Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2024
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 ororganization)
(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, 2024: 31,145,546
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
21
Item 3. Quantitative and Qualitative Disclosures About Market Risk
35
Item 4. Controls and Procedures
PART II – Other Information
Item 1. Legal Proceedings
36
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
37
Item 5. Other Information
38
Item 6. Exhibits
40
Signatures
41
2
PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
June 30,
December 31,
2024
2023
ASSETS
(Unaudited)
Current assets:
Cash and cash equivalents
$
32,247
21,047
Credit card receivable
10,979
7,234
Restricted cash and cash equivalents
552
—
Accounts receivable
9,287
10,030
Inventory
9,164
6,184
Other current assets
4,849
1,809
Due from related parties
376
Total current assets
67,454
46,680
Operating lease right-of-use assets
271,160
95,075
Property and equipment, net
260,385
139,908
Goodwill
145,162
Intangibles, net
146,193
15,306
Deferred tax assets, net
45,236
14,757
Other assets
8,639
4,636
Security deposits
1,635
883
Total assets
945,864
317,245
LIABILITIES, SERIES A PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
26,723
19,089
Accrued expenses
52,474
28,333
Current portion of operating lease liabilities
16,523
6,897
Deferred gift card revenue and other
6,715
2,077
Current portion of long-term debt
3,500
1,500
Other current liabilities
559
266
Total current liabilities
106,494
58,162
Long-term debt, net of current portion, unamortized discount and debt issuance costs
330,861
70,410
Operating lease liabilities, net of current portion
294,171
120,481
Other long-term liabilities
5,116
832
Total liabilities
736,642
249,885
Commitments and contingencies (Note 17)
Series A preferred stock, $0.0001 par value, 160,000 shares authorized; 160,000 issued and outstanding at June 30, 2024 and 0 issued and outstanding at December 31, 2023
143,481
Stockholders’ equity:
Common stock, $0.0001 par value, 75,000,000 shares authorized; 33,765,978 issued and 31,297,200 outstanding at June 30, 2024 and 33,560,428 issued and 31,283,975 outstanding at December 31, 2023
Preferred stock, other than Series A preferred stock, $0.0001 par value, 9,840,000 shares authorized; no shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively
Treasury stock, at cost, 2,468,778 shares at June 30, 2024 and 2,276,453 shares at December 31, 2023
(15,939)
(15,051)
Additional paid-in capital
71,656
58,270
Retained earnings
15,348
28,884
Accumulated other comprehensive loss
(2,987)
(2,930)
Total stockholders’ equity
68,081
69,176
Noncontrolling interests
(2,340)
(1,816)
Total stockholder's equity
65,741
67,360
Total liabilities, Series A preferred stock and stockholders' equity
See notes to the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except income per share and related share information)
For the three months ended June 30,
For the six months ended June 30,
Revenues:
Owned restaurant net revenue
169,021
79,923
250,529
158,502
Management, license, franchise and incentive fee revenue
3,473
3,470
6,960
7,447
Total revenues
172,494
83,393
257,489
165,949
Cost and expenses:
Owned operating expenses:
Owned restaurant cost of sales
35,877
19,215
54,591
38,070
Owned restaurant operating expenses
103,192
48,784
152,830
95,611
Total owned operating expenses
139,069
67,999
207,421
133,681
General and administrative (including stock-based compensation of $1,495, $1,234, $2,853 and $2,554 for the three and six months ended June 30, 2024 and 2023, respectively)
10,622
8,039
18,156
15,523
Depreciation and amortization
8,025
3,506
13,285
7,162
Transaction and exit costs
6,826
8,349
Transition and integration expenses
3,794
Pre-opening expenses
2,504
1,609
5,418
2,908
Other expenses
195
32
352
Total costs and expenses
170,840
81,348
256,455
159,626
Operating income
1,654
2,045
1,034
6,323
Other expenses, net:
Interest expense, net of interest income
7,865
1,642
9,943
3,429
Loss on early debt extinguishment
4,149
Total other expenses, net
12,014
14,092
(Loss) income before provision for income taxes
(10,360)
403
(13,058)
2,894
(Benefit) provision for income taxes
(3,268)
(13)
(3,536)
148
Net (loss) income
(7,092)
416
(9,522)
2,746
Less: net loss attributable to noncontrolling interest
(163)
(152)
(524)
(428)
Net (loss) income attributable to The ONE Group Hospitality, Inc.
(6,929)
568
(8,998)
3,174
Series A Preferred Stock paid-in-kind dividend and accretion
(4,538)
Net (loss) income available to common stockholders
(11,467)
(13,536)
Net (loss) income per common share:
Basic
(0.36)
0.02
(0.43)
0.10
Diluted
Weighted average common shares outstanding:
31,424,938
31,782,783
31,376,951
31,730,299
32,673,457
32,779,821
4
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited, in thousands)
Currency translation gain (loss), net of tax
11
52
(57)
(18)
Comprehensive (loss) income
(7,081)
468
(9,579)
2,728
Less: comprehensive loss attributable to noncontrolling interest
Comprehensive (loss) income attributable to The ONE Group Hospitality, Inc.
(6,918)
620
(9,055)
3,156
Comprehensive (loss) income attributable to common stockholders
(11,456)
(13,593)
5
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND
SERIES A PREFERRED STOCK
(Unaudited, in thousands, except share information)
Accumulated
Additional
other
Series A Preferred Stock
Common stock
Treasury
paid-in
Retained
comprehensive
Stockholders’
Noncontrolling
Shares
Amount
Par value
stock
capital
Earnings
loss
equity
interests
Total
Balance at December 31, 2023
31,283,975
Stock-based compensation
1,358
Issuance of vested restricted shares, net of tax withholding
24,521
(124)
Loss on foreign currency translation, net
(68)
Net loss
(2,069)
(361)
(2,430)
Balance at March 31, 2024
31,308,496
59,504
26,815
(2,998)
68,273
(2,177)
66,096
22,905
1,495
Exercise of stock options and warrants
50,000
242
108,124
(356)
Issuance of warrants
10,771
Purchase of treasury stock
(192,325)
(888)
Gain on foreign currency translation, net
Series A Preferred Stock issuance
160,000
138,943
4,538
Balance at June 30, 2024
31,297,200
Balance at December 31, 2022
31,735,423
(7,169)
55,583
24,166
(2,869)
69,714
(1,124)
68,590
16,205
1,320
247,536
(1,432)
(118,085)
(735)
(70)
Net income (loss)
2,606
(276)
2,330
Balance at March 31, 2023
31,881,079
(7,904)
55,471
26,772
(2,939)
71,403
(1,400)
70,003
17,930
1,234
135,500
226
66,717
(370)
(478,992)
(3,418)
Balance at June 30, 2023
31,622,234
(11,322)
56,561
27,340
(2,887)
69,695
(1,552)
68,143
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Non-cash exit costs
321
2,853
2,554
Amortization of debt issuance costs and debt original issuance discounts
806
372
Deferred taxes
(3,671)
12
Non-cash loss on early debt extinguishment
1,674
Changes in operating assets and liabilities, net of acquisition:
2,623
5,722
1,425
(37)
2,300
(253)
(35)
(2,397)
(257)
891
(922)
(4,007)
(4,943)
Operating lease liabilities and right-of-use assets
466
1,735
Other liabilities
(458)
(758)
Net cash provided by operating activities
6,554
13,136
Investing activities:
Purchase of property and equipment
(34,941)
(23,896)
Acquisition related payments, net of cash acquired
(368,605)
Net cash used in investing activities
(403,546)
Financing activities:
Borrowings of long-term debt
333,829
Repayments of long-term debt and financing lease liabilities
(73,612)
(435)
Issuance of Series A preferred stock net of discount
Issuance of warrants to Series A preferred stockholders
Exercise of stock options
Tax-withholding obligation on stock-based compensation
(480)
(1,802)
(4,153)
Net cash provided by (used in) financing activities
408,805
(6,164)
Effect of exchange rate changes on cash
(61)
(19)
Net change in cash and cash equivalents and restricted cash and cash equivalents
11,752
(16,943)
Cash and cash equivalents and restricted cash and cash equivalents, beginning of period
55,121
Cash and cash equivalents and restricted cash and cash equivalents, end of period
32,799
38,178
Supplemental disclosure of cash flow data:
Interest paid, net of capitalized interest
4,572
4,055
Income taxes paid
413
312
Accrued purchases of property and equipment
10,768
5,602
Reconciliation of cash and cash equivalents and restricted cash and cash equivalents
Total cash and cash equivalents and restricted cash and cash equivalents as shown in the statement of cash flows
7
Notes to Condensed Consolidated Financial Statements
Note 1 – Summary of Business and Significant Accounting Policies
Description of Business
The ONE Group Hospitality, Inc. and its subsidiaries (collectively, the “Company”) is an international restaurant 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 and consulting 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 at a particular hospitality venue and customized for the client. As of June 30, 2024, 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, Benihana, the nation’s leading operator of Japanese teppanyaki restaurants, Kona Grill, a polished casual bar-centric grill concept featuring American favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere, and RA Sushi, a Japanese cuisine concept that offers a fun-filled, bar-forward, upbeat, and vibrant dining atmosphere.
On May 1, 2024, the Company acquired 100% of the issued and outstanding equity interests of Safflower Holdings Corp. from Safflower Holdings LLC (the “Benihana Acquisition”). Safflower Holdings Corp. beneficially owns most of the Benihana restaurants, as well as all of the RA Sushi restaurants, in the United States. It also franchises Benihana locations in the U.S., Latin America (excluding Mexico) and the Caribbean. Refer to Note 2 – Benihana Acquisition for additional information.
