YOSHIHARU GLOBAL CO. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Prospectus on Form S-1 (File No. 333-262330). As discussed in the section titled "Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" in our Prospectus filed on Form S-1. Overview of Yoshiharu
Yoshiharu is a fast-growing Japanese restaurant operator and was borne out of the idea of introducing the modernized Japanese dining experience to customers all over the world. Specializing in Japanese ramen, Yoshiharu gained recognition as a leading ramen restaurant inSouthern California within six months of our 2016 debut and has continued to expand our top-notch restaurant service acrossSouthern California , currently owning and operating 8 restaurant stores with an additional 1 new restaurant store under construction/development and an additional 8 new restaurant stores expected to open in 2022. We take pride in our warm, hearty, smooth, and rich bone broth, which is slowly boiled for over 12 hours. Customers can taste and experience supreme quality and deep flavors. Combining the broth with the fresh, savory, and highest-quality ingredients, Yoshiharu serves the perfect, ideal ramen, as well as offers customers a wide variety of sushi rolls, bento menu and other favorite Japanese cuisine. Our acclaimed signature Tonkotsu Black Ramen has become a customer favorite with its slow cooked pork bone broth and freshly made, tender chashu (braised pork belly). Our mission is to bring our Japanese ramen and cuisine to the mainstream, by providing a meal that customers find comforting. Since the inception of the business, we have been making our own ramen broth and other key ingredients such as pork chashu and flavored eggs from scratch, whereby upholding the quality and taste of our foods, including the signature texture and deep, rich flavor of our handcrafted broth. Moreover, we believe that slowly cooking the bone broth makes it high in collagen and rich in nutrients. Yoshiharu also strives to present food that is not only healthy, but also affordable. We feed, entertain and delight our customers, with our active kitchens and bustling dining rooms providing happy hours, student and senior discounts, and special holiday events. As a result of our vision, customers can comfortably enjoy our food in a friendly and welcoming atmosphere.
We operate in a large and rapidly growing market. We believe the consumer
appetite for Asian cuisine is widespread across many demographics and have an
opportunity to expand in both existing and new
22 Our Growth Strategies Historically, we have averaged an opening of 1 store per year utilizing solely bank debt, revenues and related party loans. However, utilizing 38.47% of the net proceeds of our IPO inSeptember 2022 , we expect in the short term to open 8 new corporate-owned restaurants (excluding the 1 store currently under construction/development). Based on our internal analysis, we believe that we have the potential to grow our current domestic corporate-owned restaurants and international footprint to at least 250 restaurants domestically and at least 750 restaurants internationally by utilizing revenues generated by an increased number of corporate-owned restaurants, revenues generated through our franchise program (currently we do not have such a program), proceeds from the sale of equity securities in the public markets as a publicly traded company, and debt financings. The rate of future restaurant growth in any particular period is inherently uncertain and is subject to numerous factors that are outside of our control. As a result, we do not currently have an anticipated timeframe for
such expansion.
We have pursued a disciplined new corporate owned growth strategy. Having expanded our concept and operating model across varying restaurant sizes and geographies, we plan to leverage our expertise opening new restaurants to fill in existing markets and expand into new geographies. While we currently aim to achieve in excess of 100% annual unit growth rate over the next three to five years, we cannot predict the time period of which we can achieve any level of restaurant growth or whether we will achieve this level of growth at all. Our ability to achieve new restaurant growth is impacted by a number of risks and uncertainties beyond our control, including but not limited to landlord delays; competition in existing and new markets, including competition for restaurant sites; and the lack of development and overall decrease in commercial real estate due to a macroeconomic. We believe there is a significant opportunity to employ this strategy to open additional restaurants in our existing markets and in new markets with similar demographics and retail environments.
Deliver Consistent Comparable Restaurant Sales Growth.
We have achieved positive comparable restaurant sales growth in recent periods. We believe we will be able to generate future comparable restaurant sales growth by growing traffic through increased brand awareness, consistent delivery of a satisfying dining experience, new menu offerings, and restaurant renovations. We will continue to manage our menu and pricing as part of our overall strategy to drive traffic and increase average check. We are also exploring initiatives to grow sales of alcoholic beverages at our restaurants, including the potential of a larger format restaurant with a sake bar concept.
