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, 2020 August 31, 2020 Assets Current assets: Cash and cash equivalents $ 2,745 $ 9,259 Accounts receivable 1,995 2,130 Inventories 454 367 Due from affiliate 239 12 Prepaid expenses and other current assets 3,074 3,010 Total current assets 8,507 14,778 Non-current assets: Property and equipment - net 49,816 45,541 Operating lease right-of-use assets 55,028 56,119 Deposits and other assets 2,042 1,941 Total assets $ 115,393 $ 118,379 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 4,890 $ 4,919 Accrued expenses and other current liabilities 991 720 Salaries and wages payable 2,609 1,786 Finance leases - current 1,033 1,004 Operating lease liabilities - current 5,236 5,106 Due to affiliate 69 201 Sales tax payable 315 189 Total current liabilities 15,143 13,925 Non-current liabilities: Loan from affiliate 3,000 — Finance leases - non-current 1,194 1,481 Operating lease liabilities - non-current 55,988 56,918 Other liabilities 345 342 Total liabilities 75,670 72,666 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, 7,364 and 7,342 shares issued and outstanding as of November 30, 2020 and August 31, 2020, respectively 7 7 Class B common stock, $0.001 par value; 10,000 shares authorized, 1,000 shares issued and outstanding as of November 30, 2020 and August 31, 2020 1 1 Additional paid-in capital 60,692 60,332 Accumulated deficit (20,977 ) (14,627 ) Total stockholders' equity 39,723 45,713 Total liabilities and stockholders' equity $ 115,393 $ 118,379 The accompanying notes are an integral part of these condensed financial statements. 1 Kura Sushi USA, Inc. Condensed Statements of Operations (amounts in thousands, except per share data) (Unaudited) Three Months Ended November 30, 2020 2019 Sales $ 9,414 $ 17,440 Restaurant operating costs: Food and beverage costs 3,053 5,693 Labor and related costs 4,360 5,641 Occupancy and related expenses 1,690 1,439 Depreciation and amortization expenses 927 663 Other costs 2,079 2,047 Total restaurant operating costs 12,109 15,483 General and administrative expenses 3,521 3,326 Depreciation and amortization expenses 75 22 Total operating expenses 15,705 18,831 Operating loss (6,291 ) (1,391 ) Other expense (income): Interest expense 34 34 Interest income (4 ) (197 ) Loss before income taxes (6,321 ) (1,228 ) Income tax expense (benefit) 29 (4 ) Net loss $ (6,350 ) $ (1,224 ) Net loss per Class A and Class B shares Basic $ (0.76 ) $ (0.15 ) Diluted $ (0.76 ) $ (0.15 ) Weighted average Class A and Class B shares outstanding Basic 8,348 8,335 Diluted 8,348 8,335 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 Additional Total Class A Class B Paid-in Accumulated Stockholders' Shares Amount Shares Amount Capital Deficit Equity Balances as of August 31, 2020 7,342 $ 7 1,000 $ 1 $ 60,332 $ (14,627 ) $ 45,713 Stock-based compensation — — — — 266 — 266 Net loss — — — — — (6,350 ) (6,350 ) Exercise of stock options 22 — — — 94 — 94 Balances as of November 30, 2020 7,364 $ 7 1,000 $ 1 $ 60,692 $ (20,977 ) $ 39,723 Common Stock Additional Total Class A Class B Paid-in Retained Stockholders' Shares Amount Shares Amount Capital Earnings Equity Balances as of August 31, 2019 7,335 7 1,000 1 59,442 2,731 62,181 Stock-based compensation — — — — 121 — 121 Net loss — — — — — (1,224 ) (1,224 ) Balances as of November 30, 2019 7,335 $ 7 1,000 $ 1 $ 59,563 $ 1,507 $ 61,078 The accompanying notes are an integral part of these condensed financial statements. 3 Kura Sushi USA, Inc. Condensed Statements of Cash Flows (amounts in thousands) (Unaudited) Three Months Ended November 30, 2020 2019 Cash flows from operating activities Net loss $ (6,350 ) $ (1,224 ) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 1,002 685 Stock-based compensation 266 121 Loss on disposal of property and equipment 29 4 Deferred income taxes — (4 ) Noncash lease expense 682 586 Changes in operating assets and liabilities: Accounts receivable (19 ) (100 ) Inventories (87 ) 106 Due from affiliate (227 ) 192 Prepaid expenses and other current assets (64 ) 192 Deposits and other assets (1 ) (38 ) Accounts payable 801 (1,034 ) Accrued expenses and other current liabilities 482 (607 ) Salary and wages payable 823 11 Operating lease liabilities (238 ) (430 ) Due to affiliate 44 49 Sales tax payable 126 (47 ) Net cash used in operating activities (2,731 ) (1,538 ) Cash flows from investing activities Payments for property and equipment (6,519 ) (3,194 ) Payments for purchases of liquor licenses (100 ) (50 ) Net cash used in investing activities (6,619 ) (3,244 ) Cash flows from financing activities Proceeds from loan from affiliate 3,000 — Repayment of principal on finance leases (258 ) (252 ) Proceeds from exercise of stock options 94 — Net cash provided by (used in) financing activities 2,836 (252 ) Decrease in cash and cash equivalents (6,514 ) (5,034 ) Cash and cash equivalents, beginning of period 9,259 38,044 Cash and cash equivalents, end of period $ 2,745 $ 33,010 Noncash investing activities Amounts unpaid for purchases of property and equipment $ 1,214 $ 293 The accompanying notes are an integral part of these condensed financial statements. 