ONE Group Hospitality Inc

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share information)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited, in thousands)

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND

SERIES A PREFERRED STOCK

(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 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 infour 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.

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 1 st 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).

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):

(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

The above pro forma information includes the below post-acquisition results of the Benihana Acquisition (in thousands):

(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):

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):

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):

Note 6 – Long-Term Debt

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

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 wereno 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.

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):

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 June 30, 2024 were as follows for each year ending (in thousands):

Note 10 – Leases

The components of lease expense for the six months ended June 30, 2024 and 2023 are as follows (in thousands):

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

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 andtwo orthree 5-year options, to commence within the next twelve months.

As of June 30, 2024, maturities of the Company’s operating lease liabilities are as follows (in thousands):

As of June 30, 2024, maturities of the Company’s finance lease liabilities are as follows (in thousands):

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):

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.

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 wereno shares of preferred stock that were issued or outstanding at June 30, 2024 or December 31, 2023.

Common Stock

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 didnot 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.

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:

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 wereno 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:

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.

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:

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.

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 wereno 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 arefive operating segments. The Company has reclassified prior year disclosures to conform with the current year presentation.

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).

Note 16 – Geographic Information

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

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.