ONE Group Hospitality, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Business context
The company operates, manages and licenses STK and Kona Grill restaurants and provides food-and-beverage services to hotels, casinos and other venues. At quarter-end it had 60 venues: 23 STKs, 24 Kona Grills and 13 other hospitality venues. Management attributed the recovery in sales to easing dining restrictions and execution of sales initiatives. All domestic and international restaurants were open for in-person dining at the time described.
Financial results and liquidity
| Metric | Three months ended Sept. 30, 2021 | Three months ended Sept. 30, 2020 | Nine months ended Sept. 30, 2021 | Nine months ended Sept. 30, 2020 |
|---|---|---|---|---|
| Total revenue | $71.9 | $39.6 | $193.1 | $97.0 |
| Operating income (loss) | $5.1 | $0.02 | $13.7 | $(9.6) |
| Net income (loss) attributable to the company | $11.7 | $(0.9) | $25.6 | $(8.3) |
| Diluted EPS | $0.34 | $(0.03) | $0.75 | $(0.29) |
| Restaurant operating profit (non-GAAP) | $11.6 | $6.3 | $36.2 | $8.5 |
| Restaurant operating profit margin | 17.1% | 16.6% | 19.6% | 9.2% |
| Adjusted EBITDA (non-GAAP) | $10.2 | $5.2 | $29.8 | $4.9 |
- Q3 revenue rose 81.6%; owned restaurant revenue increased 79.7% and management, license and incentive fee revenue increased 123.7%. Comparable restaurant sales rose 78.9% year over year and 44.7% versus Q3 2019.
- Q3 owned restaurant cost of sales increased to 26.1% of owned restaurant revenue from 24.0%, mainly due to higher commodity prices. Restaurant operating costs declined as a share of revenue, reflecting sales leverage and cost management.
- Q3 net income included a $10.0 million gain from forgiveness of CARES Act/PPP loans. The nine-month period included $18.5 million of forgiveness gains. These nonrecurring gains materially increased reported net income; adjusted EBITDA excludes them.
- Nine-month operating cash flow was $23.0 million, versus cash used of $0.7 million in 2020. Investing cash outflow was $8.1 million, primarily for restaurant construction and existing-restaurant and technology spending. Financing cash outflow was $20.2 million, including a $22.2 million term-loan prepayment. Cash declined $5.3 million to $19.1 million.
- At September 30, cash was $19.1 million; total current assets were $33.1 million and current liabilities were $37.5 million. Long-term debt, net of current portion and issuance costs, was $23.2 million. The company reported $10.7 million available under its $12.0 million revolving facility, subject to conditions, and said it was in compliance with required debt covenants.
- Operating lease liabilities totaled $107.4 million; the company also disclosed a $5.6 million present-value commitment for a future San Francisco STK lease that had not commenced.
Material changes, outlook and risks
- In August 2021, the company amended its Goldman Sachs credit agreement, reduced the term loan commitment from $48 million to $25 million, prepaid $22.2 million, lowered the stated interest margins and extended facility maturity to August 2026. The amendment retained a maximum net leverage covenant of 2.00 to 1.00 and removed several other restrictions. A $0.6 million early-extinguishment loss was recorded.
- Management said it expected to finance operations for at least the next 12 months through operating cash flow and landlord construction allowances, subject to operating performance. It planned 13 new STK and F&B venues in 2021 and 2022, seven of which were open, and three to five Kona Grill locations in 2022. Several owned and managed locations were under development.
- Management reported strong post-pandemic sales momentum but said it could not predict whether sales and profitability would continue for the remainder of 2021. Renewed COVID-19 cases or dining restrictions, labor availability, supply relationships, construction and opening timing, and economic or competitive conditions could adversely affect results.
- The company disclosed ordinary-course lawsuits, including lease and employee-related matters, and disputed lease-exit costs. Management did not expect current matters to have a material adverse effect, while noting litigation outcomes are uncertain. It reported no material change to its 2020 annual-report risk factors.
Investor facts to verify
- How much of earnings and cash generation reflects recurring restaurant operations versus the $18.5 million loan-forgiveness gain and other adjustments?
- Whether sales momentum and comparable-sales growth can persist as pandemic comparisons normalize, and whether commodity, labor and other operating costs pressure margins.
- Progress, timing, capital needs and expected returns for planned openings, including the San Francisco, Dallas and Riverton projects.
- Debt covenant headroom, revolver availability and cash needs after capital spending, debt service and substantial lease obligations.
- Whether deferred payroll taxes, lease disputes, litigation or other contingencies result in material future payments.