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| HOTR > SEC Filings for HOTR > Form 10-Q on 21-Dec-2012 | All Recent SEC Filings |
21-Dec-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 nine months ended September 30, 2012, which currently consists of four Hooters locations in South Africa and one location in Budapest, Hungary which opened in August 2012.
Three months ended September 30, 2012:
(1) (2)
Budapest, Total
South Africa Hungary Restaurants
Revenues $ 1,533,767 $ 176,865 $ 1,710,632
Cost of Sales 636,164 78,387 714,551
Gross Profit 897,603 98,478 996,081
Recurring expenses:
Operating expenses 860,245 83,373 943,618
General and administrative 79,388 48,799 128,187
Interest expense 11,486 - 11,486
Depreciation and amortization 85,241 10,198 95,439
Miscellaneous (1,153 ) (1,153 )
Income taxes 7,997 - 7,997
1,044,357 141,217 1,185,574
Net income (loss) before non-recurring expenses (146,754 ) (42,739 ) (189,493 )
Pre-opening costs (537 ) 126,484 125,947
Net income (loss) $ (146,217 ) $ (169,223 ) (315,440 )
Non-controlling interest 52,628
$ (262,812 )
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(1) In South Africa, the Durban location opened in December 2009, the
Johannesburg location opened in June 2010, the Cape Town location opened in June
2011 and the Emperors Palace location opened in February 2012.
(2) The Budapest, Hungary location opened in August 2012.
Nine months ended September 30, 2012:
(1) (2)
Budapest, Total
South Africa Hungary Restaurants
Revenues $ 4,617,385 $ 176,865 $ 4,794,250
Cost of Sales 1,927,327 78,387 2,005,714
Gross Profit 2,690,058 98,478 2,788,536
Recurring expenses:
Operating expenses 2,552,867 83,373 2,636,240
General and administrative 285,266 71,417 356,683
Interest expense 37,515 - 37,515
Depreciation and amortization 247,901 10,198 258,099
Miscellaneous (1,153 ) (1,153 )
Income taxes 7,997 - 7,997
3,131,546 163,835 3,295,381
Net income (loss) before non-recurring expenses (441,488 ) (65,357 ) (506,845 )
Pre-opening costs 38,683 151,484 190,167
Net income (loss) $ (480,171 ) $ (216,841 ) (697,012 )
Non-controlling interest 181,490
$ (515,522 )
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(1) In South Africa, the Durban location opened in December 2009, the
Johannesburg location opened in June 2010, the Cape Town location opened in June
2011 and the Emperors Palace location opened in February 2012.
(2) The Budapest, Hungary location opened in August 2012.
LIQUIDITY AND CAPITAL RESOURCES
Historical information:
At September 30, 2012 and December 31, 2011, the Company had current assets of $2,563,752 and $641,963; current liabilities of $1,478,297 and $3,720,486; and a working capital balance (deficit) of $1,085,455 and $(3,078,523), respectively. The Company incurred a loss of $2,287,169 during the nine months ended September 30, 2012 and had an unrealized loss from available-for-sale securities of $264,044 and a foreign currency translation gain of $45,464, resulting in a comprehensive loss of $2,505,749. As of December 20, 2012, the Company has a consolidated cash balance of approximately $1,138,000.
The Company's corporate general and administrative expense 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. In August 2012, the Company opened its Budapest, Hungary location. 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 in the first six months of 2013.
The Company has a note with a balance at September 30, 2012 of $238,026 owed to its bank which is due in August 2013. The Company is currently seeking other financing options. 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 nine months of 2013 with some or all of the following:
· 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;
· Form joint ventures or other financing vehicles;
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 the remainder of 2012 and the first nine months of 2013, we expect to open one restaurant in each of the following countries - Australia (in addition to the one already opened in January 2012) and South Africa; and plans to secure a location in Brazil. The Company expects the total cash requirements for these restaurants to be approximately $1.8 million, of which approximately $0.6 million has been paid as of September 30, 2012.
In addition, we expect general and administrative expenses to be approximately $2.4 million for the next 12 months.
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 other forms of financing. 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 September 30, 2012 and 2011
Revenue
Revenue amounted to $1,767,512 in the three months ended September 30, 2012 and ($5,726) in the year earlier period.
Restaurant sales amounted to $1,710,632 for our four locations in South Africa and our Budapest, Hungary location which opened in August 2012.
Revenues for the management business for the three months ended September 30, 2012 amounted to $56,880 and ($5,726) in the year earlier period. In the three months ended September 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 September 30, 2012 and in the year earlier period, an accrual of $31,880 and ($30,726), respectively, was recorded for management fees from Investors II. In 2011, Investors II had a large loss in the quarter which resulted in the reversal of the previously accrued management fee for the year-to-date period.
