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.
Overview
We currently own, operate, manage or license 60 venues including 23 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and 13 F&B venues in seven hotels and casinos in the United States and Europe. We intend to open thirteen new STK and F&B venues in 2021 and 2022, of which seven are currently open, and three to five Kona Grill locations in 2022. The seven venues that were opened or added in 2021 are below:
● Managed STK restaurant in Scottsdale, Arizona;
● Owned STK restaurant in Bellevue, Washington;
● Managed Rivershore Bar & Grill restaurant in Oregon City, Oregon.
There are currently two Company-owned STK restaurants (San Francisco, CA and Dallas, TX), one Company-owned Kona Grill restaurant (Riverton, UT) and one managed STK restaurant (Stratford, UK) under construction. We are in ongoing discussions for additional owned, managed and licensed venues both in the U.S. and international.
The table below reflects our venues by restaurant brand and geographic location:
Venues
STK(1) Kona Grill ONE Hospitality(2) Total
Domestic
Licensed 1 — — 1
International
Owned — — — —
Licensed 5 — — 5
Total international 9 — 10 19
Overview of the Impact of COVID-19
The COVID-19 pandemic has significantly impacted, and will continue to adversely affect operations and financial results for the foreseeable future. In response to COVID-19, we have taken significant steps to adapt our business to increase sales while providing a safe environment for guests and employees. Currently, all restaurants are open for in-person dining. Our continuation of normal dining operations is subject to events beyond our control, including the effectiveness of governmental efforts to halt the spread of COVID-19.
We are in regular contact with our major suppliers and have not experienced any significant disruption in our supply chain. We have implemented programs to attract and retain both restaurant managers and hourly employees. We have increased cleaning protocols, including the creation of a role which is focused on sanitation in high-touch and high-
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traffic areas, implemented daily health and safety checklists, provided additional personal protective equipment and cleaning supplies and engaged third party vendors to perform electrostatic cleaning of our restaurants.
2021 Financial Highlights
Total revenue increased $135.3 million, or 95.3% to $277.2 million for 2021 compared to $141.9 million for 2020. The increase was primarily attributable to strong sales as state and local governments eased seating capacity restrictions in the markets in which we operate combined with strong execution of our sales initiatives. Same store sales increased 92.8% in 2021 compared to 2020 as seating capacity restrictions limited in-person restaurant dining in the prior year. On a two-year basis, same-store sales increased 34.2% for 2021 compared to 2019; STK same store sales increased 45.1% on a two-year basis while Kona Grill same store sales increased 23.2% reflecting the execution of our sales initiatives.
Restaurant Operating Profit increased $36.8 million, or 235.9% to $52.4 million for 2021 compared to $15.6 million in 2020. Restaurant Operating Profit as a percentage of owned restaurant net revenue was 19.8% in 2021 compared to 11.4% in 2020.
Operating income increased $33.1 million to $19.4 million for 2021 from a loss of $13.7 million for 2020. The increase in operating income was primarily driven by strong sales and better Restaurant Operating Profit.
Net income attributable to The ONE Group Hospitality, Inc was $31.3 million in 2021 compared to a loss of $12.8 million in 2020. We recognized an $18.5 million gain on CARES Act Loan Forgiveness in 2021, partly offset by a $0.6 million loss on early debt extinguishment related to the partial paydown of our credit facility.
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 expect 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 company-owned locations and 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 2021, we opened an owned STK restaurant in Bellevue, Washington, two managed STK restaurants located in Scottsdale, Arizona and London, United Kingdom and one licensed STK restaurant located at the Los Cabos International Airport in San Jose del Cabo, Mexico. Additionally, we have under construction owned STK restaurants in Dallas, Texas and San Francisco, California and a managed STK restaurant in Stratford, United Kingdom.
Expansion of Kona Grill. We expect to expand our operations domestically using a disciplined and targeted site selection process. We believe we could grow the Kona Grill brand to 200 restaurants over the foreseeable future. We expect to open as many as three to five Kona Grills annually, primarily through company-owned locations, provided that we have acceptable locations and quality restaurant managers available to support that pace of growth.
Expansion through New F&B Hospitality Projects. We expect our F&B hospitality services business to be an important contributor 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 at least one to two new F&B hospitality agreements annually. In 2021, we opened Bao Yum, a new brand under ONE Hospitality, and commenced management of certain F&B hospitality management services at The Westminster London Hotel in London, United Kingdom. We also entered into a management agreement with Rivershore Bar & Grill in Oregon City, Oregon during 2021.
