SADDLEBROOK RESORTS INC - Quarter Report: 2017 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

For the quarterly period ended September 30, 2017

OR

For the transition period from                      to                     

COMMISSION FILE NUMBER: 2-65481

SADDLEBROOK RESORTS, INC.

(Exact name of registrant as specified in its charter)

5700 Saddlebrook Way, Wesley Chapel, Florida 33543-4499

(Address of principal executive offices)

813-973-1111

(Registrant’s telephone number, including area code)

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  ☒    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 (229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ☒    NO  ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ☐    NO  ☒

Registrant has 100,000 shares of common stock outstanding, all of which are held by an affiliate of the Registrant.

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INDEX

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

SADDLEBROOK RESORTS, INC.

BALANCE SHEETS

The accompanying notes are an integral part

of these financial statements

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SADDLEBROOK RESORTS, INC.

STATEMENTS OF OPERATIONS

AND ACCUMULATED EARNINGS

(Unaudited)

The accompanying notes are an integral part

of these financial statements

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SADDLEBROOK RESORTS, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes are an integral part

of these financial statements

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SADDLEBROOK RESORTS, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

Saddlebrook Resorts, Inc. (the “Company”) developed and operates Saddlebrook Resort, which is a condominium hotel and resort located in Wesley Chapel, Florida.

The Company’s accompanying balance sheet for September 30, 2017, and its statements of operations and accumulated (deficit) earnings and cash flows for the three and nine month periods ended September 30, 2017 and 2016, are unaudited but reflect all adjustments which are, in the opinion of management, necessary for the fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The balance sheet at December 31, 2016 has been derived from the audited financial statements as of that date.

The Company’s business is seasonal. Therefore, the results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for future interim periods or the full fiscal year.

These financial statements and related notes are presented for interim periods in accordance with the requirements of Form 10-Q and Article 10 of Regulation S-X, and, consequently, do not include all disclosures normally required by accounting principles generally accepted in the United States. Accordingly, these financial statements and related notes should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

In May 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” which creates a new Topic, Accounting Standards Codification (“ASC”) Topic 606. The standard is principle-based and provides a five-step model to determine when and how revenue is recognized. The core principle is that an entity should recognize revenue when it transfers promised good or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 for all entities by one year, until years beginning in 2018, with early adoption permitted but not before 2017. Entities may adopt ASU 2014-09 using either a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients or a retrospective approach with the cumulative effect recognized at the date of adoption. Management believes the majority of the Company’s revenue falls outside the scope of this guidance and does not anticipate any significant changes to the manner or timing of the Company’s revenue recognition. The Company intends to implement the standard retrospectively with the cumulative effect, if any, recognized in retained earnings at the date of application.

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Note 2. Accounts Receivable

Note 3. Property, Buildings and Equipment

The Company’s property, buildings and equipment are pledged as security for its long-term debt (see Note 4).

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Note 4. Long-term debt and Capital Lease Obligation

On December 6, 2015 the Company’s financing agreement with a third party lender was modified to include renewal for the existing principal balance of $4,875,000, along with an advance of an additional $2,000,000. The new term note expires December 6, 2020. At September 30, 2017, $6,258,013 was outstanding under the note. The term note requires monthly principal payments of $29,380 plus interest of 3% over the one month Libor index (4.23% at September 30, 2017). The term note is collateralized by all current and subsequently acquired real and personal property. The term note requires the Company to maintain a Debt Service Ratio, as defined, of 1.25%. The Company was in default of this covenant as of December 31, 2016; however, the Company received a waiver for this default from its lender. Under the terms of its agreement, the debt service covenant will be re-measured at December 31, 2017. Management believes, based on its expectations, that the Company will be in compliance with the debt service covenant at that date; however, there can be no assurances that it will be in compliance. Should the Company not be in compliance at December 31, 2017, it will seek a waiver or modification of the covenant. In addition, under the terms of the loan agreement, the Company has certain remedies available to it by which it can cure the default, and it is management’s intent to do so if necessary.

