Greetings, and welcome to The ONE Group Third Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Tyler Loy. 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 of 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 conditions.

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.

For reconciliations of these measures, such as adjusted EBITDA, adjusted net income, restaurant operating profit, comparable sales and total food and beverage sales of owned and managed and licensed units to GAAP measures along with the 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?.

a managed STK in Scottsdale, Arizona, which opened in January; a licensed STK at the Los Cabos Airport in Mexico, which opened in May, which we believe will be the first of many future airport locations globally. We opened a managed STK and 2 F&B venues in the Westminster area of London in May at the Westminster, Curio.

On July 21, we opened a company-owned STK in Bellevue, Washington. This is the first STK to open in the Pacific Northwest. Weekly average sales volume of discretion are surpassing $240,000 per week. And finally, in August, we entered to a management agreement to manage our operations in the Rivershore Barn & Grill in Oregon City, Oregon.

As a reminder, for those restaurants that are managed or licensed, we generate management fee revenue based on top line revenues and incentive fee revenue based on a percentage of location revenues and profits. As of today, we have 3 additional STKs under construction.

They include a company-owned STK in Dallas taxes, a company-owned STK in San Francisco, California and a managed STK in the Stratford area of London. We expect all of these locations to open in late 2021 or early 2022.

Lastly, we have entered into an agreement with REEF kitchens to open pre-take out and delivery-only venues featuring offerings from our STK, Kona Grill and volume concepts. These will open either late 2021 or early 2022 in the Houston, Texas market. Turning to Kona Grill.

We have set an initial target of 3 to 5 new Kona Grill locations per year beginning in 2022 with annual unit volumes exceeding $5 million and strong store level margins, Kona Grill produces highly attractive unit economics for us with potential 40% plus cash on cash returns on our investments.

We continue to see high demand for new units from some of the most prestigious landlords in the country. We have identified The ONE Group's first new opening for Kona Grill, which will be a company-owned restaurant in Riverton, Utah, a high-profile suburb of South Lake City, Utah.

This location is already leased, under construction, and we expect that this restaurant to be open by May of 2022. Frankly, we are early in our growth strategy and lots of white space remains. Over the long term, we foresee a total addressable market of at least 200 STK restaurants globally and at least 200 Kona Grills domestically.

Combined, that's over 400 restaurants. Much of this growth will be asset light and our company-owned restaurants will be self-funded through internally generated cash. Before I turn the call to Tyler, I wanted to touch briefly on what you are seeing regarding labor shortages that our industry is facing.

While we are not immune to these challenges, we have done a very good job of recruiting and retaining employees. We have prioritized and invested in these areas during the quarter as we anticipate a very busy holiday season and believe that being fully staffed is a true differentiator and a competitive advantage in the industry today.

Currently, we are over 100% staffed at both the manager and crew levels as we go into the busy fourth quarter, and our P&L reflects an investment in recruiting, training and retention activities in the third quarter.

In terms of what we're seeing from an inflation perspective, wages are up across the board, but we are managing these increases carefully. We are particularly seeing inflation for back-of-the-house employees as the demand is high in the marketplace.

We have rolled out the TOG Perks program and enhanced benefits program, and it has been beneficial in attracting people to us and maintaining employees.

We have also rolled TOG rapid deployment an internal human resources initiative, whereby our human resource team works with our restaurant teams and consistently executing a 24-hour from application to interview to offer process for new employment applicants.

So in the toughest operating environment I can remember, we are focusing a lot of efforts on attracting and retaining talent. Our retention level, particularly for our general managers and executive chefs has been excellent, which is critical these days navigating through a complex and quickly changing environment.

To conclude, our team has certainly proven their resiliency and they are doing a fantastic job welcoming guests into our restaurants for a great vibe dining experience.

Ultimately, our focus on operations and day-to-day execution has proved effective in translating to a strong P&L, and we are very hopeful that our trajectory that we fully on will continue to accelerate in the months ahead. Now I'll turn the call back to Tyler..

Thank you, Manny. Let me start by discussing our third quarter financials in greater detail and then provide an update on our cash and liquidity. For the third quarter, total GAAP revenues were a record $71.9 million, increasing 81.6% from $39.6 million for the same quarter last year.

