UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
| |
| (Mark One) |
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|
⌧ | |
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the Quarterly Period Ended |
| |
| OR |
| |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to |
Commission File Number 001‑37379001-37379
|
THE ONE GROUP HOSPITALITY, INC. |
(Exact name of registrant as specified in its charter)
Delaware |
|
|
(State or other jurisdiction of incorporation or |
| (I.R.S. Employer Identification No.) |
|
|
|
1624 Market Street, Suite 311, Denver, Colorado |
| 80202 |
(Address of principal executive offices) |
| Zip Code |
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(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| |
|
| Name of each exchange on which registered | ||
Common Stock |
| STKS |
| Nasdaq |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒⌧ No ☐◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒⌧ No ☐◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑212b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer |
Non-accelerated filer ☒ | Smaller reporting company ☒ |
| Emerging growth company |
If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑212b-2 of the Exchange Act). Yes ☐◻ No ☒⌧
Number of shares of common stock outstanding as of May 1,July 31, 2020: 28,828,67529,021,713
| Page |
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3 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 29 |
29 | |
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29 | |
30 | |
31 | |
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32 |
2
THE ONE GROUP HOSPITALITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
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| ||||||
|
| March 31, |
| December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
| | | | | | | ||||||
| | June 30, | | December 31, | ||||||||
|
| 2020 | | 2019 | ||||||||
ASSETS |
| (Unaudited) |
|
|
| | (Unaudited) |
| |
| ||
Current assets: |
|
|
|
|
|
|
| |
|
| |
|
Cash and cash equivalents |
| $ | 8,160 |
| $ | 12,344 | | $ | 23,460 | | $ | 12,344 |
Accounts receivable |
|
| 5,189 |
|
| 10,351 | |
| 4,066 | |
| 10,351 |
Inventory |
|
| 2,490 |
|
| 3,058 | |
| 2,310 | |
| 3,058 |
Other current assets |
|
| 2,005 |
|
| 1,047 | |
| 1,470 | |
| 1,047 |
Due from related parties, net |
|
| 376 |
|
| 341 | ||||||
Due from related parties | |
| 376 | |
| 341 | ||||||
Total current assets |
|
| 18,220 |
|
| 27,141 | |
| 31,682 | |
| 27,141 |
|
|
|
|
|
|
| ||||||
| |
|
| |
|
| ||||||
Property and equipment, net |
|
| 69,183 |
|
| 70,483 | |
| 67,873 | |
| 70,483 |
Operating lease right-of-use assets |
|
| 80,228 |
|
| 81,097 | | | 78,735 | | | 81,097 |
Deferred tax assets, net |
|
| 7,876 |
|
| 7,751 | |
| 11,650 | |
| 7,751 |
Intangibles, net |
|
| 16,965 |
|
| 17,183 | | | 16,748 | | | 17,183 |
Other assets |
|
| 2,372 |
|
| 1,622 | |
| 2,479 | |
| 1,622 |
Security deposits |
|
| 1,337 |
|
| 1,308 | |
| 990 | |
| 1,308 |
Total assets |
| $ | 196,181 |
| $ | 206,585 | | $ | 210,157 | | $ | 206,585 |
|
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
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| |
|
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Current liabilities: |
|
|
|
|
|
| |
|
| |
|
|
Accounts payable |
| $ | 7,397 |
| $ | 8,274 | | $ | 6,544 | | $ | 8,274 |
Accrued expenses |
|
| 7,642 |
|
| 11,198 | |
| 8,599 | |
| 11,198 |
Deferred license revenue |
|
| 446 |
|
| 332 | |
| 208 | |
| 332 |
Deferred gift card revenue and other |
|
| 2,691 |
|
| 3,183 | |
| 2,343 | |
| 3,183 |
Current portion of operating lease liabilities |
|
| 4,454 |
|
| 4,397 | | | 4,524 | | | 4,397 |
Current portion of long-term debt |
|
| 696 |
|
| 749 | |
| 640 | |
| 749 |
Total current liabilities |
|
| 23,326 |
|
| 28,133 | |
| 22,858 | |
| 28,133 |
|
|
|
|
|
|
| ||||||
| |
|
| |
|
| ||||||
Deferred license revenue, long-term |
|
| 869 |
|
| 1,036 | |
| 1,058 | |
| 1,036 |
Operating lease liabilities, net of current portion |
|
| 97,492 |
|
| 98,278 | | | 96,328 | | | 98,278 |
CARES Act Loans | |
| 18,314 | |
| — | ||||||
Long-term debt, net of current portion |
|
| 45,123 |
|
| 45,226 | |
| 45,084 | |
| 45,226 |
Total liabilities |
|
| 166,810 |
|
| 172,673 | |
| 183,642 | |
| 172,673 |
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Commitments and contingencies |
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Stockholders’ equity: |
|
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| |
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| |
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Common stock, $0.0001 par value, 75,000,000 shares authorized; 28,807,800 and 28,603,829 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively |
|
| 3 |
|
| 3 | ||||||
Preferred stock, $0.0001 par value, 10,000,000 shares authorized; no shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively |
|
| — |
|
| — | ||||||
Common stock, $0.0001 par value, 75,000,000 shares authorized; 28,960,147 and 28,603,829 shares issued and outstanding at June 30, 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 June 30, 2020 and December 31, 2019, respectively | |
| — | |
| — | ||||||
Additional paid-in capital |
|
| 45,229 |
|
| 44,853 | |
| 45,621 | |
| 44,853 |
Accumulated deficit |
|
| (12,490) |
|
| (7,891) | |
| (15,362) | |
| (7,891) |
Accumulated other comprehensive loss |
|
| (2,695) |
|
| (2,651) | |
| (2,693) | |
| (2,651) |
Total stockholders’ equity |
|
| 30,047 |
|
| 34,314 | |
| 27,569 | |
| 34,314 |
Noncontrolling interests |
|
| (676) |
|
| (402) | |
| (1,054) | |
| (402) |
Total equity |
|
| 29,371 |
|
| 33,912 | |
| 26,515 | |
| 33,912 |
Total liabilities and equity |
| $ | 196,181 |
| $ | 206,585 | | $ | 210,157 | | $ | 206,585 |
See notes to the condensed consolidated financial statements.
3
THE ONE GROUP HOSPITALITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(Unaudited, in thousands, except (loss) earnings per share and related share information)
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| For the three months ended March 31, | ||||||||||||||||
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| 2020 |
| 2019 | ||||||||||||||
| | | | | | | | | | | | | ||||||
| | For the three months ended June 30, | | For the six months ended June 30, | ||||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||||||
Revenues: |
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| |
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| |
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Owned restaurant net revenue |
| $ | 38,557 |
| $ | 20,093 | | $ | 16,529 | | $ | 20,943 | | $ | 55,086 | | $ | 41,036 |
Management, license and incentive fee revenue |
|
| 2,162 |
|
| 2,683 | |
| 135 | | | 2,656 | |
| 2,297 | | | 5,339 |
Total revenues |
|
| 40,719 |
|
| 22,776 | |
| 16,664 | |
| 23,599 | |
| 57,383 | |
| 46,375 |
Cost and expenses: |
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Owned operating expenses: |
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| |
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| |
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Owned restaurant cost of sales |
|
| 10,113 |
|
| 5,026 | |
| 4,174 | | | 5,519 | |
| 14,287 | | | 10,545 |
Owned restaurant operating expenses |
|
| 26,499 |
|
| 12,717 | |
| 12,038 | | | 13,630 | |
| 38,537 | | | 26,347 |
Total owned operating expenses |
|
| 36,612 |
|
| 17,743 | |
| 16,212 | |
| 19,149 | |
| 52,824 | |
| 36,892 |
General and administrative (including stock-based compensation of $338 and $181 for the three months ended March 31, 2020 and 2019 respectively) |
|
| 3,397 |
|
| 2,650 | ||||||||||||
General and administrative (including stock-based compensation of $482, $456, $820, and $637 for the three and six months ended June 30, 2020 and 2019 respectively) | |
| 2,438 | | | 2,704 | |
| 5,835 | | | 5,354 | ||||||
Depreciation and amortization |
|
| 2,440 |
|
| 942 | |
| 2,510 | | | 1,004 | |
| 4,950 | | | 1,946 |
Transaction and integration costs |
|
| 1,095 |
|
| — | |
| 14 | | | 152 | |
| 1,109 | | | 152 |
COVID-19 related expenses |
|
| 1,348 |
|
| — | | | 695 | | | — | | | 2,043 | | | — |
Lease termination expenses |
|
| 179 |
|
| — | |
| 89 | | | 141 | |
| 268 | | | 141 |
Pre-opening expenses |
|
| — |
|
| 482 | |
| — | | | 63 | |
| — | | | 545 |
Other income, net |
|
| (1) |
|
| (175) | |
| (11) | | | (91) | |
| (12) | | | (266) |
Total costs and expenses |
|
| 45,070 |
|
| 21,642 | |
| 21,947 | |
| 23,122 | |
| 67,017 | |
| 44,764 |
Operating (loss) income |
|
| (4,351) |
|
| 1,134 | |
| (5,283) | |
| 477 | |
| (9,634) | |
| 1,611 |
Other expenses, net: |
|
|
|
|
|
| |
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| |
|
| |
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| |
|
|
Interest expense, net of interest income |
|
| 1,175 |
|
| 269 | |
| 1,195 | | | 218 | |
| 2,370 | | | 487 |
Loss on early debt extinguishment | |
| — | | | 437 | |
| — | | | 437 | ||||||
Total other expenses, net |
|
| 1,175 |
|
| 269 | |
| 1,195 | |
| 655 | |
| 2,370 | |
| 924 |
(Loss) income before (benefit) provision for income taxes |
|
| (5,526) |
|
| 865 | |
| (6,478) | |
| (178) | |
| (12,004) | |
| 687 |
(Benefit) provision for income taxes |
|
| (653) |
|
| 96 | |
| (3,228) | | | (15) | |
| (3,881) | | | 81 |
Net (loss) income |
|
| (4,873) |
|
| 769 | |
| (3,250) | |
| (163) | |
| (8,123) | |
| 606 |
Less: net loss attributable to noncontrolling interest |
|
| (274) |
|
| (85) | ||||||||||||
Less: net (loss) income attributable to noncontrolling interest | |
| (378) | | | 159 | |
| (652) | | | 74 | ||||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. |
| $ | (4,599) |
| $ | 854 | | $ | (2,872) | | $ | (322) | | $ | (7,471) | | $ | 532 |
Currency translation loss |
|
| (44) |
|
| (160) | ||||||||||||
Comprehensive (loss) income |
| $ | (4,643) |
| $ | 694 | ||||||||||||
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| ||||||||||||
Currency translation gain (loss) | |
| 2 | | | (120) | |
| (42) | | | (280) | ||||||
Comprehensive (loss) income attributable to The ONE Group Hospitality, Inc. | | $ | (2,870) | | $ | (442) | | $ | (7,513) | | $ | 252 | ||||||
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Net (loss) income attributable to The ONE Group Hospitality, Inc. per share: |
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Basic net (loss) income per share |
| $ | (0.16) |
| $ | 0.03 | ||||||||||||
Diluted net (loss) income per share |
| $ | (0.16) |
| $ | 0.03 | ||||||||||||
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Basic net (loss) earnings per share | | $ | (0.10) | | $ | (0.01) | | $ | (0.26) | | $ | 0.02 | ||||||
Diluted net (loss) earnings per share | | $ | (0.10) | | $ | (0.01) | | $ | (0.26) | | $ | 0.02 | ||||||
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Shares used in computing basic (loss) earnings per share |
|
| 28,636,325 |
|
| 28,314,820 | |
| 28,907,568 | |
| 28,432,510 | |
| 28,778,544 | |
| 28,373,974 |
Shares used in computing diluted (loss) earnings per share |
|
| 28,636,325 |
|
| 29,311,756 | |
| 28,907,568 | |
| 28,432,510 | |
| 28,778,544 | |
| 29,456,764 |
See notes to the condensed consolidated financial statements.
