KURA SUSHI USA, INC. 10-Q

Item 1. Financial Statements. Kura Sushi USA, Inc. Condensed Balance Sheets (amounts in thousands, except par value) (Unaudited) November 30, 2024 August 31, 2024 Assets Current assets: Cash and cash equivalents $ 107,677 $ 50,986 Accounts and other receivables 4,866 4,573 Inventories 2,107 2,219 Due from affiliate 36 166 Prepaid expenses and other current assets 3,572 3,391 Total current assets 118,258 61,335 Non-current assets: Property and equipment – net 146,282 138,589 Operating lease right-of-use assets 133,638 123,682 Deposits and other assets 5,591 4,916 Total assets $ 403,769 $ 328,522 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 8,960 $ 8,977 Accrued expenses and other current liabilities 3,196 4,261 Salaries and wages payable 7,728 8,310 Operating lease liabilities – current 11,732 10,674 Due to affiliate 670 373 Sales tax payable 1,842 1,904 Total current liabilities 34,128 34,499 Non-current liabilities: Operating lease liabilities – non-current 141,129 130,677 Other liabilities 935 808 Total liabilities 176,192 165,984 Commitments and contingencies (Note 8) Stockholders' equity: Preferred stock, $ 0.001 par value; 1,000 shares authorized, no shares issued or outstanding — — Class A common stock, $ 0.001 par value; 50,000 shares authorized, 11,064 and 10,253 shares issued and outstanding as of November 30, 2024 and August 31, 2024, respectively 11 10 Class B common stock, $ 0.001 par value; 10,000 shares authorized, 1,000 shares issued and outstanding as of November 30, 2024 and August 31, 2024 1 1 Additional paid-in capital 261,514 195,515 Accumulated deficit ( 33,949 ) ( 32,988 ) Total stockholders' equity 227,577 162,538 Total liabilities and stockholders' equity $ 403,769 $ 328,522 The accompanying notes are an integral part of these condensed financial statements. 1 Kura Sushi USA, Inc. Condensed Statements of Operations and Comprehensive Loss (amounts in thousands, except per share data) (Unaudited) Three Months Ended November 30, 2024 2023 Sales $ 64,456 $ 51,475 Restaurant operating costs: Food and beverage costs 18,667 15,365 Labor and related costs 21,235 16,410 Occupancy and related expenses 4,754 3,908 Depreciation and amortization expenses 3,091 2,476 Other costs 9,341 7,444 Total restaurant operating costs 57,088 45,603 General and administrative expenses 8,733 8,609 Depreciation and amortization expenses 109 104 Total operating expenses 65,930 54,316 Operating loss ( 1,474 ) ( 2,841 ) Other expense (income): Interest expense 13 8 Interest income ( 565 ) ( 840 ) Loss before income taxes ( 922 ) ( 2,009 ) Income tax expense 39 38 Net loss $ ( 961 ) $ ( 2,047 ) Net loss per Class A and Class B shares Basic $ ( 0.08 ) $ ( 0.18 ) Diluted $ ( 0.08 ) $ ( 0.18 ) Weighted average Class A and Class B shares outstanding Basic 11,416 11,150 Diluted 11,416 11,150 Other comprehensive income (loss): Unrealized gain on short-term investments $ — $ 3 Comprehensive loss $ ( 961 ) $ ( 2,044 ) The accompanying notes are an integral part of these condensed financial statements. 2 Kura Sushi USA, Inc. Condensed Statements of Stockholders’ Equity (amounts in thousands) (Unaudited) Common Stock Class A Class B Additional Paid-in Accumulated Total Stockholders' Shares Amount Shares Amount Capital Deficit Equity Balances as of August 31, 2024 10,253 $ 10 1,000 $ 1 $ 195,515 $ ( 32,988 ) $ 162,538 Stock-based compensation — — — — 1,152 — 1,152 Employee stock plan 11 — — — 493 — 493 Issuance of common stock in connection with follow-on public offering, net of underwriter discounts and issuance costs 800 1 — — 64,354 — 64,355 Net loss — — — — — ( 961 ) ( 961 ) Balances as of November 30, 2024 11,064 $ 11 1,000 $ 1 $ 261,514 $ ( 33,949 ) $ 227,577 Common Stock Accumulated Class A Class B Additional Paid-in Accumulated Other Comprehensive Total Stockholders' Shares Amount Shares Amount Capital Deficit Income Equity Balances as of August 31, 2023 10,147 $ 10 1,000 $ 1 $ 188,771 $ ( 24,184 ) $ 43 $ 164,641 Stock-based compensation — — — — 1,034 — — 1,034 Employee stock plan 8 — — — 110 — — 110 Net loss — — — — — ( 2,047 ) — ( 2,047 ) Other comprehensive income — — — — — — 3 3 Balances as of November 30, 2023 10,155 $ 10 1,000 $ 1 $ 189,915 $ ( 26,231 ) $ 46 $ 163,741 The accompanying notes are an integral part of these condensed financial statements. 