10-Q 1 stks-20220331x10q.htm 10-Q
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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 March 31, 2022

OR

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

For the transition period from                      to

Commission File Number 001-37379

THE ONE GROUP HOSPITALITY, INC.

(Exact name of registrant as specified in its charter)

Delaware

    

14-1961545

(State or other jurisdiction of incorporation or
organization)

 

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

 

 

 

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 April 30, 2022: ­­­­­32,448,872

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

THE ONE GROUP HOSPITALITY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share information)

March 31, 

December 31, 

    

2022

2021

ASSETS

(Unaudited)

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

28,644

$

23,614

Accounts receivable

 

8,284

 

11,356

Inventory

 

5,015

 

3,915

Other current assets

 

2,481

 

3,666

Due from related parties

 

376

 

376

Total current assets

 

44,800

 

42,927

 

  

 

  

Property and equipment, net

 

71,691

 

69,638

Operating lease right-of-use assets

87,667

85,395

Deferred tax assets, net

 

12,328

 

12,313

Intangibles, net

15,286

15,505

Other assets

 

4,001

 

3,199

Security deposits

 

801

 

858

Total assets

$

236,574

$

229,835

 

  

 

  

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

11,771

$

11,094

Accrued expenses

 

23,130

 

23,155

Deferred license revenue

 

79

 

90

Deferred gift card revenue and other

 

1,662

 

2,029

Current portion of operating lease liabilities

5,694

5,396

Current portion of long-term debt

 

500

 

500

Total current liabilities

 

42,836

 

42,264

 

  

 

  

Deferred license revenue, long-term

 

278

 

298

Operating lease liabilities, net of current portion

105,873

103,616

Long-term debt, net of current portion

 

23,068

 

23,132

Total liabilities

 

172,055

 

169,310

 

  

 

  

Commitments and contingencies (Note 14)

 

  

 

  

 

  

 

  

Stockholders’ equity:

 

  

 

  

Common stock, $0.0001 par value, 75,000,000 shares authorized; 32,272,971 issued and 32,260,337 outstanding at March 31, 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 March 31, 2022 and December 31, 2021, respectively

 

 

Treasury stock

 

(37)

 

(37)

Additional paid-in capital

 

54,046

 

53,481

Retained earnings

 

14,302

 

10,632

Accumulated other comprehensive loss

 

(2,737)

 

(2,645)

Total stockholders’ equity

 

65,577

 

61,434

Noncontrolling interests

 

(1,058)

 

(909)

Total equity

 

64,519

 

60,525

Total liabilities and equity

$

236,574

$

229,835

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 March 31, 

    

2022

    

2021

Revenues:

 

  

 

  

Owned restaurant net revenue

$

70,516

$

49,168

Management, license and incentive fee revenue

 

3,665

1,314

Total revenues

 

74,181

 

50,482

Cost and expenses:

 

  

 

  

Owned operating expenses:

 

  

 

  

Owned restaurant cost of sales

 

18,099

12,001

Owned restaurant operating expenses

 

39,373

27,906

Total owned operating expenses

 

57,472

 

39,907

General and administrative (including stock-based compensation of $879 and $1,022 for the three months ended March 31, 2022 and 2021, respectively)

 

6,879

5,174

Depreciation and amortization

 

2,715

2,699

COVID-19 related expenses

 

2,313

1,557

Pre-opening expenses

 

345

101

Lease termination expenses

255

187

Total costs and expenses

 

69,979

 

49,625

Operating income

 

4,202

 

857

Other expenses, net:

 

  

 

  

Interest expense, net of interest income

 

508

1,246

Total other expenses, net

 

508

 

1,246

Income (loss) before provision (benefit) for income taxes

 

3,694

 

(389)

Provision (benefit) for income taxes

 

173

(329)

Net income (loss)

 

3,521

 

(60)

Less: net loss attributable to noncontrolling interest

 

(149)

(130)

Net income attributable to The One Group Hospitality, Inc.

$

3,670

$

70

Currency translation loss

 

(92)

(18)

Comprehensive income attributable to The ONE Group Hospitality, Inc.