4 Kura Sushi USA, Inc. Notes to Condensed 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,” and the “Company” refer to Kura Sushi USA, Inc. unless expressly indicated or the context otherwise requires. Effects of COVID-19 In March 2020, the World Health Organization declared the novel strain of coronavirus COVID-19 a global pandemic. This contagious virus, which has continued to spread, has adversely affected workforces, customers, economies and financial markets globally. In response to this outbreak, many state and local authorities mandated the temporary closure of non-essential businesses and dine-in restaurant activity. COVID-19 and the government measures taken to control it have caused a significant disruption to the Company’s business operation. As of November 30, 2020, the Company had 27 of its 28 restaurants open in some capacity: indoor dining, outdoor dining or takeout only. Subsequent to November 30, 2020, the Company opened one new restaurant in Aventura, Florida and as of the filing date of this Quarterly Report on Form 10-Q, the Company 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, the Company has prioritized taking steps to protect the health and safety of its employees and customers. The Company has increased cleaning and sanitizing protocols of its restaurants and has implemented additional training and operational manuals for its restaurant employees, as well as increased handwashing procedures. The Company also provides each restaurant employee with face masks and gloves, and requires 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 the temporary closure of one restaurant have caused a substantial decline in the Company’s 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, the Company is focused on maximizing its in-restaurant dining capacity as permitted by the jurisdictions where it operates, mobile ordering and takeout, continuing to provide a safe environment for its employees and customers, maintaining its operational efficiencies as much as possible and preserving its liquidity. In line with the Company’s long-term growth strategy, it expects to continue to open new restaurants at locations where it believes the restaurants have the potential to achieve profitability. The future sales levels of the Company’s restaurants and its ability to implement its 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 the Company’s Financial Position On April 10, 2020, the Company and Kura Sushi, Inc. (“Kura Japan”), a majority stockholder, entered into a Revolving Credit Agreement (the “Revolving Credit Agreement”) establishing a $20 million revolving credit line. On September 2, 2020, the Company 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. For additional information, s ee “Note 4. Related Party Transactions” and “Note 6. Debt.” The Company has received rent concessions from its landlords for certain of its restaurants in the form of rent abatements and rent deferrals which were immaterial for the three months ended November 30, 2020. The Company continues to have discussions with its landlords regarding potential future rent concessions. Due to the ongoing impact of COVID-19, the Company assessed its long-lived assets for potential impairment, which resulted in no impairment charges recorded as of November 30, 2020. 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 5 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, 2020 . The accounting policies followed by the Company are set forth in Part II, Item 8, Note 2, Basis of Presentation and Summary of 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, 2020. 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 year ending August 31, 2021 or for any other future annual or interim period. Fiscal Year The Company’s fiscal year begins on September 1 and ends on August 31 and references made to “fiscal year 2021,” “fiscal year 2020” and “fiscal year 2019” refer to the Company’s fiscal years ending August 31, 2021, and ended August 31, 2020 and August 31, 2019, respectively. Use of Estimates The preparation of 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 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. Comprehensive Loss Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive loss is the same as net loss for all periods presented. Therefore, a separate statement of comprehensive loss is not included in the accompanying financial statements. Recently Issued Accounting Pronouncements In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which is intended to simplify various aspects related to accounting for income taxes. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. ASU 2019-12 is effective for the Company beginning in fiscal year 2022. The Company is currently in the process of evaluating the effects of this pronouncement on its financial statements. Note 2. Balance Sheet Components Accounts Receivable November 30, August 31, 2020 2020 (amounts in thousands) Lease receivable $ 1,651 $ 1,811 Credit card receivable 316 281 Other receivables 28 38 Total accounts receivable $ 1,995 $ 2,130 6 Property and Equipment - net November 30, August 31, 2020 2020 (amounts in thousands) Leasehold improvements $ 36,228 $ 30,497 Lease assets 6,102 6,117 Furniture and fixtures 10,008 7,908 Computer equipment 713 696 Vehicles 88 88 Software 787 689 Construction in progress 6,914 9,558 Property and equipment, gross 60,840 55,553 Less: accumulated depreciation and amortization (11,024 ) (10,012 ) Total property and equipment - net $ 49,816 $ 45,541 Depreciation and amortization expense for property and equipment was approximately $ 1.0 million and $ 0.7 million for the three months ended November 30, 2020 and November 30, 2019, respectively. Note 3. Leases At inception of a contract, the Company assesses whether the contract is a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Lease classification, measurement, and recognition are determined at lease commencement, which is the date the underlying asset is available for use by the Company. The accounting classification of a lease is based on whether the arrangement is effectively a financed purchase of the underlying asset (finance lease) or not (operating lease). The Company has operating and finance leases for its corporate office, restaurant locations, office equipment, kitchen equipment and automobiles. The Company’s leases have remaining lease terms of less than 1 year to 20 years, some of which include options to extend the leases. For leases with renewal periods at the Company’s option, the Company determines the expected lease period based on whether the renewal of any options is reasonably assured at the inception of the lease. Operating leases are accounted for on the balance sheet within the right-of-use (“ROU”) assets and lease liabilities recognized in “Operating lease right-of-use assets,” “Operating lease liabilities - current" and "Operating lease liabilities – non-current," respectively. Finance leases are accounted for on the balance sheet within ROU assets and lease liabilities recognized in "Property and equipment - net”, “Finance lease - current" and "Finance lease – non-current," respectively. Lease assets and liabilities are recognized at the lease commencement date. Lease liabilities are measured at the present value of the lease payments not yet paid. To determine the present value of lease payments not yet paid, the Company estimates incremental borrowing rates corresponding to the maturities of the leases based on prevailing financial market conditions, comparable company and credit analysis, and management judgment. ROU assets, for both operating and finance leases, are initially measured based on the lease liability, adjusted for initial direct costs, prepaid or deferred rent, and lease incentives. The operating lease ROU assets are subsequently measured at the carrying amount of the lease liability adjusted for initial direct costs, prepaid or accrued lease payments, and lease incentives. Depreciation of the finance lease ROU assets are subsequently calculated using the straight-line method over the shorter of the estimated useful lives or the expected lease terms and recorded in "Depreciation and amortization expense" on the statement of operations. The Company recognizes expense for these leases on a straight-line basis over the lease term. In addition to the fixed minimum payments required under the lease arrangements, certain leases require variable lease payments, such as common area maintenance, insurance and real estate taxes, which are recognized when the associated activity occurs. Additionally, contingent rental payments based on sales thresholds for certain of the Company’s restaurants are accrued based on estimated sales. 