UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
| |
| (Mark One) |
| |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the Quarterly Period Ended September 30, |
| |
| OR |
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to |
Commission File Number 001-37379
|
THE ONE GROUP HOSPITALITY, INC. |
(Exact name of registrant as specified in its charter)
Delaware |
| 14-1961545 |
(State or other jurisdiction of incorporation or |
| (I.R.S. Employer Identification No.) |
|
|
|
1624 Market Street, Suite 311, Denver, Colorado |
| 80202 |
(Address of principal executive offices) |
| Zip Code |
646-624-2400 |
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Common Stock |
| STKS |
| Nasdaq |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. 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-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-2 of the Exchange Act). Yes ☐ No ⌧
Number of shares of common stock outstanding as of October 31, 2022:2023: 32,265,50431,273,343
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE ONE GROUP HOSPITALITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
| | | | | | | | | | | | |
| | September 30, | | December 31, | | September 30, | | December 31, | ||||
|
| 2022 | | 2021 |
| 2023 | | 2022 | ||||
ASSETS | | (Unaudited) |
| |
| | (Unaudited) |
| |
| ||
Current assets: |
| |
|
| |
|
| |
|
| |
|
Cash and cash equivalents | | $ | 17,477 | | $ | 23,614 | | $ | 22,137 | | $ | 55,121 |
Accounts receivable | |
| 8,454 | |
| 11,356 | |
| 11,478 | |
| 15,220 |
Inventory | |
| 4,988 | |
| 3,915 | |
| 5,923 | |
| 5,728 |
Other current assets | |
| 2,274 | |
| 3,666 | |
| 2,093 | |
| 2,091 |
Due from related parties | |
| 376 | |
| 376 | |
| 376 | |
| 376 |
Total current assets | |
| 33,569 | |
| 42,927 | |
| 42,007 | |
| 78,536 |
| |
|
| |
|
| |
|
| |
|
|
Property and equipment, net | |
| 85,466 | |
| 69,638 | |
| 125,408 | |
| 94,087 |
Operating lease right-of-use assets | | | 84,928 | | | 85,395 | | | 93,366 | | | 85,161 |
Deferred tax assets, net | |
| 12,096 | |
| 12,313 | |
| 13,320 | |
| 12,323 |
Intangibles, net | | | 15,283 | | | 15,505 | | | 15,310 | | | 15,290 |
Other assets | |
| 4,231 | |
| 3,199 | |
| 4,752 | |
| 4,774 |
Security deposits | |
| 810 | |
| 858 | |
| 853 | |
| 853 |
Total assets | | $ | 236,383 | | $ | 229,835 | | $ | 295,016 | | $ | 291,024 |
| |
|
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|
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
|
| |
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Current liabilities: | |
|
| |
|
| |
|
| |
|
|
Accounts payable | | $ | 11,557 | | $ | 11,094 | | $ | 11,751 | | $ | 13,055 |
Accrued expenses | |
| 17,613 | |
| 23,155 | |
| 24,197 | |
| 22,409 |
Deferred license revenue | |
| 79 | |
| 90 | ||||||
Deferred gift card revenue and other | |
| 1,426 | |
| 2,029 | |
| 1,254 | |
| 2,115 |
Current portion of operating lease liabilities | | | 6,114 | | | 5,396 | | | 6,629 | | | 6,336 |
Current portion of long-term debt | |
| 500 | |
| 500 | |
| 1,375 | |
| 1,500 |
Other current liabilities | |
| 259 | |
| 256 | ||||||
Total current liabilities | |
| 37,289 | |
| 42,264 | |
| 45,465 | |
| 45,671 |
| |
|
| |
|
| |
|
| |
|
|
Deferred license revenue, long-term | |
| 238 | |
| 298 | ||||||
| | | | | | | ||||||
Operating lease liabilities, net of current portion | | | 105,038 | | | 103,616 | | | 115,999 | | | 105,247 |
Long-term debt, net of current portion | |
| 27,940 | |
| 23,132 | |
| 70,881 | |
| 70,544 |
Other long-term liabilities | |
| 907 | |
| 972 | ||||||
Total liabilities | |
| 170,505 | |
| 169,310 | |
| 233,252 | |
| 222,434 |
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Commitments and contingencies (Note 15) | |
|
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Stockholders’ equity: | |
|
| |
|
| |
|
| |
|
|
Common stock, $0.0001 par value, 75,000,000 shares authorized; 32,744,362 issued and 32,231,728 outstanding at September 30, 2022 and 32,138,396 issued and 32,125,762 outstanding at December 31, 2021 | |
| 3 | |
| 3 | ||||||
Preferred stock, $0.0001 par value, 10,000,000 shares authorized; no shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | |
| — | |
| — | ||||||
Treasury stock, 512,634 and 12,634 shares at cost at September 30, 2022 and December 31, 2021, respectively | |
| (3,540) | |
| (37) | ||||||
Common stock, $0.0001 par value, 75,000,000 shares authorized; 33,514,057 issued and 31,273,343 outstanding at September 30, 2023 and 32,829,995 issued and 31,735,423 outstanding at December 31, 2022 | |
| 3 | |
| 3 | ||||||
Preferred stock, $0.0001 par value, 10,000,000 shares authorized; no shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively | |
| — | |
| — | ||||||
Treasury stock, 2,240,714 and 1,094,572 shares at cost at September 30, 2023 and December 31, 2022, respectively | |
| (14,858) | |
| (7,169) | ||||||
Additional paid-in capital | |
| 54,347 | |
| 53,481 | |
| 57,083 | |
| 55,583 |
Retained earnings | |
| 19,087 | |
| 10,632 | |
| 24,242 | |
| 24,166 |
Accumulated other comprehensive loss | |
| (2,993) | |
| (2,645) | |
| (2,999) | |
| (2,869) |
Total stockholders’ equity | |
| 66,904 | |
| 61,434 | |
| 63,471 | |
| 69,714 |
Noncontrolling interests | |
| (1,026) | |
| (909) | |
| (1,707) | |
| (1,124) |
Total equity | |
| 65,878 | |
| 60,525 | |
| 61,764 | |
| 68,590 |
Total liabilities and equity | | $ | 236,383 | | $ | 229,835 | | $ | 295,016 | | $ | 291,024 |
See notes to the condensed consolidated financial statements.
3
THE ONE GROUP HOSPITALITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited, in thousands, except income per share and related share information)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, | | For the three months ended September 30, | | For the nine months ended September 30, | ||||||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
Revenues: |
| |
|
| |
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| |
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| |
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Owned restaurant net revenue | | $ | 69,538 | | $ | 67,966 | | $ | 216,984 | | $ | 184,982 | | $ | 73,700 | | $ | 69,538 | | $ | 232,202 | | $ | 216,984 |
Management, license and incentive fee revenue | |
| 3,482 | | | 3,903 | |
| 11,342 | | | 8,129 | |
| 3,184 | | | 3,482 | |
| 10,631 | | | 11,342 |
Total revenues | |
| 73,020 | |
| 71,869 | |
| 228,326 | |
| 193,111 | |
| 76,884 | |
| 73,020 | |
| 242,833 | |
| 228,326 |
Cost and expenses: | |
|
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Owned operating expenses: | |
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Owned restaurant cost of sales | |
| 17,281 | | | 17,733 | |
| 55,231 | | | 46,925 | |
| 18,230 | | | 17,281 | |
| 56,300 | | | 55,231 |
Owned restaurant operating expenses | |
| 43,136 | | | 38,640 | |
| 126,818 | | | 101,882 | |
| 46,372 | | | 43,136 | |
| 141,983 | | | 126,818 |
Total owned operating expenses | |
| 60,417 | |
| 56,373 | |
| 182,049 | |
| 148,807 | |
| 64,602 | |
| 60,417 | |
| 198,283 | |
| 182,049 |
General and administrative (including stock-based compensation of $1,001, $653, $2,791 and $2,812 for the three and nine months ended September 30, 2022 and 2021, respectively) | |
| 6,447 | | | 5,959 | |
| 20,587 | | | 17,272 | ||||||||||||
General and administrative (including stock-based compensation of $1,244, $1,001, $3,798, $2,791 for the three and nine months ended September 30, 2023 and 2022, respectively) | |
| 7,280 | | | 6,447 | |
| 22,803 | | | 20,587 | ||||||||||||
Depreciation and amortization | |
| 2,930 | | | 2,572 | |
| 8,571 | | | 7,766 | |
| 3,732 | | | 2,930 | |
| 10,894 | | | 8,571 |
Pre-opening expenses | |
| 3,097 | | | 2,684 | |
| 6,005 | | | 3,833 | ||||||||||||
COVID-19 related expenses | |
| — | | | 1,131 | |
| 2,534 | | | 3,776 | |
| — | | | — | |
| — | | | 2,534 |
Agreement restructuring expenses | | | — | | | — | | | — | | | 494 | ||||||||||||
Pre-opening expenses | |
| 2,684 | | | 587 | |
| 3,833 | | | 842 | ||||||||||||
Lease termination expenses | | | — | | | 58 | | | 255 | | | 352 | | | — | | | — | | | — | | | 255 |
Transaction costs | |
| 51 | | | 131 | |
| 51 | | | 131 | ||||||||||||
Other expenses | |
| 128 | | | 51 | |
| 480 | | | 51 | ||||||||||||
Total costs and expenses | |
| 72,529 | |
| 66,811 | |
| 217,880 | |
| 179,440 | |
| 78,839 | |
| 72,529 | |
| 238,465 | |
| 217,880 |
Operating income | |
| 491 | |
| 5,058 | |
| 10,446 | |
| 13,671 | ||||||||||||
Other expenses (income), net: | |
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| |
|
| |
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|
| ||||||||||||
Interest expense, net | |
| 435 | | | 781 | |
| 1,387 | | | 3,262 | ||||||||||||
Loss on early debt extinguishment | |
| — | | | 600 | |
| — | | | 600 | ||||||||||||
Gain on CARES Act Loan forgiveness | |
| — | | | (9,968) | |
| — | | | (18,529) | ||||||||||||
Total other expenses (income), net | |
| 435 | |
| (8,587) | |
| 1,387 | |
| (14,667) | ||||||||||||
Income before provision for income taxes | |
| 56 | |
| 13,645 | |
| 9,059 | |
| 28,338 | ||||||||||||
Operating (loss) income | |
| (1,955) | |
| 491 | |
| 4,368 | |
| 10,446 | ||||||||||||
Other expenses, net: | |
|
| |
|
| |
|
| |
|
| ||||||||||||
Interest expense, net of interest income | |
| 1,673 | | | 435 | |
| 5,102 | | | 1,387 | ||||||||||||
Total other expenses, net | |
| 1,673 | |
| 435 | |
| 5,102 | |
| 1,387 | ||||||||||||
(Loss) Income before provision for income taxes | |
| (3,628) | |
| 56 | |
| (734) | |
| 9,059 | ||||||||||||
(Benefit) provision for income taxes | |
| (321) | | | 1,544 | |
| 721 | | | 2,188 | |
| (375) | | | (321) | |
| (227) | | | 721 |
Net income | |
| 377 | |
| 12,101 | |
| 8,338 | |
| 26,150 | ||||||||||||
Less: net (loss) income attributable to noncontrolling interest | |
| (105) | | | 430 | |
| (117) | | | 573 | ||||||||||||
Net income attributable to The One Group Hospitality, Inc. | | $ | 482 | | $ | 11,671 | | $ | 8,455 | | $ | 25,577 | ||||||||||||
Net (loss) income | |
| (3,253) | |
| 377 | |
| (507) | |
| 8,338 | ||||||||||||
Less: net loss attributable to noncontrolling interest | |
| (155) | | | (105) | |
| (583) | | | (117) | ||||||||||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. | | $ | (3,098) | | $ | 482 | | $ | 76 | | $ | 8,455 | ||||||||||||
Currency translation loss | |
| (87) | | | (34) | |
| (348) | | | (44) | |
| (112) | | | (87) | |
| (130) | | | (348) |
Comprehensive income attributable to The ONE Group Hospitality, Inc. | | $ | 395 | | $ | 11,637 | | $ | 8,107 | | $ | 25,533 | ||||||||||||
Comprehensive (loss) income attributable to The ONE Group Hospitality, Inc. | | $ | (3,210) | | $ | 395 | | $ | (54) | | $ | 8,107 | ||||||||||||
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Net income attributable to The ONE Group Hospitality, Inc. per share: | |
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Basic net income per share | | $ | 0.01 | | $ | 0.36 | | $ | 0.26 | | $ | 0.83 | ||||||||||||
Diluted net income per share | | $ | 0.01 | | $ | 0.34 | | $ | 0.25 | | $ | 0.75 | ||||||||||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. per share: | |
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| ||||||||||||
Basic net (loss) income per share | | $ | (0.10) | | $ | 0.01 | | $ | — | | $ | 0.26 | ||||||||||||
Diluted net (loss) income per share | | $ | (0.10) | | $ | 0.01 | | $ | — | | $ | 0.25 | ||||||||||||
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Shares used in computing basic income per share | |
| 32,663,549 | |
| 31,993,557 | |
| 32,496,780 | |
| 30,830,521 | ||||||||||||
Shares used in computing diluted income per share | |
| 33,921,498 | |
| 34,380,573 | |
| 34,062,661 | |
| 34,223,857 | ||||||||||||
Shares used in computing basic (loss) income per share | |
| 31,515,011 | |
| 32,663,549 | |
| 31,657,761 | |
| 32,496,780 | ||||||||||||
Shares used in computing diluted (loss) income per share | |
| 31,515,011 | |
| 33,921,498 | |
| 32,537,572 | |
| 34,062,661 |
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)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | ||
| | | | | | | | | | Additional | | | | | other | | | | | | | | | | | | | | | | | | | Additional | | | | | other | | | | | | | | | | ||||
| | Common stock | | Treasury | | paid-in | | Retained | | comprehensive | | Stockholders’ | | Noncontrolling | | | | |||||||||||||||||||||||||||||||||||
|
| Shares |
| Par value |
| stock | | capital |
| Earnings |
| loss |
| equity |
| interests |
| Total | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2022 |
| 31,735,423 | | $ | 3 | | $ | (7,169) | | $ | 55,583 | | $ | 24,166 | | $ | (2,869) | | $ | 69,714 | | $ | (1,124) | | $ | 68,590 | ||||||||||||||||||||||||||
Stock-based compensation |
| 16,205 | |
| — | | | — | | | 1,320 | | | — | | | — | |
| 1,320 | |
| — | |
| 1,320 | ||||||||||||||||||||||||||
Issuance of vested restricted shares, net of tax withholding |
| 247,536 | |
| — | | | — | | | (1,432) | | | — | | | — | |
| (1,432) | |
| — | |
| (1,432) | ||||||||||||||||||||||||||
Purchase of treasury stock | | (118,085) | | | | | | (735) | | | — | | | — | | | — | | | (735) | | | — | | | (735) | ||||||||||||||||||||||||||
Loss on foreign currency translation, net |
| — | |
| — | | | — | | | — | | | — | | | (70) | |
| (70) | |
| — | |
| (70) | ||||||||||||||||||||||||||
Net income (loss) |
| — | |
| — | | | — | | | — | | | 2,606 | | | — | |
| 2,606 | |
| (276) | |
| 2,330 | ||||||||||||||||||||||||||
Balance at March 31, 2023 |
| 31,881,079 | | $ | 3 | | $ | (7,904) | | $ | 55,471 | | $ | 26,772 | | $ | (2,939) | | $ | 71,403 | | $ | (1,400) | | $ | 70,003 | ||||||||||||||||||||||||||
Stock-based compensation |
| 17,930 | | | — | | | — | | | 1,234 | | | — | | | — | |
| 1,234 | |
| — | |
| 1,234 | ||||||||||||||||||||||||||
Exercise of stock options and warrants |
| 135,500 | | | — | | | — | | | 226 | | | — | | | — | |
| 226 | |
| — | |
| 226 | ||||||||||||||||||||||||||
Issuance of vested restricted shares, net of tax withholding |
| 66,717 | | | — | | | — | | | (370) | | | — | | | — | |
| (370) | |
| — | |
| (370) | ||||||||||||||||||||||||||
Purchase of treasury stock |
| (478,992) | | | — | | | (3,418) | | | — | | | — | | | — | |
| (3,418) | |
| — | |
| (3,418) | ||||||||||||||||||||||||||
Gain on foreign currency translation, net |
| — | | | — | | | — | | | — | | | — | | | 52 | |
| 52 | |
| — | |
| 52 | ||||||||||||||||||||||||||
Net income (loss) |
| — | | | — | | | — | | | — | | | 568 | | | — | |
| 568 | |
| (152) | |
| 416 | ||||||||||||||||||||||||||
Balance at June 30, 2023 |
| 31,622,234 | | $ | 3 | | $ | (11,322) | | $ | 56,561 | | $ | 27,340 | | $ | (2,887) | | $ | 69,695 | | $ | (1,552) | | $ | 68,143 | ||||||||||||||||||||||||||
Stock-based compensation |
| 23,865 | | | — | | | — | | | 1,244 | | | — | | | — | |
| 1,244 | |
| — | |
| 1,244 | ||||||||||||||||||||||||||
Exercise of stock options |
| 22,500 | | | — | | | — | | | 75 | | | — | | | — | |
| 75 | |
| — | |
| 75 | ||||||||||||||||||||||||||
