Notes to Consolidated Financial Statements (unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Luby’s, Inc. (the “Company”, "we", "our", "us", or “Luby’s”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements that are prepared for our Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the fiscal year ending August 25, 2021. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 26, 2020.
Prior to Adoption of the Plan of Liquidation
The consolidated financial statements prior to November 19, 2020 were prepared on the going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
Plan of Liquidation
On November 17, 2020 our shareholders approved the Plan of Liquidation and Dissolution (the “Plan of Liquidation“ or the “Plan”). The Plan provides for an orderly sale of our businesses, operations, and real estate, payment of our liabilities and other obligations, and an orderly wind down of any remaining operations and dissolution of the Company. We intend to attempt to convert all of our assets into cash, satisfy or resolve our remaining liabilities and obligations, including contingent liabilities, claims and costs associated with the liquidation of the Company, and then file a certificate of dissolution with the state of Delaware. The assets to be sold include our Luby's Cafeterias, Fuddruckers, and Culinary Contract Services ("CCS") operating divisions, as well as our real estate. We currently anticipate that our common stock will be delisted from the New York Stock Exchange ("NYSE") upon the filing of the certificate of dissolution, which is not expected to occur until the earlier of the completion of all or substantially all of the asset sales or three years. The delisting of our common stock may occur sooner in accordance with the applicable rules of the NYSE.
Following the Adoption of the Plan of Liquidation
We have determined, as a result of the approval of the Plan by our shareholders, that liquidation is imminent, as defined in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 205-30 Financial Statement Presentation, Liquidation Basis of Accounting ("ASC 205-30"). Liquidation is considered imminent when the likelihood is remote that we will return from liquidation and either (a) the Plan is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the Plan will be blocked by other parties, or (b) the Plan is being imposed by other forces (for example, involuntary bankruptcy).
Accordingly, we have changed our basis of accounting from the going concern basis to the liquidation basis effective November 19, 2020. Although shareholder approval of the Plan occurred on November 17, 2020, we are using the liquidation basis of accounting effective November 19, 2020 as a convenience date. Any activity between November 17, 2020 and November 19, 2020 would not be materially different under the liquidation basis of accounting.
The liquidation basis of accounting differs significantly from the going concern basis, as summarized below.
Under the liquidation basis of accounting, the consolidated balance sheet and consolidated statements of operations, equity and cash flows are no longer presented.
The liquidation basis of accounting requires a statement of net assets in liquidation, a statement of changes in net assets in liquidation and all disclosures necessary to present relevant information about our expected resources in liquidation. The liquidation basis of accounting may only be applied prospectively from the day liquidation becomes imminent and the initial statement of changes in net assets in liquidation may present only changes in net assets that occurred during the period since that date.
Under the liquidation basis of accounting, our assets are measured at their estimated net realizable value, or liquidation value, which represents the amount of their estimated cash proceeds or other consideration from liquidation, based on current contracts, estimates and other indications of sales value, and may include previously unrecognized assets that we may expect to either sell in the course of our liquidation or use in settling liabilities, such as trademarks or other intangibles. In developing these estimates, we utilized third party valuation experts, investment bankers, real estate brokers, the expertise of members of the Special Committee of our Board of Directors, and forecasts generated by our management. For estimated real estate values, we considered comparable sales transactions, our past experience selling real estate assets of the Company and, in certain
instances, indicative offers, as well as capitalization rates observed for income-producing real estate. For estimated business unit valuations we considered estimated values of the economic components of possible transactions, the value of a buyer assuming certain liabilities in a purchase transaction, and, in certain instances, indicative offers, as well as the probabilities of certain outcomes. Estimates for the liquidation value of the business units, or subset of operating restaurants, were also tested for reasonableness through a multiple of historical and projected business cash flows. All estimates by nature involve a large degree of judgement and sensitivity to the underlying assumptions.
The liquidation basis of accounting requires us to accrue and present separately, without discounting, the estimated disposal and other costs, including any costs associated with the sale or settlement of our assets and liabilities and the estimated operating income or loss that we reasonably expect to incur, including providing for federal income taxes during the remaining expected duration of the liquidation period. In addition, deferred tax assets previously provided for under the going concern basis of accounting, which include net operating losses and other tax credits, may be realized partially or in full, subject to IRS limitations, to offset taxable income we expect to generate from the liquidation process.
Under the liquidation basis of accounting, we recognize liabilities as they would have been recognized under the going concern basis as adjusted for the timing assumptions related to the liquidation process and they will not be reduced to expected settlement values prior to settlement.
These estimates will be periodically reviewed and adjusted as appropriate. There can be no assurance that these estimated values will be realized. Such amounts should not be taken as an indication of the timing or the amount of future distributions or our actual dissolution.
The valuation of our assets and liabilities, as described above, represents estimates, based on present facts and circumstances, of the net realizable value of the assets and costs associated with carrying out the Plan. The actual values and costs associated with carrying out the Plan may differ from amounts reflected in the accompanying consolidated financial statements because of the Plan's inherent uncertainty. These differences may be material. In particular, these estimates will vary with the length of time necessary to complete the Plan. It is currently anticipated that a majority of our assets will be sold by December 31, 2021, with a final liquidation by June 30, 2022; however, it is likely that the full realization of proceeds from these sales will extend beyond that date.
Net assets in liquidation represents the estimated liquidation value to holders of common shares upon liquidation. It is not possible to predict with certainty the timing or aggregate amount which may ultimately be distributed to our shareholders and no assurance can be given that the distributions will equal or exceed the estimate presented in these consolidated financial statements.
COVID-19
The novel coronavirus disease (“COVID-19”) pandemic has had a significant impact on our level of operations, guest behavior, guest traffic, and the number of locations where we and our Fuddruckers franchisees operate. As a result, at the onset of the COVID-19 pandemic in the spring of 2020, we modified our business operations within our restaurants and significantly reduced staffing at our corporate support office.
On March 13, 2020, President Donald Trump declared a national emergency in response to the COVID-19 pandemic. Throughout the remainder of calendar 2020, we cycled through periods initially when state government orders mandated a suspension of on-premise dining, followed by periods when our on-premise dining capacity was limited due to government order, a condition that continues at certain locations through the date of this filing. Prior to the onset of the COVID-19 pandemic we operated 118 restaurants. As of March 10, 2021, we operated 81 restaurants (58 Luby’s cafeterias and 23 Fuddruckers restaurants). Additionally, our Fuddruckers franchisees operated 90 locations prior to the COVID-19 pandemic and operated 72 restaurants as of March 10, 2021.
Vaccines for COVID-19 were first made available in the United States ("U.S.") in December 2020 with increasing rates of vaccination in the U.S. population with each passing month. Additionally, in March 2021, restaurants in our core Texas market were permitted to return to utilization of 100% of seating capacity. Furthermore, the U.S. Treasury provided a new round of stimulus through direct payments to U.S. citizens. As we execute on our Plan of Liquidation, we are still operating a number of restaurants as described above. Uncertainty remains regarding the continued rate of immunization in the public, timing of an economic recovery, and changed guest decision-making with regard to dining in restaurants. The COVID-19 pandemic could continue to materially impact our cash flows and value of net assets in liquidation, while we execute on our Plan of Liquidation.
Accounting Periods
The Company’s fiscal year ends on the last Wednesday in August. Accordingly, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting for 364 days in the aggregate. However, every fifth or sixth year, we have a fiscal year that consists of 53 weeks, accounting for 371 days in the aggregate. The first fiscal quarter consists of four four-week periods, or 16 weeks, and the remaining three quarters typically include three four-week periods, or 12 weeks, in length. The fourth fiscal quarter includes 13 weeks in certain fiscal years to adjust for our standard 52 week, or 364 day, fiscal year compared to the 365 day calendar year.
Reportable Segments
Prior to the shareholder approval of the Plan, each restaurant was considered an operating segment because operating results and cash flow can be determined for each restaurant. We aggregated our operating segments into reportable segments by restaurant brand due to the nature of the products and services, the production processes, the customers, the methods used to distribute the products and services, the similarity of store level profit margins and the nature of the regulatory environment are alike. The Company had five reportable segments: Luby’s cafeterias, Fuddruckers restaurants, Cheeseburger in Paradise restaurant, Fuddruckers franchise operations, and CCS. Although we continue to operate our restaurant, franchise and CCS businesses, we no longer make operating decisions or assess performance by segment, as all of our assets and businesses are now considered held for sale. Accordingly, effective November 19, 2020, we have only one reporting and operating segment.
New Accounting Pronouncements - "to be Adopted"
There are no issued accounting pronouncements that are applicable or relevant to us under the liquidation basis of accounting.
Subsequent Events
We evaluated events subsequent to March 10, 2021 through the date the financial statements were issued to determine if the nature and significance of the events warrant inclusion in our consolidated financial statements.
On March 16, 2021, we entered into franchise agreements with a third-party to take over the operations at eight company owned Fuddruckers restaurants. On April 1, 2021, we entered into a franchise agreement with the same third-party to take over the operations at one additional company owned Fuddruckers restaurant. The new operator has assumed the lease obligation or ownership of the tenant entity at each of these nine locations. On April 23, 2021, we entered into franchise agreements with the same third-party to take over the operations at two additional company owned Fuddruckers restaurants and we entered into a management agreement with the same third-party to take over the operations at one additional Fuddruckers restaurant. At March 10, 2021, in contemplation of the completion of these transactions, we increased the liquidation value of our properties and business units held for sale by $3.4 million.
On April 5, 2021, we closed on the sale of one of our properties for a gross sale price that exceeded our previously reported liquidation value for this asset. In contemplation of the completion of this transaction, we increased the liquidation value of our properties and business units held for sale by $0.8 million at March 10, 2021.
