UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
| |
| (Mark One) |
|
|
⌧ | |
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the Quarterly Period Ended March 31, |
| |
| OR |
| |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to |
Commission File Number 001‑37379001-37379
|
THE ONE GROUP HOSPITALITY, INC. |
(Exact name of registrant as specified in its charter)
Delaware |
|
|
(State or other jurisdiction of incorporation or |
| (I.R.S. Employer Identification No.) |
|
|
|
1624 Market Street, Suite 311, Denver, Colorado |
| 80202 |
(Address of principal executive offices) |
| Zip Code |
|
(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‑212b-2 of the Exchange Act.
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‑212b-2 of the Exchange Act). Yes ☐◻ No ☒⌧
Number of shares of common stock outstanding as of May 1, 2020: 28,828,675April 30, 2021: 30,164,987
2
THE ONE GROUP HOSPITALITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
|
|
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|
| ||||||
|
| March 31, |
| December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
| | | | | | | ||||||
| | March 31, | | December 31, | ||||||||
|
| 2021 | | 2020 | ||||||||
ASSETS |
| (Unaudited) |
|
|
| | (Unaudited) |
| |
| ||
Current assets: |
|
|
|
|
|
|
| |
|
| |
|
Cash and cash equivalents |
| $ | 8,160 |
| $ | 12,344 | | $ | 28,435 | | $ | 24,385 |
Accounts receivable |
|
| 5,189 |
|
| 10,351 | |
| 4,628 | |
| 5,777 |
Inventory |
|
| 2,490 |
|
| 3,058 | |
| 2,490 | |
| 2,490 |
Other current assets |
|
| 2,005 |
|
| 1,047 | |
| 2,157 | |
| 1,348 |
Due from related parties, net |
|
| 376 |
|
| 341 | ||||||
Due from related parties | |
| 376 | |
| 376 | ||||||
Total current assets |
|
| 18,220 |
|
| 27,141 | |
| 38,086 | |
| 34,376 |
|
|
|
|
|
|
| ||||||
| |
|
| |
|
| ||||||
Property and equipment, net |
|
| 69,183 |
|
| 70,483 | |
| 67,924 | |
| 67,344 |
Operating lease right-of-use assets |
|
| 80,228 |
|
| 81,097 | | | 79,830 | | | 80,960 |
Deferred tax assets, net |
|
| 7,876 |
|
| 7,751 | |
| 12,877 | |
| 13,226 |
Intangibles, net |
|
| 16,965 |
|
| 17,183 | | | 16,110 | | | 16,313 |
Other assets |
|
| 2,372 |
|
| 1,622 | |
| 2,595 | |
| 2,446 |
Security deposits |
|
| 1,337 |
|
| 1,308 | |
| 901 | |
| 904 |
Total assets |
| $ | 196,181 |
| $ | 206,585 | | $ | 218,323 | | $ | 215,569 |
|
|
|
|
|
|
| ||||||
| |
|
| |
|
| ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
| |
|
| |
|
|
Current liabilities: |
|
|
|
|
|
| |
|
| |
|
|
Accounts payable |
| $ | 7,397 |
| $ | 8,274 | | $ | 7,997 | | $ | 7,404 |
Accrued expenses |
|
| 7,642 |
|
| 11,198 | |
| 18,586 | |
| 15,684 |
Deferred license revenue |
|
| 446 |
|
| 332 | |
| 208 | |
| 207 |
Deferred gift card revenue and other |
|
| 2,691 |
|
| 3,183 | |
| 1,682 | |
| 1,990 |
Current portion of operating lease liabilities |
|
| 4,454 |
|
| 4,397 | | | 4,971 | | | 4,817 |
Current portion of CARES Act Loans | |
| 16,247 | |
| 10,057 | ||||||
Current portion of long-term debt |
|
| 696 |
|
| 749 | |
| 548 | |
| 588 |
Total current liabilities |
|
| 23,326 |
|
| 28,133 | |
| 50,239 | |
| 40,747 |
|
|
|
|
|
|
| ||||||
| |
|
| |
|
| ||||||
Deferred license revenue, long-term |
|
| 869 |
|
| 1,036 | |
| 900 | |
| 953 |
Operating lease liabilities, net of current portion |
|
| 97,492 |
|
| 98,278 | | | 97,373 | | | 98,569 |
CARES Act Loans, net of current portion | |
| 2,067 | |
| 8,257 | ||||||
Long-term debt, net of current portion |
|
| 45,123 |
|
| 45,226 | |
| 45,050 | |
| 45,064 |
Total liabilities |
|
| 166,810 |
|
| 172,673 | |
| 195,629 | |
| 193,590 |
|
|
|
|
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| ||||||
| |
|
| |
|
| ||||||
Commitments and contingencies |
|
|
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| |
|
| |
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| ||||||
| |
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| |
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Stockholders’ equity: |
|
|
|
|
|
| |
|
| |
|
|
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 |
|
| 3 |
|
| 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 |
|
| — |
|
| — | ||||||
Common stock, $0.0001 par value, 75,000,000 shares authorized; 29,627,482 and 29,083,183 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively | |
| 3 | |
| 3 | ||||||
Preferred stock, $0.0001 par value, 10,000,000 shares authorized; no shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively | |
| — | |
| — | ||||||
Additional paid-in capital |
|
| 45,229 |
|
| 44,853 | |
| 47,522 | |
| 46,538 |
Accumulated deficit |
|
| (12,490) |
|
| (7,891) | |
| (20,646) | |
| (20,716) |
Accumulated other comprehensive loss |
|
| (2,695) |
|
| (2,651) | |
| (2,664) | |
| (2,646) |
Total stockholders’ equity |
|
| 30,047 |
|
| 34,314 | |
| 24,215 | |
| 23,179 |
Noncontrolling interests |
|
| (676) |
|
| (402) | |
| (1,521) | |
| (1,200) |
Total equity |
|
| 29,371 |
|
| 33,912 | |
| 22,694 | |
| 21,979 |
Total liabilities and equity |
| $ | 196,181 |
| $ | 206,585 | | $ | 218,323 | | $ | 215,569 |
See notes to the condensed consolidated financial statements.
3
THE ONE GROUP HOSPITALITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) INCOME
(Unaudited, in thousands, except (loss) earningsloss per share and related share information)
|
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|
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| ||||||
|
| For the three months ended March 31, | ||||||||||
|
| 2020 |
| 2019 | ||||||||
| | | | | | | ||||||
| | For the three months ended March 31, | ||||||||||
|
| 2021 |
| 2020 | ||||||||
Revenues: |
|
|
|
|
|
|
| |
|
| |
|
Owned restaurant net revenue |
| $ | 38,557 |
| $ | 20,093 | | $ | 49,168 | | $ | 38,557 |
Management, license and incentive fee revenue |
|
| 2,162 |
|
| 2,683 | |
| 1,314 | | | 2,162 |
Total revenues |
|
| 40,719 |
|
| 22,776 | |
| 50,482 | |
| 40,719 |
Cost and expenses: |
|
|
|
|
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| |
|
| |
|
|
Owned operating expenses: |
|
|
|
|
|
| |
|
| |
|
|
Owned restaurant cost of sales |
|
| 10,113 |
|
| 5,026 | |
| 12,001 | | | 10,113 |
Owned restaurant operating expenses |
|
| 26,499 |
|
| 12,717 | |
| 27,906 | | | 26,499 |
Total owned operating expenses |
|
| 36,612 |
|
| 17,743 | |
| 39,907 | |
| 36,612 |
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 | ||||||
General and administrative (including stock-based compensation of $1,022, and $338 for the three months ended March 31, 2021 and 2020 respectively) | |
| 5,174 | | | 3,397 | ||||||
Depreciation and amortization |
|
| 2,440 |
|
| 942 | |
| 2,699 | | | 2,440 |
Transaction and integration costs |
|
| 1,095 |
|
| — | ||||||
COVID-19 related expenses |
|
| 1,348 |
|
| — | | | 1,557 | | | 1,348 |
Transaction costs | |
| — | | | 1,095 | ||||||
Lease termination expenses |
|
| 179 |
|
| — | |
| 187 | | | 179 |
Pre-opening expenses |
|
| — |
|
| 482 | |
| 101 | | | — |
Other income, net |
|
| (1) |
|
| (175) | |
| — | | | (1) |
Total costs and expenses |
|
| 45,070 |
|
| 21,642 | |
| 49,625 | |
| 45,070 |
Operating (loss) income |
|
| (4,351) |
|
| 1,134 | ||||||
Operating income (loss) | |
| 857 | |
| (4,351) | ||||||
Other expenses, net: |
|
|
|
|
|
| |
|
| |
|
|
Interest expense, net of interest income |
|
| 1,175 |
|
| 269 | |
| 1,246 | | | 1,175 |
Total other expenses, net |
|
| 1,175 |
|
| 269 | |
| 1,246 | |
| 1,175 |
(Loss) income before (benefit) provision for income taxes |
|
| (5,526) |
|
| 865 | ||||||
(Benefit) provision for income taxes |
|
| (653) |
|
| 96 | ||||||
Net (loss) income |
|
| (4,873) |
|
| 769 | ||||||
Loss before benefit for income taxes | |
| (389) | |
| (5,526) | ||||||
Benefit for income taxes | |
| (329) | | | (653) | ||||||
Net loss | |
| (60) | |
| (4,873) | ||||||
Less: net loss attributable to noncontrolling interest |
|
| (274) |
|
| (85) | |
| (130) | | | (274) |
Net (loss) income attributable to The ONE Group Hospitality, Inc. |
| $ | (4,599) |
| $ | 854 | ||||||
Net income (loss) attributable to The One Group Hospitality, Inc. | | $ | 70 | | $ | (4,599) | ||||||
Currency translation loss |
|
| (44) |
|
| (160) | |
| (18) | | | (44) |
Comprehensive (loss) income |
| $ | (4,643) |
| $ | 694 | ||||||
|
|
|
|
|
|
| ||||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. per share: |
|
|
|
|
|
| ||||||
Basic net (loss) income per share |
| $ | (0.16) |
| $ | 0.03 | ||||||
Diluted net (loss) income per share |
| $ | (0.16) |
| $ | 0.03 | ||||||
|
|
|
|
|
|
| ||||||
Shares used in computing basic (loss) earnings per share |
|
| 28,636,325 |
|
| 28,314,820 | ||||||
Shares used in computing diluted (loss) earnings per share |
|
| 28,636,325 |
|
| 29,311,756 | ||||||
Comprehensive income (loss) attributable to The ONE Group Hospitality, Inc. | | $ | 52 | | $ | (4,643) | ||||||
| |
|
| |
|
| ||||||
Net income (loss) attributable to The ONE Group Hospitality, Inc. per share: | |
|
| |
|
| ||||||
Basic net income (loss) per share | | $ | — | | $ | (0.16) | ||||||
Diluted net income (loss) per share | | $ | — | | $ | (0.16) | ||||||
| |
|
| |
|
| ||||||
Shares used in computing basic income (loss) per share | |
| 29,168,576 | |
| 28,636,325 | ||||||
Shares used in computing diluted income (loss) per share | |
| 32,031,479 | |
| 28,636,325 |
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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| |||||||||||||||||||||||||
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| Common stock |
| paid-in |
| Accumulated |
| comprehensive |
| Stockholders’ |
| Noncontrolling |
|
|
| |||||||||||||||||||||||||||||||
|
| Shares |
| Par value |
| capital |
| deficit |
| loss |
| equity |
| interests |
| Total | ||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
| | | | | | | | | | | | | Accumulated | | | | | | | | | | ||||||||||||||||||||||||
| | | | | | | Additional | | | | | other | | | | | | | | | | |||||||||||||||||||||||||