Issuance of vested restricted shares, net of tax withholding | | 153,809 | | | — | | | — | | | (797) | | | — | | | — | | | (797) | | | — | | | (797) | ||||||||||||||||||||||||||
Purchase of treasury stock |
| (549,065) | | | — | | | (3,536) | | | — | | | — | | | — | |
| (3,536) | |
| — | |
| (3,536) | ||||||||||||||||||||||||||
Loss on foreign currency translation, net |
| — | | | — | | | — | | | — | | | — | | | (112) | |
| (112) | |
| — | |
| (112) | ||||||||||||||||||||||||||
Net loss |
| — | | | — | | | — | | | — | | | (3,098) | | | — | |
| (3,098) | |
| (155) | |
| (3,253) | ||||||||||||||||||||||||||
Balance at September 30, 2023 |
| 31,273,343 | | $ | 3 | | $ | (14,858) | | $ | 57,083 | | $ | 24,242 | | $ | (2,999) | | $ | 63,471 | | $ | (1,707) | | $ | 61,764 | ||||||||||||||||||||||||||
| | Common stock | | Treasury | | paid-in | | Retained | | comprehensive | | Stockholders’ | | Noncontrolling | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||
|
| Shares |
| Par value |
| stock | | capital |
| Earnings |
| loss |
| equity |
| interests |
| Total | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||
Balance at December 31, 2021 |
| 32,125,762 | | $ | 3 | | $ | (37) | | $ | 53,481 | | $ | 10,632 | | $ | (2,645) | | $ | 61,434 | | $ | (909) | | $ | 60,525 |
| 32,125,762 | | $ | 3 | | $ | (37) | | $ | 53,481 | | $ | 10,632 | | $ | (2,645) | | $ | 61,434 | | $ | (909) | | $ | 60,525 |
Stock-based compensation |
| 7,162 | |
| — | | | — | | | 879 | | | — | | | — | |
| 879 | |
| — | |
| 879 |
| 7,162 | |
| — | | | — | | | 879 | | | — | | | — | |
| 879 | |
| — | |
| 879 |
Issuance of vested restricted shares, net of tax withholding |
| 127,413 | |
| — | | | — | | | (314) | | | — | | | — | |
| (314) | |
| — | |
| (314) |
| 127,413 | |
| — | | | — | | | (314) | | | — | | | — | |
| (314) | |
| — | |
| (314) |
Loss on foreign currency translation, net |
| — | |
| — | | | — | | | — | | | — | | | (92) | |
| (92) | |
| — | |
| (92) |
| — | |
| — | | | — | | | — | | | — | | | (92) | |
| (92) | |
| — | |
| (92) |
Net income (loss) |
| — | |
| — | | | — | | | — | | | 3,670 | | | — | |
| 3,670 | |
| (149) | |
| 3,521 |
| — | |
| — | | | — | | | — | | | 3,670 | | | — | |
| 3,670 | |
| (149) | |
| 3,521 |
Balance at March 31, 2022 |
| 32,260,337 | | $ | 3 | | $ | (37) | | $ | 54,046 | | $ | 14,302 | | $ | (2,737) | | $ | 65,577 | | $ | (1,058) | | $ | 64,519 |
| 32,260,337 | | $ | 3 | | $ | (37) | | $ | 54,046 | | $ | 14,302 | | $ | (2,737) | | $ | 65,577 | | $ | (1,058) | | $ | 64,519 |
Stock-based compensation |
| 10,214 | | | — | | | — | | | 911 | | | — | | | — | |
| 911 | |
| — | |
| 911 |
| 10,214 | | | — | | | — | | | 911 | | | — | | | — | |
| 911 | |
| — | |
| 911 |
Exercise of stock options and warrants |
| 13,261 | | | — | | | — | | | 28 | | | — | | | — | |
| 28 | |
| — | |
| 28 | ||||||||||||||||||||||||||
Exercise of stock options |
| 13,261 | | | — | | | — | | | 28 | | | — | | | — | |
| 28 | |
| — | |
| 28 | ||||||||||||||||||||||||||
Issuance of vested restricted shares, net of tax withholding |
| 365,589 | | | — | | | — | | | (1,242) | | | — | | | — | |
| (1,242) | |
| — | |
| (1,242) |
| 365,589 | | | — | | | — | | | (1,242) | | | — | | | — | |
| (1,242) | |
| — | |
| (1,242) |
Loss on foreign currency translation, net |
| — | | | — | | | — | | | — | | | — | | | (169) | |
| (169) | |
| — | |
| (169) |
| — | | | — | | | — | | | — | | | — | | | (169) | |
| (169) | |
| — | |
| (169) |
Net income |
| — | | | — | | | — | | | — | | | 4,303 | | | — | |
| 4,303 | |
| 137 | |
| 4,440 |
| — | | | — | | | — | | | — | | | 4,303 | | | — | |
| 4,303 | |
| 137 | |
| 4,440 |
Balance at June 30, 2022 |
| 32,649,401 | | $ | 3 | | $ | (37) | | $ | 53,743 | | $ | 18,605 | | $ | (2,906) | | $ | 69,408 | | $ | (921) | | $ | 68,487 |
| 32,649,401 | | $ | 3 | | $ | (37) | | $ | 53,743 | | $ | 18,605 | | $ | (2,906) | | $ | 69,408 | | $ | (921) | | $ | 68,487 |
Stock-based compensation |
| 11,293 | | | — | | | — | | | 1,001 | | | — | | | — | |
| 1,001 | |
| — | |
| 1,001 | | 11,293 | | | — | | | — | | | 1,001 | | | — | | | — | | | 1,001 | | | — | | | 1,001 |
Issuance of vested restricted shares, net of tax withholding | | 71,034 | | | — | | | — | | | (397) | | | — | | | — | | | (397) | | | — | | | (397) | | 71,034 | | | — | | | — | | | (397) | | | — | | | — | | | (397) | | | — | | | (397) |
Purchase of common stock | | (500,000) | | | — | | | (3,503) | | | — | | | — | | | — | | | (3,503) | | | — | | | (3,503) | ||||||||||||||||||||||||||
Purchase of treasury stock | | (500,000) | | | — | | | (3,503) | | | — | | | — | | | — | | | (3,503) | | | — | | | (3,503) | ||||||||||||||||||||||||||
Loss on foreign currency translation, net |
| — | | | — | | | — | | | — | | | — | | | (87) | |
| (87) | |
| — | |
| (87) | | — | | | — | | | — | | | — | | | — | | | (87) | | | (87) | | | — | | | (87) |
Net income (loss) |
| — | | | — | | | — | | | — | | | 482 | | | — | |
| 482 | |
| (105) | |
| 377 | | — | | | — | | | — | | | — | | | 482 | | | — | | | 482 | | | (105) | | | 377 |
Balance at September 30, 2022 |
| 32,231,728 | | $ | 3 | | $ | (3,540) | | $ | 54,347 | | $ | 19,087 | | $ | (2,993) | | $ | 66,904 | | $ | (1,026) | | $ | 65,878 |
| 32,231,728 | | $ | 3 | | $ | (3,540) | | $ | 54,347 | | $ | 19,087 | | $ | (2,993) | | $ | 66,904 | | $ | (1,026) | | $ | 65,878 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||
Balance at December 31, 2020 |
| 29,083,183 | | $ | 3 | | $ | — | | $ | 46,538 | | $ | (20,716) | | $ | (2,646) | | $ | 23,179 | | $ | (1,200) | | $ | 21,979 | ||||||||||||||||||||||||||
Stock-based compensation |
| 25,643 | |
| — | | | — | | | 1,022 | | | — | | | — | |
| 1,022 | |
| — | |
| 1,022 | ||||||||||||||||||||||||||
Exercise of stock options and warrants |
| 450,971 | |
| — | | | — | | | — | | | — | | | — | |
| — | |
| — | |
| — | ||||||||||||||||||||||||||
Issuance of vested restricted shares, net of tax withholding |
| 67,685 | |
| — | | | — | | | (154) | | | — | | | — | |
| (154) | |
| — | |
| (154) | ||||||||||||||||||||||||||
Purchase of noncontrolling interest |
| — | |
| — | | | — | | | 116 | | | — | | | — | |
| 116 | |
| (191) | |
| (75) | ||||||||||||||||||||||||||
Loss on foreign currency translation, net |
| — | |
| — | | | — | | | — | | | — | | | (18) | |
| (18) | |
| — | |
| (18) | ||||||||||||||||||||||||||
Net income (loss) |
| — | |
| — | | | — | | | — | | | 70 | | | — | |
| 70 | |
| (130) | |
| (60) | ||||||||||||||||||||||||||
Balance at March 31, 2021 |
| 29,627,482 | | $ | 3 | | $ | — | | $ | 47,522 | | $ | (20,646) | | $ | (2,664) | | $ | 24,215 | | $ | (1,521) | | $ | 22,694 | ||||||||||||||||||||||||||
Stock-based compensation |
| 9,210 | | | — | | | — | | | 741 | | | — | | | — | |
| 741 | |
| — | |
| 741 | ||||||||||||||||||||||||||
Exercise of stock options and warrants |
| 931,558 | | | — | | | — | | | 3,151 | | | — | | | — | |
| 3,151 | |
| — | |
| 3,151 | ||||||||||||||||||||||||||
Issuance of vested restricted shares, net of tax withholding |
| 1,297,525 | | | — | | | — | | | — | | | — | | | — | |
| — | |
| — | |
| — | ||||||||||||||||||||||||||
Gain on foreign currency translation, net |
| — | | | — | | | — | | | — | | | — | | | 8 | |
| 8 | |
| — | |
| 8 | ||||||||||||||||||||||||||
Net income |
| — | | | — | | | — | | | — | | | 13,836 | | | — | |
| 13,836 | |
| 273 | |
| 14,109 | ||||||||||||||||||||||||||
Balance at June 30, 2021 |
| 31,865,775 | | $ | 3 | | $ | — | | $ | 51,414 | | $ | (6,810) | | $ | (2,656) | | $ | 41,951 | | $ | (1,248) | | $ | 40,703 | ||||||||||||||||||||||||||
Stock-based compensation |
| 18,978 | | | — | | | — | | | 679 | | | — | | | — | |
| 679 | |
| — | |
| 679 | ||||||||||||||||||||||||||
Exercise of stock options |
| 200,000 | | | — | | | — | | | 426 | | | — | | | — | |
| 426 | |
| — | |
| 426 | ||||||||||||||||||||||||||
Issuance of common shares, net of tax withholding |
| 9,500 | | | — | | | — | | | — | | | — | | | — | |
| — | |
| — | |
| — | ||||||||||||||||||||||||||
Purchase of common stock |
| — | | | — | | | (37) | | | — | | | — | | | — | |
| (37) | |
| — | |
| (37) | ||||||||||||||||||||||||||
Loss on foreign currency translation, net |
| — | | | — | | | — | | | — | | | — | | | (34) | |
| (34) | |
| — | |
| (34) | ||||||||||||||||||||||||||
Net income |
| — | | | — | | | — | | | — | | | 11,671 | | | — | |
| 11,671 | |
| 430 | |
| 12,101 | ||||||||||||||||||||||||||
Balance at September 30, 2021 |
| 32,094,253 | | $ | 3 | | $ | (37) | | $ | 52,519 | | $ | 4,861 | | $ | (2,690) | | $ | 54,656 | | $ | (818) | | $ | 53,838 |
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 nine months ended September 30, | | For the nine months ended September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2023 |
| 2022 | ||||
Operating activities: |
| |
|
| |
|
| |
|
| |
|
Net income | | $ | 8,338 | | $ | 26,150 | ||||||
Net (loss) income | | $ | (507) | | $ | 8,338 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |
|
| |
|
| |
|
| |
|
|
Depreciation and amortization | |
| 8,571 | |
| 7,766 | |
| 10,894 | |
| 8,571 |
Stock-based compensation | |
| 2,791 | |
| 2,442 | |
| 3,798 | |
| 2,791 |
CARES Act loan forgiveness | |
| — | |
| (18,529) | ||||||
Amortization of debt issuance costs | |
| 279 | |
| 321 | |
| 558 | |
| 279 |
Deferred taxes | |
| 217 | |
| 1,504 | |
| (997) | |
| 217 |
Loss on early debt extinguishment | |
| — | |
| 600 | ||||||
Changes in operating assets and liabilities: | |
| | |
|
| |
| | |
| |
Accounts receivable | |
| 2,971 | |
| (2,611) | |
| 3,730 | |
| 2,971 |
Inventory | |
| (1,073) | |
| (516) | |
| (195) | |
| (1,073) |
Other current assets | |
| 1,380 | |
| (811) | |
| 56 | |
| 1,380 |
Security deposits | |
| 48 | |
| 7 | |
| — | |
| 48 |
Other assets | |
| (494) | |
| (348) | |
| (403) | |
| (494) |
Accounts payable | |
| (841) | |
| 2,314 | |
| (1,720) | |
| (841) |
Accrued expenses | |
| (7,784) | |
| 5,454 | |
| (2,067) | |
| (7,784) |
Operating lease liabilities and right-of-use assets | | | 2,607 | | | 1,045 | | | 2,840 | | | 2,607 |
Deferred gift card and license revenue | |
| (674) | |
| (1,758) | ||||||
Other liabilities | |
| (759) | |
| (674) | ||||||
Net cash provided by operating activities | |
| 16,336 | |
| 23,030 | |
| 15,228 | |
| 16,336 |
| |
|
| |
|
| |
|
| |
|
|
Investing activities: | |
|
| |
|
| |
|
| |
|
|
Purchase of property and equipment | |
| (21,309) | |
| (8,112) | |
| (38,411) | |
| (21,309) |
Net cash used in investing activities | |
| (21,309) | |
| (8,112) | |
| (38,411) | |
| (21,309) |
| |
|
| |
|
| |
|
| |
|
|
Financing activities: | |
|
| |
|
| |
|
| |
|
|
Borrowings of long-term debt | |
| 5,000 | |
| — | |
| — | |
| 5,000 |
Repayments of long-term debt | | | (375) | | | (22,633) | ||||||
Debt issuance costs | | | — | | | (866) | ||||||
Repayments of long-term debt and financing lease liabilities | | | (458) | | | (375) | ||||||
Exercise of stock options and warrants | |
| 28 | |
| 3,577 | |
| 301 | |
| 28 |
Tax-withholding obligation on stock-based compensation | |
| (1,953) | |
| (154) | |
| (1,835) | |
| (1,953) |
Purchase of common stock | | | (3,503) | | | (37) | ||||||
Purchase of non-controlling interests | |
| — | |
| (75) | ||||||
Purchase of treasury stock | |
| (7,689) | |
| (3,503) | ||||||
Net cash used in financing activities | |
| (803) | |
| (20,188) | |
| (9,681) | |
| (803) |
Effect of exchange rate changes on cash | |
| (361) | |
| (37) | |
| (120) | |
| (361) |
Net decrease in cash and cash equivalents | |
| (6,137) | |
| (5,307) | |
| (32,984) | |
| (6,137) |
Cash and cash equivalents, beginning of period | |
| 23,614 | |
| 24,385 | |
| 55,121 | |
| 23,614 |
Cash and cash equivalents, end of period | | $ | 17,477 | | $ | 19,078 | | $ | 22,137 | | $ | 17,477 |
Supplemental disclosure of cash flow data: | |
|
| |
|
| |
|
| |
|
|
Interest paid, net of capitalized interest | | $ | 1,056 | | $ | 3,118 | | $ | 5,051 | | $ | 1,056 |
Income taxes paid | | $ | 293 | | $ | 53 | | $ | 312 | | $ | 293 |
Non-cash CARES Act loan forgiveness | | $ | — | | $ | 18,529 | ||||||
Accrued purchases of property and equipment | | $ | 4,355 | | $ | — | | $ | 8,684 | | $ | 4,355 |
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 globalan international restaurant company that develops, owns and operates, manages and licenses upscale and polished casual, high-energy restaurants and lounges and provides turn-key food and beverage (“F&B”) services and consulting 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 at a particular hospitality venue and customized for the client. The Company’s primary restaurant brands are STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse, and Kona Grill, a polished casual bar-centric grill concept featuring American favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere.
As of September 30, 2022,2023, the Company owned, operated, managed, or licensed 6164 venues, including 2325 STKs and 2426 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and 1413 F&B venues in seven hotels and casinos in the United States and Europe. For those restaurants and venues that are managed or licensed, the Company generates management fees based on top-line revenues and incentive fee revenue based on a percentage of the location’s revenues and profits.
COVID-19
In response to COVID-19, the Company has taken significant steps to adapt its business to increase sales while providing a safe environment for guests and employees. COVID-19 related expenses were zero and $2.5 million for the three and nine months ended September 30, 2022, compared to $1.1 million and $3.8 million for the three and nine months ended September 30, 2021, respectively, composed primarily of sanitation, supplies and safety precautions taken to prevent the spread of COVID-19.
Basis of Presentation
The accompanying condensed consolidated balance sheet as of December 31, 2021,2022, which has been derived from audited financial statements, and the accompanying unaudited interim condensed consolidated financial statements (“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 statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.2022.
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.
Change in Accounting Estimate
Effective April 1, 2022, the Company changed its estimated useful life of the Kona Grill trade name. Based upon the strong performance of the Kona Grill restaurants over the twelve months ended March 31, 2022, significant capital investments in both existing and new restaurants and the Company’s commitment to expand the Kona Grill brand with the opening of new restaurants, the Company has determined that the Kona Grill trade name has an indefinite life rather than the twenty-year life previously determined. The Company currently has two Kona Grill venues under construction in Riverton, Utah and Columbus, Ohio and plans to open three to five Kona Grills each year for the foreseeable future. The effect of this change in estimate will reduce depreciation and amortization expense by $0.9 million annually, increase net income by $0.9 million annually, and increase basic and diluted earnings per share by approximately $0.03 annually based upon the current number of shares outstanding.