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
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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. We will continue to evaluate potential acquisition opportunities. On October 4, 2019, we acquired substantially all of the assets of Kona Grill. We have 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.
Key Performance Indicators
We use the following key performance indicators in evaluating our restaurants and assessing our business:
Same Store Sales (“SSS”). 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. We have presented two-year comparable sales to illustrate how sales at our restaurant base before the COVID-19 pandemic compare to sales as COVID-19 restrictions have eased and we have begun to recover lost sales.
Our comparable restaurant base for STK SSS consisted of ten domestic restaurants for the year ended December 31, 2021. For Kona Grill SSS all 24 domestic restaurants are included in the comparable restaurant base. STK and Kona Grill SSS increased 131.9% and 57.7%, respectively, for 2021 compared to the prior year. On a two-year basis, STK SSS increased 45.1% while Kona Grill SSS increased 23.2%.
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.
In 2021, we opened four STK restaurants through a mix of owned, managed and licensed venues and commenced management of three venues under F&B hospitality service agreements.
Average Check Per Person. 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 for both 2021 and 2020. The average check was $33 for Kona Grill restaurants for 2021 compared to $32 for 2020.
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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 $14.8 million, $6.9 million and $11.1 million for the years ended December 31, 2021, 2020 and 2019 respectively. Our average comparable Kona Grill restaurant revenues were $5.1 million, $3.3 million and $4.2 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Key Financial Terms and Metrics
We evaluate our business using a variety of key financial measures:
Segment reporting
Our reportable operating segments are as follows:
See Note 13 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, 2021, beverage sales comprised 25% of 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.
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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.
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. 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, Adjusted EBITDA and Restaurant Operating Profit. We presentEBITDA, Adjusted EBITDA and Restaurant Operating Profit 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
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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 EBITDA before non-cash rent expense, pre-opening expenses, lease termination expenses, stock-based compensation, COVID-19 related expenses and non-recurring gains and losses. Not all of the items defining Adjusted EBITDA occur in each reporting period but have been included in our definitions of these terms based on our historical activity. We define Restaurant Operating Profit as owned restaurant net revenue minus owned restaurant cost of sales and owned restaurant operating expenses.
We believe that EBITDA, Adjusted EBITDA and Restaurant Operating Profit are appropriate measures of our operating performance because they eliminate non-cash or non-recurring expenses that do not reflect our underlying business performance. We believe Restaurant Operating Profit is an important component of financial results because: (i) it is a widely used metric within the restaurant industry to evaluate restaurant-level productivity, efficiency, and performance, and (ii) we use Restaurant Operating Profit as a key metric to evaluate our restaurant financial performance compared to our competitors. We use these metrics to facilitate a comparison of our operating performance on a consistent basis from period to period, to analyze the factors and trends affecting our business and to evaluate the performance of our restaurants. Adjusted EBITDA has limitations as an analytical tool and our calculation of Adjusted EBITDA may not be comparable to that reported by other companies; accordingly, you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Adjusted EBITDA is a key measure used by management. Additionally, Adjusted EBITDA and Restaurant Operating Profit are frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We use Adjusted EBITDA and Restaurant Operating Profit, alongside other GAAP measures such as net income, to measure profitability, as a key profitability target in our budgets, and to compare our performance against that of peer companies despite possible differences in calculation.
Please refer to the table on page 30 for our reconciliation of net income to EBITDA and Adjusted EBITDA and for a reconciliation of operating income (loss) to Restaurant Operating Profit.