We are aiming to initiate sales of franchises beginning in 2023. We intend to submit an application for franchise registration inCalifornia , and we intend to submit franchise applications in additional states over the next few months. While our initial franchise development will focus onthe United States , we also believe the Yoshiharu concept will attract future franchise partners around
the world. Increase Profitability. We have invested in our infrastructure and personnel, which we believe positions us to continue to scale our business operations. As we continue to grow, we expect to drive higher profitability by taking advantage of our increasing buying power with suppliers and leveraging our existing support infrastructure. Additionally, we believe we will be able to optimize labor costs at existing restaurants as our restaurant base matures and average revenues per restaurant increase. We believe that as our restaurant base grows, our general and administrative costs will increase at a slower rate than our sales. Heighten Brand Awareness. We intend to continue to pursue targeted local marketing efforts and plan to increase our investment in advertising. We also are exploring the development of instant ramen noodles which we would distribute through retail channels. We intend to explore partnerships with grocery retailers to provide for small-format Yoshiharu kiosks in stores to promote a limited selection of Yoshiharu cuisine. 23
Components of Our Results of Operations
Revenues. Revenues represent sales of food and beverages in restaurants. Restaurant sales in a given period are directly impacted by the number of restaurants we operate and comparable restaurant sales growth.
Food and beverage. Food and beverage costs are variable in nature, change with sales volume and are influenced by menu mix and subject to increases or decreases based on fluctuations in commodity costs. Other important factors causing fluctuations in food and beverage costs include seasonality and restaurant-level management of food waste. Food and beverage costs are a substantial expense and are expected to grow proportionally as our sales grows.
Labor. Labor includes all restaurant-level management and hourly labor costs, including wages, employee benefits and payroll taxes. Similar to the food and beverage costs that we incur, labor and related expenses are expected to grow proportionally as our sales increase. Factors that influence fluctuations in our labor and related expenses include minimum wage and payroll tax legislation, the frequency and severity of workers' compensation claims, healthcare costs and the performance of our restaurants.
Rent and utilities. Rent and utilities include rent for all restaurant locations and related taxes.
Depreciation and amortization expenses. Depreciation and amortization expenses are periodic non-cash charges that consist of depreciation of fixed assets, including equipment and capitalized leasehold improvements. Depreciation is determined using the straight-line method over the assets' estimated useful lives, ranging from three to ten years.
Delivery and service fees. The Company's customers may order online through
third party service providers such as
General and administrative expenses. General and administrative expenses include expenses associated with corporate and regional supervision functions that support the operations of existing restaurants and development of new restaurants, including compensation and benefits, travel expenses, stock-based compensation expenses for corporate-level employees, legal and professional fees, marketing costs, information systems, corporate office rent and other related corporate costs. General and administrative expenses are expected to grow as our sales grows, including incremental legal, accounting, insurance and other expenses incurred as a public company. Advertising and marketing expenses. Advertising and marketing expenses include expenses associated with marketing campaigns and periodic advertising. Advertising and marketing expenses are expected to grow leading up to planned openings of restaurant locations and is expected to stabilize as an average
by location as our sales grows.
Interest expense. Interest expense includes non-cash charges related to our capital lease obligations and bank notes payable.
Income tax provision (benefit). Provision for income taxes represents federal, state and local current and deferred income tax expense.
24 Results of Operations
Three and nine months ended
