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EX-32.1 - EXHIBIT 32.1 - LUBYS INCex32-1_060618.htm
EX-32.2 - EXHIBIT 32.2 - LUBYS INCex32-2_060618.htm
EX-31.2 - EXHIBIT 31.2 - LUBYS INCex31-2_060618.htm
EX-31.1 - EXHIBIT 31.1 - LUBYS INCex31-1_060618.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
__________________________
FORM 10-Q
__________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 6, 2018
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period From to  
Commission file number: 001-08308 
__________________________
Luby's, Inc.
(Exact name of registrant as specified in its charter)
__________________________
Delaware
74-1335253
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
  
  
13111 Northwest Freeway, Suite 600
Houston, Texas
77040
(Address of principal executive offices)
(Zip Code)
 
(713) 329-6800
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x   No  ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act: 
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  x

As of July 11, 2018, there were 29,503,642 shares of the registrant’s common stock outstanding. 

1



Luby’s, Inc.
Form 10-Q
Quarter ended June 6, 2018
Table of Contents
 



Additional Information
 
We file reports with the Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. The public may read and copy any materials we file with the SEC at its Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer, and the SEC maintains an Internet site at http://www.sec.gov that contains the reports, proxy and information statements, and other information that we file electronically. Our website address is http://www.lubysinc.com. Please note that our website address is provided as an inactive textual reference only. We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information provided on our website is not part of this report, and is therefore not incorporated by reference unless such information is specifically referenced elsewhere in this report. 



2



Part I—FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
Luby’s, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
 
 
June 6,
2018
 
August 30,
2017
 
 (Unaudited)
 
 
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
1,509

 
$
1,096

Trade accounts and other receivables, net
7,868

 
8,011

Food and supply inventories
4,830

 
4,453

Prepaid expenses
3,356

 
3,431

Total current assets
17,563

 
16,991

Property held for sale
22,042

 
3,372

Assets related to discontinued operations
1,813

 
2,755

Property and equipment, net
146,488

 
172,814

Intangible assets, net
18,508

 
19,640

Goodwill
555

 
1,068

Deferred income taxes

 
7,254

Other assets
1,982

 
2,563

Total assets
$
208,951

 
$
226,457

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
16,230

 
$
15,937

Liabilities related to discontinued operations
9

 
367

Credit facility debt
44,028

 

Accrued expenses and other liabilities
28,092

 
28,076

Total current liabilities
88,359

 
44,380

Credit facility debt, less current portion

 
30,698

Liabilities related to discontinued operations
16

 
16

Other liabilities
6,537

 
7,311

Total liabilities
94,912

 
82,405

Commitments and Contingencies

 

SHAREHOLDERS’ EQUITY
 
 
 
Common stock, $0.32 par value; 100,000,000 shares authorized; shares issued were 29,975,193 and 29,624,083, respectively; shares outstanding were 29,475,193 and 29,124,083, respectively
9,592

 
9,480

Paid-in capital
33,429

 
31,850

Retained earnings
75,793

 
107,497

Less cost of treasury stock, 500,000 shares
(4,775
)
 
(4,775
)
Total shareholders’ equity
114,039

 
144,052

Total liabilities and shareholders’ equity
$
208,951

 
$
226,457

  
The accompanying notes are an integral part of these Consolidated Financial Statements.

3



Luby’s, Inc.
Consolidated Statements of Operations (unaudited)
(In thousands, except per share data)
 
Quarter Ended
 
Three Quarters Ended
 
June 6,
2018
 
June 7,
2017
 
June 6,
2018
 
June 7,
2017
 
(12 weeks)
 
(12 weeks)
 
(40 weeks)
 
(40 weeks)
SALES:
 
 
 
 
 
 
 
Restaurant sales
$
77,803

 
$
82,594

 
$
256,737

 
$
271,741

Culinary contract services
6,639

 
4,515

 
19,413

 
12,117

Franchise revenue
1,444

 
1,477

 
4,732

 
5,167

Vending revenue
118

 
133

 
412

 
417

TOTAL SALES
86,004

 
88,719

 
281,294

 
289,442

COSTS AND EXPENSES:
 
 
 
 
 
 
 
Cost of food
22,255

 
22,922

 
73,190

 
76,353

Payroll and related costs
29,392

 
29,519

 
96,032

 
97,486

Other operating expenses
15,023

 
13,796

 
48,881

 
47,207

Occupancy costs
4,609

 
4,923

 
15,577

 
16,720

Opening costs
85

 
134

 
490

 
431

Cost of culinary contract services
6,104

 
4,194

 
18,113

 
10,966

Cost of franchise operations
341

 
361

 
1,198

 
1,378

Depreciation and amortization
4,050

 
4,639

 
13,402

 
15,977

Selling, general and administrative expenses
8,507

 
6,764

 
29,219

 
29,531

Provision for asset impairments and restaurant closings
4,464

 
869

 
6,716

 
7,120

Net loss (gain) on disposition of property and equipment
154

 
(195
)
 
172

 
219

Total costs and expenses
94,984

 
87,926

 
302,990

 
303,388

INCOME (LOSS) FROM OPERATIONS
(8,980
)
 
793

 
(21,696
)
 
(13,946
)
Interest income
1

 
3

 
12

 
5

Interest expense
(1,042
)
 
(569
)
 
(2,235
)
 
(1,898
)
Other income (expense), net
9

 
(173
)
 
317

 
(312
)
Income (loss) before income taxes and discontinued operations
(10,012
)
 
54

 
(23,602
)
 
(16,151
)
Provision for income taxes
4,121

 
431

 
7,494

 
2,576

Loss from continuing operations
(14,133
)
 
(377
)
 
(31,096
)
 
(18,727
)
Loss from discontinued operations, net of income taxes
(463
)
 
(19
)
 
(608
)
 
(434
)
NET LOSS
$
(14,596
)
 
$
(396
)
 
$
(31,704
)
 
$
(19,161
)
Loss per share from continuing operations:
 
 
 
 
 
 
 
Basic
$
(0.47
)
 
$
(0.01
)
 
$
(1.04
)
 
$
(0.64
)
Assuming dilution
$
(0.47
)
 
$
(0.01
)
 
$
(1.04
)
 
$
(0.64
)
Loss per share from discontinued operations:
 
 
 
 
 
 
 
Basic
$
(0.02
)
 
$
(0.00
)
 
$
(0.02
)
 
$
(0.01
)
Assuming dilution
$
(0.02
)
 
$
(0.00
)
 
$
(0.02
)
 
$
(0.01
)
Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.49
)
 
$
(0.01
)
 
$
(1.06
)
 
$
(0.65
)
Assuming dilution
$
(0.49
)
 
$
(0.01
)
 
$
(1.06
)
 
$
(0.65
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
30,005

 
29,536

 
29,863

 
29,453

Assuming dilution
30,005

 
29,536

 
29,863

 
29,453


 The accompanying notes are an integral part of these Consolidated Financial Statements.

4



Luby’s, Inc.
Consolidated Statement of Shareholders’ Equity (unaudited)
(In thousands)
 
 
Common Stock
 
 
 
 
 
Total
 
Issued
 
Treasury
 
Paid-In
 
Retained
 
Shareholders’
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Earnings
 
Equity
Balance at August 30, 2017
29,624

 
$
9,480

 
(500
)
 
$
(4,775
)
 
$
31,850

 
$
107,497

 
$
144,052

Net loss

 

 

 

 

 
(31,704
)
 
(31,704
)
Share-based compensation expense
81

 
25

 

 

 
1,666

 

 
1,691

Common stock issued under employee benefit plans
183

 
59

 

 

 
(59
)
 

 

Common stock issued under nonemployee benefit plans
87

 
28

 

 

 
(28
)
 

 

Balance at June 6, 2018
29,975

 
$
9,592

 
(500
)
 
$
(4,775
)
 
$
33,429

 
$
75,793

 
$
114,039

 
The accompanying notes are an integral part of these Consolidated Financial Statements. 

5



Luby’s, Inc.
Consolidated Statements of Cash Flows (unaudited)
(In thousands)
 
 
Three Quarters Ended
 
June 6,
2018
 
June 7,
2017
 
(40 weeks)
 
(40 weeks)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(31,704
)
 
$
(19,161
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Provision for asset impairments and net losses (gains) on property sales
6,599

 
7,338

Depreciation and amortization
13,402

 
15,977

Amortization of debt issuance cost
438

 
316

Share-based compensation expense
1,691

 
1,203

Deferred tax provision
8,026

 
2,922

Cash provided by (used in) operating activities before changes in operating assets and liabilities
(1,548
)
 
8,595

Changes in operating assets and liabilities:
 
 
 
Increase in trade accounts and other receivables
(264
)
 
(460
)
Decrease in insurance receivables
407

 

Decrease (Increase) in food and supply inventories
(376
)
 
68

Decrease (Increase) in prepaid expenses and other assets
575

 
(5
)
Insurance proceeds
276

 

Decrease in accounts payable, accrued expenses and other liabilities
(3,948
)
 
(4,522
)
Net cash provided by (used in) operating activities
(4,878
)
 
3,676

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from disposal of assets and property held for sale
3,363

 
3,640

Insurance proceeds
756

 

Purchases of property and equipment
(11,730
)
 
(10,114
)
Net cash used in investing activities
(7,611
)
 
(6,474
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Revolver borrowings
83,200

 
94,400

Revolver repayments
(68,600
)
 
(122,900
)
Proceeds from term loan

 
35,000

Term loan repayments
(1,415
)
 
(3,063
)
Debt issuance costs
(213
)
 
(652
)
Taxes paid for shares withheld
(70
)
 

Net cash provided by financing activities
12,902

 
2,785

Net increase (decrease) in cash and cash equivalents
413

 
(13
)
Cash and cash equivalents at beginning of period
1,096

 
1,339

Cash and cash equivalents at end of period
$
1,509

 
$
1,326

Cash paid for:
 
 
 
Income taxes
$

 
$

Interest
1,717

 
1,228

 
The accompanying notes are an integral part of these Consolidated Financial Statements.

