KURA SUSHI USA, INC. 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 endedAugust 31, 2019 (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.
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Overview
Kura Sushi USA, Inc. is a fast-growing, technology-enabled Japanese restaurant concept that provides guests with a distinctive dining experience by serving authentic Japanese cuisine through an engaging revolving sushi service model, which we refer to as the "Kura Experience". We encourage healthy lifestyles by serving freshly prepared Japanese cuisine using high-quality ingredients that are free from artificial seasonings, sweeteners, colorings, and preservatives. We aim to make quality Japanese cuisine accessible to our guests acrossthe United States through affordable prices and an inviting atmosphere.
Business Trends; Negative Effects of COVID-19 on our Business
We have expanded our restaurant base from eight restaurants inCalifornia as of the beginning of fiscal year 2016 to 25 restaurants in five states as ofFebruary 29, 2020 . We opened four restaurants in fiscal year 2018 and six restaurants in fiscal year 2019. We opened two new restaurants during the three months endedFebruary 29, 2020 . The negative effects of the novel strain of coronavirus ("COVID-19") on our business have been significant. InMarch 2020 , theWorld Health Organization declared COVID-19 a global pandemic. This contagious virus, which has continued to spread, has adversely affected workforces, customers, economies and financial markets globally. It has also disrupted the normal operations of many businesses, including ours. In response to this outbreak, many state and local authorities have mandated the temporary closure of non-essential businesses and dine-in restaurant activity. OnMarch 18, 2020 , we announced the temporary closure of all of our 25 restaurants located across five states, and have since furloughed certain of our employees. The duration of our restaurant closures and our ability to implement our growth strategy is highly uncertain, as the full impact and duration of the COVID-19 outbreak continues to evolve as of the date of this Quarterly Report. The restaurant closures effectively eliminate our ability to generate restaurant sales during this closure period, due to the fact that we have no take-out or delivery service offerings. As a result, management believes the current restaurant closures and ongoing length and severity of the economic downturn caused by the pandemic will have a material adverse impact on our future business, financial condition, liquidity and financial results for the fiscal year endingAugust 31, 2020 . We are also assessing the potential impact on the impairment analysis of our long-lived assets and the realization of our deferred tax assets. As a result of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") signed into law onMarch 27, 2020 , additional avenues of relief may be available to workers and families through enhanced unemployment insurance provisions and to small businesses through programs administered by theSmall Business Administration ("SBA"). The CARES Act includes, among other things, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. We are currently evaluating the impact of the provisions of the CARES Act. The CARES Act also established a Paycheck Protection Program ("PPP"), whereby certain small businesses are eligible for a loan to fund payroll expenses, rent, and related costs. The loan may be forgiven if the funds are used for payroll and other qualified expenses. We have submitted our application for a PPP loan. There is no certainty that our application will be approved or that, if granted, the loan will qualify for forgiveness, in whole or in part. We are currently assessing the availability of assistance under these programs as well as other capital and liquidity options as may be necessary. OnApril 10, 2020 , we and Kura Sushi, Inc. ("Kura Japan"), our controlling stockholder, entered into a Revolving Credit Agreement establishing a$20 million revolving credit line with a termination date ofMarch 31, 2024 , to provide us with additional liquidity as may be necessary as a result of the recent closures and economic downturn. The maturity date for amounts borrowed under the Revolving Credit Agreement is twelve months after the disbursement date, unless renewed or extended by mutual agreement of both parties for an additional twelve months. This is in addition to the existing borrowing capacity available under our existing non-revolving credit facility with a commercial bank. See below under "-Liquidity and Capital Resources." 15 --------------------------------------------------------------------------------
Key Financial Definitions
Sales. Sales represent sales of food and beverages in restaurants. Restaurant sales in a given period are directly impacted by the number of restaurants we operate and comparable restaurant sales growth. Food and beverage costs. Food and beverage costs are variable in nature, change with sales volume and are influenced by menu mix and subject to increases or decreases based on fluctuations in commodity costs. Other important factors causing fluctuations in food and beverage costs include seasonality and restaurant-level management of food waste. Food and beverage costs are a substantial expense and are expected to grow proportionally as our sales grows. Labor and related expenses. Labor and related expenses include all restaurant-level management and hourly labor costs, including wages, employee benefits and payroll taxes. Similar to the food and beverage costs that we incur, labor and related expenses are expected to grow proportionally as our sales grows. Factors that influence fluctuations in our labor and related expenses include minimum wage and payroll tax legislation, the frequency and severity of workers' compensation claims, healthcare costs and the performance of our restaurants.