On April 24, 2017, the Company entered in to a revolving line of credit agreement with the same third party lender with maximum borrowings of $1,500,000 to be used as working capital as needed. The agreement is cross collateralized with the existing term note under the same terms and conditions. Amounts borrowed under the revolving line of credit will bear interest at 3% over the one month LIBOR index.(4.23% at September 30, 2017). The line of credit will terminate on December 6, 2020. The Company has drawn $700,000 on this agreement as of September 30, 2017.

On December 13, 2012, the Company entered into a capital lease obligation for equipment in the amount of $80,479. The capital lease is secured by the equipment purchased, matures in November 2017 and requires monthly payments of $1,426, including interest at 2.44%. At September 30, 2017, the amount due on this capital lease obligation was $2,841.

On December 2, 2012, the Company entered into a capital lease obligation for equipment in the amount of $255,874. The assets associated with this lease cost $294,724, of which $38,850 was reduced through the Company’s trade-in of existing equipment. This capital lease is secured by the equipment purchased, matures in December 2017 and requires monthly payments of $4,995, including interest at 6.41%. At September 30, 2017, the amount due on this capital lease obligation was $14,827.

On January 15, 2014, the Company entered into a capital lease obligation for equipment in the amount of $150,000. The capital lease is secured by equipment purchased, matures in December 2018 and requires monthly payments of $3,024 including interest at 7.75%. At September 30, 2017, the amount due on this capital lease obligation was $40,374.

On January 15, 2014, the Company entered into a capital lease obligation for equipment in the amount of $102,000. The capital lease is secured by equipment purchased, matures in December 2018 and requires monthly payments of $2,233, including interest at 11.30%. At September 30, 2017, the amount due on this capital lease obligation was $31,106.

Note 5. Related Party Receivables and Payables

Related party receivables and payables at September 30, 2017 and December 31, 2016 are the result of net intercompany transactions and cash transfers between the Company and its shareholder and affiliated companies. Related party receivables and payables are unsecured and non-interest bearing.

Note 6. Income Taxes

The Company is currently a member of a Qualified Subchapter S Subsidiary Group. Accordingly, no income tax expense was reflected in the Company’s operating results as the tax is assessed to the shareholders of the Company’s parent company.

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SADDLEBROOK RENTAL POOL OPERATION

BALANCE SHEETS

DISTRIBUTION FUND

MAINTENANCE ESCROW FUND

The accompanying notes are an integral part

of these financial statements

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SADDLEBROOK RENTAL POOL OPERATION

STATEMENTS OF OPERATIONS

(Unaudited)

The accompanying notes are an integral part

of these financial statements

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SADDLEBROOK RENTAL POOL OPERATION

STATEMENTS OF CHANGES IN PARTICIPANTS’ FUND BALANCES

(Unaudited)

DISTRIBUTION FUND

MAINTENANCE ESCROW FUND

The accompanying notes are an integral part

of these financial statements

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SADDLEBROOK RENTAL POOL OPERATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Note 1. Rental Pool Operations and Rental Pool Agreement

Condominium units are provided as rental (hotel) accommodations by their owners under the Rental Pool and Agency Appointment Agreement (the “Agreement”) with Saddlebrook Resorts, Inc. (collectively, the “Rental Pool”). Saddlebrook Resorts, Inc. (“Saddlebrook”) acts as operator of the Rental Pool which provides for the distribution of a percentage of net rental income, as defined, to the owners.

The Saddlebrook Rental Pool Operation consists of two funds: the Rental Pool Income Distribution Fund (“Distribution Fund”) and the Maintenance and Furniture Replacement Escrow Fund (“Maintenance Escrow Fund”). The operations of the Distribution Fund reflect the earnings of the Rental Pool. The Distribution Fund balance sheets reflect amounts due from Saddlebrook for the rental pool distribution payable to participants and amounts due to the Maintenance Escrow Fund. The amounts due from Saddlebrook are required to be distributed no later than forty-five days following the end of each calendar quarter. The Maintenance Escrow Fund reflects the accounting for escrowed assets used to maintain unit interiors and replace furniture as it becomes necessary.

