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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2022

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.)

 

 

 

1624 Market Street, Suite 311, Denver, Colorado

 

80202

(Address of principal executive offices)

 

Zip Code

646-624-2400

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock

 

STKS

 

Nasdaq

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  

Accelerated filer  

Non-accelerated filer  

Smaller reporting company  

 

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No

Number of shares of common stock outstanding as of July 31, 2022: ­­­­­32,649,401

Table of Contents

TABLE OF CONTENTS

 

Page

PART I – Financial Information

 

Item 1. Financial Statements

3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 3. Quantitative and Qualitative Disclosures About Market Risk

26

Item 4. Controls and Procedures

26

 

 

PART II – Other Information

 

Item 1. Legal Proceedings

27

Item 1A Risk Factors

27

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

27

Item 6. Exhibits

28

 

 

Signatures

29

2

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

THE ONE GROUP HOSPITALITY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share information)

June 30, 

December 31, 

    

2022

2021

ASSETS

(Unaudited)

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

24,417

$

23,614

Accounts receivable

 

7,979

 

11,356

Inventory

 

4,732

 

3,915

Other current assets

 

2,281

 

3,666

Due from related parties

 

376

 

376

Total current assets

 

39,785

 

42,927

 

  

 

  

Property and equipment, net

 

77,213

 

69,638

Operating lease right-of-use assets

86,297

85,395

Deferred tax assets, net

 

11,727

 

12,313

Intangibles, net

15,284

15,505

Other assets

 

4,124

 

3,199

Security deposits

 

797

 

858

Total assets

$

235,227

$

229,835

 

  

 

  

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

12,278

$

11,094

Accrued expenses

 

18,698

 

23,155

Deferred license revenue

 

79

 

90

Deferred gift card revenue and other

 

1,545

 

2,029

Current portion of operating lease liabilities

5,914

5,396

Current portion of long-term debt

 

500

 

500

Total current liabilities

 

39,014

 

42,264

 

  

 

  

Deferred license revenue, long-term

 

258

 

298

Operating lease liabilities, net of current portion

104,464

103,616

Long-term debt, net of current portion

 

23,004

 

23,132

Total liabilities

 

166,740

 

169,310

 

  

 

  

Commitments and contingencies (Note 14)

 

  

 

  

 

  

 

  

Stockholders’ equity:

 

  

 

  

Common stock, $0.0001 par value, 75,000,000 shares authorized; 32,662,035 issued and 32,649,401 outstanding at June 30, 2022 and 32,138,396 issued and 32,125,762 outstanding at December 31, 2021

 

3

 

3

Preferred stock, $0.0001 par value, 10,000,000 shares authorized; no shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively

 

 

Treasury stock

 

(37)

 

(37)

Additional paid-in capital

 

53,743

 

53,481

Retained earnings

 

18,605

 

10,632

Accumulated other comprehensive loss

 

(2,906)

 

(2,645)

Total stockholders’ equity

 

69,408

 

61,434

Noncontrolling interests

 

(921)

 

(909)

Total equity

 

68,487

 

60,525

Total liabilities and equity

$

235,227

$

229,835

See notes to the condensed consolidated financial statements.

3

Table of Contents

THE ONE GROUP HOSPITALITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited, in thousands, except income per share and related share information)

For the three months ended June 30, 

For the six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

Revenues:

 

  

 

  

 

  

 

  

Owned restaurant net revenue

$

76,930

$

67,848

$

147,446

$

117,016

Management, license and incentive fee revenue

 

4,195

2,912

 

7,860

4,226

Total revenues

 

81,125

 

70,760

 

155,306

 

121,242

Cost and expenses:

 

  

 

  

 

  

 

  

Owned operating expenses:

 

  

 

  

 

  

 

  

Owned restaurant cost of sales

 

19,851

17,191

 

37,950

29,192

Owned restaurant operating expenses

 

44,309

35,336

 

83,682

63,242

Total owned operating expenses

 

64,160

 

52,527

 

121,632

 

92,434

General and administrative (including stock-based compensation of $911, $1,137, $1,790 and $2,159 for the three and six months ended June 30, 2022 and 2021, respectively)

 

7,261

6,139

 

14,140

11,313

Depreciation and amortization

 

2,926

2,495

 

5,641

5,194

COVID-19 related expenses

 

221

1,088

 

2,534

2,645

Agreement restructuring expenses

494

494

Pre-opening expenses

 

804

154

 

1,149

255

Lease termination expenses

107

255

294

Total costs and expenses

 

75,372

 

63,004

 

145,351

 

112,629

Operating income

 

5,753

 

7,756

 

9,955

 

8,613

Other expenses, net:

 

  

 

  

 

  

 

  

Interest expense, net

 

444

1,235

 

952

2,481

Gain on CARES Act Loan forgiveness

 

(8,561)

 

(8,561)

Total other expenses, net

 

444

 

(7,326)

 

952

 

(6,080)

Income before provision for income taxes

 

5,309

 

15,082

 

9,003

 

14,693

Provision for income taxes

 

869

973

 

1,042

644

Net income

 

4,440

 

14,109

 

7,961

 

14,049

Less: net income (loss) attributable to noncontrolling interest

 

137

273

 

(12)

143

Net income attributable to The One Group Hospitality, Inc.

$

4,303

$

13,836

$

7,973

$

13,906

Currency translation (loss) gain

 

(169)

8

 

(261)

(10)

Comprehensive income attributable to The ONE Group Hospitality, Inc.

$

4,134

$

13,844

$

7,712

$

13,896

 

  

 

  

 

  

 

  

Net income attributable to The ONE Group Hospitality, Inc. per share:

 

  

 

  

 

  

 

  

Basic net income per share

$

0.13

$

0.44

$

0.25

$

0.46

Diluted net income per share

$

0.13

$

0.41

$

0.23

$

0.41

 

  

 

  

 

  

 

  

Shares used in computing basic income per share

 

32,601,203

 

31,248,677

 

32,411,570

 

30,239,364

Shares used in computing diluted income per share

 

33,959,991

 

34,028,735

 

34,123,142

 

33,683,652

See notes to the condensed consolidated financial statements.

4

Table of Contents

THE ONE GROUP HOSPITALITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited, in thousands, except share information)

Accumulated

Additional

other

Common stock

Treasury

paid-in

Retained

comprehensive

Stockholders’

Noncontrolling

    

Shares

    

Par value

    

stock

capital

    

Earnings

    

loss

    

equity

    

interests

    

Total

Balance at December 31, 2021

 

32,125,762

$

3

$

(37)

$

53,481

$

10,632

$

(2,645)

$

61,434

$

(909)

$

60,525

Stock-based compensation

 

7,162

 

879

 

879

 

 

879

Issuance of vested restricted shares, net of tax withholding

 

127,413

 

(314)

 

(314)

 

 

(314)

Loss on foreign currency translation, net

 

 

(92)

 

(92)

 

 

(92)

Net income (loss)

 

 

3,670

 

3,670

 

(149)

 

3,521

Balance at March 31, 2022

 

32,260,337

$

3

$

(37)

$

54,046

$

14,302

$

(2,737)

$

65,577

$

(1,058)

$

64,519

Stock-based compensation

 

10,214

911

 

911

 

 

911

Exercise of stock options and warrants

 

13,261

28

 

28

 

 

28

Issuance of vested restricted shares, net of tax withholding

 

365,589

(1,242)

 

(1,242)

 

 

(1,242)

Loss on foreign currency translation, net

 

(169)

 

(169)

 

 

(169)

Net income

 

4,303

 

4,303

 

137

 

4,440

Balance at June 30, 2022

 

32,649,401

$

3

$

(37)

$

53,743

$

18,605

$

(2,906)

$

69,408

$

(921)

$

68,487

Balance at December 31, 2020

 

29,083,183

$

3

$

$

46,538

$

(20,716)

$

(2,646)

$

23,179

$

(1,200)

$

21,979

Stock-based compensation

 

25,643

 

1,022

 

1,022

 

 

1,022

Exercise of stock options and warrants

 

450,971

 

 

 

 

Issuance of vested restricted shares, net of tax withholding

 

67,685

 

(154)

 

(154)

 

 

(154)

Purchase of noncontrolling interest

 

 

116

 

116

 

(191)

 

(75)

Loss on foreign currency translation, net

 

 

(18)

 

(18)

 

 

(18)

Net income (loss)

 

 

70

 

70

 

(130)

 

(60)

Balance at March 31, 2021

 

29,627,482

$

3

$

$

47,522

$

(20,646)

$

(2,664)

$

24,215

$

(1,521)

$

22,694

Stock-based compensation

 

9,210

741

 

741

 

 

741

Exercise of stock options and warrants

 

931,558

3,151

 

3,151

 

 

3,151

Issuance of vested restricted shares, net of tax withholding

 

1,297,525

 

 

 

Gain on foreign currency translation, net

 

8

 

8

 

 

8

Net income

 

13,836

 

13,836

 

273

 

14,109

Balance at June 30, 2021

 

31,865,775

$

3

$

$

51,414

$

(6,810)

$

(2,656)

$

41,951

$

(1,248)

$

40,703

See notes to the condensed consolidated financial statements.

