets using the straight-line method.
The estimated useful lives used to compute depreciation and amortization are as follow:
Leasehold Improvements
Restaurant furnishings and equipment
Furniture and fixtures
Office and computer equipment
5-10 years
3-7
3-5
3-5
The carrying amount of all long-lived assets is evaluated periodically to determine if adjustment to the depreciation and
amortization period or the unamortized balance is warranted. Based upon its most recent analysis, the Company believes that no
impairment of property and equipment exists at December 31, 2013 and 2012.
Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When property and
equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain
or loss is included in operations.
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Impairment of Long-Lived Assets
The Company periodically reviews its long-lived assets when events indicate that their carrying value may not be recoverable.
Such events include a history trend or projected trend of cash flow losses or a future expectation that the Company will sell or dispose
of an asset significantly before the end of its previously estimated useful life. In reviewing for impairment identifiable cash flows are
measured at the lowest level for which they are largely independent of the cash flows of other groups of assets and liabilities, generally
at the restaurant level. The Company has identified leasehold improvements as the primary asset because it is the most significant
component of its restaurant assets, it is the principal asset from which its restaurants derive their cash flow generating capacity and has
the longest remaining useful life. The recoverability is assessed by comparing the carrying value of the assets to the undiscounted cash
flows expected to be generated by these assets. Impairment losses are measured as the amount by which the carrying values of the
assets exceed their fair values.
INTANGIBLE ASSETS
Goodwill and trade name/trademarks have been assigned to reporting units for the purpose of impairment testing. The reporting units
are the Company’s restaurant brands.
Goodwill
Generally accepted accounting principles in the United States require the Company to perform a goodwill impairment test
annually and more frequently when negative conditions or a triggering event arise. In September 2011, the FASB issued amended
guidance that simplified how entities test goodwill for impairment. The goodwill impairment test involves a two-step process. The first
step is a comparison of each reporting unit’s fair value to its carrying value. If the carrying value of the reporting unit is higher than its
fair value, there is an indication that impairment may exist and the second step must be performed to measure the amount of impairment
loss. The amount of impairment is determined by comparing the implied fair value of reporting unit goodwill to the carrying value of
the goodwill in the same manner as if the reporting unit was being acquired in a business combination. Specifically, fair value is
allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis
that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, the
Company would record an impairment loss for the difference..
Trade Name/Trademark
The fair value of trade name/trademarks are estimated and compared to the carrying value. The Company estimates the fair
value of trademarks using the relief-from-royalty method, which requires assumptions related to projected sales from its annual long-
range plan; assumed royalty rates that could be payable if the Company did not own the trademarks; and a discount rate. The Company
recognizes an impairment loss when the estimated fair value of the trade name/trademarks is less than its carrying value. The Company
finalized the purchase price allocation for ARB and JF during its fourth quarter of 2013, the Company excluded the trade
name/trademark related to ARB and JF from its annual impairment test, however, the Company did perform a qualitative assessment of
the ARB and JF’s trade name/ trademark in accordance with ASC Topic 350, Intangibles - Goodwill and Other, and no indicators of
impairment were identified. However, declines in the Company’s market capitalization (reflected in our stock price) as well as in the
market capitalization of other companies in the restaurant industry, declines in sales at our restaurants, and significant adverse changes
in the operating environment for the restaurant industry may result in future impairment. The Company’s trade name/trademarks have
been determined to have a definite-lived life and is being amortized on a straight-line basis over estimated useful lives of 10 years. The
amortization expense of these definite-lived intangibles is included in depreciation and amortization in the Company’s consolidated
statement of operations.
Franchise Cost
Intangible assets are recorded for the initial franchise fees for our restaurants. The Company amortizes these amounts over a
20 year period, which is the life of the franchise agreement.
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DERIVATIVE LIABILITIES
In connection with the issuance of a secured convertible promissory note, the terms of the convertible note included an embedded
conversion feature; which provided for the settlement of the convertible promissory note into shares of common stock at a rate which
was determined to be variable. The Company determined that the conversion feature was an embedded derivative instrument pursuant
to ASC 815 “Derivatives and Hedging”.
The accounting treatment of derivative financial instruments requires that the Company record the conversion option and related
warrants at their fair values as of the inception date of the agreements and at fair value as of each subsequent balance sheet date. Any
change in fair value was recorded as a change in the fair value of derivative liabilities for each reporting period at each balance sheet
date. The Company reassesses the classification at each balance sheet date. If the classification changes as a result of events during the
period, the contract is reclassified as of the date of the event that caused the reclassification.
The fair value of an embedded conversion option that is convertible into a variable amount of shares are deemed to be a “down-
round protection” and therefore, do not meet the scope exception for treatment as a derivative under ASC 815. Since, “down-round
protection” is not an input into the calculation of the fair value of the conversion option and cannot be considered “indexed to the
Company’s own stock” which is a requirement for the scope exception as outlined under ASC 815. The Company determined the fair
value of the Binomial Lattice Model and the Black-Scholes Model to be materially the same. The Company’s outstanding warrants did
not contain any round down protection.
The Black-Scholes option valuation model is used to estimate the fair value of the warrants or options granted. The model includes
subjective input assumptions that can materially affect the fair value estimates. The model was developed for use in estimating the fair
value of traded options or warrants. The expected volatility is estimated based on the most recent historical period of time equal to the
weighted average life of the warrants or options granted.
ACQUIRED ASSETS AND ASSUMED LIABILITIES
Pursuant to ASC No. 805-10-25, if the initial accounting for a business combination is incomplete by the end of the reporting
period in which the combination occurs, but during the allowed measurement period not to exceed one year from the acquisition date,
the company retrospectively adjusts the provisional amounts recognized at the acquisition date by means of adjusting the amount
recognized for goodwill.
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 basis. 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. The Company has provided a valuation allowance for the full amount of the deferred tax assets.
As of December 31, 2013 and 2012 the Company had no accrued interest or penalties relating to any tax obligations. The
Company currently has no federal or state examinations in progress, nor has it had any federal or state tax examinations since its
inception. The last three years of the Company's tax years are subject to federal and state tax examination.
STOCK-BASED COMPENSATION
The compensation cost relating to share-based payment transactions (including the cost of all employee stock options) is required
to be recognized in the financial statements. That cost is measured based on the estimated fair value of the equity or liability instruments
issued. A wide range of share-based compensation arrangements including share options, restricted share plans, performance-based
awards, share appreciation rights and employee share purchase plans are included. The Company’s financial statements would include
an expense for all share-based compensation arrangements granted on or after January 1, 2006 and for any such arrangements that are
modified, cancelled or repurchased after that date based on the grant-date estimated fair value.
45
As of December 31, 2013 and 2012, there were no options outstanding. See Note 12 regarding outstanding warrants.
LOSS PER COMMON SHARE
The Company is required to report both basic earnings per share, which is based on the weighted-average number of common
shares outstanding, and diluted loss per share, which is based on the weighted-average number of common shares outstanding plus all
potentially dilutive shares outstanding. For the year ended December 31, 2013 and December 31, 2012, the number of common shares
potentially issuable upon the exercise of certain warrants of 7,322,125 and 5,001,458, respectively. In addition, the Company has
convertible debt which converts into 637,592 shares at December 31, 2013. These warrants and convertible debt shares have not been
included in the computation of diluted EPS since the effect would be antidilutive. Accordingly, no common stock equivalents are
included in the loss per share calculations and basic and diluted earnings per share are the same for all periods presented.
ADVERTISING
Advertising costs are expenses as incurred. Advertising expenses which are included in restaurant operating expenses in the
accompanying consolidate statement of operations, totaled $183,656 and $124,563 for the years ended December 31, 2013 and 2012,
respectively. Advertising expense primarily includes local advertising.
FOREIGN CURRENCY TRANSLATION
Adjustments resulting from the process of translating foreign functional currency financial statements into U.S. dollars are
included in accumulated other comprehensive income in common stockholders’ equity. Foreign currency transaction gains and losses
are included in current earnings. Most of our foreign operations use their local currency as the functional currency.
COMPREHENSIVE INCOME (LOSS)
Standards for reporting and displaying comprehensive income (loss) and its components (revenues, expenses, gains and losses) in
a full set of general-purpose financial statements requires that all items that are required to be recognized under accounting standards as
components of comprehensive income (loss) be reported in a financial statement that is displayed with the same prominence as other
financial statements. We are required to (a) classify items of other comprehensive income (loss) by their nature in financial statements,
and (b) display the accumulated balance of other comprehensive income (loss) separately in the equity section of the balance sheet for
all periods presented. Other comprehensive income (loss) items include foreign currency translation adjustments, and the unrealized
gains and losses on our marketable securities classified as held for sale.
CONCENTRATION OF CREDIT RISK
The Company maintains its cash with major financial institutions. Cash held in U.S. bank institutions is currently insured by the
Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. No similar insurance or guarantee exists for cash
held in South African, Hungary or UK Kingdom bank accounts. There was a $211,064 and $648,182 aggregate uninsured cash
balances at December 31, 2013 and 2012.
RECLASSIFICATIONS
Certain reclassifications have been made in the financial statements at December 31, 2012 and for the periods then ended to
conform to the December 31, 2013 presentation. The reclassifications had no effect on net loss.
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RECENT ACCOUNTING PRONOUNCEMENTS
There are several new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) which are not
yet effective. Each of these pronouncements, as applicable, has been or will be adopted by the Company. At March 28, 2013, none of
these pronouncements are expected to have a material effect on the financial position, results of operations or cash flows of the
Company.
On July 27, 2012, the FASB issued Accounting Standards Update No. 2012-02, Intangibles—Goodwill and Other (Topic 350):
Testing Indefinite-Lived Intangible Assets for Impairment. The Update simplifies the guidance for testing the decline in the realizable
value (impairment) of indefinite-lived intangible assets other than goodwill. Examples of intangible assets subject to the guidance
include indefinite-lived trademarks, licenses, and distribution rights. The amendment allows an organization the option to first assess
qualitative factors to determine whether it is necessary to perform the quantitative impairment test. An organization electing to perform
a qualitative assessment is no longer required to calculate the fair value of an indefinite-lived intangible asset unless the organization
determines, based on a qualitative assessment, that it is “more likely than not” that the asset is impaired. Under former guidance, an
organization was required to test an indefinite-lived intangible asset for impairment on at least an annual basis by comparing the fair
value of the asset with its carrying amount. If the carrying amount of an indefinite-lived intangible asset exceeded its fair value, an
impairment loss was recognized in an amount equal to the difference. The amendments in this Update are effective for annual and
interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company has adopted this update during
its 2013 fiscal year with no significant impact on its consolidated results of operations, financial position and cash flows.
On February 5, 2013, the FASB issued Accounting Standards Update No. 2013-02, Comprehensive Income (Topic 220):
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The standard is intended to improve the
reporting of reclassifications out of accumulated other comprehensive income of various components. The Update requires an entity to
present, either parenthetically on the face of the financial statements or in the notes, significant amounts reclassified, from each
component of accumulated other comprehensive income and the income statement line items affected by the reclassification. The
amendments in this Update are effective for annual and interim periods beginning after December 15, 2012. The Company has adopted
this amendment for the March 31, 2013 interim period financial statements forward.
In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exits.” ASU 2013-11 clarifies guidance and eliminates diversity in
practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit
carryforward exists at the reporting date. This new guidance is effective for annual reporting periods beginning on or after
December 15, 2013 and subsequent interim periods. The Company is currently assessing the impact, if any, on its consolidated
financial statements.
3.
ACQUISITIONS
During the year ended December 31, 2013, the Company made the following acquisitions:
· American Roadside Burgers, effective September 30, 2013;
· West End Wings, LTD (Hooters Nottingham), effective November 7, 2013; and
·
Just Fresh, effective December 10, 2013.
American Roadside Burgers (“ARB”)
On September 30, 2013, the Company acquired American Roadside Burgers, Inc. and 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 per share. The warrants are
exercisable beginning October 1, 2014 until September 30, 2018. The merger agreement provides that Chanticleer Roadside Burgers
International, LLC (a single-member LLC, of which the Company is the sole member) shall merge with and into ARB, with ARB
continuing as the surviving entity and subsidiary of the Company. 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 occur, which has the potential to bring
additional revenue and profits to the Company in the future.
47
The acquisition was accounted for using the purchase method in accordance with ASC 805 “Business Combinations”. The
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 as determined by an independent appraisal and the
Company’s management, based on information currently available and on current assumptions as to future operations.
West End Wings (“WEW” or “Hooters Nottingham”)
On November 6, 2013, the Company finalized 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
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 JF Restaurants, L.L.C. (“JFR”) and JF
Franchising Systems, L.L.C. (“JFFS”), for the purchase of a 51%ownership interest in each entity, for a total purchase price of
$560,000. The purchase was finalized 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 five 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.
48
The acquisitions were accounted for using the purchase method of accounting and, accordingly, the 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 as determined by an independent appraisal and the Company’s management, based on information
currently available and on current assumptions as to future operations as follows:
Consideration paid:
Common stock
Warrants
Cash
Total consideration paid
Current assets, excluding cash
Property and equipment
Goodwill
Trademark/trade name
Deposits and other assets
Total assets acquired, less cash
Liabilities assumed
Deferred tax liabilities
Non-controlling interest
Common stock and warrants issued
Cash paid
Cash received in excess of cash paid
ARB
WEW
JF
Total
$
3,611,126 $
1,710,077
-
5,321,203
- $
-
3,150,000
3,150,000
- $
-
590,000
590,000
3,611,126
1,710,077
3,740,000
9,061,203
281,574
3,000,122
2,550,611
1,784,443
98,035
7,714,785
(1,490,288)
(956,000)
-
(5,321,203)
-
52,706 $
151,546
20,493
3,124,507
-
-
3,296,546
(337,831)
-
-
-
(3,150,000)
191,285 $
42,206
242,531
425,151
1,010,000
-
1,719,888
(282,317)
(384,000)
(463,571)
-
(590,000)
- $
475,326
3,263,146
6,100,269
2,794,443
98,035
12,731,219
(2,110,436)
(1,340,000)
(463,571)
(5,321,203)
(3,740,000)
243,991
$
Unaudited pro forma results of operations for the years ended December 31, 2013 and 2012, 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.
Years ended
December 31,
2013
2012
Net revenues
Loss from continuing operations
Loss from discontinued operations
Loss attributable to non-controlling interest
Net loss
Net loss per share, continuing operations, basic and diluted
Net loss per share, discontinued operations
Weighted average shares outstanding, basic and diluted
49
(25,215)
(140,142)
$17,496,810 $16,389,150
(5,795,871) (4,427,130)
(239,318)
(705,310)
$ (5,961,228) $ (5,371,758)
$
(1.74)
(0.09)
$
4,365,468 2,541,696
(1.33) $
(0.01) $
4.
INVESTMENTS
INVESTMENTS AT FAIR VALUE CONSIST OF THE FOLLOWING AT DECEMBER 31, 2013 AND 2012.
Available-for-sale investments at fair value
Total
AVAILABLE-FOR-SALE SECURITIES
Activity in our available-for-sale securities may be summarized as follows:
Cost
Unrealized loss
Total
Our available-for-sale securities consist of the following:
2013
2012
$
$
55,112 $
55,112 $
56,949
56,949
2012
2011
$
$
263,331 $
(208,219)
55,112 $
263,331
(206,382)
56,949
December 31, 2013
Appalachian Mountain Brewery
North American Energy
North American Energy
North American Energy
December 31, 2012
Appalachian Mountain Brewery
North American Energy
North American Energy
North American Energy
Unrecognized
Holding
Gains (Losses)
Fair
Value
Cost
Realized
Holding
Loss
Loss
on
Sale
1,500
126,000
10,500
125,331
263,331 $
43,050
(123,200)
(9,900)
(118,169)
(208,219) $
1,500
126,000
10,500
125,331
263,331 $
-
(111,300)
(7,350)
(87,732)
(206,382) $
$
$
44,550
2,800
600
7,162
55,112 $
1,500
14,700
3,150
37,599
56,949 $
-
-
-
-
- $
-
-
-
-
- $
-
-
-
-
-
-
-
-
-
-
Appalachian Mountain Brewery (“AMB”), formerly North Carolina Natural Energy, Inc. (“NCNE”) – AMB is a successor to
NCNE and is currently traded under the ticker HOPS. AMB began trading under this symbol on January 7, 2014, previously it was traded
under ticker NCNE on the OTC stock market. As of December 31, 2013, the Company held 16,200 shares of AMB with a closing price of
$2.75 per share. AMB makes craft beer with plans to expand its distribution network. AMB expects to have a food service line in addition to
its beer products. NCNE was a successor to Remodel Auction Incorporated whose business was discontinued. The Company originally
received 100,000,000 shares of NCNE (less than 1% on a fully diluted basis) for management services during 2011. The shares were valued
at $1,500 based on NCNE’s valuation as a shell and the Company did not adjust the cost upon the change to AMB.
North American Energy Resources, Inc. - During the quarter ended June 30, 2009, the Company exchanged its oil & gas property
investments for 700,000 shares of North American Energy Resources, Inc. ("NAEY") which were valued at $126,000 based on the closing
price of NAEY on the date of the trade. At December 31, 2013 and December 31, 2012, the stock was $0.004 and $0.02 per share,
respectively, and the Company recorded an unrealized loss of $123,200 and $111,300, respectively, based on the Company's determination
that the price decline was temporary.
50
During the first quarter of 2010, the Company received an additional 150,000 shares of NAEY in exchange for management services. The
shares were initially valued at $10,500, based on the trading price at the time. At December 31, 2013 and December 31, 2012, the Company
recorded an unrealized loss of $9,900 and $7,350, respectively, based on the market value at the time.
During June 2011, the Company’s CEO contributed 1,790,440 shares of NAEY to the Company which was valued at $125,331 based on
the trading price at the time. Mr. Pruitt did not receive additional compensation as a result of the transfer. At December 31, 2013 and
December 31, 2012, the Company recorded an unrealized loss of $118,169 and $87,732, respectively, based on the market value of the
securities.
NAEY appointed a new management team in December 2010 and they are seeking acquisition opportunities for onshore and offshore oil
and gas properties. Accordingly, the Company determined that any decline was temporary.
OTHER INVESTMENTS ARE SUMMARIZED AS FOLLOWS AT DECEMBER 31, 2013 AND 2012.
Investments accounted for under the equity method
Investments accounted for under the cost method
Total
INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD
Activity in investments accounted for using the equity method is summarized as follows.
Balance, beginning of year
Equity in loss
New investments
Reclassification of investments
Return of capital
Balance, end of year
Equity investments consist of the following at December 31, 2013 and December 31, 2012:
Carrying value:
Hoot Campbelltown Pty. Ltd. (49%) - Australia
Second Hooters location (49%) - Australia
Third Hooters location (49%) - Australia
51
2013
2012
$
$
941,963 $
1,550,000
2,491,963 $
1,066,915
1,050,000
2,116,915
2013
2012
$
$
1,066,915 $
(125,017)
100,000
-
(99,935)
941,963 $
815,550
(14,803)
409,543
(143,375)
-
1,066,915
2013
2012
$
$
483,603 $
384,605
73,755
941,963 $
555,331
511,584
-
1,066,915
Equity in earnings (loss) and distributions from equity investments during the years ended December 31, 2013 and 2012 follows.
Equity in earnings (loss):
Australia locations (49%)
Return of capital:
Second Australia location return portion of investment
2013
2012
(125,017)
(125,017) $
(14,803)
(14,803)
(99,934)
(99,934) $
-
-
$
$
The restaurant at the Hoot Campbelltown location opened in January 2012. Townsville and Surfer’s Paradise are under construction and
expected to open in the second quarter of 2014: The condensed statements of operations for the years ended December 31, 2013 and 2012
follows:
Revenue
Gross profit
Loss from continuing operations
Net loss
2013
2012
$
2,328,015 $ 3,348,928
2,381,245
1,643,287
(30,208)
(255,136)
(30,208)
(255,136)
The above loss contains $108,753 of startup expenses for our second and third locations in Australia, which are expected to open in the
second quarter of 2014.
The summarized balance sheets for the three locations in Australia of which we owned 49% at December 31, 2013 and December 31,
2012 follows:
ASSETS
Current assets
Non-current assets
TOTAL ASSETS
LIABILITIES
Current liabilities
PARTNER'S EQUITY
TOTAL LIABILITIES AND PARTNERS' EQUITY
2013
2012
$
$
$
$
362,085 $
3,089,230
3,451,315 $
604,147
2,909,276
3,513,423
972,885 $
2,478,430
3,451,315 $
1,057,911
2,455,512
3,513,423
Hooters S.A., GP - The Company formed CHL to own the Company's 50% general partner interest in Hooters S.A., GP, the general
partner of the Hooters' restaurant franchises in South Africa. The initial restaurant opened in December 2009 in Durban, South Africa and
operations commenced in January 2010. In the initial restaurant CHL had a 10% interest in restaurant cash flows until the limited partners
receive payout and a 40% interest in restaurant cash flows after limited partner payout. The second location opened in Johannesburg in June
2010 and a third location opened in Cape Town in June of 2011 with similar structures. Effective September 30, 2011, the Company acquired
majority control of the South African operations and began consolidating its operations on October 1, 2011. The fourth location opened in
February 2012 in Emperor’s Palace Casino in Johannesburg funded approximately 12% by minority investors.
CHA (Hoot Campbelltown Pty. Ltd, Hoot Townsville Pty. Ltd. and Hoot Surfers Paradise Pty. Ltd.) – CHA entered into a
partnership with the current local Hooters franchisee in Australia in which CHA will own 49% and its partner own 51%. The local partner
will also manage the restaurants. The first location, Hoot Campbelltown Pty. Ltd. opened in Campbelltown, a suburb of Sydney, in January
2012. The second and third locations are under construction and we expect them to open in the second quarter of 2014.
52
INVESTMENTS ACCOUNTED FOR USING THE COST METHOD
A summary of the activity in investments accounted for using the cost method follows.
Investments at cost:
Balance, beginning of year
Impairment
New investments
Total
Investments at cost consist of the following at December 31, 2013 and 2012:
Chanticleer Investors, LLC
Edison Nation LLC (FKA Bouncing Brain Productions)
Beacher's Madhouse
2013
2012
$
$
1,050,000 $
-
500,000
766,598
(16,598)
300,000
1,550,000 $ 1,050,000
2013
2012
$
$
800,000 $
250,000
500,000
800,000
250,000
-
1,550,000 $ 1,050,000
Chanticleer Investors LLC - The Company sold 1/2 of its investment in Investors LLC in May 2009, which reduced its ownership
from 23% to 11.5%. Accordingly, in May 2009, the Company discontinued accounting for this investment using the equity method and began
to account for the investment using the cost method. In December 2010, the Company sold an additional $75,000 of its investment at cost.
On April 18, 2006, the Company formed Investors LLC and sold units for $5,000,000. Investors LLC’s principal asset was a convertible
note in the amount of $5,000,000 with Hooters of America, Inc. (“HOA”), collateralized by and convertible into 2% of Hooters common
stock. The original note included interest at 6% and was due May 24, 2009. The note was extended until November 24, 2010 and included an
increase in the interest rate to 8%.
The Company owned $1,150,000 (23%) of Investors LLC until May 29, 2009 when it sold 1/2 of its share for $575,000. Under the
original arrangement, the Company received 2% of the 6% interest as a management fee ($25,000 quarterly) and 4% interest on its investment
($11,500 quarterly). Under the extended note and revised operating agreement, the Company received a management fee of $6,625 quarterly
and interest income of $11,500 quarterly until it was repaid in January 2011
On January 24, 2011, Investors LLC and its three partners combined to form HOA Holdings, LLC ("HOA LLC") and completed the
acquisition of HOA and Texas Wings, Inc. ("TW"). Together HOA LLC has created an operating company with 161 company-owned
locations across sixteen states, or nearly half of all domestic Hooters restaurants and over one-third of the locations worldwide.
Investors, LLC had a note receivable in the amount of $5,000,000 from HOA that was repaid at closing. Investors LLC then invested
$3,550,000 in HOA LLC (approximately 3.1%) ($500,000 of which was the Company's share). One of the investors in Investors LLC that
owned a $1,750,000 share is a direct investor in HOA LLC and will now carry its ownership in HOA LLC directly. In July 2012, the
Company acquired an additional interest of $300,000, at cost, from one of the partners for cash, which increased our ownership to
approximately 22% of Investors LLC as of December 31, 2013.
Based on the current status of this investment, the Company does not consider the investment to be impaired.
Beacher's Madhouse – the Company acquired a 5% minority interest for $500,000 in Beacher’s, a variety show and nightclub
experience. Beacher’s opened in late 2013 at an 8,500 square-foot performance theater located in the MGM Grand Hotel & Casino located on
the strip in Las Vegas. Prior to the Las Vegas opening, the show was located in Los Angeles, California, which the Company has no stake in.
The Company also received the right to participate in the financing of up to 25% offered to third party investors in any new Beacher's
Madhouse location as well as the exclusive rights to the United Kingdom, South Africa and Australia.
53
Based on the current status of this investment, the Company does not consider the investment to be impaired.
EE Investors, LLC - On January 26, 2006, we acquired an investment in EE Investors, LLC with cash in the amount of $250,000. We
acquired 1,205 units (3.378%) in EE Investors, LLC, whose sole asset is 40% of Edison Nation, LLC (formerly Bouncing Brain Productions,
LLC). Edison Nation was formed to provide equity capital for new inventions and help bring them to market. The initial business plan
included developing the products and working with manufacturers and marketing organizations to sell the products. This has evolved into a
less hands-on program which involves selling products with patents to other larger companies and retaining royalties. Edison Nation has now
reached cash flow break-even, and in addition has been retained by a number of companies for which they do product searches to supplement
its business. Edison Nation plans to repay the majority of its debt in 2014 and expects to subsequently begin making distributions to its
owners. Based on the current status of this investment, the Company does not consider the investment to be impaired.
5.
DISCONTINUED OPERATIONS
The Company closed their investment management business on May 1, 2013. A summary of the activity is presented below.
Assets and liabilities from discontinued operations
The Company had assets and liabilities for the periods ended December 31, 2013 and December 31, 2012, which is presented in our
balance sheet, as follows:
Cash
Due from related parties
Assets from discontinued operations
Accounts payable
Liabilities from discontinued operations
Net loss from discontinued operations
December 31, December 31,
2013
2012
$
$
$
$
924 $
-
924 $
1,500 $
1,500 $
24,471
19,864
44,335
14,328
14,328
The Company had a net loss from discontinued operations for the years ended December 31, 2013 and 2012, which is presented in our
statements of operations, as follows:
Revenues from Chanticleer Investors II, LLC
Expenses
Net loss from discontinued operations
Year ended
December 31,
2013
Year ended
December 31,
2012
$
$
53,710 $
78,925
(25,215) $
30,743
324,720
(293,977)
54
Chanticleer Investors II - Chanticleer Advisors, LLC (“Advisors”) acted as the managing general partner and received a management
fee based on a percentage of profits. On March 22, 2013, Chanticleer Holdings, Inc. announced its intention to exit the fund management
business, which was effectuated May 1, 2013. Advisors resigned as manager of Chanticleer Investors II (“Investors”). Matthew Miller and
Joe Koster, two of the prior fund managers, ceased to be employed by Advisors and now manage a new entity, Boyles Asset Management,
LLC (“Boyles”), which will continue management of Investors. Mr. Michael Pruitt resigned as one of the portfolio managers. From this
arrangement, the Company will have an ongoing economic benefit from this aspect of the business, while eliminating the losses associated
with the fund management business. Chanticleer Advisors has failed to produce profits and has resulted in operating losses since inception.
Chanticleer Investment Partners, LLC - Chanticleer Investment Partners, LLC (“CIPs”) was formed as a wholly owned North
Carolina limited liability company on September 20, 2011. CIP was formed to manage separate and customized investment accounts for
investors. The Company registered CIP as a registered investment advisor so that it could market openly to the public. In March 2013 the
Company decided to exit this business and on April 26, 2013 CIP’s status as a registered investment advisor was terminated.
6.
PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2013 and 2012:
2013
2012
Office and computer equipment
Furniture and fixtures
Restaurant furnishings and equipment
Accumulated depreciation and amortization
$
50,780 $
47,686
35,076
47,686
6,716,666 2,826,760
6,815,132 2,909,522
(593,376)
(1,194,943)
$ 5,620,189 $ 2,316,146
Restaurant furnishings and equipment consists of leasehold improvements, and bar, kitchen and restaurant equipment used in our five
locations opened as of December 31, 2013. Depreciation and amortization expense was $591,142 and $364,645 for the years ended
December 31, 2013, and December 31, 2012, respectively, including $78,742 and $35,314 for capital lease assets. Restaurant furnishings
and equipment includes capital lease assets from our South African restaurants of $263,392 and $141,413, with a net book value of
$158,446 and $96,230 at December 31, 2013 and December 31, 2012, respectively. Non-restaurant related depreciation expense totaled
$6,797 and $8,768 for the years ended December 31, 2013 and 2012, respectively.
7.
INTANGIBLE ASSETS, NET
GOODWILL
Goodwill is summarized by location as follows:
South Africa
ARB
WEW (Nottingham)
JF
2013
2012
$
$
396,487 $
2,550,611
3,124,507
425,151
6,496,756 $
396,497
-
-
-
396,497
Goodwill arose 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, JF and WEW acquisitions as of September 30, 2013, November 6, 2013 and December 10, 2013
respectively. An evaluation was completed effective December 31, 2013 at which time the Company determined that no impairment was
necessary for any of the Company’s acquisitions.
During 2013, the Company completed three acquisitions which resulted in payments of the amounts above in excess of the net assets
acquired. An evaluation was completed effective December 31, 2013 at which time the Company determined that no impairment was
necessary.
55
OTHER INTANGIBLE ASSETS
Franchise cost for the Company’s Hooters restaurants and trademark/trade name for the Company’s JF and ARB entities consists of the
following at December 31, 2013 and December 31, 2012. 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.
Franchise cost:
South Africa
Brazil *
Hungary
Trade name/trademark:
Just Fresh
ARB
Total intangible cost
Accumulated amortization
Intangible assets, net
2013
2012
$
448,888 $
135,000
106,506
690,394
1,010,000
1,784,327
2,794,327
3,484,721
(60,089)
$ 3,424,632 $
358,888
135,000
104,684
598,572
-
-
-
598,572
(38,740)
559,832
Years ended December 31, 2013 and 2012:
Amortization expense
$
21,349 $
18,809
Amortization for franchise costs and trade name/trademarks are as follows:
December 31,
2014
2015
2016
2017
2018
Thereafter
Totals
$
$
Franchise fee
Trade name
Total
27,770 $
27,770
27,770
27,770
27,770
356,455
495,305 $
279,432 $
279,432
279,432
279,432
279,432
1,397,167
2,794,327 $
307,202
307,202
307,202
307,202
307,202
1,753,622
3,289,632
* The Brazil franchise cost is not being amortized until we open a restaurant.
56
8.
LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt and notes payable are summarized as follows.
December 31, December 31,
2013
2012
Note payable to a bank due in monthly installments of $4,406 including interest at Wall Street
Journal Prime + 1% (minimum of 5.5%); remaining balance due October 10, 2018; collateralized
by substantially all of the Company's assets and guaranteed by an officer of the Company
$
218,119 $
236,110
Line of credit to a bank, expires April 10, 2014, interest rate of Wall Street Journal Prime
(currently 3.25%) plus 1%, floor rate of 5%
Note payable to a bank, matures August 5, 2014, interest rate of Wall St. Journal Prim (currently
3.25%) plus 1%
Loan agreement with an outside company on December 23, 2013, interest at 1% per month,
accrued interest and principal due February 23, 2014, unsecured
Current portion of long-term debt
Long-term debt, less current portion
472,000
38,614
-
-
150,000
878,733
700,168
178,565 $
-
236,110
236,110
-
$
On April 11, 2013, the Company and Paragon Commercial Bank (“Paragon”) entered into a credit agreement (the “Credit Agreement”).
The Credit Agreement provides for an additional $500,000 revolving credit facility with a one (1) year term from the Closing Date. This
increases the Company’s obligation to Paragon to a total of approximately $718,119 at December 31 2013, which includes a prior note
payable’s current outstanding balance of $218,119 and a revolving credit facility balance of $472,000 at December 31, 2013. 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 expires on April 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 (currently 3.25%) 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.
ARB entered into a term note with TD Bank in 2008 for $300,000, which has a balance of $38,614 at December 31, 2013 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 payments 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.
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 $4751 of accrued
interest. However, the note holders have not issued to the Company a formal notice of default.
57
9.
BANK
FACILITIES
OVERDRAFT
AND
TERM
Bank overdraft and term facilities at December 31, 2013 and December 31, 2012 are associated with the South African Operations
and consist of the following:
Bank overdraft facilities (1)
Term facility (2)
Term facility (3)
Term facility (4)
Other current liabilities
Other liabilities
December 31, December 31,
2013
2012
$
79,372 $
254,251
-
112,950
133,448
180,445
142,807
355,627
135,286
220,341 $
$
547,646
361,586
186,060
(1) Bank overdraft facilities are unsecured and have a total maximum facility of approximately $260,000. The interest rate as of
December 31, 2013 is 11%. The facilities are reviewed annually and are payable on demand. Concurrently with the January 31, 2013
mentioned in (2) below, the Company was released from a facility totaling $56,528, and a $56,528 gain on settlement of debt was
recognized in the first quarter of 2013.
(2) Term facility is payable on demand and the facility is secured by certain assets of one of the Company’s shareholders. After ongoing
negotiations between the bank and the Company, on January 31, 2013, $98,579 was paid in full satisfaction of the facility, resulting
in a gain on settlement of debt of $14,371 which was recognized in the first quarter of 2013.
(3) The monthly payments of principal and interests of the term facility total approximately $5,000 and have been made for the period
from October 1, 2011 through December 2013. The interest rate at December 31, 2013 is 10.3%. The maturity date on the tech
facility is June 14, 2016.
(4) On December 1, 2013, PTT secured a five-year term loan with an interest rate of 12.5% as of December 31, 2013 in the amount of
$142,807. The monthly payments of principal and interest total approximately $3,172. The term facility is secured by a bond on all
moveable assets at our Pretoria, South Africa location and is partially guaranteed by our CEO.
10.
CONVERTIBLE NOTES PAYABLE
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 and is collateralized by the assets of the
Hooters Nottingham restaurant. The funding from the private offering was used exclusively for the acquisition of the Nottingham, England
Hooters restaurant location (acquisition described in Note 3). The Notes have the following principal terms:
·
·
·
·
·
the principal amount of the Note shall be repaid within 36 months of the issuance date at a non-compounded 6% interest rate per
annum;
the Note holders shall receive 10%, pro rata, of the net profit of the Nottingham, EnglandHooters restaurant, paid quarterly for the
life of the location, and 10% of the net proceeds should the location be sold;
the consortium of investors received a total of 300,000) three-year warrants, exercisable at $3.00 per share;
the Note holder may convert his or her Note into shares of the Company’s common stock (at 90% of the average closing price ten
days prior to conversion, unless a public offering is pending at the time of the conversion notice, which would result in the
conversion price being the same price as the offering). The conversion price is subject to a floor of $1.00 per share;
the Note holder has the right to redeem the Note for a period of sixty days following the eighteen month anniversary of the issuance
of the Note, unless a capital raise is conducted within eighteen months after the issuance of the Note. In connection with the
issuance of the Note, the Company also issued warrants for the purchase of 300,000 shares of the Company’s common stock at an
exercise price of $3.00 per share through August 2, 2016.
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, $2,265,600 and $884,600, respectively, aggregated $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.
58
The fair value of the embedded conversion feature and the warrants was estimated using the Black-Scholes option-pricing model. Key
assumptions used to apply this pricing model during the three months ended December 31, 2013 were as follows:
Risk-free interest rate
Expected life of warrants
Expected volatility of underlying stock
0.006%
2.6 years
104.06%
The expected stock price volatility for the Company’s stock options was determined by the historical volatilities for the Company’s stock. Risk
free interest rates were obtained from U.S. Treasury rates for the applicable periods.
11.
CAPITAL LEASES PAYABLE
Capital leases payable at December 31, 2013 and 2012 is associated with the South African operations and consists of the following:
December 31, December 31,
2013
2012
Capital lease payable, due in 49 monthly installments of $1,081, including interest at 10%, through
April 2016
$
28,589 $
38,548
Capital lease payable, due in 32 monthly installments of $800 including interest at 10%, through
November 2014
8,627
17,183
Capital lease payable, due in 34 monthly installments of $1,560, including interest at 11.5%, through
July 2016
Capital lease payable, due in 34 monthly installments of $2,200, including interest at 11.5%, through
November 2016
46,721
66,354
-
-
Capital lease payable, due in 14 monthly installments of $1,470, including interest at 10%, through
May 2013
-
7,389
Capital lease payable, due in 36 monthly installments of $1,022, including interest at 10%, through
February 2015
Total capital leases payable
Current maturities
Capital leases payable, less current maturities
14,789
165,080
59,162
105,918 $
25,363
88,483
27,965
60,518
$
The current capital leases cover point of sale and other equipment for five of the South African restaurants. Annual requirements for capital
lease obligations are as follows:
December 31,
2014
2015
2016
Total minimum lease payments
Less: amount representing interest
Present Value of Net Minimum Lease Payments
59
Amount
59,181
57,063
48,836
165,080
(12,140)
152,940
$
$
12.
