SOST Southern States Sign Company (GM)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes and other financial information appearing elsewhere in this Current Report on Form 10-Q. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business. All amounts are set forth in euros.

The following discussion and analysis relates to the results of the Company and should be read in conjunction with the financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-Q. For further discussion and analysis related to the results of the Company, please see our Form 10-K for the fiscal year ended December 31, 2012 filed with the SEC on April 16, 2013.

Overview

Southern States Sign Company is a hospitality company that owns and develops hotels and spas in Italy. We operate through our wholly owned subsidiary, Conte Rosso & Partners S.r.l. (“CR&P”) and, as a result, are classified as property investment specialists.

We intend to develop our presence in Italy and abroad with a target of owning 3,000 rooms within the next 3 to 5 years.

We are currently undergoing advanced negotiations with respect to investments in Rome, Bari and Florence in Italy, as well as in New York, and have started searches for investment opportunities in Milan, Florence, Paris and London. We are also planning to invest in high-growth potential countries such as Albania and some selected African countries.

In addition to the items discussed above, we plan to continue to refresh our hotel room product, pursue third-party development partners for additional hotel and restaurant concepts and renovate select facilities to improve our product offerings.

Critical Accounting Policies and Estimates

We believe the following accounting policies and estimates are most critical to aid in understanding and evaluating our reported financial results.

Basis of consolidation

All majority-owned subsidiaries in which CR&P has both voting share and management control are consolidated. All significant intercompany accounts and transactions are eliminated. Subsidiaries over which control is achieved through other means, such as stockholder agreements, are also consolidated even if less than 51% of voting capital is held. The equity attributable to non-controlling interests in subsidiaries is shown separately in the consolidated financial statements.

Basis of presentation

The consolidated financial statements for the three months ended March 31, 2013 and for the fiscal year ended December 31, 2012 are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

The Euro is the functional currency of all companies included in these consolidated financial statements.

The amounts presented have been rounded to the nearest thousand.

Acquisitions

Assets acquired and liabilities assumed in business combinations are recorded on our consolidated balance sheets as of the respective acquisition dates based upon their estimated fair values at such dates.

The results of operations of businesses acquired by us have been included in the consolidated statements of income (loss) since their respective dates of acquisition. In certain circumstances, the purchase price allocations are based upon preliminary estimates and assumptions. Accordingly, the allocations are subject to revision when we receive final information, including appraisals and other analyses. There were no contingent payments, options, or commitments specified in any of the following acquisition agreements.

Cash and cash equivalents

Cash and cash equivalents comprise cash balances, cash on current accounts with banks, bank deposits and other highly liquid short-term investments with original maturities of less than three months.

Accounts receivable & Allowance for doubtful accounts

Accounts receivable represents trade obligations from customers that are subject to normal trade collection terms, without discounts. The Company periodically evaluates the collectability of its accounts receivable and considers the need to record or adjust an allowance for doubtful accounts based upon historical collection experience and specific customer information. Actual amounts could vary from the recorded estimates. The Company has determined that as of March 31, 2013 and December 31, 2012 no allowance for doubtful accounts was required. The Company does not require collateral to support customer receivables.

Investments

Investments in unconsolidated affiliates over which we exercise significant influence, but do not control, including joint ventures, are accounted for using the equity method.

Investments in unconsolidated affiliates over which we are not able to exercise significant influence are accounted for under the cost method.

Property, plant and equipment

Property, plant and equipment are stated at acquisition cost less accumulated depreciation and adjustments for impairment losses. Property, plant and equipment also includes assets under construction and plant and equipment awaiting installation.

Subsequent expenditures are capitalized only when they increase the future economic benefits embodied in an item of property, plant and equipment. All other expenditures are recognized as expenses in the consolidated statement of income as incurred.

Capitalization ceases when construction is interrupted for an extended period or when the asset is substantially complete.

Where funds are borrowed specifically for the purpose of acquiring or constructing a qualifying asset, the amount of interest costs to be capitalized in a period on that asset is the actual interest cost incurred on the borrowing during the period.

Depreciation is charged on a straight-line basis over the estimated remaining useful lives of the individual assets. Depreciation commences from the time an asset is put into operation. Depreciation is not charged on assets to be disposed of or on land. The range of the estimated useful lives is as follows:

Long-Lived Assets

We evaluate the carrying value of our long-lived assets for impairment by comparing the expected undiscounted future cash flows of the assets to the net book value of the assets when events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the estimated fair value will be charged to earnings.

