UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One) | |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the Quarterly Period Ended | |
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
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(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or |
| (I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
| Zip Code |
(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 |
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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.
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).
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 ◻ | |
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
Number of shares of common stock outstanding as of October 31, 2024:
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE ONE GROUP HOSPITALITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
September 30, | December 31, | |||||
| 2024 | 2023 | ||||
ASSETS | (Unaudited) |
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Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Credit card receivable | | | ||||
Restricted cash and cash equivalents | | — | ||||
Accounts receivable |
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Inventory |
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Other current assets |
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Due from related parties |
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Total current assets |
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Operating lease right-of-use assets | | | ||||
Property and equipment, net |
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Goodwill |
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Intangibles, net | | | ||||
Deferred tax assets, net |
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Other assets |
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Security deposits |
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Total assets | $ | | $ | | ||
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LIABILITIES, SERIES A PREFERRED STOCK AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable | $ | | $ | | ||
Accrued expenses |
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Current portion of operating lease liabilities | | | ||||
Deferred gift card revenue and other |
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Current portion of long-term debt |
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Other current liabilities |
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Total current liabilities |
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Long-term debt, net of current portion, unamortized discount and debt issuance costs |
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Operating lease liabilities, net of current portion | | | ||||
Other long-term liabilities |
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Total liabilities |
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Commitments and contingencies (Note 17) |
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Series A preferred stock, $ | | — | ||||
Stockholders’ equity: |
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Common stock, $ |
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Preferred stock, other than Series A preferred stock, $ |
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Treasury stock, at cost, |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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Total stockholders’ equity |
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Noncontrolling interests |
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Total stockholder's equity |
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Total liabilities, Series A preferred stock and stockholders' equity | $ | | $ | | ||
See notes to the condensed consolidated financial statements.
3
THE ONE GROUP HOSPITALITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except income per share and related share information)
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
Revenues: |
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Owned restaurant net revenue | $ | | $ | | $ | | $ | | ||||
Management, license, franchise and incentive fee revenue |
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Total revenues |
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Cost and expenses: |
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Owned operating expenses: |
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Owned restaurant cost of sales |
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Owned restaurant operating expenses |
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Total owned operating expenses |
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General and administrative (including stock-based compensation of $ |
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Depreciation and amortization |
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Transaction and exit costs |
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Transition and integration expenses |
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Pre-opening expenses |
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Other expenses |
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Total costs and expenses |
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Operating (loss) income |
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Other expenses, net: |
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Interest expense, net of interest income |
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Loss on early debt extinguishment |
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Total other expenses, net |
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Loss before provision for income taxes |
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Benefit for income taxes |
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Net loss |
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Less: net loss attributable to noncontrolling interest |
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Net (loss) income attributable to The ONE Group Hospitality, Inc. | $ | ( | $ | ( | $ | ( | $ | | ||||
Series A Preferred Stock paid-in-kind dividend and accretion |
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Net (loss) income available to common stockholders | $ | ( | $ | ( | $ | ( | $ | | ||||
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Net (loss) income per common share: |
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Basic | $ | ( | $ | ( | $ | ( | $ | — | ||||
Diluted | $ | ( | $ | ( | $ | ( | $ | — | ||||
Weighted average common shares outstanding: |
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Basic |
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Diluted |
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See notes to the condensed consolidated financial statements.
4
THE ONE GROUP HOSPITALITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited, in thousands)
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Currency translation gain (loss), net of tax |
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Comprehensive loss | ( | ( | ( | ( | ||||||||
Less: comprehensive loss attributable to noncontrolling interest | ( | ( | ( | ( | ||||||||
Comprehensive loss attributable to The ONE Group Hospitality, Inc. | ( | ( | ( | ( | ||||||||
Series A Preferred Stock paid-in-kind dividend and accretion | ( | — | ( | — | ||||||||
Comprehensive loss attributable to common stockholders | $ | ( | $ | ( | $ | ( | $ | ( | ||||
See notes to the condensed consolidated financial statements.
5
THE ONE GROUP HOSPITALITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND
SERIES A PREFERRED STOCK
(Unaudited, in thousands, except share information)
Accumulated | ||||||||||||||||||||||||||||||
Additional | other | |||||||||||||||||||||||||||||
Series A Preferred Stock | Common stock | Treasury | paid-in | Retained | comprehensive | Stockholders’ | Noncontrolling | |||||||||||||||||||||||
Shares |
| Amount | Shares |
| Par value |
| stock | capital |
| Earnings |
| loss |
| equity |
| interests |
| Total | ||||||||||||
Balance at December 31, 2023 | — | $ | — | | $ | | $ | ( | $ | | $ | | $ | ( | $ | | $ | ( | $ | | ||||||||||
Stock-based compensation | — |
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Issuance of vested restricted shares, net of tax withholding | — |
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Loss on foreign currency translation, net | — |
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| — | — | — | — | ( |
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Net loss | — |
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Balance at March 31, 2024 | — | $ | — | | $ | | $ | ( | $ | | $ | | $ | ( | $ | | $ | ( | $ | | ||||||||||
Stock-based compensation | — | — | | — | — | | — | — |
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Exercise of stock options and warrants | — | — | | — | — | | — | — |
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Issuance of vested restricted shares, net of tax withholding | — | — | | — | — | ( | — | — |
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Issuance of warrants | — | — | — | — | — | | — | — | | — | | |||||||||||||||||||
Purchase of treasury stock | — | — | ( | — | ( | — | — | — |
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Gain on foreign currency translation, net | — | — | — | — | — | — | — | |
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Net loss | — | — | — | — | — | — | ( | — |
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Series A Preferred Stock issuance | | | — | — | — | — | — | — | — | — | — | |||||||||||||||||||
Series A Preferred Stock paid-in-kind dividend and accretion | — | | — | — | — | — | ( | — | ( | — | ( | |||||||||||||||||||
Balance at June 30, 2024 | | $ | | | $ | | $ | ( | $ | | $ | | $ | ( | $ | | $ | ( | $ | | ||||||||||
Stock-based compensation | — | — | | — | — | | — | — |
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Issuance of vested restricted shares, net of tax withholding | — | — | | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||
Purchase of treasury stock | — | — | ( | — | ( | — | — | — |
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Gain on foreign currency translation, net | — | — | — | — | — | — | — | |
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Net loss | — | — | — | — | — | — | ( | — |
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Series A Preferred Stock paid-in-kind dividend and accretion | — | | — | — | — | ( | ( | — | ( | — | ( | |||||||||||||||||||
Balance at September 30, 2024 | | $ | | | $ | | $ | ( | $ | | $ | — | $ | ( | $ | | $ | ( | $ | | ||||||||||
Balance at December 31, 2022 | — | $ | — | | $ | | $ | ( | $ | | $ | | $ | ( | $ | | $ | ( | $ | | ||||||||||
Stock-based compensation | — |
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Issuance of vested restricted shares, net of tax withholding | — |
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Purchase of treasury stock | ( | ( | — | — | — | ( | — | ( | ||||||||||||||||||||||
Loss on foreign currency translation, net | — |
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Net income (loss) | — |
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Balance at March 31, 2023 | — | $ | — | | $ | | $ | ( | $ | | $ | | $ | ( | $ | | $ | ( | $ | | ||||||||||
Stock-based compensation | — | — | | — | — | | — | — |
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Exercise of stock options and warrants | — | — | | — | — | | — | — |
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Issuance of vested restricted shares, net of tax withholding | — | — | | — | — | ( | — | — |
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Purchase of treasury stock | — | — | ( | — | ( | — | — | — | ( | ( | ||||||||||||||||||||
Gain on foreign currency translation, net | — | — | — | — | — | — | — | |
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Net income (loss) | — | — | — | — | — | — | | — |
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Balance at June 30, 2023 | — | $ | — | | $ | | $ | ( | $ | | $ | | $ | ( | $ | | $ | ( | $ | | ||||||||||
Stock-based compensation | — | — | | — | — | | — | — | | — | | |||||||||||||||||||
Exercise of stock options | — | — | | — | — | | — | — | | — | | |||||||||||||||||||
Issuance of vested restricted shares, net of tax withholding | — | — | | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||
Purchase of treasury stock | — | — | ( | — | ( | — | — | — | ( | — | ( | |||||||||||||||||||
Loss on foreign currency translation, net | — | — | — | — | — | — | — | ( | ( | — | ( | |||||||||||||||||||
Net loss | — | — | — | — | — | — | ( | — | ( | ( | ( | |||||||||||||||||||
Balance at September 30, 2023 | — | $ | — | | $ | | $ | ( | $ | | $ | | $ | ( | $ | | $ | ( | $ | | ||||||||||
See notes to the condensed consolidated financial statements.
6
THE ONE GROUP HOSPITALITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
For the nine months ended September 30, | ||||||
| 2024 |
| 2023 | |||
Operating activities: |
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Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization |
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Non-cash exit costs |
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Stock-based compensation |
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Amortization of debt issuance costs and debt original issuance discounts |
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Deferred taxes |
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Non-cash loss on early debt extinguishment |
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Changes in operating assets and liabilities, net of acquisition: |
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Accounts receivable |
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Inventory |
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Other current assets |
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Security deposits |
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Other assets |
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Accounts payable |
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Accrued expenses |
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Operating lease liabilities and right-of-use assets | | | ||||
Other liabilities |
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Net cash provided by operating activities |
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Investing activities: |
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Purchase of property and equipment |
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Acquisition related payments, net of cash acquired |
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Net cash used in investing activities |
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Financing activities: |
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Borrowings of long-term debt |
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Repayments of long-term debt and financing lease liabilities | ( | ( | ||||
Issuance of Series A preferred stock net of discount |
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Issuance of warrants to Series A preferred stockholders |
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Exercise of stock options | | | ||||
Tax-withholding obligation on stock-based compensation |
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Purchase of treasury stock |
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Net cash provided by (used in) financing activities |
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Effect of exchange rate changes on cash |
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Net change in cash and cash equivalents and restricted cash and cash equivalents |
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Cash and cash equivalents and restricted cash and cash equivalents, beginning of period |
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Cash and cash equivalents and restricted cash and cash equivalents, end of period | $ | | $ | | ||
Supplemental disclosure of cash flow data: |
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Interest paid, net of capitalized interest | $ | | $ | | ||
Income taxes paid | $ | | $ | | ||
Accrued purchases of property and equipment | $ | | $ | | ||
Reconciliation of cash and cash equivalents and restricted cash and cash equivalents |
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Cash and cash equivalents | $ | | $ | | ||
Restricted cash and cash equivalents | | — | ||||
Total cash and cash equivalents and restricted cash and cash equivalents as shown in the statement of cash flows | $ | | $ | | ||
See notes to the condensed consolidated financial statements.
