Yoshiharu (YOSH) - 2023 Q4 - Annual Report

Part I Item 1. Business Yoshiharu Global Co. operates Japanese ramen restaurants, focusing on expansion and high-quality cuisine while managing industry risks Overview of Yoshiharu Yoshiharu is a rapidly expanding Southern California-based Japanese ramen operator with ten restaurants and plans for significant growth, managing supply chain and inflation risks - The company operates ten restaurants in Southern California, with three new stores under construction/development and an agreement to acquire three existing restaurants in Las Vegas, expected to close in Q2 2024[19] - In September 2022, the company completed its IPO, raising net proceeds of approximately $10.3 million[22] - A 1-for-10 reverse stock split was effected on November 27, 2023, resulting in 1,230,246 shares of Class A Common Stock outstanding as of December 31, 2023[24][25] Our Strengths and Growth Strategies The company leverages an experienced team, strong value, and attractive economics to drive growth through new restaurant development, comparable sales, profitability, and brand awareness - The company's Average Unit Volume (AUV) was $1.1 million in 2023, down from $1.2 million in 2022[31] - The company aims for an annual unit growth rate exceeding 100% over the next three to five years by opening new corporate-owned restaurants[33] - Future growth initiatives include exploring a larger restaurant format with a sake bar concept and initiating franchise sales in 2024[34] Properties and Expansion Yoshiharu operates ten leased restaurants in California with plans for new builds and acquisitions, focusing on disciplined site selection and multi-faceted expansion Restaurant Locations and Status | Location | Status | | :--- | :--- | | California (11) | 10 operating as of 12/31/23, 1 opened in 1Q 2024 | | California (2) | Under construction (Menifee, San Clemente) | | Las Vegas, NV (3) | Acquisition under closing process | - The company anticipates spending approximately $350,000 per new location in development costs[43] - The estimated cash build-out cost for a new standard restaurant is between $350,000 and $550,000, net of tenant allowances[52] Operations, Marketing, and Industry The company manages operations with a senior team and remote monitoring, focusing on fresh food and digital marketing within the competitive U.S. restaurant industry - The senior operations team monitors restaurants in real-time from headquarters using a system of approximately eight cameras installed in each location[54] - The company utilizes systems from Toast, Inc. for point of sale, online ordering, delivery, marketing, and payroll management[66] U.S. Restaurant Industry Sales | Year | Total Industry Sales | | :--- | :--- | | 2022 | $966 billion | | 2023 | Over $1.0 trillion | | 2024 (forecast) | $1.1 trillion | Employees, Regulation, and Intellectual Property The company employs approximately 180 individuals, operates under extensive government regulations, and protects its brand through key trademarks, with no material legal proceedings - As of December 31, 2023, the company had approximately 180 employees, with 20 being exempt[75] - The company is subject to numerous regulations, including the Americans with Disabilities Act, Fair Labor Standards Act, and menu labeling laws under the ACA[78][80][82] - The company's subsidiary, Yoshiharu Holdings Co., owns registered trademarks for "YOSHIHARU RAMEN" (Reg. No. 5030823) and its design mark (Reg. No. 5045588)[87] Item 1A. Risk Factors The company faces significant risks including operating losses, expansion challenges, geographic concentration, intense competition, supply chain disruptions, and internal control weaknesses Risks Related to Our Business The company's history of operating losses and dependence on successful, capital-intensive expansion, coupled with California geographic concentration, pose significant business risks Net Loss History | Year Ended Dec 31 | Net Loss | | :--- | :--- | | 2023 | $3.0 million | | 2022 | $3.5 million | - The company's restaurant base is geographically concentrated in California, making it susceptible to adverse conditions specific to that state[99] - The estimated cash build-out cost for a new restaurant is approximately $350,000-$550,000, making the company's results sensitive to the performance and timing of new openings[106] Risks Related to Our Brand, Operations, and Supply Chain The company's brand is vulnerable to negative publicity, operations are burdened by fixed long-term leases, and profitability is exposed to supply chain disruptions and cost inflation - The company's success depends on maintaining its brand value, which is vulnerable to negative