KURA SUSHI USA, INC. (KRUS) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with the “Selected Financial Data” and our financial statements and the related notes and other financial information included elsewhere in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Special Note Regarding Forward-Looking Statements” and “Risk Factors” sections of this report for a discussion of important 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.
The following MD&A includes a discussion comparing our results in fiscal year 2021 to fiscal year 2020. For a discussion of our results of operations comparing fiscal year 2020 to fiscal year 2019 and a discussion of our cash flows for fiscal year 2019, refer to Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2020, filed with the SEC on November 18, 2020.
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 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, 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 or limited indoor dining capacities. COVID-19 and the government measures taken to control it have caused a significant disruption to our business operation. As of fiscal year-end August 31, 2021, we had all of our 32 restaurants operating at 100% indoor dining capacity. In October 2021, we opened one new restaurant in San Francisco, California. As of the filing date of this Annual Report on Form 10-K, we had all of our 33 restaurants operating at 100% 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.
The reduced capacities at our restaurants have caused a substantial decline in our sales in the most recently completed fiscal year compared to pre-pandemic levels. In response to the ongoing challenges posed by the COVID-19 pandemic, we are focused on maximizing our in-restaurant dining capacity, continuing to provide a safe environment for our employees and customers, maintaining our operational efficiencies. Currently, with the lift of all indoor dining restrictions at all of our restaurants, we have experienced a staffing shortage and have provided certain employee retention and new hire bonuses. In line with our long-term growth strategy, we expect to continue to open new restaurants at locations where we believe they 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 date of this Annual Report on Form 10-K.
42
Recent Events Concerning Our Financial Position
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. On September 2, 2020, we and Kura Japan entered into a First Amendment to Revolving Credit Agreement (the “First Amendment”) to (i) increase the maximum credit amount under the credit line from $20 million to $35 million, (ii) extend the maturity date for each advance from 12 months to 60 months from the date of disbursement and (iii) extend the last day of the period of availability for the advances under the credit line from March 31, 2024 to April 10, 2025. On April 9, 2021, we and Kura Japan entered into a Second Amendment to Revolving Credit Agreement (the “Second Amendment”) to increase the maximum credit amount under the credit line from $35 million to $45 million. In connection with the First Amendment and Second Amendment, the Revolving Credit Note under the Revolving Credit Agreement was also amended by incorporating the same amendments as provided under the First Amendment and Second Amendment, as well as amendments to the interest rate. During fiscal 2021, we borrowed $17 million under the Revolving Credit Agreement and on July 23, 2021, we repaid the outstanding balance of $17 million to Kura Japan. See “Note 5. Related Party Transactions” and “Note 7. Debt”.
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 a refundable employee retention credit subject to certain criteria. We recognized a $10.3 million employee retention credit and a $1.8 million employee retention credit during the fiscal years 2021 and 2020, respectively. For fiscal year 2021, $9.3 million is included in labor and related costs and $1.0 million is included in general and administrative expenses in the statements of operations. The Company has filed for refunds of the employee retention credits and subsequent to August 31, 2021 and as of the date of this Annual Report on Form 10-K, has received $8.0 million in refunds and cannot reasonably estimate when it will receive any or all of the remaining refunds. As of August 31, 2021, the Company is no longer eligible to receive refundable employee retention credits.
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 fiscal year 2021. Due to a staffing shortage, we provided certain employee retention and new hire bonuses totaling $1.2 million in fiscal year 2021.
Due to the impact of COVID-19, we assessed our long-lived assets for potential impairment which resulted in no impairment charges recorded as of August 31, 2021. We also assessed the realizability of our deferred tax assets and recorded a valuation allowance of $8.4 million as of August 31, 2021. See “Note 10. 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.
43
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 unit base grows, including incremental legal, accounting, insurance and other expenses.
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.
