Vestand Inc.: Form 10-Q for the period ended Sep 30, 2023

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 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 9 restaurant stores with an additional 5 new restaurant stores under construction/development as of September 30, 2023.

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 grants us the opportunity to expand in both existing and new U.S. markets, as well as internationally.

Our Growth Strategies

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 by 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 macroeconomic decline. 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. In addition to the strategies stated above, we expect to initiate sales of franchises in 2024.

Increase Profitability.

We have invested in our infrastructure and personnel, which we believe position us to continue to scale our business operations. As we continue to grow, we expect to drive higher profitability both at a restaurant-level and corporate-level 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 small-format Yoshiharu kiosks in stores to promote a limited selection of Yoshiharu cuisine.

Experienced Management Team Dedicated to Growth.

Our team is led by experienced and passionate senior management who are committed to our mission. We are led by our Chief Executive Officer, James Chae. Mr. Chae founded Yoshiharu in 2016 and leads a team of talented professionals with deep financial, operational, culinary, and real estate experience.

Appointment of New Director

On February 17, 2023, the Company accepted independent director Helen Lee’s formal resignation, effective immediately. Ms. Lee’s decision to resign was not due to any disagreement with the Company on any matter relating to the Company’s operations, policies or practices (financial or otherwise). She was replaced on the same day by Ms. Harinne Kim who will fill her vacancy with a term expiring at our annual meeting of stockholders in 2023 or until her successor is duly elected and qualified or until her earlier resignation, removal or death.

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 grow.

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 the planned openings of restaurant locations and is expected to stabilize as an average by location as our sales grow.

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, 2023 Compared to three and nine months ended September 30, 2022

The following table presents selected comparative results of operations from our unaudited financial statements for the three and nine months ended September 30, 2023 compared to three and nine months ended September 30, 2022. 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.

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Revenues. Revenues were $6.7 million for the nine months ended September 30, 2023 compared to $5.7 million for the nine months ended September 30, 2022, representing an increase of approximately $1.0 million, or 16.8%. The increase in sales for the nine-month period was partially driven by $0.4 million in sales for the period from one new restaurant opened in July 2022 and another $0.5 million in sales from a new restaurant opened in April 2023. The remainder of the increase of $0.1 million can be attributed to the increase in sales from the existing restaurants. The seven restaurant locations that were open through all of 2022 experienced a sales growth in in general during the nine months ended September 30, 2023. Combined average monthly sales for these locations increased by 3% for the nine-month period ended September 30, 2023 from the comparable period in the prior year. Revenues were $2.0 million for the three months ended September 30, 2023 compared to $1.8 million for the three months ended September 30, 2022, representing an increase of approximately $0.2 million, or 14.3% primarily due to the one new restaurant opened in April 2023.

Food, beverage and supplies. Food, beverage and supplies costs were approximately $1.8 million for the nine months ended September 30, 2023 compared to $1.5 million for the nine months ended September 30, 2022, representing an increase of approximately $0.3 million, or 19.7%. The increase in costs for the nine-month period was primarily driven by increases in revenues from the new restaurant opened in April 2023. As a percentage of sales, food, beverage and supply costs were comparable during the nine months ended September 30, 2023 and September 30, 2022. Food, beverage and supplies costs were approximately $558 thousand for the three months ended September 30, 2023 compared to $456 thousand for the three months ended September 30, 2022, representing an increase of approximately $101 thousand or 22.2% due to the new restaurant opened in April 2023.

Labor. Labor and related costs were approximately $3.1 million for the nine months ended September 30, 2023 compared to $2.6 million for the nine months ended September 30, 2022, representing an increase of approximately $0.5 million, or 18.3%. The increase in costs was largely driven by additional labor costs incurred with respect to a new restaurant opened in April 2023. As a percentage of sales, labor and related costs were comparable during the nine months ended September 30, 2023 and September 30, 2022. Labor and related costs were approximately $1.1 million for the three months ended September 30, 2023 compared to $837 thousand for the three months ended September 30, 2022, representing an increase of approximately $289 thousand, or 34.6%. The increase in costs was mainly due to the new restaurant opened in April 2023.

Rent and utilities. Rent and utilities expenses were approximately $840 thousand for the nine months ended September 30, 2023 compared to $750 thousand for the nine months ended September 30, 2022, representing an increase of approximately $90 thousand or 12.0%. The increase was primarily a result of additional occupancy expenses incurred with respect to a new restaurant opened in April 2023. As a percentage of sales, rent and utilities expenses decreased to 12.5% in the nine months ended September 30, 2023, compared to 13.1% for the nine months ended September 30, 2022. The decrease in costs as a percentage of sales was primarily driven by the increases in sales volume from both existing restaurants and a new location. Rent and utilities expenses were approximately $285 thousand for the three months ended September 30, 2023 compared to $236 thousand for the three months ended September 30, 2022, representing an increase of approximately $49 thousand, or 20.9% due to the new restaurant opened in April 2023.