Included in our total revenues for the quarter is our owned restaurant net revenues of $68 million, which increased 79.7% from $37.8 million for the same quarter last year. The increase in revenue is primarily attributable to strong sales momentum resulting from our high-level execution of our sales initiatives along with the opening of new units.

Domestic consolidated comparable sales increased 44.7% for the quarter compared to 2019. For STK, comparable sales increased 63.8% versus 2019 and Kona Grill comparable sales increased 26.9% versus 2019. Management license and incentive fee revenues were $3.9 million, increasing 123.7% from $1.7 million in the third quarter of 2020.

This increase is primarily the result of sales recovery in the COVID-19 pandemic, coupled with the opening of STK Scottsdale in January, STK Los Cabos Airport in May and STK Westminster with 2 F&B venues in May and another F&B venue in August.

Owned restaurant cost of sales as a percentage of owned restaurant net revenue increased 210 basis points to 26.1% in the third quarter of 2021 compared to 24% in the prior year.

As a reminder, our second quarter 2021 cost of sales were 25.3%, with our quarter-over-quarter increase was only 80 basis points reflecting effective cost management in this inflationary environment. The increase in cost of sales quarter-over-quarter was primarily driven by beef and shellfish costs.

We continue to work with our vendors and supply chain in order to control costs and continue to manage and engineer our product mix towards higher-margin items. Owned restaurant operating expenses as a percentage of owned restaurant net revenue improved 250 basis points to 56.9% in the third quarter of 2021 from 59.4% in the third quarter of 2020.

Increased sales volumes primarily drove the year-over-year decrease.

Quarter-over-quarter operating expenses increased 480 basis points as we invested in fully staffing our restaurants primarily hiring and training costs for new employees and we also invested in stocking up operating lines in anticipation of high demand for those products as fourth quarter sales volume increase.

Restaurant operating profit increased 50 basis points to 17.1% for the quarter compared to 16.6% in the prior year third quarter. On a total reported basis, general and administrative expenses were $6 million compared to $3.4 million in the prior year.

The increase is related to our restaurants generating strong sales and returning to more normal operations, including normal support staff and levels. When adjusting for stock-based compensation, adjusted general and administrative expenses were $5.3 million in the third quarter of 2021 and $2.9 million in the same quarter last year.

As a percentage of revenues, adjusted general and administrative expenses were 7.4% of total revenue in the third quarter of 2021 and flat compared to the third quarter of 2020.

Additionally, as a percentage of total sales at owned, managed and licensed locations, adjusted general and administrative expenses were 5.3%, which is right in line with our 5% to 5.5% target.

We incurred approximately $1.1 million of direct costs related to COVID-19 during the third quarter composed primarily of costs for regular electrostatic cleaning of the venues, personal protective equipment and sanitation supplies to prevent the spread of COVID-19. This compares to $1.7 million of similar costs last year.

Interest expense net of interest income was $0.8 million in the third quarter of 2021 and $1.3 million in the third quarter of 2020, reflecting lower average outstanding balance and lower interest rates. Income tax expense was $1.5 million for the third quarter of 2021 compared to an income tax benefit of $0.4 million in the third quarter of 2020.

Net income attributable to The ONE Group Hospitality, Inc. was $11.7 million or $0.34 net income per share compared to a net loss of $0.9 million in the third quarter of 2020 or $0.03 net loss per share. Included in this quarter's net income is a $10 million gain related to the forgiveness of CARES Act loans.

When adjusting for the gain related to the forgiveness of CARES Act loan and COVID-19-related expenses, adjusted net income was $3.7 million or $0.11 net income per share compared to an adjusted net income of $0.4 million in the third quarter of 2020 or $0.01 net income per share.

Adjusted EBITDA for the third quarter attributable to The ONE Group Hospitality, Inc. was $10 million in the third quarter of 2021 compared to $4.7 million in the third quarter of 2020. Our adjusted EBITDA does not include any gains related to the CARES Act loan forgiveness.

