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EXCEL - IDEA: XBRL DOCUMENT - SOUTHERN STATES SIGN CoFinancial_Report.xls
EX-31.1 - EXHIBIT 31.1 - SOUTHERN STATES SIGN Cov386099_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - SOUTHERN STATES SIGN Cov386099_ex32-1.htm

 

 

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 June 30, 2014

 

¨  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   26-3014345
(State or other jurisdiction of   (I.R.S. employer
incorporation or organization)   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 July 31, 2014, there were 40,151,261 shares of the registrant’s common stock outstanding.

 

 

 

 
 

 

  Page
PART I FINANCIAL INFORMATION    
   
Item 1. Financial Statements 3
  Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013 3
     
  Consolidated Statements of Operations for the Three and Six Month Periods Ended June 30, 2014 and 2013 4
     
  Consolidated Statements of Stockholders’ Equity (Deficit) for the Six Month Period Ended June 30, 2014 5
     
  Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 2014 and 2013 6
     
  Notes to Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
     
Item 4. Controls and Procedures 19
     
PART II OTHER INFORMATION  
   
Item 1. Legal Proceedings 20
Item 1A. Risk Factors 20
     
Item 2. Unregistered Sales of Securities and Use of Proceeds 20
     
Item 3. Defaults Upon Senior Securities 20
     
Item 4. Mine Safety Disclosures 20
     
Item 5. Other Information 20
     
Item 6. Exhibits 20
     
SIGNATURES 21

 

2
 

 

Item 1. Financial Statements and Supplementary Data

 

Index to Consolidated Financial Statements:

 

Balance Sheets as of June 30, 2014 and December 31, 2013; 3
   
Statements of Operations for the three and six months periods ended June 30, 2014 and 2013 4
   
Consolidated Statement of Stockholders’ Equity (Deficit) for the six months period ended June 30, 2014; 5
   
Statements of Cash Flows for the six months periods ended June 30, 2014 and 2013; 6
   
Notes to Financial Statements. 7

 

€’000

 

SOUTHERN STATES SIGN COMPANY
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2014 & DECEMBER 31, 2014

 

   June 30,   December 31, 
   2014
Unaudited
   2013
Audited
 
ASSET          
Current Assets:          
Cash  696   728 
Net receivables   2,171    1,986 
Related parties receivables   19,071    18,804 
VAT Tax receivables   913    1,324 
Other current assets   1,276    1,270 
Total current assets   24,127    24,112 
Non - Current Assets:          
Net properties, plant and equipment
(Including Capital Leased properties € 31,607 and € 32,097, respectively)
   57,628    58,375 
Goodwill   1,541    1,541 
Other non-current assets
(Including Related Parties non-current receivables € 8,890 as of June 30, 2014 and December 31, 2013)
   10,556    10,492 
           
Total non - current assets   69,725    70,408 
           
Total Assets  93,852   94,520 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Bank overdrafts  1,036   963 
Current maturities of long term loans and capital leases   11,396    10,915 
Trade payables   8,038    7,207 
Related parties payables   6,658    6,609 
Others current liabilities   3,100    2,652 
Total current  Liabilities   30,228    28,346 
Non - current liabilities:          
Long term loans and capital leases   36,131    36,581 
Shareholder's loans   2,300    2,361 
Other non-current liabilities   3,462    4,612 
Total non - current  Liabilities   41,893    43,554 
Stockholders' Equity          
Common stocks   27    27 
Additional Paid in Capital   26,059    26,059 
Retained earnings/(Accumulated loss)   (4,355)   (3,466)
Equity attributable to owners of Southern States Sign Company   21,731    22,620 
Non-Controlling interests in the consolidated subsidiaries          
Total Stockholders' Equity   21,731    22,620 
Total Liabilities and Stockholders' Equity  93,852   94,520 

 

3
 

 

SOUTHERN STATES SIGN COMPANY

 

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 and 2013

 

   Three
Months
Ended
   Three
Months
Ended
   Six
Months
Ended
   Six
Months
Ended
 
€’000, except per share amounts  June 30,   June 30,   June 30,   June 30, 
   2014   2013   2014   2013 
   Unaudited   Unaudited   Unaudited   Unaudited 
                 
