KRUS 10-K & 10-Q changes, risk factors and insider trading

Changes in Macro Economic and Societal Conditions. As ours is a consumer-based business, certain changes in macroeconomic and societal conditions including an economic slowdown, political instability, changing U.S. and global trade policy, changing consumer preferences and spending behavior, food safety and foodborne illness concerns as well as outbreaks of flu, viruses or other diseases transmitted by human contact could adversely affect our business, financial position and results of operations.

We have experienced and continue to experience inflationary conditions with respect to the cost for food, ingredients, labor, constructionconstruction, equipment and utilities, and we may not be able to increase prices or implement operational improvements sufficient to fully offset inflationary pressures on such costs, which may adversely impact our revenues and results of operations.

The strength of our revenues and results of operations are dependent upon, among other things, the price and availability of food, ingredients, labor, construction and utilities. In fiscal year 2024,2025, 20232024 and 2022,2023, the costs of commodities, labor, energy and other inputs necessary to operate our restaurants significantly increased. Fluctuations in economic conditions, weather, demand and other factors also affect the cost of the ingredients and products that we buy. The introduction of or changes to tariffs or adverse impacts resulting from restrictive trade policies or trade disputes on imported food products, such as produce and seafood, and/or construction and equipment could increase our costs and possibly impact the supply of those products and our restaurant operating costs. Our inability to anticipate and respond effectively to one or more adverse changes in any of these factors could have a significant adverse effect on our results of operations. Our attempts to offset cost pressures, such as through menu price increases and operational improvements, may not be successful. We seek to provide a moderately priced product, and, as a result, we may not seek to or be able to pass along price increases to our customers sufficient to completely offset cost increases. Traffic may also be negatively impacted with menu price increases as consumers may be less willing to pay our menu prices and may increasingly visit lower-priced competitors, may reduce the frequency of their visits, or may forgo some purchases altogether. To the extent that price increases are not sufficient to offset higher costs adequately or in a timely manner, and/or if they result in significant decreases in revenue volume, our revenues and results of operations may be adversely affected.

Our new restaurants have historically opened with higher sales, which then decline after the initial sales surge that comes with interest in a new restaurant opening. New restaurants may not be profitable and their sales performance may not follow historical patterns as expected, which could adversely affect our business, financial condition or results of operations. In addition, our average restaurant sales and comparable restaurant sales may not increase at the rates achieved 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, including inflationary pressures, 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.

47%Approximately 44% 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 broader national footprint.

Our Revolving Credit Agreement (“Credit Facility”) with Kura Japan dated April 10, 2020 and amended on September 2, 20202020, April 9, 2021 and April 9,4, 2021,2025, provides for a $45.0 million revolving credit line. As of August 31, 20242025 and 2023,2024, we had no outstanding balance and $45.0 million available under our Credit Facility, respectively.Facility. In the future, we may, from time to time, incur additional indebtedness under our Credit Facility. Our Credit Facility places certain limitations on, among other items, our ability to merge or consolidate with or into or acquire any other business organization or sell substantially all of our assets. 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 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 as one of our primary suppliers. JFC provided us with food products and supplies equaling 55%58%, 55%, and 49%, and 52%49% of our total food and beverage costs in fiscal years 2025, 2024, 2023, and 20222023 respectively. We also rely on Mutual which provided us with food products and supplies equaling 32% and 34% of our total food and beverage costs in fiscal year 2025 and 2024, and was not significant in 2023 and 2022. In fiscal year 2025, we expect our two major suppliers to be JFC and Mutual.2023. 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.

Our profitability depends in part on our ability to anticipate and react to changes in food and supply costs and/or the availability of products necessary to operate our business, including, but not limited to, rice vinegar from Kura Japan, which owns the recipe and is our sole supplier of such rice vinegar. Shortages or interruptions in the availability of certain supplies caused by unanticipated demand, problems in production or distribution, food contamination, inclement weather, natural disasters, or other conditions could adversely affect the productivity, availability, quality and cost of our ingredients, which could harm our operations. Any increase in the prices of 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 and loss of supply as a result of factors beyond our control, such as general economic conditions, including new tariff policies, political instability, inflationary pressures, seasonal fluctuations, the effects of climate change and related weather conditions, demand, food safety concerns, generalized infectious diseases, product recalls and government regulations.

