Kura Sushi USA(KRUS) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) The company's Q3 2021 financials show a significant sales recovery and return to profitability amid growing assets and liabilities Condensed Balance Sheets Total assets grew to $130.4 million and liabilities to $92.8 million, driven by a large tax receivable and a new affiliate loan Condensed Balance Sheet Highlights (in thousands) | Account | May 31, 2021 | August 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $4,701 | $9,259 | | Total current assets | $20,401 | $14,778 | | Property and equipment - net | $51,783 | $45,541 | | Total assets | $130,434 | $118,379 | | Liabilities & Equity | | | | Total current liabilities | $16,941 | $13,925 | | Loan from affiliate | $17,000 | $— | | Total liabilities | $92,777 | $72,666 | | Total stockholders' equity | $37,657 | $45,713 | - Prepaid expenses and other current assets significantly increased to $12.0 million from $3.0 million, primarily due to a $10.7 million employee retention credit receivable as of May 31, 2021[8][34] Condensed Statements of Operations Third-quarter sales surged to $18.5 million, leading to a net income of $770,000, a sharp reversal from the prior year's pandemic-driven loss Quarterly Performance (Three Months Ended May 31, in thousands) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Sales | $18,471 | $2,812 | | Operating income (loss) | $866 | $(8,028) | | Net income (loss) | $770 | $(9,152) | | Diluted EPS | $0.09 | $(1.10) | Year-to-Date Performance (Nine Months Ended May 31, in thousands) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Sales | $36,967 | $39,640 | | Operating income (loss) | $(9,227) | $(9,659) | | Net income (loss) | $(9,461) | $(10,509) | | Diluted EPS | $(1.13) | $(1.26) | Condensed Statements of Stockholders' Equity Stockholders' equity declined to $37.7 million from $45.7 million, primarily due to the cumulative net loss for the nine-month period - The accumulated deficit increased from $(14.6) million at August 31, 2020, to $(24.1) million at May 31, 2021, driven by the net loss for the period[13] Condensed Statements of Cash Flows The company used $9.7 million in operating cash, funded primarily by a $17.0 million loan from its parent company Cash Flow Summary (Nine Months Ended May 31, in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(9,697) | $(10,695) | | Net cash used in investing activities | $(11,523) | $(9,571) | | Net cash provided by (used in) financing activities | $16,662 | $(748) | | Decrease in cash | $(4,558) | $(21,014) | | Cash at end of period | $4,701 | $17,030 | - Financing activities were the primary source of cash, with the company drawing $17.0 million from a revolving credit agreement with its parent, Kura Japan[16] Notes to Condensed Financial Statements Key notes detail the COVID-19 impact, an $8.9 million employee retention credit, an expanded credit line, and a $1.0 million litigation accrual - As of the filing date, all 32 restaurants were operating at 100% indoor capacity, a significant improvement from the weighted average capacities of 35%, 26%, and 62% in the first three quarters of fiscal 2021, respectively[19][69] - The company recognized an $8.9 million employee retention credit under the CARES Act for the nine months ended May 31, 2021, which significantly reduced labor costs[23] - The revolving credit line with parent company Kura Japan was increased to $45 million, with $17.0 million borrowed and $28.0 million available as of May 31, 2021[53][55] - The company recorded an accrued liability of $1.0 million related to a putative class action complaint alleging violations of California wage and hour laws[58] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Q3 2021 sales recovery driven by eased dining restrictions, ongoing staffing challenges, and liquidity supported by its parent company Overview and Business Trends The business is recovering from COVID-19 capacity restrictions but now faces staffing shortages while continuing its restaurant expansion strategy - Due to government restrictions, the weighted average indoor dining capacities were 35%, 26%, and 62% for the first, second, and third quarters of fiscal 2021, respectively[69] - Comparable restaurant sales for the three and nine months ended May 31, 2021, were down 19% and 39%, respectively, compared to pre-pandemic levels in 2019[71] - The company is currently experiencing a staffing shortage and has provided employee retention and new hire bonuses to address it[71] Results of Operations Q3 2021 sales grew 556.9% year-over-year to $18.5 million, resulting in net income of $0.8 million aided by a large employee retention credit Q3 Results of Operations (Three Months Ended May 31, in thousands) | Line Item | 2021 | 2020 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Sales | $18,471 | $2,812 | $15,659 | 556.9% | | Labor and related costs | $1,649 | $3,551 | $(1,902) | (53.6)% | | Operating income (loss) | $866 | $(8,028) | $8,894 | 110.8% | | Net income (loss) | $770 | $(9,152) | $9,922 | 108.4% | - The decrease in Q3 labor costs was primarily driven by $5.8 million in employee retention credits, which offset increased staffing levels and $0.7 million in retention/new hire bonuses[92] - General and administrative expenses for Q3 increased by $1.4 million, mainly due to a $1.0 million accrual for pending litigation and increased compensation[96] YTD Results of Operations (Nine Months Ended May 31, in thousands) | Line Item | 2021 | 2020 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Sales | $36,967 | $39,640 | $(2,673) | (6.7)% | | Labor and related costs | $8,070 | $15,336 | $(7,266) | (47.4)% | | Operating income (loss) | $(9,227) | $(9,659) | $432 | 4.5% | | Net income (loss) | $(9,461) | $(10,509) | $1,048 | 10.0% | Key Performance Indicators Q3 comparable sales grew 455.6% year-over-year, though Adjusted EBITDA remained negative, while six new restaurants opened in the nine-month period Adjusted EBITDA Reconciliation (in thousands) | Metric | Three Months Ended May 31, 2021 | Nine Months Ended May 31, 2021 | | :--- | :--- | :--- | | Net income (loss) | $770 | $(9,461) | | EBITDA | $2,082 | $(5,913) | | Employee retention credit | $(6,296) | $(8,931) | | Litigation accrual | $1,000 | $1,000 | | Adjusted EBITDA | $(2,592) | $(11,553) | Restaurant-Level Operating Profit (Loss) Reconciliation (in thousands) | Metric | Three Months Ended May 31, 2021 | Nine Months Ended May 31, 2021 | | :--- | :--- | :--- | | Operating income (loss) | $866 | $(9,227) | | Restaurant-level operating profit (loss) | $1,064 | $(1,423) | | Restaurant-level operating profit (loss) margin | 5.8% | (3.8)% | Comparable Restaurant Sales Performance | Period | 2021 | 2020 | | :--- | :--- | :--- | | Three Months Ended May 31 | 455.6% | (85.4)% | | Nine Months Ended May 31 | (20.5)% | (24.5)% | - The company opened 1 restaurant in Q3 2021 and a total of 6 restaurants in the nine months ended May 31, 2021, ending the period with 31 restaurants[124] Liquidity and Capital Resources Liquidity is maintained through a revolving credit line, with a $17.0 million draw funding operations and investments, and a new $50 million shelf registration - On May 7, 2021, the company filed a universal shelf registration statement on Form S-3 for a maximum aggregate offering price of up to $50 million[125] - As of May 31, 2021, the company had $17.0 million in outstanding borrowings under its Revolving Credit Agreement with Kura Japan, with $28.0 million of availability remaining[126] Summary of Cash Flows (Nine Months Ended May 31, in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(9,697) | $(10,695) | | Net cash used in investing activities | $(11,523) | $(9,571) | | Net cash provided by (used in) financing activities | $16,662 | $(748) | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are commodity price volatility and inflation, particularly in food, beverage, and labor costs - The company's profitability is dependent on its ability to manage changes in the costs of key operating resources, including food, beverage, and other commodities[144] - Primary inflationary factors affecting operations are food and beverage costs, labor costs, and energy costs, with minimum wage increases being a key driver[145] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of May 31, 2021, with no material changes during the quarter - Based on an evaluation, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[148] - No material changes to the company's internal control over financial reporting occurred during the most recent fiscal quarter[150] PART II. OTHER INFORMATION Legal Proceedings The company has accrued a $1.0 million liability for a potential settlement in a class action lawsuit related to California wage and hour laws - The company is subject to a putative class action complaint regarding California wage and hour laws and has recorded an accrued liability of $1.0 million for a potential settlement[58][153] Risk Factors No material changes have been made to the risk factors previously disclosed in the company's most recent Form 10-K annual report - There have been no material changes to the company's Risk Factors as previously reported in its Annual Report on Form 10-K[154] Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities or specific use of proceeds during the period - None[155] Exhibits Filed exhibits include an amendment to the credit agreement with its parent company and required officer certifications - Key exhibits filed include amendments to the revolving credit agreement and officer certifications[160]