Thank you for standing by. This is the conference operator. Welcome to The ONE Group Third Quarter 2020 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like the conference over to Tyler Loy, Chief Financial Officer. Please, go ahead.

Thank you, operator, and good afternoon. Before we begin our formal remarks, let me remind you that part of our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance and you should not place undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Please also note that these forward-looking statements reflect our opinion only as of the date of this call. We undertake no obligation to revise or publicly release any revisions to these forward-looking statements in light of new information or future events. We refer you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. During today's call, we will refer to certain non-GAAP financial measures, which we believe can be useful in evaluating our performance. However, the presentation of these measures or other information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliations of these measures such as adjusted EBITDA and total food and beverage sales at owned and managed and licensed units to GAAP measures, along with a discussion of why we consider these measures useful, please see our earnings release issued today. With that, I'd like to turn the call over to Manny Hilario. Manny?

Thank you, Tyler, and good afternoon everyone. We appreciate your continued interest in The ONE Group and hope that each of you have remained safe and healthy since our last business update. Today, I would like to provide a brief overview of our third quarter performance, discuss current trends regarding our ongoing recovery and reiterate our confidence in the future of our brands. Tyler will then walk you through the quarterly financials in greater detail. As we have expressed repeatedly, ensuring the well-being of our employees and guests is our top priority. And we continue to strictly follow our guidelines from the CDC, federal and local authorities. Furthermore, we have taken our commitment to safety even further by focusing our employees in our detail employee manuals specific to each location's health and safety protocols. These manuals have been extremely useful to our teams, as we have safely reopened the restaurant dining operations. Additionally, we have made significant investments in our day-to-day operations to ensure the safety of our dining rooms for our employees and guests. As of today, 34 of 36 of our domestic restaurants are open for in-person dining, subject to limited seating capacity due to state and local mandates. We thank our nearly 3000 teammates for making this all possible. They have returned to what they do best, making each restaurant the best in its market and delivering exceptional and an unforgettable experiences to each guest every time, all the while controlling costs in this very challenging environment. Overall, we are pleased with our performance for the third quarter. Our revenues grew 79% year-over-year. We delivered positive operating income for the quarter and our adjusted EBITDA grew 77% year-over-year. We are particularly pleased that we're able to significantly expand our restaurant-level margins by 640 basis points while experiencing…

Thank you, Manny. Let me start by discussing our current cash and liquidity positions before reviewing the third quarter financials in greater detail. As of September 30, we had $26.6 million in cash and cash equivalents on our balance sheet. And this amount has not changed materially through today. Notably, due to our improving sales performance in recent months, we generated positive cash flow throughout the third quarter and into October. Finally, our credit facility balance as of the end of the quarter started approximately $47.5 million. In terms of our quarterly financial total GAAP revenues were $39.6 million increasing 79% from $22.1 million from the same quarter last year. Included in our total revenues for the quarter is our owned restaurant net revenues of $37.8 million, which increased approximately 97% from $19.2 million for the same quarter last year. The increase was primarily driven by $22.8 million in additional sales from Kona Grill, which we acquired in October 2019, partly offset by lower revenues due to temporary closures and limited operations of several restaurants due to COVID-19. Domestic consolidated comparable sales decreased 15.6% for the quarter. For STK, comparable sales decreased 24.2%. And for Kona Grill comparable sales decreased 7.3%. As Manny commented, sales sequentially improved throughout the quarter for both STK and Kona Grill, with Kona Grill turning positive in September, and both STK and Kona Grill turning positive in October. Consolidated comparable sales for October increased 4.2% an 8.6% increase at Kona Grill and a point 0.3% increase at STK. We certainly appreciate that there's likely to be volatility for the foreseeable future as locations might be subject to new guidelines. Management, license, and incentive fee revenue decreased to $1.7 million in the third quarter of 2020 from $2.9 million in the third quarter of 2019. This…

