KURA SUSHI USA, INC. 10-Q

Item 1. Financial Statements. Kura Sushi USA, Inc. Condensed Balance Sheets (amounts in thousands, except par value) (Unaudited) May 31, 2021 August 31, 2020 Assets Current assets: Cash and cash equivalents $ 4,701 $ 9,259 Accounts and other receivables 3,258 2,130 Inventories 467 367 Due from affiliate 2 12 Prepaid expenses and other current assets 11,973 3,010 Total current assets 20,401 14,778 Non-current assets: Property and equipment - net 51,783 45,541 Operating lease right-of-use assets 56,165 56,119 Deposits and other assets 2,085 1,941 Total assets $ 130,434 $ 118,379 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 3,631 $ 4,919 Accrued expenses and other current liabilities 1,638 720 Salaries and wages payable 4,755 1,786 Finance leases - current 1,011 1,004 Operating lease liabilities - current 5,159 5,106 Due to affiliate 60 201 Sales tax payable 687 189 Total current liabilities 16,941 13,925 Non-current liabilities: Loan from affiliate 17,000 — Finance leases - non-current 696 1,481 Operating lease liabilities - non-current 57,777 56,918 Other liabilities 363 342 Total liabilities 92,777 72,666 Commitments and contingencies (Note 8) Stockholders' equity: Preferred stock, $0.001 par value; 1,000 shares authorized, no shares issued or outstanding — — Class A common stock, $0.001 par value; 50,000 shares authorized, 7,424 and 7,342 shares issued and outstanding as of May 31, 2021 and August 31, 2020, respectively 7 7 Class B common stock, $0.001 par value; 10,000 shares authorized, 1,000 shares issued and outstanding as of May 31, 2021 and August 31, 2020 1 1 Additional paid-in capital 61,737 60,332 Accumulated deficit (24,088 ) (14,627 ) Total stockholders' equity 37,657 45,713 Total liabilities and stockholders' equity $ 130,434 $ 118,379 The accompanying notes are an integral part of these condensed financial statements. 1 Kura Sushi USA, Inc. Condensed Statements of Operations (amounts in thousands, except per share data) (Unaudited) Three Months Ended May 31, Nine Months Ended May 31, 2021 2020 2021 2020 Sales $ 18,471 $ 2,812 $ 36,967 $ 39,640 Restaurant operating costs: Food and beverage costs 5,850 1,069 12,078 12,868 Labor and related costs 1,649 3,551 8,070 15,336 Occupancy and related expenses 1,885 1,589 5,202 4,665 Depreciation and amortization expenses 1,086 743 3,015 2,118 Other costs 2,713 964 6,843 5,221 Total restaurant operating costs 13,183 7,916 35,208 40,208 General and administrative expenses 4,292 2,885 10,687 8,994 Depreciation and amortization expenses 130 39 299 97 Total operating expenses 17,605 10,840 46,194 49,299 Operating income (loss) 866 (8,028 ) (9,227 ) (9,659 ) Other expense (income): Interest expense 67 36 154 103 Interest income (1 ) (65 ) (8 ) (432 ) Income (loss) before income taxes 800 (7,999 ) (9,373 ) (9,330 ) Income tax expense 30 1,153 88 1,179 Net income (loss) $ 770 $ (9,152 ) $ (9,461 ) $ (10,509 ) Net income (loss) per Class A and Class B shares Basic $ 0.09 $ (1.10 ) $ (1.13 ) $ (1.26 ) Diluted $ 0.09 $ (1.10 ) $ (1.13 ) $ (1.26 ) Weighted average Class A and Class B shares outstanding Basic 8,383 8,341 8,381 8,337 Diluted 8,663 8,341 8,381 8,337 The accompanying notes are an integral part of these condensed financial statements. 2 Kura Sushi USA, Inc. Condensed Statements of Stockholders’ Equity (amounts in thousands) (Unaudited) Common Stock Additional Total Class A Class B Paid-in Accumulated Stockholders' Shares Amount Shares Amount Capital Deficit Equity Balances as of August 31, 2020 7,342 $ 7 1,000 $ 1 $ 60,332 $ (14,627 ) $ 45,713 Stock-based compensation — — — — 266 — 266 Net loss — — — — — (6,350 ) (6,350 ) Exercise of stock options 22 — — — 94 — 94 Balances as of November 30, 2020 7,364 7 1,000 1 60,692 (20,977 ) 39,723 Stock-based compensation — — — — 309 — 309 Net loss — — — — — (3,881 ) (3,881 ) Exercise of stock options 49 — — — 272 — 272 Balances as of February 28, 2021 7,413 $ 7 1,000 $ 1 $ 61,273 $ (24,858 ) $ 36,423 Stock-based compensation — — — — 391 — 391 Net income — — — — — 770 770 Exercise of stock options 11 — — — 73 — 73 Balances as of May 31, 2021 7,424 $ 7 1,000 $ 1 $ 61,737 $ (24,088 ) $ 37,657 Common Stock Additional Retained Earnings Total Class A Class B Paid-in (Accumulated Stockholders' Shares Amount Shares Amount Capital Deficit) Equity Balances as of August 31, 2019 7,335 $ 7 1,000 $ 1 $ 59,442 $ 2,731 $ 62,181 Stock-based compensation — — — — 121 — 121 Net loss — — — — — (1,224 ) (1,224 ) Balances as of November 30, 2019 7,335 7 1,000 1 59,563 1,507 61,078 Stock-based compensation — — — — 211 — 211 Net loss — — — — — (133 ) (133 ) Exercise of stock options 3 — — — 15 — 15 Balances as of February 29, 2020 7,338 $ 7 1,000 $ 1 $ 59,789 $ 1,374 $ 61,171 Stock-based compensation — — — — 248 — 248 Net loss — — — — — (9,152 ) (9,152 ) Exercise of stock options 4 — — — 15 — 15 Balances as of May 31, 2020 7,342 $ 7 1,000 $ 1 $ 60,052 $ (7,778 ) $ 52,282 The accompanying notes are an integral part of these condensed financial statements. 