Business Context and Reporting Period
Company: ONE Group Hospitality, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: October 4, 2019
Context: The Company entered into a material definitive credit agreement and completed the acquisition of substantially all assets of Kona Grill, Inc.
Key Financial Metrics and Transaction Details
Acquisition of Kona Grill, Inc.
- Assets Acquired: 24 domestic restaurants and one international franchise agreement.
- Purchase Price: $25.0 million in cash.
- Liabilities Assumed: Approximately $11.0 million in working capital liabilities.
- Financing: Funded by proceeds from the new Credit Agreement.
Debt and Liquidity (New Credit Agreement)
- Lender: Goldman Sachs Bank USA.
- Facility Structure:
- Secured Revolving Credit Facility: $12.0 million.
- Term Loan: $48.0 million (payable in quarterly installments).
- Maturity Date: October 2024 for both facilities.
- Interest Rates:
- LIBOR loans: Applicable index + 5.75% to 6.75% margin (LIBOR floor 1.75%).
- Base rate loans: Applicable index + 4.75% to 5.75% margin.
- Collateral: Secured by liens on substantially all assets of the Company and subsidiaries.
Material Changes and Covenants
The filing details significant changes to the Company's capital structure and operational scope. The new Credit Agreement imposes strict financial covenants:
- Fixed Charge Coverage Ratio: Minimum 1.35:1.00 (through June 30, 2021) increasing to 1.50:1.00 thereafter.
- Leverage Ratio: Maximum 2.75:1.00 (through March 31, 2020), stepping down to 1.50:1.00 by the end of fiscal 2021 and thereafter.
- Capital Expenditures: Capped at $10.0 million for 2020 and $8.0 million for 2021 and subsequent years.
- Liquidity: Minimum consolidated liquidity of $1.5 million required at all times.
Note: This filing does not provide historical revenue, profit, or cash flow metrics for the Company or the acquired entity. Pro forma financial information is scheduled to be filed by amendment no later than December 20, 2019.
Outlook, Risks, and Contingencies
- Restrictive Covenants: The agreement limits the Company's ability to incur additional indebtedness, grant liens, make investments, merge, or dispose of assets outside the ordinary course of business.
- Future Filings: Financial statements of the acquired business and pro forma financial information are pending and will be filed by December 20, 2019.
- Guarantees: The Company and certain operating subsidiaries guarantee the obligations under the Credit Agreement.
Investor Verification Checklist
- Verify the pro forma financial impact of the Kona Grill acquisition once filed (expected by Dec 20, 2019).
- Monitor the Company's ability to meet the stepped-down leverage ratio covenants (starting at 2.75:1.00).
- Review the full text of the Credit Agreement (Exhibit 10.1) for specific definitions of "Fixed Charge Coverage" and "Liquidity."
- Assess the integration risks associated with adding 24 new domestic restaurants and an international franchise.