The following table presents selected comparative results of operations from our unaudited financial statements for the three and nine months endedSeptember 30, 2022 compared to three and nine months endedSeptember 30, 2021 . Our financial results for these periods are not necessarily indicative of the financial results that we will achieve in future periods. Certain totals for the table below may not sum to 100% due to rounding. Nine months ended September 30, Increase / (Decrease) 2022 2021 $ % Revenue$ 5,746,336 $ 4,449,354 $ 1,296,982 29.1 % Restaurant operating expenses: Food, beverages and supplies 1,493,196 1,344,672 148,524 11.0 % Labor 2,644,887 1,626,651 1,018,236 62.6 % Rent and utilities 750,141 465,677 284,464 61.1 % Delivery and service fees 373,596 384,050 (10,454 ) -2.7 % Depreciation 555,224 94,294 460,930 488.8 % Total restaurant operating expenses 5,817,044 3,915,344 1,901,700 48.6 % Net operating restaurant operating income (loss) (70,708 ) 534,010 (604,718 ) -113.2 % General and administrative 1,902,933 801,359 1,102,574 137.5 % Related party compensation 631,968 - 631,968 n/a Advertising and marketing 78,298 12,437 65,861 529.6 % Total operating expenses 2,613,199 813,796 1,799,403 221.1 % Loss from operations (2,683,907 ) (279,786 ) (2,404,121 ) 859.3 % Other income (expense): PPP loan forgiveness 385,900 269,887 116,013 43.0 % Other income 6,301 25,000 (18,699 ) -74.8 % Interest (61,876 ) (44,145 ) (17,731 ) 40.2 % Loss before income taxes (2,353,582 ) (29,044 ) (2,324,538 ) 8003.5 % Income tax provision 12,669 13,924 (1,255 ) -9.0 % Net loss$ (2,366,251 ) $ (42,968 ) $ (2,323,283 ) 5407.0 % Three months ended September 30, Increase / (Decrease) 2022 2021 $ % Revenue$ 1,772,646 $ 1,842,729 $ (70,083 ) -3.8 % Restaurant operating expenses: Food, beverages and supplies 456,442 587,581 (131,139 ) -22.3 % Labor 836,646 550,610 286,036 51.9 % Rent and utilities 235,717 196,713 39,004 19.8 % Delivery and service fees 113,889 130,702 (16,813 ) -12.9 % Depreciation 90,351 31,777 58,574 184.3 % Total restaurant operating expenses 1,733,045 1,497,383 235,662 15.7 % Net operating restaurant operating income 39,601 345,346 (305,745 ) -88.5 % General and administrative 869,244 566,494 302,750 53.4 % Related party compensation 631,968 - 631,968 n/a Advertising and marketing 37,715 10,439 27,276 261.3 % Total operating expenses 1,538,927 576,933 961,994 166.7 % Loss from operations (1,499,326 ) (231,587 ) (1,267,739 ) 547.4 % Other income (expense): PPP loan forgiveness - 269,887 (269,887 ) -100.0 % Other income - - - N/A Interest (20,882 ) (13,239 ) (7,643 ) 57.7 % Income (loss) before income taxes (1,520,208 ) 25,061 (1,545,269 ) -6166.0 % Income tax provision 5,629 7,315 (1,686 ) -23.0 % Net income (loss)$ (1,525,837 ) $ 17,746 $ (1,543,583 ) -8698.2 % 25 Nine months ended Three months ended September 30, September 30, 2022 2021 2022 2021 (as a percentage of revenues) (as a percentage of revenues)
Revenue 100.0 % 100.0 % 100.0 % 100.0 % Restaurant operating expenses: Food, beverages and supplies 26.0 % 30.2 %
25.7 % 31.9 %
Labor 46.0 % 36.6 % 47.2 % 29.9 %
Rent and utilities 13.1 % 10.5 % 13.3 % 10.7 %
Delivery and service fees 6.5 % 8.6 % 6.4 % 7.1 %
Depreciation 9.7 % 2.1 % 5.1 % 1.7 %
Total restaurant operating
expenses 101.2 % 88.0 % 97.8 % 81.3 %
Net operating restaurant
operating income (loss) -1.2 % 12.0 % 2.2 % 18.7 %
General and administrative 44.1 % 18.0 % 84.7 % 30.7 %
Advertising and marketing 1.4 % 0.3 % 2.1 % 0.6 %
Total operating expenses 45.5 % 18.3 % 86.8 % 31.3 %Income (loss) from operations -46.7 % -6.3 %
-84.6 % -12.6 %
Other income (expense):
PPP loan forgiveness 6.7 % 6.1 % 0.0 % 14.6 %
Other income 0.1 % 0.6 % 0.0 % 0.0 %
Interest -1.1 % -1.0 % -1.2 % -0.7 %
Income (loss) before income
taxes -41.0 % -0.7 % -85.8 % 1.4 %
Income tax provision 0.2 % 0.3 % 0.3 % 0.4 %
Net income (loss) -41.2 % -1.0 % -86.1 % 1.0 %
Revenues. Revenues were $5.7 million for the nine months ended September 30,
2022 compared to $4.4 million for the nine months ended September 30, 2021 ,
representing an increase of approximately $1.3 million , or 29.1%. The increase
in sales for the nine-month period was partially driven by $0.7 million in sales
for the period from three new restaurants opened in July 2021 , February 2022 and
July 2022 . The remainder of the increase of $0.8 million is considered to be
attributable to recovery from the impact of the pandemic on customer traffic
during 2021. The five restaurant locations that were open through all of 2021
each experienced consistent sales growth in the current year. Combined average
monthly sales for these locations increased 9.8% for the nine-month period ended
September 30, 2022 from the comparable period in the prior year. Revenues were
approximately $1.77 million for the three-month period ended September 30, 2022 ,
compared to $1.84 million for the comparable period in 2021, representing a
slight decrease of $70,000 , or 3.8%. The decrease in revenue for the periods was
primarily driven by the renovation of five restaurants in September 2022 to
upscale the interior design.
