Properties
As
of June 30, 2022, we operated 7 restaurants in California and opened 1 new location in July 2022 in California. We operate a variety
of restaurant formats, including in-line and end-cap restaurants located in retail centers of varying sizes. Our restaurants currently
average approximately 1,578 square feet. We lease the property for our corporate offices and all of the properties on which we operate
our restaurants.
The
table below shows the locations of our restaurants as of the date of this Report:
Store
Location |
|
Address |
|
Year
Launched |
Orange |
|
1891
N Tustin St, Orange, CA 92865 |
|
2016 |
Buena
Park |
|
6970
Beach Blvd, #F206 Buena Park, CA 90621 |
|
2017 |
Whittier |
|
8426
Laurel Ave, STE A Whittier, CA 90605 |
|
2017 |
Chino |
|
4004
Grand Ave STE C Chino, CA 91710 |
|
2019 |
Eastvale |
|
4910
Hamner Ave STE 150, Eastvale, CA 91752 |
|
2020 |
Irvine |
|
3935
Portola Pkwy, Irvine, CA 92602 |
|
2021 |
La
Mirada |
|
12806
La Mirada Blvd, La Mirada, CA 90638 |
|
2022 |
Cerritos |
|
11533
South St, Cerritos, CA 90703 |
|
3Q
2022*1 |
Corona |
|
440
N Mckinley St STE 101, Corona, CA 92879 |
|
3Q
2022*2 |
Garden
Grove |
|
9812
Chapman Avenue Garden Grove, CA 92841 |
|
4Q
2022*2 |
Menifee |
|
27311
Newport Road, Suite 320, Menifee, CA 92584 |
|
4Q
2022*2 |
Laguna
|
|
32341
Golden Lantern, STE B, Laguna Niguel, CA 92677 |
|
4Q
2022*2 |
San
Clemente |
|
638
Camino de Los Mares STE 16, San Clemente, CA 92673 |
|
4Q
2022*2 |
*1
Opened in July 2022.
*2
Under construction.
We
are obligated under non-cancelable leases for the majority of our restaurants, as well as our corporate offices. The majority of our
restaurant leases have lease terms of 10 years, inclusive of customary extensions which are at the option of the Company. Our restaurant
leases generally require us to pay a proportionate share of real estate taxes, insurance, common area maintenance charges, and other
operating costs. Some restaurant leases provide for contingent rental payments based on sales thresholds, although we generally do not
expect to pay significant rent on these properties based on the thresholds in those leases. We do not own any real property.
We
opened one restaurant in each year from 2019 through 2021, and we have opened two restaurants so far in 2022. We currently have 5 new
locations under construction/development, and we expect to begin operations of the 5 new locations in 2023. Also, we are expecting to
open an additional 6 new restaurants in 2023 by utilizing the net proceeds from the IPO.
With
respect to the 5 new locations under construction/development, the Company has entered into construction agreements with various developers
for certain tenant improvements to the store locations in Corona, Garden Grove, Menifee, Laguna Niguel and San Clemente.
We
have finalized site selection for 6 of the upcoming 2023 restaurants for the following sites in Southern California: Cypress, Santa Ana,
Ontario, Dana Point and Tustin; and one location in Washington: Seattle. We have executed commercial lease terms for Cypress, and we
are in the process of negotiating a lease agreement for Santa Ana, Ontario, Tustin, Dana Point and Seattle. Site selection is ongoing
for the other upcoming locations.
The
Company anticipates approximately $350,000 in costs per a new location in development, and has spent approximately $490,000 for the
5 locations under construction/development as of December 31, 2022.
Assuming
the Company is successful in opening the 11 locations in 2023 as set forth above, based on the anticipated development costs of the 1
location, the total anticipated costs of opening the11 locations in 2023 is approximately $3.4 million.
In
2019, we closed West Hollywood and Lynwood, California restaurants due to underperformance. We cannot provide assurance that we will
be able to open any specific number of restaurants in any year. See “Risk Factors—Risks Related to Our Business and Industry—Our
long-term success is highly dependent on our ability to successfully identify and secure appropriate sites and timely develop and expand
our operations in existing and new markets.”
Site
Development and Expansion
Site
Selection Process
We
consider site selection to be instrumental to our success. As part of our strategic site selection process, we receive potential site
locations from networks of local brokers, which are then reviewed by our Development Team. This examination consists of an analysis of
the lease terms and conditions, a profitability evaluation, as well as multiple site visits during all times of the day, e.g., lunch,
late afternoon, dinner, weekdays and weekends, to test for traffic. The Development Team holds regular meetings for site approval with
other members of our senior management team in order to get a balanced perspective on a potential site.
Our
current real estate strategy focuses on high-traffic retail centers in markets with a diverse population and above-average household
income for the state. We believe we are attractive lessees for landlords given our ability to drive strong traffic comprised of above-average
household income guests, and we imagine our bargaining power will become stronger as we accumulate more stores. In site selection, we
also consider factors such as residential and commercial population density, restaurant visibility, traffic patterns, accessibility,
availability of suitable parking, proximity to highways, universities, shopping areas and office parks, the degree of competition within
the market area, and general availability of restaurant-level employees. We also invest in site analytics tools for demographic analysis
and data collection for both existing and new market areas, which we believe allows us to further understand the market area and determine
whether to open new restaurants in that location.
Our
flexible physical footprint, which has allowed us to open restaurants in size ranging from 1,500 to 2,500 square feet, allows us to open
in-line and end-cap restaurant formats at strip malls and shopping centers and penetrate markets in both suburban and urban areas. We
believe we have the ability to open additional restaurants in our existing metropolitan areas. We also believe there is significant opportunity
to employ the strategy in new markets with similar demographics across the U.S. and globally.
Expansion
Strategy
We
plan to pursue a multi-facet expansion strategy by opening new corporate restaurants in both new and existing markets, as well as utilizing
the franchise market. We believe this expansion will be crucial to executing our growth strategy and building awareness of Yoshiharu
as a leading Japanese casual dining brand. Expansion into new markets occurs in parallel with ongoing evaluation of existing markets,
with the goal of maintaining a pipeline of top-tier development opportunities. As described under Site Selection Process, we use a systematic
approach to identify and review existing and new markets.
Upon
selecting a new market, we typically build one restaurant to prove concept viability in that market. We have developed a remote management
system whereby our senior operations team is able to monitor restaurants in real-time from our headquarters using approximately 8 cameras
installed in each restaurant. We utilize this remote management system to maintain operational quality while minimizing inefficiencies
caused by a lack of economies of scale in new markets.
Due
to our relatively small restaurant count, new restaurants have an outsized impact on our financial performance. In order to mitigate
risk, we look to expand simultaneously in new and existing markets. We base our site selection on our most successful existing restaurants
and frequently reevaluate our strategy, pacing and markets. We believe we are in the early stages of our growth story and that our restaurant
model is designed to generate strong cash flow, attractive restaurant-level financial results and high returns on invested capital, which
we believe provides us with a strong foundation for expansion.
Restaurant
Design
Restaurant
design is handled by our Development Team in conjunction with outsourced vendor relationships, e.g., architects and general contractors.
Our restaurant size currently averages approximately 1,500 square feet. Seating in our restaurant is comprised of a combination of table
seating and bar seats with an average seating capacity of 40-50 guests.
We
are developing two main restaurant layouts. The standard restaurants will be built using our current layout and design which we believe
evokes a modern and on-trend Japanese dining atmosphere. The second layout is the larger plan where we will utilize a full service restaurant
and bar. We believe the new layout achieves this atmosphere. We believe our see-through kitchens reflecting the cooks preparing first
hand meals, amplify the lively bustle provided by the great casual atmosphere, and serve to highlight the ambiance of getting great food
in a modern Japanese style ambiance.
Construction
Construction
of a new restaurant takes approximately 12 to 24 weeks once construction permits (e.g., Health and City) are issued. Our Development
Team oversees the build-out process from engaging architects and contractors to design and build out the restaurant. The capital resources
required to develop each new restaurant are significant. On average, we estimate our restaurant build-outs to cost approximately $350,000
- $550,000 per standard location, net of tenant allowances and pre-opening costs and assuming that we do not purchase the underlying
real estate, but this figure could be significantly higher depending on the market, restaurant size, and condition of the premises upon
delivery by landlord. On average, we estimate that our restaurants require a cash build-out cost of approximately $350,000-$550,000 per
restaurant, net of landlord tenant improvement allowances and pre-opening costs and assuming that we do not purchase the underlying real
estate. Actual costs may vary significantly depending upon a variety of factors, including the site and size of the restaurant and conditions
in the local real estate and labor markets.
Restaurant
Management and Operations
Restaurant
Management and Employees
Our
restaurants typically employ one restaurant manager, one or two supervisors, and approximately 8 to 12 additional team members. Managers,
supervisors and management trainees are cross-trained throughout the restaurant in order to create competency across critical restaurant
functions, both in the dining area and in the kitchen.
In
addition, our senior operations team monitors restaurants in real-time from our headquarters using our remote management system of approximately
8 cameras installed in each restaurant. These team members are responsible for different components of the restaurant: cleanliness, service,
and food quality.
Training
and Employee Programs
We
devote significant resources to identifying, selecting, and training restaurant-level employees. Our training covers leadership, team
building, food safety certification, alcohol safety programs, sexual harassment training, and other topics. Management trainees undergo
training for approximately 8 to 16 weeks in order to develop a deep understanding of our operations. In addition, we are developing extensive
training manuals that cover all aspects of restaurant-level operations.
Our
traveling “opening team” provides training to team members in advance of opening a new restaurant. We believe the opening
team facilitates a smooth opening process and efficient restaurant operations from the first day a restaurant opens to the public. The
opening team is typically on-site at new restaurants from two weeks before opening to four weeks after opening.
Food
Preparation, Quality and Safety
We
are committed to consistently providing our guests high quality, freshly prepared food. For other items we believe hand preparation achieves
the best quality. Hand preparation of menu items includes, but is not limited to, frying tempura, slicing meat and fish and making pork
bone broth. We believe guests can taste the difference in freshly prepared food and that adhering to these standards is a competitive
advantage for our brand.
