ITEM 2.01. COMPLETION OF ACQUISITION
OR DISPOSITION OF ASSETS
Acquisition
In accordance with
the Share Exchange dated November 1, 2012 we acquired all of the issued and outstanding shares of CR&P, which resulted in a
parent-subsidiary relationship (the “Acquisition”). In exchange for all of the issued and outstanding shares of CR&P,
the CR&P Shareholders received 21,250,000 shares of our common stock.
The Acquisition and
its related transactions were approved by the CR&P Shareholders.
At the time of the
Share Exchange, neither we nor CR&P had any options to purchase shares of capital stock outstanding or any warrants to purchase
shares of capital stock outstanding.
Prior to the Acquisition,
there were no material relationships between us, CR&P or the CR&P Shareholders, or any of their respective affiliates,
directors or officers, or any associates of their respective officers or directors, other than as disclosed in this Current Report
on Form 8-K. Other than Paolo Conte who is the brother of Antonio Conte, none of our other existing stockholders had a material
relationship with CR&P prior to the Share Exchange.
The shares of our common
stock issued to CR&P Shareholders in connection with the Share Exchange were not registered under the Securities Act of 1933,
as amended (the “Securities Act”), but were made pursuant to Regulation S promulgated thereunder. Each CR&P Shareholder
represented to us that he or she was a Non-US Person as defined in Regulation S. We did not engage in a distribution of this offering
in the United States. Each CR&P Shareholder represented its intention to acquire the securities for investment only and not
with a view toward distribution. All CR&P Shareholders were given adequate access to sufficient information about us to make
an informed investment decision. None of the securities were sold through an underwriter and accordingly, there were no underwriting
discounts or commissions involved.
There were 14,851,852
shares of our common stock outstanding before giving effect to the transactions described in this Current Report on Form 8-K. Following
the closing of the Share Exchange, there were 37,079,944 shares of our common stock issued and outstanding, which include the following:
Shares
|
|
Held by:
|
21,250,000
|
|
Antonio Conte and Maddalena Olivieri
|
11,851,852
|
|
Antonio Conte and Maddalena Olivieri
|
3,978,142
|
|
Other existing shareholders
|
General Changes Resulting from the
Acquisition
Subsequent to the Share
Exchange, we intend to sell our interest in our prior billboard sign business and any assets that relate to that business to Mr.
David Ben Bassat in an Assignment of Assets Agreement. We intend to carry on the business of CR&P as our primary line of business.
We have relocated our principal executive offices to Viale Bruno Buozzi 83, Rome, Italy and our telephone number is +39.06.80692582
Accounting Treatment
The Share Exchange
is being accounted for as a reverse merger. Consequently, the assets and liabilities of CR&P will be carried over at cost.
Our consolidated financial statements after completion of the Share Exchange will include the assets and liabilities of both companies,
our historical operations and the operations of CR&P from November 1, 2012, the date at which the economic interest in the
assets and liabilities of CR&P become those of SOST pursuant to the Share Exchange Agreement. Except as described herein, no
arrangements or understandings exist among present or former controlling stockholders with respect to the election of members of
our board of directors and, to our knowledge, no other arrangements exist that might result in a future change of control of the
Company. We will continue to be a “small business issuer,” as defined under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), following the Share Exchange.
FORM 10 DISCLOSURE
Item 2.01(f) of
Form 8-K provides that if a registrant reporting a transaction under Item 2.01 was a “shell company” (as such
term is defined in Rule 12b-2 under the Exchange Act), in connection with such transaction the registrant must disclose the information
that would be required if it were filing a general form for securities registration on Form 10. Since our operations after the
transaction will consist solely of Conte Rosso & Partners S.r.l. operations, except where the context otherwise requires, the
following discussion of our business and operations, “CR&P,” “we,” “us,” “our”
and the “Company” will mean or refer to Conte Rosso & Partners S.r.l.’s business and operations.
Forward-Looking Statements
This Current Report
on Form 8-K contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. To the extent
that any statements made in this Current Report contain information that is not historical, these statements are essentially forward-looking.
Forward-looking statements can be identified by the use of words such as “expects,” “plans,” “will,”
“may,” “anticipates,” believes,” “should,” “intends,” “estimates,”
and other words of similar meaning. These statements are subject to risks and uncertainties that cannot be predicted or quantified
and, consequently, actual results may differ materially from those expressed or implied by such forward-looking statements. Such
risks and uncertainties are outlined in “Risk Factors” and include, without limitation:
|
·
|
Our limited and unprofitable operating history;
|
|
·
|
the ability to raise additional capital to finance our activities;
|
|
·
|
legal and regulatory risks associated with the Acquisition;
|
|
·
|
the future trading of our common stock;
|
|
·
|
our ability to operate as a public company;
|
|
·
|
general economic and business conditions;
|
|
·
|
the volatility of our operating results and financial condition; and
|
|
·
|
our ability to attract or retain qualified senior management personnel.
|
The foregoing factors
should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included
in this Current Report on Form 8-K.
Information regarding
market and industry statistics contained in this Current Report is included based on information available to us that we believe
is accurate. It is generally based on industry and other publications that are not produced for purposes of securities offerings
or economic analysis. We have not reviewed or included data from all sources, and cannot assure investors of the accuracy or completeness
of the data included in this Current Report. Forecasts and other forward-looking information obtained from these sources are subject
to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market
acceptance of products and services. We do not undertake any obligation to publicly update any forward-looking statements. As a
result, investors should not place undue reliance on these forward-looking statements.
BUSINESS
Overview
We are a Company involved
in the hospitality business. We own and, develop hotels and spas in Italy. We operate our hotels indirectly, by means of contractual
agreements with hotel management companies, so we can be classified as hospitality property investment specialists.
We particularly focus
on the ownership and development of boutique hotels, spas and resorts. We choose the investment opportunities on the basis of analysis
and forecasts in respect of:
|
·
|
location;
|
|
·
|
profitability track record;
|
|
·
|
competitors;
|
|
·
|
development potential; and
|
|
·
|
acquisition cost vis a vis foreseeable profitability.
|
We expect our investment in boutique hotels,
spas and resorts to create:
|
·
|
capital growth over the medium term;
|
|
·
|
income immediately;
|
|
·
|
location diversification; and
|
|
·
|
synergies and scale economies.
|
We operate our hotels
- with the exception of Ripa Hotel which is currently managed by the previous owner through a company named Ku-Hotels and the Splendid
Hotel currently managed by Alain Messeguè - by means of contractual agreements with a major Italian hotel manager company
called JSH Srl or JSH. Such persons with whom contractual arrangements provide for their management of our hotels are referred
to herein as “Hotel Managers”.
JSH was founded in
2010 by four professionals in the hotel management sector, with collectively more than 80 years of experience in the business,
and as of today it manages 1,250 rooms in 14 major hotels in Italy. JSH is involved in the management business only and does not
invest in hotel properties.
The contractual agreements
in place with our Hotel Managers provide for an annual rent composed of a guaranteed minimum rent plus a variable amount linked
to the gross operating profit of our hotels. The contractual agreements with our Hotel Managers are described under “Item
2.01. Completion of Acquisition or Disposition of Assets-Business-Properties.” Therefore, our revenues are derived only from
the rents we receive from the Hotel Managers of our hotels. These rents are made of a guaranteed minimum rent, plus a variable
amount related to the profitability of the hotel.
We intend to enter
into same kind of contractual agreements with JSH in relation to the future acquisitions of hotels in Italy and abroad.
We currently own 6
hotels and resorts in Padova, Italy, Rome, Italy and Ostuni Brindisi, Italy. Collectively, these properties feature approximately
520 hotel rooms and suites as well as restaurants, conference rooms, spas and golf courses. Our portfolio of hotel properties provides
us with a diverse geographic footprint across Italy.
Our senior management
team has over 80 collective years of experience spanning multiple foreign jurisdictions. This team has established plans for growth
focusing on the core principles of providing authentic Italian hospitality and expansion into foreign markets in which we do not
have hotel properties.
We intend to develop
our presence in Italy and abroad with a target to own 3,000 rooms within the next 3 to 5 years.
We are currently in
advanced negotiations with respect to acquisitions 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.
Our Mission
Our mission is to invest
in upscale and luxury hotel properties in Italy and abroad where we can exploit at best our long term experience in providing authentic
Italian hospitality. By “upscale and luxury” hotels, we mean hotels that can be characterized by luxury appointments
such as high quality fittings and fixtures, high quality service provided by the hotel’s staff, and the highest standards
of comfort. Luxury and upscale hotels offer originality in architecture and interior design, high-grade materials in construction
and decor, and such special touches as fresh flowers and plants in the guest rooms. Luxury and upscale properties also maintain
a high staff-to-guest ratio, gourmet dining, and 24-hour room service.
Through our Hotel Managers
we focus on customer satisfaction and delivering superior guest experiences by providing Italian inspired leisure experiences that
are designed to exceed customer expectations in a clean, safe, friendly and fun environment. Our mission is for each guest at our
hotel properties to feel as if they are an honored visitor to an Italian palazzo.
We believe our long-term
success will depend substantially upon increasing the quality, reach and scope of our operating portfolio, including new-build
developments, acquisitions and, where appropriate, asset sales. Recently we have completely renovated the Majestic Hotel in Padua
and the Ripa Hotel in Rome, and we are currently restoring Masseria Santo Scalone in Ostuni (Brindisi).
Our Competitive Strengths
We have significant
competitive strengths that support our goal of building a successful group of managed hotels.
|
·
|
Top Rated Properties. We believe that our properties are well located and provide Italian hospitality that our guests seek. Our properties have consistently received four and five star ratings, awards and accolades for service and guest experience. Our property recognition and strength is key to our ability to drive preference for our hotels among our guests.
|
|
|
|
|
·
|
Italian Platform with Compelling Growth Potential. Our existing Italian presence is distributed among a populous urban center and vacation destinations in Italy. We believe that our existing hotels provide us with a strong platform from which to selectively pursue new growth opportunities in markets where we are under-represented. Our management team applies their experience, judgment and knowledge to identify potential expansion targets for us. The combination of our existing Italian presence, experienced management team, established third-party relationships and significant access to capital provides us with a strong foundation for future growth and long-term value creation.
|
|
|
|
|
·
|
High Quality Owned Hotels Located in Desirable Markets. As of June 30, 2012, we own and operate a high quality portfolio of five owned properties. Our owned full service hotels are located in key markets in Italy, including major business centers and leisure destinations with strong growth potential. One of our owned hotels operates under the name Radisson which provides high name recognition and a strong position in local markets.
|
Our Business Strategy
Our goal is to be a
leading hospitality property owner. In order to achieve this goal, we:
|
(i)
|
select the most appealing hotel properties in the boutique hotels, spas and resorts segment;
|
|
(ii)
|
undertake a full refurbishment and restoration process of these properties in order to achieve the standards we have identified to better reflect our idea of authentic Italian hospitality; and
|
|
(iii)
|
put in place Hotel Managers who will ensure high occupancy at profitable daily rates.
|
This understanding and focus
informs our strategies for improving the performance of our existing hotels and our potential expansion of our presence in markets
worldwide.
|
·
|
Focus on improvement in the performance of existing hotels.
|
We constantly monitor the activities
of our Hotel Managers through monthly audit reports and regular visits to the properties, in order to ensure the constant highest
level of service to our customers and the achievement over time of the profitability targets we have established with our Hotel
Managers.
We establish our profitability
targets with each of our Hotel Managers when we prepare our three year business plan, with an annual revision, for each of the
hotels we own, and on the basis of the profits and losses of such business plans. In particular, we focus on the gross operating
profit or G.O.P. reflected in such business plans and we determine the minimum guaranteed yearly rent or Minimum Guaranteed Amount,
plus, in the case of the Galzignano hotels (the Ripa Hotel management agreement envisages only the Minimum Guaranteed Amount without
any variable sum) and, for the future, in the case of Masseria and the other hotels we might acquire, the variable rent which is
equal to 75% of the G.O.P that eventually exceeds the Minimum Guaranteed Amount (the “Variable Amount”). The sum of
the Minimum Guaranteed Amount plus the potential Variable Amount represents the total income deriving from our properties.
In setting our profitability
targets, we take into consideration that the income we gain from the rents must be sufficient to service our debt and to cover
all other costs, and to allow us to achieve a net income in line with our expectations, which means to have a percentage over net
assets above a given level (i.e., the net yield of the 10-year Italian Treasury Bond, which currently about 4.00%) and increasing
over the years as we add new hotels under management. There can be no assurance given the number of variables involved, that we
will be able to achieve our profitability targets.
Given that all our costs are
quite easily determined, as they are basically all fixed costs, the only non-predictable item of our net income is the Variable
Amount. In this respect, in order to constantly monitor the ongoing operating results of our hotels, and to make sure that the
results indicated in the budgets and in the business plans are effectively being achieved, so that both the Minimum Guaranteed
Amount and, particularly, the Variable Amount will be effectively paid to the Company, we have a financial controller who, on a
monthly basis, audits the managerial accounts provided by our Hotel Managers, and critically examines any deviation of the actual
numbers from those contained in the business plans. His reports are then sent to our senior management, and going forward to our
Board on a quarterly basis, so that senior management and the Board can take appropriate action in respect of the Hotel Managers
with regard to our profitability targets.
A key component of our strategy
is for our Hotel Managers to maximize revenues and manage costs at existing hotel properties. Together we strive to enhance revenues
by focusing on increasing our share of hotel stays by our existing guests and increasing the number of new guests we serve on a
regular basis, with the ultimate goal of establishing and increasing guest loyalty to our properties. We manage costs by setting
performance goals for our hotel management teams that are tied to compensation, and granting our general managers operational autonomy.
We support these cost management efforts by assisting our general managers with tools and analytics provided by our regional and
corporate offices and by compensating our hotel management teams based on property performance.
All of our hotels have restaurants.
Each of Majestic, Sporting and Splendid at Galzignano has its own restaurant, and the golf club house also has one restaurant.
The Ripa Hotel has two restaurants (“Ripa Place” and “la Suite”). All of these restaurants are managed
directly by our Hotel Managers, under the terms and conditions of the Management Agreements.
Enhance Operational Efficiency.
We and our Hotel Managers strive to align our staffing levels and expenses with demand without compromising our commitment to providing
authentic hospitality and achieving high levels of guest satisfaction. During periods of declining demand for hospitality products
and services we adjust staffing, arrangements with third party service providers, vendor terms and arrangements and certain standards
in order to reduce costs without significantly impacting quality. As demand improves, we require our Hotel Managers to remain focused
on actively managing expenses.
