Vestand Inc.: Form 10-Q for the period ended Sep 30, 2022
Filed with the SEC on Nov 14, 2022 and accepted by EDGAR at Nov 14, 2022, 21:09 ET.
Management's discussion and analysis
As filed, 36,253 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
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 in Southern California within six months of our 2016 debut and has continued to expand our top-notch restaurant service across Southern 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 U.S. markets, as well as internationally.
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 in September 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.
Pursue New Restaurant Development.
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.
Franchise Program Development.
We are aiming to initiate sales of franchises beginning in 2023. We intend to submit an application for franchise registration in California, and we intend to submit franchise applications in additional states over the next few months. While our initial franchise development will focus on the 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.
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 Uber Eats, Door Dash, Grubhub and others. These third-party service providers charge delivery and order fees to the Company.
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.
Results of Operations
Three and nine months ended September 30, 2022 Compared to three and nine months ended September 30, 2021
The following table presents selected comparative results of operations from our unaudited financial statements for the three and nine months ended September 30, 2022 compared to three and nine months ended September 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, 2022 | 2021 | Increase / (Decrease) $% | ||
|---|---|---|---|---|
| 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, 2022 | 2021 | Increase / (Decrease) $% | ||
|---|---|---|---|---|
| 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 September 30, 2022 (as a percentage of revenues) | 2021 | Three months ended September 30, 2022 (as a percentage of revenues) | 2021 | |
|---|---|---|---|---|
| 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.
Labor. Labor and related costs were approximately $2.6 million for the nine months ended September 30, 2022 compared to $1.6 million for the nine months ended September 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 ended September 30, 2022 compared to 36.6% in the nine months ended September 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 ended September 30, 2022 compared to $551,000 for the three months ended September 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 ended September 30, 2022 compared to 29.9% in the three months ended September 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 ended September 30, 2022 compared to $0.5 million for the nine months ended September 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 ended September 30, 2022, compared to 10.5% for the nine months ended September 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 ended September 30, 2022 compared to $197,000 for the three months ended September 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 ended September 30, 2022, compared to 10.7% for the three months ended September 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 ended September 30, 2022 compared to $384,000 for the nine months ended September 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 ended September 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 ended September 30, 2022 compared to $131,000 for the three months ended September 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 ended September 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 ended September 30, 2022 compared to $94,000 for the nine months ended September 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 ended September 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 ended September 30, 2022 compared to $32,000 for the three months ended September 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 ended September 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.
General and administrative expenses. General and administrative expenses were approximately $1.9 million for the nine months ended September 30, 2022 compared to $0.8 million for the nine months ended September 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 ended September 30, 2022 from 18.0% in the nine months ended September 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 ended September 30, 2022 compared to $0.6 million for the three months ended September 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 ended September 30, 2022 from 30.7% in the three months ended September 30, 2021, primarily due to the significant increase in necessary corporate costs mentioned above outpacing the increase in sales.
Related party compensation: Compensation to James Chae was approximately $0.6 million for the nine months ended September 30, 2022 compared to $0 for the nine months ended September 30, 2021, representing an increase of approximately $0.6 million. The compensation was made pursuant to a nonwritten arrangement, in exchange for Mr. 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 ended September 30, 2022. Related party compensation was approximately $0.6 million for the three months ended September 30, 2022 compared to $0 for the three months ended September 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 ended September 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 ended December 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 ended December 31, 2021. Certain of these loans are eligible for forgiveness under the government plans. During the year ended December 31, 2021, PPP loans amounting to approximately $270,000 were forgiven. During the nine months ended September 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 September 2022, the Company consummated its initial public offering (the “IPO”) of 2,940,000 shares of its class A common stock at a public offering price of $4.00 per share, generating gross proceeds of $11,760,000. Net proceeds from the IPO were approximately $10.3 million after deducting underwriting discounts and commissions and other offering expenses of approximately $1.5 million.
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.
