ONE Group Hospitality, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company operates STK, Kona Grill and other hospitality and food-and-beverage venues. It acquired Kona Grill’s 24 domestic restaurants in October 2019; results include the acquisition, so year-over-year comparisons are not like-for-like.
Financial performance
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $40.7 | $22.8 |
| Operating income (loss) | $(4.4) | $1.1 |
| Operating margin | (10.7)% | 5.0% |
| Net income (loss) attributable to ONE Group | $(4.6) | $0.9 |
| Basic and diluted EPS | $(0.16) | $0.03 |
| Operating cash flow | $(3.1) | $2.5 |
| Capital expenditures | $0.8 | $2.1 |
- Revenue rose 78.8%, principally due to Kona Grill contributing $20.7 million. Owned restaurant revenue was $38.6 million; management, license and incentive fees were $2.2 million, down 19.4% as COVID-19 affected international managed locations.
- Comparable restaurant sales declined 14.1% for the quarter, including a 55.9% decline in March. The increase in revenue therefore did not translate into improved profitability.
- Owned restaurant cost of sales was 26.2% of owned restaurant revenue, versus 25.0% a year earlier; owned restaurant operating expenses were 68.7%, versus 63.3%. Adjusted EBITDA was $1.2 million, compared with $2.7 million; the company’s non-GAAP measure includes specified adjustments.
- Cash and cash equivalents fell to $8.2 million from $12.3 million at year-end. Current assets were $18.2 million and current liabilities $23.3 million. Net cash used in operations was $3.1 million; cash declined $4.2 million during the quarter.
- Debt totaled $48.0 million before debt issuance costs, including a $48.0 million term loan and no revolving-facility borrowings. The company reported $10.7 million of revolver availability and $1.3 million in standby letters of credit. Operating lease liabilities were $101.9 million; total lease payments before imputed interest were $176.9 million.
Material changes and business context
- The pandemic caused reduced guest traffic, temporary restaurant closures and limited operations at 30 restaurants, which shifted to takeout and delivery. The company recorded $1.3 million of direct COVID-19 costs, mainly employee paid time off, wasted inventory and rent-related costs.
- Operating results also included $1.1 million of transaction and integration costs related to Kona Grill and $0.2 million of lease termination costs. Interest expense increased to $1.2 million from $0.3 million, reflecting the debt raised in connection with the acquisition.
- Kona Grill reported $20.7 million of revenue and $0.8 million of operating income. STK reported $17.4 million of revenue and $1.5 million of operating income. ONE Hospitality reported $2.7 million of revenue and $1.8 million of operating income; corporate operating loss was $8.5 million.
- At March 31, the company owned, operated, managed or licensed 55 venues: 20 STKs, 24 Kona Grills and 11 other hospitality venues. Total assets were $196.2 million and total equity was $29.4 million.
Outlook, liquidity, risks and contingencies
- Management said it could not reasonably predict when closed restaurants would reopen or normal dining would resume, and expected results to be negatively affected in Q2 2020. It anticipated further COVID-19 costs in Q2. No quantified earnings or revenue guidance was provided.
- Management cited cash from operations, the Goldman Sachs credit agreement and landlord construction allowances as expected liquidity sources, while noting that adverse operating performance could affect available funds. Capital projects were deferred and employee levels reduced; the company was negotiating payment deferrals or abatements with suppliers and landlords.
- At March 31, the company reported compliance with its credit-agreement covenants. The agreement included minimum liquidity of $1.5 million and financial tests. Subsequent to quarter-end, an amendment relaxed certain 2020 covenant thresholds and raised the minimum liquidity requirement to $4.0 million for the balance of 2020.
- After quarter-end, two subsidiaries received PPP loans on May 4 totaling $18.3 million: $9.8 million for STK operations and $8.5 million for Kona Grill. The loans carry 1.00% interest and are scheduled to mature April 28, 2022; forgiveness is subject to program terms and use of proceeds. These loans were not included in March 31 balances.
- As of May 10, 11 dining rooms had reopened; the company planned five additional openings on May 11 and expected to reopen more as conditions allowed. Timing depended on public-health conditions and government actions.
- Ordinary-course legal matters include lease disputes and employee-related claims. The filing gives a possible loss range of zero to $2.2 million for certain claims and states management does not expect a material adverse effect, while acknowledging litigation outcomes are uncertain.
Important facts for investors to verify
- Whether restaurant reopenings, guest traffic and comparable sales recover, and how prolonged restrictions affect revenue and margins.
- Cash burn, available revolver capacity, covenant compliance and the effect of the amended $4.0 million minimum-liquidity requirement.
- PPP loan forgiveness eligibility and compliance with permitted-use requirements, as well as repayment exposure if amounts are not forgiven.
- Landlord and supplier deferrals or abatements, the company’s substantial lease commitments, and any resulting cash-flow or impairment effects.
- Whether Kona Grill integration improves performance and whether reported adjusted EBITDA adjustments are useful alongside GAAP losses and operating cash flow.