If any of the securities being registered on
this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following
box.
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If this Form is filed to register additional
securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration statement for the same offering.
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pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number
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pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number
of the earlier effective registration statement for the same offering.
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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.
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with new or revised financial accounting
standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
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RISK
FACTORS
An investment in shares of our common stock
involves a high degree of risk. You should carefully consider the following information about these risks, together with the other
information appearing elsewhere in this prospectus, including our financial statements and related notes thereto, before deciding
to invest in our common stock. The occurrence of any of the following risks could have a material adverse effect on our business,
financial condition, results of operations and future growth prospects. In these circumstances, the market price of our common
stock could decline, and you may lose all or part of your investment. We undertake no obligation to update any forward-looking
statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further
disclosure we make in our reports filed with the Securities and Exchange Commission. (All dollar amounts, except per share amounts,
are stated in thousands.)
Risks Related to our Business
Our business is dependent on discretionary spending patterns
in the areas in which our restaurants and food and beverage hospitality services operations are located and in the economy at large,
and economic downturns could materially adversely affect our results of operations.
Purchases at our restaurants and food and beverage
hospitality services locations are discretionary for consumers and we are therefore susceptible to changes in discretionary patterns
or economic slowdowns in the geographic areas in which they are located and in the economy at large. We believe that consumers
generally are more willing to make discretionary purchases, including high-end restaurant meals, during favorable economic conditions.
Disruptions in the overall economy, including high unemployment, financial market volatility and unpredictability, and the related
reduction in consumer confidence could negatively affect customer traffic and sales throughout our industry, including our segment.
Also, we believe the majority of our weekday revenues are derived from business customers using expense accounts and our business
therefore may be affected by reduced expense account or other business-related dining by our business clientele. If business clientele
were to dine less frequently at our locations or to spend at reduced levels, our business and results of operations would be adversely
affected as a result of a reduction in customer traffic or average revenues per customer. Our hotel-based restaurants and food
and beverage services operations would be particularly susceptible to reductions in business travel. There is also a risk that
if uncertain economic conditions persist for an extended period of time or worsen, consumers might make long-lasting changes to
their discretionary spending behavior, including dining out less frequently. Our casino-based restaurants and food and beverage
services operations would be particularly susceptible to reductions in discretionary spending. The ability of the U.S. economy
to handle this uncertainty is likely to be affected by many national and international factors that are beyond our control, including
current economic trends in Europe and Asia. These factors, including national, regional and local politics and economic conditions,
disposable consumer income and consumer confidence, also affect discretionary consumer spending. Continued uncertainty in or a
worsening of the economy, generally or in a number of our markets, and our customers’ reactions to these trends could adversely
affect our business and cause us to, among other things, reduce the number and frequency of new location openings, close locations
and delay our re-modeling of existing locations.
Changes in consumer preferences could adversely impact our
business and results of operations.
The restaurant and hospitality industry is characterized by the
continual introduction of new concepts and is subject to rapidly changing consumer preferences, tastes, trends and eating and purchasing
habits. Our success depends in part on our ability to anticipate and respond quickly to changing consumer preferences, as well
as other factors affecting the restaurant and hospitality industry, including new market entrants and demographic changes. Shifts
in consumer preferences away from upscale steakhouses or beef in general, which are significant components of our concepts’
menus and appeal, whether as a result of economic, competitive or other factors, could adversely affect our business and results
of operations.
Our STK locations in New York and Las Vegas and our food and
beverage operations at the ME Hotel in London represent a significant portion of our revenues, and any significant downturn in
their business or disruption in the operation of these locations could harm our business, financial condition and results of operations.
Our STK locations in New York and Las Vegas
represented and our food and beverage operations at the ME Hotel in London represent a significant proportion of our revenues overall.
Accordingly, we are susceptible to any fluctuations in the business at our New York, Las Vegas and London locations, whether as
a result of adverse economic conditions, negative publicity, and changes in customer preferences or for other reasons. In addition,
any natural disaster, prolonged inclement weather, act of terrorism or national emergency, accident, system failure or other unforeseen
event in or around New York City, Las Vegas or London could result in a temporary or permanent closing of that location, could
influence potential customers to avoid that geographic region or that location in particular or otherwise lead to a significant
decrease in our overall revenues. Any significant interruption in the operation of these locations or other reduction in sales
could adversely affect our business and results of operations.
In the foreseeable future we will continue
to maintain a relatively small number of restaurant and food and beverage hospitality service locations. Accordingly, we will continue
to depend on a small number of revenue generating installations to generate revenues and profits.
While we plan on growing as rapidly as prudently
possible, in the foreseeable future we will only have a relatively small installed base from which to derive revenue and profits.
Even if we are successful in implementing these plans (of which there can be no assurance), our operational risk will still be
concentrated in a relatively small base of operating installations and failure of any of those installations to produce satisfactory
levels of revenue or profit could materially and adversely affect our business, financial condition and results of operations as
a whole.
Some of our restaurants and food and beverage hospitality
services operations
are located in regions that may be susceptible to severe weather conditions. As a result,
adverse weather conditions in any of these areas could damage our operations, result in fewer customer visits to our locations
and otherwise have a material adverse effect on our business.
Sales in any of our restaurants and food and
beverage hospitality services operations may be adversely impacted by severe weather conditions, which could cause us to close
operations for a period of time and/or incur costly repairs and/or experience a reduction in customer traffic. In addition, the
impact of severe weather conditions could cause us to cease operations at the affected location altogether. For example, we believe
that the poor weather conditions in the New York City area at the end of 2014 and the beginning of 2015 had a negative impact on
our sales and results of operations. In addition and by way of example, excessive heat in locations in which we operate outdoor
installations, such as rooftops and pools, could have a material adverse effect on the operations in those locations. Weather conditions
are impossible to predict as is the negative impact on our business that such conditions might cause.
If our restaurants and food and beverage hospitality services
operations are not able to compete successfully with other restaurants, food and beverage hospitality services operations and other
similar operations, our business and results of operations may be adversely affected.
Our industry is intensely competitive with respect
to price, quality of service, location, ambiance of facilities and type and quality of food. A substantial number of national and
regional restaurant chains and independently owned restaurants compete with us for customers, restaurant locations and qualified
management and other restaurant staff. The principal competitors for our concepts are other upscale steakhouse chains such as Del
Frisco’s, Mastro’s, Fleming’s Prime Steakhouse and Wine Bar and The Capital Grille, as well as local upscale
steakhouses. Further, there is also competition from non-steak but upscale and high-energy restaurants such as Nobu and Lavo as
well as other high-end hospitality services companies such as the Gerber Group or Esquared Hospitality. Our concepts also compete
with restaurants and other food and beverage hospitality services operations in the broader upscale dining segment and high-energy
nightlife concepts. To the extent that our restaurants and food and beverage hospitality services operations are located in hotels,
casinos, resorts and similar client locations, we are subject to competition in the broader lodging and hospitality markets that
could draw potential customers away from our locations. Some of our competitors have greater financial and other resources, have
been in business longer, have greater name recognition and are better established in the markets where our restaurants and food
and beverage hospitality services operations are located or where we may expand. Our inability to compete successfully with other
restaurants and food and beverage hospitality services operations may harm our ability to maintain acceptable levels of revenue
growth, limit or otherwise inhibit our ability to grow one or more of our concepts, or force us to close one or more of our restaurants
or food and beverage hospitality services operations. We may also need to evolve our concepts in order to compete with popular
new restaurant or food and beverage hospitality services operation formats, concepts or trends that emerge from time to time, and
we cannot provide any assurance that we will be successful in doing so or that any changes we make to any of our concepts in response
will be successful or not adversely affect our profitability. In addition, with improving product offerings at fast casual restaurants
and quick-service restaurants combined with the effects of negative economic conditions and other factors, consumers may choose
less expensive alternatives, which could also negatively affect customer traffic at our restaurants or food and beverage hospitality
services operations. Any unanticipated slowdown in demand at any of our restaurants or food and beverage hospitality services operations
due to industry competition may adversely affect our business and results of operations.
To the extent that our restaurants and food and beverage hospitality
services operations are located in hotels, casinos and similar destinations, our results of operations and growth are subject to
the risks facing such venues.
Our ability to grow and realize profits from
our operations in hotels, casinos and other branded or destination venues are dependent on the success of such venues’ business.
We are subject to the actions and business decisions of our clients and third parties, in which we may have little or no influence
in the overall operation of the applicable venue and such actions and decisions could have an adverse effect on our business and
operations. For example, at STK Miami Beach, a third party contractor working on an unrelated matter caused a sprinkler head to
break, resulting in water damage and flooding in the venue as well as a delay in opening the STK from the fourth quarter of 2014
to the first quarter of 2015.
We will need to secure additional financing to support our
planned operations.
