ONE Group Hospitality, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless noted. The company develops, operates, manages and licenses hospitality venues, principally under STK and Kona Grill. At quarter-end it had 59 venues: 22 STKs, 24 Kona Grills and 13 other food-and-beverage venues.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $74.2 million | $50.5 million |
| Operating income | $4.2 million | $0.9 million |
| Net income (loss) | $3.5 million | $(0.06) million |
| Net income attributable to ONE Group | $3.7 million; $0.11 per diluted share | $0.07 million; less than $0.01 per share |
| Operating cash flow | $9.8 million | $7.0 million |
| Capital expenditures | $4.5 million | $2.6 million |
- Revenue grew 46.9%; owned restaurant revenue rose 43.4% to $70.5 million and management, license and incentive fees rose to $3.7 million from $1.3 million.
- Comparable restaurant sales increased 45.1% year over year, including 66.5% at STK and 21.9% at Kona Grill. The filing also reports a 45.3% increase versus Q1 2019.
- Restaurant Operating Profit, a company-defined non-GAAP measure, was $13.0 million, or 18.5% of owned restaurant revenue, versus $9.3 million, or 18.8%. Adjusted EBITDA attributable to the company was $10.8 million versus $6.5 million.
- Food and beverage costs rose to 25.7% of owned restaurant revenue from 24.4%, primarily reflecting higher commodity prices. Restaurant operating expenses improved to 55.8% from 56.8% of owned restaurant revenue. General and administrative expense was 9.3% of revenue versus 10.2%.
- Cash and cash equivalents were $28.6 million at March 31, 2022, up from $23.6 million at year-end. Current assets were $44.8 million and current liabilities $42.8 million. Operating cash flow less capital expenditures was approximately $5.4 million.
- Debt was $24.6 million gross, including $0.5 million current; $10.6 million of the $12.0 million revolving facility was available, subject to conditions. The company reported covenant compliance. Operating lease liabilities totaled $111.6 million at present value.
Changes, outlook and risks
- Higher sales drove the improvement in operating income and cash flow. Lower interest expense ($0.5 million versus $1.2 million) also supported results. COVID-related expenses increased to $2.3 million from $1.6 million.
- Management planned to open at least nine new venues in 2022. Five were under development: two company-owned STKs, two company-owned Kona Grills and one managed STK. It also planned to test three licensed delivery/takeout units in Texas with REEF Kitchens.
- Management said it expects to fund operations and planned openings for at least the next 12 months through operating cash flow and landlord construction allowances, with the revolver or equity issuance as possible additional sources. It provided no revenue or earnings guidance.
- All restaurants were open for in-person dining, but management said COVID-19 could continue to adversely affect operations and results. Risks include renewed restrictions or shifts in customer behavior, staffing and supply availability, commodity inflation, execution and timing of new openings, and economic and competitive conditions. A licensee permanently closed an STK in Mexico City during the quarter because of COVID-19.
- The company had two previously identified material weaknesses in internal control over financial reporting; remediation was ongoing and disclosure controls were deemed ineffective as of March 31, 2022. The filing says these weaknesses did not result in a material misstatement of the financial statements.
- Accrued expenses included $4.9 million of disputed lease-exit costs related to restaurants never built. The company also faces ordinary-course litigation, including lease and employee matters; management did not expect the current matters to have a material adverse effect, while noting outcomes are uncertain.
Important facts for investors to verify
- Whether strong comparable sales persist and how food-cost inflation affects restaurant-level margins.
- Opening dates, total investment and funding for the planned 2022 venues, and whether landlord allowances and operating cash flow are sufficient.
- Revolver availability and covenant headroom, particularly the maximum net leverage ratio requirement.
- Progress and testing of remediation for the two internal-control material weaknesses.
- Developments in disputed lease-exit costs and other litigation, and the ongoing impact of COVID-19 and labor availability.