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Item 2. Management’s Discussion and Analysis

2021-07-13 compared with 2021-04-13 · 157 added, 162 removed, 245 unchanged (57% of the section changed)

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.

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 included in this Quarterly Report on Form 10-Q 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, such as statements about our plans, objectives, expectations, and intentions, which are based on current expectations and that involve risks, uncertainties and assumptions as set forth and described in the “Special Note Regarding Forward-Looking Statements” and “Risk Factors” sections of the Annual Report .

“Kura Sushi USA,” “Kura Sushi,” “Kura,” “we,” “us,” “our,” “our company” and the “Company” refer to Kura Sushi USA, Inc.

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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 and financial markets and supply chains 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 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.

Due to these government restrictions, the weighted average indoor dining capacities of our restaurants for the first quarter of fiscal 2021, second quarter of fiscal 2021 and third quarter of fiscal 2021 were 35%, 26% and 62%, respectively.

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

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

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

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

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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.

The reduced capacities at our restaurants have caused a substantial decline in our comparable restaurant sales in the three and nine months ended May 31, 2021 compared to pre-pandemic levels in the three and nine months ended May 31, 2019 of 19% and 39%, respectively.

In response to the ongoing challenges posed by the COVID-19 pandemic, we 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.

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

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.

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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”).

(“Kura Japan”), our majority stockholder, entered into a Revolving Credit Agreement (the “Revolving Credit Agreement”) whereby Kura Japan agreed to make available to us 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.

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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.

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.

As of May 31, 2021, we had borrowings outstanding of $17.0 million under the Revolving Credit Agreements.

Related Party Transactions” and “Note 6.

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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.

We 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 and recognized a $8.9 million employee retention credit and a $1.6 million 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 labor and related costs and $0.5 million is included in general 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 value of the employee retention credit was included in labor and related costs during the three and nine months ended May 31, 2020.

We have filed for refunds of the employee retention credits and as of the date of this Quarterly Report on Form 10-Q, we have not received any refunds and cannot reasonably estimate when we will receive any or all of the refunds.

We believe we became ineligible for further employee retention credits upon the lifting of indoor dining restrictions on our California restaurants effective June 15, 2021.

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 nine months ended May 31, 2021.

Due to the current staffing shortage, we 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 impact of COVID-19, we assessed our long-lived assets for potential impairment, which resulted in no impairment charges recorded as of May 31, 2021.

Key Financial Definitions

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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.

The following tables present selected comparative results of operations for the three and nine months ended May 31, 2021 and May 31, 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

Certain totals for the tables below may not sum to 100% due to rounding.

Three Months Ended May 31,

(dollar amounts in thousands)

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Total operating expenses

Operating loss

Operating income (loss)

Other expense (income):

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Interest income

Loss before income taxes

Income (loss) before income taxes

Income tax expense

Six Months Ended

February 28, 2021

February 29, 2020

Net income (loss)

Nine Months Ended May 31,

(dollar amounts in thousands)

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Total operating expenses

Operating loss

Operating income (loss)

Other expense (income):

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Interest income

Loss before income taxes

Income (loss) before income taxes

Income tax expense

Three Months Ended

Six Months Ended

February 28, 2021

February 29, 2020

February 28, 2021

February 29, 2020

Net income (loss)

Three Months Ended May 31,

Nine Months Ended May 31,

(as a percentage of sales)

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Total operating expenses

Operating loss

Operating income (loss)

Other expense (income):

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Interest income

Loss before income taxes

Income (loss) before income taxes

Income tax expense

Three Months Ended February 28, 2021 Compared to Three Months Ended February 29, 2020

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 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.

Net income (loss)

Three Months Ended May 31, 2021 Compared to Three Months Ended May 31, 2020

Sales were $18.5 million for the three months ended May 31, 2021 compared to $2.8 million for the three months ended May 31, 2020, representing an increase of approximately $15.7 million, or 556.9%.

The increase in sales was primarily driven by an increased level of operating capacities of our restaurants as the prior year sales were impacted by the temporary closure of our restaurants as mandated by local government restrictions during the three months ended May 31, 2020 in response to the COVID-19 pandemic, as well as the sales from six new restaurants opened subsequent to May 31, 2020 and an increase in off-premises sales.

As of May 31, 2021, all 31 of our restaurants were open with at least 50% indoor dining capacity.

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.

Food and beverage costs were $5.9 million for the three months ended May 31, 2021 compared to $1.1 million for the three months ended May 31, 2020, representing an increase of approximately $4.8 million or 447.2%.