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THE ONE GROUP HOSPITALITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

For the six months ended June 30, 

    

2022

    

2021

Operating activities:

 

  

 

  

Net income

$

7,961

$

14,049

Adjustments to reconcile net income to net cash provided by operating activities:

 

  

 

  

Depreciation and amortization

 

5,641

 

5,194

Stock-based compensation

 

1,790

 

1,763

CARES Act loan forgiveness

 

 

(8,561)

Amortization of debt issuance costs

 

186

 

265

Deferred taxes

 

586

 

120

Changes in operating assets and liabilities:

 

 

  

Accounts receivable

 

3,436

 

(794)

Inventory

 

(817)

 

(181)

Other current assets

 

1,379

 

(210)

Security deposits

 

61

 

(26)

Other assets

 

(329)

 

(85)

Accounts payable

 

273

 

2,356

Accrued expenses

 

(5,154)

 

7,596

Operating lease liabilities and right-of-use assets

464

29

Deferred gift card and license revenue

 

(535)

 

(1,671)

Net cash provided by operating activities

 

14,942

 

19,844

 

  

 

  

Investing activities:

 

  

 

  

Purchase of property and equipment

 

(12,091)

 

(5,373)

Net cash used in investing activities

 

(12,091)

 

(5,373)

 

  

 

  

Financing activities:

 

  

 

  

Repayments of long-term debt

(250)

(321)

Debt issuance costs

(41)

Exercise of stock options and warrants

 

28

 

3,151

Tax-withholding obligation on stock-based compensation

 

(1,556)

 

(154)

Purchase of non-controlling interests

 

 

(75)

Net cash (used in) provided by financing activities

 

(1,778)

 

2,560

Effect of exchange rate changes on cash

 

(270)

 

(9)

Net increase in cash and cash equivalents

 

803

 

17,022

Cash and cash equivalents, beginning of period

 

23,614

 

24,385

Cash and cash equivalents, end of period

$

24,417

$

41,407

Supplemental disclosure of cash flow data:

 

  

 

  

Interest paid, net of capitalized interest

$

874

$

2,076

Income taxes paid

$

287

$

53

Non-cash CARES Act loan forgiveness

$

$

8,561

Accrued purchases of property and equipment

$

2,415

$

See notes to the condensed consolidated financial statements.

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THE ONE GROUP HOSPITALITY, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 – Summary of Business and Significant Accounting Policies

Summary of Business

The ONE Group Hospitality, Inc. and its subsidiaries (collectively, the “Company”) is a global restaurant company that develops, owns and operates, manages and licenses upscale and polished casual, high-energy restaurants and lounges and provides turn-key food and beverage (“F&B”) services and consulting services for hospitality venues including hotels, casinos and other high-end locations. Turn-key F&B services are food and beverage services that can be scaled, customized and implemented by the Company at a particular hospitality venue and customized for the client. The Company’s primary restaurant brands are STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse, and Kona Grill, a polished casual bar-centric grill concept featuring American favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere.

As of June 30, 2022, the Company owned, operated, managed, or licensed 59 venues, including 22 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and 13 F&B venues in seven hotels and casinos in the United States and Europe. For those restaurants and venues that are managed or licensed, the Company generates management fees based on top-line revenues and incentive fee revenue based on a percentage of the location’s revenues and profits.

COVID-19

The COVID-19 pandemic has significantly impacted our operations and financial results. The impact to our operations and financial results has been most notable in periods of accelerating COVID-19 case counts. In response to COVID-19, the Company has taken significant steps to adapt its business to increase sales while providing a safe environment for guests and employees. COVID-19 related expenses were $0.2 million and $2.5 million for the three and six months ended June 30, 2022, compared to $1.1 million and $2.6 million for the three and six months ended June 30, 2021, respectively, composed primarily of sanitation, supplies and safety precautions taken to prevent the spread of COVID-19. Currently, all restaurants are open for in-person dining. The continuation of normal dining operations is subject to events beyond the Company’s control, including the effectiveness of governmental efforts to halt the spread of COVID-19.

Basis of Presentation

The accompanying condensed consolidated balance sheet as of December 31, 2021, which has been derived from audited financial statements, and the accompanying unaudited interim condensed consolidated financial statements (“condensed consolidated financial statements”) of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States (“GAAP”). Certain information and footnote disclosures normally included in annual audited financial statements have been omitted pursuant to SEC rules and regulations. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

In the Company’s opinion, the accompanying unaudited interim financial statements reflect all adjustments (consisting only of normal recurring accruals and adjustments) necessary for a fair presentation of the results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of the results expected for the full year. Additionally, the Company believes that the disclosures are sufficient for interim financial reporting purposes.

Change in Accounting Estimate

Effective April 1, 2022, the Company changed its estimated useful life of the Kona Grill trade name. Based upon the strong performance of the Kona Grill restaurants over the past twelve months, significant capital investments in both existing and new restaurants and the Company’s commitment to expand the Kona Grill brand with the opening of new restaurants, the Company has determined that the Kona Grill trade name has an indefinite life rather than the twenty-year life previously determined. The Company currently has two Kona Grill venues under construction in Riverton, Utah and Columbus, Ohio and plans to open three to five Kona Grills each year for the foreseeable future. The effect of this change in estimate will reduce depreciation and amortization expense by $0.9 million annually, increase net income by $0.9 million annually, and increase basic and diluted earnings per share by approximately $0.03 annually based upon the number of shares outstanding as of June 30, 2022.

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As a result of the above change, the Company updated its accounting policy for Intangible Assets and will test for impairment annually on November 1st or on an interim basis if events or changes in circumstances between annual tests indicate a potential impairment.

Prior Period Reclassifications

Certain reclassifications of the 2021 amounts in the segment reporting footnote have been made to conform to the current year presentation.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB “) issued Accounting Standards Update (“ASU“) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to estimate credit losses. ASU 2016-13 is effective for smaller reporting companies for fiscal years beginning after December 15, 2022. The Company is currently evaluating ASU 2016-13 and assessing the impact on its financial statements.

Note 2 – Property and Equipment, net

Property and equipment, net consist of the following (in thousands):

June 30, 

December 31, 

2022

2021

Furniture, fixtures and equipment

$

26,569

$

24,942

Leasehold improvements

 

78,108

 

76,500

Less: accumulated depreciation

 

(43,229)

 

(39,425)

Subtotal

 

61,448

 

62,017

Construction in progress

 

13,453

 

5,374

Restaurant smallwares

 

2,312

 

2,247

Total

$

77,213

$

69,638

Depreciation related to property and equipment was $2.9 million and $2.3 million for the three months ended June 30, 2022 and 2021, respectively, and $5.4 million and $4.8 million for the six months ended June 30, 2022 and 2021, respectively. The Company does not depreciate construction in progress until such assets are placed into service.

Note 3 – Intangibles, net

Intangibles, net consists of the following (in thousands):

June 30, 

December 31, 

    

2022

    

2021

Indefinite-lived intangible assets

Kona Grill trade name

$

17,400

$

Finite-lived intangible assets

Kona Grill trade name

17,400

Other finite-lived intangible assets

66

66

Total finite-lived intangible assets

66

17,466

Less: accumulated amortization

 

(2,182)

 

(1,961)

Total intangibles, net

$

15,284

$

15,505

Finite-lived intangible assets are amortized using the straight-line method over their estimated useful life of 10 years. Amortization expense was nominal and $0.2 million for the three months ended June 30, 2022 and 2021, respectively. Amortization expense was $0.2 million and $0.4 million for the six months ended June 30, 2022 and 2021, respectively. The Company’s estimated aggregate amortization expense for each of the five succeeding fiscal years is a nominal amount annually. Refer to Note 1 regarding the change in accounting estimate of the Kona Grill trade name.

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Note 4 – Accrued Expenses

Accrued expenses consist of the following (in thousands):

June 30, 

December 31, 

2022

2021

Payroll and related (1)

$

6,896

 

$

6,554

Accrued lease exit costs (2)

4,913

VAT and sales taxes

2,276

 

3,477

Amounts due to landlords

2,433

1,847

Legal, professional and other services

 

1,030

458

Income taxes and related

180

Construction on new restaurants

 

622

 

359

Insurance

 

305

 

642

Interest

128

132

Other (3)

 

4,828

 

4,773

Total

$

18,698

$

23,155

(1)Payroll and related includes $1.2 million in employer payroll taxes for which payment has been deferred under the CARES Act as of June 30, 2022 and December 31, 2021, respectively.
(2)Amount relates to lease exit costs for 2016 leases for restaurants never built. All amounts have been paid as of June 30, 2022.
(3)Amount primarily relates to recurring restaurant operating expenses.

Note 5 – Long-Term Debt

Long-term debt consists of the following (in thousands):

June 30, 

December 31, 

2022

2021

Term loan agreements

$

24,500

$

24,750

Revolving credit facility

Total long-term debt

 

24,500

 

24,750

Less: current portion of long-term debt

 

(500)

 

(500)

Less: debt issuance costs

 

(996)

 

(1,118)

Total long-term debt, net of current portion

$

23,004

$

23,132

Interest expense for the Company’s debt arrangements, excluding the amortization of debt issuance costs and fees, was $0.4 million and $1.1 million for the three months ended June 30, 2022 and 2021, respectively, and $0.8 million and $2.2 million for the six months ended June 30, 2022 and 2021, respectively. Capitalized interest was $0.1 million for the three and six months ended June 30, 2022.