Occupancy and related expenses. Occupancy and related expenses include rent for all restaurant locations and related taxes.
Depreciation and amortization expenses. Depreciation and amortization expenses are periodic non-cash charges that consist of depreciation of fixed assets, including equipment and capitalized leasehold improvements. Depreciation is determined using the straight-line method over the assets' estimated useful lives, ranging from three to 20 years.
Other costs. Other costs include utilities, repairs and maintenance, credit card fees, royalty payments to Kura Japan, stock-based compensation expenses for restaurant-level employees and other restaurant-level expenses.
General and administrative expenses. General and administrative expenses include expenses associated with corporate and regional supervision functions that support the operations of existing restaurants and development of new restaurants, including compensation and benefits, travel expenses, stock-based compensation expenses for corporate-level employees, legal and professional fees, marketing costs, information systems, corporate office rent and other related corporate costs. General and administrative expenses are expected to grow as our sales grows, including incremental legal, accounting, insurance and other expenses incurred as a public company.
Interest expense. Interest expense includes cash and non-cash charges related to our line of credit and finance lease obligations.
Interest income. Interest income includes income earned on our investments.
Income tax expense (benefit). Provision for income taxes represents federal, state and local current and deferred income tax expense.
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--------------------------------------------------------------------------------Results of Operations
The following tables present selected comparative results of operations for the three months endedFebruary 29, 2020 andFebruary 28, 2019 and for the six months endedFebruary 29, 2020 andFebruary 28, 2019 . 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 Increase / (Decrease) February 29, February 28, 2020 2019 2020 vs 2019 (dollar amounts in thousands) Sales$ 19,388 $ 15,117 $ 4,271 28.3 % Restaurant operating costs Food and beverage costs 6,106 4,853 1,253 25.8 Labor and related costs 6,144 4,869 1,275 26.2 Occupancy and related expenses 1,637 1,075 562 52.3 Depreciation and amortization expenses 712 492 220 44.7 Other costs 2,210 1,701 509 29.9 Total restaurant operating costs 16,809 12,990 3,819 29.4 General and administrative expenses 2,783 1,817 966 53.2 Depreciation and amortization expenses 36 28 8 28.6 Total operating expenses 19,628 14,835 4,793 32.3 Operating income (loss) (240 ) 282 (522 ) (185.1 ) Other expense (income): Interest expense 33 40 (7 ) (17.5 ) Interest income (170 ) (5 ) (165 ) 3,300.0 Income (loss) before income taxes (103 ) 247 (350 ) (141.7 ) Income tax expense 30 35 (5 ) (14.3 ) Net income (loss)$ (133 ) $ 212 $ (345 ) (162.7 ) % Six Months Ended Increase / (Decrease) February 29, February 28, 2020 2019 2020 vs 2019 (dollar amounts in thousands) Sales$ 36,828 $ 28,537 $ 8,291 29.1 % Restaurant operating costs Food and beverage costs 11,799 9,371 2,428 25.9 Labor and related costs 11,785 9,007 2,778 30.8 Occupancy and related expenses 3,076 1,995 1,081 54.2 Depreciation and amortization expenses 1,375 940 435 46.3 Other costs 4,257 3,346 911 27.2 Total restaurant operating costs 32,292 24,659 7,633 31.0 General and administrative expenses 6,109 3,965 2,144 54.1 Depreciation and amortization expenses 58 51 7 13.7 Total operating expenses 38,459 28,675 9,784 34.1 Operating loss (1,631 ) (138 ) (1,493 ) 1,081.9 Other expense (income): Interest expense 67 81 (14 ) (17.3 ) Interest income (367 ) (10 ) (357 ) 3,570.0 Loss before income taxes (1,331 ) (209 ) (1,122 ) 536.8 Income tax expense (benefit) 26 (30 ) 56 (186.7 ) Net loss$ (1,357 ) $ (179 ) $ (1,178 ) 658.1 % 17
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Three Months Ended Six Months Ended
February 29, February 28, February 28,
2020 2019 February 29, 2020 2019
(as a percentage of sales)
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Restaurant operating costs
Food and beverage costs 31.5 32.1 32.0 32.8
Labor and related costs 31.7 32.2 32.0 31.6
Occupancy and related expenses 8.4 7.1 8.4 7.0
Depreciation and amortization
