ONE Group Hospitality, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparative periods are the same periods in 2017. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
The company develops, owns, operates, manages and licenses upscale restaurants, primarily STK, and provides food-and-beverage services to hotels, casinos and other hospitality venues. The filing describes operations across 34 venues, including owned, managed and licensed locations. It also separately says it owned, operated or managed 21 venues across seven U.S. states and seven countries; the differing counts may reflect different scope and should be verified.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $19.96 | $17.81 | $59.79 | $58.14 |
| Operating income (loss) | $0.34 | ($0.51) | $1.57 | ($2.52) |
| Net income (loss) | ($0.21) | ($1.01) | $0.22 | ($3.80) |
| Net income (loss) attributable to ONE Group | ($0.31) | ($1.17) | $0.11 | ($3.87) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $3.41 | $6.58 |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $3.24 | $4.11 |
| Adjusted EBITDA attributable to ONE Group | $2.04 | $1.44 | $6.33 | $4.52 |
Revenue increased 12.1% in Q3 and 2.8% for the first nine months. Owned restaurant sales rose 16.1% in Q3 and 9.0% year to date; management, license and incentive fees rose 8.4% and 3.4%, respectively. Owned food, beverage and other revenue declined 8.6% in Q3 and 28.5% year to date. Operating margin was 1.7% in Q3 versus negative 2.9% a year earlier, and 2.6% year to date versus negative 4.3%.
Comparable owned STK sales increased 7.7% in Q3 and 7.5% year to date. Average check rose 4.0% in Q3 and 3.0% year to date. Management estimated Hurricane Irma comparisons favorably affected comparable sales by 2.2% for Q3 and 0.7% year to date. Q3 owned restaurant operating expenses declined as a share of owned restaurant revenue, but the owned food-and-beverage segment recorded a loss of $0.11 million, compared with $0.10 million of segment profit in Q3 2017.
At September 30, 2018, cash was $0.97 million, current assets were $9.92 million, and current liabilities were $17.11 million. Total debt was approximately $11.07 million, including $3.20 million current and $7.88 million long-term, down from approximately $13.36 million at December 31, 2017. Total liabilities were $44.92 million and stockholders’ equity was $8.85 million. Cash declined $0.58 million over the first nine months to $0.97 million. Operating cash flow fell from $6.58 million to $3.41 million, which management attributed mainly to payments of accounts payable and lower accrued expenses. The company reported compliance with all debt covenants.
Material changes and unusual items
- The company adopted ASC 606 on January 1, 2018. The adoption reduced reported management, license and incentive fee revenue and net income by $0.33 million in Q3 and $0.27 million year to date compared with prior accounting guidance. Initial and upfront license fees are now generally recognized over the license term.
- 2017 owned food-and-beverage revenue included $1.8 million from a Super Bowl event that did not recur in 2018, contributing to the year-to-date decline in that revenue category.
- In March 2018, the company sold its 10% interest in One 29 Park for $0.6 million and recorded a $0.2 million gain. Its management agreement there ended September 30, 2018.
- During 2018, the company opened an owned STK in San Diego and licensed STK restaurants in Dubai and Mexico City. It received $1.22 million from the exercise of 750,000 warrants; shares outstanding were 28,293,902 on November 9, 2018, versus 27,152,101 at year-end 2017.
- The company had accrued approximately $1.5 million of future lease payments, net of expected sublease income, for abandoned restaurant development plans. Lease termination and asset write-off expense was $0.17 million year to date, compared with $0.88 million in 2017.
Outlook, risks and contingencies
Management expects to fund operations and planned restaurant openings for at least 12 months after issuance primarily from operating cash flow and landlord construction allowances. It cautioned that financing may not be available on acceptable terms, or at all; insufficient capital could delay or curtail expansion. The company had an accumulated deficit of $31.9 million and only $1.0 million of cash at quarter-end.
Management expects 2018 capital expenditures, including maintenance, of approximately $3.5 million and a similar level in 2019. Its stated growth plans include opening three to five STKs annually, primarily through management or licensing, and targeting one to two new food-and-beverage hospitality projects every 12 months. The company had entered no new food-and-beverage agreements in the first nine months of 2018. It expected company-owned same-store sales growth at a mid-single-digit pace in 2018; reported growth was above that pace through September, but included the estimated favorable Hurricane Irma comparison. Planned openings and growth are subject to site, partner, staffing, financing and execution risks.
Effective October 1, 2018, the company ceased managing three food-and-beverage venues under a terminated management agreement. It expects adoption of the new lease accounting standard to materially increase reported assets and liabilities. Management said ordinary-course litigation was not expected to have a material adverse effect. No off-balance-sheet arrangements were reported.
Controls: Management concluded that disclosure controls and internal control over financial reporting were not effective as of September 30, 2018. Remediation was ongoing and had not been completed.
Important facts for investors to verify
- Liquidity and refinancing needs: low cash, current liabilities exceeding current assets, future lease obligations and management’s operating-cash-flow assumptions.
- Whether the stated venue counts use different definitions, and the financial effect of the three management venues lost after quarter-end.
- Comparable-sales performance excluding the estimated Hurricane Irma benefit, and whether sales gains translate into sustained margins and cash generation.
- Revenue and earnings comparability after ASC 606, including the timing of deferred license-fee recognition.
- Progress and testing of the internal-control remediation plan, and the expected balance-sheet impact of lease accounting adoption.
- Execution of the opening pipeline and capital-light strategy, including the stated 2018–2019 capital expenditure plans and financing availability.