As a result of the above change, the Company updated its accounting policy for Intangible Assets and will test for impairment annually on November 1st or on an interim basis if events or changes in circumstances between annual tests indicate a potential impairment.
7
Prior Period Reclassifications
Certain reclassifications of the 2021 amounts in the segment reporting footnote have been made to conform to the current year presentation.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB “) issued Accounting Standards Update (“ASU“) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to estimate credit losses. ASU 2016-13 is effective for smaller reporting companies for fiscal years beginning after December 15, 2022. Effective, January 1, 2023, the Company implemented ASU 2016-13. The Company doesimplementation did not expect the adoption of ASU 2016-13 to have a material impact on itsthe Company’s financial statements.
7
Note 2 – Property and Equipment, netNet
Property and equipment, net consist of the following (in thousands):
| | | | | | | | | | | | |
| | September 30, | | December 31, | | September 30, | | December 31, | ||||
| | 2022 | | 2021 | | 2023 | | 2022 | ||||
Furniture, fixtures and equipment | | $ | 28,580 | | $ | 24,942 | | $ | 39,844 | | $ | 33,372 |
Leasehold improvements | |
| 81,489 | |
| 76,500 | |
| 99,562 | |
| 89,121 |
Less: accumulated depreciation | |
| (45,244) | |
| (39,425) | |
| (56,371) | |
| (47,528) |
Subtotal | |
| 64,825 | |
| 62,017 | |
| 83,035 | |
| 74,965 |
Construction in progress | |
| 18,074 | |
| 5,374 | |
| 39,482 | |
| 16,276 |
Restaurant smallwares | |
| 2,567 | |
| 2,247 | |
| 2,891 | |
| 2,846 |
Total | | $ | 85,466 | | $ | 69,638 | | $ | 125,408 | | $ | 94,087 |
Depreciation related to property and equipment was $2.9$3.6 million and $2.3$2.9 million for the three months ended September 30, 20222023 and 2021,2022, respectively, and $8.3$10.6 million and $7.1 million$8.3 for the nine months ended September 30, 20222023 and 2021,2022, respectively. The Company does not depreciatedepreciates construction in progress untilupon such assets arebeing placed into service.
Note 3 – Intangibles, netNet
Intangibles, net consists of the following (in thousands):
| | | | | | | | | | | | |
| | September 30, | | December 31, | | September 30, | | December 31, | ||||
|
| 2022 |
| 2021 |
| 2023 |
| 2022 | ||||
Indefinite-lived intangible assets | | | | | | | | | | | | |
Kona Grill trade name | | $ | 17,400 | | $ | — | | $ | 17,400 | | $ | 17,400 |
Finite-lived intangible assets | | | | | | | | | 101 | | | 75 |
Kona Grill trade name | | | — | | | 17,400 | ||||||
Other finite-lived intangible assets | | | 66 | | | 66 | ||||||
Total finite-lived intangible assets | | | 66 | | | 17,466 | ||||||
Less: accumulated amortization | |
| (2,183) | |
| (1,961) | |
| (2,191) | |
| (2,185) |
Total intangibles, net | | $ | 15,283 | | $ | 15,505 | | $ | 15,310 | | $ | 15,290 |
Finite-lived intangible assets are amortized using the straight-line method over their estimated useful life of 10 years. Amortization expense was nominal and $0.3 million for both the three months ended September 30, 20222023 and 2021, respectively.2022. Amortization expense was $0.2 millionnominal and $0.7$0.2 million for the nine months ended September 30, 20222023 and 2021,2022, respectively. The Company’s estimated aggregate amortization expense for each of the five succeeding fiscal years is a nominal amount annually. Refer to Note 1 regarding the change in accounting estimate of the Kona Grill trade name.
8
Note 4 – Accrued Expenses
Accrued expenses consist of the following (in thousands):
| | | | | | |
| | September 30, | | December 31, | ||
| | 2022 | | 2021 | ||
Payroll and related (1) | | $ | 4,059 |
| $ | 6,554 |
VAT and sales taxes | | | 2,443 |
| | 3,477 |
Construction on new restaurants | |
| 2,125 | |
| 359 |
Amounts due to landlords | | | 2,072 | | | 1,847 |
Insurance | |
| 789 | |
| 642 |
Legal, professional and other services | |
| 687 | | | 458 |
Income taxes and related | | | 155 | | | — |
Interest | | | 146 | | | 132 |
Accrued lease exit costs (2) | | | — | | | 4,913 |
Other (3) | |
| 5,137 | |
| 4,773 |
Total | | $ | 17,613 | | $ | 23,155 |
| | | | | | |
| | September 30, | | December 31, | ||
| | 2023 | | 2022 | ||
Payroll and related | | $ | 4,702 |
| $ | 5,249 |
Construction on new restaurants | |
| 4,773 | | | 1,903 |
VAT and sales taxes | | | 3,503 |
| | 4,118 |
Amounts due to landlords | | | 2,404 | |
| 2,949 |
Legal, professional and other services | |
| 767 | |
| 626 |
Insurance | |
| 462 | | | 742 |
Income taxes and related | | | 637 | | | 156 |
Interest | | | 777 | | | 268 |
Other (1) | |
| 6,172 | |
| 6,398 |
Total | | $ | 24,197 | | $ | 22,409 |
(1) |
Amount primarily relates to recurring restaurant operating expenses. |
8
Note 5 – Long-Term Debt
Long-term debt consists of the following (in thousands):
| | | | | | | | | | | | |
| | September 30, | | December 31, | | September 30, | | December 31, | ||||
| | 2022 | | 2021 | | 2023 | | 2022 | ||||
Term loan agreements | | $ | 24,375 | | $ | 24,750 | | $ | 24,000 | | $ | 24,250 |
Revolving credit facility | | | 5,000 | | | — | | | — | | | — |
Delayed draw term facility | |
| 50,000 | |
| 50,000 | ||||||
Total long-term debt | |
| 29,375 | |
| 24,750 | |
| 74,000 | |
| 74,250 |
Less: current portion of long-term debt | |
| (500) | |
| (500) | |
| (1,375) | |
| (1,500) |
Less: debt issuance costs | |
| (935) | |
| (1,118) | |
| (1,744) | |
| (2,206) |
Total long-term debt, net of current portion | | $ | 27,940 | | $ | 23,132 | | $ | 70,881 | | $ | 70,544 |
Interest expense, net for the Company’s debt arrangements, excluding the amortization of debt issuance costs and fees, was $0.4$1.8 million and $0.7$0.4 million for the three months ended September 30, 20222023 and 2021,2022, respectively, and $1.1$5.6 million and $2.9$1.1 million for the nine months ended September 30, 2023 and 2022, respectively. Capitalized interest was $0.5 million and 2021,$1.1 million for the three and nine months ended September 30, 2023, respectively. Capitalized interest was $0.1 million and $0.2 million for the three and nine months ended September 30, 2022, respectively.
As of September 30, 2022,2023, the Company had $1.4 million in standby letters of credit outstanding for certain restaurants and $5.6$10.6 million available in its revolving credit facility, subject to certain conditions.
Credit and Guaranty Agreement
On October 4, 2019, in conjunction with the acquisition of Kona Grill, the Company entered into a credit agreement with Goldman Sachs Bank USA (the “Credit Agreement”). On August 6, 2021, the Company entered into the Third Amendment to the Credit Agreement to extend the maturity date for both the term loan and revolving credit facility to August 2026. The2026, to eliminate all financial covenants except a maximum net leverage ratio of 2.00 to 1.00, and to eliminate restrictions on the maximum amount of capital expenditures, the maximum number of Company-owned new locations, and credit extensions under the revolving credit facility. As amended, the Credit Agreement provides for a secured revolving credit facility of $12.0 million and a $25.0 million term loan (reduced from $48.0 million). The term loan is payable in quarterly installments of $0.1 million, with the final payment due in August 2026.
The amendedOn December 13, 2022, the Company entered into the Fourth Amendment to the Credit Agreement has several borrowing and interest rate options, includingthat:
● | Allows for a new $50.0 million delayed draw term facility, available to draw for twelve months and subject to a 1.75x Net Leverage Ratio incurrence test (as defined in the Credit Agreement) for permitted acquisitions, stock repurchases and new restaurant capital expenditures; |
● | Allows the Company to redeem, repurchase or otherwise acquire its own capital stock in an aggregate amount of up to $50 million subject to a 1.75x Net Leverage Ratio incurrence test and no default or event of default; and |
● | Changed the interest rate from London Interbank Offered Rate (“LIBOR“) plus a margin to Secured Overnight Financing Rate (“SOFR”) plus an applicable margin. |
The Company borrowed $50.0 million on the following: (a) a LIBOR rate (or a comparable successor rate) subject to a 1.00% floor or (b) a base rate equal todelayed draw term facility on December 28, 2022. The delayed draw term loan is payable in quarterly installments of $0.25 million beginning March 31, 2024, with the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50%, (iii) the LIBOR rate for a one-month period plus 1.00% or (iv) 4.00%. final payment due in August 2026.
Loans under the amended Credit Agreement bear interest at a rate per annum using the applicable indicesSOFR rate subject to a 1.00% floor plus an interest rate margin of 5.00% (for LIBOR rate loans) and 4.00%
9
(for base rate loans)6.50%. Upon the cessation of LIBOR, the amended Credit Agreement provides for the use of a benchmark replacement as defined in the amended Credit Agreement.
In conjunction with the amended Credit Agreement, the Company made a pre-payment on the loan of $22.2 million and incurred $0.9 million in debt issuance costs. The Company accounted for the amendment as a debt modification with a partial extinguishment and recognized a loss on early debt extinguishment of $0.6 million for the nine months ended September 30, 2021 and $0.1 million in transaction costs.
The Company’s weighted average interest rate on the borrowings under the amended Credit Agreement as of September 30, 20222023 and December 31, 20212022 was 6.6%12.40% and 6.0%10.31%, respectively.
9
The 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.
The Company and certain operating subsidiaries of the Company guarantee the obligations under the amended Credit Agreement, which also are secured by liens on substantially all of the assets of the Company and its subsidiaries.
As of September 30, 2022,2023, the Company had $0.9$1.7 million of debt issuance costs related to the amended Credit Agreement, which were capitalized and are recorded as a direct deduction to long-term debt and $0.5$0.4 million in debt issuance costs recorded in Other Assets on the condensed consolidated balance sheets. As of September 30, 2022,2023, the Company was in compliance with the financial covenants required by the Credit Agreement.
Note 6 – 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. 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 September 30, 2022.2023.
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 valued using Level 2 inputs including current applicable rates for similar instruments and approximates the carrying value of such obligations.
Note 7 – Income taxesTaxes
Income taxes for the three and nine months ended September 30, 2022 are recorded at the Company’s estimated annual effective income tax rate, subject to adjustments for discrete events, should they occur. The Company recorded a benefit for income taxes of $0.2 million for the nine months ended September 30, 2023 compared to income tax expense of $0.7 million for the nine months ended September 30, 2022. The Company’s effective income tax rate including discrete events was (573.2%) and 8.0%30.9% for the three and nine months ended September 30, 2022,2023 compared to 11.3% and 7.7%8.0% for the three and nine months ended September 30, 2021.2022. The negativeincrease in the effective income tax rate for the three months ended September 30, 2022 wasis primarily the result of credits and discrete events exceedingitems in comparison to lower pre-tax book income for the quarter.period. The Company’s annualizedprojected annual effective tax rate for fiscal year 2023 is estimated atexpected to be approximately 15.9% for 2022.5.0%. The Company’s 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 with tax rates that differ from the U.S. statutory rate; (iii) taxes owed in state and local jurisdictions; and (iv) the tax effect of non-deductible compensation. IncomeThe income tax (benefit) provision recorded for the nine months ended September 30, 20222023 and 20212022 included the discrete period tax benefits resulting from the vesting of restricted stock units.
The CARES Act includes provisions allowing for the carryback of net operating losses generated for specific periods and technical amendments regarding the expensing of qualified improvement property. The CARES Act also allows for the deferral of the employer-paid portion of social security taxes, which the Company has elected to defer and will pay by December 31, 2022.
The Company is subject to U.S. federal, state, local and various foreign income taxes for the 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. There are no ongoing federal, state, local, or foreign tax examinations as of September 30, 2022.2023.
10
Note 8 – Revenue from Contracts with Customers
The following table provides information about liabilities from contracts with customers, which include deferred license revenue, deferred gift card revenue, the Konavore rewards program and deposits from customers for future events (in thousands):
| | | | | | | | | | | | |
|
| September 30, |
| December 31, |
| September 30, |
| December 31, | ||||
| | 2022 | | 2021 | | 2023 | | 2022 | ||||
Deferred license revenue (1) | | $ | 317 | | $ | 388 | | $ | 238 | | $ | 297 |
Deferred gift card and gift certificate revenue (2) | | $ | 832 | | $ | 1,769 | | $ | 791 | | $ | 1,680 |
Advanced party deposits (2) | | $ | 594 | | $ | 260 | | $ | 463 | | $ | 435 |
Konavore rewards program (3) | | $ | 160 | | $ | 136 | | $ | 170 | | $ | 163 |
(1) | Includes the current and long-term portion of deferred license revenue. |
(2) | Deferred gift card revenue and advance party deposits on goods and services yet to be provided are included in deferred gift card revenue and other on the condensed consolidated balance sheets. |
10
(3) | Konavore rewards program is included in accrued expenses on the condensed consolidated balance sheets. |
Revenue recognized during the period from contract liabilities as of the preceding fiscal year end date is as follows (in thousands):
| | | | | | | | | | | | |
|
| September 30, |
| September 30, |
| September 30, |
| September 30, | ||||
| | 2022 | | 2021 | | 2023 | | 2022 | ||||
Revenue recognized from deferred license revenue | | $ | 60 | | $ | 134 | | $ | 60 | | $ | 60 |
Revenue recognized from deferred gift card revenue | | $ | 1,126 | | $ | 1,232 | | $ | 1,121 | | $ | 1,126 |
Revenue recognized from advanced party deposits | | $ | 243 | | $ | 60 | | $ | 278 | | $ | 243 |
The estimated deferred license revenue to be recognized in the future related to performance obligations that are unsatisfied as of September 30, 20222023 were as follows for each year ending (in thousands):
| | | | | | |
2022, three months remaining |
| $ | 19 | |||
2023 |
| | 79 | |||
2023, three months remaining |
| $ | 19 | |||
2024 |
| | 45 |
| | 45 |
2025 |
| | 44 |
| | 44 |
2026 |
| | 37 |
| | 37 |
2027 |
| | 34 | |||
Thereafter |
| | 93 |
| | 59 |
Total future estimated deferred license revenue | | $ | 317 | | $ | 238 |
Note 9 – Leases
The components of lease expense for the nine months ended September 30, 20222023 and 20212022 are as follows (in thousands):
| | | | | | | | | | | | | | ||
| | September 30, |
| | September 30, |
| | September 30, |
| September 30, |
| ||||
| | 2022 |
| | 2021 |
| | 2023 |
| 2022 |
| ||||
Lease cost | | | | | | | | | | | | | | ||
Operating lease cost |
| $ | 10,999 | |
| $ | 10,099 | |
| $ | 12,104 |
| $ | 10,999 | |
Variable lease cost | | 7,707 | | | 4,275 | | |||||||||
Finance lease cost | | | | | | | | ||||||||
Amortization of ROU assets | | | 155 | | | — | | ||||||||
Interest on lease liabilities | | | 62 | | | — | | ||||||||
Total finance lease cost | | | 217 | | | — | | ||||||||
Variable lease cost (1) | | | 8,499 | | | 7,707 | | ||||||||
Short-term lease cost | | 650 | | | 458 | | | | 805 | | | 650 | | ||
Total lease cost |
| $ | 19,356 | |
| $ | 14,832 | |
| $ | 21,625 |
| $ | 19,356 | |
| | | | | | | | | | | | | | ||
Weighted average remaining lease term – operating leases | | 13 years | | | 13 years | | |||||||||
Weighted average discount rate – operating leases | | 8.37 | % | | 8.49 | % | |||||||||
Weighted average remaining lease term | | | | | | | | ||||||||
Operating leases | | | 13 years | | | 13 years | | ||||||||
Finance leases | | | 4 years | | | — | | ||||||||
Weighted average discount rate | | | | | | | | ||||||||
Operating leases | | | 8.63 | % | | 8.37 | % | ||||||||
Finance leases | | | 9.07 | % | | — | % |
(1) | Variable lease cost is comprised of percentage rent and common area maintenance. |
Due
Supplemental cash flow information related to leases for the negative effects of COVID-19, the Company implemented measures to reduce its costs, including negotiations with landlords regarding rent concessions. As the rent concessions received do not result in a significant increase in cash payments, the Company elected to account for these concessionsperiod was 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. Variable lease cost is comprised of percentage rent and common area maintenance, offset by rent concessions received as a result of COVID-19.follows (in thousands):
| | | | | | |
|
| September 30, |
| December 31, | ||
| | 2023 | | 2022 | ||
Finance lease right-of-use assets (1) | | $ | 868 | | $ | 942 |
Current portion of finance lease liabilities (1) | |
| 206 | |
| 177 |
Long-term portion of finance lease liabilities (1) | | | 722 | | | 754 |
(1) | Finance lease assets and liabilities are included in other assets, other current liabilities, and other long-term liabilities on the consolidated balance sheet. |
11
| | | | | | |
| | September 30, | | September 30, | ||
| | 2023 | | 2022 | ||
Cash paid for amounts included in the measurement of lease liabilities: |
| | | | | |
Operating cash flows from operating leases | | $ | 10,760 | | $ | 9,896 |
Operating cash flows from finance leases | | $ | 155 | | $ | — |
Financing cash flows from finance leases | | $ | 208 | | $ | — |
Right-of-use assets obtained in exchange for lease obligations: | | | | | | |
Operating leases | | $ | 9,039 | | $ | 3,709 |
Finance leases |
| $ | 81 | | $ | — |
The Company has entered into twothree operating leases for future STK restaurants in Charlotte, North Carolina and Los Angeles, California that have not commenced as of September 30, 2022.2023. The present value of the aggregate future commitment related to these leases, net of tenant improvement allowances received from the landlord, is estimated to be $3.5$5.7 million. The Company expects these leases, which have an initial lease termterms of 10 years and one or two 5-year options, to commence within the next twelve months.