| | Common stock | | paid-in | | Accumulated | | comprehensive | | Stockholders’ | | Noncontrolling | | | | |||||||||||||||||||||||||||||||
|
| Shares |
| Par value |
| capital |
| deficit |
| loss |
| equity |
| interests |
| Total | ||||||||||||||||||||||||||||||
Balance at December 31, 2020 |
| 29,083,183 | | $ | 3 | | $ | 46,538 | | $ | (20,716) | | $ | (2,646) | | $ | 23,179 | | $ | (1,200) | | $ | 21,979 | |||||||||||||||||||||||
Stock-based compensation |
| 25,643 | |
| — | | | 1,022 | | | — | | | — | |
| 1,022 | |
| — | |
| 1,022 | |||||||||||||||||||||||
Exercise of warrants |
| 450,971 | |
| — | | | — | | | — | | | — | |
| — | |
| — | |
| — | |||||||||||||||||||||||
Issuance of common shares, net of tax withholding |
| 67,685 | |
| — | | | (154) | | | — | | | — | |
| (154) | |
| — | |
| (154) | |||||||||||||||||||||||
Purchase of noncontrolling interest |
| — | |
| — | | | 116 | | | — | | | — | |
| 116 | |
| (191) | |
| (75) | |||||||||||||||||||||||
Loss on foreign currency translation, net |
| — | |
| — | | | — | | | — | | | (18) | |
| (18) | |
| — | |
| (18) | |||||||||||||||||||||||
Net income (loss) |
| — | |
| — | | | — | | | 70 | | | — | |
| 70 | |
| (130) | |
| (60) | |||||||||||||||||||||||
Balance at March 31, 2021 |
| 29,627,482 | | $ | 3 | | $ | 47,522 | | $ | (20,646) | | $ | (2,664) | | $ | 24,215 | | $ | (1,521) | | $ | 22,694 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
Balance at December 31, 2019 |
| 28,603,829 |
| $ | 3 |
| $ | 44,853 |
| $ | (7,891) |
| $ | (2,651) |
| $ | 34,314 |
| $ | (402) |
| $ | 33,912 |
| 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 | |||||||||||||||||||||||
Stock-based compensation |
| 69,327 | | | — | | | 338 | | | — | | | — | |
| 338 | |
| — | |
| 338 | |||||||||||||||||||||||
Exercise of stock options |
| 18,000 |
|
| — |
|
| 38 |
|
| — |
|
| — |
|
| 38 |
|
| — |
|
| 38 |
| 18,000 | | | — | | | 38 | | | — | | | — | |
| 38 | |
| — | |
| 38 |
Vesting of restricted shares |
| 116,644 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — | |||||||||||||||||||||||
Issuance of common shares, net of tax withholding |
| 116,644 | | | — | | | — | | | — | | | — | |
| — | |
| — | |
| — | |||||||||||||||||||||||
Loss on foreign currency translation, net |
| — |
|
| — |
|
| — |
|
| — |
|
| (44) |
|
| (44) |
|
| — |
|
| (44) |
| — | | | — | | | — | | | — | | | (44) | |
| (44) | |
| — | |
| (44) |
Net loss |
| — |
|
| — |
|
| — |
|
| (4,599) |
|
| — |
|
| (4,599) |
|
| (274) |
|
| (4,873) |
| — | | | — | | | — | | | (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 |
| 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 three months ended March 31, | ||||||||||
|
| 2020 |
| 2019 | ||||||||
| | | | | | | ||||||
| | For the three months ended March 31, | ||||||||||
|
| 2021 |
| 2020 | ||||||||
Operating activities: |
|
|
|
|
|
|
| |
|
| |
|
Net (loss) income |
| $ | (4,873) |
| $ | 769 | ||||||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |
|
|
|
|
|
| ||||||
Net loss | | $ | (60) | | $ | (4,873) | ||||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |
|
| |
|
| ||||||
Depreciation and amortization |
|
| 2,440 |
|
| 942 | |
| 2,699 | |
| 2,440 |
Stock-based compensation |
|
| 338 |
|
| 181 | |
| 1,022 | |
| 338 |
Amortization of discount on warrants and debt issuance costs |
|
| 108 |
|
| 50 | ||||||
Amortization of debt issuance costs | |
| 141 | |
| 108 | ||||||
Deferred taxes |
|
| (125) |
|
| 10 | |
| 349 | |
| (125) |
Changes in operating assets and liabilities: |
|
|
|
|
|
| |
| | |
|
|
Accounts receivable |
|
| 5,092 |
|
| 1,147 | |
| 1,148 | |
| 5,092 |
Inventory |
|
| 568 |
|
| 161 | |
| — | |
| 568 |
Other current assets |
|
| (958) |
|
| (96) | |
| (809) | |
| (958) |
Due from related parties, net |
|
| (35) |
|
| (38) | ||||||
Due from related parties | |
| — | |
| (35) | ||||||
Security deposits |
|
| (32) |
|
| (18) | |
| 3 | |
| (32) |
Other assets |
|
| (807) |
|
| 8 | |
| (164) | |
| (807) |
Accounts payable |
|
| (859) |
|
| 270 | |
| 392 | |
| (859) |
Accrued expenses |
|
| (3,560) |
|
| (1,331) | |
| 2,537 | |
| (3,560) |
Operating lease liabilities and right-of-use assets |
|
| 140 |
|
| 321 | | | 88 | | | 140 |
Deferred revenue |
|
| (540) |
|
| 137 | ||||||
Net cash (used in) provided by operating activities |
|
| (3,103) |
|
| 2,513 | ||||||
Deferred gift card and license revenue | |
| (360) | |
| (540) | ||||||
Net cash provided by (used in) operating activities | |
| 6,986 | |
| (3,103) | ||||||
| |
|
| |
|
| ||||||
Investing activities: |
|
|
|
|
|
| |
|
| |
|
|
Purchase of property and equipment |
|
| (791) |
|
| (2,060) | |
| (2,615) | |
| (791) |
Net cash used in investing activities |
|
| (791) |
|
| (2,060) | |
| (2,615) | |
| (791) |
| |
|
| |
|
| ||||||
Financing activities: |
|
|
|
|
|
| |
|
| |
|
|
Borrowings of long-term debt |
|
| — |
|
| — | ||||||
Repayments of long-term debt |
|
| (216) |
|
| (798) | | | (40) | | | (216) |
Debt issuance costs |
|
| (48) |
|
| — | | | (35) | | | (48) |
Exercise of stock options |
|
| 38 |
|
| — | |
| — | |
| 38 |
Tax-withholding obligation on stock based compensation | |
| (154) | |
| — | ||||||
Purchase of non-controlling interests | |
| (75) | |
| — | ||||||
Net cash used in financing activities |
|
| (226) |
|
| (798) | |
| (304) | |
| (226) |
Effect of exchange rate changes on cash |
|
| (64) |
|
| (168) | |
| (17) | |
| (64) |
Net decrease in cash and cash equivalents |
|
| (4,184) |
|
| (513) | ||||||
Cash and cash equivalents, beginning of year |
|
| 12,344 |
|
| 1,592 | ||||||
Cash and cash equivalents, end of year |
| $ | 8,160 |
| $ | 1,079 | ||||||
Net increase (decrease) in cash and cash equivalents | |
| 4,050 | |
| (4,184) | ||||||
Cash and cash equivalents, beginning of period | |
| 24,385 | |
| 12,344 | ||||||
Cash and cash equivalents, end of period | | $ | 28,435 | | $ | 8,160 | ||||||
Supplemental disclosure of cash flow data: |
|
|
|
|
|
| |
|
| |
|
|
Interest paid |
| $ | 704 |
| $ | 235 | | $ | 1,022 | | $ | 704 |
Income taxes paid |
|
| 85 |
|
| 191 | |
| — | |
| 85 |
Non-cash amortization of debt issuance costs |
| $ | 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 and 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. Turn-key F&B services are food and beverage services that can be scaled, customized and implemented by the Company for the client at a particular hospitality venue and customized for the client.venue. The Company’s primary restaurant brands are STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse, and Kona Grill, a polished casual 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 March 31, 2020,2021 the Company owned, operated, managed or licensed 5554 venues, including 20 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and 1110 F&B venues including sixin five hotels and casinos in the United States and Europe.
Effects of COVID-19
In January 2021, a managed STK restaurant in Scottsdale, Arizona was opened. For those restaurants that are managed or licensed, the first quarter of 2020, the negative effectCompany generates management fees based on top-line revenues and incentive fee revenue based on a percentage of the novel coronavirus (“COVID-19”) onlocation’s revenues and profits.
COVID-19
The COVID-19 pandemic has significantly impacted the Company’s business was significant. The Company experienced an initial decline in restaurant revenue that began in early March 2020 as business traveldue to state and local government mandates, including suspension of in-person dining, reduced seating capacity and social dining decreased. On March 11,distancing. Beginning in mid-March 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 resultdue to government mandated restrictions resulting in the temporary closure 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 shiftedshift in operations at 30 of its restaurants to provide only take-out and delivery service. Starting in May 2020, state and local governments began easing restrictions on stay-at-home orders; however, certain states reimposed restrictions as COVID-19 cases increased during the fall of 2020. In addition to the declineFebruary 2021, many jurisdictions began easing restrictions once again. Currently, all domestic restaurants are open for in-person dining with seating capacity restrictions 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.major metropolitan markets. The Company has implemented measurestaken significant steps to reduceadapt its costsbusiness to increase sales while providing a safe environment for guests and employees, which resulted in a significant increase in revenues during the COVID-19 pandemic, including significant reductions in employees, deferralfirst quarter of capital projects, and negotiations with suppliers and landlords regarding deferral or abatement2021 compared to the fourth quarter of payments which could become significant.2020.
Given the presentongoing uncertainty surrounding the global economy due toeffects of the COVID-19 pandemic, the Company cannot reasonably predict when its closed restaurants will re-open and openour restaurants will be able to return to normal dining room operations. The Company expects that itsCompany’s results of operations willcould be materially and negatively affected by these actionsCOVID-19 in the second quarter of 2020.2021. The Company’s re-opening of closed restaurants and resumption of normal dining operations is subject to events beyond itsour control, including the effectiveness of governmental efforts to halt the spread of COVID-19.
Basis of Presentation
The accompanying condensed consolidated balance sheet as of December 31, 2019,2020, which has been derived from audited financial statements, and the accompanying unaudited interim condensed 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 condensed 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‑K10-K for the year ended December 31, 2019.2020.