4
THE ONE GROUP HOSPITALITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited, in thousands, except share information)
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| Accumulated |
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| Additional |
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| other |
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| Common stock |
| paid-in |
| Accumulated |
| comprehensive |
| Stockholders’ |
| Noncontrolling |
|
|
| |||||||||||||||||||||||||||||||
|
| Shares |
| Par value |
| capital |
| deficit |
| loss |
| equity |
| interests |
| Total | ||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
| | | | | | | | | | | | | Accumulated | | | | | | | | | | ||||||||||||||||||||||||
| | | | | | | Additional | | | | | other | | | | | | | | | | |||||||||||||||||||||||||
| | Common stock | | paid-in | | Accumulated | | comprehensive | | Stockholders’ | | Noncontrolling | | | | |||||||||||||||||||||||||||||||
|
| Shares |
| Par value |
| capital |
| deficit |
| loss |
| equity |
| interests |
| Total | ||||||||||||||||||||||||||||||
Balance at December 31, 2019 |
| 28,603,829 |
| $ | 3 |
| $ | 44,853 |
| $ | (7,891) |
| $ | (2,651) |
| $ | 34,314 |
| $ | (402) |
| $ | 33,912 |
| 28,603,829 | | $ | 3 | | $ | 44,853 | | $ | (7,891) | | $ | (2,651) | | $ | 34,314 | | $ | (402) | | $ | 33,912 |
Stock-based compensation, net of tax withholding |
| 69,327 |
|
| — |
|
| 338 |
|
| — |
|
| — |
|
| 338 |
|
| — |
|
| 338 | |||||||||||||||||||||||
Stock-based compensation |
| 69,327 | |
| — | |
| 338 | |
| — | |
| — | |
| 338 | |
| — | |
| 338 | |||||||||||||||||||||||
Exercise of stock options |
| 18,000 |
|
| — |
|
| 38 |
|
| — |
|
| — |
|
| 38 |
|
| — |
|
| 38 |
| 18,000 | |
| — | |
| 38 | |
| — | |
| — | |
| 38 | |
| — | |
| 38 |
Vesting of restricted shares |
| 116,644 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — | |||||||||||||||||||||||
Issuance of vested restricted shares, net of tax withholding |
| 116,644 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |||||||||||||||||||||||
Loss on foreign currency translation, net |
| — |
|
| — |
|
| — |
|
| — |
|
| (44) |
|
| (44) |
|
| — |
|
| (44) |
| — | |
| — | |
| — | |
| — | |
| (44) | |
| (44) | |
| — | |
| (44) |
Net loss |
| — |
|
| — |
|
| — |
|
| (4,599) |
|
| — |
|
| (4,599) |
|
| (274) |
|
| (4,873) |
| — | |
| — | |
| — | |
| (4,599) | |
| — | |
| (4,599) | |
| (274) | |
| (4,873) |
Balance at March 31, 2020 |
| 28,807,800 |
| $ | 3 |
| $ | 45,229 |
| $ | (12,490) |
| $ | (2,695) |
| $ | 30,047 |
| $ | (676) |
| $ | 29,371 |
| 28,807,800 | | $ | 3 | | $ | 45,229 | | $ | (12,490) | | $ | (2,695) | | $ | 30,047 | | $ | (676) | | $ | 29,371 |
Stock-based compensation |
| 58,929 | |
| — | |
| 482 | |
| — | |
| — | |
| 482 | |
| — | |
| 482 | |||||||||||||||||||||||
Issuance of vested restricted shares, net of tax withholding |
| 93,418 | |
| — | |
| (90) | |
| — | |
| — | |
| (90) | |
| — | |
| (90) | |||||||||||||||||||||||
Gain on foreign currency translation, net |
| — | |
| — | |
| — | |
| — | |
| 2 | |
| 2 | |
| — | |
| 2 | |||||||||||||||||||||||
Net loss |
| — | |
| — | |
| — | |
| (2,872) | |
| — | |
| (2,872) | |
| (378) | |
| (3,250) | |||||||||||||||||||||||
Balance at June 30, 2020 |
| 28,960,147 | | $ | 3 | | $ | 45,621 | | $ | (15,362) | | $ | (2,693) | | $ | 27,569 | | $ | (1,054) | | $ | 26,515 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
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 | |||||||||||||||||||||||
Issuance of vested restricted shares, net of tax withholding |
| 20,544 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |||||||||||||||||||||||
Loss on foreign currency translation, net |
| — | |
| — | |
| — | |
| — | |
| (160) | |
| (160) | |
| — | |
| (160) | |||||||||||||||||||||||
Net income (loss) |
| — | |
| — | |
| — | |
| 854 | |
| — | |
| 854 | |
| (85) | |
| 769 | |||||||||||||||||||||||
Balance at March 31, 2019 |
| 28,333,561 | | $ | 3 | | $ | 43,724 | | $ | (27,868) | | $ | (2,470) | | $ | 13,389 | | $ | (537) | | $ | 12,852 | |||||||||||||||||||||||
Stock-based compensation |
| — | |
| — | |
| 456 | |
| — | |
| — | |
| 456 | |
| — | |
| 456 | |||||||||||||||||||||||
Loss on foreign currency translation, net |
| — | |
| — | |
| — | |
| — | |
| (120) | |
| (120) | |
| — | |
| (120) | |||||||||||||||||||||||
Net loss (income) |
| — | |
| — | |
| — | |
| (322) | |
| — | |
| (322) | |
| 159 | |
| (163) | |||||||||||||||||||||||
Balance at June 30, 2019 |
| 28,333,561 | | $ | 3 | | $ | 44,180 | | $ | (28,190) | | $ | (2,590) | | $ | 13,403 | | $ | (378) | | $ | 13,025 |
See notes to the condensed consolidated financial statements.
5
THE ONE GROUP HOSPITALITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
|
|
|
|
|
|
| ||||||
|
| For the three months ended March 31, | ||||||||||
|
| 2020 |
| 2019 | ||||||||
| | | | | | | ||||||
| | For the six months ended June 30, | ||||||||||
|
| 2020 |
| 2019 | ||||||||
Operating activities: |
|
|
|
|
|
|
| |
|
| |
|
Net (loss) income |
| $ | (4,873) |
| $ | 769 | | $ | (8,123) | | $ | 606 |
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |
|
|
|
|
|
| |
|
| |
|
|
Depreciation and amortization |
|
| 2,440 |
|
| 942 | |
| 4,950 | |
| 1,946 |
Stock-based compensation |
|
| 338 |
|
| 181 | |
| 820 | |
| 637 |
Loss on early debt extinguishment | |
| — | |
| 437 | ||||||
Amortization of discount on warrants and debt issuance costs |
|
| 108 |
|
| 50 | |
| 232 | |
| 82 |
Deferred taxes |
|
| (125) |
|
| 10 | |
| (3,899) | |
| 26 |
Changes in operating assets and liabilities: |
|
|
|
|
|
| |
| | |
|
|
Accounts receivable |
|
| 5,092 |
|
| 1,147 | |
| 5,886 | |
| 471 |
Inventory |
|
| 568 |
|
| 161 | |
| 748 | |
| 39 |
Other current assets |
|
| (958) |
|
| (96) | |
| (423) | |
| 30 |
Due from related parties, net |
|
| (35) |
|
| (38) | ||||||
Due from related parties | |
| (35) | |
| (298) | ||||||
Security deposits |
|
| (32) |
|
| (18) | |
| 315 | |
| (18) |
Other assets |
|
| (807) |
|
| 8 | |
| (863) | |
| 11 |
Accounts payable |
|
| (859) |
|
| 270 | |
| (1,602) | |
| 705 |
Accrued expenses |
|
| (3,560) |
|
| (1,331) | |
| (2,534) | |
| (2,943) |
Operating lease liabilities and right-of-use assets |
|
| 140 |
|
| 321 | | | 538 | | | 450 |
Deferred revenue |
|
| (540) |
|
| 137 | |
| (937) | |
| (37) |
Net cash (used in) provided by operating activities |
|
| (3,103) |
|
| 2,513 | |
| (4,927) | |
| 2,144 |
| |
|
| |
|
| ||||||
Investing activities: |
|
|
|
|
|
| |
|
| |
|
|
Purchase of property and equipment |
|
| (791) |
|
| (2,060) | |
| (1,681) | |
| (2,917) |
Net cash used in investing activities |
|
| (791) |
|
| (2,060) | |
| (1,681) | |
| (2,917) |
| |
|
| |
|
| ||||||
Financing activities: |
|
|
|
|
|
| |
|
| |
|
|
Proceeds from CARES Act Loans | |
| 18,314 | |
| — | ||||||
Borrowings of long-term debt |
|
| — |
|
| — | |
| — | |
| 12,150 |
Repayments of long-term debt |
|
| (216) |
|
| (798) | | | (433) | | | (10,262) |
Repayments to related parties | | | — | | | (1,197) | ||||||
Debt issuance costs |
|
| (48) |
|
| — | | | (50) | | | (421) |
Exercise of stock options |
|
| 38 |
|
| — | |
| 38 | |
| — |
Net cash used in financing activities |
|
| (226) |
|
| (798) | ||||||
Tax-withholding obligation on stock based compensation | |
| (90) | |
| — | ||||||
Net cash provided by financing activities | |
| 17,779 | |
| 270 | ||||||
Effect of exchange rate changes on cash |
|
| (64) |
|
| (168) | |
| (55) | |
| (290) |
Net decrease in cash and cash equivalents |
|
| (4,184) |
|
| (513) | ||||||
Net increase (decrease) in cash and cash equivalents | |
| 11,116 | |
| (793) | ||||||
Cash and cash equivalents, beginning of year |
|
| 12,344 |
|
| 1,592 | |
| 12,344 | |
| 1,592 |
Cash and cash equivalents, end of year |
| $ | 8,160 |
| $ | 1,079 | | $ | 23,460 | | $ | 799 |
Supplemental disclosure of cash flow data: |
|
|
|
|
|
| |
|
| |
|
|
Interest paid |
| $ | 704 |
| $ | 235 | | $ | 1,770 | | $ | 483 |
Income taxes paid |
|
| 85 |
|
| 191 | |
| 106 | |
| 193 |
Non-cash amortization of debt issuance costs |
| $ | 108 |
| $ | 5 | ||||||
Non-cash property and equipment additions | | | 303 | | | — |
See notes to the condensed consolidated financial statements.
6
THE ONE GROUP HOSPITALITY, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Summary of Business and Significant Accounting Policies
Summary of Business
The ONE Group Hospitality, Inc. and its subsidiaries (collectively, the “Company”) is a global hospitality company that develops, owns and operates, manages and licenses upscale and polished casual, high-energy restaurants and lounges and provides turn-key food and beverage (“F&B”) services for hospitality venues including hotels, casinos and other high-end locations. Turn-key F&B services are food and beverage services that can be scaled, customized and implemented by the Company for the client at a particular hospitality venue and customized for the client.venue. The Company’s primary restaurant brands are STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse, and Kona Grill, a bar-centric grill concept featuring American favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere.
As of June 30, 2020, the Company owned, operated, managed or licensed 55 venues, including 20 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and 11 F&B venues including 10 in five hotels and casinos in the United States and Europe.
On October 4, 2019, the Company acquired substantially all of the assets of Kona Grill Inc. and its affiliates (“Kona Grill”), which iswas composed of 24 domestic restaurants. The Company purchased the assets for a contractual price of $25.0$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 intendscontinues 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 ourthe Company’s condensed consolidated financial statements from the date of acquisition.
AsThe following pro forma results of March 31, 2020,operations for the three and six months ended June 30, 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 owned, operated, managed or licensed 55 venues, including 20 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe andwould have attained had the Middle East and 11 F&B venues including six hotels and casinosacquisition 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 United States and Europe.future. Amounts are in thousands, except earnings per share data.
| | | | | | |
| | Three months ended | | Six months ended | ||
|
| June 30, 2019 |
| June 30, 2019 | ||
Total revenues | | $ | 49,866 | | $ | 97,096 |
Net (loss) income attributable to The ONE Group Hospitality, Inc. | | $ | (413) | | $ | 254 |
Net (loss) income attributable to The ONE Group Hospitality, Inc. per share: | | | | | | |
Basic net (loss) earnings per share | | $ | (0.01) | | $ | 0.01 |
Diluted net (loss) earnings per share | | $ | (0.01) | | $ | 0.01 |
Effects of COVID-19
In the first quarter of 2020, the negative effect of theThe novel coronavirus (“COVID-19”) onpandemic has significantly impacted the Company’s business, was significant. The Company experienced an initial decline in restaurant revenue that began in early March 2020 as business 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. Publicpublic concerns about the spread of COVID-19 continuescontinue 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.governments and temporary closure of several restaurants and the shift in operations to provide only take-out and delivery service. Starting in May 2020, state and local governments began easing restrictions on stay-at-home orders and certain Company restaurants were allowed to open for outdoor dining or in-person dining with seating capacity restrictions, which resulted in increased revenues in May and June compared to April 2020.
In response to these conditions, and out of concern for ourits customers and partners, the Company has temporarily closed several restaurantsimplemented enhanced safety measures and thesanitation procedures to allow for in-person dining at its restaurants. The Company has shifted operations at 30 of its restaurants to provide only take-outincurred $0.7 million and delivery service. In addition to the decline in restaurant revenue, the Company has incurred approximately $1.3$2.0 million of costs directly related to COVID-19 in the three and six months ended March 31,June 30, 2020, respectively, 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.closed, sanitation supplies and safety precautions taken to prevent the spread of COVID-19. The Company has also implemented measures to reduce its costs during the COVID-19 pandemic, including significant reductions inthe furlough
7
of employees, deferral of capital projects, and negotiations with suppliers and landlords regarding deferral or abatement of payments which could become significant.
Given the presentongoing uncertainty surrounding the global economy due toeffects of the COVID-19 pandemic, the Company cannot reasonably predict when its closed restaurants will re-open and open restaurants will be able to return to normal dining room operations. The Company expects that its results of operations will be materially and negatively affected by these actions inCOVID-19 for the second quarterremainder 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 condensed consolidated balance sheet as of December 31, 2019, which has been derived from audited financial statements, and the accompanying unaudited interim condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States (“GAAP”). Certain information and footnote disclosures normally included in annual audited financial statements have been omitted pursuant to SEC rules and regulations. These unaudited interim condensed consolidated financial
7
statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10‑K10-K for the year ended December 31, 2019.
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$0.4 million and $0.9 million of owned food, beverage and other expenses to owned restaurant cost of sales and $1.8 million and $3.6 million of owned food, beverage and other expenses to owned restaurant expenses on the accompanying condensed consolidated statements of operations and comprehensive (loss) income.income for the three and six months ended June 30, 2019, respectively. Certain reclassifications were also made to conform the prior period segment reporting to the current year segment presentation. Refer to Note 1513 – Segment Reporting for additional information regarding the Company’s reportable operating segments.
Recent Accounting Pronouncements
In December 2019,June 2020, the American Institute of Certified Public Accountants in conjunction with the Financial Accounting Standards Board (“FASB”) developed Technical Question and Answer (“TQA”) 3200.18, “Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program”, which is intended to provide clarification on how to account for loans received from the Paycheck Protection Program (“PPP”). TQA 3200.18 states that an entity may account for PPP loans under ASC 470, “Debt” or, if the entity is expected to meet PPP eligibility criteria and the PPP loan is expected to be forgiven, the entity may account for the loans under IAS 20, “Accounting for Government Grants and Disclosure of Government Assistance”. The Company has elected to account for PPP loan proceeds under ASC 470 as allowed by TQA 3200.18.
In December 2019, FASB issued Accounting Standard UpdatedStandards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” (“ASU 2019-12”) which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Accounting Standard Codification Topic 740, Income Taxes, and it clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for annual and interim periods beginning after December 15, 2020. The Company is evaluating the impact of the adoption of ASU 2019-12 on its financial statements but does not expect the adoption of ASU 2019-12 to be material.
In October 2018, the FASB issued ASU No. 2018‑17,2018-17, “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 adoption of ASU 2018-17 did not have a material impact on ourthe Company’s financial position, results of operations or cash flows.
8
In August 2018, the FASB issued ASU No. 2018‑15,2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350‑40)350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract” (“ASU 2018‑15”2018-15”). ASU 2018‑152018-15 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 2018‑152018-15 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. Entities can choose to adopt the new guidance prospectively or retrospectively. The adoption of ASU 2018-15 did not have a material impact on ourthe Company’s financial position, results of operations or cash flows.
In August 2018, the FASB issued ASU No. 2018‑13,2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018‑13”2018-13”). ASU 2018‑132018-13 eliminates, modifies and adds disclosure requirements for fair value measurements. The amendments in ASU 2018‑132018-13 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 ourthe Company’s disclosures of fair value measurement, which are included in Note 76 – Fair Value of Financial Instruments.
Note 2 – Business Combination
On October 4, 2019, the Company acquired substantially all of the assets of Kona Grill Inc. and its affiliates comprising 24 domestic restaurants. The Company purchased the assets for a contractual price of $25.0 million plus $1.5 million of consideration paid primarily for the apportionment of rent and utilities. The Company also assumed approximately $7.7 million in current liabilities. The Company believes that Kona Grill is complementary to the Company’s business and will enable the Company to capture market share in the Vibe Dining segment.
