UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
  

 
FORM 10-Q
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
For the Quarterly Period Ended June 30, 2017
  
OR
  
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                          to                         
 
Commission File Number        001-37379
 
THE ONE GROUP HOSPITALITY, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
14-1961545
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
411 W. 14th Street, 2nd Floor, New York, New York
 
10014
(Address of principal executive offices)
 
Zip Code
 
646-624-2400
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether 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 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.  Yes ý  No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes ý No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 

1



Large accelerated filer ¨
 
Accelerated filer  ¨
 
Non-accelerated filer ¨
(do not check if a smaller reporting company)
Smaller reporting company x
 
 
Emerging growth company  ¨

If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨  No ý
 
Number of shares of common stock outstanding as of August 14, 2017:  25,215,571.
 
TABLE OF CONTENTS
 
 
Page
 


Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited)

Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2017 (unaudited)
6

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (unaudited)
7

8

21

39

39

 
 

 





40



 
 


 

2




PART I
FINANCIAL INFORMATION
 
Item 1. Financial Statements

THE ONE GROUP HOSPITALITY, INC. 

3



CONSOLIDATED BALANCE SHEETS
 
June 30, 
 2017
 
December 31, 
 2016
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
1,540,936

 
$
1,597,782

Accounts receivable, net
4,515,429

 
4,959,822

Inventory
1,412,091

 
1,308,851

Other current assets
1,743,819

 
1,811,787

Due from related parties, net

 
415,773

Total current assets
9,212,275

 
10,094,015

 
 
 
 
Property and equipment, net
39,067,118

 
36,815,239

Investments
2,957,278

 
3,065,557

Deferred tax assets

 
51,031

Security deposits
2,211,952

 
2,203,837

Other assets
733,593

 
661,936

Total assets
$
54,182,216

 
$
52,891,615

 
 
 
 
Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Cash overdraft
$
620,905

 
$
679,938

Long term debt, current portion
3,745,901

 
3,153,666

Accounts payable
6,166,044

 
3,761,823

Accrued expenses
6,139,657

 
5,549,638

Deferred license revenue
109,957

 
109,957

Due to related parties, net
359,302

 

Deferred revenue
403,221

 
612,574

Total current liabilities
17,544,987

 
13,867,596

 
 
 
 
Deferred license revenue, long-term
1,523,354

 
1,109,635

Due to related parties, long term
1,197,375

 
1,197,375

Long term debt, net of current portion
11,671,400

 
13,167,867

Deferred rent
17,044,305

 
16,170,605

Total liabilities
48,981,421

 
45,513,078

 
 
 
 
Commitments and contingencies


 


Stockholders’ equity:
 

 
 

Common stock, $0.0001 par value, 75,000,000 shares authorized; 25,228,278 and 25,050,628 shares issued and outstanding at June 30, 2017 (unaudited) and December 31, 2016
2,522

 
2,505

Preferred stock, $0.0001 par value, 10,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2017 (unaudited) and December 31, 2016

 

Additional paid-in capital
37,928,645

 
37,384,243

Accumulated deficit
(30,465,407
)
 
(27,763,194
)
Accumulated other comprehensive loss
(1,460,419
)
 
(1,543,951
)
Total stockholders’ equity
6,005,341

 
8,079,603

Noncontrolling interest
(804,546
)
 
(701,066
)
Total stockholders’ equity including noncontrolling interest
5,200,795

 
7,378,537

 
 
 
 
Total liabilities and stockholders’ equity
$
54,182,216

 
$
52,891,615

 
See notes to the consolidated financial statements. 

4




THE ONE GROUP HOSPITALITY, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)


5



 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 

 
 

Owned unit net revenues
$
17,113,844

 
$
15,282,704

 
$
35,226,826

 
$
29,662,634

Management and incentive fee revenue
2,784,659

 
1,943,952

 
5,098,375

 
3,958,003

Total revenue
19,898,503

 
17,226,656

 
40,325,201

 
33,620,637

 
 
 
 
 
 
 
 
Cost and expenses:
 
 
 
 
 

 
 

Owned operating expenses:
 
 
 
 
 

 
 

Food and beverage costs
4,381,150

 
3,778,797

 
9,055,211

 
7,307,550

Unit operating expenses
11,180,079

 
9,509,838

 
22,687,853

 
18,757,493

General and administrative
4,086,192

 
2,813,056

 
7,007,089

 
5,496,752

Depreciation and amortization
804,680

 
547,438

 
1,670,550

 
1,070,077

Lease termination expense

 

 
28,161

 

Transaction costs
254,011

 

 
254,011

 

Pre-opening expenses
931,013

 
1,545,417

 
1,645,355

 
2,445,603

Income of equity method investees
152,914

 
(231,203
)
 
107,603

 
(313,788
)
Derivative income

 

 

 
(100,000
)
Interest expense, net of interest income
220,183

 
99,314

 
479,173

 
197,483

Other (income) expense
(130,250
)
 
61,766

 
(118,302
)
 
286,800

Total costs and expenses
21,879,972

 
18,124,423

 
42,816,704

 
35,147,970

 
 
 
 
 
 
 
 
Loss from continuing operations before provision for income taxes
(1,981,469
)
 
(897,767
)
 
(2,491,503
)
 
(1,527,333
)
 
 
 
 
 
 
 
 
Provision for income tax
203,203

 
545,613

 
186,457

 
479,662

 
 
 
 
 
 
 
 
Loss from continuing operations
(2,184,672
)
 
(1,443,380
)
 
(2,677,960
)
 
(2,006,995
)
 
 
 
 
 
 
 
 
(Loss) income from discontinued operations, net of taxes
(142
)
 
(237
)
 
(106,372
)
 
1,598

 
 
 
 
 
 
 
 
Net loss
(2,184,814
)
 
(1,443,617
)
 
(2,784,332
)
 
(2,005,397
)
Less: net income (loss) attributable to noncontrolling interest
115,633

 
116,654

 
(82,119
)
 
11,777

Net loss attributable to The ONE Group Hospitality, Inc.
(2,300,447
)
 
$
(1,560,271
)
 
(2,702,213
)
 
$
(2,017,174
)
 
 
 
 
 
 
 
 
Amounts attributable to The ONE Group Hospitality, Inc.:
 
 
 
 
 
 
 
Loss from continuing operations
(2,300,305
)
 
(1,560,034
)
 
(2,595,841
)
 
(2,018,772
)
(Loss) income from discontinued operations, net of taxes
(142
)
 
(237
)
 
(106,372
)
 
1,598

 Net loss attributable to The ONE Group Hospitality, Inc.
(2,300,447
)
 
$
(1,560,271
)
 
(2,702,213
)
 
$
(2,017,174
)
 
 
 
 
 
 
 
 
 Net loss attributable to The ONE Group Hospitality, Inc.
(2,300,447
)
 
(1,560,271
)
 
(2,702,213
)
 
(2,017,174
)
 Other comprehensive loss
 
 
 
 
 
 
 
 Currency translation adjustment
139,709

 
3,025

 
83,532

 
(18,380
)
 
 
 
 
 
 
 
 
 Comprehensive loss
$
(2,160,738
)
 
$
(1,557,246
)
 
(2,618,681
)
 
$
(2,035,554
)
Basic and diluted loss per share:
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 Continuing operations
$
(0.09
)
 
$
(0.06
)
 
$
(0.10
)
 
$
(0.08
)
 Discontinued operations
$

 
$

 
$

 
$

 Net loss per share attributable to The ONE Group Hospitality, Inc.
$
(0.09
)
 
$
(0.06
)
 
$
(0.11
)
 
$
(0.08
)
 
 
 
 
 
 
 
 
Shares used in computing basic and diluted loss per share
25,144,932

 
24,989,560

 
25,098,040

 
25,119,992

 
 
 
 
 
 
 
 
See notes to the consolidated financial statements.

6



THE ONE GROUP HOSPITALITY, INC.
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited) 
 
 
Common stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 
Total
stockholders'
equity
 
Noncontrolling
interest
 
Total
stockholders'
equity
including
noncontrolling
interest
 
Shares
 
Par value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
25,050,628

 
$
2,505

 
$
37,384,243

 
$
(27,763,194
)
 
$
(1,543,951
)
 
$
8,079,603

 
$
(701,066
)
 
$
7,378,537

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock based compensation expense
177,650

 
17

 
544,402

 
 
 
 
 
544,419

 
 
 
544,419

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions to noncontrolling interest


 


 


 


 


 

 
(21,361
)
 
(21,361
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain on foreign currency translation, net


 


 


 


 
83,532

 
83,532

 


 
83,532

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss


 


 


 
(2,702,213
)
 


 
(2,702,213
)
 
(82,119
)
 
(2,784,332
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2017
25,228,278

 
$
2,522

 
$
37,928,645

 
$
(30,465,407
)
 
$
(1,460,419
)
 
$
6,005,341

 
$
(804,546
)
 
$
5,200,795

 
See notes to the consolidated financial statements.