Thank you, Tyler. And thank you all for your time today. To conclude, we are clearly in a much better position now than we were just a few months ago. And that is directly related to the efforts of our exceptional team that are working hard to help us successfully navigate through the pandemic and our intention is to come out on the other side even stronger than we were before. We are so grateful to them for bringing our mission to life every day, operating the best restaurant in every market that we operate in by delivering exceptional and unforgettable guest experiences to every guest every time. They have also enabled us to build a sustainable takeout delivery and e-commerce capability while effectively controlling costs at all levels of the company. The success of their efforts is reflected in our financial performance, and will pay dividends for our business long into the future. Let me conclude by thanking all our valued guests who have enjoyed STK and Kona Grill at our restaurants for takeout delivery, or have ordered our high-quality steaks from our STK Meat Market. We have greatly enjoyed serving you and appreciate your support. We also appreciate everyone joining us on the call today. Tyler and I, are happy to answer any questions that you may have. Operator?

[Operator Instructions] Our first question comes from the line of Mark Smith with [Lake] Street Capital Markets. Please go ahead.

Hey guys. I wanted to ask first, just a little bit about the patio business during the quarter and maybe any changes that you've seen as we've seen some weather shift a little bit here into Q4. Any insights you can give us in how much that's impacting and helping the business?

Hey, Mark, it's Manny. I do believe that the patios were obviously beneficial particularly for the Kona Grills, since all the Kona Grills have fantastic patios. So I would say that was one of the positive drivers of the business. Putting - and particularly in the warmer months of our August and September, I think going into October, I think they start feeling a little bit less of a of a roll in there but I would say we did benefit from the patios. But our best comp store sales was in October, which wasn't I would say that would be the best patio month for us, although the weather was reasonably good everywhere. But I would say that the patios did help.

Okay. And then as we look at the October comps, and even the comp improvements throughout the quarter, can you talk at all about, price versus traffic that's built into that comp results?

I mean, I can talk about check. I think in terms of check, I would say check was around 2% to 3% for the STK brand and Kona Grill was around probably 4% or 5% on check but we did have some positives, particularly at Kona Grill in October, where they have positive traffic in that month.

Okay, perfect. And then just an odd one on alcohol mix at both chains, how has that kind of moved throughout the quarter?

Yeah, I think with the patios, I think our mix of alcohol was pretty reasonably strong. Obviously, we're not using our bars we have made a decision that in most of our restaurants we're using the areas around the bar as incremental seating areas. So we really have de-emphasized, if you will, the bar drinking. But I think general overall it has held reasonably well. And I think one of the reasons that it has helped well is because of programs like Margarita Heaven at the Kona Grill and we continue to evolve the Specialty Cocktail at STK. And we also allowed for Happy Hour to resume in the dining rooms which is actually frankly been good for us. I would say, year-over-year, though I would say the mix is a little bit down but not dramatically compared to what it could have been by closing all the bars.

Okay, perfect. And then the last one from me, just talk a little bit about rent abatement and what we saw. And mainly just any call outs on anything that maybe is a one-time benefit, or what you wouldn't expect to see going forward in rents during the quarter?

Yeah, Mark, this is Tyler? Yeah, so I think one of the things that we accomplished from the very onset was getting as many percentage rent deals as we could as the volumes went down and as we closed some of the restaurants. And so I think what you're seeing is, on some of the lower sales volumes, we did get a benefit there but as sales, got better sequentially, through the quarter that benefit really, really kind of went away. So I think long term, we've worked really hard and really closely with our landlords. I think we've crafted arrangements with everybody that works for both parties long term. So I don't think there's anything that you see in this quarter, though, that I would call one-time.

Yeah, I would say that the one-time activity was mostly in the second quarter, where we got most abatements for the month of April, May and June, those were the months where we were doing takeout delivery, those are probably the months where we got the most help from landlords. I think as Tyler just described there, the majority of the deals with landlords is percentage based rent or percentage based. And so as sales have lifted, I think that the impact on the margins is neutral because as a percentage of revenue, the number becomes pretty equal. So I think and that's really the answer. So definitely second quarter, going into the third quarter, I think we're starting to see the rents equal or equating much closer to what they are in the long term.

