Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
⌧
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2021
OR
◻
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-37379
THE ONE GROUP HOSPITALITY, INC.
(Exact name of registrant as specified in its charter)
Delaware
14-1961545
(State or other jurisdiction of incorporation ororganization)
(I.R.S. Employer Identification No.)
1624 Market Street, Suite 311, Denver, Colorado
80202
(Address of principal executive offices)
Zip Code
646-624-2400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
STKS
Nasdaq
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ◻
Accelerated filer ◻
Non-accelerated filer ⌧
Smaller reporting company ⌧
Emerging growth company ◻
If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ◻ No ⌧
Number of shares of common stock outstanding as of April 30, 2021: 30,164,987
TABLE OF CONTENTS
Page
PART I – Financial Information
Item 1. Financial Statements
3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
27
Item 4. Controls and Procedures
PART II – Other Information
Item 1. Legal Proceedings
Item 1A Risk Factors
28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Signatures
29
2
PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
March 31,
December 31,
2021
2020
ASSETS
(Unaudited)
Current assets:
Cash and cash equivalents
$
28,435
24,385
Accounts receivable
4,628
5,777
Inventory
2,490
Other current assets
2,157
1,348
Due from related parties
376
Total current assets
38,086
34,376
Property and equipment, net
67,924
67,344
Operating lease right-of-use assets
79,830
80,960
Deferred tax assets, net
12,877
13,226
Intangibles, net
16,110
16,313
Other assets
2,595
2,446
Security deposits
901
904
Total assets
218,323
215,569
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
7,997
7,404
Accrued expenses
18,586
15,684
Deferred license revenue
208
207
Deferred gift card revenue and other
1,682
1,990
Current portion of operating lease liabilities
4,971
4,817
Current portion of CARES Act Loans
16,247
10,057
Current portion of long-term debt
548
588
Total current liabilities
50,239
40,747
Deferred license revenue, long-term
900
953
Operating lease liabilities, net of current portion
97,373
98,569
CARES Act Loans, net of current portion
2,067
8,257
Long-term debt, net of current portion
45,050
45,064
Total liabilities
195,629
193,590
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.0001 par value, 75,000,000 shares authorized; 29,627,482 and 29,083,183 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively
Preferred stock, $0.0001 par value, 10,000,000 shares authorized; no shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively
—
Additional paid-in capital
47,522
46,538
Accumulated deficit
(20,646)
(20,716)
Accumulated other comprehensive loss
(2,664)
(2,646)
Total stockholders’ equity
24,215
23,179
Noncontrolling interests
(1,521)
(1,200)
Total equity
22,694
21,979
Total liabilities and equity
See notes to the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited, in thousands, except loss per share and related share information)
For the three months ended March 31,
Revenues:
Owned restaurant net revenue
49,168
38,557
Management, license and incentive fee revenue
1,314
2,162
Total revenues
50,482
40,719
Cost and expenses:
Owned operating expenses:
Owned restaurant cost of sales
12,001
10,113
Owned restaurant operating expenses
27,906
26,499
Total owned operating expenses
39,907
36,612
General and administrative (including stock-based compensation of $1,022, and $338 for the three months ended March 31, 2021 and 2020 respectively)
5,174
3,397
Depreciation and amortization
2,699
2,440
COVID-19 related expenses
1,557
Transaction costs
1,095
Lease termination expenses
187
179
Pre-opening expenses
101
Other income, net
(1)
Total costs and expenses
49,625
45,070
Operating income (loss)
857
(4,351)
Other expenses, net:
Interest expense, net of interest income
1,246
1,175
Total other expenses, net
Loss before benefit for income taxes
(389)
(5,526)
Benefit for income taxes
(329)
(653)
Net loss
(60)
(4,873)
Less: net loss attributable to noncontrolling interest
(130)
(274)
Net income (loss) attributable to The One Group Hospitality, Inc.
70
(4,599)
Currency translation loss
(18)
(44)
Comprehensive income (loss) attributable to The ONE Group Hospitality, Inc.
52
(4,643)
Net income (loss) attributable to The ONE Group Hospitality, Inc. per share:
Basic net income (loss) per share
(0.16)
Diluted net income (loss) per share
Shares used in computing basic income (loss) per share
29,168,576
28,636,325
Shares used in computing diluted income (loss) per share
32,031,479
4
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited, in thousands, except share information)
Accumulated
Additional
other
Common stock
paid-in
comprehensive
Stockholders’
Noncontrolling
Shares
Par value
capital
deficit
loss
equity
interests
Total
Balance at December 31, 2020
29,083,183
Stock-based compensation
25,643
1,022
Exercise of warrants
450,971
Issuance of common shares, net of tax withholding
67,685
(154)
Purchase of noncontrolling interest
116
(191)
(75)
Loss on foreign currency translation, net
Net income (loss)
Balance at March 31, 2021
29,627,482
Balance at December 31, 2019
28,603,829
44,853
(7,891)
(2,651)
34,314
(402)
33,912
69,327
338
Exercise of stock options
18,000
38
116,644
Balance at March 31, 2020
28,807,800
45,229
(12,490)
(2,695)
30,047
(676)
29,371
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Operating activities:
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Amortization of debt issuance costs
141
108
Deferred taxes
349
(125)
Changes in operating assets and liabilities:
1,148
5,092
568
(809)
(958)
(35)
(32)
(164)
(807)
392
(859)
2,537
(3,560)
Operating lease liabilities and right-of-use assets
88
140
Deferred gift card and license revenue
(360)
(540)
Net cash provided by (used in) operating activities
6,986
(3,103)
Investing activities:
Purchase of property and equipment
(2,615)
(791)
Net cash used in investing activities
Financing activities:
Repayments of long-term debt
(40)
(216)
Debt issuance costs
(48)
Tax-withholding obligation on stock based compensation
Purchase of non-controlling interests
Net cash used in financing activities
(304)
(226)
Effect of exchange rate changes on cash
(17)
(64)
Net increase (decrease) in cash and cash equivalents
4,050
(4,184)
Cash and cash equivalents, beginning of period
12,344
Cash and cash equivalents, end of period
8,160
Supplemental disclosure of cash flow data:
Interest paid
704
Income taxes paid
85
6
Notes to Condensed Consolidated Financial Statements
Note 1 – Summary of Business and Significant Accounting Policies
Summary of Business
The ONE Group Hospitality, Inc. and its subsidiaries (collectively, the “Company”) is a global hospitality company that develops, owns and operates, manages and licenses upscale and polished casual, high-energy restaurants and lounges and provides turn-key food and beverage (“F&B”) services for hospitality venues including hotels, casinos and other high-end locations. Turn-key F&B services are food and beverage services that can be scaled, customized and implemented by the Company for the client at a particular hospitality venue. The Company’s primary restaurant brands are STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse, and Kona Grill, a polished casual bar-centric grill concept featuring American favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere.