$

3,578

$

52

 

  

 

  

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

 

  

 

  

Basic net income per share

$

0.11

$

Diluted net income per share

$

0.11

$

 

  

 

  

Shares used in computing basic income per share

 

32,231,210

 

29,168,576

Shares used in computing diluted income per share

 

34,245,445

 

32,031,479

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

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, 2021

 

32,125,762

$

3

$

(37)

$

53,481

$

10,632

$

(2,645)

$

61,434

$

(909)

$

60,525

Stock-based compensation

 

7,162

 

879

 

879

 

 

879

Issuance of vested restricted shares, net of tax withholding

 

127,413

 

(314)

 

(314)

 

 

(314)

Loss on foreign currency translation, net

 

 

(92)

 

(92)

 

 

(92)

Net income (loss)

 

 

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

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

See notes to the condensed consolidated financial statements.

5

THE ONE GROUP HOSPITALITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

For the three months ended March 31, 

    

2022

    

2021

Operating activities:

 

  

 

  

Net income (loss)

$

3,521

$

(60)

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

 

  

 

  

Depreciation and amortization

 

2,715

 

2,699

Stock-based compensation

 

879

 

1,022

Amortization of debt issuance costs

 

93

 

141

Deferred taxes

 

(15)

 

349

Changes in operating assets and liabilities:

 

 

  

Accounts receivable

 

3,086

 

1,148

Inventory

 

(1,100)

 

Other current assets

 

1,183

 

(809)

Security deposits

 

57

 

3

Other assets

 

(150)

 

(164)

Accounts payable

 

244

 

392

Accrued expenses

 

(575)

 

2,537

Operating lease liabilities and right-of-use assets

283

88

Deferred gift card and license revenue

 

(398)

 

(360)

Net cash provided by operating activities

 

9,823

 

6,986

 

  

 

  

Investing activities:

 

  

 

  

Purchase of property and equipment

 

(4,450)

 

(2,615)

Net cash used in investing activities

 

(4,450)

 

(2,615)

 

  

 

  

Financing activities:

 

  

 

  

Repayments of long-term debt

(125)

(40)

Debt issuance costs

(35)

Tax-withholding obligation on stock-based compensation

 

(128)

 

(154)

Purchase of non-controlling interests

 

 

(75)

Net cash used in financing activities

 

(253)

 

(304)

Effect of exchange rate changes on cash

 

(90)

 

(17)

Net increase in cash and cash equivalents

 

5,030

 

4,050

Cash and cash equivalents, beginning of period

 

23,614

 

24,385

Cash and cash equivalents, end of period

$

28,644

$

28,435

Supplemental disclosure of cash flow data:

 

  

 

  

Interest paid

$

402

$

1,022

Income taxes paid

$

86

$

Accrued purchases of property and equipment

$

1,637

$

See notes to the condensed consolidated financial statements.

6

THE ONE GROUP HOSPITALITY, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 – Summary of Business and Significant Accounting Policies

Summary of Business

The ONE Group Hospitality, Inc. and its subsidiaries (collectively, the “Company”) is a global hospitality company that develops, owns and operates, manages and licenses upscale and polished casual, high-energy restaurants and lounges and provides turn-key food and beverage (“F&B”) services 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 March 31, 2022, the Company owned, operated, managed, or licensed 59 venues, including 22 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and 13 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

The COVID-19 pandemic has significantly impacted and will continue to adversely affect our operations and financial results for the foreseeable future. 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 $2.3 million and $1.6 million for the three months ended March 31, 2022 and 2021, respectively, composed primarily of sanitation, supplies and safety precautions taken to prevent the spread of COVID-19. Currently, all restaurants are open for in-person dining. The continuation of normal dining operations is subject to events beyond the Company’s control, including the effectiveness of governmental efforts to halt the spread of COVID-19.

The Company regularly communicates with its major suppliers and has not experienced any significant disruption in its supply chain. The Company has enhanced its programs to attract and retain both restaurant managers and hourly employees. The Company has also increased cleaning protocols, including a role which is focused on sanitation in high-touch and high-traffic areas, implemented daily health and safety checklists, provided additional personal protective equipment and cleaning supplies and engaged third party vendors to perform electrostatic cleaning of its restaurants.

