ONE GROUP HOSPITALITY, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
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, 2021. A number of factors could cause actual results or outcomes to differ materially from those indicated by such forward-looking statements, including but not limited to: (1) the effects of the COVID-19 pandemic on our business, including government restrictions on our ability to operate our restaurants and changes in customer behavior; (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 products and retain our key employees; (3) factors beyond our control that affect the number 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 marketing 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 Groupmay be adversely affected by other 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.
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, 2021. 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.
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 and consulting service 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. Our vision is 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". We design all our restaurants, lounges and F&B services 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 favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere. Our F&B hospitality management services are marketed as ONE Hospitality and 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. We also provide hospitality advisory and consulting services to certain clients. Our F&B hospitality clients operate global hospitality brands such as the W Hotel, ME Hotels, Hippodrome Casino, and Curio Collection by Hilton. We opened our first restaurant in January 2004in New York, New York, and, as of March 31, 2022, we owned, operated, managed or licensed 59 venues including 22 STKs and 24 Kona Grills in major metropolitan cities in North America, Europeand the Middle Eastand 13 F&B venues operated under ONE Hospitality in seven hotels and casinos throughout the United Statesand 16
The table below reflects our locations by restaurant brand and geographic location in
Venues STK(1) Kona Grill ONE Hospitality(2) Total Domestic Owned 11 24 2 37 Managed 2 - 1 3 Licensed 1 - - 1 Total domestic 14 24 3 41 International Owned - - - - Managed 4 - 10 14 Licensed 4 - - 4 Total international 8 - 10 18 Total venues 22 24 13 59
(1) Pitches with an STK and an STK Rooftop are considered as one pitch. This
includes STK roof in
Includes concepts under the company’s F&B hotel management agreements (2) and other site brands such as ANGEL,
Our growth strategies and outlook
Our growth model is mainly based on the following elements:
? Expansion of our
? Expansion through new F&B hospitality projects
? Increase comparable store sales and increase our operational efficiency
We intend to open at least nine new venues in 2022. There are currently two Company-owned STK restaurants (
San Francisco, CAand Dallas, TX), two Company-owned Kona Grillrestaurants ( Riverton, UTand Columbus, OH) and one managed STK restaurant ( Stratford, UK) under development. In addition, in conjunction with REEF Kitchens, we plan to test and open three licensed units in Texasfor takeout and delivery only. These units will feature offerings from our STK, Kona Grilland Bao Yumconcepts. 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.
The COVID-19 pandemic has significantly impacted and will continue to adversely affect operations and financial results for the foreseeable future. In response to COVID-19, we have taken significant steps to adapt our business to increase sales while providing a safe environment for guests and employees. Currently, all restaurants are open for in-person dining. Our continuation of normal dining operations is subject to events beyond our control, including the effectiveness of governmental efforts to halt the spread of COVID-19. We regularly communicate with our major suppliers and have not experienced any significant disruption in our supply chain. We have enhanced programs to attract and retain both restaurant managers and hourly employees. We have increased cleaning protocols, including a role which is focused on sanitation in high-touch and high-traffic areas, implemented daily health and safety checklists, provided additional personal protective equipment and cleaning supplies and engaged third party vendors to perform electrostatic cleaning of our restaurants.
In the first quarter of 2022, one of our licensees permanently closed an STK restaurant in
17 Table of Contents Executive Summary Total revenue increased
$23.7 million, or 46.9% to $74.2 millionfor the three months ended March 31, 2022compared to $50.5 millionfor the three months ended March 31, 2021primarily due to strong execution of our sales initiatives. Same-store sales increased 45.1% in the first quarter of 2022 compared to the first quarter of 2021. STK same store sales increased 66.5% while Kona Grillsame store sales increased 21.9%. On a three-year basis, same store sales for the first quarter of 2022 increased 45.3% compared to the first quarter of 2019. STK same store sales increased 62.9% on a three-year basis while Kona Grillsame store sales increased 27.5% reflecting the strong execution of our sales initiatives. Restaurant operating profit increased $3.8 million, or 40.8% to $13.0 millionfor the three months ended March 31, 2022compared to $9.3 millionfor the three months ended March 31, 2021. Restaurant operating profit as a percentage of owned restaurant net revenue was 18.5% in the first quarter of 2022 compared to 18.8% in the first quarter of 2021. Operating income increased $3.3 millionto $4.2 millionfor the three months ended March 31, 2022compared to operating income of $0.9 millionfor the three months ended March 31, 2021. The increase was primarily driven by strong sales momentum. Results of Operations
The following table shows certain income statement data for the periods indicated (in thousands):
For the three months ended March 31, 2022 2021 Revenues: Owned restaurant net revenue $ 70,516 $ 49,168 Management, license and incentive fee revenue 3,665 1,314 Total revenues 74,181 50,482 Cost and expenses: Owned operating expenses: Owned restaurant cost of sales 18,099 12,001 Owned restaurant operating expenses 39,373 27,906 Total owned operating expenses 57,472 39,907
General and administrative (including stock-based compensation for
6,879 5,174 Depreciation and amortization 2,715 2,699 COVID-19 related expenses 2,313 1,557 Pre-opening expenses 345 101 Lease termination expenses 255 187 Total costs and expenses 69,979 49,625 Operating income 4,202 857 Other expenses, net: Interest expense, net of interest income 508 1,246 Total other expenses, net 508 1,246 Income (loss) before provision (benefit) for income taxes 3,694 (389) Provision (benefit) for income taxes 173 (329) Net income (loss) 3,521 (60) Less: net loss attributable to noncontrolling interest (149) (130) Net income attributable to The One Group Hospitality, Inc. $ 3,670 $ 70 18 Table of Contents
The following table shows selected income statement data as a percentage of total revenue for the periods indicated. Some percentages may not add up to the total due to rounding.