As of June 30, 2024, the Company owned, operated, managed, or licensed 167 venues, including 28 STKs, 86 Benihanas, 26 Kona Grills and 19 RA Sushis in major metropolitan cities in North America, Europe, Latin America and the Middle East and 8 F&B venues in four hotels and casinos in the United States and Europe. For those restaurants and venues that are managed, licensed or franchised, the Company generates management fees and franchise fees based on top-line revenues and incentive fee revenue based on a percentage of the location’s revenues and profits.
Basis of Presentation
The accompanying condensed consolidated balance sheet as of December 31, 2023, which has been derived from audited financial statements, and the accompanying unaudited interim condensed consolidated financial statements (“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, 2023.
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 condensed consolidated balance sheet as of December 31, 2023 have been made to conform to current year presentation. The Company has reclassified credit card receivables of $7.2 million to be presented within credit card receivables from accounts receivable.
Certain reclassifications were also made to conform the prior period segment reporting to the current year segment presentation. Refer to Note 15 – Segment Reporting for additional information regarding the Company’s reportable operating segments.
8
Significant Accounting Policies
Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for the Company’s significant accounting policies. The following represents changes in accounting policies during 2024, primarily attributable to the evaluation of accounting policies in conjunction with the Benihana acquisition discussed below:
Restricted cash and cash equivalents. Restricted cash and cash equivalents are accounts that are restricted to funding payment of employee benefits and collateral accounts relating to liquor license bonds.
Goodwill. Goodwill consists of goodwill associated with the Benihana Acquisition. Goodwill is not amortized and is tested for impairment annually on November 1st or on an interim basis whenever events or changes in circumstances indicated a potential impairment.
Recent Accounting Pronouncements
In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosure.” The ASU updates reportable segment disclosure requirements, primarily through requiring enhanced disclosures about significant segment expenses and information used to assess segment performance. The ASU is effective for fiscal years beginning after December 15, 2023, with early adoption permitted. The Company is evaluating the impact of adopting this ASU on its disclosures.
In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The ASU includes amendments requiring enhanced income tax disclosures, primarily related to standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. The guidance is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is evaluating the impact of adopting this ASU on its disclosures.
Note 2 – Benihana Acquisition
On May 1, 2024, the Company acquired 100% of the issued and outstanding equity interests of Safflower Holdings Corp. and its affiliates comprising of 93 company owned restaurants and 12 franchised restaurants (the “Benihana Acquisition”). The Company purchased the equity for a contractual price of $365.0 million, subject to customary adjustments. The Company believes that Benihana is complementary to its existing brands and will enable the Company to capture market share in the Vibe Dining segment.
The assets and liabilities of Benihana were recorded at their respective fair values as of the date of acquisition. The Company is in the process of finalizing the fair value of certain assets and liabilities acquired, including property and equipment, intangible assets, operating lease right-of-use assets, operating lease liabilities and income tax assets and liabilities. The fair values set forth below are based on preliminary estimates and are subject to change as additional information is obtained during the measurement period which is up to one year from acquisition date (amounts in thousands).
9
Preliminary purchase consideration:
Contractual purchase price
365,000
Cash and cash equivalents, restricted cash and cash equivalents and credit card receivable
25,224
Working capital adjustment
(82)
Cash consideration paid
390,142
Net assets acquired:
20,986
551
3,687
4,405
7,315
Property and equipment
103,015
181,144
26,808
Intangible assets
130,900
2,898
(9,851)
(29,228)
(5,337)
Operating lease liabilities
(187,909)
(4,404)
Total net assets acquired
244,980
The excess of the purchase price over the aggregate fair value of net assets acquired was allocated to goodwill. The portion of the purchase price attributable to goodwill represents benefits expected because of the acquisition, including sales and unit growth opportunities in addition to supply-chain and support-cost synergies. The Benihana and RA Sushi tradenames have an indefinite life based on the expected use of the asset and the regulatory and economic environment within which it is being used. The tradenames represent highly respected brands with positive connotations, and the Company intends to cultivate and protect the use of the brands. Goodwill and indefinite-lived tradenames are not amortized but are reviewed annually for impairment or more frequently if indicators of impairment exist.
As a result of the Benihana Acquisition, the Company incurred approximately $6.5 million and $7.8 million of transaction costs, respectively, during the three and six months ended June 30, 2024, which are included in transaction and exit costs in the consolidated statements of operations. The Company incurred $3.8 million for transition and related integration efforts in the three and six months ended June 30, 2024.
The following pro forma results of operations for the three and six months ended June 30, 2024 and 2023 give effect to the Benihana Acquisition as if it had occurred on January 1, 2023 (in thousands):
Total Revenues(1)
212,794
217,260
431,026
434,649
Net (loss) income as reported
(10,535)
3,293
39,880
8,577
Adjustments:
11,236
13,639
(13,639)
Transition and integration costs
(3,794)
(4,149)
Purchase price accounting adjustments(2)
67
171
9,744
463
Change in interest expense
387
1,170
Pro forma net income (loss) before income taxes
9,098
3,927
72,097
(11,372)
Income tax effect of adjustments
(1,473)
(48)
(2,416)
1,496
Change in valuation allowance
(59,925)
Pro forma net income (loss)
7,625
3,879
9,756
(9,876)
(1) $3.6 million of the year-over-year change in revenue occurred at Benihana and RA during April 2024, before the acquisition
(2) Purchase price accounting adjustments include the elimination of Benihana's impairment charges and changes to depreciation
10
The above pro forma information includes the below post-acquisition results of the Benihana Acquisition (in thousands):
Revenue
89,137
Operating Income
14,875
General and administrative(1)
(2,597)
(6,826)
Adjusted Operating Income
1,658
Interest expense
(5,787)
Loss before provision for income taxes
(8,278)
Benefit for income taxes
2,243
(6,035)
(1) Reflects only direct general and administrative costs
The most significant adjustments included in the pro forma financial information are the elimination of the release of Benihana’s valuation allowance, elimination of Benihana’s impairment charges, movement of transaction, transition, integration and debt extinguishment costs, and increased interest expense associated with debt incurred to fund the Benihana Acquisition, all giving effect as if the acquisition had occurred on January 1, 2023.
In the opinion of the Company’s management, the unaudited pro forma financial information includes all significant necessary adjustments that can be factually supported to reflect the effects of the Benihana Acquisition and related transactions. The unaudited pro forma financial information is provided for informational purposes only and are not necessarily indicative of what our actual results of operations would have been had the Benihana Acquisition and related transactions been completed as of January 1, 2023 or that may be achieved in the future.
Note 3 – Property and Equipment, Net
Property and equipment, net consist of the following (in thousands):
Furniture, fixtures and equipment
82,908
49,753
Leasehold improvements
202,609
130,136
Less: accumulated depreciation
(69,898)
(60,128)
Subtotal
215,619
119,761
Construction in progress
40,222
17,044
Restaurant smallwares
4,544
3,103
Depreciation related to property and equipment was $7.7 million and $3.4 million for the three months ended June 30, 2024 and 2023, respectively, and $13.0 million and $7.0 million for the six months ended June 30, 2024 and 2023, respectively. The Company depreciates construction in progress upon such assets being placed into service.
Note 4 – Intangibles, Net
Intangibles, net consists of the following (in thousands):
Indefinite-lived intangible assets
Tradenames
147,400
17,400
Finite-lived intangible assets
Franchise agreements
900
Other finite-lived intangible assets
101
Total finite-lived intangible assets
1,001
Less: accumulated amortization
(2,208)
(2,195)
Total intangibles, net
Finite-lived intangible assets are amortized using the straight-line method over their estimated useful life of 10-15 years. Amortization expense was nominal for the three and six months ended June 30, 2024 and 2023. The Company’s estimated aggregate amortization expense for each of the five succeeding fiscal years is less than $0.1 million annually.
Note 5 – Accrued Expenses
Accrued expenses consist of the following (in thousands):
Payroll and related
12,924
5,655
Interest
7,179
2,396
VAT and sales taxes
5,480
4,238
New restaurant construction
4,965
6,318
Amounts due to landlords
4,782
2,753
Legal, professional and other services
3,830
1,364
Insurance
1,412
545
Income taxes and related
30
Other (1)
11,902
5,034
Note 6 – Long-Term Debt
Long-term debt consists of the following (in thousands):
Term loan agreements
350,000
23,750
Revolving credit facility
Delayed draw term facility
49,750
Total long-term debt
73,500
Less: current portion of long-term debt
(3,500)
(1,500)
Less: debt issuance costs
(595)
(1,590)
Less: debt original issuance discount
(15,044)
Total long-term debt, net of current portion
Interest expense, net for the Company’s debt arrangements, excluding the amortization of debt issuance costs, debt original issuance discount and fees, was $7.3 million and $1.8 million for the three months ended June 30, 2024 and 2023, respectively, and $9.3 million and $3.8 million for the six months ended June 30, 2024 and 2023, respectively. Capitalized interest was $0.6 million and
$0.9 million for the three and six months ended June 30, 2024, respectively. Capitalized interest was $0.4 and $0.6 million for the three and six months ended June 30, 2023, respectively.
As of June 30, 2024, the Company had $6.2 million in standby letters of credit outstanding for certain restaurants and $33.8 million available in its revolving credit facility, subject to certain conditions.
Credit and Guarantee Agreement
In connection with the Benihana Acquisition, on May 1, 2024, the Company entered into a credit agreement (the “Credit Agreement”) with Deutsche Bank AG New York Branch, Deutsche Bank Securities Inc., HPS Investment Partners, LLC and HG Vora Capital Management, LLC (collectively, the “Lenders”). The Credit Agreement provides a $350.0 million senior secured term loan facility (the “Term Loan Facility”) and a $40.0 million senior secured revolving credit facility (the “Revolving Facility”, and together with the Term Loan Facility, the “Facilities”), up to $10.0 million of which will be available in the form of letters of credit. On May 1, 2024, the Company borrowed $350.0 million under the Term Loan Facility and the Revolving Facility was and remains undrawn.
