KURA SUSHI USA, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited financial statements and the related notes included in this Quarterly Report on Form 10-Q and with the audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2023 (the “Annual Report”). In addition to historical information, the following discussion and analysis contains forward-looking statements, such as statements about our plans, objectives, expectations, and intentions, which are based on current expectations and that involve risks, uncertainties and assumptions as set forth and described in the “Special Note Regarding Forward-Looking Statements” and “Risk Factors” sections of the Annual Report . You should review those sections in our Annual Report for a discussion of important factors, including the continuing development of our business and other factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in this Quarterly Report on Form 10-Q. “Kura Sushi USA,” “Kura Sushi,” “Kura,” “we,” “us,” “our,” “our company” and the “Company” refer to Kura Sushi USA, Inc. unless expressly indicated or the context otherwise requires. Overview Kura Sushi USA is a technology-enabled Japanese restaurant concept that provides guests with a distinctive dining experience by serving authentic Japanese cuisine through an engaging revolving sushi service model, which we refer to as the “Kura Experience.” We encourage healthy lifestyles by serving freshly prepared Japanese cuisine using high-quality ingredients that are free from artificial seasonings, sweeteners, colorings, and preservatives. We aim to make quality Japanese cuisine accessible to our guests across the United States through affordable prices and an inviting atmosphere. Business Trends During the nine months ended May 31, 2024, we opened 13 restaurants and expanded our restaurant base to 63 restaurants in seventeen states and Washington, DC. We expect to open a total of 14 new restaurants in fiscal year 2024 and therefore, we expect our revenue and restaurant operating costs to increase in fiscal year 2024. We also expect our general and administrative expenses to increase on a dollar basis in fiscal 2024 to support the growth of the company and the compliance requirements of no longer being an emerging growth company. We have experienced inflationary pressures affecting our operations in certain areas such as labor, repairs and maintenance, restaurant supplies and energy costs. We have been able to partially offset these inflationary and other cost pressures to some extent through various actions, such as increasing menu prices, productivity improvements, and supply chain initiatives. Although inflation has moderated so far in 2024, inflation may continue to affect our results in the near future. In addition, our restaurant sales have softened since mid-April due to macroeconomic conditions of lower consumer spending. Key Financial Definitions Sales. Sales represent sales of food and beverages in restaurants. Restaurant sales in a given period are directly impacted by the number of restaurants we operate and comparable restaurant sales performance. Food and beverage costs. Food and beverage costs are variable in nature, change with sales volume and are influenced by menu mix and subject to increases or decreases based on fluctuations in commodity costs. Other important factors causing fluctuations in food and beverage costs include seasonality and restaurant-level management of food waste. Food and beverage costs are a substantial expense and are expected to grow proportionally as our sales grow. Labor and related expenses. Labor and related expenses include all restaurant-level management and hourly labor costs, including wages, employee benefits and payroll taxes. Similar to the food and beverage costs that we incur, labor and related expenses are expected to grow proportionally as our sales grow. Factors that influence fluctuations in our labor and related expenses include minimum wage and payroll tax legislation, the frequency and severity of workers’ compensation claims, healthcare costs and the performance of our restaurants. 14 Occupancy and related expenses. Occupancy and related expenses include rent for all restaurant locations and related taxes. Depreciation and amortization expenses. Depreciation and amortization expenses are periodic non-cash charges that consist of depreciation of fixed assets, including equipment and capitalized leasehold improvements. Depreciation is determined using the straight-line method over the assets’ estimated useful lives, which range from three to 20 years. Other costs. Other costs include credit card processing fees, repairs and maintenance, restaurant-level advertising and promotions, restaurant supplies, royalty payments to Kura Japan, stock-based compensation for restaurant-level employees, utilities and other restaurant-level expenses. General and administrative expenses. General and administrative expenses include expenses associated with corporate and regional supervision functions that support the operations of existing restaurants and development of new restaurants, including compensation and benefits, travel expenses, stock-based compensation for corporate-level employees, legal and professional fees, marketing costs, information systems, corporate office rent and other related corporate costs. General and administrative expenses are expected to grow as our unit base grows. Interest expense. Interest expense includes cash and non-cash charges related to our line of credit and finance lease obligations. Interest income. Interest income includes income earned on our money market funds. Income tax expense (benefit). Provision for income taxes represents federal, state and local current and deferred income tax expense (benefit). 