Supplemental cash flow information related to leases for the period was as follows (in thousands):
| | | | | | |
| | September 30, | | September 30, | ||
| | 2022 | | 2021 | ||
Cash paid for amounts included in the measurement of operating lease liabilities |
| $ | 9,896 |
| $ | 9,211 |
Right-of-use assets obtained in exchange for operating lease obligations |
| $ | 3,709 |
| $ | 5,369 |
As of September 30, 2022,2023, maturities of the Company’s operating lease liabilities are as follows (in thousands):
| | | | | ||
2022, three months remaining | | $ | 3,118 | |||
2023 | | 13,664 | ||||
2023, three months remaining | | $ | (1,183) | |||
2024 | | 14,663 | | 14,656 | ||
2025 | | 13,705 | | 16,497 | ||
2026 | | 13,636 | | 16,562 | ||
2027 | | 16,968 | ||||
Thereafter | | | 131,925 | | | 157,319 |
Total lease payments | | 190,711 | | 220,819 | ||
Less: imputed interest | | | (79,559) | | | (98,191) |
Present value of operating lease liabilities |
| $ | 111,152 |
| $ | 122,628 |
As of September 30, 2023, maturities of the Company’s finance lease liabilities are as follows (in thousands):
| | | |
2023 | | $ | 127 |
2024 | | | 254 |
2025 | | | 254 |
2026 | | | 254 |
2027 | | | 212 |
Total lease payments | | | 1,101 |
Less: imputed interest | | | (173) |
Present value of finance lease liabilities |
| $ | 928 |
Note 10 – Earnings Per Share
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period and income available to common stockholders. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period plus the dilutive effect of potential shares of common stock including common stock issuable pursuant to stock options, warrants, and restricted stock units.
12
For the three and nine months ended September 30, 2023 and 2022, and 2021, the net (loss) income per share was calculated as follows (in thousands, except net income per share and related share data):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, | ||||||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
Net income attributable to The One Group Hospitality, Inc. | | $ | 482 | | $ | 11,671 | | $ | 8,455 | | $ | 25,577 | ||||||||||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. | | $ | (3,098) | | $ | 482 | | $ | 76 | | $ | 8,455 | ||||||||||||
| |
|
| |
|
| |
|
| |
| | |
|
| |
|
| |
|
| |
| |
Basic weighted average shares outstanding | |
| 32,663,549 | |
| 31,993,557 | |
| 32,496,780 | |
| 30,830,521 | |
| 31,515,011 | |
| 32,663,549 | |
| 31,657,761 | |
| 32,496,780 |
Dilutive effect of stock options, warrants and restricted share units | |
| 1,257,949 | |
| 2,387,016 | |
| 1,565,881 | |
| 3,393,336 | |
| — | |
| 1,257,949 | |
| 879,811 | |
| 1,565,881 |
Diluted weighted average shares outstanding | |
| 33,921,498 | |
| 34,380,573 | |
| 34,062,661 | |
| 34,223,857 | |
| 31,515,011 | |
| 33,921,498 | |
| 32,537,572 | |
| 34,062,661 |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Net income available to common stockholders per share - Basic | | $ | 0.01 | | $ | 0.36 | | $ | 0.26 | | $ | 0.83 | | $ | (0.10) | | $ | 0.01 | | $ | — | | $ | 0.26 |
Net income available to common stockholders per share - Diluted | | $ | 0.01 | | $ | 0.34 | | $ | 0.25 | | $ | 0.75 | | $ | (0.10) | | $ | 0.01 | | $ | — | | $ | 0.25 |
For the three and nine months ended September 30, 2023 and 2022, 0.7 million and 2021, a nominal amount, respectively, of stock options, warrants and restricted share units were determined to be anti-dilutive and were therefore excluded from the calculation of diluted earnings per share. For the nine months ended September 30, 2023 and 2022, a nominal amount of stock options, warrants and restricted share units were anti-dilutive.
Note 11 – Stockholder’s Equity
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock with a par value of $0.0001. There were no shares of preferred stock that were issued or outstanding at September 30, 20222023 or December 31, 2021.2022.
12
Common Stock
Stock Purchase Program
In September 2022, the Company’s Board of Directors authorized a repurchase program of up to $10.0$10.0 million of outstanding common stock. In May 2023, the Company’s Board of Directors authorized an additional $5.0 million to this program. During the quarter ended September 30, 2023, the Company purchased 0.5 million shares for aggregate consideration of $3.5 million. As of September 30, 2022, we had2023, the Company repurchased 500,0002.2 million shares for $3.5$14.8 million under the program. The repurchase program was completed in October 2023 with the repurchase of $0.2 million in shares.
Note 12 – Stock-Based Compensation and Warrants
At the 2022 Annual Meeting of Shareholders, the Company’s shareholders approved a 4,500,000 increase in the number of shares available for issuance under the 2019 Equity Plan. As of September 30, 2022,2023, the Company had 3,758,7953,297,571 shares available for issuance under the 2019 Equity Incentive Plan (“2019 Equity Plan”)Plan).
Stock-based compensation cost was $1.2 million and $1.0 million for the three months ended September 30, 20222023 and 2021 was $1.0 million and $0.7 million,2022, respectively, and $2.8$3.8 million and $2.8 million for the nine months ended September 30, 20222023 and 2021,2022, respectively. Stock-based compensation is included in general and administrative expenses in the condensed consolidated statements of operations and comprehensive income. Included in stock-based compensation cost was $0.1 million and $0.2$0.4 million of stock granted to directors for the three and nine months ended September 30, 20222023 compared to $0.1 million and $0.2 million and $0.4 million for the three and nine months ended September 30, 2021,2022, respectively. Such grants were awarded consistent with the Board of Director’s compensation practices. Stock-based compensation expense for the three and nine months ended September 30, 2022 and 20212023 included $0.1$0.2 million and $0.3$0.6 million, respectively, of compensation costs for the vesting of market condition-based options and RSUs.restricted stock units (“RSUs”).
13
Stock Option Activity
Stock options in the table below include both time basedtime-based and market condition-based awards. Changes in stock options during the nine months ended September 30, 20222023 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Weighted | | | | | | | | | Weighted | | | | ||
| | | | Weighted | | average | | Intrinsic | | | | Weighted | | average | | Intrinsic | ||||
| | | | average exercise | | remaining | | value | | | | average exercise | | remaining | | value | ||||
|
| Shares |
| price |
| contractual life |
| (thousands) |
| Shares |
| price |
| contractual life |
| (thousands) | ||||
Outstanding at December 31, 2021 |
| 1,252,352 | | $ | 3.36 |
| 3.92 years | | $ | 11,581 | ||||||||||
Exercisable at December 31, 2021 |
| 1,126,685 | | $ | 3.48 |
| 3.72 years | | $ | 10,283 | ||||||||||
Outstanding and Exercisable at December 31, 2022 |
| 1,187,352 | | $ | 3.43 |
| 2.84 years | | $ | 3,811 | ||||||||||
Granted |
| — | | $ | — |
|
| |
|
|
| — | | | — |
|
| |
|
|
Exercised |
| (13,261) | | $ | 2.13 |
|
| |
|
|
| (33,000) | | $ | 2.95 |
|
| |
|
|
Cancelled, expired or forfeited |
| — | | $ | — |
|
| |
|
|
| — | | | — |
|
| |
|
|
Outstanding at September 30, 2022 |
| 1,239,091 | | $ | 3.38 |
| 3.15 years | | $ | 4,044 | ||||||||||
Exercisable at September 30, 2022 |
| 1,239,091 | | $ | 3.38 |
| 3.15 years | | $ | 4,044 | ||||||||||
Outstanding and Exercisable at September 30, 2023 |
| 1,154,352 | | $ | 3.44 |
| 2.07 years | | $ | 2,373 |
A summary of the status of the Company’s non-vested stock options as of September 30, 2022 and changes during the nine months then ended, is presented below:
| | | | | |
| | | | Weighted average | |
|
| Shares |
| grant date fair value | |
Non-vested stock options at December 31, 2021 |
| 125,667 | | $ | 1.00 |
Vested |
| (125,667) | |
| 1.00 |
Non-vested stock options at September 30, 2022 |
| — | | $ | — |
The fair value of options that vested in the nine months ended September 30, 2022 was $0.1 million. All outstanding stock options vested as of June 30, 2022.
Restricted Stock Unit Activity
The Company issues restricted stock units (“RSUs”) under the 2019 Equity Plan. RSUs in the table below include both time basedtime-based and market condition-based awards. The fair value of time-based RSUs is determined based upon the closing fair market value of the Company’s common stock on the grant date.
AwardsRSU awards granted during the third quarter ofSeptember 2022 included 500,000 RSUs awarded to our Chief Executive Officer with both a market condition and time element (“Barrier(the “CEO RSUs”). These BarrierThe CEO RSUs may be earned based on achieving common stock price targets within a 48-month period and, if earned,
13
the CEO RSUs will vest and be settled based on a time element as outlined in the RSU agreement governing the BarrierCEO RSUs. To value the BarrierCEO RSUs, the Company, with the assistance of a third-party specialist, calculated the fair value of BarrierCEO RSUs using the Monte Carlo Simulation, a risk-free rate of 3.31%, a starting common stock value of $6.95, volatility of 73%, and a standard normal distribution. The Company valued the BarrierCEO RSUs at $3.1$2.9 million and will amortize thatthis amount evenly over 48 months. ForStock-based compensation for the three and nine months ended September 30, 2022, the Company recorded $0.12023 included $0.2 million and $0.6 million, respectively, of stock-based compensation expense associated withcosts for these awards.
A summary of the status of RSUs and changes during the nine months ended September 30, 20222023 is presented below:
| | | | | | | | | | |
| | | | Weighted average | | | | Weighted average | ||
|
| Shares |
| grant date fair value |
| Shares |
| grant date fair value | ||
Non-vested RSUs at December 31, 2021 |
| 1,690,010 | | $ | 4.98 | |||||
Non-vested RSUs at December 31, 2022 |
| 1,839,432 | | $ | 6.62 | |||||
Granted |
| 953,147 | |
| 7.46 |
| 442,618 | |
| 7.59 |
Vested |
| (715,781) | |
| 3.82 |
| (819,169) | |
| 5.42 |
Cancelled, expired or forfeited |
| (79,987) | |
| 5.99 |
| (70,341) | |
| 6.53 |
Non-vested RSUs at September 30, 2022 |
| 1,847,389 | | $ | 6.66 | |||||
Non-vested RSUs at September 30, 2023 |
| 1,392,540 | | $ | 7.62 |
As of September 30, 2022,2023, the Company had approximately $10.9$9.3 million of total unrecognized compensation costs related to both time basedtime-based and market condition basedcondition-based RSUs, which will be recognized over a weighted average period of 2.92.4 years.
Warrants
As of SeptemberDuring the three months ended June 30, 2022 and December 31, 2021, there were outstanding2023, warrants to purchase 125,000 shares of common stock at an exercise price of $1.63.$1.63 per share were exercised. There were no warrants outstanding as of September 30, 2023.
14
Note 13 – Segment Reporting
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 pre-opening expenses associated with new restaurants under development. |
● | Kona Grill. The Kona Grill segment includes the results of operations of Kona Grill restaurant locations and pre-opening expenses associated with new restaurants under development. |
● | 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, Bao Yum Heliot, Hideout, |
● | Corporate. The Corporate segment consists of the following: general and administrative costs, stock-based compensation, lease termination expenses, transaction costs, COVID-19 related expenses and other income and expenses. This segment also includes STK Meat Market, an e-commerce platform that offers signature steak cuts nationwide, the Company’s major off-site events group, which supports all brands and venue concepts, and revenue generated from gift card programs. The Corporate segment’s total assets primarily include cash and cash equivalents, the Kona Grill tradename, and deferred tax assets. |
The Company’s Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (“CODM”), 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. In the second quarter of 2022, the Company changed its
Certain financial information regularly reviewed byrelating to the CODM to include all cashthree and cash equivalents, the Kona Grill tradenamenine months ended September 30, 2023 and deferred tax assets in the Corporate segment. Previously, certain cash amounts were included in the STK and Kona Grill segments and the Kona Grill tradename and certain deferred tax assets were included in the Kona Grill segment. Fiscal 2021 figures have been reclassified2022 for comparability.each segment is provided below (in thousands).
| | | | | | | | | | | | | | | |
|
| STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | |||||
For the three months ended September 30, 2023 | | | | | | | | | | | | | | | |
Total revenues |
| $ | 43,709 | | | 32,775 | | | 345 | | | 55 | | | 76,884 |
Operating income (loss) | | $ | 6,003 | | | (444) | | | (131) | | | (7,383) | | | (1,955) |
Capital asset additions(1) | | $ | 8,775 | | | 6,012 | | | 8 | | | (280) | | | 14,515 |
For the nine months ended September 30, 2023 | | | | | | | | | | | | | | | |
Total revenues |
| $ | 143,420 | | | 97,961 | | | 1,188 | | | 264 | | | 242,833 |
Operating income (loss) | | $ | 26,957 | | | 910 | | | (174) | | | (23,325) | | | 4,368 |
Capital asset additions(1) | | $ | 19,730 | | | 17,427 | | | 34 | | | 1,220 | | | 38,411 |
As of September 30, 2023 | | | | | | | | | | | | | | | |
Total assets | | $ | 132,050 | | | 96,185 | | | 5,361 | | | 61,420 | | | 295,016 |
| | | | | | | | | | | | | | | |
| | STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | |||||
For the three months ended September 30, 2022 | | | | | | | | | | | | | | | |
Total revenues | | $ | 42,347 | | | 30,069 | | | 483 | | | 121 | | | 73,020 |
Operating income (loss) | | $ | 6,448 | | | 259 | | | 216 | | | (6,432) | | | 491 |
Capital asset additions | | $ | 5,788 | | | 2,761 | | | 58 | | | 611 | | | 9,218 |
For the nine months ended September 30, 2022 | | | | | | | | | | | | | | | |
Total revenues | | $ | 131,865 | | | 94,756 | | | 1,340 | | | 365 | | | 228,326 |
Operating income (loss) | | $ | 28,379 | | | 5,094 | | | 377 | | | (23,404) | | | 10,446 |
Capital asset additions | | $ | 13,122 | | | 6,029 | | | 111 | | | 2,047 | | | 21,309 |
As of December 31, 2022 | | | | | | | | | | | | | | | |
Total assets | | $ | 113,911 | | | 78,691 | | | 5,746 | | | 92,676 | | | 291,024 |
(1) | Capital asset additions for the Corporate segment include furniture, fixtures, and equipment for restaurants that the Company plans to open in the future. |
1415
Certain financial information relating to the three and nine months ended September 30, 2022 and 2021 for each segment is provided below (in thousands).
| | | | | | | | | | | | | | | |
|
| STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | |||||
For the three months ended September 30, 2022 | | | | | | | | | | | | | | | |
Total revenues |
| $ | 42,347 | | | 30,069 | | | 483 | | | 121 | | | 73,020 |
Operating income (loss) | | $ | 6,448 | | | 259 | | | 216 | | | (6,432) | | | 491 |
Capital asset additions | | $ | 5,788 | | | 2,761 | | | 58 | | | 611 | | | 9,218 |
For the nine months ended September 30, 2022 | | | | | | | | | | | | | | | |
Total revenues |
| $ | 131,865 | | | 94,756 | | | 1,340 | | | 365 | | | 228,326 |
Operating income (loss) | | $ | 28,379 | | | 5,094 | | | 377 | | | (23,404) | | | 10,446 |
Capital asset additions | | $ | 13,122 | | | 6,029 | | | 111 | | | 2,047 | | | 21,309 |
As of September 30, 2022 | | | | | | | | | | | | | | | |
Total assets | | $ | 103,555 | | | 73,414 | | | 5,344 | | | 54,070 | | | 236,383 |
| | | | | | | | | | | | | | | |
| | STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | |||||
For the three months ended September 30, 2021 | | | | | | | | | | | | | | | |
Total revenues | | $ | 40,018 | | | 31,177 | | | 578 | | | 96 | | | 71,869 |
Operating income (loss) | | $ | 9,996 | | | 2,258 | | | 369 | | | (7,565) | | | 5,058 |
Capital asset additions | | $ | 1,890 | | | 665 | | | 29 | | | 155 | | | 2,739 |
For the nine months ended September 30, 2021 | | | | | | | | | | | | | | | |
Total revenues | | $ | 102,495 | | | 89,001 | | | 991 | | | 624 | | | 193,111 |
Operating income (loss) | | $ | 26,403 | | | 9,124 | | | 185 | | | (22,041) | | | 13,671 |
Capital asset additions | | $ | 5,115 | | | 1,570 | | | 102 | | | 1,325 | | | 8,112 |
As of December 31, 2021 | | | | | | | | | | | | | | | |
Total assets | | $ | 95,579 | | | 69,006 | | | 5,735 | | | 59,515 | | | 229,835 |
Note 14 – Geographic Information
Certain financial information by geographic location is provided below (in thousands).
