Kura Sushi USA(KRUS) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents unaudited condensed financial statements and notes, highlighting the COVID-19 pandemic's impact on operations and financial position Condensed Balance Sheets Condensed Balance Sheet Highlights (Amounts in thousands) | Metric | November 30, 2020 | August 31, 2020 | | :-------------------------- | :------------------ | :------------------ | | Cash and cash equivalents | $2,745 | $9,259 | | Total current assets | $8,507 | $14,778 | | Total assets | $115,393 | $118,379 | | Total current liabilities | $15,143 | $13,925 | | Loan from affiliate | $3,000 | — | | Total liabilities | $75,670 | $72,666 | | Total stockholders' equity | $39,723 | $45,713 | - Total assets decreased from $118,379 thousand to $115,393 thousand[10] - Cash and cash equivalents significantly decreased from $9,259 thousand to $2,745 thousand[10] Condensed Statements of Operations Condensed Statements of Operations Highlights (Three Months Ended November 30, amounts in thousands) | Metric | 2020 | 2019 | Change ($) | Change (%) | | :-------------------------------- | :---------- | :---------- | :---------- | :---------- | | Sales | $9,414 | $17,440 | $(8,026) | (46.0)% | | Total restaurant operating costs | $12,109 | $15,483 | $(3,374) | (21.8)% | | Operating loss | $(6,291) | $(1,391) | $(4,900) | (352.3)% | | Net loss | $(6,350) | $(1,224) | $(5,126) | (418.8)% | | Net loss per Class A and B shares | $(0.76) | $(0.15) | $(0.61) | (406.7)% | - Sales decreased by 46.0% year-over-year, primarily due to reduced operating capacities from the COVID-19 pandemic[12] - Net loss increased significantly by 418.8% year-over-year, from $(1,224) thousand in 2019 to $(6,350) thousand in 2020[12] Condensed Statements of Stockholders' Equity Condensed Statements of Stockholders' Equity Highlights (Amounts in thousands) | Metric | August 31, 2020 | November 30, 2020 | | :------------------------ | :---------------- | :------------------ | | Total Stockholders' Equity | $45,713 | $39,723 | | Stock-based compensation | — | $266 | | Net loss | — | $(6,350) | - Total stockholders' equity decreased from $45,713 thousand as of August 31, 2020, to $39,723 thousand as of November 30, 2020[15] - The decrease was primarily driven by a net loss of $(6,350) thousand for the period[15] Condensed Statements of Cash Flows Condensed Statements of Cash Flows Highlights (Three Months Ended November 30, amounts in thousands) | Cash Flow Activity | 2020 | 2019 | | :-------------------------------- | :---------- | :---------- | | Net cash used in operating activities | $(2,731) | $(1,538) | | Net cash used in investing activities | $(6,619) | $(3,244) | | Net cash provided by (used in) financing activities | $2,836 | $(252) | | Decrease in cash and cash equivalents | $(6,514) | $(5,034) | | Cash and cash equivalents, end of period | $2,745 | $33,010 | - Net cash used in operating activities increased to $(2,731) thousand in 2020 from $(1,538) thousand in 2019[18] - Net cash provided by financing activities was $2,836 thousand in 2020, primarily due to a $3,000 thousand loan from an affiliate, a significant change from cash used in 2019[18] Notes to Condensed Financial Statements Note 1. Organization and Basis of Presentation - Kura Sushi USA, Inc. operates a technology-enabled Japanese restaurant concept with a revolving sushi service model[21] - The COVID-19 pandemic significantly disrupted operations, causing a substantial decline in sales due to reduced operating capacities and temporary closures. As of the filing date, all 29 restaurants are open, but many operate with restrictions (takeout only, outdoor dining, or reduced indoor capacity)[22][24] - The company increased its revolving credit line with Kura Japan from $20 million to $35 million and extended its maturity and availability dates to preserve liquidity[25] Note 2. Balance Sheet Components Accounts Receivable (Amounts in thousands) | Type of Receivable | November 30, 2020 | August 31, 2020 | | :----------------- | :---------------- | :---------------- | | Lease receivable | $1,651 | $1,811 | | Credit card receivable | $316 | $281 | | Other receivables | $28 | $38 | | Total | $1,995 | $2,130 | Property and Equipment - net (Amounts in thousands) | Asset Category | November 30, 2020 | August 31, 2020 | | :------------------------- | :---------------- | :---------------- | | Leasehold improvements | $36,228 | $30,497 | | Furniture and fixtures | $10,008 | $7,908 | | Construction in progress | $6,914 | $9,558 | | Total property and equipment - net | $49,816 | $45,541 | - Depreciation and amortization expense for property