Note 2. Liability for Estimated Costs in Excess of Estimated Receipts During Liquidation
The liquidation basis of accounting requires us to estimate net cash flows from operations and to accrue all costs associated with implementing and completing the plan of liquidation. We project that we will have estimated costs in excess of estimated receipts during the liquidation period. These amounts can vary significantly due to, among other things, the timing and estimates for receipts and costs associated with the operations of our business units until they are sold, the timing of business and property sales, estimates of direct costs incurred to complete the sales, the timing and amounts associated with discharging known and contingent liabilities, the costs associated with the winding up of operations, and other costs that we may incur which are not currently foreseeable. These receipts and accruals will be adjusted periodically as projections and assumptions change. These receipts and costs are estimated and are anticipated to be collected and paid out over the liquidation period. Upon transition to the liquidation basis of accounting on November 19, 2020, the Company accrued revenues and expenses expected to be earned or incurred during liquidation. The liability for estimated costs in excess of estimated receipts during liquidation at March 10, 2021 and November 19, 2020 was comprised of (in thousands):
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March 10, 2021
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November 19, 2020
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Total estimated receipts during liquidation
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$
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59,513
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$
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92,017
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Total estimated costs of operations
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(48,212)
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(76,151)
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Selling, general and administrative expenses
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(14,531)
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(18,745)
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Interest expense
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(1,386)
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(2,305)
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Interest component of operating lease payments
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(5,918)
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(7,064)
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Capital expenditures
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(610)
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(943)
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Sales costs
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(4,071)
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(4,079)
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Total estimated costs during liquidation
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(74,728)
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(109,287)
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Liability for estimated costs in excess of estimated receipts during liquidation
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$
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(15,215)
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$
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(17,270)
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The change in the liability for estimated costs in excess of estimated receipts during liquidation between November 19, 2020 and March 10, 2021 is as follows (in thousands):
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November 19, 2020
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Net Change in Working Capital (3)
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Changes in Estimated Future Cash Flows During Liquidation (4)
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March 10, 2021
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Assets:
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Estimated net inflows from operations (1)
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$
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7,859
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$
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(6,994)
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$
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4,518
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|
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$
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5,383
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7,859
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(6,994)
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4,518
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5,383
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Liabilities:
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Sales costs
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(4,079)
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373
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(365)
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(4,071)
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Corporate expenditures (2)
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(21,050)
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8,082
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(3,559)
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(16,527)
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(25,129)
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8,455
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(3,924)
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(20,598)
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Liability for estimated costs in excess of estimated receipts during liquidation
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$
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(17,270)
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$
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1,461
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$
|
594
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$
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(15,215)
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(1) Estimated net inflows from operations consists of total estimated receipts during liquidation less the sum of (i) total estimated costs of operations during liquidation, (ii) interest component of operating lease payments and (iii) capital expenditures.
(2) Corporate expenditures consists of (i) selling, general and administrative expenses and (ii) interest expense.
(3) Net change in working capital represents changes in cash, restricted cash, accounts receivable, accounts payable, and accrued expenses and other liabilities as a result of the Company's operating activities for the period from November 19, 2020 to March 10, 2021.
(4) Changes in estimated future cash flows during liquidation includes adjustments to previous estimates and changes in estimated holding periods of our assets.
Note 3. Net Assets in Liquidation
The following is a reconciliation of total shareholders’ equity under the going concern basis of accounting as of November 18, 2020 to net assets in liquidation under the liquidation basis of accounting as of November 19, 2020 (in thousands):
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Total Shareholders' Equity as of November 18, 2020
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$
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70,763
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Increase due to estimated net realizable value of properties and business units (1)
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78,985
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Decrease due to write-off of deferred financing costs
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(2,260)
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Decrease due to write-off of operating lease right-of-use assets
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(14,829)
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Net increase due to write-off of deferred assets, deferred income and goodwill
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1,952
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Liability for estimated costs in excess of estimated receipts during liquidation
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(17,270)
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Adjustment to reflect the change to the liquidation basis of accounting
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46,578
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Estimated value of net assets in liquidation as of November 19, 2020
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$
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117,341
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(1) Under liquidation basis of accounting, all assets are recorded at net realizable value which implicitly includes the tangible and intangible value of all assets. This adjustment at November 19, 2020 reflects adjusting real properties to net realizable value and recording an estimated value for our business units, Luby's Cafeterias, Fuddruckers restaurants and franchise operations, and Culinary Contract Services.
Net assets in liquidation increased by $5.2 million during the period from November 19, 2020 through March 10, 2021. The increase was primarily due to a $4.5 million increase in properties and business units for sale and a $0.7 million net increase due to a remeasurement of assets and liabilities. The increase in properties and business units for sale was due to a $3.4 million increase in value attributable to the contemplated sale and conversion to franchise locations of nine Fuddruckers restaurants that was completed subsequent to March 10, 2021, and a $1.5 million increase in value attributable to properties that have closed, or are under contract to sell with non-refundable deposits, at prices that exceeded our previous liquidation values. This increase was partially offset by a $0.4 million reduction in value for one of our real estate assets.
We have one class of common stock. The net assets in liquidation at March 10, 2021 would result in liquidating distributions of approximately $3.98 per common share based on the number of common shares outstanding at that date. This estimate is dependent on projections of costs and expenses to be incurred during the period required to complete the Plan and the realization of estimated net realizable value of our properties and business units. There is inherent uncertainty with these estimates, and they could change materially based on the timing of business and property sales, the performance of the underlying assets, any changes in the underlying assumptions of the projected cash flows, as well as the ultimate vesting of outstanding restricted share awards and exercise of vested stock options. The estimated liquidating distributions per share on a fully diluted basis, assuming all restricted stock awards vest and all in-the-money stock options are exercised, is not materially different than the amount stated above. No assurance can be given that the liquidating distributions will equal or exceed the estimate presented in these consolidated financial statements.
PPP Loan
As discussed in more detail at Note 15. Debt, in April 2020 we received a $10.0 million PPP Loan. In November 2020 we submitted an application for forgiveness of the full $10.0 million. While we believe that we qualify for full forgiveness pursuant to the terms of the loan agreement, under the liquidation basis of accounting we must account for the liability at the full $10.0 million face amount until such time as the forgiveness has been approved by the Small Business Administration ("SBA") and the loan has been settled.
Lease Obligations
Under both the going concern basis of accounting and the liquidation basis of accounting, lease obligations are recorded at the present value of the total fixed lease payments over the reasonably certain lease term using discount rates as of the effective date of the lease and the obligation is reduced as we make lease payments. As a result of the same accounting treatment, there is no reconciling entry to adjust total shareholders’ equity under the going concern basis of accounting as of November 18, 2020 to net assets in liquidation under the liquidation basis of accounting as of November 19, 2020.
During the fourth quarter of fiscal 2020 and the first two quarters of fiscal 2021, we were able to settle 27 leases for closed restaurant properties and negotiated an early termination date and reduced lease payment at one operating restaurant property. While the amounts paid to settle our lease liabilities varied, in the aggregate, we have settled these 27 leases for approximately 21% of the total undiscounted base rent payments that would otherwise have been due under the leases through their original contractual termination date. We can offer no assurances that we will continue to settle any lease obligations for less than the total undiscounted base rent payments, or for less than their discounted value recorded within net assets in liquidation.
Note 4. Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within our consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows:
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November 18,
2020
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August 26,
2020
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(in thousands)
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Cash and cash equivalents
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$
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14,874
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$
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15,069
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Restricted cash and cash equivalents
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6,651
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6,756
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Total cash and cash equivalents shown in our consolidated statements of cash flows
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$
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21,525
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$
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21,825
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Restricted cash and cash equivalents as of March 10, 2021 was $6.7 million. Amounts included in restricted cash represent those required to be set aside for (1) estimated amount of interest payable in the next 12 months under the Credit Agreement (see "Note 15. Debt"), (2) collateral for letters of credit issued for potential insurance obligations, which letters of credit expire within 12 months and (3) prefunding of the credit limit under our corporate purchasing card program.
Note 5. Revenue Recognition
Under the going concern basis of accounting, we recognized revenue as described below. Under the liquidation basis of accounting, we estimate the cash receipts from food and beverage sales at each of our restaurants, royalties and fees from our Fuddruckers franchisees, and fees under our culinary contract services ("CCS") contracts. We estimate these expected cash receipts from operating these businesses through the point when we expect the operations of these businesses or individual income producing properties are sold to a new owner or when we otherwise estimate operations cease. This estimated ending period for operating these businesses generally varies from third quarter fiscal 2021 through first quarter fiscal 2022. These estimated revenues are included in the calculation of estimated costs in excess of estimated receipts during liquidation on our consolidated statement of net assets in liquidation. Estimated proceeds from the sale of our operating businesses and real estate assets are recorded separately for the estimated operating revenues and are included in properties and business units for sale on our consolidated statement of net assets in liquidation.
Restaurant Sales
Under the going concern basis of accounting, restaurant sales consisted of sales of food and beverage products to restaurant guests at our Luby’s cafeterias and our Fuddruckers and Cheeseburger in Paradise restaurants. Revenue from restaurant sales was recognized at the point of sale and was presented net of discounts, coupons, employee meals and complimentary meals. Sales taxes that we collected and remitted to the appropriate taxing authority related to these sales were excluded from revenue. Under the liquidation basis of accounting, we have estimated the sales to be collected at each restaurant through the point when we estimate that operations at each restaurant no longer occur under our ownership. This estimated point when we no longer operate restaurants varies based on whether the restaurant location is operated as a Luby's cafeteria or a Fuddruckers restaurant, whether the restaurant location is situated on property we own or lease, and other factors. However, it is estimated that, as we sell certain restaurants to new owners to steward the Luby's and Fuddruckers brands, most restaurant operations would no longer be owned by us by the end of fiscal 2021. During this holding period when we operate restaurants, sales are estimated based on recent sales history and consideration of historical seasonal patterns.
We sell gift cards to our customers in our venues and through certain third-party distributors. These gift cards do not expire and do not incur a service fee on unused balances. Under the going concern basis of accounting sales of gift cards to our restaurant customers were initially recorded as a contract liability, included in accrued expenses and other liabilities, at their expected redemption value. When gift cards were redeemed, we recognized revenue and reduced the contract liability. Discounts on gift cards sold by third parties were recorded as a reduction to accrued expenses and other liabilities and were recognized as a reduction to revenue over a period that approximated redemption patterns. The portion of gift cards sold to customers that are never redeemed is commonly referred to as gift card breakage. We recognized gift card breakage revenue in proportion to the pattern of gift card redemptions exercised by our customers, using an estimated breakage rate based on our historical experience. Under the liquidation basis of accounting, the unredeemed gift card balance, net of estimated breakage, is included in accrued expenses and other liabilities on our consolidated statement of net assets in liquidation.
