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| HOTR > SEC Filings for HOTR > Form 10-Q on 13-Aug-2012 | All Recent SEC Filings |
13-Aug-2012
Quarterly Report
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report that are not historical fact are "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. The words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "believes," "estimates," "projects" or similar expressions are intended to identify these forward-looking statements. These statements are subject to risks and uncertainties beyond our reasonable control that could cause our actual business and results of operations to differ materially from those reflected in our forward-looking statements. The safe harbor provisions provided in the Securities Litigation Reform Act do not apply to forward-looking statements we make in this report. Forward-looking statements are not guarantees of future performance. Our forward-looking statements are based on trends which we anticipate in our industry and our good faith estimate of the effect on these trends of such factors as industry capacity, product demand and product pricing. The inclusion of projections and other forward-looking statements should not be regarded a representation by us or any other person that we will realize our projections or that any of the forward-looking statements contained in this prospectus will prove to be accurate.
Management's Analysis of Business
We have changed our focus recently from managing investments to owning and operating Hooters franchises internationally. Hooters restaurants are casual beach-themed establishments with sports on television, jukebox music, and the "nearly world famous" Hooters Girls. The menu consists of spicy chicken wings, seafood, sandwiches and salads. Each locations menu can vary with the tastes of the locality it is in. Hooters began in 1983 with its first restaurant in Clearwater, Florida. From the original restaurant and licensee Mr. Robert Brooks, Hooters has become a global brand, with locations in 44 states domestically and over 430 Hooters restaurants worldwide. Besides restaurants, Hooters has also branched out to other areas, including licensing its name to a golf tour and the sale of packaged food in supermarkets.
We expect to either own 100% of the Hooters franchise or partner with a local franchisee in the countries we target. We based this decision on what we believe to be the successful launch of our South African Hooters venture and believe we have aligned partners and operators in various international markets. We are focused on expanding our Hooters operations, and expect to use substantially all the net proceeds from the upcoming offering, in South Africa, Brazil, Hungary, Australia and Europe.
Accordingly, we operate in two business segments; Hooters franchise restaurants and our legacy investment management and consulting services businesses.
RESTAURANT OPERATIONS
The following is a condensed unaudited statement of operations for our restaurant operations for the three and six months ended June 30, 2012, which currently consists of four Hooters locations in South Africa.
Three months ended June 30, 2012:
(1) (2) (3) (4)
Emperors Total
Durban Johannesburg CapeTown Palace Restaurants
Revenues $ 294,293 $ 523,870 $ 162,341 $ 674,325 $ 1,654,829
Cost of Sales 109,940 187,338 62,942 246,001 606,221
Gross Profit 184,353 336,532 99,399 428,324 1,048,608
Recurring expenses:
Operating expenses 152,689 266,943 116,715 258,249 794,596
Interest expense 1,352 2,349 2,018 - 5,719
Depreciation and
amortization 16,712 45,293 17,229 44,936 124,170
Income taxes 2,537 7,078 - 37,712 47,327
173,290 321,663 135,962 340,897 971,812
Net income (loss) before
non-recurring expenses 11,063 14,869 (36,563 ) 87,427 76,796
Bad debt expense 12,092 12,092
Pre-opening costs - - - - -
Net income (loss) $ (1,029 ) $ 14,869 $ (36,563 ) $ 87,427 64,704
Income from management
company not absorbed above 1,901
Total South Africa
restaurants $ 66,605
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(1) Durban location opened in December 2009.
(2) Johannesburg location opened in June 2010.
(3) CapeTown location opened in June 2011.
(4) Emperors Palace location opened mid-February 2012.
