What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-01-11 compared with 2020-07-14 · 134 added, 219 removed, 174 unchanged (67% of the section changed)

11 unchanged sentences

Effects of COVID-19 on Our Business

The negative effects of the COVID-19 on our business have been significant.

In March 2020, the World Health Organization declared the novel strain of coronavirus COVID-19 a global pandemic.

2 unchanged sentences

COVID-19 and the government measures taken to control it have caused a significant disruption to our business operation.

On March 18, 2020, we announced the temporary closure of all of our 25 restaurants located across five states and has since furloughed certain of our employees.

As of May 31, 2020, we had reopened seven restaurants and as of the filing date of this Quarterly Report, have reopened all 25 restaurants, with 14 of them in California currently only providing takeout due to government restrictions on indoor dining.

The reopened restaurants that allow indoor dining have been operating at reduced capacities of 25% or 50% depending on local requirements.

To support our employees during this challenging time, we have maintained payroll for store managers and key kitchen staff.

We maintained payroll for all employees through April 5, 2020 and all kitchen employees through May 9, 2020.

We also continued to pay our employee’s portion of health insurance for all furloughed employees.

As of November 30, 2020, we had 27 of our 28 restaurants open in some capacity:

indoor dining, outdoor dining or takeout only.

Subsequent to November 30, 2020, we opened one new restaurant in Aventura, Florida and as of the filing date of this Quarterly Report on Form 10-Q, we had all 29 restaurants open, with 16 of them in California and Washington DC only providing takeout, one restaurant in Illinois providing outdoor dining only and the remaining 12 restaurants operating at reduced indoor capacities of 25% to 75% depending on local requirements.

In response to the ongoing COVID-19 pandemic, we have prioritized taking steps to protect the health and safety of our employees and customers.

Currently, the restaurants are not utilizing the revolving conveyor belt and all food is ordered from the tableside touchscreen.

The food is delivered either by the express belt directly from the kitchen to the customers’ tables or by the restaurant employees.

We have also increased cleaning and sanitizing protocols of our restaurants and have implemented additional training and operational manuals for our restaurant employees, as well as increased handwashing procedures.

We also provide each restaurant employee with face masks and gloves, and require each employee to pass a health screening process, which includes a temperature check, before the start of each shift.

The temporary restaurant closure and the reduced capacities at the reopened restaurants have caused a substantial decline in our sales in the most recent fiscal quarter.

The future sales levels of our restaurants and our ability to implement our growth strategy remain highly uncertain, as the full impact and duration of the COVID-19 outbreak continues to evolve as of the date of this Quarterly Report.

We expect the current decreased restaurant sales levels and ongoing length and severity of the economic downturn caused by the pandemic will continue to have a material adverse impact on our future business, financial condition, liquidity and financial results.

We have increased cleaning and sanitizing protocols of our restaurants and have implemented additional training and operational manuals for our restaurant employees, as well as increased handwashing procedures.

We have also provided each restaurant employee with face masks and gloves, and require each employee to pass a health screening process, which includes a temperature check, before the start of each shift.

The reduced capacities at open restaurants and temporary closure of one restaurant have caused a substantial decline in our sales in the most recent fiscal quarter compared to the same quarter last year.

In response to the challenges posed by the COVID-19 pandemic, we have focused on maximizing our in-restaurant dining capacity as permitted by the jurisdictions where we operate, mobile ordering and takeout, continuing to provide a safe environment for our employees and customers, maintaining our operational efficiencies as much as possible and preserving our liquidity.

In line with our long-term growth strategy, we expect to continue to open new restaurants at locations where we believe the restaurants have the potential to achieve profitability.

The future sales levels of our restaurants and our ability to implement our growth strategy, however, remain highly uncertain, as the full impact and duration of the COVID-19 pandemic continues to evolve as of the filing date of this Quarterly Report on Form 10-Q.

Recent Events Concerning Our Financial Position

On April 10, 2020, we and Kura Sushi, Inc.

(“Kura Japan”), a majority stockholder, entered into a Revolving Credit Agreement establishing a $20 million revolving credit line with a termination date of March 31, 2024, to provide us with additional liquidity as may be necessary.

On April 10, 2020, we and Kura Japan, entered into a Revolving Credit Agreement (the “Revolving Credit Agreement”) establishing a $20 million revolving credit line for us.

On September 2, 2020, we and Kura Japan entered into a First Amendment to Revolving Credit Agreement (the “First Amendment”) to (i) increase the maximum credit amount under the credit line from $20 million to $35 million, (ii) extend the maturity date for each advance from 12 months to 60 months from the date of disbursement and (iii) extend the last day of the period of availability for the advances under the credit line from March 31, 2024 to April 10, 2025.

In connection with the First Amendment, the Revolving Credit Note under the Revolving Credit Agreement was also amended by incorporating the same amendments as provided under the First Amendment.

In November 2020, we borrowed $3.0 million under the Revolving Credit Agreement.

Subsequent to November 30, 2020 and as of the filing date of this Quarterly Report on Form 10-Q, we borrowed an additional $6.0 million under the Revolving Credit Agreement.

Related Party Transactions” and “Note 6.

On April 14, 2020, we entered into a Promissory Note with Bank of the West, which provide d for a loan in the amount of $6.0 million (the “PPP Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) sig ned into law on March 27, 2020 .