expenses 3.7 3.3 3.7 3.3
Other costs 11.4 11.3 11.6 11.7
Total restaurant operating
costs 86.7 86.0 87.7 86.4
General and administrative
expenses 14.4 12.0 16.6 13.9
Depreciation and amortization
expenses 0.2 0.2 0.2 0.2
Total operating expenses 101.3 98.2 104.4 100.5
Operating income (loss) (1.3 ) 1.8 (4.4 ) (0.5 )
Other expense (income): -
Interest expense 0.2 0.3 0.2 0.3
Interest income (0.9 ) - (1.0 ) (0.0 )
Income (loss) before income
taxes (0.6 ) 1.5 (3.6 ) (0.7 )
Income tax expense (benefit) 0.2 0.2 0.1 (0.1 )
Net income (loss) (0.8 ) % 1.3 % (3.7 ) % (0.6 ) %
Three Months Ended
Sales. Sales were$19.4 million for the three months endedFebruary 29, 2020 compared to$15.1 million for the three months endedFebruary 28, 2019 , representing an increase of approximately$4.3 million or 28.3%. The increase in sales was primarily driven by the opening of five new restaurants subsequent toFebruary 28, 2019 , as well as our 10.8% comparable restaurant sales growth for the three months endedFebruary 29, 2020 . Food and beverage costs. Food and beverage costs were$6.1 million for the three months endedFebruary 29, 2020 compared to$4.9 million for the three months endedFebruary 28, 2019 , representing an increase of approximately$1.2 million , or 25.8%. The increase in food and beverage costs was primarily driven by sales from the opening of five new restaurants subsequent toFebruary 28, 2019 . As a percentage of sales, food and beverage costs decreased to 31.5% in the three months endedFebruary 29, 2020 , compared to 32.1% in the three months endedFebruary 28, 2019 . The decrease in food and beverage costs as a percentage of sales was primarily driven by an increase in menu prices, and to a lesser degree, reduced waste. Labor and related costs. Labor and related costs were$6.1 million for the three months endedFebruary 29, 2020 compared to$4.9 million for the three months endedFebruary 28, 2019 , representing an increase of approximately$1.2 million , or 26.2%. The increase in labor and related costs was driven by additional labor costs incurred with respect to the opening of five new restaurants subsequent toFebruary 28, 2019 , as well as wage increases. As a percentage of sales, labor and related costs decreased to 31.7% in the three months endedFebruary 29, 2020 , compared to 32.2% in the three months endedFebruary 28, 2019 , which was primarily driven by increases in our menu prices and more efficient staffing practices. Occupancy and related expenses. Occupancy and related expenses were$1.6 million for the three months endedFebruary 29, 2020 compared to$1.1 million for the three months endedFebruary 28, 2019 , representing an increase of approximately$0.5 million , or 52.3%. The increase was primarily a result of additional lease expense incurred with respect to the opening of five new restaurants subsequent toFebruary 28, 2019 . As a percentage of sales, occupancy and other operating expenses increased to 8.4% in the three months endedFebruary 29, 2020 , compared to 7.1% in the three months endedFebruary 28, 2019 . The increase in occupancy and related expenses as a percentage of sales was primarily driven by higher occupancy rates in our newer restaurants and the increase in pre-opening lease expense. 18
-------------------------------------------------------------------------------- Depreciation and amortization expenses. Depreciation and amortization expenses incurred as part of restaurant operating costs were$0.7 million for the three months endedFebruary 29, 2020 compared to$0.5 million for the three months endedFebruary 28, 2019 , representing an increase of approximately$0.2 million , or 44.7%. The increase was primarily due to depreciation of property and equipment related to the opening of five new restaurants subsequent toFebruary 28, 2019 . As a percentage of sales, depreciation and amortization expenses at the restaurant-level increased to 3.7% in the three months endedFebruary 29, 2020 as compared to 3.3% in the three months endedFebruary 28, 2019 . The increase is primarily due to higher build-out costs of our newer restaurants. Depreciation and amortization expenses incurred at the corporate-level were immaterial for the three months endedFebruary 29, 2020 andFebruary 28, 2019 , and as a percentage of sales remained relatively consistent at 0.2% and 0.2%, respectively. Other costs. Other costs were$2.2 million for the three