Fair value is based upon discounted cash flows of the assets at a rate deemed reasonable for the type of asset and prevailing market conditions, appraisals, and, if appropriate, current estimated net sales proceeds from pending offers.

We evaluate the carrying value of our long-lived assets based on our plans, at the time, for such assets and such qualitative factors as future development in the surrounding area and status of expected local competition.

Assets and liabilities held for resale

In connection with the strategy of concentrating in the portfolio of hotel, power, and plantations investments, in the periods presented we entered into various negotiations with potential purchasers to sell. Most of these sales were concluded at the end of September 30, 2012.

The realized value of these assets are higher than the net asset carrying value and that resulted in a gain on discontinued operations.

Goodwill and Other Intangible Assets

We evaluate goodwill for impairment on an annual basis, and do so during the last month of each year using balances as of the end of September and at an interim date if indications of impairment exist. Goodwill impairment is determined by comparing the fair value of a reporting unit to its carrying amount in a two-step process with an impairment being recognized only where the fair value is less than carrying value. We define a reporting unit at the individual property level.

When determining fair value in step one, we utilize internally developed discounted future cash flow models, third party appraisals and, if appropriate, current estimated net sales proceeds from pending offers. Under the discounted cash flow approach we utilize various assumptions, including projections of revenues based on assumed long-term growth rates, estimated costs and appropriate discount rates based on the weighted-average cost of capital. The principal factors used in the discounted cash flow analysis requiring judgment are the projected future operating cash flow, the weighted-average cost of capital and the terminal value growth rate assumptions. The weighted-average cost of capital takes into account the relative weights of each component of our capital structure (equity and long-term debt) and is determined at the reporting unit level. Our estimates of long-term growth and costs are based on historical data, various internal estimates and a variety of external sources, and are developed as part of our routine, long-term planning process. We then compare the estimated fair value to our carrying value.

If the carrying value is in excess of the fair value, we must determine our implied fair value of goodwill to measure if any impairment charge is necessary. The determination of our implied fair value of goodwill requires the allocation of the reporting unit’s estimated fair value to the individual assets and liabilities of the reporting unit as if we had completed a business combination.

We perform the allocation based on our knowledge of the reporting unit, the market in which they operate, and our overall knowledge of the hospitality industry.

Leasing

All lease agreements of the Company and its subsidiaries as lessees are accounted for as finance leases. The Company recognizes the asset and associated liability on its balance sheet. Finance leases are capitalized at the beginning of the lease at the lower of the fair value of the leased property and the present value of minimum lease payments. Each installment of the lease is apportioned between the liability and finance charges so as to achieve an equal reduction in capital due for each payment made at constant rate on the remaining financial balances.

Derivative financial instruments

The Company uses derivative financial instruments principally for the management of exposure to variable interest rates on long-term financing. All derivative financial instruments are classified as assets or liabilities and are accounted for at trade date. The Company measures all derivative financial instruments based on fair values derived from market prices of the instruments. Changes in the fair value of a derivative that is significant and that is designated and qualifies as a fair value hedge, along with the loss or gain on the hedged asset or liability, are recorded in the income statement.

As of December 31, 2012 there are no derivative instruments. During the 2012 there was only one derivative instrument hedging the risk of variable interest rates (an “interest rate cap”), the notional amount of which was € 4 million. This derivative instrument hedges the risk from change of interest rate on a mortgage loan facility with “bullet” repayments originally of € 8 million of which € 6.6 million is outstanding. This derivative was divested as part of our plan to focus on hotels only as of September 30, 2012.

Shareholders’ loans

Shareholders’ loans to the Company are all non-interest bearing. Italian law provides that the shareholders’ loans to a limited liability company ("S.r.l.") are not preferred and their repayment is subordinated to other categories of debt. As a result all shareholder loans are classified as non-current liabilities.

Severance indemnity fund

According to Italian accounting principles reflecting local law and applicable employment contracts, certain post-employment benefits accrue during the period of employment. Under U.S. GAAP, post-employment benefits are defined either as de fined contribution plans or defined benefit plans.

In defined contribution plans, the Company's obligation is limited to the payment of contributions to the Government or to a fund. Defined benefit plans are pension, insurance and healthcare programs which cover the Company's obligation, even implicitly, to provide the benefits due to former employees. The liabilities associated with defined benefit plans are determined on the basis of actuarial assumption (discounting) and accrued in the financial statements over the employment period required to obtain the benefits.

