What changed in this filing

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Item 1. Financial Statements

2021-07-13 compared with 2021-04-13 · 110 added, 144 removed, 320 unchanged (44% of the section changed)

3 unchanged sentences

(amounts in thousands, except par value)

February 28, 2021

August 31, 2020

1 unchanged sentence

Cash and cash equivalents

Accounts receivable

Accounts and other receivables

Due from affiliate

28 unchanged sentences

50,000 shares authorized,

7,413 and 7,342 shares issued and outstanding as of February 28, 2021

7,424 and 7,342 shares issued and outstanding as of May 31, 2021

and August 31, 2020, respectively

1 unchanged sentence

10,000 shares authorized,

1,000 shares issued and outstanding as of February 28, 2021

1,000 shares issued and outstanding as of May 31, 2021

and August 31, 2020

7 unchanged sentences

(amounts in thousands, except per share data)

Three Months Ended

Six Months Ended

February 28, 2021

February 29, 2020

February 28, 2021

February 29, 2020

Three Months Ended May 31,

Nine Months Ended May 31,

Restaurant operating costs:

7 unchanged sentences

Total operating expenses

Operating loss

Operating income (loss)

Other expense (income):

1 unchanged sentence

Interest income

Loss before income taxes

Income (loss) before income taxes

Income tax expense

Net loss per Class A and Class B shares

Net income (loss)

Net income (loss) per Class A and Class B shares

Weighted average Class A and Class B shares outstanding

11 unchanged sentences

Balances as of February 28, 2021

Stock-based compensation

Exercise of stock options

Balances as of May 31, 2021

Stockholders'

5 unchanged sentences

Balances as of February 29, 2020

Stock-based compensation

Exercise of stock options

Balances as of May 31, 2020

The accompanying notes are an integral part of these condensed financial statements.

2 unchanged sentences

(amounts in thousands)

Six Months Ended

February 28, 2021

February 29, 2020

Nine Months Ended May 31,

Cash flows from operating activities

5 unchanged sentences

Non-cash lease expense

Inventory write-downs

Changes in operating assets and liabilities:

Accounts receivable

Accounts and other receivables

Due from affiliate

3 unchanged sentences

Accrued expenses and other current liabilities

Salary and wages payable

Salaries and wages payable

Operating lease liabilities

5 unchanged sentences

Payments for initial direct costs

Payments for purchase of liquor license

Payments for purchases of liquor licenses

Net cash used in investing activities

Cash flows from financing activities

Proceeds from PPP loan

Repayment of PPP loan

Proceeds from loan from affiliate

7 unchanged sentences

Amounts included in accounts payable for purchases of property and equipment

Reconciliation of cash, cash equivalents and restricted cash within the condensed balance sheets to the amounts shown in the statements of cash flows above:

Cash and cash equivalents

Restricted cash included in prepaid expenses and other current assets

Total cash, cash equivalents and restricted cash

The accompanying notes are an integral part of these condensed financial statements.

9 unchanged sentences

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.

This contagious virus, which has continued to spread, has adversely affected workforces, customers, economies, supply chains and financial markets globally.

In response to this outbreak, many state and local authorities had mandated the temporary closure of non-essential businesses and dine-in restaurant activity or limited indoor dining capacities.

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

As of February 28, 2021, the Company had 28 of its 30 restaurants open in some capacity:

indoor dining, outdoor dining or takeout only.

In April 2021, the Company opened one new restaurant in Sherman Oaks, California.

As of the filing date of this Quarterly Report on Form 10-Q, the Company 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, the Company has prioritized taking steps to protect the health and safety of its employees and customers.

As of May 31, 2021, the Company had all of its 31 restaurants operating at indoor dining capacities ranging from 50% to 100%.

In June 2021, the Company opened one new restaurant in Bellevue, Washington.

As of the filing date of this Quarterly Report on Form 10-Q, the Company had all of its 32 restaurants operating at 100% indoor capacity with no restrictions in place.

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

The Company has maintained its 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 two restaurants during the quarter have caused a substantial decline in the Company’s 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, the Company is focused on maximizing its in-restaurant dining capacity as permitted by the jurisdictions where it operates, emphasizing 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.

The reduced capacities at its restaurants have caused a substantial decline in the Company’s comparable restaurant sales in the most recently completed fiscal quarter and year-to-date period compared to pre-pandemic levels.

