UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One) | |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, | |
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 001-37379 |
Commission File Number 001-37379
THE ONE GROUP HOSPITALITY, INC. |
(Exact name of registrant as specified in its charter)
Delaware | 14-1961545 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
411 W. | 10014 | |
(Address of principal executive offices) | Zip Code |
646-624-2400 |
(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. Yesx 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx No¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer | Smaller reporting company x |
Emerging growth company ¨ |
If an emerging growth company, indicate by a 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¨ Nox
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock | STKS | Nasdaq |
Number of shares of common stock outstanding as of May 8, 2018: 27,352,6012019: 28,628,880
TABLE OF CONTENTS
2 |
THE ONE GROUP HOSPITALITY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
(unaudited) March 31, 2018 | December 31, 2017 | (Unaudited), | ||||||||||||||
Assets | ||||||||||||||||
March 31, | December 31, | |||||||||||||||
2019 | 2018 | |||||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 1,143 | $ | 1,548 | $ | 1,079 | $ | 1,592 | ||||||||
Accounts receivable | 5,252 | 5,514 | 5,946 | 7,029 | ||||||||||||
Inventory | 1,288 | 1,402 | 1,243 | 1,404 | ||||||||||||
Other current assets | 1,509 | 1,299 | 1,570 | 1,471 | ||||||||||||
Due from related parties, net | 123 | 45 | ||||||||||||||
Total current assets | 9,192 | 9,763 | 9,961 | 11,541 | ||||||||||||
Property & equipment, net | 37,338 | 37,811 | ||||||||||||||
Property and equipment, net | 40,465 | 39,347 | ||||||||||||||
Operating lease right-of-use assets | 40,073 | — | ||||||||||||||
Investments | 2,519 | 2,957 | 2,684 | 2,684 | ||||||||||||
Deferred tax assets, net | 69 | 69 | 28 | 38 | ||||||||||||
Other assets | 422 | 384 | 341 | 349 | ||||||||||||
Security deposits | 2,083 | 2,031 | 2,039 | 2,020 | ||||||||||||
Total assets | $ | 51,623 | $ | 53,015 | $ | 95,591 | $ | 55,979 | ||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 5,095 | $ | 5,329 | $ | 5,700 | $ | 5,408 | ||||||||
Accrued expenses | 6,206 | 6,987 | 6,836 | 8,093 | ||||||||||||
Deferred license revenue | 215 | 115 | 154 | 171 | ||||||||||||
Deferred gift card revenue and other | 797 | 999 | 783 | 947 | ||||||||||||
Due to related parties, net | 220 | 256 | ||||||||||||||
Current portion of operating lease liabilities | 2,197 | — | ||||||||||||||
Current portion of long-term debt | 3,187 | 3,241 | 2,844 | 3,201 | ||||||||||||
Total current liabilities | 15,720 | 16,927 | 18,514 | 17,820 | ||||||||||||
Deferred license revenue, long-term | 1,477 | 1,222 | 1,081 | 1,008 | ||||||||||||
Due to related parties, long-term | 1,197 | 1,197 | 1,197 | 1,197 | ||||||||||||
Operating lease liability, net of current portion | 55,220 | — | ||||||||||||||
Deferred rent and tenant improvement allowances | 16,985 | 17,001 | — | 16,774 | ||||||||||||
Long-term debt, net of current portion | 9,378 | 10,115 | 6,727 | 7,118 | ||||||||||||
Total liabilities | 44,757 | 46,462 | 82,739 | 43,917 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Common stock, $0.0001 par value, 75,000,000 shares authorized; 27,252,101 and 27,152,101 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively | 3 | 3 | ||||||||||||||
Preferred stock, $0.0001 par value, 10,000,000 shares authorized; no shares issued and outstanding at March 31, 2018 and December 31, 2017 | — | — | ||||||||||||||
Common stock, $0.0001 par value, 75,000,000 shares authorized; 28,333,561 and 28,313,017 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively | 3 | 3 | ||||||||||||||
Preferred stock, $0.0001 par value, 10,000,000 shares authorized; no shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively | — | — | ||||||||||||||
Additional paid-in capital | 41,331 | 41,007 | 43,724 | 43,543 | ||||||||||||
Accumulated deficit | (31,802 | ) | (31,979 | ) | (27,868 | ) | (28,722 | ) | ||||||||
Accumulated other comprehensive loss | (1,631 | ) | (1,556 | ) | (2,470 | ) | (2,310 | ) | ||||||||
Total stockholders’ equity | 7,901 | 7,475 | 13,389 | 12,514 | ||||||||||||
Noncontrolling interests | (1,035 | ) | (922 | ) | (537 | ) | (452 | ) | ||||||||
Total equity | 6,866 | 6,553 | 12,852 | 12,062 | ||||||||||||
Total Liabilities and Equity | $ | 51,623 | $ | 53,015 | ||||||||||||
Total liabilities and equity | $ | 95,591 | $ | 55,979 |
See notes to the consolidated financial statements.
3 |
THE ONE GROUP HOSPITALITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited, in thousands, except earnings per share and related share information)
For the three months ended March 31, | ||||||||
2018 | 2017 | |||||||
Revenues: | ||||||||
Owned restaurant net revenues | $ | 15,076 | $ | 14,228 | ||||
Owned food, beverage and other net revenues | 2,005 | 3,885 | ||||||
Total owned revenue | 17,081 | 18,113 | ||||||
Management, license and incentive fee revenue | 2,436 | 2,314 | ||||||
Total revenues | 19,517 | 20,427 | ||||||
Cost and expenses: | ||||||||
Owned operating expenses: | ||||||||
Owned restaurants: | ||||||||
Owned restaurant cost of sales | 4,034 | 3,876 | ||||||
Owned restaurant operating expenses | 9,378 | 9,369 | ||||||
Total owned restaurant expenses | 13,412 | 13,245 | ||||||
Owned food, beverage and other expenses | 1,689 | 2,937 | ||||||
Total owned operating expenses | 15,101 | 16,182 | ||||||
General and administrative (including stock-based compensation of $324 and $153, respectively) | 3,055 | 2,921 | ||||||
Depreciation and amortization | 778 | 866 | ||||||
Lease termination expense and asset write-offs | — | 273 | ||||||
Pre-opening expenses | 210 | 470 | ||||||
Equity in loss (income) of investee companies | 23 | (45 | ) | |||||
Other (income) expense, net | (111 | ) | 12 | |||||
Total costs and expenses | 19,056 | 20,679 | ||||||
Operating income (loss) | 461 | (252 | ) | |||||
Interest expense, net of interest income | 318 | 259 | ||||||
Income (loss) from continuing operations before provision for income taxes | 143 | (511 | ) | |||||
Income tax provision (benefit) | 25 | (17 | ) | |||||
Income (loss) from continuing operations | 118 | (494 | ) | |||||
Loss from discontinued operations | — | (106 | ) | |||||
Net income (loss) | 118 | (600 | ) | |||||
Less: net loss attributable to noncontrolling interest | (113 | ) | (198 | ) | ||||
Net income (loss) attributable to The ONE Group Hospitality, Inc. | $ | 231 | $ | (402 | ) | |||
Currency translation adjustment | (75 | ) | (56 | ) | ||||
Comprehensive income (loss) | $ | 156 | $ | (458 | ) | |||
Basic earnings (loss) per share: | ||||||||
Continuing operations | $ | 0.01 | $ | (0.01 | ) | |||
Discontinued operations | $ | — | $ | — | ||||
Attributable to The ONE Group Hospitality, Inc. | $ | 0.01 | $ | (0.02 | ) | |||
Diluted earnings (loss) per share: | ||||||||
Continuing operations | $ | 0.01 | $ | (0.01 | ) | |||
Discontinued operations | $ | — | $ | — | ||||
Attributable to The ONE Group Hospitality, Inc. | $ | 0.01 | $ | (0.02 | ) | |||
Weighted average number of common shares outstanding: | ||||||||
Basic | 27,187,657 | 25,050,628 | ||||||
Diluted | 27,388,498 | 25,050,628 |
For the three months ended March 31, | ||||||||
2019 | 2018 | |||||||
Revenues: | ||||||||
Owned restaurant net revenues | $ | 17,820 | $ | 15,076 | ||||
Owned food, beverage and other net revenues | 2,273 | 2,005 | ||||||
Total owned revenue | 20,093 | 17,081 | ||||||
Management, license and incentive fee revenue | 2,683 | 2,436 | ||||||
Total revenues | 22,776 | 19,517 | ||||||
Cost and expenses: | ||||||||
Owned operating expenses: | ||||||||
Owned restaurants: | ||||||||
Owned restaurant cost of sales | 4,569 | 4,034 | ||||||
Owned restaurant operating expenses | 10,915 | 9,378 | ||||||
Total owned restaurant expenses | 15,484 | 13,412 | ||||||
Owned food, beverage and other expenses | 2,259 | 1,689 | ||||||
Total owned operating expenses | 17,743 | 15,101 | ||||||
General and administrative (including stock-based compensation of $181 and $324 for the three months ended March 31, 2019 and 2018 respectively) | 2,650 | 3,055 | ||||||
Depreciation and amortization | 942 | 778 | ||||||
Pre-opening expenses | 482 | 210 | ||||||
Equity in income of investee companies | — | 23 | ||||||
Other income, net | (175 | ) | (111 | ) | ||||
Total costs and expenses | 21,642 | 19,056 | ||||||
Operating income | 1,134 | 461 | ||||||
Other expenses, net: | ||||||||
Interest expense, net of interest income | 269 | 318 | ||||||
Total other expenses, net | 269 | 318 | ||||||
Income before provision for income taxes | 865 | 143 | ||||||
Provision for income taxes | 96 | 25 | ||||||
Net income | 769 | 118 | ||||||
Less: net loss attributable to noncontrolling interest | (85 | ) | (113 | ) | ||||
Net income attributable to The ONE Group Hospitality, Inc. | $ | 854 | $ | 231 | ||||
Currency translation adjustment | (160 | ) | (75 | ) | ||||
Comprehensive income | $ | 694 | $ | 156 | ||||
Net income attributable to The ONE Group Hospitality, Inc. per share: | ||||||||
Basic net income per share | $ | 0.03 | $ | 0.01 | ||||
Diluted net income per share | $ | 0.03 | $ | 0.01 | ||||
Shares used in computing basic earnings per share | 28,314,820 | 27,187,657 | ||||||
Shares used in computing diluted earnings per share | 29,311,756 | 27,388,498 |
See notes to the consolidated financial statements.
4 |
THE ONE GROUP HOSPITALITY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited, in thousands, except share information)
Accumulated | ||||||||||||||||||||||||||||||||
Common stock | Additional | other | ||||||||||||||||||||||||||||||
Shares | Par value | paid-in capital | Accumulated deficit | comprehensive loss | Stockholders' equity | Noncontrolling interest | Total | |||||||||||||||||||||||||
Balance at December 31, 2017 | 27,152,101 | $ | 3 | $ | 41,007 | $ | (31,979 | ) | $ | (1,556 | ) | $ | 7,475 | $ | (922 | ) | $ | 6,553 | ||||||||||||||
Adoption of ASC 606 “Revenue from contract with customers” | — | — | — | (54 | ) | — | (54 | ) | — | (54 | ) | |||||||||||||||||||||
Stock based compensation expense | — | — | 324 | — | — | 324 | — | 324 | ||||||||||||||||||||||||
Vesting of restricted shares | 100,000 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Loss on foreign currency translation, net | — | — | — | — | (75 | ) | (75 | ) | — | (75 | ) | |||||||||||||||||||||
Net income | — | — | — | 231 | — | 231 | (113 | ) | 118 | |||||||||||||||||||||||
Balance at March 31, 2018 | 27,252,101 | $ | 3 | $ | 41,331 | $ | (31,802 | ) | $ | (1,631 | ) | $ | 7,901 | $ | (1,035 | ) | $ | 6,866 |
Common stock | Accumulated | |||||||||||||||||||||||||||||||
Shares | Par value | Additional paid-in capital | Accumulated deficit | other comprehensive loss | Stockholders' equity | Noncontrolling interests | Total | |||||||||||||||||||||||||
Balance at December 31, 2018 | 28,313,017 | $ | 3 | $ | 43,543 | $ | (28,722 | ) | $ | (2,310 | ) | $ | 12,514 | $ | (452 | ) | $ | 12,062 | ||||||||||||||
Stock-based compensation | — | — | 181 | — | — | 181 | — | 181 | ||||||||||||||||||||||||
Vesting of restricted shares | 20,544 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Loss on foreign currency translation, net | — | — | — | — | (160 | ) | (160 | ) | — | (160 | ) | |||||||||||||||||||||
Net income | — | — | — | 854 | — | 854 | (85 | ) | 769 | |||||||||||||||||||||||
Balance at March 31, 2019 | 28,333,561 | $ | 3 | $ | 43,724 | $ | (27,868 | ) | $ | (2,470 | ) | $ | 13,389 | $ | (537 | ) | $ | 12,852 |
See notes to the consolidated financial statements.
5 |
THE ONE GROUP HOSPITALITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
For the quarter ended March 31, | For the three months ended March 31, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Operating activities: | ||||||||||||||||
Net income (loss) | $ | 118 | $ | (600 | ) | |||||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||
Net income | $ | 769 | $ | 118 | ||||||||||||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 778 | 866 | 942 | 778 | ||||||||||||
Amortization of discount on warrants | 51 | 47 | 50 | 51 | ||||||||||||
Deferred rent | (18 | ) | (35 | ) | ||||||||||||
Deferred rent and tenant improvement allowances | — | (18 | ) | |||||||||||||
Deferred taxes | (2 | ) | — | 10 | (2 | ) | ||||||||||
Loss (income) from equity method investments | 23 | (45 | ) | |||||||||||||
Income from equity method investments | — | 23 | ||||||||||||||
Gain on disposition of cost method investment | (185 | ) | — | — | (185 | ) | ||||||||||
Stock-based compensation | 324 | 153 | 181 | 324 | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | 190 | (386 | ) | 1,147 | 190 | |||||||||||
Inventory | 115 | (78 | ) | 161 | 115 | |||||||||||
Prepaid expenses and other current assets | (211 | ) | (506 | ) | ||||||||||||
Other current assets | (96 | ) | (211 | ) | ||||||||||||
Due from related parties, net | (99 | ) | (293 | ) | (38 | ) | (99 | ) | ||||||||
Security deposits | (54 | ) | (7 | ) | (18 | ) | (54 | ) | ||||||||
Other assets | (37 | ) | 32 | 8 | (37 | ) | ||||||||||
Accounts payable | (203 | ) | 2,394 | 270 | (203 | ) | ||||||||||
Accrued expenses | (718 | ) | (1,278 | ) | (1,331 | ) | (718 | ) | ||||||||
Operating lease liabilities and right-of-use assets | 321 | — | ||||||||||||||
Deferred revenue | 100 | 583 | 137 | 100 | ||||||||||||
Net cash provided by operating activities | 172 | 847 | 2,513 | 172 | ||||||||||||
Investing activities: | ||||||||||||||||
Purchase of property and equipment | (306 | ) | (1,353 | ) | (2,060 | ) | (306 | ) | ||||||||
Proceeds from disposition of cost method investment | 600 | — | — | 600 | ||||||||||||
Net cash provided by (used in) investing activities | 294 | (1,353 | ) | |||||||||||||
Net cash (used in) provided by investing activities | (2,060 | ) | 294 | |||||||||||||
Financing activities: | ||||||||||||||||
Proceeds from business loan and security agreement | — | 1,000 | ||||||||||||||
Repayment of term loan | (694 | ) | (800 | ) | (707 | ) | (694 | ) | ||||||||
Repayment of equipment financing agreement | (87 | ) | (82 | ) | (91 | ) | (87 | ) | ||||||||
Repayment of business loan and security agreement | (62 | ) | — | — | (62 | ) | ||||||||||
Distributions to non-controlling interests | — | (23 | ) | |||||||||||||
Net cash (used in) provided by financing activities | (843 | ) | 95 | |||||||||||||
Net cash used in financing activities | (798 | ) | (843 | ) | ||||||||||||
Effect of exchange rate changes on cash | (28 | ) | (35 | ) | (168 | ) | (28 | ) | ||||||||
Net decrease in cash and cash equivalents | (405 | ) | (446 | ) | (513 | ) | (405 | ) | ||||||||
Cash and cash equivalents, beginning of year | 1,548 | 918 | 1,592 | 1,548 | ||||||||||||
Cash and cash equivalents, end of year | $ | 1,143 | $ | 472 | $ | 1,079 | $ | 1,143 | ||||||||
Supplemental disclosure of cash flow data: | ||||||||||||||||
Interest paid | $ | 142 | $ | 138 | $ | 235 | $ | 142 | ||||||||
Income taxes paid | $ | 26 | $ | — | 191 | 26 | ||||||||||
Noncash investing and financing activities: | ||||||||||||||||
Noncash debt issuance costs | $ | — | $ | 35 | ||||||||||||
Non-cash amortization of debt issuance costs | $ | 5 | $ | 5 |
See notes to the consolidated financial statements.