As of June 30, 2022, the Company had $1.4 million in standby letters of credit outstanding for certain restaurants and $10.6 million available in its revolving credit facility, subject to certain conditions.

Credit and Guaranty Agreement

On October 4, 2019, in conjunction with the acquisition of Kona Grill, the Company entered into a credit agreement with Goldman Sachs Bank USA (the “Credit Agreement”). On August 6, 2021, the Company entered into the Third Amendment to the Credit Agreement to extend the maturity date for both the term loan and revolving credit facility to August 2026, to eliminate all financial covenants except a maximum net leverage ratio of 2.00 to 1.00, and to eliminate restrictions on the maximum amount of capital expenditures, the maximum number of Company-owned new locations, and credit extensions under the revolving credit facility. As amended, the Credit Agreement provides for a secured revolving credit facility of $12.0 million and a $25.0 million term loan (reduced from $48.0 million). The term loan is payable in quarterly installments of $0.1 million, with the final payment due in August 2026.

The amended Credit Agreement has several borrowing and interest rate options, including the following: (a) a LIBOR rate (or a comparable successor rate) subject to a 1.00% floor from a 1.75% floor or (b) a base rate equal to the greatest of (i) the prime rate, (ii)

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the federal funds rate plus 0.50%, (iii) the LIBOR rate for a one-month period plus 1.00% or (iv) 4.00%. Loans under the amended Credit Agreement bear interest at a rate per annum using the applicable indices plus an interest rate margin of 5.00% from a variable interest rate margin of 5.75 to 6.75% (for LIBOR rate loans) and 4.00% from 4.75% to 5.75% (for base rate loans). Upon the cessation of LIBOR, the amended Credit Agreement provides for the use of a benchmark replacement as defined in the amended Credit Agreement.

In conjunction with the amended Credit Agreement, the Company made a pre-payment on the loan of $22.2 million and incurred $0.9 million in debt issuance costs. The Company accounted for the amendment as a debt modification with a partial extinguishment and recognized a loss on early debt extinguishment of $0.6 million for the year ended December 31, 2021 and $0.1 million in transaction costs.

The Company’s weighted average interest rate on the borrowings under the amended Credit Agreement as of June 30, 2022 and December 31, 2021 was 6.00%.

The Credit Agreement contains customary representations, warranties and conditions to borrowing including customary affirmative and negative covenants, which include covenants that limit or restrict the Company’s ability to incur indebtedness and other obligations, grant liens to secure obligations, make investments, merge or consolidate, alter the organizational structure of the Company and its subsidiaries, and dispose of assets outside the ordinary course of business, in each case subject to customary exceptions for credit facilities of this size and type.

The Company and certain operating subsidiaries of the Company guarantee the obligations under the amended Credit Agreement, which also are secured by liens on substantially all of the assets of the Company and its subsidiaries.

As of June 30, 2022, the Company had $1.0 million of debt issuance costs related to the amended Credit Agreement, which were capitalized and are recorded as a direct deduction to long-term debt and $0.5 million in debt issuance costs recorded in Other Assets on the condensed consolidated balance sheets. As of June 30, 2022, the Company was in compliance with the financial covenants required by the Credit Agreement.

Note 6 – Fair Value of Financial Instruments

Cash and cash equivalents, accounts receivable, inventory, accounts payable and accrued expenses are carried at cost, which approximates fair value due to their short maturities. Long-lived assets are measured and disclosed at fair value on a nonrecurring basis if an impairment is identified. There were no long-lived assets measured at fair value as of June 30, 2022.

The Company’s long-term debt, including the current portion, is carried at cost on the condensed consolidated balance sheets. Fair value of long-term debt, including the current portion, is valued using Level 2 inputs including current applicable rates for similar instruments and approximates the carrying value of such obligations.

Note 7 – Income taxes

Income taxes for the three and six months ended June 30, 2022 are recorded at the Company’s estimated annual effective income tax rate, subject to adjustments for discrete events, should they occur. The Company’s effective income tax rate including discrete events was 16.4% and 11.6% for the three and six months ended June 30, 2022 compared to 6.5% and 4.4% for the three and six months ended June 30, 2021. The Company’s annualized effective tax rate is estimated at approximately 19.0% for 2022. The Company’s projected annual effective tax rate differs from the statutory U.S. tax rate of 21% primarily due to the following: (i) tax credits for FICA taxes on certain employees’ tips (ii) taxes owed in foreign jurisdictions with tax rates that differ from the U.S. statutory rate; (iii) taxes owed in state and local jurisdictions; and (iv) the tax effect of non-deductible compensation. Income tax provision recorded for the six months ended June 30, 2022 and 2021 included the discrete period tax benefits resulting from the vesting of restricted stock units.

The CARES Act includes provisions allowing for the carryback of net operating losses generated for specific periods and technical amendments regarding the expensing of qualified improvement property. The CARES Act also allows for the deferral of the employer-paid portion of social security taxes, which the Company has elected to defer and will pay by December 31, 2022.

The Company is subject to U.S. federal, state, local and various foreign income taxes for the jurisdictions in which it operates. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant

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judgment to apply. In the normal course of business, the Company is subject to examination by the federal, state, local and foreign taxing authorities. There are no ongoing federal, state, local, or foreign tax examinations as of June 30, 2022.

Note 8 – Revenue from Contracts with Customers

The following table provides information about liabilities from contracts with customers, which include deferred license revenue, deferred gift card revenue, the Konavore rewards program and deposits from customers for future events (in thousands):

    

June 30, 

    

December 31, 

2022

2021

Deferred license revenue (1)

$

337

$

388

Deferred gift card and gift certificate revenue (2)

$

1,033

$

1,769

Advanced party deposits (2)

$

512

$

260

Konavore rewards program (3)

$

153

$

136

(1)Includes the current and long-term portion of deferred license revenue.
(2)Deferred gift card revenue and advance party deposits on goods and services yet to be provided are included in deferred gift card revenue and other on the condensed consolidated balance sheets.
(3)Konavore rewards program is included in accrued expenses on the condensed consolidated balance sheets.

Revenue recognized during the period from contract liabilities is as follows (in thousands):

    

June 30, 

    

June 30, 

2022

2021

Revenue recognized from deferred license revenue

$

40

$

105

Revenue recognized from deferred gift card revenue

$

1,196

$

958

Revenue recognized from advanced party deposits

$

198

$

60

The estimated deferred license revenue to be recognized in the future related to performance obligations that are unsatisfied as of June 30, 2022 were as follows for each year ending (in thousands):

2022, six months remaining

    

$

39

2023

 

79

2024

 

45

2025

 

44

2026

 

37

Thereafter

 

93

Total future estimated deferred license revenue

$

337

Note 9 – Leases

The components of lease expense for the six months ended June 30, 2022 and 2021 are as follows (in thousands):

June 30, 

 

June 30, 

 

2022

 

2021

 

Lease cost

Operating lease cost

 

$

7,317

 

$

6,621

Variable lease cost

5,597

2,622

Short-term lease cost

521

322

Total lease cost

 

$

13,435

 

$

9,565

Weighted average remaining lease term – operating leases

13 years

13 years

Weighted average discount rate – operating leases

8.40

%

8.49

%

Due to the negative effects of COVID-19, the Company implemented measures to reduce its costs, including negotiations with landlords regarding rent concessions. As the rent concessions received do not result in a significant increase in cash payments, the Company elected to account for these concessions as a variable lease payment in accordance with ASC Topic 842. The Company’s

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right-of-use assets and operating lease liabilities have not been remeasured for lease concessions received. Variable lease cost is comprised of percentage rent and common area maintenance, offset by rent concessions received as a result of COVID-19.

Supplemental cash flow information related to leases for the period was as follows (in thousands):

June 30, 

June 30, 

2022

2021

Cash paid for amounts included in the measurement of operating lease liabilities

 

$

6,531

 

$

5,682

Right-of-use assets obtained in exchange for operating lease obligations

 

$

3,709

 

$

34

As of June 30, 2022, maturities of the Company’s operating lease liabilities are as follows (in thousands):

2022, six months remaining

$

3,164

2023

15,164

2024

14,663

2025

13,705

2026

13,636

Thereafter

131,925

Total lease payments

192,257

Less: imputed interest

(81,879)

Present value of operating lease liabilities

 

$

110,378

Note 10 – Earnings Per Share

Basic earnings per share is computed using the weighted average number of common shares outstanding during the period and income available to common stockholders. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period plus the dilutive effect of potential shares of common stock including common stock issuable pursuant to stock options, warrants, and restricted stock units.

For the three and six months ended June 30, 2022 and 2021, the net income per share was calculated as follows (in thousands, except net income per share and related share data):

Three months ended June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

Net income attributable to The One Group Hospitality, Inc.