In response to the challenges posed by the COVID-19 pandemic, the Company focused on maximizing its in-restaurant dining capacity as permitted by the jurisdictions where it operates, emphasizing 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.

Currently, with the lift of all indoor dining restrictions at all of its restaurants, the Company has experienced a staffing shortage and has provided certain employee retention and new hire bonuses.

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.

9 unchanged sentences

Under the provisions of the extension of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) passed by the United States Congress and signed by the President , the Company is eligible for a refundable employee retention credit subject to certain criteria.

The Company 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.

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 and six months ended February 28, 2021.

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 February 28 , 202 1 .

The Company recognized a $ 6.3 million employee retention credit and a $ 1.6 million employee retention credit during the three months ended May 31, 2021 and May 31, 2020 , respectively, and recognized a n $ 8.9 million employee retention credit and a $ 1.6 million employee retention credit during the nine months ended May 31, 2021 and May 31, 2020 , respectively.

For the three months ended May 31, 2021, $ 5.8 million is included in l abor and related costs and $ 0.5 million is included in g eneral and administrative expenses in the statements of operations and for the nine months ended May 31, 2021, $ 8.0 million is included in labor and related costs and $ 0.9 million is included in general and administrative expenses in the statement of operations .

The entire amount of the employee retention credit was included in labor and related costs during the three and nine months ended May 31, 2020 .

The Company has filed for refund s of the employee retention credits and as of the date of this Quarterly Report on Form 10-Q, it has not received any refunds and cannot reasonably estimate when it will receive any or all of the refunds.

Due to the current staffing shortage, the Company provided certain employee retention and new hire bonuses totaling $0.7 million in the three and nine months ended May 31, 2021.

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 May 31, 2021.

Basis of Presentation

6 unchanged sentences

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.

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 year ending August 31, 2021, and fiscal years ended August 31, 2020 and August 31, 2019, respectively.

The Company’s fiscal year begins on September 1 and ends on August 31 and references made to “fiscal year 2022”, “fiscal year 2021,” “fiscal year 2020” and “fiscal year 2019” refer to the Company’s fiscal years ending August 31, 2022 and August 31, 2021, and ended August 31, 2020 and August 31, 2019, respectively.

Use of Estimates

3 unchanged sentences

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.

Comprehensive Income (Loss)

Comprehensive income (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 income (loss) is the same as net income (loss) for all periods presented.

Therefore, a separate statement of comprehensive income (loss) is not included in the accompanying financial statements.

Recently Issued Accounting Pronouncements

5 unchanged sentences

Balance Sheet Components

Accounts Receivable

February 28, 2021

Accounts and Other Receivables

August 31, 2020

3 unchanged sentences

Other receivables

Total accounts receivable

Total accounts and other receivables

Prepaid Expenses and Other Current Assets

February 28, 2021

August 31, 2020

2 unchanged sentences

Prepaid expenses

Restricted cash (a)

Other current assets

Total prepaid expenses and other current assets

The restricted cash was pledged as a collateral for a standby letter of credit with Mizuho Bank, Ltd.

related to one of the Company’s leased properties.

For additional information, see “Note 4.

Related Party Transactions.”

Property and Equipment - net

February 28, 2021

August 31, 2020

7 unchanged sentences

Total property and equipment – net

Depreciation and amortization expense for property and equipment was approximately $1.1 million and $0.7 million for the three months ended February 28, 2021 and February 29, 2020, respectively, and was approximately $2.1 million and $1.4 million for the six months ended February 28, 2021 and February 29, 2020, respectively.

Depreciation and amortization expense for property and equipment was approximately $1.2 million and $0.8 million for the three months ended May 31, 2021 and May 31, 2020, respectively, and was approximately $3.3 million and $2.2 million for the nine months ended May 31, 2021 and May 31, 2020, respectively.

Accrued Expenses and Other Current Liabilities

February 28, 2021

August 31, 2020

10 unchanged sentences

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 with in the r ight-of- u se (“ROU”) assets and lease liabilities recognized in “Operating lease right-of-use assets , ” “Operating lease liabilities – current ” and “ O perating lease liabilities – non - current , ” respectively.