Six months ended June 30, 2012:
(1) (2) (3) (4)
Emperors Total
Durban Johannesburg CapeTown Palace Restaurants
Revenues $ 555,792 $ 1,016,539 $ 325,876 $ 1,105,609 $ 3,003,816
Cost of Sales 207,768 363,357 127,970 403,675 1,102,770
Gross Profit 348,024 653,182 197,906 701,934 1,901,046
Recurring expenses:
Operating expenses 301,855 530,173 235,818 409,957 1,477,803
Interest expense 2,692 4,764 4,129 - 11,585
Depreciation and
amortization 33,424 90,586 34,458 71,542 230,010
Income taxes 4,014 7,078 - 40,051 51,143
341,985 632,601 274,405 521,550 1,770,541
Net income (loss) before
non-recurring expenses 6,039 20,581 (76,499 ) 180,384 130,505
Bad debt expense 12,092 12,092
Pre-opening costs - - - 78,287 78,287
Net income (loss) $ (6,053 ) $ 20,581 $ (76,499 ) $ 102,097 40,126
Loss from management
company not absorbed above (2,793 )
Total South Africa
restaurants $ 37,333
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(1) Durban location opened in December 2009.
(2) Johannesburg location opened in June 2010.
(3) CapeTown location opened in June 2011.
(4) Emperors Palace location opened mid-February 2012.
We expect net income for the four stores for the remainder of 2012 to be approximately $50,000-$100,000 per quarter. The Emperor's Palace location was our first location opened since we took over operational control, and we expect this location to continue and at its current pace.
LIQUIDITY AND CAPITAL RESOURCES
Historical information:
At June 30, 2012 and December 31, 2011, the Company had current assets of $4,072,903 and $623,681; current liabilities of $1,023,065 and $3,627,306; and a working capital balance (deficit) of $3,049,838 and $(3,003,625), respectively. The Company incurred a loss of $1,301,494 during the six months ended June 30, 2012 and had an unrealized loss from available-for-sale securities of $237,639 and a foreign currency translation loss of $5,472, resulting in a comprehensive loss of $1,544,605.
The Company's corporate general and administrative expenses averaged approximately $295,000 per quarter during 2011 and has increased to $481,000 in the first quarter of 2012 and $657,000 in the current quarter as we expanded our footprint internationally. Effective October 1, 2011, the Company acquired majority control of the restaurants in South Africa and began consolidating these operations. The Company also will share 49% of the profits in our Hooters location opened in January 2012 in Campbelltown, Australia, a suburb of Sydney and plans to open a second Australia location under the same terms before the end of 2012.
The Company has a note with a balance at June 30, 2012 of $239,241 owed to its bank which is due in August 2013 and a line of credit with its bank with a balance at June 30, 2012 of $0 (total available was $2,000,000). The line matures on August 20, 2012. The Company is currently negotiating an extension of the line of credit and terms. All of our prior notes payable and convertible debt were paid in either cash or common stock with the closing of our raise in June 2012.
The Company expects to meet its obligations in the remainder of 2012 and the first six months of 2013 with some or all of the following:
· The cash proceeds received from the sale of units (consisting of common stock and warrants) in a registered offering declared effective on June 21, 2012 in which the company sold $11 million of units and netted approximately $10.1 million before expenses and approximately $3.6 million after conversion and payment of debt and accrued interest, Hoot SA non-controlling interest, and expenses;
· Received $100,000 as an annual fee for its CEO sitting on the Board of Hooters of America and expect to continue to receive this annual fee for the next three years based on the current agreement;
· Borrow, if and to the extent available, additional funds on its existing line of credit;
· Positive cash flow from our South African restaurant operations.
Evaluation of the amounts and certainty of cash flows:
The Company plans to use the funding from the S-1 Registration to partially complete its expansion plans in South Africa, Brazil, Australia, Hungary and Europe. The Company has used short-term financing to meet the preliminary requirements of its planned expansion, principally in South Africa and Australia. The Company obtained less than originally contemplated from our offering, which may require the Company to limit its expansion plans. We would use limited partner funding and other sources of capital to the extent necessary to attempt to fund as much of the planned expansion as possible. There can be no assurance that any of this funding will be available when needed.
