ONE Group Hospitality, Inc. (Committed Capital Acquisition Corporation) — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a stand-alone fourth-quarter report. The October 16, 2013 reverse merger made The ONE Group the accounting acquirer; pre-merger historical results are principally those of The ONE Group.
Business context
The company develops and operates upscale restaurants and lounges, led by its STK steakhouse brand, and manages food-and-beverage operations for hotels and casinos. At year-end it reported 10 owned and 9 managed restaurants and lounges, including six STKs. Management and incentive fees are earned under hospitality agreements.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $46.0 million | $60.1 million |
| Owned-unit net revenue | $38.6 million | $56.4 million |
| Management and incentive fee revenue | $7.3 million | $3.7 million |
| Loss from continuing operations | $16.5 million | Income of $7.2 million |
| Net loss | $21.9 million | $2.8 million |
| Net loss attributable to the company | $21.5 million | $2.3 million |
| Cash flow from operating activities | $(6.0) million | $7.8 million |
| Cash and cash equivalents at year-end | $11.7 million | $1.0 million |
| Total debt reported in selected financial data | $4.3 million | $7.8 million |
- Revenue declined 23.5%. Owned-unit revenue fell 31.5%, primarily due to the temporary closure and renovation of the Perry Hotel in Miami; management and incentive fees rose 98.8%, reflecting higher Las Vegas STK incentive fees and fuller-year London operations.
- Comparable owned and managed STK sales declined 0.7%; average check increased to $126.55 from $112.52. For STKs open a full year, average unit volume was reported at $11.0 million.
- Food and beverage costs were 25.9% of owned-unit net revenue, versus 25.3% in 2012; unit operating expenses were 64.0%, versus 57.8%. These percentages use owned-unit revenue, not total consolidated revenue.
- Adjusted EBITDA, a non-GAAP measure, was $8.6 million versus $9.0 million; company-attributable Adjusted EBITDA was $7.5 million versus $6.7 million. These figures exclude several significant items and are not substitutes for GAAP results.
- Investing activities used $7.4 million, including $5.7 million to acquire minority interests and $1.4 million of property and equipment purchases. Financing activities provided $24.0 million, including merger and private-placement proceeds.
- Year-end current assets were $16.7 million and current liabilities $10.5 million. The $4.3 million BankUnited credit facility was secured by substantially all assets, carried a floating rate, and was due to mature in 2015. Net operating lease commitments were approximately $71.1 million, including $5.0 million due within one year.
Material changes and unusual items
- The reverse merger and October 2013 private placement materially changed the company’s ownership and capital structure. The private placement issued 3.13 million shares at $5.00 per share for gross proceeds of $15.7 million. Year-end common shares outstanding were 24.95 million.
- The 2013 net loss included a $10.1 million non-cash derivative expense tied to potential payments to former One Group members and a liquidating trust, a $5.0 million change-of-control premium, $4.6 million of merger transaction costs, and $5.4 million of discontinued-operations losses. The 2012 comparison included a $5.0 million Perry Hotel option payment and $10.0 million of discontinued-operations losses.
- Owned-unit revenue and operating expenses were affected by the Perry Hotel renovation and temporary closure. The company also exited or discontinued underperforming or non-strategic operations, including Bagatelle Las Vegas and Heraea; Tenjune closed in February 2014.
- The company recorded a $10.3 million increase in its deferred-tax valuation allowance, citing cumulative losses and uncertainty about realization of deferred tax assets.
Outlook, risks and contingencies
- Management expected to open two to three STKs annually over the next three years, target at least one new food-and-beverage hospitality project every 12 to 18 months, and pursue approximately 1% annual same-store sales growth. These are targets, not guarantees.
- Planned 2014 capital expenditures were approximately $9.0 million. Management expected to fund planned investment and debt service for 12–18 months using cash, operating cash flow, merger proceeds, credit-facility borrowings and landlord allowances. Two restaurant openings were planned for 2014; an Orlando STK was expected in 2015.
- BankUnited waived covenant noncompliance, including tangible-net-worth and advance-ratio issues, and the company was discussing amendments to the credit agreement. The filing says future waivers or amendments are not assured. A default could permit acceleration and enforcement against collateral.
- The merger agreement provides for up to $14.1 million of contingent payments to former One Group holders and the liquidating trust, plus approximately $0.9 million of employee sign-on bonuses, tied to exercise of public warrants. The related derivative liability was valued at $10.1 million at year-end; valuation depends on significant assumptions.
- Management identified ineffective disclosure controls and a material weakness in internal control over financial reporting due to insufficient accounting personnel experienced in complex transactions and public-company reporting. The auditor gave an unqualified opinion on the financial statements but did not audit internal control effectiveness.
- Key risks include dependence on discretionary dining and a concentrated group of locations, weather and seasonality, beef and other food-cost volatility, long-term lease commitments, competition, need for additional financing, foreign-market exposure, and limited OTCQB trading liquidity. CEO Jonathan Segal beneficially owned approximately 34% of common stock.
- Management stated ordinary-course litigation was not expected to have a material adverse effect. A Florida sales-tax audit remained ongoing; the company estimated exposure at no more than approximately $390,000, with amounts accrued as described in the filing.
Most important facts for investors to verify
- Whether cash generation and operating performance recover after the Perry Hotel reopening, and whether the company can execute planned openings within the stated capital budget.
- The current status of BankUnited covenant compliance, any credit-agreement amendments or waivers, borrowing availability, and the facility’s maturity and security terms.
- Warrant exercise activity and the resulting contingent payments, employee bonuses, derivative remeasurement, and potential share dilution.
- Progress in remediating the material weakness and establishing effective disclosure and financial-reporting controls.
- The status of the Perry Hotel/1 Hotel South Beach agreement and reopening, the Florida sales-tax audit, and remaining obligations associated with closed units and leases.