Company Quick10K Filing
Quick10K
One Group Hospitality
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$3.78 29 $108
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-04 Officers, Shareholder Vote, Exhibits
8-K 2019-05-22 Other Events
8-K 2019-05-15 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-05-09 Earnings, Exhibits
8-K 2019-03-22 Accountant, Exhibits
8-K 2019-01-29 Officers, Exhibits
8-K 2019-01-14 Other Events
8-K 2019-01-10 Earnings, Exhibits
8-K 2018-11-12 Earnings, Exhibits
8-K 2018-10-04 Accountant, Exhibits
8-K 2018-09-28 Officers, Other Events, Exhibits
8-K 2018-09-06 Regulation FD
8-K 2018-08-14 Earnings, Exhibits
8-K 2018-06-07 Regulation FD
8-K 2018-06-04 Shareholder Vote
8-K 2018-03-23 Enter Agreement, Earnings, Officers, Exhibits
8-K 2018-01-08 Earnings, Regulation FD, Exhibits
ET Energy Transfer L.P. 38,980
CMA Comerica 11,750
IBKC Iberiabank 4,330
SAVE Spirit Airlines 3,380
CNO CNO Financial Group 2,690
SCM Stellus Capital Investment 270
BWFG Bankwell Financial 227
AQB Aquabounty Technologies 49
ALES I-On Communications 0
QUEST Quest Management 0
STKS 2019-03-31
Part I. Financial Information
Item 1. Financial Statements
Note 1 - Summary of Business and Significant Accounting Policies
Note 2 - Inventory
Note 3 - Other Current Assets
Note 4 - Property and Equipment, Net
Note 5 - Accrued Expenses
Note 6 - Long-Term Debt
Note 7 - Fair Value of Financial Instruments
Note 8 - Nonconsolidated Variable Interest Entities
Note 9 - Related Party Transactions
Note 10 - Income Taxes
Note 11 - Revenue From Contracts with Customers
Note 12 - Leases
Note 13 - Earnings per Share
Note 14 - Stockholders' Equity
Note 15 - Stock-Based Compensation
Note 16 - Segment Reporting
Note 17 - Geographic Information
Note 18 - Litigation
Note 19 - Liquidity
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II &Mdash; Other Information
Item 1. Legal Proceedings.
Item 6. Exhibits.
EX-31.1 tv520238_ex31-1.htm
EX-31.2 tv520238_ex31-2.htm
EX-32.1 tv520238_ex32-1.htm
EX-32.2 tv520238_ex32-2.htm

One Group Hospitality Earnings 2019-03-31

STKS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv520238_10q.htm FORM 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

  (Mark One)
   
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the Quarterly Period Ended March 31, 2019
   
OR
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from                          to
   
Commission File Number        001-37379

 

THE ONE GROUP HOSPITALITY, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   14-1961545
(State or other jurisdiction of incorporation or
organization)
  (I.R.S. Employer Identification No.)
     
411 W. 14th Street, 2nd Floor, New York, New York   10014
(Address of principal executive offices)   Zip Code

 

646-624-2400
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x  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 x 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  x Smaller reporting company  x
  Emerging growth company  ¨

 

If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨  No x

 

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

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock   STKS   Nasdaq

 

Number of shares of common stock outstanding as of May 8, 2019:  28,628,880

 

 

 

 

 

 

TABLE OF CONTENTS

 

  Page
PART I – Financial Information  
Item 1. Financial Statements 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 32
   
PART II – Other Information  
Item 1. Legal Proceedings 32
Item 6. Exhibits 33
   
Signatures 33

 

 2 

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

THE ONE GROUP HOSPITALITY, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share information)

 

   (Unaudited),     
   March 31,   December 31, 
   2019   2018 
ASSETS          
Current assets:          
Cash and cash equivalents  $1,079   $1,592 
Accounts receivable   5,946    7,029 
Inventory   1,243    1,404 
Other current assets   1,570    1,471 
Due from related parties, net   123    45 
Total current assets   9,961    11,541 
           
Property and equipment, net   40,465    39,347 
Operating lease right-of-use assets   40,073     
Investments   2,684    2,684 
Deferred tax assets, net   28    38 
Other assets   341    349 
Security deposits   2,039    2,020 
Total assets  $95,591   $55,979 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Accounts payable  $5,700   $5,408 
Accrued expenses   6,836    8,093 
Deferred license revenue   154    171 
Deferred gift card revenue and other   783    947 
Current portion of operating lease liabilities   2,197     
Current portion of long-term debt   2,844    3,201 
Total current liabilities   18,514    17,820 
           
Deferred license revenue, long-term   1,081    1,008 
Due to related parties, long-term   1,197    1,197 
Operating lease liability, net of current portion   55,220     
Deferred rent and tenant improvement allowances       16,774 
Long-term debt, net of current portion   6,727    7,118 
Total liabilities   82,739    43,917 
           
Commitments and contingencies          
           
Stockholders’ equity:          
Common stock, $0.0001 par value, 75,000,000 shares authorized; 28,333,561 and 28,313,017 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively   3    3 
Preferred stock, $0.0001 par value, 10,000,000 shares authorized; no shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively        
Additional paid-in capital   43,724    43,543 
Accumulated deficit   (27,868)   (28,722)
Accumulated other comprehensive loss   (2,470)   (2,310)
Total stockholders’ equity   13,389    12,514 
Noncontrolling interests   (537)   (452)
Total equity   12,852    12,062 
Total liabilities and equity  $95,591   $55,979 

 

See notes to the consolidated financial statements.

 

 3 

 

 

THE ONE GROUP HOSPITALITY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

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

 

   For the three months ended March 31, 
   2019   2018 
Revenues:          
Owned restaurant net revenues  $17,820   $15,076 
Owned food, beverage and other net revenues   2,273    2,005 
Total owned revenue   20,093    17,081 
Management, license and incentive fee revenue   2,683    2,436 
Total revenues   22,776    19,517 
Cost and expenses:          
Owned operating expenses:          
Owned restaurants:          
Owned restaurant cost of sales   4,569    4,034 
Owned restaurant operating expenses   10,915    9,378 
Total owned restaurant expenses   15,484    13,412 
Owned food, beverage and other expenses   2,259    1,689 
Total owned operating expenses   17,743    15,101 
General and administrative (including stock-based compensation of $181 and $324 for the three months ended March 31, 2019 and 2018 respectively)   2,650    3,055 
Depreciation and amortization   942    778 
Pre-opening expenses   482    210 
Equity in income of investee companies       23 
Other income, net   (175)   (111)
Total costs and expenses   21,642    19,056 
Operating income   1,134    461 
Other expenses, net:          
Interest expense, net of interest income   269    318 
Total other expenses, net   269    318 
Income before provision for income taxes   865    143 
Provision for income taxes   96    25 
Net income   769    118 
Less: net loss attributable to noncontrolling interest   (85)   (113)
Net income attributable to The ONE Group Hospitality, Inc.  $854   $231 
Currency translation adjustment   (160)   (75)
Comprehensive income  $694   $156 
           
Net income attributable to The ONE Group Hospitality, Inc. per share:          
Basic net income per share  $0.03   $0.01 
Diluted net income per share  $0.03   $0.01 
           
Shares used in computing basic earnings per share   28,314,820    27,187,657 
Shares used in computing diluted earnings per share   29,311,756    27,388,498 

 

See notes to the consolidated financial statements.