$

4,303

$

13,836

$

7,973

$

13,906

 

  

 

  

 

  

 

Basic weighted average shares outstanding

 

32,601,203

 

31,248,677

 

32,411,570

 

30,239,364

Dilutive effect of stock options, warrants and restricted share units

 

1,358,788

 

2,780,058

 

1,711,572

 

3,444,288

Diluted weighted average shares outstanding

 

33,959,991

 

34,028,735

 

34,123,142

 

33,683,652

 

  

 

  

 

  

 

  

Net income available to common stockholders per share - Basic

$

0.13

$

0.44

$

0.25

$

0.46

Net income available to common stockholders per share - Diluted

$

0.13

$

0.41

$

0.23

$

0.41

For the six months ended June 30, 2022 and 2021, zero and 0.1 million stock options, warrants and restricted share units, respectively, were determined to be anti-dilutive and were therefore excluded from the calculation of diluted earnings per share, respectively.

Note 11 – Stock-Based Compensation and Warrants

At the 2022 Annual Meeting of Shareholders, the Company’s shareholders approved a 4,500,000 increase in the number of shares available for issuance under the 2019 Equity Plan. As of June 30, 2022, the Company had 4,407,088 shares available for issuance under the 2019 Equity Incentive Plan (“2019 Equity Plan”).

Stock-based compensation cost for the three months ended June 30, 2022 and 2021 was $0.9 million and $1.1 million, respectively, and $1.8 million and $2.2 million for the six months ended June 30, 2022 and 2021, respectively. Stock-based

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compensation is included in general and administrative expenses in the condensed consolidated statements of operations and comprehensive income. Included in stock-based compensation cost was $0.1 million and $0.2 million of stock granted to directors for both the three and six months ended June 30, 2022 and 2021, respectively. Such grants were awarded consistent with the Board of Director’s compensation practices. Stock-based compensation expense for the six months ended June 30, 2021 included $0.3 million of compensation costs for the vesting of market condition based options and RSUs.

Stock Option Activity

Stock options in the table below include both time based and market condition based awards. Changes in stock options during the six months ended June 30, 2022 were as follows:

Weighted

Weighted

average

Intrinsic

average exercise

remaining

value

    

Shares

    

price

    

contractual life

    

(thousands)

Outstanding at December 31, 2021

 

1,252,352

$

3.36

 

3.92 years

$

11,581

Exercisable at December 31, 2021

 

1,126,685

$

3.48

 

3.72 years

$

10,283

Granted

 

$

 

  

 

  

Exercised

 

(13,261)

$

2.13

 

  

 

  

Cancelled, expired or forfeited

 

$

 

  

 

  

Outstanding at June 30, 2022

 

1,239,091

$

3.38

 

3.41 years

$

4,912

Exercisable at June 30, 2022

 

1,239,091

$

3.38

 

3.41 years

$

4,912

A summary of the status of the Company’s non-vested stock options as of June 30, 2022 and changes during the six months then ended, is presented below:

Weighted average

    

Shares

    

grant date fair value

Non-vested stock options at December 31, 2021

 

125,667

$

1.00

Vested

 

(125,667)

 

1.00

Non-vested stock options at June 30, 2022

 

$

The fair value of options that vested in the six months ended June 30, 2022 was $0.1 million. As of June 30, 2022, all outstanding stock options have vested.

Restricted Stock Unit Activity

The Company issues restricted stock units (“RSUs”) under the 2019 Equity Plan. The fair value of these RSUs is determined based upon the closing fair market value of the Company’s common stock on the grant date.

A summary of the status of RSUs and changes during the six months ended June 30, 2022 is presented below:

Weighted average

    

Shares

    

grant date fair value

Non-vested RSUs at December 31, 2021

 

1,690,010

$

4.98

Granted

 

316,147

 

9.61

Vested

 

(597,281)

 

2.55

Cancelled, expired or forfeited

 

(79,987)

 

5.99

Non-vested RSUs at June 30, 2022

 

1,328,889

$

7.11

As of June 30, 2022, the Company had approximately $8.1 million of total unrecognized compensation costs related to RSUs, which will be recognized over a weighted average period of 2.6 years.

Warrants

As of June 30, 2022 and December 31, 2021, there were outstanding warrants to purchase 125,000 shares of common stock at an exercise price of $1.63.

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Note 12 – Segment Reporting

The Company has identified its reportable operating segments as follows:

STK. The STK segment consists of the results of operations from STK restaurant locations, competing in the full-service dining industry, as well as management, license and incentive fee revenue generated from the STK brand and pre-opening expenses associated with new restaurants under development.
Kona Grill. The Kona Grill segment includes the results of operations of Kona Grill restaurant locations and pre-opening expenses associated with new restaurants under development.
ONE Hospitality. The ONE Hospitality segment is composed of the management, license and incentive fee revenue and results of operations generated from the Company’s other brands and venue concepts, which include ANGEL, Bao Yum Heliot, Hideout, Marconi, Radio, and Rivershore Bar & Grill. Additionally, this segment includes the results of operations generated from F&B hospitality management agreements with hotels, casinos and other high-end locations.
Corporate. The Corporate segment consists of the following: general and administrative costs, stock-based compensation, lease termination expenses, transaction costs, COVID-19 related expenses and other income and expenses. This segment also includes STK Meat Market, an e-commerce platform that offers signature steak cuts nationwide, the Company’s major off-site events group, which supports all brands and venue concepts, and revenue generated from gift card programs. The Corporate segment’s total assets primarily include cash and cash equivalents, the Kona Grill tradename, and deferred tax assets.

The Company’s Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (“CODM”), manages the business and allocates resources via a combination of restaurant sales reports and operating segment profit information, defined as revenues less operating expenses, related to the Company’s four operating segments. In the second quarter of 2022, the Company changed its financial information regularly reviewed by the CODM to include all cash and cash equivalents, the Kona Grill tradename and deferred tax assets in the Corporate segment. Previously, certain cash amounts were included in the STK and Kona Grill segments and the Kona Grill tradename and certain deferred tax assets were included in the Kona Grill segment. Fiscal 2021 figures have been reclassified for comparability.

Certain financial information relating to the three and six months ended June 30, 2022 and 2021 for each segment is provided below (in thousands).

    

STK

    

Kona Grill

    

ONE Hospitality

    

Corporate

    

Total

For the three months ended June 30, 2022

Total revenues

 

$

47,019

33,475

514

117

81,125

Operating income (loss)

$

11,213

1,798

170

(7,428)

5,753

Capital asset additions

$

5,055

1,465

16

1,105

7,641

For the six months ended June 30, 2022

Total revenues

 

$

89,518

64,687

857

244

155,306

Operating income (loss)

$

21,931

4,835

161

(16,972)

9,955

Capital asset additions

$

7,334

3,268

53

1,436

12,091

As of June 30, 2022

Total assets

$

98,389

71,786

5,377

59,675

235,227

STK

    

Kona Grill

    

ONE Hospitality

    

Corporate

    

Total

For the three months ended June 30, 2021

Total revenues

$

37,786

32,247

380

347

70,760

Operating income (loss)

$

10,809

4,416

(66)

(7,403)

7,756

Capital asset additions

$

1,749

375

58

576

2,758

For the six months ended June 30, 2021

Total revenues

$

62,477

57,824

413

528

121,242

Operating income (loss)

$

16,406

6,866

(184)

(14,475)

8,613

Capital asset additions

$

3,225

904

73

1,171

5,373

As of December 31, 2021

Total assets

$

95,579

69,006

5,735

59,515

229,835

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Note 13 – Geographic Information

Certain financial information by geographic location is provided below (in thousands).

For the three months ended June 30, 

For the six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

Domestic revenues

 

$

79,592

 

$

69,910

 

$

152,736

 

$

120,198

International revenues

 

1,533

 

850

 

2,570

 

1,044

Total revenues

$

81,125

$

70,760

$

155,306

$

121,242

June 30, 

December 31, 

2022

2021

Domestic long-lived assets

 

$

194,777

 

$

185,718

International long-lived assets

 

665

 

1,190

Total long-lived assets

$

195,442

$

186,908

Note 14 – Commitments and Contingencies

The Company is party to claims in lawsuits incidental to its business, including lease disputes and employee-related matters. The Company has recorded accruals in its consolidated financial statements in accordance with ASC 450, Contingencies. While the resolution of a lawsuit, proceeding or claim may have an impact on the Company’s financial results for the period in which it is resolved, in the opinion of management, the ultimate outcome of such matters and judgements in which the Company is currently involved, either individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q and certain information incorporated herein by reference contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). Forward-looking statements speak only as of the date thereof and involve risks and uncertainties that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. These risk and uncertainties include the risk factors discussed under Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. A number of factors could cause actual results or outcomes to differ materially from those indicated by such forward-looking statements, including but not limited to: (1) the effects of the COVID-19 pandemic on our business, including government restrictions on our ability to operate our restaurants and changes in customer behavior; (2) our ability to open new restaurants and food and beverage locations in current and additional markets, grow and manage growth profitably, maintain relationships with suppliers and obtain adequate supply of products and retain our key employees; (3) factors beyond our control that affect the number and timing of new restaurant openings, including weather conditions and factors under the control of landlords, contractors and regulatory and/or licensing authorities; (4) our ability to successfully improve performance and cost, realize the benefits of our marketing efforts and achieve improved results as we focus on developing new management and license deals; (5) changes in applicable laws or regulations; (6) the possibility that The ONE Group may be adversely affected by other economic, business, and/or competitive factors; and (7) other risks and uncertainties. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “ongoing,” “could,” “estimates,” “expects,” “intends,” “may,” “appears,” “suggests,” “future,” “likely,” “goal,” “plans,” “potential,” “projects,” “predicts,” “should,” “targets,” “would,” “will” and similar expressions that convey the uncertainty of future events or outcomes. You should not place undue reliance on any forward-looking statement. We do not undertake any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required under applicable law.

