ONE Group Hospitality, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited. The company develops, operates and manages upscale restaurants and provides food-and-beverage services, with STK as its primary brand. As of August 14, 2017, it reported 11 owned and operated restaurants, 13 managed restaurants and lounges, and one licensed restaurant.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $19.90 million | $17.23 million | $40.33 million | $33.62 million |
| Loss from continuing operations | $2.18 million | $1.44 million | $2.68 million | $2.01 million |
| Net loss attributable to ONE Group | $2.30 million | $1.56 million | $2.70 million | $2.02 million |
| Basic and diluted net loss per share | $0.09 | $0.06 | $0.11 | $0.08 |
| Operating cash flow | — | $4.87 million | $3.32 million | |
| Capital expenditures | — | $3.92 million | $6.02 million | |
| Adjusted EBITDA attributable to ONE Group (non-GAAP) | $1.47 million | $1.09 million | $3.08 million | $2.16 million |
- Q2 revenue increased 15.5%; first-half revenue increased 19.9%. Owned-unit revenue growth reflected Orlando and Denver openings, while management and incentive fee revenue rose 43.2% in Q2 and 28.8% for the first half.
- Despite revenue growth, losses widened. Q2 pre-tax loss was $1.98 million versus $0.90 million; first-half pre-tax loss was $2.49 million versus $1.53 million.
- Comparable owned STK sales rose 1.2% in Q2; comparable sales for owned or managed STKs rose 1.7% in Q2 and 2.2% for the first half. First-half comparable owned STK sales were reported at $18.0 million in both years.
- STK food and beverage costs increased as a share of owned-unit revenue, to 26.4% in Q2 from 24.7%, primarily due to rising beef costs. Q2 STK unit operating expenses also rose as a share of owned-unit revenue, to 65.7% from 62.3%.
Financial position and liquidity
- At June 30, cash and cash equivalents were $1.54 million, down from $1.60 million at year-end 2016. Current assets were $9.21 million and current liabilities were $17.54 million.
- Total debt was $16.16 million before a $0.74 million unamortized warrant discount; the balance sheet reported $3.75 million current and $11.67 million long-term debt, net of the discount. Debt included BankUnited term loans, equipment financing, promissory notes and an American Express loan.
- First-half operating cash flow was $4.87 million, while investing activities used $3.92 million and financing activities used $1.08 million. Management attributed operating cash generation partly to changes in working-capital accounts, including higher accounts payable and accrued expenses.
- Management said it expected available operating cash flow, landlord construction allowances and borrowing capacity to fund operations for at least 12 months; elsewhere it described anticipated funding for 12 to 18 months. It estimated 2017 capital expenditures at approximately $6 million.
- Undiscounted future net operating-lease commitments were approximately $121.3 million, extending through 2031. The company said adoption of the new lease accounting standard would materially increase reported assets and liabilities, but it could not yet estimate the effect.
Outlook, risks and unusual items
- Management expected 2017 same-store sales to remain flat and anticipated opening two to three STKs annually over the next three years, primarily through licensing, and targeting one to two new food-and-beverage hospitality projects every 12 months. These plans depend on suitable licensees, sites and opportunities; the filing gives no formal earnings or revenue guidance.
- The company ended its exploration of strategic alternatives, including a potential sale, and said it would refocus on management and licensing opportunities, sales and operating efficiencies, and lower corporate costs.
- Two employment class-action settlements were preliminarily approved, with final court approval pending. The company accrued $795,000 of settlement costs in general and administrative expense and recognized approximately $269,670 of its share of an investee’s settlement costs. Q2 also included $254,011 of transaction costs related to the strategic-alternatives process.
- Cash is limited relative to current obligations, and management cautioned that funding beyond its near-term forecast is uncertain and additional financing may not be available on acceptable terms. Other disclosed risks include new-unit opening costs, seasonality, weather, competition, labor and food costs, especially beef, and dependence on operating performance and landlord allowances.
- Management concluded that disclosure controls and internal control over financial reporting were not effective as of June 30, 2017. Remediation was ongoing and had not been completed. The company reported no material changes to the risk factors in its 2016 Form 10-K.
Important facts for investors to verify
- Reconcile the tax-expense disclosure: the financial statements report Q2 income-tax expense of $203,203, while the MD&A narrative refers to $159,000.
- Assess liquidity against $17.54 million of current liabilities, $1.54 million of cash, near-term debt maturities and substantial lease commitments; verify the assumptions behind management’s 12-to-18-month funding outlook.
- Track whether revenue growth translates into improved owned-unit economics, particularly given higher food-cost ratios and continued operating losses.
- Monitor final court approval and payment of the employment settlements, along with any further litigation exposure.
- Confirm progress and testing of control-remediation measures; management stated that controls were not effective at quarter-end.
- Evaluate the assumptions and exclusions in non-GAAP Adjusted EBITDA and the company’s ability to deliver planned openings and capital spending within available funding.