8
Kona Grill Inc. and its affiliates were purchased pursuant to a Chapter 11 bankruptcy. As a result, the Company recognized a bargain purchase gain of approximately $11.0 million in the consolidated statements of operation and comprehensive (loss) income for the year ended December 31, 2019, which represents the excess of the aggregate fair value of net assets acquired and liabilities assumed over the purchase price.
The purchase accounting is preliminary and represents estimates and assumptions that are subject to change during the measurement period (up to one year from the acquisition date). The following table summarizes the preliminary fair value of identified assets acquired and liabilities assumed as of the acquisition date (amounts in thousands):
|
|
|
|
Net assets acquired: |
|
|
|
Cash |
| $ | 450 |
Current assets, excluding cash |
|
| 2,830 |
Property and equipment |
|
| 31,781 |
Operating lease right-of-use assets |
|
| 42,398 |
Intangible assets |
|
| 17,400 |
Other assets |
|
| 692 |
Current liabilities |
|
| (7,690) |
Deferred tax liability |
|
| (4,044) |
Operating lease liabilities |
|
| (46,364) |
Total net assets acquired |
| $ | 37,453 |
|
|
|
|
Purchase consideration: |
|
|
|
Contractual purchase price |
|
| 25,000 |
Apportionment of rent and utilities |
|
| 775 |
Assumption of real estate lease consultant contract |
|
| 465 |
Escrow deposit |
|
| 250 |
Consideration paid |
| $ | 26,490 |
|
|
|
|
Bargain purchase gain attributable to Kona Grill acquisition |
| $ | 10,963 |
Pro Forma Results of Operations (unaudited)
The following pro forma results of operations for the three months ended March 31, 2019 have been prepared as though the acquisition occurred as of January 1, 2019. The pro forma financial information is not indicative of the results of operations that the Company would have attained had the acquisition occurred at the beginning of the periods presented, nor is the pro forma financial information indicative of the results of operations that may occur in the future. Amounts are in thousands, except earnings per share related data.
|
|
|
|
|
| Three months ended | |
|
| March 31, 2019 | |
Total revenues |
| $ | 47,230 |
Net income attributable to The ONE Group Hospitality, Inc. |
| $ | 667 |
Net income attributable to The ONE Group Hospitality, Inc. per share: |
|
|
|
Basic net income per share |
| $ | 0.02 |
Diluted net income per share |
| $ | 0.02 |
9
Note 32 – Property and Equipment, net
Property and equipment, net consist of the following (in thousands):
|
|
|
|
|
|
| ||||||
|
| March 31, |
| December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
| | | | | | | ||||||
| | June 30, | | December 31, | ||||||||
| | 2020 | | 2019 | ||||||||
Furniture, fixtures and equipment |
| $ | 20,907 |
| $ | 20,512 | | $ | 20,957 | | $ | 20,512 |
Leasehold improvements |
|
| 70,110 |
|
| 69,925 | |
| 70,742 | |
| 69,925 |
Less: accumulated depreciation and amortization |
|
| (24,218) |
|
| (21,997) | ||||||
Less: accumulated depreciation | |
| (26,511) | |
| (21,997) | ||||||
Subtotal |
|
| 66,799 |
|
| 68,440 | |
| 65,188 | |
| 68,440 |
Construction in progress |
|
| 438 |
|
| 97 | |
| 739 | |
| 97 |
Restaurant smallwares |
|
| 1,946 |
|
| 1,946 | |
| 1,946 | |
| 1,946 |
Total |
| $ | 69,183 |
| $ | 70,483 | | $ | 67,873 | | $ | 70,483 |
Depreciation and amortization related to property and equipment amounted to $2.2$2.3 million and $0.9$1.0 million for the three months ended March 31,June 30, 2020 and 2019, respectively, and $4.5 million and $1.9 million for the six months ended June 30, 2020 and 2019, respectively. The Company does not depreciate construction in progress, assets not yet put into service or restaurant supplies.smallwares.
Note 43 – Intangibles, net
Intangibles, net consists of the following (in thousands):
|
|
|
|
|
|
| ||||||
|
| March 31, |
| December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
| | | | | | | ||||||
| | June 30, | | December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
Kona Grill tradename |
| $ | 17,400 |
| $ | 17,400 | | $ | 17,400 | | $ | 17,400 |
Less: accumulated amortization |
|
| (435) |
|
| (217) | |
| (652) | |
| (217) |
Total intangibles, net |
| $ | 16,965 |
| $ | 17,183 | | $ | 16,748 | | $ | 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 and $0.4 million for the three and six months ending March 31,June 30, 2020. The Company’s estimated aggregate amortization expense for each of the five succeeding fiscal years is approximately $0.9 million annually.
9
Note 54 – Accrued Expenses
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
| ||||||
|
| March 31, |
| December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
| | | | | | | ||||||
| | June 30, | | December 31, | ||||||||
| | 2020 | | 2019 | ||||||||
Payroll and related |
| $ | 2,138 |
| $ | 4,519 | | $ | 3,233 |
| $ | 4,519 |
Variable rent, including disputed rent amounts |
|
| 1,770 |
|
| 1,796 | ||||||
Amounts due to landlords, including disputed rent amounts | | | 1,955 | | | 1,956 | ||||||
VAT, sales and other taxes | | | 659 |
| | 1,488 | ||||||
Legal, professional and other services |
|
| 1,081 |
|
| 1,103 | |
| 469 | | | 1,103 |
VAT, sales and other taxes |
|
| 689 |
|
| 1,488 | ||||||
Income taxes |
|
| — |
|
| 547 | ||||||
Insurance |
|
| 118 |
|
| 100 | |
| 143 | |
| 100 |
Income taxes and related | | | 506 | | | 547 | ||||||
Other |
|
| 1,846 |
|
| 1,645 | |
| 1,634 | |
| 1,485 |
Total |
| $ | 7,642 |
| $ | 11,198 | | $ | 8,599 | | $ | 11,198 |
10
Note 65 – Long-Term Debt and CARES Act Loans
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
| ||||||
|
| March 31, |
| December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
| | | | | | | ||||||
| | June 30, | | December 31, | ||||||||
| | 2020 | | 2019 | ||||||||
Term loan agreements |
| $ | 47,760 |
| $ | 47,880 | | $ | 47,640 | | $ | 47,880 |
Revolving credit facility |
|
| — |
|
| — | | | — | | | — |
Equipment financing agreements |
|
| 284 |
|
| 380 | |
| 187 | |
| 380 |
Total long-term debt |
|
| 48,044 |
|
| 48,260 | |
| 47,827 | |
| 48,260 |
Less: current portion of long-term debt |
|
| (696) |
|
| (749) | |
| (640) | |
| (749) |
Less: debt issuance costs |
|
| (2,225) |
|
| (2,285) | |
| (2,103) | |
| (2,285) |
Total long-term debt, net of current portion |
| $ | 45,123 |
| $ | 45,226 | | $ | 45,084 | | $ | 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 $1.1$1.0 million and $0.2 million for the three months ended March 31,June 30, 2020 and 2019 and $2.1 million and $0.4 million for the six months ended June 30, 2020 and 2019, respectively.
As of March 31,June 30, 2020, the Company had $1.3 million in standby letters of credit outstanding for certain restaurants and $10.7 million available in its revolving credit facility.facility, subect to certain conditions. As of March 31, 2020 and December 31, 2019, the Company had $0.4 million of cash collateralized letters of credit, which are recorded as a component of security deposits on the condensed consolidated balance sheet.
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 the Kona Grill restaurant performance which includes results before the acquisition date.
TheOn May 4, 2020, Goldman Sachs Bank USA (“GSB”), as administrative agent, collateral agent and lead arranger under the Credit Agreement, contains several(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 8, 2020, GSB and the Company and certain of its subsidiaries entered into an amendment to the Credit Agreement that:
10
● | 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 remainder of 2020 (from $1,500,000). |
A summary of the financial covenants includingunder the following:Credit Agreement, as amended, is as follows:
| A minimum consolidated fixed charge coverage ratio of (i) |
| A maximum consolidated leverage ratio of (i) |
| 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 (i) $4,000,000 for the remainder of 2020, and (ii) $1,500,000 at any |
The Company’s ability to borrow under its revolving credit facility is dependent on several factors. The Company’s total borrowings cannot exceed a leverage incurrence multiple of (i) 2.50 to 1.00 as of the end of any fiscal quarters ending on or prior to June 30, 2020, (ii) 2.25 to 1.00 as of the fiscal quarters ending September 30, 2020 and December 31, 2020, (iii) 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 cash and cash equivalents cannot exceed $4,000,000.
The Goldman Sachs Credit Agreement has several borrowing and interest rate options, including the following: (a) a LIBOR rate (or a comparable successor rate) subject to a 1.75% floorfloor; or (b) a base rate equal to the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50%, (iii) the LIBOR rate for a one-month period plus 1.00%, or (iv) 4.75%. Loans under the Goldman Sachs Credit
11
Agreement bear interest at a rate per annum using the applicable indices plus a varying interest rate margin of between 5.75% and 6.75% (for LIBOR rate loans) and 4.75% and 5.75% (for base rate loans). The Company’s weighted average interest rate as of June 30, 2020 and December 31, 2019 was 8.49% and 8.52%, respectively.
The Goldman Sachs Credit Agreement contains customary representations, warranties and conditions to borrowing including customary affirmative and negative covenants, which include covenants that limit or restrict the Company’s ability to incur indebtedness and other obligations, grant liens to secure obligations, make investments, merge or consolidate, alter the organizational structure of the Company and its subsidiaries, and dispose of assets outside the ordinary course of business, in each case subject to customary exceptions for credit facilities of this size and type.type.
The Company and certain operating subsidiaries of the Company guarantee the obligations under the Goldman Sachs Credit Agreement, which also are secured by liens on substantially all of the assets of the Company and its subsidiaries.
The Company has incurred approximately $2.5 million of debt issuance costs related to the Goldman Sachs Credit Agreement, which were capitalized and are recorded as a direct deduction to the long-term debt, net of current portion, on the condensed consolidated balance sheets. As of March 31,June 30, 2020, the Company was in compliance with the covenants required by the Goldman Sachs Credit Agreement. Refer to Note 16 for further discussion.
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”).Repayment of the CARES Act Loans is guaranteed by the SBA. The ONE Group, LLC received a loan of $9.8 million related to the operations of STK restaurants, and Kona Grill Acquisition, LLC received a loan of $8.5 million related to the operation of Kona Grill restaurants.
11
The CARES Act Loans are scheduled to mature on April 28, 2022 and have a 1.00% interest rate and are subject to the terms and conditions applicable to PPP loans. Among other terms, BBVA USA may declare a default of the CARES Act Loans if the SBA disputes the validity of the guaranty of indebtedness, if a material adverse change occurs in the Company’s financial condition, or if BBVA USA believes the prospect of repayment of the CARES Act Loans or performance of obligations under the promissory notes is impaired. On an event of default, BBVA USA may declare principal and unpaid interest immediately due and payable, and it may charge default interest of 10%.
The CARES Act Loans are eligible for forgiveness if the proceeds are used for qualified purposes within a specified period and if at least 60% is spent on payroll costs. The Company is using the funds in accordance with the CARES Act and SBA regulations, and these funds have supported the re-opening of in person dining and the return of approximately 3,000 furloughed employees to work. At this time, the Company anticipates forgiveness of the entire amount of the CARES Act Loans; however, no assurance can be provided that the Company will obtain forgiveness of the CARES Act Loans in whole or in part. Therefore, the Company has elected to classify the entire principal amount of the CARES Act Loans as long-term debt on the condensed consolidated balance sheet as of June 30, 2020. As of June 30, 2020, there was $10.2 million in remaining funds available to be used for qualified purposes.
Equipment Financing Agreements
On June 5, 2015 and August 16, 2016, the Company entered into financing agreements with Sterling National Bank for $1.0 million and $0.7 million, respectively, to purchase equipment for the STKs in Orlando, Chicago, San Diego, and Denver. Each of these financing agreements have five- year terms and bear interest at a rate of 5% per annum, payable in equal monthly installments.
Note 76 – Fair Value of Financial Instruments
Cash and cash equivalents, accounts receivable, inventory, accounts payable and accrued expenses are carried at cost, which approximates fair value due to their short maturities. Long-lived assets are measured and disclosed at fair value on a nonrecurring basis if an impairment is identified. There were no long-lived assets measured at fair value as of March 31,June 30, 2020.
The Company’s long-term debt, including the current portion, is carried at cost on the condensed consolidated balance sheets. Fair value of long-term debt, including the current portion, is estimated based on Level 2 inputs,, except the amount outstanding on the revolving credit facility for which the carrying value approximates fair value. Fair value is determined by discounting future cash flows using interest rates available for issues with similar terms and maturities.
The estimated fair values of long-term debt, for which carrying values do not approximate fair value, are as follows (in thousands):
|
|
|
|
|
|
|
|
| March 31, |
| December 31, | ||
|
| 2020 |
| 2019 | ||
Carrying amount of long-term debt, including current portion (1) |
| $ | 48,044 |
| $ | 48,260 |
Fair value of long-term debt, including current portion |
| $ | 37,454 |
| $ | 35,471 |
|
|
maturities.
Note 87 – Nonconsolidated Variable Interest Entities and Related Party TransactionsInvestments in Bagatelle NY
As of March 31,June 30, 2020 and December 31, 2019, the Company owned interests in the following companies, which directly or indirectly operate a restaurant:
| 31.24% interest in Bagatelle NY LA Investors, LLC (“Bagatelle Investors”) |
| 51.13% aggregate interest, held directly and indirectly through other entities, in Bagatelle Little West 12th, LLC (“Bagatelle NY”) |
Bagatelle Investors is a holding company that has an interest in Bagatelle NY. The Company records its retained interests in Bagatelle Investors and Bagatelle NY as cost method investments as the Company has determined that it does not have the ability to exercise significant influence over its investees, Bagatelle Investors and Bagatelle NY. As of March 31,June 30, 2020 and December 31, 2019, the Company has zero carrying value in these cost method investments.
12
Additionally, the Company has a management agreement with Bagatelle NY. Under this agreement, the Company did not record management fee revenue for the three months ended June 30, 2020 and recorded less than $0.1$0.1 million of management fee revenue in eachthe six months ended June 30, 2020. The Company recorded $0.2 million of management fee revenue in the three months ended March 31, 2020June 30, 2019, and 2019, respectively.$0.3 million for the six months ended June 30, 2019. The Company also receives rental income from Bagatelle NY for restaurant space that it subleases to Bagatelle NY. Rental income of approximately $0.1$0.2 million was recorded from this entity for each of the three months ended March 31,June 30, 2020 and 2019,, respectively, and $0.3 million was recorded from this entity for each of the six months ended June 30, 2020 and 2019, respectively.
