Saddlebrook Resorts Earnings 2019-06-30

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

(Mark one)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

COMMISSION FILE NUMBER: 2-65481

SADDLEBROOK RESORTS, INC.

(Exact name of registrant as specified in its charter)

 

Florida		59-1917822
(State of incorporation)		(IRS employer identification no.)

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.:

 

Large accelerated filer		☐		Accelerated filer		☐
Non-accelerated filer		☐		Smaller reporting company		☒
Emerging growth company		☐

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.

 

 

 

INDEX

 

		Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Saddlebrook Resorts, Inc.
Balance Sheets at June 30, 2019 and December 31, 2018			3
Statements of Operations and Accumulated Deficit for the three and six months ended June 30, 2019 and 2018			4
Statements of Cash Flows for the six months ended June  30, 2019 and 2018			5
Notes to Financial Statements			6
Saddlebrook Rental Pool Operation
Balance Sheets at June 30, 2019 and December 31, 2018			11
Statements of Operations for the three and six months ended June  30, 2019 and 2018			12
Statements of Changes in Participants’ Fund Balance for the six months ended June 30, 2019 and 2018			13
Notes to Financial Statements			14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosures About Market Risk			16
Item 4. Controls and Procedures			17
PART II – OTHER INFORMATION
Item 1. Legal Proceedings			17
Item 6. Exhibits			18
Signature			18

 

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SADDLEBROOK RESORTS, INC.

BALANCE SHEETS

 

		June 30, 2019 (Unaudited)				December 31, 2018
Assets
Current assets:
Cash and cash equivalents		$	476,025			$	745,240
Escrowed cash			1,584,302				1,880,231
Trade accounts receivable, net			2,141,011				1,319,156
Due from related parties			2,451,325				1,966,456
Inventory and supplies			1,038,980				1,053,645
Prepaid expenses and other assets			422,129				1,157,022
Total current assets			8,113,772				8,121,750
Property, buildings and equipment, net			15,805,095				16,566,016
Operating lease right-of-use assets			182,608				—
Total assets		$	24,101,475			$	24,687,766
Liabilities and Shareholder’s Equity
Current liabilities:
Current portion of long-term debt		$	1,852,564			$	352,560
Current portion of finance lease liabilities			93,138				90,167
Current portion of operating lease liabilities			71,723				—
Escrowed deposits			1,584,302				1,880,231
Accounts payable			693,676				673,135
Accrued rental distribution			579,340				503,066
Accrued expenses and other liabilities			920,142				1,157,553
Current portion of deferred income			788,739				729,485
Guest deposits			609,699				2,566,150
Due to related parties			13,805,671				14,698,670
Total current liabilities			20,998,994				22,651,017
Long-term debt, net of deferred issuance costs of $17,330 and $29,354 at June 30, 2019 and December 31, 2018, respectively			5,271,133				5,435,394
Long-term finance lease liabilities			310,089				330,391
Long-term operating lease liabilities			110,887				—
Deferred income			634,960				549,109
Total liabilities			27,326,063				28,965,911
Shareholder’s deficit:
Common stock, $1.00 par value, 100,000 shares authorized and outstanding			100,000				100,000
Additional paid-in capital			1,013,127				1,013,127
Accumulated deficit			(4,337,715	)			(5,391,272	)
Total shareholder’s deficit			(3,224,588	)			(4,278,145	)
Total liabilities and shareholder’s deficit		$	24,101,475			$	24,687,766

The accompanying Notes to Financial Statements are

an integral part of these financial statements

 

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SADDLEBROOK RESORTS, INC.

STATEMENTS OF OPERATIONS

AND ACCUMULATED (DEFICIT) EARNINGS

(Unaudited)

 

		Three months ended June 30,								Six months ended June 30,
		2019				2018				2019				2018
Resort revenues		$	6,319,161			$	6,975,684			$	18,435,166			$	19,773,369
Costs and expenses:
Operating costs			5,588,788				5,822,368				13,617,156				14,280,094
Sales and marketing			545,620				617,627				1,077,517				1,187,743
General and administrative			723,769				726,276				1,439,384				1,446,076
Depreciation			516,164				529,700				1,034,407				1,039,482
Total costs and expenses			7,374,341				7,695,971				17,168,464				17,953,395
Net operating (loss) income before other income (expenses)			(1,055,180	)			(720,287	)			1,266,702				1,819,974
Other income (expenses)
Other income			4,848				5,765				9,938				127,058
Interest expense			(112,460	)			(124,942	)			(223,083	)			(230,421	)
Total other expenses, net			(107,612	)			(119,177	)			(213,145	)			(103,363	)
Net (loss) income			(1,162,792	)			(839,464	)			1,053,557				1,716,611
Accumulated deficit at beginning of period			(3,174,923	)			(189,871	)			(5,391,272	)			(2,745,946	)
Accumulated deficit at end of period		$	(4,337,715	)		$	(1,029,335	)		$	(4,337,715	)		$	(1,029,335	)