6



THE ONE GROUP HOSPITALITY, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
  
 
Six months ended June 30,
 
2017
 
2016
 
 
 
 
Operating activities:
 

 
 

Net loss
$
(2,784,332
)
 
$
(2,005,397
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation and amortization
1,670,550

 
1,070,077

Amortization of discounts on warrants
92,572

 

Deferred rent
873,700

 
1,030,652

Deferred taxes
46,664

 
(125,862
)
     Income of equity method investees
107,603

 
(313,788
)
Derivative income

 
(100,000
)
Stock-based compensation
544,419

 
379,928

Distributions from equity investees
676

 
184,450

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
443,371

 
(88,159
)
Inventory
(103,240
)
 
7,390

Other current assets
66,666

 
759,479

Due from related parties, net
815,993

 
632,062

Security deposits
(8,115
)
 
(47,712
)
Other assets
(49,302
)
 
69,384

Accounts payable
2,387,088

 
687,881

Accrued expenses
565,220

 
802,317

Deferred revenue
204,366

 
378,198

Net cash provided by operating activities
4,873,899

 
3,320,900

 
 
 
 
Investing activities:
 

 
 

Purchase of property and equipment
(3,924,909
)
 
(6,018,596
)
Net cash used in investing activities
(3,924,909
)
 
(6,018,596
)
 
 
 
 
Financing activities:
 

 
 

Cash overdraft
(59,033
)
 
(353,533
)
Proceeds from promissory note

 
1,000,000

Proceeds from business loan and security agreement
1,000,000

 

Repayment of term loan
(1,415,972
)
 
(1,080,833
)
Repayment of equipment financing agreement
(164,838
)
 
(95,151
)
Repayment of business loan and security agreement
(415,984
)
 

Proceeds from rights offering

 
3,862,990

Distributions to noncontrolling interest
(21,361
)
 
(59,085
)
Net cash provided by (used in) financing activities
(1,077,188
)
 
3,274,388

 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
71,352

 
(19,563
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(56,846
)
 
557,129

Cash and cash equivalents, beginning of period
1,597,782

 
1,841,872

Cash and cash equivalents, end of period
$
1,540,936

 
$
2,399,001

 
 
 
 
Supplemental disclosure of cash flow data:
 

 
 

Interest paid
$
308,595

 
$
330,959

Income taxes paid
$
31,737

 
$
228,353

 
 
 
 
Noncash investing and financing activities:
 
 
 
Noncash property and equipment additions
$

 
$
278,955

Noncash loan discount attributable to issuance of warrant
$

 
$
125,000


7



 
See notes to the consolidated financial statements. 

8



THE ONE GROUP HOSPITALITY, INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
Note 1 - Business and basis of presentation: 
 
Nature of business:  
The ONE Group Hospitality, Inc., ("the Company") is a global hospitality company that develops, owns and operates upscale, 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 globally. The Company opened its first restaurant in January 2004 in New York City and as of August 14, 2017, owned and operated (under lease agreements) 11 and managed (under management agreements) 13 restaurants and lounges globally, including 14 STKs in major metropolitan cities in the United States, Canada and Europe (of which eight are owned, five are managed and one is under a license agreement). In addition, the Company provides F&B services in seven hotels and casinos, one of which is under a lease agreement and six of which are under separate management agreements.  The Company generates management and incentive fee revenue from those restaurants and lounges that it manages on behalf of F&B hospitality clients.

Principles of consolidation:
The accompanying consolidated financial statements of The ONE Group Hospitality, Inc. and its subsidiaries include the accounts of The ONE Group, LLC ("ONE Group") and its subsidiaries, Little West 12th LLC (“Little West 12th” ), One-LA, L.P. (“One LA”), Bridge Hospitality, LLC (“Bridge”), STK-LA, LLC (“STK-LA”), WSATOG (Miami), LLC (“WSATOG”), STK Miami Service, LLC (“Miami Services”), STK Miami, LLC (“STK Miami Beach”), Basement Manager, LLC (“Basement Manager”), JEC II, LLC (“JEC II”), One Marks, LLC (“One Marks”), MPD Space Events LLC (“MPD”), One 29 Park Management, LLC (“One 29 Park Management”), STK Midtown Holdings, LLC (“Midtown Holdings”), STK Midtown, LLC (“STK Midtown”), STKOUT Midtown, LLC (“STKOUT Midtown”), STK Atlanta, LLC (“STK Atlanta”), STK-Las Vegas, LLC (“STK Vegas”), Asellina Marks LLC (“Asellina Marks”), Heraea Vegas, LLC (“Heraea”), Xi Shi Las Vegas, LLC (“Xi Shi Las Vegas”), T.O.G. (UK) Limited (“TOG UK”), Hip Hospitality Limited (“Hip Hospitality UK”), T.O.G. (Aldwych) Limited (“TOG Aldwych”), CA Aldwych Limited (“CA Aldwych"), T.O.G. (Milan) S.r.l. ("TOG Milan"), BBCLV, LLC (“BBCLV”), STK DC, LLC (“STK DC”), STK Orlando, LLC ("STK Orlando"), STK Chicago, LLC ("STK Chicago"), TOG Biscayne, LLC ("TOG Biscayne"), STK Westwood, LLC ("STK Westwood"), STK Denver, LLC ("STK Denver"), STK Texas Holdings, LLC ("Texas Holdings"), STK Texas Holdings II, LLC ("Texas Holdings II"), STK Dallas, LLC ("STK Dallas"), STK Rebel Austin, LLC ("STK Austin"), STK Rebel San Diego, LLC ("STK San Diego"), STK Rooftop San Diego, LLC ("STK Rooftop San Diego"), 9401415 Canada Ltd. ("STK Toronto"), STK (Edinburgh) Limited ("STK Edinburgh"), STK Ibiza, LLC ("STK Ibiza"), Seaport Rebel Restaurant LLC ("STK Boston") and The ONE Group - STKPR, LLC ("STK Puerto Rico"). The entities are collectively referred to herein as the “Company” and are consolidated on the basis of common ownership and control. All significant intercompany balances and transactions have been eliminated in consolidation.
 
Net Income (Loss) Per Common Share  
Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the applicable period. Diluted net income (loss) per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential common stock. Potential common stock consists of shares issuable pursuant to stock options and warrants. At June 30, 2017 and 2016, respectively, all equivalent shares underlying options and warrants were excluded from the calculation of diluted loss per share, as the exercise price of such options were out of the money and therefore equivalent shares would have an anti-dilutive effect.

Net income (loss) per share amounts for continuing operations and discontinued operations are computed independently. As a result, the sum of per share amounts may not equal the total.
 
Fair value measurements
The carrying amounts of cash, receivables, accounts payable and accrued expenses approximate fair value due to the immediate or short-term maturity of these financial instruments. The carrying value of the long term debt approximates its fair value since the components of long term debt have been recently negotiated.

Unaudited interim financial information:
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all the information and disclosures required by GAAP for complete financial statements. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or for any other

9



interim period or other future year. In the opinion of management, the unaudited consolidated financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation. These unaudited consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes for the fiscal year ended December 31, 2016 included in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission (the “SEC”) on April 5, 2017.
 
Reclassifications:
Certain prior year amounts have been reclassified to conform to current year presentation in the consolidated financial statements. 
     
Note 2 - Liquidity

As of June 30, 2017, the Company's accumulated deficit was $30.5 million. As of June 30, 2017, the Company had cash and cash equivalents of approximately $1.5 million. Our principal liquidity requirements are to meet our lease obligations, our working capital and capital expenditure needs and to pay principal and interest on our outstanding indebtedness. Subject to our operating performance, which, if significantly adversely affected, would adversely affect the availability of funds, we expect to finance our operations for at least the next 12 months following the issuance of the consolidated financial statements, including costs of opening currently planned new restaurants, through cash provided by operations and construction allowances provided by landlords of certain locations . We cannot be sure that these sources will be sufficient to finance our operations beyond that period, however, and we may seek additional financing in the future, which may or may not be available on terms and conditions satisfactory to us, or at all.


Note 3 – Recent accounting pronouncements:

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update ("ASU") No. 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09) and has subsequently issued a number of amendments to ASU 2014-09. The new standard, as amended, provides a single comprehensive model to be used in the accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific guidance. The standard’s stated core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, ASU 2014-09 includes provisions within a five-step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when, or as, an entity satisfies a performance obligation. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard will be effective for us beginning January 1, 2018 and permits two methods of adoption: the full retrospective method, which requires the standard to be applied to each prior period presented, or the modified retrospective method, which requires the cumulative effect of adoption to be recognized as an adjustment to opening retained earnings in the period of adoption. The primary items affected by the ASU are our license fee revenue and our loyalty program liability associated with our gift card program, however we do not expect the adoption of this ASU to have a material effect on our consolidated financial statements, as our current accounting policies are consistent with the new revenue recognition standard.
In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842)” (“ASU 2016-02”), which is effective for the fiscal years beginning after December 15, 2018. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. Early adoption is permitted. The Company believes the adoption of ASU 2016-02 will materially impact our consolidated financial statements by significantly increasing our non-current assets and non-current liabilities on our consolidated balance sheets in order to record the right of use assets and related lease liabilities for our existing operating leases. Operating leases comprise the majority of our current lease portfolio. In regards to implementation, the Company is currently reviewing the accounting standard. We are currently unable to estimate the impact on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15 "Statement of Cash Flows (Topic 230), Classification of certain Cash Receipts and Cash Payments." ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.

10




In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which provides clarity and reduces complexity when an entity has changes to the terms or conditions of a share-based payment award, and when an entity should apply modification accounting. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods, and early adoption is permitted for interim or annual periods. We are currently assessing the impact of the adoption of this ASU on our consolidated financial statements.


Note 4 - Inventory:

Inventory consisted of the following:
  
 
At June 30, 
 2017
 
At December 31, 
 2016
 
 
 
 
Food
$
254,723

 
$
209,319

Beverages
1,157,368

 
1,099,532

Totals
$
1,412,091

 
$
1,308,851

 
Note 5 – Other current assets:

Other current assets consisted of the following:
 
At June 30,
 
At December 31,
 
2017
 
2016
 
 
 
 
Prepaid expenses
$
707,050

 
$
537,891

Landlord receivable
258,104

 
678,604

Deposits
250,000

 
250,000

Income tax receivable
212,252

 
212,252

Rent
120,601

 
68,740

Other
195,812

 
64,300

Totals
$
1,743,819

 
$
1,811,787


Note 6 - Property and equipment, net:
 
Property and equipment, net consisted of the following:
 
 
At June 30, 
 2017
 
At December 31, 
 2016
 
 
 
 
Furniture, fixtures and equipment
$
10,038,402

 
$
9,130,469

Leasehold improvements
40,758,041

 
36,147,135

Less accumulated depreciation and amortization
17,386,116

 
15,809,101

 
33,410,327

 
29,468,503

Construction in progress
4,234,165

 
5,992,614

Restaurant supplies
1,422,626

 
1,354,122

Total
$
39,067,118

 
$
36,815,239

 

11



Depreciation and amortization related to property and equipment included in continuing operations amounted to $804,680 and $547,438 in the three months ended June 30, 2017 and 2016, respectively, and $1,670,550 and $1,070,077 in the six months ended June 30, 2017 and 2016, respectively. 