months endedFebruary 29, 2020 compared to$1.7 million for the three months endedFebruary 28, 2019 , representing an increase in approximately$0.5 million , or 29.9%. The increase was primarily due to costs related to operating five new restaurants subsequent toFebruary 28, 2019 , such as credit card fees, kitchen supplies, promotional expenses and utilities. The remaining year-over-year increase is due to other individually insignificant items. As a percentage of sales, other costs remained relatively consistent at 11.4% in the three months endedFebruary 29, 2020 and 11.3% in the three months endedFebruary 28, 2019 . General and administrative expenses. General and administrative expenses were$2.8 million for the three months endedFebruary 29, 2020 compared to$1.8 million for the three months endedFebruary 28, 2019 , representing an increase of approximately$1.0 million , or 53.2%. This increase in general and administrative expenses was primarily due to$0.5 million of insurance, accounting, and legal costs associated with operating as a public company costs and$0.3 million in employee compensation-related expenses associated with increased wages and additional headcount to support our growth in operations. As a percentage of sales, general and administrative expenses increased to 14.4% in the three months endedFebruary 29, 2020 from 12.0% in three months endedFebruary 28, 2019 , primarily due to the increase in the expenses mentioned above.
Interest expense. Interest expense was insignificant in both the three months
ended
Interest income. Interest income was$0.2 million for the three months endedFebruary 29, 2020 compared to$5 thousand for the three months endedFebruary 28, 2019 , due to a higher cash and cash equivalents balance.
Income tax expense. Income tax expense was insignificant in both the three
months ended
Six Months Ended
Sales. Sales were$36.8 million for the six months endedFebruary 29, 2020 compared to$28.5 million for the six months endedFebruary 28, 2019 , representing an increase of approximately$8.3 million , or 29.1%. The increase in sales was primarily driven by the opening of five new restaurants subsequent toFebruary 28, 2019 , as well as our 8.9% comparable restaurant sales growth for the six months endedFebruary 29, 2020 . Food and beverage costs. Food and beverage costs were$11.8 million for the six months endedFebruary 29, 2020 compared to$9.4 million for the six months endedFebruary 28, 2019 , representing an increase of approximately$2.4 million , or 25.9%. The increase in food and beverage costs was primarily driven by sales from the opening of five new restaurants subsequent toFebruary 28, 2019 . As a percentage of sales, food and beverage costs decreased to 32.0% in the six months endedFebruary 29, 2020 , compared to 32.8% in the six months endedFebruary 28, 2019 . The decrease in food and beverage costs as a percentage of sales was primarily driven by an increase in menu prices, and to a lesser degree, reduced waste. Labor and related costs. Labor and related costs were$11.8 million for the six months endedFebruary 29, 2020 compared to$9.0 million for the six months endedFebruary 28, 2019 , representing an increase of approximately$2.8 million , or 30.8%. The increase in labor and related costs was driven by additional labor costs incurred from the opening of five new restaurants subsequent toFebruary 28, 2019 , as well as wage increases. As a percentage of sales, labor and related costs increased to 32.0% in the six months endedFebruary 29, 2020 , compared to 31.6% in the six months endedFebruary 28, 2019 , which was primarily driven by higher wage rates in our newer restaurants and wage increases in existing restaurants, partially offset by increases in our menu prices. 