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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 12,774 5,325
Cost and expenses:
Owned operating expenses:
Lease termination expenses 1,912 3,315
Agreement restructuring expenses 503 452
Other income, net — (11)
Other (income) expenses, net:
Interest expense, net of interest income 3,780 5,329
Loss on early debt extinguishment 600 —
Gain on CARES Act Loan Forgiveness (18,529) —
Total other (income) expenses, net (14,149) 5,329
Income (loss) before provision (benefit) for income taxes 33,534 (19,023)
Provision (benefit) for income taxes 1,586 (5,400)
Less: net income (loss) attributable to noncontrolling interest 600 (798)
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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 95.4 % 96.2 %
Management, license and incentive fee revenue 4.6 % 3.8 %
Cost and expenses:
Owned operating expenses:
Owned restaurant cost of sales (1) 25.5 % 24.9 %
Owned restaurant operating expenses (1) 54.7 % 63.7 %
Total owned operating expenses (1) 80.2 % 88.6 %
Depreciation and amortization 3.9 % 7.1 %
COVID-19 related expenses 2.1 % 3.9 %
Transaction costs 0.1 % 0.8 %
Lease termination expenses 0.7 % 2.3 %
Agreement restructuring expenses 0.2 % 0.3 %
Pre-opening expenses 0.4 % 0.1 %
Other income, net —% —%
Total costs and expenses 93.0 % 109.6 %
Operating income (loss) 7.0 % (9.6)%
Other (income) expenses, net:
Interest expense, net of interest income 1.4 % 3.8 %
Loss on early debt extinguishment 0.2 % —%
Gain on CARES Act Loan Forgiveness (6.7)% —%
Total other (income) expenses, net (5.1)% 3.8 %
Income (loss) before provision (benefit) for income taxes 12.1 % (13.4)%
Provision (benefit) for income taxes 0.6 % (3.8)%
Net income (loss) 11.5 % (9.6)%
Less: net income (loss) attributable to noncontrolling interest 0.2 % (0.6)%
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The following table presents a reconciliation of net income (loss) to EBITDA and Adjusted EBITDA for the periods indicated (in thousands):
For the year ended December 31,
Net income (loss) attributable to noncontrolling interest 600 (798)
Interest expense, net of interest income 3,780 5,329
Provision (benefit) for income taxes 1,586 (5,400)
Stock-based compensation 3,618 1,773
Agreement restructuring expense 503 452
Non-cash rent (3) (32) 300
Gain on CARES Act Loan forgiveness (18,529) —
Loss on early debt extinguishment 600 —
Adjusted EBITDA attributable to noncontrolling interest 507 (517)
The following table presents a reconciliation of Operating income (loss) to Restaurant Operating Profit for the periods indicated (in thousands):
For the year ended December 31,
Operating income (loss) as reported $ 19,385 $ (13,694)
Management, license and incentive fee revenue (12,774) (5,325)
Agreement restructuring expenses 503 452
Pre-opening expenses 1,037 178
Lease termination expense 1,912 3,315
Other income, net — (11)
Restaurant Operating Profit by brand is as follows (in thousands):
For the year ended December 31,
STK restaurant operating profit (Company owned) $ 34,598 $ 7,347
Kona Grill restaurant operating profit $ 17,785 $ 8,175
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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, 2021
As of December 31, 2021
STK Kona Grill ONE Hospitality Corporate Total
For the year ended December 31, 2020
As of December 31, 2020
Results of Operations for the Years Ended December 31, 2021 and December 31, 2020
Revenues
Owned restaurant net revenue. Owned restaurant net revenue increased $127.8 million, or 93.5%, to $264.4 million for 2021 from $136.6 million for 2020. The increase was primarily attributable to strong sales as state and local governments eased COVID-19 seating capacity restrictions in markets where we operate combined with strong execution of our sales initiatives. Same store sales increased 92.8% in 2021.
Management, license and incentive fee revenue. Management and license fee revenues increased $7.5 million, or 139.9%, to $12.8 million for 2021 from $5.3 million for 2020. The increase was primarily attributable to local governments lifting stay at home orders and easing seating capacity restrictions in the markets in which we operate as well as revenue generated from two managed STKs, one licensed STK and three managed F&B venues we opened during 2021.
Cost and Expenses
Owned restaurant cost of sales. Food and beverage costs for owned restaurants increased approximately $33.5 million, or 98.3%, to $67.5 million for 2021 from $34.0 million for 2020. The increase was due to the incremental sales increases noted above. As a percentage of revenues, cost of sales increased 60 basis points to 25.5% for 2021 from 24.9% for 2020 primarily due to increased commodity prices partly offset by operational cost reduction initiatives.
Owned restaurant operating expenses. Owned restaurant operating expenses increased $57.5 million, or 66.0%, to $144.5 million for 2021 from $87.0 million for 2020. Owned restaurant operating costs as a percentage of owned restaurant net revenue decreased 900 basis points from 63.7% in 2020 to 54.7% for 2021 due to leverage on higher average weekly sales and actively managing operating costs.