Cash requirements and capital expenditures:
In 2012, we expect to open one restaurant in each of the following countries - Australia (in addition to the one already opened in January 2012) and Budapest, Hungary; and plans to secure locations in South Africa and Brazil. The Company expects the total cash requirements for these restaurants to be approximately $3.3 million, of which approximately $1.3 million has been paid as of June 30, 2012.
In addition, we expect general and administrative expenses to be approximately $2.0-$2.3 million for 2012.
Discussion and analysis of known trends and uncertainties:
The world economy has been in a state of flux for some time with the debt problems of a number of countries in Europe, the recent recession in the United States, the significant increase to debt in the United States compounded by continuing to give away more than can reasonably be collected, the slowing economy in China and other factors. It is impossible to forecast what this will mean to our expansion plans in South Africa, Brazil, Australia, Europe and Hungary. We feel that we minimize our risks through investment in different geographical areas.
Expected changes in the mix and relative cost of capital resources:
Since the middle of 2010, the Company has utilized high cost capital to finance its international growth. The Company has eliminated the majority of this debt with new equity in June 2012 and further, to use this equity and possible additional financing as necessary to complete its expansion plans over the next two years.
Other prospective sources for and uses of cash:
The Company is seeking to renew its $2,000,000 line of credit which as been repaid as of June 30, 2012 and matures in August 2012. As discussed elsewhere in this Form 10-Q, effective October 1, 2011, the Company acquired majority control of the restaurants in South Africa and began consolidating these operations. Previously all restaurant operations were accounted for using the equity method.
Comparison of three months ended June 30, 2012 and 2011
Revenue
Revenue amounted to $1,686,527 in the three months ended June 30, 2012 and $32,830 in the year earlier period.
Restaurant sales, net amounted to $1,654,829 for our four locations in South Africa, one of which opened to the public on February 17, 2012.
Revenues for the management business for the three months ended June 30, 2012 amounted to $31,698 and $32,830 in the year earlier period. Cash revenues were $25,000 and $416,667 in the three months ended June 30, 2012 and 2011, respectively. In the three months ended June 30, 2012 and in the year earlier period, the revenue from non-affiliates of $25,000 represents three months of the Company's annual payment from HOA of $100,000, which is due in January each year while Mr. Pruitt serves on its board. In the three months ended June 30, 2012 and in the year earlier period, an accrual of $$6,698 and $7,830, respectively, was recorded for management fees from Investors II.
Restaurant cost of sales
Restaurant cost of sales amounted to $606,221, or 36.6% of restaurant net sales. We expect the percentage to remain approximately the same in 2012 as we expand our business in South Africa and other countries.
Restaurant operating expenses
Restaurant operating expenses amounted to $711,808, or 43.0% of restaurant net sales. We expect the percentage of operating expenses to restaurant net sales to decline as we open more Hooters locations, however we have a limited history to be able to forecast a range.
Restaurant pre-opening expenses
Restaurant pre-opening expenses amounted to $25,000 incurred for the opening of our Hooters location in Budapest, Hungary expected in the third quarter of 2012.
General and Administrative Expense ("G&A")
G&A amounted to $656,596 in the three months ended June 30, 2012 and $259,766 in the year earlier period. The more significant components of G&A are summarized as follows:
2012 2011
Professional fees $ 54,486 $ 23,899
Payroll and benefits 202,340 143,359
Consulting and investor relation fees 153,046 23,706
Travel and entertainment 78,775 17,384
Accounting and auditing 3,900 25,850
Other G&A 164,049 25,568
$ 656,596 $ 259,766
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G&A costs are expected to range from $550-$650,000 per quarter for the remainder of 2012, with the costs associated with the activities of the restaurant business continuing to grow. Revenue from the restaurants is expected to exceed this increase in expense.
Payroll and benefits increased $58,981 in 2012 from 2011 primarily from the addition of restaurant management personnel beginning in the fourth quarter of 2011 and the addition of corporate personnel in the second quarter of 2012.