15 Results of Operations The following tables present selected comparative results of operations for the three and nine months ended May 31, 2024 and May 31, 2023. Our financial results for these periods are not necessarily indicative of the financial results that we will achieve in future periods. Certain totals for the tables below may not recalculate or sum to 100% due to rounding. Three Months Ended May 31, 2024 2023 $ Change % Change (dollar amounts in thousands) Sales $ 63,082 $ 49,238 $ 13,844 28.1 % Restaurant operating costs Food and beverage costs 18,391 14,770 3,621 24.5 Labor and related costs 20,378 14,362 6,016 41.9 Occupancy and related expenses 4,318 3,554 764 21.5 Depreciation and amortization expenses 3,124 1,975 1,149 58.2 Other costs 9,076 6,165 2,911 47.2 Total restaurant operating costs 55,287 40,826 14,461 35.4 General and administrative expenses 8,857 7,012 1,845 26.3 Depreciation and amortization expenses 107 92 15 16.3 Total operating expenses 64,251 47,930 16,321 34.1 Operating (loss) income (1,169 ) 1,308 (2,477 ) (189.4 ) Other expense (income): Interest expense 15 23 (8 ) (34.8 ) Interest income (686 ) (436 ) (250 ) 57.3 (Loss) income before income taxes (498 ) 1,721 (2,219 ) (128.9 ) Income tax expense 60 41 19 46.3 Net (loss) income $ (558 ) $ 1,680 $ (2,238 ) 133.2 % Nine Months Ended May 31, 2024 2023 $ Change % Change (dollar amounts in thousands) Sales $ 171,848 $ 132,500 $ 39,348 29.7 % Restaurant operating costs Food and beverage costs 50,691 40,440 10,251 25.3 Labor and related costs 55,409 40,751 14,658 36.0 Occupancy and related expenses 12,179 9,504 2,675 28.1 Depreciation and amortization expenses 8,294 5,309 2,985 56.2 Other costs 25,023 17,352 7,671 44.2 Total restaurant operating costs 151,596 113,356 38,240 33.7 General and administrative expenses 25,634 20,776 4,858 23.4 Depreciation and amortization expenses 318 265 53 20.0 Total operating expenses 177,548 134,397 43,151 32.1 Operating loss (5,700 ) (1,897 ) (3,803 ) (200.5 ) Other expense (income): Interest expense 35 53 (18 ) (34.0 ) Interest income (2,280 ) (593 ) (1,687 ) 284.5 Loss before income taxes (3,455 ) (1,357 ) (2,098 ) 154.6 Income tax expense 148 66 82 124.2 Net loss $ (3,603 ) $ (1,423 ) $ (2,180 ) 153.2 % 16 Three Months Ended May 31, Nine Months Ended May 31, 2024 2023 2024 2023 (as a percentage of sales) Sales 100.0 % 100.0 % 100.0 % 100.0 % Restaurant operating costs Food and beverage costs 29.2 30.0 29.5 30.5 Labor and related costs 32.3 29.2 32.2 30.8 Occupancy and related expenses 6.8 7.2 7.1 7.2 Depreciation and amortization expenses 5.0 4.0 4.8 4.0 Other costs 14.4 12.5 14.6 13.1 Total restaurant operating costs 87.6 82.9 88.2 85.6 General and administrative expenses 14.0 14.2 14.9 15.7 Depreciation and amortization expenses 0.2 0.2 0.2 0.2 Total operating expenses 101.8 97.3 103.3 101.5 Operating (loss) income (1.8 ) 2.7 (3.3 ) (1.6 ) Other expense (income): Interest expense - - - - Interest income (1.1 ) (0.9 ) (1.3 ) (0.4 ) (Loss) income before income taxes (0.7 ) 3.6 (2.0 ) (1.2 ) Income tax expense 0.1 0.1 0.1 — Net (loss) income (0.8 ) % 3.5 % (2.1 ) % (1.2 ) % Three Months Ended May 31, 2024 Compared to Three Months Ended May 31, 2023 Sales. Sales were $63.1 million for the three months ended May 31, 2024 compared to $49.2 million for the three months ended May 31, 2023, representing an increase of $13.9 million, or 28.1%. The increase in sales was primarily driven by the sales resulting from seventeen new restaurants opened subsequent to May 31, 2023, as well as increases in menu prices during the same period. Comparable restaurant sales increased 0.6% for the three months ended May 31, 2024, as compared to the three months ended May 31, 2023. Food and beverage costs. Food and beverage costs were $18.4 million for the three months ended May 31, 2024 compared to $14.8 million for the three months ended May 31, 2023, representing an increase of $3.6 million, or 24.5%. The increase in food and beverage costs was primarily driven by costs associated with sales from seventeen new restaurants opened subsequent to May 31, 2023. As a percentage of sales, food and beverage costs decreased to 29.2% in the three months ended May 31, 2024 as compared to 30.0% in the three months ended May 31, 2023, primarily due to increases in menu prices and supply chain initiatives. Labor and related costs. Labor and related costs were $20.4 million for the three months ended May 31, 2024 compared to $14.4 million for the three months ended May 31, 2023, representing an increase of $6.0 million, or 41.9%. This increase in labor and related costs was primarily driven by additional labor costs incurred from seventeen new restaurants opened subsequent to May 31, 2023. As a percentage of sales, labor and related costs increased to 32.3% in the three months ended May 31, 2024 as compared to 29.2% in the three months ended May 31, 2023. The increase in cost as a percentage of sales was primarily due to increases in wage rates and higher pre-opening labor costs. 