Summary of Cash Flows
The following table summarizes our cash flows for the periods presented:
| Statement of Cash Flow Data: | Nine Months Ended September 30, 2022 | 2021 |
|---|---|---|
| Net cash (used in) provided by operating activities | $(3,332,613) | $307,913 |
| Net cash used in investing activities | (457,428) | (814,163) |
| Net cash provided by financing activities | 10,347,640 | 559,549 |
Cash Flows (Used in) Provided by Operating Activities
Net cash used in operating activities during the nine-month period ended September 30, 2022 was $3,332,613, which resulted from net loss of $2,366,251, non-cash charges of $555,224 for depreciation and amortization which was offset by the PPP loan forgiveness of $385,900, and net cash outflows of $1,135,686 from changes in operating assets and liabilities. The net loss was significantly higher for the period relative to prior periods as a result of restaurant startup costs and increased general and administrative expense. The net cash outflows from changes in operating assets and liabilities were primarily the result of a decrease of $1,383,213 in due to related party, and an increase of $401,011 in other assets, partially offset by an increase of $685,899 in accounts payable and accrued expenses. The decreases in payables to related parties and stockholder were the result of repayment of expenditures incurred by the related parties and stockholder in connection with the opening of new restaurants. The increase in accounts payable was primarily due to the three new restaurants opened in July 2021, February 2022 and July 2022.
Net cash provided by operating activities during the nine months ended September 30, 2021 was $307,913, which resulted from net loss of $42,968, non-cash charges of $94,294 for depreciation and amortization which was offset by the PPP loan forgiveness of $269,887, and net cash inflows of $526,474 from changes in operating assets and liabilities. The net cash inflows from changes in operating assets and liabilities were primarily the result of increases of $426,179 in due to related party and $114,826 in accounts payable and accrued expenses, partially offset by increases of $14,499 in inventories and $65,732 in other assets. The increase in payables to related parties was the result of expenditures incurred by the related parties in connection with the opening of new restaurants. The increase in accounts payable was primarily due to the timing of cash payments.
Cash Flows Used in Investing Activities
Net cash used in investing activities during the nine months ended September 30, 2022 and 2021 was $457,428 and $814,164, respectively. These expenditures in each period are primarily related to purchases of property and equipment in connection with current and future restaurant openings and maintaining our existing restaurants.
Cash Flows Provided by Financing Activities
Net cash provided by financing activities during the nine months ended September 30, 2022 was $10,347,640, primarily due to $10,285,650 in net proceeds from the sale of 2,940,000 shares of class A common stock after deducting underwriting discounts and commissions and other offering expenses in September 2022, $60,000 in proceeds from the sale of class A common stock in December 2021, and $140,000 cash received through borrowings from banks, offset by $138,010 of repayment of borrowings.
Net cash provided by financing activities during the nine months ended September 30, 2021 was $559,549, due to $1,579,654 cash received through borrowings from banks and from pandemic relief funds available from government agencies. This was partially offset by $696,071 in stockholder distributions and by $294,974 of repayment of borrowings.
Contractual Obligations
The following table presents our commitments and contractual obligations as of September 30, 2022, as well as our long-term obligations:
| Payments due by period as of September 30, 2022 Total | 2022 (remaining three months) | 2023-2024 | 2025-2026 | Thereafter | |
|---|---|---|---|---|---|
| Capital lease payments | $8,893,551 | $137,531 | $1,714,871 | $1,843,005 | $5,198,144 |
| Bank note payables | 1,239,662 | 63,377 | 507,016 | 344,007 | 325,262 |
| EIDL loan payables | 450,000 | 35,776 | 31,034 | 31,034 | 352,156 |
| Restaurant revitalization fund loan payable | 700,454 | - | 700,454 | - | - |
| Total contractual obligations | $11,283,667 | $683,821 | $2,107,197 | $1,191,109 | $1,741,622 |
Income Taxes
The Company files income tax returns in the U.S. federal and California state jurisdictions.
We are considered a U.S. corporation and a regarded entity for U.S. federal, state and local income taxes. Accordingly, a provision will be recorded for the anticipated tax consequences of our reported results of operations for U.S. federal, state and foreign income taxes.
JOBS Act Accounting Election
We are an “emerging growth company,” as defined in the JOBS Act, and may take advantage of certain exemptions from various public company reporting requirements for up to five years or until we are no longer an emerging growth company, whichever is earlier. The JOBS Act provides that an “emerging growth company” can delay adopting new or revised accounting standards until those standards apply to private companies. We have elected to use this extended transition period under the JOBS Act. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.