6



Luby’s, Inc.
Notes to Consolidated Financial Statements (unaudited)
 
 
Note 1. Basis of Presentation
 
The accompanying unaudited Consolidated Financial Statements of Luby’s, Inc. (the “Company” 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 the Company’s 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 quarter ended June 6, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending August 29, 2018.
 
The Consolidated Balance Sheet dated August 30, 2017, included in this Quarterly Report on Form 10-Q (this “Form 10-Q”), has been derived from the audited Consolidated Financial Statements as of that date. However, this Form 10-Q does not include all of the information and footnotes required by GAAP for audited, year-end financial statements. Therefore, 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 30, 2017.

Correction of Immaterial Errors in Previously Issued Financial Statements
In the third quarter of fiscal 2018, management identified an accounting error in Trade accounts and other receivables, net that overstated Culinary Contract Services (CCS) segment revenues by approximately $1.0 million, in the aggregate. For the fourth fiscal quarter of 2017, current assets was overstated by approximately $0.1 million and net loss was understated by approximately $0.1 million. Based on the immateriality of the error to the fiscal fourth quarter and fiscal 2017 the correction for the error impacting fiscal 2017 was recorded in the first fiscal quarter of 2018. The two fiscal quarters ended March 14, 2018 current assets were overstated by approximately $0.9 million and net loss was understated by approximately $0.9 million, or $0.03 per share. The amounts invoiced to each client were correct in each period, however, certain amounts recorded to the Company's general ledger from point of sale transactions, from one client's location, were duplicated with the amounts included on invoices submitted to that client. While this error was not material to any previously issued annual or quarterly interim consolidated financial statements, management concluded that correcting the cumulative error and related tax effects would be material to the Company's consolidated financial statements for the current fiscal quarter ended June 6, 2018.
Management evaluated the cumulative impact of the errors on prior periods under the guidance in ASC 250-10 relating to SEC Staff Accounting Bulletin (“SAB”) Topic1.M, Assessing Materiality. The Company also evaluated the impact of correcting the errors through an adjustment to its financial statements and concluded, based on the guidance within ASC 250-10 relating to SAB Topic 1.N, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, to revise its previously issued financial statements to reflect the impact of the correction of these errors when it files subsequent reports on Form 10-Q and Form 10-K. Accordingly, the Company revised its consolidated financial statements for the quarters ended December 20, 2017 (which includes the approximate $0.1 million correction with respect to fiscal 2017) and March 14, 2018, to correct these errors. The prior period error corrections did not change the net cash flows provided by or used in operating, investing or financing activities previously reported.
Recently Adopted Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-15. The amendments in ASU 2014-15 are intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Under GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently, GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The pronouncement is effective for fiscal years and interim periods within those fiscal years, after December 31, 2016, which required us to adopt these provisions in the first quarter of fiscal 2018. We adopted this pronouncement effective August 31, 2017 and the adoption did not have an impact on our consolidated financial statements or disclosures to our consolidated financial statements.


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In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330). This update requires inventory within the scope of the standard to be measured at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This update is effective for annual and interim periods beginning after December 15, 2016, which required us to adopt these provisions in the first quarter of fiscal 2018. We adopted this pronouncement in the first quarter of fiscal 2018 and the adoption did not have an impact on our consolidated financial statements or disclosures to our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740). This update requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. This update is effective for annual and interim periods beginning after December 15, 2016, which required us to adopt these provisions in the first quarter of fiscal 2018. The interim period adoption of this guidance had an immaterial impact on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). This update was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. The amendments in this update cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. This update is effective for annual and interim periods for fiscal years beginning after December 15, 2016, which required us to adopt these provisions in the first quarter of fiscal 2018. The impact on the Company’s consolidated financial statements from interim period adoption of ASU 2016-09 was immaterial. The Company maintains its accounting policy for forfeitures and continues to estimate the total number of awards for which the requisite service period will not be rendered for book expense purposes.

New Accounting Pronouncements - "to be Adopted"
 
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. This update is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which will require us to adopt these provisions in the first quarter of fiscal 2019. Early application is not permitted. This update permits the use of either the retrospective or cumulative effect transition method. Further, in March 2016, the FASB issued ASU No. 2016–08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which clarifies the guidance in ASU No. 2014–09 for evaluating when another party, along with the entity, is involved in providing a good or service to a customer. In April 2016, the FASB issued ASU No. 2016–10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,” which clarifies the guidance in ASU No. 2014–09 regarding assessing whether promises to transfer goods or services are distinct, and whether an entity's promise to grant a license provides a customer with a right to use or right to access the entity's intellectual property. The Company plans to adopt the standard in the first quarter of fiscal 2019, which is the first fiscal quarter of the annual reporting period beginning after December 15, 2017. The Company will adopt Topic 606 beginning with its fiscal first quarter 2019 and will apply the guidance retrospectively to each prior period presented. Revenue from franchise royalties is recognized each fiscal period based on contractual royalty rates applied to the franchise’s restaurant sales each fiscal period. Royalties are accrued as earned and are calculated each period based on the franchisee’s reported sales. We do not expect the adoption of this pronouncement to effect this policy. Area development fees and franchise fees are recognized as revenue when the Company has performed all material obligations and initial services. Area development fees are recognized proportionately with the opening of each new restaurant, which generally occurs upon the opening of the new restaurant. Until earned, these fees are accounted for as an accrued liability. We do anticipate the recognition of these elements as separate performance obligations in adopting the new revenue standard. As a result, the Company expects the franchise fee recognition policy to change to recognition over the term of the franchisee agreement and does not expect the impact of recognizing initial franchise fees over the franchise agreement period to have a material effect on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset. The update also requires additional disclosures about the amount, timing and uncertainty of cash flows arising from leases. This update is effective for annual and interim periods beginning after December 15, 2018, which will require us to adopt these provisions in the first quarter of fiscal 2020. This standard requires adoption based upon a modified retrospective transition approach for leases existing at, or entered into

8



after, the beginning of the earliest comparative period presented in the financial statements, with optional practical expedients. Based on a preliminary assessment, the Company expects that most of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right–of-use assets upon adoption, resulting in a significant increase in the assets and liabilities on our consolidated balance sheet. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016–04, “Liabilities – Extinguishment of Liabilities: Recognition of Breakage for Certain Prepaid Stored–Value Products,” which is intended to eliminate current and future diversity in practice related to derecognition of prepaid stored–value product liability in a way that aligns with the new revenue recognition guidance. The update is effective for fiscal years beginning after December 15, 2017; however, early application is permitted. We are evaluating the impact on the Company's consolidated financial statements and do not expect the adoption to have a material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). This update provides clarification regarding how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This update is effective for annual and interim periods beginning after December 15, 2017, which will require us to adopt these provisions in the first quarter of fiscal 2019 using a retrospective approach. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This update allows companies the option to reclassify to retained earnings the tax effects related to items in Accumulated other comprehensive income (loss) as a result of the Tax Cuts and Jobs Act that was enacted on December 22, 2017. This update is effective in fiscal years, including interim periods, beginning after December 15, 2018, and early adoption is permitted. This guidance should be applied either in the period of adoption or retrospectively to each period in which the effects of the change in the U.S. federal income tax rate in the Tax Cuts and Jobs Act is recognized. The Company is still completing its assessment of the impacts including the timing of adoption.
 
Subsequent Events
On July 12, 2018, we entered into a Consent and Waiver (the "Waiver") to the credit agreement (the "Credit Agreement") among the Company, the lenders from time to time party thereto, Wells Fargo Bank, National Association ("Wells Fargo"), as Administrative Agent, Swingline Lender, Issuing Lender, Sole Lead Arranger and Sole Bookrunner, and Cadence Bank, N.A. and Texas Capital Bank, N.A., as Co-Syndication Agents. Pursuant to the Waiver, the lenders agreed to a waiver of certain existing defaults with respect to certain financial covenants. The waiver is effective as of May 9, 2018 until the earliest to occur of (i) August 10, 2018, (ii) our failure to perform, observe or comply with any covenant, agreement or term contained in the Waiver or (iii) the occurrence of any additional Default or Event of Default (as defined in the Credit Agreement) (the "Compliance Waiver Period").
Pursuant to the Waiver, among other things, we will be required to retain an independent financial adviser to investigate a refinancing or other alternative transactions, the proceeds which will be applied to, among other things, repay the amounts owed under the Credit Agreement. The Waiver further provides that during the Compliance Waiver Period, notwithstanding anything to the contrary in the Credit Agreement, the lenders may make available to the Company Revolving Credit Loans and Letters of Credit under the Credit Agreement, provided, that during the Compliance Waiver Period (i) the Applicable Margin for LIBOR Rate Loans shall be 5.50% and the Applicable Margin for Base Rate Loans shall be 4.5%, (ii) the Interest Period for any Base Rate Loans converted into LIBOR Rate Loans or for any LIBOR Rate Loans borrowed or continued as a LIBOR Rate Loan under the Revolving Credit Facility in each case during the Compliance Waiver Period shall not be longer than one (1) month and (iii) the Revolving Credit Outstandings shall at no time exceed $29.0 million (as those terms are defined in the Credit Agreement).

