Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 20192020

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period fromto

Commission File Number 001‑37379

Commission File Number       001-37379

THE ONE GROUP HOSPITALITY, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

14-1961545

14‑1961545

(State or other jurisdiction of incorporation or
organization)

(I.R.S. Employer Identification No.)

411 W. 14th

1624 Market Street, 2nd Floor, New York, New YorkSuite 311, Denver, Colorado

10014

80202

(Address of principal executive offices)

Zip Code

 

646-624-2400

646‑624‑2400

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

STKS

Nasdaq

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. 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). Yesx No¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-212b‑2 of the Exchange Act.

 

Large accelerated filer  ¨

Accelerated filer  ¨

Non-accelerated filer  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-212b‑2 of the Exchange Act). Yes¨  Nox

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common StockSTKSNasdaq

Number of shares of common stock outstanding as of May 8, 2019:  28,628,8801, 2020:  28,828,675

 

TABLE OF CONTENTS

 

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

THE ONE GROUP HOSPITALITY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share information)

 

 (Unaudited),    

 

 

 

 

 

 

 March 31, December 31, 

 

March 31, 

 

December 31, 

 2019  2018 

    

2020

 

2019

ASSETS        

 

(Unaudited)

 

 

  

Current assets:        

 

 

  

 

 

  

Cash and cash equivalents $1,079  $1,592 

 

$

8,160

 

$

12,344

Accounts receivable  5,946   7,029 

 

 

5,189

 

 

10,351

Inventory  1,243   1,404 

 

 

2,490

 

 

3,058

Other current assets  1,570   1,471 

 

 

2,005

 

 

1,047

Due from related parties, net  123   45 

 

 

376

 

 

341

Total current assets  9,961   11,541 

 

 

18,220

 

 

27,141

        

 

 

  

 

 

  

Property and equipment, net  40,465   39,347 

 

 

69,183

 

 

70,483

Operating lease right-of-use assets  40,073    

 

 

80,228

 

 

81,097

Investments  2,684   2,684 
Deferred tax assets, net  28   38 

 

 

7,876

 

 

7,751

Intangibles, net

 

 

16,965

 

 

17,183

Other assets  341   349 

 

 

2,372

 

 

1,622

Security deposits  2,039   2,020 

 

 

1,337

 

 

1,308

Total assets $95,591  $55,979 

 

$

196,181

 

$

206,585

        

 

 

  

 

 

  

LIABILITIES AND STOCKHOLDERS' EQUITY        

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

  

 

 

  

Current liabilities:        

 

 

  

 

 

  

Accounts payable $5,700  $5,408 

 

$

7,397

 

$

8,274

Accrued expenses  6,836   8,093 

 

 

7,642

 

 

11,198

Deferred license revenue  154   171 

 

 

446

 

 

332

Deferred gift card revenue and other  783   947 

 

 

2,691

 

 

3,183

Current portion of operating lease liabilities  2,197    

 

 

4,454

 

 

4,397

Current portion of long-term debt  2,844   3,201 

 

 

696

 

 

749

Total current liabilities  18,514   17,820 

 

 

23,326

 

 

28,133

        

 

 

  

 

 

  

Deferred license revenue, long-term  1,081   1,008 

 

 

869

 

 

1,036

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 

Operating lease liabilities, net of current portion

 

 

97,492

 

 

98,278

Long-term debt, net of current portion  6,727   7,118 

 

 

45,123

 

 

45,226

Total liabilities  82,739   43,917 

 

 

166,810

 

 

172,673

        

 

 

  

 

 

  

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      

Common stock, $0.0001 par value, 75,000,000 shares authorized; 28,807,800 and 28,603,829 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

 

 3

 

 

 3

Preferred stock, $0.0001 par value, 10,000,000 shares authorized; no shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

 

 —

 

 

 —

Additional paid-in capital  43,724   43,543 

 

 

45,229

 

 

44,853

Accumulated deficit  (27,868)  (28,722)

 

 

(12,490)

 

 

(7,891)

Accumulated other comprehensive loss  (2,470)  (2,310)

 

 

(2,695)

 

 

(2,651)

Total stockholders’ equity  13,389   12,514 

 

 

30,047

 

 

34,314

Noncontrolling interests  (537)  (452)

 

 

(676)

 

 

(402)

Total equity  12,852   12,062 

 

 

29,371

 

 

33,912

Total liabilities and equity $95,591  $55,979 

 

$

196,181

 

$

206,585

 

See notes to the condensed consolidated financial statements.

3

3

 

THE ONE GROUP HOSPITALITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(Unaudited, in thousands, except (loss) earnings per share and related share information)

 

  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 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 

 

    

2020

    

2019

Revenues:

 

 

  

 

 

  

Owned restaurant net revenue

 

$

38,557

 

$

20,093

Management, license and incentive fee revenue

 

 

2,162

 

 

2,683

Total revenues

 

 

40,719

 

 

22,776

Cost and expenses:

 

 

  

 

 

  

Owned operating expenses:

 

 

  

 

 

  

Owned restaurant cost of sales

 

 

10,113

 

 

5,026

Owned restaurant operating expenses

 

 

26,499

 

 

12,717

Total owned operating expenses

 

 

36,612

 

 

17,743

General and administrative (including stock-based compensation of $338 and $181 for the three months ended March 31, 2020 and 2019 respectively)

 

 

3,397

 

 

2,650

Depreciation and amortization

 

 

2,440

 

 

942

Transaction and integration costs

 

 

1,095

 

 

 —

COVID-19 related expenses

 

 

1,348

 

 

 —

Lease termination expenses

 

 

179

 

 

 —

Pre-opening expenses

 

 

 —

 

 

482

Other income, net

 

 

(1)

 

 

(175)

Total costs and expenses

 

 

45,070

 

 

21,642

Operating (loss) income

 

 

(4,351)

 

 

1,134

Other expenses, net:

 

 

  

 

 

  

Interest expense, net of interest income

 

 

1,175

 

 

269

Total other expenses, net

 

 

1,175

 

 

269

(Loss) income before (benefit) provision for income taxes

 

 

(5,526)

 

 

865

(Benefit) provision for income taxes

 

 

(653)

 

 

96

Net (loss) income

 

 

(4,873)

 

 

769

Less: net loss attributable to noncontrolling interest

 

 

(274)

 

 

(85)

Net (loss) income attributable to The ONE Group Hospitality, Inc.

 

$

(4,599)

 

$

854

Currency translation loss

 

 

(44)

 

 

(160)

Comprehensive (loss) income

 

$

(4,643)

 

$

694

 

 

 

  

 

 

  

Net (loss) income attributable to The ONE Group Hospitality, Inc. per share:

 

 

  

 

 

  

Basic net (loss) income per share

 

$

(0.16)

 

$

0.03

Diluted net (loss) income per share

 

$

(0.16)

 

$

0.03

 

 

 

  

 

 

  

Shares used in computing basic (loss) earnings per share

 

 

28,636,325

 

 

28,314,820

Shares used in computing diluted (loss) earnings per share

 

 

28,636,325

 

 

29,311,756

 

See notes to the condensed consolidated financial statements.

4

4

THE ONE GROUP HOSPITALITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited, in thousands, except share information)

 

  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 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

other

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

paid-in

 

Accumulated

 

comprehensive

 

Stockholders’

 

Noncontrolling

 

 

 

 

    

Shares

    

Par value

    

capital

    

deficit

    

loss

    

equity

    

interests

    

Total

Balance at December 31, 2019

 

28,603,829

 

$

 3

 

$

44,853

 

$

(7,891)

 

$

(2,651)

 

$

34,314

 

$

(402)

 

$

33,912

Stock-based compensation, net of tax withholding

 

69,327

 

 

 —

 

 

338

 

 

 —

 

 

 —

 

 

338

 

 

 —

 

 

338

Exercise of stock options

 

18,000

 

 

 —

 

 

38

 

 

 —

 

 

 —

 

 

38

 

 

 —

 

 

38

Vesting of restricted shares

 

116,644

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Loss on foreign currency translation, net

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(44)

 

 

(44)

 

 

 —

 

 

(44)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(4,599)

 

 

 —

 

 

(4,599)

 

 

(274)

 

 

(4,873)

Balance at March 31, 2020

 

28,807,800

 

$

 3

 

$

45,229

 

$

(12,490)

 

$

(2,695)

 

$

30,047

 

$

(676)

 

$

29,371

 

See notes to the condensed consolidated financial statements.

5

5

THE ONE GROUP HOSPITALITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

 

 

 

 

 

 

 For the three months ended March 31, 

 

For the three months ended March 31, 

 2019  2018 

    

2020

    

2019

Operating activities:        

 

 

  

 

 

  

Net income $769  $118 
Adjustments to reconcile net loss to net cash provided by operating activities:        

Net (loss) income

 

$

(4,873)

 

$

769

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

 

 

  

 

 

  

Depreciation and amortization  942   778 

 

 

2,440

 

 

942

Amortization of discount on warrants  50   51 
Deferred rent and tenant improvement allowances     (18)

Stock-based compensation

 

 

338

 

 

181

Amortization of discount on warrants and debt issuance costs

 

 

108

 

 

50

Deferred taxes  10   (2)

 

 

(125)

 

 

10

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 

 

 

5,092

 

 

1,147

Inventory  161   115 

 

 

568

 

 

161

Other current assets  (96)  (211)

 

 

(958)

 

 

(96)

Due from related parties, net  (38)  (99)

 

 

(35)

 

 

(38)

Security deposits  (18)  (54)

 

 

(32)

 

 

(18)

Other assets  8   (37)

 

 

(807)

 

 

 8

Accounts payable  270   (203)

 

 

(859)

 

 

270

Accrued expenses  (1,331)  (718)

 

 

(3,560)

 

 

(1,331)

Operating lease liabilities and right-of-use assets  321    

 

 

140

 

 

321

Deferred revenue  137   100 

 

 

(540)

 

 

137

Net cash provided by operating activities  2,513   172 
        

Net cash (used in) provided by operating activities

 

 

(3,103)

 

 

2,513

Investing activities:        

 

 

  

 

 

  

Purchase of property and equipment  (2,060)  (306)

 

 

(791)

 

 

(2,060)

Proceeds from disposition of cost method investment     600 
Net cash (used in) provided by investing activities  (2,060)  294 
        

Net cash used in investing activities

 

 

(791)

 

 

(2,060)

Financing activities:        

 

 

  

 

 

  

Repayment of term loan  (707)  (694)
Repayment of equipment financing agreement  (91)  (87)
Repayment of business loan and security agreement     (62)

Borrowings of long-term debt

 

 

 —

 

 

 —

Repayments of long-term debt

 

 

(216)

 

 

(798)

Debt issuance costs

 

 

(48)

 

 

 —

Exercise of stock options

 

 

38

 

 

 —

Net cash used in financing activities  (798)  (843)

 

 

(226)

 

 

(798)

Effect of exchange rate changes on cash  (168)  (28)

 

 

(64)

 

 

(168)

Net decrease in cash and cash equivalents  (513)  (405)

 

 

(4,184)

 

 

(513)

Cash and cash equivalents, beginning of year  1,592   1,548 

 

 

12,344

 

 

1,592

Cash and cash equivalents, end of year $1,079  $1,143 

 

$

8,160

 

$

1,079

Supplemental disclosure of cash flow data:        

 

 

  

 

 

  

Interest paid $235  $142 

 

$

704

 

$

235

Income taxes paid  191   26 

 

 

85

 

 

191

Non-cash amortization of debt issuance costs $5  $5 

 

$

108

 

$

 5

 

See notes to the condensed consolidated financial statements.

 

6

6

 

THE ONE GROUP HOSPITALITY, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 – Summary of Business and Significant Accounting Policies

Summary of Business

The ONE Group Hospitality, Inc. and its subsidiaries (collectively, the “Company”) is a global hospitality company that develops, owns and operates, manages orand licenses upscale and polished casual, high-energy restaurants and lounges and provides turn-key food and beverage (“F&B”) services for hospitality venues including hotels, casinos and other high-end locations globally.locations. Turn-key F&B services are food and beverage services that can be scaled, customized and implemented by the Company at a particular hospitality venue and customized for the client. The Company’s primary restaurant brand isbrands are STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse.steakhouse, and Kona Grill, a bar-centric grill concept featuring American favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere.

On October 4, 2019, the Company acquired substantially all of the assets of Kona Grill Inc. and its affiliates (“Kona Grill”), which is composed of 24 domestic restaurants. The Company purchased the assets for a contractual price of $25.0 million plus approximately $1.5 million of consideration paid primarily for the apportionment of rent and utilities. The Company also assumed approximately $7.7 million in current liabilities. The Company intends to integrate Kona Grill by leveraging its corporate infrastructure, bar-business knowledge and unique Vibe Dining program, to elevate the brand experience and drive improved performance. The results of operations of these restaurants are included in our consolidated financial statements from the date of acquisition.

As of March 31, 2019, we2020, the Company owned, operated, managed or licensed 2955 venues, including 1920 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and including11 F&B services provided to fourvenues including six hotels and casinos in the United States and Europe.

Effects of COVID-19

In the first quarter of 2020, the negative effect of the novel coronavirus (“COVID-19”) on the Company’s business was significant. The Company experienced an initial decline in restaurant revenue that began in early March 2020 as business travel and social dining decreased. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic disease, and on March 13, 2020, President Trump declared a state of emergency for COVID-19. Public concerns about the spread of COVID-19 continues to be widespread. The Company has experienced a significant reduction in guest traffic at its restaurants as a result of restrictions mandated by state and local governments.