Consulting and investor relations fees increased $129,340 in 2012 from 2011 as the Company engaged experienced personnel to startup our European subsidiary and Brazil operations and to increase the Company's recognition in the investment arena. Non-cash fees for services were $9,406 and $0 in 2012 and 2011, respectively. Non-cash amortization of warrant expense for services were $25,910 and $0 in 2012 and 2011, respectively.
Travel and entertainment increased $61,391 as Company personnel, primarily the CEO and investor relations personnel, traveled to increase our company awareness and lockdown financing and partners for the restaurant locales.
Other G&A expensese increased $138,481 in 2012 from 2011 primarily related to indirect costs of the capital raise which was completed in June 2012.
Depreciation and amortization
Depreciation expense for the three months ended June 30, 2012 and 2011 amounted to $120,058 and $2,512, respectively. The restaurant segment for the three months ended June 30, 2012 and 2011 amounted to $117,723 and $0, respectively, and the management business amounted to $2,335 and $2,512, respectively.
Amortization expense for the three months ended June 30, 2012 for the restaurant businesses related to franchise fees was $7,029. There was no amortization expense in 2011.
OTHER INCOME (EXPENSE)
Other income (expense) consisted of the following for the three months ended
June 30, 2012 and 2011:
2012 2011
Other income (expense):
Equity in earnings (losses) of investments $ (33,348 ) $ 6,461
Realized gains from sale of investments - 361
Interest expense (201,550 ) (3,927 )
$ (234,898 ) $ 2,895
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Equity in Earnings of Investments
Equity in earnings of investments includes our share of earnings from investments in which we own at least 20% and are being accounted for using the equity method. This included losses from the Hoot Campbelltown partnership in 2012 of $33,348, and income from the Hoot SA partnerships in 2011 of $6,461.
Realized Gains from Sale of Investments
Realized gains are recorded when investments are sold and include transactions in 2011 from a gain on sales of DineOut.
Interest Expense
Interest expense increased by $197,623 in 2012 from 2011 primarily due to the addition in 2011 of a line of credit and convertible notes payable, all of which were paid off in June 2012 with the closing of the Company's raise. Non-cash amortization of warrant expense for interest amounted to $22,659 and $0 in 2012 and 2011, respectively.
PROVISION FOR INCOME TAXES
The Company recorded income tax expense of $47,327 based on the net profit of our South African locations at a 28% corporate income tax rate.
Comparison of six months ended June 30, 2012 and 2011
Revenue
Revenue amounted to $3,060,816 in the six months ended June 30, 2012 and $474,143 in the year earlier period.
Restaurant sales, net amounted to $3,003,816 for our four locations in South Africa, one of which opened to the public on February 17, 2012.
Revenues for the management business for the six months ended June 30, 2012 amounted to $56,698 and $474,143 in the year earlier period. The cash revenues for the management business in 2011was from a fee of $400,000 received in January 2011 for our services in facilitating the acquisition of HOA and TW plus the accrual of $41,667 for the annual $100,000 fee received in January 2012. In the six months ended June 30, 2012 the cash revenue of $50,000 represents six months of the Company's annual payment from HOA of $100,000, which is due in January each year while Mr. Pruitt serves on its board. The Company also recorded an accrual of $30,726 for management fees from Investors II in 2011. Non-cash revenues in the six months ended June 30, 2011 of $1,750 was recognized from the receipt of securities for our services.
The fair value of the equity instruments for management fees received was determined based upon the stock prices as of the date we reached an agreement with the third party. The terms of the securities are not subject to adjustment after the measurement date. See Note 4 of the consolidated financial statements for details.
Restaurant cost of sales
Restaurant cost of sales amounted to $1,102,770, or 36.7% of restaurant net sales. We expect the percentage to remain approximately the same in 2012 as we expand our business in South Africa and other countries.
Restaurant operating expenses
Restaurant operating expenses amounted to $1,327,578, or 44.2% of restaurant net sales. We expect the percentage of operating expenses to restaurant net sales to decline as we open more Hooters locations, however we have a limited history to be able to forecast a range.
Restaurant pre-opening expenses
Restaurant pre-opening expenses amounted to $91,120 incurred for the opening of our location at the Emperor's Palace Casino in Johannesburg, South Africa in February 2012 and the expected opening of our Budapest, Hungary location in the third quarter of 2012.
General and Administrative Expense ("G&A")
G&A amounted to $1,137,868 in the six months ended June 30, 2012 and $484,224 in the year earlier period. The more significant components of G&A are summarized as follows:
2012 2011
Professional fees $ 114,396 $ 42,243
Payroll and benefits 373,357 262,108
Consulting and investor relation fees 271,643 40,350
Travel and entertainment 121,741 30,570
Accounting and auditing 46,600 47,350
Other G&A 210,131 61,603
$ 1,137,868 $ 484,224
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G&A costs are expected to range from $550-$650,000 per quarter for the remainder of 2012, with the costs associated with the activities of the restaurant business continuing to grow. Revenue from the restaurants is expected to exceed this increase in expense.
Payroll and benefits increased $111,249 in 2012 from 2011 primarily from the addition of restaurant management personnel beginning in the fourth quarter of 2011 and the addition of corporate personnel in the second quarter of 2012.
Consulting and investor relations fees increased $231,293 in 2012 from 2011 as the Company engaged experienced personnel to startup our European subsidiary and Brazil operations and to increase the Company's recognition in the investment arena. Non-cash fees for services were $9,406 and $0 in 2012 and 2011, respectively. Non-cash amortization of warrant expense for services were $26,745 and $0 in 2012 and 2011, respectively.
Travel and entertainment increased $91,171 as Company personnel, primarily the CEO, traveled to increase our company awareness and lockdown financing and partners for the restaurant locales.
Other G&A expensese increased $148,528 in 2012 from 2011 primarily related to indirect costs of the capital raise which was completed in June 2012.
Depreciation and amortization
Depreciation expense for the six months ended June 30, 2012 and 2011 amounted to $222,247 and $5,061, respectively. The restaurant segment for the six months ended June 30, 2012 and 2011 amounted to $217,722 and $0, respectively, and the management business amounted to $4,525 and $5,061, respectively.
Amortization expense for the six months ended June 30, 2012 for the restaurant businesses related to franchise fees was $13,452. There was no amortization expense in 2011.
OTHER INCOME (EXPENSE)
Other income (expense) consisted of the following for the six months ended June
30, 2012 and 2011:
2012 2011
Other income (expense):
Equity in earnings (losses) of investments $ (43,886 ) $ 11,564
Realized gains from sale of investments - 19,991
Interest expense (378,768 ) (22,686 )
Interest income - 4,540
Miscellaneous income - 476
$ (422,654 ) $ 13,885
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Equity in Earnings of Investments
Equity in earnings of investments includes our share of earnings from investments in which we own at least 20% and are being accounted for using the equity method. This included losses from the Hoot Campbelltown partnership in 2012 of $43,886, and income from the Hoot SA partnerships in 2011 of $11,564.
Realized Gains from Sale of Investments
Realized gains are recorded when investments are sold and include transactions in 2011 from a gain on sales of DineOut.
Interest Expense
Interest expense increased by $356,082 in 2012 from 2011 primarily due to the addition in 2011 of a line of credit and convertible notes payable, all of which were paid in full in June 2012 with the closing of the Company's raise. Non-cash amortization of warrant expense for interest amounted to $45,318 and $0 in 2012 and 2011, respectively.
Interest Income
Interest income in 2012 decreased $4,540 as 2011 includes earnings from Investors for one month, compared to 2012 which had none.
PROVISION FOR INCOME TAXES
The Company recorded income tax expense of $51,143 based on the net profit of our South African locations at a 28% corporate income tax rate.
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