ONE Group Hospitality, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unless noted, amounts are in U.S. dollars; financial statement amounts below are shown in millions. The company develops, owns, operates, manages and licenses upscale restaurants, led by STK, and provides food-and-beverage services to hotels and other hospitality venues. At quarter-end it reported 31 venues: 10 company-owned, 17 managed, three licensed and one other.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $20.311 | $19.898 | $39.828 | $40.325 |
| Operating income (loss) | $0.773 | $(1.761) | $1.234 | $(2.013) |
| Net income (loss) | $0.314 | $(2.184) | $0.432 | $(2.784) |
| Net income (loss) attributable to ONE Group | $0.181 | $(2.300) | $0.412 | $(2.702) |
| Adjusted EBITDA | $2.710 | $1.668 | $4.463 | $3.140 |
| Adjusted EBITDA attributable to ONE Group | $2.504 | $1.470 | $4.299 | $3.079 |
Q2 revenue increased 2.1% year over year; first-half revenue declined 1.2%. Operating margin was 3.8% in Q2 versus negative 8.9% a year earlier, and 3.1% for the first half versus negative 5.0%. Adjusted EBITDA is a non-GAAP measure as defined by the company.
- Revenue mix: Q2 owned restaurant revenue rose 5.7% to $15.520 million; owned food, beverage and other revenue fell 14.3% to $2.083 million; management, license and incentive fees declined 2.7% to $2.708 million. For the first half, owned restaurant revenue rose 5.8% to $30.596 million, owned food, beverage and other revenue fell 35.3% to $4.088 million, and fees were approximately flat at $5.144 million.
- Profitability: Q2 owned restaurant segment profit increased to $2.084 million from $1.437 million. First-half owned restaurant segment profit rose to $3.748 million from $2.420 million. Lower restaurant operating costs as a share of owned restaurant revenue and reduced general and administrative expense supported improvement.
- Cash flow: First-half operating cash flow was $2.333 million, down from $4.815 million. Investing cash outflow was $1.326 million, including $1.926 million of property and equipment purchases, partly offset by $0.600 million from the sale of an investment. Financing cash outflow was $1.638 million, primarily scheduled debt payments. Cash declined $0.615 million to $0.933 million.
- Balance sheet and debt: At June 30, cash was $0.933 million, current assets $9.038 million and current liabilities $16.267 million. Total debt was approximately $11.819 million, including $3.191 million current, down from approximately $13.356 million at December 31, 2017. Total liabilities were $44.655 million and stockholders’ equity $7.665 million. The accumulated deficit was $31.621 million.
- Capital and share activity: First-half capital expenditures were $1.926 million. On July 18, after quarter-end, an investor exercised 250,000 warrants at $1.63 per share, providing $0.4 million. Shares outstanding were 27,441,780 at June 30 and 27,691,780 as of August 10.
Material changes versus the prior period
- Return to positive operating and net income in both Q2 and the first half, compared with losses in 2017; 2017 first-half results also included a $0.106 million discontinued-operations loss.
- First-half owned food, beverage and other revenue was lower largely because a 2017 Super Bowl event generated $1.8 million of revenue and was not repeated. Related expenses also declined.
- Q2 general and administrative expense decreased 20.5% to $2.615 million; first-half expense decreased 8.7% to $5.670 million. Management cited lower payroll and marketing costs, partly offset in the first half by audit-related professional fees.
- First-half 2018 results included a $0.2 million gain on the sale of the company’s 10% interest in One 29 Park for $0.6 million. The company expected its management agreement there to end within six to nine months.
- Adoption of ASC 606 on January 1, 2018 increased reported management, license and incentive fee revenue and net income by $0.028 million in Q2 and $0.057 million in the first half. Prior-year figures were not recast.
Outlook, commentary and risks
- Management expected 2018 company-owned same-store sales growth at a mid-single-digit pace; reported growth was 6.2% in Q2 and 7.4% for the first half. It targeted annual growth of three to five STK restaurants primarily through management and licensing, subject to suitable sites, licensee interest and operating resources.
- The company anticipated 2018 capital expenditures of approximately $3.0 million and planned one to two new owned STK restaurants. San Diego and Dubai STK locations opened in July 2018; planned licensed openings included Mexico City and Doha. Management described a potential 2019 pipeline but gave no assurance openings would occur on schedule.
- Management said it expected to fund operations and planned openings for at least the next 12 months through operating cash flow and landlord construction allowances. It cautioned that financing may not be available on acceptable terms, or at all; insufficient capital could delay expansion or require unfavorable financing.
- Debt covenants were reported in compliance at June 30. The company had accrued approximately $1.5 million for future lease payments, net of expected sublease income, related to locations it no longer planned to develop. Operating leases are material; adoption of the new lease standard was expected to materially increase reported assets and liabilities.
- Management cited consumer spending and preferences, costs, competition, restaurant execution and openings, margins, suitable real estate, liquidity, licensing growth, legislation and litigation among the risks to forward-looking expectations. Ordinary-course legal matters were not expected by management to have a material adverse effect.
- Disclosure controls and internal control over financial reporting were both deemed ineffective as of June 30, 2018. Remediation was ongoing and incomplete; the company had also moved accounting and accounts-payable processing to an outside provider during the quarter.
Important facts for investors to verify
- Whether cash generation and landlord allowances can support operations, debt service and planned openings given only $0.933 million of quarter-end cash and continuing financing uncertainty.
- Whether comparable-sales gains persist and whether owned restaurant cost efficiencies can offset wage, food and other cost pressures.
- Whether planned licensed, managed and owned openings occur as expected, and how much capital they require.
- The status and adequacy of internal-control remediation, including any effects of outsourced accounting and accounts-payable processing.
- The eventual effects of lease-accounting adoption and any changes to the provisional tax estimates associated with the Tax Cuts and Jobs Act.