7 Lease related costs recognized in the statements of operations for the three months ended November 30, 2020 and November 30, 2019 are as follows: Three months ended November 30, 2020 2019 (amounts in thousands) Finance lease cost Classification Amortization of right-of-use assets Depreciation and amortization expenses $ 151 $ 133 Interest on lease liabilities Interest expense 23 34 Total finance lease cost $ 174 $ 167 Three months ended November 30, 2020 2019 (amounts in thousands) Operating lease cost Classification Operating lease cost Occupancy and related expenses, other costs and general and administrative expenses $ 1,567 $ 1,161 Variable lease cost Occupancy and related expenses, and general and administrative expenses 245 310 Total operating lease cost $ 1,812 $ 1,471 Supplemental balance sheet information related to leases is as follows: Operating Leases November 30, 2020 August 31, 2020 (amounts in thousands) Right-of-use assets $ 55,028 $ 56,119 Lease liabilities – current $ 5,236 $ 5,106 Lease liabilities – non-current 55,988 56,918 Total lease liabilities $ 61,224 $ 62,024 Finance Lease Assets - net November 30, 2020 August 31, 2020 (amounts in thousands) Finance lease assets $ 6,102 $ 6,117 Accumulated depreciation (2,329 ) (2,178 ) Total finance lease assets - net $ 3,773 $ 3,939 Finance Leases Liabilities November 30, 2020 August 31, 2020 (amounts in thousands) Finance lease liabilities - current $ 1,033 $ 1,004 Finance lease liabilities - non-current 1,194 1,481 Total finance lease liabilities $ 2,227 $ 2,485 8 November 30, 2020 2019 Weighted Average Remaining Lease Term (Years) Operating leases 16.2 15.7 Finance leases 2.2 3.1 Weighted Average Discount Rate Operating leases 6.4 % 5.8 % Finance leases 4.4 % 4.4 % Supplemental disclosures of cash flow information related to leases are as follows: Three months ended November 30, 2020 2019 (amounts in thousands) Operating cash flows paid for operating lease liabilities $ 907 $ 881 Operating right-of-use assets obtained in exchange for new operating lease liabilities $ — $ 5,556 As of November 30, 2020, the Company has additional operating lease liabilities related to restaurants of which the Company has not yet taken possession of $13.7 million. These operating leases are expected to commence in fiscal year 2021 with lease terms of 20 years. Maturities of lease liabilities were as follows as of November 30, 2020: Operating Leases Finance Leases (amounts in thousands) Remainder of 2021 $ 2,167 $ 821 2022 4,715 1,005 2023 5,721 483 2024 5,847 17 2025 5,977 2 Thereafter 73,014 — Total lease payments 97,441 2,328 Less: imputed interest (36,217 ) (101 ) Present value of lease liabilities $ 61,224 $ 2,227 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 analyses. In exchange for such services, supplies, parts and equipment, the parties will 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 from Kura Japan are included in general and administrative expenses in the accompanying statements of operations. Purchases of equipment from Kura Japan are included in property and equipment in the accompanying balance sheets. 9 In August 2019, the Company entered into an Amended and Restated Exclusive License Agreement (the “License Agreement”) with Kura Japan. Pursuant to the Lice nse 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 use of certain of Kura Japan’s intellectual property rights, including, but not limited to, Kura Japan’s trademarks “Kura Sushi” 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. On April 10, 2020, the Company and Kura Japan entered into a Revolving Credit Agreement, which was subsequently amended on September 2, 2020, to provide the Company a credit line of $35 million. For additional information, see “Note 6. Debt.” Balances with Kura Japan as of November 30, 2020 and August 31, 2020 are as follows: November 30, August 31, 2020 2020 (amounts in thousands) Due from affiliate $ 239 $ 12 Due to affiliate 69 201 Loan from affiliate 3,000 — Reimbursements by the Company to Kura Japan for the three months ended November 30, 2020 and November 30, 2019 were as follows: Three Months Ended November 30, 2020 2019 (amounts in thousands) Related party transactions: Purchases of administrative supplies $ 65 $ 7 Expatriate salaries expense 31 39 Royalty payments 47 87 Travel and other administrative expenses 13 35 Purchases of equipment 366 343 Total related party transactions $ 522 $ 511 Reimbursements by Kura Japan to the Company for the three months ended November 30, 2020 and November 30, 2019 were $5 thousand and $34 thousand, respectively. The reimbursements were for travel and translation expenses. Note 5. Stock-based Compensation The following table summarizes the stock option activity under the Company’s 2018 Incentive Compensation Plan (the “Stock Incentive Plan”) for the period from August 31, 2020 through November 30, 2020: Options Outstanding Number of shares underlying outstanding options Weighted Average Exercise Price Per Share Outstanding—August 31, 2020 531,747 $ 9.51 Options exercised (21,979 ) 4.26 Options canceled/forfeited (4,265 ) 14.43 Outstanding—November 30, 2020 505,503 $ 9.70 Subsequent to November 30, 2020 and as of the filing date of this Quarterly Report on Form 10-Q, the Company granted 50 thousand options and 7 thousand restricted stock awards. Stock-based compensation for stock options issued under the Stock Incentive Plan was $0.3 million and $0.1 million for the three months ended November 30, 2020 and November 30, 2019 respectively. 