6 |
THE ONE GROUP HOSPITALITY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Basis– Summary of presentationBusiness and Significant Accounting Policies
The accompanying consolidated balance sheet asSummary of December 31, 2017, which has been derived from audited financial statements, and the unaudited consolidated financial statements of Business
The ONE Group Hospitality, Inc. and its subsidiaries (collectively, "the Company") as of and for the three months ended March 31, 2018 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”“Company”). The information furnished within this Form 10-Q reflects all adjustments (consisting only of normal recurring accruals and adjustments), which are, in the Company’s opinion, necessary to fairly state the interim operating results for the respective periods.
The Company is a global hospitality company that develops, owns and operates, and manages or licenses upscale, high-energy restaurants and lounges. The Company’s primary restaurant brand is STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality foodlounges and service of a traditional upscale steakhouse. As of March 31, 2018, the Company owned, operated or managed eighteen venues across seven states and six countries.
The Company also provides turn-key food and beverage (“F&B”) services for hospitality venues including hotels, casinos and other high-end locations.locations globally. Turn-key F&B services are food and beverage services that can be scaled, customized and implemented by the Company at a particular hospitality venue and customized per the requirements offor the client. The Company’s primary restaurant brand is STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse.
As of March 31, 2018, under various management agreements,2019, we owned, operated, managed or licensed 29 venues including 19 STKs in major metropolitan cities in North America, Europe and the CompanyMiddle East and including F&B services thirteen venues throughoutprovided to four hotels and casinos in the United States and in Europe.
Certain information and footnote disclosure normally included in annualBasis of Presentation
The accompanying consolidated balance sheet as of December 31, 2018, which has been derived from audited financial statements, and the accompanying unaudited interim consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted accounting principles in the United States (“GAAP”). Certain information and footnote disclosures normally included in annual audited financial statements have been omitted pursuant to SEC rules and regulations. The notes to theThese unaudited interim consolidated financial statements (unaudited) should be read in conjunction with the notes to the consolidated financial statements containedand notes thereto included in the Company’s annual reportAnnual Report on Form 10-K for the year ended December 31, 2017.2018.
In the Company’s opinion, the accompanying unaudited interim financial statements reflect all adjustments (consisting only of normal recurring accruals and adjustments) necessary for a fair presentation of the results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of the results expected for the full year. Additionally, the Company believes that the disclosures are sufficient for interim financial reporting purposes. However, these operating results are not necessarily indicative of the results expected for the full year.
Certain prior year amounts have been reclassified to conform to current year presentation in the consolidated financial statements.Recent Accounting Pronouncements
In March 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Updated (“ASU”) No. 2019-01, “Leases (Topic 842): Codification Improvements” (“ASU 2019-01”). ASU 2019-01 provided clarification related to adopting Accounting Standard Codification Topic 842, Leases, (“ASC Topic 842”). ASU 2019-01 addresses fair value determinations of underlying assets by lessors, cash flow statement presentation for financing leases, and transition disclosures. The Company adopted ASC Topic 842 as of January 1, 2019 and considered the clarification guidance in ASU 2019-01 as part of its adoption. Refer to Note 2 - Liquidity12 for additional details regarding the adoption of ASC Topic 842.
As of March 31,In August 2018, the Company's accumulated deficit was $31.8 millionFASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 eliminates, modifies and the Company's cashadds disclosure requirements for fair value measurements. The amendments in ASU 2018-13 are effective for annual and cash equivalents was $1.1 million.interim periods beginning after December 15, 2019, with early adoption permitted. The Company expects to finance its operations for at leastis evaluating the next twelve months following the issuanceeffects of ASU 2018-13 on its consolidated financial statements includingbut does not expect the adoption of ASU 2018-13 to be material.
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract” (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs of opening currently planned restaurants, through cash provided by operationsin cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for annual and construction allowances provided by landlords of certain locations. Other sources of liquidity could include additional potential issuances of debtinterim periods beginning after December 15, 2019, with early adoption permitted. Entities can choose to adopt the new guidance prospectively or equity securities in public or private financings, or warrant or option exercises. While the Company continues to seek capital through a number of means, there can be no assurance that additional financing will be available to it on acceptable terms, if at all. If theretrospectively. The Company is unable to access necessary capital to meetevaluating the effects of this pronouncement on its liquidity needs, the Company may have to delay or discontinue the expansion of its business or raise funds on terms that it may consider unfavorable.consolidated financial statements.
7 |
In October 2018, the FASB issued ASU No. 2018-17, “Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities” (“ASU 2018-17”). ASU 2018-17 states that indirect interests held through related parties in common control arrangements should be considered on a proportional basis to determine whether fees paid to decision makers and service providers are variable interests. This is consistent with how indirect interests held through related parties under common control are considered for determining whether a reporting entity must consolidate a variable interest entity. ASU 2018-17 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. Entities are required to adopt the new guidance retrospectively with a cumulative adjustment to retained earnings at the beginning of the earliest period presented. The Company is evaluating the effects of this pronouncement on its consolidated financial statements.
Note 3 -2 – Inventory
Inventory consists of the following (in thousands) as of::
March 31, 2018 | December 31, 2017 | March 31, | December 31, | |||||||||||||
2019 | 2018 | |||||||||||||||
Food | $ | 206 | $ | 246 | $ | 225 | $ | 300 | ||||||||
Beverages | 1,082 | 1,156 | 1,018 | 1,104 | ||||||||||||
Totals | $ | 1,288 | $ | 1,402 | ||||||||||||
Total | $ | 1,243 | $ | 1,404 |
Note 43 – Other current assetsCurrent Assets
Other current assets consistsconsist of the following (in thousands) as of::
March 31, | December 31, | |||||||||||||||
2018 | 2017 | March 31, | December 31, | |||||||||||||
2019 | 2018 | |||||||||||||||
Prepaid taxes | $ | 274 | $ | 255 | $ | 560 | $ | 503 | ||||||||
Landlord receivable | 258 | 258 | 195 | 195 | ||||||||||||
Prepaid expenses | 531 | 421 | 809 | 680 | ||||||||||||
Other | 446 | 365 | 6 | 93 | ||||||||||||
Totals | $ | 1,509 | $ | 1,299 | ||||||||||||
Total | $ | 1,570 | $ | 1,471 |
Note 4 – Property and Equipment, net
Property and equipment, net consist of the following (in thousands):
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Furniture, fixtures and equipment | $ | 11,024 | $ | 10,425 | ||||
Leasehold improvements | 45,531 | 43,890 | ||||||
Less: accumulated depreciation and amortization | (17,911 | ) | (16,969 | ) | ||||
Subtotal | 38,644 | 37,346 | ||||||
Construction in progress | — | 336 | ||||||
Restaurant supplies | 1,821 | 1,665 | ||||||
Total | $ | 40,465 | $ | 39,347 |
Depreciation and amortization related to property and equipment amounted to $0.9 million and $0.8 million for the three months ended March 31, 2019 and 2018, respectively. The Company does not depreciate construction in progress, assets not yet put into service or restaurant supplies.
8 |
Note 5 – Accrued expensesExpenses
Accrued expenses consist of the following (in thousands):
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Payroll and related | $ | 1,878 | $ | 1,794 | ||||
Variable rent, including disputed rent amounts | 1,506 | 1,766 | ||||||
Legal, professional and other services | 807 | 1,028 | ||||||
VAT and sales taxes | 530 | 645 | ||||||
Income taxes and related | 416 | 685 | ||||||
Insurance | 317 | 203 | ||||||
Due to hotels | 35 | 212 | ||||||
Other | 1,347 | 1,760 | ||||||
Total | $ | 6,836 | $ | 8,093 |
Note 6 – Long-Term Debt
Long-term debt consists of the following (in thousands) as of::
March 31, 2018 | December 31, 2017 | |||||||
VAT and Sales taxes | $ | 528 | $ | 739 | ||||
Payroll and related | 742 | 847 | ||||||
Income taxes | 573 | 610 | ||||||
Due to hotels | 1,190 | 1,168 | ||||||
Rent | 1,384 | 1,471 | ||||||
Legal, professional and other services | 374 | 1,007 | ||||||
Insurance | 302 | 103 | ||||||
Other | 1,113 | 1,042 | ||||||
Totals | $ | 6,206 | $ | 6,987 |
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Term loan agreements | $ | 3,121 | $ | 3,828 | ||||
Promissory notes | 6,250 | 6,250 | ||||||
Equipment financing agreements | 661 | 752 | ||||||
Total long-term debt | 10,032 | 10,830 | ||||||
Less: current portion of long-term debt | (2,844 | ) | (3,201 | ) | ||||
Less: discounts on warrants, net | (434 | ) | (479 | ) | ||||
Less: debt issuance costs | (27 | ) | (32 | ) | ||||
Total long-term debt, net of current portion | $ | 6,727 | $ | 7,118 |
Note 6 - Related party transactions
Net amounts due to related parties amounted to $1.4 millionInterest expense for all the Company’s debt arrangements, excluding the amortization of debt issuance costs and $1.5 million as of March 31, 2018other discounts and December 31, 2017, respectively. The Company has not reserved any related party receivables as of March 31, 2018 and December 31, 2017.
The Company incurred legal fees, of $31,000 and $0.1 million for the quarters ended March 31, 2018 and 2017, respectively, to an entity owned by one of its stockholders, who is also a former director of the Company. The Company also receives rental income for an office space subleased to this entity. Rental income of approximately $50,000 was recorded from this entity for each of the quarters ended March 31, 2018 and 2017. Included in amounts due to related parties, net at March 31, 2018 and December 31, 2017, is a balance due to this entity of approximately $0.2 million and $0.3 million for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, the Company had $1.3 million in letters of credit outstanding for certain restaurants. These letters of credit, which are cash collateralized, are recorded as a component of security deposits on the consolidated balance sheet as of March 31, 2019.
The Company incurred approximately $0.1 million and $0.8 million for the quarters ended March 31, 2018 and 2017, respectively, for construction services to an entity ownedCompany’s term loan agreements with Bank United are secured by family members of onesubstantially all of the Company’s stockholders, whoassets. The term loan agreements contain certain affirmative and negative covenants that limit or restrict, among other things, liens and encumbrances, indebtedness, mergers, asset sales, investments, assumptions and guaranties of indebtedness of other persons, change in nature of operations, changes in fiscal year and other matters customarily restricted in such agreements. The financial covenants contained in these agreements require the borrowers to maintain a certain adjusted tangible net worth and a debt service coverage ratio. As of March 31, 2019, the Company is also a former employeein compliance with all of its financial covenants under the Company. Included in amountsterm loan agreements.
Note 7 – Fair Value of Financial Instruments
Cash and cash equivalents, accounts receivable, inventory, accounts payable and accrued expenses are carried at cost, which approximates fair value due to related parties, nettheir short maturities. Long-lived assets are measured and disclosed at fair value on a nonrecurring basis if an impairment is identified. There were no long-lived assets measured at fair value as of March 31, 20182019.
The Company’s long-term debt, including the current portion, is carried at cost on the consolidated balance sheets. Fair value of long-term debt, including the current portion, is estimated based on Level 2 inputs. Fair value is determined by discounting future cash flows using interest rates available for issues with similar terms and December 31, 2017, is a balance due to this entity of approximately $14,000 and $11,000, respectively.maturities.
DuringThe estimated fair values of long-term debt, for which carrying values do not approximate fair value, are as follows:
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Carrying amount of long-term debt, including current portion(1) | $ | 10,032 | $ | 10,830 | ||||
Fair value of long-term debt, including current portion | $ | 6,616 | $ | 7,648 |
(1)Excludes the fourth quarterdiscounts on warrants, net and debt issuance costs
Note 8 – Nonconsolidated Variable Interest Entities
As of 2016,March 31, 2019 and December 31, 2018, the Company received approximately $1.2 millionowned interests in cash advances from the TOG Liquidation Trust (the “Liquidation Trust”). The TOG Liquidation Trustfollowing companies, which directly or indirectly operate restaurants:
· | 31.24% interest in Bagatelle NY LA Investors, LLC (“Bagatelle Investors”) |
· | 51.13% interest in Bagatelle Little West 12th, LLC (“Bagatelle NY”) |
Bagatelle Investors is a trustholding company that was set uphas an interest in connection with a 2013 merger transactionBagatelle NY. Both entities were formed in 2011. The Company accounts for its investments in these entities under the equity method of accounting based on management’s assessment that although it is not the primary beneficiary of these entities because it does not have the power to hold previously issued and outstanding warrants held by membersdirect their day to day activities, the Company is able to exercise influence over these entities. The Company has provided no additional types of support to these entities than what is contractually required.
The carrying values of these investments were as follows (in thousands):
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Bagatelle Investors | $ | 56 | $ | 56 | ||||
Bagatelle NY | 2,628 | 2,628 | ||||||
Total | $ | 2,684 | $ | 2,684 |
For the predecessor company. When warrants were exercised, the cash proceeds from the exercise of the warrants remained in the Trust. Amounts due to the trust are non-interest bearing and are repayable in 2021 when the trust expires. Included in due to related parties, long term atthree months ended March 31, 2018, the equity in income of investee companies for the equity method investments discussed above was approximately $23.0 thousand. There was no equity in income for the three months ended March 31, 2019.
Additionally, the Company has entered into a management agreement with Bagatelle NY. Under this agreement, the Company recorded management fee revenue of approximately $44.0 thousand and $37.0 thousand for the three months ended March 31, 2019 and 2018, respectively. The Company also receives rental income from Bagatelle NY for restaurant space that it subleases to Bagatelle NY. Rental income of approximately $0.1 million was recorded from this entity for each three months ended March 31, 2019 and 2018.
Net receivables from the Bagatelle Investors and Bagatelle NY included in due from related parties, net were approximately $0.2 million and $0.1 million as of March 31, 2019 and December 31, 2017 is a balance due2018. These receivables, combined with the Company’s equity in each of these investments, represent the Company’s maximum exposure to the Liquidation Trust of $1.2 million and $1.2 million, respectively.loss.
Please refer to Note 9In the three months ended March 31, 2018, the Company sold its 10% interest in a cost method investment, One 29 Park, LLC, for details$0.6 million, resulting in a gain of $0.2 million. The gain is included as a component of “other expenses, net” on other transactionsthe consolidated statement of operations and comprehensive income. The investment was accounted for under the cost method of accounting. The Company had also entered into a management agreement with related parties.One 29 Park, LLC, under which the Company recorded management fee revenue of $0.1 million for the three months ended March 31, 2018. The management agreement with One 29 Park, LLC terminated on September 30, 2018.
Note 79 – Related Party Transactions
Net amounts due to related parties were $1.1 million and $1.2 million as of March 31, 2019 and December 31, 2018, respectively. The Company has not reserved any related party receivables as of March 31,2019 and December 31, 2018.
During the fourth quarter of 2016, the Company received approximately $1.2 million in cash advances from the TOG Liquidation Trust (the “Liquidation Trust”). The TOG Liquidation Trust is a trust that was set up in connection with a 2013 merger transaction to hold previously issued and outstanding warrants held by members of the predecessor company. Amounts due to the trust are non-interest bearing and are repayable in 2021 when the trust expires. As of March 31, 2019 and December 31, 2018, the balance due to the Liquidation Trust included in due to related parties, long-term was approximately $1.2 million.
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Please refer to Note 8 for details on other transactions with related parties.