In response to these conditions, and out of concern for our customers and partners, the Company has temporarily closed several restaurants and the Company has shifted operations at 30 of its restaurants to provide only take-out and delivery service. In addition to the decline in restaurant revenue, the Company has incurred approximately $1.3 million of costs directly related to COVID-19 in the three months ended March 31, 2020, composed primarily of payments to employees for paid-time off during restaurant closures, inventory waste, and rent and rent related costs for closed and limited-operations restaurants from the day that the dining room closed. The Company has implemented measures to reduce its costs during the COVID-19 pandemic, including significant reductions in employees, deferral of capital projects, and negotiations with suppliers and landlords regarding deferral or abatement of payments which could become significant.

Given the present uncertainty surrounding the global economy due to the COVID-19 pandemic, the Company cannot reasonably predict when its closed restaurants will re-open and open restaurants will be able to return to normal dining room operations. The Company expects that its results of operations will be negatively affected by these actions in the second quarter of 2020. The Company’s re-opening of closed restaurants and resumption of normal dining operations is subject to events beyond its control, including the effectiveness of governmental efforts to halt the spread of COVID-19.

Basis of Presentation

The accompanying consolidated balance sheet as of December 31, 2018,2019, which has been derived from audited financial statements, and the accompanying unaudited interim consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States (“GAAP”). Certain information and footnote disclosures normally included in annual audited financial statements have been omitted pursuant to SEC rules and regulations. These unaudited interim consolidated financial

7

statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K10‑K for the year ended December 31, 2018.

2019.

In the Company’s opinion, the accompanying unaudited interim financial statements reflect all adjustments (consisting only of normal recurring accruals and adjustments) necessary for a fair presentation of the results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of the results expected for the full year. Additionally, the Company believes that the disclosures are sufficient for interim financial reporting purposes.

Prior Period Reclassifications

Certain reclassifications of the 2019 financial statements amounts have been made to conform to the current year presentation. The Company has combined owned restaurant net revenues and owned food, beverage and other net revenues to be presented in total as owned restaurant net revenue. Additionally, the Company reclassified $0.5 million of owned food, beverage and other expenses to owned restaurant cost of sales and $1.8 million of owned food, beverage and other expenses to owned restaurant expenses on the accompanying consolidated statements of operations and comprehensive (loss) income. Certain reclassifications were also made to conform the prior period segment reporting to the current year segment presentation. Refer to Note 15 – Segment Reporting for additional information regarding the Company’s reportable operating segments.

Recent Accounting Pronouncements

In MarchDecember 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Updated (“ASU”) No. 2019-01, “Leases2019-12, “Income Taxes (Topic 842)740): Codification Improvements”Simplifying the Accounting for Income Taxes,” (“ASU 2019-01”2019-12”). ASU 2019-01 provided clarification which is intended to simplify various aspects related to adoptingaccounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Accounting Standard Codification Topic 842, Leases, (“ASC Topic 842”).740, Income Taxes, and it clarifies and amends existing guidance to improve consistent application. ASU 2019-01 addresses fair value determinations of underlying assets by lessors, cash flow statement presentation for financing leases, and transition disclosures. The Company adopted ASC Topic 842 as of January 1, 2019 and considered the clarification guidance in ASU 2019-01 as part of its adoption. Refer to Note 12 for additional details regarding the adoption of ASC 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 2018-152019-12 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.2020. The Company is evaluating the effectsimpact of this pronouncementthe adoption of ASU 2019-12 on its consolidated financial statements.

7

statements but does not expect the adoption of ASU 2019-12 to be material.

In October 2018, the FASB issued ASU No. 2018-17,2018‑17, “Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities” (“ASU 2018-17”2018‑17”). ASU 2018-172018‑17 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 2018-172018‑17 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. Entities are required to adopt the new guidance retrospectively with a cumulative adjustment to retained earnings at the beginning of the earliest period presented. The Companyadoption of ASU 2018-17 did not have a material impact on our financial position, results of operations or cash flows.

In August 2018, the FASB issued ASU No. 2018‑15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350‑40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is evaluatinga Service Contract” (“ASU 2018‑15”). ASU 2018‑15 aligns the effectsrequirements for capitalizing implementation costs in cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018‑15 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. Entities can choose to adopt the new guidance prospectively or retrospectively. The adoption of this pronouncementASU 2018-15 did not have a material impact on its consolidatedour financial statements.position, results of operations or cash flows.

In August 2018, the FASB issued ASU No. 2018‑13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018‑13”). ASU 2018‑13 eliminates, modifies and adds disclosure requirements for fair value measurements. The amendments in ASU 2018‑13 are effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The adoption of ASU 2018-3 did not have a material impact on our disclosures of fair value measurement, which are included in Note 7 – Fair Value of Financial Instruments. 

 

Note 2 – InventoryBusiness Combination

On October 4, 2019, the Company acquired substantially all of the assets of Kona Grill Inc. and its affiliates comprising 24 domestic restaurants. The Company purchased the assets for a contractual price of $25.0 million plus $1.5 million of consideration paid primarily for the apportionment of rent and utilities. The Company also assumed approximately $7.7 million in current liabilities. The Company believes that Kona Grill is complementary to the Company’s business and will enable the Company to capture market share in the Vibe Dining segment.

8

Kona Grill Inc. and its affiliates were purchased pursuant to a Chapter 11 bankruptcy. As a result, the Company recognized a bargain purchase gain of approximately $11.0 million in the consolidated statements of operation and comprehensive (loss) income for the year ended December 31, 2019, which represents the excess of the aggregate fair value of net assets acquired and liabilities assumed over the purchase price.

The purchase accounting is preliminary and represents estimates and assumptions that are subject to change during the measurement period (up to one year from the acquisition date). The following table summarizes the preliminary fair value of identified assets acquired and liabilities assumed as of the acquisition date (amounts in thousands):

 

 

 

 

Net assets acquired:

    

 

 

Cash

 

$

450

Current assets, excluding cash

 

 

2,830

Property and equipment

 

 

31,781

Operating lease right-of-use assets

 

 

42,398

Intangible assets

 

 

17,400

Other assets

 

 

692

Current liabilities

 

 

(7,690)

Deferred tax liability

 

 

(4,044)

Operating lease liabilities

 

 

(46,364)

Total net assets acquired

 

$

37,453

 

 

 

 

Purchase consideration:

 

 

 

Contractual purchase price

 

 

25,000

Apportionment of rent and utilities

 

 

775

Assumption of real estate lease consultant contract

 

 

465

Escrow deposit

 

 

250

Consideration paid

 

$

26,490

 

 

 

 

Bargain purchase gain attributable to Kona Grill acquisition

 

$

10,963

Pro Forma Results of Operations (unaudited)

The following pro forma results of operations for the three months ended March 31, 2019 have been prepared as though the acquisition occurred as of January 1, 2019. The pro forma financial information is not indicative of the results of operations that the Company would have attained had the acquisition occurred at the beginning of the periods presented, nor is the pro forma financial information indicative of the results of operations that may occur in the future. Amounts are in thousands, except earnings per share related data.

 

 

 

 

 

 

Three months ended

 

    

March 31, 2019

Total revenues

 

$

47,230

Net income attributable to The ONE Group Hospitality, Inc.

 

$

667

Net income attributable to The ONE Group Hospitality, Inc. per share:

 

 

 

Basic net income per share

 

$

0.02

Diluted net income per share

 

$

0.02

 

Inventory consists

9

Table of the following (in thousands):Contents

  March 31,  December 31, 
  2019  2018 
Food $225  $300 
Beverages  1,018   1,104 
Total $1,243  $1,404 

Note 3 – Other Current Assets

Other current assets consist of the following (in thousands):

  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 43 – Property and Equipment, net

Property and equipment, net consist of the following (in thousands):

 

 

 

 

 

 

 

 March 31, December 31, 

 

March 31, 

 

December 31, 

 2019  2018 

 

2020

 

2019

Furniture, fixtures and equipment $11,024  $10,425 

 

$

20,907

 

$

20,512

Leasehold improvements  45,531   43,890 

 

 

70,110

 

 

69,925

Less: accumulated depreciation and amortization  (17,911)  (16,969)

 

 

(24,218)

 

 

(21,997)

Subtotal  38,644   37,346 

 

 

66,799

 

 

68,440

Construction in progress     336 

 

 

438

 

 

97

Restaurant supplies  1,821   1,665 

Restaurant smallwares

 

 

1,946

 

 

1,946

Total $40,465  $39,347 

 

$

69,183

 

$

70,483

 

Depreciation and amortization related to property and equipment amounted to $0.9$2.2 million and $0.8$0.9 million for the three months ended March 31, 20192020 and 2018,2019, respectively. The Company does not depreciate construction in progress, assets not yet put into service or restaurant supplies.

 

8

Note 4 – Intangibles, net

Intangibles, net consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2020

    

2019

Kona Grill tradename

 

$

17,400

 

$

17,400

Less: accumulated amortization

 

 

(435)

 

 

(217)

Total intangibles, net

 

$

16,965

 

$

17,183

The Kona Grill trade name is amortized using the straight-line method over its estimated useful life of 20 years. Amortization expense was $0.2 million for the three months ending March 31, 2020. The Company’s estimated aggregate amortization expense for each of the five succeeding fiscal years is approximately $0.9 million annually.

 

Note 5 – Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

 

 

 

 

 

 

 March 31, December 31, 

 

March 31, 

 

December 31, 

 2019  2018 

 

2020

 

2019

Payroll and related $1,878  $1,794 

 

$

2,138

 

$

4,519

Variable rent, including disputed rent amounts  1,506   1,766 

 

 

1,770

 

 

1,796

Legal, professional and other services  807   1,028 

 

 

1,081

 

 

1,103

VAT and sales taxes  530   645 
Income taxes and related  416   685 

VAT, sales and other taxes

 

 

689

 

 

1,488

Income taxes

 

 

 —

 

 

547

Insurance  317   203 

 

 

118

 

 

100

Due to hotels  35   212 
Other  1,347   1,760 

 

 

1,846

 

 

1,645

Total $6,836  $8,093 

 

$

7,642

 

$

11,198

 

10

Note 6 – Long-Term Debt

Long-term debt consists of the following (in thousands):

 

 

 

 

 

 

 

 March 31, December 31, 

 

March 31, 

 

December 31, 

 2019  2018 

 

2020

 

2019

Term loan agreements $3,121  $3,828 

 

$

47,760

 

$

47,880

Promissory notes  6,250   6,250 

Revolving credit facility

 

 

 —

 

 

 —

Equipment financing agreements  661   752 

 

 

284

 

 

380

Total long-term debt  10,032   10,830 

 

 

48,044

 

 

48,260

Less: current portion of long-term debt  (2,844)  (3,201)

 

 

(696)

 

 

(749)

Less: discounts on warrants, net  (434)  (479)
Less: debt issuance costs  (27)  (32)

 

 

(2,225)

 

 

(2,285)

Total long-term debt, net of current portion $6,727  $7,118 

 

$

45,123

 

$

45,226

 

Interest expense for all the Company’s debt arrangements, excluding the amortization of debt issuance costs and other discounts and fees, was approximately $0.2$1.1 million and $0.3$0.2 million for the three months ended March 31, 2020 and 2019, and 2018, respectively. 

As of March 31,  2019,2020, the Company had $1.3 million in standby letters of credit outstanding for certain restaurants. Theserestaurants and $10.7 million available in its revolving credit facility. As of March 31, 2020 and December 31, 2019, the Company had $0.4 million of cash collateralized letters of credit, which are cash collateralized, are recorded as a component of security deposits on the consolidated balance sheetsheet.

Goldman Sachs Bank USA Credit and Guaranty Agreement

On October 4, 2019, in conjunction with the acquisition of Kona Grill, the Company entered into a credit and guaranty agreement with Goldman Sachs Bank USA (“Goldman Sachs Credit Agreement”). The Goldman Sachs Credit Agreement provides for a secured revolving credit facility of $12.0 million and a $48.0 million term loan. The term loan is payable in quarterly installments, with the final payment due in October 2024. The revolving credit facility also matures in October 2024. Additionally, the Company’s consolidated adjusted EBITDA as defined by the Goldman Sachs Credit Agreement for determining covenant compliance includes pro forma adjustments for the annualization of March 31, 2019.the Kona Grill restaurant performance which includes results before the acquisition date.

The Goldman Sachs Credit Agreement contains several financial covenants, including the following:

·

A minimum consolidated fixed charge coverage ratio of (i) 1.35 to 1.00 as of the end of any fiscal quarter ending on or prior to June 30, 2021 and (ii) 1.50 to 1.00 as of any fiscal quarter thereafter;

·

A maximum consolidated leverage ratio of (i) 2.75 to 1.00 as of the end of any fiscal quarter ending on or prior to March 31, 2020, (ii) 2.50 to 1.00 as of the fiscal quarter ending June 30, 2020, (iii) 2.25 to 1.00 as of the fiscal quarters ending September 30, 2020 and December 31, 2020, (iv) 2.00 to 1.00 as of the fiscal quarter ending March 31, 2021, (v) 1.75 to 1.00 as of the fiscal quarter ending June 30, 2021, (vi) 1.70 to 1.00 as of the fiscal quarter ending September 30, 2021, (vii) 1.65 to 1.00 as of the fiscal quarter ending December 21, 2021 and (viii) 1.50 to 1.00 as of the end of any fiscal quarter thereafter. For purposes of calculating this ratio for the first four quarters, the agreement provides for a pro forma adjustment to reflect one full year of Kona Grill operations;  

·

Maximum consolidated capital expenditures not to exceed (i) $10,000,000 in 2020 and (ii) $8,000,000 in 2021 and every fiscal year thereafter; and,

·

Minimum consolidated liquidity not to be less than $1,500,000 at any time.

