Business context and reporting period
The ONE Group Hospitality, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2018. It develops, owns, operates, manages and licenses upscale restaurants, principally STK, and provides food-and-beverage services to hospitality venues. At quarter-end, it reported 31 venues: 10 company-owned, 17 managed, three licensed and one other venue.
Financial performance
Unless otherwise noted, dollar amounts are in millions.
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $19.52 | $20.43; down 4.5% |
| Operating income (loss) | $0.46 | $(0.25) |
| Net income (loss) | $0.12 | $(0.60) |
| Net income (loss) attributable to The ONE Group | $0.23; $0.01 per diluted share | $(0.40); $(0.02) per diluted share |
| Operating cash flow | $0.17 | $0.85 |
| Capital expenditures | $0.31 | $1.35 |
| Cash and cash equivalents at quarter-end | $1.14 | $1.55 at December 31, 2017 |
- Owned restaurant revenue rose 6.0% to $15.08 million; comparable owned STK sales increased 8.7%. Average check for comparable restaurants was $97.37 versus $96.52.
- Owned food, beverage and other revenue fell 48.4% to $2.01 million, primarily because Q1 2017 included $1.7 million of Super Bowl party revenue that did not recur.
- Management, license and incentive fee revenue grew 5.3% to $2.44 million.
- Owned restaurant cost of sales was 26.8% of owned restaurant revenue, versus 27.2%; owned restaurant operating expenses were 62.2%, versus 65.8%. Total costs and expenses were 97.6% of revenue, versus 101.2%.
- Adjusted EBITDA was $1.75 million, versus $1.47 million; the company’s reconciliation also reports $1.80 million attributable to the company, versus $1.61 million. This non-GAAP measure should not be viewed as a substitute for GAAP results.
- Cash declined $0.41 million during the quarter. Operating activities provided $0.17 million and investing activities provided $0.29 million, including $0.60 million proceeds from selling the One 29 Park interest; financing activities used $0.84 million, mainly for scheduled debt payments.
Balance sheet, liquidity and debt
At March 31, 2018, total assets were $51.62 million, total liabilities $44.76 million, and total equity $6.87 million. Total debt was approximately $12.57 million, including $3.19 million current and $9.38 million long-term, down from approximately $13.36 million at December 31, 2017. Current assets of $9.19 million were below current liabilities of $15.72 million, a working-capital deficit of approximately $6.53 million. The company reported $1.14 million cash and a $31.8 million accumulated deficit.
Management expected to fund operations and planned restaurant openings for at least the next 12 months through operating cash flows and landlord construction allowances, but cautioned that additional financing might be needed and may not be available on acceptable terms. The company reported compliance with all debt covenants at quarter-end.
Material changes, outlook and risks
- Compared with Q1 2017, the company moved from a loss to positive operating income and net income. Revenue nevertheless declined, chiefly due to the nonrecurring Super Bowl event; owned restaurant and management/license revenue increased.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. Adoption reduced opening accumulated deficit by $54,000 and increased Q1 management, license and incentive fee revenue and net income by $29,000 each.
- Management expected to open one company-owned STK in San Diego in Q2 2018 and planned licensed openings in Puerto Rico, Dubai, Qatar and Mexico. Its longer-term plan was to pursue three to five STK openings annually, mainly through management or licensing, and target one to two new food-and-beverage hospitality projects every 12 months. No new food-and-beverage agreement was signed in Q1.
- Management expected company-owned same-store sales to grow at a mid-single-digit pace in 2018; Q1 comparable owned STK sales rose 8.7%. It projected approximately $3.0 million of 2018 capital expenditures and said spending should be significantly below prior years.
- Q1 included a gain of approximately $0.2 million from the sale of the company’s 10% One 29 Park interest for $0.6 million. The company also had approximately $1.5 million accrued for future lease payments, net of expected sublease income, for abandoned Austin and Dallas development plans.
- Management cited risks including consumer demand, costs, competition, site availability, execution of openings and licensing growth, and sufficiency of cash and financing. It said pending or threatened legal matters were not expected to have a material adverse effect.
- Disclosure controls and procedures and internal control over financial reporting were reported as not effective as of March 31, 2018. Remediation was ongoing and expected to continue through 2018; management said the material weakness would not be considered remediated until controls had been implemented, tested and shown to operate effectively.
- The company’s estimate of the Tax Cuts and Jobs Act transition tax remained provisional pending a comprehensive earnings-and-profits analysis; resulting adjustments could be recorded in 2018.
Investor verification priorities
- Track cash generation, the working-capital deficit, financing availability and debt repayments against management’s 12-month liquidity expectation.
- Verify delivery and funding of planned openings, especially the San Diego restaurant, and whether licensing and hospitality project targets are achieved.
- Assess whether comparable-sales growth and restaurant-level cost improvements persist, and distinguish recurring performance from the nonrecurring Super Bowl comparison and One 29 Park gain.
- Monitor completion and testing of internal-control remediation and any updates to the provisional tax estimates.