UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One) | |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended | |
OR | |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to | |
Commission File Number 001-37379 |
THE ONE GROUP HOSPITALITY, INC. |
(Exact name of registrant as specified in its charter)
Delaware | 14-1961545 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
411 W. | 10014 | |
(Address of principal executive offices) | Zip Code |
646-624-2400 |
(Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨
Indicate by check mark whether the registrant has submitted electronically 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). YesxNo¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer x | Smaller reporting company x |
Emerging growth company ¨ |
If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ Nox
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock | STKS | Nasdaq |
Number of shares of common stock outstanding as of November 9, 2018: 28,293,902May 8, 2019: 28,628,880
TABLE OF CONTENTS
2 |
THE ONE GROUP HOSPITALITY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
(unaudited) September 30, 2018 | December 31, 2017 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 968 | $ | 1,548 | ||||
Accounts receivable | 6,129 | 5,514 | ||||||
Inventory | 1,194 | 1,402 | ||||||
Other current assets | 1,600 | 1,299 | ||||||
Due from related parties, net | 27 | — | ||||||
Total current assets | 9,918 | 9,763 | ||||||
Property & equipment, net | 38,476 | 37,811 | ||||||
Investments | 2,612 | 2,957 | ||||||
Deferred tax assets, net | 72 | 69 | ||||||
Other assets | 598 | 384 | ||||||
Security deposits | 2,091 | 2,031 | ||||||
Total assets | $ | 53,767 | $ | 53,015 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 5,855 | $ | 5,329 | ||||
Accrued expenses | 6,625 | 6,987 | ||||||
Deferred license revenue | 241 | 115 | ||||||
Deferred gift card revenue and other | 1,196 | 999 | ||||||
Due to related parties, net | — | 256 | ||||||
Current portion of long-term debt | 3,196 | 3,241 | ||||||
Total current liabilities | 17,113 | 16,927 | ||||||
Deferred license revenue, long-term | 1,663 | 1,222 | ||||||
Due to related parties, long-term | 1,197 | 1,197 | ||||||
Deferred rent and tenant improvement allowances | 17,072 | 17,001 | ||||||
Long-term debt, net of current portion | 7,877 | 10,115 | ||||||
Total liabilities | 44,922 | 46,462 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ Equity: | ||||||||
Preferred stock, $0.0001 par value, 10,000,000 shares authorized; no shares issued and outstanding at September 30, 2018 and December 31, 2017 | — | — | ||||||
Common stock, $0.0001 par value, 75,000,000 shares authorized; 28,293,902 and 27,152,101 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively | 3 | 3 | ||||||
Additional paid-in capital | 43,235 | 41,007 | ||||||
Accumulated deficit | (31,927 | ) | (31,979 | ) | ||||
Accumulated other comprehensive loss | (1,660 | ) | (1,556 | ) | ||||
Total The One Group Hospitality, Inc stockholders’ equity | 9,651 | 7,475 | ||||||
Noncontrolling interests | (806 | ) | (922 | ) | ||||
Total stockholders’ equity | 8,845 | 6,553 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 53,767 | $ | 53,015 |
(Unaudited), | ||||||||
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,079 | $ | 1,592 | ||||
Accounts receivable | 5,946 | 7,029 | ||||||
Inventory | 1,243 | 1,404 | ||||||
Other current assets | 1,570 | 1,471 | ||||||
Due from related parties, net | 123 | 45 | ||||||
Total current assets | 9,961 | 11,541 | ||||||
Property and equipment, net | 40,465 | 39,347 | ||||||
Operating lease right-of-use assets | 40,073 | — | ||||||
Investments | 2,684 | 2,684 | ||||||
Deferred tax assets, net | 28 | 38 | ||||||
Other assets | 341 | 349 | ||||||
Security deposits | 2,039 | 2,020 | ||||||
Total assets | $ | 95,591 | $ | 55,979 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 5,700 | $ | 5,408 | ||||
Accrued expenses | 6,836 | 8,093 | ||||||
Deferred license revenue | 154 | 171 | ||||||
Deferred gift card revenue and other | 783 | 947 | ||||||
Current portion of operating lease liabilities | 2,197 | — | ||||||
Current portion of long-term debt | 2,844 | 3,201 | ||||||
Total current liabilities | 18,514 | 17,820 | ||||||
Deferred license revenue, long-term | 1,081 | 1,008 | ||||||
Due to related parties, long-term | 1,197 | 1,197 | ||||||
Operating lease liability, net of current portion | 55,220 | — | ||||||
Deferred rent and tenant improvement allowances | — | 16,774 | ||||||
Long-term debt, net of current portion | 6,727 | 7,118 | ||||||
Total liabilities | 82,739 | 43,917 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Common stock, $0.0001 par value, 75,000,000 shares authorized; 28,333,561 and 28,313,017 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively | 3 | 3 | ||||||
Preferred stock, $0.0001 par value, 10,000,000 shares authorized; no shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively | — | — | ||||||
Additional paid-in capital | 43,724 | 43,543 | ||||||
Accumulated deficit | (27,868 | ) | (28,722 | ) | ||||
Accumulated other comprehensive loss | (2,470 | ) | (2,310 | ) | ||||
Total stockholders’ equity | 13,389 | 12,514 | ||||||
Noncontrolling interests | (537 | ) | (452 | ) | ||||
Total equity | 12,852 | 12,062 | ||||||
Total liabilities and equity | $ | 95,591 | $ | 55,979 |
See notes to the consolidated financial statements.
3 |
THE ONE GROUP HOSPITALITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(Unaudited, in thousands, except earnings per share and related share information)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenues: | ||||||||||||||||
Owned restaurant net revenues | $ | 15,312 | $ | 13,189 | $ | 45,908 | $ | 42,100 | ||||||||
Owned food, beverage and other net revenues | 1,960 | 2,144 | 6,048 | 8,460 | ||||||||||||
Total owned revenues | 17,272 | 15,333 | 51,956 | 50,560 | ||||||||||||
Management, license and incentive fee revenue | 2,688 | 2,479 | 7,832 | 7,577 | ||||||||||||
Total revenues | 19,960 | 17,812 | 59,788 | 58,137 | ||||||||||||
Cost and expenses: | ||||||||||||||||
Owned operating expenses: | ||||||||||||||||
Owned restaurants: | ||||||||||||||||
Owned restaurant cost of sales | 4,050 | 3,436 | 12,121 | 11,150 | ||||||||||||
Owned restaurant operating expenses | 9,779 | 8,911 | 28,556 | 27,688 | ||||||||||||
Total owned operating expenses | 13,829 | 12,347 | 40,677 | 38,838 | ||||||||||||
Owned food, beverage and other expenses | 2,068 | 2,044 | 5,782 | 7,296 | ||||||||||||
Total owned operating expenses | 15,897 | 14,391 | 46,459 | 46,134 | ||||||||||||
General and administrative (including stock-based compensation of $337, $200, $1,005 and $744, respectively) | 2,266 | 2,267 | 7,937 | 8,479 | ||||||||||||
Settlements | — | 500 | — | 1,295 | ||||||||||||
Depreciation and amortization | 896 | 950 | 2,575 | 2,621 | ||||||||||||
Lease termination expense and asset write-offs | 78 | 402 | 168 | 883 | ||||||||||||
Pre-opening expenses | 449 | 94 | 1,330 | 1,286 | ||||||||||||
Transaction costs | — | — | — | 254 | ||||||||||||
Equity in (income) of investee companies | — | (264 | ) | (111 | ) | (156 | ) | |||||||||
Other income, net | 38 | (19 | ) | (139 | ) | (137 | ) | |||||||||
Total costs and expenses | 19,624 | 18,321 | 58,219 | 60,659 | ||||||||||||
Income (loss) from operations | 336 | (509 | ) | 1,569 | (2,522 | ) | ||||||||||
Interest expense, net of interest income | 294 | 325 | 902 | 804 | ||||||||||||
Income (loss) from continuing operations before provision for income taxes | 42 | (834 | ) | 667 | (3,326 | ) | ||||||||||
Income tax provision | 251 | 179 | 445 | 365 | ||||||||||||
(Loss) income from continuing operations | (209 | ) | (1,013 | ) | 222 | (3,691 | ) | |||||||||
(Loss) from discontinued operations, net of taxes | — | — | — | (106 | ) | |||||||||||
Net (loss) income | (209 | ) | (1,013 | ) | 222 | (3,797 | ) | |||||||||
Less: net income attributable to noncontrolling interest | 96 | 153 | 116 | 71 | ||||||||||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. | $ | (305 | ) | $ | (1,166 | ) | $ | 106 | $ | (3,868 | ) | |||||
Currency translation adjustment | (170 | ) | 107 | (104 | ) | 190 | ||||||||||
Comprehensive (loss) income | $ | (475 | ) | $ | (1,059 | ) | $ | 2 | $ | (3,678 | ) | |||||
Basic (loss) earnings per share: | ||||||||||||||||
Continuing operations | $ | (0.01 | ) | $ | (0.05 | ) | $ | 0.00 | $ | (0.15 | ) | |||||
Discontinued operations | $ | — | $ | — | $ | — | $ | — | ||||||||
Attributed to The ONE Group Hospitality, Inc. | $ | (0.01 | ) | $ | (0.05 | ) | $ | 0.00 | $ | (0.15 | ) | |||||
Diluted (loss) earnings per share: | ||||||||||||||||
Continuing operations | $ | (0.01 | ) | $ | (0.05 | ) | $ | 0.00 | $ | (0.15 | ) | |||||
Discontinued operations | $ | — | $ | — | $ | — | $ | — | ||||||||
Attributed to The ONE Group Hospitality, Inc. | $ | (0.01 | ) | $ | (0.05 | ) | $ | 0.00 | $ | (0.15 | ) | |||||
Weighted average number of common shares outstanding | ||||||||||||||||
Basic | 27,751,632 | 25,228,288 | 27,437,269 | 25,141,933 | ||||||||||||
Diluted | 27,751,632 | 25,228,288 | 27,499,645 | 25,141,933 |
For the three months ended March 31, | ||||||||
2019 | 2018 | |||||||
Revenues: | ||||||||
Owned restaurant net revenues | $ | 17,820 | $ | 15,076 | ||||
Owned food, beverage and other net revenues | 2,273 | 2,005 | ||||||
Total owned revenue | 20,093 | 17,081 | ||||||
Management, license and incentive fee revenue | 2,683 | 2,436 | ||||||
Total revenues | 22,776 | 19,517 | ||||||
Cost and expenses: | ||||||||
Owned operating expenses: | ||||||||
Owned restaurants: | ||||||||
Owned restaurant cost of sales | 4,569 | 4,034 | ||||||
Owned restaurant operating expenses | 10,915 | 9,378 | ||||||
Total owned restaurant expenses | 15,484 | 13,412 | ||||||
Owned food, beverage and other expenses | 2,259 | 1,689 | ||||||
Total owned operating expenses | 17,743 | 15,101 | ||||||
General and administrative (including stock-based compensation of $181 and $324 for the three months ended March 31, 2019 and 2018 respectively) | 2,650 | 3,055 | ||||||
Depreciation and amortization | 942 | 778 | ||||||
Pre-opening expenses | 482 | 210 | ||||||
Equity in income of investee companies | — | 23 | ||||||
Other income, net | (175 | ) | (111 | ) | ||||
Total costs and expenses | 21,642 | 19,056 | ||||||
Operating income | 1,134 | 461 | ||||||
Other expenses, net: | ||||||||
Interest expense, net of interest income | 269 | 318 | ||||||
Total other expenses, net | 269 | 318 | ||||||
Income before provision for income taxes | 865 | 143 | ||||||
Provision for income taxes | 96 | 25 | ||||||
Net income | 769 | 118 | ||||||
Less: net loss attributable to noncontrolling interest | (85 | ) | (113 | ) | ||||
Net income attributable to The ONE Group Hospitality, Inc. | $ | 854 | $ | 231 | ||||
Currency translation adjustment | (160 | ) | (75 | ) | ||||
Comprehensive income | $ | 694 | $ | 156 | ||||
Net income attributable to The ONE Group Hospitality, Inc. per share: | ||||||||
Basic net income per share | $ | 0.03 | $ | 0.01 | ||||
Diluted net income per share | $ | 0.03 | $ | 0.01 | ||||
Shares used in computing basic earnings per share | 28,314,820 | 27,187,657 | ||||||
Shares used in computing diluted earnings per share | 29,311,756 | 27,388,498 |
See notes to the consolidated financial statements.
4 |
THE ONE GROUP HOSPITALITY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited, in thousands, except share information)
Common stock | Additional | Accumulated | Accumulated other comprehensive | Stockholders' | Noncontrolling | |||||||||||||||||||||||||||
Shares | Par value | capital | deficit | loss | equity | interest | Total | |||||||||||||||||||||||||
Balance at December 31, 2017 | 27,152,101 | $ | 3 | $ | 41,007 | $ | (31,979 | ) | $ | (1,556 | ) | $ | 7,475 | $ | (922 | ) | $ | 6,553 | ||||||||||||||
Adoption of ASC 606 “Revenue from contract with customers” | — | — | — | (54 | ) | — | (54 | ) | — | (54 | ) | |||||||||||||||||||||
Stock based compensation expense | 49,179 | — | 1,005 | — | — | 1,005 | — | 1,005 | ||||||||||||||||||||||||
Vesting of restricted shares | 342,622 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Exercise of warrants | 750,000 | — | 1,223 | — | — | 1,223 | — | 1,223 | ||||||||||||||||||||||||
Foreign currency translation, net | — | — | — | — | (2 | ) | (2 | ) | — | (2 | ) | |||||||||||||||||||||
Reclassification of realized gains | — | — | — | — | (102 | ) | (102 | ) | — | (102 | ) | |||||||||||||||||||||
Net income | — | — | — | 106 | — | 106 | 116 | 222 | ||||||||||||||||||||||||
Balance at September 30, 2018 | 28,293,902 | $ | 3 | $ | 43,235 | $ | (31,927 | ) | $ | (1,660 | ) | $ | 9,651 | $ | (806 | ) | $ | 8,845 |
Common stock | Accumulated | |||||||||||||||||||||||||||||||
Shares | Par value | Additional paid-in capital | Accumulated deficit | other comprehensive loss | Stockholders' equity | Noncontrolling interests | Total | |||||||||||||||||||||||||
Balance at December 31, 2018 | 28,313,017 | $ | 3 | $ | 43,543 | $ | (28,722 | ) | $ | (2,310 | ) | $ | 12,514 | $ | (452 | ) | $ | 12,062 | ||||||||||||||
Stock-based compensation | — | — | 181 | — | — | 181 | — | 181 | ||||||||||||||||||||||||
Vesting of restricted shares | 20,544 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Loss on foreign currency translation, net | — | — | — | — | (160 | ) | (160 | ) | — | (160 | ) | |||||||||||||||||||||
Net income | — | — | — | 854 | — | 854 | (85 | ) | 769 | |||||||||||||||||||||||
Balance at March 31, 2019 | 28,333,561 | $ | 3 | $ | 43,724 | $ | (27,868 | ) | $ | (2,470 | ) | $ | 13,389 | $ | (537 | ) | $ | 12,852 |
See notes to the consolidated financial statements.
5 |
THE ONE GROUP HOSPITALITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine months ended September 30, | ||||||||
2018 | 2017 | |||||||
Operating activities: | ||||||||
Net income (loss) | $ | 222 | $ | (3,797 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 2,575 | 2,621 | ||||||
Amortization of discount on warrants | 150 | 136 | ||||||
Deferred rent and tenant improvement allowances | 306 | 885 | ||||||
Deferred taxes | (1 | ) | 1 | |||||
(Income) from equity method investments | (111 | ) | (156 | ) | ||||
Gain on disposition of cost method investment | (185 | ) | — | |||||
Stock-based compensation | 1,005 | 744 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (532 | ) | (206 | ) | ||||
Inventory | 209 | 140 | ||||||
Prepaid expenses and other current assets | (301 | ) | 95 | |||||
Due from related parties, net | (208 | ) | 375 | |||||
Security deposits | (59 | ) | (12 | ) | ||||
Other assets | (213 | ) | 235 | |||||
Accounts payable | 496 | 3,117 | ||||||
Accrued expenses | (423 | ) | 1,603 | |||||
Deferred revenue | 477 | 801 | ||||||
Net cash provided by operating activities | 3,407 | 6,582 | ||||||
Investing activities: | ||||||||
Purchase of property and equipment | (3,238 | ) | (4,114 | ) | ||||
Distribution from equity method investment | 40 | — | ||||||
Proceeds from disposition of cost method investment | 600 | — | ||||||
Net cash used in investing activities | (2,598 | ) | (4,114 | ) | ||||
Financing activities: | ||||||||
Proceeds from business loan and security agreement | — | 1,000 | ||||||
Repayment of term loan | (2,108 | ) | (2,121 | ) | ||||
Repayment of equipment financing agreement | (264 | ) | (248 | ) | ||||
Repayment of business loan and security agreement | (62 | ) | (648 | ) | ||||
Issuance of common stock | 1,223 | — | ||||||
Distributions to non-controlling interests | — | (410 | ) | |||||
Net cash used in financing activities | (1,211 | ) | (2,427 | ) | ||||
Effect of exchange rate changes on cash | (178 | ) | 160 | |||||
Net (decrease) increase in cash and cash equivalents | (580 | ) | 201 | |||||
Cash and cash equivalents, beginning of period | 1,548 | 1,598 | ||||||
Cash and cash equivalents, end of period | $ | 968 | $ | 1,799 | ||||
Supplemental disclosure of cash flow data: | ||||||||
Interest paid | $ | 722 | $ | 747 | ||||
Income taxes paid | $ | 458 | $ | — | ||||
Noncash investing and financing activities: | ||||||||
Noncash debt issuance costs | $ | — | $ | 35 |
For the three months ended March 31, | ||||||||
2019 | 2018 | |||||||
Operating activities: | ||||||||
Net income | $ | 769 | $ | 118 | ||||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 942 | 778 | ||||||
Amortization of discount on warrants | 50 | 51 | ||||||
Deferred rent and tenant improvement allowances | — | (18 | ) | |||||
Deferred taxes | 10 | (2 | ) | |||||
Income from equity method investments | — | 23 | ||||||
Gain on disposition of cost method investment | — | (185 | ) | |||||
Stock-based compensation | 181 | 324 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 1,147 | 190 | ||||||
Inventory | 161 | 115 | ||||||
Other current assets | (96 | ) | (211 | ) | ||||
Due from related parties, net | (38 | ) | (99 | ) | ||||
Security deposits | (18 | ) | (54 | ) | ||||
Other assets | 8 | (37 | ) | |||||
Accounts payable | 270 | (203 | ) | |||||
Accrued expenses | (1,331 | ) | (718 | ) | ||||
Operating lease liabilities and right-of-use assets | 321 | — | ||||||
Deferred revenue | 137 | 100 | ||||||
Net cash provided by operating activities | 2,513 | 172 | ||||||
Investing activities: | ||||||||
Purchase of property and equipment | (2,060 | ) | (306 | ) | ||||
Proceeds from disposition of cost method investment | — | 600 | ||||||
Net cash (used in) provided by investing activities | (2,060 | ) | 294 | |||||
Financing activities: | ||||||||
Repayment of term loan | (707 | ) | (694 | ) | ||||
Repayment of equipment financing agreement | (91 | ) | (87 | ) | ||||
Repayment of business loan and security agreement | — | (62 | ) | |||||
Net cash used in financing activities | (798 | ) | (843 | ) | ||||
Effect of exchange rate changes on cash | (168 | ) | (28 | ) | ||||
Net decrease in cash and cash equivalents | (513 | ) | (405 | ) | ||||
Cash and cash equivalents, beginning of year | 1,592 | 1,548 | ||||||
Cash and cash equivalents, end of year | $ | 1,079 | $ | 1,143 | ||||
Supplemental disclosure of cash flow data: | ||||||||
Interest paid | $ | 235 | $ | 142 | ||||
Income taxes paid | 191 | 26 | ||||||
Non-cash amortization of debt issuance costs | $ | 5 | $ | 5 |
See notes to the consolidated financial statements.
