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 September 30, 2020

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 October 31, 2020:  29,068,007


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

18

Item 3. Quantitative and Qualitative Disclosures About Market Risk

29

Item 4. Controls and Procedures

30

 

 

PART II – Other Information

 

Item 1. Legal Proceedings

30

Item 1A Risk Factors

30

Item 6. Exhibits

31

 

 

Signatures

32

2


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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

THE ONE GROUP HOSPITALITY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share information)

September 30, 

December 31, 

    

2020

2019

ASSETS

(Unaudited)

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

26,565

$

12,344

Accounts receivable

 

5,487

 

10,351

Inventory

 

2,256

 

3,058

Other current assets

 

1,346

 

1,047

Due from related parties

 

376

 

341

Total current assets

 

36,030

 

27,141

 

  

 

  

Property and equipment, net

 

66,641

 

70,483

Operating lease right-of-use assets

82,156

81,097

Deferred tax assets, net

 

12,023

 

7,751

Intangibles, net

16,530

17,183

Other assets

 

2,607

 

1,622

Security deposits

 

992

 

1,308

Total assets

$

216,979

$

206,585

 

  

 

  

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

7,722

$

8,274

Accrued expenses

 

11,410

 

11,198

Deferred license revenue

 

207

 

332

Deferred gift card revenue and other

 

2,081

 

3,183

Current portion of operating lease liabilities

4,596

4,397

Current portion of long-term debt

 

628

 

749

Total current liabilities

 

26,644

 

28,133

 

  

 

  

Deferred license revenue, long-term

 

1,005

 

1,036

Operating lease liabilities, net of current portion

99,849

98,278

CARES Act Loans

 

18,314

 

Long-term debt, net of current portion

 

45,060

 

45,226

Total liabilities

 

190,872

 

172,673

 

  

 

  

Commitments and contingencies

 

  

 

  

 

  

 

  

Stockholders’ equity:

 

  

 

  

Common stock, $0.0001 par value, 75,000,000 shares authorized; 29,030,846 and 28,603,829 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

 

3

 

3

Preferred stock, $0.0001 par value, 10,000,000 shares authorized; no shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

 

 

Additional paid-in capital

 

46,104

 

44,853

Accumulated deficit

 

(16,237)

 

(7,891)

Accumulated other comprehensive loss

 

(2,674)

 

(2,651)

Total stockholders’ equity

 

27,196

 

34,314

Noncontrolling interests

 

(1,089)

 

(402)

Total equity

 

26,107

 

33,912

Total liabilities and equity

$

216,979

$

206,585

See notes to the condensed consolidated financial statements.

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THE ONE GROUP HOSPITALITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

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

For the three months ended September 30, 

For the nine months ended September 30, 

  

2020

    

2019

    

2020

    

2019

Revenues:

 

  

 

  

 

  

 

  

Owned restaurant net revenue

$

37,822

$

19,185

$

92,908

$

60,221

Management, license and incentive fee revenue

 

1,745

2,921

 

4,042

8,260

Total revenues

 

39,567

 

22,106

 

96,950

 

68,481

Cost and expenses:

 

  

 

  

 

  

 

  

Owned operating expenses:

 

  

 

  

 

  

 

  

Owned restaurant cost of sales

 

9,091

4,921

 

23,378

15,466

Owned restaurant operating expenses

 

22,454

12,305

 

60,991

38,652

Total owned operating expenses

 

31,545

 

17,226

 

84,369

 

54,118

General and administrative (including stock-based compensation of $496, $338, $1,316, and $975 for the three and nine months ended September 30, 2020 and 2019 respectively)

 

3,400

2,352

 

9,235

7,706

Depreciation and amortization

 

2,655

1,103

 

7,605

3,049

Transaction and integration costs

 

358

 

1,109

510

COVID-19 related expenses

1,716

3,759

Lease termination expenses

 

185

252

 

453

393

Pre-opening expenses

 

45

 

45

545

Other income, net

 

1

40

 

(11)

(226)

Total costs and expenses

 

39,547

 

21,331

 

106,564

 

66,095

Operating income (loss)

 

20

 

775

 

(9,614)

 

2,386

Other expenses, net:

 

  

 

  

 

  

 

  

Interest expense, net of interest income

 

1,280

230

 

3,650

717

Loss on early debt extinguishment

 

 

437

Total other expenses, net

 

1,280

 

230

 

3,650

 

1,154

(Loss) income before (benefit) provision for income taxes

 

(1,260)

 

545

 

(13,264)

 

1,232

(Benefit) provision for income taxes

 

(350)

76

 

(4,231)

157

Net (loss) income

 

(910)

 

469

 

(9,033)

 

1,075

Less: net (loss) income attributable to noncontrolling interest

 

(35)

9

 

(687)

83

Net (loss) income attributable to The ONE Group Hospitality, Inc.

$

(875)

$

460

$

(8,346)

$

992

Currency translation gain (loss)

 

19

(40)

 

(23)

(329)

Comprehensive (loss) income attributable to The ONE Group Hospitality, Inc.

$

(856)

$

420

$

(8,369)

$

663

 

  

 

  

 

  

 

  

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

 

  

 

  

 

  

 

  

Basic net (loss) earnings per share

$

(0.03)

$

0.02

$

(0.29)

$

0.03

Diluted net (loss) earnings per share

$

(0.03)

$

0.02

$

(0.29)

$

0.03

 

  

 

  

 

  

 

  

Shares used in computing basic (loss) earnings per share

 

29,010,348

 

28,537,477

 

28,857,990

 

28,429,074

Shares used in computing diluted (loss) earnings per share

 

29,010,348

 

29,901,144

 

28,857,990

 

29,642,926

See notes to the condensed consolidated financial statements.

