UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q


	(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Quarterly Period Ended September 30, 2022

	OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to

Commission File Number 001-37379

THE ONE GROUP HOSPITALITY, INC.

(Exact name of registrant as specified in its charter)


Delaware		14-1961545
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1624 Market Street, Suite 311, Denver, Colorado		80202
(Address of principal executive offices)		Zip Code

646-624-2400

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	STKS	Nasdaq

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ◻	Accelerated filer ⌧
Non-accelerated filer ◻	Smaller reporting company ⌧
	Emerging growth company ◻

If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧

Number of shares of common stock outstanding as of October 31, 2022: 32,265,504

Table of Contents

TABLE OF CONTENTS


	Page
PART I – Financial Information
Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	28
Item 4. Controls and Procedures	28

PART II – Other Information
Item 1. Legal Proceedings	29
Item 1A Risk Factors	29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 6. Exhibits	29

Signatures	30

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

THE ONE GROUP HOSPITALITY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share information)


	September 30,		December 31,
	2022		2021
ASSETS	(Unaudited)
Current assets:
Cash and cash equivalents	$	17,477	$	23,614
Accounts receivable		8,454		11,356
Inventory		4,988		3,915
Other current assets		2,274		3,666
Due from related parties		376		376
Total current assets		33,569		42,927

Property and equipment, net		85,466		69,638
Operating lease right-of-use assets		84,928		85,395
Deferred tax assets, net		12,096		12,313
Intangibles, net		15,283		15,505
Other assets		4,231		3,199
Security deposits		810		858
Total assets	$	236,383	$	229,835

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	11,557	$	11,094
Accrued expenses		17,613		23,155
Deferred license revenue		79		90
Deferred gift card revenue and other		1,426		2,029
Current portion of operating lease liabilities		6,114		5,396
Current portion of long-term debt		500		500
Total current liabilities		37,289		42,264

Deferred license revenue, long-term		238		298
Operating lease liabilities, net of current portion		105,038		103,616
Long-term debt, net of current portion		27,940		23,132
Total liabilities		170,505		169,310

Commitments and contingencies (Note 15)

Stockholders’ equity:
Common stock, $0.0001 par value, 75,000,000 shares authorized; 32,744,362 issued and 32,231,728 outstanding at September 30, 2022 and 32,138,396 issued and 32,125,762 outstanding at December 31, 2021		3		3
Preferred stock, $0.0001 par value, 10,000,000 shares authorized; no shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively		—		—
Treasury stock, 512,634 and 12,634 shares at cost at September 30, 2022 and December 31, 2021, respectively		(3,540)		(37)
Additional paid-in capital		54,347		53,481
Retained earnings		19,087		10,632
Accumulated other comprehensive loss		(2,993)		(2,645)
Total stockholders’ equity		66,904		61,434
Noncontrolling interests		(1,026)		(909)
Total equity		65,878		60,525
Total liabilities and equity	$	236,383	$	229,835

See notes to the condensed consolidated financial statements.

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THE ONE GROUP HOSPITALITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

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


	For the three months ended September 30,				For the nine months ended September 30,
	2022		2021		2022		2021
Revenues:
Owned restaurant net revenue	$	69,538	$	67,966	$	216,984	$	184,982
Management, license and incentive fee revenue		3,482		3,903		11,342		8,129
Total revenues		73,020		71,869		228,326		193,111
Cost and expenses:
Owned operating expenses:
Owned restaurant cost of sales		17,281		17,733		55,231		46,925
Owned restaurant operating expenses		43,136		38,640		126,818		101,882
Total owned operating expenses		60,417		56,373		182,049		148,807
General and administrative (including stock-based compensation of $1,001, $653, $2,791 and $2,812 for the three and nine months ended September 30, 2022 and 2021, respectively)		6,447		5,959		20,587		17,272
Depreciation and amortization		2,930		2,572		8,571		7,766
COVID-19 related expenses		—		1,131		2,534		3,776
Agreement restructuring expenses		—		—		—		494
Pre-opening expenses		2,684		587		3,833		842
Lease termination expenses		—		58		255		352
Transaction costs		51		131		51		131
Total costs and expenses		72,529		66,811		217,880		179,440
Operating income		491		5,058		10,446		13,671
Other expenses (income), net:
Interest expense, net		435		781		1,387		3,262
Loss on early debt extinguishment		—		600		—		600
Gain on CARES Act Loan forgiveness		—		(9,968)		—		(18,529)
Total other expenses (income), net		435		(8,587)		1,387		(14,667)
Income before provision for income taxes		56		13,645		9,059		28,338
(Benefit) provision for income taxes		(321)		1,544		721		2,188
Net income		377		12,101		8,338		26,150
Less: net (loss) income attributable to noncontrolling interest		(105)		430		(117)		573
Net income attributable to The One Group Hospitality, Inc.	$	482	$	11,671	$	8,455	$	25,577
Currency translation loss		(87)		(34)		(348)		(44)
Comprehensive income attributable to The ONE Group Hospitality, Inc.	$	395	$	11,637	$	8,107	$	25,533

