ONE Group Hospitality, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. The company develops, owns and operates upscale restaurants and provides food-and-beverage services. As of November 14, 2016, it reported 12 owned and operated and 20 managed restaurants and lounges, including 13 STKs; it also provided services at seven hotels and casinos.
Financial performance
| Metric | Q3 2016 | Q3 2015 | First 9 months 2016 | First 9 months 2015 |
|---|---|---|---|---|
| Total revenue | $18.38 million | $15.25 million | $52.00 million | $41.93 million |
| Income (loss) from continuing operations before tax | $(2.37) million | $(0.97) million | $(3.90) million | $(0.14) million |
| Net income (loss) attributable to ONE Group | $1.48 million | $(2.02) million | $(0.54) million | $5.28 million |
| Adjusted EBITDA, company-reported non-GAAP | $1.08 million | $1.14 million | $3.41 million | $3.70 million |
- Q3 revenue grew 20.5%; nine-month revenue grew 24.0%, primarily as newly opened or reopened owned STKs added sales. Comparable owned STK sales fell 9.2% in Q3 and 5.0% year to date; comparable owned and managed STK sales fell 4.2% and 2.4%, respectively.
- Owned STK segment profit was $1.35 million in Q3 and $4.41 million year to date. For the first nine months, food and beverage costs were 24.9% of owned-unit revenue versus 25.4% a year earlier; unit operating expenses were 64.5% versus 66.2%. G&A was 15.7% of total revenue versus 18.5%.
- Q3 GAAP net income included a $4.05 million income-tax benefit despite a pretax loss. The nine-month loss contrasts with 2015 net income, which included a substantial tax benefit and $3.9 million of noncash derivative income. Results are therefore affected by significant tax and noncash items.
- Cash provided by operations was $3.34 million for the nine months, compared with $0.91 million used in 2015. Investing activities used $8.33 million, mainly for restaurant construction and capital expenditures; financing provided $5.10 million. Cash declined $0.05 million to $1.79 million.
Balance sheet and liquidity
- At September 30, cash was $1.79 million; current assets were $10.53 million and current liabilities $13.07 million, a working-capital deficit of about $2.54 million. Total assets were $66.71 million.
- Total debt was $15.18 million, including $3.15 million current and $12.03 million long-term. Debt rose from $12.64 million at year-end 2015, reflecting promissory notes and equipment financing. BankUnited term loans bear 5% interest and are secured by substantially all company assets; 2016 unsecured notes bear 10% and mature in 2021.
- Operating lease commitments, net of disclosed minimum sublease income, totaled $126.49 million, including $97.06 million thereafter. The company also had approximately $1.5 million of outstanding letters of credit.
- Management expected available operating cash, landlord construction allowances, financing and the October 2016 $2.25 million Anson loan to fund anticipated needs for 12–18 months, subject to operating performance. It cautioned that financing beyond that period was not assured.
Outlook, risks and notable items
- Management expected to open as many as two to three STKs annually over the next three years, pursue at least one to two new F&B hospitality projects every 12 months, and target long-term same-store sales growth of approximately 0%–1%. These are targets, not assurances, and depend on capital, suitable sites and staffing.
- Management cited weaker private-event and à la carte dining demand, consistent with a broader hospitality-industry decline, as drivers of comparable-sales weakness. It also noted that new restaurants typically have elevated opening and operating costs and that results are seasonal and may fluctuate.
- The board authorized a review of strategic alternatives and engaged Stifel as financial adviser. There is no timetable or assurance of a transaction; the process may divert management attention, raise expenses and increase share-price volatility.
- The company reported disclosure controls and internal control over financial reporting were not effective as of September 30, 2016, and remediation was incomplete.
- Net deferred tax assets were $13.8 million, including NOL and tax-credit carryforwards. The company warned that failure to meet taxable-income projections could require a substantial valuation allowance and materially harm results.
- Ordinary-course litigation was described as not expected to have a material adverse effect. Bagatelle LA closed June 30, 2016. STK Toronto began operations September 30, 2016. The October Anson note added $2.25 million of debt at 10% and included a warrant for 340,000 shares at $2.39.
Important facts for investors to verify
- Whether comparable-sales declines persist and whether new openings generate sustainable unit-level returns.
- Whether operating cash flow can cover expansion spending, lease commitments and debt service, given low cash and negative working capital.
- The effect of the strategic review, the terms and dilution potential of lender warrants, and the company’s need for additional financing.
- Whether the company meets taxable-income projections supporting its deferred tax assets and remains compliant with debt covenants.
- Progress and testing of control remediation, and the drivers behind the substantial Q3 tax benefit and year-over-year earnings volatility.