Food, beverage and supplies. Food, beverage and supplies costs were
approximately $1.5 million for the nine months ended September 30, 2022 compared
to $1.3 million for the nine months ended September 30, 2021 , representing an
increase of approximately $0.1 million , or 11.0%. The increase in costs for the
nine-month period was primarily driven by increases in revenues from three new
restaurants opened and from the recovery from lower volume experienced during
the pandemic. As a percentage of sales, food, beverage and supplies costs
decreased to 26.0% in the nine months ended September 30, 2022 compared to 30.2%
in the nine months ended September 30, 2021 . The decrease in costs as a
percentage of sales was primarily driven by the increases in our menu prices and
management's efforts to increase purchasing power on ingredients. Food, beverage
and supplies costs were approximately $0.5 million for the three months ended
September 30, 2022 compared to $0.6 million for the three months ended September
30, 2021 , representing a decrease of approximately $0.1 million , or 22.3%. The
decrease in costs for the three-month period was primarily driven by decrease in
revenues from the renovation of five restaurants during September 2022 . As a
percentage of sales, food, beverage and supplies costs decreased to 25.7% in the
three months ended September 30, 2022 compared to 31.9% in the three months
ended September 30, 2021 . The decrease in costs as a percentage of sales was
primarily driven by the increases in our menu prices and management's efforts to
increase purchasing power on ingredients.
26
Labor. Labor and related costs were approximately$2.6 million for the nine months endedSeptember 30, 2022 compared to$1.6 million for the nine months endedSeptember 30, 2021 , representing an increase of approximately$1.0 million , or 62.6%. The increase in costs was largely driven by additional labor costs incurred with respect to three new restaurants opened. As a percentage of sales, labor and related costs increased to 46.0% in the nine months endedSeptember 30, 2022 compared to 36.6% in the nine months endedSeptember 30, 2021 . The increase in costs as a percentage of sales was primarily driven by added labor costs for new locations without commensurate increases in sales volume for those new locations yet relative to volume at other more established locations. Labor and related costs were approximately$837,000 for the three months endedSeptember 30, 2022 compared to$551,000 for the three months endedSeptember 30, 2021 , representing an increase of approximately$286,000 , or 51.9%. The increase in costs was largely driven by additional labor costs incurred with respect to three new restaurants opened. As a percentage of sales, labor and related costs increased to 47.2% in the three months endedSeptember 30, 2022 compared to 29.9% in the three months endedSeptember 30, 2021 . The increase in costs as a percentage of sales was primarily driven by added labor costs for new locations without commensurate increases in sales volume for those new locations yet relative to volume at other more established locations. Rent and utilities. Rent and utilities expenses were approximately$0.8 million for the nine months endedSeptember 30, 2022 compared to$0.5 million for the nine months endedSeptember 30, 2021 , representing an increase of approximately$0.3 million , or 61.1%. The increase was primarily a result of additional occupancy expenses incurred with respect to three new restaurants opened. As a percentage of sales, rent and utilities expenses increased to 13.1% in the nine months endedSeptember 30, 2022 , compared to 10.5% for the nine months endedSeptember 30, 2021 . The increase in costs as a percentage of sales was primarily driven by added rent and utility costs for new locations without commensurate increases in sales volume for those new locations yet relative to volume at other more established locations. Rent and utilities expenses were approximately$236,000 for the three months endedSeptember 30, 2022 compared to$197,000 for the three months endedSeptember 30, 2021 , representing an increase of approximately$39,000 , or 19.8%. The increase was primarily a result of additional occupancy expenses incurred with respect to three new restaurants opened. As a percentage of sales, rent and utilities expenses increased to 13.3% in the three months endedSeptember 30, 2022 , compared to 10.7% for the three months endedSeptember 30, 2021 . The increase in costs as a percentage of sales was primarily driven by added rent and utility costs for new locations without commensurate increases in sales volume for those new locations yet relative to volume at other more established locations. Delivery and service fees. Delivery and service fees incurred were approximately$374,000 for the nine months endedSeptember 30, 2022 compared to$384,000 for the nine months endedSeptember 30, 2021 , representing a slight decrease of approximately$10,000 or 2.7%, primarily due to the comparable food sales via delivery during the comparable period. As a percentage of sales, delivery and service fees decreased to 6.5% for the nine months endedSeptember 30, 2021 compared to 8.6% for the comparable period in the prior year. The change is largely driven by a slight decrease in food sales via delivery during the period. Delivery and service fees incurred were approximately$114,000 for the three months endedSeptember 30, 2022 compared to$131,000 for the three months endedSeptember 30, 2021 , representing a slight decrease of approximately$17,000 or 12.9%, primarily due to a slight decrease in food sales via delivery during the comparable period. As a percentage of sales, delivery and service fees decreased to 6.4% for the three months endedSeptember 30, 2021 compared to 