Changes in economic conditions including changes in U.S. or global trade policy 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. SalesOn a broader scale, shifts in U.S. trade policy and retaliatory measures by global trade partners may lead to widespread economic effects, including increased consumer prices and a reduction in discretionary income. As a result, 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 behavior,out, 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.sales, Reductionswhich could result in staff levels, asset impairment charges and potential restaurant closures could result from prolonged negative restaurant sales, which couldthat materially adversely affectaffects our business, financial condition or results of operations.

The operation of our restaurants relies on technology and equipment such as our revolving and express conveyor belts, the Bikkura-Pon rewards machines and touch screen menus. In our kitchens, we use automated equipment and systems such as sushi robots, RFID and QR Code 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 and cybersecurity systems, many of which are controlled by third-party providers, 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, third-party delivery services 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 as a result of a cybersecurity incident, phishing attack, ransomware attack or any other failure to maintain a continuous and secure cyber network could result in substantial harm or inconvenience to our Company, our team members or guests. Some of these essential business processes that are dependent on technology are outsourced to third parties. While we make efforts to ensure that our providers are observing proper standards and controls, we cannot guarantee that breaches or failures caused by these outsourced providers will not occur. TheAdditionally, rapidas evolutiontechnology systems continue to evolve and increasedas adoptionconsumers adopt new technologies, such as the use of artificial intelligenceintelligence, technologies alsowe may intensifyneed to enhance our cybersecuritysystems risks.or modify our strategies in order to remain relevant in our industry and to our guests. If we are unable to successfully identify and implement new and emerging technologies, our business could be adversely affected.

Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media and other digital platformsplatforms, and the overall success of our marketing programs, 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), social media platforms, 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. We also incur other 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 or increased brand recognition.

Developing our business will require significant capital in the future. In fiscal year 2021 Kura Japan purchased 126,500 shares of our Class A common stock as part of a secondary underwritten public offering of 1,265,000 shares of our Class A common stock. In fiscal year 2023 and fiscal year 2025, we completed public offerings of 1,265,000 shares of our Class A common stock and 800,328 shares of our Class A common stock, respectively. There is no guarantee that if we need to raise any additional capital, we will receive additional capital contributions from Kura Japan. To meet our capital needs, we expect to rely on our cash flows from operations, borrowings under our existing Credit Facility, 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 under our Credit Facility, term loans or other debt documents we may enter into. 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.

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.required. 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.

Various federal and state labor laws govern the relationship with our employees and affect operating costs.costs particularly because we have a substantial number of hourly employees who are paid wage rates based on the applicable federal, state or local minimum wage. 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 or operating results: minimum wages; tips and gratuities; mandatory health benefits; vacation accruals; paid leaves of absence, including paid sick leave; and tax reporting. Changes in such areasareas, particularly in California, may require us to implement additional pay increases or provide additional benefits in the future to continue to recruit, reward and retain the most qualified people, which could materially affect our business. 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.

During fiscal year 2024,2025, we opened fourteen15 restaurants and expanded our restaurant base to 6479 restaurants in seventeen22 U.S. states and Washington, DC as of the end of fiscal year 2024.end 2025. We expect to open 1416 new restaurants in fiscal year 20252026 and therefore, we expect our revenue and restaurant operating costs to increase in fiscal year 2025.2026. We also expect our general and administrative expenses to increase on a dollar basis in fiscal year 20252026 to support the growth of the company.

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

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

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

Interest income. Interest income includes income earned on our money market funds and investments.