 

 4 

 

 

THE ONE GROUP HOSPITALITY, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited, in thousands, except share information)

 

   Common stock           Accumulated             
   Shares   Par
value
   Additional
paid-in
capital
   Accumulated
deficit
   other
comprehensive
loss
   Stockholders'
equity
   Noncontrolling
interests
   Total 
Balance at December 31, 2018   28,313,017   $3   $43,543   $(28,722)  $(2,310)  $12,514   $(452)  $12,062 
Stock-based compensation           181            181        181 
Vesting of restricted shares   20,544                             
Loss on foreign currency translation, net                   (160)   (160)       (160)
Net income               854        854    (85)   769 
Balance at March 31, 2019   28,333,561   $3   $43,724   $(27,868)  $(2,470)  $13,389   $(537)  $12,852 

 

See notes to the consolidated financial statements.

 

 5 

 

 

THE ONE GROUP HOSPITALITY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

   For the three months ended March 31, 
   2019   2018 
Operating activities:          
Net income  $769   $118 
Adjustments to reconcile net loss to net cash provided by operating activities:          
Depreciation and amortization   942    778 
Amortization of discount on warrants   50    51 
Deferred rent and tenant improvement allowances       (18)
Deferred taxes   10    (2)
Income from equity method investments       23 
Gain on disposition of cost method investment       (185)
Stock-based compensation   181    324 
Changes in operating assets and liabilities:          
Accounts receivable   1,147    190 
Inventory   161    115 
Other current assets   (96)   (211)
Due from related parties, net   (38)   (99)
Security deposits   (18)   (54)
Other assets   8    (37)
Accounts payable   270    (203)
Accrued expenses   (1,331)   (718)
Operating lease liabilities and right-of-use assets   321     
Deferred revenue   137    100 
Net cash provided by operating activities   2,513    172 
           
Investing activities:          
Purchase of property and equipment   (2,060)   (306)
Proceeds from disposition of cost method investment       600 
Net cash (used in) provided by investing activities   (2,060)   294 
           
Financing activities:          
Repayment of term loan   (707)   (694)
Repayment of equipment financing agreement   (91)   (87)
Repayment of business loan and security agreement       (62)
Net cash used in financing activities   (798)   (843)
Effect of exchange rate changes on cash   (168)   (28)
Net decrease in cash and cash equivalents   (513)   (405)
Cash and cash equivalents, beginning of year   1,592    1,548 
Cash and cash equivalents, end of year  $1,079   $1,143 
Supplemental disclosure of cash flow data:          
Interest paid  $235   $142 
Income taxes paid   191    26 
Non-cash amortization of debt issuance costs  $5   $5 

 

See notes to the consolidated financial statements.

 

 6 

 

 

THE ONE GROUP HOSPITALITY, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1 – 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 or licenses upscale, high-energy restaurants and lounges and provides turn-key food and beverage (“F&B”) services for hospitality venues including hotels, casinos and other high-end locations globally. Turn-key F&B services are food and beverage services that can be scaled, customized and implemented by the Company at a particular hospitality venue and customized for the client. The Company’s primary restaurant brand is STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse.

 

As of March 31, 2019, we owned, operated, managed or licensed 29 venues including 19 STKs in major metropolitan cities in North America, Europe and the Middle East and including F&B services provided to four hotels and casinos in the United States and Europe.

 

Basis of Presentation

 

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

 

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

 

Recent Accounting Pronouncements

 

In March 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Updated (“ASU”) No. 2019-01, “Leases (Topic 842): Codification Improvements” (“ASU 2019-01”). ASU 2019-01 provided clarification related to adopting Accounting Standard Codification Topic 842, Leases, (“ASC Topic 842”). ASU 2019-01 addresses fair value determinations of underlying assets by lessors, cash flow statement presentation for financing leases, and transition disclosures. The Company adopted ASC Topic 842 as of January 1, 2019 and considered the clarification guidance in ASU 2019-01 as part of its adoption. Refer to Note 12 for additional details regarding the adoption of ASC Topic 842.

 

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 eliminates, modifies and adds disclosure requirements for fair value measurements. The amendments in ASU 2018-13 are effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company is evaluating the effects of ASU 2018-13 on its consolidated financial statements but does not expect the adoption of ASU 2018-13 to be material.

 

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract” (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs in cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. Entities can choose to adopt the new guidance prospectively or retrospectively. The Company is evaluating the effects of this pronouncement on its consolidated financial statements.

 

 7 

 

 

In October 2018, the FASB issued ASU No. 2018-17, “Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities” (“ASU 2018-17”). ASU 2018-17 states that indirect interests held through related parties in common control arrangements should be considered on a proportional basis to determine whether fees paid to decision makers and service providers are variable interests. This is consistent with how indirect interests held through related parties under common control are considered for determining whether a reporting entity must consolidate a variable interest entity. ASU 2018-17 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. Entities are required to adopt the new guidance retrospectively with a cumulative adjustment to retained earnings at the beginning of the earliest period presented. The Company is evaluating the effects of this pronouncement on its consolidated financial statements.

 

Note 2 – Inventory

 

Inventory consists of the following (in thousands):

 

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

 

Note 3 – Other Current Assets

 

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

 

   March 31,   December 31, 
   2019   2018 
Prepaid taxes  $560   $503 
Landlord receivable   195    195 
Prepaid expenses   809    680 
Other   6    93 
Total  $1,570   $1,471 

 

Note 4 – Property and Equipment, net

 

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

 

   March 31,   December 31, 
   2019   2018 
Furniture, fixtures and equipment  $11,024   $10,425 
Leasehold improvements   45,531    43,890 
Less: accumulated depreciation and amortization   (17,911)   (16,969)
Subtotal   38,644    37,346 
Construction in progress       336 
Restaurant supplies   1,821    1,665 
Total  $40,465   $39,347 

 

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

 

 8 

 

 

Note 5 – Accrued Expenses

 

Accrued expenses consist of the following (in thousands):

 

   March 31,   December 31, 
   2019   2018 
Payroll and related  $1,878   $1,794 
Variable rent, including disputed rent amounts   1,506    1,766 
Legal, professional and other services   807    1,028 
VAT and sales taxes   530    645 
Income taxes and related   416    685 
Insurance   317    203 
Due to hotels   35    212 
Other   1,347    1,760 
Total  $6,836   $8,093 

 

Note 6 – Long-Term Debt

 

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

 

   March 31,   December 31, 
   2019   2018 
Term loan agreements  $3,121   $3,828 
Promissory notes   6,250    6,250 
Equipment financing agreements   661    752 
Total long-term debt   10,032    10,830 
Less: current portion of long-term debt   (2,844)   (3,201)
Less: discounts on warrants, net   (434)   (479)
Less: debt issuance costs   (27)   (32)
Total long-term debt, net of current portion  $6,727   $7,118 

 

Interest expense for all the Company’s debt arrangements, excluding the amortization of debt issuance costs and other discounts and fees, was approximately $0.2 million and $0.3 million for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, the Company had $1.3 million in letters of credit outstanding for certain restaurants. These letters of credit, which are cash collateralized, are recorded as a component of security deposits on the consolidated balance sheet as of March 31, 2019.