Note 2. Management's Assessment of Going Concern
The Company sustained a net loss of approximately $14.6 million and approximately $31.7 million in the quarter ended and three quarters ended June 6, 2018, respectively. Cash flow from operations has declined to a use of cash of approximately $4.9 million in the three quarters ended June 6, 2018. The working capital deficit is magnified by the reclassification of the Company's approximate $44.0 million debt under it's Credit Agreement (as defined below) from long-term to short-term due to the debt's May 1, 2019 maturity date. As of June 6, 2018, the Company was in default of certain of its Credit Agreement financial covenants. The Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations and obtain alternative financing to refund and repay the current debt owed under it's Credit Agreement. The above conditions raise substantial doubt about the Company’s ability to continue as a going concern.

9



The accompanying condensed financial statements have been prepared assuming that the Company will continue as a going concern; however, the above condition raises substantial doubt about the Company’s ability to do so. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
Management has assessed the Company’s ability to continue as a going concern as of the balance sheet date, and at least one year beyond the financial statement issuance date. The assessment of a company’s ability to meet its obligations is inherently judgmental. Without additional funding, the company may not have sufficient available cash to meet its obligations coming due in the ordinary course of business within one year of the financial statement issuance date. However, the Company has historically been able to successfully secure funding and execute alternative cash management plans to meet its obligations as they become due. The following conditions were considered in management’s evaluation of going concern:
The Company announced on April 18, 2018, it identified approximately 14 owned properties inclusive of assets currently classified as Assets related to discontinued operations and Property held for sale on the Company’s balance sheet as part of a limited asset disposal plan to accelerate repayment of its outstanding term loans. The Board of Directors of the Company (the "Board"), approved the limited asset sales plan on April 18, 2018. The Company has identified additional owned properties, in the event it is determined necessary to sell, to reduce the outstanding debt to near zero.
The Company obtained a waiver and consent for testing all Credit Agreement covenants until August 10, 2018, from the lenders.
Management's plan includes immediate further negotiation of terms and conditions of further debt compliance waivers beyond August 10, 2018. These conditions will include certain milestones of management's plans to utilize existing real estate as collateral to maintain the necessary credit availability while executing on its' refinancing plan before the maturity date of the credit agreement, as amended.
The Company has engaged a third-party financial advisor to assist management in pursuing financing transactions.

Note 3. 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; fiscal year 2016 was such a year. 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.

Note 4. Hurricane Harvey

Hurricane Harvey struck the Texas Gulf Coast on August 26, 2017. It meandered along the upper Texas coast for several days bringing unprecedented rain fall resulting in torrential flooding throughout the Greater Houston area. Over 55 Luby’s and Fuddruckers locations in the Texas Gulf Coast region were temporarily closed over varying lengths of time due to the storm. Restaurant sales were negatively impacted by approximately 200 operating days in the aggregate. Two Fuddruckers locations, in the Houston region, were closed on a more than temporary basis, due to extensive flooding which require reconstruction and renovation. The Company estimates that it incurred over approximately $2.0 million in lost sales from the store closures in fiscal 2017. The Company estimates that Loss before income taxes and discontinued operations was negatively impacted by approximately $1.5 million in fiscal 2017 due to the reduced sales and increased costs incurred as a result of the hurricane. During the three quarters ended June 6, 2018, the Company additionally incurred an approximate $0.7 million in direct costs for repairs and other costs related to the hurricane. The Company has open insurance claims related to hurricane damages and losses. As of June 6, 2018, the Company has recovered approximately $1.0 million in insurance proceeds, which includes approximately $0.3 million recognized as a reduction to Other operating expenses as reimbursement of certain direct expenses incurred due to the storm and an approximate $0.3 million recognized as a reduction to one property's assets retirement upon its closure and reported in Net loss (gain) on disposition of property and equipment, as an advance against total claims for estimated damages and losses related to the hurricane.

Note 5. Reportable Segments
 
The Company has three reportable segments: Company-owned restaurants, Culinary Contract Services (“CCS”), and Franchise Operations.
 

10



Company-owned restaurants
 
Company-owned restaurants consists of several brands which are aggregated into one reportable segment because the nature of the products and services, the production processes, the customers, the methods used to distribute the products and services, the nature of the regulatory environment, and store level profit margin are similar. The chief operating decision maker analyzes Company-owned restaurants at store level profit which is revenue less cost of food, payroll and related costs, other operating expenses, and occupancy costs. The primary brands are Luby’s Cafeterias, Fuddruckers - World’s Greatest Hamburgers® and Cheeseburger in Paradise. All company-owned restaurants are casual dining restaurants. Each restaurant is an operating segment because operating results and cash flow can be determined for each restaurant.
 
The total number of Company-owned restaurants was 160 at June 6, 2018 and 167 at August 30, 2017.

Culinary Contract Services
 
CCS, branded as Luby’s Culinary Contract 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 has contracts with long-term acute care hospitals, acute care medical centers, ambulatory surgical centers, behavioral hospitals, sports stadiums, a senior care facility, 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 Culinary Contract Services on the Consolidated Statements of Operations include all food, payroll and related costs, other operating expenses, and other direct general and administrative expenses related to CCS sales.

CCS began selling Luby's Famous Fried Fish and Macaroni & Cheese in February 2017 and December 2016, respectively, in the freezer section of H-E-B stores, a Texas-born retailer. H-E-B stores now stock the family-sized versions (approximately five servings) of Luby's Classic Macaroni and Cheese and Luby's Jalapeño Macaroni and Cheese varieties and Luby's Fried Fish (two regular size fillets that provide four LuAnn-sized portions).

The total number of CCS locations was 25 at June 6, 2018 and 25 at August 30, 2017.
 
Franchise Operations
 
We only offer franchises for the Fuddruckers brand. Franchises are sold in markets where expansion is deemed advantageous to the development of the Fuddruckers concept and system of restaurants. Initial franchise agreements 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, the Company provides assistance to franchisees 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 standard evaluation reports.
 
The number of franchised restaurants was 109 at June 6, 2018 and 113 at August 30, 2017.  
 

11



Licensee
 
In November 1997, a prior owner of the Fuddruckers – World’s Greatest Hamburgers® brand granted to a licensee the exclusive right to use the Fuddruckers proprietary marks, trade dress and system to develop Fuddruckers restaurants in a territory consisting of certain countries in Africa, the Middle East and parts of Asia. As of June 2018, this licensee operated 36 restaurants that are licensed to use the Fuddruckers Proprietary Marks in Saudi Arabia, Egypt, United Arab Emirates, Qatar, Jordan, Bahrain, and Kuwait. The Company does not receive revenue or royalties from these restaurants.

Segment Table

The table on the following page shows segment financial information. The table also lists total assets for each reportable segment. Corporate assets include cash and cash equivalents, property and equipment, assets related to discontinued operations, property held for sale, deferred tax assets, and prepaid expenses.

12



 
 
Quarter Ended
 
Three Quarters Ended
 
June 6,
2018
 
June 7,
2017
 
June 6,
2018
 
June 7,
2017
 
(12 weeks)
 
(12 weeks)
 
(40 weeks)
 
(40 weeks)
 
(In thousands)
 
 
 
 
Sales:
 
 
 
 
 
 
 
Company-owned restaurants (1)
$
77,921

 
$
82,727

 
$
257,149

 
$
272,158

Culinary contract services
6,639

 
4,515

 
19,413

 
12,117

Franchise operations
1,444

 
1,477

 
4,732

 
5,167

Total
$
86,004

 
$
88,719

 
$
281,294

 
$
289,442

Segment level profit:
 
 
 
 

 

Company-owned restaurants
$
6,642

 
$
11,567

 
$
23,469

 
$
34,392

Culinary contract services
535

 
321

 
1,300

 
1,151

Franchise operations
1,103

 
1,116

 
3,534

 
3,789

Total
$
8,280

 
$
13,004

 
$
28,303

 
$
39,332

Depreciation and amortization:
 
 
 
 

 

Company-owned restaurants
$
3,381

 
$
3,825

 
$
11,155

 
$
13,260

Culinary contract services
18

 
13

 
54

 
51

Franchise operations
178

 
178

 
592

 
592

Corporate
473

 
623

 
1,601

 
2,074

Total
$
4,050

 
$
4,639

 
$
13,402

 
$
15,977

Capital expenditures:
 
 
 
 

 

Company-owned restaurants
$
3,152

 
$
1,630

 
$
9,569

 
$
8,963

Culinary contract services
55

 

 
185

 

Corporate
493

 
522

 
1,976

 
1,151

Total
$
3,700

 
$
2,152

 
$
11,730

 
$
10,114

 
 
 
 
 

 

Income (loss) before income taxes and discontinued operations
 
 
 
 

 

Segment level profit
$
8,280

 
$
13,004

 
$
28,303

 
$
39,332

Opening costs
(85
)
 
(134
)
 
(490
)
 
