Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited financial statements and the related notes and with the audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2020 (the “Annual Report”).
In addition to historical information, the following discussion and analysis contains forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations, and intentions set forth in the “Special Note Regarding Forward-Looking Statements” and “Risk Factors” sections of the Annual Report . You should review those sections in our Annual Report for a discussion of important factors, including the continuing development of our business and other factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
“Kura Sushi USA,” “Kura Sushi,” “Kura,” “we,” “us,” “our,” “our company” and the “Company” refer to Kura Sushi USA, Inc. unless expressly indicated or the context otherwise requires.
Overview
Kura Sushi USA, 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 we refer to as the “Kura Experience.” We encourage healthy lifestyles by serving freshly prepared Japanese cuisine using high-quality ingredients that are free from artificial seasonings, sweeteners, colorings, and preservatives. We aim to make quality Japanese cuisine accessible to our guests across the United States through affordable prices and an inviting atmosphere.
Business Trends; Effects of COVID-19 on Our Business
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 our business operation. As of February 28, 2021, we had 28 of our 30 restaurants open in some capacity: indoor dining, outdoor dining or takeout only. In April 2021, we opened one new restaurant in Sherman Oaks, California. As of the filing date of this Quarterly Report on Form 10-Q, we had all 31 restaurants operating at indoor capacities ranging from 25% to 100%, 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. We have maintained 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 two restaurants during the quarter have caused a substantial decline in our sales in the most recently completed fiscal quarter and year-to-date period compared to the same quarter and year-to-date period last year. In response to the ongoing 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, emphasizing 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 (the “Revolving Credit Agreement”) whereby Kura Japan agreed to make available to the Company loans on a revolving credit basis in the principal amount of up to $20 million as evidenced by that certain Promissory Note dated as of the same date with us as maker and made payable to Kura Japan (the “Revolving Credit Note”). 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. On April 9, 2021, we and Kura Japan entered into a Second Amendment to Revolving Credit Agreement (the “Second Amendment”) to increase the maximum credit amount under the credit line from $35 million to $45 million. In connection with the First Amendment and Second Amendment, the Revolving Credit Note under the Revolving Credit Agreement was also amended by incorporating the same amendments as provided under the First Amendment and Second Amendment, as well as amendments to the interest rate.
15
As of February 28, 2021, we had borrowings of $12.0 million under the Revolving Credit Agreements. Subsequent to February 28, 2021 and as of the filing date of this Quarterly Report on Form 10-Q, we borrowed an additional $ 2 .0 million under the Revolving Credit Agreement. See “Note 4. Related Party Transactions” and “Note 6. Debt” in the Notes to Condensed Financial Statements for further discussion.
Under the provisions of the extension of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), we are eligible for a refundable employee retention credit subject to certain criteria. We recognized a $2.6 million employee retention credit during the three months ended February 28, 2021, of which $2.2 million is included in labor and related costs and $0.4 million is included in general and administrative expenses in the statements of operations. We expect to continue to recognize credits for as long as we remain eligible and as of the date of this Quarterly Report on Form 10-Q, we continued to be eligible for such credits.
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 and six months ended February 28, 2021.
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 February 28, 2021.
Key Financial Definitions
Sales. Sales represent sales of food and beverages in restaurants. Restaurant sales in a given period are directly impacted by the number of restaurants we operate and comparable restaurant sales growth.
Food and beverage costs. Food and beverage costs are variable in nature, change with sales volume and are influenced by menu mix and subject to increases or decreases based on fluctuations in commodity costs. Other important factors causing fluctuations in food and beverage costs include seasonality and restaurant-level management of food waste. Food and beverage costs are a substantial expense and are expected to grow proportionally as our sales grows.
Labor and related expenses. Labor and related expenses include all restaurant-level management and hourly labor costs, including wages, employee benefits and payroll taxes. Labor and related expenses are expected to grow as our sales grows. Factors that influence fluctuations in our labor and related expenses include minimum wage and payroll tax legislation, the frequency and severity of workers’ compensation claims, healthcare costs and the performance of our restaurants.
Occupancy and related expenses. Occupancy and related expenses include rent for all restaurant locations and related taxes.
Depreciation and amortization expenses. Depreciation and amortization expenses are periodic non-cash charges that consist of depreciation 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. 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.