CCS revenue
Our CCS segment provides food, beverage and catering services to our clients at their locations. Depending on the type of client and service, we are either paid directly by our client and/or directly by the customer to whom we have been provided access by our client.
We typically use one of the following types of client contracts in our CCS business:
Fee-Based Contracts
Revenue from fee-based contracts was based on our costs incurred and invoiced to the client for reimbursement along with the agreed management fee, which may be calculated as a fixed dollar amount or a percentage of sales or other variable measure. Some fee-based contracts entitle us to receive incentive fees based upon our performance under the contract, as measured by factors such as sales, operating costs and client satisfaction surveys. This potential incentive revenue was allocated entirely to the management services performance obligation. Under the going concern basis of accounting, we recognized revenue from our management fee and payroll cost reimbursement over time as the services were performed; and we recognized revenue from our food and third party purchases reimbursement at the point in time when the vendor delivered the goods or performed the services.
Profit and Loss Contracts
Revenue from profit and loss contracts consisted primarily of sales made to consumers, typically with little or no subsidy charged to clients. Under the going concern basis of accounting, revenue was recognized at the point of sale to the consumer. Sales taxes that we collected and remitted to the appropriate taxing authority related to these sales were excluded from revenue.
As part of client contracts, we sometimes make payments to clients, such as concession rentals, vending commissions and profit share. These payments were accounted for as operating costs when incurred.
Revenue from the sale of frozen foods included royalty fees based on a percentage of frozen food sales and was recognized at the point in time when product was delivered by our contracted manufacturers to the retail outlet.
Under the liquidation basis of accounting, we have estimated the cash receipts, based on recent cash collections and forecasted level of operations for our CCS contracts through the expected holding period for this business unit. The estimated cash receipts are included in the calculation of estimated costs in excess of estimated receipts on our consolidated statement of net assets in liquidation.
Franchise revenues
Franchise revenues consisted primarily of royalties, marketing and advertising fund (“MAF”) contributions, initial and renewal franchise fees, and upfront fees from area development agreements related to our Fuddruckers restaurant brand. Our performance obligations under franchise agreements consist of: (1) a franchise license, including a license to use our brand and MAF management, (2) pre-opening services, such as training and inspections and (3) ongoing services, such as development of training materials and menu items as well as restaurant monitoring and inspections. These performance obligations are highly interrelated, so we do not consider them to be individually distinct. We accounted for them as a single performance obligation, which was satisfied over time by providing a right to use our intellectual property over the term of each franchise agreement.
Royalties, including franchisee MAF contributions, are calculated as a percentage of franchise restaurant sales. MAF contributions paid by franchisees are used for the creation and development of brand advertising, marketing and public relations, merchandising research and related programs, activities and materials. The initial franchisee fee is payable upon execution of the franchise agreement and the renewal fee is due and payable at the expiration of the initial term of the franchise agreement. Our franchise agreement royalties, including advertising fund contributions, represent sales-based royalties that are related entirely to our performance obligation under the franchise agreement and were recognized as franchise sales occur.
Under the going concern basis of accounting, initial and renewal franchise fees and area development fees were recognized as revenue over the term of the respective agreement. Area development fees are not distinct from franchise fees, so upfront fees paid by franchisees for exclusive development rights were deferred and apportioned to each franchise restaurant opened by the franchisee. The pro-rata amount apportioned to each restaurant was accounted for as an initial franchise fee.
Revenue from vending machine sales was recorded at the point in time when the sale occurred.
Under the liquidation basis of accounting, we have estimated the cash collections from Fuddruckers franchisees over an anticipated holding period. Recent trends in collection of Fuddruckers franchise royalties were used as a basis for this forecast.
Contract Liabilities
Contract liabilities consisted of (1) deferred revenue resulting from initial and renewal franchise fees and upfront area development fees paid by franchisees, which, under the going concern basis of accounting, were generally recognized on a
straight-line basis over the term of the underlying agreement, (2) liability for unused gift cards and (3) unamortized discount on gift cards sold to third party retailers. These contract liabilities are included in accrued expenses and other liabilities in our consolidated balance sheet as of August 26, 2020. The following table reflects the change in contract liabilities for the fiscal year ended August 26, 2020, under the going concern basis of accounting:
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|
|
Gift Cards, net of discounts
|
|
Franchise Fees
|
|
|
|
(In thousands)
|
|
Balance at August 28, 2019
|
|
$
|
2,880
|
|
|
$
|
1,287
|
|
|
Revenue recognized that was included in the contract liability balance at the beginning of the year
|
|
(1,011)
|
|
|
(128)
|
|
|
Increase, net of amounts recognized as revenue during the period
|
|
1,541
|
|
|
—
|
|
|
Balance at August 26, 2020
|
|
$
|
3,410
|
|
|
$
|
1,159
|
|
Disaggregation of Total Revenues (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 11, 2020
|
|
Period Ending November 18, 2020
|
Two Quarters Ended March 11, 2020
|
|
|
|
(12 weeks)
|
|
(12 weeks)
|
(28 weeks)
|
|
|
|
(in millions)
|
|
Revenue from performance obligations:
|
|
|
|
|
|
|
Satisfied at a point in time
|
|
$
|
63.8
|
|
|
$
|
38.5
|
|
$
|
152.0
|
|
|
Satisfied over time
|
|
4.8
|
|
|
3.4
|
|
11.7
|
|
|
Total Sales
|
|
$
|
68.6
|
|
|
$
|
41.9
|
|
$
|
163.7
|
|
See "Note 7. Reportable Segments" for disaggregation of revenue by reportable segment.
Note 6. Leases
Under the going concern basis of accounting, we accounted for our operating leases as described below. Under the liquidation basis of accounting, we value the operating lease right-of-use assets at zero, since we do not expect to receive cash proceeds or other consideration for the right-of-use assets.
We determine if a contract contains a lease at the inception date of the contract. Our material operating leases consist of restaurant locations and administrative facilities ("Property Leases"). U.S. GAAP requires that our leases be evaluated and classified as operating or finance leases for financial reporting purposes. The classification evaluation begins at the date on which the leased asset is available for our use (the “Commencement Date”) and the lease term used in the evaluation includes the non-cancellable period for which we have the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option would result in an economic penalty (the "Reasonably Certain Lease Term"). Our lease agreements generally contain a primary term of five to 30 years with one or more options to renew or extend the lease generally from one to five years each. In addition to leases for our restaurant locations and administrative facilities, we also lease vehicles and administrative equipment under operating leases.
At the inception of a new lease, we recognized an operating lease liability and a corresponding right-of-use asset, which are calculated as the present value of the total fixed lease payments over the reasonably certain lease term using discount rates as of the effective date.
Property lease agreements may include rent holidays, rent escalation clauses and contingent rent provisions based on a percentage of sales in excess of specified levels. Contingent rental expenses (“variable lease cost”) were recognized prior to the achievement of a specified target, provided that the achievement of the target was considered probable. Most of our lease agreements include renewal periods at our option. We included the rent holiday periods and scheduled rent increases in our calculation of straight-line rent expense.
Lease cost for operating leases was recognized on a straight-line basis and included the amortization of the right-of-use asset and interest expense related to the operating lease liability. We used the reasonably certain lease term in our calculation of straight-line rent expense. We expensed rent from commencement date through restaurant open date as opening expense. Once a restaurant opened for business, we recorded straight-line rent expense plus any additional variable contingent rent expense (such as common area maintenance, insurance and property tax costs) to the extent it is due under the lease agreement as occupancy expense for our restaurants and selling, general and administrative expense for our corporate office and support facilities. The interest expense related to the lease liability for abandoned leases was recorded to provision for asset impairments
and store closings. Rental expense for lease properties that were subsequently subleased to franchisees or other third parties was recorded as other income.
We made judgments regarding the reasonably certain lease term for each property lease, which impacted the classification and accounting for a lease as a finance lease or an operating lease, the rent holiday and/or escalations in payments that were taken into consideration when calculating straight-line rent, and the term over which leasehold improvements for each restaurant were amortized. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different assumed lease terms were used.
The discount rate used to determine the present value of the lease payments is our estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, we generally cannot determine the interest rate implicit in the lease.
Lessor
We occasionally lease or sublease certain restaurant properties to our franchisees or to third parties. The lease descriptions, terms, variable lease payments and renewal options are generally similar to our lessee leases described above. Similar to our lessee accounting, we elected the practical expedient that allows us to not separate non-lease components from lease components in regard to all property leases where we are the lessors.
Supplemental balance sheet information related to our leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Balance Sheet Classification
|
|
March 10, 2021
|
|
August 26, 2020
|
|
|
|
|
|
|
(Liquidation Basis)
|
|
(Going Concern Basis)
|
|
|
|
|
|
|
(in thousands)
|
|
|
Right-of-use assets
|
|
Operating lease right-of-use assets
|
|
$
|
—
|
|
|
$
|
16,756
|
|
|
|
|
|
|
|
|
|
|
|
|
Current lease liabilities
|
|
Operating lease liabilities-current
|
|
N/A
|
|
$
|
3,903
|
|
|
|
Non-current lease liabilities
|
|
Operating lease liabilities-noncurrent
|
|
N/A
|
|
17,797
|
|
|
|
Total lease liabilities
|
|
|
|
$
|
15,705
|
|
|
$
|
21,700
|
|
|
See the Lease Liabilities section of Note 3. Net Assets in Liquidation for further discussion of our lease liabilities.