3 Kura Sushi USA, Inc. Condensed Statements of Cash Flows (amounts in thousands) (Unaudited) Nine Months Ended May 31, 2021 2020 Cash flows from operating activities Net loss $ (9,461 ) $ (10,509 ) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 3,314 2,215 Stock-based compensation 966 580 Loss on disposal of property and equipment 91 4 Deferred income taxes — 1,114 Non-cash lease expense 1,975 1,695 Inventory write-downs — 50 Changes in operating assets and liabilities: Accounts and other receivables (1,227 ) 836 Inventories (100 ) 82 Due from affiliate 10 221 Prepaid expenses and other current assets (8,963 ) (1,227 ) Deposits and other assets (34 ) (108 ) Accounts payable 71 (2,995 ) Accrued expenses and other current liabilities 1,129 (861 ) Salaries and wages payable 2,969 (340 ) Operating lease liabilities (1,011 ) (915 ) Due to affiliate 76 (4 ) Sales tax payable 498 (533 ) Net cash used in operating activities (9,697 ) (10,695 ) Cash flows from investing activities Payments for property and equipment (11,412 ) (9,348 ) Payments for initial direct costs — (165 ) Payments for purchases of liquor licenses (111 ) (58 ) Net cash used in investing activities (11,523 ) (9,571 ) Cash flows from financing activities Proceeds from PPP loan — 5,983 Repayment of PPP loan — (5,983 ) Proceeds from loan from affiliate 17,000 — Repayment of principal on finance leases (777 ) (778 ) Proceeds from exercise of stock options 439 30 Net cash provided by (used in) financing activities 16,662 (748 ) Decrease in cash, cash equivalents and restricted cash (4,558 ) (21,014 ) Cash, cash equivalents and restricted cash, beginning of period 9,259 38,044 Cash, cash equivalents and restricted cash, end of period $ 4,701 $ 17,030 Noncash investing activities Amounts included in accounts payable for purchases of property and equipment $ 641 $ 1,916 The accompanying notes are an integral part of these condensed financial statements. 4 Kura Sushi USA, Inc. Notes to Condensed Financial Statements (Unaudited) Note 1. Organization and Basis of Presentation Kura Sushi USA, Inc. is a technology-enabled Japanese restaurant concept that provides guests with a distinctive dining experience by serving authentic Japanese cuisine through an engaging revolving sushi service model, which the Company refers to as the “Kura Experience.” Kura Sushi encourages healthy lifestyles by serving freshly prepared Japanese cuisine using high-quality ingredients that are free from artificial seasonings, sweeteners, colorings, and preservatives. Kura Sushi aims to make quality Japanese cuisine accessible to its guests across the United States through affordable prices and an inviting atmosphere. “Kura Sushi USA,” “Kura Sushi,” “Kura,” and the “Company” refer to Kura Sushi USA, Inc. unless expressly indicated or the context otherwise requires. Effects of COVID-19 In March 2020, the World Health Organization declared the novel strain of coronavirus COVID-19 a global pandemic. This contagious virus, which has continued to spread, has adversely affected workforces, customers, economies, 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 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 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. The future sales levels of the Company’s restaurants and its ability to implement its growth strategy, however, remain highly uncertain, as the full impact and duration of the COVID-19 pandemic continues to evolve as of the filing date of this Quarterly Report on Form 10-Q. Recent Events Concerning the Company’s Financial Position On April 10, 2020, the Company and Kura Sushi, Inc. (“Kura Japan”), the majority stockholder of the Company, 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 