General and administrative expenses. General and administrative expenses include expenses associated with corporate and regional supervision functions that support the operations of existing restaurants and development of new restaurants, including compensation and benefits, travel expenses, stock-based compensation 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 unit base grows, including incremental legal, accounting, insurance and other expenses.
Interest expense. Interest expense includes cash and non-cash charges related to our line of credit and finance lease obligations.
Interest income. Interest income includes income earned on our investments.
Income tax expense (benefit). Provision for income taxes represents federal, state and local current and deferred income tax expense.
16
Results of Operations
The following tables present selected comparative results of operations for the three and six months ended February 28, 2021 and February 29, 2020. 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
February 28, 2021
February 29, 2020
$ Change
% Change
(dollar amounts in thousands)
Sales
$
9,082
$
19,388
$
(10,306
)
(53.2
)
%
Restaurant operating costs
Food and beverage costs
3,175
6,106
(2,931
)
(48.0
)
Labor and related costs
2,061
6,144
(4,083
)
(66.5
)
Occupancy and related expenses
1,627
1,637
(10
)
(0.6
)
Depreciation and amortization expenses
1,002
712
290
40.7
Other costs
2,051
2,210
(159
)
(7.2
)
Total restaurant operating costs
9,916
16,809
(6,893
)
(41.0
)
General and administrative expenses
2,874
2,783
91
3.3
Depreciation and amortization expenses
94
36
58
161.1
Total operating expenses
12,884
19,628
(6,744
)
(34.4
)
Operating loss
(3,802
)
(240
)
(3,562
)
(1,484.2
)
Other expense (income):
Interest expense
53
33
20
60.6
Interest income
(3
)
(170
)
167
(98.2
)
Loss before income taxes
(3,852
)
(103
)
(3,749
)
(3,639.8
)
Income tax expense
29
30
(1
)
(3.3
)
Net loss
$
(3,881
)
$
(133
)
$
(3,748
)
(2,818.0
)
%
Six Months Ended
February 28, 2021
February 29, 2020
$ Change
% Change
(dollar amounts in thousands)
Sales
$
18,496
$
36,828
$
(18,332
)
(49.8
)
%
Restaurant operating costs
Food and beverage costs
6,228
11,799
(5,571
)
(47.2
)
Labor and related costs
6,421
11,785
(5,364
)
(45.5
)
Occupancy and related expenses
3,317
3,076
241
7.8
Depreciation and amortization expenses
1,929
1,375
554
40.3
Other costs
4,130
4,257
(127
)
(3.0
)
Total restaurant operating costs
22,025
32,292
(10,267
)
(31.8
)
General and administrative expenses
6,395
6,109
286
4.7
Depreciation and amortization expenses
169
58
111
191.4
Total operating expenses
28,589
38,459
(9,870
)
(25.7
)
Operating loss
(10,093
)
(1,631
)
(8,462
)
(518.8
)
Other expense (income):
Interest expense
87
67
20
29.9
Interest income
(7
)
(367
)
360
(98.1
)
Loss before income taxes
(10,173
)
(1,331
)
(8,842
)
(664.3
)
Income tax expense
58
26
32
123.1
Net loss
$
(10,231
)
$
(1,357
)
$
(8,874
)
(653.9
)
%
17
Three Months Ended
Six Months Ended
February 28, 2021
February 29, 2020
February 28, 2021
February 29, 2020
(as a percentage of sales)
Sales
100.0
%
100.0
%
100.0
%
100.0
%
Restaurant operating costs
Food and beverage costs
35.0
31.5
33.7
32.0
Labor and related costs
22.7
31.7
34.7
32.0
Occupancy and related expenses
17.9
8.4
17.9
8.4
Depreciation and amortization expenses
11.0
3.7
10.4
3.7
Other costs
22.6
11.4
22.3
11.6
Total restaurant operating costs
109.2
86.7
119.0
87.7
General and administrative expenses
31.6
14.4
34.6
16.6
Depreciation and amortization expenses
1.0
0.2
0.9
0.2
Total operating expenses
141.8
101.3
154.5
104.5
Operating loss
(41.8
)
(1.3
)
(54.5
)
(4.4
)
Other expense (income):
Interest expense
0.6
0.2
0.5
0.2
Interest income
—
(0.9
)
—
(1.0
)
Loss before income taxes
(42.4
)
(0.6
)
(55.0
)
(3.6
)
Income tax expense
0.3
0.2
0.3
0.1
Net loss
(42.7
)
%
(0.8
)
%
(55.3
)
%
(3.7
)
%
Three Months Ended February 28, 2021 Compared to Three Months Ended February 29, 2020
Sales. Sales were $9.1 million for the three months ended February 28, 2021 compared to $19.4 million for the three months ended February 29, 2020, representing a decrease of approximately $10.3 million, or 53.2%. The decrease in sales was primarily driven by a 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 February 28, 2021. The decrease in sales is partially offset by sales from the opening of five new restaurants subsequent to February 29, 2020, and increased sales from mobile ordering and takeout.