17 Occupancy and related expenses. Occupancy and related expenses were $4.3 million for the three months ended May 31, 2024 compared to $3.6 million for the three months ended May 31, 2023, representing an increase of $0.7 million, or 21.5%. The increase was primarily a result of additional lease expense related to the opening of seventeen new restaurants subsequent to May 31, 2023. As a percentage of sales, occupancy and related expenses decreased to 6.8% in the three months ended May 31, 2024 as compared to 7.2% in the three months ended May 31, 2023, primarily driven by leverage benefits from the increase in sales. Depreciation and amortization expenses. Depreciation and amortization expenses incurred as part of restaurant operating costs were $3.1 million for the three months ended May 31, 2024 compared to $2.0 million for the three months ended May 31, 2023, representing an increase of $1.1 million, or 58.2%. The increase consists of depreciation of property and equipment related to the seventeen new restaurants that opened subsequent to May 31, 2023. As a percentage of sales, depreciation and amortization expenses at the restaurant level increased to 5.0% in the three months ended May 31, 2024 as compared to 4.0% in the three months ended May 31, 2023, primarily driven by increases in depreciation and amortization due to the new restaurants opened as well as accelerated depreciation on planned restaurant remodels. Depreciation and amortization expenses incurred at the corporate level were $0.1 million for both the three months ended May 31, 2024 and May 31, 2023, and as a percentage of sales were both 0.2%, respectively. Other costs. Other costs were $9.1 million for the three months ended May 31, 2024 compared to $6.2 million for the three months ended May 31, 2023, representing an increase of $2.9 million, or 47.2%. The increase was primarily driven by an increase in costs related to the seventeen new restaurants that opened subsequent to May 31, 2023. As a percentage of sales, other costs increased to 14.4% in the three months ended May 31, 2024 as compared to 12.5% in the three months ended May 31, 2023, primarily driven by advertising and promotion, software licenses, repairs and maintenance, utilities, operating supplies and travel expenses. General and administrative expenses. General and administrative expenses were $8.9 million for the three months ended May 31, 2024 compared to $7.0 million for the three months ended May 31, 2023, representing an increase of $1.9 million, or 26.3%. This increase was primarily due to increases in $0.7 million in professional fees, $0.6 million in litigation accrual, compensation-related costs of $0.4 million due to additional headcount and $0.2 million in travel expenses. As a percentage of sales, general and administrative expenses decreased to 14.0% in the three months ended May 31, 2024 as compared to 14.2% in the three months ended May 31, 2023, primarily driven by leverage benefits from the increase in sales. Interest expense. Interest expense was $15 thousand for the three months ended May 31, 2024 compared to $23 thousand for the three months ended May 31, 2023, respectively. Interest income. Interest income was $686 thousand for the three months ended May 31, 2024 compared to $436 thousand for the three months ended May 31, 2023. The increase was primarily driven by investing our net cash proceeds from our $64.3 million follow-on offering completed in April 2023 into cash and cash equivalents and short-term investments. Income tax expense. Income tax expense was $60 thousand for the three months ended May 31, 2024 compared to an income tax expense of $41 thousand for the three months ended May 31, 2023. For further discussion of our income taxes, see “Note 9. Income Taxes” in the Notes to Condensed Financial Statements. Nine Months Ended May 31, 2024 Compared to Nine Months Ended May 31, 2023 Sales. Sales were $171.8 million for the nine months ended May 31, 2024 compared to $132.5 million for the nine months ended May 31, 2023, representing an increase of $39.3 million, or 29.7%. The increase in sales was primarily driven by the sales resulting from seventeen new restaurants opened subsequent to May 31, 2023, as well as increases in menu prices during the same period. Comparable restaurant sales increased 2.4% for the nine months ended May 31, 2024, as compared to the nine months ended May 31, 2023. Food and beverage costs. Food and beverage costs were $50.7 million for the nine months ended May 31, 2024 compared to $40.4 million for the nine months