6 |
THE ONE GROUP HOSPITALITY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Basis– Summary of presentationBusiness and Significant Accounting Policies
The accompanying consolidated balance sheet asSummary of December 31, 2017, which has been derived from audited financial statements, and the unaudited consolidated financial statements of Business
The ONE Group Hospitality, Inc. and its subsidiaries (collectively, the “Company”) as of and for the three month and nine month periods ended September 30, 2018 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The information furnished in this Form 10-Q reflects all adjustments (consisting only of normal recurring accruals and adjustments), which are, in the Company’s opinion, necessary to fairly state the interim operating results for the respective periods.
The Company is a global hospitality company that develops, owns and operates, and manages or licenses upscale, high-energy restaurants and lounges. The Company’s primary restaurant brand is STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the same quality of foodlounges and service as that of a traditional upscale steakhouse. As of September 30, 2018, the Company owns, operates or manages twenty-one venues across seven states and seven countries.
The Company also provides turn-key food and beverage (“F&B”) services for hospitality venues including hotels, casinos and other high-end locations.locations globally. Turn-key F&B services are food and beverage services that can be scaled, customized and implemented by the Company at a particular hospitality venue and customized per the requirements offor the client. The Company’s primary restaurant brand is STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse.
As of September 30, 2018, under various management agreements,March 31, 2019, we owned, operated, managed or licensed 29 venues including 19 STKs in major metropolitan cities in North America, Europe and the CompanyMiddle East and including F&B services thirteen venues throughoutprovided to four hotels and casinos in the United States and Europe.
Certain information and footnote disclosure normally included in annualBasis of Presentation
The accompanying consolidated balance sheet as of December 31, 2018, which has been derived from audited financial statements, and the accompanying unaudited interim consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted accounting principles in the United States (“GAAP”). Certain information and footnote disclosures normally included in annual audited financial statements have been omitted pursuant to SEC rules and regulations. The notes to theThese unaudited interim consolidated financial statements (unaudited) should be read in conjunction with the notes to the consolidated financial statements containedand notes thereto included in the Company’s annual reportAnnual Report on Form 10-K for the year ended December 31, 2017.2018.
In the Company’s opinion, the accompanying unaudited interim financial statements reflect all adjustments (consisting only of normal recurring accruals and adjustments) necessary for a fair presentation of the results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of the results expected for the full year. Additionally, the Company believes that the disclosures are sufficient for interim financial reporting purposes. However, these operating results are not necessarily indicative of the results expected for the full year.
Certain prior year amounts have been reclassified to conform to current year presentation in the consolidated financial statements.
Note 2 - Liquidity
As of September 30, 2018, the Company's accumulated deficit was $31.9 million and the Company's cash and cash equivalents was $1.0 million. The Company’s consolidated financial statements have been prepared and presented on a basis assuming it continues as a going concern. The Company expects to finance its operations, including the costs of opening planned restaurants, for at least the next twelve months following the issuance of its consolidated financial statements through cash provided by operations. Other sources of liquidity could include additional potential issuances of debt or equity securities in public or private financings or warrant or option exercises. While the Company continues to seek capital through a number of means, there can be no assurance that additional financing will be available to it on acceptable terms, if at all. If the Company is unable to access necessary capital to meet its liquidity needs, the Company may have to delay or discontinue the expansion of its business or raise funds on terms that it may consider unfavorable.
Note 3 – Recent Accounting Pronouncements
In February 2016,March 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Updated (“ASU”) No. 2016-02,2019-01, “Leases (Topic 842)”: Codification Improvements” (“ASU 2016-02”2019-01”). ASU 2016-02 requires a lessee2019-01 provided clarification related to recognize on the balance sheet a liability to make lease paymentsadopting Accounting Standard Codification Topic 842, Leases, (“ASC Topic 842”). ASU 2019-01 addresses fair value determinations of underlying assets by lessors, cash flow statement presentation for financing leases, and a corresponding right-of-use asset. ASU 2016-02 also requires certain disclosures about the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company’s restaurants operate under lease agreements that provide for material future lease payments. These leases comprise the majority of the Company’s material lease agreements.transition disclosures. The Company is currently evaluatingadopted ASC Topic 842 as of January 1, 2019 and considered the effectclarification guidance in ASU 2019-01 as part of this standard but expectsits adoption. Refer to Note 12 for additional details regarding the adoption of ASU 2016-02 to have a material effect on its consolidated financial statements by increasing both total assets and total liabilities.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”). ASU 2018-07 simplifies the accounting and reporting for share-based payments issued to non-employees by expanding the scope of ASC 718, “Compensation – Stock Compensation”, which currently only includes share-based compensation to employees, to also include share-based payments to nonemployees for goods and services. The amendments in ASU 2018-07 are effective for annual and interim periods beginning after December 15, 2018. The Company is evaluating the effect of this standard on its consolidated financial statements but does not expect the adoption of ASU 2018-07 to be material.Topic 842.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 eliminates, modifies and adds disclosure requirements for fair value measurements. The amendments in ASU 2018-13 are effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company is evaluating the effects of ASU 2018-13 on its consolidated financial statements but does not expect the adoption of ASU 2018-13 to be material.
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract” (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs in cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. Entities can choose to adopt the new guidance prospectively or retrospectively. The Company is currentlyevaluating the effects of this pronouncement on its consolidated financial statements.
7 |
In October 2018, the FASB issued ASU No. 2018-17, “Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities” (“ASU 2018-17”). ASU 2018-17 states that indirect interests held through related parties in common control arrangements should be considered on a proportional basis to determine whether fees paid to decision makers and service providers are variable interests. This is consistent with how indirect interests held through related parties under common control are considered for determining whether a reporting entity must consolidate a variable interest entity. ASU 2018-17 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. Entities are required to adopt the processnew guidance retrospectively with a cumulative adjustment to retained earnings at the beginning of the earliest period presented. The Company is evaluating the effects of this pronouncement on its consolidated financial statements.
Note 4 -2 – Inventory
Inventory consists of the following (in thousands) as of::
September 30, 2018 | December 31, 2017 | |||||||
Food | $ | 206 | $ | 246 | ||||
Beverages | 988 | 1,156 | ||||||
Totals | $ | 1,194 | $ | 1,402 |
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Food | $ | 225 | $ | 300 | ||||
Beverages | 1,018 | 1,104 | ||||||
Total | $ | 1,243 | $ | 1,404 |
Note 53 – Other current assetsCurrent Assets
Other current assets consistsconsist of the following (in thousands) as of::
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Prepaid taxes | $ | 560 | $ | 503 | ||||
Landlord receivable | 195 | 195 | ||||||
Prepaid expenses | 809 | 680 | ||||||
Other | 6 | 93 | ||||||
Total | $ | 1,570 | $ | 1,471 |
Note 4 – Property and Equipment, net
Property and equipment, net consist of the following (in thousands):
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Prepaid taxes | $ | 276 | $ | 255 | ||||
Landlord receivable | 258 | 258 | ||||||
Prepaid expenses | 480 | 421 | ||||||
Insurance | 217 | 90 | ||||||
Other | 369 | 275 | ||||||
Totals | $ | 1,600 | $ | 1,299 |
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Furniture, fixtures and equipment | $ | 11,024 | $ | 10,425 | ||||
Leasehold improvements | 45,531 | 43,890 | ||||||
Less: accumulated depreciation and amortization | (17,911 | ) | (16,969 | ) | ||||
Subtotal | 38,644 | 37,346 | ||||||
Construction in progress | — | 336 | ||||||
Restaurant supplies | 1,821 | 1,665 | ||||||
Total | $ | 40,465 | $ | 39,347 |
Depreciation and amortization related to property and equipment amounted to $0.9 million and $0.8 million for the three months ended March 31, 2019 and 2018, respectively. The Company does not depreciate construction in progress, assets not yet put into service or restaurant supplies.
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Note 65 – Accrued expensesExpenses
Accrued expenses consist of the following (in thousands):
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Payroll and related | $ | 1,878 | $ | 1,794 | ||||
Variable rent, including disputed rent amounts | 1,506 | 1,766 | ||||||
Legal, professional and other services | 807 | 1,028 | ||||||
VAT and sales taxes | 530 | 645 | ||||||
Income taxes and related | 416 | 685 | ||||||
Insurance | 317 | 203 | ||||||
Due to hotels | 35 | 212 | ||||||
Other | 1,347 | 1,760 | ||||||
Total | $ | 6,836 | $ | 8,093 |
Note 6 – Long-Term Debt
Long-term debt consists of the following (in thousands) as of::
September 30, 2018 | December 31, 2017 | |||||||
VAT and Sales taxes | $ | 624 | $ | 739 | ||||
Payroll and related | 1,431 | 847 | ||||||
Income taxes | 267 | 610 | ||||||
Due to hotels | 778 | 1,168 | ||||||
Rent | 1,461 | 1,471 | ||||||
Legal, professional and other services | 1,140 | 1,007 | ||||||
Insurance | 152 | 103 | ||||||
Other | 772 | 1,042 | ||||||
Totals | $ | 6,625 | $ | 6,987 |
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Term loan agreements | $ | 3,121 | $ | 3,828 | ||||
Promissory notes | 6,250 | 6,250 | ||||||
Equipment financing agreements | 661 | 752 | ||||||
Total long-term debt | 10,032 | 10,830 | ||||||
Less: current portion of long-term debt | (2,844 | ) | (3,201 | ) | ||||
Less: discounts on warrants, net | (434 | ) | (479 | ) | ||||
Less: debt issuance costs | (27 | ) | (32 | ) | ||||
Total long-term debt, net of current portion | $ | 6,727 | $ | 7,118 |
Note 7 - Related party transactions
Net amounts due to related parties amounted to $1.2 million asInterest expense for all the Company’s debt arrangements, excluding the amortization of September 30, 2018debt issuance costs and $1.5 million as of December 31, 2017, respectively. The Company has not reserved any related party receivables as of September 30, 2018other discounts and December 31, 2017.
The Company incurred approximately $0 and $26,000 for the three months ended September 30, 2018 and 2017, respectively, and approximately $42,000 and $0.4 million for the nine months ended September 30, 2018 and 2017, respectively, of legal fees, to The Giannuzzi Group, a law firm owned by a former director of the Company who resigned in 2017. The Company also receives rental income for office space subleased to this entity. Rental income of approximately $50,000 was recorded from this entity for each of the three months ended September 30, 2018 and 2017. Rental income of approximately $0.2 million was recorded from this entity for each of the nine months ended September 30, 2018, and 2017. Amounts due to related parties, net at September 30, 2018 and December 31, 2017, included approximately $0.1 million and $0.3 million, respectively, due to this entity for legal services.
The Company incurred approximately $44,000 and $0.5 million for the three months ended September 30,March 31, 2019 and 2018, and 2017, respectively, and approximately $0.3respectively. As of March 31, 2019, the Company had $1.3 million and $1.6 millionin letters of credit outstanding for certain restaurants. These letters of credit, which are cash collateralized, are recorded as a component of security deposits on the nine months ended September 30, 2018 and 2017, respectively, for construction services to an entity ownedconsolidated balance sheet as of March 31, 2019.
The Company’s term loan agreements with Bank United are secured by family members of onesubstantially all of the Company’s stockholders, whoassets. The term loan agreements contain certain affirmative and negative covenants that limit or restrict, among other things, liens and encumbrances, indebtedness, mergers, asset sales, investments, assumptions and guaranties of indebtedness of other persons, change in nature of operations, changes in fiscal year and other matters customarily restricted in such agreements. The financial covenants contained in these agreements require the borrowers to maintain a certain adjusted tangible net worth and a debt service coverage ratio. As of March 31, 2019, the Company is also a former employeein compliance with all of its financial covenants under the Company. Included in amounts due from related parties, netterm loan agreements.
Note 7 – Fair Value of Financial Instruments
Cash and cash equivalents, accounts receivable, inventory, accounts payable and accrued expenses are carried at September 30, 2018 and December 31, 2017, is a balancecost, which approximates fair value due to this entitytheir 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 approximately $58,000March 31, 2019.
The Company’s long-term debt, including the current portion, is carried at cost on the consolidated balance sheets. Fair value of long-term debt, including the current portion, is estimated based on Level 2 inputs. Fair value is determined by discounting future cash flows using interest rates available for issues with similar terms and $27,000, respectively.maturities.
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DuringThe estimated fair values of long-term debt, for which carrying values do not approximate fair value, are as follows:
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Carrying amount of long-term debt, including current portion(1) | $ | 10,032 | $ | 10,830 | ||||
Fair value of long-term debt, including current portion | $ | 6,616 | $ | 7,648 |
(1)Excludes the fourth quarterdiscounts on warrants, net and debt issuance costs
Note 8 – Nonconsolidated Variable Interest Entities
As of 2016, the Company received approximately $1.2 million in cash advances from the TOG Liquidation Trust (the “Liquidation Trust”). The TOG Liquidation Trust is a trust that was set up in connection with a 2013 merger transaction to hold previously issued and outstanding warrants held by members of the predecessor company. Amounts due to the trust are non-interest bearing and are repayable in 2021 when the trust expires. Included in due to related parties, long term at September 30, 2018March 31, 2019 and December 31, 20172018, the Company owned interests in the following companies, which directly or indirectly operate restaurants:
· | 31.24% interest in Bagatelle NY LA Investors, LLC (“Bagatelle Investors”) |
· | 51.13% interest in Bagatelle Little West 12th, LLC (“Bagatelle NY”) |
Bagatelle Investors is a balance dueholding company that has an interest in Bagatelle NY. Both entities were formed in 2011. The Company accounts for its investments in these entities under the equity method of accounting based on management’s assessment that although it is not the primary beneficiary of these entities because it does not have the power to direct their day to day activities, the Liquidation TrustCompany is able to exercise influence over these entities. The Company has provided no additional types of support to these entities than what is contractually required.
The carrying values of these investments were as follows (in thousands):
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Bagatelle Investors | $ | 56 | $ | 56 | ||||
Bagatelle NY | 2,628 | 2,628 | ||||||
Total | $ | 2,684 | $ | 2,684 |
For the three months ended March 31, 2018, the equity in income of investee companies for the equity method investments discussed above was approximately $23.0 thousand. There was no equity in income for the three months ended March 31, 2019.
Additionally, the Company has entered into a management agreement with Bagatelle NY. Under this agreement, the Company recorded management fee revenue of approximately $1.2 million.$44.0 thousand and $37.0 thousand for the three months ended March 31, 2019 and 2018, respectively. The Company also receives rental income from Bagatelle NY for restaurant space that it subleases to Bagatelle NY. Rental income of approximately $0.1 million was recorded from this entity for each three months ended March 31, 2019 and 2018.
Please referNet receivables from the Bagatelle Investors and Bagatelle NY included in due from related parties, net were approximately $0.2 million and $0.1 million as of March 31, 2019 and December 31, 2018. These receivables, combined with the Company’s equity in each of these investments, represent the Company’s maximum exposure to Note 10loss.
In the three months ended March 31, 2018, the Company sold its 10% interest in a cost method investment, One 29 Park, LLC, for details$0.6 million, resulting in a gain of $0.2 million. The gain is included as a component of “other expenses, net” on other transactionsthe consolidated statement of operations and comprehensive income. The investment was accounted for under the cost method of accounting. The Company had also entered into a management agreement with related parties.One 29 Park, LLC, under which the Company recorded management fee revenue of $0.1 million for the three months ended March 31, 2018. The management agreement with One 29 Park, LLC terminated on September 30, 2018.
Note 9 – Related Party Transactions
Net amounts due to related parties were $1.1 million and $1.2 million as of March 31, 2019 and December 31, 2018, respectively. The Company has not reserved any related party receivables as of March 31,2019 and December 31, 2018.
During the fourth quarter of 2016, the Company received approximately $1.2 million in cash advances from the TOG Liquidation Trust (the “Liquidation Trust”). The TOG Liquidation Trust is a trust that was set up in connection with a 2013 merger transaction to hold previously issued and outstanding warrants held by members of the predecessor company. Amounts due to the trust are non-interest bearing and are repayable in 2021 when the trust expires. As of March 31, 2019 and December 31, 2018, the balance due to the Liquidation Trust included in due to related parties, long-term was approximately $1.2 million.
10 |
Please refer to Note 8 for details on other transactions with related parties.
Note 10 – Income taxes
The Company’s effective income tax rate was 11.1% for the three months ended March 31 2019 compared to 17.5% for the three months ended March 31, 2018. The effective income tax rate for the three months ended March 31, 2019 was lower compared to the three months ended March 31, 2018 primarily due to the tax rates applied to domestic and foreign income (loss). Additionally, the Company’s projected annual effective tax rate differs from the statutory U.S. tax rate of 21% primarily due to the following: (i) availability of U.S. net operating loss carryforwards, resulting in no federal income taxes; (ii) a full valuation allowance on the U.S. deferred tax assets, net; (iii) taxes owed in foreign jurisdictions such as the United Kingdom, Canada and Italy; and, (iv) taxes owed in state and local jurisdictions such as New York, New York City, Colorado and Tennessee.
The Company is subject to income taxes in the U.S. federal jurisdiction, and the various states and local jurisdictions in which it operates. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In the normal course of business, the Company is subject to examination by the federal, state, local and foreign taxing authorities.
