ONE Group Hospitality, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; unaudited. The company develops and operates upscale restaurants and provides food-and-beverage services. As of November 16, 2015, it reported 12 owned and 15 managed restaurants and lounges, including 10 STKs.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $15.25 million | $12.39 million | $41.93 million | $34.93 million |
| Net income (loss) attributable to ONE Group | $(2.02) million | $0.75 million | $5.28 million | $3.04 million |
| Adjusted EBITDA attributable to ONE Group | $0.82 million | $1.75 million | $3.22 million | $4.41 million |
| Cash from operating activities | Not separately presented for the quarter | $(0.68) million | $(0.56) million |
- Q3 owned-unit revenue increased 27.5% to $13.31 million; management and incentive fee revenue was nearly flat at $1.94 million. Nine-month revenue rose 20.0%, primarily reflecting reopened or newer locations and added services.
- Q3 pretax continuing-operations loss was $0.97 million versus income of $1.31 million a year earlier. Nine-month pretax continuing-operations loss was $0.14 million versus income of $5.04 million. Nine-month net income included a $5.62 million income-tax benefit following release of deferred-tax valuation allowances; it also included $3.92 million of noncash derivative income. These items materially affect reported earnings.
- Q3 costs included $1.63 million of pre-opening expenses and $0.41 million of transaction costs. Nine-month pre-opening expenses rose to $4.40 million from $1.15 million. Management attributed the increase to openings and locations planned for 2016.
- Q3 comparable owned STK sales increased 0.3%; comparable owned-and-managed STK sales declined 0.2%. For the nine-month period, comparable owned STK sales decreased 0.2%, while comparable owned-and-managed STK sales increased 0.6%.
- Cash was $1.80 million at September 30, down from $7.91 million at year-end. Nine-month investing cash outflow was $8.70 million, including $9.00 million of property and equipment purchases; financing provided $3.53 million. Current assets were $11.13 million and current liabilities $10.75 million.
- Debt totaled $11.01 million, including $1.93 million current, versus $7.48 million at December 31, 2014. The term loans bear 5% interest and are secured by substantially all assets. The company reported compliance with financial covenants at quarter-end and expected to remain compliant through 2015 and 2016.
- Net future operating lease commitments were $137.76 million. Outstanding letters of credit were approximately $1.5 million. Total liabilities were $34.04 million and stockholders’ equity, including noncontrolling interest, was $17.85 million.
Changes, outlook, and risks
- Growth in owned-unit sales reflected the Miami reopening, Washington, D.C. operations and Westwood food-and-beverage services. STK Chicago began operations on September 30, 2015. The company also cited higher unit costs, corporate overhead, depreciation and pre-opening expenses as it expanded.
- Management said anticipated operating cash flow, landlord construction allowances and available borrowing were expected to fund planned working capital, capital spending and debt service for the next 12–18 months; it cautioned that funding beyond that period was uncertain and additional financing might be needed.
- Management’s growth plans called for two to three STKs and one to two STK Rebels annually over the next three years, subject to capital, suitable sites and management availability; it also targeted one to two new hospitality projects every 12 months. Longer-term targets included 2%–3% annual store-sales growth and operating-margin improvement. These are plans, not assurances.
- On October 21, 2015, the company and sbe terminated agreements related to acquiring the Katsuya and Cleo brands. Subsequent announcements included planned STK openings in Edinburgh and Ibiza in 2017.
- Key risks discussed include new-unit opening costs and ramp-up periods, seasonality and adverse weather, food costs (particularly beef), competition, consumer preferences, and the availability of capital, locations and qualified managers. Management stated that ordinary-course litigation was not expected to have a material adverse effect.
- Management concluded disclosure controls were effective as of September 30, 2015, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- How much of nine-month net income and future tax benefit depends on the valuation-allowance release, and what normalized earnings look like without it.
- Whether operating cash generation improves enough to support the expansion plan, given low cash, negative operating cash flow and substantial planned capital expenditures.
- Progress, costs and opening timelines for Chicago and the 2016 pipeline, and whether new units reach mature sales and margins as expected.
- Comparable-sales trends and segment profitability, particularly the deterioration in owned STK segment profit and the weak Q3 comparable-sales figures.
- Debt covenant headroom, future borrowing availability, lease obligations and the company’s ability to fund commitments beyond management’s 12–18-month outlook.