ended May 31, 2023, representing an increase of $10.3 million, or 25.3%. The increase in food and beverage costs was primarily driven by costs associated with sales from seventeen new restaurants opened subsequent to May 31, 2023. As a percentage of sales, food and beverage costs decreased to 29.5% in the nine months ended May 31, 2024 as compared to 30.5% in the nine months ended May 31, 2023, primarily due to increases in menu prices and supply chain initiatives. Labor and related costs. Labor and related costs were $55.4 million for the nine months ended May 31, 2024 compared to $40.8 million for the nine months ended May 31, 2023, representing an increase of $14.6 million, or 36.0%. This increase in labor and related costs was primarily driven by additional labor costs incurred from seventeen new restaurants opened subsequent to May 31, 2023. As a percentage of sales, labor and related costs increased to 32.2% in the nine months ended May 31, 2024 as compared to 30.8% in the nine months ended May 31, 2023. The increase in cost as a percentage of sales was primarily due to increases in wage rates and higher pre-opening labor costs. 18 Occupancy and related expenses. Occupancy and related expenses were $12.2 million for the nine months ended May 31, 2024 compared to $9.5 million for the nine months ended May 31, 2023, representing an increase of $2.7 million, or 28.1%. The increase was primarily a result of additional lease expense related to the opening of seventeen new restaurants opened subsequent to May 31, 2023. As a percentage of sales, occupancy and related expenses remained consistent at 7.1% in the nine months ended May 31, 2024, compared to 7.2% in the nine months ended May 31, 2023. Depreciation and amortization expenses. Depreciation and amortization expenses incurred as part of restaurant operating costs were $8.3 million for the nine months ended May 31, 2024 compared to $5.3 million for the nine months ended May 31, 2023, representing an increase of $3.0 million, or 56.2%. The increase consists of depreciation of property and equipment related to seventeen new restaurants opened subsequent to May 31, 2023. As a percentage of sales, depreciation and amortization expenses at the restaurant level increased to 4.8% for the nine months ended May 31, 2024 as compared to 4.0% for the nine months ended May 31, 2023, primarily driven by increases in depreciation and amortization due to the new restaurants opened as well as accelerated depreciation on planned restaurant remodels. Depreciation and amortization expenses incurred at the corporate level were $0.3 million for the nine months ended May 31, 2024 and May 31, 2023, and as a percentage of sales were both 0.2%, respectively. Other costs. Other costs were $25.0 million for the nine months ended May 31, 2024 compared to $17.4 million for the nine months ended May 31, 2023, representing an increase of $7.6 million, or 44.2%. The increase was primarily driven by an increase in costs related to seventeen new restaurants opened subsequent to May 31, 2023. As a percentage of sales, other costs increased to 14.6% in the nine months ended May 31, 2024 from 13.1% in the nine months ended May 31, 2023, primarily driven by operating supplies, advertising and promotion, software licenses, repairs and maintenance, travel expenses and utilities. General and administrative expenses. General and administrative expenses were $25.6 million for the nine months ended May 31, 2024 compared to $20.8 million for the nine months ended May 31, 2023, representing an increase of $4.8 million, or 23.4%. This increase was primarily due to increases in compensation related costs of $1.9 million due to additional headcount, $1.4 million in professional fees, $0.8 million in litigation accrual, $0.4 million in travel expenses and $0.3 in accounts with differences under $0.1 million. As a percentage of sales, general and administrative expenses decreased to 14.9% in the nine months ended May 31, 2024 from 15.7% in the nine months ended May 31, 2023, primarily driven by leverage benefits from the increase in sales. Interest expense. Interest expense was $35 thousand for the nine months ended May 31, 2024 compared to $53 thousand for the nine months ended May 31, 2023. Interest income. Interest income was $2.3 million for the nine months ended May 31, 2024 compared to $0.6 million for the nine months ended May 31, 2023. The increase was primarily driven by investing our net cash proceeds from our $64.3 million follow-on offering completed in April 2023 into cash and cash equivalents and short-term investments. Income tax expense. Income tax expense was $148 thousand for the nine months ended May 31, 2024 compared to $66 thousand for the nine months ended May 31, 2023. For further discussion of our income taxes, see “Note 9. Income Taxes” in the Notes to Condensed Financial Statements. Key Performance Indicators In assessing the performance of our business, we consider a variety of financial and performance measures. The key measures for determining how our business is performing include sales, EBITDA, Adjusted EBITDA, Restaurant-level