10 The total stock-based compensation expense recognized under the Stock Incentive Plan in the statements of operations is as follows: Three Months Ended November 30, 2020 2019 (amounts in thousands) Restaurant-level stock-based compensation included in other costs $ 23 $ 16 Corporate-level stock-based compensation included in general and administrative expenses $ 243 105 Total stock-based compensation $ 266 $ 121 Note 6. Debt On April 10, 2020, the Company and Kura Japan entered into a Revolving Credit Agreement establishing a $20 million revolving credit line for the Company. On September 2, 2020, the Company 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. There are no financial covenants under the Revolving Credit Agreement with which the Company must comply. As of November 30, 2020, the Company had borrowed $3.0 million under the Revolving Credit Agreement at a fixed interest rate of 1.1%. Interest expense for the three months ended November 30, 2020 was immaterial. Subsequent to November 30, 2020 and as of the filing date of this Quarterly Report on Form 10-Q, the Company borrowed an additional $6.0 million and has $26 million of availability remaining under the Revolving Credit Agreement. 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 the liquidation and dividend rights for Class A and Class B common stock are identical, the net loss attributable to common stockholders is allocated on a proportionate basis. The following table sets forth the computation of the Company’s basic and diluted net loss per share: Three Months Ended November 30, 2020 2019 Class A Class B Class A Class B (amounts in thousands, except per share data) Net loss attributable to common stockholders - basic $ (5,589 ) $ (761 ) $ (1,077 ) $ (147 ) Weighted average common shares outstanding - basic 7,348 1,000 7,335 1,000 Net loss per share attributable to common stockholders - basic $ (0.76 ) $ (0.76 ) $ (0.15 ) $ (0.15 ) Net loss attributable to common stockholders - diluted $ (5,589 ) $ (761 ) $ (1,077 ) $ (147 ) Weighted average shares outstanding - basic 7,348 1,000 7,335 1,000 Options to purchase common stock — — — — Weighted average shares outstanding - diluted 7,348 1,000 7,335 1,000 Net loss per share attributable to common stockholders - diluted $ (0.76 ) $ (0.76 ) $ (0.15 ) $ (0.15 ) The Company computes basic loss per common share using net loss and the weighted average number of common shares outstanding during the period. Diluted loss per common share is computed 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. 11 For the three months ended November 30, 2020 and November 30, 2019 , there were approximately 506 thousand and 404 thousand shares of common stock subject to outstanding employee stock options , respectively, 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 May 31, 2019, a putative class action complaint was filed by a former employee, Brandy Gomes, in Los Angeles County Superior Court, alleging violations of California wage and hour laws. On July 9, 2020, plaintiff’s counsel filed a first amended class action complaint to add Jamar Spencer, another former employee, as a plaintiff to this action. In addition, the first amended class action complaint added new causes of action alleging violations of California wage and hour laws including a cause of action brought under the California Private Attorney General Act. On August 7, 2020, the Company filed its answer to the first amended complaint, generally denying the allegations in the complaint. The Company intends to defend itself vigorously in this matter. The Company is currently unable to estimate the range of possible losses associated with this proceeding. 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, including the putative class action matter referenced above, 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. Note 9. Income Taxes The Company recorded income tax expense of $29 thousand and income tax benefit of $4 thousand for the three months ended November 30, 2020 and November 30, 2019, respectively. The Company’s effective tax rate for the three months ended November 30, 2020 substantially differed from the federal statutory tax rate of 21 percent primarily due to a valuation allowance for the Company’s deferred tax assets. 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, 2020 was appropriate. On December 27, 2020, Congress passed, and President Trump signed into law, the Consolidated Appropriations Act, 2021 (the “Act”), which includes certain business tax provisions. The Company does not expect the Act to have a material impact on the Company’s effective tax rate or income tax expense for the fiscal year ending August 31, 2021. 12