UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
| (Mark One) |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from _________ to ___________ | |
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(Exact name of registrant as specified in its charter)
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| (I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
| Zip Code |
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Title of each class | Name of each exchange on which registered | ||
The |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the price at which the common equity was last sold, as of the last business day of the registrant’s most recently completed second fiscal quarter, was $
Number of shares of Common Stock outstanding as of February 28, 2022:
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for its 2022 annual meeting of stockholders are incorporated by reference in Part III of this Form 10-K.
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Statements:
This Annual Report on Form 10-K and certain information incorporated herein by reference contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). Forward-looking statements speak only as of the date thereof, and involve risks and uncertainties that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These risk and uncertainties include, but are not limited to, the risk factors discussed under Item 1A. “Risk Factors” of this Annual Report on Form 10-K. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements include matters such as future economic performance, general economic conditions, consumer preferences and spending, costs, competition, new product execution, restaurant openings or closings, operating margins, the availability of acceptable real estate locations, the sufficiency of our cash balances and cash generated from operations and financing activities for our future liquidity and capital resource needs, the impact on our business of Federal and State legislation and local regulation, future litigation, the execution of our growth strategy and other matters. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “ongoing,” “could,” “estimates,” “expects,” “intends,” “may,” “appears,” “suggests,” “future,” “likely,” “goal,” “plans,” “potential,” “projects,” “predicts,” “should,” “targets,” “would,” “will” and similar expressions that convey the uncertainty of future events or outcomes. You should not place undue reliance on any forward-looking statement. We do not undertake any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as may be required under applicable law.
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PART I
As used in this report, the terms “Company,” “we,” “our,” or “us,” refer to The ONE Group Hospitality, Inc. and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates. The term “year ended” refers to the entire calendar year, unless the context otherwise indicates.
Item 1. Business
Description of the Business
We are a global hospitality company that develops, owns and operates, manages and licenses upscale and polished casual, high-energy restaurants and lounges and provides turn-key food and beverage (“F&B”) services and consulting service for hospitality venues including hotels, casinos and other high-end locations. Turn-key F&B services are food and beverage services that can be scaled, customized and implemented by us for the client at a particular hospitality venue. Our vision is to be a global market leader in the hospitality industry by melding high-quality service, ambiance, high-energy and cuisine into one great experience that we refer to as “Vibe Dining”. We design all our restaurants, lounges and F&B services to create a social dining and high-energy entertainment experience within a destination location. We believe that this design and operating philosophy separates us from more traditional restaurant and foodservice competitors.
Our primary restaurant brands are STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse, and Kona Grill, a polished casual bar-centric grill concept featuring American favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere. Our F&B hospitality management services are marketed as ONE Hospitality and include developing, managing and operating restaurants, bars, rooftop lounges, pools, banqueting and catering facilities, private dining rooms, room service and mini bars tailored to the specific needs of high-end hotels and casinos. We also provide hospitality advisory and consulting services to certain clients. Our F&B hospitality clients operate global hospitality brands such as the W Hotel, ME Hotels, Hippodrome Casino, and Curio Collection by Hilton.
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We opened our first restaurant in January 2004 in New York, New York. 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. 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.
Brands and Locations
The table below reflects our venues by restaurant brand and geographic location:
| Venues | |||||||
| STK(1) |
| Kona Grill |
| ONE Hospitality(2) |
| Total | |
Domestic |
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Owned |
| 11 |
| 24 |
| 2 |
| 37 |
Managed |
| 2 |
| — |
| 1 |
| 3 |
Licensed |
| 1 |
| — |
| — |
| 1 |
Total domestic |
| 14 |
| 24 |
| 3 |
| 41 |
International |
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|
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|
|
|
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|
Owned |
| — |
| — |
| — |
| — |
Managed |
| 4 |
| — |
| 10 |
| 14 |
Licensed |
| 5 |
| — |
| — |
| 5 |
Total international |
| 9 |
| — |
| 10 |
| 19 |
Total venues |
| 23 |
| 24 |
| 13 |
| 60 |
| (1) | Locations with an STK and STK Rooftop are considered one venue location. This includes the STK Rooftop in San Diego, CA, which is a licensed location. |
| (2) | Includes concepts under the Company’s F&B hospitality management agreements and other venue brands such as ANGEL, Bao Yum, Heliot, Hideout, Marconi, Radio and Rivershore Bar & Grill. Effective January 1, 2022, our agreement with the Hippodrome Casino was amended and extended for five years whereby the Company changed from manager to consultant for the Heliot Steak House and F&B Hospitality services for the casino. |
We expect to continue expanding our operations domestically and internationally primarily through a mix of owned, licensed and managed restaurants using a disciplined and targeted site selection process. We refer to this as our “capital light strategy” because it requires significantly less capital than expansion through owned restaurants only. Refer to Item 2 – Properties for additional details regarding the domestic and international locations in which we operate.
STK
STK is a global steakhouse restaurant concept with locations in major metropolitan cities. STK artfully blends the modern steakhouse and a chic lounge, offering a high-energy, fine dining experience in a social atmosphere with the quality and service of a traditional upscale steakhouse. Each STK location features a large, open restaurant and bar area with a DJ playing music throughout the restaurant, offering our customers a high-energy, fun “destination” environment that encourages social interaction. We believe this Vibe Dining concept truly differentiates us from other upscale steakhouses. Our menu provides a variety of portion sizes and signature options to appeal to a broad customer demographic.
We operate eleven owned, six managed and six licensed STK restaurants in North America, Europe and the Middle East. Our STK restaurants average approximately 9,000 to 10,000 square feet, and we typically target locations that range in size from 8,000 to 10,000 square feet. In 2021, the average domestic restaurant revenues and average domestic check per person for owned and managed STK restaurants that have been open 18 months at December 31, 2021 were $14.8 million and $114, respectively.
We are focused on expanding our global STK footprint. We believe that the locations of our STK restaurants are critical to our long-term success, and we devote significant time and resources to analyzing prospective restaurant sites. We intend to continue our focus on (i) metropolitan areas with demographic and discretionary spending profiles that favor our high-end concept and (ii) finding partners with excellent track records and brand recognition. We also consider factors such as traffic patterns, proximity to high-end shopping areas and office buildings, hotels and convention centers, area restaurant competition, accessibility and visibility. We have identified over 75 additional major metropolitan areas
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across the globe where we could grow our STK brand to 200 restaurants over the foreseeable future. We expect to open as many as five to six STKs annually.
Kona Grill
Kona Grill is a bar-centric grill concept featuring American favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere. Kona Grill offers freshly prepared food and attentive service in an upscale, contemporary ambiance that creates an exceptional dining experience that we believe exceeds many traditional casual dining restaurants. Menu items are prepared from scratch at each restaurant location, creating memorable flavor profiles that appeal to a wide range of customers. The diverse menu is complemented by a full-service bar offering a broad assortment of wines, craft cocktails, and beers. We believe that the Kona Grill brand is complementary to our other brands and enables us to capture market share in the Vibe Dining segment.
We own and operate 24 Kona Grill restaurants within 17 states in the United States. Our Kona Grill restaurants average approximately 7,000 to 8,000 square feet. In 2021, the average restaurant revenues were $5.1 million and average check per person was $33. We believe we can 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.
ONE Hospitality
Our ONE Hospitality platform is composed of our F&B hospitality management agreements with hotels, casinos, and other high-end locations as well as our other brands and venue concepts, which are described below:
| ● | ANGEL. ANGEL Rooftop bar and Dining is a sophisticated Southern-Mediterranean restaurant with two indoor and outdoor bars, a floral garden patio, and a plunge pool located within the Hotel Calimala in Florence, Italy. |
| ● | Bao Yum. A fast-casual concept that offers a whimsical twist on classic bao. Bao Yum serves breakfast, lunch, dinner and dessert bao along with a variety of salads, soups, sandwiches and snacks. Bao Yum currently operates within the Westminster Curio Hotel in London. |
| ● | Heliot. Heliot Steak House is an award-winning steakhouse and bar within the Hippodrome Casino in London that offers impressive views of the main casino gambling floor. |
| ● | Hideout. The Hideout by STK is an outdoor, poolside restaurant and bar within the W Hotel in Westwood, California, which complements our owned STK and F&B hospitality services also offered within the W Hotel in Westwood. |
| ● | Marconi. The Marconi Lounge is a stylish and sophisticated lounge bar that we manage within the ME London hotel that offers an extensive cocktail menu in an upbeat atmosphere. |
| ● | Radio. Radio Rooftop is a premier rooftop restaurant and lounge bar concept boasting striking city views with two signature locations on top of the ME London and ME Milan hotels. |
| ● | Rivershore Bar & Grill. Rivershore Bar & Grill celebrates the end of the Oregon Trail with a beautiful river view, American favorites and friendly, professional service in Oregon City, Oregon. |
| ● | F&B Services. Our F&B services for hospitality venues provide attractive and comprehensive tailored food and beverage solutions to our hospitality clients. Our fee-based hospitality food and beverage solutions include developing, managing and operating restaurants, bars, rooftops, pools, banquet and catering services, private dining rooms, in-room dining services and mini bars on a contract basis. Currently, we operate six venues pursuant to F&B hospitality management agreements with hotels and casinos in the United States and in Europe. Historically, our clients have provided the majority of the capital required for the development of the facilities we manage on their behalf. |
Our F&B hospitality contracts generate revenues for us through management fees, which are typically calculated as a percentage of the operation’s revenues, and we earn additional milestone and incentive fees based on the operation’s profitability. We typically target F&B hospitality service opportunities where we believe we can generate at least $500,000 of annual pre-tax income.
We expect our F&B hospitality services business to be an important driver of our growth and profitability, enabling us to generate management fee income with minimal capital expenditures. We believe we are well positioned to leverage the strength of our brands and the relationships we have developed with global hospitality providers to drive the continued growth of our F&B hospitality business. We continue to receive inbound inquiries regarding new
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opportunities globally, and we continue to work with existing hospitality clients to identify and develop additional opportunities in their venues. We expect to enter into one to two new F&B hospitality agreements annually.
Sourcing and Supply Chain
We seek to ensure that consistently high-quality food and beverages are served at all of our properties through the coordination and cooperation of our purchasing and culinary departments. Our culinary and purchasing teams establish product specifications on a global basis, which are then disseminated to all locations through recipe books for all dishes served at our properties.
We maintain consistent pricing standards and procedures for all top-volume purchases at our restaurants. Suppliers are selected and pricing is negotiated on a national level in each country where one or more of our restaurants operate. We test new suppliers on a regional basis for an extended period before using them on a national basis. We periodically review supplier consistency and satisfaction with our location chefs and continually research and evaluate products and supplies to ensure the meat, seafood and other menu ingredients that we purchase comply with our high-quality specifications. We believe we have strong relationships with national and regional foodservice distributors who can continue to supply us with our products on a consistent basis. Products are shipped directly to the restaurants from our suppliers.
Our corporate beverage program imposes guidelines for ordering beverage products at our properties. We provide beverage managers at each location with national guidelines for standardized products. Our concepts emphasize the bar as a driver of activity in the restaurants and in 2021, the sale of beverages accounted for approximately 25% of restaurant revenues.
On a company-wide basis, no supplier of food accounts for more than 30% of our total food and beverage purchases and no brand of alcohol accounts for more than 25% of our alcohol purchases. We believe that our food and beverage supplies are available from a significant number of alternate suppliers and that the loss of a supplier would not have a material adverse effect on our costs of supplies.
Advertising and Marketing
The primary focus of our advertising and marketing is to increase awareness of our brands and our overall reputation for quality, service and delivering a high-energy experience. Our marketing efforts are designed to strengthen our brand recognition in markets where we currently operate and to create brand awareness in new markets before opening a new location. We use digital/social media channels, targeted local media such as magazines, billboards and other out-of-home advertising, and a strong network of public relations teams to increase the frequency with which our existing customers visit our restaurants and to attract new customers. We conduct frequent promotional programs tailored to the city, brand and clientele of each location. We utilize a network of local and national public relations firms to support these promotional programs. Additional marketing functions include the use of our websites, www.STKsteakhouse.com and www.KonaGrill.com, to facilitate online reservations, to-go/delivery orders and gift card sales to drive revenue.
Competition
The restaurant and hospitality industries are intensely competitive with respect to price, quality of service, location, ambiance of facilities and type and quality of food. We experience competition from a variety of sources, including upscale steakhouse chains such as Ruth Chris, Del Frisco’s, Fleming’s, Mastro’s and The Capital Grille, local upscale steakhouses and polished casual chains, such as The Cheesecake Factory, Bonefish and BJ’s. There is also competition from other Vibe Dining restaurants such as Nobu, Lavo and Tao and other high-end hospitality services companies such as the Gerber Group, Lettuce Entertain You and ESquared Hospitality. To the extent that we operate lounges and similar venues in hotels and resorts, we are subject to our host venues being able to compete effectively in attracting customers who would frequent our establishments.
Seasonality
Our business is subject to fluctuations due to seasonality and adverse weather. Because of the seasonality of the business and the industry, results for any quarter are not necessarily indicative of the results that may be achieved for any
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other quarter or the full calendar year. Typically, our second and fourth quarters have higher sales volumes than other quarters in the year.
Intellectual Property
Our rights in our registered and unregistered intellectual property, including trademarks and service marks, are significant to our business. We own the U.S. federal registration rights to “STK,” “Kona Grill,” and several related word marks and design marks related to our brands. We depend on registered and unregistered trademarks and service marks to maintain the identity of our locations. We license the rights to use certain trademarks we own or license to our licensees in connection with their operations. We also own several other trademarks and service marks. It is our policy to defend our marks against encroachment by others.
Human Capital Resources
As of December 31, 2021, we employed approximately 64 corporate employees within our corporate offices and an aggregate of 243 full-time, salaried employees at all of our locations. We rely on hourly-wage employees for kitchen staff, servers, bussers, runners, polishers, hosts, bartenders, barbacks, reservationists, administrative support, and interns. The average headcount for employees in our domestic restaurants is 80. Combining full-time and part-time employees, we employ and manage directly approximately 3,364 persons and indirectly approximately 420 employees of ONE Hospitality worldwide. We have never experienced a work stoppage, and none of our employees are represented by a labor organization.
Our human capital objectives include attracting, developing, rewarding, and retaining our existing and new employees. We offer our employees online training courses and on-the-job training. Restaurant management trainees undergo training in order to understand all aspects of our restaurant operations. We provide our employees with cash-based performance bonuses. We also have an equity incentive compensation plan to provide certain management-level or other key employees with stock-based awards. We have implemented programs to attract and retain both restaurant managers and hourly employees. We monitor our progress with metrics such as employee performance measures, turnover rates and restaurant customer surveys.
