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| HOTR > SEC Filings for HOTR > Form 10-Q/A on 28-Dec-2012 | All Recent SEC Filings |
28-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 450 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 statement of operations for our restaurant
operations, which currently consists of four Hooters locations in South Africa.
(1) (2) (3) (4)
Emperors Total
Durban Johannesburg CapeTown Palace Restaurants
Revenues $ 269,660 $ 515,106 $ 165,672 $ 437,057 $ 1,387,495
Cost of Sales 125,573 202,767 46,061 207,150 581,551
Gross Profit 144,087 312,339 119,611 229,907 805,944
Recurring expenses:
Operating expenses,
including management fees
eliminated in consolidation 166,527 262,062 128,788 247,047 804,424
General and administrative
expenses 13,150 24,660 8,212 20,993 67,015
Other expenses (income) - - - - -
Interest expense 1,857 2,855 9,046 - 13,758
Depreciation and
amortization 12,803 30,589 22,247 12,196 77,835
Income taxes - - - - -
194,337 320,166 168,293 280,236 963,032
Net income (loss) before
non-recurring expenses (50,250 ) (7,827 ) (48,682 ) (50,329 ) (157,088 )
Pre-opening costs - - - - -
Net income (loss) $ (50,250 ) $ (7,827 ) $ (48,682 ) $ (50,329 ) (157,088 )
Loss from management
company not absorbed above (52,578 )
Total South Africa
restaurants $ (209,666 )
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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 to continue to improve for the remainder of 2012. 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 AND GOING CONCERN
Historical information:
At March 31, 2012 and December 31, 2011, the Company had restated current assets of $739,658 and $641,963; current liabilities of $5,087,875 and $3,720,486; and a working capital deficit of $4,348,217 and $3,078,523, respectively. The Company incurred a loss of $703,785 during the three months ended March 31, 2012 and had an unrealized loss from available-for-sale securities of $105,618 and foreign currency translation losses of $8,714, resulting in a comprehensive loss of $818,117.
The Company's corporate general and administrative expenses averaged approximately $295,000 per quarter during 2011 and increased to $481,000 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.
In addition, the Company has a note with a balance at March 31, 2012 of $241,115 owed to its bank which is due in August 2013 and a line of credit with its bank with a balance at March 31, 2012 of $1,178,000 (total available $2,000,000) due on August 20, 2012. We also have convertible notes payable with certain investors with a balance at March 31, 2012 of $2,725,000 with maturity dates from January 22 through June 26, 2012. None of the noteholders whose notes have matured have taken any action to seek to enforce their notes. As of May 1, 2012, there are $975,000 of notes that have matured. The notes bear interest at an 18% annualized rate. In addition, the Company has a note with a balance at March 31, 2012 of $241,115 owed to its bank which is. The Company plans to continue to use limited partnerships, if the Company's contemplated raise is not completed, to fund its share of costs for additional Hooters restaurants.
The Company expects to meet its obligations in 2012 with some or all of the following:
· Proceeds from the sale of units (consisting of common stock and warrants). The Company filed an S-1 registration statement (which has yet to go effective) to raise up to $15,000,000;
· The Company received $100,000 in January 2012 as an annual fee for its CEO sitting on the Board of Hooters of America and expect to continue to receive this fee for the next three years based on the current agreement;
· Borrow additional funds on its existing line of credit;
· Convert its convertible notes payable into common stock.
If any or all of the above events do not occur or if the Company does not raise sufficient capital, substantial doubt about the Company's ability to continue as a going concern exists. These consolidated financial statements do not reflect any adjustments that might result from the outcome of these uncertainties.
Evaluation of the amounts and certainty of cash flows:
The Company plans to use the funding from the S-1 Registration to 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. If the Company is unable to obtain the funding from the S-1 Registration, the Company would be required 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 February 2012), Brazil, Hungary and South Africa. The Company expects the total cash requirements for these restaurants to be approximately $3.3 million, of which approximately $450,000 has been paid as of March 31, 2012.
In addition, we expect general and administrative expenses to be approximately $1.8-$2.0 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, Poland 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 hopes to eliminate the majority of this debt with new equity and further, to use this equity to complete its expansion plans over the next two years.
Other prospective sources for and uses of cash:
If the Company is unable to obtain the funding from its Offering, it will seek other sources of interim funding to maintain its current operations and complete the restaurants already underway.
If the above events do not occur or the Company is unable to develop its business model, substantial doubt about the Company's ability to continue as a going concern exists.
As discussed elsewhere in this Form 10-Q/A, 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 March 31, 2012 (Restated Note 16) and 2011
Revenue
Revenue amounted to $1,412,495 in the three months ended March 31, 2012 and $441,313 in the year earlier period.
Restaurant sales, net amounted to $1,387,495 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 March 31, 2012 amounted to $25,000 and $441,313 in the year earlier period. Cash revenues were $25,000 and $416,667 in the three months ended March 31, 2012 and 2011, respectively. 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 $16,667 for the annual $100,000 fee received in January 2012. In the three months ended March 31, 2012 the cash revenue 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. The Company also recorded an accrual of $22,896 for management fees from Investors II in 2011. Non-cash revenues in the three months ended March 31, 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 $581,551, or 41.9% 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 $769,332, or 55.4% 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 $40,721 incurred for the opening of our location at the Emperor's Palace Casino in Johannesburg, South Africa in February 2012.
General and Administrative Expense ("G&A")
G&A amounted to $511,522 in the three months ended March 31, 2012 and $224,458 in the year earlier period. The more significant components of G&A are summarized as follows:
2012 2011
Professional fees $ 59,910 $ 18,344
Payroll and benefits 201,266 118,749
Consulting and investor relation fees 118,597 16,644
Travel and entertainment 42,966 13,186
Accounting and auditing 42,700 21,500
Other G&A 46,083 36,035
$ 511,522 $ 224,458
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G&A costs are expected to range from $400-$500,000 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 $82,517 in 2012 from 2011 primarily from the addition of restaurant management personnel beginning in the fourth quarter of 2011.
Consulting and investor relations fees increased $101,953 from 2012 to 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 $0 and $25,000 in 2012 and 2011, respectively. Non-cash amortization of warrant expense for services were $23,495 and $0 in 2012 and 2011, respectively.
Travel and entertainment increased $29,780 as Company personnel, primarily the CEO, traveled to increase our company awareness and lockdown financing and partners for the restaurant locales.
Depreciation and amortization
Depreciation expense for the three months ended March 31, 2012 and 2011 amounted to $76,265 and $2,549, respectively. The restaurant segment for the three months ended March 31, 2012 and 2011 amounted to $74,075 and $0, respectively, and the management business amounted to $2,190 and $2,549, respectively.
Amortization expense for the three months ended March 31, 2012 for the restaurant businesses related to franchise fees was $3,759. There was no amortization expense in 2011.
OTHER INCOME (EXPENSE)
Other income (expense) consisted of the following at March 31, 2012 and 2011:
2012 2011
Other income (expense):
Equity in earnings (losses) of investments $ (10,538 ) $ 5,103
Realized gains from sale of investments - 19,630
Interest expense (185,110 ) (18,759 )
Interest income - 4,541
Miscellaneous income - 476
$ (195,648 ) $ 10,991
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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 $10,538, and income from the Hoot SA partnerships in 2011 of $5,103.
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 $166,351 in 2012 from 2011 primarily due to the addition in 2011 of a line of credit with a balance as of March 31, 2012 of $1,178,000 and convertible notes payable in the amount of $1,725,000, offset by the conversion of $686,500 of convertible notes payable from 2010.
Interest Income
Interest income in 2012 decreased $4,541 as 2011 includes earnings from Investors for one month, compared to 2012 which had none.
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