 

The Company’s term loan agreements with Bank United are secured by substantially all of the Company’s assets. The term loan agreements contain certain affirmative and negative covenants that limit or restrict, among other things, liens and encumbrances, indebtedness, mergers, asset sales, investments, assumptions and guaranties of indebtedness of other persons, change in nature of operations, changes in fiscal year and other matters customarily restricted in such agreements. The financial covenants contained in these agreements require the borrowers to maintain a certain adjusted tangible net worth and a debt service coverage ratio. As of March 31, 2019, the Company is in compliance with all of its financial covenants under the term loan agreements.

 

Note 7 – Fair Value of Financial Instruments

 

Cash and cash equivalents, accounts receivable, inventory, accounts payable and accrued expenses are carried at cost, which approximates fair value due to their short maturities. Long-lived assets are measured and disclosed at fair value on a nonrecurring basis if an impairment is identified. There were no long-lived assets measured at fair value as of March 31, 2019.

 

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

 

 9 

 

 

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

 

   March 31,   December 31, 
   2019   2018 
Carrying amount of long-term debt, including current portion (1)  $10,032   $10,830 
Fair value of long-term debt, including current portion  $6,616   $7,648 

 

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

 

Note 8 – Nonconsolidated Variable Interest Entities

 

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

 

·31.24% interest in Bagatelle NY LA Investors, LLC (“Bagatelle Investors”)
·51.13% interest in Bagatelle Little West 12th, LLC (“Bagatelle NY”)

 

Bagatelle Investors is a holding company that has an interest in Bagatelle NY. Both entities were formed in 2011. The Company accounts for its investments in these entities under the equity method of accounting based on management’s assessment that although it is not the primary beneficiary of these entities because it does not have the power to direct their day to day activities, the Company is able to exercise influence over these entities. The Company has provided no additional types of support to these entities than what is contractually required.

 

The carrying values of these investments were as follows (in thousands):

 

   March 31,   December 31, 
   2019   2018 
Bagatelle Investors  $56   $56 
Bagatelle NY   2,628    2,628 
Total  $2,684   $2,684 

 

For the three months ended March 31, 2018, the equity in income of investee companies for the equity method investments discussed above was approximately $23.0 thousand. There was no equity in income for the three months ended March 31, 2019.

 

Additionally, the Company has entered into a management agreement with Bagatelle NY. Under this agreement, the Company recorded management fee revenue of approximately $44.0 thousand and $37.0 thousand for the three months ended March 31, 2019 and 2018, respectively. The Company also receives rental income from Bagatelle NY for restaurant space that it subleases to Bagatelle NY. Rental income of approximately $0.1 million was recorded from this entity for each three months ended March 31, 2019 and 2018.

 

Net receivables from the Bagatelle Investors and Bagatelle NY included in due from related parties, net were approximately $0.2 million and $0.1 million as of March 31, 2019 and December 31, 2018. These receivables, combined with the Company’s equity in each of these investments, represent the Company’s maximum exposure to loss.

 

In the three months ended March 31, 2018, the Company sold its 10% interest in a cost method investment, One 29 Park, LLC, for $0.6 million, resulting in a gain of $0.2 million. The gain is included as a component of “other expenses, net” on the consolidated statement of operations and comprehensive income. The investment was accounted for under the cost method of accounting. The Company had also entered into a management agreement with One 29 Park, LLC, under which the Company recorded management fee revenue of $0.1 million for the three months ended March 31, 2018. The management agreement with One 29 Park, LLC terminated on September 30, 2018.

 

Note 9 – Related Party Transactions

 

Net amounts due to related parties were $1.1 million and $1.2 million as of March 31, 2019 and December 31, 2018, respectively. The Company has not reserved any related party receivables as of March 31,2019 and December 31, 2018.

 

During the fourth quarter of 2016, the Company received approximately $1.2 million in cash advances from the TOG Liquidation Trust (the “Liquidation Trust”). The TOG Liquidation Trust is a trust that was set up in connection with a 2013 merger transaction to hold previously issued and outstanding warrants held by members of the predecessor company. Amounts due to the trust are non-interest bearing and are repayable in 2021 when the trust expires. As of March 31, 2019 and December 31, 2018, the balance due to the Liquidation Trust included in due to related parties, long-term was approximately $1.2 million.

 

 10 

 

 

Please refer to Note 8 for details on other transactions with related parties.

 

Note 10 – Income taxes

 

The Company’s effective income tax rate was 11.1% for the three months ended March 31 2019 compared to 17.5% for the three months ended March 31, 2018. The effective income tax rate for the three months ended March 31, 2019 was lower compared to the three months ended March 31, 2018 primarily due to the tax rates applied to domestic and foreign income (loss). Additionally, the Company’s projected annual effective tax rate differs from the statutory U.S. tax rate of 21% primarily due to the following: (i) availability of U.S. net operating loss carryforwards, resulting in no federal income taxes; (ii) a full valuation allowance on the U.S. deferred tax assets, net; (iii) taxes owed in foreign jurisdictions such as the United Kingdom, Canada and Italy; and, (iv) taxes owed in state and local jurisdictions such as New York, New York City, Colorado and Tennessee.

 

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

  

Note 11 – Revenue from contracts with customers

 

The following table provides information about receivables and contract liabilities, which include deferred license revenue and deferred gift card and gift certificate revenue, from contracts with customers (in thousands):

 

   March 31,
2019
   December 31,
2018
 
Receivables (1)  $   $174 
Deferred license revenue (2)   1,235    1,179 
Deferred gift card and gift certificate revenue (3)  $331   $491 

 

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

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

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

 

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

 

Significant changes in deferred license revenue for the three months ended March 31, 2019 were as follows (in thousands):

 

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

 

As of March 31, 2019, the estimated deferred license revenue to be recognized in the future related to performance obligations that are unsatisfied as of March 31, 2019 was as follows (in thousands):

 

2019, nine months remaining  $143 
2020   191 
2021   191 
2022   163 
2023   136 
Thereafter   411 
Total future estimated deferred license revenue  $1,235 

 

Proceeds from the sale of gift cards and gift certificates are recorded as deferred revenue and recognized as revenue when redeemed by the holder. There are no expiration dates on the Company’s gift card and gift certificates and the Company does not charge any service fees that would result in a decrease to a customer’s available balance. Although the Company will continue to honor all gift card and gift certificates presented for payment, it may determine the likelihood of redemption to be remote for certain gift cards and gift certificates due to, among other things, long periods of inactivity. In these circumstances, to the extent the Company determines there is no requirement for remitting balances to government agencies under unclaimed property laws, outstanding gift card and gift certificate balances may then be recognized as breakage in the consolidated statements of operations and comprehensive income as a component of owned food, beverage and other net revenues.

