Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following management’s discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes to those statements included elsewhere in this Annual Report on Form 10-K.
Business Summary
We are a global hospitality company that develops, owns and operates, manages and licenses upscale and polished casual, high-energy restaurants and lounges and provides turn-key food and beverage (“F&B”) services for hospitality venues including hotels, casinos and other high-end locations. Turn-key F&B services are food and beverage services that can be scaled, customized and implemented by us for the client at a particular hospitality venue. Our vision is to be a global market leader in the hospitality industry by melding high-quality service, ambiance, high-energy and cuisine into one great experience that we refer to as “Vibe Dining”. We design all our restaurants, lounges and F&B services to create a social dining and high-energy entertainment experience within a destination location. We believe that this design and operating philosophy separates us from more traditional restaurant and foodservice competitors.
Our primary restaurant brands are STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse, and Kona Grill, a polished casual bar-centric grill concept featuring American favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere. Our F&B hospitality management services include developing, managing and operating restaurants, bars, rooftop lounges, pools, banqueting and catering facilities, private dining rooms, room service and mini bars tailored to the specific needs of high-end hotels and casinos. Our F&B hospitality clients operate global hospitality brands such as the W Hotel, Hippodrome Casino, and ME Hotels.
We opened our first restaurant in January 2004 in New York, New York. We currently own, operate, manage or license 54 venues including 20 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and 10 F&B venues in five hotels and casinos in the United States and Europe. In January 2021, we opened a managed STK restaurant in Scottsdale, Arizona. For those restaurants and venues that are managed or licensed, we generate management fees based on top-line revenues and incentive fee revenue based on a percentage of the location’s revenues and net profits.
The table below reflects our venues by restaurant brand and geographic location:
Venues
STK(1)(2) Kona Grill ONE Hospitality(3) Total
Domestic
Managed 2 — — 2
Licensed 1 — — 1
International
Owned — — — —
Licensed 4 — — 4
Total international 7 — 8 15
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COVID-19
The novel coronavirus (“COVID-19”) pandemic has significantly impacted our business, and public concerns about the spread of COVID-19 continue to be widespread. We experienced a significant reduction in guest traffic at our restaurants as a result of restrictions mandated by state and local governments and temporarily closed several restaurants and shifted our operations to provide only take-out and delivery service. Starting in May 2020, state and local governments began easing restrictions on stay-at-home orders; however, certain states have reimposed restrictions as COVID-19 cases increased during the fall of 2020. Currently, all our domestic restaurants are open for outdoor dining or in-person dining with seating capacity restrictions. Certain of our managed and licensed venues internationally are temporarily closed or on to-go/delivery only due to COVID-19. We have taken significant steps to adapt our business to increase sales while providing a safe environment for guests and employees.
In response to these conditions, and out of concern for our customers and partners, we have implemented enhanced safety measures and sanitation procedures to allow for in-person dining at our restaurants. As we navigate through the pandemic, we have also implemented measures to reduce our costs including the deferral of capital projects and negotiations with suppliers and landlords regarding deferral or abatement of payments.
Given the ongoing uncertainty surrounding the effects of the COVID-19 pandemic, we cannot reasonably predict when our restaurants will be able to return to normal dining room operations. We expect that our results of operations could be materially and negatively affected by COVID-19 in 2021. Our resumption of normal dining operations is subject to events beyond our control, including the effectiveness of governmental efforts to halt the spread of COVID-19.
Executive Summary
Total revenue increased $21.3 million, or 17.6% to $141.9 million for the year ended December 31, 2020 compared to $120.7 million for the year ended December 31, 2019. The increase is primarily due to a full year of Kona Grill revenue in 2020 compared to a partial period in 2019 partially offset by the impact of the COVID-19 pandemic on our restaurants. Same-store sales decreased 27.9% for the year ended December 31, 2020 compared to the prior year as restaurants were temporarily closed or operated on a limited basis due to state and local seating capacity restrictions. Approximately $54.9 million of the increase in total revenue was attributable to the addition of the Kona Grill restaurants.
Operating income decreased $26.5 million to a loss of $13.7 million for the year ended December 31, 2020 from $12.8 million for the year ended December 31, 2019. The decrease in operating income was primarily driven by temporary closures or seating capacity restrictions due to the COVID-19 pandemic and COVID-19 related costs. We incurred $5.5 million of costs related to COVID-19 in the year ended December 31, 2020, composed primarily of costs for electrostatic cleaning of our venues, personal protective equipment, and sanitation supplies to prevent the spread of COVID-19; payments to employees for paid-time off during restaurant closures; rent and rent-related costs for closed and limited-operations restaurants from the day that the dining room closed; and inventory waste. In 2019, we recognized an $11.0 million bargain purchase gain related to the Kona Grill acquisition and a non-cash write down of $2.7 million related to an investment. Additionally, we incurred transaction costs of $1.1 million and $2.5 million in the years ended December 31, 2020 and 2019, respectively. The transaction costs included transaction and integration costs incurred with the Kona Grill acquisition and internal costs associated with capital raising activities, primarily associated with the Goldman Sachs credit agreement and a credit agreement with Bank of America, N.A.
Our Growth Strategies and Outlook
Our growth model is primarily driven by the following:
Expansion of STK. We expect to continue to expand our operations domestically and internationally through a mix of owned, licensed and managed STK restaurants using a disciplined and targeted site selection process. We have identified over 75 additional major metropolitan areas across the globe where we could grow our STK brand to 200 restaurants over the foreseeable future. We expect to open as many as five to six STKs annually, primarily through
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management or licensing agreements, provided that we have sufficient interest from prospective licensees, acceptable locations and quality restaurant managers available to support that pace of growth.
In 2019, we opened an owned STK restaurant in Nashville, Tennessee and two licensed STK restaurants located in Doha, Qatar and San Juan, Puerto Rico. Additionally, as of December 31, 2020, we have a management agreement in-place to open a managed STK restaurant in Scottsdale, Arizona which opened in January 2021 and are under construction for an owned STK restaurant in Bellevue, Washington.