7
THE ONE GROUP HOSPITALITY, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Summary of Business and Significant Accounting Policies
Description of Business
The ONE Group Hospitality, Inc. and its subsidiaries (collectively, the “Company”) is an international restaurant 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 and consulting 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 at a particular hospitality venue and customized for the client. As of September 30, 2024, the Company’s primary restaurant brands are STK, a modern twist on the American steakhouse concept featuring premium steaks, seafood and specialty cocktails in an energetic upscale atmosphere, Benihana, an interactive dining destination with highly skilled chefs preparing food in front of guests and served in an energetic atmosphere alongside fresh sushi and innovative cocktails, Kona Grill, a polished casual bar-centric grill concept featuring American favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere, and RA Sushi, a Japanese cuisine concept that offers a fun-filled, bar-forward, upbeat, and vibrant dining atmosphere anchored by creative sushi, inventive drinks, and outstanding service.
On May 1, 2024, the Company acquired
As of September 30, 2024, the Company owned, operated, managed, franchised, or licensed
Basis of Presentation
The accompanying condensed consolidated balance sheet as of December 31, 2023, which has been derived from audited financial statements, and the accompanying unaudited interim condensed consolidated financial statements (“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, 2023.
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 condensed consolidated balance sheet as of December 31, 2023 have been made to conform to current year presentation. The Company has reclassified credit card receivables of $
Certain reclassifications were also made to conform the prior period segment reporting to the current year segment presentation. Refer to Note 15 – Segment Reporting for additional information regarding the Company’s reportable operating segments.
Certain reclassifications were also made to align our international revenues and long-term assets with the Company’s classification of domestic and international venues.
8
Significant Accounting Policies
Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for the Company’s significant accounting policies. The following represents changes in accounting policies during 2024, primarily attributable to the evaluation of accounting policies in conjunction with the Benihana acquisition discussed below:
Restricted cash and cash equivalents. Restricted cash and cash equivalents are accounts that are restricted to funding payment of employee benefits and collateral accounts relating to liquor license bonds.
Goodwill. Goodwill consists of goodwill associated with the Benihana Acquisition. Goodwill is not amortized and is tested for impairment annually on November 1st or on an interim basis whenever events or changes in circumstances indicated a potential impairment.
Recent Accounting Pronouncements
In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosure.” The ASU updates reportable segment disclosure requirements, primarily through requiring enhanced disclosures about significant segment expenses and information used to assess segment performance. The ASU is effective for fiscal years beginning after December 15, 2023, with early adoption permitted. The Company is evaluating the impact of adopting this ASU on its disclosures.
In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The ASU includes amendments requiring enhanced income tax disclosures, primarily related to standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. The guidance is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is evaluating the impact of adopting this ASU on its disclosures.
Note 2 – Benihana Acquisition
On May 1, 2024, the Company acquired
The assets and liabilities of Benihana were recorded at their respective fair values as of the date of acquisition. The Company is in the process of finalizing the fair value of certain assets and liabilities acquired. Since the initial valuation, the Company adjusted the fair values for cash and cash equivalents by ($
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Purchase consideration: |
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Contractual purchase price | $ | | |
Cash and cash equivalents, restricted cash and cash equivalents and credit card receivable | | ||
Working capital adjustment | | ||
Cash consideration paid | | ||
Net assets acquired: | |||
Cash and cash equivalents | $ | | |
Restricted cash and cash equivalents | | ||
Credit card receivable | | ||
Inventory | | ||
Other current assets | | ||
Property and equipment |
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Operating lease right-of-use assets |
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Deferred tax assets, net | | ||
Intangible assets |
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Other assets |
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Accounts payable |
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Accrued expenses | ( | ||
Other current liabilities |
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Operating lease liabilities |
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Other long-term liabilities | ( | ||
Total net assets acquired | | ||
Goodwill | $ | |
The excess of the purchase price over the aggregate fair value of net assets acquired was allocated to goodwill. The portion of the purchase price attributable to goodwill represents benefits expected because of the acquisition, including sales and unit growth opportunities in addition to supply-chain and support-cost synergies. The Benihana and RA Sushi tradenames have an indefinite life based on the expected use of the asset and the regulatory and economic environment within which it is being used. The tradenames represent highly respected brands with positive connotations, and the Company intends to cultivate and protect the use of the brands. Goodwill and indefinite-lived tradenames are not amortized but are reviewed annually for impairment or more frequently if indicators of impairment exist.
As a result of the Benihana Acquisition, the Company incurred approximately $
The following unaudited pro forma results of operations for the three and nine months ended September 30, 2024 and 2023 give effect to the Benihana Acquisition as if it had occurred on January 1, 2023 (in thousands):
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
Total Revenues | $ | | $ | | $ | | $ | | ||||
Net (loss) income as reported | $ | ( | $ | ( | $ | | $ | | ||||
Adjustments: | ||||||||||||
Transaction and exit costs | | — | | ( | ||||||||
Transition and integration costs | | — | | ( | ||||||||
Loss on early debt extinguishment | — | — | | ( | ||||||||
Purchase price accounting adjustments(1) | — | | | | ||||||||
Change in interest expense | | | | | ||||||||
Pro forma net income (loss) before income taxes | ( | ( | | ( | ||||||||
Income tax effect of adjustments | ( | | ( | | ||||||||
Change in valuation allowance | — | — | ( | — | ||||||||
Pro forma net income (loss) | $ | ( | $ | ( | $ | | $ | ( | ||||
(1) Purchase price accounting adjustments include the elimination of Benihana's impairment charges and changes to depreciation
10
The most significant adjustments included in the pro forma financial information are the elimination of the release of Benihana’s valuation allowance, elimination of Benihana’s impairment charges, movement of transaction, transition, integration and debt extinguishment costs, and increased interest expense associated with debt incurred to fund the Benihana Acquisition, all giving effect as if the acquisition had occurred on January 1, 2023.
In the opinion of the Company’s management, the unaudited pro forma financial information includes all significant necessary adjustments that can be factually supported to reflect the effects of the Benihana Acquisition and related transactions. The unaudited pro forma financial information is provided for informational purposes only and are not necessarily indicative of what actual results of operations would have been had the Benihana Acquisition and related transactions been completed as of January 1, 2023 or that may be achieved in the future.
Note 3 – Property and Equipment, Net
Property and equipment, net consist of the following (in thousands):
September 30, | December 31, | |||||
2024 | 2023 | |||||
Furniture, fixtures and equipment | $ | | $ | | ||
Leasehold improvements |
| |
| | ||
Less: accumulated depreciation |
| ( |
| ( | ||
Subtotal |
| |
| | ||
Construction in progress |
| |
| | ||
Restaurant smallwares |
| |
| | ||
Total | $ | | $ | | ||
Depreciation related to property and equipment was $
Note 4 – Intangibles, Net
Intangibles, net consists of the following (in thousands):
September 30, | December 31, | |||||
| 2024 |
| 2023 | |||
Indefinite-lived intangible assets | ||||||
Tradenames | $ | | $ | | ||
Finite-lived intangible assets | ||||||
Franchise agreements | | — | ||||
Other finite-lived intangible assets | | | ||||
Total finite-lived intangible assets | | | ||||
Less: accumulated amortization |
| ( |
| ( | ||
Total intangibles, net | $ | | $ | | ||
Finite-lived intangible assets are amortized using the straight-line method over their estimated useful life of
11
Note 5 – Accrued Expenses
Accrued expenses consist of the following (in thousands):
September 30, | December 31, | |||||
2024 | 2023 | |||||
Payroll and related | $ | |
| $ | | |
Interest | | | ||||
VAT and sales taxes | |
| | |||
New restaurant construction |
| | | |||
Amounts due to landlords | |
| | |||
Legal, professional and other services |
| |
| | ||
Insurance |
| | | |||
Income taxes and related | — | | ||||
Other (1) |
| |
| | ||
Total | $ | | $ | | ||
| (1) | Amount primarily relates to recurring restaurant operating expenses. |
Note 6 – Long-Term Debt
Long-term debt consists of the following (in thousands):
September 30, | December 31, | |||||
2024 | 2023 | |||||
Term loan agreements | $ | | $ | | ||
Revolving credit facility | — | — | ||||
Delayed draw term facility |
| — |
| | ||
Total long-term debt |
| |
| | ||
Less: current portion of long-term debt |
| ( |
| ( | ||
Less: debt issuance costs |
| ( |
| ( | ||
Less: debt original issuance discount |
| ( |
| — | ||
Total long-term debt, net of current portion | $ | | $ | | ||
Interest expense, net for the Company’s debt arrangements, excluding the amortization of debt issuance costs, debt original issuance discount and fees, was $
As of September 30, 2024, the Company had $
Credit and Guarantee Agreement
In connection with the Benihana Acquisition, on May 1, 2024, the Company entered into a credit agreement (the “Credit Agreement”) with Deutsche Bank AG New York Branch, Deutsche Bank Securities Inc., HPS Investment Partners, LLC and HG Vora Capital Management, LLC (collectively, the “Lenders”). The Credit Agreement provides a $
The Term Loan Facility is not subject to a financial covenant and the Revolving Facility’s financial covenant will apply only after
12
The Term Loan Facility bears interest at a margin over a reference rate selected at the option of the borrower. The margin for the Term Loan Facility is
The Revolving Facility bears interest at a margin over a reference rate selected at the option of the borrower. The margin for the Revolving Facility is set quarterly based on the Company’s Consolidated Net Leverage Ratio for the preceding four fiscal quarters and ranges from
The Company’s weighted average interest rate on the borrowings under the Credit and Guarantee Agreement as of September 30, 2024 was
As of September 30, 2024, the Company had $
Debt Extinguishment
On October 4, 2019, the Company entered into the credit agreement with Goldman Sachs, which was replaced with the Credit Agreement described above on May 1, 2024. The Goldman Sachs credit agreement provided for a secured revolving credit facility of $
Note 7 – 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. Long-lived assets are measured and disclosed at fair value on a nonrecurring basis if an impairment is identified. There were
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 valued using Level 2 inputs including current applicable rates for similar instruments and approximates the carrying value of such obligations.