We will require additional funds for our anticipated
operations and to meet our capital needs. We expect to rely on our cash flow from operations, tenant improvement allowances and
other third-party financing for such funds. In the event our cash flow is insufficient to fund our further expansion, this would
impede our growth and could materially adversely affect our existing business, financial condition or results of operations. Our
ability to obtain additional funding will be subject to various factors, including market conditions, our operating performance,
lender sentiment and our ability to incur additional debt in compliance with other contractual restrictions such as financial covenants
under our existing credit facility or other debt documents. These factors may make the timing, amount, terms and conditions of
additional financings unattractive. There is no assurance that we will be successful in securing the additional capital we need
to fund our business plan on terms that are acceptable to us, or at all.
Our future growth depends in part on our ability to open new
restaurants and food and beverage hospitality services locations and to operate them profitably, and if we are unable to successfully
execute this strategy, our results of operations could be adversely affected.
Our financial success depends in part on management’s ability
to execute our growth strategy. One key element of our growth strategy is opening new restaurants and food and beverage hospitality
services locations. We believe there are opportunities to open approximately two to three new locations (restaurants and/or hospitality
services operations) annually, with a focus on operating under licensing agreements and with STK serving as the primary driver
of new unit growth in the near term. However, there can be no assurance that we will be able to open new restaurants and food and
beverage hospitality services locations at the rate that we currently expect.
A substantial majority of our historical growth has been due to
opening new restaurants and food and beverage hospitality services locations. Our ability to open new restaurants and food and
beverage hospitality services locations and operate them profitably is dependent upon a number of factors, many of which are beyond
our control, including without limitation:
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finding
quality site locations, competing effectively to obtain quality site locations and reaching acceptable lease or management agreements;
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obtaining
certain government approvals, permits and licenses, such as liquor licenses;
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complying
with applicable zoning, land use and environmental regulations and obtaining, for an acceptable cost, required permits and approvals;
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having
adequate capital for construction and opening costs and efficiently managing the time and resources committed to building and
opening each new restaurant and food and beverage hospitality services operation;
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timely
hiring and training and retaining the skilled management and other employees necessary to meet staffing needs;
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successfully
promoting our new locations and competing in their markets;
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acquiring
food and other supplies for new restaurants and food and beverage hospitality services operations from local suppliers; and
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addressing
unanticipated problems or risks that may arise during the development or opening of a new restaurant or food and beverage hospitality
services operation or entering a new market.
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We incur substantial pre-opening costs that may be difficult
to recoup quickly.
While our business model tends to rely on landlord
or host contributions to the capital costs of opening a new restaurant or food and beverage hospitality services operations, we
incur substantial costs in our contributions to the build-out of the locations, recruiting and training staff, obtaining necessary
permits, advertising and promotion and other pre-operating items. Once the restaurant or food and beverage hospitality services
location is open, how quickly it achieves a desired level of profitability is impacted by many factors, including the level of
market familiarity and acceptance when we enter new markets. Our business and profitability may be adversely affected if the “ramp-up”
period for a new location lasts longer than we expect or if the profitability of a new location dips after our initial “ramp-up”
marketing program ends.
Any decision to either reduce or accelerate the pace of openings
may positively or adversely affect our comparative financial performance.
Our opening costs continue to be significant
and the amount incurred in any one year or quarter is dependent on the number of restaurants expected to be opened during that
time period. As such, our decision to either decrease or increase the rate of openings may have a significant impact on our financial
performance for that period of time being measured. Therefore, if we decide to reduce our openings, our comparable opening costs
will be lower and the effect on our comparative financial performance will be favorable. Conversely, if the rate at which we develop
and open new restaurants is increased to higher levels in the future, the resulting increase in opening costs will have an unfavorable
short-term impact on our comparative financial performance. At some future point, our pace of openings and annual rate of growth
in total restaurant operating weeks will begin to gradually decelerate as we become a more mature company.
New locations, once opened, may not be profitable, and the
increases in average location sales and comparable location sales that we have experienced in the past may not be indicative of
future results.
New locations may not be profitable and their
sales performance may not follow historical or projected patterns. If we are forced to close any new operations, we will incur
losses for certain buildout costs as well as pre-opening expenses incurred in connection with opening such operations. In addition,
our average location sales and comparable location sales may not increase at the rates achieved over the past several years. If
our new locations do not perform as planned, our business, financial condition or results of operations could be adversely affected.
Our expansion into new markets may present increased risks.
We plan to open new locations in markets where
we have little or no operating experience. Restaurants or food and beverage hospitality services operations which we open in new
markets may take longer to reach expected sales and profit levels on a consistent basis and may have higher construction, occupancy
or operating costs than locations we open in existing markets, thereby affecting our overall profitability. New markets may have
competitive conditions, consumer tastes and discretionary spending patterns that are more difficult to predict or satisfy than
our existing markets. We may need to make greater investments than we originally planned in advertising and promotional activity
in new markets to build brand awareness. We may find it more difficult in new markets to hire, motivate and keep qualified employees
who share our vision, passion and business culture. We may also incur higher costs from entering new markets, if, for example,
we assign area managers to manage comparatively fewer locations than we assign in more developed markets. We may find that restaurants
in new markets do not meet our revenue and profit expectations and we may be forced to close those operations, incurring closing
costs and reducing our opportunities. If we do not successfully execute our plans to enter new markets, our business, financial
condition or results of operations could be materially adversely affected.
Opening new restaurants and
food and beverage
hospitality services operations in existing markets may negatively affect sales at our existing restaurants and food and beverage
hospitality services operations.
The consumer target area of our restaurants
and food and beverage hospitality services operations varies by location, depending on a number of factors, including population
density, other local retail and business attractions, area demographics and geography. As a result, the opening of a new restaurant
or food and beverage hospitality services operation in or near markets in which we already have existing locations could adversely
affect the sales of those existing locations. Existing locations could also make it more difficult to build our consumer base for
a new restaurant or food and beverage hospitality services operation in the same market. Our core business strategy does not entail
opening new restaurants or food and beverage hospitality services operations that we believe will materially affect sales at our
existing locations, but we may selectively open new locations in and around areas of existing locations that are operating at or
near capacity to effectively serve our customers. Sales cannibalization between our restaurants and food and beverage hospitality
services operations may become significant in the future as we continue to expand our operations and could affect our sales growth,
which could, in turn, materially adversely affect our business, financial condition or results of operations.
We rely on our licensees for the operation of our licensed
STK restaurants (including our planned STK restaurants), and we have limited control with respect to the operations of our licensed
STK restaurants, which could have a negative impact on our reputation and business.
We rely, in part, on our licensees and the manner
in which they operate the STK restaurants to develop and promote our business. As of December 2017, licensees operated STK
restaurants in Ibiza and Dubai, and we are currently working with other licensees to open STK restaurants in Puerto Rico, Abu Dhabi,
and Mexico. Our licensees are required to operate STK restaurants according to the specific guidelines we set forth, which
are essential to maintaining brand integrity and reputation, as well as in accordance with all laws and regulations applicable
to us, and all laws and regulations applicable in the countries in which we operate. We provide training to these licensees to
integrate them into our operating strategy and culture. However, since we do not have day-to-day control over all of these STK
restaurants, we cannot give assurance that there will not be differences in product and service quality, operations, labor law
enforcement, marketing or profitability or that there will be adherence to all of our guidelines and applicable laws at these STK
restaurants. In addition, if our licensees fail to make investments necessary to maintain or improve the STK restaurants, guest
preference for the STK brand could suffer. Failure of these STK restaurants to operate effectively could adversely affect our cash
flows from those operations or have a negative impact on our reputation or our business. The success of our licensed operations
depends on our ability to establish and maintain good relationships with our licensees. The value of our brand and the rapport
that we maintain with our licensees are important factors for potential licensees considering doing business with us. If we are
unable to maintain good relationships with licensees, we may be unable to renew license agreements and opportunities for developing
new relationships with additional licensees may be adversely affected. This, in turn, could have an adverse effect on our results
of operations. Although we have developed criteria to evaluate and screen prospective developers and licensees, we cannot
be certain that the developers and licensees we select will have the business acumen necessary to open and operate successful licensed
STK restaurants in their licensing areas. Our licensees compete for guests with other restaurants in their geographic markets,
and the ability of our licensees to compete for guests directly impacts our results of operations, as well as the desirability
of our brand to prospective licensees. Licensees may not have access to the financial or management resources that they need to
open the STK restaurants contemplated by their agreements with us or to be able to find suitable sites on which to develop them,
or they may elect to cease development for other reasons. Licensees may not be able to negotiate acceptable lease or purchase terms
for the sites, obtain the necessary permits and governmental approvals or meet construction schedules. Additionally, financing
from banks and other financial institutions may not always be available to licensees to construct and open new STK restaurants.
Any of these problems could slow our growth from licensing operations and reduce our licensing revenues.
Changes to minimum wage laws could increase our labor costs
substantially.
Under the minimum wage laws in most jurisdictions,
we are permitted to pay certain hourly employees a wage that is less than the base minimum wage for general employees because these
employees receive tips as a substantial part of their income. As of December 31, 2016, approximately 44% of our employees earned
this lower minimum wage in their respective locations since tips constitute a substantial part of their income. If cities, states
or the federal government change their laws to require all employees to be paid the general employee minimum base wage regardless
of supplemental tip income, our labor costs would increase substantially. Certain states in which we operate restaurants also have
adopted or are considering adopting minimum wage statutes that exceed the federal minimum wage. We may be unable or unwilling to
increase our prices in order to pass these increased labor costs on to our customers, in which case, our business and results of
operations could be adversely affected.