Note 11 – Revenue from contracts with customers
On January 1, 2018,
The following table provides information about receivables and contract liabilities, which include deferred license revenue and deferred gift card and gift certificate revenue, from contracts with customers (in thousands):
March 31, 2019 | December 31, 2018 | |||||||
Receivables (1) | $ | — | $ | 174 | ||||
Deferred license revenue (2) | 1,235 | 1,179 | ||||||
Deferred gift card and gift certificate revenue (3) | $ | 331 | $ | 491 |
(1)Receivables are included in accounts receivable on the Company adopted Accounting Standards Codification Topic 606 – “Revenue from Contracts with Customers” (“ASC 606”), usingconsolidated balance sheets.
(2)Includes the modified retrospective method. Results for reporting periods beginning after January 1, 2018 are presented undercurrent and long-term portion of deferred license revenue.
(3)Deferred gift card and gift certificate revenue is included in deferred gift card revenue and other on the new revenue recognition standard, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior periods.consolidated balance sheets.
The Company recorded a net decrease to opening accumulated deficit of $0.1 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606, with the impact primarily related to the licensing of our restaurants and the amortization of fees associated with our license agreements. The changes were as follows (in thousands):
Balance at December 31, 2017 | ASC 606 Adjustments | Balance at January 1, 2018 | ||||||||||
Liabilities | ||||||||||||
Deferred license revenue, current | $ | 115 | $ | 100 | $ | 215 | ||||||
Deferred license revenue, long-term | 1,222 | (46 | ) | 1,176 | ||||||||
Equity | ||||||||||||
Accumulated deficit | (31,979 | ) | (54 | ) | (32,033 | ) |
Under ASC 606, the Company has determined that the services it provides under its licensing agreements are primarily forthe rights to access and derive benefit from our symbolic intellectual property. As a result, the initial license fees and upfront fees and do not contain separate and distinct performance obligations from the license right; therefore, these fees will beare recognized on a straight-line basis over the term of the license agreement. Under previous guidance, initial license fees were recognized when the related services had been provided, which was generally upon the opening of the restaurant, and upfront fees were recognized on a pro-rata basis as restaurants under the development agreement were opened. These fees will continue to be recorded as a component of management, license and incentive fee revenue on the consolidated statement of operations and comprehensive (loss) income. ASC 606 requires sales-basedSales-based royalties to continue to beare recognized as licensee restaurant sales occur.
The impact of adopting ASC 606 as compared toSignificant changes in deferred license revenue for the previous recognition guidance on our consolidated statement of operations and comprehensive (loss) income wasthree months ended March 31, 2019 were as follows (in thousands):
For the three months ended September 30, 2018 | ||||||||||||
As Reported | Balances Without | Adoption Impact of ASC 606 | ||||||||||
Revenues | ||||||||||||
Management, license and incentive fee revenues | $ | 2,688 | $ | 3,014 | $ | (326 | ) | |||||
Net (loss) income | $ | (209 | ) | $ | 117 | $ | (326 | ) |
Deferred license revenue, as of December 31, 2018 | $ | 1,179 | ||
Additions to deferred license revenue | 111 | |||
Revenue recognized during the period | (55 | ) | ||
Deferred license revenue, as of March 31, 2019 | $ | 1,235 |
For the nine months ended September 30, 2018 As Reported Balances Without
Adoption of
ASC 606 Adoption Impact
of ASC 606 Revenues Management, license and incentive fee revenues $ 7,832 $ 8,101 $ (269 ) Net income $ 222 $ 491 $ (269 )
Contract balances
The following table provides information about receivables and contract liabilities (deferred license fees) from contracts with customers (in thousands):
September 30, 2018 | ||||
Receivables(a) | $ | 281 | ||
Deferred license fees | $ | 1,904 |
Significant changes inAs of March 31, 2019, the estimated deferred license fees are as follows (in thousands):
For the | ||||
Nine Months Ended | ||||
September 30, 2018 | ||||
Deferred license fees - January 1, 2018(a) | $ | 1,391 | ||
Additions to deferred revenue | 694 | |||
Revenue recognized during the period | (181 | ) | ||
Deferred license fees - September 30, 2018 | $ | 1,904 |
The following table reflects the estimated license feesrevenue to be recognized in the future related to performance obligations that are unsatisfied as of September 30, 2018March 31, 2019 was as follows (in thousands):
Remainder of 2018(a) | $ | 60 | |||
2019 | 241 | ||||
2020 | 241 | ||||
2021 | 241 | ||||
2022 | 241 | ||||
Thereafter | 880 | ||||
Total | $ | 1,904 |
2019, nine months remaining | $ | 143 | ||
2020 | 191 | |||
2021 | 191 | |||
2022 | 163 | |||
2023 | 136 | |||
Thereafter | 411 | |||
Total future estimated deferred license revenue | $ | 1,235 |
Note 9 - Stock-based Compensation
AsProceeds from the sale of September 30, 2018,gift cards and gift certificates are recorded as deferred revenue and recognized as revenue when redeemed by the holder. There are no expiration dates on the Company’s gift card and gift certificates and the Company had 597,608 sharesdoes not charge any service fees that would result in a decrease to a customer’s available balance. Although the Company will continue to honor all gift card and gift certificates presented for issuancepayment, it may determine the likelihood of redemption to be remote for certain gift cards and gift certificates due to, among other things, long periods of inactivity. In these circumstances, to the extent the Company determines there is no requirement for remitting balances to government agencies under the 2013 Employee, Directorunclaimed property laws, outstanding gift card and Consultant Equity Incentive Plan (the “2013 Equity Plan”).
Stock-based compensation expense for the three months ended September 30, 2018 and 2017 was $0.3 million and $0.2 million, respectively, and is included in general and administrative expensesgift certificate balances may then be recognized as breakage in the consolidated statementstatements of operations and comprehensive (loss) income. Stock-based compensation expense for the nine months ended September 30, 2018 and 2017 was $1.0 million and $0.7 million, respectively, and is included in general and administrative expenses in the consolidated statement of operations and comprehensive (loss) income. The Company has not granted any stock options in 2018.
The Company granted 49,179 shares of its common stock to independent members of the Board of Directors (the “Board”) in June 2018 as part of their compensation for serving on the Board. The Company recorded the $0.1 million of expense associated with these grantsincome as a component of stock-based compensation expense.owned food, beverage and other net revenues.
11 |
Stock Option Activity
Significant changes in deferred gift card and gift certificate revenue for the three months ended March 31, 2019 were as follows (in thousands):
Changes in outstanding stock options for 2018 were as follows:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | Intrinsic Value | ||||||||||||||
Outstanding at December 31, 2017 | 2,315,035 | 3.41 | |||||||||||||||
2018 Grants | — | — | |||||||||||||||
Exercised | — | — | |||||||||||||||
Forfeited | (285,527 | ) | 4.19 | ||||||||||||||
Outstanding at September 30, 2018 | 2,029,508 | 3.30 | 7.13 | $ | 1,743,600 | ||||||||||||
Exercisable at September 30, 2018 | 940,357 | 4.41 | 5.81 | $ | 242,080 |
Deferred gift card and gift certificate revenue, as of December 31, 2018 | $ | 491 | ||
Additions to deferred gift card and gift certificates revenue | 123 | |||
Revenue recognized during the period related to redemptions | (283 | ) | ||
Deferred gift card and gift certificate revenue, as of March 31, 2019 | $ | 331 |
A summaryIn each of three months ended March 31, 2019 and 2018, the statusCompany recognized revenue of the Company’s non-vested stock options as of September 30, 2018 and changes for the nine months then ended is presented below:
Shares | Weighted Average Grant Date Fair Value | ||||||||||||||||
Non-vested shares at December 31, 2017 | 1,424,651 | $ | 0.99 | ||||||||||||||
Granted | — | — | |||||||||||||||
Vested | (265,000 | ) | 1.27 | ||||||||||||||
Forfeited | (70,500 | ) | 1.10 | ||||||||||||||
Non-vested shares at September 30, 2018 | 1,089,151 | $ | 0.92 |
As of September 30, 2018, there are 579,402 options outstanding that vest based on the achievement of Company and individual objectives as set by the Board.$0.3 million related to our contract liabilities.
As of September 30, 2018, there is approximately $1.0 million of total unrecognized compensation cost related to non-vested awards, which will be recognized over a weighted-average period of 2.4 years.
Restricted Stock Award ActivityNote 12 – Leases
The fair valueCompany adopted ASC Topic 842 as of restricted stock awardsJanuary 1, 2019 using the optional transition method and has applied its transition provisions at the beginning of the period of adoption. As a result, the Company did not restate comparative periods. Under this transition provision, the Company has applied the legacy guidance under Accounting Standard Codification Topic 840, Leases, including its disclosure requirements, in the comparative periods presented.
Under ASC Topic 842, a lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. The Company’s contracts determined based uponto be or contain a lease include explicitly or implicitly identified assets where the closing fair marketCompany has the right to substantially all of the economic benefits of the assets and has the ability to direct how and for what purpose the assets are used during the lease term. Leases are classified as either operating or financing. For operating leases, the Company has recognized a lease liability equal to the present value of the remaining lease payments, and a right of use asset equal to the lease liability, subject to certain adjustments, such as prepaid rents, initial direct costs and lease incentives received from the lessor. The Company used its incremental borrowing rate to determine the present value of the lease payments. The Company’s common stockincremental borrowing rate is the rate of interest that it would have to borrow on a collateralized basis over a similar term an amount equal to the grant date.lease payments in a similar economic environment.
ASC Topic 842 includes practical expedient and policy election choices. The Company elected the practical expedient transition package available in ASC Topic 842 and, as a result, did not reassess the lease classification of existing contracts or leases or the initial direct costs associated with existing leases. The Company has made an accounting policy election not to recognize right of use assets and lease liabilities for leases with a lease term of 12 months or less, including renewal options that are reasonably certain to be exercised, that also do not include an option to purchase the underlying asset that is reasonably certain of exercise. Instead, lease payments for these leases are recognized as lease cost on a straight-line basis over the lease term.
The Company did not elect the hindsight practical expedient, and therefore the Company did not reassess its historical conclusions with regards to whether renewal option periods should be included in the terms of its leases. Given the importance of each of its restaurant locations to its operations, the Company historically concluded that it was reasonably assured of exercising all renewal periods included in its leases as failure to exercise such options would result in an economic penalty. The Company also did not elect the portfolio approach practical expedient, which permits applying the standard to a portfolio of leases with similar characteristics.
Upon adoption on January 1, 2019, the Company recognized right-of-use assets and lease liabilities for operating leases of $41.8 million and $58.9 million, respectively. The difference between the right-of-use asset and lease liability represents the net book value of deferred rent and tenant improvement allowances recognized by the Company as of December 31, 2018, which was adjusted against the right-of-use asset upon adoption of ASC Topic 842. There was no impact to the opening balance of retained earnings upon adoption.
12 |
A summaryThe changes due to the adoption of ASC Topic 842 were as follows (in thousands):
December 31, 2018 | ASC 842 Adjustments | January 1, 2019 | ||||||||||
Assets | ||||||||||||
Operating lease right-of-use assets | $ | — | $ | 41,868 | $ | 41,868 | ||||||
Liabilities | ||||||||||||
Current portion of operating lease liabilities | $ | — | $ | 3,212 | $ | 3,212 | ||||||
Operating lease liability, net of current portion | — | 55,679 | 55,679 | |||||||||
Deferred gift card revenue and other | 947 | (249 | ) | 698 | ||||||||
Deferred rent and tenant improvement allowances | $ | 16,774 | $ | (16,774 | ) | $ | — |
There was no impact to the Company’s consolidated statement of operations and comprehensive income for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.
The Company enters into contracts to lease office space, restaurant space and equipment with terms that expire at various dates through 2039. Under ASC Topic 842, the lease term at the lease commencement date is determined based on the non-cancellable period for which the Company has the right to use the underlying asset, together with any periods covered by an option to extend the lease if the Company is reasonably certain to exercise that option, periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise that option, and periods covered by an option to extend (or not to terminate) the lease in which the exercise of the statusoption is controlled by the lessor. The Company considered a number of restricted stock awardsfactors when evaluating whether the options in its lease contracts were reasonably certain of exercise, such as length of time before option exercise, expected value of the leased asset at the end of the initial lease term, importance of the lease to overall operations, costs to negotiate a new lease, and changesany contractual or economic penalties.
Certain of the Company’s leases also provide for variable rent, which is determined as a percentage of gross sales in excess of specified, minimum sales targets. These variable rents are not included in the calculation of lease payments when classifying a lease and in the measurement of the lease liability as they do not meet the definition of in-substance, fixed-lease payments under ASC Topic 842.
The Company subleases portions of its office and restaurant space where it does not use the entire space for its operations. For the three months ended March 31, 2019, sublease income was $0.2 million, of which $0.1 million was from related party, Bagatelle NY. Refer to Note 8 for details on transactions with this related party.
Certain of the Company’s leases include variable lease costs to reimburse the lessor for real estate tax and insurance expenses, and certain non-lease components that transfer a distinct service to the Company, such as common area maintenance services. The Company has elected not to separate the accounting for lease components and non-lease components, for all leased assets.
ASC Topic 842 includes a number of reassessment and re-measurement requirements for lessees based on certain triggering events or conditions, including whether a contract is or contains a lease, assessment of lease term and purchase options, measurement of lease payments, assessment of lease classification and assessment of the discount rate. The Company reviewed the reassessment and re-measurement requirements and concluded that a lease for office space required reassessment as the Company had determined not to elect to exercise an option that it had previously determined it was reasonably certain to exercise. As a result, the Company remeasured the lease liability to reflect the change in lease payments, which resulted in a reduction in the operating lease liability and a corresponding adjustment to the operating lease right-of-use asset of $1.2 million in the three months ended March 31, 2019. In addition, there were no impairment indicators identified during the three months ended March 31, 2019 that required an impairment test for the six months ended September 30, 2018 is presented below:Company’s right-of-use assets or other long-lived assets in accordance with Accounting Standard Codification Topic 360, Property, Plant, and Equipment.
Shares | Weighted Grant Date Per | ||||||||
Non-vested at December 31, 2017 | 985,000 | $ | 2.26 | ||||||
Granted | 126,781 | 2.71 | |||||||
Vested | (342,622 | ) | 1.85 | ||||||
Forfeited | (15,000 | ) | 2.73 | ||||||
Non-vested at September 30, 2018 | 754,159 | $ | 2.51 |
The components of lease expense for the period were as follows (in thousands):
March 31, | ||||
2019 | ||||
Lease cost | ||||
Operating lease cost | $ | 1,726 | ||
Variable lease cost | 674 | |||
Short-term lease cost | 108 | |||
Sublease income | (203 | ) | ||
Total lease cost | $ | 2,305 | ||
Weighted average remaining lease term – operating leases | 14 years | |||
Weighted average discount rate – operating leases | 8.25 | % |
13 |
Supplemental cash flow information related to leases for the period was as follows (in thousands):
March 31, | ||||
2019 | ||||
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 1,718 | ||
Right-of-use assets obtained in exchange for operating lease obligations | $ | 281 |
As of September 30, 2018, 150,000March 31, 2019, maturities of the Company’s operating lease liabilities are as follows (in thousands):
2019, nine months remaining | $ | 5,167 | ||
2020 | 6,801 | |||
2021 | 6,545 | |||
2022 | 6,669 | |||
2023 | 6,805 | |||
Thereafter | 69,536 | |||
Total lease payments | 101,523 | |||
Less: imputed interest | (44,106 | ) | ||
Present value of operating lease liabilities | $ | 57,417 |
Note 13 – Earnings per share
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period and income available to common stockholders. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period plus the dilutive effect of all potential shares of common stock including common stock issuable pursuant to stock options, warrants, and restricted shares subject to performance-based vesting were still outstanding. As of September 30,stock units.
For the three months ended March 31, 2019 and 2018, the Company had approximately $1.9earnings per share was calculated as follows (in thousands, except earnings per share and related share data):
Three months ended March 31, | ||||||||
2019 | 2018 | |||||||
Net income attributable to The ONE Group Hospitality, Inc. | $ | 854 | $ | 231 | ||||
Basic weighted average shares outstanding | 28,314,820 | 27,187,657 | ||||||
Dilutive effect of stock options, warrants and restricted share units | 996,936 | 200,841 | ||||||
Diluted weighted average shares outstanding | 29,311,756 | 27,388,498 | ||||||
Net income available to common stockholders per share - Basic | $ | 0.03 | $ | 0.01 | ||||
Net income available to common stockholders per share - Diluted | $ | 0.03 | $ | 0.01 |
For the three months ended March 31, 2019, 0.9 million stock options, warrants and restricted share units were determined to be anti-dilutive and were therefore excluded from the calculation of total unrecognized compensation costs relateddiluted earnings per share. For the three months ended March 31, 2018, 2.0 million stock options, warrants and restricted share units were determined to restricted stock awards, which will be recognized over a weighted average periodanti-dilutive and were therefore excluded from the calculation of 2.5 years.diluted earnings per share.
14 |
Note 1014 – Nonconsolidated variable interest entitiesStockholders’ Equity
Significant changes in stockholders’ equity for the three months ended March 31, 2019 and 2018 are as follows (in thousands):
Common Stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | Noncontrolling interests | Total | |||||||||||||||||||
Balance at December 31, 2018 | $ | 3 | $ | 43,543 | $ | (28,722 | ) | $ | (2,310 | ) | $ | (452 | ) | $ | 12,062 | |||||||||
Stock-based compensation | — | 181 | — | — | — | 181 | ||||||||||||||||||
Loss on foreign currency translation, net | — | — | — | (160 | ) | — | (160 | ) | ||||||||||||||||
Net income (loss) | — | — | 854 | — | (85 | ) | 769 | |||||||||||||||||
Balance at March 31, 2019 | $ | 3 | $ | 43,724 | $ | (27,868 | ) | $ | (2,470 | ) | $ | (537 | ) | $ | 12,852 |
Common Stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | Noncontrolling interests | Total | |||||||||||||||||||
Balance at December 31, 2017 | $ | 3 | $ | 41,007 | $ | (31,979 | ) | $ | (1,556 | ) | $ | (922 | ) | $ | 6,553 | |||||||||
Adoption of ASC 606 “Revenue from contracts with customers” | — | — | (54 | ) | — | — | (54 | ) | ||||||||||||||||
Stock-based compensation | — | 324 | — | — | — | 324 | ||||||||||||||||||
Vesting of restricted shares | — | — | — | — | — | — | ||||||||||||||||||
Loss on foreign currency translation, net | — | — | — | (75 | ) | — | (75 | ) | ||||||||||||||||
Net income (loss) | — | — | 231 | — | (113 | ) | 118 | |||||||||||||||||
Balance at March 31, 2018 | $ | 3 | $ | 41,331 | $ | (31,802 | ) | $ | (1,631 | ) | $ | (1,035 | ) | $ | 6,866 |
Note 15 - Stock-Based Compensation
As of September 30, 2018 and DecemberMarch 31, 2017, the Company owned interests in the following companies, which directly or indirectly operate restaurants:
Bagatelle Investors is a holding company that has an interest in Bagatelle NY. Both entities were formed in 2011. The Company accounts for its investments in these entities under the equity method of accounting based on management’s assessment that although it is not the primary beneficiary of these entities because it does not have the power to direct their day to day activities, the Company is able to exercise influence over these entities. The Company has provided no additional types of support to these entities than what is contractually required.
One 29 Park, formed in 2009, operates a restaurant and manages the rooftop of a hotel located in New York, NY. Until the fourth quarter of 2017, the Company accounted for its investment in One 29 Park under the equity method of accounting based on management’s assessment that2019, the Company had significant influence over One 29 Park’s operations. In the fourth quarter of 2017, the majority ownership of One 29 Park changed. As a result of this ownership change, the Company believed that it no longer had significant influence over the operations of One 29 Park, and subsequently began accounting458,746 remaining shares available for its investment in One 29 Parkissuance under the 2013 Employee, Director and Consultant Equity Incentive Plan (the “2013 Equity Plan”).
Stock-based compensation cost methodfor each of accounting. Inthe three months ended March 31, 2019 and 2018 the Company sold its 10% interest in One 29 Park to the new ownership group for $0.6was $0.2 million and recorded a gain of $0.2 million on the sale as a component of “otheris included in general and administrative expenses net” onin the consolidated statement of operations and comprehensive (loss) income.
At September 30, 2018 and December 31, 2017, the carrying values of these investments were (in thousands):
September 30, 2018 | December 31, 2017 | |||||||
Bagatelle Investors | $ | 47 | $ | 33 | ||||
Bagatelle NY | 2,565 | 2,509 | ||||||
One 29 Park | — | 415 | ||||||
Totals | $ | 2,612 | $ | 2,957 |
Stock Option Activity
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Equity in (income) of investee companies | $ | — | $ | (264 | ) | $ | (111 | ) | $ | (156 | ) |
The Company has entered into a management agreement with Bagatelle NY. Under this agreement, the Company recorded management fee revenue of approximately $42,000 and $47,000 forChanges in outstanding stock options during the three months ended September 30, 2018 and 2017, respectively, and $0.2 million and $0.1 million for the nine months ended September 30, 2018 and 2017, respectively. March 31, 2019 were as follows:
Shares | Weighted average exercise price | Weighted average remaining contractual life | Intrinsic value (thousands) | |||||||||||
Outstanding at December 31, 2018 | 2,001,008 | $ | 3.29 | |||||||||||
Granted | 68,000 | 2.99 | ||||||||||||
Exercised | — | — | ||||||||||||
Cancelled, expired or forfeited | (63,000 | ) | 2.80 | |||||||||||
Outstanding at March 31, 2019 | 2,006,008 | $ | 3.29 | 6.67 years | $ | 1,063 | ||||||||
Exercisable at March 31, 2019 | 1,065,508 | $ | 4.16 | 5.45 years | $ | — |
The Company also receives rental income from Bagatelle NY for restaurant space that it subleases to Bagatelle NY. Rental incomefair value of $0.1 million was recorded from this entity for each ofoptions granted in the three months ended September 30, 2018 and 2017, respectively and $0.4 millionMarch 31, 2019 was recorded from this entity for eachestimated on the date of grant using the nine months ended September 30, 2018 and 2017. The Company has provided no additional types of support to Bagatelle NY than what is contractually required.Black-Scholes option pricing model with the following assumptions:
The Company has also entered into a management agreement with One 29 Park. Under this agreement, the Company recorded management fee revenue of $0.1 million and $0.1 million for the three months ended September 30, 2018 and 2017, respectively and $0.3 million and $0.3 million for the six months ended September 30, 2018 and 2017, respectively. The management agreement with One 29 Park terminated on September 30, 2018.
Net receivables of $0.2 million and $0.1 million from Bagatelle NY and One 29 Park are included in due to related parties, net on the September 30, 2018 and December 31, 2017 consolidated balance sheets, respectively. These amounts, combined with the Company’s equity in each of these investments, represent the Company’s maximum exposure to loss.
Note 11 – Income taxes
The Company’s effective income tax rate was 66.7% for the nine months ended September 30, 2018, compared to -11.0% for the nine months ended September 30, 2017. The Company’s projected annual effective tax rate differs from the statutory U.S. tax rate of 21% primarily for the following reasons: 1) availability of U.S. carryforward NOLs, which results in no federal or state taxes; 2) a full valuation allowance on the U.S. net deferred tax asset; 3) taxes owed in foreign jurisdictions such as the United Kingdom, Canada and Italy; and 4) New York City taxes owed.
In December 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted. The TCJA included:
· A one-time tax on the deemed repatriation of post-1986 untaxed foreign earnings and profits (“E&P”);
· A reduction in the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017;
· The introduction of a new U.S. tax on certain off-shore earnings referred to as Global Intangible Low-Taxed Income (“GILTI”) at an effective tax rate of 10.5% for tax years beginning after December 31, 2017 (increasing to 13.125% for tax years beginning after December 31, 2025) partially offset by foreign tax credits; and
· Introduction of a territorial tax system beginning in 2018 by providing for a 100% dividend received deduction on certain qualified dividends from foreign subsidiaries.
In the fourth quarter of 2017, the Company recorded an adjustment of $2.9 million to revalue its net deferred tax asset based on a 21% corporate tax rate, which was entirely offset by a reduction in the Company’s valuation allowance. Additionally, the Company recorded a provisional amount of $1.9 million to account for the deemed repatriation of E&P. Due to the complexities involved in accounting for the enactment of the TCJA, SEC Staff Accounting Bulletin 118 allows companies to record provisional estimates of the impacts of the TCJA during a measurement period of up to one year from the enactment date. For its 2017 tax return, the Company conducted a comprehensive E&P analysis which reported a $1.4 million deemed repatriation of E&P. The adjustment to the provisional amount has been included in the tax provision for continuing operations in 2018. The impact of recording the finalized E&P is zero given the Company’s foreign tax credits, net operating loss carryforward and a full valuation allowance on domestic net deferred tax assets.
Expected life, in years | 8.5 years | |||
Risk-free interest rate | 2.62 | % | ||
Volatility | 42.0 | % | ||
Dividend yield | 0.0 | % |
FASB Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can elect to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI resulting from those items in the year the tax is incurred. The Company has elected to recognize the resulting tax on GILTI as an expense in the period the tax is incurred and expects to incur no tax for the year ended December 31, 2018 due to the availability of foreign tax credits and net operating losses.
Note 12 – (Loss) earnings per share
Basic earnings (loss) per share is computed using the weighted average number of common shares outstanding during the applicable period. Diluted earnings (loss) per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential common stock. Potential common stock consists of shares issuable pursuant to stock options, warrants and restricted share units.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in thousands, except earnings per share and related share information) | ||||||||||||||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. | $ | (305 | ) | $ | (1,166 | ) | $ | 106 | $ | (3,868 | ) | |||||
Basic weighted average shares outstanding | 27,751,632 | 25,228,288 | 27,437,269 | 25,141,933 | ||||||||||||
Dilutive effect of stock options, warrants and restricted share units | - | - | 62,376 | - | ||||||||||||
Diluted weighted average shares outstanding | 27,751,632 | 25,228,288 | 27,499,645 | 25,141,933 | ||||||||||||
Net (loss) income available to common stockholders per share - Basic | $ | (0.01 | ) | $ | (0.05 | ) | $ | 0.00 | $ | (0.15 | ) | |||||
Net (loss) income available to common stockholders per share - Diluted | $ | (0.01 | ) | $ | (0.05 | ) | $ | 0.00 | $ | (0.15 | ) |
For the three and nine months ended September 30, 2017 and for the three months ended September 30, 2018, all equivalent shares underlying options, warrants and restricted share units were excluded from the calculation of diluted earnings per share as the Company was in a net loss position. For the nine months ended September 30, 2018, 1.9 million stock options, warrants and restricted share units were determined to be anti-dilutive and were therefore excluded from the calculation of diluted earnings per share. Basic and diluted earnings per share for discontinued operations was $0.00 for each of the three and nine months ended September 30, 2018 and 2017.
Net loss per share amounts for continuing operations and discontinued operations are computed independently. As a result, the sum of per share amounts may not equal the total.
Note 13 – Litigation
The Company is subject to claims and legal actions in the ordinary course of business, including claims by or against its licensees, employees, former employees and others. The Company does not believe any currently pending or threatened matter would have a material adverse effect on its business, results of operations or financial condition.
15 |
Note 14 – Segment reportingA summary of the status of the Company’s non-vested stock options as of December 31, 2018 and March 31, 2019 and changes during the three months then ended, is presented below:
Shares | Weighted average grant date fair value | |||||||
Non-vested stock options at December 31, 2018 | 926,500 | $ | 0.91 | |||||
Granted | 68,000 | 2.99 | ||||||
Vested | — | — | ||||||
Cancelled, expired or forfeited | (54,000 | ) | 0.99 | |||||
Non-vested stock options at March 31, 2019 | 940,500 | $ | 0.95 |
As of March 31, 2019, there are 579,402 milestone-based options outstanding. These options vest based on the achievement of Company and individual objectives as set by the Board.
As of March 31, 2019, there is approximately $0.6 million of total unrecognized compensation cost related to non-vested awards, which will be recognized over a weighted-average period of 2.8 years.
Restricted Stock Unit Activity
The Company’s Chief Executive OfficerCompany issues restricted stock units (“CEO”RSUs”), who began serving as under the 2013 Equity Plan. The fair value of these RSUs is determined based upon the closing fair market value of the Company’s CEOcommon stock on October 30, 2017the grant date.
A summary of the status of RSUs and has been deemedchanges during the Company’s Chief Operating Decision Maker, managesthree months ended March 31, 2019 is presented below:
Shares | Weighted average grant date fair value | |||||||
Non-vested RSUs at December 31, 2018 | 764,201 | $ | 2.54 | |||||
Granted | 142,205 | 2.93 | ||||||
Vested | (20,544 | ) | 2.86 | |||||
Cancelled, expired or forfeited | (9,000 | ) | 2.73 | |||||
Non-vested RSUs at March 31, 2019 | 764,201 | $ | 2.59 |
As of March 31, 2019, 150,000 RSUs subject to performance-based vesting were still outstanding. As of March 31, 2019, the business and allocates resources via a combinationCompany had approximately $3.2 million of restaurant sales reports and segment profit information (which is defined as revenues less operating expenses)total unrecognized compensation costs related to the Company’s three sourcesRSUs, which will be recognized over a weighted average period of revenue, which are presented in their entirety within the consolidated statements of operations and comprehensive (loss) income. Beginning with the period ended December 31, 2017, the Company revised its segments to align with how it manages the business. Prior period segments have been restated to conform to the current segment presentation (in thousands):2.8 years.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenues: | ||||||||||||||||
Owned restaurants | $ | 15,312 | $ | 13,189 | $ | 45,908 | $ | 42,100 | ||||||||
Owned food, beverage and other operations | 1,960 | 2,144 | 6,048 | 8,460 | ||||||||||||
Managed and licensed operations | 2,688 | 2,479 | 7,832 | 7,577 | ||||||||||||
$ | 19,960 | $ | 17,812 | $ | 59,788 | $ | 58,137 | |||||||||
Segment Profits: | ||||||||||||||||
Owned restaurants | $ | 1,483 | $ | 842 | $ | 5,231 | $ | 3,262 | ||||||||
Owned food, beverage and other operations | (108 | ) | 100 | 266 | 1,164 | |||||||||||
Managed and licensed operations | 2,688 | 2,479 | 7,832 | 7,577 | ||||||||||||
Total segment profit | 4,063 | 3,421 | 13,329 | 12,003 | ||||||||||||
General and administrative | 2,266 | 2,267 | 7,937 | 8,479 | ||||||||||||
Depreciation and amortization | 896 | 950 | 2,575 | 2,621 | ||||||||||||
Interest expense, net of interest income | 294 | 325 | 902 | 804 | ||||||||||||
Equity in income of investee companies | - | (264 | ) | (111 | ) | (156 | ) | |||||||||
Other, net | 565 | 977 | 1,359 | 3,581 | ||||||||||||
Income (loss) from continuing operations before provision for income taxes | $ | 42 | $ | (834 | ) | $ | 667 | $ | (3,326 | ) |
September 30, 2018 | December 31, 2017 | |||||||
Total assets: | ||||||||
Owned restaurants | $ | 41,025 | $ | 40,570 | ||||
Owned food, beverage and other operations* | 7,067 | 7,385 | ||||||
Managed and licensed operations | 5,675 | 5,060 | ||||||
Total | $ | 53,767 | $ | 53,015 | ||||
* Includes corporate assets |
Nine Months Ended | ||||||||
September 30, | ||||||||
2018 | 2017 | |||||||
Capital asset additions: | ||||||||
Owned restaurants | $ | 2,792 | $ | 3,382 | ||||
Owned food, beverage and other operations ** | 446 | 732 | ||||||
Managed and licensed operations | - | - | ||||||
Total | $ | 3,238 | $ | 4,114 | ||||
** Includes corporate asset additions |
Note 15 – Geographic information16 - Segment Reporting
The following table contains certain financialCompany operates in three segments: “Owned restaurants,” “Owned food, beverage and other,” and “Managed and licensed operations.” The Owned restaurants segment consists of leased restaurant locations and competes in the full-service dining industry. The Owned food, beverage and other segment consists of hybrid operations, such as where the Company has a leased restaurant location and also has a food and beverage agreement at the same location, typically a hotel, and offsite banquet offerings. The Managed and licensed operations segment includes all operations for which a management, incentive or license fee is received. Management agreements generate management fees on net revenue and incentive fees on operating profit as defined in the applicable management agreement. License agreements generate revenue primarily through royalties earned on net revenue at each location. Revenues associated with developmental support for licensed locations are also included within this segment.
The Company’s Chief Executive Officer (“CEO”), who has been deemed the Company’s Chief Operating Decision Maker, manages the business and allocates resources via a combination of restaurant sales reports and segment profit information (which is defined as revenues less operating expenses) related to the Company’s three segments, or sources of revenues, which are presented in their entirety within the consolidated statements of operations and comprehensive income.
16 |
The Company’s operating results by geographic locationsegment were as follows (in thousands):
For the three months ended March 31, 2019 | ||||||||||||||||
Owned restaurants | Owned food, beverage and other | Managed and licensed operations | Total | |||||||||||||
Revenues: | ||||||||||||||||
Owned net revenues | $ | 17,820 | $ | 2,273 | $ | — | $ | 20,093 | ||||||||
Management, license and incentive fee revenue | — | — | 2,683 | 2,683 | ||||||||||||
Total revenues | 17,820 | 2,273 | 2,683 | 22,776 | ||||||||||||
Cost and expenses: | ||||||||||||||||
Owned operating expenses: | ||||||||||||||||
Cost of sales | 4,569 | — | — | 4,569 | ||||||||||||
Other operating expenses | 10,915 | — | — | 10,915 | ||||||||||||
Owned food, beverage and other expenses | — | 2,259 | — | 2,259 | ||||||||||||
Total owned operating expenses | 15,484 | 2,259 | — | 17,743 | ||||||||||||
Segment income | $ | 2,336 | $ | 14 | $ | 2,683 | $ | 5,033 | ||||||||
General and administrative | 2,650 | |||||||||||||||
Depreciation and amortization | 942 | |||||||||||||||
Interest expense, net of interest income | 269 | |||||||||||||||
Equity in income of investee companies | — | |||||||||||||||
Other | 307 | |||||||||||||||
Income before provision for income taxes | $ | 865 |
For the three months ended March 31, 2018 | ||||||||||||||||
Owned restaurants | Owned food, beverage and other | Managed and licensed operations | Total | |||||||||||||
Revenues: | ||||||||||||||||
Owned net revenues | $ | 15,076 | $ | 2,005 | $ | — | $ | 17,081 | ||||||||
Management, license and incentive fee revenue | — | — | 2,436 | 2,436 | ||||||||||||
Total revenues | 15,076 | 2,005 | 2,436 | 19,517 | ||||||||||||
Cost and expenses: | ||||||||||||||||
Owned operating expenses: | ||||||||||||||||
Cost of sales | 4,034 | — | — | 4,034 | ||||||||||||
Other operating expenses | 9,378 | — | — | 9,378 | ||||||||||||
Owned food, beverage and other expenses | — | 1,689 | — | 1,689 | ||||||||||||
Total owned operating expenses | 13,412 | 1,689 | — | 15,101 | ||||||||||||
Segment income | $ | 1,664 | $ | 316 | $ | 2,436 | $ | 4,416 | ||||||||
General and administrative | 3,055 | |||||||||||||||
Depreciation and amortization | 778 | |||||||||||||||
Interest expense, net of interest income | 318 | |||||||||||||||
Equity in loss of investee companies | 23 | |||||||||||||||
Other | 99 | |||||||||||||||
Income before provision for income taxes | $ | 143 |
The Company’s total assets by segment for the periods indicated were as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenues | ||||||||||||||||
United States: | ||||||||||||||||
Owned restaurants | $ | 15,312 | $ | 13,189 | $ | 45,908 | $ | 42,100 | ||||||||
Owned food, beverage and other operations | 1,960 | 2,144 | 6,048 | 8,460 | ||||||||||||
Managed and licensed operations | 1,469 | 1,330 | 4,797 | 4,521 | ||||||||||||
Total United States revenues | $ | 18,741 | $ | 16,663 | $ | 56,753 | $ | 55,081 | ||||||||
Foreign: | ||||||||||||||||
Owned restaurants | $ | - | $ | - | $ | - | $ | - | ||||||||
Owned food, beverage and other operations | - | - | - | - | ||||||||||||
Managed and licensed operations | 1,219 | 1,149 | 3,035 | 3,056 | ||||||||||||
Total foreign revenues | $ | 1,219 | $ | 1,149 | $ | 3,035 | $ | 3,056 | ||||||||
Total revenues | $ | 19,960 | $ | 17,812 | $ | 59,788 | $ | 58,137 |
September 30, 2018 | December 31, 2017 | |||||||
Long-lived Assets | ||||||||
United States: | ||||||||
Owned restaurants | $ | 38,215 | $ | 37,907 | ||||
Owned food, beverage and other operations | 5,164 | 5,088 | ||||||
Managed and licensed operations | 84 | 109 | ||||||
Total United States long-lived assets | $ | 43,463 | $ | 43,104 | ||||
Foreign: | ||||||||
Owned restaurants | $ | - | $ | - | ||||
Owned food, beverage and other operations | 83 | - | ||||||
Managed and licensed operations | 303 | 148 | ||||||
Total foreign long-lived assets | $ | 386 | $ | 148 | ||||
Total long-lived assets | $ | 43,849 | $ | 43,252 |
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Total assets: | ||||||||
Owned restaurants | $ | 75,272 | $ | 42,971 | ||||
Owned food, beverage and other operations(1) | 15,591 | 7,274 | ||||||
Managed and licensed operations | 4,728 | 5,734 | ||||||
Total | $ | 95,591 | $ | 55,979 |
Note 16 – Stockholders’ Equity
On July 18, 2018, an investor of the Company exercised 250,000 warrants to purchase shares of the Company’s common stock at an exercise price of $1.63 per share. The Company received proceeds of $0.4 million in connection with this transaction.