the Company as maker and made payable to Kura Japan (the “Revolving Credit Note”). On September 2, 2020, the Company and Kura Japan entered into a First Amendment to Revolving Credit Agreement (the “First Amendment”) to (i) increase the maximum credit amount under the credit line from $20 million to $35 million, (ii) extend the maturity date for each advance from 12 months to 60 months from the date of disbursement and (iii) extend the last day of the period of availability for the advances under the credit line from March 31, 2024 to April 10, 2025. On April 9, 2021, the Company and Kura Japan entered into a Second Amendment to Revolving Credit Agreement (the “Second Amendment”) to increase the maximum credit amount under the credit line from $35 million to $45 million. In connection with the First Amendment and Second Amendment, the Revolving Credit Note under the Revolving Credit Agreement was also amended by incorporating the same amendments as provided under the First Amendment and Second Amendment, as well as amendments to the interest rate. For additional information, s ee “Note 4. Related Party Transactions” and “Note 6. Debt.” 5 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 $ 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. 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 nine months ended May 31, 2021. 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 The accompanying unaudited condensed financial statements (the “Condensed Financial Statements”) have been prepared by the Company in accordance with generally accepted accounting principles in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. As such, these Condensed Financial Statements should be read in conjunction with the Company’s audited financial statements and accompanying notes included in its Annual Report on Form 10-K for the fiscal year ended August 31, 2020. The accounting policies followed by the Company are set forth in Part II, Item 8, Note 2, Basis of Presentation and Summary of Accounting Policies, of the Notes to Financial Statements included in the Company’s Annual Report on Form 10‑K for the fiscal year ended August 31, 2020. In the opinion of management, all adjustments necessary to fairly state the Condensed Financial Statements have been made. All such adjustments are of a normal, recurring nature. The results of operations for interim periods are not necessarily indicative of results to be expected for the year ending August 31, 2021 or for any other future annual or interim period. Fiscal Year The Company’s fiscal year begins on September 1 and ends on August 31 and references made to “fiscal year 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 The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods presented. Significant items subject to such estimates include asset retirement obligations, stock-based compensation, the useful lives of assets, the assessment of the recoverability of long-lived assets, and income taxes. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could differ materially from those estimates and assumptions. Comprehensive 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. 6 Recently Issued Accounting Pronouncements In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which is intended to simplify various aspects related to accounting for income taxes. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. ASU 2019-12 is effective for the Company beginning in fiscal year 2022. The Company is currently in the process of evaluating the effects of this pronouncement on its financial statements. Note 2. Balance Sheet Components Accounts and Other Receivables May 31, 2021 August 31, 2020 (amounts in thousands) Lease receivable $ 1,694 $ 1,811 Credit card receivable 1,491 281 Other receivables 73 38 Total accounts and other receivables $ 3,258 $ 2,130 Prepaid Expenses and Other Current Assets May 31, 2021 August 31, 2020 (amounts in thousands) Employee retention credit $ 10,697 $ 1,750 Prepaid expenses 1,046 885 Other current assets 230 375 Total prepaid expenses and other current assets $ 11,973 $ 3,010 Property and Equipment - net May 31, 2021 August 31, 2020 (amounts in thousands) Leasehold improvements $ 41,239 $ 30,497 Lease assets 6,102 6,117 Furniture and fixtures 12,359 7,908 Computer equipment 800 696 Vehicles 110 88 Software 761 689 Construction in progress 3,647 9,558 Property and equipment – gross 65,018 55,553 Less: accumulated depreciation and amortization (13,235 ) (10,012 ) Total property and equipment – net $ 51,783 $ 45,541 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. 