We have finalised a master -
franchising agreement concerning the Majestic Hotel in Padova, with the Rezidor Group, controlled by Carlson Hotels Worldwide,
which runs the world top search web engine in the hospitality sector. The Rezidor Group manages over 1.050 hotels in 77 countries
and it owns several brands such as Radisson, Hotel Missoni and Country Inns & Suites by Carlson & Park Inn. The Radisson
brand is among the best known brands in the international
hotellerie
business and, through the Carlson Hotels Worldwide
system, it manages the booking procedures of all the partner hotels including those belonging to our hotels. Radisson provides
booking and marketing services to JSH, in parallel with their own managing activity.
With reference to the Ripa Hotel
in Rome, we have just finalised an agreement with Worldhotels, an independent European based hotel partner, which manages the booking
procedures of more than 250 hotels in the world.
|
·
|
Expanding Our Presence in Attractive Markets
|
We intend to acquire properties
where we believe demand is strong or will strengthen to ensure high occupancy levels at appropriate daily rates. Competition for
good properties is strong but we believe that we can obtain opportunities because of our willingness to accept the need for refurbishment
or expansion or by working with existing interested parties without the need to drive standardised branding.
Properties
The following is an
overview of our existing properties as of November 1, 2012:
Property
|
|
Date Acquired or
Opened
|
|
Hotel
Rooms
|
|
Suites
|
|
|
Conference
Room
Capacity
|
|
Rome, Italy
|
|
|
|
|
|
|
|
|
|
|
|
|
Ripa Hotel and Resort Spa
|
|
May 2008
|
|
200
|
|
|
2
|
|
|
|
568
|
|
Padova, Italy
|
|
|
|
|
|
|
|
|
|
|
|
|
Galzignano Terme Golf and Resort S.r.l.
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel Sporting
|
|
March_2009
|
|
93
|
|
|
19
|
|
|
|
125
|
|
Hotel Splendid
|
|
March 2009
|
|
61
|
|
|
30
|
|
|
|
—
|
|
Radisson Blu Hotel Majestic
|
|
March 2009
|
|
45
|
|
|
52
|
|
|
|
137
|
|
Hotel Green Park*
|
|
March 2009
|
|
86
|
|
|
8
|
|
|
|
—
|
|
Ostuni Brindisi, Italy
|
|
|
|
|
|
|
|
|
|
|
|
|
Masseria Santo Scalone
|
|
May 2012
|
|
19
|
|
|
|
|
|
|
—
|
|
*This hotel is not currently
operating and will be soon transformed into a private apartments building.
The following table sets forth the historical
occupancy rate, average daily room rates and revenues per available room for our hotels:
|
|
Occupancy
|
|
|
ADR
|
|
|
REVPAR
|
|
year
|
|
Galzignano
|
|
|
RIPA
|
|
|
Galzignano
|
|
|
RIPA
|
|
|
Galzignano
|
|
|
RIPA
|
|
2009
|
|
|
60
|
%
|
|
|
69
|
%
|
|
€
|
105,0
|
|
|
€
|
85,1
|
|
|
€
|
214,6
|
|
|
€
|
119,5
|
|
2010
|
|
|
43
|
%
|
|
|
69
|
%
|
|
€
|
122,0
|
|
|
€
|
88,1
|
|
|
€
|
232,5
|
|
|
€
|
119,4
|
|
2011
|
|
|
40
|
%
|
|
|
75
|
%
|
|
€
|
120,0
|
|
|
€
|
86,4
|
|
|
€
|
257,0
|
|
|
€
|
118,4
|
|
30 sept 2012
|
|
|
46
|
%
|
|
|
74
|
%
|
|
€
|
92,0
|
|
|
€
|
86,1
|
|
|
€
|
195,8
|
|
|
€
|
120,8
|
|
Rome, Italy
Ripa Hotel and Resort
Spa
Our Ripa Hotel Resort
and Spa property commenced operations in 1973, and we bought it in May 2008. The Ripa Hotel is a full service 4-star property,
consisting of 202 guest rooms and suites, located in the historic Trastevere district, on the West bank of the Tevere River. The
hotel property is characterized by modern minimalistic style, original interiors, unexpected colors, and the use of innovative
materials. A variety of architects contributed to different designs and styles in the hotel.
Hotel Ripa is a business-friendly
hotel, seeking to meet the needs of business travelers as well as tourists. The hotel has a business center as well as other amenities
for business travelers. Dining options at the hotel include a restaurant, a coffee shop/café, a bar/lounge as well as room
service. The hotel offers a complimentary hot and cold buffet breakfast each morning to our guests.
Rome attracts over
11 million tourist and business visitors each year and this hotel is an attractive high quality destination hotel for many of such
visitors.
Hotel Ripa is managed
by Ku Hotels Srl, the former owner of the hotel. Through our subsidiary, Ripa Hotel & Resort Srl, we entered into the management
agreement and into a lease agreement with Ku Hotels Srl on April 4, 2009.
The management agreement
provides for a nine year initial term with an automatic nine year extension unless either we notify Ku Hotels Srl of our intended
termination 18 months before the contractual termination date, or Ku Hotels Srl notifies us of its intended termination 12 months
before the contractual termination date. The annual rent is €1,260,000, payable in twelve monthly payments in advance of €105,000.
Ku Hotels Srl provides and pays for ordinary and extraordinary maintenance as well as insurance during the term of the agreement.
The lease agreement
also provides for a nine year initial term with an automatic nine year extension unless either we notify Ku Hotels Srl of our intended
termination 18 months before the contractual termination date, or Ku Hotels Srl notifies us of its intended termination 12 months
before the contractual termination date. The annual rent is €1,800,000, payable in twelve monthly payments in advance of €150,000.
Ku Hotels Srl provides and pays for ordinary and extraordinary maintenance as well as insurance during the term of the agreement.
Padova, Italy
Galzignano Terme
Golf and Resort
Our Galzignano Terme
Golf and Resort commenced operations in 1969 and we bought it in March 2009
.
The resort is located at the foot of the Eugenean
Hills in the heart of the Veneto region in Italy. The hotel is located 10 km from Padua and approximately 40 km from Venice and
Verona. The resort consists of four properties covering more than 86 acres of land. The hotels within the property are the Hotel
Sporting, Hotel Splendid, Radisson Blue Hotel Majestic and Hotel Green Park. Hotel Green Park is currently closed and will be transformed
into an apartment building.
The properties have
two sports pools, six thermal pools with Jacuzzi pools and Kneipp therapy areas, six tennis courts and a Revital Center with fitness
and spa areas. There is a nine-hole golf course with a putting green, driving range and a Clubhouse on the property. Additionally,
there are three golf courses within 15 km of the hotel complex that offer discount prices to our guests. The hotel has a retail
area with shops that sell jewelry, magazines and souvenirs.
We believe that our
Padova, Italy property attracts customers primarily from Germany, Austria and northern European countries and from major Italian
cities. Approximately 1 million people reside within 50 of the Padova, Italy property.
Hotel Sporting
The Hotel Sporting
is a full service 4-star property, consisting of 112 guest rooms divided into standard, superior, comfort, junior suite and suite.
The 19 suites are each equipped with private terraces and balconies overlooking the Galzignano Terme property. Each guest room
is non-smoking and equipped with standard comforts and technology, such as satellite TV and internet connections. Hotel Sporting
offers guests access to all of the resort’s amenities, including the pools, tennis courts, and golf facilities. The hotel
also has meeting facilities, a beauty parlor and a bar lounge.
Hotel Sporting and
Hotel Majestic (described below) are managed by Galzignano Gestioni S.r.l., a company controlled by JSH, and for purposes of this
report, is referred to as JSH. We entered into the lease agreement for Hotel Sporting and Hotel Majestic with JSH on April 13,
2012 and the agreement provides for a nine year initial term with an automatic nine year extension unless either party notifies
the other at least eighteen months before the end of the initial term. We can terminate the contract at any time if JSH fails,
among other things, to pay the rent or expenses, prepare the budget within contractual deadlines, maintain the properties or arrange
for the insurance required by the contract. The annual rent consists of a guaranteed minimum rent plus a variable amount based
on 75% of the hotel’s gross operating profit. Gross operating profit is equal to revenues less allowances, premiums and discounts
as well as fixed and variable costs. The guaranteed minimum rent for 2012 was €300,000, for 2013 is €617,000, for 2014
is €934,000, and thereafter will be €1,250,000. JSH provides and pays for ordinary and extraordinary maintenance during
the term of the agreement.
Hotel Splendid
The Hotel Splendid
is a full service 4-star property, consisting of 91 luxurious and uniquely furnished guest rooms, junior suites and suites. The
top floors provide guests a view of the entire resort complex and guests have access to all of the resort’s amenities, including
the pools, tennis courts, and golf facilities.
The hotel's restaurant
overlooks a garden through large, picture windows and offers a culinary mix featuring refined and creative Italian recipes, as
well as international and regional dishes. The wine selection represents all Italian regions, with particular attention to wines
which come from the Veneto and Euganean territory.
Hotel Splendid is managed
by Salute e Benessere Alain Messegue Srl or Alain Messegue. We entered into the lease agreement with Alain Messeguè on June
28, 2012 and the agreement provides for a nine year initial term with an automatic nine year extension unless either party notifies
the other at least three months before the end of the initial term. We can terminate the contract at any time if Alain Messegue
fails to perform its obligations under the contract, particularly if, at the end of 2012, Alain Messegue has not reached the minimum
turnover of €2,5 million. The data for the minimum turnover must be made available to us by the end of January 2013. The annual
rent for 2012 was €259,250, for 2013 is €737,500, for 2014 is €790,000 and thereafter will be €970,000. Alain
Messegue provides and pays for ordinary and extraordinary maintenance as well as insurance during the term of the agreement.
Radisson Blu Hotel
Majestic
The Radisson Blu Hotel
Majestic is a full service 4-star property, consisting of 97 guest rooms with unique features such as rainfall showerheads and
concierge service, in addition to standard hotel amenities. The hotel restaurant, Naiades, specializes in modern interpretations
of traditional Mediterranean dishes. Meals are also served on a terrace with countryside views intended to promote relaxation for
our guests.
Hotel Majestic is managed
by JSH and the terms of our management agreement are described above under “Hotel Sporting.”
Hotel Green Park
The Hotel Green Park
is currently under renovation. This property will undergo complete restructuring and it will be transformed into a private apartments
building. We expect to start refurbishment in the first half of 2013.
Ostuni Brindisi, Italy
Masseria Santo Scalone
Masseria Santo Scalone
is a fortified farm house built in the XVI century and located close to Ostuni (Brindisi – Apulia region). This complex is
composed of several houses around a central larger building and it is currently undergoing a major refurbishment which will transform
it into a five-star luxury resort with beauty farm and spa. An additional 24 rooms (to the already existing 19 rooms) will be built
within the next year together with a new conference room and a pool.
Marketing
Our marketing strategy
is planned together with our Hotel Managers, and it is designed to maintain and build value and awareness while meeting the specific
business needs of hotel operations. Building awareness and differentiating each of our properties is critical to increasing our
footprint in the global hospitality industry. We are focused on targeting the distinct guest segments that each of our properties
serves and supporting the needs of the hotels by thorough analysis and application of data and analytics.
Competition
There is intense competition
in all areas of the hospitality industry in which we operate. Competition exists for hotel guests and hotel property development.
Our principal competitors are other operators of full service hotels in Italy and around the world.
We compete for guests
based primarily on reputation, location, customer satisfaction, room rates, quality of service, amenities, quality of accommodations
and security.
The universe of hotels
and hospitality is large and there are other companies who have offerings similar to us. We believe that our, desirable property
locations, strong customer base and global development team will enable us to compete effectively.
Seasonality
The hospitality industry
is seasonal in nature. The periods during which our hotel properties experience higher revenues vary from property to property,
depending principally upon location and the customer base served. Based upon historical results, our Rome property typically generates
the highest revenues in May, September and October and our Padova property generates the highest revenues in August, September
and April. We generally expect our revenues to be lower in the first quarter of each year than in each of the three subsequent
quarters.
Governmental Regulations
Our businesses are
subject to various laws and regulations promulgated by the EU, the Italian Republic and its regions, provinces and municipalities
to protect the public who utilize the hotel and tourist sector. We are subject to the EU and national legislation concerning the
protection of workers (Workers' Statute approved by Law 20.05.1970 n. 300), hygiene and safety in the workplace (Legislative Decree
no. 81 of 09.04.2008), the pension and social security obligations (Law 30/04/1969 n. 153) the administration of food and drinks
also alcoholic and food services (Consolidation Act on Public Safety approved by Royal Decree no. 773 of 06.18.1931), the prohibition
of smoking in enclosed areas (51 paragraph 3 of Law no. 3/2003), the obligations of a tax (Decree of the President of the Republic
of 22 December 1986, no. 917 - Approval of the consolidated income tax income Tax Code, Decree of the President of the Republic
of 26 October 1972, n. 633, establishing VAT; Legislative Decree 15 December 1997, n. 446, establishing IRAP). Specifically, the
Law no. 135 of 29 March 2001 contains the national legislation in the field of tourism and indicates the general principles and
coordination, on which the Regions of the Italian State are called upon to issue their own laws, in accordance with the Constitutional
Law of 18 October 2001, n. 3 which gives all such legal and administrative matters and tourist accommodation in the said regions.
Such laws and regulations could change or could be interpreted differently in the future, or new laws and regulations could be
enacted. Material changes, new laws or regulations, or material differences in interpretations by courts or governmental authorities
could adversely affect our operating results.
Environmental Matters
As property owners
we are subject to various laws and regulations. These laws and regulations include, but are not limited to, the need to obtain
consents from various regulatory authorities to build, develop, modify, expand or demolish existing structures, the requirement
to ensure compliance with health and safety regulations during any such building projects or the operation of properties and limitations
or controls on discharges to the atmosphere or waste or sewage disposal facilities.
Employees
As of June 30, 2012,
we employed 5 full and part-time employees in our hospitality business, plus seven senior consultants (three of which are full
time).We believe that our relationship with our employees is satisfactory.
Our Hotel Managers
together employ approximately 60 full time employees plus approximately 250 are outsourcing employees who regularly work on our
properties.
