UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
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| (Mark One) |
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the Quarterly Period Ended |
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| OR |
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☐ | 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
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THE ONE GROUP HOSPITALITY, INC. |
(Exact name of registrant as specified in its charter)
Delaware |
| 14‑1961545 |
(State or other jurisdiction of incorporation or |
| (I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
| Zip Code |
646‑624‑2400 |
(Registrant’s telephone number, including area code) |
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 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
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Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☒ | Smaller reporting company ☒ |
| 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 ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
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Number of shares of common stock outstanding as of August 6, 2019: 28,807,015May 1, 2020: 28,828,675
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3 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | |
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27 | |
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2
THE ONE GROUP HOSPITALITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
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| (Unaudited), |
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| June 30, |
| December 31, |
| March 31, |
| December 31, | ||||
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| 2019 |
| 2018 |
| 2020 |
| 2019 | ||||
ASSETS |
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| (Unaudited) |
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Current assets: |
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Cash and cash equivalents |
| $ | 799 |
| $ | 1,592 |
| $ | 8,160 |
| $ | 12,344 |
Accounts receivable |
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| 6,567 |
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| 7,029 |
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| 5,189 |
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| 10,351 |
Inventory |
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| 1,365 |
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| 1,404 |
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| 2,490 |
|
| 3,058 |
Other current assets |
|
| 1,440 |
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| 1,471 |
|
| 2,005 |
|
| 1,047 |
Due from related parties, net |
|
| 343 |
|
| 45 |
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| 376 |
|
| 341 |
Total current assets |
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| 10,514 |
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| 11,541 |
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| 18,220 |
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| 27,141 |
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Property and equipment, net |
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| 40,507 |
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| 39,347 |
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| 69,183 |
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| 70,483 |
Operating lease right-of-use assets |
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| 39,367 |
|
| — |
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| 80,228 |
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| 81,097 |
Investments |
|
| 2,684 |
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| 2,684 | ||||||
Deferred tax assets, net |
|
| 12 |
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| 38 |
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| 7,876 |
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| 7,751 |
Intangibles, net |
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| 16,965 |
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| 17,183 | ||||||
Other assets |
|
| 338 |
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| 349 |
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| 2,372 |
|
| 1,622 |
Security deposits |
|
| 2,038 |
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| 2,020 |
|
| 1,337 |
|
| 1,308 |
Total assets |
| $ | 95,460 |
| $ | 55,979 |
| $ | 196,181 |
| $ | 206,585 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
| $ | 6,109 |
| $ | 5,408 |
| $ | 7,397 |
| $ | 8,274 |
Accrued expenses |
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| 5,343 |
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| 8,093 |
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| 7,642 |
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| 11,198 |
Deferred license revenue |
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| 191 |
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| 171 |
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| 446 |
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| 332 |
Deferred gift card revenue and other |
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| 650 |
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| 947 |
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| 2,691 |
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| 3,183 |
Current portion of operating lease liabilities |
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| 2,201 |
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| — |
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| 4,454 |
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| 4,397 |
Current portion of long-term debt |
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| 1,065 |
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| 3,201 |
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| 696 |
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| 749 |
Total current liabilities |
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| 15,559 |
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| 17,820 |
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| 23,326 |
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| 28,133 |
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Deferred license revenue, long-term |
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| 999 |
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| 1,008 |
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| 869 |
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| 1,036 |
Due to related parties, long-term |
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| — |
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| 1,197 | ||||||
Operating lease liability, net of current portion |
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| 54,639 |
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| — | ||||||
Deferred rent and tenant improvement allowances |
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| — |
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| 16,774 | ||||||
Operating lease liabilities, net of current portion |
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| 97,492 |
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| 98,278 | ||||||
Long-term debt, net of current portion |
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| 11,238 |
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| 7,118 |
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| 45,123 |
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| 45,226 |
Total liabilities |
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| 82,435 |
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| 43,917 |
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| 166,810 |
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| 172,673 |
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Commitments and contingencies |
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Stockholders’ equity: |
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Common stock, $0.0001 par value, 75,000,000 shares authorized; 28,520,530 and 28,313,017 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively |
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| 3 |
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| 3 | ||||||
Preferred stock, $0.0001 par value, 10,000,000 shares authorized; no shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively |
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| — |
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| — | ||||||
Common stock, $0.0001 par value, 75,000,000 shares authorized; 28,807,800 and 28,603,829 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively |
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| 3 |
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| 3 | ||||||
Preferred stock, $0.0001 par value, 10,000,000 shares authorized; no shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively |
|
| — |
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| — | ||||||
Additional paid-in capital |
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| 44,180 |
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| 43,543 |
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| 45,229 |
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| 44,853 |
Accumulated deficit |
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| (28,190) |
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| (28,722) |
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| (12,490) |
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| (7,891) |
Accumulated other comprehensive loss |
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| (2,590) |
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| (2,310) |
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| (2,695) |
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| (2,651) |
Total stockholders’ equity |
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| 13,403 |
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| 12,514 |
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| 30,047 |
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| 34,314 |
Noncontrolling interests |
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| (378) |
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| (452) |
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| (676) |
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| (402) |
Total equity |
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| 13,025 |
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| 12,062 |
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| 29,371 |
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| 33,912 |
Total liabilities and equity |
| $ | 95,460 |
| $ | 55,979 |
| $ | 196,181 |
| $ | 206,585 |
See notes to the condensed consolidated financial statements.
3
THE ONE GROUP HOSPITALITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(Unaudited, in thousands, except (loss) earnings per share and related share information)
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| For the three months ended June 30, |
| For the six months ended June 30, |
| For the three months ended March 31, | ||||||||||||
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| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2020 |
| 2019 | ||||||
Revenues: |
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Owned restaurant net revenues |
| $ | 18,809 |
| $ | 15,520 |
| $ | 36,629 |
| $ | 30,596 | ||||||
Owned food, beverage and other net revenues |
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| 2,134 |
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| 2,083 |
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| 4,407 |
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| 4,088 | ||||||
Total owned revenue |
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| 20,943 |
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| 17,603 |
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| 41,036 |
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| 34,684 | ||||||
Owned restaurant net revenue |
| $ | 38,557 |
| $ | 20,093 | ||||||||||||
Management, license and incentive fee revenue |
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| 2,656 |
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| 2,708 |
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| 5,339 |
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| 5,144 |
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| 2,162 |
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| 2,683 |
Total revenues |
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| 23,599 |
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| 20,311 |
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| 46,375 |
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| 39,828 |
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| 40,719 |
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| 22,776 |
Cost and expenses: |
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Owned operating expenses: |
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Owned restaurants: |
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Owned restaurant cost of sales |
|
| 5,068 |
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| 4,037 |
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| 9,637 |
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| 8,071 |
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| 10,113 |
|
| 5,026 |
Owned restaurant operating expenses |
|
| 11,856 |
|
| 9,399 |
|
| 22,771 |
|
| 18,777 |
|
| 26,499 |
|
| 12,717 |
Total owned restaurant expenses |
|
| 16,924 |
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| 13,436 |
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| 32,408 |
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| 26,848 | ||||||
Owned food, beverage and other expenses |
|
| 2,225 |
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| 2,025 |
|
| 4,484 |
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| 3,714 | ||||||
Total owned operating expenses |
|
| 19,149 |
|
| 15,461 |
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| 36,892 |
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| 30,562 |
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| 36,612 |
|
| 17,743 |
General and administrative (including stock-based compensation of $456, $344, $637 and $668 for the three and six months ended June 30, 2019 and 2018 respectively) |
|
| 2,704 |
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| 2,615 |
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| 5,354 |
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| 5,670 | ||||||
General and administrative (including stock-based compensation of $338 and $181 for the three months ended March 31, 2020 and 2019 respectively) |
|
| 3,397 |
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| 2,650 | ||||||||||||
Depreciation and amortization |
|
| 1,004 |
|
| 901 |
|
| 1,946 |
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| 1,679 |
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| 2,440 |
|
| 942 |
Lease termination expense |
|
| 141 |
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| 90 |
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| 141 |
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| 90 | ||||||
Transaction and integration costs |
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| 1,095 |
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| — | ||||||||||||
COVID-19 related expenses |
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| 1,348 |
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| — | ||||||||||||
Lease termination expenses |
|
| 179 |
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| — | ||||||||||||
Pre-opening expenses |
|
| 63 |
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| 671 |
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| 545 |
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| 881 |
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| — |
|
| 482 |
Transaction costs |
|
| 152 |
|
| — |
|
| 152 |
|
| — | ||||||
Equity in income of investee companies |
|
| — |
|
| (134) |
|
| — |
|
| (111) | ||||||
Other income, net |
|
| (91) |
|
| (66) |
|
| (266) |
|
| (177) |
|
| (1) |
|
| (175) |
Total costs and expenses |
|
| 23,122 |
|
| 19,538 |
|
| 44,764 |
|
| 38,594 |
|
| 45,070 |
|
| 21,642 |
Operating income |
|
| 477 |
|
| 773 |
|
| 1,611 |
|
| 1,234 | ||||||
Operating (loss) income |
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| (4,351) |
|
| 1,134 | ||||||||||||
Other expenses, net: |
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Interest expense, net of interest income |
|
| 218 |
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| 290 |
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| 487 |
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| 608 |
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| 1,175 |
|
| 269 |
Loss on early debt extinguishment |
|
| 437 |
|
| — |
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| 437 |
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| — | ||||||
Total other expenses, net |
|
| 655 |
|
| 290 |
|
| 924 |
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| 608 |
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| 1,175 |
|
| 269 |
(Loss) income before provision for income taxes |
|
| (178) |
|
| 483 |
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| 687 |
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| 626 | ||||||
(Loss) income before (benefit) provision for income taxes |
|
| (5,526) |
|
| 865 | ||||||||||||
(Benefit) provision for income taxes |
|
| (15) |
|
| 169 |
|
| 81 |
|
| 194 |
|
| (653) |
|
| 96 |
Net (loss) income |
|
| (163) |
|
| 314 |
|
| 606 |
|
| 432 |
|
| (4,873) |
|
| 769 |
Less: net income attributable to noncontrolling interest |
|
| 159 |
|
| 133 |
|
| 74 |
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| 20 | ||||||
Less: net loss attributable to noncontrolling interest |
|
| (274) |
|
| (85) | ||||||||||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. |
| $ | (322) |
| $ | 181 |
| $ | 532 |
| $ | 412 |
| $ | (4,599) |
| $ | 854 |
Currency translation (loss) gain |
|
| (120) |
|
| 141 |
|
| (280) |
|
| 66 | ||||||
Currency translation loss |
|
| (44) |
|
| (160) | ||||||||||||
Comprehensive (loss) income |
| $ | (442) |
| $ | 322 |
| $ | 252 |
| $ | 478 |
| $ | (4,643) |
| $ | 694 |
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Net (loss) income attributable to The ONE Group Hospitality, Inc. per share: |
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Basic net (loss) income per share |
| $ | (0.01) |
| $ | 0.01 |
| $ | 0.02 |
| $ | 0.02 |
| $ | (0.16) |
| $ | 0.03 |
Diluted net (loss) income per share |
| $ | (0.01) |
| $ | 0.01 |
| $ | 0.02 |
| $ | 0.01 |
| $ | (0.16) |
| $ | 0.03 |
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Shares used in computing basic earnings per share |
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| 28,432,510 |
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| 27,366,322 |
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| 28,373,974 |
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| 27,277,483 | ||||||
Shares used in computing diluted earnings per share |
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| 28,432,510 |
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| 27,659,448 |
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| 29,456,764 |
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| 27,516,884 | ||||||
Shares used in computing basic (loss) earnings per share |
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| 28,636,325 |
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| 28,314,820 | ||||||||||||
Shares used in computing diluted (loss) earnings per share |
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| 28,636,325 |
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| 29,311,756 |
See notes to the condensed consolidated financial statements.
4
THE ONE GROUP HOSPITALITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited, in thousands, except share information)
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| Accumulated |
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| Additional |
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| other |
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| Common stock |
| paid-in |
| Accumulated |
| comprehensive |
| Stockholders’ |
| Noncontrolling |
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| Shares |
| Par value |
| capital |
| deficit |
| loss |
| equity |
| 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 |
| — |
|
| — |
|
| 637 |
|
| — |
|
| — |
|
| 637 |
|
| — |
|
| 637 |
Vesting of restricted shares |
| 20,544 |
|
| — |
|
| — |
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| — |
|
| — |
|
| — |
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| — |
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| — |
Loss on foreign currency translation, net |
| — |
|
| — |
|
| — |
|
| — |
|
| (280) |
|
| (280) |
|
| — |
|
| (280) |
Net income |
| — |
|
| — |
|
| — |
|
| 532 |
|
| — |
|
| 532 |
|
| 74 |
|
| 606 |
Balance at June 30, 2019 |
| 28,333,561 |
| $ | 3 |
| $ | 44,180 |
| $ | (28,190) |
| $ | (2,590) |
| $ | 13,403 |
| $ | (378) |
| $ | 13,025 |
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| Accumulated |
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| |
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| Additional |
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| other |
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| Common stock |
| paid-in |
| Accumulated |
| comprehensive |
| Stockholders’ |
| Noncontrolling |
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| Shares |
| Par value |
| capital |
| deficit |
| loss |
| equity |
| interests |
| Total | |||||||
Balance at December 31, 2019 |
| 28,603,829 |
| $ | 3 |
| $ | 44,853 |
| $ | (7,891) |
| $ | (2,651) |
| $ | 34,314 |
| $ | (402) |
| $ | 33,912 |
Stock-based compensation, net of tax withholding |
| 69,327 |
|
| — |
|
| 338 |
|
| — |
|
| — |
|
| 338 |
|
| — |
|
| 338 |
Exercise of stock options |
| 18,000 |
|
| — |
|
| 38 |
|
| — |
|
| — |
|
| 38 |
|
| — |
|
| 38 |
Vesting of restricted shares |
| 116,644 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Loss on foreign currency translation, net |
| — |
|
| — |
|
| — |
|
| — |
|
| (44) |
|
| (44) |
|
| — |
|
| (44) |
Net loss |
| — |
|
| — |
|
| — |
|
| (4,599) |
|
| — |
|
| (4,599) |
|
| (274) |
|
| (4,873) |
Balance at March 31, 2020 |
| 28,807,800 |
| $ | 3 |
| $ | 45,229 |
| $ | (12,490) |
| $ | (2,695) |
| $ | 30,047 |
| $ | (676) |
| $ | 29,371 |
See notes to the condensed consolidated financial statements.
5
THE ONE GROUP HOSPITALITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
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|
| For the six months ended June 30, |
| For the three months ended March 31, | ||||||||
|
| 2019 |
| 2018 |
| 2020 |
| 2019 | ||||
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 606 |
| $ | 432 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
| ||||||
Net (loss) income |
| $ | (4,873) |
| $ | 769 | ||||||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |
|
|
|
|
|
| ||||||
Depreciation and amortization |
|
| 1,946 |
|
| 1,679 |
|
| 2,440 |
|
| 942 |
Stock-based compensation |
|
| 637 |
|
| 668 |
|
| 338 |
|
| 181 |
Loss on early debt extinguishment |
|
| 437 |
|
| — | ||||||
Amortization of discount on warrants |
|
| 82 |
|
| 101 | ||||||
Deferred rent and tenant improvement allowances |
|
| — |
|
| 359 | ||||||
Amortization of discount on warrants and debt issuance costs |
|
| 108 |
|
| 50 | ||||||
Deferred taxes |
|
| 26 |
|
| (1) |
|
| (125) |
|
| 10 |
Income from equity method investments |
|
| — |
|
| (111) | ||||||
Gain on disposition of cost method investment |
|
| — |
|
| (185) | ||||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 471 |
|
| 147 |
|
| 5,092 |
|
| 1,147 |
Inventory |
|
| 39 |
|
| 203 |
|
| 568 |
|
| 161 |
Other current assets |
|
| 30 |
|
| (28) |
|
| (958) |
|
| (96) |
Due from related parties, net |
|
| (298) |
|
| (365) |
|
| (35) |
|
| (38) |
Security deposits |
|
| (18) |
|
| (60) |
|
| (32) |
|
| (18) |
Other assets |
|
| 11 |
|
| (23) |
|
| (807) |
|
| 8 |
Accounts payable |
|
| 705 |
|
| (199) |
|
| (859) |
|
| 270 |
Accrued expenses |
|
| (2,943) |
|
| (244) |
|
| (3,560) |
|
| (1,331) |
Operating lease liabilities and right-of-use assets |
|
| 450 |
|
| — |
|
| 140 |
|
| 321 |
Deferred revenue |
|
| (37) |
|
| (40) |
|
| (540) |
|
| 137 |
Net cash provided by operating activities |
|
| 2,144 |
|
| 2,333 | ||||||
|
|
|
|
|
|
| ||||||
Net cash (used in) provided by operating activities |
|
| (3,103) |
|
| 2,513 | ||||||
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
| (2,917) |
|
| (1,926) |
|
| (791) |
|
| (2,060) |
Proceeds from disposition of cost method investment |
|
| — |
|
| 600 | ||||||
Net cash used in investing activities |
|
| (2,917) |
|
| (1,326) |
|
| (791) |
|
| (2,060) |
|
|
|
|
|
|
| ||||||
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on revolving credit facility |
|
| 2,150 |
|
| — | ||||||
Borrowings of term loan |
|
| 10,000 |
|
| — | ||||||
Repayment of term loans |
|
| (3,828) |
|
| (1,401) | ||||||
Repayment of promissory notes |
|
| (6,250) |
|
| — | ||||||
Repayment of due to related parties, long-term |
|
| (1,197) |
|
| — | ||||||
Repayment of equipment financing agreement |
|
| (184) |
|
| (175) | ||||||
Repayment of business loan and security agreement |
|
| — |
|
| (62) | ||||||
Borrowings of long-term debt |
|
| — |
|
| — | ||||||
Repayments of long-term debt |
|
| (216) |
|
| (798) | ||||||
Debt issuance costs |
|
| (421) |
|
| — |
|
| (48) |
|
| — |
Net cash provided by (used in) financing activities |
|
| 270 |
|
| (1,638) | ||||||
Exercise of stock options |
|
| 38 |
|
| — | ||||||
Net cash used in financing activities |
|
| (226) |
|
| (798) | ||||||
Effect of exchange rate changes on cash |
|
| (290) |
|
| 16 |
|
| (64) |
|
| (168) |
Net decrease in cash and cash equivalents |
|
| (793) |
|
| (615) |
|
| (4,184) |
|
| (513) |
Cash and cash equivalents, beginning of year |
|
| 1,592 |
|
| 1,548 |
|
| 12,344 |
|
| 1,592 |
Cash and cash equivalents, end of year |
| $ | 799 |
| $ | 933 |
| $ | 8,160 |
| $ | 1,079 |
Supplemental disclosure of cash flow data: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
| $ | 483 |
| $ | 484 |
| $ | 704 |
| $ | 235 |
Income taxes paid |
|
| 193 |
|
| — |
|
| 85 |
|
| 191 |
Non-cash amortization of debt issuance costs |
| $ | 14 |
| $ | — |
| $ | 108 |
| $ | 5 |
See notes to the condensed consolidated financial statements.