We have included a reconciliation of adjusted EBITDA and adjusted net income or loss to GAAP net income and loss in the tables in our third quarter earnings release.

Finally, to touch on our liquidity, as of September 30, we had $19.1 million in cash and cash equivalents on our balance sheet, and we generated positive cash flow throughout the third quarter.

As we discussed on our previous call, we amended our credit facility with Goldman Sachs and paid down $22.2 million in debt, resulting in a lower cash balance quarter-over-quarter. The amended agreement provides for a lower interest rate and extends the maturity date for both the term loan and revolving credit facility by 5 years.

The amendment provides for a secured revolving credit facility of $12 million and a $25 million term loan. Other key modifications include the removal of many limiting restrictions, including the cash accumulation provision that restricted our revolver ability and the removal of all financial covenants at the maximum net leverage ratio of 2:1.

Under the amendment and calculated retroactively, we would have been compliant with this covenant throughout 2020, including throughout the toughest times of COVID-19. Most importantly, as a result of this new amendment, we will save $2.5 million in cash interest expense annually and are nearly debt-free when taking into account our cash balance.

And lastly, as previously discussed, on July 13, the company received notice from its bank that its remaining CARES Act loan of $9.8 million had been fully forgiven by the SBA.

As a reminder, due to the uncertainty of COVID-19, other than development, we have suspended all financial guidance for this year, but we'll provide further business updates as warranted. I will now turn the call back to Manny..

Thank you, Tyler, and thank you all for your time today. Let me conclude by saying I'm very encouraged with our results to date and our prospects for 2022 and beyond. Above all, I'm grateful to all our teammates who bring our mission to life every day to be the best restaurant in every market where we operate.

They do this by delivering exceptional and unforgettable guest experiences to every guest every time. I also want to thank our customers that everyday try and continue to return to our restaurants and enjoy the vibe dining experience that they have been craving. We appreciate everyone joining us on the call today.

Tyler and I are happy to answer any questions that you may have.

Operator?.

[Operator Instructions] And our first question is from Nicole Miller with Piper Sandler..

Appreciate the update. I was going to ask a numbers question and then a high-level question.

Could you speak to the October please STK comp you shared in the Kona comp? And could you talk about the equivalent average weekly sales for modeling purposes?.

Go ahead, Tyler..

Yes. So in terms of the average weekly sales, Nicole, average weekly sales for all of North America for STK is $323,000 and then for Kona Grill, it's about $100,000. And then the same-store sales for October were 59.2% over 2019. Kona Grill was 43%, just shy of that, and STK was just shy of 74%..

Okay. So 74 and -- 43 on STK. So the Kona comp -- I get the comp of 43%. I'm just asking what is the average weekly sales dollar number associated with that..

Yes, that equates to about $100,000 a week..

Okay. I got that part. And then the -- yes, the comp up 74%.

I'm sorry, was that the $323,000 then?.

Yes, that's $323,000..

Okay. That helps out a lot. And then big picture, I mean, there's an October acceleration. I mean you had some commentary you bought it. There's some in the press release as well.

But what is the acceleration primarily a function of because it's certainly more than just any mandates lifting that were remaining? And what does it really suggest for the holiday season ahead, maybe talking about how an October average weekly sales now that we can translate to that compares to what is the most likely higher November and December historical range of average weekly sales?.

Nicole, this is Manny. I think there were 3 questions in there, so I'll try to take -- break them in 2. No worries. So the first one is, I think the acceleration in October, if you want to call that. I just think that in October, we did a very good job with our promotion windows in that particular month.

So I think there's a lot of very strong promoting in there. And then the second thing is we have pushed our takeout and delivery business heavily in the month of October. So I think that has helped with the numbers.

And we're seeing 2 benefits from our acceleration of -- on the takeout delivery marketing, which is -- although we're marketing in engines like Postmates and GrubHub and working with those guys, we're actually seeing some of that translating into restaurant visits because we're coming out of top of mind when people are popping to those takeout delivery vehicles, and they're actually coming to the restaurants over and book a reservation come down to us.

So that takeout delivery promoting is actually both helping the takeout business as well as the dine-in business. In terms of the fourth quarter, I would say that what we've seen in general is that the advanced business demand for November and December has been off the charts, frankly, one of the highest I've seen since I've been with the company.