Repeal of the Federal Insurance Contribution Act (FICA) tip
credit could adversely impact our operating results.
A restaurant company employer may claim a credit
against the company’s federal income taxes for FICA taxes paid on certain tip wages (the FICA tip credit). We utilize the
federal FICA tip credit to reduce our periodic federal income tax expense. Changes in the tax law, including changes similar to
the 2016 House Republican tax reform plan, could reduce or eliminate the FICA tip credit, which could negatively impact our results
of operations and cash flows in future periods.
Unanticipated costs or delays in the development or construction
of future restaurants could prevent our timely and cost-effective opening of new restaurants.
We depend on contractors to construct our restaurants.
Many factors may adversely affect the cost and time associated with the development and construction of our restaurants, including,
but not limited to:
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shortages
of materials or skilled labor;
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adverse
weather conditions;
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unforeseen
engineering problems;
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environmental
problems;
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construction
or zoning problems;
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local
government regulations;
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modifications
in design; and
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other
unanticipated increases in costs.
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Any of these factors could give rise to delays or cost overruns,
which may prevent us from developing additional restaurants within our anticipated budgets or time periods or at all. Any such
failure could cause our business, results of operations and financial condition to suffer.
We face a variety of risks associated with doing business
in foreign markets that could have a negative impact on our financial performance.
We operate STK restaurants as well as food and
beverage hospitality services locations in England and Italy. We intend to continue our efforts to grow internationally. Although
we believe we have developed the support structure for international operations and growth, there is no assurance that international
operations will be profitable or international growth will continue. Our foreign operations are subject to all of the same risks
as our domestic restaurants and food and beverage hospitality services operations, as well as additional risks including, among
others, international economic and political conditions and the possibility of instability and unrest, differing cultures and consumer
preferences, diverse government regulations and tax systems, the ability to source fresh ingredients and other commodities in a
cost-effective manner and the availability of experienced management.
Currency regulations and fluctuations in exchange
rates could also affect our performance. As a result, we may experience losses from foreign currency translation, and such losses
could adversely affect our overall sales and earnings.
We are subject to governmental regulation throughout
the world, including, without limitation, antitrust and tax requirements, anti-boycott regulations, import/export/customs regulations
and other international trade regulations, the USA PATRIOT Act and the Foreign Corrupt Practices Act. Any new regulatory or trade
initiatives could impact our operations in certain countries. Failure to comply with any such legal requirements could subject
us to monetary liabilities and other sanctions, which could harm our business, results of operations and financial condition.
If we are unable to increase our sales or improve our margins
at existing restaurants and food and beverage hospitality services operations, our profitability and overall results of operations
may be adversely affected.
Another key aspect of our growth strategy is
increasing comparable restaurant and food and beverage hospitality services operation sales and improving location-level margins.
Improving comparable location sales and location-level margins depends in part on whether we achieve revenue growth through increases
in the average check and increases in customer traffic, and further expand our private dining business at each location. We believe
there are opportunities to increase the average check at our locations through, for example, selective introduction of higher priced
items and increases in menu pricing. We also believe that expanding and enhancing our private dining capacity will also increase
our location sales, as our private dining business typically has a higher average check and higher overall margins than regular
dining room business. However, these strategies may prove unsuccessful, especially in times of economic hardship, as customers
may not order or enjoy higher priced items and discretionary spending on private dining events may decrease. We believe select
price increases have not historically adversely impacted customer traffic; however, we expect that there is a price level at which
point customer traffic would be adversely affected. It is also possible that these changes could cause our sales volume to decrease.
If we are not able to increase our sales at existing locations for any reason, our profitability and results of operations could
be adversely affected.
We are dependent on our intellectual property to sustain our
branding and differentiation strategies. The failure to enforce and maintain our intellectual property rights could enable others
to use names confusingly similar to the names and marks used by our restaurants and food and beverage hospitality services operations,
which could adversely affect the value of our brands.
We have registered, or have applications pending
to register, the trademark STK with the United States Patent and Trademark Office and in certain foreign countries in connection
with restaurant services. In addition, we have registered or have applications pending to register the trademarks Asellina and
Cucina Asellina with the United States Patent and Trademark Office and in certain foreign countries in connection with restaurant
services. The success of our business depends in part on our continued ability to utilize our existing trade names, trademarks
and service marks as currently used in order to increase our brand awareness. In that regard, we believe that our trade names,
trademarks and service marks are valuable assets that are critical to our success. The unauthorized use or other misappropriation
of our trade names, trademarks or service marks could diminish the value of our brands and restaurant and food and beverage hospitality
service concepts and may cause a decline in our revenues and force us to incur costs related to enforcing our rights. In addition,
the use of trade names, trademarks or service marks similar to ours in some markets may keep us from entering those markets. While
we may take protective actions with respect to our intellectual property, these actions may not be sufficient to prevent, and we
may not be aware of all incidents of, unauthorized usage or imitation by others. Any such unauthorized usage or imitation of our
intellectual property, including the costs related to enforcing our rights, could adversely affect our business and results of
operations.
Further, each of our intellectual property marks
is pledged as collateral securing our term loan facility with BankUnited (formerly Herald National Bank). Default under that agreement
could enable BankUnited to sell (at auction or otherwise) our trademarks, which would have a material adverse effect on our ability
to continue our business.
Due to the seasonality of our business, our operating results
may fluctuate significantly and these fluctuations make it more difficult for us to predict accurately or in a timely manner factors
that may have a negative impact on our business.
Our business is subject to seasonal fluctuations
that may vary greatly depending upon the region in which a particular restaurant or food and beverage hospitality services operation
is located. These fluctuations can make it more difficult for us to predict accurately or address in a timely manner factors that
may have a negative impact on our business. Accordingly, results for any one quarter or fiscal year are not necessarily indicative
of results to be expected for any other quarter or for any year.
If our advertising and marketing programs are unsuccessful
in maintaining or driving increased customer traffic or are ineffective in comparison to those of our competitors, our results
of operations could be adversely affected.
We conduct ongoing promotion-based brand awareness
advertising campaigns. If these programs are not successful or conflict with evolving customer preferences, we may not increase
or maintain our customer traffic and will incur expenses without the benefit of higher revenues. In addition, if our competitors
increase their spending on marketing and advertising programs, or develop more effective campaigns, this could have a negative
effect on our brand relevance, customer traffic and results of operations.
Negative customer experiences or negative publicity surrounding
our locations or other restaurants or venues could adversely affect sales in one or more of our locations and make our brands less
valuable.
The quality of our food and our facilities are
two of our competitive strengths. Therefore, adverse publicity, whether or not accurate, relating to food quality, public health
concerns, illness, safety, injury or government or industry findings concerning our locations, venues operated by other foodservice
providers or others across the food industry supply chain could affect us more than it would other venues that compete primarily
on price or other factors. If customers perceive or experience a reduction in our food quality, service or ambiance or in any way
believe we have failed to deliver a consistently positive experience, the value and popularity of one or more of our concepts could
suffer. Any shifts in consumer preferences away from the kinds of food we offer, particularly beef, whether because of dietary
or other health concerns or otherwise, would make our locations less appealing and could reduce customer traffic and/or impose
practical limits on pricing.
Negative publicity relating to the consumption of beef, including
in connection with food-borne illness, or shifts in consumer tastes, could result in reduced consumer demand for our menu offerings,
which could reduce sales.
Our success depends, in large part, upon the
popularity of our menu offerings. Instances of food-borne illness, including Bovine Spongiform Encephalopathy, which is also known
as BSE or mad cow disease, aphthous fever, which is also known as hoof and mouth disease, as well as hepatitis A, lysteria, salmonella
and e-coli, whether or not found in the United States or traced directly to one of our suppliers or our locations, could reduce
demand for our menu offerings. Any negative publicity relating to these and other health-related matters, or any other shifts in
consumer preferences away from the kinds of food we offer, particularly beef, whether because of dietary or other health concerns
or otherwise, may affect consumers’ perceptions of our locations and the food that we offer, reduce customer visits to our
locations and negatively impact demand for our menu offerings. Adverse publicity relating to any of these matters, beef in general
or other similar concerns could adversely affect our business and results of operations.
Our inability or failure to recognize, respond to and effectively
manage the accelerated impact of social media could materially adversely impact our business.
There
has been a significant increase in the use of social media platforms and similar devices, including blogs, social media websites
and other forms of Internet-based communications which allow individuals’ access to a broad audience of consumers and other
interested persons. Consumers value readily available information concerning goods and services that they have or plan to purchase,
and may act on such information without further investigation or authentication. The availability of information on social media
platforms is virtually immediate as is its impact. Many social media platforms immediately publish the content their subscribers
and participants can post, often without filters or checks on accuracy of the content posted. The opportunity for dissemination
of information, including inaccurate information, is seemingly limitless and readily available. Information concerning our company
may be posted on such platforms at any time. Information posted may be adverse to our interests or may be inaccurate, each of which
may harm our performance, prospects or business. The harm may be immediate
without affording us an opportunity for redress
or correction. Such platforms also could be used for dissemination of trade secret information, compromising valuable company assets.