Available Information
For more information
about us, visit our web site at
www.italianboutiquehotels.com
(currently under construction). Our electronic filings with
the U.S. Securities and Exchange Commission (including all annual reports on Form 10-K, quarter reports on Form 10-Q, and current
reports on Form 8-K, and any amendments to these reports), including the exhibits, are available free of charge through our web
site as soon as reasonably practicable after we electronically file them with or furnish them to the U.S. Securities and Exchange
Commission.
RISK FACTORS
You should carefully
consider the risks described below, in conjunction with the other information and consolidated financial statements and related
notes included elsewhere in this Current Report on Form 8-K, before making an investment decision. You should pay particular attention
to the fact that we conduct our operations in Italy and are governed by a legal and regulatory environment that in some respects
differs significantly from the environment that prevails in other countries with which you may be familiar.
Risks Related to the Hospitality Industry
The hospitality industry is cyclical
and macroeconomic and other factors beyond our control can adversely affect and reduce demand for our hospitality products and
services.
The hospitality industry
is cyclical. For example, the last two completed business cycles in the hospitality industry, which we define as the period starting
with the first calendar year of negative revenue per available room (RevPAR) growth and ending with the last calendar year of positive
RevPAR growth, took place from 1991 to 2000 and 2001 to 2007. During the declining stages of these two business cycles, RevPAR
growth was negative for one calendar year (1991) and two calendar years (2001 and 2002), respectively.
The declining stage
of the current business cycle in Western Europe began in the fourth quarter of 2008 and continued until the second quarter of 2010,
while it slightly increased in 2011 and the first 8 months of 2012. In particular, the average RevPAR in Western Europe upscale,
upper upscale and luxury hotels declined from 90,49 euros in 2007 to 86,91 euros in 2008, it continued to decrease in 2009 to 69,92
euros and started to recover in 2010 (76,98 euros), 2011 (81,64 euros) and first eight months of 2012 (87,13 euros). Macroeconomic
and other factors beyond our control can reduce demand for hospitality products and services, including demand for rooms at our
properties. These factors include:
|
·
|
changes and volatility in general economic conditions, including the severity and duration of any downturn in the U.S., Europe or global economy and financial markets;
|
|
|
|
|
·
|
war, civil unrest (Cairo, Egypt), terrorist activities (such as the terrorist attacks in Jakarta, Indonesia and Mumbai, India) or threats and heightened travel security measures instituted in response to these events;
|
|
|
|
|
·
|
outbreaks of pandemic or contagious diseases, such as avian flu, severe acute respiratory syndrome (SARS) and H1N1 (swine) flu;
|
|
|
|
|
·
|
natural or man-made disasters, such as earthquakes, tsunamis, tornados, hurricanes, floods, oil spills and nuclear incidents;
|
|
|
|
|
·
|
changes in the desirability of particular locations or travel patterns of customers;
|
|
|
|
|
·
|
decreased corporate budgets and spending and cancellations, deferrals or renegotiations of group business (e.g., industry conventions);
|
|
·
|
low consumer confidence and high levels of unemployment;
|
|
|
|
|
·
|
depressed housing prices;
|
|
|
|
|
·
|
the financial condition of the airline, automotive and other transportation-related industries and its impact on travel;
|
|
|
|
|
·
|
decreased airline capacities and routes;
|
|
|
|
|
·
|
travel-related accidents;
|
|
|
|
|
·
|
oil prices and travel costs;
|
|
|
|
|
·
|
statements, actions or interventions by governmental officials related to travel and corporate travel-related activities, and the resulting negative public perception of such travel and activities;
|
|
|
|
|
·
|
domestic and international political and geo-political conditions;
|
|
·
|
cyclical over-building in the hotel industry; and
|
|
|
|
|
·
|
organized labor activities, which could cause a diversion of business from hotels involved in labor negotiations and loss of group business.
|
These factors can adversely
affect, and from time to time have adversely affected, individual properties, particular regions or our business as a whole. How
we manage any one or more of these factors, or any crisis, could limit or reduce demand, or the rates our properties are able to
charge for rooms or services, which could adversely affect our business, results of operations and financial condition.
A worsening of global economic conditions
could cause our revenues and profitability to decline.
Consumer demand for
our products and services is closely linked to the performance of the general economy and is sensitive to business and personal
discretionary spending levels. Declines in consumer demand due to adverse general economic conditions, risks affecting or reducing
travel patterns, lower consumer confidence and high unemployment or adverse political conditions can lower the revenues and profitability
of our owned properties. Because RevPAR is a measure of achieved average daily rate (ADR) and occupancy, declines in ADR and occupancy
relating to declines in consumer demand will lower RevPAR.
While our 2011 and
2010 results reflect an increase in ADR levels at our hotels compared to 2009, they have not increased at the same rate at which
they declined in 2009 compared to 2008, especially at Ripa Hotel Uncertainty regarding the rate and pace of further recovery and
the impact any such recovery may have on different regions of the world makes it difficult to predict further increases in RevPAR
levels. Additionally, if economic weakness were to return to any of these regions of the world, it could have an adverse impact
on our revenues and negatively affect our profitability.
We are subject to the business, financial
and operating risks inherent to the hospitality industry, any of which could reduce our profits and limit our opportunities for
growth.
Our business is subject
to a number of business, financial and operating risks inherent to the hospitality industry, including:
|
·
|
changes in taxes and governmental regulations that influence or set wages, prices, interest rates or construction and maintenance procedures and costs;
|
|
|
|
|
·
|
the costs and administrative burdens associated with complying with applicable laws and regulations;
|
|
|
|
|
·
|
the costs or desirability of complying with local practices and customs;
|
|
|
|
|
·
|
the availability and cost of capital necessary for us and potential hotel owners to fund investments, capital expenditures and service debt obligations;
|
|
|
|
|
·
|
delays in or cancellations of planned or future development projects;
|
|
·
|
foreign exchange rate fluctuations or restructurings;
|
|
|
|
|
·
|
changes in operating costs, including, but not limited to, energy, food, workers’ compensation, benefits, insurance and unanticipated costs resulting from force majeure events;
|
|
|
|
|
·
|
significant increases in cost for healthcare coverage for employees and potential government regulation in respect of health coverage;
|
|
|
|
|
·
|
shortages of labor or labor disruptions;
|
|
|
|
|
·
|
shortages of desirable locations for development; and
|
|
|
|
|
·
|
the ability of third-party internet travel intermediaries to attract and retain customers.
|
Any of these factors
could limit or reduce the prices we charge for our hospitality products or services, including the rates our properties charge
for rooms. These factors can also increase our costs or affect our ability to develop new properties or maintain and operate our
existing properties. As a result, any of these factors can reduce our profits and limit our opportunities for growth.
Risks Related to Our Hospitality Business
Because we operate in a highly competitive
industry, our revenues, profits or market share could be harmed if we are unable to compete effectively.
The segments of the
hospitality industry in which we operate are subject to intense competition. Our principal competitors are other operators of full
service properties in Italy, including other major hospitality chains with well-established and recognized brands. We also compete
against smaller hotel chains and independent and local hotel owners and operators. If we are unable to compete successfully, our
revenues or profits may decline or our ability to maintain or increase our market share may be diminished.
Competition for Guests
Competition for guests
is based primarily on reputation, location, customer satisfaction, room rates, quality of service, amenities and quality of accommodations.
Many of our competitors are larger than we are based on the number of properties or rooms they manage or based on the number of
geographic locations where they operate. Our competitors may also have greater financial and marketing resources than we do, which
could allow them to improve their properties and expand and improve their marketing efforts in ways that could affect our ability
to compete for guests effectively. In addition, industry consolidation may exacerbate these risks.
We are exposed to the risks resulting
from significant investments in owned real estate, which could increase our costs, reduce our profits, and limit our ability to
respond to market conditions or restrict our growth strategy.
Real estate ownership
is subject to risks not applicable to managed, leased or franchised properties, including:
|
·
|
governmental regulations relating to real estate ownership;
|
|
|
|
|
·
|
real estate, insurance, zoning, tax, environmental and eminent domain laws;
|
|
|
|
|
·
|
the ongoing need for owner funded capital improvements and expenditures to maintain or upgrade properties;
|
|
|
|
|
·
|
risks associated with mortgage debt, including the possibility of default, fluctuating interest rate levels and the availability of replacement financing;
|
|
|
|
|
·
|
fluctuations in real estate values or potential impairments in the value of our assets; and
|
|
|
|
|
·
|
the relative illiquidity of real estate compared to some other assets.
|
The negative impact
on profitability and cash flow generation from a decline in revenues is more pronounced in owned properties because we, as the
owner, bear the risk of their high fixed-cost structure. The need to maintain and renovate owned properties can present challenges,
especially when cash generated from operations has declined. The effectiveness of any cost-cutting efforts is limited by the fixed-cost
nature of our business. As a result, we may not be able to offset revenue reductions through cost cutting, which could further
reduce our margins. During times of economic distress, declining demand and declining earnings often result in declining asset
values.
We may seek to expand through acquisitions
of and investments in other businesses and properties, or through alliances; and we may also seek to divest some of our properties
and other assets, any of which may be unsuccessful or divert our management’s attention.
We intend to consider
strategic and complementary acquisitions of and investments in other businesses, properties, brands or other assets. In many cases,
we will be competing for these opportunities with third parties that may have substantially greater financial resources than we
do. Acquisitions or investments in businesses, properties, brands or assets, as well as these alliances, are subject to risks that
could affect our business, including risks related to:
|
·
|
issuing shares of stock that could dilute the interests of our existing stockholders;
|
|
|
|
|
·
|
spending cash and incurring debt;
|
|
|
|
|
·
|
assuming contingent liabilities;
|
|
|
|
|
·
|
contributing properties or related assets to hospitality ventures that could result in recognition of losses; or
|
|
|
|
|
·
|
creating additional expenses.
|
We cannot assure you
that we will be able to identify opportunities or complete transactions on commercially reasonable terms or at all, or that we
will actually realize any anticipated benefits from such acquisitions, investments or alliances. There may be high barriers to
entry in many key markets and scarcity of available development and investment opportunities. Similarly, we cannot assure you that
we will be able to obtain financing for acquisitions or investments on attractive terms or at all, or that the ability to obtain
financing will not be restricted by the terms of our revolving credit facility or other indebtedness we may incur.
The success of any
such acquisitions or investments will also depend, in part, on our ability to integrate the acquisition or investment with our
existing operations. We may experience difficulty with integrating acquired businesses, properties or other assets, including difficulties
relating to:
|
·
|
coordinating sales, distribution and marketing functions;
|
|
|
|
|
·
|
integrating technology information systems; and
|
|
|
|
|
·
|
preserving the important licensing, distribution, marketing, customer, labor and other relationships of the acquired assets.
|
Divestment of some
of our properties or assets may yield returns below our investment criteria. In some circumstances, sales of properties or other
assets may result in losses.
In addition, any such
acquisitions, investments, dispositions or alliances could demand significant attention from our management that would otherwise
be available for our regular business operations, which could harm our business.
Timing, budgeting and other risks
could delay our efforts to develop, redevelop or renovate the properties that we own, or make these activities more expensive,
which could reduce our profits or impair our ability to compete effectively.
We must maintain and
renovate the properties that we own in order to remain competitive, maintain the value and brand standards of our hotels and comply
with applicable laws and regulations. We also may selectively undertake ground-up construction of properties which may span multiple
phases and often take years to complete. These efforts are subject to a number of risks, including:
|
·
|
construction delays or cost overruns (including labor and materials) that may increase project costs;
|
|
·
|
obtaining zoning, occupancy and other required permits or authorizations;
|
|
|
|
|
·
|
changes in economic conditions that may result in weakened or lack of demand or negative project returns;
|
|
|
|
|
·
|
governmental restrictions on the size or kind of development;
|
|
|
|
|
·
|
force majeure events, including earthquakes, tornados, hurricanes, floods or tsunamis; and
|
|
|
|
|
·
|
design defects that could increase costs.
|
Developing new properties
typically involves lengthy development periods during which significant amounts of capital must be funded before the properties
can begin to operate. If the cost of funding these developments or renovations exceeds budgeted amounts, profits could be reduced.
Further, due to the lengthy development cycle, adverse economic conditions may alter or impede our development plans, thereby resulting
in incremental costs to us or potential impairment charges. Moreover, during the early stages of operations, charges related to
interest expense and depreciation may substantially detract from, or even outweigh, the profitability of certain new property investments.
Similarly, the timing
of capital improvements can affect property performance, including occupancy and average daily rate, particularly if we need to
close a significant number of rooms or other facilities, such as ballrooms, meeting spaces or restaurants. For example, we recently
completed broad-scope renovation projects at Majestic and Ripa while new restructuring projects are planned for Masseria in 2013.
Moreover, the investments that we make may fail to improve the performance of the properties in the manner that we expect.
If we are not able
to begin operating properties under development or renovation as scheduled, or if renovation investments adversely affect or fail
to improve performance, our ability to compete effectively could be diminished and our revenues could be reduced.
In any particular period, our Hotel
Managers may not be able to reduce expenses at the same rate that their revenues may decrease, which could have an adverse effect
on their net cash flows, margins and profits and, as a consequence, on their ability to pay us the variable part of the annual
rent and, in the worst situation, even the guaranteed minimum amount.
Many of the expenses
associated with managing and owning hotels are relatively fixed. These expenses include:
|
·
|
personnel costs;
|
|
|
|
|
·
|
interest;
|
|
|
|
|
·
|
property taxes;
|
|
|
|
|
·
|
insurance; and
|
|
|
|
|
·
|
utilities.
|
If our Hotel Managers
are unable to decrease these costs significantly or rapidly when demand for our hotels decreases, the decline in their revenues
could have a particularly adverse impact on their net cash flows and profits. This effect can be especially pronounced during periods
of economic contraction or slow economic growth, such as the recent economic recession. In such cases our Hotel Managers may not
be able to pay us the variable part of the annual rent and, in the worst situation, even the guaranteed minimum amount. To date
this has never been the case with us, although most of our lease contracts are relatively recent.
If we are unable to establish and
maintain key distribution arrangements for our properties, the demand for our rooms and our revenues could fall.
Some of the rooms at
our hotels and resorts are booked through third-party internet travel intermediaries and online travel service providers. We also
engage third-party intermediaries, including travel agencies and meeting and event management companies, who collect fees by charging
our hotels and resorts a commission on room revenues. A failure by our distributors to attract or retain their customer bases could
lower demand for hotel rooms and, in turn, reduce our revenues.
