Luby’s, Inc. (the "Company", "we", "our", "us", or "Luby's") is based in Houston, Texas. As of August 26, 2020, we owned and operated 85 restaurants, with 78 in Texas and the remainder in other states. In addition, we have royalty arrangements with 71 Fuddruckers franchises as of August 26, 2020 located primarily throughout the United States. Culinary Contract Services consists of contract arrangements to manage food services for clients operating in primarily four lines of business: healthcare; senior living; business; and venues.

On the consolidated statement of operations for the fiscal year ended August 28, 2019, we reclassified $506 thousand from Other charges to Selling, general and administrative expenses to correct an allocation error. The reclassification had no effect on Total costs and expenses or any other financial statement line item.

On the consolidated statement of cash flows for the fiscal year ended August 28, 2019, we reclassified $196 thousand to Provision for doubtful accounts from Decrease (increase) in trade accounts and other receivables to conform to current fiscal year presentation. The reclassification had no effect on Net cash used in operating activities.

As further described at Note 2. Subsequent Events, on November 17, 2020 our shareholders approved the Plan of Liquidation ("Plan of Liquidation" or "Plan"). We have determined, as a result, that liquidation is imminent, as defined at ASC 205-30 Financial Statement Presentation, Liquidation Basis of Accounting. Accordingly, we will change our basis of accounting from the going concern basis to the liquidation basis effective November 17, 2020.

The liquidation basis of accounting requires a statement of net assets in liquidation, a statement of changes in net assets in liquidation and all disclosures necessary to present relevant information about our expected resources in liquidation. The liquidation basis of accounting may only be applied prospectively from the day liquidation becomes imminent and the initial statement of changes in net assets in liquidation may present only changes in net assets that occurred during the period since that date.

Under the liquidation basis of accounting, assets are measured at the amount of their estimated cash proceeds or other consideration from liquidation and may include previously unrecognized assets that we may expect to either sell in the course of our liquidation or use in settling liabilities, such as trademarks or other intangibles.

The liquidation basis of accounting requires us to accrue and present separately, without discounting, the estimated disposal and other costs, including any costs associated with the sale or settlement of our assets and liabilities and the estimated operating income or loss that we reasonably expect to incur, including providing for federal income taxes during the remaining expected duration of the liquidation period. In addition, deferred tax assets, which include net operating losses and other tax credits may be realized partially or in full, subject to IRS limitations, to offset taxable income we expect to generate from the liquidation process.

The unaudited consolidated financial statements for the first quarter of fiscal 2021 will contain a summary of the adjustments made to our balance sheet accounts as of November 17, 2020 (under the going concern basis of accounting) to the initial Statement of Net Assets and Liabilities in Liquidation as of that same date.

The Company’s fiscal year ends on the last Wednesday in August. Accordingly, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting for 364 days in the aggregate. However, every fifth or sixth year, we have a fiscal year that consists of 53 weeks, accounting for 371 days in the aggregate. The first fiscal quarter consists of four four-week periods, or 16 weeks, and the remaining three quarters typically include three four-week periods, or 12 weeks, in length. The fourth fiscal quarter includes 13 weeks in certain fiscal years to adjust for our standard 52 week, or 364 day, fiscal year compared to the 365 day calendar year.

Events subsequent to the Company’s fiscal year ended August 26, 2020 through the date of issuance of the financial statements are evaluated to determine if the nature and significance of the events warrant inclusion in the Company’s consolidated financial statements. See Note 2. Subsequent Events

Each restaurant is an operating segment because operating results and cash flow can be determined for each restaurant. We aggregate our operating segments into reportable segments by restaurant brand due to the nature of the products and services, the production processes, the customers, the methods used to distribute the products and services, similarity of store level profit margins and the nature of the regulatory environment are alike. For the fiscal years ended August 26, 2020 and August 28, 2019 we had five reportable segments: Luby’s cafeterias, Fuddruckers restaurants, Cheeseburger in Paradise restaurants, Fuddruckers franchise operations, and Culinary Contract Services (“CCS”).

Cash and cash equivalents and restricted cash and cash equivalents include highly liquid investments such as money market funds that have a maturity of three months or less. Our bank account balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. Amounts in transit from credit card companies are also considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction.

