Company Quick10K Filing
One Group Hospitality
Price2.65 EPS0
Shares30 P/E68
MCap79 P/FCF27
Net Debt12 EBIT2
TEV91 TEV/EBIT45
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-11
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8-K 2018-01-08

STKS 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements
Note 1 – Summary of Business and Significant Accounting Policies
Note 2 – Business Combination
Note 3 – Property and Equipment, Net
Note 4 – Intangibles, Net
Note 5 – Accrued Expenses
Note 6 – Long - Term Debt
Note 7 – Fair Value of Financial Instruments
Note 8 – Nonconsolidated Variable Interest Entities and Related Party Transactions
Note 9 – Income Taxes
Note 10 – Revenue From Contracts with Customers
Note 11 – Leases
Note 12 – (Loss) Earnings per Share
Note 13 – Stockholders’ Equity
Note 14 – Stock - Based Compensation
Note 15 – Segment Reporting
Note 16 – Geographic Information
Note 17 – Commitments and Contingencies
Note 18 – Subsequent Events
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 — Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 6. Exhibits.
EX-31.1 stks-20200331ex311cac053.htm
EX-31.2 stks-20200331ex312e53430.htm
EX-32.1 stks-20200331ex321060cee.htm
EX-32.2 stks-20200331ex322b28119.htm

One Group Hospitality Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
1008060402002012201420172020
Assets, Equity
5035205-10-252012201420172020
Rev, G Profit, Net Income
2518114-3-102012201420172020
Ops, Inv, Fin

10-Q 1 stks-20200331x10q.htm 10-Q stks_Current_Folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

 

 

 

(Mark One)

 

 

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

 

For the Quarterly Period Ended March 31, 2020

 

 

 

OR

 

 

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

 

For the transition period from                      to

 

Commission File Number 001‑37379

 

 

THE ONE GROUP HOSPITALITY, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

    

14‑1961545

(State or other jurisdiction of incorporation or
organization)

 

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

 

 

 

1624 Market Street, Suite 311, Denver, Colorado

 

80202

(Address of principal executive offices)

 

Zip Code

 

 

646‑624‑2400

(Registrant’s telephone number, including area code)

 

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

 

 

 

 

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock

 

STKS

 

Nasdaq

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

 

 

Large accelerated filer  ☐

Accelerated filer  ☐

Non-accelerated filer  ☒

Smaller reporting company  ☒

 

Emerging growth company  ☐

 

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

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

Number of shares of common stock outstanding as of May 1, 2020:  28,828,675

 

 

 

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

THE ONE GROUP HOSPITALITY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share information)

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2020

 

2019

ASSETS

 

(Unaudited)

 

 

  

Current assets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

8,160

 

$

12,344

Accounts receivable

 

 

5,189

 

 

10,351

Inventory

 

 

2,490

 

 

3,058

Other current assets

 

 

2,005

 

 

1,047

Due from related parties, net

 

 

376

 

 

341

Total current assets

 

 

18,220

 

 

27,141

 

 

 

  

 

 

  

Property and equipment, net

 

 

69,183

 

 

70,483

Operating lease right-of-use assets

 

 

80,228

 

 

81,097

Deferred tax assets, net

 

 

7,876

 

 

7,751

Intangibles, net

 

 

16,965

 

 

17,183

Other assets

 

 

2,372

 

 

1,622

Security deposits

 

 

1,337

 

 

1,308

Total assets

 

$

196,181

 

$

206,585

 

 

 

  

 

 

  

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

  

 

 

  

Current liabilities:

 

 

  

 

 

  

Accounts payable

 

$

7,397

 

$

8,274

Accrued expenses

 

 

7,642

 

 

11,198

Deferred license revenue

 

 

446

 

 

332

Deferred gift card revenue and other

 

 

2,691

 

 

3,183

Current portion of operating lease liabilities

 

 

4,454

 

 

4,397

Current portion of long-term debt

 

 

696

 

 

749

Total current liabilities

 

 

23,326

 

 

28,133

 

 

 

  

 

 

  

Deferred license revenue, long-term

 

 

869

 

 

1,036

Operating lease liabilities, net of current portion

 

 

97,492

 

 

98,278

Long-term debt, net of current portion

 

 

45,123

 

 

45,226

Total liabilities

 

 

166,810

 