Basis of Presentation

The accompanying condensed consolidated balance sheet as of December 31, 2021, 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.

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

Prior Period Reclassifications

Certain reclassifications of the 2021 amounts in the segment reporting footnote have been made to conform to the current year presentation.

7

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. The Company is currently evaluating ASU 2016-13 and assessing the impact on its financial statements.

Note 2 – Property and Equipment, net

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

March 31, 

December 31, 

2022

2021

Furniture, fixtures and equipment

$

25,327

$

24,942

Leasehold improvements

 

77,158

 

76,500

Less: accumulated depreciation

 

(41,495)

 

(39,425)

Subtotal

 

60,990

 

62,017

Construction in progress

 

8,454

 

5,374

Restaurant smallwares

 

2,247

 

2,247

Total

$

71,691

$

69,638

Depreciation related to property and equipment was $2.5 million for both the three months ended March 31, 2022 and 2021. The Company does not depreciate construction in progress until such assets are placed into service.

Note 3 – Intangibles, net

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

March 31, 

December 31, 

    

2022

    

2021

Kona Grill trade name

$

17,400

$

17,400

Other finite-lived intangible assets

66

66

Less: accumulated amortization

 

(2,180)

 

(1,961)

Total intangibles, net

$

15,286

$

15,505

The Kona Grill trade name and other finite-lived intangible assets are amortized using the straight-line method over their estimated useful life of 10 to 20 years. Amortization expense was $0.2 million for both the three months ended March 31, 2022 and 2021. The Company’s estimated aggregate amortization expense for each of the five succeeding fiscal years is approximately $0.9 million annually.

8

Note 4 – Accrued Expenses

Accrued expenses consist of the following (in thousands):

March 31, 

December 31, 

2022

2021

Payroll and related (1)

$

6,774

 

$

6,554

Accrued lease exit costs (2)

4,863

4,913

VAT and sales taxes

2,801

 

3,477

Amounts due to landlords

2,010

1,847

Insurance

 

366

 

642

Interest

132

132

Legal, professional and other services

 

800

458

Income taxes and related

165

Construction on new restaurants

 

457

 

359

Other

 

4,762

 

4,773

Total

$

23,130

$

23,155

(1)Payroll and related includes $1.2 million in employer payroll taxes for which payment has been deferred under the CARES Act as of March 31, 2022 and December 31, 2021, respectively.
(2)Amount relates to lease exit costs for 2016 leases for restaurants never built and still under dispute with landlords.

Note 5 – Long-Term Debt

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

March 31, 

December 31, 

2022

2021

Term loan agreements

$

24,625

$

24,750

Revolving credit facility

Total long-term debt

 

24,625

 

24,750

Less: current portion of long-term debt

 

(500)

 

(500)

Less: debt issuance costs

 

(1,057)

 

(1,118)

Total long-term debt, net of current portion

$

23,068

$

23,132

Interest expense for the Company’s debt arrangements, excluding the amortization of debt issuance costs and other discounts and fees, was $0.5 million and $1.1 million for the three months ended March 31, 2022 and 2021, respectively.

As of March 31, 2022, the Company had $1.4 million in standby letters of credit outstanding for certain restaurants and $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, 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 amended Credit Agreement has several borrowing and interest rate options, including the following: (a) a LIBOR rate (or a comparable successor rate) subject to a 1.00% floor from a 1.75% floor or (b) a base rate equal to the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50%, (iii) the LIBOR rate for a one-month period plus 1.00% or (iv) 4.00%. Loans under the amended Credit Agreement bear interest at a rate per annum using the applicable indices plus an interest rate margin of 5.00% from a variable interest rate margin of 5.75 to 6.75% (for LIBOR rate loans) and 4.00% from 4.75% to 5.75% (for base rate loans). Upon the cessation

9

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 year ended December 31, 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 March 31, 2022 and December 31, 2021 was 6.00%.