INCOME TAXES
Loss from continuing operations before income taxes:
United States
Foreign
The income tax provision (benefit) consists of the following:
Foreign
Current
Deferred
U.S. Federal
Current
Deferred
State & local
Current
Deferred
Change in valuation allowance
Income tax provision
2013
2012
$
$
4,650,443 $ 2,346,516
800,844
5,287,094 $ 3,147,360
636,651
2013
2012
$
40,935 $
(167,554)
19,205
(170,962)
-
(652,624)
-
(791,395)
-
-
(76,786)
(93,105)
896,964 1,055,462
19,205
40,935 $
$
The provision (benefit) for income tax using the statutory U.S. federal tax rate is reconciled to the Company’s effective tax rate as follows:
2013
2012
Computed "expected" income taxe expense (benefit)
State income taxes, net of federal benefit
Foreign rate differential
Prior year deferred tax adjustment
Travel, entertainment and other
Deferred taxes from acquisitions
Change in valuation allowance
Income tax expense
$ (1,797,612) $ (1,070,100)
(93,861)
74,106
-
53,660
-
1,055,400
19,205
(211,484)
(79,399)
1,083,075
537,988
(388,597)
896,964
40,935 $
$
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for tax purposes. Major components of deferred tax assets and liabilities at December 31,
2013 and 2012 were:
60
Net operating loss carryovers
Capital loss carryforwards
Investments
Derivative liability
Warrants
Australian equity investment
Deferred occupancy liabilities
Total deferred tax assets
Property and equipment
Convertible debt
Intangibles
Total deferred tax liabilities
Net deferred tax assets
Valuation allowance
Net deferred tax assets
2013
2012
$ 4,495,059 $ 2,812,636
630,100
(80,400)
-
-
-
-
6,245,512 3,362,336
488,500
-
645,500
184,800
53,132
378,521
(278,868)
(645,500)
(1,061,844)
(1,986,212)
-
-
-
-
4,259,300 3,362,336
(4,259,300) (3,362,336)
-
- $
$
As of December 31, 2013 and 2012, the Company has U.S. federal and state net operating loss carryovers of approximately $10,666,000
and $4,187,000 respectively, which will expire at various dates beginning in 2031 through 2034, if not utilized. As of December 31, 2013 and
2012, the Company has foreign net operating loss carryovers of $1,727,000 ($464,000 for Hungary and $1,263,000 for South Africa) and
$1,073,000 ($163,000 for Hungary and $910,000 for South Africa), respectively. These net operating loss carryovers can be carried forward
indefinitely as long as the Company is trading. The Company has a capital loss carryforward of $1,286,000 which expires between 2015 and
2017 if not utilized. In accordance with Section 382 of the Internal Revenue code, deductibility of the Company’s U.S. net operating loss
carryovers may be subject to an annual limitation in the event of a change of control as defined under the Section 382 regulations.
In assessing the realization of deferred tax assets, Management considers whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration of all of the information
available, Management believes that significant uncertainty exists with respect to future realization of the deferred tax assets and has therefore
established a full valuation allowance. For the year ended December 31, 2013 and December 31, 2012, the change in valuation allowance was
approximately $896,964 and $1,055,462.
The Company evaluated the provisions of ASC 740 related to the accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements. ASC 740 prescribes a comprehensive model for how a company should recognize, present, and disclose uncertain
positions that the Company has taken or expects to take in its return. For those benefits to be recognized, a tax position must be more-likely-
than-not to be sustained upon examination by taxing authorities. Differences between two positions taken or expected to be taken in a tax
return and the benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits”. A liability is
recognized for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing-authority for a tax
position that was not recognized as a result of applying the provisions of ASC 740.
As of December 31, 2013 and December 31, 2012, no liability for unrecognized tax benefits was required to be reported.
Interest costs related to unrecognized tax benefits are required to be calculated, if applicable, and would be classified as “interest expense,
net” in the two statements of operations. Penalties would be recognized as a component of “general and administrative expenses”. As of
December 31, 2013 and December 31, 2012, no interest or penalties were required to be reported. The Company does not expect any
significant changes in its unrecognized tax benefits in the next year.
61
No provision was made for U.S. or foreign taxes on $250,528 of undistributed earnings of the Company as such earnings are considered
to be permanently reinvested. Such earnings have been, and will continue to be, reinvested, but could become subject to additional tax if they
were remitted as dividends, loaned to the Company, or if the Company should sell its interests in the foreign entities. It is not practicable to
determine the amount of additional tax, if any, that might be payable on the undistributed earnings.
13.
STOCKHOLDERS’ EQUITY
Effective May 11, 2012, the Company's common stock was reverse split, 1 share for each 2 shares issued, pursuant to a majority vote of
the Company's shareholders. All share references have been adjusted as if the split occurred in to all periods presented.
On February 3, 2014, the Company amended its certificate of incorporation increasing the number of authorized shares of Common Stock
from 20,000,000 to 45,000,000
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 services.
On November 5, 2013, the Company entered into a Subscription Agreement with JF Restaurants, L.L.C. (“JFR”) and JF Franchising
Systems, L.L.C. (“JFFS”), for the purchase of a 51% ownership interest in each entity, for a total purchase price of $560,000. The purchase
was finalized 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 a $800,000 private placement. The
aggregate purchase price we received from the sale of the Units was $800,000. 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 (5) Units, with each Unit consisting of a one percent (1%) membership interest
in Beachers. The total capital contribution made by the Company to Beachers was $500,000. In connection with the Beacher’s Subscription
Agreement, the Company executed a Right to Purchase Agreement with Madhouse Worldwide Investments, LLC (“MWI”) whereby the
Company shall issue 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 twenty five percent (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.
62
2012 Transactions
On May 8, 2012, the Company issued 5,000 shares of its common stock in exchange for services to be performed over a six month
period and valued at $32,400.
EQUITY RAISE
The Company filed a Form S-1 Registration Statement under the Securities Act of 1933 which was declared effective on June 21, 2012.
The Company issued 2,444,450 units at $4.50 per unit, consisting of one share of Common Stock and one five year redeemable warrant
(redeemable at the Company’s option) exercisable at $5.00 per share for an issuance value of $11 million (net $7.2 million). The issuance of
shares included shares issued upon the conversion of notes payable and accrued interest of approximately $1.9 million and shares issued for
the purchase of a percentage of the Hoot SA non-controlling interest of approximately $1.0 million.
During August 2012, treasury stock shares of 256,615 were cancelled and returned to the Company.
Options
There are no options outstanding as of December 31, 2013 and 2012.
Warrants
On March 28, 2012, the Company issued 125,000 and 25,000 five year warrants at $6.50 and $8.00, respectively for consulting services
related to the Company’s expansion into Europe.
On June 21, 2012, the Company issued 2,444,450 five-year redeemable warrants as noted above in the “Equity Raise” section.
On June 18, 2013, the Company issued two warrants to purchase common stock as a retainer for services provided for a six month
agreement. The first warrant was in the amount of 100,000 shares, with an exercise price of $3.25 per share. The second warrant was in the
amount of 100,000 shares and will have an exercise price of $5.25 per share. The warrants have a maturity of five years. The warrants were
valued using Black-Scholes at $298,678. This amount will be amortized to consulting expense over the six month term of the agreement.
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.
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. The
aggregate purchase price we received from the sale of the Units was $800,000. 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.
63
On October 28, 2013, the Company entered into an employment agreement with an initial term of two years and a renewal of an additional
one year term if both parties do not give notice. The agreement includes an annual salary commensurate with a veteran restaurant executive and
includes 44,000 warrants to purchase our Company stock at $5.00 per share. The warrants are exercisable after 12 months for a term of five
years and have been valued by the Company at $179,000 using the Black-Scholes model.
Warrant amortization is summarized as follows at December 31, 2013 and 2012 and for the years then ended:
Added to additional paid-in capital
Interest expense
Consulting expense
14.
RELATED PARTY TRANSACTIONS
Due to related parties
2013
2012
$
$
657,552 $
657,552 $
169,200
169,200
22,659
634,893
657,552 $
90,636
78,564
169,200
$
The Company has received non-interest bearing loans and advances from related parties. The amounts owed by the Company as of
December 31, 2013 and 2012 are as follows:
Hoot SA I, LLC
Chanticleer Investors, LLC
Due from related parties
2013
2012
$
$
12,191 $
-
12,191 $
12,191
1,542
13,733
The Company has earned income from and made advances to related parties. The amounts owed to the Company at December 31, 2013
and 2012 is as follows:
Chanticleer Dividend Fund, Inc.
Chanticleer Investors
Hoot SA II, III, IV LLC
Management income from affiliates
Chanticleer Investors LLC
2013
2012
$
$
69,281 $
1,207
45,817
116,305 $
74,281
-
43,618
117,899
Investors LLC collected its note receivable and reinvested $3,550,000 in HOA LLC (See Note 4). There was no management income
from Investors LLC in 2011 or 2012.
64
Chanticleer Investors II LLC
The Company managed Investors II and earned management income of $30,743 in 2012. The operations were discontinued in 2013.
Chanticleer Dividend Fund, Inc. ("CDF")
On November 10, 2010 the Company formed CDF under the general corporation laws of the State of Maryland. CDF filed a registration
statement under Form N-2 to register as a non-diversified, closed-end investment company in January 2011. The Company, through
Advisors, will have a role in management of CDF when its registration statement becomes effective. CDF continues to look for opportunities
to use the entity, including for growth capital in the restaurant industry.
Hoot SA, LLC; Hoot SA II, LLC; Hoot SA III, LLC and Hoot SA IV, LLC
The Hoot partnerships were formed to help finance the first four Hooters restaurants in South Africa.
Efftec International, Inc. ("Efftec")
The Company's CEO became CEO and the sole director of Efftec during 2010 and the Company received 150,000 common shares and an
option to acquire 150,000 shares for management services. The shares and option were initially valued at $22,500, based on the trading price
of Efftec at the time.
North American Energy Resources, Inc. ("NAEY")
The Company's CEO became CEO and a director of NAEY during 2010 and the Company received 150,000 common shares for
management services. The shares were valued at $10,500, based on the trading price of NAEY at the time. The Company's CEO resigned as
CEO of NAEY in December 2010 and remains a director. During June 2011, the Company’s CEO contributed 1,790,440 shares of NAEY to
the Company which was valued at $125,331 based on the trading price at the time. Mr. Pruitt did not receive additional compensation as a
result of the transfer.
Avenel Financial Group, Inc.
Avenel Financial Group, Inc. is a company owned by Mr. Pruitt. Advances previously made to the Company were repaid during 2011.
Avenel Financial Group, Inc. invested as a limited partner in the South African Hooters locations. Avenel Financial Group, Inc. invested
$14,000, $12,500, and $25,000 in the Durban, Johannesburg, and Cape Town locations, respectively, and is entitled to receive approximately
2.0%, 1.5%, and 2.9%, respectively, of the net profits after taxation (“SA Profits”) of each of the locations until payout. As of December 31,
2012, Avenel Financial Group, Inc. has received an aggregate of $6,441 in SA Profits and $49,816 in return of investment under the same
terms as the other limited partners.
15.
SEGMENTS OF BUSINESS
As of December 31, 2012, we were organized into two business segments: (1) restaurant ownership and management and (2) 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 effectuated such exit during the second quarter of fiscal 2013. Accordingly at
December 31, 2013, we no longer report by segment.
65
The following are revenues, operating loss, and long-lived assets by geographic area as of and for the years ended December 31:
Revenue:
United States
South Africa
Europe
Operating loss:
United States
South Africa
Europe
Long-lived assets, end of year:
United States
South Africa
Europe
Australia
Brazil
2013
2012
987,285 $
5,738,974
1,521,228
8,247,487 $
100,000
6,284,186
468,137
6,852,323
2013
(4,539,040) $
(386,168)
(288,911)
(5,214,119) $
$
2013
13,661,043 $
2,191,584
1,434,128
941,963
145,555
18,374,273 $
2012
(2,248,454)
(539,178)
(378,933)
(3,166,565)
-
2012
1,626,903
1,866,855
909,828
1,066,915
145,555
5,616,056
$
$
$
$
$
$
16.
COMMITMENTS AND CONTINGENCIES
Effective August 1, 2010, the Company extended its office lease agreement for its office for a term of one year with monthly lease
payments of $2,100. Since August 1, 2011, the office lease continues at the same rate on a month-to-month basis.
The Company leases the land and buildings for its five restaurants in South Africa, 10 restaurants in the United States and one restaurant
in each of Hungary and the United Kingdome through its subsidiaries. The South Africa and United Kingdom leases are for five year terms
and the Hungary lease is for a 10 year term and include options to extend the terms. The 10 restaurants operated in the United States have lease
terms varying from five to 10 years and have options to extend. We lease some of our restaurant facilities under “triple net” leases that require
us to pay minimum rent, real estate taxes, maintenance costs and insurance premiums and, in some instances, percentage rent based on sales in
excess of specified amounts.
Rent obligations for our 17 restaurants are presented below:
2014
2015
2016
2017
thereafter
Totals
$
$
1,598,671
1,588,373
1,483,784
978,819
4,330,625
9,980,272
Rent expense for the years ended December 31, 2013 and December 31, 2012 was $868,285 and $792,420, respectively. Rent expense
for the years ended December 31, 2013 and 2012 for the Company’s restaurants was $833,546 and $757,766, respectively, and is included in
the “Restaurant operating expenses” of the Consolidated Statement of Operations. Rent expense for the years ended December 31, 2013 and
2012 for the non-restaurants was $34,739 and $34,654, and is included in the “General and administrative expense” of the Consolidated
Statement of Operations.
66
On October 12, 2012, Francis Howard (“Howard”), individually and on behalf of all others similarly situated, filed a lawsuit against
Chanticleer Holdings, Inc. (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. (The “Auditor Defendant”), 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 31st, 2012, the Company
and the Individual Defendants retained Stanley Wakshlag at Kenny Nachwalter, P.A. to represent them in this litigation. On December 12th,
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 at 9:00
a.m. 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 Chanticleer’s insurance carrier and $12,500 to be paid by Creason & Associates, PLLC, subject to
Court Approval. The Company has and will continue to vigorously defend itself in this matter.
Given that the outcome of litigation is inherently uncertain, and the early stage of this class action, the Company can neither comment on
the probability of potential liabilities, nor provide an estimate of such. As of December 31, 2013, no amounts have been accrued for related to
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. We still await Madam Justice Steyri’s judgement on the matter, no indication of timing of decision or further process has
been given. The Company intends to vigorously defend itself in this matter.
Given that the outcome of litigation is inherently uncertain and the early stage of this action, the Company can neither comment on the
probability of potential liabilities, nor provide an estimate of such. As of December 31, 2013, no amounts have been accrued for related to this
matter.
On April 1, 2013, the Company received a subpoena from the Securities and Exchange Commission, 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 Africa entities (whereby, onOctober 1, 2011, Rolalor (Pty.) Ltd., Alimenta
177(Pty.) Ltd. and Labyrinth Trading (Pty.) Ltd. 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.
67
In addition to the matters disclosed above, the company is 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.
17.
DISCLOSURES ABOUT FAIR VALUE
Assets and liabilities measured at fair value on a recurring basis are summarized in the following tables according to FASB ASC 820
pricing levels.
Fair Value Measurement Using
Quoted prices
in active
markets of
identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Recorded
value
$
55,112 $
55,112 $
- $
-
$
2,146,000 $
- $
- $
2,146,000
$
56,949 $
55,449 $
1,500 $
-
December 31, 2013
Assets:
Available-for-sale securities
Liabilities:
Derivative liability
December 31, 2012
Assets:
Available-for-sale securities
At December 31, 2013 and 2012, the Company's available-for-sale equity securities were valued using Level 1 and Level 2 inputs as
summarized above. Level 1 inputs are based on unadjusted prices for identical assets in active markets that the Company can access. Level 2
inputs are based on quoted prices for similar assets other than quoted prices in Level 1, quoted prices in markets that are not yet active, or other
inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the
assets.
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.
See Note 4 for further details of the Company's investments.
18.
SUBSEQUENT EVENTS
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. The Hooters 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.
68
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.
The financial statements of the acquirees in the preceding two paragraphs are not practicable to prepare at the time of filing due to the
acquirees being privately held. The initial accounting for the business combinations are not yet complete and we are still performing
procedures to determine the appropriate accounting. As such, we are unable to make the following disclosures, (i) pro forma data, (ii) purchase
price allocation, (iii) expenses of the acquisition, and (iv) revenue and earnings of the acquires since the acquisition date.
On January 31, 2014, at a special meeting of stockholders of the Company, the Company’s stockholders approved the Chanticleer
Holdings, Inc. 2014 Stock Incentive Plan (the “2014 Plan”) and approved the increase of available Company shares from 20,000,000 to
45,000,000. The 2014 Plan, under which awards can be granted until February 3, 2024 or the 2014 Plan’s earlier termination, provides for
the grant of incentive stock options, nonqualified stock options, stock appreciation rights (“SARs”), restricted awards in the form of restricted
stock awards and restricted stock units, performance awards in the form of performance shares and performance units, phantom stock awards
and other stock-based awards to selected employees, directors and independent contractors of the Company and its affiliates.
The maximum number of shares issuable under the 2014 Plan is 4,000,000 shares, and no more than 4,000,000 shares may be issued
under the 2014 Plan pursuant to the grant of incentive stock options. In addition, under the 2014 Plan, in any 12-month period, (i) no
participant may be granted options and SARs that are not related to an option for more than 500,000 shares of common stock (or the
equivalent value thereof based on the fair market value per share of the common stock on the date of grant of an award); and (ii) no participant
may be granted awards other than options or SARs that are settled in shares of common stock for more than 500,000 shares of common stock
(or the equivalent value thereof based on the fair market value per share of the common stock on the date of grant of an award). The share and
award limitations are subject to adjustment for anti-dilution purposes as provided in the 2014 Plan.
19.
RESIGNATION OF SOUTH AFRICAN CHIEF FINANCIAL OFFICER
On September 7, 2012, the Company’s South African Chief Financial Officer (“SA CFO”) resigned. It was determined that the SA CFO
had committed certain illegal acts, fraud and certain misrepresentations of facts. Due to the SA CFO’s actions, certain taxes were not paid. In
addition, the applicable tax forms were not filed during the proper periods. The Company has engaged tax experts to assist in the tax process.
The Company also discovered approximately $85,473 (net of repayments of approximately $42,000) and $42,109 of cash that was
misappropriated by the SA CFO during the periods ended December 31, 2012 and 2011, respectively (presented as “other receivable” on the
Company’s combined balance sheet as of December 31, 2011), and approximately $128,000 in total for the period October 2011 through
September 2012. As of December 31, 2013, approximately $78,000 has been recovered by the Company and payment plans are in place for
the remainder.
69
ITEM 9:
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On October 15, 2012 the Audit Committee of the Board of Directors of Chanticleer Holdings, Inc. (the “Company”) engaged,
approved and ratified Marcum LLP (“Marcum”) as the Company’s independent registered public accounting firm.
Marcum replaced Creason and Associates, PLLC (“Creason”) as the Company’s independent registered public accountant.
Management was notified on October 3, 2012 by Creason that Creason would not continue to be the Company's independent principal auditor.
The Company engaged Marcum based on the decision to have one audit firm that is able to audit the Company’s entire operations,
including the South African operations, since that business is substantial. Marcum will now serve as the Company’s independent auditors for
the 2012 fiscal year.
Creason’s report on the Company’s consolidated financial statements for the years ended December 31, 2011 and, 2010 contained an
explanatory paragraph which noted that there was substantial doubt about the Company’s ability to continue as a going concern. Other than the
foregoing, the report contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles,
During the Company’s two most recent fiscal years and the subsequent interim period preceding the resignation of Creason there were (a) no
“disagreements” as defined in Item 304(a)(1)(iv) of Regulation S-K with Creason on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of Creason, would have caused it
to make reference to the subject matter of the disagreement in connection with its report; and (b) no “reportable events” as defined in Item
304(a)(1)(v) of Regulation S-K.
ITEM 9A:
CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Under the PCAOB standards, a control deficiency exists when the design or operation of a control does not allow management or
employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant
deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material
weakness, yet important enough to merit the attention by those responsible for oversight of the company's financial reporting. A material
weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial
officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-
15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), as of December 31, 2013. Our management has
determined that, as of December 31, 2013, the Company's disclosure controls and procedures were effective.
Management's report on internal control over financial reporting
Management Responsibility for ICOFR. Management is responsible for establishing and maintaining effective internal control over
financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. The Company's internal control over financial reporting is designed
to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation and fair presentation of
published financial statements in accordance with the United States' generally accepted accounting principles (US GAAP), including those
policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
disposition of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with US GAAP and that receipts and expenditures are being made only in accordance with authorizations of
management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
70
Management’s Evaluation of ICOFR. Management evaluated our internal control over financial reporting as of December 31, 2013.
In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control — Integrated Framework. As a result of this assessment and based on the criteria in this framework,
management has concluded that, as of December 31, 2013, our internal control over financial reporting was ineffective.
Material Weaknesses
A material weakness is a control deficiency, or a combination of control deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a
timely basis.
Management identified the following material weaknesses in its internal controls over financial reporting:
·
Lack of sufficient qualified personnel to design, implement, and maintain an effective control environment as it relates to financial
reporting. Given the significant expansion of the business and all of our operations, primarily from September 30, 2013 forward, we
did not yet integrate an effective control environment with the sufficient complement of personnel with the appropriate level of
accounting knowledge, experience, and training in U.S. GAAP to assess the completeness and accuracy of certain accounting and
reporting matters.
Period-end financial reporting process. Given the significant expansion of the business and all of our operations we did not design or
maintain effective controls over the period-end financial reporting process, including controls with respect to the preparation, review,
supervision, and monitoring of accounting operations and financial reporting. More specifically, due to the expansion of our business,
we did not yet prepare timely accounting reconciliations nor did we have adequate financial reporting personnel to prepare timely and
accurate financial statements, including related disclosures.
·
The material weaknesses described above could result in misstatements that would result in a material misstatement of the consolidated
financial statements in a future annual or interim period that would not be prevented or detected.
Remediation Plans
We have initiated several steps and plan to continue to evaluate and implement measures designed to improve our internal control over
financial reporting in order to remediate the material weaknesses, noted specifically above.
While our evaluation of the appropriate remediation plans is still ongoing, efforts to date have included recruiting experienced accounting
personnel, relating to our acquisitions during the year. As an interim measure, the Company utilizes third party consultants to assist in the
preparation of financial reporting and other financial aspects of the business, as well as continuing to integrate the Company’s subsidiaries
accounting personnel and processes.
Changes in Internal Control over Financial Reporting — As a result of the acquisitions of ARB. in September 2013, WEW in November
2013 and JF in December 2013, the Company is evaluating and implementing changes to processes, policies and other components of its
internal control over financial reporting with respect to the consolidation of ARB, WEW and JF’s operations into the Company’s financial
statements. Management continues to be engaged in substantial efforts to evaluate the effectiveness of our internal control procedures and the
design of those control procedures relating to ARB, WEW and JF. Except for the activities described above, there were no changes in the
Company’s internal control over financial reporting that occurred during the year ended December 31, 2013, that materially affected, or is
reasonably likely to materially affect, the Company’s internal control over financial reporting
ITEM 9B:
OTHER INFORMATION
Not applicable.
71
ITEM 10:
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The following section sets forth the names, ages and current positions with the Company held by the Directors, Executive Officers and
Significant Employees as of December 31, 2013; together with the year such positions were assumed. There is no immediate family
relationship between or among any of the Directors, Executive Officers or Significant Employees, and the Company is not aware of any
arrangement or understanding between any Director or Executive Officer and any other person pursuant to which he was elected to his current
position.
Each Director and Executive Officer will serve until he or she resigns or is removed or otherwise disqualified to serve or until his or her
successor is elected. The Company currently has five Directors.
NAME
Michael D. Pruitt
Eric S. Lederer
Alex Hemingway
Gordon Jestin
Darren Smith
Michael Carroll
Rusty Page
Paul I. Moskowitz
Keith Johnson
Michael D. Pruitt
AGE
POSITION
52
47
37
46
32
64
71
56
55
President, CEO and Director since June 2005
CFO since June 2012
President of CRK since 2011
COO of KPL since 2011
CFO of KPL since 2012
Independent Director since June 2005
Non-Independent Director since January 2013
Independent Director since April 2007
Independent Director since November 2009
Michael Pruitt founded Avenel Financial Group, a boutique financial services firm concentrating on emerging technology company
investments, in 1999. In 2001, he formed Avenel Ventures, a technology investment and private venture capital firm. In the late 1980s, Mr.
Pruitt owned Southern Cartridge, Inc., which he eventually sold to MicroMagnetic, Inc., where he continued working as Executive Vice
President and a Board member until Southern Cartridge was sold to Carolina Ribbon in 1992. From 1992 to 1996, Mr. Pruitt worked at Ty
Pruitt Trucking, which was sold in 1996 to Priority Freight Systems. Between 1997 and 2000, Mr. Pruitt assisted several public and private
companies in raising capital, recruiting management and preparing companies to go public or be sold, as a consultant. He was the CEO from
2002-2005, President and Chairman of the Board of Onetravel Holdings, Inc. (formerly RCG Companies), a publicly traded holding company
formerly listed on the AMEX. Mr. Pruitt received a Bachelor of Arts degree from Coastal Carolina University in Conway, South Carolina,
where he sits on the Board of Visitors of the Wall School of Business.
Eric S. Lederer
Eric Lederer joined Chanticleer Holdings in February 2011 and was appointed CFO in June 2012. Prior to joining us, he served as Controller
of PokerTek, Inc. (NASDAQ, PTEK), a licensed gaming company that develops and distributes electronic table games, since December 2005.
Prior to PokerTek, Mr. Lederer was the Controller of OneTravel Holdings, Inc. (AMEX, OTV), a holding company primarily involved in the
travel industry. Prior to OneTravel, Mr. Lederer worked as the Controller in privately-held companies in the entertainment industry and at a
New York City CPA firm. Mr. Lederer received his B.S. in Accounting from Lehigh University. Mr. Lederer is a member of our Disclosure
Committee.
72
Alex Hemingway
Alex Hemingway brings domestic and international executive management experience to the team and a proven track record of success in the
Central European QSR industry. Between 1999–2005, Alex was President and Chief Executive of Central European Franchise Group
(“CEFG”), the owner and operator of the Pizza Hut and Kentucky Fried Chicken brands in Hungary as well as three local national brands.
Both brands boasted the highest customer feedback scores in the region for YUM! Restaurants International. While managing CEFG, Mr.
Hemingway was approached by Orient Rt., Central Europe’s largest restaurant company with 130+ operating units based in Budapest, to be
its Chief Executive Officer. Between the two companies Alex has had over 180 units and 5000 people under his employ. Alex founded and
served as the Director of the Fast Food Association of Hungary. He currently serves on the Board of Supervisors of the Budapest Honved
Football Club and local charitable foundations.
Gordon Jestin
Gordon (“Gordie”) Jestin trained in the restaurant industry as far back as 1993, completing openings, front-of-house trainings, and overall
business practices. Mr. Jestin acquired a share in his first restaurant in 1995, having completed two years of work experience and management
promotion. He then went on to own one of South Africa’s most popular sports bars / restaurants, CottonfieldsUmhlanga, and was the
operating partner there until 2009 when the restaurant was transformed into the first Hooters restaurant in South Africa. Over the years, Mr.
Jestin has acquired three other restaurants, one of which he still has a share in today as a silent partner. In 2009, Mr. Jestin joined the Hooters
SA management company and was promoted to COO in October, 2011.
Darren Smith
Darren Smith has more than 7 years of financial accounting experience. He has worked for UBAC Management & Business Advisory from
February until October 2012 as a Senior Associate; VEXX Media as their Financial Director for 3 years prior; and Grant Thornton Durban
from March 2005 until February 2009 as a Senior Auditor and Audit Supervisor. Mr. Smith has expertise in leading the preparation of audited
financial statements, drafting financial statements, designing systems of internal controls, and driving efficiency and productivity through
supervision and monitoring of the financial team.
Michael Carroll
Michael Carroll currently owns and operates a sales and training consulting firm based in Richmond, Virginia. Mr. Carroll has also served as
a director for OneTravel Holdings, Inc., formerly RCG Companies Incorporated, from January of 2004 until February 2005. He previously
spent 22 years in the distribution business, 19 of which were in computer products distribution. In 1978, Mr. Carroll founded
MicroMagnetic, Inc., a computer supply distribution company that he sold to Corporate Express in 1997. From 1997 to 1999, he was a
division president at Corporate Express, a publicly traded business-to-business office products and service provider. He holds a Bachelor’s
Degree in Business Management from The College of William & Mary in Williamsburg, Virginia, and a Master’s Degree in Business
Administration from Virginia Commonwealth University. Mr. Carroll is a member of our Audit and Compensation committees. Mr. Carroll
was asked to serve as a Director based in part on his significant experience in the distribution business, as well as his general proven success
in business.
Russell (“Rusty”) Page
Rusty Page is a thirty-five year investor relations executive and is currently the founder and principal of Rusty Page & Company, a unique
equity marketing and investor relations consulting firm. He also currently sits on the Board of Directors of The Diamond Hill Financial
Trends Fund. Mr. Page previously served as Senior Managing Director of The NASDAQ Stock Market, as well as Senior Vice President and
Equity Marketing Executive for NationsBank Corporation, the predecessor of Bank of America. Mr. Page is a member of our Audit
Committee. Mr. Page was asked to serve as a Director based in part on his significant investor relations knowledge, Board membership
experience, and familiarity with The NASDAQ Stock Market.
Paul I. Moskowitz
Paul Moskowitz is a Phi Beta Kappa of Vassar College and Cardozo Law School. Mr. Moskowitz was a co-founder and partner of a Jacobs
and Moskowitz, a New York law firm specializing in corporate and real estate law. He became affiliated with The World Travel Specialist
Group/The Lawyers’ Travel Service (“WTSG/LTS”) in 1988 and served as corporate counsel, representing the travel agency network in legal,
real estate, and other business activities. In 1989, he joined WTSG full time as President and Chief Operating Officer until March 2003, with
his primary responsibilities including day-to-day operations which encompassed WTSG’s airline relationships and sales and marketing. Mr.
Moskowitz led the growth of WTSG to one of the top 20 U.S. travel management firms with more than 90 offices throughout the U.S. Mr.
Moskowitz is currently engaged as a consultant for another travel organization. Mr. Moskowitz is a member of our Compensation and
Disclosure Committees. Mr. Moskowitz was asked to serve as a Director based in part on his significant legal experience and general proven
success in business.
73
Keith Johnson
Keith Johnson currently serves as President of Efficiency Technologies, Inc., the wholly owned operating subsidiary of Efftec International,
Inc. Prior to that he has been the President and Chief Executive Officer of YRT² (Your Residential Technology Team) in Charlotte, North
Carolina, since 2004. Mr. Johnson served as Executive Vice President and Chief Financial Officer of The Telemetry Company in Dallas,
Texas (1997-2004), Senior Vice President - Finance and Administration of Brinks Home Security in Dallas, Texas (1995-1997), and Chief
Financial Officer of BAX Global in London, England (1992-1995). Mr. Johnson has a BS in accounting from Fairfield University in
Fairfield, Connecticut. Mr. Johnson is the chair of our Audit Committee, and a member of our Compensation Committee. Mr. Johnson was
asked to serve as Director based in part on his financial expertise and general proven success in business.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers, directors and persons who own more
than ten percent of our common stock to file initial reports of ownership and changes in ownership with the SEC. Additionally, SEC
regulations require that we identify any individuals for whom one of the referenced reports was not filed on a timely basis during the most
recent fiscal year or prior fiscal years. To the best of our knowledge, based solely on a review of copies of the reports filed with the SEC since
January 1, 2013 and on representations by certain officers and directors, all persons subject to the reporting requirements of Section 16(a) filed
the reports required to be filed on a timely basis, except that a Form 3 for Russell Page inadvertently was filed late.
CODE OF ETHICS
The Board of Directors of the Company adopted a Code of Ethics for all officers or persons performing similar functions, which was
effective May 23, 2005, which was filed as Exhibit 14 to the Company’s Annual Report on Form 10-K/A dated December 31, 2007. A copy
of this document is available on our website at www.chanticleerholdings.com under the “Investors - Corporate Governance” tabs.
AUDIT COMMITTEE
We have a separately designated standing audit committee, established in accordance with Section 3 (a)(58)(A) of the Exchange Act,
which is currently made up of Mr. Johnson, chair, Mr. Page, and Mr. Carroll. The Board of Directors designates which directors will serve as
the members of the audit committee. The Board of Directors has determined that Keith Johnson meets the requirements of an audit committee
financial expert and he serves as Chairman of the Audit Committee. All members are independent pursuant to applicable SEC rules and
regulations and NASDAQ listing standards. The Audit Committee met four times in 2013. The Audit Committee is governed by a written
charter approved by the Board of Directors, which is available on our website at www.chanticleerholdings.com under the “Investors -
Corporate Governance” tabs.
The primary responsibility of the Audit Committee is to oversee our financial reporting process on behalf of the Board of Directors and
report the result of their activities to the Board. Such responsibilities shall include, but shall not be limited to, the selection and, if necessary,
the replacement of our independent auditors and review and discussion with such independent auditors of (i) the overall scope and plans for
the audit, (ii) the adequacy and effectiveness of the accounting and financial controls, including our system to monitor and manage business
risks, and legal and ethical programs, and (iii) the results of the annual audit, including the financial statements to be included in our annual
report on Form 10-K.
Report of Audit Committee
The Audit Committee assists the Board of Directors with fulfilling its oversight responsibility regarding the quality and integrity of our
accounting, auditing and financial reporting practices. In performing its oversight responsibilities regarding the audit process, the Audit
Committee:
· Reviewed and discussed the audited financial statements with management;
· Discussed with the independent auditors the matters required to be discussed by Auditing Standard No. 16, Communications with
Audit Committees, as adopted by the Public Company Accounting Oversight Board; and
· Received the written disclosures and the letter from the independent accountant required by applicable requirements of the Public
Company Accounting Oversight Board regarding the independent accountant's communications with the audit committee
concerning independence, and has discussed with the independent accountant the independent accountant's independence.
74
Based on the review and discussions referred to in these three items, the Audit Committee recommended to the Board of Directors
that the audited consolidated financial statements be included in our Annual Report on Form 10-K for the fiscal year ended December 31,
2013, as filed with the Securities and Exchange Commission.
Members of the Audit Committee
Keith Johnson (chair)
Russell Page
Michael Carroll
COMPENSATION COMMITTEE
We have a separately designated standing compensation committee, established in accordance with SEC rules and regulations and
NASDAQ listing standards, which is currently made up of Mr. Johnson, Mr. Moskowitz, and Mr. Carroll. Mr. Carroll serves as the
chair.The Board of Directors designates which directors will serve as the members of the compensation committee. All members are
independent pursuant to applicable SEC rules and regulations and NASDAQ listing standards. Also, the Board of Directors has determined
that each such member meets the requirements of a “non-employee director” under Rule 16b-3 under the Exchange Act and meets the
requirements of an “outside director” for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended. The Compensation
Committee met two times in 2013. The Compensation Committee is governed by a written charter approved by the Board of Directors, which
is available on our website at www.chanticleerholdings.com under the “Investors - Corporate Governance” tabs.
The responsibilities of the Compensation Committee include overseeing the evaluation of executive officers (including the Chief
Executive Officer) of the Company, determining the compensation of executive officers of the Company, and overseeing the management of
risks associated therewith. The Compensation Committee determines and approves the Chief Executive Officer’s compensation. The
Compensation Committee also will administer our equity-based plans and make recommendations to the Board of Directors with respect to
actions that are subject to approval of the Board of Directors regarding such plans. The Compensation Committee also reviews and makes
recommendations to the Board of Directors with respect to the compensation of directors. The Compensation Committee monitors the risks
associated with the Company’s compensation policies and practices, as contemplated by Item 402(s) of Regulation S-K. In setting 2013
compensation, the Compensation Committee did not retain a compensation consultant.
NOMINATING COMMITTEE
We currently do not have a standing nominating committee. Board nominees are selected or recommended for the Board’s selection by
independent directors constituting a majority of the board’s independent directors in a vote in which only the independent directors participate.
75
ITEM 11: EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors deliberates executive compensation matters to the extent they are not delegated to
the Chief Executive Officer.
a.
Summary Compensation Table
The following table shows the compensation of the Company’s Chief Executive Officer and the next two most highly paid executive
officers (collectively the “Named Executive Officers”) for the years ended December 31, 2013 and 2012.
ANNUAL COMPENSATION
Name and Principal Position
Year
Salary
Bonus
Total
Michael D. Pruitt
(President and Chief Executive Officer)
Eric S. Lederer
(Chief Financial Officer )
Alex Hemingway
(President of CRK subsidiary)
b.
Compensation of directors
2013
2012
2013
2012
2013
2012
$
$
$
$
$
$
240,000 $
204,000 $
- $
10,000 $
240,000
214,000
84,000 $
74,000 $
- $
6,000 $
84,000
80,000
200,004 $
200,004 $
$
- $
200,004
200,004
The Company did not compensate its directors in 2012.
The following table reflects compensation earned for services performed in 2013 by members of our Board of Directors who were
not Company employees. A director who is a Company employee, such as Mr. Pruitt, does not receive any compensation for service as a
director. The compensation received by Mr. Pruitt as an employee of the Company is shown above in the Summary Compensation Table.
Director Compensation for Fiscal Year Ended December 31, 2013
Fees Earned or
Paid in Cash
($)
Total
($)
6,000
6,000
6,000
6,000
6,000
6,000
6,000
6,000
Name
Michael Carroll
Russell J. Page
Paul I. Moskowitz
Keith Johnson
We reimburse all directors for expenses incurred in their capacity as directors.
c.
Compensation Committee Interlocks and Insider Participation
Not applicable.
d.
Compensation Committee Report
Not applicable.
76
ITEM 12:
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To our knowledge, the following table sets forth information with respect to beneficial ownership of outstanding common stock as of
March 15, 2014 by:
·
·
·
·
each person known by the Company to beneficially own more than 5% of the outstanding shares of the common stock;
each of our named executive officers;
each of our directors; and
all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to
the securities as well as securities which the individual or group has the right to acquire within 60 days of the determination date. Unless
otherwise indicated, the address for those listed below is c/o Chanticleer Holdings, Inc., 11220 Elm Lane, Suite 203, Charlotte, NC 28277.
Except as indicated by footnote, and subject to applicable community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of common stock shown as beneficially owned by them. The number of shares of the common
stock outstanding used in calculating the percentage for each listed person includes the shares of common stock underlying options or other
convertible securities held by such persons that are exercisable within 60 days of March 15, 2014, but excludes shares of common stock
underlying options or other convertible securities held by any other person. The number of shares of common stock issued and outstanding as
of March 15, 2014, was 6,287,365. Except as noted otherwise, the amounts reflected below are based upon information provided to the
Company and filings with the SEC.