| | | | | | | | | | | | | | | | | | | | | ||||
| | For the three months ended September 30, | | For the nine months ended September 30, | | For the three months ended September 30, | | For the nine months ended September 30, | ||||||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
Domestic revenues |
| $ | 71,860 |
| $ | 70,192 |
| $ | 224,596 |
| $ | 190,390 |
| $ | 75,990 |
| $ | 71,860 |
| $ | 239,663 |
| $ | 224,596 |
International revenues | |
| 1,160 | |
| 1,677 | |
| 3,730 | |
| 2,721 | |
| 894 | |
| 1,160 | |
| 3,170 | |
| 3,730 |
Total revenues | | $ | 73,020 | | $ | 71,869 | | $ | 228,326 | | $ | 193,111 | | $ | 76,884 | | $ | 73,020 | | $ | 242,833 | | $ | 228,326 |
| | | | | | | | | ||||
| | September 30, | | December 31, | | September 30, | | December 31, | ||||
| | 2022 | | 2021 | | 2023 | | 2022 | ||||
Domestic long-lived assets |
| $ | 201,458 |
| $ | 185,718 |
| $ | 251,254 |
| $ | 211,143 |
International long-lived assets | |
| 1,356 | |
| 1,190 | |
| 1,755 | |
| 1,345 |
Total long-lived assets | | $ | 202,814 | | $ | 186,908 | | $ | 253,009 | | $ | 212,488 |
Note 15 – Commitments and Contingencies
The Company is party to claims in lawsuits incidental to its business, including lease disputes and employee-related matters. The Company has recorded accruals, when necessary, in its consolidated financial statements in accordance with ASC 450, Contingencies. While the resolution of a lawsuit, proceeding or claim may have an impact on the Company’s financial results for the period in which it is resolved, in the opinion of management, the ultimate outcome of such matters and judgements in which the Company is currently involved, either individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
1516
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 riskrisks and uncertainties include the risk factors discussed under Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.2022. A number of factors could cause actual results or outcomes to differ materially from those indicated by such forward-looking statements, including but not limited to: (1) the effects of the COVID-19 pandemic on our business, including government restrictions on our ability to operate our restaurants and changes in customer behavior; (2) our ability to open new restaurants and food and beverage locations in current and additional markets, grow and manage growth profitably, maintain relationships with suppliers and obtain adequate supply of products and retain our key employees; (3)(2) factors beyond our control that affect the number and timing of new restaurant openings, including weather conditions and factors under the control of landlords, contractors and regulatory and/or licensing authorities; (4)(3) our ability to successfully improve performance and cost, realize the benefits of our marketing efforts and achieve improved results as we focus on developing new management and license deals; (5)(4) changes in applicable laws or regulations; (6)(5) the possibility that The ONE Group may be adversely affected by other economic, business, and/or competitive factors; and (7)(6) other risks and uncertainties. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “ongoing,” “could,” “estimates,” “expects,” “intends,” “may,” “appears,” “suggests,” “future,” “likely,” “goal,” “plans,” “potential,” “projects,” “predicts,” “should,” “targets,” “would,” “will” and similar expressions that convey the uncertainty of future events or outcomes. You should not place undue reliance on any forward-looking statement. We do not undertake any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required under applicable law.
General
This information should be read in conjunction with the condensed consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.2022.
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 globalan international restaurant company that develops, owns and operates, manages and licenses upscale and polished casual, high-energy restaurants and lounges and provides turn-key food and beverage (“F&B”) services and consulting service for hospitality venues including hotels, casinos and other high-end locations. Turn-key F&B services are food and beverage services that can be scaled, customized and implemented by us for the client at a particular hospitality venue. Our vision is to be a global market leader in the hospitality industry by melding high-quality service, ambiance, high-energy and cuisine into one great experience that we refer to as “Vibe Dining”. We design all our restaurants, lounges and F&B services to create a social dining and high-energy entertainment experience within a destination location. We believe that this design and operating philosophy separates us from more traditional restaurant and foodservice competitors.
Our primary restaurant brands are STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse, and Kona Grill, a polished casual bar-centric grill concept featuring American favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere. Our F&B hospitality management services are marketed as ONE Hospitality and include developing, managing and operating restaurants, bars, rooftop lounges, pools, banqueting and catering facilities, private dining rooms, room service and mini bars tailored to the specific needs of high-end hotels and casinos. We also provide hospitality advisory and consulting services to certain clients. Our F&B hospitality clients operate global hospitality brands such as the W Hotel, ME Hotels,Hotel, Hippodrome Casino, and Curio Collection by Hilton.
We opened our first restaurant in January 2004 in New York, New York, and, as of September 30, 2022, we owned, operated, managed or licensed 61 venues including 23 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and 14 F&B venues operated under ONE Hospitality in seven hotels and casinos throughout the United States and Europe. In August 2022, we opened an owned STK restaurant in San Francisco, California and a licensed virtual location in
16
conjunction with REEF Kitchens in Austin, Texas that features offerings from Kona Grill and Bao Yum. In November 2022, we opened an owned STK restaurant in Dallas, Texas. For those restaurants and venues that are managed or licensed, we generate management fee revenue based on top-line revenues and incentive fee revenue based on a percentage of the location’s revenues and net profits.
We opened our first restaurant in January 2004 in New York, New York. As of October 31, 2023, we owned, operated, managed or licensed 64 venues including 25 STKs and 27 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and 12 F&B venues operated under ONE Hospitality in six hotels and casinos throughout the United States and Europe. In
17
October 2023, we consolidated STK operations in London, United Kingdom to STK Strand and STK Stratford which resulted in the closure of our operations within the Westminster London Hotel.
As our footprint increases, we expect to benefit by leveraging system-wide operating efficiencies and best practices through the management of our general and administrative expenses as a percentage of overall revenue.
We intend to open eight new venues in 2023. The six venues that have opened thus far in 2023 are below:
● | Owned Kona Grill restaurant in Columbus, Ohio |
● | Owned Kona Grill restaurant in Riverton, Utah |
● | Owned STK restaurant in Charlotte, North Carolina |
● | Owned Kona Grill restaurant in Phoenix, Arizona |
● | Two Bao Yum venues through a licensing agreement with Reef Kitchens |
There are currently three Company-owned STK restaurants under construction in the following cities:
● | Owned STK restaurant in Boston, Massachusetts |
● | Owned STK restaurant in Salt Lake City, Utah |
● | Owned STK restaurant in Washington, D.C. |
The table below reflects our current venues by restaurant brand and geographic location as of September 30, 2022:location:
| | | | | | | | | | | | | | | | |
| | Venues | | Venues | ||||||||||||
|
| STK(1) |
| Kona Grill |
| ONE Hospitality(2) |
| Total |
| STK(1) |
| Kona Grill |
| ONE Hospitality(2) |
| Total |
Domestic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned |
| 12 |
| 24 |
| 2 |
| 38 |
| 14 |
| 27 |
| 2 |
| 43 |
Managed |
| 2 |
| — |
| 1 |
| 3 |
| 2 |
| — |
| 1 |
| 3 |
Licensed |
| 1 |
| — |
| 1 |
| 2 |
| 1 |
| — |
| 3 |
| 4 |
Total domestic |
| 15 |
| 24 |
| 4 |
| 43 |
| 17 |
| 27 |
| 6 |
| 50 |
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned |
| — |
| — |
| — |
| — |
| — |
| — |
| 1 |
| 1 |
Managed |
| 4 |
| — |
| 10 |
| 14 |
| 4 |
| — |
| 5 |
| 9 |
Licensed |
| 4 |
| — |
| — |
| 4 |
| 4 |
| — |
| — |
| 4 |
Total international |
| 8 |
| — |
| 10 |
| 18 |
| 8 |
| — |
| 6 |
| 14 |
Total venues |
| 23 |
| 24 |
| 14 |
| 61 |
| 25 |
| 27 |
| 12 |
| 64 |
(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, Bao Yum, Heliot, Hideout, |
Our Growth Strategies and Outlook
Our growth model is primarily driven by the following:
● | Expansion of our STK and Kona Grill Restaurants |
● | Expansion through New F&B Hospitality Projects |
● | Increase Same Store Sales and Increase Our Operating Efficiency |
● | Acquisitions |
We intend to open at least nine new venues in 2022 and the first quarter of 2023, of which three are currently open. We have opened Company-owned STK restaurants in San Francisco, CA and Dallas, TX and a licensed virtual location in conjunction with REEF Kitchens in Austin, Texas that features offerings from Kona Grill and Bao Yum. There are currently three Company-owned Kona Grill restaurants (Riverton, UT, Columbus, OH, and Phoenix, AZ) and one managed STK restaurant (Stratford, UK) under development. In addition, in conjunction with REEF Kitchens, we plan to test and open two additional licensed units in Texas for takeout and delivery only. These units will feature offerings from our Kona Grill and Bao Yum concepts. As our footprint increases, we expect to benefit by leveraging system-wide operating efficiencies and best practices through the management of our general and administrative expenses as a percentage of overall revenue.
COVID-19
In response to COVID-19, we have taken significant steps to adapt our business to increase sales while providing a safe environment for guests and employees. COVID-19 related expenses were zero and $2.5 million for the three and nine months ended September 30, 2022 compared to $1.1 million and $3.8 million for the three and nine months ended September 30, 2021, respectively, composed primarily of sanitation, supplies and safety precautions taken to prevent the spread of COVID-19.
In the first quarter of 2022, one of our licensees permanently closed an STK restaurant in Mexico City as a result of COVID-19.
1718
Executive Summary
Total revenues increased $1.2$3.9 million, or 1.6%5.3% to $76.9 million for the three months ended September 30, 2023 compared to $73.0 million for the three months ended September 30, 2022 compared to $71.9 million for the three months ended September 30, 2021 primarily due to the opening of STKfour new venues since August 2022 (STK San Francisco, in August 2022.STK Dallas, Kona Grill Columbus and Kona Grill Riverton). Same store sales increased 0.5%decreased 3.0% in the third quarter of 20222023 compared to the third quarter of 2021.2022. STK same store sales increased 3.5%decreased 5.5% while Kona Grill same store sales decreased 3.6%increased 1.1%. On a three-year basis,Compared to 2019, our pre-pandemic base year, same store sales for the third quarter of 20222023 increased 45.6%41.7% compared to the third quarter of 2019; STK same store sales increased 70.6%61.0%, which consisted of a 40.0% increase in traffic and a 21.0% increase in average check, while Kona Grill same store sales increased 22.3%23.7%.
Restaurant operating profit was $9.1 million for both the three months ended September 30, 2023 and September 30, 2022. Operating income decreased $2.5 million or 21.3% to $9.1an operating loss of $2.0 million for the three months ended September 30, 20222023 compared to $11.6 million for the three months ended September 30, 2021 primarily due to higher labor and related costs. Operatingoperating income decreased $4.6 million toof $0.5 million for the three months ended September 30, 2022 comparedprimarily due to operating incomehigher pre-opening expenses associated with the increased number of $5.0venue openings in 2023, increased depreciation expense associated with four venues opened since August 2022 and higher labor costs driven by wage inflation and investments in human capital in anticipation of growth.
Total revenues increased $14.5 million, or 6.4% to $242.8 million for the threenine months ended September 30, 2021 primarily due to pre-opening expenses for the 2022 and 2023 openings, lower restaurant level operating profit and lower management, license and incentive fee revenue.
Total revenues increased $35.2 million, or 18.2%compared to $228.3 million for the nine months ended September 30, 2022 compared2022. Restaurant operating profit decreased $1.0 million to $193.1$33.9 million for the nine months ended September 30, 2021. Restaurant2023 compared to restaurant operating profit decreased $1.2 million toof $34.9 million for the nine months ended September 30, 20222022. For the nine months ended September 30, 2023, operating income was $4.4 million compared to restaurant operating profit of $36.2$10.4 million for the nine months ended September 30, 2021. For2022, primarily due to higher pre-opening expenses associated with the nine months ended September 30, 2022, operating income was $10.4 millionincreased number of venue openings in 2023 compared to $13.7 million2022, increased depreciation expense associated with the incremental number of new restaurants and investments in human capital for new restaurants expected to open in the nine months ended September 30, 2021.next six months.
Typically, the third quarter is our lowest revenue quarter of the year due to seasonality of our business. We have implemented several initiatives to improve restaurant operating profit and overall profitability of our company. These initiatives are focused on purchasing efficiencies for both food and operating supplies, maximizing productivity through smart scheduling, evaluating third-party vendor relationships and reducing travel costs. We believe these initiatives will improve profitability without impacting the guest experience.