and equipment increased to approximately $1.0 million for the three months ended November 30, 2020, from $0.7 million in the prior year[36] Note 3. Leases Lease Liabilities (Amounts in thousands) | Lease Type | November 30, 2020 | August 31, 2020 | | :-------------------------- | :---------------- | :---------------- | | Operating lease liabilities – current | $5,236 | $5,106 | | Operating lease liabilities – non-current | $55,988 | $56,918 | | Total operating lease liabilities | $61,224 | $62,024 | | Finance lease liabilities – current | $1,033 | $1,004 | | Finance lease liabilities – non-current | $1,194 | $1,481 | | Total finance lease liabilities | $2,227 | $2,485 | Weighted Average Lease Terms and Discount Rates (November 30, 2020) | Lease Type | Remaining Lease Term (Years) | Discount Rate | | :----------- | :--------------------------- | :------------ | | Operating | 16.2 | 6.4% | | Finance | 2.2 | 4.4% | - The company has additional operating lease liabilities of $13.7 million for restaurants not yet taken possession of, expected to commence in fiscal year 2021 with 20-year terms[46] Note 4. Related Party Transactions - Kura Sushi, Inc. ('Kura Japan'), the majority stockholder, provides strategic, operational, and support services to the Company under a Shared Services Agreement[48] - The Company pays Kura Japan a royalty fee of 0.5% of net sales for an exclusive license to use Kura Japan's intellectual property, including trademarks and food management systems[49] Balances with Kura Japan (Amounts in thousands) | Account | November 30, 2020 | August 31, 2020 | | :---------------- | :---------------- | :---------------- | | Due from affiliate | $239 | $12 | | Due to affiliate | $69 | $201 | | Loan from affiliate | $3,000 | — | Note 5. Stock-based Compensation Stock Option Activity (August 31, 2020 to November 30, 2020) | Activity | Number of Shares Underlying Outstanding Options | | :----------------------- | :---------------------------------------------- | | Outstanding—August 31, 2020 | 531,747 | | Options exercised | (21,979) | | Options canceled/forfeited | (4,265) | | Outstanding—November 30, 2020 | 505,503 | - Stock-based compensation expense was $0.3 million for the three months ended November 30, 2020, an increase from $0.1 million in the prior year[52] - Subsequent to November 30, 2020, the Company granted an additional 50 thousand options and 7 thousand restricted stock awards[51] Note 6. Debt - The Revolving Credit Agreement with Kura Japan was amended to increase the credit line from $20 million to $35 million, extend the maturity date to 60 months, and extend the availability period to April 10, 2025[54] - As of November 30, 2020, the Company had borrowed $3.0 million under the Revolving Credit Agreement at a fixed interest rate of 1.1%[55] - Subsequent to November 30, 2020, an additional $6.0 million was borrowed, leaving $26 million of availability[55] Note 7. Loss Per Share Net Loss Per Share (Three Months Ended November 30, amounts in thousands, except per share data) | Metric | 2020 | 2019 | | :-------------------------------- | :---------- | :---------- | | Net loss attributable to common stockholders - basic | $(5,589) | $(1,077) | | Weighted average common shares outstanding - basic | 7,348 | 7,335 | | Net loss per share attributable to common stockholders - basic | $(0.76) | $(0.15) | | Net loss per share attributable to common stockholders - diluted | $(0.76) | $(0.15) | - Basic and diluted net loss per share for both Class A and Class B shares was $(0.76) for the three months ended November 30, 2020, compared to $(0.15) in the prior year[57] - Approximately 506 thousand shares subject to outstanding employee stock options were excluded from diluted loss per share calculation for the three months ended November 30, 2020, as their inclusion would have been anti-dilutive[58] Note 8. Commitments and Contingencies - A putative class action complaint was filed on May 31, 2019, alleging violations of California wage and hour laws, later amended to include new plaintiffs and causes of action[59] - Management believes that current legal proceedings, including the class action, will not have a material adverse effect on the company's business, financial position, results of operations, or cash flows, though the range of possible losses cannot be estimated[59][60] Note 9. Income Taxes - The Company recorded income tax expense of $29 thousand for the three months ended November 30, 2020, compared to an income tax benefit of $4 thousand in the prior year[61] - The effective tax rate significantly differed from the federal statutory rate of 21% primarily due to a full