Food
safety is essential to our success and we have established procedures to help ensure that our guests enjoy safe, quality food. We require
each employee to complete food handler safety certification upon hiring. We have taken various additional steps to mitigate food quality
and safety risks, including undergoing internal safety audits. We also consider food safety and quality assurance when selecting our
distributors and suppliers.
Menu
We
offer a diverse menu, including our signature ramen dishes, as well as sushi rolls, bento boxes, and other Japanese cuisine. The menu
appeals to a wide range of customers, and we continue to improve upon the quality, taste and presentation. Additionally, we are able
to serve the menu in a delivery and pickup format, as our food is designed to be enjoyed on premise or at customers’ homes or offices.
We have entered the catering business through relationships with businesses who place large format orders (i.e., Bento boxes for corporate
meetings or office lunches), for delivery or pick-up. We expect that our catering business, which has a higher-than-average order value,
to grow due to the early success we have experienced in the corporate channel.
New
Menu Introductions
We
focus advertising efforts on new menu offerings to broaden our appeal to guests and drive traffic. Our menu changes twice per year to
introduce new items and remove underperforming items. We promote these new menu additions through various social media platforms, our
website and in-restaurant signage.
Marketing
and Advertising
We
use a variety of marketing and advertising channels to build brand awareness, attract new guests, increase dining frequency, support
new restaurant openings, and promote Yoshiharu as an authentic Japanese restaurant with high-quality cuisine and a distinctive dining
experience. Our primary advertising channels include digital, social, and print.
Social
Media
We
maintain a presence on several social media platforms including Facebook and Instagram, allowing us to regularly communicate with guests,
alert guests of new offerings, and conduct promotions. Our dining experience is built to provide our guests social media shareable moments,
which we believe extends our advertising reach.
Suppliers
We
carefully select suppliers based on product quality and authenticity and their understanding of our brand, and we seek to develop long-term
relationships with them. All supply arrangements are negotiated and managed at the Yoshiharu corporate-level.
Food.
Our Vice President of Operations identifies and procures high-quality ingredients at competitive prices. Each store separately makes
an order to the specific vendor, and the invoices are submitted and paid by Yoshiharu at the corporate-level. We source mainly through
the following Japanese-related distributors: JFC, a subsidiary of Kikkoman Corporation, Wismettac, a subsidiary of Nishimoto Co., Ltd.,
and Mutual Trading Co., Inc., a California corporation.
Paper.
Our Vice President of Operations negotiates long term supply agreements for our logo-branded paper including takeout bags and bowls,
chopsticks, as well as uniforms. We make a portion of our purchases annually in bulk at fixed prices, and deliver them to our warehouse
in Anaheim, California. Each restaurant Manager receives the necessary paper supplies from our warehouse.
Management
Information Systems
We
utilize systems provided by Toast, Inc. for point of sale, contactless ordering, handheld ordering, online ordering and delivery, as
well as marketing and payroll management. We believe that Toast’s systems provide us and our customers with streamlined operations
and allows us to efficiently turn tables and improve the sales conversion cycle, while reducing third-party commissions for online orders.
Restaurant
Industry Overview
According
to the National Restaurant Association (the “NRA”), U.S. restaurant industry sales in calendar year 2021 were $799.0 billion
and are expected to grow at a growth rate of 12.4% to $898 billion in calendar year 2022 and reach $997 billion in calendar
year 2023.
The
restaurant industry is divided into several primary segments, including limited-service and full-service restaurants, which are generally
categorized by price, quality of food, service, and location. Yoshiharu sits at the intersection of these two segments offering the experience
and food quality of a full-service restaurant and the speed of service of a limited-service restaurant. We primarily compete with other
full-service restaurants, which, according to the NRA, had approximately $285 billion of sales in calendar year 2019, prior to the onset
of the COVID-19 pandemic, and an increase of 3.8% over 2019. The limited-service segment generated $309 billion in calendar year 2019,
or 3.2% over the prior year. COVID-19 had a material impact on consumer spending at restaurants in 2020, resulting in a decrease compared
to the prior year.
However,
for 2021, full-service restaurant sales increased to $261 billion in calendar year 2021, an increase of 31.2% over 2020, while limited-service
restaurants generated $329 billion in sales, or 10.8% over the prior year due to rising vaccination numbers and consumers’ pent-up
demand. Full-service restaurant sales are expected to increase to $289 billion in calendar year 2022, an increase of 10.9% from 2021
and the limited-service segment is forecast to reach $355 billion in 2022, resulting in a 7.9% increase from 2021.
We
believe that increased multiculturalism in the United States, driven in part by growth in the Asian demographic, contributes to a favorable
macro environment for Yoshiharu’s future growth. According to the U.S. Census Bureau, the Asian population is projected to be one
of the fastest growing demographics in the United States, increasing in size from 20 million people in calendar year 2020 to 24.4 million
people by calendar year 2030. During this time, the Asian population’s share of the nation’s total population is projected
to increase by 15%, from approximately 6% to 6.9%.
Additionally,
we believe that Yoshiharu is well-positioned to grow our share of the restaurant market as consumers seek quality, value, healthier options,
and authentic global and regional cuisine in their dining choices. According to the National Restaurant Association 2019 State of the
Industry report, more than 60% of customers cite the availability of healthy menu options as a key factor in restaurant choice when eating
out. In addition, as referenced in the same report, ethnic spices, ethnic condiments, and Asian soups were among the projected top 25
food trends for limited-service restaurants in calendar year 2019 .
We
cannot provide assurance that we will benefit from these long-term demographic trends, although we believe the projected growth in the
Asian population and the Asian influence on dining trends will result in an increase in demand for Japanese and Asian foods.
Competition
We
face significant competition from a variety of locally owned restaurants regional, and national chain restaurants offering both Asian
and non-Asian cuisine, as well as takeaway options from grocery stores. Direct competition for Yoshiharu comes primarily from Asian restaurants
including other ramen noodles restaurants. Jinya Ramen Bar operates approximately 40 locations in the United States and also franchises
their restaurants. We believe that we compete primarily based on product quality, dining experience, ambience, location, convenience,
value perception, and price. Our competition continues to intensify as competitors increase the breadth and depth of their product offerings
and open new restaurants.
Seasonality
Due
to Yoshiharu’s menu breadth and diversification of offerings, we do not experience significant seasonality.
Employees
As
of December 31, 2022 , we had approximately 130 employees, of whom 24 were exempt employees and the remainder were non-exempt
employees. None of our employees are unionized or covered by collective bargaining agreements, and we consider our current employee relations
to be good.
Government
Regulation and Environmental Matters
We
are subject to extensive and varied federal, state and local government regulation, including regulations relating, among others, to
public and occupational health and safety, nutritional menu labeling, healthcare, the environment, sanitation and fire prevention. We
operate each of our restaurants in accordance with standards and procedures designed to comply with applicable codes and regulations.
However, an inability to obtain or retain health department or other licenses would adversely affect our operations. Although we have
not experienced, and do not anticipate, any significant difficulties, delays or failures in obtaining required licenses, permits or approvals,
any such problem could delay or prevent the opening of, or adversely impact the viability of, a particular restaurant or group of restaurants.
Additionally, difficulties, delays or failure to retain or renew licenses, permits or approvals, or increased compliance costs due to
changed regulations, could adversely affect operations at existing restaurants.
In
addition, in order to develop and construct restaurants, we must comply with applicable zoning, land use and environmental regulations.
Federal and state environmental regulations have not had a material effect on our operations to date, but more stringent and varied requirements
of local governmental bodies with respect to zoning, land use and environmental factors could delay or even prevent construction and
increase development costs for new restaurants. We are also required to comply with the accessibility standards mandated by the U.S.
Americans with Disabilities Act, which generally prohibits discrimination in accommodation or employment based on disability. We may
in the future have to modify restaurants, for example, by adding access ramps or redesigning certain architectural fixtures, to provide
service to or make reasonable accommodations for disabled persons. While these expenses could be material, our current expectation is
that any such actions will not require us to expend substantial funds.
Alcoholic
beverage control regulations require each of our restaurants to apply to a state authority and, in certain locations, county or municipal
authorities for a license that must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control
regulations relate to numerous aspects of daily operations of our restaurants, including minimum age of patrons and employees, hours
of operation, advertising, trade practices, wholesale purchasing, other relationships with alcohol manufacturers, wholesalers and distributors,
inventory control and handling, storage and dispensing of alcoholic beverages. We are also subject in certain states to “dram shop”
statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully
served alcoholic beverages to the intoxicated person. We carry liquor liability coverage as part of our existing comprehensive general
liability insurance.
Further,
we are subject to the U.S. Fair Labor Standards Act, the U.S. Immigration Reform and Control Act of 1986, the Occupational Safety and
Health Act and various other federal and state laws governing similar matters including minimum wages, overtime, workplace safety and
other working conditions. Significant numbers of our food service and preparation personnel are paid at rates related to the applicable
minimum wage, and further increases in the minimum wage or other changes in these laws could increase our labor costs. Our ability to
respond to minimum wage increases by increasing menu prices will depend on the responses of our competitors and guests. Our distributors
and suppliers also may be affected by higher minimum wage and benefit standards, which could result in higher costs of goods and services
supplied by us. We may also be subject to lawsuits from our employees, the U.S. Equal Employment Opportunity Commission or others alleging
violations of federal and state laws regarding workplace and employment matters, discrimination and similar matters.
There
has been increased regulation of certain food establishments in the United States, such as the requirements to maintain a Hazard Analysis
and Critical Control Points (“HACCP”) system. HACCP refers to a management system in which food safety is addressed through
the analysis and control of potential hazards from production, procurement and handling, to manufacturing, distribution and consumption
of the finished product. Many states have required restaurants to develop and implement HACCP systems and the U.S. government continues
to expand the sectors of the food industry that must adopt and implement HACCP programs. We cannot assure you that we will not have to
expend additional time and resources to comply with new food safety requirements either required by current or future federal food safety
regulation or legislation. Additionally, our suppliers may initiate or otherwise be subject to food recalls that may impact the availability
of certain products, result in adverse publicity or require us to take actions that could be costly for us or otherwise harm our business.
