ONE Group Hospitality, Inc.: Form 10-Q for the period ended Mar 31, 2024

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. 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 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 Company may be adversely affected by other economic, business, and/or competitive factors;(8) risks related to the Acquisition, including the additional indebtedness incurred in connection with the Acquisition and our ability to successfully integrate the acquired restaurants and (9) other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission. 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 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.

As of March 31, 2024, our primary restaurant brands were 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. 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 and Hippodrome Casino.

We opened our first restaurant in January 2004 in New York, New York. As of March 31, 2024, we 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 operated under ONE Hospitality in four hotels and casinos in the United States and Europe. In February 2024, we exited our licensing agreement with REEF Kitchens and have no venues operating pursuant to that agreement.

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 six to eight new STK or Kona Grill venues in 2024. In March 2024, we opened the following:

• Owned STK restaurant in Washington DC

There is currently one Company-owned STK restaurant, one Company-owned Kona Grill restaurant, and one company-owned Salt Water Social restaurant under construction in the following cities:

• Owned STK restaurant in Aventura, Florida
• Owned Kona Grill restaurant in Tigard, Oregon
• Owned Salt Water Social restaurant in Denver, Colorado

The table below reflects our venues by restaurant brand and geographic location as of March 31, 2024:

(1) Locations with an STK and STK Rooftop are considered one venue location. This includes the STK Rooftop in San Diego, CA, which is a licensed location.

(2) Includes concepts under the Company’s F&B hospitality management agreements and other venue brands such as Bao Yum, Heliot, Hideout, Radio and Rivershore Bar & Grill.

Our Growth Strategies and Outlook

Our growth model is primarily driven by the following:

• Expansion of our STK and Kona Grill restaurants
• Expansion through new F&B hospitality projects
• Increase same store sales and increase our operating efficiency
• Acquisitions

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 “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 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 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 with Deutsche Bank AG New York Branch, Deutsche Bank Securities Inc., HPS Investment Partners, LLC and HG Vora Capital Management, LLC. The Credit and Guarantee 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, the Company borrowed $350.0 million under the Term Loan Facility and the Revolving Facility was undrawn.

Refer to Note 15 to our condensed consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for further information regarding the preferred stock financing and new credit facility.

Executive Summary

Total revenue increased $2.4 million, or 3.0% to $85.0 million for the three months ended March 31, 2024 compared to $82.6 million for the three months ended March 31, 2023 primarily due to the opening of six new venues since July 2023. Same-store sales decreased 7.9% in the first quarter of 2024 compared to the first quarter of 2023. STK same store sales decreased 6.8% while Kona Grill same store sales decreased 9.7%.

Restaurant operating profit increased $0.3 million, or 2.0% to $13.2 million for the three months ended March 31, 2024 compared to $12.9 million for the three months ended March 31, 2023. Restaurant operating profit as a percentage of owned restaurant net revenue was 16.1% in the first quarter of 2024 compared to 16.4% in the first quarter of 2023. The change in margin is attributable to deleverage of fixed operating costs from lower same store sales, higher average wage and operating cost inflation partially offset by cost reduction initiatives.

Operating income decreased $4.9 million to an operating loss of $0.6 million for the three months ended March 31, 2024 compared to operating income of $4.3 million for the three months ended March 31, 2023. The change is primarily attributed to higher depreciation and amortization and preopening costs associated with new restaurant openings and transaction costs related to the Acquisition.

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.

(1) These expenses are shown as a percentage of owned restaurant net revenue.

The following tables show our operating results by segment for the periods indicated (in thousands).

(1) Capital asset additions for the Corporate segment include furniture, fixtures, and equipment for restaurants that the Company plans to open in the future.

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 U.S. (“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, lease termination 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 and is a metric used in our debt compliance calculation. 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.

The following table presents a reconciliation of net (loss) income to EBITDA and Adjusted EBITDA for the periods indicated (in thousands):

(1) Non-cash rent expense is included in owned restaurant operating expenses and general and administrative expense on the condensed consolidated statements of operations and comprehensive income.

