You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited financial statements and the related notes included in this Quarterly Report on Form 10-Q and with the audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2021 (the "Annual Report"). In addition to historical information, the following discussion and analysis contains forward-looking statements, such as statements about our plans, objectives, expectations, and intentions, which are based on current expectations and that involve risks, uncertainties and assumptions as set forth and described in the "Special Note Regarding Forward-Looking Statements" and "Risk Factors" sections of the Annual Report. 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 this Quarterly Report on Form 10-Q.
“Kura Sushi United States,” “Kura Sushi,” “Kura”, “we”, “us”, “our”, “our company” and the “Company” means Kura Sushi USA, Inc. unless expressly stated or the context otherwise requires.
Insight
Kura Sushi USA 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 across the 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 pandemic on our business have been
significant. In March 2020, the World Health Organization declared the novel
strain of coronavirus COVID-19 a global pandemic. This contagious virus
continues to spread, including the acceleration of the spread of certain
variants of COVID-19 in the areas in which we operate. This has adversely
affected workforces, customers, economies, supply chains 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 or limited indoor dining capacities during our previous two
fiscal years. COVID-19 and the government measures taken to control it have
caused a significant disruption to our business operation. Since the end of our
fiscal year 2021, we have been able to operate all of our restaurants with no
government restrictions on indoor dining capacity. As of the filing date of this
Quarterly Report on Form 10-Q, all of our restaurants continued to operate with
no government restrictions on indoor dining capacity.
In response to the ongoing COVID-19 pandemic, we have prioritized taking steps
to protect the health and safety of our employees and customers. We have
maintained cleaning and sanitizing protocols for 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.
Under the provisions of the Coronavirus Aid, Relief, and Economic Security Act
(the "CARES Act") signed into law on March 27, 2020, and the subsequent
extension of the CARES Act, we were eligible for refundable employee retention
credits subject to certain criteria through the fiscal year ended August 31,
2021. We recognized $6.3 million and $8.9 million of employee retention credits
during the three and nine months ended May 31, 2021, respectively. For the three
months ended May 31, 2021, $5.8 million was included in labor and related costs
and $0.5 million was included in general and administrative expenses in the
statements of operations, and for the nine months ended May 31, 2021, $8.0
million was included in labor and related costs and $0.9 million was included in
general and administrative expenses in the statement of operations. As of August
31, 2021, we had recognized and filed for refunds of the amount in the amount of
$12.1 million of employee retention credits. During the nine months ended May
31, 2022 we received $8.0 million in refunds, and through the date of this
Quarterly Report on Form 10-Q, we received $12.1 million in refunds.
Consistent with our long-term growth strategy, we expect to continue to open new
restaurants in locations where we believe such restaurants have the potential to
achieve profitability. The future sales levels of our restaurants and our
ability to implement our growth strategy, however, remain highly uncertain, as
the full impact and duration of the COVID-19 pandemic continues to evolve as of
the filing date of this Quarterly Report on Form 10-Q. It is possible that
renewed outbreaks, increases in cases and/or new variants
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of the virus, whether as part of a national trend or on a more localized basis, may result in additional COVID-19 related restrictions, including capacity restrictions, or otherwise limit our restaurant services, or adversely affect consumer demand.
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 performance. 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 grow. 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 grow. 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 charges and related expenses include the rent for all dining locations and related taxes.
Depreciation and amortization charges. Depreciation charges are periodic non-cash charges that consist of the amortization of fixed assets, including equipment and capitalized leasehold improvements. Depreciation is determined on a straight-line basis over the estimated useful life of the assets, between 3 and 20 years.
Other costs. Other costs include credit card processing fees, repairs and maintenance, restaurant-level advertising and promotions, restaurant supplies, royalty payments to Kura Japan, stock-based compensation for restaurant-level employees, utilities 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 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 unit base grows.
Interest charges. 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 money market funds.
Income tax expense (benefits). The provision for income taxes represents current and deferred federal, state and local income tax (benefit) expense.
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Operating results
The following tables present selected comparative results of operations for the
three and nine months ended May 31, 2022 and May 31, 2021. 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 tables below may not
sum to 100% due to rounding.