Finance leases are accounted for on the balance sheet with in ROU assets and lease liabilities recognized in “ Property and equipment – net , ” “Finance lease – current ” and “ Finance lease – non - current , ” respectively.

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.

7 unchanged sentences

Additionally, contingent rental payments based on sales thresholds for certain of the Company’s restaurants are accrued based on estimated sales.

Lease related costs recognized in the statements of operations for the three and six months ended February 28, 2021 and February 29, 2020 are as follows:

Three Months Ended

Six Months Ended

February 28, 2021

February 29, 2020

February 28, 2021

February 29, 2020

(amounts in thousands)

Lease related costs recognized in the statements of operations for the three and nine months ended May 31, 2021 and May 31, 2020 are as follows:

Three Months Ended May 31,

Nine Months Ended May 31,

(amounts in thousands)

6 unchanged sentences

Total finance lease cost

Three Months Ended

Six Months Ended

February 28, 2021

February 29, 2020

February 28, 2021

February 29, 2020

(amounts in thousands)

Three Months Ended May 31,

Nine Months Ended May 31,

(amounts in thousands)

8 unchanged sentences

Operating Leases

February 28, 2021

August 31, 2020

(amounts in thousands)

Right-of-use assets

Lease liabilities – current

Lease liabilities – non-current

Total lease liabilities

Operating lease right-of-use assets

Operating lease liabilities – current

Operating lease liabilities – non-current

Total operating lease liabilities

Finance Lease Assets – net

February 28, 2021

August 31, 2020

4 unchanged sentences

Finance Leases Liabilities

February 28, 2021

August 31, 2020

3 unchanged sentences

Total finance lease liabilities

February 28, 2021

February 29, 2020

Weighted Average Remaining Lease Term (Years)

5 unchanged sentences

Supplemental disclosures of cash flow information related to leases are as follows:

Six Months Ended

February 28, 2021

February 29, 2020

Nine Months Ended May 31,

(amounts in thousands)

1 unchanged sentence

Operating right-of-use assets obtained in exchange for new operating lease liabilities

As of February 28, 2021, the Company had additional operating leases liabilities related to restaurants of which the Company has not yet taken possession of $16.6 million.

As of May 31, 2021, the Company had additional operating leases liabilities related to restaurants of which the Company has not yet taken possession of $22.8 million.

These operating leases are expected to commence in fiscal years 2021 and 2022 with lease terms of 20 years.

Subsequent to February 28, 2021, the Company has entered into an additional operating lease related to a restaurant of which the Company has not yet taken possession.

Subsequent to May 31, 2021, the Company entered into an additional operating lease related to a restaurant of which the Company has not yet taken possession.

The lease liabilities associated with the lease are $5.5 million.

The operating lease is expected to commence in fiscal year 2022 with a lease term of 20 years.

Maturities of lease liabilities were as follows as of February 28, 2021:

Maturities of lease liabilities, net of lease receivables, were as follows as of May 31, 2021:

Operating Leases

8 unchanged sentences

(“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 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 certain employees to work for 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 pay fees to each other as set forth under the Shared Services Agreement.

In exchange for such services, supplies, parts and equipment, the parties pay fees to each other as set forth in the Shared Services Agreement.

A right of setoff is not required, however, from time to time, either party net settles 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 administrative supplies, expatriate salaries and travel and other administrative expenses payable to Kura Japan are included in general and administrative expenses in the accompanying statements of operations.

Purchases of equipment from Kura Japan are included in property and equipment in the accompanying balance sheets.

In August 2019, the Company entered into an Amended and Restated Exclusive License Agreement (the “License Agreement”) with Kura Japan.

Pursuant to the License Agreement, the Company pays Kura Japan a royalty fee of 0.5% of the Company’s net sales in exchange for an exclusive, royalty-bearing license for 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.

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.

2 unchanged sentences

For additional information, see “Note 6.