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 statements2020 amounts in the segment reporting footnote 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
7
Recent Accounting Pronouncements
In December 2019,June 2020, the American Institute of Certified Public Accountants in conjunction with the Financial Accounting Standards Board (“FASB”) developed Technical Question and Answer (“TQA”) 3200.18, “Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program”, which is intended to provide clarification on how to account for loans received from the Paycheck Protection Program (“PPP”). TQA 3200.18 states that an entity may account for PPP loans under ASC 470, “Debt” or, if the entity is expected to meet PPP eligibility criteria and the PPP loan is expected to be forgiven, the entity may account for the loans under IAS 20, “Accounting for Government Grants and Disclosure of Government Assistance”. Although the Company anticipates forgiveness of the entire amount of the CARES Act Loans, no assurances can be provided that the Company will obtain forgiveness of the CARES Act Loans in whole or in part. Therefore, the Company has elected to account for PPP loan proceeds under ASC 470 as allowed by TQA 3200.18.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides temporary optional expedients and exceptions to ease financial reporting burdens related to applying current GAAP to modifications of contracts, hedging relationships and other transactions in connection with the transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. In January 2021, the FASB issued ASU 2021-01 to clarify that certain optional expedients and exceptions apply to modifications of derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, computing variation margin settlements, and for calculating price alignment interest. ASU 2020-04 is effective beginning on March 12, 2020 and may be applied prospectively to such transactions through December 31, 2022. ASU 2021-01 is effective beginning on January 7, 2021 and may be applied retrospectively or prospectively to such transactions through December 31, 2022. The Company is evaluating the impact of the adoption of ASU 2020-04 and ASU 2021-01 on its financial statements.
In December 2019, FASB issued Accounting Standard UpdatedStandards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” (“ASU 2019-12”) which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Accounting Standard Codification Topic 740, Income Taxes, and it clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for annual and interim periods beginning after December 15, 2020. We adopted ASU No. 2019-12 on January 1, 2021 and it did not have a significant impact to the consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to estimate credit losses. ASU 2016-13 is effective for smaller reporting companies for fiscal years beginning after December 15, 2022. The Company is evaluating the impact of the adoption of ASU 2019-122016-13 on its financial statements but does not expect the adoption of ASU 2019-12 to be material.statements.
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 adoption of ASU 2018-17 did not have a material impact on our financial position, results of operations or cash flows.
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 adoption of ASU 2018-15 did not have a material impact on our financial position, results of operations or cash flows.
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 adoption of ASU 2018-3 did not have a material impact on our disclosures of fair value measurement, which are included in Note 7 – Fair Value of Financial Instruments.
Note 2 – Business Combination
On 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 table 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.
|
|
|
|
|
| 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 |
9
Note 32 – Property and Equipment, net
Property and equipment, net consist of the following (in thousands):
|
|
|
|
|
|
| ||||||
|
| March 31, |
| December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
| | | | | | | ||||||
| | March 31, | | December 31, | ||||||||
| | 2021 | | 2020 | ||||||||
Furniture, fixtures and equipment |
| $ | 20,907 |
| $ | 20,512 | | $ | 22,996 | | $ | 22,328 |
Leasehold improvements |
|
| 70,110 |
|
| 69,925 | |
| 71,960 | |
| 71,654 |
Less: accumulated depreciation and amortization |
|
| (24,218) |
|
| (21,997) | ||||||
Less: accumulated depreciation | |
| (33,009) | |
| (30,948) | ||||||
Subtotal |
|
| 66,799 |
|
| 68,440 | |
| 61,947 | |
| 63,034 |
Construction in progress |
|
| 438 |
|
| 97 | |
| 3,961 | |
| 2,294 |
Restaurant smallwares |
|
| 1,946 |
|
| 1,946 | |
| 2,016 | |
| 2,016 |
Total |
| $ | 69,183 |
| $ | 70,483 | | $ | 67,924 | | $ | 67,344 |
Depreciation and amortization related to property and equipment amounted to $2.2was $2.5 million and $0.9$2.2 million for the three months ended March 31, 20202021 and 2019,2020, respectively. The Company does not depreciate construction in progress, assets not yet put into service or restaurant supplies.smallwares.
8
Note 43 – Intangibles, net
Intangibles, net consists of the following (in thousands):
|
|
|
|
|
|
| ||||||
|
| March 31, |
| December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
| | | | | | | ||||||
| | March 31, | | December 31, | ||||||||
|
| 2021 |
| 2020 | ||||||||
Kona Grill tradename |
| $ | 17,400 |
| $ | 17,400 | | $ | 17,400 | | $ | 17,400 |
Indefinite-lived intangible assets | | | 15 | | | — | ||||||
Less: accumulated amortization |
|
| (435) |
|
| (217) | |
| (1,305) | |
| (1,087) |
Total intangibles, net |
| $ | 16,965 |
| $ | 17,183 | | $ | 16,110 | | $ | 16,313 |
The Kona Grill trade name is amortized using the straight-line method over its estimated useful life of 20 years. Amortization expense was $0.2 million for the three months ending March 31, 2021 and 2020. The Company’s estimated aggregate amortization expense for each of the five succeeding fiscal years is approximately $0.9 million annually.
Note 54 – Accrued Expenses
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
| ||||||
|
| March 31, |
| December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
| | | | | | | ||||||
| | March 31, | | December 31, | ||||||||
| | 2021 | | 2020 | ||||||||
Payroll and related |
| $ | 2,138 |
| $ | 4,519 | | $ | 6,852 |
| $ | 4,860 |
Variable rent, including disputed rent amounts |
|
| 1,770 |
|
| 1,796 | ||||||
Amounts due to landlords | | | 1,541 | | | 1,883 | ||||||
Accrued lease exit costs (2) | | | 4,144 | | | 4,144 | ||||||
VAT and sales taxes | | | 1,610 |
| | 1,119 | ||||||
Legal, professional and other services |
|
| 1,081 |
|
| 1,103 | |
| 807 | | | 462 |
VAT, sales and other taxes |
|
| 689 |
|
| 1,488 | ||||||
Income taxes |
|
| — |
|
| 547 | ||||||
Interest | | | 553 | | | 474 | ||||||
Insurance |
|
| 118 |
|
| 100 | |
| 206 | |
| 330 |
Other |
|
| 1,846 |
|
| 1,645 | |
| 2,873 | |
| 2,412 |
Total |
| $ | 7,642 |
| $ | 11,198 | | $ | 18,586 | | $ | 15,684 |
(1) | Payroll and related includes $2.6 million in employer payroll taxes at March 31, 2021 and December 31, 2020 for which payment has been deferred under the CARES Act. |
(2) | Amount relates to lease exit costs for restaurants never built and still under dispute with landlords. |
10
Note 65 – Long-Term Debt and CARES Act Loans
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
| ||||||
|
| March 31, |
| December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
| | | | | | | ||||||
| | March 31, | | December 31, | ||||||||
| | 2021 | | 2020 | ||||||||
Term loan agreements |
| $ | 47,760 |
| $ | 47,880 | | $ | 47,280 | | $ | 47,400 |
Revolving credit facility |
|
| — |
|
| — | | | — | | | — |
Equipment financing agreements |
|
| 284 |
|
| 380 | |
| 68 | |
| 108 |
Total long-term debt |
|
| 48,044 |
|
| 48,260 | |
| 47,348 | |
| 47,508 |
Less: current portion of long-term debt |
|
| (696) |
|
| (749) | |
| (548) | |
| (588) |
Less: debt issuance costs |
|
| (2,225) |
|
| (2,285) | |
| (1,750) | |
| (1,856) |
Total long-term debt, net of current portion |
| $ | 45,123 |
| $ | 45,226 | | $ | 45,050 | | $ | 45,064 |
Interest expense for all the Company’s debt arrangements, excluding the amortization of debt issuance costs and other discounts and fees, was approximately $1.1 million and $0.2$1.1 million for the three months ended March 31, 2021 and 2020, and 2019, respectively.
As of March 31, 2020,2021, the Company had $1.3 million in standby letters of credit outstanding for certain restaurants and $10.7 million available in its revolving credit facility. Asfacility, subject to certain conditions.
9
Goldman Sachs Bank USA Credit and Guaranty Agreement
On October 4, 2019, in conjunction with the acquisition of Kona Grill, the Company entered into a credit and guaranty agreement with Goldman Sachs Bank USA (“Goldman Sachs Credit Agreement”). The Goldman Sachs Credit Agreement provides for a secured revolving credit facility of $12.0 million and a $48.0 million term loan. The term loan is payable in quarterly installments, with the final payment due in October 2024. The revolving credit facility also matures in October 2024. Additionally,
On May 4, 2020, Goldman Sachs Bank USA (“GSB”), as administrative agent, collateral agent and lead arranger under the Company’s consolidated adjusted EBITDACredit 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 byunder the Goldman Sachs 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 determining covenant compliance includes pro forma adjustmentspurposes 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 annualizationrepayment of the Kona Grill restaurant performance which includes results beforeCARES Act Loans.
On May 8, 2020 and August 10, 2020, GSB and the acquisition date.
The Goldman SachsCompany and certain of its subsidiaries amended the Credit Agreement. A summary of the financial covenants under the Credit Agreement, contains several financial covenants, including the following:as amended, is as follows:
|
|
| A maximum consolidated |
| Maximum consolidated capital expenditures not to exceed (i) |
| Minimum consolidated liquidity of not |
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) 2.50 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)(ii) 2.00 to 1.00 as of the fiscal quarter ending March 31, 2021, (iv)(iii) 1.75 to 1.00 as of the fiscal quarter ending June 30, 2021, (v)(iv) 1.70 to 1.00 as of the fiscal quarter ending September 30, 2021, (vi)(v) 1.65 to 1.00 as of the fiscal quarter ending December 31, 2021, and (vii)(vi) 1.50 to 1.00 as of the end of any fiscal quarter thereafter. In addition, after giving effect to any new borrowings under the revolving credit facility, the Company’s cash and 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% floorfloor; or (b) a base rate equal to the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50%, (iii) the LIBOR rate for a one-month period plus 1.00%, 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 5.75% and 6.75% (for LIBOR rate loans) and 4.75% and 5.75% (for base rate loans). The Company’s weighted average interest rate on the borrowings under the Credit Agreement as of March 31, 2021 and December 31, 2020 was 8.50% and 8.50%, respectively.
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 condensed consolidated balance sheets. As of March 31, 2020,2021, the Company was in compliance with the covenants required by the Goldman Sachs Credit Agreement.
10
Equipment Financing Agreements
On June 5, 2015 and August 16, 2016, the Company entered into financing agreements with Sterling National Bank for $1.0 million and $0.7 million, respectively, to purchase equipment for the STKs in Orlando, Chicago, San Diego, and Denver. Each of these financing agreements have five- yearhas five-year terms and bear interest at a rate of 5% per annum, payable in equal monthly installments.
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.
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 USA may declare a default of the CARES Act Loans if the SBA disputes the validity of the guaranty of indebtedness, if a material adverse change occurs in the Company’s financial condition, or if BBVA USA 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 USA may declare principal and unpaid interest immediately due and payable, and it may charge default interest of 10%.
The CARES Act Loans are eligible for forgiveness if the proceeds are used for qualified purposes within a specified period and if at least 60% is spent on payroll costs. The Company has used all of the proceeds from the CARES Act Loans for qualified purposes in accordance with the CARES Act and SBA regulations, and these funds have supported the re-opening of in person dining and the return of approximately 3,000 furloughed employees to work. The Company applied for forgiveness of the CARES Act Loans in February 2021. The Company anticipates forgiveness of the entire amount of CARES Act Loans; however, no assurance can be provided that the Company will obtain forgiveness of the CARES Act Loans in whole or in part. Therefore, the Company has elected to classify the entire principal amount of the CARES Act Loans as debt. If repayment is required, principal and interest payments are expected to be repaid beginning in August 2021, ten months after the end of the covered period which was from April 2020 to October 2020.
