U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2013

 

 

¨	For the transition period from__to__.

Commission File Number 333-171842

 

Southern States Sign Company

(Exact name of small business issuer as specified in its charter)

Nevada (State or other jurisdiction of incorporation or organization)

26-3014345 (I.R.S. employer identification number)

  

Viale Bruno Buozzi 83, Rome Italy

(Address of principal executive offices)

39.06.80692582

(Issuer’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ¨ No x

 

 As of May 15, 2013, there were 40,151,261 shares of the registrant’s common stock outstanding.

  

 

SOUTHERN STATES SIGN COMPANY

 

FORM 10-Q

For the Quarter Ended March 31, 2013

 

Table of Contents

PART I FINANCIAL INFORMATION
Item 1.		Financial Statements			3
		Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012			3
		Consolidated Statements of Operations for the Three Month Periods Ended March 31, 2013 and 2012			4
		Consolidated Statement of Stockholders’ Equity (Deficit) for the Three Month Period Ended March 31, 2013			6
		Consolidated Statements of Cash Flows for the Three Month Periods Ended March 31, 2013 and 2012			7
		Notes to Financial Statements			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			27
Item 4.		Controls and Procedures			27
PART II OTHER INFORMATION
Item 1.		Legal Proceedings			28
Item 1A.		Risk Factors			28
Item 2.		Unregistered Sales of Securities and Use of Proceeds			28
Item 3.		Defaults Upon Senior Securities			28
Item 4.		Mine Safety Disclosures			28
Item 5.		Other Information			28
Item 6.		Exhibits			29
SIGNATURES					30

 

  

PART I – FINANCIAL INFORMATION

 

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

 

-

Others: 5 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

 

-

Others: 5 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.

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

 

Item 4.

Controls and Procedures

As required by paragraph (b) of Rules 13a-15 or 15d-15 under the Exchange Act, our principal executive officer and principal financial officer evaluated the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our sole chief executive officer and principal financial officer concluded that as of March 31, 2013, these disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities Exchange Commission and include controls and procedures designed to ensure that such information is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

 

 

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

 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 pursuant to the terms of two procurement contracts, dated as of November 30, 2009 and May 7, 2010, respectively, by and between Galzignano and Sercos SpA (“Sercos”), a construction company based in Parma, Italy. Galzignano plans to appeal the judgment of the arbitration panel to the Court of Venice within 60 days of the notification, as provided by Italian law. The appeal is expected to be examined by the Court of Venice during the last quarter of the current fiscal year.

 

Item 1A.

Risk Factors

A smaller reporting company is not required to provide the information required by this Item.

  

Item 2.

Unregistered Sales of Securities and Use of Proceeds.

None.

 

Item 3.

Defaults Upon Senior Securities.

None.

 

Item 4.

Mine Safety Disclosures

Not applicable.

 

Item5.

Other Information.

  None.

 

 

 

Item 6.

Exhibits.

 

Exhibit Number		Description of Exhibit
2.1		Preliminary Agreement, dated as of February 8, 2013, by and between Primesint S.r.l. and ES Group S.r.l. (incorporated by reference to Exhibit 2.1 of the Company’s Report on Form 8-K filed on February 14, 2013)
2.2		Preliminary Agreement, dated as of February 8, 2013, by and among Primesint S.r.l and Mavip S.r.l. (incorporated by reference to Exhibit 2.2 of the Company’s Report on Form 8-K filed on February 14, 2013)
3.1		Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Registration Statement on Form S-1 filed on January 25, 2011)
3.2		Bylaws (incorporated by reference to Exhibit 3.2 of  the Registration Statement on Form S-1 filed on January 25, 2011)
10.1		Amendment to Management Agreement, dated as of March 10, 2013, between Ripa Hotel & Resort Srl, as Lessor, and Ku Hotels Srl, as Lessee (incorporated by reference to Exhibit 10.5 of the Company’s Report on Form 10-K filed on April 16, 2013)
10.2		Amendment to Lease Agreement, dated as of March 10, 2013, between Ripa Hotel & Resort Srl, as Lessor, and Ku Hotels Srl, as Lessee (incorporated by reference to Exhibit 10.6 of the Company’s Report on Form 10-K filed on April 16, 2013)
10.3		Amendment to Lease Agreement, dated as of March 10, 2013, between Ripa Hotel & Resort Srl, as Lessor, and Ku Hotels Srl, as Lessee (incorporated by reference to Exhibit 10.7 of the Company’s Report on Form 10-K filed on April 16, 2013)
31.1*		Certification of Chief Executive Officer and Principal Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**		Certification of Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101***		Interactive Data Files of Financial Statements and Notes

*	Filed herewith.

**	Furnished (and not filed) herewith pursuant to Item 601(b)(32)(ii) of Regulation S-K under the Exchange Act.

***

Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act, except as shall be expressly set forth by specific reference in such filing or document.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	Southern States Sign Company.
May 20, 2013	By:	/s/ Sergio Schisani
		Sergio Schisani
		Chief Executive Officer and Principal Financial Officer