12



Note 7 – Accrued expenses:

Accrued expenses consisted of the following:
 
 
At June 30, 
 2017
 
At December 31, 
 2016
 
 
 
 
Due to hotels
986,550

 
1,327,026

Rent
879,516

 
320,854

Legal settlement costs
795,000

 

Sales tax and VAT payable
780,424

 
1,386,499

Payroll and related
740,253

 
730,615

Professional fees
362,862

 
704,190

Construction
290,000

 

Interest
156,250

 

Insurance
150,000

 
150,000

Income taxes payable
33,060

 
144,452

Other
965,742

 
786,002

Totals
$
6,139,657

 
$
5,549,638

  

 
Note 8 - Long term debt:

Long term debt consisted of the following:
 
At
 
At
 
June 30, 2017
 
December 31, 2016
 
 
 
 
Term Loan Agreements
$
8,070,833

 
$
9,485,000

Equipment Financing Agreements
1,256,452

 
1,421,033

American Express Loan
584,016

 

Promissory notes
6,250,000

 
6,250,000

 
16,161,301

 
17,156,033

Less: Current portion of Long Term Debt
3,745,901

 
3,153,666

Discount on warrants, net
744,000

 
834,500

Long Term Debt, net of Current Portion
$
11,671,400

 
$
13,167,867

 
 
 
 
Future minimum loan payments:
 
 
 
2017
2,162,877

 
 
2018
3,170,310

 
 
2019
3,187,808

 
 
2020
1,278,506

 
 
2021
111,800

 
 
Thereafter
6,250,000

 
 
Total
$
16,161,301

 
 


On December 17, 2014, the Company entered into a Term Loan Agreement with BankUnited, N.A. in the amount of $7,475,000 maturing December 1, 2019 (the "Term Loan Agreement"). The Term Loan Agreement replaced the existing credit

13



agreement which was terminated and the aggregate principal amount of the existing loans outstanding of $6,395,071 was converted into the Term Loan Agreement. Commencing on January 1, 2015, the Company made the first of sixty (60) consecutive monthly installments of $124,583 plus interest that accrues at an annual rate of 5.0%. The Company's obligations under the Term Loan Agreement are secured by substantially all of its assets. The outstanding balance under the Term Loan Agreement at June 30, 2017 and December 31, 2016 was $3,737,500 and $4,485,000, respectively.

On June 2, 2015, the Company entered into a second term loan agreement (the "Second Term Loan Agreement") with BankUnited, N.A., wherein BankUnited, N.A. agreed to make multiple advances to the Company in the aggregate principal amount of up to $6,000,000. On April 1, 2016, the Company commenced payment of fifty-four (54) consecutive equal monthly installments, with each such installment to be in the principal amount of $111,111 or such lesser amount as shall be equal to the quotient of (x) the outstanding principal amount of all advances on June 30, 2017, divided by (y) fifty-four (54); provided, however, that the final principal installment shall be in an amount equal to the aggregate principal amount of all advances outstanding on September 1, 2020, or such earlier date on which all outstanding advances shall become due and payable, whether by acceleration or otherwise. This second term loan bears interest at a rate per annum equal to 5.0%. The Company's obligations under the Second Term Loan Agreement are secured by substantially all of its assets. The outstanding balance under the Second Term Loan Agreement at June 30, 2017 and December 31, 2016 was $4,333,333 and $5,000,000, respectively.

The Term Loan Agreement and the Second Term Loan Agreement contain certain affirmative and negative covenants, including negative covenants that limit or restrict, among other things, liens and encumbrances, indebtedness, mergers, asset sales, investments, assumptions and guaranties of indebtedness of other persons, change in nature of operations, changes in fiscal year and other matters customarily restricted in such agreements. The financial covenants contained in these agreements require the borrowers to maintain a certain adjusted tangible net worth and a debt service coverage ratio.

The Company was in compliance with all of its financial covenants under the Term Loan Agreement and Second Term Loan Agreement as of June 30, 2017, and the Company believes, based on current projections that it will continue to comply with such covenants through the next four quarters following the issuance of the consolidated financial statements.

On June 5, 2015, the Company entered into a $1,000,000 Equipment Finance Agreement (the "Agreement") with Sterling National Bank. The Agreement covers certain equipment at the STKs in Orlando and Chicago. This Agreement bears interest at a rate per annum equal to 5.0%. The Company's obligations under the Agreement are secured by the equipment purchased with proceeds of the Agreement. The Agreement calls for sixty (60) monthly payments of $19,686 including interest commencing July 1, 2015.

On June 27, 2016 the Company entered into a $1,000,000 loan agreement with 2235570 Ontario Limited (the "Ontario Noteholder") though an unsecured promissory note (the "Ontario Note"). In consideration of the loan amount, the Ontario Noteholder received a warrant (the "Ontario Warrant") to purchase 100,000 shares of common stock of the Company at an exercise price of $2.61. The Ontario Warrant is exercisable at any time through June 27, 2026, in whole or in part. The Ontario Note bears interest at a rate of 10% per annum, payable quarterly commencing on September 30, 2016. The entire balance of the Ontario Note is due on its maturity date of June 27, 2021. The fair value of the Ontario Warrant of $125,000 is treated as a reduction of the principal balance of the Ontario Note and is amortized in interest expense over the term of the Ontario Note. The Company used the Black-Scholes option pricing model to calculate the fair value of the warrant as of the grant date.

On August 11, 2016 the Company entered into a $3,000,000 loan agreement with Anson Investments Master Fund LP ("Anson") though an unsecured promissory note (the "Anson August Note"). In consideration of the loan amount, the Anson received a warrant (the "Anson August Warrant") to purchase 300,000 shares of common stock of the Company at an exercise price of $2.61. The Anson August Warrant is exercisable at any time through August 11, 2026, in whole or in part. The Anson August Note bears interest at a rate of 10% per annum, payable quarterly commencing on September 30, 2016. The entire balance of the Anson August Note is due on its maturity date of August 11, 2021. The fair value of the warrant of $360,000 is treated as a reduction of the principal balance of the Anson August Note and is amortized in interest expense over the term of the Anson August Note. The Company used the Black-Scholes option pricing model to calculate the fair value of the warrant as of the grant date.

On August 16, 2016, the Company entered into a $712,187 Equipment Finance Agreement (the "Agreement") with Sterling National Bank. The Agreement covers certain equipment at the STKs that are under construction in San Diego, Denver and at the STK in Orlando. This Agreement bears interest at a rate per annum equal to 5.0%. The Company's obligations under the Agreement are secured by the equipment purchased with proceeds of the Agreement. The Agreement calls for sixty (60) monthly payments of $13,769 including interest commencing September 1, 2016.


14



On October 24, 2016, the Company entered into a $2,250,000 loan agreement with Anson through an unsecured promissory note (the "Anson October Note"). In consideration of the loan amount, the Company also issued to Anson a warrant (the "Anson October Warrant") to purchase 340,000 shares of the Company's common stock at an exercise price of $2.39 per share. The Anson October Warrant is exercisable at any time through October 24, 2026, in whole or in part. The Anson October Warrant contains limitations that prevent Anson from acquiring shares of the Company's common stock upon exercise of the Anson October Warrant that would result in the number of shares beneficially owned by it and its affiliates exceeding 9.99% of the total number of shares of the Company's common stock then issued and outstanding. The Anson October Note bears interest at a rate of 10% per annum, payable quarterly commencing December 31, 2016. The entire balance of the Anson October Note is due on its maturity date of October 24, 2021. At June 30, 2017, the amount outstanding under the Anson October Note was $2.3 million.

On February 17, 2017, certain of the Company's subsidiaries (the “Borrowers”) entered into a $1,000,000 Business Loan and Security Agreement (the “Loan Agreement”) with American Express Bank, FSB (“American Express”). In consideration of the loan amount each Borrower granted American Express a security interest in accounts receivable as specified therein. Pursuant to the Loan Agreement the Borrowers agreed to pay a loan fee equal to 3.5% of the original principal balance of the loan amount and a repayment rate of 6% of daily American Express credit card receipts pursuant to the repayment schedule set forth therein. The loan agreement is subordinated to the Company's term loan agreements with BankUnited. The entire balance of the loan amount is due and payable 365 days after the disbursement of the initial loan amount.   At June 30, 2017, the amount outstanding under the Loan was approximately $584,000 and payments of $323,000 were made during the three months ended June 30, 2017.

Interest paid amounted to $308,595 and $155,945 for the three months ended June 30, 2017 and 2016, respectively, and $446,108 and $330,959 for the six months ended June 30, 2017 and 2016, respectively. Capitalized interest amounted to $113,960 and $62,310 for the three months ended June 30, 2017 and 2016, respectively, and $378,907 and $212,236 for the six months ended June 30, 2017 and 2016, respectively.
  
As of June 30, 2017, the issued stand-alone letters of credit in the total amount of approximately $1.4 million for the STK locations in Orlando, Florida, Chicago, Illinois and Westwood, California remain outstanding for security deposits.
 