Weighted-average lease terms and discount rates were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 10, 2021
|
|
August 26, 2020
|
|
|
Weighted-average remaining lease term
|
|
6.33 years
|
|
5.73 years
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate
|
|
9.77%
|
|
9.57%
|
|
Under the going concern basis of accounting, components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
12 Weeks Ended
|
|
28 Weeks Ended
|
|
|
|
|
|
|
March 11, 2020
|
|
November 18, 2020
|
|
March 11, 2020
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Operating lease expense
|
|
$
|
1,874
|
|
|
$
|
1,120
|
|
|
$
|
4,412
|
|
|
|
|
|
Variable lease expense
|
|
257
|
|
|
138
|
|
|
553
|
|
|
|
|
|
Short-term lease expense
|
|
62
|
|
|
92
|
|
|
125
|
|
|
|
|
|
Sublease expense
|
|
161
|
|
|
18
|
|
|
161
|
|
|
|
|
|
Total lease expense
|
|
$
|
2,354
|
|
|
$
|
1,368
|
|
|
$
|
5,251
|
|
|
|
|
Under the going concern basis of accounting, operating lease income was included in other income on our consolidated statements of operations and was comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
12 Weeks Ended
|
|
28 Weeks Ended
|
|
|
|
|
|
|
March 11, 2020
|
|
November 18, 2020
|
|
March 11, 2020
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Operating lease income
|
|
$
|
213
|
|
|
$
|
62
|
|
|
$
|
503
|
|
|
|
|
|
Sublease income
|
|
114
|
|
|
18
|
|
|
286
|
|
|
|
|
|
Variable lease income
|
|
33
|
|
|
5
|
|
|
109
|
|
|
|
|
|
Total lease income
|
|
$
|
360
|
|
|
$
|
85
|
|
|
$
|
898
|
|
|
|
|
Supplemental disclosures of cash flow information related to leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Weeks Ended
|
|
12 Weeks Ended
|
|
28 Weeks Ended
|
|
|
|
|
|
|
March 11, 2020
|
|
November 18, 2020
|
|
March 11, 2020
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
2,431
|
|
|
$
|
2,358
|
|
|
$
|
5,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease liabilities
|
|
$
|
903
|
|
|
$
|
—
|
|
|
$
|
903
|
|
|
|
|
Operating lease obligations maturities in accordance with Topic 842 as of March 10, 2021 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Remainder of FY 2021
|
|
$
|
1,997
|
|
|
|
|
|
FY 2022
|
|
3,307
|
|
|
|
|
|
FY 2023
|
|
3,345
|
|
|
|
|
|
FY 2024
|
|
2,535
|
|
|
|
|
|
FY 2025
|
|
3,349
|
|
|
|
|
|
Thereafter
|
|
7,105
|
|
|
|
|
|
Total lease payments
|
|
21,638
|
|
|
|
|
|
Less: imputed interest
|
|
(5,933)
|
|
|
|
|
|
Present value of operating lease obligations
|
|
$
|
15,705
|
|
|
|
|
Note 7. Reportable Segments
As more fully described at Note 1. Basis of Presentation, through November 18, 2020, we had five reportable segments: Luby’s Cafeterias, Fuddruckers Restaurants, Cheeseburger in Paradise Restaurants, Fuddruckers franchise operations, and CCS. In connection with our Plan of Liquidation, we have one reportable segment as of November 19, 2020.
Company-owned restaurants
Company-owned restaurants consisted of Luby’s Cafeterias, Fuddruckers Restaurants and Cheeseburger in Paradise Restaurant reportable segments. We considered each restaurant to be an operating segment because operating results and cash flow could be determined for each restaurant. We aggregated our restaurant operating segments into reportable segments by restaurant brand because the nature of the products and services, the production processes, the customers, the methods used to distribute the products and services, the long-term store level profit margins, and the nature of the regulatory environment were similar. The chief operating decision maker analyzed store level profit which is defined as restaurant sales and vending revenue, less cost of food, payroll and related costs, other operating expenses and occupancy costs. All Company-owned restaurants are casual dining restaurants.
The Luby’s Cafeterias segment included the results of our company-owned Luby’s Cafeterias restaurants. The total number of Luby’s cafeterias operating at November 18, 2020 and August 26, 2020 were 60 and 61, respectively.
The Fuddruckers restaurant segment included the results of our company-owned Fuddruckers restaurants. The total number of Fuddruckers restaurants operating at November 18, 2020 and August 26, 2020 were 24 and 24, respectively.
Included in the restaurant counts above are five Combo units, where a Luby's cafeteria and a Fuddruckers restaurant occupy the same location. The Combo units are included in the above counts for both Luby's cafeteria and Fuddruckers restaurants.
We operated one Cheeseburger in Paradise restaurant during the quarter ended December 16, 2019, which was closed permanently in March 2020.
CCS
CCS, branded as Luby’s Culinary Services, consists of a business line servicing healthcare, sport stadiums, corporate dining clients, and sales through retail grocery stores. The healthcare accounts are full service and typically include in-room delivery, catering, vending, coffee service, and retail dining. CCS had contracts with long-term acute care hospitals, acute care medical centers, ambulatory surgical centers, retail grocery stores, behavioral hospitals, a senior living facility, sports stadiums, government, and business and industry clients. CCS has the unique ability to deliver quality services that include facility design and procurement as well as nutrition and branded food services to our clients. The cost of CCS on our consolidated statements of operations includes all food, payroll and related costs, other operating expenses, and other direct general and administrative expenses related to CCS sales. The total number of CCS contracts at November 18, 2020 and August 26, 2020 were 26 and 26, respectively.
Fuddruckers Franchise Operations
We only offer franchises for the Fuddruckers brand. Initial franchise agreements generally have a term of 20 years. Franchise agreements typically grant franchisees an exclusive territorial license to operate a single restaurant within a specified area.
Franchisees bear all direct costs involved in the development, construction, and operation of their restaurants. In exchange for a franchise fee, we provide franchise assistance in the following areas: site selection, prototypical architectural plans, interior and exterior design and layout, training, marketing and sales techniques, assistance by a Fuddruckers “opening team” at the time a franchised restaurant opens, and operations and accounting guidelines set forth in various policies and procedures manuals.
All franchisees are required to operate their restaurants in accordance with Fuddruckers standards and specifications, including controls over menu items, food quality, and preparation. The Company requires the successful completion of its training program by a minimum of three managers for each franchised restaurant. In addition, franchised restaurants are evaluated regularly by the Company for compliance with franchise agreements, including standards and specifications through the use of periodic, unannounced, on-site inspections and standards evaluation reports.
We had 71 franchised restaurants at both November 18, 2020 and August 26, 2020.
Segment Table
The tables below show segment financial information under the going concern basis of accounting. The table also lists total assets for each reportable segment. Corporate assets include cash and cash equivalents, restricted cash, property and equipment, assets related to discontinued operations, property held for sale, deferred tax assets, and prepaid expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 11, 2020
|
|
Period Ended November 18, 2020
|
|
Two Quarters Ended March 11, 2020
|
|
|
|
|
|
|
(12 weeks)
|
|
(12 weeks)
|
|
(28 weeks)
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
Luby's cafeterias
|
$
|
47,886
|
|
|
$
|
31,949
|
|
|
$
|
115,030
|
|
|
|
|
|
|
Fuddruckers restaurants
|
11,872
|
|
|
4,550
|
|
|
27,551
|
|
|
|
|
|
|
Cheeseburger in Paradise restaurants
|
647
|
|
|
—
|
|
|
1,492
|
|
|
|
|
|
|
Culinary contract services
|
6,998
|
|
|
4,918
|
|
|
16,772
|
|
|
|
|
|
|
Fuddruckers franchise operations
|
1,158
|
|
|
530
|
|
|
2,865
|
|
|
|
|
|
|
Total
|
68,561
|
|
|
$
|
41,947
|
|
|
$
|
163,710
|
|
|
|
|
|
|
Segment level profit:
|
|
|
|
|
|
|
|
|
|
|
Luby's cafeterias
|
$
|
4,877
|
|
|
$
|
4,896
|
|
|
$
|
12,786
|
|
|
|
|
|
|
Fuddruckers restaurants
|
527
|
|
|
(412)
|
|
|
494
|
|
|
|
|
|
|
Cheeseburger in Paradise restaurants
|
(28)
|
|
|
(85)
|
|
|
(95)
|
|
|
|
|
|
|
Culinary contract services
|
598
|
|
|
451
|
|
|
1,424
|
|
|
|
|
|
|
Fuddruckers franchise operations
|
749
|
|
|
236
|
|
|
1,890
|
|
|
|
|
|
|
Total
|
6,723
|
|
|
$
|
5,086
|
|
|
$
|
16,499
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
Luby's cafeterias
|
$
|
1,738
|
|
|
$
|
1,530
|
|
|
$
|
4,182
|
|
|
|
|
|
|
Fuddruckers restaurants
|
387
|
|
|
167
|
|
|
937
|
|
|
|
|
|
|
Cheeseburger in Paradise restaurants
|
19
|
|
|
—
|
|
|
47
|
|
|
|
|
|
|
Culinary contract services
|
5
|
|
|
8
|
|
|
17
|
|
|
|
|
|
|
Fuddruckers franchise operations
|
178
|
|
|
1
|
|
|
414
|
|
|
|
|
|
|
Corporate
|
350
|
|
|
436
|
|
|
843
|
|
|
|
|
|
|
Total
|
2,677
|
|
|
$
|
2,142
|
|
|
$
|
6,440
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
Luby's cafeterias
|
$
|
414
|
|
|
$
|
416
|
|
|
$
|
1,238
|
|
|
|
|
|
|
Fuddruckers restaurants
|
90
|
|
|
17
|
|
|
139
|
|
|
|
|
|
|
Cheeseburger in Paradise restaurants
|
—
|
|
|
—
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuddruckers franchise operations
|
—
|
|
|
—
|
|
|
14
|
|
|
|
|
|
|
Corporate
|
41
|
|
|
—
|
|
|
97
|
|
|
|
|
|
|
Total
|
$
|
545
|
|
|
$
|
433
|
|
|
$
|
1,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 11, 2020
|
|
Period Ended November 18, 2020
|
|
Two Quarters Ended March 11, 2020
|
|
|
|
|
|
|
(12 weeks)
|
|
(12 weeks)
|
|
(28 weeks)
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Loss before income taxes and discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
Segment level profit
|
$
|
6,723
|
|
|
$
|
5,086
|
|
|
$
|
16,499
|
|
|
|
|
|
|
Opening costs
|
(2)
|
|
|
—
|
|
|
(14)
|
|
|
|
|
|
|
Depreciation and amortization
|
(2,677)
|
|
|
(2,142)
|
|
|
(6,440)
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
(6,816)
|
|
|
(4,267)
|
|
|
(16,974)
|
|
|
|
|
|
|
Other charges
|
(1,509)
|
|
|
(416)
|
|
|
(2,748)
|
|
|
|
|
|
|
Net provision for asset impairments and restaurant closings
|
(661)
|
|
|
85
|
|
|
(1,770)
|
|
|
|
|
|
|
Net loss on disposition of property and equipment
|
2,527
|
|
|
(117)
|
|
|
2,498
|
|
|
|
|
|
|
Interest income
|
5
|
|
|
8
|
|
|
28
|
|
|
|
|
|
|
Interest expense
|
(1,473)
|
|
|
(1,212)
|
|
|
(3,435)
|
|
|
|
|
|
|
Other income, net
|
148
|
|
|
30
|
|
|
388
|
|
|
|
|
|
|
Total
|
$
|
(3,735)
|
|
|
$
|
(2,945)
|
|
|
$
|
(11,968)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 26, 2020
|
|
|
|
|
|
(in thousands)
|
|
|
Total assets:
|
|
|
|
|
|
Luby's cafeterias
|
|
|
$
|
90,349
|
|
|
|
Fuddruckers restaurants (1)
|
|
|
26,502
|
|
|
|
Cheeseburger in Paradise restaurants (2)
|
|
|
164
|
|
|
|
Culinary contract services
|
|
|
4,744
|
|
|
|
Fuddruckers franchise operations (3)
|
|
|
8,973
|
|
|
|
Corporate
|
|
|
46,671
|
|
|
|
Total
|
|
|
$
|
177,403
|
|
|
(1) Includes Fuddruckers trade name intangible of $6.9 million at August 26, 2020.