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

OccupancySales. and related expenses. Occupancy and related expensesSales were $16.8$282.8 million for fiscal year 20242025 compared to $13.1$237.9 million for fiscal year 2023,2024, representing an increase of $3.7$44.9 million, or 27.8%.18.9%. ThisThe increase in sales was primarily adriven resultby ofthe additionalsales leaseresulting expensefrom incurred with respect to fourteen15 new restaurants that opened during fiscal year 2024.2025, Asas awell percentageas increases in menu prices during the same period. Comparable restaurant sales decreased 1.3%, consisting of sales,negative occupancytraffic of 3.1% and otherprice/mix operatingof expenses1.8%, remained consistent at 7.1% infor fiscal year 20242025 andas 7.0%compared into fiscal year 2023.2024. AUV was $3.9 million for fiscal year 2025 compared to $4.2 million for fiscal year 2024.

OtherFood and beverage costs. OtherFood and beverage costs were $34.7 million for the fiscal year 2024 compared to $24.9$80.8 million for fiscal year 2023,2025 compared to $69.5 million for fiscal year 2024, representing an increase of $9.8$11.3 million, or 39.5%.16.2%. TheThis increase was primarily driven by an increase in costs relatedassociated towith fourteensales from 15 new restaurants opened induring fiscal year 2024.2025. As a percentage of sales, otherfood and beverage costs increaseddecreased to 14.6%28.6% in fiscal year 20242025, fromas 13.3%compared to 29.2% in fiscal year 2023,2024, primarily drivendue byto increases in advertisingmenu prices and promotion,supply softwarechain licenses,initiatives, repairswhich andwas maintenance,partially utilities,offset operatingby suppliesfood andcost travel expenses.inflation.

GeneralOccupancy and administrativerelated expenses. GeneralOccupancy and administrativerelated expenses were $39.1$21.0 million for fiscal year 20242025 compared to $28.0$16.8 million for fiscal year 2023,2024, representing an increase of $11.1$4.2 million, or 39.3%.25.1%. This increase was primarily duea result of additional lease expense incurred with respect to $5.515 millionnew inrestaurants litigationthat costs,opened anduring increasefiscal inyear compensation-related costs of $3.2 million due to additional headcount, $2.0 million in professional fees, and $0.4 million in travel expenses.2025. As a percentage of sales, generaloccupancy and administrativeother operating expenses increasedremained torelatively 16.4%consistent at 7.4% in fiscal year 20242025 fromand 15.0%7.1% in fiscal year 2023, primarily driven by litigation costs.2024.

Impairment of long-lived assets. Impairment of long-lived assets was none for fiscal year 2025 and $1.6 million for fiscal year 2024 due to impairment charges related to the property and equipment onof one underperforming restaurant location.

Interest income. Interest income was $3.1 million for fiscal year 2025 and $2.9 million for fiscal year 2024 and $1.5 million for fiscal year 2023.2024. The increase was primarily driven by investing our net cash proceeds from our $64.3 million follow-on offering completed in AprilNovember 20232024, intopartially cashoffset andby cashlower equivalentsinterest and short-term investments.rates.

Income tax expense. Income tax expense was $0.2 million for both fiscal years 20242025 and 2023. For further discussion of our income taxes, see “Note 12 — Income Taxes.”2024.

EBITDA is defined as net income (loss) before interest, income taxes and depreciation and amortization. Adjusted EBITDA is defined as EBITDA plus stock-based compensation expense, non-cash lease expense and asset disposals,lease, closure costs and restaurant impairments, as well as certain items, such as litigation, that we believe are not indicative of our core operating results. Adjusted EBITDA margin is defined as Adjusted EBITDA divided by sales. EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP measures which are intended as supplemental measures of our performance and are neither required by, nor presented in accordance with, GAAP. We believe that EBITDA, Adjusted EBITDA and Adjusted EBITDA margin provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results. However, these measures may not provide a complete understanding of the operating results of the Company as a whole and such measures should be reviewed in conjunction with our GAAP financial results.