The health and safety of our employees is our highest priority. In protecting our employees’ safety, we have invested in creating a safe work environment for our employees and guests. In response to COVID-19 concerns among guests and employees, we enhanced our cleaning protocols beginning in 2020, including implementing daily health and safety checklists and providing additional personal protective equipment and cleaning supplies. For all employees, we require masks to be worn in all restaurants and offices where required by local law and provide regular communication regarding the impact of the COVID-19 pandemic, including health and safety protocols and procedures.
Government Regulation
Our operations are subject to extensive federal, state and local governmental regulation, including health, safety, labor, sanitation, building and fire agencies in the state, county, municipality or jurisdiction in which the restaurant is located. In certain states, our restaurants are subject to “dram shop” statutes, which generally provides a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. We maintain the necessary restaurant, alcoholic beverage and retail licenses, permits and approvals. Federal and state labor laws govern our relationship with our employees and affect operating costs. The development and construction of new restaurants are also subject to compliance with applicable zoning, land use and environmental regulations. A failure to comply with one or more regulations could result in the imposition of sanctions, including the closing of restaurants for an indeterminate period of time, fines or third-party litigation.
Available Information
We are required to file reports with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.
We maintain a website at www.togrp.com, including an investor relations section at ir.togrp.com, on which we routinely post information, such as webcasts of quarterly earnings calls and other investor events in which we participate and any related material. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-
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K, and amendments to those reports, as well as other reports relating to us that are filed with or furnished to the SEC can be accessed in the investor relations section of our website free of charge as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.
We also make available on our website and in print to any stockholder who requests it, our Audit, Compensation, and Nominating and Corporate Governance Committee charters, as well as the Code of Conduct that applies to all directors, officers and associates of the Company. We do not incorporate any information found or accessible through our websites into this Annual Report on Form 10-K.
Item 1A. Risk Factors
RISK FACTORS
Ownership of our common stock involves certain risks. Holders of our common stock and prospective investors should carefully consider the following risks and other information contained in this document, including our historical financial statements and related notes included herein. The following risk factors could materially adversely affect our business, financial condition and results of operations. This could cause the trading price of our common stock to decline, perhaps significantly, and you may lose part or all of your investment. The risks and uncertainties below are all those that we have identified as material but may not be the only risks and uncertainties facing us. Our business is subject to general risks and uncertainties that affect many other companies, including overall economic and industry conditions.
Health and Safety
The COVID-19 pandemic has had, and is expected to continue to have, a significant effect on our restaurant traffic and our business, financial condition and results of operations.
The COVID-19 pandemic has significantly affected on our business and results. Restaurants we own and manage have been subject to significant government-mandated operating restrictions, including temporarily shut down of all in-person dining in 2020. Restrictions eased in late 2020 and through 2021. Although all of our venues have reopened, we expect that our operations will continue to be affected by COVID-19, and those effects may be exacerbated by resurgences and the spread of variants of the coronavirus. It remains difficult to predict the full impact of the COVID-19 pandemic on the broader economy and how consumer behavior may change, and whether such change is temporary or permanent.
We have made operational changes to adhere to government requirements on safety and sanitation in our restaurants. However, we cannot guarantee that changes to our operational policies and training will be effective to keep our employees and customers safe from COVID-19. COVID-19 may impact the willingness of customers to dine outside of the home. While it is not possible at this time to estimate the full impact that COVID-19 could have on our business going forward, the continued spread of the virus and the measures taken by governments or by us in response could adversely impact our business, financial condition and results of operations.
Costs associated with mitigating the impact of COVID-19 are significant and will continue in the future. We incurred COVID-19 related costs of $5.8 million and $5.5 million in 2021 and 2020, respectively.
Health concerns arising from outbreaks of flu viruses or other diseases, or regional or global health pandemic could severely affect our business.
The United States and other countries have experienced, or may experience in the future, outbreaks of viruses, such as coronavirus, norovirus, Avian Flu or “SARS,” and H1N1 or “swine flu,” or other diseases such as bovine spongiform encephalopathy, commonly known as “mad cow disease.” If a virus is transmitted by human contact, our employees or customers may become infected, or may choose, or be advised, to avoid gathering in public places, any of which may adversely affect the guest traffic at our restaurants and the ability to adequately staff our restaurants, receive deliveries on a timely basis or perform functions at the corporate level. We also may be adversely affected if jurisdictions in which we have restaurants impose mandatory closures, seek voluntary closures or impose restrictions on operations. Even if such measures are not implemented and a virus or other disease does not spread significantly, the perceived risk of infection or significant health risk may adversely affect our business.
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To the extent that a virus or disease is food-borne, or perceived to be food-borne, future outbreaks may adversely affect the price and availability of certain food products and cause our customers to eat less of a product. For example, health concerns relating to the consumption of beef or to specific events such as the outbreak of “mad cow disease” may adversely impact sales of our beef-related menu items. In addition, public concern over “avian flu” may cause fear about the consumption of chicken, eggs and other products derived from poultry. The inability to serve beef or poultry-based products would restrict our ability to provide a variety of menu items to our customers. If we change our menu in response to such concerns, we may lose customers who do not prefer the new menu, and we may not be able to sufficiently attract new customers to produce the revenue needed to restore the profitability of our restaurant operations. We also may generate different or additional competitors for our intended customers as a result of such a menu change and may not be able to successfully compete against such competitors.
Failure to protect food supplies and adhere to food safety standards could result in food borne illnesses and adversely affect our business.
Failure to protect our food supply or enforce food safety policies, such as proper food temperature and adherence to shelf-life dates, could result in food-borne illnesses to our guests. Also, our reputation of providing high-quality food is an important factor in our guests choosing our restaurants. Whether or not traced to our restaurants or those of our competitors, instances of food borne illness or other food safety issues could reduce the demand for certain or all of our menu offerings. If any of our guest become ill from consuming our products, the affected restaurants may be forced to close, and we may be subject to legal liability. An instance of food contamination from one of our restaurants or suppliers could have far-reaching effects, as the contamination, or the perception of contamination could affect any or all of our restaurants. Publicity related to either product contamination, recalls, or food-borne illness, including Bovine-Spongiform Encephalopathy, which is also known as BSE or mad cow disease, aphthous fever, which is also known as hoof and mouth disease, and hepatitis A, listeria, salmonella and e-coli may also injure our brand and may affect the selection of our restaurants by our guests or licensees based on fear of such illnesses. In addition, the occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, which could result in disruptions in our supply chain and/or lower margins for us and our licensees.
Economic Conditions and Competition
Our business is dependent on discretionary spending patterns, business travel and general economic conditions.
We depend on consumer discretionary spending, business travel and the overall economic environment. Disruptions in the economy, including recessions, high unemployment, foreclosures, bankruptcies, inflation and other economic impacts, could affect consumers’ ability and willingness to spend discretionary dollars. Reductions in business travel and dining, which we believe accounts for a majority of our weekday revenues at our hotel-based restaurants and food and beverage services operations, would adversely affect our revenues. Reductions in discretionary income and spending also would impact our casino-based restaurants and food and beverage services operations. If uncertain economic conditions were to persist for an extended period of time or worsen, consumers might make long-lasting changes to their discretionary spending behavior, including dining out less frequently. Adverse changes in consumer discretionary spending could be affected by many different factors that are out of our control, including international, national and local economic conditions, any of which could harm our business prospects, financial condition, operating results and cash flows. Continued uncertainty in or a worsening of the economy, generally or in a number of our markets, and our customers’ reactions to these trends could adversely affect our business and cause us to, among other things, reduce the number and frequency of new location openings, close locations and delay any re-modeling of existing locations. Our success will depend in part upon our ability to anticipate, identify and respond to changing economic and other conditions.
We have a limited number of venues, and we operate multiple venues in some cities and are therefore sensitive to economic and other trends and developments in these cities.
We have a relatively small number of restaurants and F&B service locations, and we operate multiple venues in some cities. We typically operate one to six venues in the cities where we operate. Accordingly, particularly in cities where we have multiple venues, our business is susceptible to adverse changes in these markets whether as a result of declining economic conditions, declining stock market performance, negative publicity, changes in customer preferences or for other reasons, and any such adverse changes may have a disproportionate effect on our overall results of operations compared to some of our competitors that may have less restaurant concentration or that do not operate in our markets. Any regional occurrences such as local labor strikes, natural disasters, prolonged inclement weather, acts of
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terrorism or other national emergencies, accidents, energy shortages, system failures or other unforeseen events in or around these cities could result in temporary or permanent closings of our venues, which could have a material adverse effect on our business, financial condition and results of operations as a whole.
Competition in the restaurant industry is intense.
The restaurant and hospitality industry is intensely competitive with respect to price, quality of service, location, ambiance of facilities and type and quality of food. The industry is also characterized by the continual introduction of new concepts and is subject to rapidly changing consumer preferences, tastes, trends and eating and purchasing habits. Our success depends in part on our ability to anticipate and respond quickly to changing consumer preferences, and other factors affecting the restaurant and hospitality industry, including new market entrants and demographic changes. Shifts in consumer preferences away from upscale steakhouses or beef in general, which are significant components of our concepts’ menus and appeal, whether as a result of economic, competitive or other factors, could adversely affect our business and results of operations.
A substantial number of national and regional restaurant chains, as well as independently owned restaurants, compete with us for customers, restaurant locations and qualified management and other restaurant staff. There is also competition from non-steak but upscale and high-energy restaurants, and other high-end hospitality services companies and high-energy nightlife concepts. To the extent that our restaurants and F&B hospitality services operations are in hotels, casinos, resorts and similar client locations, we are subject to competition in the broader lodging and hospitality markets that could draw potential customers away from our locations.
Some of our competitors have greater financial, marketing and operating resources than we do, have been in business longer, have greater name recognition and are better established in the markets where our restaurants and F&B hospitality services operations are located or where we may expand. In addition, improved product offerings in the fast casual segment of the restaurant industry, combined with the effects of negative economic conditions and other factors, may lead consumers to choose less expensive alternatives. Our inability to compete successfully with other restaurants, other F&B hospitality services operations and other segments of the industry may harm our ability to maintain acceptable levels of revenue growth, limit our development of new restaurants or concepts, or force us to close one or more of our restaurants or F&B hospitality services operations.
We may also need to evolve our concepts to compete with popular new restaurant or F&B hospitality services operation formats, concepts or trends that emerge from time to time, and we cannot provide any assurance that any changes we make to any of our concepts in response will be successful or not adversely affect our profitability.
Strategy and Operations
Unsuccessful implementation of any or all of the initiatives of our business strategy, including opening new restaurants and attracting new F&B hospitality service opportunities, could negatively impact our operations.
Our success depends in part on our ability to understand and satisfy the needs of our guests and licensees. Our key strategies are to:
| ● | Drive same store sales; |
| ● | Improve operational efficiency at our restaurants; |
| ● | Reduce corporate general and administrative expenses; and |
| ● | Grow our portfolio primarily through licensing and management deals. |
Improving comparable location sales and restaurant-level margins depends in part on whether we are able to achieve revenue growth through increases in the average check and increases in customer traffic, and to further expand our private dining business at each location and delivery service business in markets where offered. We believe there are opportunities to increase the average check at our locations through selective introduction of higher priced items and increases in menu pricing. We also believe that expanding and enhancing our private dining capacity will also increase our location sales, as our private dining business typically has a higher average check and higher overall margins than regular dining room business. We believe that expanding the markets in which we offer third-party delivery services will also result in incremental sales. We believe select price increases have not historically adversely impacted customer traffic; however, we expect that there is a price level at which point customer traffic would be adversely affected. It is
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also possible that these changes could cause our sales volume to decrease. If we are not able to increase our sales at existing locations for any reason, our profitability and results of operations could be adversely affected.
One key element of our growth strategy is opening new restaurants and F&B hospitality services locations. We believe there are opportunities to open approximately seven to twelve new locations (restaurants and/or hospitality services operations) annually, with a focus on operating under licensing or management agreements (referred to as our “capital light strategy”). However, there can be no assurance that we will be able to open new restaurants or F&B hospitality services locations at the rate that we currently expect.
Our success in growing our business through the opening of new restaurants and F&B hospitality locations is dependent upon a number of factors, including our ability to: cost-effectively operate in markets that we are not familiar with, find suitable license and food and beverage partners, find suitable locations, reach acceptable lease terms, have adequate capital, find acceptable contractors, obtain licenses and permits, manage construction and development costs, recruit and train appropriate staff and properly manage the new venue. Unanticipated costs or delays in the development or construction of future restaurants could impede our ability to open new restaurants timely and cost-effectively, which could have a negative impact on our business, financial condition and results of operations. Specifically, some of the factors that adversely affect the cost and time associated with the development and construction of our restaurants include: labor disputes, shortages of materials or skilled labor, adverse weather conditions, unforeseen engineering problems, environmental problems, construction or zoning problems, local government regulations, modifications in design, and other unanticipated increases in cost.
Additionally, our venues are expensive to build, and we, our managed unit partners and our licensees incur significant capital and pre-opening expense. Our business and profitability may be adversely affected if the “ramp-up” period for a new location lasts longer than we expect or if the profitability of a new location dips after our initial “ramp-up” marketing program ends. New locations may not be profitable, and their sales performance may not follow historical or projected patterns. If we are forced to close any new operations, we will incur losses for certain buildout costs and pre-opening expenses incurred in connection with opening such operations.
We face a variety of risks associated with doing business with licensees.
We rely in part on our licensees and the manner in which they operate the STK restaurants to develop and promote our business. As of December 31, 2021, we had six licensed STK restaurants. In 2021, one of our licensees permanently closed an STK restaurant in Dubai as a result of COVID-19 and the decision to consolidate operations into the remaining STK restaurant in Dubai.
Our licensees are required to operate our restaurants according to the specific guidelines we set forth, which are essential to maintaining brand integrity and reputation, as well as in accordance with all laws and regulations applicable to us, and all laws and regulations applicable in the countries in which we operate. We provide training to these licensees to integrate them into our operating strategy and culture. However, since we do not have day-to-day control over all of these restaurants, we cannot give assurance that there will not be differences in product and service quality, operations, labor law enforcement, marketing or profitability or that there will be adherence to all of our guidelines and applicable laws. In addition, if our licensees fail to make investments necessary to maintain or improve the restaurants, guest preference for our brand could suffer. Our licensees are subject to business risks similar to those we face such as competition; customer acceptance; fluctuations in the cost, quality and availability of raw ingredients; increased labor costs; difficulty obtaining acceptable site leases; and difficulty obtaining proper financing. Failure of licensed restaurants to operate effectively could adversely affect our cash flows from those operations or have a negative impact on our reputation and our business.