publicity from various sources, amplified by social media[130][131] - As of December 31, 2023, the company had an outstanding balance of $24,720 in unsecured, non-interest-bearing borrowings from its CEO and his affiliate, which are repayable on demand[134] - The company is subject to risks associated with long-term, non-cancelable leases, which account for a significant portion of operating expenses and create obligations even if a restaurant is closed[135] Risks Related to People, Regulation, and Litigation The company's success relies on key management, faces rising labor costs, navigates extensive regulations, and is susceptible to delays in construction permits impacting profitability - The company's success is highly dependent on key executives, including founder and CEO James Chae[145] - The minimum wage in California, where the company is concentrated, increased to $15.50 per hour on January 1, 2023, and further increases could materially impact labor costs[148] - Significant delays in obtaining construction permits have caused the company to incur lease payments before new locations can generate revenue, adversely affecting profitability[157] Risks Related to Our Organizational Structure & Ownership The company acknowledges material weaknesses in internal controls, benefits from reduced reporting as an "emerging growth company," but faces challenges due to management's limited public company experience - The company warns that if it fails to maintain an effective system of internal control over financial reporting, it may not be able to accurately report financial results, which could harm investor confidence[173] - The company is an "emerging growth company" and can take advantage of reduced reporting and disclosure requirements, including an exemption from the auditor attestation requirement of Section 404 of the Sarbanes-Oxley Act[177] - The management team does not have prior experience managing a U.S. public company, and current resources may be insufficient to fulfill all public company obligations[178] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments - The company has no unresolved staff comments from the SEC[182] Item 1C. Cybersecurity The company manages cybersecurity risks through an information security program overseen by the Audit Committee, with no material incidents reported to date - The Board of Directors has delegated oversight of cybersecurity risk to the Audit Committee, which receives periodic reports from management[186][187] - Management is responsible for the daily execution of the cybersecurity risk management program, supervising internal personnel and external consultants[188] - As of the date of the report, no cybersecurity incidents have had a materially adverse effect on the company's business or financial condition[185] Item 2. Properties The company's executive offices are in Buena Park, CA, with detailed restaurant property information cross-referenced in Item 1 - The company's principal executive offices are located in Buena Park, CA. Detailed information on restaurant properties is cross-referenced to Item 1[190] Item 3. Legal Proceedings The company reports no material litigation currently pending or contemplated against it or its management - There is no current or contemplated litigation pending against the company or its management[191] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable to the company[192] Part II Item 5. Market for Registrant's Ordinary Shares, Related Shareholder Matters and Issuer Purchases of Equity Securities The company's Class A Common Stock trades on Nasdaq, with no cash dividends paid or planned, and no recent unregistered sales or equity repurchases - The company's Class A Common Stock trades on Nasdaq under the ticker symbol "YOSH"[195] - As of April 1, 2024, there were 25 holders of record of Class A Common Stock and one holder of Class B Common Stock[196] - The company has never paid cash dividends and does not anticipate paying any in the foreseeable future[197] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue increased 11.3% to $9.2 million in 2023, but comparable sales declined, resulting in a $3.0 million net loss, with liquidity supported by IPO proceeds and cash from operations Results of Operations For 2023, revenues increased 11.3% to $9.2 million due to new openings, while net loss improved to $3.0 million, aided by RRF loan forgiveness, despite rising labor and G&A costs Consolidated Statements of Operations (Years ended December 31) | Metric | 2023 | 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | $9,214,779 | $8,282,368 | 11.3% | | Food, beverages and supplies | $2,376,961 | $2,163,085 | 9.9% | | Labor | $4,234,905 | $3,670,681 | 15.4% | | General and administrative | $3,419,036 | $2,884,770 | 18.5% | | Loss from operations | ($3,515,254) | ($3,784,230) | -7.1% | | RRF loan forgiveness | $700,454 | $0 | N/A | | Net loss | ($3,040,364) | ($3,487,367) | -12.8% | - The 11.3% increase in annual sales was driven by $0.3 million from a restaurant opened in July 2022 and $0.7 million from a restaurant opened in April 2023, offset by a slight decrease at other locations[222] - Related party compensation to CEO James Chae decreased significantly to $340k in 2023 from $917k in 2022, as the prior year included a large success bonus related to the IPO[230] Key Performance Indicators Adjusted EBITDA was negative $2.4 million in 2023, AUVs decreased to $1.07 million, and comparable restaurant sales growth was negative 0.8%, reflecting operational challenges Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Net loss | $(3,040) | $(3,487) | | Interest, Taxes, D&A | $812 | $766 | | EBITDA | $(2,228) | $(2,721) | | Adjustments (Loan forgiveness, opening costs, etc.) | $(163) | $482 | | Adjusted EBITDA | $(2,391) | $(2,239) | Key Operational Metrics (Years ended December 31) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Average Unit Volumes (AUV) | $1,067,726 | $1,182,032 | | Comparable Restaurant Sales Growth | -0.8% | 9.9% | | Restaurant Count (End of Period) | 10 | 8 | Liquidity and Capital Resources The company's liquidity is supported by IPO proceeds and cash from operations, with $4.6 million used in operating activities and $1.5 million in investing activities in 2023 Summary of Cash Flows (in millions) | (in millions) | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(4.6) | $(3.8) | | Net cash used in investing activities | $(1.5) | $(1.5) | | Net cash provided by financing activities | $1.4 | $10.7 | - The company believes cash flow from operations and proceeds from its IPO will be sufficient to fund obligations for at least the next 12 months[253] Total Contractual Obligations as of Dec 31, 2023 | Obligation Type | Total Amount | | :--- | :--- | | Capital lease payments | $7,913,897 | | Bank note payables | $1,406,329 | | EIDL loan payables | $425,865 | | Loans payable to financial institutions | $534,239 | | Total | $10,280,330 | Item 7A. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, Yoshiharu Global Co. is exempt from providing this market risk disclosure - The company is exempt from this disclosure requirement as it qualifies as a smaller reporting company[266] Item 8. Financial Statements and Supplementary Data The company's audited financial statements and supplementary data are included in the report, starting on page F-1 - This section incorporates by reference the financial statements which begin on page F-1 of the Form 10-K[267] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - The company reported no disagreements with its accountants[268] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were ineffective due to material weaknesses in accounting resources and segregation of duties - Management concluded that disclosure controls and procedures were ineffective as of December 31, 2023[269] - Material weaknesses were identified related to inadequate accounting resources and a lack of segregation of duties, attributed to the small size of the accounting staff[270] - Management also concluded that internal controls over financial reporting were ineffective as of December 31, 2023, based on the COSO framework[275] Item 9B. Other Information No directors or officers adopted or terminated Rule 10b5-1 trading arrangements during the fourth quarter of 2023 - No directors or officers adopted or terminated Rule 10b5-1 trading plans in the fourth quarter of 2023[278] Part III Item 10. Directors, Executive Officers and Corporate Governance The company's leadership includes CEO James Chae and CFO Soojae Ryan Cho, with a board that operates as a "controlled company" due to Mr. Chae's majority voting power Executive Officers and Directors | Name | Age | Position | | :--- | :--- | :--- | | James Chae | 60 | President, CEO, Director and Chairman | | Soojae Ryan Cho | 54 | Chief Financial Officer | | Jay Kim | 61 | Director | | Harinne Kim | 50 | Director | | Yusil Yeo | 44 | Director | - The company is a "controlled company" under Nasdaq rules because CEO James Chae controls a majority of the voting power, exempting it from certain governance requirements like having a majority-independent board[296] - The Audit Committee consists of three independent directors: Jay Kim, Harinne Kim, and Yusil Yeo, with Ms. Yeo serving as chairperson and qualifying as an "audit committee financial expert"[305][306] Item 11. Executive Compensation Executive