General and administrative. General and administrative costs increased $11.7 million, or 83.7% to $25.6 million for 2021 from $13.9 million for 2020. The increase was attributable to increased activity as restaurants resumed in-person dining compared to the prior year when significant cost savings measures were implemented as a result of COVID-19. Stock-based compensation increased $1.8 million to $3.6 million for 2021 compared to $1.8 million for 2020. The increase was driven by certain grants that vested based on stock price thresholds and employer payroll taxes on stock option exercises and restricted stock vesting. Also, accruals for performance-based compensation increased by $1.6 million compared to 2020. As a percentage of revenues, general and administrative costs were 9.2% in 2021 compared to 9.8% in 2020.
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Depreciation and amortization. Depreciation and amortization expense increased $0.7 million to $10.8 million for 2021 from $10.1 million for 2020. The increase was primarily related to the opening of an owned STK restaurant in July 2021 and capital expenditures to expand seating capacity and other initiatives to enhance the guest experience.
Transaction costs. We incurred $0.2 million in 2021 associated with capital raising and financing activities compared to transaction and integration costs of $1.1 million related to the Kona Grill acquisition in 2020.
Lease termination expenses. Lease termination expense was $1.9 million and $3.3 million in 2021 and 2020, 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.
Agreement restructuring. Agreement restructuring expense for both 2021 and 2020 was $0.5 million, related to the restructuring of agreements with our management and license partners. We do not expect to incur additional agreement restructuring expenses going forward.
COVID-19 related expenses. COVID-19 related expenses were $5.8 million and $5.5 million for 2021 and 2020, respectively, composed primarily of sanitation, supplies and safety precautions taken to prevent the spread of COVID-19.
Pre-opening expenses. Pre-opening expenses for 2021 were $1.0 million, related to the STK Bellevue restaurant which opened in July 2021 and non-cash pre-open rent for STK Dallas and STK San Francisco which are currently under construction. Pre-opening expenses for 2020 were $0.2 million.
Interest expense, net of interest income. Interest expense, net of interest income was approximately $3.8 million and $5.3 million for 2021 and 2020, respectively.
Loss on early debt extinguishment. During August 2021, we entered into the Third Amendment to the credit and guaranty agreement with Goldman Sachs Bank USA (“Credit Agreement”) and made a $22.2 million pre-payment on the term loan. We recognized a loss on early debt extinguishment of $0.6 million for the year ended December 31, 2021.
Provision (benefit) for income taxes. The provision for income taxes for 2021 was $1.6 million compared to a benefit for income taxes of $5.4 million for 2020. Our effective tax rate was 4.7% and 28.4% for the years ended December 31, 2021 and 2020, respectively. For 2021, the provision for income taxes included discrete period tax benefits resulting from the vesting of restricted stock units and the exercise of stock options. 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; (iii) taxes owed in state and local jurisdictions; (iv) the benefit of excluding the Paycheck Protection Program loans forgiven under the CARES Act; and (v) windfall tax benefits from equity compensation offset by compensation limited for certain individuals with compensation in excess of $1 million.
Net income (loss) attributable to noncontrolling interest. Net income attributable to noncontrolling interest increased by $1.4 million to $0.6 million for 2021 compared to net loss of $0.8 million for 2020.
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 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 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 also may borrow on our revolving credit facility or issue equity to support ongoing business and fund additional expansion. We believe the combination of the aforementioned items are adequate to support our immediate business operations and plans. As of December 31,
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2021, we had cash and cash equivalents of $23.6 million. We had $24.8 million in long-term debt, which consisted of borrowings under our Credit Agreement as of December 31, 2021. As of December 31, 2021, the availability on our revolving credit facility was $10.6 million, subject to the restrictions described in Note 5 to our consolidated financial statements.
Capital expenditures in 2021 were $11.5 million primarily for the construction of STK Bellevue which opened in July 2021, the development and construction of STK restaurants in Dallas and San Francisco and a Kona Grill in Riverton as well as capital expenditures for our existing restaurants and technology initiatives. 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.
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 (in thousands):
Minimum rents $ 1,600
Interest 100
Minimum general & administrative costs 500
Credit Agreement
On October 4, 2019, in conjunction with the acquisition of Kona Grill, we entered into our Credit Agreement with Goldman Sachs Bank USA. On August 6, 2021, we entered into the Third Amendment to the Credit Agreement to extend the maturity date for both the term loan and revolving credit facility to August 2026, to eliminate all financial covenants except a maximum net leverage ratio of 2.00 to 1.00, and to eliminate restrictions on the maximum amount of capital expenditures, the maximum number of Company-owned new locations, and credit extensions under the revolving credit facility. As amended, the Credit Agreement provides for a secured revolving credit facility of $12.0 million and a $25.0 million term loan (reduced from $48.0 million). The term loan is payable in quarterly installments of $0.1 million, with the final payment due in August 2026.
