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 63 venues including 25 STKs and 25 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and 13 F&B venues in six hotels and casinos in the United States and Europe. We intend to open eight to twelve new venues in 2023, including a Kona Grill restaurant in Columbus, Ohio which opened in January 2023. The four venues that were opened in 2022 are below:
● Owned STK restaurant in San Francisco, California;
● Owned STK restaurant in Dallas, Texas;
● Licensed virtual Bao Yum in Austin, Texas
● Managed STK restaurant at The Gantry London hotel in London, United Kingdom
There are currently three Company-owned STK restaurants (Charlotte, NC, Boston, MA and Washington D.C.) and two Company-owned Kona Grill restaurants (Riverton, UT and Phoenix, AZ) 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 — 3 4
International
Owned — — — —
Licensed 4 — — 4
Total international 9 — 7 16
Overview of the Impact of COVID-19
In response to COVID-19, the Company took significant steps to adapt its business to increase sales while providing a safe environment for guests and employees. COVID-19 related expenses were $2.5 million and $5.8 million for 2022 and 2021, respectively, composed primarily of sanitation, supplies and safety precautions taken to prevent the spread of COVID-19.
2022 Financial Highlights
Total revenue increased $39.5 million, or 14.2% to $316.6 million for 2022 compared to $277.2 million for 2021. The increase was primarily attributable to strong execution of our sales initiatives combined with the opening of STK San Francisco and STK Dallas in August 2022 and November 2022, respectively. Same store sales increased 10.8% in 2022 compared to 2021. STK same store sales increased 17.1% while Kona Grill same store sales increased 2.5%. On a
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three-year basis, same-store sales increased 47.7% for 2022 compared to 2019; STK same store sales increased 69.1% on a three-year basis while Kona Grill same store sales increased 26.3%.
Restaurant operating profit decreased $1.6 million, or 3.1% to $50.8 million for 2022 compared to $52.4 million in 2021. Consistent with the restaurant industry, costs faced significant inflationary pressures during 2022. Restaurant operating profit as a percentage of owned restaurant net revenue was 16.9% in 2022 compared to 19.8% in 2021.
Operating income decreased $3.1 million to $16.3 million for 2022 from $19.4 million for 2021. The decreased is attributed to higher general and administrative and pre-opening expenses and offset by higher managed, licensed and incentive fee revenue and lower COVID-19 related expenses.
Net income attributable to The ONE Group Hospitality, Inc was $13.5 million in 2022 compared to $31.3 million in 2021. We recognized an $18.5 million gain on CARES Act Loan Forgiveness in 2021.
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 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 2022, we opened two owned STK restaurants in San Francisco, California and Dallas, Texas and one managed STK restaurant in London, United Kingdom. Additionally, we have Company-owned STK restaurants in Charlotte, North Carolina, Boston, Massachusetts and Washington, D.C under construction and several restaurants under lease or in lease negotiation.
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 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. We opened the first Kona Grill since the Company acquired the Kona Grill brand in Columbus, Ohio in January 2023 and have two restaurants under construction in Riverton, Utah and Phoenix, Arizona.
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 leads to develop managed STK restaurants and 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 2022, we opened a licensed virtual location in conjunction with REEF Kitchens in Austin, Texas that features offerings from Bao Yum.
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, as defined below in Key Performance Indicators, and a reduction of store-level operating expenses.
Acquisitions. We will continue to evaluate potential acquisition opportunities.
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.
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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 at the beginning of each quarter, 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 three-year comparable sales to illustrate how sales at our restaurant base before the COVID-19 pandemic compare to sales post COVID-19 restrictions.
Our comparable restaurant base for STK SSS consisted of ten domestic restaurants for the year ended December 31, 2022. For Kona Grill SSS 24 domestic restaurants are included in the comparable restaurant base. STK and Kona Grill SSS increased 17.1% and 2.5%, respectively, for 2022 compared to the prior year. On a three-year basis, STK SSS increased 69.1% while Kona Grill SSS increased 26.3%.