If bookings by these
third-party intermediaries increase, these intermediaries may be able to obtain higher commissions or other significant contract
concessions from us, increasing the overall cost of these third-party distribution channels. Some of our distribution agreements
are not exclusive, have a short term, are terminable at will, or are subject to early termination provisions. The loss of distributors,
increased distribution costs, or the renewal of distribution agreements on significantly less favorable terms could adversely impact
our business.
If the volume of sales made through
third-party internet travel intermediaries increases significantly, consumer loyalty to our brand could decrease and our revenues
could fall.
We and our Hotel Managers
expect to derive most of our business from traditional channels of distribution and our website. However, consumers now use internet
travel intermediaries regularly. Some of these intermediaries are attempting to increase the importance of generic quality indicators
(such as “four-star downtown hotel”) at the expense of brand identification. These agencies hope that consumers will
eventually develop brand loyalties to their reservation system rather than to specific hotel brands. If the volume of sales made
through internet travel intermediaries increases significantly and consumers develop stronger loyalties to these intermediaries
rather than to our brand, our business and revenues could be harmed.
If we are not able to develop new
initiatives, including new brands, successfully, our business and profitability could be harmed.
We and our Hotel Managers
often develop and launch new initiatives which can be a time-consuming and expensive process. For example, Ripa has recently launched
special offers and promotions as a 10% discount for a minimum stay of 3 nights, a “children stay free” campaign and
a 15% discount for bookings made with a five day advance. Galzignano hotels usually launch offers and promotions as well, such,
for example, discounts for longer stay periods and spa packages. We have invested capital and resources in owned real estate, property
development, brand development and brand promotion. If such initiatives are not well received by our guests they may not have the
intended effect.
Italian labor laws could impair our
flexibility to restructure our business.
In Italy, employees
are protected by various laws which afford them consultation rights with respect to specific matters regarding their employers’
business and operations, including the downsizing or closure of facilities and employee terminations. In particular: (i) Law no.
604/1966, regulates the individual dismissals; (ii) Law no. 223/1991, concerns the collective dismissal procedure; (iii) Law no.
428/1990 as amended by legislative decree no. 18/2001, provides for the information and consultation procedure in case of a transfer
of the undertaking or a part thereof and (iv) Legislative decree no. 25/2007, introduces a general right to information and consultation
for employees. These laws and the collective bargaining agreements to which we are subject could impair our flexibility if we need
to restructure our business.
Labor shortages could restrict our
ability to operate our properties or grow our business or result in increased labor costs that could reduce our profits.
Our success depends
in large part on our Hotel Managers’ ability to attract, retain, train, manage and engage their employees. Our properties
are staffed 24 hours a day, seven days a week by hundreds of employees. If our Hotel Managers are unable to attract, retain, train
and engage skilled employees, their ability to manage and staff our properties adequately could be impaired, which could reduce
customer satisfaction. Staffing shortages could also hinder our ability to grow and expand our business. Because payroll costs
are a major component of the operating expenses at our properties, a shortage of skilled labor could also require higher wages
that would increase their labor costs, which could reduce our profits.
Negotiations of collective bargaining
agreements, attempts by labor organizations to organize additional groups of the employees of our Hotel Managers or changes in
labor laws could disrupt our operations, increase labor costs or interfere with the ability of our Hotel Managers to focus on executing
our business strategies.
Certain of our properties
are subject to collective bargaining agreements, similar agreements or regulations enforced by governmental authorities. If relationships
between our Hotel Managers and their employees, or the unions that represent them become adverse, the properties we own could experience
labor disruptions such as strikes, lockouts and public demonstrations. Labor disruptions, which are generally more likely when
collective bargaining agreements are being renegotiated, could harm the relationship between our Hotel Managers and their employees
or cause us to lose guests. Further, adverse publicity in the marketplace related to union messaging could further harm our reputation
and reduce customer demand for our services. Labor regulation could lead to higher wage and benefit costs, changes in work rules
that raise operating expenses and legal costs which may limit the ability of our Hotel Managers to take cost saving measures during
economic downturns.
Our Hotel Managers
may also become subject to additional collective bargaining agreements in the future. Potential changes in the regulatory scheme
could make it easier for unions to organize groups of their employees. If such changes take effect, more of the employees of our
Hotel Managers or other field personnel could be subject to increased organizational efforts, which could potentially lead to disruptions
or require more of our Hotel Managers’ time to address unionization issues. These or similar agreements, legislation or changes
in regulations could disrupt our operations, hinder our Hotel Managers’ abilities to cross-train and cross-promote their
employees due to prescribed work rules and job classifications, reduce our profitability, or interfere with the ability of our
Hotel Managers to focus on executing our business strategies.
The loss of our Hotel Managers could
significantly harm our business.
We do not operate our
hotels directly, but through Hotel Managers
such as JSH. We have entered into long term (usually 8+8 years) agreements
with our Hotel Managers. However, we cannot guarantee that they will remain with us at the end of the term of these agreements.
Finding suitable replacements for our Hotel Managers
could be difficult. Losing the services of one or more of these
Hotel Managers
could adversely affect our ability to execute our business strategies.
Our Hotel Managers
recruit individuals to act as general managers of specific properties. Although these individuals are not our employees, their
performance is critical to the success of our hotels. The resignation of such a general manager may result in a disruption to day-to-day
operations of a hotel and a decline in profitability.
The loss of our senior executives
could significantly harm our business.
Our ability to maintain
our competitive position is dependent to a large degree on the efforts and skills of our senior executives. We have entered into
employment letter agreements or consulting agreements with certain of our senior executives. However, we cannot guarantee that
these individuals will remain with us. Finding suitable replacements for senior executives could be difficult. Losing the services
of one or more of these senior executives could adversely affect our ability to execute our business strategies.
Our management has limited experience
in managing and operating a public company. Any failure to comply or adequately comply with federal securities laws, rules or regulations
could subject us to fines or regulatory actions, which may materially adversely affect our business, results of operations and
financial condition.
Our current management
has limited experience managing and operating a public company and relies in many instances on the professional experience and
advice of third parties including its attorneys and accountants. Failure to comply or adequately comply with any laws, rules, or
regulations applicable to our business may result in fines or regulatory actions, which may materially adversely affect our business,
results of operation, or financial condition and could result in delays in achieving the development of an active and liquid trading
market for our common stock.
Because we derive a substantial portion
of our revenues from operations in Italy, the risks of doing business in one country could lower our revenues, increase our costs,
reduce our profits or disrupt our business.
We currently own all
of our hotels and resorts in Italy. We expect that revenues from our Italian operations will continue to account for a substantial
portion of our total revenues.
As a result, we are
subject to the risks arising from doing business in one country, including:
|
·
|
local economic disruption;
|
|
|
|
|
·
|
local adverse environmental effects; or
|
|
|
|
|
·
|
exchange rate movements between the euro and the United States dollar.
|
While these factors
and the impact of these factors are difficult to predict, any one or more of them could lower our revenues, increase our costs,
reduce our profits or disrupt our business.
Our failure to comply with applicable
laws and regulations may increase our costs, reduce our profits or limit our growth.
Our business, properties
and employees are subject to a variety of laws and regulations. Generally, these laws and regulations address our sales and marketing
efforts, our handling of privacy issues and customer data, our ability to obtain licenses for business operations such as sales
of food and liquor, immigration matters, environmental, health and safety, competition and trade laws, among other things.
The extensive environmental requirements
to which we are subject could increase our environmental costs and liabilities, reduce our profits or limit our ability to run
our business.
Our operations and
the properties we own and develop are subject to extensive environmental laws and regulations of the Italian government, including
requirements addressing:
|
·
|
health and safety;
|
|
|
|
|
·
|
the use, management and disposal of hazardous substances and wastes;
|
|
|
|
|
·
|
discharges of waste materials into the environment, such as refuse or sewage; and
|
|
|
|
|
·
|
air emissions.
|
We could be subject
to liability under some of these laws for the costs of investigating or remediating hazardous substances or wastes on, under, or
in real property we currently or formerly manage, own or develop, or third-party sites where we sent hazardous substances or wastes
for disposal. We could be held liable under these laws regardless of whether we knew of, or were at fault in connection with, the
presence or release of any such hazardous or toxic substances or wastes. Some of these laws make each covered person responsible
for all of the costs involved, even if more than one person may have been responsible for the contamination. Furthermore, a person
who arranges for hazardous substances or wastes to be transported, disposed of or treated offsite, such as at disposal or treatment
facilities, may be liable for the costs of removal or remediation if those substances are released into the environment by third
parties at such disposal or treatment facilities. The presence or release of hazardous or toxic substances or wastes, or the failure
to properly clean up such materials, could cause us to incur significant costs, or jeopardize our ability to develop, use, sell
or rent real property we own or operate or to borrow using such property as collateral.
Other laws and regulations
require us to manage, abate or remove materials containing hazardous substances such as mold, lead or asbestos during demolitions,
renovations or remodeling at properties that we manage, own or develop or to obtain permits for certain of our equipment or operations.
The costs of such management, abatement, removal or permitting could be substantial. Complying with these laws and regulations,
or addressing violations arising under them, could increase our environmental costs and liabilities, reduce our profits or limit
our ability to run our business. Existing environmental laws and regulations may be revised or new laws and regulations related
to global climate change, air quality, or other environmental and health concerns may be adopted or become applicable to us. The
identification of new areas of contamination, a change in the extent or known scope of contamination or changes in cleanup requirements,
or the adoption of new requirements governing our operations could have a material adverse effect on our results or operations,
financial condition and business.
If the insurance that we carry does
not sufficiently cover damage or other potential losses or liabilities involving properties that we own, our profits could be reduced.
We carry insurance
from solvent insurance carriers that we believe is adequate for foreseeable losses and with terms and conditions that are reasonable
and customary. Nevertheless, market forces beyond our control could limit the scope of the insurance coverage that we can obtain
or restrict our ability to buy insurance coverage at reasonable rates. In the event of a substantial loss, the insurance coverage
that we carry may not be sufficient to pay the full value of our financial obligations, our liabilities or the replacement cost
of any lost investment or property loss. Because certain types of losses are significantly uncertain, they can be uninsurable or
too expensive to insure. In some cases, these factors could result in certain losses being completely uninsured. As a result, we
could lose some or all of the capital we have invested in a property, as well as the anticipated future revenues and profits from
the property. If the insurance that we carry does not sufficiently cover damages or other losses or liabilities, our profits could
be adversely affected.
Adverse judgments or settlements
resulting from legal proceedings in which we may be involved in the normal course of our business could reduce our profits or limit
our ability to operate our business.
In the normal course
of our business, we are often involved in various legal proceedings. The outcome of these proceedings cannot be predicted. If any
of these proceedings were to be determined adversely to us or a settlement involving a payment of a material sum of money were
to occur, there could be a material adverse effect on our financial condition and results of operations. Additionally, we could
become the subject of future claims by third parties, including guests who use our properties, our employees, our investors or
regulators. Any significant adverse judgments or settlements would reduce our profits and could limit our ability to operate our
business. Further, we may incur costs related to claims for which we have appropriate third party indemnity, but such third parties
fail to fulfill their contractual obligations.
Information technology system failures,
delays in the operation of our information technology systems or system enhancement failures could reduce our revenues and profits
and harm the reputation of our brands and our business.
Our success depends
on the efficient and uninterrupted operation of our information technology systems. We depend on information technology to run
our day-to-day operations, including, among others, hotel services and amenities such as guest check-in and check-out, housekeeping
and room service and systems for tracking and reporting our financial results and the financial results of our hotels.
Our information technology
systems are vulnerable to damage or interruption from fire, floods, hurricanes, power loss, telecommunications failures, computer
viruses, break-ins and similar events. The occurrence of any of these natural disasters or unanticipated problems could cause interruptions
or delays in our business or loss of data, or render us unable to process daily services.
In addition, if our
information technology systems are unable to provide the information communications capacity that we need, or if our information
technology systems suffer problems caused by installing system enhancements, we could experience similar failures or interruptions.
If our information technology systems fail and our redundant systems or disaster recovery plans are not adequate to address such
failures, or if our property and business interruption insurance does not sufficiently compensate us for any losses that we may
incur, our revenues and profits could be reduced and the reputation of our hotels and our business could be harmed.
Cyber risk and the failure to maintain
the integrity of internal or customer data could result in faulty business decisions, harm to our reputation or subject us to costs,
fines or lawsuits.
We are required to
collect and retain large volumes of internal and customer data, including credit card numbers and other personally identifiable
information and our various information technology systems enter, process, summarize and report such data. We also maintain personally
identifiable information about our employees. The integrity and protection of our guests, employee and company data is critical
to our business. Our guests expect that we will adequately protect their personal information, and the regulations applicable to
security and privacy are increasingly demanding in Italy. We have developed and maintain controls to prevent, and we have a process
to identify and mitigate, the theft, loss, fraudulent or unlawful use of guest, employee or company data. We also have what we
believe to be adequate and collectible insurance in the event of the theft, loss, fraudulent or unlawful use of customer, employee
or company data. A penetrated or compromised data system or the intentional, inadvertent or negligent release or disclosure of
data could result in theft, loss, fraudulent or unlawful use of customer, employee or company data which could harm our reputation
or result in remedial and other costs, fines or lawsuits and which could be in excess of any available insurance that we have procured.
If we fail to stay
current with developments in technology necessary for our business, our operations could be harmed and our ability to compete
effectively could be diminished.
Sophisticated information
technology and other systems are instrumental for the hospitality industry, including systems used for our reservations, revenue
management, property management and our loyalty program, as well as technology systems that we make available to our guests. These
information technology and other systems must be refined, updated, or replaced with more advanced systems on a regular basis. Developing
and maintaining these systems may require significant capital. If we are unable to replace or introduce information technology
and other systems as quickly as our competitors or within budgeted costs or schedules when these systems become outdated or need
replacing, or if we are unable to achieve the intended benefits of any new information technology or other systems, our operations
could be harmed and our ability to compete effectively could be diminished.
As a public company, we are required
to comply with the reporting obligations of the Exchange Act and Section 404 of the Sarbanes-Oxley Act of 2002. If we fail to comply
with the reporting obligations of the Exchange Act and Section 404 of the Sarbanes-Oxley Act or if we fail to maintain adequate
internal controls over financial reporting, our business, results of operations and financial condition could be materially adversely
affected.
