Kura Sushi USA(KRUS) - 2020 Q4 - Annual Report

Part I Business Kura Sushi USA, a tech-enabled Japanese restaurant chain, navigates COVID-19 impacts with a focus on growth and proprietary technology - Kura Sushi USA is a subsidiary of Kura Sushi, Inc. ("Kura Japan"), a Japanese revolving sushi chain with over 450 restaurants. As of the filing date, Kura Sushi USA operates 28 restaurants across six states[24][25] - The COVID-19 pandemic significantly disrupted business operations, leading to the temporary closure of all 25 restaurants on March 18, 2020. Reopenings occurred at reduced capacities, causing a substantial decline in sales for fiscal year 2020[25][28] - The company's growth strategy aims for a 20% average annual restaurant growth rate over the next five years, with a long-term potential for over 290 restaurants in the U.S. This will be pursued by expanding in existing markets and entering new ones[36] - The company relies heavily on two main distributors, JFC International Inc. and Wismettac Asian Foods, Inc., which accounted for approximately 59% and 27% of total food and beverage costs in fiscal year 2020, respectively[60][61] Company Overview and COVID-19 Impact Kura Sushi USA, a technology-enabled Japanese restaurant concept, faced significant negative impacts from the COVID-19 pandemic - On March 18, 2020, the company temporarily closed all 25 of its restaurants due to the COVID-19 pandemic[25] - As of the filing date, out of 28 restaurants, 12 were operating with reduced indoor dining (25-75% capacity), 15 with outdoor dining or takeout only, and one was temporarily closed[25] - In response to COVID-19, safety measures were enhanced, including increased sanitation, employee health screenings, and the temporary suspension of the revolving conveyor belt in California restaurants[27] Our Strengths and Growth Strategies The company leverages its unique dining experience and disciplined expansion to drive growth and profitability - The "Kura Experience" is a key strength, featuring a revolving conveyor belt, on-demand ordering via touch screen, and a Bikkura-Pon rewards system that dispenses toys after a certain number of plates are consumed[33] - The company aims for a 20% average annual restaurant growth rate over the next five years, with a long-term potential of over 290 restaurants in the U.S[36] - To drive comparable sales, the company is focusing on increasing brand awareness, offering new menu items, enhancing its rewards program, and growing off-premises sales through online ordering and third-party delivery[36] Site Development, Expansion, and Design The company employs a disciplined site selection process and remote management system to support its expansion strategy - The real estate strategy targets high-traffic retail centers, considering factors like population density, visibility, and proximity to shopping areas and office parks[41] - The company utilizes a remote management system with 20-30 cameras per restaurant to monitor operations in real-time from its headquarters, which helps maintain quality during expansion into new markets[44] - The average cash build-out cost for new restaurants opened since fiscal year 2019 is approximately $1.8 million per restaurant, net of landlord allowances[48] Operations and Human Capital Restaurant operations are supported by proprietary technology and a Shared Services Agreement with Kura Japan, with a focus on food safety and employee management - The company utilizes a proprietary kitchen and back-office system to analyze customer traffic, order demand, and inventory, which helps manage labor and food costs[63] - A Shared Services Agreement with Kura Japan provides strategic and operational support, including expatriate employees, support for new restaurant openings, and procurement of certain supplies and equipment[54] - As of August 31, 2020, the company had approximately 1,030 employees. Many were furloughed during the pandemic but were brought back as restaurants reopened[67] Risk Factors The company faces significant risks including COVID-19 impacts, geographic concentration, reliance on its parent, and its dual-class stock structure - The COVID-19 pandemic is a primary risk, having already caused temporary closure of all restaurants, a substantial decline in sales, and ongoing uncertainty regarding future operations and growth[93][95] - The company's geographic concentration is a key risk, with approximately 85% of its restaurants located in California and Texas, making it vulnerable to adverse conditions in these states[94][110] - Significant reliance on parent company Kura Japan for strategic support, supplies, intellectual property (via a license agreement), and a $35 million credit facility presents a risk if this relationship changes[113][114][117] - The dual-class stock structure makes the company a "controlled company," with Kura Japan holding approximately 81% of the combined voting power, allowing it to control corporate matters and potentially creating conflicts of interest[199][200] Unresolved Staff Comments The company reports that it has no unresolved staff comments - None[207] Properties As of August 31, 2020, the