On April 29, 2020, we returned the proceeds received from the PPP Loan.

Under the provisions of the CARES Act, we are eligible for a refundable employee retention credit subject to certain criteria.

In connection with the CARES Act, the Company adopted a policy to recognize the employee retention credit when earned and to offset the credit against the related expenditure.

Accordingly, we recorded a $1.6 million employee retention credit during the three months ended May 31, 2020, which is included in Labor and related costs in the statements of operations.

We have received rent concessions from our landlords for certain of our restaurants in the form of rent abatements and rent deferrals which were immaterial for the three months ended May 31, 2020.

Debt” in the Notes to Condensed Financial Statements for further discussion.

We have received rent concessions from our landlords for certain of our restaurants in the form of rent abatements and rent deferrals which were immaterial for the three months ended November 30 , 2020.

We continue to have discussions with our landlords regarding potential future rent concessions.

Due to the impact of COVID-19, we assessed our long-lived assets for potential impairment which resulted in no impairment charges recorded as of May 31, 2020.

We also assessed the realizability of our deferred tax assets and recorded a valuation allowance of $1.1 million during the three months ended May 31, 2020.

Income Taxes”.

Due to the impact of COVID-19, we assessed our long-lived assets for potential impairment which resulted in no impairment charges recorded as of November 30, 2020.

Key Financial Definitions

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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, ranging from three to 20 years.

Depreciation and amortization expenses are periodic non-cash charges that consist of depreciation and amortization of fixed assets, including equipment and capitalized leasehold improvements.

Depreciation and amortization are determined using the straight-line method over the assets’ estimated useful lives, ranging from three to 20 years.

Other costs include utilities, repairs and maintenance, credit card fees, royalty payments to Kura Japan, stock-based compensation expenses for restaurant-level employees and other restaurant-level expenses.

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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 expenses 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 sales grows, including incremental legal, accounting, insurance and other expenses incurred as a public company.

General and administrative expenses are expected to grow as our unit base grows, including incremental legal, accounting, insurance and other expenses.

Interest expense.

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Results of Operations

The following tables present selected comparative results of operations for the three months ended May 31, 2020 and May 31, 2019 and for the nine months ended May 31, 2020 and May 31, 2019.

The following tables present selected comparative results of operations for the three months ended November 30, 2020 and November 30, 2019.

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 table below may not sum to 100% due to rounding.

Three Months Ended May 31,

Increase / (Decrease)

(dollar amounts in thousands)

Restaurant operating costs

Food and beverage costs

Labor and related costs

Occupancy and related expenses

Depreciation and amortization expenses

Total restaurant operating costs

General and administrative expenses

Depreciation and amortization expenses

Total operating expenses

Operating income (loss)

Other expense (income):

Interest expense

Interest income

Income (loss) before income taxes

Income tax expense

Net income (loss)

Nine Months Ended May 31,

Three Months Ended November 30,

Increase / (Decrease)

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Total operating expenses

Operating income (loss)

Operating loss

Other expense (income):

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Interest income

Income (loss) before income taxes

Income tax expense

Net income (loss)

Three Months Ended May 31,

Nine Months Ended May 31,

Loss before income taxes

Income tax expense (benefit)

Three Months Ended November 30,

(as a percentage of sales)

8 unchanged sentences

Total operating expenses

Operating income (loss)

Operating loss

Other expense (income):

1 unchanged sentence

Interest income

Income (loss) before income taxes

Income tax expense

Net income (loss)

Three Months Ended May 31, 2020 Compared to Three Months Ended May 31, 2019

Sales were $2.8 million for the three months ended May 31, 2020 compared to $17.0 million for the three months ended May 31, 2019, representing a decrease of approximately $14.2 million or 83.4%.

Due to COVID-19, on March 18, 2020 we temporarily closed all of our 25 restaurants.

As of May 31, 2020, we had reopened seven restaurants at reduced capacity levels.

The decrease in sales was primarily driven by restaurant closures during the three months ended May 31, 2020, and was slightly offset by sales from the opening of four new restaurants subsequent to May 31, 2019.

Loss before income taxes

Income tax expense (benefit)

Three Months Ended November 30, 2020 Compared to Three Months Ended November 30, 2019

Sales were $9.4 million for the three months ended November 30, 2020 compared to $17.4 million for the three months ended November 30, 2019, representing a decrease of approximately $8.0 million or 46.0%.

The decrease in sales was primarily driven by reduced level of operating capacities of our restaurants due to local government restrictions in response to the COVID-19 pandemic during the three months ended November 30, 2020, partially offset by sales from the opening of five new restaurants subsequent to November 30, 2019.

Food and beverage costs.

Food and beverage costs were $1.1 million for the three months ended May 31, 2020 compared to $5.5 million for the three months ended May 31, 2019, representing a decrease of approximately $4.4 million or 80.6%.

The decrease in food and beverage costs was primarily driven by the temporary restaurant closures during the three months ended May 31, 2020, and was slightly offset by the costs associated with the sales from the opening of four new restaurants subsequent to May 31, 2019.

As a percentage of sales, food and beverage costs increased to 38.0% in the three months ended May 31, 2020, compared to 32.5% in the three months ended May 31, 2019.