A
number of states, counties and cities have enacted menu labeling laws requiring multi-unit restaurant operators to disclose to consumers
certain nutritional information, or have enacted legislation restricting the use of certain types of ingredients in restaurants. Many
of these requirements are inconsistent or interpreted differently from one jurisdiction to another. These requirements may be different
or inconsistent with requirements that we are subject to under the ACA, which establishes a uniform, federal requirement for certain
restaurants to post nutritional information on their menus. Specifically, the ACA requires chain restaurants with 20 or more locations
in the United States operating under the same name and offering substantially the same menus to publish the total number of calories
of standard menu items on menus and menu boards, along with a statement that puts this calorie information in the context of a total
daily calorie intake. The ACA also requires covered restaurants to provide to consumers, upon request, a written summary of detailed
nutritional information for each standard menu item, and to provide a statement on menus and menu boards about the availability of this
information upon request. While our ability to adapt to consumer preferences is a strength of our concepts, the effect of such labeling
requirements on consumer choices, if any, is unclear at this time.
We
are subject to federal, state and local environmental laws and regulations concerning waste disposal, pollution, protection of the environment,
and the presence, discharge, storage, handling, release and disposal of, or exposure to, hazardous or toxic substances (“environmental
laws”). These environmental laws can provide for significant fines and penalties for non-compliance and liabilities for remediation,
sometimes without regard to whether the owner or operator of the property knew of, or was responsible for, the release or presence of
the hazardous or toxic substances. Third parties may also make claims against owners or operators of properties for personal injuries
and property damage associated with releases of, or actual or alleged exposure to, such substances. We are not aware of any environmental
laws that will materially affect our earnings or competitive position, or result in material capital expenditures relating to our restaurants.
However, we cannot predict what environmental laws will be enacted in the future, how existing or future environmental laws will be administered,
interpreted or enforced, or the amount of future expenditures that we may need to make to comply with, or to satisfy claims relating
to, environmental laws. It is possible that we will become subject to environmental liabilities at our properties, and any such liabilities
could materially affect our business, financial condition or results of operations.
We
are also subject to laws and regulations relating to information security, privacy, cashless payments, gift cards and consumer credit,
protection and fraud, and any failure or perceived failure to comply with these laws could harm our reputation or lead to litigation,
which could adversely affect our business, financial condition or results of operations.
Furthermore,
we are subject to import laws and tariffs which could impact our ability to source and secure food products, other supplies and equipment
necessary to operate our restaurants.
For
a discussion of the various risks we face from regulation and compliance matters, see “Risk Factors.”
Intellectual
Property and Trademarks
Yoshiharu
Holdings Co., our wholly owned subsidiary, owns a number of patents, trademarks and service marks registered or pending with the U.S.
Patent and Trademark Office (“PTO”). The Company has registered the following marks with the PTO: YOSHIHARU RAMEN (Trademark
Reg. No. 5030823) and Design Mark YOSHIHARU RAMEN (Trademark Reg. No. 5045588). In addition, we have registered the Internet domain name
www.yoshiharuramen.com. The information on, or that can be accessed through, our website is not part of this Report.
We
believe that the trademarks, service marks and other intellectual property rights that we license from Yoshiharu Holdings Co. have significant
value and are important to the marketing and reputation of our brand. It is our policy to pursue registration of our intellectual property
whenever possible and to oppose vigorously any infringement thereof. However, we cannot predict whether steps taken to protect such rights
will be adequate or whether Yoshiharu Holdings Co. will take steps to enforce such rights with regard to any intellectual property that
we license from them. See “Risk Factors—Risks Related to Our Business and Industry—We may become involved in lawsuits
involving Yoshiharu Holdings Co. as the owner of intellectual property, or us as a licensee of intellectual property from Yoshiharu Holdings
Co., to protect or enforce our intellectual property rights, which could be expensive, time consuming, and unsuccessful.” We
are aware of third-party restaurants with names similar to our restaurant name in certain limited geographical areas such as in California.
However, we believe such uses will not adversely affect us.
Item
1A. Risk Factors.
Our
long-term success is highly dependent on our ability to successfully identify and secure appropriate sites and timely develop and expand
our operations in existing and new markets.
One
of the key means of achieving our growth strategies will be through opening and operating new restaurants on a profitable basis for the
foreseeable future. We opened one new restaurant in 2020, and one new restaurant in 2021, and two new restaurants in 2022. We currently
have 5 new locations under construction/development, and we expect to open an additional 6 new restaurants in 2023 . We identify
target markets where we can enter or expand, taking into account numerous factors such as the locations of our current restaurants, demographics,
traffic patterns and information gathered from various sources. We may not be able to open our planned new restaurants within budget
or on a timely basis, if at all, given the uncertainty of these factors, which could adversely affect our business, financial condition
and results of operations. As we operate more restaurants, our rate of expansion relative to the size of our restaurant base will eventually
decline.
The
number and timing of new restaurants opened during any given period may be negatively impacted by a number of factors including, without
limitation:
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identification
and availability of locations with the appropriate size, traffic patterns, local retail and business attractions and infrastructure
that will drive high levels of guest traffic and sales per unit; |
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competition
in existing and new markets, including competition for restaurant sites; |
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the
ability to negotiate suitable lease terms; |
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the
lack of development and overall decrease in commercial real estate due to a macroeconomic downturn; |
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recruitment
and training of qualified personnel in the local market; |
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our
ability to obtain all required governmental permits, including zonal approvals, on a timely basis; |
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our
ability to control construction and development costs of new restaurants; |
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landlord
delays; |
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the
proximity of potential sites to an existing restaurant, and the impact of cannibalization on future growth; |
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anticipated
commercial, residential and infrastructure development near our new restaurants; and |
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the
cost and availability of capital to fund construction costs and pre-opening costs. |
Accordingly,
we cannot assure you that we will be able to successfully expand as we may not correctly analyze the suitability of a location or anticipate
all of the challenges imposed by expanding our operations. Our growth strategy, and the substantial investment associated with the development
of each new restaurant, may cause our operating results to fluctuate and be unpredictable or adversely affect our business, financial
condition or results of operations. If we are unable to expand in existing markets or penetrate new markets, our ability to increase
our sales and profitability may be materially harmed or we may face losses.
Our
restaurant base is geographically concentrated in California, and we could be negatively affected by conditions specific to California.
Adverse
changes in demographic, unemployment, economic, regulatory or weather conditions in California have had, and may continue to have, material
adverse effects on our business, financial condition or results of operations. As a result of our concentration in California, we have
been, and in the future may be, disproportionately affected by adverse conditions in this specific market compared to other chain restaurants
with a national footprint.
Our
expansion into new markets may present increased risks due in part to our unfamiliarity with the areas and may make our future results
unpredictable.
We
have opened one new restaurant in 2021, one new restaurant in the first quarter of 2022, one new restaurant in the third quarter of 2022,
and we currently have 5 new locations under construction/development. We plan to continue to increase the number of our restaurants in
the next several years as part of our expansion strategy and expect to open an additional 6 new restaurants in 2023 by utilizing the
net proceeds from the IPO. We may in the future open restaurants in markets where we have little or no operating experience. This growth
strategy and the substantial investment associated with the development of each new restaurant may cause our operating results to fluctuate
and be unpredictable or adversely affect our business, financial condition or results of operations. Restaurants we open in new markets
may take longer to reach expected sales and profit levels on a consistent basis and may have higher construction, occupancy or operating
costs than restaurants we open in existing markets, thereby affecting our overall profitability. New markets may have competitive conditions,
consumer tastes and discretionary spending patterns that are more difficult to predict or satisfy than our existing markets and there
may be little or no market awareness of our brand in these new markets. We may need to make greater investments than we originally planned
in advertising and promotional activity in new markets to build brand awareness. We also may find it more difficult in new markets to
hire, motivate and keep qualified employees who share our vision, passion and business culture. If we do not successfully execute our
plans to enter new markets, our business, financial condition or results of operations could be materially adversely affected.
New
restaurants, once opened, may not be profitable, and the increases in average restaurant sales and comparable restaurant sales that we
have experienced in the past may not be indicative of future results.
New
restaurants may not be profitable and their sales performance may not follow historical patterns. In addition, our average restaurant
sales and comparable restaurant sales may not increase at the rates achieved over the past several years. Our ability to operate new
restaurants profitably and increase average restaurant sales and comparable restaurant sales will depend on many factors, some of which
are beyond our control, including:
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consumer
awareness and understanding of our brand; |
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general
economic conditions, which can affect restaurant traffic, local labor costs and prices we pay for the food products and other supplies
we use; |
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changes
in consumer preferences and discretionary spending; |
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competition,
either from our competitors in the restaurant industry or our own restaurants; |
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temporary
and permanent site characteristics of new restaurants; and |
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changes
in government regulation. |
If
our new restaurants do not perform as planned, our business and future prospects could be harmed. In addition, if we are unable to achieve
our expected average restaurant sales, our business, financial condition or results of operations could be adversely affected.
Our
sales and profit growth could be adversely affected if comparable restaurant sales are less than we expect.
The
level of comparable restaurant sales growth, which represents the change in year-over-year sales for restaurants open for at least 3
months, could affect our sales growth. Our ability to increase comparable restaurant sales depends in part on our ability to successfully
implement our initiatives to build sales. It is possible such initiatives will not be successful, that we will not achieve our target
comparable restaurant sales growth or that the change in comparable restaurant sales could be negative, which may cause a decrease in
our profitability and would materially adversely affect our business, financial condition or results of operations. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
Our
failure to manage our growth effectively could harm our business and operating results.
Our
growth plan includes opening new restaurants. Our existing restaurant management systems, financial and management controls and information
systems may be inadequate to support our planned expansion. Managing our growth effectively will require us to continue to enhance these
systems, procedures and controls and to hire, train and retain managers and team members. We may not respond quickly enough to the changing
demands that our expansion will impose on our management, restaurant teams and existing infrastructure which could harm our business,
financial condition or results of operations.
Our
limited number of restaurants, the significant expense associated with opening new restaurants, and the unit volumes of our new restaurants
makes us susceptible to significant fluctuations in our results of operations.