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THE ONE GROUP HOSPITALITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited, in thousands, except share information)

Accumulated

Additional

other

Common stock

paid-in

Accumulated

comprehensive

Stockholders’

Noncontrolling

    

Shares

    

Par value

    

capital

    

deficit

    

loss

    

equity

    

interests

    

Total

Balance at December 31, 2019

 

28,603,829

$

3

$

44,853

$

(7,891)

$

(2,651)

$

34,314

$

(402)

$

33,912

Stock-based compensation

 

69,327

 

 

338

 

 

 

338

 

 

338

Exercise of stock options

 

18,000

 

 

38

 

 

 

38

 

 

38

Issuance of common shares, net of tax withholding

 

116,644

 

 

 

 

 

 

 

Loss on foreign currency translation, net

 

 

 

 

 

(44)

 

(44)

 

 

(44)

Net loss

 

 

 

 

(4,599)

 

 

(4,599)

 

(274)

 

(4,873)

Balance at March 31, 2020

 

28,807,800

$

3

$

45,229

$

(12,490)

$

(2,695)

$

30,047

$

(676)

$

29,371

Stock-based compensation

 

58,929

 

 

482

 

 

 

482

 

 

482

Issuance of common shares, net of tax withholding

 

93,418

 

 

(90)

 

 

 

(90)

 

 

(90)

Gain on foreign currency translation, net

 

 

 

 

 

2

 

2

 

 

2

Net loss

 

 

 

 

(2,872)

 

(2,872)

 

(378)

 

(3,250)

Balance at June 30, 2020

 

28,960,147

$

3

$

45,621

$

(15,362)

$

(2,693)

$

27,569

$

(1,054)

$

26,515

Stock-based compensation

 

61,566

 

 

496

 

 

 

496

 

 

496

Issuance of common shares, net of tax withholding

 

9,133

 

 

(13)

 

 

 

(13)

 

 

(13)

Gain on foreign currency translation, net

 

 

 

 

 

19

 

19

 

 

19

Net loss

 

 

 

 

(875)

 

 

(875)

 

(35)

 

(910)

Balance at September 30, 2020

 

29,030,846

$

3

$

46,104

$

(16,237)

$

(2,674)

$

27,196

$

(1,089)

$

26,107

Balance at December 31, 2018

 

28,313,017

$

3

$

43,543

$

(28,722)

$

(2,310)

$

12,514

$

(452)

$

12,062

Stock-based compensation

 

 

 

181

 

 

 

181

 

 

181

Issuance of common shares, net of tax withholding

 

20,544

 

 

 

 

 

 

 

Loss on foreign currency translation, net

 

 

 

 

 

(160)

 

(160)

 

 

(160)

Net income (loss)

 

 

 

 

854

 

 

854

 

(85)

 

769

Balance at March 31, 2019

 

28,333,561

$

3

$

43,724

$

(27,868)

$

(2,470)

$

13,389

$

(537)

$

12,852

Stock-based compensation

 

 

 

456

 

 

 

456

 

 

456

Loss on foreign currency translation, net

 

 

 

 

 

(120)

 

(120)

 

 

(120)

Net loss (income)

 

 

 

 

(322)

 

 

(322)

 

159

 

(163)

Balance at June 30, 2019

 

28,333,561

$

3

$

44,180

$

(28,190)

$

(2,590)

$

13,403

$

(378)

$

13,025

Stock-based compensation

 

47,469

 

 

338

 

 

 

338

 

 

338

Exercise of stock options

 

30,000

 

 

66

 

 

 

66

 

 

66

Issuance of common shares, net of tax withholding

 

166,457

 

 

 

 

 

 

 

Loss on foreign currency translation, net

 

 

 

 

 

(49)

 

(49)

 

 

(49)

Net income

 

 

 

 

460

 

 

460

 

9

 

469

Balance at September 30, 2019

 

28,577,487

$

3

$

44,584

$

(27,730)

$

(2,639)

$

14,218

$

(369)

$

13,849

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 nine months ended September 30, 

    

2020

    

2019

Operating activities:

 

  

 

  

Net (loss) income

$

(9,033)

$

1,075

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

 

  

 

  

Depreciation and amortization

 

7,605

 

3,049

Stock-based compensation

 

1,316

 

975

Loss on early debt extinguishment

 

 

437

Amortization of discount on warrants and debt issuance costs

 

356

 

103

Deferred taxes

 

(4,272)

 

27

Changes in operating assets and liabilities:

 

 

  

Accounts receivable

 

4,567

 

908

Inventory

 

802

 

(198)

Other current assets

 

(299)

 

(332)

Due from related parties

 

(35)

 

(291)

Security deposits

 

315

 

1,271

Other assets

 

(986)

 

(13)

Accounts payable

 

(706)

 

(441)

Accrued expenses

 

241

 

(3,951)

Operating lease liabilities and right-of-use assets

710

489

Deferred gift card and license revenue

 

(1,256)

 

(130)

Net cash (used in) provided by operating activities

 

(675)

 

2,978

 

  

 

  

Investing activities:

 

  

 

  

Purchase of property and equipment

 

(2,660)

 

(3,509)

Net cash used in investing activities

 

(2,660)

 

(3,509)

 

  

 

  

Financing activities:

 

  

 

  

Proceeds from CARES Act Loans

 

18,314

 

Borrowings of long-term debt

 

 

14,750

Repayments of long-term debt

(592)

(11,543)

Repayments to related parties

(1,197)

Debt issuance costs

(50)

(734)

