ONE Group Hospitality, Inc.: Form 10-Q for the period ended Sep 30, 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, Item 1A. “Risk Factors” in our Quarterly Reports on From 10-Q for the quarters ended March 31, 2024 and June 30, 2024, 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:

• STK, a modern twist on the American steakhouse concept featuring premium steaks, seafood and specialty cocktails in an energetic upscale atmosphere;
• Benihana, an interactive dining destination with highly skilled chefs preparing food in front of guests and served in an energetic atmosphere alongside fresh sushi and innovative cocktails;
• 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 anchored by creative sushi, inventive drinks, and outstanding service.

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. 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 166 venues including 29 STKs, 85 Benihanas, 27 Kona Grills and 16 RA Sushi in major cities in North America, Europe, Latin America and the Middle East and 9 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 six new venues in 2024. As of the date of this report we have opened the following:

• Owned STK restaurant in Washington DC
• Owned RA Sushi restaurant in Plantation, Florida
• Owned Kona Grill restaurant in Tigard, Oregon
• Owned STK restaurant in Aventura, Florida
• Owned Salt Water Social restaurant in Denver, Colorado

There are currently two Company-owned STK restaurants and one Company-owned Benihana restaurant under construction in the following cities:

• Owned STK restaurant in Topanga, California
• Owned STK restaurant in Los Angeles, California
• Owned Benihana restaurant in San Mateo, California

In July 2024, we terminated a franchise agreement for one restaurant.

In October 2024, we closed four company-owned RA Sushi restaurants.

The table below reflects our current venues by restaurant brand and geographic location:

(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 Salt Water Social, Bao Yum, Heliot, Hideout, Radio and Rivershore Bar & Grill.

(3) Includes Benihana and RA Sushi co-branded locations.

Our Growth Strategies and Outlook

Our growth model is primarily driven by the following:

• Expansion of our STK, Benihana, 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 “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.

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.

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 and closures 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 $117.1 million, or 152.3% to $194.0 million for the three months ended September 30, 2024 compared to $76.9 million for the three months ended September 30, 2023 primarily due to the Benihana Acquisition on May 1, 2024. Same store sales decreased 8.8% in the third quarter of 2024 compared to the third quarter of 2023.

Operating loss increased $1.0 million to $3.0 million for the three months ended September 30, 2024 compared to $2.0 million for the three months ended September 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.

Restaurant operating profit increased $16.0 million, or 175.6% to $25.1 million for the three months ended September 30, 2024 compared to $9.1 million for the three months ended September 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 13.2% in the third quarter of 2024 compared to 12.3% in the third quarter of 2023. See “Results of Operations” below for reconciliation to Operating income (loss), the most directly comparable GAAP measure to Restaurant Operating Profit.

Total revenues increased $208.7 million, or 85.9% to $451.5 million for the nine months ended September 30, 2024 compared to $242.8 million for the nine months ended September 30, 2023 primarily attributable to the Benihana Acquisition on May 1, 2024.

For the nine months ended September 30, 2024, operating loss was $2.0 million compared to operating income of $4.4 million for the nine months ended September 30, 2023, primarily due to transaction, transition and integration costs related to the Benihana Acquisition.

Restaurant operating profit increased $34.3 million or 101.0% to $68.2 million for the nine months ended September 30, 2024 compared to restaurant operating profit of $33.9 million for the nine months ended September 30, 2023 primarily attributable to the Benihana Acquisition on May 1, 2024. Restaurant operating profit as a percentage of owned restaurant net revenue was 15.5% in the first nine months of 2024 compared to 14.6% in the same period of 2023. See “Results of Operations” below for reconciliation to Operating income (loss), the most directly comparable GAAP measure to Restaurant Operating Profit.

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 being 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 United States of America (“GAAP”). We have evolved our definition of Adjusted EBITDA starting in the third quarter of 2024 to provide more clarity and comparability relative to peers. We will exclude pre-opening expenses as an add back in the Adjusted EBITDA calculation. Prior period amounts presented in the table below have been recast to conform to the current period presentation.

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, 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.

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 component is as follows (in thousands):

(1) When adjusted for non-cash rent of $0.2 million and ($0.2) million for the nine months ended September 30, 2024 and September 30, 2023, respectively, the Benihana restaurant operating profit as a percentage of Benihana revenue increased 20 basis points from 17.0% for the pro forma three months ended September 30, 2023 to 17.2% for the three months ended September 30, 2024.

Results of Operations for the Three Months Ended September 30, 2024 and 2023

Revenues

Owned restaurant net revenue. Owned restaurant net revenue increased $116.9 million, or 158.6%, to $190.6 million for the three months ended September 30, 2024 from $73.7 million for the three months ended September 30, 2023. The increase was primarily attributable to the acquisition of Benihana and RA Sushi restaurants on May 1, 2024, which generated $119.4 million in revenues and $10.1 million in revenues from six new restaurants opened since October 2023, partially offset by a reduction in comparable restaurant sales. Comparable restaurant sales decreased 8.8% for the third quarter of 2024 compared to the third quarter of 2023.