1819
Results of Operations
The following table sets forth certain statements of operations data for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, | | For the three months ended September 30, | | For the nine months ended September 30, | ||||||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
Revenues: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Owned restaurant net revenue | | $ | 69,538 | | $ | 67,966 | | $ | 216,984 | | $ | 184,982 | | $ | 73,700 | | $ | 69,538 | | $ | 232,202 | | $ | 216,984 |
Management, license and incentive fee revenue | |
| 3,482 | |
| 3,903 | |
| 11,342 | |
| 8,129 | |
| 3,184 | |
| 3,482 | |
| 10,631 | |
| 11,342 |
Total revenues | |
| 73,020 | |
| 71,869 | |
| 228,326 | |
| 193,111 | |
| 76,884 | |
| 73,020 | |
| 242,833 | |
| 228,326 |
Cost and expenses: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Owned operating expenses: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Owned restaurant cost of sales | |
| 17,281 | |
| 17,733 | |
| 55,231 | | | 46,925 | |
| 18,230 | |
| 17,281 | |
| 56,300 | | | 55,231 |
Owned restaurant operating expenses | |
| 43,136 | |
| 38,640 | |
| 126,818 | |
| 101,882 | |
| 46,372 | |
| 43,136 | |
| 141,983 | |
| 126,818 |
Total owned operating expenses | |
| 60,417 | |
| 56,373 | |
| 182,049 | |
| 148,807 | |
| 64,602 | |
| 60,417 | |
| 198,283 | |
| 182,049 |
General and administrative (including stock-based compensation of $1,001, $653, $2,791 and $2,812 for the three and nine months ended September 30, 2022 and 2021, respectively) | |
| 6,447 | |
| 5,959 | |
| 20,587 | | | 17,272 | ||||||||||||
General and administrative (including stock-based compensation of $1,244, $1,001, $3,798, $2,791 for the three and nine months ended September 30, 2023 and 2022, respectively) | |
| 7,280 | |
| 6,447 | |
| 22,803 | | | 20,587 | ||||||||||||
Depreciation and amortization | |
| 2,930 | |
| 2,572 | |
| 8,571 | | | 7,766 | |
| 3,732 | |
| 2,930 | |
| 10,894 | | | 8,571 |
Pre-opening expenses | |
| 3,097 | |
| 2,684 | |
| 6,005 | | | 3,833 | ||||||||||||
COVID-19 related expenses | |
| — | |
| 1,131 | |
| 2,534 | | | 3,776 | |
| — | |
| — | |
| — | | | 2,534 |
Agreement restructuring expenses | | | — | |
| — | | | — | | | 494 | ||||||||||||
Pre-opening expenses | |
| 2,684 | |
| 587 | |
| 3,833 | | | 842 | ||||||||||||
Lease termination expenses | | | — | |
| 58 | | | 255 | ��� | | 352 | | | — | |
| — | | | — | | | 255 |
Transaction costs | |
| 51 | |
| 131 | |
| 51 | | | 131 | ||||||||||||
Other expenses | |
| 128 | |
| 51 | |
| 480 | | | 51 | ||||||||||||
Total costs and expenses | |
| 72,529 | |
| 66,811 | |
| 217,880 | |
| 179,440 | |
| 78,839 | |
| 72,529 | |
| 238,465 | |
| 217,880 |
Operating income | |
| 491 | |
| 5,058 | |
| 10,446 | |
| 13,671 | ||||||||||||
Other expenses (income), net: | |
|
| |
|
| |
|
| |
|
| ||||||||||||
Interest expense, net | |
| 435 | |
| 781 | |
| 1,387 | | | 3,262 | ||||||||||||
Loss on early debt extinguishment | |
| — | |
| 600 | |
| — | | | 600 | ||||||||||||
Gain on CARES Act Loan forgiveness | | | — | |
| (9,968) | | | — | |
| (18,529) | ||||||||||||
Total other expenses (income), net | |
| 435 | |
| (8,587) | |
| 1,387 | |
| (14,667) | ||||||||||||
Income before provision for income taxes | |
| 56 | |
| 13,645 | |
| 9,059 | |
| 28,338 | ||||||||||||
Operating (loss) income | |
| (1,955) | |
| 491 | |
| 4,368 | |
| 10,446 | ||||||||||||
Other expenses, net: | |
|
| |
|
| |
|
| |
|
| ||||||||||||
Interest expense, net of interest income | |
| 1,673 | |
| 435 | |
| 5,102 | | | 1,387 | ||||||||||||
Total other expenses, net | |
| 1,673 | |
| 435 | |
| 5,102 | |
| 1,387 | ||||||||||||
(Loss) Income before provision for income taxes | |
| (3,628) | |
| 56 | |
| (734) | |
| 9,059 | ||||||||||||
(Benefit) provision for income taxes | |
| (321) | |
| 1,544 | |
| 721 | |
| 2,188 | |
| (375) | |
| (321) | |
| (227) | |
| 721 |
Net income | |
| 377 | |
| 12,101 | |
| 8,338 | |
| 26,150 | ||||||||||||
Less: net (loss) income attributable to noncontrolling interest | |
| (105) | |
| 430 | |
| (117) | |
| 573 | ||||||||||||
Net income attributable to The One Group Hospitality, Inc. | | $ | 482 | | $ | 11,671 | | $ | 8,455 | | $ | 25,577 | ||||||||||||
Net (loss) income | |
| (3,253) | |
| 377 | |
| (507) | |
| 8,338 | ||||||||||||
Less: net loss attributable to noncontrolling interest | |
| (155) | |
| (105) | |
| (583) | |
| (117) | ||||||||||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. | | $ | (3,098) | | $ | 482 | | $ | 76 | | $ | 8,455 |
1920
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 September 30, | | For the nine months ended September 30, | | For the three months ended September 30, | | For the nine months ended September 30, | ||||||||
|
| 2022 | | 2021 |
| 2022 | | 2021 |
| 2023 | | 2022 |
| 2023 | | 2022 |
Revenues: | | |
| | | |
| | | |
| | | |
| |
Owned restaurant net revenue |
| 95.2 % | | 94.6 % |
| 95.0 % | | 95.8 % |
| 95.9% | | 95.2% |
| 95.6% | | 95.0% |
Management, license and incentive fee revenue |
| 4.8 % | | 5.4 % |
| 5.0 % | | 4.2 % |
| 4.1% | | 4.8% |
| 4.4% | | 5.0% |
Total revenues |
| 100.0 % | | 100.0 % |
| 100.0 % | | 100.0 % |
| 100.0% | | 100.0% |
| 100.0% | | 100.0% |
Cost and expenses: |
| | | |
| | | |
| | | |
| | | |
Owned operating expenses: |
| | | |
| | | |
| | | |
| | | |
Owned restaurant cost of sales (1) | | 24.9 % | | 26.1 % | | 25.5 % | | 25.4 % | | 24.7% | | 24.9% | | 24.2% | | 25.5% |
Owned restaurant operating expenses (1) | | 62.0 % | | 56.9 % | | 58.4 % | | 55.1 % | | 62.9% | | 62.0% | | 61.1% | | 58.4% |
Total owned operating expenses (1) | | 86.9 % | | 82.9 % | | 83.9 % | | 80.4 % | | 87.7% | | 86.9% | | 85.4% | | 83.9% |
General and administrative (including stock-based compensation of 1.4%, 0.9%, 1.2% and 1.5% for the three and nine months ended September 30, 2022 and 2021, respectively) |
| 8.8 % | | 8.3 % |
| 9.0 % | | 8.9 % | ||||||||
General and administrative (including stock-based compensation of 1.6%, 1.6%, 1.4% and 1.2% for the three and nine months ended September 30, 2023 and 2022, respectively) |
| 9.5% | | 8.8% |
| 9.4% | | 9.0% | ||||||||
Depreciation and amortization |
| 4.0 % | | 3.6 % |
| 3.8 % | | 4.0 % |
| 4.9% | | 4.0% |
| 4.5% | | 3.8% |
Pre-opening expenses |
| 4.0% | | 3.7% |
| 2.5% | | 1.7% | ||||||||
COVID-19 related expenses |
| —% | | 1.6 % |
| 1.1 % | | 2.0 % |
| —% | | —% |
| —% | | 1.1% |
Agreement restructuring expenses |
| —% | | —% |
| —% | | 0.3 % | ||||||||
Pre-opening expenses |
| 3.7 % | | 0.8 % |
| 1.7 % | | 0.4 % | ||||||||
Lease termination expenses |
| —% | | 0.1 % |
| 0.1 % | | 0.2 % |
| —% | | —% |
| —% | | 0.1% |
Transaction costs |
| 0.1 % | | 0.2 % |
| —% | | 0.1 % | ||||||||
Other expenses |
| 0.2% | | 0.1% |
| 0.2% | | —% | ||||||||
Total costs and expenses |
| 99.3 % | | 93.0 % |
| 95.4 % | | 92.9 % |
| 102.5% | | 99.3% |
| 98.2% | | 95.4% |
Operating income |
| 0.7 % | | 7.0 % |
| 4.6 % | | 7.1 % | ||||||||
Other expenses (income), net: |
| | | |
| | | | ||||||||
Interest expense, net |
| 0.6 % | | 1.1 % |
| 0.6 % | | 1.7 % | ||||||||
Loss on early debt extinguishment |
| —% | | 0.8 % |
| —% | | 0.3 % | ||||||||
Gain on CARES Act Loan forgiveness |
| —% | | (13.9)% |
| —% | | (9.6)% | ||||||||
Total other expenses (income), net | | 0.6 % | | (12.0)% | | 0.6 % | | (7.6)% | ||||||||
Income before provision for income taxes |
| 0.1 % | | 19.0 % |
| 4.0 % | | 14.7 % | ||||||||
Operating (loss) income |
| (2.5)% | | 0.7% |
| 1.8% | | 4.6% | ||||||||
Other expenses, net: |
| | | |
| | | | ||||||||
Interest expense, net of interest income |
| 2.2% | | 0.6% |
| 2.1% | | 0.6% | ||||||||
Total other expenses, net | | 2.2% | | 0.6% | | 2.1% | | 0.6% | ||||||||
(Loss) Income before provision for income taxes |
| (4.7)% | | 0.1% |
| (0.3)% | | 4.0% | ||||||||
(Benefit) provision for income taxes | | (0.4)% | | 2.1 % |
| 0.3 % | | 1.1 % | | (0.5)% | | (0.4)% |
| (0.1)% | | 0.3% |
Net income | | 0.5 % | | 16.8 % |
| 3.7 % | | 13.5 % | ||||||||
Less: net (loss) income attributable to noncontrolling interest |
| (0.1)% | | 0.6 % |
| (0.1)% | | 0.3 % | ||||||||
Net income attributable to The One Group Hospitality, Inc. |
| 0.7 % | | 16.2 % |
| 3.7 % | | 13.2 % | ||||||||
Net (loss) income | | (4.2)% | | 0.5% |
| (0.2)% | | 3.7% | ||||||||
Less: net loss attributable to noncontrolling interest |
| (0.2)% | | (0.1)% |
| (0.2)% | | (0.1)% | ||||||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. |
| (4.0)% | | 0.7% |
| —% | | 3.7% |
(1) | These expenses are being shown as a percentage of owned restaurant net revenue. |
2021
The following tables show our operating results by segment for the periods indicated (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total |
| STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | ||||||||||
For the three months ended September 30, 2022 | | | | | | | | | | | | | | | | |||||||||||||||
For the three months ended September 30, 2023 | | | | | | | | | | | | | | | | |||||||||||||||
Total revenues |
| $ | 42,347 | | | 30,069 | | | 483 | | | 121 | | | 73,020 |
| $ | 43,709 | | | 32,775 | | | 345 | | | 55 | | | 76,884 |
Operating income (loss) | | $ | 6,448 | | | 259 | | | 216 | | | (6,432) | | | 491 | | $ | 6,003 | | | (444) | | | (131) | | | (7,383) | | | (1,955) |
Capital asset additions | | $ | 5,788 | | | 2,761 | | | 58 | | | 611 | | | 9,218 | |||||||||||||||
For the nine months ended September 30, 2022 | | | | | | | | | | | | | | | | |||||||||||||||
Capital asset additions(1) | | $ | 8,775 | | | 6,012 | | | 8 | | | (280) | | | 14,515 | |||||||||||||||
For the nine months ended September 30, 2023 | | | | | | | | | | | | | | | | |||||||||||||||
Total revenues |
| $ | 131,865 | | | 94,756 | | | 1,340 | | | 365 | | | 228,326 |
| $ | 143,420 | | | 97,961 | | | 1,188 | | | 264 | | | 242,833 |
Operating income (loss) | | $ | 28,379 | | | 5,094 | | | 377 | | | (23,404) | | | 10,446 | | $ | 26,957 | | | 910 | | | (174) | | | (23,325) | | | 4,368 |
Capital asset additions | | $ | 13,122 | | | 6,029 | | | 111 | | | 2,047 | | | 21,309 | |||||||||||||||
As of September 30, 2022 | | | | | | | | | | | | | | | | |||||||||||||||
Capital asset additions(1) | | $ | 19,730 | | | 17,427 | | | 34 | | | 1,220 | | | 38,411 | |||||||||||||||
As of September 30, 2023 | | | | | | | | | | | | | | | | |||||||||||||||
Total assets | | $ | 103,555 | | | 73,414 | | | 5,344 | | | 54,070 | | | 236,383 | | $ | 132,050 | | | 96,185 | | | 5,361 | | | 61,420 | | | 295,016 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | | STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | ||||||||||
For the three months ended September 30, 2021 | | | | | | | | | | | | | | | | |||||||||||||||
For the three months ended September 30, 2022 | | | | | | | | | | | | | | | | |||||||||||||||
Total revenues | | $ | 40,018 | | | 31,177 | | | 578 | | | 96 | | | 71,869 | | $ | 42,347 | | | 30,069 | | | 483 | | | 121 | | | 73,020 |
Operating income (loss) | | $ | 9,996 | | | 2,258 | | | 369 | | | (7,565) | | | 5,058 | | $ | 6,448 | | | 259 | | | 216 | | | (6,432) | | | 491 |
Capital asset additions | | $ | 1,890 | | | 665 | | | 29 | | | 155 | | | 2,739 | | $ | 5,788 | | | 2,761 | | | 58 | | | 611 | | | 9,218 |
For the nine months ended September 30, 2021 | | | | | | | | | | | | | | | | |||||||||||||||
For the nine months ended September 30, 2022 | | | | | | | | | | | | | | | | |||||||||||||||
Total revenues | | $ | 102,495 | | | 89,001 | | | 991 | | | 624 | | | 193,111 | | $ | 131,865 | | | 94,756 | | | 1,340 | | | 365 | | | 228,326 |
Operating income (loss) | | $ | 26,403 | | | 9,124 | | | 185 | | | (22,041) | | | 13,671 | | $ | 28,379 | | | 5,094 | | | 377 | | | (23,404) | | | 10,446 |
Capital asset additions | | $ | 5,115 | | | 1,570 | | | 102 | | | 1,325 | | | 8,112 | | $ | 13,122 | | | 6,029 | | | 111 | | | 2,047 | | | 21,309 |
As of December 31, 2021 | | | | | | | | | | | | | | | | |||||||||||||||
As of December 31, 2022 | | | | | | | | | | | | | | | | |||||||||||||||
Total assets | | $ | 95,579 | | | 69,006 | | | 5,735 | | | 59,515 | | | 229,835 | | $ | 113,911 | | | 78,691 | | | 5,746 | | | 92,676 | | | 291,024 |
(1) | Capital asset additions for the Corporate segment include furniture, fixtures, and equipment for restaurants that the Company plans to open in the future. |
EBITDA, Adjusted EBITDA and Restaurant Operating Profit are presented in this Quarterly Report on Form 10-Q to supplement other measures of financial performance. EBITDA, Adjusted EBITDA and Restaurant Operating Profit are not required by, or presented in accordance with, accounting principles generally accepted in the United States of America (“GAAP”). We define EBITDA as net income before interest expense, provision for income taxes and depreciation and amortization. We define Adjusted EBITDA as net income before interest expense, provision for income taxes, depreciation and amortization, non-cash rent expense, pre-opening expenses, lease termination expenses, stock-based compensation, COVID-19 related expenses and non-recurring gains and losses. Not all of the items defining Adjusted EBITDA occur in each reporting period but have been included in our definitions of these terms based on our historical activity. We define Restaurant Operating Profit as owned restaurant net revenue minus owned restaurant cost of sales and owned restaurant operating expenses.
We believe that EBITDA, Adjusted EBITDA and Restaurant Operating Profit are appropriate measures of our operating performance because they eliminate non-cash or non-recurring expenses that do not reflect our underlying business performance. We believe Restaurant Operating Profit is an important component of financial results because: (i) it is a widely used metric within the restaurant industry to evaluate restaurant-level productivity, efficiency, and performance, and (ii) we use Restaurant Operating Profit as a key metric to evaluate our restaurant financial performance compared to our competitors. We use these metrics to facilitate a comparison of our operating performance on a consistent basis from period to period, to analyze the factors and trends affecting our business and to evaluate the performance of our restaurants. Adjusted EBITDA has limitations as an analytical tool and our calculation of Adjusted EBITDA may not be comparable to that reported by other companies; accordingly, you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Adjusted EBITDA is a key measure used by management. Additionally, Adjusted EBITDA and Restaurant Operating Profit are frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We use Adjusted EBITDA and Restaurant Operating Profit, alongside other GAAP measures such as net income, to measure profitability, as a key profitability target in our budgets, and to compare our performance against that of peer companies despite possible differences in calculation.
2122
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 September 30, | | For the nine months ended September 30, | | For the three months ended September 30, | | For the nine months ended September 30, | ||||||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
Net income attributable to The One Group Hospitality, Inc. | | $ | 482 | | $ | 11,671 | | $ | 8,455 | | $ | 25,577 | ||||||||||||
Net (loss) income attributable to noncontrolling interest | |
| (105) | |
| 430 | |
| (117) | |
| 573 | ||||||||||||
Net income | |
| 377 | |
| 12,101 | |
| 8,338 | |
| 26,150 | ||||||||||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. | | $ | (3,098) | | $ | 482 | | $ | 76 | | $ | 8,455 | ||||||||||||
Net (loss) attributable to noncontrolling interest | |
| (155) | |
| (105) | |
| (583) | |
| (117) | ||||||||||||
Net (loss) income | |
| (3,253) | |
| 377 | |
| (507) | |
| 8,338 | ||||||||||||
Interest expense, net | |
| 435 | |
| 781 | |
| 1,387 | |
| 3,262 | |
| 1,673 | |
| 435 | |
| 5,102 | |
| 1,387 |
(Benefit) provision for income taxes | |
| (321) | |
| 1,544 | |
| 721 | |
| 2,188 | |
| (375) | |
| (321) | |
| (227) | |
| 721 |
Depreciation and amortization | |
| 2,930 | |
| 2,572 | |
| 8,571 | |
| 7,766 | |
| 3,732 | |
| 2,930 | |
| 10,894 | |
| 8,571 |
EBITDA | |
| 3,421 | |
| 16,998 | |
| 19,017 | |
| 39,366 | |
| 1,777 | |
| 3,421 | |
| 15,262 | |
| 19,017 |
Pre-opening expenses | | | 3,097 | | | 2,684 | | | 6,005 | | | 3,833 | ||||||||||||
Stock-based compensation | |
| 1,244 | |
| 1,001 | |
| 3,798 | |
| 2,791 | ||||||||||||
COVID-19 related expenses | |
| — | |
| 1,131 | |
| 2,534 | |
| 3,776 | |
| — | |
| — | |
| — | |
| 2,534 |
Agreement restructuring expenses | |
| — | |
| — | |
| — | |
| 494 | ||||||||||||
Transaction costs | | | 51 | | | 131 | | | 51 | | | 131 | ||||||||||||
Stock-based compensation | |
| 1,001 | |
| 653 | |
| 2,791 | |
| 2,812 | ||||||||||||
Lease termination expense (1) | |
| — | |
| 58 | |
| 255 | |
| 352 | |
| — | |
| — | |
| — | |
| 255 |
Non-cash rent expense (2) | |
| (75) | |
| (16) | | | (160) | |
| (19) | |
| (126) | |
| (75) | | | (279) | |
| (160) |
Pre-opening expenses | | | 2,684 | | | 587 | | | 3,833 | | | 842 | ||||||||||||
Gain on CARES Act Loan forgiveness | |
| — | |
| (9,968) | |
| — | |
| (18,529) | ||||||||||||
Loss on early debt extinguishment | |
| — | |
| 600 | |
| — | |
| 600 | ||||||||||||
Other expenses | |
| 128 | |
| 51 | |
| 480 | |
| 51 | ||||||||||||
Adjusted EBITDA | |
| 7,082 | |
| 10,174 | |
| 28,321 | |
| 29,825 | |
| 6,120 | |
| 7,082 | |
| 25,266 | |
| 28,321 |
Adjusted EBITDA attributable to noncontrolling interest | |
| (56) | |
| 126 | |
| 77 | |
| 407 | |
| (72) | |
| (56) | |
| (326) | |
| 77 |
Adjusted EBITDA attributable to The ONE Group Hospitality, Inc. | | $ | 7,138 | | $ | 10,048 | | $ | 28,244 | | $ | 29,418 | | $ | 6,192 | | $ | 7,138 | | $ | 25,592 | | $ | 28,244 |
(2) | Non-cash rent expense is included in owned restaurant operating expenses and general and administrative expense on the condensed consolidated statements of operations and comprehensive income. |
The following table presents a reconciliation of Operating (loss) income to Restaurant Operating Profit for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, | | For the three months ended September 30, | | For the��nine months ended September 30, | ||||||||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
Operating income as reported | | $ | 491 | | $ | 5,058 | | $ | 10,446 | | $ | 13,671 | ||||||||||||
Operating (loss) income as reported | | $ | (1,955) | | $ | 491 | | $ | 4,368 | | $ | 10,446 | ||||||||||||
Management, license and incentive fee revenue | |
| (3,482) | | | (3,903) | | | (11,342) | | | (8,129) | |
| (3,184) | | | (3,482) | | | (10,631) | | | (11,342) |
General and administrative | |
| 6,447 | | | 5,959 | | | 20,587 | | | 17,272 | |
| 7,280 | | | 6,447 | | | 22,803 | | | 20,587 |
Depreciation and amortization | |
| 2,930 | | | 2,572 | | | 8,571 | | | 7,766 | |
| 3,732 | | | 2,930 | | | 10,894 | | | 8,571 |
Pre-opening expenses | |
| 3,097 | | | 2,684 | | | 6,005 | | | 3,833 | ||||||||||||
COVID-19 related expenses | | | — | | | 1,131 | | | 2,534 | | | 3,776 | | | — | | | — | | | — | | | 2,534 |
Agreement restructuring expenses | | | — | | | — | | | — | | | 494 | ||||||||||||
Pre-opening expenses | |
| 2,684 | | | 587 | | | 3,833 | | | 842 | ||||||||||||
Lease termination expense | |
| — | | | 58 | | | 255 | | | 352 | |
| — | | | — | | | — | | | 255 |
Transaction costs | |
| 51 | | | 131 | | | 51 | | | 131 | ||||||||||||
Other expenses | |
| 128 | | | 51 | | | 480 | | | 51 | ||||||||||||
Restaurant Operating Profit | | $ | 9,121 | | $ | 11,593 | | $ | 34,935 | | $ | 36,175 | | $ | 9,098 | | $ | 9,121 | | $ | 33,919 | | $ | 34,935 |
Restaurant Operating Profit as a percentage of owned restaurant net revenue | | | 13.1% | | | 17.1% | | | 16.1% | | | 19.6% | | | 12.3% | | | 13.1% | | | 14.6% | | | 16.1% |
2223
Restaurant operating profit by brand is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, | | For the three months ended September 30, | | For the nine months ended September 30, | ||||||||||||||||
| | 2022 |
| 2021 |
| 2022 |
| 2021 | | 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
STK restaurant operating profit (Company owned) | | $ | 7,237 | | $ | 8,309 | | $ | 25,519 | | $ | 23,458 | | $ | 6,928 | | $ | 7,237 | | $ | 25,984 | | $ | 25,519 |
STK restaurant operating profit (Company owned) as a percentage of STK revenue (Company owned) | | | 18.5% | | | 22.6% | | | 21.0% | | | 24.6% | | | 17.0% | | | 18.5% | | | 19.5% | | | 21.0% |
Kona Grill restaurant operating profit | | $ | 1,915 | | $ | 3,422 | | $ | 9,544 | | $ | 12,693 | | $ | 2,293 | | $ | 1,915 | | $ | 8,188 | | $ | 9,544 |
Kona Grill restaurant operating profit as a percentage of Kona Grill revenue | | | 6.4% | | | 11.0% | | | 10.1% | | | 14.3% | | | 7.0% | | | 6.4% | | | 8.4% | | | 10.1% |
Results of Operations for the Three Months Ended September 30, 20222023 and 20212022
Revenues
Owned restaurant net revenue. Owned restaurant net revenue increased $1.5$4.2 million, or 2.3%6.0%, to $73.7 million for the three months ended September 30, 2023 from $69.5 million for the three months ended September 30, 2022 from $68.0 million for the three months ended September 30, 2021.2022. The increase was primarily attributable to the opening of STK San Francisco infour owned venues since August 2022, partially offset by the impact of Hurricane Ian which affected 14% of our sales base.2022. Comparable restaurant sales increased 0.5%decreased 3.0% for the third quarter of 20222023 compared to the third quarter of 2021.2022.