As a public company,
we are required to comply with the periodic reporting obligations of the Exchange Act, including preparing annual reports and quarterly
reports. Our failure to prepare and disclose this information in a timely manner could subject us to penalties under U.S. federal
securities laws, expose us to lawsuits and restrict our ability to access financing. In addition, we are required under applicable
law and regulations to design and implement internal controls over financial reporting, and evaluate our existing internal controls
with respect to the standards adopted by the U.S. Public Company Accounting Oversight Board.
We cannot assure you
that we will not identify control deficiencies that may constitute significant deficiencies or material weaknesses in our internal
controls in the future. As a result, we may be required to implement further remedial measures and to design enhanced processes
and controls to address issues identified through future reviews. This could result in significant delays and costs to us and require
us to divert substantial resources, including management time, from other activities.
If we do not fully
remediate the material weaknesses identified by management or fail to maintain the adequacy of our internal controls in the future,
we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting
in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for us to produce reliable financial
reports and are important to help prevent fraud. As a result, any failure to satisfy the requirements of Section 404 on a timely
basis could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm
our business and negatively impact the trading price of our common stock.
The Public Company Accounting Oversight
Board, or PCAOB, is currently unable to inspect the audit work of auditors working in Italy, including our auditor, Bompani Audit.
Because we are a public
company in the U.S. our auditor is required to undergo regular PCAOB inspections to assess compliance with U.S. law and professional
standards in connection with its audit of our financial statements filed with the SEC. The PCAOB, however, is currently unable
to inspect the audit work and practices of auditors in Italy, where our principal office is located. As a result, investors who
rely on our auditor’s audit reports are deprived of the benefits of PCAOB inspections of our auditor, including an evaluation
of our auditor’s performance of audits and its quality control procedures. Management of the Company expects our auditor
to adhere to the highest applicable standards and to take measures to ensure that these standards are consistent with the requirements
of the PCAOB. However, we cannot exclude the possibility that PCAOB inspections could strengthen the adherence to such standards
and/or detect failures to do so.
Risks Related to Share Ownership and
Stockholder Matters
Our stock price is likely to be volatile,
and you may not be able to resell shares of your common stock at or above the price you paid.
The stock market in
general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating
performance of the underlying businesses. Given that we are a relatively new public company, these fluctuations may be even more
pronounced in the trading market for our stock. In addition, in the past few years the financial services industry experienced
a period of significant disruption characterized by the bankruptcy, failure, collapse or sale of various financial institutions,
which led to increased volatility in securities prices and a significant level of intervention from the U.S. and other governments
in securities markets. These broad market and industry factors may seriously harm the market price of our common stock, regardless
of our actual operating performance.
In addition to the
risks described in this section, several factors that could cause the price of our common stock in the public market to fluctuate
significantly include, among others, the following:
|
·
|
quarterly variations in our operating results compared to market expectations;
|
|
|
|
|
·
|
announcements of acquisitions of or investments in other businesses and properties or dispositions;
|
|
|
|
|
·
|
announcements of new services or products or significant price reductions by us or our competitors;
|
|
|
|
|
·
|
size of the public float;
|
|
|
|
|
·
|
stock price performance of our competitors;
|
|
|
|
|
·
|
fluctuations in stock market prices and volumes;
|
|
|
|
|
·
|
default on our indebtedness or foreclosure of our properties;
|
|
|
|
|
·
|
changes in senior management or key personnel;
|
|
|
|
|
·
|
changes in financial estimates by securities analysts;
|
|
|
|
|
·
|
negative earnings or other announcements by us or other hospitality companies;
|
|
|
|
|
·
|
issuances or repurchases of equity or debt securities; and
|
|
|
|
|
·
|
global economic, legal and regulatory factors unrelated to our performance.
|
Volatility in the market
price of our common stock may prevent investors from being able to sell their common stock at or above the price at which you purchased
the stock. As a result, you may suffer a loss on your investment.
Securities class action
litigation has often been instituted against companies following periods of volatility in the overall market and in the market
price of a company’s securities. This litigation, if instituted against us, could result in substantial costs, reduce our
profits, divert our management’s attention and resources and harm our business.
Because we do not expect to pay dividends
on our common stock for the foreseeable future, investors seeking cash dividends should not purchase our common stock.
We do not currently
intend to pay cash dividends on our common stock and do not anticipate paying any dividends at any time in the foreseeable future.
We currently intend to retain future earnings, if any, to finance the expansion of our business. As a result, we do not anticipate
paying any cash dividends on our common stock in the foreseeable future. Our payment of any future dividends will be at the discretion
of our Board of Directors after taking into account various factors, including but not limited to our financial condition, operating
results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. Accordingly, investors
must rely on sales of their own common stock after price appreciation, which may never occur, as the only way to realize gains
on their investment. Investors seeking cash dividends should not purchase the common stock.
If we fail to remain current on our
reporting requirements, we could be removed from the OTC Bulletin Board which would limit the ability of broker-dealers to sell
our securities and the ability of stockholders to sell their securities in the secondary market.
Companies trading on
the OTC Bulletin Board, such as us, must be reporting issuers under Section 12 of the Exchange Act, and must be current in their
reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. More specifically, the Financial
Industry Regulatory Authority (“FINRA”) has enacted Rule 6530, which determines eligibility of issuers quoted on the
OTC Bulletin Board by requiring an issuer to be current in its filings with the Commission. Pursuant to Rule 6530(e), if we file
our reports late with the Commission three times our securities will be removed from the OTC Bulletin Board for failure to timely
file. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers
to sell our securities and the ability of stockholders to sell their securities in the secondary market.
Because our common stock could be
deemed a low-priced “Penny” stock, it would be cumbersome for brokers and dealers to trade in our common stock, making
the market for our common stock less liquid and negatively affect the price of our stock.
We may be subject to
certain provisions of the Exchange Act, commonly referred to as the “penny stock” as defined in Rule 3a51-1. A penny
stock is generally defined to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions.
If our stock is deemed to be a penny stock, trading will be subject to additional sales practice requirements of broker-dealers.
These require a broker-dealer to:
|
·
|
Deliver to the customer, and obtain a written receipt for, a disclosure document;
|
|
|
|
|
·
|
Disclose certain price information about the stock;
|
|
|
|
|
·
|
Disclose the amount of compensation received by the broker-dealer or any associated person of the broker-dealer;
|
|
|
|
|
·
|
Send monthly statements to customers with market and price information about the penny stock; and
|
|
|
|
|
·
|
In some circumstances, approve the purchaser’s account under certain standards and deliver written statements to the customer with information specified in the rules.
|
Consequently, penny
stock rules may restrict the ability or willingness of broker-dealers to trade and/or maintain a market in our common stock. Also,
prospective investors may not want to get involved with the additional administrative requirements, which may have a material adverse
effect on the trading of our shares.
FINRA sales practice requirements
may also limit a stockholder’s ability to buy and sell our stock.
In addition to the
“penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer,
a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending
speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information
about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of
these rules, the FINRA believes that there is a high probability that speculative low priced securities will not be suitable for
at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy
our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
It may be difficult for stockholders
to enforce any judgment obtained in the United States against us, which may limit the remedies otherwise available to our stockholders.
All of our assets are
located outside of the United States. Moreover, a majority of our directors and officers are nationals or residents of Italy. All
or a substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult
for our stockholders to effect service of process within the United States upon these persons. In addition, there is uncertainty
as to whether the courts of Italy would recognize or enforce judgments of U.S. courts obtained against us or such officers and/or
directors predicated upon the civil liability provisions of the securities law of the United States or any state thereof, or be
competent to hear original actions brought in Italy against us or such persons predicated upon the securities laws of the United
States or any state thereof.
There may not be sufficient liquidity
in the market for our securities in order for investors to sell their securities.
There is currently
only a limited public market for our common stock and there can be no assurance that an active trading market will ever develop
or be sustained in the future.
FINANCIAL INFORMATION
Management’s Discussion and Analysis
or Plan of Operation
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 8-K. 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,
including without limitation, the disclosures made under “Risk Factors.” All amounts are set forth in euros.
The following discussion
and analysis relates to the results of CR&P and should be read in conjunction with the financial statements and the related
notes thereto and other financial information contained elsewhere in this Form 8-K. Please see our unaudited pro forma combined
financial information of SOST which is filed as Exhibit 99.1. For a discussion and analysis related to the results of SOST, please
see our Form 10-K for the fiscal year ended November 30, 2011 filed with the SEC on March 14, 2012 and Form 10-Q for the quarter
ended May 31, 2012 filed with the SEC on August 8, 2012.
Overview
We are a Company involved
in the hospitality business. We own and, develop hotels and spas in Italy. We do not operate our hotels directly so we can be classified
as property investment specialists.
We particularly focus
on the ownership and development of boutique hotels, spas and resorts. We choose the investment opportunities on the basis of analysis
and forecasts in respect of:
|
·
|
Location;
|
|
|
|
|
·
|
profitability track record;
|
|
|
|
|
·
|
competitors;
|
|
|
|
|
·
|
development potential; and
|
|
|
|
|
·
|
acquisition cost vis a vis foreseeable profitability.
|
We expect our investment
in boutique hotels, spas and resorts to create:
|
·
|
capital growth over the medium term;
|
|
|
|
|
·
|
income immediately;
|
|
|
|
|
·
|
location diversification; and
|
|
|
|
|
·
|
synergies and scale economies.
|
We operate our hotels
- with the exception of Ripa Hotel which is currently managed by the previous owner through a company named Ku-Hotels and the Splendid
Hotel currently managed by Alain Messeguè - by means of contractual agreements with a major Italian hotel manager company
called JSH.
JSH was founded in
2010 by four professionals in the hotel management sector, with collectively more than 80 years of experience in the business,
and as today it manages 1,250 rooms in 14 major hotels in Italy.
JSH is involved in
the management business only, and does not invest in hotel properties.
The contractual agreements
in place with JSH basically envisage an annual rent composed of a guaranteed minimum rent plus a variable amount linked to the
gross operating profit of our hotels.
The same contractual
arrangement is applied to the managers of the Ripa Hotel and the Splendid Hotel.
Therefore, our revenues
are derived only from the rents we receive from the managers of our hotels. These rents are made of a guaranteed minimum rent plus
a variable amount related to the profitability of the hotel.
We intend to enter
into same kind of contractual agreements with JSH in relation to the future acquisitions of hotels in Italy and abroad. We currently
own 5 hotels and resorts in Padova, Italy, Rome, Italy and Ostuni (Brindisi), Italy. Collectively, these properties have approximately
520 hotel rooms and suites as well as restaurants, conference rooms, spas and golf courses. Our portfolio of hotel properties provides
us with a diverse geographic footprint across Italy.
Our senior management
team has over 80 collective years of experience spanning multiple foreign jurisdictions. This team has established plans for growth
focusing on the core principles of providing authentic Italian hospitality and expansion into foreign markets in which we do not
have hotel properties.
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.
Recent Developments and Events
In September of 2012
(the
“
Spin-Off Date
”
), CR&P disposed of its businesses related to renewable energy and real estate
to a sister company named Masoledo S.r.l. (
“
Masoledo
”
), while CR&P acquired from the same company
the interest in Masseria Santo Scalone Hotel e Resort S.r.l. As a result of these dispositions and acquisitions, CR&P today
has a receivable of approximately euro 8.6 million due from Masoledo (the
“Receivable”
). The terms and conditions
of the Receivable are set out in a deed entered into between CR&P and Masoledo, pursuant to which Masoledo will repay the Receivable
at an annual interest rate of 6% of the Receivable. Masoledo will use the proceeds from any disposal to a third party of such renewable
energy or real estate related businesses to make payments on the principal and interest of the Receivable. Notwithstanding the
foregoing, Masoledo will repay the Receivable no later than 5 years form the Spin-Off Date.
In October of 2012,
CR&P entered into a preliminary agreement with JSH S.r.l. and its shareholders (“JSH”), pursuant to which, by the
end of 2012, CR&P will acquire not less than a 15% stake in JSH, or an equivalent stake in the new sub-holding company to be
incorporated by JSH which will control the companies involved in the management of the CR&P hotels.
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 stockholders agreement, 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 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.
Restatement
We have make changes to the balance sheets,
statement of operations and cash flow statements to correct our presentation to comply with US GAAP. None of these changes are
material and the net effect are not material to the financial statements.
Additionally, we added and changed our
footnotes to comply with US GAAP. None of these changes are material and the net effect are not material to the financial statements.
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 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.
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:
|
-
|
Buildings and constructions: 33 years
|
|
-
|
Machinery and equipment: 2 – 20
years
|
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 sale
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 are concluded at the date of presentation of the interim financial statements
ended September 30, 2012.
The Company has assessed that the potential
realizable (or realized) value of these assets at the market value are higher than the net asset carrying value and accordingly
no impairment has been provided for.
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.
Currently there is only one derivative
instrument hedging the risk of variable interest rates (an “interest rate cap”), the notional amount of is €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.
Shareholders loans
Shareholders loans to the Group 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 Group 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.
Stockholder’s equity
As of today, the share capital of CR&P
is represented by one share, fully paid as to €98,000. Mr. Antonio Conte and Ms. Maddalena Olivieri each contributed 50% of
the share capital of CR&P. In accordance with Italian law, this share is registered with the Register of Companies at the Italian
Chamber of Commerce.
Results of
Operations
For the three months ended September
30, 2012 and September 30, 2011
Revenues
Revenues for the three
months ended September 30, 2012 decreased approximately by €78,000, or 8%, compared to the three months ended September 30,
2011. The two amounts remained substantially unchanged over the period.
Direct Operating Costs
Direct Operating costs
adjustment for the three months ended September 30, 2012, increased approximately €21,000, or 5%, compared to the three months
ended September 30, 2011. This increase is related to an efficiency gain widespread throughout the Group.
Selling, General and Administrative
Costs
Selling, General and
Administrative costs adjustment for the three months ended September 30, 2012 and 2011 were approximately € 494,000 and €408,000,
respectively. Such expenses consist primarily of salaries and personnel related expenses, occupancy expenses, sales travel, consulting
costs and other expenses. The increase of approximately €86,000 was due to an efficiency gain widespread throughout the Group.
Amortization and Depreciation
Amortization and depreciation
for the three months ended September 30, 2012 and 2011 were approximately €685,000 and €735,000, respectively.