 

 11 

 

 

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

 

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

 

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

 

Note 12 – Leases

 

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

 

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

 

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

 

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

 

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

 

 12 

 

 

The changes due to the adoption of ASC Topic 842 were as follows (in thousands):

 

   December 31, 2018   ASC 842
Adjustments
   January 1, 2019 
Assets               
Operating lease right-of-use assets  $   $41,868   $41,868 
Liabilities               
Current portion of operating lease liabilities  $   $3,212   $3,212 
Operating lease liability, net of current portion       55,679    55,679 
Deferred gift card revenue and other   947    (249)   698 
Deferred rent and tenant improvement allowances  $16,774   $(16,774)  $ 

 

There was no impact to the Company’s consolidated statement of operations and comprehensive income for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.

 

The Company enters into contracts to lease office space, restaurant space and equipment with terms that expire at various dates through 2039. Under ASC Topic 842, the lease term at the lease commencement date is determined based on the non-cancellable period for which the Company has the right to use the underlying asset, together with any periods covered by an option to extend the lease if the Company is reasonably certain to exercise that option, periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise that option, and periods covered by an option to extend (or not to terminate) the lease in which the exercise of the option is controlled by the lessor. The Company considered a number of factors when evaluating whether the options in its lease contracts were reasonably certain of exercise, such as length of time before option exercise, expected value of the leased asset at the end of the initial lease term, importance of the lease to overall operations, costs to negotiate a new lease, and any contractual or economic penalties.

 

Certain of the Company’s leases also provide for variable rent, which is determined as a percentage of gross sales in excess of specified, minimum sales targets. These variable rents are not included in the calculation of lease payments when classifying a lease and in the measurement of the lease liability as they do not meet the definition of in-substance, fixed-lease payments under ASC Topic 842.

 

The Company subleases portions of its office and restaurant space where it does not use the entire space for its operations. For the three months ended March 31, 2019, sublease income was $0.2 million, of which $0.1 million was from related party, Bagatelle NY. Refer to Note 8 for details on transactions with this related party.

 

Certain of the Company’s leases include variable lease costs to reimburse the lessor for real estate tax and insurance expenses, and certain non-lease components that transfer a distinct service to the Company, such as common area maintenance services. The Company has elected not to separate the accounting for lease components and non-lease components, for all leased assets.

 

ASC Topic 842 includes a number of reassessment and re-measurement requirements for lessees based on certain triggering events or conditions, including whether a contract is or contains a lease, assessment of lease term and purchase options, measurement of lease payments, assessment of lease classification and assessment of the discount rate. The Company reviewed the reassessment and re-measurement requirements and concluded that a lease for office space required reassessment as the Company had determined not to elect to exercise an option that it had previously determined it was reasonably certain to exercise. As a result, the Company remeasured the lease liability to reflect the change in lease payments, which resulted in a reduction in the operating lease liability and a corresponding adjustment to the operating lease right-of-use asset of $1.2 million in the three months ended March 31, 2019. In addition, there were no impairment indicators identified during the three months ended March 31, 2019 that required an impairment test for the Company’s right-of-use assets or other long-lived assets in accordance with Accounting Standard Codification Topic 360, Property, Plant, and Equipment.

 

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

 

   March 31, 
   2019 
Lease cost     
Operating lease cost  $1,726 
Variable lease cost   674 
Short-term lease cost   108 
Sublease income   (203)
Total lease cost  $2,305 
      
Weighted average remaining lease term – operating leases   14 years 
Weighted average discount rate – operating leases   8.25%

 

 13 

 

 

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

 

   March 31, 
   2019 
Cash paid for amounts included in the measurement of operating lease liabilities  $1,718 
Right-of-use assets obtained in exchange for operating lease obligations  $281 

 

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

 

2019, nine months remaining  $5,167 
2020   6,801 
2021   6,545 
2022   6,669 
2023   6,805 
Thereafter   69,536 
Total lease payments   101,523 
Less: imputed interest   (44,106)
Present value of operating lease liabilities  $57,417 

 

Note 13 – Earnings per share

 

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

 

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

 

   Three months ended March 31, 
   2019   2018 
Net income attributable to The ONE Group Hospitality, Inc.  $854   $231 
           
Basic weighted average shares outstanding   28,314,820    27,187,657 
Dilutive effect of stock options, warrants and restricted share units   996,936    200,841 
Diluted weighted average shares outstanding  29,311,756   27,388,498 
           
Net income available to common stockholders per share - Basic  $0.03   $0.01 
Net income available to common stockholders per share - Diluted  $0.03   $0.01 

 

For the three months ended March 31, 2019, 0.9 million stock options, warrants and restricted share units were determined to be anti-dilutive and were therefore excluded from the calculation of diluted earnings per share. For the three months ended March 31, 2018, 2.0 million stock options, warrants and restricted share units were determined to be anti-dilutive and were therefore excluded from the calculation of diluted earnings per share.

 

 14 

 

 

Note 14 – Stockholders’ Equity

 

Significant changes in stockholders’ equity for the three months ended March 31, 2019 and 2018 are as follows (in thousands):

 

   Common
Stock
   Additional
paid-in
capital
   Accumulated
deficit
   Accumulated
other
comprehensive
loss
   Noncontrolling
interests
   Total 
Balance at December 31, 2018  $3   $43,543   $(28,722)  $(2,310)  $(452)  $12,062 
Stock-based compensation       181                181 
Loss on foreign currency translation, net               (160)       (160)
Net income (loss)           854        (85)   769 
Balance at March 31, 2019  $3   $43,724   $(27,868)  $(2,470)  $(537)  $12,852 

 

   Common
Stock
   Additional
paid-in
capital
   Accumulated
deficit
   Accumulated
other
comprehensive
loss
   Noncontrolling
interests
   Total 
Balance at December 31, 2017  $3   $41,007   $(31,979)  $(1,556)  $(922)  $6,553 
Adoption of ASC 606 “Revenue from contracts with customers”           (54)           (54)
Stock-based compensation       324                324 
Vesting of restricted shares                        
Loss on foreign currency translation, net               (75)       (75)
Net income (loss)           231        (113)   118 
Balance at March 31, 2018  $3   $41,331   $(31,802)  $(1,631)  $(1,035)  $6,866 

 

Note 15 - Stock-Based Compensation

 

As of March 31, 2019, the Company had 458,746 remaining shares available for issuance under the 2013 Employee, Director and Consultant Equity Incentive Plan (the “2013 Equity Plan”).