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 2022, we opened three STK restaurants including two owned restaurants in San Francisco, California and Dallas, Texas, a managed STK restaurant in London, United Kingdom and opened one venue under a licensing agreement.
Average Check Per Person and Average Spend. Average check is calculated by dividing total restaurant sales by total number of guests for a specified period. Average spend per transaction is calculated by dividing total restaurant sales by total number of transactions for a specified period. Our management team uses these indicators 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 $131 for 2022 compared to $114 for 2021. The average spend per transaction was $61 for Kona Grill restaurants for 2022 compared to $56 for 2021.
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. For purposes of this calculation, STK Downtown restaurant and rooftop are considered a single venue. This indicator assists management in measuring changes in customer traffic, pricing and development of our brand. Our average comparable STK restaurant revenues were $19.1 million and $16.3 million for 2022 and 2021, respectively. Our average comparable Kona Grill restaurant revenues were $5.3 million and $5.1 million for 2022 and 2021, respectively.
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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, 2022, beverage sales comprised 24% of food and beverage sales, and food sales comprised the remaining 76%. 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
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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 loss on disposal of fixed assets.
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 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
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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 and is a metric used in our debt compliance calculation. 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 28 for our reconciliation of net income to EBITDA and Adjusted EBITDA and for a reconciliation of operating income 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 15,779 12,774
Cost and expenses:
Owned operating expenses:
Transaction costs 123 160
Lease termination expenses 257 1,912
Agreement restructuring expenses — 503
Write-off of trademark costs and other 630 —
Other expenses (income), net:
Interest expense, net of interest income 2,113 3,780
Loss on early debt extinguishment — 600
Gain on CARES Act Loan Forgiveness — (18,529)
Total other expenses (income), net 2,113 (14,149)
Income before provision for income taxes 14,193 33,534
Provision for income taxes 874 1,586
Less: net (loss) income attributable to noncontrolling interest (215) 600
Net income attributable to The ONE Group Hospitality, Inc. $ 13,534 $ 31,348
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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 95.0% 95.4%
Management, license and incentive fee revenue 5.0% 4.6%
Cost and expenses:
Owned operating expenses:
Owned restaurant cost of sales (1) 25.0% 25.5%
Owned restaurant operating expenses (1) 58.1% 54.7%
Total owned operating expenses (1) 83.1% 80.2%
Depreciation and amortization 3.8% 3.9%
COVID-19 related expenses 0.8% 2.1%
Transaction costs 0.0% 0.1%
Lease termination expenses 0.1% 0.7%
Agreement restructuring expenses —% 0.2%
Pre-opening expenses 1.7% 0.4%
Write-off of trademark costs and other 0.2% —%
Total costs and expenses 94.9% 93.0%
Operating income 5.1% 7.0%
Other expenses (income), net:
Interest expense, net of interest income 0.7% 1.4%
Loss on early debt extinguishment —% 0.2%
Gain on CARES Act Loan Forgiveness —% (6.7)%
Total other expenses (income), net 0.7% (5.1)%
Income before provision for income taxes 4.5% 12.1%
Provision for income taxes 0.3% 0.6%
Less: net (loss) income attributable to noncontrolling interest (0.1)% 0.2%
Net income attributable to The ONE Group Hospitality, Inc. 4.3% 11.3%
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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 income attributable to The ONE Group Hospitality, Inc. $ 13,534 $ 31,348
Net income (loss) attributable to noncontrolling interest (215) 600
Interest expense, net of interest income 2,113 3,780
Provision for income taxes 874 1,586
Transaction costs 123 160
Stock-based compensation 3,985 3,618
Lease termination expense (1) 257 1,912
Agreement restructuring expense — 503
Non-cash rent (2) (164) (32)
Gain on CARES Act Loan forgiveness — (18,529)
Loss on early debt extinguishment — 600
Write-off of trademark costs and other 630 —
Adjusted EBITDA attributable to noncontrolling interest 72 507
The following table presents a reconciliation of Operating income to Restaurant Operating Profit for the periods indicated (in thousands):
For the year ended December 31,
Management, license and incentive fee revenue (15,779) (12,774)
Agreement restructuring expenses — 503
Lease termination expense 257 1,912
Transaction costs 123 160
Write-off of trademark costs and other 630 —
Restaurant Operating Profit by brand is as follows (in thousands):
For the year ended December 31,
STK restaurant operating profit (Company owned) $ 37,259 $ 34,598
Kona Grill restaurant operating profit $ 13,695 $ 17,785
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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, 2022
As of December 31, 2022
STK Kona Grill ONE Hospitality Corporate Total
For the year ended December 31, 2021
As of December 31, 2021
Results of Operations for the Years Ended December 31, 2022 and December 31, 2021
Revenues
Owned restaurant net revenue. Owned restaurant net revenue increased $36.5 million, or 13.8%, to $300.9 million for 2022 from $264.4 million for 2021. The increase was primarily attributable to strong execution of our sales initiatives combined with the opening of STK San Francisco and STK Dallas in August 2022 and November 2022, respectively. Same store sales increased 10.8% in 2022.