Management, license and incentive fee revenue. Management, license and incentive fee revenues increased $0.2 million, or 6.4%, to $3.4 million for the three months ended September 30, 2024 from $3.2 million for the three months ended September 30, 2023. Management, license and incentive fee revenue attributed to Benihana franchised restaurants contributed $0.7 million in revenues during the third quarter of 2024 which was offset by decreased revenues at our managed 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 $21.7 million, or 118.8%, to $39.9 million for the three months ended September 30, 2024 from $18.2 million for the three months ended September 30, 2023. The increase in owned restaurant cost of sales is primarily attributed to $23.2 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 380 basis points from 24.7% in the three months ended September 30, 2023 to 20.9% for the three months ended September 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 $79.2 million to $125.6 million for the three months ended September 30, 2024 from $46.4 million for the three months ended September 30, 2023. The increase in owned restaurant operating expense is primarily attributed to $77.7 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 300 basis points from 62.9% for the three months ended September 30, 2023 to 65.9% for the three months ended September 30, 2024.

General and administrative. General and administrative costs increased $5.5 million, or 75.6%, to $12.8 million for the three months ended September 30, 2024 from $7.3 million for the three months ended September 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 6.6% for the three months ended September 30, 2024 compared to 9.5% for the three months ended September 30, 2023.

Depreciation and amortization. Depreciation and amortization expense was $9.4 million for the three months ended September 30, 2024 compared to $3.7 million for the three months ended September 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 October 2023 and capital expenditures to maintain and enhance the guest experience in our restaurants.

Pre-opening expenses. For the three months ended September 30, 2024, we incurred $2.1 million of pre-opening expenses primarily related to payroll, training and non-cash pre-open rent for Kona Grill Tigard, which opened on September 17, 2024, and STK Aventura, which opened in October 2024. We also incurred costs during the third 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 September 30, 2023 were $3.1 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 that were under development. Detail of pre-opening expenses by category is provided in the table below for the three months ended September 30, 2024 and 2023 (in thousands).

(1) Includes Salt Water Social, STK Aventura, Kona Grill Tigard, RA Sushi Plantation and other venues under development.

(2) Cash rent paid was $202 and $64 for the three months ended September 30, 2024 and 2023, respectively.

Transaction and exit costs. Transaction and exit costs were $0.9 million for the three months ended September 30, 2024. These costs primarily included investment banking, 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 September 30, 2024, we incurred $6.3 million of transition and integration costs associated with the Benihana Acquisition, which closed on May 1, 2024. Included in these costs are expenses related to the implementation of happy hour and wagyu offerings at Benihana and identified duplicate professional service vendors, operational support offices, support positions, and maintenance expenses 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 $10.7 million and $1.7 million for the three months ended September 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 September 30, 2024 was ­11.8% compared to 12.1% in the same period of 2023.

Benefit for income taxes. For the three months ended September 30, 2024, income tax benefit was $4.6 million compared to income tax benefit of $0.4 million for the three months ended September 30, 2023.

Net loss attributable to noncontrolling interest. Net loss attributable to noncontrolling interest was $0.2 million for both the three months ended September 30, 2024 and September 30, 2023.

Results of Operations for the Nine Months Ended September 30, 2024 and 2023

Revenues

Owned restaurant net revenue. Owned restaurant net revenue increased $208.9 million, or 90.0%, to $441.1 million for the nine months ended September 30, 2024 from $232.2 million for the nine months ended September 30, 2023. The increase was primarily attributable to the acquisition of Benihana and RA Sushi restaurants on May 1, 2024, which generated $208.1 million in revenues for the five-month period owned by the Company, and $32.6 million in revenues from six new restaurants opened since October 2023, partially offset by a reduction in comparable restaurant sales. Comparable restaurant sales decreased 7.9% during the nine months ended September 30, 2024 compared to the same period in 2023.

Management, license and incentive fee revenue. Management, license and incentive fee revenues decreased $0.3 million, or 2.7%, to $10.3 million for the nine months ended September 30, 2024 from $10.6 million for the nine months September 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 $1.1 million in revenues attributed to Benihana franchised restaurants.

Cost and Expenses

Owned restaurant cost of sales. Food and beverage costs for owned restaurants increased $38.2 million, or 67.8%, to $94.5 million for the nine months ended September 30, 2024 compared to $56.3 million for the nine months ended September 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 September 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 280 basis points from 24.2% in the nine months ended September 30, 2023 to 21.4% for the nine months ended September 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 $136.5 million to $278.5 million for the nine months ended September 30, 2024 from $142.0 million for the nine months ended September 30, 2023 The increase in owned restaurant operating expense is primarily attributed to $131.5 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 200 basis points from 61.1% in the nine months ended September 30, 2023 to 63.1% for the nine months ended September 30, 2024.

