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 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; Effects of COVID-19 on Our Business
The negative effects of the COVID-19 on our business have been significant. InMarch 2020 , theWorld Health Organization declared the novel strain of coronavirus COVID-19 a global pandemic. This contagious virus, which has continued to spread, has adversely affected workforces, customers, economies and financial markets globally. In response to this outbreak, many state and local authorities mandated the temporary closure of non-essential businesses and dine-in restaurant activity. COVID-19 and the government measures taken to control it have caused a significant disruption to our business operation. OnMarch 18, 2020 , we announced the temporary closure of all of our 25 restaurants located across five states and has since furloughed certain of our employees. As ofMay 31, 2020 , we had reopened seven restaurants and as of the filing date of this Quarterly Report, have reopened all 25 restaurants, with 14 of them inCalifornia currently only providing takeout due to government restrictions on indoor dining. The reopened restaurants that allow indoor dining have been operating at reduced capacities of 25% or 50% depending on local requirements. To support our employees during this challenging time, we have maintained payroll for store managers and key kitchen staff. We maintained payroll for all employees throughApril 5, 2020 and all kitchen employees throughMay 9, 2020 . We also continued to pay our employee's portion of health insurance for all furloughed employees. In response to the ongoing COVID-19 pandemic, we have prioritized taking steps to protect the health and safety of our employees and customers. Currently, the restaurants are not utilizing the revolving conveyor belt and all food is ordered from the tableside touchscreen. The food is delivered either by the express belt directly from the kitchen to the customers' tables or by the restaurant employees. We have also increased cleaning and sanitizing protocols of our restaurants and have implemented additional training and operational manuals for our restaurant employees, as well as increased handwashing procedures. We also provide each restaurant employee with face masks and gloves, and require each employee to pass a health screening process, which includes a temperature check, before the start of each shift. The temporary restaurant closure and the reduced capacities at the reopened restaurants have caused a substantial decline in our sales in the most recent fiscal quarter. The future sales levels of our restaurants and our ability to implement our growth strategy remain highly uncertain, as the full impact and duration of the COVID-19 outbreak continues to evolve as of the date of this Quarterly Report. We expect the current decreased restaurant sales levels and ongoing length and severity of the economic downturn caused by the pandemic will continue to have a material adverse impact on our future business, financial condition, liquidity and financial results.
Recent Events Concerning Our Financial Position
On
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On April 14, 2020 , we entered into a Promissory Note with Bank of the West ,
which provided for a loan in the amount of $6.0 million (the "PPP Loan")
pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief,
and Economic Security Act (the "CARES Act") signed into law on March 27, 2020 .
On April 29, 2020 , we returned the proceeds received from the PPP Loan.
Under the provisions of the CARES Act, we are eligible for a refundable employee
retention credit subject to certain criteria. In connection with the CARES Act,
the Company adopted a policy to recognize the employee retention credit when
earned and to offset the credit against the related expenditure. Accordingly, we
recorded a $1.6 million employee retention credit during the three months ended
May 31, 2020 , which is included in Labor and related costs in the statements of
operations.
We have received rent concessions from our landlords for certain of our
restaurants in the form of rent abatements and rent deferrals which were
immaterial for the three months ended
Due to the impact of COVID-19, we assessed our long-lived assets for potential impairment which resulted in no impairment charges recorded as ofMay 31, 2020 . We also assessed the realizability of our deferred tax assets and recorded a valuation allowance of$1.1 million during the three months endedMay 31, 2020 . See "Note 9. Income Taxes".