Net income attributable to The ONE Group Hospitality, Inc. per share:
Basic net income per share	$	0.01	$	0.36	$	0.26	$	0.83
Diluted net income per share	$	0.01	$	0.34	$	0.25	$	0.75

Shares used in computing basic income per share		32,663,549		31,993,557		32,496,780		30,830,521
Shares used in computing diluted income per share		33,921,498		34,380,573		34,062,661		34,223,857

See notes to the condensed consolidated financial statements.

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THE ONE GROUP HOSPITALITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited, in thousands, except share information)


										Accumulated
						Additional				other
	Common stock			Treasury		paid-in		Retained		comprehensive		Stockholders’		Noncontrolling
	Shares	Par value		stock		capital		Earnings		loss		equity		interests		Total
Balance at December 31, 2021	32,125,762	$	3	$	(37)	$	53,481	$	10,632	$	(2,645)	$	61,434	$	(909)	$	60,525
Stock-based compensation	7,162		—		—		879		—		—		879		—		879
Issuance of vested restricted shares, net of tax withholding	127,413		—		—		(314)		—		—		(314)		—		(314)
Loss on foreign currency translation, net	—		—		—		—		—		(92)		(92)		—		(92)
Net income (loss)	—		—		—		—		3,670		—		3,670		(149)		3,521
Balance at March 31, 2022	32,260,337	$	3	$	(37)	$	54,046	$	14,302	$	(2,737)	$	65,577	$	(1,058)	$	64,519
Stock-based compensation	10,214		—		—		911		—		—		911		—		911
Exercise of stock options and warrants	13,261		—		—		28		—		—		28		—		28
Issuance of vested restricted shares, net of tax withholding	365,589		—		—		(1,242)		—		—		(1,242)		—		(1,242)
Loss on foreign currency translation, net	—		—		—		—		—		(169)		(169)		—		(169)
Net income	—		—		—		—		4,303		—		4,303		137		4,440
Balance at June 30, 2022	32,649,401	$	3	$	(37)	$	53,743	$	18,605	$	(2,906)	$	69,408	$	(921)	$	68,487
Stock-based compensation	11,293		—		—		1,001		—		—		1,001		—		1,001
Issuance of vested restricted shares, net of tax withholding	71,034		—		—		(397)		—		—		(397)		—		(397)
Purchase of common stock	(500,000)		—		(3,503)		—		—		—		(3,503)		—		(3,503)
Loss on foreign currency translation, net	—		—		—		—		—		(87)		(87)		—		(87)
Net income (loss)	—		—		—		—		482		—		482		(105)		377
Balance at September 30, 2022	32,231,728	$	3	$	(3,540)	$	54,347	$	19,087	$	(2,993)	$	66,904	$	(1,026)	$	65,878


Balance at December 31, 2020	29,083,183	$	3	$	—	$	46,538	$	(20,716)	$	(2,646)	$	23,179	$	(1,200)	$	21,979
Stock-based compensation	25,643		—		—		1,022		—		—		1,022		—		1,022
Exercise of stock options and warrants	450,971		—		—		—		—		—		—		—		—
Issuance of vested restricted shares, net of tax withholding	67,685		—		—		(154)		—		—		(154)		—		(154)
Purchase of noncontrolling interest	—		—		—		116		—		—		116		(191)		(75)
Loss on foreign currency translation, net	—		—		—		—		—		(18)		(18)		—		(18)
Net income (loss)	—		—		—		—		70		—		70		(130)		(60)
Balance at March 31, 2021	29,627,482	$	3	$	—	$	47,522	$	(20,646)	$	(2,664)	$	24,215	$	(1,521)	$	22,694
Stock-based compensation	9,210		—		—		741		—		—		741		—		741
Exercise of stock options and warrants	931,558		—		—		3,151		—		—		3,151		—		3,151
Issuance of vested restricted shares, net of tax withholding	1,297,525		—		—		—		—		—		—		—		—
Gain on foreign currency translation, net	—		—		—		—		—		8		8		—		8
Net income	—		—		—		—		13,836		—		13,836		273		14,109
Balance at June 30, 2021	31,865,775	$	3	$	—	$	51,414	$	(6,810)	$	(2,656)	$	41,951	$	(1,248)	$	40,703
Stock-based compensation	18,978		—		—		679		—		—		679		—		679
Exercise of stock options	200,000		—		—		426		—		—		426		—		426
Issuance of common shares, net of tax withholding	9,500		—		—		—		—		—		—		—		—
Purchase of common stock	—		—		(37)		—		—		—		(37)		—		(37)
Loss on foreign currency translation, net	—		—		—		—		—		(34)		(34)		—		(34)
Net income	—		—		—		—		11,671		—		11,671		430		12,101
Balance at September 30, 2021	32,094,253	$	3	$	(37)	$	52,519	$	4,861	$	(2,690)	$	54,656	$	(818)	$	53,838

