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As filed with the Securities and Exchange Commission on July 3, 2019.

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

KURA SUSHI USA, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   5812   26-3808434

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

17932 Sky Park Circle, Suite H

Irvine, California 92614

(949) 748-1786

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Koji Shinohara

Chief Financial Officer, Treasurer and Secretary

Kura Sushi USA, Inc.

17932 Sky Park Circle, Suite H

Irvine, California 92614

(949) 748-1786

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies of all communications, including communications sent to agent for service, should be sent to:

 

Hiroki Suyama, Esq.

Aaron A. Seamon, Esq.

Squire Patton Boggs (US) LLP

555 South Flower Street, 31F

Los Angeles, California 90071

(213) 624-2500

 

Anna Pinedo, Esq.

Jennifer Carlson, Esq.

Mayer Brown LLP

1221 Avenue of the Americas

New York, New York 10020

(212) 506-2500

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this Registration Statement

 

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”) check the following box.  ☐

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☒

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum Aggregate
Offering Price (1)(2)

 

Amount of

Registration Fee

Class A common stock, par value $0.001 per share

  $57,500,000   $6,969

 

 

(1)

Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act.

(2)

Includes Class A common stock issuable upon exercise of the underwriters’ option to purchase additional Class A common stock.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act, or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

 

Preliminary Prospectus    Subject to Completion, dated July 3, 2019

 

 

                 Shares

 

LOGO

KURA SUSHI USA, INC.

CLASS A COMMON STOCK

$             Per Share

This is the initial public offering of our Class A common stock. We are offering                  shares of our Class A common stock. We anticipate that the initial public offering price will be between $        and $        per share.

Prior to this offering, there has been no public market for our Class A common stock. We have applied to list our Class A common stock on the Nasdaq Global Market under the symbol “KRUS.”

Following this offering, we will have two classes of outstanding common stock, Class A common stock and Class B common stock. Holders of our Class A common stock are entitled to one vote per share while holders of our Class B common stock are entitled to 10 votes per share, and all such holders will vote together as a single class except as otherwise required by applicable law. Each share of Class B common stock is convertible into one share of Class A common stock at the option of the holder, upon transfer or in certain specified circumstances. The beneficial owner of 100% of our Class B common stock is our parent company, Kura Sushi, Inc. Upon completion of this offering, we will be controlled by Kura Sushi, Inc., which will hold approximately     % of the combined voting power of our outstanding Class A common stock and Class B common stock.

We are an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and as such, we have elected to take advantage of certain reduced public company reporting requirements for this prospectus and future filings. In addition, following this offering, we will be a “controlled company” within the meaning of the corporate governance rules of the Nasdaq Stock Market.

Investing in our Class  A common stock involves a high degree of risk. See Risk Factors beginning on page 17 of this prospectus.

 

      Per Share      Total

Initial public offering price

   $                  $            

Underwriting discount (1)

   $      $

Proceeds, before expenses, to Kura Sushi USA, Inc.

   $      $

 

 

 

(1)

The underwriters will also be reimbursed for certain expenses incurred in the offering. “Underwriting” contains additional information regarding underwriter compensation.

To the extent that the underwriters sell more than                  shares of Class A common stock, the underwriters have the option for a period of 30 days to purchase up to an additional                  shares of Class A common stock from us at the initial public offering price less the underwriting discount.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of Class A common stock on                     , 2019.

 

 

 

 

BMO Capital Markets   Stephens Inc.

 

BTIG   Roth Capital Partners

 

Maxim Group LLC

 

Prospectus dated                     , 2019


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PROSPECTUS SUMMARY

     1  

RISK FACTORS

     17  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     42  

USE OF PROCEEDS

     43  

DIVIDEND POLICY

     44  

CAPITALIZATION

     45  

DILUTION

     47  

SELECTED FINANCIAL DATA

     49  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     54  

BUSINESS

     76  

MANAGEMENT

     92  

EXECUTIVE COMPENSATION

     98  

PRINCIPAL STOCKHOLDERS

     106  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     108  

DESCRIPTION OF CAPITAL STOCK

     110  

SHARES ELIGIBLE FOR FUTURE SALE

     113  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     116  

UNDERWRITING

     121  

LEGAL MATTERS

     128  

EXPERTS

     129  

WHERE YOU CAN FIND MORE INFORMATION

     130  

INDEX TO FINANCIAL STATEMENTS

     F-1  

You should rely only on the information contained in this prospectus and any free writing prospectus we may authorize to be delivered or made available to you. We have not, and the underwriters have not, authorized anyone to provide you with additional or different information from that contained in this prospectus and any free writing prospectus we have authorized. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of Class A common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the Class A common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. “Risk Factors” and “Special Note Regarding Forward-Looking Statements” contain additional information regarding these risks.

For investors outside the United States: We have not, and the underwriters have not, done anything that would permit this offering, or possession or distribution of this prospectus, in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of Class A common stock and the distribution of this prospectus outside of the United States. See “Underwriting.”

 

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DEALER PROSPECTUS DELIVERY OBLIGATION

Through and including                     , 2019 (the 25 th day after the date of the prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions.

MARKET AND INDUSTRY DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate is based on information from independent industry and research organizations, other third-party sources (including industry publications, surveys and forecasts), and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and third-party sources, as well data from internal research, and are based on assumptions made by us upon reviewing such data and our knowledge of such industry and markets which we believe to be reasonable. Although we believe the data from these third-party sources are reliable as of their respective dates, neither we nor the underwriters have independently verified the accuracy or completeness of this information. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us. In addition, certain market and industry data has been derived from research and “whitespace” modeling prepared for us in January 2019 by Buxton Company, a leading real estate analytics firm, which we refer to herein as “Buxton.” We engaged Buxton to prepare a “whitespace” analysis to identify the Company’s potential new unit expansion opportunity in the continental United States, which excludes Alaska and Hawaii.

TRADEMARKS, SERVICE MARKS AND TRADE NAMES

We own or have rights to various trademarks, service marks and trade names that we use in connection with the operation of our business. This prospectus may also contain trademarks, service marks and trade names of third parties, which are the property of their respective owners. Our use or display of third parties’ trademarks, service marks, trade names or food products in this prospectus is not intended to imply a relationship with, or endorsement or sponsorship by, these other parties. Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus may appear without the ® , TM or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks, service marks and trade names.

BASIS OF PRESENTATION

Certain monetary amounts, percentages and other figures included in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.

In this prospectus, “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. “Kura Japan,” “parent company” and “Parent” refer to Kura Sushi, Inc., our parent company and sole holder of all outstanding Class A common stock and Class B common stock. Kura Sushi, Inc. was formerly known as Kura Corporation prior to effecting a name change to Kura Sushi, Inc. on May 1, 2019. We refer to our Class A

 

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common stock as “common stock,” unless the context otherwise requires. We sometimes refer to our Class A common stock and Class B common stock as “equity interests” when described on an aggregate basis. On all matters to be voted on by stockholders, holders of our Class A common stock are entitled to one vote per share while holders of our Class B common stock are entitled to 10 votes per share. Each share of Class B common stock is convertible into one share of Class A common stock at the option of the holder, upon transfer or in certain specified circumstances. With the exception of voting rights and conversion rights, holders of Class A and Class B common stock will have identical rights. The terms “yen” and “¥” refers to Japanese Yen, the lawful currency of Japan, and the terms “dollar” or “$” refer to U.S. dollars, the lawful currency of the United States. Unless otherwise indicated, U.S. dollar translations of yen amounts presented in this prospectus are translated using the rate of 111.00 yen to $1.00, based on the central rate as reported by the Bank of Japan on August 31, 2018.

The graphic of the map of the continental United States in the inside front cover of this prospectus shows our restaurants open as of May 31, 2019 and it does not reflect the opening of the Las Vegas restaurant which occurred on July 2, 2019. Unless otherwise indicated in this prospectus, our “current” restaurant count excludes the Las Vegas restaurant opening.

The Company’s fiscal year begins on September 1 and ends on August 31. We refer to our fiscal years as “fiscal year 2016,” “fiscal year 2017” and “fiscal year 2018.” Our financial statements are prepared in U.S. dollars and in accordance with accounting principles generally accepted in the United States (“GAAP”).

NON-GAAP FINANCIAL MEASURES

Certain financial measures presented in this prospectus, such as EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin are not recognized under GAAP. We define these terms as follows:

 

   

“EBITDA” is defined as net income before interest, income taxes and depreciation and amortization.

 

   

“Adjusted EBITDA” is defined as EBITDA plus stock-based compensation expense, pre-opening rent expense, pre-opening costs, non-cash rent expense and asset disposals, closure costs and restaurant impairments.

 

   

“Restaurant-level Contribution” is defined as operating income plus depreciation and amortization, stock-based compensation expense, pre-opening rent expense, pre-opening costs, non-cash rent expense, asset disposals, closure costs and restaurant impairments, general and administrative expenses, less corporate-level stock-based compensation expense. “Restaurant-level Contribution margin” is defined as Restaurant-level Contribution divided by sales.

EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin are intended as supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. We are presenting EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin because we believe that they provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results. Additionally, we present Restaurant-level Contribution because it excludes the impact of general and administrative expenses which are not incurred at the restaurant-level. We also use Restaurant-level Contribution to measure operating performance and returns from opening new restaurants.

We believe that the use of EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the Company’s financial measures with those of comparable companies, which may present similar non-GAAP financial measures to investors.

 

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However, you should be aware that Restaurant-level Contribution and Restaurant-level Contribution margin are financial measures which are not indicative of overall results for the Company, and Restaurant-level Contribution and Restaurant-level Contribution margin do not accrue directly to the benefit of stockholders because of corporate-level expenses excluded from such measures. In addition, you should be aware when evaluating EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin 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 EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin in the same fashion.

Because of these limitations, EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution 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, Restaurant-level Contribution and Restaurant-level Contribution margin on a supplemental basis. For a reconciliation of net income to EBITDA and Adjusted EBITDA and a reconciliation of operating income to Restaurant-level Contribution, see “Summary Historical Financial and Operating Data.”

ADDITIONAL FINANCIAL MEASURES AND OTHER DATA

 

   

“Average Unit Volumes” or “AUVs” consist of the average annualized sales of all restaurants that have been open for 18 months or longer at the end of the accounting period presented. AUVs are calculated by dividing (x) annualized sales for the trailing 12 month period 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 trailing 12 month period (e.g., a restaurant is closed for renovation) to annualize sales for the period of time. This measurement allows management to assess changes in consumer spending patterns at our restaurants and the overall performance of our restaurant base. The AUVs measure is calculated excluding the Laguna Hills, California restaurant, which closed in fiscal year 2018.

Typically, our new restaurants experience a “honeymoon” period of higher sales upon opening. For restaurants that opened in fiscal year 2017, the “honeymoon” period of higher sales upon opening ranged up to six months. In new markets, the length of time before average sales for new restaurants stabilize is less predictable as a result of our limited knowledge of these markets and consumers’ limited awareness of our brand. We assess the “honeymoon” period of newly opened restaurants by comparing year-over-year monthly sales to determine when in the prior year (i.e., the first twelve months after a restaurant opens) the “honeymoon” period ended. While the “honeymoon” period for our three restaurant openings in fiscal year 2017 ranged up to six months, our four restaurant openings in fiscal year 2018 have not operated for a sufficient period to allow us to determine the “honeymoon” period for such restaurants.

 

   

“Comparable restaurant sales growth” refers to the change in year-over-year sales for the comparable restaurant base. We include restaurants in the comparable restaurant base that have been in operation for at least 18 months prior to the start of the accounting period presented, 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. Growth in comparable restaurant sales represents the percent change in sales from the same period in the prior year for the comparable restaurant base. For the fiscal years ended August 31, 2017 and August 31, 2018, there were six and eight restaurants, respectively, in our comparable restaurant base. For the nine months ended May 31, 2018 and May 31, 2019, there were seven and ten restaurants,

 

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respectively, in our comparable restaurant base. This measure highlights performance of these mature restaurants, as the impact of new restaurant openings is excluded. The small number of restaurants in our comparable restaurant base may cause this measure to fluctuate and be unpredictable. The comparable restaurant sales growth measure is calculated excluding the Laguna Hills, California restaurant, which closed in fiscal year 2018.

 

   

“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.

 

   

“Average check” is defined as (x) dine-in sales, divided by (y) restaurant guest count for a given period of time. This is an indicator which management uses to analyze the dollars spent per guest in our restaurants and aids management in identifying trends in guest preferences, the effectiveness of menu changes and price increases.

 

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PROSPECTUS SUMMARY

This summary highlights certain information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and financial statements and related notes included elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our Class A common stock. You should read this entire prospectus carefully, especially the matters set forth under the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this prospectus and our financial statements and related notes appearing elsewhere in this prospectus, before making an investment decision. All figures are in U.S. dollars, unless otherwise stated.

Overview of Kura Sushi USA

Kura Revolving Sushi Bar is a fast-growing technology-enabled Japanese restaurant concept. We offer a distinctive dining experience which we refer to as the “Kura Experience.” Kura Sushi USA was established in 2008 as a subsidiary of Kura Japan, a Japan-based revolving sushi chain with over 400 restaurants. Kura Sushi USA opened its first restaurant in Irvine, California in 2009, and we believe we are the largest revolving sushi chain in the United States. We were ranked #15 based on sales growth in Restaurant Business Online’s Future 50 list in 2018.

The Kura Experience is built on the combination of our authentic Japanese cuisine and engaging revolving sushi service model. We offer our guests a small plates menu featuring over 140 freshly prepared items rooted in our philosophy of using old-world techniques and ingredients that are free from artificial seasonings, sweeteners, colorings, and preservatives. We believe our revolving sushi service model delights our guests by creating an exciting atmosphere where guests feel a sense of discovery and by allowing them to control the variety, portioning, check size and pace of their dining experience.

Our guest booths and bar seats share common elements that help deliver the Kura Experience: access to the revolving and express conveyor belts, on-demand ordering screen, plate slot, and the Bikkura-Pon rewards machine. Guests can begin their dining experience as soon as they are seated by selecting plates, which feature a spiral green design, from the revolving conveyor belt. The revolving conveyor belt carries a curated selection of beautifully crafted plates that include sushi rolls, nigiri, and desserts. To deliver a fresh and safe experience for our guests, all of the food on the revolving conveyor belt is protected by the proprietary Mr. Fresh dome, which pops open when a guest lifts the plate. To simplify the guest experience, all plates on the revolving conveyor belt are the same price within a restaurant and are priced below $3.00. Guests can also place orders through the tableside on-demand ordering screen which provides guests access to our full food menu, including items such as gyoza, tempura, soups, ramen, ojyu boxes, and desserts. On-demand orders are delivered directly from our kitchen to the guests’ table via the express belt. Items on the on-demand ordering menu range from $2.25 to $6.90. For every five spiral green plates placed into the plate slot, the tableside touch screen plays a short anime video, and for every 15 plates, our proprietary tableside Bikkura-Pon rewards machine dispenses a toy to reward our guests’ dining achievement. We believe the Kura Experience delivers a highly differentiated dining experience to our guests.

In addition to the guest-facing technology, we employ technology throughout our restaurants to drive efficiencies in operations and costs. Our use of conveyor belts to serve our guests allows us to minimize the number of servers in our restaurants. In our kitchens, we use automated equipment and systems such as sushi robots, RFID readers, robotic arms, and food replenishment algorithms to reduce labor and food costs. The technology in our kitchens has been honed over the course of our parent company’s 35-year history of operating revolving sushi restaurants.

The success of our restaurants demonstrates that the Kura Experience resonates with our guests. Based on our initial success, we have expanded to new markets and, as of May 31, 2019, we operate 21 high-volume



 

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restaurants in California, Texas, Georgia, and Illinois. Based on a whitespace analysis prepared for us by Buxton, we believe we have a long-term total restaurant potential in the United States for over 290 restaurants, and we aim to achieve a 20% average annual restaurant growth rate over the next five years. See “Business—Our Growth Strategies” and “Business—Site Development and Expansion” for additional information regarding our growth strategies.

 

LOGO

Our success has resulted in strong financial results as illustrated by the following:

 

   

From fiscal year 2017 to fiscal year 2018, our sales grew 38.9% to $51.7 million, operating income grew 81.5% to $1.9 million, and net income grew 146.4% to $1.7 million. Comparing the nine months ended May 31, 2018 to the nine months ended May 31, 2019, our sales grew 22.6% to $45.5 million, operating income decreased 9.1% to $0.7 million, and net income decreased 29.0% to $0.5 million;

 

   

From fiscal year 2017 to fiscal year 2018, our Restaurant-level Contribution grew 60.4% to $10.4 million and Adjusted EBITDA grew 45.0% to $4.5 million. Comparing the nine months ended May 31, 2018 to the nine months ended May 31, 2019, our Restaurant-level Contribution grew 23.7% to $8.7 million and Adjusted EBITDA grew 31.6% to $3.4 million. For a reconciliation of net income to Adjusted EBITDA and a reconciliation of operating income to Restaurant-level Contribution, see “Summary Historical Financial and Operating Data”;

 

   

In fiscal year 2018, we generated AUVs of approximately $3.5 million, operating profit margin of 3.6%, and Restaurant-level Contribution margin of 20.1%. For the nine months ended May 31, 2019, we generated operating profit margin of 1.5% and Restaurant-level Contribution margin of 19.2%; and

 

   

We have achieved positive comparable restaurant sales growth in ten out of the last eleven quarters ending in the third fiscal quarter of 2019.

Our Corporate Mission

Our corporate mission is to encourage healthy lifestyles by serving freshly prepared authentic Japanese cuisine using high-quality ingredients that are free from artificial seasonings, sweeteners, colorings, and preservatives. Our commitment to our mission extends beyond our main ingredients of seafood and vegetables, and includes soy sauce, wasabi, and all other food ingredients. We aim to make quality Japanese cuisine accessible to our guests across the United States through affordable prices and an inviting atmosphere.

Our Strengths

Authentic Japanese Cuisine—A Tribute to Our Roots . We provide our guests with an experience that is uniquely Japanese and is based on the legacy built by our Japanese parent company, Kura Japan. Kura Japan



 

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opened its first revolving sushi restaurant in 1984 and was among the pioneers of the revolving sushi restaurant model, transforming what was previously a luxury item into an accessible everyday option. To this day, all plates at Kura Japan’s Japan-based restaurants are priced at ¥100 (approximately $0.90). Kura Japan’s commitment to traditional recipes, high-quality ingredients, consistent innovation, and putting the guest at the core of its mission allowed it to successfully expand to over 400 restaurants.

At Kura Sushi USA, we are proud to continue our parent company’s tradition by bringing the Kura Experience to the United States, which we believe distinguishes us within the marketplace. Our various sushi items are made fresh using high-quality fish and certified 100% organic rice. Our vinegar, made using old-world methods, is sourced from Japan. Our broths are made in-house daily using ingredients that impart complex umami flavors. To complement our sushi selection, we offer a variety of side dishes and desserts including gyoza, tempura, soups, ramen, ojyu boxes, mochi, and cheesecake. In our commitment to our Japanese heritage and traditional cooking methods, we have prepared our food without artificial sweeteners, seasonings, colorings, or preservatives since our formation.

“Revolutionary” and Engaging Dining Experience . The Kura Experience is a multi-sensory experience for our guests. We believe the sight of our beautifully crafted cuisine weaving through our restaurants, the motion of dishes zipping by tables on the express belt, the sound of anime videos playing on tableside touch screens, the thrill of being rewarded for achieving dining milestones, and the flavor of authentic Japanese dishes create a highly entertaining and engaging environment for our guests. Our revolving conveyor belt service model offers a steady stream of dishes and continuous service which we believe builds anticipation and a sense of discovery among our guests. In addition, items ordered on our on-demand screen arrive on the express belt in a theatrical fashion, which we believe our guests find entertaining and also adds to the sense of constant motion in our restaurants. Our menu of small plates allows our guests to sample a variety of dishes, and with over 140 items on our menu, there is always something new to enjoy when our guests return. We also seek to delight and reward our guests for achieving dining milestones with short anime videos and a rotating selection of small toys from our Bikkura-Pon rewards machines. We have signed licensing agreements with VIZ Media, LLC ( Naruto Shippuden ) and tokidoki to use their popular characters and brands in our Bikkura-Pon rewards machines and will continue to seek licensing agreements with other iconic brands in the future. We believe our Bikkura-Pon rewards machines encourage guests to consume a greater quantity of plates as they work towards achieving the next dining milestone. Our continuous service model creates an atmosphere of active participation where food is at the center of the conversation, and we believe it also creates a memorable and shareable experience for our guests.

Compelling Value Proposition with Broad Appeal . Our service model allows our guests to control their dining experience, from food variety to time spent on a meal, and from portions to check size. With instant access to food on the revolving conveyor belt, our guests can drop in for a quick meal or stay longer for a more relaxed dining experience. Our guests can enjoy over 140 high-quality dishes at affordable prices as a result of our efficient kitchen operations and low front-of-house labor needs. The majority of our menu items is priced below $3.00, which appeals to guests with appetites and budgets both large and small, and our average check was $18.37 in fiscal year 2018 and $19.14 for the nine months ended May 31, 2019. We believe that our authentic approach to a popular cuisine and unique and flexible dining experience appeal to a wide range of demographics. In addition, we believe our commitment to high-quality and non-artificial ingredients in our food is at the forefront of current dining trends as consumers continue to seek healthy and natural food options.



 

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Highly Attractive Restaurant-Level Economics . At Kura Sushi USA, we leverage the disciplined operational expertise honed over the 35-year history of Kura Japan to help us achieve strong restaurant-level economics. We believe our results are driven by our high-volume restaurants, intelligent and efficient operations, and flexible real estate model:

 

   

High-Volume Restaurants: We believe the combination of authentic Japanese cuisine at an accessible price point and a service model that promotes discovery, fun, and optionality for guests creates a highly differentiated dining experience that drives traffic and robust sales in our restaurants;

 

   

Intelligent and Efficient Operations: Our revolving conveyor belt, express belt, and touch screen menu enable self-service dining and reduce our need for service staff. In addition, our use of sushi robots, vinegar mixing machines, and automatic rice washers in our kitchens eliminates the need for highly trained and expensive sushi chefs. The proprietary technology deployed in our kitchens allows us to collect real-time data on food consumption and guest preferences which we analyze to further optimize our restaurants and enhance the dining experience; and

 

   

Flexible Real Estate: We have a flexible restaurant model which has allowed us to open restaurants as small as 1,600 square feet and as large as 5,600 square feet. We believe this allows us to maximize our sales per square foot.

For fiscal year 2018, our operating income was $1.9 million and our net income was $1.7 million. For the nine months ended May 31, 2019, our operating income was $0.7 million and our net income was $0.5 million. In the same period, we had an operating profit margin of 1.5% and Restaurant-level Contribution margin of 19.2% of sales. On average, we estimate that our restaurants require a cash build-out cost of approximately $1.5 million per restaurant.