The Term Loan Facility is not subject to a financial covenant and the Revolving Facility’s financial covenant will apply only after 35% of the Revolving Facility’s capacity has been drawn.
The Term Loan Facility will bear interest at a margin over a reference rate selected at the option of the borrower. The margin for the Term Loan Facility will be 6.5% per annum for SOFR borrowings and 5.5% per annum for base rate borrowings. The Term Loan Facility will mature on the fifth anniversary of the date of the related loan agreement. The Term Loan Facility is payable in quarterly installments commencing with fiscal quarter ending September 30, 2024, and are 1% per annum for the first year (through June 30, 2025), then 2.5% per annum for the next two years (through June 2027), then 5% per annum thereafter through maturity on April 30, 2029.
The Revolving Facility will bear interest at a margin over a reference rate selected at the option of the borrower. The margin for the Revolving Facility will be set quarterly based on the Company’s Consolidated Net Leverage Ratio for the preceding four fiscal quarter period and will range from 5.5% to 6.0% per annum for SOFR borrowings and 4.5% to 5.0% for base rate borrowings. The Revolving Facility will mature on November 1, 2028.
The Company’s weighted average interest rate on the borrowings under the Credit and Guarantee Agreement as of June 30, 2024 was 11.82%.
As of June 30, 2024, the Company had $0.5 million of debt issuance costs and $16.8 million of debt original issuance discount related to the Credit Agreement, which were capitalized and are recorded as a direct deduction to long-term debt and less than $0.1 million in debt issuance costs and $1.7 million of debit original issuance discount recorded in Other Assets on the condensed consolidated balance sheets.
Debt Extinguishment
On October 4, 2019, the Company entered into the credit agreement with Goldman Sachs, which was replaced with the Credit Agreement described above on May 1, 2024. The Goldman Sachs credit agreement provided for a secured revolving credit facility of $12.0 million, a $25.0 million term loan and a $50.0 million delayed draw term loan. On May 1, 2024, the outstanding loan balance was repaid and the unamortized debt issuance costs of $1.7 million and fees incurred of $2.4 million were recognized as a loss on early debt extinguishment on the condensed consolidated statements of operations.
Note 7 – 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. 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, 2024.
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 valued using Level 2 inputs including current applicable rates for similar instruments and approximates the carrying value of such obligations.
13
Note 8 – Income Taxes
For the six months ended June 30, 2024, the Company has elected to compute its interim tax provision using the actual year-to-date effective tax rate method rather than the estimated annual effective tax rate method as small changes in projected income may produce large variations in the Company’s estimated annual effective tax rate. The Company recorded a benefit for income taxes of $3.5 million for the six months ended June 30, 2024 compared to income tax expense of $0.1 million for the six months ended June 30, 2023.
The Company’s actual year-to-date effective income tax rate was 27.1% for the six months ended June 30, 2024 compared to 5.1% for the six months ended June 30, 2023 under the estimated annual effective tax rate method. The Company’s 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 with tax rates that differ from the U.S. statutory rate; (iii) taxes owed in state and local jurisdictions; (iv) transaction costs associated with the Benihana Acquisition; and (v) the tax effect of non-deductible compensation. The income tax (benefit) provision recorded for the six months ended June 30, 2024 and 2023 included the discrete period tax benefits resulting from the vesting of restricted stock units.
The Company is subject to U.S. federal, state, local and various foreign income taxes for the 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. There are no ongoing federal, state, local, or foreign tax examinations as of June 30, 2024.
Note 9 – Revenue Recognition
The following table provides information about contract liabilities, which include deferred license revenue, deferred gift card revenue, advanced party deposits and the Konavore rewards program (in thousands):
Deferred license revenue (1)
218
Deferred gift card and gift certificate revenue (2)
6,076
1,716
Advanced party deposits (2)
639
361
Konavore rewards program (3)
187
177
Revenue recognized during the period from contract liabilities as of the preceding fiscal year end date is as follows (in thousands):
Revenue recognized from deferred license revenue
23
Revenue recognized from deferred gift card revenue
895
917
Revenue recognized from advanced party deposits
278
The estimated deferred license revenue to be recognized in the future related to performance obligations that are unsatisfied as of June 30, 2024 were as follows for each year ending (in thousands):
2024, six months remaining
2025
44
2026
2027
34
2028
Thereafter
25
Total future estimated deferred license revenue
14
Note 10 – Leases
The components of lease expense for the six months ended June 30, 2024 and 2023 are as follows (in thousands):
Lease cost
Operating lease cost
13,135
7,943
Finance lease cost
Amortization of ROU assets
108
102
Interest on lease liabilities
Total finance lease cost
144
143
Variable lease cost (1)
7,561
5,781
Short-term lease cost
922
488
Total lease cost
21,762
14,355
Weighted average remaining lease term
Operating leases
13 years
Finance leases
3 years
4.3 years
Weighted average discount rate
10.30
%
8.53
9.17
9.00
Supplemental cash flow information related to leases for the period was as follows (in thousands):
Finance lease right-of-use assets (1)
713
850
Current portion of finance lease liabilities (1)
263
222
Long-term portion of finance lease liabilities (1)
658
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
12,738
7,090
Operating cash flows from finance leases
Financing cash flows from finance leases
112
185
Right-of-use assets obtained in exchange for lease obligations:
3,081
8,034
43
The Company has entered into five operating leases for future restaurants that have not commenced as of June 30, 2024. The present value of the aggregate future commitment related to these leases, net of tenant improvement allowances received from the landlord, is estimated to be $7.2 million. The Company expects these leases, which have initial lease terms of 10 to 15 years and two or three 5-year options, to commence within the next twelve months.
15
As of June 30, 2024, maturities of the Company’s operating lease liabilities are as follows (in thousands):
14,736
44,545
45,429
46,089
45,484
418,991
Total lease payments
615,274
Less: imputed interest
(304,580)
Present value of operating lease liabilities
310,694
As of June 30, 2024, maturities of the Company’s finance lease liabilities are as follows (in thousands):
215
257
214
943
(121)
Present value of finance lease liabilities
822
Note 11 – Earnings Per Share
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period and income available to common stockholders. Diluted earnings per share is computed using the weighted average number of common shares outstanding during the period plus the dilutive effect of potential shares of common stock including common stock issuable pursuant to stock options, warrants, and restricted stock units. The two-class method for ocmputing earnings per share will be utilized when applicable.
For the three and six months ended June 30, 2024 and 2023, net (loss) income per share was calculated as follows (in thousands, except net income per share and related share data):
Three months ended June 30,
Six months ended June 30,
Basic weighted average shares outstanding
Dilutive effect of stock options, warrants and restricted share units
890,674
1,049,522
Diluted weighted average shares outstanding
Basic net (loss) income per common share
Diluted net (loss) income per common share
For the three months ended June 30, 2024 and 2023, 2.6 million and a nominal amount, respectively, of stock options, warrants and restricted share units were determined to be anti-dilutive and were therefore excluded from the calculation of diluted earnings per share. For the six months ended June 30, 2024 and 2023, 1.9 million and a nominal amount of stock options, warrants and restricted share units were anti-dilutive.
16
Note 12 – Series A Preferred Stock
On May 1, 2024, the Company issued 160,000 shares of Series A Preferred Stock for $160.0 million, subject to a 5% original issuance discount. Additionally, the Company recorded an additional discount of $2.3 million for expenses paid to the holders of the Series A Preferred Stock in connection with the issuance of the Series A Preferred Stock.
The Series A Preferred Stock is non-voting and non-convertible; has compounding dividends that begin at a rate of 13.0% per annum and increase over time at specified intervals; is subject to optional redemption by the Company and mandatory redemption following specified events and in certain circumstances upon the exercise by the holders of a majority of the outstanding shares of Series A Preferred Stock of an option to deliver written notice to the Company to require redemption, in each case, for specified prices; and gives certain consent rights for the holders of a majority of the outstanding shares of Series A Preferred Stock for specified matters.
The Company records the paid-in-kind dividend and accretion of the Series A Preferred Stock using the effective interest method based on a future redemption value of $247.4 million payable in 2027, the earliest date at which the Company can redeem the Series A Preferred Stock. During the three and six months ended June 30, 2024, the Company recorded paid-in-kind dividends and accretion of the Series A Preferred Stock of $4.5 million.
Redemption Rights
On and after May 1, 2029, holders of the Series A Preferred Stock have the right to require redemption of all or any part of the Series A Preferred Stock for an amount equal to the liquidation preference after the fifth anniversary, upon an acceleration of material indebtedness or upon a change-of-control. However, at any time between the third and fourth anniversary of the issuance date, the Company may repurchase all or some of the preferred stock for 102.5% of the liquidation preference. At any time after the fourth anniversary, the Company may repurchase all of some of the preferred stock for 100% of the liquidation preference.
Since the redemption of the Series A Preferred Stock is contingently redeemable and therefore not certain to occur, the Series A Preferred Stock is not required to be classified as a liability under ASC 480, Distinguishing Liabilities from Equity. As the Series A Preferred Stock is redeemable in certain circumstances at the option of the holder and is redeemable in certain circumstances upon the occurrence of an event that is not solely within the Company’s control, the Series A Preferred Stock is classified separately from stockholders’ equity in the condensed consolidated balance sheets.