The increase in food and beverage costs as a percentage of sales was primarily driven by inventory spoilage incurred during the three months ended May 31, 2020.

Food and beverage costs were $3.1 million for the three months ended November 30, 2020 compared to $5.7 million for the three months ended November 30, 2019, representing a decrease of approximately $2.6 million or 46.4%.

The decrease in food and beverage costs was primarily driven by reduced level of operating capacities of our restaurants due to local government restrictions in response to the COVID-19 pandemic during the three months ended November 30, 2020, partially offset by the costs associated with sales from the opening of five new restaurants subsequent to November 30, 2019.

As a percentage of sales, food and beverage costs was 32.4% in the three months ended November 30, 2020, compared to 32.6% in the three months ended November 30, 2019.

Labor and related costs.

Labor and related costs were $3.6 million for the three months ended May 31, 2020 compared to $5.3 million for the three months ended May 31, 2019, representing a decrease of approximately $1.7 million, or 32.7%.

Labor and related costs decreased due to a $1.6 million employee retention credit as a result of the CARES Act, as well as the furlough of certain employees as a result of the temporary restaurant closures during the three months ended May 31, 2020, partially offset by additional labor costs incurred from the opening of four new restaurants subsequent to May 31, 2019.

As a percentage of sales, labor and related costs increased to 126.3% in the three months ended May 31, 2020, compared to 31.1% in the three months ended May 31, 2019.

The increase in labor and related costs as a percentage of sales was primarily due to retaining certain restaurant employees during the temporary restaurant closures.

Labor and related costs were $4.4 million for the three months ended November 30, 2020 compared to $5.6 million for the three months ended November 30, 2019, representing a decrease of approximately $1.2 million, or 22.7%.

Labor and related costs decreased as a result of reduced level of operating capacities of our restaurants due to local government restrictions in response to the COVID-19 pandemic during the three months ended November 30, 2020, partially offset by additional labor costs incurred from the opening of five new restaurants subsequent to November 30, 2019.

As a percentage of sales, labor and related costs increased to 46.3% in the three months ended November 30, 2020, compared to 32.3% in the three months ended November 30, 2019.

The increase in labor and related costs as a percentage of sales was primarily due to minimum staffing requirements to operate the restaurants, particularly at reduced operating capacities.

Occupancy and related expenses.

Occupancy and related expenses were $1.6 million for the three months ended May 31, 2020 compared to $1.3 million for the three months ended May 31, 2019, representing an increase of approximately $0.3 million, or 22.5%.

The increase was primarily a result of additional lease expense incurred with respect to the opening of four new restaurants subsequent to May 31, 2019.

As a percentage of sales, occupancy and other operating expenses increased to 56.5% in the three months ended May 31, 2020, compared to 7.6% in the three months ended May 31, 2019.

The increase in occupancy and related expenses as a percentage of sales was primarily driven by the decrease in sales due to the temporary restaurant closures during the three months ended May 31, 2020, as well as higher occupancy rates in our newer restaurants and an increase in pre-opening lease expense .

Occupancy and related expenses were $1.7 million for the three months ended November 30, 2020 compared to $1.4 million for the three months ended November 30, 2019, representing an increase of approximately $0.3 million, or 17.4%.

The increase was primarily a result of additional lease expense incurred with respect to the opening of five new restaurants subsequent to November 30, 2019.

As a percentage of sales, occupancy and other operating expenses increased to 18.0% in the three months ended November 30, 2020, compared to 8.3% in the three months ended November 30, 2019.

The increase as a percentage of sales was primarily driven by the decrease in sales due to the reduced level of operating capacities of our restaurants due to local government restrictions in response to the COVID-19 pandemic during the three months ended November 30, 2020.

Depreciation and amortization expenses.

Depreciation and amortization expenses incurred as part of restaurant operating costs were $ 0.7 million for the three months ended May 31, 2020 compared to $ 0.5 million for the three months ended May 31, 2019 , representing an increase of approximately $ 0.2 million , or 43.7 %.

The increase was primarily due to depreciation of property and equipment related to the opening of four new restaurants subsequent to May 31, 2019 .

As a percentage of sales, depreciation and amortization expenses at the restaurant-level increased to 26.4 % in the three months ended May 31, 2020 as compared to 3.0 % in the three months ended May 31, 2019 .

The increase is primarily due to the de crease in sales due to the temporary restaurant closures during the three months ended May 31, 2020, as well as higher build-out costs of our newer restaurants.

Depreciation and amortization expenses incurred at the corporate-level were immaterial for the three months ended May 31, 2020 and May 31, 2019 , and as a percentage of sales were 1.4 % and 0.2 %, respectively.

Other costs were $1.0 million for the three months ended May 31, 2020 compared to $1.8 million for the three months ended May 31, 2019, representing a decrease of approximately $0.8 million, or 45.1%.

The decrease was primarily due to lower operating costs due to the temporary restaurant closures during the three months ended May 31, 2020, such as credit card fees, restaurant supplies, promotional expenses and royalties.

As a percentage of sales, other costs increased to 34.3% in the three months ended May 31, 2020 from 10.4% in the three months ended May 31, 2019 primarily due to costs that are not directly variable with the decrease in sales from the temporary restaurant closures, such as utilities and business insurance.