Management, license and incentive fee revenue. Management and license fee revenues increased $3.0 million, or 23.5%, to $15.8 million for 2022 from $12.8 million for 2021. The increase was primarily attributable to strong revenues at our managed restaurants in North America.
Cost and Expenses
Owned restaurant cost of sales. Food and beverage costs for owned restaurants increased $7.9 million, or 11.7%, to $75.4 million for 2022 from $67.5 million for 2021. The increase was primarily due to the incremental sales increases noted above. As a percentage of revenues, cost of sales decreased 50 basis points to 25.0% for 2022 from 25.5% for 2021 primarily due to product mix management, pricing and operational cost reduction initiatives partially offset by significant commodity price increases.
Owned restaurant operating expenses. Owned restaurant operating expenses increased $30.2 million, or 20.9%, to $174.7 million for 2022 from $144.5 million for 2021. Owned restaurant operating costs as a percentage of owned restaurant net revenue increased 340 basis points from 54.7% in 2021 to 58.1% for 2022 primarily due to higher average wage and operating costs.
General and administrative. General and administrative costs increased $3.5 million, or 13.7% to $29.1 million for 2022 from $25.6 million for 2021. The increase was attributable to additional investments required ahead of growth, increased accounting and legal fees partially offset by a decrease in performance based variable compensation. As a percentage of revenues, general and administrative costs were 9.2% in both 2022 and 2021.
Depreciation and amortization. Depreciation and amortization expense increased $1.3 million to $12.1 million for 2022 from $10.8 million for 2021. The increase was primarily related to the opening of two owned STK restaurant in the second half of 2022 and capital expenditures to enhance the guest experience.
Lease termination expenses. Lease termination expense was $0.3 million and $1.9 million in 2022 and 2021, respectively. Lease termination expenses are costs associated with closed, abandoned and disputed locations or disputed leases.
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Agreement restructuring. Agreement restructuring expense for 2021 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 $2.5 million and $5.8 million for 2022 and 2021, respectively, composed primarily of sanitation, supplies and safety precautions taken to prevent the spread of COVID-19.
Pre-opening expenses. We incurred $5.5 million of pre-opening expenses primarily related to payroll, training, and non-cash rent for STK San Francisco which opened August 2022, STK Dallas which opened November 2022, Kona Grill Columbus which opened January 2023 and two new restaurants which are currently under construction. Total pre-opening expenses related to non-cash rent were $1.1 million. Pre-opening expenses for 2021 were $1.0 million, primarily related to STK Bellevue, which opened in July 2021. Detail of pre-opening expenses by category is provided in the table below for 2022 (in thousands).
Preopen Expenses Preopen Rent Total
Write-off of trademark costs and other. Other expenses were $0.6 million for 2022 composed primarily of trademark defense and litigation expenses.