The Company’s purchase price allocations for the Benihana Acquisition were measured at fair value on a nonrecurring basis primarily using Level 3 inputs.
Note 8 – Income Taxes
For the nine months ended September 30, 2024, the Company has computed its interim tax provision using the estimated annual effective tax rate method. For the six months ended June 30, 2024, the Company had elected to compute its interim tax provision using the actual year-to-date effective tax rate method as small changes in projected income could have produced large variations in the Company’s estimated annual effective tax rate. The Company recorded a benefit for income taxes of $
The Company’s effective income tax rate was
13
The Company is subject to U.S. federal, state, local and various foreign income taxes for the 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. There are no ongoing federal, state, local, or foreign tax examinations as of September 30, 2024.
Note 9 – Revenue Recognition
The following table provides information about contract liabilities, which include deferred license revenue, deferred gift card revenue, advanced party deposits and the Konavore rewards program (in thousands):
| September 30, |
| December 31, | |||
2024 | 2023 | |||||
Deferred license revenue (1) | $ | | $ | | ||
Deferred gift card and gift certificate revenue (2) | $ | | $ | | ||
Advanced party deposits (2) | $ | | $ | | ||
Konavore rewards program (3) | $ | | $ | | ||
| (1) | Includes the current and long-term portion of deferred license revenue which are included in other current liabilities and other long-term liabilities on the condensed consolidated balance sheets. |
| (2) | Deferred gift card revenue and advance party deposits on goods and services yet to be provided are included in deferred gift card revenue and other on the condensed consolidated balance sheets. |
| (3) | Konavore rewards program is included in accrued expenses on the condensed consolidated balance sheets. |
Revenue recognized during the period from contract liabilities as of the preceding fiscal year end date is as follows (in thousands):
| September 30, |
| September 30, | |||
2024 | 2023 | |||||
Revenue recognized from deferred license revenue | $ | | $ | | ||
Revenue recognized from deferred gift card revenue | $ | | $ | | ||
Revenue recognized from advanced party deposits | $ | | $ | | ||
The estimated deferred license revenue to be recognized in the future related to performance obligations that are unsatisfied as of September 30, 2024 were as follows for each year ending (in thousands):
2024, three months remaining |
| $ | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
2028 |
| | |
Thereafter |
| | |
Total future estimated deferred license revenue | $ | |
14
Note 10 – Leases
The components of lease expense for the nine months ended September 30, 2024 and 2023 are as follows (in thousands):
September 30, |
| September 30, |
| ||||
2024 |
| 2023 |
| ||||
Lease cost | |||||||
Operating lease cost |
| $ | |
| $ | | |
Finance lease cost | |||||||
Amortization of ROU assets | | | |||||
Interest on lease liabilities | | | |||||
Total finance lease cost | | | |||||
Variable lease cost (1) | | | |||||
Short-term lease cost | | | |||||
Total lease cost |
| $ | |
| $ | | |
Weighted average remaining lease term | |||||||
Operating leases | |||||||
Finance leases | |||||||
Weighted average discount rate | |||||||
Operating leases | | % | | % | |||
Finance leases | | % | | % | |||
| (1) | Variable lease cost is comprised of percentage rent and common area maintenance. |
Supplemental cash flow information related to leases for the period was as follows (in thousands):
| September 30, |
| December 31, | |||
2024 | 2023 | |||||
Finance lease right-of-use assets (1) | $ | | $ | | ||
Current portion of finance lease liabilities (1) |
| |
| | ||
Long-term portion of finance lease liabilities (1) | | | ||||
| (1) | Finance lease assets and liabilities are included in other assets, other current liabilities, and other long-term liabilities on the condensed consolidated balance sheet. |
September 30, | September 30, | |||||
2024 | 2023 | |||||
Cash paid for amounts included in the measurement of lease liabilities: |
| |||||
Operating cash flows from operating leases | $ | | $ | | ||
Operating cash flows from finance leases | $ | | $ | | ||
Financing cash flows from finance leases | $ | | $ | | ||
Right-of-use assets obtained in exchange for lease obligations: | ||||||
Operating leases | $ | | $ | | ||
Finance leases |
| $ | — | $ | | |
The Company has entered into
15
As of September 30, 2024, maturities of the Company’s operating lease liabilities are as follows (in thousands):
2024, three months remaining | $ | | |
2025 | | ||
2026 | | ||
2027 | | ||
2028 | | ||
Thereafter | | ||
Total lease payments | | ||
Less: imputed interest | ( | ||
Present value of operating lease liabilities |
| $ | |
As of September 30, 2024, maturities of the Company’s finance lease liabilities are as follows (in thousands):
2024, three months remaining | $ | | |
2025 | | ||
2026 | | ||
2027 | | ||
2028 | | ||
Total lease payments | | ||
Less: imputed interest | ( | ||
Present value of finance lease liabilities |
| $ | |
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 potential shares of common stock including common stock issuable pursuant to stock options, warrants, and restricted stock units. The two-class method for computing earnings per share will be utilized when applicable.
For the three and nine months ended September 30, 2024 and 2023, net (loss) income per share was calculated as follows (in thousands, except net income per share and related share data):
Three months ended September 30, | Nine months ended September 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. | $ | ( | $ | ( | $ | ( | $ | | ||||
Series A Preferred Stock paid-in-kind dividend and accretion | ( | — | ( | — | ||||||||
Net (loss) income available to common stockholders | ( | ( | ( | | ||||||||
|
|
|
|
|
|
| ||||||
Basic weighted average shares outstanding |
| |
| |
| |
| | ||||
Dilutive effect of stock options, warrants and restricted share units |
| — |
| — |
| — |
| | ||||
Diluted weighted average shares outstanding |
| |
| |
| |
| | ||||
|
|
|
|
|
|
|
| |||||
Basic net (loss) income per common share | $ | ( | $ | ( | $ | ( | $ | — | ||||
Diluted net (loss) income per common share | $ | ( | $ | ( | $ | ( | $ | — | ||||
For the three months ended September 30, 2024 and 2023,
16
Note 12 – Series A Preferred Stock
On May 1, 2024, the Company issued
The Series A Preferred Stock is non-voting and non-convertible; has compounding dividends that begin at a rate of
The Company records the paid-in-kind dividend and accretion of the Series A Preferred Stock using the effective interest method based on a future redemption value of $
Redemption Rights
On and after May 1, 2029, holders of the Series A Preferred Stock have the right to require redemption of all or any part of the Series A Preferred Stock for an amount equal to the liquidation preference after the fifth anniversary, upon an acceleration of material indebtedness or upon a change-of-control. However, at any time between the third and fourth anniversary of the issuance date, the Company may repurchase all or some of the preferred stock for
Since the redemption of the Series A Preferred Stock is contingently redeemable and therefore not certain to occur, the Series A Preferred Stock is not required to be classified as a liability under ASC 480, Distinguishing Liabilities from Equity. As the Series A Preferred Stock is redeemable in certain circumstances at the option of the holder and is redeemable in certain circumstances upon the occurrence of an event that is not solely within the Company’s control, the Series A Preferred Stock is classified separately from stockholders’ equity in the condensed consolidated balance sheets.
Note 13 – Stockholder’s Equity
Preferred Stock
The Company is authorized to issue
Common Stock
The issuance of a dividend is dependent on a variety of factors, including but not limited to, available cash and the overall financial condition of the Company. The issuance of a dividend is also subject to legal restrictions and the terms of the Company’s credit agreement. The Company did
Stock Purchase Program
The Company’s Board of Directors authorized a repurchase program of up to $
17
Note 14 – Stock-Based Compensation and Warrants
Stock-Based Compensation
As of September 30, 2024, the Company had
Stock-based compensation cost was $
Stock Option Activity
Stock options in the table below include both time-based and market condition-based awards. Changes in stock options during the nine months ended September 30, 2024 were as follows:
Weighted | ||||||||||
Weighted | average | Intrinsic | ||||||||
average exercise | remaining | value | ||||||||
| Shares |
| price |
| contractual life |
| (thousands) | |||
Outstanding and Exercisable at December 31, 2023 |
| | $ | |
| $ | | |||
Granted |
| | |
|
|
|
| |||
Exercised |
| ( | |
|
|
|
| |||
Cancelled, expired or forfeited |
| ( | |
|
|
| ||||
Outstanding at September 30, 2024 |
| | $ | |
| $ | | |||
Stock options granted during the nine months ended September 30, 2024 were valued using the Black-Scholes method and included the following assumptions: a) expected term of
Restricted Stock Unit Activity
The Company issues restricted stock units (“RSUs”) under the 2019 Equity Plan. RSUs in the table below include time-based awards. The fair value of time-based RSUs is determined based upon the closing market value of the Company’s common stock on the grant date.
A summary of the status of RSUs and changes during the nine months ended September 30, 2024 is presented below:
Weighted average | |||||
| Shares |
| grant date fair value | ||
Non-vested RSUs at December 31, 2023 |
| | $ | | |
Granted |
| |
| | |
Vested |
| ( |
| | |
Cancelled, expired or forfeited |
| ( |
| | |
Non-vested RSUs at September 30, 2024 |
| | $ | | |
As of September 30, 2024, the Company had approximately $
18
Performance Stock Unit Activity
The Company issues performance stock units (“PSUs”) under the 2019 Equity Plan. PSUs in the table below includes both time based and market condition-based awards and are valued using the Monte Carlo Simulation.
A summary of the status of PSUs and changes during the nine months ended September 30, 2024 is presented below:
Weighted average | |||||
| Shares |
| grant date fair value | ||
Non-vested PSUs at December 31, 2023 |
| | $ | | |
Granted |
| |
| | |
Vested |
| — |
| — | |
Cancelled, expired or forfeited |
| — |
| — | |
Non-vested PSUs at September 30, 2024 |
| | $ | | |
As of September 30, 2024, the Company has approximately $
Warrants
In connection with the Benihana Acquisition, on May 1, 2024, the Company issued both market and penny warrants to the following holders of the Series A Preferred Stock. The holders of the penny warrants are entitled to receive any dividends issued to common stockholders. The Company has the following warrants to purchase shares of common stock outstanding as of September 30, 2024 and 2023.
