Item 1. Financial Statements
SOUTHERN STATES SIGN COMPANY
CONSOLIDATED
BALANCE SHEETS
AS OF MARCH 31, 2013 & DECEMBER 31, 2012
|
€’000
|
|
March
31,
2013
|
|
|
December
31,
2012
|
|
|
|
Unaudited
|
|
|
Audited
|
|
ASSET
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
€
|
115
|
|
|
€
|
441
|
|
Net receivables
|
|
|
4,935
|
|
|
|
4,701
|
|
Related
parties receivables
|
|
|
22,240
|
|
|
|
22,043
|
|
VAT
Tax receivables
|
|
|
1,034
|
|
|
|
1,628
|
|
Other
current assets
|
|
|
346
|
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
28,670
|
|
|
|
29,153
|
|
|
|
|
|
|
|
|
|
|
Non - Current Assets:
|
|
|
|
|
|
|
|
|
Net
properties, plant and equipment
(Including
Capital
Leased
properties
€
36,486
and
€
36,805
respectively)
|
|
|
68,621
|
|
|
|
69,171
|
|
Goodwill
|
|
|
1,541
|
|
|
|
1,541
|
|
Other
non-current
assets
(Including
Related
Parties
receivables
€
8,890
for
2013
and
2012)
|
|
|
10,692
|
|
|
|
10,535
|
|
Total
non - current assets
|
|
|
80,854
|
|
|
|
81,247
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
€
|
109,524
|
|
|
€
|
110,400
|
|
LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Bank
overdrafts
|
|
€
|
2,908
|
|
|
€
|
2,970
|
|
Current maturities
of long term loans and capital leases
|
|
|
11,335
|
|
|
|
11,221
|
|
Trade
payables
|
|
|
8,524
|
|
|
|
7,774
|
|
Related
parties payables
|
|
|
7,000
|
|
|
|
7,014
|
|
Others
current liabilities
|
|
|
3,775
|
|
|
|
4,232
|
|
Total
current Liabilities
|
|
|
33,542
|
|
|
|
33,211
|
|
Non - current liabilities:
|
|
|
|
|
|
|
|
|
Long
term loans and capital leases
|
|
|
41,924
|
|
|
|
42,188
|
|
Shareholder's
loans
|
|
|
230
|
|
|
|
626
|
|
Other
non-current liabilities
|
|
|
70
|
|
|
|
70
|
|
Total
non - current Liabilities
|
|
|
42,224
|
|
|
|
42,884
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
27
|
|
|
|
27
|
|
Additional
Paid in Capital
|
|
|
26,059
|
|
|
|
26,059
|
|
Retained
earnings/(Accumulated loss)
|
|
|
6,822
|
|
|
|
7,359
|
|
Equity attributable
to owners of Southern States Sign Company
|
|
|
32,908
|
|
|
|
33,445
|
|
Non-Controlling
interests in the consolidated subsidiaries
|
|
|
850
|
|
|
|
860
|
|
Total
Stockholders' Equity
|
|
|
33,758
|
|
|
|
34,305
|
|
Total
Liabilities and Stockholders' Equity
|
|
€
|
109,524
|
|
|
€
|
110,400
|
|
SOUTHERN
STATES SIGN COMPANY
|
CONSOLIDATED STATEMENTS
OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2013 & 2012
|
|
|
|
|
€’000, except per share amounts
|
|
Three Months
Ended
|
|
|
Three Months
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
Revenue
from operations
|
|
€
|
840
|
|
|
€
|
1,323
|
|
Direct operating
and selling, general and administrative costs
|
|
|
|
|
|
|
|
|
Direct
operating costs
|
|
|
68
|
|
|
|
144
|
|
Selling,
general and administrative costs
|
|
|
286
|
|
|
|
69
|
|
Amortization
and depreciation
|
|
|
554
|
|
|
|
764
|
|
Total
direct operating, selling, and administrative costs
|
|
|
908
|
|
|
|
977
|
|
Operating
Profit/(Loss)
|
|
|
(68
|
)
|
|
|
346
|
|
Interest
income
|
|
|
103
|
|
|
|
|
|
Interest
expenses
|
|
|
577
|
|
|
|
447
|
|
Other
income
|
|
|
|
|
|
|
7
|
|
Profit/(Loss)
from continuing operations, before income taxes
|
|
|
(542
|
)
|
|
|
(94
|
)
|
Income
taxes
|
|
|
|
|
|
|
37
|
|
Profit/(Loss)
from continuing operations, net of income taxes
|
|
|
(542
|
)
|
|
|
(131
|
)
|
Net loss from operations
of discontinued operations, after taxes
|
|
|
|
|
|
|
15
|
|
Net
income on disposal of discontinued operations, after taxes
|
|
|
-
|
|
|
|
3,009
|
|
Net
profit/(loss) from discontinued operations
|
|
|
-
|
|
|
|
3,024
|
|
Consolidated
net profit/(loss) for the period
|
|
|
(542
|
)
|
|
|
2,893
|
|
Less
net loss attributable to non-controlling interests in the consolidated subsidiaries
|
|
|
10
|
|
|
|
19
|
|
Net profit/(loss)
attributable to owners of Conte Rosso & Partners S.r.l
|
|
|
(532
|
)
|
|
|
2,912
|
|
|
|
|
|
|
|
|
|
|
Profit/(Loss) per share of Common
Stock
|
|
|
|
|
|
|
|
|
Loss) from continuing
operations
|
|
€
|
(0.01
|
)
|
|
€
|
(0.00
|
)
|
Profit from discontinued
operations
|
|
|
-
|
|
|
€
|
0.09
|
|
Net profit/(loss)
|
|
€
|
(0.01
|
)
|
|
€
|
0.09
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
40,151,261
|
|
|
|
33,101,852
|
|
|
|
|
|
|
|
|
|
|
SOUTHERN
STATES SIGN COMPANY
|
STATEMENT
OF COMPREHENSIVE INCOME/(LOSS)
|
|
€’000
|
|
Three Months Ended
|
|
|
Three Months
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
for the period
|
|
|
(532
|
)
|
|
|
2,912
|
|
Other comprehensive income
(loss)
|
|
|
|
|
|
|
|
|
Foreign currency
Translation differences
|
|
|
(5
|
)
|
|
|
0
|
|
Total comprehensive income
(loss) for the period
|
|
|
(537
|
)
|
|
|
2,912
|
|
|
|
|
|
|
|
|
|
|
SOUTHERN STATES
SIGN COMPANY
Consolidated
Statement of Stockholders’ Equity (Deficit)
(unaudited)
|
|
Common
Stock
|
|
|
Additional
|
|
|
Retained
|
|
|
Equity
attributable
to non-
controlling
|
|
|
TOTAL
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid
In Capital
|
|
|
earnings
|
|
|
interests
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2011
|
|
|
33,101,852
|
|
|
€
|
25
|
|
|
€
|
25,978
|
|
|
€
|
(936
|
)
|
|
€
|
(3
|
)
|
|
€
|
25,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued to Consultants
|
|
|
200,000
|
|
|
|
1
|
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Southern State Sign Company
|
|
|
6,849,409
|
|
|
|
1
|
|
|
|
67
|
|
|
|
-
|
|
|
|
-
|
|
|
|
68
|
|
Change
in Percentage of Controlling Interests
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
136
|
|
|
|
895
|
|
|
|
1,031
|
|
Net
profit/(loss) for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,153
|
|
|
|
(32
|
)
|
|
|
8,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2012
|
|
|
40,151,261
|
|
|
€
|
27
|
|
|
€
|
26,059
|
|
|
€
|
7,359
|
|
|
€
|
860
|
|
|
€
|
34,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(532
|
)
|
|
|
(10
|
)
|
|
|
(542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
(5
|
)
|
Balance
at March 31, 2013
|
|
|
40,151,261
|
|
|
€
|
27
|
|
|
€
|
26,059
|
|
|
€
|
6,822
|
|
|
€
|
850
|
|
|
€
|
33,758
|
|
SOUTHERN
STATES SIGN COMPANY
|
CONSOLIDATED STATEMENTS
OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2013 & 2012
