The ONE Group Hospitality(STKS) - 2021 Q4 - Annual Report

Part I Business The ONE Group operates upscale restaurants and provides F&B services globally, with 60 venues across its STK, Kona Grill, and ONE Hospitality brands, employing a capital-light growth strategy - The company aims to be a market leader in 'Vibe Dining,' integrating high-quality service, ambiance, energy, and cuisine[12] Venue Count by Brand and Type (as of Dec 31, 2021) | | STK | Kona Grill | ONE Hospitality | Total | | :--- | :--- | :--- | :--- | :--- | | Domestic | | | | | | Owned | 11 | 24 | 2 | 37 | | Managed | 2 | — | 1 | 3 | | Licensed | 1 | — | — | 1 | | Total domestic | 14 | 24 | 3 | 41 | | International | | | | | | Managed | 4 | — | 10 | 14 | | Licensed | 5 | — | — | 5 | | Total international | 9 | — | 10 | 19 | | Total venues | 23 | 24 | 13 | 60 | - The company utilizes a 'capital light strategy' for expansion, prioritizing licensed and managed restaurants to minimize capital outlay[18] 2021 Key Brand Performance Metrics | Brand | Avg. Domestic Restaurant Revenues (Comparable Stores) | Avg. Domestic Check Per Person | | :--- | :--- | :--- | | STK | $14.8 million | $114 | | Kona Grill | $5.1 million | $33 | - Global growth potential is identified for up to 200 restaurants across both STK and Kona Grill brands[23][25] - As of December 31, 2021, the company employed approximately 64 corporate staff and managed approximately 3,364 direct and 420 indirect personnel globally[40] Risk Factors The company faces significant risks from health and safety, economic sensitivity, intense competition, growth strategy execution, labor law changes, supply chain reliance, cybersecurity, and internal control weaknesses - The COVID-19 pandemic remains a significant risk, incurring $5.8 million in costs in 2021 and $5.5 million in 2020[50][52] - Business operations are highly dependent on consumer discretionary spending and business travel, sensitive to economic downturns[57] - The growth strategy of opening 7-12 new locations annually via a 'capital light' model faces risks in partner and location suitability, cost management, and venue profitability[69][70] - Changes to labor laws, especially minimum wage for tipped employees (32% of workforce), could significantly increase labor costs, with FICA tip credit elimination posing further financial risk[77][78] - Beef purchases constitute approximately 22% of food and beverage costs, exposing the company to commodity price volatility[91] - Approximately 80% of sales via credit/debit cards expose the company to security breaches and fraudulent transaction liability, particularly with the EMV liability shift[102] - Non-compliance with debt covenants could accelerate debt repayment, negatively impacting business operations[110] - Management identified material weaknesses in internal control over financial reporting, potentially hindering accurate financial reporting and eroding investor confidence[112][113] Unresolved Staff Comments There are no unresolved staff comments - None[120] Properties The company operates all its STK, Kona Grill, and ONE Hospitality venues in leased premises, owning no real property - The company does not own any real property, operating all venues in leased premises[121] - As of December 31, 2021, there were 23 STK, 24 Kona Grill, and 13 ONE Hospitality venues across North America, Europe, and the Middle East[122][125][126] Legal Proceedings The company faces ordinary course legal claims, primarily labor-related, with management believing current accruals are adequate and resolutions will not materially impact financial position - The company is subject to ordinary course claims, including labor law-related class action lawsuits[127] - Management believes current legal accruals are adequate, anticipating no material adverse effect on financial statements from resolutions[127] Mine Safety Disclosures This item is not applicable to the company - Not applicable[129] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under 'STKS', with no cash dividends paid or planned, as earnings are retained for growth - Common stock trades on the NASDAQ Capital Market under the symbol 'STKS'[131] - The company has not paid and does not intend to pay cash dividends, preferring to retain earnings for growth[132] Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, total revenues surged 95.3% to $277.2 million, driven by strong same-store sales and COVID-19 recovery, resulting in $31.3 million net income and robust cash from operations 2021 vs 2020 Financial Highlights | Metric | 2021 | 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $277.2M | $141.9M | +$135.3M | +95.3% | | Restaurant Operating