Warrants | Exercise | Shares available for purchase as of September 30, | |||||||||||
Issuance date | Holder of warrants | Expiration date | Issued | Price | 2024 | 2023 | |||||||
May 1, 2024 | HPC III Kaizen LP | May 1, 2029 | | $ | | — | |||||||
May 1, 2024 | HPS and affiliates | May 1, 2029 | | $ | | — | |||||||
May 1, 2024 | HPC III Kaizen LP | May 1, 2034 | | $ | | — | |||||||
May 1, 2024 | HPS and affiliates | May 1, 2034 | | $ | | — | |||||||
During the three months ended June 30, 2023, warrants to purchase
Note 15 – Segment Reporting
The Company’s Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (“CODM”), manages the business and allocates resources via a combination of restaurant sales reports and operating segment profit information, defined as revenues less operating expenses. As a result of the Benihana Acquisition, the CODM evaluated the Company’s business and determined that there are
19
The Company has identified its reportable operating segments as follows:
| ● | STK. The STK segment consists of the results of operations from STK restaurants and ONE Hospitality restaurant locations, which include Bao Yum and Hideout, as well as management, license and incentive fee revenue generated from the STK brand and ONE Hospitality restaurants which include, Heliot, Rado, Rivershore Bar & Grill and F&B hospitality management agreements, and pre-opening expenses associated with new restaurants under development. |
| ● | Benihana. The Benihana segment consists of the results of operations from Benihana restaurant locations, as well as franchise revenue from the Benihana brand and pre-opening expenses associated with new restaurants under development. |
| ● | Grill Concepts. The Grill Concepts segment consists of the results of operations of Kona Grill and RA Sushi restaurant locations and pre-opening expenses associated with new restaurants under development. |
| ● | Corporate. The Corporate segment consists of the following: general and administrative costs, stock-based compensation, lease termination expenses, transaction costs, COVID-19 related expenses and other income and expenses. This segment also includes STK Meat Market, an e-commerce platform that offers signature steak cuts nationwide, the Company’s major off-site events group, which supports all brands and venue concepts, and revenue generated from gift card programs. The Corporate segment’s total assets primarily include cash and cash equivalents, tradenames, goodwill and deferred tax assets. |
Certain financial information relating to the three and nine months ended September 30, 2024 and 2023 for each segment is provided below (in thousands).
| STK |
| Benihana |
| Grill Concepts |
| Corporate |
| Total | ||||||
For the three months ended September 30, 2024 | |||||||||||||||
Total revenues |
| $ | | | | | | ||||||||
Operating income (loss) | $ | | | ( | ( | ( | |||||||||
Capital asset additions(1) | $ | | | | | | |||||||||
For the nine months ended September 30, 2024 | |||||||||||||||
Total revenues |
| $ | | | | | | ||||||||
Operating income (loss) | $ | | | ( | ( | ( | |||||||||
Capital asset additions(1) | $ | | | | | | |||||||||
As of September 30, 2024 | |||||||||||||||
Total assets | $ | | | | | | |||||||||
STK |
| Benihana |
| Grill Concepts |
| Corporate |
| Total | |||||||
For the three months ended September 30, 2023 | |||||||||||||||
Total revenues | $ | | — | | | | |||||||||
Operating income (loss) | $ | | — | ( | ( | ( | |||||||||
Capital asset additions(1) | $ | | — | | ( | | |||||||||
For the nine months ended September 30, 2023 | |||||||||||||||
Total revenues | $ | | — | | | | |||||||||
Operating income (loss) | $ | | — | | ( | | |||||||||
Capital asset additions | $ | | — | | | | |||||||||
As of December 31, 2023 | |||||||||||||||
Total assets | $ | | — | | | | |||||||||
| (1) | Capital asset additions for the Corporate segment include furniture, fixtures, and equipment for restaurants that the Company plans to open in the future. |
20
Note 16 – Geographic Information
Certain financial information by geographic location is provided below (in thousands).
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
Domestic revenues |
| $ | |
| $ | |
| $ | |
| $ | |
International revenues |
| |
| |
| |
| | ||||
Total revenues | $ | | $ | | $ | | $ | | ||||
September 30, | December 31, | |||||
2024 | 2023 | |||||
Domestic long-lived assets |
| $ | |
| $ | |
International long-lived assets |
| |
| | ||
Total long-lived assets | $ | | $ | | ||
Note 17 – Commitments and Contingencies
The Company is party to claims in lawsuits incidental to its business, including lease disputes and employee-related matters. The Company has recorded accruals, when necessary, in its consolidated financial statements in accordance with ASC 450. While the resolution of a lawsuit, proceeding or claim may have an impact on the Company’s financial results for the period in which it is resolved, in the opinion of management, the ultimate outcome of such matters and judgements in which the Company is currently involved, either individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position or results of operations.
Item 2. Management’s Discussion and Analysis of Financial Condition and 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 risks 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, 2023, Item 1A. “Risk Factors” in our Quarterly Reports on From 10-Q for the quarters ended March 31, 2024 and June 30, 2024, and Item 1A. “Risk Factors” included in this Quarterly Report on Form 10-Q. 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) our ability to integrate the new or acquired restaurants into our operations without disruptions to operations; (2) our ability to capture anticipated synergies; (3) 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 employees; (4) 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; (5) 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; (6) changes in applicable laws or regulations; (7) the possibility that The ONE Group may be adversely affected by other economic, business, and/or competitive factors; and (8) 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.
21
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, 2023.
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 an international restaurant company that develops, owns and operates, manages and licenses, and franchises upscale and polished casual, high-energy restaurants and lounges and provides turn-key food and beverage (“F&B”) services and consulting service 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 as follows:
| ● | STK, a modern twist on the American steakhouse concept featuring premium steaks, seafood and specialty cocktails in an energetic upscale atmosphere; |
| ● | Benihana, an interactive dining destination with highly skilled chefs preparing food in front of guests and served in an energetic atmosphere alongside fresh sushi and innovative cocktails; |
| ● | Kona Grill, a polished casual bar-centric grill concept featuring American favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere; and |
| ● | RA Sushi, a Japanese cuisine concept that offers a fun-filled, bar-forward, upbeat, and vibrant dining atmosphere anchored by creative sushi, inventive drinks, and outstanding service. |
Our F&B hospitality management services are marketed as ONE Hospitality and 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. We also provide hospitality advisory and consulting services to certain clients. Our F&B hospitality clients operate global hospitality brands such as the W Hotel, ME Hotel and Hippodrome Casino. For those restaurants and venues that are managed, licensed or franchised, we generate management fee revenue and franchise revenue based on top-line revenues and incentive fee revenue based on a percentage of the location’s revenues and net profits.
We opened our first restaurant in January 2004 in New York, New York. We currently own, operate, manage, license or franchise 166 venues including 29 STKs, 85 Benihanas, 27 Kona Grills and 16 RA Sushi in major cities in North America, Europe, Latin America and the Middle East and 9 F&B venues operated under ONE Hospitality in four hotels and casinos throughout the United States and Europe.
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.
We intend to open six new venues in 2024. As of the date of this report we have opened the following:
| ● | Owned STK restaurant in Washington DC |
| ● | Owned RA Sushi restaurant in Plantation, Florida |
| ● | Owned Kona Grill restaurant in Tigard, Oregon |
| ● | Owned STK restaurant in Aventura, Florida |
22
| ● | Owned Salt Water Social restaurant in Denver, Colorado |
There are currently two Company-owned STK restaurants and one Company-owned Benihana restaurant under construction in the following cities:
| ● | Owned STK restaurant in Topanga, California |
| ● | Owned STK restaurant in Los Angeles, California |
| ● | Owned Benihana restaurant in San Mateo, California |
In July 2024, we terminated a franchise agreement for one restaurant.
In October 2024, we closed four company-owned RA Sushi restaurants.
The table below reflects our current venues by restaurant brand and geographic location:
| Venues | |||||||||||
| STK(1) |
| Benihana(3) |
| Kona Grill |
| RA Sushi |
| ONE Hospitality(2) |
| Total | |
Domestic |
|
|
|
|
|
|
|
|
|
| ||
Owned |
| 18 | 74 | 27 | 16 | 3 |
| 138 | ||||
Managed |
| 2 | — | — | — | 1 |
| 3 | ||||
Licensed |
| 1 | — | — | — | — |
| 1 | ||||
Franchised |
| — | 8 | — | — | — |
| 8 | ||||
Total domestic |
| 21 | 82 | 27 | 16 | 4 |
| 150 | ||||
International |
|
|
|
|
|
|
|
| ||||
Owned |
| — | — | — | — | 1 |
| 1 | ||||
Managed |
| 4 | — | — | — | 4 |
| 8 | ||||
Licensed |
| 4 | — | — | — | — |
| 4 | ||||
Franchised |
| — | 3 | — | — | — |
| 3 | ||||
Total international |
| 8 | 3 | — | — | 5 |
| 16 | ||||
Total venues |
| 29 | 85 | 27 | 16 | 9 |
| 166 | ||||
| (1) | Locations with an STK and STK Rooftop are considered one venue location. This includes the STK Rooftop in San Diego, CA, which is a licensed location. |
| (2) | Includes concepts under the Company’s F&B hospitality management agreements and other venue brands such as Salt Water Social, Bao Yum, Heliot, Hideout, Radio and Rivershore Bar & Grill. |
| (3) | Includes Benihana and RA Sushi co-branded locations. |
Our Growth Strategies and Outlook
Our growth model is primarily driven by the following:
| ● | Expansion of our STK, Benihana, and Kona Grill Restaurants |
| ● | Expansion through New F&B Hospitality Projects |
| ● | Increase Same Store Sales and Increase Our Operating Efficiency |
| ● | Acquisitions |
Benihana Acquisition and Related Financings
On May 1, 2024, the Company acquired 100% of the issued and outstanding equity interests of Safflower Holdings Corp. from Safflower Holdings LLC for $365.0 million., subject to customary adjustments (the “Benihana Acquisition”). Safflower Holdings Corp. beneficially owns most of the Benihana restaurants, as well as all of the RA Sushi restaurants, in the United States. It also franchises Benihana locations in the U.S., Latin America (excluding Mexico) and the Caribbean.