Note 13 – Stockholder’s Equity
Preferred Stock
The Company is authorized to issue 9,840,000 shares of preferred stock with a par value of $0.0001. There were no shares of preferred stock that were issued or outstanding at June 30, 2024 or December 31, 2023.
The issuance of a dividend is dependent on a variety of factors, including but not limited to, available cash and the overall financial condition of the Company. The issuance of a dividend is also subject to legal restrictions and the terms of the Company’s credit agreement. The Company did not issue dividends related to its common stock in the years ended June 30, 2024 and 2023, respectively.
Stock Purchase Program
The Company’s Board of Directors authorized a repurchase program of up to $15.0 million of outstanding common stock that was completed in December 2023. In March 2024, the Company’s Board of Directors authorized an additional $5.0 million of repurchases under this program. During the three and six months ended June 30, 2024, the Company spent $0.9 million for the repurchases of 0.2 million shares. During the three and six months ended June 30, 2023, the Company repurchased 0.5 million and 0.6 million shares, respectively, for an aggregate consideration of $3.4 million and $4.1 million, respectively. As of June 30, 2024, the Company had repurchased 2,456,144 shares for $15.9 million under the repurchase program.
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Note 14 – Stock-Based Compensation and Warrants
Stock-Based Compensation
As of June 30, 2024, the Company had 3,093,237 shares available for issuance under the Equity Incentive Plan.
Stock-based compensation cost was $1.5 million and $1.2 million for the three months ended June 30, 2024 and 2023, respectively, and $2.9 million and $2.6 million for the six months ended June 30, 2024 and 2023, respectively. Stock-based compensation is included in general and administrative expenses in the condensed consolidated statements of operations and comprehensive income. Included in stock-based compensation cost was $0.2 million and $0.3 million of stock granted to directors for the three and six months ended June 30, 2024 compared to $0.1 million and $0.3 million for the three and six months ended June 30, 2023, respectively. Such grants were awarded consistent with the Board of Director’s compensation practices. Stock-based compensation for the three and six months ended June 30, 2024 included $0.2 million and $0.4 million, respectively, of compensation costs for performance stock units that contain both a market condition and time element (“PSUs”) compared to $0.2 million and $0.4 million for the three and six months ended June 30, 2023.
Stock Option Activity
Stock options in the table below include both time-based and market condition-based awards. Changes in stock options during the six months ended June 30, 2024 were as follows:
Weighted
average
Intrinsic
average exercise
remaining
value
price
contractual life
(thousands)
Outstanding and Exercisable at December 31, 2023
673,942
2.35
3.24 years
2,540
Granted
260,420
5.73
Exercised
(50,000)
4.85
Cancelled, expired or forfeited
(5,000)
Outstanding at June 30, 2024
879,362
3.20
5.00 years
1,342
Stock options granted during the six months ended June 30, 2024 were valued using the Black-Scholes method and included the following assumptions: a) expected term of 5.5 years, b) risk-free rate of 4.4% and c) volatility of 71.3%. The Company recognized $0.2 million in compensation costs for stock options during the three and six months ended June 30, 2024. As of June 30, 2024, the Company had $0.7 million of unrecognized compensation costs related to 260,420 unvested stock options, which will be recognized over a weighted average period of 0.8 years. There were no unvested stock options as of December 31, 2023.
Restricted Stock Unit Activity
The Company issues restricted stock units (“RSUs”) under the 2019 Equity Plan. RSUs in the table below include both time-based and market condition-based awards. The fair value of time-based RSUs is determined based upon the closing market value of the Company’s common stock on the grant date.
A summary of the status of RSUs and changes during the six months ended June 30, 2024 is presented below:
Weighted average
grant date fair value
Non-vested RSUs at December 31, 2023
1,020,556
8.08
238,368
5.75
Vested
(260,470)
7.21
(30,024)
7.66
Non-vested RSUs at June 30, 2024
968,430
7.75
As of June 30, 2024, the Company had approximately $5.6 million of unrecognized compensation costs related to RSUs, which will be recognized over a weighted average period of 1.9 years.
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Performance Stock Unit Activity
The Company issues performance stock units (“PSUs”) under the 2019 Equity Plan. PSUs in the table below includes both time based and market condition-based awards and are valued using the Monte Carlo Simulation.
A summary of the status of PSUs and changes during the six months ended June 30, 2024 is presented below:
Non-vested PSUs at December 31, 2023
375,000
5.89
98,166
4.65
Non-vested PSUs at June 30, 2024
473,166
5.63
As of June 30, 2024, the Company has approximately $1.6 million of unrecognized compensation costs related to PSUs, which will be recognized over a weighted average period of 2.2 years.
Warrants
In connection with the Benihana Acquisition, on May 1, 2024, the Company issued both market and penny warrants to the following holders of the Series A Preferred Stock. The holders of the penny warrants are entitled to receive any dividends issued to common stockholders. The Company has the following warrants to purchase shares of common stock outstanding as of June 30, 2024 and 2023.
Exercise
Shares available for purchase as of June 30,
Issuance date
Holder of warrants
Expiration date
Issued
Price
May 1, 2024
HPC III Kaizen LP
May 1, 2029
1,000,000
10.00
HPS and affiliates
66,667
May 1, 2034
1,786,582
0.01
119,105
During the three months ended June 30, 2023, warrants to purchase 125,000 shares of common stock at an exercise price of $1.63 per share were exercised. There were no warrants outstanding as of June 30, 2023.
Note 15 – Segment Reporting
The Company’s Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (“CODM”), manages the business and allocates resources via a combination of restaurant sales reports and operating segment profit information, defined as revenues less operating expenses. As a result of the Benihana Acquisition, the CODM evaluated the Company’s business and determined that there are five operating segments. The Company has reclassified prior year disclosures to conform with the current year presentation.
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The Company has identified its reportable operating segments as follows:
Certain financial information relating to the three and six months ended June 30, 2024 and 2023 for each segment is provided below (in thousands).
STK
Benihana
Kona Grill
RA Sushi
Corporate
For the three months ended June 30, 2024
52,651
78,444
30,609
10,693
97
Operating income (loss)
7,071
14,718
763
157
(21,055)
Capital asset additions(1)
12,398
2,407
3,172
991
188
19,156
For the six months ended June 30, 2024
107,402
60,758
192
15,786
260
(29,887)
25,423
5,759
34,941
As of June 30, 2024
155,210
239,673
92,637
44,855
413,489
For the three months ended June 30, 2023
49,015
34,277
8,861
1,379
(8,195)
6,686
4,937
422
12,045
For the six months ended June 30, 2023
100,554
65,186
209
20,911
1,354
(15,942)
Capital asset additions
10,981
11,415
23,896
As of December 31, 2023
142,777
81,026
93,442
Note 16 – Geographic Information
Certain financial information by geographic location is provided below (in thousands).
Domestic revenues
171,430
82,214
255,395
163,673
International revenues
1,064
1,179
2,094
2,276
20
Domestic long-lived assets
877,346
269,052
International long-lived assets
1,513
Total long-lived assets
878,410
270,565
Note 17 – Commitments and Contingencies
The Company is party to claims in lawsuits incidental to its business, including lease disputes and employee-related matters. The Company has recorded accruals, when necessary, in its consolidated financial statements in accordance with ASC 450. While the resolution of a lawsuit, proceeding or claim may have an impact on the Company’s financial results for the period in which it is resolved, in the opinion of management, the ultimate outcome of such matters and judgements in which the Company is currently involved, either individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position or results of operations.
This Quarterly Report on Form 10-Q and certain information incorporated herein by reference contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). Forward-looking statements speak only as of the date thereof and involve risks and uncertainties that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include the risk factors discussed under Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 and Item 1A. “Risk Factors” included in this Quarterly Report on Form 10-Q. A number of factors could cause actual results or outcomes to differ materially from those indicated by such forward-looking statements, including but not limited to: (1) our ability to integrate the new or acquired restaurants into our operations without disruptions to operations; (2) our ability to capture anticipated synergies; (3) our ability to open new restaurants and food and beverage locations in current and additional markets, grow and manage growth profitably, maintain relationships with suppliers and obtain adequate supply of products and retain employees; (4) factors beyond our control that affect the number and timing of new restaurant openings, including weather conditions and factors under the control of landlords, contractors and regulatory and/or licensing authorities; (5) our ability to successfully improve performance and cost, realize the benefits of our marketing efforts and achieve improved results as we focus on developing new management and license deals; (6) changes in applicable laws or regulations; (7) the possibility that The ONE Group may be adversely affected by other economic, business, and/or competitive factors; and (8) other risks and uncertainties . We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “ongoing,” “could,” “estimates,” “expects,” “intends,” “may,” “appears,” “suggests,” “future,” “likely,” “goal,” “plans,” “potential,” “projects,” “predicts,” “should,” “targets,” “would,” “will” and similar expressions that convey the uncertainty of future events or outcomes. You should not place undue reliance on any forward-looking statement. We do not undertake any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required under applicable law.
General
This information should be read in conjunction with the condensed consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
As used in this report, the terms “Company,” “we,” “our,” or “us,” refer to The ONE Group Hospitality, Inc. and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.
Business Summary
We are an international restaurant company that develops, owns and operates, manages and licenses, and franchises upscale and polished casual, high-energy restaurants and lounges and provides turn-key food and beverage (“F&B”) services and consulting
service for hospitality venues including hotels, casinos and other high-end locations. Turn-key F&B services are food and beverage services that can be scaled, customized and implemented by us for the client at a particular hospitality venue. Our vision is to be a global market leader in the hospitality industry by melding high-quality service, ambiance, high-energy and cuisine into one great experience that we refer to as “Vibe Dining”. We design all our restaurants, lounges and F&B services to create a social dining and high-energy entertainment experience within a destination location. We believe that this design and operating philosophy separates us from more traditional restaurant and foodservice competitors.
