7/31/2019 Chanticleer - Q3 2012 Letter to Investors - Edited for Public Viewing

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October 19, 2012

At the horse track a handicapper must judge many variables, including, crucially, the jockey.

As investors we too must be able to accurately judge the capability, character and judgment ofthe management teams and boards of directors in which we entrust our capital.

Dear Fellow Partners,

The third quarter headlines were again dominated by the actions of central banks and worries of a slowing world economy.While we acknowledge the significance of these issues on asset values, we believe it is difficultif not impossibletopredict how those items will play out, as well as how other investors will respond to them. We think our time is best spenttrying to find investments that can be profitable under a variety of scenarios, instead of trying to figure out what centralbanks will do or if another recession is at hand. As Confucius said, To know that we know what we know, and that we donot know what we do not know, that is true knowledge. We continue to focus on the things we think we can understandand in which we can more accurately assess the odds, though we remain mindful of the macro-level risks that will affectmany businesses. Debt levels and the asset price manipulations of various governments have reached heights never beforeseen; of this we are well aware. Our goal is to successfully guide the fund through the economic storms that are likelycreated by the normalization of debt levels and the eventual unwinding of central bank actions.

Jockey Rating

Those familiar with horse handicapping may immediately grasp the allusion in this sections title, but those less familiar withthe track may require further explanation. When handicapping a horse race it is important to understand how fast a horsehas run historically. That however is a difficult task, given that horses race on different tracks at different times and fordifferent distances. The Ben Graham of the horse racing world is probably Andrew Beyer, whose books, includingBeyer onSpeedand Picking Winners, brought about a revolution in horse handicapping with the popularization of what he called speedfigures. These speed figures allowed one to compare the speeds of horses, adjusted for race distances and track conditions.One component of the speed figure is the speed rating, which relates to the distance-adjusted speed. While Beyer never

went on to develop a Jockey Rating (though he certainly recognizes jockey capability as one of the many factors that are

crucial to successful handicapping), that theoretical idea is the topic at hand.

One of your managers has a particular fondness for the track. (Rest assured it is a healthy fondness, as he recognizes hisinherent limitations and keeps the activity to a small diversion!) Each year he and his wife take a summer trip to Saratoga inupstate New York, one of the top tracks in the country. During this years trip, his wife got to experience the agony of nothaving a jockey rating. In one particular race, she seemed to have a sure winner with not more than a furlong to go in therace. Unfortunately, the jockey, who wasnt completely in the clear, let up noticeably on her horse as they approached thefinish. Surely enough, the trailing horse came from behind and rallied for a dramatic victory. Despite recouping her bet withthe second-place finish, she failed to win a nice sum on the winning horse. It was ultimately a poorly ridden race.

Unfortunately, companies can be poorly ridden as well; and it pays, in both capital and frustration, to avoid these situations.We bring up the topic because there are three investments that weve made over the last two years whose results have beendisappointing and whose Jockey Ratings were either poorly judged or inappropriately overlooked. We will refrain from

specifics for the time being because these companies remain in our portfolio and subject to our efforts. However, generallyspeaking, the recent issues with boards and managements in our portfolio relate to suboptimal incentive alignment, pooroversight (by appropriate boards or shareholder constituents) and poor strategic focus.

Over the years weve come to conclude that the management dynamic is especially crucial in the world of small and micro-cap investing. We enjoy fishing in this ocean of small companies for reasons weve discussed before and about which weve

written a whitepaper, with the main reason being that this universe includes more inefficiencies and thus more chances formispricing. But we have to recognize that poor or mediocre management teams, of which there are many in the small andmicro-cap space, do little to improve the odds of our success as investors, regardless of the price paid. Given that poor ormediocre management teams can significantly impair good small businesses, just imagine what they can do to averagebusinesses. In addition, the competitive advantages that are often built up over many decades in larger businesses are

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generally not present in these smaller companies. Thus, decisions from the people at the top can have a significantly largerinfluence on the direction and outcome of a small business when compared to its larger peers.