6
THE ONE GROUP HOSPITALITY, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Summary of Business and Significant Accounting Policies
Summary of Business
The ONE Group Hospitality, Inc. and its subsidiaries (collectively, the “Company”) is a global hospitality company that develops, owns and operates, manages orand licenses upscale and polished casual, high-energy restaurants and lounges and provides turn-key food and beverage (“F&B”) services for hospitality venues including hotels, casinos and other high-end locations globally.locations. 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 for the client. The Company’s primary restaurant brand isbrands are STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse.steakhouse, and Kona Grill, a bar-centric grill concept featuring American favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere.
On October 4, 2019, the Company acquired substantially all of the assets of Kona Grill Inc. and its affiliates (“Kona Grill”), which is composed of 24 domestic restaurants. The Company purchased the assets for a contractual price of $25.0 million plus approximately $1.5 million of consideration paid primarily for the apportionment of rent and utilities. The Company also assumed approximately $7.7 million in current liabilities. The Company intends to integrate Kona Grill by leveraging its corporate infrastructure, bar-business knowledge and unique Vibe Dining program, to elevate the brand experience and drive improved performance. The results of operations of these restaurants are included in our consolidated financial statements from the date of acquisition.
As of June 30, 2019, weMarch 31, 2020, the Company owned, operated, managed or licensed 2955 venues, including 1920 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and provided11 F&B services to threevenues including six hotels and one casinocasinos in the United States and Europe.
Effects of COVID-19
In the first quarter of 2020, the negative effect of the novel coronavirus (“COVID-19”) on the Company’s business was significant. The Company experienced an initial decline in restaurant revenue that began in early March 2020 as business travel and social dining decreased. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic disease, and on March 13, 2020, President Trump declared a state of emergency for COVID-19. Public concerns about the spread of COVID-19 continues to be widespread. The Company has experienced a significant reduction in guest traffic at its restaurants as a result of restrictions mandated by state and local governments.
In response to these conditions, and out of concern for our customers and partners, the Company has temporarily closed several restaurants and the Company has shifted operations at 30 of its restaurants to provide only take-out and delivery service. In addition to the decline in restaurant revenue, the Company has incurred approximately $1.3 million of costs directly related to COVID-19 in the three months ended March 31, 2020, composed primarily of payments to employees for paid-time off during restaurant closures, inventory waste, and rent and rent related costs for closed and limited-operations restaurants from the day that the dining room closed. The Company has implemented measures to reduce its costs during the COVID-19 pandemic, including significant reductions in employees, deferral of capital projects, and negotiations with suppliers and landlords regarding deferral or abatement of payments which could become significant.
Given the present uncertainty surrounding the global economy due to the COVID-19 pandemic, the Company cannot reasonably predict when its closed restaurants will re-open and open restaurants will be able to return to normal dining room operations. The Company expects that its results of operations will be negatively affected by these actions in the second quarter of 2020. The Company’s re-opening of closed restaurants and resumption of normal dining operations is subject to events beyond its control, including the effectiveness of governmental efforts to halt the spread of COVID-19.
Basis of Presentation
The accompanying consolidated balance sheet as of December 31, 2018,2019, 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 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. These unaudited interim consolidated financial
7
statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2018.2019.
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.
Prior Period Reclassifications
Certain reclassifications of the 2019 financial statements amounts have been made to conform to the current year presentation. The Company has combined owned restaurant net revenues and owned food, beverage and other net revenues to be presented in total as owned restaurant net revenue. Additionally, the Company reclassified $0.5 million of owned food, beverage and other expenses to owned restaurant cost of sales and $1.8 million of owned food, beverage and other expenses to owned restaurant expenses on the accompanying consolidated statements of operations and comprehensive (loss) income. Certain reclassifications were also made to conform the prior period segment reporting to the current year segment presentation. Refer to Note 15 – Segment Reporting for additional information regarding the Company’s reportable operating segments.
Recent Accounting Pronouncements
In MarchDecember 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Updated (“ASU”) No. 2019‑01, “Leases2019-12, “Income Taxes (Topic 842)740): Codification Improvements”Simplifying the Accounting for Income Taxes,” (“ASU 2019‑01”2019-12”). ASU 2019‑01 provided clarification which is intended to simplify various aspects related to adoptingaccounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Accounting Standard Codification Topic 842, Leases, (“ASC Topic 842”).740, Income Taxes, and it clarifies and amends existing guidance to improve consistent application. ASU 2019‑01 addresses fair value determinations of underlying assets by lessors, cash flow statement presentation2019-12 is effective for financing leases,annual and transition disclosures.interim periods beginning after December 15, 2020. The Company adopted ASC Topic 842 asis evaluating the impact of January 1, 2019 and considered the clarification guidance in ASU 2019‑01 as part of its adoption. Refer to Note 12 for additional details regarding the adoption of ASC Topic 842.ASU 2019-12 on its financial statements but does not expect the adoption of ASU 2019-12 to be material.
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.
In August 2018, the FASB 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 adds disclosure requirements for fair value measurements. The amendments in ASU 2018‑13 are effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company is evaluating the effects of ASU 2018‑13 on its consolidated financial statements but does not expect the adoption of ASU 2018‑13 to be material.2018-17 did not have a material impact on our financial position, results of operations or cash flows.
7
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 in 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 interim periods beginning after December 15, 2019, with early adoption permitted. Entities can choose to adopt the new guidance prospectively or retrospectively. The Company is evaluatingadoption of ASU 2018-15 did not have a material impact on our financial position, results of operations or cash flows.
In August 2018, the effectsFASB 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 adds disclosure requirements for fair value measurements. The amendments in ASU 2018‑13 are effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The adoption of this pronouncementASU 2018-3 did not have a material impact on its consolidated financial statements.our disclosures of fair value measurement, which are included in Note 7 – Fair Value of Financial Instruments.
Note 2 – InventoryBusiness Combination
Inventory consistsOn October 4, 2019, the Company acquired substantially all of the assets of Kona Grill Inc. and its affiliates comprising 24 domestic restaurants. The Company purchased the assets for a contractual price of $25.0 million plus $1.5 million of consideration paid primarily for the apportionment of rent and utilities. The Company also assumed approximately $7.7 million in current liabilities. The Company believes that Kona Grill is complementary to the Company’s business and will enable the Company to capture market share in the Vibe Dining segment.
8
Kona Grill Inc. and its affiliates were purchased pursuant to a Chapter 11 bankruptcy. As a result, the Company recognized a bargain purchase gain of approximately $11.0 million in the consolidated statements of operation and comprehensive (loss) income for the year ended December 31, 2019, which represents the excess of the aggregate fair value of net assets acquired and liabilities assumed over the purchase price.
The purchase accounting is preliminary and represents estimates and assumptions that are subject to change during the measurement period (up to one year from the acquisition date). The following (intable summarizes the preliminary fair value of identified assets acquired and liabilities assumed as of the acquisition date (amounts in thousands):
|
|
|
|
Net assets acquired: |
|
|
|
Cash |
| $ | 450 |
Current assets, excluding cash |
|
| 2,830 |
Property and equipment |
|
| 31,781 |
Operating lease right-of-use assets |
|
| 42,398 |
Intangible assets |
|
| 17,400 |
Other assets |
|
| 692 |
Current liabilities |
|
| (7,690) |
Deferred tax liability |
|
| (4,044) |
Operating lease liabilities |
|
| (46,364) |
Total net assets acquired |
| $ | 37,453 |
|
|
|
|
Purchase consideration: |
|
|
|
Contractual purchase price |
|
| 25,000 |
Apportionment of rent and utilities |
|
| 775 |
Assumption of real estate lease consultant contract |
|
| 465 |
Escrow deposit |
|
| 250 |
Consideration paid |
| $ | 26,490 |
|
|
|
|
Bargain purchase gain attributable to Kona Grill acquisition |
| $ | 10,963 |
Pro Forma Results of Operations (unaudited)
The following pro forma results of operations for the three months ended March 31, 2019 have been prepared as though the acquisition occurred as of January 1, 2019. The pro forma financial information is not indicative of the results of operations that the Company would have attained had the acquisition occurred at the beginning of the periods presented, nor is the pro forma financial information indicative of the results of operations that may occur in the future. Amounts are in thousands, except earnings per share related data.
|
|
|
|
|
|
|
|
| June 30, |
| December 31, | ||
|
| 2019 |
| 2018 | ||
Food |
| $ | 237 |
| $ | 300 |
Beverages |
|
| 1,128 |
|
| 1,104 |
Total |
| $ | 1,365 |
| $ | 1,404 |
|
|
|
|
|
| Three months ended | |
|
| March 31, 2019 | |
Total revenues |
| $ | 47,230 |
Net income attributable to The ONE Group Hospitality, Inc. |
| $ | 667 |
Net income attributable to The ONE Group Hospitality, Inc. per share: |
|
|
|
Basic net income per share |
| $ | 0.02 |
Diluted net income per share |
| $ | 0.02 |
Note 3 – Other Current Assets
Other current assets consist
9
|
|
|
|
|
|
|
|
| June 30, |
| December 31, | ||
|
| 2019 |
| 2018 | ||
Prepaid taxes |
| $ | 521 |
| $ | 503 |
Landlord receivable |
|
| 195 |
|
| 195 |
Prepaid expenses |
|
| 667 |
|
| 680 |
Other |
|
| 57 |
|
| 93 |
Total |
| $ | 1,440 |
| $ | 1,471 |
Note 43 – Property and Equipment, net
Property and equipment, net consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2019 |
| 2018 |
| 2020 |
| 2019 | ||||
Furniture, fixtures and equipment |
| $ | 11,588 |
| $ | 10,425 |
| $ | 20,907 |
| $ | 20,512 |
Leasehold improvements |
|
| 45,903 |
|
| 43,890 |
|
| 70,110 |
|
| 69,925 |
Less: accumulated depreciation and amortization |
|
| (18,915) |
|
| (16,969) |
|
| (24,218) |
|
| (21,997) |
Subtotal |
|
| 38,576 |
|
| 37,346 |
|
| 66,799 |
|
| 68,440 |
Construction in progress |
|
| — |
|
| 336 |
|
| 438 |
|
| 97 |
Restaurant supplies |
|
| 1,931 |
|
| 1,665 | ||||||
Restaurant smallwares |
|
| 1,946 |
|
| 1,946 | ||||||
Total |
| $ | 40,507 |
| $ | 39,347 |
| $ | 69,183 |
| $ | 70,483 |
Depreciation and amortization related to property and equipment amounted to $1.0$2.2 million and $0.9 million for the three months ended June 30,March 31, 2020 and 2019, and 2018, respectively, and $1.9 million and $1.7 million for the six months ended June 30, 2019 and 2018, respectively. The Company does not depreciate construction in progress, assets not yet put into service or restaurant supplies.
Note 4 – Intangibles, net
Intangibles, net consists of the following (in thousands):
|
|
|
|
|
|
|
|
| March 31, |
| December 31, | ||
|
| 2020 |
| 2019 | ||
Kona Grill tradename |
| $ | 17,400 |
| $ | 17,400 |
Less: accumulated amortization |
|
| (435) |
|
| (217) |
Total intangibles, net |
| $ | 16,965 |
| $ | 17,183 |
8
TableThe Kona Grill trade name is amortized using the straight-line method over its estimated useful life of Contents20 years. Amortization expense was $0.2 million for the three months ending March 31, 2020. The Company’s estimated aggregate amortization expense for each of the five succeeding fiscal years is approximately $0.9 million annually.
Note 5 – Accrued Expenses
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2019 |
| 2018 |
| 2020 |
| 2019 | ||||
Payroll and related |
| $ | 2,138 |
| $ | 4,519 | ||||||
Variable rent, including disputed rent amounts |
| $ | 1,577 |
| $ | 1,766 |
|
| 1,770 |
|
| 1,796 |
Legal, professional and other services |
|
| 1,034 |
|
| 645 |
|
| 1,081 |
|
| 1,103 |
Payroll and related |
|
| 830 |
|
| 1,794 | ||||||
VAT and sales taxes |
|
| 431 |
|
| 1,028 | ||||||
VAT, sales and other taxes |
|
| 689 |
|
| 1,488 | ||||||
Income taxes |
|
| — |
|
| 547 | ||||||
Insurance |
|
| 426 |
|
| 203 |
|
| 118 |
|
| 100 |
Income taxes and related |
|
| 284 |
|
| 685 | ||||||
Due to hotels |
|
| — |
|
| 212 | ||||||
Other |
|
| 761 |
|
| 1,760 |
|
| 1,846 |
|
| 1,645 |
Total |
| $ | 5,343 |
| $ | 8,093 |
| $ | 7,642 |
| $ | 11,198 |
10
Note 6 – Long-Term Debt
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2019 |
| 2018 |
| 2020 |
| 2019 | ||||
Term loan agreements |
| $ | 10,000 |
| $ | 3,828 |
| $ | 47,760 |
| $ | 47,880 |
Revolving credit facility |
|
| 2,150 |
|
| — |
|
| — |
|
| — |
Equipment financing agreements |
|
| 569 |
|
| 752 |
|
| 284 |
|
| 380 |
Promissory notes |
|
| — |
|
| 6,250 | ||||||
Total long-term debt |
|
| 12,719 |
|
| 10,830 |
|
| 48,044 |
|
| 48,260 |
Less: current portion of long-term debt |
|
| (1,065) |
|
| (3,201) |
|
| (696) |
|
| (749) |
Less: debt issuance costs |
|
| (416) |
|
| (32) |
|
| (2,225) |
|
| (2,285) |
Less: discounts on warrants, net |
|
| — |
|
| (479) | ||||||
Total long-term debt, net of current portion |
| $ | 11,238 |
| $ | 7,118 |
| $ | 45,123 |
| $ | 45,226 |
Interest expense for all the Company’s debt arrangements, excluding the loss on early debt extinguishment and the amortization of debt issuance costs and other discounts and fees, was approximately $0.2$1.1 million and $0.2 million for the three months ended June 30,March 31, 2020 and 2019, and 2018 and $0.4 million and $0.5 million for the six months ended June 30, 2019 and 2018, respectively.
As of June 30, 2019,March 31, 2020, the Company had $1.3 million in standby letters of credit outstanding for certain restaurants including $36.9 thousandand $10.7 million available in its revolving credit facility. As of standby letters of creditMarch 31, 2020 and $1.3December 31, 2019, the Company had $0.4 million of cash collateralized letters of credit, which are recorded as a component of security deposits on the consolidated balance sheet as of June 30, 2019.sheet.
Goldman Sachs Bank of America, N.A.USA Credit and Guaranty Agreement
On May 15,October 4, 2019,in conjunction with the acquisition of Kona Grill, the Company entered into a Credit Agreementcredit and guaranty agreement with Goldman Sachs Bank of America, N.AUSA (“Goldman Sachs Credit Agreement”). The Goldman Sachs Credit Agreement provides for a secured revolving credit facility of $10.0$12.0 million and a $10.0$48.0 million term loan. The term loan is payable in quarterly installments, with the final payment due in MayOctober 2024. The revolving credit facility also matures in MayOctober 2024. In conjunction with entering into Additionally, the Company’s consolidated adjusted EBITDA as defined by the Goldman Sachs Credit Agreement for determining covenant compliance includes pro forma adjustments for the Company incurred $0.4 millionannualization of debt issuance costs,the Kona Grill restaurant performance which were capitalized and are recorded as a direct deduction toincludes results before the long-term debt, net of current portion, on the consolidated balance sheets.acquisition date.
The Goldman Sachs Credit Agreement contains several financial covenants, including (a) athe following:
· | A minimum consolidated fixed charge coverage ratio of (i) 1.35 to 1.00 as of the end of any fiscal quarter ending on or prior to June 30, 2021 and (ii) 1.50 to 1.00 as of any fiscal quarter thereafter; |
· | A maximum consolidated leverage ratio of (i) 2.75 to 1.00 as of the end of any fiscal quarter ending on or prior to March 31, 2020, (ii) 2.50 to 1.00 as of the fiscal quarter ending June 30, 2020, (iii) 2.25 to 1.00 as of the fiscal quarters ending September 30, 2020 and December 31, 2020, (iv) 2.00 to 1.00 as of the fiscal quarter ending March 31, 2021, (v) 1.75 to 1.00 as of the fiscal quarter ending June 30, 2021, (vi) 1.70 to 1.00 as of the fiscal quarter ending September 30, 2021, (vii) 1.65 to 1.00 as of the fiscal quarter ending December 21, 2021 and (viii) 1.50 to 1.00 as of the end of any fiscal quarter thereafter. For purposes of calculating this ratio for the first four quarters, the agreement provides for a pro forma adjustment to reflect one full year of Kona Grill operations; |
· | Maximum consolidated capital expenditures not to exceed (i) $10,000,000 in 2020 and (ii) $8,000,000 in 2021 and every fiscal year thereafter; and, |
· | Minimum consolidated liquidity not to be less than $1,500,000 at any time. |
The Company’s ability to borrow under its revolving credit facility is dependent on several factors. The Company’s total borrowings cannot exceed a leverage incurrence multiple of (i) 4.752.50 to 1.00 as of the end of any fiscal quarters ending on or prior to June 30, 2020, (ii) 2.25 to 1.00 as of the fiscal quarters ending September 30, 2020 and December 31, 2020, (iii) 2.00 to 1.00 as of the fiscal quarter ending March 31, 2021 (iv) 1.75 to 1.00 as of the fiscal quarter ending June 30, 2021, (v) 1.70 to 1.00 as of the fiscal quarter ending September 30, 2021, (vi) 1.65 to 1.00 as of the fiscal quarter ending December 31, 2021, and (vii) 1.50 to 1.00 as of the end of any fiscal quarter ending on or priorthereafter. In addition, after giving effect to June 30, 2020borrowings under the revolving credit facility, the Company’s cash and (ii) 4.50 to 1.00 as of the end of any fiscal quarter thereafter and (b) a minimum consolidated fixed charge coverage ratio of 1.35 to 1.00.cash equivalents cannot exceed $4,000,000.