Expansion through New F&B Hospitality Projects. We expect our F&B hospitality services business to be an important driver of our growth and profitability, enabling us to generate management fee income with minimal capital expenditures. We believe we are well positioned to leverage the strength of our brands and the relationships we have developed with global hospitality providers to drive the continued growth of our F&B hospitality business. We continue to receive inbound inquiries regarding new opportunities globally, and we continue to work with existing hospitality clients to identify and develop additional opportunities in their venues. We expect to enter into one to two new F&B hospitality agreements annually. In 2019, we opened one managed rooftop bar concept, ANGEL, in Florence, Italy.
Increase Same Store Sales and Increase Our Operating Efficiency. In addition to expanding into new cities and hospitality venues, we intend to continue to increase revenue and profits in our existing operations through continued focus on high-quality, high-margin food and beverage menu items. We believe that our operating margins will improve through growth in same store sales (“SSS”), as defined below in Key Performance Indicators, and a reduction of store-level operating expenses.
Acquisitions. On October 4, 2019, we acquired substantially all of the assets of Kona Grill, which is comprised of 24 domestic restaurants. We integrated Kona Grill by leveraging our corporate infrastructure, our bar-business knowledge and unique Vibe Dining program, to elevate the brand experience and drive improved performance.
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 continue to look at opportunities to decrease our general and administrative expenses by outsourcing non-core activities and through increases in staff productivity.
Key Performance Indicators
We use the following key performance indicators in evaluating our restaurants and assessing our business:
Same Store Sales. SSS represents total food and beverage sales at domestic owned and managed restaurants opened for at least a full 18-month period, which removes the impact of new restaurant openings in comparing the operations of existing restaurants. For STK SSS, this measure includes total revenue from our owned and managed 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.
Our comparable restaurant base for STK SSS consisted of nine domestic restaurants for the year ended December 31, 2020. For Kona Grill SSS all 24 domestic restaurants are included in the comparable restaurant base. STK and Kona Grill SSS decreased 34.2% and 21.4%, respectively, for the year ended December 31, 2020 compared to the prior year.
Number of Restaurant Openings. Number of restaurant openings reflects the number of restaurants opened during a particular fiscal period. For each restaurant opening, we incur pre-opening costs, which are defined below. Typically, new restaurants open with an initial start-up period of higher than normalized sales volumes (also referred to in the restaurant industry as the “honeymoon” period), which decrease to a steady level approximately 18 to 24 months after opening. However, operating costs during this initial period are also higher than normal, resulting in restaurant operating margins that are generally lower during the start-up period of operation and increase to a steady level approximately 18 to 24 months after opening. Some new restaurants may experience a “honeymoon” period that is either shorter or longer than this time frame.
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In 2019, we opened an owned STK restaurant in Nashville, Tennessee, two licensed STK restaurants located in Doha, Qatar and San Juan, Puerto Rico, and a managed rooftop bar concept, ANGEL, in Florence, Italy. Additionally, as of December 31, 2020, we have a management agreement in-place to open a managed STK restaurant in Scottsdale, Arizona which opened in January 2021.
Average Check. Average check is calculated by dividing total restaurant sales by total entrees sold for a specified period. Our management team uses this indicator to analyze trends in customers’ preferences, customer expenditures and the overall effectiveness of menu changes and price increases. For our comparable STK restaurants, our average check was $114 compared to $109 for the years ended December 31, 2020 and 2019, respectively. The average check was $32 for Kona Grill restaurants for the year ended December 31, 2020 compared to $26 for the period from October 4, 2019 to December 31, 2019.
Average Comparable Restaurant Revenue. Average comparable restaurant revenue consists of the average sales of our comparable restaurants over a certain period of time. This measure is calculated by dividing total comparable restaurant sales in a given period by the total number of comparable restaurants in that period. This indicator assists management in measuring changes in customer traffic, pricing and development of our brand. Our average comparable STK restaurant revenues were $6.9 million and $11.1 million for the years ended December 31, 2020 and 2019, respectively. Our average comparable Kona Grill restaurant revenues was $3.3 million for the year ended December 31, 2020 and $1.0 million for the period from October 4, 2019 to December 31, 2019. In the year ended December 31, 2019, the average restaurant revenues for Kona Grill restaurants was $4.2 million.
Key Financial Terms and Metrics
We evaluate our business using a variety of key financial measures:
Segment reporting
In the fourth quarter of 2019, in conjunction with the Kona Grill acquisition, we implemented certain organizational changes, including the reorganization of our internal reporting structure to better facilitate our strategy for growth, operational efficiency and management accountability. As a result of these organizational changes, we identified our reportable operating segments as follows:
See Note 17 to our consolidated financial statements for further information on our segment reporting.
Revenues
Owned restaurant net revenues. Owned restaurant net revenues consist of food and beverage sales by owned restaurants net of any discounts associated with each sale and of any ancillary F&B hospitality services at owned locations. Additionally, revenues from offsite banquets, our major off-site events group, and our gift card programs are included in owned restaurant net revenues. For the year ended December 31, 2020, beverage sales comprised 25% of
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food and beverage sales, and food sales comprised the remaining 75%. This indicator assists management in understanding the trends in gross margins of the restaurants.
Our primary owned restaurant brands are STK and Kona Grill. We specifically look at comparable sales from both owned and managed restaurants to understand customer count trends and changes in average check as it relates to our primary restaurant brands.
Management, license and incentive fee revenue. Management, license and incentive fee revenues include fees received pursuant to management and license agreements. Management agreements typically call for a management fee based on a percentage of revenue, a monthly marketing fee based on a percentage of revenues and an incentive fee based on a managed venue’s net profits. Similarly, royalties from the licensee in license agreements are generally based on a percentage of the licensed restaurant’s revenue. These management, license and incentive fees are recognized as revenue in the period the restaurant’s sales occur. Initial licensing fees and upfront fees related to management and license agreements are recognized as revenue on a straight-line basis over the term of the agreement.
We evaluate the performance of our managed and licensed properties based on sales growth, a key driver for management and license fees, and on improvements in operating profitability margins, which, combined with sales, drives incentive fee growth.
Cost and expenses
Owned restaurant cost of sales. Owned restaurant cost of sales includes all owned restaurant food and beverage expenditures. We measure cost of goods as a percentage of owned restaurant net revenues. Owned restaurant cost of sales are generally influenced by the cost of food and beverage items, menu mix, discounting activity and restaurant level controls. See “Item 1A. Risk Factors — Increases in commodity prices would adversely affect our results of operations.”