On September 13, 2018, an investor of the Company exercised 500,000 warrants to purchase shares of the Company’s common stock at an exercise price of $1.63 per share. The Company received proceeds of $0.8 million in connection with this transaction.(1)Includes corporate assets
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The Company’s total assets increased $40.1 million as of March 31, 2019 compared to December 31, 2018 as a result of adopting ASC Topic 842 during the first quarter of 2019. Refer to Note 12 for additional information regarding the adoption of ASC Topic 842.
The Company’s capital asset additions by segment for the periods indicated were as follows (in thousands):
For the three months ended March 31, | ||||||||
2019 | 2018 | |||||||
Capital assets additions: | ||||||||
Owned restaurants | $ | 1,762 | $ | 301 | ||||
Owned food, beverage and other operations(1) | 298 | 5 | ||||||
Managed and licensed operations | — | — | ||||||
Total | $ | 2,060 | $ | 306 |
(1) Includes corporate capital asset additions
Note 17 - Geographic Information
The following tables contains certain financial information by geographic location for the three months ended March 31, 2019 and 2018 (in thousands):
Revenues
For the three months ended March 31, | ||||||||
2019 | 2018 | |||||||
Domestic: | ||||||||
Owned restaurants | $ | 17,820 | $ | 15,076 | ||||
Owned food, beverage and other operations | 2,273 | 2,005 | ||||||
Managed and licensed operations | 1,687 | 1,687 | ||||||
Total domestic revenues | $ | 21,780 | $ | 18,768 | ||||
International: | ||||||||
Owned restaurants | — | — | ||||||
Owned food, beverage and other operations | — | — | ||||||
Managed and licensed operationstv520238 | 996 | 749 | ||||||
Total international revenues | $ | 996 | $ | 749 | ||||
Total revenues | $ | 22,776 | $ | 19,517 |
Long-lived assets
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Domestic: | ||||||||
Owned restaurants | $ | 72,532 | $ | 38,958 | ||||
Owned food, beverage and other operations | 13,002 | 5,375 | ||||||
Managed and licensed operations | 59 | 67 | ||||||
Total domestic long-lived assets | $ | 85,593 | $ | 44,400 | ||||
International: | ||||||||
Owned restaurants | — | — | ||||||
Owned food, beverage and other operations | — | — | ||||||
Managed and licensed operations | 37 | 38 | ||||||
Total international long-lived assets | $ | 37 | $ | 38 | ||||
Total long-lived assets | $ | 85,630 | $ | 44,438 |
Note 18 – Litigation
The Company is party to claims in lawsuits incidental to its business, including lease disputes and employee-related matters. In the opinion of management, the ultimate outcome of such matters, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position or results of operations.
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Note 19 - Liquidity
During the three months ended March 31, 2019, the Company had net income of $0.8 million and had a working capital deficit of $8.6 million. As of March 31, 2019, the Company's accumulated deficit was $27.9 million. Additionally, as of March 31, 2019, the Company's cash and cash equivalents was $1.1 million, and cash from operations for the three months ended March 31, 2019 and 2018 were $2.5 million and $0.2 million, respectively. The Company expects to finance its operations, including the costs of opening planned restaurants, for at least the next twelve months from March 31, 2019 primarily through cash provided by operations. Other sources of liquidity could include additional potential issuances of debt or equity securities in public or private financings or warrant or option exercises.
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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 containscontain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). Forward-looking statements which are intended to speak only as of the date thereof and, involve risks and uncertainties that may cause our actual results, performance or achievements to be materially different from any futurethe results, performance or achievements expressed or implied by thesethe forward-looking statements. These risk and uncertainties include, the risk factors discussed under Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements include matters such as general economic conditions, consumer preferences and spending, costs, competition, new product execution, restaurant openings or closings, operating margins, the availability of acceptable real estate locations, the sufficiency of our cash balances and cash generated from operatingoperations and financing activities for our future liquidity and capital resource needs, growth of licensing, the impact on our business as a result of Federal and/orand State legislation, future litigation, the execution of our growth strategy and other matters. Forward lookingWe have attempted to identify forward-looking statements are generally accompanied by words such as:terminology including “anticipates,” “believes,” “anticipates,“can,” “continue,” “ongoing,” “could,” “estimates,” “expects,” “intends,” “may,” “appears,” “suggests,” “future,” “likely,” “goal,” “plans,” “intends,“potential,” “estimates,“projects,” “predicts,” “should,” “targets,” “expects,“would,” “contemplates”“will” and similar expressions that convey the uncertainty of future events or outcomes. These risks and uncertainties include, but areYou should not limited to, the risk factors described in our annual reportplace undue reliance on Form 10-K for the fiscal year ended December 31, 2017.any forward-looking statement. We do not undertake any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required under applicable law.
General
This information should be read in conjunction with the consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the “2017 Form 10-K”).2018.
As used in this report, the terms “company,“Company,” “we,” “our,” or “us,” refer to The OneONE Group Hospitality, Inc. and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.
Overview
The ONE Group Hospitality, Inc., a Delaware corporation, develops, owns and operates, manages or licenses upscale, high-energy restaurants and lounges and provides turn-key food and beverage services for hospitality venues including hotels, casinos and other high-end locations globally. We define turn-key food and beverage (“F&B”) services as those services that can be scaled and implemented by us at a particular hospitality venue and customized for our clients.
We were established with the vision of becoming a global market leader in the hospitality industry by melding high-quality service, ambiance, high-energy and cuisine into one great experience.experience that we refer to as “Vibe Dining.” Our primary restaurant brand is STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse.
Our F&B hospitality management services include developing, managing and operating restaurants, bars, rooftop lounges, pools, banqueting and catering facilities, private dining rooms, room service and mini bars tailored to the specific needs of high-end hotels and casinos. Our F&B hospitality clients operate global hospitality brands such as the W Hotel, Cosmopolitan Hotel, Hippodrome Casino, Hyatt and ME Hotels. These locations are typically
We opened our first restaurant in January 2004 in New York City and, as of March 31, 2019, we owned, operated, undermanaged or licensed 29 venues including 19 STKs in major metropolitan cities in North America, Europe and the Middle East. In addition, we provided food and beverage services in four hotels and casinos. We generate management agreements under which we earn a management fee based on revenue and an incentive fee basedrevenue (profit sharing) from those restaurants and lounges that we do not own, but instead manage on profitabilitybehalf of the underlying operations.our F&B hospitality clients. All our restaurants, lounges and F&B services are designed to create a social dining and high-energy entertainment experience within a destination location. We believe that this design and operating philosophy separates us from more traditional restaurant and foodservice competitors.
AsThe table below reflects our venues by restaurant brand and geographic location as of September 30, 2018, our operations were spread across 34 venues as follows:March 31, 2019:
Venues | Venues | ||||||||||||||||||||||||||||||||||||||||||||||||||||
STK | STK Rooftop | Bagatelle* | F&B Hospitality** | Total | STK(1) | Bagatelle | Radio | Hideout | Marconi | Heliot | F&B Services | Total | |||||||||||||||||||||||||||||||||||||||||
Company-owned | 9 | 2 | - | - | 11 | ||||||||||||||||||||||||||||||||||||||||||||||||
Domestic | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Owned | 10 | — | — | 1 | — | — | 1 | 12 | |||||||||||||||||||||||||||||||||||||||||||||
Managed | 6 | - | - | 13 | 19 | 1 | 1 | — | — | — | — | — | 2 | ||||||||||||||||||||||||||||||||||||||||
Licensed | 2 | 1 | - | - | 3 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Other | - | - | 1 | - | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||
17 | 3 | 1 | 13 | 34 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total domestic | 11 | 1 | — | 1 | — | — | 1 | 14 | |||||||||||||||||||||||||||||||||||||||||||||
International | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Owned | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
Managed | 3 | — | 2 | — | 1 | 1 | 3 | 10 | |||||||||||||||||||||||||||||||||||||||||||||
Licensed | 5 | — | — | — | — | — | — | 5 | |||||||||||||||||||||||||||||||||||||||||||||
Total international | 8 | — | 2 | — | 1 | 1 | 3 | 15 | |||||||||||||||||||||||||||||||||||||||||||||
Total venues | 19 | 1 | 2 | 1 | 1 | 1 | 4 | 29 |
* Unconsolidated subsidiary accounted for under(1) Locations with an STK and STK Rooftop are considered one venue location. This includes the equity method of accounting.
** Effective October 1, 2018, we ceased managing three F&B Hospitality venues associated withrooftop in San Diego, CA, which is a terminated management agreement.licensed location.
Net lossincome attributable to The ONE Group Hospitality, Inc. for the three months ended September 30, 2018March 31, 2019 was $0.2$0.9 million ($0.01 per share) compared to a net loss$0.2 million for the three months ended September 30, 2017March 31, 2018. The increase was primarily due to overall sales growth and profitability improvements from existing restaurants, newly owned restaurants and managed and licensed locations combined with labor and spending efficiencies. In the first quarter of $1.0 million (-$0.05 per share). Net income for the nine months ended September 30, 2018 was $0.1 million ($0.00 per share) compared to a net loss for the nine months ended September 30, 2017 of $3.8 million (-$0.15 per share). Our net loss for the nine months ended September 30, 2017 included a loss from discontinued operations of $0.1 million, which reflects the winding down of operations that we have exited.
In July 2018,2019, we opened an owned STK restaurant at the Andaz Hotel in San Diego, CaliforniaNashville, Tennessee and our seconda licensed STK restaurant in Dubai at the Address Downtown Hotel. We followed these openings with the opening of our first licensed STK restaurant in Mexico City at Presidente Masaryk Avenue, the first of four restaurants we target to license in Mexico. We expect that our growth in 2018 will continue with the planned opening of a licensed location in Doha, (Qatar) and a food & beverage operation in Europe. We foresee that our growth in 2019 will come from our development pipeline, with the potential opening of a domestic owned venue, a managed or licensed location in Texas and additional licensed locations in Puerto Rico and Mexico.
In March 2018, we sold our 10% interest in One 29 Park for $0.6 million. One 29 Park, which was accounted for under the cost method of accounting, operated a restaurant and managed the rooftop bar and food and beverage services of a hotel located in New York, NY. Our management agreement with One 29 Park terminated on September 30, 2018.
In 2017, we hosted a party for the Super Bowl that contributed $1.8 million of revenue in 2017. We did not have a similar event during the nine months ended September 30, 2018. Revenues and expenses associated with this event were recorded within our “owned food, beverage and other” segment.Qatar.
Our Growth Strategies and Outlook
Our growth model is primarily driven by the following:
Expansion of STK.STK. We expect to continue to expand our operations domestically and internationally through a mix of licensed restaurants and managed unitsrestaurants using a disciplined and targeted site selection process. We refer to this as our “capital light strategy” because it requires significantly less capital than expansion through owned restaurants. Under our capital light strategy, we expect to open as many as three to five STK restaurants annually primarily through management or licensing agreements, provided that we have sufficient interest from prospective licensees, acceptable locations and quality restaurant managers available to support that pace of growth.
We have identified over 3075 additional major metropolitan areas across the globe where we believe that we could grow our STK brand to 200 restaurants over the next several years. However, there can be no assurance thatforeseeable future. In the first quarter of 2019, we will be ableopened an owned STK restaurant in Nashville, Tennessee and a licensed STK restaurant in Doha, Qatar. We expect to open new STKs atcontinue to grow in 2019 with the rate we currently expect or that our pipelineplanned openings of planned offerings will be fully realized.licensed STK locations in Puerto Rico and Guadalajara, Mexico and a managed STK location in Scottsdale, Arizona.
Expansion through New Food and BeverageF&B Hospitality Projects.Projects. We believe that we are well positioned to leverage the strength of our brands and the relationships we have developed with global hospitality providers to drive the continued growth of our food and beverage hospitality projects, which traditionally have provided us with revenue through management and incentive revenue while requiring minimal capital expenditures from us. We continue to receive inquiries regarding new services at new hospitality venues globally and continue to work with existing hospitality clients to identify and develop additional opportunities at their venues.
We did not enter into any new F&B hospitality agreements for the three months ended March 31, 2019. In the future,2019, we plan to add one managed F&B location in Florence, Italy. Going forward, we expect to target at leastenter into one to two new F&B hospitality projects every twelve months. However, we cannot control the timing and number of acceptable opportunities that will be offered to us for our consideration or whether we will be able to enter into food and beverage agreements with respect to such opportunities. We did not enter into any new food and beverage agreements for the nine months ended September 30, 2018.annually.
Increase Our Operating Efficiency.Efficiency and Increase Same Store Sales.In addition to expanding into new cities and hospitality venues, we intend to increase revenue and profits in our existing operations through continued focus on high-quality, high-margin food and beverage menu items.
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We expect company-owneddomestic STK same store sales (“SSS”) to grow in 2018, at a mid-single digit pace.2019 between 3% and 4%. For the three months ended September 30, 2018,March 31, 2019, our company-owned same store salesSSS increased 7.7% compared to the same prior year period. For the nine months ended September 30, 2018, our company-owned same store sales increased 7.5%8.6% compared to the same prior year period. We consider ana domestic owned unitor managed restaurant to be comparable in the first full quarter following its 18th month of operation to remove the impact of new unitrestaurant openings in comparing the operations of existing units.restaurants. Our comparable unitrestaurant base of owned restaurantsfor SSS consisted of seven unitsnine domestic restaurants for the three and nine months ended September 30, 2018.March 31, 2019.
We believe that our operating margins will improve through same store sales growth. Furthermore, asgrowth in SSS and a reduction of store-level operating expenses. Our store-level margins for owned STK locations increased 210 basis points for the three months ended March 31, 2019. As our footprint continues to increase,increases, we expect to benefit by leveraging system-wide operating efficiencies and best practices through the management of our general and administrative expenses as a percentage of overall revenue. We will continue to look at opportunities to decrease our general and administrative expenses by outsourcing non-core activities and through increases in staff productivity. We believe that we have adequate capital and resources available to allocate towards our operational initiatives, but there can be no assurance that we will be able to expand our operations, increase our revenues or reduce our costs at the rate we currently expect, or at all.
Key Performance Indicators
We use the following key performance indicators in evaluating our restaurants and assessing our business:
Number of Restaurant Openings.Openings. Number of restaurant openings reflects the number of restaurants opened during a particular fiscal period. For each restaurant opening, we incur pre-opening costs, which are defined below. Typically, new restaurants open with an initial start-up period of higher than normalized sales volumes (also referred to in the restaurant industry as the “honeymoon” period), which decrease to a steady level approximately 18 to 24 months after opening. However, operating costs during this initial period are also higher than normal, resulting in restaurant operating margins that are generally lower during the start-up period of operation and increase to a steady level approximately 18 to 24 months after opening. Some new restaurants may experience a “honeymoon” period that is either shorter or longer than this time frame. We have opened threetwo restaurants in 2018: a company-owned2019: an owned STK restaurant located in the Andaz Hotel in San Diego, California; a licensed STK in Dubai;Nashville, Tennessee and a licensed STK restaurant in Mexico City.Doha, Qatar.
Average Check.Check. Average check is calculated by dividing total restaurant sales by total entrees sold for a given timespecified period. Our management team uses this indicator to analyze trends in customers’ preferences, customer expenditures and the overall effectiveness of menu changes and price increases. For comparable restaurants, our average check for the three months ended September 30, 2018March 31, 2019 was $94.30$110.83 compared to $90.65$108.89 for the three months ended September 30, 2017. Our average check for comparable restaurants was $95.62 for the nine months ended September 30, 2018 compared to $92.72 for the nine months ended September 30, 2017.March 31, 2018.
Average Comparable UnitRestaurant Volume. Average comparable unitrestaurant volume consists of the average sales of our comparable restaurants over a certain period of time. This measure is calculated by dividing total comparable restaurant sales in a given period by the total number of comparable restaurants in that period. This indicator assists management in measuring changes in customer traffic, pricing and development of our brand. Our average comparable unitrestaurant volume for the three months ended September 30,March 31, 2019 and March 31, 2018 and September 30, 2017 was $2.0$2.7 million and $1.9$2.5 million, respectively. Our average comparable unit volume for the nine months ended September 30, 2018 was $6.4 million compared to $6.0 million for the nine months ended September 30, 2017.
Same Store Sales.
Comparablesales. Comparable sales represent SSS represents total food and beverage sales at domestic owned and managed unitsrestaurants opened for at least a full 18-month period. This measure includes total revenue from our owned and managed STK locations, and it excludes revenues from our owned F&B services locations. Revenues from locations where we do not directly control the event sales force are excluded from this measure. Domestic comparable sales (comparable sales within the United States)SSS increased 7.7%8.6% for the three months ended September 30, 2018 and increased 7.5% for the nine months ended September 30, 2018, in each caseMarch 31, 2019 compared to the prior year periods. We estimate that Hurricane Irma, which made landfall in September 2017, resulted in a favorable impact to our comparable sales by 2.2% for the three months ended September 30, 2018 and by 0.7% for the nine months ended September 30,March 31, 2018.
Key Financial Terms and Metrics
We evaluate our business using a variety of key financial measures:
Segment reporting
We operate in three segments: “Owned restaurants”,restaurants,” “Owned food, beverage and other”,other,” and “Managed and Licensed operations”.operations.” Our Owned restaurants segment consists of leased restaurant locations and competes in the full-service dining industry. Our Owned food, beverage and other segment consists of hybrid operations, such as where we have a leased restaurant location and also have a food and beverage agreement at the same location, typically a hotel, and our offsite banquet offerings. The primary component of this segment is our operations at the W Hotel in Beverly Hills, California. Our Managed and Licensed operations segment includes all operations for which a management, incentive or license fee is received. Management agreements generate management fees on net revenue and incentive fees on operating profit as defined in the applicable management agreement. License agreements generate revenue primarily through royalties earned on net revenue at each location. Revenues associated with developmental support for licensed locations are also included within this segment.