The following table presents a reconciliation of Operating (loss) income to Restaurant operating profit for the periods indicated (in thousands):

Restaurant operating profit by brand is as follows (in thousands):

Results of Operations for the Three Months Ended March 31, 2024 and 2023

Revenues

Owned restaurant net revenue. Owned restaurant net revenue increased $2.9 million, or 3.7%, to $81.5 million for the three months ended March 31, 2024 from $78.6 million for the three months ended March 31, 2023. The increase was primarily attributable to the opening of six restaurants since July 2023 partially offset by a reduction in comparable restaurant sales. Comparable restaurant sales decreased 7.9% in the first quarter of 2024 compared to the first quarter of 2023.

Management and license fee revenue. Management and license fee revenues decreased $0.5 million, or 12.3% to $3.5 million for the three months ended March 31, 2024 from $4.0 million for the three months ended March 31, 2023. The decrease was primarily attributed 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.

Cost and Expenses

Owned restaurant cost of sales. Food and beverage costs for owned restaurants decreased $0.2 million, or 0.7%, to $18.7 million for the three months ended March 31, 2024 from $18.9 million for the three months ended March 31, 2023. As a percentage of owned restaurant net revenue, cost of sales decreased 100 basis points from 24.0% in the three months ended March 31, 2023 to 23.0% for the three months ended March 31, 2024 primarily due to product mix management, pricing and operational cost reduction initiatives.

Owned restaurant operating expenses. Owned restaurant operating expenses increased $2.8 million to $49.6 million for the three months ended March 31, 2024 from $46.8 million for the three months ended March 31, 2023. The increase was primarily due to the operating expenses associated with six new restaurants opened since July 2023. Owned restaurant operating costs as a percentage of owned restaurant net revenue increased 130 basis points from 59.6% in the three months ended March 31, 2023 to 60.9% for the three months ended March 31, 2024 primarily due to deleverage of fixed operating costs from lower same store sales, higher average wage and operating cost inflation partially offset by cost reduction initiatives.

General and administrative. General and administrative costs were $7.5 million for the three months ended March 31, 2024 and 2023. As a percentage of revenues, general and administrative costs were 8.9% for the three months ended March 31, 2024 compared to 9.1% for the three months ended March 31, 2023.

Depreciation and amortization. Depreciation and amortization expenses were $5.3 million and $3.7 million for the three months ended March 31, 2024 and 2023, respectively. The increase was primarily related to the opening of six new venues since July 2023 and capital expenditures to maintain and enhance the guest experience.

Pre-opening expenses. In the three months ended March 31, 2024, we incurred $2.9 million of pre-opening expenses primarily related to payroll and travel costs for the training team and payroll, training, and non-cash pre-open rent for STK Washington DC which opened in March 2024 and STK 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 March 31, 2023 were $1.3 million. Details of pre-opening expenses by category are provided in the table below for the three months ended March 31, 2024 and 2023 (in thousands).

(1) Cash rent paid was $0.1 million for the three months ended March 31, 2024. There was not any cash rent paid for the three months ended March 31, 2023.

Transaction and exit costs. Transaction and exit costs were approximately $1.5 million for the three months ended March 31, 2024. These costs include approximately $1.2 million related to the Acquisition, which closed on May 1, 2024. In addition, we incurred approximately $0.3 million in exit costs for accelerated depreciation 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.

Interest expense, net of interest income. Interest expense, net of interest income was $2.1 million and $1.8 million for the three months ended March 31, 2024 and 2023, respectively. The weighted average interest rate for the three months ended March 31, 2024 was 12.3% compared to 11.4% for the three months ended March 31, 2023.

(Benefit) provision for income taxes. The benefit for income taxes for the three months ended March 31, 2024 was $0.3 million compared to income tax expense of $0.2 million for the three months ended March 31, 2023. The effective income tax rate for the first quarter of 2024 was 9.9% compared to 6.5% for the first quarter of 2023.

Net loss attributable to noncontrolling interest. Net loss attributable to noncontrolling interest was $0.4 million and $0.3 million for the three months ended March 31, 2024 and 2023, respectively.