Revenue from operations  2,816   319   4,584   1,159 
Direct operating and selling, general and administrative costs                    
Direct operating costs   1,643    79    2,930    216 
Selling, general and administrative costs   354    668    607    954 
Amortization and depreciation   597    601    1,152    1,126 
Total direct operating, selling, and administrative costs   2,594    1,348    4,689    2,296 
Operating Profit/(Loss)   222    (1,029)   (105)   (1,137)
Interest income   128    (56)   257    47 
Interest expenses   548    543    1,041    1,088 
Profit/(Loss) from continuing operations, before income taxes   (198)   (1,628)   (889)   (2,178)
Income taxes                    
Profit/(Loss) from continuing operations, net of income taxes   (198)   (1,628)   (889)   (2,178)
Net loss from operations of discontinued operations, after taxes        (115)        (108)
Net income/(loss) on disposal of discontinued operations, after taxes        (32)        (32)
Net profit/(loss) from discontinued operations        (147)        (140)
Consolidated net profit/(loss) for the period   (198)   (1,775)   (889)   (2,318)
Less net loss attributable to non-controlling interests in the consolidated subsidiaries        83         93 
Net profit/(loss) attributable to owners of Southern States Sign Company  (198)  (1,692)  (889)  (2,225)
                     
Profit/(Loss) per share of Common Stock                    
Loss from continuing operations  (0.01)  (0.04)  (0.02)  (0.06)
Profit/(loss) from discontinued operations  (0.00)  (0.00)  (0.00)  (0.00)
Net profit/(loss)  (0.01)  (0.04)  (0.02)  (0.06)
                     
Weighted-average shares outstanding:                    
Common Stock                    
Basic and diluted   40,151,261    40,151,261    40,151,261    40,151,261 

 

4
 

 

SOUTHERN STATES SIGN COMPANY

STATEMENT OF COMPREHENSIVE INCOME/(LOSS)

 

   Three   Three   Six   Six 
€’000  Months   Months   Months   Months 
   Ended   Ended   Ended   Ended 
   June 30,   June 30,   June 30,   June 30, 
   2014   2013   2014   2013 
   Unaudited   Unaudited   Unaudited   Unaudited 
                 
Net profit/(loss) for the  period  (198)  (1,692)  (889)  (2,225)
Other comprehensive income                    
Foreign currency Translation differences        5         (1)
Total comprehensive income for the period  (198)  (1,687)  (889)  (2,226)

 

SOUTHERN STATES SIGN COMPANY

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

€’000

 

                   Equity     
                   attributable     
                   to non-     
   Common Stock   Additional   Retained   controlling   TOTAL 
   Shares   Amount   Paid In Capital   earnings   interests   EQUITY 
Balance at December 31, 2012   40,151,261   27   26,059   7,359   860   34,305 
                               
Net profit/(loss) for the year   -    -    -    (11,674)        (11,674)
                               
Change in percentage of controlling interests                  832    (860)   (28)
                               
Foreign currency translation   -    -    -    17    -    17 
                               
Balance at December 31, 2013   40,151,261   27   26,059   (3,466)  -   22,620 
                               
Net profit/(loss) for the year   -    -    -    (889)        (889)
                               
Balance at June 30, 2014   40,151,261   27   26,059   (4,355)  -   21,731 

 

5
 

 

€’000

 

SOUTHERN STATES SIGN COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Six months
ended  June
30, 2014
   Six months
ended June
30, 2013
 
   Unaudited   Unaudited 
           
Cash Flows from Operating Activities:          
Net Income/(loss)  (889)  (2,318)
Net (income)/loss from operations on discontinued operations   -    108 
Net (gain)/loss from discontinued operations   -    32 
Net Income/(loss) from continuing operations   (889)   (2,178)
Depreciation and amortization of non-current assets   1,152    1,126 
Other non-cash adjustments   (73)   (368)
Cash flows from operations before changes in assets and liabilities   190    (1,420)
Changes in assets and liabilities:          
Change in trade receivables   (184)   (118)
Change in related parties receivables   (697)   (475)
Change in other receivables   (1)   - 
Change in advance payment on purchase and other current assets   (4)   - 
Change in other assets   125    75 
Change in trade payables   1,618    956 
Change in related parties payables   29    507 
Change in other payables   (60)   49 
Change in tax receivable and payable   1,061    434 
Change in other liabilities   (1,351)   1 
Net cash provided by/(used in) operating activities of discontinued operations   -    (62)
Net cash provided by/(used in) Operating Activities (A)   726    (53)
Cash Flows from Investing Activities:          
Purchases of intangible assets   (386)   (165)
Purchases of properties, plant and equipment   (405)   (10)
Purchases of/proceeds from sale of associates and other company   (9)   9 
Net cash provided by/(used in) investing activities (B)   (800)   (166)
Cash Flows from Financing Activities:          
Net reimbursements/borrowings from bank overdrafts   73    (2,061)
Net proceeds from/repayment of issuance of long-term debt   30    175 
Net proceeds from/repayment of issuance of shareholders loan   (61)   1,822 
Net cash provided by Financing Activities (C )   42    (64)
Net Increase/(decrease) in Cash and Cash Equivalents (A+B+C)   (32)   (283)
Cash and cash equivalents at beginning of the year   728    441 
Cash and cash equivalents at end of the year  696   158 