As of March 31, 2021 the Company owned, operated, managed or licensed 54 venues, including 20 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and 10 F&B venues in five hotels and casinos in the United States and Europe. In January 2021, a managed STK restaurant in Scottsdale, Arizona was opened. For those restaurants that are managed or licensed, the Company generates management fees based on top-line revenues and incentive fee revenue based on a percentage of the location’s revenues and profits.
COVID-19
The COVID-19 pandemic has significantly impacted the Company’s business due to state and local government mandates, including suspension of in-person dining, reduced seating capacity and social distancing. Beginning in mid-March 2020, the Company experienced a significant reduction in guest traffic due to government mandated restrictions resulting in the temporary closure of several restaurants and the shift in operations to provide only take-out and delivery service. Starting in May 2020, state and local governments began easing restrictions on stay-at-home orders; however, certain states reimposed restrictions as COVID-19 cases increased during the fall of 2020. In February 2021, many jurisdictions began easing restrictions once again. Currently, all domestic restaurants are open for in-person dining with seating capacity restrictions in major metropolitan markets. The Company has taken significant steps to adapt its business to increase sales while providing a safe environment for guests and employees, which resulted in a significant increase in revenues during the first quarter of 2021 compared to the fourth quarter of 2020.
Given the ongoing uncertainty surrounding the effects of the COVID-19 pandemic, the Company cannot reasonably predict when our restaurants will be able to return to normal dining room operations. The Company’s results of operations could be materially and negatively affected by COVID-19 in 2021. The Company’s resumption of normal dining operations is subject to events beyond our control, including the effectiveness of governmental efforts to halt the spread of COVID-19.
Basis of Presentation
The accompanying condensed consolidated balance sheet as of December 31, 2020, which has been derived from audited financial statements, and the accompanying unaudited interim condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States (“GAAP”). Certain information and footnote disclosures normally included in annual audited financial statements have been omitted pursuant to SEC rules and regulations. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
In the Company’s opinion, the accompanying unaudited interim financial statements reflect all adjustments (consisting only of normal recurring accruals and adjustments) necessary for a fair presentation of the results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of the results expected for the full year. Additionally, the Company believes that the disclosures are sufficient for interim financial reporting purposes.
Prior Period Reclassifications
Certain reclassifications of the 2020 amounts in the segment reporting footnote have been made to conform to the current year presentation.
7
Recent Accounting Pronouncements
In June 2020, the American Institute of Certified Public Accountants in conjunction with the Financial Accounting Standards Board (“FASB”) developed Technical Question and Answer (“TQA”) 3200.18, “Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program”, which is intended to provide clarification on how to account for loans received from the Paycheck Protection Program (“PPP”). TQA 3200.18 states that an entity may account for PPP loans under ASC 470, “Debt” or, if the entity is expected to meet PPP eligibility criteria and the PPP loan is expected to be forgiven, the entity may account for the loans under IAS 20, “Accounting for Government Grants and Disclosure of Government Assistance”. Although the Company anticipates forgiveness of the entire amount of the CARES Act Loans, no assurances can be provided that the Company will obtain forgiveness of the CARES Act Loans in whole or in part. Therefore, the Company has elected to account for PPP loan proceeds under ASC 470 as allowed by TQA 3200.18.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides temporary optional expedients and exceptions to ease financial reporting burdens related to applying current GAAP to modifications of contracts, hedging relationships and other transactions in connection with the transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. In January 2021, the FASB issued ASU 2021-01 to clarify that certain optional expedients and exceptions apply to modifications of derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, computing variation margin settlements, and for calculating price alignment interest. ASU 2020-04 is effective beginning on March 12, 2020 and may be applied prospectively to such transactions through December 31, 2022. ASU 2021-01 is effective beginning on January 7, 2021 and may be applied retrospectively or prospectively to such transactions through December 31, 2022. The Company is evaluating the impact of the adoption of ASU 2020-04 and ASU 2021-01 on its financial statements.
In December 2019, FASB issued Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” (“ASU 2019-12”) which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Accounting Standard Codification Topic 740, Income Taxes, and it clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for annual and interim periods beginning after December 15, 2020. We adopted ASU No. 2019-12 on January 1, 2021 and it did not have a significant impact to the consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to estimate credit losses. ASU 2016-13 is effective for smaller reporting companies for fiscal years beginning after December 15, 2022. The Company is evaluating the impact of the adoption of ASU 2016-13 on its financial statements.
Note 2 – Property and Equipment, net
Property and equipment, net consist of the following (in thousands):
Furniture, fixtures and equipment
22,996
22,328
Leasehold improvements
71,960
71,654
Less: accumulated depreciation
(33,009)
(30,948)
Subtotal
61,947
63,034
Construction in progress
3,961
2,294
Restaurant smallwares
2,016
Depreciation related to property and equipment was $2.5 million and $2.2 million for the three months ended March 31, 2021 and 2020, respectively. The Company does not depreciate construction in progress, assets not yet put into service or restaurant smallwares.
8
Note 3 – Intangibles, net
Intangibles, net consists of the following (in thousands):
Kona Grill tradename
17,400
Indefinite-lived intangible assets
15
Less: accumulated amortization
(1,305)
(1,087)
Total intangibles, net
The Kona Grill trade name is amortized using the straight-line method over its estimated useful life of 20 years. Amortization expense was $0.2 million for the three months ending March 31, 2021 and 2020. The Company’s estimated aggregate amortization expense for each of the five succeeding fiscal years is approximately $0.9 million annually.
Note 4 – Accrued Expenses
Accrued expenses consist of the following (in thousands):
Payroll and related (1)
6,852
4,860
Amounts due to landlords
1,541
1,883
Accrued lease exit costs (2)
4,144
VAT and sales taxes
1,610
1,119
Legal, professional and other services
807
462
Interest
553
474
Insurance
206
330
Other
2,873
2,412
Note 5 – Long-Term Debt and CARES Act Loans
Long-term debt consists of the following (in thousands):
Term loan agreements
47,280
47,400
Revolving credit facility
Equipment financing agreements
68
Total long-term debt
47,348
47,508
Less: current portion of long-term debt
(548)
(588)
Less: debt issuance costs
(1,750)
(1,856)
Total long-term debt, net of current portion
Interest expense for all the Company’s debt arrangements, excluding the amortization of debt issuance costs and other discounts and fees, was $1.1 million and $1.1 million for the three months ended March 31, 2021 and 2020, respectively.
As of March 31, 2021, the Company had $1.3 million in standby letters of credit outstanding for certain restaurants and $10.7 million available in its revolving credit facility, subject to certain conditions.
9
Credit and Guaranty Agreement
On October 4, 2019, in conjunction with the acquisition of Kona Grill, the Company entered into a credit and guaranty agreement with Goldman Sachs Bank USA (“Credit Agreement”). The Credit Agreement provides for a secured revolving credit facility of $12.0 million and a $48.0 million term loan. The term loan is payable in quarterly installments, with the final payment due in October 2024. The revolving credit facility also matures in October 2024.
On May 4, 2020, Goldman Sachs Bank USA (“GSB”), as administrative agent, collateral agent and lead arranger under the Credit Agreement, (1) consented to the CARES Act Loans described below and (2) agreed that the amount of the CARES Act Loans will not be counted toward the permitted amount of Consolidated Total Debt, as defined under the Credit Agreement, to the extent the amounts are retained as cash during the term of the CARES Act Loans in a segregated deposit account or used for purposes that are forgivable under the CARES Act, provided that the proceeds of the CARES Act Loans must be used only for “allowable uses” under the CARES Act (with at least 75% of the utilized proceeds to be used for purposes that result in the CARES Act Loans being eligible for forgiveness) or used for the repayment of the CARES Act Loans.
On May 8, 2020 and August 10, 2020, GSB and the Company and certain of its subsidiaries amended the Credit Agreement. A summary of the financial covenants under the Credit Agreement, as amended, is as follows:
The Company’s ability to borrow under its revolving credit facility is dependent on several factors. The Company’s total borrowings cannot exceed a leverage incurrence multiple of (i) 2.25 to 1.00 as of the fiscal quarters ending September 30, 2020 and December 31, 2020, (ii) 2.00 to 1.00 as of the fiscal quarter ending March 31, 2021, (iii) 1.75 to 1.00 as of the fiscal quarter ending June 30, 2021, (iv) 1.70 to 1.00 as of the fiscal quarter ending September 30, 2021, (v) 1.65 to 1.00 as of the fiscal quarter ending December 31, 2021, and (vi) 1.50 to 1.00 as of the end of any fiscal quarter thereafter. In addition, after giving effect to any new borrowings under the revolving credit facility, the Company’s cash and cash equivalents cannot exceed $4,000,000.
The Credit Agreement has several borrowing and interest rate options, including the following: (a) a LIBOR rate (or a comparable successor rate) subject to a 1.75% floor; or (b) a base rate equal to the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50%, (iii) the LIBOR rate for a one-month period plus 1.00%, or (iv) 4.75%. Loans under the Credit Agreement bear interest at a rate per annum using the applicable indices plus a varying interest rate margin of between 5.75% and 6.75% (for LIBOR rate loans) and 4.75% and 5.75% (for base rate loans). The Company’s weighted average interest rate on the borrowings under the Credit Agreement as of March 31, 2021 and December 31, 2020 was 8.50% and 8.50%, respectively.
The Credit Agreement contains customary representations, warranties and conditions to borrowing including customary affirmative and negative covenants, which include covenants that limit or restrict the Company’s ability to incur indebtedness and other obligations, grant liens to secure obligations, make investments, merge or consolidate, alter the organizational structure of the Company and its subsidiaries, and dispose of assets outside the ordinary course of business, in each case subject to customary exceptions for credit facilities of this size and type.
The Company and certain operating subsidiaries of the Company guarantee the obligations under the Credit Agreement, which also are secured by liens on substantially all of the assets of the Company and its subsidiaries.
The Company has incurred approximately $2.5 million of debt issuance costs related to the Credit Agreement, which were capitalized and are recorded as a direct deduction to the long-term debt, net of current portion, on the condensed consolidated balance sheets. As of March 31, 2021, the Company was in compliance with the covenants required by the Credit Agreement.
10
Equipment Financing Agreements
On June 5, 2015 and August 16, 2016, the Company entered into financing agreements with Sterling National Bank for $1.0 million and $0.7 million, respectively, to purchase equipment for the STKs in Orlando, Chicago, San Diego, and Denver. Each of these financing agreements has five-year terms and bear interest at a rate of 5% per annum, payable in equal monthly installments.
CARES Act Loans
On May 4, 2020, two subsidiaries of the Company entered into promissory notes (“CARES Act Loans”) with BBVA USA under the Paycheck Protection Program (“PPP”) created by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Repayment of the CARES Act Loans is guaranteed by the U.S. Small Business Administration (“SBA”). The ONE Group, LLC received a loan of $9.8 million related to the operations of STK restaurants, and Kona Grill Acquisition, LLC received a loan of $8.5 million related to the operation of Kona Grill restaurants.
The CARES Act Loans are scheduled to mature on April 28, 2022 and have a 1.00% interest rate and are subject to the terms and conditions applicable to PPP loans. Among other terms, BBVA USA may declare a default of the CARES Act Loans if the SBA disputes the validity of the guaranty of indebtedness, if a material adverse change occurs in the Company’s financial condition, or if BBVA USA believes the prospect of repayment of the CARES Act Loans or performance of obligations under the promissory notes is impaired. On an event of default, BBVA USA may declare principal and unpaid interest immediately due and payable, and it may charge default interest of 10%.
The CARES Act Loans are eligible for forgiveness if the proceeds are used for qualified purposes within a specified period and if at least 60% is spent on payroll costs. The Company has used all of the proceeds from the CARES Act Loans for qualified purposes in accordance with the CARES Act and SBA regulations, and these funds have supported the re-opening of in person dining and the return of approximately 3,000 furloughed employees to work. The Company applied for forgiveness of the CARES Act Loans in February 2021. The Company anticipates forgiveness of the entire amount of CARES Act Loans; however, no assurance can be provided that the Company will obtain forgiveness of the CARES Act Loans in whole or in part. Therefore, the Company has elected to classify the entire principal amount of the CARES Act Loans as debt. If repayment is required, principal and interest payments are expected to be repaid beginning in August 2021, ten months after the end of the covered period which was from April 2020 to October 2020.
Note 6 – Fair Value of Financial Instruments
Cash and cash equivalents, accounts receivable, inventory, accounts payable and accrued expenses are carried at cost, which approximates fair value due to their short maturities. Long-lived assets are measured and disclosed at fair value on a nonrecurring basis if an impairment is identified. There were no long-lived assets measured at fair value as of March 31, 2021.
The Company’s long-term debt, including the current portion, is carried at cost on the condensed consolidated balance sheets. Fair value of long-term debt, including the current portion, is estimated based on Level 2 inputs, except the amount outstanding on the revolving credit facility for which the carrying value approximates fair value. Fair value is determined by discounting future cash flows using interest rates available for issuers with similar terms and maturities.