General

This information should be read in conjunction with the condensed consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

As used in this report, the terms “Company,” “we,” “our,” or “us,” refer to The ONE Group Hospitality, Inc. and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.

Business Summary

We are a global restaurant company that develops, owns and operates, manages and licenses upscale and polished casual, high-energy restaurants and lounges and provides turn-key food and beverage (“F&B”) services and consulting service for hospitality venues including hotels, casinos and other high-end locations. Turn-key F&B services are food and beverage services that can be scaled, customized and implemented by us for the client at a particular hospitality venue. Our vision is to be a global market leader in the hospitality industry by melding high-quality service, ambiance, high-energy and cuisine into one great experience that we refer to as “Vibe Dining”. We design all our restaurants, lounges and F&B services to create a social dining and high-energy entertainment experience within a destination location. We believe that this design and operating philosophy separates us from more traditional restaurant and foodservice competitors.

Our primary restaurant brands are STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse, and Kona Grill, a polished casual bar-centric grill concept featuring American favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere. Our F&B hospitality management services are marketed as ONE Hospitality and include developing, managing and operating restaurants, bars, rooftop lounges, pools, banqueting and catering facilities, private dining rooms, room service and mini bars tailored to the specific needs of high-end hotels and casinos. We also provide hospitality advisory and consulting services to certain clients. Our F&B hospitality clients operate global hospitality brands such as the W Hotel, ME Hotels, Hippodrome Casino, and Curio Collection by Hilton.

We opened our first restaurant in January 2004 in New York, New York, and, as of June 30, 2022, we owned, operated, managed or licensed 59 venues including 22 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and 13 F&B venues operated under ONE Hospitality in seven hotels and casinos throughout the United States and Europe. For

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those restaurants and venues that are managed or licensed, we generate management fee revenue based on top-line revenues and incentive fee revenue based on a percentage of the location’s revenues and net profits.

The table below reflects our venues by restaurant brand and geographic location as of June 30, 2022:

Venues

    

STK(1)

    

Kona Grill

    

ONE Hospitality(2)

    

Total

Domestic

 

  

 

  

 

  

 

  

Owned

 

11

 

24

 

2

 

37

Managed

 

2

 

 

1

 

3

Licensed

 

1

 

 

 

1

Total domestic

 

14

 

24

 

3

 

41

International

 

  

 

  

 

  

 

  

Owned

 

 

 

 

Managed

 

4

 

 

10

 

14

Licensed

 

4

 

 

 

4

Total international

 

8

 

 

10

 

18

Total venues

 

22

 

24

 

13

 

59

(1)Locations with an STK and STK Rooftop are considered one venue location. This includes the STK Rooftop in San Diego, CA, which is a licensed location.
(2)Includes concepts under the Company’s F&B hospitality management agreements and other venue brands such as ANGEL, Bao Yum, Heliot, Hideout, Marconi, Radio and Rivershore Bar & Grill.

Our Growth Strategies and Outlook

Our growth model is primarily driven by the following:

Expansion of our STK and Kona Grill Restaurants
Expansion through New F&B Hospitality Projects
Increase Same Store Sales and Increase Our Operating Efficiency
Acquisitions

We intend to open at least nine new venues in 2022. There are currently two Company-owned STK restaurants (San Francisco, CA and Dallas, TX), two Company-owned Kona Grill restaurants (Riverton, UT and Columbus, OH) and one managed STK restaurant (Stratford, UK) under development. In addition, in conjunction with REEF Kitchens, we plan to test and open three licensed units in Texas for takeout and delivery only. These units will feature offerings from our Kona Grill and Bao Yum concepts. As our footprint increases, we expect to benefit by leveraging system-wide operating efficiencies and best practices through the management of our general and administrative expenses as a percentage of overall revenue.

COVID-19

The COVID-19 pandemic has significantly impacted our operations and financial results. The impact to our operations and financial results has been most notable in periods of accelerating COVID-19 case counts. In response to COVID-19, we have taken significant steps to adapt our business to increase sales while providing a safe environment for guests and employees. COVID-19 related expenses were $0.2 million and $2.5 million for the three and six months ended June 30, 2022 compared to $1.1 million and $2.6 million for the three and six months ended June 30, 2021, respectively, composed primarily of sanitation, supplies and safety precautions taken to prevent the spread of COVID-19. Currently, all restaurants are open for in-person dining. The continuation of normal dining operations is subject to events beyond our control, including the effectiveness of governmental efforts to halt the spread of COVID-19.

In the first quarter of 2022, one of our licensees permanently closed an STK restaurant in Mexico City as a result of COVID-19.

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Executive Summary

Total revenues increased $10.4 million, or 14.6% to $81.1 million for the three months ended June 30, 2022 compared to $70.8 million for the three months ended June 30, 2021 primarily due to strong execution of our sales initiatives. Same store sales increased 12.8% in the second quarter of 2022 compared to the second quarter of 2021. STK same store sales increased 19.8% while Kona Grill same store sales increased 3.7%. On a three-year basis, same store sales for the second quarter of 2022 increased 53.5% compared to the second quarter of 2019; STK same store sales increased 81.9% while Kona Grill same store sales increased 27.6% reflecting the strong execution of our sales initiatives.

Restaurant operating profit decreased $2.6 million, or 16.7% to $12.8 million for the three months ended June 30, 2022 compared to $15.3 million for the three months ended June 30, 2021. Operating income decreased $2.0 million to $5.8 million for the three months ended June 30, 2022 compared to operating income of $7.8 million for the three months ended June 30, 2021.

Total revenues increased $34.1 million, or 28.1% to $155.3 million for the six months ended June 30, 2022 compared to $121.2 million for the six months ended June 30, 2021. Restaurant operating profit increased $1.2 million to $25.8 million for the six months ended June 30, 2022 compared to restaurant operating profit of $24.6 million for the six months ended June 30, 2021. For the six months ended June 30, 2022, operating income was $10.0 million compared to $8.6 million for the six months ended June 30, 2021.

Results of Operations

The following table sets forth certain statements of operations data for the periods indicated (in thousands):

For the three months ended June 30, 

For the six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

Revenues:

 

  

 

  

 

  

 

  

Owned restaurant net revenue

$

76,930

$

67,848

$

147,446

$

117,016

Management, license and incentive fee revenue

 

4,195

 

2,912

 

7,860

 

4,226

Total revenues

 

81,125

 

70,760

 

155,306

 

121,242

Cost and expenses:

 

  

 

  

 

  

 

  

Owned operating expenses:

 

  

 

  

 

  

 

  

Owned restaurant cost of sales

 

19,851

 

17,191

 

37,950

29,192

Owned restaurant operating expenses

 

44,309

 

35,336

 

83,682

 

63,242

Total owned operating expenses

 

64,160

 

52,527

 

121,632

 

92,434

General and administrative (including stock-based compensation of $911, $1,137, $1,790 and $2,159 for the three and six months ended June 30, 2022 and 2021, respectively)

 

7,261

 

6,139

 

14,140

11,313

Depreciation and amortization

 

2,926

 

2,495

 

5,641

5,194

COVID-19 related expenses

 

221

 

1,088

 

2,534

2,645

Agreement restructuring expenses

 

494

494

Pre-opening expenses

 

804

 

154

 

1,149

255

Lease termination expenses

 

107

255

294

Total costs and expenses

 

75,372

 

63,004

 

145,351

 

112,629

Operating income

 

5,753

 

7,756

 

9,955

 

8,613

Other expenses, net:

 

  

 

  

 

  

 

  

Interest expense, net

 

444

 

1,235

 

952

2,481

Gain on CARES Act Loan forgiveness

 

(8,561)

 

(8,561)

Total other expenses, net

 

444

 

(7,326)

 

952

 

(6,080)

Income before provision for income taxes

 

5,309

 

15,082

 

9,003

 

14,693

Provision for income taxes

 

869

 

973

 

1,042

 

644

Net income

 

4,440

 

14,109

 

7,961

 

14,049

Less: net income (loss) attributable to noncontrolling interest

 

137

 

273

 

(12)

 

143

Net income attributable to The One Group Hospitality, Inc.

$

4,303

$

13,836

$

7,973

$

13,906

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The following table sets forth certain statements of operations data as a percentage of total revenues for the periods indicated. Certain percentage amounts may not sum to total due to rounding.

