10-Q 1 stks-20220930x10q.htm 10-Q
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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

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.

3

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.

4

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.

5

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.

6

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 1st or on an interim basis if events or changes in circumstances between annual tests indicate a potential impairment.

7

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.

8

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%

9

(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 adjus