valuation allowance against the Company's net deferred tax assets[61][62] - The Consolidated Appropriations Act, 2021, is not expected to have a material impact on the Company's effective tax rate or income tax expense for the fiscal year ending August 31, 2021[63] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations) Management discusses financial performance, COVID-19 impact, operational responses, liquidity, and key indicators Overview - Kura Sushi USA, Inc. is a technology-enabled Japanese restaurant concept offering a distinctive revolving sushi service model, known as the 'Kura Experience'[68] - The company focuses on serving freshly prepared Japanese cuisine using high-quality ingredients free from artificial additives, aiming for accessibility through affordable prices and an inviting atmosphere[68] Business Trends; Effects of COVID-19 on Our Business - The COVID-19 pandemic caused significant disruption, leading to temporary closures and reduced operating capacities across the company's restaurants[69] - As of the filing date, all 29 restaurants are open, but 16 in California and Washington D.C. are takeout-only, one in Illinois offers outdoor dining only, and the remaining 12 operate at reduced indoor capacities (25% to 75%)[69] - The company's response includes prioritizing health and safety, maximizing in-restaurant dining capacity, mobile ordering, and takeout, while continuing its long-term growth strategy of opening new restaurants[70][71] Recent Events Concerning Our Financial Position - The Revolving Credit Agreement with Kura Japan was amended to increase the credit line from $20 million to $35 million and extend the maturity and availability dates[72] - The company borrowed $3.0 million by November 30, 2020, and an additional $6.0 million subsequently, with $26 million remaining available under the credit line[72] - Rent concessions (abatements and deferrals) received from landlords were immaterial for the three months ended November 30, 2020, with ongoing discussions for future concessions[73] Key Financial Definitions - Sales represent food and beverage sales, influenced by restaurant count and comparable restaurant sales growth[74] - Food and beverage costs are variable, affected by sales volume, menu mix, commodity costs, seasonality, and food waste management[75] - Labor and related expenses include restaurant-level management and hourly labor costs, influenced by minimum wage, payroll taxes, and healthcare costs[76] - General and administrative expenses cover corporate and regional support functions, including compensation, travel, stock-based compensation, legal fees, and marketing[79] Results of Operations Comparative Results of Operations (Three Months Ended November 30, amounts in thousands) | Metric | 2020 | 2019 | Change ($) | Change (%) | | :-------------------------------- | :---------- | :---------- | :---------- | :---------- | | Sales | $9,414 | $17,440 | $(8,026) | (46.0)% | | Food and beverage costs | $3,053 | $5,693 | $(2,640) | (46.4)% | | Labor and related costs | $4,360 | $5,641 | $(1,281) | (22.7)% | | Occupancy and related expenses | $1,690 | $1,439 | $251 | 17.4% | | Operating loss | $(6,291) | $(1,391) | $(4,900) | (352.3)% | | Net loss | $(6,350) | $(1,224) | $(5,126) | (418.8)% | Key Operating Costs as a Percentage of Sales (Three Months Ended November 30) | Cost Category | 2020 | 2019 | | :-------------------------------- | :------ | :------ | | Food and beverage costs | 32.4% | 32.6% | | Labor and related costs | 46.3% | 32.3% | | Occupancy and related expenses | 18.0% | 8.3% | | Depreciation and amortization expenses | 9.8% | 3.8% | | Other costs | 22.1% | 11.7% | | General and administrative expenses | 37.4% | 19.1% | - The significant increase in labor, occupancy, depreciation, and other costs as a percentage of sales was primarily driven by the substantial decrease in sales due to COVID-19 related operating restrictions, while certain costs remained relatively fixed or increased[88][89][90][91] Key Performance Indicators Sales - Sales represent the revenue generated from food and beverages in restaurants, influenced by the number of operating restaurants, guest traffic, and average check size[96] EBITDA and Adjusted EBITDA EBITDA and Adjusted EBITDA Reconciliation (Three Months Ended November 30, amounts in thousands) | Metric | 2020 | 2019 | | :-------------------------------- | :---------- | :---------- | | Net loss | $(6,350) | $(1,224) | | EBITDA | $(5,289) | $(706) | | Adjusted EBITDA | $(4,057) | $(342) | | Adjusted EBITDA margin | (43.1)% | (2.0)% | - Adjusted EBITDA includes adjustments for stock-based compensation