See notes to the condensed consolidated financial statements.

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THE ONE GROUP HOSPITALITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	For the nine months ended September 30,
	2022		2021
Operating activities:
Net income	$	8,338	$	26,150
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		8,571		7,766
Stock-based compensation		2,791		2,442
CARES Act loan forgiveness		—		(18,529)
Amortization of debt issuance costs		279		321
Deferred taxes		217		1,504
Loss on early debt extinguishment		—		600
Changes in operating assets and liabilities:
Accounts receivable		2,971		(2,611)
Inventory		(1,073)		(516)
Other current assets		1,380		(811)
Security deposits		48		7
Other assets		(494)		(348)
Accounts payable		(841)		2,314
Accrued expenses		(7,784)		5,454
Operating lease liabilities and right-of-use assets		2,607		1,045
Deferred gift card and license revenue		(674)		(1,758)
Net cash provided by operating activities		16,336		23,030

Investing activities:
Purchase of property and equipment		(21,309)		(8,112)
Net cash used in investing activities		(21,309)		(8,112)

Financing activities:
Borrowings of long-term debt		5,000		—
Repayments of long-term debt		(375)		(22,633)
Debt issuance costs		—		(866)
Exercise of stock options and warrants		28		3,577
Tax-withholding obligation on stock-based compensation		(1,953)		(154)
Purchase of common stock		(3,503)		(37)
Purchase of non-controlling interests		—		(75)
Net cash used in financing activities		(803)		(20,188)
Effect of exchange rate changes on cash		(361)		(37)
Net decrease in cash and cash equivalents		(6,137)		(5,307)
Cash and cash equivalents, beginning of period		23,614		24,385
Cash and cash equivalents, end of period	$	17,477	$	19,078
Supplemental disclosure of cash flow data:
Interest paid, net of capitalized interest	$	1,056	$	3,118
Income taxes paid	$	293	$	53
Non-cash CARES Act loan forgiveness	$	—	$	18,529
Accrued purchases of property and equipment	$	4,355	$	—

See notes to the condensed consolidated financial statements.

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THE ONE GROUP HOSPITALITY, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 – Summary of Business and Significant Accounting Policies

Summary of Business

The ONE Group Hospitality, Inc. and its subsidiaries (collectively, the “Company”) is a global 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. The Company’s primary restaurant brands are STK, a multi-unit steakhouse concept that combines a high-energy, social atmosphere with the quality and service of a traditional upscale steakhouse, and Kona Grill, a polished casual bar-centric grill concept featuring American favorites, award-winning sushi, and specialty cocktails in a polished casual atmosphere.

As of September 30, 2022, the Company owned, operated, managed, or licensed 61 venues, including 23 STKs and 24 Kona Grills in major metropolitan cities in North America, Europe and the Middle East and 14 F&B venues in seven hotels and casinos in the United States and Europe. For those restaurants and venues that are managed or licensed, the Company generates management fees based on top-line revenues and incentive fee revenue based on a percentage of the location’s revenues and profits.

COVID-19

In response to COVID-19, the Company has taken significant steps to adapt its business to increase sales while providing a safe environment for guests and employees. COVID-19 related expenses were zero and $2.5 million for the three and nine months ended September 30, 2022, compared to $1.1 million and $3.8 million for the three and nine months ended September 30, 2021, respectively, composed primarily of sanitation, supplies and safety precautions taken to prevent the spread of COVID-19.

Basis of Presentation

The accompanying condensed consolidated balance sheet as of December 31, 2021, 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, 2021.

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.