7 Accrued Expenses and Other Current Liabilities May 31, 2021 August 31, 2020 (amounts in thousands) Credit card payable $ 135 $ 84 Income taxes payable 143 56 Other current liabilities 1,360 580 Total accrued expenses and other current liabilities $ 1,638 $ 720 Note 3. Leases At inception of a contract, the Company assesses whether the contract is a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Lease classification, measurement, and recognition are determined at lease commencement, which is the date the underlying asset is available for use by the Company. The accounting classification of a lease is based on whether the arrangement is effectively a financed purchase of the underlying asset (finance lease) or not (operating lease). The Company has operating and finance leases for its corporate office, restaurant locations, office equipment, kitchen equipment and automobiles. The Company’s leases have remaining lease terms of less than 1 year to 20 years, some of which include options to extend the leases. For leases with renewal periods at the Company’s option, the Company determines the expected lease period based on whether the renewal of any options is reasonably assured at the inception of the lease. Operating leases are accounted for on the balance sheet within the right-of-use (“ROU”) assets and lease liabilities recognized in “Operating lease right-of-use assets,” “Operating lease liabilities – current” and “Operating lease liabilities – non-current,” respectively. Finance leases are accounted for on the balance sheet within ROU assets and lease liabilities recognized in “Property and equipment – net,” “Finance lease – current” and “Finance lease – non-current,” respectively. Lease assets and liabilities are recognized at the lease commencement date. Lease liabilities are measured at the present value of the lease payments not yet paid. To determine the present value of lease payments not yet paid, the Company estimates incremental borrowing rates corresponding to the maturities of the leases based on prevailing financial market conditions, comparable company and credit analysis, and management judgment. ROU assets, for both operating and finance leases, are initially measured based on the lease liability, adjusted for initial direct costs, prepaid or deferred rent, and lease incentives. The operating lease ROU assets are subsequently measured at the carrying amount of the lease liability adjusted for initial direct costs, prepaid or accrued lease payments, and lease incentives. Depreciation of the finance lease ROU assets are subsequently calculated using the straight-line method over the shorter of the estimated useful lives or the expected lease terms and recorded in “Depreciation and amortization expense” on the statements of operations. The Company recognizes expense for these leases on a straight-line basis over the lease term. In addition to the fixed minimum payments required under the lease arrangements, certain leases require variable lease payments, such as common area maintenance, insurance and real estate taxes, which are recognized when the associated activity occurs. Additionally, contingent rental payments based on sales thresholds for certain of the Company’s restaurants are accrued based on estimated sales. 8 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, May 31, 2021 May 31, 2020 May 31, 2021 May 31, 2020 (amounts in thousands) Finance lease cost Classification Amortization of right-of-use assets Depreciation and amortization expenses $ 157 $ 141 $ 465 $ 419 Interest on lease liabilities Interest expense 20 30 69 95 Total finance lease cost $ 177 $ 171 $ 534 $ 514 Three Months Ended May 31, Nine Months Ended May 31, May 31, 2021 May 31, 2020 May 31, 2021 May 31, 2020 (amounts in thousands) Operating lease cost Classification Operating lease cost Occupancy and related expenses, other costs and general and administrative expenses $ 1,571 $ 1,244 $ 4,687 $ 3,688 Variable lease cost Occupancy and related expenses, and general and administrative expenses 401 223 898 923 Total operating lease cost $ 1,972 $ 1,467 $ 5,585 $ 4,611 Supplemental balance sheet information