The increase in food and beverage costs was primarily driven by an increased level of operating capacities of our restaurants as the prior year was impacted by the temporary closure of our restaurants as mandated by local government restrictions during the three months ended May 31, 2020 in response to the COVID-19 pandemic, as well as costs associated with sales from six new restaurants opened subsequent to May 31, 2020.

As a percentage of sales, food and beverage costs was 31.7% in the three months ended May 31, 2021, compared to 38.0% in the three months ended May 31, 2020.

The decrease in percentage of sales is primarily due to higher inventory spoilage during the three months ended May 31, 2020 as compared to the three months ended May 31, 2021.

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.

Labor and related costs were $1.6 million for the three months ended May 31, 2021 compared to $3.6 million for the three months ended May 31, 2020, representing a decrease of approximately $2.0 million, or 53.6%.

Labor and related costs decreased as a result of $5.8 million of employee retention credits recognized under the CARES Act extension during the three months ended May 31, 2021, compared to $1.6 million of employee retention credits recognized during the three months ended May 31, 2020.

This was partially offset by an increased level of operating capacities of our restaurants as the prior year was impacted by the temporary closure of our restaurants as mandated by local government restrictions during the three months ended May 31, 2020 in response to the COVID-19 pandemic, $0.7 million in employee retention and new hire bonuses during the three months ended May 31, 2021, as well as additional labor costs incurred from six new restaurants opened subsequent to May 31, 2020.

As a percentage of sales, labor and related costs decreased to 8.9% in the three months ended May 31, 2021, compared to 126.3% in the three months ended May 31, 2020.

The decrease in labor and related costs as a percentage of sales was primarily due to the recognition of the employee retention credits and the prior year retention of certain restaurant employees during the temporary restaurant closures, partially offset by employee bonuses.

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 .

Occupancy and related expenses were $ 1.9 million for the three months ended May 31, 2021 compared to $ 1.6 million for the three months ended May 31, 2020 , representing an increase of $ 0.3 million .

As a percentage of sales, occupancy and related expenses decreased to 10.2 % in the three months ended May 31, 2021 , compared to 56.5 % in the three months ended May 31, 2020 .

The decrease as a percentage of sales was primarily driven by the increase in sales due to the increased level of operating capacit ies of our restaurants as the prior year sales were impacted by the temporary closure of our restaurants as mandated by local government restrictions during the three months ended May 31, 2020 in response to the COVID-19 pandemic.

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 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.

Depreciation and amortization expenses incurred as part of restaurant operating costs were $1.1 million for the three months ended May 31, 2021 compared to $0.7 million for the three months ended May 31, 2020, representing an increase of approximately $0.4 million, or 46.2%.

The increase was primarily due to depreciation of property and equipment related to the six new restaurants opened subsequent to May 31, 2020.

As a percentage of sales, depreciation and amortization expenses at the restaurant level decreased to 5.9% in the three months ended May 31, 2021 as compared to 26.4% in the three months ended May 31, 2020.

The decrease as a percentage of sales was primarily driven by the increase in sales due to the increased level of operating capacities of our restaurants as the prior year sales were impacted by the temporary closure of our restaurants as mandated by local government restrictions during the three months ended May 31, 2020 in response to the COVID-19 pandemic.

Depreciation and amortization expenses incurred at the corporate level were $0.1 million for the three months ended May 31, 2021 and were immaterial for the three months ended May 31, 2020, and as a percentage of sales were 0.7% and 1.4%, respectively.

Other costs were $2.7 million for the three months ended May 31, 2021 compared to $1.0 million for the three months ended May 31, 2020, representing an increase of approximately $1.7 million, or 181.4%.

The increase was primarily driven by an increase in credit card fees due to higher sales during three months ended May 31, 2021, as well as costs related to six new restaurants opened subsequent to May 31, 2020.

As a percentage of sales, other costs decreased to 14.7% in the three months ended May 31, 2021 from 34.3% in the three months ended May 31, 2020, primarily driven by the increase in sales due to the increased level of operating capacities of our restaurants as the prior year was impacted by costs that are not directly variable with the decrease in sales due to the temporary closure of our restaurants as mandated by local government restrictions during the three months ended May 31, 2020 in response to the COVID-19 pandemic.

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.

General and administrative expenses were $4.3 million for the three months ended May 31, 2021 compared to $2.9 million for the three months ended May 31, 2020, representing an increase of approximately $1.4 million, or 48.8%.