(431
)
Depreciation and amortization
(4,050
)
 
(4,639
)
 
(13,402
)
 
(15,977
)
Selling, general and administrative expenses
(8,507
)
 
(6,764
)
 
(29,219
)
 
(29,531
)
Provision for asset impairments and restaurant closings
(4,464
)
 
(869
)
 
(6,716
)
 
(7,120
)
Net (loss) gain on disposition of property and equipment
(154
)
 
195

 
(172
)
 
(219
)
Interest income
1

 
3

 
12

 
5

Interest expense
(1,042
)
 
(569
)
 
(2,235
)
 
(1,898
)
Other income (expense), net
9

 
(173
)
 
317

 
(312
)
Income (loss) before income taxes and discontinued operations
$
(10,012
)
 
$
54

 
$
(23,602
)
 
$
(16,151
)
 
June 6,
2018
 
August 30,
2017
Total assets:
 
 
 
Company-owned restaurants(2)
$
160,082

 
$
189,990

Culinary contract services
5,599

 
3,342

Franchise operations(3)
11,240

 
11,325

Corporate
32,030

 
21,800

Total
$
208,951

 
$
226,457

(1)
Includes vending revenue of $118 thousand and $133 thousand for the quarters ended June 6, 2018 and June 7, 2017, respectively, and $412 thousand and $417 thousand for the three quarters ended June 6, 2018 and June 7, 2017, respectively.
(2)
Company-owned restaurants segment includes $8.6 million of Fuddruckers trade name, Cheeseburger in Paradise liquor licenses, and Jimmy Buffett intangibles.
(3)
Franchise operations segment includes approximately $10.1 million in royalty intangibles.

13



Note 6. Derivative Financial Instruments

The Company enters into derivative instruments, from time to time, to manage its exposure to changes in interest rates on a percentage of its long-term variable rate debt. On December 14, 2016, the Company entered into an interest rate swap, pay fixed - receive floating, with a constant notional amount of $17.5 million. The fixed swap rate we pay is 1.965%, plus an applicable margin. The variable rate we receive is one-month LIBOR. The term of the interest rate swap is 5 years. The Company does not apply hedge accounting treatment to this derivative, therefore, changes in fair value of the instrument are recognized in Other income (expense), net. The changes in the interest rate swap fair value resulted in a credit to expense of approximately $0.7 million during the three quarters ended June 6, 2018 and an expense of approximately $0.2 million in the three quarters ended June 7, 2017.

The Company does not hold or use derivative instruments for trading purposes.

Note 7. Fair Value Measurements
 
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 statements require or permit 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.

 Recurring fair value measurements related to assets are presented below:
 
 
 
Fair Value
Measurement Using
 
 
 
June 6, 2018
 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Valuation Method
Recurring Fair Value - Assets
 
 
(In thousands)
 
 
Continuing Operations:
 
 
 
 
 
 
 
 
 
Derivative - Interest Rate Swap(1)
$
435

 
$

 
$
435

 
$

 
Discounted Cash Flow
(1) The fair value of the interest rate swap is recorded in Other assets on the Company's Consolidated Balance Sheets.





 




14



Recurring fair value measurements related to liabilities are presented below:
 
 
 
Fair Value
Measurement Using
 
 
 
June 6, 2018
 
Quoted
Prices in
Active
Markets for
Identical
Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Valuation Method
Recurring Fair Value - Liabilities
 
 
(In thousands)
 
 
 
 
Continuing Operations:
 
 
 
 
 
 
 
 
 
TSR Performance Based Incentive Plan(1)
$
229

 
$

 
$
229

 
$

 
Monte Carlo Simulation
(1) The fair value of the Company's 2016 and 2017 Performance Based Incentive Plan liabilities were approximately $167 thousand and $62 thousand, respectively, and is recorded in Other liabilities on the Company's Consolidated Balance Sheet. See Note 14 to the Company's consolidated financial statements in this Form 10-Q for further discussion of Performance Based Incentive Plan.

 
 
 
Fair Value
Measurement Using
 
 
 
June 7, 2017
 
Quoted
Prices in
Active
Markets for
Identical
Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Valuation Method
Recurring Fair Value - Liabilities
 
 
(In thousands)
 
 
 
 
Continuing Operations:
 
 
 
 
 
 
 
 
 
TSR Performance Based Incentive Plan(1)
$
464

 
$

 
$
464

 
$

 
Monte Carlo Simulation
Derivative - Interest Rate Swap(2)
221

 

 
221

 

 
Discounted Cash Flow
Total liabilities at Fair Value
$
685

 
$

 
$
685

 
$

 
 
(1) The fair value of the Company's 2015, 2016 and 2017 Performance Based Incentive Plan liabilities were approximately $117 thousand, $270 thousand, and $77 thousand, respectively, and is recorded in Other liabilities on the Company's Consolidated Balance Sheet.
(2) The fair value of the interest rate swap is recorded in Other liabilities on the Company's Consolidated Balance Sheet.




















15



Non-recurring fair value measurements related to impaired property held for sale, property and equipment, and goodwill consisted of the following:
 
 
 
 
Fair Value
Measurement Using
 
 
 
June 6, 2018
 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Impairments(4)
Nonrecurring Fair Value Measurements
 
 
(In thousands)
 
 
 
 
Continuing Operations
 
 
 
 
 
 
 
 
 
Property held for sale(1)
$
9,074

 
$

 
$

 
$
9,074

 
$
(2,808
)
Property and equipment related to company-owned restaurants(2)
1,519

 

 

 
1,519

 
(2,721
)
Goodwill (3)

 

 

 

 
(513
)
Total Nonrecurring Fair Value Measurements
$
10,593

 
$

 
$

 
$
10,593

 
$
(6,042
)
Discontinued Operations
 
 
 
 
 
 
 
 
 
Property held for sale(5)
$
1,800

 
$

 
$

 
$
1,800

 
$
(100
)
(1) In accordance with Subtopic 360-10, long-lived assets held for sale with a carrying value of approximately $12.9 million were written down to their fair value, less approximately $1.0 million proceeds on sales and cost to sell, of approximately $9.1 million, resulting in an impairment charge of approximately $2.8 million.
(2) In accordance with Subtopic 360-10, long-lived assets held and used with a carrying amount of approximately $4.2 million were written down to their fair value of approximately $1.5 million, resulting in an impairment charge of approximately $2.7 million.
(3) In accordance with Subtopic 350-20, goodwill with a carrying value of approximately $0.5 million was written down to zero, resulting in an impairment charge of approximately $0.5 million.
(4) Total impairments for continuing operations are included in Provision for asset impairments and restaurant closings in the Company's Consolidated Statement of Operations for the three quarters ended June 6, 2018.
(5) In accordance with Subtopic 205-20, discontinued operations held for sale with a carrying value of approximately $1.9 million were written down to their fair value, less costs to sell, of approximately $1.8 million, resulting in an impairment charge of approximately $0.1 million. This charge is included in Loss for discontinued operations on the Company's Statement of Operations for the three quarters ended June 6, 2018.

16



 
 
 
Fair Value
Measurement Using
 
 
 
June 7, 2017
 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Impairments(4)
Nonrecurring Fair Value Measurements
 
 
(In thousands)
 
 
 
 
Continuing Operations
 
 
 
 
 
 
 
 
 
Property held for sale(1)
$
3,626

 
$

 
$

 
$
3,626

 
$
(735
)
Property and equipment related to company-owned restaurants (2)
1,410

 

 

 
1,410

 
(5,476
)
Goodwill (3)

 

 

 

 
(537
)
Total Nonrecurring Fair Value Measurements
$
5,036

 
$

 
$

 
$
5,036

 
$
(6,748
)
(1) In accordance with Subtopic 360-10, long-lived assets held for sale with a carrying value of approximately $5.5 million were written down to their fair value, less approximately $1.2 million proceeds on sales and costs to sell, of approximately $3.6 million, resulting in an impairment charge of approximately $0.7 million.
(2) In accordance with Subtopic 360-10, long-lived assets held and used with a carrying amount of approximately $6.9 million were written down to their fair value of approximately $1.4 million, resulting in an impairment charge of approximately $5.5 million.
(3) In accordance with Subtopic 350-20, goodwill with a carrying value of approximately $0.5 million was written down to zero, resulting in an impairment charge of approximately $0.5 million.
(4) Total impairments are included in Provision for asset impairments and restaurant closings in the Company's Consolidated Statement of Operations in the three quarters ended June 7, 2017.

Note 8. Income Taxes 
 
On December 22, 2017, President Donald J. Trump signed into law U.S. tax reform legislation that is commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The enactment date occurred during the second quarter of fiscal 2018 and the impact on our income tax accounts of the Tax Act are accounted for in the period of enactment, in accordance with ASC 740. The Tax Act makes broad and complex changes to the U.S. tax code and most notably to the Company, the Tax Act lowered the federal statutory tax rate from 35 percent to 21 percent effective January 1, 2018. In accordance with the application of IRC Section 15, the Company's federal statutory tax rate for fiscal 2018 is now 25 percent, representing a blended tax rate for the current fiscal year based on the number of days in the fiscal year before and after the effective date. For subsequent years, the Company's federal statutory tax rate will be 21 percent. The Company was also required to remeasure its temporary differences using the new federal statutory tax rate in the period in which the Tax Act was enacted. The Company's deferred tax position is a net asset and as a result, the reduction in the federal statutory tax rate resulted in a one-time non-cash adjustment to the Company's net deferred tax balance of approximately $3.2 million with a corresponding increase to the provision for income taxes in the second quarter of fiscal 2018.

The effects of the Tax Act on the Company's income tax accounts were reflected in the fiscal 2018 financial statements as determined or as reasonably estimated provisional amounts based on available information, subject to interpretation in accordance with the SEC's Staff Accounting Bulletin No. 118 ("SAB 118"). SAB 118 provides guidance on accounting for the effects of the Tax Act where such determinations are incomplete; however, the Company was able to determine a provisional estimate of the effects of the Tax Act on its income tax accounts.

17




No cash payments of estimated federal income taxes were made during the three quarters ended June 6, 2018 and June 7, 2017, respectively. Deferred tax assets and liabilities are 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.
 
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, including a debt covenant waiver, scheduled reversals of deferred tax liabilities, tax-planning strategies, and results of recent operations. As of June 6, 2018, management determined that for the three quarters ended June 6, 2018 a full valuation allowance on the Company's net deferred tax assets was necessary. Management's valuation allowance for deferred tax assets considered the entire net deferred tax assets deemed to not be realizable.

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 the financial statements. Amounts considered probable of settlement within one year have been included in the accrued expenses and other liabilities in the accompanying Consolidated Balance Sheet.
 
Note 9. Property and Equipment, Intangible Assets and Goodwill
 
The costs, net of impairment, and accumulated depreciation of property and equipment at June 6, 2018 and August 30, 2017, together with the related estimated useful lives used in computing depreciation and amortization, were as follows:
 
 
June 6,
2018
 
August 30,
2017
 
Estimated
Useful Lives
(years)
 
(In thousands)
 
 
 
 
 
 
Land
$
49,687

 
$
60,414

 
 
 
 
 
Restaurant equipment and furnishings
71,655

 
73,411

 
3
 
to
 
15
Buildings
135,297

 
153,041

 
20
 
to
 
33
Leasehold and leasehold improvements
27,136

 
26,953

 
Lesser of lease term or estimated useful life
Office furniture and equipment
3,604

 
3,684

 
3
 
to
 
10
Construction in progress
35

 
35

 
 
 
 
 
 
287,414

 
317,538

 
 
 
 
 
 
Less accumulated depreciation and amortization
(140,926
)
 
(144,724
)
 
 
 
 
 
 
Property and equipment, net
$
146,488

 
$
172,814

 
 
 
 
 
 
Intangible assets, net
$
18,508

 
$
19,640

 
15
 
to
 
21

Intangible assets, net, consist of the Fuddruckers trade name and franchise agreements and are amortized. The Company believes the Fuddruckers brand name has an expected accounting life of 21 years from the date of acquisition, July 26, 2010, based on the expected use of its assets and the restaurant environment in which it is being used. The trade name represents a respected brand with customer loyalty and the Company intends to cultivate and protect the use of the trade name. The franchise agreements, after considering renewal periods, have an estimated accounting life of 21 years from the date of acquisition and will be amortized over this period of time.
 
Intangible assets, net, also includes 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 have an expected useful life of 15 years from the date of acquisition, December 6, 2012.
 
The aggregate amortization expense related to intangible assets subject to amortization was approximately $1.1 million for the three quarters ended June 6, 2018 and approximately $1.1 million for three quarters ended June 7, 2017, respectively. The

18



aggregate amortization expense related to intangible assets subject to amortization is expected to be approximately $1.4 million in each of the next five successive fiscal years.
 
The following table presents intangible assets as of June 6, 2018 and August 30, 2017:
 
 
June 6, 2018
 
August 30, 2017
 
(In thousands)
 
(In thousands)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Intangible Assets Subject to Amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuddruckers trade name and franchise agreements
$
29,486

 
$
(11,025
)
 
$
18,461

 
$
29,486

 
$
(9,943
)
 
$
19,543

 
 
 
 
 
 
 
 
 
 
 
 
Cheeseburger in Paradise trade name and license agreements
357

 
(310
)
 
47

 
416

 
(319
)
 
97

 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets, net
$
29,843

 
$
(11,335
)
 
$
18,508

 
$
29,902

 
$
(10,262
)
 
$
19,640

 
In fiscal 2010, the Company recorded an intangible asset for goodwill in the amount of approximately $0.2 million related to the acquisition of substantially all of the assets of Fuddruckers. The Company also recorded, in fiscal 2013, an intangible asset for goodwill in the amount of approximately $2.0 million related to the acquisition of Cheeseburger in Paradise. Goodwill is considered to have an indefinite useful life and is not amortized. Management performs its formal annual assessment as of the second quarter each fiscal year. The individual restaurant level is the level at which goodwill is assessed for impairment under ASC 350. In accordance with our understanding of ASC 350, we have allocated the goodwill value to each reporting unit in proportion to each location’s fair value at the date of acquisition. The Company performs assessments on an interim basis if an event occurs or circumstances exist that indicate that it is more likely than not that a goodwill impairment exists. The result of these second quarter and interim assessments in the three quarters ended June 6, 2018 and the three quarters ended June 7, 2017 was impairment of goodwill of approximately $0.5 million and $0.5 million, respectively. As of June 6, 2018, of the 23 Cheeseburger in Paradise locations that were acquired, seven locations remain operating as Cheeseburger in Paradise restaurants and of the restaurants closed for conversion to Fuddruckers, three locations remain operating as a Fuddruckers restaurant. Five locations were removed due to their lease term expiring, four locations were subleased to franchisees, and the remaining four were closed and held for future use.
 
Goodwill, net of accumulated impairments of approximately $1.6 million, was approximately $0.6 million as of June 6, 2018 and net of accumulated impairments of approximately $1.1 million, was approximately $1.1 million as of August 30, 2017, respectively, and relates to our Company-owned restaurants reportable segment.
 
Note 10. Impairment of Long-Lived Assets, Discontinued Operations, Property Held for Sale and Store Closings
 
Impairment of Long-Lived Assets and Store Closings
 
The Company periodically evaluates long-lived assets held for use and held for sale whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. The Company analyzes historical cash flows of operating locations and compares results of poorer performing locations to more profitable locations. The Company also analyzes 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, the Company estimates future cash flows using assumptions based on possible outcomes of the areas analyzed. If the undiscounted future cash flows are less than the carrying value of the location’s assets, the Company records 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, require management’s subjective judgments. Assumptions and estimates used include 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 are estimated is often lengthy, increasing

19



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 can vary within a wide range of outcomes. The Company considers the likelihood of possible outcomes in determining the best estimate of future cash flows. The measurement for such an impairment loss is then based on the fair value of the asset as determined by discounted cash flows.
 
The Company recognized the following impairment charges to income from operations:
 
 
Three Quarters Ended
 
June 6,
2018
 
June 7,
2017
 
(40 weeks)
 
(40 weeks)
 
(In thousands, except per share data)
Provision for asset impairments and restaurant closings
$
6,716

 
$
7,120

Net loss on disposition of property and equipment
172

 
219

 
 
 
 
 
$
6,888

 
$
7,339

Effect on EPS:
 
 
 
Basic
$
(0.23
)
 
$
(0.25
)
Assuming dilution
$
(0.23
)
 
$
(0.25
)
 
The approximate $6.7 million impairment charge for the three quarters ended June 6, 2018 is primarily related to assets at ten property locations, goodwill at three locations, ten properties held for sale written down to their fair value, and approximately $0.7 million in net lease termination costs at five property locations.

The approximate $7.1 million impairment charge for the three quarters ended June 7, 2017 is primarily related to assets at 14 locations, goodwill at six property locations, five properties held for sale written down to their fair value, and approximately $0.4 million in net lease termination costs at four property locations.
 
The approximate $0.2 million net loss for the three quarters ended June 6, 2018 is primarily related to asset retirements at six property location closures partially offset by net gains on the sale of three property locations of approximately $0.2 million.
 
The approximate $0.2 million net loss for the three quarters ended June 7, 2017 is primarily related to routine asset retirements partially offset by the gain on the sale of one property of approximately $0.4 million.
 
Discontinued Operations 
 
On March 21, 2014, the Board approved a plan focused on improving cash flow from the acquired Cheeseburger in Paradise leasehold locations. This underperforming Cheeseburger in Paradise leasehold disposal plan called for certain Cheeseburger in Paradise restaurants closure or conversion to Fuddruckers restaurants. As of June 6, 2018, no locations remain classified as discontinued operations in this plan.
 
As a result of the first quarter fiscal 2010 adoption of the Company’s Cash Flow Improvement and Capital Redeployment Plan, the Company reclassified 24 Luby’s Cafeterias to discontinued operations. As of June 6, 2018, one location remains held for sale.


20



The following table sets forth the assets and liabilities for all discontinued operations:
 
 
June 6,
2018
 
August 30,
2017
 
(In thousands)
Property and equipment
$
1,813

 
$
1,872

Deferred tax assets

 
883

Assets related to discontinued operations—non-current
$
1,813

 
$
2,755

Deferred income taxes
$

 
$
354

Accrued expenses and other liabilities
9

 
13

Liabilities related to discontinued operations—current
$
9

 
$
367

Other liabilities
$
16

 
$
16

Liabilities related to discontinued operations—non-current
$
16

 
$
16


As of June 6, 2018, under both closure plans, the Company had one property classified as discontinued operations. The asset carrying value of the owned property was approximately $1.8 million and is included in assets related to discontinued operations. The Company is actively marketing this property for sale. The asset carrying value at one other property with a ground lease, included in discontinued operations, was previously impaired to zero.
 