|
€’000
|
|
Three Months
Ended
|
|
|
Three
Months
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
|
Net Income/(loss)
|
|
€
|
(543
|
)
|
|
€
|
2,893
|
|
Net loss from
operations on discontinued operations
|
|
|
-
|
|
|
|
(15
|
)
|
Net
gain from discontinued operations
|
|
|
-
|
|
|
|
(3,009
|
)
|
Net Income/(loss) from continuing
operations
|
|
|
(543
|
)
|
|
|
(131
|
)
|
Depreciation
and amortization of non-current assets
|
|
|
554
|
|
|
|
764
|
|
Other
non-cash adjustments
|
|
|
(665
|
)
|
|
|
1,018
|
|
Cash flows from operations
before changes in assets and liabilities
|
|
|
(654
|
)
|
|
|
1,651
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Change in trade
receivables
|
|
|
(236
|
)
|
|
|
1,388
|
|
Change in related
parties receivables
|
|
|
(198
|
)
|
|
|
(1,173
|
)
|
Change in other
receivables
|
|
|
2
|
|
|
|
(2
|
)
|
Change in advance
payment on purchase and other current assets
|
|
|
(6
|
)
|
|
|
-
|
|
Change in other
assets
|
|
|
(5
|
)
|
|
|
(58
|
)
|
Change in trade
payables
|
|
|
750
|
|
|
|
(7,189
|
)
|
Change in related
parties payables
|
|
|
232
|
|
|
|
22
|
|
Change in other
payables
|
|
|
58
|
|
|
|
899
|
|
Change in VAT
taxes receivable
|
|
|
78
|
|
|
|
(286
|
)
|
Change in other
liabilities
|
|
|
-
|
|
|
|
6,904
|
|
Net
cash provided by/(used in) operating activities of discontinued operations
|
|
|
-
|
|
|
|
3,754
|
|
Net
cash provided by/(used in) Operating Activities (A)
|
|
|
21
|
|
|
|
5,910
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
|
|
|
Payment for
purchase of properties, plant and equipment
|
|
|
-
|
|
|
|
(968
|
)
|
Proceeds from
sale of associates and other company
|
|
|
9
|
|
|
|
6
|
|
Proceeds from
sale of properties, plant and equipment
|
|
|
550
|
|
|
|
|
|
Other investing
change
|
|
|
(299
|
)
|
|
|
(10
|
)
|
Net
cash provided by investing activities of discontinued operations
|
|
|
-
|
|
|
|
(2,274
|
)
|
Net
cash provided by/(used in) investing activities (B)
|
|
|
260
|
|
|
|
(3,246
|
)
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
|
|
|
Net reimbursements/borrowings
from bank overdrafts
|
|
|
(62
|
)
|
|
|
(42
|
)
|
Net proceeds
from/repayment of issuance of long-term debt
|
|
|
(149
|
)
|
|
|
(6,172
|
)
|
Net proceeds
from/repayment of issuance of shareholders loan
|
|
|
(396
|
)
|
|
|
1,351
|
|
Net
cash provided by/(used in) financing activities of discontinued operations
|
|
|
-
|
|
|
|
2,047
|
|
Net
cash provided by Financing Activities (C )
|
|
|
(607
|
)
|
|
|
(2,816
|
)
|
Net
Increase/(decrease) in Cash and Cash Equivalents (A+B+C)
|
|
|
(326
|
)
|
|
|
(152
|
)
|
Cash and cash equivalents
at beginning of the year
|
|
|
441
|
|
|
|
312
|
|
Cash and cash equivalents
at end of the year
|
|
€
|
115
|
|
|
€
|
160
|
|
SOUTHERN STATES
SIGN COMPANY
Notes to unaudited
Consolidated Financial Statements
For the three
month periods ended March 31, 2013 and 2012
(Euros, amounts
in thousands, unless otherwise indicated)
NOTE 1. ORGANIZATION
Southern States Sign
Company (“SOST”) is a corporation incorporated in the state of Nevada. SOST operates through its wholly owned subsidiary,
Conte Rosso & Partners S.r.l. (“CR&P,” and together with SOST, the “Company”), which is a company
incorporated in Italy. Operations are carried out through its subsidiary, CR&P, and mainly consist of investments in the hospitality
industry.
On November 1, 2012,
the Company entered into the Exchange Agreement with CR&P, pursuant to which the CR&P Shareholders transferred all of
the issued and outstanding capital stock of CR&P to the Company in exchange for 21,250,000 newly issued shares of our common
stock, resulting in CR&P becoming a wholly owned subsidiary of the Company. The transaction was accounted for as a reverse
acquisition into a publicly traded shell corporation, and accordingly, no goodwill was recorded. As a result of the reverse acquisition,
the historical financial statements of SOST for the periods prior to the date of the transaction are not presented.
As of March 31, 2013,
the consolidated operating subsidiaries are the following (those entities which are indented represent subsidiaries of the entity
under which they are indented):
Subsidiaries
|
|
|
|
|
% of voting
|
|
|
|
|
|
Name of Company
|
|
%
Ownership
|
|
|
capital
of subsidiary
owned by its parent
|
|
|
Location
|
|
Principal
activity
|
Southern States Sign Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A. Conte Rosso & Partners S.r.l.
|
|
|
100.00
|
|
|
|
100.00
|
|
|
Italy
|
|
Hospitality Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1. Aral Immobiliare S.r.l.*
|
|
|
100.00
|
|
|
|
100.00
|
|
|
Italy
|
|
Hospitality Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2. C.R.&P. Service S.c.a.r.l.
|
|
|
35.75
|
|
|
|
35.75
|
|
|
Italy
|
|
Group’s Exclusive financial services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. Galzignano Terme Golf &
Resort S.p.A.
|
|
|
100.00
|
|
|
|
100.00
|
|
|
Italy
|
|
Hospitality business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Masseria Santo
Scalone Hotel & Resort S.r.l.
|
|
|
100.00
|
|
|
|
100.00
|
|
|
Italy
|
|
Hospitality business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Primesint S.r.l.
|
|
|
70.00
|
|
|
|
70.00
|
|
|
Italy
|
|
Investment Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* On March 20, 2013, Aral Immobiliare,
S.r.l., a wholly owned subsidiary of the Company, consummated its merger with Ripa Hotel & Resort, S.r.l., formerly a wholly
owned subsidiary of CR&P. This merger had no impact on the consolidated financial statements.
NOTE
2.
Summary of significant accounting policies
Basis of consolidation
All majority-owned
subsidiaries in which CR&P has both voting share and management control are consolidated. All significant intercompany accounts
and transactions are eliminated. Subsidiaries over which control is achieved through other means, such as stockholder agreements,
are also consolidated, even if less than 51% of voting capital is held. The equity attributable to non-controlling interests in
subsidiaries is shown separately in the consolidated financial statements.