Owned restaurant operating expenses. We measure owned restaurant operating expenses as a percentage of owned restaurant net revenues. Owned restaurant operating expenses include the following:
General and administrative. General and administrative expenses are comprised of all corporate overhead expenses, including payroll and related benefits, stock-based compensation expense, professional fees, such as legal and accounting fees, insurance and travel expenses. Certain centrally managed general and administrative expenses are allocated specifically to restaurant locations and are reflected in owned restaurant operating expenses and include shared services such as reservations, events and marketing. We expect general and administrative expenses to be leveraged as we grow, become more efficient, and continue to focus on best practices and cost savings measures.
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Depreciation and amortization. Depreciation and amortization expense consists principally of charges related to the depreciation of fixed assets including leasehold improvements, equipment and furniture and fixtures and the amortization of the intangible assets related to the Kona Grill tradename.
Pre-opening expenses. Pre-opening expenses consist of costs incurred prior to opening an owned or managed STK restaurant at either a leased or F&B location. Pre-opening expenses are comprised principally of manager salaries and relocation costs, employee payroll, training costs for new employees and lease costs incurred prior to opening. We expect minimal pre-opening costs as we focus our growth towards our capital light model. Pre-opening expenses have varied from location to location depending on a number of factors, including the proximity of our existing restaurants; the amount of rent expensed during the construction and in-restaurant training periods; the size and physical layout of each location; the number of management and hourly employees required to operate each restaurant; the relative difficulty of the restaurant staffing process; the cost of travel and lodging for different metropolitan areas; the timing of the restaurant opening; and the extent of unexpected delays, if any, in obtaining necessary licenses and permits to open the restaurant.
Other Items
EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA are presented in this Annual Report on Form 10-K and are supplemental measures of financial performance that are not required by, or presented in accordance with, accounting principles generally accepted in the United States of America (“GAAP”). We define EBITDA as net income before interest expense, provision for income taxes and depreciation and amortization. We define Adjusted EBITDA as net income before interest expense, provision for income taxes, depreciation and amortization, non-cash impairment loss, non-cash rent expense, pre-opening expenses, lease termination expenses, non-recurring gains and losses, stock-based compensation, COVID-19 related expenses and results from discontinued operations. Not all of the aforementioned 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 believe that EBITDA and Adjusted EBITDA are appropriate measures of our operating performance, because they eliminate non-cash expenses that do not reflect our underlying business performance. 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 is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We use Adjusted EBITDA, 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.
Please refer to table on page 32 for our reconciliation of net income to EBITDA and Adjusted EBITDA.
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Results of Operations
The following table sets forth certain statements of operations data for the periods indicated (in thousands):
For the year ended December 31,
Revenues:
Management, license and incentive fee revenue 5,325 11,906
Cost and expenses:
Owned operating expenses:
Owned restaurant operating expenses 87,042 67,883
Depreciation and amortization 10,114 5,404
COVID-19 related expenses 5,492 —
Lease termination expenses 3,315 573
Agreement restructuring expenses 452 —
Pre-opening expenses 178 565
Bargain purchase gain — (10,963)
Loss on impairment of investments — 2,684
Other income, net (11) (246)
Other expenses, net:
Interest expense, net of interest income 5,329 1,954
Loss on early debt extinguishment — 858
Total other expenses, net 5,329 2,812
(Loss) income before benefit for income taxes (19,023) 9,979
Less: net (loss) income attributable to noncontrolling interest (798) 302
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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 year ended December 31,
Revenues:
Owned restaurant net revenue 96.2 % 90.1 %
Management, license and incentive fee revenue 3.8 % 9.9 %
Cost and expenses:
Owned operating expenses:
Owned restaurant cost of sales (1) 24.9 % 25.7 %
Owned restaurant operating expenses (1) 63.7 % 62.5 %
Total owned operating expenses (1) 88.6 % 88.2 %
Depreciation and amortization 7.1 % 4.5 %
COVID-19 related expenses 3.9 % —%
Transaction costs 0.8 % 2.1 %
Lease termination expenses 2.3 % 0.5 %
Agreement restructuring expenses 0.3 % —%
Pre-opening expenses 0.1 % 0.5 %
Bargain purchase gain —% (9.1)%
Loss on impairment of investments —% 2.2 %
Other income, net —% (0.2)%
Total costs and expenses 109.6 % 89.4 %
Operating (loss) income (9.6)% 10.6 %
Other expenses, net:
Interest expense, net of interest income 3.8 % 1.6 %
Loss on early debt extinguishment —% 0.7 %
Total other expenses, net 3.8 % 2.3 %
(Loss) income before benefit for income taxes (13.4)% 8.3 %
Benefit for income taxes (3.8)% (9.2)%
Net (loss) income (9.6)% 17.5 %
Less: net (loss) income attributable to noncontrolling interest (0.6)% 0.3 %
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The following table presents a reconciliation of net income to EBITDA and Adjusted EBITDA for the periods indicated (in thousands):
For the year ended December 31,
Net (loss) income attributable to noncontrolling interest (798) 302
Interest expense, net of interest income 5,329 1,954
Depreciation and amortization 10,114 5,404
COVID-19 related expenses 5,492 —
Transaction and integration costs (1) 1,109 2,513
Stock-based compensation 1,773 1,306
Lease termination expense (2) 3,315 573
Agreement restructuring expense 452 —
Pre-opening expenses 178 565
Non-cash rent expense (3) 300 61
Bargain purchase gain — (10,963)
Loss on impairment of investments — 2,684
Loss on debt extinguishment — 858
Adjusted EBITDA attributable to noncontrolling interest (517) 646
The following tables show our operating results by segment for the periods indicated (in thousands). Prior year amounts have been revised to conform to the current year segment presentation.
STK Kona Grill ONE Hospitality Corporate Total
For the year ended December 31, 2020
As of December 31, 2020
STK Kona Grill ONE Hospitality Corporate Total
For the year ended December 31, 2019
As of December 31, 2019
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Results of Operations for the Years Ended December 31, 2020 and December 31, 2019
Revenues
Owned restaurant net revenue. Owned restaurant net revenue increased $27.8 million, or 25.6%, to $136.6 million for the year ended December 31, 2020 from $108.8 million for the year ended December 31, 2019. Approximately $78.6 million of the total revenue was attributable to the Kona Grill restaurants in the year ended December 31, 2020 compared to $23.7 million in the fourth quarter of 2019. The increase was partially offset by temporary closures and limited in-person seating as a result of state and local mandates related to the COVID-19 pandemic. Same store sales decreased 27.9% in the year ended December 31, 2020.