Exercise of stock options

 

38

 

66

Tax-withholding obligation on stock based compensation

 

(103)

 

Net cash provided by financing activities

 

17,607

 

1,342

Effect of exchange rate changes on cash

 

(51)

 

(357)

Net increase (decrease) in cash and cash equivalents

 

14,221

 

454

Cash and cash equivalents, beginning of period

 

12,344

 

1,592

Cash and cash equivalents, end of period

$

26,565

$

2,046

Supplemental disclosure of cash flow data:

 

  

 

  

Interest paid

$

2,871

$

779

Income taxes paid

 

253

 

193

Non-cash property and equipment additions

303

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 hospitality company that develops, owns and operates, manages and licenses upscale and polished casual, high-energy restaurants and lounges and provides turn-key food and beverage (“F&B”) services for hospitality venues including hotels, casinos and other high-end locations. Turn-key F&B services are food and beverage services that can be scaled, customized and implemented by the Company for the client at a particular hospitality venue. 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 bar-centric grill concept featuring American favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere.

As of September 30, 2020, the Company owned, operated, managed or licensed 55 venues, including 20 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and 11 F&B venues including 10 in five hotels and casinos in the United States and Europe.

On October 4, 2019, the Company acquired substantially all of the assets of Kona Grill Inc. and its affiliates (“Kona Grill”), which was composed of 24 domestic restaurants. The Company purchased the assets for a contractual price of $25.0 million plus approximately $1.5 million of consideration paid primarily for the apportionment of rent and utilities. The Company also assumed approximately $7.7 million in current liabilities. The Company has integrated Kona Grill by leveraging its corporate infrastructure, bar-business knowledge and unique Vibe Dining program, elevating the brand experience and driving improved performance. The results of operations of these restaurants are included in the Company’s condensed consolidated financial statements from the date of acquisition.

The following pro forma results of operations for the three and nine months ended September 30, 2019 have been prepared as though the acquisition occurred as of January 1, 2019. The pro forma financial information is not indicative of the results of operations that the Company would have attained had the acquisition occurred at the beginning of the periods presented, nor is the pro forma financial information indicative of the results of operations that may occur in the future. Amounts are in thousands, except earnings per share data.

Three months ended

Nine months ended

    

September 30, 2019

    

September 30, 2019

Total revenues

$

46,625

$

143,721

Net income attributable to The ONE Group Hospitality, Inc.

$

1,306

$

1,560

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

Basic net earnings per share

$

0.04

$

0.05

Diluted net earnings per share

$

0.04

$

0.05

COVID-19

The novel coronavirus (“COVID-19”) pandemic has significantly impacted the Company’s business, and public concerns about the spread of COVID-19 continue to be widespread. The Company experienced a significant reduction in guest traffic at its restaurants as a result of restrictions mandated by state and local governments and temporary closure of several restaurants and the shift in operations to provide only take-out and delivery service. Starting in May 2020, state and local governments began easing restrictions on stay-at-home orders. Currently, 34 of 36 domestic restaurants are open for outdoor dining or in-person dining with seating capacity restrictions. The Company has taken significant steps to adapt its business to increase sales while providing a safe environment for guests and employees, which resulted in a significant increase in revenues in the third quarter of 2020 compared to the second quarter of 2020.

In response to these conditions, and out of concern for its customers and partners, the Company has implemented enhanced safety measures and sanitation procedures to allow for in-person dining at its restaurants. As the Company navigates through the pandemic, it has also implemented measures to reduce its costs including the deferral of capital projects and negotiations with suppliers and landlords regarding deferral or abatement of payments.

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Given the ongoing uncertainty surrounding the effects of the COVID-19 pandemic, the Company cannot reasonably predict when its restaurants will be able to return to normal dining room operations. The Company expects that its results of operations could be materially and negatively affected by COVID-19 for the remainder of 2020. The Company’s resumption of normal dining operations is subject to events beyond its 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, 2019, which has been derived from audited financial statements, and the accompanying unaudited interim 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, 2019.

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.

Prior Period Reclassifications

Certain reclassifications of the 2019 financial statements amounts have been made to conform to the current year presentation. The Company has combined owned restaurant net revenues and owned food, beverage and other net revenues to be presented in total as owned restaurant net revenue. Additionally, the Company reclassified $0.5 million and $1.4 million of owned food, beverage and other expenses to owned restaurant cost of sales and $1.5 million and $5.1 million of owned food, beverage and other expenses to owned restaurant expenses on the accompanying condensed consolidated statements of operations and comprehensive (loss) income for the three and nine months ended September 30, 2019, respectively. Certain reclassifications were also made to conform the prior period segment reporting to the current year segment presentation. Refer to Note 13 – Segment Reporting for additional information regarding the Company’s reportable operating segments.

Recent Accounting Pronouncements

In June 2020, the American Institute of Certified Public Accountants in conjunction with the Financial Accounting Standards Board (“FASB”) developed Technical Question and Answer (“TQA”) 3200.18, “Borrower Accounting for a Forgivable Loan Received Under the Small Business Administration Paycheck Protection Program”, which is intended to provide clarification on how to account for loans received from the Paycheck Protection Program (“PPP”). TQA 3200.18 states that an entity may account for PPP loans under ASC 470, “Debt” or, if the entity is expected to meet PPP eligibility criteria and the PPP loan is expected to be forgiven, the entity may account for the loans under IAS 20, “Accounting for Government Grants and Disclosure of Government Assistance”. Although the Company anticipates forgiveness of the entire amount of the CARES Act Loans, no assurances can be provided that the Company will obtain forgiveness of the CARES Act Loans in whole or in part. Therefore, the Company has elected to account for PPP loan proceeds under ASC 470 as allowed by TQA 3200.18.