Note 7 – Bagatelle
As of March 31, 2021 and December 31, 2020, the Company owned interests in the following companies, which directly or indirectly operate a restaurant:
Bagatelle Investors is a holding company that has an interest in Bagatelle NY. The Company records its retained interests in Bagatelle Investors and Bagatelle NY as investments as the Company has determined that it does not have the ability to exercise significant influence over its investees, Bagatelle Investors and Bagatelle NY. As of March 31, 2021 and December 31, 2020, the Company has zero carrying value in these investments.
11
Net receivables from the Bagatelle entities included in due from related parties, net were $0.4 million as of March 31, 2021 and December 31, 2020. These receivables represent the Company’s maximum exposure to loss. Upon expiration of the lease in November 2020, the Company exited its contract with Bagatelle.
Note 8 – Income taxes
Income taxes for the three months ended March 31, 2021 are recorded at the Company’s estimated annual effective income tax rate, subject to adjustments for discrete events, should they occur. The Company’s effective income tax rate was 84.4% for the three months ended March 31, 2021 compared to 11.8% for the three months ended March 31, 2020. The Company’s annualized effective tax rate is estimated at approximately 20.8% for 2021. The Company’s projected annual effective tax rate differs from the statutory U.S. tax rate of 21% primarily due to the following: (i) tax credits for FICA taxes on certain employees’ tips (ii) taxes owed in foreign jurisdictions such as the United Kingdom, Canada and Italy; (iii) taxes owed in state and local jurisdictions; and (iv) the tax effect of non-deductible compensation. Income tax benefit recorded for the three months ended March 31, 2021 also included the discrete period tax benefits resulting from the vesting of restricted stock units.
The CARES Act includes provisions allowing for the carryback of net operating losses generated for specific periods and technical amendments regarding the expensing of qualified improvement property. The CARES Act also allows for the deferral of the employer-paid portion of social security taxes, which the Company has elected to defer.
The Company is subject to income taxes in the U.S. federal jurisdiction, and the various states and local jurisdictions in which it operates. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In the normal course of business, the Company is subject to examination by the federal, state, local and foreign taxing authorities.
Note 9 – Revenue from contracts with customers
The following table provides information about contract receivables and liabilities from contracts with customers, which include deferred license revenue, deferred gift card revenue and the Konavore rewards program (in thousands):
Receivables (1)
125
Deferred license revenue (2)
1,108
1,160
Deferred gift card and gift certificate revenue (3)
1,429
1,945
Konavore rewards program (4)
110
102
Significant changes in deferred license revenue and deferred gift card revenue for the three months ended March 31, 2021 and 2020 are as follows (in thousands):
Revenue recognized from deferred license revenue
Revenue recognized from deferred gift card revenue
587
746
The estimated deferred license revenue to be recognized in the future related to performance obligations that are unsatisfied as of March 31, 2021 were as follows for each year ending (in thousands):
2021, nine months remaining
155
2022
180
2023
169
2024
134
2025
133
Thereafter
337
Total future estimated deferred license revenue
12
Note 10 – Leases
The components of lease expense for the period were as follows (in thousands):
Lease cost
Operating lease cost
3,298
3,297
Variable lease cost
767
1,156
Short-term lease cost
138
128
Sublease income
(135)
Total lease cost
4,203
4,446
Weighted average remaining lease term – operating leases
12 years
13 years
Weighted average discount rate – operating leases
8.09
%
8.49
Due to the negative effects of COVID-19, the Company implemented measures to reduce its costs, including negotiations with landlords regarding rent concessions. The Company is in ongoing discussions with landlords regarding rent obligations, including deferrals, abatements, and/or restructuring of rent. As the rent concessions received and currently being contemplated do not result in a significant increase in cash payments, the Company has elected to account for these concessions as a variable lease payment in accordance with ASC Topic 842. The Company’s right-of-use assets and operating lease liabilities have not been remeasured for lease concessions received. Variable lease cost is comprised of percentage rent and common area maintenance, offset by rent concessions received as a result of COVID-19.
Supplemental cash flow information related to leases for the period was as follows (in thousands):
Cash paid for amounts included in the measurement of operating lease liabilities
2,514
3,161
Right-of-use assets obtained in exchange for operating lease obligations
288
As of March 31, 2021, maturities of the Company’s operating lease liabilities are as follows (in thousands):
10,066
13,232
13,531
12,927
11,893
112,866
Total lease payments
174,515
Less: imputed interest
(72,171)
Present value of operating lease liabilities
102,344
For the nine months remaining in 2021, the Company’s operating lease liabilities does not include future rent abatements that have been or will be negotiated with landlords.
13
Note 11 – Earnings per share
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period and income available to common stockholders. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period plus the dilutive effect of all potential shares of common stock including common stock issuable pursuant to stock options, warrants, and restricted stock units.
For the three months ended March 31, 2021 and 2020, the income (loss) per share was calculated as follows (in thousands, except loss per share and related share data):
Three months ended March 31,
Basic weighted average shares outstanding
Dilutive effect of stock options, warrants and restricted share units
2,862,903
Diluted weighted average shares outstanding
Net income (loss) available to common stockholders per share - Basic
Net income (loss) available to common stockholders per share - Diluted
For the three months ended March 31, 2021 and 2020, 0.3 million and 2.1 million stock options, warrants and restricted share units were determined to be anti-dilutive and were therefore excluded from the calculation of diluted earnings per share, respectively.
Note 12 – Stock-Based Compensation and Warrants
As of March 31, 2021, the Company had 704,668 remaining shares available for issuance under the 2019 Equity Incentive Plan (“2019 Equity Plan”).
Stock-based compensation cost for the three months ended March 31, 2021 and 2020 was $1.0 million and $0.3 million, respectively. Stock-based compensation is included in general and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss). Included in stock-based compensation cost was $0.1 million and $0.1 million of stock granted to directors for the three months ended March 31, 2021 and 2020, respectively. Such grants were awarded consistent with the Board of Director’s compensation practices. In addition, stock-based compensation expense for the three months ended March 31, 2021 includes $0.3 million of compensation costs for the vesting of market condition based options and RSUs.