So we're seeing a lot of demand for parties. And we're also seeing a lot of demand for restaurant buyouts. So we're starting to see people wanting to spend big premium dollars to get access to the properties to host big parties. So we're very bullish, and we're very pleased with how the books have been filling up for the fourth quarter.

So I would say that this is one of the biggest demands I've seen, which is one of the reasons why, as you saw from our prepared comments, we spent a lot of time building up our employee base because we think we're going to need every single one of those employees to make sure that we can take care of the takeout delivery and event business in dine-in.

So all put together, we think our fourth quarter is going to be extraordinary relative to sales, and we really geared ourselves up in the third quarter to get there..

[Operator Instructions] We do have a question from Mark Smith with Lake Street Capital Markets..

First off, I just want to dig in a little bit deeper on the restaurant level margins. Maybe Tyler, if you can just talk about the -- first, the labor component.

It sounds like everybody is seeing pressure out there, but was any of this in Q3? Could it be viewed as kind of onetime as you invested in systems and ways to kind of keep this labor around?.

So Mark, this is Manny. Get me for the initial part of that question, and I'll turn it over to Tyler for additional color. So in the third quarter, we took our hourly employee base up about 300 people. So we finished the second quarter with around 2,900 restaurant-level employees. And we took it up to 3,200.

So think of a 3-plus -- 300-plus net increase to the account just because, as I said earlier, we needed to get employees available to take care of what we think is going to be an incredible fourth quarter. So we really bulked up on the number of employees.

The average employee that we brought in was working around 30 hours a week in just getting up to speed. So -- and we did that throughout the whole quarter. So just taking those numbers, you probably could figure out a number of what we think that number looks like, and a lot of it is training.

So it takes an average of 50 days to 60 days to really get our employee base proficient. So I would say that we did have a pretty large dollar amount in training and development of the new staff to bring them up to standard.

Tyler, do you want to add anything else to that?.

Yes, I would say that -- and really the building up of the staff with anticipation of a very, very busy Q4. So I don't think it's a matter of being necessarily onetime in nature other than the fact that there's an investment in what we anticipate to be a very, very busy holiday season..

Yes. I mean, last point on that is, I mean, our average volume for STK is 300,000-plus average week per restaurant. So that requires that we bring in more employees.

So we did have to make sure that we really loaded up the employees in the restaurants to take care of that business, particularly when our objective is not just to take care of the business, but we believe in building repeat business and frequency.

So we want to make sure that as we bulk up on sales that we continue to deliver an outstanding experience and making each one of our restaurants the best restaurant in the markets they're in..

Okay. And then looking at just other inflationary pressure, I think Tyler you called out beef and shellfish.

What are you seeing today? And then if you can update us on anything that you've got kind of on contract or anything that's running out?.

I mean so seafood was probably the most important or most relevant to us because our seafood flatters are a marquee item in the brand. But as you probably saw from our COGS, if you look at our third quarter COGS versus our second quarter COGS, I think, we only went up 80 basis points as a company.

So I would say relative to the pressure, I think, we did very well managing that. And what we're doing to manage it is several things. One is substitute. So we've looked for alternative products to -- that are a better cost. So for instance, think of red crab. We switched red king crab and we went to Dungeness crab, which is also a premium great product.

So we're using substitution as a good idea in terms of creating -- being able to offset some of the increases we're seeing. And then -- in terms of contracts, we actually now have 2 vendors on meat that are fully engaged and that really allows us to work with each one of them and work on different parts of the PMIX.

So filets versus ribeye versus New York strip. So we actually have been enhancing our supply chain for that. And then the third thing that we've been doing is utilizing promotions to help with the PMIX effect. So in the month of October, we featured Welcome Back Pumpkin, which was our highlight promotion of the quarter.

And I think I mentioned in Nicole's question that promoting had helped us. Well, that's an example that we're able to drive interest and sales and then the costs on the pumpkin total leads that we actually had as a featured product was very good. So we got a positive benefit from that. So we really are utilizing PMIX. And then, of course, cocktails.