Management, license and incentive fee revenue. Management and license fee revenues decreased $6.6 million, or 55.3%, to $5.3 million for the year ended December 31, 2020 from $11.9 million for the year ended December 31, 2019. Management and license fee revenues decreased primarily as a result of temporary closures and limited in-person seating at our managed and licensed locations due to COVID-19 prevention measures.
Cost and Expenses
Owned restaurant cost of sales. Food and beverage costs for owned restaurants increased approximately $6.0 million, or 21.5%, to $34.0 million for the year ended December 31, 2020 from $28.0 million for the year ended December 31, 2019. Approximately $12.7 million of the increase in owned restaurant cost of sales was attributable to a full year of operations for Kona Grill restaurants in the year ended December 31, 2020 compared to a partial period in 2019. The increase in owned restaurant cost of sales is partially offset by the temporary closures and limited operations of our restaurants beginning in March 2020 as a result of COVID-19. As a percentage of revenues, cost of sales decreased 80 basis points to 24.9% for the year ended December 31, 2020 from 25.7% for the year ended December 31, 2019.
Owned restaurant operating expenses. Owned restaurant operating expenses increased $19.2 million, or 28.2%, to $87.0 million for the year ended December 31, 2020 from $67.9 million for the year ended December 31, 2019. Approximately $36.6 million of the increase in owned restaurant operating expense was attributable to a full year of operations for Kona Grill in the year ended December 31, 2020 compared to a partial period in 2019. Beginning in March 2020, we reduced operating costs due to the business impact of COVID-19. As restaurant sale volumes increase with the resumption of in-person dining, restaurant operating costs are expected to increase.
General and administrative. General and administrative costs increased $2.5 million, or 21.4% to $13.9 million for the year ended December 31, 2020 from $11.5 million for the year ended December 31, 2019. As percentage of revenues, general and administrative costs were 9.8% in 2020 compared to 9.5% in 2019. We expect to leverage our general and administrative costs with the acquisition of Kona Grill along with implementing measures to reduce our costs while our operations are affected by COVID-19.
Depreciation and amortization. Depreciation and amortization expense increased approximately $4.7 million to $10.1 million for the year ended December 31, 2020 from $5.4 million for the year ended December 31, 2019. The increase was primarily related to a full year of depreciation and amortization for the 24 Kona Grill restaurants acquired in the fourth quarter of 2019 and the opening of our owned STK restaurant in Nashville, Tennessee in March 2019.
Transaction and integration costs. In the year ended December 31, 2020 and 2019, we incurred transaction and integration costs of $1.1 million and $2.5 million, respectively, related to the Kona Grill acquisition and costs associated with capital raising activities.
Lease termination expenses. Lease termination expense was approximately $3.3 million and $0.6 million in the years ended December 31, 2020 and 2019, respectively. Lease termination expenses are costs associated with closed, abandoned and disputed locations or disputed leases. In 2020, we accrued approximately $2.7 million for lease exit costs for restaurants never built and still under dispute with landlords.
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Agreement restructuring. Agreement restructuring expense for the year ended December 31, 2020 was $0.5 million, related to the restructuring of agreements with our management and license partners.
COVID-19 related expenses. COVID-19 related expenses were $5.5 million during the year ended December 31, 2020 composed primarily of sanitation, supplies and safety precautions taken to prevent the spread of COVID-19 and payments to employees for paid time off during restaurant closures.
Pre-opening expenses. Pre-opening expenses for the year ended December 31, 2020 were $0.2 million, related to our upcoming STK Bellevue restaurant. Pre-opening expenses for the year ended December 31, 2019 were $0.6 million related to the development of our owned STK restaurant in Nashville, Tennessee which opened in March 2019.
Bargain purchase gain. On October 4, 2019, we acquired substantially all of the assets of Kona Grill for a contractual price of $25.0 million plus approximately $1.5 million of consideration paid primarily for the apportionment of rent and utilities. We acquired approximately $37.5 million of assets, including $7.7 million in current liabilities, which resulted in a bargain purchase gain of approximately $11.0 million.
Loss on impairment of investments. On December 31, 2019, we determined that, because of the short term remaining on the lease (November 2020) and current market conditions, we were unable to recover the carrying amount of the investments in Bagatelle Investors and Bagatelle NY. As a result, we recorded a non-cash write down of $2.7 million related to our investments for the year ended December 31, 2019. Upon expiration of the lease in November 2020, we exited our contract with Bagatelle. Refer to Note 9 of our consolidated financial statements for further information on our nonconsolidated investments
Interest expense, net of interest income. Interest expense, net of interest income was approximately $5.3 million and $2.0 million for the years ended December 31, 2020 and 2019, respectively.
Loss on early debt extinguishment. On May 15, 2019, we entered into a credit agreement with Bank of America, N.A. (“Bank of America Credit Agreement”) and incurred approximately $0.4 million of debt issuance costs. In conjunction with entering into the Bank of America Credit Agreement, we prepaid the outstanding debt balances to early extinguish the $2.6 million of outstanding term loans with BankUnited, the $5.3 million of outstanding promissory notes with Anson Investments Master Fund LP, and the $1.0 million outstanding promissory note with 2235570 Ontario Limited. As a result, we recognized a $0.4 million loss on early debt extinguishment primarily caused by the recognition of the unamortized discounts related to warrants issued with the promissory notes and the recognition of unamortized debt issuance costs related to the debt extinguished. The Bank of America Credit Agreement was replaced with the Goldman Sachs credit agreement on October 4, 2019 in conjunction with the Kona Grill acquisition. As a result, the unamortized debt issuance costs of $0.4 million was recognized as a loss on early debt extinguishment.