Our primary restaurant brands are as follows:
Our F&B hospitality management services are marketed as ONE Hospitality and include developing, managing and operating restaurants, bars, rooftop lounges, pools, banqueting and catering facilities, private dining rooms, room service and mini bars tailored to the specific needs of high-end hotels and casinos. We also provide hospitality advisory and consulting services to certain clients. Our F&B hospitality clients operate global hospitality brands such as the W Hotel, ME Hotel, Hippodrome Casino, and Curio Collection by Hilton. For those restaurants and venues that are managed, licensed or franchised, we generate management fee revenue and franchise revenue based on top-line revenues and incentive fee revenue based on a percentage of the location’s revenues and net profits.
We opened our first restaurant in January 2004 in New York, New York. We currently own, operate, manage, license or franchise 167 venues including 28 STKs, 85 Benihanas, 26 Kona Grills and 20 RA Sushi in major cities in North America, Europe, Latin America and the Middle East and 8 F&B venues operated under ONE Hospitality in four hotels and casinos throughout the United States and Europe.
As our footprint increases, we expect to benefit by leveraging system-wide operating efficiencies and best practices through the management of our general and administrative expenses as a percentage of overall revenue.
We intend to open eight to eleven new venues in 2024. As of the date of this report we have opened the following:
There are currently two Company-owned STK restaurants, one Company-owned Kona Grill restaurant, one Company-owned Salt Water Social restaurant, and one Company-owned Benihana restaurant under construction in the following cities:
In July 2024, the Company terminated a franchise agreement for one restaurant.
22
The table below reflects our current venues by restaurant brand and geographic location:
Venues
STK(1)
Benihana(3)
ONE Hospitality(2)
Domestic
Owned
74
26
139
Managed
1
Licensed
Franchised
Total domestic
82
151
International
Total international
Total venues
28
85
167
Our Growth Strategies and Outlook
Our growth model is primarily driven by the following:
Benihana Acquisition and Related Financings
On May 1, 2024, the Company acquired 100% of the issued and outstanding equity interests of Safflower Holdings Corp. from Safflower Holdings LLC for $365.0 million., subject to customary adjustments (the “Benihana Acquisition”). Safflower Holdings Corp. beneficially owns most of the Benihana restaurants, as well as all of the RA Sushi restaurants, in the United States. It also franchises Benihana locations in the U.S., Latin America (excluding Mexico) and the Caribbean.
In connection with the Benihana Acquisition, on May 1, 2024, the Company sold and issued to (a) HPC III Kaizen LP, for $150.0 million cash, subject to a 5% original issuance discount, 150,000 shares of Series A Preferred Stock, a warrant to purchase 1,786,582 shares of Common Stock of the Company for an exercise price of $0.01 per share, and a warrant to purchase 1,000,000 shares of Common Stock of the Company for an exercise price of $10.00 per share and (b) to the HPS Investors, for $10 million cash in the aggregate, subject to a 5% original issuance discount, securities allocated among the HPS Investors as follows: (i) to HPS Special Situations Opportunity Fund II, L.P., 4,309 shares of such Series A Preferred Stock in book-entry form, a warrant to purchase 51,236 shares of Common Stock of the Company for an exercise price of $0.01 per share, and a warrant to purchase 28,729 shares of Common Stock of the Company for an exercise price of $10.00 per share, (ii) to SSOF II BH US Subsidiary, L.P., 3,691 shares of such Series A Preferred Stock in book-entry form, a warrant to purchase 43,957 shares of Common Stock of the Company for an exercise price of $0.01 per share, and a warrant to purchase 24,604 shares of Common Stock of the Company for an exercise price of $10.00 per share, (iii) to HPS Corporate Lending Fund, 1,000 shares of such Series A Preferred Stock in book-entry form, a warrant to purchase 11,911 shares of Common Stock of the Company for an exercise price of $0.01 per share, and a warrant to purchase 6,667 shares of Common Stock of the Company for an exercise price of $10.00 per share, and (iv) to HPS Corporate Capital Solutions Fund, 1,000 shares of such Series A Preferred Stock in book-entry form, a warrant to purchase 11,911 shares of Common Stock of the Company for an exercise price of $0.01 per share, and a warrant to purchase 6,667 shares of Common Stock of the Company for an exercise price of $10.00 per share, in each case of clauses (a) and (b), in a private placement exempt from registration under the Securities Act of 1933, as amended.
Additionally, in connection with the Benihana Acquisition, on May 1, 2024, the Company entered into a credit agreement with Deutsche Bank AG New York Branch, Deutsche Bank Securities Inc., HPS Investment Partners, LLC and HG Vora Capital Management, LLC (the “Credit Agreement”). The Credit Agreement provides a $350.0 million senior secured term loan facility and a $40.0 million senior secured revolving credit facility, up to $10.0 million of which will be available in the form of letters of credit. On May 1, 2024, we borrowed $350.0 million under the Term Loan Facility and the Revolving Facility was and remains undrawn.
Refer to Notes 6 and 12 to our condensed consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the new credit facility and preferred stock financing.
Key Performance Indicators
Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for the Company’s key performance indicators. The following represents changes in key performance indicators during 2024, primarily attributable to the evaluation of accounting policies in conjunction with the Benihana acquisition discussed below:
Same Store Sales (“SSS”). SSS represents total food and beverage sales at domestic owned and managed restaurants opened for at least a full 24-month period at the beginning of each quarter, which removes the impact of new restaurant openings in comparing the operations of existing restaurants. For STK SSS, this measure includes total revenue from our owned and managed domestic STK locations, excluding revenues from our owned STK restaurant located in the W Hotel in Los Angeles, California due to the impact of the F&B hospitality management agreement with the hotel. Revenues from locations where we do not directly control the event sales force are excluded from this measure.
Executive Summary
Total revenues increased $89.1 million, or 106.8% to $172.5 million for the three months ended June 30, 2024 compared to $83.4 million for the three months ended June 30, 2023 primarily due to the Benihana Acquisition on May 1, 2024. Same store sales decreased 7.0% in the second quarter of 2024 compared to the second quarter of 2023.
Restaurant operating profit increased $18.1 million, or 151.3% to $30.0 million for the three months ended June 30, 2024 compared to $11.9 million for the three months ended June 30, 2023. The increase in restaurant operating profit is primarily due to the Benihana Acquisition on May 1, 2024, strong restaurant operating profit for new STK restaurants and cost reduction initiatives. Restaurant operating profit as a percentage of owned restaurant net revenue was 17.7% in the second quarter of 2024 compared to 14.9% in the second quarter of 2023.
Operating income decreased $0.4 million to $1.7 million for the three months ended June 30, 2024 compared to operating income of $2.0 million for the three months ended June 30, 2023. The change is primarily attributed to transaction, transition and integration costs related to the Benihana Acquisition partially offset by the increase in operating income attributable to the acquired restaurants.
Total revenues increased $91.6 million, or 55.2% to $257.5 million for the six months ended June 30, 2024 compared to $165.9 million for the six months ended June 30, 2023 primarily attributable to the Benihana Acquisition on May 1, 2024. Restaurant operating profit increased $18.3 million to $43.1 million for the six months ended June 30, 2024 compared to restaurant operating profit of $24.8 million for the six months ended June 30, 2023 primarily attributable to the Benihana Acquisition on May 1, 2024. For the six months ended June 30, 2024, operating income was $1.1 million compared to $6.3 million for the six months ended June 30, 2023, primarily due to transaction, transition and integration costs related to the Benihana Acquisition.
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Results of Operations
The following table sets forth certain statements of operations data for the periods indicated (in thousands):
The following table sets forth certain statements of operations data as a percentage of total revenues for the periods indicated. Certain percentage amounts may not sum to total due to rounding.
98.0%
95.8%
97.3%
95.5%
2.0%
4.2%
2.7%
4.5%
100.0%
Owned restaurant cost of sales (1)
21.2%
24.0%
21.8%
Owned restaurant operating expenses (1)
61.1%
61.0%
60.3%
Total owned operating expenses (1)
82.3%
85.1%
82.8%
84.3%
General and administrative (including stock-based compensation of 0.9%, 1.5%, 1.1%, and 1.5%, for the three and six months ended June 30, 2024 and 2023, respectively)
6.2%
9.6%
7.1%
9.4%
4.7%
5.2%
4.3%
4.0%
—%
3.2%
2.2%
1.5%
1.9%
2.1%
1.8%
0.2%
99.0%
97.5%
99.6%
96.2%
1.0%
2.5%
0.4%
3.8%
4.6%
3.9%
2.4%
1.6%
7.0%
5.5%
(6.0)%
0.5%
(5.1)%
1.7%
(1.9)%
(1.4)%
0.1%
(4.1)%
(3.7)%
(0.1)%
(0.2)%
(0.3)%
(4.0)%
0.7%
(3.5)%
The following tables show our operating results by segment for the periods indicated (in thousands).
EBITDA, Adjusted EBITDA and Restaurant Operating Profit are presented in this Quarterly Report on Form 10-Q to supplement other measures of financial performance. EBITDA, Adjusted EBITDA and Restaurant Operating Profit are not required by, or presented in accordance with, accounting principles generally accepted in the United States of America (“GAAP”). We define EBITDA as net income before interest expense, provision for income taxes and depreciation and amortization. We define Adjusted EBITDA as net income before interest expense, provision for income taxes, depreciation and amortization, non-cash rent expense, pre-opening expenses, transaction and exit costs, transition and integration expenses, stock-based compensation, and non-recurring gains and losses. Not all of the items defining Adjusted EBITDA occur in each reporting period but have been included in our definitions of these terms based on our historical activity. We define Restaurant Operating Profit as owned restaurant net revenue minus owned restaurant cost of sales and owned restaurant operating expenses.