Food and beverage costs. Food and beverage costs were $3.2 million for the three months ended February 28, 2021 compared to $6.1 million for the three months ended February 29, 2020, representing a decrease of approximately $2.9 million or 48.0%. The decrease in food and beverage costs was primarily driven by a 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 February 28, 2021, partially offset by the costs associated with sales from the opening of five new restaurants subsequent to February 29, 2020. As a percentage of sales, food and beverage costs was 35.0% in the three months ended February 28, 2021, compared to 31.5% in the three months ended February 29, 2020. The increase in percentage of sales is primarily due to increased inventory spoilage, as well as a geographical sales mix shift towards Texas restaurants, which have lower sushi plate prices, during the three months ended February 28, 2021 as compared to the three months ended February 29, 2020.
Labor and related costs. Labor and related costs were $2.1 million for the three months ended February 28, 2021 compared to $6.1 million for the three months ended February 29, 2020, representing a decrease of approximately $4.0 million, or 66.5%. Labor and related costs decreased as a result of a $2.2 million employee retention credit recognized under the CARES Act extension and a 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 February 28, 2021, partially offset by additional labor costs incurred from the opening of five new restaurants subsequent to February 29, 2020. As a percentage of sales, labor and related costs decreased to 22.7% in the three months ended February 28, 2021, compared to 31.7% in the three months ended February 29, 2020. The decrease in labor and related costs as a percentage of sales was primarily due to the employee retention credit, partially offset by minimum staffing requirements to operate the restaurants at reduced operating capacities.
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Occupancy and related expenses. Occupancy and related expenses were $ 1.6 million for the three months ended February 28, 2021 and February 29, 2020 . As a percentage of sales, occupancy and related expenses increased to 17.9 % in the three months ended February 28, 2021 , compared to 8.4 % in the three months ended February 29, 2020 . The increase as a percentage of sales was primarily driven by the decrease in sales due to the reduced level of operating capacit ies of our restaurants due to local government restrictions in response to the COVID-19 pandemic during the three months ended February 28 , 202 1 .
Depreciation and amortization expenses. Depreciation and amortization expenses incurred as part of restaurant operating costs were $1.0 million for the three months ended February 28, 2021 compared to $0.7 million for the three months ended February 29, 2020, representing an increase of approximately $0.3 million, or 40.7%. The increase was primarily due to depreciation of property and equipment related to the opening of five new restaurants subsequent to February 29, 2020. As a percentage of sales, depreciation and amortization expenses at the restaurant level increased to 11.0% in the three months ended February 28, 2021 as compared to 3.7% in the three months ended February 29, 2020. 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 February 28, 2021. Depreciation and amortization expenses incurred at the corporate level were immaterial for the three months ended February 28, 2021 and February 29, 2020, and as a percentage of sales were 1.0% and 0.2%, respectively.
Other costs. Other costs were $2.1 million for the three months ended February 28, 2021 compared to $2.2 million for the three months ended February 29, 2020, representing a decrease of approximately $0.1 million, or 7.2%. The decrease was primarily driven by a decrease in credit card fees due to lower sales and a decrease in advertising costs during three months ended February 28, 2021, partially offset by costs related to the opening of five new restaurants subsequent to February 29, 2020. As a percentage of sales, other costs increased to 22.6% in the three months ended February 28, 2021 from 11.4% in the three months ended February 29, 2020, primarily due to costs that are not directly variable with the decrease in sales such as maintenance, utilities and business insurance.
General and administrative expenses. General and administrative expenses were $2.9 million for the three months ended February 28, 2021 compared to $2.8 million for the three months ended February 29, 2020, representing an increase of approximately $0.1 million, or 3.3%. This increase in general and administrative expenses was primarily due to $0.4 million in compensation expenses and $0.1 million of various other costs, partially offset by a $0.4 million employee retention credit recognized under the CARES Act extension. As a percentage of sales, general and administrative expenses increased to 31.6% in the three months ended February 28, 2021 from 14.4% in the three months ended February 29, 2020, 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 February 28, 2021.