As
of December 31, 2021 and 2022 , we operated 6 and 8 restaurants, respectively. We opened one new restaurant in 2019 and one
new restaurant in 2020. We have opened one new restaurant in 2021, one new restaurant in first quarter of 2022 and one new restaurant
in the third quarter of 2022. We currently have 5 new locations under construction/development, and we expect to open an additional 6
new restaurant stores in 2023 by utilizing the net proceeds from the offering. The capital resources required to develop each new restaurant
are significant. On average, we estimate that our restaurants require a cash build-out cost of approximately $350,000-$550,000 per restaurant,
net of landlord tenant improvement allowances and pre-opening costs and assuming that we do not purchase the underlying real estate.
Actual costs may vary significantly depending upon a variety of factors, including the site and size of the restaurant and conditions
in the local real estate and labor markets. The combination of our relatively small number of existing restaurants, the significant investment
associated with each new restaurant, variance in the operating results in any one restaurant, or a delay or cancellation in the planned
opening of a restaurant could materially affect our business, financial condition or results of operations.
A
decline in visitors to any of the retail centers, shopping malls, lifestyle centers, or entertainment centers where our restaurants are
located could negatively affect our restaurant sales.
Our
restaurants are primarily located in high-activity areas such as retail centers, shopping malls, lifestyle centers, and entertainment
centers. We depend on high visitor rates at these centers to attract guests to our restaurants. Factors that may result in declining
visitor rates include economic or political conditions, anchor tenants closing in retail centers or shopping malls in which we operate,
changes in consumer preferences or shopping patterns, changes in discretionary consumer spending, increasing petroleum prices, or other
factors, which may adversely affect our business, financial condition or results of operations.
We
have incurred operating losses and may not be profitable in the future. Our plans to maintain and increase liquidity may not be successful.
The report of the independent registered public accounting firm includes a going concern uncertainty explanatory paragraph in 2021.
We
incurred a net loss of $3.9 million and $1.6 million for the years ended December 31, 2022 and 2021, respectively. These factors raise
substantial doubt as to our ability to continue as a going concern, and our independent registered public accounting firm has included
a going concern uncertainty explanatory paragraph in their report for 2021.
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.
We
depend on our senior management team and other key employees, and the loss of one or more key personnel or an inability to attract, hire,
integrate and retain highly skilled personnel could have an adverse effect on our business, financial condition or results of operations.
Our
success depends largely upon the continued services of our key executives, including James Chae. We also rely on our leadership team
in setting our strategic direction, operating our business, identifying, recruiting and training key personnel, identifying expansion
opportunities, arranging necessary financing, and for general and administrative functions. From time to time, there may be changes in
our executive management team resulting from the hiring or departure of executives, which could disrupt our business. The loss or replacement
of one or more of our executive officers or other key employees could have a serious adverse effect on our business, financial condition
or results of operations.
To
continue to execute our growth strategy, we also must identify, hire and retain highly skilled personnel. We might not be successful
in continuing to attract and retain qualified personnel. Failure to identify, hire and retain necessary key personnel could have a material
adverse effect on our business, financial condition or results of operations.
Opening
new restaurants in existing markets may negatively affect sales at our existing restaurants.
The
consumer target area of our restaurants varies by location, depending on a number of factors, including population density, other local
retail and business attractions, area demographics and geography. As a result, the opening of a new restaurant in or near markets in
which we already have restaurants could adversely affect the sales of these existing restaurants and thereby adversely affect our business,
financial condition or results of operations. Existing restaurants could also make it more difficult to build our consumer base for a
new restaurant in the same market. Our core business strategy does not entail opening new restaurants that we believe will materially
affect sales at our existing restaurants, but we may selectively open new restaurants in and around areas of existing restaurants that
are operating at or near capacity to effectively serve our guests. Sales cannibalization between our restaurants may become significant
in the future as we continue to expand our operations and could affect our sales growth, which could, in turn, materially adversely affect
our business, financial condition or results of operations.
Our
operating results and growth strategies will be closely tied to the success of our future franchise partners and we will have limited
control with respect to their operations. Additionally, our franchise partners’ interests may conflict or diverge with our interests
in the future, which could have a negative impact on our business.
As
we grow, we will depend on the financial success and cooperation of our future franchise partners for our success. Our franchise partners
will be independent business operators and will not be our employees, and as such we have limited control over how our franchise partners
will run their businesses, and their inability to operate successfully could adversely affect our operating results.
We
will receive royalties, franchise fees, contributions to our marketing development fund, and other fees from our franchise partners.
Additionally, we will sell proprietary products to our franchise partners at a markup over our cost to produce. We expect to establish
operational standards and guidelines for our franchise partners; however, we will have limited control over how our franchise partners’
businesses are run, including day to day operations. Even with these operation standards and guidelines, the quality of franchised stores
may be diminished by any number of factors beyond our control. Consequently, our franchise partners may not successfully operate stores
in a manner consistent with our standards and requirements, such as quality, service and cleanliness, or may not hire and train qualified
store managers and other store personnel or may not implement marketing programs and major initiatives such as store remodels or equipment
or technology upgrades, which may require financial investment. Even if such unsuccessful operations do not rise to the level of breaching
the related franchise documents, they may be attributed by customers to our brand and could have a negative impact on our business.
Our
franchise partners may not be able to secure adequate financing to open or continue operating their stores. If they incur too much debt
or if economic or sales trends deteriorate such that they are unable to repay existing debt, our franchise partners could experience
financial distress or even bankruptcy. If a significant number of our franchise partners were to become financially distressed, it could
harm our operating results through reduced royalty revenue, marketing fees, and proprietary product sales and the impact on our profitability
could be greater than the percentage decrease in these revenue streams.
While
we are responsible for ensuring the success of our entire system of stores and for taking a longer term view with respect to system improvements,
our franchise partners will have individual business strategies and objectives, which might conflict with our interests. Our future franchise
partners may from time to time disagree with us and our strategies and objectives regarding the business or our interpretation of our
respective rights and obligations under the franchise agreement and the terms and conditions of the franchise partner relationship. This
may lead to disputes with our franchise partners and we expect such disputes to occur from time to time in the future. Such disputes
may result in legal action against us. To the extent we have such disputes, the attention, time and financial resources of our management
and our future franchise partners will be diverted from our stores, which could harm our business even if we have a successful outcome
in the dispute.
Actions
or omissions by our future franchise partners in violation of various laws may be attributed to us or result in negative publicity that
affects our overall brand image, which may decrease consumer demand for our products. Franchise partners may engage in online activity
via social media or activity in their personal lives that negatively impacts public perception of our franchise partners’ or our
operations or our brand as a whole. This activity may negatively affect franchise partners’ sales and in turn impact our revenue.
In
addition, various state and federal laws govern our relationship with our future franchise partners and our potential sale of a franchise.
A future franchise partner and/or a government agency may bring legal action against us based on the franchisee/franchisor relationships
that could result in the award of damages to a franchise partner and/or the imposition of fines or other penalties against us.
Operating
results at our restaurants could be significantly affected by competition in the restaurant industry in general and, in particular, within
the dining segments of the restaurant industry in which we compete.
We
face significant competition from a variety of restaurants offering both Asian and non-Asian cuisine, as well as takeout offerings from
grocery stores and other outlets where Asian food is sold. These segments are highly competitive with respect to, among other things,
product quality, dining experience, ambience, location, convenience, value perception, and price. Our competition continues to intensify
as competitors increase the breadth and depth of their product offerings and open new locations. These competitors may have, among other
things, chefs who are widely known to the public that may generate more notoriety for those competitors as compared to our brand. We
also compete with many restaurant and retail establishments for site locations and restaurant-level employees.
Several
of our competitors offering Asian and related choices may look to compete with us on price, quality and service. Any of these competitive
factors may materially adversely affect our business, financial condition or results of operations.
Negative
publicity relating to one of our restaurants could reduce sales at some or all of our other restaurants.
Our
success is dependent in part upon our ability to maintain and enhance the value of our brand and consumers’ connection to our brand.
We may, from time to time, be faced with negative publicity relating to food quality, restaurant facilities, guest complaints or litigation
alleging illness or injury, health inspection scores, integrity of our or our suppliers’ food processing, employee relationships
or other matters, regardless of whether the allegations are valid or whether we are held to be responsible. The negative impact of adverse
publicity relating to one restaurant may extend far beyond the restaurant involved to affect some or all of our other restaurants, thereby
causing an adverse effect on our business, financial condition or results of operations. A similar risk exists with respect to unrelated
food service businesses, if consumers associate those businesses with our own operations.
The
considerable expansion in the use of social media over recent years can further amplify any negative publicity that could be generated
by such incidents. Many social media platforms immediately publish the content their subscribers and participants post, often without
filters or checks on accuracy of the content posted. Information posted on such platforms may be adverse to our interests and/or may
be inaccurate. The dissemination of inaccurate or irresponsible information online could harm our business, reputation, prospects, financial
condition, or results of operations, regardless of the information’s accuracy. The damage may be immediate without affording us
an opportunity for redress or correction.
Additionally,
employee claims against us based on, among other things, wage and hour violations, discrimination, harassment or wrongful termination
may also create negative publicity that could adversely affect us and divert our financial and management resources that would otherwise
be used to benefit the future performance of our operations. A significant increase in the number of these claims or an increase in the
number of successful claims could materially adversely affect our business, financial condition or results of operations. Consumer demand
for our restaurants and our brand’s value could diminish significantly if any such incidents or other matters create negative publicity
or otherwise erode consumer confidence in us or our restaurants, which would likely result in lower sales and could materially adversely
affect our business, financial condition or results of operations.
Food
safety and foodborne illness concerns could have an adverse effect on our business, financial condition or results of operations.