Net receivables from the Bagatelle Investors and Bagatelle NY included in due from related parties net were approximately $0.4 million and $0.3 million as of March 31,June 30, 2020 and December 31, 2019, respectively. These receivables represent the Company’s maximum exposure to loss.
12
Note 98 – Income taxes
The Company’s effective income tax rate was 32.4% for the six months ended June 30, 2020 compared to 11.8% for the threesix months ended March 31, 2020 compared to 11.1% for the three months ended March 31,June 30, 2019. The Company’s projected annual effective tax rate differs from the statutory U.S. tax rate of 21% primarily due to the following: (i) availability of U.S. net operating loss carryforwards, resulting in no federal income taxes;tax credits for FICA taxes on certain employees’ tips (ii) taxes owed in foreign jurisdictions such as the United Kingdom, Canada and Italy; and, (iii) taxes owed in state and local jurisdictions.
The CARES Act includes provisions allowing for the carryback of net operating losses generated for specific periods and technical amendments regarding the expensing of qualified improvement property. The CARES Act also allows for the deferral of the employer-paid portion of social security taxes, which the Company has elected to defer. The Company continues to evaluate the tax-related provisions under the CARES Act.
The Company is subject to income taxes in the U.S. federal jurisdiction, and the various states and local jurisdictions in which it operates. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In the normal course of business, the Company is subject to examination by the federal, state, local and foreign taxing authorities.
Note 109 – Revenue from contracts with customers
The following table provides information about contract receivables and liabilities from contracts with customers, which include deferred license revenue, deferred gift card revenue and the Konavore rewards program (in thousands):
|
|
|
|
|
|
| ||||||
|
| March 31, |
| December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
| | | | | | | ||||||
|
| June 30, |
| December 31, | ||||||||
| | 2020 | | 2019 | ||||||||
Receivables (1) |
| $ | 125 |
| $ | 250 | | $ | 125 | | $ | 250 |
Deferred license revenue (2) |
| $ | 1,315 |
| $ | 1,368 | | $ | 1,266 | | $ | 1,368 |
Deferred gift card and gift certificate revenue (3) |
| $ | 2,594 |
| $ | 3,210 | | $ | 2,469 | | $ | 3,210 |
Konavore rewards program (4) |
| $ | 86 |
| $ | 84 | | $ | 89 | | $ | 84 |
(1) |
| Receivables are included in accounts receivable on the condensed consolidated balance sheets. |
(2) |
| Includes the current and long-term portion of deferred license revenue. |
(3) |
| Deferred gift card revenue is included in deferred gift card revenue and other on the condensed consolidated balance sheets. |
(4) |
| Konavore rewards program is included in accrued expenses on the condensed consolidated balance sheets. |
Significant changes in deferred license revenue and deferred gift card revenue for the threesix months ended March 31,June 30, 2020 and 2019 are as follows (in thousands):
|
|
|
|
|
|
| ||||||
|
| March 31, |
| March 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
| | | | | | | ||||||
|
| June 30, |
| June 30, | ||||||||
| | 2020 | | 2019 | ||||||||
Revenue recognized from deferred license revenue |
| $ | 52 |
| $ | 55 | | $ | 103 | | $ | 100 |
Revenue recognized from deferred gift card revenue |
| $ | 746 |
| $ | 283 | | $ | 866 | | $ | 566 |
As of March 31,June 30, 2020, the estimated deferred license revenue to be recognized in the future related to performance obligations that are unsatisfied as of March 31,June 30, 2020 were as follows for each year ending (in thousands):
|
|
|
| |||
2020, nine months remaining |
| $ | 154 | |||
| | | | |||
2020, six months remaining |
| $ | 103 | |||
2021 |
|
| 206 |
| | 206 |
2022 |
|
| 181 |
| | 181 |
2023 |
|
| 169 |
| | 169 |
2024 |
|
| 134 |
| | 134 |
Thereafter |
|
| 471 |
| | 473 |
Total future estimated deferred license revenue |
| $ | 1,315 | | $ | 1,266 |
13
Note 1110 – Leases
The components of lease expense for the period were as follows (in thousands):
|
|
|
|
|
|
| ||||||||||
|
| March 31, |
|
| March 31, |
| ||||||||||
|
| 2020 |
|
| 2019 |
| ||||||||||
| | | | | | | ||||||||||
| | June 30, |
| | June 30, |
| ||||||||||
| | 2020 |
| | 2019 |
| ||||||||||
Lease cost |
|
|
|
|
|
| | | | | | | ||||
Operating lease cost |
| $ | 3,297 |
|
| $ | 1,726 |
|
| $ | 6,605 | |
| $ | 3,372 | |
Variable lease cost |
| 1,156 |
|
| 674 |
| | (536) | | | 1,297 | | ||||
Short-term lease cost |
| 128 |
|
| 108 |
| | 173 | | | 214 | | ||||
Sublease income |
|
| (135) |
|
|
| (203) |
| | | (269) | | | | (474) | |
Total lease cost |
| $ | 4,446 |
|
| $ | 2,305 |
|
| $ | 5,973 | |
| $ | 4,409 | |
|
|
|
|
|
|
| ||||||||||
| | | | | | | ||||||||||
Weighted average remaining lease term – operating leases |
| 13 years |
|
| 14 years |
| | 13 years | | | 14 years | | ||||
Weighted average discount rate – operating leases |
| 8.49 | % |
| 8.25 | % | | 8.49 | % | | 8.25 | % |
Due to the negative effects of COVID-19, the Company implemented measures to reduce its costs, including negotiations with landlords regarding rent concessions. The Company is in ongoing discussions with landlords regarding rent obligations, including deferrals, abatements, and/or restructuring of rent. As the rent concessions received and currently being contemplated do not result in a significant increase in cash payments, the Company has elected to account for these concessions as a variable lease payment in accordance with ASC Topic 842. The Company’s right-of-use assets and operating lease liabilities have not been remeasured for lease concessions received.
The Company subleases one restaurant space and in 2019 subleased office space where it did not use the entire space for its operations. For the three months ended March 31,June 30, 2020 and 2019, sublease income was $0.1$0.2 million and $0.2$0.3 million, respectively, of which $0.1$0.2 million and $0.1$0.2 million, respectively, was from a related party, Bagatelle NY. For the six months ended June 30, 2020 and 2019, sublease income was $0.3 million and $0.5 million, respectively, of which $0.3 million and $0.3 million, respectively, was from Bagatelle NY. Refer to Note 87 for details on transactions with this related party.Bagatelle NY.
The Company has entered into an operating lease for one future restaurant in Bellevue, Washington that hashad not yet commenced as of March 31,June 30, 2020. The aggregate future commitment related to this lease totals $4.8 million. The Company expects this lease, to commence within the next twelve months andwhich will have a lease term of 11 years.years, to commence within the next twelve months.
Supplemental cash flow information related to leases for the period was as follows (in thousands):
|
|
|
|
| ||||||||
|
| March 31, |
| March 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
| | | | | ||||||||
| | June 30, | | June 30, | ||||||||
| | 2020 | | 2019 | ||||||||
Cash paid for amounts included in the measurement of operating lease liabilities |
| $ | 3,161 |
| $ | 1,718 |
| $ | 4,081 |
| $ | 3,456 |
Right-of-use assets obtained in exchange for operating lease obligations |
| $ | 288 |
| $ | 281 |
| $ | 288 |
| $ | 281 |
As of March 31,June 30, 2020, maturities of the Company’s operating lease liabilities are as follows (in thousands):
|
|
| ||||
2020, nine months remaining |
| $ | 9,775 | |||
| | | ||||
2020, six months remaining | | $ | 6,535 | |||
2021 |
| 12,843 | | 12,843 | ||
2022 |
| 12,801 | | 12,801 | ||
2023 |
| 13,087 | | 13,091 | ||
2024 |
| 12,486 | | 12,486 | ||
Thereafter |
|
| 115,862 | | | 115,863 |
Total lease payments |
| 176,854 | | 173,619 | ||
Less: imputed interest |
|
| (74,908) | | | (72,767) |
Present value of operating lease liabilities |
| $ | 101,946 |
| $ | 100,852 |
For the ninesix 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.
14
Note 1211 – (Loss) earnings per share
Basic (loss) earnings per share is computed using the weighted average number of common shares outstanding during the period and income available to common stockholders. Diluted (loss) earnings per share is computed using the weighted average number of common shares outstanding during the period plus the dilutive effect of all potential shares of common stock including common stock issuable pursuant to stock options, warrants, and restricted stock units.
14
For the three and six months ended March 31,June 30, 2020 and 2019, the (loss) earnings per share was calculated as follows (in thousands, except earnings per share and related share data):
|
|
|
|
|
|
| ||||||||||||
|
| Three months ended March 31, | ||||||||||||||||
|
| 2020 |
| 2019 | ||||||||||||||
| | | | | | | | | | | | | ||||||
| | Three months ended June 30, | | Six months ended June 30, | ||||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. |
| $ | (4,599) |
| $ | 854 | | $ | (2,872) | | $ | (322) | | $ | (7,471) | | $ | 532 |
|
|
|
|
|
|
| ||||||||||||
| |
|
| |
|
| |
|
| |
| | ||||||
Basic weighted average shares outstanding |
|
| 28,636,325 |
|
| 28,314,820 | |
| 28,907,568 | |
| 28,432,510 | |
| 28,778,544 | |
| 28,373,974 |
Dilutive effect of stock options, warrants and restricted share units |
|
| — |
|
| 996,936 | |
| — | |
| — | |
| — | |
| 1,082,790 |
Diluted weighted average shares outstanding |
|
| 28,636,325 |
|
| 29,311,756 | |
| 28,907,568 | |
| 28,432,510 | |
| 28,778,544 | |
| 29,456,764 |
|
|
|
|
|
|
| ||||||||||||
Net (loss) income available to common stockholders per share - Basic |
| $ | (0.16) |
| $ | 0.03 | ||||||||||||
Net (loss) income available to common stockholders per share - Diluted |
| $ | (0.16) |
| $ | 0.03 | ||||||||||||
| |
|
| |
|
| |
|
| |
|
| ||||||
Net (loss) earnings available to common stockholders per share - Basic | | $ | (0.10) | |
| (0.01) | | $ | (0.26) | | $ | 0.02 | ||||||
Net (loss) earnings available to common stockholders per share - Diluted | | $ | (0.10) | | $ | (0.01) | | $ | (0.26) | | $ | 0.02 |
For the threesix months ended March 31,June 30, 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, 0.91.4 million and 1.0 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.share, respectively.
Note 13 – Stockholders’ Equity
Significant changes in stockholders’ equity for the three months ended March 31, 2020 and 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
| ||
|
|
|
|
| Additional |
|
|
|
| other |
|
|
|
|
|
| ||
|
| Common |
| paid-in |
| Accumulated |
| comprehensive |
| Noncontrolling |
|
|
| |||||
|
| Stock |
| capital |
| deficit |
| loss |
| interests |
| Total | ||||||
Balance at December 31, 2019 |
| $ | 3 |
| $ | 44,853 |
| $ | (7,891) |
| $ | (2,651) |
| $ | (402) |
| $ | 33,912 |
Stock-based compensation, net of tax withholding |
|
| — |
|
| 338 |
|
| — |
|
| — |
|
| — |
|
| 338 |
Exercise of stock options |
|
| — |
|
| 38 |
|
| — |
|
| — |
|
| — |
|
| 38 |
Vesting of restricted shares |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Loss on foreign currency translation, net |
|
| — |
|
| — |
|
| — |
|
| (44) |
|
| — |
|
| (44) |
Net loss |
|
| — |
|
| — |
|
| (4,599) |
|
| — |
|
| (274) |
|
| (4,873) |
Balance at March 31, 2020 |
| $ | 3 |
| $ | 45,229 |
| $ | (12,490) |
| $ | (2,695) |
| $ | (676) |
| $ | 29,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
| ||
|
|
|
|
| Additional |
|
|
|
| other |
|
|
|
|
|
| ||
|
| Common |
| paid-in |
| Accumulated |
| comprehensive |
| Noncontrolling |
|
|
| |||||
|
| Stock |
| capital |
| deficit |
| loss |
| interests |
| Total | ||||||
Balance at December 31, 2018 |
| $ | 3 |
| $ | 43,543 |
| $ | (28,722) |
| $ | (2,310) |
| $ | (452) |
| $ | 12,062 |
Stock-based compensation, net of tax withholding |
|
| — |
|
| 181 |
|
| — |
|
| — |
|
| — |
|
| 181 |
Loss on foreign currency translation, net |
|
| — |
|
| — |
|
| — |
|
| (160) |
|
| — |
|
| (160) |
Net income (loss) |
|
| — |
|
| — |
|
| 854 |
|
| — |
|
| (85) |
|
| 769 |
Balance at March 31, 2019 |
| $ | 3 |
| $ | 43,724 |
| $ | (27,868) |
| $ | (2,470) |
| $ | (537) |
| $ | 12,852 |
Note 1412 – Stock-Based Compensation
As of March 31,June 30, 2020, the Company had 1,301,3571,390,326 remaining shares available for issuance under the 2019 Equity Incentive Plan (“2019 Equity Plan”).
Stock-based compensation cost for the three months ended March 31,June 30, 2020 and 2019 was $0.3$0.5 million and $0.2$0.5 million, respectively, and $0.8 million and $0.6 million for the six months ended June 30, 2020 and 2019, respectively. Stock-based compensation is included in general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss) income.. Included in stock-based compensation cost was $0.1 million and $0.2 million of unrestricted stock granted to directors for the three and six months ended March 31, 2020.June 30, 2020, respectively. Such grants were awarded consistent with the Board’s compensation practices.
