ONE Group Hospitality, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts below are in millions of dollars unless stated otherwise. The company operates STK and Kona Grill restaurants and provides hospitality food-and-beverage management and licensing services. It reported 55 venues at quarter-end. Kona Grill was acquired in October 2019, affecting year-over-year comparisons.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $16.7 | $23.6 | $57.4 | $46.4 |
| Operating income (loss) | $(5.3) | $0.5 | $(9.6) | $1.6 |
| Net income (loss) attributable to ONE Group | $(2.9) | $(0.3) | $(7.5) | $0.5 |
| Basic and diluted EPS | $(0.10) | $(0.01) | $(0.26) | $0.02 |
| Operating cash flow | Not separately stated | Not separately stated | $(4.9) | $2.1 |
- Q2 revenue fell 29.4% year over year. Same-store sales decreased 66.7%; monthly declines improved from 90.2% in April to 70.2% in May and 40.1% in June as some locations resumed restricted dining.
- Q2 owned restaurant revenue was $16.5 million, including $12.4 million from Kona Grill. Management, license and incentive fee revenue declined to $0.1 million from $2.7 million, primarily due to closures at managed locations.
- For the first half, revenue increased 23.7%, largely reflecting Kona Grill, while comparable restaurant sales fell 40.7%. The filing provides pro forma 2019 revenue of $49.9 million for Q2 and $97.1 million for the first half as if Kona Grill had been acquired at the start of 2019; these figures are not directly comparable reported results.
- Q2 operating margin was negative 31.7% of revenue, versus positive 2.0% a year earlier. First-half operating margin was negative 16.8%, versus positive 3.5%. Owned restaurant operating expenses were 72.8% of owned restaurant revenue in Q2, compared with 65.1% a year earlier.
- At June 30, cash and cash equivalents were $23.5 million, total current assets $31.7 million and current liabilities $22.9 million. Cash included $10.2 million of PPP proceeds remaining available for qualified uses. First-half investing cash use was $1.7 million; financing provided $17.8 million, including $18.3 million of PPP loans.
- Long-term debt, net of current portion and debt issuance costs, was $45.1 million, plus $18.3 million of CARES Act loans. The company had $10.7 million available on its $12 million revolving facility, subject to conditions. Its term loan bears a weighted-average rate of 8.49% at June 30. Present-value operating lease liabilities were $100.9 million.
- Total assets were $210.2 million and total liabilities $183.6 million at June 30. Equity totaled $26.5 million, down from $33.9 million at year-end 2019.
Material changes and unusual items
- COVID-19 restrictions caused temporary closures, reduced seating, and a shift toward takeout and delivery. The company recorded $0.7 million of COVID-related costs in Q2 and $2.0 million in the first half.
- The company recorded a $3.2 million Q2 income tax benefit and a $3.9 million first-half benefit. Depreciation and amortization and interest expense rose substantially year over year, including effects of the Kona Grill acquisition and October 2019 refinancing.
- Capital expenditures were $1.7 million in the first half, down from $2.9 million. Management said it deferred most non-safety-related projects.
- On August 10, 2020, after quarter-end, lenders amended the credit agreement: fixed-charge coverage testing was eliminated for the balance of 2020 and 2021; leverage testing for June 30, 2020 was eliminated and later tests shifted to net leverage; and minimum liquidity of $4.0 million was required through 2021. The amendment also reduced capital expenditure limits to $7.0 million for 2020 and 2021.
Outlook, risks and contingencies
- Management expects COVID-19 to materially and negatively affect results for the remainder of 2020 and cannot predict when normal dining operations will resume. It reported improving revenue in May and June relative to April but warned of possible renewed restrictions and changes in customer behavior.
- Management expected to fund operations for at least the next 12 months through operating cash flow, PPP proceeds, potential credit-facility borrowings and landlord construction allowances, subject to operating performance. It stated it expected covenant compliance based on current projections; the facility is secured by substantially all company assets and includes borrowing restrictions.
- The company anticipated forgiveness of the full $18.3 million PPP balance but gave no assurance. Forgiveness depends on eligibility and use-of-proceeds requirements; the loans carry 1% interest and mature in April 2022.
- Landlord discussions regarding rent deferrals, abatements or restructuring were ongoing. Lease concessions and their ultimate cash impact remain uncertain. The company disclosed a future Bellevue lease commitment of $4.8 million.
- Management disclosed ordinary-course lawsuits, including lease and employee-related claims, with a possible loss range of zero to $2.2 million; no liability was recorded for these claims. Management did not expect a material adverse outcome, but litigation outcomes are uncertain.
Investor facts to verify
- Whether restaurant traffic, same-store sales and operating cash flow recover, and how reopening restrictions affect results.
- Whether PPP proceeds qualify for full or partial forgiveness and how any unforgiven balance will be repaid.
- Compliance with amended credit covenants, minimum liquidity requirements and the conditions governing revolver availability.
- The amount and timing of rent concessions, lease payments and any effects on liquidity or restaurant operations.
- Progress integrating Kona Grill and whether its contribution supports sustainable margins after acquisition-related and pandemic effects.