While weve certainly spent time thinking about management over the years, our recent travails have stressed some oldlessons and also taught us some new ones when it comes to looking at management teams. In developing a mental model ofa jockey rating, it is necessary to evaluate managements and boards of directors regarding their:

Compensation levels Employment agreement features Ownership incentives Past management performance Attitude toward cost controls Strategic thought process Actions compared to words Luck versus skill

Board structure Benchmarks and metrics Disclosure policies Other business dealings Personal life choices Capital allocation skills Related-party concerns

We want capable and appropriately incentivized management teams overseen by competent and engaged boards of directorsthat oversee the business for its ownersthe shareholdersinstead of those that seem to treat the business as their ownpersonal checkbook, where a passion for making moneyoffof shareholders seems to take precedence over making moneyforshareholders.

While there are likely few management teams and boards of directors that would deserve a top Jockey Rating after arealistic assessment of these factors, the idea behind such a mental model is to avoid otherwise intriguing investment ideas

where the Jockey Rating is inadequate and the likely investment outcome is similarly inadequate.

High Returns with High Arctic?

As we mentioned in our prior letter, weve been spending some time analyzing oilfield services companies. During thequarter we invested in one such company called High Arctic Energy Services Inc. (TSX: HWO). The company is an oilfield

services, drilling, and equipment rental business headquartered in Red Deer, Alberta, Canada. While based in westernCanada, the company has significant operations in Papua New Guinea (PNG). Despite several unique characteristics, webelieve an investment in High Arctic could provide significant potential upside with important downside protection in itsasset base.

As we completed our investment, High Arctic was trading at the following metrics:

As Stated * Fully Diluted *

Share Price $1.75 $1.75

Market Cap $80.00 $88.31

Net Cash $12.80 $12.80

Enterprise Value $67.20 $75.51

Dividend Yield 7.00% 7.00%

TTM P/E 2.94 x 3.25 x

P/TBV 0.99 x 1.10 x

EV/EBITDA 1.87 x 2.10 x

* All financial values are in millions of Canadian dollars,

except forshare price which is simply in Canadian dollars.

The share price is not our average cost, but the share price

when we stopped buying shares.

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While there are certainly appropriate concerns about the companys exposure to PNG and a large customer in PNG; as wellas its historical reliance on the natural gas business in Canada, we believe each of those worries is overstated and is morethan priced into the stock. Interestingly, our take is that the companys exposure to PNG is actually a net benefit which

diversifies the company away from a more price-sensitive North American region, and provides a potential tailwind based onsignificant resource development occurring in PNG.

The company has a couple of additional assets which also receive little notice by the market and which are not represented tothe fullest degree on the companys balance sheet. The first is the companys tax loss carryforwards, which have only begunto be recognized on the balance sheet. Additionally, the company owns three highly specialized drilling rigs which wereoriginally developed to drill for deep gas reserves but were written down considerably during the companys recentrestructuring. These rigs, thanks to the unfolding horizontal drilling revolution, may now very well have valuableapplications in deep shale oil drilling. The company is already benefiting from the tax loss assets and is beginning to realizethe potential of these underutilized rigs.

High Arctic pays a dividend which exceeds a 7% yield at our cost. While there is clearly room for this payout to expand, thecompany is managing this against significant reinvestment opportunities both in PNG and elsewhere. High Arctic is also, in

our opinion, intelligently repurchasing shares through a normal course issuer bid for which it received approval in late Marchof this year. Further, we are comforted by the fact that Cyrus Capital Partners is a large shareholder by virtue of HighArctics restructuring. While Cyrus has a representative on the board, as a distressed credit fund, it likely will seek a liquidityevent at some point, which we believe could be a positive catalyst.

If you would be interested in a more detailed write-up on the company, please feel free to reach out to us, as wed be happyto send you one. While weve chosen to highlight High Arctic here, it is not the only oilfield services company weve beenexamining. We continue to be mindful of our exposure to a particular sector, especially one reliant on a commodity subjectto significant swings, but we remain pleased with the opportunity set in this industry.

Miscellaneous

Chanticleer Advisors will soon be launching a new website. Once the new site is complete, current partners will receive a

username and password from us, and all others will have to sign up and request an individual username and password inorder to access the site. Our quarterly letters and much of the same information on our prior site will be able to be accessedon our new site. Additionally, investors will have access to their statements online. We look forward to introducing the sitein the near future.

Sincerely,

Mike Pruitt Matthew Miller Joe Koster(704) 366-1535 (704) 366-5078 (704) 366-0496mp@chanticleerholdings.com mmiller@chanticleerholdings.com jkoster@chanticleerholdings.com