In connection with the Benihana Acquisition, on May 1, 2024, the Company sold and issued to (a) HPC III Kaizen LP, for $150.0 million cash, subject to a 5% original issuance discount, 150,000 shares of Series A Preferred Stock, a warrant to purchase 1,786,582 shares of Common Stock of the Company for an exercise price of $0.01 per share, and a warrant to purchase 1,000,000 shares of
23
Common Stock of the Company for an exercise price of $10.00 per share and (b) to the HPS Investors, for $10 million cash in the aggregate, subject to a 5% original issuance discount, securities allocated among the HPS Investors as follows: (i) to HPS Special Situations Opportunity Fund II, L.P., 4,309 shares of such Series A Preferred Stock in book-entry form, a warrant to purchase 51,236 shares of Common Stock of the Company for an exercise price of $0.01 per share, and a warrant to purchase 28,729 shares of Common Stock of the Company for an exercise price of $10.00 per share, (ii) to SSOF II BH US Subsidiary, L.P., 3,691 shares of such Series A Preferred Stock in book-entry form, a warrant to purchase 43,957 shares of Common Stock of the Company for an exercise price of $0.01 per share, and a warrant to purchase 24,604 shares of Common Stock of the Company for an exercise price of $10.00 per share, (iii) to HPS Corporate Lending Fund, 1,000 shares of such Series A Preferred Stock in book-entry form, a warrant to purchase 11,911 shares of Common Stock of the Company for an exercise price of $0.01 per share, and a warrant to purchase 6,667 shares of Common Stock of the Company for an exercise price of $10.00 per share, and (iv) to HPS Corporate Capital Solutions Fund, 1,000 shares of such Series A Preferred Stock in book-entry form, a warrant to purchase 11,911 shares of Common Stock of the Company for an exercise price of $0.01 per share, and a warrant to purchase 6,667 shares of Common Stock of the Company for an exercise price of $10.00 per share, in each case of clauses (a) and (b), in a private placement exempt from registration under the Securities Act of 1933, as amended.
The Series A Preferred Stock is non-voting and non-convertible; has compounding dividends that begin at a rate of 13.0% per annum and increase over time at specified intervals; is subject to optional redemption by the Company and mandatory redemption following specified events and in certain circumstances upon the exercise by the holders of a majority of the outstanding shares of Series A Preferred Stock of an option to deliver written notice to the Company to require redemption, in each case, for specified prices; and gives certain consent rights for the holders of a majority of the outstanding shares of Series A Preferred Stock for specified matters.
Additionally, in connection with the Benihana Acquisition, on May 1, 2024, the Company entered into a credit agreement with Deutsche Bank AG New York Branch, Deutsche Bank Securities Inc., HPS Investment Partners, LLC and HG Vora Capital Management, LLC (the “Credit Agreement”). The Credit Agreement provides a $350.0 million senior secured term loan facility and a $40.0 million senior secured revolving credit facility, up to $10.0 million of which will be available in the form of letters of credit. On May 1, 2024, we borrowed $350.0 million under the Term Loan Facility and the Revolving Facility was and remains undrawn.
Refer to Notes 6 and 12 to our condensed consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the new credit facility and preferred stock financing.
Key Performance Indicators
Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for the Company’s key performance indicators. The following represents changes in key performance indicators during 2024, primarily attributable to the evaluation of accounting policies in conjunction with the Benihana acquisition discussed below:
Same Store Sales (“SSS”). SSS represents total food and beverage sales at domestic owned and managed restaurants opened for at least a full 24-month period at the beginning of each quarter, which removes the impact of new restaurant openings and closures in comparing the operations of existing restaurants. For STK SSS, this measure includes total revenue from our owned and managed domestic STK locations, excluding revenues from our owned STK restaurant located in the W Hotel in Los Angeles, California due to the impact of the F&B hospitality management agreement with the hotel. Revenues from locations where we do not directly control the event sales force are excluded from this measure.
Executive Summary
Total revenues increased $117.1 million, or 152.3% to $194.0 million for the three months ended September 30, 2024 compared to $76.9 million for the three months ended September 30, 2023 primarily due to the Benihana Acquisition on May 1, 2024. Same store sales decreased 8.8% in the third quarter of 2024 compared to the third quarter of 2023.
Operating loss increased $1.0 million to $3.0 million for the three months ended September 30, 2024 compared to $2.0 million for the three months ended September 30, 2023. The change is primarily attributed to transaction, transition and integration costs related to the Benihana Acquisition partially offset by the increase in operating income attributable to the acquired restaurants.
Restaurant operating profit increased $16.0 million, or 175.6% to $25.1 million for the three months ended September 30, 2024 compared to $9.1 million for the three months ended September 30, 2023. The increase in restaurant operating profit is primarily due to the Benihana Acquisition on May 1, 2024, strong restaurant operating profit for new STK restaurants and cost reduction initiatives. Restaurant operating profit as a percentage of owned restaurant net revenue was 13.2% in the third quarter of 2024 compared to 12.3%
24
in the third quarter of 2023. See “Results of Operations” below for reconciliation to Operating income (loss), the most directly comparable GAAP measure to Restaurant Operating Profit.
Total revenues increased $208.7 million, or 85.9% to $451.5 million for the nine months ended September 30, 2024 compared to $242.8 million for the nine months ended September 30, 2023 primarily attributable to the Benihana Acquisition on May 1, 2024.
For the nine months ended September 30, 2024, operating loss was $2.0 million compared to operating income of $4.4 million for the nine months ended September 30, 2023, primarily due to transaction, transition and integration costs related to the Benihana Acquisition.
Restaurant operating profit increased $34.3 million or 101.0% to $68.2 million for the nine months ended September 30, 2024 compared to restaurant operating profit of $33.9 million for the nine months ended September 30, 2023 primarily attributable to the Benihana Acquisition on May 1, 2024. Restaurant operating profit as a percentage of owned restaurant net revenue was 15.5% in the first nine months of 2024 compared to 14.6% in the same period of 2023. See “Results of Operations” below for reconciliation to Operating income (loss), the most directly comparable GAAP measure to Restaurant Operating Profit.
Results of Operations
The following table sets forth certain statements of operations data for the periods indicated (in thousands):
| For the three months ended September 30, | For the nine months ended September 30, | ||||||||||
|
| 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
Revenues: |
|
|
|
|
|
|
|
| ||||
Owned restaurant net revenue | $ | 190,587 | $ | 73,700 | $ | 441,116 | $ | 232,202 | ||||
Management, license, franchise and incentive fee revenue |
| 3,388 |
| 3,184 |
| 10,348 |
| 10,631 | ||||
Total revenues |
| 193,975 |
| 76,884 |
| 451,464 |
| 242,833 | ||||
Cost and expenses: |
|
|
|
|
|
|
|
| ||||
Owned operating expenses: |
|
|
|
|
|
|
|
| ||||
Owned restaurant cost of sales |
| 39,880 |
| 18,230 |
| 94,471 | 56,300 | |||||
Owned restaurant operating expenses |
| 125,634 |
| 46,372 |
| 278,464 |
| 141,983 | ||||
Total owned operating expenses |
| 165,514 |
| 64,602 |
| 372,935 |
| 198,283 | ||||
General and administrative (including stock-based compensation of $1,580, $1,244, $4,433 and $3,798 for the three and nine months ended September 30, 2024 and 2023, respectively) |
| 12,785 |
| 7,280 |
| 30,941 | 22,803 | |||||
Depreciation and amortization |
| 9,416 |
| 3,732 |
| 22,701 | 10,894 | |||||
Transaction and exit costs | 850 |
| — |
| 9,199 | — | ||||||
Transition and integration expenses | 6,274 |
| — |
| 10,068 | — | ||||||
Pre-opening expenses |
| 2,110 |
| 3,097 |
| 7,528 | 6,005 | |||||
Other expenses |
| 46 |
| 128 |
| 78 | 480 | |||||
Total costs and expenses |
| 196,995 |
| 78,839 |
| 453,450 |
| 238,465 | ||||
Operating (loss) income |
| (3,020) |
| (1,955) |
| (1,986) |
| 4,368 | ||||
Other expenses, net: |
|
|
|
|
|
|
|
| ||||
Interest expense, net of interest income |
| 10,679 |
| 1,673 |
| 20,622 | 5,102 | |||||
Loss on early debt extinguishment |
| — |
| — |
| 4,149 | — | |||||
Total other expenses, net |
| 10,679 |
| 1,673 |
| 24,771 |
| 5,102 | ||||
Loss before provision for income taxes |
| (13,699) |
| (3,628) |
| (26,757) |
| (734) | ||||
Benefit for income taxes |
| (4,644) |
| (375) |
| (8,180) |
| (227) | ||||
Net loss |
| (9,055) |
| (3,253) |
| (18,577) |
| (507) | ||||
Less: net loss attributable to noncontrolling interest |
| (165) |
| (155) |
| (689) |
| (583) | ||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. | $ | (8,890) | $ | (3,098) | $ | (17,888) | $ | 76 | ||||
25
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.
For the three months ended September 30, | For the nine months ended September 30, | |||||||
| 2024 | 2023 |
| 2024 | 2023 | |||
Revenues: |
|
| ||||||
Owned restaurant net revenue |
| 98.3% | 95.9% |
| 97.7% | 95.6% | ||
Management, license, franchise and incentive fee revenue |
| 1.7% | 4.1% |
| 2.3% | 4.4% | ||
Total revenues |
| 100.0% | 100.0% |
| 100.0% | 100.0% | ||
Cost and expenses: |
|
| ||||||
Owned operating expenses: |
|
| ||||||
Owned restaurant cost of sales (1) | 20.9% | 24.7% | 21.4% | 24.2% | ||||
Owned restaurant operating expenses (1) | 65.9% | 62.9% | 63.1% | 61.1% | ||||
Total owned operating expenses (1) | 86.8% | 87.7% | 84.5% | 85.4% | ||||
General and administrative (including stock-based compensation of 0.8%, 1.6%, 1.0%, and 1.6%, for the three and nine months ended September 30, 2024 and 2023, respectively) |
| 6.6% | 9.5% |
| 6.9% | 9.4% | ||
Depreciation and amortization |
| 4.9% | 4.9% |
| 5.0% | 4.5% | ||
Transaction and exit costs |
| 0.4% | —% |
| 2.0% | —% | ||
Transition and integration expenses |
| 3.2% | —% |
| 2.2% | —% | ||
Pre-opening expenses |
| 1.1% | 4.0% |
| 1.7% | 2.5% | ||
Other expenses |
| —% | 0.2% |
| —% | 0.2% | ||
Total costs and expenses |
| 101.6% | 102.5% |
| 100.4% | 98.2% | ||
Operating (loss) income |
| (1.6)% | (2.5)% |
| (0.4)% | 1.8% | ||
Other expenses, net: |
|
| ||||||
Interest expense, net of interest income |
| 5.5% | 2.2% |
| 4.6% | 2.1% | ||
Loss on early debt extinguishment |
| —% | —% |
| 0.9% | —% | ||
Total other expenses, net | 5.5% | 2.2% | 5.5% | 2.1% | ||||
Loss before provision for income taxes |
| (7.1)% | (4.7)% |
| (5.9)% | (0.3)% | ||
Benefit for income taxes | (2.4)% | (0.5)% |
| (1.8)% | (0.1)% | |||
Net loss | (4.7)% | (4.2)% |
| (4.1)% | (0.2)% | |||
Less: net loss attributable to noncontrolling interest |
| (0.1)% | (0.2)% |
| (0.2)% | (0.2)% | ||
Net (loss) income attributable to The ONE Group Hospitality, Inc. |
| (4.6)% | (4.0)% |
| (4.0)% | —% | ||
| (1) | These expenses are being shown as a percentage of owned restaurant net revenue. |
26
The following tables show our operating results by segment for the periods indicated (in thousands).