The Goldman Sachs Credit Agreement has several borrowing and interest rate options, including the following: (a) a LIBOR rate (or a comparable successor rate) subject to a 1.75% floor or (b) a base rate equal to the greatergreatest of (i) the prime rate, (ii) the federal funds rate plus 0.50% or, (iii) the LIBOR rate for a one-month period plus 1.00%; provided that the base rate may not be less than zero. or (iv) 4.75%. Loans under the Goldman Sachs Credit
11
Agreement bear interest at a rate per annum using the applicable indices plus a varying interest rate margin of between 2.75%5.75% and 3.50%6.75% (for LIBOR rate loans) and 1.75%4.75% and 2.50%5.75% (for base rate loans).
9
The Goldman Sachs Credit Agreement contains customary representations, warranties and conditions to borrowing including customary affirmative and negative covenants, which include covenants that limit or restrict the Company’s ability to incur indebtedness and other obligations, grant liens to secure obligations, make investments, merge or consolidate, alter the organizational structure of the Company and its subsidiaries, and dispose of assets outside the ordinary course of business, in each case subject to customary exceptions for credit facilities of this size and type. type.
The Company and certain operating subsidiaries of the Company guarantee the obligations under the Goldman Sachs Credit Agreement, which also are secured by liens on substantially all of the assets of the Company and its subsidiaries.
The Company has incurred approximately $2.5 million of debt issuance costs related to the Goldman Sachs Credit Agreement, which were capitalized and are recorded as a direct deduction to the long-term debt, net of current portion, on the consolidated balance sheets. As of June 30, 2019,March 31, 2020, the Company iswas in compliance with the covenants required by the Goldman Sachs Credit Agreement.
Debt ExtinguishmentEquipment Financing Agreements
In conjunction with entering into the Credit Agreement on May 15, 2019,On June 5, 2015 and August 16, 2016, the Company prepaid the outstanding debt balances to early extinguish the $2.6 million of outstanding term loansentered into financing agreements with BankUnited, the $5.3 million of outstanding promissory notes with Anson Investments Master Fund LP, and theSterling National Bank for $1.0 million outstanding promissory note with 2235570 Ontario Limited. The Company recognizedand $0.7 million, respectively, to purchase equipment for the STKs in Orlando, Chicago, San Diego, and Denver. Each of these financing agreements have five- year terms and bear interest at a $0.4 million loss on early debt extinguishment within other expenses, net on the consolidated statementsrate of operations and comprehensive income, primarily caused by the recognition of the unamortized discounts related to warrants issued with the promissory notes and the recognition of unamortized debt issuance costs related to the debt extinguished. Additionally, the Company prepaid the $1.2 million of outstanding cash advances due to the TOG Liquidation Trust, a related party. Please refer to Note 9 for additional details on transactions with related parties.5% per annum, payable in equal monthly installments.
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 their 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 June 30, 2019.March 31, 2020.
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, except the amount outstanding on the revolving credit facility for which the carrying value approximates fair value. Fair value is determined by discounting future cash flows using interest rates available for issues with similar terms and maturities.maturities.
The estimated fair values of long-term debt, for which carrying values do not approximate fair value, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2019 |
| 2018 |
| 2020 |
| 2019 | ||||
Carrying amount of long-term debt, including current portion (1) |
| $ | 10,569 |
| $ | 10,830 |
| $ | 48,044 |
| $ | 48,260 |
Fair value of long-term debt, including current portion |
| $ | 8,728 |
| $ | 7,648 |
| $ | 37,454 |
| $ | 35,471 |
(1) | Excludes the discounts on warrants, net and debt issuance costs |
Note 8 – Nonconsolidated Variable Interest Entities and Related Party Transactions
As of June 30, 2019March 31, 2020 and December 31, 2018,2019, the Company owned interests in the following companies, which directly or indirectly operate a restaurant:
· | 31.24% interest in Bagatelle NY LA Investors, LLC (“Bagatelle Investors”) |
· | 51.13% aggregate interest, held directly and indirectly through other entities, in Bagatelle Little West 12th, LLC (“Bagatelle NY”) |
Bagatelle Investors is a holding company that has an interest in Bagatelle NY. Both entities were formedThe Company records its retained interests in 2011. In the three months ended June 30, 2019,Bagatelle Investors and Bagatelle NY notifiedas cost method investments as the Company that it had no intent to renew its sublease with the Company for the restaurant space. As a result, the Companyhas determined that it no longer haddoes not have the ability to exercise significant influence over its investees, Bagatelle Investors and Bagatelle NY. As of June 30,March 31, 2020 and December 31, 2019, the Company recorded its retained interestshas zero carrying value in Bagatelle Investors and Bagatelle NY asthese cost method investments, with the initial basis being the previous carrying amounts of the investments. Prior to June 30, 2019, the Company had accounted for its investments in these entities under the equity method of accounting based on management’s assessment that it was not the primary beneficiary of these entities because it did not have the power to direct their day to day activities. The Company has provided no additional types of support to these entities than what is contractually required.
1012
The carrying values of these investments were as follows (in thousands):
|
|
|
|
|
|
|
|
| June 30, |
| December 31, | ||
|
| 2019 |
| 2018 | ||
Bagatelle Investors |
| $ | 56 |
| $ | 56 |
Bagatelle NY |
|
| 2,628 |
|
| 2,628 |
Total |
| $ | 2,684 |
| $ | 2,684 |
For the each of the three and six months ended June 30, 2018, the equity in income of investee companies for the equity method investments discussed above was approximately $0.1 million. There was no equity in income for the three and six months ended June 30, 2019.
Additionally, the Company has a management agreement with Bagatelle NY. Under this agreement, the Company recorded less than $0.1 million of management fee revenue in each of approximately $0.2 million and $0.1 million for the three months ended June 30,March 31, 2020 and 2019, and 2018, respectively, and $0.3 million and $0.1 million for the six months ended June 30, 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 $0.2 million and $0.1 million was recorded from this entity for each of the three months ended June 30,March 31, 2020 and 2019 and 2018, respectively, and $0.3 million was recorded from this entity for the each of the six months ended June 30, 2019 and 2018, respectively.respectively.
Net receivables from the Bagatelle Investors and Bagatelle NY included in due from related parties, net were approximately $0.3$0.4 million and $0.1$0.3 million as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. These receivables combined with the Company’s equity in each of these investments, represent the Company’s maximum exposure to loss.
In the first quarter of 2018, the Company sold its 10% interest in a cost method investment, One 29 Park, LLC, for $0.6 million, resulting in a gain of $0.2 million. The gain is included as a component of other income, net on the consolidated statements of operations and comprehensive income for the six months ended June 30, 2018. The investment was accounted for under the cost method of accounting. The Company had also entered into a management agreement with One 29 Park, LLC, under which the Company recorded management fee revenue of $0.1 million and $0.2 million for the three and six months ended June 30, 2018. The management agreement with One 29 Park, LLC terminated on September 30, 2018.
Note 9 – Related Party Transactions
Net amounts due to related parties were $0.3 million and $1.2 million as of June 30, 2019 and December 31, 2018, respectively. The Company has not reserved any related party receivables as of June 30, 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 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 were non-interest bearing and were repayable in 2021 when the trust expires. In conjunction with entering into the Credit Agreement on May 15, 2019, the Company prepaid the $1.2 million balance due to the TOG Liquidation Trust. As a result of the prepayment, there was no amount outstanding to the TOG Liquidation Trust as of June 30, 2019. As of December 31, 2018, the $1.2 million balance due to the Liquidation Trust was included in due to related parties, long-term.
Please refer to Note 8 for details on other transactions with other related parties, and refer to Note 6 for details related to the Credit Agreement.
Note 10 – Income taxes
The Company’s effective income tax rate was 10.2%11.8% for the sixthree months ended June 30 2019March 31, 2020 compared to 31.0%11.1% for the sixthree months ended June 30, 2018.March 31, 2019. The effective income tax rate for the six months ended June 30, 2019 was lower compared to the six months ended June 30, 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)(iii) taxes owed in state and local jurisdictions such as New York, New York City, Colorado and Tennessee.jurisdictions.
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
11
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 1110 – Revenue from contracts with customers
The following table provides information about contract receivables and liabilities from contracts with customers, which include deferred license revenue, and deferred gift card revenue and gift certificate revenue, from contracts with customersthe Konavore rewards program (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2019 |
| 2018 |
| 2020 |
| 2019 | ||||
Receivables (1) |
| $ | 125 |
| $ | 174 |
| $ | 125 |
| $ | 250 |
Deferred license revenue (2) |
|
| 1,190 |
|
| 1,179 |
| $ | 1,315 |
| $ | 1,368 |
Deferred gift card and gift certificate revenue (3) |
| $ | 221 |
| $ | 491 |
| $ | 2,594 |
| $ | 3,210 |
Konavore rewards program (4) |
| $ | 86 |
| $ | 84 |
(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 |
(4) | Konavore rewards program is included in accrued expenses on the consolidated balance sheets. |
The Company determined that the services it provides under its licensing agreements are primarily the rights to access and derive benefit from our symbolic intellectual property. As a result, the initial license fees and upfront fees are recognized on a straight-line basis over the term of the license agreement as a component of management, license and incentive fee revenue on the consolidated statements of operations and comprehensive income. Sales-based royalties are recognized as licensee restaurant sales occur.
Significant changes in deferred license revenue and deferred gift card revenue for the sixthree months ended June 30,March 31, 2020 and 2019 wereare 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 |
|
| (100) |
Deferred license revenue, as of June 30, 2019 |
| $ | 1,190 |
|
|
|
|
|
|
|
|
| March 31, |
| March 31, | ||
|
| 2020 |
| 2019 | ||
Revenue recognized from deferred license revenue |
| $ | 52 |
| $ | 55 |
Revenue recognized from deferred gift card revenue |
| $ | 746 |
| $ | 283 |
As of June 30, 2019,March 31, 2020, the estimated deferred license revenue to be recognized in the future related to performance obligations that are unsatisfied as of June 30, 2019 was as follows (in thousands):
|
|
|
|
2019, six months remaining |
| $ | 95 |
2020 |
|
| 191 |
2021 |
|
| 191 |
2022 |
|
| 166 |
2023 |
|
| 136 |
Thereafter |
|
| 411 |
Total future estimated deferred license revenue |
| $ | 1,190 |
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.
12
Significant changes in deferred gift card and gift certificate revenue for the six months ended June 30, 2019March 31, 2020 were as follows for each year ending (in thousands):
|
|
|
|
Deferred gift card and gift certificate revenue, as of December 31, 2018 |
| $ | 491 |
Additions to deferred gift card and gift certificates revenue |
|
| 296 |
Revenue recognized during the period related to redemptions |
|
| (566) |
Deferred gift card and gift certificate revenue, as of June 30, 2019 |
| $ | 221 |
|
|
|
|
2020, nine months remaining |
| $ | 154 |
2021 |
|
| 206 |
2022 |
|
| 181 |
2023 |
|
| 169 |
2024 |
|
| 134 |
Thereafter |
|
| 471 |
Total future estimated deferred license revenue |
| $ | 1,315 |
The Company recognized revenue of $0.3 million and $0.2 million related to our contract liabilities, which include deferred license revenue and deferred gift card and gift certificate revenue, in the three months ended June 30, 2019 and 2018, respectively, and $0.7 million and $0.5 million in the six months ended June 30, 2019 and 2018, respectively.
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. Additionally, the Company has elected not to separate the accounting for lease components and non-lease components, for all leased assets.
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.
13
Note 11 – Leases
The changes due tocomponents of lease expense for the adoption of ASC Topic 842period were as follows (in thousands):
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|
|
|
|
|
|
|
|
|
| ASC 842 |
|
|
| |
|
| December 31, 2018 |
| 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) |
| $ | — |
|
|
|
|
|
|
|
|
|
|
| March 31, |
|
| March 31, |
| ||
|
| 2020 |
|
| 2019 |
| ||
Lease cost |
|
|
|
|
|
|
|
|
Operating lease cost |
| $ | 3,297 |
|
| $ | 1,726 |
|
Variable lease cost |
|
| 1,156 |
|
|
| 674 |
|
Short-term lease cost |
|
| 128 |
|
|
| 108 |
|
Sublease income |
|
| (135) |
|
|
| (203) |
|
Total lease cost |
| $ | 4,446 |
|
| $ | 2,305 |
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term – operating leases |
|
| 13 years |
|
|
| 14 years |
|
Weighted average discount rate – operating leases |
|
| 8.49 | % |
|
| 8.25 | % |
There was no impact to the Company’s consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2019 compared to the three and six months ended June 30, 2018.
The 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.
Certain of the Company’s leases also provide for percentage rent, which are variable lease costs determined as a percentage of gross sales in excess of specified, minimum sales targets, as well as other variable lease costs to reimburse the lessor for real estate tax and insurance expenses, and certain non-lease components that transfer a distinct service to the Company, such as common area maintenance services. These percentage rents and other variable lease costs 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 itsone restaurant space and in 2019 subleased office and restaurant space where it doesdid not use the entire space for its operations. For the three and six months ended June 30,March 31, 2020 and 2019, sublease income was $0.3$0.1 million and $0.5$0.2 million, respectively, of which $0.2$0.1 million and $0.3$0.1 million, respectively, was from a related party, Bagatelle NY. Refer to Note 8 for details on transactions with this related party.
ASC Topic 842 includes a numberThe Company has entered into an operating lease for one future restaurant that has not yet commenced as of reassessmentMarch 31, 2020. The aggregate future commitment related to this lease totals $4.8 million. The Company expects this lease to commence within the next twelve months and re-measurement requirements for lessees based on certain triggering events or conditions, including whether a contract is or containswill have a lease assessmentterm 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 six months ended June 30, 2019. In addition, there were no impairment indicators identified during the six months ended June 30, 2019 that required an impairment test for the Company’s right-of-use assets or other long-lived assets in accordance with Accounting Standard Codification Topic 360, Property, Plant, and Equipment.
14
The components of lease expense for the period were as follows (in thousands):
|
|
|
|
|
|
| June 30, |
| |
|
| 2019 |
| |
Lease cost |
|
|
|
|
Operating lease cost |
| $ | 3,372 |
|
Variable lease cost |
|
| 1,297 |
|
Short-term lease cost |
|
| 214 |
|
Sublease income |
|
| (474) |
|
Total lease cost |
| $ | 4,409 |
|
|
|
|
|
|
Weighted average remaining lease term – operating leases |
|
| 14 years |
|
Weighted average discount rate – operating leases |
|
| 8.25 | % |
11 years.
Supplemental cash flow information related to leases for the period was as follows (in thousands):
|
|
|
|
|
|
| |||
|
| June 30, |
| March 31, |
| March 31, | |||
|
| 2019 |
| 2020 |
| 2019 | |||
Cash paid for amounts included in the measurement of operating lease liabilities |
| $ | 3,456 |
| $ | 3,161 |
| $ | 1,718 |
Right-of-use assets obtained in exchange for operating lease obligations |
| $ | 281 |
| $ | 288 |
| $ | 281 |
As of June 30, 2019,March 31, 2020, maturities of the Company’s operating lease liabilities are as follows (in thousands):
|
|
|
|
| ||
2019, six months remaining |
| $ | 3,572 | |||
2020 |
| 6,731 | ||||
2020, nine months remaining |
| $ | 9,775 | |||
2021 |
| 6,472 |
| 12,843 | ||
2022 |
| 6,593 |
| 12,801 | ||
2023 |
| 6,727 |
| 13,087 | ||
2024 |
| 12,486 | ||||
Thereafter |
|
| 69,504 |
|
| 115,862 |
Total lease payments |
| 99,599 |
| 176,854 | ||
Less: imputed interest |
|
| (42,759) |
|
| (74,908) |
Present value of operating lease liabilities |
| $ | 56,840 |
| $ | 101,946 |
For the nine months remaining in 2020, the Company’s operating lease liabilities does not include future rent abatements that have been or will be negotiated with landlords.
Note 1312 – Earnings(Loss) earnings per share
Basic (loss) earnings per share is computed using the weighted average number of common shares outstanding during the period and income available to common stockholders. Diluted (loss) 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 units.
14
For the three and six months ended June 30,March 31, 2020 and 2019, and 2018, the (loss) earnings per share was calculated as follows (in thousands, except earnings per share and related share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended June 30, |
| Six months ended June 30, |
| Three months ended March 31, | ||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2020 |
| 2019 | ||||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. |
| $ | (322) |
| $ | 181 |
| $ | 532 |
| $ | 412 |
| $ | (4,599) |
| $ | 854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
| 28,432,510 |
|
| 27,366,322 |
|
| 28,373,974 |
|
| 27,277,483 |
|
| 28,636,325 |
|
| 28,314,820 |
Dilutive effect of stock options, warrants and restricted share units |
|
| — |
|
| 293,126 |
|
| 1,082,789 |
|
| 239,401 |
|
| — |
|
| 996,936 |
Diluted weighted average shares outstanding |
|
| 28,432,510 |
|
| 27,659,448 |
|
| 29,456,764 |
|
| 27,516,884 |
|
| 28,636,325 |
|
| 29,311,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholders per share - Basic |
| $ | (0.01) |
|
| 0.01 |
| $ | 0.02 |
| $ | 0.02 |
| $ | (0.16) |
| $ | 0.03 |
Net (loss) income available to common stockholders per share - Diluted |
| $ | (0.01) |
| $ | 0.01 |
| $ | 0.02 |
| $ | 0.01 |
| $ | (0.16) |
| $ | 0.03 |
For the sixthree months ended June 30,March 31, 2020, all equivalent shares underlying options, warrants and restricted share units were anti-dilutive as the Company was in a net loss position. For the three months ended March 31, 2019, 1.00.9 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 and six months ended June 30,
15
2018, 1.8 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 June 30, 2019, all equivalent shares underlying options, warrants and restricted share units were anti-dilutive as the Company was in a net loss position.