The following table reconciles net income (loss) to EBITDA, Adjusted EBITDA and Adjusted EBITDA margin for the fiscal years ended August 31, 20242025 and August 31, 20232024:

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 operationslabor and comprehensiverelated income (loss)costs and of corporate-level stock-based compensation included in general and administrative expenses in the statements of operations and comprehensive income (loss), see “Note 6 — Stock-based Compensation” to the financial statements in this Annual Report on Form 10-K.

Restaurant-level Operating Profit (Loss) is defined as operating income (loss) plus depreciation and amortization; stock-based compensation expense; pre-opening costs and general and administrative expenses which are considered normal, recurring, cash operating expenses and are essential to support the development and operations of our restaurants; non-cash lease expense; asset disposals, closure costs and restaurant impairments; less corporate-level stock-based compensation expense recognized within general and administrative expenses. Restaurant-level Operating Profit (Loss) margin is defined as Restaurant-level Operating Profit (Loss) divided by sales. Restaurant-level Operating Profit (Loss) and Restaurant-level Operating Profit (Loss) margin are intended as supplemental measures of our performance and are neither required by, nor presented in accordance with, GAAP. We believe that Restaurant-level Operating Profit (Loss) and Restaurant-level Operating Profit (Loss) margin provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results, as this measure depicts normal, recurring cash operating expenses essential to supporting the development and operations of our restaurants. However, these measures may not provide a complete understanding of the operating results of the Company as a whole and such measures should be reviewed in conjunction with our GAAP financial results. We expect Restaurant-level Operating Profit (Loss) to increase in proportion to the number of new restaurants we open and our comparable restaurant sales growth.

The following table reconciles operating income (loss) to Restaurant-level Operating Profit (Loss) and Restaurant-level Operating Profit (Loss) margin for the fiscal years ended August 31, 20242025 and August 31, 20232024:

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 operationslabor and comprehensiverelated income (loss)costs and of corporate-level stock-based compensation included in general and administrative expenses in the statements of operations and comprehensive income (loss), see “Note 6 — Stock-based Compensation” to the financial statements in this Annual Report on Form 10-K.

Comparable restaurant sales performance refers to the percent 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 full calendar months prior toby the startend of the accounting period presented due to new restaurants experiencing a period of higher sales upon opening, including those temporarily closed for renovations during the year.opening. For restaurants that were temporarily closed for renovations during the year,comparative weperiod makewas fractionalalso adjustmentsadjusted to sales such that sales are annualized in the associated period.accordingly.

Our primary sources of liquidity and cash flows are cash and cash equivalents on hand and cash provided by operating activities. Our primary uses of cash are for operational expenditures and capital investments, including new restaurants, costs incurred for restaurant remodels and restaurant fixtures. The significant components of our working capital are liquid assets such as cash, cash equivalents,equivalents and receivables reduced by accounts payable and accrued expenses. Our working capital position benefits from the fact that we generally collect cash from sales to guests the same day or, in the case of credit or debit card transactions, within several days of the related sale, while we typically have longer payment terms with our vendors.

We believe that cash provided by operating activities, cash andon hand, cash equivalents on hand and availabilityshort-term under our existing line of creditinvestments will be sufficient to fund our lease obligations, capital expenditures and working capital needs for at least the next 12 months. We also maintain a Revolving Credit Agreement with Kura Japan, of which the maturity date has been extended to April 10, 2028 pursuant to the Third Amendment with Kura Japan.

Net cash used in investing activities during the fiscal year 20232025 was $49.9$93.7 million, primarily due to $9.3$74.7 million in purchases of short-term investments, $39.1$46.1 million in purchases of property and equipmentequipment, and $1.7$2.2 million in purchases of liquor licenses and $0.5 million for payments of initial direct costs, offset by $0.8$29.8 million of redemption of short-term investments. The increase in purchases of property and equipment in fiscal year 20232025 is primarily related to capital expenditures for current and future restaurant openings and renovations, maintaining our existing restaurants and other projects.