In sum, the dissemination of information online could harm our business, prospects, financial condition and results of operations,
regardless of the information’s accuracy. The inappropriate use of social media vehicles by our customers or employees could
increase our costs, lead to litigation or result in negative publicity that could damage our reputation.
Increases in the prices of, and/or reductions in the availability
of commodities, primarily beef, could adversely affect our business and results of operations.
Our profitability depends in part on our ability
to anticipate and react to changes in commodity costs, which have a substantial effect on our total costs. For example purchases
of beef represented approximately 30% of our food and beverage costs during each of 2014, 2015 and 2016, and we may not purchase
beef pursuant to any long-term contractual arrangements with fixed pricing or use futures contracts or other financial risk management
strategies to reduce our exposure to potential price fluctuations. The market for beef is subject to extreme price fluctuations
due to seasonal shifts, climate conditions, the price of feed, industry demand, energy demand and other factors. Although we currently
do not engage in futures contracts or other financial risk management strategies with respect to potential price fluctuations,
from time to time, we may opportunistically enter into fixed price beef supply contracts or contracts for other food products or
consider other risk management strategies with regard to our meat and other food costs to minimize the impact of potential price
fluctuations. This practice could help stabilize our food costs during times of fluctuating prices, although there can be no assurances
that this will occur. The prices of other commodities can affect our costs as well, including corn and other grains, which are
ingredients we use regularly and are also used as cattle feed and therefore affect the price of beef. Energy prices can also affect
our operating results, as increased energy prices may cause increased transportation costs for beef and other supplies, as well
as increased costs for the utilities required to run each location. Historically we have passed increased commodity and other costs
on to our customers by increasing the prices of our menu items. While we believe these price increases did not historically affect
our customer traffic, there can be no assurance additional price increases would not affect future customer traffic. If prices
increase in the future and we are unable to anticipate or mitigate these increases, or if there are shortages for beef, our business
and results of operations would be adversely affected.
We depend upon frequent deliveries of food, alcohol and other
supplies, which subjects us to the possible risks of shortages, interruptions and price fluctuations.
Our ability to maintain consistent quality throughout
our locations depends in part upon our ability to acquire fresh products, including beef, seafood, quality produce and related
items from reliable sources in accordance with our specifications. While we purchase our food products from a variety of suppliers
and believe there to be multiple sources for our food products, if there were to occur any shortages, interruptions or significant
price fluctuations in beef or seafood or if our suppliers were unable to perform adequately or fail to distribute products or supplies
to our restaurants, or terminate or refuse to renew any contract with us, this could cause a short-term increase of our costs or
cause us to remove certain items from a menu, increase the price of certain offerings or temporarily close a location, which could
adversely affect our business and results of operations.
In addition, we purchase beer, wine and spirits
from distributors, such as Southern Wine & Spirits and Republic National Distributing Company, who own the exclusive rights
to sell such alcoholic beverage products in the geographic areas in which our locations reside. Our continued ability to purchase
certain brands of alcohol beverages depends upon maintaining our relationships with those distributors, of which there can be no
assurance. In the event any of our alcohol beverage distributors cease to supply us, we may be forced to offer brands of alcoholic
beverage which have less consumer appeal or which do not match the brand image of our locations, which could increase our costs
and our business and results of operations could be adversely affected.
We depend on the services of key executives, and our business
and growth strategy could be materially harmed if we were to lose these executives and were unable to replace them with executives
of equal experience and capabilities.
Some
of our senior executives, such as our Chief Executive Officer, our Director of Business Development and the Executive Chairman
of our board of directors, and our Senior Vice President of Marketing, Sales and Events, are particularly important to our success
because they have been instrumental in setting our strategic direction, operating our business, identifying, recruiting and training
key personnel, identifying expansion opportunities and arranging necessary financing. We cannot prevent our executives from terminating
their employment with us. Losing the services of any of these individuals could adversely affect our business. We also believe
that our senior executives could not quickly be replaced with executives of equal experience and capabilities and their successors
may not be
as effective.
We will need additional human and financial resources to sustain
growth and the strain on our infrastructure and resources could delay the opening of new locations and adversely affect our ability
to manage our existing locations.
We plan to continue our current pace of growth,
including the development and promotion principally of STK. We believe there are opportunities to open two to three (restaurants
and/or food and beverage hospitality services operations) annually, with new openings of STK likely serving as the key driver of
new unit growth in the near term. In addition to new openings, we also may, among other things, add additional seating to our existing
locations, further grow our private dining business, enclose outdoor space and add patio seating to our locations. This growth
and these investments will increase our operating complexity and place increased demands on our management and human resources,
purchasing and site management teams. While we have committed significant resources to expanding our current management systems,
financial and management controls and information systems in connection with our recent growth, if this infrastructure is insufficient
to support this expansion, our ability to open new locations, including the development and promotion of STK and to manage our
existing locations, including the expansion of our private dining business, would be adversely affected. If we fail to continue
to improve our infrastructure or if our improved infrastructure fails, we may be unable to implement our growth strategy or maintain
current levels of operating performance in our existing locations.
Restaurant and hospitality companies, including ours, have
been the target of class action lawsuits and other proceedings alleging, among other things, violations of federal and state workplace
and employment laws. Proceedings of this nature, if successful, could result in our payment of substantial damages.
In recent years, we and other restaurant and
hospitality companies have been and are subject to lawsuits (including class actions) alleging, among other things, violations
of federal and state laws regarding workplace and employment matters, discrimination and similar matters. Similar lawsuits have
been instituted from time to time alleging violations of various federal and state wage and hour laws regarding, among other things,
employee meal deductions, the sharing of tips amongst certain employees, overtime eligibility of assistant managers and failure
to pay for all hours worked. Although we maintain what we believe to be adequate levels of insurance commensurate with the nature
and extent of our operations, insurance may not be available at all or in sufficient amounts to cover any liabilities with respect
to these matters. Accordingly, if we are required to pay substantial damages and expenses as a result of these types or other lawsuits
our business and results of operations would be adversely affected.
Occasionally, our customers file complaints
or lawsuits against us alleging that we are responsible for some illness or injury they suffered at or after a visit to one of
our locations, including actions seeking damages resulting from food-borne illness and relating to notices with respect to chemicals
contained in food products required under state law. We are also subject to a variety of other claims from third parties arising
in the ordinary course of our business, including personal injury claims, contract claims and claims alleging violations of federal
and state laws. In addition, our restaurants and food and beverage hospitality services operations are subject to state “dram
shop” or similar laws which generally allow a person to sue us if that person was injured by a legally intoxicated person
who was wrongfully served alcoholic beverages at one of our locations. The restaurant and hospitality industry has also been subject
to a growing number of claims that the menus and actions of restaurant chains have led to the obesity of certain of their customers.
In addition, we may also be subject to lawsuits from our employees or others alleging violations of federal and state laws regarding
workplace and employment matters, discrimination, harassment and similar matters.
Regardless of whether any claims against us
are valid or whether we are liable, claims may be expensive to defend and may divert time and money away from our operations. In
addition, they may generate negative publicity, which could reduce customer traffic and sales. Although we maintain what we believe
to be adequate levels of insurance, insurance may not be available at all or in sufficient amounts to cover any liabilities with
respect to these or other matters. A judgment or other liability in excess of our insurance coverage for any claims or any adverse
publicity resulting from claims could adversely affect our business and results of operations.
Our business is subject to substantial government regulation
and we require current permits in order to operate. Failure to obtain and maintain the necessary permits in any of our locations
could cause a material adverse effect on their ability to operate and generate revenue.
Our business is subject to extensive federal,
state and local government regulation, including regulations related to the preparation and sale of food, the sale of alcoholic
beverages, the sale and use of tobacco, zoning and building codes, land use and employee, health, sanitation and safety matters.
For example, the preparation, storing and serving of food and the use of certain ingredients is subject to heavy regulation. Alcoholic
beverage control regulations govern various aspects of our locations’ daily operations, including the minimum age of patrons
and employees, hours of operation, advertising, wholesale purchasing and inventory control, handling and storage. Typically our
locations’ licenses to sell alcoholic beverages must be renewed annually and may be suspended or revoked at any time for
cause. In addition, because we operate in a number of different states, we are also required to comply with a number of different
laws covering the same topics. The failure of any of our locations to timely obtain and maintain necessary governmental approvals,
including liquor or other licenses, permits or approvals required to serve alcoholic beverages or food could delay or prevent the
opening of a new location or prevent regular day-to-day operations, including the sale of alcoholic beverages, at a location that
is already operating, any of which would adversely affect our business and results of operations.