For the three months ended June 30, 

For the six months ended June 30, 

    

2022

2021

    

2022

2021

Revenues:

  

  

Owned restaurant net revenue

 

94.8 %

95.9 %

 

94.9 %

96.5 %

Management, license and incentive fee revenue

 

5.2 %

4.1 %

 

5.1 %

3.5 %

Total revenues

 

100.0 %

100.0 %

 

100.0 %

100.0 %

Cost and expenses:

 

 

Owned operating expenses:

 

 

Owned restaurant cost of sales (1)

25.8 %

25.3 %

25.7 %

24.9 %

Owned restaurant operating expenses (1)

57.6 %

52.1 %

56.8 %

54.0 %

Total owned operating expenses (1)

83.4 %

77.4 %

82.5 %

79.0 %

General and administrative (including stock-based compensation of 1.1%, 1.6%, 1.2% and 1.8% for the three and six months ended June 30, 2022 and 2021, respectively)

 

9.0 %

8.7 %

 

9.1 %

9.3 %

Depreciation and amortization

 

3.6 %

3.5 %

 

3.6 %

4.3 %

COVID-19 related expenses

 

0.3 %

1.5 %

 

1.6 %

2.2 %

Agreement restructuring expenses

 

—%

0.7 %

 

—%

0.4 %

Pre-opening expenses

 

1.0 %

0.2 %

 

0.7 %

0.2 %

Lease termination expenses

 

—%

0.2 %

 

0.2 %

0.2 %

Total costs and expenses

 

92.9 %

89.0 %

 

93.6 %

92.9 %

Operating income

 

7.1 %

11.0 %

 

6.4 %

7.1 %

Other expenses, net:

 

 

Interest expense, net

 

0.5 %

1.7 %

 

0.6 %

2.0 %

Gain on CARES Act Loan forgiveness

 

—%

(12.1)%

 

—%

(7.1)%

Total other expenses, net

0.5 %

(10.4)%

0.6 %

(5.0)%

Income before provision for income taxes

 

6.5 %

21.3 %

 

5.8 %

12.1 %

Provision for income taxes

1.1 %

1.4 %

 

0.7 %

0.5 %

Net income

5.5 %

19.9 %

 

5.1 %

11.6 %

Less: net income (loss) attributable to noncontrolling interest

 

0.2 %

0.4 %

 

—%

0.1 %

Net income attributable to The One Group Hospitality, Inc.

 

5.3 %

19.6 %

 

5.1 %

11.5 %

(1)These expenses are being shown as a percentage of owned restaurant net revenue.

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The following tables show our operating results by segment for the periods indicated (in thousands).

    

STK

    

Kona Grill

    

ONE Hospitality

    

Corporate

    

Total

For the three months ended June 30, 2022

Total revenues

 

$

47,019

33,475

514

117

81,125

Operating income (loss)

$

11,213

1,798

170

(7,428)

5,753

Capital asset additions

$

5,055

1,465

16

1,105

7,641

For the six months ended June 30, 2022

Total revenues

 

$

89,518

64,687

857

244

155,306

Operating income (loss)

$

21,931

4,835

161

(16,972)

9,955

Capital asset additions

$

7,334

3,268

53

1,436

12,091

As of June 30, 2022

Total assets

$

98,389

71,786

5,377

59,675

235,227

STK

    

Kona Grill

    

ONE Hospitality

    

Corporate

    

Total

For the three months ended June 30, 2021

Total revenues

$

37,786

32,247

380

347

70,760

Operating income (loss)

$

10,809

4,416

(66)

(7,403)

7,756

Capital asset additions

$

1,749

375

58

576

2,758

For the six months ended June 30, 2021

Total revenues

$

62,477

57,824

413

528

121,242

Operating income (loss)

$

16,406

6,866

(184)

(14,475)

8,613

Capital asset additions

$

3,225

904

73

1,171

5,373

As of December 31, 2021

Total assets

$

95,579

69,006

5,735

59,515

229,835

EBITDA, Adjusted EBITDA and Restaurant Operating Profit are presented in this Quarterly Report on Form 10-Q to supplement other measures of financial performance. EBITDA, Adjusted EBITDA and Restaurant Operating Profit are not required by, or presented in accordance with, accounting principles generally accepted in the United States of America (“GAAP”). We define EBITDA as net income before interest expense, provision for income taxes and depreciation and amortization. We define Adjusted EBITDA as net income before interest expense, provision for income taxes, depreciation and amortization, non-cash rent expense, pre-opening expenses, lease termination expenses, stock-based compensation, COVID-19 related expenses and non-recurring gains and losses. Not all of the items defining Adjusted EBITDA occur in each reporting period but have been included in our definitions of these terms based on our historical activity. We define Restaurant Operating Profit as owned restaurant net revenue minus owned restaurant cost of sales and owned restaurant operating expenses.

We believe that EBITDA, Adjusted EBITDA and Restaurant Operating Profit are appropriate measures of our operating performance because they eliminate non-cash or non-recurring expenses that do not reflect our underlying business performance. We believe Restaurant Operating Profit is an important component of financial results because: (i) it is a widely used metric within the restaurant industry to evaluate restaurant-level productivity, efficiency, and performance, and (ii) we use Restaurant Operating Profit as a key metric to evaluate our restaurant financial performance compared to our competitors. We use these metrics to facilitate a comparison of our operating performance on a consistent basis from period to period, to analyze the factors and trends affecting our business and to evaluate the performance of our restaurants. Adjusted EBITDA has limitations as an analytical tool and our calculation of Adjusted EBITDA may not be comparable to that reported by other companies; accordingly, you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Adjusted EBITDA is a key measure used by management. Additionally, Adjusted EBITDA and Restaurant Operating Profit are frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We use Adjusted EBITDA and Restaurant Operating Profit, alongside other GAAP measures such as net income, to measure profitability, as a key profitability target in our budgets, and to compare our performance against that of peer companies despite possible differences in calculation.

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The following table presents a reconciliation of net income to EBITDA and Adjusted EBITDA for the periods indicated (in thousands):

For the three months ended June 30, 

For the six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

Net income attributable to The One Group Hospitality, Inc.

$

4,303

$

13,836

$

7,973

$

13,906

Net income (loss) attributable to noncontrolling interest

 

137

 

273

 

(12)

 

143

Net income

 

4,440

 

14,109

 

7,961

 

14,049

Interest expense, net

 

444

 

1,235

 

952

 

2,481

Provision for income taxes

 

869

 

973

 

1,042

 

644

Depreciation and amortization

 

2,926

 

2,495

 

5,641

 

5,194

EBITDA

 

8,679

 

18,812

 

15,596

 

22,368

COVID-19 related expenses

 

221

 

1,088

 

2,534

 

2,645

Agreement restructuring expenses

 

 

494

 

 

494

Stock-based compensation

 

911

 

1,137

 

1,790

 

2,159

Lease termination expense (1)

 

 

107

 

255

 

294

Non-cash rent expense (2)

 

(54)

 

(26)

(85)

 

(3)

Pre-opening expenses

804

154

1,149

255

Gain on CARES Act Loan forgiveness

 

 

(8,561)

 

(8,561)

Adjusted EBITDA

 

10,561

 

13,205

 

21,239

 

19,651

Adjusted EBITDA attributable to noncontrolling interest

 

211

 

333

 

133

 

281

Adjusted EBITDA attributable to The ONE Group Hospitality, Inc.

$

10,350

$

12,872

$

21,106

$

19,370

(1)Amount relates to lease exit costs for 2016 leases for restaurants never built. All amounts have been paid as of June 30, 2022.
(2)Non-cash rent expense is included in owned restaurant operating expenses and general and administrative expense on the condensed consolidated statements of operations and comprehensive income.

The following table presents a reconciliation of Operating income to Restaurant Operating Profit for the periods indicated (in thousands):

For the three months ended June 30, 

For the six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

Operating income as reported

$

5,753

$

7,756

$

9,955

$

8,613

Management, license and incentive fee revenue

 

(4,195)

(2,912)

(7,860)

(4,226)

General and administrative

 

7,261

6,139

14,140

11,313

Depreciation and amortization

 

2,926

2,495

5,641

5,194

COVID-19 related expenses

221

1,088

2,534

2,645

Agreement restructuring expenses

494

494

Pre-opening expenses

 

804

154

1,149

255

Lease termination expense

 

107

255

294

Restaurant Operating Profit

$

12,770

$

15,321

$

25,814

$

24,582

Restaurant Operating Profit as a percentage of owned restaurant net revenue

16.6%

22.6%

17.5%

21.0%

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Restaurant operating profit by brand is as follows (in thousands):

For the three months ended June 30, 

For the six months ended June 30, 

2022

    

2021

    

2022

    

2021

STK restaurant operating profit (Company owned)

9,469

9,672

18,282

15,149

STK restaurant operating profit (Company owned) as a percentage of STK revenue (Company owned)

21.9%

27.4%

22.2%

25.8%

Kona Grill restaurant operating profit

3,353

5,534

7,629

9,271

Kona Grill restaurant operating profit as a percentage of Kona Grill revenue

10.0%

17.2%

11.8%

16.0%

Results of Operations for the Three Months Ended June 30, 2022 and 2021

Revenues

Owned restaurant net revenue. Owned restaurant net revenue increased $9.1 million, or 13.4%, to $76.9 million for the three months ended June 30, 2022 from $67.8 million for the three months ended June 30, 2021. The increase was primarily attributable to strong execution of our sales initiatives. Comparable restaurant sales increased 12.8% for the second quarter of 2022 compared to the second quarter of 2021.

Management and license fee revenue. Management and license fee revenues increased $1.3 million, or 44.1% to $4.2 million for the three months ended June 30, 2022 from $2.9 million for the three months ended June 30, 2021. The increase was primarily attributable to local governments lifting stay at home orders and easing seating capacity restrictions in the markets in which we operate as well as a full three months of revenues from two managed STKs, one licensed STK and three managed F&B venues that opened during various months in 2021.