Basis of presentation
The consolidated financial
statements for the three months period ended March 31, 2013, unaudited, and for the fiscal year ended 2012, audited, are prepared
in accordance with generally accepted accounting principles generally accepted in the United States of America (“US GAAP”).
The Euro is the functional
currency of all companies included in these consolidated financial statements.
The amounts presented
have been rounded to the nearest thousand.
Fair value
We disclose the
fair value of our financial assets and liabilities based on observable market information where available, or on market participant
assumptions. These assumptions which are subjective in nature involve matters of judgment, and, therefore, fair values cannot
always be determined with precision. Fair value is defined as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date (an exit price). “US GAAP”
establishes a valuation hierarchy for prioritizing the inputs and the hierarchy places greater emphasis on the use of observable
market inputs and less emphasis on unobservable inputs. When determining fair value, an entity is required to maximize the use
of observable inputs and minimize the use of unobservable inputs. The three levels of the hierarchy are as follows:
Level
One—Fair values based on unadjusted quoted prices in active markets for identical assets and liabilities;
Level
Two—Fair values based on quoted market prices for similar assets and liabilities in active markets, quoted prices in inactive
markets for identical assets and liabilities, and inputs other than quoted market prices that are observable for the asset or
liability;
Level
Three—Fair values based on inputs that cannot be corroborated by observable market data and reflect the use of significant
management judgment. Valuation techniques could include the use of discounted cash flow models and similar techniques.
We utilize the market
approach and income approach for valuing our financial instruments. The market approach utilizes prices and information generated
by market transactions involving identical or similar assets and liabilities and the income approach uses valuation techniques
to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). For instances in which
the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been
determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of
the significance of a particular input to the fair value measurement requires judgment and may affect the classification of fair
value assets and liabilities within the fair value hierarchy.
The carrying values
of cash equivalents, accounts receivable, financing receivable – current, accounts payable and current maturities of long-term
debt approximate fair value due to the short-term nature of these items and their close proximity to maturity.
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 our acquisition agreements.
Cash and cash equivalents
Cash and cash equivalents
comprise cash balances, cash on current accounts with banks, bank deposits and other highly liquid short-term investments with
original maturities of less than three months.
Accounts receivable & Allowance
for doubtful accounts
Accounts receivable
represents trade obligations from customers that are subject to normal trade collection terms, without discounts. The Company
periodically evaluates the collectability of its accounts receivable and considers the need to record or adjust an allowance for
doubtful accounts based upon historical collection experience and specific customer information. Actual amounts could vary from
the recorded estimates. The Company has determined that as of March 31, 2013 and December 31, 2012, € 0 is the allowance
for doubtful accounts that was required. The Company does not require collateral to support customer receivables.
Investments
Investments in unconsolidated
affiliates over which we exercise significant influence, but do not control, including joint ventures, are accounted for using
the equity method.
Investments in unconsolidated
affiliates over which we are not able to exercise significant influence are accounted for under the cost method.
Property, plant and equipment
Property, plant and
equipment are stated at acquisition cost less accumulated depreciation and adjustments for impairment losses. Property, plant
and equipment also includes assets under construction and plant and equipment awaiting installation.
Subsequent expenditures
are capitalized only when they increase the future economic benefits embodied in an item of property, plant and equipment. All
other expenditures are recognized as expenses in the consolidated statement of income as incurred.
Capitalization ceases
when construction is interrupted for an extended period or when the asset is substantially complete.
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.
Discontinued operations
In connection with
the strategy of focusing on hotel ownership, at the end of September, 2012 we divested all of our non-hotel assets to a related
party at cost.
The realized value
of these assets is higher than the net asset carrying value.
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 capital. The Company recognizes the asset and associated liability
on its balance sheet. Capital are capitalized at the beginning of the lease at the lower of the fair value of the leased property
and the present value of minimum lease payments. Each installment of the lease is apportioned between the liability and finance
charges so as to achieve an equal reduction in capital due for each payment made at constant rate on the remaining financial balances.
Derivative financial instruments
The Company uses derivative
financial instruments principally for the management of exposure to variable interest rates on long-term financing. All derivative
financial instruments are classified as assets or liabilities and are accounted for at trade date. The Company measures all derivative
financial instruments based on fair values derived from market prices of the instruments. Changes in the fair value of a derivative
that is significant and that is designated and qualifies as a fair value hedge, along with the loss or gain on the hedged asset
or liability, are recorded in the income statement.
As of December 31,
2012 there are no derivative instruments. During the 2012 there was only one derivative instrument hedging the risk of variable
interest rates (an “interest rate cap”), the notional amount of which was € 4 million. This derivative instrument
hedges the risk from change of interest rate on a mortgage loan facility with “bullet” repayments originally of €
8 million of which € 6.6 million is outstanding. This derivative was divested as part of our plan to focus on hotels only
as of September 30, 2012.
Shareholders’ loans
Shareholders’
loans to the Company are all non-interest bearing. Italian law provides that the shareholders’ loans to a corporation ("S.r.l.")
are not preferred and their repayment is subordinated to other categories of debt. As a result all shareholder loans are classified
as non-current liabilities.
Severance indemnity fund
According to Italian
accounting principles reflecting local law and applicable employment contracts, certain post-employment benefits accrue during
the period of employment. Under U.S. GAAP, post-employment benefits are defined either as de fined contribution plans or defined
benefit plans.
In defined contribution
plans, the Company's obligation is limited to the payment of contributions to the Government or to a fund. Defined benefit plans
are pension, insurance and healthcare programs which cover the Company's obligation, even implicitly, to provide the benefits
due to former employees. The liabilities associated with defined benefit plans are determined on the basis of actuarial assumption
(discounting) and accrued in the financial statements over the employment period required to obtain the benefits.
The severance indemnity
fund required by Italian law is a liability similar to a defined benefit plan, which, however, according to Italian accounting
principles, is not subject to discounting. Given the small number of Company employees, any difference between the present provisions
in the financial statements prepared in accordance with Italian GAAP and discounted value of these benefits is considered to be
immaterial.
Revenue Recognition
Our revenues are derived from rent we receive
according to rental agreements we have in place with a Hotel Management Company. The majority of our rent is fixed and payable
monthly. We recognize additional revenue that is variable based on a percentage of the operating profit of our rented hotels.
Taxes
Income taxes
We account for income
taxes to recognize the amount of taxes payable or refundable for the current year and the amount of deferred tax assets and liabilities
resulting from the future tax consequences of differences between the financial statements and tax basis of the respective assets
and liabilities. We recognize the financial statement effect of a tax position when, based on the technical merits of the uncertain
tax position, it is more likely than not to be sustained on a review by taxing authorities. These estimates are based on judgments
made with currently available information. We review these estimates and make changes to recorded amounts of uncertain tax positions
as facts and circumstances warrant.
We are subject to
income taxes under the tax laws of Italy. The Company accounts for uncertainty in income taxes in accordance with Topic 740, “Income
Taxes,” of the Accounting Standards Codification (“ASC 740”). ASC 740 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements in accordance with generally accepted accounting principles
and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in an income tax return. ASC 740 also provides guidance on recognition, classification,
interest and penalties, accounting in interim periods, disclosure and transition. During the years ended December 31, 2012 and
2011, the Company recognized no adjustments for uncertain tax positions.
The Company recognizes
interest and penalties relating to uncertain tax positions in income tax expense. There is no interest or penalties relating to
tax positions during the periods ended March 31, 2013 and December 31, 2012.