Note 10 – Income taxes
The Company’s effective income tax rate was 11.1% for the three months ended March 31 2019 compared to 17.5% for the three months ended March 31, 2018. The effective income tax rate for the three months ended March 31, 2019 was lower compared to the three months ended March 31, 2018 primarily due to the tax rates applied to domestic and foreign income (loss). Additionally, the Company’s projected annual effective tax rate differs from the statutory U.S. tax rate of 21% primarily due to the following: (i) availability of U.S. net operating loss carryforwards, resulting in no federal income taxes; (ii) a full valuation allowance on the U.S. deferred tax assets, net; (iii) taxes owed in foreign jurisdictions such as the United Kingdom, Canada and Italy; and, (iv) taxes owed in state and local jurisdictions such as New York, New York City, Colorado and Tennessee.
The Company is subject to income taxes in the U.S. federal jurisdiction, and the various states and local jurisdictions in which it operates. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In the normal course of business, the Company is subject to examination by the federal, state, local and foreign taxing authorities.
Note 11 – Revenue from contracts with customers
On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606 – “Revenue from Contracts with Customers” (“ASC 606”), using the modified retrospective method. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue recognition standard, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior periods.
The Company recorded a net decrease to opening accumulated deficit of $0.1 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606,following table provides information about receivables and contract liabilities, which include deferred license revenue and deferred gift card and gift certificate revenue, from contracts with the impact primarily related to the licensing of our restaurants and the amortization of fees associated with our license agreements. The changes were as followscustomers (in thousands):
Balance at December 31, 2017 | ASC 606 Adjustments | Balance at January 1, 2018 | ||||||||||
Liabilities | ||||||||||||
Deferred license revenue, current | $ | 115 | $ | 100 | $ | 215 | ||||||
Deferred license revenue, long-term | 1,222 | (46 | ) | 1,176 | ||||||||
Equity | ||||||||||||
Accumulated deficit | (31,979 | ) | (54 | ) | (32,033 | ) |
March 31, 2019 | December 31, 2018 | |||||||
Receivables (1) | $ | — | $ | 174 | ||||
Deferred license revenue (2) | 1,235 | 1,179 | ||||||
Deferred gift card and gift certificate revenue (3) | $ | 331 | $ | 491 |
Under ASC 606, because(1)Receivables are included in accounts receivable on the consolidated balance sheets.
(2)Includes the current and long-term portion of deferred license revenue.
(3)Deferred gift card and gift certificate revenue is included in deferred gift card revenue and other on the consolidated balance sheets.
The Company determined that the services we provide thatit provides under its licensing agreements are relatedprimarily the rights to access and derive benefit from our symbolic intellectual property. As a result, the initial license fees and upfront fees related to our license agreements do not contain separate and distinct performance obligations from the license right, these fees will beare recognized on a straight linestraight-line basis over the term of the licensee agreement. Under previous guidance, initial license fees were recognized when the related services had been provided, which was generally upon the opening of the restaurant, and upfront fees were recognized on a pro-rata basis as restaurants under the development agreement were opened. These fees will continue to be recorded as a component of management, license and incentive fee revenue on the consolidated statement of operations and comprehensive income (loss). ASC 606 requires sales-basedincome. Sales-based royalties to continue to beare recognized as licensee restaurant sales occur.
Significant changes in deferred license revenue for the three months ended March 31, 2019 were as follows (in thousands):
Deferred license revenue, as of December 31, 2018 | $ | 1,179 | ||
Additions to deferred license revenue | 111 | |||
Revenue recognized during the period | (55 | ) | ||
Deferred license revenue, as of March 31, 2019 | $ | 1,235 |
As of March 31, 2019, the estimated deferred license revenue to be recognized in the future related to performance obligations that are unsatisfied as of March 31, 2019 was as follows (in thousands):
2019, nine months remaining | $ | 143 | ||
2020 | 191 | |||
2021 | 191 | |||
2022 | 163 | |||
2023 | 136 | |||
Thereafter | 411 | |||
Total future estimated deferred license revenue | $ | 1,235 |
Proceeds from the sale of gift cards and gift certificates are recorded as deferred revenue and recognized as revenue when redeemed by the holder. There are no expiration dates on the Company’s gift card and gift certificates and the Company does not charge any service fees that would result in a decrease to a customer’s available balance. Although the Company will continue to honor all gift card and gift certificates presented for payment, it may determine the likelihood of redemption to be remote for certain gift cards and gift certificates due to, among other things, long periods of inactivity. In these circumstances, to the extent the Company determines there is no requirement for remitting balances to government agencies under unclaimed property laws, outstanding gift card and gift certificate balances may then be recognized as breakage in the consolidated statements of operations and comprehensive income as a component of owned food, beverage and other net revenues.
Significant changes in deferred gift card and gift certificate revenue for the three months ended March 31, 2019 were as follows (in thousands):
Deferred gift card and gift certificate revenue, as of December 31, 2018 | $ | 491 | ||
Additions to deferred gift card and gift certificates revenue | 123 | |||
Revenue recognized during the period related to redemptions | (283 | ) | ||
Deferred gift card and gift certificate revenue, as of March 31, 2019 | $ | 331 |
In each of three months ended March 31, 2019 and 2018, the Company recognized revenue of $0.3 million related to our contract liabilities.
Note 12 – Leases
The Company adopted ASC Topic 842 as of January 1, 2019 using the optional transition method and has applied its transition provisions at the beginning of the period of adoption. As a result, the Company did not restate comparative periods. Under this transition provision, the Company has applied the legacy guidance under Accounting Standard Codification Topic 840, Leases, including its disclosure requirements, in the comparative periods presented.
Under ASC Topic 842, a lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. The Company’s contracts determined to be or contain a lease include explicitly or implicitly identified assets where the Company has the right to substantially all of the economic benefits of the assets and has the ability to direct how and for what purpose the assets are used during the lease term. Leases are classified as either operating or financing. For operating leases, the Company has recognized a lease liability equal to the present value of the remaining lease payments, and a right of use asset equal to the lease liability, subject to certain adjustments, such as prepaid rents, initial direct costs and lease incentives received from the lessor. The Company used its incremental borrowing rate to determine the present value of the lease payments. The Company’s incremental borrowing rate is the rate of interest that it would have to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
ASC Topic 842 includes practical expedient and policy election choices. The Company elected the practical expedient transition package available in ASC Topic 842 and, as a result, did not reassess the lease classification of existing contracts or leases or the initial direct costs associated with existing leases. The Company has made an accounting policy election not to recognize right of use assets and lease liabilities for leases with a lease term of 12 months or less, including renewal options that are reasonably certain to be exercised, that also do not include an option to purchase the underlying asset that is reasonably certain of exercise. Instead, lease payments for these leases are recognized as lease cost on a straight-line basis over the lease term.
The Company did not elect the hindsight practical expedient, and therefore the Company did not reassess its historical conclusions with regards to whether renewal option periods should be included in the terms of its leases. Given the importance of each of its restaurant locations to its operations, the Company historically concluded that it was reasonably assured of exercising all renewal periods included in its leases as failure to exercise such options would result in an economic penalty. The Company also did not elect the portfolio approach practical expedient, which permits applying the standard to a portfolio of leases with similar characteristics.
Upon adoption on January 1, 2019, the Company recognized right-of-use assets and lease liabilities for operating leases of $41.8 million and $58.9 million, respectively. The difference between the right-of-use asset and lease liability represents the net book value of deferred rent and tenant improvement allowances recognized by the Company as of December 31, 2018, which was adjusted against the right-of-use asset upon adoption of ASC Topic 842. There was no impact to the opening balance of retained earnings upon adoption.
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The impact of adopting ASC 606 as comparedchanges due to the previous recognition guidance on ouradoption of ASC Topic 842 were as follows (in thousands):
December 31, 2018 | ASC 842 Adjustments | January 1, 2019 | ||||||||||
Assets | ||||||||||||
Operating lease right-of-use assets | $ | — | $ | 41,868 | $ | 41,868 | ||||||
Liabilities | ||||||||||||
Current portion of operating lease liabilities | $ | — | $ | 3,212 | $ | 3,212 | ||||||
Operating lease liability, net of current portion | — | 55,679 | 55,679 | |||||||||
Deferred gift card revenue and other | 947 | (249 | ) | 698 | ||||||||
Deferred rent and tenant improvement allowances | $ | 16,774 | $ | (16,774 | ) | $ | — |
There was no impact to the Company’s consolidated statement of operations and comprehensive income (loss) was as follows (in thousands):
For the quarter ended March 31, 2018 | ||||||||||||
As Reported | Balances Without Adoption of ASC 606 | Adoption Impact of ASC 606 | ||||||||||
Revenues | ||||||||||||
Management, license and incentive fee revenues | 2,436 | 2,407 | 29 | |||||||||
Net income | 118 | 89 | 29 |
Note 8 - Stock-based Compensation
As of March 31, 2018, the Company had 499,207 shares reserved for issuance under the 2013 Employee, Director and Consultant Equity Incentive Plan (the “2013 Equity Plan”).
Stock-based compensation cost for the three months ended March 31, 2018 and 2017 was $0.3 million and $0.2 million, respectively, and is included in general and administrative expenses in2019 compared to the consolidated statement of operations and comprehensive income (loss). The Company did not grant any stock options during the quartersthree months ended March 31, 2018 and 2017.2018.
Stock Option ActivityThe Company enters into contracts to lease office space, restaurant space and equipment with terms that expire at various dates through 2039. Under ASC Topic 842, the lease term at the lease commencement date is determined based on the non-cancellable period for which the Company has the right to use the underlying asset, together with any periods covered by an option to extend the lease if the Company is reasonably certain to exercise that option, periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise that option, and periods covered by an option to extend (or not to terminate) the lease in which the exercise of the option is controlled by the lessor. The Company considered a number of factors when evaluating whether the options in its lease contracts were reasonably certain of exercise, such as length of time before option exercise, expected value of the leased asset at the end of the initial lease term, importance of the lease to overall operations, costs to negotiate a new lease, and any contractual or economic penalties.
Changes in outstanding stock options for 2018 were as follows:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | Intrinsic Value | ||||||||||||||
Outstanding at December 31, 2017 | 2,315,035 | 3.41 | |||||||||||||||
2018 Grants | — | — | |||||||||||||||
Exercised | — | — | |||||||||||||||
Forfeited | (80,000 | ) | 3.76 | ||||||||||||||
Outstanding at March 31, 2018 | 2,235,035 | 3.40 | 7.07 | $ | 888,040 | ||||||||||||
Exercisable at March 31, 2018 | 849,384 | 4.84 | 4.54 | $ | 2,360 |
A summary of the statusCertain of the Company’s non-vested stock optionsleases also provide for variable rent, which is determined as a percentage of gross sales in excess of specified, minimum sales targets. These variable rents are not included in the calculation of lease payments when classifying a lease and in the measurement of the lease liability as they do not meet the definition of in-substance, fixed-lease payments under ASC Topic 842.
The Company subleases portions of its office and restaurant space where it does not use the entire space for its operations. For the three months ended March 31, 20182019, sublease income was $0.2 million, of which $0.1 million was from related party, Bagatelle NY. Refer to Note 8 for details on transactions with this related party.
Certain of the Company’s leases include variable lease costs to reimburse the lessor for real estate tax and changesinsurance expenses, and certain non-lease components that transfer a distinct service to the Company, such as common area maintenance services. The Company has elected not to separate the accounting for lease components and non-lease components, for all leased assets.
ASC Topic 842 includes a number of reassessment and re-measurement requirements for lessees based on certain triggering events or conditions, including whether a contract is or contains a lease, assessment of lease term and purchase options, measurement of lease payments, assessment of lease classification and assessment of the discount rate. The Company reviewed the reassessment and re-measurement requirements and concluded that a lease for office space required reassessment as the Company had determined not to elect to exercise an option that it had previously determined it was reasonably certain to exercise. As a result, the Company remeasured the lease liability to reflect the change in lease payments, which resulted in a reduction in the operating lease liability and a corresponding adjustment to the operating lease right-of-use asset of $1.2 million in the three months ended March 31, 2019. In addition, there were no impairment indicators identified during the three months ended March 31, 2019 that required an impairment test for the quarter then ended is presented below:Company’s right-of-use assets or other long-lived assets in accordance with Accounting Standard Codification Topic 360, Property, Plant, and Equipment.
Shares | Weighted Average Grant Date Fair Value | |||||||
Non-vested shares at December 31, 2017 | 1,424,651 | $ | 0.99 | |||||
Granted | — | — | ||||||
Vested | — | — | ||||||
Forfeited | (39,000 | ) | 1.08 | |||||
Non-vested shares at March 31, 2018 | 1,385,651 | $ | 0.99 |
The components of lease expense for the period were as follows (in thousands):
March 31, | ||||
2019 | ||||
Lease cost | ||||
Operating lease cost | $ | 1,726 | ||
Variable lease cost | 674 | |||
Short-term lease cost | 108 | |||
Sublease income | (203 | ) | ||
Total lease cost | $ | 2,305 | ||
Weighted average remaining lease term – operating leases | 14 years | |||
Weighted average discount rate – operating leases | 8.25 | % |
As of March 31, 2018, there are 579,402 milestone-based options outstanding. These options vest based onSupplemental cash flow information related to leases for the achievement of Company and individual objectivesperiod was as set by the Board.follows (in thousands):
March 31, | ||||
2019 | ||||
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 1,718 | ||
Right-of-use assets obtained in exchange for operating lease obligations | $ | 281 |
As of March 31, 2018, there is approximately $1.4 million of total unrecognized compensation cost related to non-vested awards, which will be recognized over a weighted-average period of 2.8 years.
Restricted Stock Award Activity
The Company issues restricted stock awards under the 2013 Equity Plan. The fair value of these awards is determined based upon the closing fair market value2019, maturities of the Company’s common stock on the grant date.operating lease liabilities are as follows (in thousands):
2019, nine months remaining | $ | 5,167 | ||
2020 | 6,801 | |||
2021 | 6,545 | |||
2022 | 6,669 | |||
2023 | 6,805 | |||
Thereafter | 69,536 | |||
Total lease payments | 101,523 | |||
Less: imputed interest | (44,106 | ) | ||
Present value of operating lease liabilities | $ | 57,417 |
Note 13 – Earnings per share
A summaryBasic earnings per share is computed using the weighted average number of common shares outstanding during the statusperiod and income available to common stockholders. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period plus the dilutive effect of all potential shares of common stock including common stock issuable pursuant to stock options, warrants, and restricted stock awardsunits.
For the three months ended March 31, 2019 and 2018, the earnings per share was calculated as follows (in thousands, except earnings per share and related share data):
Three months ended March 31, | ||||||||
2019 | 2018 | |||||||
Net income attributable to The ONE Group Hospitality, Inc. | $ | 854 | $ | 231 | ||||
Basic weighted average shares outstanding | 28,314,820 | 27,187,657 | ||||||
Dilutive effect of stock options, warrants and restricted share units | 996,936 | 200,841 | ||||||
Diluted weighted average shares outstanding | 29,311,756 | 27,388,498 | ||||||
Net income available to common stockholders per share - Basic | $ | 0.03 | $ | 0.01 | ||||
Net income available to common stockholders per share - Diluted | $ | 0.03 | $ | 0.01 |
For the three months ended March 31, 2019, 0.9 million stock options, warrants and restricted share units were determined to be anti-dilutive and were therefore excluded from the calculation of diluted earnings per share. For the three months ended March 31, 2018, 2.0 million stock options, warrants and restricted share units were determined to be anti-dilutive and were therefore excluded from the calculation of diluted earnings per share.
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Note 14 – Stockholders’ Equity
Significant changes in stockholders’ equity for the three months ended March 31, 2019 and 2018 are presented below:as follows (in thousands):
Shares | Weighted Average Grant Date Fair Value | |||||||
Non-vested at December 31, 2017 | 985,000 | $ | 2.26 | |||||
Granted | 59,834 | 2.75 | ||||||
Vested | (100,000 | ) | 1.42 | |||||
Forfeited | (6,000 | ) | 2.73 | |||||
Non-vested at March 31, 2018 | 938,834 | $ | 2.38 |
Common Stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | Noncontrolling interests | Total | |||||||||||||||||||
Balance at December 31, 2018 | $ | 3 | $ | 43,543 | $ | (28,722 | ) | $ | (2,310 | ) | $ | (452 | ) | $ | 12,062 | |||||||||
Stock-based compensation | — | 181 | — | — | — | 181 | ||||||||||||||||||
Loss on foreign currency translation, net | — | — | — | (160 | ) | — | (160 | ) | ||||||||||||||||
Net income (loss) | — | — | 854 | — | (85 | ) | 769 | |||||||||||||||||
Balance at March 31, 2019 | $ | 3 | $ | 43,724 | $ | (27,868 | ) | $ | (2,470 | ) | $ | (537 | ) | $ | 12,852 |
As of March 31, 2018, 250,000 restricted shares subject to performance-based milestones were still outstanding. As of March 31, 2018, the Company had approximately $2.2 million of total unrecognized compensation costs related to restricted stock awards, which will be recognized over a weighted average period of 3.2 years.