Note 9 - Nonconsolidated variable interest entities:

GAAP provides a framework for identifying variable interest entities ("VIEs") and determining when a company should include the assets, liabilities, noncontrolling interests, and results of activities of a VIE in its consolidated financial statements. In general, a VIE is a corporation, partnership, limited-liability corporation, trust, or any other legal structure used to conduct activities or hold assets that (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to direct the activities of the entity that most significantly impact its economic performance, or (3) has a group of equity owners that do not have the obligation to absorb losses of the entity or the right to receive returns of the entity. A VIE should be consolidated if a party with an ownership, contractual, or other financial interest in the VIE that is considered a variable interest (a variable interest holder) has the power to direct the VIE’s most significant activities and the obligation to absorb losses or the right to receive benefits of the VIE that could be significant. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIE’s assets, liabilities, and noncontrolling interests at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. As of June 30, 2017 and December 31, 2016, the Company held investments that were evaluated against the criteria for consolidation and determined that it is not the primary beneficiary of the investments because the Company lacks the power to direct the activities of the VIEs that most significantly impact their economic performance. Therefore, consolidation in the Company’s financial statements is not required. At June 30, 2017 and December 31, 2016, the Company held the following equity investments: 
 
At June 30, 
 2017
 
At December 31, 
 2016
 
 
 
 
Bagatelle NY LA Investors, LLC ("Bagatelle Investors")
$
(15,535
)
 
$
6,569

Bagatelle Little West 12th, LLC ( "Bagatelle NY")
2,521,370

 
2,552,687

One 29 Park, LLC ("One 29 Park")
451,443

 
506,301

Totals
$
2,957,278

 
$
3,065,557



15




 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Income of equity method investees
$
152,914

 
$
(231,203
)
 
$
107,603

 
$
(313,788
)
 
Bagatelle Investors is a holding company that has interests in two operating restaurant companies, Bagatelle NY and Bagatelle La Cienega, LLC ("Bagatelle LA"). All three entities were formed in 2011. The Company holds interests in all three entities. The Company holds a 31.24% ownership over Bagatelle Investors as of June 30, 2017 and December 31, 2016. The Company holds a 5.23% direct ownership over Bagatelle NY and has indirect ownership through Bagatelle Investors as well as one of its subsidiaries of 45.90% for a total effective ownership of 51.13% as of June 30, 2017 and December 31, 2016. The Company holds a 5.23% direct ownership over Bagatelle LA and has indirect ownership through Bagatelle Investors as well as one of its subsidiaries of 38.10% for a total effective ownership of 43.33% as of June 30, 2017 and December 31, 2016. Bagatelle LA was closed on June 30, 2016. The Company holds a 10% direct ownership over One 29 Park as of June 30, 2017 and December 31, 2016.
 
As of June 30, 2017 and December 31, 2016, the Company provided no explicit or implicit financial or other support to these VIEs that were not previously contractually required.
 
In addition to the amounts presented above, the Company had receivables included in due to and from related parties, net in the consolidated balance sheets of $366,774 and $467,702 as of June 30, 2017 and December 31, 2016, respectively (see Note 10).
 


Note 10 - Related party transactions:

Net amounts due to related parties, which are expected to be repaid within the next twelve months, amount to $359,302 as of June 30, 2017. Net amounts due from related parties, which are expected to be collected within the next twelve months, amount to $415,773 as of December 31, 2016.

Included in amounts due from related parties are non-interest bearing cash advances, management fees and reimbursable expenses (See Note 12) aggregating to $402,115 and $711,885 as of June 30, 2017 and December 31, 2016, respectively.
 
The Company incurred approximately $276,000 and $128,000 for the three months ended June 30, 2017 and 2016, respectively, and $342,000 and $212,000 for the six months ended June 30, 2017 and 2016, respectively, for legal fees to an entity owned by one of the Company’s directors. Included in due from related parties are balances owed to this entity amounting to $270,017 and $237,971 as of June 30, 2017 and December 31, 2016. The Company also received rental income for an office space sublease to this entity of $48,000 and $47,000 for the three months ended June 30, 2017 and 2016, respectively, and $96,000 and $93,000 for the six months ended June 30, 2017 and 2016, respectively. There were no receivables outstanding from this entity at June 30, 2017 and December 31, 2016.
 
The Company incurred approximately $391,000 and $603,000 for the three months ended June 30, 2017 and 2016, respectively, and $1.2 million and $2.8 million for the six months ended June 30, 2017 and 2016, respectively, for construction services to an entity owned by family members of one of the Company’s shareholders. Included in other current assets are construction related deposits paid to this entity amounting to $250,000 as of June 30, 2017 and December 31, 2016. Included in amounts due from related parties are balances owed to this entity amounting to $408,898 and $10,642 as of June 30, 2017 and December 31, 2016.

Amounts due to the Company’s non-employee directors amount to $82,500 and $47,000 as of June 30, 2017 and December 31, 2016, respectively.
  
The Company received approximately $1,197,375 as proceeds from the exercise of warrants that were a part of the TOG Liquidation Trust. Such amount is presented in Due to related parties, long term in the consolidated balance sheets as of June 30, 2017 and December 31, 2016. The TOG Liquidating Trust (“Trust”) was a trust set up to hold warrants which were previously issued and outstanding to members of The One Group LLC prior to the merger transaction discussed in Note 11. When warrants were exercised the proceeds from the exercise of the warrants were recorded into the Trust. Amounts due to the trust are non-interest bearing and are repayable in 2021 when the trust expires.

16




The Chief Executive Officer of the Company is a limited personal guarantor of the lease for the STK Miami Beach premises with respect to certain covenants under the lease relating to construction of the new premises and helping the landlord obtain a new liquor license for the premises in the event of termination of the lease. The Chief Executive Officer is also a limited personal guarantor of the lease for the Bagatelle NY premises with respect to JEC II, LLC’s payment and performance under the lease.

Note 11 – Derivative liability:

On October 16, 2013, the Company, formerly known as Committed Capital Acquisition Corporation ("Committed Capital"), closed a merger transaction (the “Merger”) with The ONE Group, LLC, a privately held Delaware limited liability company (“ONE Group”), pursuant to an Agreement and Plan of Merger, dated as of October 16, 2013 (the “Merger Agreement”), by and among the Company, CCAC Acquisition Sub, LLC, a Delaware limited liability company and wholly-owned subsidiary of Committed Capital (“Merger Sub”) and The ONE Group. Pursuant to the Merger Agreement, ONE Group became a wholly-owned subsidiary of Committed Capital through a merger of Merger Sub with and into ONE Group, and the former members of ONE Group received shares of Committed Capital that constituted a majority of the outstanding shares of Committed Capital.

The Merger provided for up to an additional $14,100,000 of payments to the former holders of ONE Group membership interests (the "TOG Members") and to a liquidating trust (the "Liquidating Trust") established for the benefit of the TOG Members and the holders of warrants to acquire membership interests of ONE Group based on a formula as described in the Merger Agreement and which is contingent upon the exercise of outstanding Company warrants to purchase 5,750,000 shares of common stock at an exercise price of $5.00 per share (the “Public Warrants”). The Company was required to make any payments on a monthly basis. Additionally, certain ONE Group employees were entitled to receive a contingent sign-on bonus of an aggregate of approximately $900,000 upon the exercise of the Public Warrants. Any Public Warrants that were unexercised were set to expire on the date that is the earlier of (i) February 27, 2016 or (ii) the forty-fifth (45th) day following the date that the Company’s common stock closes at or above $6.25 per share for 20 out of 30 trading days commencing on February 27, 2014.
 
The Company estimated the fair value of the derivative liability at each reporting period based on the period of time between the balance sheet date, the exercise date and the possibility of exercise. The Public Warrants expired on February 27, 2016 and the remaining balance of $100,000 was written off on that date.
 
Note 12 - Commitments and contingencies:
 
Operating leases:
The Company is obligated under several operating leases for restaurants, equipment and office space, expiring in various years through 2031, which provide for minimum annual rentals, escalations, percentage rent, common area expenses or increases in real estate taxes.
 
Future minimum rental commitments under the leases and minimum future rental income per the sublease in five years subsequent to June 30, 2017 and thereafter are as follows:
 
Period
 
Payments
 
Sublease Income
 
Net
Amount
2017
 
$
3,738,294

 
$
(338,701
)
 
$
3,399,593

2018
 
7,554,444

 
(690,980
)
 
6,863,464

2019
 
7,613,432

 
(706,235
)
 
6,907,197

2020
 
7,853,932

 
(675,768
)
 
7,178,164

2021
 
7,376,633

 
(121,656
)
 
7,254,977

Thereafter
 
89,682,674

 

 
89,682,674

Total
 
$
123,819,409

 
$
(2,533,340
)
 
$
121,286,069

 
Rent expense (excluding percentage rent of $299,747 and $103,657 for the three months ended June 30, 2017 and 2016, respectively, and $611,103 and $187,430 for the six months ended June 30, 2017 and 2016, respectively), included in continuing operations, amounted to $1,071,367 and $1,302,263 for the three months ended June 30, 2017 and 2016,

17



respectively, and $2,351,383 and $2,458,866 for the six months ended June 30, 2017 and 2016, respectively. Rent expense included in continuing operations has been reported in the consolidated statements of operations and comprehensive loss net of rental income of $46,500 and $212,049 for the three months ended June 30, 2017 and 2016, respectively, and $233,529 and $426,235 for the six months ended June 30, 2017 and 2016, respectively, related to subleases with related and unrelated parties which expire through 2021.
 
License and management fees:
In July 2009, One 29 Park Management (a related party) entered into an agreement with a third party. Under this agreement, One 29 Park Management shall receive a management fee equal to 5% of gross revenues, as defined, from the restaurant, banquets, room service and rooftop sales and 50% of the base beverage fee, as defined, for the life of the management agreement which expires in 2025. Management fees amounted to $130,860 and $138,547 for the three months ended June 30, 2017 and 2016, respectively, and $214,254 and $245,707 for the six months ended June 30, 2017 and 2016, respectively. Included in due to and from related parties at June 30, 2017 and December 31, 2016 are amounts due for management fees and reimbursable expenses of $92,380 and $387,862, respectively (see Note 10).

In January 2010, STK Vegas entered into a management agreement with a third party for a term of 10 years, with two five-year option periods. Under this agreement, STK Vegas shall receive a management fee equal to 5% of gross sales, as defined (“gross sales fee”) plus 20% of net profits prior to the investment breakeven point date and 43% of net profits thereafter (“incentive fee”). In addition, STK Vegas is entitled to receive a development fee equal to $200,000. Management fees amounted to $1,230,979 and $1,127,497 for the three months ended June 30, 2017 and 2016, respectively, and $2,695,915 and $2,404,481 for the six months ended June 30, 2017 and 2016, respectively.
 