Benefit for income taxes. The benefit for income taxes for the year ended December 31, 2020 was $5.4 million compared to a benefit for income taxes of $11.2 million for the year ended December 31, 2019. Our effective tax rate was 28.4% and (111.8)% for the years ended December 31, 2020 and 2019, respectively. Our effective tax rate differs from the statutory U.S. tax rate of 21% primarily due to the following: (i) tax credits for FICA taxes on certain employees’ tips (ii) taxes owed in foreign jurisdictions such as the United Kingdom, Canada and Italy; and, (iii) taxes owed in state and local jurisdictions. The CARES Act includes provisions allowing for the carryback of net operating losses generated for specific periods and technical amendments regarding the expensing of qualified improvement property. The CARES Act also allows for the deferral of the employer-paid portion of social security taxes, which the Company has elected to defer.
Net (loss) income attributable to noncontrolling interest. Net loss attributable to noncontrolling interest increased by $1.1 million to ($0.8) million for the year ended December 31, 2020 compared to income of $0.3 million for the year ended December 31, 2019.
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Liquidity and Capital Resources
Executive Summary
Our principal liquidity requirements are to meet our lease obligations, our working capital and capital expenditure needs and to pay principal and interest on our outstanding indebtedness. Subject to our operating performance, which, if significantly adversely affected, would adversely affect the availability of funds, we expect to finance our operations for at least the next 12 months, including the costs of opening currently planned new restaurants, through cash provided by operations and construction allowances provided by landlords of certain locations. We believe the combination of the aforementioned items are adequate to support our immediate business operations and plans.
As of December 31, 2020, we had cash and cash equivalents of approximately $24.4 million. We had $47.5 million in long-term debt, which consisted of our Credit Agreement and an equipment financing agreement, and $18.3 million in CARES Act Loans as of December 31, 2020. As of December 31, 2020, the availability on our revolving credit facility was $10.7 million, subject to the restrictions described in Note 8.
In the year ended December 31, 2020, our capital expenditures were $5.8 million which were primarily used to fund capital expenditures at our existing restaurants and construction of STK Bellevue. Our future cash requirements will depend on many factors, including the pace of expansion, conditions in the retail property development market, construction costs, the nature of the specific sites selected for new restaurants, and the nature of the specific leases and associated tenant improvement allowances available, if any, as negotiated with landlords. Additionally, under our current capital light strategy, we plan to primarily enter into management and license agreements for the operation of future STK restaurants where we are not required to contribute significant capital upfront.
Our operations have not required significant working capital, and, like many restaurant companies, we may have negative working capital during the year. Revenues are received primarily in credit card or cash receipts, and restaurant operations do not require significant receivables or inventories, other than our wine inventory. In addition, we receive trade credit for the purchase of food, beverages and supplies, thereby reducing the need for incremental working capital to support growth.
In the event the Company needs to temporarily suspend all operations due to COVID-19 restrictions, the ongoing operating costs per month are expected to be as follows:
Minimum rent $ 1,200
Interest 400
Minimum general & administrative costs 500
Credit Agreement
On October 4, 2019, in conjunction with the acquisition of Kona Grill, we entered into the Credit Agreement, which replaced the credit agreement with Bank of America and provides for a secured revolving credit facility of $12.0 million and a $48.0 million term loan. The term loan is payable in quarterly installments, with the final payment due in October 2024. The revolving credit facility also matures in October 2024.
On May 4, 2020, Goldman Sachs Bank USA (“GSB”), as administrative agent, collateral agent and lead arranger under the Credit Agreement, (1) consented to the CARES Act Loans described below and (2) agreed that the amount of the CARES Act Loans will not be counted toward the permitted amount of Consolidated Total Debt, as defined under the Credit Agreement, to the extent the amounts are retained as cash during the term of the CARES Act Loans in a segregated deposit account or used for purposes that are forgivable under the CARES Act, provided that the proceeds of the CARES Act Loans must be used only for “allowable uses” under the CARES Act (with at least 75% of the utilized proceeds to be used for purposes that result in the CARES Act Loans being eligible for forgiveness) or used for the repayment of the CARES Act Loans.
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On May 8, 2020 and August 10, 2020, we amended the Credit Agreement with GSB to:
As of December 31, 2020, we were compliant with the covenants required by the Credit Agreement. Based on current projections, we believe that we would continue to comply with the covenants in the Credit Agreement, as amended, throughout the twelve months following the issuance of the financial statements. Additionally, our consolidated adjusted EBITDA as defined by the Credit Agreement for determining covenant compliance includes pro forma adjustments for the annualization of the Kona Grill restaurant performance which includes results before the acquisition date.
See contractual obligations below and Note 8 and Note 19 to our consolidated financial statements for further information on our long-term debt and commitments and contingencies.
CARES Act Loans
On May 4, 2020, two subsidiaries of the Company obtained CARES Act Loans from BBVA USA under the Paycheck Protection Program (“PPP”) created by the CARES Act. Repayment of the CARES Act Loans is guaranteed by the SBA. The ONE Group, LLC received a loan of $9.8 million related to the operations of STK restaurants, and Kona Grill Acquisition, LLC received a loan of $8.5 million related to the operation of Kona Grill restaurants.
The CARES Act Loans are scheduled to mature on April 28, 2022 and have a 1.00% interest rate and are subject to the terms and conditions applicable to PPP loans. Among other terms, BBVA USA may declare a default of the CARES Act Loans if the SBA disputes the validity of the guaranty of indebtedness, if a material adverse change occurs in our financial condition, or if BBVA USA believes the prospect of repayment of the CARES Act Loans or performance of obligations under the promissory notes is impaired. On an event of default, BBVA USA may declare principal and unpaid interest immediately due and payable, and it may charge default interest of 10%.
The CARES Act Loans are eligible for forgiveness if the proceeds are used for qualified purposes within a specified period and if at least 60% is spent on payroll costs. As of December 31, 2020, the Company has used all of the proceeds from the CARES Act Loans for qualified purposes in accordance with the CARES Act and SBA regulations, and these funds have supported the re-opening of in person dining and the return of approximately 3,000 furloughed employees to work. The Company applied for forgiveness of the CARES Act Loans in February 2021. The Company anticipates forgiveness of the entire amount of the CARES Act Loans; however, no assurance can be provided that the Company will obtain forgiveness of the CARES Act loans in whole or in part. Therefore, the Company has elected to classify the entire principal amount of the CARES Act Loans as debt on the consolidated balance sheet as of December 31, 2020.