| STK |
| Benihana |
| Grill Concepts |
| Corporate |
| Total | ||||||
For the three months ended September 30, 2024 | |||||||||||||||
Total revenues |
| $ | 47,391 | 104,688 | 41,835 | 61 | 193,975 | ||||||||
Operating income (loss) | $ | 4,395 | 13,906 | (2,146) | (19,175) | (3,020) | |||||||||
Capital asset additions(1) | $ | 23,235 | 3,734 | 7,269 | 374 | 34,612 | |||||||||
For the nine months ended September 30, 2024 | |||||||||||||||
Total revenues |
| $ | 154,793 | 183,132 | 113,286 | 253 | 451,464 | ||||||||
Operating income (loss) | $ | 20,181 | 28,624 | (1,729) | (49,062) | (1,986) | |||||||||
Capital asset additions(1) | $ | 35,633 | 6,141 | 11,432 | 562 | 53,768 | |||||||||
As of September 30, 2024 | |||||||||||||||
Total assets | $ | 161,126 | 242,159 | 137,940 | 412,246 | 953,471 | |||||||||
STK |
| Benihana |
| Grill Concepts |
| Corporate |
| Total | |||||||
For the three months ended September 30, 2023 | |||||||||||||||
Total revenues | $ | 44,054 | — | 32,775 | 55 | 76,884 | |||||||||
Operating income (loss) | $ | 5,872 | — | (444) | (7,383) | (1,955) | |||||||||
Capital asset additions(1) | $ | 8,783 | — | 6,012 | (280) | 14,515 | |||||||||
For the nine months ended September 30, 2023 | |||||||||||||||
Total revenues | $ | 144,608 | — | 97,961 | 264 | 242,833 | |||||||||
Operating income (loss) | $ | 26,783 | — | 910 | (23,325) | 4,368 | |||||||||
Capital asset additions | $ | 19,764 | — | 17,427 | 1,220 | 38,411 | |||||||||
As of December 31, 2023 | |||||||||||||||
Total assets | $ | 159,637 | — | 97,840 | 59,768 | 317,245 | |||||||||
| (1) | Capital asset additions for the Corporate segment include furniture, fixtures, and equipment for restaurants that the Company plans to open in the future. |
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 have evolved our definition of Adjusted EBITDA starting in the third quarter of 2024 to provide more clarity and comparability relative to peers. We will exclude pre-opening expenses as an add back in the Adjusted EBITDA calculation. Prior period amounts presented in the table below have been recast to conform to the current period presentation.
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 rent expense, transaction and exit costs, transition and integration expenses, stock-based compensation, 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.
27
The following table presents a reconciliation of net (loss) income to EBITDA and Adjusted EBITDA for the periods indicated (in thousands):
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
Net (loss) income attributable to The ONE Group Hospitality, Inc. | $ | (8,890) | $ | (3,098) | $ | (17,888) | $ | 76 | ||||
Net loss attributable to noncontrolling interest |
| (165) |
| (155) |
| (689) |
| (583) | ||||
Net loss |
| (9,055) |
| (3,253) |
| (18,577) |
| (507) | ||||
Interest expense, net |
| 10,679 |
| 1,673 |
| 20,622 |
| 5,102 | ||||
Benefit for income taxes |
| (4,644) |
| (375) |
| (8,180) |
| (227) | ||||
Depreciation and amortization |
| 9,416 |
| 3,732 |
| 22,701 |
| 10,894 | ||||
EBITDA |
| 6,396 |
| 1,777 |
| 16,566 |
| 15,262 | ||||
Stock-based compensation |
| 1,580 |
| 1,244 |
| 4,433 |
| 3,798 | ||||
Transaction and exit costs | 850 | — | 9,199 | — | ||||||||
Transition and integration expenses |
| 6,274 |
| — |
| 10,068 |
| — | ||||
Non-cash rent expense (1) |
| (343) |
| (126) | (1,034) |
| (279) | |||||
Loss on early debt extinguishment |
| — |
| — |
| 4,149 |
| — | ||||
Other expenses |
| 46 |
| 128 |
| 78 |
| 480 | ||||
Adjusted EBITDA |
| 14,803 |
| 3,023 |
| 43,459 |
| 19,261 | ||||
Adjusted EBITDA attributable to noncontrolling interest |
| (54) |
| (72) |
| (387) |
| (326) | ||||
Adjusted EBITDA attributable to The ONE Group Hospitality, Inc. | $ | 14,857 | $ | 3,096 | $ | 43,846 | $ | 19,588 | ||||
| (1) | Non-cash rent expense is included in owned restaurant operating expenses and general and administrative expense on the condensed consolidated statements of operations and comprehensive income. |
The following table presents a reconciliation of Operating (loss) income to Restaurant Operating Profit for the periods indicated (in thousands):
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
Operating income as reported | $ | (3,020) | $ | (1,955) | $ | (1,986) | $ | 4,368 | ||||
Management, license and incentive fee revenue |
| (3,388) | (3,184) | (10,348) | (10,631) | |||||||
General and administrative |
| 12,785 | 7,280 | 30,941 | 22,803 | |||||||
Depreciation and amortization |
| 9,416 | 3,732 | 22,701 | 10,894 | |||||||
Transaction and exit costs | 850 | — | 9,199 | — | ||||||||
Transition and integration expenses | 6,274 | — | 10,068 | — | ||||||||
Pre-opening expenses |
| 2,110 | 3,097 | 7,528 | 6,005 | |||||||
Other expenses |
| 46 | 128 | 78 | 480 | |||||||
Restaurant Operating Profit | $ | 25,073 | $ | 9,098 | $ | 68,181 | $ | 33,919 | ||||
Restaurant Operating Profit as a percentage of owned restaurant net revenue | 13.2% | 12.3% | 15.5% | 14.6% | ||||||||
28
Restaurant operating profit by component is as follows (in thousands):
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||
2024 |
| 2023 |
| 2024 |
| 2023 | ||||||
STK restaurant operating profit (Company owned) | $ | 6,547 | $ | 6,796 | $ | 26,769 | $ | 25,050 | ||||
STK restaurant operating profit (Company owned) as a percentage of STK revenue (Company owned) | 14.6% | 16.6% | 18.4% | 18.8% | ||||||||
Benihana restaurant operating profit (Company owned) | $ | 17,708 | $ | — | $ | 34,442 | $ | — | ||||
Benihana restaurant operating profit (Company owned) as a percentage of Benihana revenue (Company owned) (1) | 17.0% | — | 18.9% | — | ||||||||
Core Grill Concepts restaurant operating profit | $ | 1,602 | $ | 2,254 | $ | 8,271 | $ | 8,149 | ||||
Core Grill Concepts restaurant operating profit as a percentage of Grill Concepts revenue | 4.4% | 10.7% | 8.3% | 9.4% | ||||||||
Non-core Grill Concepts restaurant operating profit | $ | (783) | $ | 39 | $ | (1,291) | $ | 39 | ||||
Non-core Grill Concepts restaurant operating profit as a percentage of Non-core revenue | (15.0)% | 0.3% | (9.8)% | 0.3% | ||||||||
| (1) | When adjusted for non-cash rent of $0.2 million and ($0.2) million for the nine months ended September 30, 2024 and September 30, 2023, respectively, the Benihana restaurant operating profit as a percentage of Benihana revenue increased 20 basis points from 17.0% for the pro forma three months ended September 30, 2023 to 17.2% for the three months ended September 30, 2024. |
29
Results of Operations for the Three Months Ended September 30, 2024 and 2023
Revenues
Owned restaurant net revenue. Owned restaurant net revenue increased $116.9 million, or 158.6%, to $190.6 million for the three months ended September 30, 2024 from $73.7 million for the three months ended September 30, 2023. The increase was primarily attributable to the acquisition of Benihana and RA Sushi restaurants on May 1, 2024, which generated $119.4 million in revenues and $10.1 million in revenues from six new restaurants opened since October 2023, partially offset by a reduction in comparable restaurant sales. Comparable restaurant sales decreased 8.8% for the third quarter of 2024 compared to the third quarter of 2023.
Management, license and incentive fee revenue. Management, license and incentive fee revenues increased $0.2 million, or 6.4%, to $3.4 million for the three months ended September 30, 2024 from $3.2 million for the three months ended September 30, 2023. Management, license and incentive fee revenue attributed to Benihana franchised restaurants contributed $0.7 million in revenues during the third quarter of 2024 which was offset by decreased revenues at our managed STK restaurants in North America and early termination of the STK Westminster management agreement in the fourth quarter of 2023 as we consolidated our operations in London, UK.
Cost and Expenses
Owned restaurant cost of sales. Food and beverage costs for owned restaurants increased $21.7 million, or 118.8%, to $39.9 million for the three months ended September 30, 2024 from $18.2 million for the three months ended September 30, 2023. The increase in owned restaurant cost of sales is primarily attributed to $23.2 million in cost of sales associated with revenues generated by Benihana and RA Sushi restaurants acquired on May 1, 2024. As a percentage of owned restaurant net revenue, cost of sales decreased 380 basis points from 24.7% in the three months ended September 30, 2023 to 20.9% for the three months ended September 30, 2024 primarily due to lower cost of sales as a percentage of restaurant sales for Benihana and RA Sushi restaurants as compared to STK and Kona Grill restaurants, product mix management, pricing and operational cost reduction initiatives.