We've done a lot of emphasis in the month of October and actually September as well, really hitting our beverages as a good profit opportunity for us. So we've been really emphasizing liquor sales in the restaurants.

Tyler, anything else you can add to it?.

No. I think Manny touched on it just in terms of our overall quarter-over-quarter COGS number really increase 80 basis points. Manny touched on all the different activities that we've employed to really maintain that number and feel like we've managed that number very, very tightly for the quarter..

Okay. And the last one for me is just monthly cadence in sales. And thank you guys for giving us the October number, but I don't know if you have that readily available..

Well, we kind of reported July as being a very good month for us. So we know that was a very strong month. I would say that without giving specific numbers, not having the right in front of me, but I think August was the softer of the 3 months in the quarter. So we had a very strong July.

August was okay, and then coming back in September, it became strong again. I think the go back-to-school time frame was very good for us. We have a lot of -- particularly with Kona Grill, we have lots of restaurants that have -- restaurants near major campuses. So I think the back-to-school period was very strong.

And then as I mentioned earlier, the promoting in October between both takeout and the Welcome Back Pumpkin features have been very strong for us..

[Operator Instructions] We do have a question from David Kanen with KWM..

Congratulations. Excellent job. So the first question is in regards to the Events business. I know historically, Q4, that's a large chunk of your overall revenue. How does it look versus 2019 at this point, just the bookings? I'm sure it's off the charts versus 2020.

But how would you characterize it versus 2019?.

So I will talk -- I'll speak about it from a bookings perspective right now. We're seeing just a superior number of events being asked for. And then we also are seeing a lot more demand for premium type of events like restaurant buyouts. So we're seeing less for entry-level events, but a lot more for premium.

So I think in this fourth quarter, our strategy on that is to book on the high end because we also have a very robust à la carte business here. So really, in the fourth quarter, our focus will be balancing the great premium business from the fence that we are getting demand for right now and then balancing that with à la carte.

I would say it's the best of men I've ever seen since I've been with the company for fourth quarter. And I think that -- we've also bulked up our processes for booking events. So I think the combination of process and just demand will probably lead to a very strong event quarter for us..

Okay. That's encouraging.

So in other words, it's going to exceed 2019 despite the headwinds of COVID and so forth?.

Yes. I mean I would say that without creating a guidance number on it, I would say that the lead in right now is that it will be a very robust and like I said, it's the best bookings I've seen in a while or actually since I've been with the company. So I think that will translate into an incredible events business.

Again, I'm only not mitigating is just that as we get into the quarter, we will make sure that we don't lose the à la carte business. So we always have to make sure that we keep a good balance of that. So that's really the only question is the capacity, right? How much capacity do we have relative to the demand both for events and à la carte dine-in.

So that's going to be what our very -- season experienced operations team will be working on making sure that we get the best of both..

Understood. And then just getting back to labor. So it sounds like -- and I'm trying to quantify it. It sounds like there was some pull-in gearing up for Q4. You wanted to make sure that you were staffed up.

So do you think that part of your labor expense for Q3 reflected labor, that perhaps you wouldn't ordinarily have taken on if you knew that you didn't need it on a go-forward basis. It was called onetime, but I don't know if that's correct. But maybe pull-in.

Is that the proper way to look at it?.

Yes. I mean -- so David, the way I speak about it is that we'll probably put about $1.5 million to $2.5 million in investments and just gearing up the hiring process because -- if you think about it, it takes about 60 days to maybe 90 days for our employees to be really proficient and really execute both models really well.

So we didn't want to go into the busiest fourth quarter that we think we've ever experienced. As a matter of fact, I know that's going to be the case with rookies and experienced staff going through it. So we took the advantage of the lower volume in the third quarter, and we decided to go hard on hiring.

So we did hire plus 300 employees, which is quite a bit for us. And we took the time to train, get them ready. So I feel like now going into the fourth quarter, we're actually going to be executing the business with well-experienced employees rather than trainees going to having volumes.

When you start getting volumes in the 300-plus level, you really need to make sure that's your labor force is very well trained. So that's one of the things that we really emphasized in the third quarter is that we want to be ready and we want to really blow it out of the water in the fourth quarter.