The accompanying notes are an integral part

of these financial statements

 

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SADDLEBROOK RESORTS, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six months ended June 30,
		2019				2018
Operating activities:
Net income		$	1,053,557			$	1,716,611
Non-cash items included in net income:
Depreciation			1,034,407				1,039,482
(Gain) loss on the disposal of assets			—				(85,159	)
Amortization of debt financing costs			12,024				13,251
Amortization of operating lease right-of-use assets			34,488				—
Interest paid on finance leases			(5,365	)			—
(Increase) decrease in:
Accounts receivable			(821,855	)			(96,941	)
Inventory and supplies			14,665				57,364
Prepaid expenses and other assets			734,893				(249,757	)
Increase (decrease) in:
Escrowed deposits			(295,929	)			—
Accounts payable			20,541				(49,067	)
Accrued rental distribution			76,274				(78,415	)
Guest deposits			(1,956,451	)			(1,716,437	)
Accrued expenses and other liabilities			(237,411	)			(401,600	)
Deferred income			145,104				94,970
Operating lease liabilities			(34,485	)			—
Cash flows from operating activities			(225,543	)			244,302
Investing activities:
Capital expenditures			(273,486	)			(256,549	)
Cash flows from investing activities			(273,486	)			(256,549	)
Financing activities:
Payments on long-term debt			(176,285	)			(178,291	)
Proceeds from line of credit			1,500,004				800,000
Payments on finance lease obligations			(11,966	)			(55,090	)
Net (payments to) borrowings from related parties			(1,377,868	)			(772,238	)
Cash flows from financing activities			(66,115	)			(205,619	)
Net decrease in cash, cash equivalents and escrowed cash			(565,144	)			(217,866	)
Cash, cash equivalents and escrowed cash at beginning of period			2,625,471				698,033
Cash, cash equivalents and escrowed cash at end of period		$	2,060,327			$	480,167
Supplemental disclosure of cash flow information:
Cash paid for interest		$	211,059			$	217,170

On January 1, 2019, the Company adopted the provisions of Topic 842 within the Accounting Standards Codification, which resulted in the establishment of operating lease right-of-use assets and an operating lease liability each in the aggregate amount of $217,095 (see Notes 1 and 4).

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 June 30, 2019, and its statements of operations and accumulated earnings and cash flows for the six month periods ended June 30, 2019 and 2018, 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, 2018 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, 2018.

Recently Adopted Accounting Standard

Effective January 1, 2019, the Company adopted the provisions of Accounting Standards Update (“ASU”) 2016-02, “Leases,” which created a new Topic 842 within the Accounting Standards Codification. Topic 842 established the core principle that a lessee should recognize the assets, representing rights-of-use, and liabilities to make lease payments, that arise from leases.

The Company adopted the standard using an optional transition method allowed with the issuance of ASU 2018-11, “Leases – Targeted Improvements (Topic 842),” in July 2018. ASU 2018-11 provides entities the option to not provide comparative period financial statements and instead apply the transition requirements as of the effective date of the new standard. Pursuant to additional guidance under Topic842, the Company also elected the optional package of practical expedients, which allowed the Company to not reassess: (i) whether expired or existing contracts contain leases; (ii) lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. As a result, the consolidated balance sheet prior to January 1, 2019 was not restated, continues to be reported under ASC 840, “Leases”, which did not require the recognition of operating lease liabilities on the consolidated balance sheet, and is not comparative. Under Topic 842, all leases are required to be recorded on the balance sheet and are classified as either operating leases or finance leases, which is determined at the inception of the lease. The Company also elected under the package of practical expedients, to combine lease and non-lease components.

Under the new standard, the Company’s lease liability is based on the present value of such payments and the related right-of-use asset will generally be based on the lease liability.

See Note 4 for additional information regarding operating leases.

Note 2. Revenue

Revenue Recognition

Resort revenues are recognized as services are performed or products are delivered with the exception of initiation fee revenue, which is recognized over the average life of the memberships. Resort revenues also include rental revenues for condominium units owned by third parties participating in the Rental Pool. If these rental units were owned by the Company, normal costs associated with ownership such as depreciation, real estate taxes, unit maintenance and other costs would have been incurred.

 

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Contract Balances

Timing differences among revenue recognition may result in contract assets or liabilities. Contract liabilities totaled $2,033,398 and $3,845,000 as of June 30, 2019 and December 31, 2018, respectively.

