Net Assets in Liquidation

6 Months Ended

Mar. 10, 2021

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Net Assets in Liquidation

Liability for Estimated Costs in Excess of Estimated Receipts During Liquidation

The liquidation basis of accounting requires us to estimate net cash flows from operations and to accrue all costs associated with implementing and completing the plan of liquidation. We project that we will have estimated costs in excess of estimated receipts during the liquidation period. These amounts can vary significantly due to, among other things, the timing and estimates for receipts and costs associated with the operations of our business units until they are sold, the timing of business and property sales, estimates of direct costs incurred to complete the sales, the timing and amounts associated with discharging known and contingent liabilities, the costs associated with the winding up of operations, and other costs that we may incur which are not currently foreseeable. These receipts and accruals will be adjusted periodically as projections and assumptions change. These receipts and costs are estimated and are anticipated to be collected and paid out over the liquidation period. Upon transition to the liquidation basis of accounting on November 19, 2020, the Company accrued revenues and expenses expected to be earned or incurred during liquidation. The liability for estimated costs in excess of estimated receipts during liquidation at March 10, 2021 and November 19, 2020 was comprised of (in thousands):

	March 10, 2021		November 19, 2020
Total estimated receipts during liquidation	$	59,513	$	92,017
Total estimated costs of operations	(48,212)		(76,151)
Selling, general and administrative expenses	(14,531)		(18,745)
Interest expense	(1,386)		(2,305)
Interest component of operating lease payments	(5,918)		(7,064)
Capital expenditures	(610)		(943)
Sales costs	(4,071)		(4,079)
Total estimated costs during liquidation	(74,728)		(109,287)
Liability for estimated costs in excess of estimated receipts during liquidation	$	(15,215)	$	(17,270)

The change in the liability for estimated costs in excess of estimated receipts during liquidation between November 19, 2020 and March 10, 2021 is as follows (in thousands):

	November 19, 2020		Net Change in Working Capital (3)		Changes in Estimated Future Cash Flows During Liquidation (4)		March 10, 2021
Assets:
Estimated net inflows from operations (1)	$	7,859	$	(6,994)	$	4,518	$	5,383
	7,859		(6,994)		4,518		5,383
Liabilities:
Sales costs	(4,079)		373		(365)		(4,071)
Corporate expenditures (2)	(21,050)		8,082		(3,559)		(16,527)
	(25,129)		8,455		(3,924)		(20,598)
Liability for estimated costs in excess of estimated receipts during liquidation	$	(17,270)	$	1,461	$	594	$	(15,215)

(1) Estimated net inflows from operations consists of total estimated receipts during liquidation less the sum of (i) total estimated costs of operations during liquidation, (ii) interest component of operating lease payments and (iii) capital expenditures.

(2) Corporate expenditures consists of (i) selling, general and administrative expenses and (ii) interest expense.

(3) Net change in working capital represents changes in cash, restricted cash, accounts receivable, accounts payable, and accrued expenses and other liabilities as a result of the Company's operating activities for the period from November 19, 2020 to March 10, 2021.

(4) Changes in estimated future cash flows during liquidation includes adjustments to previous estimates and changes in estimated holding periods of our assets.

Net Assets in Liquidation

The following is a reconciliation of total shareholders’ equity under the going concern basis of accounting as of November 18, 2020 to net assets in liquidation under the liquidation basis of accounting as of November 19, 2020 (in thousands):

Total Shareholders' Equity as of November 18, 2020	$	70,763
Increase due to estimated net realizable value of properties and business units (1)	78,985
Decrease due to write-off of deferred financing costs	(2,260)
Decrease due to write-off of operating lease right-of-use assets	(14,829)
Net increase due to write-off of deferred assets, deferred income and goodwill	1,952
Liability for estimated costs in excess of estimated receipts during liquidation	(17,270)
Adjustment to reflect the change to the liquidation basis of accounting	46,578
Estimated value of net assets in liquidation as of November 19, 2020	$	117,341

(1) Under liquidation basis of accounting, all assets are recorded at net realizable value which implicitly includes the tangible and intangible value of all assets. This adjustment at November 19, 2020 reflects adjusting real properties to net realizable value and recording an estimated value for our business units, Luby's Cafeterias, Fuddruckers restaurants and franchise operations, and Culinary Contract Services.

Net assets in liquidation increased by $5.2 million during the period from November 19, 2020 through March 10, 2021. The increase was primarily due to a $4.5 million increase in properties and business units for sale and a $0.7 million net increase due to a remeasurement of assets and liabilities. The increase in properties and business units for sale was due to a $3.4 million increase in value attributable to the contemplated sale and conversion to franchise locations of nine Fuddruckers restaurants that was completed subsequent to March 10, 2021, and a $1.5 million increase in value attributable to properties that have closed, or are under contract to sell with non-refundable deposits, at prices that exceeded our previous liquidation values. This increase was partially offset by a $0.4 million reduction in value for one of our real estate assets.

We have one class of common stock. The net assets in liquidation at March 10, 2021 would result in liquidating distributions of approximately $3.98 per common share based on the number of common shares outstanding at that date. This estimate is dependent on projections of costs and expenses to be incurred during the period required to complete the Plan and the realization of estimated net realizable value of our properties and business units. There is inherent uncertainty with these estimates, and they could change materially based on the timing of business and property sales, the performance of the underlying assets, any changes in the underlying assumptions of the projected cash flows, as well as the ultimate vesting of outstanding restricted share awards and exercise of vested stock options. The estimated liquidating distributions per share on a fully diluted basis, assuming all restricted stock awards vest and all in-the-money stock options are exercised, is not materially different than the amount stated above. No assurance can be given that the liquidating distributions will equal or exceed the estimate presented in these consolidated financial statements.

PPP Loan

As discussed in more detail at Note 15. Debt, in April 2020 we received a $10.0 million PPP Loan. In November 2020 we submitted an application for forgiveness of the full $10.0 million. While we believe that we qualify for full forgiveness pursuant to the terms of the loan agreement, under the liquidation basis of accounting we must account for the liability at the full $10.0 million face amount until such time as the forgiveness has been approved by the Small Business Administration ("SBA") and the loan has been settled. 

Lease Obligations

Under both the going concern basis of accounting and the liquidation basis of accounting, lease obligations are recorded at the present value of the total fixed lease payments over the reasonably certain lease term using discount rates as of the effective date of the lease and the obligation is reduced as we make lease payments. As a result of the same accounting treatment, there is no reconciling entry to adjust total shareholders’ equity under the going concern basis of accounting as of November 18, 2020 to net assets in liquidation under the liquidation basis of accounting as of November 19, 2020.

During the fourth quarter of fiscal 2020 and the first two quarters of fiscal 2021, we were able to settle 27 leases for closed restaurant properties and negotiated an early termination date and reduced lease payment at one operating restaurant property. While the amounts paid to settle our lease liabilities varied, in the aggregate, we have settled these 27 leases for approximately 21% of the total undiscounted base rent payments that would otherwise have been due under the leases through their original contractual termination date. We can offer no assurances that we will continue to settle any lease obligations for less than the total undiscounted base rent payments, or for less than their discounted value recorded within net assets in liquidation.