Change in Accounting Estimate

Effective April 1, 2022, the Company changed its estimated useful life of the Kona Grill trade name. Based upon the strong performance of the Kona Grill restaurants over the twelve months ended March 31, 2022, significant capital investments in both existing and new restaurants and the Company’s commitment to expand the Kona Grill brand with the opening of new restaurants, the Company has determined that the Kona Grill trade name has an indefinite life rather than the twenty-year life previously determined. The Company currently has two Kona Grill venues under construction in Riverton, Utah and Columbus, Ohio and plans to open three to five Kona Grills each year for the foreseeable future. The effect of this change in estimate will reduce depreciation and amortization expense by $0.9 million annually, increase net income by $0.9 million annually, and increase basic and diluted earnings per share by approximately $0.03 annually based upon the current number of shares outstanding.

As a result of the above change, the Company updated its accounting policy for Intangible Assets and will test for impairment annually on November 1^st or on an interim basis if events or changes in circumstances between annual tests indicate a potential impairment.

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Prior Period Reclassifications

Certain reclassifications of the 2021 amounts in the segment reporting footnote have been made to conform to the current year presentation.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB “) issued Accounting Standards Update (“ASU“) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to estimate credit losses. ASU 2016-13 is effective for smaller reporting companies for fiscal years beginning after December 15, 2022. The Company does not expect the adoption of ASU 2016-13 to have a material impact on its financial statements.

Note 2 – Property and Equipment, net

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


	September 30,		December 31,
	2022		2021
Furniture, fixtures and equipment	$	28,580	$	24,942
Leasehold improvements		81,489		76,500
Less: accumulated depreciation		(45,244)		(39,425)
Subtotal		64,825		62,017
Construction in progress		18,074		5,374
Restaurant smallwares		2,567		2,247
Total	$	85,466	$	69,638

Depreciation related to property and equipment was $2.9 million and $2.3 million for the three months ended September 30, 2022 and 2021, respectively, and $8.3 million and $7.1 million for the nine months ended September 30, 2022 and 2021, respectively. The Company does not depreciate construction in progress until such assets are placed into service.

Note 3 – Intangibles, net

Intangibles, net consists of the following (in thousands):


	September 30,		December 31,
	2022		2021
Indefinite-lived intangible assets
Kona Grill trade name	$	17,400	$	—
Finite-lived intangible assets
Kona Grill trade name		—		17,400
Other finite-lived intangible assets		66		66
Total finite-lived intangible assets		66		17,466
Less: accumulated amortization		(2,183)		(1,961)
Total intangibles, net	$	15,283	$	15,505

Finite-lived intangible assets are amortized using the straight-line method over their estimated useful life of 10 years. Amortization expense was nominal and $0.3 million for the three months ended September 30, 2022 and 2021, respectively. Amortization expense was $0.2 million and $0.7 million for the nine months ended September 30, 2022 and 2021, respectively. The Company’s estimated aggregate amortization expense for each of the five succeeding fiscal years is a nominal amount annually. Refer to Note 1 regarding the change in accounting estimate of the Kona Grill trade name.

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Note 4 – Accrued Expenses

Accrued expenses consist of the following (in thousands):


	September 30,		December 31,
	2022		2021
Payroll and related ⁽¹⁾	$	4,059	$	6,554
VAT and sales taxes		2,443		3,477
Construction on new restaurants		2,125		359
Amounts due to landlords		2,072		1,847
Insurance		789		642
Legal, professional and other services		687		458
Income taxes and related		155		—
Interest		146		132
Accrued lease exit costs ⁽²⁾		—		4,913
Other ⁽³⁾		5,137		4,773
Total	$	17,613	$	23,155

(1)	Payroll and related includes $1.2 million in employer payroll taxes for which payment has been deferred under the CARES Act as of September 30, 2022 and December 31, 2021, respectively.

(2)	Amount relates to lease exit costs for 2016 leases for restaurants never built. All amounts have been paid as of September 30, 2022.

(3)	Amount primarily relates to recurring restaurant operating expenses.

Note 5 – Long-Term Debt

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


	September 30,		December 31,
	2022		2021
Term loan agreements	$	24,375	$	24,750
Revolving credit facility		5,000		—
Total long-term debt		29,375		24,750
Less: current portion of long-term debt		(500)		(500)
Less: debt issuance costs		(935)		(1,118)
Total long-term debt, net of current portion	$	27,940	$	23,132

Interest expense for the Company’s debt arrangements, excluding the amortization of debt issuance costs and fees, was $0.4 million and $0.7 million for the three months ended September 30, 2022 and 2021, respectively, and $1.1 million and $2.9 million for the nine months ended September 30, 2022 and 2021, respectively. Capitalized interest was $0.1 million and $0.2 million for the three and nine months ended September 30, 2022, respectively.