Operating Profit, Restaurant-level Operating Profit margin, comparable restaurant sales performance, and the number of restaurant openings. Sales Sales represents sales of food and beverages in restaurants, as shown on our statements of operations and comprehensive income (loss). Several factors affect our restaurant sales in any given period, including the number of restaurants in operation, guest traffic and average check. EBITDA and Adjusted EBITDA EBITDA is defined as net income (loss) before interest, income taxes and depreciation and amortization. Adjusted EBITDA is defined as EBITDA plus stock-based compensation expense, non-cash lease expense and asset disposals, closure costs and restaurant impairments, as well as certain items, such as litigation accrual that we believe are not indicative of our core operating results. Adjusted EBITDA margin is defined as Adjusted EBITDA divided by sales. EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures which are intended as supplemental measures of our performance and are neither required by, nor presented in accordance with, GAAP. We believe that EBITDA, Adjusted EBITDA and Adjusted EBITDA margin provide useful 19 information to management and investors regarding certain financial and business trends relating to our financial condition and operating results. However, these measures may not provide a complete understanding of the operating results of the Company as a whole and such measures should be reviewed in conjunction with our GAAP financial results. We believe that the use of EBITDA, Adjusted EBITDA and Adjusted EBITDA margin provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial measures with those of comparable companies, which may present similar non-GAAP financial measures to investors. However, you should be aware when evaluating EBITDA, Adjusted EBITDA and Adjusted EBITDA margin that in the future we may incur expenses similar to those excluded when calculating these measures. In addition, our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our computation of Adjusted EBITDA and Adjusted EBITDA margin may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted EBITDA and Adjusted EBITDA margin in the same fashion. Because of these limitations, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA, Adjusted EBITDA and Adjusted EBITDA margin on a supplemental basis. You should review the reconciliation of net income (loss) to EBITDA, Adjusted EBITDA and Adjusted EBITDA margin below and not rely on any single financial measure to evaluate our business. The following table reconciles net loss to EBITDA and Adjusted EBITDA: Three Months Ended May 31, Nine Months Ended May 31, 2024 2023 2024 2023 (amounts in thousands) Net (loss) income $ (558 ) $ 1,680 $ (3,603 ) $ (1,423 ) Interest income, net (671 ) (413 ) (2,245 ) (540 ) Income tax expense 60 41 148 66 Depreciation and amortization expenses 3,231 2,067 8,612 5,574 EBITDA 2,062 3,375 2,912 3,677 Stock-based compensation expense (a) 1,197 975 3,169 2,570 Non-cash lease expense (b) 630 768 2,220 1,818 Litigation accrual (c) 562 — 767 — Adjusted EBITDA $ 4,451 $ 5,118 $ 9,068 $ 8,065 Adjusted EBITDA margin 7.1 % 10.4 % 5.3 % 6.1 % (a) Stock-based compensation expense includes non-cash stock-based compensation, which is comprised of restaurant-level stock-based compensation included in other costs and of corporate-level stock-based compensation included in general and administrative expenses in the statements of operations and comprehensive income (loss). For further details of stock-based compensation, see “Note 5. Stock-based Compensation” in the notes to condensed financial statements included in this Quarterly Report on Form 10-Q. (b) Non-cash lease expense includes lease expense from the date of possession of our restaurants that did not require cash outlay in the respective periods. (c) Litigation accrual includes accruals related to legal claims or settlements. Restaurant-level Operating Profit and Restaurant-level Operating Profit Margin Restaurant-level Operating Profit (Loss) is defined as operating income (loss) plus depreciation and amortization; stock-based compensation expense; pre-opening costs and general and administrative expenses which are considered normal, recurring, cash operating expenses and are essential to support the development and operations of our restaurants; non-cash lease expense; asset disposals, closure costs and restaurant impairments; less corporate-level stock-based compensation expense recognized within general and administrative expenses. Restaurant-level Operating Profit (Loss) margin is defined as Restaurant-level Operating Profit (Loss) divided by sales. Restaurant-level Operating Profit (Loss) and Restaurant-level Operating Profit (Loss) margin are non-GAAP measures which are intended as supplemental measures of our performance and are neither required by, nor presented in accordance with, GAAP. We believe that Restaurant-level Operating Profit (Loss) and Restaurant-level Operating Profit (Loss) margin provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results, as this measure