15
Stock Option Activity
Changes in outstanding stock options during the threesix months ended March 31,June 30, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
|
|
|
|
| Weighted |
|
|
| |||||||||||
|
|
|
| Weighted |
| average |
| Intrinsic | ||||||||||||
|
|
|
| average exercise |
| remaining |
| value | ||||||||||||
|
| Shares |
| price |
| contractual life |
| (thousands) | ||||||||||||
| | | | | | | | | | | ||||||||||
| | | | | | 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 |
| 1,806,508 | | $ | 3.37 |
| 5.87 years | | $ | 1,428 |
Exercisable at December 31, 2019 |
| 1,270,508 |
| $ | 3.93 |
| 5.10 years |
| $ | 666 |
| 1,270,508 | | $ | 3.93 |
| 5.10 years | | $ | 665 |
Exercised |
| (18,000) |
|
| 2.13 |
|
|
|
|
|
| (18,000) | |
| 2.13 |
|
| |
|
|
Cancelled, expired or forfeited |
| (24,000) |
|
| 4.85 |
|
|
|
|
|
| (81,500) | |
| 3.75 |
|
| |
|
|
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 |
| $ | — | ||||||||||
Outstanding at June 30, 2020 |
| 1,707,008 | | $ | 3.37 |
| 5.49 years | | $ | 63 | ||||||||||
Exercisable at June 30, 2020 |
| 1,343,675 | | $ | 3.73 |
| 5.02 years | | $ | 42 |
15
A summary of the status of the Company’s non-vested stock options as of December 31, 2019 and March 31,June 30, 2020 and changes during the threesix months then ended, is presented below:
|
|
|
|
|
| |||||
|
|
|
| Weighted average | ||||||
|
| Shares |
| grant date fair value | ||||||
| | | | | | |||||
| | | | Weighted average | ||||||
|
| Shares |
| grant date fair value | ||||||
Non-vested stock options at December 31, 2019 |
| 536,000 |
| $ | 0.87 |
| 536,000 | | $ | 0.87 |
Vested |
| (62,667) |
|
| 0.89 |
| (172,667) | |
| 0.88 |
Non-vested stock options at March 31, 2020 |
| 473,333 |
| $ | 0.87 | |||||
Non-vested stock options at June 30, 2020 |
| 363,333 | | $ | 0.86 |
The fair value of options that vested in the threesix months ended March 31,June 30, 2020 were less than $0.1$0.2 million. As of March 31,June 30, 2020, there are 579,402 milestone-based options 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,June 30, 2020, there is approximately $0.3 million of total unrecognized compensation cost related to non-vested awards, which will be recognized over a weighted-average period of 2.52.3 years.
Restricted Stock Unit Activity
The Company issues restricted stock units (“RSUs”) under the 2019 Equity Plan. The fair value of these RSUs is determined based upon the closing fair market value of the Company’s common stock on the grant date.
A summary of the status of RSUs and changes during the threesix months ended March 31,June 30, 2020 is presented below:
|
|
|
|
|
| |||||
|
|
|
| Weighted average | ||||||
|
| Shares |
| grant date fair value | ||||||
| | | | | | |||||
| | | | Weighted average | ||||||
|
| Shares |
| grant date fair value | ||||||
Non-vested RSUs at December 31, 2019 |
| 955,011 |
| $ | 2.69 |
| 955,011 | | $ | 2.69 |
Granted |
| 1,240,599 |
|
| 1.19 |
| 1,240,599 | |
| 1.19 |
Vested |
| (116,644) |
|
| 2.97 |
| (271,894) | |
| 2.78 |
Cancelled, expired or forfeited |
| (4,000) |
|
| 3.25 |
| (32,566) | |
| 2.66 |
Non-vested RSUs at March 31, 2020 |
| 2,074,966 |
| $ | 1.77 | |||||
Non-vested RSUs at June 30, 2020 |
| 1,891,150 | | $ | 1.69 |
As of March 31,June 30, 2020, 150,000 RSUs subject to performance-based vesting were still outstanding, and there is approximately $0.4 million of unrecognized compensation cost related to these milestone-based options.awards. As of March 31,June 30, 2020, the Company had approximately $2.9$2.5 million of total unrecognized compensation costs related to RSUs, which will be recognized over a weighted average period of 2.52.4 years.
16
Note 1513 – Segment Reporting
In the fourth quarter of 2019, in conjunction with the Kona Grill acquisition, the Company implemented certain organizational changes, including the reorganization of ourthe Company’s internal reporting structure to better facilitate ourits strategy for growth and operational efficiency. As a result of these organizational changes, the Company has identified its reportable operating segments as follows:
| STK. The STK segment consists of the results of operations from STK restaurant locations, competing in the full-service dining industry, as well as management, license and incentive fee revenue generated from the STK brand and operations of STK restaurant locations. |
| Kona Grill. The Kona Grill segment includes the results of operations of Kona Grill restaurant locations. |
| ONE Hospitality. The ONE Hospitality segment is composed of the management, license and incentive fee revenue and results of operations generated from the Company’s other brands and venue concepts, which include ANGEL, 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, COVID-19 related expenses 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. |
16
The Company’s Chief Executive Officer, who is the Company’s Chief Operating Decision Maker, manages the business and allocates resources via a combination of restaurant sales reports and operating segment profit information, defined as revenues less operating expenses, related to the Company’s four operating segments.
Certain financial information relating to the three and six months ended March 31,June 30, 2020 and 2019 for each segment is provided below (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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
| | | | | | | | | | | | | | | | |||||||||||||||
|
| STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | ||||||||||||||||||||
For the three months ended June 30, 2020 | | | | | | | | | | | | | | | | |||||||||||||||
Total revenues |
| $ | 17,383 |
| $ | 20,657 |
| $ | 2,679 |
| $ | — |
| $ | 40,719 |
| $ | 4,081 |
| $ | 12,380 |
| $ | 146 |
| $ | 57 | | $ | 16,664 |
Operating income (loss) |
|
| 1,543 |
|
| 820 |
|
| 1,820 |
|
| (8,534) |
|
| (4,351) | | $ | (764) | | $ | 1,103 | | $ | 72 | | $ | (5,694) | | $ | (5,283) |
Capital asset additions |
| $ | 335 |
| $ | 410 |
| $ | 8 |
| $ | 38 |
| $ | 791 | | $ | 193 | | $ | 333 | | $ | 169 | | $ | 195 | | $ | 890 |
As of March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
For the six months ended June 30, 2020 | | | | | | | | | | | | | | | | |||||||||||||||
Total revenues |
| $ | 21,464 |
| $ | 33,037 |
| $ | 2,825 |
| $ | 57 | | $ | 57,383 | |||||||||||||||
Operating income (loss) | | $ | 779 | | $ | 1,923 | | $ | 1,894 | | $ | (14,230) | | $ | (9,634) | |||||||||||||||
Capital asset additions | | $ | 528 | | $ | 743 | | $ | 177 | | $ | 233 | | $ | 1,681 | |||||||||||||||
As of June 30, 2020 | | | | | | | | | | | | | | | | |||||||||||||||
Total assets |
| $ | 79,512 |
| $ | 88,199 |
| $ | 6,116 |
| $ | 22,354 |
| $ | 196,181 | | $ | 74,944 | | $ | 93,790 | | $ | 5,601 | | $ | 35,822 | | $ | 210,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
|
| STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | ||||||||||||||||||||
For the three months ended March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
| | | | | | | | | | | | | | | | |||||||||||||||
| | STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | ||||||||||||||||||||
For the three months ended June 30, 2019 | | | | | | | | | | | | | | | | |||||||||||||||
Total revenues | | $ | 20,067 | | $ | — | | $ | 3,517 | | $ | 15 | | $ | 23,599 | |||||||||||||||
Operating income (loss) | | $ | 2,071 | | $ | — | | $ | 2,495 | | $ | (4,089) | | $ | 477 | |||||||||||||||
Capital asset additions | | $ | 784 | | $ | — | | $ | 2 | | $ | 71 | | $ | 857 | |||||||||||||||
For the six months ended June 30, 2019 | | | | | | | | | | | | | | | | |||||||||||||||
Total revenues |
| $ | 19,245 |
| $ | — |
| $ | 3,060 |
| $ | 471 |
| $ | 22,776 | | $ | 39,311 | | $ | — | | $ | 6,578 | | $ | 486 | | $ | 46,375 |
Operating income (loss) |
|
| 2,668 |
|
| — |
|
| 2,250 |
|
| (3,784) |
|
| 1,134 | | $ | 4,739 | | $ | — | | $ | 4,746 | | $ | (7,874) | | $ | 1,611 |
Capital asset additions |
| $ | 1,726 |
| $ | — |
| $ | 36 |
| $ | 298 |
| $ | 2,060 | | $ | 2,510 | | $ | — | | $ | 38 | | $ | 369 | | $ | 2,917 |
As of December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | |
Total assets |
| $ | 82,691 |
| $ | 93,829 |
| $ | 8,252 |
| $ | 21,813 |
| $ | 206,585 | | $ | 82,691 | | $ | 93,829 | | $ | 8,252 | | $ | 21,813 | | $ | 206,585 |
Note 1614 – Geographic Information
Certain financial information by geographic location is provided below (in thousands).
|
|
|
|
| ||||||||||||||
|
| For the three months ended March 31, | ||||||||||||||||
|
| 2020 |
| 2019 | ||||||||||||||
| | | | | | | | | | | | | ||||||
| | For the three months ended June 30, | | For the six months ended June 30, | ||||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||||||
Domestic revenues |
| $ | 39,977 |
| $ | 21,780 |
| | 16,582 |
| | 22,538 |
| $ | 56,559 |
| $ | 44,318 |
International revenues |
|
| 742 |
|
| 996 | |
| 82 | |
| 1,061 | |
| 824 | |
| 2,057 |
Total revenues |
| $ | 40,719 |
| $ | 22,776 | | $ | 16,664 | | $ | 23,599 | | $ | 57,383 | | $ | 46,375 |
|
|
|
|
| ||||||||
|
| March 31, |
| December 31, | ||||||||
|
| 2020 |
| 2019 | ||||||||
| | | | | ||||||||
| | June 30, | | December 31, | ||||||||
| | 2020 | | 2019 | ||||||||
Domestic long-lived assets |
| $ | 177,684 |
| $ | 179,143 |
| $ | 178,216 |
| $ | 179,143 |
International long-lived assets |
|
| 277 |
| 301 | |
| 259 | |
| 301 | |
Total long-lived assets |
| $ | 177,961 |
| $ | 179,444 | | $ | 178,475 | | $ | 179,444 |
17
Note 1715 – Commitments and Contingencies
The Company is party to claims in lawsuits incidental to its business, including lease disputes and employee-related matters. The Company is confident in its defenses and is vigorously defending these disputes. The Company has not recorded any liabilities for these unfounded claims, and the range of possible losses is zero to $2.2 million. In the opinion of management, the ultimate outcome of such matters, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position or results of operations.
17
Note 1816 – Subsequent Events
On May 4,August 10, 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 (as amended by the First Amendment, dated May 8, 2020) (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 ansecond amendment to the Credit Agreement that:
|
|
● | Eliminates testing the “Leverage Ratio” for |
● | For the purpose of testing, replaces maximum “Leverage Ratio” with maximum “Net Leverage Ratio”. The maximum Net Leverage Ratio of (i) 2.85 to 1.00 |
| Reduces the maximum consolidated capital expenditures to $7,000,000 for 2020 and $7,000,000 for 2021; and |
● | Requires minimum “Consolidated Liquidity” to be $4,000,000 for the balance of 2020 and 2021 (from |
As of May 10, 2020, the Company has re-opened eleven restaurant dining rooms and plans to open an additional five dining rooms on May 11, 2020. The Company expects to re-open an additional five to ten dining rooms in the next two weeks and anticipates re-opening the remaining restaurants and closed dining rooms as soon as conditions permit.
18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q and certain information incorporated herein by reference contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). Forward-looking statements speak only as of the date thereof and involve risks and uncertainties that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. These risk and uncertainties include the risk factors discussed under Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.2019 and Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q. 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 the COVID-19 pandemic 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 condensed consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
As used in this report, the terms “Company,” “we,” “our,” or “us,” refer to The ONE Group Hospitality, Inc. and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.
Business Summary
We are a global hospitality company that develops, owns and operates, manages and licenses upscale and polished casual, high-energy restaurants and lounges and provides turn-key food and beverage (“F&B”) services for hospitality venues including hotels, casinos and other high-end locations. Turn-key F&B services are food and beverage services that can be scaled, customized and implemented by us for the client at a particular hospitality venue and customized for the client. We were established with thevenue. Our vision of becomingis to be a global market leader in the hospitality industry
18
by melding high-quality service, ambiance, high-energy and cuisine into one great experience that we refer to as “Vibe Dining”. AllWe design all our restaurants, lounges and F&B services are designed to create a social dining and high-energy entertainment experience within a destination location. We believe that this design and operating philosophy separates us from more traditional restaurant and foodservice competitors.
Our primary restaurant brands are STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse, and Kona Grill, a 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, New York, and, as of March 31,June 30, 2020, we owned, operated, managed or licensed 55 venues including 20 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and 11 F&B venues, including 10 in sixfive hotels and casinos in the United States and Europe. For those restaurants and venues that are managed or licensed, we generate management and incentive fee revenue based on a percentage of the location’s revenues and net profits.
19
The table below reflects our venues by restaurant brand and geographic location as of March 31,June 30, 2020:
|
|
|
|
|
|
|
|
| ||||||||
|
| Venues | ||||||||||||||
|
| STK(1) |
| Kona Grill |
| ONE Hospitality(2) |
| Total | ||||||||
| | | | | | | | | ||||||||
| | Venues | ||||||||||||||
|
| STK(1) |
| Kona Grill |
| ONE Hospitality(2) |
| Total | ||||||||
Domestic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned |
| 10 |
| 24 |
| 2 |
| 36 |
| 10 |
| 24 |
| 2 |
| 36 |
Managed |
| 1 |
| — |
| 1 |
| 2 |
| 1 |
| — |
| 1 |
| 2 |
Licensed |
| 1 |
| — |
| — |
| 1 |
| 1 |
| — |
| — |
| 1 |
Total domestic |
| 12 |
| 24 |
| 3 |
| 39 |
| 12 |
| 24 |
| 3 |
| 39 |
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
Managed |
| 3 |
| — |
| 8 |
| 11 |
| 3 |
| — |
| 8 |
| 11 |
Licensed |
| 5 |
| — |
| — |
| 5 |
| 5 |
| — |
| — |
| 5 |
Total international |
| 8 |
| — |
| 8 |
| 16 |
| 8 |
| — |
| 8 |
| 16 |
Total venues |
| 20 |
| 24 |
| 11 |
| 55 |
| 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. |
Uncertainties Related to COVID-19
In the first quarter of 2020, the negative effect of theThe novel coronavirus (“COVID-19”) onpandemic has significantly impacted the Company’s business, was significant. The Company experienced an initial decline in restaurant revenue that began in early March 2020 as business 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. Publicpublic concerns about the spread of COVID-19 continuescontinue 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.governments and temporarily closure of several restaurants and the shift in operations to provide only take-out and delivery service. Starting in May 2020, state and local governments began easing restrictions on stay-at-home orders and certain Company restaurants were allowed to open for outdoor dining or in-person dining with seating capacity restrictions, which resulted in increased revenues in May and June compared to April 2020.