 

6
 

 

SOUTHERN STATES SIGN COMPANY

 

Notes to audited Consolidated Financial Statements

For the six months ended June 30, 2014 and 2013

(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 consists of investment 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. For information regarding the Exchange Agreement, see Item 1. – “Business” of this annual report. 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 Southern State Sign Company for the periods prior to the date of the transaction are not presented.

 

As of June 30, 2014 the consolidated operating subsidiaries are the following (those entities which are indented represent subsidiaries of the entity under which they are indented):

 

Subsidiaries

 

Name of Company   %
Ownership
    Location   Principal
activity
Southern States Sign Company                
A.    Conte Rosso & Partners S.r.l.     100.00      Italy   Hospitality Business
                 
1.    Aral Immobiliare S.r.l.     100.00     Italy   Hospitality business
                 
2.    C.R.&P. Service S.c.a.r.l.     100.00     Italy   Group’s Exclusive financial services
                 
3.    Galzignano Terme Golf & Resort S.p.A.     100.00     Italy   Hospitality business
                 
4.    Masseria Santo Scalone Hotel & Resort S.r.l.     100.00     Italy   Hospitality business
                 
5.    Primesint S.r.l.     100.00     Italy   Investment Company
                 
6.    IBH Management Company S.r.l.     100.00     Italy   Hospitality business
                 
7.    IBH Ripa S.r.l     100.00     Italy   Hospitality business
                 
8.    GHG Resorts S.r.l.     100.00     Italy   Hospitality business

 

7
 

 

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 stockholders agreement, are also consolidated even if less than 51% of voting capital is held. The equity attributable to non-controlling interests in subsidiaries is shown separately in the consolidated financial statements.

  

Basis of presentation

 

The consolidated financial statements for the six months ended June 30, 2014, unaudited, and for the fiscal year ended December 31, 2013, 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 June 30, 2014 and December 31, 2013, € 0 is the allowance for doubtful accounts that was required. The Company does not require collateral to support customer receivables.

 

8
 

 

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 - 66 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 most 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.

 

In 2013 we continued to divest some non hospitality assets, by realizing following divestment:

  We sold the property located in Via Benaco, Milan (Italy), owned by Primesint, S.r.l. The property has been owned under a capital lease contract, which has been transferred to the acquirer.
  We sold the property located in Via Buozzi, Rome (Italy) owned by Conte Rosso & Partners, S.r.l. to a related party (Valma Immobiliare, S.r.l., owned by Mr.Conte’s family). The property has been owned under a capital lease contract, which has been transferred to the acquirer.
  In 2013 we also resolved the Masseria Santo Scalone purchase contract, due to non fulfillment of some conditions precedent, by returning the real estate property and the related debt to the seller.

 

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.

 

9
 

 

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 June 30, 2014 and for the fiscal year ended December 31, 2013, there are no derivative instruments.

 

Shareholders loans

 

Shareholders loans to the Group 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 employee 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. The fixed agreements with set increasing rental rates is recognized on a straight line-basis. We recognize additional revenue that is variable based on a percentage of the operating profit of our rented hotels only when contingency of the baseline target has been met.

 

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 six months ended June 30, 2014 and 2013, 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 six months ended June 30, 2014 and 2013.

 

The Company is also subject to examination in Italy where it has filed tax returns for the years 2009 through 2011. On April 11, 2014, Aral Srl. entered into a settlement agreement with the Italian Revenue Agency in relation to a tax assessment concerning certain asserted outstanding taxes (VAT, income taxes etc.), as mentioned below (see Item 2. M.D. & A. – Recent Developments and Events ).