Name of Beneficial Owner
Shares Beneficially Owned
Percent
Larry Spitcaufsky (1)
Michael D. Pruitt (2)
Sandor Capital Master Fund LP and affiliates (3)
ICS Opportunities, Ltd. and affiliates (4)
Siskey Capital, LLC and affiliates (5)
Robert B. Prag (6)
Leonid Frenkel (8)
Michael Carroll (8)
Paul I. Moskowitz (8)
Russell (“Rusty”) Page (8)
Keith Johnson (8)
Darren Smith
Eric S. Lederer
Alex Hemingway
1,067,216
17.0%
590,041
522,096
444,444
416,482
417,026
402,300
16,500
9,300
3,000
3,000
376
375
0
9.4%
8.3%
7.1%
6.6%
6.6%
6.4%
*
*
*
*
*
*
*
Officers and Directors as a Group
635,925
10.1%
* less than 1%
77
(1) This amount is based solely on a Schedule 13G filed with the SEC on February 10, 2014 on behalf of Larry Spitcaufsky, Hooters of
Washington, LLC, and Hooters of Oregon Partners, LLC. Mr. Spitcaufsky is the manager of Washington, LLC, and Hooters of Oregon
Partners, LLC, and, as a result, Mr. Spitcaufsky has shared voting and dispositive power with respect to all of the securities reported with
Washington, LLC, and Hooters of Oregon Partners, LLC. This amount reflects beneficial ownership of warrants to purchase 386,944 shares
of common stock but does not reflect beneficial ownership of warrants to purchase 292,638 shares of common stock. All warrants are
currently exercisable, but a contractual provision prohibits Larry Spitcaufsky, Hooters of Washington, LLC, and Hooters of Oregon Partners,
LLC from exercising any warrants if such exercise would result in the reporting persons beneficially owning more than 19.9% of the
outstanding common stock measured as of January 31, 2014.
(2) Michael D. Pruitt directly holds 169,125 shares of common stock, HOTR Warrants exercisable for 1,500 shares of common stock,
Class A Warrants exercisable for 168,000 shares of common stock, and 168,000 Class B Warrants exercisable for shares of common stock.
Additionally, Avenel Financial Group, Inc., a corporation controlled by Mr. Pruitt, holds 35,410 shares of common stock, Class A Warrants
exercisable for 23,940 shares of common stock, and 23,940 Class B Warrants exercisable for shares of common stock.
(3) Sandor Capital Master Fund LP is the record holder of 199,347 shares of common stock, HOTR Warrants exercisable for 95,775
shares of common stock, 87,386 Class A Warrants exercisable for shares of common stock, and 87,386 Class B Warrants exercisable for
shares of common stock. Sandor Advisors, LLC is the General Partner of Sandor Capital. John S. Lemak is the Manager of Sandor Advisors
and is the record holder of 28,002 shares of common stock, 12,100 Class A Warrants, and 12,100 Class B Warrants. Sandor Capital, Sandor
Advisors, and Mr. Lemak have shared voting power and shared dispositive power with respect to all shares except that Mr. Lemak has sole
voting power and sole dispositive power with respect to the 52,202 shares held directly in his name. The address for these parties is 2828
Routh Street, Suite 500, Dallas, Texas, 75201. This information is based solely on a Schedule 13G/A filed with the SEC on March 6, 2013.
(4) ICS Opportunities, Ltd. maintains principal offices at 666 Fifth Avenue, New York, New York 10103 and shares voting power and
dispositive power with respect to all shares with Millennium International Management LP, Millennium International Management GP LLC,
Millennium Management LLC, and Israel A. Englander. The amounts set forth in the table include 222,222 shares of common stock and
HOTR Warrants exercisable for 222,222 shares of common stock. This information is based solely on a Schedule 13G/A filed with the SEC
on July 16, 2012.
(5) This amount is based in part on a Schedule 13G filed with the SEC on October 21, 2013 and is based in part on information provided
to the Company by the stockholder. Siskey Capital, LLC shares voting power and dispositive power with respect to 120,911 shares, Carolina
Preferred Investments III, LLC shares voting power and dispositive power with respect to 295,571 shares, and Todd Beddard shares voting
power and dispositive power with respect to all 416,482 shares. The address for these parties is 4521 Sharon Road, Suite 450, Charlotte,
North Carolina 28211.
(6) According to a Schedule 13G/A filed with the SEC on March 4, 2013, Robert B. Prag is the record holder of 115,550 shares of
common stock, HOTR Warrants exercisable for 91,985 shares of common stock, 76,000 Class A Warrants exercisable for shares of common
stock, and 76,000 Class B Warrants exercisable for shares of common stock. Additionally, according to the same Schedule 13G/A, Del Mar
Consulting Group, Inc. Retirement Plan Trust, a trust for which Mr. Prag serves as Trustee, is the record holder of 16,158 shares of common
stock, 14,000 Class A Warrants, and 14,000 Class B Warrants. The Schedule 13G/A notes that Mr. Prag and the trust have shared voting
power and shared dispositive power with respect to trust shares and Mr. Prag has sole voting power and sole dispositive power with respect
to the shares held directly in his name. The address for these parties is 2455 El Amigo Road, Del Mar, California 92014. In addition to the
amounts listed above from the March 4, 2013 Schedule 13G/A, Mr. Prag and the trust each acquired additional shares through a private
placement in October 2013. Mr. Prag directly acquired an additional 6,700 shares of common stock and the trust acquired an additional 6,633
shares of common stock. These 13,333 private placement shares are included in the total shares beneficially owned in the table. Warrants for
13,333 shares, which also were acquired in the October 2013 private placement, are not included in the total shares beneficially owned in the
table because these warrants are not exercisable until October 2014.
(7) This amount is based on information provided to the Company by the stockholder. This amount includes 137,150 shares of common
stock and 265,150 shares of common stock underlying exercisable warrants. This amount does not include warrants for 22,000 shares owned
by Mr. Frenkel because such warrants are not exercisable until October 2014. The shares are held by the Equity Trust Company as custodian
fbo Leonid Frenkel, and Leonid Frenkel has voting power and dispositive power with respect to all of the securities. The address for Leonid
Frenkel is 1600 Flat Rock Road; Penn Valley, Pennsylvania 19072.
(8) Includes Class A and Class B warrants as follows:
78
Michael Carroll
Rusty Page
Paul I. Moskowitz
Keith Johnson
Shares Owned
Class A Warrants
Class B Warrants
Total
5,500
1,000
3,100
1,000
5,500
1,000
3,100
1,000
5,500
1,000
3,100
1,000
16,500
3,000
9,300
3,000
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information with respect to securities authorized for issuance under all of the Company’s equity compensation
plans as of March 15, 2014.
Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Weighted Average Compensation
Exercise Price of Plans (Excluding
Outstanding
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants Options, Warrants
Securities
Reflected in
Column) (a))
—
—
(c)
4,000,000(1)
—
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
and Rights
(a)
and Rights
(b)
—
—
(1)
Includes 4,000,000 shares available for issuance under the Chanticleer Holdings, Inc. 2014 Stock Incentive Plan, which was approved
by our stockholders on January 31, 2014.
79
ITEM 13:
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Director Independence
We undertook a review of the independence of our directors and, using the definitions and independence standards for directors provided
in the rules of The Nasdaq Stock Market, considered whether any director has a material relationship with us that could interfere with his
ability to exercise independent judgment in carrying out his responsibilities. As a result of this review, we determined that Michael Carroll,
Rusty Page, Paul Moskowitz and Keith Johnson are "independent directors" as defined under the rules of The Nasdaq Stock Market.
ITEM 14:
PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
For the fiscal years ended December 31, 2013 and 2012, Marcum LLP. billed the Company for services rendered as the Company’s principal
accountant.
We paid the following fees to Marcum LLP for fiscal years 2013 and 2012:
Audit Fees (1)
Audit-Related Fees (2)
Tax Fees (3)
All Other Fees (4)
$
2013
2012
287,800 $
4,500
—
4,200
165,200
—
—
—
$
296,500 $
165,200
(1) Audit Fees. This category includes fees for professional services provided in conjunction with the audit of our financial statements and
with the audit of management’s assessment of internal control over financial reporting and the effectiveness of internal control over
financial reporting, review of our quarterly financial statements, assistance and review of documents filed with the SEC, consents and
attestation services provided in connection with statutory and other regulatory filings and engagements.
(2) Audit Related Fees. This category pertains to fees for assurance and related professional services associated with due diligence related
to acquisitions.
(3) Tax Fees. There were no fees for tax services
(4) Other fees. This category includes other fees for services not included above.
The Audit Committee reviews, and in its sole discretion pre-approves, our independent registered public accounting firm’s annual
engagement letter, including proposed fees and all audit and non-audit services provide by the independent registered public accounting firm.
All services described above were pre-approved by our Audit Committee. The Board may not engage the independent registered public
accounting firm to perform non-audit services proscribed by law or regulation.
80
ITEM 15:
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1)
Financial Statements.
PART IV
The following financial statements of Chanticleer Holdings, Inc. are contained in Item 8 of this Form 10-K:
· Report of Independent Registered Public Accounting Firm
· Consolidated Balance Sheets at December 31, 2013 and 2012
· Consolidated Statements of Operations – For the years ended December 31, 2013 and 2012
· Consolidated Statements of Stockholders’ Equity at December 31, 2013 and 2012
· Consolidated Statements of Cash Flows – For the years ended December 31, 2013 and 2012
· Notes to the Consolidated Financial Statements
(a)(2)
Financial Statements Schedules.
Financial Statement Schedules were omitted, as they are not required or are not applicable, or the required information is included in
the Financial Statements.
(a)(3) Exhibits Filed.
The exhibits listed in the accompanying Exhibit Index are filed as a part of this report.
(b)
Exhibits.
See Exhibit Index.
(c)
Separate Financial Statements and Schedules.
None.
81
Pursuant to the requirements of Section 13 or 15(d) 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 on March 31, 2014.
SIGNATURES
CHANTICLEER HOLDINGS, INC.
By:
/s/ Michael D. Pruitt
Michael D. Pruitt, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
Date
March 31, 2014
March 31, 2014
March 31, 2014
March 31, 2014
March 31, 2014
March 31, 2014
Title (Capacity)
Chairman, Chief Executive Officer,
and Principal Executive Officer
Chief Financial Officer and Principal
Accounting Officer
Director
Director
Director
Director
82
Signature
/s/ Michael D. Pruitt
Michael D. Pruitt
/s/ Eric S. Lederer
Eric S. Lederer
/s/ Michael Carroll
Michael Carroll
/s/ Russell J. Page
Russell J. Page
/s/ Paul I. Moskowitz
Paul I. Moskowitz
/s/ Keith Johnson
Keith Johnson
Exhibit
2.1
Description
Agreement and Plan of Merger dated September 2013 between the Company and American Roadside Burgers, Inc. (9)
EXHIBIT INDEX
2.2
2.3
2.4
2.5
3.1(a)
3.1(b)
3.1(c)
3.1(d)
3.1(e)
3.1(f)
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
10.1
10.2
Share Purchase Agreement dated October 2013 between Company and Manchester Wings Limited (11)
Tax Covenant to October 2013 Share Purchase Agreement with Manchester Wings Limited (11)
Subscription Agreement dated November 2013 among the Company, JF Restaurants, LLC and the other parties named
therein (12)
Assignment, Assumption, Joinder and Amendment Agreement dated December 2013 among the Company, JF Franchising
Systems, LLC and the other parties named therein (15)
Certificate of Incorporation (2)
Certificate of Merger, filed May 2, 2005 (3)
Certificate of Amendment, filed July 16, 2008 (1)
Certificate of Amendment, filed March 18, 2011 (4)
Certificate of Amendment, filed May 23, 2012 (6)
Certificate of Amendment, filed February 3, 2014 (18)
Bylaws (2)
Form of Common Stock Certificate (5)
Form of Unit Certificate dated June 2012 (7)
Form of Warrant Agency Agreement dated June 2012 with Form of Warrant Certificate with $6.50 Exercise Price (7)
Form of 6% Secured Subordinate Convertible Note dated August 2013 (8)
Form of Warrant for August 2013 Convertible Note with $3.00 Exercise Price (8)
Form of Warrant for September 2013 Merger Agreement with $5.00 Exercise Price (9)
Form of Warrant for September 2013 Subscription Agreement with $5.00 Exercise Price (10)
Form of Warrant for November 2013 Subscription Agreement with $5.50 and $7.00 Exercise Price (13)
Revolving Credit Facility dated August 10, 2011 between the Company and Paragon Commercial Bank (5)
Credit Agreement dated April 11, 2013 between the Company and Paragon Commercial Bank
83
Exhibit
10.3
Description
Form of Franchise Agreement between the Company and Hooters of America, LLC (5)
10.4
10.5
10.6
10.7
10.8
10.9
Form of Subscription Agreement dated September 2013 (10)
Form of Subscription Agreement dated November 2013 (13)
Subscription Agreement dated December 2013 between the Company and Beacher’s LV, LLC (14)
Right to Purchase Agreement dated December 2013 between the Company and Madhouse Worldwide Investments, LLC
(14)
Brazil Franchise Agreement dated November 27, 2013 between the Company, Wings Brasil Restaurante Ltda., Chanticleer &
Wings Brasil Foods Participacoes Ltda., and Hooters of America, LLC
Agreement and Plan of Merger dated December 31, 2013 between the Company, Hooters of Washington, LLC, and Hooters
of Oregon Partners, LLC (16)
10.10
Agreement and Plan of Merger dated January 14, 2014 between the Company, Express Restaurant Holdings, L.L.C., and
Dallas Spoon, L.L.C. (17)
10.11*
Chanticleer Holdings, Inc. 2014 Stock Incentive Plan effective February 3, 2014 (18)
21
23.1
31.1
31.2
32.1
32.2
101
Subsidiaries of the Company
Consent of Marcum LLP, Independent Registered Public Accounting Firm
Certification of Periodic Report by Michael D. Pruitt, as Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of
the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Periodic Report by Eric S. Lederer, as Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of
the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Periodic Report by Michael D. Pruitt, as Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Periodic Report by Eric S. Lederer, as Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The following financial information from our Annual Report on Form 10-K for the year ended December 31, 2013,
formatted in XBRL (eXtensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets at December
31, 2013 and December 31, 2012, (ii) the Consolidated Statements of Operations for the years ended December 31, 2013
and December 31, 2012, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the years ended December
31, 2013 and December 31, 2012, (iv) the Consolidated Statements of Cash Flows for the years ended December 31, 2013
and December 31, 2012, and (v) the Notes to the Financial Statements
84
Exhibit
(1)
Description
Incorporated by reference to the exhibit filed with our Registration Statement on Form S-1/A (Registration No. 333-178307),
filed with the SEC on February 3, 2012.
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
Incorporated by reference to the exhibit filed with our Registration Statement on Form 10SB-12G, filed with the SEC on
February 15, 2000 (File No. 000-29507).
Incorporated by reference to the exhibit filed with our Quarterly Report on Form 10-Q, filed with the SEC on August 15,
2011.
Incorporated by reference to the exhibit filed with our Current Report on Form 8-K, filed with the SEC on March 18, 2011.
Incorporated by reference to the exhibit filed with our Registration Statement on Form S-1 (Registration No. 333-178307),
filed with the SEC on December 2, 2011.
Incorporated by reference to the exhibit filed with our Current Report on Form 8-K, filed with the SEC on May 24, 2012.
Incorporated by reference to the exhibit filed with our Registration Statement on Form S-1/A (Registration No. 333-178307),
filed with the SEC on May 30, 2012.
Incorporated by reference to the exhibit filed with our Current Report on Form 8-K, filed with the SEC on August 5, 2013.
Incorporated by reference to the exhibit filed with our Current Report on Form 8-K, filed with the SEC on October 1, 2013.
Incorporated by reference to the exhibit filed with our Current Report on Form 8-K, filed with the SEC on October 10, 2013.
Incorporated by reference to the exhibit filed with our Current Report on Form 8-K, filed with the SEC on October 24, 2013.
Incorporated by reference to the exhibit filed with our Current Report on Form 8-K, filed with the SEC on November 5,
2013.
Incorporated by reference to the exhibit filed with our Current Report on Form 8-K, filed with the SEC on November 13,
2013.
Incorporated by reference to the exhibit filed with our Current Report on Form 8-K, filed with the SEC on December 2,
2013.
Incorporated by reference to the exhibit filed with our Current Report on Form 8-K, filed with the SEC on December 12,
2013.
Incorporated by reference to the exhibit filed with our Current Report on Form 8-K, filed with the SEC on January 2, 2014.
Incorporated by reference to the exhibit filed with our Current Report on Form 8-K, filed with the SEC on January 15, 2014.
Incorporated by reference to the exhibit filed with our Current Report on Form 8-K, filed with the SEC on February 4, 2014.
* Denotes an executive compensation plan or agreement
Our SEC file number reference for documents filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended, is 001-35570.
Prior to June 7, 2012, our SEC file number reference was 000-29507.
85
PARAGON COMMERCIAL BANK
3535 Glenwood Avenue, Raleigh, North Carolina 27612
Loan # 9930000823
COMMERCIAL NOTE
Loan Officer
CWB/s/ Charles W. Bartz
Charles W. Bartz, Senior Vice
President
Date: April 11, 2013
Borrower: Chanticleer Holdings, Inc.
Loan Amount: $500,000.00
x Revolving Line of Credit
FOR VALUE RECEIVED, the undersigned, jointly and severally, promise(s) to pay to PARAGON COMMERCIAL BANK (“Bank”), or
order, the sum of Five Hundred Thousand and 00/100 Dollars ($500,000.00) or so much as shall have been disbursed from time to time
and remains unpaid, including or together with interest at the rate and payable in the manner hereinafter stated. Principal and interest shall be
payable at Bank at the address indicated above, or such other place as the holder of this Note may designate.
INTEREST RATE
All payments made on this Note will be applied first to accrued interest and then to principal. Interest will accrue on the unpaid principal
balance at the rate set forth below until maturity and will accrue on any unpaid past due interest before maturity and on any unpaid balance
after maturity as set forth on the reverse side of this Note.
Interest payable on this Note will be at the per annum rate of:
x Wall Street Journal Prime Rate + 1.00%, with a floor rate of 5.00%
As used in this Note “Wall Street Journal Prime” shall mean the prime rate most recently published in the “Money Rates” section specified in
the Eastern Edition of the Wall Street Journal; provided that if more than one such “Prime Rate” is published, the higher of such rate shall be
applicable.
Interest will be calculated on the basis of: x Actual days/360 day year
All rates except the “Fixed” rate will be subject to change without prior notice at the sole option of Bank and will be effective:
x As of the date the base rate (Wall Street Journal Prime Rate) changes
Effect of Variable Rate: A change in the interest rate will have the following effect on the payments:
x The amount of each scheduled payment and the final payment will change.
PRINCIPAL PAYMENT TERMS
Principal (and interest if indicated under Interest Payment Terms below) shall be payable as follows:
x
Payable in one single payment on April 10, 2014 (herein referred to as “Maturity”).
INTEREST PAYMENT TERMS
Interest shall be payable in arrears, as follows:
x
Payable monthly beginning May 10, 2013 and consecutively on the same calendar day of each such calendar period
thereafter.
LATE CHARGE
If any scheduled payment is in default 15 days or more (unless interest on this Note is payable in advance, in which case such period shall be
30 days or more), Obligors agree to pay a late charge equal to 6.00% of the amount of the payment that is in default, but not more than
maximum amount allowed by applicable law.
PREPAYMENT
x This Note may be prepaid in whole or in part any time without premium.
For partial prepayments, the Bank may, in its sole discretion, apply the prepayment to principal and recalculate the installment payment amount
so that equal payments of principal and interest will cause this Promissory Note to be paid in full with the same Maturity date (set forth
above). If the Bank decides not to recalculate the installment payment amount, then such prepayment will be applied to the most remote
installment then unpaid and shall not otherwise reduce the installment payments coming due prior thereto.
COLLATERAL
x SECURED. This Note is secured by collateral described in the following security instruments:
Cross Collateralized and Cross Defaulted with Paragon Commercial Loan #9930000455 to Borrower secured by:
x
Security agreement(s) dated July 15, 2009 evidenced by UCC-1 filing with North Carolina Secretary of State for a
blanket first priority lien on all furnishings, equipment, inventory and other items and types of personal property
now owned or hereafter acquired, all the Borrower's general intangibles, instruments and or investment documents
and accounts receivable, whether presently existing or arising in the future, and all the proceeds and products from
the foregoing (including insurance proceeds). In addition to the foregoing, the collateral shall also include the
Borrower's 11.5% interest in Chanticleer Investors, LLC sole asset: a Convertible Secured Promissory Note dated
May 24, 2006 between Robert H. Brooks and any and all amendments thereto ("Security Agreement").
1)
2)
A t maturity of this Note, or upon default, Bank is authorized and empowered to apply to the payment hereof, any and all money
deposited in Bank in the name of or to the credit of each party, without advance notice, and is authorized to offset any obligation of
Bank to any party to the payment hereof.
Collateral securing other loans of each party with Bank may also secure this loan and this loan may also be supported by separate
Guaranty Agreement(s).
1
SIGNATURES
The undersigned parties are jointly and severally liable for the payment of this Note and have subscribed their names hereto. The provisions
printed below are a part of this Note. The provisions of this Note are binding on the heirs, executors, administrators, successors and assigns of
each and every party and shall inure to the benefit of the holder, its successors and assigns. This Note is executed under the seal of each of the
parties and of the endorsers, if any.
CHANTICLEER HOLDINGS, INC.
By: /s/ Michael D. Pruitt
Michael D. Pruitt, President/CEO/CFO
(SEAL)
Additional Terms and Provisions of Note
DEFAULT. Any of the following shall constitute an event of default: (1) the failure to make when due any payment described herein,
whether of principal, interest, or otherwise; (2) the failure of any party hereto to perform any of the terms and conditions written into, the Loan
Agreement or security instrument(s) securing this Note or any guaranty agreement or security instrument(s) securing such guaranty agreement
which apply to this Note; (3) the death, dissolution, merger, consolidation or termination of existence of any party; or if any party is a
corporation with thirty-five (35) or fewer shareholders, the aggregate transfer(s) of voting shares in such party whereby persons or entities not
owning on the date hereof, singly or in the aggregate, 50% or more of the voting shares of such party, become the owner(s), singly or in the
aggregate, of 50% or more of such voting shares, or if such party is a limited or general partnership, any change in general partnership
interest(s) in such party; (4) the application for the appointment of a receiver for any party or the filing of a petition under any provisions of the
Bankruptcy Code or Act by or against any party or any assignment for the benefit of creditors by or against any party; (5) the failure of any
party to furnish from time to time, at Bank's request, financial information requested with respect to such party without undue delay; (6) a
determination by Bank that it deems itself insecure or that an adverse change in the financial condition of any party has occurred since the date
hereof; (7) the failure of any party to perform any other obligation to Bank; (8) the termination of any guaranty agreement which applies to this
Note; (9) default by Borrower or any guarantor under the terms of any agreement or instrument pursuant to which Borrower or any guarantor
has borrowed money from any person; (10) default by Borrower under terms of any instrument or other agreement to which this Agreement
or any of the other loan documents are subordinate or which is subordinate to this Agreement or any of the other loan documents.(11) default
by Borrower or any guarantor in keeping, performing or observing any term, covenant, agreement or condition of any Commitment upon
which all or any portion of any indebtedness evidenced by the NOTE was predicated.
LATE CHARGES, EXPENSES AND ACCELERATION. Each party agrees to pay any late charges permitted by applicable law that
Bank may, in its discretion, charge for late payments. If this Note is not paid in full whenever it becomes due and payable, each party agrees to
pay all costs and expenses of collection, including a reasonable attorney's fee up to the amount of fifteen (15) percent of the then outstanding
balance. Upon the occurrence of an event of default, the entire unpaid balance of this Note shall, at the option of Bank, become immediately
due and payable, without notice or demand. Failure to exercise the option to accelerate shall not constitute a waiver of the right to exercise
same in the event of any subsequent default.
INTEREST. Upon the nonpayment of any payment of interest described herein, the Bank, at its option and without accelerating this Note,
may accrue interest on such unpaid interest at the rate(s) applicable hereunder from lime to time until maturity of this Note. After maturity of
this Note, whether by acceleration or otherwise, interest will accrue on the unpaid principal of this Note and any accrued but unpaid interest
shall bear interest at the lesser of (i) the highest contract rate, if any, permitted by applicable law (ii) a rate equal to 18% per annum. Such
interest rate shall apply both before and after any judgment hereon.
WAIVER. Each party waives presentment, demand, protest and notice of dishonor, waives any rights which they may have to require Bank
to proceed against any other person or property, agrees that without notice to any party and without affecting any party's liability, Bank, at any
time or times, may grant extensions of the time for payment or other indulgences to any party or permit the renewal, amendment or
modification of this Note, the Loan Agreement or any security instrument(s), or permit the substitution, exchange or release of any security for
this Note and may add or release any party primarily or secondarily liable, and agrees that Bank may apply all moneys made available to it
from any part of the proceeds from the disposition of any security for this Note either to this Note or to any other obligation of any of the
parties to Bank, as Bank may elect from time to time.
PARTIES. Each signatory of this Note is herein sometimes referred to as "Party" or collectively as "Parties" and each agrees to be liable
hereunder jointly and severally. This Note shall apply to and bind each party's heirs, personal representatives, successors and assigns. All
references in this Note to Bank shall include the holder hereof and this Note shall inure to the benefit of any holder, its successors and assigns.
PARTIES' DUE DILIGENCE. The undersigned acknowledge and represent that they have relied upon their own due diligence in making
their own independent evaluations of the purposes for which the proceeds of this Note will be used and of the business affairs and financial
condition of all parties hereto. and they will continue to be responsible for making their own appraisals of such matters. The undersigned have
not relied upon and will not hereafter rely upon Bank for such information for such appraisal or other assessment or review and, further, will
not rely upon any such information which may now or hereafter be prepared by Bank.
CREDIT INVESTIGATION. The Bank is authorized to investigate from time to time the credit of each party and to answer questions
relating to the Bank's credit experience with each party.
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PARAGON COMMERCIAL BANK
COMMERCIAL LOAN AGREEMENT
THIS COMMERCIAL LOAN AGREEMENT (the "AGREEMENT") is made this 11th day of April, 2013, between Chanticleer
Holdings, Inc. ("BORROWER") whose address is 11220 Elm Lane Suite 203 Charlotte, NC 28277 and Paragon Commercial Bank
("BANK").
RECITAL
BORROWER wishes to acknowledge total borrowings as of the date of this Commercial Loan Agreement from BANK in the principal sum
of up to Seven Hundred Thirty Four Thousand One Hundred Thirty and 43/100 DOLLARS ($734,130.43), and BANK is and or has
been willing to lend such sum to BORROWER on the terms and conditions herein contained and as may have been contained in any and all
previous commitment letters issued by BANK (the "COMMITMENT(s)"), which COMMITMENT(s) also may require or have required one
or more guarantors (each a "GUARANTOR") to agree to certain terms and conditions contained therein and in a separate guaranty
agreements.
NOW THEREFORE, BANK and BORROWER agree to the premises herein contained as follows:
ARTICLE I – LOAN
x
x
Subject to the terms and conditions set forth herein, BANK agrees or has previously agreed to make a loan to BORROWER in the
original principal sum of $250,000.00, with a current principal balance of $234,130.43 (#9930000455).
Subject to the terms and conditions set forth herein, BANK agrees or has previously agreed to provide an open end line of credit to
BORROWER; amounts repaid may be re-borrowed , provided that the aggregate principal amount outstanding at any one time does
not exceed $500,000.00.
The indebtedness to be provided pursuant to this AGREEMENT is hereinafter sometimes referred to as the "LOAN".
SECTION 1.1. NOTE. The LOAN shall be evidenced by BORROWER's Commercial Note dated the same date as this AGREEMENT
substantially in the form of Exhibit A attached hereto ("NOTE"), all terms of which are incorporated herein by this reference.
SECTION 1.2. LOAN DOCUMENTS. The loan documents shall include this AGREEMENT, the NOTE, deed of trust, guaranty
agreement, any collateral assignments, and any and all other documents which BORROWER, GUARANTOR or any other party or parties
have executed and delivered, or may hereafter execute and deliver to evidence, secure or guarantee the obligations, or any part thereof, as the
same may from time to time be extended, amended, restated, supplemented or otherwise modified. The loan documents constitute the entire
understanding and agreement between BORROWER and BANK with respect to the transactions arising in connection with the LOAN, and
supersede all prior written or oral understandings and agreements between BORROWER and BANK with respect to the matters addressed in
the loan documents. In particular, and without limitation, the terms of any commitment by BANK to make the LOAN are merged into the loan
documents. Except as incorporated in writing into the loan documents, there are no representations, understandings, stipulations, agreements
or promises, oral or written, with respect to the matters addressed in the loan documents. If there is any conflict between the terms, conditions
and provisions of this AGREEMENT and those of any other instrument or agreement, including any other loan document, the terms,
conditions and provisions of this AGREEMENT shall prevail.
SECTION 1.3. PREPAYMENT. BORROWER may prepay principal on the indebtedness arising under this AGREEMENT only in
accordance with the terms of the NOTE.
SECTION 1.4. PURPOSE. The proceeds of the LOAN shall be used as identified in each loan approval.
SECTION 1.5. SECURITY. As security for all indebtedness to BANK, BORROWER grants to BANK a security interest in
BORROWER's collateral as identified in each set of loan documents.
SECTION 1.6. SUCCESSORS AND ASSIGNS.
(a) Each and every one of the covenants, terms, provisions and conditions of this AGREEMENT and the LOAN documents shall
apply to, bind and inure to the benefit of BORROWER, its successors and those assigns of BORROWER consented to in writing by BANK,
and shall apply to, bind and inure to the benefit of BANK and the endorsees, transferees, successors and assigns of BANK, and all persons
claiming under or through any of them.
(b) BORROWER agrees not to transfer, assign, pledge or hypothecate any right or interest in any payment or advance due pursuant
to this AGREEMENT, or any of the other benefits of this AGREEMENT, without the prior written consent of BANK, which consent may be
withheld by BANK in its sole and absolute discretion. Any such transfer, assignment, pledge or hypothecation made or attempted by
BORROWER without the prior written consent of BANK shall be void and of no effect. No consent by BANK to an assignment shall be
deemed to be a waiver of the requirement of prior written consent by BANK with respect to each and every further assignment and as a
condition precedent to the effectiveness of such assignment.
(c) BANK may sell or offer to sell the LOAN or interests therein to one or more assignees or participants. BORROWER shall
execute, acknowledge and deliver any and all instruments reasonably requested by BANK in connection therewith, and to the extent, if any,
specified in any such assignment or participation, such assignee(s) or participant(s) shall have the same rights and benefits with respect to the
LOAN Documents as such person(s) would have if such person(s) were BANK hereunder. BANK may disseminate any information it now
has or hereafter obtains pertaining to the LOAN, including any security for the LOAN, any credit or other information on the BORROWER's
property (including environmental reports and assessments), BORROWER, any of Borrower's principals or any GUARANTOR, to any
actual or prospective assignee or participant, to BANK's affiliates, to any regulatory body having jurisdiction over BANK, to any actual or
prospective counterparty (or its advisors) to any swap or derivative transaction relating to BORROWER and the LOAN, or to any other party
as necessary or appropriate in BANK's reasonable judgment.
as necessary or appropriate in BANK's reasonable judgment.
SECTION 1.7. CREDIT LINE PAYOUT. At a time of BORROWER's choosing, but prior to the maturity date of the NOTE, the principal
balance of the NOTE for any line of credit must be fully repaid by BORROWER and must remain paid out for NA consecutive days.
ARTICLE II- REPRESENTATIONS AND WARRANTIES
BORROWER makes the following representations and warranties to BANK, which representations and warranties shall survive the execution
of this AGREEMENT and the closing and shall be affirmed upon each draw request and any advances of the LOAN.
SECTION 2.1. LEGAL STATUS. BORROWER is a business entity duly organized and existing under the laws of the State of North
Carolina, and is qualified to do business in all jurisdictions in which it conducts its business.
1
SECTION 2.2. NO VIOLATION. The making and performance by BORROWER of this AGREEMENT does not violate any provision of
law, and does not result in a breach of or constitute a default under any agreement, indenture or other instrument to which BORROWER is a
party or by which BORROWER may be bound.
SECTION 2.3. AUTHORIZATION. This AGREEMENT has been duly authorized, executed and delivered, and is a valid and binding
agreement of BORROWER; and the NOTE to be issued hereunder by BORROWER, upon its execution and delivery in accordance with the
provisions of this AGREEMENT, will be a valid and binding obligation of BORROWER in accordance with its terms.
SECTION 2.4. LITIGATION. There are no pending or threatened actions or proceedings before any court or administrative agency which
may adversely affect the financial condition, results of operations, business or properties of BORROWER other than those heretofore
disclosed by BORROWER to BANK in writing.
SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENTS. The financial statements dated December 31, 2012, heretofore
delivered by BORROWER to BANK present fairly the financial condition of BORROWER, and prepared in accordance with sound
accounting principles applicable to entities such as the BORROWER, consistently applies as approved by LENDER. As of the date of such
financial statements, and since such date, there has been no material adverse change in the condition or operations of BORROWER, nor has
BORROWER mortgaged, pledged or granted a security interest in or encumbered any of BORROWER's assets or properties since such date.
SECTION 2.6. TAXES. BORROWER has filed or caused to be filed all tax returns, reports, estimates and declarations which are required to
be filed, and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and
all other taxes, fees or other charges imposed on BORROWER or any of its property by any governmental authority (other than those the
amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in
conformity with and prepared in accordance with sound accounting principles applicable to entities such as the BORROWER, consistently
applies as approved by LENDER have been established; and no liens have been filed and no claims are being asserted with respect to any such
taxes, fees or other charges and no event exists, or will exist at closing which with the giving notice or the lapse of time, or both, would give
rise to a lien. Federal tax returns of BORROWER have been audited through BORROWER's tax year ended 2012, and BORROWER has no
knowledge of any pending assessments or adjustments of its income tax payable with respect to any year subsequent to that date.
SECTION 2.7. NO SUBORDINATION. The obligations of BORROWER under this AGREEMENT or the NOTE are not subordinated in
right of payment to any other obligation of BORROWER to any other lender or other person, including without limitation any member,
manager, shareholder, principal, partner, director, officer, employee or agent of BORROWER.
SECTION 2.8. PERMITS, FRANCHISES. The BORROWER possesses, and will hereafter possess, all permits, memberships,
franchises, contracts, and licenses required and all trademark rights , trade names, trade name rights, patents, patent rights, and fictitious name
rights necessary to enable it to conduct the business in which it is now engaged without conflict with the rights of others.
SECTION 2.9 NO DEFAULT— CONTRACTUAL OBLIGATIONS. BORROWER is not in default under or with respect to any
contractual obligation (including any indebtness) in any respect which could be materially adverse to its businesses, operations, properties,
financial or other conditions, or which could materially adversely affect its ability to perform its obligations under the loan documents, and no
event exists, or will exist at closing which, with the giving of notice or the lapse of time, or both, would give rise to such a default. To the best
of its knowledge, all of the material contractual obligations of BORROWER are valid, binding, and enforceable obligations of all of the parties
thereto, in accordance with their respective terms, and, to the best of its knowledge, there are no material disputes between BORROWER and
the other parties to such material contractual obligations with respect to such contractual obligations and BORROWER, after taking the LOAN
into account, will be able to continue performing its obligations under such contractual obligations.
SECTION 2.10 NO DEFAULT — LOAN DOCUMENTS. No default conditions or EVENT OF DEFAULT shall exist at closing and, to
the best of BORROWER's knowledge, after due and diligent inquiry, no event exists, or will exist at closing which with the giving of notice
or the lapse of time, or both, would give rise to a default condition.
SECTION 2.11 OWNERSHIP OF PROPERTY; LIENS; ETC. BORROWER has good and marketable title in fee simple in and to all of
the collateral (including without limitation, the Borrowing Base, as defined in SECTION 3.4(t), if applicable) free and clear of any and all
liens, security interests, claims, demands, off-sets, contingencies or other outstanding interests, whether legal or equitable, except for liens and
interests, if any, approved by BANK.
SECTION 2.12 DISCLOSURE. Neither this AGREEMENT, the other loan documents, nor any representation , certificate, statement or
other documents furnished to BANK prior to or contemporaneous with the execution and delivery of this AGREEMENT by BORROWER
contains any untrue statement of any material fact or omits disclosure of any material fact necessary to make the statement contained herein
misleading. There is no material fact known to BORROWER which has not been disclosed to BANK in writing which affects in a materially
adverse manner the property, business, prospects, profits or condition (financial or otherwise) of BORROWER, or the ability of
BORROWER to fully perform this AGREEMENT and the other loan documents to which it is a party, and any all other transactions
contemplated herein.
SECTION 2.13 COLLATERAL AND COMPLIANCE. All of the collateral and all other property that is necessary for the full use and
enjoyment of the collateral is in material compliance with all governmental and regulatory orders, directives, rules and regulations, including
zoning, subdivision, and environmental rules and regulations, and will be operated in such manner to remain in material compliance with such
laws until the LOAN is paid and satisfied in full.
SECTION 2.14 NO MATERIALLY ADVERSE CONTRACTS ETC. BORROWER is not subject to any charter or corporate
restriction or legal restrictions, or any judgment, decree, order, rule, regulations or any other requirement of law which has or is expected in the
future to have a material adverse effect on the business, assets, or financial condition or prospects of BORROWER. BORROWER is not a
party to any contract or agreement which has or is expected to have any material adverse effect on the business, assets, financial conditions or
prospects of any of them.
SECTION 2.15 NAME. BORROWER operates its business and owns its assets only under its name used herein.
SECTION 2.16 ENVIRONMENTAL COMPLIANCE. BORROWER has not conducted any activity on any real property owned or
leased by it, or otherwise in its possession or control, involving the generation, treatment, storage or disposal of hazardous waste, other than
activities in the normal course of its business (and as to such activities in the normal course of business, it is in compliance in all material
respects with all requirements of law), nor has any previous owner conducted any such activities. BORROWER's records do not now, nor to
its best knowledge, have they ever revealed any discharge, spill, or disposal of any hazardous substances, hazardous waste or oil at, on or
under any of the aforementioned real property. There has not been any notice or violation, administrative penalty, civil or criminal action,
under any of the aforementioned real property. There has not been any notice or violation, administrative penalty, civil or criminal action,
claim, lien or any administrative or legal action or notice of same by any person whatsoever (including any governmental authority) against
BORROWER of any of the aforementioned real property relating to any hazardous substances, hazardous waste, oil, or any other
environmental matters. The soil, surface water and ground water on, under or about said real property are free from hazardous substances,
hazardous waste and oil.