 

The Company’s term loan agreements with Bank United are secured by substantially allability to borrow under its revolving credit facility is dependent on several factors. The Company’s total borrowings cannot exceed a leverage incurrence multiple of (i) 2.50 to 1.00 as of the end of any fiscal quarters ending on or prior to June 30, 2020, (ii) 2.25 to 1.00 as of the fiscal quarters ending September 30, 2020 and December 31, 2020, (iii) 2.00 to 1.00 as of the fiscal quarter ending March 31, 2021 (iv) 1.75 to 1.00 as of the fiscal quarter ending June 30, 2021, (v) 1.70 to 1.00 as of the fiscal quarter ending September 30, 2021, (vi) 1.65 to 1.00 as of the fiscal quarter ending December 31, 2021, and (vii) 1.50 to 1.00 as of the end of any fiscal quarter thereafter. In addition, after giving effect to borrowings under the revolving credit facility, the Company’s assets. cash and cash equivalents cannot exceed $4,000,000.

The term loan agreements contain certainGoldman Sachs Credit Agreement has several borrowing and interest rate options, including the following: (a) a LIBOR rate (or a comparable successor rate) subject to a 1.75% floor or (b) a base rate equal to the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50%, (iii) the LIBOR rate for a one-month period plus 1.00% or (iv) 4.75%. Loans under the Goldman Sachs Credit

11

Agreement bear interest at a rate per annum using the applicable indices plus a varying interest rate margin of between 5.75% and 6.75% (for LIBOR rate loans) and 4.75% and 5.75% (for base rate loans).

The Goldman Sachs Credit Agreement contains customary representations, warranties and conditions to borrowing including customary affirmative and negative covenants, which include covenants that limit or restrict among other things, liens and encumbrances,the Company’s ability to incur 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 restrictedobligations, grant liens to secure obligations, make investments, merge or consolidate, alter the organizational structure of the Company and its subsidiaries, and dispose of assets outside the ordinary course of business, in such agreements. each case subject to customary exceptions for credit facilities of this size and type.

The financial covenants contained in these agreements requireCompany and certain operating subsidiaries of the borrowersCompany guarantee the obligations under the Goldman Sachs Credit Agreement, which also are secured by liens on substantially all of the assets of the Company and its subsidiaries.

The Company has incurred approximately $2.5 million of debt issuance costs related to maintainthe Goldman Sachs Credit Agreement, which were capitalized and are recorded as a certain adjusted tangibledirect deduction to the long-term debt, net worth and a debt service coverage ratio.of current portion, on the consolidated balance sheets. As of March 31, 2019,2020, the Company iswas in compliance with allthe covenants required by the Goldman Sachs Credit Agreement.  

Equipment Financing Agreements

On June 5, 2015 and August 16, 2016, the Company entered into financing agreements with Sterling National Bank for $1.0 million and $0.7 million, respectively, to purchase equipment for the STKs in Orlando, Chicago, San Diego, and Denver. Each of its financial covenants under the term loan agreements.these financing agreements have five- year terms and bear interest at a rate of 5% per annum, payable in equal monthly installments. 

 

Note 7 – Fair Value of Financial Instruments

Cash and cash equivalents, accounts receivable, inventory, accounts payable and accrued expenses are carried at cost, which approximates fair value due to their short maturities. Long-lived assets are measured and disclosed at fair value on a nonrecurring basis if an impairment is identified. There were no long-lived assets measured at fair value as of March 31, 2019.2020.

The Company’s long-term debt, including the current portion, is carried at cost on the consolidated balance sheets. Fair value of long-term debt, including the current portion, is estimated based on Level 2 inputs.inputs, except the amount outstanding on the revolving credit facility for which the carrying value approximates fair value. Fair value is determined by discounting future cash flows using interest rates available for issues with similar terms and maturities.

9

maturities.

The estimated fair values of long-term debt, for which carrying values do not approximate fair value, are as follows:follows (in thousands):

 

 

 

 

 

 

 

 March 31, December 31, 

 

March 31, 

 

December 31, 

 2019 2018 

 

2020

 

2019

Carrying amount of long-term debt, including current portion(1) $10,032  $10,830 

 

$

48,044

 

$

48,260

Fair value of long-term debt, including current portion $6,616  $7,648 

 

$

37,454

 

$

35,471


(1)Excludes the discounts on warrants, net and debt issuance costs

(1)

Excludes the discounts on warrants, net and debt issuance costs 

 

Note 8 – Nonconsolidated Variable Interest Entities

and Related Party Transactions

As of March 31, 20192020 and December 31, 2018,2019, the Company owned interests in the following companies, which directly or indirectly operate restaurants:a restaurant:

·

31.24% interest in Bagatelle NY LA Investors, LLC (“Bagatelle Investors”)

·

51.13% aggregate interest, held directly and indirectly through other entities, in Bagatelle Little West 12th, LLC (“Bagatelle NY”)

Bagatelle Investors is a holding company that has an interest in Bagatelle NY. Both entities were formed in 2011. The Company accounts forrecords its retained interests in Bagatelle Investors and Bagatelle NY as cost method investments in these entities underas the equity method of accounting based on management’s assessmentCompany has determined that although it is not the primary beneficiary of these entities because it does not have the powerability to direct their day to day activities,exercise significant influence over its investees, Bagatelle Investors and Bagatelle NY. As of March 31, 2020 and December 31, 2019, the Company is able to exercise influence overhas zero carrying value in these entities. Thecost method investments.    

12

Additionally, the Company has provided no additional typesa management agreement with Bagatelle NY. Under this agreement, the Company recorded less than $0.1 million of support to these entities than what is contractually required.

The carrying valuesmanagement fee revenue in each 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 $44.0 thousand2020 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 of the three months ended March 31, 20192020 and 2018.

2019, respectively.

Net receivables from the Bagatelle Investors and Bagatelle NY included in due from related parties, net were approximately $0.2$0.4 million and $0.1$0.3 million as of March 31, 20192020 and December 31, 2018.2019, respectively. These receivables combined with the Company’s equity in each of these investments, represent the Company’s maximum exposure to loss.

In the three months ended March 31, 2018, the Company sold its 10% interest in a cost method investment, One 29 Park, LLC, for $0.6 million, resulting in a gain of $0.2 million. The gain is included as a component of “other expenses, net” on the 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 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 11.8% for the three months ended March 31, 2020 compared to 11.1% for the three months ended March 31, 2019 compared to 17.5% for the three months ended March 31, 2018.2019.  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)(iii) taxes owed in state and local jurisdictions such as New York, New York City, Colorado and Tennessee.

jurisdictions.

The Company is subject to income taxes in the U.S. federal jurisdiction, and the various states and local jurisdictions in which it operates. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In the normal course of business, the Company is subject to examination by the federal, state, local and foreign taxing authorities.

Note 1110 – Revenue from contracts with customers

The following table provides information about contract receivables and contract liabilities from contracts with customers, 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 consolidated balance sheets.

(2)Includes the current and long-term portion of deferred license revenue.

(3)Deferred gift card and gift certificate revenue is included in deferred gift card revenue and other on the consolidated balance sheets.Konavore rewards program (in thousands):

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

2020

 

2019

Receivables (1)

 

$

125

 

$

250

Deferred license revenue (2)

 

$

1,315

 

$

1,368

Deferred gift card and gift certificate revenue (3)

 

$

2,594

 

$

3,210

Konavore rewards program (4)

 

$

86

 

$

84


The Company determined that the services it provides under its licensing agreements are primarily the rights to access and derive benefit from our symbolic intellectual property. As a result, the initial license fees and upfront fees are recognized on a straight-line basis over the term of the license agreement as a component of management, license and incentive fee revenue on the consolidated statement of operations and comprehensive income. Sales-based royalties are recognized as licensee restaurant sales occur.

(1)

Receivables are included in accounts receivable on the consolidated balance sheets.

(2)

Includes the current and long-term portion of deferred license revenue.

(3)

Deferred gift card revenue is included in deferred gift card revenue and other on the consolidated balance sheets.

(4)

Konavore rewards program is included in accrued expenses on the consolidated balance sheets.

 

Significant changes in deferred license revenue and deferred gift card revenue for the three months ended March 31, 2020 and 2019 wereare as follows (in thousands):

 

Deferred license revenue, as of December 31, 2018 $1,179 
Additions to deferred license revenue  111 
Revenue recognized during the period  (55)
Deferred license revenue, as of March 31, 2019 $1,235 

 

 

 

 

 

 

 

 

    

March 31, 

    

March 31, 

 

 

2020

 

2019

Revenue recognized from deferred license revenue

 

$

52

 

$

55

Revenue recognized from deferred gift card revenue

 

$

746

 

$

283

 

As of March 31, 2019,2020, the estimated deferred license revenue to be recognized in the future related to performance obligations that are unsatisfied as of March 31, 2019 was2020 were as follows for each year ending (in thousands):

 

2019, nine months remaining $143 
2020  191 

 

 

 

2020, nine months remaining

    

$

154

2021  191 

 

 

206

2022  163 

 

 

181

2023  136 

 

 

169

2024

 

 

134

Thereafter  411 

 

 

471

Total future estimated deferred license revenue $1,235 

 

$

1,315

 

Proceeds from the sale

13

Note 11 – Leases

The components of redemption to be remote for certain gift cards and gift certificates due to, among other things, long periods of inactivity. In these circumstances, to the extent the Company determines there is no requirement for remitting balances to government agencies under unclaimed property laws, outstanding gift card and gift certificate balances may then be recognized as breakage in the consolidated statements of operations and comprehensive income as a component of owned food, beverage and other net revenues.

11

Significant changes in deferred gift card and gift certificate revenuelease expense for the three months ended March 31, 2019period were as follows (in thousands):

 

Deferred gift card and gift certificate revenue, as of December 31, 2018 $491 
Additions to deferred gift card and gift certificates revenue  123 
Revenue recognized during the period related to redemptions  (283)
Deferred gift card and gift certificate revenue, as of March 31, 2019 $331 

In each of three months ended March 31, 2019 and 2018, the Company recognized revenue of $0.3 million related to our contract liabilities.

Note 12 – Leases

The Company adopted ASC Topic 842 as of January 1, 2019 using the optional transition method and has applied its transition provisions at the beginning of the period of adoption. As a result, the Company did not restate comparative periods. Under this transition provision, the Company has applied the legacy guidance under Accounting Standard Codification Topic 840, Leases, including its disclosure requirements, in the comparative periods presented.

Under ASC Topic 842, a lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. The Company’s contracts determined to be or contain a lease include explicitly or implicitly identified assets where the Company has the right to substantially all of the economic benefits of the assets and has the ability to direct how and for what purpose the assets are used during the lease term. Leases are classified as either operating or financing. For operating leases, the Company has recognized a lease liability equal to the present value of the remaining lease payments, and a right of use asset equal to the lease liability, subject to certain adjustments, such as prepaid rents, initial direct costs and lease incentives received from the lessor. The Company used its incremental borrowing rate to determine the present value of the lease payments. The Company’s incremental borrowing rate is the rate of interest that it would have to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

ASC Topic 842 includes practical expedient and policy election choices. The Company elected the practical expedient transition package available in ASC Topic 842 and, as a result, did not reassess the lease classification of existing contracts or leases or the initial direct costs associated with existing leases. The Company has made an accounting policy election not to recognize right of use assets and lease liabilities for leases with a lease term of 12 months or less, including renewal options that are reasonably certain to be exercised, that also do not include an option to purchase the underlying asset that is reasonably certain of exercise. Instead, lease payments for these leases are recognized as lease cost on a straight-line basis over the lease term.

The Company did not elect the hindsight practical expedient, and therefore the Company did not reassess its historical conclusions with regards to whether renewal option periods should be included in the terms of its leases. Given the importance of each of its restaurant locations to its operations, the Company historically concluded that it was reasonably assured of exercising all renewal periods included in its leases as failure to exercise such options would result in an economic penalty. The Company also did not elect the portfolio approach practical expedient, which permits applying the standard to a portfolio of leases with similar characteristics.

Upon adoption on January 1, 2019, the Company recognized right-of-use assets and lease liabilities for operating leases of $41.8 million and $58.9 million, respectively. The difference between the right-of-use asset and lease liability represents the net book value of deferred rent and tenant improvement allowances recognized by the Company as of December 31, 2018, which was adjusted against the right-of-use asset upon adoption of ASC Topic 842. There was no impact to the opening balance of retained earnings upon adoption.

12

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

March 31, 

 

 

 

2020

 

 

2019

 

Lease cost

 

 

 

 

 

 

 

 

Operating lease cost

 

$

3,297

 

 

$

1,726

 

Variable lease cost

 

 

1,156

 

 

 

674

 

Short-term lease cost

 

 

128

 

 

 

108

 

Sublease income

 

 

(135)

 

 

 

(203)

 

Total lease cost

 

$

4,446

 

 

$

2,305

 

 

 

 

 

 

 

 

 

 

Weighted average remaining lease term – operating leases

 

 

13 years

 

 

 

14 years

 

Weighted average discount rate – operating leases

 

 

8.49

%

 

 

8.25

%

The 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 option is controlled by the lessor. The Company considered a number of factors when evaluating whether the options in its lease contracts were reasonably certain of exercise, such as length of time before option exercise, expected value of the leased asset at the end of the initial lease term, importance of the lease to overall operations, costs to negotiate a new lease, and any contractual or economic penalties.

