Business context and reporting period
The ONE Group Hospitality, Inc. (NASDAQ: STKS) filed this Form 10-K for the fiscal year ended December 31, 2020; it reports a full year, not standalone fourth-quarter results. The company operates upscale STK steakhouses, Kona Grill restaurants and hotel/casino food-and-beverage venues through owned, managed and licensed arrangements. At year-end it reported 54 venues. The 2019 comparison includes Kona Grill only from its October 4, 2019 acquisition, while 2020 includes a full year.
Financial and operating highlights
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $141.9 million | $120.7 million |
| Operating income (loss) | ($13.7) million | $12.8 million |
| Net income (loss) attributable to ONE Group | ($12.8) million | $20.8 million |
| Net income (loss) per diluted share | ($0.44) | $0.70 |
| Operating cash flow | $0.4 million | $8.4 million |
| Capital expenditures | $5.8 million | $4.4 million |
| Adjusted EBITDA (non-GAAP) | $9.0 million | $14.9 million |
Revenue increased 17.6%, principally because the acquired Kona Grill restaurants contributed a full year of sales; same-store sales fell 27.9% amid closures and capacity restrictions. STK same-store sales declined 34.2% and Kona Grill declined 21.4%. Management and license fee revenue fell 55.3% to $5.3 million. Operating margin was approximately negative 9.6%, compared with positive 10.6% in 2019. Owned restaurant cost of sales declined to 24.9% of owned restaurant revenue from 25.7%; owned restaurant operating expenses were 63.7% versus 62.5%.
Cash and cash equivalents were $24.4 million at year-end, up from $12.3 million. Current assets were $34.4 million and current liabilities $40.7 million. Long-term debt was $47.5 million, alongside $18.3 million of PPP/CARES Act loans; the revolving facility had $10.7 million of reported availability, subject to borrowing restrictions. The company reported $103.4 million in operating lease liabilities on the balance sheet and $177.7 million of undiscounted operating lease payments. Operating cash flow less capital expenditures was approximately negative $5.4 million.
Material changes versus the prior comparable period
- Despite higher reported revenue from the Kona Grill acquisition, pandemic-related trading weakness drove a swing from operating and net income to losses, and operating cash flow fell to $0.4 million.
- 2020 included $5.5 million of COVID-related costs, $3.3 million of lease-termination expenses (including about $2.7 million for unbuilt restaurants under landlord dispute), and $0.5 million of agreement restructuring costs.
- 2019 results included an $11.0 million bargain-purchase gain from the Kona Grill acquisition and a $2.7 million investment impairment. These unusual items affect year-over-year earnings comparability.
- Interest expense increased to $5.3 million from $2.0 million. The company received $18.3 million in PPP loans in 2020; the resulting financing helped increase year-end cash.
Outlook, risks and contingencies
Management said COVID-19 could materially and negatively affect 2021 results and that it could not predict when normal dining operations would resume. At year-end, domestic restaurants were open subject to capacity limits; some international managed and licensed venues were closed or limited to takeout/delivery. The company reduced costs, deferred capital projects and negotiated with suppliers and landlords. It expected to fund at least the next 12 months of operations and planned openings from operating cash flow and landlord construction allowances, subject to operating performance.
Strategic targets include five to six STK openings annually and one to two new food-and-beverage hospitality agreements annually, primarily through management and licensing; these are plans, not assured results. Scottsdale STK opened in January 2021. The company applied for forgiveness of all $18.3 million of PPP loans in February 2021 and anticipated full forgiveness, but stated forgiveness was not assured. It was compliant with amended credit covenants at December 31, 2020 and said it expected continued compliance based on current projections. The credit agreement had a $4 million minimum liquidity requirement for the remainder of 2020 and 2021, and covenant terms were amended during 2020.
Key risks include further pandemic restrictions, weak consumer and business-travel demand, lease obligations and disputed exit costs, debt covenant and refinancing constraints, food and labor cost inflation, and the ability to retain staff and secure supplies. Litigation includes ordinary-course lease and employee matters; management stated it did not expect current matters to materially adversely affect consolidated results, while acknowledging outcomes are uncertain. The independent auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting as of year-end.
Important facts for investors to verify
- Whether PPP loan forgiveness was granted, and the timing or amount of any repayment obligation.
- Subsequent same-store sales, restaurant capacity, closures and operating cash flow as pandemic effects evolve.
- Compliance with debt covenants, actual revolver availability and liquidity relative to required minimums.
- Progress on landlord concessions and resolution of accrued lease-exit costs and disputed leases.
- Whether planned STK openings and hospitality agreements proceed, and whether Adjusted EBITDA improvements translate into sustainable GAAP profitability and cash generation.