ARTICLE III —CONDITIONS PRECEDENT
The obligation of BANK to make any advance hereunder is subject to the fulfillment of the following conditions:
SECTION 3.1. APPROVAL OF BANK COUNSEL. All legal matters incidental to each advance hereunder shall be satisfactory to BANK
counsel.
2
SECTION 3.2. REPRESENTATIONS AND WARRANTIES. The representations and warranties made by BORROWER which are
contained herein and/or in any certificate. document. or financial or other statement furnished at any time under or in connection herewith. shall
be correct and as of closing, as if made on and as of such date, and on and as of the date of each advance or disbursement of LOAN proceeds.
SECTION 3.3 NO DEFAULT OR EVENT OF DEFAULT. No default condition or EVENT OF DEFAULT shall have occurred and be
continuing as of closing or after giving effect to the LOAN to be made at closing, nor shall a default condition or EVENT OF DEFAULT
exist as of the date of any disbursement or advance of LOAN proceeds.
SECTION 3.4. DOCUMENTATION. BORROWER shall have delivered to BANK in form and substance satisfactory to BANK the
following described documents:
(a) Loan Documents. BANK shall have received fully executed and, if necessary, recorded or filed, originals of the loan documents required
by the COMMITMENT, this AGREEMENT and/or as may be otherwise required by BANK to evidence the LOAN and to create and perfect
the lien and security interest in the collateral required herein.
(b) Supporting Documentation. All of the conditions listed in this SECTION 3.3, in the COMMITMENT and elsewhere in this
AGREEMENT shall have been completed and/or satisfied, including, without limitation, perfection in favor of BANK of the lien and security
interest in all of the collateral as required herein.
(c) UCC-11 Search Results. BANK shall have received current UCC-11 search results from such local and state filing offices verifying any
judgments, liens or pending cases as BANK may request, each showing no liens or encumbrances against any of the collateral.
(d) Taxes. BORROWER shall have delivered to BANK evidence that the ad valorem taxes on any real property that is a part of the collateral
have been paid through the most recent calendar year and information as to tax parcel identification numbers, tax rates, estimated tax values
and the identities of the taxing authorities.
(e) Licensee and Permits. BORROWER shall have received copies of all material licenses and permits respecting BORROWER's business
that are necessary for the conduct thereof.
(f) Insurance. BORROWER shall have delivered to BANK evidence that BORROWER and such other persons as required by BANK have
obtained each of the insurance policies required under this AGREEMENT together with satisfactory evidence of premium payments.
(g) Current Financial Statements. BORROWER shall have delivered to BANK complete and current financial statements, all as required by
and in form satisfactory to BANK.
(h) Taxpayer Identification Number. BORROWER shall have supplied to BANK its federal taxpayer identification numbers and/or social
security numbers.
(i) Authority Documents. BANK shall have received from BORROWER and from such other persons as BANK may request, documents
evidencing their respective authority to enter into this LOAN and loan documents, as applicable, together with certificates of authority and/or
good standing and borrowing certifications as BANK and its counsel deem appropriate.
(j) Opinion of BORROWER's Counsel. BANK shall have received from BORROWER's counsel a written legal opinion regarding, as
applicable, the organization and operation of BORROWER, the enforceability of the loan documents and such other matters as BANK may
reasonably request, such opinion to be in form and substance satisfactory to BANK.
(k) Borrowing Base Report. NA
SECTION 3.5 ORIGINATION FEE AND OTHER FEES. BORROWER shall have paid to BANK the origination fee or commitment
fee as may be required in the COMMITMENT and all other fees and costs and expenses to be paid by BORROWER at or before closing, as
provided in the COMMITMENT.
SECTION 3.6 BANK ACCOUNTS. As a condition of the LOAN, BORROWER or a related entity agrees to establish and maintain their
primary depository account with BANK. BORROWER or such related entity agrees to maintain deposits with BANK based on this
relationship and during the term of the LOAN.
SECTION 3.7 ADDITIONAL MATTERS. All other documents and legal matters in connection with the transactions contemplated by this
AGREEMENT shall be received by BANK in form and substance satisfactory to BANK and its counsel and such counsel shall have received
all information and such counterpart originals, or certified or other such copies of such documents, as such counsel may reasonably request.
SECTION 3.8 GENERAL. Without imposing any obligation or undertaking by BANK or its counsel and without acknowledging
compliance with the representations and warranties or waiving strict compliance by BORROWER with all of the terms and conditions of the
AGREEMENT and the materiality of all of the representations and warranties of BORROWER, BANK or BANK's counsel shall retain the
right to be satisfied that all matters required to be performed in connection with this transaction have been performed in such a manner that the
LOAN funds can be advanced, the lien and security position of BANK perfected in the collateral and that no event exists which will
jeopardize the LOAN or the prospect of payment of the LOAN or the payment or performance of any of BORROWER's obligations in this
AGREEMENT or any other loan documents.
ARTICLE IV — AFFIRMATIVE COVENANTS
BORROWER covenants that so long as BORROWER is indebted to BANK under this AGREEMENT, and until the payment in full of the
NOTE issued hereunder, BORROWER will:
SECTION 4.1 . PUNCTUAL PAYMENT. Punctually pay the interest and principal of the NOTE at the times and place in the manner
specified in the NOTE.
SECTION 4.2 PRIORITY PAYMENTS. Make payments of principal and interest due under this AGREEMENT and the NOTE before
making any payments of (a) principal and interest to any non-related party creditor and (b) principal and interest to any shareholder, partner,
member or other related party of BORROWER.
SECTION 4.3. ACCOUNTING RECORDS. Maintain adequate books and accounts in accordance with sound accounting principles
applicable to entities such as the Borrower, consistently applied as approved by Lender. BORROWER shall permit any representative of
BANK, at any reasonable time, to inspect, audit and examine such books and inspect the properties of BORROWER.
SECTION 4.4. FINANCIAL STATEMENTS. Furnish BANK: From time to time such other information as BANK may reasonably
request.
SECTION 4.5. EXISTENCE. Preserve and maintain its existence and all of its rights, privileges and franchises; conduct its business in an
orderly, efficient, and regular manner; and comply with the requirements of all applicable laws, rules, regulations and orders of a governmental
authority.
SECTION 4.6. INSURANCE. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business
similar to BORROWER's, including but not limited to fire, public liability. Property damage, flood , contents coverage and workers'
compensation. carried in companies and in amounts satisfactory to BANK; and BORROWER shall deliver to BANK from time to time at
BANK's request schedules setting forth all insurance then in effect.
SECTION 4.7. FACILITIES. Keep all BORROWER's properties useful or necessary to BORROWER's business in good repair and
condition, and from time to time make necessary repairs . renewals and replacements thereto so that BORROWER's property shall be fully and
efficiently preserved and maintained.
SECTION 4.8. TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all indebtedness, obligations, assessments,
taxes, including federal and state income taxes and real and personal property taxes. except such as BORROWER may in good faith contest or
as to which a bona fide dispute may arise; provided provision is made to the satisfaction of BANK for eventual payment thereof in the even
that it is found that the same is an obligation of BORROWER.
3
SECTION 4.9. LITIGATION. Promptly give notice in writing to BANK of any litigation pending or threatened in excess of $10,000.00.
SECTION 4.10. FINANCIAL CONDITION. Maintain BORROWER’s financial condition according to the following schedules: NA
SECTION 4.11 CROSS COLLATERAL. BORROWER Agrees, and GUARANTOR will agree, that any collateral securing the LOAN
will also secure any other indebtedness of BORROWER or GUARANTOR to BANK and that any other collateral pledged as security for
any other obligation of BORROWER or GUARANTOR to BANK will also secure their respective obligations under this AGREEMENT.
SECTION 4.12. DOCUMENTARY STAMP TAXES. Payor reimburse BANK on demand for all present and future documentary stamp
taxes , if any, required by any jurisdiction as a condition of filing a financing statement, deed of trust or other agreement covering collateral
which is the subject of this AGREEMENT.
SECTION 4.13. NOTICE TO BANK. Promptly give notice in writing to BANK of (1) the occurrence of any EVENT OF DEFAULT: (2)
any change in the location of any collateral for the LOAN, name of BORROWER, and in the case of an organization, any change in name,
identity or corporate structure; or (3) any uninsured or partially uninsured loss through fire, theft, liability or property damage in excess of an
aggregate of $25,000.00.
SECTION 4.14. WAIVER OF TRIAL BY JURY. To the extent permitted by law, it is mutually agreed by and between the BORROWER
and BANK that the respective parties waive trial by jury in any action, proceeding or counterclaim brought by either of the parties against the
other or any matter whatsoever arising of or in any way connected with this AGREEMENT.
SECTION 4.15. DEATH OF THE GUARANTOR. Notwithstanding anything to the contrary in the body of any of the loan documents, it
is understood that the death of any natural person who is a GUARANTOR shall constitute an EVENT OF DEFAULT, provided however,
that the BORROWER and any parties offer and consummate an alternative guaranty structure acceptable to the BANK, which shall consist of
the execution of the same unconditional guaranty agreement as initially executed by the deceased GUARANTOR by an individual,
individuals, entity or entities, or with any changes to the guaranty agreement as may be required by law and satisfactory to the BANK. The
BANK reserves the right to require documentation evidencing the authority of the substitute or alternative GUARANTOR or
GUARANTORs including, without limitation, trust agreements, partnership agreements, corporate resolutions and operating agreements, and
to require an opinion of counsel acceptable to the BANK that the guaranty or guaranties have been duly authorized, executed and delivered and
are valid and enforceable in accordance with their terms if the alternative GUARANTOR is not an individual or natural person. The party’s or
the parties’ failure to deliver and execute such alternative guaranty agreement or agreements shall entitle the BANK, at its option and in
BANK’s sole discretion, to call the LOAN due and payable in full, such failure being an EVENT OF DEFAULT under the NOTE and the
LOAN documents.
ARTICLE V — NEGATIVE COVENANTS
BORROWER further covenants that so long as BORROWER is indebted to BANK under this AGREEMENT, and until payment in full of
the NOTE issued hereunder, BORROWER shall not, without prior written consent of BANK:
SECTION 5.1. USE OF FUNDS. Use any of the proceeds of the NOTE except for the purpose(s) stated in SECTION 1.4.
SECTION 5.2. CAPITAL EXPENDITURE LIMITATION. Make any additional investment in fixed assets in anyone fiscal year in
excess of an aggregate of NA.
SECTION 5.3. LEASE EXPENDITURES; MAXIMUM LEASES. During the term of the LOAN, BORROWER will not enter into any
lease agreement which would cause or require the total amount of annual lease expenditures incurred by the BORROWER on all leases to
exceed NA per fiscal year, without the prior written approval of BANK.
SECTION 5.4. OTHER INDEBTEDNESS. Create, incur, assume, guaranty, become contingently liable for, or permit to exist any other
liabilities or other indebtedness resulting from borrowings, loans or advances, whether secured or unsecured, except short-term borrowings
from BANK and the liabilities of BORROWER to BANK for money borrowed hereunder, nor shall BORROWER knowingly grant or
permit liens on or security interests in any of BORROWER’s assets.
SECTION 5.5. MERGER, CONSOLIDATION, SALE OF ASSETS. Merge into or consolidate with any corporation or other entity, or
acquire all or substantially all of the assets of any other corporation or entity; or sell, lease, assign, transfer or otherwise dispose of all or
substantially all of its assets.
SECTION 5.6. GUARANTEES. Guarantee or become liable in any way as surety, endorser (other than as endorser of negotiable
instruments in the ordinary course of business) or accommodation endorser or otherwise for the debt or obligations of any other person or
entity.
SECTION 5.7. LOANS, ADVANCES, INVESTMENTS. Make any loans or advances to, or investments in, any person or entity,
including officers, directors, stockholders, managers, members, partners or employees of BORROWER.
SECTION 5.8. DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividend either in cash, stock or other property; or redeem , retire,
purchase or otherwise acquire any shares of any class of BORROWER’s stock or any other equity interest in BORROWER now or hereafter
outstanding. During the term of the LOAN, BORROWER may not purchase or redeem any shares of its capital stock, declare or pay any
dividends, or make any other distribution, loan or payment to any stockholder, member, partner, officer or employee in excess of NA in any
fiscal year, other than normal salaries and amounts needed to pay actual income taxes paid by the individual owners resulting from the
BORROWER’s income reported on their personal tax returns.
SECTION 5.9. OFFICER AND DIRECTOR COMPENSATION. Pay any compensation to any past, present or future shareholder,
director, officer, manager, member, partner or employee, whether through salary, bonus, or otherwise, in excess of NA. During the term of the
LOAN, the sum of all salaries, bonuses, fringe benefits or other compensation paid by BORROWER to all officers shall not exceed $ NA
without the prior written consent of BANK.
SECTION 5.10 CHANGE IN FISCAL YEAR. Change its fiscal year without the consent of the BANK.
SECTION 5.11 CHANGE OF CONTROL. Make or suffer a change of ownership or change in management that effectively changes
control of BORROWER from the current ownership or management.
ARTICLE VI — DEFAULT
SECTION 6.1. EVENTS OF DEFAULT. The following shall constitute EVENTS OF DEFAULT:
(a) Default by BORROWER in any payment of principal or interest under the NOTE subject to any applicable grace or cure periods stated in
the NOTE.
(b) Any representation or warranty made by BORROWER hereunder shall prove to be at any time incorrect in any material respect.
(c) Default by BORROWER in the performance of any other non-payment covenant or agreement contained herein.
(d) Default by BORROWER or GUARANTOR under the terms of any agreement or instrument pursuant to which BORROWER or
GUARANTOR has borrowed money from any person.
(e) The entry of any judgment or levy of any attachment, execution or other process against the assets of BORROWER, and such judgment be
not satisfied, or such levy or other process be not removed within twenty (20) days after the entry or levy thereof, or at least five (5) days prior
to the time of any proposed sale under any such judgment or levy.
(f) BORROWER or any GUARANTOR shall be adjudicated as bankrupt or insolvent, or shall consent to or apply for the appointment or a
receiver, trustee or liquidator of itself or any of its property, or shall admit in writing its inability to pay its debts generally as they become due,
or shall make a general assignment for the benefit of creditors, or shall file a voluntary petition in bankruptcy or a voluntary petition or an
answer seeking reorganization or arrangement in a proceeding under any bankruptcy law, or BORROWER or its directors, majority
stockholders, partners, managers or members shall take action looking into the dissolution or liquidation of BORROWER.
4
(g) BORROWER’s breach of or default under any of or default under any of the terms, conditions or covenants contained in this
AGREEMENT.
(h) The actual or threatened demolition, injury or waste to the collateral, or any part thereof, which, in the sole opinion of BANK, may impair
its value, or the actual or threatened decline in value of the collateral or any part thereof;
(i) The insolvency of BORROWER, or any party comprising BORROWER, GUARANTOR, or any person obligated for payment of the
LOAN.
(j) BORROWER’s default under terms of any instrument or other agreement to which this AGREEMENT or any of the other loan documents
are subordinate or which is subordinate to this AGREEMENT or any of the other loan documents.
(k) Default by BORROWER or GUARANTOR in keeping, performing or observing any term, covenant, agreement or condition of any
COMMITMENT upon which all or any portion of any indebtedness evidenced by the NOTE was predicated.
(l) Any false statement, misrepresentation or withholding of facts by BORROWER, and/or by any GUARANTOR, any principal,
shareholder, partner, member, manager, director, officer, employee or any other person in any loan application or other document provided by
BORROWER and/or any other person to BANK or its agents, including any misrepresentation made in this AGREEMENT, or in any
representation or statement made by BORROWER and/or any other person to BANK or its agents, as to any matter relied upon by BANK in
evaluating whether to extend credit and financing to BORROWER.
(m) A determination by BANK that the prospect of payment or performance by BORROWER, GUARANTOR, and/or any other person
under all or any of the loan documents is insecure or that a material adverse change in the financial condition of BORROWER,
GUARANTOR, and/or any person obligated for payment of the LOAN has occurred since the date of this AGREEMENT.
(n) The death, dissolution, merger, consolidation or termination of existence of any BORROWER, GUARANTOR, and/or any person
obligated for payment of the LOAN; or if any BORROWER, GUARANTOR, and/or any person obligated for payment of the LOAN is a
corporation with thirty-five (35) or fewer shareholders, the aggregate transfer(s) of voting shares in such BORROWER, GUARANTOR,
and/or any person obligated for payment of the LOAN whereby persons or entities not owning on the date hereof, singly or in the aggregate,
50% or more of the voting shares of such BORROWER, GUARANTOR, and/or any person obligated for payment of the LOAN, become
the owner(s), singly or in the aggregate, 50% or more of the voting shares of such BORROWER, GUARANTOR, and/or any person
obligated for payment of the LOAN, or if such party is a limited or general partnership, any change in general partnership interest(s) in such
BORROWER, GUARANTOR, and/or any person obligated for payment of the LOAN.
SECTION 6.2. REMEDIES UPON DEFAULT. Upon the occurrence of any EVENT OF DEFAULT, with respect to any personal
property, collateral or fixtures, BANK shall have all of the rights and remedies of a secured party under the North Carolina Uniform
Commercial Code. Without in any way limiting the generality of the foregoing, BANK shall also have the following specific rights and
remedies:
(a) Any indebtedness of BORROWER under this AGREEMENT or the NOTE, any of the NOTE to the contrary notwithstanding, shall, at
BANK's option and without notice, become immediately due and payable without presentment, notice or demand, all of which are hereby
expressly waived by BORROWER; and the obligation, if any, of the BANK to permit further borrowings hereunder shall immediately cease
and terminate.
(b) To take immediate possession of all equipment, inventory, fixtures, and any or all other collateral securing the LOAN, whether now owned
or hereafter acquired, without notice, demand, presentment, or resort to legal process, and, for these purposes, to enter any premises where any
of the collateral is located and remove the collateral therefrom or render it unusable.
(c) To require BORROWER to assemble and make the collateral available to BANK at a place to be designated by BANK which is also
reasonably convenient to BORROWER.
(d) To retain the collateral in satisfaction of any unpaid principal or interest on the LOAN or sell the collateral at public or private sale after
giving such notice, as the BANK deems necessary, of the time and place of the sale and with or without having the collateral physically
present at the place of the sale.
(e) To make any repairs to the collateral which BANK deems necessary or desirable for the purposes of sale.
(f) To exercise any and all rights of set-off which BANK may have against any account, fund, or property of any kind, tangible or intangible,
belonging to BORROWER which shall be in BANK’s possession or under its control.
(g) BANK shall have the right to collect receivables, endorse checks, collect rents, issues, profits and revenues assigned to BANK as
collateral for the LOAN, to appoint a receiver or other third party to inspect the books and records of BORROWER and to evaluate collateral,
at BORROWER’s expense, and to contact all account parties and direct them to pay BANK directly.
(h) BANK shall have the right to the appointment of a receiver to collect the rents and profits from the property and collateral assigned to
BANK to secure LOAN, without consideration of the value thereof or the solvency of any person liable for the payment of the amounts then
owing. BANK, at its option, in lieu of an appointment of a receiver, shall have the right to do all those things the receiver could have done. If
such receiver should be appointed, or if there should be a sale of the property and collateral by foreclosure, the BORROWER or any person in
possession of the property and collateral, as tenant or otherwise, shall become a tenant at will of the receiver or of the purchaser and may be
removed by a writ of ejectment, summary ejectment or other lawful remedy.
(i) The exercise by the BANK of any right or remedy granted to the BANK or to any receiver or trustee in law or equity, or by this or any
other document shall not be deemed an irrevocable election of remedies thereby precluding the BANK or any receiver or trustee from
exercising or pursuing any other right or remedy granted to the receiver, the trustee or BANK under this or any other document or at law or in
equity. All remedies contained herein or in any other separate agreement executed contemporaneously with the execution of this
AGREEMENT, including without limitation any assignment, security agreement, mortgage, deed of trust, or other security instrument, are
intended to be cumulative.
ARTICLE VII — MISCELLANEOUS
SECTION 7.1. WAIVER. No delay or failure of BANK, or any holder of the NOTE, in exercising any right, power or privilege hereunder
shall affect such right, power or privilege; nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to
enforce such a right, power or privilege. The rights and remedies of BANK hereunder are cumulative and not exclusive. Any waiver, permit,
consent or approval of any kind by BANK, or any holder of the NOTE, of any breach or default hereunder, or any such waiver of any
provisions or conditions hereof, must be in writing and shall be effective only to the extent set forth in writing.
5
SECTION 7.2. NOTICES. All notices. requests and demands given to or made upon the respective parties shall be deemed to have been
given or made when deposited in the mail, postage prepaid, and addressed as follows:
BORROWER: Chanticleer Holdings. Inc.
11220 Elm Lane Suite 203
Charlotte, NC 28277
BANK:
Paragon Commercial Bank
3535 Glenwood Avenue
Raleigh, North Carolina 27612
SECTION 7.3. ATTORNEY’S FEES. BORROWER will reimburse BANK for all costs, expenses and reasonable attorneys’ fees
expended or incurred by BANK in administering and enforcing this AGREEMENT, in actions for declaratory relief in any way related to this
AGREEMENT, or in collecting any sum which becomes due the BANK on the NOTE.
SECTION 7.4. NORTH CAROLINA LAW APPLICABLE. This AGREEMENT and the NOTE shall be construed in accordance
with the laws of the State of North Carolina. BORROWER and any member, manager, general partner, or GUARANTOR of
BORROWER each irrevocably consents to the jurisdiction of any Federal or State court within the State of North Carolina, and submits to
venue in the State of North Carolina, and each also consents to service of process by any means authorized by Federal law or the law of the
State of North Carolina. Without limiting the generality of the foregoing, each of BORROWER, or any member, manager, general partner and
GUARANTOR of BORROWER hereby waives and agrees not to assert by way of motion, defense, or otherwise in such suit, action, or
proceeding, any claim that (i) BORROWER or any such member, manager, general partner and GUARANTOR is not subject to the
jurisdiction of the courts of the State of North Carolina or the United States District Court for North Carolina; or (ii) such suit, action, or
proceeding is brought in an inconvenient forum; or (iii) the venue of such suit, action, or proceeding is improper.
SECTION 7.5. FURTHER ASSURANCES; POWER OF ATTORNEY. At any time, and from time to time, upon request by BANK,
BORROWER will, at BORROWER's expense: (a) correct any defect, error or omission which may be discovered in the form or content of
any of the loan documents; (b) make such further assurances as may be required by BANK; and (c) make, execute, deliver and record , or
cause to be made, executed, delivered and recorded, any and all further instruments, certificates and other documents as may, in the opinion of
BANK, be necessary or desirable in order to complete, perfect or continue and preserve the lien and security position of the BANK. Upon any
failure by BORROWER to do so, BANK may make, execute and record any and all such instruments, certificates and other documents for
and in the name of Borrower, all at the sole expense of Borrower, and BORROWER hereby irrevocably appoints the BANK as its attorney-
in-fact, this power of attorney being coupled with an interest, in order that BANK may administer the LOAN and exercise the rights and
remedies contained in this AGREEMENT and in any related loan documents and assignments by BORROWER at any time, including without
limitation after the occurrence of an EVENT OF DEFAULT under this AGREEMENT or other loan documents as may be prescribed by
BANK under SECTION 3.3 of this AGREEMENT or otherwise required by BANK.
SECTION 7.6 ARBITRATION AND DISPUTE RESOLUTION. (a) Arbitration. Except to the extent expressly provided below, any
dispute under this AGREEMENT or other loan document shall, upon the request of either party, be determined by binding arbitration in
accordance with the Federal Arbitration Act, Title 9, United States Code (or if not applicable, the applicable state law), the then-current rules
for arbitration of financial services disputes of the American Arbitration Association (“AAA”), and the other terms and conditions set forth in
this SECTION 7.6 below. In the event of any inconsistency with AAA rules, the terms and conditions of this AGREEMENT shall control.
The filing of a court action is not intended to constitute a waiver of the right of BORROWER or BANK, including the suing party, thereafter
to require submittal of the dispute to arbitration. Any party to this AGREEMENT may bring an action, including a summary or expedited
proceeding, to compel arbitration of any dispute in any court having jurisdiction over such action. The arbitration shall be administered by
AAA, who will appoint a single arbitrator. If AAA is unwilling or unable to administer the arbitration, or if AAA is unwilling or unable to
enforce or legally precluded from enforcing any and all provisions of this AGREEMENT, then any party to this Agreement may substitute
another arbitration organization that has similar procedures to AAA and that will observe and enforce any and all provisions of this
AGREEMENT. All arbitration hearings will be commenced within ninety (90) days of the demand for arbitration and completed within ninety
(90) days from the date of commencement; provided, however, that upon a showing of good cause, the arbitrator shall be permitted to extend
the commencement of such hearing for up to an additional sixty (60) days. The judgment and the award, if any, of the arbitrator shall be issued
within thirty (30) days of the close of the hearing. The arbitrator shall provide a concise written statement setting forth the reasons for the
judgment and for the award, if any. The arbitration award, if any, may be submitted to any court having jurisdiction to be confirmed and
enforced, and such confirmation and enforcement shall not be subject to arbitration. Any dispute concerning this arbitration provision,
including any such dispute as to the validity or enforceability of this provision, or whether a Dispute is arbitrable, shall be determined by the
arbitrator; provided, however, that the arbitrator shall not be permitted to vary the express provisions of these terms and conditions or the
reservation of rights set forth in subsection (b). The arbitrator shall have the power to award legal fees and costs pursuant to the terms of this
AGREEMENT.
(b) Reservations of Rights. Nothing in this AGREEMENT shall be deemed to (i) limit the applicability of any otherwise applicable statutes of
limitation and any waivers contained in this AGREEMENT, or (ii) apply to or limit the right of BANK (A) to exercise self help remedies such
as (but not limited to) setoff, or (B) to foreclose judicially or nonjudicially against any real or personal property collateral, or to exercise
judicial or nonjudicial power of sale rights, (C) to obtain from a court provisional or ancillary remedies such as (but not limited to) injunctive
relief, writ of possession, prejudgment attachment, or the appointment of a receiver, or (D) to pursue rights against a party to this
AGREEMENT in a third-party proceeding in any action brought against BANK in a state, federal or international court, tribunal or hearing
body (including actions in specialty courts, such as bankruptcy and patent courts). BANK may exercise the rights set forth in clauses (A)
through (D), inclusive, before, during or after the pendency of any arbitration proceeding brought pursuant to this AGREEMENT. Neither the
exercise of self help remedies nor the institution or maintenance of an action for foreclosure or provisional or ancillary remedies shall
constitute a waiver of the right of any party, including the claimant in any such action, to arbitrate the merits of the dispute occasioning resort
to such remedies. No provision in the loan documents regarding submission to jurisdiction and/or venue in any court is intended or shall be
to such remedies. No provision in the loan documents regarding submission to jurisdiction and/or venue in any court is intended or shall be
construed to be in derogation of the provisions in any loan document for arbitration of a dispute.
IN WITNESS WHEREOF, the parties hereto have caused this AGREEMENT to be executed under seal the day and year first hereinabove
written.
Paragon Commercial Bank
By: /s/ Charles W. Bartz
(SEAL)
Charles W. Bartz, Senior Vice President
6
CHANTICLEER HOLDINGS, INC.
By: /s/ Michael D. Pruitt
Michael D. Pruitt, President/CEO/CFO
(SEAL)
Guarantors:
By: /s/ Michael D. Pruitt
Michael D. Pruitt, an individual
(SEAL)
7
Hooters® International Franchise Agreement
Between
Hooters of America, LLC
1815 The Exchange
Atlanta, Georgia 30339
(770) 951-2040
AND
Hooters of America, LLC
Franchise Agreement
Table of Contents
GRANT, ACCEPTED LOCATION, CONSTRUCTION, AND PERMITTING
TERM; RENEWAL
HOA’S OBLIGATIONS
FEES
DUTIES OF FRANCHISEE
PROPRIETARY MARKS
HOOTERS OF AMERICA MANUALS
CONFIDENTIAL INFORMATION
TECHNOLOGY
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
ACCOUNTING AND RECORDS
11.
ADVERTISING
12.
INSURANCE
13.
TRANSFER OF INTEREST
14.
DEFAULT AND TERMINATION
15.
OBLIGATIONS ON TERMINATION OR EXPIRATION
16.
COVENANTS
17.
TAXES, PERMITS, AND INDEBTEDNESS
18.
INDEPENDENT CONTRACTOR
19.
INDEMNIFICATION
20.
APPROVALS AND WAIVERS
21.
NOTICES
22.
ENTIRE AGREEMENT
23.
SEVERABILITY AND CONSTRUCTION
24.
FORCE MAJEURE
25.
APPLICABLE LAW; DISPUTE RESOLUTION
26.
ACKNOWLEDGMENTS
27.
REGISTRATION OF AGREEMENT
EXHIBITS
A - ACCEPTED LOCATION INFORMATION
B -
C -
D -
E -
PROPRIETARY MARKS
LIST OF FRANCHISEE’S PRINCIPAL OWNERS
FORM OF RELEASE
SPECIAL STIPULATIONS
i
Page
1
5
6
7
10
17
20
21
22
25
26
27
28
31
34
39
41
42
43
44
45
45
46
47
47
49
51
Hooters of America, LLC
Franchise Agreement
THIS FRANCHISE AGREEMENT (the “Agreement”) is made and entered into the ___ day of _______, 20 __ (the “Effective
Date”), by and between HOOTERS OF AMERICA, LLC, a Georgia limited liability company with its principal business address at 1815
The Exchange, Atlanta, Georgia 30339 (hereinafter “HOA”), and, a ____________ [corporation/limited liability company/partnership] with
its registered business address at _____________________, enrolled with the General Taxpayers’ Registry (“CNPJ/MF”) under no.
________ , herein represented by its undersigned legal representative (hereinafter the “Franchisee”).
Recitals
A. HOA, itself and/or through affiliates, has developed a distinctive system (the “Hooters System”) for the establishment and
operation of restaurants (the “Hooters Restaurants”) that offer a limited menu featuring chicken wings, seafood and burgers, together with
beer, wine, and liquor and other food and beverage offerings and merchandise (the “Products”). The Hooters System includes HOA’s
distinctive exterior and interior restaurant design, trade dress, décor, and color scheme; distinctive standards, specifications, and procedures for
operations; procedures for quality control; training and ongoing operational assistance; and advertising and promotional programs; all of which
HOA may add to, delete from, and modify from time to time.
B. Pursuant to certain license agreement with an affiliate (the “License Agreement”), HOA has the right to use the Hooters
System, along with certain trademarks, trade names, service marks, logotypes, and other commercial symbols set forth on Exhibit B, in
connection with the operation of restaurants. HOA identifies the Hooters System by means of such trademarks, trade names, service marks,
logotypes, and other commercial symbols, together with HOA’s trade dress, décor, color schemes, and other identifying characteristics (all of
which are referred to collectively in this Agreement as the “Proprietary Marks”), all of which HOA may add to, delete from, and modify
from time to time.
C. Franchisee desires for HOA to grant Franchisee a franchise to operate a Hooters restaurant, using the Proprietary Marks,
under the Hooters System, and for HOA to provide Franchisee with certain training and other assistance in connection with such franchise, all
as set forth in and subject to this Agreement.
D. Franchisee understands and acknowledges the importance of HOA’s high standards of quality, appearance, and service,
and the necessity of operating its franchised business in compliance with HOA’s standards and specifications.
In consideration of the foregoing and the mutual promises and commitments set forth in this Agreement, the parties hereby agree as
follows:
1. GRANT, ACCEPTED LOCATION, CONSTRUCTION, AND PERMITTING
1.1 Grant. HOA hereby grants to Franchisee, on the terms and conditions set forth in this Agreement and subject to the
License Agreement, the right, license, and privilege, and Franchisee undertakes the obligation, to operate a business to develop, open, and
operate a Hooters restaurant (the “Franchisee’s Restaurant”), using the Proprietary Marks and the Hooters System, at the Accepted Location
(as defined in Section 1.2. of this Agreement) (collectively, the “Franchise”).
1.2 Accepted Location. The street address of the Franchisee’s Restaurant accepted under this Agreement is specified in Exhibit
A to this Agreement (the “Accepted Location Information”), and is referred to as the “Accepted Location.” Franchisee shall not relocate
the Franchisee’s Restaurant without HOA’s prior written consent. HOA shall have the right to grant or withhold acceptance of the Accepted
Location under this Section 1.2. Franchisee acknowledges and agrees that acceptance of Franchisee’s proposed location, under this Section 1.2
or pursuant Section 1.3 below, does not constitute any assurance, representation, or warranty of HOA of any kind, that the Franchisee’s
Restaurant located at the Accepted Location shall be profitable or successful.
1.3 Accepted Location Selection. If, when this Agreement is signed, Franchisee has not yet found a suitable location for the
Franchisee’s Restaurant that has been accepted by HOA in writing as the Accepted Location, Franchisee shall lease, sublease, or acquire a site
for the Franchisee’s Restaurant, subject to HOA’s acceptance, in accordance with the following procedure:
1.3.1 Time to Locate Site: Franchisee shall submit to HOA at least one (1) location for acceptance pursuant to
Subsection 1.3.3 below within forty five (45) days of the Effective Date. Within ninety (90) days after the Effective Date, Franchisee
shall acquire or lease/sublease, at Franchisee's expense, commercial real estate that is properly zoned for the use of the business as a
restaurant at a site accepted by HOA as hereinafter provided. Failure by Franchisee to acquire or lease a site for Franchisee’s
Restaurant, or to submit to HOA at least one (1) location for site acceptance, within the time specified, shall constitute a default under
Section 14.3 of the Franchise Agreement.
1.3.2 Site Evaluation Services: HOA or its designee shall furnish to Franchisee site selection guidelines, including
HOA’s minimum standards for a location for Franchisee’s Restaurant, and such site selection counseling and assistance as HOA
may deem advisable. In response to Franchisee’s request for site acceptance, HOA or its designee shall have the right to perform one
(1) on-site evaluation of a proposed site for Franchisee’s Restaurant. HOA shall have the right to designate a third party designee to
conduct any or all of the site selection counseling and assistance and evaluation, and Franchisee may be required to pay such third
party designee a fee for such services; provided, however that such fee shall not exceed Ten Thousand U.S. Dollars (US$10,000) (or
its equivalent in Brazilian Reais if such third party is a Brazilian entity or individual).
1.3.3 Site Selection Package Submission and Site Acceptance: Franchisee shall submit to HOA, in the form specified
by HOA, a completed site selection package, which may include a site selection form prescribed by HOA, copy of the site plan,
business plan, demographic statistics and information regarding the surrounding businesses, and such other information or materials
as HOA may reasonably require, together with an option contract, letter of intent or other evidence satisfactory to HOA which
confirms Franchisee's favorable prospects for obtaining the site for the Accepted Location. Franchisee acknowledges that time is of
the essence. HOA shall have thirty (30) days after receipt of such information and materials from Franchisee to accept or decline, in
its sole discretion, the proposed site as the location for Franchisee’s Restaurant. In the event HOA does not accept a proposed site by
written notice to Franchisee within said thirty (30) days, such site shall be deemed declined by HOA.
2
1.3.4 Lease Responsibilities: Within fifteen (15) days of site acceptance by HOA, Franchisee shall execute a lease
which shall be coterminous with the Franchise Agreement, or a binding agreement to purchase the site. Franchisee must provide to
HOA a copy of the actual lease or sublease (and an English translation thereof, if it is not in English) to be executed for the Accepted
Location, which must be approved in writing by HOA, and which shall provide HOA the right to enter the Accepted Location to
make any modifications necessary to protect the Proprietary Marks. The lease must attach a “Collateral Assignment of Lease” in a
form acceptable to HOA, executed by Franchisee and the lessor of the premises, providing HOA notice of Franchisee’s default of the
lease, a right (but not an obligation) to cure such default, and the right to assume the lease with the right to sublease to a Hooters
franchisee and containing other provisions as required by HOA, including the right to assume the lease upon a default under this
Agreement or under any document or instrument securing this Agreement. In lieu of the Collateral Assignment of Lease, such lease
must: (1) provide HOA, at HOA’s option, with the right to act as prime lessee under the lease and to sublease such site to Franchisee;
or (2) in form and substance satisfactory to HOA: (a) provide for notice to HOA of Franchisee’s default under the lease or sublease;
(b) require the lessor or sublessor to disclose to HOA, on HOA request, sales and other information furnished by Franchisee; (c)
give HOA (or its designee) the right to enter the premises to make any modifications to the building to protect HOA rights to the
Marks, and provide that the lessor and/or sublessor relinquishes to HOA (or its designee), on any termination or expiration of this
Agreement, any lien or other ownership interest, whether by operation of law or otherwise, in and to any tangible property (including
any outdoor sign) that embodies the Marks; (d) require that the lessor and/or sublessor acknowledges that HOA has no liability or
obligation whatsoever under the lease or sublease; and (e) allow HOA or its designee the right to elect to take an assignment of the
leasehold interest upon termination or expiration of Franchisee’s rights under this Agreement. HOA’s approval of the lease or
sublease is an indication only that the lease or sublease agreement meets HOA’s criteria for leases and subleases. HOA’s approval of
a lease or sublease does not constitute an assurance, representation, or warranty of any kind, express or implied, as to the suitability
of the lease or sublease for Franchisee’s success or for any other purpose.
1.3.5 HOA shall not be responsible for review of the lease for any terms other than those described in Subsection
1.3.4 above.
