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, 2021

	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, 2021: 31,865,775

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	29

PART II – Other Information
Item 1. Legal Proceedings	30
Item 1A Risk Factors	30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 6. Exhibits	31

Signatures	32

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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)


	June 30,		December 31,
	2021		2020
ASSETS	(Unaudited)
Current assets:
Cash and cash equivalents	$	41,407	$	24,385
Accounts receivable		6,572		5,777
Inventory		2,671		2,490
Other current assets		1,558		1,348
Due from related parties		376		376
Total current assets		52,584		34,376

Property and equipment, net		68,659		67,344
Operating lease right-of-use assets		78,588		80,960
Deferred tax assets, net		13,106		13,226
Intangibles, net		15,893		16,313
Other assets		2,516		2,446
Security deposits		876		904
Total assets	$	232,222	$	215,569

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,826	$	7,404
Accrued expenses		23,768		15,684
Deferred license revenue		109		207
Deferred gift card revenue and other		1,034		1,990
Current portion of operating lease liabilities		5,064		4,817
Current portion of CARES Act Loans		9,847		10,057
Current portion of long-term debt		507		588
Total current liabilities		50,155		40,747

Deferred license revenue, long-term		337		953
Operating lease liabilities, net of current portion		95,979		98,569
CARES Act Loans, net of current portion		—		8,257
Long-term debt, net of current portion		45,048		45,064
Total liabilities		191,519		193,590

Commitments and contingencies

Stockholders’ equity:
Common stock, $0.0001 par value, 75,000,000 shares authorized; 31,865,775 and 29,083,183 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively		3		3
Preferred stock, $0.0001 par value, 10,000,000 shares authorized; no shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively		—		—
Additional paid-in capital		51,414		46,538
Accumulated deficit		(6,810)		(20,716)
Accumulated other comprehensive loss		(2,656)		(2,646)
Total stockholders’ equity		41,951		23,179
Noncontrolling interests		(1,248)		(1,200)
Total equity		40,703		21,979
Total liabilities and equity	$	232,222	$	215,569

See notes to the condensed consolidated financial statements.

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THE ONE GROUP HOSPITALITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

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


	For the three months ended June 30,				For the six months ended June 30,
	2021		2020		2021		2020
Revenues:
Owned restaurant net revenue	$	67,848	$	16,529	$	117,016	$	55,086
Management, license and incentive fee revenue		2,912		135		4,226		2,297
Total revenues		70,760		16,664		121,242		57,383
Cost and expenses:
Owned operating expenses:
Owned restaurant cost of sales		17,191		4,174		29,192		14,287
Owned restaurant operating expenses		35,336		12,038		63,242		38,537
Total owned operating expenses		52,527		16,212		92,434		52,824
General and administrative (including stock-based compensation of $1,137, $482, $2,159, and $820 for the three and six months ended June 30, 2021 and 2020, respectively)		6,139		2,438		11,313		5,835
Depreciation and amortization		2,495		2,510		5,194		4,950
COVID-19 related expenses		1,088		695		2,645		2,043
Agreement restructuring expenses		494		—		494		—
Pre-opening expenses		154		—		255		—
Lease termination expenses		107		89		294		268
Transaction costs		—		14		—		1,109
Other income, net		—		(11)		—		(12)
Total costs and expenses		63,004		21,947		112,629		67,017
Operating income (loss)		7,756		(5,283)		8,613		(9,634)
Other (income) expenses, net:
Interest expense, net of interest income		1,235		1,195		2,481		2,370
Gain on CARES Act Loan forgiveness		(8,561)		—		(8,561)		—
Total other (income) expenses, net		(7,326)		1,195		(6,080)		2,370
Income (loss) before benefit for income taxes		15,082		(6,478)		14,693		(12,004)
Provision (benefit) for income taxes		973		(3,228)		644		(3,881)
Net income (loss)		14,109		(3,250)		14,049		(8,123)
Less: net income (loss) attributable to noncontrolling interest		273		(378)		143		(652)
Net income (loss) attributable to The One Group Hospitality, Inc.	$	13,836	$	(2,872)	$	13,906	$	(7,471)
Currency translation gain (loss)		8		2		(10)		(42)
Comprehensive income (loss) attributable to The ONE Group Hospitality, Inc.	$	13,844	$	(2,870)	$	13,896	$	(7,513)