depicts normal, recurring cash operating expenses essential to supporting the development and operations of our restaurants. However, these measures may not provide a complete understanding of the operating results of the Company as a whole and such measures should be reviewed in conjunction with our GAAP financial results. We expect 20 Restaurant-level Operating Profit (Loss) to increase in proportion to the number of new restaurants we open and our comparable restaurant sales growth. We present Restaurant-level Operating Profit (Loss) because it excludes the impact of general and administrative expenses, which are not incurred at the restaurant level. We also use Restaurant-level Operating Profit (Loss) to measure operating performance and returns from opening new restaurants. Restaurant-level Operating Profit (Loss) margin allows us to evaluate the level of Restaurant-level Operating Profit (Loss) generated from sales. However, you should be aware that Restaurant-level Operating Profit (Loss) and Restaurant-level Operating Profit (Loss) margin are financial measures that are not indicative of overall results for the Company, and Restaurant-level Operating Profit (Loss) and Restaurant-level Operating Profit (Loss) margin do not accrue directly to the benefit of stockholders because of corporate-level expenses excluded from such measures. In addition, when evaluating Restaurant-level Operating Profit (Loss) and Restaurant-level Operating Profit (Loss) margin, you should be aware that in the future we may incur expenses similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our computation of Restaurant-level Operating Profit (Loss) and Restaurant-level Operating Profit (Loss) margin may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Restaurant-level Operating Profit (Loss) and Restaurant-level Operating Profit (Loss) margin in the same fashion. Restaurant-level Operating Profit (Loss) and Restaurant-level Operating Profit (Loss) margin have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. The following table reconciles operating loss to Restaurant-level Operating Profit and Restaurant-level Operating Profit margin: Three Months Ended May 31, Nine Months Ended May 31, 2024 2023 2024 2023 (amounts in thousands) Operating (loss) income $ (1,169 ) $ 1,308 $ (5,700 ) $ (1,897 ) Depreciation and amortization expenses 3,231 2,067 8,612 5,574 Stock-based compensation expense (a) 1,197 975 3,169 2,570 Pre-opening costs (b) 861 258 2,611 1,011 Non-cash lease expense (c) 630 768 2,220 1,818 General and administrative expenses 8,857 7,012 25,634 20,776 Corporate-level stock-based compensation in general and administrative expenses (1,003 ) (812 ) (2,672 ) (2,188 ) Restaurant-level operating profit $ 12,604 $ 11,576 $ 33,874 $ 27,664 Operating (loss) income margin (1.9 )% 2.7 % (3.3 )% (1.4 )% Restaurant-level operating profit margin 20.0 % 23.5 % 19.7 % 20.9 % (a) Stock-based compensation expense includes non-cash stock-based compensation, which is comprised of restaurant-level stock-based compensation included in other costs and of corporate-level stock-based compensation included in general and administrative expenses in the statements of operations and comprehensive income (loss). For further details of stock-based compensation, see “Note 5. Stock-based Compensation” in the notes to condensed financial statements included in this Quarterly Report on Form 10-Q. (b) Pre-opening costs consist of labor costs and travel expenses for new employees and trainers during the training period, recruitment fees, legal fees, cash-based lease expenses incurred between the date of possession and the opening day of our restaurants, and other related pre-opening costs. (c) Non-cash lease expense includes lease expense from the date of possession of our restaurants that did not require cash outlay in the respective periods. 21 Comparable Restaurant Sales Performance Comparable restaurant sales performance refers to the change in year-over-year sales for the comparable restaurant base. We include restaurants in the comparable restaurant base that have been in operation for at least 18 months prior to the start of the accounting period presented due to new restaurants experiencing a period of higher sales upon opening. For restaurants that were temporarily closed for consecutive days, which primarily occurs during renovations, the comparative period was also adjusted. Measuring our comparable restaurant sales performance allows us to evaluate the performance of our existing restaurant base. Various factors impact comparable restaurant sales, including: • consumer recognition of our brand and our ability to respond to changing consumer preferences; • overall economic trends, particularly those related to consumer spending; • our ability to operate restaurants effectively and efficiently to meet consumer expectations; • pricing; • guest traffic; • per-guest spend and average check; • marketing and promotional efforts; • local competition; and • opening of new restaurants in the vicinity of existing locations. Since opening new restaurants will be a significant component of our