In December 2019, FASB issued Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” (“ASU 2019-12”) which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Accounting Standard Codification Topic 740, Income Taxes, and it clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for annual and interim periods beginning after December 15, 2020. The Company is evaluating the impact of the adoption of ASU 2019-12 on its financial statements but does not expect the adoption of ASU 2019-12 to be material.

In October 2018, the FASB issued ASU No. 2018-17, “Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities” (“ASU 2018-17”). ASU 2018-17 states that indirect interests held through related parties in common control arrangements should be considered on a proportional basis to determine whether fees paid to decision makers and service providers are variable interests. This is consistent with how indirect interests held through related parties under common control are considered for determining whether a reporting entity must consolidate a variable interest entity. ASU 2018-17 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. Entities are required to adopt the new guidance retrospectively with a cumulative adjustment to retained earnings at the beginning of the earliest period presented. The adoption of ASU 2018-17 did not have a material impact on the Company’s financial position, results of operations or cash flows.

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In August 2018, the FASB issued ASU No. 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract” (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs in cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. Entities can choose to adopt the new guidance prospectively or retrospectively. The adoption of ASU 2018-15 did not have a material impact on the Company’s financial position, results of operations or cash flows.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 eliminates, modifies and adds disclosure requirements for fair value measurements. The amendments in ASU 2018-13 are effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The adoption of ASU 2018-3 did not have a material impact on the Company’s disclosures of fair value measurement, which are included in Note 6 – Fair Value of Financial Instruments.

Note 2 – Property and Equipment, net

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

September 30, 

December 31, 

2020

2019

Furniture, fixtures and equipment

$

21,573

$

20,512

Leasehold improvements

 

71,269

 

69,925

Less: accumulated depreciation

 

(28,742)

 

(21,997)

Subtotal

 

64,100

 

68,440

Construction in progress

 

595

 

97

Restaurant smallwares

 

1,946

 

1,946

Total

$

66,641

$

70,483

Depreciation related to property and equipment was $2.5 million and $1.1 million for the three months ended September 30, 2020 and 2019, respectively, and $6.9 million and $3.0 million for the nine months ended September 30, 2020 and 2019, respectively. The Company does not depreciate construction in progress, assets not yet put into service or restaurant smallwares.

Note 3 – Intangibles, net

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

September 30, 

December 31, 

    

2020

    

2019

Kona Grill tradename

$

17,400

$

17,400

Less: accumulated amortization

 

(870)

 

(217)

Total intangibles, net

$

16,530

$

17,183

The Kona Grill trade name is amortized using the straight-line method over its estimated useful life of 20 years. Amortization expense was $0.2 million and $0.7 million for the three and nine months ending September 30, 2020. The Company’s estimated aggregate amortization expense for each of the five succeeding fiscal years is approximately $0.9 million annually.

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Note 4 – Accrued Expenses

Accrued expenses consist of the following (in thousands):

September 30, 

December 31, 

2020

2019

Payroll and related

$

4,517

 

$

4,519

Amounts due to landlords, including disputed rent amounts

2,727

1,956

VAT, sales and other taxes

1,075

 

1,488

Income taxes and related

489

547

Legal, professional and other services

 

459

1,103

Interest

428

2

Insurance

 

205

 

100

Other

 

1,510

 

1,483

Total

$

11,410

$

11,198

Note 5 – Long-Term Debt and CARES Act Loans

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

September 30, 

December 31, 

2020

2019

Term loan agreements

$

47,520

$

47,880

Revolving credit facility

Equipment financing agreements

 

148

 

380

Total long-term debt

 

47,668

 

48,260

Less: current portion of long-term debt

 

(628)

 

(749)

Less: debt issuance costs

 

(1,980)

 

(2,285)

Total long-term debt, net of current portion

$

45,060

$

45,226

Interest expense for all the Company’s debt arrangements, excluding the amortization of debt issuance costs and other discounts and fees, was approximately $1.2 million and $0.2 million for the three months ended September 30, 2020 and 2019 and $3.3 million and $0.6 million for the nine months ended September 30, 2020 and 2019, respectively.

As of September 30, 2020, the Company had $1.3 million in standby letters of credit outstanding for certain restaurants and $10.7 million available in its revolving credit facility, subject to certain conditions. As of December 31, 2019, the Company had $0.4 million of cash collateralized letters of credit, which are recorded as a component of security deposits on the condensed consolidated balance sheet.

Credit and Guaranty Agreement

On October 4, 2019, in conjunction with the acquisition of Kona Grill, the Company entered into a credit and guaranty agreement with Goldman Sachs Bank USA (“Credit Agreement”). The Credit Agreement provides for a secured revolving credit facility of $12.0 million and a $48.0 million term loan. The term loan is payable in quarterly installments, with the final payment due in October 2024. The revolving credit facility also matures in October 2024. Additionally, the Company’s consolidated adjusted EBITDA as defined by the Credit Agreement for determining covenant compliance includes pro forma adjustments for the annualization of the Kona Grill restaurant performance which includes results before the acquisition date.

On May 4, 2020, Goldman Sachs Bank USA (“GSB”), as administrative agent, collateral agent and lead arranger under the Credit Agreement, (1) consented to the CARES Act Loans described below and (2) agreed that the amount of the CARES Act Loans will not be counted toward the permitted amount of Consolidated Total Debt, as defined under the Credit Agreement, to the extent the amounts are retained as cash during the term of the CARES Act Loans in a segregated deposit account or used for purposes that are forgivable under the CARES Act, provided that the proceeds of the CARES Act Loans must be used only for “allowable uses” under the CARES Act (with at least 75% of the utilized proceeds to be used for purposes that result in the CARES Act Loans being eligible for forgiveness) or used for the repayment of the CARES Act Loans.