In July 2010, Hip Hospitality UK entered into a management agreement with a third party to manage and operate the F&B operations in the Hippodrome Casino in London. Under this agreement, Hip Hospitality UK shall receive a management fee equal to 5.5% of total revenue, as defined, as well as an incentive fee if certain conditions are met, for the life of the management agreement which expires in 2022. Management fees amounted to $120,253 and $129,194 for the three months ended June 30, 2017 and 2016, respectively, and $244,922 and $286,246 for the six months ended June 30, 2017 and 2016, respectively. Included in accounts receivable at June 30, 2017 and December 31, 2016 are amounts due for management fees of $40,028 and $117,576, respectively.
 
In December 2011, TOG Aldwych entered into a management agreement with a third party to operate a restaurant, bar and lounges in the ME Hotel in London. Under this agreement, TOG Aldwych shall receive a management fee equal to 5% of receipts received from F&B operations. In addition, TOG Aldwych is entitled to receive a monthly marketing fee equal to 1.5% of receipts received from F&B operations and an additional fee equal to 65% of net operating profits, as defined, for the life of the management agreement which expires in 2032. Management fees amounted to $577,740 and $308,621 for the three months ended June 30, 2017 and 2016, respectively, and $778,512 and $550,113 for the six months ended June 30, 2017 and 2016, respectively. Included in accounts receivable at June 30, 2017 and December 31, 2016 are amounts due for management fees of $395,029 and $520,649, respectively.

In May 2013, CA Aldwych entered into a management agreement with a third party to operate a restaurant in the ME Hotel in London. Under this agreement, CA Aldwych shall receive a management fee equal to 5% of receipts received from F&B operations. In addition, CA Aldwych is entitled to receive a monthly marketing fee equal to 1.5% of receipts received F&B operations. Management fees amounted to $0 and $1,962 for the three months ended June 30, 2017 and 2016, respectively, and $0 and $20,492 for the six months ended June 30, 2017 and 2016, respectively. Included in accounts receivable at June 30, 2017 and December 31, 2016 are amounts due for management fees of $19,177 and $0, respectively.

In June 2014, TOG (Milan) S.R.L. entered into a management agreement with Sol Melia Italia S.R.L. to operate a restaurant, rooftop bar and F&B services at the ME Milan Il Duca hotel in Milan, Italy. TOG (Milan) S.R.L. shall receive a management fee equal to 5% of operating revenue, as defined, and an additional fee equal to 65% of net operating revenue, as defined, for the life of the management agreement which expires in 2025. TOG Milan commenced operations in May 2015. In addition, TOG (Milan) S.R.L. is entitled to receive a monthly marketing fee equal to 1.5% of operating revenues. Management fees amounted to $331,928 and $128,507 for the three months ended June 30, 2017 and 2016, respectively, and $438,006 and $214,613 for the six months ended June 30, 2017 and 2016, respectively. Included in accounts receivable and at June 30, 2017 and December 31, 2016 are amounts due for management fees of $314,606 and $43,401, respectively.

In October 2015, STK Ibiza entered into a license agreement with Foxhold Holdings Limited to develop and operate a restaurant under the STK brand in the Ibiza Hotel and Spa at Marina Botafoch in Ibiza Town, Spain. STK Ibiza received an Entry Fee in the amount of 1,025,000 euros. $959,436 and $1,014,414 of the Entry Fee is included in deferred license revenue in the accompanying consolidated balance sheets as of June 30, 2017 and December 31, 2016, respectively. In addition, STK

18



Ibiza receives royalty fees equal to 8%, of the net turnover, as defined, from the restaurant. The restaurant commenced operations in July 2016. The license agreement expires in 2026, with the option of one 10-year extension if certain renewal conditions are satisfied.

In May 2016, STK Puerto Rico entered into a license agreement with Condado Duo Vanderbilt SPV, LLC to develop and operate a restaurant and a beach venue under the STK brand at the Vanderbilt hotel in San Juan, Puerto Rico. STK Puerto Rico shall receive a $250,000 Entry Fee. STK Puerto Rico will also receive royalty fees equal to 5% of the gross revenues generated by the restaurant, 2% of the first $1.8 million of annual gross revenues from the beach venue and 5% of annual gross revenue from the beach venue in excess of $1.8 million. The license agreement expires in 2026 with one five-year extension if certain financial goals are met. The restaurant and beach venue are expected to open in 2018.

In November 2016, The ONE Group-MENA, LLC entered into a license agreement with Horizon Hospitality Holdings Limited to develop and operate up to three restaurants under the STK brand in Dubai and Abu Dhabi. The ONE Group-MENA, LLC shall receive a $600,000 Entry Fee. The ONE Group-MENA, LLC will also receive $250,000 for each STK location opened and royalty fees equal to 5% of the gross revenues generated by each restaurant. The license agreement expires on the tenth anniversary of the opening of the first restaurant with one ten-year renewal option. The STK restaurant and beach venue are expected to open in 2017.

In February 2017, The ONE Group-Qatar Ventures, LLC entered into a license agreement with Katara Hospitality QSC to develop and operate a restaurant under the STK brand in Doha, Qatar. The ONE Group-Qatar Ventures, LLC shall receive a $250,000 Territory Fee. The ONE Group-Qatar Ventures, LLC will also receive royalty fees equal to 5% of the gross revenues generated by each restaurant. The license agreement expires on the fifth anniversary of the opening of the restaurant with one five-year renewal option. The restaurant is expected to open in 2018.

Note 13 - Discontinued operations:
Management decided to cease operations for the following entities: One Atlantic City (2012), STKOUT Midtown (2013), BBCLV (2013), Heraea (2013), Miami Services (2014) and Tenjune (2014).
 
The following table shows the components of assets and liabilities that are classified as discontinued operations in the Company's consolidated balance sheets as of June 30, 2017 and December 31, 2016:
 
 
June 30, 
 2017
 
December 31, 
 2016
 
 
 
 
Other current assets
$
107,630

 
$
107,630

   Assets of discontinued operations - current
107,630

 
107,630

 
 
 
 
Security deposits
75,000

 
84,904

   Assets of discontinued operations - long term
75,000

 
84,904

 
 
 
 
Accounts payable and accrued liabilities
540,944

 
529,797

   Liabilities of discontinued operations - current
540,944

 
529,797

 
 
 
 
Net assets
$
(358,314
)
 
$
(337,263
)
  
Summarized operating results related to these entities are included in discontinued operations in the accompanying consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2017 and 2016:
 

19



 
Three Months Ended June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Revenue
$

 
$

 
$

 
$

Costs and Expenses
(142
)
 
237

 
(106,372
)
 
(1,598
)
Net (loss) income from discontinued operations, net of taxes
$
142

 
$
(237
)
 
$
106,372

 
$
1,598

 
Note 14 - Litigation:

The Company is party to claims in lawsuits incidental to its business. In the opinion of management, the ultimate outcome of such matters, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

In November 2015, certain employees filed a class action lawsuit against two of the Company's subsidiaries and Bagatelle LA , an equity investee of the Company, which has since ceased operations, (collectively, the “Defendants”) alleging that the Defendants neglected to conform to California state and local rest and meal period requirements as well as other employment-related allegations. In April 2017, the Defendants agreed with the plaintiffs to propose court approval of a class action settlement to avoid the uncertainty and risk associated with continued litigation, which agreement was preliminarily approved by the court.  Accordingly, based on the probability of this matter reaching final approval, in the second quarter of 2017, the Company accrued $245,000 under general and administrative expenses, which represents its share in the settlement costs.  In addition, through Bagatelle Investors, the Company recognized its equity in Bagatelle LA's share of the settlement costs, of approximately $52,500.  Final approval by the court of this settlement agreement is pending and is expected to be completed by the close of 2017.
 
In May 2016, certain employees filed a class action lawsuit against two of the Company's subsidiaries and Bagatelle NY, an equity investee of the Company, (collectively, the “Defendants”), alleging that the Defendants improperly took tip credits due to those employees, as well certain other employment-related allegations. In May 2017, to avoid the uncertainty, risks and cost associated with continued litigation, the Defendants reached a settlement agreement with the plaintiffs. Such settlement agreement was preliminarily approved by the court.  Accordingly, based on the probability of this matter reaching final approval, in the second quarter of 2017, the Company accrued $550,000 under general and administrative expenses, which represents its share in the settlement costs.  In addition, through Bagatelle Investors the Company recognized its equity in Bagatelle NY’s share of the settlement costs, of approximately $275,000.  Final approval by the court of this settlement agreement is not scheduled to occur until October 2017.  
 
Note 15 - Stockholders’ equity:
The Company is authorized by its amended and restated certificate of incorporation to issue up to 75,000,000 shares of common stock, par value $0.0001 per share, and 10,000,000 shares of preferred stock, par value $0.0001 per share. As of June 30, 2017 and December 31, 2016, there were 25,228,278 and 25,050,628, outstanding shares of common stock, respectively, and no outstanding shares of preferred stock.  As a result of the expiration of the Public Warrants in February 2016, an aggregate of 1,437,500 shares of common stock were forfeited by the Company's initial shareholders that held shares prior to the Company's initial public offering and such shares were canceled.

On January 19, 2016, the Company commenced a rights offering (the “Rights Offering”) of non-transferable subscription rights to holders of record of its common stock as of January 15, 2016 to purchase up to 1,454,545 shares of common stock. The Company granted holders of its common stock non-transferable subscription rights to purchase one share of common stock at a subscription price of $2.75 per share. Each holder received one subscription right for each 17.16861 shares of common stock owned on January 15, 2016. Each subscription right entitled its holder to purchase one share of common stock at the subscription price. The Rights Offering which closed on February 9, 2016, generated approximately $4 million in gross proceeds. The Company issued a total of 1,454,545 shares of common stock at $2.75 per share, including 632,582 shares issued to holders upon exercise of their basic subscription rights. The Company received net proceeds of approximately $3.9 million following the deduction of expenses. The Company utilized the net proceeds of the Rights Offering to primarily fund the planned development of future STK restaurants.