 

172,673

 

 

 

  

 

 

  

Commitments and contingencies

 

 

  

 

 

  

 

 

 

  

 

 

  

Stockholders’ equity:

 

 

  

 

 

  

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

 

 

 3

 

 

 3

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

 

 

 —

 

 

 —

Additional paid-in capital

 

 

45,229

 

 

44,853

Accumulated deficit

 

 

(12,490)

 

 

(7,891)

Accumulated other comprehensive loss

 

 

(2,695)

 

 

(2,651)

Total stockholders’ equity

 

 

30,047

 

 

34,314

Noncontrolling interests

 

 

(676)

 

 

(402)

Total equity

 

 

29,371

 

 

33,912

Total liabilities and equity

 

$

196,181

 

$

206,585

 

See notes to the condensed consolidated financial statements.

3

 

 

THE ONE GROUP HOSPITALITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

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

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 

 

    

2020

    

2019

Revenues:

 

 

  

 

 

  

Owned restaurant net revenue

 

$

38,557

 

$

20,093

Management, license and incentive fee revenue

 

 

2,162

 

 

2,683

Total revenues

 

 

40,719

 

 

22,776

Cost and expenses:

 

 

  

 

 

  

Owned operating expenses:

 

 

  

 

 

  

Owned restaurant cost of sales

 

 

10,113

 

 

5,026

Owned restaurant operating expenses

 

 

26,499

 

 

12,717

Total owned operating expenses

 

 

36,612

 

 

17,743

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

 

 

3,397

 

 

2,650

Depreciation and amortization

 

 

2,440

 

 

942

Transaction and integration costs

 

 

1,095

 

 

 —

COVID-19 related expenses

 

 

1,348

 

 

 —

Lease termination expenses

 

 

179

 

 

 —

Pre-opening expenses

 

 

 —

 

 

482

Other income, net

 

 

(1)

 

 

(175)

Total costs and expenses

 

 

45,070

 

 

21,642

Operating (loss) income

 

 

(4,351)

 

 

1,134

Other expenses, net:

 

 

  

 

 

  

Interest expense, net of interest income

 

 

1,175

 

 

269

Total other expenses, net

 

 

1,175

 

 

269

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

 

 

(5,526)

 

 

865

(Benefit) provision for income taxes

 

 

(653)

 

 

96

Net (loss) income

 

 

(4,873)

 

 

769

Less: net loss attributable to noncontrolling interest

 

 

(274)

 

 

(85)

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

 

$

(4,599)

 

$

854

Currency translation loss

 

 

(44)

 

 

(160)

Comprehensive (loss) income

 

$

(4,643)

 

$

694

 

 

 

  

 

 

  

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

 

 

  

 

 

  

Basic net (loss) income per share

 

$

(0.16)

 

$

0.03

Diluted net (loss) income per share

 

$

(0.16)

 

$

0.03

 

 

 

  

 

 

  

Shares used in computing basic (loss) earnings per share

 

 

28,636,325

 

 

28,314,820

Shares used in computing diluted (loss) earnings per share

 

 

28,636,325

 

 

29,311,756

 

See notes to the condensed consolidated financial statements.

4

THE ONE GROUP HOSPITALITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited, in thousands, except share information)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

other

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

paid-in

 

Accumulated

 

comprehensive

 

Stockholders’

 

Noncontrolling

 

 

 

 

    

Shares

    

Par value

    

capital

    

deficit

    

loss

    

equity

    

interests

    

Total

Balance at December 31, 2019

 

28,603,829

 

$

 3

 

$

44,853

 

$

(7,891)

 

$

(2,651)

 

$

34,314

 

$

(402)

 

$

33,912

Stock-based compensation, net of tax withholding

 

69,327

 

 

 —

 

 

338

 

 

 —

 

 

 —

 

 

338

 

 

 —

 

 

338

Exercise of stock options

 

18,000

 

 

 —

 

 

38

 

 

 —

 

 

 —

 

 

38

 

 

 —

 

 

38

Vesting of restricted shares

 

116,644

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Loss on foreign currency translation, net

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(44)

 

 

(44)

 

 

 —

 

 

(44)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(4,599)

 

 

 —

 

 

(4,599)

 

 

(274)

 

 

(4,873)

Balance at March 31, 2020

 

28,807,800

 

$

 3

 

$

45,229

 

$

(12,490)

 

$

(2,695)

 

$

30,047

 

$

(676)

 

$

29,371

 

See notes to the condensed consolidated financial statements.