We
cannot guarantee that our internal controls and training will be fully effective in preventing all food safety issues at our restaurants,
including any occurrences of foodborne illnesses such as salmonella, E. coli and hepatitis A. In addition, there is no guarantee that
our restaurant locations will maintain the high levels of internal controls and training we require at our restaurants. Furthermore,
we rely on third-party vendors, making it difficult to monitor food safety compliance and increasing the risk that foodborne illness
would affect multiple locations rather than a single restaurant. Some foodborne illness incidents could be caused by third-party vendors
and transporters outside of our control. New illnesses resistant to our current precautions may develop in the future, or diseases with
long incubation periods could arise, that could give rise to claims or allegations on a retroactive basis. One or more instances of foodborne
illness in any of our restaurants or markets or related to food products we sell could negatively affect our restaurant sales nationwide
if highly publicized on national media outlets or through social media. This risk exists even if it were later determined that the illness
was wrongly attributed to us or one of our restaurants. A number of other restaurant chains have experienced incidents related to foodborne
illnesses that have had a material adverse effect on their operations. The occurrence of a similar incident at one or more of our restaurants,
or negative publicity or public speculation about an incident, could materially adversely affect our business, financial condition or
results of operations.
Governmental
regulation may adversely affect our ability to open new restaurants or otherwise adversely affect our business, financial condition or
results of operations.
We
are subject to various federal, state and local regulations. Our restaurants are subject to state and local licensing and regulation
by health, alcoholic beverage, sanitation, food and occupational safety and other agencies. We may experience material difficulties or
failures in obtaining the necessary licenses, approvals or permits for our restaurants, which could delay planned restaurant openings
or affect the operations at our existing restaurants. In addition, stringent and varied requirements of local regulators with respect
to zoning, land use and environmental factors could delay or prevent development of new restaurants in particular locations.
We
are subject to the U.S. Americans with Disabilities Act and similar state laws that give civil rights protections to individuals with
disabilities in the context of employment, public accommodations and other areas, including our restaurants. We may in the future have
to modify restaurants, for example, by adding access ramps or redesigning certain architectural fixtures, to provide service to or make
reasonable accommodations for disabled persons. The expenses associated with these modifications could be material.
Our
operations are also subject to the U.S. Occupational Safety and Health Act, which governs worker health and safety, the U.S. Fair Labor
Standards Act, which governs such matters as minimum wages and overtime, and a variety of similar federal, state and local laws that
govern these and other employment law matters. In addition, federal, state and local proposals related to paid sick leave or similar
matters could, if implemented, materially adversely affect our business, financial condition or results of operations.
We
rely significantly on certain vendors and suppliers, which could adversely affect our business, financial condition or results of operations.
Our
ability to maintain consistent price and quality throughout our restaurants depends in part upon our ability to acquire specified food
products and supplies in sufficient quantities from third-party vendors and suppliers at a reasonable cost. We do not control the businesses
of our vendors and suppliers and our efforts to specify and monitor the standards under which they perform may not be successful. Furthermore,
certain food items are perishable, and we have limited control over whether these items will be delivered to us in appropriate condition
for use in our restaurants. If any of our vendors or other suppliers are unable to fulfill their obligations to our standards, or if
we are unable to find replacement providers in the event of a supply or service disruption, we could encounter supply shortages and incur
higher costs to secure adequate supplies, which could materially adversely affect our business, financial condition or results of operations.
In
addition, we use various third-party vendors to provide, support and maintain most of our management information systems. We also outsource
certain accounting, payroll and human resource functions to business process service providers. The failure of such vendors to fulfill
their obligations could disrupt our operations. Additionally, any changes we may make to the services we obtain from our vendors, or
new vendors we employ, may disrupt our operations. These disruptions could materially adversely affect our business, financial condition
or results of operations.
Continued
supply chain disruptions and other forces beyond our control, and resulting changes in food and supply costs have and could continue
to adversely affect our business, financial condition or results of operations.
Our
profitability depends in part on our ability to anticipate and react to changes in food and supply costs, especially in light of recent
supply chain disruptions. We believe we have experienced higher costs due to increased commodity prices and challenges sourcing our supplies
due in part to global supply chain disruptions. For example, we believe that the cost of certain essential supplies (i.e. gloves and
canola oil) has increased as a result of lower supply attributable to supply chain disruptions. Shortages or interruptions in the availability
of certain supplies caused by unanticipated demand, problems in production or distribution, food contamination, inclement weather or
other conditions beyond our control could also adversely affect the availability, quality and cost of our ingredients, which could harm
our operations. Although historically and as of December 31, 2022, global supply chain disruptions have not materially adversely affected
our business, a substantial increase in the cost of, or inability to procure, the food products most critical to our menu, such as canola
oil, rice, meats, fish and other seafood, as well as fresh vegetables, could materially and adversely affect our business, financial
condition or results from operations. Although we try to manage the impact that these fluctuations have on our operating results by,
for example, diversifying our suppliers, we remain susceptible to continued increases in food and other essential supply costs as a result
of factors beyond our control, such as the current supply chain interruptions, general economic conditions, seasonal fluctuations, weather
conditions, demand, food safety concerns, generalized infectious diseases, product recalls and government regulations.
If
any of our distributors or suppliers performs inadequately, or our distribution or supply relationships are disrupted for any reason,
our business, financial condition, results of operations or cash flows could be adversely affected. If we cannot replace or engage distributors
or suppliers who meet our specifications in a short period of time, that could increase our expenses and cause shortages of food and
other items at our restaurants, which could cause a restaurant to remove items from its menu. If that were to happen, affected restaurants
could experience significant reductions in sales during the shortage or thereafter, if guests change their dining habits as a result.
In addition, because we provide moderately priced food, we may choose not to, or may be unable to, pass along commodity price increases
to consumers. These potential changes in food and supply costs could materially adversely affect our business, financial condition or
results of operations.
Our
operations may be subject to the effects of a rising rate of inflation which may adversely impact our financial condition and results
of operations.
Inflation
in the United States began to rise significantly in the second half of the calendar year 2021. This is primarily believed to be the result
of the economic impacts from the COVID-19 pandemic, including the global supply chain disruptions, strong economic recovery and associated
widespread demand for goods, government stimulus packages and the impacts of the many government programs which has resulted in increases
to the money supply as well to fund some of these programs and the associated spending to fund them which has created large government
deficits in almost every jurisdiction. Global supply chain disruptions have resulted in shortages in materials and services. Such shortages
have resulted in inflationary cost increases for labor, materials, and services, and could continue to cause costs to increase as well
as scarcity of certain products. In addition, inflation is often accompanied by higher interest rates. The impact of COVID-19 may increase
uncertainty in the global financial markets, as well as the possibility of high inflation and extended economic downturn, which could
reduce our ability to incur debt or access capital and impact our results of operations and financial condition even after these conditions
improve.
We
are experiencing inflationary pressures in certain areas of our business, including with respect to food and beverage costs, energy costs
and labor costs, however, we cannot predict any future trends in the rate of inflation or associated increases in our operating costs
and how that may impact our business. Historically and as of the date hereof, inflation has not had a material effect on our results
of operations. Severe increases in inflation, however, could affect the global and U.S. economies and could have a materially adverse
impact on our business, financial condition or results of operations. Furthermore, future volatile, negative, or uncertain economic conditions
and recessionary periods or periods of significant inflation may adversely impact consumer spending at our restaurants, which would materially
adversely affect our business, financial condition and results of operations. Such effects can be especially pronounced during periods
of economic contraction or slow economic growth. To the extent that we are unable to offset such cost inflation through increased menu
prices or increased efficiencies in our operations and cost savings, there could be a negative impact on our business, sales and margin
performance, net income, cash flows and the trading price of our common shares.
Failure
to receive frequent deliveries of fresh food ingredients and other supplies could harm our business, financial condition or results of
operations.
Our
ability to maintain our menu depends in part on our ability to acquire ingredients that meet our specifications from reliable suppliers.
To date, notwithstanding the current supply chain disruptions which we believe have attributed to increased costs, deliveries have been
consistent and not a source of material disruption to our business. However, shortages or interruptions in the supply of ingredients
caused by unanticipated demand, problems in production or distribution, food contamination, inclement weather or other conditions could
adversely affect the availability and quality of our ingredients in the future, which could harm our business, financial condition or
results of operations. If any of our distributors or suppliers performs inadequately, or our distribution or supply relationships are
materially disrupted for any reason, our business, financial condition or results of operations could be adversely affected. If we cannot
replace or engage distributors or suppliers who meet our specifications in a short period of time, that could increase our expenses and
cause shortages of food and other items at our restaurants, which could cause a restaurant to remove items from its menu. If that were
to happen, affected restaurants could experience significant reductions in sales during the shortage or thereafter, if guests change
their dining habits as a result. This reduction in sales could materially adversely affect our business, financial condition or results
of operations.
In
addition, our approach to competing in the restaurant industry depends in large part on our continued ability to provide authentic and
traditional Japanese cuisine that is free from artificial ingredients. As we increase our use of these ingredients, the ability of our
suppliers to expand output or otherwise increase their supplies to meet our needs may be constrained. We could face difficulties to obtain
a sufficient and consistent supply of these ingredients on a cost-effective basis.
Labor
disputes may disrupt our operations and affect our profitability, thereby causing a material adverse effect on our business, financial
condition or results of operations.
As
an employer, we are presently, and may in the future be, subject to various employment-related claims, such as individual or class actions
or government enforcement actions relating to alleged employment discrimination, employee classification and related withholding, wage-hour,
labor standards or healthcare and benefit issues. Any future actions if brought against us and successful in whole or in part, may affect
our ability to compete or could materially adversely affect our business, financial condition or results of operations.
The
minimum wage, particularly in California, continues to increase and is subject to factors outside of our control.
We
have a substantial number of hourly employees who are paid wage rates based on the applicable federal or state minimum wage. Since January
1, 2022, the State of California has a minimum wage of $15.00 per hour. Moreover, municipalities may set minimum wages above the applicable
state standards, including in the municipalities in which we operate.
The
federal minimum wage has been $7.25 per hour since July 24, 2009. Any of federally-mandated, state-mandated or municipality-mandated
minimum wages may be raised in the future which could have a materially adverse effect on our business, financial condition or results
of operations. If menu prices are increased by us to cover increased labor costs, the higher prices could adversely affect sales and
thereby reduce our margins and adversely affect our business, financial condition or results of operations.
Changes
in employment laws may adversely affect our business, financial condition, results of operations or cash flow.