Note 76 – 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 March 31, 2020.2021.
The Company’s long-term debt, including the current portion, is carried at cost on the condensed 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 issuesissuers with similar terms and maturities.
The estimated fair values of long-term debt, for which carrying values do not approximate fair value, are as follows (in thousands):
|
|
|
|
|
|
|
|
| March 31, |
| December 31, | ||
|
| 2020 |
| 2019 | ||
Carrying amount of long-term debt, including current portion (1) |
| $ | 48,044 |
| $ | 48,260 |
Fair value of long-term debt, including current portion |
| $ | 37,454 |
| $ | 35,471 |
|
|
maturities.
Note 87 – Nonconsolidated Variable Interest Entities and Related Party TransactionsBagatelle
As of March 31, 20202021 and December 31, 2019,2020, 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. The Company records its retained interests in Bagatelle Investors and Bagatelle NY as cost method investments as the Company has determined that it does not have the ability to exercise significant influence over its investees, Bagatelle Investors and Bagatelle NY. As of March 31, 20202021 and December 31, 2019,2020, the Company has zero carrying value in these cost method investments.
1211
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 the three months ended March 31, 2020 and 2019, respectively. The Company also receives rental income from Bagatelle NY for restaurant space that it subleases to Bagatelle NY. Rental income of approximately $0.1 million was recorded from this entity for each of the three months ended March 31, 2020 and 2019, respectively.
Net receivables from the Bagatelle Investors and Bagatelle NYentities included in due from related parties, net were approximately $0.4 million and $0.3 million as of March 31, 20202021 and December 31, 2019, respectively.2020. These receivables represent the Company’s maximum exposure to loss. Upon expiration of the lease in November 2020, the Company exited its contract with Bagatelle.
Note 98 – Income taxes
Income taxes for the three months ended March 31, 2021 are recorded at the Company’s estimated annual effective income tax rate, subject to adjustments for discrete events, should they occur. The Company’s effective income tax rate was 84.4% for the three months ended March 31, 2021 compared to 11.8% for the three months ended March 31, 2020 compared to 11.1%2020. The Company’s annualized effective tax rate is estimated at approximately 20.8% for the three months ended March 31, 2019.2021. 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;tax credits for FICA taxes on certain employees’ tips (ii) taxes owed in foreign jurisdictions such as the United Kingdom, Canada and Italy; and, (iii) taxes owed in state and local jurisdictions.jurisdictions; and (iv) the tax effect of non-deductible compensation. Income tax benefit recorded for the three months ended March 31, 2021 also included the discrete period tax benefits resulting from the vesting of restricted stock units.
The CARES Act includes provisions allowing for the carryback of net operating losses generated for specific periods and technical amendments regarding the expensing of qualified improvement property. The CARES Act also allows for the deferral of the employer-paid portion of social security taxes, which the Company has elected to defer.
The Company is subject to income taxes in the U.S. federal jurisdiction, and the various states and local jurisdictions in which it operates. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In the normal course of business, the Company is subject to examination by the federal, state, local and foreign taxing authorities.
Note 109 – Revenue from contracts with customers
The following table provides information about contract receivables and liabilities from contracts with customers, which include deferred license revenue, deferred gift card revenue and the Konavore rewards program (in thousands):
|
|
|
|
|
|
| ||||||
|
| March 31, |
| December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
| | | | | | | ||||||
|
| March 31, |
| December 31, | ||||||||
| | 2021 | | 2020 | ||||||||
Receivables (1) |
| $ | 125 |
| $ | 250 | | $ | 125 | | $ | 125 |
Deferred license revenue (2) |
| $ | 1,315 |
| $ | 1,368 | | $ | 1,108 | | $ | 1,160 |
Deferred gift card and gift certificate revenue (3) |
| $ | 2,594 |
| $ | 3,210 | | $ | 1,429 | | $ | 1,945 |
Konavore rewards program (4) |
| $ | 86 |
| $ | 84 | | $ | 110 | | $ | 102 |
(1) |
| Receivables are included in accounts receivable on the condensed consolidated balance sheets. |
(2) |
| Includes the current and long-term portion of deferred license revenue. |
(3) |
| Deferred gift card revenue is included in deferred gift card revenue and other on the condensed consolidated balance sheets. |
(4) |
| Konavore rewards program is included in accrued expenses on the condensed consolidated balance sheets. |
Significant changes in deferred license revenue and deferred gift card revenue for the three months ended March 31, 20202021 and 20192020 are as follows (in thousands):
|
|
|
|
|
|
| ||||||
|
| March 31, |
| March 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
| | | | | | | ||||||
|
| March 31, |
| March 31, | ||||||||
| | 2021 | | 2020 | ||||||||
Revenue recognized from deferred license revenue |
| $ | 52 |
| $ | 55 | | $ | 52 | | $ | 52 |
Revenue recognized from deferred gift card revenue |
| $ | 746 |
| $ | 283 | | $ | 587 | | $ | 746 |
As of March 31, 2020, theThe estimated deferred license revenue to be recognized in the future related to performance obligations that are unsatisfied as of March 31, 20202021 were as follows for each year ending (in thousands):
|
|
|
| |||
2020, nine months remaining |
| $ | 154 | |||
2021 |
|
| 206 | |||
| | | | |||
2021, nine months remaining |
| $ | 155 | |||
2022 |
|
| 181 |
| | 180 |
2023 |
|
| 169 |
| | 169 |
2024 |
|
| 134 |
| | 134 |
2025 |
| | 133 | |||
Thereafter |
|
| 471 |
| | 337 |
Total future estimated deferred license revenue |
| $ | 1,315 | | $ | 1,108 |
1312
Note 1110 – Leases
The components of lease expense for the period were as follows (in thousands):
|
|
|
|
|
|
| ||||||||||
|
| March 31, |
|
| March 31, |
| ||||||||||
|
| 2020 |
|
| 2019 |
| ||||||||||
| | | | | | | ||||||||||
| | March 31, |
| | March 31, |
| ||||||||||
| | 2021 |
| | 2020 |
| ||||||||||
Lease cost |
|
|
|
|
|
| | | | | | | ||||
Operating lease cost |
| $ | 3,297 |
|
| $ | 1,726 |
|
| $ | 3,298 | |
| $ | 3,297 | |
Variable lease cost |
| 1,156 |
|
| 674 |
| | 767 | | | 1,156 | | ||||
Short-term lease cost |
| 128 |
|
| 108 |
| | 138 | | | 128 | | ||||
Sublease income |
|
| (135) |
|
|
| (203) |
| | | — | | | | (135) | |
Total lease cost |
| $ | 4,446 |
|
| $ | 2,305 |
|
| $ | 4,203 | |
| $ | 4,446 | |
|
|
|
|
|
|
| ||||||||||
| | | | | | | ||||||||||
Weighted average remaining lease term – operating leases |
| 13 years |
|
| 14 years |
| | 12 years | | | 13 years | | ||||
Weighted average discount rate – operating leases |
| 8.49 | % |
| 8.25 | % | | 8.09 | % | | 8.49 | % |
Due to the negative effects of COVID-19, the Company implemented measures to reduce its costs, including negotiations with landlords regarding rent concessions. The Company subleases one restaurant spaceis in ongoing discussions with landlords regarding rent obligations, including deferrals, abatements, and/or restructuring of rent. As the rent concessions received and currently being contemplated do not result in 2019 subleased office space where it did not usea significant increase in cash payments, the entire space for its operations. For the three months ended March 31, 2020 and 2019, sublease income was $0.1 million and $0.2 million, respectively, of which $0.1 million and $0.1 million, respectively, was from a related party, Bagatelle NY. Refer to Note 8 for details on transactions with this related party.
The Company has entered into anelected to account for these concessions as a variable lease payment in accordance with ASC Topic 842. The Company’s right-of-use assets and operating lease liabilities have not been remeasured for one future restaurant that has not yet commencedlease concessions received. Variable lease cost is comprised of percentage rent and common area maintenance, offset by rent concessions received as a result of March 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 will have a lease term of 11 years.COVID-19.
Supplemental cash flow information related to leases for the period was as follows (in thousands):
|
|
|
|
| ||||||||
|
| March 31, |
| March 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
| | | | | ||||||||
| | March 31, | | March 31, | ||||||||
| | 2021 | | 2020 | ||||||||
Cash paid for amounts included in the measurement of operating lease liabilities |
| $ | 3,161 |
| $ | 1,718 |
| $ | 2,514 |
| $ | 3,161 |
Right-of-use assets obtained in exchange for operating lease obligations |
| $ | 288 |
| $ | 281 |
| $ | — |
| $ | 288 |
As of March 31, 2020,2021, maturities of the Company’s operating lease liabilities are as follows (in thousands):
|
|
| ||||
2020, nine months remaining |
| $ | 9,775 | |||
2021 |
| 12,843 | ||||
| | | ||||
2021, nine months remaining | | $ | 10,066 | |||
2022 |
| 12,801 | | 13,232 | ||
2023 |
| 13,087 | | 13,531 | ||
2024 |
| 12,486 | | 12,927 | ||
2025 | | 11,893 | ||||
Thereafter |
|
| 115,862 | | | 112,866 |
Total lease payments |
| 176,854 | | 174,515 | ||
Less: imputed interest |
|
| (74,908) | | | (72,171) |
Present value of operating lease liabilities |
| $ | 101,946 |
| $ | 102,344 |
For the nine months remaining in 2020,2021, the Company’s operating lease liabilities does not include future rent abatements that have been or will be negotiated with landlords.
13
Note 1211 – (Loss) earningsEarnings 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 months ended March 31, 2021 and 2020, and 2019, the income (loss) earnings per share was calculated as follows (in thousands, except earningsloss per share and related share data):
|
|
|
|
|
|
| ||||||
|
| Three months ended March 31, | ||||||||||
|
| 2020 |
| 2019 | ||||||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. |
| $ | (4,599) |
| $ | 854 | ||||||
|
|
|
|
|
|
| ||||||
| | | | | | | ||||||
| | Three months ended March 31, | ||||||||||
|
| 2021 |
| 2020 | ||||||||
Net income (loss) attributable to The One Group Hospitality, Inc. | | $ | 70 | | $ | (4,599) | ||||||
| |
|
| |
| | ||||||
Basic weighted average shares outstanding |
|
| 28,636,325 |
|
| 28,314,820 | |
| 29,168,576 | |
| 28,636,325 |
Dilutive effect of stock options, warrants and restricted share units |
|
| — |
|
| 996,936 | |
| 2,862,903 | |
| — |
Diluted weighted average shares outstanding |
|
| 28,636,325 |
|
| 29,311,756 | |
| 32,031,479 | |
| 28,636,325 |
|
|
|
|
|
|
| ||||||
Net (loss) income available to common stockholders per share - Basic |
| $ | (0.16) |
| $ | 0.03 | ||||||
Net (loss) income available to common stockholders per share - Diluted |
| $ | (0.16) |
| $ | 0.03 | ||||||
| |
|
| |
|
| ||||||
Net income (loss) available to common stockholders per share - Basic | | $ | — | | $ | (0.16) | ||||||
Net income (loss) available to common stockholders per share - Diluted | | $ | — | | $ | (0.16) |
For the three months ended March 31, 2021 and 2020, all equivalent shares underlying options, warrants0.3 million and restricted share units were anti-dilutive as the Company was in a net loss position. For the three months ended March 31, 2019, 0.92.1 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.share, respectively.
Note 13 – Stockholders’ Equity
Significant changes in stockholders’ equity for the three months ended March 31, 2020 and 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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, 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 1412 – Stock-Based Compensation and Warrants
As of March 31, 2020,2021, the Company had 1,301,357704,668 remaining shares available for issuance under the 2019 Equity Incentive Plan (“2019 Equity Plan”).
Stock-based compensation cost for the three months ended March 31, 2021 and 2020 was $1.0 million and 2019 was $0.3 million, and $0.2 million, respectively, andrespectively. Stock-based compensation is included in general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss) income.. Included in stock-based compensation cost was $0.1 million and $0.1 million of unrestricted stock granted to directors for the three months ended March 31, 2020.2021 and 2020, respectively. Such grants were awarded consistent with the Board’sBoard of Director’s compensation practices. In addition, stock-based compensation expense for the three months ended March 31, 2021 includes $0.3 million of compensation costs for the vesting of market condition based options and RSUs.
15
Stock Option Activity
Stock options in the table below includes both time based and market condition based awards. Changes in outstanding stock options during the three months ended March 31, 20202021 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
| $ | — |
| | | | | | | | | | |
| | | | | | Weighted | | | | |
| | | | Weighted | | average | | Intrinsic | ||
| | | | average exercise | | remaining | | value | ||
|
| Shares |
| price |
| contractual life |
| (thousands) | ||
Outstanding at December 31, 2020 |
| 2,286,410 | | $ | 3.29 |
| 4.97 years | | $ | 1,879 |
Exercisable at December 31, 2020 |
| 1,443,675 | | $ | 3.57 |
| 4.68 years | | $ | 1,112 |
Granted |
| — | |
| — |
|
| |
|
|
Exercised |
| — | |
| — |
|
| |
|
|
Cancelled, expired or forfeited |
| — | |
| — |
|
| |
|
|
Outstanding at March 31, 2021 | �� | 2,286,410 | | $ | 3.29 |
| 4.72 years | | $ | 9,590 |
Exercisable at March 31, 2021 |
| 2,045,743 | | $ | 3.41 |
| 4.54 years | | $ | 8,323 |
14
A summary of the status of the Company’s non-vested stock options as of December 31, 20192020 and March 31, 20202021 and changes during the three months then ended, is presented below:
|
|
|
|
|
|
|
|
|
| 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 |
| | | | | |
| | | | Weighted average | |
|
| Shares |
| grant date fair value | |
Non-vested stock options at December 31, 2020 |
| 263,333 | | $ | 0.99 |
Vested |
| (22,667) | |
| 1.55 |
Non-vested stock options at March 31, 2021 |
| 240,666 | | $ | 0.94 |
The fair value of options that vested in the three months ended March 31, 2020 were2021 was less than $0.1 million. As of March 31, 2020, there are 579,402 milestone-based options outstanding, and2021, 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 March 31, 2020, there is approximately $0.3$0.1 million of total unrecognized compensation cost related to non-vested awards, which will be recognized over a weighted-average period of 2.51.4 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 three months ended March 31, 20202021 is presented below:
|
|
|
|
|
| |||||
|
|
|
| Weighted average | ||||||
|
| Shares |
| grant date fair value | ||||||
Non-vested RSUs at December 31, 2019 |
| 955,011 |
| $ | 2.69 | |||||
| | | | | | |||||
| | | | Weighted average | ||||||
|
| Shares |
| grant date fair value | ||||||
Non-vested RSUs at December 31, 2020 |
| 1,871,592 | | $ | 1.68 | |||||
Granted |
| 1,240,599 |
|
| 1.19 |
| 421,381 | |
| 5.09 |
Vested |
| (116,644) |
|
| 2.97 |
| (910,540) | |
| 1.75 |
Cancelled, expired or forfeited |
| (4,000) |
|
| 3.25 |
| (12,000) | |
| 2.50 |
Non-vested RSUs at March 31, 2020 |
| 2,074,966 |
| $ | 1.77 | |||||
Non-vested RSUs at March 31, 2021 |
| 1,370,433 | | $ | 2.73 |
As of March 31, 2020, 150,000 RSUs subject to performance-based vesting were still outstanding, and there is approximately $0.4 million of unrecognized compensation cost related to these milestone-based options. As of March 31, 2020,2021, the Company had approximately $2.9$3.2 million of total unrecognized compensation costs related to RSUs, which will be recognized over a weighted average period of 2.52.4 years.
Warrants
As of December 31, 2020, there were 865,000 warrants available to be exercised at exercise prices ranging from $1.63 to $2.61. During the first quarter of 2021, the Company issued 450,971 shares in connection with the cashless exercise by Anson Investments Master Fund LP of 640,000 warrants. As of March 31, 2021, there were 225,000 warrants available to be exercised. In April 2021, the Company issued 100,000 shares to 22235570 Ontario Limited in connection with its exercise of a warrant for aggregate consideration of $261,000.
1615
Note 1513 – Segment Reporting
In the fourth quarter of 2019, in conjunction with the Kona Grill acquisition, the Company implemented certain organizational changes, including the reorganization of ourthe Company’s internal reporting structure to better facilitate ourits strategy for growth and operational efficiency. As a result of these organizational changes, the Company has identified its reportable operating segments as 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, |
| Corporate. The Corporate segment consists of the following: general and administrative costs, stock-based compensation, depreciation and amortization, acquisition related gains and losses, |
The Company’s Chief Executive Officer, who is 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, defined as revenues less operating expenses, related to the Company’s four operating segments.
Certain financial information relating to the three months ended March 31, 20202021 and 20192020 for each segment is provided below (in thousands). Prior year amounts have been revised to conform to the current year segment presentation.
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
| |||||||||||||||
|
| STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | ||||||||||||||||||||
For the three months ended March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
| | | | | | | | | | | | | | | | |||||||||||||||
|
| STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | ||||||||||||||||||||
For the three months ended March 31, 2021 | | | | | | | | | | | | | | | | |||||||||||||||
Total revenues |
| $ | 17,383 |
| $ | 20,657 |
| $ | 2,679 |
| $ | — |
| $ | 40,719 |
| $ | 24,691 |
| $ | 25,577 |
| $ | 33 |
| $ | 181 | | $ | 50,482 |
Operating income (loss) |
|
| 1,543 |
|
| 820 |
|
| 1,820 |
|
| (8,534) |
|
| (4,351) | | $ | 5,596 | | $ | 2,450 | | $ | (321) | | $ | (6,868) | | $ | 857 |
Capital asset additions |
| $ | 335 |
| $ | 410 |
| $ | 8 |
| $ | 38 |
| $ | 791 | | $ | 1,476 | | $ | 529 | | $ | 15 | | $ | 595 | | $ | 2,615 |
As of March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
As of March 31, 2021 | | | | | | | | | | | | | | | | |||||||||||||||
Total assets |
| $ | 79,512 |
| $ | 88,199 |
| $ | 6,116 |
| $ | 22,354 |
| $ | 196,181 | | $ | 82,198 | | $ | 97,631 | | $ | 4,901 | | $ | 33,593 | | $ | 218,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
|
| STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | ||||||||||||||||||||
For the three months ended March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
| | | | | | | | | | | | | | | | |||||||||||||||
| | STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | ||||||||||||||||||||
For the three months ended March 31, 2020 | | | | | | | | | | | | | | | | |||||||||||||||
Total revenues |
| $ | 19,245 |
| $ | — |
| $ | 3,060 |
| $ | 471 |
| $ | 22,776 | | $ | 19,051 | | $ | 20,657 | | $ | 924 | | $ | 87 | | $ | 40,719 |
Operating income (loss) |
|
| 2,668 |
|
| — |
|
| 2,250 |
|
| (3,784) |
|
| 1,134 | | $ | 2,291 | | $ | (339) | | $ | 73 | | $ | (6,376) | | $ | (4,351) |
Capital asset additions |
| $ | 1,726 |
| $ | — |
| $ | 36 |
| $ | 298 |
| $ | 2,060 | | $ | 335 | | $ | 410 | | $ | 8 | | $ | 38 | | $ | 791 |
As of December 31, 2019 |
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|
|
|
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|
|
|
|
|
|
|
|
|
| |||||||||||||||
As of December 31, 2020 | | | | | | | | | | | | | | | | |||||||||||||||
Total assets |
| $ | 82,691 |
| $ | 93,829 |
| $ | 8,252 |
| $ | 21,813 |
| $ | 206,585 | | $ | 81,431 | | $ | 96,262 | | $ | 5,484 | | $ | 32,392 | | $ | 215,569 |
Note 1614 – Geographic Information
Certain financial information by geographic location is provided below (in thousands).
| | | | | | |
| | For the three months ended March 31, | ||||
|
| 2021 |
| 2020 | ||
Domestic revenues |
| $ | 50,288 |
| $ | 39,977 |
International revenues | |
| 194 | |
| 742 |
Total revenues | | $ | 50,482 | | $ | 40,719 |
|
|
|
|
|
|
|
|
| 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 |
17
| | | | | | |
| | March 31, | | December 31, | ||
| | 2021 | | 2020 | ||
Domestic long-lived assets |
| $ | 179,972 |
| $ | 180,935 |
International long-lived assets | |
| 266 | |
| 258 |
Total long-lived assets | | $ | 180,238 | | $ | 181,193 |
16
Note 1715 – Commitments 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 and judgments, 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:
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|
|
|
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.
18
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, 2019. Factors that might2020. A number of factors could cause actual eventsresults or resultsoutcomes to differ materially from those indicated by thesesuch forward-looking statements, include matters such asincluding but not limited to: (1) the effect and durationeffects of the 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 impactpandemic on our business, including government restrictions on our ability to operate our restaurants and changes in customer behavior, and our ability to re-hire employees; (2) our ability to open new restaurants and food and beverage locations in current and additional markets, grow and manage growth profitably, maintain relationships with suppliers and obtain adequate supply of Federalproducts and State legislation, litigation,retain our key employees; (3) factors beyond our control that affect the executionnumber and timing of new restaurant openings, including weather conditions and factors under the control of landlords, contractors and regulatory and/or licensing authorities; (4) our ability to successfully improve performance and cost, realize the benefits of our growth strategymarketing efforts and achieve improved results as we focus on developing new management and license deals; (5) changes in applicable laws or regulations; (6) the possibility that The ONE Group may be adversely affected by other matters. economic, business, and/or competitive factors; and (7) other risks and uncertainties. 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 condensed 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, 2019.2020.
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.
Business Summary
We are a global hospitality company that develops, owns and operates, manages and 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. Turn-key F&B services are food and beverage services that can be scaled, customized and implemented by us for the client at a particular hospitality venue and customized for the client. We were established with thevenue. Our vision of becomingis to be 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”. AllWe design 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 brands are STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse, and Kona Grill, a polished casual bar-centric grill concept featuring American
17
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, New York, and, as of March 31, 2020,2021, we owned, operated, managed or licensed 5554 venues including 20 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and 1110 F&B venues in sixfive hotels and casinos in the United States and Europe. In January 2021, we opened a managed STK restaurant in Scottsdale, Arizona. For those restaurants and venues that are managed or licensed, we generate management fees based on top-line revenues and incentive fee revenue based on a percentage of the location’s revenues and net profits.
19
The table below reflects our venues by restaurant brand and geographic location as of March 31, 2020:2021:
|
|
|
|
|
|
|
|
| ||||||||
|
| Venues | ||||||||||||||
|
| STK(1) |
| Kona Grill |
| ONE Hospitality(2) |
| Total | ||||||||
| | | | | | | | | ||||||||
| | Venues | ||||||||||||||
|
| STK(1) |
| Kona Grill |
| ONE Hospitality(2) |
| Total | ||||||||
Domestic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned |
| 10 |
| 24 |
| 2 |
| 36 |
| 10 |
| 24 |
| 2 |
| 36 |
Managed |
| 1 |
| — |
| 1 |
| 2 |
| 2 |
| — |
| — |
| 2 |
Licensed |
| 1 |
| — |
| — |
| 1 |
| 1 |
| — |
| — |
| 1 |
Total domestic |
| 12 |
| 24 |
| 3 |
| 39 |
| 13 |
| 24 |
| 2 |
| 39 |
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
Managed |
| 3 |
| — |
| 8 |
| 11 |
| 3 |
| — |
| 8 |
| 11 |
Licensed |
| 5 |
| — |
| — |
| 5 |
| 4 |
| — |
| — |
| 4 |
Total international |
| 8 |
| — |
| 8 |
| 16 |
| 7 |
| — |
| 8 |
| 15 |
Total venues |
| 20 |
| 24 |
| 11 |
| 55 |
| 20 |
| 24 |
| 10 |
| 54 |
(1) |
| Locations with an STK and STK Rooftop are considered one venue location. This includes the STK Rooftop in San Diego, CA, which is a licensed location. |
(2) |
| Includes concepts under the Company’s F&B hospitality management agreements and other venue brands such as ANGEL, |
Our Growth Strategies and Outlook
Our growth model is primarily driven by the following:
● | Expansion of our STK restaurants |
● | Expansion through New F&B Hospitality Projects |
● | Increase Same Store Sales and Increase Operating Efficiency |
● | Acquisitions |
We intend to open thirteen new venues between 2021 and 2022. There are currently three STKs and four managed F&B restaurants under construction. 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 expenses as a percentage of overall revenue.
Uncertainties Related to COVID-19
In the first quarter of 2020, the negative effect of the novel coronavirus (“COVID-19”) onThe COVID-19 pandemic has significantly impacted the Company’s business was significant. The Company experienced an initial decline in restaurant revenue that began in early March 2020 as business traveldue to state and local government mandates, including suspension of in-person dining, reduced seating capacity and social dining decreased. On March 11,distancing. Beginning in mid-March 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 resultdue to government mandated restrictions resulting in the temporary closure 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 shiftedshift in operations at 30 of its restaurants to provide only take-out and delivery service. Starting in May 2020, state and local governments began easing restrictions on stay-at-home orders; however, certain states reimposed restrictions as COVID-19 cases increased during the fall of 2020. In addition to the declineFebruary 2021, many jurisdictions began easing restrictions once again. Currently, all domestic restaurants are open for in-person dining with seating capacity restrictions 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.major metropolitan markets. The Company has implemented measurestaken significant steps to reduceadapt its costsbusiness to increase sales while providing a safe environment for guests and employees, which resulted in a significant increase in revenues during the first quarter of 2021 compared to the fourth quarter of 2020.
Given the ongoing uncertainty surrounding the effects of 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 Companywe cannot reasonably predict when its closed restaurants will re-open and openour restaurants will be able to return to normal dining room operations. The Company expects that itsOur results of operations willcould be materially and negatively
18
affected by these actionsCOVID-19 in the second quarter of 2020. The Company’s re-opening of closed restaurants and2021. Our resumption of normal dining operations is subject to events beyond itsour 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 $17.9$9.8 million, or 78.8%,24.0% to $50.5 million for the three months ended March 31, 2021 compared to $40.7 million for the three months ended March 31, 2020 primarily due to strong sales momentum as state and local governments continue to ease seating capacity restrictions in the markets in which we operate. Same-store sales increased 23.5% in the first quarter of 2021 compared to $22.8the first quarter of 2020 as starting in mid-March 2020 restaurants were temporarily closed or operated only with take-out and delivery service due to the onset of the COVID-19 pandemic. Same store sales improved sequentially each month in the first quarter of 2021. STK same store sales for the months of January and February decreased 23.2% and 1.7%, respectively, and increased 181.5% in March. Kona Grill same-store sales decreased 1.4% and 0.3% for the months of January and February, respectively, and increased 126.8% for the month of March 2021. On a two-year basis, same store sales for the first quarter of 2021 increased 3.3% compared to the first quarter of 2019. STK same store sales increased 1.9% on a two-year basis while Kona Grill same store sales increased 4.6%.
Restaurant operating profit increased $7.3 million, or 376%, to $9.3 million for the first quarter of 2021 compared to $1.9 million in the first quarter of 2020. Restaurant operating profit as a percentage of owned restaurant net revenue was 18.8% compared to 5.0% in the first quarter of 2020. On a sequential basis, restaurant operating profit as a percentage of owned restaurant net revenue was 16.6% in the third quarter of 2020, 16.0% in the fourth quarter of 2020 and 18.8% in the first quarter of 2021.
We generated operating income of $0.9 million for the three months ended March 31, 2019. Approximately $20.7 million of the increase in total revenue was attributable to the addition of the Kona Grill restaurants in the first quarter of 20202021 compared to the prior year period. The increase in
20
total revenue was partially offset by the temporarily closures and limited dining room operations for 30 of our remaining open restaurants beginning in March 2020 as a result of COVID-19.
Operating income decreased approximately $5.5 million to an operating loss of $4.4 million for the three months ended March 31, 2020 from operating income of $1.1 million for the three months ended March 31, 2019.2020. The decreaseincrease was primarily driven by fixed costsstrong sales momentum aided by increased seating capacity in comparableour restaurants not decreasing at the 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 ofstate and local governments eased seating capacity restrictions as COVID-19 cases decreased and $1.1 million in integration expensesvaccination efforts increased along with increased restaurant operating profit as a resultpercentage of the Kona Grill acquisition.revenue driven by strong cost discipline. We expect additional costs related to COVID-19 in the second quarter,see continued sales momentum as seating capacity restrictions are lifted and do not anticipate any further integration expenses relatedas consumers continue to the Kona Grill acquisition.return to in-person dining.
19
Results of Operations
The following table sets forth certain statements of operations data for the periods indicated (in thousands):
|
|
|
|
|
|
| ||||||
|
| For the Three Months Ended March 31, | ||||||||||
|
| 2020 |
| 2019 | ||||||||
| | | | | | | ||||||
| | For the three months ended March 31, | ||||||||||
|
| 2021 |
| 2020 | ||||||||
Revenues: |
|
|
|
|
|
|
| |
|
| |
|
Owned restaurant net revenue |
| $ | 38,557 |
| $ | 20,093 | | $ | 49,168 | | $ | 38,557 |
Management, license and incentive fee revenue |
|
| 2,162 |
|
| 2,683 | |
| 1,314 | |
| 2,162 |
Total revenues |
|
| 40,719 |
|
| 22,776 | |
| 50,482 | |
| 40,719 |
Cost and expenses: |
|
|
|
|
|
| |
|
| |
|
|
Owned operating expenses: |
|
|
|
|
|
| |
|
| |
|
|
Owned restaurant cost of sales |
|
| 10,113 |
|
| 5,026 | |
| 12,001 | | | 10,113 |
Owned restaurant operating expenses |
|
| 26,499 |
|
| 12,717 | |
| 27,906 | |
| 26,499 |
Total owned operating expenses |
|
| 36,612 |
|
| 17,743 | |
| 39,907 | |
| 36,612 |
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 | ||||||
General and administrative (including stock-based compensation of $1,022, and $338 for the three months ended March 31, 2021 and 2020 respectively) | |
| 5,174 | | | 3,397 | ||||||
Depreciation and amortization |
|
| 2,440 |
|
| 942 | |
| 2,699 | | | 2,440 |
Transaction and integration costs |
|
| 1,095 |
|
| — | ||||||
COVID-19 related expenses |
|
| 1,348 |
|
| — | | | 1,557 | | | 1,348 |
Transaction costs | |
| — | | | 1,095 | ||||||
Lease termination expenses |
|
| 179 |
|
| — | |
| 187 | | | 179 |
Pre-opening expenses |
|
| — |
|
| 482 | |
| 101 | | | — |
Other income, net |
|
| (1) |
|
| (175) | |
| — | | | (1) |
Total costs and expenses |
|
| 45,070 |
|
| 21,642 | |
| 49,625 | |
| 45,070 |
Operating (loss) income |
|
| (4,351) |
|
| 1,134 | ||||||
Operating income (loss) | |
| 857 | |
| (4,351) | ||||||
Other expenses, net: |
|
|
|
|
|
| |
|
| |
|
|
Interest expense, net of interest income |
|
| 1,175 |
|
| 269 | |
| 1,246 | | | 1,175 |
Total other expenses, net |
|
| 1,175 |
|
| 269 | |
| 1,246 | |
| 1,175 |
(Loss) income before (benefit) provision for income taxes |
|
| (5,526) |
|
| 865 | ||||||
(Benefit) provision for income taxes |
|
| (653) |
|
| 96 | ||||||
Net (loss) income |
|
| (4,873) |
|
| 769 | ||||||
Loss before benefit for income taxes | |
| (389) | |
| (5,526) | ||||||
Benefit for income taxes | |
| (329) | |
| (653) | ||||||
Net loss | |
| (60) | |
| (4,873) | ||||||
Less: net loss attributable to noncontrolling interest |
|
| (274) |
|
| (85) | |
| (130) | |
| (274) |
Net (loss) income attributable to The ONE Group Hospitality, Inc. |
| $ | (4,599) |
| $ | 854 | ||||||
Net income (loss) attributable to The One Group Hospitality, Inc. | | $ | 70 | | $ | (4,599) |
2120
The following table sets forth certain statements of operations data as a percentage of total revenues for the periods indicated. Certain percentage amounts may not sum to total due to rounding.
|
|
|
|
| ||||
|
| For the Three Months Ended March 31, | ||||||
|
| 2020 |
| 2019 | ||||
| | | | | ||||
| | For the three months ended March 31, | ||||||
|
| 2021 | | 2020 | ||||
Revenues: |
|
|
|
| | |
| |
Owned restaurant net revenue |
| 94.7 % |
| 88.2 % |
| 97.4 % | | 94.7 % |
Management, license and incentive fee revenue |
| 5.3 % |
| 11.8 % |
| 2.6 % | | 5.3 % |
Total revenues |
| 100.0 % |
| 100.0 % |
| 100.0 % | | 100.0 % |
Cost and expenses: |
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|
|
|
| | | |
Owned operating expenses: |
|
|
|
|
| | | |
Owned restaurant cost of sales (1) |
| 26.2 % |
| 25.0 % | | 24.4 % | | 26.2 % |
Owned restaurant operating expenses (1) |
| 68.7 % |
| 63.3 % | | 56.8 % | | 68.7 % |
Total owned operating expenses (1) |
| 94.9 % |
| 88.3 % | | 81.2 % | | 95.0 % |
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 % | ||||
General and administrative (including stock-based compensation of 2% and 0.8% for the three months ended March 31, 2021 and 2020 respectively) |
| 10.2 % | | 8.3 % | ||||
Depreciation and amortization |
| 6.0 % |
| 4.1 % |
| 5.3 % | | 6.0 % |
Transaction and integration costs |
| 2.7 % |
| —% | ||||
COVID-19 related expenses |
| 3.3 % |
| —% |
| 3.1 % | | 3.3 % |
Transaction costs |
| —% | | 2.7 % | ||||
Lease termination expenses |
| 0.4 % |
| —% |
| 0.4 % | | 0.4 % |
Pre-opening expenses |
| —% |
| 2.1 % |
| 0.2 % | | —% |
Other income, net |
| —% |
| (0.8)% |
| —% | | —% |
Total costs and expenses |
| 110.7 % |
| 95.0 % |
| 98.3 % | | 110.7 % |
Operating (loss) income |
| (10.7)% |
| 5.0 % | ||||
Operating income (loss) |
| 1.7 % | | (10.7)% | ||||
Other expenses, net: |
|
|
|
|
| | | |
Interest expense, net of interest income |
| 2.9 % |
| 1.2 % |
| 2.5 % | | 2.9 % |
Total other expenses, net |
| 2.9 % |
| 1.2 % | | 2.5 % | | 2.9 % |
(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 % | ||||
Loss before benefit for income taxes |
| (0.8)% | | (13.6)% | ||||
Benefit for income taxes |
| (0.7)% | | (1.6)% | ||||
Net loss |
| (0.1)% | | (12.0)% | ||||
Less: net loss attributable to noncontrolling interest |
| (0.7)% |
| (0.4)% |
| (0.2)% | | (0.7)% |
Net (loss) income attributable to The ONE Group Hospitality, Inc. |
| (11.3)% |
| 3.7 % | ||||
Net income (loss) attributable to The One Group Hospitality, Inc. |
| 0.1 % | | (11.3)% |
(1) |
| These expenses are being shown as a percentage of owned restaurant net revenue. |
21
The following tables show our operating results by segment for the periods indicated (in thousands). Prior year amounts have been revised to conform to the current year segment presentation.
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|
|
|
| |||||||||||||||
|
| STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | ||||||||||||||||||||
For the three months ended March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
| | | | | | | | | | | | | | | | |||||||||||||||
|
| STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | ||||||||||||||||||||
For the three months ended March 31, 2021 | | | | | | | | | | | | | | | | |||||||||||||||
Total revenues |
| $ | 17,383 |
| $ | 20,657 |
| $ | 2,679 |
| $ | — |
| $ | 40,719 |
| $ | 24,691 |
| $ | 25,577 |
| $ | 33 |
| $ | 181 | | $ | 50,482 |
Operating income (loss) |
|
| 1,543 |
|
| 820 |
|
| 1,820 |
|
| (8,534) |
|
| (4,351) | | $ | 5,596 | | $ | 2,450 | | $ | (321) | | $ | (6,868) | | $ | 857 |
Capital asset additions |
| $ | 335 |
| $ | 410 |
| $ | 8 |
| $ | 38 |
| $ | 791 | | $ | 1,476 | | $ | 529 | | $ | 15 | | $ | 595 | | $ | 2,615 |
As of March 31, 2020 |
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|
|
| |||||||||||||||
As of March 31, 2021 | | | | | | | | | | | | | | | | |||||||||||||||
Total assets |
| $ | 79,512 |
| $ | 88,199 |
| $ | 6,116 |
| $ | 22,354 |
| $ | 196,181 | | $ | 82,198 | | $ | 97,631 | | $ | 4,901 | | $ | 33,593 | | $ | 218,323 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
|
| STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | ||||||||||||||||||||
For the three months ended March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
| | | | | | | | | | | | | | | | |||||||||||||||
| | STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | ||||||||||||||||||||
For the three months ended March 31, 2020 | | | | | | | | | | | | | | | | |||||||||||||||
Total revenues |
| $ | 19,245 |
| $ | — |
| $ | 3,060 |
| $ | 471 |
| $ | 22,776 | | $ | 19,051 | | $ | 20,657 | | $ | 924 | | $ | 87 | | $ | 40,719 |
Operating income (loss) |
|
| 2,668 |
|
| — |
|
| 2,250 |
|
| (3,784) |
|
| 1,134 | | $ | 2,291 | | $ | (339) | | $ | 73 | | $ | (6,376) | | $ | (4,351) |
Capital asset additions |
| $ | 1,726 |
| $ | — |
| $ | 36 |
| $ | 298 |
| $ | 2,060 | | $ | 335 | | $ | 410 | | $ | 8 | | $ | 38 | | $ | 791 |
As of December 31, 2019 |
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|
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|
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|
|
| |||||||||||||||
As of December 31, 2020 | | | | | | | | | | | | | | | | |||||||||||||||
Total assets |
| $ | 82,691 |
| $ | 93,829 |
| $ | 8,252 |
| $ | 21,813 |
| $ | 206,585 | | $ | 81,431 | | $ | 96,262 | | $ | 5,484 | | $ | 32,392 | | $ | 215,569 |
EBITDA, and Adjusted EBITDA and Restaurant Operating Profit are presented in this Quarterly Report on Form 10-Q and are supplementalto supplement other measures of financial performance thatperformance. EBITDA, Adjusted EBITDA and Restaurant Operating Profit are not required by, or presented in accordance with, 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, COVID-19 related expenses and non-recurring gains and 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. We define Restaurant Operating Profit as owned restaurant net revenue minus owned restaurant cost of sales and owned restaurant operating expenses.
We believe that EBITDA, and Adjusted EBITDA and Restaurant Operating Profit 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 believe Restaurant Operating Profit is an important component of financial results because: (i) it is a widely used metric within the restaurant industry to evaluate restaurant-level productivity, efficiency, and performance, and (ii) we use Restaurant Operating Profit as a key metric to evaluate our restaurant financial performance compared to our competitors. We use these metrics to facilitate a comparison of our operating performance on a consistent basis from period to period, to analyze the factors and trends affecting our business and to evaluate the performance of our 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 a key measure used by management. Additionally, Adjusted EBITDA isand Restaurant Operating Profit are frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We use Adjusted EBITDA and Restaurant Operating Profit, 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.
22
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 March 31, | ||||||||||
|
| 2020 |
| 2019 | ||||||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. |
| $ | (4,599) |
| $ | 854 | ||||||
| | | | | | | ||||||
| | For the three months ended March 31, | ||||||||||
|
| 2021 |
| 2020 | ||||||||
Net income (loss) attributable to The One Group Hospitality, Inc. | | $ | 70 | | $ | (4,599) | ||||||
Net loss attributable to noncontrolling interest |
|
| (274) |
|
| (85) | |
| (130) | |
| (274) |
Net (loss) income |
|
| (4,873) |
|
| 769 | ||||||
Net loss | |
| (60) | |
| (4,873) | ||||||
Interest expense, net of interest income |
|
| 1,175 |
|
| 269 | |
| 1,246 | |
| 1,175 |
(Benefit) provision for income taxes |
|
| (653) |
|
| 96 | ||||||
Benefit for income taxes | |
| (329) | |
| (653) | ||||||
Depreciation and amortization |
|
| 2,440 |
|
| 942 | |
| 2,699 | |
| 2,440 |
EBITDA |
|
| (1,911) |
|
| 2,076 | |
| 3,556 | |
| (1,911) |
COVID-19 related expenses |
|
| 1,348 |
|
| — | |
| 1,557 | |
| 1,348 |
Transaction and integration costs (1) |
|
| 1,095 |
|
| — | ||||||
Transaction costs (1) | | | — | | | 1,095 | ||||||
Stock-based compensation |
|
| 338 |
|
| 181 | |
| 1,022 | |
| 338 |
Lease termination expense (2) |
|
| 179 |
|
| — | |
| 187 | |
| 179 |
Non-cash rent expense (3) |
|
| 136 |
|
| (87) | | | 23 | |
| 136 |
Pre-opening expenses |
|
| — |
|
| 482 | | | 101 | | | — |
Adjusted EBITDA |
|
| 1,185 |
|
| 2,652 | |
| 6,446 | |
| 1,185 |
Adjusted EBITDA attributable to noncontrolling interest |
|
| (391) |
|
| (36) | |
| (53) | |
| (391) |
Adjusted EBITDA attributable to The ONE Group Hospitality, Inc. |
| $ | 1,576 |
| $ | 2,688 | | $ | 6,499 | | $ | 1,576 |
(1) |
| Primarily transaction and integration costs incurred with the Kona Grill acquisition and subsequent integration |
(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 income (loss) |
The following table presents a reconciliation of Operating Income (Loss) to Restaurant Operating Profit for the periods indicated (in thousands):
| | | | | | |
| | For the three months ended March 31, | ||||
|
| 2021 |
| 2020 | ||
Operating income (loss) as reported | | $ | 857 | | $ | (4,351) |
Management, license and incentive fee revenue | |
| (1,314) | |
| (2,162) |
General and administrative | |
| 5,174 | |
| 3,397 |
Depreciation and amortization | |
| 2,699 | |
| 2,440 |
Transaction costs | | | — | | | 1,095 |
COVID-19 related expenses | |
| 1,557 | |
| 1,348 |
Lease termination expense | |
| 187 | |
| 179 |
Pre-opening expenses | | | 101 | | | — |
Other income, net | |
| — | |
| (1) |
Restaurant Operating Profit | | $ | 9,261 | | $ | 1,945 |
| | | | | | |
Restaurant Operating Profit as a Percentage of Owned Restaurant Net Revenue | | | 18.8% | | | 5.0% |
23
Results of Operations for the Three Months Ended March 31, 20202021 and 20192020
Revenues
Owned restaurant net revenue.Owned restaurant net revenue increased $18.5$10.6 million, or 27.5%, to $49.2 million for the three months ended March 31, 2021 from $38.6 million for the three months ended March 31, 2020 from $20.12020. The increase in revenue is primarily attributable to strong sales momentum as state and local governments continue to ease seating capacity restrictions in the markets in which we operate. Comparable restaurant sales increased 23.5% in the first quarter of 2021.
Management and license fee revenue. Management and license fee revenues decreased $0.8 million to $1.3 million for the three months ended March 31, 2019. Approximately $20.7 million of the increase in owned restaurant revenue was attributable to the 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 limited operations of our restaurants beginning in March 2020 as a result of COVID-19. Comparable restaurant sales decreased 14.1% in the first quarter of 2020.
Management and license fee revenue. Management and license fee revenues decreased $0.5 million, or 19.4%, to2021 from $2.2 million for the three months ended March 31, 2020 from $2.7 million for the three months ended March 31, 2019.2020. Management and license fee revenue decreased primarily as a result of lower sales withintemporary closures and limited in-person seating at our international managed locations in the United Kingdom and Italy related to temporary closures due to COVID-19 prevention measures.
23
Cost and Expenses
Owned restaurant cost of sales. Food and beverage costs for owned restaurants increased approximately $5.1$1.9 million, or 18.7%, to $12.0 million for the three months ended March 31, 2021 from $10.1 million for the three months ended March 31, 2020. The increase in owned restaurant cost of sales is due to the incremental sales increase. As a percentage of revenues, cost of sales decreased 180 basis points to 24.4% for the three months ended March 31, 2021 from 26.2% for the three months ended March 31, 2020 from $5.0due to purchasing synergies across the Company and menu optimization.
