Kura Sushi USA(KRUS) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides a comprehensive overview of the company's financial performance and position, including statements, notes, and management's analysis Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed financial statements, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes. These statements reflect the company's financial position and performance, significantly impacted by the COVID-19 pandemic, and provide context for key accounting policies, related party transactions, and debt Condensed Balance Sheet Highlights (amounts in thousands) | Metric | Feb 28, 2021 | Aug 31, 2020 | | :---------------------------- | :----------- | :----------- | | Cash and cash equivalents | $1,747 | $9,259 | | Total current assets | $11,278 | $14,778 | | Total assets | $118,409 | $118,379 | | Total current liabilities | $13,352 | $13,925 | | Loan from affiliate | $12,000 | $— | | Total liabilities | $81,986 | $72,666 | | Total stockholders' equity | $36,423 | $45,713 | Condensed Statements of Operations Highlights (amounts in thousands) | Metric | Three Months Ended Feb 28, 2021 | Three Months Ended Feb 29, 2020 | Six Months Ended Feb 28, 2021 | Six Months Ended Feb 29, 2020 | | :---------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Sales | $9,082 | $19,388 | $18,496 | $36,828 | | Total operating expenses | $12,884 | $19,628 | $28,589 | $38,459 | | Operating loss | $(3,802) | $(240) | $(10,093) | $(1,631) | | Net loss | $(3,881) | $(133) | $(10,231) | $(1,357) | | Basic Net loss per share | $(0.46) | $(0.02) | $(1.22) | $(0.16) | Condensed Statements of Stockholders' Equity Highlights (amounts in thousands) | Metric | Aug 31, 2020 | Feb 28, 2021 | | :---------------------------- | :----------- | :----------- | | Total Stockholders' Equity | $45,713 | $36,423 | | Accumulated Deficit | $(14,627) | $(24,858) | Condensed Statements of Cash Flows Highlights (amounts in thousands) | Cash Flow Activity | Six Months Ended Feb 28, 2021 | Six Months Ended Feb 29, 2020 | | :---------------------------------------- | :---------------------------- | :---------------------------- | | Net cash used in operating activities | $(8,932) | $(272) | | Net cash used in investing activities | $(9,904) | $(7,295) | | Net cash provided by (used in) financing activities | $11,848 | $(491) | | Decrease in cash, cash equivalents and restricted cash | $(6,988) | $(8,058) | | Cash, cash equivalents and restricted cash, end of period | $2,271 | $29,986 | - The company's operations were significantly disrupted by COVID-19, leading to a substantial decline in sales and temporary restaurant closures, though 28 of 30 restaurants were open by February 28, 2021[19][21] - The Revolving Credit Agreement with Kura Japan was amended to increase the maximum credit amount from $20 million to $45 million, with $12.0 million borrowed as of February 28, 2021[22][52][54] - A $2.6 million employee retention credit was recognized during the three months ended February 28, 2021, with $2.2 million in labor costs and $0.4 million in G&A expenses[22][77] Lease Costs (amounts in thousands) | Lease Cost | Three Months Ended Feb 28, 2021 | Six Months Ended Feb 28, 2021 | | :-------------------------------- | :------------------------------ | :---------------------------- | | Total finance lease cost | $183 | $357 | | Total operating lease cost | $1,801 | $3,613 | - The company has additional operating lease liabilities of $16.6 million for future restaurant openings[43] Related Party Transactions (Six Months Ended, amounts in thousands) | Related Party Transaction | Feb 28, 2021 | Feb 29, 2020 | | :----------------------------------------------- | :----------- | :----------- | | Purchases of administrative supplies | $72 | $23 | | Expatriate salaries expense | $62 | $72 | | Royalty payments | $92 | $184 | | Purchases of equipment | $401 | $633 | | Interest expense | $27 | $— | | Total related party transactions | $671 | $962 | Stock-based Compensation Expense (amounts in thousands) | Stock-based Compensation | Three Months Ended Feb 28, 2021 | Six Months Ended Feb 28, 2021 | | :---------------------------------------------- | :------------------------------ | :---------------------------- | | Total stock-based compensation | $309 | $575 | - Basic and diluted net loss per share was $(0.46) for the three months and $(1.22) for the six months ended February 28, 2021[57] - A putative class action lawsuit alleging California wage and hour law violations is ongoing, with the company unable to estimate losses but intending to defend vigorously[60][61] - Income tax expense was $29 thousand (three months) and $58 thousand (six months), with a full valuation allowance against deferred tax assets due to cumulative losses[62][63] Condensed Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity at specific reporting dates Condensed Statements of Operations This section outlines the company's revenues, expenses, and net loss over specific reporting periods Condensed Statements of Stockholders' Equity This section details changes in the company's equity, including accumulated deficit, over specific reporting periods Condensed Statements of Cash Flows This section summarizes the company's cash inflows and