Interest expense, net of interest income. Interest expense, net of interest income, was approximately $2.1 million and $3.8 million for 2022 and 2021, respectively. In conjunction with the Third Amendment to the Credit Agreement in August 2021, we made a $22.2 million pre-payment on the loan.
Loss on early debt extinguishment. During August 2021, we entered into the Third Amendment to the Credit Agreement with Goldman Sachs Bank USA and made a $22.2 million pre-payment on the term loan. We recognized a loss on early debt extinguishment of $0.6 million in 2021.
Provision for income taxes. The provision for income taxes for 2022 was $0.9 million compared to $1.6 million for 2021. Our effective tax rate was 6.2% and 4.7% for the years ended December 31, 2022 and 2021, 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; (iii) taxes owed in state and local jurisdictions; and (iv) windfall tax benefits from equity compensation offset by compensation limited for certain individuals with compensation in excess of $1 million.
Net (loss) income attributable to noncontrolling interest. Net income attributable to noncontrolling interest decreased $0.8 million to a net loss of $0.2 million for 2022 compared to net income of $0.6 million for 2021.
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Liquidity and Capital Resources
Executive Summary
Our principal liquidity requirements are to meet our lease obligations, working capital and capital expenditure needs and to pay principal and interest on 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, construction allowances provided by landlords of certain locations and borrowings under our credit agreement. We also may borrow on our revolving credit facility or issue equity to support ongoing business and fund additional expansion. We believe these sources of financing are adequate to support our immediate business operations and plans. As of December 31, 2022, we had cash and cash equivalents of $55.1 million. We had $74.3 million in long-term debt, which consisted of borrowings under our Credit Agreement as of December 31, 2022. As of December 31, 2022, 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 2022 were $32.7 million of which $17.8 million primarily related to the construction of two new STK restaurants in San Francisco, California and Dallas, Texas which opened in 2022, Kona Grill Columbus which opened in January 2023 and several restaurants that were under construction as of December 31, 2022. We spent $10.0 million on maintenance capital expenditures for existing restaurants which included additional furniture, fixtures and equipment commensurate with the higher sales volumes at our restaurants. In addition, we spent approximately $2.3 million for furniture, fixtures and equipment for restaurants that we plan to open in the future. Net capital expenditures, inclusive of $2.2 million in landlord contributions, was $30.5 million for 2022. Capital expenditures by type for 2022 is provided below (in thousands).
STK Kona Grill Other Total
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.
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. 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.
On December 13, 2022, we entered into the Fourth Amendment to the Credit Agreement that:
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We borrowed $50.0 million on the delayed draw term facility on December 28, 2022.
Loans under the amended Credit Agreement bear interest at a rate per annum using the SOFR rate subject to a 1.00% floor plus an interest rate margin of 6.50%. Prior to the Fourth Amendment to the Credit Agreement, the amended Credit Agreement had several borrowing and interest rate options, including the following: (a) a LIBOR rate (or a comparable successor rate) subject to a 1.00% floor (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 Third Amendment to the Credit Agreement bore interest at a rate per annum using the applicable indices plus an interest rate margin of 5.00% (for LIBOR rate loans) and 4.00% (for base rate loans).
As of December 31, 2022, we were in compliance 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.
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 $0.6 million to $0.8 million, excluding the impact of cash and non-cash pre-opening rent. In addition, some of our existing restaurants will require capital improvements to either maintain or improve the facilities. We may add seating or provide enclosures for outdoor space in the next twelve months for some of our locations, when we believe that will increase revenues for those locations.
Our hospitality F&B 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.
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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 years ended December 31, 2022 and December 31, 2021 (in thousands):
For the year ended December 31,
Net cash provided by (used in):
Effect of exchange rate changes on cash (217) 5
Net increase (decrease) in cash and cash equivalents $ 31,507 $ (771)
Operating Activities.Net cash provided by operating activities was $25.3 million for 2022 compared to $31.0 million for 2021. The decrease in net cash provided by operating activities during 2022 compared to 2021 was primarily attributable to payments on accrued expenses partially offset by collection on accounts receivable.