Net income (loss) attributable to The ONE Group Hospitality, Inc. per share:
Basic net income (loss) per share	$	0.44	$	(0.10)	$	0.46	$	(0.26)
Diluted net income (loss) per share	$	0.41	$	(0.10)	$	0.41	$	(0.26)

Shares used in computing basic income (loss) per share		31,248,677		28,907,568		30,239,364		28,778,544
Shares used in computing diluted income (loss) per share		34,028,735		28,907,568		33,683,652		28,778,544

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, 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 common 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 common 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


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

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,
	2021		2020
Operating activities:
Net income (loss)	$	14,049	$	(8,123)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		5,194		4,950
Stock-based compensation		1,763		820
CARES Act loan forgiveness		(8,561)		—
Amortization of debt issuance costs		265		232
Deferred taxes		120		(3,899)
Changes in operating assets and liabilities:
Accounts receivable		(794)		5,886
Inventory		(181)		748
Other current assets		(210)		(423)
Due from related parties		—		(35)
Security deposits		(26)		315
Other assets		(85)		(863)
Accounts payable		2,356		(1,602)
Accrued expenses		7,596		(2,534)
Operating lease liabilities and right-of-use assets		29		538
Deferred gift card and license revenue		(1,671)		(937)
Net cash provided by (used in) operating activities		19,844		(4,927)

Investing activities:
Purchase of property and equipment		(5,373)		(1,681)
Net cash used in investing activities		(5,373)		(1,681)

Financing activities:
Proceeds from CARES Act Loans		—		18,314
Repayments of long-term debt		(321)		(433)
Debt issuance costs		(41)		(50)
Exercise of stock options and warrants		3,151		38
Tax-withholding obligation on stock based compensation		(154)		(90)
Purchase of non-controlling interests		(75)		—
Net cash provided by financing activities		2,560		17,779
Effect of exchange rate changes on cash		(9)		(55)
Net increase in cash and cash equivalents		17,022		11,116
Cash and cash equivalents, beginning of period		24,385		12,344
Cash and cash equivalents, end of period	$	41,407	$	23,460
Supplemental disclosure of cash flow data:
Interest paid	$	2,076	$	1,770
Income taxes paid	$	53	$	106
Non-cash CARES Act loan forgiveness	$	8,561	$	—
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 polished casual bar-centric grill concept featuring American favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere.

As of June 30, 2021, the Company-owned, operated, managed, or licensed 58 venues, including 22 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and 12 F&B venues in six hotels and casinos in the United States and Europe. In January 2021, the Company opened a managed STK restaurant in Scottsdale, Arizona. In the second quarter of 2021, the Company opened a managed STK restaurant in the Westminster area of London, United Kingdom and a licensed STK restaurant within the Los Cabos International Airport in San Jose del Cabo, Mexico which represents the STK brand’s debut at an airport. In May 2021, the Company also opened Bao Yum, a new brand under ONE Hospitality, and commenced management of certain F&B hospitality management services at the Westminster Curio Hotel in London, United Kingdom. For those restaurants that are managed or licensed, the Company generates management fee revenue 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 the Company’s business due to state and local government mandates, including suspension of in-person dining, reduced seating capacity and social distancing. Beginning in mid-March 2020, the Company experienced a significant reduction in guest traffic due to government mandated restrictions resulting in the 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; however, certain states reimposed restrictions as COVID-19 cases increased during the fall of 2020. In February 2021, many jurisdictions began easing restrictions once again and the Company has experienced strong sales momentum coming out of the pandemic. Currently, all domestic and international restaurants are open for in-person dining. The Company has taken significant steps to adapt its business to increase sales while providing a safe environment for guests and employees.

Given the ongoing uncertainty surrounding the COVID-19 pandemic, the Company cannot reasonably predict if the sales and profitability levels coming out of the pandemic will continue for the remainder of 2021. It is possible that an increase in cases could require reduction in seating capacity or restrictions on in-restaurant dining operations and could materially and negatively affect the Company’s results of operations. The Company’s continuation 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, 2020, 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, 2020.