Certain of the Company’s leases also provide for 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 itsone restaurant space and in 2019 subleased office and restaurant space where it doesdid not use the entire space for its operations. For the three months ended March 31, 2020 and 2019, sublease income was $0.1 million and $0.2 million, respectively, of which $0.1 million and $0.1 million, respectively, was from a  related party, Bagatelle NY. Refer to Note 8 for details on transactions with this related party.

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 electedentered into an operating lease for one future restaurant that has not yet commenced as of March 31, 2020. The aggregate future commitment related to separatethis lease totals $4.8 million. The Company expects this lease to commence within the accounting for lease componentsnext twelve months 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 containswill have a lease assessmentterm of lease term and purchase options, measurement of lease payments, assessment of lease classification and assessment of the discount rate. The Company reviewed the reassessment and re-measurement requirements and concluded that a lease for office space required reassessment as the Company had determined not to elect to exercise an option that it had previously determined it was reasonably certain to exercise. As a result, the Company remeasured the lease liability to reflect the change in lease payments, which resulted in a reduction in the operating lease liability and a corresponding adjustment to the operating lease right-of-use asset of $1.2 million in the 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 Company’s right-of-use assets or other long-lived assets in accordance with Accounting Standard Codification Topic 360, Property, Plant, and Equipment.

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

11 years.

Supplemental cash flow information related to leases for the period was as follows (in thousands):

 

 

 

 

 

 March 31, 

 

March 31, 

 

March 31, 

 2019 

 

2020

 

2019

Cash paid for amounts included in the measurement of operating lease liabilities $1,718 

 

$

3,161

 

$

1,718

Right-of-use assets obtained in exchange for operating lease obligations $281 

 

$

288

 

$

281

 

As of March 31, 2019,2020, maturities of the Company’s operating lease liabilities are as follows (in thousands):

 

2019, nine months remaining $5,167 
2020  6,801 

 

 

2020, nine months remaining

 

$

9,775

2021  6,545 

 

12,843

2022  6,669 

 

12,801

2023  6,805 

 

13,087

2024

 

12,486

Thereafter  69,536 

 

 

115,862

Total lease payments  101,523 

 

176,854

Less: imputed interest  (44,106)

 

 

(74,908)

Present value of operating lease liabilities $57,417 

 

$

101,946

For the nine months remaining in 2020, the Company’s operating lease liabilities does not include future rent abatements that have been or will be negotiated with landlords.

 

Note 1312 – Earnings(Loss) earnings per share

Basic (loss) earnings per share is computed using the weighted average number of common shares outstanding during the period and income available to common stockholders. Diluted (loss) earnings per share is computed using the weighted average number of common shares outstanding during the period plus the dilutive effect of all potential shares of common stock including common stock issuable pursuant to stock options, warrants, and restricted stock units.

14

For the three months ended March 31, 2020 and 2019, and 2018, the (loss) earnings per share was calculated as follows (in thousands, except earnings per share and related share data):

 

 Three months ended March 31, 

 

 

 

 

 

 

 2019  2018 

 

Three months ended March 31, 

Net income attributable to The ONE Group Hospitality, Inc. $854  $231 

    

2020

    

2019

Net (loss) income attributable to The ONE Group Hospitality, Inc.

 

$

(4,599)

 

$

854

        

 

 

  

 

 

 

Basic weighted average shares outstanding  28,314,820   27,187,657 

 

 

28,636,325

 

 

28,314,820

Dilutive effect of stock options, warrants and restricted share units  996,936   200,841 

 

 

 —

 

 

996,936

Diluted weighted average shares outstanding 29,311,756  27,388,498 

 

 

28,636,325

 

 

29,311,756

        

 

 

  

 

 

  

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 

Net (loss) income available to common stockholders per share - Basic

 

$

(0.16)

 

$

0.03

Net (loss) income available to common stockholders per share - Diluted

 

$

(0.16)

 

$

0.03

 

For the three months ended March 31, 2020, all equivalent shares underlying options, warrants and restricted share units were anti-dilutive as the Company was in a net loss position. For the three months ended March 31, 2019,  0.9 million stock options, warrants and restricted share units were determined to be anti-dilutive and were therefore excluded from the calculation of diluted earnings per share. For the three months ended March 31, 2018, 2.0 million stock options, warrants and restricted share units were determined to be anti-dilutive and were therefore excluded from the calculation of diluted earnings per share.

14

Note 1413 – Stockholders’ Equity

Significant changes in stockholders’ equity for the three months ended March 31, 20192020 and 20182019 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 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

other

 

 

 

 

 

 

 

 

Common

 

paid-in

 

Accumulated

 

comprehensive

 

Noncontrolling

 

 

 

 

 

Stock

 

capital

 

deficit

 

loss

 

interests

 

Total

Balance at December 31, 2019

 

$

 3

 

$

44,853

 

$

(7,891)

 

$

(2,651)

 

$

(402)

 

$

33,912

Stock-based compensation, net of tax withholding

 

 

 —

 

 

338

 

 

 —

 

 

 —

 

 

 —

 

 

338

Exercise of stock options

 

 

 —

 

 

38

 

 

 —

 

 

 —

 

 

 —

 

 

38

Vesting of restricted shares

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Loss on foreign currency translation, net

 

 

 —

 

 

 —

 

 

 —

 

 

(44)

 

 

 —

 

 

(44)

Net loss

 

 

 —

 

 

 —

 

 

(4,599)

 

 

 —

 

 

(274)

 

 

(4,873)

Balance at March 31, 2020

 

$

 3

 

$

45,229

 

$

(12,490)

 

$

(2,695)

 

$

(676)

 

$

29,371

 

  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 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

other

 

 

 

 

 

 

 

 

Common

 

paid-in

 

Accumulated

 

comprehensive

 

Noncontrolling

 

 

 

 

 

Stock

 

capital

 

deficit

 

loss

 

interests

 

Total

Balance at December 31, 2018

 

$

 3

 

$

43,543

 

$

(28,722)

 

$

(2,310)

 

$

(452)

 

$

12,062

Stock-based compensation, net of tax withholding

 

 

 —

 

 

181

 

 

 —

 

 

 —

 

 

 —

 

 

181

Loss on foreign currency translation, net

 

 

 —

 

 

 —

 

 

 —

 

 

(160)

 

 

 —

 

 

(160)

Net income (loss)

 

 

 —

 

 

 —

 

 

854

 

 

 —

 

 

(85)

 

 

769

Balance at March 31, 2019

 

$

 3

 

$

43,724

 

$

(27,868)

 

$

(2,470)

 

$

(537)

 

$

12,852

 

Note 15 -14 – Stock-Based Compensation

As of March 31, 2019,2020, the Company had 458,7461,301,357 remaining shares available for issuance under the 2013 Employee, Director and Consultant2019 Equity Incentive Plan (the “2013(“2019 Equity Plan”).

Stock-based compensation cost for each of the three months ended March 31, 2020 and 2019 was $0.3 million and 2018 was $0.2 million, respectively, and is included in general and administrative expenses in the consolidated statementstatements of operations and comprehensive (loss) income. Included in stock-based compensation cost was $0.1 million of unrestricted stock granted to directors for the three months ended March 31, 2020. Such grants were awarded consistent with the Board’s compensation practices.

15

Stock Option Activity

Changes in outstanding stock options during the three months ended March 31, 20192020 were as follows:

 

  Shares  Weighted average
exercise price
  Weighted average remaining
contractual life
 Intrinsic
value
(thousands)
 
Outstanding at December 31, 2018  2,001,008  $3.29       
Granted  68,000   2.99       
Exercised            
Cancelled, expired or forfeited  (63,000)  2.80       
Outstanding at March 31, 2019  2,006,008  $3.29  6.67 years $1,063 
Exercisable at March 31, 2019  1,065,508  $4.16  5.45 years $ 

The fair value of options granted in the three months ended March 31, 2019 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

Expected life, in years8.5 years
Risk-free interest rate2.62%
Volatility42.0%
Dividend yield0.0%

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

average

 

Intrinsic

 

 

 

 

average exercise

 

remaining

 

value

 

    

Shares

    

price

    

contractual life

    

(thousands)

Outstanding at December 31, 2019

 

1,806,508

 

$

3.37

 

5.87 years

 

$

1,428

Exercisable at December 31, 2019

 

1,270,508

 

$

3.93

 

5.10 years

 

$

666

Exercised

 

(18,000)

 

 

2.13

 

  

 

 

  

Cancelled, expired or forfeited

 

(24,000)

 

 

4.85

 

  

 

 

  

Outstanding at March 31, 2020

 

1,764,508

 

$

3.37

 

5.57 years

 

$

 —

Exercisable at March 31, 2020

 

1,291,175

 

$

3.84

 

4.91 years

 

$

 —

 

A summary of the status of the Company’s non-vested stock options as of December 31, 20182019 and March 31, 20192020 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 

 

 

 

 

 

 

 

 

 

 

Weighted average

 

    

Shares

    

grant date fair value

Non-vested stock options at December 31, 2019

 

536,000

 

$

0.87

Vested

 

(62,667)

 

 

0.89

Non-vested stock options at March 31, 2020

 

473,333

 

$

0.87

 

The fair value of options that vested in the three months ended March 31, 2020 were less than $0.1 million. As of March 31, 2019,2020, there are 579,402 milestone-based options outstanding.outstanding, and there is approximately $0.7 million of unrecognized compensation cost related to these milestone-based options. These options vest based on the achievement of Company and individual objectives as set by the Board.

As of March 31, 2019,2020, there is approximately $0.6$0.3 million of total unrecognized compensation cost related to non-vested awards, which will be recognized over a weighted-average period of 2.82.5 years.

Restricted Stock Unit Activity

The Company issues restricted stock units (“RSUs”) under the 20132019 Equity Plan. The fair value of these RSUs is determined based upon the closing fair market value of the Company’s common stock on the grant date.

A summary of the status of RSUs and changes during the three months ended March 31, 20192020 is presented below:

 

 Shares  Weighted
average grant
date fair value
 

 

 

 

 

 

Non-vested RSUs at December 31, 2018  764,201  $2.54 

 

 

 

Weighted average

    

Shares

    

grant date fair value

Non-vested RSUs at December 31, 2019

 

955,011

 

$

2.69

Granted  142,205   2.93 

 

1,240,599

 

 

1.19

Vested  (20,544)  2.86 

 

(116,644)

 

 

2.97

Cancelled, expired or forfeited  (9,000)  2.73 

 

(4,000)

 

 

3.25

Non-vested RSUs at March 31, 2019  764,201  $2.59 

Non-vested RSUs at March 31, 2020

 

2,074,966

 

$

1.77

 

As of March 31, 2019,2020,  150,000 RSUs subject to performance-based vesting were still outstanding.outstanding, and there is approximately $0.4 million of unrecognized compensation cost related to these milestone-based options. As of March 31, 2019,2020, the Company had approximately $3.2$2.9 million of total unrecognized compensation costs related to RSUs, which will be recognized over a weighted average period of 2.82.5 years.

16

Note 16 -15 – Segment Reporting

TheIn the fourth quarter of 2019, in conjunction with the Kona Grill acquisition, the Company operates in three segments: “Owned restaurants,” “Owned food, beverageimplemented certain organizational changes, including the reorganization of our internal reporting structure to better facilitate our strategy for growth and other,” and “Managed and licensed operations.” The Owned restaurants segment consistsoperational efficiency. As a result of leased restaurant locations and competes in the full-service dining industry. The Owned food, beverage and other segment consists of hybrid operations, such as wherethese organizational changes, the Company has a leased restaurant location and also has a food and beverage agreement at the same location, typically a hotel, and offsite banquet offerings. The Managed and licensed operations segment includes all operations for which a management, incentive or license fee is received. Management agreements generate management fees on net revenue and incentive fees onidentified its reportable operating profitsegments as defined in the applicable management agreement. License agreements generate revenue primarily through royalties earned on net revenue at each location. Revenues associated with developmental support for licensed locations are also included within this segment.follows:

·

STK. The STK segment consists of the results of operations from STK restaurant locations, competing in the full-service dining industry, as well as management, license and incentive fee revenue generated from the STK brand and operations of STK restaurant locations.

·

Kona Grill. The Kona Grill segment includes the results of operations of Kona Grill restaurant locations.

·

ONE Hospitality. The ONE Hospitality segment is composed of the management, license and incentive fee revenue and results of operations generated from the Company’s other brands and venue concepts, which include ANGEL, Bagatelle, Heliot, Hideout, Marconi, and Radio. Additionally, this segment includes the results of operations generated from F&B hospitality management agreements with hotels, casinos and other high-end locations.

·

Corporate. The Corporate segment consists of the following: general and administrative costs, stock-based compensation, depreciation and amortization, acquisition related gains and losses, pre-opening expenses, lease termination expenses, transaction costs, and other income and expenses. This segment also includes the Company’s major off-site events group, which supports all brands and venue concepts, and revenue generated from gift card programs.