Depreciation and amortization expenses incurred as part of restaurant operating costs were $0.9 million for the three months ended November 30, 2020 compared to $0.7 million for the three months ended November 30, 2019, representing an increase of approximately $0.2 million, or 39.8%.

The increase was primarily due to depreciation of property and equipment related to the opening of five new restaurants subsequent to November 30, 2019.

As a percentage of sales, depreciation and amortization expenses at the restaurant-level increased to 9.8% in the three months ended November 30, 2020 as compared to 3.8% in the three months ended November 30, 2019.

The increase as a percentage of sales is primarily due to the decrease in sales due to the reduced level of operating capacities of our restaurants due to local government restrictions in response to the COVID-19 pandemic during the three months ended November 30, 2020.

Depreciation and amortization expenses incurred at the corporate-level were immaterial for the three months ended November 30, 2020 and November 30, 2019, and as a percentage of sales were 0.8% and 0.1%, respectively.

Other costs were $2.1 million for the three months ended November 30, 2020 compared to $2.0 million for the three months ended November 30, 2019, representing an increase of approximately $32 thousand, or 1.6%.

The increase was primarily due to the opening of five new restaurants subsequent to November 30, 2019.

As a percentage of sales, other costs increased to 22.1% in the three months ended November 30, 2020 from 11.7% in the three months ended November 30, 2019 primarily due to costs that are not directly variable with the decrease in sales such as maintenance services, utilities and business insurance, as well as smallware for three new restaurants that opened within the quarter and supplies related to incremental takeout orders.

General and administrative expenses.

General and administrative expenses were $2.9 million for the three months ended May 31, 2020 compared to $1.7 million for the three months ended May 31, 2019, representing an increase of approximately $1.2 million, or 66.4%.

This increase in general and administrative expenses was primarily due to $0.7 million of insurance, accounting, and legal costs associated with operating as a public company costs and $0.4 million in employee compensation-related expenses associated with increased wages and additional headcount to support our growth in operations.

As a percentage of sales, general and administrative expenses increased to 102.6% in the three months ended May 31, 2020 from 10.2% in three months ended May 31, 2019, primarily due to the increase in the expenses mentioned above as well as the decrease in sales due to the temporary restaurant closures during the three months ended May 31, 2020.

General and administrative expenses were $3.5 million for the three months ended November 30, 2020 compared to $3.3 million for the three months ended November 30, 2019, representing an increase of approximately $0.2 million, or 5.9%.

This increase in general and administrative expenses was primarily due to $0.4 million in executive transition costs, $0.2 million in compensation-related expenses and $0.1 million of various other costs, partially offset by $0.5 million in reduced legal and audit fees.

As a percentage of sales, general and administrative expenses increased to 37.4% in the three months ended November 30, 2020 from 19.1% in three months ended November 30, 2019, primarily due to the decrease in sales from the reduced level of operating capacities of our restaurants due to local government restrictions in response to the COVID-19 pandemic during the three months ended November 30, 2020.

Interest expense.

Interest expense was insignificant in both the three months ended May 31, 2020 and May 31, 2019, and as a percentage of sales was 1.3% and 0.3%, respectively.

Interest expense was insignificant in both the three months ended November 30, 2020 and November 30, 2019 .

Interest income.

Interest income was $0.1 million for the three months ended May 31, 2020 compared to $1 thousand for the three months ended May 31, 2019, due to a higher cash and cash equivalents balance.

Interest income was $4 thousand for the three months ended November 30, 2020 compared to $197 thousand for the three months ended November 30, 2019, due to a decrease in our cash equivalents balance.

Income tax expense.

Income tax expense was $1.2 million for the three months ended May 31, 2020 compared to $71 thousand for the three months ended May 31, 2019 primarily due to a $1.1 million one-time, non-cash charge to record a valuation allowance on our deferred tax assets.

For further discussion of our income taxes, see “Note 9.

Income Taxes”.

Nine Months Ended May 31, 2020 Compared to Nine Months Ended May 31, 2019

Sales were $39.6 million for the nine months ended May 31, 2020 compared to $45.5 million for the nine months ended May 31, 2019, representing a decrease of approximately $5.9 million, or 12.9%.

The decrease in sales was primarily driven by the temporary restaurant closures during the three months ended May 31, 2020, and was partially offset by sales from the opening of four new restaurants subsequent to May 31, 2019.

Food and beverage costs.

Food and beverage costs were $12.9 million for the nine months ended May 31, 2020 compared to $14.9 million for the nine months ended May 31, 2019, representing a decrease of approximately $2.0 million, or 13.5%.

The decrease in food and beverage costs was primarily driven by the temporary restaurant closures during the three months ended May 31, 2020, and was partially offset by the costs associated with the sales from the opening of four new restaurants subsequent to May 31, 2019.

As a percentage of sales, food and beverage costs remained relatively consistent at 32.5% in the nine months ended May 31, 2020, compared to 32.7% in the nine months ended May 31, 2019.

Labor and related costs.

Labor and related costs were $15.3 million for the nine months ended May 31, 2020 compared to $14.3 million for the nine months ended May 31, 2019, representing an increase of approximately $1.0 million, or 7.3%.