The severance indemnity fund required by Italian law is a liability similar to a defined benefit plan, which, however, according to Italian accounting principles, is not subject to discounting. Given the small number of Company employees any difference between the present provisions in the financial statements prepared in accordance with Italian GAAP and discounted value of these benefits is considered to be immaterial.

Revenue Recognition

Our revenues are derived from rent we receive according to rental agreements we have in place with a hotel management company. The majority of our rent is fixed and payable monthly. We recognize additional revenue that is variable based on a percentage of the operating profit of our rented hotels.

Taxes

Income taxes

We account for income taxes to recognize the amount of taxes payable or refundable for the current year and the amount of deferred tax assets and liabilities resulting from the future tax consequences of differences between the financial statements and tax basis of the respective assets and liabilities. We recognize the financial statement effect of a tax position when, based on the technical merits of the uncertain tax position, it is more likely than not to be sustained on a review by taxing authorities. These estimates are based on judgments made with currently available information. We review these estimates and make changes to recorded amounts of uncertain tax positions as facts and circumstances warrant.

Revenues

Revenues for the three month periods ended March 31, 2013 and March 31, 2012 were € 840,000 and € 1,323,000 respectively. The decrease in revenues of approximately € 483,000 or 37% was due to the switch from a direct management system (where revenues reflected the cash paid by hotel customers) to a third party management system (where revenues consist of the fees that we receive from JSH, the management company, and thus are already net of any costs).

Direct Operating Costs

Direct Operating Costs for the three month period ended March 31, 2013, decreased approximately € 69,000, or 7%, compared to the three month period ended March 31, 2012. This decrease is mainly due to the replacement of direct management of the Galzignano Hotel & Resort with third party management.

direct operating costs is due to the fact that is mainly due to the same reason mentioned above

Selling, General and Administrative Costs

Selling, General and Administrative costs for three month periods ended March 31, 2013, and 2012 were approximately €287,000 and €69,000, respectively. Such expenses consist primarily of salaries and personnel related expenses, occupancy expenses, sales travel, consulting costs and other expenses. This increase is mainly due to the advisory costs related to the reverse merger and pre-listing process.

Amortization and Depreciation

Amortization and depreciation for the three month periods ended March 31, 2013, and 2012 were approximately €554,000 and €764,000, respectively. Such expenses consist primarily of depreciation of properties, plant and equipment held by Conte Rosso & Partners and its subsidiary Aral Immobiliare, S.r.l. The decrease of approximately €210,000 was mainly due to the revaluation of the useful life of the assets.

Interest Income

Interest income for three month periods ended March 31, 2013, and 2012 was approximately €103,000 and €0, respectively. The increase was mainly due to the Company’s liquidity management efficiency, focused on the subsidiary CR&P Service, S.c.a.r.l.

Interest Expense

Interest expense for the three month periods ended March 31, 2013, and 2012 was approximately € 577,000 and € 447,000, respectively. The increase was mainly due an increase in the financial debt of the Company in 2013 compared with the same period in 2012.

Other Income

Other Income for the three month periods ended March 31, 2013, and 2012 was approximately € 0 and € 7,000, respectively. The amount shown in 2012 was immaterial.

Discontinued operations

During the three month period ended March 31, 2012, we initiated the selling of non-hospitality subsidiaries to related parties (owned directly and indirectly by Antonio Conte, the former Chief Executive Officer of the Company) for a gain of € 3,009,000, net of taxes. The net profit from these discontinued operations was € 15,000. We have no continuing involvement with these divested subsidiaries.

Income Taxes

Income taxes for the three month periods ended March 31, 2013 and 2012 were approximately € 0 and € 37,000, respectively. The decrease is immaterial.

Liquidity and Capital Resources

For the three months period ended March 31, 2013 and 2012

As of March 31, 2013, we had cash and cash equivalents of approximately €115,000, negative working capital of approximately € 4,872,000 and retained earnings of approximately € 6,822,000.

Cash Flows from Operating Activities

Our operating activities resulted in net cash provided by operating activities of approximately €21,000 for the three month period ended March 31, 2013 compared to approximately €5,910,000 cash provided in the three month period ended March 31, 2012.

The net cash provided by operating activities for the three month period ended March 31, 2013 reflects a net loss of approximately €543,000 and a depreciation and amortization of approximately €554,000. Changes in assets and liabilities included a decrease in trade receivables of approximately €236,000, a decrease in related party receivables of approximately €198,000, an increase in other receivables of approximately €2,000, a decrease in advanced payments on purchases of property of approximately €6,000, a decrease in other assets of approximately €5,000, an increase in trade payables of approximately €750,000, an increase in related party payables of approximately €232,000, an increase in other payables of approximately €58,000, an increase in VAT taxes receivable of approximately €78,000.