Note 16 - Stock-based compensation:
In October 2013, the board of directors approved the 2013 Employee, Director and Consultant Equity Incentive Plan (the “2013 Plan”) pursuant to which the Company may issue options, warrants, restricted stock or other stock-based awards to directors,

20



officers, key employees and other key individuals performing services for the Company. The 2013 Plan has reserved 4,773,992 shares of common stock for issuance. All awards will be approved by the board of directors or a committee of the board of directors to be established for such purpose.
 
The Company’s outstanding stock options and restricted stock have maximum contractual terms of up to ten years, principally vest on a quarterly basis ratably over five years and are granted at exercise prices equal to the market price of the Company’s common stock on the date of grant. All equity awards immediately vest upon a liquidation or a change in control event. The Company’s outstanding stock options and restricted stock are exercisable into shares of the Company’s common stock. The Company measures the cost of employee services received in exchange for an award of equity instruments, including grants of employee stock options and restricted stock awards, based on the fair value of the award at the date of grant in accordance with the modified prospective method. The Company uses the Black-Scholes model for purposes of determining the fair value of stock options granted and recognizes compensation costs ratably over the requisite service period, net of estimated forfeitures. For restricted stock awards, the grant-date fair value is the quoted market price of the stock.

As of June 30, 2017, all 2,160,535 options and 875,000 shares of restricted stock outstanding, respectively, were excluded from the calculation of dilutive earnings per share as their effect would have been anti-dilutive as the exercise price of these grants are above the average market price.

As of June 30, 2016, all options and restricted stock then outstanding were excluded from the calculation of dilutive earnings per share as their effect would have been anti-dilutive as the exercise price of these grants are above the average market price.
  
The Company recognized $391,080 and $235,961, for the three months ended June 30, 2017 and 2016, respectively, and $544,419 and $379,928 for the six months ended June 30, 2017 and 2016, respectively, of non-cash stock-based compensation expense related to options, restricted stock awards and unrestricted stock grants in general and administrative expense in the consolidated statements of operations.
 
As of June 30, 2017, there was approximately $1.4 million of total unrecognized compensation cost related to unvested share-based option compensation grants, which is expected to be amortized over a weighted-average period of 3.6 years.
   
A summary of the status of stock option awards and changes during the three months ended June 30, 2017 is presented below:
 
Number of Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life (Years)
 
Intrinsic
Value
 
 
 
 
 
 
 
 
Outstanding at December 31, 2016
1,857,012

 
$
4.28

 
 
 
 
Granted
960,000

 
2.13

 
 
 
 
Cancelled, expired, or forfeited
656,477

 
$
3.21

 
 
 
 
Outstanding at June 30, 2017
2,160,535

 
$
3.65

 
7.47
 
$
35,400

Exercisable at June 30, 2017
897,718

 
$
4.74

 
5.15
 
$

  
The weighted-average grant-date fair value of option awards outstanding as of June 30, 2017 and December 31, 2016 are $1.39 and $1.65, respectively. The weighted average grant date fair value of option awards granted during the three and six months ended June 30, 2016 is $0.86.

A summary of the weighted-average assumptions utilized in the Black-Scholes option-pricing model to value the stock options granted during the six months ended June 30, 2017 are presented below:


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Expected volatility
37
%
Risk-free rate of return
1.86
%
Expected life (in years)
6.50 years

Dividend yield

Weighted-average fair value
$
2.13



A summary of the status of restricted stock awards and changes during the three months ended June 30, 2017 are presented below:
 
Number of Shares
 
Weighted Average
Grant Date Fair Value
 
 
 
 
Non-vested at December 31, 2016
716,250

 
$
2.73

Granted
410,000

 
2.13

Vested
(81,750
)
 
2.73

Cancelled, expired, or forfeited
(169,500
)
 
$
2.73

Non-vested at June 30, 2017
875,000

 
$
2.45


On April 10, 2017, the Company granted one board member a grant of 22,167 shares of common stock, which shares vested immediately as of the date thereof. The closing stock price was $2.03. On June 30, 2017, the Company granted four board members each a grant of 18,433 shares of common stock, which shares vested immediately as of the date thereof. The closing stock price was $2.17. The Company recorded compensation expense related to these awards of $205,000 for the three and six months ended June 30, 2017. Such grants were awarded consistent with the Company's board compensation practices.

Note 17 - Segment reporting:

The Company operates in three segments: owned STK units ("STKs"), F&B hospitality management agreements ("F&B") and other concepts ("Other"). The Company believes STKs, F&B and Other to be the reportable segments as they do not have similar economic or other characteristics to be aggregated into a single reportable segment. The STKs segment consists of leased restaurant locations and competes in the full service dining industry. The F&B segment consists of management agreements in which the Company operates the food and beverage services in hotels or casinos and could include an STK, which are referred to as managed STK units. The Company refers to owned STK units and managed STK units together as “STK units.” These management agreements generate management and incentive fees on net revenue at each location. The Other segment includes owned non-STK leased locations.
  


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Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 

 
 

STKs
$
17,022,459

 
$
15,282,704

 
$
33,391,793

 
$
28,963,134

F&B
2,784,659

 
1,943,952

 
5,098,375

 
3,958,003

Other
91,385

 

 
1,835,033

 
699,500

 
 
 
 
 
 
 
 
 
$
19,898,503

 
$
17,226,656

 
$
40,325,201

 
$
33,620,637

 
 
 
 
 
 
 
 
Segment Profit (loss):
 
 
 
 
 
 
 

STKs
$
1,942,838

 
$
1,983,811

 
$
3,231,228

 
$
3,172,474

F&B
2,784,659

 
1,943,952

 
5,098,375

 
3,958,003

Other
(390,223
)
 
10,258

 
252,534

 
425,117

 
 
 
 
 
 
 
 
Total segment profit
4,337,274

 
3,938,021

 
8,582,137

 
7,555,594

 
 
 
 
 
 
 
 
General and administrative
4,086,192

 
2,813,056

 
7,007,089

 
5,496,752

Depreciation and amortization
804,680

 
547,438

 
1,670,550

 
1,070,077

Interest expense, net of interest income
220,183

 
99,314

 
479,173

 
197,483

Other
1,207,688

 
1,375,980

 
1,916,828

 
2,318,615

 
 
 
 
 
 
 
 
Loss from continuing operations before provision for income taxes
$
(1,981,469
)
 
$
(897,767
)
 
$
(2,491,503
)
 
$
(1,527,333
)

 
 
June 30, 
 2017
 
December 31, 
 2016
 
 
 
 
Property & equipment, net:
 
 
 
STKs
$
38,665,825

 
$
36,505,741

F&B
344,917

 
253,120

Other
56,376

 
56,378

Total
39,067,118

 
36,815,239

  
Note 18 - Geographic information:
 
The following table contains certain financial information by geographic location for the six months ended June 30, 2017 and 2016, respectively, (the Company's foreign operations are mainly based in the United Kingdom, Spain and Italy):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
United States:
 
 
 
 
 

 
 

Revenues - owned units
$
17,113,844

 
$
15,282,704

 
$
35,226,826

 
$
29,662,634

Management, incentive and royalty fee revenue
1,701,648

 
1,338,349

 
3,537,771

 
2,794,167

 
 
 
 
 
 
 
 
Foreign:
 
 
 
 
 
 
 
Management and development fee revenue
1,083,011

 
605,603

 
1,560,604

 
1,163,836

 
 
 
 
 
 
 
 
 
The following table contains certain financial information by geographic location at June 30, 2017 and December 31, 2016:

23



 
 
June 30, 
 2017
 
December 31, 
 2016
United States:
 

 
 

Net assets
$
926,418

 
$
3,899,627

 
 
 
 
Foreign:
 
 
 
Net assets
$
4,274,377

 
$
3,478,911

 

Note 19 - Income taxes:

Management assessed the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss (excluding derivative income) incurred over the three-year period ended December 31, 2016. Such objective evidence is not solely determinative and accordingly, the Company considers all other available positive and negative evidence in its analysis. Based upon the Company's analysis, which included the recent decline in operating profits during the fourth quarter when compared to the fourth quarter of prior years, the Company believed it is more likely than not that the net deferred tax assets in the United States may not be fully realized in the future. On the basis of this evaluation, as of December 31, 2016, a valuation allowance of $12.0 million was recorded to reflect the portion of the deferred tax asset that is not more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as the projections for growth. For the three and six months ended June 30, 2017 there were increases to the valuation allowance representing the net operating losses incurred during these periods and other adjustments.

The Company estimates its annual effective income tax rate at the end of each quarterly period. This estimate takes into account the mix of expected income (loss) before income taxes by tax jurisdiction and enacted changes in tax laws.  the Company's quarterly tax provision and quarterly estimate of the annual effective tax rate is subject to significant volatility due to several factors including, but not limited to, having to forecast income (loss) before income taxes by jurisdictions for the full year prior to the completion of the full year, changes in non-deductible expenses, jurisdictional mix of our income, non-recurring and impairment charges, as well as the actual amount of income (loss) before income taxes.  For example, the impact of non-deductible expenses on the effective tax rate is greater when income (loss) before income taxes is lower. To the extent there are fluctuations in any of these variables during any given period, the provision for income taxes will vary accordingly.

The Company recognized an income tax expense of $203,203 for the three months ended June 30, 2017, compared to $545,613 for the three months ended June 30, 2016.  The Company’s effective tax rate was (10.3)% for the three months ended June 30, 2017 compared to (60.8)% for the three months ended June 30, 2016. 

These changes in the effective tax rates were due to several factors but are primarily dependent on the pre-tax income or loss and discrete items of the applicable periods. For the three months ended June 30, 2017 and June 30, 2016 the Company excluded jurisdictions with losses in which no benefit can be recognized from the effective tax rate calculation.

The Company recognized an income tax expense of $186,457 for the six months ended June 30, 2017, compared to $479,662 for the six months ended June 30, 2016.  The Company’s effective tax rate was (7.48)% for the six months ended June 30, 2017 compared to (6.6)% for the six months ended June 30, 2016. 