The amended Credit Agreement has several borrowing and interest rate options, including the following: (a) a LIBOR rate (or a comparable successor rate) subject to a 1.00% floor from a 1.75% floor or (b) a base rate equal to the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50%, (iii) the LIBOR rate for a one-month period plus 1.00% or (iv) 4.00%. Loans under the amended Credit Agreement bear interest at a rate per annum using the applicable indices plus an interest rate margin of 5.00% from a variable interest rate margin of 5.75 to 6.75% (for LIBOR rate loans) and 4.00% from 4.75% to 5.75% (for base rate loans). Upon the cessation of LIBOR, the amended Credit Agreement provides for the use of a benchmark replacement as defined in the amended Credit Agreement.
As of December 31, 2021, we were compliant with the covenants under the amended Credit Agreement. Based on current projections, we believe that we will continue to comply with the covenants in the Credit Agreement, as amended, throughout the twelve months following the issuance of the financial statements.
See Note 5 and Note 15 to our consolidated financial statements for further information on our long-term debt and commitments and contingencies.
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CARES Act Loans
On May 4, 2020, two of our subsidiaries obtained CARES Act Loans from BBVA USA under the Paycheck Protection Program (“PPP”) created by the CARES Act. Repayment of the CARES Act Loans was guaranteed by the Small Business Administration (“SBA”). The ONE Group, LLC received a loan of $9.8 million related to the operations of STK restaurants, and Kona Grill Acquisition, LLC received a loan of $8.5 million related to the operation of Kona Grill restaurants.
The CARES Act Loans were eligible for forgiveness if the proceeds were used for qualified purposes within a specified period and if at least 60% was spent on payroll costs. We 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 supported the re-opening of in person dining and the return of approximately 3,000 furloughed employees to work.
We applied for forgiveness of the CARES Act Loans in February 2021, and loans were forgiven in June 2021 and July 2021. As a result, we recognized an $18.5 million gain on CARES Act Loan forgiveness for the year ended December 31, 2021.
Capital Expenditures and Lease Arrangements
When we open new Company-owned restaurants, our capital expenditures for construction increase. For owned restaurants, where we build from a shell state, we have typically targeted an average cash investment of approximately $3.8 million for a 10,000 square-foot STK restaurant and approximately $2.5 million for an 8,000 square-foot Kona Grill restaurant, in each case, net of landlord contributions and excluding pre-opening costs. For STK locations where we may be the successor restaurant tenant, which anticipate total cash investment of $2.0 million to $3.0 million. Typical cash pre-opening costs are $0.3 million to $0.5 million. 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 services projects typically require limited capital investment from us. Capital expenditures for these projects are 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, 2021 and December 31, 2020 (in thousands):
For the year ended December 31,
Net cash provided by (used in):
Effect of exchange rate changes on cash 5 (27)
Net (decrease) increase in cash and cash equivalents $ (771) $ 12,041
Operating Activities.Net cash provided by operating activities was $31.0 million for 2021 compared to $0.4 million for 2020. The increase was primarily attributable to net income generated during the year due to strong sales compared
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to a net loss for 2020 as a result of COVID-19 restrictions. The increase is also attributed to an increase in accounts payable and accrued expenses as a result of higher sales volumes.
Investing Activities. Net cash used in investing activities for 2021 was $11.5 million primarily for the construction of STK restaurants in Bellevue, Washington; Dallas, Texas; San Francisco, California; and a Kona Grill restaurant in Riverton, Utah, as well as capital expenditures for existing restaurants and technology initiatives compared to $5.8 million for 2020.
Financing Activities. Net cash used in financing activities was $20.3 million for 2021 compared to net cash provided by financing activities of $17.4 million for 2020. During 2021, we made a $22.2 million principal payment on the amended Credit Agreement. In May of 2020, we received $18.3 million in proceeds from the CARES Act Loans, which were subsequently forgiven in 2021.
Recent Accounting Pronouncements
Refer to Note 2 of our consolidated financial statements for a detailed description of recent accounting pronouncements.