 

Stock-based compensation cost for each of the three months ended March 31, 2019 and 2018 was $0.2 million and is included in general and administrative expenses in the consolidated statement of operations and comprehensive income.

 

Stock Option Activity

 

Changes in outstanding stock options during the three months ended March 31, 2019 were as follows:

 

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

 

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

 

Expected life, in years   8.5 years 
Risk-free interest rate   2.62%
Volatility   42.0%
Dividend yield   0.0%

 

 15 

 

 

A summary of the status of the Company’s non-vested stock options as of December 31, 2018 and March 31, 2019 and changes during the three months then ended, is presented below:

 

   Shares   Weighted
average grant
date fair value
 
Non-vested stock options at December 31, 2018   926,500   $0.91 
Granted   68,000    2.99 
Vested        
Cancelled, expired or forfeited   (54,000)   0.99 
Non-vested stock options at March 31, 2019   940,500   $0.95 

 

As of March 31, 2019, there are 579,402 milestone-based options outstanding. These options vest based on the achievement of Company and individual objectives as set by the Board.

 

As of March 31, 2019, there is approximately $0.6 million of total unrecognized compensation cost related to non-vested awards, which will be recognized over a weighted-average period of 2.8 years.

 

Restricted Stock Unit Activity

 

The Company issues restricted stock units (“RSUs”) under the 2013 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, 2019 is presented below:

 

   Shares   Weighted
average grant
date fair value
 
Non-vested RSUs at December 31, 2018   764,201   $2.54 
Granted   142,205    2.93 
Vested   (20,544)   2.86 
Cancelled, expired or forfeited   (9,000)   2.73 
Non-vested RSUs at March 31, 2019   764,201   $2.59 

 

As of March 31, 2019, 150,000 RSUs subject to performance-based vesting were still outstanding. As of March 31, 2019, the Company had approximately $3.2 million of total unrecognized compensation costs related to RSUs, which will be recognized over a weighted average period of 2.8 years.

 

Note 16 - Segment Reporting

 

The Company operates in three segments: “Owned restaurants,” “Owned food, beverage and other,” and “Managed and licensed operations.” The Owned restaurants segment consists of leased restaurant locations and competes in the full-service dining industry. The Owned food, beverage and other segment consists of hybrid operations, such as where the Company has a leased restaurant location and also has a food and beverage agreement at the same location, typically a hotel, and offsite banquet offerings. The Managed and licensed operations segment includes all operations for which a management, incentive or license fee is received. Management agreements generate management fees on net revenue and incentive fees on operating profit as defined in the applicable management agreement. License agreements generate revenue primarily through royalties earned on net revenue at each location. Revenues associated with developmental support for licensed locations are also included within this segment.

 

The Company’s Chief Executive Officer (“CEO”), who has been deemed the Company’s Chief Operating Decision Maker, manages the business and allocates resources via a combination of restaurant sales reports and segment profit information (which is defined as revenues less operating expenses) related to the Company’s three segments, or sources of revenues, which are presented in their entirety within the consolidated statements of operations and comprehensive income.

 

 16 

 

 

The Company’s operating results by segment were as follows (in thousands):

 

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

 

   For the three months ended March 31, 2018 
   Owned
restaurants
   Owned food,
beverage and
other
   Managed and
licensed
operations
   Total 
Revenues:                    
Owned net revenues  $15,076   $2,005   $   $17,081 
Management, license and incentive fee revenue           2,436    2,436 
Total revenues   15,076    2,005    2,436    19,517 
                     
Cost and expenses:                    
Owned operating expenses:                    
Cost of sales   4,034            4,034 
Other operating expenses   9,378            9,378 
Owned food, beverage and other expenses       1,689        1,689 
Total owned operating expenses   13,412    1,689        15,101 
Segment income  $1,664   $316   $2,436   $4,416 
                     
General and administrative                  3,055 
Depreciation and amortization                  778 
Interest expense, net of interest income                  318 
Equity in loss of investee companies                  23 
Other                  99 
Income before provision for income taxes                 $143 

 

The Company’s total assets by segment for the periods indicated were as follows (in thousands):

 

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

 

(1) Includes corporate assets

 

 17 

 

 

The Company’s total assets increased $40.1 million as of March 31, 2019 compared to December 31, 2018 as a result of adopting ASC Topic 842 during the first quarter of 2019. Refer to Note 12 for additional information regarding the adoption of ASC Topic 842.

 

The Company’s capital asset additions by segment for the periods indicated were as follows (in thousands):

 

   For the three months ended March 31, 
   2019   2018 
Capital assets additions:          
Owned restaurants  $1,762   $301 
Owned food, beverage and other operations (1)   298    5 
Managed and licensed operations        
Total  $2,060   $306 

 

(1) Includes corporate capital asset additions

 

Note 17 - Geographic Information

 

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

 

Revenues

 

   For the three months ended March 31, 
   2019   2018 
Domestic:          
Owned restaurants  $17,820   $15,076 
Owned food, beverage and other operations   2,273    2,005 
Managed and licensed operations   1,687    1,687 
Total domestic revenues  $21,780   $18,768 
International:          
Owned restaurants        
Owned food, beverage and other operations        
Managed and licensed operationstv520238   996    749 
Total international revenues  $996   $749 
Total revenues  $22,776   $19,517 

 

Long-lived assets

 

   March 31,   December 31, 
   2019   2018 
Domestic:          
Owned restaurants  $72,532   $38,958 
Owned food, beverage and other operations   13,002    5,375 
Managed and licensed operations   59    67 
Total domestic long-lived assets  $85,593   $44,400 
International:          
Owned restaurants        
Owned food, beverage and other operations        
Managed and licensed operations   37    38 
Total international long-lived assets  $37   $38 
Total long-lived assets  $85,630   $44,438 

 

Note 18 – Litigation

 

The Company is party to claims in lawsuits incidental to its business, including lease disputes and employee-related matters. In the opinion of management, the ultimate outcome of such matters, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

 

 18 

 

 

Note 19 - Liquidity

 

During the three months ended March 31, 2019, the Company had net income of $0.8 million and had a working capital deficit of $8.6 million. As of March 31, 2019, the Company's accumulated deficit was $27.9 million. Additionally, as of March 31, 2019, the Company's cash and cash equivalents was $1.1 million, and cash from operations for the three months ended March 31, 2019 and 2018 were $2.5 million and $0.2 million, respectively. The Company expects to finance its operations, including the costs of opening planned restaurants, for at least the next twelve months from March 31, 2019 primarily through cash provided by operations. Other sources of liquidity could include additional potential issuances of debt or equity securities in public or private financings or warrant or option exercises.