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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 2020 amounts in the accrued expenses and segment reporting footnotes have been made to conform to the current year presentation.

Recent Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU’) 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides temporary optional expedients and exceptions to ease financial reporting burdens related to applying GAAP to modifications of contracts, hedging relationships and other transactions in connection with the transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. In January 2021, the FASB issued ASU 2021-01 to clarify that certain optional expedients and exceptions apply to modifications of derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, computing variation margin settlements, and for calculating price alignment interest. ASU 2020-04 is effective beginning on March 12, 2020 and may be applied prospectively to such transactions through December 31, 2022. ASU 2021-01 is effective beginning on January 7, 2021 and may be applied retrospectively or prospectively to such transactions through December 31, 2022. The Company is currently evaluating ASU 2020-04 and ASU 2021-01 and assessing the impact on its financial statements.

In December 2019, the FASB issued 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. We adopted ASU No. 2019-12 on January 1, 2021 and it did not have a significant impact to the consolidated financial statements.

In June 2016, the FASB issued 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,
	2021		2020
Furniture, fixtures and equipment	$	23,143	$	22,328
Leasehold improvements		71,953		71,654
Less: accumulated depreciation		(35,198)		(30,948)
Subtotal		59,898		63,034
Construction in progress		6,681		2,294
Restaurant smallwares		2,080		2,016
Total	$	68,659	$	67,344

Depreciation related to property and equipment was $2.3 million for each of the three months ended June 30, 2021 and 2020, and $4.8 million and $4.5 million for the six months ended June 30, 2021 and 2020, respectively. At June 30, 2021, Construction in progress included $3.6 million for STK Bellevue, which opened in July 2021, and other projects that will be completed in the near future. The Company does not depreciate construction in progress, assets not yet put into service or restaurant smallwares.

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Note 3 – Intangibles, net

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


	June 30,		December 31,
	2021		2020
Kona Grill trade name	$	17,400	$	17,400
Other finite-lived intangible assets		15		—
Less: accumulated amortization		(1,522)		(1,087)
Total intangibles, net	$	15,893	$	16,313

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 $0.4 million for each of the three and six months ended June 30, 2021 and 2020, respectively. The Company’s estimated aggregate amortization expense for each of the five succeeding fiscal years is approximately $0.9 million annually.

Note 4 – Accrued Expenses

Accrued expenses consist of the following (in thousands):


	June 30,		December 31,
	2021		2020
Payroll and related ⁽¹⁾⁽²⁾	$	9,373	$	4,860
Accrued lease exit costs ⁽³⁾		4,144		4,144
VAT and sales taxes		2,063		1,119
Amounts due to landlords		1,601		1,883
Insurance		707		330
Interest		497		474
Legal, professional and other services		464		301
Income taxes and related		463		—
Construction on new restaurants		417		—
Other		4,039		2,573
Total	$	23,768	$	15,684

(1)	Payroll and related includes $2.6 million in employer payroll taxes at June 30, 2021 and December 31, 2020 for which payment has been deferred under the CARES Act.

(2)	Payroll and related includes $2.1 million in employee payroll taxes associated with stock option exercises at June 30, 2021 for which the Company expects to remit payment to the respective jurisdiction in the third quarter of 2021.

(3)	Amount relates to lease exit costs for restaurants never built and still under dispute with landlords.

Note 5 – Long-Term Debt and CARES Act Loans

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


	June 30,		December 31,
	2021		2020
Term loan agreements	$	47,160	$	47,400
Revolving credit facility		—		—
Equipment financing agreements		27		108
Total long-term debt		47,187		47,508
Less: current portion of long-term debt		(507)		(588)
Less: debt issuance costs		(1,632)		(1,856)
Total long-term debt, net of current portion	$	45,048	$	45,064

Interest expense for all the Company’s debt arrangements, excluding the amortization of debt issuance costs and other discounts and fees, was $1.1 million and $1.0 million for the three months ended June 30, 2021 and 2020, respectively, and $2.2 million and $2.1 million for the six months ended June 30, 2021 and 2020, respectively.

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As of June 30, 2021, 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.