Management, license and incentive fee revenue. Management, license and licenseincentive fee revenues decreased $0.4$0.3 million, or 10.8%,8.6% to $3.2 million for the three months ended September 30, 2023 from $3.5 million for the three months ended September 30, 2022 from $3.9 million for the three months ended September 30, 2021.2022. The decrease was primarily drivenattributable to the non-renewal of the management agreement for Radio by decreased revenues in our managed properties inthe ME London England.hotel.
Cost and Expenses
Owned restaurant cost of sales. Food and beverage costs for owned restaurants decreased $0.4increased $0.9 million, or 2.5%5.5%, to $18.2 million for the three months ended September 30, 2023 from $17.3 million for the three months ended September 30, 2022 from $17.7 million for the three months ended September 30, 2021.2022. As a percentage of owned restaurant net revenue, cost of sales decreased 12020 basis points from 26.1%24.9% in the three months ended September 30, 20212022 to 24.9%24.7% for the three months ended September 30, 20222023 primarily due to product mix management, pricing and operational cost reduction initiatives partially offset by increased commodity prices.
Owned restaurant operating expenses. Owned restaurant operating expenses increased $4.5$3.2 million to $46.4 million for the three months ended September 30, 2023 from $43.1 million for the three months ended September 30, 2022 from $38.6 million for the three months ended September 30, 2021.2022. Owned restaurant operating expenses as a percentage of owned restaurant net revenue increased 51090 basis points from 56.9% for the three months ended September 30, 2021 to 62.0% for the three months ended September 30, 2022 to 62.9% for the three months ended September 30, 2023 primarily due to consolidated higher averagelabor costs driven by wage inflation and investments in anticipation of growth, increased marketing expenses and general operating costs.cost inflation.
General and administrative. General and administrative costs increased $0.4$0.8 million, or 8.2%12.9%, to $7.3 million for the three months ended September 30, 2023 from $6.4 million for the three months ended September 30, 2022 from $6.0 million for the three months ended September 30, 2021.2022. The increase was attributable to increased stock-based compensation expense and additional investments required ahead of growth, increased accounting and legal fees and increased stock-based compensation expense, partially offset by a decrease in performance based variable compensation. In addition, the Company experienced increased travel expenses due to rising hotel and airfare costs.new restaurant openings. As a percentage of revenues, general and administrative costs were 9.5% for the three months ended September 30, 2023 compared to 8.8% for the three months ended September 30, 2022 compared to 8.3% for the three months ended September 30, 2021.2022.
Depreciation and amortization. Depreciation and amortization expense was $2.9$3.7 million and $2.6$2.9 million for the three months ended September 30, 2023 and 2022, respectively. The increase was primarily related to the opening of four new owned venues since August 2022 and 2021, respectively.capital expenditures to maintain and enhance the guest experience in our restaurants.
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Pre-opening expenses. InFor the three months ended September 30, 2022,2023, we incurred $2.7$3.1 million of pre-opening expenses primarily related to payroll, training and non-cash pre-open rent for STK San FranciscoKona Grill Riverton which opened in August 2022 andJuly 2023, STK Dallas, Kona Grill RivertonCharlotte and Kona Grill ColumbusPhoenix, both of which areopened in October 2023 and STK and Kona Grill restaurants currently under construction.development. Total pre-opening expenses related to non-cash pre-open rent was $0.1$0.5 million.
Pre-opening expenses for the three months ended September 30, 20212022 were $0.6$2.7 million, primarily related to expensespayroll, training and non-cash pre-open rent for STK Bellevue, which opened in July 2021.Dallas, STK San Francisco and Kona Grill Columbus. Detail of pre-opening expenses by category is provided in the table below for the three months ended September 30, 2023 and 2022 (in thousands).
| | | | | | | | | | | | | | | | | | |
|
| Preopen Expenses |
| Preopen Rent | | Total | ||||||||||||
Three Months Ended September 30, 2023 |
| Preopen Expenses |
| Preopen Rent (2) | | Total | ||||||||||||
Training Team | | $ | 617 | | $ | — | | $ | 617 | | $ | 1,562 | | $ | — | | $ | 1,562 |
Restaurants (1) | | | 1,865 | | | 202 | | | 2,067 | | | 1,071 | | | 464 | | | 1,535 |
Total | | $ | 2,482 | | $ | 202 | | $ | 2,684 | | $ | 2,633 | | $ | 464 | | $ | 3,097 |
| | | | | | | | | | |||||||||
Three Months Ended September 30, 2022 |
| Preopen Expenses |
| Preopen Rent (2) | | Total | ||||||||||||
Training Team | | $ | 617 | | $ | — | | $ | 617 | |||||||||
Restaurants (3) | | | 1,865 | | | 202 | | | 2,067 | |||||||||
| | $ | 2,482 | | $ | 202 | | $ | 2,684 |
(1)Includes STK San Francisco, STK Dallas, Kona Grill Riverton, Kona Grill Columbus and other venues under development
(1) | Includes Kona Grill Riverton, STK Charlotte, Kona Grill Phoenix and other venues under development. |
(2) | Cash rent paid was $64 and $105 for the three months ended September 30, 2023 and 2022, respectively. |
(3) | Includes STK San Francisco, STK Dallas, Kona Grill Columbus and other venues under development. |
COVID-19 related expenses. COVID-19 related expenses were $1.1 million in three months ended September 30, 2021. COVID-19 related expenses are composed primarily of sanitation, supplies and safety precautions taken to prevent the spread of COVID-19.
Interest expense, net. Interest expense, net was $1.7 million and $0.4 million and $0.8 million for each of the three months ended September 30, 2023 and 2022, and 2021, respectively. In conjunction with the amended Credit Agreement in August 2021, we made a $22.2We borrowed $50.0 million pre-payment on the delayed draw term loan and reduced thefacility in December 2022. The weighted average interest rate onfor the loan.three months ended September 30, 2023 was 12.1% compared to 6.8% in the same period of 2022.
(Benefit) provision for income taxes. The provision forFor the three months ended September 30, 2023, income taxestax benefit was $0.4 million compared to income tax benefit of $0.3 million for the three months ended September 30, 2022 and 2021 was a tax benefit of $0.3 million and tax expense of $1.5 million, respectively. We estimate our 2022 annualized effective tax rate will be 15.9%.2022.
Net (loss) incomeloss attributable to noncontrolling interest. Net loss attributable to noncontrolling interest was $0.2 million for the three months ended September 30, 2023 compared to net loss of $0.1 million for the three months ended September 30, 2022 compared to net income of $0.4 million for the three months ended September 30, 2021.2022.
Results of Operations for the Nine Months Ended September 30, 20222023 and 20212022
Revenues
Owned restaurant net revenue. Owned restaurant net revenue increased $32.0$15.2 million, or 17.3%7.0%, to $232.2 million for the nine months ended September 30, 2023 from $217.0 million for the nine months ended September 30, 2022. The increase was primarily attributable to the opening of STK restaurants in San Francisco and Dallas in the second half of 2022 from $185.0and the opening of Kona Grill Columbus in January 2023 and Kona Grill Riverton in July 2023. Comparable restaurant sales decreased 2.1% during the nine months ended September 30, 2023 compared to the same period in 2022.
Management, license and incentive fee revenue. Management, license and incentive fee revenues decreased $0.7 million, or 6.3% to $10.6 million for the nine months ended September 30, 2021. The increase was primarily attributable to strong execution of our sales initiatives. Comparable restaurant sales increased 16.8% in the nine months ended September 30, 2022.
Management and license fee revenue. Management and license fee revenues increased $3.2 million, or 39.5% to2023 from $11.3 million for the nine months ended September 30, 2022 from $8.1 million for the nine months ended September 30, 2021.2022. The increasedecrease was primarily attributable to strong revenues at our managed locations in North America.the non-renewal of the management agreement for Radio by the ME London hotel.
Cost and Expenses
Owned restaurant cost of sales. Food and beverage costs for owned restaurants increased $8.3$1.1 million, or 17.7%1.9%, to $56.3 million for the nine months ended September 30, 2023 compared to $55.2 million for the nine months ended September 30, 2022 from $46.9 million for the nine months ended September 30, 2021.2022. The increase was due to the incremental sales increases.increases noted above from the opening of four new venues since August 2022, partially offset by the initiatives noted below. As a percentage of owned restaurant net revenue, cost of sales increased 10improved 130 basis points from 25.4%25.5% in the nine months ended September 30, 20212022 to 25.5%24.2% for the nine months ended September 30, 20222023 primarily due to increased commodity prices partly offset byproduct mix management, pricing and operational cost reduction initiatives.initiatives partially offset by increased commodity prices.
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Owned restaurant operating expenses. Owned restaurant operating expenses increased $24.9$15.2 million to $142.0 million for the nine months ended September 30, 2023 from $126.8 million for the nine months ended September 30, 2022 from $101.9 million for the nine months ended September 30, 2021.2022. Owned restaurant operating expenses as a percentage of owned restaurant net revenue increased 330270 basis points from 55.1%58.4% in the nine months ended September 30, 20212022 to 58.4%61.1% for the nine months ended September 30, 20222023 primarily due to consolidated higher averagelabor costs driven by wage inflation and investments in anticipation of growth, increased marketing expenses and general operating costs.cost inflation.
General and administrative. General and administrative costs increased $3.3$2.2 million, or 19.2%10.8%, to $22.8 million for the nine months ended September 30, 2023 from $20.6 million for the nine months ended September 30, 2022 from $17.3 million for the nine months ended September 30, 2021.2022. The increase was attributable to increased stock-based compensation expense and additional investments required ahead of growth and increased accounting and legal fees partially offset by a decrease in performance based variable compensation. In addition, the Company experienced increased travel expenses due to rising hotel and airfare costs.new restaurant openings. As
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a percentage of revenues, general and administrative costs were 9.4% for the nine months ended September 30, 2023 compared to 9.0% for the nine months ended September 30, 2022 compared to 8.9% for the nine months ended September 30, 2021.2022.
Depreciation and amortization. Depreciation and amortization expense was $8.6$10.9 million and $7.8$8.6 million for the nine months ended September 30, 2023 and 2022, respectively. The increase was primarily attributable to the opening of four new owned venues since August 2022 and 2021, respectively.capital expenditures to maintain and enhance the guest experience in our restaurants.
Pre-opening expenses. InFor the nine months ended September 30, 2022,2023, we incurred $3.8$6.0 million of pre-opening expenses primarily related to payroll, training and non-cash pre-open rent for STK San FranciscoKona Grill Columbus and Kona Grill Riverton which opened in August 2022January 2023 and July 2023, respectively, STK Dallas, Kona Grill Riverton,Charlotte and Kona Grill ColumbusPhoenix which areopened in October 2023 and STK and Kona Grill restaurants currently under construction.development. Total pre-opening expenses related to non-cash pre-open rent was $0.6$1.2 million.
Pre-opening expenses for the nine months ended September 30, 20212022 were $0.8$3.8 million primarily related to costs associated with two STK Bellevue whichrestaurants that opened in July 2021.the second half of 2022 and one restaurant that opened in the first quarter of 2023. Detail of pre-opening expenses by category is provided in the table below for the nine months ended September 30, 2023 and 2022 (in thousands).
| | | | | | | | | | | | | | | | | | |
|
| Preopen Expenses |
| Preopen Rent | | Total | ||||||||||||
Nine Months Ended September 30, 2023 |
| Preopen Expenses |
| Preopen Rent (2) | | Total | ||||||||||||
Training Team | | $ | 708 | | $ | — | | $ | 708 | | $ | 2,850 | | $ | — | | $ | 2,850 |
Restaurants (1) | | | 2,261 | | | 864 | | | 3,125 | | | 1,973 | | | 1,182 | | | 3,155 |
Total | | $ | 2,969 | | $ | 864 | | $ | 3,833 | | $ | 4,823 | | $ | 1,182 | | $ | 6,005 |
| | | | | | | | | | |||||||||
Nine Months Ended September 30, 2022 |
| Preopen Expenses |
| Preopen Rent (2) | | Total | ||||||||||||
Training Team | | $ | 708 | | $ | — | | $ | 708 | |||||||||
Restaurants (3) | | | 2,261 | | | 864 | | | 3,125 | |||||||||
| | $ | 2,969 | | $ | 864 | | $ | 3,833 |
(1)Includes STK San Francisco, STK Dallas, Kona Grill Riverton, Kona Grill Columbus and other venues under development
(1) | Includes Kona Grill Columbus, Kona Grill Riverton, STK Charlotte, Kona Grill Phoenix and other venues under development |
(2) | Cash rent paid was $215 and $211 for the nine months ended September 30, 2023 and 2022, respectively. |
(3) | Includes STK San Francisco, STK Dallas, Kona Grill Columbus and other venues under development |
COVID-19 related expenses. COVID-19 related expenses were $2.5 million for the nine months ended September 30, 2022 compared to $3.8 million in the prior year period. COVID-19 related expenses are composed primarily of sanitation, supplies and safety precautions taken to prevent the spread of COVID-19.
Interest expense, net. Interest expense, net was $1.4 million and $3.3$5.1 million for the nine months ended September 30, 2022 and 2021, respectively. In conjunction with2023 compared to $1.4 million for the amended Credit Agreement in August 2021, we made a $22.2nine months ended September 30, 2022. We borrowed $50.0 million pre-payment on the delayed draw term loan and reduced thefacility in December 2022. The weighted average interest rate onfor the loan.nine months ended September 30, 2023 was 11.8% compared to 6.4% for the nine months ended September 30, 2022.
(Benefit) provision for income taxes. The provisionbenefit for income taxes for the nine months ended September 30, 20222023 was $0.7$0.3 million compared to $2.2provision for income taxes of $0.7 million for the nine months ended September 30, 2021. We estimate our 2022 annualized2022. The effective income tax rate for the first nine months of 2023 was 30.9% compared to 8.0% for the first nine months of 2022. The Company’s projected annual effective tax rate willfor fiscal year 2023 is expected to be 15.9%approximately 5.0%.
Net income (loss)loss attributable to noncontrolling interest. Net loss attributable to noncontrolling interest was $0.6 million for the nine months ended September 30, 2023 compared to a net loss of $0.1 million for the nine months ended September 30, 2022 compared to net income of $0.6 million for the nine months ended September 30, 2021.2022.