Interest expense. Interest expense was insignificant in both the three months ended February 28, 2021 and February 29, 2020.
Interest income. Interest income was $3 thousand for the three months ended February 28, 2021 compared to $170 thousand for the three months ended February 29, 2020, due to a decrease in our cash and cash equivalents balance.
Income tax expense. Income tax expense was $29 thousand for the three months ended February 28, 2021 compared to $30 thousand for the three months ended February 29, 2020. For further discussion of our income taxes, see “Note 9. Income Taxes” in the Notes to Condensed Financial Statements.
Six Months Ended February 28, 2021 Compared to Six Months Ended February 29, 2020
Sales. Sales were $18.5 million for the six months ended February 28, 2021 compared to $36.8 million for the six months ended February 29, 2020, representing a decrease of approximately $18.3 million or 49.8%. The decrease in sales was primarily driven by a reduced level of operating capacities of our restaurants due to local government restrictions in response to the COVID-19 pandemic during the six months ended February 28, 2021, and was partially offset by sales from the opening of five new restaurants subsequent to February 29, 2020, and increased sales from mobile ordering and takeout.
Food and beverage costs. Food and beverage costs were $6.2 million for the six months ended February 28, 2021 compared to $11.8 million for the six months ended February 29, 2020, representing a decrease of approximately $5.6 million, or 47.2%. The decrease in food and beverage costs was primarily driven by a reduced level of operating capacities of our restaurants due to local government restrictions in response to the COVID-19 pandemic during the six months ended February 28, 2021, partially offset by the costs associated with sales from the opening of five new restaurants subsequent to February 29, 2020. As a percentage of sales, food and beverage costs was 33.7% in the six months ended February 28, 2021, compared to 32.0% in the six months ended February 29, 2020. The increase was primarily due to inventory spoilage during the six months ended February 28, 2021.
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Labor and related costs. Labor and related costs were $ 6.4 million for the six months ended February 28, 2021 compared to $ 11.8 million for the six months ended February 29, 2020 , representing a decrease of approximately $ 5.4 million , or 45.5 %. Labor and related costs decreased as a result of a $2.2 million employee retention credit recognized under the CARES Act extension and a reduced level of operating capacities of our restaurants due to local government restrictions in response to the COVID-19 pandemic during the six months ended February 28, 2021 , partially offset by additional labor costs incurred from the opening of five new restaurants subsequent to February 29, 2020 . As a percentage of sales, labor and related costs in creased to 34.7 % in the six months ended February 28, 2021 , compared to 32.0 % in the six months ended February 29, 2020 . The increase in labor and related costs as a percentage of sales w as primarily due to minimum staffing requirements to operate the restaurants at reduced operating capacities, partially offset by the employee retention credit .
Occupancy and related expenses. Occupancy and related expenses were $3.3 million for the six months ended February 28, 2021 compared to $3.1 million for the six months ended February 29, 2020, representing an increase of approximately $0.2 million, or 7.8%. The increase was primarily a result of additional lease expense incurred with respect to the opening of five new restaurants subsequent to February 29, 2020. As a percentage of sales, occupancy and related expenses increased to 17.9% in the six months ended February 28, 2021, compared to 8.4% in the six months ended February 29, 2020. The increase as a percentage of sales was primarily driven by the decline 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 six months ended February 28, 2021.
Depreciation and amortization expenses. Depreciation and amortization expenses incurred as part of restaurant operating costs were $1.9 million for the six months ended February 28, 2021 compared to $1.4 million for the six months ended February 29, 2020, representing an increase of approximately $0.5 million, or 40.3%. The increase was primarily due to depreciation of property and equipment related to the opening of five new restaurants subsequent to February 29, 2020. As a percentage of sales, depreciation and amortization expenses at the restaurant level increased to 10.4% in the six months ended February 28, 2021 as compared to 3.7% in the six months ended February 29, 2020. 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 six months ended February 28, 2021. Depreciation and amortization expenses incurred at the corporate level were immaterial for the six months ended February 28, 2021 and February 29, 2020, and as a percentage of sales were 0.9% and 0.2%, respectively.