19 -------------------------------------------------------------------------------- Occupancy and related expenses. Occupancy and related expenses were$3.1 million for the six months endedFebruary 29, 2020 compared to$2.0 million for the six months endedFebruary 28, 2019 , representing an increase of approximately$1.1 million , or 54.2%. The increase was primarily a result of additional lease expense incurred from the opening of five new restaurants subsequent toFebruary 28, 2019 . As a percentage of sales, occupancy and other operating expenses increased to 8.4% in the six months endedFebruary 29, 2020 , compared to 7.0% in the six months endedFebruary 28, 2019 . The increase in occupancy and related expenses as a percentage of sales was primarily driven by higher occupancy rates in our newer restaurants and the increase in pre-opening lease expense. Depreciation and amortization expenses. Depreciation and amortization expenses incurred as part of restaurant operating costs were$1.4 million for the six months endedFebruary 29, 2020 compared to$0.9 million for the six months endedFebruary 28, 2019 , representing an increase of approximately$0.5 million , or 46.3%. The increase was primarily due to depreciation of property and equipment related to the opening of five new restaurants subsequent toFebruary 28, 2019 . As a percentage of sales, depreciation and amortization expenses at the restaurant-level increased to 3.7% in the six months endedFebruary 29, 2020 as compared to 3.3% in the six months endedFebruary 28, 2019 . The increase is primarily due to higher build-out costs of our newer restaurants. Depreciation and amortization expenses incurred at the corporate-level were immaterial for the six months endedFebruary 29, 2020 andFebruary 28, 2019 , and as a percentage of sales remained relatively consistent at 0.2% and 0.2%, respectively. Other costs. Other costs were$4.3 million for the six months endedFebruary 29, 2020 compared to$3.3 million for the six months endedFebruary 28, 2019 , representing an increase in approximately$1.0 million , or 27.2%. The increase was primarily due to costs related to operating five new restaurants subsequent toFebruary 28, 2019 , such as credit card fees, kitchen supplies, promotional expenses and utilities. The remaining year-over-year increase is due to other individually insignificant items. As a percentage of sales, other costs remained relatively consistent at 11.6% in the six months endedFebruary 29, 2020 and 11.7% in the six months endedFebruary 28, 2019 . General and administrative expenses. General and administrative expenses were$6.1 million for the six months endedFebruary 29, 2020 compared to$4.0 million for the six months endedFebruary 28, 2019 , representing an increase of approximately$2.1 million , or 54.1%. This increase in general and administrative expenses was primarily due to$1.2 million of insurance, accounting, and legal costs associated with operating as a public company,$0.2 million of other legal costs, and$0.7 million in employee compensation-related expenses associated with increased wages and additional headcount to support our growth in operations. As a percentage of sales, general and administrative expenses increased to 16.6% in the six months endedFebruary 29, 2020 from 13.9% in the six months endedFebruary 28, 2019 , primarily due to the increase in the expenses mentioned above.
Interest expense. Interest expense was insignificant in both the six months
ended
Interest income. Interest income was
Income tax expense (benefit). Income tax expense was insignificant in the both
the six months ended
Key Performance Indicators
In assessing the performance of our business, we consider a variety of financial and performance measures. The key measures for determining how our business is performing include sales, EBITDA, Adjusted EBITDA, Restaurant-level Contribution, Restaurant-level Contribution margin, comparable restaurant sales growth, and number of restaurant openings.
Sales
Sales represents sales of food and beverages in restaurants, as shown on our
statements of operations. Several factors affect our restaurant sales in any
given period including the number of restaurants in operation, guest traffic and
average check.
EBITDA and Adjusted EBITDA
EBITDA is defined as net income before interest, income taxes and depreciation
and amortization. Adjusted EBITDA is defined as EBITDA plus stock-based
compensation expense, pre-opening lease
expense, pre-opening costs, non-cash lease expense and asset disposals, closure
costs and restaurant impairments, as well as certain items that are not
indicative of core operating results. EBITDA and Adjusted EBITDA are non-GAAP
measures which are intended as supplemental measures of our performance and are
neither required by, nor presented in accordance with, GAAP. We believe that
EBITDA and Adjusted EBITDA provide useful information to management and
investors regarding certain financial and business trends relating to our
financial condition and operating results.