In addition, the costs of operating our locations
may increase if there are changes in laws governing minimum hourly wages, working conditions, overtime and tip credits, health
care, workers’ compensation insurance rates, unemployment tax rates, sales taxes or other laws and regulations such as those
governing access for the disabled, including the Americans with Disabilities Act. For example, the Federal Patient Protection and
Affordable Care Act, or PPACA, which was enacted on March 23, 2010, among other things, includes guaranteed coverage requirements
and imposes new taxes on health insurers and health care benefits that could increase the costs of providing health benefits to
employees. In addition, because we have a significant number of locations that reside in certain states, regulatory changes in
these states could have a disproportionate impact on our business. If any of the foregoing increased costs were to occur and we
were unable to offset the change by increasing our menu prices or by other means, our business and results of operations could
be adversely affected.
Government regulation can also affect customer
traffic at our locations. A number of states, counties and cities have enacted menu labeling laws requiring multi-unit restaurant
operators to disclose certain nutritional information. For example, the PPACA establishes a uniform, federal requirement for restaurant
chains with 20 or more locations operating under the same trade name and offering substantially the same menus to post nutritional
information on their menus, including the total number of calories. The law also requires such restaurants to provide to consumers,
upon request, a written summary of detailed nutritional information, including total calories and calories from fat, total fat,
saturated fat, cholesterol, sodium, total carbohydrates, complex carbohydrates, sugars, dietary fiber, and total protein in each
serving size or other unit of measure, for each standard menu item. The FDA is also permitted to require additional nutrient disclosures,
such as trans-fat content. We are not currently subject to requirements to post nutritional information on our menus or in our
locations though there can be no assurance that we will not become subject to these requirements in the future. Our compliance
with the PPACA or other similar laws to which we may become subject could reduce demand for our menu offerings, reduce customer
traffic and/or reduce average revenue per customer, which would have an adverse effect on our revenue. Also, further government
regulation restricting smoking in restaurants and bars, may reduce customer traffic. Any reduction in customer traffic related
to these or other government regulations could affect revenues and adversely affect our business and results of operations.
We are also subject to federal, state and local
laws and regulations concerning waste disposal, pollution, protection of the environment, and the presence, discharge, storage,
handling, release and disposal of, and exposure to, hazardous or toxic substances. These environmental laws provide for significant
fines and penalties for noncompliance and liabilities for remediation, sometimes without regard to whether the owner or operator
of the property knew of, or was responsible for, the release or presence of hazardous toxic substances. Third parties may also
make claims against owners or operators of properties for personal injuries and property damage associated with releases of, or
actual or alleged exposure to, such hazardous or toxic substances at, on or from our locations. Environmental conditions relating
to releases of hazardous substances at prior, existing or future locations could materially adversely affect our business, financial
condition or results of operations. Further, environmental laws, and the administration, interpretation and enforcement thereof,
are subject to change and may become more stringent in the future, each of which could materially adversely affect our business,
financial condition or results of operations.
To the extent that governmental regulations
impose new or additional obligations on our suppliers, including, without limitation, regulations relating to the inspection or
preparation of meat, food and other products used in our business, product availability could be limited and the prices that our
suppliers charge us could increase. We may not be able to offset these costs through increased menu prices, which could have a
material adverse effect on our business. If any of our restaurants were unable to serve particular food products, even for a short
period of time, or if we are unable to offset increased costs, our business and results of operations could be adversely affected.
Further, the U.S. Congress and Department of
Homeland Security from time to time consider and may implement changes to federal immigration laws, regulations or enforcement
programs. Some of these changes may increase our obligations for compliance and oversight, which could subject us to additional
costs and make our hiring process more cumbersome, or reduce the availability of potential employees. Even if we operate our restaurants
in strict compliance with U.S. Immigration and Customs Enforcement and state requirements, some of our employees may not meet federal
work eligibility or residency requirements, which could lead to a disruption in our work force. Although we require all of our
new employees to provide us with the government-specified documentation evidencing their employment eligibility, some of our employees
may, without our knowledge, be unauthorized workers. Unauthorized workers are subject to seizure and deportation and may subject
us to fines, penalties or loss of our business license in certain jurisdictions. Additionally, a government audit could result
in a disruption to our workforce or adverse publicity that could negatively impact our brand and our use of E-Verify and/or potential
for receipt of letters from the Social Security Administration requesting information (commonly referred to as no-match letters)
could make it more difficult to recruit and/or retain qualified employees.
Potential changes in labor laws or increased
union recruiting activities could result in portions of our workforce being subjected to greater organized labor influence. Although
we do not currently have any unionized employees, labor legislation could have an adverse effect on our business and financial
results by imposing requirements that could potentially increase our costs, reduce our flexibility and impact our ability to service
our customers. In addition, a labor dispute involving some or all of our employees could harm our reputation, disrupt our operations
and reduce our revenues and resolution of disputes may increase our costs.
We could face labor shortages that could slow our growth and
adversely impact our ability to operate our locations.
Our success depends in part upon our ability
to attract, motivate and retain a sufficient number of qualified employees, including managers, kitchen staff and servers, necessary
to keep pace with our anticipated expansion schedule and meet the needs of our existing locations. A sufficient number of qualified
individuals of the requisite caliber to fill these positions may be in short supply in some communities. Competition in these communities
for qualified staff could require us to pay higher wages and provide greater benefits. Any inability to recruit and retain qualified
individuals may also delay the planned openings of new restaurants and could adversely impact our existing locations. Any such
inability to retain or recruit qualified employees, increased costs of attracting qualified employees or delays in location openings
could adversely affect our business and results of operations.
We occupy most of our restaurants and some of our food and
beverage hospitality services locations under long-term non-cancelable leases under which we may remain obligated to perform even
if we close those operations, and we may be unable to renew leases at the end of their terms.
Most of our restaurants and some of our food
and beverage hospitality operations are located in premises that we lease (while others are located in premises owned or leased
by third parties). Many of our current leases are non-cancelable and typically have terms ranging from ten to 15 years with renewal
options for terms ranging from five to ten years. We believe that leases that we enter into in the future will be on substantially
similar terms. If we were to close or fail to open a restaurant or other venue at a location we lease, we would generally remain
committed to perform our obligations under the applicable lease, which could include, among other things, payment of the base rent
for the balance of the lease term. Our obligation to continue making rental payments and fulfilling other lease obligations in
respect of leases for closed or unopened restaurants could have a material adverse effect on our business and results of operations.
Alternatively, at the end of the lease term and any renewal period for a restaurant, we may be unable to renew the lease without
substantial additional cost, if at all. If we cannot renew such a lease we may be forced to close or relocate a restaurant, which
could subject us to construction and other costs and risks.
Fixed rental payments and/or minimum percentage rent payments
account for a significant portion of our operating expenses, which increases our vulnerability to general adverse economic and
industry conditions and could limit our operating and financing flexibility.
Fixed payments and/or minimum percentage rent
payments under our operating leases and management agreements account for a significant portion of our operating expenses and we
expect the new locations we open in the future will contain similar terms. Our substantial operating lease obligations could have
significant negative consequences, including:
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increasing
our vulnerability to general adverse economic and industry conditions;
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limiting
our ability to obtain additional financing;
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requiring
a substantial portion of our available cash flow to be applied to our rental obligations, thus reducing cash available for other
purposes;
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limiting
our flexibility in planning for or reacting to changes in our business or the industry in which we compete; and
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placing
us at a disadvantage with respect to some of our competitors.
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We depend on cash flow from operations to pay
our obligations and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities
and sufficient funds are not otherwise available to us from borrowings under our term loan facility or other sources, we may not
be able to meet our operating lease and management agreement obligations, grow our business, respond to competitive challenges
or fund our other liquidity and capital needs, which could adversely affect our business and results of operations.
Limitations in our insurance coverage or rising insurance
costs could adversely affect our business or financial condition in certain circumstances.
We purchase comprehensive insurance coverage,
including, but not limited to, workers’ compensation, general liability, umbrella, directors’ and officers’ liability,
employment practices liability, property, equipment breakdown, crime and errors and omissions insurance with coverage levels that
we consider appropriate, based in part on the advice of our outside insurance and risk management advisors. However, such
insurance is subject to limitations, including deductibles, self-insured retention amounts, exclusions and maximum liabilities
covered. The cost of workers’ compensation, general liability, umbrella, directors’ and officers’ liability,
employment practices liability, property, equipment breakdown, crime and errors and omissions insurance fluctuates based on market
conditions and availability as well as our historical trends. Moreover, there are certain types of losses that may be uninsurable
or not economically insurable. Such hazards may include earthquake losses in California and flood losses in Florida. If such a
loss should occur, we would, to the extent that we were not covered for such loss by insurance, suffer a loss of the capital invested,
as well as anticipated profits and cash flow from such damaged or destroyed properties. Punitive damage awards are generally not
covered by insurance; thus, any awards of punitive damages as to which we may be liable could adversely affect our ability to continue
to conduct our business, to expand our operations or to develop additional restaurants. In April 2014, one of our former commercial
liability insurers went into liquidation and we had certain matters that were uninsured and which we believed were immaterial.
