ONE Group Hospitality, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. The filing covers the unaudited quarter and six months ended June 30, 2022, compared with the same 2021 periods. ONE Group develops, owns, operates, manages and licenses restaurants and food-and-beverage venues, principally under STK and Kona Grill. At quarter-end it operated, managed or licensed 59 venues: 22 STKs, 24 Kona Grills and 13 other hospitality venues.
Financial performance and liquidity
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $81.1 | $70.8 | $155.3 | $121.2 |
| Operating income | $5.8 | $7.8 | $10.0 | $8.6 |
| Operating margin | 7.1% | 11.0% | 6.4% | 7.1% |
| Net income attributable to ONE Group | $4.3 | $13.8 | $8.0 | $13.9 |
| Diluted earnings per share | $0.13 | $0.41 | $0.23 | $0.41 |
| Restaurant operating profit | $12.8 | $15.3 | $25.8 | $24.6 |
| Adjusted EBITDA attributable to ONE Group | $10.4 | $12.9 | $21.1 | $19.4 |
Q2 revenue rose 14.6%; same-store sales increased 12.8% (STK +19.8%, Kona Grill +3.7%). First-half revenue rose 28.1%, with comparable restaurant sales up 26.3%. Management cited sales initiatives and increased management and license fees, including contributions from venues opened in 2021.
Owned restaurant costs pressured margins. In Q2, restaurant cost of sales was 25.8% of owned restaurant revenue versus 25.3% a year earlier; operating expenses were 57.6% versus 52.1%. The company cited commodity inflation, wage increases and higher Kona Grill product costs. Restaurant operating profit margin fell to 16.6% from 22.6% in Q2 and to 17.5% from 21.0% for the first half. Q2 general and administrative expense increased to $7.3 million from $6.1 million.
Q2 and first-half 2021 net income benefited from an $8.6 million CARES Act loan-forgiveness gain; there was no comparable gain in 2022. This makes reported year-over-year net income comparisons less representative of operating trends.
For the six months, operating cash flow was $14.9 million, down from $19.8 million. Capital expenditures were $12.1 million, primarily for new restaurants and existing locations; cash increased by $0.8 million to $24.4 million. At June 30, gross long-term debt was $24.5 million, with $10.6 million available under the revolving facility, subject to conditions. The company had $1.4 million in standby letters of credit. Debt matures in August 2026; the company reported compliance with its credit covenants. Operating lease liabilities totaled $110.4 million.
Changes, outlook and risks
- Expansion: Management intended to open at least nine new venues in 2022. Under development were two company-owned STKs, two company-owned Kona Grills and one managed STK. The company also planned to test three licensed Texas takeout-and-delivery units with REEF Kitchens. It said it planned three to five Kona Grill openings annually for the foreseeable future.
- Accounting estimate: Effective April 1, the Kona Grill trade name was changed from a finite-lived to an indefinite-lived asset, based on brand performance, investment and expansion plans. The change is expected to reduce annual amortization expense and increase annual net income by about $0.9 million, or earnings per share by approximately $0.03. The asset is now subject to annual impairment testing, or interim testing if indicators arise.
- COVID-19 and operating risks: All restaurants were open for in-person dining, but management noted operations remain exposed to pandemic developments and government actions. Other cited risks include commodity and labor costs, staffing and supply availability, delays or cost increases in new openings, competition and economic conditions. One licensee permanently closed an STK in Mexico City in Q1 due to COVID-19.
- Controls and contingencies: Disclosure controls were reported ineffective as of June 30 because a material weakness in internal control over financial reporting remained. Management said the journal-entry review weakness had been remediated, but other deficiencies were still being assessed and tested. The company reported ordinary-course litigation, including lease and employee matters, and said it did not expect the outcomes to have a material adverse effect; it cautioned that litigation outcomes are uncertain.
- Liquidity outlook: Management expected cash from operations and landlord construction allowances to fund operations and planned openings for at least 12 months, subject to operating performance. It also identified borrowing on the revolver or equity issuance as potential funding sources.
Important facts for investors to verify
- Whether restaurant-level margins recover as sales grow, given higher wages, commodity costs and Kona Grill operating costs.
- Progress and spending on the 2022 opening plan, including construction timelines, landlord contributions and expected returns on new locations.
- Operating cash generation relative to capital expenditures, lease obligations and the remaining debt balance; confirm continued covenant compliance and revolver availability.
- Whether the remaining internal-control deficiencies are remediated and controls operate effectively over a sufficient testing period.
- Assumptions and impairment-test results for the Kona Grill trade name, as well as the effect of the revised useful-life estimate on reported earnings.