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We believe that the use of EBITDA and Adjusted EBITDA provides an additional
tool for investors to use in evaluating ongoing operating results and trends and
in comparing the Company's financial measures with those of comparable
companies, which may present similar non-GAAP financial measures to investors.
However, you should be aware when evaluating EBITDA and Adjusted EBITDA that in
the future we may incur expenses similar to those excluded when calculating
these measures. In addition, our presentation of these measures should not be
construed as an inference that our future results will be unaffected by unusual
or non-recurring items. Our computation of Adjusted EBITDA may not be comparable
to other similarly titled measures computed by other companies, because all
companies may not calculate Adjusted EBITDA in the same fashion.
Because of these limitations, EBITDA and Adjusted EBITDA should not be
considered in isolation or as a substitute for performance measures calculated
in accordance with GAAP. We compensate for these limitations by relying
primarily on our GAAP results and using EBITDA and Adjusted EBITDA on a
supplemental basis. You should review the reconciliation of net income to EBITDA
and Adjusted EBITDA below and not rely on any single financial measure to
evaluate our business.
The following table reconciles net income to EBITDA and Adjusted EBITDA for the
three months ended February 29, 2020 and February 28, 2019 and the six months
ended February 29, 2020 and February 28, 2019 :
Three Months Ended Six Months Ended
February 28, February 28,
February 29, 2020 2019 February 29, 2020 2019
(amounts in thousands)
Net income (loss) $ (133 ) $ 212 $ (1,357 ) $ (179 )
Interest (income) expense, net (137 ) 35 (300 ) 71
Taxes 30 35 26 (30 )
Depreciation and amortization 748 520 1,433 991
EBITDA 508 802 (198 ) 853
Stock-based compensation expense(a) 211 161 332 321
Pre-opening lease expense(b) 255 127 429 263
Pre-opening costs(c) 263 45 404 81
Non-cash lease expense(d) 132 98 259 216
Adjusted EBITDA 1,369 1,233 1,226 1,734
Adjusted EBITDA margin 7.1 % 8.2 % 3.3 % 6.1 %
(a) Stock-based compensation expense includes non-cash stock-based compensation,
which is comprised of restaurant-level stock-based compensation included in
other costs in the statements of operations and of corporate-level
stock-based compensation included in general and administrative expenses in
the statements of operations. For further details of stock-based
compensation, see "Note 5. Stock-based Compensation" to the financial
statements included in this Quarterly Report.
(b) Pre-opening lease expense includes lease expenses incurred between date of
possession and opening date of our restaurants.
(c) Pre-opening costs consist of labor costs and travel expenses for new
employees and trainers during the training period, recruitment fees, legal
fees and other related pre-opening costs.
(d) Non-cash lease expense includes lease expense from the opening date of our
restaurants that did not require cash outlay in the respective periods.
Restaurant-level Contribution and Restaurant-level Contribution Margin
Restaurant-level Contribution is defined as operating income plus depreciation and amortization, stock-based compensation expense, pre-opening lease expense, pre-opening costs, non-cash lease expense, asset disposals, closure costs and restaurant impairments, and general and administrative expenses, less corporate-level stock-based compensation expense and pre-opening costs recognized within general and administrative expenses. Restaurant-level Contribution margin is defined as Restaurant-level Contribution divided by sales. Restaurant-level Contribution and Restaurant-level Contribution margin are intended as supplemental measures of our performance and are neither required by, nor presented in accordance with, GAAP. We believe that Restaurant-level Contribution and Restaurant-level Contribution margin provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results. We expect Restaurant-level Contribution to increase in proportion to the number of new restaurants we open and our comparable restaurant sales growth.