 

 19 

 

 

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

 

This Quarterly Report on Form 10-Q and certain information incorporated herein by reference contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). Forward-looking statements speak only as of the date thereof and, involve risks and uncertainties that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. These risk and uncertainties include, the risk factors discussed under Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements include matters such as general economic conditions, consumer preferences and spending, costs, competition, restaurant openings or closings, operating margins, the availability of acceptable real estate locations, the sufficiency of our cash balances and cash generated from operations and financing activities for our future liquidity and capital resource needs, the impact on our business of Federal and State legislation, litigation, the execution of our growth strategy and other matters. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “ongoing,” “could,” “estimates,” “expects,” “intends,” “may,” “appears,” “suggests,” “future,” “likely,” “goal,” “plans,” “potential,” “projects,” “predicts,” “should,” “targets,” “would,” “will” and similar expressions that convey the uncertainty of future events or outcomes.  You should not place undue reliance on any forward-looking statement. We do not undertake any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required under applicable law.

 

General

 

This information should be read in conjunction with the consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

 

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.

 

Overview

 

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

 

We were established with the vision of becoming a global market leader in the hospitality industry by melding high-quality service, ambiance, high-energy and cuisine into one great experience that we refer to as “Vibe Dining.” Our primary restaurant brand is STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse. Our F&B hospitality management services include developing, managing and operating restaurants, bars, rooftop lounges, pools, banqueting and catering facilities, private dining rooms, room service and mini bars tailored to the specific needs of high-end hotels and casinos. Our F&B hospitality clients operate global hospitality brands such as the W Hotel, Hippodrome Casino, and ME Hotels.

 

We opened our first restaurant in January 2004 in New York City and, as of March 31, 2019, we owned, operated, managed or licensed 29 venues including 19 STKs in major metropolitan cities in North America, Europe and the Middle East. In addition, we provided food and beverage services in four hotels and casinos. We generate management and incentive fee revenue (profit sharing) from those restaurants and lounges that we do not own, but instead manage on behalf of our F&B hospitality clients. All our restaurants, lounges and F&B services are designed to create a social dining and high-energy entertainment experience within a destination location. We believe that this design and operating philosophy separates us from more traditional restaurant and foodservice competitors.

 

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

 

   Venues 
   STK(1)   Bagatelle   Radio   Hideout   Marconi   Heliot   F&B
Services
   Total 
Domestic                                        
Owned   10            1            1    12 
Managed   1    1                        2 
Licensed                                
Total domestic   11    1        1            1    14 
International                                        
Owned                                
Managed   3        2        1    1    3    10 
Licensed   5                            5 
Total international   8        2        1    1    3    15 
Total venues   19    1    2    1    1    1    4    29 

 

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

 

Net income attributable to The ONE Group Hospitality, Inc. for the three months ended March 31, 2019 was $0.9 million compared to $0.2 million for the three months ended March 31, 2018. The increase was primarily due to overall sales growth and profitability improvements from existing restaurants, newly owned restaurants and managed and licensed locations combined with labor and spending efficiencies. In the first quarter of 2019, we opened an owned STK restaurant in Nashville, Tennessee and a licensed STK restaurant in Doha, Qatar.

 

Our Growth Strategies and Outlook

 

Our growth model is primarily driven by the following:

 

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

 

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

 

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

 

We did not enter into any new F&B hospitality agreements for the three months ended March 31, 2019. In 2019, we plan to add one managed F&B location in Florence, Italy. Going forward, we expect to enter into one to two new F&B hospitality agreements annually.

 

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

 

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We expect domestic STK same store sales (“SSS”) to grow in 2019 between 3% and 4%. For the three months ended March 31, 2019, our SSS increased 8.6% compared to the same prior year period. We consider a domestic owned or managed restaurant to be comparable in the first full quarter following its 18th month of operation to remove the impact of new restaurant openings in comparing the operations of existing restaurants. Our comparable restaurant base for SSS consisted of nine domestic restaurants for the three months ended March 31, 2019.

 

We believe that our operating margins will improve through growth in SSS and a reduction of store-level operating expenses. Our store-level margins for owned STK locations increased 210 basis points for the three months ended March 31, 2019. As our footprint 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 continue to look at opportunities to decrease our general and administrative expenses by outsourcing non-core activities and through increases in staff productivity.

 

Key Performance Indicators

 

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

 

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

 

Average Check. Average check is calculated by dividing total restaurant sales by total entrees sold for a specified period. Our management team uses this indicator to analyze trends in customers’ preferences, customer expenditures and the overall effectiveness of menu changes and price increases. For comparable restaurants, our average check for the three months ended March 31, 2019 was $110.83 compared to $108.89 for the three months ended March 31, 2018.

 

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

 

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

 

Key Financial Terms and Metrics

 

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

 

Segment reporting

 

We operate in three segments: “Owned restaurants,” “Owned food, beverage and other,” and “Managed and Licensed operations.” Our Owned restaurants segment consists of leased restaurant locations and competes in the full-service dining industry. Our Owned food, beverage and other segment consists of hybrid operations, such as where we have a leased restaurant location and also have a food and beverage agreement at the same location, typically a hotel, and our offsite banquet offerings. The primary component of this segment is our operations at the W Hotel in Beverly Hills, California. Our Managed and Licensed operations segment includes all operations for which a management, incentive or license fee is received. Management agreements generate management fees on net revenue and incentive fees on operating profit as defined in the applicable management agreement. License agreements generate revenue primarily through royalties earned on net revenue at each location. Revenues associated with developmental support for licensed locations are also included within this segment.

 

See Note 16 to our consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for further information on our segment reporting.

 

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Revenues

 

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

 

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

 

Management, license and incentive revenue. Management, license and incentive fee revenues includes: (1) management fees received pursuant to management and license agreements that are calculated based on a fixed percentage of revenues at the managed or licensed location; (2) incentive fees based on the operating profitability of a particular venue, as defined in each agreement; and (3) recognition of license fee related revenues, which are recognized over the term of the license.

 

We evaluate the performance of our managed and licensed properties based on sales growth, a key driver for management and license fees, and on improvements in operating profitability margins, which, combined with sales, drives incentive fee growth.

 

Our primary restaurant brand is STK and we specifically look at comparable sales from both owned and managed STKs to understand customer count trends and changes in average check as it relates to our primary restaurant brand.

 

Cost and expenses

 

Owned restaurant cost of sales. Owned restaurant cost of sales includes all owned restaurant food and beverage expenditures. We measure cost of goods as a percentage of owned restaurant net revenues. Owned restaurant cost of sales are generally influenced by the cost of food and beverage items, menu mix, discounting activity and restaurant level controls. Purchases of beef represented approximately 37% and 35% of our food and beverage costs for the three months ended March 31, 2019 and 2018, respectively.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Pre-opening expenses. Pre-opening expenses consist of costs incurred prior to opening an owned or managed STK restaurant at either a leased or F&B location. Pre-opening expenses are comprised principally of manager salaries and relocation costs, employee payroll, training costs for new employees and lease costs incurred prior to opening. We expect these costs to decrease as we focus our growth towards our capital light model. Pre-opening expenses have varied from location to location depending on a number of factors, including the proximity of our existing restaurants; the amount of rent expensed during the construction and in-restaurant training periods; the size and physical layout of each location; the number of management and hourly employees required to operate each restaurant; the relative difficulty of the restaurant staffing process; the cost of travel and lodging for different metropolitan areas; the timing of the restaurant opening; and the extent of unexpected delays, if any, in obtaining necessary licenses and permits to open the restaurant.