5

THE ONE GROUP HOSPITALITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 

 

    

2020

    

2019

Operating activities:

 

 

  

 

 

  

Net (loss) income

 

$

(4,873)

 

$

769

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

 

 

  

 

 

  

Depreciation and amortization

 

 

2,440

 

 

942

Stock-based compensation

 

 

338

 

 

181

Amortization of discount on warrants and debt issuance costs

 

 

108

 

 

50

Deferred taxes

 

 

(125)

 

 

10

Changes in operating assets and liabilities:

 

 

  

 

 

  

Accounts receivable

 

 

5,092

 

 

1,147

Inventory

 

 

568

 

 

161

Other current assets

 

 

(958)

 

 

(96)

Due from related parties, net

 

 

(35)

 

 

(38)

Security deposits

 

 

(32)

 

 

(18)

Other assets

 

 

(807)

 

 

 8

Accounts payable

 

 

(859)

 

 

270

Accrued expenses

 

 

(3,560)

 

 

(1,331)

Operating lease liabilities and right-of-use assets

 

 

140

 

 

321

Deferred revenue

 

 

(540)

 

 

137

Net cash (used in) provided by operating activities

 

 

(3,103)

 

 

2,513

Investing activities:

 

 

  

 

 

  

Purchase of property and equipment

 

 

(791)

 

 

(2,060)

Net cash used in investing activities

 

 

(791)

 

 

(2,060)

Financing activities:

 

 

  

 

 

  

Borrowings of long-term debt

 

 

 —

 

 

 —

Repayments of long-term debt

 

 

(216)

 

 

(798)

Debt issuance costs

 

 

(48)

 

 

 —

Exercise of stock options

 

 

38

 

 

 —

Net cash used in financing activities

 

 

(226)

 

 

(798)

Effect of exchange rate changes on cash

 

 

(64)

 

 

(168)

Net decrease in cash and cash equivalents

 

 

(4,184)

 

 

(513)

Cash and cash equivalents, beginning of year

 

 

12,344

 

 

1,592

Cash and cash equivalents, end of year

 

$

8,160

 

$

1,079

Supplemental disclosure of cash flow data:

 

 

  

 

 

  

Interest paid

 

$

704

 

$

235

Income taxes paid

 

 

85

 

 

191

Non-cash amortization of debt issuance costs

 

$

108

 

$

 5

 

See notes to the condensed consolidated financial statements.

 

6

 

THE ONE GROUP HOSPITALITY, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 – Summary of Business and Significant Accounting Policies

Summary of Business

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

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

As of March 31, 2020, the Company owned, operated, managed or licensed 55 venues, including 20 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and 11 F&B venues including six hotels and casinos in the United States and Europe.

Effects of COVID-19

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

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

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

Basis of Presentation

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

7

statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2019.

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

Prior Period Reclassifications

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

Recent Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Updated (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” (“ASU 2019-12”) which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Accounting Standard Codification Topic 740, Income Taxes, and it clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for annual and interim periods beginning after December 15, 2020. The Company is evaluating the impact of the adoption of ASU 2019-12 on its financial statements but does not expect the adoption of ASU 2019-12 to be material.

In October 2018, the FASB issued ASU No. 2018‑17, “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 adoption of ASU 2018-17 did not have a material impact on our financial position, results of operations or cash flows.

In August 2018, the FASB issued ASU No. 2018‑15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350‑40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is 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 adoption of ASU 2018-15 did not have a material impact on our financial position, results of operations or cash flows.

 

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

 

Note 2 – Business Combination

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

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

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

 

 

 

 

Net assets acquired:

    

 

 

Cash

 

$

450

Current assets, excluding cash

 

 

2,830

Property and equipment

 

 

31,781

Operating lease right-of-use assets

 

 

42,398

Intangible assets

 

 

17,400

Other assets

 

 

692

Current liabilities

 

 

(7,690)

Deferred tax liability

 

 

(4,044)

Operating lease liabilities

 

 

(46,364)

Total net assets acquired

 

$

37,453

 

 

 

 

Purchase consideration:

 

 

 

Contractual purchase price

 

 

25,000

Apportionment of rent and utilities

 

 

775

Assumption of real estate lease consultant contract

 

 

465

Escrow deposit

 

 

250

Consideration paid

 

$

26,490

 

 

 

 

Bargain purchase gain attributable to Kona Grill acquisition

 

$

10,963

 

Pro Forma Results of Operations (unaudited)

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

 

 

 

 

 

 

Three months ended

 

    

March 31, 2019

Total revenues

 

$

47,230

Net income attributable to The ONE Group Hospitality, Inc.