company operated 25 leased restaurants across five states, with an average size of 3,400 square feet | City | State | Opened | | :--- | :--- | :--- | | Irvine | California | Sep-2009 | | Los Angeles (Little Tokyo) | California | Jan-2012 | | Torrance | California | Apr-2012 | | Brea | California | May-2012 | | Rancho Cucamonga | California | Aug-2012 | | Los Angeles (Sawtelle) | California | Aug-2013 | | San Diego | California | Mar-2015 | | Cupertino | California | Feb-2016 | | Plano | Texas | May-2016 | | Carrollton | Texas | Jul-2016 | | Austin | Texas | May-2017 | | Doraville | Georgia | Jul-2017 | | Houston (Westheimer) | Texas | Aug-2017 | | Sugar Land | Texas | Jan-2018 | | Houston (Midtown) | Texas | Mar-2018 | | Pleasanton | California | Apr-2018 | | Frisco | Texas | May-2018 | | Cerritos | California | Oct-2018 | | Schaumburg | Illinois | Nov-2018 | | Cypress | California | Jan-2019 | | Sacramento | California | Mar-2019 | | Las Vegas | Nevada | Jul-2019 | | Garden Grove | California | Aug-2019 | | Katy | Texas | Dec-2019 | | Glendale | California | Feb-2020 | - All restaurant and corporate office properties are leased. The majority of restaurant leases have terms of twenty years, including optional extensions, and are generally "net" leases requiring the company to pay for insurance, taxes, and maintenance[210][212] Legal Proceedings The company is involved in a putative class action lawsuit regarding California wage and hour laws, which it intends to vigorously defend - The company is facing a putative class action complaint filed on May 31, 2019, by former employees alleging violations of California wage and hour laws. The company intends to defend itself vigorously[213][433] Mine Safety Disclosures This item is not applicable to the company - Not applicable[214] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Kura Sushi's Class A common stock trades on Nasdaq, with no planned dividends, and IPO proceeds were used for debt repayment and growth - The company's common stock began trading on the Nasdaq Global Market under the symbol "KRUS" on August 1, 2019[217] - The company does not currently plan to declare dividends, anticipating that all future earnings will be used for business operations and growth[219] - The company received net proceeds of approximately $39 million from its IPO, which were used to repay a $3.1 million credit facility, with the remainder allocated to new unit growth, working capital, and general corporate purposes[224] Selected Financial and Operating Data This section presents selected historical financial and operating data, highlighting a significant downturn in fiscal 2020 due to COVID-19 | Fiscal Year Ended August 31, (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Sales | $45,168 | $64,245 | | Operating income (loss) | $(16,498) | $1,661 | | Net income (loss) | $(17,358) | $1,456 | | Basic Net income (loss) per share | $(2.08) | $0.28 | | Diluted Net income (loss) per share | $(2.08) | $0.26 | | As of August 31, (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $9,259 | $38,044 | | Total assets | $118,379 | $76,410 | | Total liabilities | $72,666 | $14,229 | | Total stockholders' equity | $45,713 | $62,181 | | Fiscal Year Ended August 31, | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Restaurants at end of period | 25 | 23 | 17 | | Average Unit Volumes (AUVs, in thousands) | $1,942 | $3,498 | $3,457 | | Comparable restaurant sales growth | (37.8)% | 6.2% | 2.9% | | Adjusted EBITDA (in thousands) | $(12,995) | $5,195 | $4,284 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the severe COVID-19 impact on fiscal 2020, leading to significant sales decline, net loss, and liquidity preservation measures Results of Operations (Fiscal 2020 vs. 2019) Fiscal 2020 results show a significant sales decline and net loss due to COVID-19, with labor costs increasing as a percentage of sales | Metric (in millions) | FY 2020 | FY 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Sales | $45.2M | $64.2M | (29.7)% | | Food & Beverage Costs | $14.7M | $21.0M | (30.1)% | | Labor & Related Costs | $18.7M | $19.9M | (6.4)% | | General & Admin Expenses | $12.1M | $7.7M | 55.7% | | Operating Income (Loss) | $(16.5M) | $1.7M | (1,093.3)% | | Net Income (Loss) | $(17.4M) | $1.5M | (1,292.2)% | - Labor costs as a percentage of sales increased from 31.0% in FY 2019 to 41.3% in FY 2020, primarily due to the decline in sales and the decision to maintain payroll for certain employees during temporary restaurant closures. This was partially offset by a $1.8 million employee retention credit from the CARES Act[258][242] - General and administrative expenses increased by $4.4 million, primarily due to $2.2 million in public company costs (insurance, legal, accounting), $1.4 million in employee compensation for growth support, and $0.8 million in other legal and consulting costs[263] Key Performance Indicators Key performance indicators for fiscal 2020, including AUVs and comparable sales, significantly declined due to the pandemic | Indicator | FY 2020 | FY 2019 | FY 2018 | | :--- | :--- | :--- | :--- | | Average Unit Volumes (AUVs, in thousands) | $1,942K | $3,498K | $3,457K | | Comparable Restaurant Sales Growth | (37.8)% | 6.2% | 2.9% | | Restaurant Openings | 2 | 6 | 4 | | (in thousands) | FY 2020 | FY 2019 | FY 2018 | | :--- | :--- | :--- | :--- | | Net income (loss) | $(17,358) | $1,456 | $1,742 | | EBITDA | $(13,338) | $3,826 | $3,538 | | Adjusted EBITDA | $(12,995) | $5,195 | $4,284 | Liquidity and Capital Resources The company's liquidity was impacted by COVID-19, leading to a $35 million credit line from Kura Japan to ensure sufficient funding | (in thousands) | FY 2020 | FY 2019 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(13,004) | $5,993 | | Net cash used in investing activities | $(14,777) | $(11,255) | | Net cash (used in) provided by financing activities | $(1,004) | $37,595 | - To ensure liquidity during the pandemic, the company entered into a Revolving Credit Agreement with parent Kura Japan, which was amended to provide a $35 million credit line available until April 10, 2025[287][240] - As of August 31, 2020, the company had $9.3 million in cash and cash equivalents, down from $38.0 million at the end of fiscal 2019[230][332] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from commodity, food, labor, and energy price fluctuations, impacting profitability - The company's profitability is dependent on its ability to anticipate and react to changes in the costs of food, beverage, and other commodities[312] - Primary inflationary factors affecting operations are food and beverage costs, labor costs (including minimum wage increases), and energy costs[313] Financial Statements and Supplementary Data This section presents audited financial statements for fiscal 2020, reflecting COVID-19 impacts, new lease accounting, and related-party transactions Financial Statements Fiscal 2020 financial statements show a net loss of $17.4 million, with significant balance sheet changes due to new lease accounting standards Balance Sheet Highlights (as of Aug 31, in thousands) | | 2020 | 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $9,259 | $38,044 | | Total current assets | $14,778 | $41,501 | | Property and equipment - net | $45,541 | $31,917 | | Operating lease right-of-use assets | $56,119 | $— | | Total assets | $118,379 | $76,410 | | Liabilities & Equity | | | | Total current liabilities | $13,925 | $8,291 | | Operating lease liabilities - non-current | $56,918 | $— | | Total liabilities | $72,666 | $14,229 | | Total stockholders' equity | $45,713 | $62,181 | Statement of Operations Highlights (Year ended Aug 31, in thousands) | | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Sales | $45,168 | $64,245 | $51,744 | | Total operating expenses | $61,666 | $62,584 | $49,881 | | Operating income (loss) | $(16,498) | $1,661 | $1,863 | | Net income (loss) | $(17,358) | $1,456 | $1,742 | Notes to Financial Statements Notes detail COVID-19 impacts, adoption of ASC 842, supplier concentration, related-party transactions, and a $5.6 million deferred tax asset valuation allowance - The company adopted the new lease accounting standard (Topic 842) on September 1, 2019, resulting in the recognition of operating lease right-of-use assets of $35.9 million and operating lease liabilities of $38.7 million on the balance sheet[389][392] - The company has significant supplier concentration, with JFC International Inc. and Wismettac Asian Foods, Inc. accounting for 59% and 27% of total food and beverage costs, respectively, in fiscal 2020[358] - Due to the adverse effects of the COVID-19 pandemic, the company determined it was no longer more likely than not that it would realize its deferred tax assets, and therefore recorded a valuation allowance of approximately $5.6 million[443] Selected Quarterly Financial Data for Fiscal 2020 (unaudited, in thousands) | | First | Second | Third | Fourth | | :--- | :--- | :--- | :--- | :--- | | Sales | $17,440 | $19,388 | $2,812 | $5,528 | | Operating income (loss) | $(1,391) | $(240) | $(8,028) | $(6,839) | | Net income (loss) | $(1,224) | $(133) | $(9,152) | $(6,849) | Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of August 31, 2020 - Management concluded that the company's disclosure controls and procedures were effective as of the end of the fiscal year[449] - Based on an assessment using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of August 31, 2020[452] Part III Directors, Executive Officers, Compensation, Security Ownership, and Accountant Fees Information for these items is incorporated by reference from the company's definitive proxy statement for the 2021 annual meeting - Information for Items 10 through 14 is not included in this report and is incorporated by reference from the registrant's definitive proxy statement for the 2021 annual meeting of stockholders[7][457] Part IV Exhibits and Financial Statement Schedules This section lists financial statements and exhibits, noting that schedules are omitted as information is included elsewhere - All financial statement schedules are omitted because they are not required, not applicable, or the necessary information is included in the financial statements or notes[458] Form 10-K Summary The company reports that there is no Form 10-K summary - None[461]