(2) Includes Cheeseburger in Paradise liquor licenses, and Jimmy Buffett intangibles of $34 thousand at August 26, 2020.
(3) Fuddruckers franchise operations segment includes royalty intangibles of $8.4 million at August 26, 2020.
Note 8. Other Charges
Under the going concern basis of accounting, other charges included those expenses that we considered related to our restructuring efforts or were not part of our ongoing operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 11, 2020
|
|
Period Ended November 18, 2020
|
|
Two Quarters Ended March 11, 2020
|
|
|
|
|
|
|
(12 weeks)
|
|
(12 weeks)
|
|
(28 weeks)
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severances
|
$
|
544
|
|
|
$
|
—
|
|
|
$
|
1,162
|
|
|
|
|
|
|
Restructuring related
|
966
|
|
|
416
|
|
|
1,586
|
|
|
|
|
|
|
Total Other charges
|
$
|
1,510
|
|
|
$
|
416
|
|
|
$
|
2,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the liquidation basis of accounting, costs that are expected to be settled in cash have been accrued for and are included in the calculation of estimated costs in excess of estimated receipts on our consolidated statement of net assets in liquidation.
Note 9. Fair Value Measurements (Going Concern Basis)
GAAP establishes a framework for using fair value to measure assets and liabilities and expands disclosure about fair value measurements. Fair value measurements guidance applies whenever other authoritative accounting guidance requires or permits assets or liabilities to be measured at fair value.
GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value. These tiers include:
•Level 1: Defined as observable inputs such as quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
•Level 2: Defined as pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.
•Level 3: Defined as pricing inputs that are unobservable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
The fair values of the Company's cash and cash equivalents, restricted cash and cash equivalents, trade receivables and other receivables, net, and accounts payable approximate their carrying value due to their short duration. The carrying value of the Company's total long-term debt, net of unamortized discounts and debt issue costs, at August 26, 2020 was approximately $54.1 million, which approximates fair value because the applicable interest rate is adjusted frequently based on short-term market rates (Level 2).
There were no recurring fair value measurements related to assets or liabilities at August 26, 2020.
There were no non-recurring fair value measurement adjustments for the 12 week period ended November 18, 2020.
Under the going concern basis of accounting, non-recurring fair value measurements related to impaired operating lease right-of-use assets and property held for sale for the two quarters ended March 11, 2020 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Measurement Using
|
|
|
|
|
March 11, 2020
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
Impairments(3)
|
|
Nonrecurring Fair Value Measurements
|
|
|
(In thousands)
|
|
|
|
|
|
Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
Property held for sale (1)
|
$
|
3,362
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,362
|
|
|
$
|
(14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets (2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,181)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Nonrecurring Fair Value Measurements
|
$
|
3,362
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,362
|
|
|
$
|
(1,195)
|
|
(1) In accordance with Subtopic 360-10, long-lived assets held for sale with a carrying value of approximately $3.4 million were written down to their fair value, less costs to sell, of approximately $3.4 million, resulting in an impairment charge of approximately $14 thousand.
(2) In accordance with Subtopic 360-10, operating lease right-of-use assets with a carrying amount of approximately $1.2 million were written down to their fair value of zero, resulting in an impairment charge of approximately $1.2 million.
(3) Total impairments are included in provision for asset impairments and restaurant closings in our unaudited consolidated statement of operations for the two quarters ended March 11, 2020.
Note 10. Income Taxes
No cash payments of estimated federal income taxes were made during the 12 week period ended November 18, 2020 and the two quarters ended March 11, 2020, respectively. Under the going concern basis of accounting, deferred tax assets and liabilities were recorded based on differences between the financial reporting basis and the tax basis of assets and liabilities using currently enacted rates and laws that will be in effect when the differences are expected to reverse. Under the liquidation basis of accounting, we have estimated the actual cash tax payments based on our estimate of operations and the timing and amount to be collected on the sale of our assets. We have included a liability of $616 thousand in accrued expenses and other liabilities on our consolidated statement of net assets in liquidation at March 10, 2021.
Under the going concern basis of accounting, deferred tax assets are recognized to the extent future taxable income is expected to be sufficient to utilize those assets prior to their expiration. If current available evidence and information raises doubt regarding the realization of the deferred tax assets, on a more likely than not basis, a valuation allowance is necessary. In evaluating our ability to realize the Company's deferred tax assets, the Company considered available positive and negative evidence, scheduled reversals of deferred tax liabilities, tax-planning strategies, and results of recent operations.
Under the going concern basis of accounting, the effective tax rate ("ETR") for continuing operations was a negative 1.6% for the quarter ended March 11, 2020. The ETR was a negative 2.0% for the 12 week period ended November 18, 2020 and a negative 1.3% for the two quarters ended March 11, 2020. The ETR for the 12 week period ended November 18, 2020 differed from the federal statutory rate of 21% due to management's full valuation allowance conclusion, state income taxes, and other discrete items.
Management believes that adequate provisions for income taxes have been reflected in the financial statements and is not aware of any significant exposure items that have not been reflected in our consolidated financial statements. Amounts considered probable of settlements within one year have been included in the accrued expenses and other liabilities in the accompanying consolidated balance sheet.
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act contains numerous tax provisions; however, there was no impact on our income tax provision due to management's full valuation allowance conclusion. We will continue to assess the effect of the CARES Act and the ongoing other legislation related to the COVID-19 pandemic that may be issued, including the Consolidated Appropriations Act 2021 that was signed in law on December 27, 2020.
Note 11. Property and Equipment, Intangible Assets and Goodwill
Under the going concern basis of accounting, our property and equipment, intangible assets and goodwill was accounted for as described below. Under the liquidation basis of accounting, our property and equipment and intangible assets, including intangible assets not recognized on the going concern basis, are recorded on the statement of net assets in liquidation at the amount of their estimated cash proceeds or other consideration from liquidation.
Our property and equipment were recorded at cost, net of impairment, and accumulated depreciation of property and equipment at August 26, 2020, together with the related estimated useful lives used in computing depreciation and amortization, as summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 26,
2020
|
|
Estimated Useful Lives (years)
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Land
|
|
|
$
|
42,572
|
|
|
|
|
—
|
|
|
|
Restaurant equipment and furnishings
|
|
|
60,685
|
|
|
3
|
|
to
|
|
15
|
|
Buildings
|
|
|
114,909
|
|
|
20
|
|
to
|
|
33
|
|
Leasehold and leasehold improvements
|
|
|
20,429
|
|
|
Lesser of lease term or estimated useful life
|
|
Office furniture and equipment
|
|
|
3,178
|
|
|
3
|
|
to
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
241,773
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
(141,174)
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
$
|
100,599
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
$
|
15,343
|
|
|
15
|
|
to
|
|
21
|
Intangible assets, net, included the Fuddruckers trade name and franchise agreements were amortized. We believed the Fuddruckers brand name had an expected accounting life of 21 years from the date of acquisition based on the expected use of its assets and the restaurant environment in which it is being used. The trade name represented a respected brand with customer loyalty and the Company intended to cultivate and protect the use of the trade name. The franchise agreements, after considering renewal periods, had an estimated accounting life of 21 years from the date of acquisition, July 2010, and was being amortized over this period of time.
Intangible assets, net, also included the license agreement and trade name related to Cheeseburger in Paradise and the value of the acquired licenses and permits allowing the sales of beverages with alcohol. These assets had an expected useful life of 15 years from the date of acquisition, December 2012.
The aggregate amortization expense related to intangible assets subject to amortization was approximately $0.3 million and $0.8 million for the 12 week period ended November, 18, 2020 and the two quarters ended March 11, 2020, respectively.
The following table presents intangible assets as of August 26, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 26, 2020
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Intangible Assets Subject to Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuddruckers trade name and franchise agreements
|
|
|
|
|
|
|
$
|
29,496
|
|
|
$
|
(14,189)
|
|
|
$
|
15,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cheeseburger in Paradise trade name and license agreements
|
|
|
|
|
|
|
146
|
|
|
(110)
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
|
|
|
|
$
|
29,642
|
|
|
$
|
(14,299)
|
|
|
$
|
15,343
|
|
Under the going concern basis of accounting, goodwill, net of accumulated impairments, was approximately $195 thousand as of August 26, 2020. The Company recorded no goodwill impairment charges during the 12 week period ended November 18, 2020 and the two quarters ended March 11, 2020, respectively. Under the liquidation basis of accounting, there is no goodwill included on our statement of net assets in liquidation.
Note 12. Impairment of Long-Lived Assets, Discontinued Operations, Property Held for Sale and Store Closings
Impairment of Long-Lived Assets and Store Closings
Under the going concern basis of accounting, we periodically evaluated long-lived assets held for use and held for sale whenever events or changes in circumstances indicated that the carrying amount of those assets may not be recoverable. We analyzed historical cash flows of operating locations and compared results of poorer performing locations to more profitable locations. We also analyzed lease terms, condition of the assets and related need for capital expenditures or repairs, as well as construction activity and the economic and market conditions in the surrounding area.
For assets held for use, we estimated future cash flows using assumptions based on possible outcomes of the areas analyzed. If the estimated undiscounted future cash flows were less than the carrying value of the location’s assets, we recorded an impairment loss based on an estimate of discounted cash flows. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, required management’s subjective judgments. Assumptions and estimates used included operating results, changes in working capital, discount rate, growth rate, anticipated net proceeds from disposition of the property and, if applicable, lease terms. The span of time for which future cash flows were estimated was often lengthy, increasing the sensitivity to assumptions made. The time span could be 20 to 25 years for newer properties, but only 5 to 10 years for older properties. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets could vary within a wide range of outcomes. We considered the likelihood of possible outcomes in determining the best estimate of future cash flows. The measurement for such an impairment loss was then based on the fair value of the asset as determined by discounted cash flows.
We recognized the following impairment charges to income from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended
|
|
Two Quarters Ended
|
|
|
November 18,
2020
|
|
March 11,
2020
|
|
|
(12 weeks)
|
|
(28 weeks)
|
|
|
(In thousands, except per share data)
|
|
Net provision (gain) for asset impairments and restaurant closings
|
$
|
(85)
|
|
|
$
|
1,770
|
|
|
Net loss (gain) on disposition of property and equipment
|
117
|
|
|
(2,498)
|
|
|
|
|
|
|
|
|
$
|
32
|
|
|
$
|
(728)
|
|
|
Effect on EPS:
|
|
|
|
|
Basic
|
$
|
—
|
|
|
$
|
0.02
|
|
|
Assuming dilution
|
$
|
—
|
|
|
$
|
0.02
|
|
The $0.1 million net gain in provision for asset impairments and restaurant closings for the period ended November 18, 2020 is primarily related to a $0.7 million net gain on the termination of seven leases where we permanently ceased operations and negotiated buyouts of the leases, partially offset by a $0.6 million write-off of the right-of-use asset for one of our leased locations.
The $1.8 million provision for asset impairments and restaurant closings for the two quarters ended March 11, 2020 was primarily related to the impairment of the right-of-use asset for two of our leased locations where we ceased operations during the period and certain surplus equipment written down to fair value.
The $2.5 million net gain on disposition of property and equipment for the two quarters ended March 11, 2020 was primarily due to gains on the sale of two previously held for sale properties partially offset by routine asset retirements.
Discontinued Operations
As a result of the first quarter fiscal 2010 adoption of our Cash Flow Improvement and Capital Redeployment Plan, we reclassified 24 Luby’s Cafeterias to discontinued operations. Under the going concern basis of accounting, at November 18, 2020, one non-operating location remained held for sale.
The following table sets forth the assets and liabilities for all discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 26,
2020
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
$
|
1,715
|
|
|
|
|
|
|
|
Assets related to discontinued operations—non-current
|
|
|
$
|
1,715
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
$
|
17
|
|
|
Liabilities related to discontinued operations—current
|
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
|
Under the going concern basis of accounting, losses from discontinued operations for the 12 week period ended November 18, 2020 and the quarter ended and two quarters ended March 11, 2020 were not significant.
Property Held for Sale
Under the going concern basis of accounting, property held for sale was accounted for as discussed below. Under the liquidation basis of accounting, all of our property is for sale and is recorded on the statement of net assets in liquidation at the amount of their estimated cash proceeds or other consideration from liquidation.
Under the going concern basis of accounting, we periodically reviewed long-lived assets against our plans to retain or ultimately dispose of properties. If we decided to dispose of a property, it was moved to property held for sale, actively marketed and recorded at fair value less transaction costs. We analyzed market conditions each reporting period and recorded additional impairments due to declines in market values of like assets. The fair value of the property was determined by observable inputs such as appraisals and prices of comparable properties in active markets for assets like ours. Gains were not recognized until the properties were sold.
Under the going concern basis of accounting, property held for sale included unimproved land, closed restaurant properties, properties with operating restaurants that our Board of Directors had approved for sale, and related equipment for locations not classified as discontinued operations. The specific assets were valued at the lower of net depreciated value or net realizable value.
At August 26, 2020, we had 10 owned properties with a carrying value of approximately $11.2 million in property held for sale.
Abandoned Leased Facilities - Liability for Store Closings
We classified nine and 18 leased restaurant locations as abandoned as of March 10, 2021 and August 26, 2020, respectively. Although we may remain obligated under the terms of the leases for the rent and other costs that may be associated with the leases, we decided to cease operations and we have no foreseeable plans to occupy the spaces as a company restaurant in the future. The total liability represents the present value of the total amount of rent and other direct costs (such as common area costs, property taxes, and insurance allocated by the landlord) for the remaining lease term less the present value of any sublease income expected to be collected. During the two quarters ended March 10, 2021, we settled and terminated nine abandoned leases.
The liability for our abandoned leases at March 10, 2021 and August 26, 2020 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 10, 2021
|
August 26, 2020
|
|
|
(Liquidation Basis)
|
(Going Concern Basis)
|
|
Short-term lease liability
|
N/A
|
$
|
365
|
|
|
Long-term lease liability
|
N/A
|
2,348
|
|
|
Operating lease liabilities
|
$
|
1,585
|
|
2,713
|
|
|
Accrued expenses and other liabilities
|
1,700
|
|
2,088
|
|
|
Total
|
$
|
3,285
|
|
$
|
4,801
|
|
Note 13. Commitments and Contingencies
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Pending Claims
From time to time, the Company is subject to various private lawsuits, administrative proceedings, and claims that arise in the ordinary course of its business. A number of these lawsuits, proceedings, and claims may exist at any given time. These matters typically involve claims from guests, employees, and others related to issues common to the restaurant industry. The Company currently believes that the final disposition of these types of lawsuits, proceedings, and claims will not have a material adverse effect on our cash flows and value of net assets in liquidation.
Note 14. Related Parties
Affiliate Services
Christopher J. Pappas, the Company’s former Chief Executive Officer (see Subsequent Events section of Note 1. Basis of Presentation), and Harris J. Pappas, a former director of Company, own two restaurant related entities (the “Pappas entities”) that may, from time to time, provide services to the Company and its subsidiaries, as detailed in the Amended and Restated Master Sales Agreement dated August 2, 2017 among the Company and the Pappas entities. Collectively, Messrs. Pappas and the Pappas entities own greater than 5 percent of the Company's common stock.
Under the terms of the Amended and Restated Master Sales Agreement, the Pappas entities may provide specialized (customized) equipment fabrication and basic equipment maintenance, including stainless steel stoves, shelving, rolling carts, and chef tables. We received no services under the Amended and Restated Master Sales Agreement for custom-fabricated and refurbished equipment in the two quarters ended March 10, 2021 and March 11, 2020, respectively. Services provided under this agreement are subject to review and approval by the Finance and Audit Committee of our Board of Directors.
Operating Leases
In the third quarter of fiscal 2004, Messrs. Pappas became partners in a limited partnership which purchased a retail strip center in Houston, Texas. Messrs. Pappas collectively own a 50% limited partnership interest and a 50% general partnership interest in the limited partnership. A third party company manages the center. One of the Company’s restaurants has rented approximately 7% of the space in that center since July 1969. No changes were made to the Company’s lease terms as a result of the transfer of ownership of the center to the new partnership.
On November 22, 2006, the Company executed a new lease agreement with respect to this shopping center. Effective upon the Company’s relocation and occupancy into the new space in July 2008, the new lease agreement provided for a primary term of approximately 12 years with two subsequent five-year options and gave the landlord an option to buy out the tenant on or after the calendar year 2015 by paying the then unamortized cost of improvements to the tenant. The Company paid rent of $22.00 per square foot per year plus maintenance, taxes, and insurance during the remaining primary term of the lease. Thereafter, the lease provided for increases in rent at set intervals. The new lease agreement was approved by the Finance and Audit Committee of our Board of Directors. Due to the COVID-19 pandemic, the landlord agreed to abate the rent for April, 2020. We entered into an amendment to the lease, effective July 1, 2020, whereby (1) the lease was terminated early on December 31, 2020, (2) the rent for May and June of 2020 was abated and (3) commencing July 1, 2020 through the early termination date, the monthly rent was a fixed gross amount. The amendment was approved by the Finance and Audit Committee of our Board of Directors.
In the third quarter of fiscal 2014, on March 12, 2014, the Company executed a new lease agreement with a Pappas entity for one of our Fuddruckers locations in Houston, Texas. The lease provided for a primary term of approximately six years with two subsequent five-year options. Pursuant to the lease agreement, the Company paid $28.53 per square foot per year plus maintenance, taxes, and insurance from March 12, 2014 until May 31, 2020. The lease agreement provided for increases in rent at set intervals. The new lease agreement was approved by the Finance and Audit Committee of our Board of Directors. In December 2019 we exercised the first five-year renewal option, effective June 1, 2020. The renewal was approved by the Finance and Audit Committee of our Board of Directors. Due to the COVID-19 pandemic, the landlord agreed to abate the rent for April and May of 2020. The lease was terminated on February 26, 2021, in conjunction with the sale of the Fuddruckers operations at this location to a Pappas entity to operate as a franchised location, as further described below.
For the two quarters ended March 10, 2021 and March 11, 2020, affiliated rents incurred as a percentage of relative total Company cost was 0.41% and 0.58%, respectively. Rent payments under the two lease agreements described above were $133 thousand and $300 thousand, respectively.
Fuddruckers Franchise
In February 2021, we completed the sale and transfer of a previously company-owned Fuddruckers restaurant to HPCP Investments, LLC, one of the Pappas entities, for cash proceeds of approximately $0.2 million and the termination of our operating lease on the property, discussed above. Concurrent with the sale, Pappas Restaurants, Inc. entered into a franchise agreement with us to operate a Fuddruckers restaurant at this location. Each of these transactions was approved by the Finance and Audit Committee of our Board of Directors.
Key Management Personnel
Mr. Pappas resigned his position as President and Chief Executive Officer, effective January 27, 2021. Mr. Pappas remains a member of the Board of Directors of the Company. Previously, on December 11, 2017, the Company had entered into a new employment agreement with Mr. Pappas. Under the employment agreement, which is no longer effective as of January 27, 2021 (see Subsequent Events section of Note 1. Basis of Presentation), the initial term of Mr. Pappas' employment ended on August 28, 2019 and automatically renewed for additional one year periods, unless terminated in accordance with its terms. The employment agreement had been unanimously approved by the Executive Compensation Committee of our Board of Directors as well as by the full Board at that time. Previously, effective August 1, 2018, the Company and Mr. Pappas agreed to reduce his fixed annual base salary to one dollar.
Also, effective January 27, 2021, the Board of Directors appointed John Garilli as the Company’s Interim President and Chief Executive Officer. The Company and Mr. Garilli’s employer, Winthrop Capital Advisors LLC ("WCA"), have entered into an agreement (the “Agreement”), pursuant to which the Company paid WCA a one-time fee of $50,000 and will pay a monthly fee of $20,000 for so long as Mr. Garilli serves the Company in said positions. The Company has also entered into an Indemnity Agreement with Mr. Garilli and WCA. The Company and WCA had previously entered into a consulting agreement, pursuant to which WCA provided consulting services related to the Company’s adoption of the liquidation basis of accounting in the filing of our Quarterly Report on Form 10-Q for the quarter ended December 16, 2020. The Company and WCA executed a second consulting agreement to provide similar services for the filing of our Quarterly Report on Form 10-Q for the quarter ended March 10, 2021.
Paulette Gerukos, Vice President of Human Resources of the Company, is the sister-in-law of Harris J. Pappas.
Note 15. Debt
The following table summarizes debt balances at March 10, 2021 (liquidation basis) and August 26, 2020 (going concern basis), in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 10,
2021
|
|
August 26,
2020
|
|
Long-Term Debt
|
(Liquidation Basis)
|
|
(Going Concern Basis)
|
|
2018 Credit Agreement - Revolver
|
$
|
10,000
|
|
|
$
|
10,000
|
|
|
2018 Credit Agreement - Term Loans
|
36,583
|
|
|
36,583
|
|
|
Total credit facility debt
|
46,583
|
|
|
46,583
|
|
|
2020 PPP Loan
|
10,000
|
|
|
10,000
|
|
|
Total Long-Term Debt
|
N/A
|
|
56,583
|
|
|
Less:
|
|
|
|
|
Unamortized debt issue costs
|
N/A
|
|
(1,410)
|
|
|
Unamortized debt discount
|
N/A
|
|
(1,055)
|
|
|
Total long-term debt, less unamortized debt issuance costs
|
N/A
|
|
54,118
|
|
|
Current portion of credit facility debt
|
N/A
|
|
—
|
|
|
Long-term debt, less current portion
|
N/A
|
|
$
|
54,118
|
|
PPP Loan
On April 21, 2020. we entered into a promissory note with Texas Capital Bank, N.A., ("TCB") effective April 12, 2020, that provides for a loan in the amount of $10.0 million (the 'PPP Loan") pursuant to the Paycheck Protection Program ("PPP") established under the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). The PPP Loan is subject to forgiveness under the PPP upon our request to the extent that the proceeds are used to pay expenses permitted by the PPP,
including payroll costs, covered rent and mortgage obligations, and covered utility payments. The PPP Loan matures on April 12, 2022, two years from the commencement date and bears interest at a rate of 1.0% per annum.
On June 5, 2020, the Paycheck Protection Program Flexibility Act (the “new Act”) was signed into law and made significant changes to the PPP to provide additional relief for borrowers under the PPP. The new Act increased flexibility for businesses that were unable to operate as normal due to COVID-19 related restrictions. The new Act extended the period that businesses have to use PPP funds to qualify for loan forgiveness to 24 weeks, up from 8 weeks under the original rules, relaxed the requirements that loan recipients must adhere to in order to qualify for loan forgiveness, and extended the payment deferral period to the earlier of the date when the amount of loan forgiveness is determined by the SBA and lender or 10 months after the 24 week covered period ends. Initially, all payments were to be deferred for six months. Under the new Act, payments are deferred until the SBA remits any loan forgiveness amount to the lender, TCB in the case of the Company. Interest accrues over the entire period of the PPP Loan for the portion of the PPP that is not ultimately forgiven.
On November 12, 2020, we submitted an application for forgiveness of the entire $10.0 million due on the PPP Loan. Notwithstanding our application for loan forgiveness, we are unable to predict the actual amount of loan forgiveness, if any, that will be approved. On January 28, 2021, we were notified that our PPP Loan had been selected for review by the Small Business Administration ("SBA") and we have responded on a timely basis to the information inquiry. As of March 10, 2021, we were in full compliance with all covenants with respect to the PPP Loan.
2018 Credit Agreement
On December 13, 2018, we entered into a credit agreement (amended as defined below), the (“Credit Agreement”) among the Company, the lenders from time to time party thereto, and a subsidiary of MSD Capital, MSD PCOF Partners VI, LLC (“MSD”), as Administrative Agent, pursuant to which the lenders party thereto agreed to make loans to the Company from time to time up to an aggregate principal amount of $80 million consisting of a $10 million revolving credit facility (the “Revolver”), a $10 million delayed draw term loan (“Delayed Draw Term Loan”), and a $60 million term loan (the “Term Loan”, and together with the Revolver and the Delayed Draw Term Loan, the “Credit Facility”). The Credit Facility terminates on, and all amounts owing thereunder must be repaid on, December 13, 2023.
On July 31, 2019, we entered into the First Amendment to the Credit Agreement (the “First Amendment”) to extend the Delayed Draw Term Loan expiration date for up to one year to the earlier to occur of (a) the date on which the commitments under the Delayed Draw Term Loan have been terminated or reduced to zero in accordance with the terms of the Credit Agreement and (b) September 13, 2020. On December 18, 2019, we entered into the Second Amendment to the Credit Agreement which did not change any terms of the agreement permanently. The amendment only decreased the amount of mandatory prepayment related to the sale of two properties in the quarter ended March 11, 2020. We entered into the Third Amendment to Credit Agreement, dated April 21, 2020 (the "Third Amendment"). The Third Amendment permitted us to incur indebtedness under the PPP Loan and terminated the $5.0 million undrawn portion of the delayed draw term loan upon receipt of the PPP Loan. On August 21, 2020, we entered into the Fourth Amendment to the Credit Agreement that decreased the amount of mandatory prepayments related to the sale of two properties in the quarter ended August 26, 2020. No other terms of the agreement were changed permanently by this amendment.
Borrowings under the Revolver, Delayed Draw Term Loan, and Term Loan bear interest at the three month London InterBank Offered Rate ("LIBOR") plus 7.75% per annum. Interest is payable quarterly and accrues daily. Under the terms of the Credit Agreement, the maximum amount of interest payable, based on the aggregate principal amount of $80.0 million and interest rates in effect at December 13, 2018, in the next 12 months was required to be prefunded at the closing date of the 2018 Credit Agreement. The prefunded amount at March 10, 2021 of approximately $4.1 million is recorded in restricted cash and cash equivalents on our consolidated statement of net asset in liquidation. Three month LIBOR is set be discontinued after June 30, 2023. We expect to agree to a replacement rate with MSD prior to the LIBOR termination.
The Credit Facility is subject to the following minimum amortization payments: 1st anniversary: $10.0 million; 2nd anniversary: $10.0 million; 3rd anniversary: $15.0 million; and 4th anniversary: $15.0 million.
As of March 10, 2021, we have approximately $6.6 million principal payments due under the Credit Facility in the next 12 months. On April 5, 2021, in connection with the sale of a real estate asset, we made a principal payment of $2.8 million, leaving a principal balance of $3.8 million to be paid by December 13, 2021.
The Company also paid a quarterly commitment fee based on the unused portion of the Revolver and the Delayed Draw Term Loan at 0.50% per annum. Voluntary prepayments, refinancing and asset dispositions constituting a sale of all or substantially all assets, under the Delayed Draw Term Loan and the Term Loan are subject to a make whole premium during years one and two equal to the present value of all interest otherwise owed from the date of the prepayment through the end of year two, a 2.0% fee during year three, and a 1.0% fee during year four. Finally, the Company paid to the lenders a one-time fee of $1.6 million in connection with the closing of the Credit Facility.
Indebtedness under the Credit Facility is secured by a security interest in, among other things, all of our present and future personal property (other than certain excluded assets), all of the personal property of our guarantors (other than certain excluded assets) and all Mortgaged Property (as defined in the Credit Agreement) of the Company and its subsidiaries. Under the Credit Facility, 80% of net proceeds from asset sales, including real property sales, are applied as mandatory prepayments of our Term Loan.
The Credit Facility contains customary covenants and restrictions on our ability to engage in certain activities, including financial performance covenants, asset sales and acquisitions, and contains customary events of default. Specifically, among other things, we are required to maintain minimum Liquidity (as defined in the Credit Agreement) of $3.0 million as of the last day of each fiscal quarter and a minimum Asset Coverage Ratio (as defined in the Credit Agreement) of 2.50 to 1.00. As of March 10, 2021, we were in full compliance with all covenants with respect to the Credit Facility.
All amounts owing by the Company under the Credit Facility are guaranteed by the subsidiaries of the Company.
As of March 10, 2021, we had approximately $1.8 million committed under letters of credit, which are used as security for the payment of insurance obligations and are fully cash collateralized, and approximately $16 thousand in other indebtedness.
As of April 26, 2021, the Company was in compliance with all covenants under the terms of the Credit Agreement.
Note 16. Share-Based and Other Compensation Matters
We have two active share-based stock plans, the Luby's Incentive Stock Plan, as amended and restated effective December 5, 2015 (the "Employee Stock Plan") and the Non-employee Director Stock Plan, as amended and restated effective February 9, 2018. Both plans authorize the granting of stock options, restricted stock, and other types of awards consistent with the purpose of the plans.
As of March 10, 2021, no shares remain available for future issuance under the Non-employee Director Stock Plan. Compensation costs for share-based payment arrangements under the Non-employee Director Stock Plan, recognized in selling, general and administrative expenses, was approximately $158 thousand, $237 thousand and $390 thousand for the 12 weeks ended November 18, 2020 and the quarter ended and two quarters ended March 11, 2020, respectively.
Of the aggregate 4.1 million shares approved for issuance under the Employee Stock Plan, as amended, 7.4 million options and restricted stock units have been granted to date, and 5.2 million options and restricted stock units were canceled or expired and added back into the plan since the plan’s inception in 2005. As of March 10, 2021, approximately 1.9 million shares remain available for future issuance. Compensation costs for share-based payment arrangements under the Employee Stock Plan, recognized in selling, general and administrative expenses, was approximately $25 thousand, $40 thousand and $136 thousand, respectively, for the 12 weeks ended November 18, 2020 and the quarter ended and two quarters ended March 11, 2020.
Stock Options
Stock options granted under either the Employee Stock Plan or the Non-employee Director Stock Plan have exercise prices equal to the market price of the Company’s common stock at the date of the grant.
Option awards under the Non-employee Director Stock Plan generally vest 100% on the first anniversary of the grant date and expire ten years from the grant date. No options were granted under the Non-employee Director Stock Plan in the two quarters ended March 10, 2021. No options to purchase shares were outstanding under the Non-employee Director Stock Plan as of March 10, 2021.
Options granted under the Employee Stock Plan generally vest 50% on the first anniversary date of the grant date, 25% on the second anniversary of the grant date and 25% on the third anniversary of the grant date, with all options expiring ten years from the grant date. No options were granted in the two quarters ended March 10, 2021. Options to purchase 823,083 shares at option prices of $2.82 to $5.95 per share remain outstanding as of March 10, 2021.
A summary of the Company’s stock option activity for the two quarters ended March 10, 2021 is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Under
Fixed
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
(Per share)
|
|
(In years)
|
|
(In thousands)
|
|
Outstanding at August 26, 2020
|
860,501
|
|
|
$
|
4.07
|
|
|
5.0
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
(26,887)
|
|
|
$
|
2.82
|
|
|
—
|
|
|
$
|
12.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
(10,531)
|
|
|
$
|
5.39
|
|
|
—
|
|
|
—
|
|
|
Outstanding at March 10, 2021
|
823,083
|
|
|
$
|
4.09
|
|
|
4.4
|
|
$
|
109.7
|
|
|
Exercisable at March 10, 2021
|
823,083
|
|
|
$
|
4.09
|
|
|
4.4
|
|
$
|
109.7
|
|
The intrinsic value for stock options is defined as the difference between the current market value, or closing price on March 10, 2021, and the grant price on the measurement dates in the table above.
At March 10, 2021, there is no unrecognized compensation cost related to unvested options.
Restricted Stock Units
Grants of restricted stock units consist of the Company’s common stock and generally vest after three years. All restricted stock units are cliff-vested. Restricted stock units are valued at the closing market price of the Company’s common stock at the date of grant.
A summary of the Company’s restricted stock unit activity during the two quarters ended March 10, 2021 is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock
Units
|
|
Weighted
Average
Fair Value
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
|
|
(Per share)
|
|
(In years)
|
|
Unvested at August 26, 2020
|
173,808
|
|
|
$
|
2.57
|
|
|
2.0
|
|
|
|
|
|
|
|
|
Vested
|
(108,572)
|
|
|
$
|
2.75
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Unvested at March 10, 2021
|
65,236
|
|
|
$
|
2.27
|
|
|
1.9
|
Performance Based Incentive Plan
The 2018 TSR Performance Based Incentive Plan (the "2018 TSR Plan") provided for a specified number of shares of common stock under the Employee Stock Plan based on the total shareholder return ranking compared to a selection of peer companies over a period of three years. The grant date fair value of the 2018 TSR Plan was determined based on a Monte Carlo simulation model for a period of three years. The target number of shares for distribution at 100% of the award was 373,294 on the grant date. The 2018 TSR Plan was accounted for as an equity award since it provides for a specified number of shares. The expense for this plan year was amortized over a period of three years based on 100% target award. The three years measurement period ended on August 26, 2020. Based on our total shareholder return ranking, no shares were vested and distributed.
Non-cash compensation expense related to our 2018 TSR Plan, recorded in selling, general and administrative expenses, was approximately $89 thousand and $207 thousand in the quarter ended and two quarters ended March 11, 2020, respectively.
Restricted Stock Awards
Under the Non-employee Director Stock Plan, directors received grants of restricted stock in lieu of cash payments, for all or a portion of their compensation as directors. Directors received a 20% premium of additional restricted stock by opting to receive stock over a minimum required amount of stock, in lieu of cash. The number of shares granted was valued at the average of the high and low price of the Company’s stock at the date of the grant. Restricted stock awards vest when granted because they are granted in lieu of a cash payment. However, directors are restricted from selling their shares until after the third anniversary of the date of the grant. As of March 10, 2021, there are no shares available for issuance under the Non-employee Director Stock Plan and future directors compensation will be paid in cash.
Cash and Restricted Share Bonus Plan
On August 12, 2020, the Board of Directors approved a bonus opportunity agreement by which five members of management, including the Chief Operating Officer, the Chief Financial Officer and the Chief Accounting Officer are eligible to receive both a cash bonus and a restricted stock award bonus (collectively, the "retention awards"). The retention awards are intended to retain certain key employees in their roles with the Company and to carry out the Plan of Dissolution. A portion of the retention awards is earned for each of the closing of the sale of (1) our CCS business line, (2) the Fuddruckers business line and (3) 30 or more of our Luby's Cafeterias (each being a "Triggering Event"). The cash bonus will be paid on the next payroll cycle following such Triggering Event. The restricted stock award will be considered earned as of such Triggering Event and shall vest on the 1st anniversary of the Triggering Event, unless the individual's employment with us is terminated prior to the restriction lapsing. The total cash bonus available to be earned is $0.2 million. The total number of restricted stock available to be earned is 127,000 shares. The grant date for the restricted stock award was August 25, 2020 and the grant date fair value was $139 thousand, based on the average share price of our common stock on the grant date of $1.095.
Severance Agreements
On August 12, 2020, the Board of Directors approved severance agreements for eight members of management, including the Chief Operating Officer, the Chief Financial Officer and the Chief Accounting Officer. The agreements provide for a separation payment upon (1) termination by the Company of employment without cause (as defined in the severance agreement), (2) resignation for Good Reason (as defined in the Appendix to the severance agreement), in either case the individual ceases to be employed by us or a successor to all or part of our business. The separation payment will not be paid if the individual is offered, but declines comparable employment with a successor. The separation payment is calculated as a percentage of the individual's annual base salary, ranging from 25% to 100% The total amount of severance that would be paid as of March 10, 2021 is $1.0 million.
Note 17. Earnings Per Share (Going Concern Basis)
Under the going concern basis of accounting, basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted net income per share, the basic weighted average number of shares is increased by the dilutive effect of stock options determined using the treasury stock method. Stock options excluded from the computation of net income per share for the 12 week period ended November 18, 2020 and the quarter ended and two quarters ended March 11, 2020 include 849,970 shares, 1,174,247 shares, and 1,174,247 shares respectively, with exercise prices exceeding market prices whose inclusion would also be anti-dilutive.
The components of basic and diluted net loss per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Period Ended
|
|
Two Quarters Ended
|
|
|
|
|
March 11,
2020
|
|
November 18,
2020
|
|
March 11,
2020
|
|
|
|
|
|
|
(12 weeks)
|
|
(12 weeks)
|
|
(28 weeks)
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
$
|
(3,797)
|
|
|
$
|
(3,003)
|
|
|
$
|
(12,124)
|
|
|
|
|
|
|
Loss from discontinued operations, net of income taxes
|
(6)
|
|
|
(16)
|
|
|
(17)
|
|
|
|
|
|
|
NET LOSS
|
$
|
(3,803)
|
|
|
$
|
(3,019)
|
|
|
$
|
(12,141)
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share—weighted-average shares
|
30,215
|
|
|
30,662
|
|
|
30,123
|
|
|
|
|
|
|
Effect of potentially dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Employee and non-employee stock options
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Denominator for earnings per share assuming dilution
|
30,215
|
|
|
30,662
|
|
|
30,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
$
|
(0.13)
|
|
|
$
|
(0.10)
|
|
|
$
|
(0.40)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
$
|
(0.13)
|
|
|
$
|
(0.10)
|
|
|
$
|
(0.40)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 18. Shareholder Rights Plan
On February 15, 2018, the Board of Directors adopted a shareholder rights plan with a 10% triggering threshold and declared a dividend distribution of one right initially representing the right to purchase one half of a share of Luby’s common stock, upon specified terms and conditions. The rights plan was effective immediately.
The Board adopted the shareholder rights plan in view of the concentrated ownership of Luby’s common stock as a means to ensure that all of Luby’s stockholders are treated equally. The shareholder rights plan is designed to limit the ability of any person or group to gain control of Luby’s without paying all of Luby’s stockholders a premium for that control. The shareholder rights plan was not adopted in response to any specific takeover bid or other plan or proposal to acquire control of Luby’s.
If a person or group acquires 10% or more of the outstanding shares of Luby’s common stock (including in the form of synthetic ownership through derivative positions), each right will entitle its holder (other than such person or members of such group) to purchase, for $12.00, a number of shares of Luby’s common stock having a then-current market value of twice such price. The rights plan exempts any person or group owning 10% or more (35.5% or more in the case of Harris J. Pappas, Christopher J. Pappas and their respective affiliates and associates) of Luby’s common stock immediately prior to the adoption of the rights plan. However, the rights will be exercisable if any such person or group acquires any additional shares of Luby’s common stock (including through derivative positions) other than as a result of equity grants made by Luby’s to its directors, officers or employees in their capacities as such.
Prior to the acquisition by a person or group of beneficial ownership of 10% or more of the outstanding shares of Luby’s common stock, the rights are redeemable for $0.01 per right at the option of Luby’s Board of Directors.
The dividend distribution was made on February 28, 2018 to stockholders of record on that date. Unless and until a triggering event occurs and the rights become exercisable, the rights will trade with shares of Luby’s common stock.
Luby’s financial condition, operations, and earnings per share were not affected by the adoption of the shareholder rights plan.
On February 11, 2019, the Board of Directors approved the first amendment to the shareholder rights plan extending the term of the shareholder rights plan to February 15, 2020.
On February 14, 2020, the Board of Directors approved the second amendment to the shareholder rights plan extending the term of the plan to February 15, 2021.
On November 17, 2020, the Company's shareholders ratified the shareholder rights plan.
On February 14, 2021, the Board of Directors approved the third amendment to the shareholder rights plan extending the term of the plan to February 15, 2022.