Other costs. Other costs were $4.1 million for the six months ended February 28, 2021 compared to $4.3 million for the six months ended February 29, 2020, representing a decrease of approximately $0.2 million, or 3.0%. The decrease was primarily driven by a decrease in credit card fees due to lower sales and a decrease in advertising costs during the six months ended February 28, 2021, partially offset by the costs related to the opening of five new restaurants subsequent to February 29, 2020. As a percentage of sales, other costs increased to 22.3% in the six months ended February 28, 2021 from 11.6% in the six months ended February 29, 2020. The increase was primarily due to costs that are not directly variable with the decrease in sales, such as maintenance, utilities and business insurance.
General and administrative expenses. General and administrative expenses were $6.4 million for the six months ended February 28, 2021 compared to $6.1 million for the six months ended February 29, 2020, representing an increase of approximately $0.3 million, or 4.7%. This increase in general and administrative expenses was primarily due to $0.6 million in compensation expenses, $0.4 million in executive transition costs and $0.2 million of various other costs, partially offset by $0.5 million in reduced legal and audit fees and a $0.4 million employee retention credit recognized under the CARES Act extension. As a percentage of sales, general and administrative expenses increased to 34.6% in the six months ended February 28, 2021 from 16.6% in the six months ended February 29, 2020, 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 six months ended February 28, 2021.
Interest expense. Interest expense was insignificant in both the six months ended February 28, 2021 and February 29, 2020.
Interest income. Interest income was $7 thousand for the six months ended February 28, 2021 compared to $367 thousand for the six months ended February 29, 2020, due to a decrease in our cash and cash equivalents balance.
Income tax expense. Income tax expense was $58 thousand for the six months ended February 28, 2021 compared to $26 thousand for the six months ended February 29, 2020. For further discussion of our income taxes, see “Note 9. Income Taxes” in the Notes to Condensed Financial Statements.
20
Key Performance Indicators
In assessing the performance of our business, we consider a variety of financial and performance measures. The key measures for determining how our business is performing include sales, EBITDA, Adjusted EBITDA, Restaurant-level Operating Profit, Restaurant-level Operating Profit margin, comparable restaurant sales performance, and number of restaurant openings.
Sales
Sales represents sales of food and beverages in restaurants, as shown on our statements of operations. Several factors affect our restaurant sales in any given period including the number of restaurants in operation, guest traffic and average check.
EBITDA and Adjusted EBITDA
EBITDA is defined as net income (loss) before interest, income taxes and depreciation and amortization 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 employee retention credit and 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. We believe that EBITDA and Adjusted EBITDA provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results. However, these measures may not provide a complete understanding of the operating results of the Company as a whole and such measures should be reviewed in conjunction with our GAAP financial results.
We believe that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the Company’s financial measures with those of comparable companies, which may present similar non-GAAP financial measures to investors. However, you should be aware when evaluating EBITDA and Adjusted EBITDA that in the future we may incur expenses similar to those excluded when calculating these measures. In addition, our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted EBITDA in the same fashion.
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA on a supplemental basis. You should review the reconciliation of net loss to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.
The following table reconciles net loss to EBITDA and Adjusted EBITDA for the three and six months ended February 28, 2021 and February 29, 2020:
Three Months Ended
Six Months Ended
February 28, 2021
February 29, 2020
February 28, 2021
February 29, 2020
(amounts in thousands)
Net loss
$
(3,881
)
$
(133
)
$
(10,231
)
$
(1,357
)
Interest expense (income), net
50
(137
)
80
(300
)
Income tax expense
29
30
58
26
Depreciation and amortization expenses
1,096
748
2,098
1,433
EBITDA
(2,706
)
508
(7,995
)
(198
)
Stock-based compensation expense (a)
309
211
575
332
Non-cash lease expense (b)
336
261
704
504
Executive transition costs (c)
—
—
390
—
Employee retention credit (d)
(2,635
)
—
(2,635
)
—
Adjusted EBITDA
$
(4,696
)
$
980
$
(8,961
)
$
638
Adjusted EBITDA margin
(51.7
)%
5.1
%
(48.4
)%
1.7
%
( a )
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 on Form 10-Q.
21
( b )
Non-cash lease expense includes lease expense from the opening date of our restaurants that did not require cash outlay in the respective periods.
( c )
Executive transition costs include severance and search fees associated with the transition of our Chief Financial Officer.