Cost and Expenses

Owned restaurant cost of sales. Food and beverage costs for owned restaurants increased $2.7 million, or 15.5%, to $19.9 million for the three months ended June 30, 2022 from $17.2 million for the three months ended June 30, 2021. The increase was due to the incremental sales increases. As a percentage of owned restaurant net revenue, cost of sales increased 50 basis points from 25.3% in the three months ended June 30, 2021 to 25.8% for the three months ended June 30, 2022 primarily due to increased commodity prices partly offset by operational cost reduction initiatives.

Owned restaurant operating expenses. Owned restaurant operating expenses increased $9.0 million to $44.3 million for the three months ended June 30, 2022 from $35.3 million for the three months ended June 30, 2021. Owned restaurant operating expenses as a percentage of owned restaurant net revenue increased 550 basis points from 52.1% for the three months ended June 30, 2021 to 57.6% for the three months ended June 30, 2022 primarily due to consolidated average wage increases and higher product costs at Kona Grill.

General and administrative. General and administrative costs increased $1.1 million, or 18.3%, to $7.3 million for the three months ended June 30, 2022 from $6.1 million for the three months ended June 30, 2021. The increase was attributable to increased activity as our restaurants generated strong average weekly sales, increased accounting fees and additional overhead required for growth. In addition, the Company experienced increased travel expenses due to rising hotel and airfare costs. As a percentage of revenues, general and administrative costs were 9.0% for the three months ended June 30, 2022 compared to 8.7% for the three months ended June 30, 2021.

Depreciation and amortization. Depreciation and amortization expense was $2.9 million and $2.5 million for the three months ended June 30, 2022 and 2021, respectively.

Pre-opening expenses. In the three months ended June 30, 2022, we incurred $0.8 million of pre-opening expenses primarily related to payroll, training and non-cash pre-open rent for STK Dallas, STK San Francisco, Kona Grill Riverton and Kona Grill Columbus which are currently under construction. Total pre-opening expenses related to non-cash pre-open rent was $0.2 million. Pre-opening expenses for the three months ended June 30, 2021 were $0.2 million.

COVID-19 related expenses. COVID-19 related expenses were $0.2 million for the three months ended June 30, 2022 compared to $1.1 million in the prior year period. COVID-19 related expenses are composed primarily of sanitation, supplies and safety precautions taken to prevent the spread of COVID-19.

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Interest expense, net. Interest expense, net of interest income was $0.4 million and $1.2 million for each of the three months ended June 30, 2022 and 2021, respectively. In conjunction with the amended Credit Agreement in August 2021, we made a $22.2 million pre-payment on the loan and reduced the interest rate on the loan.

Provision for income taxes. The provision for income taxes for the three months ended June 30, 2022 and 2021 was $0.9 million. and $1.0 million, respectively. We estimate our 2022 annualized effective tax rate will be 19.0%.

Net income (loss) attributable to noncontrolling interest. Net income attributable to noncontrolling interest was $0.1 million for the three months ended June 30, 2022 compared to $0.3 million for the three months ended June 30, 2021.

Results of Operations for the Six Months Ended June 30, 2022 and 2021

Revenues

Owned restaurant net revenue. Owned restaurant net revenue increased $30.4 million, or 26.0%, to $147.4 million for the six months ended June 30, 2022 from $117.0 million for the six months ended June 30, 2021. The increase was primarily attributable to strong execution of our sales initiatives. Comparable restaurant sales increased 26.3% in the first half of 2022.

Management and license fee revenue. Management and license fee revenues increased $3.6 million, or 86.0% to $7.9 million for the six months ended June 30, 2022 from $4.2 million for the six months ended June 30, 2021. The increase was primarily attributable to local governments lifting stay at home orders and easing seating capacity restrictions in the markets in which we operate as well as a full six months of revenues from two managed STKs, one licensed STK and three managed F&B venues that opened during various months in 2021.

Cost and Expenses

Owned restaurant cost of sales. Food and beverage costs for owned restaurants increased $8.8 million, or 30.0%, to $38.0 million for the six months ended June 30, 2022 from $29.2 million for the six months ended June 30, 2021. The increase was due to the incremental sales increases. As a percentage of owned restaurant net revenue, cost of sales increased 80 basis points from 24.9% in the six months ended June 30, 2021 to 25.7% for the six months ended June 30, 2022 primarily due to increased commodity prices partly offset by operational cost reduction initiatives.

Owned restaurant operating expenses. Owned restaurant operating expenses increased $20.5 million to $83.7 million for the six months ended June 30, 2022 from $63.2 million for the six months ended June 30, 2021. Owned restaurant operating expenses as a percentage of owned restaurant net revenue increased 280 basis points from 54.0% in the six months ended June 30, 2021 to 56.8% for the six months ended June 30, 2022 primarily due to consolidated average wage increases and higher product costs at Kona Grill.

General and administrative. General and administrative costs increased $2.8 million, or 25.0%, to $14.1 million for the six months ended June 30, 2022 from $11.3 million for the six months ended June 30, 2021. The increase was attributable to increased activity as our restaurants generated strong average weekly sales, increased accounting fees and additional overhead required for growth. In addition, the Company experienced increased travel expenses due to rising hotel and airfare costs. As a percentage of revenues, general and administrative costs were 9.1% for the six months ended June 30, 2022 compared to 9.3% for the six months ended June 30, 2021.

Depreciation and amortization. Depreciation and amortization expense was $5.6 million and $5.2 million for the six months ended June 30, 2022 and 2021, respectively.

Pre-opening expenses. In the six months ended June 30, 2022, we incurred $1.1 million of pre-opening expenses primarily related to payroll, training and non-cash pre-open rent for STK Dallas, STK San Francisco, Kona Grill Riverton, and Kona Grill Columbus which are currently under construction. Total pre-opening expenses related to non-cash pre-open rent was $0.5 million. Pre-opening expenses for the six months ended June 30, 2021 were $0.3 million.

COVID-19 related expenses. COVID-19 related expenses were $2.5 million for the six months ended June 30, 2022 compared to $2.6 million in the prior year period. COVID-19 related expenses are composed primarily of sanitation, supplies and safety precautions taken to prevent the spread of COVID-19.

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Interest expense, net. Interest expense, net was $1.0 million and $2.5 million for the six months ended June 30, 2022 and 2021, respectively. In conjunction with the amended Credit Agreement in August 2021, we made a $22.2 million pre-payment on the loan and reduced the interest rate on the loan.

Provision for income taxes. The provision for income taxes for the six months ended June 30, 2022 was $1.1 million compared to $0.6 million for the six months ended June 30, 2021. We estimate our 2022 annualized effective tax rate will be 19.0%.

Net income (loss) attributable to noncontrolling interest. Net loss attributable to noncontrolling interest was less than $0.1 million for the six months ended June 30, 2022 compared to net income of $0.1 million for the six months ended June 30, 2021.

Liquidity and Capital Resources

Executive Summary

Our principal liquidity requirements are to meet our lease obligations, working capital and capital expenditure needs and to pay principal and interest on outstanding debt. Subject to our operating performance, which, if significantly adversely affected, would adversely affect the availability of funds, we expect to finance our operations for at least the next 12 months, including the costs of opening currently planned new restaurants, through cash provided by operations and construction allowances provided by landlords of certain locations. We also may borrow on our revolving credit facility or issue equity to support ongoing business and fund additional expansion. We believe these sources of financing are adequate to support our immediate business operations and plans. As of June 30, 2022, we had cash and cash equivalents of $24.4 million and $24.5 million in long-term debt, which consisted of borrowings under our Credit Agreement. As of June 30, 2022, the availability on our revolving credit facility was $10.6 million, subject to certain conditions.

In the six months ended June 30, 2022, capital expenditures were $12.1 million of which $5.7 million related to the construction of new STK and Kona Grill restaurants and $6.3 million for existing restaurants. Our future cash requirements will depend on many factors, including the pace of expansion, conditions in the retail property development market, construction costs, the nature of the specific sites selected for new restaurants, and the nature of the specific leases and associated tenant improvement allowances available, if any, as negotiated with landlords.

Our operations have not required significant working capital, and, like many restaurant companies, we may have negative working capital during the year. Revenues are received primarily in credit card or cash receipts, and restaurant operations do not require significant receivables or inventories, other than our wine inventory. In addition, we receive trade credit for the purchase of food, beverages and supplies, thereby reducing the need for incremental working capital to support growth.

Credit Agreement

On October 4, 2019, in conjunction with the acquisition of Kona Grill, we entered into our Credit Agreement with Goldman Sachs Bank USA. On August 6, 2021, we entered into the Third Amendment to the Credit Agreement to extend the maturity date for both the term loan and revolving credit facility to August 2026, to eliminate all financial covenants except a maximum net leverage ratio of 2.00 to 1.00, and to eliminate restrictions on the maximum amount of capital expenditures, the maximum number of Company-owned new locations, and credit extensions under the revolving credit facility. As amended, the Credit Agreement provides for a secured revolving credit facility of $12.0 million and a $25.0 million term loan (reduced from $48.0 million). The term loan is payable in quarterly installments of $0.1 million, with the final payment due in August 2026.