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 endedMay 31, 2020 andMay 31, 2019 and for the nine months endedMay 31, 2020 andMay 31, 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 May 31, Increase / (Decrease) 2020 2019 2020 vs 2019 (dollar amounts in thousands) Sales$ 2,812 $ 16,955 $ (14,143 ) (83.4 ) % Restaurant operating costs Food and beverage costs 1,069 5,509 (4,440 ) (80.6 ) Labor and related costs 3,551 5,279 (1,728 ) (32.7 ) Occupancy and related expenses 1,589 1,297 292 22.5 Depreciation and amortization expenses 743 517 226 43.7 Other costs 964 1,756 (792 ) (45.1 ) Total restaurant operating costs 7,916 14,358 (6,442 ) (44.9 ) General and administrative expenses 2,885 1,734 1,151 66.4 Depreciation and amortization expenses 39 29 10 34.5 Total operating expenses 10,840 16,121 (5,281 ) (32.8 ) Operating income (loss) (8,028 ) 834 (8,862 ) (1,062.6 ) Other expense (income): Interest expense 36 45 (9 ) (20.0 ) Interest income (65 ) (1 ) (64 ) 6,400.0 Income (loss) before income taxes (7,999 ) 790 (8,789 ) (1,112.5 ) Income tax expense 1,153 71 1,082 1,523.9 Net income (loss)$ (9,152 ) $ 719$ (9,871 ) (1,372.9 ) % Nine Months Ended May 31, Increase / (Decrease) 2020 2019 2020 vs 2019 (dollar amounts in thousands) Sales$ 39,640 $ 45,492 $ (5,852 ) (12.9 ) % Restaurant operating costs Food and beverage costs 12,868 14,880 (2,012 ) (13.5 ) Labor and related costs 15,336 14,286 1,050 7.3 Occupancy and related expenses 4,665 3,292 1,373 41.7 Depreciation and amortization expenses 2,118 1,457 661 45.4 Other costs 5,221 5,102 119 2.3 Total restaurant operating costs 40,208 39,017 1,191 3.1 General and administrative expenses 8,994 5,699 3,295 57.8 Depreciation and amortization expenses 97 80 17 21.3 Total operating expenses 49,299 44,796 4,503 10.1 Operating income (loss) (9,659 ) 696 (10,355 ) (1,487.8 ) Other expense (income): Interest expense 103 126 (23 ) (18.3 ) Interest income (432 ) (11 ) (421 ) 3,827.3 Income (loss) before income taxes (9,330 ) 581 (9,911 ) (1,705.9 ) Income tax expense 1,179 41 1,138 2,775.6 Net income (loss)$ (10,509 ) $ 540$ (11,049 ) (2,046.1 ) % 18
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Three Months Ended May 31, Nine Months Ended May 31,
2020 2019 2020 2019
(as a percentage of sales)
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Restaurant operating costs
Food and beverage costs 38.0 32.5 32.5 32.7
Labor and related costs 126.3 31.1 38.7 31.4
Occupancy and related expenses 56.5 7.6 11.8 7.2
Depreciation and amortization
expenses 26.4 3.0 5.3 3.2
Other costs 34.3 10.4 13.2 11.2
Total restaurant operating
costs 281.5 84.7 101.4 85.8
General and administrative
expenses 102.6 10.2 22.7 12.5
Depreciation and amortization
expenses 1.4 0.2 0.2 0.2
Total operating expenses 385.5 95.1 124.4 98.5
Operating income (loss) (285.5 ) 4.9 (24.4 ) 1.5
Other expense (income): -
Interest expense 1.3 0.3 0.3 0.3
Interest income (2.3 ) - (1.1 ) (0.0 )
Income (loss) before income
taxes (284.5 ) 4.7 (23.5 ) 1.3
Income tax expense 41.0 0.4 3.0 0.1
Net income (loss) (325.5 ) % 4.2 % (26.5 ) % 1.2 %
Three Months Ended
Sales. Sales were$2.8 million for the three months endedMay 31, 2020 compared to$17.0 million for the three months endedMay 31, 2019 , representing a decrease of approximately$14.2 million or 83.4%. Due to COVID-19, onMarch 18, 2020 we temporarily closed all of our 25 restaurants. As ofMay 31, 2020 , we had reopened seven restaurants at reduced capacity levels. The decrease in sales was primarily driven by restaurant closures during the three months endedMay 31, 2020 , and was slightly offset by sales from the opening of four new restaurants subsequent toMay 31, 2019 . Food and beverage costs. Food and beverage costs were$1.1 million for the three months endedMay 31, 2020 compared to$5.5 million for the three months endedMay 31, 2019 , representing a decrease of approximately$4.4 million or 80.6%. The decrease in food and beverage costs was primarily driven by the temporary restaurant closures during the three months endedMay 31, 2020 , and was slightly offset by the costs associated with the sales from the opening of four new restaurants subsequent toMay 31, 2019 . As a percentage of sales, food and beverage costs increased to 38.0% in the three months endedMay 31, 2020 , compared to 32.5% in the three months endedMay 31, 2019 . The increase in food and beverage costs as a percentage of sales was primarily driven by inventory spoilage incurred during the three months endedMay 31, 2020 . Labor and related costs. Labor and related costs were$3.6 million for the three months endedMay 31, 2020 compared to$5.3 million for the three months endedMay 31, 2019 , representing a decrease of approximately$1.7 million , or 32.7%. Labor and related costs decreased due to a$1.6 million employee retention credit as a result of the CARES Act, as well