 

Stockholder’s equity

 

As of June 30, 2014 and for the fiscal year ended December 31, 2013 the share capital of CR&P is represented by 40,151,261 outstanding shares. Mr. Antonio Conte and his wife Maddalena Olivieri contributed 82.44% of the share capital of CR&P.

 

NOTE 3. RELATED PARTIES RECEIVABLES AND PAYABLES

 

Related parties current receivables and payables relate to the former CEO and shareholder, Mr. Antonio Conte, both directly and indirectly. As of June 30, 2014 the amounts of related parties current receivables of € 16,678 thousand and payables of € 6,162 thousand refers to CR&P Service, S.r.l., a subsidiary incorporated in 2012 that manages the Company’s cash facilities and cash pooling and also for other companies owned by Mr. Conte but not consolidated in CR&P (related parties). During the six months ended June 30, 2014 and the fiscal years ended December 31, 2013, the operations of CR&P Service, S.r.l. did not generate any material impact on the consolidated equity and statement of operations of CR&P. The amounts shown as non-current receivables as of June 30, 2014 and December 31, 2013 relate to a receivable from Masoledo, S.r.l., owned by Mr. Conte in connection with the sale of the non-hotel business which occurred in September, 2012.

 

10
 

 

The amount of related parties current receivables of € 1,206 thousand as of June 30, 2014 refers to a sale of two non-hotel assets (buildings of Porto Rotondo e Porto Cervo, OT, Italy), previously owned by Ripa Hotel & Resorts, S.r.l. (a wholly-owned subsidiary merged with Aral S.r.l. on March, 2013), to Valma Immobiliare, S.r.l., a related party owned by Mr. Conte’s family.

 

NOTE 4. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment, included in continuing operations, comprises:

 

€’000

 

Property, plant and equipment  June 30, 2014   December 31, 2013 
         
Hotel Ripa building, plant and equipment  43,024   42,594 
Terme di Galzignano golf, building, plant and equipment   39,129    39,129 
Less accumulated depreciation   (24,525)   (23,348)
Total, net  57,628   58,375 

 

The properties owned by the Company as of June 30, 2014 have been recently tested for impairment, by a specialized appraisal firm, which provided updated appraisals of their fair value. The methodologies applied in those appraisals mainly consist in the market value method and the discounted future cash flows method. The appraisals show fair value amount of the properties 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 Srl (“Masseria”) from a related party (Masoledo Srl, owned by Mr. Conte’s family), which had previously purchased, in June 2012, an ancient real estate property located in Ostuni, Pulia, in the south of Italy, from Peretola Srl. The cost of acquisition of Masseria was €3.2 million.

  

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.

 

On November 27, 2013, Masseria Santo Scalone Hotel and Resort Srl (“Masseria”), which was the owner of a real estate property in Ostuni, (Brindisi), resolved the contract entered with Peretola Srl on June 11, 2012 concerning the acquisition of the property. This was mainly due to the impossibility for the seller to fulfill certain conditions precedent (among which to provide the registration of the property as “hotel” instead of as “residential” in the land public registry). Accordingly the property (together with the relative mortgage loans) was returned to the seller, which in turn will have to reimburse Masseria of the down payments made so far (€ 442 thousands).  

 

Divestment of the property in Via Benaco, Milan, Italy

 

In order to focus on the hospitality business, in April, 2013 the wholly-owned subsidiary Primesint, S.r.l. sold the property located in Via Benaco, Milan (Italy). The property has been owned under a capital lease contract, which has been transferred to the acquirer with no-cash inflow paid.

 

The balance sheet effects of this disposal are summarized in the table below:

 

Balance sheets effects of the divestment of the property in Via Benaco, Milan (Italy)

 

€’000  April 1, 2013 
Inflow of cash and other assets  0 
Total assets divested, less accumulated depreciation   (438)
Total liabilities divested   406 
Recognized loss   (32)

 

The loss resulting from this divestment has been recognized in the consolidated statement of operations as a loss on disposal of discontinued operations.