As of September 30, 2022, the Company had $1.4 million in standby letters of credit outstanding for certain restaurants and $5.6 million available in its revolving credit facility, subject to certain conditions.

Credit and Guaranty Agreement

On October 4, 2019, in conjunction with the acquisition of Kona Grill, the Company entered into a credit agreement with Goldman Sachs Bank USA (the “Credit Agreement”). On August 6, 2021, the Company entered into the Third Amendment to the Credit Agreement to extend the maturity date for both the term loan and revolving credit facility to August 2026. The Credit Agreement provides for a secured revolving credit facility of $12.0 million and a $25.0 million term loan (reduced from $48.0 million). The term loan is payable in quarterly installments of $0.1 million, with the final payment due in August 2026.

The amended Credit Agreement has several borrowing and interest rate options, including the following: (a) a LIBOR rate (or a comparable successor rate) subject to a 1.00% floor or (b) a base rate equal to the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.50%, (iii) the LIBOR rate for a one-month period plus 1.00% or (iv) 4.00%. Loans under the amended Credit Agreement bear interest at a rate per annum using the applicable indices plus an interest rate margin of 5.00% (for LIBOR rate loans) and 4.00%

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(for base rate loans). Upon the cessation of LIBOR, the amended Credit Agreement provides for the use of a benchmark replacement as defined in the amended Credit Agreement.

In conjunction with the amended Credit Agreement, the Company made a pre-payment on the loan of $22.2 million and incurred $0.9 million in debt issuance costs. The Company accounted for the amendment as a debt modification with a partial extinguishment and recognized a loss on early debt extinguishment of $0.6 million for the nine months ended September 30, 2021 and $0.1 million in transaction costs.

The Company’s weighted average interest rate on the borrowings under the amended Credit Agreement as of September 30, 2022 and December 31, 2021 was 6.6% and 6.0%, respectively.

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

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

As of September 30, 2022, the Company had $0.9 million of debt issuance costs related to the amended Credit Agreement, which were capitalized and are recorded as a direct deduction to long-term debt and $0.5 million in debt issuance costs recorded in Other Assets on the condensed consolidated balance sheets. As of September 30, 2022, the Company was in compliance with the financial covenants required by the Credit Agreement.

Note 6 – Fair Value of Financial Instruments

Cash and cash equivalents, accounts receivable, inventory, accounts payable and accrued expenses are carried at cost, which approximates fair value. Long-lived assets are measured and disclosed at fair value on a nonrecurring basis if an impairment is identified. There were no long-lived assets measured at fair value as of September 30, 2022.

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 7 – Income taxes

Income taxes for the three and nine months ended September 30, 2022 are recorded at the Company’s estimated annual effective income tax rate, subject to adjustments for discrete events, should they occur. The Company’s effective income tax rate including discrete events was (573.2%) and 8.0% for the three and nine months ended September 30, 2022, compared to 11.3% and 7.7% for the three and nine months ended September 30, 2021. The negative rate for the three months ended September 30, 2022 was primarily the result of credits and discrete events exceeding pre-tax book income for the quarter. The Company’s annualized effective tax rate is estimated at approximately 15.9% for 2022. The Company’s projected annual effective tax rate differs from the statutory U.S. tax rate of 21% primarily due to the following: (i) tax credits for FICA taxes on certain employees’ tips (ii) taxes owed in foreign jurisdictions with tax rates that differ from the U.S. statutory rate; (iii) taxes owed in state and local jurisdictions; and (iv) the tax effect of non-deductible compensation. Income tax provision recorded for the nine months ended September 30, 2022 and 2021 included the discrete period tax benefits resulting from the vesting of restricted stock units.

The CARES Act includes provisions allowing for the carryback of net operating losses generated for specific periods and technical amendments regarding the expensing of qualified improvement property. The CARES Act also allows for the deferral of the employer-paid portion of social security taxes, which the Company has elected to defer and will pay by December 31, 2022.

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 federal, state, local and foreign taxing authorities. There are no ongoing federal, state, local, or foreign tax examinations as of September 30, 2022.

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Note 8 – Revenue from Contracts with Customers

The following table provides information about liabilities from contracts with customers, which include deferred license revenue, deferred gift card revenue, the Konavore rewards program and deposits from customers for future events (in thousands):


	September 30,		December 31,
	2022		2021
Deferred license revenue ⁽¹⁾	$	317	$	388
Deferred gift card and gift certificate revenue ⁽²⁾	$	832	$	1,769
Advanced party deposits ⁽²⁾	$	594	$	260
Konavore rewards program ⁽³⁾	$	160