Various
federal and state labor laws govern the relationship with our employees and affect operating costs. These laws include employee classification
as exempt/non-exempt for overtime and other purposes, minimum wage requirements, tips and gratuity payments, unemployment tax rates,
workers’ compensation rates, immigration status and other wage and benefit requirements. Significant additional government-imposed
increases in the following areas could materially affect our business, financial condition, operating results or cash flow:
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minimum
wages; |
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tips
and gratuities; |
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mandatory
health benefits; |
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vacation
accruals; |
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paid
leaves of absence, including paid sick leave; and |
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tax
reporting. |
If
we face labor shortages, increased labor costs or unionization activities, our growth, business, financial condition and operating results
could be adversely affected.
Labor
is a primary component in the cost of operating our restaurants. We are currently experiencing labor shortages which is a risk that we
share with our competitors. Availability of qualified employees is scarce. Additionally, labor costs have increased due to recent minimum
wage increases in California and the fact that we employ fewer employees who are working extended hours and therefore we are experiencing
an increase of overtime payable to such employees, If we continue to face labor shortages or increased labor costs because of these factors
or as a result of increased competition for employees, higher employee turnover rates, additional increases in federal, state or local
minimum wage rates or other employee benefits costs (including costs associated with health insurance coverage), our operating expenses
could increase and our growth could be adversely affected. In addition, our success depends in part upon our ability to attract, motivate
and retain a sufficient number of well-qualified restaurant operators and management personnel, as well as a sufficient number of other
qualified employees, to keep pace with our expansion schedule. Qualified individuals needed to fill these positions are in short supply
in some geographic areas. In addition, restaurants have traditionally experienced relatively high employee turnover rates. We are experiencing
problems in recruiting and retaining employees, and our ability to recruit and retain such individuals may delay the planned openings
of new restaurants or result in higher employee turnover in existing restaurants, which could have a material adverse effect on our business,
financial condition or results of operations.
If
we are unable to recruit and retain sufficiently qualified individuals, our business and our growth could be adversely affected, thereby
adversely affecting or business, financial condition or results of operations. Competition for these employees could require us to pay
higher wages, which could result in higher labor costs. In addition, additional increases in the minimum wage would increase our labor
costs. Additionally, costs associated with workers’ compensation are rising, and these costs may continue to rise in the future.
We may be unable to increase our menu prices in order to pass these increased labor costs on to consumers, in which case our margins
would be negatively affected, which could materially adversely affect our business, financial condition or results of operations.
Although
none of our employees are currently covered under collective bargaining agreements, our employees may elect to be represented by labor
unions in the future. If a significant number of our employees were to become unionized and collective bargaining agreement terms were
significantly different from our current compensation arrangements, it could adversely affect our business, financial condition or results
of operations.
Our
business could be adversely affected by a failure to obtain visas or work permits or to properly verify the employment eligibility of
our employees.
Although
we require all workers to provide us with government-specified documentation evidencing their employment eligibility, some of our employees
may, without our knowledge, be unauthorized workers. Unauthorized workers are subject to deportation and may subject us to fines or penalties,
and if any of our workers are found to be unauthorized, we could experience adverse publicity that may negatively impact our brand and
may make it more difficult to hire and keep qualified employees. Termination of a significant number of employees who are unauthorized
employees may disrupt our operations, cause temporary increases in our labor costs as we train new employees and result in adverse publicity.
We could also become subject to fines, penalties and other costs related to claims that we did not fully comply with all recordkeeping
obligations of federal and state immigration compliance laws. These factors could materially adversely affect our business, financial
condition or results of operations.
Compliance
with environmental laws may negatively affect our business.
We
are subject to federal, state and local laws and regulations concerning waste disposal, pollution, protection of the environment, and
the presence, discharge, storage, handling, release and disposal of, and exposure to, hazardous or toxic substances. These environmental
laws provide for significant fines and penalties for noncompliance and liabilities for remediation, sometimes without regard to whether
the owner or operator of the property knew of, or was responsible for, the release or presence of hazardous toxic substances. Third parties
may also make claims against owners or operators of properties for personal injuries and property damage associated with releases of,
or actual or alleged exposure to, such hazardous or toxic substances at, on or from our restaurants. Environmental conditions relating
to releases of hazardous substances at prior, existing or future restaurant sites could materially adversely affect our business, financial
condition or results of operations. Further, environmental laws, and the administration, interpretation and enforcement thereof, are
subject to change and may become more stringent in the future, each of which could materially adversely affect our business, financial
condition or results of operations.
Changes
in economic conditions could materially affect our ability to maintain or increase sales at our restaurants or open new restaurants.
The
restaurant industry depends on consumer discretionary spending. The United States in general or the specific markets in which we operate
may suffer from depressed economic activity, recessionary economic cycles, higher fuel or energy costs, low consumer confidence, high
levels of unemployment, reduced home values, increases in home foreclosures, investment losses, personal bankruptcies, reduced access
to credit or other economic factors that may affect consumers’ discretionary spending. Sales in our restaurants could decline if
consumers choose to dine out less frequently or reduce the amount they spend on meals while dining out. Negative economic conditions
might cause consumers to make long-term changes to their discretionary spending behavior, including dining out less frequently on a permanent
basis. If restaurant sales decrease, our profitability could decline as we spread fixed costs across a lower level of sales. Reductions
in staff levels, asset impairment charges and potential restaurant closures could result from prolonged negative restaurant sales, which
could materially adversely affect our business, financial condition or results of operations.
New
information or attitudes regarding diet and health could result in changes in regulations and consumer consumption habits that could
adversely affect our business, financial condition or results of operations.
Changes
in attitudes regarding diet and health or new information regarding the adverse health effects of consuming certain foods could result
in changes in government regulation and consumer eating habits that may impact our business, financial condition or results of operations.
These changes have resulted in, and may continue to result in, laws and regulations requiring us to disclose the nutritional content
of our food offerings, and they have resulted in, and may continue to result in, laws and regulations affecting permissible ingredients
and menu offerings. For example, a number of jurisdictions have enacted menu labeling laws requiring multi-unit restaurant operators
to disclose to consumers certain nutritional information, or have enacted legislation restricting the use of certain types of ingredients
in restaurants. These requirements may be different or inconsistent with requirements we are subject to under the Patient Protection
and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act, collectively, the “ACA,”
which establishes a uniform, federal requirement for certain restaurants to post nutritional information on their menus. Specifically,
the ACA requires chain restaurants with 20 or more locations operating under the same name and offering substantially the same menus
to publish the total number of calories of standard menu items on menus and menu boards, along with a statement that puts this calorie
information in the context of a total daily calorie intake. The ACA also requires covered restaurants to provide to consumers, upon request,
a written summary of detailed nutritional information for each standard menu item, and to provide a statement on menus and menu boards
about the availability of this information upon request. Unfavorable publicity about, or guests’ reactions to, our menu ingredients,
the size of our portions or the nutritional content of our menu items could negatively influence the demand for our offerings, thereby
adversely affecting our business, financial condition or results of operations.
Compliance
with current and future laws and regulations regarding the ingredients and nutritional content of our menu items may be costly and time-consuming.
Additionally, if consumer health regulations or consumer eating habits change significantly, we may be required to modify or discontinue
certain menu items, and we may experience higher costs associated with the implementation of those changes, as well as adversely affect
the attractiveness of our restaurants to new or returning guests. We cannot predict the impact of any new nutrition labeling requirements.
The risks and costs associated with nutritional disclosures on our menus could also impact our operations, particularly given differences
among applicable legal requirements and practices within the restaurant industry with respect to testing and disclosure, ordinary variations
in food preparation among our own restaurants, and the need to rely on the accuracy and completeness of nutritional information obtained
from third-party suppliers.
We
may not be able to effectively respond to changes in consumer health perceptions or successfully implement the nutrient content disclosure
requirements and to adapt our menu offerings to trends in eating habits. The imposition of menu labeling laws and an inability to keep
up with consumer eating habits could materially adversely affect our business, financial condition or results of operations, as well
as our position within the restaurant industry in general.
Failure
to comply with antibribery or anticorruption laws could adversely affect our reputation, business, financial condition or results of
operations.
The
U.S. Foreign Corrupt Practices Act and other similar applicable laws prohibiting bribery of government officials and other corrupt practices
are the subject of increasing emphasis and enforcement around the world. Although we have implemented policies and procedures designed
to promote compliance with these laws, there can be no assurance that our employees, contractors, agents, or other third parties will
not take actions in violation of our policies or applicable law. Any such violations or suspected violations could subject us to civil
or criminal penalties, including substantial fines and significant investigation costs, and could also materially damage our reputation,
brands, international expansion efforts and growth prospects, business, financial condition and results of operations. Publicity relating
to any noncompliance or alleged noncompliance could also harm our reputation and adversely affect our business, financial condition or
results of operations.
We
may need capital in the future, and we may not be able to raise that capital on favorable terms.
Developing
our business will require significant capital in the future. To meet our capital needs, we expect to rely on equipment financing and
facility improvements, cash flows from operations, the proceeds from the IPO, future offerings and other third-party financing. Third-party
financing in the future may not, however, be available on terms favorable to us, or at all. Our ability to obtain additional funding
will be subject to various factors, including market conditions, our operating performance, lender sentiment. These factors may make
the timing, amount, or terms and conditions of additional financings unattractive. Our inability to raise capital could impede our growth
and could materially adversely affect our business, financial condition or results of operations.
The
Company, from time to time, has received borrowings from a related party controlled by James Chae, the Company’s Chairman and Chief
Executive Officer, which may become repayable on demand. Any unexpected calls for repayment of a significant amount of such borrowings
may adversely affect our business.
The
Company, from time to time, has received unsecured borrowings from James Chae and his affiliate APIIS Financial, Inc., a company 100%
owned and controlled by our Chairman and Chief Executive Officer, Mr. Chae, which is unsecured, non-interest bearing, and is repayable
on demand. As of December 31, 2022 and December 31, 2021, the balance was $172,720 and $ 1,448,913, respectively. If James Chae
or his affiliate APIIS Financial, Inc. chooses to call for repayment of a significant of such borrowings, the Company may need to use
the net proceeds from the IPO, which may adversely impact our operations. Any failure to service such indebtedness or comply with any
such obligations may also cause us to incur legal fees if lender brings an action for breach of contract, or otherwise adversely affect
our business, financial condition, results of operation and prospects.