Owned restaurant operating expenses. Owned restaurant operating expenses increased $79.2 million to $125.6 million for the three months ended September 30, 2024 from $46.4 million for the three months ended September 30, 2023. The increase in owned restaurant operating expense is primarily attributed to $77.7 million in operating expenses associated with revenues generated by Benihana and RA Sushi restaurants acquired on May 1, 2024. Owned restaurant operating expenses as a percentage of owned restaurant net revenue increased 300 basis points from 62.9% for the three months ended September 30, 2023 to 65.9% for the three months ended September 30, 2024.
General and administrative. General and administrative costs increased $5.5 million, or 75.6%, to $12.8 million for the three months ended September 30, 2024 from $7.3 million for the three months ended September 30, 2023. The increase was attributable to incremental headcount associated with the Benihana Acquisition and increased stock-based compensation expense. As a percentage of revenues, general and administrative costs were 6.6% for the three months ended September 30, 2024 compared to 9.5% for the three months ended September 30, 2023.
Depreciation and amortization. Depreciation and amortization expense was $9.4 million for the three months ended September 30, 2024 compared to $3.7 million for the three months ended September 30, 2023. The increase was primarily related to depreciation and amortization for the Benihana and RA Sushi restaurants acquired on May 1, 2024, depreciation associated with the opening of six new owned venues since October 2023 and capital expenditures to maintain and enhance the guest experience in our restaurants.
Pre-opening expenses. For the three months ended September 30, 2024, we incurred $2.1 million of pre-opening expenses primarily related to payroll, training and non-cash pre-open rent for Kona Grill Tigard, which opened on September 17, 2024, and STK Aventura, which opened in October 2024. We also incurred costs during the third quarter of 2024 for STK, Benihana and Kona Grill restaurants currently under development. Total pre-opening expenses related to non-cash pre-open rent was $0.3 million.
Pre-opening expenses for the three months ended September 30, 2023 were $3.1 million, primarily related to payroll, training and non-cash pre-open rent for Kona Grill Riverton, which opened in July 2023, and STK and Kona Grill restaurants that were under development. Detail of pre-opening expenses by category is provided in the table below for the three months ended September 30, 2024 and 2023 (in thousands).
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Three Months Ended September 30, 2024 |
| Preopen Expenses |
| Preopen Rent (2) | Total | ||||
Training Team | $ | 1,116 | $ | — | $ | 1,116 | |||
Restaurants (1) | 549 | 445 | 994 | ||||||
Total | $ | 1,665 | $ | 445 | $ | 2,110 | |||
Three Months Ended September 30, 2023 |
| Preopen Expenses |
| Preopen Rent (2) | Total | ||||
Training Team | $ | 1,562 | $ | — | $ | 1,562 | |||
Restaurants | 1,071 | 464 | 1,535 | ||||||
Total | $ | 2,633 | $ | 464 | $ | 3,097 | |||
| (1) | Includes Salt Water Social, STK Aventura, Kona Grill Tigard, RA Sushi Plantation and other venues under development. |
| (2) | Cash rent paid was $202 and $64 for the three months ended September 30, 2024 and 2023, respectively. |
Transaction and exit costs. Transaction and exit costs were $0.9 million for the three months ended September 30, 2024. These costs primarily included investment banking, legal and professional fees incurred in conjunction with the Benihana Acquisition, which closed on May 1, 2024.
Transition and integration costs. In the three months ended September 30, 2024, we incurred $6.3 million of transition and integration costs associated with the Benihana Acquisition, which closed on May 1, 2024. Included in these costs are expenses related to the implementation of happy hour and wagyu offerings at Benihana and identified duplicate professional service vendors, operational support offices, support positions, and maintenance expenses that will be eliminated in the foreseeable future. Over the next twelve months, we intend to integrate Benihana by leveraging our corporate infrastructure, our supply chain, and unique Vibe Dining program, to elevate the brand experience and drive improved performance.
Interest expense, net. Interest expense, net was $10.7 million and $1.7 million for the three months ended September 30, 2024 and 2023, respectively. We borrowed $350.0 million on the Credit Agreement on May 1, 2024 to finance the Benihana Acquisition. The weighted average interest rate for the three months ended September 30, 2024 was 11.8% compared to 12.1% in the same period of 2023.
Benefit for income taxes. For the three months ended September 30, 2024, income tax benefit was $4.6 million compared to income tax benefit of $0.4 million for the three months ended September 30, 2023.
Net loss attributable to noncontrolling interest. Net loss attributable to noncontrolling interest was $0.2 million for both the three months ended September 30, 2024 and September 30, 2023.
Results of Operations for the Nine Months Ended September 30, 2024 and 2023
Revenues
Owned restaurant net revenue. Owned restaurant net revenue increased $208.9 million, or 90.0%, to $441.1 million for the nine months ended September 30, 2024 from $232.2 million for the nine months ended September 30, 2023. The increase was primarily attributable to the acquisition of Benihana and RA Sushi restaurants on May 1, 2024, which generated $208.1 million in revenues for the five-month period owned by the Company, and $32.6 million in revenues from six new restaurants opened since October 2023, partially offset by a reduction in comparable restaurant sales. Comparable restaurant sales decreased 7.9% during the nine months ended September 30, 2024 compared to the same period in 2023.
Management, license and incentive fee revenue. Management, license and incentive fee revenues decreased $0.3 million, or 2.7%, to $10.3 million for the nine months ended September 30, 2024 from $10.6 million for the nine months September 30, 2023. The decrease was primarily attributable to decreased revenues at our STK restaurants in North America and early termination of the STK Westminster management agreement in the fourth quarter of 2023 as we consolidated our operations in London, UK, partially offset by $1.1 million in revenues attributed to Benihana franchised restaurants.
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Cost and Expenses
Owned restaurant cost of sales. Food and beverage costs for owned restaurants increased $38.2 million, or 67.8%, to $94.5 million for the nine months ended September 30, 2024 compared to $56.3 million for the nine months ended September 30, 2023. The increase in cost of sales was due to the incremental sales increases noted above from the acquisition of Benihana and RA Sushi and the opening of six new venues since September 2023, partially offset by product mix management, pricing and operational cost reduction initiatives.
As a percentage of owned restaurant net revenue, cost of sales improved 280 basis points from 24.2% in the nine months ended September 30, 2023 to 21.4% for the nine months ended September 30, 2024 primarily due to lower cost of sales as a percentage of restaurant sales for Benihana and RA Sushi restaurants as compared to STK and Kona Grill restaurants, product mix management, pricing and operational cost reduction initiatives.
Owned restaurant operating expenses. Owned restaurant operating expenses increased $136.5 million to $278.5 million for the nine months ended September 30, 2024 from $142.0 million for the nine months ended September 30, 2023 The increase in owned restaurant operating expense is primarily attributed to $131.5 million in operating expenses associated with revenues generated by Benihana and RA Sushi restaurants acquired on May 1, 2024. Owned restaurant operating expenses as a percentage of owned restaurant net revenue increased 200 basis points from 61.1% in the nine months ended September 30, 2023 to 63.1% for the nine months ended September 30, 2024.
General and administrative. General and administrative costs increased $8.1 million, or 35.7%, to $30.9 million for the nine months ended September 30, 2024 from $22.8 million for the nine months ended September 30, 2023. The increase was attributable to incremental headcount associated with the Benihana Acquisition and increased stock-based compensation expense. As a percentage of revenues, general and administrative costs were 6.9% for the nine months ended September 30, 2024 compared to 9.4% for the nine months ended September 30, 2023.
Depreciation and amortization. Depreciation and amortization expense was $22.7 million and $10.9 million for the nine months ended September 30, 2024 and 2023, respectively. The increase was primarily related to five months of depreciation and amortization for the Benihana and RA Sushi restaurants acquired on May 1, 2024, depreciation associated with the six new owned venues opened since October 2023 and capital expenditures to maintain and enhance the guest experience in our restaurants.
Pre-opening expenses. For the nine months ended September 30, 2024, we incurred $7.5 million of pre-opening expenses primarily related to payroll, training and non-cash pre-open rent for STK Washington DC, which opened in March 2024, RA Sushi Plantation which opened on July 1, 2024, Kona Grill Tigard which opened in September 2024, and STK Aventura which opened in October 2024. Total pre-opening expenses related to non-cash pre-open rent was $0.9 million.
Pre-opening expenses for the nine months ended September 30, 2023 were $6.0 million primarily related to payroll, training, and non-cash pre-open rent for Kona Grill Columbus and Kona Grill Riverton, which opened in January 2023 and July 2023, respectively, and STK Charlotte and Kona Grill Phoenix, which opened in October 2023, and STK and Kona Grill restaurants under development. Detail of pre-opening expenses by category is provided in the table below for the nine months ended September 30, 2024 and 2023 (in thousands).
Nine Months Ended September 30, 2024 |
| Preopen Expenses |
| Preopen Rent (2) | Total | ||||
Training Team | $ | 4,069 | $ | — | $ | 4,069 | |||
Restaurants (1) | 2,083 | 1,376 | 3,459 | ||||||
Total | $ | 6,152 | $ | 1,376 | $ | 7,528 | |||
Nine Months Ended September 30, 2023 |
| Preopen Expenses |
| Preopen Rent (2) | Total | ||||
Training Team | $ | 2,850 | $ | — | $ | 2,850 | |||
Restaurants | 1,973 | 1,182 | 3,155 | ||||||
Total | $ | 4,823 | $ | 1,182 | $ | 6,005 | |||
| (1) | Includes Salt Water Social, STK Aventura, Kona Grill Tigard, RA Sushi Plantation and other venues under development |
| (2) | Cash rent paid was $589 and $215 for the nine months ended September 30, 2024 and 2023, respectively. |
Transaction and exit costs. Transaction and exit costs were $9.2 million for the nine months ended September 30, 2024. These costs primarily included investment banking, legal and professional fees incurred in conjunction with the Benihana Acquisition, which closed on May 1, 2024.
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Transition and integration costs. In the nine months ended September 30, 2024, we incurred $10.1 million of transition and integration costs associated with the Benihana and RA Sushi acquisition, which closed on May 1, 2024. Included in these costs are expenses related to the implementation of happy hour and wagyu offerings at Benihana and identified duplicate professional service vendors, operational support offices, support positions, and maintenance expenses that will be eliminated in the foreseeable future. Over the next twelve months, we intend to integrate Benihana by leveraging our corporate infrastructure, our supply chain, and unique Vibe Dining program, to elevate the brand experience and drive improved performance.
