LUBY'S, INC. Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the unaudited Consolidated Financial Statements and footnotes for the quarter endedMarch 9, 2022 included in Item 1 of Part I of this Quarterly Report on Form 10 (this "Form 10-Q"), and the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year endedAugust 25, 2021 .
Restaurant Counts:
The following table shows our restaurant unit count as ofAugust 25, 2021 andMarch 9, 2022 . August 25, YTD Q2 FY 22 Restaurants YTD Q2 FY22 Restaurants March 9, 2021 Closed Sold 2022
Luby's cafeterias 53 (8) (35) 10 Fuddruckers restaurants 7 (4) (1) 2 Total 60 (12) (36) 12 We have contracted with third party operators to oversee the day-to-day operations at each of these locations. Included in theMarch 9, 2022 counts for both Luby's cafeterias and Fuddruckers restaurants is one Combo unit, where a Luby's cafeteria and a Fuddruckers restaurant occupy the same location.
Overview
Prior to Adoption of the Plan of Liquidation
The consolidated financial statements prior toNovember 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
OnNovember 17, 2020 our shareholders approved the Plan of Liquidation. 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 convert all our remaining non-liquid 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 ofDelaware . We currently anticipate that our common stock will be delisted from theNew 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 from the adoption date of thePlan. It is anticipated that any assets and liabilities remaining at such time will be transferred to a liquidating entity. 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
As a result of the approval of the Plan by our shareholders, we changed our basis of accounting from the going concern basis to the liquidation basis effectiveNovember 19, 2020 . Although shareholder approval of the Plan occurred onNovember 17, 2020 , we changed to the liquidation basis of accounting effectiveNovember 19, 2020 as a convenience date. Activity betweenNovember 17, 2020 andNovember 19, 2020 was not 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
includes business unit valuations representing previously
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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 we assume 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.
We currently anticipate that our liquidation and dissolution of the Company will
be substantially completed by June 30, 2022 or shortly thereafter. Any assets
and liabilities remaining at such time will be transferred to a liquidating
entity for monetization through subsequent sales, and it is likely that the full
realization of proceeds from the liquidation process will extend significantly
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.
We have one class of common stock. Based on the liquidation basis of accounting,
the net assets in liquidation at March 9, 2022 would result in future aggregate
liquidating distributions of approximately $2.89 per common share based on the
number of common shares outstanding at that date. This represents no change from
our last reported estimate at the end of the first quarter of fiscal 2022. After
giving effect to the $0.50 per common share distribution paid on March 28, 2022 ,
the net assets in liquidation are currently estimated to result in future
aggregate liquidating distributions of $2.39 per common share. 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.
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, our former restaurants and our former 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.
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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, including in the core markets where we operate in Texas .
These vaccination rates, in addition to a return to full capacity on-premise
dining at most of our restaurants, U.S. Treasury stimulus payments to U.S.
citizens and decreased guest concerns with gathering in public establishments
have all reduced the risk to operating our restaurants. However, despite these
positive developments, risks and uncertainties remain as cases of COVID-19
infection continue within the communities where we operate. 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.
Asset Disposal and Liquidation Activities
Brands
•OnAugust 26, 2021 , we sold the Luby's Cafeterias brand name and the business operations at 35 Luby's locations (including one Combo unit) to an unrelated third party for an adjusted aggregate consideration of approximately$28.4 million which includes the assumption of certain liabilities by the buyer and the issuance of notes, preferred stock and common stock warrants to us. There can be no assurance that we will realize or receive full value of such consideration. The net asset value of the sale is included in properties and business units for sale on the accompanying consolidated statement of net assets in liquidation atAugust 25, 2021 and in various accounts on the accompanying consolidated statement of net assets in liquidation atMarch 9, 2022 at the aggregate amount we expect to receive upon liquidation. •During fiscal 2021, we granted franchises for 14 of the remaining Company-owned Fuddruckers locations and subsequently sold the Fuddruckers brand and franchise business to an unrelated third party.
CCS
•Subsequent to
Fuddruckers
•As ofApril 21, 2022 , one Company owned Fuddruckers and one Company owned Combo location are operating. We have contracted with third party operators to oversee the day-to-day operations at each of these locations. We are currently evaluating the remaining locations to determine the best exit strategy for each location. Cafeterias •As ofApril 21, 2022 an additional 10 Luby's restaurants (including one Combo unit), which are not part of the above referenced sales agreement, are operating. We have contracted with third party operators to oversee the day-to-day operations at each of these locations. We are currently evaluating the remaining locations to determine the best exit strategy for each location.