These changes in the effective tax rates were due to several factors but are primarily dependent on the pre-tax income or loss and discrete items of the applicable periods. For the six months ended June 30, 2017 and June 30, 2016the Company excluded jurisdictions with losses in which no benefit can be recognized from the effective tax rate calculation.


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Certain statements made or incorporated by reference in this report and our other filings with the Securities and Exchange Commission, in our press releases and in statements made by or with the approval of authorized personnel constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the

24



Securities Exchange Act of 1934, as amended, or the Exchange Act, and are subject to the safe harbor created thereby. Forward looking statements reflect intent, belief, current expectations, estimates or projections about, among other things, our industry, management’s beliefs, and future events and financial trends affecting us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward looking statements. Although we believe the expectations reflected in any forward looking statements are reasonable, such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward looking statements as a result of various factors. These differences can arise as a result of the risks described in the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, filed on April 5, 2017, as well as other factors that may affect our business, results of operations, or financial condition. Forward looking statements in this report speak only as of the date hereof, and forward looking statements in documents incorporated by reference speak only as of the date of those documents. Unless otherwise required by law, we undertake no obligation to publicly update or revise these forward looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward looking statements contained in this report will, in fact, transpire.
 
Overview
 
We are a global hospitality company that develops, owns and operates upscale, high-energy restaurants and lounges and provides turn-key food and beverage or services for hospitality venues including hotels, casinos and other high-end locations globally. We opened our first restaurant in January 2004 in New York City and as of August 14, 2017, we owned and operated (under lease agreements) 11, managed (under management agreements) 13 restaurants and lounges and licensed (under a licensing agreement) one restaurant, including 14 STKs in major metropolitan cities in the United States and Europe (of which eight are owned, five are managed and one is operated under a licensing agreement). In addition, we provided food and beverage services in six hotels and casinos, one of which is under a lease agreement and five of which are under separate management agreements. Our primary restaurant brand is STK, a steakhouse concept that features a high-energy, fun environment that encourages social interaction. STK restaurants are expected to open in San Diego in 2017 and in Austin in 2018. The lease for STK Boston was terminated in March 2017. The average unit volume, check average and beverage mix for STK restaurants that have been open a full twelve months at June 30, 2017 were $11.5 million, $110.05 and 42%, respectively.
 
In addition to operating stand-alone restaurants, we also operate turn-key food and beverage services at high-end hotels and casinos, which, in some cases, include upscale restaurants, such as STK. Our diversified portfolio of differentiated, high-energy food and beverage hospitality solutions provides landlords and owners a choice of having one or several of our concepts and/or services in their venues. These locations are typically operated under our management agreements under which we earn a management fee based on revenue and an incentive fee based on profitability of the underlying operations. We typically target food and beverage hospitality opportunities where we believe we can generate initially $500,000 to $750,000 of annual pre-tax income. We also own or manage a small number of other standalone restaurants and lounges.
 
Net loss for the six months ended June 30, 2017 was $2.8 million compared to a net loss for the six months ended June 30, 2016 of $2.0 million, and included a loss from discontinued operations of $106,372 and income from discontinued operations of $1,598 for the six months ended June 30, 2017 and 2016, respectively. Net loss for the three months ended June 30, 2017 was $2.2 million compared to net loss for the three months ended June 30, 2016 of $1.4 million. Results from discontinued operations were not significant in the three months ended June 30, 2017 and June 30, 2016. The income or loss from discontinued operations reflects our exiting of non-strategic and underperforming units during these periods and the results of operations during the wind down period.

Recent Developments

None.

Reemphasized Focus on Core Business
We previously announced that the Company had begun a process to explore and evaluate potential strategic alternatives in an effort to enhance stockholder value.   At this time, any exploration of and conversations regarding strategic alternatives, including a full or partial sale of the Company, have terminated, although the Company may continue to evaluate opportunities as they arise. Moving forward, the Company intends to focus on its core business model, with an emphasis on management and licensing opportunities, improving sales, labor and operational efficiencies, and reducing general and administrative costs.
 
Our Growth Strategies and Outlook

25



 
Our growth model is comprised of the following four primary drivers:
 
Expansion of STK. We have identified up to 50 additional major metropolitan markets globally where we could grow our STK brand over time. We expect to open as many as two to three STKs annually in the next three years primarily through licensing agreements, provided that we are able to identify prospective licensees, acceptable locations and quality restaurant managers available to support such growth. However, there can be no assurance that we will be able to open new STKs at the rate we currently expect or that our pipeline of planned offerings will be fully realized.
 
Expansion through New Food and Beverage Hospitality Projects. 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 food and beverage hospitality projects, which traditionally have provided fee income with minimal capital expenditures. We continue to receive significant inbound inquiries regarding new services in new hospitality opportunities globally and to work with existing hospitality clients to identify and develop additional opportunities in their venues. Going forward, we expect to target at least one to two new F&B hospitality projects every 12 months. However, we cannot control the timing and number of acceptable opportunities that will be offered to us for our consideration.
 
Expand Our Non-STK Concepts and Services. We believe our existing restaurant concepts and food and beverage hospitality services have significant room to grow and that our presence, brand recognition and operating performance from our continuing operations provide us with the ability to expand these concepts in the North American and international markets, with near term focus on Europe and in the longer term, Asia and the Middle East.
 
Increase Our Operating Efficiency. In addition to expanding into new cities and hospitality venues, we intend to increase revenue and profits in our existing operations, and we believe that we have adequate capital and resources available to allocate towards these operational initiatives. We expect same store sales to remain flat in 2017.  We also expect operating margin improvements as our restaurants and services mature. However, there can be no assurances that any increases in our operating margins will be achieved. Furthermore, as our footprint continues to increase in scale, we expect to benefit by leveraging system-wide operating efficiencies and best practices.
   
Key Performance Indicators
 
We use the following key performance indicators in evaluating our restaurants and assessing our business:
 
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 months after opening. However, operating costs during this initial 18 month 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 months after opening. Some new restaurants may experience a “honeymoon” period either shorter or longer than 18 months.
 
Average Check. Average check is calculated by dividing total restaurant sales by total entrees sold for a given time period. Our management team uses this indicator to analyze trends in customers’ preferences, effectiveness of menu changes and price increases, and per customer expenditures.
 
Average Comparable Unit Volume. Average comparable unit volume 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.
 
Comparable Unit Sales. We consider a unit to be comparable, whether owned or managed, in the first full quarter following the 18th month of operations to remove the impact of new unit openings in comparing the operations of existing units. Changes in comparable unit sales reflect changes in sales for the comparable group of units over a specified period of time. Changes in comparable sales reflect changes in customer count trends as well as changes in average check, which reflects both menu mix shifts and menu pricing. Our comparable unit base consisted of five units for the three months ended June 30, 2017. We believe that certain of our restaurants operate at or near their effective productive capacities. As a result, we may be unable to grow comparable restaurant sales at those restaurants.
 
Key Financial Terms and Metrics

26



 
We evaluate our business using a variety of key financial measures:
 
Segment reporting
 
We operate in three segments: owned STK units ("STKs"), food and beverage hospitality management agreements ("F&B") and Other concepts ("Other"). We believe STKs, F&B and Other to be our reportable segments as they do not have similar economic or other characteristics to be aggregated into a single reportable segment. Our STKs segment consists of leased restaurant locations and competes in the full service dining industry. Our F&B segment consists of management agreements in which we operate the F&B services in hotels, casinos and other high-end locations globally and includes an STK, which we refer to as managed STK units. We refer to owned STK units and managed STK units together as “STK units.” These management agreements generate management and incentive fees on net revenue at each location. Our Other segment includes owned non-STK leased locations.
 
Revenues
 
Owned unit net revenue. Owned unit net revenues, which includes STKs and Other segment brands, consists of food, beverage, and miscellaneous merchandise sales net of any discounts, such as management and employee meals, associated with each sale. As of June 30, 2017, beverage sales comprised 41% of STKs and Other food and beverage sales, before giving effect to any discounts, with food comprising the remaining 59%. This indicator assists management in understanding the trends in gross margins of the units.
 
Management incentive and license fee revenue. Management and incentive fee revenue includes: (1) management fees received pursuant to management agreements with hospitality clients that are calculated based on a fixed percentage of revenues; and (2) incentive fees based on operating profitability, as defined by each agreement. We evaluate the performance of our managed properties based on sales growth, which drives our management fee, and on improvements in operating profitability margins, which along with sales growth, drives incentive fee growth. License fee revenues include license fees received pursuant to license agreements with clients that are calculated based on a fixed percentage of revenues.
 
Our primary restaurant brand is STK and we specifically look at comparable revenues from both owned and managed STKs in either a leased or F&B location in order to understand customer count trends and changes in average check as it relates to our primary restaurant brand.
 
Cost and expenses
 
Food and beverage costs. Food and beverage costs include all unit-level food and beverage costs of STKs and Other units. We measure cost of goods as a percentage of owned unit net revenues. Food and beverage costs are generally influenced by the cost of food and beverage items, menu mix and discounting activity. Purchases of beef represent approximately 30% of our current food and beverage costs.
  
Unit operating expenses. We measure unit operating expenses for STKs and Other units as a percentage of owned unit net revenues. Unit operating expenses include the following:
 
Payroll and related expenses. Payroll and related expenses consists of manager salaries, hourly staff payroll and other payroll-related items, including taxes and fringe benefits. We measure our labor cost efficiency by tracking total labor costs as a percentage of food and beverage revenues.
 
Occupancy. Occupancy comprises all occupancy costs, consisting of both fixed and variable portions of 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 tracking occupancy as a percentage of revenues.
 
Direct operating expenses. Direct operating expenses consists of supplies, such as paper, smallwares, china, silverware and glassware, cleaning supplies and laundry and linen costs and typically tracks revenues.
 
Outside services. Outside services includes music and entertainment costs, such as the use of live DJ’s, promoter costs, security services, outside cleaning services at certain locations and commissions paid to event staff for banquet sales.
 