outflows from operating, investing, and financing activities Notes to Condensed Financial Statements This section provides detailed explanations and disclosures supporting the condensed financial statements Note 1. Organization and Basis of Presentation This note describes the company's organization and the accounting principles used in preparing the financial statements Note 2. Balance Sheet Components This note provides detailed breakdowns and explanations of various line items within the balance sheet Note 3. Leases This note details the company's lease arrangements, including finance and operating leases, and associated costs Note 4. Related Party Transactions This note discloses transactions between the company and its related parties, including affiliates Note 5. Stock-based Compensation This note outlines the company's stock-based compensation plans and the associated expenses recognized Note 6. Debt This note provides information on the company's debt obligations, including terms and amounts outstanding Note 7. Loss Per Share This note details the calculation of basic and diluted loss per share for the reporting periods Note 8. Commitments and Contingencies This note describes the company's significant commitments and potential contingent liabilities, including legal matters Note 9. Income Taxes This note explains the company's income tax provisions, deferred tax assets, and valuation allowances Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, highlighting the significant adverse impact of the COVID-19 pandemic on sales and profitability. It details the company's responses, including operational adjustments, liquidity preservation efforts, and continued restaurant expansion. Key financial metrics like sales, operating costs, and non-GAAP measures (EBITDA, Adjusted EBITDA, Restaurant-level Operating Profit) are discussed, showing substantial declines in profitability but also strategic adjustments and new restaurant openings - The company is a technology-enabled Japanese restaurant concept, offering a revolving sushi service model and focusing on healthy, high-quality ingredients[70] - COVID-19 caused a substantial decline in sales (53.2% for 3 months, 49.8% for 6 months) due to reduced operating capacities and temporary closures[73][90][99] - The company increased its revolving credit line from Kura Japan to $45 million and recognized a $2.6 million employee retention credit under the CARES Act[74][77] Sales and Net Loss (amounts in thousands) | Metric | Three Months Ended Feb 28, 2021 | Six Months Ended Feb 28, 2021 | | :---------------------------- | :------------------------------ | :---------------------------- | | Sales | $9,082 | $18,496 | | Net loss | $(3,881) | $(10,231) | Operating Costs as % of Sales (YoY Change) | Cost as % of Sales | Three Months Ended Feb 28, 2021 | Three Months Ended Feb 29, 2020 | Six Months Ended Feb 28, 2021 | Six Months Ended Feb 29, 2020 | | :----------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Food & beverage costs | 35.0% | 31.5% | 33.7% | 32.0% | | Labor & related costs | 22.7% | 31.7% | 34.7% | 32.0% | | Occupancy & related expenses | 17.9% | 8.4% | 17.9% | 8.4% | | Other costs | 22.6% | 11.4% | 22.3% | 11.6% | | General & administrative expenses | 31.6% | 14.4% | 34.6% | 16.6% | EBITDA and Adjusted EBITDA (amounts in thousands) | Metric | Three Months Ended Feb 28, 2021 | Three Months Ended Feb 29, 2020 | Six Months Ended Feb 28, 2021 | Six Months Ended Feb 29, 2020 | | :---------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | EBITDA | $(2,706) | $508 | $(7,995) | $(198) | | Adjusted EBITDA | $(4,696) | $980 | $(8,961) | $638 | | Adjusted EBITDA margin | (51.7)% | 5.1% | (48.4)% | 1.7% | Restaurant-level Operating Profit (amounts in thousands) | Metric | Three Months Ended Feb 28, 2021 | Three Months Ended Feb 29, 2020 | Six Months Ended Feb 28, 2021 | Six Months Ended Feb 29, 2020 | | :---------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Restaurant-level operating (loss) profit | $(1,345) | $3,875 | $(2,487) | $6,899 | | Restaurant-level operating (loss) profit margin | (14.8)% | 20.0% | (13.4)% | 18.7% | - Comparable restaurant sales performance decreased by (60.2)% for the three months and (55.2)% for the six months ended February 28, 2021[123] - The company opened five new restaurants during the six months ended February 28, 2021, and one more subsequent to the period, bringing the total to 31[124] Cash Flow Summary (amounts in thousands) | Cash Flow Activity | Six Months Ended Feb 28, 2021 | Six Months Ended Feb 29, 2020 | | :---------------------------------------- | :---------------------------- | :---------------------------- | | Net cash used in operating activities | $(8,932) | $(272) | | Net cash used in investing activities | $(9,904) | $(7,295) | | Net cash provided by (used in) financing activities | $11,848 | $(491) | - Management believes current cash, operating cash flows, and the Revolving Credit Agreement provide sufficient liquidity for the next 12 months[127] - No material changes to critical accounting policies or risk factors were reported since the last Annual Report on Form 10-K[140][152] - The company, as an "emerging growth company," has opted out of the extended transition period for