3 Kura Sushi USA, Inc. Condensed Stateme nts of Cash Flows (amounts in thousands) (Unaudited) Three Months Ended November 30, 2024 2023 Cash flows from operating activities Net loss $ ( 961 ) $ ( 2,047 ) Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization 3,200 2,600 Stock-based compensation, net of amounts capitalized 1,126 1,006 Non-cash lease expense 1,279 1,070 Changes in operating assets and liabilities: Accounts and other receivables ( 426 ) 93 Inventories 112 ( 24 ) Due from affiliate 130 102 Prepaid expenses and other current assets ( 181 ) 243 Deposits and other assets 135 5 Accounts payable 1,190 ( 411 ) Accrued expenses and other current liabilities ( 909 ) 1,380 Salaries and wages payable ( 582 ) ( 1,428 ) Operating lease liabilities 544 ( 135 ) Due to affiliate ( 143 ) ( 22 ) Sales tax payable ( 152 ) ( 4 ) Net cash provided by operating activities 4,362 2,428 Cash flows from investing activities Payments for property and equipment ( 11,555 ) ( 9,395 ) Payments for initial direct costs ( 135 ) ( 45 ) Payments for purchases of liquor licenses ( 810 ) ( 79 ) Purchases of short-term investments — ( 3,000 ) Redemption of short-term investments — 4,499 Net cash used in investing activities ( 12,500 ) ( 8,020 ) Cash flows from financing activities Repayment of principal on finance leases ( 18 ) ( 54 ) Proceeds from exercise of stock options 493 110 Proceeds from the follow-on public offering, net of discounts and commissions 64,626 — Payments of costs related to the follow-on offering ( 272 ) — Net cash provided by financing activities 64,829 56 Increase in cash and cash equivalents 56,691 ( 5,536 ) Cash and cash equivalents, beginning of period 50,986 69,697 Cash and cash equivalents, end of period $ 107,677 $ 64,161 Noncash investing activities Acquisition of finance leases $ 78 $ 28 Amounts unpaid for purchases of property and equipment $ 1,943 $ 2,865 Stock-based compensation capitalized to property and equipment, net $ 26 $ 28 The accompanying notes are an integral part of these condensed financial statements. 4 Kura Sushi USA, Inc. Notes to Conden sed Financial Statements (Unaudited) Note 1. Organization and Basis of Presentation Kura Sushi USA, Inc. 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 the Company refers to as the “Kura Experience.” Kura Sushi encourages healthy lifestyles by serving freshly prepared Japanese cuisine using high-quality ingredients that are free from artificial seasonings, sweeteners, colorings, and preservatives. Kura Sushi aims to make quality Japanese cuisine accessible to its guests across the United States through affordable prices and an inviting atmosphere. “Kura Sushi USA,” “Kura Sushi,” “Kura,” “our” and the “Company” refer to Kura Sushi USA, Inc. unless expressly indicated or the context otherwise requires. Follow-On Offering On November 13, 2024, the Company completed an underwritten public offering of common stock pursuant to the Company’s universal shelf registration statement on Form S-3, selling an aggregate of 800,328 shares of Class A common stock, including the exercise in full of the underwriters’ option to purchase 104,390 additional shares, at the price of $ 85.00 per share less an underwriting discount of $ 4.25 per share. The Company received aggregate net proceeds of $ 64.4 million after deducting the underwriting discounts and commissions and offering expenses payable by the Company. The proceeds are to be used for general corporate purposes, including capital expenditures, working capital, and other business purposes. No payments were made by the Company to directors, officers or persons owning 10 % or more of the Company’s common stock or to their associates, or to the Company’s affiliates. Basis of Presentation The accompanying unaudited condensed financial statements (the “Condensed Financial Statements”) have been prepared by the Company in accordance with generally accepted accounting principles in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. As such, these Condensed Financial Statements should be read in conjunction with the Company’s audited financial statements and accompanying notes included in its Annual Report on Form 10-K for the fiscal year ended August 31, 2024. The accounting policies followed by the Company are set forth in Part II, Item 8, Note 2, Basis of Presentation and Summary of Significant Accounting Policies, of the Notes to Financial Statements included in the Company’s Annual Report on Form 10‑K for the fiscal year ended August 31, 2024. In the opinion of management, all adjustments necessary to fairly state the Condensed Financial Statements have been made. All such adjustments are of a normal, recurring nature. The results of operations for interim periods are not necessarily indicative of results to be expected for the fiscal year ending August 31, 2025 or for any other future annual or interim period. Reclassifications Certain prior period amounts have been reclassified to conform to the current period presentation. Fiscal Year The Company’s fiscal year begins on September 1 and ends on August 31, and references made to “fiscal year 2025” and “fiscal year 2024” refer to the Company’s fiscal years ending August 31, 2025 and ended August 31, 2024 , respectively. Use of Estimates Preparing financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods presented. Significant items subject to such estimates include asset retirement obligations, stock-based compensation, the useful lives of assets, the assessment of the recoverability of long-lived assets, and income taxes. The Company evaluates its estimates and 5 assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could differ materially from those estimates and assumptions. Recently Issued Accounting Pronouncements