27



Repairs and maintenance. Repairs and maintenance consists of facility and computer maintenance contracts as well as general repair work to maintain the facilities. These costs will typically increase as the facility gets older.
 
Marketing. Marketing includes the cost of goods used specifically for complimentary purposes as well as general public relation costs related to the specific unit, but excluding any discounts such as management and employee meals. Marketing costs will typically be higher during the first 18 months of a unit’s operations.
 
General and administrative. General and administrative expenses are comprised of all corporate overhead expenses, including payroll and related benefits, professional fees, such as legal and accounting fees, insurance and travel expenses. Certain general and administrative expenses are allocated specifically to units and are credited and include shared services such as reservations, events and marketing. Although general and administrative expenses may grow as we grow, because of certain payroll needed to support our growth, such as legal, accounting and other professional fees incurred as a public company we expect to achieve certain leverage as we implement the capital light strategy.
 
Depreciation and amortization. Depreciation and amortization consists principally of charges related to the depreciation of fixed assets including leasehold improvements, equipment and furniture and fixtures.

Impairment of long lived assets. Long-lived assets are evaluated for impairment when facts and circumstances indicate that the carrying values of long-lived assets may not be recoverable. The impairment evaluation is generally performed at the individual venue asset group level. We first compare the carrying value of the asset to the asset’s estimated future undiscounted cash flows. If the estimated future cash flows are less than the carrying value of the asset, we measure an impairment loss based on the asset’s estimated fair value. The fair value of a venue’s assets is estimated using a discounted cash flow model based on internal projections and taking into consideration the view of a market participant. The estimate of cash flows is based on, among other things, certain assumptions about expected future operating performance. Factors considered during the impairment evaluation include factors related to actual operating cash flows, the period of time since a venue has been opened or remodeled and the maturity of the relevant market. Our estimates of cash flows used to assess impairment are subject to a high degree of judgment. If our estimates of future cash flows differ from actual cash flows due to, among other things, changes in economic conditions, changes to our business model or changes in operating performance, it would result in an adjustment to results of operations.
 
Management and royalty fees. In certain of our units, we pay outside third parties a management fee based on a percentage of sales or a fixed fee. Royalty fees are paid to the 50% owner of the trademark rights to the name “Asellina” and “Cucina Asellina.”
 
Pre-opening expenses. Pre-opening expenses consist of costs incurred prior to opening an owned or managed STK unit in either a leased or F&B location which are comprised principally of non-cash deferred rent expense, manager salaries and relocation costs, employee payroll and related training costs for new employees and lease costs incurred prior to opening. Pre-opening expenses vary 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.

Income of equity method investees. This represents the income or loss that we record under the equity method for entities that are not consolidated. Included in this amount is our ownership in Bagatelle New York for which we have effective ownership of approximately 51% representing 5.23% ownership directly by us and 45.90% ownership through two of our subsidiaries.
 
Provision for income taxes. We account for income taxes in accordance with Financial Accounting Standards Board ("FASB") ASC 740 “Accounting for Income Taxes.” Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis and net operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
 
Adjustments for noncontrolling interest. This represents the allocation of net income or loss attributable to the minority interest in those of our subsidiaries which are not wholly-owned.

Results of Operations
 

28



The following table sets forth certain statements of income data for the periods indicated:

 
Three Months Ended June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 

 
 

Owned unit net revenues
$
17,113,844

 
$
15,282,704

 
$
35,226,826

 
$
29,662,634

Management and incentive fee revenue (1)
2,784,659

 
1,943,952

 
5,098,375

 
3,958,003

Total revenue
19,898,503

 
17,226,656

 
40,325,201

 
33,620,637

 
 
 
 
 
 
 
 
Cost and expenses:
 
 
 
 
 

 
 

Owned operating expenses:
 
 
 
 
 

 
 

Food and beverage costs
4,381,150

 
3,778,797

 
9,055,211

 
7,307,550

Unit operating expenses
11,180,079

 
9,509,838

 
22,687,853

 
18,757,493

General and administrative
4,086,192

 
2,813,056

 
7,007,089

 
5,496,752

Depreciation and amortization
804,680

 
547,438

 
1,670,550

 
1,070,077

Lease termination expense

 

 
28,161

 

Pre-opening expenses
931,013

 
1,545,417

 
1,645,355

 
2,445,603

Transaction expenses
254,011

 
 
 
254,011

 
 
   Income of equity method investees
152,914

 
(231,203
)
 
107,603

 
(313,788
)
Derivative income

 

 

 
(100,000
)
Interest expense, net of interest income
220,183

 
99,314

 
479,173

 
197,483

Other (income) expense
(130,250
)
 
61,766

 
(118,302
)
 
286,800

 
 
 
 
 
 
 
 
Total costs and expenses
21,879,972

 
18,124,423

 
42,816,704

 
35,147,970

 
 
 
 
 
 
 
 
Loss from continuing operations before provision for income taxes
(1,981,469
)
 
(897,767
)
 
(2,491,503
)
 
(1,527,333
)
 
 
 
 
 
 
 
 
Provision for income tax
203,203

 
545,613

 
186,457

 
479,662

 
 
 
 
 
 
 
 
Loss from continuing operations
(2,184,672
)
 
(1,443,380
)
 
(2,677,960
)
 
(2,006,995
)
 
 
 
 
 
 
 
 
(Loss) income from discontinued operations, net of taxes
(142
)
 
(237
)
 
(106,372
)
 
1,598

 
 
 
 
 
 
 
 
Net loss
(2,184,814
)
 
(1,443,617
)
 
(2,784,332
)
 
(2,005,397
)
Less: net income (loss) attributable to noncontrolling interest
115,633

 
116,654

 
(82,119
)
 
11,777

 
 
 
 
 
 
 
 
Net loss attributable to The ONE Group Hospitality, Inc.
$
(2,300,447
)
 
$
(1,560,271
)
 
$
(2,702,213
)
 
(2,017,174
)
 
 
 
 
 
 
 
 
 Amounts attributable to The ONE Group Hospitality, Inc.:
 
 
 
 
 
 
 
Loss from continuing operations
(2,300,305
)
 
(1,560,034
)
 
(2,595,841
)
 
(2,018,772
)
 (Loss) income from discontinued operations, net of taxes
(142
)
 
(237
)
 
(106,372
)
 
1,598

 Net loss attributable to The ONE Group Hospitality, Inc.
$
(2,300,447
)
 
$
(1,560,271
)
 
(2,702,213
)
 
(2,017,174
)
 
 
 
 
 
 
 
 
 Net loss attributable to The ONE Group Hospitality, Inc.
(2,300,447
)
 
(1,560,271
)
 
(2,702,213
)
 
(2,017,174
)
 Other comprehensive income (loss)
 
 
 
 
 
 
 
 Currency translation adjustment
139,709

 
3,025

 
83,532

 
(18,380
)
 
 
 
 
 
 
 
 
 Comprehensive loss
$
(2,160,738
)
 
$
(1,557,246
)
 
$
(2,618,681
)
 
$
(2,035,554
)


29



(1) Such management and incentive fee revenue is based on a percentage of aggregate food and beverage sales at managed units which totaled $27,933,144 and $23,082,213 for the three months ended June 30, 2017 and 2016, and $51,388,324 and $43,928,429 for the six months ended June 30, 2017 and 2016, respectively.

The following table sets forth certain statements of income data as a percentage of revenues for the periods indicated:


30



 
Three Months Ended June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 

 
 

Owned unit net revenues
86.0
 %
 
88.7
 %
 
87.4
 %
 
88.2
 %
Management and incentive fee revenue
14.0
 %
 
11.3
 %
 
12.6
 %
 
11.8
 %
Total revenue
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
 
 
 
 
 
 
 
Cost and expenses:
 
 
 
 
 

 
 

Owned operating expenses:
 
 
 
 
 

 
 

Food and beverage costs (1)
25.6
 %
 
24.7
 %
 
25.7
 %
 
24.6
 %
Unit operating expenses (1)
65.3
 %
 
62.2
 %
 
64.4
 %
 
63.2
 %
General and administrative
23.9
 %
 
16.3
 %
 
19.9
 %
 
16.3
 %
Depreciation and amortization
4.7
 %
 
3.2
 %
 
4.7
 %
 
3.2
 %
Lease termination expense
 %
 
 %
 
 %
 
 %
Pre-opening expenses
5.4
 %
 
9.0
 %
 
4.7
 %
 
7.3
 %
   Income of equity method investees
0.9
 %
 
(1.3
)%
 
0.3
 %
 
(0.9
)%
Derivative income
 %
 
 %
 
 %
 
(0.3
)%
Interest expense, net of interest income
1.3
 %
 
6.0
 %
 
1.4
 %
 
0.6
 %
Other (income) expense
(0.8
)%
 
4.0
 %
 
(0.3
)%
 
0.9
 %
 
 
 
 
 
 
 
 
Total costs and expenses
127.8
 %
 
105.2
 %
 
106.2
 %
 
104.5
 %
 
 
 
 
 
 
 
 
Loss from continuing operations before provision for income taxes
(11.6
)%
 
(5.2
)%
 
(6.2
)%
 
(4.5
)%
 
 
 
 
 
 
 
 
Provision for income tax
1.2
 %
 
3.2
 %
 
0.5
 %
 
1.4
 %
 
 
 
 
 
 
 
 
Loss from continuing operations
(12.8
)%
 
(8.4
)%
 
(6.6
)%
 
(6.0
)%
 
 
 
 
 
 
 
 
(Loss) income from discontinued operations, net of taxes
 %
 
 %
 
(0.3
)%
 
 %
 
 
 
 
 
 
 
 
Net loss
(12.8
)%
 
(8.4
)%
 
(6.9
)%
 
(6.0
)%
Less: net income (loss) attributable to noncontrolling interest
0.7
 %
 
0.7
 %
 
(0.2
)%
 
 %
 
 
 
 
 
 
 
 
Net loss attributable to The ONE Group Hospitality, Inc.
(13.4
)%
 
(9.1
)%
 
(6.7
)%
 
(6.0
)%