ONE Group Hospitality, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unless otherwise noted, financial amounts below are in U.S. dollars. The company operates STK, Kona Grill and other hospitality venues. It acquired Kona Grill in October 2019, so reported comparisons with 2019 do not include Kona Grill in the prior-year period.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $39.6 million | $22.1 million | $97.0 million | $68.5 million |
| Operating income (loss) | $0.02 million | $0.78 million | $(9.61) million | $2.39 million |
| Net income (loss) attributable to ONE Group | $(0.88) million | $0.46 million | $(8.35) million | $0.99 million |
| Diluted earnings (loss) per share | $(0.03) | $0.02 | $(0.29) | $0.03 |
| Adjusted EBITDA, non-GAAP | $5.18 million | $2.83 million | $4.94 million | $7.77 million |
- Revenue and comparable sales: Q3 revenue increased 79%, primarily from the Kona Grill acquisition; Kona Grill contributed $22.8 million. Same-store sales fell 15.6% in Q3 and 32.6% for the first nine months. Management reported sequential monthly improvement in Q3: STK same-store sales declines narrowed from 34.9% in July to 10.4% in September; Kona Grill moved from a 16.2% decline in July to 2.3% growth in September.
- Margins: Operating margin was 0.1% in Q3 versus 3.5% a year earlier, and negative 9.9% for the nine months versus 3.5%. Restaurant Operating Profit, a non-GAAP measure, was $6.28 million (16.6% of owned restaurant revenue) in Q3 and $8.54 million (9.2%) for the nine months. Management cited purchasing synergies and cost controls as contributors to improved restaurant-level cost percentages.
- Cash flow: For the nine months, operating cash flow was negative $0.68 million, investing cash flow negative $2.66 million, and financing cash flow positive $17.61 million, chiefly reflecting $18.31 million of CARES Act/PPP loan proceeds. Cash increased by $14.22 million to $26.57 million.
- Debt and liquidity: At September 30, gross long-term debt was $47.67 million, plus $18.31 million of CARES Act loans. The company had $10.7 million available under its $12 million revolving facility, subject to borrowing conditions, and reported compliance with amended debt covenants. It also had $104.45 million in operating lease liabilities, including current and long-term portions.
- Other balance-sheet measures: Total assets were $216.98 million and total equity was $26.11 million at September 30, 2020. Cash was up from $12.34 million at December 31, 2019; total debt and CARES Act loans were higher primarily because of the PPP borrowing.
Material changes and unusual items
- The pandemic caused restaurant closures, reduced guest traffic, limited seating and shifts to takeout and delivery. By the filing date, 34 of 36 domestic restaurants were open for outdoor or restricted-capacity in-person dining.
- The company recorded $1.72 million of COVID-19-related expenses in Q3 and $3.76 million for the nine months, including sanitation and protective supplies, paid time off during closures, rent-related costs and inventory waste.
- Interest expense increased to $1.28 million in Q3 and $3.65 million for the nine months, versus $0.23 million and $0.72 million, respectively, reflecting the debt financing associated with the Kona Grill acquisition.
- The company received $9.8 million and $8.5 million in PPP loans for STK and Kona Grill operations. It reported using the proceeds for qualified purposes and anticipated full forgiveness, but stated that forgiveness was not assured; the loans remained recorded as long-term debt.
Outlook, risks and contingencies
- Management said it could not predict when normal dining operations would return and expected COVID-19 could materially and negatively affect results for the remainder of 2020. The filing provides no numerical revenue or earnings guidance.
- Management expected available cash, operating cash flow and financing sources to support operations for at least the next 12 months, subject to operating performance. A complete temporary suspension of operations was estimated to leave approximately $2.3 million of monthly costs for minimum rent, insurance, interest and minimum corporate overhead.
- Capital projects were deferred, and the company was negotiating rent deferrals, abatements or restructuring with landlords. It expected to keep capital spending low while pandemic uncertainty persisted. The company reported $2.66 million of capital expenditures for the nine-month period.
- Amended credit terms waive fixed-charge coverage testing through 2021 and impose leverage, capital-expenditure and minimum-liquidity requirements. Minimum consolidated liquidity was set at $4 million through 2021. The company reported covenant compliance at September 30 and expected continued compliance based on its projections.
- Risks include renewed COVID-19 restrictions, customer demand and employee safety, liquidity and covenant compliance, and whether PPP loans are forgiven. The company disclosed ordinary-course legal matters, including lease and employee-related claims, with a possible loss range of zero to $2.2 million; management did not expect a material adverse outcome.
Important facts for investors to verify
- Whether PPP loan forgiveness is approved, and any resulting change in reported debt or cash obligations.
- Restaurant openings, capacity restrictions and same-store sales trends, particularly as year-over-year results become more comparable after the Kona Grill acquisition.
- Operating cash generation, cash use and access to the revolving facility under its borrowing tests and covenants.
- Progress and terms of landlord concessions, and the company’s capacity to meet substantial lease obligations if sales remain weak.
- Developments in disclosed litigation and lease disputes, including whether potential losses exceed the stated range.