The following table sets forth the sales and pretax losses reported from discontinued operations:
 
 
Three Quarters Ended
 
June 6,
2018
 
June 7,
2017
 
(40 weeks)
 
(40 weeks)
 
(In thousands, except discontinued locations)
Sales
$

 
$

 
 
 
 
Pretax loss
$
(73
)
 
$
(20
)
Income tax expense from discontinued operations
(535
)
 
(414
)
Loss from discontinued operations, net of income taxes
$
(608
)
 
$
(434
)

The following table summarizes discontinued operations for the three quarters of fiscal 2018 and 2017
 
Three Quarters Ended
 
June 6,
2018
 
June 7,
2017
 
(40 weeks)
 
(40 weeks)
 
(In thousands, except per share data)
Discontinued operating loss
$
(14
)
 
$
(20
)
Impairments
(59
)
 

Pretax loss
(73
)
 
(20
)
Income tax expense from discontinued operations
(535
)
 
(414
)
Loss from discontinued operations, net of income taxes
$
(608
)
 
$
(434
)
Effect on EPS from discontinued operations—basic
$
(0.02
)
 
$
(0.01
)
  

21



Property Held for Sale
 
The Company periodically reviews long-lived assets against its plans to retain or ultimately dispose of properties. If the Company decides to dispose of a property, it will be moved to property held for sale, actively marketed and recorded at fair value less transaction costs. The Company analyzes market conditions each reporting period and records additional impairments due to declines in market values of like assets. The fair value of the property is determined by observable inputs such as appraisals and prices of comparable properties in active markets for assets like the Company’s. Gains are not recognized until the properties are sold.
 
Property held for sale includes unimproved land, closed restaurant properties, properties with operating restaurants the Board approved for sale, and related equipment for locations not classified as discontinued operations. The specific assets are valued at the lower of net depreciable value or net realizable value.
 
At June 6, 2018, the Company had 18 owned properties, of which two restaurants are located on one property, recorded at approximately $22.0 million in property held for sale. The pretax profit (loss) for the disposal group of locations for the fiscal quarters and year to date periods presented were $(2.0) million and $(2.0) million for the periods ended June 6, 2018 and $0.5 million and $1.0 million for the periods ended June 7, 2017, respectively.
 
At August 30, 2017, the Company had four owned properties recorded at approximately $3.4 million in property held for sale.
 
The Company is actively marketing the locations currently classified as property held for sale.

Abandoned Leased Facilities - Reserve for Store Closings

As of June 6, 2018, the Company classified seven restaurant leased locations in Arkansas, Illinois, Indiana, Maryland, New York, Oklahoma, and Virginia as abandoned. Although the Company remains obligated under the terms of the leases for the rent and other costs that may be associated with the leases, the Company decided to cease operations and has no foreseeable plans to occupy the spaces as a company restaurant in the future. During the three quarters ended June 6, 2018, the Company recorded an increase to the liability for lease termination expense and charged to earnings, in Provision for asset impairments and restaurant closings of approximately $0.7 million. The liability is equal to the total amount of rent and other direct costs for the remaining period of time the properties will be unoccupied plus the present value of the amount by which the rent paid by the Company to the landlord exceeds any rent paid to the Company by a tenant under a sublease over the remaining period of the lease terms. Accrued lease termination expense was approximately $1.0 million and $0.5 million as of June 6, 2018 and August 30, 2017, respectively. 

Note 11. Commitments and Contingencies
 
Off-Balance Sheet Arrangements
 
The Company has no off-balance sheet arrangements, except for operating leases. 
 
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 the Company’s financial position, results of operations, or liquidity. It is possible, however, that the Company’s future results of operations for a particular fiscal quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, proceedings, or claims.

Construction Activity
 
From time to time, the Company enters into non-cancelable contracts for the construction of its new restaurants. This construction activity exposes the Company to the risks inherent in this industry, including but not limited to rising material prices, labor shortages, delays in getting required permits and inspections, adverse weather conditions, and injuries sustained by workers, and contract termination expenses. The Company had no non-cancelable contracts commitment as of June 6, 2018.
 

22



Cheeseburger in Paradise, Royalty Commitment

The license agreement and trade name relates to a perpetual license to use intangible assets including trademarks, service marks and publicity rights related to Cheeseburger in Paradise owned by Jimmy Buffett and affiliated entities. In return, the Company pays a royalty fee of 2.5% of gross sales, less discounts, at the Company's operating Cheeseburger in Paradise locations to an entity owned or controlled by Jimmy Buffett. The trade name represents a respected brand with positive customer loyalty, and the Company intends to cultivate and protect the use of the trade name.
 
Note 12. Related Parties
 
Affiliate Services
 
Christopher J. Pappas, the Company’s Chief Executive Officer, and Harris J. Pappas, director and former Chief Operating Officer of the Company, own two restaurant entities (the “Pappas entities”) that from time to time may 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.
 
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. The Company incurred $31 thousand and $4 thousand under the Amended and Restated Master Sales Agreement for custom-fabricated and refurbished equipment in the three quarters ended June 6, 2018 and June 7, 2017, respectively. The Company also incurred $2 thousand of other operating expenses from the Pappas entities in the three quarters ended June 6, 2018. Services provided under this agreement are subject to review and approval by the Finance and Audit Committee of the Board.
 
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 provides for a primary term of approximately 12 years with two subsequent five-year options and gives 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 plus maintenance, taxes, and insurance during the remaining primary term of the lease. Thereafter, the lease provides for increases in rent at set intervals. The Company made payments of approximately $0.3 million and approximately $0.3 million in the three quarters ended June 6, 2018 and June 7, 2017, respectively. The new lease agreement was approved by the Finance and Audit Committee.
 
In the third quarter of fiscal 2014, on March 12, 2014, the Company executed a new lease agreement for one of the Company's Houston Fuddruckers locations with Pappas Restaurants, Inc. The lease provides for a primary term of approximately six years with two subsequent five-year options. Pursuant to the lease agreement, the Company paid $27.56 per square foot plus maintenance, taxes, and insurance from March 12, 2014 until November 30, 2016. Currently, the lease agreement provides for increases in rent at set intervals. The Company made payments of approximately $0.1 million and approximately $0.1 million in the three quarters ended June 6, 2018 and June 7, 2017, respectively.

23



 
Three Quarters Ended
 
June 6,
2018
 
June 7,
2017
 
(40 weeks)
 
(40 weeks)
 
(In thousands, except percentages)
Affiliated costs incurred:
 
 
 
Capital expenditures
$
34

 
$
4

Other operating expenses, occupancy costs and opening costs, including property leases
470

 
431

Total
$
504

 
$
435

Relative total Company costs:
 
 
 
Selling, general and administrative expenses
$
29,219

 
$
29,531

Capital expenditures
11,730

 
10,114

Other operating expenses, occupancy costs and opening costs
64,948

 
64,358

Total
$
105,897

 
$
104,003

Affiliated costs incurred as a percentage of relative total Company costs
0.48
%
 
0.42
%
 
Key Management Personnel
 
The Company entered into a new employment agreement with Christopher Pappas on December 11, 2017. The new employment agreement contains a termination date of August 28, 2019. Mr. Pappas continues to devote his primary time and business efforts to the Company while maintaining his role at Pappas Restaurants, Inc.
 
Peter Tropoli, a director of the Company and the Company’s Chief Operating Officer, and formerly the Company’s Senior Vice President, Administration, General Counsel and Secretary, is an attorney and stepson of Frank Markantonis, who is a director of the Company.
 
Paulette Gerukos, Vice President of Human Resources of the Company, is the sister-in-law of Harris J. Pappas, who is a director of the Company.
 

24



Note 13. Debt

The following table summarizes credit facility debt, less current portion at June 6, 2018 and August 30, 2017
 
 
 
June 6,
2018
 
August 30,
2017
Short-Term Debt
(In thousands)
Credit Agreement - Revolver
$
19,000

 
$

Credit Agreement - Term Loan
25,170

 

Total credit facility debt
44,170

 

Less unamortized debt issue costs
(142
)
 

Credit facility debt
$
44,028

 
$

Long-Term Debt
 
 
 
Credit Agreement - Revolver
$

 
$
4,400

Credit Agreement - Term Loan

 
26,585

Total credit facility debt

 
30,985

Less unamortized debt issue costs

 
(287
)
Total credit facility debt, less unamortized debt issuance costs

 
30,698

Current portion of credit facility debt

 

Credit facility debt, less current portion
$

 
$
30,698


Consent and Waiver to 2016 Credit Agreement
On July 12, 2018, the Company entered into a Consent and Waiver (the "Waiver") to the credit agreement (the "Credit Agreement") among the Company, the lenders from time to time party thereto, Wells Fargo Bank, National Association ("Wells Fargo"), as Administrative Agent, Swingline Lender, Issuing Lender, Sole Lead Arranger and Sole Bookrunner, and Cadence Bank, N.A. and Texas Capital Bank, N.A., as Co-Syndication Agents. Pursuant to the Waiver, the lenders agreed to a waiver of certain existing defaults with respect to certain financial covenants. The waiver is effective as of May 9, 2018 until the earliest to occur of (i) August 10, 2018, (ii) the failure of the Company to perform, observe or comply with any covenant, agreement or term contained in the Waiver or (iii) the occurrence of any additional Default or Event of Default (as defined in the Credit Agreement) (the "Compliance Waiver Period").
Pursuant to the Waiver, among other things, the Company has retained an independent financial advisor to pursue refinancing transactions, the proceeds which will be applied to, among other things, repay the amounts owed under the Credit Agreement. The Waiver further provides that during the Compliance Waiver Period, notwithstanding anything to the contrary in the Credit Agreement, the lenders may make available to the Company Revolving Credit Loans and Letters of Credit under the Credit Agreement, provided, that during the Compliance Waiver Period (i) the Applicable Margin for LIBOR Rate Loans shall be 5.50% and the Applicable Margin for Base Rate Loans shall be 4.50%, (ii) the Interest Period for any Base Rate Loans converted into LIBOR Rate Loans or for any LIBOR Rate Loans borrowed or continued as a LIBOR Rate Loan under the Revolving Credit Facility in each case during the Compliance Waiver Period shall not be longer than one (1) month and (iii) the Revolving Credit Outstandings shall at no time exceed $29.0 million (as those terms are defined in the Credit Agreement).