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Liquidity and Capital Resources
Executive Summary
Our principal liquidity requirements are to meet our lease obligations, working capital and capital expenditure needs and to pay principal and interest on outstanding debt. Subject to our operating performance, which, if significantly adversely affected, would adversely affect the availability of funds, we expect to finance our operations for at least the next 12 months, including the costs of opening currently planned new restaurants, through cash provided by operations and construction allowances provided by landlords of certain locations. We also may borrow on our revolving credit facility or issue equity, including preferred stock, to support ongoing business and fund additional expansion.operations. We believe these sources of financing are adequate to support our immediate business operations and plans. As of September 30, 2022,2023, we had cash and cash equivalents of $17.5$22.1 million and $29.4$74.0 million in long-term debt, which consisted of borrowings under our Credit Agreement. As of September 30, 2022,2023, the availability on our revolving credit facility was $5.6$10.6 million, subject to certain conditions.
In the nine months ended September 30, 2022, capital expenditures were $21.3 million of which $13.3 million related to the construction of new STK and Kona Grill restaurants and $8.0 million for existing restaurants. Net capital expenditures, inclusive of $2.1 million in landlord contributions, was $19.2 million for the nine months ended September 30, 2022. Capital expenditures by type for the nine months ended September 30, 2022 is provided below (in thousands).
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| | | | | | | | | | | | |
| | STK | | Kona Grill | | Other | | Total | ||||
New Venues | | $ | 10,777 | | $ | 2,524 | | $ | — | | $ | 13,301 |
Maintenance | | | 4,006 | | | 3,457 | | | — | | | 7,463 |
Other | | | — | | | — | | | 545 | | | 545 |
Total | | $ | 14,783 | | $ | 5,981 | | $ | 545 | | $ | 21,309 |
Our future cash requirements will depend on many factors, including the pace of expansion, conditions in the retail property development market, construction costs, the nature of the specific sites selected for new restaurants, and the nature of the specific leases and associated tenant improvement allowances available, if any, as negotiated with landlords.
Our operations have not required significant working capital, and, like many restaurant companies, we may have negative working capital during the year. Revenues are received primarily in credit card or cash receipts, and restaurant operations do not require significant receivables or inventories, other than our wine inventory. In addition, we receive trade credit for the purchase of food, beverages and supplies, thereby reducing the need for incremental working capital to support growth. Due to the seasonality of our business, we typically generate a greater proportion of our cash flow from operations during the fourth quarter.
Credit Agreement
On October 4, 2019,Our future cash requirements will depend on many factors, including the pace of expansion, conditions in conjunctionthe 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. We have made significant investments in our training and development teams to support new restaurants openings. We believe these investments are necessary to support the acquisitionsuccessful opening of Kona Grill,our new restaurants. If we entered intomodify our Credit Agreement with Goldman Sachs Bank USA. On August 6, 2021, we entered intogrowth plans, the Third Amendmentpersonnel that comprise our training team could be deployed to the Credit Agreement to extend the maturity date for both the term loan and revolving credit facility to August 2026. The Credit Agreement provides for a secured revolving credit facility of $12.0 million and a $25.0 million term loan (reduced from $48.0 million). The term loan is payable in quarterly installments of $0.1 million, with the final payment due in August 2026.operate existing restaurants.
The amended Credit Agreement has several borrowing and interest rate options, includingTo help manage future cash requirements, we limit the following: (a)number of owned company venues under construction at any given time to four restaurants. We also set a LIBOR rate (or a comparable successor rate) subjectmaximum number of signed leases for new restaurant development to a 1.00% floor (b) a base rate equaltwelve in order to the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50%, (iii) the LIBOR rateminimize our cash rent commitment to approximately $3.0 million to $4.0 million annually for a one-month period plus 1.00% or (iv) 4.00%. Loansrestaurants under the amended Credit Agreement bear interest at a rate per annum using the applicable indices plus an interest rate margin of 5.00% (for LIBOR rate loans) and 4.00% (for base rate loans).
As of September 30, 2022, we were compliant with the covenants required by the amended Credit Agreement. 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.
Refer to Note 5 and Note 15 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.development.
Capital Expenditures and Lease Arrangements
When we open new Company-owned restaurants, our capital expenditures for construction increase. For owned restaurants, where we build from a shell state, we have typically targeted an average cash investment of approximately $3.8 million for a 10,000 square-foot STK restaurant and anticipate approximately $2.5 million for an 8,000 square-foot Kona Grill restaurant, in each case, net of landlord contributions and excluding pre-opening costs. For STK locations where we may be the successor restaurant tenant, we anticipate total cash investment in the $2.0 million to $3.0 million range. We are currently testing various Kona Grill prototypes with different size layouts, equipment packages and features such as rooftops and mezzanines which may result in the buildout costs being higher than the anticipated costs stated above. Typical pre-opening costs, excluding non-cash rent, are $0.3$0.6 million to $0.5 million.$0.8 million per restaurant assuming ten restaurant openings during the year. In addition, some of our existing restaurants will require capital improvements to either maintain or improve the facilities. We may add seating or provide enclosures for outdoor space in the next twelve months for some of our locations, which we expect will increase revenues for those locations.
Our hospitality F&B venues typically require limited capital investment from us. Capital expenditures for these projects will primarily be funded by cash flows from operations depending upon the timing of these expenditures and cash availability.
We typically seek to lease our restaurant locations for periods of 10 to 20 years under operating lease arrangements, with a limited number of renewal options. Our rent structure varies, but our leases generally provide for the payment of both minimum and contingent rent based on sales, as well as other expenses related to the leases such as our pro-rata share of common area maintenance, property tax and insurance expenses. Many of our lease arrangements include the opportunity to secure tenant improvement allowances to partially offset the cost of developing and opening the related restaurants. Generally, landlords recover the cost of such
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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 nine months ended September 30, 2023, capital expenditures were $38.4 million of which $31.0 million related to the construction of new STK and Kona Grill restaurants and $7.1 million for existing restaurants. We have opened four Company-owned restaurants in the first ten months of 2023 and expect to open an additional three to five Company-owned restaurants over the next six
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months. Net capital expenditures, inclusive of $1.8 million in landlord contributions, was $36.6 million for the nine months ended September 30, 2023. We expect to receive between $4.0 million to $4.4 million in landlord contributions in the next three months. Capital expenditures by type for the nine months ended September 30, 2023 is provided below (in thousands).
| | | | | | | | | | | | |
| | STK | | Kona Grill | | Other(1) | | Total | ||||
New Venues | | $ | 15,798 | | $ | 13,457 | | $ | 1,743 | | $ | 30,998 |
Maintenance | | | 3,675 | | | 3,379 | | | — | | | 7,054 |
Technology | | | — | | | — | | | 359 | | | 359 |
Total | | $ | 19,473 | | $ | 16,836 | | $ | 2,102 | | $ | 38,411 |
| | | | | | | | | | | | |
Tenant Improvement Allowance | | $ | 1,033 | | $ | 750 | | $ | — | | $ | 1,783 |
(1)Includes inventory of restaurant equipment for venues under development.
Credit Agreement
On October 4, 2019, in conjunction with the acquisition of Kona Grill, we entered into a credit agreement with Goldman Sachs Bank USA (the “Credit Agreement”). On August 6, 2021, we entered into the Third Amendment to the Credit Agreement to extend the maturity date for both the term loan and revolving credit facility to August 2026, to eliminate all financial covenants except a maximum net leverage ratio of 2.00 to 1.00, and to eliminate restrictions on the maximum amount of capital expenditures, the maximum number of Company-owned new locations, and credit extensions under the revolving credit facility. As amended, the Credit Agreement provides for a secured revolving credit facility of $12.0 million and a $25.0 million term loan (reduced from $48.0 million). The term loan is payable in quarterly installments of $0.1 million, with the final payment due in August 2026.
On December 13, 2022, we entered into the Fourth Amendment to the Credit Agreement that:
● | Allows for a new $50.0 million delayed draw term facility, available to draw for twelve months and subject to a 1.75x Net Leverage Ratio incurrence test (as defined in the Credit Agreement) for permitted acquisitions, stock repurchases and new restaurant capital expenditures; |
● | Allows us to redeem, repurchase or otherwise acquire its own capital stock in an aggregate amount of up to $50 million subject to a 1.75x Net Leverage Ratio incurrence test and no default or event of default; and |
● | Changed the interest rate from London Interbank Offered Rate (“LIBOR“) plus a margin to Secured Overnight Financing Rate (“SOFR”) plus an applicable margin. |
We borrowed $50.0 million on the delayed draw term facility on December 28, 2022. The delayed draw term loan is payable in quarterly installments of $0.25 million beginning March 31, 2024, with the final payment due in August 2026.
Loans under the amended Credit Agreement bear interest at a rate per annum using the SOFR rate subject to a 1.00% floor plus an interest rate margin of 6.50%.
As of September 30, 2023, we were in compliance with the covenants under the amended Credit Agreement. Based on current projections, we believe that we will continue to comply with the covenants in the Credit Agreement, as amended, throughout the twelve months following the issuance of the financial statements.
Refer to Note 5 and Note 15 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.
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Cash Flows
The following table summarizes the statement of cash flows for the nine months ended September 30, 20222023 and 20212022 (in thousands):
| | | | | | | | | | | | |
| | For the nine months ended September 30, | | For the nine months ended September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2023 |
| 2022 | ||||
Net cash provided by (used in): |
| |
|
| |
|
| |
|
| |
|
Operating activities | | $ | 16,336 | | $ | 23,030 | | $ | 15,228 | | $ | 16,336 |
Investing activities | |
| (21,309) | |
| (8,112) | |
| (38,411) | |
| (21,309) |
Financing activities | |
| (803) | |
| (20,188) | |
| (9,681) | |
| (803) |
Effect of exchange rate changes on cash | |
| (361) | |
| (37) | |
| (120) | |
| (361) |
Net decrease in cash and cash equivalents | | $ | (6,137) | | $ | (5,307) | | $ | (32,984) | | $ | (6,137) |
Operating Activities. Net cash provided by operating activities was $15.2 million for the nine months ended September 30, 2023, compared to net cash provided by operating activities of $16.3 million for the nine months ended September 30, 2022, compared to net cash provided by operating activities of $23.0 million for the nine months ended September 30, 2021. For the nine months ended September 30, 2022,2022. The decrease in net cash provided by operating activities was driven by strong net income from higher sales volumes and collectionprimarily attributable to the timing of collections on accounts receivables partially offset byand payments on accrued expenses including payments for lease settlements.expenses.
Investing Activities. Net cash used in investing activities for the nine months ended September 30, 20222023 was $21.3$38.4 million primarily for the construction of STK restaurants in Dallas, TexasCharlotte, North Carolina; Boston Massachusetts; Salt Lake City, Utah and San Francisco, California,Washington D.C. and Kona Grill restaurants in Columbus, Ohio; Riverton, Utah and Columbus, Ohio,Phoenix, Arizona and several restaurants that were under development as of September 30, 2023, as well as capital expenditures for existing restaurants compared to $8.1$21.3 million for the nine months ended September 30, 2021.2022. We intend to open six Company-owned restaurants in 2023, of which four restaurants have opened, compared to opening two Company-owned restaurants during 2022.
Financing Activities. Net cash used in financing activities for the nine months ended September 30, 2023 was $9.6 million compared to $0.8 million for the nine months ended September 30, 2022. We purchased $7.7 million in common stock under our share repurchase program and used $1.8 million to pay employee taxes for shares withheld upon the vesting of restricted stock units during the nine months ended September 30, 2023. During the nine months ended September 30, 2022, was $0.8 million. We borrowed $5.0 million against the revolving line of credit, offset by the purchase and retirement ofwe purchased $3.5 million in common stock under our share repurchase program and used $2.0 million to pay employee taxes for shares withheld upon the vesting of restricted stock units. Net cash used in financing activities for the nine months ended September 30, 2021 was $20.2 million primarily attributable to the partial paydownunits, partially offset by net borrowings on our credit facility of the term loan in conjunction with the Third Amendment to the Credit Agreement.$4.6 million.
Recent Accounting Pronouncements
See Note 1 to our condensed consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for a detailed description of recent accounting pronouncements. We do not expect the recent accounting pronouncements discussed in Note 1 to have a significant impact on our consolidated financial position or results of operations.
Critical Accounting Estimates
In addition to the critical accounting estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, we have added a critical accounting estimate with respect to indefinite-lived intangible assets.
Indefinite-lived intangible assets are tested for impairment annually or on an interim basis if events or changes in circumstances between annual tests indicate a potential impairment. First, we determine if, based on qualitative factors, it is more likely than not that an impairment exists. Factors considered include, but are not limited to, historical financial performance, expected future cash flows, changes in management or key personnel, macroeconomic and industry conditions and the legal and regulatory environment. If the qualitative assessment indicates that it is more likely than not that an impairment exists, then a quantitative assessment is performed.
The quantitative assessments require the use of estimates and assumptions regarding future cash flows. Key assumptions include projected revenue growth and operating expenses, discount rates, royalty rates and other factors that could affect fair value or otherwise indicate potential impairment. These estimates are subjective, and our ability to realize future cash is affected by factors such as changes in economic conditions and operating performance. Changes in circumstances existing at the measurement date or at
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other times in the future, or in the estimates associated with management’s judgments and assumptions made in assessing the fair value of our trademarks, could result in an impairment loss of a portion or all of our trademarks.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a “smaller reporting company,” as defined in 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
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as our controls are designed to do, and management necessarily applies its judgment in evaluating the risk and cost benefit relationship related to controls and procedures.
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Our Chief Executive Officer and Chief Financial Officer, have reviewed the effectiveness of our disclosure controls and procedures as of September 30, 20222023 and, based on this evaluation, have concluded that one material weakness remains in our internal control over financial reporting previously identified in Item 9A. “Controls and Procedures” of our 2021 Annual Report on Form 10-K, which related to identified deficiencies surrounding control design and operating effectiveness, and inappropriate application of technical accounting for certain transactions and disclosures. As such, our disclosure controls and procedures were not effective as of September 30, 2022. The material weakness did not result in a material misstatement of the consolidated financial statements.
Remediation Efforts to Address the Material Weakness
Our remediation efforts previously identified in Item 9A. “Controls and Procedures” of our 2021 Annual Report on Form 10-K to address the identified material weaknesses are ongoing. During the first nine months of 2022, we redesigned the control over the review of journal entries to ensure the appropriate level of segregation of duties. We completed our assessment of the redesigned journal entry control, which included both qualitative and quantitative design enhancements, to determine if it was designed and operating effectively. As a result of these actions, management has concluded that the material weakness associated with the review of journal entries was remediated as of June 30, 2022.
We have implemented certain new or redesigned controls to address the other deficiencies as noted above, which in the aggregate, constituted a material weakness, as identified in the 2021 Annual Report. While we believe the steps taken to date will improve the effectiveness of our internal control over financial reporting, we are in the process of testing these new or redesigned controls to determine if they are operating effectively.
The material weakness which arose from other deficiencies in the aggregate cannot be considered remediated until applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. Accordingly, we will continue to monitor and evaluate the effectiveness of our internal control over financial reporting in the areas affected by the material weakness.2023.
Changes in Internal Controls
Other than the ongoing steps being taken to implement the remediation plan described above and under Item 9A. “Controls and Procedures” in our 2021 Annual Report on Form 10-K, thereThere have been no other changes in internal control over financial reporting that occurred during the quarter ended September 30, 20222023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
We are subject to claims common to our industry and in the ordinary course of our business. 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 one or more successful claims under which we incur greater liabilities than is currently anticipated, could materially and adversely affect our consolidated financial statements.
Item 1A. Risk Factors.
There have been no material changes to the risk factors contained in Item 1A of our Form 10-K for the year ended December 31, 2021.2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On September 7, 2022, we announced a repurchase program of up to $10.0 million of our outstanding common stock, whichstock. In May 2023, our Board of Directors authorized an additional $5.0 million to this program. During the quarter ended September 30, 2023, we purchased 0.5 million shares for aggregate consideration of $3.5 million. As of September 30, 2023, we repurchased 2.2 million shares for $14.8 million under the program. As of September 30, 2023, $0.2 million remained available for repurchase under the repurchase program. The repurchase program terminateswas completed in September 2024.October 2023. The table below sets forth information with respect to share repurchases under the program in September 2022.for each month during the third quarter of 2023.
| | | | | | | | | | | | | | | | |
Period | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced plan | | Maximum dollar value of shares that may yet be purchased under the plan | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced plan | | Maximum dollar value of shares that may yet be purchased under the plan |
September 7-30, 2022 | | 500,000 | | $ 6.98 | | 500,000 | | $ 6,496,970 | ||||||||
July 1-31, 2023 | | - | | - | | - | | $ 3,714,894 | ||||||||
August 1-31, 2023 | | 231,253 | | $ 6.82 | | 231,253 | | $ 2,129,698 | ||||||||
September 1-30, 2023 |
| 317,812 |
| $ 6.11 |
| 317,812 |
| $ 179,392 |
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Item 6. Exhibits.
(a) Exhibits required by Item 601 of Regulation S-K.
Exhibit |
| Description |
Amended and Restated Bylaws (Incorporated by reference to Form 8-K filed on October 25, 2011) | ||
| ||
| ||
| ||
31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002 | |
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002 | ||
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
101.INS* | Inline XBRL Instance Document | |
101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
104* | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
*Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November | | |
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| THE ONE GROUP HOSPITALITY, INC. | |
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| By: | /s/ Tyler Loy |
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| Tyler Loy, Chief Financial Officer |
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