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 March 31, 2022, the Company had $1.1 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 $0.6 million in debt issuance costs recorded in Other Assets on the condensed consolidated balance sheets. As of March 31, 2022, 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 due to their short maturities. Long-lived assets are measured and disclosed at fair value on a nonrecurring basis if an impairment is identified. There were no long-lived assets measured at fair value as of March 31, 2022.

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 taxes

Income taxes for the three months ended March 31, 2022 are recorded at the Company’s estimated annual effective income tax rate, subject to adjustments for discrete events, should they occur. The Company’s effective income tax rate including discrete events was 4.7% for the three months ended March 31, 2022 compared to 84.4% for the three months ended March 31, 2021. The Company’s annualized effective tax rate is estimated at approximately 19.5% for 2022. 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 such as the United Kingdom, Canada and Italy; (iii) taxes owed in state and local jurisdictions; and (iv) the tax effect of non-deductible compensation. Income tax provision recorded for the three months ended March 31, 2022 and 2021 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 March 31, 2022.

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 and the Konavore rewards program (in thousands):

    

March 31, 

    

December 31, 

2022

2021

Deferred license revenue (1)

$

357

$

388

Deferred gift card and gift certificate revenue (2)

$

1,214

$

1,769

Konavore rewards program (3)

$

144

$

136

(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.
(3)Konavore rewards program is included in accrued expenses on the condensed consolidated balance sheets.

Significant changes in deferred license revenue and deferred gift card revenue for the three months ended March 31, 2022 and 2021 are as follows (in thousands):

    

March 31, 

    

March 31, 

2022

2021

Revenue recognized from deferred license revenue

$

31

$

52

Revenue recognized from deferred gift card revenue

$

627

$

587

The estimated deferred license revenue to be recognized in the future related to performance obligations that are unsatisfied as of March 31, 2022 were as follows for each year ending (in thousands):

2022, nine months remaining

    

$

59

2023

 

79

2024

 

45

2025

 

44

2026

 

37

Thereafter

 

93

Total future estimated deferred license revenue

$

357

Note 9 – Leases

The components of lease expense for the period were as follows (in thousands):

March 31, 

 

March 31, 

 

2022

 

2021

 

Lease cost

Operating lease cost

 

$

3,635

 

$

3,298

Variable lease cost

2,665

767

Short-term lease cost

244

138

Sublease income

Total lease cost

 

$

6,544

 

$

4,203

Weighted average remaining lease term – operating leases

13 years

12 years

Weighted average discount rate – operating leases

8.40

%

8.09

%

Due to 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 concessions as a variable lease payment in accordance with ASC Topic 842. The Company’s right-of-use assets and operating lease liabilities have not been remeasured for lease concessions received. Variable lease cost is comprised of percentage rent and common area maintenance, offset by rent concessions received as a result of COVID-19.

11

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

March 31, 

March 31, 

2022

2021

Cash paid for amounts included in the measurement of operating lease liabilities

 

$

3,043

 

$

2,514

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

 

$

3,709

 

$

As of March 31, 2022, maturities of the Company’s operating lease liabilities are as follows (in thousands):

2022, nine months remaining

$

6,674

2023

15,164

2024

14,663

2025

13,705

2026

13,636

Thereafter

131,925

Total lease payments

195,767

Less: imputed interest

(84,200)

Present value of operating lease liabilities

 

$

111,567

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.

For the three months ended March 31, 2022 and 2021, the net income per share was calculated as follows (in thousands, except net income per share and related share data):

Three months ended March 31, 

    

2022

    

2021

Net income attributable to The One Group Hospitality, Inc.

$

3,670

$

70

 

  

 

Basic weighted average shares outstanding

 

32,231,210

 

29,168,576

Dilutive effect of stock options, warrants and restricted share units

 

2,014,235

 

2,862,903

Diluted weighted average shares outstanding

 

34,245,445

 

32,031,479

 

  

 

  

Net income available to common stockholders per share - Basic

$

0.11

$

Net income available to common stockholders per share - Diluted

$

0.11

$

For the three months ended March 31, 2022 and 2021, a nominal amount and 0.3 million stock options, warrants and restricted share units were determined to be anti-dilutive and were therefore excluded from the calculation of diluted earnings per share, respectively.