 

11
 

 

NOTE 6. GOODWILL

 

The table below shown the breakdown of goodwill related to continuing operations:

 

€’000

 

   Owned and leased
hotel
   Others owned
properties
   Total 
Balance as of January 1, 2013               
                
Goodwill, net   1,149    392    1,541 
                
No Activity during the period   -    -    - 
                
Balance as of December 31, 2013               
                
Goodwill, net   1,149    392    1,541 
                
Balance as of January 1, 2014               
                
Goodwill, net   1,149    392    1,541 
                
Balance as of June 30, 2014               
                
Goodwill, net   1,149    392    1,541 

 

In the six months ended June 30, 2014 and in the fiscal years ended December 31, 2013, 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

 

   June 30, 2014   December 31, 2013 
Related parties non-current receivables  8,890   8,890 
Investment in other companies   4    4 
Accruals and deferred costs   130    259 
Other intangible assets   1,532    1,339 
Total Other non-current assets  10,556   10,492 

 

NOTE 8. BANK OVERDRAFTS AND LONG-TERM DEBT

 

Amounts of financial debt (related to continuing operations) due to non-related parties are:

  

€’000

 

Mortgage & Capital Leases

 

   June 30,
2014
   December 31,
2013
 
Mortgage loan on property  21,297   21,084 
Leases   26,229    26,412 
Total  47,526   47,496 

 

   June 30,
2014
   December 31, 2013 
Current portion of debt  11,396   10,915 
Long term debt   36,130    36,581 
Total  47,526   47,496 

  

BANK OVERDRAFT

 

The following tables sets out the main terms and conditions and the outstanding overdraft balances as of June 30, 2014 and December 31, 2013 of the financial debts referred to continuing operations:

 

€’000

 

Company  Type of debt  Object  Collateral   Outstanding
balance as of
March
31, 2014
   Outstanding
balance as 
of Dec. 31, 
2013
 
CONTE ROSSO & PARTNERS, S.R.L.  BANK OVERDRAFT  Cash facility   -    -    - 
TERME DI GALZIGNANO, S.r.l.  BANK OVERDRAFT  Cash facility   -    1,036    963 
           TOTAL      1,036    963 

 

12
 

 

Outstanding non-current loans related to continuing operations

 

as of June 30, 2014 and December 31, 2013

 

€’000

 

Company  Type of debt  Object  Collateral  Outstanding.
balance as of June
30, 2014
   Outstanding
balance as of Dec.
31, 2013
 
CONTE ROSSO & PARTNERS, S.R.L.  UNSECURED LOAN  Cash facility  -   507    507 
ARAL IMMOBILIARE, S.r.l.  CAPITAL LEASE  Building purchase  Hotel property in Rome, Italy   26,229    26,279 
ARAL IMMOBILIARE, S.r.l.  MORTGAGE LOAN  Building purchase  Building, Porto Cervo (Olbia), Italy   -    308 
TERME DI GALZIGNANO, S.r.l.  MORTGAGE LOAN  Building purchase  Hotel property in Galzignano (Padova), Italy   14,843    14,843 
TERME DI GALZIGNANO, S.r.l.  MORTGAGE LOAN ("bullet" reimbursement plan)  Cash facility  Hotel property in Galzignano (Padova), Italy   5,947    5,559 
         TOTAL   47,526    47,496 

 

The following table sets out the significant term and future payments of long-term loans related to continuing operations:

  

            €’000                 
            Installments maturity as  of June 30 
Company  Type of debt  Object  Collateral  2015   2016   2017   2018   2019 
CONTE ROSSO & PARTNERS, S.R.L.  UNSECURED LOAN  Cash facility  -   458    49    -    -      
                                   
ARAL IMMOBILIARE, S.r.l.  CAPITAL LEASE  Building purchase  Hotel property in Rome, Italy   1,182    664    694    725    759 
TERME DI GALZIGNANO, S.r.l.  MORTGAGE LOAN  Building purchase  Hotel property in Galzignano (Padova), Italy   3,809    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   5,947                     
         TOTAL  11,396   2,092   2,073   2,104   2,138 

 

The following table sets out the amounts of the assets held and used by capital lease:

 

   Asset Balances at   Asset Balances at 
Class of property  June 30, 2014   December 31, 2013 
           
Building  38,730   38,730 
           
Less: accumulated depreciation   (7,123)   (6,633)
           
Net balance  31,607   32,097 

 

The following table sets out the schedule of the undiscounted and discounted future minimum lease payments:

 

Minimum lease payments (future and net present value)     
Twelve months ending June 30:    €’000   
2015   2,310 
2016   1,763 
2017   1,763 
2018   1,763 
2019   1,763 
Later years   17,859 
Purchase option   11,522 
Net minimum lease payments   38,743 
Less: Amount representing interest   (12,513)
Present value of net minimum lease payments  26,230 

  

As of June 30, 2014, there are no unused credit lines.

