ONE Group Hospitality, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Financial amounts below are in U.S. dollars; unless stated otherwise, millions. The company develops, operates, manages and licenses hospitality venues, led by its STK brand. At quarter-end, it had 29 venues, including 19 STKs, and provided food-and-beverage services at three hotels and one casino.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $22.1 | $20.0 | $68.5 | $59.8 |
| Operating income | $0.8 | $0.3 | $2.4 | $1.6 |
| Operating margin | 3.5% | 1.7% | 3.5% | 2.6% |
| Net income (loss) attributable to ONE Group | $0.5 | $(0.3) | $1.0 | $0.1 |
| Diluted earnings per share | $0.02 | $(0.01) | $0.03 | $0.00 |
| Adjusted EBITDA attributable to ONE Group | $2.6 | $2.0 | $7.4 | $6.3 |
| Cash from operations | — | $3.0 | $3.4 | |
| Capital expenditures | — | $3.5 | $3.2 |
- Q3 revenue grew 10.5%; nine-month revenue grew 14.5%. Owned restaurant revenue was $17.1 million for Q3, up 11.8%, and $53.7 million for nine months, up 17.0%. Management and license fees rose 7.4% in Q3 and 6.4% year to date.
- Q3 domestic same-store sales increased 9.3% per the executive summary; MD&A separately reports 7.9% for owned restaurant same-store sales. Nine-month domestic same-store sales increased 8.1% in the executive summary, while MD&A reports 8.7% for owned restaurant same-store sales. The filing does not reconcile these differing measures.
- At September 30, cash was $2.0 million, current assets $11.9 million and current liabilities $13.6 million, implying a $1.7 million working-capital deficit. Total assets were $95.4 million and total equity $13.8 million.
- Gross third-party debt was $14.0 million at quarter-end, comprising term loans, $3.75 million drawn on the revolving facility and equipment financing. Cash from operations was below capital spending. Operating lease liabilities were $57.3 million; adoption of ASC 842 added $41.9 million of right-of-use assets and $58.9 million of lease liabilities at the start of 2019.
Changes, outlook and risks
- Profitability improved year over year, which management attributed to sales growth, improved performance at existing and new locations, and labor and spending efficiencies. Q3 owned restaurant cost of sales declined to 26.1% of restaurant revenue from 26.4%; restaurant operating expenses declined to 63.0% from 63.9%. Nine-month G&A declined to 11.3% of revenue from 13.3%.
- Cash from operations declined $0.4 million year over year, primarily due to cash used to settle working-capital accounts, including accrued expenses. Investing cash outflow increased to $3.5 million. Financing provided $1.3 million, versus a $1.2 million outflow in the prior-year period.
- On October 4, 2019, after quarter-end, the company acquired substantially all Kona Grill assets, including 24 domestic restaurants and one international franchise agreement, for $25 million cash and assumed approximately $11 million in working-capital liabilities. The acquisition was financed through a new Goldman Sachs facility: a $48 million term loan and $12 million revolving facility, replacing the Bank of America agreement. The filing does not state the amount drawn under the new facilities.
- The Goldman Sachs agreement carries LIBOR margins of 5.75%–6.75% and includes minimum liquidity of $1.5 million, fixed-charge coverage and progressively tighter leverage covenants, plus capital expenditure limits. The company guaranteed the debt, secured by substantially all company and subsidiary assets. At September 30, it reported compliance with the then-existing Bank of America covenants.
- Management expected to fund operations for at least 12 months through operating cash flow, borrowings and landlord allowances, subject to operating performance. It forecast approximately $5 million of 2019 capital expenditures net of landlord incentives. It targeted domestic STK same-store sales growth of 6%–8% in 2019; reported results exceeded that range through Q3.
- Growth plans included as many as three to five STK openings annually, primarily through management or licensing, and one to two new food-and-beverage hospitality agreements annually. The company planned to integrate Kona Grill over the following 12 months. These plans depend on suitable sites, licensee interest, staffing and execution.
- Risks include consumer spending and preferences, competition, labor and food costs, restaurant openings and margins, lease commitments, liquidity and debt covenant compliance, foreign currency exposure, and litigation. Management said ordinary-course legal matters were not expected to materially affect results, but acknowledged outcomes are uncertain. Q3 included $0.3 million of lease termination expense and $0.4 million of transaction costs; nine-month results also included a $0.4 million loss on early debt extinguishment.
Investor verification priorities
- Confirm the post-quarter Kona Grill acquisition accounting, actual Goldman Sachs borrowings, resulting leverage and covenant headroom.
- Reconcile the filing’s differing Q3 and nine-month same-store sales figures and review the comparable-store definitions.
- Track operating cash flow against capital spending, working-capital needs, lease payments and the $1.5 million minimum liquidity covenant.
- Assess whether same-store sales gains and cost efficiencies persist, particularly at newer restaurants with initially lower margins.
- Review integration costs and performance of Kona Grill, planned restaurant openings, and any material developments in lease or employment litigation.