We believe that EBITDA, Adjusted EBITDA and Restaurant Operating Profit are appropriate measures of our operating performance because they eliminate non-cash or non-recurring expenses that do not reflect our underlying business performance. We believe Restaurant Operating Profit is an important component of financial results because: (i) it is a widely used metric within the restaurant industry to evaluate restaurant-level productivity, efficiency, and performance, and (ii) we use Restaurant Operating Profit as a key metric to evaluate our restaurant financial performance compared to our competitors. We use these metrics to facilitate a comparison of our operating performance on a consistent basis from period to period, to analyze the factors and trends affecting our business and to evaluate the performance of our restaurants. Adjusted EBITDA has limitations as an analytical tool and our calculation of Adjusted EBITDA may not be comparable to that reported by other companies; accordingly, you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Adjusted EBITDA is a key measure used by management. Additionally, Adjusted EBITDA and Restaurant Operating Profit are frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We use Adjusted EBITDA and Restaurant Operating Profit, alongside other GAAP measures such as net income, to measure profitability, as a key profitability target in our budgets, and to compare our performance against that of peer companies despite possible differences in calculation.
27
The following table presents a reconciliation of net (loss) income to EBITDA and Adjusted EBITDA for the periods indicated (in thousands):
Net loss attributable to noncontrolling interest
Interest expense, net
EBITDA
5,530
5,551
10,170
13,485
Non-cash rent expense (1)
(429)
(123)
(691)
(154)
Adjusted EBITDA
23,869
8,466
34,074
19,145
Adjusted EBITDA attributable to noncontrolling interest
(71)
(65)
(333)
(254)
Adjusted EBITDA attributable to The ONE Group Hospitality, Inc.
23,940
8,532
34,407
19,400
The following table presents a reconciliation of Operating income to Restaurant Operating Profit for the periods indicated (in thousands):
Operating income as reported
Management, license and incentive fee revenue
(3,473)
(3,470)
(6,960)
(7,447)
General and administrative
Restaurant Operating Profit
29,952
11,924
43,108
24,821
Restaurant Operating Profit as a percentage of owned restaurant net revenue
17.7%
14.9%
17.2%
15.7%
Restaurant operating profit by brand is as follows (in thousands):
STK restaurant operating profit (Company owned)
9,114
8,463
20,221
18,854
STK restaurant operating profit (Company owned) as a percentage of STK revenue (Company owned)
18.3%
18.6%
20.0%
20.2%
Benihana restaurant operating profit (Company owned)
16,734
Benihana restaurant operating profit (Company owned) as a percentage of Benihana revenue (Company owned)
21.4%
Core Kona Grill restaurant operating profit
3,308
3,296
5,625
5,628
Core Kona Grill restaurant operating profit as a percentage of Core Kona Grill revenue
12.1%
11.0%
10.3%
9.9%
Non-core Kona Grill restaurant operating profit
(171)
98
(427)
267
Non-core Kona Grill restaurant operating profit as a percentage of Non-core Kona Grill revenue
(5.2)%
2.3%
(6.7)%
3.3%
Core RA Sushi restaurant operating profit
Core RA Sushi restaurant operating profit as a percentage of Core RA Sushi revenue
11.1%
Non-core RA Sushi restaurant operating profit
Non-core RA Sushi restaurant operating profit as a percentage of Non-core RA Sushi revenue
(5.3)%
29
Results of Operations for the Three Months Ended June 30, 2024 and 2023
Revenues
Owned restaurant net revenue. Owned restaurant net revenue increased $89.1 million, or 111.5%, to $169.0 million for the three months ended June 30, 2024 from $79.9 million for the three months ended June 30, 2023. The increase was primarily attributable to the acquisition of Benihana and RA Sushi restaurants on May 1, 2024, which generated $88.7 million in revenues for the two-month period owned by the Company and $12.7 million in revenues from six new restaurants opened since July 2023, partially offset by a reduction in comparable restaurant sales. Comparable restaurant sales decreased 7.0% for the second quarter of 2024 compared to the second quarter of 2023.
Management, license and incentive fee revenue. Management, license and incentive fee revenues were flat at $3.5 million for both the three months ended June 30, 2024 and the three months ended June 30, 2023. Management, license and incentive fee revenue attributed to Benihana franchised restaurants contributed $0.4 million in revenues during the second quarter of 2024 which was offset by decreased revenues at our STK restaurants in North America and early termination of the STK Westminster management agreement in the fourth quarter of 2023 as we consolidated our operations in London, UK.
Cost and Expenses
Owned restaurant cost of sales. Food and beverage costs for owned restaurants increased $16.7 million, or 86.7%, to $35.9 million for the three months ended June 30, 2024 from $19.2 million for the three months ended June 30, 2023. The increase in owned restaurant cost of sales is primarily attributed to $17.6 million in cost of sales associated with revenues generated by Benihana and RA Sushi restaurants acquired on May 1, 2024. As a percentage of owned restaurant net revenue, cost of sales decreased 280 basis points from 24.0% in the three months ended June 30, 2023 to 21.2% for the three months ended June 30, 2024 primarily due to lower cost of sales as a percentage of restaurant sales for Benihana and RA Sushi restaurants as compared to STK and Kona Grill restaurants, product mix management, pricing and operational cost reduction initiatives.
Owned restaurant operating expenses. Owned restaurant operating expenses increased $54.4 million to $103.2 million for the three months ended June 30, 2024 from $48.8 million for the three months ended June 30, 2023. The increase in owned restaurant operating expense is primarily attributed to $53.8 million in operating expenses associated with revenues generated by Benihana and RA Sushi restaurants acquired on May 1, 2024. Owned restaurant operating expenses as a percentage of owned restaurant net revenue increased 10 basis points from 61.0% for the three months ended June 30, 2023 to 61.1% for the three months ended June 30, 2024.
General and administrative. General and administrative costs increased $2.6 million, or 32.9%, to $10.7 million for the three months ended June 30, 2024 from $8.0 million for the three months ended June 30, 2023. The increase was attributable to incremental headcount associated with the Benihana Acquisition and increased stock-based compensation expense. As a percentage of revenues, general and administrative costs were 6.2% for the three months ended June 30, 2024 compared to 9.6% for the three months ended June 30, 2023.
Depreciation and amortization. Depreciation and amortization expense was $8.0 million for the three months ended June 30, 2024 compared to $3.5 million for the three months ended June 30, 2023. The increase was primarily related to depreciation and amortization for the Benihana and RA Sushi restaurants acquired on May 1, 2024, depreciation associated with the opening of six new owned venues since July 2023 and capital expenditures to maintain and enhance the guest experience in our restaurants.
Pre-opening expenses. For the three months ended June 30, 2024, we incurred $2.5 million of pre-opening expenses primarily related to payroll, training and non-cash pre-open rent for a RA Sushi restaurant which opened on July 1, 2024. We also incurred costs during the second quarter of 2024 for STK, Benihana and Kona Grill restaurants currently under development. Total pre-opening expenses related to non-cash pre-open rent was $0.3 million.
Pre-opening expenses for the three months ended June 30, 2023 were $1.6 million, primarily related to payroll, training and non-cash pre-open rent for Kona Grill Riverton which opened in July 2023 and STK and Kona Grill restaurants currently under development. Detail of pre-opening expenses by category is provided in the table below for the three months ended June 30, 2024 and 2023 (in thousands).
Three Months Ended June 30, 2024
Preopen Expenses
Preopen Rent (2)
Training Team
1,430
Restaurants (1)
500
574
1,074
1,930
Three Months Ended June 30, 2023
764
Restaurants
405
440
845
1,169
Transaction and exit costs. Transaction and exit costs were $6.8 million for the three months ended June 30, 2024. These costs primarily included investment banker, legal and professional fees incurred in conjunction with the Benihana Acquisition, which closed on May 1, 2024.
Transition and integration costs. In the three months ended June 30, 2024, we incurred $3.8 million of transition and integration costs associated with the Benihana and RA Sushi acquisition, which closed on May 1, 2024. Included in these costs are expenses related to identified duplicate professional service vendors, operational support offices, and support positions that will be eliminated in the foreseeable future. Over the next twelve months, we intend to integrate Benihana by leveraging our corporate infrastructure, our supply chain, and unique Vibe Dining program, to elevate the brand experience and drive improved performance.
Interest expense, net. Interest expense, net was $7.9 million and $1.6 million for the three months ended June 30, 2024 and 2023, respectively. We borrowed $350.0 million on the Credit Agreement on May 1, 2024 to finance the Benihana Acquisition. The weighted average interest rate for the three months ended June 30, 2024 was 11.9% compared to 11.8% in the same period of 2023.
Loss on early debt extinguishment. On May 1, 2024, in conjunction with entering into the Credit Agreement, we prepaid the outstanding debt balance under the credit agreement with Goldman Sachs to early extinguish the $73.1 million of outstanding term loans. We recognized a $4.1 million loss on debt extinguishment primarily caused by the prepayment penalty and the recognition of unamortized debt issuance costs related to the debt extinguished.
(Benefit) provision for income taxes. For the three months ended June 30, 2024, income tax benefit was $3.3 million compared to a nominal benefit for the three months ended June 30, 2023.
Net loss attributable to noncontrolling interest. Net loss attributable to noncontrolling interest was $0.2 million for both the three months ended June 30, 2024 and June 30, 2023.