compensation for NEOs, including CEO James Chae ($340,000) and CFO Soojae Ryan Cho ($144,000) in 2023, is performance-based, supported by an equity incentive plan 2023 Summary Compensation Table | Name and Principal Position | Year | Salary ($) | Bonus ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | James Chae, CEO and Chairman | 2023 | $285,000 | $55,000 | $340,000 | | Soojae Ryan Cho, CFO | 2023 | $144,000 | -0- | $144,000 | - CEO James Chae has an employment contract for an annual salary of $285,000. CFO Soojae Ryan Cho's offer letter provides for an annual salary of $144,000[333][334] - The company adopted a 2022 Omnibus Equity Incentive Plan, authorizing up to 1,500,000 shares of Class A common stock for issuance as various types of awards[339][344] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters As of April 1, 2024, CEO James Chae beneficially owned 52.68% of Class A and 100% of Class B stock, resulting in 73.90% total voting power Security Ownership of Principal Shareholders and Management (as of April 1, 2024) | Name of Beneficial Owner | Class A Shares Beneficially Owned | % of Class A | Class B Shares Beneficially Owned | % of Class B | % of Total Voting Power | | :--- | :--- | :--- | :--- | :--- | :--- | | James Chae | 648,100 | 52.68% | 100,000 | 100.00% | 73.90% | | All NEOs and Directors as a Group (5 persons) | 663,000 | 53.89% | 100,000 | 100.00% | 74.57% | Item 13. Certain Relationships and Related Transactions, and Director Independence The company has significant related party transactions with CEO James Chae, who controls 73.9% of voting power, and has a policy for reviewing such transactions - James Chae, the CEO, holds 100% of the Class B Common Stock and 52.7% of the Class A Common Stock, granting him 73.9% of the total voting power[373] - The company was formed through a series of transactions where James Chae contributed his existing restaurant entities and intellectual property in exchange for equity[371][372] - The Board of Directors has adopted a written policy for reviewing and approving related party transactions, which is administered by the Audit Committee[374] Item 14. Principal Accountant Fees and Services BF Borgers CPA PC served as the independent auditor, with total fees of $314,000 in 2023, and the Audit Committee pre-approves all services Principal Accountant Fees | Fee Category | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Audit fees | $198,000 | $222,000 | | Tax fees | $12,000 | $11,000 | | All other fees | $104,000 | $33,000 | | Total fees | $314,000 | $266,000 | - The Audit Committee pre-approves all audit and permitted non-audit services provided by the independent registered public accounting firm[378] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists the documents filed as part of the Form 10-K, including financial statements and various exhibits - The report includes the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Operations, Statements of Changes in Stockholders' Equity, Statements of Cash Flows, and Notes to Financial Statements[381] Item 16. Form 10-K Summary This item is not applicable as the company has not provided a Form 10-K summary - This item is not applicable[384] Financial Statements and Supplementary Data Consolidated Financial Statements The audited consolidated financial statements present the company's financial position and results, showing total assets of $13.0 million and a net loss of $3.0 million in 2023 Consolidated Balance Sheet Highlights (as of Dec 31, 2023) | Account | Amount | | :--- | :--- | | Total Assets | $13,019,364 | | Cash | $1,832,661 | | Property and equipment, net | $4,092,950 | | Total Liabilities | $10,365,885 | | Line of credit | $1,000,000 | | Operating lease liabilities | $6,261,765 | | Bank notes payables | $1,406,329 | | Total Stockholders' Equity | $2,653,479 | Consolidated Statement of Operations Highlights (Year ended Dec 31, 2023) | Account | Amount | | :--- | :--- | | Total Revenue | $9,214,779 | | Total Restaurant Operating Expenses | $8,850,385 | | Loss from Operations | ($3,515,254) | | Net Loss | ($3,040,364) | | Loss Per Share (Basic & Diluted) | ($2.29) | Notes to Consolidated Financial Statements The notes detail the company's formation, accounting policies, financial statement line items, including the 2023 reverse stock split, IPO specifics, and related party transactions - A 1-for-10 reverse stock split of both Class A and Class B common stock was effective November 27, 2023[400] - In 2022, a total of $385,900 in Paycheck Protection Program (PPP) loans were forgiven by the SBA[461][466][469] - On November 28, 2023, a $700,454 Restaurant Revitalization Fund (RRF) loan was forgiven by the SBA[488]