Critical Accounting Estimates
Critical accounting estimates are those that management believes are the most important to the portrayal of our financial condition and results and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain, especially in light of the current economic environment due to the COVID-19 pandemic. Judgments and uncertainties may result in materially different amounts being reported under different conditions or using different assumptions.
Our significant accounting estimates are discussed in additional detail in Note 2 to our consolidated financial statements. We base our estimates on historical experience and various assumptions that we believe to be reasonable under the circumstances and we evaluate those estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. We believe that our significant accounting estimates involve a higher degree of judgment and/or complexity for the reasons discussed below:
Income Taxes
We recognize 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 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, 2021, we had a valuation allowance of $0.3 million that 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 income 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 provisions that do not allow us to defer the earnings of our U.K. and Italy subsidiaries.
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Impairment of Long-Lived Assets and Disposal of Property and Equipment
Long-lived assets, which include property and equipment and right-of-use assets for operating leases, 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 restaurant 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 flowsexpected 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 undiscounted future cash flows an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds its fair value. The estimated fair value is determined for these assets in accordance with ASC 820. Property and equipment, net of accumulated depreciation, and the operating lease right-of-use assets as of December 31,2021 were $69.6 million and $85.4 million, respectively. For the year ended December 31, 2021, no impairment loss related to long-lived assets has been recognized
From time to time, we have decided to close or dispose of restaurants. Typically, such decisions are 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, 2021 and 2020, we did not identify any event or changes in circumstances that indicated that the carrying values of our restaurant long-lived 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 recognize 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 use 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 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 rate, the rent holidays and/or escalations in payments that are taken into consideration when calculating the rent expense and the related lease liability
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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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
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. In addition, the COVID-19 pandemic has adversely impacted commodity prices due to supply and labor shortages. 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. In addition, the COVID-19 pandemic has resulted in inflation due to supply and labor shortages. 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
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.
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.
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Item 9A. 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 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 December 31, 2021 and, based on this evaluation, have concluded that due to two material weaknesses in our internal control over financial reporting described below, our disclosure controls and procedures were not effective as of December 31, 2021. These material weaknesses did not result in a material misstatement of the annual or interim consolidated financial statements.
Report of Management on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act and based upon the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO framework”). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in the COSO framework.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Based on our assessment, management has concluded that as of December 31, 2021, our internal control over financial reporting was ineffective due to the material weaknesses in the control activities component of the COSO framework described below:
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These material weaknesses did not result in a material misstatement of the annual or interim consolidated financial statements. However, these deficiencies in control activities result in the potential for there to have been material accounting errors.
Deloitte & Touche LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report, has issued an attestation report on our internal control over financial reporting as of December 31, 2021.
Remediation Efforts to Address the Material Weaknesses
To remediate the material weakness regarding the lack of segregation of duties as it relates to the review of journal entries, in late 2021 we modified our journal entry review process to require that senior members of the management team who are outside of the journal entry recording process review journal entries in order to enforce proper segregation of duties.
To remediate the material weakness resulting from other identified deficiencies, we plan to accelerate the timeline for testing and documenting the design and operating effectiveness of control activities to aid in the repetition of control activities and implementation of corrective actions as necessary. In addition, the following remediation efforts are planned or ongoing:
We are committed to maintaining a strong internal control environment and have fully implemented measures designed to help ensure that the control deficiencies contributing to the material weaknesses are remediated. However, there cannot be any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts.These material weaknesses cannot be considered remediated until the applicable remediated controls have operated for a period of time sufficient for management to conclude that they have operated effectively.
Changes in Internal Control Over Financial Reporting
Except for the changes in connection with our implementation of the remediation plan discussed above, there have been no other changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of The ONE Group Hospitality, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of The ONE Group Hospitality, Inc. and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weaknesses identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of the Company and our report dated March 16, 2022, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses in the control activities component of the COSO framework have been identified and included in management's assessment:
● Lack of segregation of duties as it relates to the review of journal entries
● The following deficiencies in the aggregate constitute a material weakness:
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 31, 2021, of the Company, and this report does not affect our report on such financial statements.
/s/ Deloitte & Touche LLP
Denver, Colorado
March 16, 2022
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Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
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 2022 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 2022 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 2022 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 2022 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 2022 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.