Our net trade accounts receivables were approximately $2,141,000 and $1,319,000 as of June 30, 2019 and December 31, 2018, respectively. Trade accounts receivable are stated in the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to the allowance of doubtful accounts based on its assessment of the current status of individual accounts. Balances still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance of doubtful accounts and a credit to trade accounts receivable. Changes in the allowance for doubtful accounts have not been material to the consolidated financial statements.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under the new revenue recognition standard. The transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our revenue transactional and the contracts performance obligation is generally satisfied at the time of the transaction.

Note 3. Trade Accounts Receivable

 

		June 30, 2019 (Unaudited)				December 31, 2018
Trade accounts receivable		$	2,161,897			$	1,338,966
Less reserve for bad debts			(20,886	)			(19,810	)
		$	2,141,011			$	1,319,156

 

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Note 4. Operating Leases

The Company leases certain equipment under non-cancellable operating leases, which begin to expire in 2021. The leases are classified as operating leases in conformity with the provisions of Topic 842. Accordingly, the Company recorded a right-of-use asset and related operating lease liability totaling approximately $217,000 upon adoption of Topic 842 as of January 1, 2019. Aggregated information regarding the leases as of and for the six months ended June 30, 2019 is as follows:

 

Lease costs (included in operating costs)		$	19,926
Incremental borrowing rate			5.32	%

Note 5. Property, Buildings and Equipment

 

		June 30, 2019 (Unaudited)				December 31, 2018
Land and land improvements		$	8,830,867			$	8,830,867
Buildings and recreational facilities			32,080,687				32,055,525
Machinery and equipment			21,736,306				21,592,565
Construction in progress			223,305				118,722
			62,871,165				62,597,679
Less accumulated depreciation			(47,066,070	)			(46,031,663	)
		$	15,805,095			$	16,566,016

The Company’s property, buildings and equipment are pledged as security for its debt (see Note 6).

 

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Note 6. Notes Payable and Finance Lease Liabilities

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 June 30, 2019, $5,641,026 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 (5.43% at June 30, 2019). 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, 2018; however, the Company received a waiver for this default from its lender. The debt service covenant will be re-measured at December 31, 2019. 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, 2019, 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. (5.43% at June 30, 2019). The line of credit will terminate on December 6, 2020. As of June 30, 2019, the Company had $1,500,000 in outstanding borrowings on this agreement.

On March 1, 2018, the Company entered into a finance lease liability for equipment in the amount of $332,206. The assets associated with this lease cost $461,506, of which $129,300 was reduced through the Company’s trade-in of existing equipment. This finance lease is secured by the equipment purchased, matures in February 2023 and requires monthly payments of $6,500, including interest at 6.5%. At June 30, 2019, the amount due on this finance lease liability was $253,864.

On April 1, 2018, the Company entered into a finance lease liability for equipment in the amount of $156,942. The assets associated with this lease cost $178,942, of which $22,000 was reduced through the Company’s trade-in of existing equipment. This finance lease is secured by the equipment purchased, matures in March 2023 and requires monthly payments of $3,071, including interest at 6.5%. At June 30, 2019, the amount due on this finance lease liability was $122,339.

 

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Note 6. Related Party Receivables and Payables

Related party receivables and payables at June 30, 2019 and December 31, 2018 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 7. 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

 

		June 30, 2019 (Unaudited)				December 31, 2018
Assets
Receivable from Saddlebrook Resorts, Inc.		$	579,340			$	503,066
Liabilities and Participants’ Fund Balance
Due to participants for rental pool distribution		$	481,310			$	424,193
Due to maintenance escrow fund			98,030				78,873
		$	579,340			$	503,066

MAINTENANCE ESCROW FUND

 

		June 30, 2019 (Unaudited)				December 31, 2018
Assets
Cash and cash equivalents		$	1,570,203			$	1,864,132
Receivables:
Distribution fund			98,030				78,873
From owners			7,062				—
Prepaid expenses and other assets			14,650				58,710
Due from Saddlebrook Resorts, Inc.			—				94,547
Linen Inventory			43,964				—
Furniture Inventory			39,651				39,651
		$	1,773,560			$	2,135,913
Liabilities and Participants’ Fund Balance
Saddlebrook Resorts, Inc.		$	72,769			$	—
Participants’ fund balance			1,700,791				2,135,913
		$	1,773,560			$	2,135,913

 

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SADDLEBROOK RENTAL POOL OPERATION

STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three months ended June 30,								Six months ended June 30,
		2019				2018				2019				2018
Rental pool revenues		$	1,653,930			$	1,878,857			$	5,271,180			$	5,896,675
Deductions:
Marketing fee			124,045				140,914				395,339				442,250
Management fee			206,741				234,857				658,897				737,084
Travel agent commissions			206,967				202,361				383,888				352,747
Credit card expense			46,599				77,212				133,087				170,473
			584,352				655,344				1,571,211				1,702,554
Net rental income			1,069,578				1,223,513				3,699,969				4,194,121
Less operator share of net rental income			(481,310	)			(550,581	)			(1,664,986	)			(1,887,355	)
Other revenues (expenses):
Complimentary room revenues			9,021				8,273				21,874				19,918
Minor repairs and replacements			(17,949	)			(24,348	)			(47,923	)			(47,139	)
Amount available for distribution		$	579,340			$	656,857			$	2,008,934			$	2,279,545

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

 

		Six months ended June 30,
		2019				2018
Balance at beginning of period		$	—			$	—
Additions:
Amount available for distribution			2,008,934				2,279,545
Reductions:
Amount withheld for maintenance escrow fund			(343,947	)			(392,191	)
Amount accrued or paid to participants			(1,664,987	)			(1,887,355	)
Balance at end of period		$	—			$	—

MAINTENANCE ESCROW FUND

 

		Six months ended June 30,
		2019				2018
Balance at beginning of period		$	2,135,913				334,392
Additions:
Amount withheld from distribution fund			343,947				392,191
Unit owner payments			142,226				46,224
Interest earned			7,162				13
Reductions:
Escrow account refunds			(306,483	)			(10,731	)
Maintenance charges			(121,096	)			(145,359	)
Unit renovations			(423,399	)			(49,136	)
Linen replacement			(77,479	)			(91,482	)
Balance at end of period		$	1,700,791			$	476,112

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 (the “Rental Pool”) 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

Three months ended June 30, 2019 compared to three months ended June 30, 2018

The Company’s total revenues decreased approximately $657,000, or about 9%, for the three months ended June 30, 2019 compared to the same period in the prior year. Total revenues for the Rental Pool decreased about $225,000, or about 12%.

Total costs and expenses decreased approximately $322,000, or about 4%, for the Company, and appoximately $71,000, or about 11%, for the Rental Pool Operation.

The Company experienced a net loss for the quarter in the amount of approximately $1,163,000, compared to the net loss of the prior comparable quarter of approximately $839,000. Amounts available for distribution for the Rental Pool Operation decreased approximately $78,000 from the comparable period last year.

Six months ended June 30, 2019 compared to six months ended June 30, 2018

The Company’s total revenues decreased approximately $1,338,000, about 7%, for the six months ended June 30, 2019 compared to the same period in the prior year. The total revenues for the Rental Pool decreased approximately $625,000, about 11%.

Total costs and expenses for the Company decreased approximately $785,000 or about 4%. Total costs and expenses for the Rental Pool Operation decreased by about $131,000, about 8%.

The Company’s net income for the period decreased approximately $663,000 compared to the same period in the prior year. Amounts available for distribution for the Rental Pool Operation decreased approximately $271,000 over the same period in the prior year.

Impact of Current Economic Conditions

The Company experienced a minor decrease in revenue for the period ending June 30, 2019 compared to the previous year.

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.

 

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Liquidity and Capital Resources

Net loss for the 6 months ended June 30, 2019 was $1,053,558. Excluding non-cash expenses such as Depreciation and Amortization of $1,080,918 the company’s actual operating cash was $2,134,476.

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 June 30, 2019, $5,641,026 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 (5.43% at June 30, 2019). 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, 2018; however, the Company received a waiver for this default from its lender. The debt service covenant will be re-measured at December 31, 2019. 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, 2019, 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. (5.43% at June 30, 2019). The line of credit will terminate on December 6, 2020. As of June 30, 2019, the Company had $1,500,000 in outstanding borrowings on this agreement.

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 to the affiliated companies of approximately $13.8 million and $14.7 million as of June 30, 2019 and December 31, 2018, respectively. In addition to the shareholders’ financial ability, these affiliated Companies are expected to continue to generate positive cash flows during fiscal year 2019 should additional funding be required to support the Company’s operations.

The Company’s operation of the Resort is not considered to be dependent on any individual or small group of customers, the loss of which would have a material adverse effect on the Company’s business or financial condition.

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 and its line of credit bear interest at 3.0% over the one month LIBOR index and mature in December 2020.

 

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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 March 31, 2019, 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 March 31, 2019 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 three months ended June 30, 2019 that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company is 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:

 

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.

 

						SADDLEBROOK RESORTS, INC.
						(Registrant)
Date: August 14, 2019						/s/    Donald L. Allen
						Donald L. Allen
						Vice President and Treasurer
						(Principal Financial and
						Accounting Officer)

 

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