1.4 Protected Territory and HOA’s Reserved Rights. Except as otherwise provided in this Agreement, during the term of this
Agreement, HOA shall not establish or operate, or license any other person to establish or operate, a Hooters Restaurant at any location within
the territory specified in Exhibit A (the “Protected Territory”). HOA retains all other rights, and may, among other things, on any terms and
conditions HOA deems advisable, and without granting Franchisee any rights therein:
1.4.1 Own, acquire, establish, and/or operate and license others to establish and operate, Hooters Restaurants at any
location outside the Protected Territory notwithstanding their proximity to the Protected Territory or the Accepted Location or their
actual or threatened impact on sales at the Franchisee’s Restaurant;
1.4.2 Own, acquire, establish, and/or operate, and license others to establish and operate, Hooters Restaurants under
the Proprietary Marks at Reserved Facilities (as defined below) at any location within or outside the Protected Territory. As used in
this Agreement, “Reserved Facilities” shall mean: airports; hotels; department stores; supermarkets; cultural institutions (examples
include, but are not limited to, theaters, museums, art centers and educational facilities); casinos; United States military bases; sports
and entertainment venues and stadiums; and business and industrial complexes and offices at which the food services are managed by
service providers with national or international operations;
3
1.4.3 Own, acquire, establish, and/or operate and license others to establish and operate businesses: (a) using the
Proprietary Marks (but not the “Hooters®” mark) and other marks in connection with the operation of such businesses; (b) which
businesses may be the same as, similar to, or different from Hooters Restaurants; and (c) which may be located within or outside the
Protected Territory, despite the proximity of such businesses to the Accepted Location (but this clause shall not allow HOA to
operate or license others to operate a Hooters Restaurant inside the Protected Territory, unless permitted pursuant to Section 1.4.2
above); and/or
1.4.4 Sell and distribute, directly or indirectly, or license others to sell and to distribute, directly or indirectly, any
Products from any location to any business or customer, including without limitation through restaurants, cafes, retail kiosks, grocery
or convenience stores or other retail outlets, and any other distribution channels (including without limitation, through retail,
wholesale, mail order, toll free numbers, or the Internet), provided that this clause shall not allow HOA to operate or license others to
operate a Hooters Restaurant inside the Protected Territory under: (a) the Hooters System; and (b) the Proprietary Marks, unless
permitted pursuant to Section 1.4.2 above).
1.4.5 HOA and/or its affiliates have the unrestricted right to engage, directly or indirectly, through its or their
employees, representatives, licensees, assigns, agents, and others, at wholesale, retail, and otherwise, in the production, distribution,
and sale of products bearing the Proprietary Marks licensed under this Agreement or other names or marks, including without
limitation products included as part of the Hooters System.
1.5 Franchisee shall offer and sell Products only from Franchisee’s Restaurant; only in accordance with the requirements of
this Agreement, the procedures set forth in the Manuals (as this term is defined in Section 2.2.4, below), or as otherwise set forth by HOA in
writing; and only to: (a) retail customers for consumption at or in common seating near to Franchisee’s Restaurant; (b) retail customers for
personal carry-out consumption of Products sold at Franchisee’s Restaurant. Franchisee will not under any circumstances engage in any
wholesale trade or sale of Hooters System Products for resale. Franchisee also shall not engage in delivery unless expressly permitted by
HOA, and unless such delivery is conducted in accordance with the requirements as set forth by HOA in the Manuals or otherwise in writing.
As used in this Agreement, “delivery customers” means customers that purchase Products for delivery to (and consumption in) their home or
office. Franchisee shall not engage, unless expressly permitted by HOA in writing, in any other type of sale of, or offer to sell, or distribution
of Products, including but not limited to, selling, distributing, or otherwise providing, any Products at wholesale, or for resale or distribution
by any third party, or through satellite locations, sales or mail order catalogs, temporary locations, carts or kiosks, the Internet, or through any
other electronic or print media.
1.6 Construction, Permitting, and Licensing.
1.6.1 Franchisee shall complete the construction of Franchisee’s Restaurant in accordance with the provisions and
requirements of Section 5.5. of this Agreement (the “Construction”) and shall open Franchisee’s Restaurant for business within six
(6) months after the Effective Date of this Agreement (the “Opening Date”). On Franchisee’s written request, HOA may grant
Franchisee one (1) ninety (90) day extension past the six (6) months allotted within which to open Franchisee’s Restaurant.
Franchisee shall pay HOA a non-refundable extension fee of Five Thousand U.S. Dollars (US$5,000) contemporaneously with
Franchisee’s request for the extension.
1.6.2 Provided that Franchisee has made full and complete application for all building permits, operating licenses, and
all other permits required to open its Restaurant, within ninety (90) days after the Effective Date of this Agreement, HOA may, on
Franchisee’s written request, grant Franchisee one (1) thirty (30) day extension to obtain all necessary permits, without charging
Franchisee any amounts for such extensions, if the delay was due to causes beyond Franchisee’s reasonable control, which grant
HOA will not unreasonably withhold. Franchisee must submit documentation of the status of the license and permit applications
together with Franchisee’s request for such extension. On HOA’s grant of such extension, HOA will commensurately extend the
Opening Date.
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1.6.3 Should Franchisee be unable to obtain all necessary permits and licenses (as detailed in Section 5.5.4, below)
during the stated period and extension time periods as a result of causes beyond Franchisee’s reasonable control, HOA or Franchisee,
with proof of attempt to get permits and licenses, may terminate this Agreement on written notice to the other, without the necessity of
further action by either party or further documentation. On such termination, HOA will retain one-third (1/3) of the Initial Franchise
Fee set forth in Section 4.2 of this Agreement to compensate HOA for its costs and administrative expenses spent in granting
Franchisee its Franchise, and for its lost or deferred opportunities to grant Hooters System franchises to others. HOA will refund the
amount HOA owes Franchisee within thirty (30) days after notice by HOA or Franchisee of the termination of this Agreement.
1.7 Destruction of Accepted Location. In the event Franchisee’s Restaurant is damaged or destroyed by fire or other casualty,
or is required by any governmental authority to be repaired or reconstructed, Franchisee shall commence repair or reconstruction of the
building within ninety (90) days after the date of such casualty or notice of governmental requirement (or such lesser period as such
governmental requirement may specify) and shall complete all required repair or reconstruction as soon as possible thereafter, but in no event
later than one hundred eighty (180) days after the date of such casualty or governmental requirement. In the case of reconstruction due to
casualty, the minimum acceptable appearance for the restored building will be that which existed immediately prior to the casualty; provided,
however, Franchisee will use its best efforts to have the restored building include the then- current image, design, and specifications of new
Restaurants.
1.8 No Subfranchising. FRANCHISEE SHALL HAVE NO RIGHT TO GRANT SUBFRANCHISES TO OTHERS.
FRANCHISEE SHALL NOT, AND SHALL NOT ATTEMPT TO, GRANT SUBFRANCHISES TO OTHERS.
2. TERM; RENEWAL
2.1 Initial Term. This Agreement will commence on the Effective Date and will continue in effect for a period of twenty (20)
years thereafter (the “Initial Term”), subject to earlier termination as set forth in this Agreement.
2.2 Renewal Term. Franchisee may renew the Franchise as to Franchisee’s Restaurant for two (2) additional ten (10) year
terms (such additional terms being referred to in this Agreement as the “Renewal Terms,” and the Initial Term, together with the Renewal
Terms, being referred to collectively in this Agreement as the “Term”), provided that:
2.2.1 Franchisee delivers written notice (the “Renewal Notice”) fewer than eighteen (18) months but more than six
(6) months before the end of the Initial Term, of Franchisee’s intent to renew the Franchise for the Renewal Term;
2.2.2 Franchisee pays HOA a renewal fee in the amount of one-third (1/3) of the then- current Initial Franchise Fee
(as defined in Section 4.2, below), delivered contemporaneously with Franchisee’s delivery of the Renewal Notice, for renewal of the
Franchise for Franchisee’s Restaurant (the “Renewal Fee”);
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2.2.3 Franchisee is, at the time Franchisee delivers the Renewal Notice, in compliance with all other agreements to
which HOA or its affiliates on the one hand, and Franchisee or its affiliates on the other hand, are parties;
2.2.4 Franchisee is and has been, at all times during the Initial Term, in compliance with: (i) this Agreement and all
amendments to it; and (ii) HOA’s confidential operations manuals (the “Manuals”);
2.2.5 Franchisee is, at the time Franchisee delivers the Renewal Notice, current with respect to its obligations to its
lessor, suppliers, and any other parties with whom it does business.
2.2.6 Franchisee enters into HOA’s then-current form of franchise agreement, including all schedules, exhibits,
addenda, and attachments to it (collectively, the “Renewal Franchise Agreement”), all of which may contain terms that vary
materially from the terms of this Agreement; and
2.2.7 Franchisee and its Principal Owners (as defined in Section 13.2 of this Agreement) execute and deliver to HOA
a general release in substantially the form set forth in Exhibit D to this Agreement (collectively, the “Release”).
2.3 Non-Renewal By Franchisee. Franchisee will be deemed to have declined to renew the Franchise as to Franchisee’s
Restaurant, and the option to renew the Franchise set forth in Section 2.2 of this Agreement will expire automatically and without notice as to
such Restaurant, if Franchisee does not deliver to HOA all items required for renewal, including without limitation the Renewal Fee, the
executed Renewal Franchise Agreement, and the executed Release, to HOA within thirty (30) days after HOA delivers the Renewal Franchise
Agreement and Release to Franchisee for execution.
2.4 Effect of Non-Renewal or Expiration. Non-renewal or expiration of this Agreement will end the Franchise as to
Franchisee’s Restaurant described in this Agreement. Upon non-renewal or expiration of this Agreement, Franchisee must meet all of the
obligations upon termination or expiration, as set forth in Section 15, below.
3. HOA’S OBLIGATIONS
3.1 HOA will provide Franchisee with guidance relating to the opening of Franchisee’s Restaurant, including without
limitation providing acceptable site criteria, approved supplier lists, and approved renovation criteria; and, at HOA’s option, a set of
architectural plans of an existing Hooters restaurant.
3.2 HOA will provide Franchisee with the manager training program described in Section 5.6 of this Agreement.
3.3 HOA will offer Franchisee additional pre-opening training and opening supervision and assistance as HOA deems
advisable, provided that Franchisee must give HOA adequate prior written notice of its proposed opening date.
3.4 HOA will provide such continuing advisory assistance to Franchisee in the operation, advertising, and promotion of
Franchisee’s Restaurant as HOA deems appropriate.
3.5 HOA will provide such refresher training for Franchisee and Franchisee’s employees as HOA deems appropriate.
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3.6 HOA may provide Franchisee, itself or thorough the Global Advertising Fund, with advertising and promotional plans and
materials for local advertising as described in Section 11 of this Agreement.
3.7 HOA will provide Franchisee with access to the Manuals, as set forth in Section 7 of this Agreement.
3.8 HOA may provide Franchisee with such merchandising, marketing, and other data and advice as HOA may develop and
deem to be helpful in the management and operation of Franchisee’s Restaurant.
3.9 HOA may provide Franchisee with such periodic individual or group advice, consultation, and assistance, rendered by
personal visit or telephone, through newsletters, bulletins or other communications (delivered in hard copy or digitally), or by utilizing
mystery-shopper or other similar programs; such advice, consultation and assistance will made available from time to time to all HOA
franchisees, as HOA deems appropriate.
3.10 HOA will provide Franchisee with such bulletins, webinars, brochures, manuals, and reports, as HOA may publish for
franchisees generally regarding HOA’s plans, policies, developments, and activities. In addition, HOA will provide such communication
concerning new developments, techniques, and improvements in food preparation, equipment, food products, packaging, and restaurant
management, that HOA deems relevant to the operation of Franchisee’s Restaurant.
3.11 HOA will provide Franchisee with the requirements for a standardized system for accounting, cost control, and inventory
control.
4. FEES
4.1 Application Fee. Franchisee shall have paid an Application Fee in the amount of Three Thousand U.S. Dollars (US$3,000)
(the “Application Fee”) at the time of application to HOA for the grant of a Franchise, in consideration of the administrative and other
expenses HOA incurs in reviewing Franchisee’s franchise application. The Application Fee will be credited towards the Initial Franchise Fee,
as described in Section 4.2, below.
4.2 Initial Franchise Fee. Franchisee shall pay to HOA an initial franchise fee (the “Initial Franchise Fee”) in the amount of
Seventy-Five Thousand U.S. Dollars (US$75,000) immediately following registration of the Agreement with the Brazilian Institute of
Industrial Property (“INPI”). Franchisee shall pay the Initial Franchise Fee in a lump sum in immediately-available bank funds. Except as
described in Section 1.6.3 of this Agreement, the Initial Franchise Fee shall be deemed fully-earned and nonrefundable upon Franchisee’s
execution of this Agreement, in consideration of the administrative and other expenses HOA incurs in granting Franchisee its Franchise and in
further consideration of HOA’s lost or deferred opportunities to grant Hooters System franchises to others. If Franchisee paid HOA an
Application Fee prior to HOA’s execution of this Agreement, HOA will credit the amount of the Application Fee against the amount of the
Initial Franchise Fee.
4.3 Continuing Franchise Fee. In consideration for the right to operate the Franchisee’s Restaurant using the Proprietary Marks
and the Hooters System, Franchisee shall pay to HOA a continuing franchise fee (the “Continuing Franchise Fee”) of six percent (6%) of
Franchisee’s Gross Sales (as defined in Section 4.9 of this Agreement). Continuing Franchise Fees shall be payable by Franchisee to HOA,
so that HOA actually receives such payment by the end of ten (10) days after the end of each month.
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4.4 Local Advertising.
4.4.1 Franchisee shall spend each calendar year a minimum of two and one-half percent (2.5%) of the Gross Sales of
Franchisee’s Restaurant on local advertising and promotion (the “Minimum Local Advertising Expenditure”).
4.4.2 In the event HOA establishes a Local Advertising Cooperative that encompasses the Franchisee’s Restaurant,
Franchisee shall contribute up to one-half (½) of the Minimum Local Advertising Expenditure described above to such Cooperative,
so that the Cooperative actually receives such payment (the “Cooperative Contribution”) by the end of ten (10) days after the end
of each month. HOA shall designate Franchisee’s Cooperative Contribution from time to time.
4.5 Global Advertising Fee. Franchisee shall pay to HOA, to be actually received by the end of ten (10) days after the end of
each month, a global advertising fee equal to one-half percent (0.5%) of Franchisee’s Gross Sales of Franchisee’s Restaurant (the “Global
Advertising Fee”) during such month. HOA may increase the Global Advertising Fee from time to time; provided that it shall not be more
than one percent (1%) of the Gross Sales at the Franchisee’s Restaurant. HOA or HOA’s designee will maintain and administer the Global
Advertising Fund as provided in Section 11.3 of this Agreement.
4.6 Advertising Fee Cap. Notwithstanding the percentages set forth in Sections 4.4.1 and 4.5 above for the Minimum Local
Advertising Expenditure, Cooperative Contribution and Global Advertising Fee, HOA will not require Franchisee to pay a combined amount
for the Minimum Local Advertising Expenditure, Cooperative Contribution and Global Advertising Fee that exceeds three and one-half
percent (3.5%) of Franchisee’s Gross Sales.
4.7 Casualties. Franchisee’s obligation to pay the Continuing Franchise Fee and the Global Advertising Fee (collectively, the
“Fees”) shall not be altered by the occurrence of any casualty or event that would cause a temporary closing of Franchisee’s Restaurant for a
period of more than five (5) days. In the event that such a casualty or event occurs, the Fees to be paid by Franchisee for each month in which
Franchisee’s Restaurant is closed shall be the average of all Fees payable by Franchisee during the immediately- preceding thirteen (13)
months, or such lesser period as Franchisee’s Restaurant has been open if Franchisee’s Restaurant has been open fewer than thirteen (13)
months.
4.8 Past-Due Payments. Any payment that HOA does not actually receive by the end of the specified date shall be deemed past
due. If any payment is past due, in addition to HOA’s right to exercise all rights and remedies available to HOA under Section 14 of this
Agreement, Franchisee shall pay to HOA, in addition to the past-due amount, interest on such amount from the date it came due until the date
HOA actually receives such payment. The rate of such interest shall be the lesser of: (i) eighteen percent (18%) per annum; or (ii) the
maximum rate allowed by applicable laws (hereinafter the “Default Rate”), until paid in full.
4.9 Gross Sales. As used in this Agreement, “Gross Sales” shall include all revenue related to the sale of Products and
performance of services in, at, about, through, or from Franchisee’s Restaurant, whether for cash, check, meal vouchers, credit or any other
electronic means of payment, and regardless of collection in the case of credit and electronic payment, and income of every kind and nature
related to Franchisee’s Restaurant, including without limitation insurance proceeds and condemnation awards for loss of sales, profits, or
business; and further including without limitation amounts from vending machines, slot machines or gambling devices, any coin-operated
machines for vending merchandise to customers, entertainment devices for the playing of electronic or manual games, pool tables, juke boxes,
ATM fees, liquor, gift cards, merchandise, delivery, catering, and any off-premises consumption; provided, however, that “Gross Sales” shall
not include: (i) revenues from sales taxes or other add-on taxes Franchisee collects from guests and actually transmits to the appropriate taxing
authority; (ii) tips guests give and that are charged to the guests’ credit or debit cards; and (iii) the retail value of any complimentary services,
discounts, trade-outs, credit card fees, cash refunds to guests, and promotional coupons used by guests (collectively, the “Comps”), up to a
maximum of two percent (2%) of Gross Sales in the aggregate. In no event may Franchisee exclude or deduct from Franchisee’s Gross Sales
greater than two percent (2%) of such Gross Sales for Comps.
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4.10 Payment of Amounts Owed.
4.10.1 Unless notified by HOA in writing to pay any amounts due under this Agreement in the local currency (the “Local
Currency”), Franchisee shall pay all amounts due under this Agreement in United States Dollars or Euro as designated by Franchisor
(the “Designated Currency”) by wire transfer to such bank account as HOA may notify Franchisee from time to time. All costs,
charges and expenses, including bank charges, incurred in association with such payments or currency conversions shall be borne by
Franchisee. Franchisee shall participate in any automatic debit/credit transfer program specified by HOA from time to time for the
payment of amounts due to HOA under this Agreement, and shall execute and deliver to HOA all necessary documents and
instruments therefor.
4.10.2 Franchisee shall pay all amounts due to HOA under this Agreement without counterclaim or set-off.
4.11 Currency Conversions. All amounts payable to HOA under this Agreement shall be paid in the Designated Currency.
On or about the first (1st) business day of each calendar month, HOA will convert the amounts reported by Franchisee in Brazilian Reais
with respect to the immediately preceding month, according to the prevailing exchange rate as reported in the “Currency Trading” section of
The Wall Street Journal (or its future equivalent), or such other source as HOA reasonably deems appropriate, on or for the first business
day of each calendar month. The amounts thus converted by HOA into the Designated Currency pursuant to this Paragraph shall be paid by
Franchisee within the applicable payment terms specified in this Agreement, at the conversion rate applicable on the date of actual
remittance, as published by the Central Bank of Brazil.
4.12 Local Withholding Taxes.
4.12.1 HOA and its affiliates shall not have any liability for any taxes, duties, assessments, fees or other governmental
charges, including any sales tax, use tax business tax, value-added tax, service tax, excise tax, gross receipts tax, property tax,
workers’ compensation, unemployment compensation, or otherwise (“Local Taxes”), whether levied upon Franchisee or its assets or
income, or upon HOA or its affiliates, in connection with business conducted or services performed by the Restaurant, or any payment
to HOA or its affiliates under this Agreement, except for any non-resident income withholding tax levied by the government agency in
Brazil (the “Income Withholdings”).
4.12.2 If any Local Taxes are required to be deducted or withheld from any payment to HOA under this Agreement, then the
amount payable shall be increased by Franchisee by such amount as is necessary to make the actual amount received by HOA (after
such Local Taxes and after any additional Local Taxes on account of such additional payment) equal to the amount due before the
application of any Local Taxes. If any Income Withholdings are required to be deducted or withheld from any payment to HOA under
this Agreement, then the amount payable shall be so deducted. Franchisee shall promptly pay the Local Taxes and Income
Withholdings required to be deducted or withhold to the applicable taxing authority and deliver to HOA original receipts of applicable
governmental authorities showing that all Local Taxes and Income Withholdings were properly deducted or withheld in compliance
with applicable law (or, if original receipts are unavailable, photocopies, tax returns and other documentation, as HOA may require).
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4.12.3 The parties shall, subject to applicable law, use all reasonable endeavors to minimize any Local Taxes and Income
Withholdings payable by each party under this Agreement, and to secure all tax refunds and credits available to each party, including
if necessary by restructuring or amending this Agreement.
4.13 In the event that any order, law, regulation, court decision, financial constraint, embargo or any other act or fact that is
beyond Franchisee’s reasonable control shall prevent Franchisee from remitting any amounts due under this Agreement to HOA, Franchisee
shall notify HOA immediately. Franchisee shall use its best efforts to obtain any consents or authorizations which may be necessary in order
to permit timely payments in the Designated Currency of all amounts payable hereunder. While such restrictions are in effect, HOA may
require Franchisee to deposit all amounts due but unpaid in any bank or institution and in any currency designated by HOA that is available to
Franchisee. HOA shall be entitled to all interest earned on such deposits. If such restrictions are in place for more than one hundred and eighty
(180) days, HOA may, upon the delivery of written notice to Franchisee, terminate this Agreement.
5. DUTIES OF FRANCHISEE
5.1 Franchisee acknowledges and agrees that every detail of Franchisee’s Restaurant, including without limitation the
uniformity of appearance, service, products, and advertising of Franchisee’s Restaurant, is important to Franchisee, HOA, the Hooters
System, and HOA’s other franchisees, in order to maintain the Hooters System’s high and uniform operating standards, to increase the
demand for the Products and services, and to protect HOA’s reputation and goodwill.
5.2 If Franchisee is or becomes a corporation, limited liability company, or any other form of business entity, Franchisee shall
comply with Section 13 of this Agreement and the following requirements:
5.2.1 Franchisee shall confine its activities exclusively to the development, opening and operation of Franchisee’s
Restaurant.
5.2.2 Franchisee’s Bylaws, Articles of Association, or any other comparable acts of incorporation and governing
documents shall at all times provide that: (i) Franchisee’s activities shall be confined exclusively to the development, opening, and
operation of Franchisee’s Restaurant; and (ii) the issuance, redemption, purchase for cancellation, and transfer of voting stock,
partnership interests, membership interests, or other equity interests in Franchisee, are restricted by the terms of this Agreement.
5.2.3 Franchisee shall provide to HOA copies of Franchisee’s Bylaws, Articles of Association or any other
comparable acts of incorporation and governing documents, and any other documents HOA may reasonably request, and any
amendments to any of them (all with an English translation thereof, if it is not in English), so that HOA actually receives such copies
by the end of ten (10) days after HOA requests such copies.
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5.2.4 Franchisee shall maintain stop transfer instructions against the transfer on its record of any equity securities (voting or
otherwise) except in compliance with Section 13 and Section 16 of this Agreement. All securities Franchisee issues shall bear the
following legend, which shall be printed legibly and conspicuously on each stock certificate or other evidence of ownership interest:
THE TRANSFER OF THESE SECURITIES IS SUBJECT TO THE TERMS AND CONDITIONS OF A FRANCHISE
AGREEMENT WITH HOOTERS OF AMERICA, LLC DATED [INSERT DATE]. REFERENCE IS MADE TO SUCH
AGREEMENT AND TO THE RESTRICTIVE PROVISIONS OF THE [INSERT TYPE OF CERTIFICATE] OF THIS
[INSERT TYPE OF ENTITY].
5.2.5 Franchisee shall maintain a current list of all owners of record and all beneficial owners of any class of voting equity
of Franchisee and shall furnish the list to HOA upon request (and an English translation thereof, if it is not in English) so that HOA
actually receives such list by the end of ten (10) days after HOA requests such list.
5.2.6 If Franchisee is a partnership, Franchisee shall maintain a current list of all general and limited partners, and a
list of all owners of record and all beneficial owners of any class of voting equity of Franchisee and such general and limited partners,
and shall furnish such list to HOA so that HOA actually receives such list upon request by the end of ten (10) days after HOA
requests such list.
5.3 Each Principal Owner (as defined in Section 13.2.1 below) of Franchisee, and such of Franchisee’s other Owners as HOA
may specify, shall enter into a continuing guaranty agreement in a form acceptable to HOA (the “Guaranty”), which Guaranty must be
delivered to HOA upon execution of this Agreement. HOA may amend or modify the form of such Guaranty from time to time as to Owners
signing the Guaranty after the Effective Date of this Agreement.
5.4 Franchisee assumes all costs, liability, expense, and responsibility for locating, obtaining, and developing the Accepted
Location for Franchisee’s Restaurant and for constructing and equipping Franchisee’s Restaurant at such Accepted Location. Franchisee shall
not make any binding commitment to a prospective vendor or lessor of real estate with respect to the Accepted Location unless HOA accepts
such Accepted Location in accordance with the procedures set forth in this Agreement and unless the lease documents for such Accepted
Location provide, without limitation: (i) that the landlord shall provide HOA with notice of any default thereunder at least thirty (30) days prior
to any termination of the lease, specifying such default and granting HOA the right (but not the obligation) to cure any such default within
such period; and (ii) that the landlord accepts HOA as an assignee of Franchisee’s interest thereunder. FRANCHISEE ACKNOWLEDGES
THAT HOA’S ACCEPTANCE OF A SITE AND THE RENDERING OF ASSISTANCE IN THE SELECTION OF A SITE DOES NOT
CONSTITUTE HOA’S REPRESENTATION, PROMISE, WARRANTY, OR GUARANTY THAT A HOOTERS RESTAURANT AT
THE ACCEPTED SITE WILL BE PROFITABLE OR OTHERWISE SUCCESSFUL. Franchisee must agree to a collateral assignment of
the leases for the Accepted Location, in a form acceptable to the HOA. Under the collateral assignment of leases, upon default by Franchisee
of the lease for the Accepted Location, this Agreement, or the document securing this Agreement, HOA will have right to take possession of
the Accepted Location and Franchisee will have no further right, title or interest in the lease.
5.5 Franchisee shall, at its expense, and to HOA’s satisfaction, comply with all of the following requirements:
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5.5.1 Before commencing Construction of Franchisee’s Restaurant, Franchisee shall submit a site plan to HOA,
including a footprint of the proposed building, and architectural, kitchen, and signage drawings, for HOA’s approval. Franchisee
must use an architect or engineer approved by HOA to prepare detailed plans and specifications for the Construction of Franchisee’s
Restaurant.
5.5.2 Franchisee shall: (i) use a qualified general contractor or construction supervisor to supervise the Construction
of Franchisee’s Restaurant and the completion of all improvements; and (ii) submit to HOA a statement providing the name and
contact information of such general contractor or construction supervisor.
5.5.3 Franchisee shall cause such Construction to be performed only in accordance with the site plan and the plans
and specifications HOA approved. No changes will be made to such approved plans and specifications, or to the Construction, or to
any of the materials used in Franchisee’s Restaurant, or to interior and exterior colors of Franchisee’s Restaurant, without HOA’s
express prior written consent.
5.5.4 Franchisee shall obtain and shall thereafter maintain all licenses, permits, and certifications required for lawful
Construction of Franchisee’s Restaurant, including without limitation building, zoning, access, parking, driveway access, sign, and
occupancy permits and licenses, and shall certify in writing to HOA that it has obtained all such licenses, permits, and certifications
5.5.5 Franchisee shall obtain and shall thereafter maintain all health, life, safety, operational, and other licenses,
permits, and certifications required for operation of Franchisee’s Restaurant and shall certify in writing to HOA prior to the Opening
Date that it has obtained all such licenses, permits, and certifications.
5.5.6 Franchisee shall complete Construction of Franchisee’s Restaurant in order to meet the requirements to open
Franchisee’s Restaurant in compliance with Section 1.6.1, above.
5.6 HOA will provide its manager training program to up to six (6) of Franchisee’s manager- in-training personnel. If
Franchisee is an individual, Franchisee and Franchisee’s management personnel must complete HOA’s manager training program to HOA’s
reasonable satisfaction prior to Franchisee’s opening of Franchisee’s Restaurant for business. If Franchisee is a corporation, partnership,
limited liability company, or any other form of business entity, at least the General Manager (as defined in Section 5.7, below) of Franchisee
and Franchisee’s other management personnel must complete HOA’s manager training program to HOA’s reasonable satisfaction prior to
Franchisee’s opening of Franchisee’s Restaurant for business. In the event the General Manager is not a Principal Owner, then at least one (1)
Principal Owner must attend HOA’s “executive overview” training program (the term “Principal Owner” is defined in Section 13.2.1, below).
At HOA’s option, key personnel Franchisee subsequently employs must also complete HOA’s manager training program to HOA’s
reasonable satisfaction. HOA may, at its discretion, make available additional training programs, seminars, and refresher courses to Franchisee
and Franchisee’s designated personnel from time to time. All such training will take place at the locations HOA designates. HOA may, at any
time, discontinue management training and decline to certify Franchisee or Franchisee’s designated personnel who fail to demonstrate an
understanding acceptable to HOA of the management training. If HOA discontinues the management training of Franchisee or Franchisee’s
designated personnel, Franchisee shall have thirty (30) days to present HOA with an acceptable alternative candidate for the manager training
program. If HOA reasonably determines that Franchisee is unable or unwilling to provide individuals who can complete the manager training
program to HOA’s reasonable satisfaction, or if HOA reasonably determines that the individuals whom Franchisee has presented for manager
training lack the skills to operate Franchisee’s Restaurant successfully, HOA will have the right to terminate this Agreement pursuant to
Section 14.3 hereof. HOA will provide instructors and training materials for all required training programs. Franchisee shall be responsible for
all expenses Franchisee or its personnel incur in connection with any training programs, including without limitation wage and benefit costs,
and the costs of transportation, lodging, and meals. If the Hooters Restaurant developed under this Agreement is not the first Hooters
Restaurant developed by Franchisee or its affiliate pursuant to a development agreement entered into by the parties (or their respective
affiliates), HOA may, at its sole discretion, waive certain initial training requirements and on-site assistance programs.
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5.7 Franchisee shall designate at least one (1) manager (the “General Manager”) of Franchisee’s Restaurant who shall have
authority over the other managers. If Franchisee is an individual, Franchisee may serve as General Manager. Franchisee’s designated General
Manager shall devote his or her full time, energy, and best efforts to the management and operation of Franchisee’s Restaurant. Franchisee
will require such General Manager to complete, to HOA’s reasonable satisfaction, an HOA- approved manager training program by the end of
ninety (90) days after such individual’s appointment to serve as General Manager. If Franchisee is a corporation or other business entity,
General Manager shall be an individual appointed by Franchisee and approved by HOA.
5.7.1 HOA will offer Franchisee training resources for Franchisee’s hourly employees as described in the Manual or
otherwise in writing.
5.7.2 Franchisee shall pay, as directed by HOA, the expenses of HOA personnel that provide training to Franchisee
and Franchisee’s employees at Franchisee’s Restaurant. Expenses shall include, without limitation, travel expenses, per diem, and
lodging expenses.
5.7.3 If Franchisee’s Restaurant opened under this Agreement is not the first restaurant the Franchisee has opened
under the Hooters System, HOA may waive certain training requirements, at HOA’s sole discretion.
5.8 Franchisee shall use the Accepted Location solely for the operation of Franchisee’s Restaurant. Franchisee shall not use or
permit the use of the Accepted Location for any other purpose or activity at any time without first obtaining HOA’s written consent.
Franchisee shall keep Franchisee’s Restaurant open and in normal operation as designated by HOA in the Manuals or otherwise in writing.
Franchisee shall not locate or permit to be located on or about Franchisee’s Restaurant premises or any other area of the Accepted Location
any slot machines or gambling devices, or any coin-operated machines for vending of any merchandise, entertainment devices for the playing
of electronic or manual games or for any similar purpose, pool tables or juke boxes, except as prescribed in the Manuals or as HOA may
otherwise approve in writing. Franchisee shall not permit on or about Franchisee’s Restaurant premises or any other area of the Accepted
Location the sale of products or services not included in the Hooters System without HOA’s prior express written consent. HOA, in its sole
discretion, may prescribe conditions under which Franchisee may sell such products or services.
5.9 Franchisee shall display all signs and other promotional materials HOA may require, to the extent permitted by applicable
laws, ordinances, rules, regulations, court orders, and decisional authority of all applicable governmental authorities having jurisdiction over
Franchisee’s Restaurant (hereinafter collectively the “Laws”). The color, size, design, and location of such signs shall be as HOA specifies or
approves. Franchisee shall not place additional signs, posters, or other décor items in, on, or about the Accepted Location without HOA’s
prior written consent.
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5.10 Franchisee shall comply with, and shall cause the Accepted Location and Franchisee’s Restaurant to comply with, any and
all Laws. Franchisee shall be solely responsible for ensuring that all requirements set forth in this Agreement and all other requirements related
to the development, opening, and operation of Franchisee’s Restaurant, including without limitation all requirements related to employment,
employment discrimination, wage and hour rules, building design, building construction, hygiene, food and beverage products, and alcoholic
beverages, comply with any and all Laws. In the event that any requirement set forth in this Agreement or any other requirement related to the
development, opening, and operation of Franchisee’s Restaurant violates any Law, and as a result Franchisee does not comply with this
Agreement or other requirements related to the development, opening, and operation of Franchisee’s Restaurant, the existence or enforcement
of such Law shall not excuse Franchisee’s noncompliance and shall not prevent HOA from asserting that such noncompliance constitutes a
default of this Agreement. Franchisee acknowledges and agrees that it has taken any and all steps necessary to ensure that this Agreement and
all other requirements related to the development, opening, and operation of Franchisee’s Restaurant comply with all Laws.
5.11 Franchisee shall maintain the interior and exterior of Franchisee’s Restaurant, and all other areas of the Accepted Location,
in first-class repair and condition, and in compliance with all of HOA’s maintenance and operating standards. In connection with such
maintenance, Franchisee shall make such additions, alterations, and repairs to the Accepted Location, and such replacement of items in and
about Franchisee’s Restaurant, as HOA may require, which additions, alterations, and repairs may include, without limitation, periodic
repainting, refinishing, and repairing of Franchisee’s Restaurant interior and exterior and replacing of obsolete or worn signs, furnishings,
fixtures, and equipment.
5.12 Franchisee acknowledges and agrees that it is in Franchisee’s best interests, and in the best interests of the Hooters System,
that Franchisee’s Restaurant be clean, up-to-date, well-maintained, and well-appointed. Therefore, Franchisee acknowledges and agrees that
Franchisee will, at HOA’s request, remodel, redecorate, equip, improve, and modify (collectively, “Renovate”) Franchisee’s Restaurant to
conform such Restaurant to: (i) the building design, trade dress, color schemes, signage, and presentation of trademarks and service marks
consistent with HOA’s then-current image; (ii) the requirements set forth in the Manuals; and (iii) the condition, state of repair, and general
appearance of Hooters restaurants that HOA reasonably deems desirable. HOA and Franchisee acknowledge and agree that the obligation to
Renovate is intended to be periodic remodeling, redecorating, equipping, improvement to, and modification of, Franchisee’s Restaurant, and
that nothing contained in this Section 5.12 will affect Franchisee’s obligation to maintain its Restaurant in compliance with the other provisions
of this Agreement and the Manuals. Notwithstanding anything set forth in this Section 5.12 to the contrary, HOA will not require Franchisee
to Renovate Franchisee’s Restaurant more often than one (1) time every seven (7) years. Upon request by HOA, Franchisee shall perform
reasonable equipment upgrades, as determined by HOA, within ninety (90) days after receipt of notice from HOA to upgrade equipment.
5.13 Franchisee shall operate Franchisee’s Restaurant in strict compliance with such methods, standards, and specifications as
HOA may from time to time prescribe in the Manuals or otherwise in writing, to maintain maximum efficiency and productivity and to ensure
that the highest degree of quality, appearance, and service is consistently maintained. Without limiting the generality of the foregoing,
Franchisee specifically agrees:
5.13.1 To maintain in sufficient supply, and to use at all times, only such products, materials, supplies, ingredients, and like
items as HOA may require, and to refrain from deviating therefrom by using nonconforming items without HOA’s prior written
consent;
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5.13.2 To use at all times only such methods of preparation, methods of service, and like methods as HOA may require,
including without limitation HOA’s standards and specifications for preparation and presentation of products served; and to refrain
from deviating therefrom by using nonconforming methods without HOA’s prior written consent;
5.13.3 To maintain the highest standards of cleanliness, health, and sanitation;
5.13.4 To obtain such products, equipment, services, and supplies as HOA may require, for the appropriate handling,
preparation, presentation, selling, and service of any food or beverage products;
5.13.5 To require clean uniforms conforming to such specifications as to color, design, and like factors as HOA may
designate from time to time, to be worn by all of Franchisee’s personnel at all times while working at, in, through, or on behalf of
Franchisee’s Restaurant, and to cause all personnel to present a clean, neat appearance and to render competent and courteous service
to guests;
5.13.6 To permit HOA, at any reasonable time, to remove from Franchisee’s Restaurant samples of items without payment
therefor, in amounts reasonably necessary for testing by HOA or an independent laboratory to determine whether such samples meet
HOA’s then-current standards and specifications. HOA may require Franchisee to bear the cost of such testing if HOA has not
previously approved the supplier of the item, or if the sample fails to conform to HOA’s specifications;
5.13.7 Not to install or permit to be installed on or about Franchisee’s Restaurant premises, without HOA’s prior written
consent, any furnishings, fixtures, equipment, décor, signage, or other improvements not previously approved as meeting HOA’s
standards and specifications;
5.13.8 To employ a sufficient number of trained and qualified personnel to operate Franchisee’s Restaurant;
5.13.9 To maintain sufficient inventories to operate Franchisee’s Restaurant; and
5.13.10 To honor all credit, charge, courtesy or cash cards or other credit devices required or approved by HOA. Franchisee
must obtain the written approval of HOA prior to honoring any previously unapproved credit, charge, courtesy or cash cards or other
credit devices. Franchisee shall ensure that the Restaurant adheres to the standards applicable to electronic payments including PCI
(Payment Card Industry) standards or any equivalent thereof. If required by HOA, Franchisee shall provide HOA with evidence of
compliance with the applicable standards and provide, or make available to HOA copies of an audit, scanning results or related
documentation relating to such compliance. Any costs associated with an audit or to gain compliance with these standards shall be
borne by Franchisee. Franchisee shall immediately (in any event within 24 hours) notify HOA if it suspects or has been notified by
any third party of a possible security breach related to the cashless system (or related cashless data) used in the Restaurant.