We present Restaurant-level Contribution because it excludes the impact of general and administrative expenses, which are not incurred at the restaurant-level. We also use Restaurant-level Contribution to measure operating performance and returns from opening new restaurants. Restaurant-level Contribution margin allows us to evaluate the level of Restaurant-level Contribution generated from sales.
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However, you should be aware that Restaurant-level Contribution and
Restaurant-level Contribution margin are financial measures which are not
indicative of overall results for the Company, and Restaurant-level Contribution
and Restaurant-level Contribution margin do not accrue directly to the benefit
of stockholders because of corporate-level expenses excluded from such measures.
In addition, when evaluating Restaurant-level Contribution and Restaurant-level
Contribution margin, you should be aware that in the future we may incur
expenses similar to those excluded when calculating these measures. Our
presentation of these measures should not be construed as an inference that our
future results will be unaffected by unusual or non-recurring items. Our
computation of Restaurant-level Contribution and Restaurant-level Contribution
margin may not be comparable to other similarly titled measures computed by
other companies, because all companies may not calculate Restaurant-level
Contribution and Restaurant-level Contribution margin in the same fashion.
Restaurant-level Contribution and Restaurant-level Contribution 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 income to Restaurant-level Contribution
and Restaurant-level Contribution margin for the three months ended February 29,
2020 and February 28, 2019 and for the six months ended February 29, 2020 and
February 28, 2019 :
Three Months Ended Six Months Ended
February 29, February February February
2020 28, 2019 29, 2020 28, 2019
(amounts in thousands)
Operating income (loss) $ (240 ) $ 282 $ (1,631 ) $ (138 )
Depreciation and amortization 748 520 1,433 991
Stock-based compensation expense(a) 211 161 332 321
Pre-opening lease expense(b) 255 127 429 263
Pre-opening costs(c) 263 45 404 81
Non-cash lease expense(d) 132 98 259 216
General and administrative expenses 2,783 1,817 6,109 3,965
Corporate-level stock-based
compensation and pre-opening costs
included in General and
administrative expenses (255 ) (137 ) (393 ) (276 )
Restaurant-level Contribution 3,897 2,913 6,942 5,423
Operating profit margin (1.2 )% 1.9 % (4.4 )% (0.5 )%
Restaurant-level Contribution margin 20.1 % 19.3 % 18.8 % 19.0 %
(a) Stock-based compensation expense includes non-cash stock-based compensation,
which is comprised of restaurant-level stock-based compensation included in
other costs in the statements of operations and of corporate-level
stock-based compensation included in general and administrative expenses in
the statements of operations. For further details of stock-based
compensation, see "Note 5. Stock-based Compensation" to the financial
statements included in this Quarterly Report.
(b) Pre-opening lease expense includes lease expenses incurred between date of
possession and opening date of our restaurants.
(c) Pre-opening costs consist of labor costs and travel expenses for new
employees and trainers during the training period, recruitment fees, legal
fees and other related pre-opening costs.
(d) Non-cash lease expense includes lease expense from the opening date of our
restaurants that did not require cash outlay in the respective periods.
Comparable Restaurant Sales Growth
Comparable restaurant sales growth refers to the change in year-over-year sales
for the comparable restaurant base. We include restaurants in the comparable
restaurant base that have been in operation for at least 18 months prior to the
start of the accounting period presented due to new restaurants experiencing a
period of higher sales upon opening, including those temporarily closed for
renovations during the year. For restaurants that were temporarily closed for
renovations during the year, we make fractional adjustments to sales such that
sales are annualized in the associated period.
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--------------------------------------------------------------------------------Measuring our comparable restaurant sales growth allows us to evaluate the performance of our existing restaurant base. Various factors impact comparable restaurant sales, including:
• consumer recognition of our brand and our ability to respond to changing
consumer preferences;
• overall economic trends, particularly those related to consumer spending;
• our ability to operate restaurants effectively and efficiently to meet
consumer expectations;
• pricing;
• guest traffic;
• per-guest spend and average check;
• marketing and promotional efforts;
• local competition; and
• opening of new restaurants in the vicinity of existing locations.