Results of Operations for the Six Months Ended June 30, 2024 and 2023
Owned restaurant net revenue. Owned restaurant net revenue increased $92.0 million, or 58.1%, to $250.5 million for the six months ended June 30, 2024 from $158.5 million for the six months ended June 30, 2023. The increase was primarily attributable to the acquisition of Benihana and RA Sushi restaurants on May 1, 2024, which generated $88.7 million in revenues for the two-month period owned by the Company and $24.2 million in revenues from six new restaurants opened since July 2023, partially offset by a reduction in comparable restaurant sales. Comparable restaurant sales decreased 7.2% during the six months ended June 30, 2024 compared to the same period in 2023.
Management, license and incentive fee revenue. Management, license and incentive fee revenues decreased $0.4 million, or 6.5% to $7.0 million for the six months ended June 30, 2024 from $7.4 million for the six months ended June 30, 2023. The decrease was primarily attributable to decreased revenues at our STK restaurants in North America and early termination of the STK Westminster management agreement in the fourth quarter of 2023 as we consolidated our operations in London, UK, partially offset by $0.4 million in revenues attributed to Benihana franchised restaurants.
31
Owned restaurant cost of sales. Food and beverage costs for owned restaurants increased $16.5 million, or 43.4%, to $54.6 million for the six months ended June 30, 2024 compared to $38.1 million for the six months ended June 30, 2023. The increase in cost of sales was due to the incremental sales increases noted above from the acquisition of Benihana and RA Sushi and the opening of six new venues since July 2023, partially offset by product mix management, pricing and operational cost reduction initiatives.
As a percentage of owned restaurant net revenue, cost of sales improved 220 basis points from 24.0% in the six months ended June 30, 2023 to 21.8% for the six months ended June 30, 2024 primarily due to lower cost of sales as a percentage of restaurant sales for Benihana and RA Sushi restaurants as compared to STK and Kona Grill restaurants, product mix management, pricing and operational cost reduction initiatives.
Owned restaurant operating expenses. Owned restaurant operating expenses increased $57.2 million to $152.8 million for the six months ended June 30, 2024 from $95.6 million for the six months ended June 30, 2023 The increase in owned restaurant operating expense is primarily attributed to $53.4 million in operating expenses associated with revenues generated by Benihana and RA Sushi restaurants acquired on May 1, 2024. Owned restaurant operating expenses as a percentage of owned restaurant net revenue increased 70 basis points from 60.3% in the six months ended June 30, 2023 to 61.0% for the six months ended June 30, 2024.
General and administrative. General and administrative costs increased $2.7 million, or 17.3%, to $18.2 million for the six months ended June 30, 2024 from $15.5 million for the six months ended June 30, 2023. The increase was attributable to incremental headcount associated with the Benihana Acquisition and increased stock-based compensation expense. As a percentage of revenues, general and administrative costs were 7.1% for the six months ended June 30, 2024 compared to 9.4% for the six months ended June 30, 2023.
Depreciation and amortization. Depreciation and amortization expense was $13.3 million and $7.2 million for the six months ended June 30, 2024 and 2023, respectively. The increase was primarily related to two months of depreciation and amortization for the Benihana and RA Sushi restaurants acquired on May 1, 2024, depreciation associated with the six new owned venues opened since July 2023 and capital expenditures to maintain and enhance the guest experience in our restaurants.
Pre-opening expenses. For the six months ended June 30, 2024, we incurred $5.4 million of pre-opening expenses primarily related to payroll, training and non-cash pre-open rent for STK Washington DC which opened in March 2024 and a RA Sushi restaurant which opened on July 1, 2024. We also incurred costs during the first six months of 2024 for two STK restaurants that opened during December 2023 and STK, Benihana and Kona Grill restaurants currently under development. Total pre-opening expenses related to non-cash pre-open rent was $0.7 million.
Pre-opening expenses for the six months ended June 30, 2023 were $2.9 million primarily related to payroll, training, and non-cash pre-open rent for Kona Grill Columbus and Kona Grill Riverton which opened in January 2023 and July 2023, respectively, and STK and Kona Grill restaurants under development. Detail of pre-opening expenses by category is provided in the table below for the six months ended June 30, 2024 and 2023 (in thousands).
Six Months Ended June 30, 2024
2,953
1,444
1,021
2,465
4,397
Six Months Ended June 30, 2023
1,288
902
718
1,620
2,190
Transaction and exit costs. Transaction and exit costs were $8.3 million for the six months ended June 30, 2024. These costs primarily included investment banker and legal and professional fees incurred in conjunction with the Benihana Acquisition, which closed on May 1, 2024. In addition, we incurred approximately $0.6 million for accelerated depreciation and exit costs associated with the April 30th lease expiration of Kona Grill Scottsdale and accelerated amortization due to the exit of the licensing agreement with REEF Kitchens.
Transition and integration costs. In the six months ended June 30, 2024, we incurred $3.8 million of transition and integration costs associated with the Benihana and RA Sushi acquisition, which closed on May 1, 2024. Included in these costs are expenses related to identified duplicate professional service vendors, operational support offices, and support positions that will be eliminated in the foreseeable future. Over the next twelve months, we intend to integrate Benihana by leveraging our corporate infrastructure, our supply chain, and unique Vibe Dining program, to elevate the brand experience and drive improved performance.
Interest expense, net. Interest expense, net was $9.9 million for the six months ended June 30, 2024 compared to $3.4 million for the six months ended June 30, 2023. We borrowed $350.0 million on the Credit Agreement on May 1, 2024 to finance the Benihana Acquisition. The weighted average interest rate for the six months ended June 30, 2024 was 12.0% compared to 11.6% in the same period of 2023.
(Benefit) provision for income taxes. The benefit for income taxes for the six months ended June 30, 2024 was $3.5 million compared to a provision for income taxes of $0.1 million for the six months ended June 30, 2023.
Net loss attributable to noncontrolling interest. Net loss attributable to noncontrolling interest was $0.5 million for the six months ended June 30, 2024 compared to a net loss of $0.4 million for the six months ended June 30, 2023.
Liquidity and Capital Resources
Our principal liquidity requirements are to meet our lease obligations, working capital and capital expenditure needs and to pay principal and interest on outstanding debt. Subject to our operating performance, which, if significantly adversely affected, would adversely affect the availability of funds, we expect to finance our operations for at least the next 12 months, including the costs of opening currently planned new restaurants, through cash provided by operations and construction allowances provided by landlords of certain locations. We also may borrow on our revolving credit facility or issue equity, including preferred stock, to support ongoing business operations. We believe these sources of financing are adequate to support our immediate business operations and plans. As of June 30, 2024, we had cash and cash equivalents and restricted cash and cash equivalents of $32.8 million and $350.0 million in long-term debt, which consisted of borrowings under our Credit Agreement. As of June 30, 2024, the availability on our revolving credit facility was $33.8 million, subject to certain conditions.
For the six months ended June 30, 2024, capital expenditures were $34.9 million of which $29.0 million related to the construction of new STK, Benihana, Kona Grill and RA Sushi restaurants and $5.8 million related to existing restaurants. We have opened two Company-owned restaurants in 2024 and expect to open an additional four to five Company-owned restaurants over the next six months. Net capital expenditures, inclusive of $1.8 million in landlord contributions, was $33.1 million for the six months ended June 30, 2024. We expect to receive between $5.0 million to $6.0 million in landlord contributions in the next three months. Capital expenditures by type for the six months ended June 30, 2024 is provided below (in thousands).
New Venues
23,554
433
4,070
746
165
28,968
Maintenance
1,869
1,974
1,689
245
5,777
Other
196
Tenant Improvement Allowance
1,441
375
1,816
33
8,365
9,059
1,512
18,936
2,539
2,161
4,700
10,904
11,220
1,772
577
750
1,327
(1)Includes inventory of restaurant equipment for venues under development.
Our operations have not required significant working capital, and, like many restaurant companies, we may have negative working capital during the year. Revenues are received primarily in credit card or cash receipts, and restaurant operations do not require significant receivables or inventories, other than our wine inventory. In addition, we receive trade credit for the purchase of food, beverages and supplies, thereby reducing the need for incremental working capital to support growth. Due to the seasonality of our business, we typically generate a greater proportion of our cash flow from operations during the fourth quarter.
Our future cash requirements will depend on many factors, including the pace of expansion, conditions in the retail property development market, construction costs, the nature of the specific sites selected for new restaurants, and the nature of the specific leases and associated tenant improvement allowances available, if any, as negotiated with landlords. We have made significant investments in our training and development teams to support new restaurants openings. We believe these investments are necessary to support the successful opening of our new restaurants. If we modify our growth plans, the personnel that comprise our training team could be deployed to operate existing restaurants.
To help manage future cash requirements, we limit the number of owned company venues under construction at any given time to six restaurants. We also set a maximum number of signed leases for new restaurant development to twelve in order to minimize our cash rent commitment to approximately $3.0 million to $4.0 million annually for restaurants under development.
Capital Expenditures and Lease Arrangements
When we open new Company-owned restaurants, our capital expenditures for construction increase. For owned STK restaurants, where we build from a shell state, we have typically targeted a restaurant size of 8,000 square feet with a gross cash investment of approximately $515 to $675 per square foot, exclusive of $200 per square foot in landlord contributions. For owned Kona Grill restaurants, where we build from a shell state, we have typically targeted a restaurant size of 7,000 square feet with a gross cash investment of approximately $510 per square foot, exclusive of $150 per square foot in landlord contributions. In situations where we add functional space and build an STK or Kona Grill restaurant with a mezzanine, covered patio, or rooftop, costs per square foot will increase. Typical cash pre-opening costs are $0.6 million to $0.8 million, excluding the impact of cash and non-cash pre-opening rent. In addition, some of our existing restaurants will require capital improvements to either maintain or improve the facilities. We may add seating or provide enclosures for outdoor space in the next twelve months for some of our locations, when we believe that will increase revenues for those locations.
Our hospitality F&B venues typically require limited capital investment from us. Capital expenditures for these projects will primarily be funded by cash flows from operations depending upon the timing of these expenditures and cash availability.
We typically seek to lease our restaurant locations for periods of 10 to 20 years under operating lease arrangements, with a limited number of renewal options. Our rent structure varies, but our leases generally provide for the payment of both minimum and contingent rent based on sales, as well as other expenses related to the leases such as our pro-rata share of common area maintenance, property tax and insurance expenses. Many of our lease arrangements include the opportunity to secure tenant improvement allowances to partially offset the cost of developing and opening the related restaurants. Generally, landlords recover the cost of such allowances from increased minimum rents. However, there can be no assurance that such allowances will be available to us on each project that we select for development.
Credit Agreement
Refer to Note 6 and Note 17 to our condensed consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the terms of our long-term debt arrangements and information regarding our commitments and contingencies.
Cash Flows
The following table summarizes the statement of cash flows for the six months ended June 30, 2024 and 2023 (in thousands):
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net decrease in cash and cash equivalents
Operating Activities. Net cash provided by operating activities was $6.6 million for the six months ended June 30, 2024, compared to $13.1 million for the six months ended June 30, 2023. The change in net cash provided by operating activities was primarily attributable to the timing of collections on accounts receivables and payments on accrued expenses.
Investing Activities. Net cash used in investing activities for the six months ended June 30, 2024 was $403.5 million which was comprised of $368.6 million for the Benihana acquisition, net of cash acquired and $34.9 million in capital expenditures for the construction of STK Washington DC, which opened in March 2024, and a RA Sushi in Plantation, FL which opened in July 2024 in addition to residual payments on four restaurants that opened during the fourth quarter of 2023 and several restaurants that were under development as of June 30, 2024.
Net cash used in investing activities for the six months ended June 30, 2023 was $23.9 million primarily for the construction of STK restaurants in Charlotte, North Carolina; Boston Massachusetts; and Washington D.C. and Kona Grill restaurants in Columbus, Ohio; Riverton, Utah and Phoenix, Arizona and several restaurants that were under development as of June 30, 2023, as well as capital expenditures for existing restaurants.
Financing Activities. Net cash used in financing activities for the six months ended June 30, 2024 was $408.8 million and was comprised of net proceeds from borrowings under the Credit Agreement of $333.8 million and net proceeds from the issuance of preferred stock and warrants of $138.9 million, partially offset by the repayment of the Goldman Sachs debt of $73.6 million. Net cash used in financing activities was $6.2 million for the six months ended June 30, 2023 which reflected $4.2 million in common stock purchased under our share repurchase program and $1.8 million in tax withholding obligation on stock-based compensation.
See Note 1 to our condensed consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for a detailed description of recent accounting pronouncements. We do not expect the recent accounting pronouncements discussed in Note 1 to have a significant impact on our consolidated financial position or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a “smaller reporting company,” as defined in Item 10 of Regulation S-K, we are not required to provide this information.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as our controls are designed to do, and management necessarily applies its judgment in evaluating the risk and cost benefit relationship related to controls and procedures.
Our Chief Executive Officer and Chief Financial Officer, have reviewed the effectiveness of our disclosure controls and procedures as of June 30, 2024 and, based on this evaluation, have concluded that our disclosure controls and procedures were effective as of June 30, 2024.
Changes in Internal Controls
On May 1, 2024, we completed the Benihana Acquisition and have implemented new processes and internal controls to assist us in the preparation and disclosure of financial information. Given the significance of the Benihana Acquisition, we intend to exclude the acquired Benihana business from our assessment and report on internal controls over financial reporting for the year ended December 31, 2024. Other than discussed above, there have been no changes in our internal controls over financial reporting that occurred during the quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
We are subject to claims common to our industry and in the ordinary course of our business. Companies in our industry, including us, have been and are subject to class action lawsuits, primarily regarding compliance with labor laws and regulations. Defending lawsuits requires significant management attention and financial resources and the outcome of any litigation is inherently uncertain. We believe that accrual and disclosure for these matters are adequately provided for in our consolidated financial statements. We do not believe the ultimate resolutions of these matters will have a material adverse effect on our consolidated financial position and results of operations. However, the resolution of lawsuits is difficult to predict. A significant increase in the number of these claims, or one or more successful claims under which we incur greater liabilities than is currently anticipated, could materially and adversely affect our consolidated financial statements.
Item 1A. Risk Factors.
There have been no material changes to the risk factors contained in Item 1A of our Form 10-K for the year ended December 31, 2023 except as discussed below.
We have a debt financing arrangement and preferred stock outstanding that could have a material adverse effect on our financial health and our ability to obtain financing in the future and may impair our ability to react quickly to changes in our business.
In connection with our acquisition of Safflower Holdings Corp., on May 1, 2024, we entered into a credit agreement pursuant to which we borrowed $350 million as a term loan and have a $40 million revolving credit facility available. On that same date we also issued shares of Series A Preferred Stock for $160 million that has a compounding dividend initially at 13% and which increases over time at specified intervals and which is mandatorily redeemable, at the option of the holders of a majority of such shares, after a specified period in specified circumstances. Our exposure to these financing obligations could limit our ability to satisfy our other obligations, limit our ability to operate our business and impair our competitive position. For example, they could:
We may also incur additional indebtedness in the future, which could materially increase the impact of these risks on our financial condition and results of operations.
We may not be able to refinance our debt obligations or the redemption of our preferred stock. Failure to successfully refinance these obligations could have a material adverse effect on our business, financial condition and results of operations.
Our acquisition of Safflower Holdings Corp., as well as any future acquisitions, may have unanticipated consequences that could harm our business and our financial condition.
Our acquisition of Safflower Holdings Corp. and any other acquisition that we pursue, whether successfully completed or not, involves risks, including:
Future acquisitions, which may be accomplished through a cash purchase transaction, the issuance of our equity securities or a combination of both, could result in potentially dilutive issuances of our equity securities, the incurrence of debt and contingent liabilities and impairment charges related to goodwill and other intangible assets, any of which could harm our business and financial condition.
In September 2022, the Company’s Board of Directors authorized a repurchase program of up to $10.0 million of outstanding common stock. In May 2023, the Company’s Board of Directors authorized an additional $5.0 million to this program. As of December 31, 2023, the Company had repurchased 2.3 million shares for $15.0 million under the program. In March 2024, the Company’s Board of Directors authorized an additional $5.0 million of repurchases under this program. The table below reflects shares of common stock purchased during the second quarter of 2024.
Period
Total number of shares purchased
Average price paid per share
Total number of shares purchased as part of publicly announced plan
Maximum dollar value of shares that may yet be purchased under the plan
April 1-30, 2024
May 1-31, 2024
June 1-30, 2024
192,325
$ 4.59
$ 4,112,328
(a) Reclassification of Segment Disclosure
As discussed in Note 15, the Benihana Acquisition resulted in the CODM evaluating the Company’s business and determining that there are five operating segments. The Company has reclassified prior year disclosures from the Annual Report on Form 10-K below to conform with the current year presentation.
For the three months ended March 31, 2024
54,751
30,149
95
84,995
8,715
(503)
(8,832)
(620)
13,035
2,587
173
15,795
As of March 31, 2024
143,822
92,376
73,117
309,315
For the twelve months ended December 31, 2023
200,678
131,716
332,769
39,077
2,189
(31,972)
9,294
28,549
21,450
3,551
53,550
142,774
93,092
81,379
For the three months ended September 30, 2023
44,054
32,775
55
76,884
5,872
(444)
(7,383)
(1,955)
8,783
6,012
(280)
14,515
For the nine months ended September 30, 2023
144,608
97,961
264
242,833
26,783
910
(23,325)
4,368
19,764
17,427
1,220
38,411
As of September 30, 2023
125,263
92,497
77,256
295,016
As of June 30, 2023
115,551
82,299
91,557
289,407
For the three months ended March 31, 2023
51,539
30,909
82,556
12,050
(25)
(7,747)
4,278
4,298
6,476
1,078
11,852
As of March 31, 2023
107,892
78,583
102,184
288,659
For the twelve months ended December 31, 2022
189,746
126,341
316,638
41,625
7,217
(32,536)
16,306
19,255
10,496
2,878
32,629
As of December 31, 2022
104,575
73,912
112,537
291,024
(1) Capital asset additions for the Corporate segment include furniture, fixtures, and equipment for restaurants that the Company plans to open in the future.
(c) Adoption or Termination of 10b5-1 Trading Plans
During the second quarter ended June 30, 2024, no director or officer adopted, modified, or terminated any Rule 10b5-1trading arrangement or non-Rule 10b5-1 trading arrangement, as such terms are defined in Item 408(a) of Regulation S-K.
39
Item 6. Exhibits.
(a) Exhibits required by Item 601 of Regulation S-K.
Exhibit
Description
10.1
Form of Stock Option Grant Notice (2019 Equity Incentive Plan) (Incorporated by reference to the Form 8-K filed on April 4, 2024)
31.1*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002
31.2*
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002
32.1*
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes – Oxley Act of 2002, 18 U.S.C. Section 1350.
32.2*
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes – Oxley Act of 2002, 18 U.S.C. Section 1350.
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.INS*
Inline XBRL Instance Document
101.SCH*
Inline XBRL Taxonomy Extension Schema Document
104*
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: August 6, 2024
By:
/s/ Tyler Loy
Tyler Loy, Chief Financial Officer