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5.14 HOA may require Franchisee to purchase or lease certain products (including food and beverages), equipment, services,
and supplies, including without limitation furnishings, fixtures, equipment, signage, and other items required for the operation of Franchisee’s
Restaurant, solely from suppliers (including manufacturers, distributors, and other sources), that demonstrate, to HOA’s continuing
reasonable satisfaction, the ability to meet HOA’s then-current standards and specifications for such items; that possess adequate quality
controls and capacity to supply Franchisee’s needs promptly and reliably; and that HOA has first approved in writing and has not thereafter
withdrawn from the approved supplier list. HOA will list such items and suppliers in the Manuals or in periodic bulletins and newsletters
HOA may supply. If Franchisee desires to purchase any items from an unapproved supplier, Franchisee shall submit to HOA a written
request for HOA’s consent to use such supplier, and shall have such supplier acknowledge in writing that Franchisee is an independent entity
from HOA and that HOA is not liable for debts Franchisee incurs. HOA shall have the right to require that its representatives be permitted to
inspect the supplier’s facilities, and that samples from the supplier be delivered to HOA or to an independent laboratory that HOA designates
for testing. Franchisee will pay a charge not to exceed the reasonable cost of the inspection and the actual cost of the test. HOA may also
require that the supplier comply with such other reasonable requirements as HOA may deem appropriate, including without limitation payment
of reasonable continuing inspection fees and administrative costs. HOA reserves the right, following HOA’s consent to use any supplier, to
reinspect the facilities and products of such supplier and to revoke its consent on the supplier’s failure to continue to meet any of HOA’s then-
current standards. If, in providing products, equipment, services, or supplies to Franchisee, any third party may obtain access to any of
HOA’s confidential information or trade secrets (as defined below), HOA may require, as a condition of approval of such supplier, that the
supplier execute covenants of non- disclosure and non-competition in a form HOA provides.
5.15 Franchisee recognizes that HOA shall have the right to appoint only one manufacturer, distributor, reseller, and/or other
vendor for any particular item. HOA may, in some instances, be the only designated supplier of an item.
5.16 HOA may require Franchisee to purchase or lease products, equipment, services, and supplies from HOA, HOA’s
affiliates, or third parties HOA designates or approves. Franchisee acknowledges and agrees that HOA and HOA’s affiliates may enter into
agreements with third parties, including without limitation suppliers and distributors, under which HOA and HOA’s affiliates may derive
revenue, profits, and other benefits, including without limitation rebates, credits, discounts, allowances, monies, payments, or marketing
assistance (collectively, “Allowances”) as a result of consideration Franchisee pays to such third parties for purchases or leases HOA requires
Franchisee to make. These Allowances may be based on individual or Hooters System-wide purchases of food, beverages, paper goods and
other items. Franchisee assigns to HOA or its designee all of Franchisee’s right, title and interest in and to any and all such Allowances and
authorizes HOA or its designee to collect and retain any or all such Allowances without restriction (unless otherwise instructed by the
supplier).
5.17 Franchisee shall grant HOA the right to enter Franchisee’s Restaurant premises at any reasonable time to inspect,
photograph, audiotape, or videotape Franchisee’s Restaurant and the equipment and operations at Franchisee’s Restaurant, to ensure
compliance with this Agreement and the Manuals; provided, however, that HOA, in the exercise of such right, shall use all reasonable efforts
to prevent disruption or interference with the operation of Franchisee’s Restaurant. Franchisee shall cooperate with HOA in such inspections
by rendering such assistance as HOA may reasonably request, and shall enforce and comply with all inspection standards HOA may
establish; and, on reasonable notice from HOA, and without limiting HOA’s other rights under this Agreement, shall take such steps as may
be necessary to correct immediately the deficiencies detected during any such inspection, including without limitation immediately desisting
from the further use of any products, equipment, services, or supplies, including without limitation advertising material, that do not conform to
HOA’s then-current standards or specifications.
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5.18 Franchisee shall not engage in any trade practice or other activity, and shall not offer any product or service, that HOA
determines to be harmful to the goodwill of, or to reflect unfavorably on the reputation of, Franchisee, HOA, Franchisee’s Restaurant, the
Products sold at Franchisee’s Restaurant, or the Hooters System; or that constitutes a deceptive or unfair trade practice; or that otherwise
violates any Law.
5.19 In any equipment or trade fixture lease or financing that Franchisee enters into in connection with Franchisee’s Restaurant,
Franchisee shall include a provision approving HOA as transferee without any right to accelerate or to modify such lease or financing, and
requiring the lessor or lender to send notice of any default of such lease or financing to HOA at HOA’s then-current address and to give HOA
thirty (30) days from the date HOA receives such notice of default to cure such default. HOA is under no duty or obligation whatsoever to
cure such default, but should HOA elect to cure such default, Franchisee shall reimburse and indemnify HOA for any costs and expenses
HOA incurs in connection with the cure of such default, on HOA’s written request, so that HOA actually receives such reimbursement by the
end of ten (10) days after HOA requests such reimbursement.
5.20 In order to secure payment of all amounts Franchisee is obligated to pay under this Agreement, Franchisee hereby grants to
HOA a first priority, unsubordinated security interest in all of Franchisee’s trade fixtures, equipment, inventory, and accounts receivable, and
in the proceeds of the foregoing. Franchisee shall execute all documents HOA reasonably deems necessary to perfect HOA’s security interest
in such items.
5.21 Franchisee will immediately notify HOA, in writing, of any act, omission, or circumstance that: (i) would constitute a
default by Franchisee of this Agreement or any other agreement to which Franchisee and HOA are parties; or (ii) would reasonably be
expected to impair Franchisee’s ability to fulfill its obligations to HOA. Franchisee will not intentionally, willfully, or negligently: (a)
misrepresent any matter to HOA; or (b) fail to immediately notify HOA of any matter as to which this Agreement requires Franchisee to
notify HOA.
5.22 Incentive/Convenience Programs. If required by HOA, Franchisee shall offer for sale, and will honor for purchases by
customers, any incentive or convenience programs which HOA may institute from time to time, and Franchisee shall do so in compliance with
HOA’s standards and procedures for such programs. Additionally, Franchisee shall sell, issue, and redeem gift cards (“Gift Cards”) and
(whether as a part of, or separate from, Gift Cards) loyalty cards (“Loyalty Cards”) that have been prepared utilizing the standard form of
Gift Card or Loyalty Card provided or designated by HOA, and only in the manner specified in the Manuals or otherwise in writing.
Franchisee shall fully honor all Gift Cards and Loyalty Cards regardless of whether a Gift Card or Loyalty Card was issued by HOA or
another franchisee, regardless of whether the Gift Card or Loyalty Card has been discounted for third-party retailer fees pursuant to
arrangements that HOA has established with such retailers for the sale of Gift Cards and Loyalty Cards.
6. PROPRIETARY MARKS
6.1 HOA represents with respect to the Proprietary Marks that:
6.1.1 Pursuant to the License Agreement with an affiliate, HOA has been granted the exclusive right to use and to
license others to use the Proprietary Marks and the Hooter System to establish Hooters restaurants in Brazil. HOA has taken, and shall
take or cause to be taken, all steps reasonably necessary to preserve and protect the ownership and validity in Brazil of the Proprietary
Marks that HOA has designated for use in the Hooters System in Brazil.
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6.2 Franchisee covenants, warrants, represents, and agrees that:
6.2.1 Franchisee will use only the Proprietary Marks HOA designates, and will use them only in the manner HOA
authorizes and permits. Franchisee acknowledges and agrees that any unauthorized use of the Proprietary Marks will constitute an
infringement of HOA’s rights.
6.2.2 Franchisee will use the Proprietary Marks only for the operation of Franchisee’s Restaurant, and only at
Franchisee’s Restaurant or in advertising for Franchisee’s Restaurant.
6.2.3 Franchisee will operate and advertise Franchisee’s Restaurant only under the name “Hooters” without prefix or
suffix, except as otherwise authorized or required by us.
6.2.4 Franchisee will identify itself as the owner of Franchisee’s Restaurant in connection with any use of the
Proprietary Marks, including without limitation on invoices, order forms, receipts, menus, employee forms, and contracts, and at such
conspicuous locations on the premises of Franchisee’s Restaurant as HOA may require. The form and content of such identification
will comply with HOA’s standards and specifications.
6.2.5 Franchisee will not use any Proprietary Mark: (i) to incur any obligation or indebtedness on behalf of HOA; (ii)
as a part of Franchisee’s corporate or other legal name; (iii) in any part of a web site domain name without HOA’s prior written
consent, which consent HOA will not unreasonably withhold; or (iv) on a web site, including without limitation a social media site,
without HOA’s prior written consent.
6.2.6 Franchisee will file for and maintain, at its sole cost and expense, all trade name or business name registrations
required by HOA or by Law.
6.2.7 Franchisee will promptly execute any powers of attorney or other documents HOA deems necessary to obtain or
enhance protection for the Proprietary Marks, to maintain the continued validity and enforceability of the Proprietary Marks, to further
HOA’s exercise of its rights under this Agreement, or otherwise. Without limiting the generality of the foregoing, Franchisee must
execute (and file, if applicable) any documents that HOA or its counsel deem necessary to obtain protection for the Proprietary Marks
or to maintain their continued validity and enforceability, including license agreements (which shall be subject to the terms of this
Agreement). Upon termination or expiration of this Agreement, Franchisee agrees to do everything necessary to ensure that Franchisee
ceases to be a licensee of the Marks, and Franchisee hereby appoints HOA as Franchisee’s attorney to execute any documents and to
do such things as may be necessary for this purpose. Franchisee agrees to pay for all costs of preparation, recordation and cancellation
of the license agreement.
6.2.8 In the event that any person or entity commences or threatens litigation against Franchisee related to the
Proprietary Marks or the Hooters System, Franchisee will promptly notify HOA and will cooperate fully in defending or settling such
litigation, as determined exclusively by HOA.
6.3 Franchisee expressly acknowledges and agrees that:
6.3.1 As between HOA and Franchisee, HOA has the sole and exclusive right and interest in and to the Proprietary
Marks and the goodwill associated with and symbolized by them.
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6.3.2 The Proprietary Marks are valid, distinctive, and serve to identify HOA as the source of the goods and services
offered pursuant to those marks and by those who are authorized to operate under the Hooters System.
6.3.3 Franchisee will not directly or indirectly contest the validity, distinctiveness, or ownership of the Proprietary Marks,
or HOA’s right to license the Proprietary Marks, either during the Term or thereafter.
6.3.4 Franchisee has no ownership interest or other interest in or to the Proprietary Marks, except the license granted by
this Agreement.
6.3.5 In the event HOA substitutes different Proprietary Marks for the Proprietary Marks Franchisee is then using,
Franchisee will promptly effect such substitution at Franchisee’s sole cost and expense.
6.3.6 Any and all goodwill related to Franchisee’s use of the Hooters System or the Proprietary Marks will inure solely
and exclusively to the benefit of HOA, and on termination or expiration of this Agreement and the license granted under this
Agreement, no monetary amount will be assigned as attributable to any goodwill associated with Franchisee’s use of the Hooters
System or the Proprietary Marks.
6.3.7 The license of the Proprietary Marks granted to Franchisee under this Agreement is nonexclusive, and HOA thus
has and retains the rights, among others:
(a) To use the Proprietary Marks itself in connection with selling products and services;
(b) To grant other licenses for the Proprietary Marks, in addition to those licenses already granted to existing
franchisees and otherwise; and
(c) To develop and establish other systems using marks the same or similar to the Proprietary Marks, or any
other marks, and to grant licenses or franchises thereto at any locations whatsoever, without providing any rights or
compensation to Franchisee.
6.4 HOA represents and warrants that Exhibit B is a true and correct description of HOA’s trademark applications and
registrations for the Proprietary Marks in Brazil (the “Country”). During the term of this Agreement, HOA shall use commercially reasonable
efforts to obtain and maintain the registration for such Proprietary Marks in the Country. Franchisee acknowledges and agrees that: (a) HOA
makes no representation or covenant that any Proprietary Marks for which applications are currently pending, or for which applications may
be filed in the future, will be registered in the Country; and (b) HOA will have no liability to Franchisee if HOA does not obtain registration
for one or more of the Proprietary Marks in the Country.
6.5 Franchisee acknowledges and agrees that HOA has no obligation to, and has not and will not investigate or research
whether the Proprietary Marks or other intellectual property infringes the intellectual property rights of any third party in the Country. Except
as expressly provided in this Agreement, HOA shall have no responsibility for any such infringements. Nothing in this Agreement shall be
construed as a warranty by HOA regarding clear title to or ownership of the Proprietary Marks or any other intellectual property, which such
warranty is hereby expressly disclaimed.
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7. HOOTERS OF AMERICA MANUALS
7.1 In order to protect the reputation and goodwill of HOA and the Proprietary Marks, to maintain the high standards of
operation under the Hooters System, and to protect the investments of HOA and HOA’s other franchisees, Franchisee shall conduct
Franchisee’s Restaurant in compliance with this Agreement, the Manuals, and such other written directives as HOA may issue from time to
time whether or not such directives are made part of the Manuals, and any other manuals, videos, or materials HOA may create or approve for
use in the operation of the Hooters System or Franchisee’s Restaurant.
7.2 The Manuals, written directives, other manuals and materials, and any other confidential communications HOA provides or
approves, shall at all times remain the sole property of HOA and shall at all times be kept and maintained in a secure place on Franchisee’s
Restaurant premises.
7.3 HOA may add to, delete from, or modify the contents of the Manuals and any other written directives, manuals, and
materials created or approved for use in the operation of the Hooters System, or Franchisee’s Restaurant. Franchisee expressly agrees that
such contents shall be deemed effective on receipt by Franchisee or at such other time as HOA may otherwise specify.
7.4 Franchisee shall at all times ensure that its copy of the Manuals is kept current and up-to- date. In the event of any dispute as
to the contents of the Manuals, the master copy of the Manuals that HOA maintains shall be controlling.
7.5 The Manuals, their contents and all intellectual property rights therein shall be HOA’s sole property, notwithstanding that
Franchisee may have materially assisted HOA in adapting the Manuals or translating the Manuals into another language. Franchisee shall sign
whatever assignment or other documents HOA requests to evidence HOA’s ownership or to provide such other assistance to secure HOA’s
intellectual property rights in such ideas, concepts, methods and techniques.
7.6 From time to time, Franchisee may submit to HOA for its review and approval any proposed modifications to the Manuals
and the Hooters System that, in Franchisee’s reasonable judgment, are necessary to comply with applicable Laws or for the commercial
success of the Hooters Restaurants in the Country, including any modifications to, additions to or deletions from the menu items. HOA will
consider in good faith such proposed modifications, but retains the sole and complete discretion to approve or reject such proposed
modifications.
7.7 HOA may provide the Manual and all other materials only in English. If Franchisee considers it necessary or desirable to
translate the Manuals and/or all other bulletins, brochures, labels, advertising materials or audio or visual materials into local language,
Franchisee, at Franchisee’s expense, shall be responsible for complete and accurate translations. HOA has the right to review, re-translate or
comment upon any translation prepared by Franchisee. Franchisee must immediately at Franchisee’s expense make any modifications to any
translation that HOA reasonably requests. Franchisee must not use any translations disapproved by HOA.
7.8 HOA reserves the right to provide the Manuals in hard copy, electronic or such other form as it may select, including
through an intranet portal. Franchisee shall at its expense ensure that it has the necessary equipment to receive and use the Manuals in its
various forms.
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8. CONFIDENTIAL INFORMATION
8.1 “Confidential Information” means any information that HOA discloses to Franchisee that HOA designates as confidential
or that, by its nature, would reasonably be expected to be held in confidence or kept secret, whether such disclosure occurred prior to or after
the Effective Date of this Agreement. Without limiting the definition of “Confidential Information,” all the following shall be conclusively
presumed to be Confidential Information whether or not HOA designates them as such: (i) all information that HOA has marked or designated
as confidential; (ii) HOA’s Marketing Manual, Promotions Management Manual, Concept Overview Manual, and all other Hooters System
Manuals, including without limitation those on the subjects of Franchise Operations, Employee Relations, Finance and Administration, Field
Operations, Purchasing, and Marketing, together with all similar directives and documentation; (iii) HOA’s training programs and the material
contained in them; (iv) HOA’s rules, guidelines, standards, specifications, plans, programs, procedures, and agreements, related to the
development, opening, and operation of restaurants; (v) HOA’s cost information; and (vi) all other information that HOA provides to
Franchisee in confidence, except where such information is a Trade Secret.
8.2 “Trade Secrets” means information that derives independent economic value, actual or potential, from not being generally
known to, and not being readily ascertainable by proper means by, other persons who may obtain economic value from its disclosure or use,
whether Franchisee obtained such information prior to or after the Effective Date of this Agreement. Without limiting the definition of “Trade
Secret,” all the following shall be conclusively presumed to be Trade Secrets whether or not HOA or any judicial or other administrative body
has designated them as such: (i) the Hooters System’s guest lists, and the contact information of such guests, including without limitation
guest lists and contact information compiled by Franchisee; (ii) HOA’s food and beverage recipes, lists of ingredients, preparation
instructions, and serving instructions; (iii) HOA’s advertising, marketing, and public relations strategies; (iv) HOA’s marketing analyses; (v)
products and services that HOA proposes to introduce, but that it has not yet introduced; and (vi) HOA’s expansion plans.
8.3 Confidentiality. Franchisee shall not, during the term of this Agreement or thereafter, communicate, divulge, or use for the
benefit of any other person, persons, partnership, entity, association, or corporation any Confidential Information, Trade Secret, knowledge, or
know-how concerning the methods of operation of the business franchised hereunder which may be communicated to Franchisee or of which
Franchisee may be apprised by virtue of Franchisee’s operation under the terms of this Agreement. Franchisee shall divulge such confidential
information only to such of its employees as must have access to it in order to operate Franchisee’s Restaurant. Any and all information,
knowledge, know-how, and techniques which HOA designates as confidential shall be deemed confidential for purposes of this Agreement,
except information which Franchisee can demonstrate came to its attention before disclosure thereof by HOA; or which, at or after the time of
disclosure by HOA to Franchisee, had become or later becomes a part of the public domain, through publication or communication by others.
Any employee who may have access to any confidential information regarding Franchisee’s Restaurant shall execute a covenant that s/he will
maintain the confidentiality of information they receive in connection with their association with Franchisee. Such covenants shall be on a form
provided by HOA, (an “Individual Non-Disclosure and Non-Competition Agreement”), which form shall, among other things, designate
HOA as a third party beneficiary of such covenants with the independent right to enforce them.
8.4 Consequences of Breach. Franchisee acknowledges that any failure to comply with the requirements of this Section 8 will
cause HOA irreparable injury, and Franchisee agrees to pay all court costs and reasonable attorney’s fees incurred by HOA in obtaining
specific performance of, or an injunction against violation of, the requirements of this Section 8.
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8.5 Franchisee-Developed Concepts. Franchisee agrees to disclose to HOA all ideas, concepts, methods, techniques and
products conceived or developed by Franchisee, its affiliates, owners or employees during the term of this Agreement relating to the
development and/or operation of Franchisee’s Restaurant. Franchisee hereby grants to HOA and agrees to procure from its affiliates, owners
or employees a perpetual, non-exclusive, and worldwide right to use any such ideas, concepts, methods, techniques and products in all food
and beverage service businesses operated by HOA or its affiliates, franchisees and designees. HOA shall have no obligation to make any
payments to Franchisee with respect to any such ideas, concepts, methods, techniques or products. Franchisee agrees that Franchisee will not
use or allow any other person or entity to use any such concept, method, technique or product without obtaining HOA’s prior written
approval.
9. TECHNOLOGY
9.1 Computer Systems and Software. With respect to computer systems and required software:
9.1.1 HOA shall have the right to specify or require that certain brands, types, makes, and/or models of
communications, computer systems, and hardware to be used by, between, or among Restaurants, including without limitation: (a)
back office and point of sale systems, data, audio, video, and voice storage, retrieval, and transmission systems for use at Restaurants,
between or among Restaurants, and between and among Franchisee’s Restaurants and HOA, HOA’s designee and/or Franchisee; (b)
cash register systems; (c) physical, electronic, and other security systems; (d) printers, “media wall” systems, and other peripheral
devices; (e) archival back-up systems; and (f) internet access mode (e.g., form of telecommunications connection) and speed
(collectively, the “Computer System”).
9.1.2 HOA shall have the right, but not the obligation, to develop or have developed for it, or to designate: (a) computer
software programs and accounting system software that Franchisee must use in connection with the Computer System (“Required
Software”), which Franchisee shall install; (b) updates, supplements, modifications, or enhancements to the Required Software, which
Franchisee shall install; (c) the tangible media upon which such Franchisee shall record or receive data; and (d) the database file
structure of Franchisee’s Computer System.
9.1.3 Franchisee shall install and use the Computer System and Required Software in the manner required by HOA.
9.1.4 Franchisee shall record all sales on the computer-based point of sale system specified by HOA in the Manuals or
otherwise in writing, which shall be deemed part of the Franchisee’s Computer System.
9.1.5 Franchisee shall implement and periodically make upgrades and other changes to the Computer System and
Required Software as HOA may reasonably request in writing (collectively, “Computer Upgrades”).
9.1.6 Franchisee shall comply with all specifications issued by HOA with respect to the Computer System and the
Required Software, and with respect to Computer Upgrades, at Franchisee’s expense. Franchisee shall also afford HOA unimpeded
access to Franchisee’s Computer System and Required Software as HOA may request, in the manner, form, and at the times requested
by HOA.
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9.2 Data. All data provided by Franchisee, uploaded to HOA’s system from the Franchisee’s system, and/or downloaded from
the Franchisee’s system to HOA’s system is and will be owned exclusively by HOA, and HOA will have the right to use such data in any
manner that HOA deems appropriate without compensation to Franchisee. In addition, all other data created or collected by Franchisee in
connection with the Computer System, or in connection with Franchisee’s operation of the business (including but not limited to consumer
and transaction data), is and will be owned exclusively by HOA during the term of, and following termination or expiration of, this
Agreement. Copies and/or originals of such data must be provided to HOA upon HOA’s request. HOA hereby licenses use of such data back
to Franchisee, at no additional cost, solely for the term of this Agreement and solely for Franchisee’s use in connection with the business
franchised under this Agreement.
9.3 Data Requirements and Usage. HOA may, from time-to-time, specify in the Manuals or otherwise in writing the information
that Franchisee shall collect and maintain on the Computer System installed at Franchisee’s Restaurant, and Franchisee shall provide to HOA
such reports as HOA may reasonably request from the data so collected and maintained. Franchisee shall download daily, or in such other
intervals as HOA may require, all information and materials HOA may require in connection with the operation of Franchisee’s Restaurant,
and shall display such information and materials in the manner HOA may prescribe, including, without limitation, to employees of
Franchisee’s Restaurant, or on media displayed at Franchisee’s Restaurant. During and subsequent to the term of this Agreement, HOA shall
have the right to use all data pertaining to, derived from, or displayed at Franchisee’s Restaurant (including, without limitation, data pertaining
to or otherwise related to Franchisee’s Restaurant customers).
9.3.1 Franchisee shall abide by all of the Country’s Laws pertaining to the privacy of consumer, employee, and
transactional information (“Privacy Laws”). Without limiting the generality of the foregoing, Franchisee shall adopt and maintain strict
procedures to safeguard the security and confidentiality of such information, and shall ensure that all necessary or required consents or
authorizations are obtained regarding the use and disclosure of their information as may be necessary, in light of applicable Privacy
Laws;
9.3.2 Franchisee shall comply with HOA’s standards and policies pertaining to Privacy Laws. If there is a conflict
between HOA’s standards and policies pertaining to Privacy Laws and actual applicable Laws, Franchisee shall: (a) comply with the
requirements of applicable Law; (b) immediately give HOA written notice of said conflict; and (c) promptly and fully cooperate with
HOA and HOA’s counsel in determining the most effective way, if any, to meet HOA’s standards and policies pertaining to Privacy
Laws within the bounds of applicable Law.
9.3.3 Franchisee shall not publish, disseminate, implement, revise, or rescind a data privacy policy without HOA’s
prior written consent as to such policy.
9.4 Electronic Identifiers; E-Mail. Franchisee shall not use the Proprietary Marks or any abbreviation or other name associated
with HOA and/or the System as part of any e-mail address, domain name, and/or other identification of Franchisee in any electronic medium.
Franchisee agrees not to transmit or cause any other party to transmit advertisements or solicitations by e-mail or other electronic media
without first obtaining HOA’s written consent as to: (a) the content of such e-mail advertisements or solicitations; and (b) Franchisee’s plan
for transmitting such advertisements. In addition to any other provision of this Agreement, Franchisee shall be solely responsible for
compliance with any Law pertaining to sending e-mails.
9.5 Internet Web Sites and Listings.
9.5.1 Franchisee may, at its expense, create its own web site and social media sites for Franchisee’s Restaurant. To do so,
Franchisee must submit all web site and social media site plans and information to HOA for HOA’s prior written consent.
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9.5.2 Franchisee’s web site, and the content of all Franchisee’s social media sites, must conform to HOA’s then-current
standards. Franchisee must keep HOA advised at all times of all of Franchisee’s web site and social media site addresses and domain
names. Upon notice to Franchisee, and notwithstanding the provisions of Section 9.5.1 above, HOA shall have the right to acquire
control over Franchisee’s web site, social media addresses and domain names, and Franchisee agrees to execute such documents and
take such actions as may be necessary to cooperate fully with HOA in connection with HOA’s doing so.
9.5.3 Franchisee has, or may acquire during the term of this Agreement, certain right, title, and interest in and to certain
domain names, hypertext markup language (“html”), uniform resource locator (“url”) addresses, and access to corresponding Internet
web sites, and the right to hyperlink to certain web sites and listings on various Internet search engines and other social networking
media, business networking media, and marketing media sites, applications, and platforms, all as modified and expanded from time to
time as technology progresses and otherwise (collectively, the “Internet Web Sites and Listings”) related to the Franchise or the
Proprietary Marks.
9.5.4 Franchisee must comply with all Laws in relation to its Internet Web Sites and Listings, and must obtain HOA’s
prior written consent for any online ordering that may occur through Franchisee’s web site.
9.5.5 Transfer. On Termination of the Franchise Agreement:
(a) Franchise shall immediately and without request therefor provide HOA with a full and complete written list
and description of any and all Internet Web Sites and Listings; and
(b) If HOA directs Franchisee to do so, Franchisee shall immediately direct all Internet Service Providers,
domain name registries, Internet search engines, and other listing agencies (collectively, the “Internet Companies”) with
which Franchisee has Internet Web Sites and Listings: (i) to transfer all Franchisee’s interest in such Internet Web Sites and
Listings to HOA; and (ii) to execute such documents and take such actions as may be necessary to effectuate such transfer. In
the event HOA does not desire to accept any or all of such Internet Web Sites and Listings, Franchisee shall immediately
direct the Internet Companies to terminate such Internet Web Sites and Listings or shall take such other actions with respect to
the Internet Web Sites and Listings as HOA may direct.
9.5.6 Appointment; Power of Attorney. Franchisee hereby constitutes and appoints HOA and any officer or agent of
HOA, for HOA’s benefit under this Agreement and this Agreement or otherwise, with full power of substitution, as Franchisee’s true
and lawful attorney- in-fact with full power and authority in Franchisee’s place and stead, and in Franchisee’s name, on termination of
this Agreement, to take any and all appropriate action and to execute and deliver any and all documents that may be necessary or
desirable to accomplish the purposes of this Internet Listing Agreement. Franchisee further agrees that this appointment constitutes a
power coupled with an interest and is irrevocable. Without limiting the generality of the foregoing, Franchisee hereby grants to HOA
the power and right to do the following:
(a) Direct the Internet Companies to transfer all or any part of Franchisee’s interest in and to the Internet Web
Sites and Listings to HOA or any third party HOA designates;
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(b) Direct the Internet Companies to terminate all or any part of the Internet Web Sites and Listings; and
(c) Execute the Internet Companies’ standard assignment forms or other documents in order to effect such
transfer or termination of Franchisee’s interest in the Internet Web Sites and Listings.
any documents and take any actions as may be necessary to confirm the powers and rights granted hereunder.
To the extent required by applicable Laws or deemed convenient by Franchisor, Franchisee further undertakes to execute
9.5.7 Certification of Termination. Franchisee hereby directs the Internet Companies that they shall accept, as
conclusive proof of termination of this Agreement, HOA’s written statement, signed by an officer or agent of HOA, that this
Agreement has terminated.
9.5.8 Cessation of Obligations. After the Internet Companies have duly transferred all Franchisee’s interest in such
Internet Web Sites and Listings to HOA, or after the Internet Companies have duly terminated Franchisee’s interest in such Internet
Web Sites and Listings, as between Franchisee and HOA, Franchisee will have no further interest in, or obligations under, such
Internet Web Sites and Listings. Notwithstanding the foregoing, Franchisee shall remain liable to each and all of the Internet
Companies for the sums Franchisee is obligated to pay such Internet Companies for obligations Franchisee incurred before the date
HOA duly accepted the transfer of such interest in the Internet Web Sites and Listings, or for any other obligations not subject to the
Franchise Agreement.
9.6 Changes. Franchisee and HOA acknowledge and agree that changes to technology are dynamic and not predictable within
the term of this Agreement. In order to provide for inevitable but unpredictable changes to technological needs and opportunities, Franchisee
agrees that HOA shall have the right to establish, in writing, reasonable new standards for the implementation of technology in the Hooters
System; and Franchisee agrees that it shall abide by those reasonable new standards established by HOA as if this Section 9 were periodically
revised by HOA for that purpose.
10. ACCOUNTING AND RECORDS
10.1 Franchisee shall maintain, and shall preserve for at least five (5) years after the dates of their preparation, full, complete, and
accurate books, records, and accounts, prepared in accordance with generally-accepted accounting principles consistently applied, in the form
and manner HOA prescribes.
10.2 Franchisee shall submit to HOA:
10.2.1 After the opening of Franchisee’s Restaurant: (i) a royalty report, on a monthly basis, in the form HOA
prescribes, that accurately states all Gross Sales during each preceding month and that provides such other data or information as HOA
may require, so that HOA actually receives such report by the end of ten (10) days after the end of each such month; (ii) profit and loss
statements and balance sheets prepared in a form that we shall designate and in accordance with generally-accepted accounting
principles consistently applied for each accounting period, so that HOA actually receives such information by the end of fifteen (15)
days after the end of each period covered by the report; and (iii) copies of all tax returns that Franchisee is required by Law to file
related to Franchisee’s Restaurant, so that HOA actually receives such returns by the end of ten (10) days after the end of the
applicable tax reporting period.
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10.2.2 Reports of daily receipts, vendor purchases, payroll payments, and such other forms, reports, records, and
information as HOA may request from time to time, and reports of all rebates, discounts, allowances, marketing assistance, or other
benefits received from vendors, on forms HOA provides to Franchisee or in the form HOA specifies.
10.2.3 Such records, reports, documents, data, certificates, and other information related to this Agreement, Franchisee’s
obligations or Franchisee’s Restaurant, as HOA may require, so that HOA actually receives such items by the end of ten (10) days
after HOA requests that Franchisee submit such items to HOA.
10.3 Franchisee shall, at its expense, provide to HOA a profit and loss statement and balance sheet, accompanied by a review
report certified by Franchisee’s chief executive officer or chief financial officer, within ninety (90) days after the end of each of Franchisee’s
fiscal years, showing the results of operations of Franchisee’s Restaurant during such fiscal year. HOA reserves the right to require
Franchisee to have such review report prepared by an independent certified public accountant satisfactory to HOA.
10.4 HOA and its designated agents shall have the right, at all reasonable times, to examine and copy, at HOA’s expense, the
books, records, tax returns, and tax filings of Franchisee and Franchisee’s Restaurant. HOA shall also have the right, at any time, to have an
independent audit made of the books of Franchisee’s Restaurant. If an inspection should reveal that any payments to HOA have been
understated in any report to HOA, Franchisee shall immediately pay to HOA the amount understated on HOA’s demand, plus interest on such
amount from the date such amount came due until paid, at the Default Rate, calculated on a daily basis. If an inspection discloses an
understatement in any payment to HOA of two percent (2%) or more, Franchisee shall, in addition, reimburse HOA for any and all costs and
expenses related to the inspection (including without limitation travel, food, lodging, and wage expenses of HOA’s personnel, and reasonable
accounting and legal fees and costs); and, at HOA’s discretion, shall submit audited financial statements prepared, at Franchisee’s expense, by
an independent certified public accountant satisfactory to HOA. If an inspection discloses an understatement in any payment to HOA of four
percent (4%) or more, such act or omission shall constitute grounds for termination of this Agreement pursuant to Section 14.3.8 of this
Agreement. The foregoing remedies shall be in addition to any other remedies HOA may have pursuant to this Agreement or at law, in equity,
or otherwise.
10.5 Franchisee shall comply with the daily accounting and reporting procedures HOA prescribes, as modified from time to time,
and shall purchase the accounting and reporting equipment, including without limitation point of sale equipment, that HOA requires.
11. ADVERTISING
11.1 Franchisee will comply with its local advertising obligations set forth in Section 4.4 of this Agreement. Franchisee may
conduct such additional local advertising and promotion of Franchisee’s Restaurant as Franchisee deems appropriate. All advertising and
promotion Franchisee conducts shall conform to such standards and requirements as HOA may specify. Franchisee shall submit to HOA for
HOA’s prior written approval, to the extent the Law requires, samples of all advertising and promotional plans and materials that Franchisee
desires to use and that HOA has not prepared or previously approved. Franchisee shall display the Proprietary Marks in the manner HOA
prescribes on all signs and other advertising and promotional materials used in connection with Franchisee’s Restaurant.
11.2 HOA may provide to Franchisee, itself or through the Global Advertising Fund, at Franchisee’s expense, such advertising
and promotional plans and materials as HOA deems advisable for local advertising. HOA may develop advertising programs for the
promotion of the Proprietary Marks or merchandise offered at Hooters restaurants, and Franchisee must comply with the requirements of such
programs.
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11.3 Global Advertising Fund. HOA reserves the right to establish a global advertising fund (the “Global Advertising Fund”),
for which Franchisee will be required to pay the Global Advertising Fee. If and when established, the Global Advertising Fund shall be
maintained and administered by HOA or its designee, on such terms and conditions as HOA deems appropriate, including control over
content and media; deposits and expenditures of the Global Advertising Fund; and allocation of HOA’s direct costs and overhead relating to
the Ad Fund. For purpose of clarification, the Global Advertising Fund is not intended to be, and should not be treated as, a trust or similar
arrangement.
11.4 HOA may require Franchisee to participate in cooperative advertising programs with certain suppliers or approved sources
of goods. Franchisee agrees that HOA reserves the right, to the fullest extent allowed by Law, to establish maximum, minimum or other
pricing requirements with respect to the prices Franchisee may charge for the Products offered and sold at Franchisee’s Restaurant.
11.5 Franchisee acknowledges that periodic rebates, give-aways and other promotions and programs are an integral part of the
Hooters System. Accordingly, Franchisee, at its sole cost and expense, from time to time shall issue and offer such rebates, give-aways,
discounts, incentives and promotions in accordance with any reasonable marketing programs established by HOA, and further shall honor
rebates, give-aways and other promotions issued by other franchisees as long as all of the above do not contravene the Laws of appropriate
governmental authorities.
12. INSURANCE
12.1 Franchisee shall obtain, prior to the commencement of any operations under this Agreement, and shall maintain in full force
and effect at all times, at Franchisee’s expense, an insurance policy or policies insuring Franchisee, together with HOA, HOA’s affiliates, and
Franchisee’s and HOA’s respective directors, officers, shareholders, general partners, limited partners, members, employees, and agents, as
additional insureds, against any demand or claim related to personal injury, death, or property damage, or any other loss, expense, liability,
damage, or damages whatsoever, arising out of or related to Franchisee’s Restaurant.
12.2 Such policy or policies shall, to the fullest extent allowed by Law, be in accordance with standards and specifications set
forth in the Manuals or otherwise in writing from time to time, and shall include, at a minimum: (a) comprehensive, general and product
liability insurance; (b) general casualty insurance, including fire and extended coverage, vandalism and malicious mischief insurance, for the
replacement value of the Restaurant and its contents; and (c) such other insurance policies, such as business interruption and unemployment
insurance, as HOA may determine from time to time. All insurance policies must: (i) be issued by carriers approved by HOA; (ii) contain such
types and minimum amounts of coverage, exclusions and maximum deductibles as HOA prescribes from time to time; (iii) name HOA and its
Affiliates as additional insured (or otherwise provide coverage that is equivalent to additional insured coverage); (iv) provide for thirty (30)
days’ prior written notice to HOA of any material modification, cancellation or expiration of such policy that may affect HOA; and (v) include
such other provisions as HOA may reasonably require from time to time. Franchisee shall notify HOA immediately of cancellation of
insurance or any modification of insurance that is inconsistent with the foregoing requirements.
12.3 Franchisee’s obligation to obtain and maintain the foregoing policy or policies in the amounts specified shall not be limited
in any way by reason of any insurance that HOA may maintain, nor shall Franchisee’s performance of such obligations relieve Franchisee of
liability under the indemnity provisions set forth in Section 19 of this Agreement.
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12.4 Prior to the opening of Franchisee’s Restaurant, and thereafter at least thirty (30) days prior to the expiration of any such
policy, Franchisee shall deliver to HOA certificates of insurance evidencing the proper coverage with limits not less than those required under
this Agreement. All certificates shall expressly provide that the insurer will give HOA not less than thirty (30) days’ prior written notice in the
event of material alteration to, termination of, non-renewal of, or cancellation of, the coverages evidenced by such certificates.
12.5 In the event of fire or other insured casualty that results in the damage or destruction of Franchisee’s Restaurant, Franchisee
shall pay to HOA, from the proceeds received by Franchisee of any business interruption or other insurance applicable to loss of revenues or
proceeds, an amount equal to five percent (5%) of such insurance proceeds (the “Casualty Proceeds”). HOA’s portion of the Casualty
Proceeds shall be paid to HOA within ten (10) days after receipt. At the same time, Franchisee shall notify HOA whether it will reconstruct
Franchisee’s Restaurant in a prompt and timely manner. In the event Franchisee notifies HOA that it will not do so, HOA shall terminate this
Agreement pursuant to Section 14.2.3 and Franchisee shall thereafter comply with all of the obligations upon termination set forth in Section
15 of this Agreement that HOA may reasonably require under the circumstances.