The success of our licensed operations depends on our ability to establish and maintain good relationships with our licensees. The value of our brand and the rapport that we maintain with our licensees are important factors for potential licensees considering doing business with us. If we are unable to maintain good relationships with licensees, we may be unable to renew license agreements and opportunities for developing new relationships with additional licensees may be adversely affected. This, in turn, could have an adverse effect on our results of operations. Although we have developed criteria to evaluate and screen prospective developers and licensees, we cannot be certain that the developers and licensees we select will have the business acumen necessary to open and operate successful licensed restaurants in their licensing areas, or that the licensees, once selected, will be able to negotiate acceptable lease or purchase terms for prospective sites or to obtain the necessary approvals for such sites, or that financing will be available to construct and open new venues.
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To the extent that our operations are located in hotels, casinos or similar destinations, our results of operations and growth are subject to the risks facing such venues.
Our ability to grow and realize profits from our operations in hotels, casinos and other branded or destination venues are dependent on the success of such venues’ business. We are subject to the actions and business decisions of our clients and third parties, in which we may have little or no influence in the overall operation of the applicable venue and such actions and decisions could have an adverse effect on our business and operations.
Labor and Supplies
Changes to wage, immigration and labor laws could increase our costs substantially.
Under the minimum wage laws in most domestic jurisdictions, we are permitted to pay certain hourly employees a wage that is less than the base minimum wage because these employees receive tips as a substantial part of their income. As of December 31, 2021, approximately 32% of our employees earn this lower minimum wage in their respective locations since tips constitute a substantial part of their income. If cities, states or the federal government change their laws to require all employees to be paid the general employee minimum base wage regardless of supplemental tip income, our labor costs would increase substantially. Certain states in which we operate restaurants also have adopted or are considering adopting minimum wage statutes that exceed the federal minimum wage. We may be unable or unwilling to increase our prices to pass these increased labor costs on to our customers, in which case, our business and results of operations could be adversely affected.
A restaurant company employer may claim a credit against the company’s federal income taxes for FICA taxes paid on certain tip wages (the “FICA tip credit”). We utilize the federal FICA tip credit to reduce our federal income tax expense. Changes in the tax law could reduce or eliminate the FICA tip credit, which could negatively impact our results of operations and cash flows in future periods.
Further, the U.S. Congress and Department of Homeland Security may implement changes to federal immigration laws, regulations or enforcement programs. Some of these changes may increase our obligations for compliance and oversight, which could subject us to additional costs and make our hiring process more cumbersome or reduce the availability of potential employees. Even if we operate our restaurants in strict compliance with U.S. Immigration and Customs Enforcement and state requirements, some of our employees may not meet federal work eligibility or residency requirements, which could lead to a disruption in our work force. Although we require all of our new employees to provide us with the government-specified documentation evidencing their employment eligibility, some of our employees may, without our knowledge, be unauthorized workers. Unauthorized workers are subject to seizure and deportation and may subject us to fines, penalties or loss of our business license in certain jurisdictions. Additionally, a government audit could result in a disruption to our workforce or adverse publicity that could negatively impact our brand and our use of E-Verify and/or potential for receipt of letters from the Social Security Administration requesting information (commonly referred to as no-match letters) could make it more difficult to recruit and/or retain qualified employees.
Potential changes in labor laws or increased union recruiting activities could result in portions of our workforce being subjected to greater organized labor influence. Although we do not currently have any unionized employees, labor legislation could have an adverse effect on our business and financial results by imposing requirements that could potentially increase our costs, reduce our flexibility and impact our ability to service our customers. In addition, a labor dispute involving some or all of our employees could harm our reputation, disrupt our operations and reduce our revenues and resolution of disputes may increase our costs.
The loss of key personnel or difficulties recruiting and retaining qualified personnel could adversely affect our business and financial results.
Our success depends substantially on the contributions and abilities of key executives and other employees, and on our ability to recruit and retain high-quality employees to work in and manage our restaurants. We must continue to recruit, retain and motivate management and other employees sufficient to maintain our current business and support our projected growth. A loss of key employees or a significant shortage of high-quality restaurant employees to maintain our current business and support our projected growth could adversely affect our business and financial results.
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We have been able to fully staff our restaurants in this challenging labor environment. There is no assurance that we will be able to continue to effectively manage our employee base and avoid a labor shortage.
We occupy most of our restaurants and some of our food and beverage hospitality services locations under long-term non-cancelable leases under which we may remain obligated to perform even if we close those operations, and we may be unable to renew leases at the end of their terms.
Most of our restaurants and some of our food and beverage hospitality operations are located in premises that we lease. Many of our current leases are non-cancelable and typically have terms ranging from 10 to 15 years with renewal options for terms ranging from 1 to 5 years. We believe that future leases that we enter into will be on substantially similar terms. Fixed payments and/or minimum percentage rent payments under our operating leases and management agreements account for a significant portion of our operating expenses. This may increase our vulnerability to general adverse economic and industry conditions, limit our ability to obtain additional financing, and limit our flexibility in planning for or reacting to changes in our business.
We primarily depend on cash flow from operations to pay our obligations and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities and sufficient funds are not otherwise available to us from borrowings under our credit facility or other sources, we may not be able to meet our operating lease and management agreement obligations, grow our business, respond to competitive challenges or fund our other liquidity and capital needs, which could adversely affect our business and results of operations.
If we were to close or fail to open a restaurant or other venue at a location we lease, we would generally remain committed to perform our obligations under the applicable lease, which could include, among other things, payment of the base rent for the balance of the lease term. Our obligation to continue making rental payments and fulfilling other lease obligations in respect of leases for closed or unopened restaurants could have a material adverse effect on our business and results of operations. Alternatively, at the end of the lease term and any renewal period for a restaurant, we may be unable to renew the lease without substantial additional cost, if at all. If we cannot renew such a lease we may be forced to close or relocate a restaurant, which could subject us to construction and other costs and risks.
Additionally, negative effects on our existing and potential landlords due to the inaccessibility of credit and other unfavorable economic factors may adversely affect our business and results of operations. If our landlords are unable to obtain financing or remain in good standing under their existing financing arrangements, they may be unable to provide construction contributions or satisfy other lease covenants to us. If any landlord files for bankruptcy protection, the landlord may be able to reject our lease in the bankruptcy proceedings. While we would under some circumstances have the option to retain our rights under the lease, we could not compel the landlord to perform any of its obligations and would be left with damages (which are subject to collectability risk) as our sole recourse. Our development of new locations may also be adversely affected by the negative financial situations of potential developers, landlords and host sites. Such parties may delay or cancel development projects or renovations of existing projects due to the instability in the credit markets and economic uncertainty. This could reduce the number of high-quality locations available that we would consider for our new operations or cause the quality of the sites in which the restaurants and food and beverage hospitality services operations are located to deteriorate. Any of these developments could have an adverse effect on our existing businesses or cause us to curtail new projects.
We depend upon frequent deliveries of food, alcohol and other supplies, which subjects us to the possible risks of shortages, interruptions and price fluctuations.
Our ability to maintain consistent quality throughout our locations depends in part upon our ability to acquire fresh, quality products, including beef, seafood, produce and related items, from reliable sources in accordance with our specifications. We currently purchase our food products from various suppliers. We have elected to purchase our beef from a limited number of suppliers. If there were any shortages, interruptions or significant price fluctuations in beef or seafood or if our suppliers were unable to perform adequately or fail to distribute products or supplies to our restaurants, or terminate or refuse to renew any contract with us, this could cause a short-term increase of our costs or cause us to remove certain items from our menu, increase the price of certain offerings or temporarily close a location, which could adversely affect our business and results of operations.
In addition, we purchase beer, wine and spirits from distributors who own the exclusive rights to sell such alcoholic beverage products in the geographic areas in which our locations reside. Our continued ability to purchase certain brands of alcoholic beverages depends upon maintaining our relationships with those distributors, of which there can be no
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assurance. If any of our alcohol beverage distributors cease to supply us, we may be forced to offer brands of alcoholic beverage which have less consumer appeal or that do not match our brand image, which could adversely affect our business and results of operations.
Increases in commodity prices would adversely affect our results of operations.
Our profitability depends in part on our ability to anticipate and react to changes in commodity costs, which have a substantial effect on our total costs. The purchase of beef represents approximately 22% of our food and beverage costs. The market for beef is subject to extreme price fluctuations due to seasonal shifts, climate conditions, the price of feed, industry demand, energy demand and other factors. Our ability to forecast and manage our commodities could significantly affect our gross margins. Energy prices can also affect our operating results, because increased energy prices may cause increased transportation costs for beef and other commodities and supplies, and increased costs for the utilities required to run each location. Historically we have passed increased commodity and other costs on to our customers by increasing the prices of our menu items. While we believe these price increases have historically not affected customer traffic, there can be no assurance that additional price increases would not affect future customer traffic. If prices increase in the future and we are unable to anticipate or mitigate these increases, or if there are shortages for beef, our business and results of operations would be adversely affected.
Litigation and Brand Risk
We face the risk of adverse publicity in connection with our operations, including as a result of increased social media usage.
The quality of our food and our facilities are two of our competitive strengths. Therefore, adverse publicity, whether accurate or not, relating to food quality, public health concerns, illness, safety, injury or government or industry findings concerning our venues or those operated by others could negatively impact us. Any shifts in consumer preferences away from the kinds of food we offer, particularly beef, whether because of dietary or health concerns or otherwise, would make our locations less appealing and could reduce customer traffic and/or impose practical limits on pricing.
The use of social media platforms allows individuals to access a broad audience of consumers and other interested persons. Consumers value readily available information concerning goods and services that they have or plan to purchase and may act on such information without further investigation or authentication. Many social media platforms immediately publish content from their subscribers and participants, often without filters or checks on the accuracy of the content posted. Information concerning our company may be posted on such platforms at any time. If customers perceive or experience a reduction in our food quality, service or ambiance or in any way believe we have failed to deliver a consistently positive experience, this information can be immediately and broadly disseminated. This information may be adverse to our interests or may be inaccurate, each of which may harm our performance, prospects or business.
We face the risk of litigation in connection with our operations.
We are, from time to time, the subject of complaints or litigation from our consumers alleging, among other things, illness, injury or other food quality, health or operational concerns. The inappropriate use of social media by our employees or customers could lead to litigation and result in negative publicity that could damage our reputation. In addition, third party and employee claims against us based on, among other things, alleged discrimination, harassment or wrongful termination, or labor code violations may divert financial and management resources that would otherwise be used to benefit our future performance. Regardless of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time and money away from our operations. In addition, they may generate negative publicity, which could reduce customer traffic and sales. Although we maintain what we believe to be adequate levels of insurance commensurate with the nature and extent of our operations, insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to these matters. A significant increase in the number of these claims or in the number of such claims that are successful could materially adversely affect our brand, financial condition or operating results. Like most employee practices liability insurance policies, our policy does not provide protection against hour and wage claims, and therefore litigation in the area could adversely impact our financial condition.
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We may not be able to protect our brands, trademarks, service marks or other proprietary rights.
We have registered, or have applications pending to register, the trademarks STK, Kona Grill and Konavore with the United States Patent and Trademark Office and in certain foreign countries in connection with restaurant services. Our brands, which include our trademarks, service marks and other intellectual property and proprietary rights, are important to our success and our competitive position. In that regard, we believe that our trade names, trademarks and service marks are valuable assets that are critical to our success. Accordingly, we devote substantial resources to the establishment and protection of our brands. However, the actions we take may be inadequate to prevent imitation of our products and concepts by others, to prevent various challenges to our registrations or applications or denials of applications for the registration of trademarks, service marks and proprietary rights in the U.S. or other countries, or to prevent others from claiming violations of their trademarks and proprietary marks. In addition, others may assert rights in our trademarks, service marks and other proprietary rights or may assert that we are infringing rights they have in their trademarks, service marks, patents or other proprietary rights. Any such disputes could force us to incur costs related to enforcing our rights. In addition, the use of trade names, trademarks or service marks similar to ours in some markets may keep us from entering those markets.
Each of our intellectual property marks is pledged as collateral securing our credit and guaranty agreement with Goldman Sachs Bank USA (“Goldman Sachs”). Default under these agreements could enable Goldman Sachs to sell (at auction or otherwise) our trademarks, which would have a material adverse effect on our ability to continue our business.
Other Risks
Our operations may be negatively impacted by seasonality, adverse weather conditions, natural disasters or acts of terror.
Our business is subject to seasonal fluctuations, adverse weather conditions and natural disasters that may at times affect the regions in which our restaurants and F&B hospitality services operations are located, regions that supply or produce food products for our restaurants, or locations of our distribution network. As a result of the seasonality of our business due to weather, holiday events and other factors, our quarterly results for any one quarter or fiscal year may not be indicative of results to be expected for any other quarter or for any year.
In addition, if adverse weather conditions or natural disasters such as fires and hurricanes affect our restaurants, we could experience closures, repair and restoration costs, food spoilage, and other significant reopening costs, any of which would adversely affect our business. We could also experience shortages or delayed shipments at our restaurants if adverse weather or natural disasters affect our distribution network, which could adversely affect our restaurants and our business as a whole. Additionally, during periods of extreme temperatures (either hot or cold) or precipitation, we may experience a reduction in customer traffic, which could adversely affect our restaurants and our business as a whole. Weather conditions are impossible to predict as is the negative impact on our business that such conditions might cause. Catastrophic weather conditions are likely to affect the supply of and costs for food products. If we do not anticipate or react to changing food costs by adjusting our purchasing practices or menu prices, our operating margins would likely deteriorate.
Terrorism, including cyber-terrorism or efforts to tamper with food supplies, could have an adverse impact on our brand and results of operations.
Security breaches, loss of data and other disruptions could compromise sensitive information related to our business, prevent us from accessing critical information or expose us to liability, which could adversely affect our business and our reputation
We utilize information technology systems and networks to process, transmit and store electronic information in connection with our business activities. As the use of digital technologies has increased, cyber incidents, including deliberate attacks and attempts to gain unauthorized access to computer systems and networks, have increased in frequency and sophistication. These threats pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data, all of which are vital to our operations and business strategy. There can be no assurance that we will be successful in preventing cyber-attacks or successfully mitigating their effects.
We estimate that approximately 80% of our sales are by credit or debit cards. Other restaurants and retailers have experienced security breaches in which credit and debit card information has been stolen. We may in the future become
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subject to claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, and we may also be subject to lawsuits or other proceedings relating to these types of incidents. Further, in 2015, the major credit card networks shifted the liability associated with EMV (Europay/Mastercard/Visa) chip card technology to the merchants. With this liability shift, any restaurant or merchant that is not using an approved chip-and-pin point-of-sale device would be liable for counterfeit or fraudulent charges.