Off Balance Sheet Arrangements
As of September 30, 2022, we did not have any material off-balance sheet arrangements.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to utilize estimates and make judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. The estimates are evaluated by management on an ongoing basis, and the results of these evaluations form a basis for making decisions about the carrying value of assets and liabilities that are not readily apparent from other sources. Although actual results may differ from these estimates under different assumptions or conditions, management believes that the estimates used in the preparation of our financial statements are reasonable. The critical accounting policies affecting our financial reporting are summarized in Note 2 to the financial statements included elsewhere in this Quarterly Report.
Recent Accounting Pronouncements
We have determined that all other issued, but not yet effective accounting pronouncements are inapplicable or insignificant to us and once adopted are not expected to have a material impact on our financial position.
Market risk
As filed, 132 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
We are a smaller reporting company as defined by 17 C.F.R. 229.10(f)(1) and are not required to provide information under this item.
Controls and procedures
As filed, 3,641 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
Evaluation of Disclosure Controls and Procedures
Our management has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of September 30, 2022. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2022, our disclosure controls and procedures were ineffective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (a) is recorded, processed, summarized and reported within the time periods specified by Securities and Exchange Commission (“SEC”) rules and forms and (b) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding any required disclosure.
Management has identified control deficiencies regarding inadequate accounting resources, the lack of segregation of duties and the need for a stronger internal control environment. Management of the Company believes that these material weaknesses are due to the small size of the Company’s accounting staff. The small size of the Company’s accounting outsourced staff may prevent adequate controls in the future due to the cost/benefit of such remediation.
To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of external legal and accounting professionals. As we grow, we expect to increase our number of employees, which will enable us to implement adequate segregation of duties within the internal control framework.
These control deficiencies could result in a misstatement of account balances that would result in a reasonable possibility that a material misstatement to our financial statements may not be prevented or detected on a timely basis. In light of this material weakness, we performed additional analyses and procedures in order to conclude that our financial statements for the quarter ended September 30, 2022 included in this Quarterly Report on Form 10-Q were fairly stated in accordance with GAAP. Accordingly, management believes that despite our material weaknesses, our financial statements for the quarter ended September 30, 2022 are fairly stated, in all material respects, in accordance with GAAP.
Changes in Internal Control Over Financial Reporting
Due to a transition period established by SEC rules applicable to newly public companies, our management is not required to evaluate the effectiveness of our internal control over financial reporting until after the filing of our Annual Report on Form 10-K for the year ending December 31, 2022. As a result, this Quarterly Report does not address whether there have been any changes in our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Figures reported in this filing
Standardized line items from the XBRL in this filing, for the period ended 2022-09-30. Comparative periods it repeats are left out.
| Line item | Period | Value | XBRL concept |
|---|---|---|---|
| Revenue | 3 months2022-07-01 to 2022-09-30 | $1.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months2022-01-01 to 2022-09-30 | $5.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Operating income | 3 months2022-07-01 to 2022-09-30 | −$1.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months2022-01-01 to 2022-09-30 | −$2.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months2022-07-01 to 2022-09-30 | $20.9k | us-gaap:InterestExpense |
| Interest expense | 9 months2022-01-01 to 2022-09-30 | $61.9k | us-gaap:InterestExpense |
| Income tax | 3 months2022-07-01 to 2022-09-30 | $5.6k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months2022-01-01 to 2022-09-30 | $12.7k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months2022-07-01 to 2022-09-30 | −$1.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months2022-01-01 to 2022-09-30 | −$2.4m | us-gaap:NetIncomeLoss |
| Basic EPS | 3 months2022-07-01 to 2022-09-30 | −$0.15 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months2022-01-01 to 2022-09-30 | −$0.24 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 9 months2022-01-01 to 2022-09-30 | −$3.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months2022-01-01 to 2022-09-30 | $457.4k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | At period end2022-09-30 | $7.6m | us-gaap:Cash |
| Current assets | At period end2022-09-30 | $7.7m | us-gaap:AssetsCurrent |
| Total assets | At period end2022-09-30 | $16.6m | us-gaap:Assets |
| Current liabilities | At period end2022-09-30 | $1.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | At period end2022-09-30 | $9.9m | us-gaap:Liabilities |
| Long-term debt | At period end2022-09-30 | $1.2m | us-gaap:LongTermDebt |
| Shareholders' equity | At period end2022-09-30 | $6.8m | us-gaap:StockholdersEquity |
Source: SEC EDGAR, the filing index for accession 0001493152-22-032033. Last ingested by Listed: Oct 24, 2026, 15:00 ET. Listed shows no prices and gives no investment advice.