Receivables consist principally of amounts due from franchises, culinary contract service clients, catering customers and restaurant food sales to corporations. Receivables are recorded at the invoiced amount. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on historical loss experience for CCS clients, catering customers and restaurant sales to corporations and, for CCS receivables and franchise royalty and marketing and advertising receivables. We also consider the franchisees’ and CCS clients’ unsecured default status. We periodically review our allowance for doubtful accounts. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

We periodically review long-lived assets against its plans to retain or ultimately dispose of properties. If we decide to dispose of a property, it will be moved to property held for sale and actively marketed. Property held for sale is recorded at amounts not in excess of what management currently expects to receive upon sale, less costs of disposal. Depreciation on assets moved to property held for sale is discontinued and gains are not recognized until the properties are sold.

Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount. We evaluate impairments on a restaurant-by-restaurant basis and use cash flow results and other market conditions as indicators of impairment.

Debt issuance costs include costs incurred in connection with the arrangement of long-term financing agreements. The debt issuance costs associated with our term loans are presented on our consolidated balance sheet as a direct deduction from long-term debt. The debt issuance costs associated with our revolving credit facility are included in other assets on our consolidated balance sheet. These costs are amortized using the effective interest method over the respective term of the debt to which they specifically relate.

The carrying value of cash and cash equivalents, trade accounts and other receivables, accounts payable and accrued expenses approximates fair value based on the short-term nature of these accounts. The carrying value of credit facility debt also approximates fair value based on its recent renewal.

We self-insure a significant portion of expected losses under its workers’ compensation, employee injury and general liability programs. Accrued liabilities have been recorded based on estimates of the ultimate costs to settle incurred claims, both reported and not yet reported. These recorded estimated liabilities are based on judgments and independent actuarial estimates, which include the use of claim development factors based on loss history; economic conditions; the frequency or severity of claims and claim development patterns; and claim reserve management settlement practices.

We maintain a self-insured health benefit plan which provides medical and prescription drug benefits to certain of our employees electing coverage under the plan. Our exposure is limited by individual and aggregate stop loss limits per third party insurance carriers. We record expenses under the plan based on estimates of the costs of expected claims, administrative costs and stop-loss insurance premiums. Our self-insurance expense is accrued based upon the aggregate of the expected liability for reported claims and the estimated liability for claims incurred but not reported, based on historical claims experience provided by our third party insurance advisors, adjusted as necessary based upon management’s reasoned judgment. Actual employee medical claims expense may differ from estimated loss provisions based on historical experience.

The cost of CCS includes all food, payroll and related expenses, other operating expenses, and selling, general and administrative expenses related to culinary contract service sales. All depreciation and amortization, property disposal, and asset impairment expenses associated with CCS are reported within those respective lines as applicable.

The cost of franchise operations includes all food, payroll and related expenses, other operating expenses, and selling, general and administrative expenses related to franchise operations sales. All depreciation and amortization, property disposal, and asset impairment expenses associated with franchise operations are reported within those respective lines as applicable.

Marketing and advertising costs are expensed as incurred. Total advertising expense included in other operating expenses and selling, general and administrative expense was $3.9 million and $4.0 million in fiscal 2020 and 2019, respectively. We record advertising attributable to local store marketing and local community involvement efforts in other operating expenses and we record advertising attributable to our brand identity, our promotional offers, and our other marketing messages intended to drive guest awareness of our brands, in selling, general, and administrative expenses. We believe this separation of our marketing and advertising costs assists with measurement of the profitability of individual restaurant locations by associating only the local store marketing efforts with the operations of each restaurant.

Property and equipment are recorded at cost. We depreciate the cost of equipment over its estimated useful life using the straight-line method. Leasehold improvements are amortized over the lesser of their estimated useful lives or the related lease terms. Depreciation of buildings is provided on a straight-line basis over the estimated useful lives.

The estimated future income tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss and tax credit carrybacks and carryforwards are recorded. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities (temporary differences) and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established against deferred tax assets when the Company determines, based on the weight of available evidence, that they are more likely to not be realized than realized. In the event the Company subsequently determines that it would be able to realize deferred income tax assets in excess of their net recorded amount, the Company would reduce the valuation allowance, which would reduce the provision for income taxes. During fiscal 2018, we concluded to increase the valuation allowance to reduce fully the Company’s net deferred tax asset balances, net of deferred tax liabilities, including through the fiscal year ended August 26, 2020. The Plan of Liquidation (see Note 2. Subsequent Events) may or may not impact this determination in future periods.

We make judgments regarding the interpretation of tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions as well as by the Internal Revenue Service (“IRS”). In management’s opinion, adequate provisions for income taxes have been made for all open tax years. The potential outcomes of examinations are regularly assessed in determining the adequacy of the provision for income taxes and income tax liabilities. We believe that adequate provisions have been made for reasonably possible outcomes related to uncertain tax matters.

We will report the disposal of a component or a group of components of the Company in discontinued operations if the disposal of the components or group of components represents a strategic shift that has or will have a major effect on the Company’s operations and financial results.