Stock Option Activity
Stock options in the table below includes both time based and market condition based awards. Changes in stock options during the three months ended March 31, 2021 were as follows:
Weighted
average
Intrinsic
average exercise
remaining
value
price
contractual life
(thousands)
Outstanding at December 31, 2020
2,286,410
3.29
4.97 years
1,879
Exercisable at December 31, 2020
1,443,675
3.57
4.68 years
1,112
Granted
Exercised
Cancelled, expired or forfeited
Outstanding at March 31, 2021
4.72 years
9,590
Exercisable at March 31, 2021
2,045,743
3.41
4.54 years
8,323
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A summary of the status of the Company’s non-vested stock options as of December 31, 2020 and March 31, 2021 and changes during the three months then ended, is presented below:
Weighted average
grant date fair value
Non-vested stock options at December 31, 2020
263,333
0.99
Vested
(22,667)
1.55
Non-vested stock options at March 31, 2021
240,666
0.94
The fair value of options that vested in the three months ended March 31, 2021 was less than $0.1 million. As of March 31, 2021, there is $0.1 million of total unrecognized compensation cost related to non-vested awards, which will be recognized over a weighted-average period of 1.4 years.
Restricted Stock Unit Activity
The Company issues restricted stock units (“RSUs”) under the 2019 Equity Plan. The fair value of these RSUs is determined based upon the closing fair market value of the Company’s common stock on the grant date.
A summary of the status of RSUs and changes during the three months ended March 31, 2021 is presented below:
Non-vested RSUs at December 31, 2020
1,871,592
1.68
421,381
5.09
(910,540)
1.75
(12,000)
2.50
Non-vested RSUs at March 31, 2021
1,370,433
2.73
As of March 31, 2021, the Company had approximately $3.2 million of total unrecognized compensation costs related to RSUs, which will be recognized over a weighted average period of 2.4 years.
Warrants
As of December 31, 2020, there were 865,000 warrants available to be exercised at exercise prices ranging from $1.63 to $2.61. During the first quarter of 2021, the Company issued 450,971 shares in connection with the cashless exercise by Anson Investments Master Fund LP of 640,000 warrants. As of March 31, 2021, there were 225,000 warrants available to be exercised. In April 2021, the Company issued 100,000 shares to 22235570 Ontario Limited in connection with its exercise of a warrant for aggregate consideration of $261,000.
Note 13 – Segment Reporting
In the fourth quarter of 2019, in conjunction with the Kona Grill acquisition, the Company implemented certain organizational changes, including the reorganization of the Company’s internal reporting structure to better facilitate its strategy for growth and operational efficiency. As a result of these organizational changes, the Company has identified its reportable operating segments as follows:
The Company’s Chief Executive Officer, who is the Company’s Chief Operating Decision Maker, manages the business and allocates resources via a combination of restaurant sales reports and operating segment profit information, defined as revenues less operating expenses, related to the Company’s four operating segments.
Certain financial information relating to the three months ended March 31, 2021 and 2020 for each segment is provided below (in thousands). Prior year amounts have been revised to conform to the current year segment presentation.
STK
Kona Grill
ONE Hospitality
Corporate
For the three months ended March 31, 2021
24,691
25,577
33
181
5,596
2,450
(321)
(6,868)
Capital asset additions
1,476
529
595
2,615
As of March 31, 2021
82,198
97,631
4,901
33,593
For the three months ended March 31, 2020
19,051
20,657
924
87
2,291
(339)
73
(6,376)
335
410
791
As of December 31, 2020
81,431
96,262
5,484
32,392
Note 14 – Geographic Information
Certain financial information by geographic location is provided below (in thousands).
Domestic revenues
50,288
39,977
International revenues
194
742
Domestic long-lived assets
179,972
180,935
International long-lived assets
266
258
Total long-lived assets
180,238
181,193
16
Note 15 – Commitments and Contingencies
The Company is party to claims in lawsuits incidental to its business, including lease disputes and employee-related matters. In the opinion of management, the ultimate outcome of such matters and judgments, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position or results of operations.
This Quarterly Report on Form 10-Q and certain information incorporated herein by reference contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). Forward-looking statements speak only as of the date thereof and involve risks and uncertainties that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. These risk and uncertainties include the risk factors discussed under Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. A number of factors could cause actual results or outcomes to differ materially from those indicated by such forward-looking statements, including but not limited to: (1) the effects of the COVID-19 pandemic on our business, including government restrictions on our ability to operate our restaurants and changes in customer behavior, and our ability to re-hire employees; (2) our ability to open new restaurants and food and beverage locations in current and additional markets, grow and manage growth profitably, maintain relationships with suppliers and obtain adequate supply of products and retain our key employees; (3) factors beyond our control that affect the number and timing of new restaurant openings, including weather conditions and factors under the control of landlords, contractors and regulatory and/or licensing authorities; (4) our ability to successfully improve performance and cost, realize the benefits of our marketing efforts and achieve improved results as we focus on developing new management and license deals; (5) changes in applicable laws or regulations; (6) the possibility that The ONE Group may be adversely affected by other economic, business, and/or competitive factors; and (7) other risks and uncertainties. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “ongoing,” “could,” “estimates,” “expects,” “intends,” “may,” “appears,” “suggests,” “future,” “likely,” “goal,” “plans,” “potential,” “projects,” “predicts,” “should,” “targets,” “would,” “will” and similar expressions that convey the uncertainty of future events or outcomes. You should not place undue reliance on any forward-looking statement. We do not undertake any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required under applicable law.
General
This information should be read in conjunction with the condensed consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
As used in this report, the terms “Company,” “we,” “our,” or “us,” refer to The ONE Group Hospitality, Inc. and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.
Business Summary
We are a global hospitality company that develops, owns and operates, manages and licenses upscale and polished casual, high-energy restaurants and lounges and provides turn-key food and beverage (“F&B”) services for hospitality venues including hotels, casinos and other high-end locations. Turn-key F&B services are food and beverage services that can be scaled, customized and implemented by us for the client at a particular hospitality venue. Our vision is to be a global market leader in the hospitality industry by melding high-quality service, ambiance, high-energy and cuisine into one great experience that we refer to as “Vibe Dining”. We design all our restaurants, lounges and F&B services to create a social dining and high-energy entertainment experience within a destination location. We believe that this design and operating philosophy separates us from more traditional restaurant and foodservice competitors.
Our primary restaurant brands are STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse, and Kona Grill, a polished casual bar-centric grill concept featuring American
favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere. Our F&B hospitality management services include developing, managing and operating restaurants, bars, rooftop lounges, pools, banqueting and catering facilities, private dining rooms, room service and mini bars tailored to the specific needs of high-end hotels and casinos. Our F&B hospitality clients operate global hospitality brands such as the W Hotel, Hippodrome Casino, and ME Hotels.
We opened our first restaurant in January 2004 in New York, New York, and, as of March 31, 2021, we owned, operated, managed or licensed 54 venues including 20 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and 10 F&B venues in five hotels and casinos in the United States and Europe. In January 2021, we opened a managed STK restaurant in Scottsdale, Arizona. For those restaurants and venues that are managed or licensed, we generate management fees based on top-line revenues and incentive fee revenue based on a percentage of the location’s revenues and net profits.