Common Stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | Noncontrolling interests | Total | |||||||||||||||||||
Balance at December 31, 2017 | $ | 3 | $ | 41,007 | $ | (31,979 | ) | $ | (1,556 | ) | $ | (922 | ) | $ | 6,553 | |||||||||
Adoption of ASC 606 “Revenue from contracts with customers” | — | — | (54 | ) | — | — | (54 | ) | ||||||||||||||||
Stock-based compensation | — | 324 | — | — | — | 324 | ||||||||||||||||||
Vesting of restricted shares | — | — | — | — | — | — | ||||||||||||||||||
Loss on foreign currency translation, net | — | — | — | (75 | ) | — | (75 | ) | ||||||||||||||||
Net income (loss) | — | — | 231 | — | (113 | ) | 118 | |||||||||||||||||
Balance at March 31, 2018 | $ | 3 | $ | 41,331 | $ | (31,802 | ) | $ | (1,631 | ) | $ | (1,035 | ) | $ | 6,866 |
Note 9 – Nonconsolidated variable interest entities15 - Stock-Based Compensation
As of December 31, 2017 and March 31, 2018, the Company’s equity method and cost method investments, for which the Company has determined it is not the primary beneficiary, consist of interests in the following companies, which directly or indirectly operate restaurants:
Bagatelle Investors is a holding company that has an interest in Bagatelle NY. Both entities were formed in 2011. The Company has determined that it is not the primary beneficiary of these entities as it does not have the power to direct their day to day activities, but the Company is able to exercise influence over these entities. The Company has provided no additional types of support to these entities than what is contractually required.
One 29 Park, formed in 2009, operates a restaurant and manages the rooftop of a hotel located in New York, NY. Until the fourth quarter of 2017, the Company accounted for its investment in One 29 Park under the equity method of accounting based on management’s assessment that2019, the Company had significant influence over One 29 Park’s operations. In the fourth quarter of 2017, the majority ownership of One 29 Park changed. As a result of this ownership change, the Company believes that it no longer has significant influence over the operations of One 29 Park, and subsequently began accounting458,746 remaining shares available for its investment in One 29 Parkissuance under the 2013 Employee, Director and Consultant Equity Incentive Plan (the “2013 Equity Plan”).
Stock-based compensation cost methodfor each of accounting. In March 2018, the Company entered into an agreement to sell its 10% interest in One 29 Park to the new ownership group for $0.6 million. For the quarterthree months ended March 31, 2019 and 2018 the Company reduced its investment in One 29 Park to $0 and recorded a gain ofwas $0.2 million on the sale of its interestand is included in One 29 Park as a component of othergeneral and administrative expenses net onin the consolidated statement of operations and comprehensive income (loss).income.
Stock Option Activity
Changes in outstanding stock options during the three months ended March 31, 2019 were as follows:
Shares | Weighted average exercise price | Weighted average remaining contractual life | Intrinsic value (thousands) | |||||||||||
Outstanding at December 31, 2018 | 2,001,008 | $ | 3.29 | |||||||||||
Granted | 68,000 | 2.99 | ||||||||||||
Exercised | — | — | ||||||||||||
Cancelled, expired or forfeited | (63,000 | ) | 2.80 | |||||||||||
Outstanding at March 31, 2019 | 2,006,008 | $ | 3.29 | 6.67 years | $ | 1,063 | ||||||||
Exercisable at March 31, 2019 | 1,065,508 | $ | 4.16 | 5.45 years | $ | — |
The fair value of options granted in the three months ended March 31, 2019 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
Expected life, in years | 8.5 years | |||
Risk-free interest rate | 2.62 | % | ||
Volatility | 42.0 | % | ||
Dividend yield | 0.0 | % |
At MarchA summary of the status of the Company’s non-vested stock options as of December 31, 2018 and DecemberMarch 31, 2017,2019 and changes during the carrying values of these investments were (in thousands):three months then ended, is presented below:
March 31, 2018 | December 31, 2017 | |||||||
Bagatelle Investors | $ | 30 | $ | 33 | ||||
Bagatelle NY | 2,489 | 2,509 | ||||||
One 29 Park | — | 415 | ||||||
Totals | $ | 2,519 | $ | 2,957 |
Shares | Weighted average grant date fair value | |||||||
Non-vested stock options at December 31, 2018 | 926,500 | $ | 0.91 | |||||
Granted | 68,000 | 2.99 | ||||||
Vested | — | — | ||||||
Cancelled, expired or forfeited | (54,000 | ) | 0.99 | |||||
Non-vested stock options at March 31, 2019 | 940,500 | $ | 0.95 |
For the quarter ended March 31, | ||||||||
2018 | 2017 | |||||||
Equity in loss (income) of investee companies | $ | 23 | $ | (45 | ) |
As of March 31, 2019, there are 579,402 milestone-based options outstanding. These options vest based on the achievement of Company and individual objectives as set by the Board.
As of March 31, 2019, there is approximately $0.6 million of total unrecognized compensation cost related to non-vested awards, which will be recognized over a weighted-average period of 2.8 years.
Restricted Stock Unit Activity
The Company has entered into management agreements with Bagatelle NY and One 29 Park. For Bagatelle,issues restricted stock units (“RSUs”) under the Company recorded management fee revenue2013 Equity Plan. The fair value of approximately $37,000 and $48,000 forthese RSUs is determined based upon the quarters ended March 31, 2018 and 2017, respectively. For One 29 Park, the Company recorded management fee revenue of $0.1 million for eachclosing fair market value of the quarters ended March 31, 2018 and 2017, respectively. The Company receives rental income from Bagatelle for restaurant space that it subleases to Bagatelle. Rental income of $0.1 million was recorded from this entity for eachCompany’s common stock on the grant date.
A summary of the quarters ended March 31, 2018status of RSUs and 2017, respectively. Net payables of $43,000 and net receivables of $0.1 million to/from Bagatelle and One 29 Park are included in due to related parties, net on the March 31, 2018 and December 31, 2017 consolidated balance sheets, respectively. These amounts, combined with the Company’s equity in each of these investments, represent the Company’s maximum exposure to loss.
Note 10 – Income taxes
The Company’s effective income tax rate was 17.5% forchanges during the three months ended March 31, 2018, compared to an effective tax rate of 14.7% for the three months ended March 31, 2017. For the three months ended March 31, 2018 and March 31, 2017 the Company excluded jurisdictions with losses in which no benefit can be recognized from the effective tax rate calculation.2019 is presented below:
In December 2017, the President signed The Tax Cuts and Jobs Act (the “TCJA”), which includes a broad range of provisions. The TCJA contains several key provisions including:
Pursuant to the enactment of the TCJA, in the fourth quarter of 2017, the Company recorded an adjustment of $2.9 million to revalue its net deferred tax asset utilizing the corporate tax rate of 21% which was entirely offset by a reduction in our valuation allowance. Additionally, the Company accounted for the mandatory deemed repatriation using a provisional amount of $1.9 million. Due to the complexities involved in accounting for the enactment of the TCJA, SEC Staff Accounting Bulletin 118 allows companies to record provisional estimates of the impacts of the TCJA during a measurement period of up to one year from the enactment date. In order to estimate the impact of the one-time transition tax on accumulated foreign earnings, the Company used the retained earnings of its foreign subsidiaries as a proxy to calculate E&P for the 2017 tax provision. While retained earnings and E&P are two separate and distinct calculations, the Company believes that retained earnings can initially be used as a relatively accurate proxy for E&P. The Company believes that typical E&P adjustments for items such as depreciation, certain reserves and tax exempt income and other permanent nondeductible expenses for E&P are either immaterial or nonexistent. Therefore, in the absence of a formal E&P analysis, retained earnings was considered to be a reasonable estimate. The Company will conduct a comprehensive E&P analysis prior to the filing of its 2017 tax return. Only after the completion of the E&P study will the Company be able to determine with certainty the tax impact of the deemed repatriation provision of the TCJA. Any adjustment resulting from the E&P analysis will be included as a tax adjustment to continuing operations in 2018.
Shares | Weighted average grant date fair value | |||||||
Non-vested RSUs at December 31, 2018 | 764,201 | $ | 2.54 | |||||
Granted | 142,205 | 2.93 | ||||||
Vested | (20,544 | ) | 2.86 | |||||
Cancelled, expired or forfeited | (9,000 | ) | 2.73 | |||||
Non-vested RSUs at March 31, 2019 | 764,201 | $ | 2.59 |
As mentioned above,of March 31, 2019, 150,000 RSUs subject to performance-based vesting were still outstanding. As of March 31, 2019, the TCJA subjects a U.S. shareholder to current tax on GILTI earned by certain foreign subsidiaries. Financial Accounting Standards Board (“FASB”) Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expenseCompany had approximately $3.2 million of total unrecognized compensation costs related to GILTI resulting from those items in the year the tax is incurred. The Company has elected to recognize the resulting tax on GILTI asRSUs, which will be recognized over a period expense in the period the tax is incurred and expects to incur no tax for the year ended December 31, 2018 due to the availability of foreign tax credits and net operating losses.
Note 11 – Net income per share
Basic net income (loss) per share is computed using the weighted average numberperiod of common shares outstanding during the applicable period. Diluted net income (loss) per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential common stock. Potential common stock consists of shares issuable pursuant to stock options and warrants.2.8 years.
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
(in thousands, except earnings per share and related share information) | ||||||||
Net income (loss) attributable to The ONE Group Hospitality, Inc. | $ | 231 | $ | (402 | ) | |||
Basic weighted average shares outstanding | 27,187,657 | 25,050,628 | ||||||
Dilutive effect of stock options, warrants and restricted share units | 200,841 | — | ||||||
Diluted weighted average shares outstanding | 27,388,498 | 25,050,628 | ||||||
Net income (loss) available to common stockholders per share - Basic | $ | 0.01 | $ | (0.02 | ) | |||
Net income (loss) available to common stockholders per share - Diluted | $ | 0.01 | $ | (0.02 | ) | |||
Anti-dilutive stock options, warrants and restricted share units | 2,114,437 | — |
For the three months ended March 31, 2017, all equivalent shares underlying options and warrants were excluded from the calculation of diluted earnings per share as the Company was in a net loss position. Basic and diluted earnings per share for discontinued operations was $0.00 for each of the quarters ended March 31, 2018 and 2017.
Net income (loss) per share amounts for continuing operations and discontinued operations are computed independently. As a result, the sum of per share amounts may not equal the total.
Note 12 – Litigation
The Company is subject to claims and legal actions in the ordinary course of business, including claims by or against its licensees, employees, former employees and others. The Company does not believe any currently pending or threatened matter would have a material adverse effect on its business, results of operations or financial condition.
Note 13 –16 - Segment reportingReporting
The Company operates in three segments: “Owned restaurants,” “Owned food, beverage and other,” and “Managed and licensed operations.” The Owned restaurants segment consists of leased restaurant locations and competes in the full-service dining industry. The Owned food, beverage and other segment consists of hybrid operations, such as where the Company has a leased restaurant location and also has a food and beverage agreement at the same location, typically a hotel, and offsite banquet offerings. The Managed and licensed operations segment includes all operations for which a management, incentive or license fee is received. Management agreements generate management fees on net revenue and incentive fees on operating profit as defined in the applicable management agreement. License agreements generate revenue primarily through royalties earned on net revenue at each location. Revenues associated with developmental support for licensed locations are also included within this segment.
The Company’s Chief Executive Officer (“CEO”), who began serving as the Company’s CEO on October 30, 2017 and has been deemed the Company’s Chief Operating Decision Maker, manages the business and allocates resources via a combination of restaurant sales reports and segment profit information (which is defined as revenues less operating expenses) related to the Company’s three segments, or sources of revenue,revenues, which are presented in their entirety within the consolidated statements of operations and comprehensive income (loss). We have revised our segments to align with how our CEO manages the business. Prior period segments have been restated to conform to the current year’s presentation (in thousands):
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
Revenues: | ||||||||
Owned restaurants | $ | 15,076 | $ | 14,228 | ||||
Owned food, beverage and other operations | 2,005 | 3,885 | ||||||
Managed and licensed operations | 2,436 | 2,314 | ||||||
$ | 19,517 | $ | 20,427 | |||||
Segment Profits: | ||||||||
Owned restaurants | $ | 1,664 | $ | 983 | ||||
Owned food, beverage and other operations | 316 | 948 | ||||||
Managed and licensed operations | 2,436 | 2,314 | ||||||
Total segment profit | 4,416 | 4,245 | ||||||
General and administrative | 3,055 | 2,921 | ||||||
Depreciation and amortization | 778 | 866 | ||||||
Interest expense, net of interest income | 318 | 259 | ||||||
Equity in loss (income) of investee companies | 23 | (45 | ) | |||||
Other, net | 99 | 755 | ||||||
Income (loss) from continuing operations before provision for income taxes | $ | 143 | $ | (511 | ) |
Total assets: | March 31, 2018 | December 31, 2017 | ||||||
Owned restaurants | $ | 40,285 | $ | 40,570 | ||||
Owned food, beverage and other operations* | 6,501 | 7,385 | ||||||
Managed and licensed operations | 4,837 | 5,060 | ||||||
Total | $ | 51,623 | $ | 53,015 | ||||
* Includes corporate assets |
income.
The Company’s operating results by segment were as follows (in thousands):
Capital asset additions: | Three Months Ended March 31, | |||||||
2018 | 2017 | |||||||
Owned restaurants | $ | 301 | $ | 1,236 | ||||
Owned food, beverage and other operations** | 5 | 117 | ||||||
Managed and licensed operations | — | — | ||||||
Total | $ | 306 | $ | 1,353 | ||||
** Includes corporate capital asset additions |
For the three months ended March 31, 2019 | ||||||||||||||||
Owned restaurants | Owned food, beverage and other | Managed and licensed operations | Total | |||||||||||||
Revenues: | ||||||||||||||||
Owned net revenues | $ | 17,820 | $ | 2,273 | $ | — | $ | 20,093 | ||||||||
Management, license and incentive fee revenue | — | — | 2,683 | 2,683 | ||||||||||||
Total revenues | 17,820 | 2,273 | 2,683 | 22,776 | ||||||||||||
Cost and expenses: | ||||||||||||||||
Owned operating expenses: | ||||||||||||||||
Cost of sales | 4,569 | — | — | 4,569 | ||||||||||||
Other operating expenses | 10,915 | — | — | 10,915 | ||||||||||||
Owned food, beverage and other expenses | — | 2,259 | — | 2,259 | ||||||||||||
Total owned operating expenses | 15,484 | 2,259 | — | 17,743 | ||||||||||||
Segment income | $ | 2,336 | $ | 14 | $ | 2,683 | $ | 5,033 | ||||||||
General and administrative | 2,650 | |||||||||||||||
Depreciation and amortization | 942 | |||||||||||||||
Interest expense, net of interest income | 269 | |||||||||||||||
Equity in income of investee companies | — | |||||||||||||||
Other | 307 | |||||||||||||||
Income before provision for income taxes | $ | 865 |
For the three months ended March 31, 2018 | ||||||||||||||||
Owned restaurants | Owned food, beverage and other | Managed and licensed operations | Total | |||||||||||||
Revenues: | ||||||||||||||||
Owned net revenues | $ | 15,076 | $ | 2,005 | $ | — | $ | 17,081 | ||||||||
Management, license and incentive fee revenue | — | — | 2,436 | 2,436 | ||||||||||||
Total revenues | 15,076 | 2,005 | 2,436 | 19,517 | ||||||||||||
Cost and expenses: | ||||||||||||||||
Owned operating expenses: | ||||||||||||||||
Cost of sales | 4,034 | — | — | 4,034 | ||||||||||||
Other operating expenses | 9,378 | — | — | 9,378 | ||||||||||||
Owned food, beverage and other expenses | — | 1,689 | — | 1,689 | ||||||||||||
Total owned operating expenses | 13,412 | 1,689 | — | 15,101 | ||||||||||||
Segment income | $ | 1,664 | $ | 316 | $ | 2,436 | $ | 4,416 | ||||||||
General and administrative | 3,055 | |||||||||||||||
Depreciation and amortization | 778 | |||||||||||||||
Interest expense, net of interest income | 318 | |||||||||||||||
Equity in loss of investee companies | 23 | |||||||||||||||
Other | 99 | |||||||||||||||
Income before provision for income taxes | $ | 143 |
The Company’s total assets by segment for the periods indicated were as follows (in thousands):
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Total assets: | ||||||||
Owned restaurants | $ | 75,272 | $ | 42,971 | ||||
Owned food, beverage and other operations(1) | 15,591 | 7,274 | ||||||
Managed and licensed operations | 4,728 | 5,734 | ||||||
Total | $ | 95,591 | $ | 55,979 |
(1)Includes corporate assets
17 |
The Company’s total assets increased $40.1 million as of March 31, 2019 compared to December 31, 2018 as a result of adopting ASC Topic 842 during the first quarter of 2019. Refer to Note 12 for additional information regarding the adoption of ASC Topic 842.