We
are subject to all of the risks associated with leasing space subject to long-term non-cancelable leases.
We
do not own any real property. Payments under our operating leases account for a significant portion of our operating expenses and we
expect the new restaurants we open in the future will similarly be leased. The majority of our operating leases have lease terms of 10
years, inclusive of customary extensions which are at the option of the Company. Most of our leases require a fixed annual rent which
generally increases each year, and some require the payment of additional rent if restaurant sales exceed a negotiated amount. Generally,
our leases are “net” leases, which require us to pay all of the cost of insurance, taxes, maintenance and utilities. We generally
cannot cancel these leases. Additional sites that we lease are likely to be subject to similar long-term non-cancelable leases. If an
existing or future restaurant is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations
under the applicable lease including, among other things, paying the base rent for the balance of the lease term. In addition, as each
of our leases expires, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to
pay increased occupancy costs or to close restaurants in desirable locations. If we fail to negotiate renewals, we may have to dispose
of assets at such restaurant locations and incur closure costs as well as impairment of property and equipment. Furthermore, if we fail
to negotiate renewals, we may incur additional costs associated with moving transferable furniture, fixtures and equipment. These potential
increased occupancy and moving costs, as well as closures of restaurants, could materially adversely affect our business, financial condition
or results of operations.
Macroeconomic
conditions, including economic downturns, may cause landlords of our leases to be unable to obtain financing or remain in good standing
under their existing financing arrangements, resulting in failures to pay required tenant improvement allowances or satisfy other lease
covenants to us. In addition, tenants at shopping centers in which we are located or have executed leases, or to which our locations
are near, may fail to open or may cease operations. Decreases in total tenant occupancy in shopping centers in which we are located,
or to which our locations are near, may affect traffic at our restaurants. All of these factors could have a material adverse impact
on our business, financial condition or results of operations.
Delays
In Obtaining Construction Permits Can Have A Material Adverse Effect on Our Business.
We
typically are able to negotiate approximately 6 months to complete a construction/development of our stores before we have to make our
first lease payment. Construction/development of a new restaurant takes approximately 3 - 6 months once construction permits (e.g., Health
and City) are issued. Prior to the COVID-19 pandemic, permits took approximately 2 months to obtain. During the pandemic and as of December
31, 2022 , construction permits have been significantly delayed, causing us to incur lease payments prior to the opening of
such locations, which means prior to the generation of any revenues from such stores. A delay in construction permits has had a direct
impact on our ability to open our 3 stores currently under construction/development. We are also making lease payments on all 3 of such
stores. There can be no assurance that construction permits will be timely obtained on future stores, or that they will ever be obtained
(including with respect to the 3 stores under construction/development). There is also no assurance that we can successfully negotiate
an abatement on any of our existing non-cancelable leases to alleviate such costs, or that we will have the leverage to negotiate longer
periods before the first rental payment is required to be made on future leases. A significant increase in lease payments prior to opening
our stores could have a material adverse effect on our profitability and growth potential, since increased lease costs could cause us
to divert cash away from opening new stores. If we are unable to open new stores, we could be forced to cease operations.
We
may become involved in lawsuits involving Yoshiharu Holdings Co. as the owner of intellectual property, or us as a licensee of intellectual
property from Yoshiharu Holdings Co., to protect or enforce intellectual property rights, which could be expensive, time consuming, and
unsuccessful.
Third
parties may sue Yoshiharu Holdings Co., our wholly owned subsidiary, or us for alleged infringement of their proprietary rights. The
party claiming infringement might have greater resources than we do to pursue its claims, and we could be forced to incur substantial
costs and devote significant management resources to defend against such litigation, even if the claims are meritless and even if we
ultimately prevail. If the party claiming infringement were to prevail, we could be forced to pay significant damages, or enter into
expensive royalty or licensing arrangements with the prevailing party. In addition, any payments we are required to make, and any injunction
we are required to comply with as a result of such infringement, could harm our reputation and our business, financial condition or results
of operations.
Infringements
on Yoshiharu Holdings Co.’s intellectual property rights, including Yoshiharu Holdings Co.’s service marks and trade secrets,
could result in additional expense and could devalue our brand equity, as well as substantially affect our business, financial condition
or results of operations.
Other
parties may infringe on our intellectual property rights, including those which we develop or otherwise license to use, and may thereby
dilute our brand in the marketplace. Any such infringement of our intellectual property rights would also likely result in a commitment
of our time and resources to protect these rights through litigation or otherwise.
Our
business prospects depend in part on our ability to develop favorable consumer recognition of the Yoshiharu name. Although the “YOSHIHARU
RAMEN” word and design marks are federally registered marks owned by Yoshiharu Holdings Co., such marks could be imitated in ways
that we or Yoshiharu Holdings Co. cannot prevent. Alternatively, third parties may attempt to cause us to change our name or not operate
in a certain geographic region if our name is confusingly similar to their name. In addition, we rely on trade secrets, proprietary know-how,
concepts, and recipes, some of which we license from Yoshiharu Holdings Co. Our methods or Yoshiharu Holdings Co.’s methods of
protecting this information may not be adequate. Moreover, we or Yoshiharu Holdings Co. may face claims of misappropriation or infringement
of third parties’ rights that could interfere with our use of this information. Defending these claims may be costly and, if unsuccessful,
may prevent us from continuing to use this proprietary information in the future, and may result in a judgment or monetary damages. We
do not maintain confidentiality and non-competition agreements with all of our executives, key personnel, or suppliers. If competitors
independently develop or otherwise obtain access to the trade secrets, proprietary know-how, concepts, or recipes we rely upon to operate
our restaurants, some of which we license from Yoshiharu Holdings Co., the appeal of our restaurants could be significantly reduced and
our business, financial condition or results of operations could be adversely affected.
A
breach of security of confidential consumer information related to our electronic processing of credit and debit card transactions, as
well as a breach of security of our employee information, could substantially affect our reputation, business, financial condition of
results of operations.
The
majority of our restaurant sales are by credit or debit cards. Other restaurants and retailers have experienced security breaches in
which credit and debit card information has been stolen. We may in the future become subject to claims for purportedly fraudulent transactions
arising out of the actual or alleged theft of credit or debit card information, and we may also be subject to lawsuits or other proceedings
relating to these types of incidents. We may ultimately be held liable for the unauthorized use of a cardholder’s card number in
an illegal activity and be required by card issuers to pay charge-back fees. In addition, most states have enacted legislation requiring
notification of security breaches involving personal information, including credit and debit card information. Any such claim or proceeding
could cause us to incur significant unplanned expenses, which could have an adverse impact on our business, financial condition or results
of operations. Further, adverse publicity resulting from these allegations may have a material adverse effect on us and could substantially
affect our reputation and business, financial condition or results of operations.
In
addition, our business requires the collection, transmission and retention of large volumes of guest and employee data, including personally
identifiable information, in various information technology systems that we maintain and in those maintained by third parties with whom
we contract to provide services. The collection and use of such information is regulated at the federal and state levels, as well as
at the international level, in which regulatory requirements have been increasing. As our environment continues to evolve in the digital
age and reliance upon new technologies becomes more prevalent, it is imperative we secure the privacy and sensitive information we collect.
Failure to do so, whether through fault of our own information systems or those of outsourced third-party providers, could not only cause
us to fail to comply with these laws and regulations, but also could cause us to face litigation and penalties that could adversely affect
our business, financial condition or results of operations. Our brand’s reputation and image as an employer could also be harmed
by these types of security breaches or regulatory violations.
We
rely significantly on information technology, and any material failure, weakness, interruption or breach of security could prevent us
from effectively operating our business.
We
rely significantly on information systems, including point-of-sale processing in our restaurants for management of our supply chain,
payment of obligations, collection of cash, credit and debit card transactions and other processes and procedures. Our ability to efficiently
and effectively manage our business depends significantly on the reliability and capacity of these systems. Failures of these systems
to operate effectively, maintenance problems, upgrading or transitioning to new platforms, or a breach in security of these systems could
result in delays in customer service and reduce efficiency in our operations. Remediation of such problems could result in significant,
unplanned capital investments.
Our
marketing programs may not be successful, and our new menu items, advertising campaigns and restaurant designs and remodels may not generate
increased sales or profits.
We
incur costs and expend other resources in our marketing efforts on new menu items, advertising campaigns and restaurant designs and remodels
to raise brand awareness and attract and retain guests. These initiatives may not be successful, resulting in expenses incurred without
the benefit of higher sales. Additionally, some of our competitors have greater financial resources, which enable them to spend significantly
more on marketing and advertising and other initiatives than we are able to. Should our competitors increase spending on marketing and
advertising and other initiatives or our marketing funds decrease for any reason, or should our advertising, promotions, new menu items
and restaurant designs and remodels be less effective than our competitors, there could be a material adverse effect on our business,
financial condition or results of operations.
Our
inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could materially adversely
impact our business, financial condition or results of operations.
Our
marketing efforts rely heavily on the use of social media. In recent years, there has been a marked increase in the use of social media
platforms, including weblogs (blogs), mini-blogs, chat platforms, social media websites, and other forms of Internet-based communications
which allow individuals access to a broad audience of consumers and other interested persons. Many of our competitors are expanding their
use of social media, and new social media platforms are rapidly being developed, potentially making more traditional social media platforms
obsolete. As a result, we need to continuously innovate and develop our social media strategies in order to maintain broad appeal with
guests and brand relevance. We also continue to invest in other digital marketing initiatives that allow us to reach our guests across
multiple digital channels and build their awareness of, engagement with, and loyalty to our brand. These initiatives may not be successful,
resulting in expenses incurred without the benefit of higher sales or increased brand recognition.
We
could be party to litigation that could adversely affect us by distracting management, increasing our expenses or subjecting us to material
money damages and other remedies.