 

NOTE 9. SHAREHOLDER’S LOANS

 

In order to strengthen the Group’s capital position and taking into account future financial commitments to enable the real estate investment and development projects to be progressed, in the last quarter of 2011, Mr. Conte waived repayment of shareholder’s loans of € 25.9 million.

 

NOTE 10. OTHER NON CURRENT LIABILITIES

 

The amount of € 3,462 as of June 30, 2014, mainly refers to the following allowances to provisions account:

  the amount of € 1,016 is related to the settlement of Aral. with the Italian  Revenues Agency, mentioned below (see Item 2. M.D. & A. – Recent Developments and Events )..
 

 

-

The amount of € 1,548 refers to a litigation occurred between Galzignano Terme Golf & Resort, S.p.A. and Sercos SpA.

 

The amount of € 590 refers to an allowance about a dispute with a supplier.

 

13
 

  

NOTE 11. 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 12. 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 June 30, 2014 and December 31, 2013 is € 13,214 and €12,325, 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 June 30, 2014 and December 31, 2013:

 

€’000

 

   June 30,
2014
   December 31,
2013
 
Deferred tax asset – net operating loss carryovers   3,634    3,389 
Less Valuation allowance   (3,634)   (3,389)
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:

 

   Six months period ended June 30, 
   2014   2013 
Income tax at Italian statutory rate of 27.5%  (245)  (629)
Increase in valuation allowance   245    629 
Income tax benefit  -   - 

 

NOTE 13. SUBSEQUENT EVENTS

 

On July 18, 2014, Masseria Santo Scalone Hotel and Resort Srl (“Masseria”), which was the owner of a real estate property in Ostuni, (Brindisi) and which resolved, on November 27, 2013, the contract concerning the acquisition of the property (see above), being unable to achieve its corporate purpose, was put into liquidation.

 

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 Report on Form 10-Q (the “Report”). 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, 2013 filed with the SEC on May 16, 2014.

 

14
 

 

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 2,000 rooms within the next 3 to 5 years.

 

We are currently in a negotiations with respect to acquisitions in Rome and Florence and have started searches for investment opportunities in Milan

 

In addition to our primary business, we have recently decided to enter into the hotel management business. In this respect we have set up a new entity called IBH Ripa Srl which is directly involved in the management of the Ripa Hotel in Rome.

 

Recent Developments and Events

 

On April 11, 2014, Aral Immobiliare Srl (“Aral”), the owner of the Ripa Hotel under a financial lease agreement with Unicredit Leasing SpA, entered into a settlement agreement with the Agenzia delle Entrate (the Italian Revenue Agency) in relation to a tax assessment issued by the latter on January 30, 2014. The tax assessment was concerning certain asserted outstanding taxes (VAT, income taxes etc.) related to the financial lease contract mentioned above for the years from 2008 onwards, for an overall amount of € 3,877,056.35. The settlement agreement envisages that, in relation to the first year of the financial lease contract (2008), Aral will pay the overall amount of € 1,234,202,52 plus interest, in twelve quarterly installments. The first installment has already been paid on April 30, 2014.

 

For the years from 2009 up to 2013, Aral and the Agenzia delle Entrate entered into a settlement that envisages the following payments:

 

2009: € 329,278.00

2010: € 189,810.00

2011: € 184,210.00

2012: € 179,710.00

2013 up to 2027: € 151,034.00 (which may be offset by Aral against higher VAT credit, if any)

2028: € 25,172.41 (which may be offset by Aral against higher VAT credit, if any)

On the basis of the above settlement, Aral already set an allowance for € 2,250,000.00 in its 2013 financial statements, which covers all expenses, penalties and interest costs related to this matter.

 

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 six months ended June 30, 2014 and for the fiscal year ended December 31, 2013 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. After the recognition of loss on receivables for doubtful accounts in the statement of operations of the six-months period ended June 30, 2014, the Company has determined that as of June 30, 2014 and December 31, 2013 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.

 

15
 

 

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 – 66 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 non-hotel assets. Most of these sales concluded at the end of September 30, 2012, some residual non-hotel assets sold in 2013.

 

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 June 30, 2014 and December 31, 2013, there are no derivative instruments.

