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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Kura Sushi USA, Inc.    KRUS

KURA SUSHI USA, INC.

(KRUS)
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KURA SUSHI USA : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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04/14/2020 | 04:19pm EDT
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, 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.

"Kura Sushi USA," "Kura Sushi," "Kura," "we," "us," "our," "our company" and the "Company" refer to Kura Sushi USA, Inc. unless expressly indicated or the context otherwise requires.

Overview


Kura Sushi USA, Inc. is a 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 across the
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 in California as of
the beginning of fiscal year 2016 to 25 restaurants in five states as of
February 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 ended February 29, 2020. The negative effects of the novel strain of
coronavirus ("COVID-19") on our business have been significant. In March 2020,
the World 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. On March
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 ending August 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 on March 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 Small
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.

On April 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 of March 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."

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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 ended February 29, 2020 and February 28, 2019 and for the six
months ended February 29, 2020 and February 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   %


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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 February 29, 2020 Compared to Three Months Ended February 28, 2019


Sales. Sales were $19.4 million for the three months ended February 29, 2020
compared to $15.1 million for the three months ended February 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 to
February 28, 2019, as well as our 10.8% comparable restaurant sales growth for
the three months ended February 29, 2020.

Food and beverage costs. Food and beverage costs were $6.1 million for the three
months ended February 29, 2020 compared to $4.9 million for the three months
ended February 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 to February 28, 2019. As a
percentage of sales, food and beverage costs decreased to 31.5% in the three
months ended February 29, 2020, compared to 32.1% in the three months ended
February 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 ended February 29, 2020 compared to $4.9 million for the three months
ended February 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 to
February 28, 2019, as well as wage increases. As a percentage of sales, labor
and related costs decreased to 31.7% in the three months ended February 29,
2020, compared to 32.2% in the three months ended February 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 ended February 29, 2020 compared to $1.1 million for the
three months ended February 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
to February 28, 2019. As a percentage of sales, occupancy and other operating
expenses increased to 8.4% in the three months ended February 29, 2020, compared
to 7.1% in the three months ended February 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.

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Depreciation and amortization expenses. Depreciation and amortization expenses
incurred as part of restaurant operating costs were $0.7 million for the three
months ended February 29, 2020 compared to $0.5 million for the three months
ended February 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 to February
28, 2019. As a percentage of sales, depreciation and amortization expenses at
the restaurant-level increased to 3.7% in the three months ended February 29,
2020 as compared to 3.3% in the three months ended February 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 ended February 29, 2020 and February 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 ended February
29, 2020 compared to $1.7 million for the three months ended February 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
to February 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 ended February 29, 2020 and
11.3% in the three months ended February 28, 2019.

General and administrative expenses. General and administrative expenses were
$2.8 million for the three months ended February 29, 2020 compared to $1.8
million for the three months ended February 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 ended February 29, 2020 from 12.0% in three months ended
February 28, 2019, primarily due to the increase in the expenses mentioned
above.

Interest expense. Interest expense was insignificant in both the three months ended February 29, 2020 and February 28, 2019, and as a percentage of sales remained relatively consistent at 0.2% and 0.3%, respectively.


Interest income. Interest income was $0.2 million for the three months ended
February 29, 2020 compared to $5 thousand for the three months ended February
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 February 29, 2020 and February 28, 2019. For further discussion of our income taxes, see "Note 9 - Income Taxes".

Six Months Ended February 29, 2020 Compared to Six Months Ended February 28, 2019


Sales. Sales were $36.8 million for the six months ended February 29, 2020
compared to $28.5 million for the six months ended February 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
to February 28, 2019, as well as our 8.9% comparable restaurant sales growth for
the six months ended February 29, 2020.

Food and beverage costs. Food and beverage costs were $11.8 million for the six
months ended February 29, 2020 compared to $9.4 million for the six months ended
February 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 to February 28, 2019. As a
percentage of sales, food and beverage costs decreased to 32.0% in the six
months ended February 29, 2020, compared to 32.8% in the six months ended
February 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 ended February 29, 2020 compared to $9.0 million for the six months ended
February 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 to February
28, 2019, as well as wage increases. As a percentage of sales, labor and related
costs increased to 32.0% in the six months ended February 29, 2020, compared to
31.6% in the six months ended February 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.

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Occupancy and related expenses. Occupancy and related expenses were $3.1 million
for the six months ended February 29, 2020 compared to $2.0 million for the six
months ended February 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 to February
28, 2019. As a percentage of sales, occupancy and other operating expenses
increased to 8.4% in the six months ended February 29, 2020, compared to 7.0% in
the six months ended February 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 ended February 29, 2020 compared to $0.9 million for the six months ended
February 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 to February 28,
2019. As a percentage of sales, depreciation and amortization expenses at the
restaurant-level increased to 3.7% in the six months ended February 29, 2020 as
compared to 3.3% in the six months ended February 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 ended February 29, 2020 and February 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 ended February 29,
2020 compared to $3.3 million for the six months ended February 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
to February 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 ended February 29, 2020 and
11.7% in the six months ended February 28, 2019.

General and administrative expenses. General and administrative expenses were
$6.1 million for the six months ended February 29, 2020 compared to $4.0 million
for the six months ended February 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 ended February 29, 2020 from 13.9%
in the six months ended February 28, 2019, primarily due to the increase in the
expenses mentioned above.

Interest expense. Interest expense was insignificant in both the six months ended February 29, 2020 and February 28, 2019, and as a percentage of sales remained relatively consistent at 0.2% and 0.3%, respectively.

Interest income. Interest income was $0.4 million for the six months ended February 29, 2020 compared to $10 thousand for the six months ended February 28, 2019, due to a higher cash and cash equivalents balance.

Income tax expense (benefit). Income tax expense was insignificant in the both the six months ended February 29, 2020 and February 28, 2019. For further discussion of our income taxes, see "Note 9. Income Taxes".

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.

                                       21

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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.

                                       22

--------------------------------------------------------------------------------

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.

                                       23
--------------------------------------------------------------------------------


As a result of the CARES Act signed into law on March 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.

On April 10, 2020, we and Kura Japan entered into a Revolving Credit Agreement
establishing a $20 million revolving credit line with a termination date of
March 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 on July 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:

© Edgar Online, source Glimpses

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