Capital Expenditures and Lease Arrangements
To the extent we open new company-owned restaurants, we anticipate capital expenditures would increase related to the construction of new restaurants compared to general capital expenditures of existing restaurants. Although we are committed to our capital light strategy, in which our capital investment is expected to be limited, we are willing to consider opening owned restaurants as opportunities arise. For owned restaurants, we have typically targeted an average cash investment of approximately $3.8 million for a 10,000 square-foot STK restaurant, net of landlord contributions and
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equipment financing and excluding pre-opening costs. For locations where we may be the successor restaurant tenant, and currently our preference, total cash investment will be significantly less and in the $1.0 million to $1.5 million range. Typical pre-opening costs will be in the $0.3 million to $0.5 million range. In addition, some of our existing restaurants will require capital improvements to either maintain or improve the facilities. We may add seating or provide enclosures for outdoor space in the next twelve months for some of our locations, which we expect will increase revenues for those locations. As we continue to navigate the impact of the COVID-19 pandemic, the Company will evaluate the timing of opening new locations.
Our hospitality F&B services projects typically require limited capital investment from us. Capital expenditures for these projects will primarily be funded by cash flows from operations and equipment financing, depending upon the timing of these expenditures and cash availability.
We typically seek to lease our restaurant locations for periods of 10 to 20 years under operating lease arrangements, with a limited number of renewal options. Our rent structure varies, but our leases generally provide for the payment of both minimum and contingent rent based on sales, as well as other expenses related to the leases such as our pro-rata share of common area maintenance, property tax and insurance expenses. Many of our lease arrangements include the opportunity to secure tenant improvement allowances to partially offset the cost of developing and opening the related restaurants. Generally, landlords recover the cost of such allowances from increased minimum rents. However, there can be no assurance that such allowances will be available to us on each project that we select for development.
Cash Flows
The following table summarizes the statement of cash flows for the fiscal years ended December 31, 2020 and December 31, 2019 (in thousands):
For the year ended December 31,
Net cash provided by (used in):
Operating activities $ 431 $ 8,360
Effect of exchange rate changes on cash (27) (332)
Net increase in cash and cash equivalents $ 12,041 $ 10,752
Operating Activities.Net cash provided by operating activities was $0.4 million for the year ended December 31, 2020 compared to $8.4 million for the year ended December 31, 2019. The decrease was primarily attributable to the net loss for the year ended December, 31 2020 as a result of the temporary closure and limited seating capacity at our restaurants due to the COVID-19 pandemic; including $5.5 million in costs directly attributable to COVID-19, and $1.1 million in transaction and integration expenses related to the Kona Grill acquisition.
Investing Activities. Net cash used in investing activities for the year ended December 31, 2020 was $5.8 million compared to $30.4 million for the year ended December 31, 2019. Approximately $26.0 million of the net cash used in investing activities in 2019 related to Kona Grill acquisition related payments, net of cash acquired. The remaining net cash used in investing activities in 2020 and in 2019 was primarily related to the construction of new restaurants and general capital expenditures of existing restaurants.
Financing Activities. Net cash provided by financing activities was $17.4 million for the year ended December 31, 2020 as compared to $33.1 million for the year ended December 31, 2019. In May of 2020, we received $18.3 million in proceeds from the CARES Act Loans. In 2019, we received proceeds from the Goldman Sachs credit agreement and Bank of America Credit Agreement of $50.0 million and $14.8 million, respectively and we made principal payments of approximately $28.5 million towards our long-term debt, which included $22.5 million of early debt extinguishment payments.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
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Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2020 (in thousands):
Less than 1 More than 5
Total year 1 - 3 years 3 - 5 years years
Standby letters of credit 337 90 179 68 —
Recent Accounting Pronouncements
Refer to Note 2 of our consolidated financial statements for a detailed description of recent accounting pronouncements.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, net sales and operating expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and various assumptions that we believe to be reasonable under the circumstances and we evaluate these estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies require us to make difficult, subjective or complex judgements that could have a material impact on our financial statements.
Our significant accounting policies are discussed in Note 2 to our consolidated financial statements.
Business Combinations
On October 4, 2019, we acquired substantially all the assets of Kona Grill, which was accounted for using the acquisition method of accounting prescribed by Accounting Standard Codification Topic 805, Business Combinations. Acquired assets and assumed liabilities were assigned fair values based on widely accepted valuation techniques, in accordance with Accounting Standard Codification Topic 820, Fair Value Measurements. The process for estimating fair values in many cases requires the use of significant estimates, assumptions and judgments, including determining the timing and estimates of future cash flows and developing appropriate discount rates. Unanticipated events or circumstances may occur which could affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies.
Income Taxes
We recognized deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the respective tax bases of our assets and liabilities. Deferred tax assets and liabilities are measured using current enacted rates expected to apply to taxable income in the years in which we expect the temporary differences to reverse. We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a valuation allowance if, based on all available evidence, we determine that some portion of the tax benefit will not be realized.
In addition, our income tax returns are periodically audited by federal, state and foreign tax authorities. These audits include questions regarding our tax filing positions, including the timing and amount of deductions taken and the allocation of income amongst various tax jurisdictions. We evaluate our exposures associated with our various tax filing
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positions and record a related liability. We adjust our liability for unrecognized tax benefits and income tax provision in the period in which an uncertain tax provision is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available.
As of December 31, 2019, we released approximately $10.3 million of the valuation allowance based on an assessment of the realizability of our deferred tax assets. As of December 31, 2020, the remaining valuation allowance of $0.3 million relates to foreign tax credits we do not expect to utilize as a result of generating income in a jurisdiction with a higher income tax rate than the U.S. The recording of deferred taxes requires significant management judgment regarding the interpretation of applicable statutes, the status of various income tax audits, and our particular facts and circumstances.
Our taxes are impacted by the enactment of the Tax Cuts and Job Act in December 2017 (the “TCJA”), which, amongst other things, enacted global intangible low-taxed income (“GILTI”) which does not allow us to defer the earnings of our U.K. and Italy subsidiaries.