The table below reflects our venues by restaurant brand and geographic location as of March 31, 2021:
Venues
STK(1)
ONE Hospitality(2)
Domestic
Owned
24
36
Managed
Licensed
1
Total domestic
39
International
Total international
Total venues
20
54
Our Growth Strategies and Outlook
Our growth model is primarily driven by the following:
We intend to open thirteen new venues between 2021 and 2022. There are currently three STKs and four managed F&B restaurants under construction. As our footprint increases, we expect to benefit by leveraging system-wide operating efficiencies and best practices through the management of our general and administrative expenses as a percentage of overall revenue.
Given the ongoing uncertainty surrounding the effects of the COVID-19 pandemic, we cannot reasonably predict when our restaurants will be able to return to normal dining room operations. Our results of operations could be materially and negatively
18
affected by COVID-19 in 2021. Our resumption of normal dining operations is subject to events beyond our control, including the effectiveness of governmental efforts to halt the spread of COVID-19.
Executive Summary
Total revenue increased $9.8 million, or 24.0% to $50.5 million for the three months ended March 31, 2021 compared to $40.7 million for the three months ended March 31, 2020 primarily due to strong sales momentum as state and local governments continue to ease seating capacity restrictions in the markets in which we operate. Same-store sales increased 23.5% in the first quarter of 2021 compared to the first quarter of 2020 as starting in mid-March 2020 restaurants were temporarily closed or operated only with take-out and delivery service due to the onset of the COVID-19 pandemic. Same store sales improved sequentially each month in the first quarter of 2021. STK same store sales for the months of January and February decreased 23.2% and 1.7%, respectively, and increased 181.5% in March. Kona Grill same-store sales decreased 1.4% and 0.3% for the months of January and February, respectively, and increased 126.8% for the month of March 2021. On a two-year basis, same store sales for the first quarter of 2021 increased 3.3% compared to the first quarter of 2019. STK same store sales increased 1.9% on a two-year basis while Kona Grill same store sales increased 4.6%.
Restaurant operating profit increased $7.3 million, or 376%, to $9.3 million for the first quarter of 2021 compared to $1.9 million in the first quarter of 2020. Restaurant operating profit as a percentage of owned restaurant net revenue was 18.8% compared to 5.0% in the first quarter of 2020. On a sequential basis, restaurant operating profit as a percentage of owned restaurant net revenue was 16.6% in the third quarter of 2020, 16.0% in the fourth quarter of 2020 and 18.8% in the first quarter of 2021.
We generated operating income of $0.9 million for the three months ended March 31, 2021 compared to an operating loss of $4.4 million for the three months ended March 31, 2020. The increase was primarily driven by strong sales momentum aided by increased seating capacity in our restaurants as state and local governments eased seating capacity restrictions as COVID-19 cases decreased and vaccination efforts increased along with increased restaurant operating profit as a percentage of revenue driven by strong cost discipline. We expect to see continued sales momentum as seating capacity restrictions are lifted and as consumers continue to return to in-person dining.
19
Results of Operations
The following table sets forth certain statements of operations data for the periods indicated (in thousands):
The following table sets forth certain statements of operations data as a percentage of total revenues for the periods indicated. Certain percentage amounts may not sum to total due to rounding.
97.4 %
94.7 %
2.6 %
5.3 %
100.0 %
Owned restaurant cost of sales (1)
24.4 %
26.2 %
Owned restaurant operating expenses (1)
56.8 %
68.7 %
Total owned operating expenses (1)
81.2 %
95.0 %
General and administrative (including stock-based compensation of 2% and 0.8% for the three months ended March 31, 2021 and 2020 respectively)
10.2 %
8.3 %
6.0 %
3.1 %
3.3 %
—%
2.7 %
0.4 %
0.2 %
98.3 %
110.7 %
1.7 %
(10.7)%
2.5 %
2.9 %
(0.8)%
(13.6)%
(0.7)%
(1.6)%
(0.1)%
(12.0)%
(0.2)%
0.1 %
(11.3)%
21
The following tables show our operating results by segment for the periods indicated (in thousands). Prior year amounts have been revised to conform to the current year segment presentation.
EBITDA, Adjusted EBITDA and Restaurant Operating Profit are presented in this Quarterly Report on Form 10-Q to supplement other measures of financial performance. EBITDA, Adjusted EBITDA and Restaurant Operating Profit are not required by, or presented in accordance with, accounting principles generally accepted in the United States of America (“GAAP”). We define EBITDA as net income before interest expense, provision for income taxes and depreciation and amortization. We define Adjusted EBITDA as net income before interest expense, provision for income taxes, depreciation and amortization, non-cash impairment loss, non-cash rent expense, pre-opening expenses, lease termination expenses, stock-based compensation, COVID-19 related expenses and non-recurring gains and losses. Not all of the items defining Adjusted EBITDA occur in each reporting period but have been included in our definitions of these terms based on our historical activity. We define Restaurant Operating Profit as owned restaurant net revenue minus owned restaurant cost of sales and owned restaurant operating expenses.
We believe that EBITDA, Adjusted EBITDA and Restaurant Operating Profit are appropriate measures of our operating performance because they eliminate non-cash or non-recurring expenses that do not reflect our underlying business performance. We believe Restaurant Operating Profit is an important component of financial results because: (i) it is a widely used metric within the restaurant industry to evaluate restaurant-level productivity, efficiency, and performance, and (ii) we use Restaurant Operating Profit as a key metric to evaluate our restaurant financial performance compared to our competitors. We use these metrics to facilitate a comparison of our operating performance on a consistent basis from period to period, to analyze the factors and trends affecting our business and to evaluate the performance of our restaurants. Adjusted EBITDA has limitations as an analytical tool and our calculation of Adjusted EBITDA may not be comparable to that reported by other companies; accordingly, you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Adjusted EBITDA is a key measure used by management. Additionally, Adjusted EBITDA and Restaurant Operating Profit are frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We use Adjusted EBITDA and Restaurant Operating Profit, alongside other GAAP measures such as net income, to measure profitability, as a key profitability target in our budgets, and to compare our performance against that of peer companies despite possible differences in calculation.
22
The following table presents a reconciliation of net (loss) income to EBITDA and Adjusted EBITDA for the periods indicated (in thousands):
Net loss attributable to noncontrolling interest
EBITDA
3,556
(1,911)
Transaction costs (1)
Lease termination expense (2)
Non-cash rent expense (3)
23
136
Adjusted EBITDA
6,446
1,185
Adjusted EBITDA attributable to noncontrolling interest
(53)
(391)
Adjusted EBITDA attributable to The ONE Group Hospitality, Inc.