Experienced Management Team Dedicated to Kura’s Values and Growth . Our team is led by experienced and passionate senior management who are committed to our mission. Our President and Chief Executive Officer and our operational leaders have an average tenure of 18 years in the restaurant industry and with our parent company. We are led by our President and Chief Executive Officer, Hajime “Jimmy” Uba. Mr. Uba joined Kura Japan in 2000 as a store manager candidate. He was promoted to Kura Japan’s corporate headquarters and helped grow the business from approximately 30 restaurants to 180 restaurants in Japan. During his tenure with our parent company, Mr. Uba led various strategic initiatives including concept development, real estate selection, and menu development and pricing. Mr. Uba was selected by Kura Japan to lead the business’ expansion into the United States. Our Chief Operating Officer, Manabu Kamei, has been with the Kura brand for 21 years, including his time at Kura Japan where he is also currently a Board Member. Mr. Kamei played an instrumental role in establishing processes at Kura Japan to accelerate the pace of new restaurant development and streamline restaurant operations. Mssrs. Uba and Kamei lead a team of talented professionals with deep financial, operational, culinary, and real estate experience.

Our Growth Strategies

Pursue New Restaurant Development. We have pursued a disciplined new unit growth strategy during our 11 years of operation in the United States. Having expanded our concept and operating model across varying restaurant sizes and geographies, we plan to leverage our expertise opening new restaurants to fill in existing markets and expand into new geographies with the same careful planning as we have demonstrated in the past. The overall Asian restaurant landscape in the United States is highly fragmented, with the top five concepts estimated to have a market share of approximately 7.0% in 2017 according to Technomic, Inc. (“Technomic”), a national consulting and market research firm. Based on an analysis by Buxton, we estimate that we have the potential to become a national Japanese restaurant brand, with a long-term total restaurant potential in the United States for over 290 restaurants, and we aim to achieve a 20% average annual restaurant growth rate over the next five years. We opened three new restaurants in fiscal year 2017 and four new restaurants in fiscal year 2018. As



 

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of May 31, 2019, we have opened four of the five planned new restaurants in fiscal year 2019 and plan to open six to seven new restaurants in fiscal year 2020. While we currently aim to achieve 20% average annual unit growth rate over the next five years, we cannot predict the time period of which we can achieve any level of restaurant growth or whether we will achieve this level of growth at all. Our ability to achieve new restaurant growth is impacted by a number of risks and uncertainties beyond our control, including those described under the caption “Risk Factors.” In particular, see “Risk Factors—Our long-term success is highly dependent on our ability to successfully identify and secure appropriate sites and timely develop and expand our operations in existing and new markets” for specific risks that could impede our ability to achieve new restaurant growth in the future.

Our current real estate strategy focuses on high-traffic retail centers in markets with a diverse population and above-average household income. Our flexible physical footprint, which has allowed us to open restaurants ranging in size from 1,600 to 5,600 square feet, provides us the ability to open in-line and end-cap restaurants at strip malls and shopping centers. We believe there is a significant opportunity to employ this strategy to open additional restaurants in our existing markets and in new markets with similar demographics and retail environments.

Deliver Consistent Comparable Restaurant Sales Growth. We have achieved positive comparable restaurant sales growth in ten out of the last eleven quarters ending in the third fiscal quarter of 2019. We believe we will be able to generate future comparable restaurant sales growth by growing traffic through increased brand awareness, consistent delivery of a unique and engaging dining experience, new menu offerings, and restaurant renovations. We will continue to manage our menu and pricing as part of our overall strategy to drive traffic and increase average check. We are also exploring initiatives to grow sales of alcoholic beverages at our restaurants. Sales of alcoholic beverages accounted for approximately 2.3% of sales in fiscal year 2018 and approximately 2.2% of sales for the nine months ended May 31, 2019. In addition to the strategies stated above, we are currently evaluating additional growth initiatives including increasing off-premises sales, piloting a rewards program, and improving our mobile application. We are piloting a rewards program at selected restaurants that tracks participants’ spending and provides a discount voucher if a spending threshold is achieved. To participate, guests sign up with their email addresses, download a virtual rewards card which is stored on their phones, and display the rewards card in the restaurant when paying the bill. Based on the performance of the pilot program, we may roll out the program across our entire restaurant base.

Increase Profitability. During our U.S. expansion, we have invested in our infrastructure and personnel, which we believe positions us to continue to scale our business operations. As we continue to grow, we expect to drive higher profitability both at a restaurant-level and corporate-level by taking advantage of our increasing buying power with suppliers and leveraging our existing support infrastructure. Additionally, we believe we will be able to optimize labor costs at existing restaurants as our restaurant base matures and AUVs increase. We believe that as our restaurant base grows, our general and administrative costs will increase at a slower rate than our sales.

Heighten Brand Awareness . We intend to continue to pursue targeted local marketing efforts and plan to increase our investment in advertising while managing margins. We intend to continue to promote limited time offerings through our monthly “Japan Fair” to build guest loyalty and brand awareness. See “Business—Marketing and Advertising—Japan Fair” for more information on our Japan Fair.

Corporate Overview

In November 2008, our parent company, Kura Japan, organized our predecessor, Kula West Irvine, Inc., a California corporation, or “Kula West,” as a wholly-owned subsidiary of Kura Japan, through which Kura Japan conducted its U.S. operations. Kura Japan owned all 10,000 shares of Kula West common stock. In June 2011, Kula West changed its name to Kula Sushi USA, Inc., or “Kula Sushi.”



 

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Corporate Reorganization . In October 2017, Kura Japan reorganized its U.S. operations in order to effect the reincorporation of its U.S. subsidiary in Delaware and to change its name. Kura Japan effected this reorganization by forming Kura Sushi USA, Inc. on October 4, 2017 as a wholly-owned Delaware subsidiary with a dual class structure and issuing to Kura Japan 100 shares of our Class B common stock. Thereafter, on October 10, 2017, Kula Sushi merged with us, with Kura Sushi USA, Inc. as the surviving corporation (the “Merger”). By virtue of the Merger, each share of common stock of Kula Sushi held by Kura Japan was automatically cancelled and converted into 1,000 shares of Class B common stock of Kura Sushi USA, resulting in Kura Japan holding a total of 10,000,100 shares of our Class B common stock immediately following the Merger. As of August 31, 2018, there were 20,000,000 authorized shares of Class A common stock, with zero shares issued and outstanding and 10,000,100 authorized shares of Class B common stock, all of which were issued and outstanding and held by Kura Japan, representing 100% of our issued and outstanding capital stock.

On January 25, 2019, the Company entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with Kura Japan to exchange 8,000,000 shares of the Company’s Class B common stock for 8,000,000 shares of the Company’s Class A common stock on a pre-reverse split basis. For the purposes of presenting our historical financial data in this prospectus, we have given retroactive effect to the Merger and the share exchange provided for in the Share Exchange Agreement by reflecting Kura Japan as having held 8,000,000 shares of our Class A common stock and 2,000,000 shares of our Class B common stock as of September 1, 2016 on a pre-reverse split basis, notwithstanding that the Merger and Share Exchange Agreement did not occur until October 10, 2017 and January 25, 2019, respectively. See Note 1 to our audited financial statements included in this prospectus.

Relationship with Kura Japan . Following the closing of this offering and after giving effect to the reverse stock split of 1-for         of our shares of Class A common stock and Class B common stock that will occur immediately prior to this offering, Kura Japan will own all of our Class B common stock and                  shares of our Class A common stock, representing approximately     % of the combined voting power of our outstanding capital stock or     % if the underwriters exercise their option to purchase additional shares of our Class A common stock. See “Principal Stockholders.” As a result, we will be a “controlled company” within the meaning of the corporate governance rules of the Nasdaq Stock Market, and Kura Japan will be able to exert significant voting influence over fundamental and significant corporate matters and transactions and may have interests that differ from yours. See “Risk Factors—Risks Related to Our Organizational Structure.”

In connection with this offering, we and Kura Japan will enter into an amended and restated exclusive license agreement with respect to our use of certain intellectual property owned by Kura Japan, as well as a shared services agreement to provide a framework for our continuing relationship. For a description of such agreements, see “Certain Relationships and Related Party Transactions—Relationship with Kura Japan.”

On all matters to be voted on by stockholders, holders of our Class A common stock are entitled to one vote per share while holders of our Class B common stock are entitled to 10 votes per share. Each share of Class B common stock is convertible into one share of Class A common stock at the option of the holder, upon transfer or in certain specified circumstances. With the exception of voting rights and conversion rights, holders of Class A and Class B common stock will have identical rights. We do not intend to list Class B common stock on any stock exchange.

Corporate and other information . Our principal executive offices are located at 17932 Sky Park Circle, Suite H, Irvine, California 92614, and our telephone number at that address is (949) 748-1786. Our website is located at www.kurausa.com. We expect to make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission, or the SEC, available free of charge through our website as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on, or otherwise accessible through, our website or any other website is not incorporated by reference herein and does not constitute a part of this prospectus.



 

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Risk Factors Summary

Investing in our Class A common stock involves significant risks. You should carefully consider the risks described in “Risk Factors” before making a decision to invest in our Class A common stock. If any of these risks actually occur, our business, financial condition and results of operations would likely be materially adversely affected. In such case, the trading price of our Class A common stock would likely decline, and you may lose all or part of your investment. In reviewing this prospectus, we stress that past experience is no indication of future performance, and “Special Note Regarding Forward-Looking Statements” contains a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this prospectus. Below is a summary of some of the significant risks we face:

 

   

We may not be able to successfully implement our growth strategy if we are unable to identify appropriate sites for restaurant locations, expand in existing and new markets, obtain favorable lease terms, attract guests to our restaurants or hire and retain personnel;

 

   

We may not be able to maintain or improve our comparable restaurant sales growth;

 

   

We may no longer receive strategic, operational and financial support from Kura Japan at the same levels as in the past, and we may face difficulties replacing certain services, supplies and financial assistance that Kura Japan has historically provided to us;

 

   

The restaurant industry is a highly competitive industry with many competitors;

 

   

We may face negative publicity or damage to our reputation, which could arise from concerns regarding food safety and foodborne illness or other matters;

 

   

Minimum wage increases and mandated employee benefits could cause a significant increase in our labor costs;

 

   

Events or circumstances could cause the termination or limitation of our rights to certain intellectual property critical to our business that is licensed from Kura Japan, or we could face infringements on our intellectual property rights and be unable to protect our brand name, trademarks and other intellectual property rights;

 

   

Challenging economic conditions may affect our business by adversely impacting numerous items that include, but are not limited to: consumer confidence and discretionary spending, the availability of credit presently arranged from our existing non-revolving line of credit, inclusive of any amounts converted to be payable on a term loan basis, under that certain Business Loan Agreement, dated January 31, 2019 (the “Credit Facility”), the future cost and availability of credit and the operations of our third-party vendors and other service providers;

 

   

We may fail to secure guests’ confidential, personally identifiable, debit card or credit card information or other private data relating to our employees or us;

 

   

Our information technology or automated equipment, including our revolving and express conveyor belts, may fail or be unreliable;

 

   

We will face increased costs as a result of being a public company; and

 

   

We have previously identified a material weakness in our internal control over financial reporting, and if we fail to develop and maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results in a timely manner.



 

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Emerging Growth Company Status

We are an “emerging growth company” as defined in the JOBS Act. For as long as we are an emerging growth company, unlike other public companies that do not meet those qualifications, we are not required to:

 

   

provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act;

 

   

provide more than two years of audited financial statements and related management’s discussion and analysis of financial condition and results of operations in a registration statement on Form S-1;

 

   

comply with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer;

 

   

provide certain disclosure regarding executive compensation required of larger public companies or hold shareholder advisory votes on executive compensation required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act; or

 

   

obtain shareholder approval of any golden parachute payments not previously approved.

We will cease to be an “emerging growth company” upon the earliest of:

 

   

the last day of the fiscal year in which we have $1.07 billion or more in annual gross revenues;

 

   

the date on which we become a “large accelerated filer” (which means the year-end at which the total market value of our common equity securities held by non-affiliates is $700 million or more as of the last business day of our most recently completed second fiscal quarter);

 

   

the date on which we have issued more than $1 billion of non-convertible debt securities over a three-year period; and

 

   

the last day of the fiscal year following the fifth anniversary of our initial public offering.

In addition, 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 of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards, but we have irrevocably opted out of the extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates in which adoption of such standards is required for other public companies.



 

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THE OFFERING

 

Class A common stock offered by
Kura Sushi USA, Inc.


            shares (or                  shares, if the underwriters exercise in full their option to purchase additional shares).

 

Class A common stock outstanding after the
offering

            shares (or                 shares, if the underwriters exercise in full their option to purchase additional shares).

 

Class B common stock outstanding
after the offering (1)


            shares.

 

Over-allotment option

We have granted the underwriters a 30 day option to purchase up to an aggregate of                  additional shares of our Class A common stock.

 

Use of proceeds

We expect to receive approximately $        million of the net proceeds from this offering (assuming an initial public offering price of $        , which is the midpoint of the price range set forth on the cover of this prospectus) from the sale of the Class A common stock offered by us (or approximately $        million if the underwriters exercise in full their option to purchase additional shares) after deducting underwriter discounts and commissions and estimated offering expenses payable by us. Each $1.00 change in the assumed initial public offering price would change our net proceeds by approximately $        million after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We intend to use the net proceeds from this offering for working capital, to fund new unit growth and for other general corporate purposes, including a portion to repay all outstanding indebtedness, which is approximately $        million under our line of credit under the Credit Facility and approximately $3.1 million in term loan indebtedness with the same financial institution. See “Use of Proceeds” for additional information regarding our intended use of proceeds from this offering.

 

Voting rights

Each share of Class A common stock will entitle its holder to one vote on all matters to be voted on by stockholders generally.

Kura Japan, our parent company, will hold all of the outstanding shares of our Class B common stock and will also hold shares of our Class A common stock on a post-reverse split basis. Each share of Class B common stock will entitle its holder to 10 votes on all matters to be voted on by stockholders generally. Upon completion of this offering, we will be controlled by Kura Japan, which will hold

 

(1)  

Following this offering, we will have two classes of outstanding common stock, Class A common stock and Class B common stock. With the exception of voting rights and conversion rights, the rights of the holders of Class A common stock and Class B common stock are identical.



 

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approximately % of the combined voting power of our outstanding Class A common stock and Class B common stock, or approximately     % if the underwriters exercise their option to purchase additional shares of our Class A common stock.

 

  Holders of our Class A common stock and Class B common stock will generally vote together as a single class, unless otherwise required by applicable law or our amended and restated certificate of incorporation. See “Description of Capital Stock” for more information.

 

Conversion rights

Our Class B common stock is convertible as follows:

 

   

at such time as any shares of Class B common stock cease to be beneficially owned by Kura Japan, such shares of Class B common stock will be automatically converted into shares of Class A common stock on a one-for-one basis;

 

   

all of the Class B common stock will automatically convert into Class A common stock on a one-for-one basis on such date when the number of shares of Class A and Class B common stock beneficially owned by Kura Japan represents less than 20.0% of the total number of shares of Class A and Class B common stock outstanding; and

 

   

at the election of the holder of Class B common stock, any share of Class B common stock may be converted into one share of Class A common stock.

 

Controlled company

Following this offering we will be a “controlled company” within the meaning of the corporate governance rules of the Nasdaq Stock Market. See “Risk Factors—Risks Related to Our Organizational Structure” and “Management—Controlled Company.”

 

Dividend policy

We do not anticipate paying any cash dividends to holders of our Class A common stock or Class B common stock in the foreseeable future. See “Dividend Policy” for additional information.

 

Risk factors

See “Risk Factors” for a discussion of factors that you should consider carefully before deciding whether to purchase shares of our Class A common stock.

 

Proposed Nasdaq Global Market symbol

We have applied to list our Class A common stock on the Nasdaq Global Market under the symbol “KRUS.”

The number of Class A common stock and Class B common stock to be outstanding after this offering is based on                  shares of Class A common stock and                  shares of Class B common stock outstanding as of                     , 2019.



 

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Except as otherwise indicated, the number of Class A common stock and Class B common stock to be outstanding after this offering referred to above and all other information in this prospectus:

 

   

gives effect to a reverse stock split of 1-for-                 of our shares of Class A common stock and our shares of Class B common stock, effective immediately prior to the completion of this offering;

 

   

assumes the effectiveness of our amended and restated certificate of incorporation and amended and restated bylaws included as exhibits to the registration statement of which this prospectus forms a part, which we will adopt prior to the completion of this offering;

 

   

excludes (i) 818,501 shares of our Class A common stock issuable on a pre-reverse split basis upon the exercise of stock options outstanding as of May 31, 2019 at a weighted average exercise price of $2.23 and (ii) 581,499 shares of our common stock reserved for future grants under the 2018 Incentive Compensation Plan. See “Executive Compensation”; and

 

   

assumes (i) no exercise by the underwriters of their option to purchase up to              additional shares of Class A common stock from us, (ii) no exercise of the outstanding stock options described above, and (iii) an initial public offering price of $         per share, which represents the midpoint of the price range set forth on the cover of this prospectus.



 

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SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA

The following table summarizes our historical financial and operating data for the periods and as of the dates indicated. The statements of income data for the fiscal years ended August 31, 2017 and August 31, 2018 and the balance sheet data as of August 31, 2017 and August 31, 2018 have been derived from our audited financial statements included elsewhere in this prospectus and reflects the effects of the immaterial correction of errors to the fiscal year ended August 31, 2017, as discussed in Note 9, Immaterial Correction of Previously Reported Expenses , to the audited financial statements included in this prospectus. The statements of income data for the nine months ended May 31, 2018 and May 31, 2019 and the balance sheet data as of May 31, 2019 have been derived from our unaudited interim financial statements included elsewhere in this prospectus. The financial data presented includes all normal and recurring adjustments that we consider necessary for a fair presentation of the financial position and results of operations for such periods.

The historical results presented below are not necessarily indicative of the results to be expected for any future period. This information should be read in conjunction with “Risk Factors,” “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and unaudited interim financial statements and the related notes included elsewhere in this prospectus.

 

     Fiscal Years Ended August 31,     Nine Months Ended May 31,  
     2017     2018     2018     2019  
     (amounts in thousands, except share and per share data)  

Statements of Income Data:

        

Sales

   $ 37,251     $ 51,744     $ 37,099     $ 45,492  

Restaurant operating costs:

        

Food and beverage costs

     13,389       17,594       12,772       14,880  

Labor and related costs

     12,117       15,994       11,711       14,286  

Occupancy and related expenses

     2,077       3,013       2,330       3,292  

Depreciation and amortization expenses

     1,345       1,624       1,133       1,457  

Other costs

     3,907       5,404       3,911       5,102  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total restaurant operating costs

     32,835       43,629       31,857       39,017  
  

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative expenses

     3,364       5,965       4,437       5,699  

Depreciation and amortization expenses

     25       51       38       80  

Impairment of long-lived asset

     —         236       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     36,224       49,881       36,332       44,796  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,027       1,863       767       696  

Other expense (income):

        

Interest expense

     85       128       97       126  

Interest income

     (5     (12     (6     (11
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     947       1,747       676       581  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense (benefit)

     240       5       (86     41  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 707     $ 1,742     $ 762     $ 540  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Class A and Class B common stockholder

        

- basic and diluted

   $ 707     $ 1,742     $ 762     $ 540  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to Class A and Class B common stockholder

        

Basic

   $ 0.07     $ 0.17     $ 0.08     $ 0.05  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.07     $ 0.17     $ 0.08     $ 0.05  
  

 

 

   

 

 

   

 

 

   

 

 

 


 

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     Fiscal Years Ended August 31,      Nine Months Ended May 31,  
     2017      2018      2018      2019  
     (amounts in thousands, except share and per share data)  

Weighted average shares used to compute net income per share attributable to Class A and Class B common stockholder

           

Basic

     10,000,000        10,000,091        10,000,088        10,000,100  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     10,000,000        10,100,568        10,000,088        10,302,308  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     As of August 31,      As of May 31,  
           2017                  2018            2019  
     (amounts in thousands)  

Balance Sheet Data:

        

Cash and cash equivalents

   $         2,882      $         5,711      $         1,265  

Total assets

     23,160        32,069        37,638  

Total liabilities

     8,502        10,564        15,117  

Total stockholder’s equity

     14,658        21,505        22,521  

 

     Fiscal Years Ended August 31,     Nine Months Ended May 31,  
             2017                     2018                     2018                     2019          
     (dollar amounts in thousands)  

Key Financial and Operational Metrics:

        

Restaurants at the end of period

     14       17       18       21  

Average unit volumes (1)

   $         3,358     $         3,457       —         —    

Comparable restaurant sales growth (2)

     34.8     2.9     9.5     4.9

EBITDA (3)

   $ 2,397     $ 3,538     $ 1,938     $ 2,233  

Adjusted EBITDA (3)

   $ 3,107     $ 4,506     $ 2,608     $ 3,431  

as a percentage of sales

     8.3     8.7     7.0     7.5

Operating income

   $ 1,027     $ 1,863     $ 767     $ 696  

Operating profit margin

     2.8     3.6     2.1     1.5

Restaurant-level Contribution (3)

   $ 6,471     $ 10,380     $ 7,045     $ 8,716  

Restaurant-level Contribution margin (3)

     17.4     20.1     19.0     19.2

 

(1)

Average Unit Volumes (AUVs) consist of the average annualized sales of all restaurants that have been open for 18 months or longer at the end of the accounting period presented. The AUVs measure is calculated excluding the Laguna Hills, California restaurant, which closed in fiscal year 2018.

(2)

Comparable restaurant sales growth represents the change in year-over-year sales for restaurants open for at least 18 months prior to the start of the accounting period presented, including those temporarily closed for renovations during the year. The comparable restaurant sales growth measure is calculated excluding the Laguna Hills, California restaurant, which closed in fiscal year 2018.

(3)

EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin are intended as supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. We are presenting EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin because we believe that they provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results. Additionally, we present Restaurant-level Contribution because it excludes the impact of general and administrative expenses which are not incurred at the restaurant-level. We also use Restaurant-level Contribution to measure operating performance and returns from opening new restaurants.

EBITDA is calculated as net income before interest expense, provision (benefit) for income taxes and depreciation and amortization. Adjusted EBITDA further adjusts EBITDA to reflect the additions and



 

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eliminations described in the table below. Restaurant-level Contribution represents operating income plus depreciation and amortization, stock-based compensation expense, pre-opening rent expense, pre-opening costs, non-cash rent expense, asset disposals, closure costs and restaurant impairments, general and administrative expenses, less corporate-level stock-based compensation expense. Restaurant-level Contribution margin is defined as Restaurant-level Contribution divided by sales.

We believe that the use of EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the Company’s financial measures with those of comparable companies, which may present similar non-GAAP financial measures to investors. However, you should be aware that Restaurant-level Contribution and Restaurant-level Contribution margin are financial measures which are not indicative of overall results for the Company, and Restaurant-level Contribution and Restaurant-level Contribution margin do not accrue directly to the benefit of stockholders because of corporate-level expenses excluded from such measures. In addition, you should be aware when evaluating EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin 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 EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin in the same fashion.

Because of these limitations, EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution 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, Restaurant-level Contribution and Restaurant-level Contribution margin on a supplemental basis. Our management recognizes that EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin have limitations as analytical financial measures, including the following:

 

   

EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin do not reflect our capital expenditures or future requirements for capital expenditures;

 

   

EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin do not reflect interest expense or the cash requirements necessary to service interest or principal payments associated with our indebtedness;

 

   

EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin do not reflect depreciation and amortization, which are non-cash charges, although the assets being depreciated and amortized will likely have to be replaced in the future, and do not reflect cash requirements for such replacements;

 

   

Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin do not reflect the costs of stock-based compensation expense, pre-opening rent expense, pre-opening costs, non-cash rent expense, and asset disposals, closure costs and restaurant impairments;

 

   

Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin do not reflect changes in, or cash requirements for, our working capital needs; and

 

   

other companies in our industry may calculate these measures differently, limiting their usefulness as comparative measures.



 

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The following table presents a reconciliation of net income to EBITDA and Adjusted EBITDA:

 

     Fiscal Years Ended August 31,      Nine Months Ended May 31,  
             2017                      2018                      2018                     2019          
     (amounts in thousands)  

Net income, as reported

   $ 707      $ 1,742      $ 762     $ 540  

Interest, net

     80        116        91       115  

Taxes

     240        5        (86     41  

Depreciation and amortization

     1,370        1,675        1,171       1,537  
  

 

 

    

 

 

    

 

 

   

 

 

 

EBITDA

     2,397        3,538        1,938       2,233  

Stock-based compensation expense (a)

     —          105        —         476  

Pre-opening rent expense (b)

     203        197        288       219  

Pre-opening costs (c)

     341        77        77       152  

Non-cash rent expense (d)

     166        353        305       351  

Asset disposals, closure costs and restaurant impairments (e)

     —          236        —         —    
  

 

 

    

 

 

    

 

 

   

 

 

 

Adjusted EBITDA

   $ 3,107      $ 4,506      $ 2,608     $ 3,431  

 

(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 income and of corporate-level stock-based compensation included in general and administrative expenses in the statements of income. In fiscal year 2018, restaurant-level stock-based compensation was $13,884 and corporate-level stock-based compensation was $91,435. For the nine months ended May 31, 2019, restaurant-level stock-based compensation was $62,568 and corporate-level stock-based compensation was $413,649.

(b)

Pre-opening rent expense includes rent expenses incurred between date of possession and opening month of our restaurants.

(c)

Pre-opening costs represent labor costs for new employees (trainees) and includes hourly wages, payroll taxes and benefits, travel expenses for trainees and trainers and recruitment fees.

(d)

Non-cash rent expense includes rent expense after the opening month of our restaurants that did not require cash outlay in the respective periods.

(e)

Asset disposals, closure costs and restaurant impairments include losses incurred due to impairment of property and equipment.

The following table presents a reconciliation of operating income to Restaurant-level Contribution:

 

     Fiscal Years Ended August 31,     Nine Months Ended May 31,  
             2017                      2018                     2018                      2019          
     (amounts in thousands)         

Operating income, as reported

   $ 1,027      $ 1,863     $ 767      $ 696  

Depreciation and amortization

     1,370        1,675       1,171        1,537  

Stock-based compensation expense (a)

     —          105       —          476  

Pre-opening rent expense (b)

     203        197       288        219  

Pre-opening costs (c)

     341        77       77        152  

Non-cash rent expense (d)

     166        353       305        351  

Asset disposals, closure costs and restaurant impairments (e)

     —          236       —          —    

General and administrative expenses

     3,364        5,965       4,437        5,699  

Corporate-level stock-based compensation included in General and administrative expenses

     —          (91     —          (414
  

 

 

    

 

 

   

 

 

    

 

 

 

Restaurant-level Contribution

   $ 6,471      $ 10,380     $ 7,045      $ 8,716  
  

 

 

    

 

 

   

 

 

    

 

 

 


 

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(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 income and of corporate-level stock-based compensation included in general and administrative expenses in the statements of income. In fiscal year 2018, restaurant-level stock-based compensation was $13,884 and corporate-level stock-based compensation was $91,435. For the nine months ended May 31, 2019, restaurant-level stock-based compensation was $62,568 and corporate-level stock-based compensation was $413,649.

(b)

Pre-opening rent expense includes rent expenses incurred between date of possession and opening month of our restaurants.

(c)

Pre-opening costs represent labor costs for new employees (trainees) and includes hourly wages, payroll taxes and benefits, travel expenses for trainees and trainers and recruitment fees.

(d)

Non-cash rent expense includes rent expense after the opening month of our restaurants that did not require cash outlay in the respective periods.

(e)

Asset disposals, closure costs and restaurant impairments include losses incurred due to impairment of property and equipment.



 

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RISK FACTORS

An investment in our Class A common stock, which we refer to in this prospectus as our “common stock,” involves a high degree of risk. You should carefully consider the risks and uncertainties described below before deciding whether to purchase shares of our Class A common stock. In assessing these risks, you should also refer to the other information contained in this prospectus, including our financial statements and related notes. If any of the risks described below actually occur, our business, financial condition or results of operations could be materially adversely affected. In any such case, the trading price of our Class A common stock could decline and you could lose all or part of your investment. The risks below are not the only risks we face. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial also may materially and adversely affect our business, properties, operating results or financial condition.

Risks Related to Our Business and Industry

Our long-term success is highly dependent on our ability to successfully identify and secure appropriate sites and timely develop and expand our operations in existing and new markets.

One of the key means of achieving our growth strategies will be through opening and operating new restaurants on a profitable basis for the foreseeable future. We opened three new restaurants in fiscal year 2017 and four new restaurants in fiscal year 2018. We have currently opened four of the five planned new restaurants in fiscal year 2019 and plan to open six to seven new restaurants in fiscal year 2020. We identify target markets where we can enter or expand, taking into account numerous factors such as the locations of our current restaurants, demographics, traffic patterns and information gathered from various sources. We may not be able to open our planned new restaurants within budget or on a timely basis, if at all, given the uncertainty of these factors, which could adversely affect our business, financial condition and results of operations. As we operate more restaurants, our rate of expansion relative to the size of our restaurant base will eventually decline.

The number and timing of new restaurants opened during any given period may be negatively impacted by a number of factors including, without limitation:

 

   

identification and availability of locations with the appropriate size, traffic patterns, local retail and business attractions and infrastructure that will drive high levels of guest traffic and sales per unit;

 

   

competition in existing and new markets, including competition for restaurant sites;

 

   

the ability to negotiate suitable lease terms;

 

   

the lack of development and overall decrease in commercial real estate due to a macroeconomic downturn;

 

   

recruitment and training of qualified personnel in the local market;

 

   

our ability to obtain all required governmental permits, including zonal approvals, on a timely basis;

 

   

our ability to control construction and development costs of new restaurants;

 

   

landlord delays;

 

   

the proximity of potential sites to an existing restaurant, and the impact of cannibalization on future growth;

 

   

anticipated commercial, residential and infrastructure development near our new restaurants; and

 

   

the cost and availability of capital to fund construction costs and pre-opening costs.

Accordingly, we cannot assure you that we will be able to successfully expand as we may not correctly analyze the suitability of a location or anticipate all of the challenges imposed by expanding our operations. Our growth strategy, and the substantial investment associated with the development of each new restaurant, may

 

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cause our operating results to fluctuate and be unpredictable or adversely affect our business, financial condition or results of operations. If we are unable to expand in existing markets or penetrate new markets, our ability to increase our sales and profitability may be materially harmed or we may face losses.

In addition, our restaurant count potential based on our current whitespace analysis by Buxton may change in the future, or we may conduct future analyses that yield results inconsistent with our earlier analysis.

Our restaurant base is geographically concentrated in California and Texas, and we could be negatively affected by conditions specific to these states.

Approximately 90% of our restaurants are located in California and Texas. Adverse changes in demographic, unemployment, economic, regulatory or weather conditions in California and Texas have had, and may continue to have, material adverse effects on our business, financial condition or results of operations. As a result of our concentration in these markets, we have been, and in the future may be, disproportionately affected by adverse conditions in either of these markets compared to other chain restaurants with a national footprint.

Our expansion into new markets may present increased risks due in part to our unfamiliarity with the areas and also due to consumer unfamiliarity with our revolving sushi bar concept and may make our future results unpredictable.

As of May 31, 2019, we operate our restaurants in four states: California, Texas, Georgia, and Illinois. As of May 31, 2019, we have opened four of the five planned new restaurants in fiscal year 2019, and we plan to continue to increase the number of our restaurants in the next several years as part of our expansion strategy. We may in the future open restaurants in markets where we have little or no operating experience. This growth strategy and the substantial investment associated with the development of each new restaurant may cause our operating results to fluctuate and be unpredictable or adversely affect our business, financial condition or results of operations. Restaurants we open in new markets may take longer to reach expected sales and profit levels on a consistent basis and may have higher construction, occupancy or operating costs than restaurants we open in existing markets, thereby affecting our overall profitability. New markets may have competitive conditions, consumer tastes and discretionary spending patterns that are more difficult to predict or satisfy than our existing markets and there may be little or no market awareness of our brand or revolving sushi bar concept in these new markets. We may need to make greater investments than we originally planned in advertising and promotional activity in new markets to build brand awareness. We also may find it more difficult in new markets to hire, motivate and keep qualified employees who share our vision, passion and business culture. If we do not successfully execute our plans to enter new markets, our business, financial condition or results of operations could be materially adversely affected.

New restaurants, once opened, may not be profitable, and the increases in average restaurant sales and comparable restaurant sales that we have experienced in the past may not be indicative of future results.

Our new restaurants have historically opened with above-average volumes, which then decline after the initial sales surge that comes with interest in a new restaurant opening. For restaurants that opened in fiscal year 2017, the “honeymoon” period of higher sales upon opening ranged up to six months. In new markets, the length of time before average sales for new restaurants stabilize is less predictable as a result of our limited knowledge of these markets and consumers’ limited awareness of our brand. We assess the “honeymoon” period of newly opened restaurants by comparing year-over-year monthly sales to determine when in the prior year (i.e., the first twelve months after a restaurant opens) the “honeymoon” period ended. While the “honeymoon” period for our three restaurant openings in fiscal year 2017 ranged up to six months, our four restaurant openings in fiscal year 2018 have not operated for a sufficient period to allow us to determine the “honeymoon” period for such restaurants. New restaurants may not be profitable and their sales performance may not follow historical patterns. In addition, our average restaurant sales and comparable restaurant sales may not increase at the rates achieved

 

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over the past several years. Our ability to operate new restaurants profitably and increase average restaurant sales and comparable restaurant sales will depend on many factors, some of which are beyond our control, including:

 

   

consumer awareness and understanding of our brand and our revolving sushi bar concept;

 

   

general economic conditions, which can affect restaurant traffic, local labor costs and prices we pay for the food products and other supplies we use;

 

   

changes in consumer preferences and discretionary spending;

 

   

competition, either from our competitors in the restaurant industry or our own restaurants;

 

   

temporary and permanent site characteristics of new restaurants; and

 

   

changes in government regulation.

If our new restaurants do not perform as planned, our business and future prospects could be harmed. In addition, if we are unable to achieve our expected average restaurant sales, our business, financial condition or results of operations could be adversely affected.

Our sales and profit growth could be adversely affected if comparable restaurant sales are less than we expect.

The level of comparable restaurant sales growth, which represents the change in year-over-year sales for restaurants open for at least 18 months, could affect our sales growth. Our ability to increase comparable restaurant sales depends in part on our ability to successfully implement our initiatives to build sales. It is possible such initiatives will not be successful, that we will not achieve our target comparable restaurant sales growth or that the change in comparable restaurant sales could be negative, which may cause a decrease in our profitability and would materially adversely affect our business, financial condition or results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Comparable Restaurant Sales Growth.”

Our failure to manage our growth effectively could harm our business and operating results.

Our growth plan includes opening new restaurants. Our existing restaurant management systems, financial and management controls and information systems may be inadequate to support our planned expansion. Managing our growth effectively will require us to continue to enhance these systems, procedures and controls and to hire, train and retain managers and team members. We may not respond quickly enough to the changing demands that our expansion will impose on our management, restaurant teams and existing infrastructure which could harm our business, financial condition or results of operations.

Our limited number of restaurants, the significant expense associated with opening new restaurants, and the unit volumes of our new restaurants makes us susceptible to significant fluctuations in our results of operations.

As of May 31, 2019, we operate 21 restaurants. We opened three new restaurants in fiscal year 2017 and four new restaurants in fiscal year 2018. As of May 31, 2019, we have opened four of the five planned new restaurants in fiscal year 2019 and plan to open six to seven new restaurants in fiscal year 2020. The capital resources required to develop each new restaurant are significant. On average, we estimate that our restaurants require a cash build-out cost of approximately $1.5 million per restaurant, net of landlord tenant improvement allowances and pre-opening costs and assuming that we do not purchase the underlying real estate. Actual costs may vary significantly depending upon a variety of factors, including the site and size of the restaurant and conditions in the local real estate and labor markets. The combination of our relatively small number of existing restaurants, the significant investment associated with each new restaurant, variance in the operating results in any one restaurant, or a delay or cancellation in the planned opening of a restaurant could materially affect our business, financial condition or results of operations.

 

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A decline in visitors to any of the retail centers, shopping malls, lifestyle centers, or entertainment centers where our restaurants are located could negatively affect our restaurant sales.

Our restaurants are primarily located in high-activity areas such as retail centers, shopping malls, lifestyle centers, and entertainment centers. We depend on high visitor rates at these centers to attract guests to our restaurants. Factors that may result in declining visitor rates include economic or political conditions, anchor tenants closing in retail centers or shopping malls in which we operate, changes in consumer preferences or shopping patterns, changes in discretionary consumer spending, increasing petroleum prices, or other factors, which may adversely affect our business, financial condition or results of operations.

We have historically received strategic, operational and financial support from Kura Japan, and as we increase our independence from Kura Japan, we may face difficulties replacing certain services, supplies and financial assistance Kura Japan has provided to us.

We have been a subsidiary of Kura Japan since 2008 and have benefited from our relationship as a consolidated and wholly-owned subsidiary. Being a wholly-owned subsidiary of Kura Japan has affected the way we operate and manage our business and we are dependent on Kura Japan for certain strategic, operational and financial support. Because we have no independent operating history, our historical results may not be indicative of our future performance. Our future results depend on various factors, including those identified in these risk factors.

For example, Kura Japan provides us from time to time with employees from its operations in Japan to assist us with meeting our workforce requirements and opening new restaurants. Our President and Chief Executive Officer was previously employed by Kura Japan, our Chief Operating Officer is currently employed by Kura Japan and both were appointed to their respective positions by Kura Japan to lead the operation of our business in the United States. We also benefit from our relationship with Kura Japan and the intellectual property that we license from Kura Japan in the operation of our business. Following this offering, we expect that Kura Japan will own approximately     % of the combined voting power of our equity interests. Kura Japan is not subject to any contractual obligation to maintain its ownership position in our shares, except that it has agreed not to sell or otherwise dispose of any of our equity interests for a period ending 180 days after the date of the final prospectus without the prior written consent of the representatives of the underwriters as described in “—Risks Related to Our Organizational Structure—Future sales of our shares by Kura Japan could depress our Class A common stock price.” If Kura Japan’s ownership interest in our company declines significantly in the future, this may affect our ongoing relationship. In connection with this offering, we intend to enter into one or more agreements with Kura Japan, including a shared services agreement and an amended and restated exclusive license agreement, to clarify and memorialize our existing business relationship. Although we expect Kura Japan to continue providing services to us, Kura Japan does not have any contractual obligation to provide strategic, operational or other support to us except as required under our shared services agreement and amended and restated exclusive license agreement with them. See “Certain Relationships and Related Party Transactions—Relationship with Kura Japan” for additional information.

As an additional example, we from time to time purchase certain supplies, parts and equipment for use in our restaurants from Kura Japan. While we are not certain, we believe that Kura Japan obtains these supplies, parts and equipment at a discounted price due to Kura Japan’s higher purchasing power with suppliers. If Kura Japan’s ownership interest in our company declines significantly in the future, this may also affect their provision of supplies, parts and equipment to us. Kura Japan has no contractual obligation to continue providing us with such supplies, parts and equipment except as required under our shared services agreement with them. See “Certain Relationships and Related Party Transactions—Relationship with Kura Japan” for additional information.

As a final example, historically, we have relied on financial support from Kura Japan, including capital contributions by Kura Japan of $5.0 million to the Company in each of fiscal years 2017 and 2018. After the completion of this offering, we do not expect to receive any additional capital contributions from Kura Japan.

 

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We depend on our senior management team and other key employees, and the loss of one or more key personnel or an inability to attract, hire, integrate and retain highly skilled personnel could have an adverse effect on our business, financial condition or results of operations.

Our success depends largely upon the continued services of our key executives. We also rely on our leadership team in setting our strategic direction, operating our business, identifying, recruiting and training key personnel, identifying expansion opportunities, arranging necessary financing, and for general and administrative functions. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. In addition, a small portion of our workforce is Japanese expatriates whose services we have secured from Kura Japan as our parent company, including our Chief Operating Officer, who is currently employed by Kura Japan and who was appointed to his position by Kura Japan to assist in the operation of our business in the United States. Our Chief Operating Officer may be recalled to Kura Japan at any time at Kura Japan’s option. The loss or replacement of one or more of our executive officers or other key employees could have a serious adverse effect on our business, financial condition or results of operations.

To continue to execute our growth strategy, we also must identify, hire and retain highly skilled personnel, which may include the services of personnel who are Japanese expatriates whose services we secure due to our relationship with Kura Japan. We might not be successful in continuing to attract and retain qualified personnel. Failure to identify, hire and retain necessary key personnel could have a material adverse effect on our business, financial condition or results of operations.

Opening new restaurants in existing markets may negatively affect sales at our existing restaurants.

The consumer target area of our restaurants varies by location, depending on a number of factors, including population density, other local retail and business attractions, area demographics and geography. As a result, the opening of a new restaurant in or near markets in which we already have restaurants could adversely affect the sales of these existing restaurants and thereby adversely affect our business, financial condition or results of operations. Existing restaurants could also make it more difficult to build our consumer base for a new restaurant in the same market. Our core business strategy does not entail opening new restaurants that we believe will materially affect sales at our existing restaurants, but we may selectively open new restaurants in and around areas of existing restaurants that are operating at or near capacity to effectively serve our guests. Sales cannibalization between our restaurants may become significant in the future as we continue to expand our operations and could affect our sales growth, which could, in turn, materially adversely affect our business, financial condition or results of operations.

Operating results at our restaurants could be significantly affected by competition in the restaurant industry in general and, in particular, within the dining segments of the restaurant industry in which we compete.

We face significant competition from a variety of restaurants offering both Asian and non-Asian cuisine, as well as takeout offerings from grocery stores and other outlets where Asian food is sold. These segments are highly competitive with respect to, among other things, product quality, dining experience, ambience, location, convenience, value perception, and price. Our competition continues to intensify as competitors increase the breadth and depth of their product offerings and open new locations. These competitors may have, among other things, chefs who are widely known to the public that may generate more notoriety for those competitors as compared to our brand. We also compete with many restaurant and retail establishments for site locations and restaurant-level employees.

Several of our competitors offering Asian and related choices may look to compete with us on price, quality and service. Any of these competitive factors may materially adversely affect our business, financial condition or results of operations.

 

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Negative publicity relating to one of our restaurants could reduce sales at some or all of our other restaurants.

Our success is dependent in part upon our ability to maintain and enhance the value of our brand and consumers’ connection to our brand. We may, from time to time, be faced with negative publicity relating to food quality, restaurant facilities, guest complaints or litigation alleging illness or injury, health inspection scores, integrity of our or our suppliers’ food processing, employee relationships or other matters, regardless of whether the allegations are valid or whether we are held to be responsible. The negative impact of adverse publicity relating to one restaurant may extend far beyond the restaurant involved to affect some or all of our other restaurants, thereby causing an adverse effect on our business, financial condition or results of operations. A similar risk exists with respect to unrelated food service businesses, if consumers associate those businesses with our own operations.

The considerable expansion in the use of social media over recent years can further amplify any negative publicity that could be generated by such incidents. Many social media platforms immediately publish the content their subscribers and participants post, often without filters or checks on accuracy of the content posted. Information posted on such platforms may be adverse to our interests and/or may be inaccurate. The dissemination of inaccurate or irresponsible information online could harm our business, reputation, prospects, financial condition, or results of operations, regardless of the information’s accuracy. The damage may be immediate without affording us an opportunity for redress or correction.

Additionally, employee claims against us based on, among other things, wage and hour violations, discrimination, harassment or wrongful termination may also create negative publicity that could adversely affect us and divert our financial and management resources that would otherwise be used to benefit the future performance of our operations. A significant increase in the number of these claims or an increase in the number of successful claims could materially adversely affect our business, financial condition or results of operations. Consumer demand for our restaurants and our brand’s value could diminish significantly if any such incidents or other matters create negative publicity or otherwise erode consumer confidence in us or our restaurants, which would likely result in lower sales and could materially adversely affect our business, financial condition or results of operations.

Food safety and foodborne illness concerns could have an adverse effect on our business, financial condition or results of operations.

We cannot guarantee that our internal controls and training will be fully effective in preventing all food safety issues at our restaurants, including any occurrences of foodborne illnesses such as salmonella, E. coli and hepatitis A. In addition, there is no guarantee that our restaurant locations will maintain the high levels of internal controls and training we require at our restaurants. Furthermore, we rely on third-party vendors, making it difficult to monitor food safety compliance and increasing the risk that foodborne illness would affect multiple locations rather than a single restaurant. Some foodborne illness incidents could be caused by third-party vendors and transporters outside of our control. New illnesses resistant to our current precautions may develop in the future, or diseases with long incubation periods could arise, that could give rise to claims or allegations on a retroactive basis. One or more instances of foodborne illness in any of our restaurants or markets or related to food products we sell could negatively affect our restaurant sales nationwide if highly publicized on national media outlets or through social media. This risk exists even if it were later determined that the illness was wrongly attributed to us or one of our restaurants. A number of other restaurant chains have experienced incidents related to foodborne illnesses that have had a material adverse effect on their operations. The occurrence of a similar incident at one or more of our restaurants, or negative publicity or public speculation about an incident, could materially adversely affect our business, financial condition or results of operations.

Governmental regulation may adversely affect our ability to open new restaurants or otherwise adversely affect our business, financial condition or results of operations.

We are subject to various federal, state and local regulations. Our restaurants are subject to state and local licensing and regulation by health, alcoholic beverage, sanitation, food and occupational safety and other

 

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agencies. We may experience material difficulties or failures in obtaining the necessary licenses, approvals or permits for our restaurants, which could delay planned restaurant openings or affect the operations at our existing restaurants. In addition, stringent and varied requirements of local regulators with respect to zoning, land use and environmental factors could delay or prevent development of new restaurants in particular locations.

We are subject to the U.S. Americans with Disabilities Act and similar state laws that give civil rights protections to individuals with disabilities in the context of employment, public accommodations and other areas, including our restaurants. We may in the future have to modify restaurants, for example, by adding access ramps or redesigning certain architectural fixtures, to provide service to or make reasonable accommodations for disabled persons. The expenses associated with these modifications could be material.

Our operations are also subject to the U.S. Occupational Safety and Health Act, which governs worker health and safety, the U.S. Fair Labor Standards Act, which governs such matters as minimum wages and overtime, and a variety of similar federal, state and local laws that govern these and other employment law matters. In addition, federal, state and local proposals related to paid sick leave or similar matters could, if implemented, materially adversely affect our business, financial condition or results of operations.

We rely significantly on certain vendors and suppliers, which could adversely affect our business, financial condition or results of operations.

Our ability to maintain consistent price and quality throughout our restaurants depends in part upon our ability to acquire specified food products and supplies in sufficient quantities from third-party vendors and suppliers at a reasonable cost. In addition, we are dependent upon a few suppliers for certain specialized equipment utilized in our restaurants, such as our conveyor belts and other parts of our proprietary system. We rely on JFC International Inc. (“JFC”), a subsidiary of Kikkoman Corporation, as one of our primary suppliers. JFC provided us with food products and supplies equaling approximately 29.0% and 47.4% of our total food and beverage costs in fiscal years 2017 and 2018, respectively, and approximately 54.5% of our total food and beverage costs for the nine months ended May 31, 2019. We also rely on Wismettac Asian Foods, Inc. (formerly Nishimoto Trading Co., Ltd.) (“Wismettac”), a subsidiary of Nishimoto Co., Ltd., which provided us with food products and supplies equaling approximately 15.1% and 28.0% of our total food and beverage costs for fiscal years 2017 and 2018, respectively, and 27.9% of our total food and beverage costs for the nine months ended May 31, 2019. We do not control the businesses of our vendors and suppliers and our efforts to specify and monitor the standards under which they perform may not be successful. Furthermore, certain food items are perishable, and we have limited control over whether these items will be delivered to us in appropriate condition for use in our restaurants. If any of our vendors or other suppliers are unable to fulfill their obligations to our standards, or if we are unable to find replacement providers in the event of a supply or service disruption, we could encounter supply shortages and incur higher costs to secure adequate supplies, which could materially adversely affect our business, financial condition or results of operations.

In addition, we use various third-party vendors to provide, support and maintain most of our management information systems. We also outsource certain accounting, payroll and human resource functions to business process service providers. The failure of such vendors to fulfill their obligations could disrupt our operations. Additionally, any changes we may make to the services we obtain from our vendors, or new vendors we employ, may disrupt our operations. These disruptions could materially adversely affect our business, financial condition or results of operations.

Changes in food and supply costs could adversely affect our business, financial condition or results of operations.

Our profitability depends in part on our ability to anticipate and react to changes in food and supply costs. Shortages or interruptions in the availability of certain supplies caused by unanticipated demand, problems in production or distribution, food contamination, inclement weather or other conditions could adversely affect the availability, quality and cost of our ingredients, which could harm our operations. Any increase in the prices of

 

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the food products most critical to our menu, such as rice, fish and other seafood, as well as fresh vegetables, could adversely affect our business, financial condition or results from operations. Although we try to manage the impact that these fluctuations have on our operating results, we remain susceptible to increases in food costs as a result of factors beyond our control, such as general economic conditions, seasonal fluctuations, weather conditions, demand, food safety concerns, generalized infectious diseases, product recalls and government regulations.

If any of our distributors or suppliers performs inadequately, or our distribution or supply relationships are disrupted for any reason, our business, financial condition, results of operations or cash flows could be adversely affected. If we cannot replace or engage distributors or suppliers who meet our specifications in a short period of time, that could increase our expenses and cause shortages of food and other items at our restaurants, which could cause a restaurant to remove items from its menu. If that were to happen, affected restaurants could experience significant reductions in sales during the shortage or thereafter, if guests change their dining habits as a result. In addition, because we provide moderately priced food, we may choose not to, or may be unable to, pass along commodity price increases to consumers. These potential changes in food and supply costs could materially adversely affect our business, financial condition or results of operations.

Failure to receive frequent deliveries of fresh food ingredients and other supplies could harm our business, financial condition or results of operations.

Our ability to maintain our menu depends in part on our ability to acquire ingredients that meet our specifications from reliable suppliers, including, but not limited to, rice vinegar from our parent company, Kura Japan, which owns the recipe of such rice vinegar and is our sole supplier of rice vinegar. Shortages or interruptions in the supply of ingredients caused by unanticipated demand, problems in production or distribution, food contamination, inclement weather or other conditions could adversely affect the availability, quality and cost of our ingredients, which could harm our business, financial condition or results of operations. If any of our distributors or suppliers performs inadequately, or our distribution or supply relationships are disrupted for any reason, our business, financial condition or results of operations could be adversely affected. If we cannot replace or engage distributors or suppliers who meet our specifications in a short period of time, that could increase our expenses and cause shortages of food and other items at our restaurants, which could cause a restaurant to remove items from its menu. If that were to happen, affected restaurants could experience significant reductions in sales during the shortage or thereafter, if guests change their dining habits as a result. This reduction in sales could materially adversely affect our business, financial condition or results of operations.

In addition, our approach to competing in the restaurant industry depends in large part on our continued ability to provide authentic and traditional Japanese cuisine that is free from artificial ingredients. As we increase our use of these ingredients, the ability of our suppliers to expand output or otherwise increase their supplies to meet our needs may be constrained. We could face difficulties to obtain a sufficient and consistent supply of these ingredients on a cost-effective basis.

Labor disputes may disrupt our operations and affect our profitability, thereby causing a material adverse effect on our business, financial condition or results of operations.

As an employer, we are presently, and may in the future be, subject to various employment-related claims, such as individual or class actions or government enforcement actions relating to alleged employment discrimination, employee classification and related withholding, wage-hour, labor standards or healthcare and benefit issues. On May 31, 2019, a putative class action complaint was filed in Los Angeles County Superior Court, alleging violations of California wage and hour laws. This action, or any future actions if brought against us and successful in whole or in part, may affect our ability to compete or could materially adversely affect our business, financial condition or results of operations.

The minimum wage, particularly in California, continues to increase and is subject to factors outside of our control.

We have a substantial number of hourly employees who are paid wage rates based on the applicable federal or state minimum wage. Since January 1, 2019, the State of California has a minimum wage of $12.00 per hour.

 

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Moreover, municipalities may set minimum wages above the applicable state standards. The federal minimum wage has been $7.25 per hour since July 24, 2009. Any of federally-mandated, state-mandated or municipality-mandated minimum wages may be raised in the future which could have a materially adverse effect on our business, financial condition or results of operations. If menu prices are increased by us to cover increased labor costs, the higher prices could adversely affect sales and thereby reduce our margins and adversely affect our business, financial condition or results of operations.

Changes in employment laws may adversely affect our business, financial condition, results of operations or cash flow.

Various federal and state labor laws govern the relationship with our employees and affect operating costs. These laws include employee classification as exempt/non-exempt for overtime and other purposes, minimum wage requirements, tips and gratuity payments, unemployment tax rates, workers’ compensation rates, immigration status and other wage and benefit requirements. Significant additional government-imposed increases in the following areas could materially affect our business, financial condition, operating results or cash flow:

 

   

minimum wages;

 

   

tips and gratuities;

 

   

mandatory health benefits;

 

   

vacation accruals;

 

   

paid leaves of absence, including paid sick leave; and

 

   

tax reporting.

If we face labor shortages, increased labor costs or unionization activities, our growth, business, financial condition and operating results could be adversely affected.

Labor is a primary component in the cost of operating our restaurants. If we face labor shortages or increased labor costs because of increased competition for employees, higher employee turnover rates, increases in federal, state or local minimum wage rates or other employee benefits costs (including costs associated with health insurance coverage), our operating expenses could increase and our growth could be adversely affected. In addition, our success depends in part upon our ability to attract, motivate and retain a sufficient number of well-qualified restaurant operators and management personnel, as well as a sufficient number of other qualified employees, to keep pace with our expansion schedule. Qualified individuals needed to fill these positions are in short supply in some geographic areas. In addition, restaurants have traditionally experienced relatively high employee turnover rates. Although we have not yet experienced significant problems in recruiting or retaining employees, our ability to recruit and retain such individuals may delay the planned openings of new restaurants or result in higher employee turnover in existing restaurants, which could have a material adverse effect on our business, financial condition or results of operations.

If we are unable to continue to recruit and retain sufficiently qualified individuals, our business and our growth could be adversely affected, thereby adversely affecting or business, financial condition or results of operations. Competition for these employees could require us to pay higher wages, which could result in higher labor costs. In addition, increases in the minimum wage would increase our labor costs. Additionally, costs associated with workers’ compensation are rising, and these costs may continue to rise in the future. We may be unable to increase our menu prices in order to pass these increased labor costs on to consumers, in which case our margins would be negatively affected, which could materially adversely affect our business, financial condition or results of operations.

Although none of our employees are currently covered under collective bargaining agreements, our employees may elect to be represented by labor unions in the future. If a significant number of our employees

 

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were to become unionized and collective bargaining agreement terms were significantly different from our current compensation arrangements, it could adversely affect our business, financial condition or results of operations.

Our business could be adversely affected by a failure to obtain visas or work permits or to properly verify the employment eligibility of our employees.

Some of our corporate employees’ ability to work in the United States depends on obtaining and maintaining necessary visas and work permits. On certain occasions we have been, and in the future we may be, unable to obtain visas or work permits to bring necessary employees to the United States for any number of reasons including, among others, limits set by the U.S. Department of Homeland Security or the U.S. Department of State.

Although we require all workers to provide us with government-specified documentation evidencing their employment eligibility, some of our employees may, without our knowledge, be unauthorized workers. We currently participate in the “E-Verify” program, an Internet-based, free program run by the U.S. government to verify employment eligibility, in states in which participation is required, and we plan to introduce its use across all our restaurants. However, use of the “E-Verify” program does not guarantee that we will properly identify all applicants who are ineligible for employment. Unauthorized workers are subject to deportation and may subject us to fines or penalties, and if any of our workers are found to be unauthorized, we could experience adverse publicity that may negatively impact our brand and may make it more difficult to hire and keep qualified employees. Termination of a significant number of employees who are unauthorized employees may disrupt our operations, cause temporary increases in our labor costs as we train new employees and result in adverse publicity. We could also become subject to fines, penalties and other costs related to claims that we did not fully comply with all recordkeeping obligations of federal and state immigration compliance laws. These factors could materially adversely affect our business, financial condition or results of operations.

Compliance with environmental laws may negatively affect our business.

We are subject to federal, state and local laws and regulations concerning waste disposal, pollution, protection of the environment, and the presence, discharge, storage, handling, release and disposal of, and exposure to, hazardous or toxic substances. These environmental laws provide for significant fines and penalties for noncompliance and liabilities for remediation, sometimes without regard to whether the owner or operator of the property knew of, or was responsible for, the release or presence of hazardous toxic substances. Third parties may also make claims against owners or operators of properties for personal injuries and property damage associated with releases of, or actual or alleged exposure to, such hazardous or toxic substances at, on or from our restaurants. Environmental conditions relating to releases of hazardous substances at prior, existing or future restaurant sites could materially adversely affect our business, financial condition or results of operations. Further, environmental laws, and the administration, interpretation and enforcement thereof, are subject to change and may become more stringent in the future, each of which could materially adversely affect our business, financial condition or results of operations.

Changes in economic conditions could materially affect our ability to maintain or increase sales at our restaurants or open new restaurants.

The restaurant industry depends on consumer discretionary spending. The United States in general or the specific markets in which we operate may suffer from depressed economic activity, recessionary economic cycles, higher fuel or energy costs, low consumer confidence, high levels of unemployment, reduced home values, increases in home foreclosures, investment losses, personal bankruptcies, reduced access to credit or other economic factors that may affect consumers’ discretionary spending. Sales in our restaurants could decline if consumers choose to dine out less frequently or reduce the amount they spend on meals while dining out. Negative economic conditions might cause consumers to make long-term changes to their discretionary spending

 

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behavior, including dining out less frequently on a permanent basis. If restaurant sales decrease, our profitability could decline as we spread fixed costs across a lower level of sales. Reductions in staff levels, asset impairment charges and potential restaurant closures could result from prolonged negative restaurant sales, which could materially adversely affect our business, financial condition or results of operations.

New information or attitudes regarding diet and health could result in changes in regulations and consumer consumption habits that could adversely affect our business, financial condition or results of operations.

Changes in attitudes regarding diet and health or new information regarding the adverse health effects of consuming certain foods could result in changes in government regulation and consumer eating habits that may impact our business, financial condition or results of operations. These changes have resulted in, and may continue to result in, laws and regulations requiring us to disclose the nutritional content of our food offerings, and they have resulted in, and may continue to result in, laws and regulations affecting permissible ingredients and menu offerings. For example, a number of jurisdictions have enacted menu labeling laws requiring multi-unit restaurant operators to disclose to consumers certain nutritional information, or have enacted legislation restricting the use of certain types of ingredients in restaurants. These requirements may be different or inconsistent with requirements we are subject to under the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act, collectively, the “ACA,” which establishes a uniform, federal requirement for certain restaurants to post nutritional information on their menus. Specifically, the ACA requires chain restaurants with 20 or more locations operating under the same name and offering substantially the same menus to publish the total number of calories of standard menu items on menus and menu boards, along with a statement that puts this calorie information in the context of a total daily calorie intake. The ACA also requires covered restaurants to provide to consumers, upon request, a written summary of detailed nutritional information for each standard menu item, and to provide a statement on menus and menu boards about the availability of this information upon request. Unfavorable publicity about, or guests’ reactions to, our menu ingredients, the size of our portions or the nutritional content of our menu items could negatively influence the demand for our offerings, thereby adversely affecting our business, financial condition or results of operations.

Compliance with current and future laws and regulations regarding the ingredients and nutritional content of our menu items may be costly and time-consuming. Additionally, if consumer health regulations or consumer eating habits change significantly, we may be required to modify or discontinue certain menu items, and we may experience higher costs associated with the implementation of those changes, as well as adversely affect the attractiveness of our restaurants to new or returning guests. We cannot predict the impact of any new nutrition labeling requirements. The risks and costs associated with nutritional disclosures on our menus could also impact our operations, particularly given differences among applicable legal requirements and practices within the restaurant industry with respect to testing and disclosure, ordinary variations in food preparation among our own restaurants, and the need to rely on the accuracy and completeness of nutritional information obtained from third-party suppliers.

We may not be able to effectively respond to changes in consumer health perceptions or successfully implement the nutrient content disclosure requirements and to adapt our menu offerings to trends in eating habits. The imposition of menu labeling laws and an inability to keep up with consumer eating habits could materially adversely affect our business, financial condition or results of operations, as well as our position within the restaurant industry in general.

Failure to comply with antibribery or anticorruption laws could adversely affect our reputation, business, financial condition or results of operations.

The U.S. Foreign Corrupt Practices Act and other similar applicable laws prohibiting bribery of government officials and other corrupt practices are the subject of increasing emphasis and enforcement around the world. Although we have implemented policies and procedures designed to promote compliance with these laws, there can be no assurance that our employees, contractors, agents, or other third parties will not take actions in

 

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violation of our policies or applicable law. Any such violations or suspected violations could subject us to civil or criminal penalties, including substantial fines and significant investigation costs, and could also materially damage our reputation, brands, international expansion efforts and growth prospects, business, financial condition and results of operations. Publicity relating to any noncompliance or alleged noncompliance could also harm our reputation and adversely affect our business, financial condition or results of operations.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

As of August 31, 2018, we had federal net operating loss carryforwards of $4.1 million and federal tax credit carryover of $1.4 million. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. In general, an “ownership change” generally occurs if there is a cumulative change in our ownership by “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. We do not believe that we will experience an ownership change as a result of this issuance. However, we may have experienced an ownership change in the past and may experience ownership changes in the future as a result of this issuance and future transactions in our stock, some of which may be outside our control. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards, or other pre-change tax attributes, to offset U.S. federal and state taxable income may be subject to significant limitations. Those net operating loss carryforwards and general business tax credits resulted in a tax effected deferred tax asset of $2.2 million at August 31, 2018.

Our indebtedness may limit our ability to invest in the ongoing needs of our business and if we are unable to comply with our financial covenants, our liquidity and results of operations could be adversely affected.

Our existing Credit Facility is comprised of an equipment purchase facility and a tenant improvements subfacility, on a non-revolving basis, in the aggregate principal amount of up to $5.0 million and is collateralized by a first-priority interest in, among other things, our inventory, equipment, accounts, general intangibles and fixtures. As of May 31, 2019, we had $1.1 million available under our Credit Facility. During May and June of 2019, we converted a portion of the outstanding indebtedness under our Credit Facility into term loan indebtedness with the same financial institution, and memorialized that indebtedness in the form of promissory notes with associated commercial security agreements. As of May 31, 2019, we had approximately $1.0 million of outstanding indebtedness under the line of credit under our Credit Facility and $2.1 million of outstanding indebtedness payable on a term loan basis. We intend to use a portion of the net proceeds from this offering to repay the entire amount of the outstanding borrowings under our line of credit under the Credit Facility and the term loans. In the future, we may, from time to time, incur additional indebtedness under our Credit Facility, up to the aggregate principal amount of $5.0 million (of which $1.1 million was available as of May 31, 2019), and any amounts exceeding $300,000 under the Credit Facility will be converted into term loans upon such terms as established between us and our Credit Facility bank.

Our Credit Facility places certain limitations on our ability to incur additional senior indebtedness. The Credit Facility also places certain limitations on, among other things, our ability to create any encumbrance other than permitted encumbrances, make capital expenditures not in the ordinary course of business or transfer or sell certain assets or merge or consolidate with or into or acquire any other business organization. Failure to comply with certain covenants could result in the acceleration of our obligations under the Credit Facility, which would have an adverse effect on our liquidity, capital resources and results of operations. Our Credit Facility also requires us to comply with certain financial covenants regarding our liquidity, fixed charge coverage ratio and tangible net worth ratio. Our failure to comply with or perform any term, obligation or covenant under our Credit Facility is also a default under our term loans. Changes in our financial condition causing a breach of any of these financial covenants could result in a default and an acceleration of our obligations under the Credit Facility or term loans, which could have an adverse effect on our liquidity, capital resources and results of operations.

 

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We may need capital in the future, and we may not be able to raise that capital on favorable terms.

Developing our business will require significant capital in the future. Historically, we have relied on financial support from Kura Japan, including capital contributions by Kura Japan of $5.0 million to the Company in each of fiscal years 2017 and 2018. After the completion of this offering, we do not expect to receive any additional capital contributions from Kura Japan. To meet our capital needs, we expect to rely on our borrowings under our existing Credit Facility for equipment financing and facility improvements, cash flows from operations, the proceeds from this offering, future offerings and other third-party financing. Third-party financing in the future may not, however, be available on terms favorable to us, or at all. Our ability to obtain additional funding will be subject to various factors, including market conditions, our operating performance, lender sentiment and our ability to incur additional debt in compliance with other contractual restrictions such as financial covenants under our Credit Facility, term loans or other debt documents. These factors may make the timing, amount, or terms and conditions of additional financings unattractive. Our inability to raise capital could impede our growth and could materially adversely affect our business, financial condition or results of operations.

We are subject to all of the risks associated with leasing space subject to long-term non-cancelable leases.

We do not own any real property. Payments under our operating leases account for a significant portion of our operating expenses and we expect the new restaurants we open in the future will similarly be leased. The majority of our operating leases have lease terms of twenty years, inclusive of customary extensions which are at the option of the Company. Most of our leases require a fixed annual rent which generally increases each year, and some require the payment of additional rent if restaurant sales exceed a negotiated amount. Generally, our leases are “net” leases, which require us to pay all of the cost of insurance, taxes, maintenance and utilities. We generally cannot cancel these leases. Additional sites that we lease are likely to be subject to similar long-term non-cancelable leases. If an existing or future restaurant is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. In addition, as each of our leases expires, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to pay increased occupancy costs or to close restaurants in desirable locations. If we fail to negotiate renewals, we may have to dispose of assets at such restaurant locations and incur closure costs as well as impairment of property and equipment. Furthermore, if we fail to negotiate renewals, we may incur additional costs associated with moving transferable furniture, fixtures and equipment. These potential increased occupancy and moving costs, as well as closures of restaurants, could materially adversely affect our business, financial condition or results of operations.

Macroeconomic conditions, including economic downturns, may cause landlords of our leases to be unable to obtain financing or remain in good standing under their existing financing arrangements, resulting in failures to pay required tenant improvement allowances or satisfy other lease covenants to us. In addition, tenants at shopping centers in which we are located or have executed leases, or to which our locations are near, may fail to open or may cease operations. Decreases in total tenant occupancy in shopping centers in which we are located, or to which our locations are near, may affect traffic at our restaurants. All of these factors could have a material adverse impact on our business, financial condition or results of operations.

We have licensed certain intellectual property critical to our business from our parent company, Kura Japan. Any events or circumstances that result in the termination or limitation of our rights under our agreement between us and Kura Japan of our intellectual property could have a material adverse effect on our business, financial condition or results of operations.

The intellectual property that is critical to our business has been licensed to us by our parent company, Kura Japan, which following this offering we expect will own approximately     % of the combined voting power of our equity interests. Any termination or limitation of, or loss of exclusivity under, our exclusive license

 

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agreement with Kura Japan would have a material adverse effect on our business, financial condition or results of operations. In connection with this offering, we intend to enter into an amended and restated exclusive license agreement with regard to the intellectual property we license from Kura Japan. See “Certain Relationships and Related Party Transactions—Relationship with Kura Japan” for additional information.

We may become involved in lawsuits involving Kura Japan as the owner of intellectual property, or us as a licensee of intellectual property from Kura Japan, to protect or enforce intellectual property rights, which could be expensive, time consuming, and unsuccessful.

Third parties may sue Kura Japan or us for alleged infringement of their proprietary rights. The party claiming infringement might have greater resources than we do to pursue its claims, and we could be forced to incur substantial costs and devote significant management resources to defend against such litigation, even if the claims are meritless and even if we ultimately prevail. If the party claiming infringement were to prevail, we could be forced to pay significant damages, or enter into expensive royalty or licensing arrangements with the prevailing party. In addition, any payments we are required to make, and any injunction we are required to comply with as a result of such infringement, could harm our reputation and our business, financial condition or results of operations.

Infringements on Kura Japan’s intellectual property rights, including Kura Japan’s service marks and trade secrets, could result in additional expense and could devalue our brand equity, as well as substantially affect our business, financial condition or results of operations.

Other parties may infringe on our intellectual property rights, including those which we develop or otherwise license to use, and may thereby dilute our brand in the marketplace. Any such infringement of our intellectual property rights would also likely result in a commitment of our time and resources to protect these rights through litigation or otherwise.

Our business prospects depend in part on our ability to develop favorable consumer recognition of the Kura Sushi name. Although “Kura Sushi” and “Kura Revolving Sushi Bar” are federally registered service marks owned by Kura Japan, such marks could be imitated in ways that we or Kura Japan cannot prevent. Alternatively, third parties may attempt to cause us to change our name or not operate in a certain geographic region if our name is confusingly similar to their name. In addition, we rely on trade secrets, proprietary know-how, concepts, and recipes, some of which we license from Kura Japan. Our methods or Kura Japan’s methods of protecting this information may not be adequate. Moreover, we or Kura Japan may face claims of misappropriation or infringement of third parties’ rights that could interfere with our use of this information. Defending these claims may be costly and, if unsuccessful, may prevent us from continuing to use this proprietary information in the future, and may result in a judgment or monetary damages. We do not maintain confidentiality and non-competition agreements with all of our executives, key personnel, or suppliers. If competitors independently develop or otherwise obtain access to the trade secrets, proprietary know-how, concepts, or recipes we rely upon to operate our restaurants, some of which we license from Kura Japan, the appeal of our restaurants could be significantly reduced and our business, financial condition or results of operations could be adversely affected.

A breach of security of confidential consumer information related to our electronic processing of credit and debit card transactions, as well as a breach of security of our employee information, could substantially affect our reputation, business, financial condition of results of operations.

The majority of our restaurant sales are by credit or debit cards. Other restaurants and retailers have experienced security breaches in which credit and debit card information has been stolen. We may in the future become subject to claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, and we may also be subject to lawsuits or other proceedings relating to these types of incidents. We may ultimately be held liable for the unauthorized use of a cardholder’s card number in an illegal activity and be required by card issuers to pay charge-back fees. In addition, most states have enacted legislation

 

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requiring notification of security breaches involving personal information, including credit and debit card information. Any such claim or proceeding could cause us to incur significant unplanned expenses, which could have an adverse impact on our business, financial condition or results of operations. Further, adverse publicity resulting from these allegations may have a material adverse effect on us and could substantially affect our reputation and business, financial condition or results of operations.

In addition, our business requires the collection, transmission and retention of large volumes of guest and employee data, including personally identifiable information, in various information technology systems that we maintain and in those maintained by third parties with whom we contract to provide services. The collection and use of such information is regulated at the federal and state levels, as well as at the international level, in which regulatory requirements have been increasing. As our environment continues to evolve in the digital age and reliance upon new technologies becomes more prevalent, it is imperative we secure the privacy and sensitive information we collect. Failure to do so, whether through fault of our own information systems or those of outsourced third-party providers, could not only cause us to fail to comply with these laws and regulations, but also could cause us to face litigation and penalties that could adversely affect our business, financial condition or results of operations. Our brand’s reputation and image as an employer could also be harmed by these types of security breaches or regulatory violations.

We rely significantly on the operation of our revolving and express conveyor belts, sushi robots and other automated equipment, and any mechanical failure could prevent us from effectively operating our restaurants.

The operation of our restaurants relies on technology and equipment such as our revolving and express conveyor belts, the Bikkura-Pon rewards machine and touch screen menus. In our kitchens, we use automated equipment and systems such as sushi robots, RFID readers, robotic arms, vinegar mixing machines, rice washers and dishwashers. Our ability to safely, efficiently and effectively manage our restaurants depends significantly on the reliability and capacity of these systems. Mechanical failures and our inability to service such equipment in a timely manner could result in delays in customer service and reduce efficiency of our restaurant operations, including a loss of sales. Remediation of such problems could result in significant, unplanned capital investments and any equipment failure may have an adverse effect on our business, financial condition or results of operations due to our reliance on such equipment.

We rely significantly on information technology, and any material failure, weakness, interruption or breach of security could prevent us from effectively operating our business.

We rely significantly on information systems, including point-of-sale processing in our restaurants for management of our supply chain, payment of obligations, collection of cash, credit and debit card transactions and other processes and procedures. We also operate tableside access to touch screen ordering systems to allow guests to place special orders. Our ability to efficiently and effectively manage our business depends significantly on the reliability and capacity of these systems. Failures of these systems to operate effectively, maintenance problems, upgrading or transitioning to new platforms, or a breach in security of these systems could result in delays in customer service and reduce efficiency in our operations. Remediation of such problems could result in significant, unplanned capital investments.

Our marketing programs may not be successful, and our new menu items, advertising campaigns and restaurant designs and remodels may not generate increased sales or profits.

We incur costs and expend other resources in our marketing efforts on new menu items, advertising campaigns and restaurant designs and remodels to raise brand awareness and attract and retain guests. These initiatives may not be successful, resulting in expenses incurred without the benefit of higher sales. Additionally, some of our competitors have greater financial resources, which enable them to spend significantly more on marketing and advertising and other initiatives than we are able to. Should our competitors increase spending on marketing and advertising and other initiatives or our marketing funds decrease for any reason, or should our

 

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advertising, promotions, new menu items and restaurant designs and remodels be less effective than our competitors, there could be a material adverse effect on our business, financial condition or results of operations.

Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could materially adversely impact our business, financial condition or results of operations.

Our marketing efforts rely heavily on the use of social media. In recent years, there has been a marked increase in the use of social media platforms, including weblogs (blogs), mini-blogs, chat platforms, social media websites, and other forms of Internet-based communications which allow individuals access to a broad audience of consumers and other interested persons. Many of our competitors are expanding their use of social media, and new social media platforms are rapidly being developed, potentially making more traditional social media platforms obsolete. As a result, we need to continuously innovate and develop our social media strategies in order to maintain broad appeal with guests and brand relevance. We also continue to invest in other digital marketing initiatives that allow us to reach our guests across multiple digital channels and build their awareness of, engagement with, and loyalty to our brand. These initiatives may not be successful, resulting in expenses incurred without the benefit of higher sales or increased brand recognition.

We could be party to litigation that could adversely affect us by distracting management, increasing our expenses or subjecting us to material money damages and other remedies.

Our guests occasionally file complaints or lawsuits against us alleging we caused an illness or injury they suffered at or after a visit to our restaurants, or that we have problems with food quality or operations. We are also subject to a variety of other claims arising in the ordinary course of our business, including personal injury claims, contract claims and claims alleging violations of federal and state law regarding workplace and employment matters, equal opportunity, discrimination and similar matters, and we are presently subject to class action and other lawsuits with regard to certain of these matters and could become subject to additional class action or other lawsuits related to these or different matters in the future. Regardless of whether any claims against us are valid, or whether we are ultimately held liable, claims may be expensive to defend and may divert time and money away from our operations and hurt our performance. A judgment in excess of our insurance coverage for any claims could materially and adversely affect our business, financial condition or results of operations. Any adverse publicity resulting from these allegations may also materially and adversely affect our reputation or prospects, which in turn could materially adversely affect our business, financial condition or results of operations.

We are subject to state and local “dram shop” statutes, which may subject us to uninsured liabilities. These statutes generally allow a person injured by an intoxicated person to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. Because a plaintiff may seek punitive damages, which may not be fully covered by insurance, this type of action could have an adverse impact on our business, financial condition or results of operations. A judgment in such an action significantly in excess of, or not covered by, our insurance coverage could adversely affect our business, financial condition or results of operations. Further, adverse publicity resulting from any such allegations may adversely affect our business, financial condition or results of operations.

Our current insurance may not provide adequate levels of coverage against claims.

There are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure. Such losses could have a material adverse effect on our business, financial condition or results of operations. In addition, our current insurance policies may not be adequate to protect us from liabilities that we incur in our business in areas such as workers’ compensation, general liability, auto and property. In the future, our insurance premiums may increase, and we may not be able to obtain similar levels of insurance on reasonable terms, or at all. Any substantial inadequacy of, or inability to obtain, insurance coverage could materially adversely affect our business, financial condition and results of operations. As a public company, we intend to adjust our existing directors’ and officers’ insurance. While we expect to obtain such

 

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coverage, we may not be able to obtain such coverage at all or at a reasonable cost now or in the future. Failure to obtain and maintain adequate directors’ and officers’ insurance would likely adversely affect our ability to attract and retain qualified officers and directors.

Failure to obtain and maintain required licenses and permits or to comply with alcoholic beverage or food control regulations could lead to the loss of our liquor and food service licenses and, thereby, harm our business, financial condition or results of operations.

The restaurant industry is subject to various federal, state and local government regulations, including those relating to the sale of food and alcoholic beverages. Such regulations are subject to change from time to time. The failure to obtain and maintain licenses, permits and approvals relating to such regulations could adversely affect our business, financial condition or results of operations. Typically, licenses must be renewed annually and may be revoked, suspended or denied renewal for cause at any time if governmental authorities determine that our conduct violates applicable regulations. Difficulties or failure to maintain or obtain the required licenses and approvals could adversely affect our existing restaurants and delay or result in our decision to cancel the opening of new restaurants, which would adversely affect our business, financial condition or results of operations.

Alcoholic beverage control regulations generally require our restaurants to apply to a state authority and, in certain locations, county or municipal authorities for a license that must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of daily operations of our restaurants, including minimum age of patrons and employees, hours of operation, advertising, trade practices, wholesale purchasing, other relationships with alcohol manufacturers, wholesalers and distributors, inventory control and handling, storage and dispensing of alcoholic beverages. Any future failure to comply with these regulations and obtain or retain liquor licenses could adversely affect our business, financial condition or results of operations.

We have identified a material weakness in our internal control over financial reporting for fiscal year 2017. If we fail to develop and maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results in a timely manner, which may adversely affect investor confidence in our company.

In connection with the audit of our financial statements for fiscal year 2017, our management identified a material weakness in our internal control over financial reporting, as defined in the standards established by the PCAOB, but a material weakness in our internal controls over financial reporting was not identified for fiscal year 2018. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness identified for fiscal year 2017 resulted from a lack of sufficient segregation of duties within the Company’s financial recording and reporting IT systems.

In addition, in fiscal year 2019, the Company identified an error related to the classification of labor and related costs, occupancy and related expenses, other costs, and general and administrative expenses that impacted the Company’s previously issued financial statements, including interim periods during fiscal year 2017. As a result, the Company adjusted the fiscal year 2017 financial data presented in this prospectus to correctly reclassify such costs and expenses. See Note 9 to our audited financial statements included in this prospectus.

Although we have initiated remedial measures, we cannot be certain that any such measures are sufficient to address the material weakness or that other material weaknesses and control deficiencies will not be discovered in the future. If our remediation efforts are not successful or other material weaknesses or control deficiencies occur in the future, we may be unable to report our financial results accurately on a timely basis, which could cause our reported financial results to be materially misstated and result in the loss of investor confidence or delisting and cause the market price of our common stock to decline.

 

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We have not performed an evaluation of our internal control over financial reporting, such as required by Section 404 of the Sarbanes-Oxley Act, nor have we engaged our independent registered public accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date or for any period reported in our financial statements.

Changes to accounting rules or regulations may adversely affect our business, financial condition or results of operations.

Changes to existing accounting rules or regulations may impact our business, financial condition or results of operations. Other new accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future. For instance, accounting regulatory authorities have recently issued new accounting rules which require lessees to capitalize operating leases in their financial statements in the next few years. When adopted, such change would require us to record significant operating lease obligations on our balance sheet and make other changes to our financial statements. This and other future changes to accounting rules or regulations could materially adversely affect our business, financial condition or results of operations.

We will incur increased costs as a result of being a public company.

As a public company, we expect to incur significant legal, accounting and other expenses that we did not incur as a private company, particularly after we are no longer an “emerging growth company” as defined under the JOBS Act. In addition, new and changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Act and the rules and regulations promulgated and to be promulgated thereunder, as well as under the Sarbanes-Oxley Act and the JOBS Act, have created uncertainty for public companies and increased costs and time that boards of directors and management must devote to complying with these rules and regulations. The Sarbanes-Oxley Act and related rules of the SEC and the Nasdaq Stock Market regulate corporate governance practices of public companies. We expect compliance with these rules and regulations to increase our legal and financial compliance costs and lead to a diversion of management time and attention from sales-generating activities. For example, we will be required to adopt new internal controls and disclosure controls and procedures. In addition, we will incur additional expenses associated with our SEC reporting requirements and increased compensation for our management team. We cannot predict or estimate the amount of additional costs we will incur as a public company or the specific timing of such costs.

We are an “emerging growth company,” and we cannot be certain if the reduced reporting and disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

For as long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” These exceptions provide for, but are not limited to, relief from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, less extensive disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements to hold a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved and an extended transition period for complying with new or revised accounting standards. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.” We will remain an “emerging growth company” until the earliest of: (i) the last day of the fiscal year in which we have $1.07 billion or more in annual gross revenues; (ii) the date on which we become a “large accelerated filer” (which means the year-end at which the total market value of our common equity securities held by non-affiliates is $700 million or more as of the last business day of our most recently completed second fiscal quarter); (iii) the date on which we have issued more than $1 billion of non-convertible debt securities over a three-year period; and (iv) the last day of the fiscal year following the fifth anniversary of our initial public offering. We cannot predict if investors will find our common stock less attractive because we

 

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may rely on these exemptions. If some investors find our common stock to be less attractive as a result, there may be a less active trading market for our common stock and the market price of our common stock may be more volatile.

Our management does not have experience managing a U.S. public company and our current resources may not be sufficient to fulfill our public company obligations.

Following the closing of this offering, we will be subject to various regulatory requirements, including those of the SEC and Nasdaq Stock Market. These requirements include recordkeeping, financial reporting and corporate governance rules and regulations. Our management team does not have experience in managing a U.S. public company and, historically, has not had the resources typically found in a public company. Our internal infrastructure may not be adequate to support our increased reporting obligations and we may be unable to hire, train or retain necessary staff and may be reliant on engaging outside consultants or professionals to overcome our lack of experience or employees. Our business, financial condition or results of operations could be adversely affected if our internal infrastructure is inadequate, including if we are unable to engage outside consultants or are otherwise unable to fulfill our public company obligations.

Pursuant to the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act for so long as we are an “emerging growth company.”

Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we file with the SEC as a public company, and generally requires in the same report a report by our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. However, under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until we are no longer an “emerging growth company.” We will be an “emerging growth company” until the earliest of: (i) the last day of the fiscal year in which we have $1.07 billion or more in annual gross revenues; (ii) the date on which we become a “large accelerated filer” (which means the year-end at which the total market value of our common equity securities held by non-affiliates is $700 million or more as of the last business day of our most recently completed second fiscal quarter); (iii) the date on which we have issued more than $1 billion of non-convertible debt securities over a three-year period; and (iv) the last day of the fiscal year following the fifth anniversary of our initial public offering.

In addition, Section 107 of the JOBS Act also 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. An “emerging growth company” can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

Risks Related to Ownership of Our Class A Common Stock

There may be an adverse effect on the value and liquidity of our Class A common stock due to the disparate voting rights of our Class A common stock and our Class B common stock.

With the exception of voting rights and certain conversion rights for the Class B common stock, holders of our Class A common stock and Class B common stock have identical rights. On all matters to be voted on by stockholders, holders of our Class A common stock are entitled to one vote per share while holders of our

 

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Class B common stock are entitled to 10 votes per share. The difference in the voting rights of our Class A common stock and Class B common stock could adversely affect the value of the Class A common stock to the extent that any investor or potential future purchaser of our Class A common stock ascribes value to the superior voting rights of our Class B common stock. The existence of two separate classes of common stock could result in less liquidity for our Class A common stock than if there were only one class of our common stock. In addition, if we issue additional shares of Class B common stock in the future, there will be further dilution to investors or potential future purchasers of our Class A common stock. See “Description of Capital Stock” for a description of our Class A common stock and Class B common stock and the rights associated with them.

There is no existing market for our common stock and we do not know if one will develop. Even if a market does develop, the stock prices in the market may not exceed the offering price.

Prior to this offering, there has not been a public market for our common stock or any of our equity interests. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the Nasdaq Global Market, or how liquid that market may become. An active public market for our common stock may not develop or be sustained after the offering. If an active trading market does not develop or is not sustained, you may have difficulty selling any shares that you buy.

The initial public offering price for the common stock will be determined by negotiations among us, Kura Japan and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell shares of our common stock at prices equal to or greater than the price you pay in this offering.

Our quarterly operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors due to seasonality and other factors, some of which are beyond our control, resulting in a decline in our stock price.

Our quarterly operating results may fluctuate significantly because of several factors, including:

 

   

the timing of new restaurant openings and related expense;

 

   

restaurant operating costs for our newly-opened restaurants, which are often materially greater during the first several months of operation than thereafter;

 

   

labor availability and costs for hourly and management personnel;

 

   

profitability of our restaurants, especially in new markets;

 

   

changes in interest rates;

 

   

increases and decreases in Average Unit Volumes and comparable restaurant sales;

 

   

impairment of long-lived assets and any loss on restaurant closures;

 

   

macroeconomic conditions, both nationally and locally;

 

   

negative publicity relating to the consumption of seafood or other food products we serve;

 

   

changes in consumer preferences and competitive conditions;

 

   

expansion in existing and new markets;

 

   

increases in infrastructure costs; and

 

   

fluctuations in commodity prices.

Seasonal factors and the timing of holidays also cause our sales to fluctuate from quarter to quarter. As a result of these factors, our quarterly and annual operating results and comparable restaurant sales may fluctuate

 

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significantly. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year and comparable restaurant sales for any particular future period may decrease. In addition, as we expand by opening more restaurants in cold weather climates, the seasonality of our business may be amplified. In the future, operating results may fall below the expectations of securities analysts and investors. In that event, the price of our common stock could be adversely impacted.

The price of our common stock may be volatile and you may lose all or part of your investment.

The market price of our common stock could fluctuate significantly, and you may not be able to resell your shares at or above the offering price. Those fluctuations could be based on various factors in addition to those otherwise described in this prospectus, including those described under “—Risks Related to Our Business and Industry” and the following:

 

   

our operating performance and the performance of our competitors or restaurant companies in general;

 

   

the public’s reaction to our press releases, our other public announcements and our filings with the SEC;

 

   

changes in earnings estimates or recommendations by research analysts who follow us or other companies in our industry;

 

   

global, national or local economic, legal and regulatory factors unrelated to our performance;

 

   

the number of shares to be publicly traded after this offering;

 

   

future sales of our common stock or our equity interests by our officers, directors and significant stockholders;

 

   

the arrival or departure of key personnel; and

 

   

other developments affecting us, our industry or our competitors.

In addition, in recent years the stock market has experienced significant price and volume fluctuations. These fluctuations may be unrelated to the operating performance of particular companies. These broad market fluctuations may cause declines in the market price of our common stock. The price of our common stock could fluctuate based upon factors that have little or nothing to do with our business, financial condition or results of operations, and those fluctuations could adversely impact our common stock price.

Future sales of our common stock, or the perception that such sales may occur, could depress our common stock price.

Sales of a substantial number of shares of our common stock in the public market, or the perception that such sales may occur, following this offering could depress the market price of our common stock. This would include sales by Kura Japan, as detailed below under “—Risks Related to Our Organizational Structure—Future sales of our shares by Kura Japan could depress our Class A common stock price.” Our executive officers and directors and holders of all of our options and equity interests, including Kura Japan, have agreed with the underwriters not to offer, sell, dispose of or hedge any shares of common stock or securities convertible into or exchangeable for shares of common stock (including shares of our Class B common stock), subject to specified limited exceptions and extensions described elsewhere in this prospectus, during the period ending 180 days after the date of the final prospectus, except with the prior written consent of the representatives of the underwriters. See “Underwriting.”

Our amended and restated certificate of incorporation will authorize us to issue up to                  shares of Class A common stock and                  shares of Class B common stock, of which, as of the date of this prospectus,                  shares of Class A common stock and                  shares of Class B common stock are outstanding, and                  shares of Class A common stock will be issuable upon the exercise of outstanding

 

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stock options. The shares of Class A common stock offered in this offering will be freely tradable without restriction under the Securities Act, except for any shares of our common stock that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available.

After the expiration of the lock-up agreements, shares of our Class A common stock and Class B common stock held by our affiliates will continue to be subject to the volume and other restrictions of Rule 144 under the Securities Act. The representatives of the underwriters may, in its sole discretion and at any time without notice, release all or any portion of the shares subject to the lock-up. See “Underwriting.”

In addition, immediately following this offering, we intend to file a registration statement registering under the Securities Act the shares of Class A common stock reserved for issuance under our 2018 Incentive Compensation Plan. See the information under the heading “Shares Eligible for Future Sale” for a more detailed description of the shares that will be available for future sales upon completion of this offering.

If you purchase shares of our common stock sold in this offering, you will incur immediate and substantial dilution.

If you purchase shares of our common stock in this offering, you will incur immediate and substantial dilution in the amount of $        per share because the initial public offering price of $        per share is substantially higher than the pro forma net tangible book value per share of our outstanding common stock. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares. In addition, you may also experience additional dilution upon future equity issuances or the exercise of stock options to purchase common stock granted to our employees and non-employees, including directors, under our 2018 Incentive Compensation Plan. See “Dilution.”

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our common stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who cover us downgrades our common stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock prices and trading volume to decline.

We do not intend to pay dividends for the foreseeable future.

We may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any future determination to declare and pay cash dividends will be at the discretion of our board of directors and will depend on, among other things, our financial condition, results of operations, cash requirements, contractual restrictions and such other factors as our board of directors deems relevant. Our ability to pay dividends may also be limited by covenants under our Credit Facility, terms loans or of any future outstanding indebtedness we, our subsidiaries or affiliates (including Kura Japan) incur. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it. See “Dividend Policy.”

Provisions in our charter documents and Delaware law may delay or prevent our acquisition by a third party.

Our amended and restated certificate of incorporation and amended and restated bylaws, and Delaware law, contain several provisions that may make it more difficult for a third party to acquire control of us without the

 

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approval of our board of directors. These provisions may make it more difficult or expensive for a third party to acquire a majority of our outstanding equity interests. These provisions also may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our stockholders receiving a premium over the market price for their common stock. See “Description of Capital Stock.”

Risks Related to Our Organizational Structure

We are controlled by Kura Japan, whose interests may differ from those of our other stockholders.

Immediately following this offering and the application of net proceeds from this offering, Kura Japan will control approximately     % of the combined voting power of our equity interests through their ownership of both Class A common stock and Class B common stock. Kura Japan will, for the foreseeable future, have significant influence over corporate management and affairs, and will be able to control virtually all matters requiring stockholder approval so long as Kura Japan owns a majority of the combined voting power of our outstanding equity interests. Following this offering, if Kura Japan continues to own              shares of Class B common stock on a post-split basis, Kura Japan will own a majority of the combined voting power of our outstanding equity interests, and effectively control the outcome of matters submitted to stockholders that require a majority vote, so long as Kura Japan holds         % of the issued and outstanding shares of Class A common stock, and further assuming              shares of our Class A common stock and              shares of our Class B common stock are outstanding as of                 , 2019. Kura Japan is able to, subject to applicable law, elect a majority of the members of our board of directors and control actions to be taken by us and our board of directors, including amendments to our certificate of incorporation and bylaws and approval of significant corporate transactions, including, among other matters, mergers and sales of substantially all of our assets, as well as incurrence of indebtedness by us. The directors so elected will have the authority, subject to the terms of our indebtedness and applicable rules and regulations, to issue additional stock, implement stock repurchase programs, declare dividends and make other decisions. It is possible that the interests of Kura Japan may in some circumstances conflict with our interests and the interests of our other stockholders, including you. For example, Kura Japan may have different tax positions from us that could influence their decisions regarding whether and when to dispose of assets and whether and when to incur new or refinance existing indebtedness. Such indebtedness could contain covenants that prevent us from declaring dividends to stockholders. In addition, the determination of future tax reporting positions and the structuring of future transactions may take into consideration Kura Japan’s tax or other considerations, which may differ from our considerations or our other stockholders. For additional information about our relationships with Kura Japan, you should read the information under the headings “Principal Stockholders” and “Certain Relationships and Related Party Transactions—Relationship with Kura Japan.”

We are a “controlled company” within the meaning of the Nasdaq listing standards and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

Immediately following this offering and the application of net proceeds from this offering, Kura Japan will control approximately     % of the combined voting power of our equity interests through their ownership of both Class A common stock and Class B common stock. Because of the voting power of Kura Japan, we are considered a “controlled company” for the purposes of the Nasdaq Stock Market. As such, we are exempt from certain corporate governance requirements of the Nasdaq Stock Market, including (i) the requirement that a majority of the board of directors consist of independent directors, (ii) the requirement that we have a Nominating and Corporate Governance Committee that is composed entirely of independent directors and (iii) the requirement that we have a Compensation Committee that is composed entirely of independent directors. Following this offering, we intend to rely on some or all of these exemptions. As a result, we will not have a majority of independent directors, we will not have a Nominating and Corporate Governance Committee and our Compensation Committee may not consist entirely of independent directors so long as we are considered a

 

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“controlled company” under the Nasdaq Stock Market requirements. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the Nasdaq Stock Market.

The interests of Kura Japan may conflict with ours or yours in the future.

Various conflicts of interest between Kura Japan and us could arise. Ownership interests of directors or officers of Kura Japan in our common stock, or a person’s service as either a director or officer of both companies, could create or appear to create potential conflicts of interest when those directors and officers are faced with decisions that could have different implications for Kura Japan and Kura Sushi USA. These decisions could, for example, relate to:

 

   

disagreement over corporate opportunities;

 

   

management stock ownership;

 

   

employee retention or recruiting;

 

   

our dividend policy; and

 

   

the services and arrangements from which we benefit as a result of its relationship with Kura Japan.

Potential conflicts of interest could also arise if we enter into any new commercial arrangements with Kura Japan in the future. Our directors and officers who have interests in both Kura Japan and us may also face conflicts of interest with regard to the allocation of their time between Kura Japan and Kura Sushi USA.

The corporate opportunity provisions in our amended and restated certificate of incorporation could enable Kura Japan to benefit from corporate opportunities that might otherwise be available to Kura Sushi USA.

Our amended and restated certificate of incorporation will contain provisions related to corporate opportunities that may be of interest to both Kura Japan and us. It will provide that if a corporate opportunity is offered to:

 

   

one of our officers or employees who is also a director (but not an officer or employee) of Kura Japan, that opportunity will belong to us unless expressly offered to that person primarily in his or her capacity as a director of Kura Japan, in which case it will belong to Kura Japan;

 

   

one of our directors who is also an officer or employee of Kura Japan, that opportunity will belong to Kura Japan unless expressly offered to that person primarily in his or her capacity as our director, in which case it will belong to us; and

 

   

any person who is either (1) an officer or employee of both us and Kura Japan or (2) a director of both us and Kura Japan (but not an officer or employee of either one), that opportunity will belong to Kura Japan unless expressly offered to that person primarily in his or her capacity as our director, in which case such opportunity shall belong to us.

Upon the completion of this offering, Manabu Kamei, our Chief Operating Officer and a member of our board of directors, will also be a member of the board of directors and an employee of Kura Japan, but none of our other officers, employees or directors will also be an officer, employee or director of Kura Japan. Accordingly, upon the completion of this offering, there will be no officers or employees of the Company who would fit the description of the first bullet above, and only Mr. Kamei would fit the description of personnel described in the second and third bullets above given his roles at our company and Kura Japan.

In following these procedures, any person who is offered a corporate opportunity will have satisfied his or her fiduciary duties to our stockholders and us. In addition, our amended and restated certificate of incorporation will provide that any corporate opportunity that belongs to Kura Japan or to us, as the case may be, may not be

 

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pursued by the other, unless and until the party to whom the opportunity belongs determines not to pursue the opportunity and so informs the other party. Furthermore, so long as the material facts of any transaction between us and Kura Japan have been disclosed to or are known by our board of directors or relevant board committee, and the board or such committee (which may, for quorum purposes, include directors who are directors or officers of Kura Japan) authorizes the transaction by an affirmative vote of a majority of the disinterested directors, then Kura Japan will have satisfied its fiduciary duties and will not be liable to us or our stockholders for any breach of fiduciary duty or duty of loyalty relating to that transaction. These provisions create the possibility that a corporate opportunity that may be pertinent to us may be used for the benefit of Kura Japan.

Future sales of our shares by Kura Japan could depress our Class A common stock price.

After this offering, and subject to the lock-up period described below, Kura Japan may sell all or a portion of the shares of our Class A common stock and Class B common stock that it owns (which shares of Class B common stock would be converted automatically into Class A shares in connection with any sale). Sales by Kura Japan in the public market could depress our Class A common stock price. Kura Japan is not subject to any contractual obligation to maintain its ownership position in our shares, except that it has agreed not to sell or otherwise dispose of any of our equity interests for a period ending 180 days after the date of the final prospectus without the prior written consent of the representatives of the underwriters, subject to specified limited exceptions and extensions described in “Underwriting.” Consequently, Kura Japan may decide not to maintain its ownership of our equity interests once the lock-up period expires.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are contained principally in “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” In some cases, you can identify forward-looking statements by terms such as “target,” “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “design,” “estimate,” “continue,” “predict,” “potential,” “plan,” “anticipate” or the negative of these terms, and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these assumptions, risks and uncertainties, you should not place undue reliance on these forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:

 

   

our ability to successfully maintain increases in our comparable restaurant sales and AUVs;

 

   

our ability to successfully execute our growth strategy and open new restaurants that are profitable;

 

   

our ability to expand in existing and new markets;

 

   

our projected growth in the number of our restaurants;

 

   

macroeconomic conditions and other economic factors;

 

   

our ability to compete with many other restaurants;

 

   

our reliance on vendors, suppliers and distributors, including Kura Japan;

 

   

concerns regarding food safety and foodborne illness;

 

   

changes in consumer preferences and the level of acceptance of our restaurant concept in new markets;

 

   

minimum wage increases and mandated employee benefits that could cause a significant increase in our labor costs;

 

   

the failure of our automated equipment or information technology systems or the breach of our network security;

 

   

the loss of key members of our management team;

 

   

the impact of governmental laws and regulations; and

 

   

volatility in the price of our common stock.

We discuss many of these risks in this prospectus in greater detail under the heading “Risk Factors.” Also, these forward-looking statements represent our estimates and assumptions only as of the date of this prospectus. Unless required by United States federal securities laws, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after the statement is made.

The market data and certain other statistical information used throughout this prospectus are based on independent industry publications, governmental publications, reports by market research firms or other independent sources. Some data are also based on our good faith estimates. Although we believe these third-party sources are reliable, we have not independently verified the information attributed to these third-party sources and cannot guarantee its accuracy and completeness. Similarly, our estimates have not been verified by any independent source.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

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USE OF PROCEEDS

We estimate that the net proceeds we will receive from this offering will be approximately $         million based on an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares in this offering from us is exercised in full, our net proceeds will be approximately $         million after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds we receive from this offering for working capital, to fund new unit growth and for other general corporate purposes, including a portion to repay all outstanding indebtedness under our Credit Facility, comprised of approximately $         million under our line of credit under the Credit Facility and approximately $3.1 million under our term loans.

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share of Class A common stock, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, would increase (decrease) net proceeds to us from this offering by approximately $         million, assuming that the number of shares of Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares of Class A common stock we are offering. Each                 increase (decrease) in the number of shares of Class A common stock we are offering would increase (decrease) the net proceeds to us from this offering by approximately $         million, assuming no change in the assumed initial public offering price per share.

We intend to use approximately $         million of the net proceeds we receive from this offering to repay the entire amount of the outstanding borrowings under our line of credit under the Credit Facility and the amounts outstanding under our term loans. The line of credit under the Credit Facility is scheduled to mature on July 31, 2020 and had an outstanding balance of approximately $         million as of                     , 2019. The term loans have scheduled maturities in May 2022 for approximately $2.1 million of indebtedness and June 2022 for approximately $1.0 million of indebtedness. Borrowings under our line of credit under the Credit Facility bear interest at our option at either (i) the lender’s prime lending rate less one-half of one percent (0.5%) or (ii) one-month LIBOR plus one and one-half percent (1.5%). Borrowings under our term loans are pursuant to promissory notes entered into for the foregoing referenced amounts, and bear interest at a variable interest rate based on one-month LIBOR, plus one and one-half percent (1.5%).

Our expected use of net proceeds from this offering represents our current intentions based upon our present plans and business condition. As of the date of this prospectus, we cannot predict with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering or the amounts that we will actually spend. The amounts and timing of our actual use of net proceeds will vary depending on numerous factors. As a result, our management will have broad discretion in the application of the net proceeds of this offering, and investors will be relying on our judgment regarding the application of the net proceeds.

Pending use of the net proceeds from this offering as described above, we may invest the net proceeds in short-and intermediate-term interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the United States government.

 

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DIVIDEND POLICY

No dividends have been declared or paid on our shares of equity interests. We do not anticipate paying any cash dividends on shares of our Class A common stock or Class B common stock in the foreseeable future. We currently intend to retain any earnings to finance the development and expansion of our business. Any future determination to pay dividends will be at the discretion of our board of directors and will be dependent upon then-existing conditions, including our earnings, capital requirements, results of operations, financial condition, business prospects and other factors that our board of directors considers relevant. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Certain Relationships and Related Party Transactions” for additional information regarding our financial condition.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of May 31, 2019:

 

   

on an actual basis, except to the extent it has been adjusted to give effect to a reverse stock split of 1-for-                of our shares of Class A common stock and our shares of Class B common stock, effective immediately prior to the completion of this offering; and

 

   

on an as adjusted basis to give effect to the sale of                  shares of Class A common stock in this offering at an assumed initial public offering price of $                (the midpoint of the price range set forth on the cover page of this prospectus) after deducting estimated underwriting discounts and estimated offering expenses payable by us, and the application of the net proceeds thereof.

You should read the following table in conjunction with the sections entitled “Use of Proceeds,” “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included in this prospectus.

 

     As of May 31, 2019  
    

Actual

    

As Adjusted (1)(2)

 
     (in thousands, except share
and per share data)
 

Cash and cash equivalents

   $ 1,265      $                
  

 

 

    

 

 

 

Debt (current and non-current):

     

Credit Facility (3)

     3,055     
  

 

 

    

 

 

 

Stockholder’s Equity:

     

Class A common stock, $0.001 par value per share (             shares authorized,              shares issued and outstanding, actual;              shares authorized,              shares issued and outstanding, as adjusted)

     8   

Class B common stock, $0.001 par value per share (             shares authorized,              shares issued and outstanding, actual;              shares authorized,              shares issued and outstanding, as adjusted) (4)

     2     

Additional paid-in capital

     20,696     

Retained earnings

     1,815   
  

 

 

    

 

 

 

Total stockholder’s equity

     22,521     
  

 

 

    

 

 

 

Total capitalization

   $ 25,576     
  

 

 

    

 

 

 

 

(1)

Excludes (i) 818,501 shares of our Class A common stock issuable on a pre-reverse split basis upon the exercise of stock options outstanding as of May 31, 2019 at a weighted average exercise price of $2.23 and (ii) 581,499 shares of our common stock reserved for future grants under the 2018 Incentive Compensation Plan. See “Executive Compensation.” Also assumes no exercise by the underwriters of their option to purchase up to              additional shares of Class A common stock from us.

(2)

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus, would increase (decrease) our as adjusted cash and cash equivalents, additional paid-in capital, total stockholder’s equity and total capitalization by approximately $         million, assuming that the number of shares of Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares of Class A common stock we are offering. Each                  increase (decrease) of in the number of shares of Class A common stock we are offering would increase (decrease) our as adjusted cash and cash equivalents, additional paid-in capital, total stockholder’s equity and total capitalization by approximately $         million, assuming no change in the assumed initial public offering price per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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(3)

We intend to use approximately $         million of the net proceeds we receive from this offering to repay the entire amount of the outstanding borrowings under the line of credit under our Credit Facility and the term loans, which was originally drawn down under the line of credit under the Credit Facility but converted to be payable on a term loan basis. The Credit Facility is scheduled to mature on July 31, 2020 and had an outstanding balance of approximately $         million as of                     , 2019. The term loans have scheduled maturities in May 2022 for approximately $2.1 million of indebtedness and June 2022 for approximately $1.0 million of indebtedness. See “Use of Proceeds.”

(4)

On all matters to be voted on by stockholders, holders of our Class A common stock are entitled to one vote per share while holders of our Class B common stock are entitled to 10 votes per share. Upon completion of this offering and the adoption of our amended and restated certificate of incorporation, the Class B common stock will be convertible as follows: (i) at such time as any shares of Class B common stock cease to be beneficially owned by Kura Japan; such shares of Class B common stock will be automatically converted into shares of Class A common stock on a one-for-one basis, (ii) all of the Class B common stock will automatically convert into Class A common stock on a one-for-one basis on such date when the number of shares of Class A and Class B common stock beneficially owned by Kura Japan represents less than 20.0% of the total number of shares of Class A and Class B common stock outstanding, and (iii) at the election of the holder of Class B common stock, any share of Class B common stock may be converted into one share of Class A common stock. With the exception of voting rights and conversion rights, holders of Class A and Class B common stock will have identical rights. See “Description of Capital Stock.”

 

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DILUTION

Currently we have, and upon completion of this offering we will have, two classes of equity interests issued and outstanding: Class A common stock, which is being sold in this offering and to which we refer in this prospectus as “common stock,” and Class B common stock. Dilution is the amount by which the initial public offering price paid by purchasers of shares of our equity interests exceeds the net tangible book value per share of our equity interests immediately following the completion of the offering. Net tangible book value represents the amount of our total tangible assets reduced by our total liabilities. Net tangible book value per share represents our net tangible book value divided by the number of shares of our equity interests outstanding. As of May 31, 2019, prior to giving effect to the offering, our net tangible book value was $18.8 million and our net tangible book value per share was $1.88.

After giving effect to the issuance and sale of the                  shares of Class A common stock offered in this offering and the application of the estimated net proceeds of the offering received by us, as described in “Use of Proceeds,” based upon an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus, our net tangible book value as of May 31, 2019 would have been approximately $         million, or $         per share of equity interest. This represents an immediate increase in net tangible book value to our existing stockholder, Kura Japan, of $         per share and an immediate dilution to new investors in this offering of $         per share. The following table illustrates this per share dilution net tangible book value to new investors after giving effect to this offering:

 

Assumed initial public offering price per share

      $                

Net tangible book value per share as of May 31, 2019

   $ 1.88     

Increase in net tangible book value per share attributable to new investors

   $       
  

 

 

    

Adjusted net tangible book value per share after this offering

      $    
     

 

 

 

Dilution per share to new investors

      $    
     

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $        per share would increase (decrease) our net tangible book value by $        million, the net tangible book value per share after this offering by $        and the dilution per share to new investors by $        , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their over-allotment option in full, the net tangible book value per share of our Class A common stock after giving effect to this offering would be $        per share, which amount represents an immediate increase in net tangible book value of $        per share to Kura Japan and the immediate dilution in net tangible book value per share to new investors in this offering of $        per share.

The following table presents, as of May 31, 2019, the differences between the number of shares purchased from us, the total consideration paid to us, and the average price per share paid by Kura Japan and by new investors purchasing Class A common stock at the assumed initial offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent  

Kura Japan

                                $                             $                

New investors

            
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100.0   $          100.0   $    
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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If the underwriters were to fully exercise their option to purchase                  additional shares of our Class A common stock, the percentage of shares of our Class A common stock held by Kura Japan after this offering would be     %, and the percentage of shares of our Class A common stock held by new investors after this offering would be     %.

The foregoing table does not reflect options outstanding under our 2018 Incentive Compensation Plan or stock options to be granted after the offering. As of May 31, 2019, there were 818,501 options outstanding with a weighted average exercise price of $2.23 per share on a pre-reverse split basis. To the extent any outstanding options or other equity awards are exercised or become vested or any additional options or other equity awards are granted and exercised or become vested or other issuances of shares of our common stock are made, there may be further economic dilution to new investors.

 

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SELECTED FINANCIAL DATA

The following table summarizes our historical financial and operating data for the periods and as of the dates indicated. The statements of income data for the fiscal years ended August 31, 2017 and August 31, 2018 and the balance sheet data as of August 31, 2017 and August 31, 2018 have been derived from our audited financial statements included elsewhere in this prospectus and reflects the effects of the immaterial correction of errors to the fiscal year ended August 31, 2017, as discussed in Note 9, Immaterial Correction of Previously Reported Expenses , to the audited financial statements included in this prospectus. We have derived the statements of income data for the nine months ended May 31, 2018 and May 31, 2019 and the balance sheet data as of May 31, 2019 from our unaudited interim financial statements included elsewhere in this prospectus. The financial data presented includes all normal and recurring adjustments that we consider necessary for a fair presentation of the financial position and results of operations for such periods.

The historical results presented below are not necessarily indicative of the results to be expected for any future period. This information should be read in conjunction with “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and unaudited interim financial statements and the related notes included elsewhere in this prospectus.

 

     Fiscal Years Ended August 31,     Nine Months Ended May 31,  
             2017                     2018                     2018                     2019          
     (amounts in thousands, except share and per share data)  

Statements of Income Data:

        

Sales

   $ 37,251     $ 51,744     $ 37,099     $ 45,492  

Restaurant operating costs:

        

Food and beverage costs

     13,389       17,594       12,772       14,880  

Labor and related costs

     12,117       15,994       11,711       14,286  

Occupancy and related expenses

     2,077       3,013       2,330       3,292  

Depreciation and amortization expenses

     1,345       1,624       1,133       1,457  

Other costs

     3,907       5,404       3,911       5,102  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total restaurant operating costs

     32,835       43,629       31,857       39,017  
  

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative expenses

     3,364       5,965       4,437       5,699  

Depreciation and amortization expenses

     25       51       38       80  

Impairment of long-lived asset

     —         236       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     36,224       49,881       36,332       44,796  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,027       1,863       767       696  

Other expense (income):

        

Interest expense

     85       128       97       126  

Interest income

     (5     (12     (6     (11
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     947       1,747       676       581  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax (benefit) expense

     240       5       (86     41  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 707     $ 1,742     $ 762     $ 540  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Class A and Class B common stockholder

        

- basic and diluted

   $ 707     $ 1,742     $ 762     $ 540  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to Class A and Class B common stockholder

        

Basic

   $ 0.07     $ 0.17     $ 0.08     $ 0.05  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.07     $ 0.17     $ 0.08     $ 0.05  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used to compute net income per share attributable to Class A and Class B common stockholder

        

Basic

     10,000,000       10,000,091       10,000,088       10,000,100  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     10,000,000       10,100,568       10,000,088       10,302,308  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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     As of August 31,      As of
May 31,
 
           2017                  2018            2019  
     (amounts in thousands)  

Balance Sheet Data:

        

Cash and cash equivalents

   $         2,882      $         5,711      $         1,265  

Total assets

     23,160        32,069        37,638  

Total liabilities

     8,502        10,564        15,117  

Total stockholder’s equity

     14,658        21,505        22,521  

 

     Fiscal Years Ended August 31,     Nine Months Ended May 31,  
             2017                     2018                     2018                     2019          
     (dollar amounts in thousands)  

Key Financial and Operational Metrics:

        

Restaurants at the end of period

     14       17       18       21  

Average Unit Volumes (1)

   $         3,358     $         3,457       —         —    

Comparable restaurant sales growth (2)

     34.8     2.9     9.5     4.9

EBITDA (3)

   $ 2,397     $ 3,538     $ 1,938     $         2,233  

Adjusted EBITDA (3)

   $ 3,107     $ 4,506     $         2,608     $ 3,431  

as a percentage of sales

     8.3     8.7     7.0     7.5

Operating income

   $ 1,027     $ 1,863     $ 767     $ 696  

Operating profit margin

     2.8     3.6     2.1     1.5

Restaurant-level Contribution (3)

   $ 6,471     $ 10,380     $ 7,045     $ 8,716  

Restaurant-level Contribution margin (3)

     17.4     20.1     19.0     19.2

 

(1)

Average Unit Volumes (AUVs) consist of the average annualized sales of all restaurants that have been open for 18 months or longer at the end of the accounting period presented. The AUVs measure is calculated excluding the Laguna Hills, California restaurant, which closed in fiscal year 2018.

(2)

Comparable restaurant sales growth represents the change in year-over-year sales for restaurants open for at least 18 months prior to the start of the accounting period presented, including those temporarily closed for renovations during the year. The comparable restaurant sales growth measure is calculated excluding the Laguna Hills, California restaurant, which closed in fiscal year 2018.

(3)

EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin are intended as supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. We are presenting EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin because we believe that they provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results. Additionally, we present Restaurant-level Contribution because it excludes the impact of general and administrative expenses which are not incurred at the restaurant-level. We also use Restaurant-level Contribution to measure operating performance and returns from opening new restaurants.

EBITDA is calculated as net income before interest expense, provision (benefit) for income taxes and depreciation and amortization. Adjusted EBITDA further adjusts EBITDA to reflect the additions and eliminations described in the table below. Restaurant-level Contribution represents operating income plus depreciation and amortization, stock-based compensation expense, pre-opening rent expense, pre-opening costs, non-cash rent expense, asset disposals, closure costs and restaurant impairments, general and administrative expenses, less corporate-level stock-based compensation expense. Restaurant-level Contribution margin is defined as Restaurant-level Contribution divided by sales.

We believe that the use of EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the Company’s financial measures with those of comparable companies, which may present similar non-GAAP financial measures to investors. However, you should be aware that Restaurant-level Contribution and Restaurant-level Contribution margin are financial measures which are

 

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not indicative of overall results for the Company, and Restaurant-level Contribution and Restaurant-level Contribution margin do not accrue directly to the benefit of stockholders because of corporate-level expenses excluded from such measures. In addition, you should be aware when evaluating EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin 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 EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin in the same fashion.

Because of these limitations, EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution 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, Restaurant-level Contribution and Restaurant-level Contribution margin on a supplemental basis. Our management recognizes that EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin have limitations as analytical financial measures, including the following:

 

   

EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin do not reflect our capital expenditures or future requirements for capital expenditures;

 

   

EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin do not reflect interest expense or the cash requirements necessary to service interest or principal payments associated with our indebtedness;

 

   

EBITDA, Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin do not reflect depreciation and amortization, which are non-cash charges, although the assets being depreciated and amortized will likely have to be replaced in the future, and do not reflect cash requirements for such replacements;

 

   

Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin do not reflect the costs of stock-based compensation expense, pre-opening rent expense, pre-opening costs, non-cash rent expense, and asset disposals, closure costs and restaurant impairments;

 

   

Adjusted EBITDA, Restaurant-level Contribution and Restaurant-level Contribution margin do not reflect changes in, or cash requirements for, our working capital needs; and

 

   

other companies in our industry may calculate these measures differently, limiting their usefulness as comparative measures.

 

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A reconciliation of net income to EBITDA and Adjusted EBITDA is provided below:

 

     Fiscal Years Ended August 31,      Nine Months Ended May 31,  
             2017                      2018                      2018                     2019          
     (amounts in thousands)  

Net income, as reported

   $ 707      $ 1,742      $ 762     $ 540  

Interest, net

     80        116        91       115  

Taxes

     240        5        (86     41  

Depreciation and amortization

     1,370        1,675        1,171       1,537  
  

 

 

    

 

 

    

 

 

   

 

 

 

EBITDA

     2,397        3,538        1,938       2,233  

Stock-based compensation expense (a)

     —          105        —       476  

Pre-opening rent expense (b)

     203        197        288       219  

Pre-opening costs (c)

     341        77        77       152  

Non-cash rent expense (d)

     166        353        305       351  

Asset disposals, closure costs and restaurant impairments (e)

     —          236        —       —    
  

 

 

    

 

 

    

 

 

   

 

 

 

Adjusted EBITDA

   $         3,107      $         4,506      $         2,608     $         3,431  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(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 income and of corporate-level stock-based compensation included in general and administrative expenses in the statements of income. In fiscal year 2018, restaurant-level stock-based compensation was $13,884 and corporate-level stock-based compensation was $91,435. For the nine months ended May 31, 2019, restaurant-level stock-based compensation was $62,568 and corporate-level stock-based compensation was $413,649.

(b)

Pre-opening rent expense includes rent expenses incurred between date of possession and opening month of our restaurants.

(c)

Pre-opening costs represent labor costs for new employees (trainees) and includes hourly wages, payroll taxes and benefits, travel expenses for trainees and trainers and recruitment fees.

(d)

Non-cash rent expense includes rent expense after the opening month of our restaurants that did not require cash outlay in the respective periods.

(e)

Asset disposals, closure costs and restaurant impairments include losses incurred due to impairment of property and equipment.

A reconciliation of operating income to Restaurant-level Contribution is provided below:

 

     Fiscal Years Ended August 31,     Nine Months Ended May 31,  
             2017                      2018                     2018                      2019          
     (amounts in thousands)  

Operating income, as reported

   $ 1,027      $ 1,863     $ 767      $ 696  

Depreciation and amortization

     1,370        1,675       1,171        1,537  

Stock-based compensation expense (a)

     —          105       —          476  

Pre-opening rent expense (b)

     203        197       288        219  

Pre-opening costs (c)

     341        77       77        152  

Non-cash rent expense (d)

     166        353       305        351  

Asset disposals, closure costs and restaurant impairments (e)

     —          236       —          —    

General and administrative expenses (f)

     3,364        5,965       4,437        5,699  

Corporate-level stock-based compensation included in General and administrative expenses

     —          (91     —          (414
  

 

 

    

 

 

   

 

 

    

 

 

 

Restaurant-level Contribution (f)

   $         6,471      $         10,380     $         7,045      $         8,716  
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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(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 income and of corporate-level stock-based compensation included in general and administrative expenses in the statements of income. In fiscal year 2018, restaurant-level stock-based compensation was $13,884 and corporate-level stock-based compensation was $91,435. For the nine months ended May 31, 2019, restaurant-level stock-based compensation was $62,568 and corporate-level stock-based compensation was $413,649.

(b)

Pre-opening rent expense includes rent expenses incurred between date of possession and opening month of our restaurants.

(c)

Pre-opening costs represent labor costs for new employees (trainees) and includes hourly wages, payroll taxes and benefits, travel expenses for trainees and trainers and recruitment fees.

(d)

Non-cash rent expense includes rent expense after the opening month of our restaurants that did not require cash outlay in the respective periods.

(e)

Asset disposals, closure costs and restaurant impairments include losses incurred due to impairment of property and equipment.

(f)

Amounts related to the fiscal year ended August 31, 2017 have been restated from those previously reported to give effect to the immaterial correction of errors as discussed in Note 9, Immaterial Correction of Previously Reported Expenses , to the audited financial statements included in this prospectus. General and administrative expenses and Restaurant-level Contribution as previously reported of $2,635 and $5,742, respectively, have each been increased in the amount of $729, to the amounts as restated of $3,364 and $6,471, respectively, which has resulted in an increase in Restaurant-level Contribution margin of 2%.

 

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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 prospectus. The following information reflects the effects of the immaterial correction of errors in the fiscal year ended August 31, 2017, as discussed in Note 9, Immaterial Correction of Previously Reported Expenses , to the audited financial statements included in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, 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 prospectus 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.

Overview

Kura Revolving Sushi Bar is a fast-growing technology-enabled Japanese restaurant concept. We offer a distinctive dining experience which we refer to as the “Kura Experience.” The Kura Experience is built on the combination of our authentic Japanese cuisine and engaging revolving sushi service model. Kura Sushi USA was established in 2008 as a subsidiary of Kura Japan, a Japan-based revolving sushi chain with over 400 restaurants. Kura Sushi USA opened its first restaurant in Irvine, California in 2009, and we believe we are the largest revolving sushi chain in the United States. The success of our restaurants demonstrates that the Kura Experience resonates with our guests. Based on our initial success, we have expanded to new markets and, as of May 31, 2019, we operate 21 high-volume restaurants in California, Texas, Georgia, and Illinois.

We offer our guests a small plates menu featuring over 140 freshly prepared items rooted in our philosophy of using old-world techniques and ingredients that are free from artificial seasonings, sweeteners, colorings, and preservatives. We believe our revolving sushi service model delights our guests by creating an exciting atmosphere where guests feel a sense of discovery, and by allowing them to control the variety, portioning, check size and pace of their dining experience.

Our restaurant model and disciplined growth strategy has driven strong performance in our business. As a result, for the fiscal year ended August 31, 2018, our sales grew 38.9% to $51.7 million, operating income grew 81.5% to $1.9 million, net income grew 146.4% to $1.7 million, and Restaurant-level Contribution grew 60.4% to $10.4 million. Our sales for the nine months ended May 31, 2019 increased by 22.6% to $45.5 million from $37.1 million for the nine months ended May 31, 2018. For the same period, operating income decreased 9.1% to $0.7 million, net income decreased 29.0% to $0.5 million, and Restaurant-level Contribution grew 23.7% to $8.7 million. The decrease in operating income and net income for the nine months ended May 31, 2019 was primarily driven by a $1.3 million increase in general and administrative expenses. The increase in general and administrative expenses is primarily due to an increase in costs associated with outside administrative, legal and professional fees, stock-based compensation, and other general corporate expenses associated with preparing to become a public company. Upon completion of our initial public offering, we expect that we will continue to incur significant legal, accounting and other expenses associated with being public, including additional expenses associated with our ongoing SEC reporting requirements as well as increased compensation for our management team. See “Risk Factors—We will incur increased costs as a result of being a public company.”

For a reconciliation of operating income to Restaurant-level Contribution, a non-GAAP measure, see “Key Performance Indicators”.

Business Trends

Changes in customer preferences, general economic conditions, discretionary spending priorities, demographic trends, traffic patterns and the type, number and location of competing restaurants affect the

 

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restaurant industry. Our success depends to a significant extent on consumer confidence, which is influenced by general economic conditions, local and regional economic conditions in the markets in which we operate, and discretionary income levels. Our sales may decline during economic downturns, which can be caused by various economic factors during periods of uncertainty. Any material decline in consumer confidence spending could cause our sales, operating results, business or financial condition to decline.

In addition, as further discussed below, our new restaurants historically open with above-average volumes, which then decline after the initial sales surge that comes with interest in a new restaurant opening, which is our “honeymoon period” for new restaurants. In new markets, the length of time before average sales for new restaurants stabilize is less predictable as a result of our limited knowledge of these markets and consumers’ limited awareness of our brand. We assess the “honeymoon” period of newly opened restaurants by comparing year-over-year monthly sales to determine when in the prior year (i.e., the first twelve months after a restaurant opens) the “honeymoon” period ended. While the “honeymoon” period for our three restaurant openings in fiscal year 2017 ranged up to six months, our four restaurant openings in fiscal year 2018 have not operated for a sufficient period to allow us to determine the “honeymoon” period for such restaurants. New restaurants may not be profitable and their sales performance may not follow historical patterns. Since opening new restaurants is a significant component of our plans for sales growth, comparable restaurant sales growth is one key measure we use to evaluate performance, which measurement is subject to a variety of factors, including 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.

Our sales in future periods will continue to be subject to these and other factors that are beyond our control and, as a result, are likely to fluctuate.

Growth Strategies and Outlook

We plan to execute the following strategies to continue to increase our sales and improve profitability:

 

   

open new restaurant locations;

 

   

deliver consistent comparable restaurant sales growth;

 

   

improve our profitability by leveraging scale and/or infrastructure; and

 

   

increase brand awareness.

We have expanded our restaurant base from eight restaurants in California as of the beginning of fiscal year 2016 to 17 restaurants in three states as of the end of fiscal year 2018. We opened three restaurants in fiscal year 2017 and four restaurants in fiscal year 2018. As of May 31, 2019, we operate 21 restaurants within the United States. We expect to double our restaurant base within the next four years. To increase comparable restaurant sales, we plan to increase existing guest frequency, increase average check and increase brand awareness to drive new guest traffic to our restaurants. We believe we are well-positioned for future growth with our current infrastructure capable of supporting a larger restaurant base. The financial results provided herein reflect the fact that, to date, we have been a private company and as such have not incurred costs typically found in publicly traded companies. While we expect our selling, general and administrative expenses will increase, similar to other companies who complete an initial public offering, we believe we have an opportunity to optimize costs and enhance our profitability as we benefit from economies of scale.

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 Contribution, Restaurant-level Contribution margin, Average Unit Volumes (AUVs), comparable restaurant sales growth, and number of restaurant openings.

 

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Sales

Sales represents sales of food and beverages in restaurants, as shown on our statements of income. 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 before interest, income taxes and depreciation and amortization. Adjusted EBITDA is defined as EBITDA plus stock-based compensation expense, pre-opening rent expense, pre-opening costs, non-cash rent expense and asset disposals, closure costs and restaurant impairments. Adjusted EBITDA is intended as a supplemental measure of our performance that is neither required by, nor presented in accordance with, GAAP. We believe that EBITDA and Adjusted EBITDA provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results.

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

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

The following table reconciles net income to EBITDA and Adjusted EBITDA for the fiscal years ended August 31, 2017 and August 31, 2018, and for the nine months ended May 31, 2018 and May 31, 2019, respectively:

 

     Fiscal Years Ended August 31,      Nine Months Ended May 31,  
             2017                      2018                      2018                      2019          
     (amounts in thousands)  

Net income, as reported

   $ 707      $ 1,742      $ 762      $ 540  

Interest, net

     80        116        91        115  

Taxes

     240        5        (86      41  

Depreciation and amortization

     1,370        1,675        1,171        1,537  
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

     2,397        3,538        1,938        2,233  

Stock-based compensation expense (a)

     —          105        —          476  

Pre-opening rent expense (b)

     203        197        288        219  

Pre-opening costs (c)

     341        77        77        152  

Non-cash rent expense (d)

     166        353        305        351  

Asset disposals, closure costs and restaurant impairments (e)

     —          236        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 3,107      $ 4,506      $ 2,608      $ 3,431  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 income and of

 

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  corporate-level stock-based compensation included in general and administrative expenses in the statements of income. In fiscal year 2018, restaurant-level stock-based compensation was $13,884 and corporate-level stock-based compensation was $91,435. For the nine months ended May 31, 2019, restaurant-level stock-based compensation was $62,568 and corporate-level stock-based compensation was $413,649.
(b)

Pre-opening rent expense includes rent expenses incurred between date of possession and opening month of our restaurants

(c)

Pre-opening costs represent labor costs for new employees (trainees) and includes hourly wages, payroll taxes and benefits, travel expenses for trainees and trainers and recruitment fees for the training period

(d)

Non-cash rent expense includes rent expense after the opening month of our restaurants that did not require cash outlay in the respective periods

(e)

Asset disposals, closure costs and restaurant impairments include losses incurred due to impairment of property and equipment

Restaurant-level Contribution and Restaurant-level Contribution Margin

Restaurant-level Contribution is defined as operating income plus depreciation and amortization, stock-based compensation expense, pre-opening rent expense, pre-opening costs, non-cash rent expense, asset disposals, closure costs and restaurant impairments, general and administrative expenses, less corporate-level stock-based compensation expense. Restaurant-level Contribution margin is defined as Restaurant-level Contribution divided by sales. Restaurant-level Contribution and Restaurant-level Contribution margin are intended as supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. We believe that Restaurant-level Contribution and Restaurant-level Contribution margin provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results. We expect Restaurant-level Contribution to increase in proportion to the number of new restaurants we open and our comparable restaurant sales growth.

We present Restaurant-level Contribution because it excludes the impact of general and administrative expenses, which are not incurred at the restaurant-level. We also use Restaurant-level Contribution to measure operating performance and returns from opening new restaurants. Restaurant-level Contribution margin allows us to evaluate the level of Restaurant-level Contribution generated from sales.

However, you should be aware that Restaurant-level Contribution and Restaurant-level Contribution margin are financial measures which are not indicative of overall results for the Company, and Restaurant-level Contribution and Restaurant-level Contribution margin do not accrue directly to the benefit of stockholders because of corporate-level expenses excluded from such measures.

 

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In addition, when evaluating Restaurant-level Contribution and Restaurant-level Contribution 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 Contribution and Restaurant-level Contribution margin may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Restaurant-level Contribution and Restaurant-level Contribution margin in the same fashion. Restaurant-level Contribution and Restaurant-level Contribution margin have limitations as analytical tools, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. The following table reconciles operating income to Restaurant-level Contribution and Restaurant-level Contribution margin for the fiscal years ended August 31, 2017 and August 31, 2018 and for the nine months ended May 31, 2018 and May 31, 2019, respectively:

 

     Fiscal Years Ended August 31,     Nine Months Ended May 31,  
             2017                     2018                     2018                     2019          
     (amounts in thousands)  

Operating income, as reported

   $ 1,027     $ 1,863     $ 767     $ 696  

Depreciation and amortization

     1,370       1,675       1,171       1,537  

Stock-based compensation expense (a)

     —         105       —         476  

Pre-opening rent expense (b)

     203       197       288       219  

Pre-opening costs (c)

     341       77       77       152  

Non-cash rent expense (d)

     166       353       305       351  

Asset disposals, closure costs and restaurant impairments (e)

     —         236       —         —    

General and administrative expenses (f)

     3,364       5,965       4,437       5,699  

Corporate-level stock-based compensation included in General and administrative expenses

     —         (91     —         (414
  

 

 

   

 

 

   

 

 

   

 

 

 

Restaurant-level Contribution (f)

   $ 6,471     $ 10,380     $ 7,045     $ 8,716  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit margin

     2.8     3.6     2.1     1.5

Restaurant-level Contribution margin (f)

     17.4     20.1     19.0     19.2

 

(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 income and of corporate-level stock-based compensation included in general and administrative expenses in the statements of income. In fiscal year 2018, restaurant-level stock-based compensation was $13,884 and corporate-level stock-based compensation was $91,435. For the nine months ended May 31, 2019, restaurant-level stock-based compensation was $62,568 and corporate-level stock-based compensation was $413,649.

(b)

Pre-opening rent expense includes rent expenses incurred between date of possession and opening month of our restaurants.

(c)

Pre-opening costs represent labor costs for new employees (trainees) and includes hourly wages, payroll taxes and benefits, travel expenses for trainees and trainers and recruitment fees for the training period.

(d)

Non-cash rent expense includes rent expense after the opening month of our restaurants that did not require cash outlay in the respective periods.

(e)

Asset disposals, closure costs and restaurant impairments include losses incurred due to impairment of property and equipment.

(f)

Amounts related to the fiscal year ended August 31, 2017 have been restated from those previously reported to give effect to the immaterial correction of errors as discussed in Note 9, Immaterial Correction of Previously Reported Expenses , to the audited financial statements included in this prospectus. General and administrative expenses and Restaurant-level Contribution as previously reported of $2,635 and $5,742, respectively, have each been increased in the amount of $729, to the amounts as restated of $3,364 and $6,471, respectively, which has resulted in an increase in Restaurant-level Contribution margin of 2%.

 

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Average Unit Volumes (AUVs)

“Average Unit Volumes” or “AUVs” consist of the average annualized sales of all restaurants that have been open for 18 months or longer at the end of the accounting period presented. AUVs are calculated by dividing (x) annualized sales for the trailing 12 month period 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 trailing 12 month period (e.g., a restaurant is closed for renovation) to annualize sales for the period of time. This measurement allows management to assess changes in consumer spending patterns at our restaurants and the overall performance of our restaurant base. The AUVs measure is calculated excluding the Laguna Hills, California restaurant, which closed in fiscal year 2018.

Typically, our new restaurants experience a “honeymoon” period of higher sales upon opening. The “honeymoon” period for our three restaurant openings in fiscal year 2017 ranged up to six months. In new markets, the length of time before average sales for new restaurants stabilize is less predictable as a result of our limited knowledge of these markets and consumers’ limited awareness of our brand. We assess the “honeymoon” period of newly opened restaurants by comparing year-over-year monthly sales to determine when in the prior year (i.e., the first twelve months after a restaurant opens) the “honeymoon” period ended. While the “honeymoon” period for our three restaurant openings in fiscal year 2017 ranged up to six months, our four restaurant openings in fiscal year 2018 have not operated for a sufficient period to allow us to determine the “honeymoon” period for such restaurants.

The following table shows the AUVs for the fiscal years ended August 31, 2017 and August 31, 2018 respectively:

 

     Fiscal Years Ended August 31,  
             2017                      2018          
     (in thousands)  

Average Unit Volumes

   $ 3,358      $ 3,457  

Comparable Restaurant Sales Growth

Comparable restaurant sales growth refers to the change in year-over-year sales for the comparable restaurant base. We include restaurants in the comparable restaurant base that have been in operation for at least 18 months prior to the start of the accounting period presented, 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. Growth in comparable restaurant sales represents the percent change in sales from the same period in the prior year for the comparable restaurant base. For the fiscal years ended August 31, 2017 and August 31, 2018, there were six and eight restaurants, respectively, in our comparable restaurant base. For the nine months ended May 31, 2018 and May 31, 2019, there were seven and ten restaurants, respectively, in our comparable restaurant base. This measure highlights performance of existing restaurants, as the impact of new restaurant openings is excluded. The comparable restaurant sales growth measure is calculated excluding the Laguna Hills, California restaurant, which closed in fiscal year 2018.

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

 

   

consumer recognition of our brand and our ability to respond to changing consumer preferences;

 

   

overall economic trends, particularly those related to consumer spending;

 

   

our ability to operate restaurants effectively and efficiently to meet consumer expectations;

 

   

pricing;

 

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guest traffic;

 

   

per-guest spend and average check;

 

   

marketing and promotional efforts;

 

   

local competition; and

 

   

opening of new restaurants in the vicinity of existing locations.

Since opening new restaurants will be a significant component of our sales growth, comparable restaurant sales growth is only one measure of how we evaluate our performance. The following table shows the comparable restaurant sales growth for the fiscal years ended August 31, 2017 and August 31, 2018 and for the nine months ended May 31, 2018 and May 31, 2019, respectively:

 

     Fiscal Years Ended August 31,     Nine Months Ended May 31,  
     2017     2018     2018     2019  

Comparable restaurant sales growth (%)

     34.8     2.9     9.5     4.9

Comparable restaurant base

     6       8       7       10  

We typically experience a 120% - 150% increase in sales at renovated restaurants from increased traffic and higher average check size. For renovated restaurants, the degree of the increase in sales at renovated restaurants, the length of time the restaurant is closed for renovation, the number of restaurants that underwent renovations in our comparable restaurant base and the timing of reopening renovated restaurants can impact our comparable restaurant sales growth.

For fiscal year 2017, our comparable restaurant sales grew 34.8% and were impacted by the timing of reopening three renovated restaurants in the latter part of fiscal year 2016 and two renovated restaurants in fiscal year 2017. For fiscal year 2018, our comparable restaurant sales grew 2.9% and were impacted by the timing of reopening three renovated restaurants in 2016 and two renovated restaurants in 2017. The three restaurants that opened in fiscal year 2016 maintained their post-renovation sales level in fiscal year 2018. Additionally, the comparable restaurant base increased to eight restaurants during fiscal year 2018, and the increased sales of the two restaurants that underwent renovations in 2017 had a proportionately smaller effect on comparable restaurant sales growth in fiscal year 2018.

The difference between the comparable restaurant sales growth of 9.5% during the nine months ended May 31, 2018, and the comparable restaurant sales growth of 4.9% during the nine months ended May 31, 2019, was due to similar reasons as the changes from fiscal year 2017 to fiscal year 2018.

 

Renovated Restaurants

   Renovation Start
Date
   Fiscal Quarter for Re-opening of
Restaurant

Torrance

     2/22/2016    Q3’2016

Sawtelle

       6/1/2016    Q4’2016

Brea

     6/20/2016    Q4’2016

Irvine

   12/19/2016    Q3’2017

Little Tokyo

     9/19/2016    Q1’2017

Rancho Cucamonga

     5/14/2018    Q3’2018

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

 

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growth in our restaurant base for the fiscal years ended August 31, 2016, August 31, 2017 and August 31, 2018 and for the nine months ended May 31, 2018 and May 31, 2019, respectively:

 

         Fiscal Years Ended August 31,             Nine Months Ended May 31,      
         2016              2017              2018             2018              2019      

Restaurant activity:

          

Beginning of period

     8        11        14       14        17  

Openings

     3        3        4       4        4  

Closing

     —          —          (1     —          —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

End of period

     11        14        17       18        21  

Key Financial Definitions

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

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

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

Occupancy and related expenses. Occupancy and related expenses include rent for all restaurant locations and related taxes.

Depreciation and amortization expenses. Depreciation and amortization expenses are periodic non-cash charges that consist of depreciation of fixed assets, including equipment and capitalized leasehold improvements. Depreciation is determined using the straight-line method over the assets’ estimated useful lives, ranging from three to 20 years.

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

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

Interest expense. Interest expense includes non-cash charges related to our capital 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

Nine months ended May 31, 2019 Compared to Nine months ended May 31, 2018

The following table presents selected comparative results of operations from our unaudited financial statements for the nine months ended May 31, 2019 compared to nine months ended May 31, 2018. Our financial results for these periods are not necessarily indicative of the financial results that we will achieve in future periods. Certain totals for the table below may not sum to 100% due to rounding. As reflected in the table below, we experienced a decrease in operating income and net income for the nine months ended May 31, 2019 as compared to the nine months ended May 31, 2018, which was primarily driven by a $1.3 million increase in general and administrative expenses. The increase in general and administrative expenses is primarily due to an increase in costs associated with outside administrative, legal and professional fees, stock-based compensation, and other general corporate expenses associated with preparing to become a public company.

 

     Nine Months Ended May 31,      Increase / (Decrease)  
             2018                      2019              Dollars      Percentage  
     (dollar amounts in thousands)                

Statements of Income Data:

           

Sales

   $         37,099      $         45,492      $         8,393        22.6

Restaurant operating costs:

           

Food and beverage costs

     12,772        14,880        2,108        16.5  

Labor and related costs

     11,711        14,286        2,575        22.0  

Occupancy and related expenses

     2,330        3,292        962        41.3  

Depreciation and amortization expenses

     1,133        1,457        324        28.6  

Other costs

     3,911        5,102        1,191        30.5  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total restaurant operating costs

     31,857        39,017        7,160        22.5  
  

 

 

    

 

 

    

 

 

    

 

 

 

General and administrative expenses

     4,437        5,699        1,262        28.4  

Depreciation and amortization expenses

     38        80        42        110.5  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     36,332        44,796        8,464        23.3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     767        696        (71      (9.3

Other expense (income):

           

Interest expense

     97        126        29        29.9  

Interest income

     (6      (11      (5      83.3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     676        581        (95      (14.1
  

 

 

    

 

 

    

 

 

    

 

 

 

Income tax expense (benefit)

     (86      41        127        (147.7
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 762      $ 540      $ (222      (29.1 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Nine Months Ended May 31,  
             2018                     2019          
     (as a percentage of sales)  

Statements of Income Data:

    

Sales

     100.0     100.0

Restaurant operating costs:

    

Food and beverage costs

     34.4       32.7  

Labor and related costs

     31.6       31.4  

Occupancy and related expenses

     6.3       7.2  

Depreciation and amortization expenses

     3.1       3.2  

Other costs

     10.5       11.2  
  

 

 

   

 

 

 

Total restaurant operating costs

     85.9       85.8  
  

 

 

   

 

 

 

General and administrative expenses

     11.9       12.5  

Depreciation and amortization expenses

     0.1       0.2  
  

 

 

   

 

 

 

Total operating expenses

     97.9       98.5  
  

 

 

   

 

 

 

Operating income

     2.1       1.5  

Other expense (income):

    

Interest expense

     0.3       0.3  

Interest income

     0.0       0.0  
  

 

 

   

 

 

 

Income before income taxes

     1.8       1.3  
  

 

 

   

 

 

 

Income tax benefit

     (0.2     0.1  
  

 

 

   

 

 

 

Net income

     2.1     1.2
  

 

 

   

 

 

 

Sales. Sales were $45.5 million for the nine months ended May 31, 2019 compared to $37.1 million for the nine months ended May 31, 2018, representing an increase of approximately $8.4 million, or 22.6%. The increase in sales for the nine months ended May 31, 2019 was primarily driven by $8.5 million in sales from four new restaurants opened during fiscal year 2019 and the four new restaurants that opened in the second and third quarter of fiscal year 2018. Restaurants included in the comparable restaurant base accounted for a $1.6 million increase in sales primarily due to increases in our menu prices, including side dish and per plate prices. The increase in sales was partially offset by the stabilizing of sales from mature restaurants and the loss of sales from the closure of the Laguna Hills restaurant in the last month of fiscal year 2018.

Food and beverage costs . Food and beverage costs were $14.9 million for the nine months ended May 31, 2019 compared to $12.8 million for the nine months ended May 31, 2018, representing an increase of approximately $2.1 million, or 16.5%. The increase in food and beverage costs for the nine months ended May 31, 2019 was primarily driven by sales from four new restaurants opened during fiscal year 2019 and the four new restaurants that opened in the second and third quarter of fiscal year 2018. As a percentage of sales, food and beverage costs decreased to 32.7% in the nine months ended May 31, 2019 compared to 34.4% in the nine months ended May 31, 2018. The decrease in food and beverage costs as a percentage of sales was primarily driven by the increases in our menu prices which resulted in an increase in sales.

Labor and related costs . Labor and related costs were $14.3 million for the nine months ended May 31, 2019 compared to $11.7 million for the nine months ended May 31, 2018, representing an increase of approximately $2.6 million, or 22.0%. The increase in labor and related costs was driven by additional labor costs incurred for the nine months ended May 31, 2019 with respect to four new restaurants opened during fiscal year 2019 and the four new restaurants that opened in the second and third quarter of fiscal year 2018. As a percentage of sales, labor and related costs remained relatively consistent at 31.4% and 31.6% for the nine months ended May 31, 2019 and May 31, 2018, respectively.

 

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Occupancy and related expenses . Occupancy and related expenses were $3.3 million for the nine months ended May 31, 2019 compared to $2.3 million for the nine months ended May 31, 2018, representing an increase of approximately $1.0 million, or 41.3%. The increase was primarily a result of an additional $1.0 million of occupancy expenses incurred with respect to four new restaurants opened during fiscal year 2019 and the four new restaurants that opened in the second and third quarter of fiscal year 2018. As a percentage of sales, occupancy and related expenses increased to 7.2% in the nine months ended May 31, 2019, compared to 6.3% for the nine months ended May 31, 2018.

Depreciation and amortization expenses . Depreciation and amortization expenses incurred as part of restaurant operating costs were $1.5 million for the nine months ended May 31, 2019 compared to $1.1 million for the nine months ended May 31, 2018, representing an increase of approximately $0.3 million, or 28.6%. The increase was primarily due to depreciation of property and equipment related to the four new restaurants opened during fiscal year 2019 and the four new restaurants that opened in the second and third quarter of fiscal year 2018. As a percentage of sales, depreciation and amortization expenses at the restaurant-level remained relatively consistent at 3.2% and 3.1% for the nine months ended May 31, 2019 and May 31, 2018, respectively. Depreciation and amortization expenses incurred at the corporate-level were immaterial for the nine months ending May 31, 2019 and May 31, 2018, and as a percentage of sales remained relatively consistent at 0.2% and 0.1%, respectively.

Other costs . Other costs were $5.1 million for the nine months ended May 31, 2019 compared to $3.9 million for the nine months ended May 31, 2018, representing an increase in approximately $1.2 million, or 30.5%. The increase was primarily due to an increase of $0.2 million in small tools and equipment, $0.2 million in credit card fees as a result of higher sales, $0.2 million in advertising and promotions and $0.3 million in repairs and maintenance. The remaining year-over-year increase is due to individually insignificant items. As a percentage of sales, other costs increased to 11.2% in the nine months ended May 31, 2019 from 10.5% in the nine months ended May 31, 2018, primarily due to an increase in small tools, office supplies, and other restaurant expenses incurred for four new restaurants opened during the nine months ended May 31, 2019.

General and administrative expenses . General and administrative expenses were $5.7 million for the nine months ended May 31, 2019 compared to $4.4 million for the nine months ended May 31, 2018, representing an increase of approximately $1.3 million, or 28.4%. This increase in general and administrative expenses was primarily due to $1.0 million in higher salary and employee compensation-related expenses associated with the hiring of additional executives and administrative employees to support our growth in operations. The remaining year-over-year increase is due to increases in professional services, travel expenses and corporate-level recruiting costs to support our growth plans and the opening of our new restaurants, as well as costs associated with outside administrative, legal and professional fees and other general corporate expenses associated with preparing to become a public company. As a percentage of sales, general and administrative expenses increased to 12.5% in the nine months ended May 31, 2019 from 11.9% in the nine months ended May 31, 2018 primarily due to the increase in the expenses mentioned above.

Interest expense . Interest expense increased approximately $29 thousand, or 29.9%, in the nine months ended May 31, 2019. The increase in interest expense was primarily due to interest incurred from additional capital leases as a result of restaurants opening after May 31, 2018.

Income tax benefit . Income tax expense was immaterial for the nine months ended May 31, 2019. In comparison to the income tax benefit of $0.1 million for the nine months ended May 31, 2018, the year-over-year change represents an increase in expense of approximately $0.1 million or 147.7%. This increase in income tax expense was primarily due to certain discrete tax benefits recorded for the nine months ended May 31, 2018 related to the changes enacted by the Tax Cuts and Jobs Act.

 

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Results of Operations

Fiscal Year Ended August 31, 2018 Compared to Fiscal Year Ended August 31, 2017

The following table presents selected comparative results of operations from our audited financial statements for the fiscal year ended August 31, 2018 compared to the fiscal year ended August 31, 2017. Our financial results for these periods are not necessarily indicative of the financial results that we will achieve in future periods. Certain totals for the table below may not sum to 100% due to rounding.

 

    Fiscal Years Ended August 31,     Increase / (Decrease)  
              2017                         2018               Dollars     Percentage  
    (dollar amounts in thousands)              

Statements of Income Data:

       

Sales

  $         37,251     $         51,744     $   14,493       38.9

Restaurant operating costs:

       

Food and beverage costs

    13,389       17,594       4,205       31.4  

Labor and related costs

    12,117       15,994       3,877       32.0  

Occupancy and related expenses

    2,077       3,013       936       45.1  

Depreciation and amortization expenses

    1,345       1,624       279       20.7  

Other costs

    3,907       5,404       1,497       38.3  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total restaurant operating costs

    32,835       43,629       10,794       32.9  
 

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative expenses

    3,364       5,965       2,601       77.3  

Depreciation and amortization expenses

    25       51       26       103.8  

Impairment of long-lived asset

    —         236       236       *  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    36,224       49,881       13,657       37.7  
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    1,027       1,863       836       81.5  

Other expense (income):

       

Interest expense

    85       128       43       50.5  

Interest income

    (5     (12     (7     144.6  
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    947       1,747       800       84.5  
 

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

    240       5       (235     (98.0
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 707     $ 1,742     $ 1,035       146.4
 

 

 

   

 

 

   

 

 

   

 

 

 

 

*

Percentage not meaningful

 

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     Fiscal Years Ended August 31,  
             2017                     2018          
     (as a percentage of sales)  

Statements of Income Data:

    

Sales

         100.0         100.0

Restaurant operating costs:

    

Food and beverage costs

     35.9       34.0  

Labor and related costs

     32.5       30.9  

Occupancy and related expenses

     5.6       5.8  

Depreciation and amortization expenses

     3.6       3.1  

Other costs

     10.5       10.4  
  

 

 

   

 

 

 

Total restaurant operating costs

     88.1       84.2  
  

 

 

   

 

 

 

General and administrative expenses

     9.0       11.5  

Depreciation and amortization expenses

     0.1       0.1  

Impairment of long-lived asset

     0.0       0.5  
  

 

 

   

 

 

 

Total operating expenses

     97.2       96.3  
  

 

 

   

 

 

 

Operating income

     2.8       3.6  

Other expense (income):

    

Interest expense

     0.2       0.2  

Interest income

     0.0       0.0  
  

 

 

   

 

 

 

Income before income taxes

     2.5       3.4  
  

 

 

   

 

 

 

Income tax expense

     0.6       0.0  
  

 

 

   

 

 

 

Net income

     1.9     3.4
  

 

 

   

 

 

 

Sales. Sales were $51.7 million for fiscal year 2018 compared to $37.3 million for fiscal year 2017, representing an increase of approximately $14.5 million, or 38.9%. The increase in sales was primarily driven by $12.8 million from four new restaurants that opened during fiscal year 2018 and the three new restaurants that opened in the last two quarters of fiscal year 2017. Additionally, restaurants included in the comparable restaurant base contributed $1.7 million to the increase in sales during fiscal year 2018.

Food and beverage costs. Food and beverage costs were $17.6 million for fiscal year 2018 compared to $13.4 million for fiscal year 2017, representing an increase of approximately $4.2 million, or 31.4%. The increase in food and beverage costs was primarily driven by sales from the four new restaurants opened during fiscal year 2018 and the three new restaurants that were opened in the last two quarters of fiscal year 2017. As a percentage of sales, food and beverage costs decreased to 34.0% in fiscal year 2018, compared to 35.9% in fiscal year 2017.

Labor and related costs. Labor and related costs were $16.0 million for fiscal year 2018 compared to $12.1 million for fiscal year 2017, representing an increase of approximately $3.9 million, or 32.0%. The increase in labor and related costs was driven by additional labor costs incurred with respect to the four new restaurants opened during fiscal year 2018 and the three new restaurants that were opened in the last two quarters of fiscal year 2017. As a percentage of sales, labor and related costs decreased to 30.9% in fiscal year 2018, compared to 32.5% in fiscal year 2017. The decrease was primarily due to opening three new restaurants in fiscal year 2018 and three new restaurants in the last two quarters in fiscal year 2017 in states with lower wage rates.

Occupancy and related expenses. Occupancy and related expenses were $3.0 million for fiscal year 2018 compared to $2.1 million for fiscal year 2017, representing an increase of approximately $0.9 million, or 45.1%. The increase was primarily a result of an additional $0.6 million of rental costs incurred with respect to four new restaurants opened during fiscal year 2018, and an additional $0.2 million for the three restaurants that opened in

 

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the last two quarters of fiscal year 2017. As a percentage of sales, occupancy and other operating expenses increased to 5.8% in fiscal year 2018, compared to 5.6% for fiscal year 2017.

Depreciation and amortization expenses. Depreciation and amortization expenses incurred as part of restaurant operating costs were $1.6 million for fiscal year 2018 compared to $1.3 million for fiscal year 2017, representing an increase of approximately $0.3 million, or 20.8%. The increase was primarily due to depreciation of property and equipment related to the opening of four new restaurants. As a percentage of sales, depreciation and amortization expenses at the restaurant-level decreased to 3.1% in fiscal year 2018 from 3.6% in fiscal year 2017, primarily due to higher sales from the four new restaurants that opened during fiscal year 2018 and the three new restaurants that opened in the last two quarters of fiscal year 2017. Depreciation and amortization expenses incurred at the corporate-level were immaterial for fiscal years 2017 and 2018, and as a percentage of sales remained relatively consistent at 0.1%.

Other costs. Other costs were $5.4 million for fiscal year 2018 compared to $3.9 million for fiscal year 2017, representing an increase in approximately $1.5 million, or 38.3%. The increase was primarily due to an increase of $0.4 million in credit card fees as a result of higher sales, as well as $0.3 million in royalty payments to the Parent as a result of executing a licensing agreement with the Parent in fiscal year 2018. The remaining year-over-year increase is due to individually insignificant items. As a percentage of sales, other costs decreased to 10.4% in fiscal year 2018 from 10.5% in fiscal year 2017, primarily due to the increase in sales year-over-year. Additional information on royalty payments is set forth in Note 5 to our audited financial statements included in this prospectus.

General and administrative expenses. General and administrative expenses were $6.0 million for fiscal year 2018 compared to $3.4 million for fiscal year 2017, representing an increase of approximately $2.6 million, or 77.3%. This increase in general and administrative expenses was primarily due to $1.8 million in higher salary and employee compensation-related expenses associated with the hiring of additional executives and administrative employees to support our growth in operations. The remaining year-over-year increase is due to increases in professional services, travel expenses and corporate-level recruiting costs to support our growth plans and the opening of our new restaurants. As a percentage of sales, general and administrative expenses increased to 11.5% in fiscal year 2018 from 9.0% in fiscal year 2017, primarily due to the increase in the expenses mentioned above.

Interest expense. Interest expense increased approximately $0.1 million, or 50.5%, in fiscal year 2018. The increase in interest expense was primarily due to interest incurred from additional capital leases as a result of restaurant openings during fiscal year 2018.

Income tax expense. Income tax expense was insignificant in fiscal year 2018 compared to $0.2 million in fiscal year 2017, representing a decrease of approximately $0.2 million or 98.0%. This decrease in income tax expense was primarily due to income tax benefits from the increase in general business credits.

 

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Quarterly Results of Operations

The following tables summarize our selected unaudited quarterly statements of operations data for each of the eleven fiscal quarters in the period ended May 31, 2019 and reflects the effects of the immaterial correction of errors to the quarters in the fiscal year ended August 31, 2017, as discussed in Note 9, Immaterial Correction of Previously Reported Expenses , to the audited financial statements included in this prospectus. The information for each of these fiscal quarters has been prepared on a basis consistent with our audited financial statements and, in the opinion of management, includes all adjustments of a normal, recurring nature that are necessary for the fair statement of the results of operations for these periods in accordance with GAAP. The data should be read in conjunction with our audited financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected for a full year or in any future period.

 

    Three Months Ended  
    Nov. 30,
2016
    Feb. 29,
2017
    May 31,
2017
    Aug. 31,
2017
    Nov. 30,
2017
    Feb. 28,
2018
    May 31,
2018
    Aug. 31,
2018
    Nov. 30,
2018
    Feb. 28,
2019
    May 31,
2019
 
    (amounts in thousands)        

Sales

  $ 8,009     $ 7,780     $ 9,804     $ 11,658     $ 11,695     $ 11,748     $ 13,656     $ 14,645     $ 13,420     $ 15,117     $ 16,955  

Restaurant operating costs:

                     

Food and beverage costs

    2,964       2,824       3,505       4,096       4,120       4,021       4,631       4,822       4,518       4,853       5,509  

Labor and related costs

    2,534       2,651       3,190       3,742       3,731       3,767       4,213       4,283       4,138       4,869       5,279  

Occupancy and related expenses

    472       496       517       592       709       757       864       683       920       1,075       1,297  

Depreciation and amortization expenses

    283       301       332       429       328       364       441       491       448       492       517  

Other costs

    803       844       980       1,280       1,255       1,227       1,429       1,493       1,645       1,701       1,756  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total restaurant operating costs

    7,056       7,116       8,524       10,139       10,143       10,136       11,578       11,772       11,669       12,990       14,358  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative expenses

    689       903       991       781       1,446       1,484       1,508       1,527       2,148       1,817       1,734  

Depreciation and amortization expenses

    1       3       14       7       9       15       13       14       23       28       29  

Impairment of long-lived asset

    —         —         —         —         —         —         —         236       —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    7,746       8,022       9,529       10,927       11,598       11,635       13,099       13,549       13,840       14,835       16,121  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    263       (242     275       731       97       113       557       1,096       (420     282       834  

Other expense (income):

                     

Interest expense

    16       19       21       29       31       30       36       31       41       40       45  

Interest income

    —         (1     (3     (1     (1     —         (5     (6     (5     (5     (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    247       (260     257       703       67       83       526       1,071       (456     247       790  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense (benefit)

    62       (66     66       178       5       (213     122       91       (65     35       71  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 185     $ (194   $ 191     $ 525     $ 62     $ 296     $ 404     $ 980     $ (391   $ 212     $ 719  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table sets forth our unaudited quarterly results of operations data for each of the periods indicated as a percentage of sales:

 

    Three Months Ended  
    Nov. 30,
2016
    Feb. 29,
2017
    May 31,
2017
    Aug. 31,
2017
    Nov. 30,
2017
    Feb. 28,
2018
    May 31,
2018
    Aug. 31,
2018
    Nov. 30,
2018
    Feb. 28,
2019
    May 31,
2019
 

Sales

    100     100     100     100     100     100     100     100     100     100     100

Restaurant operating costs:

                     

Food and beverage costs

    37.0       36.3       35.8       35.1       35.2       34.2       33.9       32.9       33.7       32.1       32.5  

Labor and related costs

    31.6       34.1       32.5       32.1       31.9       32.1       30.9       29.2       30.8       32.2       31.1  

Occupancy and related expenses

    5.9       6.4       5.3       5.1       6.1       6.4       6.3       4.7       6.9       7.1       7.6  

Depreciation and amortization expenses

    3.5       3.9       3.4       3.7       2.8       3.1       3.2       3.4       3.3       3.3       3.0  

Other costs

    10.0       10.8       10.0       11.0       10.7       10.4       10.5       10.2       12.3       11.3       10.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total restaurant operating costs

    88.1       91.5       86.9       87.0       86.7       86.3       84.8       80.4       87.0       85.9       84.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative expenses

    8.6       11.6       10.1       6.7       12.4       12.6       11.0       10.4       16.0       12.0       10.2  

Depreciation and amortization expenses

    0.0       0.0       0.1       0.1       0.1       0.1       0.1       0.1       0.2       0.2       0.2  

Impairment of long-lived asset

    0.0       0.0       0.0       0.0       0.0       0.0       0.0       1.6       0.0       0.0       0.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    96.7       103.1       97.2       93.7       99.2       99.0       95.9       92.5       103.1       98.1       95.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    3.3       (3.1     2.8       6.3       0.8       1.0       4.1       7.5       (3.1     1.9       4.9  

Other expense (income):

                     

Interest expense

    0.2       0.2       0.2       0.2       0.3       0.3       0.3       0.2       0.3       0.3       0.3  

Interest income

    0.0       0.0       0.0       0.0       0.0       0.0       0.0       0.00       0.0       0.0       0.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    3.1       (3.3     2.6       6.0       0.6       0.7       3.9       7.3       (3.4     1.6       4.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense (benefit)

    0.8       (0.8     0.7       1.5       0.0       (1.8     0.9       0.6       (0.5     0.2       0.4