The Company’s capital asset additions by segment for the periods indicated were as follows (in thousands):
For the three months ended March 31, | ||||||||
2019 | 2018 | |||||||
Capital assets additions: | ||||||||
Owned restaurants | $ | 1,762 | $ | 301 | ||||
Owned food, beverage and other operations(1) | 298 | 5 | ||||||
Managed and licensed operations | — | — | ||||||
Total | $ | 2,060 | $ | 306 |
(1) Includes corporate capital asset additions
Note 14 –17 - Geographic informationInformation
The following tabletables contains certain financial information by geographic location for the periods indicatedthree months ended March 31, 2019 and 2018 (in thousands):
Revenues
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
United States: | ||||||||
Owned restaurants | $ | 15,076 | $ | 14,228 | ||||
Owned food, beverage and other operations | 2,005 | 3,885 | ||||||
Managed and licensed operations | 1,687 | 1,687 | ||||||
Total United States revenues | $ | 18,768 | $ | 19,800 | ||||
Foreign: | ||||||||
Owned restaurants | $ | — | $ | — | ||||
Owned food, beverage and other operations | — | — | ||||||
Managed and licensed operations | 749 | 627 | ||||||
Total foreign revenues | $ | 749 | $ | 627 | ||||
Total revenues | $ | 19,517 | $ | 20,427 |
For the three months ended March 31, | ||||||||
2019 | 2018 | |||||||
Domestic: | ||||||||
Owned restaurants | $ | 17,820 | $ | 15,076 | ||||
Owned food, beverage and other operations | 2,273 | 2,005 | ||||||
Managed and licensed operations | 1,687 | 1,687 | ||||||
Total domestic revenues | $ | 21,780 | $ | 18,768 | ||||
International: | ||||||||
Owned restaurants | — | — | ||||||
Owned food, beverage and other operations | — | — | ||||||
Managed and licensed operationstv520238 | 996 | 749 | ||||||
Total international revenues | $ | 996 | $ | 749 | ||||
Total revenues | $ | 22,776 | $ | 19,517 |
Long-lived Assetsassets
March 31, 2018 | December 31, 2017 | |||||||
United States: | ||||||||
Owned restaurants | $ | 37,451 | $ | 37,907 | ||||
Owned food, beverage and other operations*** | 4,768 | 5,088 | ||||||
Managed and licensed operations | 92 | 109 | ||||||
Total United States long-lived assets | $ | 42,311 | $ | 43,104 | ||||
Foreign: | ||||||||
Owned restaurants | $ | — | $ | — | ||||
Owned food, beverage and other operations | — | — | ||||||
Managed and licensed operations | 120 | 148 | ||||||
Total foreign long-lived assets | $ | 120 | $ | 148 | ||||
Total long-lived assets | $ | 42,431 | $ | 43,252 | ||||
*** Includes corporate assets |
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Domestic: | ||||||||
Owned restaurants | $ | 72,532 | $ | 38,958 | ||||
Owned food, beverage and other operations | 13,002 | 5,375 | ||||||
Managed and licensed operations | 59 | 67 | ||||||
Total domestic long-lived assets | $ | 85,593 | $ | 44,400 | ||||
International: | ||||||||
Owned restaurants | — | — | ||||||
Owned food, beverage and other operations | — | — | ||||||
Managed and licensed operations | 37 | 38 | ||||||
Total international long-lived assets | $ | 37 | $ | 38 | ||||
Total long-lived assets | $ | 85,630 | $ | 44,438 |
Note 18 – Litigation
The Company is party to claims in lawsuits incidental to its business, including lease disputes and employee-related matters. In the opinion of management, the ultimate outcome of such matters, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position or results of operations.
Note 19 - Liquidity
During the three months ended March 31, 2019, the Company had net income of $0.8 million and had a working capital deficit of $8.6 million. As of March 31, 2019, the Company's accumulated deficit was $27.9 million. Additionally, as of March 31, 2019, the Company's cash and cash equivalents was $1.1 million, and cash from operations for the three months ended March 31, 2019 and 2018 were $2.5 million and $0.2 million, respectively. The Company expects to finance its operations, including the costs of opening planned restaurants, for at least the next twelve months from March 31, 2019 primarily through cash provided by operations. Other sources of liquidity could include additional potential issuances of debt or equity securities in public or private financings or warrant or option exercises.
19 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We wish to caution our readers that thisThis Quarterly Report on Form 10-Q and certain information incorporated herein by reference containscontain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). Forward-looking statements which are intended to speak only as of the date thereof and, involve risks and uncertainties that may cause our actual results, performance or achievements to be materially different from any futurethe results, performance or achievements expressed or implied by thesethe forward-looking statements. These risk and uncertainties include, the risk factors discussed under Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements may include matters such as future economic performance, general economic conditions, consumer preferences and spending, costs, competition, new product execution, restaurant openings or closings, operating margins, the availability of acceptable real estate locations, the sufficiency of our cash balances and cash generated from operatingoperations and financing activities for our future liquidity and capital resource needs, growth of licensing, the impact on our business as a result of Federal and/orand State legislation, future litigation, the execution of our growth strategy and other matters, and are generally accompaniedmatters. We have attempted to identify forward-looking statements by words such as:terminology including “anticipates,” “believes,” “anticipates,“can,” “continue,” “ongoing,” “could,” “estimates,” “expects,” “intends,” “may,” “appears,” “suggests,” “future,” “likely,” “goal,” “plans,” “intends,“potential,” “estimates,“projects,” “predicts,” “should,” “targets,” “expects,“would,” “contemplates”“will” and similar expressions that convey the uncertainty of future events or outcomes. These risks and uncertainties include, but areYou should not limited to, the risk factors described in our annual reportplace undue reliance on Form 10-K for the fiscal year ended December 31, 2017.any forward-looking statement. We do not undertake any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as may be required under applicable law.
General
This information should be read in conjunction with the consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the “2017 Form 10-K”).2018.
As used in this report, the terms “company,“Company,” “we,” “our,” or “us,” refer to The OneONE Group Hospitality, Inc. and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates. The term “quarter ended” refers to the entire calendar quarter, unless the context otherwise indicates.
Overview
The ONE Group Hospitality, Inc. is, a Delaware corporation, that develops, owns and operates, manages or licenses upscale, high-energy restaurants and lounges and provides turn-key food and beverage services for hospitality venues including hotels, casinos and other high-end locations globally. We define turn-key food and beverage (“F&B”) services as those services that can be scaled and implemented by us at a particular hospitality venue and customized per the requirements of the client.for our clients.
We were established with the vision of becoming a global market leader in the hospitality industry by melding high-quality service, ambiance, high-energy and cuisine into one great experience.experience that we refer to as “Vibe Dining.” Our primary restaurant brand is STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse.
Our F&B hospitality management services include developing, managing and operating restaurants, bars, rooftop lounges, pools, banqueting and catering facilities, private dining rooms, room service and mini bars tailored to the specific needs of high-end hotels and casinos. Our F&B hospitality clients operate global hospitality brands such as the W Hotel, Cosmopolitan Hotel, Hippodrome Casino, Hyatt and ME Hotels. These locations are typically
We opened our first restaurant in January 2004 in New York City and, as of March 31, 2019, we owned, operated, under ourmanaged or licensed 29 venues including 19 STKs in major metropolitan cities in North America, Europe and the Middle East. In addition, we provided food and beverage services in four hotels and casinos. We generate management agreements under which we earn a management fee based on revenue and an incentive fee basedrevenue (profit sharing) from those restaurants and lounges that we do not own, but instead manage on profitabilitybehalf of the underlying operations.our F&B hospitality clients. All our restaurants, lounges and F&B services are designed to create a social dining and high-energy entertainment experience within a destination location. We believe that this design and operating philosophy separates us from more traditional restaurant and foodservice competitors.
AsThe table below reflects our venues by restaurant brand and geographic location as of March 31, 2018, our operations are spread across 31 venues as follows:2019:
Venues | Venues | |||||||||||||||||||||||||||||||||||||||||||||||||||
STK | STK Rooftop | Bagatelle* | F&B Hospitality | Total | STK(1) | Bagatelle | Radio | Hideout | Marconi | Heliot | F&B Services | Total | ||||||||||||||||||||||||||||||||||||||||
Company-owned | 8 | 2 | - | - | 10 | |||||||||||||||||||||||||||||||||||||||||||||||
Domestic | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Owned | 10 | — | — | 1 | — | — | 1 | 12 | ||||||||||||||||||||||||||||||||||||||||||||
Managed | 4 | - | - | 13 | 17 | 1 | 1 | — | — | — | — | — | 2 | |||||||||||||||||||||||||||||||||||||||
Licensed | 2 | 1 | - | - | 3 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Other | - | - | 1 | - | 1 | |||||||||||||||||||||||||||||||||||||||||||||||
14 | 3 | 1 | 13 | 31 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total domestic | 11 | 1 | — | 1 | — | — | 1 | 14 | ||||||||||||||||||||||||||||||||||||||||||||
International | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Owned | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Managed | 3 | — | 2 | — | 1 | 1 | 3 | 10 | ||||||||||||||||||||||||||||||||||||||||||||
Licensed | 5 | — | — | — | — | — | — | 5 | ||||||||||||||||||||||||||||||||||||||||||||
Total international | 8 | — | 2 | — | 1 | 1 | 3 | 15 | ||||||||||||||||||||||||||||||||||||||||||||
Total venues | 19 | 1 | 2 | 1 | 1 | 1 | 4 | 29 |
* Unconsolidated subsidiary accounted for under(1) Locations with an STK and STK Rooftop are considered one venue location. This includes the equity method of accounting.rooftop in San Diego, CA, which is a licensed location.
Our plansNet income attributable to The ONE Group Hospitality, Inc. for near termthe three months ended March 31, 2019 was $0.9 million compared to $0.2 million for the three months ended March 31, 2018. The increase was primarily due to overall sales growth includeand profitability improvements from existing restaurants, newly owned restaurants and managed and licensed locations combined with labor and spending efficiencies. In the openingfirst quarter of 2019, we opened an owned STK restaurant in San DiegoNashville, Tennessee and a licensed STK restaurant in the second quarter of 2018. We expect that our growth in 2018 will continue with the planned openings of licensed locations in Puerto Rico, Dubai, Qatar and Mexico.
Net income for the quarter ended March 31, 2018 was $0.1 million ($0.01 per share) compared to a net loss for the quarter ended March 31, 2017 of $0.6 million (-$0.02 per share). Our net loss for the quarter ended March 31, 2017 included a loss from discontinued operations of $0.1 million ($-0.01 per share). The loss from discontinued operations reflects the winding down of operations that we have exited.
Recent Developments
In March 2018, we entered into an agreement to sell our 10% interest in One 29 Park for $0.6 million. One 29 Park, which is accounted for under the cost method of accounting, operates a restaurant and manages the rooftop bar of a hotel located in New York, NY.
During the first quarter of 2017, we hosted a party for the Super Bowl. The party contributed $1.7 million of revenue for the first quarter of 2017. We did not have a similar event during the first quarter of 2018. Revenues and expenses associated with this event were recorded within our “owned food, beverage and other” segment.Doha, Qatar.
Our Growth Strategies and Outlook
Our growth model is primarily comprised ofdriven by the following drivers:following:
Expansion of STK.STK. We expect to continue to expand our operations domestically and internationally through a mix of licensed restaurants and managed unitsrestaurants using a disciplined and targeted site selection process (“capitalprocess. We refer to this as our “capital light strategy”). because it requires significantly less capital than expansion through owned restaurants. Under our capital light strategy, we expect to open as many as three to five STK restaurants annually primarily through management or licensing agreements, provided that we have sufficient interest from prospective licensees, acceptable locations and quality restaurant managers available to support that pace of growth.
We have identified over 3075 additional major metropolitan areas across the globe where we believe that we could grow our STK brand to 200 restaurants over the next several years. However, there can be no assurance thatforeseeable future. In the first quarter of 2019, we will be ableopened an owned STK restaurant in Nashville, Tennessee and a licensed STK restaurant in Doha, Qatar. We expect to open new STKs atcontinue to grow in 2019 with the rate we currently expect or that our pipelineplanned openings of planned offerings will be fully realized.licensed STK locations in Puerto Rico and Guadalajara, Mexico and a managed STK location in Scottsdale, Arizona.
Expansion through New Food and BeverageF&B Hospitality Projects.Projects. We believe that we are well positioned to leverage the strength of our brands and the relationships we have developed with global hospitality providers to drive the continued growth of our food and beverage hospitality projects, which traditionally have provided us with revenue through management and incentive revenue while requiring minimal capital expenditures from us. We continue to receive a large number of inquiries regarding new services at new hospitality venues globally and continue to work with existing hospitality clients to identify and develop additional opportunities at their venues.
We did not enter into any new F&B hospitality agreements for the three months ended March 31, 2019. In the future,2019, we plan to add one managed F&B location in Florence, Italy. Going forward, we expect to target at leastenter into one to two new F&B hospitality projects every twelve months. However, we cannot control the timing and number of acceptable opportunities that will be offered to us for our consideration or whether we will be able to enter into food and beverage agreements with respect to such opportunities. We did not enter into any new food and beverage agreements for the quarter ended March 31, 2018.annually.
Increase Our Operating Efficiency.Efficiency and Increase Same Store Sales. In addition to expanding into new cities and hospitality venues, we intend to increase revenue and profits in our existing operations through continued focus on high-quality, high-margin food and beverage menu items.
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We expect company-owneddomestic STK same store sales (“SSS”) to grow in 2018, at a mid-single digit pace.2019 between 3% and 4%. For the quarterthree months ended March 31, 2018,2019, our company-ownedSSS increased 8.6% compared to the same store sales increased +8.7%. prior year period. We consider a domestic owned or managed restaurant to be comparable in the first full quarter following its 18th month of operation to remove the impact of new restaurant openings in comparing the operations of existing restaurants. Our comparable restaurant base for SSS consisted of nine domestic restaurants for the three months ended March 31, 2019.
We believe that our operating margins will improve through same store sales growth. Furthermore, asgrowth in SSS and a reduction of store-level operating expenses. Our store-level margins for owned STK locations increased 210 basis points for the three months ended March 31, 2019. As our footprint continues to increase,increases, we expect to benefit by leveraging system-wide operating efficiencies and best practices through the management of our general and administrative expenses as a percentage of overall revenue. We will continue to look at opportunities to decrease our general and administrative expenses by outsourcing non-core activities and through increases in staff productivity. We believe that we have adequate capital and resources available to allocate towards our operational initiatives, but there can be no assurance that we will be able to expand our operations, increase our revenues or reduce our costs at the rate we currently expect, or at all.