related to leases is as follows: Operating Leases May 31, 2021 August 31, 2020 (amounts in thousands) Operating lease right-of-use assets $ 56,165 $ 56,119 Operating lease liabilities – current $ 5,159 $ 5,106 Operating lease liabilities – non-current 57,777 56,918 Total operating lease liabilities $ 62,936 $ 62,024 Finance Lease Assets – net May 31, 2021 August 31, 2020 (amounts in thousands) Finance lease assets $ 6,102 $ 6,117 Accumulated depreciation (2,644 ) (2,178 ) Total finance lease assets - net $ 3,458 $ 3,939 Finance Leases Liabilities May 31, 2021 August 31, 2020 (amounts in thousands) Finance lease liabilities - current $ 1,011 $ 1,004 Finance lease liabilities - non-current 696 1,481 Total finance lease liabilities $ 1,707 $ 2,485 9 May 31, 2021 May 31, 2020 Weighted Average Remaining Lease Term (Years) Operating leases 16.0 15.1 Finance leases 1.7 2.6 Weighted Average Discount Rate Operating leases 6.6 % 5.8 % Finance leases 4.5 % 4.5 % Supplemental disclosures of cash flow information related to leases are as follows: Nine Months Ended May 31, May 31, 2021 May 31, 2020 (amounts in thousands) Operating cash flows paid for operating lease liabilities $ 3,234 $ 2,644 Operating right-of-use assets obtained in exchange for new operating lease liabilities $ 2,952 $ 15,074 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 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, net of lease receivables, were as follows as of May 31, 2021: Operating Leases Finance Leases (amounts in thousands) Remainder of 2021 $ 428 $ 263 2022 3,828 1,005 2023 6,106 483 2024 6,237 17 2025 6,335 1 Thereafter 79,694 — Total lease payments 102,628 1,769 Less: imputed interest (39,692 ) (62 ) Present value of lease liabilities $ 62,936 $ 1,707 Note 4. Related Party Transactions Kura Sushi, Inc. (“Kura Japan”) is the majority stockholder of the Company, and is incorporated and headquartered in Japan. In August 2019 the Company entered into a Shared Services Agreement with Kura Japan, pursuant to which Kura Japan provides the Company with certain strategic, operational and other support services, including assigning certain employees to work for the Company as expatriates to provide support to the Company’s operations, sending 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 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 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. 10 In August 2019, the Company entered into an Amended and Restated Exclusive License Agreement (the “License Agreement”) with Kura Japan. Pursuant to the Lice nse Agreement, the Company pays Kura Japan a royalty fee of 0.5 % of the Company’s net sales in exchange for an exclusive, royalty-bearing license for use of certain of Kura Japan’s intellectual property rights, including, but not limited to, Kura Japan’s trademarks “Kura Sushi” and “Kura Revolving Sushi Bar,” and patents for a food management system and the Mr. Fresh protective dome, among other intellectual property rights necessary to continue operation of the Company’s restaurants. Royalty payments to Kura Japan are included in other costs at the restaurant-level in the accompanying statements of operations. On April 10, 2020, the Company and Kura Japan entered into a Revolving Credit Agreement, which was subsequently amended on September 2, 2020 and April 9, 2021, to provide the Company a credit line of $45 million. For additional information, see “Note 6. Debt.” Balances with Kura Japan as of May 31, 2021 and August 31, 2020 are as follows: May 31, 2021 August 31, 2020 (amounts in thousands) Due from affiliate $ 2 $ 12 Due to affiliate $ 60 $ 201 Loan from affiliate $ 17,000 $ — 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, 2021 2020 2021 2020 (amounts in thousands) Related party transactions: Purchases of administrative supplies $ 4 $ 8 $ 76 $ 31 Expatriate salaries expense 30 34 92 106 Royalty payments 93 14 185 198 Travel and other administrative expenses — 23 17 73 Purchases of equipment 29 200 430 833 Interest expense 47 — 74 — Total related party transactions $ 203 $ 279 $ 874 $ 1,241 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. Note 5. 