Profit | $52.4M | $15.6M | +$36.8M | +235.9% | | Operating Income (Loss) | $19.4M | ($13.7M) | +$33.1M | - | | Net Income (Loss) Attributable | $31.3M | ($12.8M) | +$44.1M | - | Same Store Sales (SSS) Growth | Period | Total SSS vs Prior Year | STK SSS vs Prior Year | Kona Grill SSS vs Prior Year | | :--- | :--- | :--- | :--- | | 2021 vs 2020 | +92.8% | +131.9% | +57.7% | | 2021 vs 2019 (Two-Year) | +34.2% | +45.1% | +23.2% | Reconciliation of Net Income to Adjusted EBITDA (in thousands) | | For the year ended December 31, | | :--- | :--- | :--- | | | 2021 | 2020 | | Net income (loss) | $31,948 | ($13,623) | | EBITDA | $48,104 | ($3,580) | | Gain on CARES Act Loan forgiveness | ($18,529) | — | | COVID-19 related expenses | $5,821 | $5,492 | | Stock-based compensation | $3,618 | $1,773 | | Adjusted EBITDA | $43,194 | $9,039 | Restaurant Operating Profit by Brand (in thousands) | Brand | 2021 Profit | 2021 Margin | 2020 Profit | 2020 Margin | | :--- | :--- | :--- | :--- | :--- | | STK (Company owned) | $34,598 | 24.7% | $7,347 | 13.1% | | Kona Grill | $17,785 | 14.4% | $8,175 | 10.4% | - In 2021, the company recognized an $18.5 million gain from the forgiveness of CARES Act PPP loans[212] Summary of Cash Flows (in thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by Operating activities | $30,966 | $431 | | Net cash used in Investing activities | ($11,467) | ($5,787) | | Net cash (used in) provided by Financing activities | ($20,275) | $17,424 | Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from commodity price fluctuations, inflationary pressures on labor and food costs, and foreign currency exchange rates from international operations - The company faces commodity price risk, particularly for beef, seafood, and produce, without current hedging through financial instruments[237] - Inflation poses a risk to labor, food, and occupancy costs, mitigated by price increases, cost controls, and efficient purchasing[238] - Foreign currency exchange risk exists from international operations, though currently unhedged[239] Financial Statements and Supplementary Data This section incorporates the company's audited Consolidated Financial Statements, located in Item 15 of the Annual Report on Form 10-K - The Consolidated Financial Statements are located in Item 15 of the report[240] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure during the period - None[241] Controls and Procedures Management concluded disclosure controls were ineffective as of December 31, 2021, due to material weaknesses in internal control over financial reporting, leading to an adverse auditor opinion, with remediation efforts underway - Management concluded that disclosure controls and procedures were not effective as of December 31, 2021[244] - Two material weaknesses were identified: lack of segregation of duties for journal entry review, and aggregate deficiencies in control design, IT user access, and technical accounting application[247][254] - Deloitte & Touche LLP issued an adverse opinion on the company's internal control over financial reporting as of December 31, 2021[258][265] - Remediation efforts include modifying journal entry review, enhancing control design, and providing further technical accounting education and resources[251][252][255] Other Information There is no other information to report - None[269] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This disclosure is not applicable to the company - None[270] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the 2022 Proxy Statement - Information is incorporated by reference from the Company's 2022 Proxy Statement[272] Executive Compensation Information for this item is incorporated by reference from the 2022 Proxy Statement - Information is incorporated by reference from the Company's 2022 Proxy Statement[273] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the 2022 Proxy Statement - Information is incorporated by reference from the Company's 2022 Proxy Statement[274] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the 2022 Proxy Statement - Information is incorporated by reference from the Company's 2022 Proxy Statement[275] Principal Accounting Fees and Services Information for this item is incorporated by reference from the 2022 Proxy Statement - Information is incorporated by reference from the Company's 2022 Proxy Statement[276] Part IV Exhibits, Financial Statement Schedules This section contains the financial statements and a list of all exhibits filed as part of the Annual Report on Form 10-K - This item includes the financial statements and the exhibit list for the Form 10-K[279][281] Form 10-K Summary No Form 10-K summary was provided - None[280]