 

The Company’s Chief Executive Officer, (“CEO”), who has been deemedis the Company’s Chief Operating Decision Maker, manages the business and allocates resources via a combination of restaurant sales reports and operating segment profit information, (which is defined as revenues less operating expenses)expenses, related to the Company’s four operating segments.

Certain financial information relating to the three segments, or sources of revenues, which are presented in their entirety withinmonths ended March 31, 2020 and 2019 for each segment is provided below (in thousands). Prior year amounts have been revised to conform to the consolidated statements of operations and comprehensive income.current year segment presentation.

 

16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

STK

    

Kona Grill

    

ONE Hospitality

    

Corporate

    

Total

For the three months ended March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

17,383

 

$

20,657

 

$

2,679

 

$

 —

 

$

40,719

Operating income (loss)

 

 

1,543

 

 

820

 

 

1,820

 

 

(8,534)

 

 

(4,351)

Capital asset additions

 

$

335

 

$

410

 

$

 8

 

$

38

 

$

791

As of March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

79,512

 

$

88,199

 

$

6,116

 

$

22,354

 

$

196,181

 

The Company’s operating results by segment 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):

  March 31,  December 31, 
  2019  2018 
Total assets:        
Owned restaurants $75,272  $42,971 
Owned food, beverage and other operations(1)  15,591   7,274 
Managed and licensed operations  4,728   5,734 
Total $95,591  $55,979 

(1)Includes corporate assets

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STK

    

Kona Grill

    

ONE Hospitality

    

Corporate

    

Total

For the three months ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

19,245

 

$

 —

 

$

3,060

 

$

471

 

$

22,776

Operating income (loss)

 

 

2,668

 

 

 —

 

 

2,250

 

 

(3,784)

 

 

1,134

Capital asset additions

 

$

1,726

 

$

 —

 

$

36

 

$

298

 

$

2,060

As of December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

82,691

 

$

93,829

 

$

8,252

 

$

21,813

 

$

206,585

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 -16 – Geographic Information

The following tables contains certainCertain financial information by geographic location for the three months ended March 31, 2019 and 2018is provided below (in thousands):.

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 

 

    

2020

    

2019

Domestic revenues

 

$

39,977

 

$

21,780

International revenues

 

 

742

 

 

996

Total revenues

 

$

40,719

 

$

22,776

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

2020

 

2019

Domestic long-lived assets

 

$

177,684

 

$

179,143

International long-lived assets

 

 

277

 

 

301

Total long-lived assets

 

$

177,961

 

$

179,444

17

 

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 1817 – Litigation

Commitments and Contingencies

The Company is party to claims in lawsuits incidental to its business, including lease disputes and employee-related matters. The Company is confident in its defenses and is vigorously defending these disputes. The Company has not recorded any liabilities for these unfounded claims, and the range of possible losses is zero to $2.2 million. In the opinion of management, the ultimate outcome of such matters, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

 

Note 18 – Subsequent Events

On May 4, 2020, Goldman Sachs Bank USA (“GSB”), as administrative agent, collateral agent and lead arranger under the Credit and Guaranty Agreement dated October 4, 2019 between The ONE Group Hospitality, Inc. (the “Company”) and certain of its subsidiaries, the lenders from time to time party thereto and GSB (the “Credit Agreement”), (1) consented to the CARES Act Loans described below and (2) agreed that the amount of the CARES Act Loans will not be counted toward the permitted amount of Consolidated Total Debt, as defined under the Credit Agreement, to the extent the amounts are retained as cash during the term of the CARES Act Loans in a segregated deposit account or used for purposes that are forgivable under the CARES Act, provided that the proceeds of the CARES Act Loans must be used only for “allowable uses” under the CARES Act (with at least 75% of the utilized proceeds to be used for purposes that result in the CARES Act Loans being eligible for forgiveness) or used for the repayment of the CARES Act Loans.

On May 4, 2020, two subsidiaries of  the Company entered into promissory notes (“CARES Act Loans”) with BBVA USA under the Paycheck Protection Program (“PPP”) created by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Repayment of the CARES Act Loans is guaranteed by the U.S. Small Business Administration (“SBA”). The ONE Group, LLC received a loan of $9.8 million related to the operations of STK restaurants, and Kona Grill Acquisition, LLC received a loan of $8.5 million related to the operation of Kona Grill restaurants.

In accordance with the requirements of the CARES Act, the Company will use proceeds from the CARES Act Loans primarily for payroll costs. The CARES Act Loans are scheduled to mature on April 28, 2022 and have a 1.00% interest rate and are subject to the terms and conditions applicable to PPP loans. Among other terms, BBVA may declare a default of the CARES Act Loans if a guarantor disputes the validity of the guaranty of indebtedness, if a material adverse change occurs in our financial condition, or if BBVA believes the prospect of repayment of the CARES Act Loans or performance of obligations under the promissory notes is impaired. On an event of default, BBVA may declare principal and unpaid interest immediately due and payable, and it may charge default interest of 10%.

On May 8, 2020, GSB and the Company and certain of its subsidiaries entered into an amendment to the Credit Agreement that:

18

·

Relaxes the fixed charge coverage ratio (decreasing the ratio for remaining measurement dates in 2020 to 1.20 to 1.00 from 1.35 to 1.00) and the leverage ratio (increasing the ratio at June 30, 2020 to 3.00 to 1.00 from 2.50 to 1.00, and the ratio at September 30 and December 31, 2020 to 2.75 to 1.00 from 2.25 to 1.00).

·

Requires minimum “Consolidated Liquidity” to be $4,000,000 for the balance of 2020 (from $1,500,000).

 

Note 19 - Liquidity

During the three months ended March 31, 2019,As of May 10, 2020, the Company had net income of $0.8 millionhas re-opened eleven restaurant dining rooms 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.plans to open an additional five dining rooms on May 11, 2020. The Company expects to finance its operations, including the costs of opening planned restaurants, for at leastre-open an additional five to ten dining rooms in 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.two weeks and anticipates re-opening the remaining restaurants and closed dining rooms as soon as conditions permit.

 

19

18

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q and certain information incorporated herein by reference contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). Forward-looking statements speak only as of the date thereof and involve risks and uncertainties that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. These risk and uncertainties include the risk factors discussed under Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements include matters such as the effect and duration of COVID-19 and related stay at home orders and other government actions, the effect of COVID-19 on customer behavior, general economic conditions, consumer preferences and spending, costs, competition, restaurant openings or closings, operating margins, the availability of acceptable real estate locations, the sufficiency of our cash balances and cash generated from operations and financing activities for our future liquidity and capital resource needs, the impact on our business of Federal and State legislation, litigation, the execution of our growth strategy and other matters. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “ongoing,” “could,” “estimates,” “expects,” “intends,” “may,” “appears,” “suggests,” “future,” “likely,” “goal,” “plans,” “potential,” “projects,” “predicts,” “should,” “targets,” “would,” “will” and similar expressions that convey the uncertainty of future events or outcomes.  You should not place undue reliance on any forward-looking statement. We do not undertake any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required under applicable law.

 

General

 

This information should be read in conjunction with the consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2019.

 

As used in this report, the terms “Company,” “we,” “our,” or “us,” refer to The ONE Group Hospitality, Inc. and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.

 

OverviewBusiness Summary

 

The ONE Group Hospitality, Inc.,We are a Delaware corporation,global hospitality company that develops, owns and operates, manages orand licenses upscale and polished casual, high-energy restaurants and lounges and provides turn-key food and beverage (“F&B”) services for hospitality venues including hotels, casinos and other high-end locations globally. We define turn-keylocations. Turn-key F&B services are food and beverage (“F&B”) services as services that can be scaled, customized and implemented by us at a particular hospitality venue and customized for our clients.

the client. We were established with the vision of becoming a global market leader in the hospitality industry by melding high-quality service, ambiance, high-energy and cuisine into one great experience that we refer to as “Vibe Dining.” Dining”. All our restaurants, lounges and F&B services are designed to create a social dining and high-energy entertainment experience within a destination location. We believe that this design and operating philosophy separates us from more traditional restaurant and foodservice competitors.

Our primary restaurant brand isbrands are STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse.steakhouse, and Kona Grill, a bar-centric grill concept featuring American favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere. Our F&B hospitality management services include developing, managing and operating restaurants, bars, rooftop lounges, pools, banqueting and catering facilities, private dining rooms, room service and mini bars tailored to the specific needs of high-end hotels and casinos. Our F&B hospitality clients operate global hospitality brands such as the W Hotel, Hippodrome Casino, and ME Hotels.

We opened our first restaurant in January 2004 in New York, CityNew York, and, as of March 31, 2019,2020, we owned, operated, managed or licensed 2955 venues including 1920 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe and the Middle East. In addition, we provided foodEast and beverage services11 F&B venues in foursix hotels and casinos. Wecasinos in the United States and Europe. For those restaurants and venues that are managed or licensed, we generate management and incentive fee revenue (profit sharing) from those restaurantsbased on a percentage of the location’s revenues and lounges that we do not own, but instead manage on behalfnet profits.

19

The table below reflects our venues by restaurant brand and geographic location as of March 31, 2019:2020:

 

 

 

 

 

 

 

 

 

 Venues 

 

Venues

 STK(1)  Bagatelle  Radio  Hideout  Marconi  Heliot  F&B
Services
  Total 

    

STK(1)

    

Kona Grill

    

ONE Hospitality(2)

    

Total

Domestic                                

 

  

 

  

 

  

 

  

Owned  10         1         1   12 

 

10

 

24

 

 2

 

36

Managed  1   1                  2 

 

 1

 

 —

 

 1

 

 2

Licensed                        

 

 1

 

 —

 

 —

 

 1

Total domestic  11   1      1         1   14 

 

12

 

24

 

 3

 

39

International                                

 

  

 

  

 

  

 

  

Owned                        

 

 —

 

 —

 

 —

 

 —

Managed  3      2      1   1   3   10 

 

 3

 

 —

 

 8

 

11

Licensed  5                     5 

 

 5

 

 —

 

 —

 

 5

Total international  8      2      1   1   3   15 

 

 8

 

 —

 

 8

 

16

Total venues  19   1   2   1   1   1   4   29 

 

20

 

24

 

11

 

55

(1)

Locations with an STK and STK Rooftop are considered one venue location. This includes the STK Rooftop in San Diego, CA, which is a licensed location.

(2)

Includes concepts under the Company’s F&B hospitality management agreements and other venue brands such as ANGEL, Bagatelle, Heliot, Hideout, Marconi and Radio.

 

(1) Locations withUncertainties Related to COVID-19

In the first quarter of 2020, the negative effect of the novel coronavirus (“COVID-19”) on the Company’s business was significant. The Company experienced an STKinitial decline in restaurant revenue that began in early March 2020 as business travel and STK Rooftop are considered one venue location. This includessocial dining decreased. On March 11, 2020, the rooftopWorld Health Organization declared COVID-19 a pandemic disease, and on March 13, 2020, President Trump declared a state of emergency for COVID-19. Public concerns about the spread of COVID-19 continues to be widespread. The Company has experienced a significant reduction in San Diego, CA, which isguest traffic at its restaurants as a licensed location.result of restrictions mandated by state and local governments.

Net income attributableIn response to The ONE Group Hospitality, Inc.these conditions, and out of concern for our customers and partners, the Company has temporarily closed several restaurants and the Company has shifted operations at 30 of its restaurants to provide only take-out and delivery service. In addition to the decline in restaurant revenue, the Company has incurred approximately $1.3 million of costs related to COVID-19 in the three months ended March 31, 2020, composed primarily of payments to employees for paid-time off during restaurant closures, inventory waste, and rent and rent related costs for closed and limited-operations restaurants from the day that the dining room closed. The Company has implemented measures to reduce its costs during the COVID-19 pandemic, including significant reductions in employees, deferral of capital projects, and negotiations with suppliers and landlords regarding deferral or abatement of payments which could become significant.

Given the present uncertainty surrounding the global economy due to the COVID-19 pandemic, the Company cannot reasonably predict when its closed restaurants will re-open and open restaurants will be able to return to normal dining room operations. The Company expects that its results of operations will be negatively affected by these actions in the second quarter of 2020. The Company’s re-opening of closed restaurants and resumption of normal dining operations is subject to events beyond its control, including the effectiveness of governmental efforts to halt the spread of COVID-19. 

Acquisitions

On October 4, 2019, we acquired substantially all of the assets of Kona Grill Inc. and its affiliates (“Kona Grill”) comprising 24 domestic restaurants. We purchased the assets for a contractual price of $25.0 million plus approximately $1.5 million of consideration paid primarily for the apportionment of rent and utilities. We also assumed approximately $7.7 million in current liabilities. The purchase was $0.9financed with proceeds from the credit and guaranty agreement we entered into with Goldman Sachs Bank USA in conjunction with the acquisition (“Goldman Sachs Credit Agreement”). Over the remainder of 2020, we intend to integrate Kona Grill by leveraging our corporate infrastructure, our bar-business knowledge and unique Vibe Dining program, to elevate the brand experience and drive improved performance.

Executive Summary

Total revenue increased $17.9 million, comparedor 78.8%, to $0.2$40.7 million for the three months ended March 31, 2018. The increase was primarily due2020 compared to overall sales growth and profitability improvements from existing restaurants, newly owned restaurants and managed and licensed locations combined with labor and spending efficiencies. In the first quarter of 2019, we opened an owned STK restaurant in Nashville, Tennessee and a licensed STK restaurant in Doha, Qatar.