This increase in general and administrative expenses was primarily due to an accrued estimated liability of $1.0 million associated with pending litigation and $1.1 million in increased compensation expenses, which was partially offset by a $0.5 million employee retention credit recognized under the CARES Act extension.

As a percentage of sales, general and administrative expenses decreased to 23.2% in the three months ended May 31, 2021 from 102.6% in the three months ended May 31, 2020, primarily driven by the increase in sales due to the increased level of operating capacities of our restaurants as the prior year sales were impacted by the temporary closure of our restaurants as mandated by local government restrictions during the three months ended May 31, 2020 in response to the COVID-19 pandemic.

Interest expense.

Interest expense was insignificant in both the three months ended February 28, 2021 and February 29, 2020.

Interest expense was $67 thousand for the three months ended May 31, 2021 and was $36 thousand for the three months ended May 31, 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.

Interest income was $1 thousand for the three months ended May 31, 2021 compared to $65 thousand for the three months ended May 31, 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.

Income tax expense was $30 thousand for the three months ended May 31, 2021 compared to $1.2 million for the three months ended May 31, 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 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.

Nine Months Ended May 31, 2021 Compared to Nine Months Ended May 31, 2020

Sales were $37.0 million for the nine months ended May 31, 2021 compared to $39.6 million for the nine months ended May 31, 2020, representing a decrease of approximately $2.6 million or 6.7%.

The decrease in sales was primarily driven by local government restrictions in response to the COVID-19 pandemic limiting operating capacities of our restaurants during the nine months ended May 31, 2021, which had a greater impact than the temporary closure of our restaurants that occurred during the nine months ended May 31, 2020.

The decrease was partially offset by the sales of six new restaurants opened subsequent to May 31, 2020 and an increase in off-premises sales.

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.

Food and beverage costs were $ 12.1 million for the nine months ended May 31, 2021 compared to $ 12.9 million for the nine months ended May 31, 2020 , representing a decrease of approximately $ 0.8 million , or 6.1 %.

The decrease in food and beverage costs was primarily driven by local government restrictions in response to the COVID-19 pandemic limiting operating capacities of our restaurants during the nine months ended May 31, 2021 , which had a greater impact than the temporary closure of our restaurants that occurred during the nine months ended May 31, 2020 .

The decrease was partially offset by the costs related to sales from six new restaurants opened subsequent to May 31, 2020 .

As a percentage of sales, food and beverage costs was 32.7 % in the nine months ended May 31, 2021 , compared to 32.5 % in the nine months ended May 31, 2020 .

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 .

Labor and related costs were $8.1 million for the nine months ended May 31, 2021 compared to $15.3 million for the nine months ended May 31, 2020, representing a decrease of approximately $7.2 million, or 47.4%.

Labor and related costs decreased as a result of a $8.0 million of employee retention credits recognized under the CARES Act extension during the nine months ended May 31, 2021, compared to $1.6 million of employee retention credits recognized during the nine months ended May 31, 2020, and local government restrictions in response to the COVID-19 pandemic limiting operating capacities of our restaurants during the nine months ended May 31, 2021, which had a greater impact than the temporary closure of our restaurants that occurred during nine months ended May 31, 2020.

The decrease was partially offset by $0.7 million in employee retention and new hire bonuses during the nine months ended May 31, 2021, and additional labor costs incurred from six new restaurants opened subsequent to May 31, 2020.

As a percentage of sales, labor and related costs decreased to 21.8% in the nine months ended May 31, 2021, compared to 38.7% in the nine months ended May 31, 2020.

The decrease in labor and related costs as a percentage of sales was primarily due to the employee retention credits, partially offset by the employee bonuses.

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.

Occupancy and related expenses were $5.2 million for the nine months ended May 31, 2021 compared to $4.7 million for the nine months ended May 31, 2020, representing an increase of approximately $0.5 million, or 11.5%.

The increase was primarily a result of additional lease expense incurred with respect to six new restaurants opened subsequent to May 31, 2020.

As a percentage of sales, occupancy and related expenses increased to 14.1% in the nine months ended May 31, 2021, compared to 11.8% in the nine months ended May 31, 2020.

The increase as a percentage of sales was primarily driven by local government restrictions in response to the COVID-19 limiting our operating capacities of our restaurants during the nine months ended May 31, 2021, which had a greater impact than the temporary closure of our restaurants that occurred during the nine months ended May 31, 2020.

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.

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 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.