So that was our strategy with hiring and bringing people in..

Yes, I get it, and I commend you for the forward thinking and the leadership thereof. And then another question just on the airport business. I've heard -- I have some friends that have been in Cabo Airport. They send me pictures. It seems like there's a hyena out the door, almost nonstop.

Can you speak to just the -- those unit economics? And then also you alluded to an opportunity. You said it's probably going to be the first of many.

If we look out 2 to 3 years, can you quantify that opportunity kind of a target of other STK airport locations?.

Yes. So great question. So far, our experience has been fantastic right in line with what we thought it would be. We had a lot of excitement because we have a great bar business and that works very well with airport travelers. So we're super excited about that.

And then we also -- the first deal that we did is with areas, which is a fantastic airport operator and they have incredible footprint worldwide. So we think we've gotten a great partner, and now we have a great access to future opportunities with them. As a matter of fact, we are ongoing dialoguing with them. So that's great.

And then on the standby, we have a couple of other great operators that we've been talking to who are also interested and going into the airport business with us. So we think it's a great opportunity for us. We think it can be somewhere between 10 and 20 restaurants in airports.

And obviously, the big trick is to make sure that the airport business is also very strategic. So if you think of Cabos, why that's a strategic play for us is that's because where a lot of people from Arizona, Nevada, California go for vacation.

So that was a great billboard type of restaurant for us because it keeps the brand top of mind with the travelers. So it's not just about the number of units, but it's also making sure that when we get to airports, it's a strategic business that you're getting to the right airports, into the right terminals, into the right occasion.

So in Cabos were by the international gates, which is the place you want to be at. So we're super excited about that. And the business has been very high volume, and our partners are very excited about the profitability of the business because of the bar component..

Sounds good. And then last question. This is, I guess, looking out a year from now, it seems like you're going to be confronted with the high-class problem of having net cash pretty soon and generating significant free cash flow given the capital-light nature of the business.

And it seems like CapEx next year based on development shouldn't be a whole lot higher than this year.

Am I correct in saying that?.

Yes. I mean we're going to generate a lot of free cash flow is really the answer there, yes..

Okay. So this is the question is the high-class problem of generating so much free cash flow.

How do you see you guys allocating that options being potential M&A, accretive M&A, dividends, stock buyback, all of the above? What are your thoughts thereof?.

So my answer on that is that -- we -- that's a good problem. As you said, high-class problem. We are anticipating that will happen very soon. My answer to that is we'll always do what's best for the shareholders and maximizing the shareholder return.

So if we're in a good place to get the right acquisition, we can do that just like we did with Kona Grill. And what I mean by that is we can get a great return and we can really make a difference with the assets. So that always will be in play. We also have the option of accelerating growth. As a matter of fact, we just did that.

We added the 3 to 5 Kona Grill to our growth model. So it's -- that's another lever and level flexibility that we have. And then after those options, we also have the option of doing dividends and stock buybacks. So all of those things are all open.

And obviously, as the time gets -- as we get closer to those decision times, we will make the decision that's best to drive ultimate shareholder value..

We also have a follow-up question from Nicole Miller with Piper Sandler..

I wanted to come back, digging into the back of the release here, there's the operating profit by brand. It just has to be store level.

That's what that is, right, Tyler, the $8.3 million and the $3.4 million?.

Yes, you're talking about the 17% and the 11%....

Yes, the 22.6% and 11%....

The 22% and the 115?.

Yes, exactly. Okay.

So on STK, the 22.6%, how much of that was this labor you're talking about getting fully staffed and getting ahead of what's going to be a great holiday? And how does that kind of taper? Does it doesn't probably entirely taper in a quarter, but does it stick with you just for a couple of quarters or for -- get to annualize it?.

I think -- so the majority, I would say, about 75% of the labor investment was Kona Grill and the 25% of the labor....

I was just going to say and then I'll ask the same question on Kona.

So this was -- the whole store level margin was brought down by Kona then?.

