ONE Group Hospitality, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; financial statements are unaudited. The company develops and operates upscale restaurants and provides food-and-beverage services. As of August 14, 2015, it reported 11 owned and 15 managed restaurants and lounges.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $14.90 million | $12.27 million | $26.68 million | $22.54 million |
| Income before tax | $2.63 million | $3.61 million | $0.82 million | $3.73 million |
| Net income | $8.52 million | $3.15 million | $7.33 million | $2.10 million |
| Net income attributable to ONE Group | $8.39 million | $3.01 million | $7.30 million | $2.29 million |
| Adjusted EBITDA attributable to ONE Group | $1.63 million | $1.65 million | $2.39 million | $2.66 million |
- Revenue increased 21.5% year over year in Q2 and 18.3% for the first half. Owned-unit revenue growth reflected the Miami STK reopening and new operations; management and incentive fee revenue declined slightly.
- Q2 pretax margin was 17.6%, versus 29.4% a year earlier; first-half pretax margin was 3.1%, versus 16.5%. Higher unit operating and pre-opening costs weighed on operating results.
- Reported net income included a $5.9 million Q2 tax benefit ($6.5 million for the first half), primarily from releasing a deferred-tax valuation allowance. It also included noncash derivative income of $3.4 million in Q2 and $2.8 million for the first half. These items substantially affect comparisons with underlying operating performance.
- Basic and diluted earnings per share were $0.34 in Q2 and $0.29 for the first half, compared with $0.12 and $0.09, respectively, in 2014.
Cash, debt and liquidity
- Cash was $2.85 million at June 30, down from $7.91 million at December 31, 2014. Current assets were $13.38 million and current liabilities $9.04 million.
- First-half operating cash flow was negative $0.10 million; investing cash flow was negative $5.04 million, chiefly reflecting $5.01 million of property and equipment purchases. Financing provided $0.31 million. Cash declined by $5.06 million during the period.
- Total debt was $7.83 million, including $1.73 million current and $6.10 million long-term. The BankUnited loans bear 5% interest and are secured by substantially all company assets. The company reported covenant compliance at June 30 and expected to remain compliant through 2015.
- Net future lease commitments were approximately $138.7 million, including commitments thereafter. The company said existing resources and anticipated operating cash flow should fund planned needs for 12–18 months, excluding the announced acquisition.
Changes, outlook and risks
- Q2 comparable owned STK sales rose 2.7%; comparable owned and managed STK sales rose 3.1%. First-half comparable owned STK sales declined 0.5%, while comparable owned and managed STK sales rose 1.0%; management cited harsh first-quarter weather affecting New York.
- Pre-opening expense increased to $1.69 million in Q2 and $2.77 million for the first half, associated with Miami, Westwood and planned Orlando and Chicago openings. Management expected to open as many as two to three STKs and one to two STK Rebels annually over the next three years, subject to capital, locations and staffing. It also targeted one to two new F&B projects every 12 months and long-term same-store sales growth of 2%–3%; these are expectations, not assured results.
- On July 9, 2015, after quarter-end, the company announced an agreement to acquire the Katsuya and Cleo brands and four Katsuya restaurants for $75 million cash plus warrants. It said additional debt and equity financing would be required; financing availability, potential dilution, and transaction completion are significant uncertainties. The agreement contemplated at least 10 additional hotel restaurant opportunities over five years.
- Other notable items: STK Miami reopened in March after water damage; the company recorded $550,000 of business-interruption income in the first half and was pursuing remaining property-damage insurance proceeds. Litigation was described as incidental and not expected to have a material adverse effect. The filing identifies risks from restaurant-opening costs, seasonality, weather, food costs, and acquisition financing and closing conditions.
Key facts for investors to verify
- How much reported earnings depended on the tax valuation-allowance release and noncash derivative remeasurement, versus recurring restaurant operations.
- Whether operating cash generation and available financing can support planned openings, debt service and substantial lease commitments.
- Whether the Katsuya/Cleo acquisition closed, how it was financed, and the resulting debt, dilution and integration costs.
- Whether new locations mature as expected and whether unit-level operating costs and pre-opening expenses moderate.