new accounting standards but will utilize other JOBS Act exemptions[141][142] Overview This section provides a high-level introduction to the company's business and the context of its financial performance Business Trends; Effects of COVID-19 on Our Business This section discusses key business trends and the significant impact of the COVID-19 pandemic on the company's operations Recent Events Concerning Our Financial Position This section highlights recent developments and their implications for the company's financial standing Key Financial Definitions This section defines important financial terms and non-GAAP measures used in management's discussion and analysis Results of Operations This section analyzes the company's financial performance, including sales, costs, and profitability over the reporting periods Key Performance Indicators This section discusses critical metrics used to evaluate the company's operational and financial health Liquidity and Capital Resources This section assesses the company's ability to meet its short-term and long-term financial obligations and fund operations Summary of Cash Flows This section provides a concise overview of the company's cash flow activities from operations, investing, and financing Contractual Obligations This section details the company's future payment commitments under various contractual agreements Off-Balance Sheet Arrangements This section describes any significant financial arrangements not recorded on the company's balance sheet Recent Accounting Pronouncements This section discusses the impact of newly issued accounting standards on the company's financial statements Critical Accounting Policies and Estimates This section highlights accounting policies requiring significant judgment and estimates that impact financial reporting Jumpstart Our Business Startups Act of 2012 This section explains the company's status and elections under the JOBS Act, affecting its reporting requirements Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks primarily related to commodity and food price fluctuations, as well as inflation. While it has historically mitigated these risks through menu price adjustments and operational efficiencies, substantial cost increases could impact operating results if not offset. Competitive conditions and macroeconomic factors may limit future pricing flexibility - Profitability is dependent on the ability to anticipate and react to changes in costs of key operating resources, including food and beverage and other commodities[143] - The company has partially offset cost increases by raising menu prices and making operational adjustments, but substantial increases could still impact operating results[143] - Primary inflationary factors are food and beverage costs, labor costs (influenced by minimum wage laws), and energy costs[144] Item 4. Controls and Procedures Management, under the supervision of the principal executive and financial officers, evaluated the effectiveness of disclosure controls and procedures as of February 28, 2021, and concluded they were effective. No material changes in internal control over financial reporting occurred during the most recent fiscal quarter - Disclosure controls and procedures were evaluated and deemed effective as of February 28, 2021[146] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[148] PART II. OTHER INFORMATION This section includes additional disclosures not covered in the financial statements, such as legal proceedings and risk factors Item 1. Legal Proceedings For a description of legal proceedings, the company refers to Note 8 – Commitments and Contingencies, in the Notes to Condensed Financial Statements - Legal proceedings information is incorporated by reference from Note 8 of the financial statements[151] Item 1A. Risk Factors The company states that there have been no material changes to the risk factors previously reported in its Annual Report on Form 10-K for the fiscal year ended August 31, 2020 - No material changes to risk factors were reported since the Annual Report on Form 10-K for fiscal year ended August 31, 2020[152] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - No unregistered sales of equity securities or use of proceeds were reported[153] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - No defaults upon senior securities were reported[154] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[155] Item 5. Other Information The company reported no other information for this item - No other information was reported for this item[156] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the principal executive and financial officers (Sections 302 and 906 of Sarbanes-Oxley Act) and XBRL instance and taxonomy documents - Exhibits include certifications from principal executive and financial officers (31.1, 31.2, 32.1, 32.2) and XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)[158] Signatures This section formally attests to the accuracy and completeness of the report by authorized company officers Signatures This section contains the official signatures of the company's authorized officers, validating the report - The report was signed by Steven H. Benrubi, Chief Financial Officer, Treasurer, and Secretary, on April 13, 2021[163]