Results of Operations
The following table presents selected comparative results of operations from our audited financial statements for the fiscal year ended August 31, 2021 compared to the fiscal year ended August 31, 2020. Our financial results for these periods are not necessarily indicative of the financial results that we will achieve in future periods. Certain percentage totals for the table below may not sum to 100% due to rounding.
| Fiscal Years Ended August 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | $ Change | % Change | ||||||||||||||
| (dollar amounts in thousands) | |||||||||||||||||
| Sales | $ | 64,891 | $ | 45,168 | $ | 19,723 | 43.7 | % | |||||||||
| Restaurant operating costs: | |||||||||||||||||
| Food and beverage costs | 20,686 | 14,709 | 5,977 | 40.6 | |||||||||||||
| Labor and related costs | 16,430 | 18,669 | (2,239 | ) | (12.0 | ) | |||||||||||
| Occupancy and related expenses | 7,093 | 6,359 | 734 | 11.5 | |||||||||||||
| Depreciation and amortization expenses | 4,126 | 2,980 | 1,146 | 38.5 | |||||||||||||
| Other costs | 10,448 | 6,705 | 3,743 | 55.8 | |||||||||||||
| Total restaurant operating costs | 58,783 | 49,422 | 9,361 | 18.9 | |||||||||||||
| General and administrative expenses | 15,701 | 12,064 | 3,637 | 30.1 | |||||||||||||
| Depreciation and amortization expenses | 396 | 180 | 216 | 120.0 | |||||||||||||
| Total operating expenses | 74,880 | 61,666 | 13,214 | 21.4 | |||||||||||||
| Operating loss | (9,989 | ) | (16,498 | ) | 6,509 | (39.5 | ) | ||||||||||
| Other expense (income): | |||||||||||||||||
| Interest expense | 220 | 136 | 84 | 61.8 | |||||||||||||
| Interest income | (20 | ) | (450 | ) | 430 | (95.6 | ) | ||||||||||
| Loss before income taxes | (10,189 | ) | (16,184 | ) | 5,995 | (37.0 | ) | ||||||||||
| Income tax expense | 106 | 1,174 | (1,068 | ) | (91.0 | ) | |||||||||||
| Net loss | $ | (10,295 | ) | $ | (17,358 | ) | $ | 7,063 | (40.7 | ) | % |
44
| Fiscal Years Ended August 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | ||||||||
| (as a percentage of sales) | |||||||||
| Sales | 100.0 | % | 100.0 | % | |||||
| Restaurant operating costs | |||||||||
| Food and beverage costs | 31.9 | 32.6 | |||||||
| Labor and related costs | 25.3 | 41.3 | |||||||
| Occupancy and related expenses | 10.9 | 14.1 | |||||||
| Depreciation and amortization expenses | 6.4 | 6.6 | |||||||
| Other costs | 16.1 | 14.8 | |||||||
| Total restaurant operating costs | 90.6 | 109.4 | |||||||
| General and administrative expenses | 24.2 | 26.7 | |||||||
| Depreciation and amortization expenses | 0.6 | 0.4 | |||||||
| Total operating expenses | 115.4 | 136.5 | |||||||
| Operating loss | (15.4 | ) | (36.5 | ) | |||||
| Other expense (income): | |||||||||
| Interest expense | 0.3 | 0.3 | |||||||
| Interest income | (0.0 | ) | (1.0 | ) | |||||
| Loss before income taxes | (15.7 | ) | (35.8 | ) | |||||
| Income tax expense | 0.2 | 2.6 | |||||||
| Net loss | (15.9 | ) | % | (38.4 | ) | % |
Fiscal Year Ended August 31, 2021 Compared to Fiscal Year Ended August 31, 2020
Sales. Sales were $64.9 million for fiscal year 2021 compared to $45.2 million for fiscal year 2020, representing an increase of $19.7 million, or 43.7%. The increase in sales was primarily driven by an increased level of operating capacities of our restaurants, as the prior year sales were impacted by the temporary closure of our restaurants as mandated by local government restrictions in response to the COVID-19 pandemic, the sales from seven new restaurants opened during fiscal year 2021 and an increase in off-premises sales. As of August 31, 2021, all 32 of our restaurants were open with 100% indoor dining capacity.