Restaurant cost of sales
Restaurant cost of sales amounted to $714,551, or 41.8% 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 $943,618, or 55.2% 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 $125,947 incurred for the opening of our Hooters location in Budapest, Hungary which opened in the third quarter of 2012.
General and Administrative Expense ("G&A")
G&A amounted to $666,300 in the three months ended September 30, 2012 and $277,934 in the year earlier period. The more significant components of G&A are summarized as follows:
2012 2011
Professional fees $ 81,512 $ 12,181
Payroll and benefits 240,992 118,970
Consulting and investor relation fees 206,636 73,250
Travel and entertainment 29,489 21,482
Accounting and auditing 2,900 11,350
Other G&A 104,771 40,701
$ 666,300 $ 277,934
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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.
Professional fees increased $69,331 in 2012 from 2011 primarily from additional legal and regulatory expenses incurred as part of the continued growth of the Company.
Payroll and benefits increased $122,022 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 $133,386 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 $16,,200 and $0 in 2012 and 2011, respectively. Non-cash amortization of warrant expense for services were $52,655 and $0 in 2012 and 2011, respectively.
Other G&A expense increased $64,070 in 2012 from 2011 primarily related to the addition of restaurant management costs.
Depreciation and amortization
Depreciation expense for the three months ended September 30, 2012 and 2011 amounted to $92,757 and $2,512, respectively. The restaurant segment for the three months ended September 30, 2012 and 2011 amounted to $90,313 and $0, respectively, and the management business amounted to $2,444 and $2,512, respectively.
Amortization expense for the three months ended September 30, 2012 for the restaurant businesses related to franchise fees was $5,126. There was no amortization expense in 2011.
OTHER INCOME (EXPENSE)
Other income (expense) consisted of the following for the three months ended
September 30, 2012 and 2011:
2012 2011
Other income (expense):
Equity in earnings (losses) of investments $ 33,412 $ (20,820 )
Miscellaneous income 1,680 -
Other than temporary decline in available-for-sale securities - (147,973 )
Interest expense (39,583 ) (41,190 )
$ (4,491 ) $ (209,983 )
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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 earnings from the Hoot Campbelltown partnership in 2012 of $33,412, and a loss from the Hoot SA partnerships in 2011 of $20,820.
Interest Expense
Interest expense decreased by $1,607 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 at the end of June 2012 with the closing of the Company's raise. The majority of the 2012 interest expense is non-cash amortization of warrant expense.
Comparison of nine months ended September 30, 2012 and 2011
Revenue
Revenue amounted to $4,907,828 in the nine months ended September 30, 2012 and $468,417 in the year earlier period.
Restaurant sales amounted to $4,794,250 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 nine months ended September 30, 2012 amounted to $113,578 and $468,417 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 $66,667 for the annual $100,000 fee received in January 2012. In the nine months ended September 30, 2012 the cash revenue of $75,000 represents nine 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. Non-cash revenues in the nine months ended September 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 condensed consolidated financial statements for details.
Restaurant cost of sales
Restaurant cost of sales amounted to $2,005,714, or 44.8% 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 $2,636,240, or 55.0% 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 $190,167 incurred for the opening of our location at the Emperor's Palace Casino in Johannesburg, South Africa in February 2012 and the opening of our Budapest, Hungary location in August of 2012.
General and Administrative Expense ("G&A")
G&A amounted to $1,833,933 in the nine months ended September 30, 2012 and $762,159 in the year earlier period. The more significant components of G&A are summarized as follows:
2012 2011
Professional fees $ 188,633 $ 101,045
Payroll and benefits 671,440 356,701
Consulting and investor relation fees 478,279 113,600
Travel and entertainment 151,796 52,052
Accounting and auditing 49,500 58,700
Other G&A 294,285 80,061
$ 1,833,933 $ 762,159
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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 $87,588 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 $314,,739 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 $25,606 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 expense increased $148,044 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 nine months ended September 30, 2012 and 2011 amounted to $251,691 and $7,573, respectively. The restaurant segment for the nine months ended September 30, 2012 and 2011 amounted to $244,722 and $0, respectively, and the management business amounted to $6,969 and $7,573, respectively.
Amortization expense for the nine months ended September 30, 2012 for the restaurant businesses related to franchise fees was $13.377. There was no amortization expense in 2011.
OTHER INCOME (EXPENSE)
Other income (expense) consisted of the following for the nine months ended
September 30, 2012 and 2011:
2012 2011
Other income (expense):
Equity in earnings (losses) of investments $ (10,474 ) $ (9,256 )
Realized gains from sale of investments - 19,991
Other than temporary decline in available-for-sale securities - (147,973 )
Interest expense (432,795 ) (63,876 )
Interest income - 4,540
Miscellaneous income 1,680 476
$ (441,589 ) $ (196,098 )
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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 $10,474, and a loss from the Hoot SA partnerships in 2011 of $9,256.
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 $368,919 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 $120,632 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.
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