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.

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.

On May 8, 2020 and August 10, 2020, GSB and the Company and certain of its subsidiaries amended the Credit Agreement. 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 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 June 30, 2021 and December 31, 2020 was 8.50% and 8.50%, 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 June 30, 2021, the Company was in compliance with the covenants required by the Credit Agreement.

On August 6, 2021, the Company amended the Credit Agreement with GSB. Refer to Note 16 for further information.

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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 has five-year terms and bear interest at a rate of 5% per annum, payable in equal monthly installments.

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.

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. 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 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 debt.

The Company applied for forgiveness of the CARES Act Loans in February 2021. In June 2021, the Company was notified that the SBA had forgiven the CARES Act Loan for Kona Grill Acquisition, LLC in its entirety. As a result, the Company recognized an $8.6 million gain on CARES Act Loan forgiveness for the three months ended June 30, 2021. Subsequently, in July 2021, the Company was notified that the SBA had forgiven the CARES Act Loan for The ONE Group, LLC in its entirety.

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, 2021.

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 – Bagatelle

As of June 30, 2021 and December 31, 2020, the Company-owned interests in the following companies, which directly or indirectly operate a restaurant:

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31.24% interest in Bagatelle NY LA Investors, LLC (“Bagatelle Investors”)

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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 June 30, 2021 and December 31, 2020, the Company has zero carrying value in these investments.

Net receivables from the Bagatelle entities included in due from related parties, net were $0.4 million as of June 30, 2021 and December 31, 2020. These receivables represent the Company’s maximum exposure to loss. Upon expiration of the lease in November 2020, the Company exited its contract with Bagatelle.

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Note 8 – Income taxes

Income taxes for the three and six months ended June 30, 2021 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 6.5% and 4.4% for the three and six months ended June 30, 2021 compared to 49.8% and 32.4% for the three and six months ended June 30, 2020, respectively. The Company’s annualized effective tax rate is estimated at approximately 11.7% for 2021. 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; (iii) taxes owed in state and local jurisdictions; (iv) the tax effect of non-deductible compensation and (v) forgiveness of the CARES Act Loan is non-taxable. Income tax provision recorded for the three and six months ended June 30, 2021 also included the discrete period tax benefits resulting from the vesting of restricted stock units and exercise of stock options.

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 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):


	June 30,		December 31,
	2021		2020
Receivables ⁽¹⁾	$	—	$	125
Deferred license revenue ⁽²⁾	$	446	$	1,160
Deferred gift card and gift certificate revenue ⁽³⁾	$	967	$	1,945
Konavore rewards program ⁽⁴⁾	$	122	$	102

(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 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.

(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 six months ended June 30, 2021 and 2020 are as follows (in thousands):


	June 30,		June 30,
	2021		2020
Revenue recognized from deferred license revenue	$	105	$	103
Revenue recognized from deferred gift card revenue	$	958	$	866

The estimated deferred license revenue to be recognized in the future related to performance obligations that are unsatisfied as of June 30, 2021 were as follows for each year ending (in thousands):


2021, six months remaining	$	59
2022		90
2023		79
2024		45
2025		44
Thereafter		129
Total future estimated deferred license revenue	$	446

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Note 10 – Leases

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


	June 30,			June 30,
	2021			2020
Lease cost
Operating lease cost	$	6,621		$	6,605
Variable lease cost		2,622			(536)
Short-term lease cost		322			173
Sublease income		—			(269)
Total lease cost	$	9,565		$	5,973

Weighted average remaining lease term – operating leases		13 years			13 years
Weighted average discount rate – operating leases		8.49	%		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. 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 STK restaurant in Dallas, Texas that had not commenced as of June 30, 2021. The present value of the aggregate future commitment related to this lease totals $5.2 million. The Company expects this lease, which has an initial lease term of 15 years and two five-year options, to commence within the next twelve months.

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


	June 30,		June 30,
	2021		2020
Cash paid for amounts included in the measurement of operating lease liabilities	$	5,682	$	4,081
Right-of-use assets obtained in exchange for operating lease obligations	$	34	$	288

As of June 30, 2021, maturities of the Company’s operating lease liabilities are as follows (in thousands):