Interest Income
Interest income for
the three months ended September 30, 2012 and 2011 are negligible.
Interest Expenses
Interest expense
for the three months ended September 30, 2012 and 2011 was approximately €86,000 and €538,000, respectively.
Asset Impairment
There are no asset
impairment as of September 30, 2012. For the three months period ended September 30, 2011 we recognized € 710,000 related
to a write-down of improvement expenses on a building owned by our subsidiary Carciano Immobiliare, S.r.l. We did not close on
this building as such all of the improvements were written off.
Other Income/(Loss)
Other Income for the
three months ended September 30, 2012 and 2011 was € 95,000 and € 393,000 respectively.
Gain on business combination (bargain
purchase)
Gain on business combination
of September 30, 2011 was reduced of € 59,000, due to the adjustment of the consideration paid by the Company for the acquisition
of Terme di Galzignano, Sp.A. during 2011.
Income Taxes
Income taxes for the
three months ended September 30, 2012 and 2011 were approximately €37,000 and €28,000, respectively.
These
items are substantially stable in the two interim periods compared
.
Net profit / (loss) from discontinued
operations
Net profit/(loss) from
discontinued operations for the three months ended September 30, 2012 and 2011 were approximately €3,259,000 and € (3,131,000),
respectively. The profit recorded in the 2012 quarter is principally due to the result of the Spin-Off which took place in September
2012. In September of 2012 (the
“
Spin-Off Date
”
), CR&P disposed of its businesses related to renewable
energy and real estate to a sister company named Masoledo S.r.l. (
“
Masoledo
”
), while CR&P acquired
from the same company the interest in Masseria Santo Scalone Hotel e Resort S.r.l. As a result of these dispositions and acquisitions,
CR&P today holds a receivable of approximately € 8.6 million due from Masoledo (the
“Receivable”
).
The terms and conditions of the Receivable are set out in a deed entered into between CR&P and Masoledo, pursuant to which
Masoledo will repay the Receivable at an annual interest rate of 6% of the Receivable. Masoledo will use the proceeds from any
disposal to a third party of such renewable energy or real estate related businesses to make payments on the principal and interest
of the Receivable. Notwithstanding the foregoing, Masoledo will repay the Receivable no later than 5 years from the Spin-Off Date.
Six Month Period Ended June 30, 2012
compared to the Six Month Period Ended June 30, 2011
€/000
|
|
For the six
months Ended
June 30, 2012
|
|
|
For the six
months Ended
June 30, 2011
|
|
|
|
Unaudited
|
|
|
Unaudited
|
|
Revenue from operations
|
|
|
2.305
|
|
|
|
2.386
|
|
Direct operating and selling, general and administrative costs
|
|
|
|
|
|
|
|
|
Direct operating costs
|
|
|
(981
|
)
|
|
|
(1.280
|
)
|
Selling, general and administrative costs
|
|
|
(245
|
)
|
|
|
(1.918
|
)
|
Amortization and depreciation
|
|
|
(1.473
|
)
|
|
|
(1.386
|
)
|
Total direct operating and selling, general and administrative costs
|
|
|
(2.698
|
)
|
|
|
(4.584
|
)
|
Operating income/(Loss)
|
|
|
(393
|
)
|
|
|
(2.198
|
)
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
1
|
|
Interest expenses
|
|
|
(1.471
|
)
|
|
|
(1.683
|
)
|
Asset impairment
|
|
|
|
|
|
|
(710
|
)
|
Other income
|
|
|
112
|
|
|
|
463
|
|
Gain on business combination (bargain purchase)
|
|
|
|
|
|
|
2.563
|
|
Loss from continuing operations, before income taxes
|
|
|
(1.753
|
)
|
|
|
(1.564
|
)
|
Income taxes
|
|
|
(76
|
)
|
|
|
(77
|
)
|
Loss from continuing operations, net of income taxes
|
|
|
(1.829
|
)
|
|
|
(1.641
|
)
|
Net income/(loss) from operations of discontinued operations, after taxes
|
|
|
(19
|
)
|
|
|
(22
|
)
|
Net income/(loss) on disposal of discontinued operations, after taxes
|
|
|
306
|
|
|
|
95
|
|
Net profit/(loss) from discontinued operations
|
|
|
287
|
|
|
|
73
|
|
Consolidated net loss for the period
|
|
|
(1.542
|
)
|
|
|
(1.568
|
)
|
Less net loss attributable to non-controlling interests in the consolidated subsidiaries
|
|
|
161
|
|
|
|
294
|
|
Net loss attributable to owners of Conte Rosso & Partners S.r.l.
|
|
|
(1.381
|
)
|
|
|
(1.274
|
)
|
Revenues
Revenues for the six
months ended June 30, 2012, decreased approximately €81,000, or 3.4%, compared to the six months ended June 30, 2011. The
two amounts remained substantially unchanged over the period.
Direct Operating Costs
Direct Operating costs
for the six months ended June 30, 2012, decreased approximately €299,000, or 23%, compared to the six months ended June 30,
2011. This decrease is related to an efficiency gain widespread throughout the Group.
Selling, General and Administrative
Costs
Selling, General and
Administrative costs for the six months ended June 30, 2012 and 2011 were approximately €245,000 and €1,918,000, respectively.
Such expenses consist primarily of salaries and personnel related expenses, occupancy expenses, sales travel, consulting costs
and other expenses. The decrease of approximately €1,673,000 was due to an efficiency gain widespread throughout the Group.
Amortization and Depreciation
Amortization and depreciation
for the six months ended June 30, 2012 and 2011 were approximately €1,473,000 and €1,386,000, respectively. Such expenses
consist primarily of depreciation of properties, plant and equipment held by Conte Rosso & Partners and the subsidiaries Ripa
Hotel & Resort and Terme di Galzignano. The two amounts remained substantially unchanged over the period.
Interest Income
Interest income for
the six months ended June 30, 2012 and 2011 was negligible.
Interest Expense
Interest expense for the six months ended
June 30, 2012 and 2011 was approximately €1,471,000 and €1,683,000, respectively. These costs decreased mainly because
of the spin off of Antonio Srl which took place in January 2012.
Asset Impairment
The asset impairment as of June 30, 2011
was due to the write-down of € 710,000 of expenses for improvements on a building owned by our subsidiary Carciano Immobiliare
under a purchase contract. We did not close on this building as such all of the improvements were written off.
Other Income
Other Income for the six months ended June
30, 2012 and 2011 was approximately €112,000 and €463,000, respectively.
Gain on business combination (bargain
purchase)
Gain on business combination of June 30,
2011, of € 2,563,000 was referred to the acquisition of 97.25% equity stake in Terme di Galzignano SpA.
Income Taxes
Income taxes for the
six months ended June 30, 2012 and 2011 were approximately €76,000 and €77,000, respectively.
These
items are substantially stable in the two interim periods compared
.
Net profit / (loss) from discontinued
operations
Net profit / (loss)
from operations of discontinued operations for the six months ended June 30, 2012 and 2011 were approximately €287,000 and
€73,000, respectively. Loss from operations and gain on disposal of discontinued operations are related to assets held for
sale. In the first six months of 2012 Ripa Hotel and Resort Srl disposed a real estate property owned in Pisa, Via San Martino,
while Aral Srl disposed two real estate properties owned in Porto Cervo and Porto Rotondo, Sardinia, Italy, both with a net financial
gain of approximately € 300,000. As of June 30, 2011, the net profit from discontinued operations was due to the disposal
of a real estate property owned by Ripa Hotel and Resort Srl located in Todi, Perugia, with a net financial gain of approximately
€ 95,000.
For the year ended December 31, 2011
and the year ended December 31, 2010
€/000
|
|
For the year ended
December 31, 2011
|
|
|
For the year ended
December 31, 2010
|
|
|
|
Audited
|
|
|
Audited
|
|
Revenue from operations
|
|
|
10.196
|
|
|
|
3.684
|
|
Direct operating and selling, general and administrative costs
|
|
|
|
|
|
|
|
|
Direct operating costs
|
|
|
(3.281
|
)
|
|
|
(1.526
|
)
|
Selling, general and administrative costs
|
|
|
(6.232
|
)
|
|
|
(1.414
|
)
|
Amortization and depreciation
|
|
|
(2.834
|
)
|
|
|
(1.517
|
)
|
Total direct operating and selling, general and administrative costs
|
|
|
(12.347
|
)
|
|
|
(4.457
|
)
|
Operating income/(Loss)
|
|
|
(2.151
|
)
|
|
|
(773
|
)
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
18
|
|
|
|
4
|
|
Interest expenses
|
|
|
(3.849
|
)
|
|
|
(3.110
|
)
|
Asset impairment
|
|
|
(710
|
)
|
|
|
|
|
Other income
|
|
|
1.438
|
|
|
|
630
|
|
Gain on business combination (bargain purchase)
|
|
|
2.476
|
|
|
|
5
|
|
Loss from continuing operations, before income taxes
|
|
|
(2.778
|
)
|
|
|
(3.244
|
)
|
Income taxes
|
|
|
(957
|
)
|
|
|
(181
|
)
|
Loss from continuing operations, net of income taxes
|
|
|
(3.735
|
)
|
|
|
(3.425
|
)
|
Net income/(loss) from operations of discontinued operations, after taxes
|
|
|
(39
|
)
|
|
|
(41
|
)
|
Net income/(loss) on disposal of discontinued operations, after taxes
|
|
|
118
|
|
|
|
|
|
Net profit/(loss) from discontinued operations
|
|
|
79
|
|
|
|
(41
|
)
|
Consolidated net loss for the period
|
|
|
(3.656
|
)
|
|
|
(3.466
|
)
|
Less net loss attributable to non-controlling interests in the consolidated subsidiaries
|
|
|
687
|
|
|
|
201
|
|
Net loss attributable to owners of Conte Rosso & Partners S.r.l.
|
|
|
(2.969
|
)
|
|
|
(3.265
|
)
|
Revenues
Revenues for the year
ended December 31, 2011, increased approximately €6,512,000, or 177%, compared to the year ended December 31, 2010. This increase
is mainly dependent on the following events:
|
-
|
Sale of two properties (located in Pisa and Todi, Italy) by the subsidiary Ripa Hotel & Resort, which generated revenues of more than € 1,800,000;
|
|
|
|
|
-
|
Recognition of additional premium of € 5,200,000 on the sale of the property of the subsidiary Carciano Immobiliare – mentioned above - to a third party, based on the settlement agreement;
|
|
|
|
|
-
|
Impact of the consolidation of the subsidiary Terme di Galzignano for the first time in 2011 (approximately € 1,600,000) .
|
Direct Operating Costs
Direct
Operating Costs for the year ended December 31, 2011, increased approximately €1,755,000, or 115%, compared to the year ended
December 31, 2010.
This increase is mainly dependent on the following events:
|
-
|
Start-up costs increase in the subsidiary Enital (approximately € 500,000);
|
|
|
|
|
-
|
Services costs increase in the subsidiary Carciano Immobiliare (approximately €350,000);
|
|
|
|
|
-
|
Impact of the consolidation of the subsidiary Terme di Galzignano for the first time in 2011 (approximately € 1,000,000).
|
Selling, General and Administrative
Costs
Selling,
General and Administrative costs for the years ended December 31, 2011 and 2010 were approximately €6,232,000 and €1,414,000,
respectively. Such expenses consist primarily of salaries and personnel related expenses, occupancy expenses, sales travel, consulting
costs and other expenses. The increase of approximately €4,818,000
is mainly dependent on the following events:
|
-
|
the provision for 2011, accounted for € 3,100,000, relating to the settlement agreement of the preliminary contract of the property at Via Carciano, Rome, Italy held by the subsidiary Carciano Immobiliare (mentioned above) and reflects a partial uncertainty in the determination of the additional revenue established in the agreement, given the fact that the conditions for its payment are still pending;
|
|
|
|
|
-
|
Impairment of receivables in the subsidiaries CRP Immobiliare (approximately € 800,000) and Investimenti Immobiliari (approximately € 300,000).
|
Amortization and Depreciation
Amortization
and depreciation for the years ended December 31, 2011 and 2010 were approximately €2,834,000 and €1,517,000, respectively.
Such expenses consist primarily of depreciation of properties, plant and equipment held by Conte Rosso & Partners and the subsidiaries
Ripa Hotel & Resort and Terme di Galzignano
.
The increase of approximately €1,317,000
was basically due to the impact of the consolidation of the subsidiary Terme di Galzignano for the first time in 2011.
Interest Income
Interest income for
the years ended December 31, 2011 and 2010 was approximately a gain of €18,000 and a gain of €4,000, respectively. These
items are substantially stable in the two interim periods being compared.
Interest Expense
Interest expense for
the years ended December 31, 2011 and 2010 was approximately €3,849,000 and €3,110,000, respectively. The increase was
essentially due to the increase in outstanding current and non-current financial debts in 2011.
Asset Impairment
The asset impairment
as of June 30, 2011 was due to the write-down of € 710,000 of expenses for improvements on a building owned by our subsidiary
Carciano Immobiliare under a purchase contract. We did not close on this building as such all of the improvements were written
off.
Other Income
Other Income for the
years ended December 31, 2011 and 2010 was approximately € 1,438,000 and € 630,000, respectively. The increase was essentially
due to the preliminary sale agreement of some lodges to be built within the Terme di Galzignano resort where the Green Hotel, currently
not operating, is planned to be transformed into a lodge residence.
Gain on business combination (bargain
purchase)
Gain on business combination
(bargain purchase) for the years ended December 31, 2011 and 2010 was approximately € 2,476,000 and € 5,000, respectively.
The € 2,476,000 gain recorded in 2011 was substantially due to the acquisition of 97,25% equity stake in Terme di Galzignano
SpA.
Discontinued operations
During the fiscal year ended December 31,
2011, we sold the Via Gereschi (Pisa) property for a gain of € 23,000, net of taxes, and the Todi (Perugia) property for a
gain of € 95,000, net of taxes. These properties were previously classified as Available for Sale. We have no continuing involvement
with either property. There was no activity from discontinued operations in 2010.
Income Taxes
Income taxes for the
years ended December 31, 2011 and 2010 were approximately €957,000 and €181,000, respectively. The increase of €
776,000 is mainly due to the recognition of the additional premium in the subsidiary Carciano Immobiliare and the non-deductibility
of the related provision mentioned above.