The increase in labor and related costs was driven by additional labor costs incurred from the opening of four new restaurants subsequent to May 31, 2019, partially offset by a $1.6 million employee retention credit as a result of the CARES Act, as well as the furlough of certain employees as a result of the temporary restaurant closures during the three months ended May 31, 2020.

As a percentage of sales, labor and related costs increased to 38.7% in the nine months ended May 31, 2020, compared to 31.4% in the nine months ended May 31, 2019, which was primarily due to retaining certain restaurant employees during the temporary restaurant closures.

Occupancy and related expenses.

Occupancy and related expenses were $ 4.7 million for the nine months ended May 31, 2020 compared to $ 3.3 million for the nine months ended May 31, 2019 , representing an increase of approximately $ 1.4 million , or 41.7 %.

The increase was primarily a result of additional lease expense incurred from the opening of four new restaurant s subsequent to May 31, 2019 .

As a percentage of sales, occupancy and other operating expenses increased to 11.8 % in the nine months ended May 31, 2020 , compared to 7.2 % in the nine months ended May 31, 2019 .

Depreciation and amortization expenses.

Depreciation and amortization expenses incurred as part of restaurant operating costs were $2.1 million for the nine months ended May 31, 2020 compared to $1.5 million for the nine months ended May 31, 2019, representing an increase of approximately $0.6 million, or 45.4%.

The increase was primarily due to depreciation of property and equipment related to the opening of four new restaurants subsequent to May 31, 2019.

As a percentage of sales, depreciation and amortization expenses at the restaurant-level increased to 5.3% in the nine months ended May 31, 2020 as compared to 3.2% in the nine months ended May 31, 2019.

The increase is primarily driven by the decrease in sales due to the temporary restaurant closures during the three months ended May 31, 2020, as well as higher build-out costs of our newer restaurants.

Depreciation and amortization expenses incurred at the corporate-level were immaterial for the nine months ended May 31, 2020 and May 31, 2019, and as a percentage of sales remained relatively consistent at 0.2% and 0.2%, respectively.

Other costs were $5.2 million for the nine months ended May 31, 2020 compared to $5.1 million for the nine months ended May 31, 2019, representing an increase in approximately $0.1 million, or 2.3%.

The increase was primarily due to costs related to operating four new restaurants subsequent to May 31, 2019, offset by lower operating costs due to the temporary restaurant closures during the three months ended May 31, 2020, such as credit card fees, restaurant supplies, promotional expenses and royalties.

As a percentage of sales, other costs increased to 13.2% in the nine months ended May 31, 2020 compared to 11.2% in the nine months ended May 31, 2019, primarily due to costs that are not directly variable with the decrease in sales from the temporary restaurant closures, such as utilities and business insurance.

General and administrative expenses.

General and administrative expenses were $9.0 million for the nine months ended May 31, 2020 compared to $5.7 million for the nine months ended May 31, 2019, representing an increase of approximately $3.3 million, or 57.8%.

This increase in general and administrative expenses was primarily due to $1.7 million of insurance, accounting, and legal costs associated with operating as a public company, $0.4 million of other legal costs, and $0.9 million in employee compensation-related expenses associated with increased wages and additional headcount to support our growth in operations.

As a percentage of sales, general and administrative expenses increased to 22.7% in the nine months ended May 31, 2020 from 12.5% in the nine months ended May 31, 2019, primarily due to the increase in the expenses mentioned above as well as the decrease in sales due to the temporary restaurant closures during the three months ended May 31, 2020.

Interest expense.

Interest expense was insignificant in both the nine months ended May 31, 2020 and May 31, 2019, and as a percentage of sales remained consistent at 0.3%.

Interest income.

Interest income was $0.4 million for the nine months ended May 31, 2020 compared to $11 thousand for the nine months ended May 31, 2019, due to a higher cash and cash equivalents balance.

Income tax expense (benefit).

Income tax expense was $1.2 million for the nine months ended May 31, 2020 compared to $41 thousand for the nine months ended May 31, 2019 primarily due to a $1.1 million one-time, non-cash charge to record a valuation allowance for the Company’s deferred tax assets.

Income tax expense was $29 thousand for the three months ended November 30, 2020 compared to a tax benefit of $4 thousand for the three months ended November 30, 2019.

For further discussion of our income taxes, see “Note 9.

Income Taxes”.

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 growth, and number of restaurant openings.

Sales represents sales of food and beverages in restaurants, as shown on our statements of operations.

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EBITDA and Adjusted EBITDA

EBITDA is defined as net income 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 that are not indicative of core operating results.

EBITDA is defined as net income (loss) before interest, income taxes and depreciation and amortization expenses.

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 certain executive transition costs, that are not indicative of core operating results.

EBITDA and Adjusted EBITDA are non-GAAP measures which are intended as supplemental measures of our performance and are neither required by, nor presented in accordance with, GAAP.

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You should review the reconciliation of net income to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.

The following table reconciles net income to EBITDA and Adjusted EBITDA for the three months ended May 31, 2020 and May 31, 2019 and the nine months ended May 31, 2020 and May 31, 2019:

Three Months Ended May 31,

Nine Months Ended May 31,

The following table reconciles net income to EBITDA and Adjusted EBITDA for the three months ended November 30, 2020 and November 30, 2019 :

Three Months Ended November 30,

(amounts in thousands)

Net income (loss)

Interest (income) expense, net

Depreciation and amortization

Stock-based compensation expense (b)

Non-cash lease expense (c)

Employee retention credit (d)

Interest expense (income), net

Income tax expense (benefit)

Depreciation and amortization expenses

Stock-based compensation expense (a)

Non-cash lease expense (b)

Executive transition costs (c)

Adjusted EBITDA

Adjusted EBITDA margin

Effective May 31, 2020, we no longer exclude pre-opening lease expense and pre-opening costs from our computation of Adjusted EBITDA.