Yes. I would say on the overall average, I'd say Kona was the bigger proponent of that because that's what we -- of the 300 employees that we went up, I think about 200-plus was Kona Grill and about 100 or so was STK. So Kona Grill was the one where we put the more investment behind on the labor.

And as I mentioned on David's question about the range of value. I figured about $1.5 million to $2 million of onboarding and initial training costs. And in terms of how long that lasts, I don't think that lasts more than 60 to 90 days. So it will be a very short-term onetime investment in labor..

And then is the whole idea, big picture long term, no time line attached that Kona is still like a 17% store level margin and STK with all of its modifications and certainly higher volume enhancement is like a 27% store-level margin?.

Yes. I mean, if I adjust for the labor just this quarter alone for Kona Grill, we'd probably would have been in the 15% -- 14%, 15% range once you adjust for everything associated with bringing the individuals and so forth. And -- but then also remember that the third quarter is an average quarter in volume for Kona Grill.

So seasonally, that is not the best quarter for Kona Grill. I think the second quarter is actually the best quarter for Kona Grill. So I would look at the quarter dip mostly as a factor of seasonality as well as the investment in labor..

All right. Thanks for clearing that up for me. And sorry I had to repeat some of it. I appreciate it..

No worries. Thank you, Nicole..

We have a question from Greg Cohen with Rambleside..

Congrats on the amazing performance. Question on the REEF ghost Kitchen deal.

Can you just kind of walk through the economics of that agreement in Houston just so we can understand the potential EBITDA contribution? And then is that just a trial market and this is something we could expand across the country in kind of the secondary and tertiary markets where we don't want to have a store? Or how should we think about how meaningful that deal could be?.

Sure. So that's a great question. So our initial agreement with REEF is currently for the state of Texas. And we specifically narrowed down to Houston because that's the one market that we currently don't have a restaurant.

And based on our development plan, it's going to take us -- we will get to Houston with the street store, but it's not in the next year. So there's going to be a window of time to get there. And then we also know that Kona Grill had a really good presence in Houston at one point and it was a very good brand accepted there.

So we're utilizing REEF right now as an opportunity to bring the brands to a place where we don't have a street store, and we're looking at that as kind of ancillary complementary opportunity for us. So it's interesting. I think as we've talked about internally, we think the REEF opportunity could be pretty big.

We've spoken about 300 to 500 type of vessels just in the U.S. So we think it could be a very big business for us. But I don't want to overpromise on that. We're going to go into -- the reason that we did our deal with them although REEF would like to have done a whole U.S.

sized deal, we decided that as we do with everything, we want to test it and see if the works or not. I also want to have a good understanding of what the brand acceptance is when we take an STK and Kona Grill to a place where really there's not a street store. So I'm excited. Tyler is super excited.

He's over here smiling a lot when we talk about this, but the reality is, as you know, we're very -- we're -- we take risk, and we want to be -- and we're all about growing the business, but we also don't want to overcommit on it, but it certainly looks promising.

There they have a lot of places that we can go with them and a lot of places that we probably don't want to take the motor cost of doing the street stores. So this could be a very interesting complementary growth strategy for our street store strategy. Economics on it, it's all top line.

So we get a royalty of the revenues and it's in line with our typical 5% to 7% deal on top. So there is no risk on the bottom line, if you will, it's a full top line deal..

Okay. Great. No, that's interesting. I mean if we couldn't grow that that's kind of a second franchise pillar and given the fact that it's no capital from us. I mean it doesn't seem as conceivable this could be a business that does well into the tens of millions of EBITDA in short order. So that's good. Good clarification.

The second question I have is around Street stores. I think historically, we've spoken about opening stores in secondary markets kind of -- maybe not even secondary markets, but Boston, D.C., Minneapolis, and then getting into secondary markets and second locations within primary markets.

Can you just kind of walk us through where we are with that, with STK in particular, as we think about the pipeline next year and maybe the year after?.

Yes. I mean, so great question in terms of talking about the strategic development of the footprint. So I mean, I guess, if you're in New York, everything else is kind of the secondary market, that's kind of like our old definition of secondary markets.