Okay, and maybe I'll squeeze one more in. Just remind us, has there been any changes in kind of opening or capacity restraints just in the last couple of weeks, as we've seen cases maybe move a little bit higher? And I'm thinking in particular about New York or any of the big metro areas, any changes in the operations that you that you kind of had to do at any of your restaurants here in the last couple of weeks?

Yeah, so a couple - so the ones that are more meaningful to us were El Paso was gone to take out delivery only, and that's a Kona Grill. And then in Chicago, we're allowed to do outdoor dining only, which it's not exactly ideal for November and December in Chicago. And but other than those two, we - obviously, there's a lot of talk about new curfews, but it is what the reality of this environment is. We basically have a daily meeting, we go through this, there's a lot of different shifting in a lot of the communities, but we have not yet seen a major tightening yet. However, in Europe, we did see London, shut down again for one month, and we did see Milan, enact stricter curfews with a 6 p.m. cut off. So we have seen some stuff, but not dramatic to the overall - to the overall performance of the company.

Okay, great. Well, quarter look great. Thank you, guys, for taking time, take some questions. Thank you.

Thank you, sir.

Thanks Mark.

[Operator Instructions] Our next question comes from the line of Nicole Miller with Piper Sandler. Please go ahead.

Thank you. Good afternoon. Hey, Manny and team. Could you talk a little bit about average capacity by concept in the quarter please?

Yeah, I mean, I think and if we're now looking on the global basis, I would say that we're at about 50% allowed capacity in our venues. Meaning that, - that that's what we're limited and restricted for. And I think as we saw on our prepared comments, some of the strategies that we've taken on is, we've been testing brunch, so we're trying to extend the utilization of the space over more hours. So we're trying to deal with the state of capacities by increasing some of the utilization hours of the restaurants. Kona Grill already has a pretty good lunch business. So you know, the limitations there are a little bit less impactful than in STK where we don't really have lunch business. So, but overall, I would describe it at a 50% level of restriction. Where that restriction really hurts us for now is obviously Vegas, which is our flagship restaurant, and we're limited to around 150 or so in that property. So that's probably our biggest limiter. And maybe New York where we're only allowed to use 25% of the dining rooms.

And on the STK side, is there a difference in comp between like a restaurant with a retail front versus a managed property restaurant?

I mean, to be honest with you, I think we're pretty blessed that's in October, I mean, we were pretty busy everywhere. We didn't notice, any particular, if we will, patterns of the lot, I would say. If I have to come up with something that we saw in the portfolios, actually, I think our B markets means smaller markets, outperformed the bigger markets. And that's been kind of something that we've seen very interesting. And obviously, it does make sense because the business traveler, and some of the other activities are not in those markets or tourism. But I definitely would say that our B markets out performed significantly on the comp. As a matter of fact, in our prepared comments, we talked about what the comps look like, without New York and Vegas, and I think it's in the mid-teen. So it's very powerful, same store sales in what I'd consider B markets.

That is helpful. It's very interesting. And then just finding different ways to drill down on the comp, I'm thinking about how you reallocate or move people around away from those bars into sitting in the restaurant, even though capacity is reduced, how does that impact comps? I mean, clearly positively, but wondering, were they not a comp before when they're at the bar and likewise, with brunch, extra hours? I guess I mean, that's typically more sales and comp but it's also something that wasn't in the prior year, right? How do you think about some of those nuances?