Depreciation and amortization expenses incurred as part of restaurant operating costs were $3.0 million for the nine months ended May 31, 2021 compared to $2.1 million for the nine months ended May 31, 2020, representing an increase of approximately $0.9 million, or 42.4%.

The increase was primarily due to depreciation of property and equipment related to six new restaurants opened subsequent to May 31, 2020.

As a percentage of sales, depreciation and amortization expenses at the restaurant level increased to 8.2% in the nine months ended May 31, 2021 as compared to 5.3% in the nine months ended May 31, 2020.

The increase as a percentage of sales is primarily due to local government restrictions in response to the COVID-19 limiting our operating capacities of our restaurants during the nine months ended May 31, 2021, which had a greater impact than the temporary closure of our restaurants during the nine months ended May 31, 2020.

Depreciation and amortization expenses incurred at the corporate level were $0.3 million for the nine months ended May 31, 2021 and were $0.1 million for the nine months ended May 31, 2020.

As a percentage of sales, depreciation and amortization expenses incurred at the corporate level were 0.8% and 0.2%, respectively.

Other costs were $6.8 million for the nine months ended May 31, 2021 compared to $5.2 million for the nine months ended May 31, 2020, representing an increase of approximately $1.6 million, or 31.1%.

The increase was primarily driven by an increase in small tools expense during the nine months ended May 31, 2021, as well as costs related to six new restaurants opened subsequent to May 31, 2020.

As a percentage of sales, other costs increased to 18.5% in the nine months ended May 31, 2021 from 13.2% in the nine months ended May 31, 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.

General and administrative expenses were $10.7 million for the nine months ended May 31, 2021 compared to $9.0 million for the nine months ended May 31, 2020, representing an increase of approximately $1.7 million, or 18.8%.

This increase in general and administrative expenses was primarily due to an accrued estimated liability of $1.0 million associated with pending litigation and $1.7 million in increased compensation expenses, partially offset by a $0.9 million employee retention credit recognized under the CARES Act extension.

As a percentage of sales, general and administrative expenses increased to 28.9% in the nine months ended May 31, 2021 from 22.7% in the nine months ended May 31, 2020, primarily due to local government restrictions in response to the COVID-19 pandemic limiting our operating capacities of our restaurants during the nine months ended May 31, 2021, which had a greater impact than the temporary closure of our restaurants during nine months ended May 31, 2020.

Interest expense.

Interest expense was insignificant in both the six months ended February 28, 2021 and February 29, 2020.

Interest expense was $ 0.2 million for the nine months ended May 31, 2021 and was $ 0.1 million for the nine months ended May 31, 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.

Interest income was $8 thousand for the nine months ended May 31, 2021 compared to $432 thousand for the nine months ended May 31, 2020, due to a decrease in our cash and cash equivalents balance during the nine months ended May 31, 2021.

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.

Income tax expense was $88 thousand for the nine months ended May 31, 2021 compared to $1.2 million for the nine months ended May 31, 2020.

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

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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.

Several factors affect our restaurant sales in any given period including the number of restaurants in operation, guest traffic and average check amount.

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.

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, litigation accrual and certain executive transition costs, that we believe are not indicative of our core operating results.

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

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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

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

The following table reconciles net income ( loss ) to EBITDA and Adjusted EBITDA for the three and nine months ended May 31, 2021 and May 31, 2020 :

Three Months Ended May 31,

Nine Months Ended May 31,

(amounts in thousands)

Net income (loss)

Interest expense (income), net

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Employee retention credit (d)

Litigation accrual (e)

Adjusted EBITDA

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

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

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.

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

Employee retention credit includes a refundable credit recognized under the provisions of the CARES Act extension.

Employee retention credit includes a refundable credit recognized under the provisions of the CARES Act and extension thereof.

Accrual related to a litigation claim.

Commitments and Contingencies” to the financial statements includes in this Quarterly Report on Form 10-Q.

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

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

The following table reconciles operating loss to Restaurant-level Operating Profit (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

The following table reconciles operating income (loss) to Restaurant-level Operating Profit (Loss) and Restaurant-level Operating Profit (Loss) margin for the three and nine months ended May 31, 2021 and May 31, 2020:

Three Months Ended May 31,

Nine Months Ended May 31,

(amounts in thousands)

Operating loss

Operating income (loss)

Depreciation and amortization expenses

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Corporate-level stock-based compensation and employee retention credit included in general and administrative expenses

Restaurant-level operating (loss) profit

Operating loss margin

Restaurant-level operating (loss) profit margin

Restaurant-level operating profit (loss)

Operating profit (loss) margin

Restaurant-level operating profit (loss) margin

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.

