Kura Sushi USA, Inc. KRUS Form 10-Q filing Q2 FY2024

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

The accompanying notes are an integral part of these condensed financial statements.

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The accompanying notes are an integral part of these condensed financial statements.

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The accompanying notes are an integral part of these condensed financial statements.

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The accompanying notes are an integral part of these condensed financial statements.

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Kura Sushi USA, Inc.

Notes to Condensed Financial Statements

(Unaudited)

Note 1. Organization and Basis of Presentation

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 the Company refers to as the “Kura Experience.” Kura Sushi encourages healthy lifestyles by serving freshly prepared Japanese cuisine using high-quality ingredients that are free from artificial seasonings, sweeteners, colorings, and preservatives. Kura Sushi aims to make quality Japanese cuisine accessible to its guests across the United States through affordable prices and an inviting atmosphere. “Kura Sushi USA,” “Kura Sushi,” “Kura,” “our” and the “Company” refer to Kura Sushi USA, Inc. unless expressly indicated or the context otherwise requires.

Basis of Presentation

The accompanying unaudited condensed financial statements (the “Condensed Financial Statements”) have been prepared by the Company in accordance with generally accepted accounting principles in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. As such, these Condensed Financial Statements should be read in conjunction with the Company’s audited financial statements and accompanying notes included in its Annual Report on Form 10-K for the fiscal year ended August 31, 2023.

The accounting policies followed by the Company are set forth in Part II, Item 8, Note 2, Basis of Presentation and Summary of Significant Accounting Policies, of the Notes to Financial Statements included in the Company’s Annual Report on Form 10‑K for the fiscal year ended August 31, 2023. In the opinion of management, all adjustments necessary to fairly state the Condensed Financial Statements have been made. All such adjustments are of a normal, recurring nature. The results of operations for interim periods are not necessarily indicative of results to be expected for the fiscal year ending August 31, 2024 or for any other future annual or interim period.

Fiscal Year

The Company’s fiscal year begins on September 1 and ends on August 31, and references made to “fiscal year 2024” and “fiscal year 2023” refer to the Company’s fiscal years ending August 31, 2024 and ended August 31, 2023, respectively.

Use of Estimates

Preparing financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods presented.

Significant items subject to such estimates include asset retirement obligations, stock-based compensation, the useful lives of assets, the assessment of the recoverability of long-lived assets, and income taxes. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could differ materially from those estimates and assumptions.

Short-Term Investments

Short-term investments consist of certificates of deposits and Treasury bills. The Company considers all highly liquid investments with an original maturity date greater than three months but less than one year as short-term investments. The carrying value of the short-term investments is equivalent to their amortized cost basis. As of February 29, 2024 and August 31, 2023, short-term investments were $6.1 million and $8.5 million, respectively. The certificates of deposits are deposited at Federal Deposit Insurance Corporation (“FDIC”) insured banks. The certificates of deposits are in amounts of $250,000 and deposited in multiple banks to ensure that the entire deposit balance is eligible for FDIC insurance. Certificates of deposits and Treasury bills are classified as available-for-sale debt securities which are measured at fair value with unrealized gains or losses recorded in other comprehensive income (loss). As of February 29, 2024, the Company recorded $76 thousand in unrealized gains on short-term investments in accumulated other comprehensive income (loss), which consisted of $75 thousand in unrealized gains on Treasury bills and $1 thousand in unrealized gains on certificates of deposits. The Company reclassified $41 thousand out of accumulated other comprehensive income into earnings for the period related to maturities of certificates of deposits and a Treasury bill, which consisted

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of $41 thousand in realized gains on certificates of deposits and none in realized gains or losses on Treasury bills. The Company determines realized gains or losses on the available-for-sale debt securities on a specific identification method basis. Based on the evaluation of credit risk factors, the Company has concluded that an allowance for credit losses is unnecessary for its short-term investments.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company’s short-term investments consist of certificates of deposits and Treasury bills that are classified as available-for-sale debt securities which are measured at fair value with unrealized gains or losses recorded in other comprehensive income (loss).

Recently Issued Accounting Pronouncements

In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”, which requires greater disaggregation of income tax disclosures related to the income tax rate reconciliation and income taxes paid and effective for fiscal years beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued. The amendments should be applied on a prospective basis although retrospective application is permitted. The Company is currently evaluating the effects of this pronouncement on its financial statements and expects the update to result in additional disclosures.

In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” which improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The guidance in this update is effective for all public entities for fiscal years beginning after December 15, 2023, with early adoption permitted. The Company is currently evaluating the effects of this pronouncement on its financial statements and expects the update to result in additional disclosures.

Note 2. Balance Sheet Components

Accounts and Other Receivables

Property and Equipment - net

Depreciation and amortization expense for property and equipment was $2.8 million and $1.8 million for the three months ended February 29, 2024 and February 28, 2023, respectively, and was $5.4 million and $3.5 million for the six months ended February 29, 2024 and February 28, 2023, respectively.

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Note 3. Leases

The Company has operating and finance leases for its corporate office, restaurant locations, office equipment, kitchen equipment and automobiles. The Company’s finance leases are immaterial. The Company’s leases have remaining lease terms of less than 1 year to 20 years, some of which include options to extend the leases.

Lease related costs recognized in the statements of operations and comprehensive income (loss) are as follows:

Supplemental balance sheet information related to leases is as follows:

Operating Leases

Supplemental disclosures of cash flow information related to leases are as follows:

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As of February 29, 2024, the Company had an additional $44.8 million of operating leases related to restaurants for which the Company had not yet taken possession. Subsequent to February 29, 2024, the Company entered into one additional operating lease related to a restaurant for which the Company has not yet taken possession. The lease liabilities associated with the lease after February 29, 2024 is $4.4 million. The operating lease is expected to commence in fiscal year 2024, with a lease term of 15 years.

Maturities of lease liabilities, net of lease receivables, were as follows:

Note 4. Related Party Transactions

Kura Sushi, Inc. (“Kura Japan”) is the majority stockholder of the Company and is incorporated and headquartered in Japan. In August 2019, the Company entered into a Shared Services Agreement with Kura Japan, pursuant to which Kura Japan provides the Company with certain strategic, operational and other support services, including assigning certain employees to work for the Company as expatriates to provide support to the Company’s operations, sending its employees to the Company on a short-term basis to provide support for the opening of new restaurants or renovation of existing restaurants, and providing the Company with certain supplies, parts and equipment for use in the Company’s restaurants. In addition, the Company has agreed to continue to provide Kura Japan with certain translational support services and market research. In exchange for such services, supplies, parts and equipment, the parties pay fees to each other as set forth under the Shared Services Agreement. A right of setoff is not required; however, from time to time, either party will net settle transactions as needed. Purchases of administrative supplies, expatriate salaries and travel and other administrative expenses payable to Kura Japan are included in general and administrative expenses in the accompanying statements of operations and comprehensive income (loss). Purchases of equipment from Kura Japan are included in property and equipment in the accompanying balance sheets.

In August 2019, the Company entered into an Amended and Restated Exclusive License Agreement (the “License Agreement”) with Kura Japan. Pursuant to the License Agreement, the Company pays Kura Japan a royalty fee of 0.5% of the Company’s net sales in exchange for an exclusive, royalty-bearing license for the use of certain of Kura Japan’s intellectual property rights, including, but not limited to, Kura Japan’s trademarks for “Kura Sushi,” “Mr. Fresh” and “Kura Revolving Sushi Bar,” and patents for a food management system and the Mr. Fresh protective dome, among other intellectual property rights necessary to continue operation of the Company’s restaurants. Royalty payments to Kura Japan are included in other costs at the restaurant level in the accompanying statements of operations and comprehensive income (loss).

On April 10, 2020, the Company and Kura Japan entered into a Revolving Credit Agreement, as amended, to provide the Company a revolving credit line of $45.0 million (the “Revolving Credit Agreement”). For additional information, see “Note 6. Debt.”

Balances with Kura Japan are as follows:

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Reimbursements and other payments by the Company to Kura Japan were as follows:

Reimbursements by Kura Japan to the Company were $65 thousand and $26 thousand for the three months ended February 29, 2024 and February 28, 2023, respectively and were $222 thousand and $60 thousand for the six months ended February 29, 2024 and February 28, 2023, respectively. The reimbursements were primarily for directors and officers liability insurance, travel, professional fees and other administrative expenses.

Note 5. Stock-based Compensation

The following table summarizes the stock option activity under the Company’s 2018 Incentive Compensation Plan, as amended and restated (the “Stock Incentive Plan”):

The following table summarizes the restricted stock unit (“RSU”) activity under the Stock Incentive Plan:

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The total stock-based compensation recognized under the Stock Incentive Plan in the statements of operations and comprehensive income (loss) is as follows:

Note 6. Debt

On April 10, 2020, the Company and Kura Japan entered into a Revolving Credit Agreement, as amended, establishing a $45.0 million revolving credit line for the Company. The maturity date for each advance is 60 months from the date of disbursement and the last day of the period of availability for advances is April 10, 2025. The Revolving Credit Note under the Revolving Credit Agreement has an interest rate for advances fixed at 130% of the Annual Compounding Long-Term Applicable Federal Rate (“AFR”) on the date such advance is made. There are no financial covenants under the Revolving Credit Agreement with which the Company must comply.

As of February 29, 2024 and August 31, 2023, the Company had no outstanding balance and $45.0 million of availability remaining under the Revolving Credit Agreement. For additional information, see “Note 4. Related Party Transactions.”

Note 7. Income (Loss) Per Share

The net income (loss) per share attributable to common stockholders is allocated based on the contractual participation rights of the Class A common stock and Class B common stock as if the income for the year had been distributed. As the liquidation and dividend rights for Class A and Class B common stock are identical, the net loss attributable to all common stockholders is allocated on a proportionate basis.

The following table sets forth the computation of the Company’s basic and diluted net income (loss) per share:

The Company computes basic income (loss) per common share using net income (loss) and the weighted average number of common shares outstanding during the period, and computes diluted income (loss) per common share using net income (loss) and the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include dilutive outstanding employee stock options and restricted stock units.

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For the three and six months ended February 29, 2024 and February 28, 2023, there were 678 thousand and 768 thousand shares of common stock subject to outstanding employee stock options and RSUs that were excluded from the calculation of diluted loss per share because their inclusion would have been anti-dilutive.

Note 8. Commitments and Contingencies

The Company is involved from time to time in various legal proceedings that arise in the ordinary course of business, including but not limited to commercial disputes, environmental matters, employee related claims, intellectual property disputes and litigation in connection with transactions, including acquisitions and divestitures. In the opinion of management, the Company does not believe that such litigation, claims, and administrative proceedings will have a material adverse effect on its business, financial position, results of operations or cash flows. However, a significant increase in the number of these claims or an increase in amounts owing under successful claims, including the putative class action referenced above, could materially and adversely affect its business, financial condition, results of operations or cash flows. The Company records a liability when a loss is considered probable, and the amount can be reasonably estimated.

Note 9. Income Taxes

The Company recorded an income tax expense of $50 thousand and $15 thousand for the three months ended February 29, 2024 and February 28, 2023, respectively and income tax expense of $88 thousand and $25 thousand for the six months ended February 29, 2024 and February 28, 2023, respectively. The Company’s effective tax rates for the three and six months ended February 29, 2024 substantially differed from the federal statutory tax rate of 21% primarily due to a valuation allowance for the Company’s deferred tax assets.

The Company continually monitors and performs an assessment of the realizability of its deferred tax assets, including an analysis of factors such as future taxable income, reversal of existing taxable temporary differences, and tax planning strategies. In assessing the need for a valuation allowance, the Company considered both positive and negative evidence related to the likelihood of realization of deferred tax assets using a “more likely than not” standard. In making such assessment, more weight was given to evidence that could be objectively verified, including recent cumulative losses. Based on the Company’s review of this evidence, management determined that a full valuation allowance against all of the Company’s net deferred tax assets at February 29, 2024 was appropriate.

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Note 10. Fair Value Measurements

The following table sets forth the Company’s assets measured at fair value on a recurring basis as of February 29, 2024.

The Company’s cash and cash equivalents include cash on hand, deposits in banks, certificates of deposits and money market funds. Due to their short-term nature, the carrying amounts reported in the accompanying balance sheets approximate the fair value of cash and cash equivalents. The fair value of our certificates of deposits are considered using Level 2 inputs of the fair value hierarchy. Level 2 inputs are based on market data that include factors such as interest rates, market and pricing activity and other market-based valuation techniques. The Company determines realized gains or losses on the available-for-sale debt securities on a specific identification method basis.

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Item 2. 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 our unaudited financial statements and the related notes included in this Quarterly Report on Form 10-Q and with the audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2023 (the “Annual Report”).

In addition to historical information, the following discussion and analysis contains forward-looking statements, such as statements about our plans, objectives, expectations, and intentions, which are based on current expectations and that involve risks, uncertainties and assumptions as set forth and described in the “Special Note Regarding Forward-Looking Statements” and “Risk Factors” sections of the Annual Report. You should review those sections in our Annual Report for a discussion of important factors, including the continuing development of our business and other factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in this Quarterly Report on Form 10-Q.

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

Overview

Kura Sushi USA 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 the six months ended February 29, 2024, we opened nine restaurants and expanded our restaurant base to 59 restaurants in seventeen states and Washington, DC. We expect to open 13 to 14 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 on a dollar basis 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 labor, repairs and maintenance, restaurant supplies and energy costs. We have been able to offset these inflationary and other cost pressures to some extent through various actions, such as increasing menu prices, productivity improvements, and supply chain initiatives. Although inflation has steadied so far in 2024, inflation may continue to affect our results in the near future.

Key Financial Definitions

Sales. Sales represent sales of food and beverages in restaurants. Restaurant sales in a given period are directly impacted by the number of restaurants we operate and comparable restaurant sales performance.

Food and beverage costs. Food and beverage costs are variable in nature, change with sales volume and are influenced by menu mix and subject to increases or decreases based on fluctuations in commodity costs. Other important factors causing fluctuations in food and beverage costs include seasonality and restaurant-level management of food waste. Food and beverage costs are a substantial expense and are expected to grow proportionally as our sales grow.

Labor and related expenses. Labor and related expenses include all restaurant-level management and hourly labor costs, including wages, employee benefits and payroll taxes. Similar to the food and beverage costs that we incur, labor and related expenses are expected to grow proportionally as our sales grow. Factors that influence fluctuations in our labor and related expenses include minimum wage and payroll tax legislation, the frequency and severity of workers’ compensation claims, healthcare costs and the performance of our restaurants.

Occupancy and related expenses. Occupancy 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, which range from three to 20 years.

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Other costs. Other costs include credit card processing fees, repairs and maintenance, restaurant-level advertising and promotions, restaurant supplies, royalty payments to Kura Japan, stock-based compensation for restaurant-level employees, utilities and other restaurant-level expenses.

General and administrative expenses. General and administrative expenses include expenses associated with corporate and regional supervision functions that support the operations of existing restaurants and development of new restaurants, including compensation and benefits, travel expenses, stock-based compensation for corporate-level employees, legal and professional fees, marketing costs, information systems, corporate office rent and other related corporate costs. General and administrative expenses are expected to grow as our unit base grows.

Interest 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 money market funds.

Income tax expense (benefit). Provision for income taxes represents federal, state and local current and deferred income tax expense (benefit).

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Results of Operations

The following tables present selected comparative results of operations for the three and six months ended February 29, 2024 and February 28, 2023. Our financial results for these periods are not necessarily indicative of the financial results that we will achieve in future periods. Certain totals for the tables below may not recalculate or sum to 100% due to rounding.

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Three Months Ended February 29, 2024 Compared to Three Months Ended February 28, 2023

Sales. Sales were $57.3 million for the three months ended February 29, 2024 compared to $43.9 million for the three months ended February 28, 2023, representing an increase of $13.4 million, or 30.4%.The increase in sales was primarily driven by the sales resulting from fourteen new restaurants opened subsequent to February 28, 2023, as well as increases in menu prices during the same period. Comparable restaurant sales increased 3.0% for the three months ended February 29, 2024, as compared to the three months ended February 28, 2023.

Food and beverage costs. Food and beverage costs were $16.9 million for the three months ended February 29, 2024 compared to $13.2 million for the three months ended February 28, 2023, representing an increase of $3.7 million, or 27.9%. The increase in food and beverage costs was primarily driven by costs associated with sales from fourteen new restaurants opened subsequent to February 28, 2023. As a percentage of sales, food and beverage costs decreased to 29.6% in the three months ended February 29, 2024 as compared to 30.1% in the three months ended February 28, 2023, primarily due to increases in menu prices and supply chain initiatives.

Labor and related costs. Labor and related costs were $18.8 million for the three months ended February 29, 2024 compared to $13.9 million for the three months ended February 28, 2023, representing an increase of $4.9 million, or 35.5%. This increase in labor and related costs was primarily driven by additional labor costs incurred from fourteen new restaurants opened subsequent to February 28, 2023. As a percentage of sales, labor and related costs increased to 32.8% in the three months ended February 29, 2024 as compared to 31.5% in the three months ended February 28, 2023. The increase in cost as a percentage of sales was primarily due to increases in wage rates, higher pre-opening labor costs and the impact of adverse weather conditions.

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Occupancy and related expenses. Occupancy and related expenses were $4.0 million for the three months ended February 29, 2024 compared to $3.1 million for the three months ended February 28, 2023, representing an increase of $0.9 million, or 29.0%. The increase was primarily a result of additional lease expense related to the opening of fourteen new restaurants subsequent to February 28, 2023. As a percentage of sales, occupancy and related expenses remained consistent at 6.9% in the three months ended February 29, 2024 as compared to 7.0% in the three months ended February 28, 2023.

Depreciation and amortization expenses. Depreciation and amortization expenses incurred as part of restaurant operating costs were $2.7 million for the three months ended February 29, 2024 compared to $1.8 million for the three months ended February 28, 2023, representing an increase of $0.9 million, or 53.2%. The increase consists of depreciation of property and equipment related to the fourteen new restaurants that opened subsequent to February 28, 2023. As a percentage of sales, depreciation and amortization expenses at the restaurant level increased to 4.7% in the three months ended February 29, 2024 as compared to 4.0% in the three months ended February 28, 2023. Depreciation and amortization expenses incurred at the corporate level were $0.1 million for both the three months ended February 29, 2024 and February 28, 2023, and as a percentage of sales were both 0.2%, respectively.

Other costs. Other costs were $8.4 million for the three months ended February 29, 2024 compared to $5.9 million for the three months ended February 28, 2023, representing an increase of $2.5 million, or 42.4%. The increase was primarily driven by an increase in costs related to the fourteen new restaurants that opened subsequent to February 28, 2023. As a percentage of sales, other costs increased to 14.6% in the three months ended February 29, 2024 as compared to 13.3% in the three months ended February 28, 2023, primarily driven by advertising and promotion, repairs and maintenance and travel expenses.

General and administrative expenses. General and administrative expenses were $8.2 million for the three months ended February 29, 2024 compared to $7.1 million for the three months ended February 28, 2023, representing an increase of $1.1 million, or 14.7%. This increase was primarily due to increases in compensation-related costs of $0.5 million due to additional headcount, $0.4 million in professional fees and $0.1 million in travel expenses. As a percentage of sales, general and administrative expenses decreased to 14.3% in the three months ended February 29, 2024 as compared to 16.2% in the three months ended February 28, 2023, primarily driven by leverage benefits from the increase in sales.

Interest expense. Interest expense was $12 thousand for the three months ended February 29, 2024 compared to $14 thousand for the three months ended February 28, 2023, respectively.

Interest income. Interest income was $754 thousand for the three months ended February 29, 2024 compared to $63 thousand for the three months ended February 28, 2023. 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 $50 thousand for the three months ended February 29, 2024 compared to an income tax expense of $15 thousand for the three months ended February 28, 2023. For further discussion of our income taxes, see “Note 9. Income Taxes” in the Notes to Condensed Financial Statements.

Six Months Ended February 29, 2024 Compared to Six Months Ended February 28, 2023

Sales. Sales were $108.8 million for the six months ended February 29, 2024 compared to $83.3 million for the six months ended February 28, 2023, representing an increase of $25.5 million, or 30.6%. The increase in sales was primarily driven by the sales resulting from fourteen new restaurants opened subsequent to February 28, 2023, as well as increases in menu prices during the same period. Comparable restaurant sales increased 3.5% for the six months ended February 29, 2024, as compared to the six months ended February 28, 2023.

Food and beverage costs. Food and beverage costs were $32.3 million for the six months ended February 29, 2024 compared to $25.7 million for the six months ended February 28, 2023, representing an increase of $6.6 million, or 25.8%. The increase in food and beverage costs was primarily driven by costs associated with sales from fourteen new restaurants opened subsequent to February 28, 2023. As a percentage of sales, food and beverage costs decreased to 29.7% in the six months ended February 29, 2024 as compared to 30.8% in the six months ended February 28, 2023, primarily due to increases in menu prices and supply chain initiatives.

Labor and related costs. Labor and related costs were $35.0 million for the six months ended February 29, 2024 compared to $26.4 million for the six months ended February 28, 2023, representing an increase of $8.6 million, or 32.7%. This increase in labor and related costs was primarily driven by additional labor costs incurred from fourteen new restaurants opened subsequent to February 28, 2023. As a percentage of sales, labor and related costs increased to 32.2% in the six months ended February 29, 2024 as compared to 31.7% in the six months ended February 28, 2023. The increase in cost as a percentage of sales was primarily due to increases in wage rates and higher pre-opening labor costs.

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Occupancy and related expenses. Occupancy and related expenses were $7.9 million for the six months ended February 29, 2024 compared to $6.0 million for the six months ended February 28, 2023, representing an increase of $1.9 million, or 32.1%. The increase was primarily a result of additional lease expense related to the opening of fourteen new restaurants opened subsequent to February 28, 2023. As a percentage of sales, occupancy and related expenses remained consistent at 7.2% in the six months ended February 29, 2024, compared to 7.1% in the six months ended February 28, 2023.

Depreciation and amortization expenses. Depreciation and amortization expenses incurred as part of restaurant operating costs were $5.2 million for the six months ended February 29, 2024 compared to $3.3 million for the six months ended February 28, 2023, representing an increase of $1.9 million, or 55.1%. The increase consists of depreciation of property and equipment related to fourteen new restaurants opened subsequent to February 28, 2023. As a percentage of sales, depreciation and amortization expenses at the restaurant level increased to 4.8% for the six months ended February 29, 2024 as compared to 4.0% for the six months ended February 28, 2023. Depreciation and amortization expenses incurred at the corporate level were $0.2 million for the six months ended February 29, 2024 and February 28, 2023, and as a percentage of sales were both 0.2%, respectively.

Other costs. Other costs were $15.9 million for the six months ended February 29, 2024 compared to $11.2 million for the six months ended February 28, 2023, representing an increase of $4.7 million, or 42.5%. The increase was primarily driven by an increase in costs related to fourteen new restaurants opened subsequent to February 28, 2023. As a percentage of sales, other costs increased to 14.7% in the six months ended February 29, 2024 from 13.4% in the six months ended February 28, 2023, primarily driven by advertising and promotion and travel expenses.

General and administrative expenses. General and administrative expenses were $16.8 million for the six months ended February 29, 2024 compared to $13.8 million for the six months ended February 28, 2023, representing an increase of $3.0 million, or 21.9%. This increase was primarily due to increases in compensation related costs of $1.5 million due to additional headcount, $0.9 million in professional fees, $0.3 million in travel expenses and $0.2 million in legal costs. As a percentage of sales, general and administrative expenses decreased to 15.4% in the six months ended February 29, 2024 from 16.5% in the six months ended February 28, 2023, primarily driven by leverage benefits from the increase in sales.

Interest expense. Interest expense was $20 thousand for the six months ended February 29, 2024 compared to $30 thousand for the six months ended February 28, 2023.

Interest income. Interest income was $1.6 million for the six months ended February 29, 2024 compared to $0.2 million for the six months ended February 28, 2023. 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 $88 thousand for the six months ended February 29, 2024 compared to $25 thousand for the six months ended February 28, 2023. For further discussion of our income taxes, see “Note 9. Income Taxes” in the Notes to Condensed Financial Statements.

Key Performance Indicators

In assessing the performance of our business, we consider a variety of financial and performance measures. The key measures for determining how our business is performing include sales, EBITDA, Adjusted EBITDA, Restaurant-level Operating Profit, Restaurant-level Operating Profit margin, comparable restaurant sales 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 litigation accrual 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

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operating results. However, these measures may not provide a complete understanding of the operating results of the Company as a whole and such measures should be reviewed in conjunction with our GAAP financial results.

We believe that the use of EBITDA, Adjusted EBITDA and Adjusted EBITDA margin provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial measures with those of comparable companies, which may present similar non-GAAP financial measures to investors. However, you should be aware when evaluating EBITDA, Adjusted EBITDA and Adjusted EBITDA margin that in the future we may incur expenses similar to those excluded when calculating these measures. In addition, our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our computation of Adjusted EBITDA and Adjusted EBITDA margin may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted EBITDA and Adjusted EBITDA margin in the same fashion.

Because of these limitations, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA, Adjusted EBITDA and Adjusted EBITDA margin on a supplemental basis. You should review the reconciliation of net income (loss) to EBITDA, Adjusted EBITDA and Adjusted EBITDA margin below and not rely on any single financial measure to evaluate our business.

The following table reconciles net loss to EBITDA and Adjusted EBITDA:

(a)

Stock-based compensation expense includes non-cash stock-based compensation, which is comprised of restaurant-level stock-based compensation included in other costs and of corporate-level stock-based compensation included in general and administrative expenses in the statements of operations and comprehensive income (loss). For further details of stock-based compensation, see “Note 5. Stock-based Compensation” in the notes to condensed financial statements included in this Quarterly Report on Form 10-Q.

(b)

Non-cash lease expense includes lease expense from the date of possession of our restaurants that did not require cash outlay in the respective periods.

(c)

Litigation accrual includes an accrual related to a litigation claim.

Restaurant-level Operating Profit and Restaurant-level Operating Profit 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 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 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 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

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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 that 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 substitutes for analysis of our results as reported under GAAP.

The following table reconciles operating loss to Restaurant-level Operating Profit and Restaurant-level Operating Profit margin:

(a)

Stock-based compensation expense includes non-cash stock-based compensation, which is comprised of restaurant-level stock-based compensation included in other costs and of corporate-level stock-based compensation included in general and administrative expenses in the statements of operations and comprehensive income (loss). For further details of stock-based compensation, see “Note 5. Stock-based Compensation” in the notes to condensed financial statements included in this Quarterly Report on Form 10-Q.

(b)

Pre-opening costs consist of labor costs and travel expenses for new employees and trainers during the training period, recruitment fees, legal fees, cash-based lease expenses incurred between the date of possession and the 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.

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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. For restaurants that were temporarily closed for consecutive days, which primarily occurs during renovations, the comparative period was also adjusted.

Measuring our comparable restaurant sales performance allows us to evaluate the performance of our existing restaurant base. Various factors impact comparable restaurant sales, including:

• consumer recognition of our brand and our ability to respond to changing consumer preferences;
• overall economic trends, particularly those related to consumer spending;
• our ability to operate restaurants effectively and efficiently to meet consumer expectations;
• pricing;
• guest traffic;
• per-guest spend and average check;
• marketing and promotional efforts;
• local competition; and
• opening of new restaurants in the vicinity of existing locations.

Since opening new restaurants will be a significant component of our sales growth, comparable restaurant sales performance is only one measure of how we evaluate our performance. The following table shows the comparable restaurant sales performance:

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:

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 will be used for general corporate purposes, including capital expenditures, working capital, and

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other business purposes. We made no payments to directors, officers or persons owning 10% or more of our common stock or to their associates, or to our affiliates.

During the six months ended February 29, 2024, we had no borrowings under the Revolving Credit Agreement and have $45.0 million of availability remaining. As of February 29, 2024, we did not have any material off-balance sheet arrangements.

The significant components of our working capital are liquid assets such as cash, 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, cash equivalents, short-term investments and availability under our existing Revolving Credit Agreement, will be sufficient to fund our lease obligations, capital expenditures and working capital needs for at least the next 12 months.

Summary of Cash Flows

Our primary sources of liquidity and cash flows are operating cash flows, cash on hand, cash equivalents and short-term investments. We use this to fund investing expenditures for new restaurant openings, reinvest in our existing restaurants, and 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:

Cash Flows Provided by Operating Activities

Net cash provided by operating activities during the six months ended February 29, 2024 was $6.2 million, primarily due to a net loss of $3.0 million, non-cash charges of $5.4 million for depreciation and amortization, $2.0 million for stock-based compensation, and $2.3 million in non-cash lease expense, and net cash outflows of $0.3 million from changes in operating assets and liabilities.

Net cash provided by operating activities during the six months ended February 28, 2023 was $1.7 million, which results from a net loss of $3.1 million, non-cash charges of $3.5 million for depreciation and amortization, $1.6 million for stock-based compensation, and $1.8 million in non-cash lease expense, and net cash outflows of $2.1 million from changes in operating assets and liabilities.

Cash Flows Used in Investing Activities

Net cash used in investing activities during the six months ended February 29, 2024 was $20.6 million, primarily due to $3.5 million in purchases of short-term investments, $22.8 million in purchases of property and equipment and $0.1 million in purchases of liquor licenses offset by $5.9 million of redemption of short-term investments. The increase in purchases of property and equipment in the six months ended February 29, 2024 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 six months ended February 28, 2023 was $15.4 million, primarily due to $14.3 million in purchases of property and equipment and $0.8 million in purchases of liquor licenses. The purchases of property and equipment in the six months ended February 28, 2023 is primarily related to capital expenditures for current and future restaurant openings and renovations, maintaining our existing restaurants and other projects.

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Cash Flows Provided by Financing Activities

Net cash provided by financing activities during the six months ended February 29, 2024 was $1.5 million and is primarily due to $1.9 million of proceeds from exercise of stock options offset by $0.4 million in taxes paid on vested stock options and RSUs.

Net cash provided by financing activities during the six months ended February 28, 2023 was $0.2 million and is primarily due $0.6 million of proceeds from the exercise of stock options offset by $0.3 million in repayments of principal on finance leases.

Material Cash Requirements

As of February 29, 2024, we had $10.1 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 3. Leases” in the Notes to Condensed Financial Statements included in this Quarterly Report on Form 10-Q.

Recent Accounting Pronouncement

For a description of our recently adopted accounting pronouncement, including the respective date of adoption and expected effect on our results of operations and financial condition, see “Part I, Item 1, Note 1. Organization and Basis of Presentation” of the Notes to Condensed Financial Statements included in this Quarterly Report on Form 10-Q.

Critical Accounting Policies and Estimates

Our discussion and analysis of operating results and financial condition are based on our financial statements. Preparing 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 assessment of potential impairments of long-lived assets is affected by significant judgments and estimates used in the preparation of our financial statements and that the judgments and estimates are reasonable.

There have been no material changes in our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10‑K for the fiscal year ended August 31, 2023. Please refer to “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” of our Annual Report on Form 10‑K for the fiscal year ended August 31, 2023 for a discussion of our critical accounting policies and estimates.

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 initial public offering, or August 31, 2024.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes to our market risk during the six months ended February 29, 2024. For a discussion of our exposure to market risk, refer to our market risk disclosures set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of our 2023 Form 10-K.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Our management carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q.

Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

For a description of our legal proceedings, see Part I, Item 1, Note 8 – Commitments and Contingencies, of the Notes to Condensed Financial Statements of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

Item 1A. Risk Factors.

A description of the risk factors associated with our business is contained in the “Risk Factors” section of our Annual Report on Form 10-K for our fiscal year ended August 31, 2023. There have been no material changes to our Risk Factors as therein previously reported.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

During the six months ended February 29, 2024, no director or officer of the Company, adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement, as each term is defined in Item 408(a) of Regulation S-K.

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Item 6. Exhibits.

Exhibit Number Description

31.1* Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2* Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. 101.SCH Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents (104) Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)

• Filed herewith.

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