Adjusted EBITDA for the three and nine months ended May 31, 2019 has been restated to the current period computation methodology.

Stock-based compensation expense includes non-cash stock-based compensation, which is comprised of restaurant-level stock-based compensation included in other costs in the statements of operations and of corporate-level stock-based compensation included in general and administrative expenses in the statements of operations.

For further details of stock-based compensation, see “Note 5.

Stock-based Compensation” to the financial statements included in this Quarterly Report.

Stock-based Compensation” to the financial statements included in this Quarterly Report on Form 10-Q.

Non-cash lease expense includes lease expense from the opening date of our restaurants that did not require cash outlay in the respective periods.

Refundable credit against certain employment taxes recognized under the provisions of the CARES Act.

Executive transition costs include severance and search fees associated with the transition of our Chief Financial Officer.

Restaurant-level Operating Profit and Restaurant-level Operating Profit Margin

Restaurant-level Operating Profit is defined as operating income plus depreciation and amortization;

Restaurant-level Operating Profit is defined as operating income (loss) plus depreciation and amortization expenses;

stock-based compensation expense;

pre-opening lease expense, pre-opening costs and general and administrative expenses, which are considered normal, recurring cash operating expenses and are essential to supporting 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 and pre-opening costs recognized within general and administrative expenses.

Restaurant-level Operating Profit margin is defined as

R estaurant-level Operating Profit divided by sales.

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 margin is defined as Restaurant-level Operating Profit divided by sales.

Restaurant-level Operating Profit and Restaurant-level Operating Profit margin 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 and Restaurant-level Operating Profit margin provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results.

We expect Restaurant-level Operating Profit to increase in proportion to the number of new restaurants we open and our comparable restaurant sales growth.

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 Restaurant-level Operating Profit to increase in proportion to the number of new restaurants we open and our comparable restaurant sales growth, if any.

We present Restaurant-level Operating Profit because it excludes the impact of general and administrative expenses, which are not incurred at the restaurant-level.

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Our computation of Restaurant-level Operating Profit and Restaurant-level Operating Profit margin may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Restaurant-level Operating Profit and Restaurant-level Operating Profit margin in the same fashion.

Restaurant-level Operating Profit and Restaurant-level Operating Profit margin have limitations as analytical tools, and you should not consider those measures in isolation or as a substitute for analysis of our results as reported under GAAP.

The following table reconciles operating income to Restaurant-level Operating Profit and Restaurant-level Operating Profit margin for the three months ended May 31, 2020 and May 31, 2019 and for the nine months ended May 31, 2020 and May 31, 2019:

Three Months Ended May 31,

Nine Months Ended May 31,

Restaurant-level Operating Profit and Restaurant-level Operating

Profit margin have limitations as analytical tools, and you should not consider those measures in isolation or as a substitute 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 for the three months ended November 30, 2020 and November 30, 2019:

Three Months Ended November 30,

(amounts in thousands)

Operating income (loss)

Depreciation and amortization

Operating loss

Depreciation and amortization expenses

Stock-based compensation expense (a)

Pre-opening lease expense (b)

Pre-opening costs (c)

Non-cash lease expense (d)

Employee retention credit (e)

Pre-opening costs (b)

Non-cash lease expense (c)

General and administrative expenses

Corporate-level stock-based compensation and pre-opening costs included in General and administrative expenses

Restaurant-level operating profit (loss)

Operating profit margin

Restaurant-level operating profit margin

Corporate-level stock-based compensation included in General and administrative expenses

Restaurant-level operating (loss) profit

Operating loss margin

Restaurant-level operating (loss) profit margin

For further details of stock-based compensation, see “Note 5.

Stock-based Compensation” to the financial statements included in this Quarterly Report.

Pre-opening lease expense includes lease expenses incurred between date of possession and opening date of our restaurants.

Pre-opening costs consist of labor costs and travel expenses for new employees and trainers during the training period, recruitment fees, legal fees and other related pre-opening costs.

Non-cash lease expense includes lease expense from the opening date of our restaurants that did not require cash outlay in the respective periods.

Refundable credit against certain employment taxes recognized under the provisions of the CARES Act.

Comparable Restaurant Sales Growth

Comparable restaurant sales growth refers to the change in year-over-year sales for the comparable restaurant base.

Stock-based Compensation” to the financial statements included in this Quarterly Report on Form 10-Q.

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 opening day of our restaurants, and other related pre-opening costs.

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 .

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, including those temporarily closed for renovations during the year.

For restaurants that were temporarily closed for renovations during the year, we make fractional adjustments to sales such that sales are annualized in the associated period.

We did not make any adjustments for the temporary restaurant closures due to COVID-19 during three and nine months ended May 31, 2020.

Measuring our comparable restaurant sales growth allows us to evaluate the performance of our existing restaurant base.