The Company is also
subject to examination in Italy where it has filed tax returns for the years 2009 through 2011.
Stockholder’s equity
As of March 31, 2013
the share capital of CR&P is represented by 40,151,261 outstanding shares. Mr. Antonio Conte, the former Chief Executive Officer
of the Company and his family contributed 87.14% of the share capital of CR&P.
As of December 31,
2012, after the reverse merge with the shell company Southern State Sign Company, Inc. consummated on November 1, 2012, the share
capital of CR&P is represented by 39,526,261 outstanding shares.
NOTE 3.
Related
parties receivables and payables
Related parties
current receivables and payables relate to the former CEO and majority shareholder, Antonio Conte, both directly and
indirectly. As of March 31, 2013 the amounts of related parties current receivables and payables mainly refers to CR&P
Service, S.c.a.r.l., a subsidiary of the Company incorporated in 2012 that manages the cash facilities of the Company with
regards to cash pooling as well as the cash pooling for other companies owned by Mr. Conte that are not consolidated in
CR&P (related parties). During the fiscal year 2012 and the three month period ended March 31, 2013, the operations of
CR&P Service, S.c.a.r.l. did not have any material impact on the consolidated statement of stockholders’ equity
and statement of operations of the Company. The amounts shown as non-current receivables as of March 31, 2013 and December
31, 2012 relate to a receivable from Masoledo, S.r.l., owned by Mr. Conte, in connection with the sale of the non-hotel
business.
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, included
in continuing operations, comprises :
€’000
Property,
plant and equipment
|
|
March
31, 2013
|
|
|
December
31, 2012
|
|
|
|
|
|
|
|
|
|
|
Hotel Ripa building,
plant and equipment
|
|
€
|
42,654
|
|
|
€
|
42,654
|
|
Terme di Galzignano golf, building,
plant and equipment
|
|
|
39,229
|
|
|
|
39,229
|
|
Via Buozzi, Rome, building
|
|
|
3,300
|
|
|
|
3,300
|
|
San Giuliano Milanese (Milan),
Via Benaco, building
|
|
|
555
|
|
|
|
555
|
|
Ostuni (BR) - Hotel Masseria
Santo Scalone building
|
|
|
5,017
|
|
|
|
5,013
|
|
Less accumulated
depreciation
|
|
|
(22,134
|
)
|
|
|
(21,580
|
)
|
Total,
net
|
|
€
|
68,621
|
|
|
€
|
69,171
|
|
The properties owned
by the Company as of March 31, 2013 has been recently tested for impairment, by committing a specialized appraisal firm, which
provided updated appraisals of their fair value. The methodologies applied in those appraisals mainly consists in the market value
method and the discounted future cash flows method. The appraisals show fair value amounts of each property significantly higher
than the relevant carrying amount.
NOTE 5. MAJOR ACQUISITIONS AND DIVESTMENTS
Masseria Santo Scalone Hotel &
Resort S.r.l.
In line with the strategy
to expand operations in the hospitality area, on September 29, 2012 the Company acquired 100.00% of Masseria Santo Scalone Hotel
& Resort S.r.l. (“Masseria”) from a related party (Masoledo, S.r.l., owned by Mr. Conte and his family). The cost
of acquisition of Masseria was €23,266 million. It was paid with cash of €4.90 million and assumption of €18,276
million of debt.
The primary asset
of Masseria is a resort spa located in Ostuni, Pulia, in the south of Italy. The complex is restructuring.
The balance sheet
effects of the acquisition are summarized below:
The purchase price allocation for the
acquisition of Masseria Santo Scalone Hotel & Resort S.r.l.. is as follows;
€’000
|
|
May 29, 2012
|
|
Current maturity
of long-term debt
|
|
€
|
2,898
|
|
Related parties payable
|
|
|
300
|
|
Cash payments
|
|
|
10
|
|
Total purchase price
|
|
€
|
3,208
|
|
|
|
|
|
|
Allocated to:
|
|
|
|
|
Property, plant and equipment
|
|
€
|
4,903
|
|
Net working capital
|
|
|
(1,705
|
)
|
Cash
|
|
|
10
|
|
Total
|
|
€
|
3,208
|
|
There is no Goodwill recognized on the
acquisition of Masseria.
Divestment of all non-hospitality businesses
In September 2012,
the Company divested all of it non-hotel assets to a related party company controlled by the shareholders. The total assets and
liabilities divested was $ 52.9 million and $ 44.7 million, respectively.
NOTE 6. GOODWILL
The table below shows the breakdown of
goodwill related to continuing operations:
€’000
|
|
Owned
and leased hotel
|
|
|
Others
owned properties
|
|
|
Total
|
|
Balance as of January 1, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill,
net
|
|
|
1,149
|
|
|
|
392
|
|
|
|
1,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No Activity
during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December
31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill,
net
|
|
|
1,149
|
|
|
|
392
|
|
|
|
1,541
|
|
Balance as of January 1,
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill,
net
|
|
|
1,149
|
|
|
|
392
|
|
|
|
1,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No Activity
during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31,
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill,
net
|
|
|
1,149
|
|
|
|
392
|
|
|
|
1,541
|
|
In the three month
period ended March 31, 2013 and in the fiscal year ended December 31, 2012, the Company did not have any new goodwill or any impairment
on existing goodwill.
NOTE 7. OTHER NON-CURRENT ASSETS
The table below shown the breakdown of
other non-current assets, related to continuing operations:
€’000
|
|
March
31, 2013
|
|
|
December
31,
2012
|
|
Related parties
non-current receivables
|
|
€
|
8,890
|
|
|
€
|
8,890
|
|
Investment in other companies
|
|
|
4
|
|
|
|
13
|
|
Accruals and deferred costs
|
|
|
380
|
|
|
|
375
|
|
Other
intangible assets
|
|
|
1,418
|
|
|
|
1,257
|
|
Other non-current assets
|
|
€
|
10,692
|
|
|
€
|
10,535
|
|
NOTE 8. BANK OVERDRAFTS AND LONG-TERM
DEBT
Amounts of financial debt due to non-related
parties are:
€’000
Mortgages & Capital Leases
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
Mortgage loan on
property
|
|
€
|
23,862
|
|
|
€
|
23,836
|
|
Leasing
|
|
|
29,397
|
|
|
|
29,573
|
|
Total
|
|
€
|
53,259
|
|
|
€
|
53,409
|
|
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
Current portion
of debt
|
|
€
|
11,335
|
|
|
€
|
11,221
|
|
Long term
debt
|
|
|
41,924
|
|
|
|
42,188
|
|
Total
|
|
€
|
53,259
|
|
|
€
|
53,409
|
|
The following tables
sets out the main terms and conditions and the outstanding balances as of March 31, 2013 and December 31, 2012 of the financial
debts:
Outstanding bank overdrafts
as of March 31, 2013 and December
31, 2012
€’000
Company
|
|
Type of debt
|
|
Object
|
|
Collateral
|
|
|
Outstanding
balance as of March 31, 2013
|
|
|
Outstanding
balance as of Dec. 31, 2012
|
|
CONTE ROSSO &
PARTNERS, S.R.L.
|
|
BANK OVERDRAFT
|
|
Cash facility
|
|
|
-
|
|
|
|
2,000
|
|
|
|
2,051
|
|
TERME DI GALZIGNANO, S.r.l.