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On May 8, 2020 and August 10, 2020, GSB and the Company and certain of its subsidiaries amended the Credit Agreement to:

Eliminate testing of the fixed charge coverage ratio for the balance of 2020 and 2021;
For the purpose of testing, replace maximum “Leverage Ratio” with maximum “Net Leverage Ratio”. The maximum Net Leverage Ratio is (i) 2.85 to 1.00 as of the fiscal quarter ending September 30, 2020, (ii) 3.60 to 1.00 as of the fiscal quarter ending December 31, 2020, (iii) 3.10 to 1.00 as of the fiscal quarter ending March 31, 2021, (iv) 2.10 to 1.00 as of the fiscal quarters ending June 30, 2021 and September 30, 2021, and (v) 1.90 to 1.00 as of the fiscal quarter ending December 31, 2021. The Credit Agreement provides for a pro forma adjustment to reflect one full year of Kona Grill operations;
Reduce the maximum consolidated capital expenditures to $7,000,000 for 2020 and $7,000,000 for 2021; and
Require minimum “Consolidated Liquidity” of not less than $4,000,000 for the balance of 2020 and 2021 (from $1,500,000 for 2021).

A summary of the financial covenants under the Credit Agreement, as amended, is as follows:

The minimum consolidated fixed charge coverage ratio is (i) eliminated for the balance of 2020 and 2021; and (ii) 1.50 to 1.00 as of any fiscal quarter thereafter;
A maximum consolidated Net Leverage Ratio of (i) 2.85 to 1.00 as of the fiscal quarter ending September 30, 2020, (ii) 3.60 to 1.00 as of the fiscal quarter ending December 31, 2020, (iii) 3.10 to 1.00 as of the fiscal quarter ending March 31, 2021, (iv) 2.10 to 1.00 as of the fiscal quarters ending June 30, 2021 and September 30, 2021, (v) 1.90 to 1.00 as of the fiscal quarter ending December 31, 2021, and (vi) maximum consolidated Leverage Ratio of 1.50 to 1.00 as of the end of any fiscal quarter thereafter. For purposes of calculating this ratio for the first four quarters, the agreement provides for a pro forma adjustment to reflect one full year of Kona Grill operations. In addition, the consolidated net leverage ratio reduces the Company’s debt by its cash and cash equivalents. The consolidated leverage ratio has no such reductions;
Maximum consolidated capital expenditures not to exceed (i) $7,000,000 in each of 2020 and 2021, and (ii) $8,000,000 in every fiscal year thereafter; and,
Minimum consolidated liquidity of not less than (i) $4,000,000 for the remainder of 2020 and 2021, and (ii) $1,500,000 at any time thereafter.

The Company’s ability to borrow under its revolving credit facility is dependent on several factors. The Company’s total borrowings cannot exceed a leverage incurrence multiple of (i) 2.25 to 1.00 as of the fiscal quarters ending September 30, 2020 and December 31, 2020, (ii) 2.00 to 1.00 as of the fiscal quarter ending March 31, 2021, (iii) 1.75 to 1.00 as of the fiscal quarter ending June 30, 2021, (iv) 1.70 to 1.00 as of the fiscal quarter ending September 30, 2021, (v) 1.65 to 1.00 as of the fiscal quarter ending December 31, 2021, and (vi) 1.50 to 1.00 as of the end of any fiscal quarter thereafter. In addition, after giving effect to any new borrowings under the revolving credit facility, the Company’s cash and cash equivalents cannot exceed $4,000,000.

The Credit Agreement has several borrowing and interest rate options, including the following: (a) a LIBOR rate (or a comparable successor rate) subject to a 1.75% 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) 4.75%. Loans under the Credit Agreement bear interest at a rate per annum using the applicable indices plus a varying interest rate margin of between 5.75% and 6.75% (for LIBOR rate loans) and 4.75% and 5.75% (for base rate loans). The Company’s weighted average interest rate on the borrowings under the Credit Agreement as of September 30, 2020 and December 31, 2019 was 8.50% and 8.55%, respectively.

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

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

The Company has incurred approximately $2.5 million of debt issuance costs related to the Credit Agreement, which were capitalized and are recorded as a direct deduction to the long-term debt, net of current portion, on the condensed consolidated balance sheets. As of September 30, 2020, the Company was in compliance with the covenants required by the Credit Agreement.

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CARES Act Loans

On May 4, 2020, two subsidiaries of the Company entered into promissory notes (“CARES Act Loans”) with BBVA USA under the Paycheck Protection Program (“PPP”) created by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Repayment of the CARES Act Loans is guaranteed by the U.S. Small Business Administration (“SBA”). The ONE Group, LLC received a loan of $9.8 million related to the operations of STK restaurants, and Kona Grill Acquisition, LLC received a loan of $8.5 million related to the operation of Kona Grill restaurants.

The CARES Act Loans are scheduled to mature on April 28, 2022 and have a 1.00% interest rate and are subject to the terms and conditions applicable to PPP loans. Among other terms, BBVA USA may declare a default of the CARES Act Loans if the SBA disputes the validity of the guaranty of indebtedness, if a material adverse change occurs in the Company’s financial condition, or if BBVA USA believes the prospect of repayment of the CARES Act Loans or performance of obligations under the promissory notes is impaired. On an event of default, BBVA USA may declare principal and unpaid interest immediately due and payable, and it may charge default interest of 10%.