In November 2024, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2024-03, “Disaggregation of Income Statement Expenses, which requires public companies to disaggregate key expense categories such as inventory purchases, employee compensation and depreciation in their financial statements. The guidance is effective for all public entities with fiscal years beginning after December 15, 2026 and interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. The Company is currently evaluating the effects of this pronouncement on its financial statements and expects the update to result in additional disclosures. In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”, which requires greater disaggregation of income tax disclosures related to the income tax rate reconciliation and income taxes paid and effective for fiscal years beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued. The amendments should be applied on a prospective basis although retrospective application is permitted. The Company is currently evaluating the effects of this pronouncement on its financial statements and expects the update to result in additional disclosures. In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” which improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The guidance in this update is effective for all public entities for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the effects of this pronouncement on its financial statements and expects the update to result in additional disclosures. Note 2. Balance Sheet Components Accounts and Other Receivables November 30, 2024 August 31, 2024 (amounts in thousands) Lease receivables $ 1,567 $ 1,701 Credit card and other receivables 3,299 2,872 Total accounts and other receivables $ 4,866 $ 4,573 Property and Equipment - net November 30, 2024 August 31, 2024 (amounts in thousands) Leasehold improvements $ 111,292 $ 100,345 Lease assets 6,148 6,108 Furniture and fixtures 57,254 50,951 Computer equipment 4,094 3,714 Vehicles 273 243 Software 1,017 1,017 Construction in progress 8,249 15,080 Property and equipment – gross 188,327 177,458 Less: accumulated depreciation and amortization ( 42,045 ) ( 38,869 ) Total property and equipment – net $ 146,282 $ 138,589 Depreciation and amortization expense for property and equipment was $ 3.2 million and $ 2.6 million for the three months ended November 30, 2024 and November 30, 2023, respectively. Accrued Expenses and Other Current Liabilities 6 November 30, 2024 August 31, 2024 (amounts in thousands) Credit card purchases $ 1,331 $ 1,443 Income taxes payable 202 169 Finance leases - current 40 30 Other current liabilities 1,623 2,619 Total accrued expenses and other current liabilities $ 3,196 $ 4,261 Note 3. Leases The Company has operating and finance leases for its corporate office, restaurant locations, office equipment, kitchen equipment and automobiles. The Company’s finance leases are immaterial. The Company’s leases have remaining lease terms of less than 1 year to 30 years, some of which include options to extend the leases. Lease related costs recognized in the statements of operations and comprehensive income (loss) are as follows: Three Months Ended November 30, 2024 2023 (amounts in thousands) Operating lease cost Classification Operating lease cost Occupancy and related expenses, other costs and general and administrative expenses $ 3,804 $ 3,061 Variable lease cost Occupancy and related expenses, and general and administrative expenses 991 851 Total operating lease cost $ 4,795 $ 3,912 Supplemental disclosures of cash flow information related to leases are as follows: Three Months Ended November 30, 2024 2023 (amounts in thousands) Operating cash flows paid for operating lease liabilities $ 3,166 $ 2,425 Operating right-of-use assets obtained in exchange for new operating lease liabilities $ 11,016 $ 4,990 As of November 30, 2024, the Company had an additional $ 43.7 million of operating leases related to restaurants for which the Company had not yet taken possession. 7 Note 4. Related Party Transactions Kura Sushi, Inc. (“Kura Japan”) is the majority stockholder of the Company and is incorporated and headquartered in Japan. In August 2019, the Company entered into a Shared Services Agreement with Kura Japan, pursuant to which Kura Japan provides the Company with certain strategic, operational and other support services, including assigning certain employees to work for the Company as expatriates to provide support to the Company’s operations, sending its employees to the Company on a short-term basis to provide support for the opening of new restaurants or renovation of existing restaurants, and providing the Company with certain supplies, parts and equipment for use in the Company’s restaurants. In addition, the Company has agreed to continue to provide Kura Japan with certain translational support services and market research. In exchange for such services, supplies, parts and equipment, the parties pay fees to each other as set forth under the Shared Services Agreement. A