Item 16. 10-K Summary
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 16, 2022
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 16, 2022
Emanuel Hilario (Principal Executive Officer)
/s/ TYLER LOY Chief Financial Officer March 16, 2022
Tyler Loy (Principal Financial Officer)
/s/ CHRISTI HING Chief Accounting Officer March 16, 2022
Christi Hing (Principal Accounting Officer)
/s/ JONATHAN SEGAL Executive Chairman, Director March 16, 2022
Jonathan Segal
/s/ DIMITRIOS ANGELIS Director March 16, 2022
Dimitrios Angelis
/s/ EUGENE BULLIS Director March 16, 2022
Eugene Bullis
/s/ SUSAN LINTONSMITH Director March 16, 2022
Susan Lintonsmith
/s/ HAYDEE OLINGER Director March 16, 2022
Haydee Olinger
/s/ MICHAEL SERRUYA Director March 16, 2022
Michael Serruya
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Exhibit Index
ExhibitNumber Exhibit Description
21.1* List of Subsidiaries.
23.1* Consent of Deloitte & Touche LLP
23.2* Consent of Plante & Moran, PLLC
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
* 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
Report of Independent Registered Public Accounting Firm (PCAOB ID: 34) F-2
Report of Independent Registered Public Accounting Firm (PCAOB ID: 166) F-4
Consolidated Balance Sheets F-5
Consolidated Statements of Operations and Comprehensive Income (Loss) F-6
Consolidated Statements of Changes in Stockholders’ Equity F-7
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-9
F-1
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Report of Independent Registered Accounting Firm
To the stockholders and the Board of Directors of The ONE Group Hospitality, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The ONE Group Hospitality, Inc. and subsidiaries (the "Company") as of December 31, 2021, the related consolidated statements of operations and comprehensive income (loss), changes in stockholders' equity, and cash flows, for the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2022, expressed an adverse opinion on the Company's internal control over financial reporting because of material weaknesses.
Basis for Opinion
These financial statements are the responsibility of the Company's management. 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 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 audits 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. Our audits 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 audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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Long-Lived Asset Impairment — Refer to Note 2 to the financial statements
Critical Audit Matter Description
Long-lived assets, which includes property and equipment and right-of-use assets for operating leases, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying values of these assets may not be fully recoverable. The impairment evaluation is performed at the individual restaurant level. Recoverability of restaurant assets is measured by a comparison of the carrying amount of an individual restaurant’s assets to the estimated undiscounted future cash flows expected to be generated by those restaurant assets. If the carrying amount of an individual restaurant’s assets exceeds its estimated undiscounted future cash flows an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds its fair value. The estimated fair value is determined for these assets in accordance with ASC 820. Property and equipment, net, and the Operating lease right-of-use assets as of December 31, 2021 were $69.6 million and $85.4 million, respectively. For the year ended December 31, 2021, no impairment loss related to long-lived assets was recognized.
We identified the determination of possible triggering events for long-lived assets as a critical audit matter because of the significant assumptions management makes when determining whether events or changes in circumstances have occurred indicating that the carrying amounts of long-lived assets may not be recoverable. This required a high degree of auditor judgement.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to evaluation of long-lived asset impairment indicators included the following, among others:
/s/ Deloitte & Touche LLP
Denver, Colorado
March 16, 2022
We have served as the Company's auditor since 2021.
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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.
/s/ Plante & Moran PLLC
We served as the Company’s auditor from 2018 to 2021.
Boulder, Colorado
March 19, 2021
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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 376 376
Operating lease right-of-use assets 85,395 80,960
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Deferred license revenue 90 207
Deferred gift card revenue and other 2,029 1,990
Current portion of operating lease liabilities 5,396 4,817
Current portion of CARES Act Loans — 10,057
Current portion of long-term debt 500 588
Deferred license revenue, long-term 298 953
Operating lease liabilities, net of current portion 103,616 98,569
CARES Act Loans, net of current portion — 8,257
Long-term debt, net of current portion 23,132 45,064
Commitments and contingencies (Note 15)
Stockholders’ equity:
Retained earnings (accumulated deficit) 10,632 (20,716)
Accumulated other comprehensive loss (2,645) (2,646)
Noncontrolling interests (909) (1,200)
See notes to the consolidated financial statements.
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THE ONE GROUP HOSPITALITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except earnings per share and related share information)
For the year ended December 31,
Revenues:
Management, license and incentive fee revenue 12,774 5,325
Cost and expenses:
Owned operating expenses:
Lease termination expenses 1,912 3,315
Agreement restructuring expenses 503 452
Other income, net — (11)
Other (income) expenses, net:
Interest expense, net of interest income 3,780 5,329