13. TRANSFER OF INTEREST
13.1 Transfer by HOA. HOA shall have the absolute right to transfer, assign, and delegate all or any part of its rights and
obligations under this Agreement to any person or entity HOA deems appropriate. Such transfer, assignment, or delegation shall effect a
complete novation as to the right or obligation transferred, assigned, or delegated. After such transfer, assignment, or delegation, Franchisee
shall look solely to the transferee, assignee, or delegatee, and not to HOA, for the satisfaction of any obligation transferred, assigned, or
delegated. HOA may also, without Franchisee’s consent, transfer, assign, or otherwise alter any or all of the ownership in HOA.
13.2 Transfer by Franchisee or Owners.
13.2.1 An “Owner” is a natural person who “owns” equity in the Franchisee, where such ownership is direct, indirect,
or beneficial. A “Principal Owner” of Franchisee shall mean each: (i) an Owner with ten percent (10%) or more equity in Franchisee;
and (ii) an Owner with ten percent (10%) or more equity in any business entity that holds a ten percent (10%) or more equity in
Franchisee. If there are no such natural persons (e.g., in the case of a publicly-held franchisee), “Principal Owners” shall mean the
eight (8) natural persons who own or hold the greatest shares of equity of Franchisee. Franchisee’s Principal Owners and other
Owners as of the Effective Date, and the percentage and type of equity of Franchisee each such Owner owns or holds, and the manner
of such holding, are set forth on Exhibit C to this Agreement.
13.2.2 Franchisee acknowledges and agrees that: (i) this Agreement is a contract for the personal services of Franchisee
and its Principal Owners; and (ii) HOA has granted this Agreement in reliance on information Franchisee and its Principal Owners
provided related to Franchisee’s and such Principal Owners’ business skills, business acumen, personal character, education, credit
rating, and financial resources (collectively, the “Principal Owner Qualifications”). Franchisee hereby directs any party construing
this Agreement, including without limitation any court, mediator, master, or other party acting as a trier of fact or law, to conclusively
presume that this Agreement is a contract for the personal services of Franchisee and its Principal Owners.
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13.2.3 Unless HOA otherwise consents in writing, Principal Owners shall own and hold a majority of the equity in
Franchisee. The remaining equity in Franchisee may be owned or held by Owners, persons not to exceed ten (10) in number, directly,
indirectly, or beneficially, with HOA’s prior written consent, which consent HOA may grant or withhold in HOA’s sole discretion.
13.2.4 HOA’s prior written consent is a necessary condition precedent to the sale, assignment, delegation, transfer,
conveyance, gift, pledge, mortgage, encumbrance, or hypothecation (collectively, the “Transfer”) of any direct, indirect, or beneficial
interest of an Owner in Franchisee, of Franchisee’s Restaurant (or all or substantially all of its assets) Franchised Business, of this
Agreement, in any interest or rights granted under this Agreement.
13.2.5 Except as specifically provided in this Agreement, HOA has the absolute and unfettered right to withhold its consent
to a Transfer of any interest described in Section 13.2.4 of this Agreement (collectively, any “Interest”). Any permitted transferee of a
Principal Owner must satisfy the Principal Owner Qualifications. In addition, HOA may, in its sole discretion, require any or all of the
following as conditions precedent to HOA’s consent to a Transfer:
(a) Franchisee and its affiliates must satisfy all monetary obligations and other outstanding obligations owed to
HOA, HOA’s affiliates, and Franchisee’s other creditors.
(b) Franchisee and its affiliates must have substantially complied with this Agreement, any amendment to this
Agreement, and all other agreements between Franchisee or such affiliates on the one hand, and HOA or HOA’s affiliates on
the other hand; and, at the time of Transfer, must not be in default of any such agreements.
(c) Franchisee, Owners, transferor, and transferee must duly execute and deliver to HOA the then-current form
of transfer and assumption agreement, which transfer and assumption agreement: (i) will require the transferee to assume and
agree to discharge all of the obligations of the transferor; (ii) will provide that the transferor shall remain liable for all of the
obligations to HOA and HOA’s affiliates in connection with Franchisee’s Restaurant arising prior to the effective date of the
Transfer; and (iii) will contain a Release in substantially the form attached as Exhibit D to this Agreement.
13.2.6 In addition, if a Transfer is of a controlling interest in Franchisee, Franchisee’s Restaurant (or all or substantially all
of its assets), this Agreement, in any interest or rights granted under this Agreement (a “Controlling Interest Transfer”), HOA may,
in its sole discretion, require any or all of the following as conditions precedent to HOA’s consent to such transfer:
(a) Transferee must enter into HOA’s then-current form of franchise agreement (the “Replacement Franchise
Agreement”). The provisions of the Replacement Franchise Agreement may differ materially from the provisions of this
Agreement. HOA will not require the transferee to pay the Initial Franchise Fee set forth in 4.2 of this Agreement. The initial
term of the Replacement Franchise Agreement shall be the balance remaining of the Initial Term of this Agreement.
(b) Transferor or transferee must pay HOA a Transfer fee in an amount equal to twenty percent (20%) of
HOA’s then-current Initial Franchise Fee (the “Transfer Fee”).
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(c) The transferee, at its expense, must Renovate Franchisee’s Restaurant, and must complete such obligation
to Renovate by the end of the reasonable time HOA may specify.
(d) The transferee and, if applicable, the transferee’s designated general manager, must complete any training
programs then in effect for new franchisees prior to the effective date of such Transfer, on such terms and conditions as HOA
may reasonably require.
(e) The transferee must agree to a sublease, or to a transfer and assumption, of the lease of the Accepted
Location from the original franchisee, and must obtain the landlord’s approval prior to any transfer or sublease, if applicable.
(f) If Franchisee (or any of its affiliates) owns and operates one or more Hooters Restaurants in addition to the
Franchisee’s Restaurant operated hereunder, all such Hooters Restaurants, at HOA’s option, must be transferred to the same
transferee as part of a single transaction.
13.2.7 Any purported Transfer that does not comply with this Section 13.2 shall be voidable by HOA, and shall be a
default of this Agreement that shall permit HOA to terminate this Agreement pursuant to Section 14.2.5 of this Agreement.
13.3 Right of First Refusal.
13.3.1 Franchisee and any Owner who desires to accept any bona fide offer from a third party to purchase any Interest
shall notify HOA in writing of each such offer, and shall provide such information and documentation related to the offer as HOA
may require, including without limitation a true copy of any such offer. HOA shall have the right and option, exercisable within thirty
(30) business days after HOA receives such written notification, to send written notice to the seller that HOA may desire to purchase
the Interest on substantially the same terms and conditions as offered by the third party. To enable HOA to determine whether it will
exercise its option, Franchisee or Owner, as appropriate, and the third party shall provide such information and documentation,
including without limitation financial statements, as HOA may require. In the event that HOA elects to purchase such Interest, closing
on such purchase must occur within ninety (90) days after the date of notice to the seller of HOA’s election to purchase such Interest.
HOA’s election not to exercise the option afforded by this Section 13.3 shall not constitute a waiver of any other provision of this
Agreement, including all of the requirements of this Section 13 related to a proposed Transfer of any Interest. Any subsequent change
in the terms of any offer prior to closing shall constitute a new offer subject to the same rights of first refusal by HOA as in the case of
an initial offer.
13.3.2 In the event that the consideration, terms, or conditions offered by a third party are such that HOA may not
reasonably be required to furnish the same consideration, terms, or conditions, then HOA may purchase such Interest for the
reasonable equivalent in cash. If the parties cannot agree within a reasonable time on the cash consideration, HOA will designate an
independent appraiser experienced in appraising such Interest, and the determination of such appraiser shall be conclusive and binding
on all parties.
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13.4 Transfer On Death or Mental Incompetence. On the death or mental incompetence of any Principal Owner, the executor,
administrator, or personal representative of such individual shall Transfer within one (1) year after such death or mental incompetence the
Interest owned and controlled by the Principal Owner to a natural person or persons who satisfy the Principal Owner Qualifications, and
whom HOA approves. Mental incompetence, for purposes of this Agreement, shall mean the appointment of a guardian for the Principal
Owner by a court of competent jurisdiction. Such Transfers, including without limitation Transfers by devise or inheritance, shall be subject to
the same conditions as any inter vivos Transfer. However, in the case of Transfer by devise or inheritance, if the heirs or beneficiaries of any
such Principal Owner are unable to satisfy the conditions in this Section 13 within such one (l) year period, HOA may terminate this
Agreement or may exercise its option to purchase the Interest at fair market value, as determined by an independent appraiser HOA designates,
which determination shall be conclusive and binding on all parties.
13.5 Interim Operation of Franchisee’s Restaurant. Pending assignment on the death of the Principal Owner, or in the event of
any temporary or permanent mental incompetence or physical disability of the Principal Owner, a manager shall be employed for the operation
of Franchisee’s Restaurant who has successfully completed an HOA-approved manager training program, to serve as General Manager and to
operate Franchisee’s Restaurant for the account of Franchisee. If Franchisee’s Restaurant is not being managed by such General Manager,
Franchisee hereby grants to HOA (or its designee) the right, but not the obligation, to immediately take such steps as are necessary to manage
Franchisee’s Restaurant for the account of Franchisee in the event of the death of, or reasonable determination by an independent third party
(such as a medical doctor) as to the physical incapacity or mental incompetency of the Franchisee or the Principal Owner who is managing
Franchisee’s Restaurant on behalf of Franchisee, until such time as Franchisee appoints a new General Manager who has been trained
pursuant to Section 5.7 of this Agreement. Franchisee agrees to hold HOA and its respective directors, officers, agents, employees, attorneys
and shareholders harmless from all claims or damages arising out of or connected with HOA’s management of the Franchise. Franchisee shall
pay HOA in addition to all other amounts due pursuant to the terms of this Agreement a fee of eight percent (8%) of the Gross Sales, plus
costs during the period in which the Franchise is so managed by HOA.
13.6 Non-Waiver of Claims. Neither HOA’s consent to any proposed Transfer of any Interest nor HOA’s election not to
exercise its option to purchase any Interest shall be deemed to constitute a waiver of any claims HOA may have against the transferor, nor
shall it be deemed a waiver of HOA’s right to demand exact compliance with this Agreement or any future rights or options of HOA.
14. DEFAULT AND TERMINATION
14.1 Bankruptcy. HOA shall have the right to immediately terminate this Agreement with notice to Franchisee, if Franchisee
becomes insolvent or makes a general assignment for the benefit of creditors; or if a petition in bankruptcy is filed by Franchisee or such a
petition is filed against and not opposed by Franchisee; or if Franchisee files for judicial or extrajudicial recuperation (“recuperação judicial ou
extrajudicial”); or if Franchisee is adjudicated a bankrupt or insolvent; or if a proceeding for the appointment of a receiver of Franchisee or
other custodian for Franchisee’s business or assets is filed and consented to by Franchisee; or if a receiver or other custodian (permanent or
temporary) of Franchisee’s assets or property, or any part thereof, is appointed by any court of competent jurisdiction; or if proceedings for a
composition with creditors under any Law should be instituted by or against Franchisee; or if a final judgment remains unsatisfied or of record
for thirty (30) days or longer (unless unappealed or a supersedeas bond is filed); or if Franchisee is dissolved; or if execution is levied against
Franchisee’s business or property; or if suit to foreclose any lien or mortgage against Franchisee’s Restaurant premises or equipment is
instituted against Franchisee and not dismissed within thirty (30) days.
14.2 With Notice. Franchisee shall be in default of this Agreement, and HOA may, at its option, terminate this Agreement and all
rights granted hereunder, without affording Franchisee any opportunity to cure the default, effective immediately upon the delivery of written
notice to Franchisee by HOA (in the manner set forth in Section 21 below), upon the occurrence of any of the following events:
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14.2.1 If Franchisee fails to acquire or lease a site for Franchisee’s Restaurant, or to submit to HOA at least one (1) location
for site approval, within the time specified under Section
1.4 of this Agreement;
14.2.2 If Franchisee fails to open Franchisee’s Restaurant by the later of: (i) the Opening Date prescribed in Section 1.5.1 of
this Agreement; or (ii) the last extension of time, if any, that HOA grants to Franchisee to open Franchisee’s Restaurant;
14.2.3 Except as otherwise provided in this Agreement, if Franchisee at any time ceases to operate or otherwise abandons
Franchisee’s Restaurant for five (5) consecutive days, or otherwise forfeits the right to do or transact business in the jurisdiction where
Franchisee’s Restaurant is located;
14.2.4 If Franchisee, or any Principal Owner is convicted of or elects not to contest a crime punishable by imprisonment of
1 year or more, fraud, sale of illegal drugs, crime involving moral turpitude, crime that is directly related to Franchisee’s Restaurant, or
any other crime that HOA determines to have an adverse effect on Franchisee’s Restaurant, the Hooters System, the Proprietary
Marks, the goodwill associated with the Proprietary Marks, or HOA’s interest in the Proprietary Marks;
14.2.5 If Franchisee, any Principal Owner or Owner purports to transfer any rights or obligations under this Agreement or
any interest to any third party in a manner that is contrary to the terms of Section 13 above;
14.2.6 If Franchisee fails to: (i) comply with the in-term covenants set forth in this Agreement (including the covenants set
forth in Sections 6, 8 and 16); or (ii) obtain execution of the Individual Non-Disclosure and Non-Competition Agreement in a form
acceptable to HOA;
14.2.7 If Franchisee knowingly maintains false books or records, or submits any false reports (including, but not limited to,
information provided as part of Franchisee’s application for this Franchise) to HOA;
14.2.8 If Franchisee commits two (2) or more defaults under this Agreement in any fifty-two (52) week period, whether or
not each such default has been cured after notice;
14.2.9 If Franchisee engages in any conduct or practice that is fraudulent, unfair, unethical, or a deceptive practice;
14.2.10 If the Franchisee’s interest in the lease or sublease for the Accepted Location is terminated or expires; or
14.2.11 If Franchisee misuses or makes any unauthorized use of the Proprietary Marks or otherwise materially impairs the
goodwill associated with the Proprietary Marks or HOA’s rights in the Proprietary Marks.
14.3 With Notice and Ten Day Opportunity to Cure. Upon the occurrence of any of the following events of default, HOA may, at
its option, terminate this Agreement by giving written notice of termination (in the manner set forth under Section 21 below) stating the nature
of the default to Franchisee at least ten (10) days prior to the effective date of termination; provided, however, that Franchisee may avoid
termination by immediately initiating a remedy to cure such default, curing it to the satisfaction of HOA, and by promptly providing proof
thereof to HOA within the ten (10) day period. If any such default is not cured within the specified time, or such longer period as Law may
require, this Agreement shall terminate without further notice to Franchisee, effective immediately upon the expiration of the ten (10) day
period or such longer period as Law may require.
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14.3.1 If Franchisee fails, refuses, or neglects promptly to pay any monies owing to HOA or its affiliates when due;
14.3.2 If Franchisee fails, refuses, or neglects promptly to pay any monies owing to third parties, lessors, or lenders or
creditors of the Accepted Location;
14.3.3 If a threat or danger to public health or safety results from the maintenance or operation of Franchisee’s Restaurant;
14.3.4 If Franchisee sells products not previously approved by HOA, or purchases any product from a supplier not
previously approved by HOA;
14.3.5 If Franchisee fails to comply with Laws;
14.3.6 If Franchisee or Owner defaults under any other agreement with HOA;
14.3.7 If Franchisee refuses to permit HOA to inspect the Accepted Location, or the books, records, or accounts of
Franchisee upon demand;
14.3.8 If an inspection of the Franchisee’s books and records discloses an understatement in any payment to HOA of four
percent (4%) or more;
14.3.9 If Franchisee fails to operate Franchisee’s Restaurant during such days and hours specified in the Manuals;
14.3.10 If Franchisee is unable or unwilling to provide individuals who can complete the manager training program to
HOA’s reasonable satisfaction, or if HOA reasonably determines that the individuals whom Franchisee has presented for manager
training lack the skills to operate Franchisee’s Restaurant successfully, pursuant to Section 5.6 of this Agreement;
14.3.11 If Franchisee fails, refuses, or neglects promptly to submit certificates of insurance to HOA when due as required
under Section 12; or
14.3.12 If Franchisee fails to maintain or observe any of the health and sanitation standards and procedures prescribed by
HOA in this Agreement, the Manuals, by Laws, or otherwise in writing; or
14.3.13 If Franchisee fails to operate Franchisee’s Restaurant in compliance with the standards and specifications in HOA’s
Manuals.
14.4 With Notice and Thirty Day Opportunity to Cure. Except as otherwise provided in Sections 14.1, 14.2 and 14.3 above,
upon any other default by Franchisee or its obligations hereunder, HOA may terminate this Agreement by giving written notice of termination
(in the manner set forth under Section 21 below) setting forth the nature of such default to Franchisee at least thirty (30) days before the
effective date of termination; provided, however, that Franchisee may avoid termination by immediately initiating a remedy to cure such
default, curing it to HOA’s satisfaction, and by promptly providing proof thereof to HOA, all within the thirty (30) day period. If any such
default is not cured within the specified time, or such longer period as Law may require, this Agreement shall terminate without further notice
to Franchisee effective immediately upon the expiration of the thirty (30) day period or such longer period as Law may require.
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14.5 The foregoing rights to terminate are without prejudice to all other rights and remedies provided for hereunder or at law or
equity. The parties acknowledge and agree that a judicial, arbitral or administrative order shall not be required to give effect to any termination
of this Agreement.
14.6 Limitations on Actions. Any and all claims (except for monies due HOA) arising out of or related to: (i) the offer for sale,
sale, negotiation, administration, or termination of the Franchise or this Agreement; (ii) the development, opening, operation, or closure of
Franchisee’s Restaurant; or (iii) the relationship between the parties to this Agreement, shall be barred unless an action at law or in equity is
properly filed in a court of competent jurisdiction within one (l) year after the date Franchisee on the one hand, or HOA on the other hand,
knows or should have known of the facts giving rise to such claim, except to the extent any Law provides for a shorter period of time to bring
a claim.
15. OBLIGATIONS ON TERMINATION OR EXPIRATION
On termination or expiration of this Agreement for any reason, all rights granted to Franchisee under this Agreement shall
immediately terminate, and:
15.1 Franchisee shall immediately cease to operate the business franchised under this Agreement, and shall not thereafter,
directly or indirectly, represent to the public or hold itself out as a present or former franchisee of HOA.
15.2 Franchisee shall immediately and permanently cease to use, in any manner whatsoever, any or all of: (i) HOA’s
Confidential Information or Trade Secrets; and (ii) the Proprietary Marks. Without limiting the generality of the foregoing, Franchisee shall
cease to use all signs, advertising materials, displays, stationery, forms, and any other articles that display the Proprietary Marks; provided,
however, that this Section 15.2 shall not apply to the operation by Franchisee of any other franchise under the Hooters System that HOA may
separately and independently have granted to Franchisee and that HOA has not terminated. Franchisee shall return to HOA the Manuals, all
other materials containing Confidential Information or Trade Secrets, equipment and other property owned by HOA, and all copies thereof and
all signage bearing any Proprietary Marks and other materials, though owned by Franchisee, which bear the Proprietary Marks and or utilize
the trade dress, designs or colors of HOA. Franchisee shall retain no copy or record of any of the foregoing; provided Franchisee may retain
its copy of this Agreement, any correspondence between the parties, and any other document which Franchisee needs for compliance with any
applicable provision of Law.
15.3 Franchisee shall remove or change all signs, displays, furniture, fixtures, equipment, and other trade dress, and shall
change all colors of buildings and other structures, to the extent required to distinguish Franchisee’s Restaurant from its former appearance
and from any other Hooters restaurants, and shall comply with HOA’s restaurant de-identification requirements (collectively, to “De-
Identify” Franchisee’s Restaurant), so that Franchisee’s Restaurant is fully De-Identified by the end of ten (10) days after the termination or
expiration of this Agreement.
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15.3.1 If Franchisee fails to fully De-Identify Franchisee’s Restaurant by the end of ten (10) days after the termination
or expiration of this Agreement, HOA and its agents shall have the right to enter onto the premises of Franchisee’s Restaurant without
prior notice to Franchisee, and without liability for trespass, and to De-Identify Franchisee’s Restaurant at Franchisee’s expense,
which amounts Franchisee agrees to pay so that HOA actually receives such payment by the end of ten (10) days after demand
therefor.
15.3.2 Franchisee will provide HOA with photographic or other evidence of the De- Identification satisfactory to
HOA. If Franchisee fails to provide HOA with satisfactory photographic or other evidence of De-Identification so that HOA actually
receives such evidence by the end of ten (10) days after the by the end of ten (10) days after the termination or expiration of this
Agreement, HOA shall have the right to enter onto the premises of Franchisee’s Restaurant without prior notice to Franchisee, and
without liability for trespass, to inspect Franchisee’s Restaurant at Franchisee’s expense, which amounts Franchisee agrees to pay so
that HOA actually receives such payment by the end of ten (10) days after demand therefor.
15.3.3 Franchisee shall take such appropriate steps needed to transfer the telephone number for the business to HOA.
15.4 Franchisee shall: (i) comply with its obligations for Web Sites and Internet Listings as set forth in this Agreement at Section
9.5; and, (ii) take such action as may be necessary to cancel any assumed name or equivalent registrations of Franchisee that contain the mark
“Hooters” or any other Proprietary Mark. Franchisee shall furnish HOA with confirmation that Franchisee has fulfilled such obligations by
the end of thirty (30) days after termination or expiration of this Agreement.
15.5 Franchisee shall not, in connection with any other business, use any reproduction, counterfeit, copy, or colorable imitation
of the Proprietary Marks, either in connection with such other business or the promotion of such other business or otherwise, that may cause
or constitute confusion, mistake, or deception, or that is likely to dilute HOA’s rights in or to the Proprietary Marks, and further shall not use
any designation of origin or description or representation that falsely suggests or represents an association or former association with HOA or
the Hooters System.
15.6 Payments.
15.6.1 Franchisee shall pay to HOA and HOA’s affiliates, so that HOA and its affiliates actually receive such payment by
the end of ten (10) days after the termination or expiration of this Agreement, all sums owing to HOA and its affiliates accrued through
the effective date of termination or expiration.
15.6.2 Liquidated Damages. If HOA terminates this Agreement prior to the expiration of the Initial Term, Franchisee shall
pay to HOA, so that HOA actually receives such payment by the end of ten (10) days after such termination:
(a) An amount equal to the Fees payable by Franchisee for the lesser of: (i) the balance of the Initial Term
remaining; or (ii) the twenty-six (26) months prior to the effective date of HOA’s termination of this Agreement;
(b) If HOA terminates this Agreement and Franchisee’s Restaurant has not been open for business for twenty-
six (26) months, the amount of Fees payable by Franchisee for the periods Franchisee was obligated to pay Fees prior to the
effective date of HOA’s termination of this Agreement, projected to twenty-six (26) months; or
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(c) If HOA terminates this Agreement before Franchisee’s obligation to pay Fees has commenced, the average
amount of Fees payable by Hooters Restaurants in the Country generally (or, if there are less than five (5) Hooters
Restaurants in the Country at the time, in the United States), for the twenty-six (26) months prior to the effective date of
HOA’s termination of this Agreement.
(d) Franchisee acknowledges and agrees, and hereby directs any party construing this Agreement, including
without limitation any court, mediator, master, or other party acting as a trier of fact or law, to conclusively presume, that the
damages set forth in this Section 15.6.2.: (i) are true liquidated damages; (ii) are intended to compensate HOA for the harm
HOA will suffer as a result of the premature termination of this Agreement; (iii) are not a penalty; (iv) are a reasonable
estimate of HOA’s probable loss resulting from the premature termination of this Agreement, viewed as of the date of this
Agreement; (v) shall be in lieu of, and not in addition to, actual damages for loss of the benefit of the bargain that HOA is
entitled to receive; and (vi) shall, subject to clause (v) above, be in addition to all other rights HOA may have to legal or
equitable relief.
15.6.3 Without prejudice to the liquidated damages set for in Section 15.6.2 above, if HOA terminates this Agreement as a
result of Franchisee’s default of this Agreement, Franchisee shall pay to HOA all costs and expenses HOA may incur related to such
default and termination, including without limitation attorneys’ fees and costs that HOA incurs related to: (i) drafting notices, demands,
and other documents related to such default and termination; (ii) obtaining decrees for specific performance; (iii) obtaining injunctive or
other relief; (iv) collection of amounts owed; and (v) appeal; so that HOA actually receives such payments by the end of ten (10) days
after demand therefor.
15.6.4 The obligations set forth in this Section 15.6, until paid in full, shall be and constitute a lien in favor of HOA against
any and all of Franchisee’s personal property, furnishings, fixtures, equipment, signage, inventory, and other assets.
15.7 Franchisee shall immediately deliver to HOA all manuals, including the Manuals; all records, files, instructions,
correspondence, and other materials related to the operation of Franchisee’s Restaurant, including without limitation brochures, agreements,
and invoices, in Franchisee’s possession or under Franchisee’s control, and all copies thereof (all of which Franchisee acknowledges are
HOA’s property), and shall retain no copy or record of any of the foregoing, except Franchisee’s copy of this Agreement and of any
correspondence between the parties and any other documents that Franchisee reasonably needs for compliance with any provision of Law.
15.8 HOA’s Purchase Option.
15.8.1 Upon termination or expiration (without renewal) of this Agreement, HOA shall have the right, exercisable by giving
notice thereof (“Appraisal Notice”) within ten (10) days after the date of such termination or expiration, to require that a determination
be made of the “Agreed Value” (as defined below) of all the assets and personal property (as a going concern) used in Franchisee’s
Restaurant, including the Restaurant building (if owned by Franchisee) inventories of Menu Items, materials, supplies, furniture,
equipment, signs, but excluding any cash and short-term investments and any items not meeting HOA’s specifications (the
“Purchased Assets”). Such Purchased Assets shall exclude items bearing Proprietary Marks as described in Section 15.2, above.
Upon such notice, Franchisee may not sell or remove any of the personal property of Franchisee’s Restaurant and must give HOA, its
designated agents and the “Appraiser” (as defined below) full access to such Restaurant and all of Franchisee’s books and records at
any time during customary business hours in order to conduct inventories and determine the purchase price for the Purchased Assets.
At HOA’s sole discretion, HOA may opt to purchase all of the ownership interest in Franchisee (the “Purchased Equity”), rather
than the Purchased Assets, and the provisions below in Section 15.8.2 through Section 15.8.5 shall also apply, mutatis mutandis, to
the Purchased Equity.
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15.8.2 The Agreed Value shall be determined by consultation between Franchisee and HOA. If Franchisee and HOA
are unable to agree on the Agreed Value of the Purchased Assets within fifteen (15) days after the Appraisal Notice, then the Agreed
Value shall be the Fair Market Value (as defined below).
15.8.3 The “Fair Market Value” shall be the amount that an arm’s length purchaser would be willing to pay for the
Purchased Assets (for the avoidance of doubt, Fair Market Value shall include going concern value or terminal value for the business
based on a historical value of the relevant business at the relevant location, but shall not include goodwill associated with the
Proprietary Marks or the Hooters System). The Fair Market Value will be determined by a member of an accounting firm (other than a
firm which conducts audits of HOA’s financial statements) selected by HOA who has experience in the valuation of retail businesses
(the “Appraiser”). HOA will notify Franchisee of the identity of the Appraiser, who will make his determination and submit a written
report (“Appraisal Report”) to Franchisee and HOA as soon as practicable, but in no event more than sixty (60) days after his
appointment. Franchisee agrees to promptly provide the Appraiser with such books and records as he or she may require, which
Franchisee represents and warrants to be complete and accurate. In absence of such books and records or if the Appraiser is not
satisfied with their completeness or accuracy, the Appraiser may make the determination of Fair Market Value on the basis of other
sources and information he or she deems appropriate. HOA and Franchisee shall also be permitted to submit additional information or
positions for the consideration of the Appraiser. The Appraiser’s determination shall be final and binding on the parties hereto.
15.8.4 HOA shall have the option, exercisable by delivering notice thereof within 30 days after submission of the
Appraisal Report (or the date that an agreement is reached, if the parties agree to the Agreed Value), to elect to purchase any or all of
the Purchased Assets at the Agreed Value for such assets. HOA shall have the unrestricted right to assign this option to purchase
separate and apart from the remainder of this Agreement.
15.8.5 If HOA exercises its option to purchase, the purchase price for the selected Purchased Assets will be paid in
cash at the closing, which will occur at the place, time and date HOA designates, but not later than sixty (60) days after the exercise of
HOA option to purchase the Purchased Assets. At the closing, HOA will be entitled to all agreements, covenants, representations and
warranties, and other closing documents and post-closing indemnifications as HOA may reasonably require, including: (a) instruments
transferring good and merchantable title to the Purchased Assets, free and clear of all liens, encumbrances, and liabilities, to HOA or
its designee, with all sales, value added and other transfer taxes paid by Franchisee; (b) the right to conduct a physical inventory of
Menu Items; and (c) an assignment of all leases of personal property and real estate used in the operation of the Franchisee
Restaurants, including land, building and/or equipment (or if an assignment is prohibited, a sublease to HOA or HOA’s designee for
the full remaining term and on the same terms and conditions as Franchisee’s lease, including renewal and/or purchase options),
provided, however, that if any of Franchisee’s affiliates directly or indirectly owns the land and/or building of a Franchisee Restaurant,
Franchisee will, at HOA’s option, cause such affiliate to grant to HOA a lease at reasonable and customary rental rates and other terms
prevailing in the community where Franchisee’s Restaurant is located. Any dispute concerning the rental rates and terms of such lease
shall be resolved by the Appraiser.
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15.8.6 If Franchisee cannot deliver clear title to all of the assets, or if there are other unresolved issues, the closing of
the sale may, at HOA’s option, be accomplished through an escrow on such terms and conditions as HOA deems appropriate,
including the making of payments, to be deducted from the purchase price, directly to third parties in order to obtain clear title to any of
the Purchased Assets. Further, Franchisee shall comply with all Laws and local tax notification and/or escrow procedures. HOA shall
have the right to set off against and reduce the purchase price by any and all amounts owed by Franchisee or any of Franchisee’s
affiliates to HOA or any of HOA’s affiliates.
15.8.7 Upon delivery of the Appraisal Notice and pending (a) determination of Agreed Value, (b) HOA’s option
period, and (c) the closing of the purchase, Franchisee shall, unless otherwise directed by HOA, continue temporary operations of the
Franchisee Restaurants to be purchased pursuant to the terms of this Agreement, subject to the supervision and control of one or more
of HOA’s appointed managers.
15.9 Any right or interest Franchisee, any Principal Owner, any affiliate, or any person or entity otherwise under Franchisee’s
direction or control (collectively, a “Licensed Party”) has in any license necessary or required to operate the Restaurant (collectively, the
“Operating Licenses”) shall automatically transfer to HOA or its designee. Franchisee shall have five (5) days after HOA’s delivery of
written notice of termination or expiration of this Agreement to commence all procedures necessary to transfer or relocate all Operating
Licenses to HOA; or, if HOA designates another party to receive such Operating Licenses, to such designee, and to notify HOA in writing of
such commencement. Licensed Party shall promptly use all commercially reasonable efforts to obtain the necessary approvals from any
applicable authority for the prompt transfer or relocation of the Operating License.
15.9.1 If Laws do not permit the transfer or relocation of the Operating Licenses, Licensed Party shall have five (5)
days after HOA’s delivery of written notice of termination or expiration of this Agreement to contact all applicable authorities
regarding, and to initiate, all procedures necessary to apply for a new Operating Licenses in the name of HOA or its designee in all
applicable jurisdictions, and shall notify HOA in writing of such initiation. Licensed Party shall join and cooperate with HOA in
promptly procuring a replacement Operating Licenses. Both Licensed Party and HOA shall immediately fulfill any directives or
requirements from all applicable authorities in order to expedite the transfer or relocation of the existing Operating Licenses or
acquisition of a new Operating Licenses.
15.9.2 Franchisee shall pay or promptly arrange for the full payment of all taxes of any kind or nature whatsoever,
including without limitation property taxes, personal property taxes, sales, use, withholding, and any other taxes, that may affect title or
the rights to any Operating Licenses in any way.
15.9.3 Franchisee shall indemnify and hold HOA harmless for any and all of any Licensed Party’s liabilities and
obligations related to the rights of HOA or its designee to own, possess, and use any Operating Licenses.
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16. COVENANTS
16.1 Franchisee covenants, warrants, represents, and agrees that Franchisee shall devote its full time, energy, and best efforts to
the management and operation of Franchisee’s Restaurant.
16.2 Franchisee covenants, warrants, represents, and agrees that, during the term of this Agreement, except as HOA may
otherwise approve in writing, Franchisee shall not, either directly or indirectly, for itself or through, on behalf of, or in conjunction with, any
person or other entity, employ or seek to employ any person who is at that time, or who has been within the immediately-preceding one
hundred eighty (180) days, employed by HOA or by any other franchisee or affiliate of HOA as a salaried employee, or otherwise directly or
indirectly induce such person to leave his or her employment. If Franchisee chooses to hire such person despite the provisions of this Section
16.2, Franchisee shall pay to HOA, within ten (10) days of such hire, fifty percent (50%) of such person’s most recent annualized salary.
16.3 Franchisee specifically acknowledges that, pursuant to this Agreement, Franchisee will receive valuable specialized training
and confidential information, including, without limitation, information regarding the operational, sales, promotional, and marketing methods
and techniques of HOA and the Hooters System. Franchisee covenants that during the term of this Agreement, except as otherwise approved
in writing by HOA, Franchisee shall not, either directly or indirectly, for itself, or through, on behalf of, or in conjunction with any person,
persons, partnership, corporation, or entity, divert or attempt to divert any business or customer of Franchisee’s Restaurant or of any
Restaurant using the Hooters System to any competitor, by direct or indirect inducement or otherwise, or do or perform, directly or indirectly,
any other act injurious or prejudicial to the goodwill associated with HOA’s Proprietary Marks and the Hooters System.
16.4 Covenants Not to Compete.
16.4.1 The following definitions are applicable to this Section 16.4:
(a) Competing Activity. “Competing Activity” means: (i) developing, opening, or operating any Competing
Business; or (ii) authorizing, assisting, or inducing another to develop, open, or operate a Competing Business.
(b) Competing Business. “Competing Business” means a restaurant or bar concept, other than a business
Franchisee operates pursuant to an agreement with HOA, that: (i) features female sex appeal; or (ii) focuses on the sale of
chicken wings. Without limiting the generality of the foregoing, all of the following businesses shall conclusively be deemed
to be Competing Businesses: (a) Tilted Kilt, Winghouse, Twin Peaks, Bikinis, and any other restaurant or bar concept that
features female sex appeal; and (b) Buffalo Wild Wings, Buffalo’s, and any other restaurant concept that focuses on the sale
of chicken wings.
(c) Immediate Family Member. “Immediate Family Member” means an individual’s spouse, children,
parents and siblings.
16.4.2 In-Term Covenant Not to Compete. Franchisee covenants, warrants, represents, and agrees that it will not, during
the term of this Agreement, individually or jointly with others, directly or indirectly, by, through, on behalf of, or in conjunction with,
any other person or entity (including any Immediate Family Member): (i) engage in a Competing Activity; (ii) act as a director, officer,
shareholder, partner, member, employee, independent contractor, consultant, principal, agent, or proprietor, or participate or assist in
the establishment or operation of, directly or indirectly, any business engaged in a Competing Activity, except that Franchisee may
purchase or hold less than five percent (5%) of the shares of any publicly- traded business engaged in a Competing Activity; or (iii)
divert or attempt to divert any business from Franchisee’s Restaurant or the Hooters System.
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16.4.3 Post-Term Covenant Not to Compete. Franchisee covenants, warrants, represents, and agrees that it will not,
beginning at the expiration or termination of this Agreement and continuing for two (2) years thereafter or two (2) year after a court of
competent jurisdiction enters an order enforcing this Section 16.4, whichever occurs last, individually or jointly with others, directly or
indirectly, by, through, on behalf of, or in conjunction with, any other person or entity (including any Immediate Family Member), (i)
engage in a Competing Activity; (ii) act as a director, officer, shareholder, partner, member, employee, independent contractor,
consultant, principal, agent, or proprietor, or participate or assist in the establishment or operation of, directly or indirectly, any
business engaged in a Competing Activity, except that Franchisee may purchase or hold less than five percent (5%) of the shares of
any publicly- traded business engaged in a Competing Activity; or (iii) divert or attempt to divert any business from Franchisee’s
Restaurant or the Hooters System, within: (a) Franchisee’s Protected Territory; (b) any of Franchisee’s Protected Territories or former
Protected Territories under any other agreement with HOA or its affiliates; or (c) a protected territory of any other franchisee or
affiliate of HOA.
16.4.4 Directives. In the event of any dispute related to this Section 16.4, Franchisee hereby directs any third party
construing this Section 16.4, including without limitation any court, mediator, master, or other party acting as trier of fact or law:
(a) To conclusively presume that the restrictions set forth in this Section 16.4 are reasonable and necessary in
order to protect: (i) HOA’s legitimate business interests, including without limitation the interests of HOA’s other
franchisees; (ii) the confidentiality of HOA’s Confidential Information and the secrecy of HOA’s Trade Secrets; (iii) the
integrity of the Hooters System; (iv) HOA’s investment in the System; (v) the investment of HOA’s other franchisees in their
franchised businesses; and (vi) the goodwill associated with the System.
(b) To conclusively presume that this Section 16.4 was made freely and voluntarily by Franchisee, as an
independent business operator to which HOA delivered good and valuable consideration, in an arms-length commercial
transaction between skilled and experienced business professionals.
(c) To conclusively presume that the restrictions set forth in this Section 16.4 will not unduly burden
Franchisee’s ability to earn a livelihood.
(d) To construe this Section 16.4 under Laws governing franchise and general commercial contracts between
commercial entities in an arms-length business transaction, and not under Laws governing contracts of employment.
(e) To conclusively presume that any violation of any of the terms of this Section 16.4: (i) was accompanied by
the misappropriation and inevitable disclosure of HOA’s Confidential Information, Trade Secrets, and other methods and
procedures; and (ii) constitutes a deceptive and unfair trade practice and unfair competition.