All such uninsured matters have since been resolved, and such exposure did not materially adversely affect our business or financial
condition. There is no assurance that any insurance coverage we maintain will be adequate, that we can continue to obtain and maintain
such insurance at all or that the premium costs will not rise to an extent that they adversely affect us or our ability to economically
obtain or maintain such insurance.
We maintain insurance through third-party commercial
insurers, subject to deductibles and self-insured retention amounts, to protect against various risks associated with our activities,
including, among others, general liability and property insurance. The dollar amount of claims that we actually experience under
our general liability, umbrella and property insurance, for which we carry high deductibles and self-insured retention amounts,
may increase at any time, thereby further increasing our costs. Additionally, health insurance costs have risen significantly over
the past few years and are expected to continue to increase. These increases have a negative impact on our profitability if we
are not able to offset the effect of such increases with plan modifications and cost control measures, or by continuing to improve
our operating efficiencies.
The impact of negative economic factors, including the availability
of credit, on our landlords or the hotels, resorts or casinos in which some of our restaurants and food and beverage hospitality
services operations are located, could negatively affect our financial results.
Negative effects on our existing and potential
landlords due to the inaccessibility of credit and other unfavorable economic factors may, in turn, adversely affect our business
and results of operations. If our landlords are unable to obtain financing or remain in good standing under their existing financing
arrangements, they may be unable to provide construction contributions or satisfy other lease covenants to us. If any landlord
files for bankruptcy protection, the landlord may be able to reject our lease in the bankruptcy proceedings. While we would under
some circumstances have the option to retain our rights under the lease, we could not compel the landlord to perform any of its
obligations and would be left with damages (which are subject to collectability risk) as our sole recourse. In addition, if the
sites within which our co-located restaurants and food and beverage hospitality services operations are located are unable to obtain
sufficient credit to continue to properly manage their sites, we may experience a drop in the level of quality of such sites. Our
development of new locations may also be adversely affected by the negative financial situations of potential developers, landlords
and host sites. Such parties may delay or cancel development projects or renovations of existing projects due to the instability
in the credit markets and recent declines in consumer spending. This could reduce the number of high-quality locations available
that we would consider for our new operations or cause the quality of the sites in which the restaurants and food and beverage
hospitality services operations are located to deteriorate. Any of these developments could have an adverse effect on our existing
businesses or cause us to curtail new projects.
Our current term loan facility requires that we comply with
certain affirmative and negative covenants and provides for a pledge of substantially all of our assets to secure our obligations.
Failure to comply with the terms of the term loan agreement could result in a negative adverse impact on our ability to maintain
or expand our business.
We and certain of our subsidiaries are parties
to term loan agreements dated as of December 17, 2014 and June 2, 2015 (the “Term Loan Agreements”) with BankUnited,
N.A. The Term Loan Agreements contain a number of significant restrictive covenants that generally limit our ability to, among
other things:
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incur
additional indebtedness or make amendments to indebtedness, subject to certain exceptions;
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use
assets as security in other transactions or create any other liens;
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sell
assets or merge with or into other companies;
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make
capital expenditures in excess of specified amounts;
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change
the fiscal year or the nature of our operations; and
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terminate
any ERISA plans.
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Our Term Loan Agreements limit our ability to
engage in these types of transactions even if we believed that a specific transaction would contribute to our future growth or
improve our operating results. Our Term Loan Agreements also require us to achieve specified financial and operating results and
maintain compliance with specified financial ratios. Our ability to comply with these provisions may be affected by events beyond
our control. A breach of any of these provisions or our inability to comply with required financial ratios in our Term Loan Agreements
could result in a default under the Term Loan Agreements in which case the lenders will have the right to declare all borrowings
to be immediately due and payable. If we are unable to repay all borrowings when due, whether at maturity or if declared due and
payable following a default, the lenders would have the right to proceed against the collateral granted to secure the indebtedness
which consists of substantially all of our assets. If we breach these covenants or fail to comply with the terms of the Term Loan
Agreements, and the lenders accelerate the amounts outstanding under the Term Loan Agreements, our business and results of operations
would be adversely affected. As of December 31, 2016, and for all subsequently reported quarters, we were in compliance with all
of our financial covenants under the Term Loan Agreements except for the tangible net worth covenant. We requested and received
a waiver from our creditor with respect to compliance with this covenant as of December 31, 2016.
We may be dependent on the availability of additional debt
financing to support our operations and growth. Any future indebtedness would increase our exposure, would likely limit our operational
and financing flexibility and negatively impact our business.
Our
ability to continue to grow will be dependent on our ability to raise additional financing. To the extent that this consists of
debt, it will increase our liabilities, require additional cash flow to service such debt and will most likely contain further
restrictive covenants limiting our financial and operational flexibility. There can be no assurance that such additional financing
will be available on favorable terms or at all. We expect that we will depend primarily on cash generated by our operations for
funds to pay our expenses. Our ability to make these payments depends on our future performance, which will be affected by financial,
business, economic and other factors, many of which we cannot control. Our business may not generate sufficient cash flows from
operations in the future and our currently anticipated growth in revenues and cash flows may not be realized, either or both of
which could result in our being unable to repay indebtedness or to fund other liquidity needs. If our operations do not generate
sufficient cash flow to service our debt, we may be required to refinance all or part of our then existing debt, sell assets or
borrow more money, in each case on terms that are not acceptable to us. In addition, the terms of existing or future debt agreements
may restrict us from adopting any of these alternatives. Our ability to raise capital and incur additional debt in the future could
also delay or prevent a change in control of our company, make some transactions more difficult and impose additional financial
or other covenants on us. In addition, any significant levels of indebtedness in the future could place us at a competitive disadvantage
compared to our competitors that may have proportionately less debt and could make us more vulnerable to economic downturns and
adverse developments in our business. Our indebtedness and any inability to pay our
debt obligations as they come due or
inability to incur additional debt could adversely affect our business and results of operations.
Information technology system failures or failure to maintain
a continuous and secure cyber network, or breaches of our network security, including with respect to confidential information,
could interrupt our operations and adversely affect our business.
We rely on our computer systems and network
infrastructure across our operations, including point-of-sale processing at our locations, for management of our supply chain,
payment of obligations, collection of cash, credit and debit card transactions and other processes and procedures. Our ability
to efficiently and effectively manage our business depends significantly on the reliability and capacity of these systems. Our
operations also depend upon our ability to protect our computer equipment and systems against damage from physical theft, fire,
power loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, viruses,
worms and other disruptive problems. Any damage or failure of our computer systems or network infrastructure that causes an interruption
in our operations could subject us to litigation or actions by regulatory authorities. The failure of these systems to operate
effectively, maintenance problems, upgrading or transitioning to new platforms, or a material network breach in security of these
systems as a result of cyber attack or any other failure to maintain a continuous and secure cyber network could further result
in substantial harm, or in delays in customer service and reduce efficiency in our operations. This could include the theft of
our intellectual property or trade secrets, or the improper use of personal information or other "identity theft." Although
we employ both internal resources and external consultants to conduct auditing and testing for weaknesses in our systems, controls,
firewalls and encryption and intend to maintain and upgrade our security technology and operational procedures to prevent such
damage, breaches or other disruptive problems, there can be no assurance that these security measures will be successful. Any such
claim, proceeding or action by a regulatory authority, or any adverse publicity resulting from these allegations, could adversely
affect our business and results of operations.
Jonathan Segal, our Director of Business Development and the
chairman of our board of directors, who beneficially owns a substantial portion of our common stock, may have conflicts of interest
with other stockholders in the future and his significant ownership may limit your ability to influence corporate matters.
Jonathan Segal beneficially owns approximately
27% of our common stock. As a result of this concentration of stock ownership, Jonathan Segal, acting on his own, has sufficient
voting power to effectively control all matters submitted to our stockholders for approval that do not require a super majority,
including director elections and proposed amendments to our bylaws.
In addition, this concentration of ownership
may delay or prevent a merger, consolidation or other business combination or change in control of our company and make some transactions
that might otherwise give you the opportunity to realize a premium over the then-prevailing market price of our common stock more
difficult or impossible without the support of Mr. Segal. The interests of Mr. Segal may not always coincide with our interests
as a company or the interests of other stockholders. Accordingly, Mr. Segal could cause us to enter into transactions or agreements
of which you would not approve or make decisions with which you would disagree. This concentration of ownership may also adversely
affect our share price.
Mr. Segal currently owns and will continue to
own equity interests, including controlling equity interests, in other restaurant and food and beverage hospitality service companies,
some of which may compete with our company. Therefore, the interest of Mr. Segal with respect to his ownership or control of such
other competing companies may not always coincide with our interests as a company or the interests of other stockholders.
We are a holding company and depend on the cash flow of our
subsidiaries.