Balances with Kura Japan as of February 28, 2021 and August 31, 2020 are as follows:

February 28, 2021

Balances with Kura Japan as of May 31, 2021 and August 31, 2020 are as follows:

August 31, 2020

3 unchanged sentences

Loan from affiliate

Reimbursements by the Company to Kura Japan for the three and six months ended February 28, 2021 and February 29, 2020 were as follows:

Three Months Ended

Six Months Ended

February 28, 2021

February 29, 2020

February 28, 2021

February 29, 2020

(amounts in thousands)

Reimbursements and other payments by the Company to Kura Japan for the three and nine months ended May 31, 2021 and May 31, 2020 were as follows:

Three Months Ended May 31,

Nine Months Ended May 31,

(amounts in thousands)

7 unchanged sentences

Total related party transactions

Reimbursements by Kura Japan to the Company were $20 thousand and $35 thousand for the three months ended February 28, 2021 and February 29, 2020, respectively, and were $25 thousand and $69 thousand for the six months ended February 28, 2021 and February 29, 2020, respectively.

Reimbursements by Kura Japan to the Company were $2 thousand and $17 thousand for the three months ended May 31, 2021 and May 31, 2020, respectively, and were $27 thousand and $86 thousand for the nine months ended May 31, 2021 and May 31, 2020, respectively.

The reimbursements were for travel and audit expenses.

As of February 28, 2021, the Company had $0.5 million of restricted cash included in prepaid expenses and other current assets on the condensed balance sheet pledged as collateral for a standby letter of credit with Mizuho Bank, Ltd.

related to one of the Company’s leased properties.

Subsequent to February 28, 2021 and as of the filing date of this Quarterly Report on Form 10-Q, Mizuho Bank, Ltd.

entered into an agreement with Kura Japan, pursuant to which Kura Japan provided a guaranty on the standby letter of credit, which released the restricted cash.

Stock-based Compensation

The following table summarizes the stock option activity under the Company’s 2018 Incentive Compensation Plan, as amended and restated (the “Stock Incentive Plan”) for the period from August 31, 2020 through February 28, 2021:

Options Outstanding

7 unchanged sentences

Options canceled/forfeited

Outstanding—February 28, 2021

The Company issued seven thousand restricted stock awards during the three and six months ended February 28, 2021 in addition to the option awards stated below, amounting to an expense of $28 thousand for the three and six months ended February 28, 2021.

No restricted stock awards were issued during the three and six months ended February 29, 2020.

Outstanding— May 31, 2021

The Company issued seven thousand restricted stock awards during the nine months ended May 31, 2021 in addition to the option awards stated above, amounting to an expense of $32 thousand for the three months ended May 31, 2021 and $60 thousand for the nine months ended May 31, 2021.

No restricted stock awards were issued during the three months ended May 31, 2021 and the three and nine months ended May 31, 2020.

The total stock-based compensation expense recognized under the Stock Incentive Plan in the statements of operations is as follows:

Three Months Ended

Six Months Ended

February 28, 2021

February 29, 2020

February 28, 2021

February 29, 2020

(amounts in thousands)

Three Months Ended May 31,

Nine Months Ended May 31,

(amounts in thousands)

6 unchanged sentences

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, and additionally, amending the interest rate for advances disbursed prior to April 10, 2021 to be fixed at 1.1% and the interest rate for advances disbursed on or after April 10, 2021 to be fixed at 130% of the Annual Compounding Long-Term Applicable Federal Rate (“AFR”) on the date such advance is made.

The AFR as of February 28, 2021 was 1.9%.

The AFR as of May 31, 2021 was 2.82%.

There are no financial covenants under the Revolving Credit Agreement with which the Company must comply.

As of February 28, 2021, the Company had borrowed $12.0 million under the Revolving Credit Agreement at a fixed interest rate of 1.1%.

Interest expense for the three and six months ended February 28, 2021 was immaterial.

Subsequent to February 28, 2021 and as of the filing date of this Quarterly Report on Form 10-Q, the Company borrowed an additional $2.0 million and has $31.0 million of availability remaining under the Revolving Credit Agreement.

As of May 31, 2021, the Company had borrowed $14.0 million at a fixed interest rate of 1.1% and $3.0 million at a fixed interest rate of 2.8% under the Revolving Credit Agreement.

Interest expense for the three and nine months ended May 31, 2021 was immaterial.

As of May 31, 2021, the Company had $28.0 million of availability remaining under the Revolving Credit Agreement.

For additional information, see “Note 4.

Related Party Transactions.”

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

Six Months Ended

February 28, 2021

February 29, 2020

February 28, 2021

February 29, 2020

Income (Loss) Per Share

The net income (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 income (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 income ( loss ) per share:

Three Months Ended May 31,

Nine Months Ended May 31,

(amounts in thousands, except per share data)

Net loss attributable to common stockholders - basic and diluted

Weighted average common shares outstanding - basic and diluted

Net loss per share attributable to common stockholders - basic and diluted

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.