We did not make any adjustments for the temporary restaurant closures due to COVID-19 during the three months ended November 30, 2020.

Measuring our comparable restaurant sales performance allows us to evaluate the performance of our existing restaurant base.

Various factors impact comparable restaurant sales, including:

government restrictions on indoor dining capacity due to COVID-19;

consumer recognition of our brand and our ability to respond to changing consumer preferences;

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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 growth is only one measure of how we evaluate our performance.

The following table shows the comparable restaurant sales growth for the three and nine months ended May 31, 2020 and May 31, 2019:

Three Months Ended May 31,

Nine Months Ended May 31,

Comparable restaurant sales growth (%)

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 for the three months ended November 30, 2020 and November 30, 2019:

Three Months Ended November 30,

Comparable restaurant sales performance (%)

Comparable restaurant base

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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 for the three and nine months ended May 31, 2020 and May 31, 2019:

Three Months Ended May 31,

Nine Months Ended May 31,

The following table shows the growth in our restaurant base for the three months ended November 30, 2020 and November 30, 2019:

Three Months Ended November 30,

Restaurant activity:

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End of period

Subsequent to November 30, 2020 and as of the filing date of this Quarterly Report on Form 10-Q, we opened one new restaurant in Aventura, Florida.

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.

Historically, our main sources of liquidity have been cash flows from operations and annual capital contributions from Kura Japan.

Since the completion of our initial public offering, w e did not expect to receive any additional capital contributions from Kura Japan.

However, the impact of the COVID-19 pandemic is highly uncertain and management expects that the current restaurant sales levels and ongoing length and severity of the economic downturn will have a material adverse impact on our business, financial condition, liquidity and financial results.

Historically, our main sources of liquidity had been cash flows from operations and the cash proceeds from our initial public offering in fiscal 2019.

The impact of the COVID-19 pandemic is highly uncertain and management expects that the current restaurant sales levels and ongoing length and severity of the economic downturn will have a material adverse impact on our business, financial condition, liquidity and financial results.

For further discussion, see above under “—Business Trends;

Effects of COVID-19 on our Business.”

On April 10 , 2020, we and Kura Japan entered into a Revolving Credit Agreement establishing a $ 20 million revolving credit line with a termination date of March 31, 2024 , t o provide us w ith additional liquidity as may be necessary as a result of the recent closures and economic downturn.

The maturity date for amounts borrowed under the Revolving Credit Agreement is twelve months after the disbursement date, unless renewed or extended by m utual agreement of both parties for an additional twelve months.

We also have $1.1 million available under our non-revolving line of credit (the “Credit Facility”) that matures on July 31, 2020, which Credit Facility is further described in “Note 6.

Debt” to the financial statements included in this Quarterly Report.

In November 2020, we borrowed $3.0 million under the Revolving Credit Agreement.

Subsequent to November 30, 2020 and as of the filing date of this Quarterly Report on Form 10-Q, we borrowed an additional $6.0 million and have $26 million of availability remaining under the Revolving Credit Agreement.

The significant components of our working capital are liquid assets such as cash, cash equivalents and receivables, 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 and availability under our Revolving Credit Agreement provided by Kura Japan, 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 and cash on hand.

Our primary sources of liquidity and cash flows are operating cash flows, cash on hand and proceeds from our Revolving Credit Agreement.

We use this to fund investing expenditures for new restaurant openings, reinvest in our existing restaurants, and increase our working capital.

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The following table summarizes our cash flows for the periods presented:

Nine Months Ended May 31,

Three Months Ended November 30,

Statement of Cash Flow Data:

(amounts in thousands)

Net cash (used in) provided by operating activities

Net cash used in operating activities

Net cash used in investing activities

Net cash used in financing activities

Cash Flows (Used in) Provided by Operating Activities

Net cash used in operating activities during the nine months ended May 31, 2020 was $10.7 million, which results from net loss of $10.5 million, non-cash charges of $2.2 million for depreciation and amortization, $0.6 million for stock-based compensation, $1.7 million in noncash lease expense, $1.1 million for deferred income taxes, and net cash outflows of approximately $5.8 million from changes in operating assets and liabilities.

The net cash outflows from changes in operating assets and liabilities were primarily the result of decreases of $3.0 million for accounts payable, $0.9 million for operating lease liabilities, $0.9 million for accrued expenses and other current liabilities, $0.5 million for sales tax payable, and $0.3 million for salary and wages payable, as well as increases of $0.8 million for accounts receivable, $1.2 million for prepaid expenses and other current assets, and $0.2 million for amounts due from affiliate.

The decrease in accounts payable and accrued expenses and other current liabilities was primarily driven by timing of payment for certain liabilities.

The increase in accounts receivable was due to the timing of tenant allowance receivables as well as lower credit card receivable balances at May 31, 2020 due to the temporary restaurant closures.

Net cash provided by operating activities during the nine months ended May 31, 2019 was $3.4 million, which resulted from net income of $0.5 million, non-cash charges of $1.5 million for depreciation and amortization, $0.5 million for stock-based compensation, and net cash inflows of $0.9 million from changes in operating assets and liabilities.

The net cash inflows from changes in operating assets and liabilities were primarily the result of increases of $1.0 million for deferred rent and tenant allowances and $0.4 million for salaries and wages payable, partially offset by a decrease of $0.4 million for prepaid expense.