Impairment of Long-Lived Assets and Disposal of Property and Equipment
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be fully recoverable. The impairment evaluation is generally performed at the individual venue asset group level, as we believe this is the lowest level of identifiable cash flows. We believe that historical cash flows, in addition to other relevant facts and circumstances, are the primary basis for estimating future cash flows. Relevant facts and circumstances include, among others, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the overall business, and significant negative industry or economic trends. Recoverability of restaurant assets is measured by a comparison of the carrying amount of an individual restaurant’s assets to the estimated identifiable undiscounted future cash flows expected to be generated by those restaurant assets. This process requires the use of estimates and assumptions, which are subject to a high degree of judgment. If the carrying amount of an individual restaurant’s assets exceeds its estimated, identifiable, undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds its fair value. Fair value is determined by discounting a restaurant’s identifiable future cash flows.
From time to time, we have decided to close or dispose of restaurants. Typically, such decisions are made based on operating performance or strategic considerations and must be made before the actual costs or proceeds of disposition are known, and management must make estimates of these outcomes. Such outcomes could include the sale of a leasehold, mitigating costs through a tenant or subtenant, or negotiating a buyout of a remaining lease term. In these instances, management evaluates possible outcomes, frequently using outside real estate and legal advice, and records provisions for the effect of such outcomes. The accuracy of such provisions can vary materially from original estimates, and management regularly monitors the adequacy of the provisions until final disposition occurs.
For the years ended December 31, 2020 and 2019, we did not identify any event or changes in circumstances that indicated that the carrying values of our restaurant assets were impaired.
Leases
Contracts are evaluated to determine whether they contain a lease at inception, and leases are classified as either operating or financing. For operating leases, we have recognized a lease liability equal to the present value of the remaining lease payments, and a right of use asset equal to the lease liability, subject to certain adjustments, such as prepaid rents, initial direct costs and lease incentives received from the lessor. For leases that do not have a rate implicit in the lease, we used our incremental borrowing rate to determine the present value of the lease payments. Our incremental borrowing rate is the rate of interest that we would have to borrow on a collateralized basis over a similar term on an amount equal to the lease payments in a similar economic environment.
The lease term at the lease commencement date is determined based on the non-cancellable period for which we have the right to use the underlying asset, together with any periods covered by an option to extend the lease if we are reasonably certain to exercise that option, periods covered by an option to terminate the lease if we are reasonably
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certain not to exercise that option, and periods covered by an option to extend (or not to terminate) the lease in which the exercise of the option is controlled by the lessor.
Certain of our leases also provide for percentage rent, which are variable lease costs determined as a percentage of gross sales in excess of specified, minimum sales targets. These percentage rents are recognized as rent expense prior to the achievement of the specified sales target provided achievement of the sales target is considered probable.
We currently lease all of our restaurant locations under leases classified as operating leases. Management makes judgments regarding the probable term for each lease and considers a number of factors to evaluate whether renewal options in the lease contracts are reasonably certain of exercise, such as length of time before option exercise, expected value of the leased asset at the end of the initial lease term, importance of the lease to overall operations, costs to negotiate a new lease, and any contractual or economic penalties. The lease term can impact the lease classification and accounting for a lease as either an operating or financing lease, the incremental borrowing, the rent holidays and/or escalations in payments that are taken into consideration when calculating the rent expense and the related lease liability and right-of-use asset, and the term over which leasehold improvements for each restaurant are depreciated. These judgments may produce materially different amounts of depreciation, amortization and rent expense and materially different lease liabilities and right-of-use assets than would be reported if different assumed lease terms were used.
Stock-Based Compensation
We used the Black-Scholes model to estimate the fair value of our option awards. The Black-Scholes model requires estimates of the expected term of the option, the risk-free interest rate, future volatility and dividend yield. The Company’s assumptions are as follows:
There is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may differ from the actual values realized upon the exercise, expiration, early termination or forfeiture of those share-based payments in the future. Certain share-based payments, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements. Although the fair value of our share-based awards is determined in accordance with GAAP, the value calculated may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Rate Risk
We are subject to foreign currency exchange risk for our restaurants operating in the United Kingdom, Italy, Canada, Mexico and the Middle East. If foreign currency exchange rates depreciate in these countries or regions, or any other country or region in which we may operate in the future, we may experience declines in our international operating results but such exposure would not be material to the consolidated financial statements. We currently do not use financial instruments to hedge foreign currency exchange rate changes.
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Commodity Price Risk
We are exposed to market price fluctuations in beef, seafood, produce and other food product prices. Given the historical volatility of beef, seafood, produce and other food product prices, these fluctuations can materially impact our food and beverage costs. While we have taken steps to qualify multiple suppliers who meet our standards as suppliers for our restaurants and enter into agreements with suppliers for some of the commodities used in our restaurant operations, we do not enter into long-term agreements for the purchase of such supplies. There can be no assurance that future supplies and costs for such commodities will not fluctuate due to weather and other market conditions outside of our control and we may be subject to unforeseen supply and cost fluctuations. Dairy costs can also fluctuate due to government regulation. Because we typically set our menu prices in advance of our food product prices, our menu prices cannot immediately take into account the changing costs of food items. To the extent that we are unable to pass the increased costs on to our customers through price increases, our results of operations would be adversely affected. We do not use financial instruments to hedge our risk to market price fluctuations in beef, seafood, produce and other food product prices at this time.
Inflation
Over the past several years, inflation has not significantly affected our operations. However, the impact of inflation on labor, food and occupancy costs could, in the future, significantly affect our operations. We pay many of our employees hourly rates related to the applicable federal or state minimum wage. Food costs as a percentage of revenues have been somewhat stable due to procurement efficiencies and menu price adjustments, although no assurance can be made that our procurement will continue to be efficient or that we will be able to raise menu prices in the future. Costs for construction, taxes, repairs, maintenance and insurance all impact our occupancy costs. We believe that our current strategy, which is to seek to maintain operating margins through a combination of menu price increases, cost controls, careful evaluation of property and equipment needs, and efficient purchasing practices, has been an effective tool for dealing with inflation. There can be no assurance, however, that future inflationary or other cost pressure will be effectively offset by this strategy.
Item 8. Financial Statements and Supplementary Data
Our Consolidated Financial Statements required by this Item are set forth in Item 15 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We are required to 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 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.
In connection with the preparation of this Annual Report on Form 10-K, as of December 31, 2020, an evaluation was performed under the supervision and with the participation of our management, including the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation and as described below under “Management’s Assessment on Internal
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Control Over Financial Reporting,” we have concluded that our disclosure controls and procedures were effective as of December 31, 2020.