Real Estate
•During the first two quarters of fiscal 2022, we closed on the sale of 36 properties for total gross proceeds of approximately$114.2 million . A portion of the proceeds from the sales were utilized to fully repay our credit facility debt and to pay an initial liquidating distribution (described below).
•As of
Liquidating Distributions
•On
•On
Lease Settlements
Although we can offer no assurances that we will settle any of our remaining lease obligation for less than its recorded values, any future settlements at less than the recorded value of the related lease obligation would increase our reported net assets in liquidation.
General and Administrative Expenses
As we progress through our Plan of Liquidation, we remain focused on reducing
our operating and administrative costs, when appropriate, to provide maximum
liquidation value to our shareholders.
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--------------------------------------------------------------------------------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. The current fiscal year is a 53 week
fiscal year.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
For the 12 week period endedNovember 18, 2020 . under the going concern basis of accounting (in thousands): Period Ended November 18, 2020 (12 weeks) SALES: Restaurant sales $ 36,485 Culinary contract services 4,918 Franchise revenue 530 Vending revenue 14 TOTAL SALES 41,947 COSTS AND EXPENSES: Cost of food 9,348 Payroll and related costs 12,964 Other operating expenses 7,154 Occupancy costs 2,634 Cost of culinary contract services 4,467 Cost of franchise operations 294 Depreciation and amortization 2,142 Selling, general and administrative expenses 4,267 Other charges 416 Net gain for asset impairments and restaurant closings (85) Net loss on disposition of property and equipment 117 Total costs and expenses 43,718 LOSS FROM OPERATIONS (1,771) Interest income 8 Interest expense (1,212) Other income, net 30 Loss before income taxes and discontinued operations (2,945) Provision for income taxes 58 Loss from continuing operations (3,003) Loss from discontinued operations, net of income taxes (16) NET LOSS $ (3,019)
Under the liquidation basis of accounting subsequent to
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--------------------------------------------------------------------------------LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents
Our ability to meet our obligations is contingent upon the disposition of our assets in accordance with our Plan of Liquidation. We expect that our cash on hand and proceeds from the sale of assets pursuant to the Plan will be adequate to pay our obligations; however, we cannot provide any assurance as to the prices or net proceeds we may receive from the disposition of our assets.
Cash and cash equivalents and restricted cash increased approximately
Subsequent to the end of the second fiscal quarter of 2022, onMarch 28, 2022 , we paid a second liquidating distribution of approximately$15.5 million , or$0.50 per share to shareholders of record onMarch 21, 2022 .
Status of
As part of the transaction to sell the Luby's brand and the operations of 35 Luby's cafeterias in the quarter endedMarch 9, 2022 , we received preferred stock and common stock warrants inCAL Acquisition Corp. , an unrelated third party that are valued at$3.0 million . We are restricted from selling the preferred stock or exercising the common stock warrants for a period endingMay 26, 2022 , which may be extended for an additional three months. We will continue to monitor the underlying investments and notes to determine estimated net realizable value of the preferred stock and common stock warrants.
Status of Trade Accounts and Other Receivables, Net
We monitor the aging of our receivables, including Fuddruckers franchising related receivables, and record provisions for uncollectible accounts, as appropriate. Credit terms of accounts receivable associated with our CCS business vary from 30 to 45 days based on contract terms.
The buyer of the Fuddruckers brand franchise business and the buyer of the Luby's Cafeterias brand name and business operations have executed and delivered secured promissory notes (the "Notes") to us. See the Notes Receivable section of Note 3, Net Assets in Liquidation to our unaudited consolidated financial statements included in Item 1. of this Quarterly Report on Form 10-Q for a further discussion of the Notes. We continue to monitor the terms of the Notes and the payment history of the issuers to determine estimated net realizable value. Capital Expenditures Capital expenditures for the two quarters endedMarch 9, 2022 were approximately$365 thousand primarily related to recurring maintenance of our existing units. Our future maintenance capital expenditures are difficult to predict and will depend on the timing of the sales of our businesses and real estate as part of our Plan of Liquidation. DEBT The following table summarizes debt balances atMarch 9, 2022 andAugust 25, 2021 :March 9 ,August 25, 2022 2021
Long-Term Debt
2018 Credit Agreement - Revolver $ -
- 12,024
Total credit facility debt $ - $ 17,024 All amounts outstanding under the Credit Facility were repaid and the Credit
Facility was terminated on
We do not anticipate future borrowings as we complete our Plan of Liquidation.
As ofMarch 9, 2022 , we had approximately$3.3 million committed under letters of credit, which are used as security for payments of insurance obligations and to our largest food vendor. The letters of credit are fully cash collateralized. 30 --------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The unaudited consolidated financial statements included in Item 1 of Part 1 of this Form 10-Q were prepared in conformity with GAAP. Preparation of the financial statements requires us to make judgments, estimates and assumptions that affect the amounts of assets and liabilities in the financial statements and revenues and expenses during the reporting periods. Due to the significant, subjective and complex judgments and estimates used when preparing our unaudited consolidated financial statements, management regularly reviews these assumptions and estimates with theFinance and Audit Committee of our Board. Actual results may differ from these estimates, including our estimates of future cash flows, which are subject to the current economic environment and changes in estimates. Under the liquidation basis of accounting, we had no changes in the critical accounting policies and estimates which were disclosed in our Annual Report on Form 10-K for the fiscal year endedAugust 25, 2021 .
NEW ACCOUNTING PRONOUNCEMENTS
There are no new accounting pronouncements that are applicable or relevant to the Company under the Liquidation Basis of Accounting.
INFLATION
It is generally our policy to maintain stable menu prices without regard to seasonal variations in food costs. Certain increases in costs of food, wages, supplies, transportation and services may require us to increase our menu prices from time to time. To the extent prevailing market conditions allow, we intend to adjust menu prices to maintain profit margins.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains statements that are "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). All statements contained in this Form 10-Q, other than statements of
historical facts, are forward-looking statements for purposes of these
provisions, including any statements regarding:
•the implementation of the Plan of Liquidation (as defined herein), including
the timing and amount of any liquidating distributions made in connection with
the Plan of Liquidation,
•future sales of assets in accordance with the Plan of Liquidation and the
amount of proceeds that we may receive as a result of any such sales,
•future operating results,
•anticipated liabilities, and
•closing existing units
In some cases, investors can identify these statements by forward-looking words
such as "anticipate," "believe," "could," "estimate," "expect," "intend,"
"outlook," "may," "should," "will," and "would" or similar words.
Forward-looking statements are based on certain assumptions and analyses made by
management in light of its experience and perception of historical trends,
current conditions, expected future developments and other factors it believes
are relevant. Although management believes that its assumptions are reasonable
based on information currently available, those assumptions are subject to
significant risks and uncertainties, many of which are outside of its control.
The following factors, as well as the factors set forth in Item 1A of this Form
10-K and any other cautionary language in this Form 10-K, provide examples of
risks, uncertainties, and events that may cause our financial and operational
results to differ materially from the expectations described in our
forward-looking statements:
•our ability to successfully implement the Plan of Liquidation,
•the ability to realize property values,
•collectability of accounts receivable,
•costs relating to legal proceedings,
•fluctuations in the costs of commodities, including beef, poultry, seafood,
dairy, cheese, oils and produce,
•increases in utility costs, including the costs of natural gas and other energy
supplies,
•changes in the availability and cost of labor, including the ability to attract
and retain qualified managers and team members,
•decisions made in the allocation of capital resources,
•changes in governmental regulations, including changes in minimum wages and
health care benefit regulation,
•the effects of inflation and changes in our customers' disposable income,
spending trends and habits,
•the effectiveness of our credit card controls and Payment Card Industry ("PCI")
compliance,
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•impact of adoption of new accounting standards, •the duration of the COVID-19 pandemic and its impact and the impact of any variants on our business and general business and economic conditions, •effects of actual or threatened future terrorist attacks inthe United States , and •unfavorable publicity relating to operations, including publicity concerning food quality, illness or other health concerns or labor relations Each forward-looking statement speaks only as of the date of this report, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Investors should be aware that the occurrence of the events described above and elsewhere in this report could have material adverse effect on our business and our Plan of Liquidation.
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