Despite the implementation of security measures (such as the employment of internal resources and external consultants to conduct auditing and testing for weaknesses in our informational technology environment), our internal computer systems and those of our third-party contractors and consultants are vulnerable to damage or disruption from hacking, computer viruses, software bugs, unauthorized access or disclosure, natural disasters, terrorism, war, and telecommunication, equipment and electrical failures. There can be no assurance that we will promptly detect any such disruption or security breach, if at all. Unauthorized access, loss or dissemination could disrupt our operations, our ability to process and prepare company financial information, and manage various general and administrative aspects of our business. To the extent that any such disruption or security breach results in a loss of or damage to our data or applications, or inappropriate disclosure or theft of confidential, proprietary or personal information, we could incur liability, suffer reputational damage or poor financial performance or become the subject of regulatory actions by state, federal or non-US authorities, any of which could adversely affect our business.
We are subject to numerous and changing U.S. federal and foreign government regulations. Failure to comply with or substantial changes in government regulations could negatively affect our sales, increase our costs or result in fines or other penalties against us.
Each of our venues is subject to licensing and regulation by the health, sanitation, safety, labor, building environmental (including disposal, pollution, and the presence of hazardous substances) and fire agencies of the respective states, counties, cities, and municipalities in which it is located, as well as under federal law. These regulations govern the preparation and sale of food, the sale of alcoholic beverages, the sale and use of tobacco, zoning and building codes, land use and employee, health, sanitation and safety matters. Alcoholic beverage control regulations govern various aspects of our locations’ daily operations, including the minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing and inventory control, handling and storage. Typically, our locations’ licenses to sell alcoholic beverages must be renewed annually and may be suspended or revoked at any time for cause. A failure to comply with one or more regulations could result in the imposition of sanctions, including the closing of venues for an indeterminate period of time, or third-party litigation, any of which could have a material adverse effect on us and our results of operations.
Government regulation can also affect customer traffic at our locations. A number of states, counties and cities have enacted menu labeling laws requiring multi-unit restaurant operators to disclose certain nutritional information. For example, the Affordable Care Act establishes a uniform, federal requirement for restaurant chains with 20 or more locations operating under the same trade name and offering substantially the same menus to post nutritional information on their menus, including the total number of calories. The law also requires such restaurants to provide to consumers, upon request, a written summary of detailed nutritional information, including total calories and calories from fat, total fat, saturated fat, cholesterol, sodium, total carbohydrates, complex carbohydrates, sugars, dietary fiber, and total protein in each serving size or other unit of measure, for each standard menu item. The Food and Drug Administration is also permitted to require additional nutrient disclosures, such as trans-fat content. Our compliance with the Affordable Care Act or other similar laws to which we may become subject could reduce demand for our menu offerings, reduce customer traffic and/or reduce average revenue per customer, which would have an adverse effect on our revenue. Any reduction in customer traffic related to these or other government regulations could affect revenues and adversely affect our business and results of operations.
Our foreign operations are subject to all of the same risks as our domestic restaurants and food and beverage hospitality services operations, and additional risks that include, among others, international economic and political conditions and the possibility of instability and unrest, differing cultures and consumer preferences, diverse government regulations and tax systems, the ability to source fresh ingredients and other commodities in a cost-effective manner and the availability of experienced management.
We are subject to governmental regulation in the domestic and international jurisdictions where we operate, including antitrust and tax requirements, anti-boycott regulations, import/export/customs regulations and other international trade regulations, the USA PATRIOT Act and the Foreign Corrupt Practices Act. Any new regulatory or
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trade initiatives could impact our operations in certain countries. Failure to comply with any such legal requirements could subject us to monetary liabilities and other sanctions, which could harm our business, results of operations and financial condition.
We may not be able to comply with certain debt covenants on our debt.
Our credit agreement requires us to achieve specified financial and operating results and maintain compliance with specified financial ratios. Our ability to comply with these provisions may be affected by events beyond our control, including the effects on our business of COVID-19 and related government actions and consumer behavior. If we were to default under our covenants and such default were not cured or waived, our indebtedness could become immediately due and payable. If we breach these covenants and fail to comply with the credit agreement, and the lenders accelerate the amounts outstanding, our business and results of operations would be adversely affected.
In addition, our ability to borrow under our revolving credit facility depends on several factors, including compliance with specified leverage incurrence ratios. If we are not able to borrow under our revolving credit facility to bridge losses we incur while our operations are affected by the COVID-19 pandemic, and if alternative financing is not available to us on acceptable terms or at all, our business and results of operations would be adversely affected.
Failure of our internal controls over financial reporting could harm our business and financial results.
Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that we would prevent or detect a misstatement of our financial statements or fraud. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. A significant financial reporting failure or material weakness in internal control over financial reporting could cause a loss of investor confidence and decline in the market price of our stock.
We cannot be certain that we will be able to maintain adequate controls over our financial processes and reporting. Refer to Part II —Item 9A, “Controls and Procedures” of this Annual Report on Form 10-K for management’s assessment as of December 31, 2021. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. A significant financial reporting failure or material weakness in internal control over financial reporting could cause a loss of investor confidence and decline in the market price of our stock, and we could be subject to sanctions or investigation by regulatory authorities, such as the SEC or Nasdaq.
Insiders have substantial control over us, and they could delay or prevent a change in our corporate control even if our other stockholders wanted it to occur.
Our executive officers, directors, and principal stockholders hold a significant percentage of our outstanding common stock. Accordingly, these stockholders are able to control or have a significant impact on all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This could delay or prevent an outside party from acquiring or merging with us even if our other stockholders affirmed such action. In addition, such concentrated control may adversely affect the price of our common stock and sales by our insiders or affiliates, along with any other market transactions, could affect the market price of our common stock.
Provisions in our amended and restated certificate of incorporation, our bylaws and Delaware law may inhibit a takeover of us, which could limit the price investors might be willing to pay in the future for our common stock and could entrench management.
Our amended and restated certificate of incorporation and our bylaws contain provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. Our Board of Directors (the “Board”) is divided into three classes, each of which generally serve for a term of three years with only one class of directors being elected each year. As a result, at a given annual meeting, only a minority of the Board may be considered for election. Since our staggered Board may prevent our stockholders from replacing a majority of our Board at any given annual meeting, it may entrench management and discourage unsolicited stockholder proposals that may be in the best interests of stockholders.
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Moreover, our Board has the ability to designate the terms of and issue new series of preferred stock without stockholder approval. Under the terms of our amended and restated certificate of incorporation, our Board may authorize and issue up to 10,000,000 shares of one or more series or class of preferred stock with rights superior to those of holders of common stock in terms of liquidation and dividend preference, voting and other rights. The issuance of preferred stock would reduce the relative rights of holders of common stock vis-à-vis the holders of preferred stock without the approval of the holders of common stock. In addition, to the extent that such preferred stock is convertible into shares of common stock, its issuance would result in a dilution of the percentage ownership of holders of common stock on a fully diluted basis. In addition, the issuance of a series of preferred stock could be used as a method of discouraging, delaying or preventing a change in control of our company.
We are also subject to the anti-takeover provisions under Delaware law, which could delay or prevent a change of control. Together, these provisions may make the removal of management more difficult and may discourage transactions that otherwise could involve a payment of a premium over prevailing market prices for our securities.
The price of our common stock could be subject to volatility related or unrelated to our operations.
The trading price of our common stock could fluctuate significantly due to a number of factors, including market perception of our ability to meet our growth projections and expectations, quarterly operating results of other companies in the same industry, trading value in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our business and the business of others in the industry. In addition, the stock market itself is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons related and unrelated to their operating performance and could have the same effect on our common stock.
Item 1B. Unresolved Staff Comments
None
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Item 2. Properties
We do not own any real property. Each of our “owned” restaurants operates in premises leased by its operating subsidiary. We do not have a direct ownership interest in restaurants we operate under a management agreement (“managed”) or license agreement (“licensed”).
Our STK locations are as follows:
Type of | ||||||
Venue | Hotel/Casino/Special Venue | Location | Interest | |||
STK Atlanta | — | Atlanta, Georgia | Owned | |||
STK Bellevue | — | Bellevue, Washington | Owned | |||
STK Chicago | — | Chicago, Illinois | Owned | |||
STK Denver | — | Denver, Colorado | Owned | |||
STK Doha | The Ritz-Carlton | Doha, Qatar | Licensed | |||
STK Downtown (1) | — | New York, New York | Owned (2) | |||
STK Dubai | Jumeirah Beach Residence | Dubai, United Arab Emirates | Licensed | |||
STK Ibiza | Ibiza Corso Hotel & Spa | Illes Balears, Spain | Licensed | |||
STK Las Vegas | The Cosmopolitan | Las Vegas, Nevada | Managed | |||
STK London | ME London | London, England | Managed | |||
STK Los Cabos | Los Cabos Airport | Cabo San Lucas, Mexico | Licensed | |||
STK Mexico City | — | Mexico City, Mexico | Licensed | |||
STK Miami Beach | — | Miami Beach, Florida | Owned | |||
STK Midtown | — | New York, New York | Owned | |||
STK Milan | ME Milan | Milan, Italy | Managed | |||
STK Nashville | — | Nashville, Tennessee | Owned | |||
STK Orlando (1) | Disney Springs | Orlando, Florida | Owned | |||
STK San Diego (1) | Andaz Hotel | San Diego, California | Owned | |||
STK San Juan | Condado Vanderbilt Hotel | San Juan, Puerto Rico | Licensed | |||
STK Scottsdale | — | Scottsdale, Arizona | Managed | |||
STK Toronto | — | Toronto, Canada | Managed | |||
STK Westminster | The Westminster London | London, England | Managed | |||
STK Westwood | W Hotel | Los Angeles, California | Owned |
| (1) | Location includes an owned rooftop lounge, except for the STK Rooftop San Diego which is a licensed location. |
| (2) | Ownership in location is 64.81%. |
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Our Kona Grill locations are as follows:
Type of | ||||||
Venue | Hotel/Casino/Special Venue | Location | Interest | |||
Kona Grill Alpharetta | — | Alpharetta, Georgia | Owned | |||
Kona Grill Baltimore | — | Baltimore, Maryland | Owned | |||
Kona Grill Boca Park | — | Las Vegas, Nevada | Owned | |||
Kona Grill Boise | — | Meridian, Idaho | Owned | |||
Kona Grill Carmel | — | Carmel, Indiana | Owned | |||
Kona Grill Cincinnati | — | Cincinnati, Ohio | Owned | |||
Kona Grill Dallas | — | Dallas, Texas | Owned | |||
Kona Grill Denver | — | Denver, Colorado | Owned | |||
Kona Grill Eden Prairie | — | Eden Prairie, Minnesota | Owned | |||
Kona Grill El Paso | — | El Paso, Texas | Owned | |||
Kona Grill Gilbert | — | Gilbert, Arizona | Owned | |||
Kona Grill Huntsville | — | Huntsville, Alabama | Owned | |||
Kona Grill Kansas City | — | Kansas City, Missouri | Owned | |||
Kona Grill Minnetonka | — | Minnetonka, Minnesota | Owned | |||
Kona Grill North Star | — | San Antonio, Texas | Owned | |||
Kona Grill Oak Brook | — | Oak Brook, Illinois | Owned | |||
Kona Grill Omaha | — | Omaha, Nebraska | Owned | |||
Kona Grill Plano | — | Plano, Texas | Owned | |||
Kona Grill San Antonio | — | San Antonio, Texas | Owned | |||
Kona Grill Sarasota | — | Sarasota, Florida | Owned | |||
Kona Grill Scottsdale | — | Scottsdale, Arizona | Owned | |||
Kona Grill Tampa | — | Tampa, Florida | Owned | |||
Kona Grill Troy | — | Troy, Michigan | Owned | |||
Kona Grill Woodbridge | — | Iselin, New Jersey | Owned |
Our ONE Hospitality brands and F&B services locations are as follows:
Type of | ||||||
Venue | Hotel/Casino/Special Venue | Location | Interest | |||
ANGEL | Hotel Calimala | Florence, Italy | Managed | |||
Bao Yum | The Westminster London | London, England | Managed | |||
F&B Services - Westminster London | The Westminster London | London, England | Managed | |||
F&B Services - Hippodrome | Hippodrome Casino | London, England | Managed | |||
F&B Services - ME London | ME London | London, England | Managed | |||
F&B Services - ME Milan | ME Milan | Milan, Italy | Managed | |||
F&B Services - W Hotel | W Hotel | Los Angeles, California | Owned | |||
Heliot | Hippodrome Casino | London, England | Managed | |||
Hideout | W Hotel | Los Angeles, California | Owned | |||
Marconi | ME London | London, England | Managed | |||
Radio Rooftop Bar | ME London | London, England | Managed | |||
Radio Rooftop Bar | ME Milan | Milan, Italy | Managed | |||
Rivershore Bar & Grill | Best Western Plus | Oregon City, Oregon | Managed |
In addition to the locations above, we lease office space for support offices in Denver, Colorado; New York, New York; Scottsdale, Arizona; and London, England.
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Item 3. Legal Proceedings
We are subject to claims common to our industry and in the ordinary course of our business. Companies in our industry, including us, have been and are subject to class action lawsuits, primarily regarding compliance with labor laws and regulations. Defending lawsuits requires significant management attention and financial resources and the outcome of any litigation is inherently uncertain. We believe that accruals for these matters are adequately provided for in our consolidated financial statements. We may have to make payments from time to time to settle or resolve legal matters. We do not believe the ultimate resolutions of these matters will have a material adverse effect on our consolidated financial position and results of operations. However, the resolution of lawsuits is difficult to predict. A significant increase in the number of these claims, or one or more successful claims under which we incur greater liabilities than is currently anticipated, could materially and adversely affect our consolidated financial statements.
For information regarding litigation refer to Note 15. “Commitments and Contingencies” in our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data.” For more information about the impact of legal proceedings in our business, see Item 1A. “Risk Factors”.
Item 4. Mine Safety Disclosures
Not applicable
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on the NASDAQ Capital Market under the symbol "STKS". As of February 28, 2022, there were 85 holders of record of our common stock.
Dividends
We have not declared or paid any cash dividends on our common stock and do not intend to declare or pay any cash dividend in the foreseeable future. The payment of dividends, if any, is within the discretion of our Board of Directors and will depend on our earnings, our capital requirements, compliance with debt covenants, overall financial condition and such other factors as the Board of Directors may consider. As a Delaware corporation, we are also limited by Delaware law as to the payment of dividends. We currently intend to retain our earnings to finance our growth.