Our Growth Strategies and Outlook

Our growth model is primarily driven by the following:

Expansion of STK. We expect to continue to expand our operations domestically and internationally through a mix of licensed and managed restaurants using a disciplined and targeted site selection process. We refer to this as our “capital light strategy” because it requires significantly less capital than expansion through owned restaurants. Under our capital light strategy, we expect to open as many as three to five STK restaurants annually primarily through management or licensing agreements, provided that we have sufficient interest from prospective licensees, acceptable locations and quality restaurant managers available to support that pace of growth.

We have identified over 75 additional major metropolitan areas across the globe where we could grow our STK brand to 200 restaurants over the foreseeable future. In the first quarter of 2019, we opened an owned STK restaurant in Nashville, Tennessee and a licensed STK restaurant in Doha, Qatar. We expect to continue to grow in 2019 with the planned openings of licensed STK locations in Puerto Rico and Guadalajara, Mexico and a managed STK location in Scottsdale, Arizona.

Expansion through New F&B Hospitality Projects. We believe that we are well positioned to leverage the strength of our brands and the relationships we have developed with global hospitality providers to drive the continued growth of our food and beverage hospitality projects, which traditionally have provided us with revenue through management and incentive revenue while requiring minimal capital expenditures from us. We continue to receive inquiries regarding new services at new hospitality venues globally and continue to work with existing hospitality clients to identify and develop additional opportunities at their venues.

We did not enter into any new F&B hospitality agreements$22.8 million for the three months ended March 31, 2019.  In 2019, we planApproximately $20.7 million of the increase in total revenue was attributable to add one managed F&B locationthe addition of the Kona Grill restaurants in Florence, Italy. Going forward, we expect to enter into one to two new F&B hospitality agreements annually.

Increase Our Operating Efficiency and Increase Same Store Sales. In addition to expanding into new cities and hospitality venues, we intend to increase revenue and profits in our existing operations through continued focus on high-quality, high-margin food and beverage menu items.

21

We expect domestic STK same store sales (“SSS”) to grow in 2019 between 3% and 4%. For the three months ended March 31, 2019, our SSS increased 8.6%first quarter of 2020 compared to the same prior year period. We considerThe increase in

20

total revenue was partially offset by the temporarily closures and limited dining room operations for 30 of our remaining open restaurants beginning in March 2020 as a domestic owned or managed restaurantresult of COVID-19.

Operating income decreased approximately $5.5 million to be comparable in the first full quarter following its 18th monthan operating loss of operation to remove the impact of new restaurant openings in comparing the operations of existing restaurants. Our comparable restaurant base for SSS consisted of nine domestic restaurants$4.4 million for the three months ended March 31, 2019.

We believe that our2020 from operating margins will improve through growth in SSS and a reductionincome of store-level operating expenses. Our store-level margins for owned STK locations increased 210 basis points$1.1 million for the three months ended March 31, 2019. As our footprint increases, we expect to benefitThe decrease was primarily driven by leveraging system-wide operating efficiencies and best practices throughfixed costs in comparable restaurants not decreasing at the management of our general and administrative expenses as a percentage of overall revenue. We continue to look at opportunities to decrease our general and administrative expenses by outsourcing non-core activities and through increases in staff productivity.

Key Performance Indicators

We use the following key performance indicators in evaluating our restaurants and assessing our business:

Number of Restaurant Openings. Number of restaurant openings reflects the number of restaurants opened during a particular fiscal period. For each restaurant opening, we incur pre-opening costs, which are defined below. Typically, new restaurants open with an initial start-up period of higher than normalized sales volumes (also referred to in the restaurant industrysame rate as the “honeymoon” period)decrease in comparable sales for the quarter of 14.1%, whichspecifically the decrease to a steady level approximately 18 to 24 months after opening. However, operating costs during this initial period are also higher than normal, resultingof comparable sales of 55.9% in restaurant operating margins that are generally lower during the start-up periodMarch of operation and increase to a steady level approximately 18 to 24 months after opening. Some new restaurants may experience a “honeymoon” period that is either shorter or longer than this time frame. We opened two restaurants2020.  Additionally, in 2019: an owned STK restaurant in Nashville, Tennessee and a licensed STK restaurant in Doha, Qatar.

Average Check. Average check is calculated by dividing total restaurant sales by total entrees sold for a specified period. Our management team uses this indicator to analyze trends in customers’ preferences, customer expenditures and the overall effectiveness of menu changes and price increases. For comparable restaurants, our average check for the three months ended March 31, 2019 was $110.83 compared2020, we incurred $1.3 million in costs directly related to $108.89the effects of COVID-19 and $1.1 million in integration expenses as a result of the Kona Grill acquisition. We expect additional costs related to COVID-19 in the second quarter, and do not anticipate any further integration expenses related to the Kona Grill acquisition.

Results of Operations

The following table sets forth certain statements of operations data for the three months ended March 31, 2018.

Average Comparable Restaurant Volume. Average comparable restaurant volume consists of the average sales of our comparable restaurants over a certain period of time. This measure is calculated by dividing total comparable restaurant sales in a given period by the total number of comparable restaurants in that period. This indicator assists management in measuring changes in customer traffic, pricing and development of our brand. Our average comparable restaurant volume for the three months ended March 31, 2019 and March 31, 2018 was $2.7 million and $2.5 million, respectively.

Same Store Sales. SSS represents total food and beverage sales at domestic owned and managed restaurants opened for at least a full 18-month period. This measure includes total revenue from our owned and managed STK locations, and it excludes revenues from our owned F&B services locations. Revenues from locations where we do not directly control the event sales force are excluded from this measure. Domestic SSS increased 8.6% for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.

Key Financial Terms and Metrics

We evaluate our business using a variety of key financial measures:

Segment reporting

We operate in three segments: “Owned restaurants,” “Owned food, beverage and other,” and “Managed and Licensed operations.” Our Owned restaurants segment consists of leased restaurant locations and competes in the full-service dining industry. Our Owned food, beverage and other segment consists of hybrid operations, such as where we have a leased restaurant location and also have a food and beverage agreement at the same location, typically a hotel, and our offsite banquet offerings. The primary component of this segment is our operations at the W Hotel in Beverly Hills, California. 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.periods indicated (in thousands):

 

22

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31,

 

    

2020

    

2019

Revenues:

 

 

  

 

 

  

Owned restaurant net revenue

 

$

38,557

 

$

20,093

Management, license and incentive fee revenue

 

 

2,162

 

 

2,683

Total revenues

 

 

40,719

 

 

22,776

Cost and expenses:

 

 

  

 

 

  

Owned operating expenses:

 

 

  

 

 

  

Owned restaurant cost of sales

 

 

10,113

 

 

5,026

Owned restaurant operating expenses

 

 

26,499

 

 

12,717

Total owned operating expenses

 

 

36,612

 

 

17,743

General and administrative (including stock-based compensation of $338 and $181 for the three months ended March 31, 2020 and 2019 respectively)

 

 

3,397

 

 

2,650

Depreciation and amortization

 

 

2,440

 

 

942

Transaction and integration costs

 

 

1,095

 

 

 —

COVID-19 related expenses

 

 

1,348

 

 

 —

Lease termination expenses

 

 

179

 

 

 —

Pre-opening expenses

 

 

 —

 

 

482

Other income, net

 

 

(1)

 

 

(175)

Total costs and expenses

 

 

45,070

 

 

21,642

Operating (loss) income

 

 

(4,351)

 

 

1,134

Other expenses, net:

 

 

  

 

 

  

Interest expense, net of interest income

 

 

1,175

 

 

269

Total other expenses, net

 

 

1,175

 

 

269

(Loss) income before (benefit) provision for income taxes

 

 

(5,526)

 

 

865

(Benefit) provision for income taxes

 

 

(653)

 

 

96

Net (loss) income

 

 

(4,873)

 

 

769

Less: net loss attributable to noncontrolling interest

 

 

(274)

 

 

(85)

Net (loss) income attributable to The ONE Group Hospitality, Inc.

 

$

(4,599)

 

$

854

 

Revenues

21

Owned restaurant net revenues. Owned restaurant net revenues consistThe following table sets forth certain statements of food and beverage sales by owned restaurants net of any discounts associated with each sale. For the trailing twelve months ended March 31, 2019, beverage sales comprised 36% of food and beverage sales, before giving effect to any discounts, and food sales comprised the remaining 64%. This indicator assists management in understanding the trends in gross margins of the restaurants.

Owned food, beverage and other net revenue. Owned food, beverage and other net revenues include the sales generated by the STK restaurant at the W Hotel in Los Angeles, California and any ancillary food and beverage hospitality services at the same location. Revenues from offsite banquet services also are reflected in this segment.

Management, license and incentive 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 goodsoperations data 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 37% and 35% of our food and beverage coststotal revenues for the three months ended March 31, 2019 and 2018, respectively.periods indicated. Certain percentage amounts may not sum to total due to rounding.

 

 

 

 

 

 

 

For the Three Months Ended March 31,

 

    

2020

 

2019

Revenues:

 

 

  

 

Owned restaurant net revenue

 

94.7 %

 

88.2 %

Management, license and incentive fee revenue

 

5.3 %

 

11.8 %

Total revenues

 

100.0 %

 

100.0 %

Cost and expenses:

 

 

 

 

Owned operating expenses:

 

 

 

 

Owned restaurant cost of sales (1)

 

26.2 %

 

25.0 %

Owned restaurant operating expenses (1)

 

68.7 %

 

63.3 %

Total owned operating expenses (1)

 

94.9 %

 

88.3 %

General and administrative (including stock-based compensation of 0.8% and 0.8% for the three months ended March 31, 2020 and 2019 respectively)

 

8.3 %

 

11.6 %

Depreciation and amortization

 

6.0 %

 

4.1 %

Transaction and integration costs

 

2.7 %

 

—%

COVID-19 related expenses

 

3.3 %

 

—%

Lease termination expenses

 

0.4 %

 

—%

Pre-opening expenses

 

—%

 

2.1 %

Other income, net

 

—%

 

(0.8)%

Total costs and expenses

 

110.7 %

 

95.0 %

Operating (loss) income

 

(10.7)%

 

5.0 %

Other expenses, net:

 

 

 

 

Interest expense, net of interest income

 

2.9 %

 

1.2 %

Total other expenses, net

 

2.9 %

 

1.2 %

(Loss) income before (benefit) provision for income taxes

 

(13.6)%

 

3.8 %

(Benefit) provision for income taxes

 

(1.6)%

 

0.4 %

Net (loss) income

 

(12.0)%

 

3.4 %

Less: net loss attributable to noncontrolling interest

 

(0.7)%

 

(0.4)%

Net (loss) income attributable to The ONE Group Hospitality, Inc.

 

(11.3)%

 

3.7 %


(1)

These expenses are being shown as a percentage of owned restaurant net revenue.

The following tables show our operating results by segment for the periods indicated (in thousands). Prior year amounts have been revised to conform to the current year segment presentation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

STK

    

Kona Grill

    

ONE Hospitality

    

Corporate

    

Total

For the three months ended March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

17,383

 

$

20,657

 

$

2,679

 

$

 —

 

$

40,719

Operating income (loss)

 

 

1,543

 

 

820

 

 

1,820

 

 

(8,534)

 

 

(4,351)

Capital asset additions

 

$

335

 

$

410

 

$

 8

 

$

38

 

$

791

As of March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

79,512

 

$

88,199

 

$

6,116

 

$

22,354

 

$

196,181

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STK

    

Kona Grill

    

ONE Hospitality

    

Corporate

    

Total

For the three months ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

19,245

 

$

 —

 

$

3,060

 

$

471

 

$

22,776

Operating income (loss)

 

 

2,668

 

 

 —

 

 

2,250

 

 

(3,784)

 

 

1,134

Capital asset additions

 

$

1,726

 

$

 —

 

$

36

 

$

298

 

$

2,060

As of December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

82,691

 

$

93,829

 

$

8,252

 

$

21,813

 

$

206,585

 

Owned restaurant operating expenses. We measure owned restaurant operating expenses as a percentage of owned restaurant net revenues. Owned restaurant operating expenses include the following:

Payroll and related expenses. Payroll and related expenses consist of manager salaries, hourly staff payroll and other payroll-related items, including taxes and fringe benefits. We measure our labor cost efficiency by tracking total labor costs as a percentage of owned restaurant net revenues.

Occupancy. Occupancy comprises all occupancy costs, consisting of both fixed and variable portions of rent, non-cash rent expense, which is a non-cash adjustment included in our Adjusted EBITDA calculation as defined below, common area maintenance charges, real estate property taxes, utilities and other related occupancy costs and is measured by considering both the fixed and variable components of certain occupancy expenses.

Direct operating expenses. Direct operating expenses consist of supplies, such as paper, smallwares, china, silverware and glassware, cleaning supplies and laundry, credit card fees and linen costs. Direct operating expenses are typically measured as a variable expense based on owned restaurant net revenues.

Outside services. Outside services include music and entertainment costs, such as the use of live DJ’s, promoter costs, security services, outside cleaning services and commissions paid to event staff for banquet sales.

Repairs and maintenance. Repairs and maintenance consist of general repair work to maintain our facilities, and computer maintenance contracts. We expect these costs to increase at each facility as they get older.

Marketing. Marketing includes the cost of promoting our brands and, at times, can include the cost of goods used specifically for complementary purposes. Marketing costs will typically be higher during the first 18 months of a restaurant’s operations.