Food and beverage costs. Food and beverage costs were $20.7 million for fiscal year 2021 compared to $14.7 million for fiscal year 2020, representing an increase of $6.0 million, or 40.6%. The increase in food and beverage costs was primarily driven by an increased level of operating capacities of our restaurants, as the prior year was impacted by the temporary closure of our restaurants as mandated by local government restrictions in response to the COVID-19 pandemic, and costs associated with sales from seven new restaurants opened during fiscal year 2021. As a percentage of sales, food and beverage costs remained relatively consistent at 31.9% in fiscal year 2021, compared to 32.6% in fiscal year 2020.
Labor and related costs. Labor and related costs were $16.4 million for fiscal year 2021 compared to $18.7 million for fiscal year 2020, representing a decrease of $2.3 million, or 12.0%. The decrease in labor and related costs was driven by $9.3 million in employee retention credits as a result of the CARES Act extension recognized in fiscal year 2021 compared to $1.7 million recognized in fiscal year 2020. This was partially offset by an increased level of operating capacities of our restaurants, as the prior year was impacted by the temporary closure of our restaurants as mandated by local government restrictions in response to the COVID-19 pandemic, $1.2 million in employee retention and new hire bonuses, and additional labor costs incurred from seven new restaurants that opened during fiscal year 2021. As a percentage of sales, labor and related costs decreased to 25.3% in fiscal year 2021, compared to 41.3% in fiscal year 2020. The decrease in labor and related costs as a percentage of sales was primarily due to the recognition of the employee retention credits and the retention of certain restaurant employees during the temporary restaurant closures in the prior year, partially offset by employee retention and new hire bonuses.
45
Occupancy and related expenses. Occupancy and related expenses were $7.1 million for fiscal year 2021 compared to $6.4 million for fiscal year 2020, representing an increase of $0.7 million, or 11.5%. The increase was primarily a result of additional lease expense incurred with respect to seven new restaurants that opened during fiscal year 2021. As a percentage of sales, occupancy and other operating expenses decreased to 10.9% in fiscal year 2021, compared to 14.1% in fiscal year 2020. The decrease as a percentage of sales was primarily driven by the increase in sales due to the increased level of operating capacities of our restaurants, as the prior year sales were impacted by the temporary closure of our restaurants as mandated by local government restrictions in response to the COVID-19 pandemic.
Depreciation and amortization expenses. Depreciation and amortization expenses incurred as part of restaurant operating costs were $4.1 million for fiscal year 2021 compared to $3.0 million fiscal year 2020, representing an increase of $1.1 million or 38.5%. The increase was primarily due to depreciation of property and equipment related to the opening of seven new restaurants in fiscal 2021. As a percentage of sales, depreciation and amortization expenses at the restaurant-level remained relatively consistent at 6.4% in fiscal year 2021 as compared to 6.6% in fiscal year 2020.
Other costs. Other costs were $10.4 million for fiscal year 2021 compared to $6.7 million for fiscal year 2020, representing an increase of $3.7 million, or 55.8%. The increase was primarily driven by an increased level of operating capacities of our restaurants as the prior year was impacted by the temporary closure of our restaurants as mandated by local government restrictions in response to the COVID-19 pandemic, and the initial costs of kitchenware and other supplies and the ongoing costs associated with seven new restaurants opened during fiscal year 2021. As a percentage of sales, other costs increased to 16.1% in fiscal year 2021 from 14.8% in fiscal year 2020, primarily due to the initial costs of kitchenware and other supplies related to the opening of seven new restaurants in fiscal year 2021 compared to two new restaurants in fiscal year 2020.