Delivery and service fees. Delivery and service fees incurred were approximately $415 thousand for the nine months ended September 30, 2023 compared to $374 thousand for the nine months ended September 30, 2022, representing an increase of approximately $41 thousand or 11.1%, primarily due to an increase in food sales via delivery during the comparable period. As a percentage of sales, delivery and service fees ratio for the nine months ended September 30, 2023 was comparable to the ratio in the prior year due to comparable sales mix between the in-dining and take-out. Delivery and service fees incurred were approximately $130 thousand the three months ended September 30, 2023 compared to $114 thousand for the three months ended September 30, 2022, representing an increase of approximately $16 thousand or 14.3% primarily due to an increase in food sales via delivery during the comparable period.

Depreciation and amortization expenses. Depreciation and amortization expenses incurred were approximately $396 thousand for the nine months ended September 30, 2023 compared to $555 thousand for the nine months ended September 30, 2022, representing a decrease of approximately $159 thousand, or 28.6%. The decrease was primarily due to the changes in estimated depreciable lives for existing restaurants during the first quarter in 2022. As a result, the depreciation and amortization expenses as a percentage of sales decreased to 5.9% for the nine months ended September 30, 2023 compared to 9.7% for the comparable period in the prior year. Depreciation and amortization expenses incurred were approximately $145 thousand for the three months ended September 30, 2023 compared to $90 thousand for the three months ended September 30, 2022, representing an increase of approximately $55 thousand or 60.2% due to the increase in fixed assets during the comparable period.

General and administrative expenses. General and administrative expenses were approximately $2.7 million for the nine months ended September 30, 2023 compared to $1.9 million for the nine months ended September 30, 2022, representing an increase of approximately $0.8 million or 41.9%. 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, and the construction/development of new restaurants. As a percentage of sales, general and administrative expenses increased to 40.2% in the nine months ended September 30, 2023 from 33.1% in the nine months ended September 30, 2022, primarily due to the significant increase in necessary corporate costs mentioned above outpacing the increase in sales. General and administrative expenses were approximately $0.5 million for the three months ended September 30, 2023 compared to $0.9 million for the three months ended September 30, 2022, representing a decrease of approximately $0.4 million or 45.0%. This decrease in general and administrative expenses was due to the non-recurring expenses incurred for the IPO in September 2022.

Related party compensation: Compensation to James Chae was approximately $216 thousand for the nine months ended September 30, 2023 compared to $632 thousand for the nine months ended September 30, 2022, representing a decrease of approximately $416 thousand. With the IPO in September 2022, the board has approved a success bonus to James Chae for the amount and the employment contract was made with James Chae in November 2022 for the management of the Company. As a percentage of sales, related party compensation was 3.2% in the nine months ended September 30, 2023 and 11.2% in the nine months ended September 30, 2022. Compensation to James Chae was approximately $93 thousand for the three months ended September 30, 2023 per the employment contract made in November 2022.

Key Performance Indicators

In assessing the performance of our business, we consider a variety of financial and performance measures. The key measures for determining how our business is performing include sales, EBITDA, Adjusted EBITDA, Restaurant-level Operating Profit, Restaurant-level Operating Profit margin, Average Unit Volumes (“AUVs”), comparable restaurant sales performance, and the number of restaurant openings.

Revenue

Revenue represents sales of food and beverages in restaurants, as shown on our statements of income. Several factors affect our restaurant sales in any given period including the number of restaurants in operation, guest traffic and average check.

EBITDA and Adjusted EBITDA

EBITDA is defined as net income (loss) before interest, income taxes and depreciation and amortization. Adjusted EBITDA is defined as EBITDA plus stock-based compensation expense, non-cash lease expense and asset disposals, closure costs and restaurant impairments, as well as certain items, such as employee retention credit, litigation accrual, and certain executive transition costs, that we believe are not indicative of our core operating results. Adjusted EBITDA margin is defined as Adjusted EBITDA divided by sales. EBITDA, and Adjusted EBITDA are non-GAAP measures which are intended as supplemental measures of our performance and are neither required by, nor presented in accordance with, GAAP. We believe that EBITDA, and Adjusted EBITDA provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results. However, these measures may not provide a complete understanding of the operating results of the Company as a whole and such measures should be reviewed in conjunction with our GAAP financial results.

We believe that the use of EBITDA, and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial measures with those of comparable companies, which may present similar non-GAAP financial measures to investors. However, you should be aware when evaluating EBITDA, and Adjusted EBITDA that in the future we may incur expenses similar to those excluded when calculating these measures. In addition, our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted EBITDA in the same fashion.

Because of these limitations, EBITDA, and Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA, and Adjusted EBITDA on a supplemental basis. You should review the reconciliation of net loss to EBITDA, and Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.

The following table presents a reconciliation of net loss to EBITDA and Adjusted EBITDA:

(a) Represents income recorded upon the forgiveness of payroll protection loans from the SBA.