right of setoff is not required; however, from time to time, either party will net settle transactions as needed. Purchases of administrative supplies, expatriate salaries and travel and other administrative expenses payable to Kura Japan are included in general and administrative expenses in the accompanying statements of operations and comprehensive income (loss). Purchases of equipment from Kura Japan are included in property and equipment in the accompanying balance sheets. In August 2019, the Company entered into an Amended and Restated Exclusive License Agreement (the “License Agreement”) with Kura Japan. Pursuant to the License Agreement, the Company pays Kura Japan a royalty fee of 0.5 % of the Company’s net sales in exchange for an exclusive, royalty-bearing license for the use of certain of Kura Japan’s intellectual property rights, including, but not limited to, Kura Japan’s trademarks for “Kura Sushi,” “Mr. Fresh” and “Kura Revolving Sushi Bar,” and patents for a food management system and the Mr. Fresh protective dome, among other intellectual property rights necessary to continue operation of the Company’s restaurants. Royalty payments to Kura Japan are included in other costs at the restaurant level in the accompanying statements of operations and comprehensive income (loss). On April 10, 2020, the Company and Kura Japan entered into a Revolving Credit Agreement, as amended, to provide the Company a revolving credit line of $ 45.0 million (the “Revolving Credit Agreement”). For additional information, see “Note 6. Debt.” Balances with Kura Japan are as follows: November 30, 2024 August 31, 2024 (amounts in thousands) Due from affiliate $ 36 $ 166 Due to affiliate $ 670 $ 373 Reimbursements and other payments by the Company to Kura Japan were as follows: Three Months Ended November 30, 2024 2023 (amounts in thousands) Related party transactions: Expatriate salaries expense $ 29 $ 43 Royalty payments 322 258 Travel and other administrative expenses 42 5 Purchases of equipment 1,264 640 Total related party transactions $ 1,657 $ 946 Reimbursements by Kura Japan to the Company were $ 187 thousand and $ 157 thousand for the three months ended November 30, 2024 and November 30, 2023, respectively. The reimbursements were primarily for directors and officers liability insurance, travel, professional fees and other administrative expenses. 8 Note 5. Stock-based Compensation The following table summarizes the stock option activity under the Company’s 2018 Incentive Compensation Plan, as amended and restated (the “Stock Incentive Plan”): Options Outstanding Number of Shares Underlying Outstanding Options Weighted Average Exercise Price Per Share Outstanding — August 31, 2024 610,514 $ 41.11 Granted 2,195 $ 77.53 Exercised ( 11,006 ) $ 44.84 Cancelled/forfeited ( 5,919 ) $ 56.32 Outstanding — November 30, 2024 595,784 $ 41.03 The following table summarizes the restricted stock unit (“RSU”) activity under the Stock Incentive Plan: Number of Shares Underlying Outstanding RSU Weighted Average Grant Date Fair Value Outstanding — August 31, 2024 36,120 $ 84.01 Granted — — Vested — — Cancelled/forfeited ( 873 ) $ 81.89 Outstanding — November 30, 2024 35,247 $ 84.06 The total stock-based compensation recognized under the Stock Incentive Plan in the statements of operations and comprehensive income (loss) is as follows: Three Months Ended November 30, 2024 2023 (amounts in thousands) Restaurant-level stock-based compensation included in labor and related costs $ 179 $ 147 Corporate-level stock-based compensation included in general and administrative expenses 947 $ 859 Stock-based compensation, net of amounts capitalized 1,126 1,006 Amount capitalized to property and equipment - net $ 26 $ 28 Total stock-based compensation $ 1,152 $ 1,034 Note 6. Debt On April 10, 2020, the Company and Kura Japan entered into a Revolving Credit Agreement, as amended, establishing a $ 45.0 million revolving credit line for the Company. The maturity date for each advance is 60 months from the date of disbursement and the last day of the period of availability for advances is April 10, 2025. The Revolving Credit Note under the Revolving Credit Agreement has an interest rate for advances fixed at 130 % of the Annual Compounding Long-Term Applicable Federal Rate (“AFR”) on the date such advance is made. There are no financial covenants under the Revolving Credit Agreement with which the Company must comply. As of November 30, 2024 and August 31, 2024, the Company had no o utstanding balance and $ 45.0 million of availability remaining under the Revolving Credit Agreement. For additional information, see “Note 4. Related Party Transactions.” Note 7 . Loss Per Share The net loss per share attributable to common stockholders is allocated based on the contractual participation rights of the Class A common stock and Class B common stock as if the loss for the year had been distributed. As the liquidation and dividend rights for Class A and Class B common stock are identical, the net loss attributable to all common stockholders is allocated on a proportionate basis. 