See Note 16 to our consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for further information on our segment reporting.
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Revenues
Owned restaurant net revenues. Owned restaurant net revenues consist of food and beverage sales by owned restaurants net of any discounts associated with each sale. For the trailing twelve months ended September 30, 2018,March 31, 2019, beverage sales comprised 37%36% of food and beverage sales, before giving effect to any discounts, and food sales comprised the remaining 63%64%. This indicator assists management in understanding the trends in gross margins of the units.restaurants.
Owned food, beverage and other net revenuesrevenue. Owned food, beverage and other net revenues include the sales generated by the STK restaurant at the W Hotel in Los Angeles, California and any ancillary food and beverage hospitality services at the same location. Revenues from offsite banquet opportunitiesservices also are reflected in this segment.
Management, license and incentive fee revenues.revenue. Management, license and incentive fee revenues includes: (1) management fees received pursuant to management and license agreements that are calculated based on a fixed percentage of revenues at the managed or licensed location; (2) incentive fees based on the operating profitability of a particular venue, as defined in each agreement; and (3) recognition of license fee related revenues, which are recognized over the term of the license.
We evaluate the performance of our managed and licensed properties based on sales growth, a key driver for management and license fees, and on improvements in operating profitability margins, which, combined with sales, drives incentive fee growth.
Our primary restaurant brand is STK and we specifically look at comparable sales from both owned and managed STKs to understand customer count trends and changes in average check as it relates to our primary restaurant brand.
Cost and expenses
Owned restaurant cost of sales. Owned restaurant cost of sales includes all owned restaurant food and beverage expenditures. We measure cost of goods as a percentage of owned restaurant net revenues. Owned restaurant cost of sales are generally influenced by the cost of food and beverage items, menu mix, discounting activity and restaurant level controls. Purchases of beef represented approximately 38%37% and 36%35% of our food and beverage costs for the ninethree months ended September 30,March 31, 2019 and 2018, and 2017, respectively.
Owned restaurant operating expenses.We measure owned restaurant operating expenses as a percentage of owned restaurant net revenues. Owned restaurant operating expenses include the following:
Payroll and related expenses. Payroll and related expenses consist of manager salaries, hourly staff payroll and other payroll-related items, including taxes and fringe benefits. We measure our labor cost efficiency by tracking total labor costs as a percentage of owned restaurant net revenues.
Occupancy. Occupancy comprises all occupancy costs, consisting of both fixed and variable portions of rent, deferrednon-cash rent expense, which is a non-cash adjustment included in our Adjusted EBITDA calculation as defined below, common area maintenance charges, real estate property taxes, utilities and other related occupancy costs and is measured by considering both the fixed and variable components of certain occupancy expenses.
Direct operating expenses. Direct operating expenses consist of supplies, such as paper, smallwares, china, silverware and glassware, cleaning supplies and laundry, credit card fees and linen costs. Direct operating expenses are typically measured as a variable expense based on owned restaurant net revenues.
Outside services. Outside services include music and entertainment costs, such as the use of live DJ’s, promoter costs, security services, outside cleaning services and commissions paid to event staff for banquet sales.
Repairs and maintenance. Repairs and maintenance consistsconsist of general repair work to maintain our facilities, as well asand computer maintenance contracts. We expect these costs to increase at each facility as they get older.
Marketing. Marketing includes the cost of promoting our brands and, at times, can include the cost of goods used specifically for complimentarycomplementary purposes. Marketing costs will typically be higher during the first 18 months of a unit’srestaurant’s operations.
General and administrative. General and administrative expenses are comprised of all corporate overhead expenses, including payroll and related benefits, professional fees, such as legal and accounting fees, insurance and travel expenses. Certain centrally managed general and administrative expenses are allocated specifically to unitsrestaurant locations and are reflected in owned restaurant operating expenses and include shared services such as reservations, events and marketing. We expect general and administrative expenses to be leveraged as we grow, become more efficient, and continue to focus on best practices and cost savings measures.
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Depreciation and amortization. Depreciation and amortization consistsconsist principally of charges related to the depreciation of fixed assets including leasehold improvements, equipment and furniture and fixtures. Because we intend to support our growth initiatives with an increasing number of managed and licensed restaurant openings, depreciation and amortization is not expected to increase significantly in the near future.
Pre-opening expenses. Pre-opening expenses consist of costs incurred prior to opening an owned or managed STK unitrestaurant at either a leased or F&B location. Pre-opening expenses are comprised principally of manager salaries and relocation costs, employee payroll, training costs for new employees and lease costs incurred prior to opening. We expect these costs to decrease as we focus our growth towards our capital light model. Pre-opening expenses have varied from location to location depending on a number of factors, including the proximity of our existing restaurants; the amount of rent expensed during the construction and in-restaurant training periods; the size and physical layout of each location; the number of management and hourly employees required to operate each restaurant; the relative difficulty of the restaurant staffing process; the cost of travel and lodging for different metropolitan areas; the timing of the restaurant opening; and the extent of unexpected delays, if any, in obtaining necessary licenses and permits to open the restaurant.
Equity in (income) lossincome of subsidiaries.This represents the income or loss that we record under the cost or equity method of accounting for entities that are not consolidated.
Included in this amount is our approximate 51% ownership inof Bagatelle New York, for which we effective ownership of approximately 51%, consisting of a 5.23% direct ownership interest by us and a 45.9% ownership interest through two of our subsidiaries.
Until the fourth quarter of 2017, we accounted for a 10% effective ownership in One 29 Park, LLC (“One 29 Park”) under the equity method of accounting based on our assessment that we had significant influence over One 29 Park’s operations. One 29 Park operated a restaurant and managed the rooftop bar and food and beverage services of a hotel located in New York, NY. In the fourth quarter of 2017, the majority ownership of One 29 Park changed. As a result of this ownership change, we believed that we no longer had significant influence over the operations of One 29 Park and accounted for our investment in One 29 Park under the cost method of accounting. In March 2018, we sold our 10% interest in One 29 Park to the new ownership group for $0.6 million and recorded a gain of $0.2 million.
Other Items
EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA are presented in this Quarterly Report on Form 10-Q and are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define EBITDA as net income before interest expense, provision for income taxes and depreciation and amortization. We define Adjusted EBITDA as net income before interest expense, provision for income taxes, depreciation and amortization, non-cash impairment loss, deferrednon-cash rent expense, pre-opening expenses, lease termination expenses, non-recurring gains and losses, stock-based compensation and lossesresults from discontinued operations. Not all of the aforementioned items defining Adjusted EBITDA occur in each reporting period but have been included in our definitions of these terms based on our historical activity.
We believe that EBITDA and Adjusted EBITDA are appropriate measures of our operating performance, because they provide a clear picture of our operating results by eliminatingeliminate non-cash expenses that do not reflect our underlying business performance. We use these metrics to facilitate a comparison of our operating performance on a consistent basis from period to period, to analyze the factors and trends affecting our business and to evaluate the performance of our units.restaurants. Adjusted EBITDA has limitations as an analytical tool and our calculation of Adjusted EBITDA may not be comparable to that reported by other companies; accordingly, you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Adjusted EBITDA is included in this Quarterly Report on Form 10-Q because it is a key metricmeasure used by management. Additionally, Adjusted EBITDA is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We use Adjusted EBITDA, alongside other GAAP measures such as net income, (loss), to measure profitability, as a key profitability target in our budgets, and to compare our performance against that of peer companies despite possible differences in calculation.
Please refer to the table on page 2728 for our reconciliation of net (loss) income to EBITDA and Adjusted EBITDA.
Results of Operations
The following table sets forth certain statements of operations data for the periods indicated (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenues: | ||||||||||||||||
Owned restaurant net revenues | $ | 15,312 | $ | 13,189 | $ | 45,908 | $ | 42,100 | ||||||||
Owned food, beverage and other net revenues | 1,960 | 2,144 | 6,048 | 8,460 | ||||||||||||
Total owned revenues | 17,272 | 15,333 | 51,956 | 50,560 | ||||||||||||
Management, license and incentive fee revenue | 2,688 | 2,479 | 7,832 | 7,577 | ||||||||||||
Total revenues | 19,960 | 17,812 | 59,788 | 58,137 | ||||||||||||
Cost and expenses: | ||||||||||||||||
Owned operating expenses: | ||||||||||||||||
Owned restaurants: | ||||||||||||||||
Owned restaurant cost of sales | 4,050 | 3,436 | 12,121 | 11,150 | ||||||||||||
Owned restaurant operating expenses | 9,779 | 8,911 | 28,556 | 27,688 | ||||||||||||
Total owned operating expenses | 13,829 | 12,347 | 40,677 | 38,838 | ||||||||||||
Owned food, beverage and other expenses | 2,068 | 2,044 | 5,782 | 7,296 | ||||||||||||
Total owned operating expenses | 15,897 | 14,391 | 46,459 | 46,134 | ||||||||||||
General and administrative (including stock-based compensation of $337, $200, $1,005 and $744, respectively) | 2,266 | 2,267 | 7,937 | 8,479 | ||||||||||||
Settlements | - | 500 | - | 1,295 | ||||||||||||
Depreciation and amortization | 896 | 950 | 2,575 | 2,621 | ||||||||||||
Lease termination expense and asset write-offs | 78 | 402 | 168 | 883 | ||||||||||||
Pre-opening expenses | 449 | 94 | 1,330 | 1,286 | ||||||||||||
Transaction costs | - | - | - | 254 | ||||||||||||
Equity in income of investee companies | - | (264 | ) | (111 | ) | (156 | ) | |||||||||
Other expense (income), net | 38 | (19 | ) | (139 | ) | (137 | ) | |||||||||
Total costs and expenses | 19,624 | 18,321 | 58,219 | 60,659 | ||||||||||||
Income (loss) from operations | 336 | (509 | ) | 1,569 | (2,522 | ) | ||||||||||
Interest expense, net of interest income | 294 | 325 | 902 | 804 | ||||||||||||
Income (loss) from continuing operations before provision for income taxes | 42 | (834 | ) | 667 | (3,326 | ) | ||||||||||
Provision for income taxes | 251 | 179 | 445 | 365 | ||||||||||||
(Loss) income from continuing operations | (209 | ) | (1,013 | ) | 222 | (3,691 | ) | |||||||||
Loss from discontinued operations, net of taxes | - | - | - | (106 | ) | |||||||||||
Net (loss) income | (209 | ) | (1,013 | ) | 222 | (3,797 | ) | |||||||||
Less: net income attributable to noncontrolling interest | 96 | 153 | 116 | 71 | ||||||||||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. | $ | (305 | ) | $ | (1,166 | ) | $ | 106 | $ | (3,868 | ) |
For the three months ended March 31, | ||||||||
2019 | 2018 | |||||||
Revenues: | ||||||||
Owned restaurant net revenues | $ | 17,820 | $ | 15,076 | ||||
Owned food, beverage and other net revenues | 2,273 | 2,005 | ||||||
Total owned revenue | 20,093 | 17,081 | ||||||
Management, license and incentive fee revenue | 2,683 | 2,436 | ||||||
Total revenues | 22,776 | 19,517 | ||||||
Cost and expenses: | ||||||||
Owned operating expenses: | ||||||||
Owned restaurants: | ||||||||
Owned restaurant cost of sales | 4,569 | 4,034 | ||||||
Owned restaurant operating expenses | 10,915 | 9,378 | ||||||
Total owned restaurant expenses | 15,484 | 13,412 | ||||||
Owned food, beverage and other expenses | 2,259 | 1,689 | ||||||
Total owned operating expenses | 17,743 | 15,101 | ||||||
General and administrative (including stock-based compensation of $181 and $324, respectively) | 2,650 | 3,055 | ||||||
Depreciation and amortization | 942 | 778 | ||||||
Pre-opening expenses | 482 | 210 | ||||||
Equity in income of investee companies | — | 23 | ||||||
Other income, net | (175 | ) | (111 | ) | ||||
Total costs and expenses | 21,642 | 19,056 | ||||||
Operating income | 1,134 | 461 | ||||||
Other expenses, net: | ||||||||
Interest expense, net of interest income | 269 | 318 | ||||||
Total other expenses, net | 269 | 318 | ||||||
Income before provision for income taxes | 865 | 143 | ||||||
Provision for income taxes | 96 | 25 | ||||||
Net income | 769 | 118 | ||||||
Less: net loss attributable to noncontrolling interest | (85 | ) | (113 | ) | ||||
Net income attributable to The ONE Group Hospitality, Inc. | $ | 854 | $ | 231 |
The following table sets forth certain statements of operations data as a percentage of total revenues for the periods indicated:
Three Months Ended September 30, | Nine Months Ended September 30, | For the three months ended March 31, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Owned restaurant net revenues | 76.7 | % | 74.0 | % | 76.8 | % | 72.4 | % | 78.2 | % | 77.2 | % | ||||||||||||
Owned food, beverage and other net revenues | 9.8 | % | 12.0 | % | 10.1 | % | 14.6 | % | 10.0 | % | 10.3 | % | ||||||||||||
Total owned revenues | 86.5 | % | 86.1 | % | 86.9 | % | 87.0 | % | ||||||||||||||||
Total owned revenue | 88.2 | % | 87.5 | % | ||||||||||||||||||||
Management, license and incentive fee revenue | 13.5 | % | 13.9 | % | 13.1 | % | 13.0 | % | 11.8 | % | 12.5 | % | ||||||||||||
Total revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
Cost and expenses: | ||||||||||||||||||||||||
Owned operating expenses: | ||||||||||||||||||||||||
Owned restaurants: | ||||||||||||||||||||||||
Owned restaurant cost of sales(1) | 26.4 | % | 26.1 | % | 26.4 | % | 26.5 | % | 25.6 | % | 26.8 | % | ||||||||||||
Owned restaurant operating expenses(1) | 63.9 | % | 67.6 | % | 62.2 | % | 65.8 | % | 61.3 | % | 62.2 | % | ||||||||||||
Total owned operating expenses(1) | 90.3 | % | 93.6 | % | 88.6 | % | 92.3 | % | ||||||||||||||||
Total owned restaurant expenses(1) | 86.9 | % | 89.0 | % | ||||||||||||||||||||
Owned food, beverage and other expenses(2) | 105.5 | % | 95.3 | % | 95.6 | % | 86.2 | % | 99.4 | % | 84.2 | % | ||||||||||||
Total owned operating expenses(3) | 92.0 | % | 93.9 | % | 89.4 | % | 91.2 | % | 88.3 | % | 88.4 | % | ||||||||||||
General and administrative (including stock-based compensation of 1.7%, 1.1%, 1.7% and 1.3%, respectively) | 11.4 | % | 12.7 | % | 13.3 | % | 14.6 | % | ||||||||||||||||
Settlements | 0.0 | % | 2.8 | % | 0.0 | % | 2.2 | % | ||||||||||||||||
General and administrative (including stock-based compensation of 0.8% and 1.7%, respectively) | 11.6 | % | 15.7 | % | ||||||||||||||||||||
Depreciation and amortization | 4.5 | % | 5.3 | % | 4.3 | % | 4.5 | % | 4.1 | % | 4.0 | % | ||||||||||||
Lease termination expense and asset write-offs | 0.4 | % | 2.3 | % | 0.3 | % | 1.5 | % | ||||||||||||||||
Pre-opening expenses | 2.2 | % | 0.5 | % | 2.2 | % | 2.2 | % | 2.1 | % | 1.1 | % | ||||||||||||
Transaction costs | 0.0 | % | 0.0 | % | 0.0 | % | 0.4 | % | ||||||||||||||||
Equity in income of investee companies | 0.0 | % | (1.5 | )% | (0.2 | )% | (0.3 | )% | — | % | 0.1 | % | ||||||||||||
Other expense (income), net | 0.2 | % | (0.1 | )% | (0.2 | )% | (0.2 | )% | ||||||||||||||||
Other income, net | (0.8 | )% | (0.6 | )% | ||||||||||||||||||||
Total costs and expenses | 98.3 | % | 102.9 | % | 97.4 | % | 104.3 | % | 95.0 | % | 97.6 | % | ||||||||||||
Income (loss) from operations | 1.7 | % | (2.9 | )% | 2.6 | % | (4.3 | )% | ||||||||||||||||
Operating income | 5.0 | % | 2.4 | % | ||||||||||||||||||||
Other expenses, net: | ||||||||||||||||||||||||
Interest expense, net of interest income | 1.5 | % | 1.8 | % | 1.5 | % | 1.4 | % | 1.2 | % | 1.6 | % | ||||||||||||
Income (loss) from continuing operations before provision for income taxes | 0.2 | % | (4.7 | )% | 1.1 | % | (5.7 | )% | ||||||||||||||||
Income tax provision | 1.3 | % | 1.0 | % | 0.7 | % | 0.6 | % | ||||||||||||||||
(Loss) income from continuing operations | (1.0 | )% | (5.7 | )% | 0.4 | % | (6.3 | )% | ||||||||||||||||
(Loss) from discontinued operations, net of taxes | 0.0 | % | 0.0 | % | 0.0 | % | (0.2 | )% | ||||||||||||||||
Net (loss) income | (1.0 | )% | (5.7 | )% | 0.4 | % | (6.5 | )% | ||||||||||||||||
Total other expenses, net | 1.2 | % | 1.6 | % | ||||||||||||||||||||
Income before provision for income taxes | 3.8 | % | 0.7 | % | ||||||||||||||||||||
Provision for income taxes | 0.4 | % | 0.1 | % | ||||||||||||||||||||
Net income | 3.4 | % | 0.6 | % | ||||||||||||||||||||
Less: net loss attributable to noncontrolling interest | 0.5 | % | 0.9 | % | 0.2 | % | 0.1 | % | (0.4 | )% | (0.6 | )% | ||||||||||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. | (1.5 | )% | (6.5 | )% | 0.2 | % | (6.7 | )% | ||||||||||||||||
Net income attributable to The ONE Group Hospitality, Inc. | 3.7 | % | 1.2 | % |
(1) These expenses are being shown as a percentage of owned restaurant net revenues.
(2) These expenses are being shown as a percentage of owned food, beverage and other net revenues.
(3) These expenses are being shown as a percentage of total owned revenue.
The following tables show our operating results by segment for the periods indicated (in thousands):
Three Months Ended September 30, 2018 | Three Months Ended September 30, 2017 | For the three months ended March 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
Owned restaurants | Owned food, beverage and other | Managed and licensed operations | Total | Owned restaurants | Owned food, beverage and other | Managed and licensed operations | Total | Owned restaurants | Owned food, beverage and other | Managed and licensed operations | Total | |||||||||||||||||||||||||||||||||||||
Revenues, net: | ||||||||||||||||||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||
Owned net revenues | $ | 15,312 | $ | 1,960 | $ | - | $ | 17,272 | $ | 13,189 | $ | 2,144 | $ | - | $ | 15,333 | $ | 17,820 | $ | 2,273 | $ | — | $ | 20,093 | ||||||||||||||||||||||||
Management, license and incentive fee revenue | - | - | 2,688 | 2,688 | - | - | 2,479 | 2,479 | — | — | 2,683 | 2,683 | ||||||||||||||||||||||||||||||||||||
Total revenue | 15,312 | 1,960 | 2,688 | 19,960 | 13,189 | 2,144 | 2,479 | 17,812 | ||||||||||||||||||||||||||||||||||||||||
Total revenues | 17,820 | 2,273 | 2,683 | 22,776 | ||||||||||||||||||||||||||||||||||||||||||||
Cost and expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||
Owned operating expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||
Cost of sales | 4,050 | - | - | 4,050 | 3,436 | - | - | 3,436 | 4,569 | — | — | 4,569 | ||||||||||||||||||||||||||||||||||||
Other operating expenses | 9,779 | - | - | 9,779 | 8,911 | - | - | 8,911 | 10,915 | — | — | 10,915 | ||||||||||||||||||||||||||||||||||||
Owned food, beverage and other expenses | - | 2,068 | - | 2,068 | - | 2,044 | - | 2,044 | — | 2,259 | — | 2,259 | ||||||||||||||||||||||||||||||||||||
Total owned operating expenses | 13,829 | 2,068 | - | 15,897 | 12,347 | 2,044 | - | 14,391 | 15,484 | 2,259 | — | 17,743 | ||||||||||||||||||||||||||||||||||||
Segment income (loss) | $ | 1,483 | $ | (108 | ) | $ | 2,688 | 4,063 | $ | 842 | $ | 100 | $ | 2,479 | 3,421 | |||||||||||||||||||||||||||||||||
Segment income | $ | 2,336 | $ | 14 | $ | 2,683 | $ | 5,033 | ||||||||||||||||||||||||||||||||||||||||
General and administrative | 2,266 | 2,267 | 2,650 | |||||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 896 | 950 | 942 | |||||||||||||||||||||||||||||||||||||||||||||
Interest expense, net of interest income | 294 | 325 | 269 | |||||||||||||||||||||||||||||||||||||||||||||
Equity in (income) of investee companies | - | (264 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Equity in income of investee companies | — | |||||||||||||||||||||||||||||||||||||||||||||||
Other | 565 | 977 | 307 | |||||||||||||||||||||||||||||||||||||||||||||
Income (loss) from continuing operations before provision for income taxes | $ | 42 | $ | (834 | ) | |||||||||||||||||||||||||||||||||||||||||||
Income before provision for income taxes | $ | 865 |
Nine Months Ended September 30, 2018 | Nine Months Ended September 30, 2017 | For the three months ended March 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||
Owned restaurants | Owned food, beverage and other | Managed and licensed operations | Total | Owned restaurants | Owned food, beverage and other | Managed and licensed operations | Total | Owned restaurants | Owned food, beverage and other | Managed and licensed operations | Total | |||||||||||||||||||||||||||||||||||||
Revenues, net: | ||||||||||||||||||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||
Owned net revenues | $ | 45,908 | $ | 6,048 | $ | - | $ | 51,956 | $ | 42,100 | $ | 8,460 | $ | - | $ | 50,560 | $ | 15,076 | $ | 2,005 | $ | — | $ | 17,081 | ||||||||||||||||||||||||
Management, license and incentive fee revenue | - | - | 7,832 | 7,832 | - | - | 7,577 | 7,577 | — | — | 2,436 | 2,436 | ||||||||||||||||||||||||||||||||||||
Total revenue | 45,908 | 6,048 | 7,832 | 59,788 | 42,100 | 8,460 | 7,577 | 58,137 | ||||||||||||||||||||||||||||||||||||||||
Total revenues | 15,076 | 2,005 | 2,436 | 19,517 | ||||||||||||||||||||||||||||||||||||||||||||
Cost and expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||
Owned operating expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||
Cost of sales | 12,121 | - | - | 12,121 | 11,150 | - | - | 11,150 | 4,034 | — | — | 4,034 | ||||||||||||||||||||||||||||||||||||
Other operating expenses | 28,556 | - | - | 28,556 | 27,688 | - | - | 27,688 | 9,378 | — | — | 9,378 | ||||||||||||||||||||||||||||||||||||
Owned food, beverage and other expenses | - | 5,782 | - | 5,782 | - | 7,296 | - | 7,296 | — | 1,689 | — | 1,689 | ||||||||||||||||||||||||||||||||||||
Total owned operating expenses | 40,677 | 5,782 | - | 46,459 | 38,838 | 7,296 | - | 46,134 | 13,412 | 1,689 | — | 15,101 | ||||||||||||||||||||||||||||||||||||
Segment income | $ | 5,231 | $ | 266 | $ | 7,832 | 13,329 | $ | 3,262 | $ | 1,164 | $ | 7,577 | 12,003 | $ | 1,664 | $ | 316 | $ | 2,436 | $ | 4,416 | ||||||||||||||||||||||||||
General and administrative | 7,937 | 8,479 | 3,055 | |||||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 2,575 | 2,621 | 778 | |||||||||||||||||||||||||||||||||||||||||||||
Interest expense, net of interest income | 902 | 804 | 318 | |||||||||||||||||||||||||||||||||||||||||||||
Equity in (income) of investee companies | (111 | ) | (156 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Equity in loss of investee companies | 23 | |||||||||||||||||||||||||||||||||||||||||||||||
Other | 1,359 | 3,581 | 99 | |||||||||||||||||||||||||||||||||||||||||||||
Income (loss) from continuing operations before provision for income taxes | $ | 667 | $ | (3,326 | ) | |||||||||||||||||||||||||||||||||||||||||||
Income before provision for income taxes | $ | 143 |
The following table presents a reconciliation of net lossincome to EBITDA and Adjusted EBITDA for the periods indicated (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. | $ | (305 | ) | $ | (1,166 | ) | $ | 106 | $ | (3,868 | ) | |||||
Net income attributable to noncontrolling interest | 96 | 153 | 116 | 71 | ||||||||||||
Net (loss) income | (209 | ) | (1,013 | ) | 222 | (3,797 | ) | |||||||||
Interest expense, net of interest income | 294 | 325 | 902 | 804 | ||||||||||||
Income tax provision | 251 | 179 | 445 | 365 | ||||||||||||
Depreciation and amortization | 896 | 950 | 2,575 | 2,621 | ||||||||||||
EBITDA | 1,232 | 441 | 4,144 | (7 | ) | |||||||||||
Deferred rent(1) | (52 | ) | 14 | (141 | ) | (39 | ) | |||||||||
Pre-opening expenses | 449 | 94 | 1,330 | 1,286 | ||||||||||||
Lease termination expense and asset write-offs(2) | 78 | 402 | 168 | 883 | ||||||||||||
Loss from discontinued operations, net of taxes | - | - | - | 106 | ||||||||||||
Transaction costs(3) | - | - | - | 254 | ||||||||||||
Stock-based compensation | 337 | 200 | 1,005 | 744 | ||||||||||||
Settlements | - | 500 | - | 1,295 | ||||||||||||
Equity share of settlement costs | - | - | - | 270 | ||||||||||||
Other | 145 | - | 145 | - | ||||||||||||
Adjusted EBITDA | 2,189 | 1,651 | 6,651 | 4,792 | ||||||||||||
Adjusted EBITDA attributable to noncontrolling interest | 153 | 208 | 317 | 269 | ||||||||||||
Adjusted EBITDA attributable to The ONE Group Hospitality, Inc. | $ | 2,036 | $ | 1,443 | $ | 6,334 | $ | 4,523 |
For the three months ended March 31, | ||||||||
2019 | 2018 | |||||||
Net income attributable to The ONE Group Hospitality, Inc. | $ | 854 | $ | 231 | ||||
Net loss attributable to noncontrolling interest | (85 | ) | (113 | ) | ||||
Net income | 769 | 118 | ||||||
Interest expense, net of interest income | 269 | 318 | ||||||
Provision for income taxes | 96 | 25 | ||||||
Depreciation and amortization | 942 | 778 | ||||||
EBITDA | 2,076 | 1,239 | ||||||
Non-cash rent expense(1) | (87 | ) | (20 | ) | ||||
Pre-opening expenses | 482 | 210 | ||||||
Stock-based compensation | 181 | 324 | ||||||
Adjusted EBITDA | 2,652 | 1,753 | ||||||
Adjusted EBITDA attributable to noncontrolling interest | (36 | ) | (42 | ) | ||||
Adjusted EBITDA attributable to The ONE Group Hospitality, Inc. | $ | 2,688 | $ | 1,795 |
Three Months Ended September 30, 2018 Compared to(1) Non-cash rent expense is included in owned restaurant operating expenses and general and administrative expense on the statement of operations and comprehensive income.
Results of Operations for the Three Months Ended September 30, 2017March 31, 2019 and March 31, 2018
Revenues
Owned restaurant net revenues. Owned restaurant net revenues increased $2.1$2.7 million, or 16.1%18.2%, from $13.2$15.1 million for the three months ended September 30, 2017March 31, 2018 to $15.3$17.8 million for the three months ended September 30, 2018. This increase was primarily due to the opening of our restaurant in San Diego (California) and increased sales at existing locations. Comparable owned STK unit sales increased 7.7% and average check increased 4.0% for the three months ended September 30, 2018. To drive revenue, we have recently begun opening our restaurants earlier to take advantage of happy hour/pre-dinner time frames. We are also now open during lunch hours in several venues. For the three months ended September 30, 2017, we temporarily suspended business at our Florida venues due to Hurricane Irma. We estimate that Hurricane Irma, which made landfall in September 2017, resulted in a favorable impact to our comparable sales by 2.2% for the three months ended September 30, 2018.
Owned food, beverage and other revenues. Owned food, beverage and other revenues decreased $0.2 million, or -8.6%, from $2.1 million for the three months ended September 30, 2017 to $2.0 million for the three months ended September 30, 2018. The decrease was primarily due to a decrease in dining and banquet sales at our STK restaurant in Beverly Hills, California.
Management, license and incentive fee revenues. Revenue generated from the restaurants and lounges we operate under management or license agreements, and from F&B services at hospitality venues affects the amount of management and incentive fees we earn. Management, license and incentive fee revenues increased $0.2 million, or 8.4%, from $2.5 million for the three months ended September 30, 2017 to $2.7 million for the three months ended September 30, 2018. The increase was primarily due to increased revenues from our operations in Las Vegas, London (United Kingdom) and Milan (Italy) and from managed and licensed locations opened in the past twelve months, including locations in Dubai and Mexico City.
Costs and Expenses
Owned restaurant cost of sales. Food and beverage costs for owned restaurants increased $0.6 million, or 17.9%, from $3.4 million for the three months ended September 30, 2017 to $4.1 million for the three months ended September 30, 2018. This increase was primarily due to increased sales at our owned locations and the opening of our restaurant in San Diego, California in July 2018. As a percentage of owned restaurant net revenues, cost of sales increased from 26.1% for the three months ended September 30, 2017 to 26.4% for the three months ended September 30, 2018. The increase in the percentage of food and beverage costs as a percentage of food and beverage sales was due to product mix changes due to the introduction of happy hour menus as well as the increase in new store cost of sales due to promotions and other factors impacting a new location in its initial opening months. Food revenues as a percentage of total food and beverage revenues were approximately 66% and 59% for the three months ended September 30, 2018 and 2017, respectively. Food costs as a percentage of food revenues are typically higher than beverage costs as a percentage of beverage revenues.
Owned restaurant operating expenses.Owned restaurant operating expenses increased $0.9 million, or 9.7%, from $8.9 million for the three months ended September 30, 2017 to $9.8 million for the three months ended September 30, 2018. This increase was primarily related to the San Diego opening and the increase in variable expenses related to the increase in comparable sales. As a percentage of owned restaurant net revenues, owned restaurant operating expenses decreased 370 basis points from 63.9% for the three months ended September 30, 2017 to 60.6% for the three months ended September 30, 2018. This improvement was due to the leverage of comparable sales growth, price negotiations with existing vendors, and a continued focus on labor and spending efficiency.
Owned food, beverage and other expenses. Owned food, beverage and other expenses increased $0.1 million, or 12.5%, from $2.0 million for the three months ended September 30, 2017 to $2.1 million for the three months ended September 30, 2018. As a percentage of owned food, beverage and other net revenues, the related expenses increased 1020 basis points from 95.3% for the three months ended September 30, 2017 to 105.5% for the three months ended September 30, 2018. This increase was primarily due to the deleveraging impact of reduced revenues on the operation’s fixed costs.
General and administrative. General and administrative costs were $2.3 million for each of the three months ended September 30, 2018 and September 30, 2017. Stock-based compensation expense, a non-cash charge, was $0.3 million for the three months ended September 30, 2018 compared to $0.2 million for the three months ended September 30, 2017. General and administrative expenses as a percentage of total revenues decreased to 11.4% for the three months ended September 30, 2018 from 12.7% for the three months ended September 30, 2017 as a demonstration of the continued leverage gained from sales increases and a focus on cost control.
Settlements. For the three months ended September 30, 2017, we recorded $0.5 million of settlement expense related to an arrangement with a management agreement partner to resolve a dispute.
Depreciation and amortization. Depreciation and amortization expense was $0.9 million for the three months ended September 30, 2018 and $1.0 million for the three months ended September 30, 2017. Despite increases in fixed assets, certain assets at our older locations have become fully depreciated. In July 2018, we began depreciating the assets at our new STK restaurant in San Diego as they have now been placed in service.
Lease termination expense and asset write-offs.Lease termination expense and asset write-offs of approximately $0.1 million and $0.4 million for the three months ended September 30, 2018 and 2017, respectively, were for charges we incurred for the development of future company-owned restaurants that we decided to not pursue further as we have decided to move forward with a capital light strategy. In 2017, the Company determined that it would not open venues in Austin and Dallas, Texas. As of September 30, 2018, we have accrued for approximately $1.5 million of future lease payments, net of expected sublease income.
Pre-opening expenses. Pre-opening expenses for the three months ended September 30, 2018 were $0.4 million compared to pre-opening expenses of $0.1 million for the three months ended September 30, 2017. Preopening expenses in the third quarter of 2018 were primarily due to the development of our restaurant at the Andaz Hotel in San Diego, California, which opened in July 2018.
Interest expense, net of interest income.Interest expense, net of interest income, was $0.3 million for each of the three month periods ending September 30, 2018 and September 30, 2017.
Provision for income taxes. Our effective tax rate was 597.6% for the three months ended September 30, 2018, compared to an effective tax rate of -21.5% for the three months ended September 30, 2017. Our projected annual effective tax rate differs from the statutory U.S. tax rate of 21% primarily for the following reasons: 1) availability of U.S. carryforward NOLs, which results in no federal or state taxes; 2) a full valuation allowance on the U.S. net deferred tax asset; 3) taxes owed in foreign jurisdictions such as the United Kingdom, Canada and Italy; and 4) New York City taxes.
Please refer to Note 11 of our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for details on the impacts of the TCJA on our financial position and results of operations.
Net loss attributable to noncontrolling interest. Net income attributable to noncontrolling interest was $0.2 million and $0.1 million for the three months ended September 30, 2017 and 2018, respectively. Our noncontrolling interests relate to outside ownerships of a restaurant and outdoor rooftop operation in New York City.
Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
Revenues
Owned restaurant net revenues. Owned restaurant net revenues increased $3.8 million, or 9.0%, from $42.1 million for the nine months ended September 30, 2017 to $45.9 million for the nine months ended September 30, 2018.March 31, 2019. This increase was primarily due to the opening of our restaurant in San Diego, California in July 2018 and increased sales at our existing locations. Comparable ownedAdditionally, in March 2019, we opened our STK unit salesrestaurant in Nashville, Tennessee. SSS increased 7.5%8.6% and average check increased 3.0%2.3% for the ninethree months ended September 30, 2018. We estimate that Hurricane Irma, which made landfall in September 2017, resulted in a favorable impactMarch 31, 2019 compared to our comparable sales by 0.7% for the ninethree months ended September 30,March 31, 2018. Our Denver location, which opened in January 2017, and is nowwas considered a comparable location.location for SSS in the three months ended March 31, 2019. To drive revenue, among several strategies, we have recently begun opening our restaurants earlier to take advantage of happy hour/happy-hour and pre-dinner time frames. We are also now open during lunch hours in several locations.
Owned food, beverage and other revenues. Owned food, beverage and other revenues decreased $2.4increased $0.3 million, or 28.5%13.4%, from $8.5$2.0 million for the ninethree months ended September 30, 2017March 31, 2018 to $6.0$2.3 million for the ninethree months ended September 30, 2018. In 2017, we hosted aMarch 31, 2019. The increase in revenue was primarily related to the 2019 Super Bowl party in Atlanta, Georgia for the Super Bowl. The party contributed $1.8 million of revenue in 2017. We didwhich there was not have a similar event in 2018. The remaining decrease can be attributed to decreased restaurant and banquet revenue from our operation in Beverly Hills, California.
Management and license and incentive fee revenues.revenue. Revenue generated from the restaurants and lounges we operate under management or license agreements, and from F&B services at hospitality venues affects the amount of management and incentive fees that we earn. Management license and incentivelicense fee revenues increased $0.3$0.2 million, or 3.4%10.1%, to $7.8from $2.4 million for the three months ended September 30,March 31, 2018 compared to $7.6$2.7 million for the ninethree months ended September 30, 2017 dueMarch 31, 2019. The increase was primarily related to increases in revenue and profitability at existing locations and new STK licensed locations that have opened over the past twelve months.in 2018, including in Mexico City, Mexico and Dubai, United Arab Emirates. Additionally, in March of 2019, we opened a licensed STK restaurant in Doha, Qatar.