(b) Represents expenses incurred to secure the restaurant locations under development and costs to reserve back-office managers to manage those restaurants.

(c) Represents non-recurring IPO success bonus in September 2022.

(d) Represents non-recurring professional expenses incurred for the IPO preparation

Restaurant-level Contribution and Restaurant-level Contribution Margin

Restaurant-level Contribution and Restaurant-level Contribution margin are intended as supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. We believe that Restaurant-level Contribution and Restaurant-level Contribution margin provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results. We expect Restaurant-level Contribution to increase in proportion to the number of new restaurants we open and our comparable restaurant sales growth.

We present Restaurant-level Contribution because it excludes the impact of general and administrative expenses, which are not incurred at the restaurant-level. We also use Restaurant-level Contribution to measure operating performance and returns from opening new restaurants. Restaurant- level Contribution margin allows us to evaluate the level of Restaurant-level Contribution generated from sales.

However, you should be aware that Restaurant-level Contribution and Restaurant-level Contribution margin are financial measures which are not indicative of overall results for the Company, and Restaurant-level Contribution and Restaurant-level Contribution margin do not accrue directly to the benefit of stockholders because of corporate-level expenses excluded from such measures.

In addition, when evaluating Restaurant-level Contribution and Restaurant-level Contribution margin, you should be aware that in the future we may incur expenses similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our computation of Restaurant-level Contribution and Restaurant- level Contribution margin may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Restaurant-level Contribution and Restaurant-level Contribution margin in the same fashion. Restaurant-level Contribution and Restaurant- level Contribution margin have limitations as analytical tools, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.

The following table reconciles net restaurant operating income to Restaurant-level Contribution and Restaurant-level Contribution margin for the nine months and three months ended September 30, 2023 and 2022:

(a) Represents restaurant-level contribution divided by revenue.

Average Unit Volumes (AUVs)

“Average Unit Volumes” or “AUVs” consist of the average annual sales of all restaurants that have been open for 3 months or longer at the end of the period presented. AUVs are calculated by dividing (x) annual sales for the year presented for all such restaurants by (y) the total number of restaurants in that base. We make fractional adjustments to sales for restaurants that were not open for the entire year presented (such as a restaurant closed for renovation) to annualize sales for such period of time. This measurement allows management to assess changes in consumer spending patterns at our restaurants and the overall performance of our restaurant base.

The following table shows the AUVs for the nine months ended September 30, 2023 and September 30, 2022, respectively:

Comparable Restaurant Sales Growth

Comparable restaurant sales growth represents the change in year-over-year sales for restaurants open for at least 3 months prior to the start of the accounting period presented, including those temporarily closed for renovations during the year. Measuring our comparable restaurant sales growth allows us to evaluate the performance of our existing restaurant base. Various factors impact comparable restaurant sales, including:

• consumer recognition of our brand and our ability to respond to changing consumer preferences;
• overall economic trends, particularly those related to consumer spending;
• our ability to operate restaurants effectively and efficiently to meet consumer expectations;
• pricing;
• guest traffic;
• per-guest spend and average check;
• marketing and promotional efforts;
• local competition; and
• opening of new restaurants in the vicinity of existing locations.

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The following table shows the comparable restaurant sales growth for the nine months ended September 30, 2023 and September 30, 2022:

Number of Restaurant Openings

The following table shows the growth in our restaurant base for the nine months ended September 30, 2023 and 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 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 the 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:

Cash Flows Used in Operating Activities

Net cash used in operating activities during the nine-month period ended September 30, 2023 was $3,311,317, which resulted from net loss of $3,048,961, non-cash charges of $387,478 for the net of depreciation and amortization and gain on disposal of fixed asset, and net cash outflows of $649,824 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 expenses. The net cash outflows from changes in operating assets and liabilities were primarily the result of an increase in other assets by $564,775, a decrease in due to related party of $142,106 and a decrease in payables of $3,118, which was offset by decreases in inventory and other payables. The increase in other assets of $564,775 primarily consists of a payment of $294,276 in escrow to purchase a restaurant in Southern California and an investment of $300,000 in a financial company for a fixed interest income.

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.

Cash Flows Used in Investing Activities

Net cash used in investing activities during the nine months ended September 30, 2023 and 2022 was $1,339,797 and $457,428, respectively. These expenditures in each period are primarily related to purchases of property and equipment in connection with current and future restaurant openings.

Cash Flows Provided by Financing Activities

Net cash provided by financing activities during the nine months ended September 30, 2023 was $666,720 due to $500,000 cash received through line of credit and two additional bank loans in total of $300,00, offset by the repayment of bank borrowings.

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.

Contractual Obligations

The following table presents our commitments and contractual obligations as of September 30, 2023, as well as our long-term obligations:

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, 2023, 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.

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.

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, 2023. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2023, 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 the 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, 2023 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, 2023 are fairly stated, in all material respects, in accordance with GAAP.

Internal Control Over Financial Reporting

This annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the company’s registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.

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.