ONE Group Hospitality, Inc. quarterly report, Q1 FY2014

ONE Group Hospitality, Inc. — Q1 2014 Form 10-Q

Reporting period: Three months ended March 31, 2014; interim financial statements are unaudited. The filing is under Committed Capital Acquisition Corporation, the public-company name following its October 2013 merger with The ONE Group, LLC. The merger was accounted for as a reverse merger, with One Group the accounting acquirer.

Business context and financial performance

The company develops and operates upscale restaurants and lounges and provides food-and-beverage services to hospitality venues in the U.S. and U.K. At quarter-end it reported seven owned and nine managed restaurants and lounges.

Metric	Q1 2014	Q1 2013
Total revenue	$10.27 million	$10.98 million
Income (loss) from continuing operations	$(116,000)	$1.74 million
Net loss	$(1.04) million	$(153,000)
Net income (loss) attributable to the company	$(722,000)	$88,000
Adjusted EBITDA attributable to the company	$1.01 million	$1.81 million
Net cash used in operating activities	$(866,000)	$(1.17) million

Revenue comprised $8.15 million from owned units and $2.12 million from management and incentive fees. Continuing-operations pretax income was $120,000; income tax expense was $235,000. The filing reports basic and diluted loss per share attributable to the company of $0.03.

Liquidity, debt and cash flow

• Cash and cash equivalents were $9.24 million at March 31, down $2.44 million from year-end. Current assets were $14.70 million and current liabilities $10.62 million, a current ratio of approximately 1.38.
• Operating activities used $866,000; investing activities used $1.68 million, primarily for property and equipment; financing activities provided $87,000. Capital spending on property and equipment was $1.68 million.
• Outstanding BankUnited credit-facility borrowings were $4.35 million against a $5.0 million facility, bearing interest at the greater of prime plus 1.75% or 5%, with a stated maturity of April 30, 2015. Notes payable were $10,000.
• The company reported a $10.14 million derivative liability related to potential payments and employee bonuses contingent on exercise of public warrants. This is a reported liability, not ordinary borrowing.
• Net future minimum operating-lease commitments were approximately $80.0 million, including amounts thereafter.

Changes versus the prior comparable period

• Revenue declined 6.5%. Owned-unit revenue fell 13.1%, mainly because the STK and hotel food-and-beverage operations at the Perry Hotel in Miami were temporarily closed during renovation. Management fees rose 32.8%, supported by STK Las Vegas and a full quarter of London ME Hotel operations.
• Comparable sales for owned or managed STKs rose 5.2%; the reported average check for those STKs fell from $127.08 to $123.78.
• General and administrative expense increased 115.8% to $1.91 million, which management attributed to added corporate staffing and professional fees. Pre-opening expense rose to $246,000, primarily for the Washington, D.C. STK.
• Continuing-operations results deteriorated from $1.74 million income to a $116,000 loss. The company reported a $1.04 million consolidated net loss, while discontinued-operations losses improved to $925,000 from $1.89 million.
• Adjusted EBITDA attributable to the company declined to $1.01 million from $1.81 million. This non-GAAP measure excludes specified items and should be considered alongside GAAP results.

Outlook, risks and unusual items

• Management expected to open two restaurants in 2014, including Miami in the fourth quarter; it expected Orlando to open in 2015. The Washington, D.C. STK opened April 25, 2014. Management described a longer-term target of two to three STK openings annually for the next three years, subject to capital, locations and staffing.
• Management estimated approximately $7.0 million of 2014 capital expenditures and said available cash, operating cash flow, landlord allowances and credit-facility borrowings were expected to fund planned needs. It stated these sources should cover anticipated working capital, capital spending and debt service for the next 12–18 months, while cautioning that future funding was not assured.
• The company failed to meet certain credit-agreement covenants, including tangible-net-worth and advance-ratio requirements. BankUnited granted waivers, including in March 2014, and the company was discussing covenant amendments. Its covenant-calculated tangible net worth at March 31 was $7.18 million versus a $14.5 million threshold cited in the filing.
• Accrued expenses included $2.36 million of termination costs associated with previously terminated leases and a management agreement. A May 2014 settlement with the Bagatelle Las Vegas landlord followed the quarter-end; related payments were included in those accrued costs.
• Management said disclosure controls and internal control over financial reporting were ineffective at March 31 because of a material weakness: insufficient accounting personnel with experience to prepare and review complex transactions, valuations and GAAP financial statements. The company was seeking a permanent financial-reporting hire and using temporary support.
• Risks highlighted include dependence on operating cash flow and financing for expansion, execution and opening costs, seasonality and weather, food-cost fluctuations (particularly beef), and the possibility that planned openings, sales growth or margin improvements may not be achieved. No specific quantified full-year earnings guidance was provided.

Important facts for investors to verify

• Whether BankUnited waives or amends covenant requirements and whether the company remains in compliance with its credit facility.
• Cash generation, available borrowing capacity and funding for planned capital expenditures and lease obligations.
• Performance of owned and managed restaurants, including the Miami reopening, new-unit costs and comparable sales and average-check trends.
• Progress in remediating the disclosed material weakness and improving financial-reporting controls.
• Final settlement costs and payments related to discontinued locations, and the potential value and timing of warrant-contingent payments underlying the derivative liability.