General and administrative. General and administrative costs increased $8.1 million, or 35.7%, to $30.9 million for the nine months ended September 30, 2024 from $22.8 million for the nine months ended September 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 6.9% for the nine months ended September 30, 2024 compared to 9.4% for the nine months ended September 30, 2023.

Depreciation and amortization. Depreciation and amortization expense was $22.7 million and $10.9 million for the nine months ended September 30, 2024 and 2023, respectively. The increase was primarily related to five 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 October 2023 and capital expenditures to maintain and enhance the guest experience in our restaurants.

Pre-opening expenses. For the nine months ended September 30, 2024, we incurred $7.5 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, RA Sushi Plantation which opened on July 1, 2024, Kona Grill Tigard which opened in September 2024, and STK Aventura which opened in October 2024. Total pre-opening expenses related to non-cash pre-open rent was $0.9 million.

Pre-opening expenses for the nine months ended September 30, 2023 were $6.0 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 Charlotte and Kona Grill Phoenix, which opened in October 2023, and STK and Kona Grill restaurants under development. Detail of pre-opening expenses by category is provided in the table below for the nine months ended September 30, 2024 and 2023 (in thousands).

(1) Includes Salt Water Social, STK Aventura, Kona Grill Tigard, RA Sushi Plantation and other venues under development

(2) Cash rent paid was $589 and $215 for the nine months ended September 30, 2024 and 2023, respectively.

Transaction and exit costs. Transaction and exit costs were $9.2 million for the nine months ended September 30, 2024. These costs primarily included investment banking, legal and professional fees incurred in conjunction with the Benihana Acquisition, which closed on May 1, 2024.

Transition and integration costs. In the nine months ended September 30, 2024, we incurred $10.1 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 the implementation of happy hour and wagyu offerings at Benihana and identified duplicate professional service vendors, operational support offices, support positions, and maintenance expenses 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 $20.6 million for the nine months ended September 30, 2024 compared to $5.1 million for the nine months ended September 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 nine months ended September 30, 2024 was ­11.8% 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 for income taxes. The benefit for income taxes for the nine months ended September 30, 2024 was $8.2 million compared to a benefit for income taxes of $0.3 million for the nine months ended September 30, 2023.

Net loss attributable to noncontrolling interest. Net loss attributable to noncontrolling interest was $0.7 million for the nine months ended September 30, 2024 compared to a net loss of $0.6 million for the nine months ended September 30, 2023.

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 for the next 12 months and the foreseeable future, 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 September 30, 2024, we had cash and cash equivalents and restricted cash and cash equivalents of $28.7 million and $349.1 million in long-term debt, which consisted of borrowings under our Credit Agreement. As of September 30, 2024, the availability on our revolving credit facility was $34.1 million, subject to certain conditions.

For the nine months ended September 30, 2024, capital expenditures were $53.8 million of which $43.0 million related to the construction of new STK, Benihana, Kona Grill and RA Sushi restaurants and $10.7 million related to existing restaurants. Net capital expenditures, inclusive of $4.7 million in landlord contributions, was $49.1 million for the nine months ended September 30, 2024. We expect to receive between $3.0 million to $4.0 million in landlord contributions in the next three months. Capital expenditures by type for the nine months ended September 30, 2024 and 2023, respectively are provided below (in thousands).

(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 nine months ended September 30, 2024 and 2023 (in thousands):

Operating Activities. Net cash provided by operating activities was $25.7 million for the nine months ended September 30, 2024, compared to $15.2 million for the nine months ended September 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 accounts payable and accrued expenses.

Investing Activities. Net cash used in investing activities for the nine months ended September 30, 2024 was $423.6 million, which was comprised of $369.8 million for the Benihana acquisition, net of cash acquired, and $53.8 million in capital expenditures for the construction of STK Washington DC, which opened in March 2024, RA Sushi Plantation, which opened in July 2024, Kona Grill Tigard, which opened in September 2024, and STK Aventura, which opened in October 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 September 30, 2024.

Net cash used in investing activities for the nine months ended September 30, 2023 was $38.4 million primarily for the construction of STK restaurants in Charlotte, North Carolina; Boston, Massachusetts; Salt Lake City, Utah 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 September 30, 2023, as well as capital expenditures for existing restaurants.

Financing Activities. Net cash provided by financing activities for the nine months ended September 30, 2024 was $405.6 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 $9.7 million for the nine months ended September 30, 2023 which reflected $7.7 million in common stock purchased under our share repurchase program and $1.8 million in tax withholding obligation on stock-based compensation.

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 September 30, 2024 and, based on this evaluation, have concluded that our disclosure controls and procedures were effective as of September 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 September 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls 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 and in Part II, Item 1A in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2024 and June 30, 2024.