General and administrative. General and administrative expenses are comprised of all corporate overhead expenses, including payroll and related benefits, professional fees, such as legal and accounting fees, insurance and travel expenses. Certain centrally managed general and administrative expenses are allocated specifically to restaurant locations and are reflected in owned restaurant operating expenses and include shared services such as reservations, events and marketing. We expect general and administrative expenses to be leveraged as we grow, become more efficient, and continue to focus on best practices and cost savings measures.

23

Depreciation and amortization. Depreciation and amortization consist principally of charges related to the depreciation of fixed assets including leasehold improvements, equipment and furniture and fixtures. Because we intend to support our growth initiatives with an increasing number of managed and licensed restaurant openings, depreciation and amortization is not expected to increase significantly in the near future.

Pre-opening expenses. Pre-opening expenses consist of costs incurred prior to opening an owned or managed STK restaurant at either a leased or F&B location. Pre-opening expenses are 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 of subsidiaries. This represents the income that we record under the cost or equity method of accounting for entities that are not consolidated. Included in this amount is our approximate 51% ownership of Bagatelle New York, consisting of a 5.23% direct ownership interest by us and a 45.9% ownership interest through two of our subsidiaries.

Other Items

EBITDA and Adjusted EBITDA.EBITDA and Adjusted EBITDA are presented in this Quarterly Report on Form 10-Q and are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP.accounting principles generally accepted in the United States of America (“GAAP”). We define EBITDA as net income before interest expense, provision for income taxes and depreciation and

22

amortization. We define Adjusted EBITDA as net income before interest expense, provision for income taxes, depreciation and amortization, non-cash impairment loss, non-cash rent expense, pre-opening expenses, lease termination expenses, stock-based compensation and non-recurring gains and losses, stock-based compensation and results from discontinued operations.losses. Not all of the aforementioned items defining Adjusted EBITDA occur in each reporting period but have been included in our definitions of these terms based on our historical activity.

activity.

We believe that EBITDA and Adjusted EBITDA are appropriate measures of our operating performance, because they eliminate non-cash or non-recurring expenses that do not reflect our underlying business performance. We use these metrics to facilitate a comparison of our operating performance on a consistent basis from period to period, to analyze the factors and trends affecting our business and to evaluate the performance of our restaurants. Adjusted EBITDA has limitations as an analytical tool and our calculation of Adjusted EBITDA may not be comparable to that reported by other companies; accordingly, you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Adjusted EBITDA is included in this Quarterly Report on Form 10-Q because it is a key measure used by management. Additionally, Adjusted EBITDA is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We use Adjusted EBITDA, alongside other GAAP measures such as net income, to measure profitability, as a key profitability target in our budgets, and to compare our performance against that of peer companies despite possible differences in calculation.

Please refer to table on page 28 for our reconciliation of net income to EBITDA and Adjusted EBITDA.

24

Results of Operations

The following table sets forth certain statements of operations data for the periods indicated (in thousands):

  For the three months ended March 31, 
  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 

25

The following table sets forth certain statements of operations data as a percentage of total revenues for the periods indicated:

  For the three months ended March 31, 
  2019  2018 
Revenues:        
Owned restaurant net revenues  78.2%  77.2%
Owned food, beverage and other net revenues  10.0%  10.3%
Total owned revenue  88.2%  87.5%
Management, license and incentive fee revenue  11.8%  12.5%
Total revenues  100.0%  100.0%
Cost and expenses:        
Owned operating expenses:        
Owned restaurants:        
Owned restaurant cost of sales(1)  25.6%  26.8%
Owned restaurant operating expenses(1)  61.3%  62.2%
Total owned restaurant expenses(1)  86.9%  89.0%
Owned food, beverage and other expenses(2)  99.4%  84.2%
Total owned operating expenses(3)  88.3%  88.4%
General and administrative (including stock-based compensation of 0.8% and 1.7%, respectively)  11.6%  15.7%
Depreciation and amortization  4.1%  4.0%
Pre-opening expenses  2.1%  1.1%
Equity in income of investee companies  %  0.1%
Other income, net  (0.8)%  (0.6)%
Total costs and expenses  95.0%  97.6%
Operating income  5.0%  2.4%
Other expenses, net:        
Interest expense, net of interest income  1.2%  1.6%
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  (0.4)%  (0.6)%
Net income attributable to The ONE Group Hospitality, Inc.  3.7%  1.2%

(1) These expenses are being shown as a percentage of owned restaurant net revenues.

(2) These expenses are being shown as a percentage of owned food, beverage and other net revenues.

(3) These expenses are being shown as a percentage of total owned revenue.

26

The following tables show our operating results by segment for the periods indicated (in thousands):

  For the three months ended March 31, 2019 
  Owned
restaurants
  Owned food,
beverage and
other
  Managed and
licensed
operations
  Total 
Revenues:                
Owned net revenues $17,820  $2,273  $  $20,093 
Management, license and incentive fee revenue        2,683   2,683 
Total revenues  17,820   2,273   2,683   22,776 
                 
Cost and expenses:                
Owned operating expenses:                
Cost of sales  4,569         4,569 
Other operating expenses  10,915         10,915 
Owned food, beverage and other expenses     2,259      2,259 
Total owned operating expenses  15,484   2,259      17,743 
Segment income $2,336  $14  $2,683  $5,033 
                 
General and administrative              2,650 
Depreciation and amortization              942 
Interest expense, net of interest income              269 
Equity in income of investee companies               
Other              307 
Income before provision for income taxes             $865 

  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 

27

The following table presents a reconciliation of net (loss) income to EBITDA and Adjusted EBITDA for the periods indicated (in thousands):

 

  For the three months ended March 31, 
  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 

(1) Non-cash rent expense is included in owned restaurant operating expenses and general and administrative expense on the statement

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 

 

    

2020

    

2019

Net (loss) income attributable to The ONE Group Hospitality, Inc.

 

$

(4,599)

 

$

854

Net loss attributable to noncontrolling interest

 

 

(274)

 

 

(85)

Net (loss) income

 

 

(4,873)

 

 

769

Interest expense, net of interest income

 

 

1,175

 

 

269

(Benefit) provision for income taxes

 

 

(653)

 

 

96

Depreciation and amortization

 

 

2,440

 

 

942

EBITDA

 

 

(1,911)

 

 

2,076

COVID-19 related expenses

 

 

1,348

 

 

 —

Transaction and integration costs (1)

 

 

1,095

 

 

 —

Stock-based compensation

 

 

338

 

 

181

Lease termination expense (2)

 

 

179

 

 

 —

Non-cash rent expense (3)

 

 

136

 

 

(87)

Pre-opening expenses

 

 

 —

 

 

482

Adjusted EBITDA

 

 

1,185

 

 

2,652

Adjusted EBITDA attributable to noncontrolling interest

 

 

(391)

 

 

(36)

Adjusted EBITDA attributable to The ONE Group Hospitality, Inc.

 

$

1,576

 

$

2,688


(1)

Primarily transaction and integration costs incurred with the Kona Grill acquisition and subsequent integration activities and internal costs associated with capital raising activities, most recently the Goldman Sachs Credit Agreement.

(2)

Lease termination expense are costs associated with closed, abandoned and disputed locations or leases.

(3)

Non-cash rent expense is included in owned restaurant operating expenses and general and administrative expense on the consolidated statements of operations and comprehensive (loss) income.

 

Results of Operations for the Three Months Ended March 31, 20192020 and March 31, 20182019

 

Revenues

 

Owned restaurant net revenues.revenue.Owned restaurant net revenuesrevenue increased $2.7$18.5 million or 18.2%, from $15.1to $38.6 million for the three months ended March 31, 2018 to $17.82020 from $20.1 million for the three months ended March 31, 2019.  ThisApproximately $20.7 million of the increase in owned restaurant revenue was primarily dueattributable to the openingaddition of our restaurantthe Kona Grill restaurants in San Diego, California in July 2018 and increased sales at our existing locations. Additionally, in March 2019, we opened our STK restaurant in Nashville, Tennessee. SSS increased 8.6% and average check increased 2.3% for the three months ended March 31, 2019first quarter of 2020 compared to the three months endedprior year period. The increase in total revenue was partially offset by the temporarily closures and limited operations of our restaurants beginning in March 31, 2018. Our Denver location, which opened in January 2017, was considered2020 as a comparable location for SSSresult of COVID-19. Comparable restaurant sales decreased 14.1% in the three months ended March 31, 2019. To drivefirst quarter of 2020.

Management and license fee revenue among several strategies, we have recently begun opening our restaurants earlier to take advantage of happy-hour. Management and pre-dinner time frames. We are also now open during lunch hours in several locations.

Owned food, beverage and otherlicense fee revenues. Owned food, beverage and other revenues increased $0.3 decreased $0.5 million, or 13.4%19.4%, from $2.0to $2.2 million for the three months ended March 31, 2018 to $2.3 million for the three months ended March 31, 2019. The increase in revenue was primarily related to the 2019 Super Bowl party in Atlanta, Georgia for which there was not a similar event in 2018.

Management and license fee revenue. Revenue generated2020 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 and license fee revenues increased $0.2 million, or 10.1%, from $2.4 million for the three months ended March 31, 2018 to $2.7 million for the three months ended March 31, 2019. The increase wasManagement and license fee revenue decreased primarily as a result of lower sales within our international managed locations in the United Kingdom and Italy related to new STK licensed locations that opened in 2018, including in Mexico City, Mexico and Dubai, United Arab Emirates. Additionally, in Marchtemporary closures due to COVID-19 prevention measures.

23

 

Cost and Expenses

 

Owned restaurant cost of sales.sales. Food and beverage costs for owned restaurants increased approximately $0.5$5.1 million or 13.3%, from $4.0to $10.1 million for the three months ended March 31, 2018 to $4.62020 from $5.0 million for the three months ended March 31, 2019.  ThisApproximately $5.6 million of the increase was primarily due to increased sales at our existing,in 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 26.8%was attributable to the addition of the Kona Grill restaurants in the first quarter of 2020 compared to the prior year period.  The increase in owned restaurant cost of sales was partially offset by the temporary closures and limited operations of our restaurants beginning in March 2020 as a result of COVID-19.

Owned restaurant operating expenses.  Owned restaurant operating expenses increased $13.8 million to $26.5 million for the three months ended March 31, 20182020 from $12.7 million for the three months ended March 31, 2019.  Approximately $14.2 million of the increase in owned restaurant operating expenses was attributable to 25.6%the addition of the Kona Grill restaurants in the first quarter of 2020 compared to the prior year period. The Company began reducing operating costs in March due to the impact of COVID-19.

General and administrative. General and administrative costs increased approximately $0.7 million, or 28.2%, to $3.4 million for the three months ended March 31, 2020 from $2.7 million for the three months ended March 31, 2019.  However,  general and administrative costs as a percentage of total revenues decreased to 8.3% for the three months ended March 31, 2020 from 11.6% for the three months ended March 31, 2019. We have implemented measures to reduce our costs while our operations are affected by COVID-19, including significant reductions in employees, deferral of capital projects, and reduction of third-party professional services.

Depreciation and amortization. Depreciation and amortization expense increased approximately $1.5 million to $2.4 million for the three months ended March 31, 2020 from $0.9 million for the three months ended March 31, 2019 due to the positive impactsaddition of operating initiatives coupled with selective price increases that we implementedthe Kona Grill restaurants in January 2019. Food revenues as a percentagethe first quarter of total food2020 compared to the prior year period.

Transaction and beverage revenues were approximately 64% and 68% forintegration costs.  In the three months ended March 31, 20192020, we incurred transaction and 2018, respectively. Foodintegration costs as a percentage of food revenues are typically higher than beverage costs as a percentageapproximately $1.1 million related to the Kona Grill acquisition, which closed on October 4, 2019. Over the remainder of beverage revenues.2020, we intend to integrate Kona Grill by leveraging our corporate infrastructure, our bar-business knowledge and unique Vibe Dining program, to elevate the brand experience and drive improved performance.

28

Owned restaurant operating expenses.Owned restaurant operatingCOVID-19 related expenses increased $1.5 million, or 16.4%, from $9.4 million for. In the three months ended March 31, 20182020, we incurred approximately $1.3 million of direct costs related to $10.9 millionCOVID-19, composed primarily of payments to employees for paid-time off during restaurant closures, inventory waste and rent and rent related costs for closed and limited-operations restaurants from the day that the dining room closed.  

Lease termination expenses.  In the three months ended March 31, 2019. As a percentage of owned restaurant net revenues, owned restaurant operating2020, lease termination expense was approximately $0.2 million. Lease termination expenses decreased 110 basis points from 62.2% for the three months ended March 31, 2018 to 61.3% for the three months ended March 31, 2019. This improvement was due to the leverage of SSS growthare costs associated with closed, abandoned and labor and spending efficiencies.

Owned food, beverage and other expenses. Owned food, beverage and other expenses increased $0.6 million,disputed locations or 33.7%, from $1.7 million for the three months ended March 31, 2018 to $2.3 million for the three months ended March 31, 2019. The increase in revenue was primarily related to the 2019 Super Bowl party in Atlanta, Georgia for which there was not a similar event in 2018.disputed leases.

 

General and administrative. General and administrative costs decreased $0.4 million, or 13.3% from $3.1 million for the three months ended March 31, 2018 to $2.7 million for the three months ended March 31, 2019. The decrease was primarily due to reduced stock-based compensation expense as a result of headcount reductions in 2018 as well as reduced external professional fees. General and administrative costs as a percentage of total revenues decreased from 15.7% for the three months ended March 31, 2018 to 11.6% for the three months ended March 31, 2019.