Amendment to 2016 Credit Agreement
On April 20, 2018, the Company amended our 2016 Credit Agreement (as defined below) effective as of March 14, 2018 (as amended, the "Credit Agreement). The amendment accelerates the maturity date of the Credit Agreement to May 1, 2019, approximately 11 months after the balance sheet date, June 6, 2018. The amendment included the following changes:

Aggregate commitments under the senior secured revolving credit facility (“Revolver”) will be reduced from $30.0 million to $27.0 million beginning August 29, 2018.
Changed the maturity date of the Revolver and Term Loan to May 1, 2019.
Reduced the letter of credit sub-limit from $5.0 million to $2.0 million.
Interest rate on LIBOR Rate Loans (LIBOR + Applicable Margin) changed to the following:
LIBOR + 4.50%     April 20, 2018 - June 30, 2018
LIBOR + 4.75%     July 1, 2018 - September 30, 2018

25



LIBOR + 5.00%    October 1, 2018 - December 31, 2018
LIBOR + 5.25%    January 1, 2019 - March 31, 2019
LIBOR + 5.50%    April 1, 2019 - Maturity Date
Interest rate margin on Base Rate Loans changed to the following:
100 basis points less than the Applicable Margin for LIBOR Rate Loans
Maximum Consolidated Total Lease-Adjusted Leverage Ratio (“CTLAL”) is changed to 6.50 to 1.00 at March 14, 2018; 6.75 to 1.00 at June 6, 2018 and August 29, 2018; and 6.50 to 1.00 at each measurement period in fiscal 2019.
Minimum Consolidated EBITDA covenant required at $7.0 million (thirteen consecutive accounting periods) tested monthly, prior to the second fiscal quarter fiscal 2019 and $7.5 million for each fiscal quarter thereafter (consisting of thirteen consecutive accounting periods).
Minimum liquidity covenant requiring for at least $2.0 million in liquidity at all times.
Maximum annual maintenance capital expenditures not to exceed $9.6 million for the fiscal year ending August 29, 2018 and $8.5 million in fiscal 2019.
Within 30 days of the date of amendment, a senior security interest in and lien on any of the Company's real estate properties identified by the Administrative Agent and loan to value ratio of 0.50 to 1.00 on collateral real estate.
Excess liquidity provision requiring any consolidated cash balances of the Borrower and its Subsidiaries in excess of $1.0 million, as reported in the 13-week cash flow reports, used to repay Revolving Credit Loans.

As of July 23, 2018, the Company is in compliance with all covenants under the terms of the Waiver and had $4.0 million of availability under the Revolver.
As of July 23, 2018, the Company had $1.3 million in outstanding letters of credit which it uses as security for the payment of insurance obligations.
Management has identified approximately 14 owned properties inclusive of assets currently classified as Assets related to discontinued operations and Property held for sale on the Company’s Balance Sheet, as of June 6, 2018, as part of a limited asset disposal plan to accelerate repayment of its outstanding term loans. The Board approved the limited asset sales plan on April 18, 2018. The Company estimates that such additional limited asset sales plan will be implemented over the course of the next 18 months. These asset disposal plans, in conjunction with other operational changes, are designed to lower the outstanding debt and to improve the Company’s financial condition as the Company pursues a new credit facility.
As of March 14, 2018, the Company would not have been in compliance with the Company’s Lease Adjusted Leverage Ratio and Fixed Charge Coverage Ratio covenants of the Credit Agreement prior to the Second Amendment thereto, which became effective on March 14, 2018. At any determination date, if the results of the Company's covenants exceed the maximums or minimums permitted under its 2016 Credit Agreement, the Company would be considered in default under the terms of the agreement which could cause a substantial financial burden by requiring the Company to repay the debt earlier than otherwise anticipated. Due to negative results in the first three quarters of fiscal 2018, continued under performance in the current fiscal year could cause the Company's financial ratios to exceed the permitted limits under the terms of the Credit Agreement.

Senior Secured Credit Agreement
On November 8, 2016, we entered into a $65.0 million Senior Secured Credit Facility with Wells Fargo Bank, National Association, as Administrative Agent and Cadence Bank, NA and Texas Capital Bank, NA, as lenders (“2016 Credit Agreement”). The 2016 Credit Agreement, as amended, was comprised of a $30.0 million 5-year Revolver (the “Revolver”) and a $35.0 million 5-year Term Loan (the “Term Loan”). The maturity date of the 2016 Credit Agreement was November 8, 2021. For this section of this Form 10-Q, capitalized terms that are used but not otherwise defined shall have the meanings given to such terms in the 2016 Credit Agreement.
The 2016 Credit Agreement also provided for the issuance of letters of credit in an aggregate amount equal to the lesser of $5.0 million and the Revolving Credit Commitment, which was $30.0 million as of June 6, 2018. The 2016 Credit Agreement is guaranteed by all of the Company’s present subsidiaries and will be guaranteed by our future subsidiaries.
Until April 20, 2018, we have the option to elect one of two bases of interest rates. One interest rate option is the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50% and (c) 30-day LIBOR plus 1.00%, plus, in each case, the Applicable Margin, which ranged from 1.50% to 2.50% per annum. The other interest rate option is the LIBOR plus the Applicable Margin, which ranged from 2.50% to 3.50% per annum. The Applicable Margin under each option is dependent upon our CTLAL at the most recent quarterly determination date.
The Term Loan amortized 7.0% per year (35.0% in 5 years) which includes the quarterly payment of principal. As of March 14, 2018, we have prepaid the required principal payments through March 30, 2019. On December 14, 2016, we entered into an interest rate swap with a notional amount of $17.5 million, representing 50% of the initial outstanding Term Loan.

26



We are obligated to pay to the Administrative Agent for the account of each lender a quarterly commitment fee based on the average daily unused amount of the commitment of such lender, ranged from 0.30% to 0.35% per annum depending on the CTLAL at the most recent quarterly determination date.
The proceeds of the 2016 Credit Agreement were available for us to (i) pay in full all indebtedness outstanding under the 2013 Credit Agreement as of November 8, 2016, (ii) pay fees, commissions, and expenses in connection with our repayment of the 2013 Credit Agreement, initial extensions of credit under the 2016 Credit Agreement, and (iii) for working capital and general corporate purposes of the Company.
The 2016 Credit Agreement, as amended, contained the following covenants among others:
CTLAL of not more than (i) 5.00 to 1.00, at the end of each fiscal quarter, through and including the third fiscal quarter of the Borrower’s fiscal year 2018, and (ii) 4.75 to 1.00 thereafter,
Consolidated Fixed Charge Coverage Ratio of not less than 1.25 to 1.00, at the end of each fiscal quarter,
Limit on Growth Capital Expenditures so long as the CTLAL is at least 0.25x less than the then-applicable permitted maximum CTLAL,
restrictions on mergers, acquisitions, consolidations, and asset sales,
restrictions on the payment of dividends, redemption of stock, and other distributions,
restrictions on incurring indebtedness, including certain guarantees, and capital lease obligations,
restrictions on incurring liens on certain of our property and the property of our subsidiaries,
restrictions on transactions with affiliates and materially changing our business,
restrictions on making certain investments, loans, advances, and guarantees,
restrictions on selling assets outside the ordinary course of business,
prohibitions on entering into sale and leaseback transactions, and
restrictions on certain acquisitions of all or a substantial portion of the assets, property and/or equity interests of any person, including share repurchases and dividends.

The 2016 Credit Agreement is secured by an all asset lien on all of the Company's real property and also includes customary events of default. If a default occurs and is continuing, the lenders’ commitments under the 2016 Credit Agreement may be immediately terminated, and, or the Company may be required to repay all amounts outstanding under the 2016 Credit Agreement.
As of June 6, 2018, the Company had $44.2 million in total outstanding loans and approximately $1.3 million committed under letters of credit, which it uses as security for the payment of insurance obligations, and approximately $0.2 million in other indebtedness.
Note 14. Share-Based Compensation
 
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 Nonemployee Director Stock Plan. Both plans authorize the granting of stock options, restricted stock, and other types of awards consistent with the purpose of the plans.
 