Rental pool participants and Saddlebrook share rental revenues according to the provisions of the Agreement. Net Rental Income shared consists of rentals received less a marketing surcharge of 7.5%, a 12.5% management fee, travel agent commissions, credit card expenses and provision for bad debts, if warranted. Saddlebrook receives 45% of Net Rental Income as operator of the Rental Pool. The remaining 55% of Net Rental Income, after adjustments for complimentary room revenues (ten percent of the normal unit rental price paid by Saddlebrook for promotional use of the unit) and certain minor repair and maintenance charges, is available for distribution to the participants and Maintenance Escrow Fund based upon each participant’s respective participation factor (computed using the value of a furnished unit and the number of days it was available to the pool). Quarterly, 45% of Net Rental Income is distributed to participants and 10%, as adjusted for complimentary room revenues and minor interior maintenance and replacement charges, is deposited in an escrow account until a maximum of 20% of the set value of the individual owner’s furniture package has been accumulated. Excess escrow balances are refunded to participants.

Note 2. Summary of Significant Accounting Policies

Basis of Accounting

The accounting records of the funds are maintained on the accrual basis of accounting.

Income Taxes

No federal or state taxes have been reflected in the accompanying financial statements as the tax effect of fund activities accrues to the rental pool participants and Saddlebrook.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The Company operates Saddlebrook Resort (the “Resort”) in Wesley Chapel, Florida, which contains condominium units that have been sold to third parties or to affiliates of the Company. The majority of the condominium units are hotel accommodations that participate in a rental-pooling program that provides its owners with a percentage distribution of related room revenues minus certain fees and expenses. The remainder of the condominium units participate in a non-pooling rental program, are owner-occupied or are designated as hospitality suites or housing for young athletes independent of the rental programs. Other resort property owned by the Company and its affiliates include golf courses, tennis courts, a spa, restaurants and conference center facilities.

Results of Operations

Third quarter 2017 compared to third quarter 2016

The Company’s total revenues decreased approximately $509,000, or about 12%, for the three months ended September 30, 2017 compared to the same period in the prior year. Total revenues for the Rental Pool increased approximately $150,000, or about 16%.

Total costs and expenses decreased approximately $94,000, or about 1%, for the Company. Total costs and expenses for the Rental Pool Operation increased approximately $53,000, or about 18%.

The Company experienced a net loss for the quarter in the amount of approximately $2,401,000, compared to a net loss of approximately $1,578,000 in the prior comparable quarter. Contributing to the profit for the 3rd quarter ended September 30, 2016 was a payment to the Company of $397,488 for a claim related to the BP oil spill. This amount was recorded as Other Income during the period. Amounts available for distribution for the Rental Pool Operation increased approximately $79,000, or about 26%, from the comparable period last year.

First nine months 2017 compared to first nine months 2016

The Company’s total revenues decreased approximately $526,000, about 2%, for the nine months ended September 30, 2017 compared to the same period in the prior year. The total revenues for the Rental Pool increased approximately $304,000, or about 5%.

Total costs and expenses for the Company increased approximately $1,010,000, or 4%. Total costs and expenses for the Rental Pool Operation increased by about $304,000, about 17%.

The Company had net loss for the period of approximately $1,855,000, compared with net income of approximately $108,000 in the comparable period last year. Contributing to the Company’s profit for the period ended September 30, 2016 was a payment of $397,488 for a claim related to the BP oil spill. This amount was recorded as Other Income during the period. Amounts available for distribution for the Rental Pool Operation increased approximately $92,000, or about 4%, over the same period in the prior year.

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Impact of Current Economic Conditions

The Company experienced a minor decrease in revenue for the 9 months ending 9/30/2017 compared to the same period in the previous year. The Company believes this trend will improve during the remaining months of 2017. The increase in expenses for the period ended 9/30/2017 as compared to the same period in the prior year is a result of increased efforts in its sales programs and upgrades of its golf training program and its two 18 hole golf courses. The investment in these areas will position the Company as one of the top training facilities and golf courses.

The Company continues its marketing efforts toward the social clientele by developing packages designed to target more social guests, including families. These social packages are being promoted through the Company’s website as well as through travel wholesalers and with emphasis on e-commerce sites. Management has implemented programs and measures to help the Company get back to positive operating income. These programs and measures include cost control programs, consolidation of restaurant operations and efforts to increase brand awareness and recognition of the Resort.

Liquidity and Capital Resources

Future operating costs and planned expenditures for minor capital additions and improvements are expected to be adequately funded by the Company and its affiliates’ current cash reserves and cash generated by the Resort’s operations.

On December 6, 2015 the Company’s financing agreement with a third party lender was modified to include renewal for the existing principal balance of $4,875,000, along with an advance of an additional $2,000,000. The new term note expires December 6, 2020. At September 30, 2017, $6,258,013 was outstanding under the note. The term note requires monthly principle payments of $29,380 plus interest of 3% over the one month Libor index (4.23% at September 30, 2017). The term note is collateralized by all current and subsequently acquired real and personal property. The term note requires the Company to maintain a Debt Service Ratio, as defined, of 1.25%. The Company was in default of this covenant as of December 31, 2016; however, the Company received a waiver for this default from its lender. Under the terms of its agreement, the debt service covenant will be re-measured at December 31, 2017. Management believes, based on its expectations, that the Company will be in compliance with the debt service covenant at that date; however, there can be no assurances that it will be in compliance. Should the Company not be in compliance at December 31, 2017, it will seek a waiver or modification of the covenant. In addition, under the terms of the loan agreement, the Company has certain remedies available to it by which it can cure the default, and it is management’s intent to do so if necessary.

On April 24, 2017, the Company entered in to a revolving line of credit agreement with the same third party lender with maximum borrowings of $1,500,000 to be used as working capital as needed. The agreement is cross collateralized with the existing term note under the same terms and conditions. Amounts borrowed under the revolving line of credit will bear interest at 3% over the one month

LIBOR index.(4.23% at September 30, 2017). The line of credit will terminate on December 6, 2020. As of the date of this filing, the Company has drawn $700,000 on this agreement.

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During the nine month period ended September 30, 2017 the Company had a deficiency in net working capital with current liabilities exceeding current assets by approximately $12.1 million. The Company’s ultimate shareholder has the financial ability and intent to continue to fund operations through affiliated companies that are 100% owned by the Company’s ultimate shareholder to the extent required to support the Company’s operations. The Company has loans outstanding, included in current liabilities, to the affiliated companies of approximately $12.2 million and $10.9 million as of September 30, 2017 and December 31, 2016, respectively. In addition to the shareholders’ financial ability and willingness to defer collection on these loans, these affiliated companies are expected to continue to generate positive cash flows during the fiscal year 2017 should additional funding be required to support the Company’s operations.

Seasonality

The Company’s operations are seasonal with the highest volume of revenue generally occurring in the first quarter of each calendar year.

Due to the seasonal business of the Company, the results of operations for the interim period shown in this report are not necessarily indicative of results to be expected for the full fiscal year.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s invested cash is subject to changes in market interest rates. Otherwise, the Company does not have significant market risk with respect to foreign currency exchanges or other market rates.

The Company’s term note bears interest at 3.0% over the one month LIBOR index and matures in December 2020.

Item 4. Controls and Procedures

The Company’s management, including the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the disclosure controls and procedures as of September 30, 2017, pursuant to Exchange Act Rule 15d-15. Based upon that evaluation, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2017 in timely alerting them to material information required to be included in the Company’s periodic SEC filings.

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect that its disclosure controls and procedures over internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must be considered relative to their costs. Because of the inherent limitation in all control systems, no evaluation of controls can provide absolute assurance that all control issues within the Company have been detected.

There were no changes in the Company’s internal controls over financial reporting during the nine months ended September 30, 2017 that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The Company is from time to time involved in litigation in the ordinary course of business. In the opinion of the Company’s management, insurance or indemnification from other third parties adequately covers these matters. Accordingly, the effect, if any, of these claims is considered immaterial to the Company’s financial condition and results of operations.

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Item 6. Exhibits

The following exhibits are included in this Form 10-Q:

The following exhibits are included in this Form 10-Q:

31.1 – Chief Executive Officer Rule 15d-14(a) Certification

31.2 – Chief Financial Officer Rule 15d-14(a) Certification

32.1 – Chief Executive Officer Section 1350 Certification

32.2 – Chief Financial Officer Section 1350 Certification

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

101.LAB XBRL Taxonomy Extension Label Linkbase Document

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURE

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.

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