expense, non-cash lease expense, and executive transition costs, providing a supplemental view of core operating results[101][102] - Adjusted EBITDA margin significantly declined from (2.0)% in 2019 to (43.1)% in 2020, reflecting the severe impact on profitability[101] Restaurant-level Operating Profit and Restaurant-level Operating Profit Margin Restaurant-level Operating Profit Reconciliation (Three Months Ended November 30, amounts in thousands) | Metric | 2020 | 2019 | | :-------------------------------- | :---------- | :---------- | | Operating loss | $(6,291) | $(1,391) | | Restaurant-level operating (loss) profit | $(934) | $3,024 | | Restaurant-level operating (loss) profit margin | (9.9)% | 17.3% | - Restaurant-level Operating Profit turned into a loss of $(934) thousand in 2020 from a profit of $3,024 thousand in 2019, with the margin decreasing from 17.3% to (9.9)%[107] - This non-GAAP measure excludes general and administrative expenses and corporate-level stock-based compensation to assess restaurant-specific performance[103] Comparable Restaurant Sales Performance Comparable Restaurant Sales Performance (Three Months Ended November 30) | Metric | 2020 | 2019 | | :-------------------------------- | :------ | :------ | | Comparable restaurant sales performance (%) | (50.8)% | 7.9% | | Comparable restaurant base | 20 | 14 | - Comparable restaurant sales performance decreased by 50.8% for the three months ended November 30, 2020, compared to a 7.9% increase in the prior year, primarily due to government restrictions on indoor dining capacity from COVID-19[110][111] - The comparable restaurant base increased to 20 restaurants in 2020 from 14 in 2019[111] Number of Restaurant Openings Restaurant Activity (Three Months Ended November 30) | Metric | 2020 | 2019 | | :---------------- | :--- | :--- | | Beginning of period | 25 | 23 | | Openings | 3 | — | | End of period | 28 | 23 | - The company opened 3 new restaurants during the three months ended November 30, 2020, increasing the total restaurant count to 28[112] - Subsequent to November 30, 2020, one new restaurant was opened in Aventura, Florida, bringing the total to 29[112] Liquidity and Capital Resources - Primary uses of cash include operational expenditures and capital investments for new restaurants, remodels, and fixtures[113] - Main sources of liquidity are operating cash flows, cash on hand, and the Revolving Credit Agreement with Kura Japan[113][116] - The company believes its current liquidity sources will be sufficient to fund lease obligations, capital expenditures, and working capital needs for at least the next 12 months[115] Summary of Cash Flows Summary of Cash Flow Data (Three Months Ended November 30, amounts in thousands) | Cash Flow Activity | 2020 | 2019 | | :-------------------------------- | :---------- | :---------- | | Net cash used in operating activities | $(2,731) | $(1,538) | | Net cash used in investing activities | $(6,619) | $(3,244) | | Net cash provided by (used in) financing activities | $2,836 | $(252) | Cash Flows Used in Operating Activities - Net cash used in operating activities was $2.7 million for the three months ended November 30, 2020, primarily due to a net loss of $6.4 million, partially offset by non-cash charges and net cash inflows from changes in operating assets and liabilities[118] - Key changes in operating assets and liabilities included increases in accounts payable, accrued expenses, sales tax payable, and salaries and wages payable, partially offset by increases in prepaid expenses, inventories, and amounts due from affiliate[118] Cash Flows Used in Investing Activities - Net cash used in investing activities was $6.6 million for the three months ended November 30, 2020, primarily driven by purchases of property and equipment for current and future restaurant openings, renovations, and maintenance[120] Cash Flows Provided by (Used in) Financing Activities - Net cash provided by financing activities was $2.8 million for the three months ended November 30, 2020, primarily due to $3.0 million in loan proceeds from the Revolving Credit Agreement[122] Contractual Obligations - As of November 30, 2020, the company had $1.5 million in contractual obligations related to purchase commitments for restaurant operations goods and new restaurant construction, all expected to be paid within the current fiscal year[123] - Operating and finance lease obligations are detailed in Note 3 to the financial statements[123] Off-Balance Sheet Arrangements - As of November 30, 2020, the company did not have any material off-balance sheet arrangements[124] Recent Accounting Pronouncements - For