Key Performance Indicators
We use the following key performance indicators in evaluating our restaurants and assessing our business:
Number of Restaurant Openings.Openings. Number of restaurant openings reflects the number of restaurants opened during a particular fiscal period. For each restaurant opening, we incur pre-opening costs, which are defined below. Typically, new restaurants open with an initial start-up period of higher than normalized sales volumes (also referred to in the restaurant industry as the “honeymoon” period), which decrease to a steady level approximately 18 to 24 months after opening. However, operating costs during this initial period are also higher than normal, resulting in restaurant operating margins that are generally lower during the start-up period of operation and increase to a steady level approximately 18 to 24 months after opening. Some new restaurants may experience a “honeymoon” period that is either shorter or longer than this time frame. We plan to openopened two restaurants in 2019: an owned STK restaurant in the Andaz HotelNashville, Tennessee and a licensed STK restaurant in San Diego, California during the second quarter of 2018.
We consider an owned unit to be comparable in the first full quarter following its 18th month of operation to remove the impact of new unit openings in comparing the operations of existing units. Our comparable unit base of owned restaurants consisted of six units for the quarter ended March 31, 2018.Doha, Qatar.
Average Check.Check. Average check is calculated by dividing total restaurant sales by total entrees sold for a given timespecified period. Our management team uses this indicator to analyze trends in customers’ preferences, customer expenditures and the overall effectiveness of menu changes and price increases. For comparable restaurants, our average check for the quarterthree months ended March 31, 20182019 was $97.37$110.83 compared to $96.52$108.89 for the quarterthree months ended March 31, 2017.2018.
Average Comparable UnitRestaurant Volume. Average comparable unitrestaurant volume consists of the average sales of our comparable restaurants over a certain period of time. This measure is calculated by dividing total comparable restaurant sales in a given period by the total number of comparable restaurants in that period. This indicator assists management in measuring changes in customer traffic, pricing and development of our brand. For restaurants that have been open a full twelve months, ourOur average comparable unitrestaurant volume for the quarterthree months ended March 31, 2019 and March 31, 2018 was $2.3$2.7 million compared to $2.2and $2.5 million, respectively.
Same Store Sales. SSS represents total food and beverage sales at domestic owned and managed restaurants opened for at least a full 18-month period. This measure includes total revenue from our owned and managed STK locations, and it excludes revenues from our owned F&B services locations. Revenues from locations where we do not directly control the event sales force are excluded from this measure. Domestic SSS increased 8.6% for the quarterthree months ended March 31, 2017.2019 compared to the three months ended March 31, 2018.
Key Financial Terms and Metrics
We evaluate our business using a variety of key financial measures:
Segment reporting
We operate in three segments: “Owned restaurants”,restaurants,” “Owned food, beverage and other”,other,” and “Managed and Licensed operations”. We believe these to be our reportable segments as they do not have similar economic or other characteristics to be aggregated into a single reportable segment.operations.” Our Owned restaurantrestaurants segment consists of leased restaurant locations and competes in the full-service dining industry. Our Owned food, beverage and other segment consists of operations that are hybrid in nature,operations, such as where we have a leased restaurant location and also have a food and beverage agreement at the same location, typically a hotel, and our offsite banquet offerings. The primary component of this segment is our operations at the W Hotel in Beverly Hills, California. Our Managed and Licensed operations segment includes all operations for which a management, incentive or license fee is received. Management agreements generate management fees on net revenue and incentive fees on operating profit as defined in the applicable management agreement. License agreements generate revenue primarily through royalties earned on net revenue at each location. Revenues associated with developmental support for licensed locations are also included within this segment.
See Note 16 to our consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for further information on our segment reporting.
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Revenues
Owned restaurant net revenues. Owned restaurant net revenues consistsconsist of food and beverage sales by owned restaurants net of any discounts associated with each sale. For the quartertrailing twelve months ended March 31, 2018,2019, beverage sales comprised 32%36% of food and beverage sales, before giving effect to any discounts, withand food sales comprisingcomprised the remaining 68%. For the quarter ended March 31, 2017, beverage sales comprised 34% of food and beverage sales, before giving effect to any discounts, with food sales comprising the remaining 66%64%. This indicator assists management in understanding the trends in gross margins of the units.restaurants.
Owned food, beverage and other net revenuesrevenue. Owned food, beverage and other net revenues include the sales generated by the STK restaurant at the W Hotel in Los Angeles, California and any ancillary food and beverage hospitality services at the same location. From time-to-time,Revenues from offsite banquet opportunities arise andservices also are reflected here.in this segment.
Management, license and incentive fee revenues.revenue. Management, license and incentive fee revenues includesincludes: (1) management fees received pursuant to management and license agreements that are calculated based on a fixed percentage of revenues at the managed or licensed location; (2) incentive fees based on the operating profitability of a particular venue, as defined in each agreement; and (3) recognition of license fee related revenues, which are recognized over the term of the license.
We evaluate the performance of our managed and licensed properties based on sales growth, a key driver for our management/royaltymanagement and license fees, and on improvements in operating profitability margins, which, combined with sales, drives incentive fee growth.
Our primary restaurant brand is STK and we specifically look at comparable revenuessales from both owned and managed STKs to understand customer count trends and changes in average check as it relates to our primary restaurant brand.
Cost and expenses
Owned restaurant cost of sales. Owned restaurant cost of sales includes all owned restaurant food and beverage expenditures. We measure cost of goods as a percentage of owned restaurant net revenues. Owned restaurant cost of sales are generally influenced by the cost of food and beverage items, menu mix, discounting activity and restaurant level controls. Purchases of beef represented approximately 35%37% and 30%35% of our food and beverage costs duringfor the quartersthree months ended March 31, 20182019 and 2017,2018, respectively.
Owned restaurant operating expenses. We measure owned restaurant operating expenses as a percentage of owned restaurant net revenues. Owned restaurant operating expenses include the following:
Payroll and related expenses. Payroll and related expenses consistsconsist of manager salaries, hourly staff payroll and other payroll-related items, including taxes and fringe benefits. We measure our labor cost efficiency by tracking total labor costs as a percentage of owned restaurant net revenues.
Occupancy. Occupancy comprises all occupancy costs, consisting of both fixed and variable portions of rent, deferrednon-cash rent expense, which is a non-cash adjustment included in our Adjusted EBITDA calculation as defined below, common area maintenance charges, real estate property taxes, utilities and other related occupancy costs and is measured by considering both the fixed and variable components of certain occupancy expenses.
Direct operating expenses. Direct operating expenses consistsconsist of supplies, such as paper, smallwares, china, silverware and glassware, cleaning supplies and laundry, credit card fees and linen costs. Direct operating expenses are typically measured as a variable expense based on owned restaurant net revenues.
Outside services. Outside services includesinclude music and entertainment costs, such as the use of live DJ’s, promoter costs, security services, outside cleaning services and commissions paid to event staff for banquet sales.
Repairs and maintenance. Repairs and maintenance consistsconsist of general repair work to maintain our facilities, as well asand computer maintenance contracts. We expect these costs to increase at each facility as they get older.
Marketing. Marketing includes the cost of promoting our brands and, at times, can include the cost of goods used specifically for complimentarycomplementary purposes. Marketing costs will typically be higher during the first 18 months of a unit’srestaurant’s operations.
General and administrative. General and administrative expenses are comprised of all corporate overhead expenses, including payroll and related benefits, professional fees, such as legal and accounting fees, insurance and travel expenses. Certain centrally managed general and administrative expenses are allocated specifically to unitsrestaurant locations and are reflected in owned restaurant operating expenses and include shared services such as reservations, events and marketing. We expect general and administrative expenses to be leveraged as we grow, become more efficient, and continue to focus on best practices and cost savings measures.
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Depreciation and amortization. Depreciation and amortization consistsconsist principally of charges related to the depreciation of fixed assets including leasehold improvements, equipment and furniture and fixtures. AsBecause we intend to support our growth initiatives with an increasing number of managed and licensed restaurant openings, depreciation and amortization is not expected to increase significantly in the near future.
Pre-opening expenses. Pre-opening expenses consist of costs incurred prior to opening an owned or managed STK unitrestaurant at either a leased or F&B location. Pre-opening expenses are comprised principally of manager salaries and relocation costs, employee payroll, training costs for new employees and lease costs incurred prior to opening. We expect these costs to decrease as we focus our growth towards our capital light model. Pre-opening expenses have varied from location to location depending on a number of factors, including the proximity of our existing restaurants; the amount of rent expensed during the construction and in-restaurant training periods; the size and physical layout of each location; the number of management and hourly employees required to operate each restaurant; the relative difficulty of the restaurant staffing process; the cost of travel and lodging for different metropolitan areas; the timing of the restaurant opening; and the extent of unexpected delays, if any, in obtaining necessary licenses and permits to open the restaurant.
Equity in (income) lossincome of subsidiaries. This represents the income or loss that we record under the cost or equity method of accounting for entities that are not consolidated. Included in this amount is our approximate 51% ownership inof Bagatelle New York, for which we have effective ownership of approximately 51%, consisting of a 5.23% direct ownership interest by us and a 45.9% ownership interest through two of our subsidiaries. We also have a 10% effective ownership in One 29 Park, LLC (“One 29 Park”). One 29 Park operates a restaurant and manages the rooftop of a hotel located in New York, NY. Until the fourth quarter of 2017, we accounted for our investment in One 29 Park under the equity method of accounting based on our assessment that we had significant influence over One 29 Park’s operations. In the fourth quarter of 2017, the majority ownership of One 29 Park changed. As a result of this ownership change, we believe that we no longer have significant influence over the operations of One 29 Park and now account for our investment in One 29 Park under the cost method of accounting. In March 2018, we entered into an agreement to sell our 10% interest in One 29 Park to the new ownership group for $0.6 million and recorded a gain of $0.2 million.
Other Items
EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA are presented in this Quarterly Report on Form 10-Q and are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define EBITDA as net income before interest expense, provision for income taxes and depreciation and amortization. We define Adjusted EBITDA as net income before interest expense, provision for income taxes, depreciation and amortization, non-cash impairment loss, deferrednon-cash rent expense, pre-opening expenses, lease termination expenses, non-recurring gains and losses, stock-based compensation and lossesresults from discontinued operations. Not all of the aforementioned items defining Adjusted EBITDA occur in each reporting period but have been included in our definitions of these terms based on our historical activity.
We believe that EBITDA and Adjusted EBITDA are more appropriate measures of our operating performance, asbecause they provide a clearer picture of our operating results by eliminating certaineliminate non-cash expenses that aredo not reflective of thereflect our underlying business performance. We use these metrics to facilitate a comparison of our operating performance on a consistent basis from period to period, to analyze the factors and trends affecting our business and to evaluate the performance of our units.restaurants. Adjusted EBITDA has limitations as an analytical tool and our calculation of Adjusted EBITDA may not be comparable to that reported by other companies; accordingly, you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Adjusted EBITDA is included in this Quarterly Report on Form 10-Q because it is a key metricmeasure used by management. Additionally, Adjusted EBITDA is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We use Adjusted EBITDA, alongside other GAAP measures such as net income, (loss), to measure profitability, as a key profitability target in our budgets, and to compare our performance against that of peer companies despite possible differences in calculation.
Please refer to table on page 2628 for our reconciliation of net lossincome to EBITDA and Adjusted EBITDA.
Results of Operations
The following table sets forth certain statements of operations data for the periods indicated (in thousands):
For the quarters ended March 31, | For the three months ended March 31, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Revenues: | ||||||||||||||||
Owned restaurant net revenues | $ | 15,076 | $ | 14,228 | $ | 17,820 | $ | 15,076 | ||||||||
Owned food, beverage and other net revenues | 2,005 | 3,885 | 2,273 | 2,005 | ||||||||||||
Total owned revenue | 17,081 | 18,113 | 20,093 | 17,081 | ||||||||||||
Management, license and incentive fee revenues | 2,436 | 2,314 | ||||||||||||||
Management, license and incentive fee revenue | 2,683 | 2,436 | ||||||||||||||
Total revenues | 19,517 | 20,427 | 22,776 | 19,517 | ||||||||||||
Cost and expenses: | ||||||||||||||||
Owned operating expenses: | ||||||||||||||||
Owned restaurants: | ||||||||||||||||
Owned restaurant cost of sales | 4,034 | 3,876 | 4,569 | 4,034 | ||||||||||||
Owned restaurant operating expenses | 9,378 | 9,369 | 10,915 | 9,378 | ||||||||||||
Total owned restaurant expenses | 13,412 | 13,245 | 15,484 | 13,412 | ||||||||||||
Owned food, beverage and other expenses | 1,689 | 2,937 | 2,259 | 1,689 | ||||||||||||
Total owned operating expenses | 15,101 | 16,182 | 17,743 | 15,101 | ||||||||||||
General and administrative (including stock-based compensation expense of $324 and $153, respectively) | 3,055 | 2,921 | ||||||||||||||
General and administrative (including stock-based compensation of $181 and $324, respectively) | 2,650 | 3,055 | ||||||||||||||
Depreciation and amortization | 778 | 866 | 942 | 778 | ||||||||||||
Lease termination expense and asset write-offs | — | 273 | ||||||||||||||
Pre-opening expenses | 210 | 470 | 482 | 210 | ||||||||||||
Equity in losses (income) of investee companies | 23 | (45 | ) | |||||||||||||
Other (income) expense, net | (111 | ) | 12 | |||||||||||||
Equity in income of investee companies | — | 23 | ||||||||||||||
Other income, net | (175 | ) | (111 | ) | ||||||||||||
Total costs and expenses | 19,056 | 20,679 | 21,642 | 19,056 | ||||||||||||
Operating income (loss) | 461 | (252 | ) | |||||||||||||
Operating income | 1,134 | 461 | ||||||||||||||
Other expenses, net: | ||||||||||||||||
Interest expense, net of interest income | 318 | 259 | 269 | 318 | ||||||||||||
Income (loss) from continuing operations before provision for income taxes | 143 | (511 | ) | |||||||||||||
Income tax provision (benefit) | 25 | (17 | ) | |||||||||||||
Income (loss) from continuing operations | 118 | (494 | ) | |||||||||||||
Loss from discontinued operations | — | (106 | ) | |||||||||||||
Net income (loss) | 118 | (600 | ) | |||||||||||||
Less: net loss attributable to noncontrolling interests | (113 | ) | (198 | ) | ||||||||||||
Net income (loss) attributable to The ONE Group Hospitality, Inc. | $ | 231 | $ | (402 | ) | |||||||||||
Total other expenses, net | 269 | 318 | ||||||||||||||
Income before provision for income taxes | 865 | 143 | ||||||||||||||
Provision for income taxes | 96 | 25 | ||||||||||||||
Net income | 769 | 118 | ||||||||||||||
Less: net loss attributable to noncontrolling interest | (85 | ) | (113 | ) | ||||||||||||
Net income attributable to The ONE Group Hospitality, Inc. | $ | 854 | $ | 231 |
The following table sets forth certain statements of operations data as a percentage of total revenues for the periods indicated:
For the quarters ended March 31, | For the three months ended March 31, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Revenues: | ||||||||||||||||
Owned restaurant net revenues | 77.2 | % | 69.7 | % | 78.2 | % | 77.2 | % | ||||||||
Owned food, beverage and other net revenues | 10.3 | % | 19.0 | % | 10.0 | % | 10.3 | % | ||||||||
Total owned revenues | 87.5 | % | 88.7 | % | ||||||||||||
Management, license and incentive fee revenues | 12.5 | % | 11.3 | % | ||||||||||||
Total owned revenue | 88.2 | % | 87.5 | % | ||||||||||||
Management, license and incentive fee revenue | 11.8 | % | 12.5 | % | ||||||||||||
Total revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost and expenses: | ||||||||||||||||
Owned operating expenses: | ||||||||||||||||
Owned Restaurants: | ||||||||||||||||
Owned restaurants: | ||||||||||||||||
Owned restaurant cost of sales(1) | 26.8 | % | 27.2 | % | 25.6 | % | 26.8 | % | ||||||||
Owned restaurant operating expenses(1) | 62.2 | % | 65.8 | % | 61.3 | % | 62.2 | % | ||||||||
Total owned restaurant expenses(1) | 89.0 | % | 93.1 | % | 86.9 | % | 89.0 | % | ||||||||
Owned food, beverage and other expenses(2) | 84.2 | % | 75.6 | % | 99.4 | % | 84.2 | % | ||||||||
Total owned operating expenses(3) | 88.4 | % | 89.3 | % | 88.3 | % | 88.4 | % | ||||||||
General and administrative (including stock-based compensation expense of 1.7% and 0.7%, respectively) | 15.7 | % | 14.3 | % | ||||||||||||
General and administrative (including stock-based compensation of 0.8% and 1.7%, respectively) | 11.6 | % | 15.7 | % | ||||||||||||
Depreciation and amortization | 4.0 | % | 4.2 | % | 4.1 | % | 4.0 | % | ||||||||
Lease termination expense and asset write-offs | — | % | 1.3 | % | ||||||||||||
Pre-opening expenses | 1.1 | % | 2.3 | % | 2.1 | % | 1.1 | % | ||||||||
Equity in loss (income) of investee companies | 0.1 | % | (0.2 | )% | ||||||||||||
Other (income) expenses | (0.6 | )% | 0.1 | % | ||||||||||||
Equity in income of investee companies | — | % | 0.1 | % | ||||||||||||
Other income, net | (0.8 | )% | (0.6 | )% | ||||||||||||
Total costs and expenses | 97.6 | % | 101.2 | % | 95.0 | % | 97.6 | % | ||||||||
Operating income (loss) | 2.4 | % | (1.2 | )% | ||||||||||||
Operating income | 5.0 | % | 2.4 | % | ||||||||||||
Other expenses, net: | ||||||||||||||||
Interest expense, net of interest income | 1.6 | % | 1.3 | % | 1.2 | % | 1.6 | % | ||||||||
Income (loss) from continuing operations before provision for income taxes | 0.7 | % | (2.5 | )% | ||||||||||||
Total other expenses, net | 1.2 | % | 1.6 | % | ||||||||||||
Income before provision for income taxes | 3.8 | % | 0.7 | % | ||||||||||||
Provision for income taxes | 0.1 | % | (0.1 | )% | 0.4 | % | 0.1 | % | ||||||||
Income (loss) from continuing operations | 0.6 | % | (2.4 | )% | ||||||||||||
Loss from discontinued operations | — | % | (0.5 | )% | ||||||||||||
Net income (loss) | 0.6 | % | (2.9 | )% | ||||||||||||
Less: net loss attributable to noncontrolling interests | (0.6 | )% | (1.0 | )% | ||||||||||||
Net income (loss) attributable to The One Group Hospitality, Inc. | 1.2 | % | (1.9 | )% | ||||||||||||
Net income | 3.4 | % | 0.6 | % | ||||||||||||
Less: net loss attributable to noncontrolling interest | (0.4 | )% | (0.6 | )% | ||||||||||||
Net income attributable to The ONE Group Hospitality, Inc. | 3.7 | % | 1.2 | % |
(1) These expenses are being shown as a percentage of owned restaurant net revenues.