For the three months ended March 31, 2022 2021 Revenues: Owned restaurant net revenue 95.1 % 97.4 %
Management, license and incentive fee revenue 4.9
% 2.6 % Total revenues 100.0 % 100.0 % Cost and expenses: Owned operating expenses:
Owned restaurant cost of sales (1) 25.7 % 24.4 % Owned restaurant operating expenses (1) 55.8 % 56.8 % Total owned operating expenses (1) 81.5 % 81.2 %
General and administrative (including stock-based compensation of 1.2% and 2.0% for the three months ended
9.3 % 10.2 % Depreciation and amortization 3.7
% 5.3 % COVID-19 related expenses 3.1 % 3.1 % Pre-opening expenses 0.5 % 0.2 % Lease termination expenses 0.3 % 0.4 % Total costs and expenses 94.3 % 98.3 % Operating income 5.7 % 1.7 % Other expenses, net:
Interest expense, net of interest income 0.7 % 2.5 % Total other expenses, net 0.7 % 2.5 % Income (loss) before provision (benefit) for income taxes 5.0 % (0.8)% Provision (benefit) for income taxes 0.2 % (0.7)% Net income (loss) 4.7 % (0.1)% Less: net loss attributable to noncontrolling interest (0.2)% (0.2)% Net income attributable to The One Group Hospitality, Inc. 4.9 % 0.1 %
(1) These expenses are presented as a percentage of the restaurant’s net
revenue. 19 Table of Contents The following tables show our operating results by segment for the periods indicated (in thousands). STK Kona Grill ONE Hospitality Corporate Total For the three months ended March 31, 2022 Total revenues
$ 42,49931,212 343 127 74,181 Operating income (loss) $ 10,7183,037 (9) (9,544) 4,202 Capital asset additions $ 2,2791,803 37 331 4,450 As of March 31, 2022Total assets $ 96,02294,988 5,489 40,075 236,574 STK Kona Grill ONE Hospitality Corporate Total For the three months ended March 31, 2021 Total revenues $ 24,69125,577 33 181 50,482 Operating income (loss) $ 5,5962,450 (118) (7,071) 857 Capital asset additions $ 1,476529 15 595 2,615 As of December 31, 2021Total assets $ 95,51091,323
6,117 36,885 229,835
EBITDA, Adjusted EBITDA and Restaurant Operating Profit are presented in this Quarterly Report on Form 10-Q to supplement other measures of financial performance. 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 amortization. We define Adjusted EBITDA as net income before interest expense, provision for income taxes, depreciation and amortization, 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 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, 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 and 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. 20
The following table provides a reconciliation of net earnings to EBITDA and Adjusted EBITDA for the periods indicated (in thousands):
For the three
Net income attributable to
$ 3,670 $ 70 Net loss attributable to noncontrolling interest (149) (130) Net income (loss) 3,521 (60) Interest expense, net of interest income 508 1,246 Provision (benefit) for income taxes 173 (329) Depreciation and amortization 2,715 2,699 EBITDA 6,917 3,556 COVID-19 related expenses 2,313 1,557 Stock-based compensation 879 1,022 Lease termination expense (1) 255 187 Non-cash rent expense (2) (31) 23 Pre-opening expenses 345 101 Adjusted EBITDA 10,678 6,446 Adjusted EBITDA attributable to noncontrolling interest (78) (53) Adjusted EBITDA attributable to The ONE Group Hospitality, Inc. $ 10,756 $ 6,499
(1) Lease termination fees are the costs associated with buildings that are closed, abandoned and
pitches or disputed leases.