Liquidity
and
Capital Resources
For the nine month period ended September
30, 2012 and 2011
As of September 30, 2012,
we had cash and cash equivalents of approximately €211,000, net working capital of approximately €1,526,000, and retained
earnings of approximately €7,573,000.
Cash Flows from Operating Activities
Our operating activities
resulted in net cash provided in operations of approximately €4,355,000 for the nine months ended September 30, 2012, compared
to net cash provided in operations of approximately €1,386,000 for the nine months ended September 30, 2011.
The net cash provided
in operating activities for the nine months period ended September 30, 2012 reflects a net income of approximately €2,194,000
which basically consists of depreciation and amortization of approximately €2,158,000. Changes in assets and liabilities included
an increase in trade receivables of approximately €4,355,000, a decrease in related party receivables of approximately €17,193,000,
a decrease in other payables of approximately €8,622,000, an increase in advanced payments on purchases of property of approximately
€6,450,000, an increase in other assets of approximately €134,000, a decrease in trade payables of approximately €2,485,000,
an increase in related party payables of approximately €4,331,000, an increase in current income taxes of approximately €569,000
and a decrease in other liabilities of approximately €61,000.
The net cash provided
in operating activities for the nine months period ended September 30, 2011 reflects a net loss of approximately €3,138,000
offset by depreciation and amortization of approximately €2,154,000. Changes in assets and liabilities included a decrease
in trade receivables of approximately €5,189,000, a decrease in related party receivables of approximately €1,199,000,
an increase in other receivables of approximately €508,000, an increase in advanced payments on purchases of property of approximately
€11,906,000, a decrease in other assets of approximately €354,000, an increase in trade payables of approximately €4,384,000,
a decrease in related party payables of approximately €700,000, a decrease in other payables of approximately €2,874,000,
a decrease in current income taxes of approximately €1,158,000 and a decrease in other liabilities of approximately €1,962,000.
Cash Flows from Investing Activities
The net cash provided
in investing activities for the nine months periods ended September 30, 2012 consist primarily of the cash inflow (approximately
€ 31,864,000) due to the Spin-Off of non-hotel business.
The net cash used in
investing activities for the nine months periods ended September 30, 2011 consist primarily of the cash outflow (approximately
€ 25,985,000) for the purchase of properties, plant and equipment basically due to the acquisition and the consolidation of
the subsidiary Terme di Galzignano in 2011.
Cash Flows from Financing Activities
Net cash provided by
financing activities for the nine months ended September 30, 2012 and the nine months ended September 30, 2011 was a loss of €22,474,000
and cash inflow of €22,727,000, respectively.
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.
For the six month period ended June
30, 2012 and 2011
As of June 30, 2012,
we had cash and cash equivalents of approximately €1,286,000, negative working capital of approximately €21,388,000,
and retained earnings of approximately €4,849,000.
Cash Flows from Operating Activities
Our operating activities
resulted in net cash provided in operations of approximately €987,000 for the six months ended June 30, 2012, compared to
net cash provided in operations of approximately €6,211,000 for the six months ended June 30, 2011.
The net cash provided
in operating activities for the six month period ended June 30, 2012 reflects a net loss of approximately €1,542,000 offset
by depreciation and amortization of approximately €1,473,000. Changes in assets and liabilities included an increase in trade
receivables of approximately €306,000, a decrease in related party receivables of approximately €403,000, a decrease
in other receivables of approximately €653,000, an increase in advanced payments on purchases of property of approximately
€4,600,000, an increase in other assets of approximately €87,000, a decrease in trade payables of approximately €2,779,000,
a decrease in related party payables of approximately €350,000, an increase in other payables of approximately €37,000,
an increase in current income taxes of approximately €312,000 and a decrease in other liabilities of approximately €102,000.
The net cash provided
in operating activities for the six month period ended June 30, 2011 reflects a net loss of approximately €1,568,000 offset
by depreciation and amortization of approximately €1,386,000. Changes in assets and liabilities included a decrease in trade
receivables of approximately €1,764,000, a decrease in related party receivables of approximately €65,000, a decrease
in other receivables of approximately €858,000, an increase in advanced payments on purchases of property of approximately
€7,406,000, a decrease in other assets of approximately €170,000, an increase in trade payables of approximately €4,307,000,
a decrease in related party payables of approximately €555,000, a decrease in other payables of approximately €368,000,
a decrease in current income taxes of approximately €1,962,000 and a decrease in other liabilities of approximately €2,015,000.
Cash Flows from Investing Activities
The net cash used in
investing activities for the six month periods ended June 30, 2012 consist primarily of the cash inflow (approximately € 7,195,000)
due to the sale of the building held for resale and of the cash outflow (approximately € 1,590,000) due to the real estate
development business of the subsidiary Aros.
The net cash used in
investing activities for the six month periods ended June 30, 2011 consist primarily of the cash outflow (approximately €
25,575,000) for purchase of properties, plant and equipment basically due to the impact of the acquisition and the consolidation
of the subsidiary Terme di Galzignano for the first time in 2011.
Cash Flows from Financing Activities
Net cash provided by
financing activities for the six months ended June 30, 2012 and the six months ended June 30, 2011 was a loss of €5,884,000
and €19,413,000, respectively.
For the year ended December 31, 2011
and the year ended December 31, 2010
As of December 31,
2011, we had cash and cash equivalents of approximately €545,000, negative working capital of approximately €19,660,000
and retained earnings of approximately €134,000.
Cash Flows from Operating Activities
Our operating activities
resulted in net cash provided by operating activities of approximately €6,111,000 for the year ended December 31, 2011 compared
approximately €11,785,000 for the year ended December 31, 2010.
The net cash provided
by operating activities for the year ended December 31, 2011 reflects a net loss of approximately €3,656,000 offset by depreciation
and amortization of approximately €2,834,000. Changes in assets and liabilities included a decrease in trade receivables of
approximately €3,646,000, an increase in related party receivables of approximately €1,318,000, a decrease in other receivables
of approximately €973,000, an increase in advanced payments on purchases of property of approximately €7,406,000, a decrease
in other assets of approximately €477,000, a decrease in trade payables of approximately €4,947,000, a decrease in related
party payables of approximately €813,000, a decrease in other payables of approximately €1,581,000, an increase in current
income taxes of approximately €20,000 and a decrease in other liabilities of approximately €1,658,000.
The net cash provided
in operating activities for the year ended December 31, 2010 reflects a net loss of approximately €3,466,000 partially offset
by depreciation and amortization of approximately €1,517,000. Changes in assets and liabilities included a decrease in trade
receivables of approximately €1,480,000, a decrease in related party receivables of approximately €1,025,000, an increase
in other receivables of approximately €1,012,000, an increase in advanced payments on purchases of property of approximately
€2,825,000, an increase in other assets of approximately €1,086,000, a decrease in trade payables of approximately €280,000,
an increase in related party payables of approximately €638,000, an increase in other payables of approximately €8,361,000,
a decrease in current income taxes of approximately €47,000 and an increase in other liabilities of approximately €2,593,000.
Cash Flows from Investing Activities
The net cash used in
investing activities for the year ended December 31, 2011 consist primarily of the cash outflow (approximately € 26,200,000)
for purchase of properties, plant and equipment basically due to the impact of the acquisition and the consolidation of the subsidiary
Terme di Galzignano for the first time in 2011.
The net cash used in
investing activities for the year ended December 31, 2010 consist primarily of the cash outflow (approximately € 15,000,000)
for purchase of properties, plant and equipment basically due to the impact of the acquisition and consolidation of the subsidiary
Enital.
Cash Flows from Financing Activities
Net cash provided by
financing activities for the year ended December 31, 2011 and the year ended December 31, 2010 was approximately €21,030,000
and €7,167,000, respectively.
Future Liquidity Needs
We have evaluated
our expected cash requirements over the next twelve months, which includes, but is 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 our control.
We are also planning, but as yet have no contractual commitments, to make acquisitions and whilst we wish to effect at least some
of these acquisitions through the issue of shares there can be no certainty that the vendors will accept such consideration and
we may wish, to in any case, to effect such acquisitions using cash. Further, we plan to put in place new borrowings to finance
the assets to be acquired or take-on existing borrowings secured on the assets planned to be acquired.
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 finance 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 being converted to 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, with the creation of additional
24 rooms, will take place in Q1 2014. It is expected that the first part of the development will cost additional €400,000
($520,000). A development loan is currently being negotiated for this amount. The terms of the loan are expected to be interest
only during the development period and then bullet repayment to be effected by the entering into of a longer term mortgage financing
secured on the property. At present no internal capital is expected to be required for this expansion. The last part of the development
will cost approximately €600,000 ($780,000).
The development of
the Green Park Hotel should start in the second half of 2014. It is expected that the Green Park Hotel conversion will cost approximately
€4.4 million ($ 5.7 million) to be spent over a period of 1½ years from commencement in 2014.
In each case no work,
beyond planning and negotiation of finance, has been undertaken and no work will start until the required financing has been agreed
and contracted with lending institutions.
Off-Balance Sheet Arrangements
We have no off-balance
sheet arrangements.
PROPERTIES
Our
principal executive offices are located at
Viale Bruno Buozzi 83, in Rome, Italy. Currently, we own and occupy approximately
5,000 square feet of office space.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table
sets forth, as of November 1, 2012, the beneficial ownership of our common stock by each executive officer and director, by each
person known by us to beneficially owning more than 5% of the our common stock and by the executive officers and directors as a
group. Except as otherwise indicated, all shares are owned directly and the percentage shown is based on 14,851,852 shares of common
stock issued and outstanding on November 1, 2012.
Name and address of beneficial owner
|
|
Amount of
beneficial ownership
|
|
|
Percent
of class
|
|
Antonio Conte
Via Cortina d’ ampezzo 221
Rome, Italy 00135
|
|
|
10,666,667
|
|
|
|
71.8
|
%
|
|
|
|
|
|
|
|
|
|
Maddalena Olivieri (wife of Antonio Conte)
Via Cortina d’ ampezzo 221
Rome, Italy 00135
|
|
|
1,185,185
|
|
|
|
8.0
|
%
|
|
|
|
|
|
|
|
|
|
Total all executive officers and directors (one person)
|
|
|
11,851,852
|
|
|
|
79.8
|
%
|
|
|
|
|
|
|
|
|
|
Other 5% Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paolo Conte
Via Partenope 2
Napoli, Italy
|
|
|
1,342,775
|
|
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
|
As used in this table,
“beneficial ownership” means the sole or shared power to vote, or to direct the voting of, a security, or the sole
or shared investment power with respect to a security (i.e., the power to dispose of, or to direct the disposition of, a security).
In addition, for purposes of this table, a person is deemed, as of any date, to have “beneficial ownership” of any
security that such person has the right to acquire within 60 days after such date.
The persons named above
have full voting and investment power with respect to the shares indicated. Under the rules of the Securities and Exchange
Commission, a person (or group of persons) is deemed to be a “beneficial owner” of a security if he or she, directly
or indirectly, has or shares the power to vote or to direct the voting of such security, or the power to dispose of or to direct
the disposition of such security. Accordingly, more than one person may be deemed to be a beneficial owner of the same
security. A person is also deemed to be a beneficial owner of any security, which that person has the right to acquire within 60
days, such as options or warrants to purchase our common stock.
DIRECTORS AND EXECUTIVE OFFICERS
The following table
sets forth information regarding the members of our board of directors and our executive officers and other significant employees.
All of our officers and directors were appointed on the effective date of the Acquisition. All of our directors hold office until
the next annual meeting of stockholders and their successors are duly elected and qualified. Executive officers serve at the request
of the board of directors.
Name
|
|
Age
|
|
Position(s)
|
Antonio Conte
|
|
47
|
|
Chief Executive Officer and Director
|
Giuseppe Cagiati
|
|
51
|
|
Chief Operating Officer
|
Domenico Ballo
|
|
50
|
|
Secretary
|
Giovanni Marraffa
|
|
36
|
|
VP of Control
|
Giancarlo Lanna
|
|
54
|
|
Chairman
|
Marco Milli
|
|
45
|
|
Director
|
Charles Gargano
|
|
78
|
|
Director
|
Dorothy Herman
|
|
59
|
|
Director
|
Set forth below is
a brief description of the background and business experience of our current executive officers and directors.
Antonio Conte
is the founder of
CR&P and has been the President and Chief Executive Officer of CR&P since 2006. Mr. Conte obtained a law degree from the
University Federico II of Naples, Italy. In 1991, Mr. Conte started trading and developing real estate properties in Italy. In
the early 2000s, Mr. Conte founded a cleaning and maintenance company that reached a total turnover of € 15 million. Mr. Conte
sold this company in 2006.
Giuseppe Cagiati
joined CR&P
in 2008 and serves as the Company’s General Manager. Prior to joining CR&P, Mr. Cagiati was Chief Technical Manager of
the Statuto Group, one of the largest Italian real estate market players, where he followed all the developing activities in central
and southern Italy.
Giovanni Marraffa
has over ten years
experience as financial controller in Italy and abroad. Mr. Marraffa has worked for Asea Brown Boveri, General Motors and Cap Gemini,
and Ernst & Young in Italy.
Domenico Ballo
is a professional
Chartered Accountant based in Naples, and has been working as a consultant in tax and fiscal matters for CR&P for over 10 years.
Giancarlo Lanna
has practiced law
since 1982. Mr. Lanna’s practice focuses primarily on the areas of business, employment and administrative law for private
clients, public institutions and listed companies. Mr. Lanna currently serves as a member of the Board of Governors for the Promotion
of International Commercial Arbitration and Conciliation in the Mediterranean, Vice Chairman of the Italy-China Foundation and
Director for SIBAC Co Ltd., a business consulting company. From 2005 to 2012, Mr. Lanna served as Chairman of Simest SpA, a financial
institution for the development and promotion of Italian enterprises abroad. Also, from 2003 to 2007, Mr. Lanna served as the Chairman
of Italian System for Business SpA, a company whose aim is to promote the internationalization of Italian companies.
Marco Milli
currently runs his own
legal practice in Rome and has more than 15 years of experience in academia as a professor and visiting professor in various Italian
and European universities. Mr. Milli currently serves as a director at the Fondazione Banca Nazionale delle Comunicaziono, or the
BNC Foundation, whose mission is to provide funding for studies, projects, actions and initiatives in various areas such as volunteering,
philanthropy, charity, environmental protection and quality and art conservation and enhancement of cultural heritage. Mr. Milli
graduated with a law degree from the University of Rome “La Sapienza.”
Charlie Gargano
served as Chairman
and Chief Executive Officer of the Empire State Development Corporation and Vice-Chairman of the Port Authority of New York and
New Jersey from 1995 to 2007. He was appointed to these positions by Governor George Pataki. Mr. Gargano has spent more than 20
years in public service at the Federal and State level, serving under two presidents as well as the administration of Governor
Pataki. He has an MBA and Bachelor's degree in Civil Engineering from Farleigh Dickinson University, as well as a Master's degree
in Civil Engineering from Manhattan College. Mr. Gargano has also received four Honorary Doctorate Degrees and holds professional
engineering licenses in New York, New Jersey, Connecticut, Oklahoma and Vermont.
Dorothy Herman
is the Chief Executive
Officer of Prudential Douglas Elliman, a real estate brokerage company, which is New York’s largest residential brokerage,
with over 4,000 real estate professionals and 675 employees working in more than 70 offices. Ms. Herman also controls a portfolio
of real estate services, including commercial and retail leasing and sales services, relocation and settling-in services, new development
and consulting services, property management services, PDE Title service and mortgage services as provided by DE Capital Mortgage.
Ms. Herman began her real estate career in Long Island where she purchased Prudential Long Island Realty in 1989. After turning
DE Capital Mortgage into a major brokerage operating in Long Island and the Hamptons, Ms. Herman purchased Douglas Elliman, one
of Manhattan’s largest brokerage firms, with her partner Howard Lorber in 2003. Since 2003, Prudential Douglas Elliman has
become one of the largest and fastest-growing real estate firms in New York as well as South Florida.
Director Qualifications
We have not formally
established any specific, minimum qualifications that must be met by each of our directors or specific qualities or skills that
are necessary for one or more of our members of the board of directors to possess. However, we generally evaluate the following
qualities: educational background, diversity of professional experience, knowledge of our business, integrity, professional reputation,
independence, wisdom and ability to represent the best interests of our stockholders.
We, along with our
officers and directors, believe that the above-mentioned attributes, along with the leadership skills and other experiences of
our board members described below, provide us with a diverse range of perspectives and judgment necessary to facilitate our goals.
Antonio Conte
We believe that Mr.
Conte, as founder of CR&P and majority shareholder of the Company, is well-qualified to serve on the board of directors of
the Company due to his success as an entrepreneur. Mr. Conte has proven to possess the vision as well as the strategic skills necessary
to assist the Company in achieving its growth targets in the future.
Giancarlo Lanna
We believe that Mr.
Lanna is well-qualified to serve on the board of directors of the Company as his background in the international business environment
as well as his experience in working for publicly-held companies will be of great support for the international development of
the Company.
Marco Milli
We believe that Mr.
Milli is well-qualified to serve on the board of directors of the Company as his contacts and well-established relationships in
the hospitality sector will be a great asset to the development of the Company.
Charles Gargano
We believe that Mr.
Gargano is well-qualified to serve on the board of directors of the Company as his past experience as Chairman and Chief Executive
Officer of the Empire State Development Corporation and Vice-Chairman of the Port Authority of New York and New Jersey demonstrates
his leadership and business development skills that will aid in the growth and development of the Company. Mr. Gargano has full
knowledge of U.S. GAAP.
Dorothy Herman
We believe that Ms.
Herman is well-qualified to serve on the board of directors of the Company due to her lengthy experience in the real estate industry
and, in particular, with regards to the process of real estate development and acquisitions in the U.S.
Terms of Directors
All directors hold
office for one-year terms until the election and qualification of their successors. Officers are elected by the board of directors
and serve at the discretion of the board.
There are no family
relationships among our directors and executive officers.
Involvement in Certain Legal Proceedings
To the best of our
knowledge, during the past ten years, none of the following occurred with respect to a present or former director or executive
officer: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer
either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being
subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order,
judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities;
and (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission
to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
Committees of the Board of Directors
Our board of directors
has two standing committees: an Audit Committee and a Nominating or Governance Committee. To date, our board of directors has not
established a Compensation Committee, in part because our Board of Directors believes that, at this stage of our development, the
functions of a Compensation Committee can be adequately performed by the members of the Board of Directors. We intend to establish
a Compensation Committee in the future.
Audit Committee:
Charles Gargano, Marco
Milli and Dottie Herman currently serve as members of the Audit Committee. Responsibilities of the Audit Committee include:
|
·
|
the appointment, compensation, retention,
replacement, and oversight of the work of the independent auditors and any other independent registered public accounting firm
engaged by us;
|
|
·
|
pre-approving all audit and permitted
non-audit services to be provided by the independent auditors or any other registered public accounting firm engaged by us, and
establishing pre-approval policies and procedures;
|
|
·
|
reviewing and discussing with the independent
auditors all relationships the auditors have with us in order to evaluate their continued independence;
|
|
·
|
setting clear hiring policies for employees
or former employees of the independent auditors;
|
|
·
|
obtaining a report, at least annually,
from the independent auditors describing (i) the independent auditor’s internal quality-control procedures and (ii) any material
issues raised by the most recent internal quality-control review, or peer review, of the audit firm, or by any inquiry or investigation
by governmental or professional authorities within the preceding five years respecting one or more independent audits carried out
by the firm and any steps taken to deal with such issues;
|
|
·
|
reviewing and approving any related party
transaction required to be disclosed pursuant to Item 404 of Regulation S-K promulgated by the SEC prior to us entering into such
transaction; and
|
|
·
|
reviewing with management, the independent
auditors, and our legal advisors, as appropriate, any legal, regulatory or compliance matters, including any correspondence with
regulators or government agencies and any employee complaints or published reports that raise material issues regarding our financial
statements or accounting policies and any significant changes in accounting standards or rules promulgated by the Financial Accounting
Standards Board, the SEC or other regulatory authorities.
|
Nominating and Corporate Governance
Committee:
Charles Gargano, Marco
Milli and Dottie Herman currently serve as members of the Nominating and Corporate Governance Committee. Responsibilities of the
Nominating and Corporate Governance Committee shall include:
|
·
|
establishing and articulating qualifications,
desired background and selection criteria for members of the board of directors;
|
|
·
|
developing policy regarding the consideration
of candidates for election or appointment to the board of directors that are recommended by stockholders of the Company and procedures
to be followed by stockholders in submitting such recommendations;
|
|
·
|
making recommendations to the board of
directors concerning all nominees for board membership, including the re-election of existing board members and the filling of
any vacancies;
|
|
·
|
evaluating and making recommendations
to the board of directors concerning the number and responsibilities of board committees and committee assignments, including recommending
committee chairs;
|
|
·
|
annually soliciting input from the board
of directors and conducting an annual review of the effectiveness of the operation of the board of directors and the board committees;
|
|
·
|
developing, recommending and periodically
reviewing a set of corporate governance principles applicable to the Company in accordance with applicable laws and regulations;
|
|
·
|
considering matters relating to the retirement
of board members;
|
|
·
|
developing an orientation program for
new directors, reviewing such programs on a periodic basis and recommending action to the board of directors, individual directors
and management, where appropriate;
|
|
·
|
conducting an annual self-assessment of
the performance of the Nominating or Governance Committee;
|
|
·
|
approving service by directors on any
additional for-profit boards, on public company audit committees and approving service by executive officers on any board; and
|
|
·
|
overseeing the implementation by management
of standards and procedures for detecting and deterring unethical conduct and promoting an organizational culture that encourages
a commitment to compliance with the law and periodically reviewing the efficacy of such standards and procedures.
|
Our Company currently
does not have any defined policy or procedural requirements for stockholders to submit recommendations or nominations for directors,
but we will define a nominating policy soon after the completion of the Acquisition. The board of directors believes that, given
the stage of our development, a specific nominating policy would be premature and of little assistance until our business operations
develop to a more advanced level. Our Company does not currently have any specific or minimum criteria for the election of nominees
to the board of directors and we do not have any specific process or procedure for evaluating such nominees. The board of directors
will assess all candidates, whether submitted by management or shareholders, and make recommendations for election or appointment.
A stockholder who wishes
to communicate with our board of directors may do so by directing a written request addressed to our CEO and director, Antonio
Conte, at the address appearing on the first page of this Current Report on Form 8-K.
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
The Company presently
not does have employment agreements with its named executive officer and it has not established a system of executive compensation
or any fixed policies regarding compensation of executive officers. The Company has not paid any cash and/or stock compensation
to its named executive officers.
Our Chief Executive
Officer holds substantial ownership in the Company and is motivated by a strong entrepreneurial interest in developing our operations
and potential revenue base to the best of his ability. As our business and operations expand and mature, we expect to
develop a formal system of compensation designed to attract, retain and motivate talented executives.
Summary Compensation Table
The Company has made
no compensation payments to any directors or officers.
Narrative Disclosure to the Summary
Compensation Table
Our named executive
officers do not currently receive any compensation from the Company for their service as officers of the Company.
Outstanding Equity Awards at Fiscal
Year-end Table
The Company has made
no equity awards to any executive officer.
Narrative Disclosure to the Director
Compensation Table
Our directors do not
currently receive any compensation from the Company for their service as members of the Board of Directors of the Company.
Securities Authorized for Issuance Under
Equity Compensation Plans
To date, we have not
adopted a stock option plan or other equity compensation plan and have not issued any stock, options, or other securities as compensation.
Stock Option Grants
We have not granted
any stock options to our executive officers or directors since our inception.
Disclosure of Commission Position of
Indemnification for Securities Act Liabilities
In accordance with
the provisions in our articles of incorporation, we will indemnify an officer, director, or former officer or director, to the
full extent permitted by law.
Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director,
officer or controlling person of us in the successful defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel
the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AND DIRECTOR INDEPENDENCE
Antonio Conte is a
shareholder in and a director of both the Company and CR&P and received further 10,625,000 shares of common stock issued by
the Company in exchange for his interest in CR&P. As detailed above Mr. Conte’s wife, Maddalena Olivieri, and his brother,
Mr. Paolo Conte, beneficially own common stock of the Company before the new shares of common stock were issued as part of the
Share Exchange Agreement.
Except as detailed
above with the exception of the Acquisition and the agreements discussed herein, none of our directors or executive officers, nor
any proposed nominee for election as a director, nor any person who beneficially owns, directly or indirectly, shares carrying
more than 5% of the voting rights attached to all of our outstanding shares, nor any members of the immediate family (including
spouse, parents, children, siblings, and in-laws) of any of the foregoing persons has any material interest, direct or indirect,
in any transaction over the last two years or in any presently proposed transaction which, in either case, has or will materially
affect us.
LEGAL PROCEEDINGS
The Company is not
party to any legal proceedings or disputes at the time of this Current Report on Form 8-K.
MARKET PRICE OF AND DIVIDENDS ON THE
REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is
currently quoted on the OTC Bulletin Board (“OTCBB”), which is sponsored by FINRA. The OTCBB is a network of security
dealers who buy and sell stock. The dealers are connected by a computer network that provides information on current “bids”
and “asks”, as well as volume information. As of the date of the Acquisition, our shares were quoted on the OTCBB under
the symbol “SOST.OB.”
The following table
sets forth the range of high and low bid quotations for our common stock for each of the periods indicated as reported by the OTCBB.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent
actual transactions.
Fiscal Year Ending December
31, 2011
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
High $
|
|
|
|
Low $
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Fiscal Year Ending December
31, 2010
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
High $
|
|
|
|
Low $
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Transfer Agent
Our transfer agent
is Empire Stock Transfer Inc., located at 7251 West Lake Mead Boulevard, Suite 300 Las Vegas, NV 89128-8351. Phone:
(702)-974-1444.
RECENT SALES OF UNREGISTERED SECURITIES
Reference is made to
the disclosure set forth under Item 3.02 of this Current Report, which disclosure is incorporated by reference into this section.
DESCRIPTION OF REGISTRANT’S SECURITIES
TO BE REGISTERED
We have 90,000,000
common shares with a par value of $0.001 per share of common stock authorized, of which 39,123,563
shares were outstanding
after the events description in Item 1.01 above.
Common Stock
Holders of common stock
have the right to cast one vote for each share of stock in his or her own name on the books of the corporation, whether represented
in person or by proxy, on all matters submitted to a vote of holders of common stock, including the election of directors. There
is no right to cumulative voting in the election of directors. Except where a greater requirement is provided by statute
or by the Articles of Incorporation, or by the Bylaws, the presence, in person or by proxy duly authorized, of the holder or holders
of a majority of the outstanding shares of the our common voting stock shall constitute a quorum for the transaction of business.
The vote by the holders of a majority of such outstanding shares is also required to effect certain fundamental corporate changes
such as liquidation, merger or amendment of the Company’s Articles of Incorporation.
Dividends
There are no restrictions
in our articles of incorporation or bylaws that restrict us from declaring dividends.
We have not declared
any dividends, and we do not plan to declare any dividends in the foreseeable future.
Pre-emptive Rights
Holders of common stock
are not entitled to pre-emptive or subscription or conversion rights, and there are no redemption or sinking fund provisions applicable
to our common stock. All outstanding shares of common stock are, and the shares of common stock offered hereby will be when issued,
fully paid and non-assessable.
Share Purchase Warrants
We have not issued
and do not have outstanding any warrants to purchase shares of our common stock.
Options
We have not issued
and do not have outstanding any options to purchase shares of our common stock.
Convertible Securities
We have not issued
and do not have outstanding any securities convertible into shares of our common stock or any rights convertible or exchangeable
into shares of our common stock.
Preferred Stock
We have 10,000,000
shares of preferred stock authorized with a par value of $0.001 per share, of which no
shares are outstanding as of
June 30, 2012.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Certificate of
Incorporation allows us to indemnify our present and former officers and directors and other personnel against liabilities and
expenses arising from their service to the full extent permitted by Delaware law. The persons indemnified include our (i) present
or former directors or officers, (ii) any person who while serving in any of the capacities referred to in clause (i) who served
at our request as a director, officer, partner, proprietor, trustee, employee, agent or similar functionary of another foreign
or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, and (iii) any person nominated
or designated by (or pursuant to authority granted by) our board of directors or any committee thereof to serve in any of the capacities
referred to in clauses (i) or (ii).
FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Reference is made to
the disclosure set forth under Item 9.01 of this Current Report on Form 8-K, which disclosure is incorporated by reference into
this section.