Owned restaurant operating expenses. Owned restaurant operating expenses increased $1.4 million to $27.9 million for the three months ended March 31, 2019. Approximately $5.6 million of the increase in owned restaurant cost of sales was attributable to the 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 was partially offset by the temporary closures and limited operations of our restaurants beginning in March 2020 as a result of COVID-19.
Owned restaurant operating expenses. Owned restaurant operating expenses increased $13.8 million to2021 from $26.5 million for the three months ended March 31, 2020. Owned restaurant operating costs decreased 1,190 basis points as a percentage of revenue from 68.7% in the three months ended March 31, 2020 from $12.7to 56.8% for the three months ended March 31, 2021 due to actively managing operating costs, cost saving measures and the impact of COVID-19 in the first quarter of 2020.
General and administrative. General and administrative costs increased $1.8 million, or 52.3%, to $5.2 million for the three months ended March 31, 2019. Approximately $14.2 million of the increase in owned restaurant operating expenses was attributable to the addition of the Kona Grill restaurants in the first quarter of 2020 compared to the prior year period. The Company began reducing operating costs in March due to the impact of COVID-19.
General and administrative. General and administrative costs increased approximately $0.7 million, or 28.2%, to2021 from $3.4 million for the three months ended March 31, 20202020. General and administrative expenses increased due to a $0.7 million increase in stock-based compensation, partially driven by certain grants that vested due to a substantial increase in our stock price during the quarter, higher legal and professional fees and an increase in travel expenses due to an increase in business activity. We expect that general and administrative expenses as a percentage of revenues will decrease as revenues continue to increase from the lifting of COVID-19 related restrictions both domestically and internationally.
Depreciation and amortization. Depreciation and amortization expense increased $0.3 million to $2.7 million for the three months ended March 31, 2019. However, general and administrative costs as a percentage of total revenues decreased to 8.3% for the three months ended March 31, 20202021 from 11.6% for the three months ended 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. Depreciation and amortization expense increased approximately $1.5 million to $2.4 million for the three months ended March 31, 2020 from $0.9 million for the three months ended March 31, 2019 due to the addition of the Kona Grill restaurants in the first quarter of 2020 compared to the prior year period.2020.
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 Kona Grill acquisition, which closed on October 4, 2019. 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.
COVID-19 relatedPre-opening expenses. In the three months ended March 31, 2020,2021, we incurred approximately $1.3$0.1 million of direct costspre-opening expenses 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. our upcoming STK Bellevue restaurant.
Lease termination expenses. In the three months ended March 31, 2020, lease termination expense was approximately $0.2 million. Lease termination expenses are costs associated with closed, abandoned and disputed locations or disputed leases.
Pre-opening expenses. Pre-opening expenses for the three months ended March 31, 2019 were $0.5 million related to the development of our owned STK restaurant in Nashville, Tennessee which opened in March 2019.
Interest expense, net of interest income. Interest expense, net of interest income was approximately $1.2 million and $0.3$1.2 million for the three months ending March 31, 2021 and 2020, and 2019, respectively.
(Benefit) provisionBenefit for income taxes. The provisionbenefit for income taxes for the three months ended March 31, 20202021 was $0.3 million compared to a tax benefit of $0.7 million comparedfor the three months ended March 31, 2020. Our 2021 annualized effective tax rate is estimated at 20.8% for 2021. For the three months ended March 31, 2021, the benefit for income taxes includes discrete period tax benefits resulting from the vesting of restricted stock units.
Net loss attributable to tax expense ofnoncontrolling interest. Net loss attributable to noncontrolling interest was $0.1 million for the three months ended March 31, 2019. Our annualized effective tax rate is estimated at 12.4% for 20202021 compared to 9.7% for the three months ended March 31, 2019. Our projected annual effective tax rate differs from the statutory U.S. tax ratenet loss of 21% primarily due to the following: (i) availability of U.S. net operating loss carryforwards, resulting in no federal income taxes; (ii) taxes owed in foreign jurisdictions such as the United Kingdom, Canada and Italy; and, (iii) taxes owed in state and local jurisdictions.
Net loss attributable to noncontrolling interest. Net loss attributable to noncontrolling interest was approximately $0.3 million and $0.1 million for the three months ended March 31, 2020 and 2019, respectively.2020.
24
Liquidity and Capital Resources
Executive Summary
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
24
the costs of opening currently planned new restaurants, through cash provided by operations borrowings on our Goldman Sachs Credit Agreement and construction allowances provided by landlords of certain locations.
We believe the combination of our cash provided by operations and our Goldman Sachs Credit Agreementthe aforementioned items are adequate to support our immediate business operations and plans. As of March 31, 2020,2021, we had cash and cash equivalents of approximately $8.2$28.4 million. We had $47.3 million andin long-term debt, of $48.0 million, which consisted of our Goldman Sachs Credit Agreement and an equipment financing agreements.agreement, and $18.3 million in CARES Act Loans as of March 31, 2021. As of March 31, 20202021, the availability pursuant toon our revolving credit facility was $10.7 million.million, subject to the restrictions described in Note 5 to the condensed consolidated financial statements.
In the three months ended March 31, 2020,2021, our capital expenditures were approximately $0.8 million.$2.6 million primarily for the construction of an STK restaurant in Bellevue, Washington, technology initiatives, and capital expenditures for existing restaurants. 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. Additionally, under our current capital light strategy, we plan to primarily enter into management and license agreements for the operation of future STK restaurants where we are not required to contribute significant capital upfront.
Our operations have not required significant working capital, and, like many restaurant companies, we may have negative working capital.capital during the year. 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.
Goldman Sachs In the event the Company needs to temporarily suspend all operations due to COVID-19 restrictions, the ongoing operating costs per month are expected to be as follows:
| | | |
Minimum rent | | $ | 1,200 |
Insurance payments | | | 200 |
Interest payments | | | 400 |
Minimum general & administrative costs | | | 500 |
Total | | $ | 2,300 |
Credit Agreement
On October 4, 2019, in conjunction with the acquisition of Kona Grill, we entered into the Credit Agreement with Goldman Sachs Credit Agreement, which replaced the Bank of America Credit Agreement andUSA that provides for a secured revolving credit facility of $12.0 million and a $48.0 million term loan. The term loan is payable in quarterly installments, with 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, 2020,2021, we were in compliancecompliant with the covenants 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 175 and Note 1815 to our condensed 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 arrangements and information regarding our commitments and contingencies.
CARES Act Loans
On May 4, 2020, two subsidiaries of the Company obtained CARES Act Loans from BBVA USA under the Paycheck Protection Program (“PPP”) created by the CARES Act. Repayment of the CARES Act Loans is guaranteed by the 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.
25
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 USA may declare a default of the CARES Act Loans if the SBA disputes the validity of the guaranty of indebtedness, if a material adverse change occurs in our financial condition, or if BBVA USA 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 USA may declare principal and unpaid interest immediately due and payable, and it may charge default interest of 10%.
The CARES Act Loans are eligible for forgiveness if the proceeds are used for qualified purposes within a specified period and if at least 60% is spent on payroll costs. As of March 31, 2021, the Company has used all of the proceeds from the CARES Act Loans for qualified purposes in accordance with the CARES Act and SBA regulations, and these funds have supported the re-opening of in person dining and the return of approximately 3,000 furloughed employees to work. The Company applied for forgiveness of the CARES Act Loans in February 2021. The Company anticipates forgiveness of the entire amount of CARES Act Loans; however, no assurance can be provided that the Company will obtain forgiveness of the CARES Act Loans in whole or in part. Therefore, the Company has elected to classify the entire principal amount of the CARES Act Loans as debt. If repayment is required, principal and interest payments are expected to be repaid beginning in August 2021, ten months after the end of the covered period which was from April 2020 to October 2020.
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 related to the 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 for 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, but our leases generally provide for the payment of both minimum and contingent rent based on sales, as well as other expenses related to the leases such as our pro-rata share of common area maintenance,
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property tax and insurance expenses. Many of our lease arrangements include the opportunity to secure tenant improvement allowances to partially offset the cost of developing and opening the related restaurants. Generally, landlords recover the cost of such allowances from increased minimum rents. However, there can be no assurance that such allowances will be available to us on each project that we select for development.
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.
Cash Flows
The following table summarizes the statement of cash flows for the three months ended March 31, 20202021 and 20192020 (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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| 2021 |
| 2020 | ||||||||
Net cash provided by (used in): |
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Operating activities |
| $ | (3,103) |
| $ | 2,513 | | $ | 6,986 | | $ | (3,103) |
Investing activities |
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| (791) |
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| (2,060) | |
| (2,615) | |
| (791) |
Financing activities |
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| (226) |
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| (798) | |
| (304) | |
| (226) |
Effect of exchange rate changes on cash |
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| (64) |
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| (168) | |
| (17) | |
| (64) |
Net decrease in cash and cash equivalents |
| $ | (4,184) |
| $ | (513) | ||||||
Net increase (decrease) in cash and cash equivalents | | $ | 4,050 | | $ | (4,184) |
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Operating Activities. Net cash provided by operating activities was $7.0 million for the three months ended March 31, 2021 compared to net cash used in operating activities wasof $3.1 million for the three months ended March 31, 2020 compared2020. The increase was primarily attributable to $2.5 million of cash generated from operating activitiesthe reduction in net loss for the three months ended March 31, 2019. The decrease was primarily attributable2021 compared to the decrease in net income which included $1.3 million in expenses for payments to employees for paid-time off during restaurant closures,same period prior year as a result of state and inventory waste directly attributable tolocal jurisdictions easing COVID-19 related restrictions and $1.1 million in transaction and integration expenses related to the Kona Grill acquisition coupled with $4.4 million reductionan increase in accounts payable and accrued expenses.expenses due to higher restaurant sales volumes.
Investing Activities. Net cash used in investing activities for the three months ended March 31, 20202021 was $0.8$2.6 million primarily for the construction of an STK restaurant in Bellevue, Washington, technology initiatives, and capital expenditures for existing restaurants compared to $2.1$0.8 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 most non-safety related capital projects.2020.
Financing Activities. Net cash used in financing activities for the three months ended March 31, 20202021 was $0.2$0.3 million compared to $0.8$0.2 million in the three months ended March 31, 2019.2020.
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 condensed 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.
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 first quarter of 20202021 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. 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 accrual and disclosure 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
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one or more successful claims under which we incur greater liabilities than is currently anticipated, could materially and adversely affect our consolidated financial statements.
SeeThere have been no material changes to the risk factors contained in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 for additional risk factors.2020.
The outbreakItem 2. Unregistered Sales of COVID-19 has significantly affected our restaurant trafficEquity Securities and our business.Use of Proceeds
Our business has been adversely affected by the effectOn March 25, 2021 we issued an aggregate of the public perception450,971 shares of common stock to Anson Investments Master Fund LP in connection with its cashless exercise (based on a share value of $8.441) of two common stock purchase warrants.
On April 22, 2021, we issued 100,000 shares of common stock to 22235570 Ontario Limited in connection with its exercise of a riskwarrant for aggregate consideration 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.$261,000.
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(a) Exhibits required by Item 601 of Regulation S-K.
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 | |
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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.
Dated: May 11, | | |
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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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