Lub Liquidating Trust (LUB) 10-Q2022 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

__________________________

FORM 10-Q

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(Registrant’s telephone number, including area code)

As of April 14, 2022, there were 31,083,122 shares of the registrant’s common stock outstanding. 

Luby’s, Inc.

Part I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

Consolidated Statements of Net Assets in Liquidation

Consolidated Statements of Changes in Net Assets in Liquidation

Consolidated Statement of Operations (unaudited)

Consolidated Statement of Cash Flows (unaudited)

 

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

Notes to Consolidated Financial Statements (unaudited)

Note 1. Basis of Presentation and Nature of Operations

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. Changes in net assets for the interim periods are not necessarily indicative of the results that may be expected for the fiscal year ending August 31, 2022. 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 25, 2021.

Nature of Operations

As of March 9, 2022, we had 10 operating Luby's cafeterias and 2 operating Fuddruckers restaurants, which have remained open pending the sale of the restaurant property or settlement of the lease obligation on the property. Included in the counts for both Luby's cafeterias and Fuddruckers restaurants is 1 Combo unit, where a Luby's cafeteria and a Fuddruckers restaurant occupy the same location. We have contracted with third party operators to oversee the day-to-day operations at each of these locations. In addition, as of March 9, 2022, our Culinary Service ("CCS") business operated 23 contracts to manage food services for clients operating in primarily three lines of business: healthcare, senior living facilities and schools. As discussed below, subsequent to March 9, 2022, we sold our CCS business.

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. 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 substantially all of 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 of Delaware.

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 from the adoption date of the Plan. It is anticipated that any assets and liabilities remaining at such time will be transferred to a liquidating entity, where the monetization will continue until completed. 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 effective November 19, 2020. Although shareholder approval of the Plan occurred on November 17, 2020, we changed to the liquidation basis of accounting effective November 19, 2020 as a convenience date. Activity between November 17, 2020 and November 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 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.

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.

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.

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.

New Accounting Pronouncements

There are no issued accounting pronouncements that are applicable or relevant to us under the liquidation basis of accounting.

We evaluated events subsequent to March 9, 2022 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 28, 2022, we paid a second liquidating distribution of approximately $15.5 million, or $0.50 per share to shareholders of record on March 21, 2022.

The liability for estimated costs in excess of estimated receipts during liquidation at March 9, 2022 and August 25, 2021 was comprised of (in thousands):

Current Fiscal Year Activity

Net assets in liquidation decreased by $65.0 million during the period from August 25, 2021 through March 9, 2022. The decrease was primarily due to a $62.2 million distribution to our shareholders, a $2.7 million net decrease due to changes in estimated future cash flows during liquidation and a $0.1 million net decrease from the expected sale of assets at estimated prices that were different than our previous estimated liquidation values.

The $2.7 million decrease generated by the remeasurement of assets and liabilities was due to a $4.4 million decrease in projected future operating results, which were primarily as a result of changes in estimated holding periods for our operating properties, partially offset by actual operating results exceeding projected operating results by $1.7 million.

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.

Lease Obligations

We continue to negotiate with our landlords to settle and terminate our existing leases; however, we can offer no assurances that we will 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.

Notes Receivable

In connection with the sale of the Fuddruckers brand franchise business in the fourth quarter of fiscal 2021 and the sale of the Luby's Cafeterias brand name and business in the first quarter of fiscal 2022, we received secured promissory notes (the "Notes") from the respective buyers of the brands. The Notes are carried at the aggregate amount we expect to receive upon liquidation of the Notes and are included in accounts and notes receivable in our consolidated statements of net assets in liquidation.

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 (in thousands):

Restricted cash and cash equivalents as of March 9, 2022 and August 25, 2021 was $3.8 million and $5.5 million, respectively. Amounts included in restricted cash at March 9, 2022 represent those required to be set aside for (1) collateral for a letter of credit required to guarantee payment to our largest food vendor, (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. Restricted cash at August 25, 2021 also included the estimated amount of interest payable in the next 12 months under the Credit Agreement (see Note 11. Debt) that was released during the first quarter of fiscal 2022 when all amounts due under the Credit Agreement were paid and the Credit Agreement was terminated.

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 and royalties 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 is the third quarter of 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 from the estimated operating revenues and are included in properties and business units for sale on our consolidated statement of net assets in liquidation.

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 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 own operating restaurants varies based on whether the restaurant location is a Luby's cafeteria or a Fuddruckers restaurant, whether the restaurant location is situated on property we own or lease, and other factors. During this holding period when we own restaurants, sales are estimated based on recent sales history and consideration of historical seasonal patterns.

We sold 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, was included in accrued expenses and other liabilities on our consolidated statement of net assets in liquidation. The buyer of the Fuddruckers brand assumed the liability for unredeemed Fuddruckers gift cards in the fourth quarter of fiscal 2021. The buyer of the Luby's brand assumed the liability for unredeemed Luby's gift cards in the first quarter of fiscal 2022.

CCS revenue

We typically use one of the following types of client contracts in our CCS business:

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.

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 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 consisted 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 did 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, were calculated as a percentage of franchise restaurant sales. MAF contributions paid by franchisees were 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 was payable upon execution of the franchise agreement and any renewal fee was due and payable at the expiration of the initial term of the franchise agreement. Our franchise agreement royalties, including advertising fund contributions, represented sales-based royalties that were 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.

Under the liquidation basis of accounting, we 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. We sold the Fuddruckers franchise operations in the fourth quarter of fiscal 2021.

Revenue from vending machine sales was recorded at the point in time when the sale occurred.

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.

At the inception of a new lease, we recognized an operating lease liability and a corresponding right-of-use asset, which were 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 have produced 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 was our estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms. We use this method because we generally cannot determine the interest rate implicit in the lease.

We classified 6 and 7 leased restaurant locations as abandoned as of March 9, 2022 and August 25, 2021, 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 9, 2022, we settled and terminated 1 abandoned lease.

The liability for our abandoned leases at March 9, 2022 and August 25, 2021 is as follows (in thousands):

Under the going concern basis of accounting, we had 5 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 1 reportable segment under the liquidation basis of accounting.

Segment Table

The tables below show segment financial information under the going concern basis of accounting (in thousands):

Note 8. Income Taxes

No cash payments of estimated federal income taxes were made during the two quarters ended March 9, 2022. 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 $1.7 million in accrued expenses and other liabilities on our consolidated statements of net assets in liquidation at March 9, 2022.

At August 25, 2021, we recognized a net deferred tax liability of $0.7 million after valuation allowance as a result of anticipated taxable gains to be generated from future asset sales as part of our Plan of Liquidation and our ability to utilize our deferred tax assets. The net deferred tax liability is included in other liabilities on our consolidated statements of net assets in liquidation at August 25, 2021.

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 our deferred tax assets, we considered anticipated utilization of deferred tax assets against the results of our liquidation activities.

Under the going concern basis of accounting, the effective tax rate ("ETR") for continuing operations was a negative 2.0% for the 12 week period ended November 18, 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 consolidated financial statements and is not aware of any significant exposure items that have not been reflected in our consolidated financial statements.

The Company has no off-balance sheet arrangements. 

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.

Christopher J. Pappas, the Company’s former Chief Executive Officer, and Harris J. Pappas, a former director of the Company, own 2 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. 

We received no services under the Amended and Restated Master Sales Agreement for custom-fabricated and refurbished equipment in the two quarters ended March 9, 2022 and March 10, 2021, respectively. Services provided under this agreement are subject to review and approval by the Finance and Audit Committee of our Board of Directors. 

We had leased 2 restaurant locations that were owned by a Pappas entity. The leases were terminated on December 31, 2020 and February 26, 2021, respectively.

For the two quarters ended March 10, 2021, affiliated rents incurred as a percentage of relative total Company cost was 0.41%. Rent payments under the 2 lease agreements were $133 thousand for the two quarters ended March 10, 2021.

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.

Other

Management Affiliations

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"), 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.

Effective September 1, 2021 the Board of Directors appointed Eric Montague as the Company's Interim Chief Financial Officer. The Company and Mr. Montague's employer, WCA, entered into an agreement pursuant to which the Company will pay WCA a monthly fee of $10,000 for so long as Mr. Montague serves the Company in said position.

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 also executed separate consulting agreements to provide similar services for the filing of each of our subsequent Quarterly Reports on Form 10-Q and for the filing of our Annual Report on Form 10-K for the fiscal year ended August 25, 2021. In addition, the Company and WCA executed separate consulting agreements to provide treasury accounting services on an as-needed basis at an hourly rate.

The following table summarizes debt balances at March 9, 2022 and August 25, 2021 (in thousands):

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 $80.0 million consisting of a $10.0 million revolving credit facility, a $10.0 million delayed draw term loan, and a $60.0 million term loan (the "Credit Facility").

As of March 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.

We have 2 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 9, 2022, no shares remain available for future issuance under the Non-employee Director Stock Plan. Under the going concern basis of accounting, 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, for the 12 weeks ended November 18, 2020.

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 5.5 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 9, 2022, approximately 2.2 million shares remain available for future issuance. Under the going concern basis of accounting, compensation costs for share-based payment arrangements under the Employee Stock Plan, recognized in selling, general and administrative expenses, was approximately $25 thousand for the 12 weeks ended November 18, 2020.

Stock options granted under either the Employee Stock Plan have exercise prices equal to the market price of the Company’s common stock at the date of the grant. 

No options to purchase shares were outstanding under the Non-employee Director Stock Plan as of March 9, 2022 or as of August 25, 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 9, 2022. Options to purchase 347,524 shares at adjusted option prices of $0.82 to $2.89 per share remain outstanding as of March 9, 2022. 

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 9, 2022 is presented in the following table:

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 9, 2022, 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 Plans

On August 12, 2020, the Board of Directors approved a bonus opportunity agreement by which 6 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 as of March 9, 2022 is approximately $28 thousand. The total number of restricted shares available to be earned as of March 9, 2022 is 18,000 shares. The grant date for the restricted stock award was August 25, 2020 and the grant date fair value of the unearned shares as of March 9, 2022 was approximately $20 thousand, based on the average share price of our common stock of $1.095 on the grant date.

Severance Agreements

On August 12, 2020, the Board of Directors approved severance agreements for 8 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%. NaN members of management have since resigned from the Company and their severance agreements were terminated. We made $0.2 million in separation payments under the agreement during the two quarters ended March 9, 2022. The total amount of severance that would be paid to the 5 remaining members of management with severance agreements as of March 9, 2022 is approximately $0.6 million.

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. Potentially dilutive shares not included in the computation of net loss per share, because to do so would have been anti-dilutive, totaled 115,515 for the 12 week period ended November 18, 2020. Additionally, stock options excluded from the computation of net income per share for the 12 week period ended November 18, 2020 include 849,970 shares with exercise prices exceeding market prices whose inclusion would be anti-dilutive.

Note 14. Shareholder Rights Plan

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 Board of Directors 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 shareholder 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 shareholder 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.

Luby’s financial condition, operations, and earnings per share were not affected by the adoption of the shareholder rights plan.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 ended March 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 ended August 25, 2021.

The following table shows our restaurant unit count as of August 25, 2021 and March 9, 2022.

Overview

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. 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 of Delaware.

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 from the adoption date of the Plan. 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 effective November 19, 2020. Although shareholder approval of the Plan occurred on November 17, 2020, we changed to the liquidation basis of accounting effective November 19, 2020 as a convenience date. Activity between November 17, 2020 and November 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

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.

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.

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

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.

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.

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.

For the 12 week period ended November 18, 2020. under the going concern basis of accounting (in thousands):

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 $11.5 million at March 9, 2022 to $31.4 million from $19.9 million at the beginning of the fiscal year.

Subsequent to the end of the second fiscal quarter of 2022, on March 28, 2022, we paid a second liquidating distribution of approximately $15.5 million, or $0.50 per share to shareholders of record on March 21, 2022.

Status of Long-Term Investments and Liquidity

As part of the transaction to sell the Luby's brand and the operations of 35 Luby's cafeterias in the quarter ended March 9, 2022, we received preferred stock and common stock warrants in CAL 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 ending May 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.

Capital Expenditures

Capital expenditures for the two quarters ended March 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.

As of March 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.

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 the Finance 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 ended August 25, 2021.

There are no new accounting pronouncements that are applicable or relevant to the Company under the Liquidation Basis of Accounting.

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. 

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:

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:

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.

As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information. 

Evaluation of Disclosure Controls and Procedures

Management, under the supervision and with the participation of our Interim Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act), as of March 9, 2022. Based on that evaluation, our Interim Chief Executive Officer and Chief Financial Officer have concluded that, as of March 9, 2022, our disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. 

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting during the quarter ended March 9, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting due to the COVID-19 pandemic, despite the fact that many of our corporate office employees are working remotely. We are continually monitoring and assessing the COVID-19 situation to minimize the impact on the design and operating effectiveness of our internal controls.

 

There have been no material changes to our legal proceedings as disclosed in “Legal Proceedings” in Item 3 of Part I of our Annual Report on Form 10-K for the fiscal year ended August 25, 2021. 

Except as described below, there have been no material changes during the quarter ended March 9, 2022 to the Risk Factors discussed in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended August 25, 2021. 

Item 5. Other Information

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.