 

Equity in income of subsidiaries. This represents the income that we record under the cost or equity method of accounting for entities that are not consolidated. Included in this amount is our approximate 51% ownership of Bagatelle New York, consisting of a 5.23% direct ownership interest by us and a 45.9% ownership interest through two of our subsidiaries.

 

Other Items

 

EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA are presented in this Quarterly Report on Form 10-Q and are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define EBITDA as net income before interest expense, provision for income taxes and depreciation and amortization. We define Adjusted EBITDA as net income before interest expense, provision for income taxes, depreciation and amortization, non-cash impairment loss, non-cash rent expense, pre-opening expenses, lease termination expenses, non-recurring gains and losses, stock-based compensation and results from discontinued operations. Not all of the aforementioned items defining Adjusted EBITDA occur in each reporting period but have been included in our definitions of these terms based on our historical activity.

 

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

 

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

 

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Results of Operations

 

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

 

   For the three months ended March 31, 
   2019   2018 
Revenues:          
Owned restaurant net revenues  $17,820   $15,076 
Owned food, beverage and other net revenues   2,273    2,005 
Total owned revenue   20,093    17,081 
Management, license and incentive fee revenue   2,683    2,436 
Total revenues   22,776    19,517 
Cost and expenses:          
Owned operating expenses:          
Owned restaurants:          
Owned restaurant cost of sales   4,569    4,034 
Owned restaurant operating expenses   10,915    9,378 
Total owned restaurant expenses   15,484    13,412 
Owned food, beverage and other expenses   2,259    1,689 
Total owned operating expenses   17,743    15,101 
General and administrative (including stock-based compensation of $181 and $324, respectively)   2,650    3,055 
Depreciation and amortization   942    778 
Pre-opening expenses   482    210 
Equity in income of investee companies       23 
Other income, net   (175)   (111)
Total costs and expenses   21,642    19,056 
Operating income   1,134    461 
Other expenses, net:          
Interest expense, net of interest income   269    318 
Total other expenses, net   269    318 
Income before provision for income taxes   865    143 
Provision for income taxes   96    25 
Net income   769    118 
Less: net loss attributable to noncontrolling interest   (85)   (113)
Net income attributable to The ONE Group Hospitality, Inc.  $854   $231 

 

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

 

   For the three months ended March 31, 
   2019   2018 
Revenues:          
Owned restaurant net revenues   78.2%   77.2%
Owned food, beverage and other net revenues   10.0%   10.3%
Total owned revenue   88.2%   87.5%
Management, license and incentive fee revenue   11.8%   12.5%
Total revenues   100.0%   100.0%
Cost and expenses:          
Owned operating expenses:          
Owned restaurants:          
Owned restaurant cost of sales (1)   25.6%   26.8%
Owned restaurant operating expenses (1)   61.3%   62.2%
Total owned restaurant expenses (1)   86.9%   89.0%
Owned food, beverage and other expenses (2)   99.4%   84.2%
Total owned operating expenses (3)   88.3%   88.4%
General and administrative (including stock-based compensation of 0.8% and 1.7%, respectively)   11.6%   15.7%
Depreciation and amortization   4.1%   4.0%
Pre-opening expenses   2.1%   1.1%
Equity in income of investee companies   %   0.1%
Other income, net   (0.8)%   (0.6)%
Total costs and expenses   95.0%   97.6%
Operating income   5.0%   2.4%
Other expenses, net:          
Interest expense, net of interest income   1.2%   1.6%
Total other expenses, net   1.2%   1.6%
Income before provision for income taxes   3.8%   0.7%
Provision for income taxes   0.4%   0.1%
Net income   3.4%   0.6%
Less: net loss attributable to noncontrolling interest   (0.4)%   (0.6)%
Net income attributable to The ONE Group Hospitality, Inc.   3.7%   1.2%

 

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

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

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

 

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

 

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

 

   For the three months ended March 31, 2018 
   Owned
restaurants
   Owned food,
beverage and
other
   Managed and
licensed
operations
   Total 
Revenues:                    
Owned net revenues  $15,076   $2,005   $   $17,081 
Management, license and incentive fee revenue           2,436    2,436 
Total revenues   15,076    2,005    2,436    19,517 
                     
Cost and expenses:                    
Owned operating expenses:                    
Cost of sales   4,034            4,034 
Other operating expenses   9,378            9,378 
Owned food, beverage and other expenses       1,689        1,689 
Total owned operating expenses   13,412    1,689        15,101 
Segment income  $1,664   $316   $2,436   $4,416 
                     
General and administrative                  3,055 
Depreciation and amortization                  778 
Interest expense, net of interest income                  318 
Equity in loss of investee companies                  23 
Other                  99 
Income before provision for income taxes                 $143 

 

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

 

   For the three months ended March 31, 
   2019   2018 
Net income attributable to The ONE Group Hospitality, Inc.  $854   $231 
Net loss attributable to noncontrolling interest   (85)   (113)
Net income   769    118 
Interest expense, net of interest income   269    318 
Provision for income taxes   96    25 
Depreciation and amortization   942    778 
EBITDA   2,076    1,239 
Non-cash rent expense (1)   (87)   (20)
Pre-opening expenses   482    210 
Stock-based compensation   181    324 
Adjusted EBITDA   2,652    1,753 
Adjusted EBITDA attributable to noncontrolling interest   (36)   (42)
Adjusted EBITDA attributable to The ONE Group Hospitality, Inc.  $2,688   $1,795 

 

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

 

Results of Operations for the Three Months Ended March 31, 2019 and March 31, 2018

 

Revenues

 

Owned restaurant net revenues. Owned restaurant net revenues increased $2.7 million, or 18.2%, from $15.1 million for the three months ended March 31, 2018 to $17.8 million for the three months ended March 31, 2019. This increase was primarily due to the opening of our restaurant in San Diego, California in July 2018 and increased sales at our existing locations. Additionally, in March 2019, we opened our STK restaurant in Nashville, Tennessee. SSS increased 8.6% and average check increased 2.3% for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. Our Denver location, which opened in January 2017, was considered a comparable location for SSS in the three months ended March 31, 2019. To drive revenue, among several strategies, we have recently begun opening our restaurants earlier to take advantage of happy-hour and pre-dinner time frames. We are also now open during lunch hours in several locations.