|
|
BANK OVERDRAFT
|
|
Cash facility
|
|
|
-
|
|
|
|
908
|
|
|
|
919
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
|
2,908
|
|
|
|
2,970
|
|
Outstanding non-current loans
as of March 31, 2013 and December
31, 2012
€’000
Company
|
|
Type
of debt
|
|
Object
|
|
Collateral
|
|
Outstanding
balance as of March 31, 2013
|
|
|
Outstanding
balance as of Dec. 31, 2012
|
|
CONTE
ROSSO & PARTNERS, S.R.L.
|
|
CAPITAL
LEASE
|
|
Building
purchase
|
|
Headquarter
property, via B.Buozzi, Rome, Italy
|
|
|
2,640
|
|
|
|
2,665
|
|
CONTE
ROSSO & PARTNERS, S.R.L.
|
|
UNSECURED
LOAN
|
|
Cash
facility
|
|
-
|
|
|
608
|
|
|
|
688
|
|
MASSERIA
SANTO SCALONE, S.r.l.
|
|
MORTGAGE
LOAN
|
|
Building
purchase
|
|
Hotel
and land property, Santo Scalone, Ostuni (Brindisi), Italy
|
|
|
2,388
|
|
|
|
2,388
|
|
MASSERIA
SANTO SCALONE, S.r.l.
|
|
MORTGAGE
LOAN
|
|
Building
purchase
|
|
Hotel
and land property, Santo Scalone, Ostuni (Brindisi), Italy
|
|
|
510
|
|
|
|
510
|
|
PRIMESINT,
S.r.l.
|
|
CAPITAL
LEASE
|
|
Building
purchase
|
|
Building,
Via Benaco, San Giuliano (Milan), Italy
|
|
|
355
|
|
|
|
342
|
|
ARAL
IMMOBILIARE, S.r.l.
|
|
CAPITAL
LEASE
|
|
Building
purchase
|
|
Hotel
property in Rome, Italy
|
|
|
26,437
|
|
|
|
26,713
|
|
ARAL
IMMOBILIARE, S.r.l.
|
|
MORTGAGE
LOAN
|
|
Building
purchase
|
|
Building,
Porto Cervo (Olbia), Italy
|
|
|
438
|
|
|
|
438
|
|
TERME
DI GALZIGNANO, S.r.l.
|
|
MORTGAGE
LOAN
|
|
Building
purchase
|
|
Hotel
property in Galzignano (Padova), Italy
|
|
|
14,503
|
|
|
|
14,361
|
|
TERME
DI GALZIGNANO, S.r.l.
|
|
MORTGAGE
LOAN ("bullet" reimbursement plan)
|
|
Cash
facility
|
|
Hotel
property in Galzignano (Padova), Italy
|
|
|
5,380
|
|
|
|
5,304
|
|
|
|
|
|
|
|
TOTAL
|
|
|
53,259
|
|
|
|
53,409
|
|
The following table sets out the significant
term and future payments of long-term loans:
€’000
|
|
|
|
|
|
|
|
Installments
maturity as of December 31
|
|
Company
|
|
Type
of debt
|
|
Object
|
|
Collateral
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
CONTE
ROSSO & PARTNERS, S.R.L.
|
|
CAPITAL
LEASE
|
|
Building
purchase
|
|
Headquarter
property, via B.Buozzi, Rome, Italy
|
|
€
|
223
|
|
|
€
|
103
|
|
|
€
|
108
|
|
|
€
|
113
|
|
|
€
|
118
|
|
CONTE
ROSSO & PARTNERS, S.R.L.
|
|
UNSECURED
LOAN
|
|
Cash
facility
|
|
-
|
|
|
338
|
|
|
|
270
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
MASSERIA
SANTO SCALONE, S.r.l.
|
|
MORTGAGE
LOAN
|
|
Building
purchase
|
|
Hotel
and land property, Santo Scalone, Ostuni (Brindisi), Italy
|
|
|
783
|
|
|
|
189
|
|
|
|
197
|
|
|
|
206
|
|
|
|
215
|
|
MASSERIA
SANTO SCALONE, S.r.l.
|
|
MORTGAGE
LOAN
|
|
Building
purchase
|
|
Hotel
and land property, Santo Scalone, Ostuni (Brindisi), Italy
|
|
|
510
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
PRIMESINT,
S.r.l.
|
|
CAPITAL
LEASE
|
|
Building
purchase
|
|
Building,
Via Benaco, San Giuliano (Milan), Italy
|
|
|
51
|
|
|
|
22
|
|
|
|
23
|
|
|
|
24
|
|
|
|
25
|
|
ARAL
IMMOBILIARE, S.r.l.
|
|
MORTGAGE
LOAN
|
|
Building
purchase
|
|
Building,
Porto Cervo (Olbia), Italy
|
|
|
60
|
|
|
|
61
|
|
|
|
63
|
|
|
|
66
|
|
|
|
69
|
|
ARAL
IMMOBILIARE, S.r.l.
|
|
CAPITAL
LEASE
|
|
Building
purchase
|
|
Hotel
property in Rome, Italy
|
|
|
522
|
|
|
|
621
|
|
|
|
649
|
|
|
|
678
|
|
|
|
709
|
|
TERME
DI GALZIGNANO, S.r.l.
|
|
MORTGAGE
LOAN
|
|
Building
purchase
|
|
Hotel
property in Galzignano (Padova), Italy
|
|
|
3,469
|
|
|
|
1,379
|
|
|
|
1,379
|
|
|
|
1,379
|
|
|
|
1,379
|
|
TERME
DI GALZIGNANO, S.r.l.
|
|
MORTGAGE
LOAN ("bullet" reimbursement plan)
|
|
Cash
facility
|
|
Hotel
property in Galzignano (Padova), Italy
|
|
|
5,380
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
TOTAL
|
|
€
|
11,335
|
|
|
€
|
2,645
|
|
|
€
|
2,419
|
|
|
€
|
2,467
|
|
|
€
|
2,516
|
|
The following table sets out the amounts
of the assets held and used by capital lease:
€’000
|
|
Asset
Balances at
|
|
|
Asset
Balances at
|
|
Class of property
|
|
March
31,
2013
|
|
|
December
31, 2012
|
|
|
|
|
|
|
|
|
|
|
Building
|
|
€
|
42,580
|
|
|
€
|
42,580
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated
depreciation
|
|
|
(6,094
|
)
|
|
|
(5,775
|
)
|
|
|
|
|
|
|
|
|
|
Net balance
|
|
€
|
36,486
|
|
|
€
|
36,805
|
|
The following table sets out the schedule
of the undiscounted and discounted future minimum lease payments:
€’000
Minimum lease payments (future and net present
value)
|
Twelve month period ending March 31:
|
|
|
|
2014
|
|
€
|
2,012
|
|
2015
|
|
|
2,012
|
|
2016
|
|
|
2,012
|
|
2017
|
|
|
2,012
|
|
2018
|
|
|
2,012
|
|
Later years
|
|
|
22,568
|
|
Purchase
option
|
|
|
11,965
|
|
Net minimum
lease payments
|
|
|
44,595
|
|
Less: Amount
representing interest
|
|
|
(15,198
|
)
|
Present value
of net minimum lease payments
|
|
€
|
29,397
|
|
As of March 31, 2013, there are no unused
credit lines.
NOTE 9. 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.