as the furlough of certain employees as a result of the temporary restaurant closures during the three months endedMay 31, 2020 , partially offset by additional labor costs incurred from the opening of four new restaurants subsequent toMay 31, 2019 . As a percentage of sales, labor and related costs increased to 126.3% in the three months endedMay 31, 2020 , compared to 31.1% in the three months endedMay 31, 2019 . The increase in labor and related costs as a percentage of sales was primarily due to retaining certain restaurant employees during the temporary restaurant closures. Occupancy and related expenses. Occupancy and related expenses were$1.6 million for the three months endedMay 31, 2020 compared to$1.3 million for the three months endedMay 31, 2019 , representing an increase of approximately$0.3 million , or 22.5%. The increase was primarily a result of additional lease expense incurred with respect to the opening of four new restaurants subsequent toMay 31, 2019 . As a percentage of sales, occupancy and other operating expenses increased to 56.5% in the three months endedMay 31, 2020 , compared to 7.6% in the three months endedMay 31, 2019 . The increase in occupancy and related expenses as a percentage of sales was primarily driven by the decrease in sales due to the temporary restaurant closures during the three months endedMay 31, 2020 , as well as higher occupancy rates in our newer restaurants and an increase in pre-opening lease expense. 19 -------------------------------------------------------------------------------- Depreciation and amortization expenses. Depreciation and amortization expenses incurred as part of restaurant operating costs were$0.7 million for the three months endedMay 31, 2020 compared to$0.5 million for the three months endedMay 31, 2019 , representing an increase of approximately$0.2 million , or 43.7%. The increase was primarily due to depreciation of property and equipment related to the opening of four new restaurants subsequent toMay 31, 2019 . As a percentage of sales, depreciation and amortization expenses at the restaurant-level increased to 26.4% in the three months endedMay 31, 2020 as compared to 3.0% in the three months endedMay 31, 2019 . The increase is primarily due to the decrease in sales due to the temporary restaurant closures during the three months endedMay 31, 2020 , as well as higher build-out costs of our newer restaurants. Depreciation and amortization expenses incurred at the corporate-level were immaterial for the three months endedMay 31, 2020 andMay 31, 2019 , and as a percentage of sales were 1.4% and 0.2%, respectively. Other costs. Other costs were$1.0 million for the three months endedMay 31, 2020 compared to$1.8 million for the three months endedMay 31, 2019 , representing a decrease of approximately$0.8 million , or 45.1%. The decrease was primarily due to lower operating costs due to the temporary restaurant closures during the three months endedMay 31, 2020 , such as credit card fees, restaurant supplies, promotional expenses and royalties. As a percentage of sales, other costs increased to 34.3% in the three months endedMay 31, 2020 from 10.4% in the three months endedMay 31, 2019 primarily due to costs that are not directly variable with the decrease in sales from the temporary restaurant closures, such as utilities and business insurance. General and administrative expenses. General and administrative expenses were$2.9 million for the three months endedMay 31, 2020 compared to$1.7 million for the three months endedMay 31, 2019 , representing an increase of approximately$1.2 million , or 66.4%. This increase in general and administrative expenses was primarily due to$0.7 million of insurance, accounting, and legal costs associated with operating as a public company costs and$0.4 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 102.6% in the three months endedMay 31, 2020 from 10.2% in three months endedMay 31, 2019 , primarily due to the increase in the expenses mentioned above as well as the decrease in sales due to the temporary restaurant closures during the three months endedMay 31, 2020 . Interest expense. Interest expense was insignificant in both the three months endedMay 31, 2020 andMay 31, 2019 , and as a percentage of sales was 1.3% and 0.3%, respectively. Interest income. Interest income was$0.1 million for the three months endedMay 31, 2020 compared to$1 thousand for the three months endedMay 31, 2019 , due to a higher cash and cash equivalents balance. Income tax expense. Income tax expense was$1.2 million for the three months endedMay 31, 2020 compared to$71 thousand for the three months endedMay 31, 2019 primarily due to a$1.1 million one-time, non-cash charge to record a valuation allowance on our deferred tax assets. For further discussion of our income taxes, see "Note 9. Income Taxes".