Issuer Purchases of Equity Securities
None
Recent Sales of Unregistered Securities
None
Item 6. [Reserved]
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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; |
| ● | Licensed STK restaurant within the Los Cabos International Airport in San Jose del Cabo, Mexico; |
| ● | Managed STK restaurant at The Westminster London hotel in London, United Kingdom; |
| ● | Owned STK restaurant in Bellevue, Washington; |
| ● | Managed Bao Yum restaurant and F&B hospitality services at The Westminster London hotel in London, United Kingdom; and |
| ● | 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 |
|
|
|
|
|
|
|
|
Owned |
| 11 |
| 24 |
| 2 |
| 37 |
Managed |
| 2 |
| — |
| 1 |
| 3 |
Licensed |
| 1 |
| — |
| — |
| 1 |
Total domestic |
| 14 |
| 24 |
| 3 |
| 41 |
International |
|
|
|
|
|
|
|
|
Owned |
| — |
| — |
| — |
| — |
Managed |
| 4 |
| — |
| 10 |
| 14 |
Licensed |
| 5 |
| — |
| — |
| 5 |
Total international |
| 9 |
| — |
| 10 |
| 19 |
Total venues |
| 23 |
| 24 |
| 13 |
| 60 |
| (1) | Locations with an STK and STK Rooftop are considered one venue location. This includes the STK Rooftop in San Diego, CA, which is a licensed location. |
| (2) | Includes concepts under the Company’s F&B hospitality management agreements and other venue brands such as ANGEL, Bao Yum, Heliot, Hideout, Marconi, Radio and Rivershore Bar & Grill. Effective January 1, 2022, our agreement with the Hippodrome Casino was amended and extended for five years whereby the Company changed from manager to consultant for the Heliot Steak House and F&B Hospitality services for the casino. |
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-
22
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
23
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:
| ● | STK. The STK segment consists of the results of operations from STK restaurant locations, competing in the full-service dining industry, as well as management, license and incentive fee revenue generated from the STK brand and operations of STK restaurant locations. |
| ● | Kona Grill. The Kona Grill segment includes the results of operations of Kona Grill restaurant locations. |
| ● | ONE Hospitality. The ONE Hospitality segment is comprised of the management, license and incentive fee revenue and results of operations generated from our other brands and venue concepts, which include ANGEL, Bao Yum, Heliot, Hideout, Marconi, Radio and Rivershore Bar & Grill. Additionally, this segment includes the results of operations generated from F&B hospitality management agreements with hotels, casinos and other high-end locations. |
| ● | Corporate. The Corporate segment consists of the following: general and administrative costs, stock-based compensation, lease termination expenses, transaction costs, COVID-19 related expenses and other income and expenses. This segment also includes STK Meat Market, an e-commerce platform that offers signature steak cuts nationwide, our major off-site events group, which supports all brands and venue concepts, and revenue generated from gift card programs. |
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:
| ● | Payroll and related expenses. Payroll and related expenses consist of manager salaries, hourly staff payroll and other payroll-related items, including taxes, insurance and fringe benefits. We measure our labor cost efficiency by tracking total labor costs as a percentage of owned restaurant net revenues. |
| ● | Occupancy. Occupancy comprises all occupancy costs, consisting of both fixed and variable rent, deferred rent expense, which is a non-cash adjustment included in our Adjusted EBITDA calculation as defined below, common area maintenance charges, real estate property taxes, utilities and other related occupancy costs and is measured by considering both the fixed and variable components of certain occupancy expenses. |
| ● | Direct operating expenses. Direct operating expenses consist of supplies, such as paper, smallwares, china, silverware and glassware, cleaning supplies, credit card fees and linen costs. Direct operating expenses are typically measured as a variable expense based on owned restaurant net revenues. |
| ● | Outside services. Outside services include music and entertainment costs, such as the use of live DJ’s, promoter costs, security services, outside cleaning services and commissions paid to event staff for banquet sales and delivery service fees. |
| ● | Repairs and maintenance. Repairs and maintenance consist of general repair work to maintain our facilities, and computer maintenance contracts. We expect these costs to increase at each facility as they get older. |
| ● | Marketing. Marketing includes the cost of promoting our brands and, at times, can include the cost of goods used specifically for complementary purposes. Marketing costs will typically be higher during the first 18 months of a restaurant’s operations. |
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 present EBITDA, 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
26
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.
27
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, | |||||
|
| 2021 |
| 2020 | ||
Revenues: |
|
|
|
| ||
Owned restaurant net revenue | $ | 264,404 | $ | 136,618 | ||
Management, license and incentive fee revenue |
| 12,774 |
| 5,325 | ||
Total revenues |
| 277,178 |
| 141,943 | ||
Cost and expenses: |
|
|
|
| ||
Owned operating expenses: |
|
|
| |||
Owned restaurant cost of sales |
| 67,468 |
| 34,024 | ||
Owned restaurant operating expenses |
| 144,529 |
| 87,042 | ||
Total owned operating expenses |
| 211,997 |
| 121,066 | ||
General and administrative (including stock-based compensation of $3,618 and $1,773 for the years ended December 31, 2021 and 2020, respectively) |
| 25,573 |
| 13,922 | ||
Depreciation and amortization |
| 10,790 |
| 10,114 | ||
COVID-19 related expenses |
| 5,821 |
| 5,492 | ||
Transaction costs | 160 |
| 1,109 | |||
Lease termination expenses |
| 1,912 |
| 3,315 | ||
Agreement restructuring expenses |
| 503 |
| 452 | ||
Pre-opening expenses |
| 1,037 |
| 178 | ||
Other income, net |
| — |
| (11) | ||
Total costs and expenses |
| 257,793 |
| 155,637 | ||
Operating income (loss) |
| 19,385 |
| (13,694) | ||
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) | ||
Net income (loss) |
| 31,948 |
| (13,623) | ||
Less: net income (loss) attributable to noncontrolling interest |
| 600 |
| (798) | ||
Net income (loss) attributable to The ONE Group Hospitality, Inc. | $ | 31,348 | $ | (12,825) | ||
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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, | ||||
| 2021 | 2020 | ||
Revenues: |
| |||
Owned restaurant net revenue |
| 95.4 % | 96.2 % | |
Management, license and incentive fee revenue |
| 4.6 % | 3.8 % | |
Total revenues |
| 100.0 % | 100.0 % | |
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 % | ||
General and administrative (including stock-based compensation of 1.3% and 1.2% for the years ended December 31, 2021 and 2020, respectively) |
| 9.2 % | 9.8 % | |
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)% | |
Net income (loss) attributable to The ONE Group Hospitality, Inc. |
| 11.3 % | (9.0)% | |
| (1) | These expenses are being shown as a percentage of owned restaurant net revenue. |
29
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, | ||||||
| 2021 |
| 2020 | |||
Net income (loss) attributable to The ONE Group Hospitality, Inc. | $ | 31,348 | $ | (12,825) | ||
Net income (loss) attributable to noncontrolling interest |
| 600 |
| (798) | ||
Net income (loss) |
| 31,948 |
| (13,623) | ||
Interest expense, net of interest income |
| 3,780 |
| 5,329 | ||
Provision (benefit) for income taxes |
| 1,586 |
| (5,400) | ||
Depreciation and amortization |
| 10,790 |
| 10,114 | ||
EBITDA |
| 48,104 |
| (3,580) | ||
COVID-19 related expenses | 5,821 | 5,492 | ||||
Transaction costs (1) | 160 | 1,109 | ||||
Stock-based compensation | 3,618 | 1,773 | ||||
Lease termination expense (2) |
| 1,912 |
| 3,315 | ||
Agreement restructuring expense |
| 503 |
| 452 | ||
Pre-opening expenses |
| 1,037 |
| 178 | ||
Non-cash rent (3) | (32) | 300 | ||||
Gain on CARES Act Loan forgiveness | (18,529) | — | ||||
Loss on early debt extinguishment | 600 | — | ||||
Adjusted EBITDA |
| 43,194 |
| 9,039 | ||
Adjusted EBITDA attributable to noncontrolling interest |
| 507 |
| (517) | ||
Adjusted EBITDA attributable to The ONE Group Hospitality, Inc. | $ | 42,687 | $ | 9,556 | ||
| (1) | Primarily transaction costs incurred with the Kona Grill acquisition and subsequent integration activities and costs associated with capital raising activities. |
| (2) | Lease termination expense are costs associated with closed, abandoned and disputed locations or leases. |
| (3) | Non-cash rent expense is included in owned restaurant operating expenses and general and administrative expense on the consolidated statements of operations and comprehensive income. |
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, | ||||||
| 2021 |
| 2020 | |||
Operating income (loss) as reported | $ | 19,385 | $ | (13,694) | ||
Management, license and incentive fee revenue |
| (12,774) |
| (5,325) | ||
General and administrative |
| 25,573 |
| 13,922 | ||
Depreciation and amortization |
| 10,790 |
| 10,114 | ||
COVID-19 related expenses | 5,821 | 5,492 | ||||
Agreement restructuring expenses | 503 | 452 | ||||
Pre-opening expenses | 1,037 | 178 | ||||
Lease termination expense |
| 1,912 |
| 3,315 | ||
Transaction costs | 160 | 1,109 | ||||
Other income, net |
| — |
| (11) | ||
Restaurant Operating Profit | $ | 52,407 | $ | 15,552 | ||
Restaurant Operating Profit as a percentage of owned restaurant net revenue | 19.8% | 11.4% | ||||
Restaurant Operating Profit by brand is as follows (in thousands):
For the year ended December 31, | ||||||
| 2021 |
| 2020 | |||
STK restaurant operating profit (Company owned) | $ | 34,598 | $ | 7,347 | ||
STK restaurant operating profit (Company owned) as a percentage of STK revenue (Company owned) | 24.7% | 13.1% | ||||
Kona Grill restaurant operating profit | $ | 17,785 | $ | 8,175 | ||
Kona Grill restaurant operating profit as a percentage of Kona Grill revenue | 14.4% | 10.4% | ||||
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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 | |||||||||||||||
Total revenues |
| $ | 151,436 |
| $ | 123,181 |
| $ | 1,725 |
| $ | 836 | $ | 277,178 | |
Operating income (loss)(1) | 39,863 | 12,982 | 466 | (33,926) | 19,385 | ||||||||||
Capital asset additions | $ | 7,581 | $ | 2,307 | $ | 170 | $ | 1,409 | $ | 11,467 | |||||
As of December 31, 2021 | |||||||||||||||
Total assets | $ | 95,510 | $ | 91,323 | $ | 6,117 | $ | 36,885 | $ | 229,835 | |||||
STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | |||||||
For the year ended December 31, 2020 | |||||||||||||||
Total revenues | $ | 60,932 | $ | 78,591 | $ | 1,197 | $ | 1,223 | $ | 141,943 | |||||
Operating income (loss)(1) | 5,973 | 3,356 | 33 | (23,056) | (13,694) | ||||||||||
Capital asset additions | $ | 2,734 | $ | 1,952 | $ | 206 | $ | 895 | $ | 5,787 | |||||
As of December 31, 2020 | |||||||||||||||
Total assets | $ | 81,431 | $ | 96,262 | $ | 5,484 | $ | 32,392 | $ | 215,569 | |||||
| (1) | Operating loss for the Corporate segment for the years ended December 31, 2021 and 2020 includes $5.8 million and $5.5 million, respectively, in COVID-19 related expenses. |
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 | |
Insurance |
| 200 | |
Interest | 100 | ||
Minimum general & administrative costs |
| 500 | |
Total | $ | 2,400 |
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, | |||||
|
| 2021 |
| 2020 | ||
Net cash provided by (used in): |
|
|
|
| ||
Operating activities | $ | 30,966 | $ | 431 | ||
Investing activities |
| (11,467) |
| (5,787) | ||
Financing activities |
| (20,275) |
| 17,424 | ||
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 flows expected to be generated by those restaurant assets. This process requires the use of estimates and assumptions, which are subject to a high degree of judgment. If the carrying amount of an individual restaurant’s assets exceeds its estimated 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:
| ● | Management identified there is a lack of segregation of duties as it relates to the review of journal entries. |
| ● | In addition, management identified the following deficiencies which, in the aggregate, constitute a material weakness: |
| ● | The Company’s redesign of certain controls throughout 2021 did not contemplate all the relevant design elements of control activities necessary to address the risks of material misstatement, as well as the completeness and accuracy over the information used in those controls. Additionally, certain controls were not executed as designed or were performed without sufficiently documented supporting evidence. The business processes impacted primarily consisted of payroll, accounts payable and property and equipment. Additionally, in certain cases controls were redesigned and implemented without a sufficient period of time remaining to evidence operating effectiveness. |
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| ● | The Company did not design and maintain formal and effective controls over user access to certain information systems to ensure adequate restriction of users and privileged access to venue level transaction processing applications and IT systems maintained by third parties. As a result, it is possible that the Company’s business process controls that depend on the accuracy and completeness of data or financial reports generated by these information technology systems could be adversely affected due to the lack of operating effectiveness of information technology controls. |
| ● | In certain instances, the Company determined there was inappropriate application of technical accounting pronouncements for certain transactions and disclosures. |
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 plan to increase the precision and specificity in the design of our control activities, including the controls over the completeness and accuracy of the information used in performing control activities. |
| ● | We will continue to educate control owners and enhance policies to ensure that all design elements of control activities are addressed in the performance of control activities, including a focus on information technology user access security. |
| ● | We will provide access to accounting literature and research to enable the controls owners in evaluating technical accounting pronouncements for certain transactions. |
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.
39
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.
40
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: |
| ● | The Company’s redesign of certain controls throughout 2021 did not contemplate all the relevant design elements of control activities necessary to address the risks of material misstatement, as well as the completeness and accuracy over the information used in those controls. Additionally, certain controls were not executed as designed or were performed without sufficiently documented supporting evidence. The business processes impacted primarily consisted of payroll, accounts payable and property and equipment. Additionally, in certain cases controls were redesigned and implemented without a sufficient period of time remaining to evidence operating effectiveness |
| ● | The Company did not design and maintain formal and effective controls over user access to certain information systems to ensure adequate restriction of users and privileged access to venue level transaction processing applications and IT systems maintained by third parties. As a result, it is possible that the Company’s business process controls that depend on the accuracy and completeness of data or financial reports generated by these information technology systems could be adversely affected due to the lack of operating effectiveness of information technology controls |
| ● | In certain instances, the Company determined there was inappropriate application of technical accounting pronouncements for certain transactions and disclosures |
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
41
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.
42
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)(1) | Financial Statements. For the financial statements included in this annual report, see “Index to the Financial Statements” on page F-1. |
|
|
(a)(3) | Exhibits. The list of exhibits filed as part of this Annual Report on Form 10-K is set forth on the Exhibit Index immediately preceding such exhibits and is incorporated by reference in this Item 15(a)(3). |
|
|
(b) | Exhibits. See Exhibit Index. |
|
|
(c) | Separate Financial Statements. None. |
Item 16. 10-K Summary
None.