The CARES Act Loans are eligible for forgiveness if the proceeds are used for qualified purposes within a specified period and if at least 60% is spent on payroll costs. As of September 30, 2020, the Company has used all of the proceeds from the CARES Act Loans for qualified purposes in accordance with the CARES Act and SBA regulations, and these funds have supported the re-opening of in person dining and the return of approximately 3,000 furloughed employees to work. The Company anticipates forgiveness of the entire amount of the CARES Act Loans; however, no assurance can be provided that the Company will obtain forgiveness of the CARES Act Loans in whole or in part. Therefore, the Company has elected to classify the entire principal amount of the CARES Act Loans as long-term debt on the condensed consolidated balance sheet as of September 30, 2020.

Equipment Financing Agreements

On June 5, 2015 and August 16, 2016, the Company entered into financing agreements with Sterling National Bank for $1.0 million and $0.7 million, respectively, to purchase equipment for the STKs in Orlando, Chicago, San Diego, and Denver. Each of these financing agreements have five- year terms and bear interest at a rate of 5% per annum, payable in equal monthly installments.

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 September 30, 2020.

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 estimated based on Level 2 inputs, except the amount outstanding on the revolving credit facility for which the carrying value approximates fair value. Fair value is determined by discounting future cash flows using interest rates available for issuers with similar terms and maturities.

Note 7 – Investments in Bagatelle NY

As of September 30, 2020 and December 31, 2019, the Company owned interests in the following companies, which directly or indirectly operate a restaurant:

31.24% interest in Bagatelle NY LA Investors, LLC (“Bagatelle Investors”)
51.13% aggregate interest, held directly and indirectly through other entities, in Bagatelle Little West 12th, LLC (“Bagatelle NY”)

Bagatelle Investors is a holding company that has an interest in Bagatelle NY. The Company records its retained interests in Bagatelle Investors and Bagatelle NY as investments as the Company has determined that it does not have the ability to exercise significant influence over its investees, Bagatelle Investors and Bagatelle NY. As of September 30, 2020 and December 31, 2019, the Company has zero carrying value in these investments.

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Additionally, the Company has a management agreement with Bagatelle NY. Under this agreement, the Company did not record management fee revenue for the three months ended September 30, 2020 because the restaurant has remained closed since March 2020 and recorded less than $0.1 million of management fee revenue in the nine months ended September 30, 2020. The Company recorded $0.1 million of management fee revenue in the three months ended September 30, 2019, and $0.3 million for the nine months ended September 30, 2019.

Note 8 – Income taxes

The Company’s effective income tax rate was 32% for the nine months ended September 30, 2020 compared to 12.7% for the nine months ended September 30, 2019. 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 such as the United Kingdom, Canada and Italy; and, (iii) taxes owed in state and local jurisdictions.

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. The Company continues to evaluate the tax-related provisions under the CARES Act.

The Company is subject to income taxes in the U.S. federal jurisdiction, and the various states and local jurisdictions in which it operates. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In the normal course of business, the Company is subject to examination by the federal, state, local and foreign taxing authorities.

Note 9 – Revenue from contracts with customers

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

    

September 30, 

    

December 31, 

2020

2019

Receivables (1)

$

125

$

250

Deferred license revenue (2)

$

1,212

$

1,368

Deferred gift card and gift certificate revenue (3)

$

2,244

$

3,210

Konavore rewards program (4)

$

95

$

84


(1)Receivables are included in accounts receivable on the condensed consolidated balance sheets.
(2)Includes the current and long-term portion of deferred license revenue.
(3)Deferred gift card revenue is included in deferred gift card revenue and other on the condensed consolidated balance sheets.
(4)Konavore rewards program is included in accrued expenses on the condensed consolidated balance sheets.

Significant changes in deferred license revenue and deferred gift card revenue for the nine months ended September 30, 2020 and 2019 are as follows (in thousands):

    

September 30, 

    

September 30, 

2020

2019

Revenue recognized from deferred license revenue

$

154

$

148

Revenue recognized from deferred gift card revenue

$

1,173

$

707

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The estimated deferred license revenue to be recognized in the future related to performance obligations that are unsatisfied as of September 30, 2020 were as follows for each year ending (in thousands):

2020, three months remaining

    

$

52

2021

 

207

2022

 

180

2023

 

169

2024

 

134

Thereafter

 

470

Total future estimated deferred license revenue

$

1,212

Note 10 – Leases

The components of lease expense for the period were as follows (in thousands):

September 30, 

 

September 30, 

 

2020

 

2019

 

Lease cost

Operating lease cost

 

$

9,950

 

$

5,040

Variable lease cost

(415)

1,811

Short-term lease cost

315

273

Sublease income

(404)

(582)

Total lease cost

 

$

9,446

 

$

6,542

Weighted average remaining lease term – operating leases

12 years

14 years

Weighted average discount rate – operating leases

8.10

%

8.22

%

Due to the negative effects of COVID-19, the Company implemented measures to reduce its costs, including negotiations with landlords regarding rent concessions. The Company is in ongoing discussions with landlords regarding rent obligations, including deferrals, abatements, and/or restructuring of rent. As the rent concessions received and currently being contemplated do not result in a significant increase in cash payments, the Company has elected to account for these concessions as a variable lease payment in accordance with ASC Topic 842. The Company’s right-of-use assets and operating lease liabilities have not been remeasured for lease concessions received. Variable lease cost is comprised of percentage rent and common area maintenance, offset by rent concessions received as a result of COVID-19.