Note 1413 – Stockholders’ Equity
Significant changes in stockholders’ equity for the three and six months ended June 30,March 31, 2020 and 2019 and 2018 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
| ||
|
|
|
|
| Additional |
|
|
|
| other |
|
|
|
|
|
| ||
|
| Common |
| paid-in |
| Accumulated |
| comprehensive |
| Noncontrolling |
|
|
| |||||
|
| Stock |
| capital |
| deficit |
| loss |
| 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 |
Stock-based compensation |
|
| — |
|
| 456 |
|
| — |
|
| — |
|
| — |
|
| 456 |
Loss on foreign currency translation, net |
|
| — |
|
| — |
|
| — |
|
| (120) |
|
| — |
|
| (120) |
Net (loss) income |
|
| — |
|
| — |
|
| (322) |
|
| — |
|
| 159 |
|
| (163) |
Balance at June 30, 2019 |
| $ | 3 |
| $ | 44,180 |
| $ | (28,190) |
| $ | (2,590) |
| $ | (378) |
| $ | 13,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
| ||
|
|
|
|
| Additional |
|
|
|
| other |
|
|
|
|
|
| ||
|
| Common |
| paid-in |
| Accumulated |
| comprehensive |
| Noncontrolling |
|
|
| |||||
|
| Stock |
| capital |
| deficit |
| loss |
| interests |
| Total | ||||||
Balance at December 31, 2019 |
| $ | 3 |
| $ | 44,853 |
| $ | (7,891) |
| $ | (2,651) |
| $ | (402) |
| $ | 33,912 |
Stock-based compensation, net of tax withholding |
|
| — |
|
| 338 |
|
| — |
|
| — |
|
| — |
|
| 338 |
Exercise of stock options |
|
| — |
|
| 38 |
|
| — |
|
| — |
|
| — |
|
| 38 |
Vesting of restricted shares |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Loss on foreign currency translation, net |
|
| — |
|
| — |
|
| — |
|
| (44) |
|
| — |
|
| (44) |
Net loss |
|
| — |
|
| — |
|
| (4,599) |
|
| — |
|
| (274) |
|
| (4,873) |
Balance at March 31, 2020 |
| $ | 3 |
| $ | 45,229 |
| $ | (12,490) |
| $ | (2,695) |
| $ | (676) |
| $ | 29,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
| ||
|
|
|
|
| Additional |
|
|
|
| other |
|
|
|
|
|
| ||
|
| Common |
| paid-in |
| Accumulated |
| comprehensive |
| Noncontrolling |
|
|
| |||||
|
| Stock |
| capital |
| deficit |
| loss |
| 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 |
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 |
Stock-based compensation |
|
| — |
|
| 344 |
|
| — |
|
| — |
|
| — |
|
| 344 |
Loss on foreign currency translation, net |
|
| — |
|
| — |
|
| — |
|
| 141 |
|
| — |
|
| 141 |
Net income |
|
| — |
|
| — |
|
| 181 |
|
| — |
|
| 133 |
|
| 314 |
Balance at June 30, 2018 |
| $ | 3 |
| $ | 41,675 |
| $ | (31,621) |
| $ | (1,490) |
| $ | (902) |
| $ | 7,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
| ||
|
|
|
|
| Additional |
|
|
|
| other |
|
|
|
|
|
| ||
|
| Common |
| paid-in |
| Accumulated |
| comprehensive |
| Noncontrolling |
|
|
| |||||
|
| Stock |
| capital |
| deficit |
| loss |
| interests |
| Total | ||||||
Balance at December 31, 2018 |
| $ | 3 |
| $ | 43,543 |
| $ | (28,722) |
| $ | (2,310) |
| $ | (452) |
| $ | 12,062 |
Stock-based compensation, net of tax withholding |
|
| — |
|
| 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 |
Note 1514 – Stock-Based Compensation
Effective June 4, 2019, the Company’s stockholders approved amendments to the 2013 Employee, Director and Consultant Equity Incentive Plan (the “2019 Equity Plan”). Among other things, the amendments increased the number of shares of common stock authorized for issuance under the 2019 Equity Plan by 2,300,000 shares to a new maximum aggregate limit of 7,073,922 shares. As of June 30, 2019,March 31, 2020, the Company had 2,634,177,1,301,357 remaining shares available for issuance under the 2019 Equity Plan.Incentive Plan (“2019 Equity Plan”).
Stock-based compensation cost was $0.5 and $0.3 million for the three months ended June 30,March 31, 2020 and 2019 was $0.3 million and 2018,$0.2 million, respectively, and $0.6 and $0.7 million for the six months ended June 30, 2019 and 2018, respectively. Stock-based compensation is included in general and administrative expenses in the consolidated statements of operations and comprehensive (loss) income. Included in stock-based compensation cost was $0.1 million of unrestricted stock granted to directors for the three months ended March 31, 2020. Such grants were awarded consistent with the Board’s compensation practices.
1615
Stock Option Activity
Changes in outstanding stock options during the sixthree months ended June 30, 2019March 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
| |
|
|
|
| Weighted |
| average |
| Intrinsic | ||
|
|
|
| average exercise |
| remaining |
| value | ||
|
| Shares |
| price |
| contractual life |
| (thousands) | ||
Outstanding at December 31, 2018 |
| 2,001,008 |
| $ | 3.29 |
|
|
|
|
|
Granted |
| 68,000 |
|
| 2.99 |
|
|
|
|
|
Exercised |
| — |
|
| — |
|
|
|
|
|
Cancelled, expired or forfeited |
| (126,000) |
|
| 2.53 |
|
|
|
|
|
Outstanding at June 30, 2019 |
| 1,943,008 |
| $ | 3.33 |
| 6.36 years |
| $ | 1,268 |
Exercisable at June 30, 2019 |
| 1,256,508 |
| $ | 4.01 |
| 5.41 years |
| $ | 477 |
The fair value of options granted in the six months ended June 30, 2019 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
|
| ||
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
| |
|
|
|
| Weighted |
| average |
| Intrinsic | ||
|
|
|
| average exercise |
| remaining |
| value | ||
|
| Shares |
| price |
| contractual life |
| (thousands) | ||
Outstanding at December 31, 2019 |
| 1,806,508 |
| $ | 3.37 |
| 5.87 years |
| $ | 1,428 |
Exercisable at December 31, 2019 |
| 1,270,508 |
| $ | 3.93 |
| 5.10 years |
| $ | 666 |
Exercised |
| (18,000) |
|
| 2.13 |
|
|
|
|
|
Cancelled, expired or forfeited |
| (24,000) |
|
| 4.85 |
|
|
|
|
|
Outstanding at March 31, 2020 |
| 1,764,508 |
| $ | 3.37 |
| 5.57 years |
| $ | — |
Exercisable at March 31, 2020 |
| 1,291,175 |
| $ | 3.84 |
| 4.91 years |
| $ | — |
A summary of the status of the Company’s non-vested stock options as of December 31, 20182019 and June 30, 2019March 31, 2020 and changes during the sixthree months then ended, is presented below:
|
|
|
|
|
|
|
|
|
| Weighted average | |
|
| Shares |
| grant date fair value | |
Non-vested stock options at December 31, 2018 |
| 926,500 |
| $ | 0.91 |
Granted |
| 68,000 |
|
| 2.99 |
Vested |
| (203,000) |
|
| 1.25 |
Cancelled, expired or forfeited |
| (105,000) |
|
| 0.97 |
Non-vested stock options at June 30, 2019 |
| 686,500 |
| $ | 0.86 |
|
|
|
|
|
|
|
|
|
| Weighted average | |
|
| Shares |
| grant date fair value | |
Non-vested stock options at December 31, 2019 |
| 536,000 |
| $ | 0.87 |
Vested |
| (62,667) |
|
| 0.89 |
Non-vested stock options at March 31, 2020 |
| 473,333 |
| $ | 0.87 |
The fair value of options that vested in the three months ended March 31, 2020 were less than $0.1 million. As of June 30, 2019,March 31, 2020, there are 579,402 milestone-based options outstanding.outstanding, and there is approximately $0.7 million of unrecognized compensation cost related to these milestone-based options. These options vest based on the achievement of Company and individual objectives as set by the Board.
As of June 30, 2019,March 31, 2020, there is approximately $0.5$0.3 million of total unrecognized compensation cost related to non-vested awards, which will be recognized over a weighted-average period of 3.12.5 years.
Restricted Stock Unit Activity
The Company issues restricted stock units (“RSUs”) under the 2019 Equity Plan. The fair value of these RSUs is determined based upon the closing fair market value of the Company’s common stock on the grant date.
A summary of the status of RSUs and changes during the sixthree months ended June 30, 2019March 31, 2020 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average |
|
|
| Weighted average | ||
|
| Shares |
| grant date fair value |
| Shares |
| grant date fair value | ||
Non-vested RSUs at December 31, 2018 |
| 764,201 |
| $ | 2.54 | |||||
Non-vested RSUs at December 31, 2019 |
| 955,011 |
| $ | 2.69 | |||||
Granted |
| 301,305 |
|
| 3.09 |
| 1,240,599 |
|
| 1.19 |
Vested |
| (160,044) |
|
| 2.49 |
| (116,644) |
|
| 2.97 |
Cancelled, expired or forfeited |
| (28,000) |
|
| 2.83 |
| (4,000) |
|
| 3.25 |
Non-vested RSUs at June 30, 2019 |
| 877,462 |
| $ | 2.72 | |||||
Non-vested RSUs at March 31, 2020 |
| 2,074,966 |
| $ | 1.77 |
As of June 30, 2019,March 31, 2020, 150,000 RSUs subject to performance-based vesting were still outstanding.outstanding, and there is approximately $0.4 million of unrecognized compensation cost related to these milestone-based options. As of June 30, 2019,March 31, 2020, the Company had approximately $1.8$2.9 million of total unrecognized compensation costs related to RSUs, which will be recognized over a weighted average period of 3.02.5 years.
1716
Note 1615 – Segment Reporting
TheIn the fourth quarter of 2019, in conjunction with the Kona Grill acquisition, the Company operates in three segments: “Owned restaurants,” “Owned food, beverageimplemented certain organizational changes, including the reorganization of our internal reporting structure to better facilitate our strategy for growth and other,” and “Managed and licensed operations.” The Owned restaurants segment consistsoperational efficiency. As a result 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 wherethese organizational changes, 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 onidentified its reportable operating profitsegments 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.follows:
· | STK. The STK segment consists of the results of operations from STK restaurant locations, competing in the full-service dining industry, as well as management, license and incentive fee revenue generated from the STK brand and operations of STK restaurant locations. |
· | Kona Grill. The Kona Grill segment includes the results of operations of Kona Grill restaurant locations. |
· | ONE Hospitality. The ONE Hospitality segment is composed of the management, license and incentive fee revenue and results of operations generated from the Company’s other brands and venue concepts, which include ANGEL, Bagatelle, Heliot, Hideout, Marconi, and Radio. Additionally, this segment includes the results of operations generated from F&B hospitality management agreements with hotels, casinos and other high-end locations. |
· | Corporate. The Corporate segment consists of the following: general and administrative costs, stock-based compensation, depreciation and amortization, acquisition related gains and losses, pre-opening expenses, lease termination expenses, transaction costs, and other income and expenses. This segment also includes the Company’s major off-site events group, which supports all brands and venue concepts, and revenue generated from gift card programs. |
The Company’s Chief Executive Officer, (“CEO”), who has been deemedis the Company’s Chief Operating Decision Maker, manages the business and allocates resources via a combination of restaurant sales reports and operating segment profit information, (which is defined as revenues less operating expenses)expenses, related to the Company’s four operating segments.
Certain financial information relating to the three segments, or sources of revenues, which are presented in their entirety within the consolidated statements of operationsmonths ended March 31, 2020 and comprehensive income.
The Company’s operating results by2019 for each segment were as followsis provided below (in thousands):. Prior year amounts have been revised to conform to the current year segment presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the three months ended June 30, 2019 |
| For the three months ended June 30, 2018 | ||||||||||||||||||||
|
|
|
|
| Owned food, |
| Managed and |
|
|
|
|
|
|
| Owned food, |
| Managed and |
|
|
| ||||
|
| Owned |
| beverage and |
| licensed |
|
|
|
| Owned |
| beverage and |
| licensed |
|
|
| ||||||
|
| restaurants |
| other |
| operations |
| Total |
| restaurants |
| other |
| operations |
| Total | ||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned net revenues |
| $ | 18,809 |
| $ | 2,134 |
| $ | — |
| $ | 20,943 |
| $ | 15,520 |
| $ | 2,083 |
| $ | — |
| $ | 17,603 |
Management, license and incentive fee revenue |
|
| — |
|
| — |
|
| 2,656 |
|
| 2,656 |
|
| — |
|
| — |
|
| 2,708 |
|
| 2,708 |
Total revenues |
|
| 18,809 |
|
| 2,134 |
|
| 2,656 |
|
| 23,599 |
|
| 15,520 |
|
| 2,083 |
|
| 2,708 |
|
| 20,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
| 5,068 |
|
| — |
|
| — |
|
| 5,068 |
|
| 4,037 |
|
| — |
|
| — |
|
| 4,037 |
Other operating expenses |
|
| 11,856 |
|
| — |
|
| — |
|
| 11,856 |
|
| 9,399 |
|
| — |
|
| — |
|
| 9,399 |
Owned food, beverage and other expenses |
|
| — |
|
| 2,225 |
|
| — |
|
| 2,225 |
|
| — |
|
| 2,025 |
|
| — |
|
| 2,025 |
Total owned operating expenses |
|
| 16,924 |
|
| 2,225 |
|
| — |
|
| 19,149 |
|
| 13,436 |
|
| 2,025 |
|
| — |
|
| 15,461 |
Segment income (loss) |
| $ | 1,885 |
| $ | (91) |
| $ | 2,656 |
| $ | 4,450 |
| $ | 2,084 |
| $ | 58 |
| $ | 2,708 |
| $ | 4,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
| 2,704 |
|
|
|
|
|
|
|
|
|
|
| 2,615 |
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
| 1,004 |
|
|
|
|
|
|
|
|
|
|
| 901 |
Interest expense, net of interest income |
|
|
|
|
|
|
|
|
|
|
| 218 |
|
|
|
|
|
|
|
|
|
|
| 290 |
Loss on early debt extinguishment |
|
|
|
|
|
|
|
|
|
|
| 437 |
|
|
|
|
|
|
|
|
|
|
| — |
Equity in income of investee companies |
|
|
|
|
|
|
|
|
|
|
| — |
|
|
|
|
|
|
|
|
|
|
| (134) |
Other |
|
|
|
|
|
|
|
|
|
|
| 265 |
|
|
|
|
|
|
|
|
|
|
| 695 |
(Loss) income before provision for income taxes |
|
|
|
|
|
|
|
|
|
| $ | (178) |
|
|
|
|
|
|
|
|
|
| $ | 483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | |||||
For the three months ended March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
| $ | 17,383 |
| $ | 20,657 |
| $ | 2,679 |
| $ | — |
| $ | 40,719 |
Operating income (loss) |
|
| 1,543 |
|
| 820 |
|
| 1,820 |
|
| (8,534) |
|
| (4,351) |
Capital asset additions |
| $ | 335 |
| $ | 410 |
| $ | 8 |
| $ | 38 |
| $ | 791 |
As of March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
| $ | 79,512 |
| $ | 88,199 |
| $ | 6,116 |
| $ | 22,354 |
| $ | 196,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | |||||
For the three months ended March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
| $ | 19,245 |
| $ | — |
| $ | 3,060 |
| $ | 471 |
| $ | 22,776 |
Operating income (loss) |
|
| 2,668 |
|
| — |
|
| 2,250 |
|
| (3,784) |
|
| 1,134 |
Capital asset additions |
| $ | 1,726 |
| $ | — |
| $ | 36 |
| $ | 298 |
| $ | 2,060 |
As of December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
| $ | 82,691 |
| $ | 93,829 |
| $ | 8,252 |
| $ | 21,813 |
| $ | 206,585 |
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the six months ended June 30, 2019 |
| For the six months ended June 30, 2018 | ||||||||||||||||||||
|
|
|
|
| Owned food, |
| Managed and |
|
|
|
|
|
|
| Owned food, |
| Managed and |
|
|
| ||||
|
| Owned |
| beverage and |
| licensed |
|
|
|
| Owned |
| beverage and |
| licensed |
|
|
| ||||||
|
| restaurants |
| other |
| operations |
| Total |
| restaurants |
| other |
| operations |
| Total | ||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned net revenues |
| $ | 36,629 |
| $ | 4,407 |
| $ | — |
| $ | 41,036 |
| $ | 30,596 |
| $ | 4,088 |
| $ | — |
| $ | 34,684 |
Management, license and incentive fee revenue |
|
| — |
|
| — |
|
| 5,339 |
|
| 5,339 |
|
| — |
|
| — |
|
| 5,144 |
|
| 5,144 |
Total revenues |
|
| 36,629 |
|
| 4,407 |
|
| 5,339 |
|
| 46,375 |
|
| 30,596 |
|
| 4,088 |
|
| 5,144 |
|
| 39,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
| 9,637 |
|
| — |
|
| — |
|
| 9,637 |
|
| 8,071 |
|
| — |
|
| — |
|
| 8,071 |
Other operating expenses |
|
| 22,771 |
|
| — |
|
| — |
|
| 22,771 |
|
| 18,777 |
|
| — |
|
| — |
|
| 18,777 |
Owned food, beverage and other expenses |
|
| — |
|
| 4,484 |
|
| — |
|
| 4,484 |
|
| — |
|
| 3,714 |
|
| — |
|
| 3,714 |
Total owned operating expenses |
|
| 32,408 |
|
| 4,484 |
|
| — |
|
| 36,892 |
|
| 26,848 |
|
| 3,714 |
|
| — |
|
| 30,562 |
Segment income (loss) |
| $ | 4,221 |
| $ | (77) |
| $ | 5,339 |
| $ | 9,483 |
| $ | 3,748 |
| $ | 374 |
| $ | 5,144 |
| $ | 9,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
| 5,354 |
|
|
|
|
|
|
|
|
|
|
| 5,670 |
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
| 1,946 |
|
|
|
|
|
|
|
|
|
|
| 1,679 |
Interest expense, net of interest income |
|
|
|
|
|
|
|
|
|
|
| 487 |
|
|
|
|
|
|
|
|
|
|
| 608 |
Loss on early debt extinguishment |
|
|
|
|
|
|
|
|
|
|
| 437 |
|
|
|
|
|
|
|
|
|
|
| — |
Equity in income of investee companies |
|
|
|
|
|
|
|
|
|
|
| — |
|
|
|
|
|
|
|
|
|
|
| (111) |
Other |
|
|
|
|
|
|
|
|
|
|
| 572 |
|
|
|
|
|
|
|
|
|
|
| 794 |
Income before provision for income taxes |
|
|
|
|
|
|
|
|
|
| $ | 687 |
|
|
|
|
|
|
|
|
|
| $ | 626 |
The Company’s total assets by segment for the periods indicated were as follows (in thousands):
|
|
|
|
|
|
|
|
| June 30, |
| December 31, | ||
|
| 2019 |
| 2018 | ||
Total assets: |
|
|
|
|
|
|
Owned restaurants |
| $ | 74,424 |
| $ | 42,971 |
Owned food, beverage and other operations (1) |
|
| 15,848 |
|
| 7,274 |
Managed and licensed operations |
|
| 5,205 |
|
| 5,734 |
Total |
| $ | 95,477 |
| $ | 55,979 |
|
|
The Company’s total assets increased $39.4 million as of June 30, 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 six months ended June 30, | ||||
|
| 2019 |
| 2018 | ||
Capital assets additions: |
|
|
|
|
|
|
Owned restaurants |
| $ | 2,530 |
| $ | 1,837 |
Owned food, beverage and other operations (1) |
|
| 387 |
|
| 89 |
Managed and licensed operations |
|
| — |
|
| — |
Total |
| $ | 2,917 |
| $ | 1,926 |
|
|
19
Note 1716 – Geographic Information
The following tables contain certainCertain financial information by geographic location for the three and six months ended June 30, 2019 and 2018is provided below (in thousands):
Revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the three months ended June 30, |
| For the six months ended June 30, | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Domestic: |
|
|
|
|
|
|
|
|
|
|
|
|
Owned restaurants |
| $ | 18,809 |
| $ | 15,520 |
| $ | 36,629 |
| $ | 30,596 |
Owned food, beverage and other operations |
|
| 2,134 |
|
| 2,083 |
|
| 4,407 |
|
| 4,088 |
Managed and licensed operations |
|
| 1,595 |
|
| 1,641 |
|
| 3,282 |
|
| 3,328 |
Total domestic revenues |
| $ | 22,538 |
| $ | 19,244 |
| $ | 44,318 |
| $ | 38,012 |
International: |
|
|
|
|
|
|
|
|
|
|
|
|
Owned restaurants |
|
| — |
|
| — |
|
| — |
|
| — |
Owned food, beverage and other operations |
|
| — |
|
| — |
|
| — |
|
| — |
Managed and licensed operations |
|
| 1,061 |
|
| 1,067 |
|
| 2,057 |
|
| 1,816 |
Total international revenues |
| $ | 1,061 |
| $ | 1,067 |
| $ | 2,057 |
| $ | 1,816 |
Total revenues |
| $ | 23,599 |
| $ | 20,311 |
| $ | 46,375 |
| $ | 39,828 |
|
|
|
|
|
|
|
|
| For the three months ended March 31, | ||||
|
| 2020 |
| 2019 | ||
Domestic revenues |
| $ | 39,977 |
| $ | 21,780 |
International revenues |
|
| 742 |
|
| 996 |
Total revenues |
| $ | 40,719 |
| $ | 22,776 |
|
|
|
|
|
|
|
|
| March 31, |
| December 31, | ||
|
| 2020 |
| 2019 | ||
Domestic long-lived assets |
| $ | 177,684 |
| $ | 179,143 |
International long-lived assets |
|
| 277 |
|
| 301 |
Total long-lived assets |
| $ | 177,961 |
| $ | 179,444 |
Long-lived assets
17
|
|
|
|
|
|
|
|
| June 30, |
| December 31, | ||
|
| 2019 |
| 2018 | ||
Domestic: |
|
|
|
|
|
|
Owned restaurants |
| $ | 72,192 |
| $ | 38,958 |
Owned food, beverage and other operations |
|
| 12,684 |
|
| 5,375 |
Managed and licensed operations |
|
| 33 |
|
| 67 |
Total domestic long-lived assets |
| $ | 84,909 |
| $ | 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 |
| $ | 84,946 |
| $ | 44,438 |
Note 1817 – LitigationCommitments and Contingencies
The Company is party to claims in lawsuits incidental to its business, including lease disputes and employee-related matters. The Company is confident in its defenses and is vigorously defending these disputes. The Company has not recorded any liabilities for these unfounded claims, and the range of possible losses is zero to $2.2 million. 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 18 – Subsequent Events
On May 4, 2020, Goldman Sachs Bank USA (“GSB”), as administrative agent, collateral agent and lead arranger under the Credit and Guaranty Agreement dated October 4, 2019 between The ONE Group Hospitality, Inc. (the “Company”) and certain of its subsidiaries, the lenders from time to time party thereto and GSB (the “Credit Agreement”), (1) consented to the CARES Act Loans described below and (2) agreed that the amount of the CARES Act Loans will not be counted toward the permitted amount of Consolidated Total Debt, as defined under the Credit Agreement, to the extent the amounts are retained as cash during the term of the CARES Act Loans in a segregated deposit account or used for purposes that are forgivable under the CARES Act, provided that the proceeds of the CARES Act Loans must be used only for “allowable uses” under the CARES Act (with at least 75% of the utilized proceeds to be used for purposes that result in the CARES Act Loans being eligible for forgiveness) or used for the repayment of the CARES Act Loans.
On May 4, 2020, two subsidiaries of the Company entered into promissory notes (“CARES Act Loans”) with BBVA USA under the Paycheck Protection Program (“PPP”) created by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Repayment of the CARES Act Loans is guaranteed by the U.S. Small Business Administration (“SBA”). The ONE Group, LLC received a loan of $9.8 million related to the operations of STK restaurants, and Kona Grill Acquisition, LLC received a loan of $8.5 million related to the operation of Kona Grill restaurants.
In accordance with the requirements of the CARES Act, the Company will use proceeds from the CARES Act Loans primarily for payroll costs. The CARES Act Loans are scheduled to mature on April 28, 2022 and have a 1.00% interest rate and are subject to the terms and conditions applicable to PPP loans. Among other terms, BBVA may declare a default of the CARES Act Loans if a guarantor disputes the validity of the guaranty of indebtedness, if a material adverse change occurs in our financial condition, or if BBVA believes the prospect of repayment of the CARES Act Loans or performance of obligations under the promissory notes is impaired. On an event of default, BBVA may declare principal and unpaid interest immediately due and payable, and it may charge default interest of 10%.
On May 8, 2020, GSB and the Company and certain of its subsidiaries entered into an amendment to the Credit Agreement that:
· | Relaxes the fixed charge coverage ratio (decreasing the ratio for remaining measurement dates in 2020 to 1.20 to 1.00 from 1.35 to 1.00) and the leverage ratio (increasing the ratio at June 30, 2020 to 3.00 to 1.00 from 2.50 to 1.00, and the ratio at September 30 and December 31, 2020 to 2.75 to 1.00 from 2.25 to 1.00). |
· | Requires minimum “Consolidated Liquidity” to be $4,000,000 for the balance of 2020 (from $1,500,000). |
As of May 10, 2020, the Company has re-opened eleven restaurant dining rooms and plans to open an additional five dining rooms on May 11, 2020. The Company expects to re-open an additional five to ten dining rooms in the next two weeks and anticipates re-opening the remaining restaurants and closed dining rooms as soon as conditions permit.
2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q and certain information incorporated herein by reference contain 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 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 the results, performance or achievements expressed or implied by the 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, 2018.2019. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements include matters such as the effect and duration of COVID-19 and related stay at home orders and other government actions, the effect of COVID-19 on customer behavior, general economic conditions, consumer preferences and spending, costs, competition, restaurant openings or closings, operating margins, the availability of acceptable real estate locations, the sufficiency of our cash balances and cash generated from operations and financing activities for our future liquidity and capital resource needs, the impact on our business of Federal and State legislation, litigation, the execution of our growth strategy and other matters. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “ongoing,” “could,” “estimates,” “expects,” “intends,” “may,” “appears,” “suggests,” “future,” “likely,” “goal,” “plans,” “potential,” “projects,” “predicts,” “should,” “targets,” “would,” “will” and similar expressions that convey the uncertainty of future events or outcomes. You should not place undue reliance on 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 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, 2018.2019.
As used in this report, the terms “Company,” “we,” “our,” or “us,” refer to The ONE Group Hospitality, Inc. and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.
OverviewBusiness Summary
The ONE Group Hospitality, Inc.,We are a Delaware corporation,global hospitality company that develops, owns and operates, manages orand licenses upscale and polished casual, high-energy restaurants and lounges and provides turn-key food and beverage (“F&B”) services for hospitality venues including hotels, casinos and other high-end locations globally. We define turn-keylocations. Turn-key F&B services are food and beverage (“F&B”) services as services that can be scaled, customized and implemented by us at a particular hospitality venue and customized for our clients.
the client. 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 that we refer to as “Vibe Dining.” Dining”. 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.
Our primary restaurant brand isbrands are STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse.steakhouse, and Kona Grill, a bar-centric grill concept featuring American favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere. 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, Hippodrome Casino, and ME Hotels.
We opened our first restaurant in January 2004 in New York, CityNew York, and, as of June 30, 2019,March 31, 2020, we owned, operated, managed or licensed 2955 venues including 1920 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe and the Middle East. In addition, we provided foodEast and beverage services11 F&B venues in threesix hotels and one casino. Wecasinos in the United States and Europe. For those restaurants and venues that are managed or licensed, we generate management and incentive fee revenue (profit sharing) from those restaurantsbased on a percentage of the location’s revenues and lounges that we do not own, but instead manage on behalf of 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.
net profits.
2119
The table below reflects our venues by restaurant brand and geographic location as of June 30, 2019:March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Venues |
| Venues | ||||||||||||||||||||
|
| STK(1) |
| Bagatelle |
| Radio |
| Hideout |
| Marconi |
| Heliot |
| F&B Services |
| Total |
| STK(1) |
| Kona Grill |
| ONE Hospitality(2) |
| Total |
Domestic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned |
| 10 |
| — |
| — |
| 1 |
| — |
| — |
| 1 |
| 12 |
| 10 |
| 24 |
| 2 |
| 36 |
Managed |
| 1 |
| 1 |
| — |
| — |
| — |
| — |
| — |
| 2 |
| 1 |
| — |
| 1 |
| 2 |
Licensed |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 1 |
| — |
| — |
| 1 |
Total domestic |
| 11 |
| 1 |
| — |
| 1 |
| — |
| — |
| 1 |
| 14 |
| 12 |
| 24 |
| 3 |
| 39 |
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
Managed |
| 3 |
| — |
| 2 |
| — |
| 1 |
| 1 |
| 3 |
| 10 |
| 3 |
| — |
| 8 |
| 11 |
Licensed |
| 5 |
| — |
| — |
| — |
| — |
| — |
| — |
| 5 |
| 5 |
| — |
| — |
| 5 |
Total international |
| 8 |
| — |
| 2 |
| — |
| 1 |
| 1 |
| 3 |
| 15 |
| 8 |
| — |
| 8 |
| 16 |
Total venues |
| 19 |
| 1 |
| 2 |
| 1 |
| 1 |
| 1 |
| 4 |
| 29 |
| 20 |
| 24 |
| 11 |
| 55 |
(1) |
|
(2) | Includes concepts under the Company’s F&B hospitality management agreements and other venue brands such as ANGEL, Bagatelle, Heliot, Hideout, Marconi and Radio. |
Uncertainties Related to COVID-19
In the first quarter of 2020, the negative effect of the novel coronavirus (“COVID-19”) on the Company’s business was significant. The Company experienced an initial decline in restaurant revenue that began in early March 2020 as business travel and social dining decreased. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic disease, and on March 13, 2020, President Trump declared a state of emergency for COVID-19. Public concerns about the spread of COVID-19 continues to be widespread. The Company has experienced a significant reduction in guest traffic at its restaurants as a result of restrictions mandated by state and local governments.
In response to these conditions, and out of concern for our customers and partners, the Company has temporarily closed several restaurants and the Company has shifted operations at 30 of its restaurants to provide only take-out and delivery service. In addition to the decline in restaurant revenue, the Company has incurred approximately $1.3 million of costs related to COVID-19 in the three months ended March 31, 2020, composed primarily of payments to employees for paid-time off during restaurant closures, inventory waste, and rent and rent related costs for closed and limited-operations restaurants from the day that the dining room closed. The Company has implemented measures to reduce its costs during the COVID-19 pandemic, including significant reductions in employees, deferral of capital projects, and negotiations with suppliers and landlords regarding deferral or abatement of payments which could become significant.
Given the present uncertainty surrounding the global economy due to the COVID-19 pandemic, the Company cannot reasonably predict when its closed restaurants will re-open and open restaurants will be able to return to normal dining room operations. The Company expects that its results of operations will be negatively affected by these actions in the second quarter of 2020. The Company’s re-opening of closed restaurants and resumption of normal dining operations is subject to events beyond its control, including the effectiveness of governmental efforts to halt the spread of COVID-19.
Acquisitions
On October 4, 2019, we acquired substantially all of the assets of Kona Grill Inc. and its affiliates (“Kona Grill”) comprising 24 domestic restaurants. We purchased the assets for a contractual price of $25.0 million plus approximately $1.5 million of consideration paid primarily for the apportionment of rent and utilities. We also assumed approximately $7.7 million in current liabilities. The purchase was financed with proceeds from the credit and guaranty agreement we entered into with Goldman Sachs Bank USA in conjunction with the acquisition (“Goldman Sachs Credit Agreement”). Over the remainder of 2020, we intend to integrate Kona Grill by leveraging our corporate infrastructure, our bar-business knowledge and unique Vibe Dining program, to elevate the brand experience and drive improved performance.
Executive Summary
Total revenue increased $3.3$17.9 million, or 16.3%78.8%, to $23.6$40.7 million for the three months ended June 30, 2019March 31, 2020 compared to $20.3$22.8 million for the three months ended June 30, 2018. TotalMarch 31, 2019. Approximately $20.7 million of the increase in total revenue increased $6.6 million, or 16.6%,was attributable to $46.4 million for the six months ended June 30, 2019addition of the Kona Grill restaurants in the first quarter of 2020 compared to $39.8 millionthe prior year period. The increase in
20
total revenue was partially offset by the temporarily closures and limited dining room operations for the six months ended June 30 2018.of our remaining open restaurants beginning in March 2020 as a result of COVID-19.
Operating income decreased $0.3approximately $5.5 million or 37.5%, to $0.5an operating loss of $4.4 million for the three months ended June 30, 2019March 31, 2020 from $0.8operating income of $1.1 million for the three months ended June 30,March 31, 2019. Operating income increased $0.4 million, or 33.3%, to $1.6 million for the six months ended June 30, 2019 from $1.2 million for the six months ended June 30, 2018.
For the six months ended June 30, 2019 compared to the six months ended June 30, 2018, the increase in operating incomeThe decrease was primarily due to overall sales growth and profitability improvements from existing restaurants, newly owned restaurants and managed and licensed locations combined with labor and spending efficiencies. In the first quarter of 2019, we opened an owned STK restaurant in Nashville, Tennessee and a licensed STK restaurant in Doha, Qatar.
Our Growth Strategies and Outlook
Our growth model is primarily driven by fixed costs in comparable restaurants not decreasing at the following:same rate as the decrease in comparable sales for the quarter of 14.1%, specifically the decrease of comparable sales of 55.9% in March of 2020. Additionally, in the three months ended March 31, 2020, we incurred $1.3 million in costs directly related to the effects of COVID-19 and $1.1 million in integration expenses as a result of the Kona Grill acquisition. We expect additional costs related to COVID-19 in the second quarter, and do not anticipate any further integration expenses related to the Kona Grill acquisition.
ExpansionResults of STK. We expect to continue to expand our operations domestically and internationally through a mix of licensed and managed restaurants using a disciplined and targeted site selection process. 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.Operations
We have identified over 75 additional major metropolitan areas acrossThe following table sets forth certain statements of operations data for the globe where we could grow our STK brand to approximately 200 restaurants over the foreseeable future. In the first quarter of 2019, we opened an owned STK restaurant in Nashville, Tennessee and a licensed STK restaurant in Doha, Qatar. We expect to continue to grow in 2019 with the planned openings of licensed STK locations in Puerto Rico, Mexico and a managed STK location in Scottsdale, Arizona.periods indicated (in thousands):
Expansion through New F&B Hospitality 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 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. In 2019, we plan to add one managed F&B location in Florence, Italy. Going forward, we expect to enter into one to two new F&B hospitality agreements annually.
|
|
|
|
|
|
|
|
| For the Three Months Ended March 31, | ||||
|
| 2020 |
| 2019 | ||
Revenues: |
|
|
|
|
|
|
Owned restaurant net revenue |
| $ | 38,557 |
| $ | 20,093 |
Management, license and incentive fee revenue |
|
| 2,162 |
|
| 2,683 |
Total revenues |
|
| 40,719 |
|
| 22,776 |
Cost and expenses: |
|
|
|
|
|
|
Owned operating expenses: |
|
|
|
|
|
|
Owned restaurant cost of sales |
|
| 10,113 |
|
| 5,026 |
Owned restaurant operating expenses |
|
| 26,499 |
|
| 12,717 |
Total owned operating expenses |
|
| 36,612 |
|
| 17,743 |
General and administrative (including stock-based compensation of $338 and $181 for the three months ended March 31, 2020 and 2019 respectively) |
|
| 3,397 |
|
| 2,650 |
Depreciation and amortization |
|
| 2,440 |
|
| 942 |
Transaction and integration costs |
|
| 1,095 |
|
| — |
COVID-19 related expenses |
|
| 1,348 |
|
| — |
Lease termination expenses |
|
| 179 |
|
| — |
Pre-opening expenses |
|
| — |
|
| 482 |
Other income, net |
|
| (1) |
|
| (175) |
Total costs and expenses |
|
| 45,070 |
|
| 21,642 |
Operating (loss) income |
|
| (4,351) |
|
| 1,134 |
Other expenses, net: |
|
|
|
|
|
|
Interest expense, net of interest income |
|
| 1,175 |
|
| 269 |
Total other expenses, net |
|
| 1,175 |
|
| 269 |
(Loss) income before (benefit) provision for income taxes |
|
| (5,526) |
|
| 865 |
(Benefit) provision for income taxes |
|
| (653) |
|
| 96 |
Net (loss) income |
|
| (4,873) |
|
| 769 |
Less: net loss attributable to noncontrolling interest |
|
| (274) |
|
| (85) |
Net (loss) income attributable to The ONE Group Hospitality, Inc. |
| $ | (4,599) |
| $ | 854 |
2221
Increase Our Operating 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 existingThe following table sets forth certain statements of operations through continued focus on high-quality, high-margin food and beverage menu items.
We expect domestic STK same store sales (“SSS”) to grow between 4% and 6% in 2019. For the three months ended June 30, 2019, our domestic SSS increased 6.4% compared to the same prior year period. For the six months ended June 30, 2019, our domestic SSS increased 7.5% compared to the same 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 and six months ended June 30, 2019.
We believe that our operating margins will improve through growth in SSS and a reduction of store-level operating expenses. Our store-level margins for owned STK locations decreased 340 and 70 basis points for the three and six months ended June 30, 2019. As of June 30, 2019, approximately 20% of our owned STK locations were in the first 18 months of operations. New restaurants generally have low store-level margins within the first 18 months of operations. As our footprint increases, we expect to benefit by leveraging system-wide operating efficiencies and best practices through the management of our general and administrative expensesdata as a percentage of overall revenue. We continuetotal revenues for the periods indicated. Certain percentage amounts may not sum to look at opportunitiestotal due to decreaserounding.
|
|
|
|
|
|
| For the Three Months Ended March 31, | ||
|
| 2020 |
| 2019 |
Revenues: |
|
|
|
|
Owned restaurant net revenue |
| 94.7 % |
| 88.2 % |
Management, license and incentive fee revenue |
| 5.3 % |
| 11.8 % |
Total revenues |
| 100.0 % |
| 100.0 % |
Cost and expenses: |
|
|
|
|
Owned operating expenses: |
|
|
|
|
Owned restaurant cost of sales (1) |
| 26.2 % |
| 25.0 % |
Owned restaurant operating expenses (1) |
| 68.7 % |
| 63.3 % |
Total owned operating expenses (1) |
| 94.9 % |
| 88.3 % |
General and administrative (including stock-based compensation of 0.8% and 0.8% for the three months ended March 31, 2020 and 2019 respectively) |
| 8.3 % |
| 11.6 % |
Depreciation and amortization |
| 6.0 % |
| 4.1 % |
Transaction and integration costs |
| 2.7 % |
| —% |
COVID-19 related expenses |
| 3.3 % |
| —% |
Lease termination expenses |
| 0.4 % |
| —% |
Pre-opening expenses |
| —% |
| 2.1 % |
Other income, net |
| —% |
| (0.8)% |
Total costs and expenses |
| 110.7 % |
| 95.0 % |
Operating (loss) income |
| (10.7)% |
| 5.0 % |
Other expenses, net: |
|
|
|
|
Interest expense, net of interest income |
| 2.9 % |
| 1.2 % |
Total other expenses, net |
| 2.9 % |
| 1.2 % |
(Loss) income before (benefit) provision for income taxes |
| (13.6)% |
| 3.8 % |
(Benefit) provision for income taxes |
| (1.6)% |
| 0.4 % |
Net (loss) income |
| (12.0)% |
| 3.4 % |
Less: net loss attributable to noncontrolling interest |
| (0.7)% |
| (0.4)% |
Net (loss) income attributable to The ONE Group Hospitality, Inc. |
| (11.3)% |
| 3.7 % |
(1) | These expenses are being shown as a percentage of owned restaurant net revenue. |
The following tables show our general and administrative expensesoperating results by outsourcing non-core activities and through increases in staff productivity.segment for the periods indicated (in thousands). Prior year amounts have been revised to conform to the current year segment presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | |||||
For the three months ended March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
| $ | 17,383 |
| $ | 20,657 |
| $ | 2,679 |
| $ | — |
| $ | 40,719 |
Operating income (loss) |
|
| 1,543 |
|
| 820 |
|
| 1,820 |
|
| (8,534) |
|
| (4,351) |
Capital asset additions |
| $ | 335 |
| $ | 410 |
| $ | 8 |
| $ | 38 |
| $ | 791 |
As of March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
| $ | 79,512 |
| $ | 88,199 |
| $ | 6,116 |
| $ | 22,354 |
| $ | 196,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | |||||
For the three months ended March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
| $ | 19,245 |
| $ | — |
| $ | 3,060 |
| $ | 471 |
| $ | 22,776 |
Operating income (loss) |
|
| 2,668 |
|
| — |
|
| 2,250 |
|
| (3,784) |
|
| 1,134 |
Capital asset additions |
| $ | 1,726 |
| $ | — |
| $ | 36 |
| $ | 298 |
| $ | 2,060 |
As of December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
| $ | 82,691 |
| $ | 93,829 |
| $ | 8,252 |
| $ | 21,813 |
| $ | 206,585 |
Key Performance Indicators
We use the following key performance indicators in evaluating our restaurants and assessing our business:
Number of Restaurant 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 opened two restaurants in 2019: an owned STK restaurant in Nashville, Tennessee and a licensed STK restaurant in Doha, Qatar.
Average Check. Average check is calculated by dividing total restaurant sales by total entrees sold for a specified 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 three months ended June 30, 2019 was $106.24 compared to $104.66 for the three months ended June 30, 2018. Our average check for SSS restaurants was $108.52 for the six months ended June 30, 2019 compared to $106.50 for the six months ended June 30, 2018.
Average Comparable Restaurant Volume. Average comparable restaurant 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. Our average comparable restaurant volume for the three months ended June 30, 2019 and June 30, 2018 was $2.7 million and $2.5 million, respectively. Our average comparable unit volume for the six months ended June 30, 2019 was $5.4 million compared to $5.0 million for the six months ended June 30, 2018.
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 6.4% for the three months ended June 30, 2019 compared to the three months ended June 30, 2018. Domestic SSS increased 7.5% for the six months ended June 30, 2019 compared to the six months ended June 30, 2018.
23
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,” “Owned food, beverage and other,” and “Managed and Licensed operations.” Our Owned restaurants segment consists of leased restaurant locations and competes in the full-service dining industry. Our Owned food, beverage and other segment consists of hybrid 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 and activities for our major off-site events group. 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.
Revenues
Owned restaurant net revenues. Owned restaurant net revenues consist of food and beverage sales by owned restaurants net of any discounts associated with each sale. For the trailing twelve months ended June 30, 2019, beverage sales comprised 35% of food and beverage sales, before giving effect to any discounts, and food sales comprised the remaining 65%. This indicator assists management in understanding the trends in gross margins of the restaurants because food costs as a percentage of food revenues are typically higher than beverage costs as a percentage of beverage revenues.
Owned food, beverage and other net revenue. 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. Revenues from our major off-site events group also are reflected in this segment.
Management, license and incentive revenue. Management, license and incentive fee revenues include: (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 management 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 sales 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 36% and 37% of our food and beverage costs for the six months ended June 30, 2019 and 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 consist 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, non-cash rent expense, which is a non-cash adjustment included in our Adjusted EBITDA calculation as defined below, common area
24
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 consist 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 include 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 consist of general repair work to maintain our facilities, and 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 complementary purposes. Marketing costs will typically be higher during the first 18 months of a restaurant’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 restaurant 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.
Depreciation and amortization. Depreciation and amortization consist principally of charges related to the depreciation of fixed assets including leasehold improvements, equipment and furniture and fixtures. Because 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 restaurant at either a leased or F&B location. Pre-opening expenses are composed 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 of subsidiaries. Equity in income of subsidiaries represents the income 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 of the Bagatelle New York restaurant, consisting of a 5.23% direct ownership interest by us and a 45.9% ownership interest through Bagatelle Investors and Bagatelle NY. As of June 30, 2019, we recorded our interests in Bagatelle Investors and Bagatelle NY as cost method investments. Prior to June 30, 2019, we had accounted for the investments in these entities under the equity method of accounting. Refer to Note 8 of our consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for further information on our nonconsolidated investments.
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.accounting principles generally accepted in the United States of America (“GAAP”). We define EBITDA as net income before interest expense, provision for income taxes and depreciation and
22
amortization. We define Adjusted EBITDA as net income before interest expense, provision for income taxes, depreciation and amortization, non-cash impairment loss, non-cash rent expense, pre-opening expenses, lease termination expenses, stock-based compensation and non-recurring gains and losses, stock-based compensation and results from discontinued operations.losses. 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.activity
.
We believe that EBITDA and Adjusted EBITDA are appropriate measures of our operating performance, because they eliminate non-cash or non-recurring expenses that do not reflect 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
25
evaluate the performance of our 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 measure 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, 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 28 for our reconciliation of net income 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 three months ended June 30, |
| For the six months ended June 30, | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Owned restaurant net revenues |
| $ | 18,809 |
| $ | 15,520 |
| $ | 36,629 |
| $ | 30,596 |
Owned food, beverage and other net revenues |
|
| 2,134 |
|
| 2,083 |
|
| 4,407 |
|
| 4,088 |
Total owned revenue |
|
| 20,943 |
|
| 17,603 |
|
| 41,036 |
|
| 34,684 |
Management, license and incentive fee revenue |
|
| 2,656 |
|
| 2,708 |
|
| 5,339 |
|
| 5,144 |
Total revenues |
|
| 23,599 |
|
| 20,311 |
|
| 46,375 |
|
| 39,828 |
Cost and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Owned operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Owned restaurants: |
|
|
|
|
|
|
|
|
|
|
|
|
Owned restaurant cost of sales |
|
| 5,068 |
|
| 4,037 |
|
| 9,637 |
|
| 8,071 |
Owned restaurant operating expenses |
|
| 11,856 |
|
| 9,399 |
|
| 22,771 |
|
| 18,777 |
Total owned restaurant expenses |
|
| 16,924 |
|
| 13,436 |
|
| 32,408 |
|
| 26,848 |
Owned food, beverage and other expenses |
|
| 2,225 |
|
| 2,025 |
|
| 4,484 |
|
| 3,714 |
Total owned operating expenses |
|
| 19,149 |
|
| 15,461 |
|
| 36,892 |
|
| 30,562 |
General and administrative (including stock-based compensation of $456, $344, $637 and $668 for the three and six months ended June 30, 2019 and 2018 respectively) |
|
| 2,704 |
|
| 2,615 |
|
| 5,354 |
|
| 5,670 |
Depreciation and amortization |
|
| 1,004 |
|
| 901 |
|
| 1,946 |
|
| 1,679 |
Lease termination expense and asset write-offs |
|
| 141 |
|
| 90 |
|
| 141 |
|
| 90 |
Pre-opening expenses |
|
| 63 |
|
| 671 |
|
| 545 |
|
| 881 |
Transaction costs |
|
| 152 |
|
| — |
|
| 152 |
|
| — |
Equity in income of investee companies |
|
| — |
|
| (134) |
|
| — |
|
| (111) |
Other income, net |
|
| (91) |
|
| (66) |
|
| (266) |
|
| (177) |
Total costs and expenses |
|
| 23,122 |
|
| 19,538 |
|
| 44,764 |
|
| 38,594 |
Operating income |
|
| 477 |
|
| 773 |
|
| 1,611 |
|
| 1,234 |
Other expenses, net: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net of interest income |
|
| 218 |
|
| 290 |
|
| 487 |
|
| 608 |
Loss on early debt extinguishment |
|
| 437 |
|
| — |
|
| 437 |
|
| — |
Total other expenses, net |
|
| 655 |
|
| 290 |
|
| 924 |
|
| 608 |
(Loss) income before provision for income taxes |
|
| (178) |
|
| 483 |
|
| 687 |
|
| 626 |
(Benefit) provision for income taxes |
|
| (15) |
|
| 169 |
|
| 81 |
|
| 194 |
Net (loss) income |
|
| (163) |
|
| 314 |
|
| 606 |
|
| 432 |
Less: net income attributable to noncontrolling interest |
|
| 159 |
|
| 133 |
|
| 74 |
|
| 20 |
Net (loss) income attributable to The ONE Group Hospitality, Inc. |
| $ | (322) |
| $ | 181 |
| $ | 532 |
| $ | 412 |
26
The following table sets forth certain statements of operations data as a percentage of total revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
| For the three months ended June 30, |
| For the six months ended June 30, | ||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
Revenues: |
|
|
|
|
|
|
|
|
Owned restaurant net revenues |
| 79.7 % |
| 76.4 % |
| 79.0 % |
| 76.8 % |
Owned food, beverage and other net revenues |
| 9.0 % |
| 10.3 % |
| 9.5 % |
| 10.3 % |
Total owned revenue |
| 88.7 % |
| 86.7 % |
| 88.5 % |
| 87.1 % |
Management, license and incentive fee revenue |
| 11.3 % |
| 13.3 % |
| 11.5 % |
| 12.9 % |
Total revenues |
| 100.0 % |
| 100.0 % |
| 100.0 % |
| 100.0 % |
Cost and expenses: |
|
|
|
|
|
|
|
|
Owned operating expenses: |
|
|
|
|
|
|
|
|
Owned restaurants: |
|
|
|
|
|
|
|
|
Owned restaurant cost of sales (1) |
| 26.9 % |
| 26.0 % |
| 26.3 % |
| 26.4 % |
Owned restaurant operating expenses (1) |
| 63.0 % |
| 60.6 % |
| 62.2 % |
| 61.4 % |
Total owned restaurant expenses (1) |
| 90.0 % |
| 86.6 % |
| 88.5 % |
| 87.8 % |
Owned food, beverage and other expenses (2) |
| 104.3 % |
| 97.2 % |
| 101.7 % |
| 90.9 % |
Total owned operating expenses (3) |
| 91.4 % |
| 87.8 % |
| 89.9 % |
| 88.1 % |
General and administrative (including stock-based compensation of 1.9%, 1.7%, 1.4% and 1.7% for the three and six months ended June 30, 2019 and 2018 respectively) |
| 11.5 % |
| 12.9 % |
| 11.5 % |
| 14.2 % |
Depreciation and amortization |
| 4.3 % |
| 4.4 % |
| 4.2 % |
| 4.2 % |
Lease termination expense and asset write-offs |
| 0.6 % |
| 0.4 % |
| 0.3 % |
| 0.2 % |
Pre-opening expenses |
| 0.3 % |
| 3.3 % |
| 1.2 % |
| 2.2 % |
Transaction costs |
| 0.6 % |
| —% |
| 0.3 % |
| —% |
Equity in income of investee companies |
| —% |
| (0.7)% |
| —% |
| (0.3)% |
Other income, net |
| (0.4)% |
| (0.3)% |
| (0.6)% |
| (0.4)% |
Total costs and expenses |
| 98.0 % |
| 96.2 % |
| 96.5 % |
| 96.9 % |
Operating income |
| 2.0 % |
| 3.8 % |
| 3.5 % |
| 3.1 % |
Other expenses, net: |
|
|
|
|
|
|
|
|
Interest expense, net of interest income |
| 0.9 % |
| 1.4 % |
| 1.1 % |
| 1.5 % |
Loss on early debt extinguishment |
| 1.9 % |
| —% |
| 0.9 % |
| —% |
Total other expenses, net |
| 2.8 % |
| 1.4 % |
| 2.0 % |
| 1.5 % |
(Loss) income before provision for income taxes |
| (0.8)% |
| 2.4 % |
| 1.5 % |
| 1.6 % |
(Benefit) provision for income taxes |
| (0.1)% |
| 0.8 % |
| 0.2 % |
| 0.5 % |
Net (loss) income |
| (0.7)% |
| 1.5 % |
| 1.3 % |
| 1.1 % |
Less: net income attributable to noncontrolling interest |
| 0.7 % |
| 0.7 % |
| 0.2 % |
| 0.1 % |
Net (loss) income attributable to The ONE Group Hospitality, Inc. |
| (1.4)% |
| 0.9 % |
| 1.1 % |
| 1.0 % |
|
|
|
|
|
|
27
The following tables show our operating results by segment for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the three months ended June 30, 2019 |
| For the three months ended June 30, 2018 | ||||||||||||||||||||
|
|
|
|
| Owned food, |
| Managed and |
|
|
|
|
|
|
| Owned food, |
| Managed and |
|
|
| ||||
|
| Owned |
| beverage and |
| licensed |
|
|
|
| Owned |
| beverage and |
| licensed |
|
|
| ||||||
|
| restaurants |
| other |
| operations |
| Total |
| restaurants |
| other |
| operations |
| Total | ||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned net revenues |
| $ | 18,809 |
| $ | 2,134 |
| $ | — |
| $ | 20,943 |
| $ | 15,520 |
| $ | 2,083 |
| $ | — |
| $ | 17,603 |
Management, license and incentive fee revenue |
|
| — |
|
| — |
|
| 2,656 |
|
| 2,656 |
|
| — |
|
| — |
|
| 2,708 |
|
| 2,708 |
Total revenues |
|
| 18,809 |
|
| 2,134 |
|
| 2,656 |
|
| 23,599 |
|
| 15,520 |
|
| 2,083 |
|
| 2,708 |
|
| 20,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
| 5,068 |
|
| — |
|
| — |
|
| 5,068 |
|
| 4,037 |
|
| — |
|
| — |
|
| 4,037 |
Other operating expenses |
|
| 11,856 |
|
| — |
|
| — |
|
| 11,856 |
|
| 9,399 |
|
| — |
|
| — |
|
| 9,399 |
Owned food, beverage and other expenses |
|
| — |
|
| 2,225 |
|
| — |
|
| 2,225 |
|
| — |
|
| 2,025 |
|
| — |
|
| 2,025 |
Total owned operating expenses |
|
| 16,924 |
|
| 2,225 |
|
| — |
|
| 19,149 |
|
| 13,436 |
|
| 2,025 |
|
| — |
|
| 15,461 |
Segment income (loss) |
| $ | 1,885 |
| $ | (91) |
| $ | 2,656 |
| $ | 4,450 |
| $ | 2,084 |
| $ | 58 |
| $ | 2,708 |
| $ | 4,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
| 2,704 |
|
|
|
|
|
|
|
|
|
|
| 2,615 |
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
| 1,004 |
|
|
|
|
|
|
|
|
|
|
| 901 |
Interest expense, net of interest income |
|
|
|
|
|
|
|
|
|
|
| 218 |
|
|
|
|
|
|
|
|
|
|
| 290 |
Loss on early debt extinguishment |
|
|
|
|
|
|
|
|
|
|
| 437 |
|
|
|
|
|
|
|
|
|
|
| — |
Equity in income of investee companies |
|
|
|
|
|
|
|
|
|
|
| — |
|
|
|
|
|
|
|
|
|
|
| (134) |
Other |
|
|
|
|
|
|
|
|
|
|
| 265 |
|
|
|
|
|
|
|
|
|
|
| 695 |
(Loss) income before provision for income taxes |
|
|
|
|
|
|
|
|
|
| $ | (178) |
|
|
|
|
|
|
|
|
|
| $ | 483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the six months ended June 30, 2019 |
| For the six months ended June 30, 2018 | ||||||||||||||||||||
|
|
|
|
| Owned food, |
| Managed and |
|
|
|
|
|
|
| Owned food, |
| Managed and |
|
|
| ||||
|
| Owned |
| beverage and |
| licensed |
|
|
|
| Owned |
| beverage and |
| licensed |
|
|
| ||||||
|
| restaurants |
| other |
| operations |
| Total |
| restaurants |
| other |
| operations |
| Total | ||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned net revenues |
| $ | 36,629 |
| $ | 4,407 |
| $ | — |
| $ | 41,036 |
| $ | 30,596 |
| $ | 4,088 |
| $ | — |
| $ | 34,684 |
Management, license and incentive fee revenue |
|
| — |
|
| — |
|
| 5,339 |
|
| 5,339 |
|
| — |
|
| — |
|
| 5,144 |
|
| 5,144 |
Total revenues |
|
| 36,629 |
|
| 4,407 |
|
| 5,339 |
|
| 46,375 |
|
| 30,596 |
|
| 4,088 |
|
| 5,144 |
|
| 39,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
| 9,637 |
|
| — |
|
| — |
|
| 9,637 |
|
| 8,071 |
|
| — |
|
| — |
|
| 8,071 |
Other operating expenses |
|
| 22,771 |
|
| — |
|
| — |
|
| 22,771 |
|
| 18,777 |
|
| — |
|
| — |
|
| 18,777 |
Owned food, beverage and other expenses |
|
| — |
|
| 4,484 |
|
| — |
|
| 4,484 |
|
| — |
|
| 3,714 |
|
| — |
|
| 3,714 |
Total owned operating expenses |
|
| 32,408 |
|
| 4,484 |
|
| — |
|
| 36,892 |
|
| 26,848 |
|
| 3,714 |
|
| — |
|
| 30,562 |
Segment income (loss) |
| $ | 4,221 |
| $ | (77) |
| $ | 5,339 |
| $ | 9,483 |
| $ | 3,748 |
| $ | 374 |
| $ | 5,144 |
| $ | 9,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
| 5,354 |
|
|
|
|
|
|
|
|
|
|
| 5,670 |
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
| 1,946 |
|
|
|
|
|
|
|
|
|
|
| 1,679 |
Interest expense, net of interest income |
|
|
|
|
|
|
|
|
|
|
| 487 |
|
|
|
|
|
|
|
|
|
|
| 608 |
Loss on early debt extinguishment |
|
|
|
|
|
|
|
|
|
|
| 437 |
|
|
|
|
|
|
|
|
|
|
| — |
Equity in income of investee companies |
|
|
|
|
|
|
|
|
|
|
| — |
|
|
|
|
|
|
|
|
|
|
| (111) |
Other |
|
|
|
|
|
|
|
|
|
|
| 572 |
|
|
|
|
|
|
|
|
|
|
| 794 |
Income before provision for income taxes |
|
|
|
|
|
|
|
|
|
| $ | 687 |
|
|
|
|
|
|
|
|
|
| $ | 626 |
28
The following table presents a reconciliation of net (loss) income to EBITDA and Adjusted EBITDA for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the three months ended June 30, |
| For the six months ended June 30, |
| For the three months ended March 31, | ||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2020 |
| 2019 | ||||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. |
| $ | (322) |
| $ | 181 |
| $ | 532 |
| $ | 412 |
| $ | (4,599) |
| $ | 854 |
Net income attributable to noncontrolling interest |
|
| 159 |
|
| 133 |
|
| 74 |
|
| 20 | ||||||
Net loss attributable to noncontrolling interest |
|
| (274) |
|
| (85) | ||||||||||||
Net (loss) income |
|
| (163) |
|
| 314 |
|
| 606 |
|
| 432 |
|
| (4,873) |
|
| 769 |
Interest expense, net of interest income |
|
| 218 |
|
| 290 |
|
| 487 |
|
| 608 |
|
| 1,175 |
|
| 269 |
(Benefit) provision for income taxes |
|
| (15) |
|
| 169 |
|
| 81 |
|
| 194 |
|
| (653) |
|
| 96 |
Depreciation and amortization |
|
| 1,004 |
|
| 901 |
|
| 1,946 |
|
| 1,679 |
|
| 2,440 |
|
| 942 |
EBITDA |
|
| 1,044 |
|
| 1,674 |
|
| 3,120 |
|
| 2,913 |
|
| (1,911) |
|
| 2,076 |
Non-cash rent expense (1) |
|
| (2) |
|
| (69) |
|
| (91) |
|
| (89) | ||||||
COVID-19 related expenses |
|
| 1,348 |
|
| — | ||||||||||||
Transaction and integration costs (1) |
|
| 1,095 |
|
| — | ||||||||||||
Stock-based compensation |
|
| 338 |
|
| 181 | ||||||||||||
Lease termination expense (2) |
|
| 179 |
|
| — | ||||||||||||
Non-cash rent expense (3) |
|
| 136 |
|
| (87) | ||||||||||||
Pre-opening expenses |
|
| 63 |
|
| 671 |
|
| 545 |
|
| 881 |
|
| — |
|
| 482 |
Lease termination expense (2) |
|
| 141 |
|
| 90 |
|
| 141 |
|
| 90 | ||||||
Loss on debt extinguishment |
|
| 437 |
|
| — |
|
| 437 |
|
| — | ||||||
Transaction costs (3) |
|
| 152 |
|
| — |
|
| 152 |
|
| — | ||||||
Stock-based compensation |
|
| 456 |
|
| 344 |
|
| 637 |
|
| 668 | ||||||
Adjusted EBITDA |
|
| 2,291 |
|
| 2,710 |
|
| 4,941 |
|
| 4,463 |
|
| 1,185 |
|
| 2,652 |
Adjusted EBITDA attributable to noncontrolling interest |
|
| 205 |
|
| 206 |
|
| 169 |
|
| 164 |
|
| (391) |
|
| (36) |
Adjusted EBITDA attributable to The ONE Group Hospitality, Inc. |
| $ | 2,086 |
| $ | 2,504 |
| $ | 4,772 |
| $ | 4,299 |
| $ | 1,576 |
| $ | 2,688 |
| (1) | Primarily transaction and integration costs incurred with the Kona Grill acquisition and subsequent integration activities and internal costs associated with capital raising activities, most recently the Goldman Sachs Credit Agreement. |
(2) | Lease termination expense are costs associated with closed, abandoned and disputed locations or leases. |
(3) | Non-cash rent expense is included in owned restaurant operating expenses and general and administrative expense on the consolidated statements of operations and comprehensive (loss) income. |
Results of Operations for the Three Months Ended June 30,March 31, 2020 and 2019 and June 30, 2018
Revenues
Owned restaurant net revenues.revenue.Owned restaurant net revenuesrevenue increased $3.3$18.5 million or 21.3%, to $18.8$38.6 million for the three months ended June 30, 2019March 31, 2020 from $15.5$20.1 million for the three months ended June 30, 2018. ThisMarch 31, 2019. Approximately $20.7 million of the increase in owned restaurant revenue was primarily dueattributable to increased sales at our existing, owned locationsthe addition of the Kona Grill restaurants in the first quarter of 2020 compared to the prior year period. The increase in total revenue was partially offset by the temporarily closures and the openinglimited operations of our restaurants in San Diego, California in July 2018 and Nashville, Tennesseebeginning in March 2019. SSS increased 7.8% with an average check increase2020 as a result of 1.5% for the three months ended June 30, 2019 compared to the three months ended June 30, 2018. Our Denver location, which opened in January 2017, was considered a comparable location for SSSCOVID-19. Comparable restaurant sales decreased 14.1% in the three months ended June 30, 2019. To drive revenue, among several strategies, we have emphasized happy-hour and pre-dinner time frames. We have also emphasized group dining and increased efforts in digital marketing.
Owned food, beverage and other revenues. Owned food, beverage and other revenues in eachfirst quarter of the three months ended June 30, 2019 and 2018 was approximately $2.1 million.2020.
Management and license fee revenue.revenue. Management and license fee revenues in each ofdecreased $0.5 million, or 19.4%, to $2.2 million for the three months ended June 30, 2019 and 2018 wasMarch 31, 2020 from $2.7 million.million for the three months ended March 31, 2019. Management and license fee revenues increased related to new STK licensed locations that opened in the second halfrevenue decreased primarily as a result of 2018 or in 2019, including in Mexico City, Mexico, Dubai, United Arab Emirates, and Doha, Qatar. This increase was offset by primarily by the loss of management fee revenue from the One 29 Park, LLC management agreement, which terminated on September 30, 2018, as well as negative currency effects of a weaker British Pound and Euro related tolower sales within our international managed and license locations in the United Kingdom and Italy.Italy related to temporary closures due to COVID-19 prevention measures.
23
Cost and Expenses
Owned restaurant cost of sales.sales. Food and beverage costs for owned restaurants increased approximately $1.1$5.1 million or 27.5%, to $5.1$10.1 million for the three months ended June 30, 2019March 31, 2020 from $4.0$5.0 million for the three months ended June 30, 2018. ThisMarch 31, 2019. Approximately $5.6 million of the increase in owned restaurant cost of sales was primarily dueattributable to increasedthe addition of the Kona Grill restaurants in the first quarter of 2020 compared to the prior year period. The increase in owned restaurant cost of sales at our existing, owned locationswas partially offset by the temporary closures and the openinglimited operations of our restaurants in San Diego, California in July 2018 and Nashville, Tennesseebeginning in March 2019. As a percentage of owned restaurant net revenues, cost of sales increased from 26.0% for the three months ended June 30, 2018 to 26.9% for the three months ended June 30, 2019 primarily due to cost increases in
29
large, premium shrimp and an increased sales mix of food to beverage sales. Food revenues2020 as a percentageresult of total food and beverage revenues were approximately 66% and 63% for the three months ended June 30, 2019 and 2018, respectively. Food costs as a percentage of food revenues are typically higher than beverage costs as a percentage of beverage revenues. COVID-19.
Owned restaurant operating expenses.expenses. Owned restaurant operating expenses increased $2.5$13.8 million or 26.6%, to $11.9$26.5 million for the three months ended June 30, 2019March 31, 2020 from $9.4$12.7 million for the three months ended June 30, 2018. As a percentageMarch 31, 2019. Approximately $14.2 million of owned restaurant net revenues,the increase in owned restaurant operating expenses increased 240 basis pointswas attributable to 63.0% for the three months ended June 30, 2019 from 60.6% for the three months ended June 30, 2018 primarily as a resultaddition of the openings of two owned STKKona Grill restaurants in San Diego, California in July 2018 and Nashville, Tennesseethe first quarter of 2020 compared to the prior year period. The Company began reducing operating costs in March 2019.due to the impact of COVID-19.
Owned food, beverageGeneral and other expensesadministrative. Owned food, beverage General and other expensesadministrative costs increased $0.2approximately $0.7 million, or 10.0%28.2%, to $2.2$3.4 million for the three months ended June 30, 2019March 31, 2020 from $2.0$2.7 million for the three months ended June 30, 2018 due to increased marketing activities from our major off-site events group.
General and administrative. General and administrative costs were approximately $2.6 million for each of the three months ended June 30, 2019 and 2018. Improvements inMarch 31, 2019. However, general and administrative costs related to headcount reductions in the three months ended June 30, 2019 compared to the three months ended June 30, 2018 were offset by increased stock-based compensation expense due to timing of equity issuances. General and administrative costs as a percentage of total revenues decreased from 12.9%to 8.3% for the three months ended June 30, 2018 to 11.5%March 31, 2020 from 11.6% for the three months ended June 30,March 31, 2019. We have implemented measures to reduce our costs while our operations are affected by COVID-19, including significant reductions in employees, deferral of capital projects, and reduction of third-party professional services.
Depreciation and amortization.amortization. Depreciation and amortization expense increased approximately $0.1$1.5 million or 11.1%, to $1.0$2.4 million for the three months ended June 30, 2019March 31, 2020 from $0.9 million for the three months ended June 30, 2018. The increase was primarilyMarch 31, 2019 due to the addition of the Kona Grill restaurants in the first quarter of 2020 compared to the prior year period.
Transaction and integration costs. In the three months ended March 31, 2020, we incurred transaction and integration costs of approximately $1.1 million related to the openingKona Grill acquisition, which closed on October 4, 2019. Over the remainder of 2020, we intend to integrate Kona Grill by leveraging our restaurant in San Diego, California in July 2018corporate infrastructure, our bar-business knowledge and our restaurant in Nashville, Tennessee in March 2019.unique Vibe Dining program, to elevate the brand experience and drive improved performance.
COVID-19 related expenses. In the three months ended March 31, 2020, we incurred approximately $1.3 million of direct costs related to COVID-19, composed primarily of payments to employees for paid-time off during restaurant closures, inventory waste and rent and rent related costs for closed and limited-operations restaurants from the day that the dining room closed.
Lease termination expense and asset write-offs. expensesLease termination expense and asset write-offs for each of. In the three months ending June 30, 2019 and 2018 were $0.1ended March 31, 2020, lease termination expense was approximately $0.2 million. TheseLease termination expenses are costs are associated with closed, abandoned and disputed locations or leases.disputed leases.
Pre-opening expenses.expenses. Pre-opening expenses for the three months ended June 30,March 31, 2019 were $0.1$0.5 million compared to pre-opening expenses of $0.7 million for the three months ended June 30, 2018. In 2018, preopening expenses were primarily related to the development of our restaurant in San Diego, California, which opened in July 2018. In 2019, our preopening expenses related to the opening related expenses of our STK restaurant in Nashville, Tennessee, which opened in March 2019.
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Transaction costs. In the three months ended June 30, 2019, we incurred transaction costs of approximately $0.2 million primarily related to internal costs associated with entering into the Credit Agreement with Bank of America, N.A. on May 15, 2019 as well as preparation costs for our Form S-8 related to shareholder approved changes to the employee equity compensation plan. Refer to Note 6 to our consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for details related to the Credit Agreement.
Equity in income of investee companies. Equity in income of investee companies was approximately $0.1 million for the three months ended June 30, 2018. We did not recognize any equity in income of investee companies for the three months ended June 30, 2019. Refer to Note 8 of our consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for further information on our nonconsolidated investments.
Interest expense, net of interest income. Interest expense, net of interest income was approximately $0.2 million and $0.3 million for the three months ending June 30, 2019 and 2018, respectively.
Loss on early debt extinguishment.On May 15, 2019, in conjunction with entering into a Credit Agreement with Bank of America, N.A., we prepaid the outstanding debt balances to early extinguish the $2.6 million of outstanding term loans with BankUnited, the $5.3 million of outstanding promissory notes with Anson Investments Master Fund LP, and the $1.0 million outstanding promissory note with 2235570 Ontario Limited. We recognized a $0.4 million loss on debt extinguishment primarily caused by the recognition of the unamortized discounts related to warrants issued with the promissory notes and the recognition of unamortized debt issuance costs related to the debt extinguished.
Provision for income taxes. The provision for income taxes for the three months ended June 30, 2019 was a tax benefit of $15.0 thousand compared to tax expense of $169.0 thousand for the three months ended June 30, 2018. Our annual effective tax rate was 10.0% and 35.0% for the three months ended June 30, 2019 and 2018, respectively. Our 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,
30
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.
Net income attributable to noncontrolling interest. Net income attributable to noncontrolling interest was approximately $0.2 million $0.1 million for the three months ended June 30, 2019 and 2018, respectively.
Results of Operations for the Six Months Ended June 30, 2019 and June 30, 2018
Revenues
Owned restaurant net revenues. Owned restaurant net revenues increased $6.0 million, or 19.6%, to $36.6 million for the six months ended June 30, 2019 from $30.6 million for the six months ended June 30, 2018. This increase was primarily due to increased sales at our existing, owned locations and the opening of our restaurants in San Diego, California in July 2018 and Nashville, Tennessee in March 2019. SSS increased 9.1% with an average check increase of 1.9% for the six months ended June 30, 2019 compared to the six months ended June 30, 2018. Our Denver location, which opened in January 2017, was considered a comparable location for SSS in the six months ended June 30, 2019. To drive revenue, among several strategies, we have emphasized happy-hour and pre-dinner time frames. We have also emphasized group dining and increased efforts in digital marketing.
Owned food, beverage and other revenues. Owned food, beverage and other revenues increased $0.3 million, or 7.3%, to $4.4 million for the six months ended June 30, 2019 from $4.1 million for the six months ended June 30, 2018. The increase in revenue was primarily related to the 2019 Super Bowl activities in Atlanta, Georgia for which there was not a similar event in 2018.
Management and license fee revenue. Management and license fee revenues increased $0.2 million, or 3.9%, to $5.3 million for the six months ended June 30, 2019 from $5.1 million for the six months ended June 30, 2018. Management and license fee revenues increased related to new STK licensed locations that opened in the second half of 2018 or in 2019, including in Mexico City, Mexico, Dubai, United Arab Emirates, and Doha, Qatar. This increase was partially offset by the loss of management fee revenue from the One 29 Park, LLC management agreement, which terminated on September 30, 2018, as well as negative currency effects of a weaker British Pound and Euro related to our managed and license locations in the United Kingdom and Italy.
Cost and Expenses
Owned restaurant cost of sales. Food and beverage costs for owned restaurants increased approximately $1.5 million, or 18.5%, to $9.6 million for the six months ended June 30, 2019 from $8.1 million for the six months ended June 30, 2018. This increase was primarily due to increased sales at our existing, owned locations and the opening of our restaurants in San Diego, California in July 2018 and Nashville, Tennessee in March 2019. As a percentage of owned restaurant net revenues, cost of sales decreased from 26.4% for the six months ended June 30, 2018 to 26.3% for the six months ended June 30, 2019 primarily due to the positive impacts of operating initiatives coupled with selective price increases that we implemented in January 2019. This increase was partially offset by inflation of food prices and an increased sales mix of food to beverage sales. Food revenues as a percentage of total food and beverage revenues were approximately 65% and 63% for the six months ended June 30, 2019 and 2018, respectively. Food costs as a percentage of food revenues are typically higher than beverage costs as a percentage of beverage revenues.
Owned restaurant operating expenses. Owned restaurant operating expenses increased $4.0 million, or 21.3%, to $22.8 million for the six months ended June 30, 2019 from $18.8 million for the six months ended June 30, 2018. As a percentage of owned restaurant net revenues, owned restaurant operating expenses increased 80 basis points to 62.2% for the six months ended June 30, 2019 from 61.4% for the six months ended June 30, 2018 primarily as a result of the openings of two owned STK restaurants in San Diego, California in July 2018 and Nashville, Tennessee in March 2019.
Owned food, beverage and other expenses. Owned food, beverage and other expenses increased $0.8 million, or 21.6%, to $4.5 million for the six months ended June 30, 2019 from $3.7 million for the six months ended June 30, 2018. The increase in expense was primarily related to the 2019 Super Bowl activities in Atlanta, Georgia for which there was not a similar event in 2018, and increased marketing activities from our major off-site events group in the second quarter of 2019.
General and administrative. General and administrative costs decreased $0.3 million, or 5.3%, to $5.4 million for the six months ended June 30, 2019 from $5.7 million for the six months ended June 30, 2018. The decrease was primarily due to headcount reductions in 2018 as well as reduced external professional fees. General and administrative costs as a percentage of total revenues decreased from 14.2% for the six months ended June 30, 2018 to 11.5% for the six months ended June 30, 2019.
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Depreciation and amortization. Depreciation and amortization expense increased approximately $0.2 million, or 11.8%, to $1.9 million for the six months ended June 30, 2019 from $1.7 million for the six months ended June 30, 2018. The increase was primarily related to the opening of our restaurant in San Diego, California in July 2018 and our restaurant in Nashville, Tennessee in March 2019.
Lease termination expense and asset write-offs. Lease termination expense and asset write-offs for each of the six months ending June 30, 2019 and 2018 were $0.1 million. These costs are associated with closed, abandoned and disputed locations or leases.
Pre-opening expenses. Pre-opening expenses for the six months ended June 30, 2019 were $0.5 million compared to pre-opening expenses of $0.9 million for the six months ended June 30, 2018. In 2018, preopening expenses were primarily related to the development of our restaurant in San Diego, California, which opened in July 2018. In 2019, our preopening expenses related to the opening related expenses of our STK restaurant in Nashville, Tennessee which opened in March 2019.
Transaction costs. In the six months ended June 30, 2019, we incurred transaction costs of approximately $0.2 million primarily related to internal costs associated to entering into the Credit Agreement with Bank of America, N.A. on May 15, 2019 as well as preparation costs for our Form S-8 related to shareholder approved changes to the employee equity compensation plan. Refer to Note 6 to our consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for details related to the Credit Agreement.
Equity in income of investee companies. Equity in income of investee companies was approximately $0.1 million for the six months ended June 30, 2018. We did not recognize any equity in income of investee companies for the six months ended June 30, 2019. Refer to Note 8 of our consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for further information on our nonconsolidated investments.
Interest expense, net of interest income.income. Interest expense, net of interest income was approximately $0.5$1.2 million and $0.60.3 million for the sixthree months ending June 30,March 31, 2020 and 2019, and 2018, respectively.
Loss on early debt extinguishment.On May 15, 2019, in conjunction with entering into a Credit Agreement with Bank of America, N.A., we prepaid the outstanding debt balances to early extinguish the $2.6 million of outstanding term loans with BankUnited, the $5.3 million of outstanding promissory notes with Anson Investments Master Fund LP, and the $1.0 million outstanding promissory note with 2235570 Ontario Limited. We recognized a $0.4 million loss on debt extinguishment primarily caused by the recognition of the unamortized discounts related to warrants issued with the promissory notes and the recognition of unamortized debt issuance costs related to the debt extinguished.
Provision(Benefit) provision for income taxes.taxes. The provision for income taxes for the sixthree months ended June 30, 2019March 31, 2020 was a tax benefit of $0.7 million compared to tax expense of $81.0 thousand compared to $194.0 thousand$0.1 million for the sixthree months ended June 30, 2018.March 31, 2019. Our annualannualized effective tax rate was 10.2% and 31.0%is estimated at 12.4% for 2020 compared to 9.7% for the sixthree months ended June 30, 2019 and 2018, respectively.March 31, 2019. Our 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)(iii) taxes owed in state and local jurisdictions such as New York, New York City, Colorado and Tennessee.jurisdictions.
Net incomeloss attributable to noncontrolling interest. Net incomeloss attributable to noncontrolling interest was less thanapproximately $0.3 million and $0.1 million for each of the sixthree months ended June 30,March 31, 2020 and 2019, and 2018.respectively.
Liquidity and Capital Resources
On May 15, 2019, we entered into a Credit Agreement with Bank of America, N.A. The Credit Agreement provides for a secured revolving credit facility of $10.0 million and a $10.0 million term loan. The term loan is payable in quarterly installments, with the final payment due in May 2024. The revolving credit facility also matures in May 2024.
The Credit Agreement contains several financial covenants, including (a) a maximum consolidated leverage ratio of (i) 4.75 to 1.00 as of the end of any fiscal quarter ending on or prior to June 30, 2020 and (ii) 4.50 to 1.00 as of the end of any fiscal quarter thereafter and (b) a minimum consolidated fixed charge coverage ratio of 1.35 to 1.00.
The Credit Agreement has several borrowing and interest rate options, including the following: (a) a LIBOR rate (or a comparable successor rate) or (b) a base rate equal to the greater of the prime rate, the federal funds rate plus 0.50% or the LIBOR rate for a one-month period plus 1.00%; provided that the base rate may not be less than zero. Loans under the Credit Agreement bear interest at a
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rate per annum using the applicable indices plus a varying interest rate margin of between 2.75% and 3.50% (for LIBOR rate loans) and 1.75% and 2.50% (for base rate loans).
In conjunction with entering into the Credit Agreement on May 15, 2019, we prepaid the outstanding debt balances to early extinguish the $2.6 million of outstanding term loans with BankUnited, the $5.3 million of outstanding promissory notes with Anson Investments Master Fund LP, and the $1.0 million outstanding promissory note with 2235570 Ontario Limited. We recognized a $0.4 million loss on debt extinguishment within other expenses, net on the consolidated statements of operations and comprehensive income, primarily caused by the recognition of the unamortized discounts related to warrants issued with the promissory notes and the recognition of unamortized debt issuance costs related to the debt extinguished. Additionally, we prepaid the $1.2 million of outstanding cash advances due to the TOG Liquidation Trust, a related party.
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, including
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the costs of opening currently planned new restaurants, through cash provided by operations, borrowings on our Goldman Sachs Credit FacilityAgreement and construction allowances provided by landlords of certain locations.
In the context of our current debt structure and projected cash needs, weWe believe the combination of our cash provided by operations and our credit capacity under ourGoldman Sachs Credit Agreement are adequate to support our immediate business operations and plans.plans. As June 30, 2019,of March 31, 2020, we had cash and cash equivalents of approximately $0.8$8.2 million and long-term debt of $48.0 million, which consisted of our Goldman Sachs Credit Agreement and equipment financing agreements. As of March 31, 2020 the availability pursuant to our revolving credit facility was $10.7 million.
We expect thatIn the three months ended March 31, 2020, our capital expenditures net of amounts received as landlord incentives, in 2019 will be less than prior years because we expect that that the Nashville, Tennessee STK restaurant will be the only new, owned restaurant we open in 2019. In the six months ended June 30, 2019, we have receivedwere approximately $0.5 million of landlord incentives which were primarily used to fund capital expenditures for the construction of new, owned restaurants. We currently anticipate our total capital expenditures for 2019, inclusive of all maintenance expenditures, will be approximately $3.5$0.8 million.
We expect to fund our anticipated capital expenditures for 2019 with current cash on hand, expected cash flows from operations, proceeds from expected tenant improvement allowances, and borrowings under our Credit Facility. 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.
Underlandlords. Additionally, under our current capital light strategy, we plan to enter into management and license agreements for the operation of STKsSTK restaurants 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 six months ended June 30, 2019 and June 30, 2018 (in thousands):
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| For the six months ended June 30, | ||||
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| 2019 |
| 2018 | ||
Net cash provided by (used in): |
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|
Operating activities |
| $ | 2,144 |
| $ | 2,333 |
Investing activities |
|
| (2,917) |
|
| (1,326) |
Financing activities |
|
| 270 |
|
| (1,638) |
Effect of exchange rate changes on cash |
|
| (290) |
|
| 16 |
Net increase in cash and cash equivalents |
| $ | (793) |
| $ | (615) |
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Operating Activities
Net cash provided by operating activities was $2.1 million for the six months ended June 30, 2019 compared to $2.3 million for the six months ended June 30, 2018. The decrease was primarily attributable changes within our working capital accounts, primarily reductions in our accrued expenses, partially offset by improvements in net income and due to increased domestic SSS and the openings of our owned STK restaurants in San Diego, California and Nashville, Tennessee in July 2018 and March 2019, respectively.
Investing Activities
Net cash used in investing activities for the six months ended June 30, 2019 was $2.9 million compared to net cash provided by investing activities of $1.3 million for the six months ended June 30, 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. In the six months ended June 30, 2019, we received $0.5 million of landlord incentives which were primarily used to fund capital expenditures for the construction of new, owned restaurants. The receipt of the landlord incentives were reflected within the change in operating lease liabilities and right-of-use assets within net cash provided by operating activities. In the six months ended June 30, 2018, we received of $0.6 million of proceeds related to the sale of our interest in One 29 Park, a restaurant and rooftop bar located in a New York City hotel.
Financing Activities
Goldman Sachs Credit Agreement
Net cash provided by financing activities forOn October 4, 2019, in conjunction with the six months ended June 30, 2019 was $0.3 million compared to net cash used in financing activitiesacquisition of $1.6 million in the six months ended June 30, 2018. On May 15, 2019,Kona Grill, we entered into athe Goldman Sachs Credit Agreement, withwhich replaced the Bank of America N.A, whichCredit Agreement and provides for a secured revolving credit facility of $10.0$12.0 million and a $10.0$48.0 million term loan. The term loan incurring $0.4 million of debt issuance costs. In conjunctionis payable in quarterly installments, with entering into the final payment due in October 2024. The revolving credit facility also matures in October 2024. Additionally, our consolidated adjusted EBITDA as defined by the Goldman Sachs Credit Agreement for determining covenant compliance includes pro forma adjustments for the annualization of the Kona Grill restaurant performance which includes results before the acquisition date.
As of March 31, 2020, we prepaidwere in compliance with the outstandingcovenants required by the Goldman Sachs Credit Agreement. Based on current projections, we believe that we would continue to comply with the covenants in the Goldman Sachs Credit Agreement, as amended, throughout the twelve months following the issuance of the financial statements.
Refer to Note 6, Note 17 and Note 18 to our consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the terms of our long-term debt balances to early extinguish the $2.6 million of outstanding term loans with BankUnited, the $5.3 million of outstanding promissory notes with Anson Investments Master Fund LP,arrangements and the $1.0 million outstanding promissory note with 2235570 Ontario Limited as well as prepaid the $1.2 million of outstanding cash advances due to the TOG Liquidation Trust, a related party.information regarding our commitments and contingencies.
Capital Expenditures and Lease Arrangements
Given the present uncertainty due to the COVID-19 pandemic, the Company has deferred capital expenditures. To the extent we open new company-owned restaurants, we anticipate capital expenditures would increase fromrelated to the amounts described in “Investing Activities” above.construction of new restaurants compared to general capital expenditures of existing restaurants. Although we are committed to our capital light strategy, in which our capital investment is expected to be limited, we are willing to consider opening owned restaurants as opportunities arise. For owned restaurants, where we build from a shell state, we have typically targeted an average cash investment of approximately $3.8 million for a 10,000 square-foot STK restaurant, net of landlord contributions and equipment financing and excluding pre-opening costs. For locations where we may be the successor restaurant tenant, and currently our preference, total cash investment will be significantly less and in the $1.0 million to $1.5 million range. Typical pre-opening costs will be in the $0.3 million to $0.5 million range. In addition, some of our existing restaurants will require capital improvements to either maintain or improve the facilities. We may add seating or provide enclosures for outdoor space in the next twelve months atfor some of our locations which we expect will increase revenues for those 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 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,such as our pro-rata share of common area maintenance,
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property tax and insurance expenses).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.
For the three months ended March 31, 2020, we spent a total of $0.8 million in capital expenditures, $1.3 million less than the amount spent for the same period in the prior year, and expect to keep capital expenditures at a low level as long as the uncertainty related to COVID-19 continues.
Loan AgreementsCash Flows
AsThe following table summarizes the statement of June 30,cash flows for the three months ended March 31, 2020 and 2019 our long-term debt consisted of a term loan, a revolving credit facility and equipment financing agreements(in thousands):
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| For the three months ended March 31, | ||||
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| 2020 |
| 2019 | ||
Net cash (used in) provided by: |
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|
|
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|
Operating activities |
| $ | (3,103) |
| $ | 2,513 |
Investing activities |
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| (791) |
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| (2,060) |
Financing activities |
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| (226) |
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| (798) |
Effect of exchange rate changes on cash |
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| (64) |
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| (168) |
Net decrease in cash and cash equivalents |
| $ | (4,184) |
| $ | (513) |
Operating Activities. Net cash used in operating activities was $3.1 million for which no additional financing was available. In 2019, we made principal payments of approximately $10.3 million towards our long-term debt, which includes $8.9the three months ended March 31, 2020 compared to $2.5 million of early debt extinguishment payments. As of June 30, 2019, we had approximately $12.7cash generated from operating activities for the three months ended March 31, 2019. The decrease was primarily attributable to the decrease in net income which included $1.3 million of outstanding debtin expenses for payments to third parties.employees for paid-time off during restaurant closures, and inventory waste directly attributable to COVID-19, and $1.1 million in transaction and integration expenses related to the Kona Grill acquisition coupled with $4.4 million reduction in accounts payable and accrued expenses.
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TableInvesting Activities. Net cash used in investing activities for the three months ended March 31, 2020 was $0.8 million compared to $2.1 million for the three months ended March 31, 2019. We have implemented measures to reduce our costs for the foreseeable future due to COVID-19, including the deferral of Contentsmost non-safety related capital projects.
The Credit Agreement with Bank of America, N.A., contains customary representations, warranties and conditionsFinancing Activities. Net cash used in financing activities for the three months ended March 31, 2020 was $0.2 million compared to borrowing including customary affirmative and negative covenants, which include covenants that limit or restrict our ability to incur indebtedness and other obligations, grant liens to secure obligations, make investments, merge or consolidate, and dispose of assets outside$0.8 million in the ordinary course of business, in each case subject to customary exceptions for credit facilities of this size and type. three months ended March 31, 2019As of June 30, 2019, we are in compliance with the covenants required by the Credit Agreement. 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 Regulation S-K.
Recent Accounting Pronouncements
See Note 1 to our consolidated financial statements set forth in Item 1 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 impact of implementing ASC Topic 842.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide this information.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief 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 defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange
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Act is timely recorded, processed, summarized and reported and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the secondfirst quarter of 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are subject to claims common to our industry and in the ordinary course of our business, including lease disputes and employee-related matter.business. Companies in our industry, including us, have been and 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 accrualsaccrual for these matters are adequately provided for in our consolidated financial statements. We do not believe the ultimate resolutions of these matters will have a material adverse effect on our consolidated financial position and results of operations. 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 statements.
See our Annual Report on Form 10-K for the year ended December 31, 2019 for additional risk factors.
The outbreak of COVID-19 has significantly affected our restaurant traffic and our business.
Our business has been adversely affected by the effect of, the public perception of a risk of, and government actions to contain, COVID-19. In December 2019, COVID-19 was identified in Wuhan, China, and subsequently spread to other regions of the world. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic disease. Since early March 2020, we have experienced a significant decline in restaurant traffic and government agencies have since declared a state of emergency in the U.S. and in foreign jurisdictions where we operate, and some government agencies have restricted movement, required restaurant and bar closures, and advised people not to visit restaurants or bars. In some jurisdictions, people have been instructed to shelter in place to reduce the spread of COVID-19. In response to these conditions, we temporarily closed several restaurants and shifted operations at others to provide only take-out and delivery service. We expect our results of operations to be materially and negatively affected by these actions. A prolonged occurrence of COVID-19 may result in further restrictions, including possible travel restrictions and additional restrictions on the restaurant industry. Our efforts to mitigate the effect of COVID-19 on our business may be unsuccessful, and we may not be able to adequately reduce our costs as we move to a take-out and delivery model, with which we have limited experience. Any of these events could result in a sustained, significant drop in restaurant traffic and could have a material adverse effect on us. In the event that the effect of COVID-19 be prolonged, there could be other events that drive risk in the business. For a description of those risks, refer to our Annual Report on Form 10-K for the year ended December, 31, 2019 for additional risk factors.
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(a) Exhibits required by Item 601 of Regulation S-K.
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Exhibit |
| Description |
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| Amended and Restated Bylaws (Incorporated by reference to Form 8-K filed on October 25, 2011) | |
31.1* |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002 |
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002 | |
| ||
| ||
101.CAL* |
| XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* |
| XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* |
| XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* |
| XBRL Taxonomy Extension Presentation Linkbase Document |
101.INS* |
| XBRL Instance Document |
101.SCH* |
| XBRL Taxonomy Extension Schema Document |
*Filed herewith.
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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.
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Dated: |
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| THE ONE GROUP HOSPITALITY, INC. | |
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| By: |
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| Tyler Loy, Chief Financial Officer |
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