43
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 |
44
Exhibit Index
Exhibit |
| Exhibit Description |
3.1 | ||
3.2 | Amended and Restated Bylaws (Incorporated by reference to Form 8-K filed on October 25, 2011). | |
4.1 | ||
4.2 | ||
10.1 | ||
10. 2† | ||
10.3† | ||
10.4† | ||
10.5† | ||
10.6† | ||
10.7 | ||
10.8 | ||
10.9 | ||
10.10 | ||
10.11† | ||
21.1* | ||
23.1* | ||
23.2* | ||
31.1* | ||
31.2* | ||
32.1** | ||
32.2** | ||
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.
45
THE ONE GROUP HOSPITALITY, INC.
INDEX TO FINANCIAL STATEMENTS
Page | |
Report of Independent Registered Public Accounting Firm (PCAOB ID: | F-2 |
Report of Independent Registered Public Accounting Firm (PCAOB ID: | F-4 |
F-5 | |
Consolidated Statements of Operations and Comprehensive Income (Loss) | F-6 |
F-7 | |
F-8 | |
F-9 |
F-1
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.
F-2
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:
| ● | We tested effectiveness of internal controls over the Company’s long lived asset impairment indicator evaluation. |
| ● | We evaluated the reasonableness of the Company’s evaluation of impairment indicators by: |
| – | 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 |
| ● | We tested the completeness and accuracy of the underlying source information used by management to identify quantitative indicators of impairment. |
/s/
March 16, 2022
We have served as the Company's auditor since 2021.
F-3
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/
We served as the Company’s auditor from 2018 to 2021.
March 19, 2021
F-4
THE ONE GROUP HOSPITALITY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
December 31, | December 31, | |||||
| 2021 | 2020 | ||||
ASSETS |
|
| ||||
Current assets: |
|
|
|
| ||
Cash and cash equivalents | $ | | $ | | ||
Accounts receivable |
| |
| | ||
Inventory |
| |
| | ||
Other current assets |
| |
| | ||
Due from related parties |
| |
| | ||
Total current assets |
| |
| | ||
|
|
|
| |||
Property and equipment, net |
| |
| | ||
Operating lease right-of-use assets | | | ||||
Deferred tax assets, net |
| |
| | ||
Intangibles, net | | | ||||
Other assets |
| |
| | ||
Security deposits |
| |
| | ||
Total assets | $ | | $ | | ||
|
|
|
| |||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
| ||
Current liabilities: |
|
|
|
| ||
Accounts payable | $ | | $ | | ||
Accrued expenses |
| |
| | ||
Deferred license revenue |
| |
| | ||
Deferred gift card revenue and other |
| |
| | ||
Current portion of operating lease liabilities | | | ||||
Current portion of CARES Act Loans | — | | ||||
Current portion of long-term debt |
| |
| | ||
Total current liabilities |
| |
| | ||
|
|
|
| |||
Deferred license revenue, long-term |
| |
| | ||
Operating lease liabilities, net of current portion | | | ||||
CARES Act Loans, net of current portion |
| — |
| | ||
Long-term debt, net of current portion |
| |
| | ||
Total liabilities |
| |
| | ||
|
|
|
| |||
Commitments and contingencies (Note 15) |
|
|
|
| ||
|
|
|
| |||
Stockholders’ equity: |
|
|
|
| ||
Common stock, $ |
| |
| | ||
Preferred stock, $ |
|
| ||||
Treasury stock, |
| ( |
| — | ||
Additional paid-in capital |
| |
| | ||
Retained earnings (accumulated deficit) |
| |
| ( | ||
Accumulated other comprehensive loss |
| ( |
| ( | ||
Total stockholders’ equity |
| |
| | ||
Noncontrolling interests |
| ( |
| ( | ||
Total equity |
| |
| | ||
Total liabilities and equity | $ | | $ | | ||
See notes to the consolidated financial statements.
F-5
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, | ||||||
| 2021 |
| 2020 | |||
Revenues: |
|
|
|
| ||
Owned restaurant net revenue | $ | | $ | | ||
Management, license and incentive fee revenue |
| |
| | ||
Total revenues |
| |
| | ||
Cost and expenses: |
|
|
|
| ||
Owned operating expenses: |
|
| ||||
Owned restaurant cost of sales |
| |
| | ||
Owned restaurant operating expenses |
| |
| | ||
Total owned operating expenses |
| |
| | ||
General and administrative (including stock-based compensation of $ |
| |
| | ||
Depreciation and amortization |
| |
| | ||
COVID-19 related expenses |
| |
| | ||
Transaction costs |
| |
| | ||
Lease termination expenses |
| |
| | ||
Agreement restructuring expenses |
| |
| | ||
Pre-opening expenses |
| |
| | ||
Other income, net |
| — |
| ( | ||
Total costs and expenses |
| |
| | ||
Operating income (loss) |
| |
| ( | ||
Other (income) expenses, net: |
|
|
|
| ||
Interest expense, net of interest income |
| |
| | ||
Loss on early debt extinguishment |
| |
| — | ||
Gain on CARES Act Loan Forgiveness | ( | — | ||||
Total other (income) expenses, net |
| ( |
| | ||
Income (loss) before provision (benefit) for income taxes |
| |
| ( | ||
Provision (benefit) for income taxes |
| |
| ( | ||
Net income (loss) |
| |
| ( | ||
Less: net income (loss) attributable to noncontrolling interest |
| |
| ( | ||
Net income (loss) attributable to The ONE Group Hospitality, Inc. | $ | | $ | ( | ||
Currency translation (loss) gain |
| |
| | ||
Comprehensive income (loss) attributable to The One Group Hospitality, Inc. | $ | | $ | ( | ||
|
|
|
| |||
Net income (loss) attributable to The ONE Group Hospitality, Inc. per share: |
|
|
|
| ||
Basic net income (loss) per share | $ | | $ | ( | ||
Diluted net income (loss) per share | $ | | $ | ( | ||
|
|
|
| |||
Shares used in computing basic earnings per share |
| |
| | ||
Shares used in computing diluted earnings per share |
| |
| | ||
See notes to the consolidated financial statements.
F-6
THE ONE GROUP HOSPITALITY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share information)
Accumulated | ||||||||||||||||||||||||||
Additional | other | |||||||||||||||||||||||||
Common stock | paid-in | Treasury | Retained | comprehensive | Stockholders’ | Noncontrolling | ||||||||||||||||||||
| Shares |
| Par value |
| capital |
| stock |
| earnings |
| loss |
| equity |
| interests |
| Total | |||||||||
Balance at January 1, 2020 |
| | $ | | $ | | $ | — | $ | ( | $ | ( | $ | | $ | ( | $ | | ||||||||
Stock-based compensation |
| |
| — |
| |
| — |
| — |
| — |
| |
| — |
| | ||||||||
Exercise of stock options |
| |
| — |
| |
| — |
| — |
| — |
| |
| — |
| | ||||||||
Issuance of vested restricted shares, net of tax withholding |
| |
| — |
| ( |
| — |
| — |
| — |
| ( |
| — |
| ( | ||||||||
Gain on foreign currency translation, net |
| — |
| — |
| — |
| — |
| — |
| |
| |
| — |
| | ||||||||
Net loss |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( |
| ( |
| ( | ||||||||
Balance at December 31, 2020 |
| | $ | | $ | | $ | — | $ | ( | $ | ( | $ | | $ | ( | $ | | ||||||||
Stock-based compensation |
| |
| — |
| |
| — |
| — |
| — |
| |
| — |
| | ||||||||
Exercise of stock options and warrants |
| |
| — |
| |
| — |
| — |
| — |
| |
| — |
| | ||||||||
Issuance of vested restricted shares, net of tax withholding |
| |
| — |
| ( |
| — |
| — |
| — |
| ( |
| — |
| ( | ||||||||
Purchase of treasury stock |
| ( |
| — |
| — |
| ( |
| — |
| — |
| ( |
| — |
| ( | ||||||||
Purchase of noncontrolling interest |
| — |
| — |
| |
| — |
| — |
| — |
| |
| ( |
| ( | ||||||||
Gain on foreign currency translation, net |
| — |
| — |
| — |
| — |
| — |
| |
| |
| — |
| | ||||||||
Net income |
| — |
| — |
| — |
| — |
| |
| — |
| |
| |
| | ||||||||
Balance at December 31, 2021 |
| | $ | | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | $ | | ||||||||
See notes to the consolidated financial statements.
F-7
THE ONE GROUP HOSPITALITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended December 31, | ||||||
| 2021 |
| 2020 | |||
Operating activities: |
|
|
|
| ||
Net income (loss) | $ | | $ | ( | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
| ||
Depreciation and amortization |
| |
| | ||
Stock-based compensation |
| |
| | ||
Loss on early debt extinguishment |
| |
| — | ||
Amortization of debt issuance costs |
| |
| | ||
Deferred taxes |
| |
| ( | ||
Gain on CARES Act Loan Forgiveness |
| ( |
| — | ||
Changes in operating assets and liabilities: |
|
|
|
| ||
Accounts receivable |
| ( |
| | ||
Inventory |
| ( |
| | ||
Other current assets |
| ( |
| ( | ||
Due from related parties |
| — |
| ( | ||
Security deposits |
| |
| | ||
Other assets |
| ( |
| ( | ||
Accounts payable |
| |
| ( | ||
Accrued expenses |
| |
| | ||
Operating lease liabilities and right-of-use assets | | | ||||
Deferred revenue |
| ( |
| ( | ||
Net cash provided by operating activities |
| |
| | ||
Investing activities: |
|
|
|
| ||
Purchase of property and equipment |
| ( |
| ( | ||
Net cash used in investing activities |
| ( |
| ( | ||
Financing activities: |
|
|
|
| ||
Repayments of long-term debt | ( | ( | ||||
Proceeds from CARES Act Loans |
| — |
| | ||
Debt issuance costs | ( | ( | ||||
Exercise of stock options and warrants |
| |
| | ||
Tax-withholding obligation on stock-based compensation | ( | ( | ||||
Purchase of treasury stock | ( | — | ||||
Purchase of non-controlling interests |
| ( |
| — | ||
Net cash (used in) provided by financing activities |
| ( |
| | ||
Effect of exchange rate changes on cash |
| |
| ( | ||
Net (decrease) increase in cash and cash equivalents |
| ( |
| | ||
Cash and cash equivalents, beginning of year |
| |
| | ||
Cash and cash equivalents, end of year | $ | | $ | | ||
Supplemental disclosure of cash flow data: |
|
|
|
| ||
Interest paid | $ | | $ | | ||
Income taxes paid | $ | | $ | | ||
Non-cash CARES Act Loan Forgiveness | $ | | $ | — | ||
Non-cash capital expenditures | $ | | $ | | ||
See notes to the consolidated financial statements.
F-8
THE ONE GROUP HOSPITALITY, INC.
Notes to Consolidated Financial Statements
Note 1 – Description of Business
The ONE Group Hospitality, Inc. and its subsidiaries (collectively, the “Company”) is a global hospitality company that develops, owns and operates, manages and licenses upscale and polished casual, high-energy restaurants and lounges and provides turn-key food and beverage (“F&B”) services for hospitality venues including hotels, casinos and other high-end locations. Turn-key F&B services are food and beverage services that can be scaled, customized and implemented by the Company at a particular hospitality venue and customized for the client. The Company’s primary restaurant brands are STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse, and Kona Grill, a polished casual bar-centric grill concept featuring American favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere.
As of December 31, 2021, the Company owned, operated, managed or licensed
Overview of the Impact of COVID-19
The COVID-19 pandemic has significantly impacted, and will continue to adversely affect our operations and financial results for the foreseeable future. In response to COVID-19, the Company has taken significant steps to adapt its business to increase sales while providing a safe environment for guests and employees. COVID-19 related expenses were $
The Company is in regular contact with its major suppliers and has not experienced any significant disruption in its supply chain. The Company has implemented programs to attract and retain both restaurant managers and hourly employees. The Company has also increased cleaning protocols, including the creation of a role which is focused on sanitation in high-touch and high-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 its restaurants.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany accounts and transactions have been eliminated in consolidation.
Prior Period Reclassifications
Certain reclassifications of the 2020 amounts in the accrued expenses and segment reporting footnotes have been made to conform to the current year presentation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions for the reporting period and as of the reporting date. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingencies. Actual results could differ from those estimates.
F-9
Fair Value Measurements
Fair value represents the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Assets and liabilities are valued based upon observable and non-observable inputs. Valuations using Level 1 inputs are based on unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date. Level 2 inputs utilize significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly. Valuations using Level 3 inputs are based on significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. There were no significant transfers between levels during any period presented.
Cash and Cash Equivalents
Cash and cash equivalents are defined as cash on hand and highly liquid instruments with original maturities of three months or less when purchased. The Company’s cash and cash equivalents consist of cash in banks and at the restaurants as of December 31, 2021 and 2020.
Accounts Receivable
The majority of the Company’s receivables arise primarily from credit cards, management agreements, trade customers and other reimbursable amounts due from hotel operators where the Company operates a food and beverage service. The increase in accounts receivables at December 31, 2021 is attributable to strong sales reflecting the execution of the Company’s sales initiatives. Accounts receivable from credit card processors and third party delivery services at December 31, 2021 and 2020 was $
Inventory
Inventories, which consist of food, liquor and other beverages, are stated at the lower of cost or net realizable value. Cost is determined by the first in, first out method. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs to sell.
Property and Equipment
Additions to property and equipment, including leasehold improvements, are recorded at cost while costs incurred to repair and maintain the Company’s operations and equipment are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful life of the asset. When assets are retired or otherwise disposed of, the cost of the assets and the related accumulated depreciation are removed from the accounts, and any gain or loss on retirements is reflected in operating income in the year of disposition.
Computers and equipment as well as furniture and fixtures are depreciated over their useful lives from to
Other Assets
Other assets include liquor license acquisition costs and costs to fulfill obligations under the Company’s management and license agreements.
F-10
Intangible Assets
Intangible assets consist of the “Kona Grill” trade name and other finite-lived intangible assets that are amortized using the straight-line method over their estimated useful life of
Impairment of Long-Lived Assets
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 flows exclusive of operating lease payments, expected to be generated by those restaurant assets. This process requires the use of estimates and assumptions, which are subject to a high degree of judgment. If the carrying amount of an individual restaurant’s assets exceeds its estimated undiscounted future cash flows, exclusive of operating lease payments, 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 $
For the years ended December 31, 2021 and 2020, the Company did not identify any event or changes in circumstances that indicated that the carrying values of its restaurant assets were impaired.
Debt Issuance Costs
Debt issuance costs incurred in connection with the issuance of long-term debt are capitalized and amortized to interest expense based on the term of the related debt agreement using the straight-line method, which approximates the effective interest method. The Company has recorded debt issuance costs related to the revolving credit facility in other assets on the consolidated balance sheets. The portion of debt issuance costs related to the term loan is recorded in long-term debt, net of current portion on the consolidated balance sheets.