But I think actually, what we've seen the last couple of years actually are mid-sized markets like Denver, markets like San Diego, markets like Nashville, they're just killing it. I mean, actually, in those markets, our volumes have become frankly, incredibly attractive in the $250,000 range.

And we also saw that when we opened in Bellevue, we're also around that $250 level. So we're seeing now that frankly, this idea of secondary market is really not existent for us because I don't think there's other brands in America that opened a $250,000 pace and keep it there.

So right now, I'm looking from a -- at least from an STK perspective, that the white space for us is actually wide open right now, because once we can be successful in this type of markets, it just takes -- gives us a lot of comfort that markets like Houston, Boston, Washington, D.C., Minneapolis, Charlotte, Philadelphia, all those markets now really in play for us.

And what we're also doing now is we're looking at markets like Denver and Chicago, which we're just destroying in those markets. We're looking at those markets as a second and third store opportunity. So we're really seeing kind of, frankly, right now, a very white space for STK. And I frankly don't really see anything as a secondary market anymore.

It's kind of like really trying to get to market as fast as you can in these markets to have the opportunities. Then on Kona Grill, the opportunity is there's a lot of great markets in America that don't have a clear player in the sushi category or that in great college campuses type of towns. I think there's a tremendous opportunity for us to go hit.

Now that our definition of secondary markets is more the high profile suburbs and really cities in the 500,000 population range where we think that Kona Grill can do really well, particularly which broad grill offering, complemented with unique sushi program. So I think that right now, pretty much the map is wide open in the U.S.

And I think we have a tremendous amount of white space ahead of us. As a matter of fact, I think we stated that we're excited about the fact that our white space now is 400-plus restaurants. So we're super excited and frankly, really busy right now just getting through managing our real estate pipeline..

Okay. That makes a ton of sense, and that's helpful color. And just one final question.

Given what you're saying about how we have kind of industry-leading sales, industry-leading growth, industry-leading margins, industry-leading brands, industry-leading food quality and, I guess, 3 separate high-growth business lines, including a growing franchise component with ghost kitchens, cloud kitchens and just traditional franchise and management.

What do you think the market is missing or what do you think the company could be doing better to kind of tell its story because the math that I do, Manny, and I hope that Nicole updates her model to reflect this, but we should be doing $70 million in EBITDA next year, if you think about the EBITDA contribution from the franchise channel, the new store growth and the contributions from Kona.

And if you look at the recent IPOs of various fast casual restaurant chains and where premium high growth, kind of low CapEx businesses are trading, which frankly have worse unit economics, worse margins, worse product, worst growth, et cetera, are trading at 15 to 20x EBITDA out of the gate.

And if you apply that to the EBITDA, I just mentioned, our business should be valued between $1 billion and $1.5 billion of enterprise value, and that could get you to $30 to $40 of stock.

So I guess, the long -- the short answer to the long question is, why are we trading at $15, $14 or $13 a share, whatever it is, when we should be trading at least 2, if not 3x that value? And what are we going to do about it?.

All right. Well, let me answer the question this way. And this is going to be my answer to that question. So we, as a business, internally, we focus on strategy and we focus on execution, and we focus on driving great results. And then we circle that back with telling the story, which is what we're doing today.

So we tell you what we're doing and what we plan to do. We don't -- so what we can do is focus on our business. So that's what we do here. And we go out and tell the story now relative to everything else that you said, that's really the market. And so that's something that as we go forward, we will continue working on it.

Also don't forget that for the last year, our TSR is over 400%. So there's a lot of -- there's a lot of good things to say about a business that's delivering 400-plus TSR. So my focus as a CEO is to keep the business on track, keep executing, delivering great results, and then I'll let the market evaluate the business..

And there's no further questions at this time..

All right. Well, I want to thank everyone for taking the time and interest on The ONE Group. As I always do, I want to thank the fantastic contributions of our teammates, frankly, in my opinion, the best team in the industry. They have frankly done some things that are extraordinary, and I look forward into the fourth quarter and beyond.

And I look forward to running into you in our restaurants. So everyone, have a great day, and I'll turn it back over to the operator..

Thank you. That concludes the call for today. We thank you for your participation and ask that you please disconnect your lines..