9 The following table sets forth the computation of the Company’s basic and diluted net loss per share: Three Months Ended November 30, 2024 2023 Class A Class B Class A Class B (amounts in thousands, except per share data) Net loss attributable to common stockholders $ ( 877 ) $ ( 84 ) $ ( 1,863 ) $ ( 184 ) Weighted average common shares outstanding – basic 10,416 1,000 10,150 1,000 Dilutive effect of stock-based awards — — — — Weighted average common shares outstanding – diluted 10,416 1,000 10,150 1,000 Net loss per share attributable to common stockholders – basic $ ( 0.08 ) $ ( 0.08 ) $ ( 0.18 ) $ ( 0.18 ) Net loss per share attributable to common stockholders – diluted $ ( 0.08 ) $ ( 0.08 ) $ ( 0.18 ) $ ( 0.18 ) The Company computes basic loss per common share using net loss and the weighted average number of common shares outstanding during the period, and computes diluted loss per common share using net loss and the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include dilutive outstanding employee stock options and restricted stock units. For the three months ended November 30, 2024 and November 30, 2023, there were 631 thousand and 688 thousand , respectively, shares of common stock subject to outstanding employee stock options and RSUs that were excluded from the calculation of diluted loss per share because their inclusion would have been anti-dilutive . Note 8. Commitments and Contingencies On January 19, 2024, two former employees initiated arbitration against the Company. Subsequently, on February 26, 2024, three additional former employees initiated a separate arbitration against the Company. Both sets of claimants allege violations of the Fair Labor Standards Act (“FLSA”) and violations of certain Washington, D.C. wage laws. In both arbitrations, claimants purported to raise collective claims on behalf of other similarly situated employees and former employees. In August 2024, the Company settled the claims with these five former employees, as well as 58 other current and former employees asserting similar claims (some under the laws of Pennsylvania, Virginia and Massachusetts), for approximately $ 3.9 million. Since that time, other current and former employees have asserted claims under the FLSA and applicable state laws (including Pennsylvania, New Jersey and Massachusetts) through counsel. In October 2024, the Company agreed to settle those claims for approximately $ 1.2 million. The Company expensed $ 5.1 million related to these matters within general and administrative expenses in the statements of operations and comprehensive income (loss) and paid $ 3.9 million during the fiscal year ended August 31, 2024. The Company paid the remaining accrued liability of $ 1.2 m illion related to these matters in October 2024. The Company is involved from time to time in various legal proceedings that arise in the ordinary course of business, including but not limited to commercial disputes, environmental matters, employee related claims, intellectual property disputes and litigation in connection with transactions, including acquisitions and divestitures. In the opinion of management, the Company does not believe that such litigation, claims, and administrative proceedings will have a material adverse effect on its business, financial position, results of operations or cash flows. However, a significant increase in the number of these claims or an increase in amounts owing under successful claims, including the putative class action referenced above, could materially and adversely affect its business, financial condition, results of operations or cash flows. The Company records a liability when a loss is considered probable, and the amount can be reasonably estimated. 10 Note 9. Income Taxes The Company recorded an income tax expense of $ 39 thousand and $ 38 thousand for the three months ended November 30, 2024 and November 30, 2023, respectively. The Company’s effective tax rates for the three months ended November 30, 2024 substantially differed from the federal statutory tax rate of 21 % primarily due to a valuation allowance for the Company’s deferred tax assets and permanent difference related to employer tip credit. The Company continually monitors and performs an assessment of the realizability of its deferred tax assets, including an analysis of factors such as future taxable income, reversal of existing taxable temporary differences, and tax planning strategies. In assessing the need for a valuation allowance, the Company considered both positive and negative evidence related to the likelihood of realization of deferred tax assets using a “more likely than not” standard. In making such assessment, more weight was given to evidence that could be objectively verified, including recent cumulative losses. Based on the Company’s review of this evidence, management determined that a full valuation allowance against all of the Company’s net deferred tax assets at November 30, 2024 was appropriate. 11