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16.4.5 Individual Covenants. Franchisee shall require and obtain execution of covenants similar to those set forth in
Sections 6.2, 8, 13, 15, and this Section 16 (as modified to apply to an individual) from all of the following persons: Owners, General
Manager (or a person in a managerial position with Franchisee), and employees. The covenants required by this Section 16.4.5 shall be
in a form acceptable to HOA. Failure by Franchisee to obtain execution of a covenant required by this Section 16.4.5 shall constitute a
default under Section 14.2.6, above.
16.5 Covenant as to Anti-Terrorism and Anti-Corruption Laws. Franchisee agrees to comply with, and/or to assist HOA to the
fullest extent possible in HOA’s efforts to comply with, (a) the USA PATRIOT Act, and all other present and future U.S., E.U., and United
Nations laws, ordinances, regulations, policies, lists and any other requirements of any governmental authority addressing or in any way
relating to terrorist acts and acts of war; and (b) the Foreign Corrupt Practices Act and all other applicable anti-corruption and anti-money
laundering Laws.
16.6 The parties agree that each of the foregoing covenants shall be construed as independent of any other covenant or provision
of this Agreement. If all or any portion of a covenant in this Section 16 is held unreasonable or unenforceable by a court or agency having
valid jurisdiction in an unappealed final decision to which we are a party, you expressly agree to be bound by any lesser covenant subsumed
within the terms of such covenant that imposes the maximum duty permitted by Law, as if the resulting covenant were separately stated in and
made a part of this Section 16.
16.7 We Can Reduce Application of Covenants. You understand and acknowledge that we shall have the right, in our sole
discretion, to reduce the scope of any covenant set forth in Sections 16.3 and 16.4 above, or any portion of this Agreement, without your
consent, effective immediately upon receipt by you of written notice thereof; and you agree that you shall comply forthwith with any covenant
as so modified, which shall be fully enforceable notwithstanding the provisions of Section 25.4.3 below.
16.8 Franchisee expressly agrees that the existence of any claims it may have against HOA, whether or not arising from this
Agreement, shall not constitute a defense to the enforcement by HOA of the covenants in this Section 16. Franchisee agrees to pay all
damages, costs, and expenses (including reasonable attorneys’ fees) HOA may incur in connection with the enforcement of this Section 16.
17. TAXES, PERMITS, AND INDEBTEDNESS
17.1 Franchisee shall pay when due all taxes levied or assessed, including, without limitation unemployment and sales taxes,
and all accounts payable and other indebtedness of every kind Franchisee incurs in the conduct of Franchisee’s Restaurant.
17.2 In the event of any bona fide dispute as to Franchisee’s liability for taxes assessed or other indebtedness, Franchisee may
contest the validity or the amount of the tax or indebtedness in accordance with the procedures of the taxing authority or Law; however, in no
event shall Franchisee permit a tax sale or seizure by levy or execution or similar writ or warrant, or attachment by a creditor, including
without limitation foreclosure, eviction, or repossession, to occur against the premises of Franchisee’s Restaurant, or any improvements to
such premises, or any furnishings, fixtures, equipment, or other assets of Franchisee’s Restaurant.
17.3 Franchisee shall notify HOA in writing within five (5) days of the commencement of any action, suit, or proceeding, and
of the issuance of any order, writ, injunction, award, or decree of any court, agency, or other governmental instrumentality, arising out of or
related to Franchisee’s Restaurant.
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18. INDEPENDENT CONTRACTOR
18.1 HOA and Franchisee acknowledge and agree that: (i) this Agreement does not create a fiduciary relationship between the
parties hereto or any affiliated or related parties or entities; (ii) Franchisee is an independent contractor; and (iii) nothing in this Agreement is
intended to or shall be construed to constitute either party as an agent, legal representative, subsidiary, joint venturer, partner, employee, or
servant of the other for any purpose whatsoever.
18.2 Franchisee shall hold itself out to the public as an independent contractor operating Franchisee’s Restaurant pursuant to a
franchise from HOA. Franchisee will take all such actions as may be required to notify all interested persons or entities of such independent
contractual relationship by exhibiting a notice of such relationship in a conspicuous place in Franchisee’s Restaurant, the content and form of
which notice HOA shall have the right to specify.
18.3 Franchisee acknowledges and agrees that nothing in this Agreement authorizes Franchisee, and that Franchisee shall have
no authority, to make any contract, agreement, warranty, or representation on behalf of HOA, or to incur any debt or other obligation in
HOA’s name; and that HOA shall in no event assume liability for, or be deemed liable hereunder or thereunder as a result of any such action;
nor shall HOA be liable by reason of any act or omission of Franchisee in its conduct of Franchisee’s Restaurant or for any claim or judgment
arising out of or related to Franchisee’s Restaurant against Franchisee or HOA.
18.4 Franchisee acknowledges and agrees that: (i) HOA’s business is the business of developing the System, granting
franchises to independent business operators to use the System, and servicing independent operators of franchised businesses in the System;
(ii) Franchisee’s Franchised Business is the business of operating Franchisee’s Restaurant; and (iii) the business HOA operates and the
business Franchisee operates are separate and distinct businesses engaged in separate and distinct activities.
18.5 Enforcement.
18.5.1 Franchisee, for itself, its Principals, and its employees, hereby covenants, warrants, represents, and agrees that
neither it nor they nor any of them will: (i) make or raise any claim, counterclaim, crossclaim, affirmative defense, or demand; (ii)
commence, or cause or permit to be commenced; (iii) prosecute, or cause or permit to be prosecuted; or (iv) assist or cooperate in the
commencement or prosecution of, any suit or action, any arbitration or like proceeding, or any administrative or agency proceeding,
against or related to HOA, HOA’s affiliates, or HOA’s or such affiliates’ directors, officers, shareholders, partners, members,
employees, agents, or attorneys (collectively, the “HOA Parties”), alleging any matter contrary to any acknowledgment or agreement
set forth in this Section 18 of this Agreement.
18.5.2 Franchisee, for itself, its Principal Owners, and its employees, hereby acknowledges and agrees that in the event
of any breach of Section 18.5.1 of this Agreement, the HOA Parties would be irreparably injured and without adequate remedy at law.
Therefore, in the event of a breach or a threatened or attempted breach of any provision of Section 18.5.1, Franchisee, for itself, its
Principals, and its employees, agrees that HOA and the other HOA Parties will be entitled, in addition to any other remedies such
HOA Parties may have, to a preliminary and permanent injunction and a decree for specific performance of the terms of Section 18.5.1
in accordance with Articles 461, 461-A, 466-A to 466-C, 632 et seq, 642 et seq and 646 et seq of the Brazilian Civil Procedure Code.
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18.5.3 Franchisee hereby covenants, warrants, represents, and agrees that it has the authority to bind its Principals and
employees to this Section 18 of this Agreement.
19. INDEMNIFICATION
19.1 As used in this Section 19, the term “Losses and Expenses” shall include, without limitation, any and all obligations, debts,
claims, demands, rights, actions, causes of action, loss, losses, damage, damages, expenses, costs, liability, and liabilities of any nature or
kind; including without limitation reasonable accountants’, attorneys’, and expert witness fees and costs; costs of investigation and proof of
facts; court costs and other expenses of litigation; and travel and living expenses, together with compensation for damages to HOA’s
reputation and goodwill, costs of or resulting from delays, financing, costs of advertising material and media time or space, and costs of
changing, substituting, or replacing such advertising material and media time or space, and any and all expenses of recalls, refunds,
compensation, public notices, and other amounts arising out of or related to such matters.
19.2 Franchisee shall, at all times, fully indemnify and hold harmless HOA and its affiliates, and HOA’s and such affiliates’
directors, officers, shareholders, partners, members, employees, agents, and attorneys, and the predecessors, successors, heirs, and assigns of
any and all of the foregoing (collectively, the “Indemnitees”), from all Losses and Expenses arising out of or related to Franchisee,
Franchisee’s Restaurant, the Accepted Location, and the development, opening, operation, or closure of Franchisee’s Restaurant. Such
obligations shall include, without limitation, Losses and Expenses incurred by any Indemnitees in connection with:
19.2.1 Any action, suit, proceeding, claim, demand, investigation, or inquiry (formal or informal), or any settlement
thereof (whether or not a formal proceeding or action has been instituted) that arises out of Franchisee’s operation of the Franchisee’s
Restaurant or is related to any of the foregoing;
19.2.2 Franchisee’s default of any covenant, warranty, representation, agreement, or obligation set forth in this Agreement or
any schedule, exhibit, addendum, attachment, or amendment to this Agreement;
19.2.3 Franchisee’s default or alleged default of any other agreement;
19.2.4 Franchisee’s violation or alleged violation of any Law, any standard or directive, or any industry standard,
including without limitation violations resulting from Franchisee’s use of the Hooters System;
19.2.5 Libel, slander, or any other form of defamation by Franchisee; and
19.2.6 Acts, errors, or omissions of Franchisee or any of Franchisee’s directors, officers, shareholders, partners,
members, employees, agents, and attorneys.
19.2.7 This indemnification shall include losses alleging the negligence of any Indemnitee, including without limitation
negligence in the supervision and inspection of Franchisee’s Restaurant, the training of an employee of Franchisee’s Restaurant, and
the Hooters System standards, but excluding any case in which the Indemnitee is determined by a court of competent jurisdiction to
have engaged in grossly negligent or willful misconduct. The indemnification set forth in this Section 19 shall survive the termination
or expiration of this Agreement.
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19.3 Franchisee shall promptly notify HOA of any action, suit, proceeding, claim, demand, inquiry, investigation, or default
described in Section 19.2. If HOA is or may be named as a party in any action, suit, or proceeding, HOA may elect to undertake, but shall not
be obligated to undertake, the defense or settlement thereof, at Franchisee’s cost and expense. No such undertaking by HOA shall, in any
manner or form, diminish Franchisee’s obligation to indemnify HOA and to hold it harmless.
19.4 With respect to any action, suit, proceeding, claim, demand, inquiry, or investigation, HOA may, at any time and without
notice, in order to protect persons or property or the reputation or goodwill of HOA or others, order, consent, or agree to any settlement or
take any remedial or corrective action that HOA deems expedient; if, in HOA’s sole judgment, there are reasonable grounds to believe that:
19.4.1 Any of the acts, omissions, or circumstances giving rise to the action, suit, proceeding, claim, demand, inquiry,
or investigation, in fact occurred; or
19.4.2 Any act, error, or omission of Franchisee may result directly in or indirectly in damage, injury, or harm to any
person or any property.
19.5 All Losses and Expenses incurred under this Section 19 shall be chargeable to and paid by Franchisee pursuant to
Franchisee’s obligations of indemnity under this Agreement.
19.6 Under no circumstances shall the Indemnitees be required or obligated to seek recovery from third parties or to otherwise
mitigate their losses in order to maintain a claim against Franchisee. Franchisee agrees that the failure to pursue such recovery or to mitigate
loss shall in no way reduce the amounts the Indemnitees may recover from Franchisee.
19.7 The Indemnitees assume no liability whatsoever for any acts, errors, or omissions of any persons with whom Franchisee
may contract, regardless of the purpose. Franchisee shall hold harmless and indemnify the Indemnitees and each of them for all Losses and
Expenses that may arise out of any acts, errors, or omissions of persons with whom Franchisee may contract.
20. APPROVALS AND WAIVERS
20.1 Whenever this Agreement requires the prior approval or consent of HOA, Franchisee shall make a timely written request to
HOA for such approval or consent, and such approval or consent shall only be valid if made in writing.
20.2 HOA makes no representations, warranties, or guaranties on which Franchisee may rely, and assumes no liability or
obligation to Franchisee, by providing any waiver, approval, consent, or suggestion to Franchisee or in connection with any consent, or by
reason of any neglect, delay, or denial of any request therefor.
20.3 No failure of HOA to exercise any power reserved to it in this Agreement, or to insist on compliance by Franchisee with
any obligation or condition in this Agreement, and no custom or practice of the parties at variance with the terms of this Agreement, shall
constitute a waiver of HOA’s rights to demand exact compliance with any of the terms of this Agreement. Waiver by HOA of any particular
default shall not affect or impair HOA’s right with respect to any subsequent default of the same or of a different nature; nor shall any delay,
forbearance, or omission by HOA to exercise any power or right arising out of any breach or default by Franchisee of any of the terms,
provisions, or covenants of this Agreement affect or impair HOA’s rights; nor shall such delay, forbearance, or omission constitute a waiver
by HOA of any rights under this Agreement or any right to obtain relief for any subsequent breach or default.
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21. NOTICES
Any and all notices required or permitted under this Agreement shall be in writing and shall be effective the earlier of: (i) the day that it is
personally delivered; (ii) the day it is sent by facsimile or email with a confirmation of receipt; (iii) the intended recipient’s failure or refusal to
accept delivery; or (iii) the third business day after it is sent by a commercially recognized international delivery service (e.g. UPS, Federal
Express, or DHL) to the respective parties at the following addresses unless and until a different address has been designated by written notice
to the other party. Except for notices of actions to be taken pursuant to Section 14, it is agreed that each party can send communications to the
other party by facsimile or email for the purpose of delivering notices under this Agreement, including this Section 21.
Notices to HOA:
Hooters of America, LLC
1815 The Exchange
Atlanta, Georgia 30339
Attention: Legal Department
Facsimile: ___________
Email: _____________
Notices to Franchisee:
See Exhibit A
22. ENTIRE AGREEMENT
22.1 This Agreement, including the exhibits, attachments, and amendments to it, and further including the Franchise Disclosure
Document, is a complete integration that sets forth the entire agreement between HOA and Franchisee, fully superseding any and all prior
negotiations, agreements, representations, or understandings between HOA and Franchisee, whether oral or written, related to the subject
matter of this Agreement. HOA and Franchisee hereby expressly confirm that there are no other oral or written agreements, “side-deals,”
arrangements, or understandings between HOA and Franchisee except as expressly set forth in this Agreement or in a duly-executed written
amendment to this Agreement. No course of dealing, whether occurring before or after the Effective Date of this Agreement, shall operate to
amend, modify, terminate, or waive any express written provision of this Agreement.
22.2 Except for those acts that this Agreement permits HOA to take unilaterally, no amendment, change, or variance from this
Agreement will be binding on HOA unless such amendment, change, or variance is set forth with particularity in a written agreement duly
executed by HOA’s authorized officer and by Franchisee.
22.3 Franchisee hereby covenants, warrants, represents, and agrees that it will not: (i) make or raise any claim, counterclaim,
crossclaim, affirmative defense, or demand; (ii) commence, or cause or permit to be commenced; (iii) prosecute, or cause or permit to be
prosecuted; or (iv) assist or cooperate in the commencement or prosecution of, any suit or action at law or in equity or otherwise, alleging or
asserting any matter contrary to Sections 22.1 or 22.2 of this Agreement.
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23. SEVERABILITY AND CONSTRUCTION
23.1 No Implied Covenant. HOA and Franchisee have negotiated the terms of this Agreement and agree that neither party shall
claim the existence of an implied covenant of good faith and fair dealing to contravene or limit any express written term or provision of this
Agreement.
23.2 Partial Invalidity. If any term or provision of this Agreement is declared invalid or unenforceable for any reason, such
provision will be modified to the minimum extent necessary to make it valid and enforceable; or, if it cannot be so modified, then severed, and
the remaining provisions of this Agreement will remain in full force and effect. The parties agree that they would have signed the Agreement
as so modified.
23.3 Interpretation. The table of contents and section headings in this Agreement are inserted for convenience only and will not
affect the meaning or construction of this Agreement. Except as otherwise set forth in this Agreement, the language of this Agreement will be
construed simply according to its fair meaning and not strictly for or against either party. Both parties have had the opportunity to be
represented by skilled and experienced counsel in the transaction resulting in the execution of this Agreement, and both parties are skilled and
experienced business professionals; and as a result, both parties shall be deemed to have drafted this Agreement and in no event will any
adverse construction of this Agreement be attributed to HOA as the drafting party. The Recitals of this Agreement are a material part of this
Agreement, and shall in no event be considered mere prefatory material or surplusage. “Herein,” “hereof,” and “hereunder” refer to this
Agreement as a whole and not to any particular part. Words importing the singular number only shall include the plural and vice-versa, and
words importing the masculine gender shall include the feminine and neuter genders and vice-versa. The word “including” means “including
without limiting the scope or generality” of any description preceding such word, and the word “or” means, and is used in the inclusive sense
of, “and/or.” References to documents, instruments, or agreements shall be deemed to refer as well to all addenda, exhibits, schedules, or
amendments thereto. Any reference to any English language legal term or concept (including for any action, remedy, method of judicial
proceeding, document, legal status, statute court, official governmental authority or agency) shall, in respect of any jurisdiction other than the
United States of America, be interpreted to mean the nearest and most appropriate analogous term to the English term in the legal language in
that jurisdiction as the context reasonably requires so as to produce as nearly as possible the same effect in relation to that jurisdiction as would
be the case in relation to the United States of America.
23.4 Survival of Obligations. All obligations of this Agreement, whether HOA’s or Franchisee’s, that expressly or by their
terms require performance after the termination or expiration of this Agreement, or that by their nature would reasonably be expected to
continue in full force and effect until they are satisfied in full or by their nature expire, will be deemed to be self-executing and will continue in
full force and effect subsequent to and notwithstanding the termination, expiration, setting aside, cancellation, rescission, unenforceability or
otherwise of this Agreement (including without limitation the Personal Guaranty of Franchisee’s Principal Owners, Individual Non-
Disclosure and Non- Competition Agreement, and Collateral Assignment of Leases). The provisions of Section 25, below, will survive and
will govern any claim for rescission or otherwise and will apply to and govern any claim against, or with respect to, the Global Advertising
Fund.
23.5 Calculation of Days. Except where this Agreement expressly requires “business days” in any calculation of time, all
references to “days” shall mean “calendar days.”
23.6 Submission of Agreement. Submission of this Agreement to Franchisee does not constitute an offer to enter into a contract.
This Agreement will become effective only on its execution by HOA and Franchisee, and will not be binding on HOA unless and until it is
signed by HOA’s authorized officer and delivered to Franchisee.
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23.7 Counterparts. This Agreement may be executed in multiple counterparts, and each copy so executed shall be deemed an
original.
23.8 Further Assurances. Franchisee shall execute and deliver all documents and agreements that HOA may require in order to
further the intent of this Agreement, promptly on HOA’s request. Without limiting the foregoing, with respect to any power of attorney
granted by this Agreement which would be required to be in a specific form, translated into another language or executed in a particular
manner for it to be binding and enforceable in any country, Franchisee agrees to execute, or to cause its affiliates to execute, in the required
form and manner a separate power of attorney meeting all such legal requirements to ensure enforceability.
23.9 Language. This Agreement is entered into in the English language. If a translation of this Agreement into any other
language is required or desired for any reason, it is understood that in all matters involving interpretations of this Agreement, the English text
shall control. If a translation is required, Franchisee will prepare the translation at its cost, provided that HOA retains the right to approve such
translation.
24. FORCE MAJEURE
24.1 Except for: (i) the covenants and obligations of the Franchisee set forth in Section 1 of this Agreement; and (ii) monetary
obligations under this Agreement, and (iii) except as otherwise specifically provided in this Agreement, if either party to this Agreement shall
be delayed or hindered in or prevented from the performance of any act required under this Agreement by reason of strikes, lock- outs, labor
troubles, inability to procure materials, failure of power, war, acts of terror, riots, insurrection, or other causes beyond the reasonable control
of the party required to perform such work or act under the terms of this Agreement not the fault of such party (a “Force Majeure”), then
performance of such act shall be excused during the period of such Force Majeure. The party whose performance is affected by a Force
Majeure shall give prompt, written notice to the other party of such Force Majeure. If there shall be a Force Majeure that HOA deems
economically harmful or otherwise detrimental to HOA or the Hooters System, then HOA shall be entitled to terminate this Agreement on
ninety (90) days’ written notice to Franchisee; provided, however, that HOA may withdraw such notice if, within such ninety (90) day period,
HOA determines that the economically harmful or otherwise detrimental effects have ceased.
25. APPLICABLE LAW; DISPUTE RESOLUTION
25.1 Notice of Dispute. Franchisee shall give HOA advance written notice of Franchisee’s intent to institute legal action against
HOA, stating with specificity the basis for such proposed action, and shall grant HOA thirty (30) days from HOA’s receipt of such notice to
cure the alleged act on which such legal action is to be based.
25.2 Governing Law. All matters related to this Agreement, including without limitation all matters related to the making,
existence, construction, enforcement, and sufficiency of performance of this Agreement, shall be determined exclusively in accordance with,
and governed exclusively by, the laws of the state where HOA’s principal business office is located (applicable to agreements made and to be
entirely performed in the state where HOA’s principal business office is located), currently the State of Georgia (USA), which laws shall
prevail in the event of any conflict of laws.
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25.3 Arbitration.
25.3.1 In the event of any dispute arising out of or in connection with this Agreement, including its validity or a breach
thereof (each a “Dispute”), the parties shall use their best efforts to settle the Dispute by consulting and negotiating with each other in
good faith to attempt to reach a satisfactory solution. If they do not reach a solution within thirty (30) days of the written notice of the
existence of a Dispute, then, upon written notice by any party to the other, any such Disputes shall be finally settled under the Rules of
Arbitration of the International Centre for Dispute Resolution (“ICDR”) by (a) one arbitrator if the amount of claim is US$5 million or
less, or (b) three (3) arbitrators if the amount of claim is more than US$5 million.
25.3.2 If there is one arbitrator, such shall be appointed by the ICDR. If there are three arbitrators, each party shall
appoint one (1) arbitrator. If a party fails to appoint an arbitrator within (30) thirty days of the commencement of the arbitration, such
appointment shall be made by the ICDR. The two arbitrators so appointed shall appoint the third arbitrator, who shall be the chairman
of the tribunal. If the two arbitrators fail to appoint the third arbitrator within (30) days of the appointment of the second of the
arbitrators, the appointment of the third arbitrator shall be made by the ICDR.
25.3.3 For purposes of appointing arbitrators, Franchisee and all Principal Owners shall be considered to be the same
party and shall together have the right to appoint only one arbitrator. All arbitrators must be fluent in English and at least one arbitrator
must be a lawyer licensed to practice in a state of the United States of America.
25.3.4 The place of the arbitration shall be Atlanta, GA (USA), and the language of the arbitration shall be English.
25.3.5 15.3.5 Subject to the limitations set forth in Section 25.4, the arbitrators shall have the power to grant any
remedy or relief that they deem appropriate, including injunctive relief, whether interim or final, and any provisional measures ordered
by the arbitrators may be specifically enforced by any court of competent jurisdiction. The arbitrators are not empowered, however, to
act ex aequo et bono or as amiable compositeurs. HOA retains the right to seek interim measures from a judicial authority or other
governmental authority, and any such request shall not be deemed incompatible with the agreement to arbitrate or a waiver of the right
to arbitrate.
25.3.6 The arbitrators may award to the prevailing party, if any, as determined by the arbitrators, its costs and expenses,
including attorneys’ fees. Judgment upon any award rendered by the arbitrators may be entered in and enforced by any court of
competent jurisdiction.
25.3.7 No information concerning an arbitration, beyond the names of the parties and the relief requested, may be
unilaterally disclosed to a third party by any party unless required by applicable law. Any documentary or other evidence given by a
party or witness in the arbitration shall be treated as confidential by any party whose access to such evidence arises exclusively as a
result of its participation in the arbitration, and shall not be disclosed to any third party (other than a witness or expert), except as may
be required by applicable law.
25.3.8 An arbitral tribunal constituted under this Agreement may, unless consolidation would prejudice the rights of
any party, consolidate an arbitration hereunder with an arbitration under any development agreement and franchise agreement between
HOA (or its affiliate) and Franchisee (or its affiliate) if the arbitration proceedings raise common questions of law or fact. If two or
more arbitral tribunals under these agreements issue consolidation orders, the order issued first shall prevail.
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25.4 Waiver of Punitive Damages. HOA and Franchisee hereby waive any right to or claim for punitive, exemplary,
consequential, multiplied, enhanced, or speculative damages.
25.5 Liquidated Damages. In the event Franchisee, directly or indirectly, commits any breach of Section 8 or 16.4 of this
Agreement, then in addition to and not in lieu of HOA’s right to terminate under Section 14 hereof, Franchisee shall pay HOA the sum of
Five Hundred Thousand U.S. dollars (US$500,000) for each breach of the duties set forth therein. In the event the breach occurs with respect
to one or more Competitive Businesses, each such Competitive Business shall constitute a separate breach, obligating Franchisee to pay HOA
the sum of Five Hundred Thousand U.S. dollars (US$500,000) for each such Competitive Business. In the event a Competitive Business
consists of multiple units, outlets or locations, each such unit, outlet or location shall constitute a separate Competitive Business. Franchisee
acknowledges that the damages HOA will incur as a result of any breach of Section 8 or 16.4 are difficult to ascertain and that the foregoing is
a reasonable estimate of these damages and not a penalty or forfeiture of any kind.
25.6 No Limitation. No right or remedy conferred on or reserved to HOA or Franchisee by this Agreement is intended to be,
nor shall be deemed, exclusive of any other right or remedy set forth in this Agreement or by law provided or permitted, but each shall be
cumulative of every other right or remedy.
25.7 Costs of Enforcement. If HOA files a claim in a judicial or arbitration proceeding for amounts Franchisee or any of its
affiliates owes HOA or any of its affiliates, or if HOA seeks to enforce this Agreement in a judicial or arbitration proceeding, Franchisee
agrees to reimburse HOA for all of its costs and expenses incurred from Franchisee’s failure to comply with this Agreement, including
reasonable accounting, paralegal, expert witness and attorneys’ fees. If HOA is required to engage legal counsel in connection with
Franchisee’s failure to comply with this Agreement, Franchisee must reimburse HOA for any legal fees HOA incurs.
26. ACKNOWLEDGMENTS
26.1 Reasonable Business Judgment. HOA acknowledges and agrees that it will, and Franchisee acknowledges and agrees that
HOA may, use Reasonable Business Judgment in the exercise of HOA’s rights, discharge of its obligations, and exercise of its discretion, and
in all circumstances where HOA is required to give its consent, unless this Agreement expressly provides some other standard. “Reasonable
Business Judgment” shall mean that HOA’s determinations or choices will prevail, even if other alternatives are also reasonable or arguably
preferable, if HOA intends to benefit, or is acting in a way that could benefit, the Hooters System (by, for example, enhancing the value of the
Proprietary Marks, increasing franchisee or guest satisfaction, or increasing HOA’s financial strength). Franchisee agrees to this concept of
Reasonable Business Judgment in acknowledgment of the fact that HOA should have at least as much discretion in administering the Hooters
System as a corporate board of directors has in directing a corporation and because the long-term interests of the Hooters System, all
franchisees and owners of franchised businesses in the Hooters System, and HOA and its owners, taken together, require that HOA have the
latitude to exercise Reasonable Business Judgment. HOA shall not be required to consider a Franchisee’s particular economic or other
circumstances or to slight HOA’s own economic or other business interests when HOA exercises its Reasonable Business Judgment.
Franchisee acknowledges and agrees that: (i) HOA has a legitimate interest in seeking to maximize the return to its equityholders; and (ii) the
fact that HOA or its affiliates benefit economically from an action will not be relevant to showing that HOA did not exercise Reasonable
Business Judgment. Neither Franchisee nor any third party (including without limitation any third party acting as a trier of fact or law) shall
substitute Franchisee’s, his, her, or its judgment for HOA’s Reasonable Business Judgment. In a given situation, Franchisee shall have the
burden of establishing, by clear and convincing proof, that HOA failed to exercise Reasonable Business Judgment.
49
26.2 Nature of Obligations.
26.2.1 Franchisee acknowledges and agrees that: (i) all obligations HOA owes under this Agreement HOA owes to
Franchisee alone; and (ii) no other person or entity, including without limitation Franchisee’s affiliates, and Franchisee’s and such
affiliates’ directors, officers, shareholders, partners, members, employees, and agents, and the predecessors, successors, heirs, and
assigns of any of them, shall be entitled to rely on, enforce, or obtain relief for breach of, any of HOA’s obligations arising out of or
related to this Agreement, whether directly, indirectly, by subrogation, as an intended third-party beneficiary, or otherwise.
26.2.2 Franchisee acknowledges and agrees that: (i) all obligations of HOA under this Agreement are owed by HOA
alone; and (ii) no other person or entity, including without limitation HOA’s officers, members, employees, and agents, and HOA’s
affiliates and their directors, officers, shareholders, partners, members, employees, and agents, and the predecessors, successors, heirs,
and assigns of any of them, shall be subject to liability under this Agreement.
26.3 Business Risks. Franchisee acknowledges and agrees that: (i) it has conducted an independent investigation of the business
contemplated by this Agreement; (ii) it understands that such business involves business risks; and (iii) it understands that making a success
of Franchisee’s Restaurant depends largely on Franchisee’s business skill, effort, and business acumen.
26.4 Review of Documents. Franchisee acknowledges and agrees that: (i) HOA’s review of any lease, loan agreement, purchase
agreement, sale agreement, assignment, transfer agreement, site plan, or other agreement or document Franchisee proposes to enter into or
provides is intended solely to ensure that HOA’s interests are adequately protected; (ii) HOA is not undertaking any such review on
Franchisee’s behalf or for Franchisee’s benefit; (iii) HOA’s review will not replace review by Franchisee’s accountant, attorney, architect, and
other business and professional advisors; and (iv) HOA will have no responsibility or liability related to such review.
26.5 Variances. Franchisee acknowledges and agrees that: (i) HOA may from time to time approve exceptions or changes to the
standards and specifications of the Hooters System (including, without limitation, the amount and payment terms of any fee) that HOA deems
necessary or desirable under particular circumstances (the “Variances”); (ii) Franchisee will have no right to require HOA to disclose any
Variances to Franchisee or to grant Franchisee the same or similar Variances; and (iii) other franchisees, whether existing now or in the future,
will operate under different forms of agreements, and that as a result their rights and obligations may differ materially from Franchisee’s rights
and obligations.
26.6 No Unauthorized Representations or Commitments. Franchisee acknowledges and agrees that: (i) HOA does not permit
any agreements or commitments, and does not approve any changes in this Agreement, except by means of a written amendment signed by the
parties to this Agreement; and (ii) if any representations or commitments, or any promises of changes in this Agreement, have been made to
Franchisee that are not in an amendment signed by HOA’s authorized officer and delivered to Franchisee, such representations, commitments,
and promises will not be enforceable.
26.7 Employees. Under no circumstances shall Franchisee’s managerial personnel or other employees be deemed to be
employees of HOA. Franchisee acknowledges that it is the sole employer of the employees in Franchisee’s Restaurant and is solely
responsible for the labor relations and employment practices in Franchisee’s Restaurant. Franchisee agrees to indemnify and hold HOA
harmless from any and all liability, including costs, attorneys’ fees or other damages which result directly or indirectly from Franchisee’s
employees or independent contractors.
50
26.8 Receipt. Franchisee hereby represents and warrants that it received from HOA, more than ten (10) days prior to the
Effective Date, the HOA Offering Circular for the Federative Republic of Brazil with respect to the Hooters System, and that Franchisee fully
analyzed and understood such Offering Circular.
26.9 Special Stipulations. Set forth on Exhibit C attached hereto are special stipulations that are made a part hereof by reference,
In the event such stipulations conflict with any of the foregoing provisions, the special stipulations shall control.
26.10 Travel Restrictions. Notwithstanding anything to the contrary contained in this Agreement or the Manuals, any obligation
HOA may have to provide training or assistance that involves personnel traveling to the Country is subject to HOA’s determination, in its sole
discretion and based on such information as HOA deems appropriate, including U.S. State Department travel advisories, that it is safe to travel
to the proposed destination.
26.11 Delegation of HOA’s Duties. Franchisee acknowledges and agrees that any designee, affiliate, employee, regional/branch
offices, contractor or agent of HOA’s may perform any duty or obligation imposed on HOA by this Agreement, as HOA may designate.
27. REGISTRATION OF AGREEMENT
27.1 Promptly following the execution of this Agreement by both parties, but in no event more than fifteen (15) days after such
execution, Franchisee shall submit this Agreement for registration with INPI and the Central Bank of Brazil. The expenses related to such
registrations shall be borne by Franchisee.
27.2 Franchisee shall immediately inform HOA upon issuance of the registration certificate of the Agreement by INPI and shall,
immediately after such issuance, make any payments due hereunder to HOA as set forth herein.
[SIGNATURES CONTAINED ON FOLLOWING PAGE]
51
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the Effective Date set forth
above.
Witnesses:
1.
Name:
ID No.
2.
Name:
ID No.
Date and Place:
HOOTERS OF AMERICA, LLC
By:
Name: Terry Marks, CEO
ID No.:
STATE OF _________
COUNTY OF _________
§
§
BEFORE ME, the undersigned authority, personally appeared ___________________, known to be to be the person whose name is
subscribed to the foregoing instrument, and swore and acknowledged that he/she executed the same for the purposes and consideration herein
expressed and that he is an authorized representative of HOOTERS OF AMERICA, LLC, and is authorized to execute this Agreement on its
behalf.
TO CERTIFY WHICH WITNESS MY HAND AND SEAL OF OFFICE on this ______ day of ______________, 20 ___.
My Commission Expires:
Notary Public
Witnesses:
1.
Name:
ID No.
2.
Name:
ID No.
Date and Place:
FRANCHISEE:
By:
Name:
ID No.:
[SIGNATURE OF FRANCHISEE TO BE NOTARIZED BEFORE BRAZILIAN NOTARY PUBLIC]
With the consent and approval of HI LIMITED PARTNERSHIP, the owner of the Proprietary Marks.
Witnesses:
1.
Name:
ID No.
2.
Name:
ID No.
Date and Place:
HI LIMITED PARTNERSHIP
By:
Name:
ID No.:
STATE OF _________
COUNTY OF _________
§
§
BEFORE ME, the undersigned authority, personally appeared __________________, known to be to be the person whose name is
subscribed to the foregoing instrument, and swore and acknowledged that he/she executed the same for the purposes and consideration herein
expressed and that he is an authorized representative of HOOTERS OF AMERICA, LLC, and is authorized to execute this Agreement on its
behalf.
TO CERTIFY WHICH WITNESS MY HAND AND SEAL OF OFFICE on this _______ day of __________________, 20__.
My Commission Expires:
Notary Public
Name
Jurisdiction of Incorporation
Chanticleer Holdings Australia Pty, Ltd
Crown Restaurants Kft.
Chanticleer Holdings, Ltd.
Chanticleer South Africa (Pty) Ltd.
Hooters CapeTown (Pty) Ltd.
Hooters Emperors Palace (Pty) Ltd.
Hooters SA (Pty) Ltd.
Hooters Umhlanga (Pty) Ltd.
Pulse Time (Pty) Ltd.
Tundraspex (Pty) Ltd.
DineOut SA Ltd.
West End Wings, Ltd.
Australia
Hungary
Jersey
South Africa
South Africa
South Africa
South Africa
South Africa
South Africa
South Africa
United Kingdom
United Kingdom
American Roadside Burgers, Inc.
United States – Delaware
Avenel Financial Services, L.L.C.
Avenel Ventures, L.L.C.
Chanticleer Advisors, L.L.C.
United States – Nevada
United States – Nevada
United States – Nevada
Chanticleer Investment Partners, L.L.C
United States – North Carolina
JF Franchising Systems, L.L.C.
United States – North Carolina
JF Restaurants, L.L.C.
Jantzen Beach Wings, L.L.C.
Oregon Owl’s Nest, L.L.C.
Dallas Spoon Beverage, L.L.C.
Dallas Spoon, L.L.C.
Tacoma Wings, L.L.C.
United States – North Carolina
United States – Oregon
United States – Oregon
United States – Texas
United States – Texas
United States - Washington
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
We consent to the incorporation by reference in the Registration Statements of Chanticleer Holdings, Inc. and Subsidiaries on Form S-3 (File
No. 333-193144) and Form S-8 (File No. 333-193742) of our report, which includes an explanatory paragraph as to the Company’s ability to
continue as a going concern, dated March 31, 2014, with respect to our audits of the consolidated financial statements of Chanticleer Holdings,
Inc. and Subsidiaries as of December 31, 2013 and 2012 and for the years then ended, which report is included in this Annual Report on
Form 10-K of Chanticleer Holdings, Inc. and Subsidiaries for the year ended December 31, 2013.
/s/ Marcum llp
Marcum llp
New York, New York
March 31, 2014
Exhibit 31.1
CHANTICLEER HOLDINGS, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
OF 2002
I, Michael D. Pruitt, certify that:
1.
I have reviewed this report on Form 10-K of Chanticleer Holdings, Inc;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 31, 2014
/s/ Michael D. Pruitt
Michael D. Pruitt
President, Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CHANTICLEER HOLDINGS, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
OF 2002
I, Eric S. Lederer, certify that:
1.
I have reviewed this report on Form 10-K of Chanticleer Holdings, Inc;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 31, 2014
/s/ Eric S. Lederer
Eric S. Lederer
Chief Financial Officer
(Principal Financial Officer)
Exhibit 32.1
CHANTICLEER HOLDINGS, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael D. Pruitt, certify that:
I am the Chief Executive Officer of Chanticleer Holdings, Inc. (the “Issuer”).
1.
2. Attached to this certification is a Form 10-K for the fiscal year ended December 31, 2013 (the “Report”) filed by the Issuer with the
Securities Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 (the “Exchange Act”),
which contains financial statements.
I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to
my knowledge:
3
·
·
The Report containing the financial statements fully complies with the requirements of Section 13(a) or 15(d) of the Exchange
Act; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Issuer for the periods presented.
March 31, 2014
/s/ Michael D. Pruitt
Michael D. Pruitt
President, Chief Executive Officer
(Principal Executive Officer)
Exhibit 32.2
CHANTICLEER HOLDINGS, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Eric S. Lederer, certify that:
I am the Chief Financial Officer of Chanticleer Holdings, Inc. (the “Issuer”).
1.
2. Attached to this certification is a Form 10-K for the fiscal year ended December 31, 2013 (the “Report”) filed by the Issuer with the
Securities Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 (the “Exchange Act”),
which contains financial statements.
I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to
my knowledge:
3
·
·
The Report containing the financial statements fully complies with the requirements of Section 13(a) or 15(d) of the Exchange
Act; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Issuer for the periods presented.
March 31, 2014
/s/ Eric S. Lederer
Eric S. Lederer
Chief Financial Officer
(Principal Financial Officer)