6,499
1,576
The following table presents a reconciliation of Operating Income (Loss) to Restaurant Operating Profit for the periods indicated (in thousands):
Operating income (loss) as reported
(1,314)
(2,162)
General and administrative
Lease termination expense
Restaurant Operating Profit
9,261
Restaurant Operating Profit as a Percentage of Owned Restaurant Net Revenue
18.8%
5.0%
Results of Operations for the Three Months Ended March 31, 2021 and 2020
Revenues
Owned restaurant net revenue. Owned restaurant net revenue increased $10.6 million, or 27.5%, to $49.2 million for the three months ended March 31, 2021 from $38.6 million for the three months ended March 31, 2020. The increase in revenue is primarily attributable to strong sales momentum as state and local governments continue to ease seating capacity restrictions in the markets in which we operate. Comparable restaurant sales increased 23.5% in the first quarter of 2021.
Management and license fee revenue. Management and license fee revenues decreased $0.8 million to $1.3 million for the three months ended March 31, 2021 from $2.2 million for the three months ended March 31, 2020. Management and license fee revenue decreased primarily as a result of temporary closures and limited in-person seating at our managed locations due to COVID-19 prevention measures.
Cost and Expenses
Owned restaurant cost of sales. Food and beverage costs for owned restaurants increased $1.9 million, or 18.7%, to $12.0 million for the three months ended March 31, 2021 from $10.1 million for the three months ended March 31, 2020. The increase in owned restaurant cost of sales is due to the incremental sales increase. As a percentage of revenues, cost of sales decreased 180 basis points to 24.4% for the three months ended March 31, 2021 from 26.2% for the three months ended March 31, 2020 due to purchasing synergies across the Company and menu optimization.
Owned restaurant operating expenses. Owned restaurant operating expenses increased $1.4 million to $27.9 million for the three months ended March 31, 2021 from $26.5 million for the three months ended March 31, 2020. Owned restaurant operating costs decreased 1,190 basis points as a percentage of revenue from 68.7% in the three months ended March 31, 2020 to 56.8% for the three months ended March 31, 2021 due to actively managing operating costs, cost saving measures and the impact of COVID-19 in the first quarter of 2020.
General and administrative. General and administrative costs increased $1.8 million, or 52.3%, to $5.2 million for the three months ended March 31, 2021 from $3.4 million for the three months ended March 31, 2020. General and administrative expenses increased due to a $0.7 million increase in stock-based compensation, partially driven by certain grants that vested due to a substantial increase in our stock price during the quarter, higher legal and professional fees and an increase in travel expenses due to an increase in business activity. We expect that general and administrative expenses as a percentage of revenues will decrease as revenues continue to increase from the lifting of COVID-19 related restrictions both domestically and internationally.
Depreciation and amortization. Depreciation and amortization expense increased $0.3 million to $2.7 million for the three months ended March 31, 2021 from $2.4 million for the three months ended March 31, 2020.
Pre-opening expenses. In the three months ended March 31, 2021, we incurred $0.1 million of pre-opening expenses related to our upcoming STK Bellevue restaurant.
Interest expense, net of interest income. Interest expense, net of interest income was $1.2 million and $1.2 million for the three months ending March 31, 2021 and 2020, respectively.
Benefit for income taxes. The benefit for income taxes for the three months ended March 31, 2021 was $0.3 million compared to a tax benefit of $0.7 million for the three months ended March 31, 2020. Our 2021 annualized effective tax rate is estimated at 20.8% for 2021. For the three months ended March 31, 2021, the benefit for income taxes includes discrete period tax benefits resulting from the vesting of restricted stock units.
Net loss attributable to noncontrolling interest. Net loss attributable to noncontrolling interest was $0.1 million for the three months ended March 31, 2021 compared to net loss of $0.3 million for the three months ended March 31, 2020.
Liquidity and Capital Resources
Our principal liquidity requirements are to meet our lease obligations, our working capital and capital expenditure needs and to pay principal and interest on our outstanding indebtedness. Subject to our operating performance, which, if significantly adversely affected, would adversely affect the availability of funds, we expect to finance our operations for at least the next 12 months, including the costs of opening currently planned new restaurants, through cash provided by operations and construction allowances provided by landlords of certain locations. We believe the combination of the aforementioned items are adequate to support our immediate business operations and plans. As of March 31, 2021, we had cash and cash equivalents of approximately $28.4 million. We had $47.3 million in long-term debt, which consisted of our Credit Agreement and an equipment financing agreement, and $18.3 million in CARES Act Loans as of March 31, 2021. As of March 31, 2021, the availability on our revolving credit facility was $10.7 million, subject to the restrictions described in Note 5 to the condensed consolidated financial statements.
In the three months ended March 31, 2021, our capital expenditures were $2.6 million primarily for the construction of an STK restaurant in Bellevue, Washington, technology initiatives, and capital expenditures for existing restaurants. Our future cash requirements will depend on many factors, including the pace of expansion, conditions in the retail property development market, construction costs, the nature of the specific sites selected for new restaurants, and the nature of the specific leases and associated tenant improvement allowances available, if any, as negotiated with landlords. Additionally, under our current capital light strategy, we plan to primarily enter into management and license agreements for the operation of future STK restaurants where we are not required to contribute significant capital upfront.
Our operations have not required significant working capital, and, like many restaurant companies, we may have negative working capital during the year. Revenues are received primarily in credit card or cash receipts, and restaurant operations do not require significant receivables or inventories, other than our wine inventory. In addition, we receive trade credit for the purchase of food, beverages and supplies, thereby reducing the need for incremental working capital to support growth.
In the event the Company needs to temporarily suspend all operations due to COVID-19 restrictions, the ongoing operating costs per month are expected to be as follows:
Minimum rent
1,200
Insurance payments
200
Interest payments
400
Minimum general & administrative costs
500
2,300
Credit Agreement
On October 4, 2019, in conjunction with the acquisition of Kona Grill, we entered into the Credit Agreement with Goldman Sachs Bank USA that provides for a secured revolving credit facility of $12.0 million and a $48.0 million term loan. The term loan is payable in quarterly installments, with the final payment due in October 2024. The revolving credit facility also matures in October 2024.
As of March 31, 2021, we were compliant with the covenants required by the Credit Agreement. Based on current projections, we believe that we would continue to comply with the covenants in the Credit Agreement, as amended, throughout the twelve months following the issuance of the financial statements.
Refer to Note 5 and Note 15 to our condensed consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the terms of our long-term debt arrangements and information regarding our commitments and contingencies.
