ONE Group Hospitality, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. The company develops, operates, manages, and licenses upscale restaurants and food-and-beverage services, with STK as its principal brand. As of November 13, 2017, it reported 11 owned and operated, 13 managed, and one licensed restaurant or lounge.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $17.81 million | $18.38 million | $58.14 million | $52.00 million |
| Net income (loss), attributable to ONE Group | $(1.17) million | $1.48 million | $(3.87) million | $(0.54) million |
| Loss from continuing operations before tax | $(0.83) million | $(2.37) million | $(3.33) million | $(3.90) million |
| Operating cash flow | Not separately provided for the quarter | $5.70 million | $3.60 million |
- Q3 revenue fell 3.1% year over year: owned-unit revenue declined 6.0%, partly offset by 20.2% growth in management and incentive fees. Nine-month revenue rose 11.8%, driven by new venues and fee growth.
- Comparable owned STK sales decreased 0.9% in Q3 and 0.5% year to date; comparable owned and managed STK sales increased 1.9% and 2.2%, respectively. Hurricane-related closures affected Florida sales.
- For the nine months, cash from operations of $5.70 million less $4.11 million of capital expenditures implies approximately $1.59 million of cash flow after capital spending. Cash increased $0.20 million to $1.80 million.
- At September 30, cash was $1.80 million, current assets $9.77 million, and current liabilities $19.19 million—negative working capital of approximately $9.42 million. Total liabilities were $49.86 million and total equity including noncontrolling interests was $4.11 million.
- Debt was $15.14 million before the unamortized warrant discount; balance-sheet carrying debt was approximately $14.44 million, including $3.52 million current. The company reported compliance with BankUnited financial covenants and expected continued compliance for the next four quarters.
- Net minimum operating lease commitments, after disclosed sublease income, totaled approximately $119.59 million, extending through 2031.
Changes, outlook, and notable items
- Q3 loss attributable to the company compared with prior-year profit; the 2016 quarter included a $4.05 million income-tax benefit, while Q3 2017 recorded $0.18 million of tax expense. For the first nine months, the company’s attributable loss widened to $3.87 million from $0.54 million. A valuation allowance and limits on recognizing tax benefits in loss jurisdictions contributed to tax volatility.
- Owned STK segment profit declined to $1.05 million in Q3 from $1.35 million, and to $3.42 million for nine months from $4.41 million. Management cited new-unit costs, weaker comparable sales in certain markets, and rising beef costs. Pre-opening expense fell substantially year over year.
- Q3 general and administrative expense included a $500,000 charge to resolve a dispute with a management-agreement partner. Nine-month G&A also included approximately $1.3 million of company and equity-method legal settlement costs. One employment settlement was paid in October; another remained subject to final court approval, then expected in November.
- Management’s non-GAAP Adjusted EBITDA was $1.65 million for Q3 versus $1.08 million, and $4.79 million for nine months versus $3.41 million. These figures include adjustments for items such as stock compensation, pre-opening costs, legal settlements, and the Q3 fee adjustment; they are not GAAP earnings.
- Management expected to fund operations and planned openings for at least 12 months (elsewhere describing a 12-to-18-month outlook) using operating cash, landlord construction allowances, and borrowing capacity. It warned funding beyond that period was uncertain and additional financing might not be available on acceptable terms. Fiscal 2017 capital expenditures were estimated at approximately $4.5 million.
- Plans included two to three STK openings annually over the next three years, primarily through licensing, and at least one to two new food-and-beverage hospitality projects every 12 months. Management expected positive same-store sales through Q4 2017 and margin improvement as units mature, but gave no quantified earnings guidance and cautioned that results were not assured. San Diego and Austin openings were targeted for mid-2018.
- On October 30, 2017, Emanuel Hilario became CEO; founder Jonathan Segal became Executive Chairman, focusing on licensing and business development. Management said disclosure controls and internal control over financial reporting were ineffective as of September 30; remediation was ongoing and incomplete.
Investor verification priorities
- Test the cash-runway outlook against negative working capital, upcoming debt service, lease commitments, and reliance on landlord allowances or new financing.
- Review the remediation and testing of financial-reporting controls, including whether identified deficiencies are resolved.
- Track comparable sales, hurricane effects, beef and labor costs, and whether newer restaurants achieve expected mature margins.
- Confirm the final outcome and cash cost of the pending employment settlement and assess any further partner disputes or related-party costs.
- Assess the assumptions and exclusions behind Adjusted EBITDA and the timing, capital needs, and execution risks of planned openings and licensing growth.