 

16
 

 

Shareholder loans

 

Shareholder 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 hotel management companies. The majority of our rent is fixed and payable monthly. The fixed agreements with set increasing rental rates are recognized on a straight line basis. We recognize additional revenue that is variable based on a percentage of the operating profit of our rented hotels only when the contingency of baseline target has been met.

 

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 six months ended June 30, 2014 and June 30, 2013

 

€’000, except per share amounts  Six
Months
Ended
June 30,
2014
   Six
Months Ended
June 30,
2013
 
   Unaudited   Unaudited 
         
Revenue from operations  4,584   1,159 
Direct operating and selling, general and administrative costs          
Direct operating costs   2,930    216 
Selling, general and administrative costs   607    954 
Amortization and depreciation   1,152    1,126 
Total direct operating, selling, and administrative costs   4,689    2,296 
Operating Profit/(Loss)   (105)   (1,137)
Interest income   257    47 
Interest expenses   1,041    1,088 
Profit/(Loss) from continuing operations, before income taxes   (889)   (2,178)
Income taxes          
Profit/(Loss from continuing operations, net of income taxes   (889)   (2,178)
Net loss from operations of discontinued operations, after taxes        (108)
Net income/(loss) on disposal of discontinued operations, after taxes        (32)
Net profit/(loss) from discontinued operations        (140)
Consolidated net profit/(loss) for the period   (889)   (2,318)
Less net loss attributable to non-controlling interests in the consolidated subsidiaries        93 
Net profit/(loss) attributable to owners of Southern States Sign Company  (889)  (2,225)

  

Revenues

 

 Revenues for the six months ended June 30, 2014, increased approximately € 3,425,000, or 295.5%, compared to the six months ended June 30, 2013. This increase is due mainly to the consolidation into the Company’s accounts of the revenues generated by the management of the Ripa Hotel, now directly managed through CR&P’s subsidiary, IBH Ripa Srl.

 

Direct Operating Costs

 

Direct Operating Costs for the six months ended June 30, 2014, increased approximately € 2,714,000 compared to the six months ended June 30, 2013. Again, this increase is mainly due to the consolidation into the Company’s accounts of the costs related to the management of the Ripa Hotel.

 

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Selling, General and Administrative Costs

 

Selling, General and Administrative costs for the six months ended June 30, 2014 and June 30, 2013, were approximately € 608,000 and €954,000, respectively. Such expenses consist primarily of salaries and personnel related expenses, occupancy expenses, sales travel, consulting costs and other expenses. The decrease is mainly due to the efficiency policy.

 

Amortization and Depreciation

 

Amortization and depreciation for the six months ended June 30, 2014 and June 30, 2013 were approximately € 1,152,000 and € 1,126,000, respectively. The increase is immaterial.

 

Interest Income

 

Interest income for the six months ended June 30, 2014 and June 30, 2013 was approximately a gain of € 257,000 and a gain of €47,000, respectively. The increase is mainly due to the recognition of interest income related to the receivable from Masoledo, arising from sale of most of non-hotel assets in the second half of 2013.

 

Interest Expense

 

Interest expense for the six months ended June 30, 2014 and June 30, 2013 was approximately € 1,041,000 and € 1,088,000 respectively. The decrease is immaterial.

 

Income Taxes

 

Income taxes for the six months ended June 30, 2014 and June 30, 2013 were approximately € 0.

 

Going concern considerations

 

Notwithstanding the losses recorded in 2013 and in the six months ended June 30, 2014, we expect to remain in operation for the foreseeable future on the basis of the strategies we are currently implementing, which will have a positive impact on the profitability of our business in the future years. Therefore we have the ability to continue as a going concern for a long and reasonable period following the date of the financial statements.

 

Liquidity and Capital Resources

 

For the six months ended June 30, 2014 and 2013

 

As of June 30, 2014 we had cash and cash equivalents of approximately € 696,000, negative working capital of approximately € 6,101,000 and accumulated loss of approximately € 4,355,000.

 

Cash Flows from Operating Activities

 

Net cash provided by operating activities was approximately € 726,000 for the six months ended June 30, 2014, compared to the net cash used of approximately € 53,000 for the six months ended June 30, 2013.