CostsCost and Expenses
Owned restaurant cost of sales. Food and beverage costs for owned restaurants increased $1.0approximately $0.5 million, or 8.7%13.3%, from $11.2$4.0 million for the ninethree months ended September 30, 2017March 31, 2018 to $12.1$4.6 million for the ninethree months ended September 30, 2018.March 31, 2019. This increase was primarily due to increased sales at our existing, owned locations and the opening of our restaurant in San Diego, California in July 2018. Additionally, in March 2019, we opened our STK restaurant in Nashville, Tennessee. As a percentage of owned restaurant net revenues, cost of sales decreased from 26.5%26.8% for the ninethree months ended September 30, 2017March 31, 2018 to 26.4%25.6% for the ninethree months ended September 30, 2018. The decrease inMarch 31, 2019 due to the percentagepositive impacts of food and beverage costs as a percentage of food and beverage sales was due tooperating initiatives coupled with selective price increases that we implemented in January 2018.2019. Food revenues as a percentage of total food and beverage revenues were approximately 65%64% and 59%68% for the ninethree months ended September 30,March 31, 2019 and 2018, and 2017, respectively. Food costs as a percentage of food revenues are typically higher than beverage costs as a percentage of beverage revenues.
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Owned restaurant operating expenses.Owned restaurant operating expenses increased $0.9$1.5 million, or 3.1%16.4%, from $27.7$9.4 million for the ninethree months ended September 30, 2017March 31, 2018 to $28.6$10.9 million for the ninethree months ended September 30, 2018.March 31, 2019. As a percentage of owned restaurant net revenues, owned restaurant operating expenses decreased 360110 basis points from 65.8% for the nine months ended September 30, 2017 to 62.2% for the ninethree months ended September 30, 2018.March 31, 2018 to 61.3% for the three months ended March 31, 2019. This improvement was due to the leverage of comparable salesSSS growth and a continued focus on labor and spending efficiency. Our cost saving initiatives are aimed to offset minimum wage increases.efficiencies.
Owned food, beverage and other expenses. Owned food, beverage and other expenses decreased $1.5increased $0.6 million, or 20.8%33.7%, from $7.3$1.7 million for the ninethree months ended September 30, 2017March 31, 2018 to $5.8$2.3 million for the ninethree months ended September 30, 2018. This decreaseMarch 31, 2019. The increase in revenue was primarily duerelated to costs associated with the 2019 Super Bowl event that we heldparty in 2017 that we didAtlanta, Georgia for which there was not holda similar event in 2018.
General and administrative. General and administrative costs decreased $0.5$0.4 million, or 6.4%13.3% from $8.5$3.1 million for the ninethree months ended September 30, 2017March 31, 2018 to $7.9$2.7 million for the ninethree months ended September 30, 2018.March 31, 2019. The decrease was primarily due primarily to payroll savingsreduced stock-based compensation expense as a result of $0.9 million resulting from 2017headcount reductions in headcount, partially offset by increased2018 as well as reduced external professional fees associated with the completion of the 2017 annual financial statement audit of approximately $0.5 million.fees. General and administrative costs as a percentage of total revenues decreased from 14.6%15.7% for the ninethree months ended September 30, 2017March 31, 2018 to 13.3%11.6% for the ninethree months ended September 30, 2018. General and administrative expenses before audit-related fees were 12.4% of revenue for the nine months ended September 30, 2018.March 31, 2019.
Settlements. For the nine months ended September 30, 2017, we recorded $1.3 million of settlements. $0.8 million of these settlement expense related to two class action lawsuits that were brought against our equity investees and represent our portion of the overall settlement. The remaining $0.5 million related to an arrangement with a management agreement partner to resolve a dispute.
Depreciation and amortization. Depreciation and amortization expense was $2.6 million for each of the nine-month periods ended September 30, 2018 and September 30, 2017.
Lease termination expense and asset write-offs.Lease termination expense and asset write-offs ofincreased approximately $0.2 million, andor 21.1%, from $0.8 million for the three months ended March 31, 2018 to $0.9 million for the ninethree months ended September 30, 2018 and September 30, 2017, respectively, were for charges we incurred forMarch 31, 2019. The increase was primarily related to the developmentopening of future company-owned restaurants that we decided to not pursue further as we have decided to move forward with a capital light strategy. In 2017, the Company determined that it would not open venuesour restaurant in Austin and Dallas, Texas. As of September 30, 2018, we have accrued for approximately $1.5 million of future lease payments, net of expected sublease income.San Diego, California in July 2018.
Pre-opening expenses. Pre-opening expenses for the ninethree months ended September 30, 2018March 31, 2019 were $1.3$0.5 million compared to pre-opening expenses of $1.3$0.2 million infor the prior year period. Preopeningthree months ended March 31, 2018. In 2018, preopening expenses were primarily duerelated to the development of our restaurantsrestaurant at the Andaz Hotel in San Diego, California, which opened in July 2018, and2018. In 2019, our preopening expenses related to the opening of our STK restaurant in Denver, ColoradoNashville, Tennessee in January 2017.
March 2019.
Transaction costs.
Equity in income of investee companies. Transaction costs were $0.3 millionEquity in income of investee companies was approximately $23.0 thousand for the ninethree months ended September 30, 2017. These costs included professional and other expenses related toMarch 31, 2018. We did not recognize any equity in income of investee companies for the evaluation of strategic alternatives and capital raising activities. The evaluation was completed in 2017.
Other income. For the sixthree months ended June 30, 2018, we recorded a gain of $0.2 million on the sale of our 10% interest in One 29 Park. One 29 Park operates a restaurant and manages the rooftop of a hotel located in New York, NY.March 31, 2019.
Interest expense, net of interest income.Interest expense, net of interest income increased $0.1 million from $0.8was approximately $0.3 million for each of the ninethree months ended September 30, 2017 to $0.9 million for the nine months ended September 30,ending March 31, 2019 and 2018. The increase is due primarily to the capitalization of interest in 2017 towards our development projects.
Provision for income taxes. The provision for income taxes for the three months ended March 31, 2019 was tax expense of $96.0 thousand compared to $25.0 thousand for the three months ended March 31, 2018. Our annual effective income tax rate was 66.7%9.7% and 15.6% for the ninethree months ended September 30 compared to an effective tax rate of -11.0% for the nine months ended September 30, 2017.March 31, 2019 and 2018, respectively. Our projected annual effective tax rate differs from the statutory U.S. tax rate of 21% primarily fordue to the following reasons: 1)following: (i) availability of U.S. carryforward NOLs, which resultsnet operating loss carryforwards, resulting in no federal or stateincome taxes; 2)(ii) a full valuation allowance on the U.S. net deferred tax asset; 3)assets, net; (iii) taxes owed in foreign jurisdictions such as the United Kingdom, Canada and Italy; and, 4)(iv) taxes owed in state and local jurisdictions such as New York, New York City, taxes owed.
Please refer to Note 11 of our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for details on the impacts of the TCJA on our financial positionColorado and results of operations.
Income (loss) from discontinued operations, net of taxes. Prior to 2015, we decided to cease operations in six of our locations. Expenses for these operations are presented as loss from discontinued operations and represent the winding down of these operations. Income from discontinued operations was $0.1 million for the nine months ended September 30, 2017.Tennessee.
Net income (loss)loss attributable to noncontrolling interest. Net incomeloss attributable to our noncontrolling interestsinterest was approximately $0.1 million for each of the ninethree months ended September 30, 2018 compared to net income attributable to our noncontrolling interests of $71,000 for the nine months ended September 30, 2017. Our noncontrolling interests primarily relate to outside ownerships of a restaurantMarch 31, 2019 and outdoor rooftop operation in New York City.2018.
Liquidity and Capital Resources
Our principal liquidity requirements are to meet our lease obligations, our working capital and capital expenditure needs and to pay principal and interest on our outstanding indebtedness. Subject to our operating performance, which, if significantly adversely affected, would adversely affect the availability of funds, we expect to finance our operations for at least the next 12 months, following the issuance of the consolidated financial statements, including costs of opening currently planned new restaurants, through cash provided by operations and construction allowances provided by landlords of certain locations.
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We cannot be sure that these sources will be sufficient
In the context of our current debt structure and projected cash needs, we believe the cash provided by operations is adequate to financesupport our immediate business operations throughout this period and beyond, however, and we may seek additional financing in the future, which may or may not be available on terms and conditions satisfactory to us, or at all.plans. As of September 30, 2018,March 31, 2019, we had cash and cash equivalents of approximately $1.0$1.1 million.
We expect that our capital expenditures during fiscal 2018in 2019 will be less than prior years because we plan to openexpect that that the Nashville, Tennessee STK restaurant will be the only one to two new, owned STK restaurants.restaurant we open in 2019. We currently anticipate our total capital expenditures for 2018,2019, inclusive of all maintenance expenditures, will be approximately $3.5 million.
We expect to fund our anticipated capital expenditures for 2019 with current cash on hand, expected cash flows from operations and proceeds from expected tenant improvement allowances. Our future cash requirements will depend on many factors, including the pace of our expansion, conditions in the retail property development market, construction costs, the nature of the specific sites selected for new restaurants, and the nature of the specific leases and associated tenant improvement allowances available, if any, as negotiated with landlords.
Under our current capital light strategy, we plan a similar levelto enter into management and license agreements for the operation of expenditure inSTKs where we are not required to contribute significant capital upfront. We expect to rely on our cash flow from operations and continued financing to fund the majority of our planned capital expenditures for 2019.
Our operations have not required significant working capital, and, like many restaurant companies, we have negative working capital. Revenues are received primarily in credit card or cash receipts and restaurant operations do not require significant receivables or inventories, other than our wine inventory. In addition, we receive trade credit for the purchase of food, beverages and supplies, thereby reducing the need for incremental working capital to support growth
Cash Flows
The following table summarizes the statement of cash flows for the ninethree months ended September 30,March 31, 2019 and March 31, 2018 and 2017 (in thousands):
Nine Months Ended | ||||||||||||||||
September 30, | For the three months ended March 31, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Net cash provided by (used in): | ||||||||||||||||
Operating activities | $ | 3,407 | $ | 6,582 | $ | 2,513 | $ | 172 | ||||||||
Investing activities | (2,598 | ) | (4,114 | ) | (2,060 | ) | 294 | |||||||||
Financing activities | (1,211 | ) | (2,427 | ) | (798 | ) | (843 | ) | ||||||||
Effect of exchange rate changes on cash | (178 | ) | 160 | (168 | ) | (28 | ) | |||||||||
Net (decrease) increase in cash and cash equivalents | $ | (580 | ) | $ | 201 | |||||||||||
Net increase in cash and cash equivalents | $ | (513 | ) | $ | (405 | ) |
Operating Activities
Net cash provided by operating activities was $3.4 million and $6.6$2.5 million for the ninethree months ended September 30,March 31, 2019 compared to $0.2 million for the three months ended March 31, 2018. The increase was primarily attributable to improvements in net income and changes within our working capital accounts due to increased domestic SSS and the openings of our owned STK restaurants in San Diego, California and Nashville, Tennessee in July 2018 and 2017,March 2019, respectively. We attribute a majority of this change to the payment of accounts payable and the reduction of accrued expenses for the nine months ended September 30, 2018.
Investing Activities
Net cash used in investing activities for the ninethree months ended September 30, 2018March 31, 2019 was $2.6 million. We purchased $3.2$2.1 million compared to net cash provided by investing activities of fixed assets,$0.3 million for the three months ended March 31, 2018. The difference was attributable to increased capital expenditures in 2019 for purchases of property and equipment, primarily in connection withrelated to the construction of our new STK at the Andaz Hotelowned restaurants and general capital expenditures of existing restaurants. Additionally, in San Diego, California. These purchases were partially offset by2018, we received of $0.6 million that we received forof proceeds related to the sale of our interest in One 29 Park, a restaurant and rooftop bar located in a New York City hotel.
Net cash used in investing activities for the nine months ended September 30, 2017 was $4.1 million, consisting primarily of property and equipment purchases related to the construction of new restaurants and general capital expenditures at existing restaurants.
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Financing Activities
Net cash used in financing activities for each of the ninethree months ended September 30,March 31, 2019 and 2018 was $1.2approximately $0.8 million. We made $2.4 million of scheduled debt payments on our outstanding debt. These debt payments were partially offset by $1.2 million in proceeds received from shareholders who exercised their outstanding warrants to purchase our common stock.
Net cash used in financing activities primarily relate to repayments for the nine months ended September 30, 2017 was $2.4 million. We received $1.0 million in proceeds from a short-term loan agreement. These proceeds were partially offset by third party debt payments of $3.0 millionour term loans and we made $0.4 million in distributions to our partners at our downtown New York location.equipment financing agreements.
Covenants
We are subject to a number of customary covenants under our term loan agreements, including limitations on additional borrowings and requirements to maintain certain financial ratios. As of September 30, 2018, we were in compliance with all debt covenants.
Capital Expenditures and Lease Arrangements
To the extent we open new company-owned restaurants, we anticipate capital expenditures would increase from the amounts described in “Investing Activities” above. Although we are committed to our capital light strategy, in which our capital investment is expected to be limited, we are willing to consider a variety of operating modelsopening owned restaurants as new opportunities arise. WeFor owned restaurants, we have typically targeted an average cash investment of approximately $3.8 million for a 10,000 square-foot STK restaurant, in each case net of landlord contributions and equipment financing and excluding pre-opening costs. In addition, some of our existing unitsrestaurants will require capital improvements to either maintain or improve the facilities. We may add seating or provide enclosures for outdoor space in the next twelve months forat some of our units.locations.
Our hospitality F&B services projects typically require limited capital investment from us. Capital expenditures for these projects will primarily be funded by cash flows from operations and equipment financing, depending upon the timing of these expenditures and cash availability.
We typically seek to lease our restaurant locations for periods of 10 to 20 years under operating lease arrangements, with a limited number of renewal options. Our rent structure varies from lease to lease, but our leases generally provide for the payment of both minimum and contingent (percentage) rent based on sales, as well as other expenses related to the leases (for example, our pro-rata share of common area maintenance, property tax and insurance expenses). Many of our lease arrangements include the opportunity to secure tenant improvement allowances to partially offset the cost of developing and opening the related restaurants. Generally, landlords recover the cost of such allowances from increased minimum rents. However, there can be no assurance that such allowances will be available to us on each project that we select for development.
Loan Agreements
As of March 31, 2019, our long-term debt consisted of term loans, promissory notes and equipment financing agreements for which no additional financing was available. In 2019, we made principal payments of approximately $0.8 million towards our long-term debt. As of March 31, 2019, we had approximately $10.0 million of outstanding debt to third parties.
Our term loan agreements with BankUnited contain certain affirmative and negative covenants, including negative covenants that limit or restrict, among other things, liens and encumbrances, indebtedness, mergers, asset sales, investments, assumptions and guaranties of indebtedness of other persons, change in nature of operations, changes in fiscal year and other matters customarily restricted in such agreements. The financial covenants in these agreements require us to maintain a certain adjusted tangible net worth and a debt service coverage ratio. We were in compliance with all of our financial covenants under the BankUnited term loan agreements as of March 31, 2019. Based on current projections, we believe that we will continue to comply with such covenants throughout the twelve months following the issuance of the financial statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Recent Accounting Pronouncements
See Note 3, recent accounting pronouncements,1 to theour consolidated financial statements includedset forth in Item 1 of Part 1 of this Quarterly Report on Form 10-Q for a detailed description of recent accounting pronouncements. SeeWe do not expect the recent accounting pronouncements discussed in Note 81 to thehave a significant impact on our consolidated financial statements included in Itemposition or results of operations.
As of January 1, of Part I of this Quarterly Report on Form 10-Q for information regarding the adoption of2019, we adopted Accounting Standard Codification Topic 606 “Revenue from Contracts With Customers”842, Leases, (“ASC Topic 842”). There were no other material changes from what was previously disclosed inRefer to Note 212 to our consolidated financial statements set forth in Item 81 of our 2017this Quarterly Report on Form 10-K.10-Q for a detailed description of the impact of implementing ASC Topic 842.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide this information.
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Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management , with the participation of our chief executive officerChief Executive Officer and chief financial officer, evaluatedChief Financial Officer, carried out an evaluation as of the last day of the period covered by this Quarterly Report on Form 10-Q of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2018. The term “disclosure controls and procedures,” as defined in RulesRule 13a-15(e) and 15d-15(e) underof the Securities Exchange Act of 1934, (the “Exchangeas amended (“Exchange Act”), means. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and other procedures of a company that(a) are designedeffective to ensure that information required to be disclosed by a companyus in the reports that it filesfiled or submitssubmitted under the Exchange Act is timely recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures(b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a companyus in the reports that it filesfiled or submitssubmitted under the Exchange Act is accumulated and communicated to the company’sour management, including its principal executiveour Chief Executive Officer and principal financial officers,Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2018, our chief executive officer and our chief financial officer concluded that, as of such date, our disclosure controls and procedures were not effective at the reasonable assurance level.
As disclosed in our 2017 Form 10-K, our management concluded that our internal control over financial reporting was not effective at December 31, 2017. Our internal control over financial reporting was also not effective as of September 30, 2018.
Remedial Measures
We are in the process of remediating the identified deficiencies in internal control over financial reporting. However, we have not completed all of the corrective remediation actions that we believe are necessary.
We are taking appropriate and reasonable steps to make necessary improvements to our internal controls over the financial statement close and reporting process. We expect that our remediation efforts, including design, implementation and testing, will continue throughout 2018, although the material weakness in our internal controls will not be considered remediated until our controls are operational for a period of time, tested, and management concludes that these controls are properly designed and operating effectively.
Changes in Internal Controls
NoBeginning January 1, 2019, we implemented ASC Topic 842, Leases. As such, we implemented changes to our processes related to leases and the control activities within them. These included the development of new policies based on the requirements provided in the new standard, new training, ongoing contract review requirements, and gathering of information provided for disclosures. There were no other changes in our internal controlscontrol over financial reporting, (asas defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)Act, that occurred during the quarterly period ended September 30, 2018first quarter of 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except for our remediation efforts described above.reporting.
PART II —OTHER— OTHER INFORMATION
We are subject to claims common to our industry and legal actions in the ordinary course of our business, including claims by or againstlease disputes and employee-related matter. Companies in our licensees, employees, former employeesindustry, including us, have been and others.are subject to class action lawsuits, primarily regarding compliance with labor laws and regulations. Defending lawsuits requires significant management attention and financial resources and the outcome of any litigation is inherently uncertain. We believe that accrual for these matters are adequately provided for in our consolidated financial statements. We do not believe that any currently pending or threatened matter wouldthe ultimate resolutions of these matters will have a material adverse effect on our business,consolidated financial position and results of operationsoperations. However, the resolution of lawsuits is difficult to predict. A significant increase in the number of these claims, or one or more successful claims under which we incur greater liabilities than is currently anticipated, could materially and adversely affect our consolidated financial condition.statements.
(a) Exhibits required by Item 601 of Regulation S-K.
* | Filed herewith. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 12, 2018May 9, 2019
THE ONE GROUP HOSPITALITY, INC. | ||
By: | /s/ | |