Business context and reporting period
The ONE Group Hospitality, Inc. filed this Form 10-K for the fiscal year ended December 31, 2021. It develops, owns, operates, manages and licenses hospitality venues, principally STK steakhouses and Kona Grill restaurants, as well as hotel and casino food-and-beverage services. At year-end, it reported 60 venues: 23 STKs, 24 Kona Grills and 13 ONE Hospitality venues. All restaurants had reopened for in-person dining, but COVID-19 continued to affect operations.
Key financial metrics
Amounts are in U.S. dollars; figures below are for fiscal 2021 compared with fiscal 2020 unless stated otherwise.
| Metric | 2021 | 2020 |
|---|---|---|
| Total revenue | $277.2 million | $141.9 million |
| Operating income (loss) | $19.4 million | $(13.7) million |
| Net income (loss) attributable to ONE Group | $31.3 million | $(12.8) million |
| Diluted EPS | $0.93 | $(0.44) |
| Operating cash flow | $31.0 million | $0.4 million |
| Capital expenditures | $11.5 million | $5.8 million |
- Revenue mix: Owned restaurant revenue was $264.4 million; management, license and incentive-fee revenue was $12.8 million.
- Margins: Restaurant Operating Profit, a company-defined non-GAAP measure, was $52.4 million, or 19.8% of owned restaurant revenue, versus $15.6 million, or 11.4%. GAAP operating margin was 7.0%, compared with a 9.6% operating loss margin.
- Sales trends: Same-store sales increased 92.8% year over year; on a two-year basis, they rose 34.2%. Reported brand-specific year-over-year comparable sales increases were 131.9% for STK and 57.7% for Kona Grill; two-year increases were 45.1% and 23.2%, respectively.
- Cash and liquidity: Cash was $23.6 million at year-end. Current assets were $42.9 million and current liabilities $42.3 million. The company reported $10.6 million available on its $12 million revolving facility, subject to conditions.
- Debt and leases: Gross term-loan debt was $24.75 million; the revolving facility was undrawn. The term loan matures in August 2026. The balance sheet reported $109.0 million in operating lease liabilities, including current and long-term amounts.
- Non-GAAP earnings: Adjusted EBITDA attributable to ONE Group was $42.7 million versus $9.6 million. This measure excludes specified items and should not be treated as a substitute for GAAP results.
Material changes versus the prior comparable period
- Revenue increased 95.3%, primarily as government capacity restrictions eased and sales initiatives supported recovery. The 2020 comparison was heavily affected by COVID-related closures and restrictions.
- Owned restaurant operating expenses fell as a share of owned restaurant revenue, from 63.7% to 54.7%, reflecting higher sales and cost management. Food and beverage cost of sales rose from 24.9% to 25.5% of owned restaurant revenue, primarily due to commodity inflation.
- Operating cash flow rose to $31.0 million from $0.4 million. Investing cash outflow increased with restaurant construction and other capital spending; financing shifted to a $20.3 million outflow, including substantial debt repayment.
- The company repaid $22.2 million of term debt in 2021 and amended its credit agreement, reducing the term loan from $48 million to $25 million, extending maturity to August 2026, and leaving a maximum net leverage covenant of 2.00 to 1.00.
- Net income included an $18.5 million gain from forgiveness of $18.3 million in PPP loans, partly offset by a $0.6 million loss on early debt extinguishment. The forgiveness gain materially boosted reported earnings.
Guidance, outlook, risks and unusual items
- Expansion plans: Management expects to open as many as five to six STKs and three to five Kona Grills annually, and to enter one to two new F&B hospitality agreements annually. It described a broader target of approximately seven to twelve new restaurant and/or hospitality locations annually. These plans depend on suitable sites, partners, staff, capital and operating conditions; they are not assured.
- COVID-19 and operating risks: The filing warns that further outbreaks, variants, restrictions or changes in customer behavior could affect traffic and results. COVID-related costs were $5.8 million in 2021. Management estimated that a temporary shutdown would still leave about $2.4 million of monthly costs, including rent, insurance, interest and minimum corporate expenses.
- Cost and execution risks: Inflation in food, labor, construction and occupancy costs, labor availability, supply disruptions, competition, long-term lease commitments and the success of new locations could pressure margins and liquidity. The company does not hedge food commodity or foreign-exchange exposure.
- Debt and liquidity: Management said available cash, operating cash flow and potential financing were expected to support operations and planned openings for at least 12 months, subject to operating performance. It reported covenant compliance at year-end; adverse performance could affect covenant compliance or access to revolving borrowings.
- Internal controls: Management and the auditor concluded internal control over financial reporting was ineffective at December 31, 2021 because of material weaknesses, including journal-entry segregation, control design and documentation, information-system access, and technical accounting. The weaknesses did not result in a material misstatement of the financial statements. The financial-statement audit opinion was unqualified; the auditor issued an adverse opinion on internal control.
- Other items: The company reported ordinary-course litigation, including lease disputes and employee-related claims, and said it did not expect the ultimate outcomes to have a material adverse effect. Its Hippodrome agreement changed from manager to consultant effective January 1, 2022. No cash dividends were paid or expected in the foreseeable future.
Important facts for investors to verify
- How much of 2021 profitability and earnings growth is repeatable apart from the $18.5 million PPP-loan forgiveness gain and pandemic-recovery comparisons.
- Whether same-store sales, restaurant-level margins and cash generation remain strong as capacity restrictions recede and inflation and labor costs continue to affect operations.
- Progress on planned openings, required capital spending, landlord contributions and the returns achieved by new company-owned locations.
- Debt-covenant headroom, borrowing availability and the company’s ability to meet substantial lease commitments while funding growth.
- Whether remediation of the disclosed internal-control material weaknesses is completed and independently demonstrated to be effective.