The increase in the above-mentioned items was primarily due to the opening of four restaurants during the nine months ended May 31, 2019.

Net cash provided by (used in) financing activities

Cash Flows Used in Operating Activities

Net cash used in operating activities during the three months ended November 30, 2020 was $2.7 million, which results from net loss of $6.4 million, non-cash charges of $1.0 million for depreciation and amortization, $0.3 million for stock-based compensation, $0.7 million in noncash lease expense, and net cash inflows of approximately $1.6 million from changes in operating assets and liabilities.

The net cash inflows from changes in operating assets and liabilities were primarily the result of increases of $0.8 million for accounts payable, $0.5 million for accrued expenses and other current liabilities, $0.1 million for sales tax payable, and $0.8 million for salary and wages payable, partially offset by increases in $0.1 million for prepaid expenses and other current assets, $0.1 million for inventories and $0.2 million for amounts due from affiliate.

The increases in accounts payable and accrued expenses and other current liabilities were primarily driven by timing of payment for certain liabilities.

Net cash used in operating activities during the three months ended November 30, 2019 was $1.5 million, which resulted from net loss of $1.2 million, non-cash charges of $0.7 million for depreciation and amortization, $0.1 million for stock-based compensation, $0.6 million in noncash lease expense, and net cash outflows of approximately $1.7 million from changes in operating assets and liabilities.

The net cash outflows from changes in operating assets and liabilities were primarily the result of decreases of $1.0 million for accounts payable and $0.6 million for accrued expenses and other current liabilities, driven by timing of payment for certain liabilities.

Cash Flows Used in Investing Activities

Net cash used in investing activities during the nine months ended May 31, 2020 was $9.6 million, primarily due to purchases of property and equipment.

The purchases of property and equipment in the nine months ended May 31, 2020 are primarily related to capital expenditures for current and future restaurant openings, renovations, maintaining our existing restaurants and other projects.

Net cash used in investing activities during the nine months ended May 31, 2019 was $ 7.7 million , primarily due to purchases of property and equipment.

The increase in purchases of property and equipment in the nine months ended May 31, 2019 is primarily related to capital expenditures for current and future restaurant openings, renovations, maintaining our existing restaurants and other projects.

Cash Flows Used in Financing Activities

Net cash used in financing activities during the nine months ended May 31, 2020 was $0.7 million primarily due to repayment of principal on financing leases of equipment.

Net cash used in financing activities during the nine months ended May 31, 2019 was $0.2 million primarily due to payments of $2.4 million related to our initial public offering, which was completed in August 2019, repayments $0.8 million principal balances on financing leases of equipment as well as repayment of debt of $0.9 million during nine months ended May 31, 2019.

This was partially offset by proceeds from the issuance of long-term debt of $3.9 million.

Net cash used in investing activities during the three months ended November 30, 2020 was $6.6 million, primarily due to purchases of property and equipment.

The purchases of property and equipment in the three months ended November 30, 2020 are primarily related to capital expenditures for current and future restaurant openings, renovations, maintaining our existing restaurants and other projects.

Net cash used in investing activities during the three months ended November 30, 2019 was $3.2 million, primarily due to purchases of property and equipment.

The increase in purchases of property and equipment in the three months ended November 30, 2019 is primarily related to capital expenditures for current and future restaurant openings, renovations, maintaining our existing restaurants and other projects.

Cash Flows Provided by (Used in) Financing Activities

Net cash provided by financing activities during the three months ended November 30, 2020 was $2.8 million and is primarily due to $3.0 million in loan proceeds from our Revolving Credit Agreement.

Net cash used in financing activities during the three months ended November 30, 2019 was $0.3 million primarily due to repayment of principal on financing leases.

Contractual Obligations

As of May 31, 2020, we had $4.9 million in contractual obligations relating to purchase commitments for goods related to restaurant operations and commitments for construction of new restaurants.

As of November 30, 2020, we had $1.5 million in contractual obligations relating to purchase commitments for goods related to restaurant operations and commitments for construction of new restaurants.

All purchase commitments are expected to be paid during the current fiscal year.

For operating and finance lease obligations, see “Note 3.

Leases” to the financial statements included in this Quarterly Report.

Leases” to the financial statements included in this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

As of May 31, 2020, we did not have any material off-balance sheet arrangements.

As of November 30, 2020, we did not have any material off-balance sheet arrangements.

Recent Accounting Pronouncements

For a description of recently issued and adopted accounting pronouncements, including the respective dates of adoption and expected effects on our results of operations and financial condition, see “Part I, Item 1, Note 1.

For a description of recently issued accounting pronouncements, including the respective dates of adoption and expected effects 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.

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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.

See “Part I, Item 1, Note 1.

Organization and Basis of Presentation” and “Note 3.

Leases” to the financial statements included in this Quarterly Report on Form 10-Q for a discussion of a recently adopted accounting pronouncement that affects our accounting for lease obligations.

There have been no other 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, 2020.

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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.

Subject to certain conditions set forth in the JOBS Act, we are also eligible for and intend to t ake 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 periodi c reports and proxy statements.

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 m arket 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 we had total annual gross revenue of $1 billion or more 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 .

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 we had total annual gross revenue of $1 billion or more 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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis