KURA SUSHI USA, INC. (KRUS) FY 2023 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 2023 to fiscal year 2022. For a discussion of our results of operations comparing fiscal year 2022 to fiscal year 2021 and a discussion of our cash flows for fiscal year 2021, 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, 2022, filed with the SEC on November 10, 2022.
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
During fiscal year 2023, we opened ten restaurants and expanded our restaurant base to 50 restaurants in fifteen states and Washington, DC as of the end of fiscal year 2023. We expect to open 11 to 13 new restaurants in fiscal year 2024 and therefore, we expect our revenue and restaurant operating costs to increase in fiscal year 2024. We also expect our general and administrative expenses to increase in fiscal 2024 to support the growth of the company and the compliance requirements of no longer being an emerging growth company.
We have experienced inflationary pressures affecting our operations in certain areas such as food and beverage costs, labor costs, construction costs and energy costs. We have been able to offset to some extent these inflationary and other cost pressures through various actions, such as increasing menu prices, productivity improvements, and supply chain initiatives, however, we expect these inflationary and other cost pressures to level out in fiscal year 2024.
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 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 grows. Factors that influence
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fluctuations in our labor and related expenses include minimum wage and payroll tax legislation, the frequency and severity of workers’ compensation claims, healthcare costs and the performance of our restaurants.
Occupancy and related expenses. Occupancy and related expenses include rent for all restaurant locations and related taxes.
Depreciation and amortization expenses. Depreciation and amortization expenses are periodic non-cash charges that consist of depreciation of fixed assets, including equipment and capitalized leasehold improvements. Depreciation is determined using the straight-line method over the assets’ estimated useful lives, ranging from three to 20 years.
Other costs. Other costs include utilities, repairs and maintenance, credit card fees, royalty payments to Kura Japan, stock-based compensation expenses for restaurant-level employees and other restaurant-level expenses.
General and administrative expenses. General and administrative expenses include expenses associated with corporate and regional supervision functions that support the operations of existing restaurants and the 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.
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Results of Operations
The following table presents selected comparative results of operations from our audited financial statements for the fiscal year ended August 31, 2023 compared to the fiscal year ended August 31, 2022. 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 due to rounding.
| Fiscal Years Ended August 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ Change | % Change | ||||||||||||||
| (dollar amounts in thousands) | |||||||||||||||||
| Sales | $ | 187,429 | $ | 141,089 | $ | 46,340 | 32.8 | % | |||||||||
| Restaurant operating costs: | |||||||||||||||||
| Food and beverage costs | 56,631 | 42,510 | 14,121 | 33.2 | |||||||||||||
| Labor and related costs | 56,547 | 43,997 | 12,550 | 28.5 | |||||||||||||
| Occupancy and related expenses | 13,141 | 9,917 | 3,224 | 32.5 | |||||||||||||
| Depreciation and amortization expenses | 7,422 | 5,258 | 2,164 | 41.2 | |||||||||||||
| Other costs | 24,911 | 17,517 | 7,394 | 42.2 | |||||||||||||
| Total restaurant operating costs | 158,652 | 119,199 | 39,453 | 33.1 | |||||||||||||
| General and administrative expenses | 28,035 | 22,289 | 5,746 | 25.8 | |||||||||||||
| Depreciation and amortization expenses | 410 | 355 | 55 | 15.5 | |||||||||||||
| Total operating expenses | 187,097 | 141,843 | 45,254 | 31.9 | |||||||||||||
| Operating income (loss) | 332 | (754 | ) | 1,086 | (144.0 | ) | |||||||||||
| Other expense (income): | |||||||||||||||||
| Interest expense | 69 | 87 | (18 | ) | (20.7 | ) | |||||||||||
| Interest income | (1,472 | ) | (151 | ) | (1,321 | ) | 874.8 | ||||||||||
| Income (loss) before income taxes | 1,735 | (690 | ) | 2,425 | (351.4 | ) | |||||||||||
| Income tax expense | 233 | 74 | 159 | 214.9 | |||||||||||||
| Net income (loss) | $ | 1,502 | $ | (764 | ) | $ | 2,266 | (296.6 | ) | % |
| Fiscal Years Ended August 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | ||||||||
| (as a percentage of sales) | |||||||||
| Sales | 100.0 | % | 100.0 | % | |||||
| Restaurant operating costs | |||||||||
| Food and beverage costs | 30.2 | 30.1 | |||||||
| Labor and related costs | 30.2 | 31.2 | |||||||
| Occupancy and related expenses | 7.0 | 7.0 | |||||||
| Depreciation and amortization expenses | 4.0 | 3.7 | |||||||
| Other costs | 13.3 | 12.4 | |||||||
| Total restaurant operating costs | 84.6 | 84.5 | |||||||
| General and administrative expenses | 15.0 | 15.8 | |||||||
| Depreciation and amortization expenses | 0.2 | 0.3 | |||||||
| Total operating expenses | 99.8 | 100.5 | |||||||
| Operating income (loss) | 0.2 | (0.5 | ) | ||||||
| Other expense (income): | |||||||||
| Interest expense | 0.0 | 0.1 | |||||||
| Interest income | (0.8 | ) | (0.1 | ) | |||||
| Income (loss) before income taxes | 0.9 | (0.5 | ) | ||||||
| Income tax expense | 0.1 | 0.1 | |||||||
| Net income (loss) | 0.8 | % | (0.5 | ) | % |
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Fiscal Year Ended August 31, 2023 Compared to Fiscal Year Ended August 31, 2022
Sales. Sales were $187.4 million for fiscal year 2023 compared to $141.1 million for fiscal year 2022, representing an increase of $46.3 million, or 32.8%. Comparable restaurant sales increased 9.5% for fiscal year 2023 as compared to fiscal year 2022. AUV was $4.3 million for fiscal year 2023 compared to $3.8 million for fiscal year 2022. The increase in sales was primarily driven by the sales resulting from ten new restaurants opened during fiscal year 2023, as well as increases in menu prices during the same period.
Food and beverage costs. Food and beverage costs were $56.6 million for fiscal year 2023 compared to $42.5 million for fiscal year 2022, representing an increase of $14.1 million, or 33.2%. This increase was primarily driven by costs associated with sales from ten new restaurants opened during fiscal year 2023. As a percentage of sales, food and beverage costs remained consistent at 30.2% in fiscal year 2023, as compared to 30.1% in fiscal year 2022.
Labor and related costs. Labor and related costs were $56.5 million for fiscal year 2023 compared to $44.0 million for fiscal year 2022, representing an increase of $12.5 million, or 28.5%. This increase in labor and related costs was primarily driven by additional labor costs incurred from ten new restaurants opened during fiscal year 2023. As a percentage of sales, labor and related costs decreased to 30.2% in fiscal year 2023, compared to 31.2% in fiscal year 2022. The decrease in cost as a percentage of sales was primarily due to increases in menu prices and technological initiatives, partially offset by increases in wage rates.
Occupancy and related expenses. Occupancy and related expenses were $13.1 million for fiscal year 2023 compared to $9.9 million for fiscal year 2022, representing an increase of $3.2 million, or 32.5%. This increase was primarily a result of additional lease expense incurred with respect to ten new restaurants that opened during fiscal year 2023. As a percentage of sales, occupancy and other operating expenses remained consistent at 7.0% in fiscal year 2023 and fiscal year 2022.
Depreciation and amortization expenses. Depreciation and amortization expenses incurred as part of restaurant operating costs were $7.4 million for fiscal year 2023 compared to $5.3 million for fiscal year 2022, representing an increase of $2.1 million or 41.2%. This increase was primarily due to the depreciation of property and equipment related to the opening of ten new restaurants in fiscal year 2023. As a percentage of sales, depreciation and amortization expenses at the restaurant-level increased to 4.0% in fiscal year 2023 as compared to 3.7% in fiscal year 2022. Depreciation and amortization expenses incurred at the corporate level were $0.4 million for fiscal year 2023 as compared to $0.3 million for fiscal year 2022, and as a percentage of sales were 0.2% and 0.3%, respectively.
Other costs. Other costs were $24.9 million for fiscal year 2023 compared to $17.5 million for fiscal year 2022, representing an increase of $7.4 million, or 42.2%. The increase was primarily driven by an increase in costs related to ten new restaurants opened in fiscal year 2023. As a percentage of sales, other costs increased to 13.3% in fiscal year 2023 from 12.4% in fiscal year 2022, primarily driven by general inflationary pressures on advertising costs, repair and maintenance fees, utilities and restaurant supplies.
General and administrative expenses. General and administrative expenses were $28.0 million for fiscal year 2023 compared to $22.3 million for fiscal year 2022, representing an increase of $5.7 million, or 25.8%. This increase was primarily due to increases in compensation related costs of $4.9 million due to additional headcount, $0.5 million in travel expenses and $0.3 million in professional fees. As a percentage of sales, general and administrative expenses decreased to 15.0% in fiscal year 2023 from 15.8% in fiscal year 2022, primarily driven by leverage benefits from the increase in sales.
Interest expense. Interest expense was $69 thousand for fiscal year 2023 and $87 thousand for fiscal year 2022.
Interest income. Interest income was $1.5 million for fiscal year 2023 and $0.2 million for fiscal year 2022. The increase was primarily driven by investing our net cash proceeds from our $64.3 million follow-on offering completed in April 2023 into cash and cash equivalents and short-term investments.
Income tax expense. Income tax expense was $0.2 million for fiscal year 2023 and $0.1 million for fiscal year 2022. For further discussion of our income taxes, see “Note 12 — Income Taxes.”
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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 and comprehensive income (loss). 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 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.
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The following table reconciles net income (loss) to EBITDA, Adjusted EBITDA and Adjusted EBITDA margin for the fiscal years ended August 31, 2023 and August 31, 2022:
| Fiscal Years Ended August 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||||
| (amounts in thousands) | ||||||||
| Net income (loss) | $ | 1,502 | $ | (764 | ) | |||
| Interest (income) expense, net | (1,403 | ) | (64 | ) | ||||
| Taxes | 233 | 74 | ||||||
| Depreciation and amortization | 7,832 | 5,613 | ||||||
| EBITDA | 8,164 | 4,859 | ||||||
| Stock-based compensation expense(a) | 3,550 | 2,409 | ||||||
| Non-cash lease expense(b) | 2,628 | 1,712 | ||||||
| Executive transition costs(c) | — | 175 | ||||||
| Adjusted EBITDA | 14,342 | 9,155 | ||||||
| Adjusted EBITDA margin | 7.7 | % | 6.5 | % |
_______________
(a)
Stock-based compensation expense includes non-cash stock-based compensation, which is comprised of restaurant-level stock-based compensation included in other costs in the statements of operations and comprehensive income (loss) and of corporate-level stock-based compensation included in general and administrative expenses in the statements of operations and comprehensive income (loss), see “Note 6 — Stock-based Compensation” to the financial statements in this Annual Report on Form 10-K.
(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.
(c)
Executive transition costs include severance and search fees associated with the transition of our Chief Financial Officer.
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
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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 substitutes for analysis of our results as reported under GAAP.
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, 2023 and August 31, 2022:
| Fiscal Years Ended August 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||||
| (amounts in thousands) | ||||||||
| Operating income (loss) | $ | 332 | $ | (754 | ) | |||
| Depreciation and amortization | 7,832 | 5,613 | ||||||
| Stock-based compensation expense(a) | 3,550 | 2,409 | ||||||
| Pre-opening costs(b) | 1,730 | 784 | ||||||
| Non-cash lease expense(c) | 2,628 | 1,712 | ||||||
| General and administrative expenses | 28,035 | 22,289 | ||||||
| Corporate-level stock-based compensation included in general and administrative expenses | (3,044 | ) | (2,112 | ) | ||||
| Restaurant-level operating profit | 41,063 | 29,941 | ||||||
| Operating income (loss) margin | 0.2 | % | (0.5 | )% | ||||
| Restaurant-level operating profit margin | 21.9 | % | 21.2 | % |
_______________
(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 comprehensive income (loss) and of corporate-level stock-based compensation included in general and administrative expenses in the statements of operations and comprehensive income (loss), see “Note 6 — Stock-based Compensation” to the financial statements in this Annual Report on Form 10-K.
(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.
(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
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. This measurement allows management to assess changes in consumer spending patterns at our restaurants and the overall performance of our restaurant base.
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The following table shows the AUVs for the fiscal years ended August 31, 2023 and August 31, 2022:
| Fiscal Years Ended August 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2023 | 2022 | ||||||
| (in thousands) | |||||||
| Average Unit Volumes | $ | 4,281 | $ | 3,825 |
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.
Measuring our comparable restaurant sales performance allows us to evaluate the performance of our existing restaurant base. Various factors impact comparable restaurant sales, including:
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consumer recognition of our brand and our ability to respond to changing consumer preferences;
•
overall economic trends, particularly those related to consumer spending;
•
our ability to operate restaurants effectively and efficiently to meet consumer expectations;
•
pricing;
•
guest traffic;
•
per-guest spend and average check;
•
marketing and promotional efforts;
•
local competition; and
•
opening of new restaurants in the vicinity of existing locations.
Since opening new restaurants will be a significant component of our sales growth, comparable restaurant sales 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, 2023 and August 31, 2022:
| Fiscal Years Ended August 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||||
| Comparable restaurant sales performance (%) | 9.5 | % | 81.9 | % | ||||
| Comparable restaurant base | 30 | 25 |
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, 2023 and August 31, 2022:
| Fiscal Years Ended August 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2023 | 2022 | ||||||
| Restaurant activity: | |||||||
| Beginning of period | 40 | 32 | |||||
| Openings | 10 | 8 | |||||
| End of period | 50 | 40 |
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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.
On April 13, 2023, we completed an underwritten public offering of common stock pursuant to our universal shelf registration statement on Form S-3, selling 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 the price of $54.00 per share less an underwriting discount of $2.70 per share. We received aggregate net proceeds of $64.3 million after deducting the underwriting discounts and commissions and offering expenses payable by us. The proceeds are to be used for general corporate purposes, including capital expenditures, working capital, and other business purposes. No payments were made by us to directors, officers or persons owning 10% or more of our common stock or to their associates, or to our affiliates.