Liquidity and Capital Resources

Executive Summary

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, including the costs of opening currently planned new restaurants, for the foreseeable future, including at least the next 12 months, 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 to support ongoing business and fund additional expansion. We believe these sources of financing are adequate to support our immediate business operations and plans. As of March 31, 2024, we had cash and cash equivalents of $15.4 million and $73.5 million in long-term debt, which consisted of borrowings under our Credit Agreement. As of March 31, 2024, the availability on our revolving credit facility was $10.6 million, subject to certain conditions.

For the three months ended March 31, 2024, capital expenditures were $15.8 million of which $14.1 million related to the opening of five restaurants during the past six months, including STK Washington DC which opened in March 2024 and several restaurants that were under development as of March 31, 2024. We spent $1.6 million on maintenance capital expenditures for existing restaurants which included additional furniture, fixtures, and equipment. Net capital expenditures, inclusive of $0.4 million in landlord contributions, was $15.4 million for the three months ended March 31, 2024. We expect to receive between $2.2 million and $2.8 million in landlord contributions in the next three months.

Capital expenditures by type for the three months ended March 31, 2024 and 2023 is provided below (in thousands).

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 cards 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.

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 four restaurants. We also set a maximum number of signed leases for new restaurant development to approximately twelve in order to minimize our cash rent commitment to approximately $3.0 million to $4.0 million annually for restaurants under development.

Credit Agreement

Refer to Note 14 and Note 15 to our condensed consolidated financial statements set forth in Item 1 of this Quarterly Report on Form 10-Q for further information regarding our commitments and contingencies and information regarding our new long-term debt arrangements.

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 services projects typically require limited capital investment from us. Capital expenditures for these projects are primarily funded by cash flows from operations.

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.

Cash Flows

The following table summarizes the statement of cash flows for the three months ended March 31, 2024 and 2023 (in thousands):

Operating Activities. Net cash provided by operating activities was $10.4 million for the three months ended March 31, 2024, compared to net cash provided by operating activities of $6.6 million for the three months ended March 31, 2023. The increase was primarily attributable to the timing of payments on accrued expenses.

Investing Activities. Net cash used in investing activities for the three months ended March 31, 2024 was $15.8 million primarily for the construction of STK Washington DC, which opened in March 2024, residual payments on the four restaurants that opened during the fourth quarter of 2023 and several restaurants that were under development as of March 31, 2024, as well as capital expenditures for existing restaurants compared to $11.9 million for the three months ended March 31, 2023. Purchases of property and equipment during the three months ended March 31, 2024 included approximately $5.3 million that was accrued as of December 31, 2023 and paid during the first quarter of 2024.

Financing Activities. Net cash used in financing activities for the three months ended March 31, 2024 and 2023 was $0.2 million and $1.1 million, respectively. Common stock purchased under our share repurchase program was $0.7 million for the three months ended March 31, 2023.

Recent Accounting Pronouncements

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.

As a “smaller reporting company,” as defined in Item 10 of Regulation S-K, we are not required to provide this information.

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 March 31, 2024 and, based on this evaluation, have concluded that our disclosure controls and procedures were effective as of March 31, 2024.

Changes in Internal Controls

There have been no changes in internal control over financial reporting that occurred during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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:

• increase our vulnerability to adverse economic and industry conditions, including interest rate fluctuations, because the revolving loan portion of our borrowings are at variable rates of interest;
• require us to dedicate significant future cash flows to the repayment of debt or redemption of the preferred stock, reducing the availability of cash to fund working capital, capital expenditures or other general corporate purposes;
• limit our flexibility in planning for, or reacting to, changes in our business and industry; and
• limit our ability to obtain additional debt or equity financing due to applicable financial and restrictive covenants contained in our debt and preferred stock arrangements.

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:

• material adverse effects on our operating results, particularly in the fiscal quarters immediately following the acquisition as the acquired restaurants are integrated into our operations;
• risks associated with entering into markets or conducting operations where we have no or limited prior experience;
• problems retaining key personnel;
• potential impairment of tangible and intangible assets and goodwill acquired in the acquisition;
• potential unknown liabilities;
• difficulties of integration and failure to realize anticipated synergies; and
• disruption of our ongoing business, including diversion of management’s attention from other business concerns.

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.