We are a holding company with no material assets
other than the equity interests of our subsidiaries. Our subsidiaries conduct substantially all of our operations and own substantially
all of our assets and intellectual property. Consequently, our cash flow and our ability to meet our obligations and pay any future
dividends to our stockholders depends upon the cash flow of our subsidiaries and the payment of funds by our subsidiaries directly
or indirectly to us in the form of dividends, distributions and other payments. Any inability on the part of our subsidiaries to
make payments to us could have a material adverse effect on our business, financial condition and results of operations. The equity
interests of most of our subsidiaries are pledged to BankUnited (formerly Herald National Bank) to secure our obligations under
the Term Loan Agreements. In addition, we guaranteed to BankUnited the obligations of our subsidiaries.
If we continue to fail to maintain an effective system of
internal controls over financial reporting, we may not be able to accurately report our financial results. As a result, current
and potential stockholders could lose confidence in our financial reporting, which could harm our business and the trading price
of our stock.
Effective internal controls over financial reporting
are necessary for us to provide reliable financial reports. If we cannot maintain effective controls and reliable financial reports,
our business and operating results could be harmed. For example, as of December 31, 2016, our management identified material weaknesses
related to a lack of a robust and effective financial statement close and reporting process to assess whether our consolidated
financial statements are in compliance with US GAAP, improper segregation of duties and other design gaps in our information technology
environment and an inadequate level of review of journal entries, including improper segregation of duties within our journal entry
process. We are actively engaged in developing a remediation plan designed to address these material weaknesses. We cannot, however,
be certain that any measures we undertake will successfully remediate the material weaknesses or that other material weaknesses
and control deficiencies will not be discovered in the future. Any failure to implement and maintain controls over our financial
reporting or difficulties encountered in the implementation of improvements in our controls, could cause us to fail to meet our
reporting obligations. Any material failure to maintain our internal controls over financial reporting or to address weaknesses
in the future, if they were to occur, could also cause investors to lose confidence in our reported financial information, which
could have a negative impact on the trading price of our stock.
We have identified material weaknesses in our internal control
over financial reporting which could, if not remediated, result in material misstatements in our financial statements.
Our management is responsible for establishing
and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange
Act. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not
be prevented or detected on a timely basis. Management identified material weaknesses in our internal control over financial reporting
related to a lack of a robust and effective financial statement close and reporting process to assess whether our consolidated
financial statements are in compliance with US GAAP, improper segregation of duties and other design gaps in our information technology
environment, including the ability of accounting and finance employees who have custody over cash accounts to process and record
transactions within our accounting system and an inadequate level of review of journal entries, including improper segregation
of duties within our journal entry process. These material weaknesses are primarily due to an insufficient complement of finance
and accounting resources within the organization. As a result of these material weaknesses, our management concluded that our internal
control over financial reporting was not effective based on criteria set forth by the Committee of Sponsoring Organization of the
Treadway Commission in Internal Control - An Integrated Framework issued in 2013. We initiated and are in the process of implementing
a formal remediation plan designed to address these material weaknesses. We cannot, however, be certain that any measures we undertake
will successfully remediate the material weaknesses or that other material weaknesses and control deficiencies will not be discovered
in the future. If our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses
or significant deficiencies in our internal controls are discovered or occur in the future, we may be unable to report our financial
results accurately or on a timely basis, which could cause our reported financial results to be materially misstated and result
in a loss of investor confidence or delisting and adversely affect the market price of our common stock.
We may incur costs resulting from breaches of security of
confidential consumer information related to our electronic processing of credit and debit card transactions.
The majority of our sales are by credit or debit
cards. Other restaurants and retailers have experienced security breaches in which credit and debit card information has been stolen.
We may in the future become subject to claims for purportedly fraudulent transactions arising out of the actual or alleged theft
of credit or debit card information, and we may also be subject to lawsuits or other proceedings relating to these types of incidents.
Further, in 2015, the major credit card networks shifted the liability associated with EMV (Europay/Mastercard/Visa) chip card
technology to the merchants. With this liability shift, any restaurant or merchant that is not using an approved chip-and-pin POS
device would be liable for counterfeit or fraudulent charges. Any such claim or proceeding could cause us to incur significant
unplanned expenses, which could have an adverse impact on our financial condition and results of operations. Further, adverse publicity
resulting from these allegations may have a material adverse effect on us and our restaurants.
Future changes in financial accounting standards may significantly
change our reported results of operations.
Generally accepted accounting principles in
the U.S., or GAAP, are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of
Certified Public Accountants, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles.
A change in these principles or interpretations could have a significant effect on our reported financial results and could affect
the reporting of transactions completed before the announcement of a change. In addition, the FASB has issued authoritative accounting
guidance, ASU 2016-02, that will require an entity to recognize assets and liabilities arising from a lease. Consistent with current
GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease will depend primarily on its
classification as a finance or operating lease. The guidance also requires additional disclosures to enable users of financial
statements to understand the amount, timing, and uncertainty of cash flows arising from leases. The guidance requires a retrospective
cumulative adjustment to retained earnings in the period of initial adoption. This change could have a significant effect on our
reported financial results.
Additionally, our assumptions, estimates and
judgments related to complex accounting matters could significantly affect our financial results. Generally accepted accounting
principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of
matters that are relevant to our business, including but not limited to, revenue recognition, fair value of investments, impairment
of long-lived assets, leases and related economic transactions, income taxes, property and equipment, unclaimed property laws and
litigation, and stock-based compensation are highly complex and involve many subjective assumptions, estimates and judgments by
us. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by us could significantly
change our reported or expected financial performance.
Our federal, state and local tax returns may, from time to
time, be selected for audit by the taxing authorities, which may result in tax assessments or penalties that could have a material
adverse impact on our results of operations and financial position.
We are subject to federal, state and local taxes.
Significant judgment is required in determining the provision for income taxes. Although we believe our tax estimates are reasonable,
if the Internal Revenue Service or other taxing authority disagrees with the positions we have taken on our tax returns, we could
have additional tax liability, including interest and penalties. If material, payment of such additional amounts, upon final adjudication
of any disputes, could have a material impact on our results of operations and financial position. The cost of complying with new
tax rules, laws or regulations could be significant. Increases in federal or state statutory tax rates and other changes in tax
laws, rules or regulations may increase our effective tax rate. Any increase in our effective tax rate could have a material impact
on our financial results.
Risks Related to our Securities
Insiders have substantial control over us, and they could
delay or prevent a change in our corporate control even if our other stockholders wanted it to occur.
Our executive officers, directors, and principal
stockholders hold a significant percentage of our outstanding common stock (with Jonathan Segal alone accounting for approximately
27%). Accordingly, these stockholders are able to control or have a significant impact on all matters requiring stockholder
approval, including the election of directors and approval of significant corporate transactions. This could delay or
prevent an outside party from acquiring or merging with us even if our other stockholders affirmed such action. In addition, such
concentrated control may adversely affect the price of our common stock and sales by our insiders or affiliates, along with any
other market transactions, could affect the market price of our common stock.
Our common stock may be considered “penny stock.”
The SEC has adopted regulations, which generally
define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific
exemptions. The market price of our common stock may trade at less than $5.00 per share and therefore may be a “penny
stock.” Brokers and dealers effecting transactions in “penny stock” must disclose certain information
concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable
to purchase the securities. These rules may restrict the ability of brokers or dealers to sell the common stock and
may affect your ability to sell shares.
If securities or industry analysts do not publish, or cease
publishing, research or reports about us, our business or our market, or if they change their recommendations regarding our stock
adversely, our stock price and trading volume could decline.
If a trading market for our common stock develops,
it will likely be influenced by whether industry or securities analysts publish research and reports about us, our business, our
market or our competitors and, if any analysts do publish such reports, what they publish in those reports. We currently have no
coverage and may not obtain analyst coverage in the future. Any analysts that do cover us may make adverse recommendations regarding
our stock, adversely change their recommendations from time to time, and/or provide more favorable relative recommendations about
our competitors. If any analyst who may cover us in the future were to cease coverage of our company or fail to regularly publish
reports on us, or if analysts fail to cover us or publish reports about us at all, we could lose, or never gain, visibility in
the financial markets, which in turn could cause our stock price or trading volume to decline.
If we do not meet the continued listing standards of the NASDAQ
Capital Market, our common stock could be delisted from trading, which could limit investors' ability to make transactions in our
common stock and subject us to additional trading restrictions.
Our securities are currently listed on the NASDAQ
Capital Market under the symbol "STKS," Although we expect to meet the continued listing standards of NASDAQ, we cannot
assure you that our securities will continue to be listed on NASDAQ in the future. In order to continue listing our securities
on NASDAQ, we must maintain certain financial, distribution and stock price levels. Generally we must maintain a minimum amount
in stockholder's equity (generally $2,500,000), a minimum number of holders of our securities (generally 300 public holders), and
a minimum stock price (generally $1.00). We cannot assure you that we will be able to continue to meet those NASDAQ listing requirements.
If NASDAQ delists our securities from trading
on its exchange, we could face significant material adverse consequences, including:
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limited availability of market quotations for our securities;
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reduced
liquidity with respect to our securities;
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limited amount of news and analyst coverage for our company; and
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decreased ability to issue additional securities or obtain additional financing in the future.
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There has been limited trading activity in our common stock
and there is no assurance that an active market will develop in the future.
There has been limited trading activity in our
common stock. As a result, an investor may find it difficult to dispose of, or to obtain accurate quotations of the price of our
common stock. There can be no assurance that a more active market for our common stock will develop, or if one should develop,
there is no assurance that it will be sustained. This severely limits the liquidity of our common stock, and would likely have
a material adverse effect on the market price of our common stock and on our ability to raise additional capital. The price of
our securities may vary significantly due to our reports of operating losses, one or more potential business transactions, the
filing of periodic reports with the SEC, and general market and economic conditions. In addition, the price of the securities can
vary due to our general business condition. Our stockholders may be unable to sell their securities unless a market can be established
and sustained.
In order to raise sufficient funds to expand our operations,
we may have to issue additional securities at prices that may result in substantial dilution to our stockholders.
If we raise additional funds through the sale
of equity or convertible debt, our current stockholders’ percentage ownership will be reduced. In addition, these
transactions may dilute the book value of our outstanding securities. We may have to issue securities that have rights,
preferences and privileges senior to our common stock. We cannot provide assurance that we will be able to raise additional
funds on terms acceptable to us, if at all. If future financing is not available or is not available on acceptable terms,
we may not be able to fund our future needs, which would have a material adverse effect on our business plans, prospects, results
of operations and financial condition.
Our ability to raise capital in the future may be limited.
Our
business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds through
the issuance of new equity securities, debt or a combination of both. Additional financing may not be available on favorable terms,
or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital
requirements. If
we issue new debt securities, the debt holders would have rights senior to common stockholders to make claims on our assets, and
the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. If we issue additional
equity securities, existing stockholders will experience dilution, and the new equity securities could have rights senior to those
of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other
factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders
bear the risk of our future securities offerings reducing the market price of our common stock and diluting their interest.
The price of our common stock could be subject to volatility
related or unrelated to our operations.
The trading price of our common stock could
fluctuate substantially due to a number of factors, including market perception of our ability to meet our growth projections and
expectations, quarterly operating results of other companies in the same industry, trading volume in our common stock, changes
in general conditions in the economy and the financial markets or other developments affecting our business and the business of
others in our industry. In addition, the stock market itself is subject to extreme price and volume fluctuations. This volatility
has had a significant effect on the market price of securities issued by many companies for reasons related and unrelated to their
operating performance and could have the same effect on our common stock.
As a public company, we incur significant costs and face demands
on our management to comply with SEC requirements.
We are required as a public company to comply
with an extensive body of regulations, including provisions of the Sarbanes-Oxley Act of 2002 as well as rules and regulations
promulgated by the SEC. These rules and regulations could result in substantial legal and financial compliance costs and make some
activities more time-consuming and costly, and these costs and demands may increase if we no longer qualify as a “smaller
reporting company.” In addition, we incur costs associated with our public company reporting requirements and maintaining
directors’ and officers’ liability insurance. Furthermore, our management has increased demands on its time in order
to ensure we comply with public company reporting requirements and the compliance requirements of the Sarbanes-Oxley Act of 2002,
as well as any rules and requirements subsequently implemented by the SEC.
Applicable regulatory requirements, including those contained
in and issued under the Sarbanes-Oxley Act, may make it difficult for us to retain or attract qualified officers and directors,
which could adversely affect the management of our business and our ability to obtain or retain listing of our common stock.
We may be unable to attract and retain those
qualified officers, directors and members of board committees required to provide for effective management because of the rules
and regulations that govern publicly held companies, including, but not limited to, certifications by principal executive officers.
The enactment of the Sarbanes-Oxley Act has resulted in the issuance of a series of related rules and regulations and the strengthening
of existing rules and regulations by the SEC, as well as the adoption of new and more stringent rules by the stock exchanges. The
perceived increased personal risk associated with these changes may deter qualified individuals from accepting roles as directors
and executive officers.
Further, some of these changes heighten the
requirements for board or committee membership, particularly with respect to an individual’s independence from the corporation
and level of experience in finance and accounting matters. We may have difficulty attracting and retaining directors with the requisite
qualifications. If we are unable to attract and retain qualified officers and directors, the management of our business and our
ability to obtain or retain listing of our shares of common stock on any stock exchange (assuming we elect to seek and are successful
in obtaining such listing) could be adversely affected.
We have adopted the 2013 Employee, Director and Consultant
Equity Incentive Plan pursuant to which we have the ability to issue options and/or restricted stock, which have the potential
to dilute stockholder value and cause the price of our common stock to decline.
We have established an employee, director and
consultant equity incentive plan ("Equity Incentive Plan") pursuant to which we may issue options, warrants, restricted
stock grants or similar equity linked instrument. Pursuant to the Equity Incentive Plan, we have granted options and restricted
stock units to purchase 3,429,035 shares of our common stock through December 28, 2017 and we expect to offer stock options, restricted
stock and/or other forms of stock-based compensation to our directors, officers and employees, subject to vesting requirements.
If the stock issued upon exercise of options or the restricted stock that we issue are sold into the public market, the market
price of our common stock may decline. In addition, the availability of shares of common stock for award under our equity incentive
plan, or the grant of stock options, restricted stock or other forms of stock-based compensation, may adversely affect the market
price of our common stock.
The resale of shares covered by a registration statement,
including this Registration Statement, could adversely affect the market price of our common stock in the public market, which
result would in turn negatively affect our ability to raise additional equity capital.
The sale, or availability for sale, of our common
stock in the public market may adversely affect the prevailing market price of our common stock and may impair our ability to raise
additional capital by selling equity or equity-linked securities. The resale of a substantial number of shares of our common stock
in the public market could adversely affect the market price for our common stock and make it more difficult for you to sell shares
of our common stock at times and prices that you feel are appropriate.
We do not anticipate paying cash dividends, and accordingly,
stockholders must rely on stock appreciation for any return on their investment.
We have never declared or paid any cash dividend
on our stock and do not currently intend to do so for the foreseeable future. We currently anticipate that we will retain future
earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends
for the foreseeable future. Therefore, the success of an investment in shares of our common stock will depend upon any future appreciation
in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which
our stockholders have purchased their shares.
Provisions in our amended and restated certificate of incorporation
and bylaws and Delaware law may inhibit a takeover of us, which could limit the price investors might be willing to pay in the
future for our common stock and could entrench management.
Our amended and restated certificate of incorporation
and bylaws contain provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their
best interests. Our board of directors is divided into three classes, each of which will generally serve for a term of three years
with only one class of directors being elected in each year. As a result, at a given annual meeting only a minority of the board
of directors may be considered for election. Since our staggered board of directors may prevent our stockholders from replacing
a majority of our board of directors at any given annual meeting, it may entrench management and discourage unsolicited stockholder
proposals that may be in the best interests of stockholders. Moreover, our board of directors has the ability to designate the
terms of and issue new series of preferred stock without stockholder approval.
We are also subject to anti-takeover provisions
under Delaware law, which could delay or prevent a change of control. Together, these provisions may make more difficult the removal
of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for
our securities.
Our amended and restated certificate of incorporation entitles
us to issue “blank check” preferred stock without stockholder approval. Such preferred stock would have terms and conditions
more favorable to its holders that are enjoyed by the holders of common stock.
Under the terms of our amended and restated
certificate of incorporation, our board of directors may authorize and issue up to 10,000,000 shares of one or more series or class
of preferred stock with rights superior to those of holders of common stock in terms of liquidation and dividend preference, voting
and other rights. The issuance of preferred stock would reduce the relative rights of holders of common stock vis-à-vis
the holders of preferred stock without the approval of the holders of common stock. In addition, to the extent that such preferred
stock is convertible into shares of common stock, its issuance would result in a dilution of the percentage ownership of holders
of common stock on a fully diluted basis. In addition, the issuance of a series of preferred stock could be used as a method of
discouraging, delaying or preventing a change in control of our company.
Failure of our internal control over financial reporting could
harm our business and financial results.
Our
management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control
over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external
purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting
includes: (i) maintaining reasonably detailed records that accurately and fairly reflect our transactions; and (ii) providing reasonable
assurance that we (a) record transactions as necessary to prepare the financial statements, (b) make receipts and expenditures
in accordance with management authorizations, and (c) would timely prevent or detect any unauthorized acquisition, use or disposition
of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control
over financial reporting is not intended to provide absolute assurance that we would
prevent or detect a misstatement of
our financial statements or fraud. Any failure to maintain an effective system of internal control over financial reporting could
limit our ability to report our financial results accurately and timely or to detect and prevent fraud. A significant financial
reporting failure could cause an immediate loss of investor confidence in us and a sharp decline in the market price of our common
stock. Management identified material weaknesses in our internal control over financial reporting related to a lack of a robust
and effective financial statement close and reporting process to assess whether our consolidated financial statements are in compliance
with US GAAP, improper segregation of duties and other design gaps in our information technology environment and an inadequate
level of review of journal entries and improper segregation of duties within our journal entry process.