The Company has entered into an operating lease for a future restaurant in Bellevue, Washington that had not commenced as of September 30, 2020. The aggregate future commitment related to this lease totals $4.8 million. The Company expects this lease, which will have a lease term of 11 years, to commence within the next twelve months.

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

September 30, 

September 30, 

2020

2019

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

 

$

6,263

 

$

5,212

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

 

$

4,968

 

$

1,076

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As of September 30, 2020, maturities of the Company’s operating lease liabilities are as follows (in thousands):

2020, three months remaining

$

3,315

2021

13,220

2022

13,228

2023

13,524

2024

12,927

Thereafter

124,760

Total lease payments

180,974

Less: imputed interest

(76,529)

Present value of operating lease liabilities

 

$

104,445

For the three months remaining in 2020, the Company’s operating lease liabilities does not include future rent abatements that have been or will be negotiated with landlords.

Note 11 – (Loss) earnings per share

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

For the three and nine months ended September 30, 2020 and 2019, the (loss) earnings per share was calculated as follows (in thousands, except earnings per share and related share data):

Three months ended September 30, 

Nine months ended September 30, 

    

2020

    

2019

    

2020

    

2019

Net (loss) income attributable to The ONE Group Hospitality, Inc.

$

(875)

$

460

$

(8,346)

$

992

 

  

 

  

 

  

 

Basic weighted average shares outstanding

 

29,010,348

 

28,537,477

 

28,857,990

 

28,429,074

Dilutive effect of stock options, warrants and restricted share units

 

 

1,363,667

 

 

1,213,852

Diluted weighted average shares outstanding

 

29,010,348

 

29,901,144

 

28,857,990

 

29,642,926

 

  

 

  

 

  

 

  

Net (loss) earnings available to common stockholders per share - Basic

$

(0.03)

 

0.02

$

(0.29)

$

0.03

Net (loss) earnings available to common stockholders per share - Diluted

$

(0.03)

$

0.02

$

(0.29)

$

0.03

For the nine months ended September 30, 2020 and 2019, 1.4 million and 1.0 million stock options, warrants and restricted share units were determined to be anti-dilutive and were therefore excluded from the calculation of diluted earnings per share, respectively.

Note 12 – Stock-Based Compensation

As of September 30, 2020, the Company had 1,204,428 remaining shares available for issuance under the 2019 Equity Incentive Plan (“2019 Equity Plan”).

Stock-based compensation cost for the three months ended September 30, 2020 and 2019 was $0.5 million and $0.3 million, respectively, and $1.3 million and $1.0 million for the nine months ended September 30, 2020 and 2019, respectively. Stock-based compensation is included in general and administrative expenses in the condensed consolidated statements of operations and comprehensive (loss) income. Included in stock-based compensation cost was $0.1 million and $0.3 million of stock granted to directors for the three and nine months ended September 30, 2020, respectively. Such grants were awarded consistent with the Board of Director’s compensation practices.

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Stock Option Activity

Changes in outstanding stock options during the nine months ended September 30, 2020 were as follows:

Weighted

Weighted

average

Intrinsic

average exercise

remaining

value

    

Shares

    

price

    

contractual life

    

(thousands)

Outstanding at December 31, 2019

 

1,806,508

$

3.37

 

5.87 years

$

1,428

Exercisable at December 31, 2019

 

1,270,508

$

3.93

 

5.10 years

$

665

Exercised

 

(18,000)

 

2.13

 

  

 

  

Cancelled, expired or forfeited

 

(81,500)

 

3.75

 

  

 

  

Outstanding at September 30, 2020

 

1,707,008

$

3.37

 

5.24 years

$

174

Exercisable at September 30, 2020

 

1,343,675

$

3.73

 

4.77 years

$

116

A summary of the status of the Company’s non-vested stock options as of December 31, 2019 and September 30, 2020 and changes during the nine months then ended, is presented below:

Weighted average

    

Shares

    

grant date fair value

Non-vested stock options at December 31, 2019

 

536,000

$

0.87

Vested

 

(172,667)

 

0.88

Non-vested stock options at September 30, 2020

 

363,333

$

0.86

The fair value of options that vested in the nine months ended September 30, 2020 was $0.2 million. As of September 30, 2020, there are 579,402 milestone-based options outstanding and $0.7 million of unrecognized compensation cost related to these milestone-based options. These options vest based on the achievement of Company and individual objectives as set by the Board of Directors. As of September 30, 2020, there is $0.2 million of total unrecognized compensation cost related to non-vested awards, which will be recognized over a weighted-average period of 2.1 years.

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 nine months ended September 30, 2020 is presented below:

Weighted average

    

Shares

    

grant date fair value

Non-vested RSUs at December 31, 2019

 

955,011

$

2.69

Granted

 

1,309,099

 

1.21

Vested

 

(281,027)

 

2.75

Cancelled, expired or forfeited

 

(38,566)

 

2.71

Non-vested RSUs at September 30, 2020

 

1,944,517

$

1.68

As of September 30, 2020, 150,000 RSUs subject to performance-based vesting were outstanding with unrecognized compensation cost of $0.4 million related to these milestone-based awards. As of September 30, 2020, the Company had approximately $2.2 million of total unrecognized compensation costs related to RSUs, which will be recognized over a weighted average period of 2.1 years.