a description of recently issued accounting pronouncements, including adoption dates and expected effects, refer to Part I, Item 1, Note 1 of the Notes to Condensed Financial Statements[125] Critical Accounting Policies and Estimates - There have been no material changes to the company's critical accounting policies and estimates from those disclosed in its Annual Report on Form 10-K for the fiscal year ended August 31, 2020[128] Jumpstart Our Business Startups Act of 2012 - The company qualifies as an 'emerging growth company' under the JOBS Act[129] - It has irrevocably elected not to use the extended transition period for complying with new or revised accounting standards, adopting them on the same dates as other public companies[129] - The company intends to take advantage of other JOBS Act exemptions, such as those related to auditor attestation for internal control and reduced executive compensation disclosure[130] Item 3. Quantitative and Qualitative Disclosures About Market Risk) This section details the company's market risk exposure, including commodity, food price, and inflation, and mitigation strategies Commodity and Food Price Risks - The company's profitability is dependent on its ability to anticipate and react to changes in the costs of key operating resources, including food, beverages, and other commodities[131] - Cost increases, driven by market conditions, supply shortages, or regulations, are partially offset by increasing menu prices and operational adjustments[131] - Substantial increases in costs and expenses could adversely impact operating results if they cannot be offset by menu price increases or operational adjustments[132] Inflation Risk - Primary inflationary factors affecting operations include food and beverage costs, labor costs (especially minimum wage increases), and energy costs[133] - The company mitigates increased costs by gradually increasing menu prices, implementing efficient purchasing practices, and improving productivity, though competitive conditions may limit flexibility[133][134] - There is no assurance that future cost increases can be fully offset by menu price increases or that guests will fully absorb such increases without impacting visit frequencies or purchasing patterns[134] Item 4. Controls and Procedures) This section confirms effective disclosure controls and procedures, with no material changes in internal control over financial reporting Disclosure Controls and Procedures - Management, under the supervision of the principal executive and financial officers, evaluated and concluded that the disclosure controls and procedures were effective as of November 30, 2020[135] - The design of any control system has inherent limitations, providing only reasonable assurance of achieving its objectives[136] Changes in Internal Control over Financial Reporting - There have been no changes in internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[137] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section refers to the detailed description of the company's legal proceedings in the Notes to Condensed Financial Statements - For a description of legal proceedings, refer to Part I, Item 1, Note 8 – Commitments and Contingencies, of the Notes to Condensed Financial Statements[140] Item 1A. Risk Factors This section confirms no material changes to risk factors previously reported in the Annual Report on Form 10-K - There have been no material changes to the risk factors associated with the business as previously reported in the Annual Report on Form 10-K for the fiscal year ended August 31, 2020[141] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports no unregistered sales of equity securities or use of proceeds during the period - None[142] Item 3. Defaults Upon Senior Securities This section indicates no defaults upon senior securities during the reporting period - None[143] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company's operations - Not applicable[144] Item 5. Other Information This section reports no other information to disclose - None[145] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including agreements, awards, and various certifications - Exhibits include employment agreements (Steven H. Benrubi), restricted stock award forms, a confidential separation agreement (Koji Shinohara), Section 302 and 906 certifications, and XBRL instance and taxonomy documents[147] Signatures This section contains the required signatures for the Form 10-Q, confirming its due authorization and filing - The report was signed on January 11, 2021, by Steven Benrubi, Chief Financial Officer, Treasurer, and Secretary[151]