Net cash provided by financing activities during fiscal year 20232025 was $65.8$65.5 million,million and is primarily due to aggregate net proceeds from the issuance of $64.3stock of $64.4 million after deducting the underwriting discounts and commissions and offering expensesexpenses, payable, and $2.0$1.6 million of proceeds from exercise of stock options offset by $0.5$0.3 million in repaymentstax ofpayments principalin onrelation financeto leases.vested restricted stock units.

As of August 31, 2024,2025, we had $11.1an aggregate of approximately $17.2 million in contractual obligations relatingwhich consisted of $9.8 million related to the construction of new restaurants and $7.4 million in purchase commitments for goodsfood related to restaurant operations. All contractual obligations are expected to be paid during the next 12 months utilizing cash and cash equivalents on hand and provided by operations. For operating and finance lease obligations, see “Note 4 — Leases” to the financial statements included in this Annual Report on Form 10-K.

Our critical accounting policies are those that materially affect our financial statements. Our critical accounting estimates are those estimates that are made in accordance with GAAP, involve subjective or complex judgments by management, and are reasonably likely to have a material impact on our financial statements or results of operations. Although these estimates are based on management’s best knowledge of current events and actions that may impact us in the future, actual results may be materially different from the estimates. We believe the following incremental borrowing rates and impairment of long-lived assets estimate isare affected by significant judgments and estimates used in the preparation of our financial statements and that the judgments and estimates are reasonable.

We assess potential impairments of our long-lived assets, which includes property and equipment and operating lease right-of-use assets, in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360—Property, Plant and Equipment. An impairment test is performed on an annual basis or whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. In determining the recoverability of the asset value, an analysis is performed at the individual restaurant level. Assets are grouped at the individual restaurant level for purposes of the impairment assessment because a restaurant represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of an asset group is measured by a comparison of the carrying amount of an asset group to its estimated undiscounted forecasted restaurant cash flows expected to be generated by the asset group. Factors considered by us in estimating future cash flows include but are not limited to: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of the acquired assets; and significant negative industry or economic trends. The estimated undiscounted forecasted cash flows include assumptions made by management regarding certain items such as revenue, food and beverage costs, labor costs, occupancy costs, and other restaurant operating costs and therefore are subject to uncertainty as our actual results may differ from our estimates. If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds the fair value of the asset, which is determined by the cost approach method. For more information on impairment of long-lived assets, see “Note 2 — Basis of Presentation and Summary of Significant Accounting Policies” to the financial statements included in this Annual Report on Form 10-K.

During the sixnine months ended FebruaryMay 28,31, 2026, we opened fivetwelve restaurants and expanded our restaurant base to 8491 restaurants in 22 states and Washington, DC. Subsequent to FebruaryMay 28,31, 2026, we opened fourthree additional restaurants totaling 8894 restaurants.restaurants in 24 states and Washington, DC. We expect to open a total of 16 new restaurants in fiscal year 20262026. and therefore,Accordingly, we expect our revenue and restaurant operating costs to increase in fiscal year 2026. We also expect our general and administrative expenses to increase on a dollar basis in fiscal 2026 to support theour growthcontinued of the company.growth.

We have evaluated and will continue to evaluate the impact of import laws and tariffs on our operations. During the sixnine months ended FebruaryMay 28,31, 2026, tariffs continued to have a considerable impact on our business, financial condition, results of operations and cash flows. Based on the current economic environment, tariffs are expected to continue to have a considerable impact on our operations in certain areas, such as food and beverage costs, construction and equipment costs and other restaurant operating costs throughout fiscal year 2026. The reduction in tariffs as a result of the termination of IEEPA tariffs on our food and beverage costs are offset by an increase in commodity inflation and therefore, based on the current economic environment, we expect our food and beverage costs as a percentage of sales for the remainder of fiscal year 2026 to remain reasonably consistent with the sixnine months ended FebruaryMay 28,31, 2026. In addition, ongoing geopolitical events could lead to a disruption of energy supplies, which has and could continue to impact inflation, disrupt global supply chains and food distribution markets, and adversely impact consumer spending which couldhas and can continue to adversely affect our business, financial condition or results of operations. We have historically used menu price increases to manage profitability in times of inflation or tariff increases. During our fiscal first quarter 2026, we increased menu prices, which we expect will partially offset the impact on our operations in fiscal year 2026. Additionally, we increased menu prices in July 2026. See our Annual Report on Form 10-K “Part I, Item 1A, “Risk Factors — Risks Related to Our Operations and Growth Strategy”.

The following tables present selected comparative results of operations for the three and sixnine months ended FebruaryMay 28,31, 2026 and FebruaryMay 28,31, 2025. Our financial results for these periods are not necessarily indicative of the financial results that we will achieve in future periods. Certain totals for the tables below may not recalculate or sum up to 100% due to rounding.

Three Months Ended FebruaryMay 28,31, 2026 Compared to Three Months Ended FebruaryMay 28,31, 2025

Sales. Sales were $153.5$85.9 million for the sixthree months ended FebruaryMay 28,31, 2026 compared to $129.4$74.0 million for the sixthree months ended FebruaryMay 28,31, 2025, representing an increase of $24.1$11.9 million, or 18.6%.16.2%. The increase in sales was primarily driven by the sales resulting from elevenfifteen new restaurants that opened subsequent to FebruaryMay 28,31, 2025, as well as increases in menu prices during the same period. Comparable restaurant sales increaseddecreased 3.0%,0.4%, consisting of negative traffic of 0.9%5.1% and a price/mix of 2.1%4.7%, for the sixthree months ended FebruaryMay 28,31, 2026, as compared to the sixthree months ended FebruaryMay 28,31, 2025. The decrease in traffic is a result of lower consumer spending due to the macroeconomic environment.

Food and beverage costs. Food and beverage costs were $46.3$25.9 million for the sixthree months ended FebruaryMay 28,31, 2026 compared to $37.3$20.9 million for the sixthree months ended FebruaryMay 28,31, 2025, representing an increase of $9.0$5.0 million, or 24.0%.23.8%. The increase in food and beverage costs was primarily driven by costs associated with sales from elevenfifteen new restaurants that opened subsequent to FebruaryMay 28,31, 2025. As a percentage of sales, food and beverage costs increased to 30.1%30.2% in the sixthree months ended FebruaryMay 28,31, 2026 as compared to 28.8%28.3% in the sixthree months ended FebruaryMay 28,31, 2025, primarily due to tariffs on imported ingredients, which was partially offset by increases in menu prices.

Labor and related costs. Labor and related costs were $48.5$26.3 million for the sixthree months ended FebruaryMay 28,31, 2026 compared to $43.8$24.5 million for the sixthree months ended FebruaryMay 28,31, 2025, representing an increase of $4.7$1.8 million, or 10.6%.7.4%. This increase in labor and related costs was primarily driven by additional labor costs incurred from elevenfifteen new restaurants that opened subsequent to FebruaryMay 28,31, 2025. As a percentage of sales, labor and related costs decreased to 31.6%30.6% in the sixthree months ended FebruaryMay 28,31, 2026 as compared to 33.9%33.1% in the sixthree months ended FebruaryMay 28,31, 2025. The decrease in cost as a percentage of sales was2025, primarily due to initiatives relating to operationsoperations, such as the reservation system and scheduling, and increases in menu prices and improved sales leverage,prices, partially offset by low-single digit wage inflation.

Occupancy and related expenses. Occupancy and related expenses were $12.4$6.7 million for the sixthree months ended FebruaryMay 28,31, 2026 compared to $9.9$5.5 million for the sixthree months ended FebruaryMay 28,31, 2025, representing an increase of $2.5$1.2 million, or 25.4%.20.5%. The increase was primarily a result of additional lease expense related to the opening of elevenfifteen new restaurants that opened subsequent to FebruaryMay 28,31, 2025. As a percentage of sales, occupancy and related expenses increased to 8.1%7.8% in the sixthree months ended FebruaryMay 28,31, 2026,2026 as compared to 7.6%7.5% in the sixthree months ended FebruaryMay 28,31, 2025, primarily driven by incremental pre-opening lease expenses.

Depreciation and amortization expenses. Depreciation and amortization expenses incurred as part of restaurant operating costs were $8.1$4.2 million for the sixthree months ended FebruaryMay 28,31, 2026 compared to $6.4$3.5 million for the sixthree months ended FebruaryMay 28,31, 2025, representing an increase of $1.7$0.7 million, or 27.4%.22.8%. The increase consists of depreciation of property and equipment related to eleventhe fifteen new restaurants that opened subsequent to FebruaryMay 28,31, 2025. As a percentage of sales, depreciation and amortization expenses at the restaurant level wereremained 5.3%relatively consistent at 4.9% for the sixthree months ended FebruaryMay 28,31, 2026 as compared to 4.9%4.7% forin the sixthree months ended FebruaryMay 28,31, 2025, primarily due to depreciation associated with restaurant remodel costs.2025. Depreciation and amortization expenses incurred at the corporate level waswere $0.3 million for the six months ended February 28, 2026 compared to $0.2$0.1 million, andor 0.1% as a percentage of salessales, werefor both 0.2%.the three months ended May 31, 2026 and May 31, 2025.

Other costs. Other costs were $23.4$12.6 million for the sixthree months ended FebruaryMay 28,31, 2026 compared to $18.1$10.9 million for the sixthree months ended FebruaryMay 28,31, 2025, representing an increase of $5.3$1.7 million, or 29.1%.15.4%. The increase was primarily driven by an increase in costs related to eleventhe fifteen new restaurants that opened subsequent to FebruaryMay 28,31, 2025. As a percentage of sales, other costs wereremained 15.2%relatively forconsistent at 14.6% in the sixthree months ended FebruaryMay 28,31, 2026 as compared to 14.0%14.7% forin the sixthree months ended FebruaryMay 28,31, 2025, primarily driven by higher marketing expense due to incremental promotional collaborations, as well as utilities expense.2025.

General and administrative expenses. General and administrative expenses were $20.5$10.2 million for the sixthree months ended FebruaryMay 28,31, 2026 compared to $19.7$8.7 million for the sixthree months ended FebruaryMay 28,31, 2025, representing an increase of $0.8$1.5 million, or 4.1%.16.6%. ThisThe changeincrease was primarily due to the increase in compensation-related costs of $0.7$1.1 million, professional$0.2 feesmillion of $0.2 million, travel expenses ofand $0.2 million and $0.4 million of other net expenses, partially offset by a net decrease in litigation costs of $0.7 million.expenses. As a percentage of sales, general and administrative expenses decreasedremained torelatively 13.4%consistent at 11.9% in the sixthree months ended FebruaryMay 28,31, 2026 fromas 15.2%compared to 11.8% in the sixthree months ended FebruaryMay 28,31, 2025, primarily driven by sales leverage of compensation-related costs and litigation costs.2025.

Interest expense. Interest expense was $33$17 thousand for the sixthree months ended FebruaryMay 28,31, 2026 compared to $26$30 thousand for the sixthree months ended FebruaryMay 28,31, 2025.

Interest income. Interest income was $1.3$528 millionthousand for the sixthree months ended FebruaryMay 28,31, 2026 compared to $1.4$812 millionthousand for the sixthree months ended FebruaryMay 28,31, 2025. The decrease was primarily driven by lower interest rates and decrease in investments due to withdraws for cash operating needs.

Income tax expense. Income tax expense was $87$49 thousand for the sixthree months ended FebruaryMay 28,31, 2026 compared to $77an income tax expense of $55 thousand for the sixthree months ended FebruaryMay 28,31, 2025. For further discussion of our income taxes, see “Note 9.12. Income Taxes” in the Notes to Condensed Financial Statements.