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Note 13 – Segment Reporting

In the fourth quarter of 2019, in conjunction with the Kona Grill acquisition, the Company implemented certain organizational changes, including the reorganization of the Company’s internal reporting structure to better facilitate its strategy for growth and operational efficiency. As a result of these organizational changes, the Company has identified its reportable operating segments as follows:

STK. The STK segment consists of the results of operations from STK restaurant locations, competing in the full-service dining industry, as well as management, license and incentive fee revenue generated from the STK brand and operations of STK restaurant locations.
Kona Grill. The Kona Grill segment includes the results of operations of Kona Grill restaurant locations.
ONE Hospitality. The ONE Hospitality segment is 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, Bagatelle, Heliot, Hideout, Marconi, and Radio. 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, depreciation and amortization, acquisition related gains and losses, lease termination expenses, transaction costs, COVID-19 related expenses and other income and expenses. This segment also includes STK Meat Market, an e-commerce platform that offers signature steak cuts nationwide, and the Company’s major off-site events group, which supports all brands and venue concepts, and revenue generated from gift card programs.

The Company’s Chief Executive Officer, who is the Company’s Chief Operating Decision Maker, manages the business and allocates resources via a combination of restaurant sales reports and operating segment profit information, defined as revenues less operating expenses, related to the Company’s four operating segments.

Certain financial information relating to the three and nine months ended September 30, 2020 and 2019 for each segment is provided below (in thousands). Prior year amounts have been revised to conform to the current year segment presentation.

    

STK

    

Kona Grill

    

ONE Hospitality

    

Corporate

    

Total

For the three months ended September 30, 2020

Total revenues

 

$

16,475

 

$

22,794

 

$

169

 

$

129

$

39,567

Operating income (loss)

$

2,406

$

2,215

$

(116)

$

(4,485)

$

20

Capital asset additions

$

528

$

398

$

7

$

46

$

979

For the nine months ended September 30, 2020

Total revenues

 

$

39,740

 

$

55,831

 

$

1,105

 

$

274

$

96,950

Operating income (loss)

$

3,335

$

1,816

$

(209)

$

(14,556)

$

(9,614)

Capital asset additions

$

1,056

$

1,141

$

184

$

279

$

2,660

As of September 30, 2020

Total assets

$

80,780

$

97,053

$

5,590

$

33,556

$

216,979

STK

    

Kona Grill

    

ONE Hospitality

    

Corporate

    

Total

For the three months ended September 30, 2019

Total revenues

$

20,227

$

$

1,762

$

117

$

22,106

Operating income (loss)

$

3,059

$

$

625

$

(2,909)

$

775

Capital asset additions

$

490

$

$

2

$

100

$

592

For the nine months ended September 30, 2019

Total revenues

$

63,451

$

$

4,074

$

956

$

68,481

Operating income (loss)

$

9,412

$

$

1,170

$

(8,196)

$

2,386

Capital asset additions

$

3,000

$

$

40

$

469

$

3,509

As of December 31, 2019

Total assets

$

82,691

$

93,829

$

8,252

$

21,813

$

206,585

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Table of Contents

Note 14 – Geographic Information

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

For the three months ended September 30, 

For the nine months ended September 30, 

    

2020

    

2019

    

2020

    

2019

Domestic revenues

 

38,745

 

20,730

 

$

95,304

 

$

65,048

International revenues

 

822

 

1,376

 

1,646

 

3,433

Total revenues

$

39,567

$

22,106

$

96,950

$

68,481

September 30, 

December 31, 

2020

2019

Domestic long-lived assets

 

$

180,670

 

$

179,143

International long-lived assets

 

279

 

301

Total long-lived assets

$

180,949

$

179,444

Note 15 – Commitments and Contingencies

The Company is party to claims in lawsuits incidental to its business, including lease disputes and employee-related matters. The Company is confident in its defenses and is vigorously defending these disputes. The Company has not recorded any liabilities for these unfounded claims, and the range of possible losses is zero to $2.2 million. In the opinion of management, the ultimate outcome of such matters, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

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, 2019 and Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements include matters such as the effect and duration of the COVID-19 pandemic and related stay at home orders and other government actions and restrictions, the effect of COVID-19 on customer behavior, general economic conditions, consumer preferences and spending, costs, competition, restaurant openings or closings, operating margins, the availability of acceptable real estate locations, the sufficiency of our cash balances and cash generated from operations and financing activities for our future liquidity and capital resource needs, the impact on our business of Federal and State legislation, litigation, the execution of our growth strategy and other matters. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “ongoing,” “could,” “estimates,” “expects,” “intends,” “may,” “appears,” “suggests,” “future,” “likely,” “goal,” “plans,” “potential,” “projects,” “predicts,” “should,” “targets,” “would,” “will” and similar expressions that convey the uncertainty of future events or outcomes.  You should not place undue reliance on any forward-looking statement. We do not undertake any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as 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, 2019.

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.

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Table of Contents

Business Summary

We are a global hospitality company that develops, owns and operates, manages and licenses upscale and polished casual, high-energy restaurants and lounges and provides turn-key food and beverage (“F&B”) services 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 bar-centric grill concept featuring American favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere. Our F&B hospitality management services 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. Our F&B hospitality clients operate global hospitality brands such as the W Hotel, Hippodrome Casino, and ME Hotels.

We opened our first restaurant in January 2004 in New York, New York, and, as of September 30, 2020, we owned, operated, managed or licensed 55 venues including 20 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and 11 F&B venues, including 10 in five hotels and casinos in the United States and Europe. For those restaurants and venues that are managed or licensed, we generate management 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 September 30, 2020:

Venues

    

STK(1)

    

Kona Grill

    

ONE Hospitality(2)

    

Total

Domestic

 

  

 

  

 

  

 

  

Owned

 

10

 

24

 

2

 

36

Managed

 

1

 

 

1

 

2

Licensed

 

1

 

 

 

1

Total domestic

 

12

 

24

 

3

 

39

International

 

  

 

  

 

  

 

  

Owned

 

 

 

 

Managed

 

3