Investing Activities. Net cash used in investing activities for 2022 was $32.7 million primarily for the construction of STK restaurants in Dallas, Texas and San Francisco, California; and Kona Grill restaurants in Riverton, Utah and Columbus, Ohio, as well as capital expenditures for existing restaurants compared to $11.5 million for 2021.
Financing Activities. Net cash provided by financing activities was $39.1 million for 2022 compared to net cash used by financing activities of $20.3 million for 2021. During 2022, we borrowed $50.0 million under the amended Credit Agreement, partially offset by $7.1 million in purchases of common stock and $2.0 million to pay employee taxes for shares withheld upon vesting of restricted stock units. During 2021, we made a $22.2 million payment for the partial paydown of the term loan in conjunction with the Third Amendment to the Credit Agreement.
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:
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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, 2022, we had a valuation allowance of $0.6 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.
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, Fair Value Measurement. Property and equipment, net of accumulated depreciation and the operating lease right-of-use assets as of December 31, 2022 were $94.1 million and $85.2 million, respectively.
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, 2022 and 2021, we did not identify any event or changes in circumstances that indicated that the carrying values of our restaurant long-lived assets were impaired and therefore, no impairment loss related to long-lived assets has been recognized.
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Impairment of Indefinite-Lived Intangible Assets
Indefinite-lived intangible assets are tested for impairment annually or on an interim basis if events or changes in circumstances between annual tests indicate a potential impairment. First, we determine if, based on qualitative factors, it is more likely than not that an impairment exists. Factors considered include, but are not limited to, historical financial performance, expected future cash flows, changes in management or key personnel, macroeconomic and industry conditions and the legal and regulatory environment. If the qualitative assessment indicates that it is more likely than not that an impairment exists, then a quantitative assessment is performed.
The quantitative assessments require the use of estimates and assumptions regarding future cash flows. Key assumptions include projected revenue growth and operating expenses, discount rates, royalty rates and other factors that could affect fair value or otherwise indicate potential impairment. These estimates are subjective, and our ability to realize future cash is affected by factors such as changes in economic conditions and operating performance. Changes in circumstances existing at the measurement date or at other times in the future, or in the estimates associated with management’s judgments and assumptions made in assessing the fair value of our trademarks, could result in an impairment loss of a portion or all of our trademarks.
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 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.
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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
Inflation significantly affected our operations in 2022. 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 increases, 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.
Interest Rate Risk
Under our Credit Agreement, we are exposed to market risk from changes in interest rates on our borrowings. Borrowings under the Credit Agreement are subject to rates based on SOFR plus an interest rate margin of 6.5%. As of December 31, 2022, we had $74.3 million of borrowings subject to variable interest rates.
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, 2022 and, based on this evaluation, have concluded that our disclosure controls and procedures were effective as of December 31, 2022.
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. 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.
Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. 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, 2022.
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, 2022.
Remediation Efforts to Address the Previously Disclosed Material Weaknesses
As previously disclosed in our 2021 Annual Report on Form 10-K filed on March 16, 2022, we identified two material weaknesses in our internal control over financial reporting. 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.
Our remediation efforts previously identified in Item 9A. “Controls and Procedures” of our 2021 Annual Report on Form 10-K to address the identified material weaknesses have been completed. As of December 31, 2022, we completed the execution of the following remediation measures, including testing of the design and concluding on the operating effectiveness of the related controls:
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Based upon the above, we believe the steps taken have improved the effectiveness of our internal control over financial reporting and determined that these new or redesigned controls are operating effectively.
Changes in Internal Control Over Financial Reporting
Except for the improvements to our internal control over financial reporting to remediate the material weaknesses discussed above, there have been no other changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2022 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 shareholders 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, 2022, 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, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, 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, 2022, of the Company and our report dated March 9, 2023, 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.