Net income (loss) attributable to common stockholders - basic

Weighted average common shares outstanding - basic

Net income (loss) per share attributable to common stockholders - basic

Net income (loss) attributable to common stockholders - diluted

Weighted average shares outstanding - basic

Dilutive effect of stock-based awards

Weighted average shares outstanding - diluted

Net income (loss) per share attributable to common stockholders - diluted

The Company computes basic income (loss) per common share using net income (loss) and the weighted average number of common shares outstanding during the period.

Diluted income (loss) per common share is computed using net income (loss) and the weighted average number of common shares and potentially dilutive common shares outstanding during the period.

Potentially dilutive common shares include dilutive outstanding employee stock options and restricted stock awards.

For the three months ended February 28, 2021 and February 29, 2020, there were 600 thousand and 241 thousand shares of common stock subject to outstanding employee stock options and restricted stock awards, respectively, that were excluded from the calculation of diluted loss per share because their inclusion would have been anti-dilutive.

For the six months ended February 28, 2021 and February 29, 2020, there were approximately 600 thousand and 208 thousand shares of common stock subject to outstanding employee stock options and restricted stock awards, respectively, that were excluded from the calculation of diluted loss per share because their inclusion would have been anti-dilutive.

For the three months ended May 31, 2021 and May 31, 2020, there were 87 thousand and 21 thousand shares of common stock subject to outstanding employee stock options that were excluded from the calculation of diluted income (loss) per share because their inclusion would have been anti-dilutive.

For the nine months ended May 31, 2021 and May 31, 2020, there were approximately 586 thousand and 137 thousand shares of common stock subject to outstanding employee stock options and restricted stock awards, respectively, that were excluded from the calculation of diluted loss per share because their inclusion would have been anti-dilutive.

Commitments and Contingencies

3 unchanged sentences

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.

During the three months ended May 31, 2021, a joint stipulation was filed requesting a delay in the class certification hearing date to March 3, 2022 and a mediation was scheduled for September 24, 2021.

Based on research conducted by the Company in preparation for the mediation, the Company recorded an accrued liability of $1.0 million related to this complaint within general and administrative expenses in the statements of operations during the three months ended May 31, 2021, as the liability associated with a potential settlement became probable and reasonably estimable.

The Company is unable to reasonably estimate the upper end of the range of possible loss.

There can be no assurance of the actual liability associated with this complaint, which may be higher than the estimated amount accrued during the three months ended May 31, 2021.

As the Company receives new information, it will reevaluate its estimated liability and the estimated liability may change significantly.

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.

In the opinion of management, the Company does not believe that such litigation, claims, and administrative proceedings, excluding 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.

The Company recorded income tax expense of $29 thousand and $30 thousand for the three months ended February 28, 2021 and February 29, 2020, respectively, and of $58 thousand and $26 thousand for the six months ended February 28, 2021 and February 29, 2020, respectively.

The Company’s effective tax rates for the three and six months ended February 28, 2021 and February 29, 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 recorded income tax expense of $30 thousand and $1.2 million for the three months ended May 31, 2021 and May 31, 2020, respectively, and of $88 thousand and $1.2 million for the nine months ended May 31, 2021 and May 31, 2020, respectively.

The Company’s effective tax rates for the three and nine months ended May 31, 2021 substantially differed from the federal statutory tax rate of 21% 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 assessing the need for a valuation allowance, the Company considered both positive and negative evidence related to the likelihood of realization of its 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 February 28, 2021 was appropriate.

On December 27, 2020, Congress passed, and the President signed into law, the Consolidated Appropriations Act, 2021 (the “CAA”), which includes certain business tax provisions.

The Company does not expect the CAA to have a material impact on the Company’s effective tax rate or income tax expense for the fiscal year ending August 31, 2021.

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 May 31, 2021 was appropriate.

On December 27, 2020, Congress passed, and the President 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.

On March 11, 2021, Congress passed, and the President signed into law, the American Rescue Plan Act, 2021 (the “ARP”), which includes certain business tax provisions.

1 unchanged sentence

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 1. Financial Statements