In response to these conditions, and out of concern for our customers and partners, the Company has temporarily closed several restaurantsimplemented enhanced safety measures and thesanitation procedures to allow for in-person dining at our restaurants. The Company has shifted operations at 30 of its restaurants to provide only take-outincurred $0.7 million and delivery service. In addition to the decline in restaurant revenue, the Company has incurred approximately $1.3$2.0 million of costs related to COVID-19 in the three and six months ended March 31,June 30, 2020, respectively, 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.closed, sanitation supplies and safety precautions taken to prevent the spread of COVID-19. The Company has also implemented measures to reduce its costs during the COVID-19 pandemic, including significant reductions inthe furlough of employees, deferral of capital projects, and negotiations with suppliers and landlords regarding deferral or abatement of payments which could become significant.
Given the presentongoing uncertainty surrounding the global economy due toeffects of the COVID-19 pandemic, the Company cannot reasonably predict when its closed restaurants will re-open and open restaurants will be able to return to normal dining room operations. The Company expects that its results of operations will be materially and negatively affected by these actions inCOVID-19 for the second quarterremainder 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.
19
Acquisitions
On October 4, 2019, we acquired substantially all of the assets of Kona Grill Inc. and its affiliates (“Kona Grill”) comprising 24 domestic restaurants. We purchased the assets for a contractual price of $25.0 million plus approximately $1.5 million of consideration paid primarily for the apportionment of rent and utilities. We also assumed approximately $7.7 million in current liabilities. The purchase was financed with proceeds from the credit and guaranty agreement we entered into with Goldman Sachs Bank USA in conjunction with the acquisition (“Goldman Sachs Credit Agreement”). Over the remainder of 2020, we intend to integrateare integrating 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 $17.9decreased $6.9 million, or 78.8%,29.4% to $40.7$16.7 million for the three months ended March 31,June 30, 2020 compared to $22.8$23.6 million for the three months ended March 31, 2019.June 30, 2019 primarily due to the COVID-19 pandemic, partly offset by the addition of the Kona Grill restaurants. Same-store sales decreased 66.7% in the second quarter of 2020 compared to the second quarter of 2019 as restaurants were temporarily closed or operated on a limited basis due to state and local mandates. Approximately $20.7 $12.4 million of the increase in total revenue for the quarter ended June 30, 2020 was attributable to the addition of the Kona Grill restaurants inrestaurants. Revenues improved sequentially throughout the firstsecond quarter of 2020 compared toas state and local governments relaxed restrictions. Same-store sales for the prior year period. The increase in
20
total revenue was partially offset by the temporarily closuresApril, May and limited dining room operations for 30 of our remaining open restaurants beginning in MarchJune 2020 as a result of COVID-19.
decreased 90.2%, 70.2% and 40.1%, respectively.
Operating income decreased approximately $5.5$5.8 million to an operating loss of $4.4$5.3 million for the three months ended March 31,June 30, 2020 from operating income of $1.1$0.5 million for the three months ended March 31,June 30, 2019. The decrease was primarily driven by fixed costs in comparable restaurants not decreasing atlower revenues due to temporarily closures or limited operations due to the same rate asCOVID-19 pandemic. For the decrease in comparable sales for the quarter of 14.1%, specifically the decrease of comparable sales of 55.9% in March of 2020. Additionally, in the threesix months ended March 31,June 30, 2020, we incurred $1.3an operating loss of $9.6 million in costs directly relatedcompared to operating income of $1.6 million for the effectssix months ended June 30, 2019. Funds from the CARES Act Loans were used to support operations and bring workforce back from furlough during the COVID-19 pandemic. Additionally, we incurred $0.7 million and $2.0 million 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,three and do not anticipate any further integration expenses relatedsix months ended June 30, 2020, respectively, composed primarily of payments to employees for paid-time off during restaurant closures, inventory waste, rent and rent-related costs for closed and limited-operations restaurants from the Kona Grill acquisition.day that the dining room closed, sanitation supplies and safety precautions taken to prevent the spread of COVID-19.
20
Results of Operations
The following table sets forth certain statements of operations data for the periods indicated (in thousands):
|
|
|
|
|
|
| ||||||||||||
|
| For the Three Months Ended March 31, | ||||||||||||||||
|
| 2020 |
| 2019 | ||||||||||||||
| | | | | | | | | | | | | ||||||
| | For the three months ended June 30, | | For the six months ended June 30, | ||||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||||||
Revenues: |
|
|
|
|
|
|
| |
|
| |
|
| |
|
| |
|
Owned restaurant net revenue |
| $ | 38,557 |
| $ | 20,093 | | $ | 16,529 | | $ | 20,943 | | $ | 55,086 | | $ | 41,036 |
Management, license and incentive fee revenue |
|
| 2,162 |
|
| 2,683 | |
| 135 | |
| 2,656 | |
| 2,297 | |
| 5,339 |
Total revenues |
|
| 40,719 |
|
| 22,776 | |
| 16,664 | |
| 23,599 | |
| 57,383 | |
| 46,375 |
Cost and expenses: |
|
|
|
|
|
| |
|
| |
|
| |
|
| |
|
|
Owned operating expenses: |
|
|
|
|
|
| |
|
| |
|
| |
|
| |
|
|
Owned restaurant cost of sales |
|
| 10,113 |
|
| 5,026 | |
| 4,174 | |
| 5,519 | |
| 14,287 | | | 10,545 |
Owned restaurant operating expenses |
|
| 26,499 |
|
| 12,717 | |
| 12,038 | |
| 13,630 | |
| 38,537 | |
| 26,347 |
Total owned operating expenses |
|
| 36,612 |
|
| 17,743 | |
| 16,212 | |
| 19,149 | |
| 52,824 | |
| 36,892 |
General and administrative (including stock-based compensation of $338 and $181 for the three months ended March 31, 2020 and 2019 respectively) |
|
| 3,397 |
|
| 2,650 | ||||||||||||
General and administrative (including stock-based compensation of $482, $456, $820, and $637 for the three and six months ended June 30, 2020 and 2019 respectively) | |
| 2,438 | |
| 2,704 | |
| 5,835 | | | 5,354 | ||||||
Depreciation and amortization |
|
| 2,440 |
|
| 942 | |
| 2,510 | |
| 1,004 | |
| 4,950 | | | 1,946 |
Transaction and integration costs |
|
| 1,095 |
|
| — | |
| 14 | |
| 152 | |
| 1,109 | | | 152 |
COVID-19 related expenses |
|
| 1,348 |
|
| — | | | 695 | |
| — | | | 2,043 | | | — |
Lease termination expenses |
|
| 179 |
|
| — | |
| 89 | |
| 141 | |
| 268 | | | 141 |
Pre-opening expenses |
|
| — |
|
| 482 | |
| — | |
| 63 | |
| — | | | 545 |
Other income, net |
|
| (1) |
|
| (175) | |
| (11) | |
| (91) | |
| (12) | | | (266) |
Total costs and expenses |
|
| 45,070 |
|
| 21,642 | |
| 21,947 | |
| 23,122 | |
| 67,017 | |
| 44,764 |
Operating (loss) income |
|
| (4,351) |
|
| 1,134 | |
| (5,283) | |
| 477 | |
| (9,634) | |
| 1,611 |
Other expenses, net: |
|
|
|
|
|
| |
|
| |
|
| |
|
| |
|
|
Interest expense, net of interest income |
|
| 1,175 |
|
| 269 | |
| 1,195 | |
| 218 | |
| 2,370 | | | 487 |
Loss on early debt extinguishment | | | — | |
| 437 | | | — | |
| 437 | ||||||
Total other expenses, net |
|
| 1,175 |
|
| 269 | |
| 1,195 | |
| 655 | |
| 2,370 | |
| 924 |
(Loss) income before (benefit) provision for income taxes |
|
| (5,526) |
|
| 865 | |
| (6,478) | |
| (178) | |
| (12,004) | |
| 687 |
(Benefit) provision for income taxes |
|
| (653) |
|
| 96 | |
| (3,228) | |
| (15) | |
| (3,881) | |
| 81 |
Net (loss) income |
|
| (4,873) |
|
| 769 | |
| (3,250) | |
| (163) | |
| (8,123) | |
| 606 |
Less: net loss attributable to noncontrolling interest |
|
| (274) |
|
| (85) | ||||||||||||
Less: net (loss) income attributable to noncontrolling interest | |
| (378) | |
| 159 | |
| (652) | |
| 74 | ||||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. |
| $ | (4,599) |
| $ | 854 | | $ | (2,872) | | $ | (322) | | $ | (7,471) | | $ | 532 |
21
The following table sets forth certain statements of operations data as a percentage of total revenues for the periods indicated. Certain percentage amounts may not sum to total due to rounding.
|
|
|
|
| ||||||||
|
| For the Three Months Ended March 31, | ||||||||||
|
| 2020 |
| 2019 | ||||||||
| | | | | | | | | ||||
| | For the three months ended June 30, | | For the six months ended June 30, | ||||||||
|
| 2020 | | 2019 |
| 2020 | | 2019 | ||||
Revenues: |
|
|
|
| | |
| | | |
| |
Owned restaurant net revenue |
| 94.7 % |
| 88.2 % |
| 99.2 % | | 88.7 % |
| 96.0 % | | 88.5 % |
Management, license and incentive fee revenue |
| 5.3 % |
| 11.8 % |
| 0.8 % | | 11.3 % |
| 4.0 % | | 11.5 % |
Total revenues |
| 100.0 % |
| 100.0 % |
| 100.0 % | | 100.0 % |
| 100.0 % | | 100.0 % |
Cost and expenses: |
|
|
|
|
| | | |
| | | |
Owned operating expenses: |
|
|
|
|
| | | |
| | | |
Owned restaurant cost of sales (1) |
| 26.2 % |
| 25.0 % | | 25.3 % | | 26.4 % | | 25.9 % | | 25.7 % |
Owned restaurant operating expenses (1) |
| 68.7 % |
| 63.3 % | | 72.8 % | | 65.1 % | | 70.0 % | | 64.2 % |
Total owned operating expenses (1) |
| 94.9 % |
| 88.3 % | | 98.1 % | | 91.4 % | | 95.8 % | | 89.9 % |
General and administrative (including stock-based compensation of 0.8% and 0.8% for the three months ended March 31, 2020 and 2019 respectively) |
| 8.3 % |
| 11.6 % | ||||||||
General and administrative (including stock-based compensation of 2.9%, 1.9%, 1.4%, and 1.4% for the three and six months ended June 30, 2020 and 2019 respectively) |
| 14.6 % | | 11.5 % |
| 10.2 % | | 11.5 % | ||||
Depreciation and amortization |
| 6.0 % |
| 4.1 % |
| 15.1 % | | 4.3 % |
| 8.6 % | | 4.2 % |
Transaction and integration costs |
| 2.7 % |
| —% |
| 0.1 % | | 0.6 % |
| 1.9 % | | 0.3 % |
COVID-19 related expenses |
| 3.3 % |
| —% |
| 4.2 % | | —% |
| 3.6 % | | —% |
Lease termination expenses |
| 0.4 % |
| —% |
| 0.5 % | | 0.6 % |
| 0.5 % | | 0.3 % |
Pre-opening expenses |
| —% |
| 2.1 % |
| —% | | 0.3 % |
| —% | | 1.2 % |
Other income, net |
| —% |
| (0.8)% |
| (0.1)% | | (0.4)% |
| —% | | (0.6)% |
Total costs and expenses |
| 110.7 % |
| 95.0 % |
| 131.7 % | | 98.0 % |
| 116.8 % | | 96.5 % |
Operating (loss) income |
| (10.7)% |
| 5.0 % |
| (31.7)% | | 2.0 % |
| (16.8)% | | 3.5 % |
Other expenses, net: |
|
|
|
|
| | | |
| | | |
Interest expense, net of interest income |
| 2.9 % |
| 1.2 % |
| 7.2 % | | 0.9 % |
| 4.1 % | | 1.1 % |
Loss on early debt extinguishment |
| —% | | 1.9 % |
| —% | | 0.9 % | ||||
Total other expenses, net |
| 2.9 % |
| 1.2 % | | 7.2 % | | 2.8 % | | 4.1 % | | 2.0 % |
(Loss) income before (benefit) provision for income taxes |
| (13.6)% |
| 3.8 % |
| (38.9)% | | (0.8)% |
| (20.9)% | | 1.5 % |
(Benefit) provision for income taxes |
| (1.6)% |
| 0.4 % | | (19.4)% | | (0.1)% |
| (6.8)% | | 0.2 % |
Net (loss) income |
| (12.0)% |
| 3.4 % | | (19.5)% | | (0.7)% |
| (14.2)% | | 1.3 % |
Less: net loss attributable to noncontrolling interest |
| (0.7)% |
| (0.4)% | ||||||||
Less: net (loss) income attributable to noncontrolling interest |
| (2.3)% | | 0.7 % |
| (1.1)% | | 0.2 % | ||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. |
| (11.3)% |
| 3.7 % |
| (17.2)% | | (1.4)% |
| (13.0)% | | 1.1 % |
(1) |
| These expenses are being shown as a percentage of owned restaurant net revenue. |
22
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
| | | | | | | | | | | | | | | | |||||||||||||||
|
| STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | ||||||||||||||||||||
For the three months ended June 30, 2020 | | | | | | | | | | | | | | | | |||||||||||||||
Total revenues |
| $ | 17,383 |
| $ | 20,657 |
| $ | 2,679 |
| $ | — |
| $ | 40,719 |
| $ | 4,081 |
| $ | 12,380 |
| $ | 146 |
| $ | 57 | | $ | 16,664 |
Operating income (loss) |
|
| 1,543 |
|
| 820 |
|
| 1,820 |
|
| (8,534) |
|
| (4,351) | | $ | (764) | | $ | 1,103 | | $ | 72 | | $ | (5,694) | | $ | (5,283) |
Capital asset additions |
| $ | 335 |
| $ | 410 |
| $ | 8 |
| $ | 38 |
| $ | 791 | | $ | 193 | | $ | 333 | | $ | 169 | | $ | 195 | | $ | 890 |
As of March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
For the six months ended June 30, 2020 | | | | | | | | | | | | | | | | |||||||||||||||
Total revenues |
| $ | 21,464 |
| $ | 33,037 |
| $ | 2,825 |
| $ | 57 | | $ | 57,383 | |||||||||||||||
Operating income (loss) | | $ | 779 | | $ | 1,923 | | $ | 1,894 | | $ | (14,230) | | $ | (9,634) | |||||||||||||||
Capital asset additions | | $ | 528 | | $ | 743 | | $ | 177 | | $ | 233 | | $ | 1,681 | |||||||||||||||
As of June 30, 2020 | | | | | | | | | | | | | | | | |||||||||||||||
Total assets |
| $ | 79,512 |
| $ | 88,199 |
| $ | 6,116 |
| $ | 22,354 |
| $ | 196,181 | | $ | 74,944 | | $ | 93,790 | | $ | 5,601 | | $ | 35,822 | | $ | 210,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
|
| STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | ||||||||||||||||||||
For the three months ended March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
| | | | | | | | | | | | | | | | |||||||||||||||
| | STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | ||||||||||||||||||||
For the three months ended June 30, 2019 | | | | | | | | | | | | | | | | |||||||||||||||
Total revenues | | $ | 20,067 | | $ | — | | $ | 3,517 | | $ | 15 | | $ | 23,599 | |||||||||||||||
Operating income (loss) | | $ | 2,071 | | $ | — | | $ | 2,495 | | $ | (4,089) | | $ | 477 | |||||||||||||||
Capital asset additions | | $ | 784 | | $ | — | | $ | 2 | | $ | 71 | | $ | 857 | |||||||||||||||
For the six months ended June 30, 2019 | | | | | | | | | | | | | | | | |||||||||||||||
Total revenues |
| $ | 19,245 |
| $ | — |
| $ | 3,060 |
| $ | 471 |
| $ | 22,776 | | $ | 39,311 | | $ | — | | $ | 6,578 | | $ | 486 | | $ | 46,375 |
Operating income (loss) |
|
| 2,668 |
|
| — |
|
| 2,250 |
|
| (3,784) |
|
| 1,134 | | $ | 4,739 | | $ | — | | $ | 4,746 | | $ | (7,874) | | $ | 1,611 |
Capital asset additions |
| $ | 1,726 |
| $ | — |
| $ | 36 |
| $ | 298 |
| $ | 2,060 | | $ | 2,510 | | $ | — | | $ | 38 | | $ | 369 | | $ | 2,917 |
As of December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | |
Total assets |
| $ | 82,691 |
| $ | 93,829 |
| $ | 8,252 |
| $ | 21,813 |
| $ | 206,585 | | $ | 82,691 | | $ | 93,829 | | $ | 8,252 | | $ | 21,813 | | $ | 206,585 |
EBITDA and Adjusted EBITDA are presented in this Quarterly Report on Form 10-Q and are supplementalto supplement other measures of financial performance thatperformance. EBITDA and Adjusted EBITDA are not required by, or presented in accordance with, accounting principles generally accepted in the United States of America (“GAAP”). We define EBITDA as net income before interest expense, provision for income taxes and depreciation and
22
amortization. We define Adjusted EBITDA as net income before interest expense, provision for income taxes, depreciation and amortization, non-cash impairment loss, non-cash rent expense, pre-opening expenses, lease termination expenses, stock-based compensation and non-recurring gains and losses. Not all of the aforementioned items defining Adjusted EBITDA occur in each reporting period but have been included in our definitions of these terms based on our historical activity.
