ONE Group Hospitality, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Financial statements are unaudited. The company develops and operates upscale restaurants and lounges and provides food-and-beverage services; as of August 15, 2016, it reported 13 owned and 17 managed restaurants and lounges.
Financial performance and position
- Revenue: Q2 revenue was $17.23 million, up 15.6% year over year; first-half revenue was $33.62 million, up 26.0%. Owned-unit revenue increased with the reopening of Miami and openings in Los Angeles, Chicago and Orlando. Management and incentive fees declined 8.4% in Q2 and 5.2% for the first half.
- Comparable sales: Comparable owned STK sales fell 6.6% in Q2 and 2.6% for the first half. Comparable owned or managed STK sales fell 5.2% and 1.4%, respectively. Management attributed weakness to lower private-event business and a la carte dining, alongside industry softness.
- Profitability: Net loss attributable to the company was $1.56 million in Q2, versus net income of $8.39 million in Q2 2015. For the first half, attributable net loss was $2.02 million versus net income of $7.30 million. The prior-year comparisons included a roughly $6.2 million deferred-tax valuation-allowance reversal and substantial noncash derivative income. First-half adjusted EBITDA was $2.33 million versus $2.56 million; adjusted EBITDA attributable to the company was $2.16 million versus $2.39 million.
- Operating costs: For owned STKs, food and beverage costs were 24.7% of owned-unit revenue in Q2 versus 25.3% a year earlier; unit operating expenses were 62.3% versus 63.2%. Pre-opening costs were $1.55 million in Q2 and $2.45 million for the first half.
- Cash flow: First-half operating cash flow was $3.14 million, investing cash outflow was $5.83 million, and financing cash inflow was $3.27 million. Capital spending on property and equipment was $6.02 million. Cash rose by $0.56 million to $2.40 million.
- Liquidity and debt: At June 30, cash was $2.40 million and current assets were $11.20 million versus current liabilities of $12.73 million. Total debt, including current maturities, was $12.61 million; $3.03 million was current. Bank term loans were secured by substantially all company assets. The company said it was covenant-compliant and expected to remain so through 2016.
- Equity: The February rights offering generated approximately $3.86 million net of expenses and issued 1,454,545 shares at $2.75 per share. Common shares outstanding were 24,989,560 at June 30.
Changes, outlook and risks
- Revenue growth came principally from new and reopened owned restaurants; same-store performance declined and management-fee revenue also weakened. Pre-opening expenses decreased year over year, but growth-related costs and capital needs remain material.
- Management targeted two to three new STKs annually over the next three years, at least one to two new F&B hospitality projects every 12 months, and long-term comparable-store sales growth of approximately 0% to 1% annually. These are targets, not assurances; management noted growth depends on capital, suitable locations, staffing and available opportunities.
- Management stated that anticipated operating cash flow, landlord construction allowances, rights-offering proceeds and available borrowings were expected to fund working capital, planned capital expenditures and debt service for the next 12 to 18 months, while cautioning that additional financing might be needed and may not be available on acceptable terms.
- Debt and financing developments: in June the company borrowed $1.0 million under an unsecured note bearing 10% interest, with a warrant for 100,000 shares. On August 11, after quarter-end, it borrowed an additional $3.0 million under a similar 10% unsecured note and issued a warrant for 300,000 shares. Both notes mature in 2021.
- Subsequent developments included the July opening of STK Ibiza and the August opening of a second STK in Miami; the company also began hotel food-and-beverage operations in Miami in July. The $1.1 million Ibiza license fee received in 2015 is recognized over the 10-year license term.
- Long-term operating lease commitments, net of disclosed sublease income, totaled approximately $127.23 million, including $95.90 million thereafter. These obligations are significant relative to cash and current assets.
- Management said ordinary-course litigation was not expected to have a material adverse effect and reported no material changes to the risk factors in the 2015 Form 10-K. Disclosure controls were concluded to be ineffective as of June 30; remediation of internal-control deficiencies was ongoing and not complete.
Most important facts for investors to verify
- Whether comparable-sales declines stabilize and new restaurant openings deliver sustainable unit-level returns.
- Whether operating cash generation and financing can support expansion, debt service and substantial lease obligations; monitor liquidity after the subsequent $3.0 million borrowing.
- How much of reported year-over-year earnings change reflects the unusual 2015 tax benefit and derivative income rather than recurring operations; compare GAAP results with adjusted measures.
- Progress and results of internal-control remediation, and continued compliance with debt covenants.
- The dilution and financing implications of the warrants, equity awards and future capital needs.