10-Q: Yoshiharu Global Co. Reports Increased Revenue but Continues to Face Losses in Q3 2024

Yoshiharu Global Co. saw a significant revenue increase in the third quarter of 2024, primarily driven by the acquisition of three Las Vegas restaurants, but the company still reported a net loss.

Summary

• Yoshiharu Global Co. reported a revenue of $9.15 million for the nine months ended September 30, 2024, a 36.3% increase compared to $6.71 million for the same period in 2023.
• The revenue increase was largely due to the acquisition of three Las Vegas restaurants in April 2024.
• The company's net loss for the nine months ended September 30, 2024, was $3.2 million, compared to a net loss of $3.05 million for the same period in 2023.
• Restaurant operating expenses increased to $8.75 million for the nine months ended September 30, 2024, up from $6.57 million in 2023.
• General and administrative expenses also rose to $2.95 million for the nine months ended September 30, 2024, compared to $2.7 million in 2023.
• The company's loss per share was $2.39 for the nine months ended September 30, 2024, compared to $2.29 for the same period in 2023.
• For the three months ended September 30, 2024, revenue was $3.02 million, a 48.9% increase from $2.03 million in 2023.
• The net loss for the three months ended September 30, 2024, was $1.22 million, compared to a net loss of $0.88 million for the same period in 2023.

Sentiment

Score: 4

Explanation: The document presents a mixed picture. While revenue growth is positive, the continued and increased net losses, coupled with identified internal control weaknesses, raise concerns. The company's future growth plans are ambitious but carry significant risks.

Positives

• The company experienced a substantial increase in revenue, driven by the acquisition of new restaurants.
• Restaurant-level contribution margin improved to 11.0% for the nine months ended September 30, 2024, compared to 8.1% in the same period of 2023.
• The company opened a new restaurant in San Clemente, CA on October 31, 2024, bringing the total number of locations to 15 with 2 additional locations under construction.
• Delivery and service fees decreased as a percentage of sales, indicating a shift towards more in-dining customers.

Negatives

• The company continues to operate at a net loss, with a loss of $3.2 million for the nine months ended September 30, 2024.
• Operating expenses, including restaurant and general administrative costs, have increased.
• Interest expenses have significantly increased due to new borrowings related to the Las Vegas acquisition.
• The company's disclosure controls and procedures were deemed ineffective due to inadequate accounting resources and lack of segregation of duties.

Risks

• The company may not be able to successfully implement its growth strategy if it cannot identify appropriate restaurant locations or expand into new markets.
• The company may not be able to maintain or improve its comparable restaurant sales growth.
• The restaurant industry is highly competitive, which could impact the company's performance.
• The company's limited number of restaurants and the significant expense of opening new locations make it susceptible to fluctuations in results.
• The company has incurred operating losses and may not be profitable in the future.
• The company depends on its senior management team, and the loss of key personnel could adversely affect the business.
• The company's operating results are tied to the success of future franchise partners, over which it has limited control.
• The company could face negative publicity or damage to its reputation due to food safety concerns.
• Minimum wage increases and mandated employee benefits could increase labor costs.
• The company may face infringements on its intellectual property rights.
• Challenging economic conditions may affect consumer confidence and discretionary spending.
• The company may fail to secure guests' confidential information.
• The COVID-19 pandemic or similar public health threats could impact the business.

Future Outlook

The company aims to achieve over 100% annual unit growth rate in the next three to five years, generate comparable restaurant sales growth, drive high profitability, and heighten brand awareness. They also plan to initiate franchise sales in 2025 and are exploring new menu offerings, alcoholic beverage sales, and retail partnerships.

Management Comments

• The company is led by CEO James Chae, who founded Yoshiharu in 2016.
• Management believes that the expected cash flow from operations and proceeds from equity sales will be adequate to fund obligations for at least the next 12 months.
• Management has identified control deficiencies regarding inadequate accounting resources, the lack of segregation of duties and the need for a stronger internal control environment.

Industry Context

The company operates in the rapidly growing Asian cuisine market, which presents opportunities for expansion in both existing and new U.S. markets, as well as internationally. The company is also exploring new concepts such as a larger format restaurant with a sake bar and instant ramen noodles for retail distribution.

Comparison to Industry Standards

• The company's revenue growth of 36.3% year-over-year is strong, but the continued net losses are a concern.
• The restaurant-level contribution margin of 11.0% is a positive sign, but needs to be sustained and improved.
• The company's average unit volumes (AUVs) of $1.00 million are below the $1.13 million reported in the same period of 2023, indicating a potential need to improve sales per location.
• The company's general and administrative expenses as a percentage of sales decreased to 32.2% in the nine months ended September 30, 2024 from 40.2% in the nine months ended September 30, 2023, indicating improved efficiency.
• The company's labor costs as a percentage of sales decreased to 45.1% in the nine months ended September 30, 2024 compared to 46.6% in the nine months ended September 30, 2023, indicating improved efficiency.
• The company's food, beverage and supply costs as a percentage of sales stayed comparable at 25.8% in the nine months ended September 30, 2024 and at 26.6% in the nine months ended September 30, 2023.
• The company's rent and utilities as a percentage of sales was 13.8% in the nine months ended September 30, 2024 which is comparable to 12.5% in the prior period.
• The company's delivery and service fees as a percentage of sales decreased to 4.4% in the nine months ended September 30, 2024 compared to 6.2% in the prior period due to the decrease of take-out sales in the sales mix between the in-dining and take-out.

Related Party Transactions

• The company has borrowed money from APIIS Financial Group, a company owned by James Chae, the majority stockholder and CEO.
• The company has a promissory note and a convertible note to Mr. Jihyuck Hwang, a related party, in connection with the acquisition of three Las Vegas restaurants.

Stakeholder Impact

• Shareholders are impacted by the continued net losses and the potential dilution from equity sales.
• Employees are impacted by the company's growth and expansion plans.
• Customers are impacted by the company's new restaurant openings and menu offerings.
• Suppliers are impacted by the company's increasing buying power.
• Creditors are impacted by the company's increasing debt.

Next Steps

• The company plans to open additional restaurants in existing and new markets.
• The company intends to initiate sales of franchises in 2025.
• The company is exploring the development of instant ramen noodles for retail distribution.
• The company is exploring partnerships with grocery retailers to provide small-format Yoshiharu kiosks in stores.
• The company intends to increase its investment in advertising.
• The company plans to address the identified material weaknesses in internal controls.

Key Dates

Keywords

ramen, Japanese cuisine, restaurant, expansion, revenue, net loss, operating expenses, acquisition, Las Vegas, franchise, EBITDA, restaurant-level contribution, internal controls