We 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 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.
23
The following table presents a reconciliation of net (loss) income to EBITDA and Adjusted EBITDA for the periods indicated (in thousands):
|
|
|
|
|
|
| ||||||||||||
|
| For the three months ended March 31, | ||||||||||||||||
|
| 2020 |
| 2019 | ||||||||||||||
| | | | | | | | | | | | | ||||||
| | For the three months ended June 30, | | For the six months ended June 30, | ||||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. |
| $ | (4,599) |
| $ | 854 | | $ | (2,872) | | $ | (322) | | $ | (7,471) | | $ | 532 |
Net loss attributable to noncontrolling interest |
|
| (274) |
|
| (85) | ||||||||||||
Net (loss) income attributable to noncontrolling interest | |
| (378) | |
| 159 | |
| (652) | |
| 74 | ||||||
Net (loss) income |
|
| (4,873) |
|
| 769 | |
| (3,250) | |
| (163) | |
| (8,123) | |
| 606 |
Interest expense, net of interest income |
|
| 1,175 |
|
| 269 | |
| 1,195 | |
| 218 | |
| 2,370 | ��� |
| 487 |
(Benefit) provision for income taxes |
|
| (653) |
|
| 96 | |
| (3,228) | |
| (15) | |
| (3,881) | |
| 81 |
Depreciation and amortization |
|
| 2,440 |
|
| 942 | |
| 2,510 | |
| 1,004 | |
| 4,950 | |
| 1,946 |
EBITDA |
|
| (1,911) |
|
| 2,076 | |
| (2,773) | |
| 1,044 | |
| (4,684) | |
| 3,120 |
COVID-19 related expenses |
|
| 1,348 |
|
| — | |
| 695 | |
| — | |
| 2,043 | |
| — |
Transaction and integration costs (1) |
|
| 1,095 |
|
| — | |
| 14 | |
| 152 | |
| 1,109 | |
| 152 |
Stock-based compensation |
|
| 338 |
|
| 181 | |
| 482 | |
| 456 | |
| 820 | |
| 637 |
Lease termination expense (2) |
|
| 179 |
|
| — | |
| 89 | |
| 141 | |
| 268 | |
| 141 |
Non-cash rent expense (3) |
|
| 136 |
|
| (87) | |
| 74 | |
| (2) | | | 210 | |
| (91) |
Pre-opening expenses |
|
| — |
|
| 482 | | | — | | | 63 | | | — | | | 545 |
Loss on debt extinguishment | |
| — | |
| 437 | |
| — | |
| 437 | ||||||
Adjusted EBITDA |
|
| 1,185 |
|
| 2,652 | |
| (1,419) | |
| 2,291 | |
| (234) | |
| 4,941 |
Adjusted EBITDA attributable to noncontrolling interest |
|
| (391) |
|
| (36) | |
| (595) | |
| 205 | |
| (986) | |
| 169 |
Adjusted EBITDA attributable to The ONE Group Hospitality, Inc. |
| $ | 1,576 |
| $ | 2,688 | | $ | (824) | | $ | 2,086 | | $ | 752 | | $ | 4,772 |
(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,June 30, 2020 and 2019
Revenues
Owned restaurant net revenue.Owned restaurant net revenue increased $18.5decreased $4.4 million to $38.6$16.5 million for the three months ended March 31,June 30, 2020 from $20.1$20.9 million for the three months ended March 31,June 30, 2019. The decline in revenue is attributable to COVID-19 which resulted in the temporary closure of certain restaurants and a shift to delivery/take-out business and limited in-person seating due to state and local mandates. Approximately $20.7$12.4 million of the increase in owned restaurant revenue wasis attributable to the addition of the Kona Grill restaurants in the firstsecond quarter of 2020 compared to the prior year period. Comparable restaurant sales decreased 66.7% in the second quarter of 2020.
Management and license fee revenue. Management and license fee revenues decreased $2.6 million to $0.1 million for the three months ended June 30, 2020 from $2.7 million for the three months ended June 30, 2019. Management and license fee revenue decreased primarily as a result of temporary closures of our managed locations due to COVID-19 prevention measures.
Cost and Expenses
Owned restaurant cost of sales. Food and beverage costs for owned restaurants decreased $1.3 million, or 24.4% to $4.2 million for the three months ended June 30, 2020 from $5.5 million for the three months ended June 30, 2019. The decrease in owned restaurant cost of sales was due to the temporary closures and limited operations of our restaurants as a result of COVID-19 during the second quarter of 2020.
Owned restaurant operating expenses. Owned restaurant operating expenses decreased $1.6 million to $12.0 million for the three months ended June 30, 2020 from $13.6 million for the three months ended June 30, 2019. The Company is actively managing operating costs and negotiating with landlords on rent concessions due to the impact of COVID-19 on its restaurant sales.
General and administrative. General and administrative costs decreased $0.3 million, or 9.8%, to $2.4 million for the three months ended June 30, 2020 from $2.7 million for the three months ended June 30, 2019. We have implemented measures to reduce our costs while our operations are affected by COVID-19, including furlough of certain employees, deferral of capital projects, and reduction of third-party professional services.
24
Depreciation and amortization. Depreciation and amortization expense increased $1.5 million to $2.5 million for the three months ended June 30, 2020 from $1.0 million for the three months ended June 30, 2019 due to the addition of the Kona Grill restaurants.
COVID-19 related expenses. In the three months ended June 30, 2020, we incurred approximately $0.7 million of direct costs related to COVID-19, composed primarily of payments to employees for paid-time off during restaurant closures, benefit costs for furloughed employees, inventory waste, sanitation supplies and safety precautions taken to prevent the spread of COVID-19.
Interest expense, net of interest income. Interest expense, net of interest income was $1.2 million and $0.2 million for the three months ending June 30, 2020 and 2019, respectively. The Company refinanced its debt in October 2019 in conjunction with the Kona Grill acquisition.
Loss on early debt extinguishment. When we entered into a credit agreement with Bank of America during the second quarter of 2019, we recognized a $0.4 million loss on debt extinguishment primarily related to the recognition of unamortized discounts on warrants and unamortized debt issuance costs related to the debt extinguished.
(Benefit) provision for income taxes. The benefit for income taxes for the three months ended June 30, 2020 was a tax benefit of $3.2 million compared to a tax benefit of $0.1 million for the three months ended June 30, 2019. Our annualized effective tax rate is estimated at 32.4% for 2020 compared to 10.2% for the six months ended June 30, 2019. Our projected annual effective tax rate differs from the statutory U.S. tax rate of 21% primarily due to the following: (i) tax credits for FICA taxes on certain employees’ tips (ii) taxes owed in foreign jurisdictions such as the United Kingdom, Canada and Italy; and, (iii) taxes owed in state and local jurisdictions.
Net loss attributable to noncontrolling interest. Net loss attributable to noncontrolling interest was $0.4 million compared to net income of $0.2 million for the three months ended June 30, 2020 and 2019, respectively, due to the impact of COVID-19.
Results of Operations for the Six Months Ended June 30, 2020 and 2019
Revenues
Owned restaurant net revenue. Owned restaurant net revenue increased $14.1 million, or 34.2% to $55.1 million for the six months ended June 30, 2020 from $41.0 million for the six months ended June 30, 2019. Approximately $33.1 million of the increase in owned restaurant revenue is attributable to the addition of the Kona Grill restaurants. The increase in total revenue was partially offset by the temporarily closures and limited operations of our restaurants beginning in March 2020 as a result of COVID-19. Comparable restaurant sales decreased 14.1%40.7% in the first quartersix months of 2020.
Management and license fee revenue. Management and license fee revenues decreased $0.5$3.0 million or 19.4%, to $2.2$2.3 million for the threesix months ended March 31,June 30, 2020 from $2.7$5.3 million for the threesix months ended March 31,June 30, 2019. Management and license fee revenue decreased primarily as a result of lower sales withintemporary closures for our international managed locations in the United Kingdom and Italy related to temporary closures due to COVID-19 prevention measures.COVID-19. The majority of our managed international locations have since reopened for business subject to certain governmental mandates.
23
Cost and Expenses
Owned restaurant cost of sales. Food and beverage costs for owned restaurants increased approximately $5.1$3.8 million to $10.1$14.3 million for the threesix months ended March 31,June 30, 2020 from $5.0$10.5 million for the threesix months ended March 31,June 30, 2019. Approximately $5.6$8.7 million of the increase in owned restaurant cost of sales wasis attributable to the addition of the Kona Grill restaurants in the first quarter of 2020 compared to the prior year period.restaurants. 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$12.2 million to $26.5$38.5 million for the threesix months ended March 31,June 30, 2020 from $12.7$26.3 million for the threesix months ended March 31,June 30, 2019. Approximately $14.2$22.7 million of the increase in owned restaurant operating expenses wasfor the period is attributable to the addition of the Kona Grill restaurants in the first quarter of 2020 compared to the prior year period.restaurants. The Company began reducing operating costs in March due to the business impact of COVID-19. As restaurant sale volumes increase with the resumption of in-person dining, restaurant operating costs are expected to increase proportionately.
General and administrative. General and administrative costs increased approximately $0.7$0.4 million, or 28.2%9.0%, to $3.4$5.8 million for the threesix months ended March 31,June 30, 2020 from $2.7$5.4 million for the threesix months ended March 31,June 30, 2019. However, general and administrative costs as a percentage of total revenues decreased to 8.3%10.2% for the threesix months ended March 31,June 30, 2020 from 11.6%11.5% for the threesix months ended March 31,
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June 30, 2019. We have implemented measures to reduce our costs while our operations are affected by COVID-19, including significant reductions infurlough of certain employees, deferral of capital projects, and reduction of third-party professional services.
Depreciation and amortization. Depreciation and amortization expense increased approximately $1.5$3.0 million to $2.4$4.9 million for the threesix months ended March 31,June 30, 2020 from $0.9$1.9 million for the threesix months ended March 31,June 30, 2019 due to the addition of the Kona Grill restaurants in the first quarter of 2020 compared to the prior year period.restaurants.
Transaction and integration costs. In the threesix months ended March 31,June 30, 2020, we incurred transactiontransaction and integration costs of approximately $1.1 million related to the Kona Grill acquisition, which closed on October 4, 2019. Over the remainder of 2020, we intend to continue to integrate Kona Grill by leveraging our corporate infrastructure, our bar-business knowledge and unique Vibe Dining program, to elevate the brand experience and drive improved performance.
COVID-19 related expenses. In the threesix months ended March 31,June 30, 2020, we incurred approximately $1.3$2.0 million of direct costs related to COVID-19, composed primarily of payments to employees for paid-time off during restaurant closures, inventory waste, and rent and rent related costs for closed and limited-operations restaurants from the day that the dining room closed. closed, sanitation supplies and safety precautions taken to prevent the spread of COVID-19.
Lease termination expenses. In the threesix months ended March 31,June 30, 2020, leaselease termination expense was approximately $0.2$0.3 million. Lease termination expenses are costs associated with closed, abandoned and disputed locations or disputed leases.leases.
Pre-opening expenses. Pre-opening expenses for the threesix months ended March 31,June 30, 2019 were $0.5 million related to the development of our owned STK restaurant in Nashville, Tennessee which opened in MarchJune 2019.
Interest expense, net of interest income. Interest expense, net of interest income was approximately $1.2$2.4 million and $0.3$0.5 million for the threesix months ending March 31,June 30, 2020 and 2019, respectively.