General and administrative expenses. General and administrative expenses were $15.7 million for fiscal year 2021 compared to $12.1 million for fiscal year 2020, representing an increase of $3.6 million, or 30.1%. This increase in general and administrative expenses was primarily due to $2.5 million in compensation-related expenses, an accrued litigation settlement of $1.8 million, $0.4 million in recruiting expense, and $0.4 million in travel-related expenses, partially offset by a $0.9 million employee retention credit recognized under the CARES Act extension and a $0.7 million decrease in auditor, attorney and other costs as compared to fiscal year 2020, which was our first full year as a public company. As a percentage of sales, general and administrative expenses decreased to 24.2% in fiscal year 2021 from 26.7% in fiscal year 2020. The decrease in general and administrative expenses as a percentage of sales was primarily driven by the increase in sales due to the increased level of operating capacities of our restaurants, as the prior year sales were impacted by the temporary closure of our restaurants as mandated by local government restrictions in response to the COVID-19 pandemic.
Interest expense. Interest expense was $0.2 million for fiscal year 2021 and $0.1 million for fiscal year 2020.
Income tax expense. Income tax expense was $0.1 million for fiscal year 2021 compared to $1.2 million for fiscal year 2020. The decrease in income tax expense was primarily due to a $1.1 million non-cash charge to record a valuation allowance on our deferred tax assets during 2020. For further discussion of our income taxes, see “Note 10. 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, 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.
46
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 credit, 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 (loss) income 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, Adjusted EBITDA and Adjusted EBITDA margin for the fiscal years ended August 31, 2021 and August 31, 2020:
| Fiscal Years Ended August 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| (amounts in thousands) | ||||||||
| Net (loss) income | $ | (10,295 | ) | $ | (17,358 | ) | ||
| Interest (income) expense, net | 200 | (314 | ) | |||||
| Taxes | 106 | 1,174 | ||||||
| Depreciation and amortization | 4,522 | 3,160 | ||||||
| EBITDA | (5,467 | ) | (13,338 | ) | ||||
| Stock-based compensation expense(a) | 1,409 | 860 | ||||||
| Non-cash lease expense(b) | 1,212 | 1,233 | ||||||
| Employee retention credit(c) | (10,258 | ) | (1,750 | ) | ||||
| Executive transition costs(d) | 390 | — | ||||||
| Litigation accrual(e) | 1,780 | — | ||||||
| Adjusted EBITDA | (10,934 | ) | (12,995 | ) | ||||
| Adjusted EBITDA margin | (16.8 | )% | (28.8 | )% |
| Column 1 | Column 2 |
|---|---|
| (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, see “Note 6. Stock-based Compensation” to the financial statements in this Annual Report on Form 10-K. |
47
| Column 1 | Column 2 |
|---|---|
| (b) | Non-cash lease expense includes lease expense from the date of possession of our restaurants that did not require cash outlay in the respective periods |
| Column 1 | Column 2 |
|---|---|
| (c) | Employee retention credit includes refundable credits recognized under the provisions of the CARES Act and extension thereof. |
| Column 1 | Column 2 |
|---|---|
| (d) | Executive transition costs include severance and search fees associated with the transition of our Chief Financial Officer. |
| Column 1 | Column 2 |
|---|---|
| (e) | Litigation accrual includes an accrual related to a litigation claim. See “Note 9 - Commitments and Contingencies” to the financial statements included in this Annual Report on Form 10-K. |
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; asset disposals, closure costs and restaurant impairments; less corporate-level stock-based compensation expense and employee retention credit 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 this measure depicts 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 our comparable restaurant sales growth.
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 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 a substitutes for analysis of our results as reported under GAAP.
48
The following table reconciles operating income (loss) to Restaurant-level Operating Profit (Loss) and Restaurant-level Operating Profit (Loss) margin for the fiscal years ended August 31, 2021 and August 31, 2020:
| Fiscal Years Ended August 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2021 | 2021 | ||||||
| (amounts in thousands) | |||||||
| Operating (loss) income | $ | (9,989 | ) | $ | (16,498 | ) | |
| Depreciation and amortization | 4,522 | 3,160 | |||||
| Stock-based compensation expense(a) | 1,409 | 860 | |||||
| Pre-opening costs(b) | 873 | 972 | |||||
| Non-cash lease expense(c) | 1,212 | 1,233 | |||||
| Employee retention credit(d) | (10,258 | ) | (1,750 | ) | |||
| General and administrative expenses | 15,701 | 12,064 | |||||
| Corporate-level stock-based compensation and employee related credit included in general and administrative expenses | (301 | ) | (774 | ) | |||
| Restaurant-level operating profit (loss) | 3,169 | (733 | ) | ||||
| Operating loss margin | (15.4 | )% | (36.5 | )% | |||
| Restaurant-level operating profit (loss) margin | 4.9 | % | (1.6 | )% |
_______________
| Column 1 | Column 2 |
|---|---|
| (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, see “Note 6. Stock-based Compensation” to the financial statements in this Annual Report on Form 10-K. |
| Column 1 | Column 2 |
|---|---|
| (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. |
| Column 1 | Column 2 |
|---|---|
| (c) | Non-cash lease expense includes lease expense from the date of possession of our restaurants that did not require cash outlay in the respective periods |
| Column 1 | Column 2 |
|---|---|
| (d) | Employee retention credit includes refundable credits recognized under the provisions of the CARES Act and extension thereof. |
Average Unit Volumes (“AUVs”)
“Average Unit Volumes” or “AUVs” consist of the average annual sales of all restaurants that have been open for 18 months or longer at the end of the fiscal year presented due to new restaurants experiencing a period of higher sales upon opening. AUVs are calculated by dividing (x) annual sales for the fiscal year presented for all such restaurants by (y) the total number of restaurants in that base. We make fractional adjustments to sales for restaurants that were not open for the entire fiscal year presented (such as a restaurant closed for renovation) to annualize sales for such period of time. We did not make any adjustments for the temporary restaurant closures due to COVID-19 during fiscal years 2021 or 2020. This measurement allows management to assess changes in consumer spending patterns at our restaurants and the overall performance of our restaurant base.
The following table shows the AUVs for the fiscal years ended August 31, 2021 and August 31, 2020:
| Fiscal Years Ended August 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2021 | 2020 | ||||||
| (in thousands) | |||||||
| Average Unit Volumes | $ | 2,138 | $ | 1,942 |
49
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 fiscal years 2021 or 2020.
Measuring our comparable restaurant sales performance allows us to evaluate the performance of our existing restaurant base. Various factors impact comparable restaurant sales, including:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | government restrictions on indoor dining capacity due to COVID-19; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | consumer recognition of our brand and our ability to respond to changing consumer preferences; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | overall economic trends, particularly those related to consumer spending; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | our ability to operate restaurants effectively and efficiently to meet consumer expectations; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | pricing; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | guest traffic; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | per-guest spend and average check; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | marketing and promotional efforts; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | local competition; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | 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 performance is only one measure of how we evaluate our performance. The following table shows the comparable restaurant sales performance for the fiscal years ended August 31, 2021 and August 31, 2020:
| Fiscal Years Ended August 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| Comparable restaurant sales performance (%) | 16.2 | % | (37.8 | )% | ||||
| Comparable restaurant base | 20 | 14 |
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 fiscal years ended August 31, 2021 and August 31, 2020:
| Fiscal Years Ended August 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2021 | 2020 | ||||||
| Restaurant activity: | |||||||
| Beginning of period | 25 | 23 | |||||
| Openings | 7 | 2 | |||||
| End of period | 32 | 25 |
50
Subsequent to August 31, 2021, we opened one new restaurant in San Francisco, California.
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, cash proceeds from our initial public offering in fiscal 2019 and proceeds under our Revolving Credit Agreement. 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”.
On May 7, 2021, we filed a universal shelf registration statement on Form S-3 (the “Registration Statement”) with the SEC in accordance with the Securities Act of 1933, as amended (the “Securities Act”). The Registration Statement was declared effective on May 17, 2021 and registers Class A common stock, preferred stock, depositary shares, warrants, subscription rights, share purchase contracts, share purchase units, and any combination of the foregoing, for a maximum aggregate offering price of up to $50 million, which may be sold from time to time. The terms of any securities offered under the Registration Statement and intended use of proceeds were to be established at the times of the offerings and described in prospectus supplements filed with the SEC at the times of the offerings. The Registration Statement had a three-year term from May 17, 2021, the date of effectiveness. Upon completion of the follow-on offering described immediately below, no further offering capacity remains under the Registration Statement.
On July 23, 2021, we completed a follow-on offering and sold an aggregate of 1,265,000 shares of Class A common stock, including the exercise in full of the underwriters’ option to purchase 165,000 additional shares, at a price of $45.00 per share less an underwriting discount of $2.48 per share. The net proceeds were $53.5 million, after deducting underwriting discounts, commissions and offering expenses payable by us. For further discussion, please see “Note 1. Follow-on Offering”
As of August 31, 2021, we had no outstanding borrowings under the Revolving Credit Agreement and have $45.0 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 line of credit 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.
51
The following table summarizes our cash flows for the periods presented:
| Fiscal Years Ended August 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||||
| (amounts in thousands) | ||||||||
| Statement of Cash Flow Data: | ||||||||
| Net cash used in operating activities | $ | (7,146 | ) | $ | (13,004 | ) | ||
| Net cash used in investing activities | (14,668 | ) | (14,777 | ) | ||||
| Net cash provided by (used in) financing activities | 52,985 | (1,004 | ) |
Cash Flows Used in Operating Activities
Net cash used in operating activities during the fiscal year 2021 was $7.1 million, which results from net loss of $10.3 million, non-cash charges of $4.5 million for depreciation and amortization, $1.4 million for stock-based compensation, $2.7 million in noncash lease expense, and net cash outflows of $5.6 million from changes in operating assets and liabilities. The net cash outflows from changes in operating assets and liabilities were primarily the result of increases of $2.3 million for accrued expenses and other current liabilities and $0.9 million for accounts payable, and an increase of $10.9 million in prepaid expenses and other current assets. The increase in the above-mentioned items was primarily due to the timing of cash payments. The increase in prepaid expenses and other current assets was primarily due to the employee retention credit accrued under the CARES Act.
Net cash used in operating activities during the fiscal year 2020 was $13.0 million, which results from net loss of $17.4 million, non-cash charges of $3.2 million for depreciation and amortization, $0.9 million for stock-based compensation, $2.3 million in noncash lease expense, $1.1 million in deferred tax assets, and net cash outflows of $3.2 million from changes in operating assets and liabilities. The net cash outflows from changes in operating assets and liabilities were primarily the result of decreases of $1.0 million for accrued expenses and other current liabilities and $0.6 million for accounts payable, and an increase of $1.3 million in prepaid expenses and other current assets. The decrease in the above-mentioned items was primarily due to the timing of cash payments. The increase in prepaid expenses and other current assets was primarily due to the employee retention credit accrued under the CARES Act.
Cash Flows Used in Investing Activities
Net cash used in investing activities during the fiscal year 2021 was $14.7 million, primarily due to purchases of property and equipment. The increase in purchases of property and equipment in fiscal year 2021 is primarily related to capital expenditures for current and future restaurant openings, maintaining our existing restaurants and other projects.
Net cash used in investing activities during the fiscal year 2020 was $14.8 million, primarily due to purchases of property and equipment. The increase in purchases of property and equipment in fiscal year 2020 is primarily related to capital expenditures for current and future restaurant openings, renovations, maintaining our existing restaurants and other projects.
Cash Flows Provided by (Used in) Financing Activities
Net cash provided by financing activities during fiscal year 2021 was $53.0 million, primarily due to $53.5 million in net proceeds from the follow-on offering, offset by repayment of principal on financing leases of equipment.
52
Net cash used in financing activities during fiscal year 2020 was $1.0 million primarily due to repayment of principal on financing leases of equipment.
Contractual Obligations
As of August 31, 2021, we had $8.4 million in contractual obligations relating to purchase commitments for goods related to restaurant operations and commitments for construction of new restaurants. All purchase commitments are expected to be paid during the fiscal year 2022. For operating and finance lease obligations, see “Note 4. Leases” to the financial statements included in this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
As of August 31, 2021, we did not have any material off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our discussion and analysis of operating results and financial condition are based upon our financial statements. The preparation of our financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, expenses and related disclosures of contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.
Our critical accounting policies are those that materially affect our financial statements. Our critical accounting estimates are those that involve subjective or complex judgments by management. Although these estimates are based on management’s best knowledge of current events and actions that may impact us in the future, actual results may be materially different from the estimates. We believe the following impairment of long-lived assets estimate is affected by significant judgments and estimates used in the preparation of our financial statements and that the judgments and estimates are reasonable.
Operating and Finance Leases
We currently lease all of our restaurant locations, corporate offices, and some of the equipment used in our restaurants. At commencement of the lease, we determine the appropriate classification as an operating lease or a finance lease. All of our restaurant and office leases are classified as operating leases and most of our equipment leases are classified as finance leases.
Our office leases provide for fixed minimum rent payments. Most of our restaurants provide for fixed minimum rent payments and some require additional contingent rent payments based upon sales in excess of specified thresholds. When achievement of such sales thresholds is deemed probable, contingent rent is accrued in proportion to the sales recognized in the period. For operating leases that include free-rent periods and rent escalation clauses, we recognize rent expense based on the straight-line method. For the purpose of calculating rent expenses under the straight-line method, the lease term commences on the date we obtain control of the property. Lease incentives used to fund leasehold improvements are recognized when probable of being earned upon signing the lease and reduce the operating right-of-use asset related to the lease. These are amortized through the operating right-of-use asset as reductions of expense over the lease term. Restaurant lease expense is included in the occupancy and related expenses financial statement line item, while office lease expense is included in general and administrative expenses financial statement line item, on the accompanying financial statements.
Assets we acquired under finance lease arrangements are recorded at the lower of the present value of future minimum lease payments or fair value of the assets at the inception of the lease. Finance lease assets are amortized over the shorter of the useful life of the assets or the lease term, and the amortization expense is included in the depreciation and amortization financial statement line item on the accompanying financial statements.
53
Impairment of Long-Lived Assets
We assess potential impairments of our long-lived assets, which includes property and equipment and operating lease right-of-use assets, in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360—Property, Plant and Equipment. An impairment test is performed on an annual basis or whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. In determining the recoverability of the asset value, an analysis is performed at the individual restaurant level. Assets are grouped at the individual restaurant level for purposes of the impairment assessment because a restaurant represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of an asset group is measured by a comparison of the carrying amount of an asset group to its estimated undiscounted forecasted restaurant cash flows expected to be generated by the asset group. Factors considered by us in estimating future cash flows include but are not limited to: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of the acquired assets; and significant negative industry or economic trends. The estimated undiscounted forecasted cash flows include assumptions made by management regarding certain items such as revenue, food and beverage costs, labor costs, occupancy costs, and other restaurant operating costs and therefore are subject to uncertainty as our actual results may differ from our estimates. If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds the fair value of the asset.
The assumptions and estimated undiscounted forecasted cash flows used in the estimate have not changed materially during the year, and no impairment loss was recognized during fiscal years ended August 31, 2021 and August 31, 2020.
Jumpstart Our Business Startups Act of 2012
We qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.
Subject to certain conditions set forth in the JOBS Act, we are also eligible for and intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, (ii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We may take advantage of these exemptions until we are no longer an emerging growth company. We will continue to be an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which the market value of our Class A common stock that is held by non-affiliates exceeds $700 million as of June 30 of that fiscal year, (ii) the last day of the fiscal year in which we had total annual gross revenue of $1 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which we have issued more than $1 billion in non-convertible debt in the prior three-year period or (iv) the last day of the fiscal year following the fifth anniversary of the date of the completion of our IPO.
54