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 May 31, 2021: Options Outstanding Number of Shares Underlying Outstanding Options Weighted Average Exercise Price Per Share Outstanding—August 31, 2020 531,747 $ 9.51 Options granted 152,260 20.97 Options exercised (82,588 ) 5.31 Options canceled/forfeited (22,537 ) 10.88 Outstanding— May 31, 2021 578,882 $ 13.07 11 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 May 31, Nine Months Ended May 31, 2021 2020 2021 2020 (amounts in thousands) Restaurant-level stock-based compensation included in other costs $ 34 $ 23 $ 83 $ 59 Corporate-level stock-based compensation included in general and administrative expenses 357 225 883 521 Total stock-based compensation $ 391 $ 248 $ 966 $ 580 Note 6. Debt On April 10, 2020, the Company and Kura Japan entered into a Revolving Credit Agreement establishing a $20 million revolving credit line for the Company. On September 2, 2020, the Company and Kura Japan entered into a First Amendment to Revolving Credit Agreement (the “First Amendment”) to (i) increase the maximum credit amount under the credit line from $20 million to $35 million, (ii) extend the maturity date for each advance from 12 months to 60 months from the date of disbursement and (iii) extend the last day of the period of availability for the advances under the credit line from March 31, 2024 to April 10, 2025. On April 9, 2021, the Company and Kura Japan entered into a Second Amendment to Revolving Credit agreement (the “Second Amendment”) to increase the maximum credit amount under the credit line from $35 million to $45 million. In connection with the First Amendment and Second Amendment, the Revolving Credit Note under the Revolving Credit Agreement was also amended by incorporating the same amendments as provided under the First Amendment and Second Amendment, 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 May 31, 2021 was 2.82%. There are no financial covenants under the Revolving Credit Agreement with which the Company must comply. 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.” Note 7. 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. 12 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, 2021 2020 2021 2020 Class A Class B Class A Class B Class A Class B Class A Class B (amounts in thousands, except per share data) Net income (loss) attributable to common stockholders - basic $ 678 $ 92 $ (8,055 ) $ (1,097 ) $ (8,332 ) $ (1,129 ) $ (9,248 ) $ (1,261 ) Weighted average common shares outstanding - basic 7,383 1,000 7,341 1,000 7,381 1,000 7,337 1,000 Net income (loss) per share attributable to common stockholders - basic $ 0.09 $ 0.09 $ (1.10 ) $ (1.10 ) $ (1.13 ) $ (1.13 ) $ (1.26 ) $ (1.26 ) Net income (loss) attributable to common stockholders - diluted $ 681 $ 89 $ (8,055 ) $ (1,097 ) $ (8,332 ) $ (1,129 ) $ (9,248 ) $ (1,261 ) Weighted average shares outstanding - basic 7,383 1,000 7,341 1,000 7,381 1,000 7,337 1,000 Dilutive effect of stock-based awards 280 — — — — — — — Weighted average shares outstanding - diluted 7,663 1,000 7,341 1,000 7,381 1,000 7,337 1,000 Net income (loss) per share attributable to common stockholders - diluted $ 0.09 $ 0.09 $ (1.10 ) $ (1.10 ) $ (1.13 ) $ (1.13 ) $ (1.26 ) $ (1.26 ) 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 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. Note 8. Commitments and Contingencies On May 31, 2019, a putative class action complaint was filed by a former employee, Brandy Gomes, in Los Angeles County Superior Court, alleging violations of California wage and hour laws. On July 9, 2020, plaintiff’s counsel filed a first amended class action complaint to add Jamar Spencer, another former employee, as a plaintiff to this action. In addition, the first amended class action complaint added new causes of action alleging violations of California wage and hour laws including a cause of action brought under the California Private Attorney General Act. On August 7, 2020, the Company filed its answer to the first amended complaint, generally denying the allegations in the complaint. 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. 13 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, 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. Note 9. Income Taxes 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 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 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. The Company does not expect the ARP to have a material impact on the Company’s effective tax rate or income tax expense for the fiscal year ending August 31, 2021. 14