NOTE 10. INCOME TAXES
Tax losses carryforwards
Under Italian tax
law the operating loss carryforwards available for offset against future profits can be used indefinitely. Operating loss carryforwards
are only available for offset against national income tax, in the limit of 80% of taxable annual income (this restriction does
not apply to the operating loss incurred in the first three years of the Company’s activity, which are therefore available
for 100% offsetting).
Our operating losses
carried forward and available for offset against future profits as of March 31, 2013 and December 31, 2012 is € 967 and €
651, respectively.
Deferred income taxes
reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Components of the Company’s deferred
tax asset are as follows as of March 31, 2013 and December 31 2012:
€’000
|
|
March
31, 2013
|
|
|
2012
|
|
Deferred tax asset – net operating
loss carryovers
|
|
|
328
|
|
|
|
179
|
|
Less Valuation allowance
|
|
|
(328
|
)
|
|
|
(179
|
)
|
Net deferred tax asset
|
|
€
|
-
|
|
|
€
|
-
|
|
The Company periodically
evaluates whether it is more likely than not that it will generate sufficient taxable income to realize the deferred income tax
asset. The ultimate realization of this asset is dependent upon the generation of future taxable income sufficient to offset the
related deductions. At the present time, management cannot presently determine when the Company will be able to generate sufficient
taxable income to realize the deferred tax asset; accordingly, a valuation allowance has been established to offset the asset.
The reconciliation
of income tax benefit attributable to continuing operations computed at the Italian statutory tax rates to the income tax benefit
recorded is as follows:
|
|
Three
months period ended March 31,
|
|
€’000
|
|
2013
|
|
|
2012
|
|
Income tax at Italian statutory rate of
27.5%
|
|
€
|
(149
|
)
|
|
€
|
796
|
|
Increase in valuation allowance
|
|
|
149
|
|
|
|
(796
|
)
|
Income tax benefit
|
|
€
|
-
|
|
|
€
|
-
|
|
NOTE 13. SUBSEQUENT EVENTS
On May 15, 2013
,
Galzignano Terme Golf & Resort S.p.A.(“Galzignano”), a wholly owned subsidiary of the Company, was formally notified
that an arbitration panel rendered a judgment against it in the amount of € 5.05 million in connection with a dispute involving
the renovation of the Hotel Majestic in 2010. For more information regarding the arbitration award, see Part II, Item 1. –
“Legal Proceedings” of this quarterly report.
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Introduction
The following discussion
of our financial condition and results of operations should be read in conjunction with our financial statements and the related
notes and other financial information appearing elsewhere in this Current Report on Form 10-Q. In addition to historical financial
information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual
results could differ materially from those discussed in the forward-looking statements. Readers are also urged to carefully review
and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business.
All amounts are set forth in euros.
The following discussion
and analysis relates to the results of the Company and should be read in conjunction with the financial statements and the related
notes thereto and other financial information contained elsewhere in this Form 10-Q. For further discussion and analysis related
to the results of the Company, please see our Form 10-K for the fiscal year ended December 31, 2012 filed with the SEC on April
16, 2013.
Overview
Southern States Sign
Company is a hospitality company that owns and develops hotels and spas in Italy. We operate through our wholly owned subsidiary,
Conte Rosso & Partners S.r.l. (“CR&P”) and, as a result, are classified as property investment specialists.
We intend to develop
our presence in Italy and abroad with a target of owning 3,000 rooms within the next 3 to 5 years.
We are currently undergoing
advanced negotiations with respect to investments in Rome, Bari and Florence in Italy, as well as in New York, and have started
searches for investment opportunities in Milan, Florence, Paris and London. We are also planning to invest in high-growth potential
countries such as Albania and some selected African countries.
In addition to the
items discussed above, we plan to continue to refresh our hotel room product, pursue third-party development partners for additional
hotel and restaurant concepts and renovate select facilities to improve our product offerings.
Critical Accounting Policies and Estimates
We believe the following
accounting policies and estimates are most critical to aid in understanding and evaluating our reported financial results.
Basis of consolidation
All majority-owned
subsidiaries in which CR&P has both voting share and management control are consolidated. All significant intercompany accounts
and transactions are eliminated. Subsidiaries over which control is achieved through other means, such as stockholder agreements,
are also consolidated even if less than 51% of voting capital is held. The equity attributable to non-controlling interests in
subsidiaries is shown separately in the consolidated financial statements.
Basis of presentation
The consolidated financial
statements for the three months ended March 31, 2013 and for the fiscal year ended December 31, 2012 are prepared in accordance
with accounting principles generally accepted in the United States of America (“US GAAP”).
The Euro is the functional
currency of all companies included in these consolidated financial statements.
The amounts presented
have been rounded to the nearest thousand.
Acquisitions
Assets acquired and
liabilities assumed in business combinations are recorded on our consolidated balance sheets as of the respective acquisition
dates based upon their estimated fair values at such dates.
The results of operations
of businesses acquired by us have been included in the consolidated statements of income (loss) since their respective dates of
acquisition. In certain circumstances, the purchase price allocations are based upon preliminary estimates and assumptions. Accordingly,
the allocations are subject to revision when we receive final information, including appraisals and other analyses. There were
no contingent payments, options, or commitments specified in any of the following acquisition agreements.
Cash and cash equivalents
Cash and cash equivalents
comprise cash balances, cash on current accounts with banks, bank deposits and other highly liquid short-term investments with
original maturities of less than three months.
Accounts receivable & Allowance
for doubtful accounts
Accounts receivable
represents trade obligations from customers that are subject to normal trade collection terms, without discounts. The Company
periodically evaluates the collectability of its accounts receivable and considers the need to record or adjust an allowance for
doubtful accounts based upon historical collection experience and specific customer information. Actual amounts could vary from
the recorded estimates. The Company has determined that as of March 31, 2013 and December 31, 2012 no allowance for doubtful accounts
was required. The Company does not require collateral to support customer receivables.
Investments
Investments in unconsolidated
affiliates over which we exercise significant influence, but do not control, including joint ventures, are accounted for using
the equity method.
Investments in unconsolidated
affiliates over which we are not able to exercise significant influence are accounted for under the cost method.
Property, plant and equipment
Property, plant and
equipment are stated at acquisition cost less accumulated depreciation and adjustments for impairment losses. Property, plant
and equipment also includes assets under construction and plant and equipment awaiting installation.
Subsequent expenditures
are capitalized only when they increase the future economic benefits embodied in an item of property, plant and equipment. All
other expenditures are recognized as expenses in the consolidated statement of income as incurred.
Capitalization ceases
when construction is interrupted for an extended period or when the asset is substantially complete.
Where funds are borrowed
specifically for the purpose of acquiring or constructing a qualifying asset, the amount of interest costs to be capitalized in
a period on that asset is the actual interest cost incurred on the borrowing during the period.
Depreciation is charged
on a straight-line basis over the estimated remaining useful lives of the individual assets. Depreciation commences from the time
an asset is put into operation. Depreciation is not charged on assets to be disposed of or on land. The range of the estimated
useful lives is as follows:
|
-
|
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
resale
In connection with
the strategy of concentrating in the portfolio of hotel, power, and plantations investments, in the periods presented we entered
into various negotiations with potential purchasers to sell. Most of these sales were concluded at the end of September 30, 2012.
The realized value
of these assets are higher than the net asset carrying value and that resulted in a gain on discontinued operations.
Goodwill and Other Intangible Assets
We evaluate goodwill
for impairment on an annual basis, and do so during the last month of each year using balances as of the end of September and
at an interim date if indications of impairment exist. Goodwill impairment is determined by comparing the fair value of a reporting
unit to its carrying amount in a two-step process with an impairment being recognized only where the fair value is less than carrying
value. We define a reporting unit at the individual property level.
When determining fair
value in step one, we utilize internally developed discounted future cash flow models, third party appraisals and, if appropriate,
current estimated net sales proceeds from pending offers. Under the discounted cash flow approach we utilize various assumptions,
including projections of revenues based on assumed long-term growth rates, estimated costs and appropriate discount rates based
on the weighted-average cost of capital. The principal factors used in the discounted cash flow analysis requiring judgment are
the projected future operating cash flow, the weighted-average cost of capital and the terminal value growth rate assumptions.
The weighted-average cost of capital takes into account the relative weights of each component of our capital structure (equity
and long-term debt) and is determined at the reporting unit level. Our estimates of long-term growth and costs are based on historical
data, various internal estimates and a variety of external sources, and are developed as part of our routine, long-term planning
process. We then compare the estimated fair value to our carrying value.
If the carrying value
is in excess of the fair value, we must determine our implied fair value of goodwill to measure if any impairment charge is necessary.
The determination of our implied fair value of goodwill requires the allocation of the reporting unit’s estimated fair value
to the individual assets and liabilities of the reporting unit as if we had completed a business combination.
We perform the allocation
based on our knowledge of the reporting unit, the market in which they operate, and our overall knowledge of the hospitality industry.
Leasing
All lease agreements
of the Company and its subsidiaries as lessees are accounted for as finance leases. The Company recognizes the asset and associated
liability on its balance sheet. Finance leases are capitalized at the beginning of the lease at the lower of the fair value of
the leased property and the present value of minimum lease payments. Each installment of the lease is apportioned between the
liability and finance charges so as to achieve an equal reduction in capital due for each payment made at constant rate on the
remaining financial balances.
Derivative financial instruments
The Company uses derivative
financial instruments principally for the management of exposure to variable interest rates on long-term financing. All derivative
financial instruments are classified as assets or liabilities and are accounted for at trade date. The Company measures all derivative
financial instruments based on fair values derived from market prices of the instruments. Changes in the fair value of a derivative
that is significant and that is designated and qualifies as a fair value hedge, along with the loss or gain on the hedged asset
or liability, are recorded in the income statement.
As of December 31,
2012 there are no derivative instruments. During the 2012 there was only one derivative instrument hedging the risk of variable
interest rates (an “interest rate cap”), the notional amount of which was € 4 million. This derivative instrument
hedges the risk from change of interest rate on a mortgage loan facility with “bullet” repayments originally of €
8 million of which € 6.6 million is outstanding. This derivative was divested as part of our plan to focus on hotels only
as of September 30, 2012.
Shareholders’ loans
Shareholders’
loans to the Company are all non-interest bearing. Italian law provides that the shareholders’ loans to a limited liability
company ("S.r.l.") are not preferred and their repayment is subordinated to other categories of debt. As a result all
shareholder loans are classified as non-current liabilities.
Severance indemnity fund
According to Italian
accounting principles reflecting local law and applicable employment contracts, certain post-employment benefits accrue during
the period of employment. Under U.S. GAAP, post-employment benefits are defined either as de fined contribution plans or defined
benefit plans.
In defined contribution
plans, the Company's obligation is limited to the payment of contributions to the Government or to a fund. Defined benefit plans
are pension, insurance and healthcare programs which cover the Company's obligation, even implicitly, to provide the benefits
due to former employees. The liabilities associated with defined benefit plans are determined on the basis of actuarial assumption
(discounting) and accrued in the financial statements over the employment period required to obtain the benefits.
The severance indemnity
fund required by Italian law is a liability similar to a defined benefit plan, which, however, according to Italian accounting
principles, is not subject to discounting. Given the small number of Company employees any difference between the present provisions
in the financial statements prepared in accordance with Italian GAAP and discounted value of these benefits is considered to be
immaterial.
Revenue Recognition
Our revenues are derived
from rent we receive according to rental agreements we have in place with a hotel management company. The majority of our rent
is fixed and payable monthly. We recognize additional revenue that is variable based on a percentage of the operating profit
of our rented hotels.
Taxes
Income taxes
We account for income
taxes to recognize the amount of taxes payable or refundable for the current year and the amount of deferred tax assets and liabilities
resulting from the future tax consequences of differences between the financial statements and tax basis of the respective assets
and liabilities. We recognize the financial statement effect of a tax position when, based on the technical merits of the uncertain
tax position, it is more likely than not to be sustained on a review by taxing authorities. These estimates are based on judgments
made with currently available information. We review these estimates and make changes to recorded amounts of uncertain tax positions
as facts and circumstances warrant.
Results
of
Operations
For the three months ended March
31, 2013 and March 31, 2012
€’000
|
|
Three Months
Ended
|
|
|
Three Months
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
|
Revenue
from operations
|
|
€
|
840
|
|
|
€
|
1,323
|
|
Direct operating
and selling, general and administrative costs
|
|
|
|
|
|
|
|
|
Direct
operating costs
|
|
|
68
|
|
|
|
144
|
|
Selling,
general and administrative costs
|
|
|
286
|
|
|
|
69
|
|
Amortization
and depreciation
|
|
|
554
|
|
|
|
764
|
|
Total
direct operating, selling, and administrative costs
|
|
|
908
|
|
|
|
977
|
|
Operating
Profit/(Loss)
|
|
|
(68
|
)
|
|
|
346
|
|
Interest
income
|
|
|
103
|
|
|
|
|
|
Interest
expenses
|
|
|
577
|
|
|
|
447
|
|
Other
income
|
|
|
|
|
|
|
7
|
|
Profit/(Loss)
from continuing operations, before income taxes
|
|
|
(542
|
)
|
|
|
(94
|
)
|
Income
taxes
|
|
|
|
|
|
|
37
|
|
Profit/(Loss)
from continuing operations, net of income taxes
|
|
|
(542
|
)
|
|
|
(131
|
)
|
Net loss from operations
of discontinued operations, after taxes
|
|
|
|
|
|
|
15
|
|
Net
income on disposal of discontinued operations, after taxes
|
|
|
|
|
|
|
3,009
|
|
Net
profit/(loss) from discontinued operations
|
|
|
|
|
|
|
3,024
|
|
Consolidated
net profit/(loss) for the period
|
|
|
(542
|
)
|
|
|
2,893
|
|
Less
net loss attributable to non-controlling interests in the consolidated subsidiaries
|
|
|
10
|
|
|
|
19
|
|
Net profit/(loss)
attributable to owners of Conte Rosso & Partners S.r.l
|
|
|
(532
|
)
|
|
|
2,912
|
|
|
|
|
|
|
|
|
|
|
Revenues
Revenues for the three
month periods ended March 31, 2013 and March 31, 2012 were € 840,000 and € 1,323,000 respectively. The decrease in revenues
of approximately € 483,000 or 37% was due to the switch from a direct management system (where revenues reflected the cash paid by hotel customers)
to a third party management system (where revenues consist of the fees that we receive from JSH, the management company,
and thus are already net of any costs).
Direct Operating Costs
Direct Operating Costs
for the three month period ended March 31, 2013, decreased approximately € 69,000, or 7%, compared to the three month period
ended March 31, 2012. This decrease is mainly due to the replacement of direct management of the Galzignano Hotel & Resort
with third party management.
direct operating costs
is due to the fact that is mainly due to the same reason mentioned above
Selling, General and Administrative
Costs
Selling, General and
Administrative costs for three month periods ended March 31, 2013, and 2012 were approximately €287,000 and €69,000,
respectively. Such expenses consist primarily of salaries and personnel related expenses, occupancy expenses, sales travel, consulting
costs and other expenses. This increase is mainly due to the advisory costs related to the reverse merger and pre-listing process.
Amortization and Depreciation
Amortization and depreciation
for the three month periods ended March 31, 2013, and 2012 were approximately €554,000 and €764,000, respectively. Such
expenses consist primarily of depreciation of properties, plant and equipment held by Conte Rosso & Partners and its subsidiary
Aral Immobiliare, S.r.l. The decrease of approximately €210,000 was mainly due to the revaluation of the useful life of the
assets.
Interest Income
Interest income for
three month periods ended March 31, 2013, and 2012 was approximately €103,000 and €0, respectively. The increase was
mainly due to the Company’s liquidity management efficiency, focused on the subsidiary CR&P Service, S.c.a.r.l.
Interest Expense
Interest expense for
the three month periods ended March 31, 2013, and 2012 was approximately € 577,000 and € 447,000, respectively. The
increase was mainly due an increase in the financial debt of the Company in 2013 compared with the same period in 2012.
Other Income
Other Income for the
three month periods ended March 31, 2013, and 2012 was approximately € 0 and € 7,000, respectively. The amount shown
in 2012 was immaterial.
Discontinued operations
During the three month
period ended March 31, 2012, we initiated the selling of non-hospitality subsidiaries to related parties (owned directly and indirectly
by Antonio Conte, the former Chief Executive Officer of the Company) for a gain of € 3,009,000, net of taxes. The net profit
from these discontinued operations was € 15,000. We have no continuing involvement with these divested subsidiaries.
Income Taxes
Income taxes for the
three month periods ended March 31, 2013 and 2012 were approximately € 0 and € 37,000, respectively. The decrease is
immaterial.
Liquidity
and
Capital Resources
For the three months period ended
March 31, 2013 and 2012
As of March 31, 2013,
we had cash and cash equivalents of approximately €115,000, negative working capital of approximately € 4,872,000 and
retained earnings of approximately € 6,822,000.
Cash Flows from Operating Activities
Our operating activities
resulted in net cash provided by operating activities of approximately €21,000 for the three month period ended March 31,
2013 compared to approximately €5,910,000 cash provided in the three month period ended March 31, 2012.
The net cash provided
by operating activities for the three month period ended March 31, 2013 reflects a net loss of approximately €543,000 and
a depreciation and amortization of approximately €554,000. Changes in assets and liabilities included a decrease in trade
receivables of approximately €236,000, a decrease in related party receivables of approximately €198,000, an increase
in other receivables of approximately €2,000, a decrease in advanced payments on purchases of property of approximately €6,000,
a decrease in other assets of approximately €5,000, an increase in trade payables of approximately €750,000, an increase
in related party payables of approximately €232,000, an increase in other payables of approximately €58,000, an increase
in VAT taxes receivable of approximately €78,000.
The net cash provided
by operating activities for the three month period ended March 31, 2012 reflects a net income of approximately €2,893,000,
a net loss from operations on discontinued operations of approximately € 15,000 and a depreciation and amortization of approximately
€764,000, offset by a gain on disposal of discontinued operations of approximately € 3,009,000. Changes in assets and
liabilities included an increase in trade receivables of approximately €1,388,000, a decrease in related party receivables
of approximately €1,173,000, a decrease in other receivables of approximately €2,000, a decrease in other assets of
approximately €58,000, a decrease in trade payables of approximately €7,189,000, an increase in related party payables
of approximately €22,000, an increase in other payables of approximately €899,000, a decrease in VAT tax receivable
of approximately €286,000,an increase in other liabilities of approximately €6,904,000 and a net cash provided by operating
activities of discontinued operations of approximately € 3,754,000.
Cash Flows from Investing Activities
The net cash provided
by investing activities for the three month period ended March 31, 2013 of approximately € 259,000 consist primarily , of
the cash inflow of approximately € 550,000 offset by by a decrease for other investing change of approximately € 299.
The net cash used
in investing activities for the three month period ended March 31, 2012 of approximately € 3,246,000 consist primarily of
the cash outflow of approximately € 2,274,000 for the purchase of properties, plants and equipment in connection with relating
to the operations of the non-hospitality business that has since been divested, and a cash outflow of approximately € 968,000.
Cash Flows from Financing Activities
Net cash used in financing
activities for the three month period ended March 31, 2013 was approximately €607,000, which was mainly due to the reimbursement
of shareholders loans (approximately € 396,000). Net cash used in the three months period ended March 31, 2012 was approximately
€ 2,816,000, which was mainly due to the repayment of long-term loans (approximately € 6,172,000) offset by a repayment
of shareholders loans of approximately € 1,351,000 and a net cash outflow provided by discontinued operations.
Future Liquidity Needs
We have evaluated
our expected cash requirements over the next twelve months, which include, but are not limited to, interest payments, capital
repayments, capital expenditures and working capital requirements. Whilst we are able to manage certain aspects of these cash
requirements, the level of income, rate of repayment of related party receivables and cost of debt, where variable, are outside
of our control. We are also planning, but as of yet have no contractual commitments, to make acquisitions in the future, and whilst
we wish to effect at least some of these acquisitions through the issuance of shares, there can be no assurance that the vendors
will accept such consideration, and consequently, we to effect such acquisitions using cash. Also, we plan to further borrow funds
in to finance these acquisitions.
Based on existing
assets, expected related party receivables repayments, business level, debt and interest rates, we believe our current resources
are sufficient for at least the next twelve months.
However, to implement
the business plan for the expansion of our assets, we will require additional financing in the future. The timing of our need
for additional capital will depend on the timing of the completion of the planned acquisitions, the terms of such acquisitions
and whether existing lenders are willing to continue to provide financing upon a change of control of such assets.
We are in the process
of developing two properties which will require capital expenditure – the Green Park Hotel, which is being converted into
apartments, and the expansion of the Masseria Hotel.
While the first part
of the Masseria development has already started and will be completed by April 2013, the second part, including the creation of
an additional 24 rooms, will take place in the first quarter of 2014. It is expected that the first part of the development will
cost an additional € 400 (approximately $520). A development loan is currently being negotiated for this amount. The terms
of the loan are expected to include interest only during the development period and then bullet repayment to be effected by entering
into a longer term mortgage financing secured by the property. At present time, no internal capital is expected to be required
for this expansion. The last part of the development will cost approximately €600 ($780).
The development of
the Green Park Hotel should start in the second half of 2014. It is expected that the Green Park Hotel conversion will cost approximately
€ 4.4 million ($ 5.7 million) over a period of 1½ years from commencement in 2014.
No work beyond planning
and the negotiation of financing has taken place, and no work will begin until the required financing has been agreed and contracted
with the lending institutions.
Commitments and Contingencies
The Company and certain
subsidiaries are defendants in legal actions in the normal course of business. Based on the advice of legal counsel, management
believes that the amounts recognized and recorded as debt provisions or asset negative adjustments are sufficient to cover probable
losses in connection with such actions.
The risk provisions
or negative adjustments are recognized when in accordance with the opinion of legal counsel the liability is probable and measurable.
Off-Balance Sheet Arrangements
We have no off-balance
sheet arrangements.