Note 11 – Stock-Based Compensation and Warrants

As of March 31 2022, the Company had 43,459 remaining shares available for issuance under the 2019 Equity Incentive Plan (“2019 Equity Plan”).

Stock-based compensation cost for the three months ended March 31, 2022 and 2021 was $0.9 million and $1.0 million, 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 of stock granted to directors for the three months ended March 31, 2022 and 2021. Such grants were awarded consistent with the Board of Director’s compensation practices. Stock-based compensation for the three months ended March 31, 2021 included $0.3 million of compensation costs for the vesting of market condition based options and RSUs.

12

Stock Option Activity

Stock options in the table below include both time based and market condition based awards. Changes in stock options during the three months ended March 31, 2022 were as follows:

Weighted

Weighted

average

Intrinsic

average exercise

remaining

value

    

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

Vested

 

$

 

  

 

  

Exercised

 

$

 

  

 

  

Cancelled, expired or forfeited

 

$

 

  

 

  

Outstanding at March 31, 2022

 

1,252,352

$

3.36

 

3.67 years

$

8,951

Exercisable at March 31, 2022

 

1,149,352

$

3.47

 

3.54 years

$

8,088

A summary of the status of the Company’s non-vested stock options as of March 31, 2022 and changes during the three 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

 

(22,667)

 

1.55

Cancelled, expired or forfeited

 

 

Non-vested stock options at March 31, 2022

 

103,000

$

0.87

The fair value of options that vested in the three months ended March 31, 2022 was less than $0.1 million. As of March 31, 2022, there is a nominal amount of unrecognized compensation cost related to non-vested awards, which will be recognized over a weighted-average period of 0.1 years.

Restricted Stock Unit Activity

The Company issues restricted stock units (“RSUs”) under the 2019 Equity Plan. The fair value of these RSUs is determined based upon the closing fair market value of the Company’s common stock on the grant date.

A summary of the status of RSUs and changes during the three months ended March 31, 2022 is presented below:

Weighted average

    

Shares

    

grant date fair value

Non-vested RSUs at December 31, 2021

 

1,690,010

$

4.98

Granted

 

116,670

 

11.32

Vested (1)

 

(512,446)

 

2.51

Cancelled, expired or forfeited

 

(6,667)

 

8.80

Non-vested RSUs at March 31, 2022

 

1,287,567

$

6.51

(1)This amount includes 403,913 RSUs that have vested, but which shares have not yet been issued as of March 31, 2022.

As of March 31, 2022, the Company had approximately $7.6 million of total unrecognized compensation costs related to RSUs, which will be recognized over a weighted average period of 2.9 years.

Warrants

As of March 31, 2022 and December 31, 2021, there were outstanding warrants to purchase 125,000 shares of common stock at an exercise price of $1.63.

13

Note 12 – 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 operations of STK restaurant locations.
Kona Grill. The Kona Grill segment includes the results of operations of Kona Grill restaurant locations.
ONE Hospitality. The ONE Hospitality segment is composed of the management, license and incentive fee revenue and results of operations generated from the Company’s other brands and venue concepts, which include ANGEL, Bao Yum Heliot, Hideout, Marconi, Radio, and Rivershore Bar & Grill. Additionally, this segment includes the results of operations generated from F&B hospitality management agreements with hotels, casinos and other high-end locations.
Corporate. The Corporate segment consists of the following: general and administrative costs, stock-based compensation, depreciation and amortization, acquisition related gains and losses, 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 Company’s Chief Executive Officer, who is the Company’s Chief Operating Decision Maker, manages the business and allocates resources via a combination of restaurant sales reports and operating segment profit information, defined as revenues less operating expenses, related to the Company’s four operating segments.

Certain financial information relating to the three months ended March 31, 2022 and 2021 for each segment is provided below (in thousands).