Depreciation and amortization. Depreciation and amortization expense increased approximately $0.2 million, or 21.1%, from $0.8 million for the three months ended March 31, 2018 to $0.9 million for the three months ended March 31, 2019. The increase was primarily related to the opening of our restaurant in San Diego, California in July 2018.

Pre-opening expenses.expenses. Pre-opening expenses for the three months ended March 31, 2019 were $0.5 million compared to pre-opening expenses of $0.2 million for the three months ended March 31, 2018. In 2018, preopening expenses were primarily related to the development of our restaurant at the Andaz Hotel in San Diego, California, which opened in July 2018. In 2019, our preopening expenses related to the opening of ourowned STK restaurant in Nashville, Tennessee which opened in March 2019.

Equity in income of investee companies. Equity in income of investee companies was approximately $23.0 thousand for the three months ended March 31, 2018. We did not recognize any equity in income of investee companies for the three months ended March 31, 2019.

 

Interest expense, net of interest income.income. Interest expense, net of interest income was approximately $0.3$1.2 million and $0.3 million for each of the three months ending March 31, 2020 and 2019, and 2018.respectively.

 

Provision(Benefit) provision for income taxes.taxes. The provision for income taxes for the three months ended March 31, 20192020 was a tax benefit of $0.7 million compared to tax expense of $96.0 thousand compared to $25.0 thousand$0.1 million for the three months ended March 31, 2018.2019.  Our annualannualized effective tax rate wasis estimated at 12.4% for 2020 compared to 9.7% and 15.6% for the three months ended March 31, 2019 and 2018, respectively.2019. Our projected annual effective tax rate differs from the statutory U.S. tax rate of 21% primarily due to the following: (i) availability of U.S. net operating loss carryforwards, resulting in no federal income taxes; (ii) a full valuation allowance on the U.S. deferred tax assets, net; (iii) taxes owed in foreign jurisdictions such as the United Kingdom, Canada and Italy; and, (iv)(iii) taxes owed in state and local jurisdictions such as New York, New York City, Colorado and Tennessee.jurisdictions.

 

Net loss attributable to noncontrolling interest. Net loss attributable to noncontrolling interest was approximately $0.3 million and $0.1 million for each of the three months ended March 31, 2020 and 2019, and 2018.respectively.

 

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, including

24

the costs of opening currently planned new restaurants, through cash provided by operations, borrowings on our Goldman Sachs Credit Agreement and construction allowances provided by landlords of certain locations.

 

29

InWe believe the contextcombination of our current debt structure and projected cash needs, we believe the cash provided by operations isand our Goldman Sachs Credit Agreement are adequate to support our immediate business operations and plans. As of March 31, 2019,2020, we had cash and cash equivalents of approximately $1.1$8.2 million and long-term debt of $48.0 million, which consisted of our Goldman Sachs Credit Agreement and equipment financing agreements. As of March 31, 2020 the availability pursuant to our revolving credit facility was $10.7 million.

 

We expect thatIn the three months ended March 31, 2020, our capital expenditures in 2019 will be less than prior years because we expect that that the Nashville, Tennessee STK restaurant will be the only new, owned restaurant we open in 2019. We currently anticipate our total capital expenditures for 2019, inclusive of all maintenance expenditures, will bewere approximately $3.5$0.8 million.

We expect to fund our anticipated capital expenditures for 2019 with current cash on hand, expected cash flows from operations 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 Additionally, under our current capital light strategy, we plan to enter into management and license agreements for the operation of STKsSTK restaurants where we are not required to contribute significant capital upfront. We expect to rely on our cash flow from operations and continued financing to fund the majority of our planned capital expenditures for 2019.

 

Our operations have not required significant working capital, and, like many restaurant companies, we have negative working capital. Revenues are received primarily in credit card or cash receipts, and restaurant operations do not require significant receivables or inventories, other than our wine inventory. In addition, we receive trade credit for the purchase of food, beverages and supplies, thereby reducing the need for incremental working capital to support growthgrowth.

 

Cash FlowsGoldman Sachs Credit Agreement

On October 4, 2019, in conjunction with the acquisition of Kona Grill, we entered into the Goldman Sachs Credit Agreement, which replaced the Bank of America Credit Agreement and provides for a secured revolving credit facility of $12.0 million and a $48.0 million term loan. The term loan is payable in quarterly installments, with the final payment due in October 2024. The revolving credit facility also matures in October 2024. Additionally, our consolidated adjusted EBITDA as defined by the Goldman Sachs Credit Agreement for determining covenant compliance includes pro forma adjustments for the annualization of the Kona Grill restaurant performance which includes results before the acquisition date.

 

The following table summarizes the statementAs of cash flows for the three months ended March 31, 2019 and March 31, 2018 (in thousands):

  For the three months ended March 31, 
  2019  2018 
Net cash provided by (used in):        
Operating activities $2,513  $172 
Investing activities  (2,060)  294 
Financing activities  (798)  (843)
Effect of exchange rate changes on cash  (168)  (28)
Net increase in cash and cash equivalents $(513) $(405)

Operating Activities

Net cash provided2020, we were in compliance with the covenants required by operating activities was $2.5 million for the threeGoldman Sachs Credit Agreement. Based on current projections, we believe that we would continue to comply with the covenants in the Goldman Sachs Credit Agreement, as amended, throughout the twelve months ended March 31, 2019 compared to $0.2 million forfollowing 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 andissuance of the openings of our owned STK restaurants in San Diego, California and Nashville, Tennessee in July 2018 and March 2019, respectively.

financial statements.

 

Investing ActivitiesRefer to Note 6, Note 17 and Note 18 to our consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the terms of our long-term debt arrangements and information regarding our commitments and contingencies.

 

Net cash used in investing activities for the three months ended March 31, 2019 was $2.1 million compared to net cash provided by investing activities of $0.3 million for the three months ended March 31, 2018. The difference was attributable to increased capital expenditures in 2019 for purchases of property and equipment, primarily related to the construction of our owned restaurants and general capital expenditures of existing restaurants. Additionally, in 2018, we received of $0.6 million of proceeds related to the sale of our interest in One 29 Park, a restaurant and rooftop bar located in a New York City hotel.

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Financing Activities

Net cash used in financing activities for each of the three months ended March 31, 2019 and 2018 was approximately $0.8 million. Net cash used in financing activities primarily relate to repayments for our term loans and equipment financing agreements.

Capital Expenditures and Lease Arrangements

Given the present uncertainty due to the COVID-19 pandemic, the Company has deferred capital expenditures. To the extent we open new company-owned restaurants, we anticipate capital expenditures would increase fromrelated to the amounts described in “Investing Activities” above.construction of new restaurants compared to general capital expenditures of existing restaurants. Although we are committed to our capital light strategy, in which our capital investment is expected to be limited, we are willing to consider opening owned restaurants as opportunities arise. For owned restaurants, where we build from a shell state, we have typically targeted an average cash investment of approximately $3.8 million for a 10,000 square-foot STK restaurant, net of landlord contributions and equipment financing and excluding pre-opening costs. For locations where we may be the successor restaurant tenant, and currently our preference, total cash investment will be significantly less and in the $1.0 million to $1.5 million range. Typical pre-opening costs will be in the $0.3 million to $0.5 million range.  In addition, some of our existing restaurants will require capital improvements to either maintain or improve the facilities. We may add seating or provide enclosures for outdoor space in the next twelve months atfor some of our locations which we expect will increase revenues for those locations.

Our hospitality F&B services projects typically require limited capital investment from us. Capital expenditures for these projects will primarily be funded by cash flows from operations and equipment financing, depending upon the timing of these expenditures and cash availability.

We typically seek to lease our restaurant locations for periods of 10 to 20 years under operating lease arrangements, with a limited number of renewal options. Our rent structure varies, from lease to lease, but our leases generally provide for the payment of both minimum and contingent (percentage) rent based on sales, as well as other expenses related to the leases (for example,such as our pro-rata share of common area maintenance,

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property tax and insurance expenses).expenses. Many of our lease arrangements include the opportunity to secure tenant improvement allowances to partially offset the cost of developing and opening the related restaurants. Generally, landlords recover the cost of such allowances from increased minimum rents. However, there can be no assurance that such allowances will be available to us on each project that we select for development.

For the three months ended March 31, 2020, we spent a total of $0.8 million in capital expenditures, $1.3 million less than the amount spent for the same period in the prior year, and expect to keep capital expenditures at a low level as long as the uncertainty related to COVID-19 continues.

Loan AgreementsCash Flows

 

AsThe following table summarizes the statement of cash flows for the three months ended March 31, 2020 and 2019 our long-term debt consisted of term loans, promissory notes and equipment financing agreements(in thousands):

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 

 

    

2020

    

2019

Net cash (used in) provided by:

 

 

  

 

 

  

Operating activities

 

$

(3,103)

 

$

2,513

Investing activities

 

 

(791)

 

 

(2,060)

Financing activities

 

 

(226)

 

 

(798)

Effect of exchange rate changes on cash

 

 

(64)

 

 

(168)

Net decrease in cash and cash equivalents

 

$

(4,184)

 

$

(513)

Operating Activities.  Net cash used in operating activities was $3.1 million for which no additional financing was available. In 2019, we made principal payments of approximately $0.8 million towards our long-term debt. As ofthe three months ended March 31, 2019, we had approximately $10.02020 compared to $2.5 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 undercash generated from operating activities for the BankUnited term loan agreements as ofthree months ended March 31, 2019. Based on current projections, we believe that we will continueThe decrease was primarily attributable to complythe decrease in net income which included $1.3 million in expenses for payments to employees for paid-time off during restaurant closures, and inventory waste directly attributable to COVID-19, and $1.1 million in transaction and integration expenses related to the Kona Grill acquisition coupled with such covenants throughout$4.4 million reduction in accounts payable and accrued expenses.

Investing Activities.  Net cash used in investing activities for the twelvethree months followingended March 31, 2020 was $0.8 million compared to $2.1 million for the issuancethree months ended March 31, 2019.  We have implemented measures to reduce our costs for the foreseeable future due to COVID-19, including the deferral of most non-safety related capital projects.

Financing Activities.  Net cash used in financing activities for the financial statements.three months ended March 31, 2020 was $0.2 million compared to $0.8 million in the three months ended March 31, 2019.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

 

Recent Accounting Pronouncements

 

See Note 1 to our consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for a detailed description of recent accounting pronouncements. We do not expect the recent accounting pronouncements discussed in Note 1 to have a significant impact on our consolidated financial position or results of operations.

As of January 1, 2019, we adopted Accounting Standard Codification Topic 842, Leases, (“ASC Topic 842”). Refer to Note 12 to our consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for a detailed description of the impact of implementing ASC Topic 842.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide this information.

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Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, , with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation as of the last day of the period covered by this Quarterly Report on Form 10-Q of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange

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Act is timely recorded, processed, summarized and reported and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls

 

Beginning 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 control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the first quarter of 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

We are subject to claims common to our industry and in the ordinary course of our business, including lease disputes and employee-related matter.business. Companies in our industry, including us, have been and are subject to class action lawsuits, primarily regarding compliance with labor laws and regulations. Defending lawsuits requires significant management attention and financial resources and the outcome of any litigation is inherently uncertain. We believe that accrual for these matters are adequately provided for in our consolidated financial statements. We do not believe the ultimate resolutions of these matters will have a material adverse effect on our consolidated financial position and results of operations. However, the resolution of lawsuits is difficult to predict. A significant increase in the number of these claims, or one or more successful claims under which we incur greater liabilities than is currently anticipated, could materially and adversely affect our consolidated financial statements.

Item 1A. Risk Factors.

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See our Annual Report on Form 10-K for the year ended December 31, 2019 for additional risk factors.

The outbreak of COVID-19 has significantly affected our restaurant traffic and our business.

Our business has been adversely affected by the effect of, the public perception of a risk of, and government actions to contain, COVID-19. In December 2019, COVID-19 was identified in Wuhan, China, and subsequently spread to other regions of the world. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic disease. Since early March 2020, we have experienced a significant decline in restaurant traffic and government agencies have since declared a state of emergency in the U.S. and in foreign jurisdictions where we operate, and some government agencies have restricted movement, required restaurant and bar closures, and advised people not to visit restaurants or bars. In some jurisdictions, people have been instructed to shelter in place to reduce the spread of COVID-19. In response to these conditions, we temporarily closed several restaurants and shifted operations at others to provide only take-out and delivery service. We expect our results of operations to be materially and negatively affected by these actions. A prolonged occurrence of COVID-19 may result in further restrictions, including possible travel restrictions and additional restrictions on the restaurant industry. Our efforts to mitigate the effect of COVID-19 on our business may be unsuccessful, and we may not be able to adequately reduce our costs as we move to a take-out and delivery model, with which we have limited experience. Any of these events could result in a sustained, significant drop in restaurant traffic and could have a material adverse effect on us. In the event that the effect of COVID-19 be prolonged, there could be other events that drive risk in the business. For a description of those risks, refer to our Annual Report on Form 10-K for the year ended December, 31, 2019 for additional risk factors.

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SIGNATURESSIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: May 9, 2019

 

Dated: May 11, 2020

THE ONE GROUP HOSPITALITY, INC.

By:

/s/

 /s/ Tyler Loy

Tyler Loy, Chief Financial Officer

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