sales growth, comparable restaurant sales performance is only one measure of how we evaluate our performance. The following table shows the comparable restaurant sales performance: Three Months Ended May 31, Nine Months Ended May 31, 2024 2023 2024 2023 Comparable restaurant sales performance (%) 0.6% 10.3% 2.4% 11.0% Comparable restaurant base 40 32 36 30 Number of Restaurant Openings The number of restaurant openings reflects the number of restaurants opened during a particular reporting period. Before we open new restaurants, we incur pre-opening costs. New restaurants may not be profitable, and their sales performance may not follow historical patterns. The number and timing of restaurant openings has had, and is expected to continue to have, an impact on our results of operations. The following table shows the growth in our restaurant base: Three Months Ended May 31, Nine Months Ended May 31, 2024 2023 2024 2023 Restaurant activity: Beginning of period 59 45 50 40 Openings 4 1 13 6 End of period 63 46 63 46 Liquidity and Capital Resources Our primary uses of cash are for operational expenditures and capital investments, including new restaurants, costs incurred for restaurant remodels and restaurant fixtures. On April 13, 2023, we completed an underwritten public offering of common stock pursuant to our universal shelf registration statement on Form S-3, selling an aggregate of 1,265,000 shares of Class A common stock, including the exercise in full of the underwriters’ option to purchase 165,000 additional shares, at the price of $54.00 per share less an underwriting discount of $2.70 per share. We received aggregate net proceeds of $64.3 million after deducting the underwriting discounts and commissions and offering expenses payable by us. The proceeds will be used for general corporate purposes, including capital expenditures, working capital, and 22 other business purposes. We made no payments to directors, officers or persons owning 10% or more of our common stock or to their associates, or to our affiliates. During the nine months ended May 31, 2024, we had no borrowings under the Revolving Credit Agreement and have $45.0 million of availability remaining. As of May 31, 2024, we did not have any material off-balance sheet arrangements. The significant components of our working capital are liquid assets such as cash, cash equivalents, receivables and short-term investments reduced by accounts payable and accrued expenses. Our working capital position benefits from the fact that we generally collect cash from sales to guests the same day or, in the case of credit or debit card transactions, within several days of the related sale, while we typically have longer payment terms with our vendors. We believe that cash provided by operating activities, cash on hand, cash equivalents, short-term investments and availability under our existing Revolving Credit Agreement, will be sufficient to fund our lease obligations, capital expenditures and working capital needs for at least the next 12 months. Summary of Cash Flows Our primary sources of liquidity and cash flows are operating cash flows, cash on hand, cash equivalents and short-term investments. We use this to fund investing expenditures for new restaurant openings, reinvest in our existing restaurants, and our working capital. Our working capital position benefits from the fact that we generally collect cash from sales to guests the same day, or in the case of credit or debit card transactions, within several days of the related sale, and we typically have at least 30 days to pay our vendors. The following table summarizes our cash flows for the periods presented: Nine Months Ended May 31, 2024 2023 Statement of Cash Flow data: (amounts in thousands) Net cash provided by operating activities $ 14,943 $ 7,063 Net cash used in investing activities $ (27,257 ) $ (37,231 ) Net cash provided by financing activities $ 2,022 $ 64,860 Cash Flows Provided by Operating Activities Net cash provided by operating activities during the nine months ended May 31, 2024 was $14.9 million, primarily due to a net loss of $3.6 million, non-cash charges of $8.6 million for depreciation and amortization, $3.2 million for stock-based compensation, and $3.4 million in non-cash lease expense, and net cash outflows of $3.4 million from changes in operating assets and liabilities. Net cash provided by operating activities during the nine months ended May 31, 2023 was $7.1 million, which results from a net loss of $1.4 million, non-cash charges of $5.6 million for depreciation and amortization, $2.6 million for stock-based compensation, and $2.8 million in non-cash lease expense, and net cash outflows of $2.5 million from changes in operating assets and liabilities. Cash Flows Used in Investing Activities Net cash used in investing activities during the nine months ended May 31, 2024 was $27.3 million, primarily due to $3.3 million in purchases of short-term investments, $34.0 million in purchases of property and equipment and $0.2 million in purchases of liquor licenses offset by $10.5 million of redemption of short-term