Management’s Assessment of Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control system is designed to provide reasonable assurance to our management and Board regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations (the “COSO”) of the Treadway Commission in Internal Control – Integrated Framework (2013). Based on this assessment, our CEO and CFO concluded that our internal control over financial reporting was effective as of December 31, 2020, based on the criteria set forth by COSO in Internal Control – Integrated Framework (2013).
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fourth quarter of 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
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PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this item is incorporated by reference from the Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders.
Item 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from the Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information required by this item is incorporated by reference from the Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required by this item is incorporated by reference from the Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this item is incorporated by reference from the Company’s Proxy Statement for the 2021 Annual Meeting of Stockholders.
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PART IV
Item 15. Exhibits, Financial Statement Schedules
(b) Exhibits. See Exhibit Index.
(c) Separate Financial Statements. None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 19, 2021
THE ONE GROUP HOSPITALITY, INC.
By: /s/ TYLER LOY
Tyler Loy
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ EMANUEL HILARIO Chief Executive Officer and Director March 19, 2021
Emanuel Hilario (Principal Executive Officer)
/s/ TYLER LOY Chief Financial Officer March 19, 2021
Tyler Loy (Principal Financial Officer)
/s/ CHRISTI HING Chief Accounting Officer March 19, 2021
Christi Hing (Principal Accounting Officer)
/s/ JONATHAN SEGAL Executive Chairman, Director March 19, 2021
Jonathan Segal
/s/ DIMITRIOS ANGELIS Director March 19, 2021
Dimitrios Angelis
/s/ EUGENE BULLIS Director March 19, 2021
Eugene Bullis
/s/ MICHAEL SERRUYA Director March 19, 2021
Michael Serruya
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Exhibit Index
ExhibitNumber Exhibit Description
21.1* List of Subsidiaries.
23.1* Consent of Plante & Moran, PLLC
23.2* Consent of Plante Moran, PC
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
* Filed herewith.
** Furnished herewith.
† Management contract or compensatory plan or arrangement.
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THE ONE GROUP HOSPITALITY, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Reports of Independent Registered Public Accounting Firms F-2
Consolidated Balance Sheets F-6
Consolidated Statements of Operations and Comprehensive (Loss) Income F-7
Consolidated Statements of Changes in Stockholders’ Equity F-8
Consolidated Statements of Cash Flows F-9
Notes to Consolidated Financial Statements F-10
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
The ONE Group Hospitality, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of The ONE Group Hospitality, Inc. (the “Company”) as of December 31, 2020 the related consolidated statements of operations and comprehensive (loss) income, changes in stockholders' equity, and cash flows for the year ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of Long-Lived Asset Impairment Indicators – Refer to Note 2 to the financial statements
Critical Audit Matter Description
As disclosed in the consolidated financial statements, long-lived assets including property and equipment, right-of-use assets, and the Kona tradename are tested for impairment at the asset group level, whenever events or changes in circumstances indicate that the carrying values of these assets may not be fully recoverable.
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How the Critical Audit Matter was Addressed in the Audit
/s/ Plante & Moran PLLC
We have served as the Company’s auditor since 2018.
Boulder, Colorado
March 19, 2021
F-4
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
The ONE Group Hospitality, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of The ONE Group Hospitality, Inc. (the “Company”) as of December 31, 2019, the related consolidated statements of operations and comprehensive (loss) income, changes in stockholders' equity, and cash flows for the year ended December 31, 2019, and the related notes, collectively referred to as the “financial statements”. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Plante & Moran PC
We have served as the Company’s auditor since 2018.
Boulder, Colorado
March 26, 2020
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THE ONE GROUP HOSPITALITY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
December 31, December 31,
ASSETS
Current assets:
Due from related parties, net 376 341
Operating lease right-of-use assets 80,960 81,097
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Deferred license revenue 207 332
Deferred gift card revenue and other 1,990 3,183
Current portion of operating lease liabilities 4,817 4,397
Current portion of CARES Act Loans 10,057 —
Current portion of long-term debt 588 749
Deferred license revenue, long-term 953 1,036
Operating lease liabilities, net of current portion 98,569 98,278
CARES Act Loans, net of current portion 8,257 —
Long-term debt, net of current portion 45,064 45,226
Commitments and contingencies
Stockholders’ equity:
Accumulated other comprehensive loss (2,646) (2,651)
Noncontrolling interests (1,200) (402)
See notes to the consolidated financial statements.
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THE ONE GROUP HOSPITALITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(in thousands, except earnings per share and related share information)
For the year ended December 31,
Revenues:
Management, license and incentive fee revenue 5,325 11,906
Cost and expenses:
Owned operating expenses:
Owned restaurant operating expenses 87,042 67,883
Depreciation and amortization 10,114 5,404
COVID-19 related expenses 5,492 —
Lease termination expenses 3,315 573
Agreement restructuring expenses 452 —
Pre-opening expenses 178 565
Bargain purchase gain — (10,963)
Loss on impairment of investments — 2,684
Other income, net (11) (246)
Other expenses, net:
Interest expense, net of interest income 5,329 1,954
Loss on early debt extinguishment — 858
Total other expenses, net 5,329 2,812
(Loss) income before benefit for income taxes (19,023) 9,979
Less: net (loss) income attributable to noncontrolling interest (798) 302
Currency translation gain (loss) 5 (341)
Net income attributable to The ONE Group Hospitality, Inc. per share:
Basic net (loss) income per share $ (0.44) $ 0.73
Diluted net (loss) income per share $ (0.44) $ 0.70
See notes to the consolidated financial statements.
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THE ONE GROUP HOSPITALITY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share information)
Accumulated
Additional other
Shares Par value capital deficit loss equity interests Total
Exercise of stock options 42,000 — 92 — — 92 — 92
Distributions to noncontrolling interests — — — — — — (252) (252)
Exercise of stock options 18,000 — 38 — — 38 — 38
Gain on foreign currency translation, net — — — — 5 5 — 5
See notes to the consolidated financial statements.
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THE ONE GROUP HOSPITALITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended December 31,
Operating activities:
Depreciation and amortization 10,114 5,404
Bargain purchase gain — (10,963)
Loss on early debt extinguishment — 858
Amortization of discount on warrants and debt issuance costs 479 233