(Benefit) provision for income taxes. The provisionbenefit for income taxes for the threesix months ended March 31,June 30, 2020 was a tax benefit of $0.7$3.9 million compared to tax expense of $0.1 million for the threesix months ended March 31,June 30, 2019. Our annualized effective tax rate is estimated at 12.4%32.4% for 2020 compared to 9.7%10.2% for the threesix months ended March 31,June 30, 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) taxes owed in foreign jurisdictions such as the United Kingdom, Canada and Italy; and, (iii) taxes owed in state and local jurisdictions.
Net loss attributable to noncontrolling interest. Net loss attributable to noncontrolling interest was approximately $0.3$0.7 million andcompared to net income of $0.1 million for the threesix months ended March 31,June 30, 2020 and 2019, respectively.respectively, due to the impact of COVID-19.
Liquidity and Capital Resources
Executive Summary
Our principal liquidity requirements are to meet our lease obligations, our working capital and capital expenditure needs and to pay principal and interest on our outstanding indebtedness. Subject to our operating performance, which, if significantly adversely affected, would adversely affect the availability of funds, we expect to finance our operations for at least the next 12 months, including
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the costs of opening currently planned new restaurants, through cash provided by operations, use of proceeds from the CARES Act Loans, borrowings on our Goldman Sachs Credit Agreement and construction allowances provided by landlords of certain locations.
We believe the combination of our cash provided by operations and our Goldman Sachs Credit Agreementthe aforementioned items are adequate to support our immediate business operations and plans. As of March 31,June 30, 2020, we had cash and cash equivalents of approximately $8.2$23.5 million andwhich includes $10.2 million in cash from the CARES Act Loans. We had $47.8 million in long-term debt, of $48.0 million, which consisted of our Goldman Sachs Credit Agreement and an equipment financing agreements.agreement, and $18.3 million in CARES Act Loans as of June 30, 2020. As of March 31,June 30, 2020, the availability pursuant toon our revolving credit facility was $10.7 million.million, subject to the restrictions described in Note 5.
In the threesix months ended March 31,June 30, 2020, our capital expenditures were approximately $0.8$1.7 million. Our future cash requirements will depend on many factors, including the pace of our expansion, conditions in the retail property development market, construction costs, the nature of the specific sites selected for new restaurants, and the nature of the specific leases and associated tenant improvement allowances available, if any, as negotiated with landlords. Additionally, under our current capital light strategy, we plan to enter into management and license agreements for the operation of STK restaurants where we are not required to contribute significant capital upfront.
Our operations have not required significant working capital, and, like many restaurant companies, we have negative working capital. Revenues are received primarily in credit card or cash receipts, and restaurant operations do not require significant receivables or inventories, other than our wine inventory. In addition, we receive trade credit for the purchase of food, beverages and supplies, thereby reducing the need for incremental working capital to support growth.
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In the event the Company needs to temporarily suspend all operations due to COVID-19, the ongoing operating costs per month are expected to be as follows:
| | | |
Minimum rent | | $ | 1,200 |
Insurance payments | | | 200 |
Interest payments | | | 400 |
Minimum general & administrative costs | | | 500 |
Total | | $ | 2,300 |
Goldman 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 credit agreement with 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.
On May 4, 2020, Goldman Sachs Bank USA (“GSB”), as administrative agent, collateral agent and lead arranger under 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 8, 2020, GSB and the Company and certain of its subsidiaries entered into an amendment to the Credit Agreement that:
● | Relaxes the fixed charge coverage ratio (decreasing the ratio for remaining measurement dates in 2020 to 1.20 to 1.00 from 1.35 to 1.00) and the leverage ratio (increasing the ratio at June 30, 2020 to 3.00 to 1.00 from 2.50 to 1.00, and the ratio at September 30 and December 31, 2020 to 2.75 to 1.00 from 2.25 to 1.00). |
● | Requires minimum “Consolidated Liquidity” to be $4,000,000 for the remainder of 2020 (from $1,500,000). |
As of June 30, 2020, we were in compliance with the covenants required by the Credit Agreement, as amended on August 10, 2020. Based on current projections, we believe that we would continue to comply with the covenants in the Credit Agreement, as amended, throughout the twelve months following the issuance of the financial statements. Additionally, our consolidated adjusted EBITDA as defined by the Goldman Sachs Credit Agreement for determining covenant compliance includes pro forma adjustments for the annualization of the Kona Grill restaurant performance which includes results before the acquisition date.
As of March 31, 2020, we were in compliance with the covenants required by the Goldman Sachs Credit Agreement. Based on current projections, we believe that we would continue to comply with the covenants in the Goldman Sachs Credit Agreement, as amended, throughout the twelve months following the issuance of the financial statements.
Refer to Note 6,5, Note 1715 and Note 1816 to our condensed consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the terms of our long-term debt arrangements and information regarding our commitments and contingencies.
CARES Act Loans
On May 4, 2020, two subsidiaries of the Company obtained CARES Act Loans from BBVA USA under the Paycheck Protection Program (“PPP”) created by the CARES Act. Repayment of the CARES Act Loans is guaranteed by the SBA. The ONE Group, LLC received a loan of $9.8 million related to the operations of STK restaurants, and Kona Grill Acquisition, LLC received a loan of $8.5 million related to the operation of Kona Grill restaurants.
The CARES Act Loans are scheduled to mature on April 28, 2022 and have a 1.00% interest rate and are subject to the terms and conditions applicable to PPP loans. Among other terms, BBVA USA may declare a default of the CARES Act Loans if the SBA disputes the validity of the guaranty of indebtedness, if a material adverse change occurs in our financial condition, or if BBVA USA believes the prospect of repayment of the CARES Act Loans or performance of obligations under the promissory notes is impaired. On an event of default, BBVA USA may declare principal and unpaid interest immediately due and payable, and it may charge default interest of 10%.
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The CARES Act Loans are eligible for forgiveness if the proceeds are used for qualified purposes within a specified period and if at least 60% is spent on payroll costs. The Company is using the funds in accordance with the CARES Act and SBA regulations, and these funds have supported the re-opening of in person dining and the return of approximately 3,000 furloughed employees to work. At this time, the Company anticipates forgiveness of the entire amount of the CARES Act Loans; however, no assurance can be provided that the Company will obtain forgiveness of the CARES Act loans in whole or in part. Therefore, the Company has elected to classify the entire principal amount of the CARES Act Loans as long-term debt on the condensed consolidated balance sheet as of June 30, 2020. As of June 30, 2020, there was $10.2 million in remaining funds available to be used for qualified purposes.
Capital Expenditures and Lease Arrangements
Given the present uncertainty due to the COVID-19 pandemic, the Company has deferred capital expenditures. To the extent we open new company-owned restaurants, we anticipate capital expenditures would increase related to the construction of new restaurants compared to general capital expenditures of existing restaurants. Although we are committed to our capital light strategy, in which our capital investment is expected to be limited, we are willing to consider opening owned restaurants as opportunities arise. For owned restaurants, where we build from a shell state, we have typically targeted an average cash investment of approximately $3.8 million for a 10,000 square-foot STK restaurant, net of landlord contributions and equipment financing and excluding pre-opening costs. For locations where we may be the successor restaurant tenant, and currently our preference, total cash investment will be significantly less and in the $1.0 million to $1.5 million range. Typical pre-opening costs will be in the $0.3 million to $0.5 million range. In addition, some of our existing restaurants will require capital improvements to either maintain or improve the facilities. We may add seating or provide enclosures for outdoor space in the next twelve months for some of our locations, which we expect will increase revenues for those locations. If the impact of COVID-19 persists, the Company may evaluate the timing of opening new locations.
Our hospitality F&B services projects typically require limited capital investment from us. Capital expenditures for these projects will primarily be funded by cash flows from operations and equipment financing, depending upon the timing of these expenditures and cash availability.
We typically seek to lease our restaurant locations for periods of 10 to 20 years under operating lease arrangements, with a limited number of renewal options. Our rent structure varies, but our leases generally provide for the payment of both minimum and contingent rent based on sales, as well as other expenses related to the leases such as our pro-rata share of common area maintenance,
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property tax and insurance expenses. Many of our lease arrangements include the opportunity to secure tenant improvement allowances to partially offset the cost of developing and opening the related restaurants. Generally, landlords recover the cost of such allowances from increased minimum rents. However, there can be no assurance that such allowances will be available to us on each project that we select for development.
For the threesix months ended March 31,June 30, 2020, we spent a total of $0.8$1.7 million in capital expenditures $1.3compared to $2.9 million less than the amount spent for the same period in the prior year, andyear. We expect to keep capital expenditures at a low level as long as the uncertainty related to COVID-19 continues.
Cash Flows
The following table summarizes the statement of cash flows for the threesix months ended March 31,June 30, 2020 and 2019 (in thousands):
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Net cash (used in) provided by: |
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Net cash provided by (used in): |
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Operating activities |
| $ | (3,103) |
| $ | 2,513 | | $ | (4,927) | | $ | 2,144 |
Investing activities |
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| (791) |
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| (2,060) | |
| (1,681) | |
| (2,917) |
Financing activities |
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| (226) |
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| (798) | |
| 17,779 | |
| 270 |
Effect of exchange rate changes on cash |
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| (64) |
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| (168) | |
| (55) | |
| (290) |
Net decrease in cash and cash equivalents |
| $ | (4,184) |
| $ | (513) | ||||||
Net increase (decrease) in cash and cash equivalents | | $ | 11,116 | | $ | (793) |
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Operating Activities. Net cash used inby operating activities was $3.1$4.9 million for the threesix months ended March 31,June 30, 2020 compared to $2.5$2.1 million of net cash generated from operating activities for the threesix months ended March 31,June 30, 2019. The decrease was primarily attributable to an increase in the decrease in net income which included $1.3loss for the six months ended June 30, 2020 as a result of the temporary closure of our restaurants due to the COVID-19 pandemic as well as $2.0 million in expenses for payments to employees for paid-time off during restaurant closures, and inventory waste and other costs directly attributable to COVID-19, and $1.1 million in transaction and integration expenses related to the Kona Grill acquisition coupled with $4.4 million reduction in accounts payable and accrued expenses.acquisition.
Investing Activities. Net cash used in investing activities for the threesix months ended March 31,June 30, 2020 was $0.8$1.7 million compared to $2.1$2.9 million for the threesix months ended March 31,June 30, 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 inprovided by financing activities for the threesix months ended March 31,June 30, 2020 was $0.2$17.8 million compared to $0.8$0.3 million in the threesix months ended March 31, 2019.June 30, 2019. We received $18.3 million in proceeds from the CARES Act Loans.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
Recent Accounting Pronouncements
See Note 1 to our condensed consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for a detailed description of recent accounting pronouncements. We do not expect the recent accounting pronouncements discussed in Note 1 to have a significant impact on our condensed consolidated financial position or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide this information.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation as of the last day of the period covered by this Quarterly Report on Form 10-Q of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange
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Act is timely recorded, processed, summarized and reported and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the firstsecond quarter of 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are subject to claims common to our industry and in the ordinary course of our business. Companies in our industry, including us, have been and are subject to class action lawsuits, primarily regarding compliance with labor laws and regulations. Defending lawsuits requires significant management attention and financial resources and the outcome of any litigation is inherently uncertain. We believe that accrual and disclosure for these matters are adequately provided for in our consolidated financial statements. We do not believe the ultimate resolutions of these matters will have a material adverse effect on our consolidated financial position and results of operations. However, the resolution of lawsuits is difficult to predict. A significant increase in the number of these claims, or
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one or more successful claims under which we incur greater liabilities than is currently anticipated, could materially and adversely affect our consolidated financial statements.
SeeThe risk factors below update the risks factors contained in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 for additional risk factors.2019.
The outbreak of COVID-19 has, and will continue to, significantly affect our restaurant traffic and our business, financial condition and results of operations.
The outbreak of COVID-19 and government actions to contain COVID-19 have, and may continue for an extended period of time to, materially and adversely affected our restaurant traffic and our business.
Our business, has beenand may continue to materially and adversely affected byaffect us for an extended period. In response to the effect of, the public perception of a risk of, and government actions to contain, COVID-19. In December 2019, COVID-19 was identifiedpandemic, 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 beenwere instructed to shelter in placestay at home 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 expectAlthough certain of our results of operationsrestaurants have been allowed to be materially and negatively affected by these actions. open for outdoor dining or in-person dining they are subject to seating capacity restrictions to allow for social distancing.
A prolonged occurrence and resurgence of COVID-19 cases may result in state or local governments implementing further restrictions,guidelines, including possible travel restrictions, social distancing requirements and additional restrictions on the restaurant industry. Our effortsindustry, including closures or partial closures. We are unable to mitigatepredict how long the pandemic will last, what additional restrictions may be enacted, the extent to which our restaurants may be impacted if a significant number of our employees are diagnosed with COVID-19, or if an outbreak of COVID-19 is traced to one of our restaurants.
We have made operational changes to adhere to government requirements on safety and sanitation in our restaurants. However, we cannot guarantee that changes to our operational policies and training will be effective to keep our employees and customers safe from COVID-19. COVID-19 may impact the willingness of customers to dine outside of the home. While it is not possible at this time to estimate the full impact that COVID-19 could have on our business going forward, the continued spread of the virus and the measures taken by governments or by us in response could adversely impact our business, financial condition and results of operations.
In response to the challenging business environment, we obtained CARES Act Loans as described in Note 5 to our condensed consolidated financial statements. At this time, we anticipate forgiveness of the entire amount of the CARES Act Loans; however, no assurance can be provided that we will obtain forgiveness of the CARES Act Loans in whole or in part.
The COVID-19 pandemic may also have 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 beheightening other events that drive riskrisks disclosed in the business. For a description of those risks, refer toRisk Factors section in our Annual Report on Form 10-K for the year ended December 31, 2019, for additional risk factors.including, but not limited to, those related to cybersecurity, supply chain, and liquidity.
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(a) Exhibits required by Item 601 of Regulation S-K.
Exhibit |
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| Description | |
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| Amended and Restated Bylaws (Incorporated by reference to Form 8-K filed on October 25, 2011). | |
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31.1* |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002 |
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002 | |
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101.CAL* |
| XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* |
| XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* |
| XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* |
| XBRL Taxonomy Extension Presentation Linkbase Document |
101.INS* |
| XBRL Instance Document |
101.SCH* |
| XBRL Taxonomy Extension Schema Document |
*Filed herewith.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: | | |
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| THE ONE GROUP HOSPITALITY, INC. | |
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| By: |
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| Tyler Loy, Chief Financial Officer |
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