ONE Group Hospitality, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017, compared with the same period in 2016. The company develops, owns and operates upscale restaurants and provides food-and-beverage services under management and license agreements. Its reportable segments are owned STK units, food-and-beverage management, and other concepts.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $20.43 million | $16.39 million |
| Loss from continuing operations before tax | $510,000 | $630,000 |
| Consolidated net loss | $600,000 | $562,000 |
| Net loss attributable to ONE Group | $402,000 | $457,000 |
| Operating cash flow | $848,000 | $(380,000) |
| Capital expenditures | $1.35 million | $3.70 million |
| Adjusted EBITDA | $1.47 million | $996,000 |
Revenue increased approximately 24.6%. Owned-unit revenue was $18.11 million, up from $14.38 million; management and incentive fee revenue was $2.31 million, up from $2.01 million. Segment profit before corporate and other costs was $4.24 million, compared with $3.62 million. Food and beverage costs were 25.8% of owned-unit revenue versus 24.5%; unit operating expenses were 63.5% versus 64.3%. General and administrative expense declined to 14.3% of revenue from 16.4%. The company still reported a GAAP loss from continuing operations of $493,000.
At March 31, cash was $1.79 million and current assets were $11.53 million against current liabilities of $16.66 million. Long-term debt was reported at $17.28 million before the current portion and warrant discount presentation; the balance sheet shows $4.06 million current and $12.43 million long-term, net of discount. Cash overdraft was $1.32 million. Total liabilities were $47.98 million. Operating lease commitments, net of disclosed sublease receipts, totaled $122.98 million through 2031.
Material changes versus the prior period
- Owned STK revenue rose primarily with Orlando and Denver openings; comparable owned STK sales fell 1.8%, and comparable sales across owned and managed STKs fell 2.3%.
- Other-concept revenue increased to $1.74 million from $700,000, largely due to Super Bowl-related off-site catering.
- Depreciation and amortization increased to $866,000 from $523,000, mainly reflecting new restaurants. Pre-opening costs fell to $714,000 from $900,000.
- Net interest expense rose to $259,000 from $98,000, reflecting promissory notes issued in 2016. Q1 2017 financing included a $1.0 million American Express loan; Q1 2016 financing included proceeds from a rights offering.
- Operating cash flow turned positive, while investing cash outflow remained significant. Cash increased by $190,000 during the quarter.
Outlook, risks and unusual items
- Management expected same-store sales to remain flat in 2017 and anticipated operating-margin improvement as units mature, while cautioning that improvement is not assured. Planned 2017 capital expenditures were approximately $3.3 million; the company expected to open two to three owned STKs and pursue licensing-led growth.
- Management said anticipated operating cash flow, landlord construction allowances and financing were expected to fund operations and planned needs for at least 12 months; elsewhere it described expected funding sufficiency for 12 to 18 months. It cautioned that weaker operating performance or unavailable financing could impair plans.
- The board was evaluating strategic alternatives with Stifel as financial adviser; no transaction or timetable was assured. The company warned that the review could distract management, increase costs and create employee or market uncertainty.
- Disclosure controls and internal control over financial reporting were reported ineffective as of March 31, 2017. Remediation was ongoing and expected to continue through 2017.
- After quarter-end, CFO Samuel Goldfinger announced his resignation effective May 26, 2017, and COO Alejandro Munoz-Suarez resigned effective April 21, 2017; an interim CFO was named.
- The company reported a $12.0 million U.S. deferred-tax valuation allowance recorded in 2016, unchanged in Q1 2017. Management cited cumulative losses and uncertainty about realizing deferred tax assets. Routine litigation was not expected by management to materially affect financial position or results.
- Quarterly results are subject to opening costs, new-unit maturation, seasonality, weather, consumer demand and food-cost changes. The filing notes beef accounts for about 30% of food-and-beverage costs.
Most important facts for investors to verify
- Whether operating cash flow and landlord allowances can cover lease obligations, planned investment and debt service, given low cash and current liabilities exceeding current assets.
- Debt terms, repayment schedules, covenant compliance and the cost and maturity of the 10% promissory notes and short-term American Express loan.
- Comparable-sales trends, new-unit performance and whether management’s flat same-store-sales outlook and margin expectations are being achieved.
- Progress and testing of internal-control remediation, and the effect of CFO and COO departures on reporting and execution.
- Any eventual outcome of the strategic review; the filing gives no assurance of a transaction or change in strategy.