On May 4, 2020, two subsidiaries of the Company obtained CARES Act Loans from BBVA USA under the Paycheck Protection Program (“PPP”) created by the CARES Act. Repayment of the CARES Act Loans is guaranteed by the SBA. The ONE Group, LLC received a loan of $9.8 million related to the operations of STK restaurants, and Kona Grill Acquisition, LLC received a loan of $8.5 million related to the operation of Kona Grill restaurants.
25
The CARES Act Loans are scheduled to mature on April 28, 2022 and have a 1.00% interest rate and are subject to the terms and conditions applicable to PPP loans. Among other terms, BBVA USA may declare a default of the CARES Act Loans if the SBA disputes the validity of the guaranty of indebtedness, if a material adverse change occurs in our financial condition, or if BBVA USA believes the prospect of repayment of the CARES Act Loans or performance of obligations under the promissory notes is impaired. On an event of default, BBVA USA may declare principal and unpaid interest immediately due and payable, and it may charge default interest of 10%.
The CARES Act Loans are eligible for forgiveness if the proceeds are used for qualified purposes within a specified period and if at least 60% is spent on payroll costs. As of March 31, 2021, the Company has used all of the proceeds from the CARES Act Loans for qualified purposes in accordance with the CARES Act and SBA regulations, and these funds have supported the re-opening of in person dining and the return of approximately 3,000 furloughed employees to work. The Company applied for forgiveness of the CARES Act Loans in February 2021. The Company anticipates forgiveness of the entire amount of CARES Act Loans; however, no assurance can be provided that the Company will obtain forgiveness of the CARES Act Loans in whole or in part. Therefore, the Company has elected to classify the entire principal amount of the CARES Act Loans as debt. If repayment is required, principal and interest payments are expected to be repaid beginning in August 2021, ten months after the end of the covered period which was from April 2020 to October 2020.
Capital Expenditures and Lease Arrangements
To the extent we open new company-owned restaurants, we anticipate capital expenditures would increase related to the construction of new restaurants compared to general capital expenditures of existing restaurants. Although we are committed to our capital light strategy, in which our capital investment is expected to be limited, we are willing to consider opening owned restaurants as opportunities arise. For owned restaurants, where we build from a shell state, we have typically targeted an average cash investment of approximately $3.8 million for a 10,000 square-foot STK restaurant, net of landlord contributions and equipment financing and excluding pre-opening costs. For locations where we may be the successor restaurant tenant, and currently our preference, total cash investment will be significantly less and in the $1.0 million to $1.5 million range. Typical pre-opening costs will be in the $0.3 million to $0.5 million range. In addition, some of our existing restaurants will require capital improvements to either maintain or improve the facilities. We may add seating or provide enclosures for outdoor space in the next twelve months for some of our locations, which we expect will increase revenues for those locations.
Our hospitality F&B services projects typically require limited capital investment from us. Capital expenditures for these projects will primarily be funded by cash flows from operations depending upon the timing of these expenditures and cash availability.
We typically seek to lease our restaurant locations for periods of 10 to 20 years under operating lease arrangements, with a limited number of renewal options. Our rent structure varies, but our leases generally provide for the payment of both minimum and contingent rent based on sales, as well as other expenses related to the leases such as our pro-rata share of common area maintenance, property tax and insurance expenses. Many of our lease arrangements include the opportunity to secure tenant improvement allowances to partially offset the cost of developing and opening the related restaurants. Generally, landlords recover the cost of such allowances from increased minimum rents. However, there can be no assurance that such allowances will be available to us on each project that we select for development.
Cash Flows
The following table summarizes the statement of cash flows for the three months ended March 31, 2021 and 2020 (in thousands):
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
26
Operating Activities. Net cash provided by operating activities was $7.0 million for the three months ended March 31, 2021 compared to net cash used in operating activities of $3.1 million for the three months ended March 31, 2020. The increase was primarily attributable to the reduction in net loss for the three months ended March 31, 2021 compared to the same period prior year as a result of state and local jurisdictions easing COVID-19 related restrictions and an increase in accounts payable and accrued expenses due to higher restaurant sales volumes.
Investing Activities. Net cash used in investing activities for the three months ended March 31, 2021 was $2.6 million primarily for the construction of an STK restaurant in Bellevue, Washington, technology initiatives, and capital expenditures for existing restaurants compared to $0.8 million for the three months ended March 31, 2020.
Financing Activities. Net cash used in financing activities for the three months ended March 31, 2021 was $0.3 million compared to $0.2 million in the three months ended March 31, 2020.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
See Note 1 to our condensed consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for a detailed description of recent accounting pronouncements. We do not expect the recent accounting pronouncements discussed in Note 1 to have a significant impact on our consolidated financial position or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not required to provide this information.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation as of the last day of the period covered by this Quarterly Report on Form 10-Q of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is timely recorded, processed, summarized and reported and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the first quarter of 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
We are subject to claims common to our industry and in the ordinary course of our business. Companies in our industry, including us, have been and are subject to class action lawsuits, primarily regarding compliance with labor laws and regulations. Defending lawsuits requires significant management attention and financial resources and the outcome of any litigation is inherently uncertain. We believe that accrual and disclosure for these matters are adequately provided for in our consolidated financial statements. We do not believe the ultimate resolutions of these matters will have a material adverse effect on our consolidated financial position and results of operations. However, the resolution of lawsuits is difficult to predict. A significant increase in the number of these claims, or
one or more successful claims under which we incur greater liabilities than is currently anticipated, could materially and adversely affect our consolidated financial statements.
Item 1A. Risk Factors.
There have been no material changes to the risk factors contained in Item 1A of our Form 10-K for the year ended December 31, 2020.
On March 25, 2021 we issued an aggregate of 450,971 shares of common stock to Anson Investments Master Fund LP in connection with its cashless exercise (based on a share value of $8.441) of two common stock purchase warrants.
On April 22, 2021, we issued 100,000 shares of common stock to 22235570 Ontario Limited in connection with its exercise of a warrant for aggregate consideration of $261,000.
Item 6. Exhibits.
(a) Exhibits required by Item 601 of Regulation S-K.
Exhibit
Description
3.1
Amended and Restated Certificate of Incorporation (Incorporated by reference to Form 8-K filed on June 5, 2014).
3.2
Amended and Restated Bylaws (Incorporated by reference to Form 8-K filed on October 25, 2011).
31.1*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002
31.2*
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002
32.1*
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes – Oxley Act of 2002, 18 U.S.C. Section 1350.
32.2*
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes – Oxley Act of 2002, 18 U.S.C. Section 1350.
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
*Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: May 11, 2021
By:
/s/ Tyler Loy
Tyler Loy, Chief Financial Officer