ONE Group Hospitality, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unless otherwise noted, financial amounts below are in U.S. dollars; statement amounts are in thousands. The company develops, owns, operates, manages and licenses upscale restaurants and provides food-and-beverage services. At quarter-end it had 29 venues, including 19 STKs, and served four hotels and casinos.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $22.8 million | $19.5 million; up 16.7% |
| Owned restaurant revenue | $17.8 million | $15.1 million; up 18.2% |
| Management, license and incentive revenue | $2.7 million | $2.4 million; up 10.1% |
| Operating income | $1.13 million; 5.0% of revenue | $0.46 million; 2.4% of revenue |
| Net income attributable to ONE Group | $0.85 million; $0.03 per diluted share | $0.23 million; $0.01 per diluted share |
| Adjusted EBITDA (non-GAAP) | $2.65 million | $1.75 million |
| Cash from operations | $2.51 million | $0.17 million |
| Capital expenditures | $2.06 million | $0.31 million |
Owned restaurant cost of sales fell to 25.6% of owned restaurant revenue from 26.8%; restaurant operating expenses fell to 61.3% from 62.2%. Management reported a 210-basis-point increase in owned STK store-level margins. General and administrative expense declined to $2.65 million from $3.06 million, while pre-opening expense increased to $0.48 million from $0.21 million. Interest expense was $0.27 million, versus $0.32 million.
Cash and cash equivalents were $1.08 million at March 31, down from $1.59 million at year-end. The company reported an $8.6 million working-capital deficit and a $27.9 million accumulated deficit. Gross third-party debt was $10.0 million, including $2.8 million current; debt net of discounts and issuance costs was presented as $9.6 million. Operating lease liabilities totaled $57.4 million, including $2.2 million current. The company was in compliance with its BankUnited financial covenants.
Material changes and notable items
- Domestic same-store sales increased 8.6% for the quarter; comparable average check rose 2.3%, to $110.83, and average comparable restaurant volume increased to $2.7 million from $2.5 million.
- Revenue and profitability benefited from existing-restaurant sales growth, the San Diego restaurant opened in 2018, new managed and licensed locations, and operating efficiencies. Nashville, an owned STK, and Doha, a licensed STK, opened during Q1.
- Owned food, beverage and other revenue increased 13.4%, primarily reflecting a Super Bowl event in Atlanta with no comparable event in Q1 2018.
- The company adopted ASC 842 leases on January 1, 2019 without restating prior periods. Adoption recorded $41.9 million of operating right-of-use assets and $58.9 million of lease liabilities; the balance-sheet increase is primarily an accounting change, not equivalent new borrowing. Q1 lease cost, net of sublease income, was $2.31 million.
- Cash declined by $0.51 million: operating cash flow was offset by $2.06 million of investing outflow, $0.80 million of debt repayments and foreign-exchange effects.
Outlook, risks and contingencies
- Management expected to fund operations and planned openings for at least the next 12 months primarily with operating cash flow and landlord construction allowances; it also cited potential debt or equity issuance and warrant or option exercises as possible liquidity sources. This outlook is subject to operating performance and cash-generation risks.
- 2019 capital expenditures were estimated at approximately $3.5 million. Management expected Nashville to be the only new owned restaurant opening in 2019, while planned openings included licensed STKs in Puerto Rico and Guadalajara and a managed STK in Scottsdale. The company planned one managed F&B location in Florence and expected one to two new F&B agreements annually.
- Management forecast domestic STK same-store sales growth of 3%–4% for 2019. This is a company outlook, not a reported result; Q1 same-store sales growth was 8.6%.
- Growth plans depend on suitable sites, prospective licensees, qualified managers, construction costs and landlord allowances. Other identified risks include consumer spending and preferences, competition, operating costs, litigation, and the sufficiency of liquidity.
- The company was involved in ordinary-course lease disputes and employee-related claims, including potential labor-law class actions. Management considered accruals adequate and did not expect a material adverse outcome, while noting litigation outcomes are uncertain.
Important facts for investors to verify
- Whether operating cash flow can sustain the stated 12-month liquidity outlook given cash of $1.08 million and the $8.6 million working-capital deficit.
- Progress against the 2019 opening plans, capital-expenditure estimate and 3%–4% same-store-sales outlook.
- Comparable performance of new and existing restaurants, including whether Q1 sales growth and margin improvements continue after opening-period effects.
- Lease obligations and their cash burden: reported operating lease liabilities were $57.4 million, with $101.5 million of undiscounted scheduled lease payments.
- Debt repayment and covenant compliance, and developments in lease disputes, employee claims and other litigation.