ONE Group Hospitality Inc

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share information)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

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

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited, in thousands, except share information)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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 March 31, 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, and Kona Grill, a polished casual bar-centric grill concept featuring American favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere.

As of March 31, 2024, the Company owned, operated, managed, or licensed 63 venues, including 28 STKs and 27 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and 8 F&B venues infour hotels and casinos in the United States and Europe. For those restaurants and venues that are managed or licensed, the Company generates management 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 U.S. (“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.

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 – Property and Equipment, net

Property and equipment, net consist of the following (in thousands):

Depreciation related to property and equipment was $5.3 million and $3.6 for the three months ended March 31, 2024 and 2023, respectively. The Company depreciates construction in progress upon such assets being placed into service.

Note 3 – Accrued Expenses

Accrued expenses consist of the following (in thousands):

Note 4 – Long-Term Debt

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

Interest expense for the Company’s debt arrangements, excluding the amortization of debt issuance costs and other discounts and fees, was $2.0 million for both the three months ended March 31, 2024 and 2023. Capitalized interest was $0.3 million for the three months ended March 31, 2024. There wasno capitalized interest for the three months ended March 31, 2023.

As of March 31, 2024, the Company had $1.4 million in standby letters of credit outstanding for certain restaurants and $10.6 million available in its revolving credit facility, subject to certain conditions.

• Credit and Guaranty Agreement*

On October 4, 2019, in conjunction with the acquisition of Kona Grill, the Company entered into a credit agreement with Goldman Sachs Bank USA (the “Credit Agreement”). On August 6, 2021, the Company entered into the Third Amendment to the Credit Agreement to extend the maturity date for both the term loan and revolving credit facility to August 2026, to eliminate all financial covenants except a maximum net leverage ratio of 2.00 to 1.00, and to eliminate restrictions on the maximum amount of capital expenditures, the maximum number of Company-owned new locations, and credit extensions under the revolving credit facility. As amended, the Credit Agreement provides for a secured revolving credit facility of $12.0 million and a $25.0 million term loan (reduced from $48.0 million). The term loan is payable in quarterly installments of $0.1 million, with the final payment due in August 2026.

On December 13, 2022, the Company entered into the Fourth Amendment to the Credit Agreement that:

The Company borrowed $50.0 million on the delayed draw term facility on December 28, 2022. The delayed draw term loan is payable in quarterly installments of $0.25 million beginning December 31, 2023, with the final payment due in August 2026.

Loans under the amended Credit Agreement bear interest at a rate per annum using the SOFR rate subject to a 1.00% floor plus an interest rate margin of 6.50%.

The Company’s weighted average interest rate on the borrowings under the amended Credit Agreement as of March 31, 2024 and December 31, 2023 was 12.15% and 12.40%, respectively.

The Credit Agreement contains customary representations, warranties and conditions to borrowing including customary affirmative and negative covenants, among other things, that limit or restrict the Company’s ability to incur indebtedness and other obligations, grant liens to secure obligations, make investments, merge or consolidate, alter the organizational structure of the Company and its subsidiaries, and dispose of assets outside the ordinary course of business, in each case subject to customary exceptions for credit facilities of this size and type.

The Company and certain operating subsidiaries of the Company guarantee the obligations under the amended Credit Agreement, which also are secured by liens on substantially all of the assets of the Company and its subsidiaries.

As of March 31, 2024, the Company had $1.4 million of debt issuance costs related to the amended Credit Agreement, which were capitalized and are recorded as a direct deduction to long-term debt and $0.3 million in debt issuance costs recorded in Other Assets on the condensed consolidated balance sheets. As of March 31, 2024, the Company was in compliance with the financial covenants required by the Credit Agreement.

Note 5 – Fair Value of Financial Instruments

Cash and cash equivalents, accounts receivable, inventory, accounts payable and accrued expenses are carried at cost, which approximates fair value due to their short maturities. Long-lived assets are measured and disclosed at fair value on a nonrecurring basis if an impairment is identified. There wereno long-lived assets measured at fair value as of March 31, 2024.

The Company’s long-term debt, including the current portion, is carried at cost on the condensed consolidated balance sheets. The 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.

Note 6 – Income Taxes

Income taxes are recorded at the Company’s estimated annual effective income tax rate, subject to adjustments for discrete events, should they occur. The Company recorded a benefit for income taxes of $0.3 million for the first quarter of 2024 compared to income

tax expense of $0.2 million for the first quarter of 2023. The Company’s effective income tax rate including discrete events was 9.9% for the three months ended March 31, 2024 compared to 6.5% for the three months ended March 31, 2023. The Company’s projected annual effective tax rate differs from the statutory U.S. tax rate of 21% primarily due to the following: (i) tax credits for FICA taxes on certain employees’ tips (ii) taxes owed in foreign jurisdictions with tax rates that differ from the U.S. statutory rate; (iii) taxes owed in state and local jurisdictions; and (iv) the tax effect of non-deductible compensation. Income tax provision recorded for the three months ended March 31, 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 March 31, 2024.

Note 7 – 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):

Revenue recognized during the period from contract liabilities as of the preceding fiscal year end date is as follows (in thousands):

The estimated deferred license revenue to be recognized in the future related to performance obligations that are unsatisfied as of March 31, 2024 were as follows for each year ending (in thousands):

Note 8 – Leases

The components of lease expense for the three months ended March 31, 2024 and 2023 were as follows (in thousands):

The components of finance lease assets and liabilities on the condensed consolidated balance sheet were as follows (in thousands):

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

The Company has entered intosix operating leases for future restaurants that have not commenced as of March 31, 2024. The present value of the aggregate future commitment related to these leases totals $6.8 million. The Company expects these leases, which have an initial lease term of 10 years, to commence within thenext twelve months.