( d )
Employee retention credit includes a refundable credit recognized under the provisions of the CARES Act extension.
Restaurant-level Operating Profit and Restaurant-level Operating Profit Margin
Restaurant-level Operating Profit is defined as operating income (loss) plus depreciation and amortization expenses; stock-based compensation expense; employee retention credit; 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 and employee retention credit 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. 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. We also use Restaurant-level Operating Profit to measure operating performance and returns from opening new restaurants. Restaurant-level Operating Profit margin allows us to evaluate the level of Restaurant-level Operating Profit generated from sales.
However, you should be aware that Restaurant-level Operating Profit and Restaurant-level Operating Profit margin are financial measures, which are not indicative of overall results for the Company, and Restaurant-level Operating Profit and Restaurant-level Operating Profit margin do not accrue directly to the benefit of stockholders because of corporate-level expenses excluded from such measures.
In addition, when evaluating Restaurant-level Operating Profit and Restaurant-level Operating Profit margin, you should be aware that in the future we may incur expenses similar to those excluded when calculating these measures. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our computation of Restaurant-level Operating Profit 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.
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The following table reconciles operating loss to Restaurant-level Operating Profit (Loss) and Restaurant-level Operating Profit (Loss) margin for the three and six months ended February 28, 2021 and February 29, 2020 :
Three Months Ended
Six Months Ended
February 28, 2021
February 29, 2020
February 28, 2021
February 29, 2020
(amounts in thousands)
Operating loss
$
(3,802
)
$
(240
)
$
(10,093
)
$
(1,631
)
Depreciation and amortization expenses
1,096
748
2,098
1,433
Stock-based compensation expense (a)
309
211
575
332
Pre-opening costs (b)
326
303
561
448
Non-cash lease expense (c)
336
261
704
504
Employee retention credit (d)
(2,635
)
—
(2,635
)
—
General and administrative expenses
2,874
2,783
6,395
6,109
Corporate-level stock-based compensation and employee retention credit included in general and administrative expenses
151
(191
)
(92
)
(296
)
Restaurant-level operating (loss) profit
$
(1,345
)
$
3,875
$
(2,487
)
$
6,899
Operating loss margin
(41.9
)%
(1.2
)%
(54.6
)%
(4.4
)%
Restaurant-level operating (loss) profit margin
(14.8
)%
20.0
%
(13.4
)%
18.7
%
(a)
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 on Form 10-Q.
(b)
Pre-opening costs consist of labor costs and travel expenses for new employees and trainers during the training period, recruitment fees, legal fees, cash-based lease expenses incurred between the date of possession and opening day of our restaurants, and other related pre-opening costs.
( c )
Non-cash lease expense includes lease expense from the date of possession of our restaurants that did not require cash outlay in the respective periods .
( d )
Employee retention credit includes a refundable credit recognized under the provisions of the CARES Act extension.
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 the three and six months ended February 28, 2021.
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;
•
overall economic trends, particularly those related to consumer spending;
•
our ability to operate restaurants effectively and efficiently to meet consumer expectations;
•
pricing;
•
guest traffic;
•
per-guest spend and average check;
23
•
marketing and promotional efforts;
•
local competition; and
•
opening of new restaurants in the vicinity of existing locations.
Since opening new restaurants will be a significant component of our sales growth, comparable restaurant sales performance is only one measure of how we evaluate our performance. The following table shows the comparable restaurant sales performance for the three and six months ended February 28, 2021 and February 29, 2020:
Three Months Ended
Six Months Ended
February 28, 2021
February 29, 2020
February 28, 2021
February 29, 2020
Comparable restaurant sales performance (%)
(60.2)%
10.8%
(55.2)%
8.9%
Comparable restaurant base
21
17
20
14
Number of Restaurant Openings
The number of restaurant openings reflects the number of restaurants opened during a particular reporting period. Before we open new restaurants, we incur pre-opening costs. New restaurants may not be profitable, and their sales performance may not follow historical patterns. The number and timing of restaurant openings has had, and is expected to continue to have, an impact on our results of operations. The following table shows the growth in our restaurant base for the three and six months ended February 28, 2021 and February 29, 2020:
Three Months Ended
Six Months Ended
February 28, 2021
February 29, 2020
February 28, 2021
February 29, 2020
Restaurant activity:
Beginning of period
28
23
25
23
Openings
2
2
5
2
End of period
30
25
30
25
Subsequent to February 28, 2021, we opened one new restaurant in Sherman Oaks, California.