Interest expense, net. Interest expense, net was $20.6 million for the nine months ended September 30, 2024 compared to $5.1 million for the nine months ended September 30, 2023. We borrowed $350.0 million on the Credit Agreement on May 1, 2024 to finance the Benihana Acquisition. The weighted average interest rate for the nine months ended September 30, 2024 was 11.8% compared to 11.8% in the same period of 2023.
Loss on early debt extinguishment. On May 1, 2024, in conjunction with entering into the Credit Agreement, we prepaid the outstanding debt balance under the credit agreement with Goldman Sachs to early extinguish the $73.1 million of outstanding term loans. We recognized a $4.1 million loss on debt extinguishment primarily caused by the prepayment penalty and the recognition of unamortized debt issuance costs related to the debt extinguished.
Benefit for income taxes. The benefit for income taxes for the nine months ended September 30, 2024 was $8.2 million compared to a benefit for income taxes of $0.3 million for the nine months ended September 30, 2023.
Net loss attributable to noncontrolling interest. Net loss attributable to noncontrolling interest was $0.7 million for the nine months ended September 30, 2024 compared to a net loss of $0.6 million for the nine months ended September 30, 2023.
Liquidity and Capital Resources
Executive Summary
Our principal liquidity requirements are to meet our lease obligations, working capital and capital expenditure needs and to pay principal and interest on outstanding debt. Subject to our operating performance, which, if significantly adversely affected, would adversely affect the availability of funds, we expect to finance our operations for the next 12 months and the foreseeable future, including the costs of opening currently planned new restaurants, through cash provided by operations and construction allowances provided by landlords of certain locations. We also may borrow on our revolving credit facility or issue equity, including preferred stock, to support ongoing business operations. We believe these sources of financing are adequate to support our immediate business operations and plans. As of September 30, 2024, we had cash and cash equivalents and restricted cash and cash equivalents of $28.7 million and $349.1 million in long-term debt, which consisted of borrowings under our Credit Agreement. As of September 30, 2024, the availability on our revolving credit facility was $34.1 million, subject to certain conditions.
For the nine months ended September 30, 2024, capital expenditures were $53.8 million of which $43.0 million related to the construction of new STK, Benihana, Kona Grill and RA Sushi restaurants and $10.7 million related to existing restaurants. Net capital expenditures, inclusive of $4.7 million in landlord contributions, was $49.1 million for the nine months ended September 30, 2024. We expect to receive between $3.0 million to $4.0 million in landlord contributions in the next three months. Capital expenditures by type for the nine months ended September 30, 2024 and 2023, respectively are provided below (in thousands).
Nine Months Ended September 30, 2024 | STK | Benihana | Kona Grill | RA Sushi | Other (1) | Total | ||||||||||||
New Venues | $ | 32,833 | $ | 1,401 | $ | 7,113 | $ | 1,257 | $ | 414 | $ | 43,018 | ||||||
Maintenance | 2,865 | 4,739 | 2,395 | 668 | — | 10,667 | ||||||||||||
Other | — | — | — | — | 85 | 85 | ||||||||||||
Total | $ | 35,698 | $ | 6,140 | $ | 9,508 | $ | 1,925 | $ | 499 | $ | 53,770 | ||||||
Tenant Improvement Allowance | $ | 3,247 | $ | — | $ | 1,460 | $ | — | $ | — | $ | 4,706 | ||||||
Nine Months Ended September 30, 2023 | STK | Benihana | Kona Grill | RA Sushi | Other (1) | Total | ||||||||||||
New Venues | $ | 15,798 | $ | — | $ | 13,457 | $ | — | $ | 1,743 | $ | 30,998 | ||||||
Maintenance | 3,675 | — | 3,379 | — | — | 7,054 | ||||||||||||
Other | — | — | — | — | 359 | 359 | ||||||||||||
Total | $ | 19,473 | $ | — | $ | 16,836 | $ | — | $ | 2,102 | $ | 38,411 | ||||||
Tenant Improvement Allowance | $ | 1,033 | $ | — | $ | 750 | $ | — | $ | — | $ | 1,783 | ||||||
(1)Includes inventory of restaurant equipment for venues under development.
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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. Due to the seasonality of our business, we typically generate a greater proportion of our cash flow from operations during the fourth quarter.
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. We have made significant investments in our training and development teams to support new restaurants openings. We believe these investments are necessary to support the successful opening of our new restaurants. If we modify our growth plans, the personnel that comprise our training team could be deployed to operate existing restaurants.
To help manage future cash requirements, we limit the number of owned company venues under construction at any given time to six restaurants. We also set a maximum number of signed leases for new restaurant development to twelve in order to minimize our cash rent commitment to approximately $3.0 million to $4.0 million annually for restaurants under development.
Capital Expenditures and Lease Arrangements
When we open new Company-owned restaurants, our capital expenditures for construction increase. For owned STK restaurants, where we build from a shell state, we have typically targeted a restaurant size of 8,000 square feet with a gross cash investment of approximately $515 to $675 per square foot, exclusive of $200 per square foot in landlord contributions. For owned Kona Grill restaurants, where we build from a shell state, we have typically targeted a restaurant size of 7,000 square feet with a gross cash investment of approximately $510 per square foot, exclusive of $150 per square foot in landlord contributions. In situations where we add functional space and build an STK or Kona Grill restaurant with a mezzanine, covered patio, or rooftop, costs per square foot will increase. Typical cash pre-opening costs are $0.6 million to $0.8 million, excluding the impact of cash and non-cash pre-opening rent. 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, when we believe that will increase revenues for those locations.
Our hospitality F&B venues 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.
Credit Agreement
Refer to Note 6 and Note 17 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.
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Cash Flows
The following table summarizes the statement of cash flows for the nine months ended September 30, 2024 and 2023 (in thousands):
| For the nine months ended September 30, | |||||
|
| 2024 |
| 2023 | ||
Net cash provided by (used in): |
|
|
|
| ||
Operating activities | $ | 25,668 | $ | 15,228 | ||
Investing activities |
| (423,606) |
| (38,411) | ||
Financing activities |
| 405,565 |
| (9,681) | ||
Effect of exchange rate changes on cash |
| 10 |
| (120) | ||
Net increase (decrease) in cash and cash equivalents | $ | 7,637 | $ | (32,984) | ||
Operating Activities. Net cash provided by operating activities was $25.7 million for the nine months ended September 30, 2024, compared to $15.2 million for the nine months ended September 30, 2023. The change in net cash provided by operating activities was primarily attributable to the timing of collections on accounts receivables and payments on accounts payable and accrued expenses.
Investing Activities. Net cash used in investing activities for the nine months ended September 30, 2024 was $423.6 million, which was comprised of $369.8 million for the Benihana acquisition, net of cash acquired, and $53.8 million in capital expenditures for the construction of STK Washington DC, which opened in March 2024, RA Sushi Plantation, which opened in July 2024, Kona Grill Tigard, which opened in September 2024, and STK Aventura, which opened in October 2024, in addition to residual payments on four restaurants that opened during the fourth quarter of 2023 and several restaurants that were under development as of September 30, 2024.
Net cash used in investing activities for the nine months ended September 30, 2023 was $38.4 million primarily for the construction of STK restaurants in Charlotte, North Carolina; Boston, Massachusetts; Salt Lake City, Utah and Washington D.C. and Kona Grill restaurants in Columbus, Ohio; Riverton, Utah and Phoenix, Arizona and several restaurants that were under development as of September 30, 2023, as well as capital expenditures for existing restaurants.
Financing Activities. Net cash provided by financing activities for the nine months ended September 30, 2024 was $405.6 million and was comprised of net proceeds from borrowings under the Credit Agreement of $333.8 million and net proceeds from the issuance of preferred stock and warrants of $138.9 million, partially offset by the repayment of the Goldman Sachs debt of $73.6 million. Net cash used in financing activities was $9.7 million for the nine months ended September 30, 2023 which reflected $7.7 million in common stock purchased under our share repurchase program and $1.8 million in tax withholding obligation on stock-based compensation.
Recent Accounting Pronouncements
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 in 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
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the
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desired control objectives, as our controls are designed to do, and management necessarily applies its judgment in evaluating the risk and cost benefit relationship related to controls and procedures.
Our Chief Executive Officer and Chief Financial Officer have reviewed the effectiveness of our disclosure controls and procedures as of September 30, 2024 and, based on this evaluation, have concluded that our disclosure controls and procedures were effective as of September 30, 2024.
Changes in Internal Controls
On May 1, 2024, we completed the Benihana Acquisition and have implemented new processes and internal controls to assist us in the preparation and disclosure of financial information. Given the significance of the Benihana Acquisition, we intend to exclude the acquired Benihana business from our assessment and report on internal controls over financial reporting for the year ended December 31, 2024. Other than discussed above, there have been no changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls 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, 2023 and in Part II, Item 1A in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2024 and June 30, 2024.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In September 2022, the Company’s Board of Directors authorized a repurchase program of up to $10.0 million of outstanding common stock. In May 2023, the Company’s Board of Directors authorized an additional $5.0 million to this program. As of December 31, 2023, the Company had repurchased 2.3 million shares for $15.0 million under the program. In March 2024, the Company’s Board of Directors authorized an additional $5.0 million of repurchases under this program. The table below reflects shares of common stock purchased during the third quarter of 2024.
Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plan | Maximum dollar value of shares that may yet be purchased under the plan | ||||
July 1-31, 2024 | 203,656 | $ 4.50 | 203,656 | $ 3,189,492 | ||||
August 1-31, 2024 | 290,430 | $ 3.89 | 290,430 | $ 2,050,972 | ||||
September 1-30, 2024 |
| 56,790 | $ 3.52 | 56,790 | $ 1,849,218 | |||
550,876 | $ 4.07 | 550,876 |
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Item 5. Other Information
(c) Adoption or Termination of 10b5-1 Trading Plans
During the third quarter ended September 30, 2024,
Item 6. Exhibits.
(a) Exhibits required by Item 601 of Regulation S-K.
Exhibit |
| Description |
31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002 | |
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002 | ||
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
101.INS* | Inline XBRL Instance Document | |
101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
*Filed herewith.
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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: November 7, 2024 | ||
| THE ONE GROUP HOSPITALITY, INC. | |
|
|
|
| By: | /s/ Tyler Loy |
|
| Tyler Loy, Chief Financial Officer |
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