During the three months ended March 31, 2024, the Company decided not to renew the lease for STK Westwood, which will terminate within the next twelve months. As a result, the right-of-use asset was reduced by $5.5 million, and the right-of-use liability decreased $5.7 million.

As of March 31, 2024, maturities of the Company’s operating lease liabilities are as follows (in thousands):

As of March 31, 2024, maturities of the Company’s finance lease liabilities are as follows (in thousands):

Note 9 – 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.

For the three months ended March 31, 2024 and 2023, the net (loss) income per share was calculated as follows (in thousands, except net (loss) income per share and related share data):

For the three months ended March 31, 2024 and 2023,1.2 million and 0.1 million, 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.

Note 10 – Stockholder’s Equity

Preferred Stock

The Company is authorized to issue 10,000,000 shares of preferred stock with a par value of $0.0001. There wereno shares of preferred stock that were issued or outstanding at March 31, 2024 or December 31, 2023.

Common Stock

• 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. There wereno stock repurchases in the first quarter of 2024.

Note 11 – Stock-Based Compensation and Warrants

As of March 31, 2024, the Company had 3,723,300 shares available for issuance under the Equity Incentive Plan.

Stock-based compensation cost for the three months ended March 31, 2024 and 2023 was $1.4 million and $1.3 million, 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 for the three months ended March 31, 2024 and 2023, was $0.1 million of cost related to stock granted to directors. Such grants were awarded consistent with the Board of Director’s compensation practices. Stock-based compensation for both the three months ended March 31, 2024 and 2023 included $0.2 million of compensation costs for performance stock units that contain both a market condition and time element (“PSUs”).

Stock Option Activity

Stock options in the table below include both time based and market condition-based awards. Changes in stock options during the three months ended March 31, 2024 were as follows:

All outstanding stock options are fully vested.

Restricted Stock Unit Activity

The Company issues restricted stock units (“RSUs”) under the 2019 Equity Plan. The fair value of time-based RSUs is determined based upon the closing fair market value of the Company’s common stock on the grant date.

A summary of the status of RSUs and changes during the three months ended March 31, 2024 is presented below:

As of March 31, 2024, the Company had approximately $5.3 million of unrecognized compensation costs related to RSUs, which will be recognized over a weighted average period of 1.8 years.

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 three months ended March 31, 2024 is presented below:

As of March 31, 2024, the Company had approximately $1.8 million of unrecognized compensation costs related to PSUs, which will be recognized over a weighted average period of 2.4 years.

Note 12 – Segment Reporting

The Company has identified its reportable operating segments as follows:

The Company’s Chief Executive Officer, who is the Company’s Chief Operating Decision Maker, manages the business and allocates resources via a combination of restaurant sales reports and operating segment profit information, defined as revenues less operating expenses, related to the Company’sfour operating segments.

Certain financial information relating to the three months ended March 31, 2024 and 2023 for each segment is provided below (in thousands).

Note 13 – Geographic Information

Certain financial information by geographic location is provided below (in thousands).

Note 14 – 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 in its condensed 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 condensed consolidated financial position or results of operations.

Note 15 – Subsequent Events

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 “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. The Company expects the Acquisition will accelerate and diversify its revenue growth.

In connection with the 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 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 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 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 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 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 (the “Preferred Stock Financing”).

The Preferred Stock will be non-voting and non-convertible; will have compounding dividends that begin at a rate of 13.0% per annum and increase over time at specified intervals; will be 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 Preferred Stock of an option to deliver written notice to the Company to require redemption, in each case, for specified prices; and will grant certain consent rights for the holders of a majority of the outstanding shares of Preferred Stock for specified matters.

Additionally, in connection with the Acquisition, on May 1, 2024, the Company entered into a credit agreement (the “Credit and Guarantee Agreement”) with Deutsche Bank AG New York Branch, Deutsche Bank Securities Inc., HPS Investment Partners, LLC and HG Vora Capital Management, LLC (collectively, the “Initial Lenders”). The Credit and Guarantee 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 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 the date that isfifty-four months after the date of the related loan agreement.

The Term Loan Facility and the proceeds from the Preferred Stock Financing were used to finance the Acquisition as well as refinance the Company’s existing Credit Agreement with Goldman Sachs Specialty Lending Group, L.P. and Goldman Sachs Bank USA (the “Refinancing”) and to pay fees and expenses in connection with the Acquisition, the Refinancing, the Preferred Stock Financing and incurrence of the Facilities.

Transaction costs related to the Acquisition were approximately $1.2 million for the three months ended March 31, 2024.

Disclosures regarding purchase accounting and supplemental pro forma financial information required under ASC Topic 805, “Business Combinations” have been excluded from this Quarterly Report on Form 10-Q. Disclosure of such information has been deemed impracticable by management due primarily to the short timeframe to obtain the necessary information from the acquired company, apply various valuation methodologies and prepare the information for this filing. The purchase accounting and related disclosures will be included in the Company’s Quarterly Report on Form 10-Q for the six months ending June 30, 2024 and finalized within the one-year measurement period permitted under ASC 805.