 

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

 

Management and license fee revenue. Revenue generated from the restaurants and lounges we operate under management or license agreements, and from F&B services at hospitality venues affects the amount of management and incentive fees that we earn. Management and license fee revenues increased $0.2 million, or 10.1%, from $2.4 million for the three months ended March 31, 2018 to $2.7 million for the three months ended March 31, 2019. The increase was primarily related to new STK licensed locations that opened in 2018, including in Mexico City, Mexico and Dubai, United Arab Emirates. Additionally, in March of 2019, we opened a licensed STK restaurant in Doha, Qatar.

 

Cost and Expenses

 

Owned restaurant cost of sales. Food and beverage costs for owned restaurants increased approximately $0.5 million, or 13.3%, from $4.0 million for the three months ended March 31, 2018 to $4.6 million for the three months ended March 31, 2019. This increase was primarily due to increased sales at our existing, owned locations and the opening of our restaurant in San Diego, California in July 2018. Additionally, in March 2019, we opened our STK restaurant in Nashville, Tennessee. As a percentage of owned restaurant net revenues, cost of sales decreased from 26.8% for the three months ended March 31, 2018 to 25.6% for the three months ended March 31, 2019 due to the positive impacts of operating initiatives coupled with selective price increases that we implemented in January 2019. Food revenues as a percentage of total food and beverage revenues were approximately 64% and 68% for the three months ended March 31, 2019 and 2018, respectively. Food costs as a percentage of food revenues are typically higher than beverage costs as a percentage of beverage revenues.

 

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Owned restaurant operating expenses. Owned restaurant operating expenses increased $1.5 million, or 16.4%, from $9.4 million for the three months ended March 31, 2018 to $10.9 million for the three months ended March 31, 2019. As a percentage of owned restaurant net revenues, owned restaurant operating expenses decreased 110 basis points from 62.2% for the three months ended March 31, 2018 to 61.3% for the three months ended March 31, 2019. This improvement was due to the leverage of SSS growth and labor and spending efficiencies.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Liquidity and Capital Resources

 

Our principal liquidity requirements are to meet our lease obligations, our working capital and capital expenditure needs and to pay principal and interest on our outstanding indebtedness. Subject to our operating performance, which, if significantly adversely affected, would adversely affect the availability of funds, we expect to finance our operations for at least the next 12 months, including costs of opening currently planned new restaurants, through cash provided by operations and construction allowances provided by landlords of certain locations.

 

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In the context of our current debt structure and projected cash needs, we believe the cash provided by operations is adequate to support our immediate business operations and plans. As of March 31, 2019, we had cash and cash equivalents of approximately $1.1 million.

 

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

 

We expect to fund our anticipated capital expenditures for 2019 with current cash on hand, expected cash flows from operations and proceeds from expected tenant improvement allowances. Our future cash requirements will depend on many factors, including the pace of our expansion, conditions in the retail property development market, construction costs, the nature of the specific sites selected for new restaurants, and the nature of the specific leases and associated tenant improvement allowances available, if any, as negotiated with landlords.

 

Under our current capital light strategy, we plan to enter into management and license agreements for the operation of STKs where we are not required to contribute significant capital upfront. We expect to rely on our cash flow from operations and continued financing to fund the majority of our planned capital expenditures for 2019.

 

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

 

Cash Flows

 

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

 

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

 

Operating Activities

 

Net cash provided by operating activities was $2.5 million for the three months ended March 31, 2019 compared to $0.2 million for the three months ended March 31, 2018. The increase was primarily attributable to improvements in net income and changes within our working capital accounts due to increased domestic SSS and the openings of our owned STK restaurants in San Diego, California and Nashville, Tennessee in July 2018 and March 2019, respectively.

 

Investing Activities

 

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

 

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Financing Activities

 

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

 

Capital Expenditures and Lease Arrangements

 

To the extent we open new company-owned restaurants, we anticipate capital expenditures would increase from the amounts described in “Investing Activities” above. Although we are committed to our capital light strategy, in which our capital investment is expected to be limited, we are willing to consider opening owned restaurants as opportunities arise. For owned restaurants, we have typically targeted an average cash investment of approximately $3.8 million for a 10,000 square-foot STK restaurant, net of landlord contributions and equipment financing and excluding pre-opening costs. 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 at some of our locations.

 

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

 

We typically seek to lease our restaurant locations for periods of 10 to 20 years under operating lease arrangements, with a limited number of renewal options. Our rent structure varies from lease to lease, but our leases generally provide for the payment of both minimum and contingent (percentage) rent based on sales, as well as other expenses related to the leases (for example, our pro-rata share of common area maintenance, property tax and insurance expenses). Many of our lease arrangements include the opportunity to secure tenant improvement allowances to partially offset the cost of developing and opening the related restaurants. Generally, landlords recover the cost of such allowances from increased minimum rents. However, there can be no assurance that such allowances will be available to us on each project that we select for development.

 

Loan Agreements

 

As of March 31, 2019, our long-term debt consisted of term loans, promissory notes and equipment financing agreements for which no additional financing was available. In 2019, we made principal payments of approximately $0.8 million towards our long-term debt. As of March 31, 2019, we had approximately $10.0 million of outstanding debt to third parties.

 

Our term loan agreements with BankUnited contain certain affirmative and negative covenants, including negative covenants that limit or restrict, among other things, liens and encumbrances, indebtedness, mergers, asset sales, investments, assumptions and guaranties of indebtedness of other persons, change in nature of operations, changes in fiscal year and other matters customarily restricted in such agreements. The financial covenants in these agreements require us to maintain a certain adjusted tangible net worth and a debt service coverage ratio. We were in compliance with all of our financial covenants under the BankUnited term loan agreements as of March 31, 2019. Based on current projections, we believe that we will continue to comply with such covenants throughout the twelve months following the issuance of the financial statements.

 

Off-Balance Sheet Arrangements

 

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

 

Recent Accounting Pronouncements

 

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

 

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

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

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

 

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Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Our management , with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation as of the last day of the period covered by this Quarterly Report on Form 10-Q of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is timely recorded, processed, summarized and reported and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls

 

Beginning January 1, 2019, we implemented ASC Topic 842, Leases. As such, we implemented changes to our processes related to leases and the control activities within them. These included the development of new policies based on the requirements provided in the new standard, new training, ongoing contract review requirements, and gathering of information provided for disclosures. There were no other changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the first quarter of 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

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

 

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Item 6. Exhibits.

 

(a) Exhibits required by Item 601 of Regulation S-K.

 

Exhibit   Description
3.1   Amended and Restated Certificate of Incorporation (Incorporated by reference to Form 8-K filed on June 5, 2014).
3.2   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
31.2*   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002
32.1*   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes – Oxley Act of 2002, 18 U.S.C. Section 1350.
32.2*   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes – Oxley Act of 2002, 18 U.S.C. Section 1350.
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document
101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document

 

* Filed herewith.

 

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: May 9, 2019

 

  THE ONE GROUP HOSPITALITY, INC.
     
  By: /s/ Tyler Loy
    Tyler Loy, Chief Financial Officer

 

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