Three Months Ended May 31,
2022 2021 $ Change % Change
(dollar amounts in thousands)
Sales $ 37,969 $ 18,471 $ 19,498 105.6 %
Restaurant operating costs
Food and beverage costs 11,282 5,850 5,432 92.9
Labor and related costs 11,788 1,649 10,139 614.9
Occupancy and related expenses 2,693 1,885 808 42.9
Depreciation and amortization expenses 1,376 1,086 290 26.7
Other costs 4,372 2,713 1,659 61.2
Total restaurant operating costs 31,511 13,183 18,328 139.0
General and administrative expenses 5,900 4,292 1,608 37.5
Depreciation and amortization expenses 85 130 (45 ) (34.6 )
Total operating expenses 37,496 17,605 19,891 113.0
Operating income 473 866 (393 ) (45.4 )
Other expense (income):
Interest expense 23 67 (44 ) (65.7 )
Interest income (25 ) (1 ) (24 ) 2,400.0
Income before income taxes 475 800 (325 ) (40.6 )
Income tax (benefit) expense (2 ) 30 (32 ) (106.7 )
Net income $ 477 $ 770 $ (293 ) (38.1 ) %
Nine Months Ended May 31,
2022 2021 $ Change % Change
(dollar amounts in thousands)
Sales $ 99,091 $ 36,967 $ 62,124 168.1 %
Restaurant operating costs
Food and beverage costs 29,615 12,078 17,537 145.2
Labor and related costs 31,840 8,070 23,770 294.5
Occupancy and related expenses 7,195 5,202 1,993 38.3
Depreciation and amortization expenses 3,814 3,015 799 26.5
Other costs 12,326 6,843 5,483 80.1
Total restaurant operating costs 84,790 35,208 49,582 140.8
General and administrative expenses 16,714 10,687 6,027 56.4
Depreciation and amortization expenses 256 299 (43 ) (14.4 )
Total operating expenses 101,760 46,194 55,566 120.3
Operating loss (2,669 ) (9,227 ) 6,558 (71.1 )
Other expense (income):
Interest expense 70 154 (84 ) (54.5 )
Interest income (75 ) (8 ) (67 ) 837.5
Loss before income taxes (2,664 ) (9,373 ) 6,709 (71.6 )
Income tax expense 13 88 (75 ) (85.2 )
Net loss $ (2,677 ) $ (9,461 ) $ 6,784 (71.7 ) %
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Three Months Ended May 31, Nine Months Ended May 31,
2022 2021 2022 2021
(as a percentage of sales)
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Restaurant operating costs
Food and beverage costs 29.7 31.7 29.9 32.7
Labor and related costs 31.0 8.9 32.1 21.8
Occupancy and related
expenses 7.1 10.2 7.3 14.1
Depreciation and
amortization expenses 3.6 5.9 3.8 8.2
Other costs 11.5 14.7 12.4 18.5
Total restaurant operating
costs 83.0 71.4 85.5 95.3
General and administrative
expenses 15.5 23.2 16.9 28.9
Depreciation and
amortization expenses 0.2 0.7 0.3 0.8
Total operating expenses 98.7 95.3 102.7 125.0
Operating income (loss) 1.3 4.7 (2.7 ) (25.0 )
Other expense (income):
Interest expense 0.1 0.4 0.1 0.4
Interest income (0.1 ) - (0.1 ) -
Income (loss) before
income taxes 1.3 4.3 (2.7 ) (25.4 )
Income tax expense - 0.2 - 0.2
Net income (loss) 1.3 % 4.1 % (2.7 ) % (25.6 ) %
Three months completed May 31, 2022 Compared to the three months ended May 31, 2021
Sales. Sales were $38.0 million for the three months ended May 31, 2022 compared
to $18.5 million for the three months ended May 31, 2021, representing an
increase of $19.5 million, or 105.6%. Comparable restaurant sales increased
65.3% for the three months ended May 31, 2022, as compared to the three months
ended May 31, 2021. The increase in sales was primarily driven by all of our
restaurants operating with no government restrictions on indoor dining capacity,
as well as the sales resulting from six new restaurants opened subsequent to May
31, 2021, whereas the prior year sales were impacted by indoor dining capacity
restrictions mandated by local government regulations in response to the
COVID-19 pandemic.