 

$

667

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

 

 

 

Basic net income per share

 

$

0.02

Diluted net income per share

 

$

0.02

 

 

 

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Note 3 – Property and Equipment, net

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

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

2020

 

2019

Furniture, fixtures and equipment

 

$

20,907

 

$

20,512

Leasehold improvements

 

 

70,110

 

 

69,925

Less: accumulated depreciation and amortization

 

 

(24,218)

 

 

(21,997)

Subtotal

 

 

66,799

 

 

68,440

Construction in progress

 

 

438

 

 

97

Restaurant smallwares

 

 

1,946

 

 

1,946

Total

 

$

69,183

 

$

70,483

 

Depreciation and amortization related to property and equipment amounted to $2.2 million and $0.9 million for the three months ended March 31, 2020 and 2019, respectively. The Company does not depreciate construction in progress, assets not yet put into service or restaurant supplies.

 

Note 4 – Intangibles, net

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

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2020

    

2019

Kona Grill tradename

 

$

17,400

 

$

17,400

Less: accumulated amortization

 

 

(435)

 

 

(217)

Total intangibles, net

 

$

16,965

 

$

17,183

 

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

 

 

Note 5 – Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

2020

 

2019

Payroll and related

 

$

2,138

 

$

4,519

Variable rent, including disputed rent amounts

 

 

1,770

 

 

1,796

Legal, professional and other services

 

 

1,081

 

 

1,103

VAT, sales and other taxes

 

 

689

 

 

1,488

Income taxes

 

 

 —

 

 

547

Insurance

 

 

118

 

 

100

Other

 

 

1,846

 

 

1,645

Total

 

$

7,642

 

$

11,198

 

 

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Note 6 – Long-Term Debt

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

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

2020

 

2019

Term loan agreements

 

$

47,760

 

$

47,880

Revolving credit facility

 

 

 —

 

 

 —

Equipment financing agreements

 

 

284

 

 

380

Total long-term debt

 

 

48,044

 

 

48,260

Less: current portion of long-term debt

 

 

(696)

 

 

(749)

Less: debt issuance costs

 

 

(2,225)

 

 

(2,285)

Total long-term debt, net of current portion

 

$

45,123

 

$

45,226

 

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

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

Goldman Sachs Bank USA Credit and Guaranty Agreement

 

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

 

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

·

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

·

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

·

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

·

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

 

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

 

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

11

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

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

The Company and certain operating subsidiaries of the Company guarantee the obligations under the Goldman Sachs Credit Agreement, which also are secured by liens on substantially all of the assets of the Company and its subsidiaries.

 

The Company has incurred approximately $2.5 million of debt issuance costs related to the Goldman Sachs Credit Agreement, which were capitalized and are recorded as a direct deduction to the long-term debt, net of current portion, on the consolidated balance sheets. As of March 31, 2020, the Company was in compliance with the covenants required by the Goldman Sachs Credit Agreement.  

 

Equipment Financing Agreements

 

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

 

Note 7 – Fair Value of Financial Instruments

Cash and cash equivalents, accounts receivable, inventory, accounts payable and accrued expenses are carried at cost, which approximates fair value due to their short maturities. Long-lived assets are measured and disclosed at fair value on a nonrecurring basis if an impairment is identified. There were no long-lived assets measured at fair value as of March 31, 2020.

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

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

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

2020

 

2019

Carrying amount of long-term debt, including current portion (1)

 

$

48,044

 

$

48,260

Fair value of long-term debt, including current portion

 

$

37,454

 

$

35,471


(1)

Excludes the discounts on warrants, net and debt issuance costs 

 

Note 8 – Nonconsolidated Variable Interest Entities and Related Party Transactions

As of March 31, 2020 and December 31, 2019, the Company owned interests in the following companies, which directly or indirectly operate a restaurant:

·

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

·

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

Bagatelle Investors is a holding company that has an interest in Bagatelle NY. The Company records its retained interests in Bagatelle Investors and Bagatelle NY as cost method investments as the Company has determined that it does not have the ability to exercise significant influence over its investees, Bagatelle Investors and Bagatelle NY. As of March 31, 2020 and December 31, 2019, the Company has zero carrying value in these cost method investments.    