I mean, I think the way I think of, obviously, a very complex question. And I do think that with the bars, we converted to what you call T-station. So we converted, we put tables, right in front of the bars almost on a T shaped. I think we gain on the average 16 seats of dining capacity per location. And obviously, we lost about 20 to 25 bar seats. So I think what we ended up doing was replacing low revenue seats with higher revenue seats for the table. So I do think that did help with the comp in terms of - of mitigating the impact of having less tables in the dining room, because we have to follow the six-foot rules in there and capacity restriction. So I do think that the bar has helped. And as I mentioned, there it's really just a replacement of those chairs. I do think that the one thing that we focused more on this quarter than we ever have is, is turnover times at the table. So we went into restrict, maintenance enforcement of 90 minutes at the table. So that was one of the critical metrics. And one of the things that we really observed during the quarter, making sure that we were turning the tables. I mean, we have restaurants like Vegas that were turning tables five times a day. So we did really have to make sure that we enforced times. And then the other thing that we worked very diligently in the quarter, particularly in days, like Friday, Saturdays, and even Sundays, is what we call reset times at the table. So from the time people leave the table, to time they'll will reset those tables, we try to keep those times down below two minutes. So we worked very effectively, in making sure that we never have seats in the restaurants that are not occupied. So we do have a very, if you will, thorough and diligent process of making sure that we have tables fully occupied all the time. And that was STK. And from the [group] it's, frankly and some of the Kona Grills, we will have to be very thoughtful about turning those over, because we had a lot of demand at some of those properties.

And I'm asking those questions and I appreciate the pointed answers, because clearly, you're doing a whole lot more with a whole lot less. If you just take capacity at face value, I think that commentary is very important to reconcile the comp performance, which is just fantastic. So thank you. You know, if I think about pre-pandemic, you brought Kona into the portfolio for growth and maybe if you just look out into the future, where do you see growth for STK and where do you see growth for Kona and kind of what's on the horizon?

That's a great question. Let me just add one final point to your previous question, which I probably should have told you. And I think we've talked about this before but the one thing that we do differently from other companies is we actually have a logistics planning team in the headquarters where we work with the restaurant management teams to plan out capacity daily. So we do have a little bit of a different process than most restaurant companies because we have are logistically thoughtful about how we turn the restaurant. So every day before the restroom ever opens up, we present a very thoughtful, thorough, if you will, plan as to how want the dining room to turn. So I do think that in times we have limited capacity, having selected that process as part of our core operational approach, it really has helped. Now, your other part of the question was related to? I forgot what the question was though.

Unit growth.

The go forward growth?

Yeah, I mean, Kona Grill. I think what's happening now and this is, just anecdotal. But I do have some landlords that have figured out that our restaurants are very successful in their projects now. And so I have existing landlords, at least four or five of our projects for Kona Grill are now saying, hey, wait a second, you guys are definitely doing something with the brand. I mean, people have noticed that the brand has become fun and it's exciting. It's more vibrant with change, the menus have changed, the music program have changed, the approach with the beverage, we've definitely made substantial changes and improvements in service style. So it's definitely noticeable. And we're starting to see a lot of landlords coming into us, and asking us and providing ideas. Frankly, our stated answer to that is we don't have a plan. So we don't really talk much about it. But there's been a rise in demand for Kona Grill projects. In terms of STK, we currently have about 10 projects on the pipeline that are either licensed or management deals, and the partner who want to move forward with us. So we're getting a lot of pressure from our partners to continue growing. So the pipeline is probably the best pipeline we've had in a long time. And obviously, our partners must have been to our restaurants during the pandemic periods in some instances. And they can certainly see what we've been able to do in those properties, including properties like London, which is in a hotel, and it was open for several months in the pandemic period. And we were drawing a tremendous amount of customers into the property. And not only just to come and dine, but we were actually filling hotel rooms because people were staying overnight to come down and experience the STK brand on a Saturday night. So I would say from a growth development perspective, this is probably the best pipeline I've seen in quite a long time for us.

Well, thanks again, Manny. I know you've covered a lot but those details are important. And as always, we're very impressed with your team's performance. Thanks a lot.

Thank you, Nicole.

[Operator Instructions] And we have no questions at this time. I'll turn the call back to Manny Hilario.

Thank you everyone for your interest in our company. I would like to again thank the One Group team for an amazing job in the quarter. Frankly, super impressed and very thankful for an amazing team and I look forward to seeing everyone in our restaurants. Cheers.