ONE Group Hospitality, Inc. — Q1 2015 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2015; amounts below are compared with the three months ended March 31, 2014 unless stated otherwise. ONE Group develops and operates upscale restaurants and lounges and manages food-and-beverage services. At quarter-end it owned and operated nine locations and managed eight, including operations in the United States and England.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Total revenue | $11.78 million | $10.27 million; up 14.6% |
| Owned-unit revenue | $9.73 million | $8.15 million |
| Management and incentive fees | $2.05 million | $2.12 million |
| Loss from continuing operations | $1.19 million | $116,000 |
| Net loss attributable to ONE Group | $1.09 million; $0.04 per share | $722,000; $0.03 per share |
| Adjusted EBITDA attributable to ONE Group | $762,000 | $1.01 million |
| Cash from operations | $(730,000) | $(866,000) |
| Cash and cash equivalents | $4.52 million | $7.91 million at Dec. 31, 2014 |
| Term loan outstanding | $7.10 million | $7.48 million at Dec. 31, 2014 |
Net cash used in investing was $2.44 million, including $2.40 million of property and equipment purchases. Cash declined $3.38 million during the quarter. Current assets were $14.37 million versus current liabilities of $6.79 million. The term loan’s current portion was $1.50 million; the remaining $5.61 million was long term. Separately, the company reported a $6.86 million derivative liability related to contingent merger payments and warrants.
Owned STK food-and-beverage costs were 26.0% of owned STK revenue, compared with 26.8% a year earlier; unit operating expenses rose to 70.2% from 68.8%. Total costs and expenses were 115.3% of revenue, versus 98.8%. STK segment profit was $325,000, down from $386,000; F&B segment profit was $2.05 million, down from $2.12 million. The company reported a $610,000 income tax benefit for the quarter.
Material changes and notable items
- Owned-unit revenue growth reflected the Washington, D.C. STK opening and Miami reopening, as well as W Hotel Westwood food-and-beverage operations. Comparable owned STK sales fell 3.7%, which management attributed mainly to harsh New York weather; comparable owned or managed STK sales declined 3.5% overall.
- Pre-opening expense rose to $1.07 million from $246,000, principally for Miami and planned Orlando and Chicago openings. General and administrative expense increased 28% to $2.44 million.
- The $614,000 non-cash derivative expense compared with $48,000 of expense in Q1 2014. The derivative liability was remeasured using a Monte Carlo valuation method.
- After water damage and renovation work, STK Miami reopened March 13. The company recorded an estimated $200,000 insurance recovery in other income and $575,000 of estimated reimbursements offset against pre-opening expense; it had filed an insurance claim of approximately $1.5 million and said estimates may change.
- Long-term operating lease commitments, net of scheduled sublease income, totaled approximately $114.96 million, including $86.44 million thereafter.
Outlook, risks and contingencies
Management said cash, expected operating cash flows, merger proceeds, landlord construction allowances, and available borrowing were expected to fund planned operations and openings for at least 12–18 months, subject to operating performance. It stated that the company was in compliance with its BankUnited loan covenants and expected to remain compliant in 2015. The secured $7.475 million loan matures December 1, 2019, bears 5% interest, and is repaid in monthly principal installments of approximately $125,000.
Management’s stated growth plans included opening two to three STKs and one to two STK Rebels annually over the next three years, subject to capital, suitable sites, and staffing; targeting one to two new F&B projects every 12 months; and seeking 2%–3% annual same-store sales growth. These are plans, not guaranteed results. Miami reopened during the quarter; the company opened an STK in Milan on May 11, 2015 and said Chicago and Orlando STKs and STK Rebel locations in Miami and Denver were expected in 2015.
Management identified risks from opening timing and startup costs, seasonality, adverse weather, competition, consumer preferences, food costs—particularly beef—and the capital required for expansion. Quarterly results may vary, and the company cautioned that it might need additional financing if current sources prove insufficient. It reported ordinary-course litigation that management did not expect to have a material adverse effect, no legal proceedings listed in Part II, and effective disclosure controls as of March 31, 2015.
Important facts for investors to verify
- Whether operating cash generation and available financing can support planned openings, capital spending, lease obligations, and debt service.
- Whether comparable sales recover from the reported declines and new units improve profitability after startup periods.
- Whether the estimated Miami insurance recoveries are received and whether related estimates or pre-opening costs change.
- How the warrant-related derivative liability may change with stock price, volatility, and the remaining warrant term.
- Whether the company maintains loan covenant compliance and can manage its substantial lease commitments and expansion funding needs.
- The filing identifies subsequent events including the May 8, 2015 start of Nasdaq trading under “STKS” and the May 11 Milan opening; confirm their effects in subsequent filings.