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Additionally, the Company has a management agreement with Bagatelle NY. Under this agreement, the Company recorded less than $0.1 million of management fee revenue in each of the three months ended March 31, 2020 and 2019, respectively. The Company also receives rental income from Bagatelle NY for restaurant space that it subleases to Bagatelle NY. Rental income of approximately $0.1 million was recorded from this entity for each of the three months ended March 31, 2020 and 2019, respectively.

Net receivables from the Bagatelle Investors and Bagatelle NY included in due from related parties, net were approximately $0.4 million and $0.3 million as of March 31, 2020 and December 31, 2019, respectively. These receivables represent the Company’s maximum exposure to loss.

Note 9 – Income taxes

The Company’s effective income tax rate was 11.8% for the three months ended March 31, 2020 compared to 11.1% for the three months ended March 31, 2019.  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)  taxes owed in foreign jurisdictions such as the United Kingdom, Canada and Italy; and, (iii) taxes owed in state and local jurisdictions.

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

Note 10 – Revenue from contracts with customers

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

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

2020

 

2019

Receivables (1)

 

$

125

 

$

250

Deferred license revenue (2)

 

$

1,315

 

$

1,368

Deferred gift card and gift certificate revenue (3)

 

$

2,594

 

$

3,210

Konavore rewards program (4)

 

$

86

 

$

84


(1)

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

(2)

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

(3)

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

(4)

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

 

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

 

 

 

 

 

 

 

 

 

    

March 31, 

    

March 31, 

 

 

2020

 

2019

Revenue recognized from deferred license revenue

 

$

52

 

$

55

Revenue recognized from deferred gift card revenue

 

$

746

 

$

283

 

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

 

 

 

 

 

2020, nine months remaining

    

$

154

2021

 

 

206

2022

 

 

181

2023

 

 

169

2024

 

 

134

Thereafter

 

 

471

Total future estimated deferred license revenue

 

$

1,315

 

 

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Note 11 – Leases

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

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

March 31, 

 

 

 

2020

 

 

2019

 

Lease cost

 

 

 

 

 

 

 

 

Operating lease cost

 

$

3,297

 

 

$

1,726

 

Variable lease cost

 

 

1,156

 

 

 

674

 

Short-term lease cost

 

 

128

 

 

 

108

 

Sublease income

 

 

(135)

 

 

 

(203)

 

Total lease cost

 

$

4,446

 

 

$

2,305

 

 

 

 

 

 

 

 

 

 

Weighted average remaining lease term – operating leases

 

 

13 years

 

 

 

14 years

 

Weighted average discount rate – operating leases

 

 

8.49

%

 

 

8.25

%

 

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

The Company has entered into an operating lease for one future restaurant that has not yet commenced as of March 31, 2020. The aggregate future commitment related to this lease totals $4.8 million. The Company expects this lease to commence within the next twelve months and will have a lease term of 11 years.

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

 

 

 

 

 

 

 

 

 

 

March 31, 

 

March 31, 

 

 

2020

 

2019

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

 

$

3,161

 

$

1,718

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

 

$

288

 

$

281

 

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

 

 

 

 

 

2020, nine months remaining

 

$

9,775

2021

 

 

12,843

2022

 

 

12,801

2023

 

 

13,087

2024

 

 

12,486

Thereafter

 

 

115,862

Total lease payments

 

 

176,854

Less: imputed interest

 

 

(74,908)

Present value of operating lease liabilities

 

$

101,946

 

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

 

 

Note 12 – (Loss) earnings per share

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

14

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

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

    

2020

    

2019

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

 

$

(4,599)

 

$

854

 

 

 

  

 

 

 

Basic weighted average shares outstanding

 

 

28,636,325

 

 

28,314,820

Dilutive effect of stock options, warrants and restricted share units

 

 

 —

 

 

996,936

Diluted weighted average shares outstanding

 

 

28,636,325