The net cash provided by operating activities for the three month period ended March 31, 2012 reflects a net income of approximately €2,893,000, a net loss from operations on discontinued operations of approximately € 15,000 and a depreciation and amortization of approximately €764,000, offset by a gain on disposal of discontinued operations of approximately € 3,009,000. Changes in assets and liabilities included an increase in trade receivables of approximately €1,388,000, a decrease in related party receivables of approximately €1,173,000, a decrease in other receivables of approximately €2,000, a decrease in other assets of approximately €58,000, a decrease in trade payables of approximately €7,189,000, an increase in related party payables of approximately €22,000, an increase in other payables of approximately €899,000, a decrease in VAT tax receivable of approximately €286,000,an increase in other liabilities of approximately €6,904,000 and a net cash provided by operating activities of discontinued operations of approximately € 3,754,000.

Cash Flows from Investing Activities

The net cash provided by investing activities for the three month period ended March 31, 2013 of approximately € 259,000 consist primarily , of the cash inflow of approximately € 550,000 offset by by a decrease for other investing change of approximately € 299.

The net cash used in investing activities for the three month period ended March 31, 2012 of approximately € 3,246,000 consist primarily of the cash outflow of approximately € 2,274,000 for the purchase of properties, plants and equipment in connection with relating to the operations of the non-hospitality business that has since been divested, and a cash outflow of approximately € 968,000.

Cash Flows from Financing Activities

Net cash used in financing activities for the three month period ended March 31, 2013 was approximately €607,000, which was mainly due to the reimbursement of shareholders loans (approximately € 396,000). Net cash used in the three months period ended March 31, 2012 was approximately € 2,816,000, which was mainly due to the repayment of long-term loans (approximately € 6,172,000) offset by a repayment of shareholders loans of approximately € 1,351,000 and a net cash outflow provided by discontinued operations.

Future Liquidity Needs

We have evaluated our expected cash requirements over the next twelve months, which include, but are not limited to, interest payments, capital repayments, capital expenditures and working capital requirements. Whilst we are able to manage certain aspects of these cash requirements, the level of income, rate of repayment of related party receivables and cost of debt, where variable, are outside of our control. We are also planning, but as of yet have no contractual commitments, to make acquisitions in the future, and whilst we wish to effect at least some of these acquisitions through the issuance of shares, there can be no assurance that the vendors will accept such consideration, and consequently, we to effect such acquisitions using cash. Also, we plan to further borrow funds in to finance these acquisitions.

Based on existing assets, expected related party receivables repayments, business level, debt and interest rates, we believe our current resources are sufficient for at least the next twelve months.

However, to implement the business plan for the expansion of our assets, we will require additional financing in the future. The timing of our need for additional capital will depend on the timing of the completion of the planned acquisitions, the terms of such acquisitions and whether existing lenders are willing to continue to provide financing upon a change of control of such assets.

We are in the process of developing two properties which will require capital expenditure – the Green Park Hotel, which is being converted into apartments, and the expansion of the Masseria Hotel.

While the first part of the Masseria development has already started and will be completed by April 2013, the second part, including the creation of an additional 24 rooms, will take place in the first quarter of 2014. It is expected that the first part of the development will cost an additional € 400 (approximately $520). A development loan is currently being negotiated for this amount. The terms of the loan are expected to include interest only during the development period and then bullet repayment to be effected by entering into a longer term mortgage financing secured by the property. At present time, no internal capital is expected to be required for this expansion. The last part of the development will cost approximately €600 ($780).

The development of the Green Park Hotel should start in the second half of 2014. It is expected that the Green Park Hotel conversion will cost approximately € 4.4 million ($ 5.7 million) over a period of 1½ years from commencement in 2014.

No work beyond planning and the negotiation of financing has taken place, and no work will begin until the required financing has been agreed and contracted with the lending institutions.

Commitments and Contingencies

The Company and certain subsidiaries are defendants in legal actions in the normal course of business. Based on the advice of legal counsel, management believes that the amounts recognized and recorded as debt provisions or asset negative adjustments are sufficient to cover probable losses in connection with such actions.

The risk provisions or negative adjustments are recognized when in accordance with the opinion of legal counsel the liability is probable and measurable.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.