Since opening new restaurants will be a significant component of our sales
growth, comparable restaurant sales growth is only one measure of how we
evaluate our performance. The following table shows the comparable restaurant
sales growth for the three and six months ended February 29, 2020 and February
28, 2019 :
Three Months Ended Six Months Ended
February February February February
29, 2020 28, 2019 29, 2020 28, 2019
Comparable restaurant sales growth (%) 10.8% 6.8% 8.9% 5.1%
Comparable restaurant base 17 11 14 10
Number of Restaurant Openings
The number of restaurant openings reflects the number of restaurants opened
during a particular reporting period. Before we open new restaurants, we
incur pre-opening costs. New restaurants may not be profitable, and their sales
performance may not follow historical patterns. The number and timing of
restaurant openings has had, and is expected to continue to have, an impact on
our results of operations. The following table shows the growth in our
restaurant base for the three and six months ended February 29, 2020 and
February 28, 2019 :
Three Months Ended Six Months Ended
February 28,
February 29, 2020 2019 February 29, 2020 February 28, 2019
Restaurant activity:
Beginning of period 23 19 23 17
Openings 2 1 2 3
Closings - - - -
End of period 25 20 25 20
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 have been
cash flows from operations and annual capital contributions from Kura Japan.
Since the completion of our initial public offering, we did not expect to
receive any additional capital contributions from Kura Japan. However, the
impact of the COVID-19 pandemic is highly uncertain and management expects that
the recent restaurant closures and ongoing length and severity of the economic
downturn will have a material adverse impact on our business, financial
condition, liquidity and financial results. For further discussion, see above
under "-Business Trends; Negative Effects of COVID-19 on our Business" and "Note
10. Subsequent Events" to the financial statements included in this Quarterly
Report.
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-------------------------------------------------------------------------------- As a result of the CARES Act signed into law onMarch 27, 2020 , additional avenues of relief may be available to workers and families through enhanced unemployment insurance provisions and to small businesses through programs administered by the SBA. The CARES Act also established a PPP, whereby certain small businesses are eligible for a loan to fund payroll expenses, rent, and related costs. The loan may be forgiven if the funds are used for payroll and other qualified expenses. We have submitted our application for a PPP loan. There is no certainty that our application will be approved or that, if granted, the loan will qualify for forgiveness, in whole or in part. Management is currently assessing the availability of assistance under these programs as well as other capital and liquidity options as may be necessary. OnApril 10, 2020 , we and Kura Japan entered into a Revolving Credit Agreement establishing a$20 million revolving credit line with a termination date ofMarch 31, 2024 , to provide us with additional liquidity as may be necessary as a result of the recent closures and economic downturn. The maturity date for amounts borrowed under the Revolving Credit Agreement is twelve months after the disbursement date, unless renewed or extended by mutual agreement of both parties for an additional twelve months. We also have$1.1 million available under our non-revolving line of credit (the "Credit Facility") that matures onJuly 31, 2020 , which Credit Facility is further described in "Note 6. Debt" to the financial statements included in this Quarterly Report. The significant components of our working capital are liquid assets such as cash, cash equivalents and receivables, reduced by accounts payable and accrued expenses. Our working capital position benefits from the fact that we generally collect cash from sales to guests the same day or, in the case of credit or debit card transactions, within several days of the related sale, while we typically have longer payment terms with our vendors. We believe that cash provided by operating activities, cash on hand and availability under our existing lines of credit, both with our commercial bank as well as the recently established credit facility provided by Kura Japan, along with potential sources of liquidity that management may obtain through available CARES Act financing programs for which we may qualify, will be sufficient to fund our lease obligations, capital expenditures and working capital needs for at least the next 12 months.
Summary of Cash Flows
Our primary sources of liquidity and cash flows are operating cash flows and cash on hand. We use this to fund investing expenditures for new restaurant openings, reinvest in our existing restaurants, and increase our working capital. Our working capital position benefits from the fact that we generally collect cash from sales to guests the same day, or in the case of credit or debit card transactions, within several days of the related sale, and we typically have at least 30 days to pay our vendors.
The following table summarizes our cash flows for the periods presented:
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