Non-cash rent expense is included in directly owned restaurant operating expenses and (2) general and administrative expenses in the condensed consolidated statements
operations and comprehensive income.
The following table provides a reconciliation between operating profit and restaurant operating profit for the periods indicated (in thousands):
the three months have ended
2022 2021 Operating income as reported 4,202 857 Management, license and incentive fee revenue (3,665) (1,314) General and administrative 6,879 5,174 Depreciation and amortization
2,715 2,699 COVID-19 related expenses 2,313 1,557 Pre-opening expenses 345 101 Lease termination expense 255 187
Restaurant Operating Profit $ 13,044 $ 9,261 Restaurant Operating Profit as a percentage of owned restaurant net revenue 18.5% 18.8% 21 Table of Contents
Restaurant operating income by brand is as follows (in thousands):
three months completed
2022 2021 STK restaurant operating profit (Company owned) 8,813 5,477
STK (corporate-owned) restaurant operating profit as a percentage of STK (corporate-owned) revenue
22.6% 23.4% Kona Grill restaurant operating profit 4,276 3,737
Results of operations for the three months ended
Owned restaurant net revenue. Owned restaurant net revenue increased
$21.3 million, or 43.4%, to $70.5 millionfor the three months ended March 31, 2022from $49.2 millionfor the three months ended March 31, 2021. The increase was primarily attributable to strong execution of our sales initiatives. Comparable restaurant sales increased 45.1% in the first quarter of 2022. Management and license fee revenue. Management and license fee revenues increased $2.4 million, or 178.9% to $3.7 millionfor the three months ended March 31, 2022from $1.3 millionfor the three months ended March 31, 2021. The increase was primarily attributable to local governments lifting stay at home orders and easing seating capacity restrictions in the markets in which we operate as well as revenue generated from the opening of two managed STKs, one licensed STK and three managed F&B venues during 2021.
Costs and expenses
Owned restaurant cost of sales. Food and beverage costs for owned restaurants increased
$6.1 million, or 50.8%, to $18.1 millionfor the three months ended March 31, 2022from $12.0 millionfor the three months ended March 31, 2021. The increase was due to the incremental sales increases. As a percentage of owned restaurant net revenue, cost of sales increased 130 basis points from 24.4% in the three months ended March 31, 2021to 25.7% for the three months ended March 31, 2022primarily due to increased commodity prices partly offset by operational cost reduction initiatives. Owned restaurant operating expenses. Owned restaurant operating expenses increased $11.5 millionto $39.4 millionfor the three months ended March 31, 2022from $27.9 millionfor the three months ended March 31, 2021. Owned restaurant operating costs as a percentage of owned restaurant net revenue decreased 100 basis points from 56.8% in the three months ended March 31, 2021to 55.8% for the three months ended March 31, 2022due to leverage on higher average weekly sales and actively managing operating costs. General and administrative. General and administrative costs increased $1.7 million, or 32.7%, to $6.9 millionfor the three months ended March 31, 2022from $5.2 millionfor the three months ended March 31, 2021. The increase was attributable to increased activity as our restaurants are generating strong average weekly sales. As a percentage of revenues, general and administrative costs were 9.3% for the three months ended March 31, 2022compared to 10.2% for the three months ended March 31, 2021.
Depreciation and amortization. The depreciation charge was
Pre-opening expenses. In the three months ended
March 31, 2022, we incurred $0.3 millionof pre-opening expenses primarily related to non-cash pre-open rent for STK Dallas, STK San Francisco, Kona Grill Riverton, and Kona Grill Columbuswhich are currently under construction. Pre-opening expenses for the three months ended March 31, 2021were $0.1 million. COVID-19 related expenses. COVID-19 related expenses were $2.3 millionfor the three months ended March 31, 2022compared to $1.6 millionin the prior year period. COVID-19 related expenses are composed primarily of sanitation, supplies and safety precautions taken to prevent the spread of COVID-19.
Debit interest, net of credit interest. Debit interest, net of credit interest, has been
Provision (benefit) for income taxes. The provision for income taxes for the three months ended
March 31, 2022was $0.2 millioncompared to a benefit for income taxes of $0.3 millionfor the three months ended March 31, 2021. Our 2022 annualized effective tax rate is estimated at 19.5%. Net income (loss) attributable to noncontrolling interest. Net loss attributable to noncontrolling interest was $0.1 millionfor the three months ended March 31, 2022and 2021.