As of August 31, 2023, we had no outstanding borrowings under the Revolving Credit Agreement and have $45.0 million of availability remaining. As of August 31, 2023, we did not have any material off-balance sheet arrangements.
The significant components of our working capital are liquid assets such as cash and cash equivalents, receivables and short-term investments 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, short-term investments 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, cash on hand and short-term investments. We use this to fund investing expenditures for new restaurant openings, reinvest in our existing restaurants, and increase our working capital. Our working capital position benefits from the fact that we generally collect cash from sales to guests the same day, or in the case of credit or debit card transactions, within several days of the related sale, and we typically have at least 30 days to pay our vendors.
The following table summarizes our cash flows for the periods presented:
| Fiscal Years Ended August 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||||
| (amounts in thousands) | ||||||||
| Statement of Cash Flow Data: | ||||||||
| Net cash provided by operating activities | $ | 18,064 | $ | 23,694 | ||||
| Net cash used in investing activities | (49,903 | ) | (28,172 | ) | ||||
| Net cash provided by (used in) financing activities | 65,754 | (170 | ) |
Cash Flows Provided by Operating Activities
Net cash provided by operating activities during the fiscal year 2023 was $18.1 million, which primarily results from net income of $1.5 million, non-cash charges of $7.8 million for depreciation and amortization, $3.6 million for stock-based compensation, $3.7 million in noncash lease expense, and net cash inflows of $1.3 million from changes in operating assets and liabilities. The net cash inflows from changes in operating assets and liabilities were primarily the result of increases of $1.7 million of accounts payable and $1.6 million for salary and wages payable, $0.3 million in sales tax payable offset by decreases of $1.2 million in prepaid expenses and other current assets, $0.6 million of inventory, $0.3 million in accrued expenses and other current liabilities and $0.4 million of accounts and other receivables.
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Net cash provided by operating activities during the fiscal year 2022 was $23.7 million, which results from net loss of $0.8 million, non-cash charges of $5.6 million for depreciation and amortization, $2.4 million for stock-based compensation, $3.2 million in noncash lease expense, and net cash inflows of $13.2 million from changes in operating assets and liabilities. The net cash inflows from changes in operating assets and liabilities were primarily the result of increases of $0.9 million for accrued expenses and other current liabilities and $1.3 million for salary and wages payable, as well as an increase of $11.5 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 cash inflows from prepaid expenses and other current assets was primarily due to employee retention credit refunds received under the CARES Act.
Cash Flows Used in Investing Activities
Net cash used in investing activities during the fiscal year 2023 was $49.9 million, primarily due to $9.3 million in purchases of short-term investments, $39.1 million in purchases of property and equipment and $1.7 million in purchases of liquor licenses offset by $0.8 million of redemption of short-term investments. The increase in purchases of property and equipment in fiscal year 2023 is primarily related to capital expenditures for current and future restaurant openings and renovations, maintaining our existing restaurants and other projects.
Net cash used in investing activities during the fiscal year 2022 was $28.2 million, primarily due to purchases of property and equipment. The increase in purchases of property and equipment in fiscal year 2022 is primarily related to capital expenditures for current and future restaurant openings, maintaining our existing restaurants and other projects.
Cash Flows Provided by (Used in) Financing Activities
Net cash provided by financing activities during fiscal year 2023 was $65.8 million, primarily due to aggregate net proceeds of $64.3 million after deducting the underwriting discounts and commissions and offering expenses payable, and $2.0 million of proceeds from exercise of stock options offset by $0.5 million in repayments of principal on finance leases.
Net cash used in financing activities during fiscal year 2022 was $0.2 million, primarily due to $1.0 million repayment of principal on financing leases of equipment, $0.2 million taxes paid on vested restricted stock awards, partially offset by $1.0 million proceeds from stock option exercises.
Material Cash Requirements
As of August 31, 2023, we had $9.8 million in contractual obligations relating to the construction of new restaurants and purchase commitments for goods related to restaurant operations. All contractual obligations are expected to be paid during the next 12 months utilizing cash and cash equivalents on hand and provided by operations. For operating and finance lease obligations, see “Note 4 — Leases” to the financial statements included in this Annual Report on Form 10-K.
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.
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Operating Leases
We currently lease all of our restaurant locations and our corporate office. At the commencement of a 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.
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 such sales thresholds are deemed probable, contingent rent is accrued in proportion to the sales recognized in the period. We recognize rent expense based on the straight-line method for operating leases that include free-rent periods and rent escalation clauses. 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 incentives 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.
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.
There were no impairment tests performed for the fiscal years ended August 31, 2023 or August 31, 2022 and no impairment loss was recognized during fiscal years ended August 31, 2023 and August 31, 2022.
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.
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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 our annual gross revenues exceed $1.235 billion 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, or August 31, 2024.
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