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 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.”
In November 2020, we borrowed $3.0 million under the Revolving Credit Agreement. During the three months ended February 28, 2021, we borrowed an additional $9.0 million. As of February 28, 2021, we had borrowed $12.0 million under the Revolving Credit Agreement. Subsequent to February 28, 2021 and as of the filing date of this Quarterly Report on Form 10-Q, we borrowed an additional $2.0 million and have $31.0 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 at least 30 days to pay vendors.
We believe that cash provided by operating activities, cash on hand and availability under our Revolving Credit Agreement will be sufficient to fund our lease obligations, capital expenditures and working capital needs for at least the next 12 months.
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Summary of Cash Flows
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 contribute to our working capital. Our working capital position is impacted by collecting cash from sales to guests the same day, or in the case of credit or debit card transactions, within several days of the related sale, and we typically have at least 30 days to pay our vendors.
The following table summarizes our cash flows for the periods presented:
Six Months Ended
February 28, 2021
February 29, 2020
Statement of Cash Flow data:
(amounts in thousands)
Net cash used in operating activities
$
(8,932
)
$
(272
)
Net cash used in investing activities
(9,904
)
(7,295
)
Net cash provided by (used in) financing activities
11,848
(491
)
Cash Flows Used in Operating Activities
Net cash used in operating activities during the six months ended February 28, 2021 was $8.9 million, which results from net loss of $10.2 million, non-cash charges of $2.1 million for depreciation and amortization, $0.6 million for stock-based compensation, $1.4 million in non-cash lease expense, and net cash outflows of approximately $2.8 million from changes in operating assets and liabilities. The net cash outflows from changes in operating assets and liabilities were primarily the result of increases of $2.9 million in prepaid expenses and other current assets, $0.4 million in accounts receivable, $0.2 million due from affiliate, and a decrease of $0.6 million in operating lease liabilities. The cash outflow is partially offset by increases of $0.9 million in salary and wages payable, $0.2 million in accrued expenses and other current liabilities and $0.2 million due to affiliate. The increases in accrued expenses and other current liabilities were primarily driven by timing of payment for certain liabilities.
Net cash used in operating activities during the six months ended February 29, 2020 was $0.3 million, which resulted from net loss of $1.4 million, non-cash charges of $1.4 million for depreciation and amortization, $0.3 million for stock-based compensation, $1.1 million in non-cash 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 $1.2 million in accounts payable and $0.5 million in 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 six months ended February 28, 2021 was $9.9 million, primarily due to purchases of property and equipment. The increase in purchases of property and equipment in the six months ended February 28, 2021 is 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 six months ended February 29, 2020 was $7.3 million, primarily due to purchases of property and equipment. The increase in purchases of property and equipment in the six months ended February 29, 2020 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 six months ended February 28, 2021 was $11.8 million and is primarily due to $12.0 million in loan proceeds from our Revolving Credit Agreement.
Net cash used in financing activities during the six months ended February 29, 2020 was $0.5 million primarily due to repayment of principal on financing leases.
Contractual Obligations
As of February 28, 2021, we had $0.7 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 on Form 10-Q.
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Off-Balance Sheet Arrangements
As of February 28, 2021, we did not have any material off-balance sheet arrangements.
Recent Accounting Pronouncements
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.
Critical Accounting Policies and Estimates
Our discussion and analysis of operating results and financial condition are based upon our financial statements. The preparation of our financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, expenses and related disclosures of contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.
Our critical accounting policies are those that materially affect our financial statements and involve subjective or complex judgments by management. Although these estimates are based on management’s best knowledge of current events and actions that may impact us in the future, actual results may be materially different from the estimates.
There have been no material changes in our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10‑K for the fiscal year ended August 31, 2020. Please refer to “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” of our Annual Report on Form 10‑K for the fiscal year ended August 31, 2020 for a discussion of our critical accounting policies and estimates.
Jumpstart Our Business Startups Act of 2012
We qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.
Subject to certain conditions set forth in the JOBS Act, we are also eligible for and intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, (ii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We may take advantage of these exemptions until we are no longer an emerging growth company. We will continue to be an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which the market value of our Class A common stock that is held by non-affiliates exceeds $700 million as of June 30 of that fiscal year, (ii) the last day of the fiscal year in which 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.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.