The following table reconciles net income (loss) to EBITDA and Adjusted EBITDA:

Stock-based compensation expense includes non-cash stock-based compensation, which is comprised of restaurant-level stock-based compensation included in labor and related costs and of corporate-level stock-based compensation included in general and administrative expenses in the condensed statements of operations and comprehensive loss.income (loss). For further details of stock-based compensation, see “Note 5.10. Stock-based Compensation” in the notes to condensed financial statements included in this Quarterly Report on Form 10-Q.

Stock-based compensation expense includes non-cash stock-based compensation, which is comprised of restaurant-level stock-based compensation included in labor and related costs and of corporate-level stock-based compensation included in general and administrative expenses in the condensed statements of operations and comprehensive loss.income (loss). For further details of stock-based compensation, see “Note 5.10. Stock-based Compensation” in the notes to condensed financial statements included in this Quarterly Report on Form 10-Q.

During the sixnine months ended FebruaryMay 28,31, 2026, we had no borrowings under the Revolving Credit Agreement and have $45.0 million of availability remaining. As of FebruaryMay 28,31, 2026, we did not have any material off-balance sheet arrangements.

Net cash provided by operating activities during the sixnine months ended FebruaryMay 28,31, 2026 was $8.1$18.4 million, primarily due to a net loss of $4.8$4.3 million, non-cash charges of $8.4$12.7 million for depreciation and amortization, $2.3$3.5 million for stock-based compensation, and net cash outflows of $2.1$6.3 million from changes in operating assets and liabilities.

Net cash provided by operating activities during the sixnine months ended FebruaryMay 28,31, 2025 was $8.6$15.3 million, primarily due to a net loss of $4.7$4.2 million, non-cash charges of $6.6$10.2 million for depreciation and amortization, $2.2$3.5 million for stock-based compensation, and net cash outflows of $4.4$5.6 million from changes in operating assets and liabilities.

Net cash used in investing activities during the sixnine months ended FebruaryMay 28,31, 2026 was $29.1$42.0 million, primarily due to $33.7 million in purchases of investments and $29.3$43.3 million in purchases of property and equipmentequipment, $35.3 million in purchases of investments and $1.0 million in purchases of liquor licenses offset by $35.0$37.9 million in maturities and redemptions of investments. The increase in purchases of property and equipment in the sixnine months ended FebruaryMay 28,31, 2026 is primarily related to capital expenditures for the construction of future restaurant openings, maintaining our existing restaurants, renovations and other projects.

Net cash used in investing activities during the sixnine months ended FebruaryMay 28,31, 2025 was $39.4$84.2 million, primarily due to $25.3$70.2 million in purchases of long-term investments, $23.1$36.7 million in purchases of property and equipment and $0.9$1.0 million in purchases of liquor licenses offset by $10.0$24.0 million ofin redemptions of long-term investments. The increase in purchases of property and equipment in the sixnine months ended FebruaryMay 28,31, 2025 is primarily related to capital expenditures for current and future restaurant openings, maintaining our existing restaurants and other projects.

Net cash provided by financing activities during the sixnine months ended FebruaryMay 28,31, 2026 was $73$0.4 thousandmillion and is primarily due to $474$0.9 thousandmillion of proceeds from exercise of stock options offset by $361$0.4 thousandmillion in taxes paid on vested RSUs and $40 thousand in repayment of principal on finance leases.RSUs.

Net cash provided by financing activities during the sixnine months ended FebruaryMay 28,31, 2025 was $65.0 million and is primarily due to aggregate net proceeds from the issuance of stock of $64.4 million after deducting the underwriting discounts and commissions and offering expenses, $0.9 million of proceeds from exercise of stock options offset by $0.3 million in taxes paid on vested RSUs.

As of FebruaryMay 28,31, 2026, we had $19.3$18.8 million in contractual obligations which consisted of $12.4$13.0 million in purchase commitments for food related to restaurant operations and $6.9$5.8 million related to the construction of new restaurants. All contractual obligations are expected to be paid during the next 12 months utilizing cash and cash equivalents on hand and provided by operating activities. For operating lease obligations, see “Note 3. Leases” in the Notes to Condensed Financial Statements included in this Quarterly Report on Form 10-Q.