(2) These expenses are being shown as a percentage of owned food, beverage and other net revenues.
(3) These expenses are being shown as a percentage of total owned revenue.
The following tables show our operating results by segment for the periods indicated (in thousands):
For the three months ended March 31, 2019 | ||||||||||||||||
Owned restaurants | Owned food, beverage and other | Managed and licensed operations | Total | |||||||||||||
Revenues: | ||||||||||||||||
Owned net revenues | $ | 17,820 | $ | 2,273 | $ | — | $ | 20,093 | ||||||||
Management, license and incentive fee revenue | — | — | 2,683 | 2,683 | ||||||||||||
Total revenues | 17,820 | 2,273 | 2,683 | 22,776 | ||||||||||||
Cost and expenses: | ||||||||||||||||
Owned operating expenses: | ||||||||||||||||
Cost of sales | 4,569 | — | — | 4,569 | ||||||||||||
Other operating expenses | 10,915 | — | — | 10,915 | ||||||||||||
Owned food, beverage and other expenses | — | 2,259 | — | 2,259 | ||||||||||||
Total owned operating expenses | 15,484 | 2,259 | — | 17,743 | ||||||||||||
Segment income | $ | 2,336 | $ | 14 | $ | 2,683 | $ | 5,033 | ||||||||
General and administrative | 2,650 | |||||||||||||||
Depreciation and amortization | 942 | |||||||||||||||
Interest expense, net of interest income | 269 | |||||||||||||||
Equity in income of investee companies | — | |||||||||||||||
Other | 307 | |||||||||||||||
Income before provision for income taxes | $ | 865 |
Three Months Ended March 31, 2018 | Three Months Ended March 31, 2017 | For the three months ended March 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||
Owned restaurants | Owned food, beverage and other | Managed and licensed operations | Total | Owned restaurants | Owned food, beverage and other | Managed and licensed operations | Total | Owned restaurants | Owned food, beverage and other | Managed and licensed operations | Total | |||||||||||||||||||||||||||||||||||||
Revenues, net: | ||||||||||||||||||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||
Owned net revenues | $ | 15,076 | $ | 2,005 | $ | — | $ | 17,081 | $ | 14,228 | $ | 3,885 | $ | — | $ | 18,113 | $ | 15,076 | $ | 2,005 | $ | — | $ | 17,081 | ||||||||||||||||||||||||
Management, license and incentive fee revenue | — | — | 2,436 | 2,436 | — | — | 2,314 | 2,314 | — | — | 2,436 | 2,436 | ||||||||||||||||||||||||||||||||||||
Total revenue | 15,076 | 2,005 | 2,436 | 19,517 | 14,228 | 3,885 | 2,314 | 20,427 | ||||||||||||||||||||||||||||||||||||||||
Total revenues | 15,076 | 2,005 | 2,436 | 19,517 | ||||||||||||||||||||||||||||||||||||||||||||
Cost and expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||
Owned operating expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||
Cost of sales | 4,034 | — | — | 4,034 | 3,876 | — | — | 3,876 | 4,034 | — | — | 4,034 | ||||||||||||||||||||||||||||||||||||
Other operating expenses | 9,378 | — | — | 9,378 | 9,369 | — | — | 9,369 | 9,378 | — | — | 9,378 | ||||||||||||||||||||||||||||||||||||
Owned food, beverage and other expenses | — | 1,689 | — | 1,689 | — | 2,937 | — | 2,937 | — | 1,689 | — | 1,689 | ||||||||||||||||||||||||||||||||||||
Total owned operating expenses | 13,412 | 1,689 | — | 15,101 | 13,245 | 2,937 | — | 16,182 | 13,412 | 1,689 | — | 15,101 | ||||||||||||||||||||||||||||||||||||
Segment income | $ | 1,664 | $ | 316 | $ | 2,436 | 4,416 | $ | 983 | $ | 948 | $ | 2,314 | 4,245 | $ | 1,664 | $ | 316 | $ | 2,436 | $ | 4,416 | ||||||||||||||||||||||||||
General and administrative | 3,055 | 2,921 | 3,055 | |||||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 778 | 866 | 778 | |||||||||||||||||||||||||||||||||||||||||||||
Interest expense, net of interest income | 318 | 259 | 318 | |||||||||||||||||||||||||||||||||||||||||||||
Equity in income of investee companies | 23 | (45 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Equity in loss of investee companies | 23 | |||||||||||||||||||||||||||||||||||||||||||||||
Other | 99 | 755 | 99 | |||||||||||||||||||||||||||||||||||||||||||||
Income (loss) from continuing operations before provision for income taxes | $ | 143 | $ | (511 | ) | |||||||||||||||||||||||||||||||||||||||||||
Income before provision for income taxes | $ | 143 |
The following table presents a reconciliation of net lossincome to EBITDA and Adjusted EBITDA for the periods indicated (in thousands):
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
Net income (loss) attributable to The ONE Group Hospitality, Inc. | $ | 231 | $ | (402 | ) | |||
Net loss attributable to noncontrolling interest | (113 | ) | (198 | ) | ||||
Net income (loss) | 118 | (600 | ) | |||||
Interest expense, net of interest income | 318 | 259 | ||||||
Provision (benefit) for income tax | 25 | (17 | ) | |||||
Depreciation and amortization | 778 | 866 | ||||||
EBITDA | 1,239 | 508 | ||||||
Deferred rent (1) | (20 | ) | (38 | ) | ||||
Pre-opening expenses | 210 | 470 | ||||||
Lease termination expense and asset write-offs (2) | — | 273 | ||||||
Loss from discontinued operations, net of taxes | — | 106 | ||||||
Stock based compensation | 324 | 153 | ||||||
Adjusted EBITDA | 1,753 | 1,472 | ||||||
Adjusted EBITDA attributable to noncontrolling interest | (42 | ) | (137 | ) | ||||
Adjusted EBITDA attributable to The ONE Group Hospitality, Inc. | $ | 1,795 | $ | 1,609 |
For the three months ended March 31, | ||||||||
2019 | 2018 | |||||||
Net income attributable to The ONE Group Hospitality, Inc. | $ | 854 | $ | 231 | ||||
Net loss attributable to noncontrolling interest | (85 | ) | (113 | ) | ||||
Net income | 769 | 118 | ||||||
Interest expense, net of interest income | 269 | 318 | ||||||
Provision for income taxes | 96 | 25 | ||||||
Depreciation and amortization | 942 | 778 | ||||||
EBITDA | 2,076 | 1,239 | ||||||
Non-cash rent expense(1) | (87 | ) | (20 | ) | ||||
Pre-opening expenses | 482 | 210 | ||||||
Stock-based compensation | 181 | 324 | ||||||
Adjusted EBITDA | 2,652 | 1,753 | ||||||
Adjusted EBITDA attributable to noncontrolling interest | (36 | ) | (42 | ) | ||||
Adjusted EBITDA attributable to The ONE Group Hospitality, Inc. | $ | 2,688 | $ | 1,795 |
Three Months Ended March 31, 2018 Compared to(1) Non-cash rent expense is included in owned restaurant operating expenses and general and administrative expense on the statement of operations and comprehensive income.
Results of Operations for the Three Months Ended March 31, 20172019 and March 31, 2018
Revenues
Owned restaurant net revenues. Owned restaurant net revenues increased $0.9$2.7 million, or 6.0%18.2%, from $14.2 million for the quarter ended March 31, 2017 to $15.1 million for the quarter ended March 31, 2018. This increase was primarily due to increased sales at our New York, Orlando, Florida and Atlanta, Georgia locations, partially offset by decreased sales at our Denver, Colorado location. Comparable owned STK unit sales increased +8.7% and average check increased +0.9% for the three months ended March 31, 2018. We believe that2018 to $17.8 million for the three months ended March 31, 2019. This increase was primarily due to the opening of our restaurant in San Diego, California in July 2018 and increased sales at our Denver location have decreased due to higher than normal sales volumeexisting locations. Additionally, in March 2019, we opened our STK restaurant in Nashville, Tennessee. SSS increased 8.6% and average check increased 2.3% for the quarterthree months ended March 31, 2017.2019 compared to the three months ended March 31, 2018. Our Denver location, which opened in January 2017. Typically, new restaurants open with an initial start-up period of higher than normalized sales volumes (referred to2017, was considered a comparable location for SSS in the restaurant industry as the “honeymoon” period).three months ended March 31, 2019. To drive revenue, among several strategies, we have recently begun opening our restaurants earlier to take advantage of happy-hour and pre-dinner time frames. We are also now open during lunch hours in several locations.
Owned food, beverage and other revenues. Owned food, beverage and other revenues decreased $1.9increased $0.3 million, or 48.4%13.4%, from $3.9 million for the quarter ended March 31, 2017 to $2.0 million for the quarterthree months ended March 31, 2018. During the first quarter of 2017, we hosted a party2018 to $2.3 million for the three months ended March 31, 2019. The increase in revenue was primarily related to the 2019 Super Bowl. TheBowl party contributed $1.7 million of revenuein Atlanta, Georgia for the first quarter of 2017. We didwhich there was not have a similar event during the first quarter ofin 2018.
Management and license and incentive fee revenues.revenue. Revenue generated from the restaurants and lounges at which we operate under management or license agreements, and from F&B services at hospitality venues impactsaffects the amount of management and incentive fees that we earn. Management license and incentivelicense fee revenues increased $0.1$0.2 million, or 5.3%10.1%, from $2.3 million for the three months ended March 31, 2017 to $2.4 million for the three months ended March 31, 2018.2018 to $2.7 million for the three months ended March 31, 2019. The increase was primarily duerelated to an increasenew STK licensed locations that opened in our management2018, including in Mexico City, Mexico and incentive fee revenue at ourDubai, United Arab Emirates. Additionally, in March of 2019, we opened a licensed STK restaurant in Las Vegas (Nevada) and from our operations in London (United Kingdom) and Milan (Italy).Doha, Qatar.
CostsCost and Expenses
Owned restaurant cost of sales. Food and beverage costs for owned restaurants increased $0.2approximately $0.5 million, or 4.1%13.3%, from $3.8 million for the quarter ended March 31, 2017 to $4.0 million for the quarterthree months ended March 31, 2018.2018 to $4.6 million for the three months ended March 31, 2019. This increase was primarily due to increased sales at our existing, owned locations.locations and the opening of our restaurant in San Diego, California in July 2018. Additionally, in March 2019, we opened our STK restaurant in Nashville, Tennessee. As a percentage of owned restaurant net revenues, cost of sales decreased from 27.2%26.8% for the quarterthree months ended March 31, 20172018 to 26.8%25.6% for the quarterthree months ended March 31, 2018. The decrease in2019 due to the percentagepositive impacts of food and beverage costs as a percentage of food and beverage sales was due tooperating initiatives coupled with selective price increases that we implemented in January 2018.2019. Food revenues as a percentage of total food and beverage revenues were approximately 68%64% and 66%68% for the quartersthree months ended March 31, 20182019 and 2017,2018, respectively. Food costs as a percentage of food revenues are typically higher than beverage costs as a percentage of beverage revenues.
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Owned restaurant operating expenses.Owned restaurant operating expenses remained flat atincreased $1.5 million, or 16.4%, from $9.4 million for the quarterthree months ended March 31, 2018 as compared to $10.9 million for the quarterthree months ended March 31, 2017. This is primarily due to our cost savings at all locations, including venues that have been open for over eighteen months as well as more recently opened locations. Our cost saving initiatives are aimed to offset minimum wage increases.2019. As a percentage of owned restaurant net revenues, owned restaurant operating expenses decreased 3.6%110 basis points from 65.8%62.2% for the quarterthree months ended March 31, 20172018 to 62.2%61.3% for the quarterthree months ended March 31, 2018.2019. This improvement was due to the leverage of comparable salesSSS growth and a continued focus on labor and spending efficiency.efficiencies.
Owned food, beverage and other expenses. Owned food, beverage and other expenses decreased $1.2increased $0.6 million, or 42.5%33.7%, from $2.9 million for the quarter ended March 31, 2017 to $1.7 million for the quarterthree months ended March 31, 2018. This decrease is2018 to $2.3 million for the three months ended March 31, 2019. The increase in revenue was primarily duerelated to costs associated with the 2019 Super Bowl event that we heldparty in 2017 that we didAtlanta, Georgia for which there was not holda similar event in 2018.
General and administrative. General and administrative costs increased $0.1decreased $0.4 million, or 4.6%13.3% from $2.9 million for the quarter ended March 31, 2017 to $3.1 million for the quarterthree months ended March 31, 2018.2018 to $2.7 million for the three months ended March 31, 2019. The increasedecrease was primarily due primarily to an increasereduced stock-based compensation expense as a result of headcount reductions in fees associated with the completion of the annual audit of our financial statements for fiscal 2017 in the first quarter of 2018 of approximately $0.5 million and an increase in non-cash stock based compensation of $0.2 million, partially offset by savings in corporate payroll of approximately $0.5 million.as well as reduced external professional fees. General and administrative costs as a percentage of total revenues increaseddecreased from 14.3%15.7% for the quarterthree months ended March 31, 20172018 to 15.7%11.6% for the quarterthree months ended March 31, 2018. General and administrative expenses before audit-related fees were 13.2% of revenue for the quarter ended March 31, 2018.2019.
Depreciation and amortization. Depreciation and amortization expense decreased $0.1increased approximately $0.2 million, or 10.2%21.1%, from $0.8 million for the three months ended March 31, 2018 to $0.9 million for the quarterthree months ended March 31, 20172019. The increase was primarily related to $0.8 million for the quarter ended March 31,opening of our restaurant in San Diego, California in July 2018. The decrease is primarily due to assets at our older locations becoming fully depreciated.
Lease termination expense and asset write-offs.Lease termination expense and asset write-offs of approximately $0.3 million for the quarter ended March 31, 2017 are for charges we incurred for the development of future company-owned restaurants that we decided to not pursue further as we have decided to move forward with a capital light strategy. In 2017, the Company determined that it would not open venues in Austin and Dallas, Texas. As of March 31, 2018, we have accrued for approximately $1.5 million of future lease payments, net of expected sublease income.
Pre-opening expenses. Pre-opening expenses for the quarterthree months ended March 31, 20182019 were $0.2$0.5 million compared to pre-opening expenses of $0.5$0.2 million infor the prior year. The decrease isthree months ended March 31, 2018. In 2018, preopening expenses were primarily duerelated to the development of fewer owned restaurants and limited pre-openingour restaurant at the Andaz Hotel in San Diego, California, which opened in July 2018. In 2019, our preopening expenses for managed locationsrelated to the opening of our STK restaurant in the current period. As ofNashville, Tennessee in March 31, 2018, we have one company-owned location for which we are incurring pre-opening expenses. The location is expected to open during the second quarter of 2018.
2019.
Other
Equity in income of investee companies.. For Equity in income of investee companies was approximately $23.0 thousand for the quarterthree months ended March 31, 2018, we recorded a gain2018. We did not recognize any equity in income of $0.1 million oninvestee companies for the sale of our 10% interest in One 29 Park. One 29 Park operates a restaurant and manages the rooftop of a hotel located in New York, NY.three months ended March 31, 2019.
Interest expense, net of interest income. Interest expense, net of interest income remained flat atwas approximately $0.3 million for each of the quarter endedthree months ending March 31, 2018 when compared to the quarter ended March 31, 2017.2019 and 2018.
Provision for income taxes. Our effectiveThe provision for income tax rate was 17.5%taxes for the three months ended March 31, 2018,2019 was tax expense of $96.0 thousand compared to an effective tax rate of 14.7%$25.0 thousand for the three months ended March 31, 2017. For2018. Our annual effective tax rate was 9.7% and 15.6% for the three months ended March 31, 2019 and 2018, and March 31, 2017, we excluded jurisdictions with losses in which no benefit can be recognized from therespectively. Our projected annual effective tax rate calculation.
In December 2017,differs from the President signed The Tax Cuts and Jobs Act (the “TCJA”), which includes a broad range of provisions. The TCJA contains several key provisions including:
Pursuant to the enactment of the TCJA, in the fourth quarter of 2017, we recorded an adjustment of $2.9 million to revalue its net deferred tax asset utilizing the corporate tax rate of 21% which was entirely offset by a reduction in our valuation allowance. Additionally, we accounted for the mandatory deemed repatriation using a provisional amount of $1.9 million. Due to the complexities involved in accounting for the enactment of the TCJA, SEC Staff Accounting Bulletin 118 allows companies to record provisional estimates of the impacts of the TCJA during a measurement period of up to one year from the enactment date. In order to estimate the impact of the one-time transition tax on accumulated foreign earnings, we used the retained earnings of our foreign subsidiaries as a proxy to calculate E&P for the 2017 tax provision. While retained earnings and E&P are two separate and distinct calculations, we believe that retained earnings can initially be used as a relatively accurate proxy for E&P. We believe that typical E&P adjustments for items such as depreciation, certain reserves and tax exempt income and other permanent nondeductible expenses for E&P are either immaterial or nonexistent. Therefore, in the absence of a formal E&P analysis, retained earnings was considered to be a reasonable estimate. We will conduct a comprehensive E&P analysis prior to the filing of its 2017 tax return. Only after the completion of the E&P study will we be able to determine with certainty the tax impact of the deemed repatriation provision of the TCJA. Any adjustment resulting from the E&P analysis will be included as a tax adjustment to continuing operations in 2018.
As mentioned above, the TCJA subjects a U.S. shareholder to current tax on GILTI earned by certain foreign subsidiaries. Financial Accounting Standards Board (“FASB”) Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI resulting from those items in the year the tax is incurred. We have elected to recognize the resulting tax on GILTI as a period expense in the period the tax is incurred and expects to incur no tax for the year ended December 31, 2018primarily due to the following: (i) availability of foreign tax credits andU.S. net operating losses.
Income (loss) from discontinued operations, net of taxes. Prior to 2015, we decided to cease operationsloss carryforwards, resulting in six of our locations. Expenses for these operations are presentedno federal income taxes; (ii) a full valuation allowance on the U.S. deferred tax assets, net; (iii) taxes owed in foreign jurisdictions such as loss from discontinued operationsthe United Kingdom, Canada and represent the winding down of these operations. Income from discontinued operations was $0.1 million for the quarter ended March 31, 2017.Italy; and, (iv) taxes owed in state and local jurisdictions such as New York, New York City, Colorado and Tennessee.
Net loss attributable to noncontrolling interest. Net loss attributable to noncontrolling interest was $0.2 andapproximately $0.1 million for each of the quartersthree months ended March 31, 20172019 and 2018, respectively. Our noncontrolling interests primarily relate to outside ownerships of a restaurant and outdoor rooftop operation in New York City. The rooftop operation is normally not open during the first quarter due to inclement weather.2018.
Liquidity and Capital Resources
Our principal liquidity requirements are to meet our lease obligations, our working capital and capital expenditure needs and to pay principal and interest on our outstanding indebtedness. Subject to our operating performance, which, if significantly adversely affected, would adversely affect the availability of funds, we expect to finance our operations for at least the next 12 months, following the issuance of the consolidated financial statements, including costs of opening currently planned new restaurants, through cash provided by operations and construction allowances provided by landlords of certain locations.
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We cannot be sure that these sources will be sufficient
In the context of our current debt structure and projected cash needs, we believe the cash provided by operations is adequate to financesupport our immediate business operations throughout this period and beyond, however, and we may seek additional financing in the future, which may or may not be available on terms and conditions satisfactory to us, or at all.plans. As of March 31, 2018,2019, we had cash and cash equivalents of approximately $1.1 million.
We expect that our capital expenditures during fiscal 2018in 2019 will be significantly less than prior years sincebecause we plan to openexpect that that the Nashville, Tennessee STK restaurant will be the only one new, owned STK restaurant we open in addition to our necessary restaurant-level maintenance and key initiative-related capital expenditures.2019. We currently anticipate our total capital expenditures for fiscal 2018,2019, inclusive of all maintenance expenditures, towill be approximately $3.0$3.5 million.
We expect to fund our anticipated capital expenditures for 2019 with current cash on hand, expected cash flows from operations and proceeds from expected tenant improvement allowances. Our future cash requirements will depend on many factors, including the pace of our expansion, conditions in the retail property development market, construction costs, the nature of the specific sites selected for new restaurants, and the nature of the specific leases and associated tenant improvement allowances available, if any, as negotiated with landlords.
Under our current capital light strategy, we plan to enter into management and license agreements for the operation of STKs where we are not required to contribute significant capital upfront. We expect to rely on our cash flow from operations and continued financing to fund the majority of our planned capital expenditures for 2019.
Our operations have not required significant working capital, and, like many restaurant companies, we have negative working capital. Revenues are received primarily in credit card or cash receipts and restaurant operations do not require significant receivables or inventories, other than our wine inventory. In addition, we receive trade credit for the purchase of food, beverages and supplies, thereby reducing the need for incremental working capital to support growth
Cash Flows
The following table summarizes the statement of cash flows for the three months ended March 31, 20182019 and 2017March 31, 2018 (in thousands):
Three Months Ended March 31, | For the three months ended March 31, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Net cash provided by (used in): | ||||||||||||||||
Operating activities | $ | 172 | $ | 847 | $ | 2,513 | $ | 172 | ||||||||
Investing activities | 294 | (1,353 | ) | (2,060 | ) | 294 | ||||||||||
Financing activities | (843 | ) | 95 | (798 | ) | (843 | ) | |||||||||
Effect of exchange rate changes on cash | (28 | ) | (35 | ) | (168 | ) | (28 | ) | ||||||||
Net decrease in cash and cash equivalents | $ | (405 | ) | $ | (446 | ) | ||||||||||
Net increase in cash and cash equivalents | $ | (513 | ) | $ | (405 | ) |
Operating Activities
Net cash provided by operating activities was $0.2 million and $0.8$2.5 million for the quartersthree months ended March 31, 2018 and 2017, respectively. We attribute a majority of this change2019 compared to the payment of accounts payable and the reduction of accrued liabilities$0.2 million for the quarterthree months ended March 31, 2018. The increase was primarily attributable to improvements in net income and changes within our working capital accounts due to increased domestic SSS and the openings of our owned STK restaurants in San Diego, California and Nashville, Tennessee in July 2018 as we have had more cash on hand resulting from a stock offering completed late in 2017 and improved cash flows at our restaurants.March 2019, respectively.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2019 was $2.1 million compared to net cash provided by investing activities of $0.3 million for the quarterthree months ended March 31, 2018. The difference was attributable to increased capital expenditures in 2019 for purchases of property and equipment, primarily related to the construction of our owned restaurants and general capital expenditures of existing restaurants. Additionally, in 2018, was $0.3 million. Wewe received of $0.6 million forof proceeds related to the sale of our interest in One 29 Park, a restaurant and rooftop bar located in a New York City hotel, partially offset by capital expenditures of $0.3 million.hotel.
Net cash used in investing activities for the quarter ended March 31, 2017 was $1.4 million, consisting primarily of property and equipment purchases related to the construction of new restaurants and general capital expenditures at existing restaurants.
Financing Activities
Net cash used in financing activities for each of the quarterthree months ended March 31, 2019 and 2018 was approximately $0.8 million, which related to scheduled debt payments on our outstanding debt.
million. Net cash provided byused in financing activities primarily relate to repayments for the quarter ended March 31, 2017 was $0.1 million. We received $1.0 million in proceeds from a shortour term loan agreement. These proceeds were partially offset by third party debt payments of $0.9 million.loans and equipment financing agreements.
Covenants
We are subject to a number of customary covenants under our term loan agreements, including limitations on additional borrowings and requirements to maintain certain financial ratios. As of March 31, 2018, we were in compliance with all debt covenants.
Capital Expenditures and Lease Arrangements
To the extent we open new company-owned restaurants, we anticipate capital expenditures in the future would increase from the amounts described in “Investing Activities” above. Although we are committed to our capital light strategy, in which our capital investment is expected to be limited, we are willing to consider a variety of operating modelsopening owned restaurants as new opportunities present themselves. Wearise. For owned restaurants, we have typically targeted an average cash investment of approximately $3.8 million for a 10,000 square-foot STK restaurant, in each case net of landlord contributions and equipment financing and excluding pre-opening costs. In addition, some of our existing unitsrestaurants will require some capital improvements in the future to either maintain or improve the facilities. We are also looking at opportunities tomay add seating or provide enclosures for outdoor space in the next twelve months forat some of our units.locations.
Our hospitality F&B services projects typically require limited capital investment from us. Capital expenditures for these projects will primarily be funded by cash flows from operations and equipment financing, depending upon the timing of these expenditures and cash availability.
We typically seek to lease our restaurant locations for periods of 10 to 20 years under operating lease arrangements, with a limited number of options for renewal.renewal options. Our rent structure varies from lease to lease, but our leases generally provide for the payment of both minimum and contingent (percentage) rent based on sales, as well as other expenses related to the leases (for example, our pro-rata share of common area maintenance, property tax and insurance expenses). Many of our lease arrangements include the opportunity to secure tenant improvement allowances to partially offset the cost of developing and opening the related restaurants. Generally, landlords recover the cost of such allowances from increased minimum rents. However, there can be no assurance that such allowances will be available to us on each project that we select for development.
Loan Agreements
As of March 31, 2019, our long-term debt consisted of term loans, promissory notes and equipment financing agreements for which no additional financing was available. In 2019, we made principal payments of approximately $0.8 million towards our long-term debt. As of March 31, 2019, we had approximately $10.0 million of outstanding debt to third parties.
Our term loan agreements with BankUnited contain certain affirmative and negative covenants, including negative covenants that limit or restrict, among other things, liens and encumbrances, indebtedness, mergers, asset sales, investments, assumptions and guaranties of indebtedness of other persons, change in nature of operations, changes in fiscal year and other matters customarily restricted in such agreements. The financial covenants in these agreements require us to maintain a certain adjusted tangible net worth and a debt service coverage ratio. We were in compliance with all of our financial covenants under the BankUnited term loan agreements as of March 31, 2019. Based on current projections, we believe that we will continue to comply with such covenants throughout the twelve months following the issuance of the financial statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Recent Accounting Pronouncements
See Note 7 to the consolidated financial statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for information regarding the adoption of Accounting Standard Codification Topic 606 “Revenue from Contracts With Customers”. There were no other material changes from what was previously disclosed in Note 2 to our consolidated financial statements set forth in Item 81 of this Quarterly Report on Form 10-Q for a detailed description of recent accounting pronouncements. We do not expect the recent accounting pronouncements discussed in Note 1 to have a significant impact on our consolidated financial position or results of operations.
As of January 1, 2019, we adopted Accounting Standard Codification Topic 842, Leases, (“ASC Topic 842”). Refer to Note 12 to our consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for a detailed description of the our 2017 Form 10-K.impact of implementing ASC Topic 842.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a “smaller reporting company”company,” as defined by Item 10 of Regulation S-K, we are not required to provide this information.
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Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management , with the participation of our chief executive officerChief Executive Officer and chief financial officer, evaluatedChief Financial Officer, carried out an evaluation as of the last day of the period covered by this Quarterly Report on Form 10-Q of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2018. The term “disclosure controls and procedures,” as defined in RulesRule 13a-15(e) and 15d-15(e) underof the Securities Exchange Act of 1934, as amended or(“Exchange Act”). Based upon that evaluation, the Exchange Act, meansChief Executive Officer and Chief Financial Officer concluded that our disclosure controls and other procedures of a company that(a) are designedeffective to ensure that information required to be disclosed by a companyus in the reports that it filesfiled or submitssubmitted under the Exchange Act is timely recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures(b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a companyus in the reports that it filesfiled or submitssubmitted under the Exchange Act is accumulated and communicated to the company’sour management, including its principal executiveour Chief Executive Officer and principal financial officers,Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2018, our chief executive officer and our chief financial officer concluded that, as of such date, our disclosure controls and procedures were not effective at the reasonable assurance level.
As disclosed in our 2017 Form 10-K, our management concluded that our internal control over financial reporting was not effective at December 31, 2017. Our internal control over financial reporting was also not effective as of March 31, 2018.
Remedial Measures
We are in the process of remediating the identified deficiencies in internal control over financial reporting. However, we have not completed all of the corrective remediation actions that we believe are necessary.
We are taking appropriate and reasonable steps to make necessary improvements to our internal controls over the financial statement close and reporting process. We expect that our remediation efforts, including design, implementation and testing, will continue throughout fiscal year 2018, although the material weakness in our internal controls will not be considered remediated until our controls are operational for a period of time, tested, and management concludes that these controls are properly designed and operating effectively.
Changes in Internal Controls
NoBeginning January 1, 2019, we implemented ASC Topic 842, Leases. As such, we implemented changes to our processes related to leases and the control activities within them. These included the development of new policies based on the requirements provided in the new standard, new training, ongoing contract review requirements, and gathering of information provided for disclosures. There were no other changes in our internal controlscontrol over the financial reporting, (asas defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)Act, that occurred during the quarterly period ended March 31, 2018first quarter of 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except for our remediation efforts described above.reporting.
We are subject to claims common to our industry and legal actions in the ordinary course of our business, including claims by or againstlease disputes and employee-related matter. Companies in our licensees, employees, former employeesindustry, including us, have been and others.are subject to class action lawsuits, primarily regarding compliance with labor laws and regulations. Defending lawsuits requires significant management attention and financial resources and the outcome of any litigation is inherently uncertain. We believe that accrual for these matters are adequately provided for in our consolidated financial statements. We do not believe that any currently pending or threatened matter wouldthe ultimate resolutions of these matters will have a material adverse effect on our business,consolidated financial position and results of operationsoperations. However, the resolution of lawsuits is difficult to predict. A significant increase in the number of these claims, or one or more successful claims under which we incur greater liabilities than is currently anticipated, could materially and adversely affect our consolidated financial condition.statements.
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(a) Exhibits required by Item 601 of Regulation S-K.
* | Filed herewith. |
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.
Dated: May 15, 20189, 2019
THE ONE GROUP HOSPITALITY, INC. | ||
By: | /s/ | |