Our
guests may file complaints or lawsuits against us alleging we caused an illness or injury they suffered at or after a visit to our restaurants,
or that we have problems with food quality or operations. We may also be subject to a variety of other claims arising in the ordinary
course of our business, including personal injury claims, contract claims and claims alleging violations of federal and state law regarding
workplace and employment matters, equal opportunity, discrimination and similar matters, and we are presently subject to class action
and other lawsuits with regard to certain of these matters and could become subject to additional class action or other lawsuits related
to these or different matters in the future. Regardless of whether any claims against us are valid, or whether we are ultimately held
liable, claims may be expensive to defend and may divert time and money away from our operations and hurt our performance. A judgment
in excess of our insurance coverage for any claims could materially and adversely affect our business, financial condition or results
of operations. Any adverse publicity resulting from these allegations may also materially and adversely affect our reputation or prospects,
which in turn could materially adversely affect our business, financial condition or results of operations.
We
are subject to state and local “dram shop” statutes, which may subject us to uninsured liabilities. These statutes generally
allow a person injured by an intoxicated person to recover damages from an establishment that wrongfully served alcoholic beverages to
the intoxicated person. Because a plaintiff may seek punitive damages, which may not be fully covered by insurance, this type of action
could have an adverse impact on our business, financial condition or results of operations. A judgment in such an action significantly
in excess of, or not covered by, our insurance coverage could adversely affect our business, financial condition or results of operations.
Further, adverse publicity resulting from any such allegations may adversely affect our business, financial condition or results of operations.
Our
current insurance may not provide adequate levels of coverage against claims.
There
are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure. Such losses
could have a material adverse effect on our business, financial condition or results of operations. In addition, our current insurance
policies may not be adequate to protect us from liabilities that we incur in our business in areas such as workers’ compensation,
general liability, auto and property. In the future, our insurance premiums may increase, and we may not be able to obtain similar levels
of insurance on reasonable terms, or at all. Any substantial inadequacy of, or inability to obtain, insurance coverage could materially
adversely affect our business, financial condition and results of operations. As a public company, we intend to obtain directors’
and officers’ insurance. While we expect to obtain such coverage, we may not be able to obtain such coverage at all or at a reasonable
cost now or in the future. Failure to obtain and maintain adequate directors’ and officers’ insurance would likely adversely
affect our ability to attract and retain qualified officers and directors.
Failure
to obtain and maintain required licenses and permits or to comply with alcoholic beverage or food control regulations could lead to the
loss of our liquor and food service licenses and, thereby, harm our business, financial condition or results of operations.
The
restaurant industry is subject to various federal, state and local government regulations, including those relating to the sale of food
and alcoholic beverages. Such regulations are subject to change from time to time. The failure to obtain and maintain licenses, permits
and approvals relating to such regulations could adversely affect our business, financial condition or results of operations. Typically,
licenses must be renewed annually and may be revoked, suspended or denied renewal for cause at any time if governmental authorities determine
that our conduct violates applicable regulations. Difficulties or failure to maintain or obtain the required licenses and approvals could
adversely affect our existing restaurants and delay or result in our decision to cancel the opening of new restaurants, which would adversely
affect our business, financial condition or results of operations.
Alcoholic
beverage control regulations generally require our restaurants to apply to a state authority and, in certain locations, county or municipal
authorities for a license that must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control
regulations relate to numerous aspects of daily operations of our restaurants, including minimum age of patrons and employees, hours
of operation, advertising, trade practices, wholesale purchasing, other relationships with alcohol manufacturers, wholesalers and distributors,
inventory control and handling, storage and dispensing of alcoholic beverages. Any future failure to comply with these regulations and
obtain or retain liquor licenses could adversely affect our business, financial condition or results of operations.
If
we fail to develop and maintain an effective system of internal control over financial reporting, we may not be able to accurately report
our financial results in a timely manner, which may adversely affect investor confidence in our company.
If
material weaknesses or control deficiencies occur in the future, we may be unable to report our financial results accurately on a timely
basis, which could cause our reported financial results to be materially misstated and result in the loss of investor confidence or delisting
and cause the market price of our common stock to decline.
We
have not performed an evaluation of our internal control over financial reporting, such as required by Section 404 of the Sarbanes-Oxley
Act, nor have we engaged our independent registered public accounting firm to perform an audit of our internal control over financial
reporting as of any balance sheet date or for any period reported in our financial statements.
Changes
to accounting rules or regulations may adversely affect our business, financial condition or results of operations.
Changes
to existing accounting rules or regulations may impact our business, financial condition or results of operations. Other new accounting
rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future.
For instance, accounting regulatory authorities have recently issued new accounting rules which require lessees to capitalize operating
leases in their financial statements in the next few years. When adopted, such change would require us to record significant operating
lease obligations on our balance sheet and make other changes to our financial statements. This and other future changes to accounting
rules or regulations could materially adversely affect our business, financial condition or results of operations.
We
will incur increased costs as a result of being a public company.
As
a public company, we expect to incur significant legal, accounting and other expenses that we did not incur as a private company, particularly
after we are no longer an “emerging growth company” as defined under the JOBS Act. In addition, new and changing laws, regulations
and standards relating to corporate governance and public disclosure, including the Dodd-Frank Act and the rules and regulations promulgated
and to be promulgated thereunder, as well as under the Sarbanes-Oxley Act and the JOBS Act, have created uncertainty for public companies
and increased costs and time that boards of directors and management must devote to complying with these rules and regulations. The Sarbanes-Oxley
Act and related rules of the SEC and the Nasdaq Stock Market regulate corporate governance practices of public companies. We expect compliance
with these rules and regulations to increase our legal and financial compliance costs and lead to a diversion of management time and
attention from sales-generating activities. For example, we will be required to adopt new internal controls and disclosure controls and
procedures. In addition, we will incur additional expenses associated with our SEC reporting requirements and increased compensation
for our management team. We cannot predict or estimate the amount of additional costs we will incur as a public company or the specific
timing of such costs.
We
are an “emerging growth company,” and we cannot be certain if the reduced reporting and disclosure requirements applicable
to emerging growth companies will make our common stock less attractive to investors.
For
as long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions
from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.”
These exceptions provide for, but are not limited to, relief from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act, less extensive disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions
from the requirements to hold a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments
not previously approved and an extended transition period for complying with new or revised accounting standards. We may take advantage
of these reporting exemptions until we are no longer an “emerging growth company.” We will remain an “emerging growth
company” until the earliest of: (i) the last day of the fiscal year in which we have $1.07 billion or more in annual gross revenues;
(ii) the date on which we become a “large accelerated filer” (which means the year-end at which the total market value of
our common equity securities held by non-affiliates is $700 million or more as of the last business day of our most recently completed
second fiscal quarter); (iii) the date on which we have issued more than $1 billion of non-convertible debt securities over a three-year
period; and (iv) the last day of the fiscal year following the fifth anniversary of our initial public offering. We cannot predict if
investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock
to be less attractive as a result, there may be a less active trading market for our common stock and the market price of our common
stock may be more volatile.
Our
management does not have experience managing a U.S. public company and our current resources may not be sufficient to fulfill our public
company obligations.
Following
the closing of the IPO, we are subject to various regulatory requirements, including those of the SEC and Nasdaq Stock Market. These
requirements include recordkeeping, financial reporting and corporate governance rules and regulations. Our management team does not
have experience in managing a U.S. public company and, historically, has not had the resources typically found in a public company. Our
internal infrastructure may not be adequate to support our increased reporting obligations and we may be unable to hire, train or retain
necessary staff and may be reliant on engaging outside consultants or professionals to overcome our lack of experience or employees.
Our business, financial condition or results of operations could be adversely affected if our internal infrastructure is inadequate,
including if we are unable to engage outside consultants or are otherwise unable to fulfill our public company obligations.
Pursuant
to the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal
control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act for so long as we are an “emerging growth company.”
Section
404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting,
starting with the second annual report that we file with the SEC as a public company, and generally requires in the same report a report
by our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. However,
under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal
control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until we are no longer an “emerging growth company.”
We will be an “emerging growth company” until the earliest of: (i) the last day of the fiscal year in which we have $1.07
billion or more in annual gross revenues; (ii) the date on which we become a “large accelerated filer” (which means the year-end
at which the total market value of our common equity securities held by non-affiliates is $700 million or more as of the last business
day of our most recently completed second fiscal quarter); (iii) the date on which we have issued more than $1 billion of non-convertible
debt securities over a three-year period; and (iv) the last day of the fiscal year following the fifth anniversary of our initial public
offering.
In
addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended
transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. An “emerging
growth company” can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to
private companies. However, we are choosing to “opt out” of such extended transition period and, as a result, we will comply
with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth
companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new
or revised accounting standards is irrevocable.
The
ongoing COVID-19 pandemic has adversely affected, and may continue to adversely affect, our operations, financial condition, liquidity
and financial results.
In
March 2020, the World Health Organization declared the novel strain of coronavirus COVID-19 a global pandemic. For the past two and one-half
years, this contagious virus, has continued to spread and has adversely affected workforces, customers, economies and financial markets
globally. In response to this outbreak, many state and local authorities mandated the temporary closure of non-essential businesses and
dine-in restaurant activity or limited indoor dining capacities. COVID-19 and the government measures taken to control it have caused
a significant disruption to our business operation. As of the filing date of this Annual Report on Form 10-K, all of our restaurants
are operating at 100% indoor dining capacity; however, there can be no assurance that developments with respect to the COVID-19 pandemic
and government measures taken to control it will not adversely affect our operations and financial results.
Additionally,
consumer behavior has changed and may fundamentally change as a result of COVID-19 in both the near and long term and such change may
pose significant challenges to our current service and business models. Traffic in restaurants, including ours, has been affected and
may be materially and adversely affected with more consumers relying on off-premises orders. All of this could materially and adversely
impact sales at our restaurants and our growth prospects. We have made adjustments to our restaurant operations due to the COVID-19 pandemic
and may have to re-design our service and business models to accommodate consumers’ changed behavior patterns. Any such attempted
effort could result in capital expenditures, business disruption and lower margin sales, and may not be successful in growing our profitability.
In
addition to the COVID-19 pandemic, the United States may experience in the future, outbreaks of other viruses, such as norovirus, the
bird/avian flu or other diseases. As we have experienced with the COVID-19 pandemic, if a regional or global health pandemic occurs,
depending upon its location, duration and severity, our business could be severely affected.