Nine Months Ended
Sales. Sales were$39.6 million for the nine months endedMay 31, 2020 compared to$45.5 million for the nine months endedMay 31, 2019 , representing a decrease of approximately$5.9 million , or 12.9%. The decrease in sales was primarily driven by the temporary restaurant closures during the three months endedMay 31, 2020 , and was partially offset by sales from the opening of four new restaurants subsequent toMay 31, 2019 . Food and beverage costs. Food and beverage costs were$12.9 million for the nine months endedMay 31, 2020 compared to$14.9 million for the nine months endedMay 31, 2019 , representing a decrease of approximately$2.0 million , or 13.5%. The decrease in food and beverage costs was primarily driven by the temporary restaurant closures during the three months endedMay 31, 2020 , and was partially offset by the costs associated with the sales from the opening of four new restaurants subsequent toMay 31, 2019 . As a percentage of sales, food and beverage costs remained relatively consistent at 32.5% in the nine months endedMay 31, 2020 , compared to 32.7% in the nine months endedMay 31, 2019 . Labor and related costs. Labor and related costs were$15.3 million for the nine months endedMay 31, 2020 compared to$14.3 million for the nine months endedMay 31, 2019 , representing an increase of approximately$1.0 million , or 7.3%. The increase in labor and related costs was driven by additional labor costs incurred from the opening of four new restaurants subsequent toMay 31, 2019 , partially offset by a$1.6 million employee retention credit as a result of the CARES Act, as well as the furlough of certain employees as a result of the temporary restaurant closures during the three months endedMay 31, 2020 . As a percentage of sales, labor and related costs increased to 38.7% in the nine months endedMay 31, 2020 , compared to 31.4% in the nine months endedMay 31, 2019 , which was primarily due to retaining certain restaurant employees during the temporary restaurant closures. 20 -------------------------------------------------------------------------------- Occupancy and related expenses. Occupancy and related expenses were$4.7 million for the nine months endedMay 31, 2020 compared to$3.3 million for the nine months endedMay 31, 2019 , representing an increase of approximately$1.4 million , or 41.7%. The increase was primarily a result of additional lease expense incurred from the opening of four new restaurants subsequent toMay 31, 2019 . As a percentage of sales, occupancy and other operating expenses increased to 11.8% in the nine months endedMay 31, 2020 , compared to 7.2% in the nine months endedMay 31, 2019 . The increase in occupancy and related expenses as a percentage of sales was primarily driven by the decrease in sales due to the temporary restaurant closures during the three months endedMay 31, 2020 , as well as 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$2.1 million for the nine months endedMay 31, 2020 compared to$1.5 million for the nine months endedMay 31, 2019 , representing an increase of approximately$0.6 million , or 45.4%. The increase was primarily due to depreciation of property and equipment related to the opening of four new restaurants subsequent toMay 31, 2019 . As a percentage of sales, depreciation and amortization expenses at the restaurant-level increased to 5.3% in the nine months endedMay 31, 2020 as compared to 3.2% in the nine months endedMay 31, 2019 . The increase is primarily driven by the decrease in sales due to the temporary restaurant closures during the three months endedMay 31, 2020 , as well as higher build-out costs of our newer restaurants. Depreciation and amortization expenses incurred at the corporate-level were immaterial for the nine months endedMay 31, 2020 andMay 31, 2019 , and as a percentage of sales remained relatively consistent at 0.2% and 0.2%, respectively. Other costs. Other costs were$5.2 million for the nine months endedMay 31, 2020 compared to$5.1 million for the nine months endedMay 31, 2019 , representing an increase in approximately$0.1 million , or 2.3%. The increase was primarily due to costs related to operating four new restaurants subsequent toMay 31, 2019 , offset by lower operating costs due to the temporary restaurant closures during the three months endedMay 31, 2020 , such as credit card fees, restaurant supplies, promotional expenses and royalties. As a percentage of sales, other costs increased to 13.2% in the nine months endedMay 31, 2020 compared to 11.2% in the nine months endedMay 31, 2019 , primarily due to costs that are not directly variable with the decrease in sales from the temporary restaurant closures, such as utilities and business insurance. General and administrative expenses. General and administrative expenses were$9.0 million for the nine months endedMay 31, 2020 compared to$5.7 million for the nine months endedMay 31, 2019 , representing an increase of approximately$3.3 million , or 57.8%. This increase in general and administrative expenses was primarily due to$1.7 million of insurance, accounting, and legal costs associated with operating as a public company,$0.4 million of other legal costs, and$0.9 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 22.7% in the nine months endedMay 31, 2020 from 12.5% in the nine months endedMay 31, 2019 , primarily due to the increase in the expenses mentioned above as well as the decrease in sales due to the temporary restaurant closures during the three months endedMay 31, 2020 .
Interest expense. Interest expense was insignificant in both the nine months
ended
Interest income. Interest income was$0.4 million for the nine months endedMay 31, 2020 compared to$11 thousand for the nine months endedMay 31, 2019 , due to a higher cash and cash equivalents balance. Income tax expense (benefit). Income tax expense was$1.2 million for the nine months endedMay 31, 2020 compared to$41 thousand for the nine months endedMay 31, 2019 primarily due to a$1.1 million one-time, non-cash charge to record a valuation allowance for the Company's deferred tax assets. 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 Operating Profit, Restaurant-level Operating Profit 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.
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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, 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. However, these measures may not provide a complete understanding of the operating results of the Company as a whole and such measures should be reviewed in conjunction with our GAAP financial results. 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 endedMay 31, 2020 andMay 31, 2019 and the nine months endedMay 31, 2020 andMay 31, 2019 : Three Months Ended May 31, Nine Months Ended May 31, 2020 2019(a) 2020 2019(a) (amounts in thousands) Net income (loss)$ (9,152 ) $ 719 $ (10,509 ) $ 540 Interest (income) expense, net (29 ) 44 (329 ) 115 Taxes 1,153 71 1,179 41 Depreciation and amortization 782 546 2,215 1,537 EBITDA (7,246 ) 1,380 (7,444 ) 2,233 Stock-based compensation expense(b) 248 155 580 476 Non-cash lease expense(c) 140 109 399 325 Employee retention credit(d) (1,580 ) - (1,580 ) - Adjusted EBITDA (8,438 ) 1,644 (8,045 ) 3,034 Adjusted EBITDA margin (300.1 )% 9.7 % (20.3 )% 6.7 %
(a) Effective
pre-opening costs from our computation of Adjusted EBITDA. Adjusted EBITDA
for the three and nine months ended
current period computation methodology.
(b) 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.
(c) Non-cash lease expense includes lease expense from the opening date of our
restaurants that did not require cash outlay in the respective periods.
(d) Refundable credit against certain employment taxes recognized under the
provisions of the CARES Act.
Restaurant-level Operating Profit and Restaurant-level Operating Profit Margin
Restaurant-level Operating Profit is defined as operating income plus
depreciation and amortization; stock-based compensation expense; pre-opening
lease expense, pre-opening costs and general and administrative expenses, which
are considered normal, recurring cash operating expenses and are essential to
supporting the development and operations of our restaurants; non-cash lease
expense, asset disposals, closure costs and restaurant impairments; less
corporate-level stock-based compensation expense and pre-opening costs
recognized within general and administrative expenses. Restaurant-level
Operating Profit margin is defined as
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Restaurant-level Operating Profit divided by sales. Restaurant-level Operating
Profit and Restaurant-level Operating Profit 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 Operating Profit and
Restaurant-level Operating Profit 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 Operating Profit to increase in proportion to the number of new
restaurants we open and our comparable restaurant sales growth.
We present Restaurant-level Operating Profit because it excludes the impact of
general and administrative expenses, which are not incurred at the
restaurant-level. We also use Restaurant-level Operating Profit to measure
operating performance and returns from opening new restaurants. Restaurant-level
Operating Profit margin allows us to evaluate the level of Restaurant-level
Operating Profit generated from sales.
However, you should be aware that Restaurant-level Operating Profit and
Restaurant-level Operating Profit margin are financial measures, which are not
indicative of overall results for the Company, and Restaurant-level Operating
Profit and Restaurant-level Operating Profit 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 Operating Profit and
Restaurant-level Operating Profit 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 Operating Profit and Restaurant-level Operating
Profit margin may not be comparable to other similarly titled measures computed
by other companies, because all companies may not calculate Restaurant-level
Operating Profit and Restaurant-level Operating Profit margin in the same
fashion. Restaurant-level Operating Profit and Restaurant-level Operating Profit
margin have limitations as analytical tools, and you should not consider those
measures in isolation or as a substitute for analysis of our results as reported
under GAAP.
The following table reconciles operating income to Restaurant-level Operating
Profit and Restaurant-level Operating Profit margin for the three months ended
May 31, 2020 and May 31, 2019 and for the nine months ended May 31, 2020 and May
31, 2019 :
Three Months Ended May 31, Nine Months Ended May 31,
2020 2019 2020 2019
(amounts in thousands)
Operating income (loss) $ (8,028 ) $ 834 $ (9,659 ) $ 696
Depreciation and amortization 782 546 2,215 1,537
Stock-based compensation expense(a) 248 155 580 476
Pre-opening lease expense(b) 290 156 719 419
Pre-opening costs(c) 177 71 581 152
Non-cash lease expense(d) 140 109 399 325
Employee retention credit(e) (1,580 ) - (1,580 ) -
General and administrative expenses 2,885 1,734 8,994 5,699
Corporate-level stock-based
compensation and pre-opening costs
included in General and
administrative expenses (259 ) (138 ) (652 ) (414 )
Restaurant-level operating profit
(loss) (5,345 ) 3,467 1,597 8,890
Operating profit margin (285.5 )% 4.9 % (24.4 )% 1.5 %
Restaurant-level operating profit
margin (190.1 )% 20.4 % 4.0 % 19.5 %
(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.
(e) Refundable credit against certain employment taxes recognized under the
provisions of the CARES Act.
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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. We did not make any adjustments for the temporary restaurant closures due to COVID-19 during three and nine months endedMay 31, 2020 .
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 nine months ended
Three Months Ended May 31, Nine Months Ended May 31,
2020 2019 2020 2019
Comparable restaurant sales growth (%) (85.4)% 7.6% (24.5)% 5.8%
Comparable restaurant base 17 13 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 nine months ended May 31, 2020 and May 31,
2019 :
Three Months Ended May 31, Nine Months Ended May 31,
2020 2019 2020 2019
Restaurant activity:
Beginning of period 25 20 23 17
Openings - 1 2 4
Closings - - - -
End of period 25 21 25 21
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 current restaurant sales levels and ongoing length and severity of the
economic downturn will have a material adverse impact on our business, financial
condition, liquidity and financial results. For further discussion, see above
under "-Business Trends; Effects of COVID-19 on our Business".
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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 Revolving Credit Agreement provided by Kura Japan, 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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