Cash and capital resources
Our principal liquidity requirements are to meet our lease obligations, working capital and capital expenditure needs and to pay principal and interest on outstanding debt. 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 the costs of opening currently planned new restaurants, through cash provided by operations and construction allowances provided by landlords of certain locations. We also may borrow on our revolving credit facility or issue equity to support ongoing business and fund additional expansion. We believe these sources of financing are adequate to support our immediate business operations and plans. As of
March 31, 2022, we had cash and cash equivalents of $28.6 millionand $24.6 millionin long-term debt, which consisted of borrowings under our Credit Agreement. As of March 31, 2022, the availability on our revolving credit facility was $10.6 million, subject to certain conditions. In the three months ended March 31, 2022, capital expenditures were $4.5 millionof which $1.7 millionrelated to the construction of new STK and Kona Grillrestaurants and $2.8 millionfor existing restaurants and technology initiatives. Our future cash requirements will depend on many factors, including the pace of 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. Our operations have not required significant working capital, and, like many restaurant companies, we may have negative working 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.
In the event that the Company should temporarily suspend all operations due to COVID-19 restrictions, the ongoing operating costs per month are expected to be as follows:
$ 1,600Insurance 200 Interest 100 Minimum general & administrative costs 500 Total $ 2,400Credit Agreement On October 4, 2019, in conjunction with the acquisition of Kona Grill, we entered into our Credit Agreement with Goldman Sachs Bank USA. On August 6, 2021, we entered into the Third Amendment to the Credit Agreement to extend the maturity date for both the term loan and revolving credit facility to August 2026, to eliminate all financial covenants except a maximum net leverage ratio of 2.00 to 1.00, and to eliminate restrictions on the maximum amount of capital expenditures, the maximum number of Company-owned new locations, and credit extensions under the revolving credit facility. As amended, the Credit Agreement provides for a secured revolving credit facility of $12.0 millionand a $25.0 millionterm loan (reduced from $48.0 million). The term loan is payable in quarterly installments of $0.1 million, with the final payment due in August 2026. The amended Credit Agreement has several borrowing and interest rate options, including the following: (a) a LIBOR rate (or a comparable successor rate) subject to a 1.00% floor from a 1.75% floor 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) 4.00%. Loans under
the amended 23 Table of Contents Credit Agreement bear interest at a rate per annum using the applicable indices plus an interest rate margin of 5.00% from a variable interest rate margin of 5.75 to 6.75% (for LIBOR rate loans) and 4.00% from 4.75% to 5.75% (for base rate loans).
Refer to Notes 5 and 14 of our condensed consolidated financial statements presented in Item 1 of this Quarterly Report on Form 10-Q for more information on the terms of our long-term debt agreements and information on our covenants. and contingencies.
Capital expenditures and rental agreements
When we open new Company-owned restaurants, our capital expenditures for construction increase. For owned restaurants, where we build from a shell state, we have typically targeted an average cash investment of approximately
$3.8 millionfor a 10,000 square-foot STK restaurant and anticipate approximately $2.5 millionfor an 8,000 square-foot Kona Grillrestaurant, in each case, net of landlord contributions and excluding pre-opening costs. For STK locations where we may be the successor restaurant tenant, we anticipate total cash investment in the $2.0 millionto $3.0 millionrange. Typical pre-opening costs are $0.3 millionto $0.5 million. 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 venues typically require limited capital investment from us. Capital expenditures for these projects will primarily be funded by cash flows from operations 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, 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.
The following table summarizes the statement of cash flows for the three months ended
three months completed
2022 2021 Net cash provided by (used in): Operating activities $ 9,823 $ 6,986 Investing activities (4,450) (2,615) Financing activities (253) (304)
Effect of exchange rate changes on cash (90) (17) Net increase in cash and cash equivalents $ 5,030 $ 4,050 Operating Activities. Net cash provided by operating activities was
$9.8 millionfor the three months ended March 31, 2022, compared to net cash provided by operating activities of $7.0 millionfor the three months ended March 31, 2021. The increase was primarily attributable to net income generated for the three months ended March 31, 2022driven by strong sales. Investing Activities. Net cash used in investing activities for the three months ended March 31, 2022was $4.5 millionprimarily for the construction of STK restaurants in Dallas, Texasand San Francisco, California, and Kona Grillrestaurants in Riverton, Utahand Columbus, Ohio, as well as capital expenditures for existing restaurants and technology initiatives compared to $2.6 millionfor the three months ended March 31, 2021.
Fundraising activities. Net cash used in financing activities for the three months ended
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.
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