Share-based compensation expense is estimated for equity awards at fair value at the grant date. The Company determines fair value of restricted stock awards based on the average of the high and low price of its common stock on the date awarded by the Board of Directors. The Company determines the fair value of stock option awards using a Black-Scholes option pricing model. The Black-Scholes option pricing model requires various judgmental assumptions including the expected dividend yield, stock price volatility, and the expected life of the award. If any of the assumptions used in the model change significantly, share-based compensation expense may differ materially in the future, from that recorded in the current period. The fair value of performance share based award liabilities are estimated based on a Monte Carlo simulation model. For further discussion, see Note 18. Share-Based and Other Compensation.

Basic income per share is computed by dividing net income by the weighted-average number of shares outstanding, including restricted stock units, during each period presented. 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.

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from these estimates.

On August 29, 2019, the first day of fiscal 2020, (the "Effective Date") we adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), along with related clarifications and improvements (“ASC 842”). ASC 842 requires lessees to recognize, on their consolidated balance sheet, a liability for lease obligations, which represents the discounted obligation to make future lease payments, and a corresponding right-of-use asset. The guidance requires lessors to classify leases as sales-type, direct financing or operating. The pronouncement also requires disclosure of key information about leasing arrangements that is intended to give financial statement users the ability to assess the amount, timing, and potential uncertainty of cash flows related to leases. We have implemented a new lease tracking and accounting system in connection with the adoption of ASC 842.

We elected the optional transition method to apply ASC 842 as of the effective date and therefore, we have not applied the standard to the comparative periods presented on our consolidated financial statements. We also elected the package of practical expedients that allowed us not to reassess previous accounting conclusions regarding lease identification, initial direct costs and classification for existing or expired leases as of the effective date. We did not elect the practical expedient that would have permitted us to use hindsight when determining the lease term, including option periods, and impairment of operating lease assets.

We have made an accounting policy election to account for lease components and non-lease components as a single lease component for all underlying classes of assets where (1) the lease component is predominant, (2) the lease component, if accounted for separately, would be classified as an operating lease and (3) the timing and pattern of the lease component and non-lease component are the same. We have also elected the short-term lease recognition exemption for all of our leases that allows us to not recognize right-of-use assets and related liabilities for leases with an initial term of 12 months or less and that do not include an option to purchase the underlying asset that we are reasonably certain to exercise. Our transition to ASC 842 represents a change in accounting principle.

Upon adoption of ASC 842, we recorded operating lease liabilities of approximately $32.4 million based on the present value of the remaining lease payments using discount rates as of the effective date. The current portion of the operating lease liabilities recorded was approximately $8.1 million. In addition, we recorded operating lease right-of-use assets of approximately $27.2 million, calculated as the initial amount of the operating lease liability, adjusted for amounts reclassified from other lease related asset and liability accounts (such as prepaid rent, favorable and unfavorable lease intangibles and straight-line rent timing differences), in accordance with the new guidance, and impairment of certain right-of-use assets recognized as a charge to retained earnings as of the effective date.

On the effective date, we recorded the $1.0 million net cumulative effect of the adoption as an increase to retained earnings. Included in the net cumulative effect was an adjustment of approximately $2.0 million to clear the unamortized balance for deferred gains from sale / leaseback transactions. For most future sale / leaseback transactions, the gain (adjusted for any off-market items) will be recognized immediately in the period that the sale / leaseback transaction occurs.


	Balance at August 28, 2019		ASC 842 Adjustment		Balance at August 29, 2019
	(In thousands)
ASSETS
Trade accounts and other receivables, net	$	8,852	$	70	$	8,922
Prepaid expenses	2,355		(225)		2,130
Total Current Assets	27,395		(155)		27,240
Intangible assets, net	16,781		(190)		16,591
Operating lease right-of-use assets, net	—		27,191		27,191
Total Assets	$	186,000	$	26,846	$	212,846
LIABILITIES
Operating lease liabilities-current	$	—	$	8,061	$	8,061
Accrued expenses and other liabilities	24,475		(1,002)		23,473
Total Current Liabilities	32,954		7,059		40,013
Operating lease liabilities-non-current	—		24,360		24,360
Other liabilities	6,577		(5,600)		977
Total Liabilities	$	84,970	$	25,819	$	110,789
SHAREHOLDERS’ EQUITY
Retained earnings	$	61,182	$	1,027	$	62,209
Total Shareholders' Equity	101,030		1,027		102,057
Total Liabilities and Shareholders' Equity	$	186,000	$	26,846	$	212,846