Of the aggregate 2.1 million shares approved for issuance under the Nonemployee Director Stock Plan, (which amount includes shares authorized under the original plan and shares authorized pursuant to the amended and restated plan effective as of February 9, 2018), 1.3 million options, restricted stock units and restricted stock awards were granted, and 0.1 million options were canceled or expired and added back into the plan, since the plan’s inception. Approximately 1.0 million shares remain available for future issuance as of June 6, 2018. Compensation cost for share-based payment arrangements under the Nonemployee Director Stock Plan, recognized in selling, general and administrative expenses for the three quarters ended June 6, 2018 and June 7, 2017 were approximately $0.4 million and $0.5 million, respectively.

Of the aggregate 4.1 million shares approved for issuance under the Employee Stock Plan, as amended, 7.3 million options and restricted stock units were granted, and 3.8 million options and restricted stock units were canceled or expired and added back into the plan, since the plan’s inception in 2005. Approximately 0.6 million shares remain available for future issuance as of June 6, 2018. Compensation cost for share-based payment arrangements under the Employee Stock Plan, recognized in selling, general and administrative expenses was approximately $0.7 million for the three quarters ended June 6, 2018 and June 7, 2017 were approximately, respectively.
 

27



Stock Options
 
Stock options granted under either the Employee Stock Plan or the Nonemployee 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 Nonemployee 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 Nonemployee Director Stock Plan in the three quarters ended June 6, 2018. No options to purchase shares were outstanding under this plan as of June 6, 2018.
 
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. All options granted in the three quarters ended June 6, 2018 were granted under the Employee Stock Plan. Options to purchase 1,668,133 shares at option prices of $2.82 to $5.95 per share remain outstanding as of June 6, 2018.
 
A summary of the Company’s stock option activity for the quarter ended June 6, 2018 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 30, 2017
1,345,916

 
$
4.64

 
6.4

 
$

Granted
449,410

 
2.82

 

 

Forfeited
(82,392
)
 
3.88

 

 

Expired
(44,801
)
 
7.89

 

 

Outstanding at June 6, 2018
1,668,133

 
$
4.10

 
6.8

 
$

Exercisable at June 6, 2018
1,080,822

 
$
4.54

 
5.5

 
$


The intrinsic value for stock options is defined as the difference between the current market value, or closing price on June 6, 2018, and the grant price on the measurement dates in the table above.

At June 6, 2018, there was approximately $0.4 million of total unrecognized compensation cost related to unvested options that are expected to be recognized over a weighted-average period of 1.8 years.
 
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 three quarters ended June 6, 2018 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 30, 2017
404,364

 
$
4.54

 
1.8

Granted
244,748

 
2.83

 

Vested
(99,495
)
 
4.42

 

Forfeited
(32,326
)
 
3.87

 

Unvested at June 6, 2018
517,291

 
$
3.79

 
2.0


28



 
At June 6, 2018, there was approximately $0.9 million of total unrecognized compensation cost related to unvested restricted stock units that is expected to be recognized over a weighted-average period of 2.0 years.

Performance Based Incentive Plan

For fiscal years 2015 - 2018, The Company approved a Total Shareholder Return ("TSR") Performance Based Incentive Plan (“Plan”). Each Plan’s award value varies from 0% to 200% of a base amount, as a result of the Company’s TSR performance in comparison to its peers over the respective measurement period. Each Plan’s vesting period is three years.
The Plans for fiscal years 2015 - 2017 provides for a right to receive an unspecified 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 the three-year vesting period, for each plan year. The number of shares at the end of the three-year period will be determined as the award value divided by the closing stock price on the last day of each fiscal year, accordingly. Each three-year measurement period is designated a plan year name based on year one of the measurement period. Since the plans provide for an undeterminable number of awards, the plans are accounted for as liability based plans. The liability valuation estimate for each plan year has been determined based on a Monte Carlo simulation model. Based on this estimate, management accrues expense ratably over the three-year service periods. A valuation estimate of the future liability associated with each fiscal year's performance award plan is performed periodically with adjustments made to the outstanding liability at each reporting period to properly state the outstanding liability for all plan years in the aggregate as of the respective balance sheet date. As of June 6, 2018, the valuation estimate which represents the fair value of the performance awards liability for all plan years 2016 and 2017, resulted in an approximate $0.1 million decrease in the aggregate liability. The 2015 TSR Performance Based Incentive Plan vested for each active participant on August 30, 2017 and a total of 187,883 shares were awarded under the Plan at 50% of the original target. The fair value of the 2015 plan's liability in the amount of $496 thousand was converted to equity and the number of shares awarded for the 2015 TSR Performance Based Incentive Plan was based on the Company's stock price at closing on the last day of fiscal 2017. The number of shares at the end of each plan's three-year periods will be determined as the award value divided by the Company's closing stock price on the last day of the plan's fiscal year.
The 2018 TSR Performance Based Incentive Plan provides 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 three-year cycle. The Fair Value of the 2018 Plan has been determined based on a Monte Carlo simulation model for the three-year period. The target number of shares for distribution at 100% of the plan is 373,294. The 2018 TSR Performance Based Incentive Plan is accounted for as an equity award since the Plan provides for a specified number of shares. The expense for this Plan year is amortized over the three-year period based on 100% target award.
Non-cash compensation expense related to the Company's TSR Performance Based Incentive Plans was approximately $69 thousand and a credit of $329 thousand in the three quarters ended June 6, 2018 and June 7, 2017, respectively, and is recorded in Selling, general and administrative expenses.
A summary of the Company’s restricted stock Performance Based Incentive Plan activity during the three quarters ended June 6, 2018 is presented in the following table:
 
Units
 
Weighted
Average
Fair Value
 
 
 
(Per share)
Unvested at August 30, 2017
0

 
$

Granted
561,177

 
3.33

Vested
(187,883
)
 
2.64

Unvested at June 6, 2018
373,294

 
$
3.68


At March 14, 2018, there was approximately $1.2 million of total unrecognized compensation cost related to 2018 TSR Performance Based Incentive Plan that is expected to be recognized over a weighted-average period of 2.2 years.


29



Restricted Stock Awards
 
Under the Nonemployee Director Stock Plan, directors are granted restricted stock in lieu of cash payments, for all or a portion of their compensation as directors. Directors may receive 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 is 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.
 
Note 15. Earnings Per Share
 
Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding and unvested restricted stock 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 quarter ended June 6, 2018 include 1,668,133 shares with exercise prices exceeding market prices and no shares whose inclusion would also be anti-dilutive. 

The components of basic and diluted net loss per share are as follows:
 

 
Quarter Ended
 
Three Quarters Ended
 
June 6,
2018
 
June 7,
2017
 
June 6,
2018
 
June 7,
2017
 
(12 weeks)
 
(12 weeks)
 
(40 weeks)
 
(40 weeks)
 
(In thousands, expect per share data)
Numerator:
 
 
 
 
 
 
 
Loss from continuing operations
$
(14,133
)
 
$
(377
)
 
$
(31,096
)
 
$
(18,727
)
Loss from discontinued operations, net of income taxes
(463
)
 
(19
)
 
(608
)
 
(434
)
NET LOSS
$
(14,596
)
 
$
(396
)
 
$
(31,704
)
 
$
(19,161
)
Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share—weighted-average shares
30,005

 
29,536

 
29,863

 
29,453

Effect of potentially dilutive securities:
 
 
 
 
 
 
 
Employee and non-employee stock options

 

 

 

Denominator for earnings per share assuming dilution
30,005

 
29,536

 
29,863

 
29,453

Loss per share from continuing operations:
 
 
 
 
 
 
 
Basic
$
(0.47
)
 
$
(0.01
)
 
$
(1.04
)
 
$
(0.64
)
Assuming dilution
$
(0.47
)
 
$
(0.01
)
 
$
(1.04
)
 
$
(0.64
)
Loss per share from discontinued operations:
 
 
 
 
 
 
 
Basic
$
(0.02
)
 
$
(0.00
)
 
$
(0.02
)
 
$
(0.01
)
Assuming dilution
$
(0.02
)
 
$
(0.00
)
 
$
(0.02
)
 
$
(0.01
)
Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.49
)
 
$
(0.01
)
 
$
(1.06
)
 
$
(0.65
)
Assuming dilution
$
(0.49
)
 
$
(0.01
)
 
$
(1.06
)
 
$
(0.65
)

30




Note 16: Shareholder Rights Plan
On February 15, 2018, the Board of Directors adopted a 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 is effective immediately.
The Board adopted the 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 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 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 $12.0, 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 issuance of this press release. 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 1 cent 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 was not affected by the adoption of the rights plan.

31




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 June 6, 2018 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 30, 2017.
 
The following presents an analysis of the results and financial condition of our continuing operations. Except where indicated otherwise, the results of discontinued operations are excluded from this discussion.

32



The following table sets forth selected operating data as a percentage of total sales (unless otherwise noted) for the periods indicated. All information is derived from the accompanying consolidated statements of income.

Percentages may not total due to rounding. 

33



 
Quarter Ended
 
Three Quarters Ended
 
June 6,
2018
 
June 7,
2017
 
June 6,
2018
 
June 7,
2017
 
(12 weeks)
 
(12 weeks)
 
(40 weeks)
 
(40 weeks)
Restaurant sales
90.5
 %
 
93.1
 %
 
91.3
 %
 
93.9
 %
Culinary contract services
7.7
 %
 
5.1
 %