    

STK

    

Kona Grill

    

ONE Hospitality

    

Corporate

    

Total

For the three months ended March 31, 2022

Total revenues

 

$

42,499

31,212

343

127

74,181

Operating income (loss)

$

10,718

3,037

(9)

(9,544)

4,202

Capital asset additions

$

2,279

1,803

37

331

4,450

As of March 31, 2022

Total assets

$

96,022

94,988

5,489

40,075

236,574

STK

    

Kona Grill

    

ONE Hospitality

    

Corporate

    

Total

For the three months ended March 31, 2021

Total revenues

$

24,691

25,577

33

181

50,482

Operating income (loss)

$

5,596

2,450

(118)

(7,071)

857

Capital asset additions

$

1,476

529

15

595

2,615

As of December 31, 2021

Total assets

$

95,510

91,323

6,117

36,885

229,835

Note 13 – Geographic Information

Certain financial information by geographic location is provided below (in thousands).

For the three months ended March 31, 

    

2022

    

2021

Domestic revenues

 

$

73,144

 

$

50,288

International revenues

 

1,037

 

194

Total revenues

$

74,181

$

50,482

March 31, 

December 31, 

2022

2021

Domestic long-lived assets

 

$

190,564

 

$

185,718

International long-lived assets

 

1,210

 

1,190

Total long-lived assets

$

191,774

$

186,908

14

Note 14 – 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 in its consolidated financial statements in accordance with ASC 450. 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 or results of operations.

15

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

This Quarterly Report on Form 10-Q and certain information incorporated herein by reference contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). Forward-looking statements speak only as of the date thereof and involve risks and uncertainties that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. These risk and uncertainties include the risk factors discussed under Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. A number of factors could cause actual results or outcomes to differ materially from those indicated by such forward-looking statements, including but not limited to: (1) the effects of the COVID-19 pandemic on our business, including government restrictions on our ability to operate our restaurants and changes in customer behavior; (2) our ability to open new restaurants and food and beverage locations in current and additional markets, grow and manage growth profitably, maintain relationships with suppliers and obtain adequate supply of products and retain our key employees; (3) factors beyond our control that affect the number and timing of new restaurant openings, including weather conditions and factors under the control of landlords, contractors and regulatory and/or licensing authorities; (4) our ability to successfully improve performance and cost, realize the benefits of our marketing efforts and achieve improved results as we focus on developing new management and license deals; (5) changes in applicable laws or regulations; (6) the possibility that The ONE Group may be adversely affected by other economic, business, and/or competitive factors; and (7) other risks and uncertainties. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “ongoing,” “could,” “estimates,” “expects,” “intends,” “may,” “appears,” “suggests,” “future,” “likely,” “goal,” “plans,” “potential,” “projects,” “predicts,” “should,” “targets,” “would,” “will” and similar expressions that convey the uncertainty of future events or outcomes. You should not place undue reliance on any forward-looking statement. We do not undertake any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required under applicable law.

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.

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

Business Summary

We are a global hospitality company that develops, owns and operates, manages and licenses upscale and polished casual, high-energy restaurants and lounges and provides turn-key food and beverage (“F&B”) services and consulting service for hospitality venues including hotels, casinos and other high-end locations. Turn-key F&B services are food and beverage services that can be scaled, customized and implemented by us for the client at a particular hospitality venue. Our vision is to be a global market leader in the hospitality industry by melding high-quality service, ambiance, high-energy and cuisine into one great experience that we refer to as “Vibe Dining”. We design all our restaurants, lounges and F&B services to create a social dining and high-energy entertainment experience within a destination location. We believe that this design and operating philosophy separates us from more traditional restaurant and foodservice competitors.

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

We opened our first restaurant in January 2004 in New York, New York, and, as of March 31, 2022, we owned, operated, managed or licensed 59 venues including 22 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and 13 F&B venues operated under ONE Hospitality in seven hotels and casinos throughout the United States and

16

Europe. 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.

The table below reflects our venues by restaurant brand and geographic location as of March 31, 2022:

Venues

    

STK(1)

    

Kona Grill

    

ONE Hospitality(2)

    

Total

Domestic

 

  

 

  

 

  

 

  

Owned

 

11

 

24

 

2

 

37

Managed

 

2

 

 

1

 

3

Licensed

 

1

 

 

 

1

Total domestic

 

14

 

24

 

3

 

41

International

 

  

 

  

 

  

 

  

Owned

 

 

 

 

Managed

 

4