investments. The increase in purchases of property and equipment in the nine months ended May 31, 2024 is primarily related to capital expenditures for current and future restaurant openings and renovations, maintaining our existing restaurants and other projects. Net cash used in investing activities during the nine months ended May 31, 2023 was $37.2 million, primarily due to $8.7 million in purchases of short-term investments, $27.2 million in purchases of property and equipment and $0.9 million in purchases of liquor licenses. The purchases of property and equipment in the nine months ended May 31, 2023 is primarily related to capital expenditures for current and future restaurant openings and renovations, maintaining our existing restaurants and other projects. 23 Cash Flows Provided by Financing Activities Net cash provided by financing activities during the nine months ended May 31, 2024 was $2.0 million and is primarily due to $2.3 million of proceeds from exercise of stock options offset by $0.2 million in taxes paid on vested RSUs. Net cash provided by financing activities during the nine months ended May 31, 2023 was $64.9 million and is primarily due to aggregate net proceeds of $64.3 million after deducting the underwriting discounts and commissions and offering expenses payable, and $1.0 million of proceeds from exercise of stock options offset by $0.4 million in repayments of principal on finance leases. Material Cash Requirements As of May 31, 2024, we had $13.0 million in contractual obligations relating to the construction of new restaurants and purchase commitments for goods related to restaurant operations. All contractual obligations are expected to be paid during the next 12 months utilizing cash and cash equivalents on hand and provided by operations. For operating and finance lease obligations, see “Note 3. Leases” in the Notes to Condensed Financial Statements included in this Quarterly Report on Form 10-Q. Recent Accounting Pronouncement For a description of our recently adopted accounting pronouncement, including the respective date of adoption and expected effect on our results of operations and financial condition, see “Part I, Item 1, Note 1. Organization and Basis of Presentation” of the Notes to Condensed Financial Statements included in this Quarterly Report on Form 10-Q. Critical Accounting Policies and Estimates Our discussion and analysis of operating results and financial condition are based on our financial statements. Preparing our financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, expenses and related disclosures of contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Our critical accounting policies are those that materially affect our financial statements. Our critical accounting estimates are those that involve subjective or complex judgments by management. Although these estimates are based on management’s best knowledge of current events and actions that may impact us in the future, actual results may be materially different from the estimates. We believe the assessment of potential impairments of long-lived assets is affected by significant judgments and estimates used in the preparation of our financial statements and that the judgments and estimates are reasonable. There have been no material changes in our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10‑K for the fiscal year ended August 31, 2023. Please refer to “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” of our Annual Report on Form 10‑K for the fiscal year ended August 31, 2023 for a discussion of our critical accounting policies and estimates. Jumpstart Our Business Startups Act of 2012 We qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the JOBS Act. Section 107 of the JOBS Act 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. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. 24 Subject to certain conditions set forth in the JOBS Act, we are also eligible for and intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, (ii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We may take advantage of these exemptions until we are no longer an emerging growth company. We will continue to be an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which the market value of our Class A common stock that is held by non-affiliates exceeds $700 million as of June 30 of that fiscal year, (ii) the last day of the fiscal year in which our annual gross revenues exceed $1.235 billion during such fiscal year (as indexed for inflation), (iii) the date on which we have issued more than $1 billion in non-convertible debt in the prior three-year period or (iv) the last day of the fiscal year following the fifth anniversary of the date of the completion of our initial public offering, or August 31, 2024. Item 3. Quantitative and Qualitati ve Disclosures About Market Risk. There have been no material changes to our market risk during the nine months ended May 31, 2024. For a discussion of our exposure to market risk, refer to our market risk disclosures set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of our 2023 Form 10-K.