7.1% for the comparable period in the prior year. The change is largely driven by the comparable food sales via delivery during the period. Depreciation and amortization expenses. Depreciation and amortization expenses incurred were approximately$555,000 for the nine months endedSeptember 30, 2022 compared to$94,000 for the nine months endedSeptember 30, 2021 , representing an increase of approximately$461,000 , or 488.8%. The increase was primarily due to increased depreciation for the new restaurants opened and to changes in estimated depreciable lives for existing restaurants. As a percentage of sales, depreciation and amortization expenses increased to 9.7% for the nine months endedSeptember 30, 2022 compared to 2.1% for the comparable period in the prior year. The change is largely driven by the increased depreciation as a result of the new locations and the change in estimated depreciable lives. Depreciation and amortization expenses incurred were approximately$90,000 for the three months endedSeptember 30, 2022 compared to$32,000 for the three months endedSeptember 30, 2021 , representing an increase of approximately$58,000 , or 184.3%. The increase was primarily due to increased depreciation for the new restaurants opened. As a percentage of sales, depreciation and amortization expenses increased to 5.1% for the three months endedSeptember 30, 2022 compared to 1.7% for the comparable period in the prior year. The change is largely driven by the increased depreciation as a result of the new locations. 27 General and administrative expenses. General and administrative expenses were approximately$1.9 million for the nine months endedSeptember 30, 2022 compared to$0.8 million for the nine months endedSeptember 30, 2021 , representing an increase of approximately$1.1 million or 137.5%. This increase in general and administrative expenses was primarily due to the hiring of additional administrative employees, increases in professional services and corporate-level costs to support growth plans, the opening of new restaurants, as well as costs associated with outside administrative, legal and professional fees and other general corporate expenses associated with preparing to become a public company. As a percentage of sales, general and administrative expenses increased to 33.1% in the nine months endedSeptember 30, 2022 from 18.0% in the nine months endedSeptember 30, 2021 , primarily due to the significant increase in necessary corporate costs mentioned above outpacing the increase in sales. General and administrative expenses were approximately$0.9 million for the three months endedSeptember 30, 2022 compared to$0.6 million for the three months endedSeptember 30, 2021 , representing an increase of approximately$0.3 million or 53.4%. This increase in general and administrative expenses was primarily due to the hiring of additional administrative employees, increases in professional services and corporate-level costs to support growth plans, the opening of new restaurants, as well as costs associated with outside administrative, legal and professional fees and other general corporate expenses associated with preparing to become a public company. As a percentage of sales, general and administrative expenses increased to 49.0% in the three months endedSeptember 30, 2022 from 30.7% in the three months endedSeptember 30, 2021 , primarily due to the significant increase in necessary corporate costs mentioned above outpacing
the increase in sales. Related party compensation: Compensation toJames Chae was approximately$0.6 million for the nine months endedSeptember 30, 2022 compared to$0 for the nine months endedSeptember 30, 2021 , representing an increase of approximately$0.6 million . The compensation was made pursuant to a nonwritten arrangement, in exchange forMr. Chae's services rendered in connection with the successful completion of our IPO. As a percentage of sales, related party compensation was 11.0% in the nine months endedSeptember 30, 2022 . Related party compensation was approximately$0.6 million for the three months endedSeptember 30, 2022 compared to$0 for the three months endedSeptember 30, 2021 , representing an increase of approximately$0.6 million . As a percentage of sales, related party compensation was 35.7% in the three months endedSeptember 30, 2022 .
Liquidity and Capital Resources
Our primary uses of cash are for operational expenditures and capital investments, including new restaurants, costs incurred for restaurant remodels and restaurant fixtures. Historically, our main sources of liquidity have been cash flows from operations, borrowings from banks, and sales of common shares. In recent periods, the Company received significant assistance from governmental funds available in response to closures and impact on the business as a result of the pandemic. During the year endedDecember 31, 2020 , the Company received approximately$723,000 in loans from these government assistance programs, and received additional loans amounting to approximately$1,360,000 during the year endedDecember 31, 2021 . Certain of these loans are eligible for forgiveness under the government plans. During the year endedDecember 31, 2021 , PPP loans amounting to approximately$270,000 were forgiven. During the nine months endedSeptember 30, 2022 , additional PPP loans amounting to approximately$386,000 were forgiven. See Note 4 (Bank Notes Payables) and Note 5 (Loan Payables, PPP) to the financial statements report for a more detailed discussion.
In
We believe that expected cash flow from operations and the proceeds from the IPO will be adequate to fund operating lease obligations, capital expenditures and working capital obligations for at least the next 12 months and thereafter.
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