/s/ Deloitte & Touche LLP
Denver, Colorado
March 9, 2023
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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 2023 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 2023 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 2023 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 2023 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 2023 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 9, 2023
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 9, 2023
Emanuel Hilario (Principal Executive Officer)
/s/ TYLER LOY Chief Financial Officer March 9, 2023
Tyler Loy (Principal Financial Officer)
/s/ CHRISTI HING Chief Accounting Officer March 9, 2023
Christi Hing (Principal Accounting Officer)
/s/ JONATHAN SEGAL Executive Chairman, Director March 9, 2023
Jonathan Segal
/s/ DIMITRIOS ANGELIS Director March 9, 2023
Dimitrios Angelis
/s/ EUGENE BULLIS Director March 9, 2023
Eugene Bullis
/s/ SUSAN LINTONSMITH Director March 9, 2023
Susan Lintonsmith
/s/ HAYDEE OLINGER Director March 9, 2023
Haydee Olinger
/s/ MICHAEL SERRUYA Director March 9, 2023
Michael Serruya
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Exhibit Index
ExhibitNumber Exhibit Description
21.1* List of Subsidiaries.
23.1* Consent of Deloitte & Touche LLP
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
* 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
Consolidated Balance Sheets F-4
Consolidated Statements of Operations and Comprehensive Income (Loss) F-5
Consolidated Statements of Changes in Stockholders’ Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders 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, 2022 and 2021, the related consolidated statements of operations and comprehensive income (loss), changes in shareholders' equity, and cash flows, for each of the two years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, 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, 2022, 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 9, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.
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.
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
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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, Fair Value Measurement. Property and equipment, net, and the Operating lease right-of-use assets as of December 31, 2022, were $94.1 million and $85.2 million, respectively. For the year ended December 31, 2022, no impairment loss related to long-lived assets was recognized.
We identified the determination of possible impairment indicators 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 and an increased extent of effort when performing audit procedures to evaluate whether management appropriately identified impairment indicators.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the evaluation of long-lived asset impairment indicators included the following, among others:
– Testing long-lived restaurant assets for possible indications of impairment, including searching for locations with current period losses or projected losses
– Performing inquiries of management regarding the process and assumptions used to identify potential indicators of impairment and evaluating the consistency of the assumptions with evidence obtained in other areas of the audit
– Inspecting minutes of the board of directors, the Company's public statements, operating plans, and industry data to identify any evidence that may contradict management's assumptions
/s/ Deloitte & Touche LLP
Denver, Colorado
March 9, 2023
We have served as the Company's auditor since 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 85,161 85,395
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Deferred gift card revenue and other 2,115 2,029
Current portion of operating lease liabilities 6,336 5,396
Current portion of long-term debt 1,500 500
Other current liabilities 256 90
Operating lease liabilities, net of current portion 105,247 103,616
Long-term debt, net of current portion 70,544 23,132
Other long-term liabilities 972 298
Commitments and contingencies (Note 15)
Stockholders’ equity:
Accumulated other comprehensive loss (2,869) (2,645)
Noncontrolling interests (1,124) (909)
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 15,779 12,774
Cost and expenses:
Owned operating expenses:
Lease termination expenses 257 1,912
Agreement restructuring expenses — 503
Write-off of trademark costs and other 630 —
Other expenses (income), net:
Interest expense, net of interest income 2,113 3,780
Loss on early debt extinguishment — 600
Gain on CARES Act Loan Forgiveness — (18,529)
Total other expenses (income), net 2,113 (14,149)
Income before provision for income taxes 14,193 33,534
Provision for income taxes 874 1,586
Less: net (loss) income attributable to noncontrolling interest (215) 600
Net income attributable to The ONE Group Hospitality, Inc. $ 13,534 $ 31,348
Currency translation (loss) gain (224) 1
Net income attributable to The ONE Group Hospitality, Inc. per share:
Basic net income per share $ 0.42 $ 1.01
Diluted net income per share $ 0.40 $ 0.93
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 stock capital earnings loss equity interests Total
Gain on foreign currency translation, net — — — — — 1 1 — 1
See notes to the consolidated financial statements.
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THE ONE GROUP HOSPITALITY, INC.