Food and beverage costs. Food and beverage costs were $11.3 million for the
three months ended May 31, 2022 compared to $5.9 million for the three months
ended May 31, 2021, representing an increase of $5.4 million, or 92.9%. The
increase in food and beverage costs was primarily driven by all of our
restaurants operating with no government restrictions on indoor dining capacity,
whereas the prior year was impacted by indoor dining capacity restrictions
mandated by local government regulations in response to the COVID-19 pandemic,
as well as costs associated with sales from six new restaurants opened
subsequent to May 31, 2021. As a percentage of sales, food and beverage costs
decreased to 29.7% in the three months ended May 31, 2022 as compared to 31.7%
in the three months ended May 31, 2021, primarily due to an increase in menu
prices, partially offset by food cost inflation, as well as higher inventory
spoilage in the prior year.
Labor and related costs. Labor and related costs were $11.8 million for the
three months ended May 31, 2022 compared to $1.6 million for the three months
ended May 31, 2021, representing an increase of $10.2 million, or 614.9%. This
increase in labor and related costs was primarily driven by $5.8 million in
employee retention credits recognized under the CARES Act extension during the
three months ended May 31, 2021, all of our restaurants operating with no
government restrictions on indoor dining capacity as the prior year was impacted
by indoor dining capacity restrictions mandated by local government regulations
in response to the COVID-19 pandemic, as well as additional labor costs incurred
from six new restaurants opened subsequent to May 31, 2021, partially offset by
$0.7 million in retention and new hire bonuses during the three months ended May
31, 2021. As a percentage of sales, labor and related costs increased to 31.0%
in the three months ended May 31, 2022 as compared to 8.9% in the three months
ended May 31, 2021. The increase in cost as a percentage of sales was primarily
driven by the employee retention credits recognized under the CARES Act
extension during the three months ended May 31, 2021. Excluding the impact of
the employee retention credit and retention and new hire bonuses, labor and
related costs as a percentage of sales for the three months ended May 31, 2021
would have been 36.6%, primarily due to minimum staffing required to operate the
restaurants at significantly reduced operating capacities in the prior year.
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Occupancy and related expenses. Occupancy and related expenses were $2.7 million
for the three months ended May 31, 2022 compared to $1.9 million for the three
months ended May 31, 2021, representing an increase of $0.8 million, or 42.9%.
The increase was primarily a result of additional lease expense related to the
opening of six new restaurants subsequent to May 31, 2021, as well as
incremental pre-opening lease expense. As a percentage of sales, occupancy and
related expenses decreased to 7.1% in the three months ended May 31, 2022 as
compared to 10.2% in the three months ended May 31, 2021, primarily driven by
leverage benefits from the increase in sales.
Depreciation and amortization expenses. Depreciation and amortization expenses
incurred as part of restaurant operating costs were $1.4 million for the three
months ended May 31, 2022 compared to $1.1 million for the three months ended
May 31, 2021, representing an increase of $0.3 million, or 26.7%. The increase
was primarily due to depreciation of property and equipment related to the six
new restaurants opened subsequent to May 31, 2021. As a percentage of sales,
depreciation and amortization expenses at the restaurant level decreased to 3.6%
in the three months ended May 31, 2022 as compared to 5.9% in the three months
ended May 31, 2021, primarily driven by leverage benefits from the increase in
sales. Depreciation and amortization expenses incurred at the corporate level
were $0.1 million for the three and nine months ended May 31, 2022 and May 31,
2021, and as a percentage of sales were 0.2% and 0.7%, respectively.
Other costs. Other costs were $4.4 million for the three months ended May 31,
2022 compared to $2.7 million for the three months ended May 31, 2021,
representing an increase of $1.7 million, or 61.2%. The increase was primarily
driven by an increase in credit card fees, utilities and supplies due to higher
sales, as well as costs related to six new restaurants opened subsequent to May
31, 2021. As a percentage of sales, other costs decreased to 11.5% in the three
months ended May 31, 2022 as compared to 14.7% in the three months ended May 31,
2021, primarily driven by leverage benefits from the increase in sales.
General and administrative expenses. General and administrative expenses were
$5.9 million for the three months ended May 31, 2022 compared to $4.3 million
for the three months ended May 31, 2021, representing an increase of $1.6
million, or 37.5%. This increase was primarily due to an increase of $1.7
million in compensation-related expenses due to an increase in headcount, a $0.2
million increase in travel expenses and a $0.2 million increase in other costs,
as well as $0.5 million in employee retention credits recognized under the CARES
Act extension in the three months ended May 31, 2021, offset by a $1.0 million
litigation expense in the three months ended May 31, 2021. As a percentage of
sales, general and administrative expenses decreased to 15.5% in the three
months ended May 31, 2022 from 23.2% in the three months ended May 31, 2021,
primarily driven by leverage benefits from the increase in sales.