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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 .

Employee retention credit includes a refundable credit recognized under the provisions of the CARES Act extension.

Employee retention credit includes a refundable credit recognized under the provisions of the CARES Act and extension thereof.

Comparable Restaurant Sales Performance

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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.

Performance in comparable restaurant sales represents the percent change in sales from the same period in the prior year for the comparable restaurant base.

We did not make any adjustments for the temporary restaurant closures due to COVID-19 during the three and nine months ended May 31, 2021 and May 31, 2020 .

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

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guest traffic;

per-guest spend and average check;

per-guest spend and average check amount;

marketing and promotional efforts;

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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

The following table shows the comparable restaurant sales performance for the three and nine months ended May 31, 2021 and May 31, 2020:

Three Months Ended May 31,

Nine Months Ended May 31,

Comparable restaurant sales performance (%)

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The number and timing of restaurant openings has had, and is expected to continue to have, an impact on our results of operations.

The following table shows the growth in our restaurant base for the three and 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

The following table shows the growth in our restaurant base for the three and nine months ended May 31, 2021 and May 31, 2020:

Three Months Ended May 31,

Nine Months Ended May 31,

Restaurant activity:

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End of period

Subsequent to February 28, 2021, we opened one new restaurant in Sherman Oaks, California.

Subsequent to May 31, 2021, we opened one new restaurant in Bellevue, Washington.

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.

Historically, our main sources of liquidity have been cash flows from operations, cash proceeds from our initial public offering in fiscal 2019 and proceeds under our Revolving Credit Agreement.

The continuing 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 may 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.

On May 7, 2021, we filed a universal shelf registration statement on Form S-3 (the “Registration Statement”) with the SEC in accordance with the Securities Act of 1933, as amended (the “Securities Act”).

The Registration Statement was declared effective on May 17, 2021 and registers Class A common stock, preferred stock, depositary shares, warrants, subscription rights, share purchase contracts, share purchase units, and any combination of the foregoing, for a maximum aggregate offering price of up to $50 million, which may be sold from time to time.

The terms of any securities offered under the Registration Statement and intended use of proceeds will be established at the times of the offerings and will be described in prospectus supplements filed with the SEC at the times of the offerings.

The Registration Statement has a three-year term from May 17, 2021, the date of effectiveness.

During the three months ended May 31, 2021, we borrowed $5.0 million under the Revolving Credit Agreement.

As of May 31, 2021, we had outstanding borrowings of $17.0 million under the Revolving Credit Agreement and have $28.0 million of availability remaining.

The significant components of our working capital are liquid assets such as cash, cash equivalents and receivables, reduced by accounts payable and accrued expenses.

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

Six Months Ended

February 28, 2021

February 29, 2020

Nine Months Ended May 31,

Statement of Cash Flow data:

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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.

Net cash used in operating activities during the nine months ended May 31, 2021 was $9.7 million, which results from net loss of $9.5 million, non-cash charges of $3.3 million for depreciation and amortization, $1.0 million for stock-based compensation, and $2.0 million in non-cash lease expense, and net cash outflows of approximately $6.6 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 $9.0 million in prepaid expenses and other current assets, and $1.2 million in accounts and other receivables, and a decrease of $1.0 million in operating lease liabilities.

The cash outflow is partially offset by increases of $3.0 million in salaries and wages payable, $1.1 million in accrued expenses and other current liabilities and $0.5 million sales tax payable.

The increases in prepaid expenses and other current assets was primarily due to the employee retention credit recognized under the CARES Act extension.

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

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

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

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

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.

Net cash used in investing activities during the nine months ended May 31, 2021 was $11.5 million, primarily due to purchases of property and equipment.

The increase in purchases of property and equipment in the nine months ended May 31, 2021 is primarily related to capital expenditures for current and future restaurant openings and renovations, maintaining our existing restaurants and other projects.

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

The increase in purchases of property and equipment in the nine months ended May 31, 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.

Net cash provided by financing activities during the nine months ended May 31, 2021 was $16.7 million and is primarily due to $17.0 million in loan proceeds from our Revolving Credit Agreement.

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

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.

As of May 31, 2021, we had $2.1 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 fiscal years 2021 and 2022.

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

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Off-Balance Sheet Arrangements

As of February 28, 2021, we did not have any material off-balance sheet arrangements.

As of May 31, 2021, we did not have any material off-balance sheet arrangements.

Recent Accounting Pronouncements

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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.

We qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis