ONE Group Hospitality, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
The ONE Group develops, operates, manages and licenses restaurants and provides food-and-beverage services. Its principal brands are STK and Kona Grill. At September 30, 2022, it owned, operated, managed or licensed 61 venues, including 23 STKs, 24 Kona Grills and 14 other hospitality venues. The company opened STK San Francisco and a licensed virtual Austin location during the quarter; STK Dallas opened in November 2022.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $73.0 | $71.9 | $228.3 | $193.1 |
| Operating income | $0.5 | $5.1 | $10.4 | $13.7 |
| Net income attributable to The ONE Group | $0.5 | $11.7 | $8.5 | $25.6 |
| Adjusted EBITDA attributable to The ONE Group | $7.1 | $10.0 | $28.2 | $29.4 |
| Restaurant operating profit | $9.1 | $11.6 | $34.9 | $36.2 |
| Restaurant operating profit margin | 13.1% | 17.1% | 16.1% | 19.6% |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $16.3 | $23.0 |
Q3 revenue rose 1.6%; owned restaurant revenue increased 2.3%, while management, license and incentive fee revenue declined 10.8%. Same-store sales increased 0.5% overall, with STK up 3.5% and Kona Grill down 3.6%. Nine-month revenue rose 18.2%, including 16.8% comparable restaurant sales growth.
Profitability weakened despite higher year-to-date sales. Q3 operating income fell to $0.5 million, primarily with higher labor and operating costs, lower restaurant-level profit and increased pre-opening expenses. Owned restaurant operating expenses were 62.0% of owned restaurant revenue in Q3 versus 56.9% a year earlier. Q3 pre-opening expenses were $2.7 million, compared with $0.6 million. Prior-year net income and adjusted EBITDA benefited from CARES Act loan forgiveness: $10.0 million in Q3 2021 and $18.5 million in the first nine months of 2021, making headline earnings comparisons less representative of underlying operations.
For the nine months, operating cash flow was $16.3 million, investing cash outflow was $21.3 million, and financing cash outflow was $0.8 million. Cash declined $6.1 million to $17.5 million. Capital expenditures were $21.3 million, including $13.3 million for new venues; the filing reports $19.2 million of net capital expenditures after landlord contributions.
At September 30, cash was $17.5 million and long-term debt was $29.4 million gross ($27.9 million net of debt issuance costs and current portion presentation). Debt included a $24.4 million term loan and $5.0 million drawn on the revolver. The company reported $5.6 million of revolver availability, subject to conditions, and a 6.6% weighted-average borrowing rate. It was in compliance with financial covenants. Operating lease liabilities totaled $111.2 million. Current assets of $33.6 million were below current liabilities of $37.3 million, a $3.7 million working-capital deficit.
Changes, outlook and notable items
- Management said it expects to fund operations and planned openings for at least the next 12 months with operating cash flow and landlord construction allowances; it may also use the revolver or issue equity. This expectation is subject to operating performance.
- The company intended to open at least nine new venues in 2022 and Q1 2023; three were described as open at the time of the filing. Planned or developing projects included company-owned Kona Grill locations and a managed STK, alongside additional licensed delivery-only tests. The filing provides no financial earnings guidance.
- In September, the board authorized up to $10.0 million of share repurchases through September 2024. By September 30, it had repurchased 500,000 shares for $3.5 million, at an average $6.98 per share; $6.5 million remained available.
- Effective April 1, the company changed the Kona Grill trade name from a finite-lived to an indefinite-lived intangible asset, citing brand performance, investment and expansion plans. It estimates the change reduces annual amortization expense and increases annual net income by approximately $0.9 million, or about $0.03 per share. Impairment testing is required at least annually.
- Management cited wage and operating-cost inflation, commodity costs, Hurricane Ian’s effect on sales, construction and opening costs, and weaker managed-property revenue in London as factors affecting results. COVID-related expenses were $2.5 million for the first nine months, down from $3.8 million a year earlier.
- The company faces ordinary-course legal claims, including lease and employee matters; management does not expect their resolution to have a material adverse effect, but litigation outcomes are uncertain. The filing reports no material changes to the prior annual report’s risk factors.
- Disclosure controls were not effective at quarter-end because a material weakness in internal control over financial reporting remained. Management said the journal-entry review weakness was remediated as of June 30, 2022, but other redesigned controls were still being tested.
Important facts for investors to verify
- Whether labor and other restaurant operating costs stabilize and restaurant-level margins recover, particularly at Kona Grill.
- Actual opening dates, construction spending, landlord contributions and operating performance of planned venues against the expansion schedule.
- Cash generation relative to capital spending, lease commitments, debt service and the company’s conditional revolver availability.
- Progress in testing and remediating the remaining internal-control material weakness.
- Assumptions supporting the indefinite-lived Kona Grill trade name and future impairment assessments.
- How the share repurchase program affects liquidity and share count, and how earnings trends look excluding prior-year CARES Act forgiveness.