ONE Group Hospitality, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparative period is Q1 2015. The company develops and operates upscale restaurants and lounges and provides food-and-beverage services. As of May 16, 2016, it reported 12 owned and operated and 15 managed restaurants and lounges globally.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $16.4 million | $11.8 million |
| Owned-unit revenue | $14.4 million | $9.7 million |
| Management and incentive fees | $2.0 million | $2.1 million |
| Loss from continuing operations | $564,000 | $1.19 million |
| Net loss attributable to ONE Group | $457,000 | $1.09 million |
| Basic and diluted loss per share | $0.02 | $0.04 |
| Net cash used in operating activities | $380,000 | $940,000 |
| Net cash used in investing activities | $3.60 million | $2.23 million |
- Revenue rose 39.2%, driven mainly by new or reopened STK locations. Owned STK revenue increased 60.3%; comparable owned STK sales rose 2.4%, and comparable owned and managed STK sales rose 2.8%. Other-concept revenue fell 41.2%, while management and incentive fee revenue declined 1.8%.
- Owned STK segment profit increased to $1.19 million from $325,000; F&B segment revenue and segment profit were both $2.01 million. Other-segment revenue decreased to $700,000, but segment profit improved to $415,000 from a loss of $106,000.
- Food and beverage costs were 24.8% of owned STK revenue and unit operating expenses were 66.5%, compared with 26.0% and 70.2%, respectively, in Q1 2015. General and administrative costs increased 9.8% to $2.68 million but fell to 16.4% of total revenue from 20.8%. Pre-opening expenses declined to $900,000 from $1.07 million.
- Management-reported Adjusted EBITDA was $996,000, versus $688,000. This non-GAAP measure excludes specified items, including pre-opening costs, derivative income or expense, deferred rent and stock compensation; it should not be treated as a substitute for GAAP results.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $1.21 million, down from $1.84 million at year-end 2015. Current assets were $11.42 million and current liabilities $10.84 million, implying working capital of about $586,000.
- Total debt was $12.49 million, including $3.02 million current and $9.47 million long-term. The term loans bear 5% interest, are secured by substantially all company assets, and require financial covenant compliance. The company reported compliance at quarter-end and expected to remain compliant through 2016. Approximately $1.5 million of letters of credit remained outstanding.
- Capital expenditures were $3.70 million in Q1, primarily for restaurant construction and existing-unit capital needs. The company completed a rights offering that generated approximately $3.8 million net proceeds, intended primarily to fund planned STK development. Financing cash flow was $3.37 million, and cash decreased by $628,000 overall.
- Management said expected operating cash, landlord construction allowances, rights-offering proceeds and available borrowings should fund anticipated working capital, planned capital spending and debt service for the next 12–18 months, subject to operating performance. It cautioned that additional financing may be needed and may not be available on acceptable terms.
- Net future minimum lease commitments were reported at $135.3 million, including $100.4 million thereafter, partly offset by $3.7 million of minimum rental income.
Outlook, risks and unusual items
- The company expected to open as many as two to three STKs annually over the next three years, subject to capital, suitable locations and management capacity. It targeted at least one to two new F&B hospitality projects every 12 months. Long-term targets included 0%–1% annual store-sales growth and operating-margin improvement; these are targets, not assured results.
- Pre-opening expense of $900,000 primarily related to the planned Orlando STK, which management projected to open in Q2 2016. New restaurants typically have elevated costs during start-up, and quarterly results may vary with opening schedules, seasonality, weather, consumer demand and food costs, especially beef.
- The February 2016 expiration of 5.75 million public warrants led to a $100,000 derivative gain in Q1 and cancellation of 1,437,500 shares held by initial stockholders. The company also issued 1,454,545 shares through the rights offering at $2.75 per share.
- Disclosure controls and procedures were concluded to be ineffective as of the quarter-end evaluation; management was continuing remediation of previously identified internal-control deficiencies and said the material weakness would not be considered remediated until controls were tested and found effective.
- The company reported ordinary-course litigation and said management did not expect the matters, individually or in aggregate, to materially adversely affect financial position or results. It reported no material changes to the risk factors in its 2015 Form 10-K.
Important facts for investors to verify
- Whether planned openings, particularly Orlando, proceed on schedule and within expected capital and pre-opening costs.
- Whether operating cash flow and available financing are sufficient given low cash, ongoing capital spending, debt service and substantial lease commitments.
- Progress and testing of internal-control remediation, given management’s conclusion that disclosure controls were ineffective.
- The sustainability of comparable-sales growth and improved restaurant-level cost ratios as newly opened units mature.
- The terms and performance implications of subsequent April 2016 equity awards, including 1.0 million options and 787,500 restricted stock units disclosed in the filing.