Income Taxes
The Company computes income taxes using the asset and liability method. Under this method, deferred income taxes are recognized for differences between the basis of assets and liabilities for financial statement and income tax purposes, using the enacted statutory rate in effect for the year these differences are expected to be taxable or refunded. Deferred income tax expenses or credits are based on the changes in the asset or liability, respectively, from period to period. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carry-forwards. If the Company determines that a deferred tax asset or liability could be realized in a greater or lesser amount than recorded, the deferred tax asset or liability is adjusted and a corresponding adjustment is made to the provision for income taxes in the consolidated statements of operations and comprehensive income in the period during which the determination is made.
F-11
The Company reduces its deferred tax assets by a valuation allowance if it determines that it is more likely than not that some portion or all of these tax assets will not be realized. In making this determination, the Company considers various qualitative and quantitative factors, such as:
| ● | the level of historical taxable income; |
| ● | the projection of future taxable income over periods in which the deferred tax assets would be deductible; |
| ● | events within the restaurant industry; |
| ● | the health of the economy; and, |
| ● | historical trending. |
As of December 31, 2021, the Company had a valuation allowance of $
The Company recognizes the tax benefit from an uncertain tax position when it determines that it is more-likely-than-not that the position would be sustained upon examination by taxing authorities.
Revenue Recognition
Revenue is derived from restaurant sales, management services and license related operations.
The Company recognizes restaurant revenues, net of discounts, when goods and services are provided. Sales tax amounts collected from customers that are remitted to governmental authorities are excluded from net revenue.
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.
The Company recognizes initial licensing fees and upfront fees related to management and license agreements on a straight-line basis over the term of the agreement as a component of management, license and incentive fee revenue on the consolidated statements of operations and comprehensive income.
The Company has a loyalty program for Kona Grill to encourage customers to frequent its restaurants. The loyalty rewards program awards a customer one point for every dollar spent. When a customer is part of the rewards program, the obligation to provide future discounts related to points earned is considered a separate performance obligation, to which a portion of the transaction price is allocated. The performance obligation related to loyalty points is deemed to have been satisfied, and the amount deferred in the balance sheet is recognized as revenue, when the points are converted to a reward and redeemed, or the likelihood of redemption is remote. A portion of the transaction price is allocated to loyalty points, if necessary, on a pro-rata basis, based on the stand-alone selling price, as determined by menu pricing and loyalty points terms. As of December 31, 2021 and 2020 the deferred revenue allocated to loyalty points that have not been redeemed is $
Gift Cards
Proceeds from the sale of gift cards are recorded as deferred revenue and recognized as revenue when redeemed by the holder. There are no expiration dates on the Company’s gift cards and the Company does not charge any service fees that would result in a decrease to a customer’s available balance.
F-12
Although the Company will continue to honor all gift cards presented for payment, it may determine the likelihood of redemption to be remote for certain gift cards due to, among other things, long periods of inactivity. In these circumstances, to the extent the Company determines there is no requirement for remitting balances to government agencies under unclaimed property laws, outstanding gift card balances may then be recognized as breakage in the consolidated statements of operations and comprehensive income as a component of owned restaurant net revenue. For the years ended December 31, 2021 and 2020, the Company recognized $
Pre-opening Costs
Pre-opening costs for Company owned restaurants are expensed as incurred prior to a restaurant opening for business. Pre-opening costs for the years ended December 31, 2021 and 2020 were $
Advertising Costs
The Company expenses the cost of advertising and promotions as incurred. Advertising expense was $
Leases
Contracts are evaluated to determine whether they contain a lease at inception. The Company’s contracts determined to be or contain a lease include explicitly or implicitly identified assets where the Company has the right to substantially all of the economic benefits of the assets and has the ability to direct how and for what purpose the assets are used during the lease term. If it is determined that the contract contains an operating lease, a right-of-use asset and operating lease liability are recorded on the consolidated balance sheets. A right-of-use asset represents the Company’s right to use the underlying asset and the lease liability represents the Company’s contractually obligated payments. Both the right-of-use asset and the lease liability are recognized as of the commencement date of the lease and are based upon the present value of lease payments due over the course of the lease. The right-of-use asset is reduced by any lease incentives received. For leases that do not have a rate implicit in the lease, the Company’s incremental borrowing rate at the date of commencement is used to determine the present value of the lease payments. The Company’s incremental borrowing rate is the rate of interest that it 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 Company enters into contracts to lease office and restaurant space with terms that expire at various dates through 2047, which includes exercise of options to extend the lease. The lease term is the minimum of the noncancelable period of the lease or the lease term inclusive of reasonably certain renewal periods. The Company considers a number of factors when evaluating whether the options in its lease contracts were 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.
Certain of the Company’s 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, as well as other lease costs to reimburse the lessor for real estate tax and insurance expenses, and certain non-lease components that transfer a distinct service to the Company, such as common area maintenance services. These percentage rents and other variable lease costs are not included in the calculation of lease payments when classifying a lease and in the measurement of the lease liability as they do not meet the definition of in-substance, fixed-lease payments under ASC Topic 842.
F-13
Stock-Based Compensation
The Company maintains an equity incentive compensation plan under which it may grant options, warrants, restricted stock or other stock-based awards to directors, officers, key employees and other key individuals performing services to the Company. Restricted stock and restricted stock units (“RSUs”) are valued using the closing stock price on the date of grant.
Under the plan, vesting of awards can either be based on the passage of time or on the achievement of performance goals. For awards that vest on the passage of time, compensation cost is recognized over the vesting period. For performance-based awards, the Company recognizes compensation costs over the requisite service period when conditions for achievement become probable. The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ or are expected to differ. These estimates, which are currently at
Earnings per Share
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period and income available to common stockholders. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period plus the dilutive effect of all potential shares of common stock including common stock issuable pursuant to stock options, warrants, and RSUs. Refer to Note 10 for the calculations of basic and diluted earnings per share.
Segment Reporting
The Company has identified the following
Foreign Currency Translation
Assets and liabilities of foreign operations are translated into U.S. dollars at the balance sheet date. Revenues and expenses are translated at average monthly exchange rates. Gains or losses resulting from the translation of foreign subsidiaries represent other comprehensive income (loss) and are accumulated as a separate component of stockholders’ equity. Currency translation gains or losses are recorded in accumulated other comprehensive loss within stockholders’ equity and amounted to a gain of approximately $
Comprehensive Income
Comprehensive income consists of two components: net income and other comprehensive income (loss). The Company’s other comprehensive income (loss) is comprised of foreign currency translation adjustments. All of the Company’s foreign currency translation adjustments relate to wholly-owned subsidiaries of the Company.
Recent Accounting Pronouncements
In November 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-10 (“ASU 2021-10”) to increase the transparency of government assistance including the disclosure of the types of assistance, the entity’s accounting for the assistance, and the effect of the assistance on an entity’s financial statements. ASU 2021-10 is effective for annual periods beginning after December 15, 2021 with early application permitted. The Company has incorporated the requirements of ASU 2021-10 into its financial statements as of December 31, 2021. The adoption of ASU 2021-10 did not have a material impact on the Company’s financial statements.
F-14
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Accounting Standard Codification Topic 740, Income Taxes, and it clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for annual and interim periods beginning after December 15, 2020. The adoption of ASU 2019-12 did not have a material impact on the Company’s financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326)” (“ASU 2016-13”). ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to assess credit loss estimates. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2022. The Company does not expect the adoption of ASU 2016-13 to have a material impact on its financial statements.
Note 3 – Property and Equipment, net
Property and equipment, net consist of the following (in thousands):
December 31, | December 31, | |||||
2021 | 2020 | |||||
Furniture, fixtures and equipment | $ | | $ | | ||
Leasehold improvements |
| |
| | ||
Less: accumulated depreciation and amortization |
| ( |
| ( | ||
Subtotal |
| |
| | ||
Construction in progress |
| |
| | ||
Restaurant smallwares |
| |
| | ||
Total | $ | | $ | | ||
Depreciation and amortization related to property and equipment amounted to $
For the years ended December 31, 2021 and 2020, the Company did not identify any event or changes in circumstances that indicated that the carrying values of its restaurant assets were impaired.
Note 4 – Accrued Expenses
Accrued expenses consist of the following (in thousands):
December 31, | December 31, | |||||
2021 | 2020 | |||||
Payroll and related (1) | $ | |
| $ | | |
Accrued lease exit costs (2) | |
| | |||
VAT and sales taxes |
| | | |||
Variable rent | |
| | |||
Insurance |
| |
| | ||
Legal, professional and other services | | | ||||
Construction on new restaurants |
| |
| — | ||
Interest | | | ||||
Other |
| |
| | ||
Total | $ | | $ | | ||
| (1) | Payroll and related includes $ |
| (2) | Amount relates to lease exit costs for 2016 leases for restaurants never built and still under dispute with landlords. |
F-15
Note 5 – Long Term Debt
Long-term debt consists of the following (in thousands):
December 31, | December 31, | |||||
2021 | 2020 | |||||
Term loan agreements | $ | | $ | | ||
Revolving credit facility | — | — | ||||
Equipment financing agreements |
| — |
| | ||
Total long-term debt |
| |
| | ||
Less: current portion of long-term debt |
| ( |
| ( | ||
Less: debt issuance costs |
| ( |
| ( | ||
Total long-term debt, net of current portion | $ | | $ | | ||
Future minimum loan payments: |
| ||
2022 | $ | | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
Total | $ | |
Interest expense for the Company’s debt arrangements, excluding the amortization of debt issuance costs and other discounts and fees, was approximately $
As of December 31, 2021 and 2020, the Company had $
Credit and Guaranty Agreement
On October 4, 2019, in conjunction with the acquisition of Kona Grill, the Company entered into a Credit Agreement with Goldman Sachs Bank USA. On August 6, 2021, the Company 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
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
In conjunction with the amended Credit Agreement, the Company made a pre-payment on the loan of $
F-16
The Company’s weighted average interest rate on the borrowings under the amended Credit Agreement as of December 31, 2021 and December 31, 2020 was
The Credit Agreement contains customary representations, warranties and conditions to borrowing including customary affirmative and negative covenants, which include covenants that limit or restrict the Company’s ability to incur indebtedness and other obligations, grant liens to secure obligations, make investments, merge or consolidate, alter the organizational structure of the Company and its subsidiaries, and dispose of assets outside the ordinary course of business, in each case subject to customary exceptions for credit facilities of this size and type.
The Company and certain operating subsidiaries of the Company guarantee the obligations under the Credit Agreement, which also are secured by liens on substantially all of the assets of the Company and its subsidiaries.
As of December 31, 2021, the Company had $
Equipment Financing Agreements
On June 5, 2015 and August 16, 2016, the Company entered into financing agreements with Sterling National Bank for $
CARES Act Loans
On May 4, 2020,
The CARES Act Loans were eligible for forgiveness if the proceeds were used for qualified purposes within a specified period and if at least
The Company applied for forgiveness of the CARES Act Loans in February 2021, and the loans were forgiven in June 2021 and July 2021. As a result, the Company recognized $
Note 6 – Related Party Transactions
As of December 31, 2021 and 2020, the Company owned interests in the following companies, which directly or indirectly operate restaurants:
| ● |
| ● |
Bagatelle Investors is a holding company that has an interest in Bagatelle NY. The Company records its retained interests in Bagatelle Investors and Bagatelle NY as cost method investments as the Company has determined that it does not have ability to exercise significant influence over its investees, Bagatelle Investors and Bagatelle NY. As of December 31, 2021 and 2020, the Company has
F-17
Net receivables from the Bagatelle entities included in due from related parties were $
Note 7 – Income Taxes
The components of income before provision (benefit) for income taxes were as follows (in thousands):
For the years ended December 31, | ||||||
| 2021 |
| 2020 | |||
Domestic | $ | | $ | ( | ||
Foreign |
| |
| | ||
Total | $ | | $ | ( | ||
The components of the Company’s provision (benefit) for income taxes were as follows (in thousands):
For the years ended December 31, | ||||||
| 2021 |
| 2020 | |||
Current: |
|
|
|
| ||
Federal | $ | — | $ | — | ||
State and local |
| |
| | ||
Foreign |
| |
| | ||
Total current |
| |
| | ||
Deferred: |
|
|
|
| ||
Federal |
| ( |
| ( | ||
State and local |
| |
| ( | ||
Foreign |
| — |
| | ||
Total deferred |
| |
| ( | ||
Total provision (benefit) for income taxes | $ | | $ | ( | ||
The Company’s effective tax rate differs from the statutory rates as follows:
For the years ended December 31, |
| ||||
| 2021 |
| 2020 | ||
Income tax provision (benefit) at federal statutory rate |
| ( | |||
State and local taxes |
| ( | |||
FICA tip credit |
| ( | ( | ||
Change in valuation allowance |
| — | ( | ||
Compensation subject to IRC Section 162(m) |
| — | |||
Equity based compensation | ( | — | |||
PPP income exclusion | ( | — | |||
Other items, net |
| ( | |||
Effective income tax rate |
| ( | |||
F-18
The income tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows (in thousands):
For the years ended December 31, | ||||||
| 2021 |
| 2020 | |||
Deferred tax assets: |
|
|
|
| ||
Operating lease liabilities | $ | | $ | | ||
Stock compensation |
| |
| | ||
FICA tip credit carryforward |
| |
| | ||
Net operating loss |
| |
| | ||
Goodwill |
| |
| | ||
Inventory |
| |
| | ||
Charitable contributions carryforward |
| — |
| | ||
Foreign tax credit carryforward |
| |
| | ||
Deferred revenue |
| |
| | ||
State and local tax credit carryforward |
| |
| | ||
Expenses not deductible until paid |
| |
| | ||
Basis in LLC interest | — | | ||||
IRC 163(j) disallowed interest carryforward | — | | ||||
Debt issuance costs | | — | ||||
Kona related acquisition costs | | | ||||
Deferred payroll taxes | | | ||||
Total deferred tax assets |
| |
| | ||
Deferred tax liabilities: |
|
|
|
| ||
Operating lease right-of-use assets | ( | ( | ||||
Depreciation and amortization |
| ( |
| ( | ||
Other |
| ( |
| — | ||
Total deferred tax liabilities |
| ( |
| ( | ||
Valuation allowance |
| ( | ( | |||
Net deferred tax assets | $ | | $ | | ||
Correction of the Prior Period
Subsequent to the issuance of the December 31, 2020 consolidated financial statements, management determined that the deferred tax assets and deferred tax liabilities related to the right-of-use asset and lease liabilities were incorrectly presented on a net basis as deferred rent liabilities and lease incentives for the year ended December 31, 2020. To correct for the classification on a gross basis, the Company presented the operating lease liabilities line item of $
Tax Carryforwards
As of December 31, 2021, the Company has federal net operating loss (“NOL”) carryforwards of $
F-19
In assessing the realizability of deferred tax assets, the Company evaluates whether it is more likely than not that the deferred tax assets will be realized. In the assessment of the valuation allowance, appropriate consideration was given to all positive and negative evidence including current operating results, tax planning strategies and forecasts of future earnings. As of December 31, 2021 and December 31, 2020, the Company has valuation allowance of $
Uncertain tax positions
The following table summarizes the activity related to the Company’s uncertain tax positions (in thousands):
For the years ended December 31, | ||||||
| 2021 |
| 2020 | |||
Balance, beginning of year | $ | | $ | | ||
Increase related to current year positions |
| — |
| | ||
Decrease related to prior period positions |
| ( |
| ( | ||
Balance, end of year | $ | | $ | | ||
Included in the balance of unrecognized tax benefits as of December 31, 2021 and December 31, 2020, are $
The Company is subject to income taxes in the U.S. federal jurisdiction, and the various states and local jurisdictions in which it operates. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company’s federal tax filings remain subject to examination for federal tax years 2018 through 2020. The Company’s state and local tax filings remain subject to examination for tax years 2018 through 2020. NOL carryforwards are subject to examination regardless of whether the tax year in which they are generated has been closed by statute. The amount subject to disallowance is limited to the NOL utilized. Accordingly, the Company may be subject to examination for prior NOLs generated as such NOLs are utilized.
The Company’s foreign income tax returns prior to fiscal year 2018 are closed and management continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings.
Note 8 – Revenue recognition
The following table provides information about contract receivables and liabilities from contracts with customers, which include deferred license revenue, deferred gift card revenue and the Konavore rewards program (in thousands):
| December 31, |
| December 31, | |||
2021 | 2020 | |||||
Receivables (1) | $ | — | $ | | ||
Deferred license revenue (2) |
| |
| | ||
Deferred gift card revenue (3) | | | ||||
Konavore rewards program (4) | | | ||||
| (1) | Deferred license receivables are included in accounts receivable on the consolidated balance sheets. |
| (2) | Includes the current and long-term portion of deferred license revenue. |
| (3) | Deferred gift card revenue and advance party deposits on good and services yet to be provided are included in deferred gift card revenue and other on the consolidated balance sheets. |
| (4) | Konavore rewards program is included in accrued expenses on the consolidated balance sheets. |
F-20
Significant changes in deferred license revenue and deferred gift card revenue for the years ended December 31, 2021 and 2020 are as follows (in thousands):
| December 31, |
| December 31, | |||
2021 | 2020 | |||||
Revenue recognized from deferred license revenue | $ | | $ | | ||
Revenue recognized from deferred gift card revenue |
| |
| | ||
As of December 31, 2021, the estimated deferred license revenue to be recognized in the future related to performance obligations that are unsatisfied as of December 31, 2021 were as follows for each year ending (in thousands):
2022 |
| $ | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
Thereafter |
| | |
Total future estimated deferred license revenue | $ | |
Note 9 – Leases
The components of lease expense for the period were as follows (in thousands):
December 31, | December 31, | ||||||
2021 | 2020 | ||||||
Lease cost | |||||||
Operating lease cost |
| $ | |
| $ | | |
Variable lease cost | | | |||||
Short-term lease cost | | | |||||
Sublease income | — | ( | |||||
Total lease cost |
| $ | |
| $ | | |
Weighted average remaining lease term – operating leases | |||||||
Weighted average discount rate – operating leases | | % | | % | |||
Due to the negative effects of COVID-19, the Company implemented measures to reduce its costs, including negotiations with landlords regarding rent concessions. As the rent concessions received and currently being contemplated do not result in a significant increase in cash payments, the Company has elected to account for these concessions as a variable lease payment in accordance with ASC Topic 842. The Company’s right-of-use assets and operating lease liabilities have not been remeasured for lease concessions received. Variable lease cost is comprised of percentage rent and common area maintenance, offset by rent concessions received as a result of COVID-19.
The Company has entered into an operating lease for a future Kona Grill restaurant in Riverton, Utah that had not commenced as of December 31, 2021. The present value of the aggregate future commitment related to this lease totals $
F-21
Supplemental cash flow information related to leases for the period was as follows (in thousands):
December 31, |
| December 31, | ||||
2021 |
| 2020 | ||||
Cash paid for amounts included in the measurement of operating lease liabilities |
| $ | | $ | | |
Right-of-use assets obtained in exchange for operating lease obligations |
| $ | | $ | | |
As of December 31, 2021, maturities of the Company’s operating lease liabilities are as follows (in thousands):
2022 | $ | | |
2023 | | ||
2024 | | ||
2025 | | ||
2026 | | ||
Thereafter | | ||
Total lease payments | | ||
Less: imputed interest | ( | ||
Present value of operating lease liabilities |
| $ | |
Note 10 – Earnings per share
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period and income available to common stockholders. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period plus the dilutive effect of all potential shares of common stock including common stock issuable pursuant to stock options, warrants, and restricted stock units.
For the years ended December 31, 2021 and 2020, earnings per share was calculated as follows (in thousands, except earnings per share and related share data):
Year ended December 31, | ||||||
| 2021 |
| 2020 | |||
Net income (loss) attributable to The ONE Group Hospitality, Inc. | $ | | $ | ( | ||
|
|
| ||||
Basic weighted average shares outstanding |
| |
| | ||
Dilutive effect of stock options, warrants and restricted share units |
| |
| | ||
Diluted weighted average shares outstanding |
| |
| | ||
|
|
|
| |||
Net income (loss) available to common stockholders per share - Basic | $ | | $ | ( | ||
Net income (loss) available to common stockholders per share - Diluted | $ | | $ | ( | ||
For the years ended December 31, 2021 and 2020, , restricted share units totaling
F-22
Note 11 – Stockholders’ Equity
Common Stock
The Company is authorized by its amended and restated certificate of incorporation to issue up to
The Company has the following warrants to purchase shares of common stock outstanding as of December 31, 2021 and 2020:
Shares available for purchase as of | |||||||||||||
Warrants | Exercise | December 31, | December 31, | ||||||||||
Issuance date | Holder of warrants | Expiration date | Issued | Price | 2021 | 2020 | |||||||
June 27, 2016 | 2235570 Ontario Limited | June 27, 2026 | $ | — | |||||||||
August 11, 2016 | Anson Investments Master Fund LP | August 11, 2026 | — | ||||||||||
October 24, 2016 | Anson Investments Master Fund LP | October 24, 2026 | — | ||||||||||
November 15, 2017 | 2017 Securities Purchase Agreement investors | May 15, 2023 | $ | ||||||||||
The issuance of a dividend is dependent on a variety of factors, including but not limited to, available cash and the overall financial condition of the Company. The issuance of a dividend is also subject to legal restrictions and the terms of the Company’s credit agreement. The Company did not issue dividends related to its common stock in the years ended December 31, 2021 or 2020.
Preferred Stock
The Company is authorized by its amended and restated certificate of incorporation to issue
Note 12 – Employee Benefit Plans
Defined Contribution Retirement Plan
The Company sponsors a qualified defined contribution retirement plan (the “401(k) Plan”) covering all eligible employees, as defined in the 401(k) Plan. The 401(k) Plan allows participating employees to defer the receipt of a portion of their compensation, on a pre-tax or post-tax basis, and contribute such amount to one or more investment options. Employer contributions to the plan are at the discretion of the Company. The Company did not accrue or make any employer contributions in 2021 and 2020.
Equity Incentive Plan
In October 2013, the Board approved the 2013 Employee, Director and Consultant Equity Incentive Plan (the “2013 Equity Plan”). The 2013 Equity Plan provides for the granting of stock options, warrants, restricted stock or other stock-based awards to directors, officers, key employees and other key individuals performing services for the Company. All awards are required to be approved by the Board or a designated committee of the Board. Options are generally granted with an exercise price equal to fair market value on the date of grant and expire after
The 2013 Equity Plan will terminate automatically in October 2023, unless terminated by the Board at an earlier date. The Board has the authority to amend, modify or terminate the 2013 Equity Plan, subject to any required approval by the Company’s stockholders under applicable law or upon advice of counsel. No such action would affect any options previously granted under the 2013 Equity Plan without the consent of the holders.
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Effective June 4, 2019, the Company’s stockholders approved amendments to the 2013 Equity Plan (the “2019 Equity Plan”). Among other things, the amendments increased the number of shares of common stock authorized for issuance under the 2019 Equity Plan by
Stock-based compensation cost for the years ended December 31, 2021 and 2020 was $
Stock Option Activity
Changes in outstanding stock options during the years ended December 31, 2021 and 2020 were as follows:
Weighted | ||||||||||
Weighted | average | Intrinsic | ||||||||
average exercise | remaining | value | ||||||||
| Shares |
| price |
| contractual life |
| (thousands) | |||
Outstanding at January 1, 2020 |
| | $ | |
|
|
|
| ||
Vested |
| |
| |
|
|
|
| ||
Exercised |
| ( |
| |
|
|
|
| ||
Cancelled, expired or forfeited |
| ( |
| |
|
|
|
| ||
Outstanding at December 31, 2020 |
| | $ | |
| $ | | |||
Exercisable at December 31, 2020 |
| | $ | |
| $ | | |||
Vested |
| |
| |
|
|
|
| ||
Exercised |
| ( |
| |
|
|
|
| ||
Cancelled, expired or forfeited |
| ( |
| |
|
|
|
| ||
Outstanding at December 31, 2021 |
| | $ | |
| $ | | |||
Exercisable at December 31, 2021 |
| | $ | |
| $ | | |||
There were
A summary of the status of the Company’s non-vested stock options as of December 31, 2021 and 2020 and changes during the years then ended, is presented below:
Weighted average | |||||
| Shares |
| grant date fair value | ||
Non-vested stock options at January 1, 2020 |
| | $ | | |
Granted |
| |
| | |
Vested |
| ( |
| | |
Cancelled, expired or forfeited |
| |
| | |
Non-vested stock options at December 31, 2020 |
| | $ | | |
Granted |
| |
| | |
Vested |
| ( |
| | |
Cancelled, expired or forfeited |
| ( |
| | |
Non-vested stock options at December 31, 2021 |
| | $ | | |
The fair value of options that vested in the years ended December 31, 2021 and 2020 were $
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Restricted Stock Unit Activity
The Company issues restricted stock units under the 2019 Equity Plan. The fair value of these RSUs is determined based upon the closing fair market value of the Company’s common stock on the grant date.
A summary of the status of RSUs and changes during the years ended December 31, 2021 and 2020 is presented below:
Weighted average | |||||
| Shares |
| grant date fair value | ||
Non-vested RSUs at January 1, 2020 |
| | $ | | |
Granted |
| |
| | |
Vested |
| ( |
| | |
Cancelled, expired or forfeited |
| ( |
| | |
Non-vested RSUs at December 31, 2020 |
| | $ | | |
Granted |
| |
| | |
Vested |
| ( |
| | |
Cancelled, expired or forfeited |
| ( |
| | |
Non-vested RSUs at December 31, 2021 |
| | $ | | |
As of December 31, 2021, the Company had approximately $
Note 13 – Segment Reporting
In the fourth quarter of 2019, in conjunction with the Kona Grill acquisition, the Company implemented certain organizational changes, including the reorganization of our internal reporting structure to better facilitate our strategy for growth and operational efficiency. As a result of these organizational changes, the Company has identified its reportable operating segments as follows:
| ● | STK. The STK segment consists of the results of operations from STK restaurant locations, competing in the full-service dining industry, as well as management, license and incentive fee revenue generated from the STK brand and operations of STK restaurant locations. |
| ● | Kona Grill. The Kona Grill segment includes the results of operations of Kona Grill restaurant locations. |
| ● | ONE Hospitality. The ONE Hospitality segment is comprised of the management, license and incentive fee revenue and results of operations generated from the Company’s other brands and venue concepts, which include ANGEL, Heliot, Hideout, Marconi, Radio and Rivershore Bar & Grill. Additionally, this segment includes the results of operations generated from F&B hospitality management agreements with hotels, casinos and other high-end locations. |
| ● | Corporate. The Corporate segment consists of the following: general and administrative costs, stock-based compensation, acquisition related gains and losses, lease termination expenses, transaction costs, COVID-19 related expenses and other income and expenses. This segment also includes STK Meat Market, an e-commerce platform that offers signature steak cuts nationwide, the Company’s major off-site events group, which supports all brands and venue concepts, and revenue generated from gift card programs. |
The Company’s Chief Executive Officer, who is the Company’s Chief Operating Decision Maker, manages the business and allocates resources via a combination of restaurant sales reports and operating segment profit information, defined as revenues less operating expenses, related to the Company’s
F-25
Certain financial information relating to the years ended December 31, 2021 and 2020 for each segment is provided below (in thousands). Prior year amounts for the STK and ONE Hospitality segments 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 | |||||||||||||||
Total revenues |
| $ | |
| $ | |
| $ | |
| $ | | $ | | |
Operating income (loss)(1) | | | | ( | | ||||||||||
Capital asset additions | $ | | $ | | $ | | $ | | $ | | |||||
As of December 31, 2021 | |||||||||||||||
Total assets | $ | | $ | | $ | | $ | | $ | | |||||
STK |
| Kona Grill |
| ONE Hospitality |
| Corporate |
| Total | |||||||
For the year ended December 31, 2020 | |||||||||||||||
Total revenues | $ | | $ | | $ | | $ | | $ | | |||||
Operating income (loss)(1) | | | | ( | ( | ||||||||||
Capital asset additions | $ | | $ | | $ | | $ | | $ | | |||||
As of December 31, 2020 | |||||||||||||||
Total assets | $ | | $ | | $ | | $ | | $ | | |||||
| (1) | Operating loss for the Corporate segment for the years ended December 31, 2021 and 2020 includes $ |
Note 14 – Geographic Information
Certain financial information by geographic location relating to the years ended December 31, 2021 and 2020 is provided below (in thousands).
For the year ended December 31, | ||||||
| 2021 |
| 2020 | |||
Domestic revenues |
| $ | |
| $ | |
International revenues |
| |
| | ||
Total revenues | $ | | $ | | ||
December 31, | December 31, | |||||
2021 | 2020 | |||||
Domestic long-lived assets |
| $ | |
| $ | |
International long-lived assets |
| |
| | ||
Total long-lived assets | $ | | $ | | ||
Note 15 – Commitments and Contingencies
The Company is party to claims in lawsuits incidental to its business, including lease disputes and employee-related matters. The Company has recorded accruals in its consolidated financial statements in accordance with ASC 450. While the resolution of a lawsuit, proceeding or claim may have an impact on the Company’s financial results for the period in which it is resolved, in the opinion of management, the ultimate outcome of such matters and judgements in which the Company is currently involved, either individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position or results of operations.
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