Interest charges. Interest charges were $23,000 for the three months ended
May 31, 2022 compared to $67,000 for the three months ended May 31, 2021.
Interest income. Interest income was $25,000 for the three months ended May 31, 2022 compared to $1,000 for the three months ended May 31, 2021.
Income tax (benefit) expense. Income tax benefit was $2 thousand for the three months ended May 31, 2022 compared to income tax expense of $30 thousand for the three months ended May 31, 2021. For further discussion of our income taxes, see "Note 9. Income Taxes" in the Notes to Condensed Financial Statements.
Nine month period ended May 31, 2022 Compared to the nine months ended May 31, 2021
Sales. Sales were $99.1 million for the nine months ended May 31, 2022 compared
to $37.0 million for the nine months ended May 31, 2021, representing an
increase of $62.1 million, or 168.1%. Comparable restaurant sales increased
118.7% for the nine months ended May 31, 2022, as compared to the nine months
ended May 31, 2021. The increase in sales was primarily driven by all of our
restaurants operating with no government restrictions on indoor dining capacity,
as well as the sales resulting from six new restaurants opened subsequent to May
31, 2021, whereas the prior year sales were impacted by indoor dining capacity
restrictions mandated by local government regulations in response to the
COVID-19 pandemic.
Food and beverage costs. Food and beverage costs were $29.6 million for the nine
months ended May 31, 2022 compared to $12.1 million for the nine months ended
May 31, 2021, representing an increase of $17.5 million, or 145.2%. The increase
in food and beverage costs was primarily driven by all of our restaurants
operating with no government restrictions on indoor dining capacity, whereas the
prior year was impacted by indoor dining capacity restrictions mandated by local
government regulations in response to the COVID-19 pandemic, as well as costs
associated with sales from six new restaurants opened subsequent to May 31,
2021. As a percentage of sales, food and beverage costs decreased to 29.9% in
the nine months ended May 31, 2022 as compared to 32.7% in the nine months ended
May 31, 2021, primarily due to an increase in menu prices, partially offset by
food cost inflation, as well as higher inventory spoilage in the prior year.
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Labor and related costs. Labor and related costs were $31.8 million for the nine
months ended May 31, 2022 compared to $8.1 million for the nine months ended May
31, 2021, representing an increase of $23.7 million, or 294.5%. This increase in
labor and related costs was primarily driven by $8.0 million in employee
retention credits recognized under the CARES Act extension during the nine
months ended May 31, 2021, all of our restaurants operating with no government
restrictions on indoor dining capacity as the prior year was impacted by indoor
dining capacity restrictions mandated by local government regulations in
response to the COVID-19 pandemic, as well as additional labor costs incurred
from six new restaurants opened subsequent to May 31, 2021, partially offset by
$0.7 million in retention and new hire bonuses during the nine months ended May
31, 2021. As a percentage of sales, labor and related costs increased to 32.1%
in the nine months ended May 31, 2022 as compared to 21.8% in the nine months
ended May 31, 2021. The increase in cost as a percentage of sales was primarily
driven by the employee retention credits recognized under the CARES Act
extension during the nine months ended May 31, 2021. Excluding the impact of the
employee retention credit and retention and new hire bonuses, the percentage of
labor and related costs as a percentage of sales for the nine months ended May
31, 2021 would have been 41.6%. The decrease in cost as a percentage of sales
was primarily driven by leverage benefits from the increase in sales.
Occupancy and related expenses. Occupancy and related expenses were $7.2 million
for the nine months ended May 31, 2022 compared to $5.2 million for the nine
months ended May 31, 2021, representing an increase of $2.0 million, or 38.3%.
The increase was primarily a result of additional lease expense related to the
opening of six new restaurants subsequent to May 31, 2021, as well as
incremental pre-opening lease expense. As a percentage of sales, occupancy and
related expenses decreased to 7.3% in the nine months ended May 31, 2022,
compared to 14.1% in the nine months ended May 31, 2021, primarily driven by
leverage benefits from the increase in sales.
Depreciation and amortization expenses. Depreciation and amortization expenses
incurred as part of restaurant operating costs were $3.8 million for the nine
months ended May 31, 2022 compared to $3.0 million for the nine months ended May
31, 2021, representing an increase of $0.8 million, or 26.5%. The increase was
primarily due to depreciation of property and equipment related to the six new
restaurants opened subsequent to May 31, 2021. As a percentage of sales,
depreciation and amortization expenses at the restaurant level decreased to 3.8%
in the nine months ended May 31, 2022 as compared to 8.2% in the nine months
ended May 31, 2021, primarily driven by leverage benefits from the increase in
sales. Depreciation and amortization expenses incurred at the corporate level
were $0.3 million for the nine months ended May 31, 2022 and May 31, 2021, and
as a percentage of sales were 0.3% and 0.8%, respectively.
Other costs. Other costs were $12.3 million for the nine months ended May 31,
2022 compared to $6.8 million for the nine months ended May 31, 2021,
representing an increase of $5.5 million, or 80.1%. The increase was primarily
driven by an increase in credit card fees, utilities and supplies due to higher
sales, as well as costs related to six new restaurants opened subsequent to May
31, 2021. As a percentage of sales, other costs decreased to 12.4% in the nine
months ended May 31, 2022 from 18.5% in the nine months ended May 31, 2021,
primarily driven by leverage benefits from the increase in sales.
General and administrative expenses. General and administrative expenses were
$16.7 million for the nine months ended May 31, 2022 compared to $10.7 million
for the nine months ended May 31, 2021, representing an increase of $6.0
million, or 56.4%. This increase was primarily due to an increase of $4.8
million in compensation-related expenses due to an increase in headcount, a $0.7
million increase in travel expenses, a $0.2 million increase in recruiting
costs, a $0.2 million increase in legal and consulting fees and $0.2 increase in
insurance costs, as well as $0.9 million in employee retention credits
recognized under the CARES Act extension in the nine months ended May 31, 2021,
offset by a $1.0 million litigation expense in the nine months ended May 31,
2021. As a percentage of sales, general and administrative expenses decreased to
16.9% in the nine months ended May 31, 2022 from 28.9% in the nine months ended
May 31, 2021, primarily driven by leverage benefits from the increase in sales.
Interest charges. Interest charges were $70,000 for the nine months ended
May 31, 2022 compared to $154,000 for the nine months ended May 31, 2021.
Interest income. Interest income was $75,000 for the nine months ended May 31, 2022 compared to $8,000 for the nine months ended May 31, 2021.
Income tax expense. Income tax expense was $13 thousand for the nine months
ended May 31, 2022 compared to $88 thousand for the nine months ended May 31,
2021. For further discussion of our income taxes, see "Note 9. Income Taxes" in
the Notes to Condensed Financial Statements.
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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, Average Unit Volumes ("AUVs"),
comparable restaurant sales performance, and the 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 (loss) 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, such as
employee retention credits, litigation accrual, and certain executive transition
costs, that we believe are not indicative of our core operating results.
Adjusted EBITDA margin is defined as Adjusted EBITDA divided by sales. EBITDA,
Adjusted EBITDA and Adjusted EBITDA margin 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, Adjusted
EBITDA and Adjusted EBITDA margin 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, Adjusted EBITDA and Adjusted EBITDA margin
provides an additional tool for investors to use in evaluating ongoing operating
results and trends and in comparing our 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, Adjusted EBITDA
and Adjusted EBITDA margin 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 and Adjusted EBITDA margin may not be comparable to other
similarly titled measures computed by other companies, because all companies may
not calculate Adjusted EBITDA and Adjusted EBITDA margin in the same fashion.
Because of these limitations, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin
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, Adjusted EBITDA and
Adjusted EBITDA margin on a supplemental basis. You should review the
reconciliation of net income (loss) to EBITDA, Adjusted EBITDA and Adjusted
EBITDA margin below and not rely on any single financial measure to evaluate our
business.
The following table reconciles net income (loss) to EBITDA and Adjusted EBITDA:
Three Months Ended May 31, Nine Months Ended May 31,
2022 2021 2022 2021
(amounts in thousands)
Net income (loss) $ 477 $ 770 $ (2,677 ) $ (9,461 )
Interest (income) expense,
net (2 ) 66 (5 ) 146
Income tax (benefit)
expense (2 ) 30 13 88
Depreciation and
amortization expenses 1,461 1,216 4,070 3,314
EBITDA 1,934 2,082 1,401 (5,913 )
Stock-based compensation
expense(a) 732 391 1,771 966
Non-cash lease expense(b) 517 231 1,189 935
Executive transition
costs(c) - - - 390
Employee retention
credit(d) - (6,296 ) - (8,931 )
Litigation accrual(e) - 1,000 - 1,000
Adjusted EBITDA $ 3,183 $ (2,592 ) $ 4,361 $ (11,553 )
Adjusted EBITDA margin 8.4 % (14.0 )% 4.4 % (31.3 )%
(a)
Stock-based compensation expense includes non-cash stock-based compensation,
which is comprised of restaurant-level stock-based compensation included in
other costs and of corporate-level stock-based compensation included in general
and
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administrative expenses in the statements of operations. For further details of
stock-based compensation, see "Note 5. Stock-based Compensation" in the notes to
condensed financial statements included in this Quarterly Report on Form 10-Q.
(b)
Non-cash rental expenses include rental expenses from the date of possession of our restaurants that did not require cash out during the respective periods.
(vs)
Senior management transition costs include severance and research costs associated with the transition of our former CFO.
(D)
The employee retention credit includes a refundable credit recognized under the provisions of the CARES Act extension.
(e)
Litigation accrual consists of an expense related to a litigation claim. See "Note 8. Commitments and Contingencies" to the financial statements includes in this Quarterly Report on Form 10-Q.
Restaurant Level Operating Profit (Loss) and Restaurant Level Operating Profit (Loss) Margin
Restaurant-level Operating Profit (Loss) is defined as operating income (loss)
plus depreciation and amortization; stock-based compensation expense;
pre-opening costs and general and administrative expenses which are considered
normal, recurring, cash operating expenses and are essential to support the
development and operations of our restaurants; non-cash lease expense; and asset
disposals, closure costs and restaurant impairments; less corporate-level
stock-based compensation expense and employee retention credits recognized
within general and administrative expenses. Restaurant-level Operating Profit
(Loss) margin is defined as Restaurant-level Operating Profit (Loss) divided by
sales. Restaurant-level Operating Profit (Loss) and Restaurant-level Operating
Profit (Loss) 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 (Loss) and Restaurant-level Operating
Profit (Loss) margin provide useful information to management and investors
regarding certain financial and business trends relating to our financial
condition and operating results, as these measures depict normal, recurring cash
operating expenses essential to supporting the development and operations of our
restaurants. 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 expect
Restaurant-level Operating Profit (Loss) to increase in proportion to the number
of new restaurants we open and upon comparable restaurant sales growth, if any.
We present Restaurant-level Operating Profit (Loss) 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 (Loss) to
measure operating performance and returns from opening new restaurants.
Restaurant-level Operating Profit (Loss) margin allows us to evaluate the level
of Restaurant-level Operating Profit (Loss) generated from sales.
However, you should be aware that Restaurant-level Operating Profit (Loss) and
Restaurant-level Operating Profit (Loss) margin are financial measures which are
not indicative of overall results for the Company, and Restaurant-level
Operating Profit (Loss) and Restaurant-level Operating Profit (Loss) margin do
not accrue directly to the benefit of stockholders because of corporate-level
and certain other expenses excluded from such measures.
In addition, when evaluating Restaurant-level Operating Profit (Loss) and
Restaurant-level Operating Profit (Loss) 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 (Loss) and
Restaurant-level Operating Profit (Loss) margin may not be comparable to other
similarly titled measures computed by other companies, because all companies may
not calculate Restaurant-level Operating Profit (Loss) and Restaurant-level
Operating Profit (Loss) margin in the same fashion. Restaurant-level Operating
Profit (Loss) and Restaurant-level Operating Profit (Loss) margin have
limitations as analytical tools, and you should not consider them in isolation
or as substitutes for analysis of our results as reported under GAAP.
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The following table reconciles operating profit (loss) with restaurant-level operating profit (loss) and restaurant-level operating profit (loss) margin:
Three Months Ended May 31,
Nine month period ended May 31st,
2022 2021 2022 2021
(amounts in
thousands)
Operating income (loss) $ 473 $ 866 $ (2,669 ) $ (9,227 ) Depreciation and amortization expenses 1,461 1,216 4,070 3,314 Stock-based compensation expense(a) 732 391 1,771 966 Pre-opening costs(b) 104 271 420 832 Non-cash lease expense(c) 517 231 1,189 935 Employee retention credit(d) - (6,296 ) - (8,931 ) General and administrative expenses 5,900 4,292 16,714 10,687 Corporate-level stock-based compensation and employee retention credit in general and administrative expenses (644 ) 93 (1,576 ) 1 Restaurant-level operating profit (loss) $ 8,543 $ 1,064 $ 19,919 $ (1,423 ) Operating profit (loss) margin 1.2 % 4.7 % (2.7 )% (25.0 )% Restaurant-level operating profit (loss) margin 22.5 % 5.8 % 20.1 % (3.8 )% (a) Stock-based compensation expense includes non-cash stock-based compensation, which is comprised of restaurant-level stock-based compensation included in other costs 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" in the notes to condensed financial statements included in this Quarterly Report on Form 10-Q.
(b)
Pre-opening costs consist of labor costs and travel expenses for new employees and trainers during the training period, recruitment fees, legal fees, cash-based lease expenses incurred between the date of possession and opening day of our restaurants, and other related pre-opening costs.
(vs)
Non-cash rental expenses include rental expenses from the date of possession of our restaurants that did not require cash out during the respective periods.
(D)
The employee retention credit includes a refundable credit recognized under the provisions of the CARES Act extension.
Comparable restaurant sales performance
Comparable restaurant sales performance 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 the three and nine months ended May 31, 2021. Measuring our comparable restaurant sales performance allows us to evaluate the performance of our existing restaurant base. Various factors impact comparable restaurant sales, including:
•
government restrictions on indoor dining capacity due to COVID-19;
•
consumer recognition of our brand and our ability to respond to changing consumer preferences;
•
global economic trends, particularly those related to consumer spending;
•
our ability to operate restaurants effectively and efficiently to meet consumer expectations;
• pricing; • guest traffic;
•
spend per guest and average check;
•
marketing and promotional efforts;
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• local competition; and •
opening of new restaurants near existing locations.
Since opening new restaurants will be a significant component of our sales
growth, comparable restaurant sales performance is only one measure of how we
evaluate our performance. The following table shows the comparable restaurant
sales performance:
Three Months Ended May 31, Nine Months Ended May 31,
2022 2021 2022 2021
Comparable restaurant sales
performance (%) 65.3% 455.6% 118.7% (20.5)%
Comparable restaurant base 25 23 25 21
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:
Three Months Ended May 31, Nine Months Ended May 31,
2022 2021 2022 2021
Restaurant activity:
Beginning of period 36 30 32 25
Openings 1 1 5 6
End of period 37 31 37 31
Cash and capital resources
Our primary uses of cash are for operational expenditures and capital
investments, including new restaurants, and costs incurred for restaurant
remodels and restaurant fixtures. Historically, our main sources of liquidity
have been cash flows from operations, cash proceeds from our initial public
offering in fiscal 2019 and our secondary offering in fiscal 2021 and
availability under our Revolving Credit Agreement. The ongoing impact of the
COVID-19 pandemic remains highly uncertain and may have a material adverse
impact on our business, financial condition, liquidity and financial results.
For further discussion, see above "Business Trends; Effects of COVID-19 on our
Business."
During the nine months ended May 31, 2022, we had no borrowings under the
Revolving Credit Agreement and have $45.0 million of availability remaining.
During the nine months ended May 31, 2021, we had borrowed $17.0 million under
the Revolving Credit Agreement and had $28.0 million of availability remaining.
The significant components of our working capital are liquid assets such as
cash, cash equivalents and receivables, reduced by accounts payable and accrued
expenses. 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 Revolving Credit Agreement will be sufficient to
fund our lease obligations, capital expenditures and working capital needs for
at least the next 12 months.
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Cash flow summary
Our primary sources of liquidity and cash flows are operating cash flows, cash on hand and proceeds from our Revolving Credit Agreement. We use this to fund investing expenditures for new restaurant openings, reinvest in our existing restaurants, and contribute to our working capital. Our working capital position is impacted by collecting 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, whereas 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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