The amended Credit Agreement has several borrowing and interest rate options, including the following: (a) a LIBOR rate (or a comparable successor rate) subject to a 1.00% floor from a 1.75% floor or (b) a base rate equal to the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50%, (iii) the LIBOR rate for a one-month period plus 1.00% or (iv) 4.00%. Loans under the amended Credit Agreement bear interest at a rate per annum using the applicable indices plus an interest rate margin of 5.00% from a variable interest rate margin of 5.75 to 6.75% (for LIBOR rate loans) and 4.00% from 4.75% to 5.75% (for base rate loans).

As of June 30, 2022, we were compliant with the covenants required by the amended Credit Agreement. Based on current projections, we believe that we would continue to comply with the covenants in the Credit Agreement, as amended, throughout the twelve months following the issuance of the financial statements.

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Refer to Note 5 and Note 14 to our condensed consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the terms of our long-term debt arrangements and information regarding our commitments and contingencies.

Capital Expenditures and Lease Arrangements

When we open new Company-owned restaurants, our capital expenditures for construction increase. For owned restaurants, where we build from a shell state, we have typically targeted an average cash investment of approximately $3.8 million for a 10,000 square-foot STK restaurant and anticipate approximately $2.5 million for an 8,000 square-foot Kona Grill restaurant, in each case, net of landlord contributions and excluding pre-opening costs. For STK locations where we may be the successor restaurant tenant, we anticipate total cash investment in the $2.0 million to $3.0 million range. Typical pre-opening costs, excluding non-cash rent, are $0.3 million to $0.5 million. In addition, some of our existing restaurants will require capital improvements to either maintain or improve the facilities. We may add seating or provide enclosures for outdoor space in the next twelve months for some of our locations, which we expect will increase revenues for those locations.

Our hospitality F&B venues typically require limited capital investment from us. Capital expenditures for these projects will primarily be funded by cash flows from operations depending upon the timing of these expenditures and cash availability.

We typically seek to lease our restaurant locations for periods of 10 to 20 years under operating lease arrangements, with a limited number of renewal options. Our rent structure varies, but our leases generally provide for the payment of both minimum and contingent rent based on sales, as well as other expenses related to the leases such as our pro-rata share of common area maintenance, property tax and insurance expenses. Many of our lease arrangements include the opportunity to secure tenant improvement allowances to partially offset the cost of developing and opening the related restaurants. Generally, landlords recover the cost of such allowances from increased minimum rents. However, there can be no assurance that such allowances will be available to us on each project that we select for development.

Cash Flows

The following table summarizes the statement of cash flows for the six months ended June 30, 2022 and 2021 (in thousands):

For the six months ended June 30, 

    

2022

    

2021

Net cash provided by (used in):

 

  

 

  

Operating activities

$

14,942

$

19,844

Investing activities

 

(12,091)

 

(5,373)

Financing activities

 

(1,778)

 

2,560

Effect of exchange rate changes on cash

 

(270)

 

(9)

Net increase in cash and cash equivalents

$

803

$

17,022

Operating Activities. Net cash provided by operating activities was $14.9 million for the six months ended June 30, 2022, compared to net cash provided by operating activities of $19.8 million for the six months ended June 30, 2021. For the six months ended June 30, 2022, net cash provided by operating activities was driven by strong net income from higher sales volumes and collection on accounts receivables partially offset by payments on accrued expenses including payments for lease settlements.

Investing Activities. Net cash used in investing activities for the six months ended June 30, 2022 was $12.1 million primarily for the construction of STK restaurants in Dallas, Texas and San Francisco, California, and Kona Grill restaurants in Riverton, Utah and Columbus, Ohio, as well as capital expenditures for existing restaurants compared to $5.4 million for the six months ended June 30, 2021.

Financing Activities. Net cash used in financing activities for the six months ended June 30, 2022 was $1.8 million of which $1.4 million was used to pay employee taxes for shares withheld upon the vesting of restricted stock units. Net cash provided by financing activities for the six months ended June 30, 2021 was $2.6 million primarily attributable to proceeds from the exercise of stock options and warrants.

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Recent Accounting Pronouncements

See Note 1 to our condensed consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for a detailed description of recent accounting pronouncements. We do not expect the recent accounting pronouncements discussed in Note 1 to have a significant impact on our consolidated financial position or results of operations.

Critical Accounting Estimates

In addition to the critical accounting estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, we have added a critical accounting estimate with respect to indefinite-lived intangible assets.

Indefinite-lived intangible assets are tested for impairment annually or on an interim basis if events or changes in circumstances between annual tests indicate a potential impairment. First, we determine if, based on qualitative factors, it is more likely than not that an impairment exists. Factors considered include, but are not limited to, historical financial performance, expected future cash flows, changes in management or key personnel, macroeconomic and industry conditions and the legal and regulatory environment. If the qualitative assessment indicates that it is more likely than not that an impairment exists, then a quantitative assessment is performed.

The quantitative assessments require the use of estimates and assumptions regarding future cash flows. Key assumptions include projected revenue growth and operating expenses, discount rates, royalty rates and other factors that could affect fair value or otherwise indicate potential impairment. These estimates are subjective, and our ability to realize future cash is affected by factors such as changes in economic conditions and operating performance. Changes in circumstances existing at the measurement date or at other times in the future, or in the estimates associated with management’s judgments and assumptions made in assessing the fair value of our trademarks, could result in an impairment loss of a portion or all of our trademarks.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

As a “smaller reporting company,” as defined in Item 10 of Regulation S-K, we are not required to provide this information.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as our controls are designed to do, and management necessarily applies its judgment in evaluating the risk and cost benefit relationship related to controls and procedures.

Our Chief Executive Officer and Chief Financial Officer, have reviewed the effectiveness of our disclosure controls and procedures as of June 30, 2022 and, based on this evaluation, have concluded that one material weakness remains in our internal control over financial reporting previously identified in Item 9A. “Controls and Procedures” of our 2021 Annual Report on Form 10-K, which related to identified deficiencies surrounding control design and operating effectiveness, and inappropriate application of technical accounting for certain transactions and disclosures. As such, our disclosure controls and procedures were not effective as of June 30, 2022. The material weakness did not result in a material misstatement of the consolidated financial statements.

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Remediation Efforts to Address the Material Weakness

Our remediation efforts previously identified in Item 9A. “Controls and Procedures” of our 2021 Annual Report on Form 10-K to address the identified material weaknesses are ongoing. During the first six months of 2022, we redesigned the control over the review of journal entries to ensure the appropriate level of segregation of duties. We completed our assessment of the redesigned journal entry control, which included both qualitative and quantitative design enhancements, to determine if it was designed and operating effectively. As a result of these actions, management has concluded that the material weakness associated with the review of journal entries has been remediated as of June 30, 2022.

We have implemented certain new or redesigned controls to address the other deficiencies as noted above, which in the aggregate, constituted a material weakness, as identified in the 2021 Annual Report. While we believe the steps taken to date will improve the effectiveness of our internal control over financial reporting, we are in the process of assessing these new or redesigned controls to determine if they are designed and operating effectively.

The material weakness which arose from other deficiencies in the aggregate cannot be considered remediated until applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. Accordingly, we will continue to monitor and evaluate the effectiveness of our internal control over financial reporting in the areas affected by the material weakness.

Changes in Internal Controls

Other than the ongoing steps being taken to implement the remediation plan described above and under Item 9A. “Controls and Procedures” in our 2021 Annual Report on Form 10-K , there have been no other changes in internal control over financial reporting that occurred during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

We are subject to claims common to our industry and in the ordinary course of our business. Companies in our industry, including us, have been and are subject to class action lawsuits, primarily regarding compliance with labor laws and regulations. Defending lawsuits requires significant management attention and financial resources and the outcome of any litigation is inherently uncertain. We believe that accrual and disclosure for these matters are adequately provided for in our consolidated financial statements. We do not believe the ultimate resolutions of these matters will have a material adverse effect on our consolidated financial position and results of operations. However, the resolution of lawsuits is difficult to predict. A significant increase in the number of these claims, or one or more successful claims under which we incur greater liabilities than is currently anticipated, could materially and adversely affect our consolidated financial statements.

Item 1A. Risk Factors.

There have been no material changes to the risk factors contained in Item 1A of our Form 10-K for the year ended December 31, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

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Item 6. Exhibits.

(a) Exhibits required by Item 601 of Regulation S-K.

Exhibit

 

Description

3.1

 

Amended and Restated Certificate of Incorporation (Incorporated by reference to Form 8-K filed on September 5, 2014).

3.2

 

Amended and Restated Bylaws (Incorporated by reference to Form 8-K filed on October 25, 2011).

31.1*

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002

31.2*

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002

32.1*

 

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes – Oxley Act of 2002, 18 U.S.C. Section 1350.

32.2*

 

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes – Oxley Act of 2002, 18 U.S.C. Section 1350.

101.CAL*

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*

 

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

101.INS*

 

Inline XBRL Instance Document

101.SCH*

 

Inline XBRL Taxonomy Extension Schema Document

104*

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: August 4, 2022

 

THE ONE GROUP HOSPITALITY, INC.

 

 

 

 

By:

/s/ Tyler Loy

 

 

Tyler Loy, Chief Financial Officer

29