 

The net cash provided by operating activities for the six months ended June 30, 2014 reflects a net loss of approximately € 889,000 offset by a depreciation and amortization of approximately € 1,152,000. Changes in assets and liabilities included a decrease in trade receivables of approximately € 184,000, a decrease in related party receivables of approximately € 697,000, a decrease in advanced payments on purchases of property of approximately € 4, an increase in other assets of approximately € 125,000, an increase in trade payables of approximately € 1,618,000, an increase in related party payables of approximately € 28,000, a decrease in other payables of approximately € 60,000, an increase in VAT taxes receivable of approximately € 1,061,000 and a decrease in other liabilities of approximately € 1,351,000.

 

The net cash used in operating activities for the six months ended June 30, 2013 reflects a net loss of approximately € 2,318,000, a net loss from discontinued operations of approximately € 140,000 and a depreciation and amortization of approximately € 1,126,000. Changes in assets and liabilities included a decrease in trade receivables of approximately € 118,000, a decrease in related party receivables of approximately € 475,000, an increase in other assets of approximately € 75,000, an increase in trade payables of approximately € 956,000, an increase in related party payables of approximately € 507,000, an increase in other payables of approximately € 49,000, an increase in VAT taxes receivable of approximately € 434,000 and an increase in other liabilities of approximately € 1,000. The net cash used in operating activities of discontinued operations was approximately € 62,000.

 

Cash Flows from Investing Activities

The net cash used in investing activities for the six months ended June 30, 2014 of approximately € 800,000 consist primarily of the cash outflow due to the purchases of plant, equipment and intangible assets related to the hotel-management business.

 

The net cash used in investing activities for the six months ended June 30, 2013 of approximately € 166,000 consist primarily of the cash outflow due to the purchase of intangible assets.

 

Cash Flows from Financing Activities

 

Net cash provided by financing activities for the six months ended June 30, 2014 was approximately € 42,000, which was mainly due to the borrowings from bank overdrafts. Net cash used in financing activities for the six months ended June 30, 2014 was approximately € 64,000, which was mainly due to the reimbursement of bank overdrafts (€ 2,061,000) offset by the issuance of shareholders loan (€ 1,822,000) and the issuance of long-term financial debt (€ 175,000).

 

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Future Liquidity Needs

 

We have evaluated our expected cash requirements over the next twelve months, which includes, but is not limited to, interest payments, capital repayments, capital expenditures and working capital requirements. While we are able to manage certain aspects of these cash requirements, the level of income, rate of repayment of related party receivables and cost of debt, where variable, are outside our control.

 

In order to optimize our cash flow, we are currently negotiating with the lenders (a pool of four banks) of the mortgage loan in place on the Galzignano property, in order to achieve better terms and conditions (specifically to lengthen the maturity of the loan, currently set for October 2018, and to reduce interest costs).

We have just about to finalise with UniCredit Leasing SpA a moratorium of the financial lease regarding the Ripa Hotel, whereby we will have to pay interests only for a 3,5 year period starting in Augustr 2014. This will make available to us the financial resources required to renovate the last 78 rooms of the hotel which still need to be completed. The closing of the moratorium agreement is scheduled for beginning of September, 2014.

 

We are also planning, but as yet have no contractual commitments, to make acquisitions and while we wish to effect at least some of these acquisitions through the issue of shares there can be no certainty that the vendors will accept such consideration and we may wish, in any case, to effect such acquisitions using cash. Further, we plan to put in place new borrowings to finance the assets to be acquired or take-on existing borrowings secured on the assets planned to be acquired.

 

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

 

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

 

We are in the process of developing one property which will require capital expenditure – the Green Park Hotel is being converted to apartments.

 

The development of the Green Park Hotel should start in the first half of 2015. It is expected that the Green Park Hotel conversion will cost approximately €4.4 million ($ 5.7 million) to be spent over a period of 1½ years from commencement in 2015.

 

In each case no work, beyond planning and negotiation of financing, has been undertaken and no work will start until the required financing has been agreed and contracted with 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 June 30, 2014, 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 and 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.

 

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PART II. OTHER INFORMATION

 

Item 1.          Legal Proceedings

 

For a discussion relating to current legal proceedings of the Company, please see Part II, Item I, “Legal Proceedings” of our Form 10-K, previously filed with the Securities and Exchange Commission on May 16, 2014.

 

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.

 

Item 5.          Other Information.

 

None.

 

Item 6.           Exhibits.

 

Exhibit Number   Description of Exhibit
     
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)
     
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 Quarterly Report on Form 10-Q 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.

 

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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

 

8/13/2014

  By:
/s/ Sergio Schisani   Sergio Schisani
Chief Executive Officer and Principal Financial Officer  

 

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